Last week, Judge Lawrence O’Neill of the U.S. District Court in Fresno issued a preliminary injunction blocking enforcement of California’s Low Carbon Fuel Standard (LCFS), a regulation requiring a 10% reduction in the carbon content of motor fuels sold in the state by 2020. O’Neill concluded that the LCFS violates the Commerce Clause of the U.S. Constitution because it discriminates against out-of-state economic interests and attempts to control conduct outside the state’s jurisdiction.

The California Air Resources Board (CARB) adopted the LCFS as part of its strategy to implement California Assembly Bill 32, the Global Warming Solutions Act of 2006, which aims to reduce the state’s total greenhouse gas (GHG) emissions to 1990 levels by 2020. Other AB 32-implementing measures include a cap-and-trade program covering the state’s largest emitters, a renewable portfolio standard (RPS) requiring 33% of California’s baseload power to come from renewable sources by 2020, and the state’s motor vehicle greenhouse gas emission standards (AB 1493), which implicitly (and, I argue, unlawfully) regulate fuel economy. CARB estimated that the LCFS would reduce in-state carbon dioxide-equivalent (CO2-e) emissions by 16 million metric tons (mmt), or about 10% of the total 174 mmt CO2-e emission reduction target for 2020.

The injunction is a setback for the California greenhouse political establishment, including former Gov. Arnold “I say the debate is over” Schwarzenegger, who issued the Jan. 2007 executive order directing CARB to develop and adopt the LFCS. CARB says it will appeal O’Neill’s decision. If the injunction is upheld, it should strengthen opponents of similar policies proposed or adopted by other states.

O’Neill considered three separate lawsuits by refiners, truckers, and out-of-state ethanol producers against the LCFS. The injunction focuses on the ethanol producers’ complaints.

The LCFS requires a 10% reduction in the carbon intensity (CI) of motor fuels sold in the state by 2020. CI is calculated on a life-cyle (“well-to-wheels”) basis, taking into account not only the GHGs emitted when the fuel is combusted but also emissions associated with production and transport of the fuel. Life-cycle analysis is an essential planning tool for climate policy regulators, because what supposedly matters climatologically is not the emission reductions from a particular source or jurisdiction but the net reduction in global emissions.

For example, life-cycle analysis indicates that switching from gasoline-powered cars to electric vehicles in China would actually increase net GHG emissions, because almost 80% of China’s electricity comes from coal.

But it’s precisely CARB’s use of life-cycle analysis that puts the LCFS crosswise with the U.S. Constitution. Midwest ethanol producers get much of their electricity from coal. To sell their product in California they must transport it thousands of miles. Their methods of turning ethanol byproducts into animal feed may be more carbon-intensive than comparable operations in California. On a life-cycle basis, ethanol produced in the Midwest, although physically and chemically identical to ethanol produced in California, has a higher CI rating.

Thus, to compete in the California motor fuels market, Midwest producers must either make additional CI-reducing investments California producers do not have to make, or buy surplus low-carbon fuel credits from California producers whose CI score is below the required state-wide average for that year. Either way, the LCFS puts the Midwest producers at a competitive disadvantage. It discriminates against interstate commerce.

In Judge O’Neill’s words:

CARB is attempting to stop leakage of GHG emissions by treating electricity generated outside the state differently than electricity generated inside its border. This discriminates against interstate commerce. Moreover, tying carbon intensity scores to the distance a good travels in interstate commerce discriminates against interstate commerce.

O’Neill also agreed with plaintiffs that the LCFS attempts to control conduct outside of California’s territorial jurisdiction. According to plaintiffs, CARB’s life-cycle analysis “calibrates CI scores so that they regulate, among other things, deforestation in South America, how Midwest farmers use their land, and how ethanol plants in the Midwest produce animal nutrients.” For example, CARB “imposes a substantial penalty — more than 30% of the CI score for corn ethanol — for ‘indirect land use.’ That penalty is used to discourage farmers around the world from converting nonagricultural land into farmland to enter the corn market.”

CARB contends that taking these out-of-state activities into account in calculating CI scores is not the same as regulating those activities. O’Neill disagreed. Just because the LCFS does not “directly regulate” out-of-state activities does not mean it does not attempt to control the conduct of out of state activities. CARB acknowledges that the LCFS assigns higher CI scores based on those out-of-state activities to provide “an incentive for regulated parties to adopt production methods which result in lower emissions.” CARB “cannot dispute that the ‘practical effect’ of the regulation would be to control this conduct — occurring wholly outside of California.” Thus, the LCFS “impermissibly attempts to ‘control conduct beyond the boundary of the state.’”

O’Neill also considered what would happen if many or all states adopt a LCFS. To the extent that distance traveled influences CI, each state’s LCFS would discriminate against out-of-state imports. [A Midwest LCFS would discriminate against California ethanol producers -- Ha!] The proliferation of LCFS regulations would “balkanize” fuel markets and “plainly intefere” with free trade in ethanol and ethanol production. Moreover, there is no guarantee that each state would set the same CI reduction targets. “Ethanol producers and suppliers would be hard pressed to satisfy the requirements of 50 different LCFS regulations which may require 50 different levels of reductions over 50 different time periods.”

If upheld, Judge O’Neill’s ruling should embolden opponents of the LCFS proposed last August by the Northeast States for Coordinated Air Use Management (NESCAUM).

Last week, after three years of environmental review, public meetings, and public comment, President Obama postponed until first quarter 2013 a decision on whether or not to approve the Keystone XL Pipeline — the $7 billion, shovel-ready project to deliver up to 830,000 barrels a day of tar sands oil from Canada to U.S. Gulf Coast refineries. Obama’s punt, which Keystone opponents hope effectively kills the pipeline, is topic-of-the-week on National Journal’s Energy Experts Blog. So far, a dozen ”experts” have posted, including yours truly.

Now, if you’ve been paying attention at all over the past 40 years, you may suspect that most Keystone opponents want to kill the pipeline just because they hate oil and oil companies — even as they fill up their tanks to drive to the next demonstration. Bill McKibben, lead organizer of the anti-Keystone protest rallies outside the White House, lives in Vermont. On the Colbert Report, host Stephen Colbert asked McKibben: ”You’re from Vermont? Did you ride your bicycle down here? Or did you ride ox cart? How did you get down here? Or do you have a vehicle that runs on hypocrisy?”

If we take them at their word, McKibben and his climate guru, NASA scientist James Hansen, oppose Keystone because they believe it will contribute to global warming. How? The cutting-edge method for extracting oil from tar sands is a process called steam assisted gravity drainage. SAGD uses natural gas to heat and liquefy bitumen, a tar-like form of petroleum too viscous to be pumped by conventional wells, and burning natural gas emits carbon dioxide (CO2). So their gripe is that replacing conventional oil with tar sands oil will increase CO2 emissions from the U.S. transport sector. Maybe by only 1% annually,* but to hard-core warmists, any increase is intolerable.

Enter the Law of Unintended Consequences. If McKibben and Hansen succeed in killing the pipeline, petroleum-related CO2 emissions might actually increase!

Charles Drevna of the National Petrochemical & Refiners Association (NPRA) made this point on the aforementioned National Journal energy blog:

A study last year by Barr Engineering found that shipping more Canadian oil to Asia and shipping more oil from other parts of the world to the United States would increase greenhouse gas emissions, because of the long sea voyages. Barr Engineering called this the crude oil shuffle. So using more Canadian oil in the United States would reduce greenhouse gas emissions.

The Barr Engineering study analyzes the impacts on CO2 emissions of a low-carbon fuel standard (LCFS) that effectively bars U.S. imports of Canadian tar sands oil. Because global petroleum demand is growing, Canada would continue to produce tar sands oil even if the USA adopts an LCFS. However, instead of shipping the oil to the USA, Canada would ship the oil to China. At the same time, to meet U.S. demand that the LCFS does not allow Canada to fill, Middle East countries would ship oil to the USA that would otherwise go to China. The Canadian oil re-routed to China and Mideastern oil re-routed to the USA would travel by tankers, which burn fuel and emit CO2. Longer transport routes mean higher CO2 emissions. From the report:

Under the base case, crude is transported approximately 8,500 to 9,000 miles from Edmonton [Canada] to Chicago and from Basrah [Iraq] to Ningbo [China]. Under the crude shuffle case, total transport distance nearly triples, with crude transported approximately 22,300 to 22,700 miles from Basrah to Chicago and from Edmongton to Ningbo. Resulting GHG emissions are approximately twice as high on a total basis (for any of the crude displacement scenarios considered). . . .Under all scenarios considered, the crude shuffle results in emissions that are approximately twice as great as the emissions associatd with current base-case crude transport patterns.

The figure above shows U.S. petroleum-related greenhouse gas emissions in a “base case” and a “crude shuffle case.” PADD II refers to the Midwest petroleum market.

Although killing Keystone would not ban imports of Canadian tar sands oil, as would an LCFS, it would effectively block much of the forecast 830,000 daily barrels of tar sands from reaching U.S. refineries. That, in turn, would induce similar re-routing of international oil flows. Each barrel “shuffled” to more distant markets would have a bigger carbon footprint than a barrel of Canadian crude shipped via Keystone to the USA.

* The State Department estimates that full operation of the Keystone pipeline would produce incremental greenhouse gas emissions of 3 million to 21 million metric tons of CO2 annually (ES-15). For perspective, the U.S. transport sector in 2009 generated 1,854.5 million metric tons of CO2.

Yesterday’s Greenwire (subscription required) reports that 11 Northeast and Mid-Atlantic states are working on a plan, modeled on California’s Low Carbon Fuel Standard (LCFS) program, to cut the carbon intensitity (CI) of motor fuels by 5%-15% over the next 15 years. The Northeast States for Coordinated Air Use Management (NESCAUM), the association of Northeast air regulatory agencies, could release the framework for the plan “as early as this month,” writes Greenwire reporter Jason Plautz.

Plautz links to a NESCAUM-authored discussion draft for “stakeholders.” After a short introductory paragraph, the document states in bold italics:  ”This document is not intended for distribution beyond the participating agencies and should not be cited or quoted.” Hey, I just did — so sue me!

The document never mentions the potential impact of the LCFS on fuel prices. But what else did you expect? In the “trust us, we know what’s best for the planet” world of carbon politics, affordable energy is despised, not prized. 

Mandated reductions in motor fuel CI are bound to increase fuel prices. To comply with an LCFS, blenders must either modify the mix of the fuels they sell, modify their production processes, or both. If lower-carbon fuels were cheaper than gasoline, government wouldn’t need to mandate their sale, because consumers would demand them, and competition would drive energy companies to supply them. Alternative fuels must be mandated precisely because they are more expensive to produce than gasoline, reduce auto fuel economy, or face market barriers such as the massive investments required to build natural gas fueling infrastructure.

As a regional standard, the proposed LCFS would create another category of ”boutique” fuels — fuel blends that vary by state and region based on regulatory specifications. Reformulating gasoline or diesel fuel to comply with such specifications increases production costs, some of which get passed on to consumers. Boutique fuels also have smaller economies of scale than standard blends. As the American Trucking Assocations says of California’s boutique diesel fuel:

California was the first state in the nation to mandate a boutique diesel fuel. Although California diesel costs only 4-5 cents extra to refine, the fuel typically sells for a 14 cent premium compared to neighboring states. This price differential is the result of higher distribution costs and reduced competition, as only a handful of refineries produce California’s boutique diesel fuel.

So would nationalizing California’s or NESCAUM’s LCFS fix the problem? Only if U.S. refineries could actually make upwards of 135 billion gallons annually of affordable low-carbon fuel. A June 2010 Charles River Associates (CRA) report analyzed the economic repercussions of a national LCFS requiring a 10% reduction in motor fuel CI from 2015 to 2025. The problem, argues CRA, is that achieving a 10% overall reduction in U.S. motor fuel CI is ”beyond the reach of foreseeable technology.” Unable to comply, blenders would sell less fuel. The drop in fuel supply would drive up fuel prices by 30% to 80%, which in turn would have severe negative impacts on GDP, household purchasing power, and job creation.

Who would benefit from a Northeast LCFS? Why, the bureaucrats who design and run the program, of course. NESCAUM’s discussion draft contemplates the creation of a new “regional organization” to administer the LCFS. The program would also effectively raise taxes via ”surcharges” on the sale of low-carbon credits, “alternative compliance payments,” and “transaction fees.”

So more pain at the pump, more bureaucracy, and more boodle for the “participating agencies.” Any resemblance to cap-and-trade programs living or dead is not coincidental.