Posts Tagged ‘Assembly Bill 32’


In POET, LLC v. State Air Resources Board (2017) ___Cal.App.5th___ (Case No. F073340) (“POET II”), the Fifth District Court of Appeal held that the California Air Resources Board (CARB) failed to comply with the terms of the writ of mandate issued by the same court in POET, LLC v. State Air Resources Board (2013) 218 Cal.App.4th 681 (“POET I”). The court invalidated the trial court’s discharge of the writ, modified the existing writ, and ordered CARB to correct its defective CEQA Environmental Analysis (EA).

Legal and Factual Background
CARB promulgated low carbon fuel standards (LCFS) in 2009 as required by the 2006 California Global Warming Solutions Act (“AB 32”). In promulgating the LCFS, CARB adopted an EA, the regulatory equivalent to an Environmental Impact Report, pursuant to CEQA. Those original regulations and the associated EA were the subject of litigation in POET I, where the Fifth District found that the EA violated CEQA by impermissibly deferring analysis of nitrous oxide (NOx) emissions from biodiesel fuel. The appellate court took the acknowledged “unusual” step of allowing the regulations to remain in effect, pending satisfaction of a writ of mandate (“2014 writ”).

In 2015, in response to the court’s ruling in POET I, CARB produced an updated EA, updated LCFS regulations (2015 regulations), and alternative diesel fuel regulations (ADF regulations). The EA analyzed the project using a 2014 baseline and determined that the regulations would not have significant impacts related to NOx emissions. On the return to the writ, the trial court sided with CARB and discharged the 2014 writ. This appeal followed.

Court’s Analysis
The Court of Appeal applied the abuse of discretion standard to its analysis of whether the lower court’s discharge of the 2014 writ was proper. The court concluded that CARB continued to violate CEQA and the 2014 writ by selecting a 2014 project baseline. The court explained that a normal existing-conditions baseline begins when the project commences and must include all related project activities. In addition, a regulatory scheme is a “project” under CEQA and includes all enactment, implementation, and enforcement activities. Here, the original regulations, 2015 regulations, and ADF regulations were related activities because they concerned the same subject matter, had a shared objective, covered the same geographic area, and were temporally connected.

Thus, by selecting 2014 as the baseline, the court found that the EA failed to consider how the original regulations, which remained in effect during and after POET I, encouraged and increased the use of biodiesel fuel and its effect on NOx emissions. According to the court, selecting such a limited baseline was not even “objectively reasonable” from the point of view of an attorney familiar with CEQA and the Guidelines. In addition, the court found that the flawed CEQA analysis was prejudicial because it deprived the public of a meaningful opportunity to review the effect of the agency’s actions on the environment.

Remedy
On remand, the court ordered that CARB review its project baseline. While declining to require a specific baseline date, CARB was instructed to select a “normal” baseline consistent with the court’s analysis and in any event, to not select a baseline date of 2010 or after. The court implied that the baseline could even have begun in calendar year 2006, consistent with then-Governor Schwarzenegger’s 2007 mandate to the agency to review fuel emissions.

The parties agreed that the ADF regulations were both severable and independently enforceable from the 2015 regulations. The court found that the 2015 regulations were also severable from the remainder of the LCFS regulations because, though more effective in their entirety, the remaining regulations would be complete and retain utility. Ultimately though, like in POET I, the court concluded that, on balance, suspending the regulations would cause more environmental harm than allowing them to remain.

Thus, the court reversed the order discharging the writ and ordered the superior court to modify the writ to compel CARB to amend its analysis of NOx emissions and freeze the existing regulations as they relate to diesel and its substitutes. In addition, the court ordered the superior court to retain jurisdiction, and to require CARB to “proceed diligently, reasonably and in subjective good faith.” Finally, the court ordered that if CARB fails to proceed in this manner, the superior court shall immediately vacate the portion of the writ preserving the existing regulations, and may impose additional sanctions.

 

In a 2-1 opinion, the Third District Court of Appeal upheld the auction-sale component of the cap-and-trade program created by the State Air Resources Board pursuant to the California Global Warming Solutions Act of 2006 (“AB 32”). (California Chamber of Commerce et al. v. State Air Resources Board et al. (2017) ___Cal.App.5th___ (Case No. C075930).)

As part of its regulations to implement AB 32, the State Air Resources Board created the California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms, referred to as the ‘cap-and-trade program.’ The program imposes a cap on aggregate greenhouse gas emissions. Covered entities must either reduce their emissions below a threshold point or obtain offset credits or emissions allowances at the Board’s quarterly auctions or in a secondary market. Allowances are tradable, so participants can buy, bank, or sell them. Proceeds from the Board’s auction sales are kept in a fund to further AB 32’s purposes. Plaintiffs California Chamber of Commerce and Morning Star Packing Company filed two separate lawsuits challenging the regulations and the court consolidated the cases. The trial court ruled in favor of the Air Resources Board and both plaintiffs appealed.

The Court of Appeal considered two arguments: (1) whether the auction sales exceed the Legislature’s delegation of authority to the Board, and (2) whether the revenue generated by the auction sales amounts to a tax that violates the two-thirds vote requirement of Proposition 13. With respect to Plaintiffs’ first argument, the court considered whether the auction program is “(1) consistent and not in conflict with the statute and (2) reasonably necessary to effectuate the purpose of the statute.” The court held that by allowing the Board to design regulations that include “distribution of emissions allowances,” the Legislature gave broad discretion to determine how to implement the statute, and the auctioning of allowances does not exceed the scope of the delegation. In addition, the court found that the Legislature later ratified the auction system when it directed how to use the proceeds therefrom.

With respect to Plaintiffs’ second argument, the court found that the auction sales do not equate to a tax. Proposition 13 requires that any change in a State tax must be passed by a two-thirds vote of each house of the Legislature. Sinclair Paint Co. v. State Bd. of Equalization (1997) 15 Cal.4th 866 is the leading authority on application of Prop 13, but contrary to the ruling of the lower court, the Court of Appeal found the test from that case was inapplicable here. According to the court, Sinclair Paint did not hold that it applies to any “revenue generating measure.” Instead, Sinclair Paint sets forth rules to evaluate purported regulatory fees to determine whether they are taxes subject to Proposition 13. The Board’s cap-and-trade regulations do not purport to impose a regulatory fee, but instead call for the auction of allowances, which the court explained is an entirely different system. Thus, the Court of Appeal found, Sinclair Paint did not apply.

Because Sinclair Paint did not apply, the court looked to the general test for whether something is a “tax” subject to Proposition 13. The court explained that the hallmarks of a tax are: (1) it is compulsory, and (2) the payor receives nothing of particular value for payment. The court found that, regardless of the fact that the cap-and-trade program may increase the cost of doing business in California, the purchase of allowances through the Board’s auction is voluntary; businesses must simply make the judgment whether it is more beneficial to the company to make the purchase required by the program than to reduce emissions. In addition, the court emphasized that no entity has a vested right to pollute. Once purchased, the allowances are valuable, tradable commodities, conferring on the holder the privilege to pollute the air. Thus, the court found that participation in the auction system is voluntary and the purchaser receives a specific thing of value, so the auction system does not impose a tax.

Justice Hull concurred with the majority’s analysis of the first question, but disagreed with the second part of the opinion. In a lengthy dissent, Justice Hull argued that the cap-and-trade program is a tax because: (1) the purchase of auction credits by certain businesses is not voluntary, (2) the auction credits do not confer property rights, and (3) the use of the auction proceeds must be considered for determining whether a State exaction is a tax. Thus, Justice Hull concluded that the program is a “tax” of sorts, and because it was not passed by a 2/3 vote of the State Legislature, it violates Proposition 13.

In January 2017, the California Air Resources Board (CARB) released the Draft 2017 Climate Change Scoping Plan Update. The Proposed Scoping Plan identifies the overall strategy to reduce greenhouse gas (GHG) emissions by 40 percent below 1990 levels by 2030—the target codified in SB 32. The strategy requires contributions from all economic sectors and includes a combination of extending key reduction programs and new actions that would prioritize direct emissions reductions.

The Proposed Scoping Plan continues the cap-and-trade program through 2030. The analysis in the plan finds that cap-and-trade is the lowest cost, most efficient policy approach to meeting the 2030 goal. According to the analysis, even if other measures fall short, cap-and-trade provides certainty that California will meet the 2030 target emissions reduction. The agency is also evaluating potential changes to the cap-and-trade program to “support greater direct GHG emissions reductions.” Under evaluation are measures which include reducing the offset usage limit, redesigning the allocation strategy to support increased technology and energy investments to reduce GHG emissions, and reducing allocation for entities with criteria or toxic emissions that exceed a predetermined baseline.

Other key components of the overall approach include: a 20 percent reduction in GHG emissions from the refinery sector; continued investment in renewable energy; efforts to reduce emissions of short-lived climate pollutants; and increased focus on zero- and near-zero emission vehicle technologies.

CARB is currently seeking comments on the Proposed Scoping Plan. The comment period was recently extended until April 10, 2017. A public board meeting on the Final Proposed Scoping Plan is scheduled for June 22-23, 2017.

On April 29, 2015, Governor Brown issued Executive Order B-30-15 setting an interim target to cut California’s greenhouse gas emissions to 40 percent below 1990 levels by 2030. According to the Governor’s announcement, California is on track to meet or exceed its current target of reducing GHG emissions to 1990 levels by 2020, as required by the California Global Warming Solutions Act of 2006 (AB 32). The new goal of reducing emissions to 40 percent below 1990 levels by 2030 is intended to help the state achieve its ultimate goal of reducing emissions 90 percent under 1990 levels by 2050, a target established by Governor Schwarzenegger’s Executive Order S-3-05. The new interim target is consistent with the recommendation of the California Air Resources Board, in its First Update to the Climate Change Scoping Plan (May 2014).

The new executive order requires the Air Resources Board to update the Climate Change Scoping Plan to express the 2030 target in terms of million metric tons of carbon dioxide equivalent. All state agencies with jurisdiction over GHG emission sources must implement measures to achieve the 2030 and 2050 targets.

In addition, the Natural Resources Agency is to update the state’s climate adaptation strategy, Safeguarding California,  every three years and ensure that its provisions are fully implemented. The Safeguarding California plan will help California adapt to climate change by identifying vulnerabilities by sector (e.g., vulnerabilities to the water supply, the energy grid, the transportation network, etc.); outlining primary risks of these vulnerabilities to people, property, and natural resources; specifying priority actions needed to reduce the risks; and identifying lead agencies to spearhead the adaption efforts for each sector. Each sector will then be responsible to prepare an implementation plan by September of this year outlining adaptation actions and report back to the Natural Resources Agency by June 2016 on the actions taken.

Brown’s executive order also requires state agencies to take climate change into account of their planning and investment decisions, and employ full life-cycle cost accounting to evaluate investments and alternatives. The order establishes principles that state agencies must use in making planning and investing decisions. These principles include: prioritizing actions that both help the state prepare for climate change and reduce GHG emissions; implementing flexible and adaptive approaches, where possible, to prepare for uncertain climate change impacts; protecting the state’s most vulnerable populations; and prioritizing natural infrastructure solutions.

Executive Order B-30-15 follows relatively swiftly on the heels of Executive Order B-29-15, issued earlier this month, which imposes a 25-percent mandatory water reduction in 2015 over 2013 usage for urban areas, commercial, industrial, and institutional properties, along with other restrictions.

On November 13, 2013, the California Air Resources Board (ARB) announced that it had approved forest carbon offsets under the cap-and-trade program’s Forest Offset Protocol.

The protocol is designed to address the forest sector’s unique capacity to capture and store carbon dioxide. Whether forests function as net source of carbon dioxide emissions or as a net sink depends on their management as well as natural events. Sequestered carbon stays in the trees, plants, and soil for a long time, which slows the accumulation of greenhouse gases in the atmosphere and ocean. Thus, with sustainable management and protection, forests can play a significant role in addressing global climate change.

Under the forestry protocol, ARB provides offset credits for certain “Forest Projects.” These offsets may be used to comply with the cap-and-trade program. A Forest Project is a planned set of activities designed to increase removal of carbon dioxide from the atmosphere (“removal enhancement”) or reduce or prevent emissions of carbon dioxide (“emission reductions”) by increasing or conserving forest carbon stocks. To qualify for carbon offset credits, the projects must reduce greenhouse gas emissions or enhance greenhouse gas removal beyond any reductions or removals required by law or that would occur under business as usual. The forestry protocol provides methods for quantifying the net climate benefits of activities that sequester carbon on forest land.

Forest Projects eligible for offsets include reforestation, improved forest management, and avoided conversion. Offset projects using this protocol can be credited for up to 25 years after the project commences.

On November 14, 2013, Judge Timothy Frawley of the Sacramento Superior Court rejected two industry challenges to California’s cap-and-trade program.

The Air Resources Board adopted regulations in 2011 to implement AB 32, the Global Warming Solutions Act. The 2006 Act authorized ARB to implement various mechanisms, including a market-based mechanism, such as a cap-and-trade program, to reduce the state’s GHG emissions. The cap-and-trade program is based on an initial “cap” on the total amount of GHG emissions that can be released by regulated sources. That cap is lowered over time.

Under the program, regulated entities must get a permit (referred to as an “allowance”) for every ton of GHG emissions they emit. The allowances will be distributed, under ARB’s regulations, through quarterly auctions for emissions, which will each consist of one round of sealed bidding. Allowances may subsequently be banked, or bought and sold on a new auction-based carbon market. Sale proceeds will be deposited into a special fund and available for uses designated in AB 32. The Legislative Analyst’s Office estimates that auctions will raise as much as $12 to $70 billion over the life of the program for the State.

The California Chamber of Commerce and the Morning Star Packing Company both challenged the cap-and-trade program in related lawsuits. Petitioners made two main claims: (1) the cap-and-trade provisions of ARB’s regulations are invalid because the Legislature never authorized ARB to raise billions of dollars by auctioning allowances, and thus cap-and-trade exceeds ARB’s delegated scope of authority, and (2) the charges for emissions allowances constitute illegal taxes adopted in violation of Proposition 13, which requires a two-thirds vote in the Legislature to pass a tax increase.

On the first issue, the court concluded that AB 32 specifically delegated to ARB the discretion to adopt a cap-and-trade program and to design a system of emissions reductions that meets the statutory goals. Even without the express delegation of authority, the court concluded that ARB would have had to make the inevitable choice as how to allocate the allowances. The court also pointed to post-AB 32 legislation, which reflected a legislative understanding that AB 32 permitted the sale of allowances.

As to the second issue, after acknowledging the question was a close one, the court declined to find the money collected by the auction is a tax. Instead, the court concluded the proceeds are more like regulatory fees. Ultimately, the court was persuaded by the fact that the primary purpose of the fees is regulation, not revenue generation. Furthermore, the court found that Prop. 13’s goal of providing effective tax relief was not subverted by shifting the costs of environmental protection to those who seek to impact natural resources. The sale of allowances helps to achieve AB 32’s regulatory goals by gradually increasing the cost of compliance, thereby creating a financial incentive to reduce emissions.

In a significant victory for the California Air Resources Board, a Ninth Circuit Court of Appeals panel concluded that California’s Low Carbon Fuel Standard does not facially discriminate against out-of-state fuel producers. At issue in the case, Rocky Mountain Farmers Union v. Corey (Sept. 18, 2013, Case Nos. 12-15131, 12-15135), were regulations imposed as part of the California Global Solutions Act of 2006 (Assembly Bill 32). The Act established the nation’s first greenhouse gas regulatory program.

The Low Carbon Fuel Standard requires producers of ethanol, crude oil and other fuels to reduce the carbon intensity of transportation fuels sold or supplied to California. The regulations are based on “lifecycle” analyses that take into account not only emissions that result from combustion at the end of a fuel’s “life,” but also emissions generated during the production and transportation of such a fuel.

In 2009, Rocky Mountain Farmers Union challenged the ethanol provisions of the fuel standard. Rocky Mountain claimed the standard’s reach, which extends beyond California, exceeded the state’s authority under the dormant Commerce Clause, and that it was preempted by federal law. The American Fuel & Petrochemical Manufacturers Association challenged both the ethanol and crude oil provisions. A federal trial court held in late 2011 that the fuel standard was unconstitutional because it discriminated against out-of-state fuel producers, in violation of the dormant Commerce Clause.

In its opinion, the Ninth Circuit panel dissolved the lower court’s preliminary injunction that at one point prevented the California Air Resources Board from implementing the fuel regulations. The court held that the ethanol provisions do not “facially” discriminate against out-of-state commerce, and that the initial crude oil provisions did not discriminate against out-of-state crude oil “in purpose or practical effect.” The court also held that the regulations did not violate the dormant Commerce Clause’s prohibition on extraterritorial regulation. The Ninth Circuit did not completely dispense with the controversy, however. The court remanded the case to the lower court to determine whether the ethanol provisions discriminate in purpose or practical effect, and if not, to apply the less restrictive Pike balancing test to determine the standard’s validity under the Commerce Clause. The court also remanded on the crude oil issue, ordering a similar balancing determination.

The opinion contains an in-depth and favorable discussion of the fuel standard’s “lifecycle analysis” approach. It also approvingly describes California’s “tradition of leadership” among states in protecting the environment, particularly with regard to the regulation of greenhouse gas emissions to reduce the risk of global warming. In explaining its rationale, the court stated: “California should be encouraged to continue and to expand its efforts to find a workable solution to lower carbon emissions, or to slow their rise. If no such solution is found, California residents and people worldwide will suffer great harm. We will not at the outset block . . . this innovative, nondiscriminatory regulation to impede global warming.”  

What follows is a deeper discussion of this case. It includes a summary of the genesis and technical aspects of the Low Carbon Fuel Standard for both ethanol and crude oil, the procedural background and challenges involved in the case, and the Ninth Circuit decision, which has generated significant media attention and speculation about whether the case will go to the U.S. Supreme Court.  

 Factual Background

The Ninth Circuit began its discussion of the facts by pointing to California’s long history of efforts to protect the environment, with a particular concern for vehicle emissions. The court noted that section 209(a) of the federal Clean Air Act allows California to adopt its own standards regulating vehicle emissions if they are at least as protective as federal standards. Other states may then either follow the federal or the California standards. But no other states may adopt vehicle emission standards of their own.

Following this tradition of environmental protection, California passed Assembly Bill 32, the Global Warming Solutions Act of 2006. Through AB 32, the state resolved to reduce greenhouse gas (GHG) emissions to 1990 levels by 2020. The bill directed the California Air Resources Board (CARB) to develop various regulations to achieve this goal. Through a scoping plan process required by AB 32, CARB determined that vehicle emissions constitute 40% of the state’s total GHG emissions. CARB responded to this finding by adopting a three-part approach to lowering GHG emissions in the transportation sector. The approach involved reducing emissions “at the tailpipe” by establishing progressively stricter emission limits for new vehicles and integrating regional land use and transportation planning to reduce vehicle miles traveled annually. Last, CARB aimed to lower the GHG intensity of transportation fuel by adopting the Low Carbon Fuel Standard. This would reduce the quantity of GHGs emitted in both the production and transportation of fuels.

The fuel standard applies to most transportation fuels currently used in California and any fuels developed in the future.  The fuel standard was intended to establish a declining annual cap on the average carbon intensity of fuels in California beginning in 2011. To comply with the fuel standard, producers must keep the average carbon intensity of their total volume of fuel below the annual limit. Producers selling fuel with lower intensity than the annual cap receive credits. These credits may be sold to other fuel producers or banked for later years. Under this credit-trading scheme, a fuel producer may still sell fuel with higher carbon intensities than the annual limit by purchasing credits to offset the overage.

The total carbon intensity of any given fuel is determined by a “lifecycle analysis.” This analysis drove much of the controversy in the litigation. Before addressing this controversy, the court dedicated a sizable portion of its background discussion to CARB’s policy choices regarding the adoption of the fuel standard and the lifecycle analysis. The court noted that because GHG emissions mix in the atmosphere to create global impacts, emissions from the production of fuels used in California impact the state even if the fuels are produced out-of-state. The lifecycle analysis captures these emissions by including GHGs from fuel production in the fuel’s final carbon intensity score. If CARB did not adopt this inclusive lifecycle approach, GHGs emitted before fuels are imported into the state would escape California’s regulation. Additionally, climate-change benefits of biofuels, such as ethanol, would be ignored if CARB’s focus were simply on tailpipe emissions, as the benefits of these alternative fuels largely come before combustion of the fuel itself.

To measure the lifecycle emission of various fuels, CARB relied on Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation Model (“GREET”) produced by the Argonne National Laboratory. This model has been used by the federal Environmental Protection Agency for its own lifecycle analysis under the federal Clean Air Act and by agencies of other states. CARB set a baseline average carbon intensity in the 2010 gasoline market of 95.86 grams of carbon-dioxide equivalent per mega joule (gCO2e/MJ.) In 2011, this carbon intensity cap would drop .25% below the 2010 average. Each subsequent annual limit would be further reduced from the 2010 baseline. As a side note, the court pointed out that evidence demonstrates CARB’s program is starting to work as intended. After reviewing ethanol sales in different markets during 2011, the Oil Price Information Service reported that lower carbon intensity fuels received a price premium in California.

Regulated fuel producers comply with the fuel standard reporting requirements through one of two methods. Fuel producers may rely on “default pathways” established for a range of fuels CARB anticipates will be sold in California. Or fuel produces may register individualized pathways to be approved for use by CARB.

The ethanol issue:

Ethanol is a fuel-alcohol produced through the fermentation and distillation of various organic feedstocks. Most domestic ethanol comes from corn, while Brazilian sugarcane dominates the import market. The California GREET model for ethanol considers various factors in the production of the fuel to reach a carbon intensity value. These factors include: (1) growth and transportation of the feedstock, with a credit for GHGs absorbed during photosynthesis; (2) efficiency of production; (3) type of electricity used to power the plant; (4) fuel used for thermal energy; (5) milling process used; (6) offsetting value of an animal-feed co-product (distiller’s grains) that displace demand for feed that would generate its own emissions in production; (7) transportation of the fuel to the fuel blender in California; and (8) conversion of land to agricultural use.

By 2011, producers from California, the Midwest, and Brazil had all obtained approval from CARB to use individualized pathways to measure the carbon intensity of their fuels. The pathways ranged in carbon intensity from 56.56 gCO2e/MJ to 120.99 gCO2e/MJ. The lowest intensity was achieved by a Midwest producer. The default pathway for Brazilian sugarcane ethanol made with co-generated electricity had a slightly higher carbon intensity of 58.40 gCO2e/MJ. The highest intensity of 120.99 gCO2e/MJ was assigned to Midwestern wet-mill ethanol, using 100% coal for thermal energy. In comparison, the carbon intensity of gasoline in 2010 was 95.86 gCO2e/MJ.

The crude oil issue:

CARB’s fuel standard also regulates crude oil and derivatives sold in California. The court explained that regulation of crude oil is necessary for CARB to achieve its GHG emission reduction goals set for the state. As easily accessible sources of crude oil are exhausted, they will be replaced by newer sources that require more energy to extract and refine. This leads to a higher carbon intensity for the fuel. CARB predicted that fuels with carbon intensity values 50 to 80 percent lower than gasoline will be needed to reach AB 32’s emission reduction targets.

Provisions developed in 2011 for the CARB fuel standard distinguished between crude oil through two factors: first, whether the crude originated from an existing or emerging source, and second, whether the crude is high carbon intensity crude oil or not. Crude is classified as high intensity if more than 15.0 gCO2e/MJ of emissions in extraction, production, and transportation result.

 Procedural Background

This case involved a host of petitioners, intervenors, and amici curiae. Plaintiffs included Rocky Mountain Farmers Union et al. and American Fuel & Petrochemical Manufacturers Association et al. Numerous environmental organizations intervened on behalf of CARB. These groups included Environmental Defense Fund, Natural Resources Defense Council, and Sierra Club. A diverse group of amici curiae, including states, law professors, and other organizations also filed briefs.

The litigation began in 2009, when Rocky Mountain Farmers Union challenged the ethanol provisions of the fuel standard for violating the dormant Commerce Clause and being preempted by federal law. In 2010, American Fuels challenged both the ethanol and crude oil provisions on similar grounds. Rocky Mountain requested a preliminary injunction on its Commerce Clause and preemption claims, while American Fuels moved for summary judgment on its Commerce Clause claims. CARB filed cross-motions for summary judgment on all grounds.

The district court granted Rocky Mountain’s preliminary injunction and American Fuel’s partial motion for summary judgment. The district court determined that CARB’s fuel standard violated the Commerce Clause by engaging in extraterritorial regulation, facially discriminating against out-of-state ethanol, and discriminating against out-of-state crude oil in purpose and effect. The district court concluded that CARB’s fuel standard could not survive the strict scrutiny review courts apply to facially discriminatory regulations.

CARB achieved one small victory at the district court. The court granted partial summary judgment in favor of CARB after finding the fuel standard is “a control or prohibition respecting a characteristic or component of a fuel under section 211(c)(4)(B) of the Clean Air Act.” CARB appealed the case to the Ninth Circuit.

The Ninth Circuit’s Decision

The Commerce Clause and the Fuel Standard Ethanol Provisions

The Ninth Circuit first addressed plaintiffs’ Commerce Clause arguments regarding CARB’s regulation of ethanol. Specifically, plaintiffs argued the fuel standard’s ethanol provisions improperly discriminate against out-of-state commerce and regulate extraterritorial activity.

The court explained that under the dormant Commerce Clause, economic protectionism by states is prohibited. In other words, a state may not engage in the differential treatment of in-state and out-of-state economic interests to the benefit of the former and detriment to the latter. State statutes or regulations that discriminate on their face, in purpose or in practical effect, are unconstitutional unless they serve a “legitimate local purpose” and no alternative non-discriminatory means are available.

To determine whether a statute or regulation is actually discriminatory, courts must determine which factors make entities suitable for comparison. Entitles are “similarly situated” for the purposes of the dormant Commerce Clause test if their products compete against each other in a single market.

 When analyzing the ethanol regulations to determine which fuel pathways were similarly situated, the district court excluded all factors based on origin of the fuel. The district court excluded sugar cane ethanol and all GHG emissions related to transportation, electricity used in production, and production plant efficiency when considering whether the regulations discriminated against out-of-state interests.

The Ninth Circuit rejected the district court’s approach. The Ninth Circuit pointed out that the factors the district court ignored “contribute to the actual GHG emissions from every ethanol pathway, even if the size of their contribution is correlated with their location.” In contrast, the district court’s analysis considered different fuel lifecycle pathways to be equivalent simply if they used the same feedstock and production process. But the Ninth Circuit determined that the factors the district court ignored were necessary in determining whether the fuel standard gives equal treatment to similarly situated fuels.

Under the dormant Commerce Clause, regulations are not necessarily facially discriminatory because they affect in-state and out-of-state interests unequally. Instead, the reason for different treatment must be based on something other than origin. Here, CARB did not base its different treatment of fuels on the fuel’s origin. Instead, the fuel regulations treated fuels differently based on their carbon intensity measured by a lifecycle analysis. As the court pointed out, under this analysis, Midwest ethanol attained both the highest and lowest carbon intensity values depending on various factors. Just because Brazilian ethanol earned the lowest default pathway for measuring carbon intensity did not mean the regulations were discriminatory. Instead, the various factors were necessary for realistically assessing and attempting to limit GHG emissions from ethanol production.

Further, CARB’s decision to establish default pathways based on regional categories was also not facially discriminatory. The fuel standard regulations established default pathways in each region based on the same factors. The regulations also allowed for individualized fuel intensity values in lieu of default pathway values. A fuel producer obtains an individualized value based on factual showings, regardless of region of origin. As a result, CARB’s decision to construct categories of default fuel pathways, with reference to California’s border, was not discriminatory. The default pathways provide symmetrical burdens and benefits to both in-state and out-of-state corn ethanol.

The Commerce Clause and the Fuel Standard Crude Oil Provisions

On appeal, CARB challenged the district court’s conclusion that the fuel standard’s crude oil provisions discriminated against out-of-state crude oil “in purpose and effect.” The Ninth Circuit found CARB’s arguments compelling.

Under the 2011 crude oil provisions, CARB assessed a crude oil pathway’s carbon intensity based on whether it was an emerging or existing source and whether it was a high carbon intensity source. If a crude oil was high carbon intensity and not an existing source (more than 2% of the state’s market share), it was assigned its individual carbon intensity value. All other crude oils were assigned a 2006 baseline average of 8.07 gCO2e/MJ. California crude oil recovered using thermal-enhanced oil-recovery techniques (California TEOR) was the only existing source that was also high carbon intensity to qualify for the 2006 baseline treatment of 8.07 gCO2e/MJ, even though the actual carbon intensity of California TEOR is approximately 18.89 gCO2e/MJ. CARB stated the purpose of distinguishing between existing and emerging sources and high carbon intensity versus non-high carbon intensity crudes was to prevent increases in carbon intensity and “fuel shuffling.” The district court concluded these stated purposes disguised a discriminatory purpose due to the fuel standard’s favorable treatment of California TEOR as compared to other crudes. The Ninth Circuit faulted the district court’s comparison for leaving out other sources of California crude oil.

The Ninth Circuit noted that the district court’s comparison left out significant portions of California’s 2006 crude oil market. In context of the full market, the court did not find the regulations protectionist in favor of California interests. For example, California Primary had the lowest individual carbon intensity in the market of 4.31 gCO2e/MJ, but was assigned the 2006 baseline value of 8.07 gCO2e/MJ. American Fuels argued this unfavorable treatment of California Primary was irrelevant, arguing that a state law that discriminates against out-of-state commerce is no less discriminatory simply because it burdens some interstate commerce. But the Ninth Circuit pointed out the cases American Fuels cited to involved regulations adopted by local governments which favored local interests at the expense of both in-state (but out-of-town) and out-of-state commerce . In contrast, the 2011 crude oil provisions of the fuel standard burdened and benefited in-state interests at the state level. The court could find no compelling evidence that CARB preferred California TEOR to California Primary and ultimately could find no protectionist purpose to the regulations.

The Fuel Standard and Regulation of Extraterritorial Conduct

The Ninth Circuit explained that the Commerce Clause prohibits, in addition to discrimination based on origin, any statute or regulation directly controlling commerce occurring wholly outside of the state. The district court agreed with plaintiffs that the fuel standard improperly attempted to regulate extraterritorial conduct for numerous reasons. For example, the district court believed the lifecycle analysis, including measuring GHG emissions during the transportation of fuel, improperly extended California’s police power to other states. The Ninth Circuit disagreed with this analysis.

The Ninth Circuit considered prior cases where courts found states engaged in improper regulation of extraterritorial conduct. It did not find the fuel standard’s regulation of ethanol analogous to any of these cases. The regulations had no impact on ethanol produced, sold and used outside of California. Nor did the regulations require other states to adopt reciprocal standards before allowing import of that state’s ethanol. Finally, the regulations were not intended to ensure California ethanol would remain at lower prices than in other states. The Ninth Circuit did not agree that offering financial incentives to encourage the sale of lower carbon intensity fuel within the state is categorically the same as regulating production of fuel outside of the state.

The Ninth Circuit also rejected plaintiffs’ assertion that the fuel standard would “Balkanize” the fuels market or lead to inconsistent regulations among the states. The court reasoned that the fuel standard does not place a financial barrier around the state. Similar states could adopt similar standards without impermissibly interfering with interstate trade. Instead, the purpose of the regulations was to allow California to assume legal and political responsibility for GHG emissions from fuels used within the state. Plaintiffs argued this attempt to take responsibility was indistinguishable from taking control of fuel production. The Ninth Circuit firmly disagreed, concluding that the “Commerce Clause does not protect plaintiff’s ability to make others pay for the hidden harms of their products merely because those products are shipped across state lines. The Fuel Standard has incidental effects on interstate commerce, but it does not control conduct wholly outside the state.”

The Holding

The Ninth Circuit ultimately rejected CARB’s argument that the fuel standard was expressly allowed under the Commerce Clause due to California’s exemption from Clean Air Act section 211(c)(4). However, CARB did succeed in convincing the appellate panel that its crude oil provisions did not discriminate in purpose or effect and that its ethanol provisions were not facially discriminatory or an impermissible extraterritorial regulation. The panel remanded the case to the district court to determine whether the ethanol provisions discriminate in purpose or practical effect, and if not, to apply the Pike balancing test to the regulations to determine whether they are valid. Under this test, plaintiffs must show that CARB’s fuel standard imposes a burden on interstate commerce “‘clearly excessive’ in relation to its local benefits.” The court also directed the lower court to apply the Pike balancing test to the 2011 provisions for crude oil.

In Friends of Oroville v. City of Oroville, ___Cal.App.4th ___ (Aug. 19, 2013, Case No. C070448), the Third District Court of Appeal ruled that the City of Oroville misapplied the threshold-of significance standard in Assembly Bill 32 (the California Global Warming Solutions Act of 2006) when it approved an EIR for a new Wal-Mart Supercenter. In the published portion of the opinion, the court found that the city identified the proper significance threshold for the Wal-Mart project’s greenhouse gas (GHG) emissions. But the court held that the city failed to apply the standard properly because it a) applied a “meaningless” number to determine insignificant impact and b) failed to ascertain the existing GHG emissions for the project. The case provides clear guidance for an agency making a determination under CEQA of GHG emissions impacts.

The project involved the relocation and expansion of an existing Wal-Mart store. At the time the EIR was developed, neither the city nor the Butte County Air Quality Management District had adopted a plan for reducing greenhouse gas emissions that would be applicable to the project. Therefore, the city adopted a standard that asked whether the project would “significantly hinder or delay” California’s ability to meet the reduction targets in Assembly Bill 32, which seeks to reduce greenhouse gases including carbon dioxide to 1990 levels by the year 2020. The EIR noted that the State Air Resources Board’s Scoping Plan for achieving that goal calls for cutting approximately 30 percent from “business-as-usual” emission levels projected for 2020. The court found this standard proper.

The city’s error came when it compared the project’s estimated carbon dioxide emissions at build-out with the entire state of California’s 2004 GHG emissions. The calculation showed the project’s emissions constituted just 0.003 percent of the state’s total emissions. The EIR concluded the impact was less than significant because it would not significantly hinder or delay California’s ability to meet the GHG reduction targets in Assembly Bill 32. In a sharp rebuke, the court called the comparison “meaningless” and “worse than apples to oranges” because “[o]f course, one store’s GHG emissions will pale in comparison to those of the world’s eighth largest economy.”

The court pointed to Citizens for Responsible Equitable Environmental Development v. City of Chula Vista (2011) 197 Cal.App.4th 327, for the proper application of the standard. According to the court, the relevant question is whether a project’s emissions should be considered significant “in light of the threshold-of significance standard of Assembly Bill 32, which seeks to cut about 30 percent from business-as-usual emission levels projected for 2020 [emphasis added].”

The court also found the EIR deficient because it failed to ascertain or estimate the effect of the project’s mitigation measures on GHG emissions. The court stated: “Without these determinations, ascertaining whether AB 32’s target reductions are being met is difficult if not futile.” In its disposition, the court reversed the trial court’s denial for writ of mandate and remanded with directions to grant the petition as to the issue of greenhouse gas emissions and payment of transportation-related fees.
[written by Deb Kollars]

In POET, LLC v. State Air Resources Board (2013) __Cal.App.4th__ (Case No. F064045) (POET), the Fifth District Court of Appeal held that the California Air Resources Board (CARB) committed procedural violations of the California Environmental Quality Act (CEQA) when it approved regulations for the nation’s first “Low Carbon Fuel Standard” program. The court ruled that CARB must set aside its approval of the regulations and take proper actions to comply with CEQA, but that the regulations should remain operative in the meantime in the interest of protecting the environment.

Facts and Procedural Background

The Low Carbon Fuel Standard regulations took effect in 2011 as part of the California Global Solutions Act of 2006 (Assembly Bill 32). The Act established the first comprehensive greenhouse gas regulatory program in the United States. The regulations at issue in POET were designed to reduce the carbon content of transportation fuels used in California.

On April 23, 2009, at the close of the public comment period, CARB passed a resolution that approved the proposed regulations for adoption. The resolution designated the board’s executive officer as the “decision maker” assigned to respond to certain remaining environmental issues. The board gave the executive officer authority to modify and adopt the regulations, but he did not have the option of declining to implement them.

The plaintiffs in the case included POET, LLC, which produces corn ethanol in the Midwest. POET challenged the regulations, claiming CARB violated CEQA during the adoption process. The Fresno County Superior Court denied the plaintiffs’ petition for a writ of mandate and entered judgment in favor of CARB. The Fifth District Court of Appeal reversed the judgment and remanded the matter for further proceedings.

The Court of Appeal’s Analysis

As a threshold matter in its 95-page opinion, the Court of Appeal concluded CARB’s actions were subject to CEQA. CARB contended that because it operated a certified regulatory program, it was required to follow only the procedures set out in its specific regulatory program. The court disagreed. Certified regulatory programs are exempt from CEQA’s procedural requirements regarding preparation of negative declarations and EIRs under Public Resources Code section 21080.5, which provides that a state agency’s preparation of environmental documents under its own regulatory program may serve as the functional equivalent of an EIR. The court noted, however, that this exemption is narrow and such regulatory programs remain subject to “CEQA’s broad policy goals and substantive standards,” including the timing of environmental review and approval of projects.

In its analysis of the CEQA claims, the court first determined that approval of the project under CEQA occurred when the CARB’s decision-making board (Board) approved the regulations for adoption in April 2009. CARB argued approval did not occur until the executive officer took final action on the regulations the following year. The court applied Save Tara v. City of West Hollywood (2008) 45 Cal.4th 116 (Save Tara), calling it “the leading case regarding the application of the definition of ‘approval’ under CEQA Guidelines section 15352.” The Supreme Court in Save Tara articulated a general test for determining the point at which agency action on a proposed project necessitates CEQA review. The Fifth District quoted Save Tara in noting the determination must take into account the terms of the resolution as well as “the surrounding circumstances to determine whether, as a practical matter, the agency has committed itself to the project . . . so as to effectively preclude any alternatives or mitigation measures that CEQA would otherwise require . . . .”

Save Tara involved a private project and a post-approval CEQA EIR compliance condition in an agreement to convey property. The Fifth District extended the Save Tara principles regarding project approval to “projects undertaken by public agencies under certified regulatory programs.” The court held that the Board’s 2009 approval of the Low Carbon Fuel Standard regulations constituted “approval,” based on the clear language in numerous Board documents, as well as the practical effects of the action.

From there, the court concluded CARB violated CEQA because its environmental review under its certified regulatory program was not completed before the regulations were approved. The court noted that this “premature approval” decided a controversial issue involving carbon intensity values related to land use changes for ethanol produced from corn. This was because CARB, in delegating subsequent environmental review authority to the executive director, expressly denied the executive director the authority to modify this aspect of the regulations.

The court also held the CARB “violated a fundamental policy of CEQA” by improperly delegating responsibility for completing the environmental review process to its executive director. Under CEQA Guidelines section 15025, subdivision (b) and case law, a public agency’s decisionmaking body may not delegate the review and consideration of a final EIR or approval of a negative declaration prior to approval of a project. “For an environmental review document to serve CEQA’s basic purpose of informing governmental decision makers about environmental issues, that document must be reviewed and considered by the same person or group of persons who make the decision to approve or disapprove the project at issue.” The court stated that this purpose “applies with equal force whether the environmental review document is an EIR or documentation is prepared under a certified regulatory program.”

The Court of Appeal further held that the CARB violated CEQA when it deferred formulating mitigation measures for NOx emissions from biodiesel fuel. Courts have recognized an exception to the general rule prohibiting the deferral of the formulation of mitigation measures under CEQA Guidelines section 15126.4, subdivision (a)(1)(B). The court stated that under this exception, an agency must commit to “specific performance criteria for evaluating the efficacy of the measures implemented.” In this case, the court held that CARB’s statement that future rules would “establish specifications to ensure there is no increase in NOx” failed to constitute the objective performance criteria required for the exception.

The Remedy

The court remanded the case, directing the trial court to issue a writ of mandate compelling CARB to set aside its approval of the Low Carbon Fuel Standard regulations while allowing the Low Carbon Fuel Standard program to remain in place “as long as [the Air Resources Board] is diligent in taking the action necessary” to comply with CEQA. The court concluded that “the environment will be given greater protection” if the status quo is preserved. The court noted this was a rare outcome. More commonly, the courts have set aside rules, ordinances or other types of written requirements governing third party action when CEQA has been violated. But the court determined that such a remedy was appropriate under power authorized it by Public Resources Code, section 21168.9.

On November 13, 2012, the California Chamber of Commerce filed a petition seeking to block the California Air Resources Board (CARB) from auctioning carbon allowances. The complaint, filed in a Sacramento state court, asserts that CARB lacks the authority under AB 32 to raise money beyond what is needed to cover its administrative costs of implementing a state emissions regulatory program.

The Chamber argues that the California Legislature never authorized CARB to raise fees or taxes through an auction mechanism. Therefore, the program constitutes an unauthorized and unconstitutional tax according to the Chamber. The Chamber cites the California Constitution, which requires a two-thirds vote of the Legislature to raise taxes. In prepared statements regarding the suit, the Chamber states the current CARB proposal “is the most costly way to implement AB 32” and that it will “hurt consumers, the job climate, and the ability of business to expand” in California. The Chamber argues other states will decline to follow California’s AB 32 as a model if it is not designed to be the most cost effective way of reducing carbon emissions.

In the suit, the Chamber did not seek a court order blocking the first auction set for November 14, 2012, and state officials indicated the sale would proceed as scheduled. An affiliate of the Chamber indicated that the organization is trying to eliminate future auctions, which are set for regular intervals over the next eight years. Tim O’Conner, director of the Environmental Defense Fund’s California Climate and Energy Initiative noted that the Chamber’s filing of the suit on the eve of the first auction “seems quite unsavory” and could dampen California’s comprehensive program to curb greenhouse gases. The Chamber insisted the suit was not filed in relation to the specific auction scheduled for November 14, 2012.

CARB spokesperson Stanley Young indicated that the agency is confident the cap-and-trade program will withstand any court challenge. CARB believes the market-based approach to cutting greenhouse emissions gives California business flexibility to best decide now to reduce emissions.

The court must decide whether the auction should be viewed as a tax and whether AB 32 granted CARB discretion to design a mechanism, such as cap and trade, to curb the state’s greenhouse gas emissions. Considering that the Legislature passed legislation directing the State’s Department of Finance and CARB to develop a plan to invest auction proceeds and to set up an account for the deposit of auction funds, it seems the Chamber may have a difficult time convincing a court that the Legislature intended to limit CARB’s discretion in a way that would prohibit the auction of allowances for a cap-and-trade program designed under AB 32.

On November 14, 2012, the California Air Resources Board will conduct its first quarterly auction for greenhouse gas allowances under the cap-and-trade program, which is identified in the Assembly Bill 32 Scoping Plan as one of the strategies California will employ to reduce the greenhouse gas emissions that cause climate change.

In 2006, the Legislature passed and Governor Schwarzenegger signed AB 32, the Global Warming Solutions Act of 2006, which requires California to reduce greenhouse gas emissions to 1990 levels by 2020. In complying with AB 32, CARB prepared a Scoping Plan identifying a cap-and-trade program as one of the strategies California will use to reduce the GHG emissions that cause climate change. The cap-and-trade program places a limit on the GHG emissions allowed from pollution producers like refineries and cement manufacturers, and directs all entities subject to the cap (covered entities) to surrender “compliance instruments” equivalent to their GHG emissions to CARB. Compliance instruments include both allowances, which are allocated by CARB or obtained from auctions or secondary markets, and offset credits, which represent GHG emissions reductions achieved in sectors that are not subject to the cap.

This year, the cap-and-trade program covers about 350 industrial businesses operating a total of 600 facilities throughout the state. They include cement plants, steel mills, food processors, electric utilities, and refineries. Starting in 2015, the program will also cover distributors of natural gas and other fuels. For the first two years of the cap-and-trade program, covered entities will receive 90 percent of their allowances for free, with the free amount and the cap declining over time. Covered entities must either cut their GHG production to that level or buy credits to make up the difference. Companies that have more credits than they need can sell them at the auction, and CARB will sell additional credits as well. The proceeds from CARB’s sale of allowances sold at auction will be deposited in CARB’s Air Pollution Control Fund, awaiting appropriation by the Legislature.

The November 14, 2012, auction is the first, major step for CARB in implementing the cap-and-trade program. Though there remains strong opposition to the program from those businesses required to participate in it, CARB’s completion of this first auction signifies its commitment and readiness to enforce compliance with the cap-and-trade program when it comes online in January 2013.