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.
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.
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 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.