Will California LCFS ruling affect other state and regional climate initiatives?

On December 29, U.S. District Judge Lawrence O’Neil issued a preliminary injunction against California’s Air Resources Board’s (“CARB”) low carbon fuel standard (“LCFS”).  The lawsuit, brought by the ethanol, oil and trucking industries, alleged that California’s LCFS violates the Commerce Clause of the U.S. Constitution and is preempted by federal law. Judge O’Neil held that California’s LCFS violates the Commerce Clause of the U.S. Constitution, because the regulation impermissibly attempts to regulate interstate commerce. The ruling, however, dismissed the plaintiffs’ claim that federal law preempted California’s LCFS.  An important question will be the influence that this recent decision will have on other state and regional climate initiatives.  

A little bit of background is necessary to understand the issues and potential ramifications associated with the lawsuit over California’s LCFS. In 2009, CARB finalized the LCFS, which would require a 10% reduction in the carbon intensity (“CI”) of the state’s transportation fuels by 2020. The rule defines CI as the amount of lifecycle GHG emissions, per unit of energy of fuel delivered. The rule assessed different CI values for various types of ethanol, including assigning lower CI values to California corn-derived ethanol than to Midwest corn-derived ethanol. In addition, the rule created a CI distinction with regard to conventional and unconventional crude oil, including fuels derived from the Canadian oil sands. CARB does allow for a producer to obtain a customized CI value if it can demonstrate that its energy use data “deviates substantially from that of the pathways” represented in this initial rule. 

Judge O’Neil’s ruling held that California’s LCFS violates the Commerce Clause. First, the ruling found that the LCFS facially discriminated against out-of-state ethanol by penalizing Midwest producers for larger lifecycle GHG emissions. Judge O’Neil also agreed with the plaintiffs’ argument that the LCFS is attempting to control commerce wholly outside the state’s border. Finally, Judge O’Neil ruled that CARB failed to demonstrate that reducing climate change could be achieved through other non-discriminatory means. According to Judge O’Neil, there are other non-discriminatory means to reducing GHG emissions from the transportation sector, including adopting a tax on fossil fuels.  

If upheld by the Ninth Circuit, Judge O’Neil’s ruling could potentially signal a blow to other state and regional climate initiatives. Several Northeastern states are working on developing a clean fuel standard based in part on California’s LCFS and with the goal of reducing the CI value of transportation fuels by 10% over the next decade. Oregon and Washington State are also considering adopting a LCFS based on California’s model. Judge O’Neil’s ruling could influence these fledgling fuel standard efforts by encouraging states to eliminate CI distinctions between different types of ethanol and conventional and unconventional crude.  

It will also be important to monitor the effect of this ruling on other state climate initiatives. In one notable case, North Dakota, electric cooperatives and coal producers are suing Minnesota over its Next Generation Act. Minnesota’s legislation committed the state to reducing GHG emissions 30% by 2023 and 80% by 2050. Specifically, the legislation prohibited utilities from purchasing power from new plants unless the GHG emissions associated with that power are fully offset. The lawsuit contends that Minnesota’s law violates the Commerce Clause by discriminating against North Dakota’s coal interests. North Dakota is home to one of the world’s largest reserves of lignite coal, which provides a majority of the fuel used in Minnesota’s coal-fired power plants.   The state’s power plants also export significant amounts of electricity to Minnesota. The plaintiffs are also arguing that exemptions provided in the law for four specific projects favor Minnesota businesses at the expense of North Dakota business interests. Undoubtedly, the plaintiffs will point to Judge O’Neil’s ruling in urging the court to block Minnesota’s Next Generation Act.    

Judge O’Neil’s ruling could also spur a proliferation of lawsuits challenging other state climate regulations.