On December 29, 2011, the United States District Court for the Eastern District of California (“District Court”) issued three separate rulings on motions for summary adjudication in the matter of Rocky Mountain Farmers Union v. Goldstene (Dec. 29, 2011, No. CV-F-09-2234 LJO GSA; No. CV-F-10-163 LJO DLB) 2011 U.S. Dist. LEXIS 149590).  Plaintiffs in the case, a coalition of associations representing agricultural interests, refineries, and biofuel companies, alleged that California’s Low Carbon Fuel Standard (“LCFS”) regulations promulgated by the California Air Resource Board (“CARB”) were unconstitutional.  Specifically, Plaintiffs alleged that the regulations violated the dormant Commerce Clause of the United States Constitution by improperly discriminating against out-of-state products in favor of in-state products, and that these regulations are preempted by provisions of federal law found in the Clean Air Act (“CAA”).  Defendant CARB asserted in a separate motion that provisions in the CAA both prevented Plaintiffs from making any preemption claims and prevented Plaintiffs from bringing any dormant Commerce Clause claims.  The District Court ultimately found that the LCFS was discriminatory and violated the dormant Commerce Clause, and held that while there is an exception in the CAA that prevents Plaintiffs from making claims of express preemption, there was no such restriction on traditional conflict preemption claims or dormant Commerce Clause claims.  These rulings could have a significant impact on the future of California’s LCFS regulations and the state’s overall approach to future regulation of greenhouse gas emissions. 

Background

California’s Low Carbon Fuel Standard (Cal. Code Regs., tit. 17, §§ 95480-95490) is one of a series of regulations designed to implement the state’s landmark greenhouse gas reduction law, Assembly Bill 32 of 2006 (“AB 32”), the Global Warming Solutions Act of 2006.  The purpose of the LCFS is to implement a low carbon fuel standard that will reduce greenhouse gas emissions “by reducing the full fuel-cycle, carbon intensity of the transportation fuel used in California.” (Cal. Code Regs., tit. 17, § 95480.)  The LCFS is also designed to reduce California’s dependence on petroleum and to stimulate the production and use of alternative, low-carbon fuels in California.  The regulations require entities to report a significant amount of information regarding a fuel’s attributes and carbon intensity, and ultimately sets goals to reduce the average carbon intensity of each fuel component through 2020. 

Analysis

Plaintiff National Petrochemical & Refiners Association (“NPRA”) Alleges Dormant Commerce Clause Violations

Plaintiff NPRA’s primary substantive claim is based on alleged violations of the dormant Commerce Clause.  The dormant Commerce Clause directly limits the power of the states to discriminate against interstate commerce, and in the context presented by the LCFS regulations, “[d]iscrimination simply means differential treatment of in-state and out-of state economic interests that benefits the former and burdens the latter.”  (United Haulers Ass’n v. Oneida-Herkimer Solid Waste Mgmt. Auth. (2007) 550 U.S. 330, 333.)  NPRA contended that the LCFS violates the dormant Commerce Clause because it (1) discriminates in favor of California corn ethanol and against Midwest corn ethanol; (2) discriminates in favor of California crude oil and against crude oils from outside of California; and (3) attempts to regulate interstate and foreign commerce based on a fuel’s production and transport that occurs outside of California.  The District Court examined each of these claims in turn, and held that the LCFS regulations were discriminatory, and because other non-discriminatory means were available for achieving CARB’s stated goals, prevented the regulations from being applied.

First, Plaintiffs argued that because out-of-state ethanol producers are assigned a higher “carbon intensity” than in-state producers, the regulation facially discriminates against out-of-state producers.  The justification provided by CARB for the discrepancy in assigned carbon intensity was the underlying difference in greenhouse gas emissions associated with each producer’s transportation methods as well as electricity sources (i.e., transport from out-of-state sources results in higher greenhouse gas emissions, and California has access to cleaner power sources than some out-of-state producers).  The court agreed with Plaintiffs on this issue, finding that the differences in carbon intensity constitute facial discrimination, and therefore granted NPRA’s motion.  Citing a separate order issued concurrently in the case, the court applied the constitutional “strict scrutiny” test and concluded that the LCFS “discriminates against out-of-state corn derived ethanol on its face and impermissibly regulates extraterritorially based on the ethanol pathways.” 

Second, Plaintiffs argued that the LCFS discriminates against emerging sources of high carbon intensity crude oil (“HCICO”) by treating them less favorably than HCICO from California and foreign countries.  A HCICO is a crude oil with a high carbon intensity value, and through the LCFS regulations CARB distinguished between existing HCICOs and emerging HCICOs.  NPRA argued that this classification system in the LCFS treats crude oil from California more favorably than crude oil from outside of California because (1) the LCFS treats emerging crude sources less favorably than HCICO from California, and (2) under the LCFS all existing crude sources are assigned the same carbon intensity value even though HCICO from California has a higher carbon intensity than other low carbon intensity crude oils from Alaska and foreign countries.  Defendant CARB argued the LCFS applies evenhandedly to all ethanol pathways, does not discriminate in the crude oil market, and does not regulate extraterritorial activity.  However, the District Court sided with NPRA, determining that even though the values assigned under the LCFS system for HCICOs appears facially neutral, the design and practical effect of these LCFS provisions is to favor California HCICO and discriminate against foreign HCICOs, thereby protecting California’s type of processed crude oil by giving that fuel an artificially favorable and lower carbon intensity value.

Finally, because the District Court found that these provisions of the LCFS were discriminatory, it also examined whether CARB had demonstrated that the LCFS serves a legitimate local purpose and that this purpose could not be served as well by available nondiscriminatory means.  (See Hunt v. Washington State Apple Advertising Com. (1977) 432 U.S. 333, 353.)  On the first element, the court found that CARB’s stated purpose, to reduce the risks of global warming, does serve a local and legitimate interest and CARB was able to establish that the regulations are justified by a valid factor unrelated to economic protectionism, the preservation of the environment by reducing greenhouse gas emissions.  However, the court also found that CARB failed to establish that the goal of reducing global warming cannot be adequately served by nondiscriminatory alternatives or that CARB could not achieve this goal through other nondiscriminatory means.  Thus, the District Court concluded that although alternative approaches may be less desirable for a number of reasons, CARB’s failure to demonstrate that there are no nondiscriminatory means by which California could combat global warming through the reduction of greenhouse gas emissions other than the LCFS could not withstand dormant Commerce Clause challenges, and granted NPCA’s motion on this issue. 

District Court Finds Exception to Express Preemption in the CAA Applies to the LCFS, but Traditional Conflict Preemption Principles Still Apply 

In addition to the substantive dormant Commerce Clause issues, both Plaintiffs and Defendants raised divergent interpretations of the CAA in their respective motions.  Specifically, section 211 of the Clean Air Act (42 U.S.C. § 7545) sets forth the federal statutory framework for regulating motor vehicle fuels and fuel additives, and also authorizes the United States Environmental Protection Agency (“EPA”) to regulate fuels to control vehicle emissions and to ensure a national market for fuels.  Plaintiffs alleged that the LCFS conflicts with and is preempted by the national renewable fuel standard program (42 U.S.C. § 7545(o), hereafter “section 211(o).”) because the LCFS requires renewable fuel facilities that are exempted from section 211(o) requirements to comply with the LCFS.  In contrast, Defendants asserted that the LCFS does not conflict with Section 211(o) and is instead authorized by section 211(c)(4)(B) which, in effect, serves as an exception to the preemption provision for California.  (“Any state for which application of [section 209(a)] has at any time been waived under [section 209(b)] may at any time prescribe and enforce, for the purpose of motor vehicle emission control, a control or prohibition respecting any fuel or fuel additive.”  (42 U.S.C. § 7545(c)(4)(B), emphasis added.)  More specifically, CARB claimed that the LCFS is an “authorized control of a motor vehicle fuel” as articulated in section 211(c)(4)(B), and is thus insulated from preemption challenges.

After examining the history of CARB’s action as it relates to the CAA, the court found that CARB properly established that the LCFS was passed for the purpose of “motor vehicle emission control,” and that the LCFS is a “control respecting a fuel or fuel additive”, and thus the regulations fit within the section 211(c)(4)(B) preemption exception.  However, the District Court found that even though the LCFS is an authorized regulation pursuant to section 211(c)(4)(B), California’s authority pursuant to that section is not unfettered, and even California regulations that are exempt from preemption under provisions of the CAA must still be analyzed according to ordinary conflict preemption principles.  According to the court, even when state laws fall within a savings clause and are therefore not expressly preempted, those laws are still subject to the ordinary working of conflict preemption principles.  (Citing Chicanos Por La Causa, Inc. v. Napolitano (2009) 558 F.3d 856, 866.)  The court denied without prejudice this portion of Defendants’ summary judgment motion because no party had yet addressed the appropriate standard of review for a conflict preemption challenge. 

District Court Rejects Defendants’ Assertion that the Preemption Exception Insulates the State Regulations from Commerce Clause Claims

Finally, CARB contended that Section 211(c)(4)(B) (the preemption exception) insulates the LCFS regulations from dormant Commerce Clause claims because Congress directly authorized California, via this provision, to regulate a significant aspect of interstate commerce by allowing the state to adopt fuels regulations that burden interstate commerce.  However, the court expressly rejected this argument, noting that in order to authorize a Commerce Clause violation, Congress must do more than simply authorize a state to regulate in an area.  Rather, Congress must “affirmatively contemplate otherwise invalid state legislation” and clearly express its intent to “remove federal Constitutional constraints.”  (Citing South-Central Timber Dev., Inc. v. Wunnicke (1984) 467 U.S. 82, 91; Sporhase v. Nebraska ex rel. Douglas (1982) 458 U.S. 941, 960.)  In this instance, the District Court found that Defendants failed to establish by clear and unmistakable evidence that Congress intended to exempt the LCFS from scrutiny under the Commerce Clause, and thus Plaintiffs were entitled to bring such a claim. 

Conclusions and Implications

The District Court’s rulings on the validity of the LCFS may have a significant impact on the implementation of AB 32 and California’s efforts to reduce greenhouse gas emissions in the future, as the LCFS was reportedly designed to account for approximately 10% of the targeted reductions in overall emissions.  It is not entirely clear how CARB or the state will react to being unable, at least temporarily, to proceed with implementing the LCFS as drafted.  However, CARB has since issued “Supplemental Regulatory Advisory 10-04B,” which states that CARB intends to appeal these rulings, will seek an order staying the court’s preliminary injunction, and will continue its stakeholder and rulemaking processes for the LCFS.  It will be interesting for affected entities to continue to monitor the success of any appeal as well as participate in the ongoing interim regulatory processes. 

For additional information related to the recent ruling in Rocky Mountain Farmers Union v. Goldstene (Dec. 29, 2011, No. CV-F-09-2234 LJO GSA; No. CV-F-10-163 LJO DLB) 2011 U.S. Dist. LEXIS 149590), please contact Adam D. Link at alink@somachlaw.com.

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