The Constitutional Threat to the California Effect: A Court Strikes Down California’s Low Carbon Fuel Standard

George Hoberg
December 31, 2011

This week a federal district court in California declared the California low carbon fuel standard unconstitutional for its violation of the interstate commerce clause. The grounds for the decision are revealing about the tensions of sub-national jurisdictions producing complex regulations that have economic implications for other parts of the federation. One of the most important dynamics in US and indeed global environmental policy has been the “California effect,” where innovations in environmental regulation produced by such a gigantic market spillover into other jurisdictions and get adopted more broadly. If upheld, the ruling could have the effect of negating future California effects.

The case is Rocky Mountain Farmers Union v. Gladstone. It focuses on standards for corn-based ethanol, but has direct implications for other unconventional sources of transportation fuels, including oil sands. It also may have implications for state renewable portfolio standards that treat out of state renewable different from in-state. Because the judicial standards for interstate commerce are similar to what they are for international trade, the logic of the ruling also has implications for the consistency of domestic international regulations with NAFTA and WTO.

Does the LCFS discriminate on the basis of location?

There are three essential findings of the case. The first is that the LCFS is, on its face, discriminatory of out of state sources of fuel. This is probably the most controversial and consequential part of the ruling. In its LCFS, California gives different carbon intensity values to different source of fuel. The standard contains a table showing the default carbon intensity values of Midwest corn-based ethanol is 10% higher than California corn-based ethanol. These different values are based on a life cycle analysis (LCA) of greenhouse gas emissions (from the CA-GREET model adopted by the California Air Resources Board). Like any good LCA, the model attempts to be comprehensive, and includes as factors in the analysis transportation distance and the GHG intensity of electricity input. Because Midwest corn-based ethanol needs to travel farther to get to California, and is based on a more coal-intensive electricity supply, it is considered more carbon intensive.

The core issue is whether including transportation distance and type of electricity supply is simply a sensible consequence of the application of a well-intentioned methodology to address a legitimate state policy problem, or whether it constitutes impermissible discrimination based on place of origin. The court sided with plaintiffs and firmly adopted the latter conclusion: “Having considered the parties’ arguments, relevant case law, and admissible evidence, this Court finds that the LCFS…explicitly differentiate[s] among ethanol pathways based on origin (Midwest vs. California) and activities inextricably intertwined with origin (electricity provided by Midwest power companies vs. California power suppliers and interstate transportation).”

California argues this logic is flawed, that the standard discriminates on the basis of carbon intensity, which is exactly its purpose, and not location per se. But the court ruled differently.

If the argument that application of a life cycle analysis is “inextricably intertwined with origin” holds up, it posed grave threats to state-level regulatory standards under the US constitution and national regulatory standards under international trade law. In fact, the judge in this case goes so far as to imply that any standard addressing carbon leakage is discriminatory: “California is attempting to stop leakage of GHG emissions by treating electricity generate outside of the state differently than electricity generated inside its border. This discriminates against interstate commerce.”

Can Climate Change be Legally Constructed as Legitimate Local Concern?

Under US constitutional law (and international trade law), discrimination based on location is not inherently unlawful. The state must “demonstrate both that the statute ‘serves a legitimate local purpose,’ and that this purpose could not be served as well by available nondiscriminatory means” (p.  22).

The second part of the ruling addresses whether the LCFS serves a legitimate local interest. The ethanol producers argued that because greenhouse gas emissions have a global effect, that they do not have a particular local impact on California. The district court rejected this argument, based on previously established decision in the landmark Massachusetts v. EPA case.

Can the Policy Objective be Achieved by Non-discriminatory Means?

The third part of the ruling addresses whether California’s policy goals can be a achieved through other means that don’t discriminate based on location. The court ruled that “California has failed to establish this fact. “ The judge pointed to testimony that even state experts acknowledge that a carbon tax, vehicle emission standards, and reductions in vehicle miles travelled could be applied to pursue the same objective of reducing carbon emissions from transportation in the state. The judge faulted the state for not demonstrating that alternatives to the LCFS could meet the same objective with less discriminatory effect.

What’s Next?

The future of this case is critical to the development of climate policy in the US and perhaps other jurisdictions. The state could win on appeal (the next stage is the federal court of appeals, and then potentially the US Supreme Court). Another court may be more convinced by California’s logic that the standard discriminates on the basis of carbon intensity and not location. The provision in the standard for “customized carbon intensity pathways” should strengthen its case. The law provides for tailored carbon intensities for suppliers that can demonstrate that their practices differ from the assumptions in the standard, and the state has already granted a number of these.

However, if higher courts agree that application of a life cycle analysis is “inextricably intertwined with origin,” the ability of states to use LCA as the basis for climate policy will be thwarted. The state could attempt to redesign a low carbon fuel standard that was more neutral to location, but that would undermine its effectiveness. California might be forced to abandon its LCFS and pursue other policy instruments.

It is important to note that all these unfortunate dynamics are being created by the failure of the US government to take concerted action on climate change. In the past, California’s leadership on environmental policy has prompted more effective and comprehensive federal action. In the case of California’s LCFS, Midwestern corn-ethanol producers have succeeded in using the courts to stop the California effect in its tracks. For now.

See also Richard Frank’s analysis from Legal Planet.

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