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.
Governor Schwarzenegger Struck Again
California Governor Schwarzenegger struck again last week. The Governor issued Executive Order S-21-09 requiring California utilities to obtain 33 percent of their electricity from renewable energy sources by 2020. The previous requirement was 20 percent by 2010. This law compliments the State goal to reduce GHG emissions to 1990 levels by 2020. Yet the Executive Order comes with controversy on the horizon.
Citing a variety of generation, siting, permitting and transmission barriers and a preference to avoid a protectionist approach to energy, the Governor issued the Executive Order just days after threatening to veto a California Legislature bill with the same target. Compared to the legislative proposal, the Executive Order provides more flexibility for utilities to purchase out-of-state sources of renewable energy in partnership with the Western Governor Association’s “Western Renewable Energy Zone” initiative, and creates a more streamlined approach at the California Fish and Game Department for permitting of renewables while taking ecosystem protections into account. Some view this second provision as a key for large solar power projects planned in Southern California deserts. Senator Feinstein has raised concerns with some solar projects in this region due to impacts on the landscape and vulnerable species such as the tortoise.
Going forward, the California Air Resources Board will craft implementation rules that will take on sensitive issues including potential expansion of the definition of “renewable energy” to allow run-of-river hydroelectricity from British Columbia into the system, and will try to find a balance between creation of jobs and energy in California, ecosystem impacts, energy costs and putting more low carbon power sources on the grid. There will be no shortage of challenges to achieve this 33 percent by 2020 target. These challenges -- and of course the inevitable political and philosophical differences -- have not prevented stakeholders out West from finding a way to move forward. The US Senate could learn a thing or two from California as it continues to debate a federal approach to the same challenges.
Praise for a Climate Policy in Regression?
The praise keeps pouring in for the Administration’s recent first steps toward withdrawing EPA’s objections to California's effort to implement tough emission standards for automobiles. I wrote about this earlier, pointing out that Congress needs to act quickly or get left behind.
Today’s editorial page of the Washington Post suggests that the most effective action might not be regulation at all, or at least not regulation alone -- state or federal. The editorial writers at the Post say the best way to proceed would be to “change the incentives so that people want to buy fuel-efficient vehicles; then companies will make such cars, even without commands from Washington.”
The Post is right, and here’s why: we can impose emissions restrictions on the cars Detroit produces or we can shape the demand for Detroit’s products. Emission regulations like the ones California will pursue will do the former, but a consistent and high gasoline price signal will do the latter. If it were adopted, it would likely produce real emissions reductions more quickly and efficiently. There are many ways to do this, and Congress knows all of them. But the important thing is to support gas prices at consistent and high enough levels to allow market incentives to go to work. Cap-and-trade? Perhaps. Or a gas tax? Perhaps. And rebates to the public, as the Post says, are entirely consistent with this strategy.
It’s only been six months since John McCain and Hillary Clinton called for gas tax holidays during the Presidential race. President Obama wisely refused to support those efforts. Is he willing to go even further and work for a “a gradual rise in fuel prices that would not shock the system,” as the Post put it? Is Congress willing to do the same? That would be leadership.
It would also be leadership if the auto manufacturers took the initiative, as I suggested yesterday, and softened the path for the Administration and Congress by convening key interest groups and agencies to join with them in fashioning a single omnibus vehicle performance standard. Who knows? Out of such a group might come consensus on a gradual rise to a sustained gas price level that would incentivize people to buy fuel-efficient low-GHG emissions cars.
California 1, US 0
The Obama Administration has taken the first steps toward withdrawing EPA’s objections to a California's effort to implement tough emission standards for automobiles. Could that be bad news for those hungry for federal action on transportation emissions?
At first glance, the news seems to be a win for federal leadership, since the lifting of the roadblock in Washington makes California's efforts possible. But the roadblock's removal could soon be seen as a victory for the states. And that could end up leaving Washington's aspirations to lead the regulation of emissions from cars in the dust.
For years, the Bush administration rebuffed California's effort to regulate carbon emissions from cars, officially a waiver of a Clean Air Act allowing the state to regulate greenhouse gases (GHGs) in automobiles. The automobile industry has objected strongly to state-based regulation efforts, stating that different standards in different states are confusing and expensive. In practice, state standard-making forces the industry to design cars to meet all standards, which means the decision is up to the strictest state with a market that the autos can't ignore. Enter the California Air Resources Board.
If Congressional action doesn't follow an Obama decision in due course, we'll all be looking to the states led by bellwether California for emission standards for the auto industry. And how might the auto manufacturers best proceed to get the best deal from Congress in the Obama era? Consensus solutions and public-private collaboration to break policy deadlock are the new watchwords. The auto manufacturers might take a page from the many highly diverse multi-stakeholder groups that have sprung up recently to address everything from climate legislation to chemical testing and production.
The manufacturers might be well advised at this point to ask key state and federal agencies, labor unions, fleet purchasers, non-governmental environmental and consumer organizations, and other potential legislative “deal-breakers” to join with them in fashioning a single omnibus vehicle performance standard for mileage, emissions, air-conditioning refrigerant, electrification, and other green elements. This might be the best path to a uniform federal approach to autos in climate legislation.
