By Glen C. Hansen

As California seeks to reduce greenhouse gas (“GHG”) emissions in the state’s industries in order to implement provisions of California’s Global Warming Solutions Act of 2006 (i.e., AB 32), entities and trade groups both inside and outside the state have looked to the “dormant” Commerce Clause in the U.S. Constitution as a legal means to challenge those efforts. That constitutional argument could be potent. As Professor Deborah A. Sivas of Stanford Law School explains: “It could become impossible for states to do anything for regulating greenhouse gas emissions if there’s an invigorated dormant Commerce Clause, because states can’t really get their arms around emissions unless they look at what other states are doing.” To date, dormant Commerce Clause challenges to California’s GHG-reduction efforts have met with varied success in the federal courts.

Early efforts were not successful. For example, in Pacific Merchant Shipping Association v. Goldstene, 639 F.3d 1154 (9th Cir. 2011), cert. denied, 2012 U.S. LEXIS 4810, a California regulation that requires that ships coming in and out of the state’s ports use cleaner fuels up to 24 miles offshore was challenged by an industry trade group on several grounds, including the dormant Commerce Clause. The Ninth Circuit rejected that constitutional challenge: “[W]e are not currently confronted with a state attempting to regulate conduct in either another state of the Union …, in the territory or waters of a foreign nation, …, or in the open ocean waters hundreds or even thousands of miles from the state’s coast.” (639 F.3d at 1180.) On June 25, 2012, the Supreme Court denied the petition for writ of certiorari in the Pacific Merchant Shipping case.

However, as California adopts more aggressive GHG-reduction efforts that have more impacts on industries in other states, the Commerce Clause challenges to those efforts may be more successful. That recently occurred in a federal challenge to California’s Low Carbon Fuel Standard (“LCFS”) that was promulgated by California Air Resource Board (“CARB”). The significance of the LCFS cannot be overstated, because CARB expects the LCFS to produce about 10 percent of the total GHG reductions required by AB 32. As a result, the LCFS has become ground-zero over a fight between environmental and economic interests, and even between the different states. For example, a representative of the Environmental Defense Fund opines that, in addition to fighting climate change, “the LCFS cuts pollution that poisons our air and water and results in respiratory ailments and diseases that cost us tens of billions of dollars a year in health care costs,” and “the LCFS can help California finally achieve attainment of federal health standards for air quality.” However, a spokesman for the Consumer Energy Alliance counters that the LCFS is “a costly and destructive program” that “will fail to reduce CO2 emissions, double gas prices, place thousands of jobs at risk, and will cost our economy billions of dollars.”

Not surprisingly, numerous farmer groups, ethanol producers and petroleum interests filed actions in the U.S. District Court for the Eastern District of California challenging the LCFS. On cross-motions for summary judgment, the District Court held on December 29, 2011, that the LCFS violates the dormant Commerce Clause because it impermissibly discriminates against out-of-state corn ethanol. The District Court explained that the LCFS assigned over 10% more favorable carbon intensity scores for corn-derived ethanol produced in California than it does for corn-derived ethanol produced in the Midwest. Because those scores ultimately will affect the price of the product, the District Court held that “the LCFS impermissibly discriminates on its face against out-of-state entities.” CARB argued that the difference in scores was due to the California-produced fuels benefitting from “shorter transportation distances and lower carbon intensity electrical sources,” since CARB assumed that, compared to Midwestern producers, California producers will not use coal in their processes and will have better access to electricity produced from hydropower and nuclear power. The District Court found that argument unavailing:

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. Moreover, tying carbon intensity scores to the distance a good travels in interstate commerce discriminates against interstate commerce. [Citation.] In addition, the overtly favorable assumptions (although they may be true) related to the electricity powering the plants favors California producers and penalizes out-of-state competitors.

While the ethanol made in the Midwest and California are physically and chemically identical when ultimately mixed with petroleum, and while the pathways may be the similar, this Court appreciates that the carbon intensities of these two otherwise-identical products are different according to lifecycle analysis. Indeed, the point of the LCFS is to penalize the differences between the California and Midwest ethanol-the carbon emissions from the transportation, the different farming methods used, and the different types of electricity provided to and used by the plants-to reduce emissions. Although CARB’s goal to combat global warming may be “legitimate,” however, it cannot “be achieved by the illegitimate means of isolating the State from the national economy.” … Because of the transportation, electricity and other penalties assigned to Midwest corn ethanol will affect the price of the Midwest ethanol in the California market, the LCFS makes the higher [carbon intensity value] corn-ethanol undesirable to purchase or use.  But the price differential is based on transportation and out-of-state electricity-both factors that discriminate based on location.  In addition, the pressure the LCFS puts on out-of-state competitors to reduce its [carbon intensity] score to become equal to those scores in California “make[s] doing business in the state…more costly for out-of-state companies relative to in-state firms.” CARB may not impose a barrier to interstate commerce based on the distance that the product must travel in interstate commerce. Accordingly, the LCFS discriminates against out-of-state commerce and is subject to strict scrutiny analysis. [Citations omitted.]

The District Court further held that the LCFS violates the dormant Commerce Clause because it controls conduct outside of its borders. The court rejected CARB’s argument that any out-of-state effects are merely indirect:

By using the lifecycle analysis approach to reducing GHG emissions, California is attempting to account for-and reduce-emissions from the entire pathway. Differences in [carbon intensity] scores are based on CARB’s assessment of Midwest states “[f]arming practices (e.g. frequency and type of fertilizer used); [c]rop yields; [h]arvesting practices; [and] [c]ollection and transportation of the crop.” In addition, the LCFS includes a “land use change” component, with higher scores given to the Midwest and Brazil. According to CARB, the LCFS assigns carbon intensity based on these activities to provide an “incentive for regulated parties to adopt production methods which result in lower emissions.” Defendants cannot dispute that the “practical effect” of the regulation would be to control this conduct-occurring wholly outside of California. Indeed, the aim of the LCFS is to change these practices to reduce GHG emissions. But in penalizing these practices to “incentive regulated parties to change” their conduct (including conduct occurring wholly outside of the state), the LCFS impermissibly attempts to “control conduct beyond the boundary of the state.” [Citations omitted.]

Defendants admit that, in enacting the LCFS, “California has essentially assumed legal and political responsibility for emissions of carbon resulting from the production and transport, regardless of location, of transportation fuels actually used in California.” However, the District Court held that was not allowed under the Commerce Clause because “States and localities may not attach restrictions to…imports in order to control commerce in other States,” as that would “extend the [State’s] police power beyond its jurisdictional bounds.”

Even though the District Court found that the LCFS served a local and legitimate interest in reducing global warming, the District Court nevertheless held that California failed to establish that the goal of global warming through the reduction of GHG emissions cannot be adequately served by nondiscriminatory (albeit “less desirable”) alternatives, such as “a tax on fossil fuels,” “regulating only tailpipe GHG emissions in California,” “increasing vehicle efficiency,” or “reducing the number of vehicle miles traveled.” The District Court concluded that, in passing the LCFS, “California impermissibly treads into the province and powers of our federal government, reaches beyond its boundaries to regulate activity wholly outside of its borders, and offends the dormant Commerce Clause.”

The District Court denied the Plaintiffs’ summary judgment motion, in part and without prejudice, on the separate issue of whether the LCFS is preempted by the federal Energy Independence and Security Act of 2007, because Plaintiffs failed to establish the appropriate standard of review.

The District Court further found that, because Plaintiffs established a likelihood of success on the merits of their Commerce Clause claim, and raised serious questions related to their preemption claim, likelihood of irreparable harm, and the balance of the equities so tips in their favor, the District Court granted Plaintiffs’ preliminary injunction motion and enjoined enforcement of the LCFS during the pendency of the litigation. 

Defendants appealed the District Court’s judgments and ruling on the motion for preliminary injunction to the United States Court of Appeals for the Ninth Circuit. Defendants then filed a motion for a stay of the District Court’s orders and judgments with the Ninth Circuit. The four factors regulating the issuance of a stay are (1) whether the stay applicant has made a strong showing that he is likely to succeed on the merits; (2) whether the applicant will be irreparably injured absent a stay; (3) whether issuance of the stay will substantially injure the other parties interested in the proceeding; and (4) where the public interest lies. (Hilton v. Braunskill, 481 U.S. 770, 776 (1987); Leiva-Perez v. Holder, 640 F.3d 962, 964-966 (9th Cir. 2011).) In April 2012, the Ninth Circuit granted the motion for stay, citing Hilton v. Braunskill, but providing no other discussion or analysis. There is no indication as to when the Ninth Circuit will issue its final ruling on the merits of the case.

It is likely that the legal challenge to the LCFS case will end up in the U.S. Supreme Court. The LCFS impacts a national ethanol industry that generates tens of billions of dollars of economic activity. Already, a number of States, national trade groups and environmental organizations have filed amicus briefs in the District Court and the Ninth Circuit. Midwestern farm states are especially incensed by California’s indirect attempt to force changes to electricity production and farming practices in those other states through the LCFS. As one amicus brief on behalf of several Midwestern States against the motion to stay made the following typical comment:

California assigns a penalty [i.e., a higher carbon intensity score] based on “indirect land use change” – the theory being that out-of-state lands will have to be cultivated to produce corn for ethanol (or to produce replacement crops). California wants to discourage such activity because it believes it contributes to global warming. But Amici States may want to encourage cultivation and other economic activity. That is our decision to make.        

The success of the plaintiffs in the District Court in Rocky Mountain Farmers will likely encourage other entities to case employ the dormant Commerce Clause in their legal challenges to California efforts to curtail GHG in industries that impact other states. For example, another dormant Commerce Clause challenge that is brewing involving California’s Renewable Portfolio Standard (“RPS”), and utility providers in the Northwest who have historically provided California with electricity. One such provider, Public Utility District No. 1 of Cowlitz County, Washington, had invested millions of dollars in renewable projects and was negotiating to sell renewable electricity to PG&E when California passed the RPS legislation that redefined how California utilities could buy clean energy. Under the new rules, “Category 1” contracts, which will be used to meet the far majority of California’s future renewable needs, have to be projects that either connect directly to the state’s grid or use a complicated process for moving renewable energy between grids. The Cowlitz utility does not have such a connection. Cowlitz announced in January 2012 that it is considering filing an action that alleges both a $10 million claim against the California Public Utilities Commission (“PUC”) and a challenge to the RPS on the ground that it violates the dormant Commerce Clause. While Cowlitz is presently seeking a rehearing with the PUC on the new rules, industry groups are already lining up on both sides of the fight. If Cowlitz ever filed a federal lawsuit on Commerce Clause grounds, the outcome is uncertain. As Richard M. Frank, director of UC Davis School of Law’s California Environmental Law & Policy Center explains: Renewable portfolio standards “are a relatively new context in which this constitutional issue is being raised and debated.” Mr. Frank adds: “It’s a serious debate and serious issue that’s unresolved.”

RockyMountain Farmers Union v. Goldstene, slip opinions (E.D.Ca. 2011, cases nos. CV-F-09-2234, CV-F-10-163), 2011 U.S. Dist. LEXIS 149593, on appeal with Ninth Circuit as case no. 12-15131; Pacific Merchant Shipping Association v. Goldstene, 639 F.3d 1154 (9th Cir. 2011), cert. denied, 2012 U.S. LEXIS 4810.

Glen C. Hansen is Senior Counsel at Abbott & Kindermann, LLP. For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, or the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.