BIOMASS HUB

Last week, I ran an article in Biofuels Digest about California’s low carbon fuel standard (LCFS) testing the boundaries of Green Federalism.  In it, I examined the constitutional arguments raised by Midwest ethanol (Growth Energy, Renewable Fuels Association, and others), namely, whether the Supremacy Clause and Commerce Clause of the U.S. Constitution prevent California from enacting rules regulating the carbon intensity of fuels.

Ultimately, the case pits energy security and King Corn versus climate prudence.  More specifically, a key part of the analysis is the interplay between California’s goal to reduce greenhouse gas emissions from the fuel supply and the federal renewable fuel standard, which under the Energy Independence and Security Act of 2007 (EISA), mandates that the US produce 36 billion gallons of biofuels annually by 2022.

With the subsequent release of the EPA’s RFS 2.0 and more suits challenging California’s LCFS, the issues are back in the spotlight.  Short answer to the title of this post: maybe.

The original article is reprinted in full below:

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California’s Low Carbon Fuel Standard: Testing the Boundaries of Green Federalism

California, a long-time pioneer in the area of environmental law and policy, is now the target of a lawsuit challenging the constitutionality of its recently adopted Low Carbon Fuel Standard (LCFS), given final approval by the California’s Office of Administrative Law in December 2009.

The case pits energy security and the promise of biofuels against climate change and regulations designed to reduce carbon intensity in transportation fuels.  Because emerging federal and state energy standards designed to mitigate climate change and protect energy security increasingly overlap, the court’s decision will be closely watched around the country.

Ultimately, the case tests the boundaries of  “green federalism.”  Although the connection between localized greenhouse gases (GHG) emissions and climate change-related harm to California’s citizens is tenuous, even a substantial limitation on Midwest ethanol may be justified in this case based on Supreme Court precedent.  In short, the ethanol interests bringing the suit will have to overcome a strong presumption in favor of California’s right to protect the health and safety of its citizens.

Background

California’s LCFS is the most recent tool in the state’s arsenal of global warming measures designed to help meet AB 32 emission targets.  It covers emissions from “well to wheels,” representing a comprehensive and ambitious program to account for the pollution created by extracting, growing, or refining fuels.  Designed to spur innovation in the transportation fuel industry, which accounts for 40 percent of the state’s annual GHG emissions, the standard aims to reduce the “life-cycle carbon intensity” of fuels by 10 percent over the next decade.

The standard works by setting progressively lower carbon intensity baselines for gasoline and diesel sold in California.  Its likely effects will be to increase the uptake of cellulosic and second-generation biofuels while penalizing corn ethanol for its “lifecycle emissions,” a controversial measurement that aims to account for the GHGs at all stages of the fuel’s production, including its role in inducing indirect land-use change (ILUC).

The inclusion of ILUC has ethanol fuel producers up in arms, hence the lawsuit.  They argue that it unfairly penalizes Midwest corn ethanol and impedes the country’s goal of increasing the use of renewable fuels in the transportation sector.

Several out-of-state ethanol and farm groups, led by Growth Energy and the Renewable Fuels Association, suit against California’s Air Resources Board (ARB) in federal district court alleges that California’s LCFS violates the Supremacy Clause and Commerce Clause of the US Constitution.  Specifically:

1. [It] conflicts with and is preempted by federal law, including the Energy Independence and Security Act of 2007 (EISA);
2. Interferes with the regulation of interstate commerce; and
3. Discriminates against out-of-state corn ethanol producers and importers and improperly regulates their extraterritorial conduct.

This article examines the constitutional arguments raised by these claims.

Energy Security and King Corn v. Climate Prudence

Claim:  ARB’s LCFS conflicts with and is preempted by federal law, including the Energy Independence and Security Act of 2007 (EISA).

The Supremacy Clause, which establishes the Constitution, Federal Statutes, and US Treaties as the “supreme law of the land” may preempt conflicting state law.  This can occur either through an express preemption clause contained in the federal law or implied if the court determines: 1) that it would be impossible to comply with both the federal and state laws; or 2) the federal regulatory scheme was intended to “occupy the field” (i.e. leaves no room for state law to supplement the federal law).

California’s LCFS is an attempt to mitigate the economic and health effects of climate change, and more directly, GHG emissions.  In the absence of clear legislation from the federal government, states like California are increasingly inclined to implement their own regulatory regime (11 Northwestern states have signed an MOU adopting California’s standard).  Under the US Constitution, this is well within their rights, so long as it does not conflict with existing federal legislation.

Although the federal renewable fuel standard (RFS) does not expressly preempt state low carbon fuel standards, Midwest ethanol argues that California’s LCFS frustrates EISA’s blending mandate by excluding Midwest corn from California’s market.  The federal renewable fuel standard (RFS), enacted under the Energy Policy Act of 2005 (EPACT) and amended by EISA, requires the blending of biofuels in the US fuel supply: 36 billion gallons of biofuels annually by 2022, of which, 15 billion gallons must be corn-based ethanol.

The dual purposes of EISA are to reduce dependence on foreign oil and encourage further biofuel innovation:

[T]he production of transportation fuels from renewable energy would help the United States meet rapidly growing domestic and global energy demands, reduce the dependence of the United States on energy imported from volatile regions of the world that are politically unstable, stabilize the cost and availability of energy, and safeguard the economy and security of the United States.

EISA mandates that GHG emission assessments must evaluate the full lifecycle emission impacts of fuel production including both direct and indirect emissions, including significant emissions from land use changes.  However, EISA also expressly exempts existing corn ethanol biorefineries from having to claim or demonstrate reductions in GHG emissions, which under EPA analysis, includes 15 billion gallons of existing production.

The fate of “newer” biofuels (including corn ethanol) is unclear.  Under proposed EPA rules, the full lifecycle emissions of feedstocks would be assessed, but whether the final rules incorporate or conflict with California’s LCFS lifecycle analysis has yet to be determined (EPA’s “RFS2” is due out any day).  As such, even if California’s LCFS frustrates the integration of 15 billion gallons of “grandfathered” corn ethanol into the fuel supply, it could provide a framework for a future federal lifecycle analysis that covers all new biofuels.  In the meantime, Midwest ethanol producers can still access other markets with less stringent standards than California to move their 15 billion gallons.

As the federal RFS (under EISA) and California’s LCFS are explicitly designed to accomplish two different goals — augment domestic fuel supply and reduce carbon intensity of fuels respectively — the two objectives are inherently contradictory in the short term, which presents a difficult issue before the courts.  Whether the courts determine that energy security and climate security are different “fields” for the sake of Supremacy Clause analysis, the fact remains that California’s strict LCFS standard would make it very difficult to achieve the blending goals set forth by EISA.  Ultimately, EPA’s lifecycle standards could do the same, effectively eliminating existing corn ethanol production’s market, which would also suggest that California’s LCFS is consistent with federal law.

Interstate Commerce v. Health and Safety

Claim:  ARB’s LCFS interferes with the regulation of interstate commerce.

Claim:  ARB’s LCFS discriminates against out-of-state corn ethanol producers and importers and improperly regulates their extraterritorial conduct.

The last two claims raised by Midwest ethanol involve the Dormant Commerce Clause, a complex constitutional matter that courts in the U.S. have inferred from the Commerce Clause and Article I of the U.S. Constitution.  While the Commerce Clause grants Congress the power to enact legislation that affects interstate commerce, the Dormant Commerce Clause is interpreted to prohibit a state from enacting legislation that excessively burdens or discriminates against interstate commerce.  In short, it acts as a check on state power.

Justice O’Conner explains:

The central rationale for [the Dormant Commerce Clause] is to prohibit state or municipal laws whose object is local economic protectionism, laws that would excite those jealousies and retaliatory measures the Constitution was designed to prevent. See The Federalist No. 22, pp. 143-145 (C. Rossiter ed. 1961) (A. Hamilton); Madison, Vices of the Political System of the United States, in 2 Writings of James Madison 362-363 (G. Hunt ed. 1901).

Under Dormant Commerce Clause jurisprudence, courts will: (1) look to whether the state or municipal law advances a legitimate state purpose (i.e., nondiscriminatory); and if so, (2) apply a “Pike” balancing test that looks at whether the legitimate state purpose is outweighed by the burdens imposed on interstate commerce.  In short, where the court finds that the law has the effect of favoring in-state economic interests over out-of-state interests, the law is struck down as unconstitutional.  But, even if the law burdens interstate commerce, it may still be deemed constitutional if the state can show that it advances a legitimate local interest.

This latter Pike balancing test was first articulated by the Supreme Court in Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970), in which the Court explained that a state regulation having only “incidental” effects on interstate commerce “will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.”  Justice Cordozo clarifies that when “a state tries to isolate itself economically” it must show an important interest for doing so and that it had no less discriminatory mean open for accomplishing its goal.”

On its face, California’s LCFS standard appears legitimate.  Although its inclusion of an ILUC measure of a fuels’ lifecycle emissions is controversial, the standard applies to “any” transportation fuel sold in California, and therefore, does not explicitly single out specific fuel sources.

The plaintiffs assert that the inclusion of the poorly measured and understood ILUC standard effectively eliminates Midwest ethanol from the California market:

By assigning them relatively higher total carbon intensity values vis-à-vis California corn ethanol producers, who use substantially the same production methods to produce substantially the same product…merely because they must ship their corn ethanol into California from out-of-state.

California’s LCFS is designed to significantly reduce GHG emissions in its transportation industry.  While ILUC is still an emerging standard, it has its merits.  According to Climate Intel (unrelated to Biomass Intel), “the logic for considering ILUC is that if increased production of a specific type of biofuel in the United States causes a shift in land use, the immediate and future GHG emissions resulting from that land use change should be included in the life-cycle GHG emissions for that biofuel.”

Even if the inclusion of ILUC places a burden on the Midwest corn ethanol industry, ARB’s LCFS standard applies equally to both in-state and out-of-state ethanol producers and importers.  The purpose is to accurately measure the full lifecycle greenhouse gas emissions of ethanol products from “seed to wheel,” not to erect an impenetrable barrier to out-of-state ethanol products.

California’s LCFS appears to survive the Supreme Court’s Pike test as well.  While LCFS burdens interstate commerce, this does not necessarily make it unconstitutional.  Most likely, the Court’s decision will turn on an analysis of ARB’s interest in protecting the state and its citizens from the harmful effects of global warming as a health and safety issue.

Although it is seemingly impossible to draw a direct causal link from GHG emissions from ethanol fuel consumed in California to specific climate change impacts suffered within the borders of the state, federal courts generally defer to the states’ traditional power to “legislate on all subjects relating to the health, life, and safety of their citizens” even when doing so has some effect on national commerce.

The strongest support for a decision in favor of ARB and California’s LCFS is likely to be found in Exxon Corp. v. Maryland, 437 U.S. 117 (1978), in which the Court held that the Commerce Clause protects the interstate market, not particular interstate firms, from prohibitive or burdensome regulations, “the fact that the burden of a state regulation falls on some interstate companies does not, by itself establish a claim of discrimination against interstate commerce.”  A nondiscriminatory regulation serving a substantial state purpose is not invalid simply because it causes some business to shift from a predominantly out-of-state industry to a predominantly in-state industry.

As with Exxon, the effect of the LCFS is to burden firms producing and selling Midwest corn ethanol in the name of climate change, and does not directly impede the flow of biofuels across state lines so long as their carbon intensity meets specific benchmarks.  But whether ARB’s intent to legislate around climate change is deemed a “substantial state purpose” is open for debate.

The lawsuit asserts that the interests protected by the regulations – climate change – is largely symbolic.  Although climate change is clearly a health and safety issue, any specific reduction in GHGs in California achieved through an LCFS is essentially immeasurable when compared with total worldwide GHG emissions, which raises serious questions about whether California’s standard is the best means to achieve its purported purpose.

The state’s landmark Global Warming Solutions Act of 2006 (AB 32), which authorizes ARB to establish a LCFS, deems global warming to be “a serious threat to the economic well-being, public health, natural resources, and the environment of California.”  The federal district court’s decision around this issue could have a major impact on state global warming legislation throughout the country, which suggests that it may defer to California’s interest.

Even if holding ethanol to strict environmental standards is tenuously connected to the health or safety of Californian citizens, the Supreme Court has held that:

[S]afety measures carry a strong presumption of validity when challenged in court.  If there are alternative ways of solving a problem, we do not sit to determine which of them is best suited to achieve a valid state objective.  Policy decisions are for the state legislature, absent federal entry into the field.

Accordingly, Dormant Commerce Clause precedent suggests a strong presumption in favor of ARB and California’s LCFS.

Conclusion

The case pits the politics of energy security and King Corn versus climate change prudence.  In the absence of a clear intent on the part of the federal government to regulate carbon intensity in fuels, it appears that California may be free to set restrictive standards to protect the health and safety of its citizens.  The court’s decisions will have a profound impact on the interplay between the federal government and state interests as energy security and climate change concerns converge.  Until there is a viable alternative to Midwest corn ethanol that can compete on price and quantity, emerging low carbon standards will continue to test the outer boundaries of green federalism.

A White Paper on the policy justification for California’s LCFS is available from the Governor’s Office here.

While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.  For specific technical or legal advice on the information provided and related topics, please contact the author.

Image: Flickr/The Rocketeer