Legal challenges to California's greenhouse gas
("GHG") regulatory programs continue to work their way
through California and federal courts. With the most significant
challenge facing possible review by the U.S. Supreme Court, two
other challenges pending before the California Court of Appeal, and
a fourth prompting CARB to redo part of its rulemaking, the
long-term viability of California's latest efforts to curb GHG
emissions is uncertain.
GHG Emission Allowances and Offset Credits
Under California's cap-and-trade program, covered operators of
stationary sources of GHG emissions must surrender compliance
instruments—emission allowances or offset credits—for
each ton of GHGs they emit. The California Air Resources Board
("CARB") has adopted several methods of allocating these
compliance instruments to covered entities, two of which face
continuing legal challenges.
In Our Children's Earth Foundation v. CARB, No.
CGC-12-519554 (S.F. Sup. Ct., March 8, 2013), two environmental
groups are seeking a writ of mandate that would stop CARB, at least
temporarily, from distributing any offset credits. Under the offset
program, CARB may award credits to qualifying operators of projects
that reduce GHG emissions or remove GHGs from the environment. CARB
adopted four Compliance Offset Protocols for determining whether
projects qualify for credits. The Global Warming Solutions Act of
2006 ("AB 32") authorizes the offset credit program, but
it prohibits CARB from awarding credits for emission reductions
that would have occurred even without the incentive of offset
credits (the "additionality requirement"). The
petitioners argue that the four Protocols do not satisfy the
additionality requirement because they apply general standards,
rather than a project-by-project analysis, to determine whether
emission reductions would have occurred without the offset credit
incentive. The Superior Court rejected this challenge, holding that
CARB acted within its statutory authority to implement the offset
credit program. Our Children's Earth Foundation filed an
appeal, which currently is pending.
In California Chamber of Commerce v. CARB, No.
34-2012-80001313 (Sac. Sup. Ct., Nov. 12, 2013) (consolidated with
Morning Star Packing Company v. CARB), the petitioners
challenged CARB's authority under AB 32 to sell GHG emission
allowances at auctions. The petitioners also argued that CARB's
auctions create a tax that was not authorized by a two-thirds vote
in the legislature, as required by the California Constitution. The
Superior Court rejected both challenges. While acknowledging that
AB 32 does not expressly authorize CARB to sell allowances, the
court nonetheless held that CARB acted within its delegated
authority to design a system for distributing allowances. The court
also held that auction payments to CARB are valid regulatory fees
rather than taxes, and thus are not subject to the supermajority
requirement.
In early March 2014, the petitioners filed notices of appeal with
the California Court of Appeal. It is too early to tell how the
arguments on appeal will take shape, but the Superior Court's
opinion highlights possible grounds for reversal. The Superior
Court observed that it is a "close question" whether
auction payments are a tax. The court also relied on the
"unique circumstances" of the case, not directly
addressed by case law, to reach its conclusion that the auction
payments are valid regulatory fees. Given the novelty of the issues
in this case, it is difficult to predict how the Court of Appeal
will rule.
Low Carbon Fuel Standard
The Low Carbon Fuel Standard ("LCFS") assigns
"carbon intensity scores" to all transportation fuels
used in California. A fuel's score is based on the GHG
emissions it generates over its entire "lifecycle," on
its "pathway" from production to consumption. CARB uses
carbon intensity scores to impose compliance costs on fuel
producers, which must surrender credits to offset any emissions its
fuel generates, as measured by the carbon intensity score, in
excess of the annual emissions cap. Challengers to LCFS have argued
that by imposing regulatory costs based on out-of-state production
and transportation, the LCFS violates the Commerce Clause's ban
on extraterritorial regulation. In addition, challengers have
argued that the LCFS facially discriminates against interstate
commerce because its default fuel pathways, which producers can use
in place of individualized lifecycle analyses, expressly
incorporate geographical origin as one factor in determining a
fuel's carbon intensity score.
In Rocky Mountain Farmers Union v. Goldstene, 730 F.3d
1070 (9th Cir. 2013), the Ninth Circuit held that the LCFS does not
facially discriminate against interstate commerce, in part because
its regional characterizations are based on real differences in the
carbon intensities resulting from transportation and other factors.
For example, according to the Ninth Circuit, Midwestern ethanol
receives a higher score not because it is from the Midwest per se,
but because of the GHG emissions that result from transporting it
to California. The Ninth Circuit also held that the LCFS is not an
unconstitutional extraterritorial regulation, because the
regulation creates incentives that influence out-of-state activity,
not mandates that control out-of-state activity. The court remanded
for further consideration whether the regulation discriminates in
purpose and effect, or imposes an excessive burden on interstate
commerce.
On January 22, the Ninth Circuit denied a petition for rehearing en
banc, over the dissent of seven judges who criticized the majority
for disregarding "longstanding dormant Commerce Clause
doctrine" and for placing "the law of this circuit
squarely at odds with Supreme Court precedent." Rocky
Mountain Farmers Union v. Corey, 740 F.3d 507, 512 (9th Cir.
2014). Two months later, the challengers filed a petition for
certiorari to the U.S. Supreme Court. Given the weighty
constitutional issue in this case, the strong dissent in the Ninth
Circuit, and the high level of public interest in climate change
regulation, there is a good chance that the Supreme Court will
accept the petition and address whether the LCFS violates the
Commerce Clause.
The LCFS faced another challenge in Poet LLC v. CARB, 217
Cal. App. 4th 1214 (App. 5th Dist. 2013). The California Court of
Appeal held that CARB committed procedural violations of the
California Environmental Quality Act and the California
Administrative Procedures Act when it enacted the LCFS. The Court
of Appeal reversed the lower court and ordered it to invalidate
CARB's approval of the LCFS. However, the Court of Appeal also
allowed CARB to continue enforcing the LCFS while it works to cure
the defects. On March 11, CARB held a public workshop to discuss
potential amendments to the LCFS. It will propose a revised
regulation in the fall of 2014. CARB has commented that the LCFS
"is working as designed and intended," and that
"implementation ... has gone smoothly," suggesting that
the agency does not envision wholesale revision of the program in
the readoption processes. See CARB's Low Carbon Fuel
Standard Re-Adoption Concept Paper (March 7, 2014) at 2-3.
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