For the second time in five years, the United States Court of Appeals for the Ninth Circuit has upheld a state's regulatory efforts to reduce greenhouse gas emissions from transportation fuels. On September 7, 2018, a divided Ninth Circuit panel affirmed the United States District Court for the District of Oregon's dismissal of industry groups' lawsuit challenging Oregon's Clean Fuels Program ("Program"). Am. Fuel & Petrochemical Mfrs. v. O'Keeffe, 903 F.3d 903 (9th Cir. 2018).

The Oregon legislature created the Program in 2009, after finding that global warming posed a serious threat to Oregon's economic well-being, public health, natural resources, and environment. The Program is designed to reduce the average amount of greenhouse gas emissions from transportation fuels produced in or imported into Oregon to at least 10 percent lower than 2010 levels by 2025.

Modeled after California's low carbon fuel standards ("LCFS"), the fuel standards are based on the annual average carbon intensity for a given fuel, which reflects all stages of fuel production and use, including feedstock generation or extraction, production, distribution, and combustion of the fuel by the consumer. Producers and importers of transportation fuels comply with the standards by obtaining sufficient credits to offset the deficits they incur. Deficits are generated when the carbon intensity exceeds the fuel standard in a given year, and credits are generated when the carbon intensity is lower than the standard.

In March 2015, several industry groups filed suit in the district court, alleging that the Program violated the Commerce Clause of the U.S. Constitution and was preempted by § 211(c) of the Clean Air Act ("CAA"). Several entities intervened in support of the Program, including conservation organizations, the California Air Resources Board, and the State of Washington. The district court dismissed the lawsuit in September 2015, holding that the Program did not unlawfully discriminate against out-of-state fuel producers and was not preempted by the CAA. The industry groups appealed in February 2016.

On September 7, 2018, a divided Ninth Circuit panel affirmed the district court in rejecting the industry groups' challenge to the Program. Relying significantly on the Ninth Circuit's decision upholding the analogous California LCFS in Rocky Mountain Farmers Union v. Corey, 730 F.3d 1070 (9th Cir. 2013), the majority rejected the industry groups' Commerce Clause and CAA arguments.

With regard to the Commerce Clause, the majority held that: (i) the Program was not facially discriminatory; (ii) the industry groups failed to plausibly allege that the Program was discriminatory in purpose or effect; and (iii) the Program did not legislate extraterritorially. According to the majority, the Program lawfully "discriminates against fuels based on lifecycle greenhouse emissions, not state of origin."

The majority also rejected the industry groups' argument that the Program was preempted, given the U.S. Environmental Protection Agency's ("EPA") decision not to regulate methane under § 211(k) of the CAA. The court held that EPA's decision not to regulate methane under that section was not a finding that regulating methane's contributions to greenhouse gas emissions is unnecessary, and therefore Oregon's regulations were not preempted. Circuit Judge N. Randy Smith dissented, concluding that the Program is facially discriminatory under the Commerce Clause because it incorporates location and distance data into the calculation of carbon-intensity values, which imposes higher costs on out-of-state fuel producers.

As of this publication, it is unclear whether the industry groups will seek further review. But given that the U.S. Supreme Court declined to hear the analogous Rocky Mountain case, it is somewhat unlikely that it would take up American Fuels. Thus, barring an unforeseen reversal, the American Fuels decision solidifies the Ninth Circuit's view on clean fuel standards similar to those enacted by California and Oregon. Although California and Oregon remain the only states with enacted LCFS, similar LCFS legislation is currently under consideration in the Washington legislature.

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