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 Emissions Allowances and Offset Credits. Under California's cap-and-trade program, covered operators of stationary sources of GHG emissions must surrender compliance instruments—emissions allowances or offset credits—for each ton of GHGs they emit. 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. The petitioners argue that CARB's methods of distributing credits violate the implementing statute by failing to ensure that only new or "additional" emissions reductions qualify for credits. The Superior Court rejected this challenge, holding that CARB acted within its statutory authority to implement the offset credit program. The petitioner's appeal 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 challenge CARB's authority to sell GHG emissions allowances at auctions. They also argue that the 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, holding that CARB acted within its delegated authority to design a system for distributing allowances, and that auction payments are valid regulatory fees that are not subject to the supermajority requirement. In early March 2014, the petitioners filed their appeals with the California Court of Appeal.

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 in excess of the annual emissions cap, as measured by the 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 or regulate extraterritorially in violation of the Commerce Clause. The court reasoned that, although the LCFS expressly distinguishes between fuels on the basis of geographical origin, those distinctions are based on real differences in the carbon intensities resulting from transportation and other factors. The LCFS is not an unconstitutional extraterritorial regulation, the court held, because the regulation creates incentives that influence out-of-state activity, not mandates that control out-of-state activity. In March 2014, after the Ninth Circuit denied a petition for rehearing en banc, the challengers filed a petition for certiorari to the U.S. Supreme Court.

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. However, the Court of Appeal also allowed CARB to continue enforcing the LCFS while it works to cure the defects. On March 11, 2014, CARB held a public workshop to discuss potential amendments to the LCFS. It will propose a revised regulation in the fall of 2014. (For more on EPA's proposed standard, read our Jones Day Alert, " Update on Litigation Challenging California's Greenhouse Gas Regulatory Programs").

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