United States: Update On Litigation Challenging California's Greenhouse Gas Regulatory Programs

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.