Investing in Clean Fuels Benefits Everyone

The process to implement California’s Low Carbon Fuel Standard has had an interesting month. In mid-December we achieved a great victory when California’s Air Resources Board (CARB) unanimously agreed to move forward with implementation of the low emission fuel standard . However, a couple weeks after the December 15th vote, a legal ruling was issued that might delay that progress. Following is an explanation of the LCFS and what the ruling means for the program’s future.

What is LCFS?

California’s low carbon fuel standard (LCFS) is part of California’s strategy to reduce pollution under the state’s global warming law (AB32) and is expected to produce roughly 15% of the reductions needed to return to 1990 levels of greenhouse gas emissions by 2020.  California’s LCFS would help reduce harmful air pollution from the fuels used by our cars and trucks, reduce our dependence in petroleum, and drive innovation of advanced fuels. The program is designed to incentivize all producers of motor fuels, including gasoline and corn ethanol, to reduce by 10% the carbon intensity of motor fuels sold in California.  It is a performance based standard that works by assigning a carbon intensity score to all transportation fuels and setting up a trading system for credits.  

Under the LCFS, all producers, both domestic and importers, must meet the average carbon intensity standard for their fuel products. Producers of fuels with a carbon intensity score greater than the standard set by the CARB can meet the standard by selling more lower-carbon fuels, using banked credits, or purchasing credits from other fuel providers.  This raises the value of lower-carbon intensity fuels and decreases the value of higher carbon-intensity fuels.  If you’re interested in learning more about the details of the LCFS, you can check out my post on Legal Planet here or my colleague Simon Mui’s post here

Background on the LCFS litigation so far

Representatives of the oil and ethanol industries filed suit in 2009 to block implementation of the LCFS.  On December 29, 2011, U.S. District Court Judge Lawrence J. O’Neil in Fresno sided with the plaintiffs and ruled that the LCFS violates the Dormant Commerce Clause of the U.S. Constitution because, in his view, it discriminates against out-of-state commerce and because it attempts to regulate out-of-state businesses.  Judge O’Neill also enjoined enforcement of the LCFS.  CARB and intervenors in the litigation, including the Natural Resources Defense Council, have filed an appeal. 

Below is a brief summary of the Court’s ruling; for a very carefully-written view from the oil industry’s side, take a look here.

Judge O’Neil’s opinion

Judge O’Neil ruled that California’s low-carbon program facially or “overtly” discriminates against out-of-state corn ethanol and crude oil. He based this conclusion on three main factors: 

  • First, the court found that CARB discriminates against out-of-state fuels by counting the emissions that come from transporting fuels from where they ate produced to where they are sold in California. For corn ethanol, the Court noted the LCFS assigns fuels produced out of state a carbon debit associated with transporting the fuel into California. For crude oil, the court noted the LCFS assigns a lower carbon intensity score to High Carbon Intensity Crude Oil (HCICO) produced in California than its actual carbon intensity value (and, conversely, a higher carbon intensity score than the actual value for HCICO produced abroad).  Ironically, California producers do worse than Midwest producers on the transportation factor because of the long distances that corn feedstock must be shipped to get to California refineries. 
  • Second, the Court found that the LCFS differentiates among fuel sources based on activities ‘inextricably intertwined’ with origin; chiefly by assigning carbon intensity scores based in part on the regional generation mix of electricity powering biofuel facilities that produce corn ethanol.  In shorthand: Midwest ethanol facilities more often rely on polluting power sources (particularly coal) than California does.  
  • Third, Judge O’Neil ruled that California is unconstitutionally regulating activities outside its border when it uses a formula to compute carbon intensity scores that has an input for lifecycle greenhouse gas emissions associated with the production of a fuel, if those emissions occur outside of California. 

Lifecycle Emissions

Here is the problem with ignoring a lifecycle analysis if you’re worried about the effects of GHG emissions on California.  A gallon equivalent of fuel made from tar sands, conventional oil, corn ethanol, or cellulosic ethanol will have virtually the same carbon emission from combustion but very different lifecycle emissions due to the differences in producing these fuels.  So, contrary to Judge O’Neill’s suggestion that California could achieve its desired result from a simple carbon tax, taxing the amount of carbon in a gallon of fuel will not incentivize anyone to reduce GHG emissions from the production of that fuel, and without those reductions California is just moving the GHG problem somewhere else.  As most readers of this blog probably know, a ton of GHGs emitted in Kansas has the same climate change potential for California as a ton emitted in Sacramento. 

On the legal issues raised by Judge O’Neill, NRDC argued in our intervenor brief that the LCFS does not facially discriminate against out-of-state ethanol or crude oil. The LCFS evenhandedly regulates all transportation fuels sold in California based on emissions, not on location. California's carbon calculations apply equally to the lifecycle emissions of all fuels, including the emissions needed to refine and transport those fuels.  Critically, the same formulas apply whether the fuel is made in California or elsewhere.

On the issue of extraterritoriality, or regulating out of state conduct, ARB’s carbon accounting for out-of-state electricity does not, as a factual matter, involve the type of lifecycle emissions analysis that the court found had the “practical effect” of regulating conduct occurring wholly outside California’s borders and therefore required strict scrutiny. For example, indirect land use change factors, which the court noted are used to discourage farmers “around the world” from converting non-agricultural land into farmland to enter the corn market, are not at play in this case.

Ultimately, the Ninth Circuit Court of Appeals will decide this new issue in American law:  to what extent can a State rely on a lifecycle analysis of fuels in order to protect its land and residents against adverse physical impacts that occur in that State.  It is NRDC’s view that the LCFS does not cross the line and offend the Commerce Clause by protecting Californians.

This blog first appeared in the California Progress Report on January 18, 2011.