Lawsuit: LCFS violates US Constitution

By Todd J. Guerrero, attorney, Fredrikson & Byron P.A | December 09, 2009
Contribution article posted Jan. 4, 2010, at 11:55 p.m. CST

In a case that will be closely watched throughout the country, Growth Energy and the Renewable Fuels Association recently filed suit in federal district court alleging that California's low carbon fuel standard (LCFS) violates the federal Constitution. Specifically, the lawsuit claims that the LCFS is preempted by the Supremacy Clause, and violates the Commerce Clause.

Adopted by the California Air Resources Board in 2009, the LCFS is intended to reduce California greenhouse gas (GHG) emissions by reducing the carbon intensity of transportation fuels used in California by an average of 10 percent by the year 2020. Carbon intensity is a measure of the direct and indirect GHG emissions associated with each step of a fuel's full life cycle - the "well-to-wheels" for fossil fuels and "seed-to-wheels" for biofuels.

The carbon intensity baseline is measured against gasoline mixed with 10 percent corn ethanol. Fuels that have carbon intensity levels below the baseline generate credits, and fuels with levels above the baseline create deficits. To comply, a party must show that the total amount of credits equals or exceeds the deficits incurred. If a party incurs a negative credit balance for two or more consecutive years or incurs a credit to deficit ratio of less than 90 percent, the party will be deemed in violation and subject to civil and criminal penalties.
Life-Cycle and Indirect Land Use Changes
Carbon intensity is measured in two parts. The first part represents the direct emissions associated with producing, transporting, and using the fuel. The second part considers indirect effects, including those caused by changes in land use.

For corn ethanol, indirect land use changes are a significant source of additional GHG emissions. For instance, gasoline has a carbon intensity of 95.86 megajoules (g CO2 e/mj) measured on a life-cycle basis. On a direct basis, the LCFS measures corn ethanol at 69.40 megajoules. But when indirect land use is added, corn ethanol's carbon intensity jumps another 30 points, so that its life-cycle carbon intensity score is actually higher than gasoline (99.40). In other words, the LCFS finds that corn ethanol produces more GHGs than does gasoline. Given the LCFS' requirement of reduced carbon intensity, it's not difficult to see that corn ethanol will be severely disadvantaged in California. And with California as the country's largest ethanol market, the LCFS will undoubtedly have impacts outside of the state.

According to the LCFS, California is the fifteenth largest GHG emitter in the world, representing approximately two percent of worldwide GHG emissions. Transportation fuels are responsible for approximately 38 percent of annual California GHG emissions. A 10 percent reduction in the carbon intensity of transportation fuels is expected to reduce GHG emissions by approximately 15 million metric tons per year. As the lawsuit claims, any reduction in GHGs in California is essentially immeasurable when compared with total worldwide GHG emissions.

The Supremacy Clause of the Constitution invalidates state laws that interfere with or are contrary to federal law. All state laws in a particular field are preempted where the scheme of federal regulation "leaves no room' for supplementary state regulation, and where they "stand as an obstacle" to federal objectives.

In its lawsuit, the trade groups assert that the LCFS stands as an obstacle to Congress' intent in adopting the Environmental Security and Independence Act of 2007. EISA specifically exempted existing corn ethanol producers from claiming or demonstrating GHG reductions. The LCFS conflicts with EISA because it will impose limits on GHG emissions on existing plants that Congress specifically exempted.

The industry's second claim is that the LCFS violates the Constitution's Commerce Clause. The Commerce Clause explicitly grants Congress authority to regulate commerce among the states, and has also long been understood to limit the power of the states to discriminate against or unduly burden interstate commerce.

The Supreme Court has adopted a two-tiered approach to Commerce Clause analysis. The first tier applies when a statute directly regulates or discriminates against interstate commerce. In such cases, the courts will generally strike down the regulation without further inquiry.

The second tier is for cases where a statute or regulation is said to regulate in-state and out-of-state commerce evenly and has only an indirect effect on interstate commerce. This test, which requires the courts to balance the burdens of a state rule against its purported benefits, has become known as the Pike balancing test, taken from 1970 Supreme Court case which first applied it.

In their lawsuit, the industry groups allege that the LCFS violates both the tiers of the Commerce Clause.

First, the LCFS' requirement that land use changes be considered in calculating carbon intensity necessarily regulates conduct that occurs almost entirely outside of California's boundaries. Since California harvests only a fraction of the country's corn, the land use practices that the LCFS finds as GHG-unfriendly occur overwhelmingly outside that state. The industry groups allege that this is an illegal attempt by California to extend its policy powers beyond its borders.

The groups also allege that LCFS is economically protectionist. In enacting the LCFS, CARB noted that California may develop 25 in-state biorefineries. Thus, by including land use changes in the LCFS, the groups allege that California is directly advantaging in-state growers and biofuel refiners and disadvantaging out-of-state corn growers and corn ethanol producers.

They allege that the LCFS also fails the Pike balancing test because the interest protected by the regulations - climate change - is largely symbolic, whereas the rule's effect on interstate commerce of corn ethanol will be significant. Climate change is, by definition, a global phenomenon. One ton of GHGs emitted in California will have the same impact on overall climate change as one ton emitted anywhere else. Thus, the groups allege that given the relatively small amount of GHGs that California will avoid through its LCFS compared with the total amount emitted globally, the state's interest is inconsequential in terms of protecting the state's citizens against climate change.

In contrast, by denying corn ethanol access to the nation's largest market for transportation fuels, the burden on ethanol created by the LCFS will be significant.

The lawsuit will have a significant impact on the corn ethanol industry. Because of its implications to other state GHG initiatives, it will also be closely watched by the federal government, states, other industries, and environmental groups. CARB has yet to answer the complaint.

EDITOR'S NOTE: The preceding article was contributed by Todd J. Guerrero, an attorney within the energy group at Fredrikson & Byron P.A. The claims and statements made in this article belong exclusively to the author and do not necessarily reflect the views of EPM or its advertisers.