By Joshua T. Bledsoe and Aron Potash

California’s low carbon fuel standard (LCFS), a core component of the state’s greenhouse gas (GHG) emission reduction strategy, likely will survive a legal challenge and remain in effect despite an appellate court’s order indicating that the regulation was improperly adopted.

The California Court of Appeal for the Fifth Appellate District issued a tentative disposition on June 3, 2013, in POET, LLC et al. v. Goldstene, et al. finding that the California Air Resources Board (ARB) violated the California Environmental Quality Act (CEQA) in adopting the LCFS.  The tentative ruling, if ultimately issued, would require ARB to set aside its approval of the LCFS.  Nonetheless, the court would allow the LCFS to remain in effect while ARB reapproves the regulation.  While technically a ruling against ARB, such a disposition would be a significant win for the regulator because it would avoid the market disruption and confusion that could have ensued had the court enjoined the LCFS.

The LCFS requires fuel suppliers to reduce the carbon intensity of certain transportation fuels, including gasoline and diesel, to 10 percent below 2010 levels by 2020.  The LCFS was adopted pursuant to the state’s overarching GHG law, the Global Warming Solutions Act of 2006, commonly known as “AB 32,” which requires that the state’s GHG emissions be scaled back to 1990 levels by 2020.

The ethanol company POET challenged the LCFS on CEQA grounds in 2009.  POET alleged that the CEQA process associated with ARB’s LCFS rulemaking failed to disclose significant environmental impacts, evaluate alternatives, and follow CEQA’s procedural rules, among other deficiencies.  The Fresno County Superior Court ruled against POET in November 2011, and POET appealed.  The Fifth Appellate District signaled in February that it might reverse the Fresno County Superior Court.

Now, the Fifth Appellate District’s tentative disposition indicates that reversal is imminent.  The court asked the parties to comment on the tentative decision and, for purposes of doing so, assume that ARB violated CEQA by both:  (1) splitting the decision to approve the LCFS between ARB’s board and executive officer; and (2) deferring the formulation of mitigation measures to address an increase in nitrogen oxides (NOx) emissions that could result from increased biodiesel use.  Further, the court asked the parties to assume that the LCFS would not be suspended.  It is likely that the court’s ultimate decision, like its non-binding tentative decision, will find that the LCFS was improperly adopted but is allowed to remain in effect.

The Fifth Appellate District also asked the parties to comment on certain aspects of the tentative decision that the court is still considering, including whether the decision should require that ARB:

  • Remedy the CEQA deficiencies by a specific deadline and file an initial return to the writ of mandate setting forth a plan and schedule for corrective actions;
  • Maintain the status quo by continuing to implement the LCFS’s 2013 carbon intensity requirements, rather than the more stringent 2014 carbon intensity requirements, if the CEQA deficiencies are not remedied during calendar year 2013;
  • Assure that any reapproval of the LCFS be performed by a decision maker with appropriate authority;
  • Allow public comments on carbon intensity values attributed to land use changes; and
  • Commit to specific performance criteria if the formulation of any mitigation measures relating to NOx emissions from biodiesel is deferred or, alternatively, make findings of fact supported by substantial evidence that mitigation is not required.

The court’s non-binding tentative disposition includes all of the requirements listed above, but the court’s ultimate decision could differ.  The court asked the parties to provide input by June 11, 2013 and a binding decision could follow soon thereafter.

In the meantime, the LCFS also is being challenged in the federal case Rocky Mountain Farmers Union, et al. v. James Goldstene and Environmental Defense Fund, et al.  In December 2011, the United States District Court for the Eastern District of California held that the LCFS violates the dormant Commerce Clause of the United States Constitution.  The court further granted a preliminary injunction that prohibits enforcement of the LCFS until the conclusion of the litigation, but the Ninth Circuit stayed the injunction upon ARB’s appeal.  The Ninth Circuit heard oral argument in October 2012 but has not yet issued a decision.

As it defends the LCFS from legal challenge, ARB is considering significant changes to the regulation.  On May 24, 2013, ARB held a workshop to discuss the changes, which include modifications relating to cost containment and electricity use provisions.  ARB also issued a discussion paper detailing the cost containment mechanisms ARB is considering adding to the program.  These cost containment mechanisms include a “credit window” that regulated entities could use to purchase compliance-only credits from ARB, a compliance option by which regulated entities could meet their compliance obligations by investing in projects that further the goals of the LCFS, and others.  ARB is accepting comments on the potential changes to the LCFS until June 14, 2013.  ARB is planning additional workshops throughout the summer to further discuss these changes and plans to release a proposed modified regulation in early September.

At the federal level, a lawsuit is possible that would seek to force the United States Environmental Protection Agency (EPA) to adopt a nationwide low carbon fuel standard.  The Institute for Policy Integrity at the New York University School of Law filed an 180-day notice of intent to sue last November alleging that EPA violated the federal Clean Air Act by failing to respond to the Institute’s petition for a rulemaking to reduce GHG emissions from motor vehicles, non-road vehicles, and aircraft through the implementation of a cap-and-trade system.  The notice period ended in late May 2013, and the Institute is now free to file a lawsuit seeking a federal low carbon fuel standard.