High Court’s action clears pathway for low-carbon fuel standard programs.

By Joshua T. Bledsoe, Kimberly D. Farbota, and Brian F. McCall

On May 13, 2019, the US Supreme Court denied certiorari in American Fuel & Petrochemical Manufacturers (AFPM), et al., v. O’Keeffe, et al (O’Keeffe), effectively affirming a US Court of Appeals for the Ninth Circuit decision that upheld the constitutionality of Oregon’s Clean Fuels Program (CFP). The CFP is modeled after, and operates according to, the same principles and general structure as California’s Low Carbon Fuel Standard (LCFS) program. Petitioners argued that Oregon’s CFP discriminates against out-of-state fuels in violation of the US Constitution’s Dormant Commerce Clause. Oregon argued that while a state may not regulate wholly out-of-state commerce, there is no constitutional bar to a state regulating its fuels market based on a product’s objectively measured contributions to in-state harms (i.e., regulating based on harm caused by a fuel’s carbon intensity).

With the Supreme Court’s refusal to hear the case, the Ninth Circuit’s September 2018 ruling that Oregon’s CFP does not unconstitutionally favor in-state fuels over out-of-state fuels stands. The denial of certiorari follows a 2014 refusal by the Supreme Court to review a Ninth Circuit decision in a similar case, commonly known as Rocky Mountain I, that upheld the constitutionality of California’s LCFS program under the same reasoning.

Following the Ninth Circuit’s Rocky Mountain I decision, the case was remanded to the US District Court for the Eastern District of California for further proceedings under the more lenient (from the state’s perspective) Dormant Commerce Clause standard: the “Pike balancing test.” Following a series of supplemental briefings addressing new developments in the LCFS landscape and a flurry of motions to dismiss, the District Court issued a final opinion dismissing Plaintiffs’ final claim on August 14, 2017. Plaintiffs again appealed (Rocky Mountain II) and on January 18, 2019, the Ninth Circuit affirmed the District Court’s decision. Plaintiffs in Rocky Mountain II did not file a petition for certiorari with the Supreme Court.

With the Supreme Court denying certiorari in O’Keeffe and Rocky Mountain I, and plaintiffs in Rocky Mountain II choosing not to seek review, the future of the LCFS, the CFP, and similar programs is much clearer. Any future federal law challenges likely would involve similar claims of alleged discrimination against out-of-state fuels and resultant extraterritorial regulation. Within the Ninth Circuit (which includes Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington), additional federal litigation on those grounds seems unlikely to be successful in light of Rocky Mountain I, Rocky Mountain II, and O’Keeffe.

The authors of this blog have described state court challenges to California’s LCFS in the cases commonly referred to as POET I and POET II. The claims in those cases focused on the California Air Resources Board’s (CARB’s) alleged failure to comply with the California Environmental Quality Act (CEQA), along with ancillary procedural claims relating to the manner in which the LCFS was adopted. Those cases have concluded, and successive iterations of the LCFS, including CARB’s 2018 extension, have aimed to address deficiencies cited in the POET I and POET II decisions. Additional state litigation against the LCFS appears unlikely as well, as the statutes of limitations have run with no lawsuits filed pursuant to CEQA or the California Administrative Procedure Act.

To produce and supply alternative fuels at the volumes required to generate an adequate number of LCFS credits to meet the program’s carbon intensity reduction targets, additional infrastructure must be developed and, critically, financed. Historically, alternative fuel production projects that generate a significant portion of their revenue from the monetization of LCFS credits, which is most of them, have struggled to secure affordable capital. Several factors contribute to this difficultly, including traditional capital providers’ lack of familiarity with the LCFS, change-in-law risk, litigation risk, and credit price risk. Indeed, long-term offtake agreements for LCFS credits generally have not been available.

With the resolution of both federal and state judicial challenges to the LCFS, one significant hurdle has been lowered for additional capital to flow into the low-carbon fuels space. The Supreme Court’s recent action is also noteworthy for effectively ending a decade of continuous litigation attacks against the LCFS and its progeny.

Latham & Watkins’ Environment, Land & Resources lawyers will continue to track and report on developments related to low-carbon fuel standard programs across the country.