On Thursday, December 29, 2011, Judge Lawrence D. O'Neill of the U.S. District Court for the Eastern District of California issued a decision finding that California's Low Carbon Fuel Standard (LCFS) is unconstitutional on the grounds it violates the Commerce Clause of the United States Constitution. According to press accounts, California's Air Resources Board (CARB) will immediately appeal the decision to the U.S. Court of Appeals for the 9th Circuit and intends to seek a stay of the ruling to allow CARB to continue implementing the LCFS. To date, CARB has not filed its appeal. Background: On December 24, 2009, the RFA, together with other plaintiffs including Growth Energy, filed for Summary Judgment and Preliminary Injunction against the LCFS in U.S. District Court for the Eastern District of California. The RFA argued the LCFS was unconstitutional and unlawful on four points:
- The LCFS discriminates against interstate commerce in ethanol because it assigns worse carbon-intensity scores to Midwest ethanol than to California ethanol (in part because Midwest ethanol has to be shipped to California and because CARB assumed Midwest ethanol would be produced with electricity generated by burning coal);
- That the LCFS attempts to regulate conduct occurring wholly outside the borders of the state of California and is thus impermissibly extraterritorial;
- That the benefits of the LCFS are nil and thus outweighed by their substantial burdens;
- That the LCFS impermissibly interferes with federal laws protecting the domestic corn ethanol industry.
- What does this ruling mean? This is a significant ruling in favor of American ethanol producers. It upholds the claims made by RFA that CARB had unlawfully sought to regulate the way in which businesses not based in California operate and penalized ethanol by imposing significant carbon penalties based upon commerce occurring outside the state of California. As a result, CARB must halt implementation of the LCFS.
- Why does it matter? California is the single largest market for U.S. ethanol at nearly 1.5 billion gallons a year. As it was being implemented, the LCFS would eventually exclude grain-based ethanol from most ethanol producers outside the state of California. In addition, the unsubstantiated carbon accounting schemes employed by CARB would have encouraged the import of Brazilian ethanol at the expense of U.S. produced ethanol from all feedstocks. This perversion would have both made the U.S. more dependent on imported oil and resulted in an increase in the carbon emissions CARB was trying to reduce as U.S. ethanol would be exported to Brazil to fill the void being created by Brazilian imports to California.
- What are the next steps? CARB has stated that it plans to appeal the decision. The RFA will monitor CARB's action and act accordingly to defend the result achieved at the District Court level. CARB's actions and the ruling on the appeal will determine if additional action will occur.
- What is the end game for this litigation? The RFA is hopeful the decision by Judge O'Neill will be upheld and the LCFS will continue to be stopped. It unlawfully regulates out of state activities and discriminates against ethanol on a geographic basis and would close off the largest market for U.S. ethanol (the state of California) for virtually all grain-based ethanol producers.