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States, Climate and the Constitution

For many years, the vast majority of American efforts to reduce GHG emissions have come from the states, not Washington.  And on September 18, the Ninth Circuit Court of Appeals issued a major legal decision concerning such state authority in the case involving California’s Low Carbon Fuel Standard.

The legal issue in Rocky Mountain Farmers Union v. Corey was whether the Constitution’s “dormant Commerce Clause” allows states to impose regulatory consequences on carbon emitted out-of-state during the production and transportation of energy that is consumed in-state.  The LCFS imposes such consequences on all such out-of-state emissions from ethanol and gasoline that are sold in California.  For example, Midwest ethanol made using coal-fired electricity has a higher “carbon intensity” score than California ethanol made with electricity from natural gas or renewables, and thus the former is less useful for meeting the regulatory standard (and thus less valuable) than the latter.  The Court decided that the LCFS does not economically discriminate against other states, and thus passes muster under the threshold Commerce Clause question.

The LCFS case is not over; indeed, in some sense the most important part of the case may lie ahead.  Assuming that the Ninth Circuit does not reconsider its decision (plaintiffs have asked them to do so), the case will go back to the district court to resolve remaining issues; of these, the most interesting is whether, although it does not discriminate against out-of-state interests, the LCFS nevertheless imposes “excessive” burdens on interstate commerce that outweigh its benefits to California.

We expected the Ninth Circuit to rule as it did, and we expect that ultimately it will find (whatever the district court decides) that the LCFS’ benefits outweigh its burdens on commerce: fuels are responsible for 40% of California’s GHG emissions.  However, we note that the many significant practical issues with the LCFS, which requires a 10% reduction in the carbon intensity of fuels sold by 2020, will now be fully aired; chief among them is the industry view that CARB’s conservative accounting of ethanol’s GHG benefits may mean that eventually the only way to comply would be by actually reducing the total amount of fuel supplied to the California market.  Proving that in court would presumably satisfy the “excessive burden on interstate commerce” test.

But the really important question is: what about the next regulated product?  Suppose, as the plaintiffs have argued, California were to assign a similar carbon intensity value to other products, such as “oranges from Florida, milk from Vermont, lumber from Alaska, cars from Michigan, wine from France, or any product from any state or country”?  We now know the procedure: if California were to enact an equivalent “Low Carbon Wine Standard”, it would be up to a court to decide whether the resulting rather modest CO2 reduction benefits are outweighed by the burdens on commerce in Montrachet and Haut-Medoc. And even if the local courts take a supportive view of the regulation, the World Trade Organization (WTO) may well feel – and act – differently.

Amusing to contemplate, but not really a laughing matter.  The longer the federal government does nothing, the more such state efforts will proliferate; in just the short term, this decision will likely cause Oregon and Washington State (which have LCFS programs on the books, but who have been waiting for legal clarification) to revive their programs, and reignite interest in the dormant Northeast Regional LCFS, which probably makes the industry’s practical compliance problems worse.  For a unified economy, even one as large as the US, a balkanized climate policy is inherently undesirable, and a balkanized one where no measure is even certain until federal (and perhaps international)  judges have decided whether the benefits of each specific emission reduction measure outweighs its economic burdens is just plain stupid.

Carbon tax, anyone?