Federal Judge Blocks California AB 32 Low Carbon Fuel Standard

California’s Global Warming Solutions Act of 2006 or AB32 as it is often called was designed to reduce greenhouse gas emissions. For a while it was thought this law would be made obsolete by the passage of Federal Cap and Trade legislation.  But after cap and trade failed to in support in Congress and the Copenhagen Conference of Parties failed to win international agreement on extending the Kyoto Protocol, AB32 proponents have pressed forward.

But in a ruling handed down December 29, 2011 Federal Judge Lawrence O’Neill blocked implementation of the new rules.  The California Air Resources Board says it will appeal the judge’s decision.

Low Carbon Fuel Standard

On April 23, 2009 the California Air Resources Board adopted Low Carbon Fuel Standards to reduce greenhouse gas emissions and diversify the variety of transportation fuels in the state to reduce the carbon intensity of California’s transportation fuels by at least 10 percent by 2020.  The rules became effective on April 15, 2010. Opponents protested the new rules even before they were adopted in 2009 but CARB adopted them anyway so the National Petrochemical & Refiners Association and the Consumer Energy Alliance sued in Federal District court in 2009 claiming that among other things the California rules violate the Commerce Clause of the US Constitution and discriminate against oil and biofuels producers from outside of California.

The LCFS rules set annual performance standards that fuel producers and importers must meet beginning in 2011.  Applying the rules to fuel importers is one of the key issues in the lawsuit decided by Judge O’Neill because the importers allege that California is setting state standards that interfere with interstate commerce in violation of the Commerce Clause in the US Constitution. The LCFS applies either on a compulsory or opt-in basis to all fuels used for transportation in California including California reformulated gasoline, California ultra-low-sulfur diesel fuel, E85, compressed or liquefied natural gas, biogas, electricity, and compressed or liquefied hydrogen.

The California ARB said the rules will reduce California’s dependence on petroleum by 20 percent and make-up 10% of the state’s goal to cut greenhouse gas emissions by 2020. The regulation assigns a carbon-intensity score to various fuels forcing all gasoline and diesel fuel sold in California to be 10 percent less carbon-intensive by 2020. The low carbon fuel standard is being phased in over time with 2010 a reporting year only and 2011 was the first year that the rules required a reduction in the carbon intensity (CI) of transportation fuels by 0.25percent ramping up in subsequent years to meet the 2020 goal.

While California already has a series of ‘boutique motor fuels’ produced by in-state refineries specially formulated to reduce emissions in various regions of the state these rules are imposed on out of state refiners seeking to sell all fuels in California.

On December 8, 2011 just prior to Judge O’Neill’s ruling, CARB completed the latest LCFS Program Review Report summarizing progress to date and the ongoing work of stakeholders.  The next program review is not scheduled until 2015.  The program review report also outlines a range of rules from other states that bear on the issues as the stakeholders were unable to address all the “harmonizing” questions to avoid conflicts with other states rules.

So what does this mean?

The implications of this ruling could materially affect California’s ability to implement AB32.  If upheld on appeal, the decision could spill over into the electric power industry since California also restricts imports of coal fired generation and requires certain renewable energy projects be located in state to qualify for renewable portfolio standards.  It is unclear whether Judge O’Neill’s ruling extends beyond motor fuels to electricity.