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California Faces More Litigation over AB 32

February 26, 2013

Introduction

In a recent issue, we discussed the implications of the latest court decision in Citizens Climate Lobby and Our Children’s Earth Foundation v. California Air Resources Board, a case brought by two environmental groups challenging the offset program created pursuant to the cap-and-trade regulation promulgated under California’s Global Warming Solution Act of 2006, or AB 32. The California Air Resources Board (“CARB”) has been sued by both regulated parties and environmentalists, challenging the manner in which CARB has set about regulating greenhouse gas (“GHG”) emissions from sources within the state, alleging violations of both federal and state law. These alleged violations have included claims that CARB’s low carbon fuel standard (“LCFS”) violates the United States Constitution, that CARB failed to comply with the California Environmental Quality Act (“CEQA”) in drafting the LCFS rule, that CARB’s auctioning of carbon allowances exceeds the authority delegated to it in AB 32, that its Truck and Bus Regulation is preempted by federal law, and that CARB’s Scoping Plan violated CEQA and exceeded AB 32’s grant of authority.

The goal of AB 32 is to cut California’s carbon emissions to 1990 levels by 2020. AB 32 calls for a multi-pronged program to meet this target, consisting of multiple components, including: cap-and-trade, LCFS, vehicle emission reductions, energy efficiency, use of renewable energy, and public transit improvements. (The full Scoping Plan is available here.) This article will update our readers on the status of challenges to AB 32, specifically to LCFS, cap-and-trade, the Truck and Bus Regulation, and the Scoping Plan.

Low Carbon Fuel Standard Litigation

The LCFS rule is a regulation promulgated by CARB with the goal of reducing the carbon content of transportation fuels sold in California by 10% by 2020 from a 2010 baseline.[1] The LCFS requires that California fuel providers meet annual average carbon intensity goals for GHG emissions.[2] CARB’s LCFS rule takes into account the lifecycle GHG emissions of fuel, including emissions produced during production and transportation of fuels to California. Thus, an identical ethanol imported from the Midwest would be deemed to have a higher carbon intensity than ethanol produced in California, making the Midwest product more expensive for fuel providers seeking to meet fuel standard requirements. The LCFS rule has been challenged in two court cases alleging it violates federal and state law.

Rocky Mountain Farmers Union v. Goldstene challenges the LCFS rule as violating the Commerce Clause of the United States Constitution.[3] Plaintiffs allege that by factoring the distance a fuel travels before reaching California into the calculation of carbon intensity, CARB discriminated against interstate commerce and fuels produced out of state.[4] Plaintiffs also assert that the LCFS is preempted by the federal Clean Air Act.[5]

In December 2011, Judge Lawrence O’Neill of the Eastern District of California agreed with the plaintiffs’ Commerce Clause argument, invalidating certain parts of the LCFS rule and enjoining the rule’s enforcement. Judge O’Neill concluded that the standard “discriminates against out-of-state corn-derived ethanol while favoring in-state corn ethanol and impermissibly regulates extraterritorial conduct.”[6] He also found that the standard “discriminates against out-of-state and foreign crude oil while giving an economic advantage to in-state crude oil.”[7] After CARB appealed the decision, the Ninth Circuit stayed the district court’s injunction in April 2012.[8] It then heard argument on October 16, and the parties are now awaiting a decision.[9] Some legal experts are already anticipating the case will be appealed to the Supreme Court, regardless of the Ninth Circuit’s decision.[10]

In Poet, LLC v. California Air Resources Board, Poet LLC, the largest ethanol producer in the United States challenged the LCFS rule in California state court on the grounds that CARB failed to comply with the California Environmental Quality Act.[11] Poet has argued that CARB failed to respond to numerous public comments, that it omitted documents from the rulemaking file, and that the LCFS will lead to increased GHG emissions, not the reductions it promises.[12] Poet also alleges that CARB’s LCFS rule exceeds the scope of authority delegated to it by the legislature.[13] After Fresno County Superior Court Judge Jeffrey Hamilton, Jr. ruled for CARB by denying Poet’s verified petition for writ of mandate, Poet appealed the decision to the California Court of Appeals for the Fifth Appellate District on November 23, 2011.[14] Both sides have completed supplemental briefing, and it is unclear from the court’s docket when arguments or a final decision may occur.

Cap-and-Trade Auction Litigation

CARB’s cap-and-trade auction procedure is designed to help set the price of carbon allowances and to generate funds to support California’s GHG emissions reduction scheme.[15] As we discussed a few weeks ago, the California Chamber of Commerce filed a lawsuit in November seeking to invalidate the cap-and-trade auction scheme under AB 32. The complaint in California Chamber of Commerce v. California Air Resources Board, available here, asserts that AB 32 does not authorize CARB to impose fees other than those needed to cover the ordinary administrative costs of implementing a state emissions regulatory program.[16] Little has occurred to this point in the litigation. CARB answered the Chamber’s petition by denying all allegations and asserting an array of affirmative defenses. The National Association of Manufacturers also has filed to intervene, and would join the Chamber in asserting that the high revenues to be generated through auction constitute an impermissible tax.[17] Sacramento Superior Court will hear arguments on May 31, 2013.

Truck and Bus Regulation Litigation

The California Dump Truck Owners Association (“CDTOA”) filed suit in the United States District Court of the Eastern District of California in February 2011 to challenge CARB’s Truck and Bus Regulation, which provides for stricter emissions standards for dump trucks and other diesel-fuel vehicles.[18] The regulation requires particulate matter retrofits beginning in 2012, and will require replacement of older vehicles beginning in 2015.[19] These retrofits and replacements will address a variety of public health concerns from diesel particulate emissions in addition to cutting greenhouse gas emissions.[20]

In California Dump Truck Owners Association v. California Air Resources Board,CDTOA alleges that CARB’s regulation is unconstitutional because it is preempted by the Federal Aviation Administration Authorization Act (“FAAAA”).[21] CDTOA seeks an injunction prohibiting CARB from enforcing its rule.[22] CDTOA also makes a public policy argument, claiming that the economic impacts of the regulation would be catastrophic for one-truck independent owner-operators and other small trucking companies.[23] CDTOA complains that the $150,000 needed for a new CARB-compliant truck and the dramatically decreased value of old trucks unfairly burdens small business owners.[24]

In December 2012, the District Court concluded that it lacked subject matter jurisdiction and dismissed the case.[25] According to the court, a decision favoring CDTOA would undermine the validity of EPA’s approval of California’s State Implementation Plan (“SIP”) under the Clean Air Act because the Truck and Bus Regulation is part of California’s SIP.[26] Since exclusive jurisdiction of final Environmental Protection Agency (“EPA”) decisions, such as SIP approval, lies with the court of appeals, the District Court concluded it lacked jurisdiction. Further, the District Court determined that EPA was a necessary and indispensable party to the litigation due to EPA’s interests in the SIP.[27] Because the court could not grant any practical relief without joining EPA, but claims challenging EPA final decisions must be brought in the court of appeals, the court concluded that the action could not proceed and should be dismissed.[28]

CDTOA, recently renamed the California Construction Trucking Association (“CCTA”), has filed a notice of appeal to the Court of Appeals for the Ninth Circuit.[29] Additionally, the CCTA has said it will file a petition for review with the Ninth Circuit challenging EPA’s approval of the SIP under the theory that the SIP impermissibly conflicts with other federal laws, specifically, the FAAAA and Commerce Clause.[30]

Legal commentators remain skeptical of CCTA’s argument.[31] While the FAAAA contains language preempting state regulation taking the form of controls on who can enter the trucking industry within a state, it does not appear to limit a state’s ability to regulate emission standards.[32]

Scoping Plan Litigation

On June 19, 2012, CARB prevailed in Association of Irritated Residents v. California Air Resources Board when the California First District Court of Appeal upheld its Climate Change Scoping Plan, which charts CARB’s overall GHG reduction scheme.[33] Several amici weighed in for each side of this high-profile case, including the Bay Area Council, represented by Marten Law attorney Kevin Haroff. The court ruled that CARB’s planned mechanisms for reducing GHG emissions were in compliance with AB 32, allowing CARB to move forward with a market-based cap-and-trade program. The court was convinced that CARB had complied with CEQA by exercising sound judgment, providing substantial evidence to support its decisions, and giving adequate consideration to alternatives.[34]

Conclusion

Thus far, CARB has withstood the many challenges it has faced. Yet, Poet, LLC and especially Rocky Mountain Farmers Union represent real threats to the LCFS rule, and the California Chamber of Commerce litigation could disrupt the auction procedure that CARB has already begun using. Additional lawsuits against CARB could build upon issues already raised in litigation. For example, the Chamber of Commerce and other groups representing regulated entities will be watching carefully to see how the proceeds of CARB’s auctions are spent. If the auction proceeds are used by the state of California for purposes other than reducing or mitigating GHG emissions, CARB may face additional litigation alleging that it has levied an unauthorized tax against regulated entities.[35] Further, while the environmental plaintiffs in Citizens Climate Lobby and Our Children’s Earth Foundation may have failed to secure a ruling invalidating the entire carbon offsets scheme, these groups or others may bring additional challenges against specific elements of the offsets program, including particular existing or forthcoming offset protocols.

Looming is a possible dormant Commerce Clause challenge from industry against CARB’s cap-and-trade program.[36] If successful, such a lawsuit could completely derail CARB’s cap and trade program. Industry may wait to see how the Rocky Mountain Farmers Union litigation is resolved before it brings such a challenge.

For more information on AB 32 and the litigation surrounding it, please contact any of the attorneys in Marten Law’s San Francisco office.

[1] California Air Resources Board, Final Regulation Order.

[2] W. Newman, California’s Low Carbon Fuel Standard: Current and Future Impact, Ethanol Producer Magazine (Oct. 14, 2010).

[3] K. Haroff, California’s Climate Change Program Comes Together in 2012–Or Does It? Climate Change, Sustainable Development, and Ecosystems Committee Newsletter, American Bar Association (Apr. 2012).

[4] Id.

[5] Id.

[6] L. Hurley, Lawyers go west as climate litigation warms up, E&E Publishing, LLC (Sept. 20, 2012).

[7] Id.

[8] R. Frank, Previewing This Week’s Constitutional Battle Over California’s Low Carbon Fuel Standard, Legal Planet (Oct. 15, 2012).

[9] K. Gullo, California Asks Court to Reinstate Carbon Fuel Standard, Bloomberg Businessweek (Oct. 16, 2012).

[10] Supra note 6, 8.

[11] J. Cullen Howe, Judicial Developments, Climate Change, Sustainable Development, and Ecosystems Committee Newsletter, American Bar Association (Apr. 2012).

[12] T. Neeley, Challenging CARB 1 - Poet Files Lawsuit in California, DTN (The Progressive Farmer) (2010).

[13] The State Bar of California: Environmental Law Section, A.B. 32: Climate, Commerce and the Constitution (Oct. 26, 2012).

[14] Id.

[15] K. Haroff California Inaugurates Country’s First Carbon Credit Auction Under Cap-and-Trade, Marten Law Environmental News (Dec. 3, 2012).

[16] CalChamber, CalChamber Sues to Invalidate CARB’s Cap and Trade Auction (Nov. 13, 2012).

[17] National Association of Manufacturers, Capital Briefing (Feb. 21, 2013).

[18] R. Enion, California Dump Trucks v. CARB, Legal Planet (Mar. 23, 2011).

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] California Construction Trucking Association, California Dump Truck Owners Association Sues State Air Resources Board to Overturn Overreaching Truck & Bus Rule (Feb. 24, 2011).

[24] Id.

[25] Cal. Dump Truck Owners Ass’n v. Cal. Air Res. Bd., No. 2:11-cv-00384-MCE-GGH (E.D. Cal. Dec 19, 2012), Memorandum and Order.

[26] Id.

[27] Id.

[28] Id.

[29] PR Newswire, Truckers Will Continue Legal Battle Against CARB and U.S. EPA (Jan. 22, 2013).

[30] Id.

[31] Supra note 18.

[32] See Federal Aviation Administration Authorization Act of 1994, H.R. 2739, 103rd Cong. § 601 (1994).

[33] Ass’n of Irritated Residents v. Cal. Air Res. Bd., 206 Cal. App. 4th 1487 (2012)

[34] Id.

[35] Supra note 15.

[36] Supra note 8.

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