US: California declines to rehear LCFS lawsuit

The Ninth Circuit Court of Appeal rejected a petition this week to rehear a lawsuit that claimed California’s low carbon fuel standard (LCFS) violated the dormant commerce clause, a move which could prove bearish for the state’s carbon allowances in future.

Environmental lawyers had expected the court would decide against rehearing the lawsuit filed by the Rocky Mountain Farmers Union, citing the relatively few amount of cases the court decides to rehear.

The lawsuit could have a critical impact on the California carbon market, because any loss in emission reductions from the LCFS would likely be made up by the California cap-and-trade programme. Traders said without the LCFS, the California carbon allowance (CCA) market could be much more bullish.

Legal experts said the fate of the LCFS could be decided by the US Supreme Court.

“It makes sense for them to file a petition to the US Supreme Court,” Reed Smith attorney Jamon Bollock said. “It is a novel legal issue, and it is important to other states.”

Lawyers involved in the case said they are weighing their options, including whether to petition the Supreme Court.

Lawsuit claims discrimination

The lawsuit claims the state’s LCFS discriminated against out-of-state ethanol, and as a result, it violates the dormant commerce clause, which prevents states for regulating commerce across state lines.

A lower court ruled in favor of the Rocky Mountain Farmers Union, but last year, the Ninth Circuit Court of Appeals reversed the decision. The court ruled the LCFS did not discriminate against fuel sources from out-of-state facilities and did not violate the dormant commerce clause.

Writing for the majority opinion in the en banc petition, Judge Ronald M. Gould said California made its decision based on carbon impact, not on the origin of the fuel source.

“While a state may not mandate compliance with its preferred policies in wholly out-of-state transactions, it may regulate commerce within its boundaries even if one of its goals is to influence the out-of-state choices of market participants,” Gould wrote. “This is what California permissibly has done with the LCFS.”

A strongly-written dissent by seven judges said the California requirement clearly violates the dormant commerce clause, and by doing so, it “is a protectionist regulatory scheme that threatens to Balkanize our national economy”.

Both the majority and dissenting opinions mentioned the case could be decided by the Supreme Court. Dan X. McGraw