On Tuesday, October 16, 2012, the Ninth Circuit Court of Appeals heard oral arguments in the case of Rocky Mountain Farmers Union vs. Goldstene. In that case, the state of California is asking the Ninth Circuit to overturn a lower court decision that invalidated the state’s low carbon fuel standard under the federal “dormant” commerce clause. Under that doctrine, there are limitations on the authority of states to enact legislation to restrict interstate commerce. The purpose of the low carbon fuel standard is to reduce the carbon content of transportation fuels sold in the state. In December 2011, U.S. District Judge Lawrence O’Neill of the Eastern District of California ruled that the low carbon fuel standard violated the dormant commerce clause on the grounds that it discriminates against out-of-state ethanol producers and out-of-state and foreign crude oil transporters in favor of in-state competitors because it incorporates a transportation factor into its energy life cycle analysis in determining carbon intensity. Many observers believe the outcome and reasoning of any rulings in this case may have an impact on potential challenges to the state’s climate change cap-and-trade regulations.

Keith Casto of Cooper White Cooper LLP commented on the case in the October 16th edition of the Law360 as follows:

“In considering the case, the Ninth Circuit is going to examine the state’s defense that it did not intend to discriminate against ethanol producers outside the state and consider whether unintended discrimination is enough to violate the commerce clause,” according to Keith Casto, a Cooper White & Cooper LLP partner.

“The court will look at whether there is something magical about the state boundary that makes the so-called neutral application of the measure of carbon intensity transform into a dormant commerce clause violation,” he said.

If the Ninth Circuit affirms the lower court’s ruling, CARB would be forced to go back and modify its fuel standard on how it applies the carbon intensity analysis, and this might allow out-of-state producers to ship ethanol who otherwise wouldn’t be able to compete due to the standard’s transportation factor, according to Casto.

“That may result in higher greenhouse gas emissions and may inhibit the state’s ability to apply standards that unintentionally penalize or put a higher price on out-of-state ethanol or other fuel producers,” he said.

Out-of-state power producers may use a Ninth Circuit decision finding the fuel standard unconstitutional to go after the cap-and-trade program, but they could run into problems with that approach, according to Casto.

“In contrast to the generation of electricity, the transmission of electricity doesn’t generate significant carbon,” he said. “As opposed to trucking in a fuel, the transmission of electricity as electrons in power lines involves a different medium. An attempt to strictly apply the low carbon fuel standard ruling has that as a limitation.”

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