Energy, Transportation

GHG Program in Oregon Found (Appropriately) Discriminatory

In a majority opinion, a panel of the U.S. Court of Appeals for the 9th Circuit found that Oregon state violated neither the dormant Interstate Commerce Clause nor a provision of the federal Clean Air Act (CAA) when it assigned a carbon intensity value to transportation fuels produced out of state and imported into Oregon, which was higher than the value assigned to transportation fuels produced in Oregon.

Transportation fuel oil gas

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American Fuel and Petrochemical Manufacturers and other industry plaintiffs argued that Oregon’s Clean Fuels Program discriminated against out-of-state competitors whose fuels carried a carbon-intensity deficiency in Oregon, thereby forcing entities importing the fuel to obtain credits to satisfy Oregon’s program requirements. This argument was initially rejected by a U.S. district court; the 9th Circuit majority affirmed that ruling. The majority did indeed find that Oregon’s standard is discriminatory, but it discriminates against fuels with a higher carbon intensity, not against the states where those fuels are produced.

Given that the objective of Oregon’s program is to reduce emissions of greenhouse gases (GHGs) over the complete life cycle of transportation fuels, any standard that favors fuels with a lower life cycle carbon intensity constitutes permissible discrimination, the majority found.

The majority bases much of its opinion on conclusions the 9th Circuit drew in Rocky Mountain Farmers Union v. Corey, a 2013 case in which the court upheld California’s Low Carbon Fuel Standard (LCFS), a program after which Oregon modeled its own program.

Oregon’s 2007 Law

Oregon’s Clean Fuels Program was part of a 2007 state law that directed the Oregon Environmental Quality Commission (OEQC) to undertake actions to decrease life cycle GHG emissions from transportation fuels produced in or imported into Oregon. Accordingly, the OEQC promulgated rules designed to reduce GHG emissions from fuels used in Oregon to at least 10 percent lower than 2010 levels by 2025. A regulated party must keep the average carbon intensity of its transportation fuels below an annual limit, which becomes more stringent annually through 2025.

A fuel with a carbon intensity below the limit generates a credit, and one with a carbon intensity above the limit generates a deficit. Regulated parties must generate carbon intensity credits greater than or equal to their deficits on an annual basis. These parties can buy or sell credits, store them for future use, or use them to offset immediate deficits. Thus, a regulated party may demonstrate compliance in each compliance period either by producing or importing fuel that in the aggregate meets the standard or by obtaining sufficient credits to offset the deficits it has incurred for such fuel produced or imported into Oregon.

Impermissible Benefit to Oregon

The plaintiffs contested Oregon’s standard on several grounds. First, they argued that Oregon’s assignment of credits and deficits creates an impermissible burden on producers or importers of petroleum and Midwest ethanols. For example, the plaintiffs allege that discrimination arises from Oregon’s decision to draw the maximum allowed carbon intensity value in such a manner that all in-state fuel producers generate credits and only out-of-state fuel producers generate deficits.

But the majority emphasized that out-of-state producers also generate credits that have no connection to the state in which the fuel is produced.

“The Oregon program distinguishes among fuels not on the basis of origin, but rather on carbon intensity,” the majority says. “Out-of-state fuels are not necessarily disfavored: when the complaint was filed, the Program assigned twelve out-of-state ethanols, including five Midwest ethanols, lower carbon intensities than those assigned to Oregon biofuels. The fact that the Program labels fuels by state of origin does not render it discriminatory, as these labels are not the basis for any differential treatment.”

Political Statements

Second, citing statements by former Oregon Governor John Kitzhaber and Oregon legislators, the plaintiffs alleged that the Oregon program was enacted to “foster Oregon biofuels production at the expense of existing out-of-state fuel producers.”

Citing the language of Oregon’s 2007 law instead of statements by government leaders, the majority emphasized that the purpose of the program is simply to “reduce Oregon’s contribution to the global levels of GHG gas emissions and the impacts of those emissions in Oregon”—in particular, to “reduce the amount of lifecycle [sic] GHG emissions per unit of energy by a minimum of 10 percent below 2010 levels by 2025.”

“The district court did not err in finding that the statements by Oregon public officials cited in American Fuel’s complaint do not demonstrate that the objectives identified by the legislature were not the true goals of the Program,” the majority wrote. “Even construing the allegations in the complaint in the light most favorable to American Fuel, the statements cited do not plausibly relate to a discriminatory design and are ‘easily understood, in context, as economic defense of a [regulation] genuinely proposed for environmental reasons.’ (quoting the U.S. Supreme Court’s 1983 opinion in Minnesota v. Clover Leaf Creamery Co.). The statements of the Oregon officials are no more probative of a discriminatory or protectionist purpose than the statements by California state officials we found insufficient to establish discriminatory purpose in Rocky Mountain.”

Promoting Oregon Fuels

Also, regarding statements by Oregon’s leadership, the majority noted that the federal system recognizes each state’s freedom to serve as a laboratory and to try novel social and economic experiments.

“This freedom would be meaningless if officials could not promote the economic benefits of these experiments to their states without running afoul of the Commerce Clause,” said the majority. “For this reason, regulations justified by a valid factor unrelated to economic protectionism are permissible, even if they benefit a state’s economy.”

Preemption

Finally, the plaintiffs contended that Oregon’s standard is preempted under CAA Section 211, which prohibits any state from controlling or prohibiting any characteristic or component of a fuel or fuel additive in a motor vehicle if the EPA administrator has found that no such control or prohibition is necessary. The plaintiffs’ contention is that the EPA has found the regulation of methane unnecessary because it excluded methane from the definition of volatile organic compounds under CAA Section 211(k) in light of its low reactivity. Again, the majority disagreed with this interpretation.

“The EPA’s decision not to regulate methane under Section 211(k) of the Clean Air Act was not a finding that regulating methane’s contributions to GHG emissions was unnecessary, and thus the decision not to regulate was not preemptive under Section 211(c)(4)(A)(i),” the majority stated.

The 9th Circuit’s opinion in American Fuel and Petrochemical Manufacturers et al. v.  Oregon Department of Environmental Quality is here.