California Court Rules Against Air Resources Board over LCFS but Preserves 2017 Status Quo 

  

April 13, 2017 

By  Joshua T. Bledsoe  and  Max Friedman

In two  recent   posts , we discussed how California's Low Carbon Fuel Standard ( LCFS ) had been thrown into a state of potential upheaval by two interrelated legal challenges commonly known as POET I and POET II, including a recent oral argument before the California Court of Appeal for the Fifth Appellate District (Court of Appeal) in POET I. That proceeding aimed to determine whether a lower court correctly dismissed a writ of peremptory mandate (the Writ) requiring the California Air Resources Board (ARB) to remedy violations of the California Environmental Quality Act (CEQA) that occurred during promulgation of the original LCFS regulation. ARB re-adopted the revised LCFS regulations in September 2015, but POET, LLC (POET), a South Dakota-based ethanol producer, contended that these revisions failed to properly discharge ARB's responsibilities under the Writ.

 

Court Rules Against ARB over NOx Analysis

In its published April 10, 2017 opinion in POET I, the Court of Appeal largely agreed with POET, reversing the lower court's dismissal of the Writ and holding that ARB had failed to comply with CEQA's requirement that it analyze the degree to which nitrogen oxide (NOx) emissions from biodiesel fuels had been and would be impacted by the implementation of the LCFS rules. The Court found that ARB's failure to properly define the scope of the project caused ARB to use an improper baseline against which NOx emissions could be measured. As a result, the Court concluded that ARB's analysis of NOx emissions from biodiesel fuel was deficient under CEQA, and the environmental analysis was inadequate as an informational document disclosing the entirety of the project's impacts.

The Court of Appeal therefore directed the lower court to deny ARB's request for dismissal of the Writ and to "[s]et aside its 2015 approval of the parts of the final [CEQA] Environmental Analysis addressing NOx emissions from biodiesel." The Court further directed ARB to conduct a year-by-year analysis of whether the project as a whole - .e., the implementation of the LCFS rules - is likely to have caused an increase in NOx emissions, with respect to both the program's past operations and its future impacts. This entails establishing a baseline for NOx emissions, and the Court directed ARB to use the conditions as they existed at the time the environmental analysis for the original LCFS regulations commenced (and in no event to use a year later than 2010 for the baseline). ARB must also determine whether any increase in NOx emissions that it identifies has had or is likely to have a significant impact on the environment, or whether impacts are cumulatively considerable, and must address mitigation measures or alternatives, if appropriate.

 

Silver Linings for ARB

While POET succeeded in forcing ARB to conduct further CEQA analysis, this opinion was far from a total loss for ARB. Indeed, given the Court of Appeal's previously expressed skepticism as to ARB's CEQA procedures with respect to NOx emissions from biodiesel, this opinion represents something of a "best-case scenario" for ARB under the circumstances. Indeed, the Court of Appeal agreed with ARB that it was possible to segregate provisions relating to conventional diesel fuel and its substitutes from the rest of the LCFS, allowing the other provisions to continue according to the re-adopted schedule. Further, the Court decided not to throw out or strike text from the diesel and biodiesel fuel provisions of the LCFS, or even return them to their 2013 levels, as POET had suggested at trial. Instead, the Court of Appeal froze the carbon intensity (CI) targets for diesel and biodiesel fuel provisions at 2017 levels until ARB has completed its corrective action by conducting its baseline analysis and until the trial court has approved this analysis and discharged the Writ. This holding has important implications not only for participants in the LCFS program, but for CEQA practitioners, as well.

The freeze at 2017 levels is far from optimal for ARB, because it will prevent the CI targets from diesel and biodiesel regulations from ratcheting down in 2018, as the CI targets applicable to other fuel types (e.g., gasoline) will continue to decrease. Nevertheless, at trial, ARB suggested that it could conduct its analysis in about nine months. If true, ARB could be in a position to return to trial court and again request discharge of the Writ in early 2018 (although further challenge from POET appears likely based on the history here).

 

The Court of Appeal also preserved the 2015 Alternative Diesel Fuels (ADF) regulations, which essentially were adopted to counteract the effects of NOx emissions from increased use of biodiesel. To the extent that ARB is required to mitigate NOx emissions under CEQA, these ADF regulations, which take effect in 2018, may go a long way to doing so. Likewise, the Court made clear that ARB "need not suspend its consideration or approval of additional fuel pathways for diesel fuel and its substitutes." This will give ARB some discretion in how it considers alternatives and potential mitigation.

While the Court's opinion gave ARB the opportunity to correct the procedural deficiencies with respect to its re-adoption of the LCFS rules with only minimal impact to the overall LCFS implementation scheme, the Court of Appeal also indicated that its patience with ARB had come to an end. The Court repeatedly asserted that ARB had not acted in good faith (a rare finding in our experience) in its NOx emissions analysis, and that the leniency of its remedy resulted from its desire that "the relief granted . . . should serve the public interest by protecting the environment and providing information to the public and decision makers," rather than "punish agency bad faith." If, after ARB completes its revised NOx emissions analysis, the trial court were to find that ARB had still not met its statutory burden and done so expeditiously and in good faith, the Court of Appeal ordered the trial court to immediately vacate all LCFS provisions relating to diesel fuel and its substitutes (not just biodiesel), to suspend operation and enforcement of those provisions, and perhaps to consider imposing further sanctions on ARB. In short, this appears to be ARB's last chance to comply.

 

Implications for ARB and LCFS Practitioners

Still, for those engaged in the LCFS markets, the Court of Appeal's opinion must come as something of a relief. At least for the time being, this opinion ensures that the LCFS markets will continue to function essentially unchanged, though it remains to be seen how the LCFS credit prices will react to the result of this case. Likewise, this opinion results in no immediate impact for regulated parties submitting quarterly LCFS reports in 2017 or for the annual LCFS reports to be submitted online by April 30th, 2017 via the  LCFS Reporting Tool . Indeed, even the 2017 annual report to be submitted by April 30th, 2018 would be unaffected by this ruling, though subsequent reports would be impacted if CI targets remain frozen at 2017 levels next year.

 

But with the 2020 deadline imposed by Executive Order S-1-07 for ARB to fulfill its mandate to reduce CI of gasoline and diesel by 10% from 2010 levels fast approaching, ARB still faces difficult choices. ARB had already been forced to back-load the ratcheting down of CI targets, placing a heavy burden on the 2018-2020 period, due to the years when targets were frozen at 2013 levels as a result of an earlier ruling in this case. As a result of the most recent opinion, ARB will either have to further steepen the compliance curve in 2019 and 2020, or else miss its statutory CI-reduction target in 2020.

Adding further complexity to this situation is the fact that these issues will be revisited when POET's parallel challenge to the re-adopted LCFS regulations, POET II, comes before the Fresno County Superior Court on July 26th, 2017. Many of the same issues will be before the POET II court, which is why the court delayed oral argument until after POET I had been resolved by the Court of Appeal. While it is likely that the POET II court will simply borrow the rulings of the Court of Appeal in POET I, and many of the POET II issues may be precluded by res judicata, there remains a real possibility that the POET II court could upend certain other portions of the LCFS regulations. This added uncertainty will not be resolved for months-or even longer if the POET II court's ruling is appealed.

 

Finally, a comment in the Court of Appeal's opinion raises the possibility that the entire LCFS regulatory scheme could become subject to extreme political pressure and perhaps further legal challenge. The POET I court stated that "the public is entitled to know that ARB and [its governing] Board were willing to accept the risk of higher levels of NOx emissions, with the attendant increase in smog and human health impacts, in exchange for lower overall emissions of greenhouse gases to combat global warming." Although the court did not address the potential implications of this comment, a finding that ARB had accepted higher NOx emissions in the name of improved overall greenhouse gas emissions could subject the entire LCFS regulatory regime to pressure from groups arguing it violates AB 32, the state's overarching climate change mitigation statute. AB 32 mandates that "[p]rior to the inclusion of any market-based compliance mechanism in the regulations, to the extent feasible and in furtherance of achieving the statewide greenhouse gas emissions limit, the state board shall . . . [d]esign any market-based compliance mechanism to prevent any increase in the emissions of toxic air contaminants or criteria air pollutants." Cal. Health & Safety Code § 38570(b). LCFS is a "market-based compliance mechanism," and NOx is a "criteria air pollutant," so a finding that NOx levels have increased as a result of LCFS could lead environmental justice and other groups to argue that LCFS had not complied with this statutory requirement to the maximum extent feasible. Further legal challenges could even argue that the entire LCFS program is invalid under AB 32. For this reason, not only will ARB need to ensure that it rigorously adheres to CEQA procedures in conducting its NOx analysis, the results of that analysis will have potentially critical implications for the LCFS program, as well.

Editor's Note: This article was republished with permission from the authors.

(Biodico)

(NBB)

April 26, 2017

WASHINGTON, D.C. - Today the National Biodiesel Board applauded the introduction of a bipartisan biodiesel tax credit bill that would convert the blender's credit for biodiesel to a $1-per-gallon production credit for fuels produced in the United States for three years. The bill provides an additional 10-cent-per-gallon credit for small U.S. biodiesel producers.

"Well-crafted and efficient tax incentives can be powerful policy mechanisms to achieve the nation's energy objectives and to create jobs. But subsidizing foreign manufacturing and hurting U.S. workers were not Congress' intent. We applaud the senators' bill to close this loophole by reforming the credit as a domestic production credit," said Anne Steckel, vice president of federal affairs at the National Biodiesel Board. "Updating this tax credit is necessary to create a level playing field for U.S. biodiesel producers-and it has the added benefit of saving millions of taxpayer dollars."

This bipartisan bill seeks to reinstate the biodiesel and small producers tax credits that expired at the end of 2016, but with a change to who is eligible for the credit. Previously, the tax credit was open to blenders of biodiesel, but this legislation would provide tax credits to 

U.S. producers instead of blenders. Doing so prevents subsidization of foreign manufacturers.

Taxpayer dollars and U.S. energy policy should be-and typically are-aimed at incentivizing domestic production, not foreign production. The current structure of the biodiesel tax incentive as a blender's credit increasingly allows foreign producers to access the credit if their fuel is blended in the United States. Importantly, this reform would not block imported biodiesel from entering the U.S. market; in fact, significant imports would likely continue coming to the U.S. and receiving incentives under the Renewable Fuel Standard and California's Low Carbon Fuel Standard.

U.S. biodiesel producers just need a level playing field to compete with foreign production. For example, since 2009, the European Union has levied duties on U.S. biodiesel that effectively block U.S. biodiesel from entering the European market. Additionally, Argentinian biodiesel that receives significant incentives under that country's Differential Export Tax regime is increasingly being shipped to the U.S. market where it also can qualify for the U.S. tax incentive. Without this reform, U.S. tax policy is increasingly creating competitive disparities in which U.S. companies are losing U.S. jobs and market share to subsidized foreign production in Europe, Argentina and other nations. Because of this flood of imports, the National Biodiesel Board also had to file an antidumping and countervailing duty petition against Argentina and Indonesia for violating trade laws and for harming U.S. workers and manufacturers.

Changing the structure of the tax credit also would save taxpayers millions of dollars. Biodiesel imports to the U.S. have grown sharply in recent years, largely as a result of the tax credit. In 2015 alone, the U.S. Treasury spent more than $600 million on tax credits for imported biodiesel and renewable diesel. Importantly, this fuel often had already received subsidies in its country of origin (Argentina, Indonesia and the European Union, for example). According to the Joint Committee on Taxation, reforming the tax incentive would save U.S. taxpayers $90 million as imports are reduced and domestic production grows.

Since being implemented in 2005, the biodiesel tax incentive has played a key role in stimulating growth in the U.S. biodiesel industry, helping it become the first EPA-designated advanced biofuel to reach commercial-scale production nationwide. By helping biodiesel compete on a more level playing field with petroleum, the $1-per-gallon tax credit creates jobs, strengthens U.S. energy security, reduces harmful and costly emissions, diversifies the fuels market and ultimately lowers costs to the consumer. There is a clear correlation between the tax incentive and increased U.S. biodiesel production, which has grown from nearly 100 million gallons in 2005 when the tax incentive was first implemented to almost 1.8 billion gallons in 2016.

The American Renewable Fuel and Job Creation Act of 2017 was introduced by U.S. Senators Chuck Grassley (R-Iowa) and Maria Cantwell (D-Wash.), with 14 other original sponsors, including Pat Roberts (R-Kan.), Heidi Heitkamp (D-N.D.), John Thune (R-S.D.), Sheldon Whitehouse (D-R.I.), Martin Heinrich (D-N.M.), Joni Ernst (R-Neb.), Joe Donnelly (D-Ind.), Roy Blunt (R-Mo.), Mazie Hirono (D-Hawaii), Al Franken (D-Minn.), Patty Murray (D-Wash.), Amy Klobuchar (D-Minn.), Tom Udall (D-N.M.) and Jeanne Shaheen (D-N.H.). 

(Oregon Environmental Council)

Oregon's Clean Fuels Standard: 1st Year Successes

Posted April 13, 2017

Transportation is a leading source of Oregon's greenhouse gas emissions - cars, trucks & buses are responsible for nearly 40% of our state's climate pollution. So when it comes to taking responsibility for our part in contributing to climate change, changes to transportation is, naturally, where we can make a big difference.

That's why the Clean Fuels Standard is so critical. There are three ways to reduce transportation climate pollution: cleaner cars, cleaner fuels, and fewer vehicle miles traveled (walking, biking and using transit more). We need all three for a stable climate and healthy communities.

CLEAN FUELS STANDARD

At OEC we've worked tirelessly to pass (2009) and reauthorize Oregon's Clean Fuels Standard (2015) against intense oil industry opposition. Because of our dedication to making clean fuels work, Oregonians now have more choices at the pump, while alternative fuel producers are able to thrive.

The standard ranks fuels according to their life-cycle climate impact and rewards the lowest carbon fuels the most. This creates a built-in incentive for continuous innovation and improvement. Examples of some of the lowest carbon fuels (see graphic below) include biogas produced from waste streams or electricity generated from renewable energy.

1st YEAR - BIG RESULTS

One year in, the Clean Fuels Standard is working. In its first three quarters, clean fuels has displaced more than 589,000 tons of climate pollution - that's30% more than required by the program. Over the life of the program, it will reduce 8.4 million metric tons of climate pollution, the equivalent of taking 1.8 million cars off the road. Oil importers are complying with the law, while DEQ has already certified over 350 different low-carbon fuel options that are eligible in the program.

Businesses all across the state, from Coburg to Sherwood, Klamath Falls to Boardman, and Portland to Medford are signed up and using cleaner fuels. You can check out the success stories at  cleanfuelswork.com .

JOBS FOR OREGON

One of our favorite success stories comes from Portland-headquartered SeQuential, a producer of ultra low-carbon biodiesel made from recycled waste grease. From adding employees to their office in Portland, their retail station in Eugene, processing plant in Salem and truck drivers in White City, the Clean Fuels Standard has allowed SeQuential to grow their business footprint in Oregon by 150 employees. SeQuential recently released a video series explaining how the Clean Fuels Standard is helping their work.  Check it out here.

Before Clean Fuels, Oregonians sent more than $6 billion out of state each year through importing gas and diesel. Now more of these dollars are staying local to support jobs and our economy.

The value to Oregonians from the clean fuels standard:

• immediate and measurable emissions reductions (cleaner air)
• accountability of oil companies if they try to import dirtier petroleum fuels (like tar sands)
• more clean fuel choices

All of this for the equivalent of a fraction of a cent per gallon at the gas pump.

As the world oil market looks poised for serious volatility thanks to meddling from Russia and OPEC, locally-made clean fuels will have more stable prices as well as less pollution, giving businesses and consumers greater protection from oil price spikes.

Oregon's leadership on clean fuels shows not only how our state can lead on climate - demonstrating a real commitment to lower emissions from our largest sources - but also illustrates how the actions we take motivate broader change. Clean fuels standards are working so well here and in California and British Columbia, that Canada is now taking their policy nationwide.

It's been an amazing first year, and we can't wait to see what comes next.