LCFS: Court Rules Against CARB over NOx-Biodiesel Issue but Keeps 2017 Status Quo

A report from Latham & Watkins this week provides a straightforward, relatively simple review of a court case decided last week by California’s Court of Appeal for the Fifth Appellate District. The case (known as “POET I”) essentially concerns the question of whether CARB violated the California Environmental Quality Act (CEQA) when it originally promulgated the Low Carbon Fuels Standard (LCFS) program. The court found that CARB had failed to comply with CEQA’s requirement that it analyze the degree to which NOx emissions from biodiesel fuels had been and would be impacted by the implementation of the LCFS rules and that its analysis for deficient under CEQA.

The Court further directed ARB to conduct a year-by-year analysis of whether the project as a whole—i.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.

The Court of Appeal agreed with CARB 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, according to the article. Instead, the Court of Appeal froze the carbon intensity (CI) targets for diesel and biodiesel fuel provisions at 2017 levels until CARB has completed its corrective action by conducting its baseline analysis and until the trial court has approved it. CARB expects to have that done in early 2018.

What’s the point here? First, 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. But, the article notes, with the 2020 deadline to reduce CI of gasoline and diesel by 10% from 2010 levels fast approaching, CARB still faces difficult choices. CARB 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, CARB will either have to further steepen the compliance curve in 2019 and 2020, or else miss its statutory CI-reduction target in 2020, according to the article.

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 CARB had accepted higher NOx emissions in the name of improved overall GHG 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. Recall that 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).

The article notes that the 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, the article concludes, 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. This is one of those red-herring issues to watch.

Tammy Klein is a consultant and strategic advisor providing market and policy intelligence and analysis on transportation fuels to the auto and oil industries, governments, and NGOs. She writes and advises on petroleum fuels, biofuels, alternative fuels, automotive fuels, and fuels policy.