Two related cases, advancing in parallel, have the potential to upend California’s low carbon fuel standard (LCFS), whether via full suspension of the LCFS or carving out diesel fuels from the deficit and crediting regime.[1]

Both cases involve challenges by POET LLC, a South Dakota-based ethanol producer, against the LCFS rules adopted by the California Air Resources Board. ARB first adopted LCFS rules in 2009 and amended them in 2011, but these rules successfully were challenged by POET, leading the California Court of Appeal for the Fifth Appellate District on July 15, 2013, to find deficiencies in ARB’s California Environmental Quality Act review process. The Court of Appeal issued a peremptory writ of mandate in this case (POET I), requiring ARB to remedy legal defects in the initial adoption of the regulation, but opting to leave the LCFS in place while ARB reworked its analysis and repeated the necessary procedural steps and substantive analysis. Over the next two years, ARB reviewed and revised the LCFS, before readopting the regulation on Sept. 25, 2015. Shortly thereafter, on Oct. 30, 2015, POET once again brought suit in Fresno County Superior Court to challenge the readopted regulations (POET II), arguing that ARB both failed to comply with the writ issued in POET I and that it violated CEQA, the California Administrative Procedure Act, and the Health & Safety Code.

Upon readoption of the LCFS, the Superior Court in POET I issued an order discharging the writ on Jan. 5, 2016. POET filed a motion to stay that order on Feb. 5, 2015, which was denied by the Superior Court on Feb. 25, 2016. POET challenged the Superior Court’s discharge of the writ in POET I as improper because ARB allegedly had not strictly complied with its terms. POET argued, among other things, that ARB had failed to comply with the writ by declining to analyze or mitigate nitrogen oxide (NOx) emissions caused by the original LCFS, opting instead to include those emissions in the CEQA baseline for the readopted LCFS, which ARB deemed to be a new regulation distinct from its predecessor. On March 9, 2016, POET appealed the discharge of the writ to the Court of Appeal and on March 14, 2016, POET filed a writ of supersedeas seeking the extraordinary relief of staying the Superior Court’s order that discharged the writ. On March 23, 2016, the Court of Appeal denied POET’s writ of supersedeas, but the appeal otherwise proceeded. As the outcome of POET I could impact POET II, the parties stipulated on Feb. 22, 2017, that the Superior Court hearing on the merits of the POET II claims will be postponed until July 26, 2017. Meanwhile, the POET I case is advancing in the Court of Appeal, with oral argument scheduled for March 23, 2017.

In its appellate briefs, POET reiterated that ARB had failed to comply with the writ by not analyzing or mitigating NOx emissions associated with increased biodiesel usage that had resulted from the original LCFS rules, but POET also argued that the Court of Appeal retained jurisdiction over both the original and readopted LCFS regulations and had the power to suspend enforcement of the readopted LCFS. POET may have been attempting to blunt ARB’s arguments that the original and readopted LCFS regulations were separate CEQA projects and, therefore, portions of the writ were mooted by ARB’s repeal of the original LCFS regulations.

If the Court of Appeal in POET I finds that ARB failed to comply with the writ, it may attempt to vacate ARB’s readoption of the LCFS. Should the Court of Appeal rule against ARB, the resulting order could take several forms, including: (i) returning to the status quo established by the writ, which would “refreeze” the carbon intensity (CI) targets at 2013 levels; (ii) preserving the current status quo, which would freeze the CI targets at either 2016 or 2017 levels; or (iii) suspending the operative effect of the current and former LCFS regulations entirely. These three options are floated in the Court of Appeal’s Jan. 25, 2017, Oral Argument Notice in POET I, which seems to assume that the Court of Appeal indeed has the power to vacate the LCFS regulations. However, the Court of Appeal notably characterized the invalidation, suspension or freezing of the entire LCFS regulation as the “the-baby-with-the-bathwater problem.” In other words, the Court of Appeal seems concerned that invalidating, suspending or freezing the operative effect of the LCFS regulations may “cause greater detriments that [sic] allowing the regulations to remain operative pending compliance with the writ….”

The Court of Appeal in POET I, which has received complete briefing on the question of whether to discharge the writ, on Feb. 3, 2017, issued a letter requesting supplemental briefing on the question of whether either the biodiesel fuel provisions or, more generally, the diesel fuel provisions of the LCFS and 2015 Alternative Diesel Fuels (ADF) regulations can be severed effectively from the rest of the LCFS rules, allowing the remainder of the regulations to remain operative. This request can be interpreted as a signal from the Court of Appeal that it believes ARB’s CEQA analysis of the biodiesel provisions of the aforementioned rules may not have fully complied with the writ and that the Court of Appeal is seeking guidance from the parties on how to best craft an appropriate remedy. Briefing on these supplemental questions was due on Feb. 24, 2017.

In its response to the Court of Appeal’s request, POET argued that severance of either the biodiesel or diesel provisions from the rest of the LCFS would be improper because: (i) it would prejudice complete and full compliance with CEQA under Public Resource Code Section 21168.9(b)(2); and (ii) the writ itself did not allow it. Instead, POET advocated for invalidation of the LCFS rules in their entirety. Nevertheless, POET did identify provisions that could be severed from the LCFS if the Court of Appeal disagreed, arguing that the removal of these provisions “would not affect the ability of other fuels to be used in California, or the ability of those fuels to receive credits under the LCFS program.” If the Court of Appeal does sever certain provisions from the LCFS regulation, POET also argued that the Court of Appeal should implement the remainder of the LCFS at the 2013 CI levels that applied while ARB was first revising and readopting the LCFS.

By contrast, ARB argued that Public Resource Code Section 21168.9 does allow the Court of Appeal to tailor its remedy by severing the biodiesel provisions (but not the diesel provisions generally) from the LCFS regulations. However, ARB argued that similar severance would not be appropriate with respect to the related ADF regulations, because any suspension of the ADF rules would have the effect of increasing NOx emissions, thereby thwarting the intent of CEQA.[2] Nevertheless, ARB counseled against severing the biodiesel provisions from the LCFS, instead advocating for a more limited, nontextual remedy from the Court of Appeal, if it determines that ARB failed to fully comply with the writ. ARB advised the Court of Appeal to take the more measured approach of issuing a limited mandate requiring ARB to take specific actions as needed to remedy the remaining issues (as opposed to excising certain sections of the regulations), while leaving the readopted LCFS in place in the interim.

The Natural Resources Defense Council, an intervenor in the case and ARB’s co-respondent, submitted supplemental comments to the Court of Appeal to clarify the potential environmental and public health consequences if the Court of Appeal were to stay the biodiesel provisions of the LCFS. NRDC argued that biodiesel reduces particulate matter, carbon monoxide, hydrocarbons and volatile organic compounds, benzene, ethyl benzene, and polycyclic aromatic hydrocarbons. Additionally, NRDC alleged flaws in POET’s calculations regarding the impact of LCFS on the prevalence of biodiesel and NOx emissions in the state.

The implications of either the suspension of the LCFS rules or the severance and abrogation of the biodiesel or diesel components of LCFS would be very significant, and extend beyond the public health issues flagged by NRDC. At a minimum, there could be a market reaction, with a concomitant impact on LCFS credit prices. Both ARB and NRDC in their supplemental briefing allude to potential market impact, with both suggesting an overall negative impact on low CI fuel development and deployment should LCFS credit prices fall. There are at least two potential outcomes contemplated by the parties vis-à-vis generation/accrual of LCFS credits and deficits. First, should the biodiesel provisions be excised from the LCFS, then biodiesel (at least in the short term) would no longer be able to generate LCFS credits. Second, should all of the diesel provisions be excised from the LCFS, then suppliers of diesel fuel would no longer generate LCFS deficits (that then need to be balanced with credits).

Another legal setback for ARB on the LCFS could have ripple effects on other climate programs being implemented by ARB and the overall strategy to achieve the reductions in GHG emissions necessary to comply with Senate Bill 32 (i.e., 40 percent below 1990 levels of GHG emissions by 2030). For example, ARB’s proposed 2017 Climate Change Scoping Plan Update makes certain assumptions about the GHG emissions reductions attributable to the LCFS that may no longer be realistic should the Court of Appeal in POET I suspend the LCFS or excise portions of the regulations. Accordingly, other GHG emission reduction measures (e.g., the Cap-and-Trade Program) may be asked to pick up the slack. Further, ARB’s efforts to implement the Short-Lived Climate Pollutant Reduction Strategy could be adversely affected as ARB is relying heavily on the LCFS to incentivize the capture of biogas (e.g., from dairy farms) for reuse as transportation fuels.

[1] The LCFS focuses on the transportation sector and requires a 10 percent reduction in the carbon intensity (CI) of gasoline and diesel from 2010 levels by 2020, with CI targets designed to become more stringent each year. The CI of fuels, expressed as grams of CO2e per megajoule, is calculated across the full lifecycle of transportation fuels (i.e., well-to-wheel) and is intended to include all of the greenhouse gas (GHG) emissions associated with producing, distributing and using fuels.

[2] The ADF was adopted to essentially counteract the effect of the LCFS vis-à-vis increased NOx emissions from biodiesel.

Authors: Joshua T. Bledsoe, Counsel

Max Friedman, Associate

Latham & Watkins LLP

714-755-8049

Joshua.bledsoe@lw.com

714-755-8286

Max.friedman@lw.com

Editor’s Note: This article was originally published in Latham & Watkins’ Clean Energy Law Report March 2 and has been republished on www.BiodieselMagazine.com with permission from Latham & Watkins LLP.