|Regulating Carbon Intensity and Anti-Protectionism: Finding the Right Balance|
|Written by Gunnar Baldwin|
|Monday, 23 January 2012 06:21|
A recent federal court decision ruling that California's Low Carbon Fuel Standard (LCFS) violates the dormant Commerce Clause of the U.S. Constitution highlights an issue that has much broader implications than the setback it creates for that state's plan for shrinking its net carbon emissions in the transportation sector. In finding that California's preferential treatment for fuels with low full life-cycle "carbon intensity" (all carbon emitted from extraction and refinement to point of sale) discriminates against out-of-state fuel suppliers, the court's decision in Rocky Mountain Farmers Union v. Goldstene has underscored the need for balancing legitimate anti-protectionist concerns with the ability of governments to reduce the carbon footprints of states, regions, or countries.
Anti-protectionist challenges to the regulation of extraterritorial carbon emissions are not unique to the U.S. They also appear in the context of international trade law, the European Union's regulation of carbon in international aviation, and elsewhere. For example, the General Agreement on Tariffs and Trade (GATT) requires signatory countries to treat imported "like products" as favorably as domestic products and does not provide an exception for intangible attributes (such as delivery route used) that are not observable physical characteristics of the final product. 
The case against the LCFS
The LCFS was established by the California Air Resources Board (CARB) as part of a set of actions for complying with California Assembly Bill 32 (AB 32) and is designed to reduce the carbon intensity of fuels used in the state by at least 10 percent by the year 2020. Under the LCFS, California fuel suppliers would be required to calculate the "carbon intensity" of a fuel according to several criteria based on its full life-cycle, including carbon emissions embedded in the transportation of fuel into and within California.
The dormant Commerce Clause is a judicially created construct that forbids states from unjustifiably discriminating against other states in interstate commerce. The District Court found that the LCFS discriminates against out-of-state ethanol producers in two ways. First, the LCFS assigns higher carbon intensity scores to fuels produced in the Midwest, based on longer transportation routes and presumes that electricity used in producing the fuels is generated from sources with greater carbon intensity. Second, the LCFS provides built-in preferences for crude oil produced in California versus crude oil produced out-of-state, based on assumptions not tied to actual carbon intensity.
Based on its findings, the court held that the LCS had the practical effect of controlling commercial activity occurring entirely outside of California. Under the strict scrutiny standard, such activity is only justified if it is necessary to achieve a compelling purpose and there is no reasonable less restrictive alternative. In reaching its decision, the court found that CARB had "failed to establish that no alternative, nondiscriminatory means exist to address their legitimate purpose."
Caught in a "Catch-22"
Although the Goldstene decision accepted the legitimacy of the LCFS's purpose, it rejected the means used to achieve it. CARB argued that there was no reasonable, less discriminatory means, since alternatives to the LCFS (such as a tax on fossil fuels) would result in "leakage" - merely shifting carbon emissions to states with less stringent regulations and defeating the goal of reducing net global carbon emissions. In rejecting the leakage justification, the court reiterated that the dormant Commerce Clause presented a bar to the regulation of conduct occurring wholly out-of-state. The court did not suggest alternatives that could be workable from a global emission reduction perspective, leaving that for CARB to devise.
The ability to limit the full life-cycle carbon intensity of products is an indispensible tool that both private and public sector entities will require in almost any realistic program for mitigating the net build-up of greenhouse gases. Since carbon that is emitted outside of a state's jurisdiction increases the net climate impact inside the state, emissions resulting from the importation of fuel from distant sources are an integral part of the climate impact of fuel use within the state. In this respect, the embedded carbon intensity of a product (or other embedded characteristics, such as "dolphin-safe" or the use of fair labor practices) may be considered a legitimate attribute that governments may specify to fulfill an important policy objective, much as they could limit a weight, size, or toxicity level.
In choosing to lead by example on climate action in the face of inaction elsewhere, California and the European Union have come under fire for regulating behavior beyond their borders. The bases for criticism in both cases would be largely moot if most other states and countries were to pursue parallel schemes for carbon regulation, since these actions would likely result in reciprocity and coordination for the purpose of advancing commonly shared climate goals.
Anti-protectionist barriers confronting states or countries which aspire to be climate leaders impede their efforts to rise above the lowest common denominator for carbon regulation. In the U.S., this may mean preemption of state standards that are based on full life-cycle carbon by federal standards. A system that disallows unilateral state action holds state climate mitigation ambitions hostage to a federal timeline for climate action and legislative (political) paralysis.
The lowest common denominator analogy is not merely implicit in the Goldstene court's ruling. In fact, the court cited a 1992 U.S. Supreme Court ruling that "[n]o State may attempt to isolate itself from a problem common to several States by raising barriers to the free flow of interstate trade." Chemical Waste Mgmt., Inc. v. Hunt, 504 U.S. 334, 339-40 (1992). CARB could well argue that the court has assessed the situation 180 degrees backwards. Far from trying to isolate itself from a common problem, California and other regions where full life-cycle carbon is regulated (such as the European Union), are taking steps to face the climate problem head on, going above and beyond the common denominator to set an example for the world to follow.
Laws and treaties that discourage "unfair" trading practices serve an important and useful function by encouraging trade and investment and by prohibiting states and countries from using their positions to gain unfair competitive advantages. However, the urgency of robust climate action requires some form of accommodation of measures that appear to run counter to the very essence of anti-protectionist law: preferences for local goods, except when the carbon-intensity of foreign goods are on an even par. Yet creating exceptions to anti-protectionist safeguards based on transportation distances is not the answer. It would be too easy for governments to exploit such a loophole to gain unfair advantages.
As legislators and policy makers look for solutions to this dilemma, it will be important to keep two things in perspective. First, in taking unilateral steps to reduce net carbon emissions, local, regional, and national regulatory bodies will need to exercise care to implement every aspect of carbon intensity regulation along neutral lines based on verifiable, science-based reasoning. In California, insufficient evidence of objectivity in selecting the assumptions used to determine carbon intensity scores has muddied the water somewhat in the adjudication of this case. Second, since atmospheric carbon buildup is a global problem, collaboration between governments is the best answer. Where this is not possible, creative new mechanisms for offsetting the discriminatory effect of carbon intensity classifications will be crucial in overcoming legal barriers.
1 Jason E. Bordoff, International Trade Law and the Economics of Climate Policy: Evaluating the Legality and Effectiveness of Proposals to Address Competitiveness and Leakage Concerns, Brookings Trade Forum 2008/2009, p.44. Available at http://www.bupedu.com/lms/admin/uploded_article/eA.534.pdf. The Brookings Institute has suggested that World Trade Organization case law indicates possible leeway for recognition of intangible product characteristics, such as embedded transportation carbon, under Article XX of GATT.
2 The LCFS "Carbon Intensity Lookup Table" (Cal. Code Regs. Tit. 17.§95486(b)) assigns carbon intensity scores for each of a broad range of fuels, based in part on transportation "pathways" into and within California as well as other criteria. The Table uses different methodologies to calculate the carbon intensity of biofuels and fossil fuels.
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