Latest In-State Offset Proposal Will Raise Legal Challenge

Guest Post by Nicholas van Aelstyn of Sheppard, Mullin, Richter & Hampton LLP
The Climate Trust’s ‘Point of View’ guest blogger initiative fosters and amplifies expert industry voices
July 12, 2017

The latest proposal to extend cap and trade in California, AB 398, requires that half of the offsets used by compliance entities “provide direct environmental benefits in state.” Below Nico van Aelstyn, a partner at Sheppard Mullin, discusses how this protectionist provision exposes the program to the threat of litigation as a violation of the interstate commerce clause, causing continued legal uncertainty.

The in-state offset requirement of the proposed AB398 facially discriminates against out-of-state offsets, and as such I believe that a court likely would hold that it violates the Dormant Commerce Clause (DCC).

In Rocky Mountain Farmers Union v. Corey, 730 F.3d 1070 (9th Cir. 2013), rehearing denied, 740 F.3d 507 (9th Cir.), cert. denied, 134 S. Ct. 2884 (2014), ARB withstood a DCC challenge because it demonstrated that the higher carbon intensity ascribed to ethanol from the Midwest was due to the life cycle analysis that captured the emissions associated with the transportation of the fuel to California—not to discriminate against out-of-state producers. Specifically, the Rocky Mountain court found the state was regulating internal markets and setting incentives for firms to produce less harmful products for sale in California and not regulating extraterritorial conduct. Similarly, in Energy and Environment Legal Institute (“EELI”) v. Epel, 793 F.3d 1169 (10th Cir. 2015), cert. denied, 136 S. Ct. 595 (2015), the court found that DCC was not violated because Colorado’s 20% RPS, while it applied to electricity on a multi-state grid, was held not to be regulating extraterritorial conduct. The court stated that, “without a regulation more blatantly regulating price and discriminating against out-of-state consumers or producers,’ the near per se rule of invalidation would not apply.”

There are no similar arguments available to defend the preferential treatment for California offsets in the deal language quoted above. Unlike Rocky Mountain, it is not based on a difference in the carbon intensity of offsets generated in-state vs. out-of-state, as they are all generated in accordance with California’s offset protocols and all deemed to represent one ton of greenhouse gases. And unlike EELI, it does not establish a uniform quota applicable to all regardless of origin. It expressly preferences in-state offsets over out-of-state offsets.

Instead, the extension deal language more closely resembles the decision in North Dakota v. Heydinger, No. 14-2156, 2016 WL 3343639 (8th Cir. 2016). While the judges on the panel were split with regard to preemption and DCC rationales, they were united in invalidating Minnesota’s statute that prohibited any person from importing or committing to import power from an out-of-state, new large energy facility, or from entering into a new long-term power purchase agreement that would increase Minnesota’s statewide carbon dioxide emissions (curiously, the lead decision was based on the DCC, though two of the three judges would have avoided reaching the constitutional issue and decided the case on federal preemption under the Federal Power Act and the Clean Air Act).

While the economic impact is clearer in Heydinger, as it clearly regulates commerce into and out of the state, the blatant discriminatory language echoes the proposed offsets language here. And there is no obvious alternative federal statutory regime that might decide the issue as there was in Heydinger. Thus, the proposed language presents a blatant constitutional infirmity—and invites a legal challenge.

It bears mention that the Pacific Legal Foundation (“PLF”) filed an amicus in the Heydinger on the side of North Dakota arguing that the Minnesota statute violated the DCC. Of course, it was PLF that filed the first allowance auctions case in California. The proposed language serves up a credible constitutional challenge. The last time the cap and trade program was presented with such a challenge—the auctions case—it sparked a crisis that endangered the entire program, as we had four “failed” auctions in a row. Why invite another constitutional challenge by including such facially unconstitutional language? There are those that want to undermine the program altogether and they are likely to seize upon this weakness.

Image credit: Flickr/USDA NRCS