The Costs of Doing Business: 9th Circuit Upholds Oregon Clean Fuels Program

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In 2007, the Oregon legislature instituted a program designed to reduce the state’s greenhouse emissions to at least 10 percent lower than 2010 levels by 2025. The Oregon Clean Fuels Program uses a cap-and-trade scheme that attributes a carbon intensity value to transportation fuels produced or imported into Oregon. Regulated parties must keep the average carbon intensity of all transportation fuels used in Oregon below an annual limit. A fuel with a carbon intensity below the limit generates a credit, and one with a carbon intensity above the limit generates a deficit. Regulated parties must generate carbon intensity “credits” greater than or equal to their “deficits” on an annual basis. Regulated parties can buy or sell credits, store them for future use, or use them to offset immediate deficits.


The American Fuel & Petrochemical Manufacturers(AFPM) and other related trade groups challenged the Program, arguing it violates the Commerce Clause in the U.S. Constitution and that the Program is preempted by federal regulations under the Clean Air Act (American Fuel & Petrochemical Manufacturers v. O’Keefe).Under the Commerce Clause, states cannot pass laws that discriminate against out-of-state business or burden the interstate flow of commerce, unless they can show a good reason. The Commerce Clause rule prohibiting discrimination or burdening of interstate commerce also extends to state laws that have negative effects on interstate commerce, even if the laws weren’t explicitly aimed at out-of-state businesses.


The AFPM argued that the program favored Oregon biofuel producers over those in other states, such as Midwest ethanol producers. Both the district court and the 9th Circuit (on appeal) disagreed. The key fact for the courts was that the program assigned carbon intensity scores to fuels based on a model that had already been upheld as neutral toward out-of-state commerce in a similar challenge to a California program. Thus, statements by Oregon’s governor about how the program would benefit Oregon ethanol producers did not show discrimination — a state can tout a law’s domestic economic benefits so long as the true purpose of the law is neutral. The courts were not even swayed by the fact that the program works out so that all Oregon fuel producers generated credits that could be sold, and only out-of-state fuel producers generate deficits.


The 9th Circuit gave short shrift to the AFPM’s preemption argument. The Clean Air Act prohibits states from regulating vehicle fuels where the EPA has found that no regulation of a particular characteristic or component of a fuel or fuel additive is necessary. The AFPM argued that the EPA had made such a statement by opting not to regulate methane. The 9th Circuit said that choosing not to regulate a substance is not the same as affirmatively stating that no regulation is necessary.


This looks like the end of the road for the AFPM’s challenge to the program. Given the previous unsuccessful challenge to California’s version of the program and the absence of a split among the federal appellate courts on these topics, it is unlikely that the AFPM’s case will make it to the Supreme Court. The end result is that fuel producers and importers will have to deal with the costs of Oregon’s efforts to pare down the state’s greenhouse emissions.