On Friday, the Ninth Circuit affirmed a lower court’s dismissal of all claims about Oregon’s Low-Carbon Fuel Standard (LCFS). The majority concluded that the policy does not discriminate against out-of-state fuel producers, regulate exterritorialy, or unduly burden interstate commerce under the dormant Commerce Clause and is not preempted by the Clean Air Act. Judge N.R. Smith dissented, finding that the plaintiffs had “plausibly alleged that the Oregon program discriminates in its practical effect.”

The LCFS requires fuel importers or producers to maintain an average carbon intensity of all transportation fuels sold in Oregon below an annual limit. Fuel with a lifecycle carbon intensity below the limit generates credits, while fuel with a carbon intensity higher than standard causes deficits. A regulated party may demonstrate compliance either by producing or importing fuel that in the aggregate meets the standard or by obtaining sufficient credits to offset the deficits it has incurred for such fuel produced or imported into Oregon.

In 2013, the Ninth Circuit dismissed similar dormant Commerce Clause claims brought by the same plaintiffs against California’s analogous policy. Like California’s LCFS, Oregon’s policy “distinguishes among fuels not on the basis of origin, but rather on carbon intensity” to achieve a legitimate environmental purpose. The majority therefore easily dismissed claims of facial discrimination, discriminatory purpose, and discriminatory effects under the Ninth Circuit’s prior decision. The panel also dismissed plaintiffs’ extraterritoriality claims under the Ninth Circuit’s prior decision and tersely rejected a claim that the LCFS unduly burdens interstate commerce.

While the decision largely recycles the Ninth Circuit’s 2013 decision and subsequent denial of hearing en banc, it also amplifies those prior decisions’ conclusions that local economic benefits do not render a state climate policy invalid under the dormant Commerce Clause. Citing the Supreme Court’s landmark decision in Massachusetts v. EPA, the decision observes that “it is well settled that states have a legitimate interest in combating the adverse effects of climate change.” Recognizing that our federal system allows each state “to serve as [policy] laboratory,” the panel finds that this “freedom would be meaningless” if state officials were prohibited by the dormant Commerce Clause from promoting the local economic benefits of environmental policies. So long as the state policy is not “enacted for the purpose of supporting a uniquely local industry,” local economic benefits and elected officials’ statements touting those benefits should not doom a state climate policy.

The plaintiffs also alleged that the LCFS is preempted by section 211(c) of the Clean Air Act, which prohibits states from regulating “any characteristic or component of a fuel” if EPA finds that regulation is not necessary. Plaintiffs claimed that EPA found regulation of methane (a component of the LCFS’s carbon intensity score) unnecessary when it excluded it from the definition of volatile organic compounds under section 211(k) in 1994. The panel concluded that EPA’s decision not to regulate methane under § 211(k), which addresses reformulated gasoline, “is not a finding that regulating methane’s contributions to greenhouse gas emissions is unnecessary, and thus is not preemptive under § 211(c).”

Judge Smith dissented because “the majority fails to grapple with the Oregon program’s West Lynn Creamery problem.” That 1994 Supreme Court decision held that a Massachusetts tax on all milk wholesalers violated the dormant Commerce Clause because proceeds from the tax subsidized only in-state producers to maintain their competitiveness in the interstate market. Although the tax itself was not discriminatory, coupling the tax with payments only to Massachusetts producers “created a program more dangerous to interstate commerce” than the tax or subsidy alone.

Here, Judge Smith observed that the practical result of the policy is to reward all in-state fuel producers with credits and penalize only out-of-state fuel producers with deficits. The policy therefore exempts in-state entities from any burden while also providing them with a subsidy in the form of valuable credits paid for by out-of-state entities. Thus, according to Judge Smith, “like the tax and subsidy in West Lynn Creamery, Oregon’s program discriminates in its practical effect,” and the complaint should survive a motion to dismiss.

The decision is available on the Oregon page.