Twin Challenges to LCFS Advance in California Courts, With Potential Implications for State’s Overall Climate Stabilization Strategy

By Latham & Watkins LLP.

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 (POET), a South Dakota-based ethanol producer, against the LCFS rules adopted by the California Air Resources Board (ARB). 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 (Court of Appeal) on July 15, 2013, to find deficiencies in ARB’s California Environmental Quality Act (CEQA) review process. The Court of Appeal issued a peremptory writ of mandate (Writ) 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 re-adopting the regulation on September 25, 2015. Shortly thereafter, on October 30, 2015, POET once again brought suit in Fresno County Superior Court (Superior Court) to challenge the re-adopted 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 (APA), and the Health & Safety Code.

Upon re-adoption of the LCFS, the Superior Court in POET I issued an order discharging the Writ on January 5, 2016. POET filed a motion to stay that order on February 5, 2015, which was denied by the Superior Court on February 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 re-adopted 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 February 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.