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California's Low Carbon Fuel Standard Upheld after Initial Defeat in Federal Court

By: Sahir Surmeli 

California lawmakers passed the “California Global Warming Solutions Act,” AB32, which included regulations known as the Low Carbon Fuel Standard.  The standard required the oil industry to reduce the carbon intensity of industrial fuels such as diesel and gasoline by a minimum of 10 percent by 2020.  The standard was challenged by a group of fuel makers, trucking interests, and farming interests.  Although the challenged was initially successful, just this week California appealed and won that appeal to keep the new standard in place. 

In December 2011 the U.S. District Court in Fresno, California had found in favor of the plaintiffs and ruled that the law was unconstitutional because it discriminated against out-of-state ethanol and fuel producers by regulating out-of-state conduct.  The California Air Resources Board, the state agency in charge of implementing the law, appealed the ruling and was successful in reversing the lower court’s decision.  The reversal was issued earlier this week by the Ninth Circuit U.S. Court of Appeals.

This is good news for clean energy advocates. It also gives a boost to companies working on next gen biofuels because the standards will require oil makers to seek out fuel sources that can help them reach the 10% reduction in carbon intensity.

The development timeline of these next generation fuels has been long, which has caused financing challenges.  In particular, it proved harder than expected for venture capital backers to surmount high costs and lack of project financing for early facilities. The rule of thumb became that less expensive (and more leveraged) project finance would not be available until a third project had been operational and proven.  U.S. government support for early facilities was available for a period and helped get some early plants built, but this has been cut back dramatically.

Mandates like California’s and those from branches of the U.S. military (to strengthen domestic supply) help bridge the gap. Although the road will continue to be bumpy, clean technology industry watchers should expect biofuels to be a meaningful part of the U.S. transportation fuel mix within 10 years.

Mintz Levin stays on top of all of the latest energy and clean technology news at its Energy & Clean Technology Matters blog and with regulatory and legislative developments from ML Strategies weekly Energy and Environmental Update.

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Sahir Surmeli

Member / Co-chair, Energy & Sustainability Practice

Sahir Surmeli is a Mintz business counselor who advises companies, boards, entrepreneurs, investment banks, and venture and private equity investors as they build and grow companies. He handles public offerings, 144A and private financings, acquisitions, joint ventures, and strategic partnerships.