SAN FRANCISCO (Reuters) - A judge blocked one of California's signature attempts to lower greenhouse gas emissions, a victory for out-of-state ethanol producers and refiners that has California's air quality board vowing to appeal.
U.S. District Judge Lawrence O'Neill in Fresno on Thursday issued a preliminary injunction against a regulation adopted by the California Air Resources Board in 2010.
The rules are aimed at rewarding biofuel fuel producers that consume less energy in their businesses, including transportation to customers.
Out-of-state producers having to ship their fuels over long distances would be at a disadvantage to California refiners.
The regulation unconstitutionally discriminates against out-of-state producers, O'Neill found.
Sue Reid, vice president at the Conservation Law Foundation, said O'Neill's injunction is "surprising" in terms of its scope.
"If this decision stands it would have an enormous chilling effect on states' ability to address climate change," said Reid, whose group intervened in the case to help defend the regulation. California is the only state that has implemented such an approach, she said.
Dave Clegern, a spokesman for the board, said it plans to ask O'Neill next week to put his ruling on hold, pending an appeal to the 9th U.S. Circuit Court of Appeals.
Shares of Pacific Ethanol Inc, which produces and markets renewable fuels on the West Coast, fell 7 percent on Friday following the judge's ruling.
The regulation was intended to force producers and refiners by 2020 to reduce their fuel's carbon footprint by 10 percent as part of a state effort to reduce greenhouse gas emissions to 1990 levels.
It was adopted in the wake of a related 2007 executive order by Arnold Schwarzenegger, then the state's governor.
While Congress has constitutional power to regulate interstate commerce, state interference with such commerce is also limited under so-called dormant Commerce Clause interpretations of the U.S. Constitution.
O'Neill, who was nominated by President George W. Bush, said California violated this doctrine. The regulation "discriminates against out-of-state corn-derived ethanol while favoring in-state corn ethanol and impermissibly regulates extraterritorial conduct.
"California impermissibly treads into the province and powers of our federal government, reaches beyond its boundaries to regulate activity wholly outside of its borders, and offends the dormant Commerce Clause," he continued.
Industry participants applauded the decision, including Bob Dinneen, chief executive of the Renewable Fuels Association, and Tom Buis, chief executive of trade group Growth Energy. Those entities are plaintiffs in the case.
"With this ruling, it is our hope that the California regulators will come back to the table to work on a thoughtful, fair, and ultimately achievable strategy for improving our environment by incenting the growth and evolution of American renewable fuels," Dinneen and Buis said in a joint statement.
Environmentalists, meanwhile, are hoping for a better result on appeal.
"We're optimistic the 9th Circuit will take a hard look at this decision and come to a different conclusion," Reid said.
The case is Rocky Mountain Farmers Union et al v. Goldstene et al, U.S. District Court, Eastern District of California, No. 09-02234.
Reporting by Dan Levine and Noel Randewich in San Francisco, Jonathan Stempel in New York; editing by Jim Marshall, Richard Chang, Gary Hill