Judge blocks California attempt to lower greenhouse gas emissions

SAN FRANCISCO (Reuters) - A U.S. judge blocked California's signature attempt 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 regulation unconstitutionally discriminates against out-of-state producers and tries to regulate commercial activities outside California, O'Neill found.

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 said California violated this doctrine, saying 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.

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, and by Jonathan Stempel in New York; editing by Jim Marshall and Richard Chang)

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