With Pipeline Stopped for Now, Tar Sands Battle Continues in California Courts

A high-stakes legal battle is underway in California over whether the state's clean air agency can enforce a first-ever rule to slash carbon emissions in transportation fuels. The fight is being closely watched because the rule could choke global market demand for Alberta's carbon-intensive oil sands at a very precarious time for the industry.

On Wednesday, the Obama administration rejected a permit for the controversial Keystone XL pipeline, which could have increased imports of the fuel into the U.S. by up to 830,000 barrels a day. It was a major setback for the oil industry and its allies and an unexpected victory for environmentalists and their allies. The two sides are now facing each other down in this court case.

California's low-carbon fuel standard is the world's first attempt to require oil suppliers to slash the carbon footprint of their motor fuels, measured not just by emissions from tailpipes but across their full lifecycle, from extraction to combustion. Eleven Northeast and Mid-Atlantic states, and the European Union, are closely tracking California's case because they are working to adopt similar rules.

The state's influential Air Resources Board, or CARB, adopted the Low Carbon Fuel Standard in 2009 as part of its landmark global warming law, A.B. 32. The agency was supposed to begin enforcing the rule on Jan. 1, 2012. But oil companies, which say it unfairly penalizes high-carbon fuels like oil sands crude, have fought furiously to kill the standard. And on Dec. 29, a federal judge in Fresno, Calif., handed them a victory by ruling that CARB can't enforce the measure until an outstanding lawsuit by the oil industry and ethanol advocates is resolved in 2013.

The judge, Lawrence J. O'Neill, a Pres. George W. Bush appointee, said the rule unconstitutionally discriminates against out-of-state fuel sources and regulates commercial activity outside California's borders.

A week later, CARB appealed O'Neill's decision and asked a federal court in San Francisco to reverse it. An agency spokesperson told InsideClimate News this week that CARB will request a stay of the injunction "very shortly" as it awaits a decision on the appeal. National environmental groups Natural Resources Defense Council (NRDC) and the Conservation Law Foundation are providing legal help to CARB. (Editor's note: On Friday, Jan. 20, CARB filed a motion with Judge O'Neill to stay the injunction on the LCFS, which the judge rejected on Jan 23.)

Both sides are playing for huge stakes.

If CARB and the conservationists win the appeal, the agency can immediately mandate that oil importers, refiners and fuel blenders meet the target they've set for 2012—to cut the "carbon intensity" of their fuel mix by a quarter of one percent. (The policy calls for a 10 percent reduction by 2020.)

That could send a signal to other states and countries that are waiting on California to follow suit. For months, EU states have been locked in their own battle over whether to implement the EU Fuel Quality Directive that labels fuel imports from the oil sands as "dirty," with Canada accused of heavy lobbying to delay action.