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

A legal brawl over a low-carbon fuel rule will shape the appetite of global markets for Canada's dirtier crude.

Jan 20, 2012
Valero's Benicia refinery in Solano County, Calif.

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.

But if CARB loses the appeal—and the oil and ethanol industries ultimately win their lawsuit in 2013—it could delay California's low-carbon fuel standard for years and discourage similar efforts elsewhere.

Both opponents and supporters of the rule say that whatever happens will have a big impact on the market for Alberta's tar sands in California and across the world.

They give two main reasons why. First, the tar sands industry is eyeing California, the nation's third-largest refining market, as a crucial future destination for its oil. The low-carbon rule would constrict that market, suggested Charles Drevna, president of the National Petrochemical and Refiners Association, an oil industry advocacy group. "It would deny the American people access to abundant supplies of oil derived from oil sands in Canada," he said via email.

Second, the stigma from California that oil sands are dirty could make other oil-importing states and countries reluctant to invest in or deepen dependence on the fuel source, given rising public concern worldwide over oil and gas safety and inaction over climate change. 

The Boom Hits a Snag

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