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Federal Judge Lawrence J. O'Neill, of the U.S. District Court for the Eastern District of California in Fresno, rejected the state's greenhouse-gas emissions regulations, finding that California's effort to control fuel imports infringed on Congress's constitutional authority over interstate commerce. It is a victory for refiners and ethanol producers because the ruling says the regulations would have discriminated against crude oil and ethanol imported into the state. The ruling means that refiners and ethanol producers won't have to buy credits when importing oil and ethanol into California, as the regulations would have required in certain cases.

The decision puts on hold a major portion of California's effort to cut greenhouse-gas emissions, at a time when the most-populous state's stance has taken on extra importance nationwide because of a stalemate in Washington over greenhouse-gas legislation.

Refiners and ethanol producers filed a lawsuit over the issue two years ago, arguing the rules penalize suppliers that use crude oil or ethanol from outside the state and would lead to higher costs for consumers.
Judge O'Neill hasn't issued a final decision on the case, but on Thursday he barred California from enforcing the rules while the lawsuit continues.

In setting out the rules, the California Air Resources Board calculated a "carbon intensity" score for different types of fuel, favoring biofuels over carbon-heavy crude, and also assigning imported fuels a higher "carbon intensity" score. To comply with the rules, companies could in some cases be forced to buy credits for fuel scoring high on the carbon intensity scale.

California said the rules on importing were justified because suppliers burn fuel and emit carbon when they transport fuels into the state.

The California Air Resources Board, which put the rules in place in 2010, said it would appeal the ruling and ask the court to "stay its preliminary injunction order in the shortest time possible."

The low-carbon rules on transportation fuels were approved by the California Air Resources Board as part of a sweeping initiative to limit greenhouse-gas emissions, signed in 2006 by then-Gov. Arnold Schwarzenegger. The Republican governor had allied himself with Democratic lawmakers in Sacramento in seeking to make California a world leader in the fight against carbon emissions.

Under the legislation, the state aims to cut its total emissions by 174 million metric tons by 2020, with most of the reduction intended to come from a cap-and-trade program on carbon credits. About 15 million metric tons, or 9% of the total, would come from the low-carbon fuel requirements such as mandating more use of ethanol and biodiesel in vehicles.

The rules have come under broad attack, legally and politically. A ballot measure in 2010 known as Proposition 23 would have kept provisions of the legislation from going into effect until California's unemployment rate dropped by more than half. That measure was defeated by voters, but Judge O'Neill's order adds new uncertainty. (WSJ, 12/30/2011)