BRUSSELS (Reuters) - The European Union proposes legislation to label crude oil derived from Canada's vast reserves of tar sands, as well as from other sources of unconventional oil, as highly carbon intensive.
Canada has fought the proposal vigorously, with help from its EU ally, Britain, and through political and industry lobbying.
European Climate Commissioner Connie Hedegaard has said she will stand firm and EU government officials meet for further discussion of their plans in early December.
These are some of the questions surrounding the debate.
Canada has the world's third largest oil reserves behind Venezuela and Saudi Arabia. The bulk of Canada's and Venezuela's oil wealth is unconventional crude, whereas Saudi Arabia's is mostly conventional oil that is very easy to extract.
Ottawa sees acceptance of oil from tar sands as vital to its economic future and has questioned the science behind the EU stance.
Canada's oil output this year is expected to rise to 2.9 million barrels per day (bpd), the country's largest oil industry lobby group said earlier this year.
Unconventional oil costs much more to extract than conventional crude, but with oil prices well above $100 a barrel, profits are still huge.
So far Canada does not export crude directly to Europe, although some oil products arriving in Europe are derived from oil sands.
A planned pipeline, Keystone XL, would transport crude from the northern Alberta oil sands to the U.S. Gulf Coast, meaning more of it could move to Europe.
Feelings have run high on both sides of the Atlantic.
The United States has delayed its approval for the full Keystone project to late 2012 or early 2013, asking that the link's path should avoid environmentally-sensitive areas.
Canada's Environment Minister Peter Kent said last week opposition legislators who campaigned in Washington against tar sands and their shipment though the Keystone pipeline were treacherous.
Within the EU, Britain, as a traditional ally of Canada, has led opposition to the labeling of tar sands as highly polluting in the green fuel ranking.
"The UK is not against the development of tar sands. They think it's another oil source, which will make a contribution toward global supplies and they will become a dissenting voice within the EU," said a western diplomatic source.
Britain has a direct stake through its interest in BP and Anglo-Dutch company Royal Dutch Shell.
The Netherlands has also voiced some opposition to the label, although it has already included a default greenhouse gas value for oil sands in its national legislation, EU sources and lobby groups have said.
Another opponent is Estonia, whose shale oil reserves would also be ranked as highly polluting under the EU plans. Other east European nations have rallied to its cause.
Business Europe, representing companies across 35 nations, has written to the European Commission arguing the measure would have "a disproportionate impact on EU competitiveness and trade for little environmental benefit."
The European Commission approved on October 4 a proposal to include tar sands in a ranking designed to enable fuel suppliers to identify the most carbon-intensive options.
Tar sands are assigned a default greenhouse gas value of 107 grams of carbon per megajoule, informing buyers it has more climate impact than conventional crude with 87.5 grams, EU sources said.
The Commission's proposal must now be approved by a majority of EU governments under the bloc's weighted voting system, after which European Parliament lawmakers will have three months to either accept or reject their decision.
If finalised, the ranking would complete legislation introduced in 2008, when the EU agreed to reduce the carbon intensity of its transport fuels by 6 percent by 2020 as part of wider goals to cut carbon emissions by 20 percent by 2020.
Most fuels were dealt with in the ranking under the 2008 fuel quality directive by the end of last year.
A decision on whether to include tar sands in the ranking was delayed after objections from Canada.
The EU and Canada, keen to diversify its exports away from the United States, have been thrashing out their differences in a series of talks on a proposed free trade deal.
Canada has repeatedly raised the tar sands issue as a potential threat to trade ties.
The European Commission's Legal Service has said the EU proposals could probably be defended if Canada were to take its case to the World Trade Organization (WTO).
Tim Grabiel, senior lawyer, at Defense Terre, which advises non-governmental organisations, said the EU had a strong likelihood of success in the event of any WTO challenge.
Tar sands, he argued, would most likely not be considered "like products" to conventional crude, and therefore the EU would not be found to be committing unlawful discrimination.
Scientists have pointed to evidence that oil from tar sands is more polluting.
A study by Adam Brandt at Stanford University, California, found there was some uncertainty, but greenhouse gas emissions from oil sands production were "significantly different enough from conventional oil emissions that regulatory frameworks should address this discrepancy."
Canada's Natural Resources Minister Joe Oliver accused EU Commissioner Hedegaard of being motivated by politics, rather than science. Hedegaard hit back.
"We have the knowledge and the fact that oil sands are more CO2-polluting than other kinds of fuel," Hedegaard said.
Even if Britain and other EU governments win enough support to oppose the Commission's proposal, some lawmakers have said the European Parliament will not approve any rules that treat tar sands in the same way as conventional crude oil.
"Production of fuel from tar sands involves the release of more emissions than from most oils taken straight from the ground, and that has to be taken into account," Chris Davies, Liberal Democrat environment spokesman in the parliament, said.
Additional reporting by Emma Farge in London and Jeff Jones in Calgary; Editing by Anthony Barker