April 27, 2009 / 3:55 AM / 8 years ago

New California fuel rule may violate NAFTA: lawyer

3 Min Read

<p>Traffic is backed up as residents return to town after being evacuated during wildfires in the Ramona area of San Diego County October 26, 2007.Phil McCarten</p>

CALGARY, Alberta (Reuters) - California's new low-carbon fuel rules may be a violation of NAFTA and World Trade Organization provisions because they would unfairly limit exports of crude from Canada's oil sands to the state, a prominent Canadian trade lawyer said Friday.

California adopted a first-ever rule Thursday requiring refineries, producers and importers of motor fuels sold in the state to reduce the "carbon intensity" of their products by 10 percent by 2020, with greater cuts thereafter.

The measures to slash such emissions would force refiners to consider the carbon footprint of the fuels they produce, a potential blow to synthetic crude upgraded from Alberta's oil sands, whose production emits more carbon-dioxide than conventional oil.

However, the state may have no business imposing such rules on oil produced in other countries, a Canadian lawyer said, and the provisions may violate international trade treaties.

"There's definitely a NAFTA case and a WTO case. There's no doubt in my mind about it," said Simon Potter, a partner at the McCarthy Tetrault law firm whose practice includes trade and competition law.

"This is California deciding they are going to treat oil differently depending on ... where it comes from. It's an obvious violation of the requirement for national treatment."

NAFTA provisions guarantee that companies and products from Canada, the United States and Mexico are not discriminated against on the basis of nationality or origin.

"Once you get across the border, you have to be treated like everybody else," said Potter, a former president of the Canadian Bar Association.

"To the extent that these measures make oil from one part of the world that they consider dirty more expensive than identical oil from another part of the world they consider clean, they've got a discriminatory treatment issue."

Canadian trade officials said in an e-mailed statement that the new California rules may amount to discrimination against the country's crude oil.

"Canada's overall energy integration with the United States and our common goal of reducing green house gas emissions makes it all the more important that our individual efforts to address climate change do not lead to the creation of unnecessary barriers," the statement said.

"We are continuing to examine the potential consequences for trade of California's LCFS regulations."

While little or no oil sands crude is currently exported to California, the Alberta government said it considers the provision a threat because the state is a potential market. Also, other U.S. states are considering similar regulations.

"Does it have a possibility of a negative effect on Alberta's bitumen future? I would suggest I'd be very naive if I thought anything other than 'yes' is the proper answer to that," Alberta Energy Minister Mel Knight said Friday in Houston.

Additional reporting by Bruce Nichols and Jeffrey Hodgson; Editing by Alex Richardson

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