Canada and the European Union may be heading for yet another flare-up, this time over the proposed regulations to implement the 2009 EU Fuel Quality Directive. Ottawa has said that if the issue isn’t settled, it may end up before the World Trade Organization.

This comes just after the EU challenged Ontario’s Green Energy Act at the WTO and during a delicate point in the ongoing Canada-EU trade negotiations.

At issue is Article 7a of the Directive, which orders a 6% GHG reduction for Europe's transport fuels by 2020.

Originally the European Commission indicated that it would give oil sands fuel a greenhouse gas emissions factor 23% higher than fuel made from conventional oil. Extra taxes would apply to fuels that fell within the higher factor. After pressure by the Canadian government and oil industry, the Commission dropped the higher oil sands figure in the draft regulations.

Now there is the possibility that – after intense lobbying by environmental groups – the EU may reinstate the 23% oil sands factor. Canada strongly opposes any distinction between oil sands and conventional oil in international trade.

The Canadian position is that WTO Agreement prevents discrimination against imports that are “like“ other goods, whether imported or domestically produced, including discrimination between like goods that may be produced by different processes. If the fuel produced from the oil sands is the same end-product as fuel produced from conventional sources, Canada says the WTO non-discrimination rules apply.

The WTO agreement prevents any measure that affects the “competitive position“ of imports vis-à-vis the same products from domestic or foreign sources, including charges, taxes, regulations and border measures such as duties.

There is a long way to go before this measure ends up before a WTO panel. At the end of the day, the EU may relent and apply the Directive equally across the board, as originally intended. If it doesn’t make these changes and the case goes to a WTO panel, it will test the applicability of WTO rules to local climate change measures that apply to goods made by different production processes or methods.

For Canadian energy producers, this is an extraordinarily important case to watch as events unfold. As with the Green Energy Act challenge, this dispute could have an impact across the globe.