The low-carbon fuel standard is part of California's Global Warming Solutions Act of 2007, also known as AB 32, aimed at decreasing the state's greenhouse gas emissions to their 1990 level by 2020.
The standard requires producers, refiners and importers of gasoline and diesel to reduce the carbon intensity of transportation fuels by at least 10 percent by 2020. It applies to all gasoline and other fuels used within California, whether produced inside or outside the state.
The standard takes into account carbon emissions generated during a fuel's production and transportation to market as well as those created during its combustion.
Petroleum and ethanol producers had argued the fuel standard discriminated against out-of-state companies and violated the U.S. Constitution's protection of interstate commerce.
A three-judge panel of the 9th U.S Circuit Court of Appeals ruled 2 to 1 Wednesday to reverse a lower-court ruling from 2011 that temporarily halted the state's ability to enforce rules.
They said the fuel standard does not discriminate against out-of-state crude oil and does not violate the extraterritorial regulation prohibition in the U.S. Constitution's Commerce Clause.
"California should be encouraged to continue and to expand its efforts to find a workable solution to lower carbon emissions, or to slow their rise," Judge Ronald Gould wrote for the majority, the Los Angeles Times reports.
"If no such solution is found, California residents and people worldwide will suffer great harm. We will not at the outset block California from developing this innovative, non-discriminatory regulation to impede global warming," Gould stated.
Environmentalists applauded the decision.
"Today's victory ensures Californians are given better, cleaner choices at the fuel pump," David Pettit, a senior attorney at the Natural Resources Defense Council, was quoted as saying by the Los Angeles Times. "This policy will spur American ingenuity to produce cleaner fuels with fewer impacts to our environment. The standard is working to reduce pollution while decreasing the state's reliance on oil."
But the American Fuel & Petrochemical Manufacturers Association said it was "deeply disappointed" by the ruling and is considering a further appeal.
"Although the low-carbon fuel standard is a California law, its broad reach and intended scope means that implementing the LCFS will have adverse consequences throughout the nation's fuel refining facilities and supply chain far beyond California's borders," association president Charles Drevna said in a statement.