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Europe took a major step toward essentially banning oil sands crude, dealing a blow to the industry's global image and sparking warnings of a trade battle from the Canadian government.

The European Commission proposed that oil sands crude be ranked as a dirtier source of fuel compared with oil from conventional wells. That would discourage imports of oil sands crude since European oil buyers would seek cleaner fuels to help meet the continent's long-term carbon-emission targets.

The move singles out Canada because all of the world's oil sands reserves are in northern Alberta and Saskatchewan. Though none of the oil sands production is currently shipped to Europe, the Canadian energy industry is worried that Europe's anti-oil-sands policy could spread to other regions, such as Asia, where Canada is aiming to build a market for oil sands crude.

"The concern for us is one of principle and precedent," said Greg Stringham, vice-president of oil sands and markets at the Canadian Association of Petroleum Producers (CAPP), the industry association. "The importance of it in the EU for us is that it could set a precedent on which others then build their policies."

The Canadian government vowed to fight the move, saying it could turn to the World Trade Organization if it believes the European Union discriminates against the country's enormous reserves of unconventional oil.

"Should the European Union implement unjustified measures which discriminate against the oil sands we won't hesitate to defend our interests," said Natural Resources Minister Joe Oliver.

Canada's energy industry is battling a growing image problem over the oil sands, which critics say is an undue source of carbon emissions. TransCanada Corp.'s plan to build the Keystone XL pipeline from Alberta to the southern U.S. has led to a wave of protests over environmental risks, and opposition by some lawmakers in the U.S. In Canada, critics continue to campaign against the Northern Gateway pipeline proposal, which would ship oil sands crude to the West Coast for shipment to Asia.

The EU Commission's proposal divided its members, with trade and energy officials opposing a separate reference to oil sands, and climate change officials in favour. European companies must cut the carbon intensity of their transport fuels by 6 per cent by 2020. This means energy sporting the higher carbon dioxide values will be shunned.

The commission's proposal must be approved by the European Parliament and representatives of EU governments before becoming law.

Under the draft legislation, oil sands crude would have a value of 107 grams of carbon dioxide per megajoule of energy, compared to 87.5 grams for conventional oil. Canada's energy industry is not opposed to laws designed to lower carbon emissions, said CAPP's Mr. Stringham, but wants to make sure the EU is not picking on Canada or basing the proposed legislation on questionable science. Mr. Stringham noted that Europe's rules do not distinguish between light and heavy oil, which may allow high-carbon oil from other countries into Europe while blocking oil sands oil.

"We remain concerned about the implementing measures of the directive because they could well be discriminatory and stigmatize the oil sands crude," Mr. Oliver told reporters on a conference call from Washington.

"We think it's unjustified and particularly when based on science, the oil crude from Russia and Nigeria has similar greenhouse gas emissions to that of the oil sands in Canada."

He said the EU move blatantly plays favourites on oil imports.

"What possible justification could there be to discriminate other than the fact that Europe is importing oil from Nigeria and Russia and not from Canada, so they can take a shot at us?"

With files from Dow Jones and Reuters