California's goal of combatting global warming "may be legitimate," the judge said, but "it cannot be achieved by the illegitimate means of isolating the state from the national economy."
He said other rules that assign higher and lower values to fuels produced by different farming practices amounted to an attempt to regulate out-of-state conduct, which exceeds a state's constitutional power. And O'Neill said California had failed to show that it could not accomplish its goals with regulations that applied only to in-state commerce, such as a tax on gasoline and other carbon-containing fuels.
Out-of-state fuels producers hailed the decision as a win for California drivers.
"Today's decision ... struck down a misguided policy that would have resulted in even higher fuel costs for Californian consumers while increasing the cost of business throughout the state," said Consumer Energy Alliance Executive Vice President Michael Whatley.
The California Air Resources Board plans to ask the judge to stay the ruling, and appeal if necessary to San Francisco's 9th U.S. Circuit Court of Appeals, spokesman Dave Clegern said.
The rule is "an evenhanded standard that encourages the use of cleaner low-carbon fuels by regulating fuel providers in California," Clegern said, adding that it "does not discriminate against any fuels on the basis of geography."
Beginning this year, the standard has required petroleum refiners, companies that blend fuel and distributors to gradually increase the cleanliness of the fuel they sell in California.
The board previously had said the low-carbon mandate will reduce California's dependence on petroleum by 20 percent and account for one-tenth of the state's goal to cut greenhouse gas emissions by 2020.
The Rocky Mountain Farmers Union, the California Dairy Campaign, the Renewable Fuels Associations and other groups filed a similar lawsuit in the same court in 2009. Their complaint said the regulation conflicted with the federal Renewable Fuel Standard and would close California's borders to corn ethanol made in other states.
The nonprofit legal organization Earthjustice, which was not party to the suit but works on climate-related issues, said the ruling was a major setback for the state's aggressive greenhouse gas emission regulations.
"California is leading the way on cleaner fuels and a cleaner power grid, and the state's programs are consistent with federal law," Earthjustice President Trip Van Noppen said. "It is not surprising that the oil industry is attacking these programs, but like previous attacks in the courts and at the ballot box, we expect this one ultimately to fail."