Tesoro Corp. (NYSE: TSO) has sued the California Air Resources Board to stop the state's new ethanol blending mandate, saying more study into biofuel's environmental costs is needed.

The mandate passed in August requires an increase in the amount of ethanol blended into gasoline from 5.7 percent to up to 10 percent. The state is giving oil refineries like Tesoro until the end of 2009 to carry out the mandate.

San Antonio, Texas-based Tesoro argues in the lawsuit that the mandate is ill conceived and will in fact conflict with the state's goal to reduce its greenhouse gas emissions to the 1990 levels by 2020. The company operates refineries in two California cities: Los Angeles and Martinez.

"We believe there is an important and necessary role for alternative fuels but we want industry and business leaders, elected officials, and regulators to proceed in a cautious, thoughtful manner to ensure we consider environmental and economic impacts," Bruce Smith, Tesoro's CEO and chairman said in a statement.

Federal and state mandates to increase ethanol use have prompted fierce "food v. fuel" debates, especially because most ethanol produced in the United States is made from corn. Critics have contended that those mandates have pushed up corn prices, leading to higher prices for everyone from cattle feeders to supermarket shoppers.

Ethanol industry advocates dispute the claim, saying ethanol has environmental benefits. 

The economic impact of biofuels has been the source of much argument in the last year, with Science journal studies and Time magazine articles claiming that the fuels hurt the environment, while others say that biofuels are greener than gasoline (see stories here, here, here and here).

In August, the U.S. Environmental Protection Agency dismissed claims that corn-based ethanol hurts food prices or the environment when it denied Texas' request to waive the federal Renewable Fuel Standard, which calls for the country to use 36 billion gallons of biofuels by 2022 (See EPA Denies Texas Ethanol Waiver).

In the lawsuit, Tesoro claimed that planting corn and making ethanol from it will increase greenhouse gas emissions. Scientists have found that farmers are clearing more forests -- which can effectively absorb carbon emissions – to make way for ethanol cropland.

Tesoro said it wants the state to study the environmental and food price impacts of corn-based ethanol before implementing a rule that could nearly double the state's ethanol use.

CARB spokesman Dimitri Stanich said the state does "recognize that the way ethanol is produced from corn does have problems" with environmental impacts, though he wouldn't comment on the lawsuit's specific claims. The lawsuit drew a quick and angry rebuttal from ethanol industry advocates after it was filed Wednesday.

The New Fuels Alliance, a nonprofit biofuel advocacy group, called it "a blatant attempt by Tesoro to try to use the regulatory and legal process to gain competitive advantage in the market place" and said it could hurt an already suffering U.S. ethanol industry (see Ethanol Margins Suffer and Ethanol Stocks Keep Falling).

Brooke Coleman, New Fuels Alliance executive director, said making ethanol and burning it as fuel causes 30 percent less greenhouse gas emissions than making and burning gasoline. He pointed to rising oil prices, rather than rising corn prices, as the main culprit for higher food prices.

Despite the lawsuit, the company is still actively investing $15 million to $25 million to upgrade its two Californian refineries to meet the state's new ethanol mandate, said Sarah Simpson, vice president of corporate communications for Tesoro.

Coleman said he was concerned that the lawsuit might lead other refineries in the state to delay or abandon plans to increase ethanol blending.

Rick Kment, biofuels analyst with DTN, on Thursday said it was too early to say if the lawsuit would have an effect on the ethanol industry.

If California waters down or eliminate its ethanol mandate, then other states could follow suit, he added.

"Where California goes in energy, the country seems to follow," Kment said.