In my view, this lawsuit stems directly from a lawmaking flaw based on the now-outdated assumption (circa 2006) that all ethanol causes less life cycle GHG emissions than all petroleum products. Tesoro is correct to point out that since this is no longer thought to be true, a volumetric blending mandate no longer makes sense from the perspective of climate mitigation .
In theory the volumetric mandates could still serve other purposes such as to prevent water pollution or to reduce dependence on petroleum. In practice these mandates directly conflict with the LCFS. I'm not sure the full extent of what's motivating Tesoro's action, but I can see how as a refiner, it would be untenable to be required to blend a certain percentage of ethanol, but the only cheaply/freely available ethanol causes more emissions than the gasoline/MTBE it's replacing, yet the LCFS requires reduced carbon intensity of Tesoro's fuel.
This isn't just a California issue. British Columbia, Ontario and the EU have (or may have) volumetric/percentage blending mandates underlying LCFS. These mandates also are vestiges of the assumption that all ethanol is greener than BAU. Come to think of it, there may also be conflicts between the LCFS and the volumetric biofuels mandates under US EISA. If that's so, numerous other states might eventually be affected too.