You'd take a reputation hit whether or not it came from a Papal order. Best course of actions IMHO is to spend a few coins to counter the hit to your Papal reputation rather than endanger your alliance with your ally, as this would start you down the slope of untrustworthiness, which would make it difficult to regain your ally or add some other ones.

So just ignore the Papal order and offer him some coin, lands or anything to make him happy (not discounting young and virgin girls...j/k)