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Originally published Wednesday, November 14, 2012 at 12:06 AM

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California to debut landmark cap-and-trade system

California is debuting its new, landmark cap-and-trade program with an auction of greenhouse gas pollution permits, despite an eleventh-hour lawsuit filed by the state's largest business group.

Associated Press

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SAN FRANCISCO —

California is debuting its new, landmark cap-and-trade program with an auction of greenhouse gas pollution permits, despite an eleventh-hour lawsuit filed by the state's largest business group.

The cap-and-trade plan is a central piece of the state's 2006 global warming law, AB32, a suite of regulations meant to reduce dramatically the state's emissions of heat-trapping gases.

The program places a limit, or cap, on emissions from individual polluters. Businesses are required to cut emissions to cap levels or buy allowances from other companies for each ton over the cap that is discharged annually. If a business were to cut emissions below the cap, it could profit by selling its extra allowances.

The program's first auction on Wednesday is being closely watched, as it will essentially put a price on carbon emissions for the first time in state history. Only the European Union has implemented a similar plan in terms of scope.

But the California Chamber of Commerce has sued, challenging the validity of the state's cap-and-trade program. The lawsuit filed Tuesday in Sacramento Superior Court was not expected to stop the auction. The group was not seeking an injunction to halt the program immediately, said Denise Davis, a chamber spokeswoman.

The suit challenges the California Air Resources Board's authority as stated under the state's 2006 climate-change law, AB32, to sell the permits, called "allowances," for the purpose of generating revenue for the state. It is also challenging the sale of allowances as an illegal tax, arguing that taxes need a two-thirds vote by the Legislature.

"This action by an unelected state board to use regulatory statutes to raise tens of billions of dollars from taxpayers is unprecedented in our state's history," the chamber's complaint said.

For the first two years of the program, large industrial emitters will receive 90 percent of their allowances for free in a soft start meant to give companies time to reduce emissions through new technologies or other means. The cap, or number of allowances, will decline over time in an effort to drastically reduce greenhouse gas emissions by 2050.

The chamber's challenge is the latest lawsuit filed over the state's landmark global warming law, which so far has survived myriad legal challenges.

Stanley Young, a board spokesman, said officials were reviewing the lawsuit and expected cap-and-trade to withstand legal scrutiny.

"This market-based approach to cutting greenhouse emissions gives businesses the flexibility to best decide how to reduce their emissions," Young said.

The board estimates that about $1 billion could be raised from the sale of allowances in fiscal year 2012-13. About 23 million allowances will be sold for 2013 emissions, and 39.5 million allowances are being pre-sold Wednesday for 2015 emissions.

There is some uncertainty about how, exactly, the money will be used. But California law dictates it go into a special greenhouse gas reduction account, and any programs that use the funds be consistent with the AB32's goals.

California officials hope a successful rollout of its cap-and-trade system will embolden other states to follow suit. Currently, a much less inclusive cap-and-trade scheme that covers only electricity producers is in effect for northeastern states.

The chamber argues that California's system goes too far and will alienate other states.

"Unless we adopt the most cost-effective way of reducing carbon emissions, other states will not follow us," Allan Zaremberg, the chamber's president and CEO, said in a statement. "The current ... proposal is the most costly way to implement AB32, and it will hurt consumers, the job climate, and the ability of businesses to expand here."

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