California Gov. Jerry Brown wants his state's cap-and-trade program to serve as a golden example of how industries can slash pollution. But business groups argue the billions the program has collected through auctions amount to an “illegal tax.”

A state appeals court in Sacramento is hearing arguments on Tuesday for two separate lawsuits filed by the California Chamber of Commerce and Morning Star Packing Company, the world’s largest tomato processor and a company that is required to buy carbon-emissions permits through the program. The case is expected to reach the state Supreme Court, as both sides have said they will appeal if they lose.

California and the Canadian province of Quebec operate the world’s only economy-wide limits on greenhouse-gas emissions. Other programs managed by a group of northeastern US states and by the European Union don’t place limits on as many industries.

Lawyers representing the business groups claim the lawsuits challenge only the authority of the California Air Resources Board to hold cap-and-trade auctions, not the mission of the program nor climate change science in general. But the challenge comes as California and its governor have drawn battle lines against the environmental policies they expect under President Trump, with the cap-and-trade program a building block of California’s goal to cut its greenhouse-gas emissions 40 percent by 2030.

Passed under Republican Gov. Arnold Schwarzenegger in 2006, the cap-and-trade program, also known as AB 32 (Assembly Bill 32) “provides a stool with four legs: instituting a cap-and-trade program, lowering carbon content in fuel, increasing fuel efficiency in vehicles, and pushing communities to become more energy efficient,” as Daniel Wood reported for The Christian Science Monitor.

Cap and trade places an annually declining cap on greenhouse-gas emissions and allows polluters – essentially large manufactures and oil refineries – to buy and sell carbon allowances. These allowances are auctioned quarterly to affected companies or to investors, who can hold onto these permits for future sale to polluting companies that exceed their individual emissions caps.

Revenue from the program helps fund the state’s clean energy programs, especially in poorer communities, as well as helps finance the state’s ambitious high-speed rail project.

But CalChamber and Morning Star argue the state never authorized the Air Resources Board, which oversees the program, to levy fees through an auction.

"This is just about the state's illegal add-on, this allowance auction," said Tony Francois, a lawyer from Pacific Legal Foundation, a conservative legal foundation that represents Morning Star. "The lawsuit does not affect the integrity of the cap and trade program.”

Even if the AB32 did allow an auction, the business groups argue the auction equates to a tax increase, and tax increases require two-thirds approval of the state Assembly and Senate. AB32 did not pass by that percentage, although Mr. Brown called on the Legislature this month to gather the two-thirds necessary to explicitly authorize carbon auctions after 2020.

But Alex Jackson, an attorney for the Natural Resources Defense Council, which is defending the program, said the lawsuit is an attack on not just the auction, but the whole program.

"This lawsuit strikes at the heart of how this program is operated,” he said.

Questions about the legality of the program, first raised in the original 2013 case in Sacramento County Superior Court, have already slowed demand for these pollution permits. This slowdown is a blow to Brown and his goal to make California an example for the rest of the world on how to cut carbon emissions.

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It also comes as California gears up for a policy war with Washington. California has set emissions standards that are far stricter than much of the country. While Mr. Trump has questioned climate change science, his pick to head the Environmental Protection Agency indicated in a congressional hearing on Wednesday he wouldn’t necessarily support California’s climate change efforts. Scott Pruitt, currently the attorney general of Oklahoma, said he would not commit to letting California set more stringent vehicles emission standards through a federal waiver. He also said EPA rules should not hurt economic development.

This report contains material from the Associated Press and Reuters.