A state appeals court on Thursday upheld the state’s cap-and-trade program to reduce carbon emissions, rejecting a challenge from several business and industry groups.

The three-judge panel on the Third District Court of Appeal in Sacramento voted two-to-one to uphold the program, which requires oil refineries, power plants, cement manufacturers, and other major carbon emitters to buy permits on a marketplace.

The cap and trade program sets a declining limit on the amount of greenhouse gases that facilities can emit, then requires companies to buy a permit for every ton of carbon gas they emit. In theory, if the price is set high enough, this forces companies to invest in pollution control equipment to reduce carbon emissions. Under the program, companies can also buy and sell permits amongst themselves on a secondary, private market.

The California Chamber of Commerce, the Pacific Legal Foundation, and other business groups filed a lawsuit five years ago challenging the cap-and-trade program, alleging that the credit purchases were really taxes because the amount collected exceeded the cost to run the program. Therefore, the plaintiffs contended, the program needed a two-thirds vote of the Legislature or a vote of the people, which it did not have. When a lower court rejected this argument, the business groups appealed.

“We are disappointed in the 2-1 decision. We are reviewing the decision and evaluating our options,” the chamber said in a brief statement about the appellate court decision on Thursday.

An attempt two years ago to extend the cap-and-trade program beyond its initial sunset date of 2020 failed, in part because this lawsuit remained unresolved. But last year, the Legislature enacted SB 32, which requires cuts in greenhouse gas emissions to 40 percent below 1990 levels by 2030.

Public policy and energy reporter Howard Fine can be reached at hfine@labusinessjournal.com. Follow him on Twitter @howardafine.

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