Plans for California’s new carbon cap-and-trade scheme have been thrown into doubt, after businesses filed a last-minute petition to block the scheme ahead of its first emission allowance auction today.

But the government body managing the cap-and-trade scheme defended the plans and said it will continue with its much-anticipated carbon allowance auction.

California’s Air Resource Board (CARB) is set to host the state’s first auction, marking the launch of an ambitious cap-and-trade scheme designed to reduce the state’s emissions to 1990 levels by the end of the decade.

But the state’s Chamber of Commerce yesterday filed a lawsuit to block the plans, arguing the Board would exceed its powers by establishing the revenue-raising programme.

The group has long argued that the cap-and-trade scheme represents a stealth tax that will cost businesses more than $1bn in the first year.

The complaint, filed in Sacramento Superior Court , argues that California’s Global Warming Solutions Act of 2006 (AB32) does not allow the Air Resources Board to charge companies anything other than “ordinary administrative costs” related to launching a state emissions regulatory programme.

In the first year of the scheme the Board plans to give away the vast majority of credits, auctioning just 10 per cent in order to put a price on carbon. The amount of free carbon permits will be reduced each year so by 2020, 50 per cent of allowances will be auctioned, providing a clear price signal for firms to invest in low emission technologies.

But if the case succeeds, the Board may have to give away all of the credits for free.

Stanley Young, a spokesman for the Air Resources Board, said it was confident the cap-and-trade programme could withstand any court challenge. He argued that the design of the system will give businesses greater choice in the way they reduce emissions.

Young added that the Board was still planning to go ahead with the auction today.

The Chamber of Commerce said the lawsuit does not challenge any of the provisions of the AB 32 act that underpins the emissions trading scheme, nor the merits of climate change science.

Instead it contests that AB 32 does not grant the Board the right to keep a percentage of the annual statewide greenhouse gas (GHG) emissions allowances and to auction them off to the highest bidders.

“AB 32 gives California the opportunity to be the leader in reducing carbon emissions,” said Allan Zaremberg, president and chief executive of the California Chamber of Commerce.

“Unless we adopt the most cost-effective way of reducing carbon emissions, other states will not follow us. The current CARB proposal is the most costly way to implement AB 32 and it will hurt consumers, the job climate, and the ability of businesses to expand here.”

Reuters analyst Ashley Lawson told BusinessGreen that it was still evaluating the potential impact of the lawsuit on the auction.

“The news broke after the close of trading yesterday, so the market will be digesting it today - but auction participants only have until the close of the auction at 4 pm EST today to alter their bidding strategies,” she said.

She added it is more liklely that the V2013 CCA auction for allowances that can be used from 2013, will be undersubscribed, and that the clearing price of V2013 CCAs would be at the lower end of its forcast.

“For now we are holding to the low end of our previously projected range ($11.75/t) since the market fundamentals have not changed.”