California's Assembly Bill 32, the Global Warming Solutions Act, was passed in 2006. It set the goal of hitting early 1990s greenhouse gas emission levels by 2020, and does so though a "cap and trade" system. California sets a statewide cap on carbon emissions, awards permits to affected companies, and then the companies are free to buy, sell, and trade between themselves.
There are also a number of permits that are held back. The state auctions these permits as a revenue-raising measure, with the proceeds earmarked for further efforts to reduce greenhouse gas emissions.
These auctions are the basis of two legal challenges, both defeated Thursday at the trial level, which allege that the auctions weren't authorized by AB 32, and even if they were, the regulation amounts to a tax, and is unconstitutional because it was not passed by a two-thirds majority in the legislature.