Environmental groups may have thrown a wrench into full implementation of California's 2006 climate law, AB 32. A state court in San Francisco ruled that regulators did not adequately consider alternatives to the part of the state's emissions reduction plan known as "cap-and-trade."

Environmental justice advocates sued the state because they say cap-and trade ignores the needs of people who live in close proximity to the state's largest industrial polluters. People like Urvanda Williams.

Every day at about 3 o'clock, Williams' five kids come tumbling off a school bus here on the outskirts of Rodeo, a community on the northwest corner of San Francisco Bay. They live in public housing, right at the fence line to the ConocoPhillips refinery.

"Sometimes it's kind of scary because you don't know exactly what's going on inside the refinery," said Williams.

Bayo Vista is like many low-income public housing communities up and down the state that abut big industrial polluters.

"Sometimes [the refinery emits] a foul odor, a stinky odor," said Williams. "And you can't help but think that these chemicals are harmful to your health."

A few years ago, state regulators allowed ConocoPhillips to expand the refinery in exchange for reducing some emissions, and paying for wildlife habitat restoration.

Here in Rodeo, the net result was a mixed bag: while some types of air pollutants decreased on-site as a result of the expansion, some toxic pollutants increased.

"We can see there is an impact in the community as a result of this," said Adrienne Bloch, a senior staff attorney at the Oakland-based Communities for a Better Environment.

"They were not required to address those co-pollutants at all. It was an issue that was ignored," said Bloch.

Bloch's organization and several other environmental justice groups decided to sue the state's Air Resources Board over the way it's implementing AB 32.

They're taking aim at cap-and-trade, a market-based system that limits the total amount of greenhouse gas emissions from stationary sources --  like refineries -- but doesn't necessarily reduce local pollution from individual plants.

For example, in Rodeo, ConocoPhillips could buy offsets to reduce greenhouse gases elsewhere but still not reduce local air pollution here.

"If the facilities expand then they'll see an increase in pollution because that facility will be allowed to use offsets for the expansion," said Brent Newell, a lead attorney for the plaintiffs.

"Because the people who live near the facilities won't enjoy the benefits of the program, the decision by the Air Resources Board is violating their civil rights," said Newell.

But cap-and-trade has some staunch defenders in the environmental community. The program is a crucial part of the state's plan to reduce greenhouse gas emissions 80 percent by 2050.

"It creates an incentive for those facilities to find the most cost-efficient and cost-effective way possible for reducing their emissions," said Tim O'Connor an analyst with the Environmental Defense Fund.

O'Connor says that cap-and-trade doesn't negate state and federal air quality laws in place to control local pollutants.

"Nothing in the law allows California to go back on the requirements that we need to improve our air quality -- and we do need to improve it throughout the state -- but cap-and-trade is not going to necessarily exacerbate those problems.

But attorney Newell says loopholes in existing federal and state air pollution laws allow industries to expand and emit more air pollutants -- much like what happened in Rodeo.

"They're not an adequate backstop to eliminate harm from cap-and-trade," said Newell. "People say don't worry about cap-and-trade because the Clean Air Act will protect you but that's not the truth."

The environmental justice groups say they support AB 32 in principal -- but want a more thorough review of alternatives to cap-and-trade, like direct regulation of greenhouse gas emissions from facilities.

In the meantime, people like Urvanda Williams live side-by-side with heavy industry every day - like it or not.

"Right now this is what I can afford," said Williams. "So pretty much, I don't want to say I don't have a choice, but it's what I can afford. I would relocate if I could."

The ruling announced yesterday is written broadly enough so it may halt implementation of all or part of AB 32, at least temporarily. The Air Resources Board says it disagrees with the ruling and will appeal.