"We can now move forward with developing a market-based system that makes California a world leader in the effort to reduce carbon emissions," Schwarzenegger said.

The move makes California the first state in the country to limit the emission of carbon dioxide and other gases accused of contributing to global warming.

California is the 12th largest carbon emitter in the world, Schwarzenegger noted, "despite leading the nation in energy efficiency standards and its lead role in protecting its environment.

"Reducing greenhouse gas emissions is an issue we must show leadership on," he said.

The proposed bill, called AB 32, would cut the state's carbon dioxide emissions -- the principal contributor to global warming -- by 25 percent by the year 2020.

It would require large firms that generate greenhouse cases, such as power plants, oil refineries, factories and cement kilns to report their level of emissions to California's Air Resources Board.

However, the bill includes a provision allowing firms who exceed the limits, or cap, on greenhouse gas emissions to buy "credits" from companies with below-cap emissions.

This "cap-and-trade" provision is supported by Schwarzenegger, who says businesses must have flexibility in dealing with the emissions, and opposed by environmental groups because it would allow polluters to buy their way out of the problem.

There is additional concern that poor neighborhoods will be saddled with more pollution if utility companies -- which are mostly located in economically depressed districts -- evade emissions limits through cap-and-trade.

"The idea that this is some kind of silver bullet is great - unless you are living next to one of these plants," said Angela Johnson Meszaros, a lawyer with the Environmental Rights Alliance in Los Angeles.

Another controversial issue is the bill's failure to properly address what has become known as the "leakage" problem, by which utility companies can buy more power from out of state without having to produce cleaner energy -- 20 percent of California's energy needs come from out of state.

The bill, in its current form, merely says the state must "minimize leakage."

Businesses have begun lobbying against the bill because they argue it would increase energy costs and make California less attractive to companies.

"This bill would make it virtually impossible for California industries to remain competitive in the marketplace," Chamber of Commerce vice president Dominic DiMare said recently in a letter to California lawmakers.

On the political front, the bill is seen as Schwarzenegger's attempt to secure his reelection next November against his Democratic rival Phil Angelides, by co-opting voters concerned with the environment -- a recent poll found 66 percent of Californians were concerned with global warming.

Angelides has accused the governor of trying to "gut" the measure with business-friendly amendments.

California plan on greenhouse gases chellenges Bush
by Richard Ingham and Emmanuel Angleys
Paris (AFP) Aug 31 - Plans by the state of California to slash its greenhouse-gas pollution was greeted on Thursday with cheers in Europe, where some said it added strongly to President George W. Bush's isolation on the issue of global warming.

The cross-section of legislators, Greens and carbon experts interviewed by AFP also said the initiative set on Wednesday by the richest US state could transform America's half-hearted campaign against the world's most pressing environmental problem.

California's governor, Arnold Schwarzenegger, agreed with state legislators on plans to take the state's greenhouse emissions back to 1990 levels by 2020, a cut of about 25 percent over today's levels.

The scheme, to be implemented from 2012, would make California the first US state to impose a cap on carbon dioxide (CO2) and other emissions and to offer market incentives for achieving them.

Nathalie Kosciusko-Morizet, a legislator with France's governing Union for a Popular Majority (UMP) and spokeswoman for a French parliamentary mission on climate change, heaped praise on California for its "remarkable will."

"California is a state, not a national government," she said. "The federal government is using the fact that not all countries are committed (to reducing emissions) as an argument for doing nothing."

A Socialist MP, Jean-Yves Le Deaut, who chairs the climate-change mission, agreed: "It's incomprehensible and intolerable that the country that is expending a quarter of the planet's fossil fuels has still done nothing nearly 10 years after (the) Kyoto (agreement) was signed.

"So it's a good thing that a state like California has stuck its tongue out at Bush, saying, 'We've got to do something'."

The United States is the world's biggest emitter of greenhouse gases, the byproduct of fossil fuels blamed for trapping heat from the Sun and altering Earth's delicate climate system. By itself, California ranks as the 12th biggest emitter globally.

Greenpeace climate-change spokesman Steve Sawyer, an American, said: "California is in many ways the economic engine of the country and has a long history of standing up to the federal government on issues in relation to the environment.

"It's an old saying, but I think it's still true: where goes California, the rest of the country will follow in another five or 10 years."

California's cap-and-trade approach also lies at the heart of the UN's Kyoto Protocol for curbing greenhouse-gas emissions by industrialised countries.

One of Bush's first decisions after entering the Oval Office in 2001 was to abandon Kyoto. He blasted the pact's mandatory caps as too costly for the energy-guzzling American economy, and unfair as they did not apply to big emerging economies such as China and India. Instead, Bush promoted voluntary action, backed by some incentives for cleaner energy sources and gains in energy efficiency.

Veronique Bugnion, head of research for North America at Point Carbon, an Oslo-based firm that analyses the carbon market, said California had become the latest US state to outflank the federal government on climate change, after a regional initiative on utilities emissions by seven northeastern states.

Bugnion also said the bill's fine print revealed several tools to help the future California CO2 market hook up to its counterparts in Europe and elsewhere, creating global trade in carbon dioxide worth tens of billions of dollars annually.

Jean-Francois Conil-Lacoste, managing director of the Paris firm Powernext, which manages the CO2 bourse Powernext Carbon, said Wednesday's deal was unlikely to have any early impact on carbon prices in Europe, the engine for CO2 trading under Kyoto.

"But in the long term, (California's initiative) may have a very positive influence, both as a trailblazer and also in terms of concrete reductions in pollution by a state that is a big emitter," said Conil-Lacoste.

On Thursday, a tonne of CO2 was changing hands in Europe for just under 16 euros, in a market that reached nearly 30 euros early this year before crashing to below nine euros in May.

That fall was caused by a big problem in the way the European Union (EU) started its carbon market: 17 months after the market was launched, EU members belatedly discovered they were polluting less than they had thought.

Bugnion predicted the Californians would surely learn from Europe's blunder and accurately measure their emissions before launching their own market.

But she also warned of hurdles ahead.

One will be to name which Californian utilities and industries will bear the deepest emissions cuts, a thorny task given the impact on balance sheets and competitiveness against out-of-state corporate rivals.

Britain, whose prime minister, Tony Blair, met Schwarzenegger in July to discuss joint research on global warming, said it welcomed "Californian leadership on climate change."

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