SACRAMENTO, Calif. (AP) -- California is on the verge of creating the first system in the nation to give polluting companies such as utilities or refineries financial incentives to emit fewer greenhouse gases.
They hope their plan will inspire other states to follow, while officials in the state -- the world's eighth-largest economy -- discuss plans to link the new system with similar ones under way or being planned in Canada, Europe and Asia.
California is trying to "fill the vacuum created by the failure of Congress to pass any kind of climate or energy legislation for many years now," said Mary mid, chairwoman of the state's air quality board.
The board began hearing testimony Thursday and will likely vote on the regulations on Friday. Outside the chambers, a few climate change skeptics held signs reading "Global Warming: Science by Homer Simpson."
Some businesses that would fall under the new rules say the system could dampen California's already flagging economy, complicate lawmakers' efforts to close a $28.1 billion revenue shortfall and lead to an increase in the price of electricity.
The rate increases, however, would still need approval from the state.
Gov. Arnold Schwarzenegger told the board he is sensitive to the recession, but argued that many of the new jobs being created under the system are in the clean technology industry.
"The jobs we're creating right now are green jobs. Since 2006 that's been growing 10 times faster than any other sector," he said.
But he said reducing greenhouse gas pollution is not just about climate change, but about human health and national security.
"I despise that we send $1 billion a year to foreign places for oil and to places and people that hate us, and who are organizing terrorists against us," he said.
Supporters say the system will help spur economic recovery and innovation, pushing business to invest in clean technologies.
They say the billions of dollars the state collects in the system could help fund clean air programs and help offset any increases in utility rates. Details of the uses of these new funds is still uncertain.
California has already enacted the strictest climate-related regulations in the country involving renewable energy mandates for utilities, tighter fuel-efficiency standards for automobiles and low-carbon fuel standards.
The state's landmark climate law had a Jan. 1, 2011, deadline for devising and enacting the so-called cap-and-trade system.
Here's how it would broadly work:
A company that produces pollution, such as a utility or a refinery, buys a permit from the state that allows it to send a specified amount of carbon dioxide and other greenhouse gases into the air each year.
Those permits could then be bought and sold by the polluters in a marketplace.
If a company in Fresno is 15 percent under its pollution allowance, it can sell the unused portion to a company in Long Beach that has exceeded its quota. The Fresno company gets to keep the money.
Polluters can even make a profit, if the marketplace sets a price above the initial cost of the permit.
Adding another wrinkle, a company that exceeds its allowance can also buy what are called "offsets." These can be bought by companies with forestry or other projects that reduce greenhouse gases.
Those companies can sell those to polluters in the marketplace, also at a profit.
Under the new California rules, regulators would enforce limits on heat-trapping gas emissions beginning in 2012, eventually including 85 percent of the state's worst polluters.
The amount of allowed emissions would be reduced over time, and the regulations would expand in 2015 to include refineries and fuel distributors, such as oil companies.
The cap would reach its lowest level in 2020, when California wants its greenhouse gas emissions reduced to 1990 levels.
Ninety percent of the allowances would be free in the first years of the program to give industry time to upgrade to cleaner equipment or account for increased future costs as the cap tightens.
Over time, as the cap gets lower and fewer allowances are available, costs would rise.
"The idea is to incentivize clean technology over fossil fuels by putting a price on carbon," said Jon Costantino, a senior adviser at a Sacramento law firm who formerly served as the climate change planning manager at the Air Resources Board.
Business groups raised concerns that the board had not yet given hard details about what each facility's allowances would be.
"It's crucial for companies to know what their compliance requirements are going to be far in advance," said Dorothy Rothrock of the California Manufacturers and Technology Association.
"There are definitely going to be some costs incurred right up front for these companies," she said.
State officials say they had to act, because of years of delays in Washington. "The goal of (the law's) authors in 2006 was to lead by example, and being a leader you have to bring others along with you," Nichols said.
A bill to place a limit on the amount of greenhouse gases nationwide narrowly passed the U.S. House in the summer of 2009, after arm-twisting by President Barack Obama and other Democratic leaders.
But the measure died in the Democrat-controlled Senate -- because all Republicans and some Democrats from coal- and industry-heavy states balked about how it would raise electricity bills.
Obama, who made the climate bill the centerpiece of his Democratic agenda, pulled support for it after the mid-term elections put Republicans in control of the House. The president said he would be looking at other ways to address climate change.
While the Environmental Protection Agency has proposed the first-ever rules to reduce greenhouse gases from large industrial polluters, the GOP, with some support from Democrats, vows in 2011 to block it from moving ahead with the regulations.
California's system, however, could end up being linked to ones being developed in other countries. State officials are talking with the European Union as well as provinces in China and Canada to link systems.
In the U.S., New Mexico narrowly approved its own cap-and-trade program last month and OK'd the state's participation in a regional market. There is another market proposed in the Midwest and in New England.
Associated Press writer Dina Cappiello in Washington contributed to this report.
Copyright 2010 The Associated Press.