The move represents the world's second-largest carbon program after the European Union, with an estimated $10 billion in allowances to be traded by 2016, the Los Angeles Times reports.
The cap-and-trade plan was approved unanimously Thursday by California's Air Resources Board, nearly a year after a similar plan was approved then delayed by environmentalists who wanted the board to consider taxing carbon as an alternative to the cap-and-trade scheme.
The program is one of more than 70 measures being carried out under California's Global Warming Solutions Act of 2006, also known as AB 32, which calls for the state to reduce carbon emissions to 1990 levels by 2020.
ARB Chairwoman Mary Nichols said the cap-and-trade program "sends the right policy signal to the market" and guarantees that California, the nation's most populous state and which would be the world's eighth largest economy if a separate country, will continue to attract investment in clean technology.
"When the nation addresses the growing danger of climate change, as I believe it must and will, California's climate plan will serve as the model for a national program," Nichols said.
The two-phase program will limit carbon emissions from about 350 of the state's biggest emitters, accounting for about 20 percent of the AB 32 goal. Most of the remaining AB 32 reductions come from initiatives such as requiring more fuel-efficient vehicles, limiting the amount of carbon in fuel as well as renewable energy mandates.
The cap-and-trade's first phase begins in 2013 and includes large industrial plants and electrical utilities. Phase two, starting in 2015, adds fuel distributors.
While companies aren't given a specific limit on greenhouse gas emissions, ARB says, they must supply a sufficient number of allowances, each the equivalent of 1 ton of carbon dioxide, to cover their annual emissions.
Under the program, allowances for each industrial sector will be set at about 90 percent of average emissions, based on a benchmark that rewards efficient facilities
Last year, the U.S. Senate rejected a cap-and-trade program backed by U.S. President Barack Obama.
"California is proof that common sense climate action is still possible on a large scale in the United States even though Washington, D.C., remains gridlocked," Fred Krupp, president of Environmental Defense Fund, said in a statement.
"This climate law has been the target of serious attacks but it has survived because business leaders have stood up for the law's clear economic benefits, and environmental advocates have stood up for its potential to drive deep reductions in carbon pollution."
The California Chamber of Commerce declared the 10 percent cut in alliances "arbitrary" and said ARB's actions will drive up costs for consumers in California as business pass along the $2 billion the cap-and-trade plan is expected to generate.
California Chamber of Commerce Policy Advocate Brenda M. Coleman said, "CalChamber believes this is an illegal tax that will negatively impact businesses and consumers at a time when they can least afford it."