Under the cap-and-trade scheme, California will distribute annual allowances to industrial entities such as power plants, refineries and cement factories that emit more than 25,000 metric tons of carbon dioxide. It will apply to about 300 industrial businesses operating 600 facilities throughout the state.
If the enterprises plan to emit more greenhouse gases than allotted levels, they will be required to buy pollution credits.
In 2015 the program will expand to cover distributors of natural gas and other fuels.
The program was created by California's Global Warming Solutions Act of 2006 which requires the state -- the world's ninth-largest economy -- to cut greenhouse gas emissions 30 percent by 2020 and 80 percent by 2050.
The first compliance period for the program begins Jan. 1. In August, the state staged a trial run of the online auction of emissions permits.
The approach "is a reasonable, well-thought-out program with rigorous reporting, monitoring and enforcement ... while protecting California's business and jobs," Matt Rodriquez, the head of the state's Environmental Protection Agency, said at a recent conference in San Diego.
Just in the first year, the cap and trade program is expected to generate $660 million-$3 billion in auction proceeds, reports InsideClimate News. By 2020, it could send $8 billion into state coffers each year.
Opponents of the system, however, say it will impose high costs on California businesses and could force some to move out of state.
Glendora, Calif., cement maker Cal Portland Co. told the Los Angeles Times that it projects a direct increase in costs of $2 million-$5 million annually.
"It's a significant percentage of our costs," said Cal Portland spokesman Steve Regis, adding that the company also expects electricity costs to soar because of the new credits system.
"Our concern is, we may no longer manufacture in California," Regis warned. "We'd ... bring it in from overseas or out of state."
Severin Borenstein, executive director of the University of California Energy Institute acknowledges that California's carbon market and efforts to curb greenhouse gas emissions won't directly make a significant impact on global warming because the state contributes less than 2 percent of worldwide emissions.
"But California is creating a model for a cap-and-trade that can work," he told the Times. "Potentially, it could provide an example that other countries and larger organizations of countries could adopt, while we work out some of the kinks along the way."