SACRAMENTO, Calif., Aug. 30, 2006

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(AP) California will become the first state to impose a cap on all greenhouse gas emissions, including those from industrial plants, under a landmark deal reached Wednesday by Gov. Arnold Schwarzenegger and legislative Democrats.

The agreement marks a clear break with the Bush administration and puts California on a path to reducing its emissions of carbon dioxide and other greenhouse gases by an estimated 25 percent by 2020.

It also gives Schwarzenegger a key environmental victory as he seeks re-election this fall.

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

The agreement came after weeks of difficult negotiations and was announced simultaneously by the governor's office and Steve Maviglio, spokesman for Assembly Speaker Fabian Nunez, D-Los Angeles.

The bill, expected to go to the Senate floor later today, requires the state's major industries — such as utility plants, oil and gas refineries, and cement kilns — to reduce their emissions of the pollutants widely believed to contribute to global warming. The key mechanism driving the reductions will be a market program that will allow businesses to buy, sell and trade emission credits with other companies.

Schwarzenegger had insisted that the California Air Resources Board, which will oversee the program, be required to implement the market-based strategy.

The cap was praised by environmentalists as a step toward fighting global climate change but criticized by some business leaders. They say it will increase their costs and force them to scale back their California operations.

Republicans in the Legislature say climate change should be addressed at the national level, not on a state-by-state basis.

"Adopting costly and unattainable regulations will drive businesses and jobs out of California into other states and even into other countries with no commitment to improve air quality," said Assembly Republican leader George Plescia, R-La Jolla.

Schwarzenegger and the Legislature's Democratic leadership have embraced a state emissions cap on vehicles and industries as a way to make California a trendsetter in combatting global warming.

The nation's most populous state is the world's 12th largest emitter of greenhouse gases and could suffer dire consequences if global temperatures increase only a few degrees. Reports by state agencies indicate a 2- to 3-degree rise in temperature could melt the Sierra snowpack earlier each year, lead to flooding in the Central Valley and threatening the state's long-term water supply for cities and farms.

"This is not anecdotal legislation; this is rooted in fact," Senate President Pro Tem Don Perata, D-Oakland, said during a news conference called by Democratic leaders to announce the deal. "... The facts are if we do not do something to stop carbon emissions in this world, we will see a diminution in the quality of life."

Schwarzenegger has tried to position himself as a leader on the issue. Last year, he issued an executive order calling for the state to reduce its greenhouse gas emissions to 2000 levels by 2010, 1990 levels by 2020 and to 80 percent below 1990 levels by 2050.

He organized a Climate Action Team that recommended a statewide cap and last month signed an accord with British Prime Minister Tony Blair in which California and Great Britain will work together to research cleaner-burning fuels and technologies.

California has led the country in reducing greenhouse gas emissions through its renewable energy policies and a 2004 law reducing tailpipe emissions from vehicles.

Ten other states are poised to enact California's auto rule, while more than 20 states have required utilities to eventually generate some power from renewable sources such as solar, wind and geothermal.

The California bill also would eclipse an effort under way in seven Northeast states, which are seeking to cap emissions from power plants.

"We need to have all important sectors of the economy do their fair share," said Jim Martson, a senior attorney with Environmental Defense, one of the main environmental groups involved in negotiations over the bill. "If you only do electricity or autos, you're only getting at 70 percent of the problem."

In the absence of federal action, much of the effort to combat climate change has been focused in the states.

More than 100 climate-related bills have been held up in Congress, including one by Sens. John McCain, R-Ariz., and Joe Lieberman, D-Conn., that call for a national cap on greenhouse gas emissions.

During the negotiations over the California cap, Schwarzenegger had sought to appease his supporters in the business community by arguing for safeguards for the industries that would be most affected.

Administration officials have spent weeks seeking assurances that any legislation would require a market program similar to schemes in the Northeast and the European Union. The idea would allow businesses to buy, sell or trade emission credits with other companies instead of making their own reductions if those cuts were considered too costly or technology difficult.

Such a program could help industries that may not be able to meet their targets through energy efficiency practices or the use of alternative fuels.

Schwarzenegger also sought a so-called "safety valve" that would allow California to delay the emission-cap mandate if the state is hit with a natural disaster, terrorist attack or some other emergency. It was not immediately clear whether such a measure was included in the final bill.

Silicon Valley entrepreneurs have touted a cap as an opportunity to get California ahead of the rest of the nation in designing new technology to achieve carbon savings.

In addition to the emissions cap, California lawmakers are poised to give final approval to related legislation. It would prohibit the state from entering long-term contracts with any out-of-state utility that fails to reduce its carbon dioxide emissions. The bill by Perata is awaiting an Assembly vote.