The cap-and-trade program is the centerpiece of Gov.'s Schwarzenegger's landmark global warming law which mandates that California reduce its greenhouse gas emissions to 1990 levels in 10 years.
"This is not just about global climate change. That's one of the reasons why I believe in it. But, it's about our health," he said.
California's cap-and-trade system basically goes after the state's largest polluters. Starting in 2012, the Air Resources Board will give out, then eventually sell, emissions permits that will specify how much certain companies can pollute.
If they over the allowance, the polluter will have to either cut emissions or buy credits from a carbon trader or another company that is under its pollution allowance. Companies that haven't used up all their allowance can sell their credits on the carbon market.
Over time, the idea is to have fewer and fewer permits available because companies aren't polluting as much.
"What polluters are willing to pay for those permits to continue to emit is what sets the price in the program," Steven Cliff from the California Air Resources Board said.
Businesses testified they're concerned the nation's first cap-and-trade program will cost too much money and force them to relocate outside California.
"This is not the time to impose drastically high energy costs based on over optimistic assumptions that it'll all work out over time," David Lizarraga from the U.S. Hispanic Chamber of Commerce.
"We either have to operate under that or enter into a market, a market that has not yet been established," Craig Anderson from Solar Turbines said.
At first, the state hopes to make $100 million selling carbon permits. By 2020, it estimates it can make $6 billion.