SACRAMENTO—Only two weeks after California voters turned back an effort to suspend the state's program to combat climate change, a cap-and-trade market for greenhouse gas emissions saw its first trade, a swap of a climate-change pollution permit for 2012.

"While our federal government is sitting on its hands, California is moving full speed ahead to a clean-energy future," Gov. Arnold Schwarzenegger said in his weekly address on November 19. "We are creating a consistent, long-term energy policy—something that has eluded Washington for decades. In fact, Washington should take a lesson from what is happening right now here in California."

Deep in the bowels of state government bureaucracies such as the California Air Resources Board (ARB)—responsible for implementing much of the state's program to combat climate change—new rules are being set, rules that may one day extend from the west coast across the U.S. After all, standards set in California—the eighth-largest economy in the world on its own—are often adopted at the federal level, ranging from emission standards for vehicles to efficiency settings for appliances. That is because California has often set standards more stringent than the federal government's—for example its decades-long efforts to rein in pollution from automobile exhaust, including being the first state to mandate catalytic converters in 1975.

And, right now, the main goal for California, environmentally speaking, is to reduce the state's greenhouse gas emissions to 1990 levels by 2020, or back to roughly 427 million metric tons of carbon dioxide–equivalent from roughly 525 million metric tons now—as enshrined into law in 2006 with the passage of Global Warming Solutions Act (aka Assembly Bill 32.)

In charge of developing the bulk of that program is the Air Resources Board—described by some as "the most powerful agency in California, and that's not a compliment," according to transportation expert and board member Daniel Sperling of the University of California, Davis. Its plan calls for roughly 70 different measures, ranging from energy-efficiency standards for residential and commercial buildings to rules that require fuels sold in California to yield fewer greenhouse gas emissions when burned. The board's oversight is to ensure "all our regulations are as cost-effective as possible while advancing the environmental agenda," explains economist William Dean of the California Environmental Protection Agency.

The centerpiece of the program, however, is a new market for greenhouse gas pollution, so-called cap and trade. In it California sets an overall cap for the amount of pollution that can be emitted by roughly 600 sources that individually emit more than 25,000 metric tons of CO2 equivalent per year—mainly power plants and refineries. Then the state government awards or sells emission permits to the roughly 360 corporations and other entities that control those sources. Those that reduce emissions below the cap can sell their excess permits to those sources that fail to meet the targets—the trade part of the market—resulting in an overall reduction of pollution at the lowest economic cost, in theory. "If I'm under the cap, I make more and more money. If I'm above the cap, I'm paying more and more money," explains policy analyst Tiffany Roberts of California's Legislative Analyst's Office (LAO). "They are actually able to profit from that good behavior."

The program will not take effect until 2012 at the earliest—and sources will average their emissions over three-year compliance periods to even out any short-term emissions bumps—but the market may prove to be a model for federal efforts, alongside a regional greenhouse gas cap-and-trade program among 10 northeastern states. That program, known as the Regional Greenhouse Gas Initiative (RGGI), aims to reduce emissions from more than 200 power plants in states from Maine to Maryland by 10 percent by 2019—a goal the program has already more than met thanks to the impacts of the Great Recession.

California's goal will be harder to meet, and cap and trade alone may not provide all the necessary emission cuts. Nor can the ARB "do it all by themselves," Dean says.

Energy standards
The California Energy Commission has also been tasked with helping the state meet its climate-change goals. Already, the CEC (set up in 1975 in the wake of the nation's first oil crisis) balances new energy demands—such as screening new power plants on the basis of at least 23 different impacts, ranging from economics to air quality—with efficiency efforts. "We are to promote energy efficiency," says Thom Kelly, acting chief deputy director at the CEC. "We have an environmentally driven energy policy."

Earlier this year the commission released new standards for televisions with screens sized 1.5 meters and smaller that will apply to all sets sold after January 1. As it stands, such televisions—in conjunction with digital recording devices, DVD players and cable boxes—consume a full 10 percent of the electricity used by the average California household, or 8,772 gigawatt-hours annually.

"We're down from 450 watts per television to 125 to 200 watts per TV," Kelly says. "We're estimating that we'll save about $700 million a year just in energy costs."

In fact, the new standards should save roughly 6,515 gigawatt-hours of electricity by 2013 when fully implemented—the same amount of electricity used to power the cities of Anaheim, Burbank, Glendale and Palo Alto. The CEC is also planning to phase out incandescent light bulbs in the state and will tackle efficiency standards for chargers in coming years. "Per capita use of electricity is pretty much the same over several decades in California, even though there are more electrical appliances and gadgets around the house," Kelly notes. "But because all these things [starting with refrigerators] got more efficient, it's been level."

And home-owners and builders will soon face new codes aimed at improving the energy efficiency of homes themselves, such as requirements for double-paned windows and certain levels of insulation. In fact, retrofitting old homes to meet such standards—many homes in California were built prior to 1950—may be the most productive way to reduce emissions. "The most cost-effective way to reduce greenhouse gas emissions is by doing some of these retrofits," LAO's Roberts says. "How can we do it at a scale that is actually going to be beneficial?"

Power supply
The CEC also has a mandate to prioritize new electricity-generating projects that either improve the efficiency of producing that power or are derived from renewable resources, such as the sun, wind and hot rocks (geothermal). Partially as a result, a host of renewable energy projects have broken ground in the Golden State in the past two years, including a solar-thermal power plant from BrightSource Energy at Ivanpah on October 27 that will produce 392 megawatts. "Regulators in the 1980s were dragged kicking and screaming into renewable energy," says Charles Ricker, senior vice president of business development at BrightSource. "Now regulators are leading the charge."

In fact, another agency is specifically tasked with leading that charge: the California Public Utilities Commission is responsible by law for ensuring that publicly owned utilities in the state get 20 percent of their electricity from renewable resources by the end of this year (although the utilities have until 2013 to prove that they have complied) and 33 percent by 2020. "On average, we're at 13 percent," Roberts says. "We're not there yet."

Despite the renewables building boom, such geothermal, wind and solar projects still do not crowd out fossil fuel–fired generation in the energy mix of, for example, the utility Pacific Gas & Electric. "As many plants as there are, it's not enough," Kelly adds, noting that older, fossil fuel–fired plants would have to be shut down in order for renewables to make up the required percentage.

At the same time, old, inefficient "peaker" units—so-called because they run no more than 77 hours a year when electricity demand in the state is at its highest—will be shut down or replaced by newer natural gas–fired turbines. Such natural gas power plants can be built cheaply and quickly. "Lay down a concrete pad, bring the jet engine, hook it up [to the grid] and you're ready to go," Kelly says. "We are approving fossil-fuel power plants. They're in process. They're just not first in line."

And, of course, California still gets the bulk of its renewable power from solar plants and wind farms built in the 1980s—the last time the federal and state government tried to create a market for renewables—such as Solar Energy Generating Systems power plant near Barstow, Calif. That solar-thermal power plant—built by the BrightSource precursor known as Luz—still pumps out 354 megawatts of power from the sun at full capacity.

The hope is that this time around the renewed interest will not just spur a cleanup of the power supply but also create jobs. "In the last 10 to 15 years California has attracted about 25 percent of global 'cleantech' capital, which resulted in a lot of job growth in that area," says California Labor and Workforce Development Agency Undersecretary Paul Feist. State government numbers suggest that such clean technology has created 10 times more jobs than any other sector of the California economy since 2005. "We are voracious consumers of innovation [in California]. We like technology. We want panels on our roof that make the [electricity] meter go backward."

And companies can be sure of California's commitment. "There's relative certainty in terms of our policy and our commitment to a less carbon-reliant economy. Those things are huge in attracting business investment and technology innovation," Feist says. "When you know the utility is going to have to purchase a percentage of their electricity from renewable sources, that makes all the difference in the world."

Wrong commitment?
At the same time, even if California meets its ambitious target, it may not make a huge dent in the atmospheric concentrations of greenhouse gases causing climate change. "At the time the bill was promulgated [in 2006], the belief was that particular level would help stabilize climate change. It seemed feasible and it seemed appropriate," Roberts notes. "Since then, there have been questions about whether that was the right amount."

Plus, California hardly generates power solely in-state. Rather, it draws electricity from states across the U.S. West, including from coal-fired power plants as far away as Idaho—a problem that may get worse as California shuts down its own most polluting power plants. Think of it as outsourcing greenhouse gas pollution, a problem also faced by the 10 northeastern states' RGGI. "Electricity is almost like water. If you've got rivers running into a lake how do you distinguish which river it came from once it gets there?" Roberts notes. "I don't know how they're going to track it."

Given Republican gains in Congress and that party's stance on combating climate change, it seems unlikely the federal government would be willing or able to match California anytime soon. As a result of that inaction, the nation's largest voluntary carbon market—the Chicago Climate Exchange—will be shutting its doors after nine years as the companies who voluntarily participated have decided not to continue. Nor are the United Nations international climate negotiations—set to resume November 29 in Cancun—yielding much progress.

"California is a bright spot for clean energy. States have often been the laboratories for policies that move to the federal level," notes Jonathan Kevles of the Sierra Club's Clean Energy Solutions campaign. "We can show the rest of the country that the economy and the environment are not mutually exclusive goals."

If California can prove that it's not the economy or the environment but rather the economy and the environment, the nation will likely follow. "It may take us in the U.S. 20 years to get there, but it will happen in some way, shape or form," says environmental engineer Sheeraz Haji, president of the Cleantech Group, a research and consulting firm, noting the convergence of governments, environmentalists and companies looking to reinvent themselves. "The general trend towards energy efficiency, a low-carbon economy and resource efficiency are bets that are so clear to me."

After all, it only took eight years for the U.S. to follow California's lead on increased fuel efficiency for cars and other vehicles. "One thing Obama has done on climate, he allowed California to adopt aggressive standards and now we're going to do it for the whole country," ARB board member Sperling says. "Now we're adopting a cap-and-trade program on our own."

Editor's Note: Reporting for this feature took place as a result of a Jefferson Fellowship from the East–West Center in Honolulu, Hawaii.