SACRAMENTO (Reuters) - California on Thursday approved rules for a multibillion-dollar carbon market, in what proponents hope and detractors fear will be a turning point for the United States toward building a national program to address global warming.

Century City and downtown Los Angeles are seen through the smog December 31, 2007. REUTERS/Lucy Nicholson

After Congress failed to pass a climate change law last year, California is the vanguard of the nation’s effort to address global warming and its bid to build alternative energy and related industries.

California has mandated that a third of its electricity come from renewable sources like solar and wind. It is also encouraging “low carbon” auto fuels, like some biofuels and natural gas, and on Thursday approved rules for the carbon market.

“This is what makes us the leader,” Governor Arnold Schwarzenegger, who signed the state’s climate change law in 2006 and helped convince voters to crush a ballot box challenge to it last month, told regulators.

California is struggling with a budget shortfall, but it is creating “green” jobs and garnering the lion’s share of venture capital investment thanks to its environmental efforts, he said.

The rules adopted by the Air Resources Board, the state’s climate change regulator, limit emissions of carbon dioxide and other greenhouse gases and let power plants, factories and eventually refiners and others to trade permits to pollute in a program generally known as cap-and-trade.

California will become the second-largest carbon market in the world, following a European system. Point Carbon, a Thomson Reuters company, forecasts the market will grow from $1.7 billion in 2012 to nearby $10 billion in 2016, with prices rising from $10 a metric ton in 2012 to $18 per ton in 2016.

Environmentally, California’s move could rank with U.S. efforts decades ago to clean up air and water, said Gary Gero, President of the Climate Action Reserve. “We will say this was when the United States started seriously building a program for climate change,” he said.

Calls to force companies to buy permits at auctions have largely been rebuffed due to the weak economy. Most permits will be given away, especially in the first three-year period.

Factories and power producers will be able to bear some of the burden for cutting emissions with credits for projects that soak up carbon, known as offsets. There is already a market in such offsets, and prices have jumped in the last several weeks to about $8 a ton, traders said.

WORLD WATCHES CALIFORNIA

“The world is watching what California is doing,” said Louis Blumberg, director of the California Climate Change Team at the Nature Conservancy environmental group.

A substantial number of manufacturers still view the program as a disaster that will raise costs and hurt the state’s competitiveness. Companies will have to buy more and more permits at auctions as the multi-year program continues.

“This is going to dampen their enthusiasm to grow and invest in California,” Dorothy Rothrock, head of government relations at the California Manufacturers and Technology Association, told the board.

A number of studies have shown the net effect on the economy of cap-and-trade will be modest, but it could be disruptive in the short term.

Some environmentalists also criticized the plan, taking aim at offset creation rules that let lumber companies level stands of trees, called clear cutting, if they preserve other stands and raise total carbon held in a project area.

“To me, clear cutting looks a lot like deforestation,” Sierra Club member Karen Maki testified.

Canadian provinces Ontario, Quebec and British Columbia are working to join California in 2012. They are members of a group called the Western Climate Initiative, and some California backers hope to join forces with a small U.S. Northeast plan and a developing Midwest program.