Arnold Schwarzenegger, the state's Republican governor, has gone against the opinion of many in his own party by announcing on Wednesday that he had reached a "historic agreement" with Democrats to make California a world leader in reducing carbon emissions.
He said: "The success of our system will be an example for other states and nations to follow as the fight against climate change continues."
Schwarzenegger has previously said that George Bush, the US president, displays little leadership on climate change and this latest measure is designed to further boost his own green image as he seeks re-election.
California's Global Warming Solutions Act aims to cut emissions to 1990 levels by 2020 with an enforceable cap and a mandatory reporting procedure for the worst polluters, such as energy companies.
The act comes after an executive order last year calling for the state to reduce its greenhouse gas emissions to 2000 levels by 2010, 1990 levels by 2020 and to 80 per cent below 1990 levels by 2050.
Schwarzenegger also organised a Climate Action Team that recommended a state-wide cap and last month signed an agreement with Tony Blair, the British prime minister, in which California and Britain will work together to research cleaner-burning fuels and technologies.
California has led the US in reducing greenhouse gas emissions through its renewable energy policies including a law in 2004 reducing tailpipe emissions from vehicles.
That law is set to be replicated in ten other states and more than 20 states have forced utilities to eventually generate some power from renewable sources such as solar, wind and geothermal.
The cap was praised by environmentalists but criticised by some business leaders. They say it will increase their costs and force them to scale back their California operations.
Some of Schwarzenegger’s Republican colleagues in the Californian legislature have echoed that criticism, claiming climate change policy should be dictated at national level rather than on a state by state basis.
George Plescia, the Republican leader of the assembly, said: "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."
The bill should win approval in the state senate and assembly as the Democrats hold a majority in both. Thursday is the last day of the current legislative session before mid-term elections in November.
The US is the world's largest producer of greenhouse gases that many scientists link to extreme weather like violent hurricanes and rising sea levels.
But Bush pulled the United States out of the 160-nation Kyoto Protocol to cut greenhouse gas emissions in 2001, arguing that it would hurt the economy and unfairly excluded developing nations like China.