Blowing hot air.

CALIFORNIA went out on the proverbial limb in 2006 when, alone among states, it mandated that so-called greenhouse gas emissions must be limited to 1990 levels by the year 2020.

But now the state appears to be scooting even farther out on that limb. That's because the most cost-effective method for businesses to reduce their gas emissions is coming under attack in Sacramento.

The method is cap and wade. Under it, a business that cleans its emissions beyond what it is required to do gets credits. It can sell those credits to a business that hasn't yet cleaned up and is out of compliance. The goal is the same: Overall emissions are reduced.

The beauty of a cap and trade system is that it accounts for real-world reality. In the real world, a big greenhouse gas producer does not reduce its emissions by 5 percent a year, year after year after year, in the way that governments typically mandate. Instead, it may reduce them not one whiff for a few years, then reduce them by 50 percent all at once when it buys and installs expensive equipment.

With cap and trade, the business that invests in new, cleaner equipment can get some payback by selling credits. And the business that doesn't want to install new equipment--maybe it's waiting for new technologies to be perfected, maybe it can't afford to do it just yet, maybe it's got a zillion other reasons--can buy a little time by purchasing credits for a few years.

But no, that system isn't good enough for some. Now that the rules are being formulated on how greenhouse gases will be reduced--and it's a years-long process that's unfolding in Sacramento--there's been some pushback on the notion of adopting a cap and trade system.

Five state senators, all Democrats, wrote to Gov. Arnold Schwarzenegger last month warning him that the cap and trade momentum is proceeding too aggressively. Also, environmental justice groups have been actively lobbying against a cap and wade system arguing, among other things, that some areas in California--presumably poorer areas--will suffer with pollution if a plant nearby buys credits and is allowed to continue emitting fumes for years.

However, as two academics, Lawrence Goulder and Robert Stavins, wrote in an op-ed in the Sacramento Bee, the law in question pertains to greenhouse gases, not pollution, which is different. If a plant is polluting, they wrote, "the most environmentally and economically effective way to address such pollution is to revisit existing local pollution laws and perhaps make them more stringent."

A couple of weeks ago, the California Manufacturers and Technology Association, a business trade group, sent a letter asking that the governor fight for a cap and wade system. It pointed out that the Congressional Research Service estimated that reducing greenhouse gases would cost $23 to $50 per ton under a cap and wade system. It would cost much more--$193 to $295 per ton--without it.

California went out on the limb a couple of years ago by imposing the cap on greenhouse gas emissions. Because neighboring states have no such requirements, that puts pressure on California's businesses to expand elsewhere or not expand at all or, in an extreme case, move to another state.

But the state would go even farther out if it does not minimize the costs by allowing a sound, market-based cap and trade program to develop.

Charles Crumpley is editor of the Business Journal. He can be reached at [e-mail].