The state Assembly passed the measure in a 46-31 vote late Thursday. The state Senate had given its 23-14 approval in a vote a day earlier.

The measure was the result of a deal between Schwarzenegger and Democratic lawmakers -- in the Senate, all 23 votes in favor were from Democrats; the 14 opposed were all Republicans, since the governor's fellow Republicans argued it would hurt business throughout the state.

California is the world's 12th-largest emitter of carbon, "despite leading the nation in energy-efficiency standards and its lead role in protecting its environment," Schwarzenegger noted before the bill went to the legislature.

"Reducing greenhouse gas emissions is an issue we must show leadership on," he said.

The bill would cut the state's carbon dioxide emissions -- the principal contributor to global warming -- by 25 percent by the year 2020.

It would require large firms that generate greenhouse gases, such as power plants, oil refineries and factories, to report their level of emissions to California's Air Resources Board.

However, the bill includes a provision allowing firms which exceed the cap on greenhouse gas emissions to buy "credits" from companies with below-cap emissions.

This "cap-and-trade" provision was supported by Schwarzenegger, who says businesses must have flexibility in dealing with the emissions, but it was opposed by environmental groups, which feared it would allow polluters to buy their way out of the problem.

There is additional concern that poor neighborhoods will be saddled with more pollution if utility companies -- which are mostly located in economically depressed districts -- evade emissions limits through cap-and-trade.

The cap-and-trade approach also lies at the heart of the UN's Kyoto Protocol for curbing industrialized countries' greenhouse gas emissions.

Another controversial issue is the bill's failure to properly address what has become known as the "leakage" problem, by which utility companies can buy more power from out of state without having to produce cleaner energy. Twenty percent of California's energy needs come from outside the state.

The bill merely says the state must "minimize leakage."

Businesses lobbied against the bill because they argued it would increase energy costs and make California less attractive to companies.

"This bill would make it virtually impossible for California industries to remain competitive in the marketplace," Chamber of Commerce vice president Dominic DiMare said recently in a letter to California lawmakers.

On the political front, the bill is seen as Schwarzenegger's attempt to secure his re-election next November against his Democratic rival Phil Angelides, by co-opting voters concerned with the environment. A recent poll found 66 percent of Californians were concerned about global warming.

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