"This is something that we owe our children and we owe our grandchildren. We can save our planet and boost our economy at the same time," the former Hollywood action hero added.

Under the plan, California will aim to slash the state's carbon dioxide emissions by 25 percent by the year 2020 and by another 80 percent by 2050, Schwarzenegger said.

California's initiative was welcomed by British Prime Minister Tony Blair in a live satellite link-up.

"This will echo right around the world," Blair said.

"This is a win-win for safeguarding the planet's future and making our economy strong in a sustainable way."

Blair called on the United States and other countries not signed on with the Kyoto Protocol to join the momentum and get on board when the time came to renew the environmental pact in 2020.

Schwarzenegger said the state would create a thriving clean technology industry that would "pump up" the economy while protecting the environment.

"It is not an easy task," Japanese Prime Minister Junichiro Koizumi said in a message read at the event by the country's consul general in San Francisco.

"But with cutting-edge technologies being developed on both sides of the Pacific and growing awareness of the need to take action, I'm sure we will be able to meet the challenge and hand down this beautiful planet to our children."

The bill signed by Schwarzenegger requires major companies such as power plants, oil refineries and factories that generate greenhouse gases to report levels of emissions to California's Air Resources Board.

California is the world's 12th-largest emitter of atmosphere-warming carbon dioxide, according to the governor's office.

In a concession to Republicans that groused the caps would hurt business, firms which exceed the cap on greenhouse gas emissions can buy "credits" from companies with below-cap emissions.

This "cap-and-trade" provision was supported by Schwarzenegger, who argued 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.

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

Blair said fears about emissions caps hurting the economy were proven unfounded in Britain, where "hundreds of thousands" of jobs have been added while trimming the spew of greenhouse gases.

"You are showing brilliant leadership that will inspire a lot of people worldwide," Blair told Schwarzenegger and those assembled for the signing.

"You guys have set yourselves a really bold target. It is right and it is important."

Schwarzenegger said he was excited by what he saw as the near certainty that countries such as India, China, Brazil and Mexico would emulate the gas-capping model after they see it work in California.

"Also, our federal government will follow us," Schwarzenegger said with a confident smile. "Trust me. Because there is nothing more important than protecting our planet."

The event also served as a venue for Schwarzenegger to flex political muscle in his bid to win re-election in November.

Schwarzenegger made himself a champion of an issue dear to nature-loving Democrats.

San Francisco Mayor Gavin Newsom, a Democratic Party golden boy who has endorsed Schwarzenegger's rival, was among the party figures who joined the governor at the signing against the backdrop of a fog-shrouded San Francisco skyline.

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