The legislation will make California the first state to cap emissions of carbon dioxide and other gases thought to be responsible for global warming.

Mr Schwarzenegger, who has accused his fellow Republican George Bush of a lack of leadership over climate change, says that the law will make California “a world leader in the effort to fight emissions” and could force a change at the federal level.

The Bush Administration has rejected the idea of controls on emissions repeatedly, withdrawing from the Kyoto Protocol in 2001 and seeking to cast doubt on the science of global warming. “The success of our system will be an example for other states and nations to follow as the fight against climate change continues,” Mr Schwarzenegger said, as he announced a deal with Democrats to make the restrictions law.

California is the most populous state in America, the world’s eighth-largest economy and the twelfth-largest producer of greenhouse gas emissions. The Global Warming Solutions Act will force the state’s leading industries, such as utility plants and oil and gas refineries, to reduce emissions of greenhouse gases to 1990 levels by 2020 — a reduction of about 25 per cent. It will also formalise mechanisms for carbon trading, a market-based system that provides companies with financial incentives to cut emissions by allowing them to buy, sell and trade emission credits with other countries.

Weeks of difficult negotiations preceded the deal, with the governor anxious to placate industry concerns but maintain his crowd-pleasing environmental record. Ultimately, Mr Schwarzenegger was forced to capitulate over outstanding differences rather than risk the wrath of environmentally savvy voters. The Bill sailed through the Democrat-controlled assembly last night and was due to be signed into law by the governor, despite opposition from within his party and the business community.

Democrats and other supporters hailed the breakthrough as an historic moment not just for California but also for the country. “My main objective was getting a Bill that the environmental community can champion around the country and say, ‘California did this, and you should too’. And we did that,” Fabián Núñez, the Democratic Speaker of the assembly, said.

In the face of federal inaction many US states and cities have taken it upon themselves to “meet or beat” the Kyoto standards by introducing regulations. But the latest measures in California go further, leading critics to paint a bleak scenario of industry fleeing to other states or countries with fewer restrictions, such as India or China.

“Climate change is a global problem that requires a global solution, not a punitive cap on energy supplies in California,” Allen Zaremberg, the president of the California chamber of commerce, said. “Being the only state to have absolute caps on carbon emissions puts California at a competitive disadvantage. Companies could leave California, taking their jobs and greenhouse gas emissions with them — having little impact on global climate change but a severe negative impact on California’s economy.”

Supporters dismiss this argument, noting the knock-on effect of California’s earlier environmental laws. “This is part of a steady drumbeat of activity from the states,” Dale Bryk, of the National Resources Defence Council, said. “The governors leading these changes are not martyrs, they aren’t going to tank their economies for the sake of some altruistic environmental goal.”

She predicted that companies based in California would campaign for federal action, as they would want their competitors to be held to the same standard.

The legislation will also provide added incentives for some out-of-state companies to impose restrictions on themselves, such as the energy companies that provide California with $30 billion (£16 billion) of fossil fuel-derived energy.

The move also widens a useful gap between Mr Schwarzenegger and President Bush, who is regarded in some states as an electoral liability. It was a tip that Tony Blair picked up from Mr Schwarzenegger when they met last month and announced an Anglo-Californian agreement on cutting carbon emissions and promoting embryonic stem-cell research — the two issues on which the President and the governor have clashed.

Explore Law

• Columnists

• Law Panel

• Law Reports

• Student Law

Times Recommends

• The best legal yarns this Christmas
• Legal school 'earned £1m by exploiting bar course'
• Axe may fall on 5,000 more City lawyers