"Reducing greenhouse gas emissions is an issue we must show leadership on," added the governor, who has made combating global warming the centerpiece of his reelection campaign.

    Environmentalists praised the agreement with the governor for providing California with the tools for cutting greenhouse gas emissions. But business groups expressed their concern that the requirement to create a system of market-based pollution credit trading was not strong enough.

    U.S. President George W. Bush pulled the United States out of the Kyoto Protocol to cut the world's greenhouse gas emissions in 2001, and refused to take practical steps to fight global warming at federal level.

    However, fellow Republican Schwarzenegger, always a sharp critic of Bush on environmental issues, has bypassed the President and rallied with the state's Democrats for cooperation.

    In a separate but related bill approved on Thursday, California is set to prohibit new long-term contracts for power produced by coal-fired plants, at least until such plants can operate with equipment to control carbon dioxide emissions.

    Although California does not have any coal-fired power plants, it gets around 20 percent of its electricity from such generators located in other western states. The second bill, SB 1368, is expected to be signed by Schwarzenegger into law together with AB 32.

    Both bills were opposed by some business groups. The California Manufacturers and Technology Association announced that such a drastic cap on emissions would drive businesses and jobs from California to other states or countries, while greenhouse gases may not be reduced much globally as a result. Enditem