Sept. 23 (Bloomberg) -- The largest U.S. market-based system for addressing climate change would be created under a plan released today by a group of Western states and Canadian provinces.

The Western Climate Initiative, a collaboration of seven Western states including California and four Canadian provinces, has vowed to cut emissions by 15 percent of 2005 levels by 2020. The group plans to create a regional cap-and-trade program starting in four years that requires polluters to have permits for emitting carbon dioxide, according to the final draft recommendations.

The regional plan is the first trading program that will cap emissions from all major sources of greenhouse-gases, including utilities, manufacturers and makers of transportation fuels. The guidelines, covering about 20 percent of the U.S. economy and more than 70 percent of the Canadian economy, follow rejection of a national policy to address climate change by President George W. Bush and Congress.

``It's a really big deal,'' said Judi Greenwald, director of innovative solutions for the Arlington, Virginia-based Pew Center on Global Climate Change. ``It's a more expansive design than anybody has done around the world so far. It demonstrates that this is doable, that you have a very diverse group of states and provinces that are saying loud and clear that we can do this.''

The plan ``is an important road map for what will be the most comprehensive climate program in North America,'' California Governor Arnold Schwarzenegger said in a statement. ``States and provinces are moving forward in the absence of federal action and we're setting the stage for national programs that are just as aggressive.''

An economic analysis of the plan said it would be a net benefit to participating states because of reduced energy use among residential and commercial users. Energy-intensive industries could see economic output drop less than 1 percent, the report said.

Northeastern States

The outline of the Western plan comes as 10 Northeastern states including New York and New Jersey will on Sept. 25 start ``Reggie,'' the first U.S. market for greenhouse-gas permits, an effort addressing only emissions from power plants. Midwestern governors also are beginning to collaborate on a regional approach.

Established in 2007, the Western Climate Initiative includes Arizona, California, Montana, New Mexico, Oregon, Utah, Washington, British Columbia, Manitoba, Quebec and Ontario. The program sets a regional cap on emissions and outlines a market-based system for the states to use to help reach that target.

The initiative is to begin in two phases. The first, starting in 2012, will include electricity and industrial sources. In 2015, the program will expand to include transportation fuels and residential, commercial and industrial fuels.

Permit Required

The trading program would require polluters to obtain a permit for each ton of carbon dioxide it releases into the atmosphere. Over time, the pool of available permits would shrink, making it more expensive to pollute.

The pollution allowances would be distributed by each state to polluters within its borders. The plan calls for a minimum of 10 percent of a state's credits be sold through an auction starting in 2012 and at least 25 percent by 2025. The remaining permits could be given away for free to help reduce the cost of complying with the new pollution limits.

Environmental groups have advocated polluters buy all credits.

`Revenue Stream'

``Auctions would create a revenue stream that could be used to offset price increase for low and medium-increase consumers as well as increase energy efficiency and renewable energy,'' said Jessica Finn Coven, policy specialist for Climate Solutions in Seattle.

The proposal also allows companies in the program to use offset credits and allowances from other greenhouse-gas trading systems for as much as 49 percent of total emission reductions needed from 2012 to 2020. Offset credits are awarded for investments in projects that cut greenhouse gas emissions.

Going forward, each government will independently have to craft laws and regulations to meet the goals set out by the Western Climate Initiative.

California is the furthest along, aiming to reduce greenhouse gas output to 1990 levels by 2020. In other states, the effort has caused controversy. Arizona lawmakers voted in May to stay out of the initiative, a move then blocked by Governor Janet Napolitano.

``Each of the partners is in a different status in terms of their ability to move forward,'' said Michael Gibbs, assistant secretary of the California Environmental Protection Agency.

For Related News: On environment: XTOP On the U.S. and climate change: TNI US CLIMATE

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

Last Updated: September 23, 2008 16:30 EDT