"This is not just about global climate change. That's one of the reasons why I believe in it 100 percent. But it's about our health," said Schwarzenegger.
California's cap-and-trade system basically goes after the state's largest polluters.
Starting in 2012, the California Air Resources Board will give out, then eventually sell, emissions permits that will specify how much certain companies can pollute.
If they go over the allowance, the polluter will have to either cut emissions or buy credits from a carbon trader or another company that is under its pollution allowance.
Companies that haven't used up all their allowance can sell their credits on the carbon market.
Over time, the idea is to have fewer and fewer permits available because companies aren't polluting as much.
"What polluters are willing to pay for those permits to continue to emit is what sets the price in the program," said Steven Cliff, a spokesman for the California Air Resources Board.
Businesses testified they're concerned the nation's first carbon cap-and-trade program will cost too much money and force them to relocate outside California.
"This is not the time to impose drastically higher energy costs based on over optimistic assumptions that it'll all work out over time," said David Lizarraga, board chairman of the U.S. Hispanic Chamber of Commerce.
"We either have to operate under that or enter into a market, a market that has not yet been established," said Craig Anderson, a spokesman for Solar Turbines.
At first the state hopes to make $100 million selling carbon permits. By 2020, it estimates it can make $6 billion.