For the first two years of the program, large industrial emitters will receive 90 percent of their allowances for free in a soft start meant to give companies time to reduce emissions through new technologies or other means.
The cap, or number of allowances, will decline over time in an effort to reduce greenhouse gas emissions year-by-year.
If a business cuts emissions below its cap, it could profit by selling its extra allowances at a later auction.
Firms can also generate credits by investing in forestry and other projects that remove carbon from the atmosphere. Those credits can satisfy up to 8 percent of a company's mandated emissions reductions.
Some businesses targeted by the program have argued the increased costs will drive jobs out of California. Executives also argue it could result in increased emissions by businesses in neighboring states that boost production to grab business.
"Raising costs in California will allow out-of-state firms to lower prices and take market share," said Shelly Sullivan of the AB32 Implementation Group, a business coalition that supports greenhouse gas reductions but opposes the auctioning of allowances.
"As it stands now the auction equates to a tax for these businesses to continue to operate in the state," Sullivan said. "Those costs will be passed through to consumers."
The California Chamber of Commerce has filed a lawsuit challenging the air board's authority to sell the allowances to generate revenue for the state. It claims the sale of allowances is an illegal tax because taxes need a two-thirds vote by the Legislature.
The board has said it expects cap-and-trade to withstand legal scrutiny.