California is the incubator for US environmental regulation. Its clean air, water, and energy standards invariably presage similar efforts nationwide. California’s eco-friendly culture deserves tremendous credit for this, but it’s the state’s strong economy and colossal buying power that silence critics who argue green laws are bad for business.

Which makes the drama surrounding the Golden State’s cap and trade system quite interesting. On one hand, the system works beautifully. In its first two years, it has systematically cut greenhouse gas emissions. But cap and trade was supposed to generate millions of dollars for clean air projects. It did, until recently. As clean air revenues dwindled, political support for the program eroded, raising the question that underlies all environmental regulation: Is clean ____ worth the economic hit? Because California’s laws are so weird, a minefield of legal caveats clouds the answer. Last week, Governor Jerry Brown initiated what amounts to a last-ditch effort to save the system.

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Ironically, you can blame environmentalists for the threat to the California’s system. “When the law enabling cap and trade was being argued over, the whole progressive left-of-the-left were pretty suspicious of carbon trading,” says Michael Wara, an expert in energy and climate at Stanford Law. So the law’s authors offered a compromise: the state Legislature would reevaluate cap and trade in 2020. It didn’t seem like a big gamble at the time. After all, this is California.

But, it isn’t that simple. Although Californians love the environment, they hate taxes. State law (Proposition 13) makes it impossible to adopt new ones without a two-thirds majority of the Legislature. “Environmental law makers have historically gotten around this by defining money taken from polluters as fees, and saying this is money that goes into special funds used to clean up harm caused by emissions,” says Wara. But a law (Proposition 26, for those keeping score) passed in 2010 expanded the definition of tax in a way that essentially includes cap and trade. So even if the bill reauthorizing cap and trade does pass, cap and trade itself will be illegal under this new interpretation of state law. And, given that cap and trade always has been dicey among hard leftists and pro-business politicians alike, achieving a two-thirds “supermajority” for the reauthorization is nearly impossible.

But if cap and trade is safe until 2020, why is everyone so worried right now? Economics. The system places positive pressure on energy companies to invest in things like solar and wind. If cap and trade isn’t around, it makes financial sense to continue burning fossil fuels. Given that even modest renewable energy projects take years to get going, these companies must know now whether to invest. “In terms of power planning, it is like this debate is happening at 11:59 pm on December 31, 2019,” says Wara.

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In California, the shakiness of cap and trade is manifesting itself economically. Just 9 percent of permits sold in the last auction, creating a budgetary shortfall for clean air projects statewide. “This is politically important, because that money is the grease that lubricates agreements in constituencies that support cap and trade,” says Wara.

Wara says this is an opportunity for California to take the lead in reframing how lawmakers negotiate emissions regulations. The cap and trade model sets revenue aside only for clean air projects. He thinks legislators could use that revenue to entice businesses to do the right thing—by reducing corporate income tax, or capital gains tax, for instance. California has proven it can cut emissions. Its next lesson for America is how to make climate regulations benefit everyone.