As U.S. prospects for a national climate change bill fade, five U.S. states and Canadian provinces are on track to start a cap-and-trade market for carbon dioxide in 2012, say officials who see fading federal momentum boosting regional efforts.

California, the keystone market with the eighth-largest economy in the world, New Mexico, and the Canadian provinces of Ontario, British Columbia and Quebec all plan to join the system meant to combat climate change and boost economies by creating green jobs such as for workers who build alternative energy equipment.

There is already a working U.S. cap-and-trade system in the Northeast, although the five Western partners' market would be roughly four times bigger when fully implemented.

Cap-and-trade systems put limits on pollution -- in this case, gases that suck up heat and warm the planet -- which are decreased year by year. Polluters must acquire emissions credits, which can be bought and sold. If a factory can make changes to cut pollution for less than the price of a credit, it is likely to do so, then sell unneeded credits at a profit.

Many members would prefer strong national systems, but at the moment they are not getting them.

If things continue to stall in Washington D.C., then I think there's some renewed energy around getting the authority to do this at the state level, said California Environmental Protection Agency's Michael Gibbs.

The 11-member Western Climate Initiative had planned a bigger effort to cover most Western U.S. states and four of the 10 Canadian provinces, but Arizona says it won't join cap-and-trade, and states like Washington and Montana have failed to get necessary legislative approval so far.

The contention that green policies like cap-and-trade are good for jobs is still a source of debate. Many businesses concerned with costs are mounting an effort to reverse the plan, and Republican candidates for California governor agree.

Such a move could roil the entire system, since smaller players can't make an efficient market on their own.

CRITICAL MASS NEEDED

The governor and many others believe that the future of New Mexico's economy is in green jobs and renewable energy and clean-tech, and so we think that cap-and-trade will only support those types of companies, said Sarah Cottrell, adviser to Democratic Governor Bill Richardson.

But the state may put conditions in its plan to make sure there is a critical mass for a robust market. New Mexico does not want to be trading on its own, she said.

If the current five stay on track, emissions from power plants and other big stationary sources will be traded in 2012, with transportation included in 2015 to cover up to 90 percent of their greenhouse gas emissions. The market for the five would be equal in size to roughly a tenth of U.S. emissions.

The economic bulk is going to be in it, said Paul Cartwright, senior energy analyst and adviser to the governor in Montana -- which has not received legislative approval for cap-and-trade and won't make the 2012 start.

California's Gibbs said the five states and provinces in January had said they were ready to go and accounted for some two-thirds of WCI emissions. Other states and provinces unlikely to join the first cap-and-trade round are Manitoba, Oregon, and Utah.

British Columbia already has a carbon tax that must be harmonized with the cap-and-trade system.

California has come a long way but has yet to make key decisions such as how to apportion the allowances to pollute. A panel recently recommend that all allowances be auctioned -- as opposed to giving some to power plants and other emitters -- and that most of the proceeds be given back to households.

A big key is the price of carbon. The Regional Greenhouse Gas Initiative in the northeastern United States is trading carbon at low prices around $2 per ton -- about a tenth of what prices in Europe have been at times.

A 2008 analysis estimated the western U.S. could produce a price of $24 per ton for a system with a broad scope and the use of credits for projects that soak up greenhouse gases, offsetting pollution. A revised version of the economic analysis is due soon.

(Additional reporting by Allan Dowd in Vancouver; Editing by Cynthia Osterman)