The Democrat-dominated legislature voted to reauthorise the state's carbon emissions cap-and-trade program, which is set to expire after 2030.
Then-governor Arnold Schwarzenegger, a Republican, signed a law authorising the program in 2006, and it launched in 2013.
The program sets a declining limit on total planet-warming emissions in the state from major polluters.
Companies must reduce their emissions, buy allowances from the state or other businesses, or fund projects aimed at offsetting their emissions.
Money the state receives from the sales funds climate-change mitigation, affordable housing and transportation projects, as well as utility bill credits for Californians.
Newsom, a Democrat, and legislative leaders, who said months ago they would prioritise reauthorising the program, almost ran out of time to introduce the proposal before the statehouse wraps for the year.
"After months of hard work with the legislature, we have agreed to historic reforms that will save money on your electric bills, stabilise gas supply, and slash toxic air pollution — all while fast-tracking California's transition to a clean, green job-creating economy," Newsom said after striking the deal this week.
The proposal would reauthorise the program to 2045, better align the declining cap on emissions with the state's climate targets and potentially boost carbon-removal projects.
It would also change the name to "cap and invest" to emphasise its funding of climate programs.
The legislature will vote on another bill committing annual funding from the program's revenues.
It includes $US1 billion ($A1.5 billion) ($A1.5 billion) for the state's long-delayed high-speed rail project, $US800 million ($A1.2 billion) for an affordable housing program, $US250 million ($A379 million) for community air protection programs and $US1 billion ($A1.5 billion) for the legislature to decide on annually.
The votes come as officials contend with balancing the state's ambitious climate goals and the cost of living.
California has some of the highest utility and gas prices in the country.
Officials face increased pressure to stabilise the cost and supply of fuel amid the planned closures of two oil refineries that make up roughly 18 per cent of the state's refining capacity, according to energy regulators.
Proponents of the extension say it will give companies certainty over the program's future.
The state lost out on $US3.6 billion ($A5.5 billion) in revenues over the past year and a half, largely due to uncertainty, according to a report from Clean and Prosperous California, a group of economists and lawyers supporting the program.
Some environmentalists say the Trump administration's attacks on climate programs, including the state's first-in-the-nation ban on the sale of new gas-powered cars by 2035, added urgency to the reauthorisation effort.
Cap and trade is an important cost-effective tool for curbing carbon emissions, said Katelyn Roedner Sutter, the California state director for the Environmental Defence Fund.
"Supporting this program and making this commitment into the future is extremely important — now more than ever," she said.
But environmental justice advocates opposing the proposal say it doesn't go far enough and lacks strong air quality protections for low-income Californians and communities of colour more likely to live near major polluters.
"This really continues to allow big oil to reduce their emissions on paper instead of in real life," said Asha Sharma, state policy manager at the Leadership Council for Justice and Accountability.
Republicans criticised the program, saying it would make living in California more expensive.
