Cap and trade means setting an overall cap or limit on greenhouse gases, and then allowing companies to buy and sell the carbon allowances or credits. Businesses that move quickly to reduce emissions can sell their credits to companies that act more slowly.
The Midwest follows three other regional groups that are working cooperatively to create cap and trade markets. Individual states aren't big enough to make cap and trade markets work, but regional groupings are.
In Thursday's agreement, six governors -- including Minnesota's Tim Pawlenty and Wisconsin's Jim Doyle -- and the premier of Manitoba, agreed to create this kind of market. Three other states will help design it, but did not commit themselves to take part once it's set up.
Gov. Pawlenty said the cap-and-trade market is a good way to reduce pollution.
"If you unleash the requirements and incentives and attractive features of a market, people will respond to it," he said. "Some will respond by reducing pollution directly. Others will respond by buying credits or offsets in the marketplace, with the ultimate same net effect."
Pawlenty said the regional action should push Congress and the president to create a national system.
Environmentalists seem to agree. Several regional environmental groups called the pact a historic step.
Bill Grant, from the Izaak Walton League in Minnesota, said the deal moves the state into a market envisioned last spring when the Minnesota legislature set carbon emission reduction goals. He said the participation by Illinois -- a coal-producing state -- is also a big step.
"Having coal states now involved in a greenhouse gas initiative like this is a very significant thing politically not only here in this region but on Capitol Hill. This could very well be the thing that breaks the logjam on federal legislation that really needs to move in this area as well."
But the environmentalists said there's lots of hard work yet to be done.
Keith Reopelle, from Clean Wisconsin, said the governors will have to convince their legislatures to set a target for carbon reductions that will be effective -- he said specifically 80% by mid-century. That matches the commitment made by the 2007 legislature.
Reopelle said the states shouldn't give away the store as they set up this market.
"It's critical that we have a public auction to distribute those credits, and not give them away for free to the polluters. We need to have auctions so we can lower the cost for the customers, for the people of the Midwest, and so we can reinvest the money in the lowest-cost solutions to attack global warming."
In addition to the carbon trading market, 10 out of the 12 Midwest governors agreed on broad goals to promote conservation and renewables.
The Midwest produces more greenhouse gases than many countries -- as a region, it's the number-five emitter in the world, and it produces about one quarter of the greenhouse gases in the U.S.
Both the governors and the environmentalists watching them said that means there's potential to make a big difference in global warming.