Is the U.S. Environmental Protection Agency irrelevant? Before long, it may look that way. In late December, the agency blocked California's plan to reduce greenhouse gases, but California is suing, and most legal scholars expect the state to win. If that happens, it will be an important event in the battle over how the nation will fight global warming and who -- EPA or the states -- will call the shots.

At the center of the struggle is California's tough air pollution law, which requires auto manufacturers to reduce greenhouse gas emissions 30 percent by 2016. EPA Administrator Stephen L. Johnson, standing alone against even his own agency's previous policy, rejected California's request for a waiver of federal law to pursue its standards. He could not allow the states to set their own course, Johnson said, because a "patchwork of state rules" would cause chaos. But Johnson's plan for federal control, critics charged, would take far too long to bring any meaningful improvement in air quality.

California Governor Arnold Schwarzenegger is one of those critics. "Anything less than aggressive action on the greatest environmental threat of all time," Schwarzenegger says, "is inexcusable."

Fueling the political battle were back-channel conversations Vice President Dick Cheney and other top White House officials had with automakers. The industry was worried about the costly investments the California standards would require. In the short run, they won. Even if EPA loses in the federal courts or a new administration switches course, the automakers will have delayed those investments for at least a couple of years.

The long run is another matter, for the lawsuit is a 20th-century-style tussle over one of the biggest 21st-century issues. We've moved away from the question of whether we should try to reduce global warming to arguments about how: what strategies will work best. The Bush administration is not only fighting a losing battle, it's fighting a battle that's essentially over.

The smart money is betting that the next round of clean-air standards will be market-driven, especially through "cap and trade" plans. The government would set pollution-reduction targets and allow companies to trade pollution credits. Companies that find it cheapest to reduce their emissions will be able to sell credits to others for which pollution reduction requires larger investments. The 1989 Clean Air Act reduced acid rain by creating such a market for sulfur dioxide credits, and the success of the strategy surprised even its critics.

A market-driven plan for greenhouse gases would be much tougher to create, however. Europe has struggled to find the right caps for its carbon-trading market because the greenhouse gas problem is far more complex than acid rain. Tweaking the system along the way could undermine the predictability that companies find attractive about it.

But two things are certain: EPA's decision benefits only those playing for time, and it doesn't resolve the question of who will run a market-driven strategy. It's impossible to build markets completely from the states, because the scale would be too small, even in California. And it's impossible to develop market-based strategies from Washington without bringing in the states, because they do much of the front-line work on air quality. There is no escaping the need to act on climate change, but there's also no avoiding the fact that an effective climate change strategy is going to require a new environmental partnership between Washington and the states.

On this and other federalism fronts, the Bush administration is leaving behind a fractious legacy. The states lost many a battle against Washington in the Bush years, but it's hard to escape the sense that they have the feds on the run. The EPA ruling was a rear-guard action. Pressures are building for everyone to dance more to the states' tune, even though the states can't dance alone.

All of this shapes the environmental challenge for the administration that will take office in 2009. Whoever becomes president, the next steps will require a move from stonewalling to stronger incentives for collaboration. EPA will need to find a strategy that makes it relevant in one of the policy issues sure to define this century.