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Make or brake — Rich states in voluntary federal emission pricing

Christina Roolfs, Beatriz Gaitan and Ottmar Edenhofer

Journal of Environmental Economics and Management, 2021, vol. 109, issue C

Abstract: Voluntary participation can improve multilateral environmental governance. We model voluntary participation of states in unanimously approved federal environmental policy. A Pareto-improving federal emission price coexists with state-level emission pricing. Federal revenues are distributed equally per capita (egalitarian), in proportion to states' historical emission levels (sovereignty), or states’ actual payments (juste retour). We find that the existence of Pareto-improving uniform federal prices depends on wealth differences, transfer rules, and on whether or not states anticipate transfers. Sovereignty transfers work in all cases. Differences in wealth can undermine egalitarian transfers. Juste retour transfers render federal policy ineffective if states anticipate them. The richest state prefers the lowest Pareto-optimal federal price (“minimum price”) as it becomes the largest net-donor. Adding different population sizes, the richest and largest (smallest) state prefers the minimum price with sovereignty and juste retour transfers (egalitarian transfers). Therefore, rich states brake and simultaneously make possible passing unanimous federal policy.

Keywords: Environmental regulation; Fiscal federalism; Pollution taxes; Transfer design; Voluntary participation; Pareto-improvements; Minimum price (search for similar items in EconPapers)
JEL-codes: D62 H23 H77 H87 Q58 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jeem.2021.102463

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Journal of Environmental Economics and Management is currently edited by M.A. Cole, A. Lange, D.J. Phaneuf, D. Popp, M.J. Roberts, M.D. Smith, C. Timmins, Q. Weninger and A.J. Yates

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