Make or brake — Rich states in voluntary federal emission pricing

61 Pages Posted: 29 Mar 2017 Last revised: 24 Apr 2020

See all articles by Christina Roolfs

Christina Roolfs

Potsdam-Institut für Klimafolgenforschung (PIK); Technische Universität Berlin

Beatriz Gaitan

Potsdam-Institut für Klimafolgenforschung (PIK)

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK); Mercator Research Institute on Global Commons and Climate Change (MCC); Technische Universität Berlin (TU Berlin)

Date Written: April 24, 2020

Abstract

Voluntary participation can improve multilateral environmental governance. We develop a theory of voluntary participation in federal environmental policy by states of differing wealth. Using a general equilibrium model, we formalize voluntary participation by a Pareto-improving federal emission price that 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 the transfer rules, and on whether or not states anticipate them. Sovereignty transfers work in all cases. The effectiveness of egalitarian transfers is hampered by too large differences in wealth between states. Juste retour transfers render federal policy ineffective if states anticipate them. The lowest optimal federal price maximizes the utility of the richest state and represents the voluntarily-feasible federal minimum price. In that sense, rich states brake or make possible voluntary federal policy.

Keywords: Environmental Regulation; Fiscal Federalism; Pollution Taxes; Transfer Design; Voluntary participation; Pareto improvements; Minimum price

JEL Classification: H77, Q58, H23, D62, H87

Suggested Citation

Roolfs, Christina and Gaitan, Beatriz and Edenhofer, Ottmar, Make or brake — Rich states in voluntary federal emission pricing (April 24, 2020). Available at SSRN: https://ssrn.com/abstract=2941505 or http://dx.doi.org/10.2139/ssrn.2941505

Christina Roolfs (Contact Author)

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

Technische Universität Berlin

Straße des 17
Juni 135
Berlin, 10623
Germany

Beatriz Gaitan

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegrafenberg A31
Potsdam, 14412
Germany

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK) ( email )

P.O. Box 601203
14412 Potsdam, Brandenburg
Germany

Mercator Research Institute on Global Commons and Climate Change (MCC)

Torgauer Straße 12-15
Berlin, 10829
Germany

Technische Universität Berlin (TU Berlin)

Straße des 17
Juni 135
Berlin, 10623
Germany

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