Global Warming Policy in a Federation

Abstract

We explore alternate allocations of responsibility for greenhouse gas emissions policies in a small open federation. Emissions result from consumption and production of a tradeable dirty good. Emissions control policies are based on social values which depend on the allocation of policy responsibility. Policies include emissions taxes and permit trading systems and involve administrative costs that can differ by level of government. We show that federal and regional optimal emission pricing policies are variants of Pigovian taxes, and there may be a role for tariffs when regional governments are responsible for emissions policy and the federal government makes interregional transfers.