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Journal Article

Make or brake - rich states in voluntary federal emission pricing


Roolfs,  Christina
Potsdam Institute for Climate Impact Research;


Gaitan,  Beatriz
Potsdam Institute for Climate Impact Research;


Edenhofer,  Ottmar
Potsdam Institute for Climate Impact Research;

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Roolfs, C., Gaitan, B., Edenhofer, O. (2021): Make or brake - rich states in voluntary federal emission pricing. - Journal of Environmental Economics and Management, 109, 102463.

Cite as: https://publications.pik-potsdam.de/pubman/item/item_25617
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.