Live simultaneous interpretation in French.
For two decades economists have proposed a designed system for managing global carbon emissions that would be ambitious, efficient, comprehensive and legally binding. Progress on this approach has stalled. However, policies have emerged in many national and subnational jurisdictions that have reduced emissions, promoted technological change and built political coalitions within and among jurisdictions. This engine for progress may involve an ongoing relationship between leading jurisdictions and others. In the U.S., under the Clean Air Act regime, federal requirements imposed on all states are based on findings about technical opportunities that have been commercially demonstrated, often due to policies in leadership states. National regulations (in a federalist system) or international agreements might not be expected to identify an efficient long-term policy equilibrium but instead to close the gap among leaders and others, enabling leaders to adopt additional incremental policy measures fueling an iterative process of governance. Hence, an important element of agreements in a dynamic setting may need to be designs that coordinate disparate policies to facilitate ongoing innovation rather than replace them. A fundamental characteristic of this decentralized model is variation among jurisdictions in the form of regulations and policies that are adopted that may facilitate unintended emissions leakage and free riding. In the U.S., new regulations for the power sector may enable these untended outcomes. We show that an innovative application of output-based allocation under an emissions cap can help remedy the situation in the U.S. This approach is second best, but it may not have to be implemented. Understanding the opportunity for this strategy may change the equilibrium while the strategy remains an off-the-equilibrium path option.
