How heterogeneity in perceived external benefits differently affects federal and state efforts to address climate change

This paper explores how heterogeneity across policymakers and the jurisdictions they represent, such as in their perceived external benefits from reducing greenhouse gas emissions, affects state and federal efforts to address climate change. State governments restrict their emissions anticipating spillback and the impact of their choice on trade flows. Federally, legislators restrict national emissions and distribute green pork to secure key votes. Heterogeneity gives rise to differential distortions across levels of the federation reflecting political failure. As a result, the central state policy undershoots mitigation relative to the conditionally Pareto optimal level using a central estimate of the global social cost of carbon whereas the central federal policy overshoots. Moreover, these policies achieve nearly the same amount of true surplus gains possible, 72.4% and 72.7%, respectively. State policies tend to be less regressive and provide true surplus gains to states that choose not to mitigate, whereas federal policy is likely to deliver losses to no voting districts. Taken together these results indicate that its possible for state policy to yield greater societal welfare than federal policy when policies generate transboundary spillovers and that there exists complex linkages between the relative political failure, emissions, efficiency, and equity impacts of policies selected across levels of the federation as a result of heterogeneity.