Confronting the American Divide on Carbon Emissions Regulation - Working Paper 232

The failure of carbon regulation in the U.S. Congress has undermined international negotiations to reduce carbonemissions. The global stalemate has, in turn, increased the likelihood that vulnerable developing countries will be severelydamaged by climate change. This paper asks why the tragic American impasse has occurred, while the EU has succeededin implementing carbon regulation. Both cases have involved negotiations between relatively rich “Green” regions and relatively poor “Brown” (carbon-intensive) regions, with success contingent on two factors: the interregional disparity incarbon intensity, which proxies the extra mitigation cost burden for the Brown region, and the compensating incentivesprovided by the Green region. The European negotiation has succeeded because the interregional disparity in carbonintensity is relatively small, and the compensating incentive (EU membership for the Brown region) has been huge. Incontrast, the U.S. negotiation has repeatedly failed because the interregional disparity in carbon intensity is huge, andthe compensating incentives have been modest at best. The unsettling implication is that an EU-style arrangement isinfeasible in the United States, so the Green states will have to find another path to serious carbon mitigation.

Oneoption is mitigation within their own boundaries, through clean technology subsidies or emissions regulation. TheGreen states have undertaken such measures, but potential free-riding by the Brown states and international competitorsseems likely to limit this approach, and it would address only the modest Green-state portion of U.S. carbon emissionsin any case. The second option is mobilization of the Green states’ enormous market power through a carbon added tax(CAT). Rather than taxing carbon emissions at their points of production, a CAT taxes the carbon embodied in productsat their points of consumption. For Green states, a CAT has four major advantages: It can be implemented unilaterally,state-by-state; it encourages clean production everywhere, by taxing carbon from all sources equally; it creates a marketadvantage for local producers, by taxing transport-related carbon emissions; and it offers fiscal flexibility, since it caneither offset existing taxes or raise additional revenue.