Local Solutions to Global Problems: Climate Change Policies and Regulatory Jurisdiction

Abstract

This article considers the efficacy of various types of environmental regulations when they are applied locally to pollutants, such as greenhouse gases, whose damages extend beyond the jurisdiction of the local regulator. While previous work has noted the possibility for leakage, whereby polluting sources move outside the jurisdiction of the regulation, we identify an additional problem that occurs when policies are targeted downstream, at consumers of goods whose production creates pollution. Specifically, we show how consumer-based policies can be circumvented by a simple reshuffling of who is buying from whom. We argue that the leakage problems are more pronounced with regulations that impose costs on firms than with subsidies that reward production of low-polluting goods. Reshuffling problems are more pronounced when the options for compliance are more flexible, such as with market-based regulations. We conclude that localities may be able to have the greatest impact on global pollutants when they enact relatively inflexible regulations such as efficiency standards or targeted subsidies.