Timing and Form of Federal Regulation: The Case of Climate Change

Authors:  J.R. DeShazo, Jody Freeman

Date: January 1, 2007

Project: Timing and Form of Federal Regulation: The Case of Climate Change

DeShazo and Freeman use the example of climate change to explore two questions: what effect does initial state regulatory activity have on timing of federal regulation, and what explains the form of the ensuing federal policy response? Drawing on race to the bottom, interstate externality and defensive preemption theory, the article develops a picture of how state regulatory entrepreneurialism can provoke interest groups on both sides of an issue to simultaneously demand federal regulation, though for different reasons: environmentalists and state and local governments appeal for federal standards to help solve a collective action problem, spread the cost of regulation, and benefit in-state industries whereas industry will appeal for uniform and preemptive federal standards in the face of costly and heterogeneous state regulations. The article explains how states have hit the “regulatory sweet spot” with their climate change initiatives, illustrating how states can be incremental catalysts of a federal policy response, essentially prompting federal action sooner rather than later. The article then explores three key factors that influence the form of the federal policy response: the end-goals of the dominant interest groups, the particular properties of the regulatory problem, and the compatibility of the available regulatory tools with the eligible targets of regulation. These factors help explain interest group convergence on cap-and-trade as the regulatory tool of choice. The authors show how the unique nature of climate change – the fact that it involves stock pollutants – frees environmentalists from concerns about local effects and enables them to support a cap-and-trade approach; how cap-and-trade, uniquely, provides opportunities for rent seeking in the form of grandfathering, allocation, credits, and offsets; and how early “voluntary” emissions reductions programs create some path dependence for cap-and-trade. Finally, the article explains how some regulatory tools are more compatible than others with different nodes of regulation in the supply chain. As a result, the outcome of political struggles over where to place the burden of regulation (i.e., upstream or downstream) has an impact on what tools will be chosen. Although cap-and-trade may seem on its face like a sensible solution to greenhouse gas regulation, the article explains how a convergence of support for this instrument comes about.