Global warming policy in a federation

We explore the efficiency of alternate allocations of responsibility for greenhouse gas emissions pricing policies in a small open economy federation. Emissions result from consumption and production of a tradeable dirty good, and their intensity depends on the emissions technology. National emissions have an imperceptible effect on global warming, so preferences for control are based on social norms which can differ depending on the allocation of policy responsibility. Policies include emissions taxes and permit trading systems. The costs of collecting emission taxes and administering a permit trading system are lower for the regional governments that the federal government because of informational advantages. Unlike the regions, the federal government internalizes the social costs of emissions borne by both regions. Both federal and regional optimal emission pricing policies are variants of Pigovian taxes. When regional governments are responsible for emissions policy and the federal government makes interregional income transfers, the timing of government decisions affects policies.