U.S. State-Level Carbon Regulation

Laura Padilla
December 19, 2016

Submitted as coursework for PH240, Stanford University, Fall 2016

Why Regulation is Necessary

There are quite a few market failures in the fossil fuel electricity-generating industry, such as the social costs, environmental externalities, and polluting public goods. [1] These costs that neither the consumer nor producer bear is therefore carried by the rest of society, taking on the form of adverse health effects and climate change. If the current Private Marginal Cost of production were to take into account the current costs that society has to pay, the industry would have to pollute less and maybe be more willing to invest in technology that reduced their emissions, such as carbon-capturing scrubbers or invest in renewables as a part of their electricity generation. It is important to regulate carbon emissions to correct for the market failures that currently exist and, should the federal government be unwilling to take leadership in passing regulations, state governments can take the initiative through carbon taxes.

Kinds of Regulation: Carbon Tax versus Cap and Trade

A carbon tax sets a fee per unit of carbon dioxide emitted by an electricity-generating plant. The Cap and Trade alternative can be more powerful if multiple states in a region all participate in a similar program with an initial set of permits allocated and able to be traded. However, if the country finds itself in an administration that does not prioritize environmental regulation, passing a carbon tax is still something a state can do on its own to combat climate change and reduce the other externalities associated with the heavy carbon emissions. [2]

State Legislation

While the federal government does play a major role in setting the stage for environmental regulation across the country, each state has the power to enact environmental legislation, independent of the federal goals (or lack thereof). For example, the state of California has a cap-and-trade program independent of federal regulations. [3] Absent federal leadership and support for carbon emissions reduction, individual states can take the initiative by implementing statewide carbon taxes. By allocating a dollar cost to the tons of carbon dioxide emitted, the damages to air quality, environment, and human health will finally be taken into account in the power-generating transaction. [4]

© Laura Padilla. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.


[1] S. Brunner, C. Flachsland, and R. Marschinski, "Credible Commitment in Carbon Policy," Climate Policy 12, 255 (2012).

[2] W. Rosenbaum, Environmental Politics and Policy, 9th Ed. (CQ Press, 2013).

[3] J. S. Dryzek, The Politics of the Earth, 3rd Ed. (Oxford University Press, 2013).

[4] R. W. Hahn, "Economic Prescriptions for Environment Problems: How the Patient Followed the Doctor's Orders," J. Econ. Perspect. 3, 95 (1989).