The U.S Carbon Legislation: "Demonstrate Resolve"

I agree with Nat Keohane's main claim here . I read this as a "Field of Dreams" domino effect. If we build it, they (i.e China, India) will follow. The specific details don't really matter. Leadership is leadership. We are trying to shift a perception that the U.S is a free rider and that it is acceptable to continue to free ride on global carbon production. If the U.S commits to being a credible "first mover", then this sharply reduces Political Business cycle issues. Forward looking investors will start to calculate the carbon content of various investment strategies and be more likely to "go green". Such little choices will accelerate the reduction in carbon intensity of our economy. Now will a future Republican administration void all of this carbon stuff in the future? If business people think that the answer is "yes", then they may hedge their investments today. What is cheaper; good lobbyists or "green tech"?

Now, of course the specific details matter. If you want to see serious economists hard at work at getting the details right, please look at this . Larry Goulder's Committee is working hard to get the details right on California's AB32. Economists can use our basic knowledge of incentives to reduce the full cost of meeting a carbon goal. As we lower this "price tag", affected polluters have less reason to complain about the regime shift (switching from a zero price on carbon to a positive price).

Right now we are in the midst of a big tug of war about property rights. The polluters want their "right to pollute" to be acknowledged and to have cap and trade permits be freely allocated to them. They are threatening to lobby and complain and rile up the public if they don't get them. The Greens want the permits to be auctioned so that the polluter pays and the State has more $ for Public Works projects and deficit reduction.

Most economists don't really care about such income effects (unless we own shares in the polluting companies). We care about getting the marginal incentives right.

Now, I do have an international relations question. If the messy U.S democratic process does yield carbon legislation; will the rest of the world follow? Will India and China be impressed? I doubt it but if endogenous technological change means that our engineering nerds invent green products that become cheap and high quality; they will be happy to use them rather than status quo "brown" technologies. So my causal story for how the U.S changes the world is;

1. we go green
2. we innovate and China innovates in order to sell to us under the new carbon laws
3. Learning by doing with respect to these new products
4. due to low price per unit of energy (the rest of the world buys it)
5. carbon intensity falls sharply,
6. does 5 fall more more than global gdp increases? I don't know.