Sunday, May 29, 2011

Field Experiments and Free Riding

In today's NY Times, Rob Stavins and I are both quoted in this piece about California's continued effort to launch a serious carbon cap and trade program as part of its ambitious AB32 legislation.   I would love to see this effort succeed but I would like to focus on a slightly different point here.

We all agree that ideas are public goods and that learning offers positive spillover externalites to society.  So, a question arises -- who is the "sucker" who runs the "policy experiment" to generate this new knowledge?

When we know that we don't know the truth and there exists a costly (but we don't know how costly) experiment that can be run (such as cap & trade), the free rider problem will arise.   Everyone will delay running their own experiment hoping that somebody else will run the experiment. If the experiment fails, then others won't imitate California while if the AB32 experiment succeeds then others will join the "coalition of the willing" and cap & trade could diffuse and build up into a national effort.

I have argued that California should be rewarded for running this experiment.  The rest of the country appears to view us as Berkeley hippies who will push ahead with this effort even without an explicit incentive. You may be right about this but the recession and lingering unemployment have pushed many moderate greens to ask tougher questions about whether the California "green push" is good public policy.

Contrast environmental policy with medical clinical trials. If I am suffering from a health problem, I will seek any cure and will be happy to sign up for a randomized trial because I may be randomly assigned to the treatment group and the new pill may help me.  In contrast, in the case of environmental policy --- the people of California know that they cannot single handedly stop climate change.  We are volunteering to be the "green guinea pig" and the lessons we learn here will spread widely.  We need a mechanism where we can "sell" this new knowledge or at least be rewarded for generating this knowledge.  Each Republican should have to take their family for a one month vacation in California each year.  Such a cultural exchange program would generate tolerance and cash for the people of California.

1 comment :

Skeptikos said...

I've been thinking the same thing-- though I'm not really sure how we could turn this into some kind of real-life policy. Perhaps the federal government could simply offer money to states for experimenting with a carbon cap?

But we can push your free rider story farther-- even with the free rider problem, some states have more to gain than others from a successful federal cap and trade program. Specifically, states with relatively little carbon use and a relatively high vulnerability to climate change should be more willing to experiment, if it means that a federal program is more likely afterwards.

Actually, it should even be possible for some states to have too much of an incentive to experiment. Mancur Olson's treatment of collective action suggests this will not be the case, but it doesn't necessarily apply here, because a federal cap and trade program will redistribute resources between states. So, hypothetically, if cap and trade was an overall benefit to the U.S., and the benefits were concentrated in California, and the state of California would also gain from cap and trade-induced redistribution from other states, it could, in theory, have an incentive to over-experiment. (Though, admittedly, this does not seem to be the case in real life.)

But then there's always the small amount of damage that Californian CO2 emissions will cause to Californians. Doesn't California have an incentive to cap just a little bit for its own sake? (It seems like this should be a stronger incentive for a larger and more populous state, because a larger fraction of the damage from emissions will happen within the state-- so California is a good example this time.)