Make or brake — Rich states in voluntary federal emission pricing

Voluntary participation can improve multilateral environmental governance. We develop a theory of voluntary participation in federal environmental policy by states of differing wealth. Using a general equilibrium model, we formalize voluntary participation by a Pareto-improving federal emission price that coexists with state-level emission pricing. Federal revenues are distributed equally per capita (egalitarian), in proportion to states' historical emission levels (sovereignty), or states' actual payments (juste retour). We find that the existence of Pareto-improving uniform federal prices depends on the transfer rules, and on whether or not states anticipate them. Sovereignty transfers work in all cases. The effectiveness of egalitarian transfers is hampered by too large differences in wealth between states. Juste retour transfers render federal policy ineffective if states anticipate them. The lowest optimal federal price maximizes the utility of the richest state and represents the voluntarily-feasible federal minimum price. In that sense, rich states brake or make possible voluntary federal policy