if the private sector is known to deal poorly with systematic risk and long timehorizons, then the local public sector has an even greater incentive to intervene.The conclusion of this analysis is not that decentralized GHG regulation is a substitutefor a comprehensive climate change regime. Because of carbon leakages, theseunilateral initiatives will have a limited direct impact on short term global GHGemissions. Nonetheless, decentralized GHG regulation is a significant and growing phenomenon. As the proliferation and intensification of decentralized GHGregulation gains momentum these programs can be expected to have an increasingimpact on country level payoffs from an internationally negotiated regulatory regime.Furthermore, in a finite world, the carbon leakages from a marginal regulator can beexpected to decrease as the proportion of regulators increases. For these reasons,decentralized GHG regulation is nontrivial; rather it is the driving force of globalclimate change mitigation.
The majority of political and economic scholarship on climate change mitigationdeals with the issue of negotiating, implementing and enforcing a comprehensiveinternational regime. Contributions to this debate generally focus on the problem of designing an efficient, yet feasible, mechanism for achieving a socially optimal levelof GHG emissions: one which distributes costs and benefits ethically and efficientlyacross space and time. The emphasis on the international level has overshadowed amarginal scholarship on the local decision making processes that can directly, or indirectly, influence GHG emissions and global climate change negotiations.Even among economists who consider unilateral regulation, it is commonly arguedthat local action to reduce GHG emissions will have negligible, or even perverse,effects on aggregate global emissions. This argument is formalized by Hoel (1991).The game theoretic model Hoel uses is two representative individuals who makedecisions regarding a purely public good, given the expected responses of the other individual. The conclusions of this game theoretic approach to public goods werestrongly pessimistic for unilateral emissions regulation.3