For the time being, U.S. climate policy will be fractured by political geography. The coalition of blue states and cities will not be able to significantly reduce emissions on their own. However, by subsidizing the shift to green energy, richer blue states can make the eventual transition easier for red fossil fuel-dependent states. This coalition is unlikely to be able to dramatically reduce national emissions through their own efforts. The nine states in the coalition account for only 14% of total CO2 emissions. Still, these coastal states are a powerful force in national markets, containing 26% of the nation’s population and producing 30% of its GDP. They have the ability to protect infant green industries from the market power of incumbents who do not internalize their environmental costs. For instance, California alone is responsible for nearly 50% of national Tesla Model S sales. Wealthy, liberal states provide demand for green innovators to engage in learning-by-doing, which helps products improve and become cheaper. The net effect of green companies selling their first generation products to green “guinea pig” consumers in states such as California is that consumers in other states will later have the option to purchase a higher quality less expensive product. While the U.S is not providing international leadership on climate change mitigation, there is a certain irony that President Trump and progressive governors together may have stumbled upon a politically winning formula for tackling climate change. Coal miners will face less risk of unemployment. Teslas will continue to be demanded, and conservatives in the Houston heat can crank up their air conditioning. Back in 1817, David Ricardo introduced the concept of comparative advantage in analyzing the determinants of who exports what to whom. In 2017, Donald Trump and Jerry Brown have inadvertently rediscovered this key idea.

Will President Trump’s decision to walk out from the Paris climate accord mean that U.S. greenhouse gas emissions will increase? It depends, in part, on what states and cities do next. Several blue-state governors have already announced their commitment to emissions reduction, while red states are considerably less likely to prioritize climate action.

For the time being, U.S. climate policy will be fractured by political geography. The coalition of blue states and cities will not be able to significantly reduce emissions on their own. However, by subsidizing the shift to green energy, richer blue states can make the eventual transition easier for fossil-fuel-dependent red states.

The Background

Total U.S. greenhouse gas emissions peaked in 2007, and by 2015 had declined by 10%. Electricity generation and transportation each constitute around 30% of total emissions, with industrial sources making up 20% of total emissions. The reduction in total emissions has been driven by the electricity sector. Total U.S. emissions from electricity generators fell 20% from 2007 to 2015, while emissions from other sectors fell more modestly.

If the United States had followed through with the promises that the Obama administration made at the 2015 Paris climate conference, the federal government would have continued on with a suite of policies including encouraging the phase-out of coal-fired power plants, more stringent vehicle fuel economy standards, and deep subsidies for renewable power and low-carbon technologies.

Together, such policies would encourage energy-efficient cars and buildings and cleaner power generation. Investors in the green economy would face less risk because of the federal government’s subsidies for basic energy research and its encouragement of cleaner products.

Much of the environmentalist outrage directed at President Trump is based on a technological optimism that America’s entrepreneurial talent could produce great solar panels and electric vehicles if there are “rules of the game” that reduce the risk for innovators while guaranteeing that there is a large market for the new products such as the Tesla. Therefore, one of the main questions to ask of our fractured state-level climate policy is whether it can unleash the same level of innovation.

Blue States

As the federal government retreats, the leaders of traditional blue states such as California and New York have announced that they will redouble their efforts to reduce their greenhouse gas emissions. California’s governor, Jerry Brown, responded to Trump’s announcement by flying to China to sign agreements with Chinese cities to help them reduce their greenhouse gas emissions. He has declared that California will continue its own efforts to sharply reduce its greenhouse gas emissions. Other progressive states are joining this coalition. The Democratic governors of California, Connecticut, Hawaii, New York, Oregon, Rhode Island, and Washington have each signaled a desire to adhere to the principles of the Paris accord. They have been joined by the Republican governors of Massachusetts and Vermont, as well as by the mayors of scores of the nation’s largest cities.

This coalition is unlikely to be able to dramatically reduce national emissions through their own efforts. The nine states in the coalition account for only 14% of total CO2 emissions. Still, these coastal states are a powerful force in national markets, containing 26% of the nation’s population and producing 30% of its GDP. They have the ability to protect infant green industries from the market power of incumbents that do not internalize their environmental costs. For instance, California alone is responsible for nearly 50% of national Tesla Model S sales. Wealthy liberal states provide demand for green innovators to engage in learning by doing, which helps products improve and become cheaper. The net effect of green companies selling their first-generation products to “guinea pig” consumers in states such as California is that consumers in other states will later have the option to purchase a higher-quality, less-expensive product.

Brown States

At the same time that the green push occurs in progressive states, other regions of the country continue to rely on fossil fuel for power and for employment. There are still whole towns whose livelihoods are based around coal mining. Appalachia, long a relatively depressed region, has been badly affected by the collapse of its primary industry. Because families in coal mining regions, with social and economic roots in their homes, have few other local employment centers, many small towns stand to be devastated by the transition to green energy. Politicians in these states work to protect these jobs by using state tax funds from city centers to subsidize the cost of purchasing local coal. Our research has found that power plants are more likely to buy coal from mines in their state than from a similarly distant mine across the state border. One plausible explanation for this fact is that local politicians in coal regions exert pressure on local power plants to “buy local.”

The Geographic Logic of America’s Climate Divide

Just as it is no surprise that coal-country politicians resist climate mitigation, there is a certain geographic logic to the U.S. political divide on the issue. Only three states that voted for Hillary Clinton have per capita CO2 emissions above the national average. Employment in liberal states tends to be dominated by low-energy-intensity industries, like tech and finance, while conservative states are more likely to rely on energy extraction or manufacturing. Liberals are more likely to live in cities with small dwellings and more access to public transportation, while suburban or rural life styles are more energy intensive. Urban liberals are also wealthier than conservatives, are more willing to purchase green products, and can afford the up-front costs of subsidizing nascent technologies.

These facts suggest that conservative areas will pay a higher price for reducing greenhouse gas emissions than coastal urbanites will. If suburban and rural conservatives have a larger carbon footprint and are more likely to work in affected industries and own shares in fossil fuel companies, then narrow self-interest may drive them to support Trump’s decision. Progressives would say that conservative states are free-riding and shirking on protecting the planet. Conservatives would counter that they are being asked to bear the costs of unproven new technologies.

Given Trump’s action, the nation will benefit if the blue states stick to their plan to make the green push on their own. For any unproven technology, we need “first movers” who are willing to try out the first generation of a product. Technologies that prove to be cost-effective can then be adopted by the rest of the nation.

While the U.S. is not providing international leadership on climate change mitigation, there is a certain irony that President Trump and progressive governors together may have stumbled upon a politically winning formula for tackling climate change. Coal miners will face less risk of unemployment. Teslas will continue to be in demand, and conservatives in the Houston heat can crank up their air conditioning. Back in 1817, David Ricardo introduced the concept of comparative advantage in analyzing the determinants of who exports what to whom. In 2017 Donald Trump and Jerry Brown have inadvertently rediscovered the idea.