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Defining a role for states within a federal cap-and-trade program will require balancing the benefits of preserving states’ ability to innovate and spur emissions reductions with the challenges that state-by-state regulation may create for some businesses. Finding the approach that draws on the unique strengths of each level of government will help ensure a more effective nationwide cap-and-trade program and a more cost-effective means for reducing emissions. However, it requires expressly providing a mechanism for state action in the federal law.

This policy brief presents the competing arguments for state-led and federal-led climate legislation, and argues for a third—“hybrid”—approach that maximizes the strengths of each level of government. The authors argue that preserving space for state climate change action in a future federal cap-and-trade program will be necessary to achieve desired emissions reductions, and outline possible roles for states under a federal cap-and-trade program. Approaches such as these will allow for continued state innovation while also achieving substantial nationwide uniformity. Without such provisions, the federal government may unwittingly reduce or eliminate the incentive states have to implement strong policies that complement federal efforts.