THIS CHAPTER EXAMINES THE LEVEL OF GOVERNMENT – STATE versus federal – at which an Environmental Competition Statute could be most effectively implemented. After years of inaction, the federal government is now debating legislation to address climate change. On May 21, 2009, the House Energy and Commerce Committee took the unprecedented step of voting for the American Clean Energy and Security Act of 2009, which would establish, among other important policies, a comprehensive cap-and-trade program for controlling emissions of greenhouse gases (GHGs). Recent federal action follows a period of rapid policy development by state and local governments. In the absence of strong federal leadership, a growing number of states have filled the void in climate policy with a broad array of programs, including regulation of GHG emissions from vehicles and power plants, renewable energy mandates, GHG emissions registries, and energy-efficiency initiatives.

The question addressed in this chapter is how state initiatives can operate in conjunction with federal programs to induce the technological change needed to mitigate climate change. I show that promoting innovation is a distinct regulatory end that is subject to a market failure – technology spillovers – unrelated to the negative externalities that have traditionally justified environmental regulation. This distinction is significant because critics of state action have questioned whether anything is left for the states once the federal government acts or even whether state initiatives are per se misguided given the global scale inherent in reducing GHG emissions.