This article investigates the roles of policy diffusion and policy learning in shaping the design of California’s cap-and-trade system. On the surface, it is very similar to other cap-and-trade programs, but in practice many detailed differences reflect active efforts by California policy-makers to avoid flaws that they saw in other systems, such as the EU ETS and the US East Coast’s Regional Greenhouse Gas Initiative. We assess how California’s cap-and-trade system emerged, the significance of policy diffusion, and the lessons for other trading systems by applying two broad sets of theoretical frames—the role of policy diffusion and the role of organized local political concerns. We find that despite the signature status of the trading system, California mostly relies on much less transparent and more costly direct regulation. We also find that California’s cap-and-trade system has developed mostly in its own, special political context, which hampers the feasibility of cross-border trading.

Arild Underdal's “law of the least ambitious program” is properly pessimistic about the prospects for cooperation in the international system where nations must give their consent to be bound by meaningful commitments. Those pessimistic expectations are now being revealed in the collective efforts to address the problem of climate change, notably through the Kyoto Protocol. Over-coming Underdal's law requires narrowing the numbers of countries that participate in key climate agreements and tailoring membership so that just the most important countries are engaged and there are strong incentives to avoid defection. At the same time, the effectiveness of cooperative efforts would gain from fuller use of nonbinding instruments, review procedures and high level conferences—as were put to effective use in the North Sea cooperation, for example— in addition to legally binding international law through instruments such as the Kyoto Protocol. Sadly, most of the conventional wisdom runs the opposite direction, favoring binding treaties among large numbers of countries.

When addressing an externality such as air pollution, regulators can control policy inputs (e.g., pollution taxes and technology standards) or outputs (e.g., emission caps). Economists are familiar with this debate, known broadly as “prices vs. quantities,” but analysts of international environmental agreements have rarely focused sustained attention to such questions. Using an inventory of all international air pollution agreements, we document the historical patterns in instrument choice. Those agreements that require little effort beyond the status quo are usually codified in terms of effort, but agreements that require substantial actions by the parties nearly always deploy a cap on emission quantities as the central regulatory instrument. We suggest that this concentration of experience with emission caps and paucity of serious efforts to coordinate policy inputs may explain why the architects of international environmental agreements appear to believe that emission caps work best. We illustrate what's at stake with the example of international efforts to control the emissions that cause global climate change. We also show that the conventional history of the agreement that is most symbolic of the superiority of emission caps—the Montreal Protocol on Substances that Deplete the Ozone Layer—has wrongly overlooked a little-known provision that operates akin to a “price” instrument.