Greg Mankiw:
The Fundamental Theorem of Carbon Taxation
In today's Washington Post, congressman John Dingell pushes for a carbon tax. He ends by suggesting, however, that cap-and-trade is politically more feasible.
He may be right, but it is a frustrating conclusion. Economists recognize that a cap-and-trade system is equivalent to a tax on carbon emissions with the tax revenue rebated to existing carbon emitters, such as energy companies. That is,
Cap-and-trade = Carbon tax + Corporate welfare.
If the public understood this theorem, the carbon tax alternative, with revenues rebated to households through lower payroll or income taxes, would attract a lot more interest.
There are good ways to do the comparative economic analysis of carbon taxes vs cap-and-trade and there are bad ways. Comparing a cap-and-trade giveway to corporate welfare is a bad way (especially since this is not the only allocation method for permits).
If there are efficiency arguments to suggest that carbon taxes are preferred to cap-and-trade (other than revenue neutral reductions in distortionary taxes, which are not a given anyway, since these are two different policies with two different politics), and there are, then I'm ready to listen. If you are resorting to populist rhetoric, I'm not.
I'm beginning to think that I should switch intro textbooks.