I read my own required reading. First, I read Mankiw's Economic View piece advocating a global carbon tax.
Mankiw (me):
- A tax would reduce carbon and mitigate climate change (yep, and so would cap-and-trade)
- A tax would raise revenue that can be used to reduce income taxes (in fact, the "double dividend" of a Pigovian tax is more general, the increased government revenue could be used for lots of things, such as covering the deficit instead of using social security taxes for that purpose.)
- A tax would be easier to negotiate internationally than cap-and-trade (maybe so, but I'd say the negotiations are significantly difficult that the difference in difficulty is minor; also, implementation of a carbon tax in the U.S. seems near impossible with the strong opposition from business)
As always in this debate, I'm blown away by the way economists pit a carbon tax against cap-and-trade as if it were an academic exercise (in graduate school it was the great macro debate "money matters, no it doesn't"). The contrasts in the two approaches are presented as stark but this isn't so. A carbon cap-and-trade system with an auction and safety value is similar to a carbon tax. It raises revenue and etc. Economists state this similarity and then ignore it and revert back to stating that a carbon tax is a much superior policy*.
Suppose we economists push for cap-and-trade in the power sector** with an initial giveaway of permits and a gradual ratcheting up of auctions? Since we are playing for keeps with Congress seemingly ready to implement cap-and-trade, playing the name game, i.e., gradually moving from cap-and-trade to a carbon tax might be one way to make all economists happy and actually get some sort of sensible climate legislation passed sometime soon.
Second, I read the WSJ piece. I found a balanced comparison of the economic issues with a clear statement that most of the differences in the two proposals are about distribution and not efficiency.
*The only really good reason to favor a carbon tax is the idea that regulating prices (i.e., taxes) works better with uncertain benefits.
**An increased gas tax, er, carbon tax on transportation, covers the other big carbon sector.
