Inspired by a series of comments (here and here), I'll try again to make my criticism of Mankiw's climate policy more clear.
Mankiw points out that taxes distort economic behavior (no economist wants any part of that). Using a straightforward model he describes a policy to mitigate the distortion in the product market (the negative externality of climate change) without making the labor market distortion worse. However, since climate policy makes the carbon-intensive goods and services more expensive, the purchasing power of income falls. As a result people will want to work less and the labor market distortion worsens. Hence, climate policy must raise revenue significant enough (i.e., revenue recycling) is necessary to avoid the worsening of the labor market distortion.
I have no quibble with this analysis. My worry is the potential confusion that Mankiw creates amongst noneconomists. He is working towards the most efficient* policy and is opposed to anything less than that (hence, the advice to Obama to veto whatever climate bill might come out of Congress). This is an honorable Milton Friedman-esque position. But noneconomists might not understand the difference unless the "most efficient policy" goal is explicitly stated in a way that noneconomists will understand it (but it isn't, as far as I can tell).Many people in the general public, including some economists (e.g., myself**), would be happy with climate policy that is more efficient than the status quo (albeit, not the most efficient). For example, suppose the most efficient policy, a carbon tax with revenue recycling, generates net benefits of $100. Another efficient policy might generate might generate $90 (cap-and-trade with full auction) or $50 (cap-and-trade without full auction). Any of these are better than the status quo and even better than regulatory alternatives that might generate negative net benefits.
*Note: I'm using a definition of efficient as additional benefits exceed additional costs. The most efficient policy is one where the net benefits are maximized.
**Note: It is rare that a democratic process that allows non-efficiency goals into the mix will generate maximum net benefits.
