Lots of stuff has been written lately over the relative merits of carbon taxes vs. carbon trading markets. Just to summarize the policies, a carbon tax would apply an across the board premium on all users of carbon depending upon the amount they use. A carbon trading market would sell permits for carbon emission that could be traded at the market value.
Glenn Hubbard, a former chairmen of this President's Council of Economic Advisors, advocates a trading market (sadly this is behind a subscription wall because the WSJ insists on operating in the 17th century...the article is excerpted here). Greg Mankiw, another former CEA chair, argues the other way. The blog Economist's View proposes a duel over the matter:
Looks like it's time for two former chairmen of the Council of Economic Advisers for the Bush administration, Glenn Hubbard and Greg Mankiw, to settle this tradable permit versus carbon taxes issue once and for all. I propose an Econoduel. Mankiw versus Hubbard, whiteboards only, any theory goes, and you cannot be saved by the end of period bell.
Perhaps to the death, but maybe just to severe intellectual wounding... (Actually read all of that post, because it has some interteresting info in it as well.)
I would have to say that I fall on the side of carbon taxes as well. Even though the taxes are quite regressive, a carbon trading market is just going to become a fiesta of Congressional pork with special dispensations and initial allocations all to be argued over. They might as well call it the Lobbyist Retirement Fund.
Advocates of carbon trading markets argue that the benefits of markets is that they impose an actual maximum on emissions. I doubt that this is actually how it will happen in practice. Either the number of permits issued will be so high that it exceeds demand -- as happened in Europe -- or so many dispensations will be given to "critical" industries that the maximum is likely to become nebulous.
I am shocked to hear myself say it, but taxes in this case will be more effective. Maybe we could use the revenue to pay down Social Security and kill two birds with one stone.
Hat-tip: Marginal Revolution.