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Wednesday, January 16, 2008

Asymmetric carbon benefits

Megan McArdle explains some of a carbon tax's benefits over cap-and-trade. For one thing, cap-and-trade requires governments to understand carbon demand well enough to know where to set the cap without (a) having no effect, or (b) handing out favors to interest groups. Plus, a carbon tax allows trade-offs among competing priorities, rather than just assuming carbon emissions must stop at a certain level. She writes:

Ideally, we should understand what the economic cost of carbon emissions is, and use a carbon tax to raise the price until it includes the cost of that negative externality. If, once we have raised the cost of carbon to the price of the utility + the negative utility, and people still continue consuming carbon-intensive goods, then that is telling us something important about the value of that added carbon-intensive economic activity.

I'd add to Megan's points that a carbon tax provides revenue that lets you cut taxes elsewhere.

By the way, the "negative externality" from carbon-based energy is not just climate change but also serious problems of ordinary air pollution and environmental damage from mining and drilling--plus the geopolitical disaster of buying oil from dictators and terrorism enablers.

UPDATE: Fixed spelling of McArdle.

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