Krugman Explains the Problem With a Carbon Tax

I was saying over the weekend that I don’t think the world needs me to point out every time Paul Krugman writes a good column. But a friend of mine was saying that maybe that’s not right. So you know what, this from Paul Krugman is a very good explanation of why the economically elegant idea of a carbon tax suffers from some very difficult implementation problems:

One objection — the claim that carbon taxes are better than cap and trade — is, in my view, just wrong. In principle, emission taxes and tradable emission permits are equally effective at limiting pollution. In practice, cap and trade has some major advantages, especially for achieving effective international cooperation.


Not to put too fine a point on it, think about how hard it would be to verify whether China was really implementing a promise to tax carbon emissions, as opposed to letting factory owners with the right connections off the hook. By contrast, it would be fairly easy to determine whether China was holding its total emissions below agreed-upon levels.

Yes. As Krugman goes on to explain, by auctioning 100 percent of the permits under a cap and trade system you capture virtually all of a carbon tax’s benefits while avoiding this problem. Unfortunately, rather than joining with liberal Democrats to pass an elegant 100 percent auction system, Republicans have chosen almost universal opposition to the Waxman-Markey process. That’s made it necessary to gain support of coal-belt and rust-belt Democrats throughout emission permit giveaways that maintain the crucial element of climate efficacy. The result is not as elegant, and is worse from a social justice point of view, but it still succeeds in bringing about substantial emissions reductions.