On Sunday, economist Gregory Mankiw wrote a piece in the New York Times making the case for a “carbon tax.” Among other things, Mankiw discusses how a carbon tax could be adopted without imposing regressive tax burdens.
[The] natural aversion to carbon taxes can be overcome if the revenue from the tax is used to reduce other taxes. By itself, a carbon tax would raise the tax burden on anyone who drives a car or uses electricity produced with fossil fuels, which means just about everybody. Some might fear this would be particularly hard on the poor and middle class.
But Gilbert Metcalf, a professor of economics at Tufts, has shown how revenue from a carbon tax could be used to reduce payroll taxes in a way that would leave the distribution of total tax burden approximately unchanged. He proposes a tax of $15 per metric ton of carbon dioxide, together with a rebate of the federal payroll tax on the first $3,660 of earnings for each worker.
Mankiw also explains why a carbon tax is preferable to various energy conservation regulations, such as automobile fuel economy standards.
Enhancing fuel efficiency by itself is not the best way to reduce energy consumption. Fuel use depends not only on the efficiency of the car fleet but also on the daily decisions that people make — how far from work they choose to live and how often they carpool or use public transportation.
A carbon tax would provide incentives for people to use less fuel in a multitude of ways. By contrast, merely having more efficient cars encourages more driving. Increased driving not only produces more carbon, but also exacerbates other problems, like accidents and road congestion.
Mankiw also explains why a carbon tax would be preferable to an equivalent cap-and-trade regime. In addition to the points Mankiw raises, I have argued that a cap-and-trade scheme is likely to result in greater corporate rent-seeking.