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.
Another popular proposal to limit carbon emissions is a cap-and-trade system, under which carbon emissions are limited and allowances are bought and sold in the marketplace. The effect of such a system depends on how the carbon allowances are allocated. If the government auctions them off, then the price of a carbon allowance is effectively a carbon tax.
But the history of cap-and-trade systems suggests that the allowances would probably be handed out to power companies and other carbon emitters, which would then be free to use them or sell them at market prices. In this case, the prices of energy products would rise as they would under a carbon tax, but the government would collect no revenue to reduce other taxes and compensate consumers.
The international dimension of the problem also suggests the superiority of a carbon tax over cap-and-trade. Any long-term approach to global climate change will have to deal with the emerging economies of China and India. By some reports, China is now the world's leading emitter of carbon, in large part simply because it has so many people. The failure of the Kyoto treaty to include these emerging economies is one reason that, in 1997, the US Senate passed a resolution rejecting the Kyoto approach by a vote of 95 to zero.
Agreement on a truly global cap-and-trade system, however, is hard to imagine.
China is unlikely to be persuaded to accept fewer carbon allowances per person than the US. Using a historical baseline to allocate allowances, as is often proposed, would reward the US for having been a leading cause of the problem.
But allocating carbon allowances based on population alone would create a system in which the US, with its higher standard of living, would buy allowances from China. American voters are not going to embrace a system of higher energy prices, coupled with a large transfer of national income to the Chinese. It would amount to a massive foreign aid program to one of the world's most rapidly growing economies.
A global carbon tax would be easier to negotiate. All governments require revenue for public purposes.
The world's nations could agree to use a carbon tax as one instrument to raise some of that revenue. No money need change hands across national borders. Each government could keep the revenue from its tax and use it to finance spending or whatever form of tax relief it considered best.
Convincing China of the virtues of a carbon tax, however, may prove to be the easy part. The first and more difficult step is to convince US voters, and therefore political consultants, that "tax" is not a four-letter word.
N. Gregory Mankiw is a professor of economics at Harvard. He was an adviser to US President George W. Bush and is advising former Massachusetts governor Mitt Romney in his campaign for the Republican presidential nomination.
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