Climate Change as Repeated Prisoners' Dilemma

Andrew Sullivan reaffirms his membership in the Pigou Club:

It's the truly conservative response to an emerging problem. It's simple, involves as little government bureaucracy as possible, and will unleash the private sector to do its magic. Neither Democrats nor Republicans really want to go there, which is a sign of how broken the system is. But Steve Chapman is absolutely right: we need a simple, effective carbon tax. Now.

I agree (with tax revenues rebated with lower income taxes). I would add that the carbon tax should start modest and increase gradually in size--for two reasons.

First, the magnitude of the climate change problem is uncertain. If the problem turns out smaller than many now fear, we can change course. Some people argue that we shouldn't do anything until more of the uncertainty is resolved. I don't buy that, but the uncertainty may argue for starting slowly.

Second, we need to get China on board. China is, I understand, fueling its impressive growth with building numerous coal-powered electricity plants, and many experts think that China will be the biggest emitter of greenhouse gases in a few years. If we levy a large carbon tax and China does not, then some carbon-intensive industries will just migrate to China. With such migration, a U.S. carbon tax could end up adversely affecting economic efficiency without much improving the problem of global warming.

Policy toward global climate change is a lot like repeated prisoners' dilemma. We need to convince China to adopt the cooperative equilibrium in which everyone taxes carbon. Starting with a small tax that increases over time, together with the threat that we will revert to the non-cooperative equilibrium without a tax if China does not participate too, may be an effective strategy for inducing cooperation.