Thursday, August 02, 2007

The Fundamental Theorem of Carbon Taxation

In today's Washington Post, congressman John Dingell pushes for a carbon tax. He ends by suggesting, however, that cap-and-trade is politically more feasible.

He may be right, but it is a frustrating conclusion. Economists recognize that a cap-and-trade system is equivalent to a tax on carbon emissions with the tax revenue rebated to existing carbon emitters, such as energy companies. That is,

Cap-and-trade = Carbon tax + Corporate welfare.

If the public understood this theorem, the carbon tax alternative, with revenues rebated to households through lower payroll or income taxes, would attract a lot more interest.