Carbon Tax v. Carbon Trading Permits

Once again, Arnold Kling provides some insight to an issue that I think deserves some thought. He lays out the differences between putting out a carbon tax, carbon offsets, and purchases of carbon permits.

My favorite takeaway from the article is when Arnold writes:

It may be true, as Greg Mankiw argues in his Pigou Club Manifesto, that higher taxes on bad energy are justified. Figuring out the optimum tax is a difficult challenge, even for the Pigou Club. However, once the correct tax is set, that by itself provides all the incentive that is needed to get people to switch to good energy. The tax on bad energy will raise the price that people are willing to pay for good energy. That higher price for good energy is all of the incentive that producers need to undertake the effort to provide more good energy.

At then end of Arnold’s article, I thought to myself how ironic it was that if I were to buy a carbon offset, I would not be committing an economically efficient act. Why, because I had already used the “bad energy.” While my carbon offset would subsidize good energy, it wouldn’t really discourage use in bad energy for anyone else, which is why a broad tax for everyone would be more efficient.