Carbon Tax vs. Carbon Auction

My favorite economist, Greg Mankiw, is an advocate of the Pigovian tax such as a carbon tax. The Pigovian tax, which is named after Auther Pigou, a prominent British economist, aims to internalize optimally negative externalities such like the emission of carbon dioxide. That's a today's topic:

The Best Idea for Reducing Global Warming
It's not a carbon tax and it's not a cap-and-trade system. It's a carbon auction.
Robert B. Reich June 20, 2007 web only

The best idea I've heard so far to deal with global warming is not a carbon tax. I can't imagine any politician calling for higher taxes affecting the middle class, or for that matter the middle class -- already squeezed by high energy prices and stagnant wages -- putting up with it.

....The best idea I've heard is described as a carbon auction. Companies would have to bid for the right to pollute. And, most ingeniously, the money raised in the auction would be shared equally by all citizens in the form of yearly dividend checks -- just like the residents of Alaska now get yearly dividends for their share of the state's oil revenues.

....In a carbon auction, companies would have to bid against other companies for a portion of the atmosphere they intend to use -- within overall limits that reduce pollution levels.

Get it? It's a win-win. The auction market itself determines who can pollute and by how much. And since companies will inevitably want to reduce their bidding costs, they'll search for new technologies that cut their emissions. And even if companies pass on increased costs to their customers, we'll still be better off because we'll get dividend checks and cleaner air.

This column is adapted from Reich's weekly commentary on American Public Radio's Marketplace.

To sum up his idea on reducing global warming:

(1) He's not for a carbon tax because higher taxes hit the middle class.


(2) He's for a carbon auction because the money raised in the auction would be shared equally by all citizens in the form of yearly dividend checks.

According to his views (1) and (2), he talks of a carbon tax and auction not in terms of efficiency but equity. What's the matter in his statement? To reduce global warming, a carbon tax and a carbon auction will be both effective measures. Rather to reduce the gap between the middle class and the executive class, a carbon auction might be more effective, as Reich says. However, there's no guarantee for the money to be shared equally among all the citizens. The companies that sell the right for the emission of carbon dioxide to other companies will get much of the revenue. It seems few citizens will get it. Because there's no incentive to have them equally get the money raised in the auction.

The Pigovian tax as well as the auction will let market determine who can pollute and by how much. And since companies (and consumers) want to reduce their payment of the tax on the emission of carbon dioxide, they'll search for new technologies that cut their emissions. And even if companies pass on increased costs to their customers, we'll still be better off because we'll get cleaner air.