Carbon Tax or Cap-and-Trade? None of the Above?

Which is best, a carbon tax or a cap-and-trade system? Robert Reich says neither. After noting the political problems and other difficulties with a carbon tax or a cap-and-trade system, he says:

The Best Way to Reduce Global Warming, by Robert Reich: The best idea I’ve heard so far to deal with global warming ... 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.

I mean, it’s our atmosphere, right? Think of a national park or a national forest. No company is simply allowed to take what they want from it, free of charge. Why should the atmosphere be any different?

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.

Message to presidential candidates: American voters will buy this one. And it’s good policy.

Update: If you are wondering how this differs from cap-and-trade where the tradeable permits are auctioned, see John Whitehead at Environmental Economics.