Carbon tax versus cap-and-trade

Normally, I don’t go so policy-oriented on people, but I think that there is an important point to be made here. Today Energy and Commerce  Committee Chairman John Dingell wrote:

A carbon tax or fee has been endorsed by President Bush‘s former chief economic adviser, Greg Mankiw; Nobel Prize-winning conservative economist Gary Becker; the chief executive of the largest U.S. auto-dealer chain, Mike Jackson; and several environmental organizations. From Alan Greenspan to Greenpeace, many recognize its utility. …

I don’t expect to overcome ideological Republican opposition to all forms of taxation, but if CEOs, economists, environmentalists and citizens speak out, we could effect real change. I don’t pretend to speak for my party on this; I’m trying to speak to common sense and experience.

While I don’t want to agree with John Dingell on anything but Greg Mankiw makes an important point:

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.

In many ways, cap-and-trade is a policy-equivalent of sending tariffs to struggling businesses, something Democrats love. In addition, there is something deeply arbitrary about cap-and-trade. Right now, 5 EU member states are suing the EU because the caps are arbitrary:

Poland, Hungary, the Czech Republic, Slovakia and Estonia have all started legal action against pollution quotas imposed by the European Commission. The arguments they use are similar to those made by China and other emerging markets: that the strict limits will hurt their economic growth.

It seems to me that if you believe that environmental regulation is necessary, the least market distorting is a carbon tax. Now many (but perhaps not most) conservatives and Republicans will disagree with the if clause in that statement. But, surely legislation is coming on this in the next Congress, especially with a Democrat president. Surely we need a position that makes sense before then? And an idea like replacing a corporate tax with a carbon tax could get some Republican support?