The Oil Price as a Dry Run for a Carbon Tax

Greg Mankiw must be happy: Oil

just hit a new high of $81.24 a barrel this morning. This is a Pigovian

tax with the proceeds going to Saudi Arabia rather than the US Treasury, but

if Mankiw is right that a carbon tax would reduce carbon emissions, then these

high oil prices should be instrumental in reducing oil consumption, carbon emissions,

and, ultimately, the pace of global warming.

On the other hand, if demand for energy does not fall appreciably

as a result of these stratospheric prices, then the whole basis of a carbon

tax is disproved, and Mankiw will have to throw his weight behind a cap-and-trade

system (with auctioned rather than allocated emissions rights).

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