Sunday, January 6, 2008

Democratic Candidates Debate on Carbon Tax

Mankiw comments on the Democratic Candidates Debate in The Pigou Club watches the debates:
"...For the passages I put in bold, Bill Richardson and Barack Obama deserve special commendation, for opposite reasons. As a former energy secretary during the Clinton administration, Richardson has presumably studied these issues. But here he demonstrates extraordinary ignorance (or perhaps extraordinary disingenuousness) about the economic impact of cap-and-trade systems. By contrast, Obama shows extraordinary clarity and honesty about the effects of the policy he is proposing.

The economics is straightforward and uncontroversial. Both carbon taxes and cap-and-trade systems put a price on carbon, raising the cost of producing carbon-intensive products such as gasoline and electricity. In both cases, this cost will be passed on to consumers. The only question is whether the government raises revenue through a carbon tax or auction that can be used to reduce other taxes and help offset the adverse income effect.

In case you are curious, Hillary Clinton is the next speaker on this question, but she does not weigh in on the particular issue of carbon taxes vs cap-and-trade. Instead, she offers the typical vacuous blather about mandating utility companies to help make us all more energy efficient. I think of this as "magic wand" economics. Like your fairy god mother, the President can wave a magic wand and make your problems go away."

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