I thought another argument used by the cap and traders was the clean development mechanism in which an entity (corporation or nation?) sponsors a reduction in GHG emissions in a developing country as a means to meet their emission allowance. Could a similar mechanism work under a carbon tax?

There is something that most economists and analysts fail to acknowledge. The end goal is ABSOLUTE reductions in C02 emitted. Any policies that result in greater efficiency or cost-shifting will NOT result in reduced emissions in the long run.

Think it all the way through. My wife and I were spending $100/month to heat our home to 70º F. We got ourselves a brand spanking new high-efficiency furnace that heats our home to 70º F for $65/month. That's not what we do though. We heat our home to 73º F for $100/month. No CO2 offset.

High mileage cars just lead to longer commutes and more long distance trips--the percentage of income spent on travel will inevitably remain the same. You can argue that a carbon tax will raise the cost of emitting--but if it is accompanied by offsetting tax breaks elsewhere, and income stays the same, one way or the other, the same amount of CO2 will get emitted. Income gets spent--and if there are no absolute limits on CO2 emission, one way or the other the spending of that income will cause CO2 to get emitted.

Cap and trade on the other hand, properly implemented, WILL result in an absolute reduction. X tons of coal, Y barrels of oil, and Z mcf of natural gas are avaliable for sale this year. Bid on your slice of that pie--and next year the pie shrinks 5%. Now you HAVE to start getting your energy from wind, solar, nuclear, biomass, and hydro-electric--because you CAN'T get it from fossil carbon. Real investments have to be made, real changes in behavior have to occur--and probably, in the short term, real losses of income will occur.

Cap and trade is easier to administer, too. Coal, oil and natural gas enter distribution at a limited number of points in the economy, with a limited number of buyers and sellers. Resellers will be of no consequence. These are commodities sold by weight or volume and easily measured. A market for permits to SELL fossil carbon is easily set up and easily monitored for cheating, too.

A carbon tax will not work, will be an administrative nightmare, and will not cause structural change. Cap and trade will.

Hubris, distrust of markets and a fervent desire for political camouflage are the three legs supporting the case for cap-and-trade.

The hubris resides in the serene faith that regulating the carbon-equivalent emissions of the entire American economy is an easy matter of "proper implementation." Distrust of markets -- in particular, of the oft-demonstrated principle that raising the price of a good or service tends to make people use less of it -- is not always accompanied by the yearning for government control, for government commands and public obedience expressed by the poster just upthread. It's clear enough, though, from the argument that carbon taxes mean more regulation and complexity (never mind that for the most part they represent simple increases in the taxes we already pay) while cap-and-trade would be a breeze by comparison.

The desire for political camouflage is at least as important as the other two legs. Supporters of cap-and-trade in the administration and Congress want to increase energy prices; they just don't want to be blamed for it. They want to be able to point to a system, an entity, a faceless bureaucracy when their constituents come to them with complaints about $4/gallon gas -- more than anything, they want to be able to say that higher energy prices aren't their fault.

A natural impulse, especially given the state of Congress these days, but camouflage only works if it disguises what one is trying to do. Cap-and-trade won't. The issue is between raising energy prices through taxation before global energy markets do it for us, and holding on to cheap energy policies until the world won't let us do it anymore. Advocates of the second course have inertia and public sentiment on their side. What cap-and-trade gives them is a third, crucial political weapon -- it lets them charge their opponents with misleading the American people about their intentions. This charge will be widely believed, because it happens to be true.

No one, not even Barack Obama, is clever enough to make necessary changes in public policy while never trying to persuade the public that an unpopular idea is true. Cap-and-trade advocates think that a lot of happy talk about mandatory reductions and certain limits will get them off the hook with the public for wanting Americans to pay a lot more for energy. American politics will prove them wrong.

You have missed the point:
And then anybody who can produce stuff using less fossil fuel can sell it cheaper. If you get tax breaks and you have the chance to spend the same money to get more stuff that use less fossil fuel instead of fewer stuff that uses more, won't you do that?

When you get to buy more stuff, the amount of CO2 goes up, unless there is a hard cap. My furnace is much more efficient, it saves me money, which I then spend on keeping the temperature in my house higher.

Let's say, through efficency and alternative fuels, that we reduce the cost of food, transportation, and home energy use by 20%. How do you think people will spend those savings? Will they fly to Disneyland? Drive to the Grand Canyon? One way or another, they will spend--and total CO2 emitted goes up--perhaps not as much as it would without the changes--but it still goes up. We are after ABSOLUTE reductions in emissions, not slow downs in the rate of increase!

I want the market to do the work, not regulation. An open dutch auction gets held monthly for 1/12 of the year's fossil carbon production and importation quota. Bid what you think it's worth to you. Highest bidder gets as much of the quota as they want. Others can buy leftovers at that bid--no takers, then the next highest bidder takes their slice, and so on. Dutch auctions are VERY economically efficient allocators.

All sorts of market-driven innovation goes on afterwards. producers are given enormous incentive to produce their fossil carbon with the smallest input possible. Alternative energy gets an enormous boost because it exists outside the limits--exceeding which will mean bidding on the open market for a scarce commodity. Conservation becomes an ongoing concern--because there is a certainty that next year's quota will be going DOWN. There will be immense innovation and desire for change.

Any TAX is going to run into incredible right-wing vitriol. Any attempt to INCREASE it will have NO political friends. The gas tax hasn't gone anywhere in who-knows-how-long. A cap-and-trade, on the other hand can be set up ONCE with known parameters. Those who adapt quickest will become politcal friends with those ensuring it doesn't get watered down or monkeyed with--they will have a competitive stake in maintenance of the cap-and-trade's limits and goals. Carbon taxes will never have that.

The dutch auction for fossil carbon production and importation quotas is about as transparent a process as you can get. The same cannot be said for the tax code!

Something else to consider. Hypothetically, let's impose a carbon tax that doubles the cost of fossil carbon. What happens? Initially there is sticker shock. Then those sectors and firms that have pricing power inflate their prices to cover the expense. Demand for fossil carbon drops--so does the price. Somewhere, at less that double the initial price, equilibrium is reached. But over the long run, inflation sets in. Eventually, wages and prices across the economy deal with the new carbon price -- BY ADJUSTING EVERYTHING ELSE upward. Think about what the gas tax is in real tems, after inflation. It is contantly being whittled away. A carbon tax will face that same problem.

Moreover, if a significant portion of demand gets substituted, fossil carbon's prices will DROP. If every vehicle in the US becomes a plug-in electric, do you want to guess at the price of oil? $30/bbl? $20/bbl? Any economist who has looked at very long term commodities will tell you they NEVER get exhausted--they get replaced. We didn't run out of whales or whale-oil. Those commodities didn't run out. They became worthless BEFORE they ran out--because petroleum was better and cheaper. A tipping point arrived.

The political will to impose a carbon tax and march it upward in the face of falling fossil carbon prices until the tipping point is reached will be virtually impossible to sustain in the 24 hr news cycle and the permanent election campaign environment today. A cap-and-trade can be a one-time politcal enterprise, done correctly.

Moreover, some egghead will have to decide, repeatedly, how high to set the carbon tax. Look at how well that has work with interest rates under Greenspan, Bernanke et al. Let the market decide it. Under a cap-and-trade, the price of fossil carbon could even FALL as it is being phased out, if efficiency and substitution take hold strongly and quickly enough. That will almost certainly not happen by design with a carbon tax.

Mankiw's 10 principles of economics, translated for the uninitiated.

(Youtube video)

The furnace analogy - the assumption that energy use won't go down with more efficient climate control works only to a point. I won't be raising the temp in my house to 80, but as the population continues to grow, we will be able to support more people on the same level of energy output.

I find it interesting that all your comments assume this is an either/or proposition. From my reading, scientists admit that all human activity currently produces only 3.6% of global CO2 emissions. Cynics like me see cap&trade, and carbon taxes as both a power and money grab by governments acting under the cover of environmental political correctness.

The economic impact of a cap & trade system with a firm carbon cap has not been discussed here.
How do we maintain economic stability in the absence of economic growth? How do we maintain global competitiveness against countries that leverage our self imposed limits on business to undercut the prices of our products worldwide? As recently discussed in another FP article, governments around the world have been actively supporting their fossil fuel energy companies, and buying up control of most of the worlds supplies while the US government is actively demonizing producers, strengthening barriers to exploration, production, and refining, leaving only 12% of current reserves aqvailable to private producers. Alternative sources will not be able to supply our needs for many decades, yet we are backing ourselves into an untenable corner. Environmentalists may see a lack of supply as a positive but we know it will actually lead to destabilization.
How do we prevent existing enterprises from monopolizing existing co2 caps and using them as barriers to competition?
Will new businesses with carbon emissions, like the local dry cleaners, restaurant, or manufacturing plant, suddenly be prohibited by over zealous politicians using CO2 as political cover for no-growth policies?

All of these are schemes designed to ARTIFICALLY raise energy costs for politically incorrect fuels. Probably most importantly, these energy taxes transfer massive levels of income and power from the private sector to the public sector. As a society founded on the basis of limited, and citizen conntrolled government, what will be the long term impact on the balance of power between citizens and governments?

The words “Green” and “Global warming” are psychologically front loaded that later hatches the economic body that feeds on our freedoms. The earths temperature fluctuates similar to are own bodies and planets in our solar system (with no humans inhabitant). I believe its an erroneous belief (that uses volume over the facts) that attempts to create demand from nothing and does nothing more than imprisons the society mind set that seems to spark socialism, feudalism and centralized planning that makes the people invisible and has a history of revolution and collapse. It uses to be in the name of the masses (people) now it in the name of the planet: psychological economics. Develop the psychology (the mind set) then set the economics around it, cap and trade our freedom (individual power) away. I understand the psychology can dictate economic but do we need to add an extra step and dictate psychology. Isn’t this just taking the productive goose (America) that is laying golden egg and making them green (turning something in to nothing so the other non golden egg producing geese are equal)?