Introduction

David Weisbach addresses one of the most widely debated issues among policy analysts in the climate policy debate: Is the best way to reduce greenhouse gas emissions to impose an excise tax on carbon emissions (carbon tax) or to allocate a fixed amount of emission permits, which firms may then be permitted to trade (tradable permits)? This debate occurs within a broad consensus among economists that free market mechanisms that allow firms and households faced with higher energy prices to choose how best to reduce emissions are superior to alternative approaches. These alternatives include command and control regulations that mandate how emissions should be reduced and subsidies that encourage the use of specified investments in renewable energy and conservation.

This academic debate on how best to use a market mechanism to reduce emissions is occurring within a larger political debate on whether to enact any form of market-based limits on carbon emissions in the United States. Politicians and commentators opposed to overall limits on carbon emissions are refusing to accept the broad scientific consensus that man-made carbon emissions are causing global climate change, and public opinion polls also reflect growing skepticism of the scientific consensus and the need for action (Pew Research 2009). The U.S. House of Representatives enacted legislation in 2009 establishing a system of tradable permits, but the legislation faces uncertain prospects in the U.S. Senate.