- A straight Pigouvian tax: a fixed tax rate on carbon dioxide emissions. This establishes price certainty and allows the government to mitigate global warming in a revenue-neutral fashion, a sort of "Green Tax Shift" from taxing "goods" such as income to taxing "bads" such as CO2 emission.
- Cap and auction. This is the "Cap and Trade" proposal favored by Barack Obama. It is essentially a tax scheme, wherein the quantity of emissions is fixed and the price is set by demand when a year's permits are sold at auction. It allows permits to be bought and traded, but doesn't incorporate many of the advantages, of an emissions market as it doesn't establish a persistent property right.
- Cap and auction with allocation. This is the system used successfully to mitigate acid rain; permits for emission in or after a year are sold at auction, but some permits are allocated each year to emitters in business when the permit system was created. This thus doesn't so drastically shift taxes to a single activity as do the Pigouvian tax and cap-and-auction--it's less of a one-time shock. When emitters are largely fixed, large-scale operations, it makes sense, but in a situation we want to be dynamic, it establishes a permanently favored class of permit-receivers. Those who can make early cheap reductions in carbon emissions--probably cement makers and transoceanic shippers, and possibly the fertilizer industry--receive what amounts to a permanent subsidy. In practice this has resulted in some Coase-like bargaining, but since the best one can do is stop one-time emissions, buying and retiring permits is a Sisyphean means to reduction.
- Cap and trade by establishment of a persistent "property right" to emit. Here the permits that are allocated are not the right to emit once but rather a right to emit a certain quantity per fiscal year. This has been implemented in some of the fisheries management tradeable permits schemes, but has been the subject of far less "straight economics" research than the other three. Its advantages are that it is less vulnerable to year-to-year government tampering, it allows for Coaseian bargaining, and that it makes almost obvious an "Epsteinesque" or "Kaldor-Hicks" framework for reduction of emissions by government: the government buys and retires permits. Unlike the first three, persistent emissions rights do not establish a revenue source for the government, but a small property tax on the permits could be established, to pay for program administration and emissions reductions through permit.
A savvy reader will note that the the first two are limiting cases of an infinite family of policies trading price and quantity certainty. Physicists and mathematicians, familiar with perturbation theory, will probably see this more readily than economists.
None of these could be effective if implemented by Arizona alone. All are intellectually respectable, and all are certainly better than the current state of affairs (unlimited dumping). I prefer the fourth option, which has not been given sufficient attention, but I understand and appreciate why others may prefer one of the other three.
Today in the Tucson Citizen, Robert Robb joins the many savvy libertarians--Greg Mankiw, Megan McArdle, Gary Becker, Brink Lindsey, Brian Holtz, and Richard Posner, to name a few--supporting a carbon tax. He appreciates the tradeoffs involved and is spot-on about the problem with Obama's proposal to use cap-and-auction revenues to offset price changes.
Many free-marketeers are (what should be embarrassingly) unfamiliar with the solutions to global warming that are actually on the table. Not all are as bad as the Goldwater Institute's Byron Scholmach, who, if he's still worried about his ability to breathe should try pulling his head out of his ass, but most nevertheless would rather put made-up tyrannical nonsense in the mouths of the constructive than put forth constructive solutions themselves. If you find yourself among the belatedly clueless, Robb's column is a good place to learn how market liberals (the sort with their heads in the right places) are thinking about global warming.