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).