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The Oil Price As A Dry Run For A Carbon Tax

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by Felix Salmon
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Sep 18 2007 12:00am EDT

The Oil Price as a Dry Run for a Carbon Tax

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).

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