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Condos With Embedded Puts   Should CFOs be Economic Pundits?
Apr 24 2008 9:52AM EDT

Do People Drive Less When There's a Carbon Tax?

Peter Zimonjic makes an important point today: that a carbon tax, in itself, and over the short-to-medium term, will have very little effect on gasoline consumption.

What Zimonjic doesn't mention is that this is no reason not to implement a carbon tax. For one thing, a carbon tax affects non-gasoline sources of carbon emissions, and many of them can be reduced much more easily than gasoline consumption. And for another, high gas prices do actually bring down consumption in the long term: maybe not a lot, but a glance at Europe shows you a lot of people with much smaller cars, and downsizing one's car is one of the best ways of increasing one's fuel mileage. Obviously replacing gas-guzzlers with smaller models is a very long-term project.

Zimonjic also doesn't mention that this is another reason in favor of a cap-and-trade system. If you want to be sure of reducing carbon emissions, the only way to do that is to cap them. A carbon tax, in the first instance, would probably be set too low to have much effect on anything.

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