There's a nice "interview" on the Technology Review web site herewith Gilbert Metcalf, an economist at Tufts University. Dr. Metcalf advocates for a carbon tax on fossil fuels.
I happen to be a big fan of carbon tax, also. However, my opinion is largely intuitive, while Dr. Metcalf is able to explain with appropriate economic theory the strengths and weaknesses of a carbon tax, especially in contrast with cap-and-trade system.
More, below.
The majority of Metcalf's arguments have to do with the simplicity of the carbon tax, its transparency, and predictability for industry. For example:
TR: Why a carbon tax, rather than a cap-and-trade program?
GM: As businesses are planning long-lived investments, power plants that last 50, 60 years or longer, they need to know what price they are going to face to make these plants competitive. With a tax, we know what that price is. It's the tax rate. With cap-and-trade, we have much less certainty about what the price will be. For example, we're seeing carbon prices falling [in the E.U.] because the demand for energy is falling as the economy slows down.
TR: Beyond allowing for a more predictable price, why is a carbon tax better than a cap-and-trade scheme?
GM: It's much simpler. From both an efficiency and an administrative perspective, a carbon tax is a better approach. I think there is a clear consensus on that among economists.
Up until now, I'd always considered that a carbon tax will be paid by the consumer, for example on your monthly power bill, or for gasoline at the pump. That would be a pretty complex system. Allowing for renewables in the mix would make the system that much more complicated. For example: what if 60% of my power is generated from hydro? Someone has to figure out how to adjust my monthly bill.
But Metcalf's idea is much simpler. Simply tax fossil fuels at the source. Tax coal at the mine, natural gas at the processers, and tax petroleum at the refinery. That's a pretty system, for sure. It also seems politically to be the most difficult to achieve, since it would be fought tooth and nail by those specific industries.
More details about Metcalf's proposal are on a PDF here from a talk he gave earlier this month. On page 7, he shows that the entire carbon tax can be collected at a total of 2172 sites in the US. That would be pretty efficient!
There are plenty of complications. How to handle sequestered CO2 from combustion of fossil fuels? His answer: give a tax credit. How to prevent such a tax from impacting disproportionately economically disadvantaged? Offer some sore of earned income tax credit.
Metcalf's idea is to make the carbon tax revenue neutral for the government, to avoid the argument about government size and waste. Here, I disagree; setting aside some percentage of that revenue explicitly for research and development of renewables seems important, to me.
A very serious pitfall is the impact on domestic manufacturing. If goods manufactured in the US have to compete in the marketplace with goods oversees, the domestic manufacturers might potentially be at a serious disadvantage. It doesn't do the world any good if we merely shift our CO2 emissions from one part of the world to another. I couldn't find any reference to how Metcalf proposes to deal with this issue. This is clearly an important one, since it could kill whatever manufacturing we've got left in the country, without solving any environmental problems at all.