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RENEE MONTAGNE, host:

This is MORNING EDITION from NPR News. I'm Renee Montagne.

JOHN YDSTIE, host:

And I'm John Ydstie.

As we look for ways to attack global warming, there's an important tool Americans are forgetting to pull out of the toolbox: it's a carbon tax. That's the view of economist Greg Mankiw. He used to be an economic adviser to President Bush, so the idea of him supporting a tax - any tax - might be surprising. Mankiw never had any luck convincing the president to back the carbon tax, but he continues to plug the idea.

He joins us now from his home in Wellesley, Massachusetts. Welcome to the program.

Professor GREGORY MANKIW (Economics, Harvard University): Nice to be with you.

YDSTIE: First of all, tell us how a carbon tax would work and why it would be effective.

Prof. MANKIW: What the carbon tax would do is that we put a price on carbons. So if you want to release carbon into the atmosphere, you have to pay a tax. For example, an electricity company burns coal and emits carbon into the atmosphere by burning coal, it's going to have to pay a tax. And that'll provide an incentive to release less carbon.

YDSTIE: And…

Prof. MANKIW: And that would, eventually, of course, be passed onto consumers in a form of higher electricity prices. But at the same time, the carbon tax will give the government revenue that it can then turn around and recycle and give back to consumers. So the income hit or these higher prices will be offset to some extent by lower taxes in, say, their earning or other forms of income.

YDSTIE: Now, I presumed, you'd also tax carbon in the form of petroleum, gasoline, so you'd have higher taxes at the gasoline pump?

Prof. MANKIW: Absolutely. There's no question that gasoline prices would go up. And that would provide people an incentive to buy more fuel-efficient cars. To buy hybrids rather than traditional cars, to carpool, to live closer to work, to use public transportation, to make all sorts of decisions in order to reduce their carbon imprint.

YDSTIE: Of course, the big argument against most of these kinds of taxes is that they hurt the economy. Wouldn't a carbon tax make it more difficult for the U.S. to compete internationally?

Prof. MANKIW: Well, I think that's why if we do have a carbon tax, it really needs to be done internationally. And the ideal with the sort of a carbon tax is the same across countries so that they wouldn't provide an incentive for industries to migrate from one country to another, based on the level of the carbon tax.

YDSTIE: Mm-hmm. Many economists, including a lot of conservative economists, support this idea of a carbon tax. But most politicians support the idea of something called cap and trade, which would allow companies to reduce their pollution, to sell the right to pollute to other companies. Why won't that work?

Prof. MANKIW: Well, there's two ways of doing cap and trade. Cap and trade would limit the amount of carbon that went into the atmosphere. If you auctioned off the right to produce carbon under a cap and trade system, then something just like a carbon tax. The auction price of these emission permits would be, effectively, a tax on carbon.

On the other hand, if you give out to the existing companies the right to produce carbons, which is often what's done in these cap and trade systems, that is strictly worse than a carbon tax in a sense that they're still putting a price on carbon and you're still going to raise the price of petroleum products, electricity and so on, but the government's going to collect no revenues that it can then use and give back to consumers in the form of lower other taxes.

YDSTIE: Now, part of the problem you face is that you can't even really have a discussion of this option in the political arena because politicians - both Democrat and Republican - are so afraid to utter the words tax increase.

Prof. MANKIW: Absolutely. There's no question that, politically, tax is a four-letter word. But we have to really convince the voters that this is not an overall tax increase. It's really a tax shift. It's a shift away from the payroll or income taxes toward carbon taxes. It's not going to take more money out of their pocket and into the government coffers. It's going to be taking a different way.

And to be honest, if I thought we couldn't reduce other taxes, and we only have yet, another tax, I'd be against it too. But I think we can decide to change the structure of our tax system to rely less on taxes that provide dis-incentives for economic growth, like income taxes, payroll taxes, and more on taxes that provide the right incentives.

YDSTIE: Professor Gregory Mankiw is a former chairman of the White House Council of Economic Advisors under the current President Bush. He currently teaches at Harvard University. Thanks very much.

Prof. MANKIW: It's good talking to you.

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