Feldstein vs. Nordhaus
If you want to reduce gasoline consumption or carbon emissions, should you use a tax or tradable rights? Martin Feldstein argues for tradable gasoline rights (TGR’s).
The government would decide how many gallons of gasoline should be consumed per year and would give out that total number of TGRs. In 2006, Americans will buy about 110 billion gallons of gasoline. To keep that total unchanged in 2007, the government would distribute 110 billion TGRs. To reduce total gasoline consumption by 5%, it would cut the number of TGRs to 104.5 billion.
William Nordhaus argues for a carbon tax.
if the curvature of the benefit function is small relative to the curvature of the cost function, then price-type regulation is more efficient; conversely, if the benefit functions are highly nonlinear while the cost functions are close to linear, then quantity-type regulation is more efficient.
While this issue has received little attention in the design of climate-change policies, the structure of the costs and damages in climate change gives a strong presumption to price-type approaches.
Feldstein’s article does not really specify a “benefit function” for curbing the use of gasoline. One gets the feeling that his main concern is to fend off fuel economy regulations, which are indeed exercises in moral vanity–they do little to reduce gasoline consumption but they do help to brand auto companies as villains.