As economists see it, the nation is giving a massive implicit subsidy
to the users of fossil fuels, who fill the air with carbon dioxide, imposing real costs on society, without paying for the privilege. Make users pay for the carbon dioxide they emit and they will waste less energy, while investment will flow into low-carbon technologies. The nation would obtain emissions cuts at a minimum cost to the economy.
This is Economics 101, but Republicans have largely ceded the free-market arena to Democrats such as Mr. Van Hollen. His proposal would put a limit on the country’s greenhouse-gas emissions, a cap that would decline each year. Beneath that cap, companies would have to buy permits for the emissions their fuels produce. The buying and selling of permits would set a market price for carbon dioxide. The government would rebate all of the revenue from selling permits back to anyone with a Social Security number, more than offsetting
any rise in consumer prices for 80 percent of Americans. Most upper-income people, who use more energy, and government, which would get no rebate, would pay more under the plan.
Behind the plan’s elegance are some inevitable complications. Mr. Van Hollen would slap a border charge on goods that come from countries that lack comparable anti-emissions policies. That will be hard to pull off efficiently. Officials will have to calculate the carbon footprint of various goods from various points of origin, and other countries will accuse the United States of protectionism. Yet any carbon pricing plan will have to include some trade adjustment. Otherwise U.S. industry will be disadvantaged.
Mr. Van Hollen’s plan also faces political challenges. Lawmakers will be tempted to give away pollution permits to interests they favor, shattering the equity and efficiency of the policy. This is among the reasons we have preferred enacting a carbon tax. It would be less vulnerable to political gaming, and its revenue also could be rebated back to consumers or recycled back through cuts in other taxes. But both approaches have strengths.