THE economic approach to global warming is relatively
straightforward. The emission of greenhouse gases generates a
negative spillover—global warming—that harms others. Someone
driving a car emits carbon dioxide into the atmosphere which
contributes to climate change, but because most of the cost of
the car's contribution to warming will be felt by people other
than the driver, he has an incentive to drive too much.
Aggregate that decision to emit too much across all of the
world's population, and you get a serious economic problem.
Luckily, there is a solution. By taxing the emission of
greenhouse gases, one can align private and public costs. The
cost of the driver's emissions will be "internalised", he'll
drive less, emissions will fall, and warming will slow. All that
remains is to tot up an estimate of the "social cost of carbon"
and convert that into an optimal tax rate. And in fact, many
models reckon the tax need not be too high, as it makes sense to
accommodate quite a lot of warming. The costs of cl