TAX WHAT YOU DON'T WANT:

Guess who wants a carbon tax? (Nina Easton, September 1, 2010, Fortune)

Inglis and Flake, two House members with impeccable conservative credentials, want to impose a carbon tax on the nation.

Surprised? Most people are. But scratch the surface at conservative think tanks and universities that house free-market economists, and it's not hard to find proponents of a carbon tax. Not as an industry directive from Washington, nor as a revenue grab by the feds. Conservative carbon-tax proposals are revenue neutral: The Inglis-Flake bill offsets its carbon tax with a cut in payroll taxes.

Instead, free-marketers view a carbon tax as a way to cover a public cost -- something economists call "negative externalities." In 2008, Harvard's Greg Mankiw, formerly chairman of George W. Bush's Council on Economic Advisers, wrote a paper extolling the virtues of what he called a "Pigovian tax," named for the British economist Arthur Pigou. Here's how the argument goes: When economic transactions impose a cost or a benefit on individuals who are not part of the transaction, "Adam Smith's invisible hand will fail to lead to an efficient outcome." Therefore, Pigou -- "sometime friend and sometime nemesis to his more famous colleague John Maynard Keynes," as Mankiw notes -- argued that individuals and institutions should be charged for the external costs they impose on others.

Mankiw cites a range of costs for oil use -- ranging from accidents, congestion, and insurance to global climate change and national security. Imposing a simple tax, in sharp contrast to a cap-and-trade system (in which the government sets limits on emissions), would account for these costs and "let the market sort it out," he told me. Mankiw favors offsetting a carbon tax by reducing levies with more distorted effects, like those for income and corporate taxes.