I posted recently about William Nordhaus’ contention that anyone who proposed tackling the problem of climate change without imposing a carbon price clearly wasn’t serious about the whole thing. And as anyone with at least a casual acquaintance with the topic will know there are basically two ways in which such a carbon price can be imposed: A carbon tax under which the emission of ton of carbon is penalized through the tax system or a cap-and-trade system under which you set a limit on emissions, give out rights to emit just this amount and then let the market work its magic in determining the price at which this is achieved.
There is an enormous amount of literature on which of these two systems will likely yield better results (and what exactly “better” means). If – like me – you have no interest in delving into this literature too deeply but would still like to be able to debate the fine points of various variations on the basic cap-and-trade system at cocktail parties, you may want to have a look at Cap-and-trade through musical chairs (via The Bayesian Heresy). Get your information through an analogy everyone who has ever been to a 4-year old’s birthday party will understand instead of the dry, jargon-laden prose that us economists are usually known for.