In practice there are a couple of important differences between cap and trade and a pollution tax. One is that the two systems produce different types of uncertainty. If the government imposes a pollution tax, polluters know what price they will have to pay, but the government does not know how much pollution they will generate. If the government imposes a cap, it knows the amount of pollution, but polluters do not know what the price of emissions will be. Another important difference has to do with government revenue. A pollution tax is, well, a tax, which imposes costs on the private sector while generating revenue for the government. Cap and trade is a bit more complicated. If the government simply auctions off licenses and collects the revenue, then it is just like a tax. Cap and trade, however, often involves handing out licenses to existing players, so the potential revenue goes to industry instead of the government.

Politically speaking, doling out licenses to industry isn’t entirely bad, because it offers a way to partly compensate some of the groups whose interests would suffer if a serious climate-change policy were adopted. This can make passing legislation more feasible.

These political considerations probably explain why the solution to the acid-rain predicament took the form of cap and trade and why licenses to pollute were distributed free to power companies. It’s also worth noting that the Waxman-Markey bill, a cap-and-trade setup for greenhouse gases that starts by giving out many licenses to industry but puts up a growing number for auction in later years, was actually passed by the House of Representatives last year; it’s hard to imagine a broad-based emissions tax doing the same for many years.

That’s not to say that emission taxes are a complete nonstarter. Some senators have recently floated a proposal for a sort of hybrid solution, with cap and trade for some parts of the economy and carbon taxes for others — mainly oil and gas. The political logic seems to be that the oil industry thinks consumers won’t blame it for higher gas prices if those prices reflect an explicit tax.

In any case, experience suggests that market-based emission controls work. Our recent history with acid rain shows as much. The Clean Air Act of 1990 introduced a cap-and-trade system in which power plants could buy and sell the right to emit sulfur dioxide, leaving it up to individual companies to manage their own business within the new limits. Sure enough, over time sulfur-dioxide emissions from power plants were cut almost in half, at a much lower cost than even optimists expected; electricity prices fell instead of rising. Acid rain did not disappear as a problem, but it was significantly mitigated. The results, it would seem, demonstrated that we can deal with environmental problems when we have to.

So there we have it, right? The emission of carbon dioxide and other greenhouse gases is a classic negative externality — the “biggest market failure the world has ever seen,” in the words of Nicholas Stern, the author of a report on the subject for the British government. Textbook economics and real-world experience tell us that we should have policies to discourage activities that generate negative externalities and that it is generally best to rely on a market-based approach.

Climate of Doubt?
This is an article on climate economics, not climate science. But before we get to the economics, it’s worth establishing three things about the state of the scientific debate.

The first is that the planet is indeed warming. Weather fluctuates, and as a consequence it’s easy enough to point to an unusually warm year in the recent past, note that it’s cooler now and claim, “See, the planet is getting cooler, not warmer!” But if you look at the evidence the right way ­— taking averages over periods long enough to smooth out the fluctuations — the upward trend is unmistakable: each successive decade since the 1970s has been warmer than the one before.

Second, climate models predicted this well in advance, even getting the magnitude of the temperature rise roughly right. While it’s relatively easy to cook up an analysis that matches known data, it is much harder to create a model that accurately forecasts the future. So the fact that climate modelers more than 20 years ago successfully predicted the subsequent global warming gives them enormous credibility.

Paul Krugman is a Times columnist and winner of the 2008 Nobel Memorial Prize in Economic Science. His latest book is “The Return of Depression Economics and the Crisis of 2008.”