Is a market-based approach to climate policy desirable?

A uniform price for carbon is at the center of market-based approaches to climate policy. Actual climate policy, by contrast, has many sector-specific rules. This paper studies the desirability of the market-based approach using tools from the theory of taxation. It is found that a justification for the market-based approach can be given, it involves indifference with respect to the distributive consequences of climate policy, and it requires that a condition of proportional fiscal externalities is met. If these conditions are not met, a sector specific approach is preferable.