A reader explains:

One of the key differences between Krugman and Hansen is where the price on carbon is attached. Often when talking about cap-and-trade, the pricing of carbon is attached somewhere in the middle of the stream, not at the extraction of fossil fuels and not at the emission point. Because the price is attached in the middle, the policy gets wrangled between interest groups.

What Hansen is talking about is upstream pricing, or at the point of harvesting fossil fuels. Pricing carbon this way greatly reduces the amount of interest groups involved in making the policy to coal, oil, and gas companies.

As both point out, the companies will pass on the price downstream ultimately to consumers, but think about the policy-making ramifications. Do you write a policy that basically involves every interest group on the planet (current cap-and-trade proposals) or do you write a policy that targets the fossil fuel industry, which is already pretty easy to pick on given, among other things, their ridiculous record profits. Cap and trade can also be made to work upstream, just as a carbon tax can be made for downstream. What Hansen and Krugman argue about is not only how to price carbon, but where, and the "where" has serious policy ramifications.

[This post's headline originally had Robert Hansen, the spy, not James Hansen, the scientist. Brain fart. Apologies.]