The relative merits of cap-and-trade versus a carbon tax for pricing carbon have been discussed here before. One characteristic that was not mentioned, and which is a blow against cap-and-trade, has to do with incentives to go beyond the minimum. Specifically, when the government sets a cap and auctions permits, you can be pretty sure the actual level of emissions will not fall lower than the cap. If it did, the market price for permits would plummet and people would rush in to buy the right to pollute.
A carbon tax wouldn’t have this problem, since people would be paying for every tonne of emissions, regardless of where the whole country was relative to the target. Also, a cap-and-trade system could probably be designed in a way that eliminates or eliminates this problem. For instance, the government could mandate a price floor, below which point permits are automatically withdrawn from sale.
Personally, I think it is possible to design either system well. It would also be possible to use an alternative cap-and-dividend or fee-and-dividend system, with automatic recycling of revenues. The key thing is to put a price on carbon domestically, and do so in a way that can eventually be integrated with systems elsewhere. By itself, carbon pricing won’t be enough. The volume of coal and unconventional fossil fuels out there makes them too dangerous to allow continued growing use. Before carbon prices, I would be happier to see both developed and developing states adopt moratoriums on new coal-fired facilities, except perhaps those that actually capture and store the great majority of their greenhouse gas emissions.