The Wall Street Journal has a nice set of interviews with economists who discuss the advantages and disadvantages of taxing carbon emissions and a cap and trade market. Read more if you are interested in my opinion.
I favor using an auction to allocate permits to emit carbon and then letting firms trade. Using the auction gives the government funds to use to compensate people hurt by carbon emissions. The cap and trade market gives a price that measures the marginal cost of reducing emissions. The government can easily relax or tighten the emission quota by selling or buying permits if analysts conclude that the optimal amount of emissions changes.
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