Carbon permits and taxation

In the 1990s cap-and-trade, the idea of reducing carbon dioxide emissions by auctioning off a set number of pollution permits, which could then lead be traded in a market, was the beginning of the green policy. A similar approach to sulphur dioxide emissions, introduced under the 1990 Clean Air Act, was credited with having helped solve acid-rain problems fast and cheaply. It's great advantage was that it hardly looked like a tax at all, though it would bring in a lot of money.

Welcome to the world of today, global warming concerns and too much GHG emissions. Yet the ability to raise money from industry is not so attractive in a downturn. Market mechanisms have lost their appeal as a result of the financial crisis. More generally, climate is not something the public seems to feel strongly about at the moment, partly because of the recessions and partly because they have worries about the science.
We however, still have hope for the carbon credit market and carbon taxation.

April 13, 2010, Bloomberg reported that the U.S. Northeast's cap-and-trade program for power plants will offer 42.8 million carbon dioxide permits for sale at it's eighth auction, to be help June 9, 2010. The minimum bid for each permit will be $1.86, unchanged from earlier auctions, stated by the Greenhouse Gas Initiative. Each permit gives a plant the right to emit 1 ton of carbon dioxide. Permits for December delivery fell 3 cents today, or 1.4 %, to $2.10 each on the Chicago Climate Futures Exchange.
The June auction will offer 40.7 million permits for the program's first phase which began in 2009 and goes to 2011. There will be a separate offering of 2.14 million permits from the program's 2012-2014 period. The regional trading program which aims to limit the carbon dioxide produced by power plants from Maryland to Maine, has raised $582 million from quarterly permit auctions since Sept 2008.

This is exactly the kind of thing negative externalities need: a market for pollution. If a cap-and-trade system for carbon is to be maximally effective, the permits should be sold rather than handed out, and fluctuations in the permit price over time should be limited. Basically, the cap-and-trade system should be designed to resemble a carbon tax. For those interested I would suggest you read up on B.C's Climate Action Plan. Specifically, what we find exciting is the revenue-neutral aspect of B.C's carbon tax.
From an economic efficiency perspective, the price of carbon emissions should be passed on to consumers in the form of higher energy prices, so that consumers can make optimal decisions about energy consumption. Consumers should be compensated for these higher prices by way of cuts in income or payroll taxes. Those tax cuts would be financed by the revenue generated from auctions of carbon rights (or, carbon taxation). None of the carbon revenue would be used for expenditure programs.