If we want to reduce carbon emissions, should we cap the total and then allow trading, or should we impose a tax on all carbon emissions? Organizations and Markets looks at the economics. Here is the conclusion:
So the final score is: Permits get a moderate edge on political economy/public choice issues; taxes have a big advantage on institutional/governance issues; and taxes deliver a big can of whipass on traditional economic efficiency concerns. So conditional on accepting the weak case for CO2 emissions control, the Pigou people have a strong case against the cap-and-trade brigade. Maybe they should start making it.
One issue that is not covered here is the distribution between countries. From the point of view of developing countries, cap-and-trade (with equal per-capita emissions targets) presumably has a large advantage over taxing emissions, in the absence of a mechanism to redistribute the revenues from rich countries (which will collect the taxes) to poor countries (who bear most of the costs of adjustment to climate change).