Jim Roumasset, Professor of Economics, University of Hawaii:

Environmental Economics plus Rob Stavins' blogs provide substantial food for thought.  Some unresolved issues:

1.  Cap and trade has a major political advantage over carbon taxes. The political system is left to choose the percentages of free allocations and permits to be auctioned.  “The Wonderful Politics of Cap-and-Trade: A Closer Look at Waxman-Markey.”  Some exceptions/reservations:

a) Anything caps can do, block-rate tax schedules can emulate. If you want to "give away" 85% of the cap, set the intra-marginal tax rate at zero, up to 85% of 2005 emissions. For reasons of uncertainty, you can combine a two-tier tax system with an absolute ceiling on total emissions. This is equivalent to a cap-and-trade system with a minimum price and an allowance reserve  http://www.nber.org/papers/w14258.

b) Unfortunately the politics doesn't stop with the percentage of allocations to be auctioned. There are legitimate ambiguities about whether the caps should be production or consumption based and what leakage avoidance devices are WTO-compliant. Ambiguity plus politics predisposes a free-for-all over standards, subsidies, mandates, picked-winners and an indecipherable formula for who gets the free allocations. Any study that makes these more transparent will make an important contribution to the debate.

2. It is said that either system will not have adverse international-competitiveness effects because other costs "swamp" abatement costs. The logic doesn't go through. Comparative advantage is determined at the margin. And we can hardly expect empirical studies to be definitive, given the enormity of the challenge. Static comparative advantage is determined by the usual neoclassical reasons plus Krugmanian economies and transport costs. To that one would want to account for changes in each country’s produced, natural, human, and knowledge capital in order to determine dynamic comparative advantage.