It has been a bit of a mantra on some bulletin boards that "Green Taxes" don't work. A report from the Irish Times has something interesting on that - Look at the number of Petrol driven cars in the top 10 new car list from 2008 V's 2009.

I think Pigovian taxes/carbon taxes are better than carbon trading. Speaking of within a market economy here.

In a market economy it would be predictable that businesses would try to avoid the "polluter pays principle" by shifting the burden of the costs for their polluting activities to consumers and mainly in a regressive manner on poorer consumers. So pollution taxes should be linked to cuts in regressive taxes.

http://en.wikipedia.org/wiki/Pigovian_tax


However the assumption is that with carbon taxes, quantities produced plus cost of externalities will tend toward a socially optimal level.

But the economist and environmentalist, Robin Hahnel (who teaches ecological economics at American University) from "Economic Justice and Democracy: From Competition to Cooperation" challenges this,

"more and more economists outside the mainstream are challenging this assumption, and a growing number of skeptics now dare to suggest that externalities are prevalent, and often substantial. Or, as E.K. Hunt put it externalities are the rule rather than the exception, and therefore markets often work as if they were guided by a "malevolent invisible foot" that keeps kicking us to produce more of some things, and less of others than is socially efficient."


Unfortunately Pigovian taxes in a market economy, along with associated corrective measures advanced by market economists, fall far short of adequately or fairly addressing externalities like carbon.

Again Hahnel argues such methods are incapable of attaining accurate assessments of social costs:

"Markets corrected by pollution taxes only lead to the efficient amount of pollution and satisfy the polluter pays principle if the taxes are set equal to the magnitude of the damage victims suffer. But because markets are not incentive compatible for polluters and pollution victims, markets provide no reliable way to estimate the magnitudes of efficient taxes for pollutants.

Ambiguity over who has the property right, polluters or pollution victims, free rider problems among multiple victims, and the transaction costs of forming and maintaining an effective coalition of pollution victims, each of whom is affected to a small but unequal degree, all combine to render market systems incapable of eliciting accurate information from pollution victims about the damages they suffer, or acting upon that information even if it were known." *

*
Protecting the Environment in a Participatory Economy

by Robin Hahnel
http://www.greens.org/s-r/34/34-18.html