Interesting.  How would a system like this deal with transportation? Through a gas tax? How would it impact efficiency?    

1 other (Cap v. Tax) point & 1 question:

Tax proponents often cite the price volatility of the a cap (EU Market), without mentioning the obvious fixes (100% auction, no offramps, no free permits, cap upstream). A steadily declining upstream cap, done right, would provide price stability.

 I've noticed this point made quite often: "Emission caps and performance standards are rarely if ever set at levels that represent true sustainability, and are generally biased toward extreme cost conservatism."  What makes you think a tax would be set at a level that represented true sustainability and not biased toward cost conservatism?  

I see a Cap (done right) and Tax are simply different sides of the same coin- one driving down supply with the other driving down demand. I'd prefer to drive the supply down and let the market set the price, primarily for political (not policy) reasons.  

For the electricity sector, how would the refund for wind/solar/hydro/nuclear be calculated in this system?  Perhaps Sweden already did this, but I'm feeling too lazy to check the references.  If you use ongoing emissions of CO2, then the allocation weight is infinite for "zero carbon" developments and the entire refund would be allocated to "zero carbon" developments.  In other words, zero carbon electricity would be directly subsidized by coal & natural gas.  I like this conclusion, but would utilities? Perhaps you could use an allocation weight based on the CO2 used to construct the plant amortized over the expected life, although this would be complicated, particularly for previously constructed plants.  Either way, this system would be similar to feed-in tarrifs paid for out of electricity revenue from coal/natural gas, but instead of tying the tarrif rate to cost, the rate would be tied to CO2 levels.

Re setb: "What makes you think a tax would be set at a level that represented true sustainability and not biased toward cost conservatism?"

I don't expect that it would. Probably nobody has a clue what tax rate - or what cap level - represents "true sustainability". But consider the following:

(1) The Swedish NOx program was intended to achieve a 35% reduction between 1990 and 1995, but in that time frame it actually achieved 60% reduction in specific emissions (and 50% reduction in the total - including demand growth). How much reduction do you think would have been achieved if cap-and-trade had been employed?

(2) The U.S. SO2 program is expected to achieve $122 billion in benefits in 2010, while annual costs are projected at just $3 billion - half of the estimated costs in 1990. What would you guess would have happened if SO2 emission prices had been maintained at their original expectation level?

(3) Whatever the merits of cap-and-trade, what would be preferable: cap-and-trade with or without a price floor?

Re bvenner: "For the electricity sector, how would the refund for wind/solar/hydro/nuclear be calculated in this system?"

Under a pure output-based system, the dollar-per-MWh refund would be the same for all energy sources, including renewables and fossil fuels. Renewables would benefit because they would pay little or no carbon tax, not because of any difference in the refund rate.