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This paper may be a bit out of date, but I found the in-depth discussion of the challenges facing a cap & trade system [PDF] very illuminating:

This monograph explores the political, economic, and technical issues that policy makers must address prior to creating a complete emission trading system. It argues that, when viewed in totality, the hurdles to be cleared are so daunting that a sensible emission trading system is infeasible in the foreseeable future. It also argues that the diplomats who crafted the Kyoto Protocol have painted themselves into a corner. In Kyoto they achieved agreement by setting emission targets that would be politically impossible to implement without an emission trading system; yet they deferred discussion of all the details about how the system would operate. During their first high-level meeting after Kyoto—held in November 1998 in Buenos Aires—diplomats set a hopelessly optimistic timetable for resolving by late 2000 all 152 “elements” left outstanding in Kyoto. Individually, nearly every element—such as “compliance,” “reporting,” and “independent certification and verification”—is difficult to settle; together, the task is impossible.

…With the clock ticking towards 2008, and the fate of the Kyoto Protocol hanging in the balance, what should be done? Should political leaders soldier on, ratify the protocol, and hope for the best? Should they retain the targets and trading architecture that they created in Kyoto but stretch out the timetables to make it easier to comply? Or should they use Kyoto’s troubles as an opportunity to construct a different framework for slowing global warming?

Most governments plan to soldier on, but that option has the least to recommend it because it forces countries to select among three dead ends...

…These reasons explain why governments are now following the worst strategy—implementing all three of the Kyoto-saving devices simultaneously.

The problem with trading is that it requires solving a nearly impossible problem before trading can begin: governments must allocate the emission permits. Because no nation knows its future level of emissions or the cost of controlling emissions, no nation will know how many permits it will need. Diplomats, properly trained to protect national interests, will seek allocations based on a worst-case perspective. They will imagine scenarios where their nation’s future emissions and costs of control are much higher than expected. Each will demand a large share of the total number of permits and feel harmed by the share awarded to other countries. The difficulty of allocating benefits and burdens is hardly new to international politics; allocation will confound any collective effort to slow global warming. But emission trading makes solving the allocation problem much harder—chapter 2 explores the three reasons why.

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