Carbon taxes or cap-and-trade?

I’m late commenting on your question: to compare carbon taxes vs cap-and-trade schemes. I too wish to understand which is the best policy. My quick comments:

Greg Mankiw posted the following question:

Compare the effects of a $25 carbon tax with a cap-and-trade system in which the cap is set so that the price of a carbon permit ends up at $25. Is the impact on carbon emissions different under the two systems? Is the impact on consumers different? Who wins and who loses with cap-and-trade compared to the tax?

I posted a brief comment, which I’ll repeat here, expanded slightly, in the hope of further reader comments:

[1] A carbon tax lends itself to a simple revenue-neutral implementation, where carbon tax revenues are directly offset $ for $ by cuts in other taxes. I would favor cuts in investment-inhibiting taxes [e.g., capital gains, dividends]. Others may favor cuts in regressive taxes such as payroll taxes [this was Al Gore’s recent testimony]. A carbon-tax-swap proposal seems much more politically feasible to me than either a pure carbon tax or cap-and-trade.

[2] The best carbon-pricing policy will assure that utility investment analysis produces unambiguous results that allow utility boards to act promptly on the price signal. E.g., invest in IGCC or other advanced coal-fired plant rather than initially cheaper dirty coal technology. Carbon taxes make that analysis very straightforward, while cap-and-trade does not.

[3] Cap-and-trade will be a highly complex system to administer. Thus it is likely to be favored by politicians for a number of reasons, including the new opportunity to reward special interests with a variety of special treatments [corruption].

[4] Personally, I find the ten-point summary of the advantages of the price-type vs. quantity-type signal by William Nordhaus compelling — in his Life After Kyoto: Alternative Approaches to Global Warming Policies [PDF].

I have a number of questions about carbon tax policy design. Two are:

[a] How to initiate a carbon tax scheme unilaterally? Or at least without the cooperation of all major competitors. E.g., how can Australia get started without waiting for interminable negotiations with other OECD countries?

[b] How to deal with “border arbitrage” or any form of deviation which could motivate an enterprise to relocate to another country viewed to have a more favorable scheme?