1)Price volatility - the problem is that price volatility is more extreme under trading than under a carbon tax and knowing that prices may vary down as well as up lowers the incentive to innovate.

2)Reducing pollution, saving energy, and creating renewable energy tend to be cheaper than anticipated. A cap tends to encourage finding these cheapest methods and just meeting the cap exactly. A carbon tax encourages overshoot, reducing usage more than the minimum of the cap. If we knew exactly the "right" price this would not be so, in the presence of imperfect knowledge it is well documented.  Actually market based means in general tend to encourage less innovation then more conventional regulation. For example in Sulfur trading to reduce acid rain the U.S. reduced sulfur by less than European Command & control methods (including European nations such Belgium that were not caught in the post Soviet collapse).

3) Dynamic efficiency. Innovation comes later under cap & trade, meaning innovation is deployed with less time to mature. Many reasons for this, but lets look at one. A business looks at the very low price of credits under the initial cap assumes other people will continue to innovate and keep those prices low, thus plans on buying credits rather than making changes. Everyone else makes the same plan.

Imagine technology x, not needed under the first phase of the cap, absolutely the best alternative when the second phase. So where under a carbon tax maybe one in 50 businesses would deploy technology x, only one in 200 businesses does. When the cap is lowered and suddenly 1 in 5 businesses need to deploy technology x, it has not been tested and debugged in the real world, improvements have not been made, costs have not been lowered. Total cost for technology x is HIGHER under the cap & trade than under the carbon tax. Innovation (if you include deployment and maturation) has been less. (Of course under a cap & trade low demand might cause technology x to fail entirely, leaving people stuck with inferior alternatives; even the development phase can fail.)

If you want some examples of this, look at the RECLAIM mess in Los Angeles, where a trading system failed to meet the target. Cheap credits were available in the first phase. So everyone assumed they would be in the second. Eventually RECLAIM failed to meet its target; industry was given an extension and Command & Control regulations were put in place to supplment the trading system.  

4)Transparency - in the reclaim system there was a fair amount of fraud, as there is in the CDM system today. Trading institutes levels of complexity that don't exist in a carbon tax or auctioned permit system - making fraud harder to spot and harder to prove.

Bottom line. Carbon taxes and trading are only identical in economics 101. People trying to make real world decisions have to go beyond the baby step assumptions of freshman economics.

I do thank you for responding.  Bear with me now as I offer some alternative perspective to your points.

1. There are ways to reduce price volatility in C&T.  Take for example the proposal put forth a few weeks ago that created a framework in which a C&T scheme would allow participants to bank & borrow carbon credits, as well as trade them.  The banking mechanism reduces wild price volatility, without creating a stagnant carbon price.  Also note, a little volatility in prices is actually a good thing.

2.  A carbon tax only encourages overshoot when the marginal cost of innovation is less than the marginal cost of paying the tax.  In fact, once the marginal costs are equal, or the tax is less expensive, the participants no longer have an incentive to innovate.  Instead, they just pay the tax.  On the other hand, the profit motive created by the cap-and-trade mechanism can continue to create incentives.  Someone will always be looking for the cheaper, better (more efficient) way to cut carbon.  Someone else will always be looking for the cheapest way to meet regulatory standards.  They can both benefit from exchange.  

Actually market based means in general tend to encourage less innovation then more conventional regulation.</quoteblock>

If the conventional regulation you're referring to is technology standards, then this is false.  There is no innovation under technology standards.  Bureaucrats decide where and how emissions are reduced, often with no regard for costs.  
I'm guessing you have a certain picture in your head of what "innovation" - probably some technological breakthrough that either increases efficiency or becomes a substitute for an older technology.  The thing is this is only technological innovation - there are other types.  

For example, whereas a cap-and-trade scheme could potentially spark eco-entrepreneurship -- finding ways to profit from the restoration, creation, and protection of ecosystems -- a tax would not.  The mitigation and restoration industry would grow under cap-and-trade, but not under a tax.  Making the conservation of resources profitable is exactly the incentive people need to be attracted to the idea of protecting the Earth's wonderful resources and beauty.

3.  Is it necessary that the price of carbon is very low in the first phase?

I think we have different views on what exactly constitutes innovation, and exactly how it occurs.  I understand where you're coming from on this one, but I also like the eco-entrpreneurship that occurs and the creative destruction that only comes with the cap-and-trade mechanism.

I think that the type, more so than the amount, of
innovation is different under the two schemes.

4.  Could you point to some of the examples of the complexity caused by a cap-and-trade relative to a tax so that I could better assess this point?

There are going to be large administrative costs associated with either scheme, so I need some examples so that we can weigh the costs and benefits.

Don't get me wrong, I'd support a tax if it was the thing on the table, or if, after comparing, it was designed better than a competing cap-and-trade scheme.  But I think some people are, more or less, running a smear campaign against cap and trade when perhaps they haven't considered all the differences between the two.  

I think there is a strong case to be made, from an environmental perspective, for placing a strict cap on emissions rather than a known price with unknown emissions cuts.  I know there are uncertainty issues with setting the right cap, but   the concept of a cap cut is more direct, encouraging more people to let their voices be known.  On the other hand, a tax is bound to be set by bureaucrats, with less public input.  From an environmental perspective, I think the knowledge problem tilts the balance in favor of a  cap-and-trade scheme.

Maybe a kind administrator could fix my mistake?

In terms of fixing your block quote - sorry none of us not even posters can fix stuff like that. So basically if our comments include a typo or bad html, we just live with them up there forever.

As to whether systems start out with small cuts, well most proposals do. Most people assume a phaseout, not cutting emissions by 60% to 90% overnight.

I'm also interested in what you, and the carbon tax folks have to say about the Lieberman-Warner proposal.