Setting the Caps is the problem. A Cap is a limit on a quantity the production of which is to be limited. When society wants to limit CO2 emission or production, knowing how much to limit is a difficult problem. If no Cap is imposed, then emitters of CO2 are free to emit as much as needed. When a Cap is imposed, the emitters will need to procure the right to emit beyond a prescribed limit. Because there is a cap, then there is a "market" scarcity value for the artificially limited emission. True, that is a market mechanism which theoretically efficiently allocates the right to emit among the emitters. Demand for such a right will compete with one another to procure the limited supply of emission allowance. However, this does not at all guarantee that the optimal amount of CO2 emission is being imposed as the Cap. If the Cap is too high, it has little or effect on the market price of CO2 and there is no financial incentive for the emitters to modify their plants or invest in new plants to reduce CO2 emission. If the Cap is set too low, then there may be disruption of the plant operation because of the unavailability of emission allowance.
In essence, the problem of setting the Cap is like a Central Planning idea. If some super knowledgeable body has optimized the whole economy to balance CO2 emission consequences (global climate effects) with the rest of the economy and figured out the optimal amount of CO2 cap, then one can believe that the Cap would be the right amount. The fact is that no such Central Planning or theoretical optimization is possible. The consequence, then, of letting government officials to set Caps based on whatever reasonings may be a disastrous path to take.
In contrast, a CO2 tax (or ideally a CO2 Public Benefits Charge) is more amenable to a market mechanism. The resulting effect of a given CO2 price on the subsequent amount of CO2 emission, and the amount of technology changes that lead to even lower CO2 emission can be monitored. Setting the CO2 price becomes an art, just like the way the Federal Reserve and other Central Banks set their nation's discount rate. It is basically a feedback process. If the pace of change in CO2 emission is not fast enough, raise the CO2 price. If it is causing too high a cost burden on the economy, lower it.
We can take courage from the prevalent practices of gasoline taxes. Different countries have different gasoline tax rates. When have we seen gasoline shortage due to too high a gasoline tax in any country? But we have seen long lines waiting for gasoline when a country puts a limit on the gasoline price, resulting in shortage. The fact that different countries conserve gasoline at different rates, due to the different gasoline tax rates, has not seemed to trigger inter-national conflicts over which nation has not done its job in conserving gasoline usage.
It seems that a nationally set CO2 Public Benefit Charge is a viable way to enable different countries to reduce CO2 emission at their own rates, compatible with their ability to do so given their local problems in the economy.
