Pigouvian taxation vs. Carbon Trading

I have no intention of going into whether of not climate change is happening (personally I have been convinced it is) but would like to discus the solutions that have been put forward for it. Of course there are those that would prefer everybody else to go back to a preindustrial lifestyle of hard work, inbreeding and death in middle age (that is if they are not part of the 80% of the global population needed to be killed to reach this utopia), but the more sensible tend to cluster around 2 options (unless they simply want to wait for technical advancement to sort the problems out, as it will) carbon credits, and Pigouvian taxation.

Now ignoring for a moment what actually happened in the debacle of the EU Carbon Trading system (which in reality turned out to a system for the various national governments to slyly extract a subsidy for anybody that took it seriously, which was only the British) and let assume that both will work as effectively, which should be chosen? Classical Liberals are normally extremely attracted to market based solutions, rabidly so some might say. They are also very wary of government taxation. I am a Classical Liberal, or Libertarian, but in this case I actually prefer the taxation option to the market. Here is why.

The carbon market is based around artificial scarcity. The only reason to buy then is because the government demands it. You get nothing directly from a carbon credit; unlike buying a physical product where you get the product, a bit of information where you get that information, a share where you get a share of future profits, or some kind of weird derivative where you get a hedge against some some event. A carbon credit gives you nothing except a government license to generate a certain amount of carbon. The government can issue as many, or as few carbon credits as it thinks are required. And there is the rub, carbon credits require some omniscient central authority that can accurately decide the amount of carbon that should be generated in order to maximise happiness. They are better than a pure rationing system as they can be traded so that people that really need them more can get more, but even with this it it still at heart reliant on a central government that can never know how much carbon production to allocate to maximise happiness, it simply does not have enough information to make an informed decision.

Pigouvian taxation on the other hand makes no assumptions about how much carbon production will maximise happiness across a society. Everybody is free to produce as much carbon as they like, but they have to pay for the damage it causes. It is about forcing everybody to take responsibility for the damage of their own actions. Each individual weighs their own individual circumstances and decides what will make them happiest. In this they will always have far more information about their individual desires and circumstances in order to make a better informed decision than any centralised authority ever can, and since the negative externalities have now been internalised, thanks to the Pigouvian tax, that is included as well.

So which is better comes down to who you think can make the decision better. Is decision as to the amount of carbon produced by a society best done socially by the government, or individually by the citizens? As a Classical Liberal I prefer individuals taking responsibility for their own decisions, and so on this occasion I think that Pigouvian Taxation is better than Carbon Trading. As a confirmation there is the Neil Harding Test. Yep, looks like I was right.