This is the interesting part: ideally the costs would trickle down to consumers. The other half to a carbon tax policy, or the government auctioning permits in

This is the interesting part: ideally the costs would trickle down to consumers. The other half to a carbon tax policy, or the government auctioning permits in a cap and trade system, is that the revenue raised would ideally be handed back to individuals through increases in welfare payments and tax cuts. This probably sounds a bit pointless. Why take with one hand and give with the other? Because of substitution effects. By making carbon intensive goods and services relatively more expensive, consumers at the margins will substitute away to less carbon intensive products. In other words, you're relying on the substitution effect rather than the income effect for a carbon price to do its magic. This is going to sound cynical, but I feel it's much safer to rely on the behavioural effects of direct financial incentives rather than the belief that individuals will make ethical choices in service to the common good. One important caveat: I'm only 'talking the theory' here. It would be interesting to see if all this theory has been empirically validated (I honestly haven't looked). I'd imagine there's a bunch of studies examining the effects of carbon pricing in (mostly) European countries, but I can't certain about that. I might have a hunt around on the weekend (unless anyone here has some good references)...