Your analysis of EU Cap is off base. The price collapsed in the first phase for two reasons: 1. They set the cap far too high; and 2. They did not allow bankin

Your analysis of EU Cap is off base. The price collapsed in the first phase for two reasons: 1. They set the cap far too high; and 2. They did not allow banking between phases. They correct the first error in the second phase of the system. For the second, they still allocated too many permits but the economic collapse in Europe led to far lower output than had been expected, and for a time declining confidence in the future existence of the EU led to a collapse in confidence in the long-term existence of the policy, making "banking" the credits for future abatement less attractive. Finally, the cap is a "backstop" mechanism, which exists to ensure that the marginal abatement takes place, with inframarginal abatement taking place through, e.g., the Renewables Directive and the Large Combustion Directive as well as very high fuel taxes among many other mechanisms the EU uses to drive renewable energy and consumption efficiency. The cap worked perfectly from a qualitative perspective - there is a highly visible price on carbon with complete capital market instruments available (forwards, futures, options, etc.) to give long-term investors what they need to make investment decisions. It has been the quantitative parameters that have not been ratcheted high enough. You'd have the same issues with a tax. Both forms of pricing carbon can work, but both need good design.