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Stuart_Armstrong comments on How should negative externalities be handled? (Warning: politics) - Less Wrong Discussion
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Why is this a problem? If the emissions are being reduced, then the gyrations of the carbon credit market are irrelevant. If the prices have collapsed, it means that carbon reduction is turning out to be much easier/cheaper than expected. Yay!
I calculate the cost of this carbon reduction to be $3.3 trillion per year across all of Europe. That's how much smaller their economy is as a result of the recession for which the drop in CO2 was merely an externality. I'm not sure celebrations are in order.
Some studies (which I don't have to hand immediately) suggest that the recession was only partially responsible for the reduction.
But the price of carbon still remains irrelevant. As long as the reduction happened, the price could be zero for all the difference it makes. We aren't trying to punish people for emitting too much carbon, making them pay the moral price of their erroneous ways. We're simply trying to reduce carbon emissions.
I don't see any drawback to the price of carbon having collapsed.
If your goal is long-term reduction in CO2 emissions, you've introduced market volatility. The goal of any such measure is to reduce CO2 emissions, but the -mechanism- by which it does so is encouraging research into alternatives. If the market is volatile, the value of any such research is called into question; tomorrow it might be valuable, it might be worthless. A tax, by comparison, has a fairly static value. The cap-and-trade measure, through its volatility, increases the risk of investment into reducing carbon emissions; the value of your investment isn't determined by the degree to which you can reduce carbon, but by the amount of carbon emitted in the market as a whole.
Unless we assume some level of carbon emission is better than no carbon emission, the tax scheme is better.