California is implementing a cap and trade system for carbon (H/T to SS).
While I question the impact of such a system on global climate change (akin to trying to drain the Pacific Ocean with a pail), I agree that auctions (like this design) are the best way to distribute/re-allocate permits.
I also think that the State should forget about keeping/spending the money from the auctions. Better to just rebate it back to citizens (or taxpayers or -- best -- voters). Then, if there's no impact, at least there's been a tax on pollution that's gone BACK to citizens instead of wasted on boondoggles like the high speed train or a solar cooker on every roof.