(A post from http://www.econstudent.org pre my involvement in ALS)
If one accepts the science of global climate change then it is clear that overall carbon emissions must be reduced. The preferred method of reducing carbon emissions or more broadly reducing pollution has been either the use of pigouvian taxes (pollution/carbon tax) or an emissions trading scheme. I have explained the basics of both these measures in my environmental economics mini-lectures http://www.youtube.com/watch?v=8ID6IP2-gHc&feature=youtu.be and http://youtu.be/Z6xB5b-4MRI.
In both cases the cost of the pollution is internalised and becomes part of the cost of producing the good or service in a marketplace. This moves the supply curve for the good and this results in a new market equilibrium that accounts for the social cost of the pollution. What this means is the people gaining the benefit from the carbon emitting activity have to compensate society for the impact of the carbon. This gives firms an incentive to find less carbon intensive methods of producing their goods and raises the prices of carbon inefficient activities compared to carbon efficient activities.
Unfortunately, many classical liberals have seen the introduction of carbon taxes or less directly emissions trading schemes as a further grab of economic liberty by the State thus reducing individual liberties. Based on past form this is not an unrealistic view. Since the second world war the percentage of GDP occupied by Government in all industrialised countries has increased in-spite of the fact the overall size of the their economies have grown. Much of this growth has been in the form of income redistribution with the government taxing the income from individuals work to redistribute to those group the government chooses.
However, I would argue if the tax revenues raised through pollution taxes are offset by reductions on income tax then this is moving from taxing positive externalities to taxing negative externalities. If you view labour as a good being sold in the marketplace the purchaser of that good is gaining a consumer surplus and the worker does not receive the full benefit of their work, there is infact a broader benefit to a company hiring the labour and to society as a whole. I would argue that taxing individual income is perverse when there are alternative means of raising taxation that discourage negative externalities rather than discourage positive externalities.
The argument can be made that the atmosphere belongs to society as a whole and there is a limit to how much pollution can be emitted into it before serious harm is caused. The limited amount of pollution that is sustainable is therefore a scarce resource owned by society and by it is fair to charge those who use that resource. I would argue that for society to get a compensation for the use of its property is not in contrast with classical liberal beliefs.
I believe that it is unfortunate that the environmental movement is so closely linked to groups who have economically left-wing views and those groups that would seek an expansion on the role of government. Carbon will be one of many common-resources society must develop mechanisms to achieve a socially optimal level of demand. We have the opportunity to develop a system that pays for public goods through the taxation of negative externalities, increasing personal responsibility and reducing many of the perverse disincentives of the current taxation system.