Carbon/Pollution Credits: I think there is some free-market carbon trading system in Chicago already. It is opt-in, and actually has companies doing it. Which is remarkable, though I think they are doing it to impress Europe which has some mandatory form of carbon trading already IIHC (if i heard correctly) on the radio.
What would be interesting is if people dont sell their carbon credits. Because of complexity, ideology, or just not caring. That would shrink the available pollution pool, and would be an instance of the crowd being wiser than government ever could through tax manipulation.
The problem with petrol isnt so much its consumption, but its pollution. I think we should remove taxes off petrol, and not tax consumption. but instead make pollution expensive, so the real cost of the combustion engine is obvious.
Increasing taxes on petrol also hits the non-wealthy hard. I am established enough that I could barter with any prospective employer to have my salary increased to cover my travelling. Someone going for a job at Walmart would get laughed out of the room if they tried it.
If petrol prices increase, those that have enough power in the labor market will just up their salaries to cover their petrol consumption during their commute. Those that dont have that power, will just see their take home pay dwindle even more. As Millman said, it becomes a fine on people for the failure of the market and government to build an economicly alternative infrastructure and transportation method.
The other issue is, right now, I dont pay for most of my petrol consumption. When I go to New Jersey, or Pittsburgh, or Baltimore, Philly etc, I get a rental car. I expense the car, tolls and fuel to the company.
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