Oddly, the best argument against C&T, I think, is that it doesn't combine well with other regulatory initiatives. Adopt a local reg to increase building efficiency, for example, and energy use goes down. But that just drives the permit price down, which will drive other carbon emitting activities up. C&T is good at forcing emissions to meet a target, but it also pretty much guarantees that you'll never beat the target. For some reason, though, critics don't often use this argument.Indeed, the is the key inefficiency of cap-and-trade. Although cap-and-trade keeps carbon emissions below a certain level, it doesn't offer any additional incentive to lower total emissions beyond that level. In fact, the implicit price it assigns to carbon goes from zero to infinity at the cap amount, which is extremely difficult to justify. Of course, the constant price offered by a carbon tax isn't perfect either—the potential damages from climate change rise nonlinearly with total emissions, and the ideal policy is a sliding price that moves up (within limits) if emissions are too high. But in the absence of specific information telling us that the climate system will collapse when the amount of carbon in the atmosphere reaches exactly X, the carbon tax is a closer approximation.
Allowing investors to save and borrow permits, however, relieves an important part of this inefficiency. Since our emissions targets in the long run are very ambitious, it's almost certain that carbon permits will be valuable at some time in the future. Even if we overshoot our targets at the beginning, and market slack sends the carbon price plummeting, it will stabilize well above zero: it's better to simply buy permits and save them until they're in higher demand. This means that if the market can cheaply reduce emissions in the current year below the cap, it will—the need to reduce total carbon emissions determines the price, not the need to meet an arbitrary cap in any particular year. Bankable permits liberate the market to achieve long-term carbon reduction in the most efficient way possible.
Fortunately, the current Waxman-Markey bill includes provisions for borrowing and saving permits. This is incredibly important. We can't let misguided appeals to environmentalist populism ("don't let polluters put off their obligations" or "don't let speculators pile up a fortune") put this policy in danger, when it has the potential to improve cap-and-trade so dramatically.