I'm a bit sceptical of a cap and trade system. It seems to me that both the buyer and the seller of carbon credits have an incentive to 'cheat'. It's not really self regulating like a normal market. My 2c is that all of the permits should also have a taxation component, so the government has an incentive to police the transactions, as well as having a dampening effect on the market. If no one wants your unused credits (the price falls below the taxation rate) then you just give them back to the government.

Obviously along with this the government should lower income tax - maybe use the revenue to dump the bottom tax bracket.