James Hansen, one of the climate scientists tangentially embroiled in ClimateGate, has an alternative to the ludicrously complex pork-fest that is our cap and trade system.  On this, we agree:

There is a better alternative, one that would be more efficient and less costly than cap and trade: "fee and dividend." Under this approach, a gradually rising carbon fee would be collected at the mine or port of entry for each fossil fuel (coal, oil and gas). The fee would be uniform, a certain number of dollars per ton of carbon dioxide in the fuel. The public would not directly pay any fee, but the price of goods would rise in proportion to how much carbon-emitting fuel is used in their production.

All of the collected fees would then be distributed to the public. Prudent people would use their dividend wisely, adjusting their lifestyle, choice of vehicle and so on. Those who do better than average in choosing less-polluting goods would receive more in the dividend than they pay in added costs.

For example, when the fee reached $115 per ton of carbon dioxide it would add $1 per gallon to the price of gasoline and 5 to 6 cents per kilowatt-hour to the price of electricity. Given the amount of oil, gas and coal used in the United States in 2007, that carbon fee would yield about $600 billion per year. The resulting dividend for each adult American would be as much as $3,000 per year. As the fee rose, tipping points would be reached at which various carbon-free energies and carbon-saving technologies would become cheaper than fossil fuels plus their fees. As time goes on, fossil fuel use would collapse.

This is akin to what I believe should happen, though I'm not sure what the ultimate level should be.  The more I consider the audit problems inherent in carbon offsets, the more convinced I become that any system which includes them simply will not work.  Planting trees, for example, only keeps carbon out of the atmosphere if you keep that land planted with the same number of trees forever.  Since this would rapidly cover the entire land-mass of most industrialized countries, it's not really very helpful.  Even higher quality offsets have basically insurmountable audit problems:  you can't see what the world would have looked like without your intervention.  Not to mention the fact that paying people to stop polluting may well create a booming market in polluting.

A source fuels tax is simple to administer, hard to evade.  If it's refunded in a shiny check every year, it might even be sort of popular.  Of course, for our politicians that's a bug, not a feature.  They need the pork in order to buy off enough legislators to pass it.