I like the idea of free markets, however I am quite cynical about the motivations of private companies. Exxon/Mobil, Toyota, Tyco, Enron, Adelphia Cable, Microsoft, Sony, Walmart....
do you really trust any of those companies to do the right thing for the common good?
If Exxon weren't regulated and threatened with fines, they would have no incentive to not pollute.
What carbon credit trading is doing is putting a different financial incentive on not polluting. If you're a major polluter, you have to pay into the carbon system.... that gives you an incentive to clean up your act. Once you're below the threshold level of pollution, you now get to sell the credits for pollution you don't create to the highest bidder. That gives a second financial incentive to you and the trading market price you set creates an additional incentive to other polluters. The money earned from selling carbon credits can be used <if the company is smart> to buy additional pollution reducing equipment and then get more carbon credits. I'm sure there is a point of diminishing returns, but this is a system that rewards investment in pollution control rather than penalizing for lack of pollution control. Rather than the money going to the government, the money is exchanged between companies. The system isn't sustainable in a static state, so the pollution threshold will have to be adjusted from time to time, which would be the sole role of the government.
If anything, carbon trading is MORE freemarket than just fining companies who don't comply with pollution law because it creates an entirely new market <like the stock market>, and government for the most part stays out of it other than setting the bar.