According to the SRD, if a torch is used in combat, it is treated as a one-handed improvised weapon that deals bludgeoning damage equal to that of a gauntlet of its size, plus 1 point of fire damage. For a Medium-size character, that is 1d3 bludgeoning + 1 fire damage.
If you're prepared to spend a feat to use a torch *really well* in combat, I guess you could remove the -4 penalty for attacking with an improvised weapon, and the opponent hit must make a DC 5 Reflex save or catch on fire (DC 10 on a critical hit). I don't think I would increase the base damage of the torch - it only weighs one pound, and a club (1d6 damage for a medium-sized opponent) weighs 3 pounds.
Of course, you could always come up with a "combat torch" exotic weapon that weighs 3 pounds and does damage as a club plus 1 point fire plus chance of opponent catching on fire.