> How would you do this ?

It depends. I have many questions.

> My goal is to minimize CPU usage on the computer. Would h264 compression be a good thing here given source and destination are the same machine?

No.

> Other ideas?

1. Why does it need to be displayed in a web browser (as opposed to more appropriate / better performing software specifically built for video)?

2. via what interface/library is the camera connected to the machine? What format/codec is the uncompressed stream you're getting from the camera?

3. I am available at very reasonable consulting rates