Under our present economic system we are reasonably good at minimising costs and finding efficiencies that save companies money. However we do not price negative externalities. So companies and individuals can do things that are bad for other people, or which only become bad when lots of people do them. There is no actual incentive for them to not do this except when there is legislation in place which provides that incentive.
Companies and individuals are good at acting in their own short term best interest but much worse at considering the longer term and the wider system of which they are only a small part. One of the primary duties of government is to ensure that this short term best interest lines up with the long term best interest of the country and the wider world.

Currently various places have carbon trading schemes. These just do not work. Companies are granted the right to produce a certain quantity of carbon dioxide, if they produce less they can sell the spare to other companies, if they produce more they must buy some. The problem here is that if companies can persuade their governments that they need slightly more right to emit then they can then sell this right at a big profit. This also results in the particularly tiresome behaviour where deliberately inefficient systems are built, and then made more efficient and large quantities of money obtained for the efficiencies that have been made (yey carbon offsetting).

Market systems do work but require things to be properly priced, carbon trading doesn’t do that. Instead a carbon tax where each tonne of carbon dioxide equivalent is given a fixed price by a certain quantity of tax being due for its emission. Here I mean tax in terms of the manner of its collection (imposed by government) but what it is is an encapsulation of the actual cost of the emission. The money raised could not just be used for arbitrary purposes but only those which help deal with the problems caused by the emission (investment in renewable technologies, efficiency, retrofitting insulation etc.).

Of course none of that is new, it has all been said before.

However normal schemes would fail as it is not in the best short term ‘economic’ interests of a country to impose an additional tax on carbon dioxide equivalent production. This is because foreign imports will have lower costs due to their emissions not being paid for. Hence to avoid shooting themselves in the foot by destroying their local industries and just relocate the pollution to other countries where it is harder to legislate for its reduction but with moral responsibility for it still lying with the importer. Hence import taxes based on the carbon dioxide equivalent in the country of manufacture and of the transport of it are required.

Such import taxes would as I understand it be illegal under international agreements through the WTO[1]. Tedious. However this is not a normal ‘tax’ it does not exist to raise revenue for a particular government (it should probably be focused on ensuring developing countries move straight to clean technologies without an intermediate dirty state) or to protect industries in a particular country. It is an enforcement of an actual cost, as long as it gets paid it doesn’t matter where. So it could be charged by the government in the country of origin and kept by them and then the importer would not need to charge it. This should hopefully mean that governments don’t get so upset with each other.

I envision three classes of countries, those fully into carbon taxation for whom all production inside their countries and for them in other countries is properly costed. Those countries who export to the first class ones and charge the cost for those exports in their own country. Those third class countries which don’t charge anything and if exporting to first class ones see the import tax charged but don’t get the money from it.
The main additional requirement for first and second class countries is what they do with the money they collect – they must not use it to subsides the very industries they are taxing though they could use it to provide loans for efficiency improvements etc. – as otherwise it would not have the correct incentiveising effect and would be anti-competitive.

That would of course require a huge quantity of political will and is fairly unlikely to happen, however when enough people start dying politicians will be forced to take notice. Unfortunately this will likely be rather late in the day.

The main difficulties are in calculating the quantity emitted and in fixing the cost. Calculation by “assume the worst possible method unless proved otherwise” should give pretty good incentives to provide good proofs of efficient methods and this becomes much easier when these things are priced in at the beginning. For example application when petrol is first petrol rather than misc oil then it is destined to be burnt so apply the tax then. When some coal comes out of the ground – going to be burnt so apply tax. An additional incentive for encouraging people to apply these things early in the supply chain when it is easier is to have a linearly increasing cost where each second it gets ever so slightly more expensive. So we start from 0 and run up to 1 over the course of a year so as to get the bugs out of the system before particularly large quantities of money get involved (10 per household is not much) then draw a straight line between 1 and 100 in price between then and 2050. Picking the currency to price this in is hard as its value is built on rainbows and not tied down to anything. Using the euro of the dollar might make sense but I am not clear as to what the best method would be for this.

[1] Though we do apparently have a tax on the import of components but not finished products which helps destroy our manufacturing industry, see petition to change that.

This begins my series of “ideas I have had”. Time for you to find all the holes in it :-)