Coal mines, like this one in China, could be taxed (Image: China Photos / Getty)

Goods should be taxed to reflect the damage they do to the planet, with revenues redistributed to society.

CONSIDER this injustice. Governments tax labour and profit, the engines of prosperity, while pollution and the depletion of resources – arguably the greatest threats to our economic well-being – remain largely untouched. So while we’re thinking about how to rebuild our broken economies, here’s a plea for a new cornerstone: a universal carbon tax.

The world needs to put a price on carbon, that much is agreed. The Kyoto protocol involves a very different mechanism, known as cap and trade. Permits to emit carbon are distributed among polluters up to a total, or “cap”, equivalent to existing levels of carbon emissions. Those who don’t use all their permits can sell them to those who exceed their allocation. Over time, the number of permits is reduced, raising their price and encouraging people to reduce emissions.

That’s the theory, but the reality has not lived up to expectations. The world’s largest cap-and-trade scheme, the European Union’s Emissions Trading System, saw emissions rise 2 per cent in its first trading period from 2005 to 2007. Too many permits were distributed, and after tripling in value in the first six months of trading, their price rapidly collapsed to virtually nothing.

Tweaks introduced for the scheme’s second phase might make it more effective, but there are some weaknesses to cap and trade that will never be eradicated. In particular, it is open to manipulation and political influence, and if not properly managed just shifts pollution around rather than reducing …