One of the big problems with the Kyoto Protocol is that it depends on all countries participating in a carbon market. The Protocol itself doesn’t contain a lot of teeth because it assumes that countries would rather cut their emissions than buy a bunch of carbon credits. It’s as if it never occurred to anyone that countries could just decide to do neither.

So carbon emissions are still a market failure externality. This leads to perversity even for countries that have embraced Kyoto. As George Monbiot writes in a recent series of articles, the UK has met its Kyoto targets by importing goods rather than manufacturing them locally. When a product is manufactured in China rather than Britain, the carbon emissions go on China’s balance sheet.

If there were a carbon market that covered the globe, China would have to buy carbon credits from Britain to cover their manufacturing emissions. The cost of those credits would be added to the Chinese goods and British consumers would end up paying. Manufacturing will tend toward countries with lower (or no) carbon pricing, just as it tends toward countries with lower taxes and weaker labor regulations.

The short-term nudge for this is mandatory carbon labeling. Consumers should at least be made aware that buying imported goods is just offshoring their emissions. The medium-term solution is global carbon pricing either through a market or a common rate of taxation. Long-term, this should cause us to stop consuming so much.