A lot of people ask why carbon permits or taxes should be levied as far upstream as possible. Why tax or auction permits for pumping or importing oil, rather than burning it?

One obvious answer is: red tape. Regardless of where a tax is levied, you will pay. But if it is collected at the wellhead, you don’t have to have a separate line on every gas receipt under the sales tax. Your local supermarket does not have to buy a major upgrade to it’s software, slowing the line you are in as their system crashes, and the checkers switch to hand calculators.

This is even more striking in a permit system, where upstream collection prevents you from needing the equivalent of a new credit card you may never leave at home.

But there are more serious reasons. Every step downstream allows leakages in a tax or permitting system. For example, in the European trading system, industries who buy permits often play games with how they measure emissions — picking and choosing among estimates and measurements to get the lowest value. The further downstream you measure, the more room there is for honest mistakes or deliberate game playing. Greenhouse emissions are not easy to measure. And if we are really going to ratchet down over the course of decades, then increasing that imprecision will seriously impact how long that decrease takes.

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