The problem always originates with the other kind of mismatch, but arbitrage works on two markets, if you have one market A where production of some good is tax

The problem always originates with the other kind of mismatch, but arbitrage works on two markets, if you have one market A where production of some good is taxed at 20% and another market B where production is taxed at 10%, all production soon shifts to market B. (Market here = market for production, you "buy" precursors + labour, you get goods.) Market A has set its taxes so high that nobody ever pays them, simply by moving it all elsewhere. If you have a local industry for that good, you kill it. So yeah, technically it is not due to a price/externality mismatch because there is no Market C where the gods trade carbon credits with perfect foresight. But from Market B's perspective, let's say the true externality cost is around 20% (and Market A is approximately correct, and so wouldn't go any higher), Market B has priced it beneath the externality cost, and this difference is exploited and arbitraged on Market A, whose leaders were honestly trying to do the right thing. So NOBODY wants to tax this stuff unless everybody taxes the same stuff at the same rate and there's a closed system. It's really hard to find a closed system, but you can find them in e.g. electricity generation in one closed area without any electricity imported from elsewhere. Technically if you did this but didn't perfectly match the price to the externality (which would be very normal), it couldn't be exploited. But most markets cannot be that enclosed. The problem can be seen a bit more easily by looking at carbon credits, where the price is supposed to reflect the value of a unit or emissions reduction. If you are Market A, and you value emissions reduction highly, then what tends to happen is: (1) Market B says it agrees with you, and develops a scheme for trading its credits with yours, (2) Market B allows for people to tell the government "hey, we were going to chop down this forest, and we decided not to!" and gives them credits (3) those people go and chop down a different forest, but not before they repeat the procedure ten more times (4) those people sell their credits to airlines and transport companies and anyone who wants to advertise themselves as carbon neutral (5) millions of clueless consumers tick the "carbon neutral" box when they book their flights, and money flows all the way to people who are now cutting down more forests than ever before, because the operation now finances itself with zero effort, and no difference is made to CO2e whatsoever. This is a description of the REDD+ credit scheme. It's a perfect example of the price being set too high compared to the actual CO2e changes, not on a tax, but on a credit scheme. With taxes, some of those numbers flip their sign, but it is ultimately the same problem. Finally, think about what it would take for Market A to stop B's goods at the border and go... "Hang on, you produced X amount of CO2e to make these, I'm going to tax you on that!" Say Market A and B are sovereign States. B has deliberately set its taxes too low, so as to improve the profits its local companies can achieve in foreign markets like A's. Basically, B's companies can lie, and B will back them up. A can't really do anything about it. A would then think about incentivising industrial espionage, in order to impose taxes correctly, but if it accuses B of lying, it turns into a diplomatic dispute with B. So one malicious actor, especially an entire sovereign State, can really ruin the whole thing. (Bringing this back to banning things outright, one big advantage of a ban over a tax is that it is much more difficult for a State to lie about the use of a banned thing, than it is for them to fudge some numbers in a spreadsheet.)