Cap & Share Diagrams Laurence Matthews This is a printable version of a set of Powerpoint slides I use to explain some aspects of Cap & Share. The Powerpoint slides are also downloadable from and you are welcome to use them in your own presentations. I have found that diagrams are one of the best ways to explain how C&S works. It’s easy to explain in words the essence of C&S, but once people are trying to understand how C&S compares with PCAs, how C&S can dovetail with an ETS, and how electricity is treated, then simple diagrams are invaluable. I am preparing a booklet of these diagrams based on this document, with a few additions and with the formatting and some loose ends tidied up a bit. While I am doing this, any comments on this present version will be gratefully received. capandshare.org

Carbon footprints We can indicate this in the diagram above. The horizontal arrow shows the flow of fossil fuels, from the fossil fuel suppliers (oil companies, etc) on the left-hand side of the diagram to us, the individuals, on the right. The flame indicates the burning of the fossil fuels, which causes CO2 emissions. For each of us, this accounts for half of our “carbon footprint”. Other emissions are caused by companies producing goods and services on our behalf. In the diagram below the black arrow represents the “embedded emissions” or “indirect emissions” built into the goods and services we buy. This accounts for the other half of our “carbon footprint”. Now, if we want to cap or limit the CO2 emissions, one way to do this is to use “emissions permits”. The total number of permits issued in the country would be equal to the national cap on emissions. These permits could be traded (bought and sold) without affecting the total number in circulation. So who gets these permits? We buy some fossil fuels (petrol, gas, coal) directly and burn them.

Upstream Downstream One way to cap emissions is to control the amount of fossil fuels going into the system at the left- hand side. This is called capping the emissions “upstream”. The fossil fuel suppliers would have to have emissions permits (indicated by the rectangles) to cover the emissions caused by the fossil fuels they bring into the system. Cap & Share is an upstream system. So is auctioning the permits to fossil fuel suppliers (as in ‘Cap & Dividend’). Both systems are simple because only a small number of companies (the fossil fuel suppliers) have to be policed. An alternative way of doing things is to cap the emissions “downstream”. This time the individual citizens have the emissions permits. This could work for our direct emissions (the lower line). However, it is impractical for the indirect emissions (the upper line) as it would involve trying to calculate what carbon emissions are built in to all goods and services - every haircut, every pair of scissors. So instead, downstream systems in practice are as shown in the diagram: they cap all emissions at the point of combustion - where the fossil fuels are burnt. Individuals have emissions permits - and so do companies - but everyone only looks at their direct emissions (your indirect emissions are somebody else’s direct emissions). The two parts of this scheme are called Personal Carbon Allowances (PCAs) for individuals, and an Emissions Trading Scheme (ETS) for companies.

A B £ A B A B In a downstream system such as PCAs individuals are allocated equal personal allowances. Individual A is not allocated enough to cover all his emissions, whereas B has some to spare. Let’s look at two individuals A and B, who have Above and Below average emissions respectively. For simplicity, let’s just look first at direct emissions. So B can sell some allowances to A. Who gains and who loses

A B £ £ Pay A B Now let’s look at what the same thing looks like under an upstream system. A and B have Above and Below average carbon usages, as before. In an upstream system the fossil fuel suppliers have to acquire permits to cover the fossil fuels they supply. The total amount of permits in circulation is the same as before. Clearly the fossil fuel suppliers will use use their permits as shown, transferring some “from B to A”. But none of this matters to A or B; it is invisible to them. What does matter to A and B is that the fossil fuel supplier will build the cost of buying the permits into the price of fossil fuels. The price of petrol and gas will go up. So A and B will pay more for fossil fuels. The extra money they have to pay out is proportional to the amount of fuel they buy:

£ £ £ £ PayGet PayGet A B Lose Gain However everyone gets the same rebates: the rebates are the same for A and B, regardless of their fuel usage. Under C&S the rebates come from selling the certificates; under Sky Trust the rebates come from the auction proceeds. The outcomes as far as A and B are concerned, are that A pays out more then he receives so is worse off; while B pays out less then he receives so is better off. The gains and losses are exactly the same as the transfer of money from A to B when B sold allowances to A In other words, A and B are exactly as well off as they would have been under a downstream system.

A B Now let’s look at the indirect emissions of the same two individuals A and B. Assume that A and B have Above and Below average indirect emissions (as they did for direct emissions). This time let’s look at the upstream system first. The fossil fuel suppliers must have permits to cover the fossil fuels they sell, as before. The costs of buying these permits are built in to fuel costs for the company, and the company passes these costs on to the final consumers A and B. The amounts of money paid by A and B depend on the embedded emissions in the goods and services they buy. These amounts are offset by permit rebates (C&S or auction) as before. A B £ £ Pay £ £ Get

A B £ £ Pay Now for the downstream system. Recall this works by having the companies in an ETS. The companies trade permits just like individuals did for their direct emissions. Under many ETS systems the companies are given an allocation of permits for free. The initial allocation may be based on previous fossil fuel use (‘grandfathering’). The permits are then traded. So they have a price, and this is passed on to A and B. So again, A and B face higher prices. But this time, A and B lose out, as they are not compensated for these price rises. Meanwhile the companies get a windfall profit from selling the grandfathered permits, which they got for free. This problem only arises if the permits are given free to the companies. An alternative is for the permits to be auctioned (in which case the company pays for them at the auction) with the proceeds of the auction rebated (‘recycled’) to the individuals by the government. (Some companies advocate an auction with proceeds ‘recycled’ instead to the ETS companies – which would still leave the companies profiting and the individuals losing out). To summarise: Upstream systems are neutral overall: Below-average emitters gain, Above-average emitters lose, and there is no overall ‘tax burden’ or ‘giveaway’. For a downstream system, it depends on the allocation of ETS permits. If these are auctioned and the auction proceeds given back to the citizens, then we have a neutral system. But if the permits are given free to ETS companies (grandfathering), it is more complicated. For direct emissions, the situation is neutral: Below-average emitters gain, Above-average emitters lose. But for indirect emissions, everybody loses out to ETS companies (and Above-average emitters lose most).

The ETS Not in ETS In ETS In practice, an ETS only includes a few large companies. All other companies, including hundreds of thousands of small ones, are not in the ETS. So we have two sorts of company: those in the ETS and those that are not. The companies not in the ETS do not have emissions permits, so their carbon emissions are not captured by the cap. Notice that the middle line has no emissions permit straddling it. So the PCA/ETS combination has incomplete coverage of carbon emissions. Supporters of the ETS want to extend it so that more and more companies are included - but this will always leave most small companies outside the scheme (and thus outside the cap). An ETS can never work properly with a downstream system like PCAs. An upstream system, on the other hand, can work with an ETS. For political reasons we might want to keep the current ETS, and if so, introducing an upstream system is easy and can be made to dovetail with the existing ETS perfectly. To do this, start with the upstream system and simply allow the ETS companies to remain in the ETS, trading emissions permits. In the diagram above, notice that in the top line the emissions permit has moved “downstream” to the ETS company. Fossil fuel suppliers must acquire permits for all fossil fuels as before, except that now any fossil fuels supplied to ETS companies are exempt. Notice that all three lines have an emissions permit straddling them, so this hybrid system has complete coverage of emissions. But we still have only a small number of companies involved (namely, the fossil fuel suppliers and the ETS companies). Not in ETS In ETS

The ETS, and PCAs as proposed, include electricity as well as fossil fuels. This makes sense, as electricity can be a substitute for gas in heating and cooking, and vice versa. So how does this affect things? Using electricity causes indirect emissions, as the emissions are caused at the power station. We can depict this as follows: Electricity The light blue lines from the power station indicate the embedded or indirect emissions built into the electricity, and the flash symbols indicate electricity usage. There are now 4 lines in the diagram instead of 2, and to apply an emissions cap we need to see where to put emissions permits to straddle all 4 of these lines. An upstream system like Cap & Share works like this:

In practice, the ETS causes complications, since the electricity generators are usually members of the ETS. There is then a potential for double-counting, as shown in the diagram below. The 2 lines through the power station each have two permits straddling them. In theory, a downstream system (PCAs plus an ETS) works like this. To avoid this we can suppose that we have the top diagram above instead. But we also have to remember that the ETS is only a partial system. So we also have to look at the companies not in the ETS. We do this next.

This is the full diagram. It looks complicated, but we just need to put emissions permits to straddle 6 lines instead of 4. In ETS Not in ETS In ETS Not in ETS A downstream system is shown below. (To avoid double counting, the electricity generator is not in the ETS). Households and ETS companies trade permits in fossil fuels and electricity. This downstream system has incomplete coverage of emissions. (For example the upper line through the non-ETS company is not capped).

By contrast an upstream system like Cap & Share simply captures everything upstream as before. Once again, this gives complete coverage of emissions. In ETS Not in ETS An upstream system can embrace the existing ETS as shown below. Check that there is an emissions permit straddling each of the 6 lines. Fossil fuel suppliers need permits for all fossil fuels with two exemptions - fossil fuels supplied to ETS companies, and fossil fuels used to generate electricity supplied to ETS companies. These two quantities are capped instead by the ETS. Again this gives complete coverage, and yet only a small number of companies (the fossil fuel suppliers, the electricity generators and the ETS companies) are involved. In ETS Not in ETS