Chapter 3: Cap & Share in Pictures by Laurence Matthews

This chapter illustrates some features of Cap & Share (C&S) and its variants. Pictures (each worth a thousand words, after all) can be useful for understanding C&S and for explaining it to others.

Cap & Share (C&S) is a way of limiting the carbon dioxide (CO2) emissions from burning fossil fuels [1]. It could operate on a global scale, but to start with, imagine a national scheme applied to a single country’s economy.

As the name implies, there are two parts to C&S:

Cap: The total carbon emissions are limited (capped) in a simple, no-nonsense way.
Share: The benefits, from the huge amounts of money involved, are shared equally.

These principles are simple, but there are a number of ways of interpreting them, especially the ‘Share’. The principles are more important than the details, so let’s look first at the main principles themselves.

The Cap

The cap is a limit each year on overall, total CO2 emissions. This is set, in line with scientific advice, at a level which will bring concentrations of CO2 in the atmosphere down to a safe level. But how do we ensure this cap is met?

The ‘Cap’ in Cap & Share is ‘upstream’. A good way to explain this [2] is to think of watering a lawn with a hosepipe connected to a lawn sprinkler, with lots of small holes spraying water everywhere. If you wanted to save water, what would you do? One idea is to try to block up all the sprinkler holes one by one. But wouldn’t it be simpler to turn off the tap a bit?

It’s the same with fossil fuels, where the sprinkler holes correspond to the millions of houses, factories and vehicles ‘downstream’ (on the right-hand side of Figure 1), each emitting CO2 by burning these fuels. But corresponding to the tap (on the left-hand side of Figure 1) there are only a few primary fossil fuel suppliers (e.g. oil companies) who introduce fossil fuels into the economy – by importing them or extracting them from the ground.

Figure 1

So it’s easier to work ‘upstream’, on the left-hand side of Figure 1. The cap operates by requiring the fossil fuel suppliers to acquire permits. A permit for 1 tonne of CO2 entitles a fossil fuel supplier to introduce fossil fuel with that CO2 content – that is, the amount which will emit 1 tonne of CO2 when burnt. The number of permits issued equates to the desired cap. By controlling the supply of fossil fuels coming into the economy, we automatically control the emissions which occur when those fossil fuels are burnt somewhere down the line.

For imports of fossil fuels, the cap may best be applied at the point of entry to the country (port, pipeline); for domestic production the best place is likely to be the mine (for coal) or the refinery (for gas/oil). The details need to be sorted out, but will be able to make use of systems already in place for accounting and taxation purposes, and will be in any event much simpler than trying to account for everything downstream.

Figure 2

Now look at Figure 2. This shows the two halves of our carbon footprint (‘direct emissions’ and ‘indirect emissions’). Some fossil fuels are burnt by companies producing goods and services on our behalf – these are our ‘indirect emissions’ and form the upper line in Figure 2. The goods that reach us have these emissions ‘embedded’ in them. Meanwhile we also buy fossil fuels (such as petrol) directly and burn them ourselves – these are our ‘direct emissions’ and form the lower line in Figure 2. The permits are represented by the small rectangles. Direct and indirect emissions are both taken care of by the same system.

In other words, it doesn’t matter where the emissions take place (the emissions are indicated by flame symbols in Figure 2). We don’t need to monitor and measure emissions at all, because instead of focussing on the emissions, we are focussing on the fossil fuels themselves. This focus also makes clear the connection between controlling emissions and ‘keeping fossil fuels in the ground’.

(Elaborations to this simple basis for the cap are possible: for example, offsets might be allowed against sequestration using methods like scrubbers or biochar. But abuse of the ‘paying someone else to cut their emissions’ type of offset has to stop).

The Share

Next, the Share. In Figure 3, the curved arrows represent flows of money. The fossil fuel suppliers must buy the permits to cover the CO2 content of the fuel they supply. They will seek to recoup this cost by building it into the price of fuel. This mark-up then flows through the economy like a carbon tax, making carbon-intensive goods cost more. There is thus a flow of money from the end-consumers to the fossil fuel companies, represented by the upper curved arrow in Figure 3. This sounds like bad news for the consumer. But wait – the fossil fuel suppliers paid for their permits, so where did that money go? The trick is to share this money out, back to the people (the lower curved arrow in Figure 3), which compensates for the price rises.

Figure 3

There are two possible mechanisms for returning (‘recycling’ or ‘rebating’) the money to the population. In the version called Cap & Dividend in the USA [2], permits are auctioned and the auction revenue distributed to the citizens on an equal per capita basis. Alternatively, under ‘classic’ C&S [1] each adult receives free of charge (say, monthly or annually) a certificate for his or her share of the cap – that is, of the country’s carbon footprint. These certificates are then sold to the fossil fuel suppliers (through market intermediaries such as banks) and become the permits. Under ‘classic’ C&S people thus receive certificates instead of money, so that if they should wish to, they can retain (and destroy) a portion of their certificates – and thus are able to reduce the country’s carbon footprint by that amount.

(Again, elaborations are possible. We’ll consider these later).

That’s C&S in a nutshell. It’s simple and transparent; fair; cheap and fast to implement; positive and empowering; effective and efficient. The same principle could also apply to other greenhouse gases (see Chapter 8 by Richard Douthwaite) – in fact any other common resource such as a fishery could be incorporated: it is easy to maintain a cap using permits, auction these permits and distribute shares of the revenue to the population. This is a resonance with emerging so-called ‘commons thinking’ (Chapter 2).

Of course, a framework such as C&S is not the answer to everything: it is a complement to, not a substitute for, measures such as technology standards, tax regimes (e.g. support for renewables), education, and efforts to envisage and communicate a low-carbon future as a desirable one. It will not be sufficient to put the framework in place and ‘let people get on with it’. But it is the framework which ensures that the numerical target set by the cap is met.

Winners and Losers

The payments to people compensate them for price rises, that is, the two curved arrows in Figure 3 balance. But this is only true on average. If you have a lower carbon footprint than the national average (remember that we are still talking about a scheme for a single country), then you will come out ahead: your payments from C&S will more than compensate for any price rises. On the other hand, people with higher than average carbon footprints will be worse off.

This means that there will be many more winners than losers. Why? For the same reason that there are more people on below-average incomes than on above-average incomes. Figure 4 illustrates this effect for an imaginary country consisting of only 10 people with CO2 emissions as shown (in units of tonnes of CO2). The total of all emissions is 15 tonnes and so the average is 1.5 tonnes.

Figure 4

Thus a majority would be in favour of maintaining a tight cap, since they gain financially. This is a force to counterbalance the vested interests who would push for a cap to be relaxed or abandoned, and this counterbalance gives a certain political robustness to C&S in the face of shocks and political events. This robustness is necessary for a system which will need to survive for decades.

(Consider, by contrast, carbon taxes. A carbon tax is equivalent to an upstream cap if the tax level is set high enough. But the money disappears into general taxation, and so taxes are unpopular. So it is much less likely that the tax level would be set high enough. It might be a different story if carbon tax revenues were to be rebated directly to the population, but this is rarely proposed).

Of course there are some non-tangible gains, even for the people who are losers in strictly financial terms. For example, since everyone knows that the problem is being addressed, the rich can counter criticism from environmentalists by responding, ‘my emissions are all within the cap too, and I am now paying for them, so stop criticising!’

More fundamentally, all are winners in the sense of benefiting from a stable climate. Indeed this, rather than financial gain or loss, ought to be the main argument for schemes like C&S. We face a collective crisis, and solving it effectively, fairly and collectively is simply the right thing to do.

Money isn’t everything

The original formulation of Cap & Share envisaged a simple distribution of the benefits – in the form of certificates or their monetary equivalent – with equal shares going to the adult population. But exactly how to implement the Share is open to many different interpretations.

To begin with, one may ask why the adult population – what about children? Arguments can be made for partial shares to children. (Arguments can also be made for other adjustments to simple equity, such as allocating extra to rural households in developed countries. But special-case pleading could go on indefinitely, and there is a lot to be said for the simple guideline of equity).

Some argue against a distribution of money to individuals anyway. Many of the things that need doing in order to adapt to climate change are collective. Individuals don’t usually build defensive sea-walls, for example. The original proposals for Cap & Share [1] include a Transition Fund, where a proportion of funds (declining over time) is held back and used for adaptation purposes, to help the people most severely impacted by climate change. On the other hand, at least in many developed countries, the individual payments would be seen as a popular factor in securing agreement to the policy, as outlined in the previous section.

One suggestion neatly combines the idea of collective funds with the issue of children mentioned above. If shares are to the whole population, not just adults, then the children’s portion could support a Children’s Fund to be used collectively in adaptation work and green investment – in other words, to benefit the world which the children will inherit.

An even more fundamental question is whether money should be distributed at all. Firstly, money is poor compensation for the climate being wrecked. But that is not what the Share is about – it is about changing the current destructive pattern of economic activity, not licensing its continuation. Secondly, there are many communities around the world which function well in the absence of monetary exchange and where its introduction might be disruptive. This is a powerful point. Certainly these societies should share in some way, but perhaps at a community or societal rather than an individual level. The communities themselves would be the best people to decide. This issue is discussed further in Chapters 6 and 7.

Perhaps the main conclusion from this discussion is that there is no single arrangement that is best for all circumstances. Different arrangements would be appropriate in different countries – this is as it should be, and probably applies at sub-national levels too.

But we must get going. Any debate over policy details takes place against the backdrop of a planetary emergency, where urgent action is needed despite the fact that no system will ever be perfect. The power of the idea of ‘Share’ lies not in the details adopted by this or that group, but in the general appeal to equity and to a shared effort to solve an urgent common global problem.

Comparison with Downstream systems

Cap & Share is an upstream system. To many people, however, the ‘obvious’ mechanism is not Cap & Share but a version of cap and trade applied ‘downstream’ where the emissions take place. This downstream approach may be an obvious one, but it is also more complicated. This is the route explored by various governments in developed countries, notably in the European Union.

In an upstream system, as we have seen, indirect emissions and direct emissions are covered by the same system. In a downstream system, however, they are treated separately. Indirect emissions are controlled with an Emissions Trading System (ETS) for companies, whereas direct emissions are covered by some form of personal carbon trading (PCT) [3]. PCT is based on ideas of ‘rationing’ and typically involves giving an equal allowance to each adult citizen, after which each purchase of petrol, oil or gas is deducted from the allowance (typically using swipe card technology). As shown in Figure 5, an ETS and PCT each operate at the point of combustion (which means the ETS is really ‘midstream’).

Figure 5

There is no reason why an ETS cannot have recycling of permit revenue to the population. To date, however, free allocation of permits has tended to predominate, generating windfall profits for ETS companies at the expense of the consumer. In the European Union, the EU ETS is already up and running, and has had its teething problems – lax caps through too many permits being issued, free allocation windfalls to large utility companies, partial coverage only of the economy, leaks through dubious ‘CDM’ projects and susceptibility to fraud. These shortcomings are now widely accepted and are being addressed in the next phase.

The downstream picture is complicated in practice by the treatment of electricity, measures necessary to avoid double counting, and the fact that the ETS leaves small companies outside the cap. These points are discussed below.


Figure 6

In practice, an ETS only includes large companies (although in the UK for instance, schemes like the Carbon Reduction Commitment extend the idea to medium-sized companies too). 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. In a downstream system the companies not in the ETS do not have emissions permits, so their carbon emissions are not captured by the cap. In Figure 6, notice that the middle line has no emissions permit straddling it. So the downstream PCT/ETS combination has incomplete coverage of CO2 emissions.

Supporters of the ETS concept 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 PCT.

Figure 7

An upstream system, on the other hand, can work with an ETS [4]. If for example we want to keep an existing ETS for political reasons, then introducing an upstream system is easy and can be made to dovetail with the existing ETS perfectly. To do this, start with a totally upstream system and simply allow the ETS companies to remain in the ETS, trading emissions permits. Fossil fuel suppliers must acquire permits for all fossil fuels as before, except that now any fossil fuels supplied to ETS companies are exempt. In Figure 7, 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), so the overall system remains simple and cheap to operate.


Usually an ETS, and PCT as currently proposed, include electricity as well as fossil fuels. This makes sense in a downstream system, 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 in Figure 8 [5]. The three lines ‘downstream’ from the power station indicate the embedded or indirect emissions built into the electricity, and the flash symbols indicate electricity usage.

Figure 8

There are now 6 lines in the diagram leading from the fossil fuel supplier to the end consumer, instead of 3. But again all we need to do, in order to apply an emissions cap, is to decide where to put emissions permits to straddle each of these 6 lines. Cap & Share simply captures everything upstream (on the left hand side of the picture) as before. Once again, this is simple and gives complete coverage of emissions, as in Figure 9 (a). With a downstream system, we have the same problem as before because the ETS is only a partial system, but now there is another potential problem. Since the electricity generators are usually members of the ETS, there is a potential for double-counting: in Figure 9(b) two of the three lines which pass through the power station have two permits straddling them.

Figure 9

But once again an upstream system can embrace the existing ETS – with the permits as shown in Figure 10: it’s easy to check that there is an emissions permit straddling each of the 6 lines. The rule is: fossil fuel suppliers need permits for all fossil fuels – but with fossil fuels supplied to ETS companies, or used to generate electricity supplied to ETS companies, exempt. 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.

Figure 10

(Hybrids such as this are one way of introducing C&S ‘gently’ to allay fears and incorporate learning from other schemes. Other pathways are also possible: for example a government initially reluctant to impose a cap might introduce a carbon tax levied upstream; but this can easily morph into an upstream permit system with ‘ceiling prices’ and then (by raising the ceiling prices) into an upstream cap).

International versus Global

So far we’ve implicitly looked at a single country. What about the world as a whole? An obvious approach here is the international one, which seeks to add up and link together actions taken by the world’s sovereign nations. In this approach a global cap is apportioned using a formula agreed by all, then each nation operates its own scheme (such as national C&S).

Figure 11

The apportionment formula between nations is of course a thorny question, as UNFCCC negotiations have shown. Suggestions include Contraction & Convergence (C&C) as promoted by the Global Commons Institute [6], under which national shares of a global emissions budget start at the current shares of global emissions and converge over time to equal per capita shares. Or there might be any number of ingenious elaborations on C&C performing a tricky balancing act of incentives. Or again, when the world recognises the extent of the emergency, we may be into Greenhouse Development Rights [7] territory – an approach which also explicitly addresses inequality within nations. Once again, the ‘obvious’ approach gets complicated very quickly.

In an ideal world, C&S would operate as a global scheme, a single policy for the planet considered as a whole. Figure 11 illustrates the difference between an international scheme and a global one. A global scheme needs a global institution to operate it, such as a Global Climate Commons Trust (Chapter 5), run perhaps by the UN. There would be a worldwide system of permits (which in this case would apply to digging up of fossil fuels only, since there are no ‘imports’ from other planets), with the resulting revenue returned to the (world) population. Global schemes thus bypass nations, except perhaps as a vehicle for transmitting the funds to their populations.

Global C&S is equivalent to national C&S in each nation with the national caps calculated on an equal per capita basis. So the eventual destination of many global and international frameworks would be the same. In fact, global C&S is just C&C with immediate convergence, and with ‘the money going to the people’. (Once again, there are many possible elaborations. Some of the revenue could be kept back to fund collective projects, or to help specific countries with adaptation. Some proposals in fact, such as Kyoto2 [8], commandeer all the funds for such purposes).

Global frameworks would require global institutions (and probably other things like monetary reform), and some regard this overruling of national sovereignty as hopelessly unrealistic – although others see climate change as a catalyst for wider reform. Global institutions would seem to be an obvious long term goal, but even international systems need global elements too: greenhouse gas concentrations are global entities and the cap must be set accordingly. ‘Realism’ is considered further in [9].

Winners and Losers Revisited

Extending the scope from a national scheme to a global one entails a change of perspective, from looking at the situation in one’s nation to looking at one’s situation in the world.

Suppose we look at another imaginary example, where the world has only 2 countries, each with 3 people with various carbon footprints, as shown in Figure 12.

Figure 12
In Country 1 the average emitted is 7 tonnes. So B and C, being below average emitters, would gain if Country 1 adopted C&S (with C gaining more than B). These gains would increase as the cap in Country 1 tightens (for example, first moving to an overall reduction of 10% and then to a 20%, reduction). The same sort of effect happens in Country 2.

But this supposes that Country 1 and Country 2 act in isolation, which would have the effect of ‘locking in’ the inequality between the two countries. If, instead, there is any sort of convergence between countries, as discussed in the previous section, then the situation moves closer to one where the global average becomes the benchmark. Now the global average is 5 tonnes. C is still below this global average, but gains less than before. B, who was below average in Country 1, is above average in the world. Clearly people living in Country 1 gain now less than they did under separate C&S systems, and people in Country 2 gain more than they did.

This is an argument for building in convergence from the beginning before caps get too tight. Once C&S is well established in Country 1 in isolation (and achieving the desired effect of reducing Country 1’s carbon footprint), moving from this to global C&S will be unpopular in Country 1. This issue has to be faced, in the same way that the issue of ‘rich people are worse off under a cap’ has to be faced in a national scheme – by pointing to the need for a collective solution to a collective problem, by appeals to equity and natural justice, by pointing out other non-monetary benefits, and by simply out-voting opponents. But underlying all this is the change of perspective mentioned above. B may cast envious glances at A, but is actually better off than the whole population of Country 2. It is natural to compare oneself with those closest to home, but increasingly, to solve global problems, we will have to recognise that we live in a single, interconnected world and think and act – and feel – accordingly.


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