Not a tax – Cap and Share is automatically
'revenue neutral'

Carbon taxes are frequently proposed as a way of reducing greenhouse emissions. However, a carbon tax, however structured, cannot guarantee that any particular level of emissions reduction will be achieved at any given date in the future whereas a cap can. This is because a carbon tax rate which would bring about the required emissions reduction in a booming economy would have a depressing effect on a depressed one. As a result, for it to work well, the rate of a carbon tax needs to adjusted regularly to conform with the stages of the business cycle, thus creating uncertainty and making setting the rate a perennial source of conflict between the government, the consumer and business interests. With Cap and Share, the market adjusts the price paid for entitlements automatically according to how well the economy is doing and leaves no scope for debate.

Moreover, if a carbon tax was used, there would be no equivalent to the automatic mechanism in Cap and Share to compensate the public for the rise in the cost of living that the tax would cause. Instead the government would have to use bureaucratic tools, such as increasing the state pension, social welfare payments and family allowances, to ensure that the vulnerable were not plunged into fuel poverty.

The same situation will arise if, when the EU Emissions Trading System is reformed for its third phase from 2013 onwards, the emissions permits are auctioned by governments instead of being given away free as they are at present. The income that governments get from the auction will essentially be a tax and they will need to distribute a lot of the revenue they take in to protect the less-well-off. Cap and Share avoids this complication. It automatically distributes the revenue from the sale of entitlements to people on an 'equal per capita' basis. In the jargon, it is automatically revenue neutral.