An upstream cap

The simplest point of control of carbon emissions is "upstream." Some approaches to reducing greenhouse gas emissions (such as the EU ETS) operate as if we are going to have to get 6 billion people and hundreds of thousands of companies to mend their ways and reduce their carbon consumption. Of course this is going to have to happen. But the most effective way of making that happen is to have a framework in which the few thousand companies who introduce fossil fuels into the world economy (or into an individual national economy) are controlled in how much fossil fuel they are allowed to sell. This means that fossil fuel suppliers should be required to have permits before they are allowed to bring the fuel out of the ground and sell it on from coal mines, oil wells and refineries and gas terminals. These installations are so big, and the volumes of the fossil fuel they process are so vast, it would be virtually impossible for suppliers to evade such a permit scheme, if properly enforced.

The permits would be denominated in the greenhouse gas content of the fuel that they want to sell, when that fuel is eventually burned. If the global warming effects of burning the fuel is increased by burning it at altitude, in aviation, then a correspondingly higher number of permits would be required for fuels to be sold for use in aircraft. The permitted quantity of greenhouse gases, that can enter the economy (global or national) can thus be controlled and that quantity can be brought down over time as quickly as possible to zero emissions.

That would force all fossil fuel users - companies, governments and households, to adjust to a reduction in carbon emissions as a fait accompli. With such an upstream cap in force everything downstream of this arrangement would be subjected to a reduced supply of carbon based fuel. Instead of companies, organisations and households being at the cutting edge of the carbon reduction process they would all be responding to a reduction in carbon entering the economy that had already taken place - at refinery gates, at coal mines, and at gas production or import terminals.

There is a need to ensure that this policy is imposed in an equitable and fair way. There are two possible approaches and the Trust would be prepared to work with either. These are:

Cap and Dividend

With a Cap and Dividend arrangement the permits to upstream suppliers would be auctioned and the bulk of the revenue thus raised would be distributed to everyone equally, on a per capita basis, as cash sum called a 'dividend'. This would be administered by the Global Trust itself or national affiliated trusts ("Sky Trusts") on behalf of the Global Trust. Note that the auctioning and dividend pay out would NOT be done by governments. This is partly to reassure citizens that the permit auction revenues would not go into a government budget and then get diverted into general government expenditures. The advantage of this approach is that it would be a cheaper and quicker method of administering the permit revenues.

Cap and Share

With a Cap and Share arrangement there would be a distribution of the bulk of supply authorisation permits to the public and then the fossil fuel companies would be obliged to buy the permits to sell fossil fuels from the public. In practice intermediaries and market makers like banks and post offices would buy the permits from the public, consolidate them and sell them on to fuel suppliers. The advantage of this approach is that it would engage and involve the public more tangibly than a dividend cash payment.

Whether Cap and Dividend or Cap and Share the principle would be that the bulk of permit revenue were distributed on a per capita basis. Some would be held back to pay for the administration of the scheme and also in recognition that the equal per capita principle does not completely cover all aspects of fairness - nor what would be needed in the way of urgent expenditures for countries in serious difficulties adjusting to the low carbon economy or overwhelmed by climate difficulties. Problems of fairness, equity and special emergency needs will therefore need to be the subject of ongoing negotiations but we cannot wait for these to be sorted out before action is taken to reduce carbon emissions. Some of the permits would therefore be auctioned by the Trust and and the revenues would be put into a Transition Fund awaiting negotiated agreement among participants to the scheme as to the principles on which it is be distributed.

Under either Cap and Share or Cap and Dividend individuals, households, companies and organisations would experience the fait accompli of a reducing upstream cap as rising fuel prices - as well as rising prices for goods produced in a carbon intensive way. Without any compensation this would drive people with a low purchasing power out of the market and would be grossly inequitable.

However, if the whole or at least the bulk of permit revenues are distributed on a per capita basis then people with a low carbon intensity to their lifestyle (mostly poor people) would be rewarded whereas those with a high carbon intensity lifestyle (mostly high income people) would have to pay much more highly. This is because the former group would make more in permit revenues than they would lose in rising energy prices and the rising prices of goods made with energy with a high carbon content.

This would "pre-distribute" income towards those who have low carbon lifestyles and makes the process more equitable.

Even with the "share" or "dividend" in these arrangements there will still be an important job of work to be done in which national and local governments and civil society organisations will have to assist people make the transition that the policies drive. Unless individuals and communities are able to respond to the falling availability of carbon energy/rising price of fuels there is likely to be a resistance to the tightening of the cap which would derail the process of transformation. The per capita distribution is a rough and ready approach to the equity issues and public acceptability but it does not answer all the concerns. Rather than replacing many of the very valuable climate programmes currently under way we believe that the Cap and Share or Cap and Dividend have an important role in driving, complementing and enhancing these other programmes, making them more effective.

Because it will be necessary to take the level of emissions effectively down to zero, care needs to be taken in regard to the end stage of the cap and share or cap and dividend arrangements. There are serious scientific suggestions that the concentration of greenhouse gases in the atmosphere must be brought down to lower than they are at the present time (2008). It has been suggested that below 350ppm CO2 might be a safe level, though even this is not certain. At this time we are already at 387ppm. For all intents and purposes to get the level of CO2 down to that level means that emissions must fall to zero - plus there must be an additional strategy to take CO2 out of the atmosphere. That's the formidable scale of the challenge. It is most important therefore that whatever arrangements are set up to bring down carbon emissions do not build up institutions and populations that become dependent on the continuance of the carbon market in perpetuity.

The time to solve the climate crisis is very short. The poor of the world will be a constituency in favour of a very tight cap, leading to a very high carbon price. But a steep reduction in carbon, which is what we want, would eventually mean that this income source from permit revenues would come to an end. We would not want people trying to hang onto these carbon revenues, wanting to prevent further reductions which would see their carbon income source end altogether. At some point the permitted carbon fuel supplies will fall to such a low level that the next reduction step will no longer mean additional income but the loss of income. After all - the last reduction - from a tiny amount allowed to none at all allowed must, logically, lead to a ceasing of the carbon permit income. Indeed, before this point, near the end, it may be that such has been the transformation in the way that the society operates that the demand for fossil fuels falls away. That's what we want to achieve.

That's why, by the time that this happens a real grass roots kind of economic development would have had to have taken hold. The income-turned-into capital transfer would have to have been used in the most productive and sustainable way possible in the development of zero carbon form of development.


Kyoto2 is a global system to auction transferable Permits to pollute the atmosphere with industrial greenhouse gases up to a series of annual caps defined at levels that would prevent dangerous interference with the Earth's climate system. Recognizing the poor design and implementation of the Kyoto Protocol and the EUETS have caused them to be ineffective, wasteful and loaded with perverse incentives. Accordingly, Kyoto2 proposes an 'upstream' cap, to sell the permits by way of a global 'uniform price sealed bid' auction, subject to both reserve price and a 'safety valve' or ceiling price, with the proceeds accruing to a Climate Change Fund, credit Permits when greenhouse gases are verifiably destroyed or sequestered into secure long term storage, as with 'carbon capture and storage' (CCS), apply the Climate Change Fund to tackling both the causes and the consequences of climate change, that is a combination of mitigation and adaptation, and incorporate non-market solutions.