APPENDIX
A NUMERICAL EXAMPLE
9.1 This artificial example is purely to
illustrate Cap & Share, and to show how it achieves the same
results as personal carbon trading using Domestic Tradable Quotas
(DTQs). In this simplified example we suppose petrol is the only
fossil fuel and that the country only has two people, A (for Affluent)
and B (for Basic).
9.2 Suppose that petrol is 90p per litre,
and that A uses 100 litres per month and B uses 20 litres per
month, so that their total consumption is 120 litres.
9.3 Suppose that we wish to achieve a cap
on emissions that equates to 110 litres per month. We issue certificates
totalling 110 litres; the fossil fuel suppliers have to acquire
these certificates, and are thus limited to supplying 110 litres
of petrol into the system. But A and B are used to consuming 120
litres between them, so there is more demand than supply. This
means that the petrol price goes up.
9.4 As the price goes up, A and B reconsider
their use of petrol, and start to use slightly less. The more
the price goes up, the less they will use. Suppose that by the
time they have reduced to 110 litres the price has gone up to
£1.20 per litre. We might have A using 92 litres (down by
8%) and B using 18 litres (down by 10%).
9.5 Meanwhile let's look at the fossil fuel
suppliers. Suppose they are used to making 22p per litre profit.
They are now only selling 110 litres instead of 120 litres, so
they increase their margin by 2p per litre to make the same amount
of profit overall (since 120 x 22p = 110 x 24p). They are charging
30p more for petrol (it is now £1.20, up from 90p), and so
can afford to pay up to 28p per litre for the certificates. So
(in a competitive market) the certificate price will be 28p.
9.6 Under Cap & Share, A and B get certificates
for 55 litres each, and they sell these certificates at the bank,
getting 28p each for them. So A and B fare as follows:
| A | B
| |
Petrol cost | £110.40
| £21.60 | at £1.20 per litre
|
| Income from certificates | -£15.40
| -£15.40 | 55 x 28p |
| Total cost | £95.00 |
£6.20 | |
| |
| |
9.7 Next, let's look at exactly the same scenario under
DTQs. We start with the same situation: petrol at 90p per litre,
A using 100 litres per month and B using 20 litres per month,
giving a total consumption of 120 litres.
9.8 Suppose once again that we have a cap of 110 litres.
This time we issue A and B with a quota of permits for 55 litres
each. These permits are needed to buy petrol.
9.9 This time the fossil fuel suppliers aren't involved.
As before, they can only sell 110 litres instead of 120 litres,
so they increase their margin by 2p per litre to make the same
amount of overall profit, and the pump price rises to 92p per
litre.
9.10 A is used to consuming 100 litres, so wants 45 more
than his allocation of 55; and B is used to consuming 20 litres,
so his allocation of 55 is 35 more than he needs. So A wants more
permits than B has to sell, and the price of permits goes up.
9.11 As the price goes up, A and B reconsider their use
of petrol, and start to use slightly less. The more the price
of permits goes up, the more A has to pay for each permit, and
the more B can get for any unused permit. The price of petrol
is effectively the pump price plus the going rate for a permit,
and the more this effective petrol price goes up, the less petrol
they will use. They will behave exactly as before: by the time
they reduce to using 110 litres, the effective price has gone
up to £1.20 per litre. At this point the going rate for permits
will be £1.20 - 92p = 28p.
9.12 As before we will have A using 92 litres and B using
18 litres. This is achieved by B selling 37 permits to A. So A
and B fare as follows under DTQs:
| A | B
| |
Petrol cost | £84.64
| £16.56 | at 92p per litre
|
| Buying/selling permits | £10.36
| -£10.36 | 37 x 28p |
| Total cost | £95.00 |
£6.20 | |
| |
| |
Notice that the total cost is exactly as before. But this
time A and B have had to use up permits (using their carbon debit
cards) every time they bought petrol.
NOTES
1. This example has deliberately been kept simple (although
factors such as transaction charges, different fossil fuels, the
separate treatment of electricity, etc could easily be incorporated).
2. It serves to show that Cap & Share can have an
equivalent effect to DTQs. Indeed Cap & Share can be implemented
as a transitional measure which could evolve into personal carbon
trading later if desired. With Cap & Share, as with DTQs,
there is a need to decide on details (eg how to treat children)
and a need for concurrent actions (eg measures to address fuel
poverty).
3. There isn't a problem of "petrol running out
at the pumps" under Cap & Share, any more than there
is under rationing or DTQs. Excess demand is taken care of by
the price rising; in the case of DTQs it is the price of permits,
in the case of Cap & Share it is simply the price of petrol.
In the same way, land never runs out either. Nobody can afford
as much as they'd like, but that's a different matter.
4. Companies, as well as consumers, are having to buy
petrol at the higher prices, and will tend to pass these prices
on, eventually to consumers. The price rises of various goods
and services will depend on how much fuel has been used in their
manufacture and distribution. Carbon-intensive goods will go up
somewhat, and low-carbon goods hardly at all. This all happens
automatically, and consumers simply see the final retail prices.
As a result, consumers will gradually tend to favour low-carbon
goods and services. These effects will differ under DTQs depending
on how ETS permits are allocated to companies. As an upstream
system, Cap & Share can embrace Steve Sorrell's "hybrid"
approach to dealing with the existing ETS as a transitional measure.
Dr Laurence Matthews
February 2007
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