CAP
CAP LOWERED
Purchased or
traded permits
Carbon
dioxide
emissions
Carbon
permits
Remaining
carbon
permits
Freely issued permits
CAPPED INDUSTRIES
INDUSTRY A
INDUSTRY B
CAPPED INDUSTRIES
CAP AND PERMIT
The government imposes a cap on the total amount of greenhouse emissions allowed from major industries, then issues permits to match the amount of the cap. Each permit allows the emission of one ton of carbon dioxide, or equivalent.
ISSUE, BUY AND TRADE
Initially, most of the permits are given to industries at no cost. The remaining permits can be bought at a government auction or traded in a carbon market set up for that purpose.
LOWERING THE CAP
The government gradually lowers the carbon cap by a few percent a year, which reduces the number of available permits and cuts the total amount of pollution allowed by the industries under the carbon cap.
No reduction
in emissions
Offset credits
Steep reduction
Investment
CARBON-REDUCING
PROJECT
INDUSTRY A
INDUSTRY B
INDUSTRY A
REDUCING TOTAL EMISSIONS
Industries can reduce their emissions by spending money to upgrade their facilities and equipment, or they can use the carbon market to purchase the carbon permits needed to cover their emissions — whichever is cheaper.
CARBON OFFSETS
Industries can also invest in projects elsewhere that lower carbon emissions, like forestry or burning methane from dairy cows. These projects create “offset credits” that can be used or sold, usually at a lower price than government-auctioned permits.
