A cap and a market
- want 100 tonnes100 factories90Permits printed
Picture a hundred factories that together give off a hundred tonnes of smoke a year. The government prints ninety permits. Each permit is one tonne. No permit, no tonne. The permits can be bought and sold. Next year it prints eighty-five.
- Fewer permits than tonnesSome factory must cutPermits get a priceCheapest cuts go first
People call this a cap and a market. The cap is how many permits exist. The market is where they change hands, and that is what sets the price. A factory that can cut cheaply cuts, and sells its spare permit. One that cannot cut cheaply buys. Nobody wrote the price down. It comes out of the trading.
- £5 a tonneCheap to cut£50 a tonneDear to cut
Ninety permits, a hundred tonnes wanted. Which factory cuts first?
The biggest factory.
Not yet. Size is not cost. A big factory with cheap cuts sells permits; a small one with dear cuts buys them. The permit does not know how big you are.Every factory cuts a tenth.
Not yet. The cap says ninety in total. It says nothing about each. Spreading the cut evenly would make the £50 factory cut when the £5 one could do it for less.The one where cutting is cheapest. It can sell its permit for more than the cut cost.
Right. If a permit trades at £20, a £5 cut earns £15 by selling the permit. A £50 cut loses £30, so that factory buys instead. The market sorts the cuts by cost. Set how many permits are printed and how many tonnes the factories want to emit. The price is made up on one rule: £2 for every tonne the cap falls short by.
Permits (the cap)100 tonnesTonnes wanted80 tonnesPermits printed: 100 · Tonnes wanted: 80
100 permits, 80 tonnes wanted. Permits to spare. Nobody needs to buy one, so the price is about zero.
Permits (the cap)100 tonnesTonnes wanted100 tonnesPermits printed: 100 · Tonnes wanted: 100
100 permits, 100 tonnes wanted. Permits to spare. Nobody needs to buy one, so the price is about zero.
Permits (the cap)100 tonnesTonnes wanted120 tonnesPermits printed: 100 · Tonnes wanted: 120
100 permits, 120 tonnes wanted. 20 tonnes must be cut somewhere. The price settles at about £40 a tonne, where the cheapest 20 cuts get made.
Permits (the cap)90 tonnesTonnes wanted80 tonnesPermits printed: 90 · Tonnes wanted: 80
90 permits, 80 tonnes wanted. Permits to spare. Nobody needs to buy one, so the price is about zero.
Permits (the cap)90 tonnesTonnes wanted100 tonnesPermits printed: 90 · Tonnes wanted: 100
90 permits, 100 tonnes wanted. 10 tonnes must be cut somewhere. The price settles at about £20 a tonne, where the cheapest 10 cuts get made.
Permits (the cap)90 tonnesTonnes wanted120 tonnesPermits printed: 90 · Tonnes wanted: 120
90 permits, 120 tonnes wanted. 30 tonnes must be cut somewhere. The price settles at about £60 a tonne, where the cheapest 30 cuts get made.
Permits (the cap)80 tonnesTonnes wanted80 tonnesPermits printed: 80 · Tonnes wanted: 80
80 permits, 80 tonnes wanted. Permits to spare. Nobody needs to buy one, so the price is about zero.
Permits (the cap)80 tonnesTonnes wanted100 tonnesPermits printed: 80 · Tonnes wanted: 100
80 permits, 100 tonnes wanted. 20 tonnes must be cut somewhere. The price settles at about £40 a tonne, where the cheapest 20 cuts get made.
Permits (the cap)80 tonnesTonnes wanted120 tonnesPermits printed: 80 · Tonnes wanted: 120
80 permits, 120 tonnes wanted. 40 tonnes must be cut somewhere. The price settles at about £80 a tonne, where the cheapest 40 cuts get made.
Permits (the cap)70 tonnesTonnes wanted80 tonnesPermits printed: 70 · Tonnes wanted: 80
70 permits, 80 tonnes wanted. 10 tonnes must be cut somewhere. The price settles at about £20 a tonne, where the cheapest 10 cuts get made.
Permits (the cap)70 tonnesTonnes wanted100 tonnesPermits printed: 70 · Tonnes wanted: 100
70 permits, 100 tonnes wanted. 30 tonnes must be cut somewhere. The price settles at about £60 a tonne, where the cheapest 30 cuts get made.
Permits (the cap)70 tonnesTonnes wanted120 tonnesPermits printed: 70 · Tonnes wanted: 120
70 permits, 120 tonnes wanted. 50 tonnes must be cut somewhere. The price settles at about £100 a tonne, where the cheapest 50 cuts get made.
When is a permit worth nothing?
When the cap is lowest.
Not yet. The lowest cap, 70, gives the highest price in every column. A small cap is a big shortage, and the shortage is the price.When there are more permits than tonnes wanted.
Right. A thing nobody needs is free. Print a hundred permits for eighty tonnes and twenty sit unused. The price is not set by the government; it is set by the shortage.Never. A permit always costs something.
Not yet. At 100 printed and 80 wanted the price is zero in every frame. That is not a quirk of the rule: it is what happened in Europe in 2007, when too many had been printed and they could not be kept.Move both controls.
- 2005100 smoke under the cap, 2005 = 100202353 smoke under the cap, 2005 = 100
Europe built the first big one for carbon in 2005. It printed too many permits at first, and they could not be kept for the next round, so by 2007 one was worth almost nothing. From 2013 the cap fell every year. By 2023 the smoke under it was 47 in 100 below 2005; that February a permit passed €100.
- Heathrow to Parisa permit a tonneHeathrow to New Yorknot in this scheme
The UK started its own scheme on 1 January 2021. It covers power stations, factories and flights from a UK airport to the UK, the EU, Norway, Iceland, Switzerland or Gibraltar. A permit cost about £40 in 2024, nearer £50 in 2025. A Heathrow flight to Paris needs a permit for every tonne; one to New York does not.
Three sources of smoke. Tap the one that is NOT inside the UK scheme.
Tap the part of the picture that answers it.
A gas power station in LeedsA flight, Heathrow to ParisA flight, Heathrow to New YorkA flight, Heathrow to New York
Right. Outside. The UK scheme covers flights to the UK, the EU, Norway, Iceland, Switzerland and Gibraltar. A long flight to America falls under a separate international arrangement, where airlines buy offsets for their growth above a set level.A gas power station in Leeds
Not yet. Inside. Power stations were the first thing both schemes covered. Every tonne it gives off needs a permit.A flight, Heathrow to Paris
Not yet. Inside. Flights from a UK airport to the EU and its near neighbours have been counted since 2021. Every tonne from that flight needs a permit, held by the airline.- 10 tonnes£50 a permit? added
Picture a flight from Heathrow to Paris that gives off 10 tonnes. The permit price is £50 a tonne. What does the scheme add to the cost of that flight?
poundsRight. Five hundred pounds. Spread over 180 seats, that is under £3 a passenger. The bill is real; from 2026 the airline buys every permit, with none handed out free. Whether a passenger notices it depends on how it is spread, which is a fact about the spreading, not the bill. - Half the smokespare permits to sellThe marketprice?
The cap falls by five permits a year. A factory invents a way to make the same things with half the smoke. What happens to a permit's price?
It rises. The cap is still falling.
Not yet. The cap falls five a year as before. The invention cut demand by more than five, so the shortage shrank. The price follows the shortage, not the cap alone.It falls. The factory sells its spares, and more permits chase fewer buyers.
Right. The cap sets the supply. The invention cut the demand. Fewer tonnes wanted against the same permits is a smaller shortage, and the shortage is the price.Nothing. The government sets the price.
Not yet. The government sets the cap. The price comes out of the trading, which is the whole reason it can fall when somebody invents something.
Lesson complete
A cap sets how much. The trade finds the price, and the cheapest cuts get made first.