The scheme states:
Some of the annual ‘carbon budget’ would then be distributed to individuals on a per capita basis for free, with the remainder sold or allocated to businesses and the public sector. The allowances or credits would then be surrendered whenever individuals or businesses bought carbon directly – for example, through purchases of electricity, petrol, gas, or fuel oil.
To allow flexibility, a market would be created whereby participants could buy and sell carbon credits, leading to the creation of a price for carbon, which would encourage energy efficiency and behavioural change, whilst stimulating the demand for low carbon technologies such as renewable energy.
Which is the natural extension of a Kyoto style Cap and Trade system put on to individuals. I guess it makes sense to impose these credits at the most obvious points in the cycle, eg when we pay for electricity or petrol etc, rather than when we buy a finished product which took electricity to make but can be put into the price.
Of course we could just implement a tax on carbon to perform the same function, but it seems this cap and trade method is preferred for this reason:
The effect on business would be similar to that of a carbon tax, and this would be reflected in the price of carbon-intensive products. However, unlike a carbon tax, a cap and trade scheme like Domestic Tradable Quotas would be guaranteed to deliver the carbon reductions decided upon, as the carbon limit would be fixed for several years ahead.
Although I do wonder if the Cap and Trade scheme is preferred by government because it doesn’t involve the “T” word. The idea of rationing it out to everyone seems much more equitable, but of course if you are going to meaningfully start restricting carbon usage I can’t see how the actual price effect can be different, and it has the potential to be much more volatile. A straight tax would also avoid people having to track two kinds of money, carbon money and actual money but its good to see progress being made on this.