Cap-and-trade as a method of managing greenhouse gas emissions

The table below shows how three types of policy - command and control, tax and cap-and-trade - affect three imaginary organisations.

Imagine that the government wants the three organisations to reduce their carbon footprints by 30% collectively, and they have the ability to reduce their emissions by 38%. Each company must spend a different amount to achieve emission reductions.

  Org A Org B Org C TOTAL
Carbon footprint (tonnes) 1m 2m 2.5m 5.5m
Desired reduction (10% 30% 30% 30% 30%
Desired reduction (tonnes) 300k 600k 750k 1.65m
Marginal cost of reductions £3/t £10/t £7/t £6.67/t
Total reductions possible 500k 600k 1m 2.1m
Total reductions possible (%) 50% 30% 40% 38%
         
COMMAND AND CONTROL        
Reductions made 300k 600k 750k 1.65 Mt
Cost of reductions £900k £6m £5.25m £12.15m
         
TAX        
Tax / tonne of emissions £8 £8 £8  
Makes reductions? Yes No Yes  
Reductions made 500k 0 1m 1.5 Mt
Cost of reductions £1.5m £0 £7m £8.5m
Tax paid (this may be recycled) £4m £16m £12m £32m
         
CAP AND TRADE        
Reductions made 500k 150k 1m 1.65 Mt
Cost of reductions £1.5m £1.5m £7m £10m
Credits bought (sold) (200k) 450k (250k) 0
Possible price of credits £6.67 £6.67 £6.67  
Cost of credits (sales) (£1.33m) £3m (£1.67m) 0
Cost after trading
 £167k £4.5m £5.33m £10m