In general terms, the choices for applying controls (i.e., who is assigned the cap) include upstream targeting, downstream targeting, or a hybrid involving some combination of the two. In an upstream point of regulation, allowances are surrendered at the point of extraction, production, import, processing, or distribution of substances that (when used or combusted) result in GHG emissions. This approach was originally developed with fossil fuels in mind, but it could be extended to other gases. A downstream point of regulation would focus control on the point of emission into the atmosphere (power plants, cars, etc.).
An upstream approach controls emissions indirectly rather than directly. For example, energy suppliers would either have to employ technologies to reduce the carbon in their fuels or buy allowances to cover what remains. Since fuels with high-carbon content would need relatively more allowances per BTU of energy, they would experience a relative increase in their cost—an increase that would be passed forward to consumers. This higher cost of energy in general would promote greater investments in energy efficiency, and the relative price increase for high-carbon fuels would promote some substitution of fuels with lower carbon content.
Because it involves monitoring fewer parties, an upstream approach would likely have lower administrative costs. However, it would necessitate a system for rebating fees for feedstocks that are not combusted and therefore do not become GHG emissions (such as oil used for lubrication) and for combustion gases that are captured and sequestered rather than emitted. Like so many other design choices, the point of regulation is not necessarily an either/or choice. Hybrid strategies, involving upstream control of some sources and downstream control of others, are also possible.
Both tax and cap-and-trade policies control access to the use of the atmosphere as a repository for emitted GHGs. When this access is limited, the access rights become very valuable, and the initial allocation of these rights can advantage certain groups. To whom, and under what terms, should this value accrue?
Both tax systems and auctioned cap-and-trade systems force users to pay for that access. This approach generates revenue—in the case of GHG control, a considerable