"Cap & share" emission reductions

Continuing the discussion about carbon trading, carbon taxes and "cap and trade", here's "cap and share" described by its authors as "a fair way to cut greenhouse gas emissions and tackle climate change".

Here's a flow chart of how it works:


This is a very interesting background document by Brian Davey called "Who owns the Sky?". He outlines the basic pre-conditions for an effective emission reduction system:

1. The necessity for an overall cap on greenhouse gas emissions
   
2. Control of carbon emissions should take place "upstream" (producers) and not "downstream (users)
   
3. Who Owns the Sky? "Scarcity rent"