The Rudd Government proposed an emissions trading scheme as its central policy response to persuade Australian businesses to reduce their greenhouse gas emissions. The scheme is based on a cap and trade system.

Liable firms will be required to surrender permits to the Government each year and the total cap for Australia will be reduced over time.

By limiting the availability of carbon permits, the scheme creates scarcity. As the permits will be traded in a market, this scarcity creates a price signal. The price will be an incentive for organisations to either reduce their carbon emissions or to buy permits from other firms that can reduce the same amount more cheaply.

By reducing the cap annually, Australia will meet its international commitments to reduce its emissions over time.

The Rudd Government planned to ease the cost of transition by compensating low-income households, motorists and export exposed industries.

A very similar cap and trade system has been operating in the EU for a number of years. The global market for carbon has grown quickly - from $65B in 2007 to $120B in 2009, with forecasts of $1.9T by 2020.

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