Cap-and-Trade Properties Under Different Hybrid Scheme Designs

30 Pages Posted: 5 Dec 2009 Last revised: 7 Mar 2011

See all articles by Georg Gruell

Georg Gruell

University of Duisburg-Essen

Luca Taschini

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment; University of Verona - Department of Economics

Date Written: August 1, 2010

Abstract

This paper examines the key design mechanisms of existing and proposed cap-and-trade markets. First, it is shown that the hybrid systems under investigation (safety-valve with offsets, price floor using a subsidy, price collar, allowance reserve, and options offered by the regulator) can be decomposed into a combination of an ordinary cap-and-trade scheme with European or American-style call and put options. Then, we quantify and discuss the advantages and disadvantages of the proposed hybrid schemes by investigating whether pre-set objectives (enforcement of permit price bounds and reduction of potential costs for relevant companies) can be accomplished while maintaining the original environmental targets.

Keywords: Allowance reserve, Price ceiling, Price collar, Price floor, Safety valve

JEL Classification: H23, Q28, Q54, Q58

Suggested Citation

Gruell, Georg and Taschini, Luca, Cap-and-Trade Properties Under Different Hybrid Scheme Designs (August 1, 2010). Journal of Environmental Economics and Management, Vol. 61, No 1, 2011. Available at SSRN: https://ssrn.com/abstract=1518102

Georg Gruell

University of Duisburg-Essen ( email )

Lotharstrasse 1
Duisburg, 47048
Germany

Luca Taschini (Contact Author)

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment ( email )

Houghton Street
London, WC2A 2AE
Great Britain

University of Verona - Department of Economics ( email )

Via Cantarane 24
Verona, Verona 37129
Italy

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