Cap-and-trade properties under different hybrid scheme designs

Georg Grull, Luca Taschini

Research output: Contribution to journalArticlepeer-review

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 (price floor using a minimum price guarantee, price collar, allowance reserve, options offered by the regulator, and offset relaxation) 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 the compliance costs for relevant companies) can be accomplished while maintaining the original environmental targets. Plain vanilla options are proposed as an alternative that reconciles the otherwise conflicting policy objectives.
Original languageEnglish
Pages (from-to)107-118
Number of pages12
JournalJournal of Environmental Economics and Management
Volume61
Issue number1
Early online date30 Oct 2010
DOIs
Publication statusPublished - 31 Jan 2011

Keywords

  • allowance reserve
  • price ceiling
  • price collar
  • price floor
  • offset
  • safety valve

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