Cap-and-trade properties under different hybrid scheme designs

Georg Grüll and Luca Taschini

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: allowance reserve; price ceiling; price collar; price floor; offset; safety valve (search for similar items in EconPapers)
JEL-codes: C60 H23 Q52 Q58 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2010-09
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http://eprints.lse.ac.uk/37597/ Open access version. (application/pdf)

Related works:
Journal Article: Cap-and-trade properties under different hybrid scheme designs (2011)
Working Paper: Cap-and-trade properties under different hybrid scheme designs (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:37597

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