Cap-and-trade properties under different hybrid scheme designs

Georg Gr�ll and Luca Taschini

No 26, GRI Working Papers from Grantham Research Institute on Climate Change and the Environment

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 conicting policy objectives.

Date: 2010-09
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http://www.lse.ac.uk/GranthamInstitute/wp-content/ ... trade-properties.pdf (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:lsg:lsgwps:wp26

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