Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2004:17: A Generalized Hybrid Approach to Controlling Emissions

Svante Mandell ()
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Svante Mandell: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden

Abstract: This paper examines the optimal instrument choice to control emissions under uncertainty. A hybrid regulation mechanism is developed that contains cap-and-trade, emissions taxes and socalled safety valves as special cases. This makes it possible to examine optimal policy choice and the resulting efficiency losses for each instrument. It is shown that the hybrid regulation mechanism in efficiency terms is weakly superior to the other instruments. The model is also used to study optimal response to non-optimal policy implementations.

Keywords: Emissions tax; Emissions trading; Safety valve; Ranking; Uncertainty

JEL-codes: H23; Q28; Q58

18 pages, November 10, 2004

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