Tax and trade: a hybrid climate policy instrument to control carbon prices and emissions

This article describes a 'tax and trade' emission regulations system that controls both emission costs and emission quantities. Emitters are taxed at a fixed price on carbon emissions and the government uses the tax revenue to buy carbon offsets on existing emissions markets. Unlike a traditional carbon tax, regulated firms may also produce carbon credits which may be sold to the government. Thus, the government bears the compliance cost risk rather than an individual firm and has control over the number of offsets purchased and the effective emission reduction. This unusual form of hybrid has potential political advantages of creating an economic incentive on corporate choices (at the margin) substantially greater than the actual trading price, and with lower financial transfers than in most schemes. Policy relevance The article presents a hybrid carbon emissions system that adds to the growing discussion of hybrid policy instruments which could be implemented by policy makers, particularly in nations without current cap and trade policies.