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Cap-and-Trade Properties under Different Scheme Designs

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  • Georg Grüll
  • Luca Taschini

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 (safety-valve with offsets, price floor using a subsidy, price collar, allowance reserve, and options offered by the regulator) 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 potential costs for relevant companies) can be accomplished while maintaining the original environmental targets.

Suggested Citation

  • Georg Grüll & Luca Taschini, 2009. "Cap-and-Trade Properties under Different Scheme Designs," Working Papers 0919, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  • Handle: RePEc:mee:wpaper:0919
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