A Generalized Hybrid Approach to Controlling Emissions

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.Emissions tax; Emissions trading; Safety valve; Ranking; Uncertainty