Environmental and Resource Economics

, Volume 61, Issue 4, pp 463–476 | Cite as

A Note on Correlated Uncertainty and Hybrid Environmental Policies

  • John K. Stranlund


This note examines the effects of correlated uncertainty between abatement costs and pollution damage on hybrid emissions control policies. In particular, I show how correlated uncertainty affects the structure and performance of control policies that combine permit trading with price controls. Moreover, I show how correlated uncertainty affects the choice between a simple emissions tax versus a hybrid policy. Under correlated uncertainty, constant marginal damage is no longer necessary or sufficient for a tax to be an optimal policy.


Cap-and-trade Correlated uncertainty Emissions trading Emissions taxes Hybrid policies Price controls 

JEL Classification

H23 L51 Q58 


  1. Burtraw D, Palmer K, Kahn D (2010) A symmetric safety valve. Energy Policy 38(9):4921–4932CrossRefGoogle Scholar
  2. Fell H, Morgenstern R (2010) Alternative approaches to cost containment in a cap-and-trade system. Environ Resour Econ 47(2):275–297CrossRefGoogle Scholar
  3. Fell H, Burtraw D, Morgenstern R, Palmer K (2012) Soft and hard price collars in a cap-and-trade system: a comparative analysis. J Environ Econ Manag 64(2):183–198CrossRefGoogle Scholar
  4. Grull G, Taschini L (2011) Cap-and trade properties under different hybrid scheme designs. J Environ Econ Manag 61(1):107–118CrossRefGoogle Scholar
  5. Jacoby HD, Ellerman AD (2004) The safety valve and climate policy. Energy Policy 32(4):481–491CrossRefGoogle Scholar
  6. Newell RG, Pizer WA, Raimi D (2013) Carbon markets 15 years after Kyoto: lessons learned, new challenges. J Econ Perspect 27(1):123–146Google Scholar
  7. Philibert C (2008) Price caps and price floors in climate policy: a quantitative assessment. International Energy Agency Information Paper, OECD/IEAGoogle Scholar
  8. Pizer WA (1999) The optimal choice of climate change policy in the presence of uncertainty. Resour Energy Econ 21(3–4):255–287CrossRefGoogle Scholar
  9. Pizer WA (2002) Combining price and quantity controls to mitigate global climate change. J Public Econ 85(3):409–434CrossRefGoogle Scholar
  10. Quirion P (2010) Complying with the Kyoto protocol under uncertainty: taxes or tradable permits? Energy Policy 38(9):5166–5173CrossRefGoogle Scholar
  11. Roberts MJ, Spence M (1976) Effluent charges and licenses under uncertainty. J Public Econ 5(3–4):193–208CrossRefGoogle Scholar
  12. Shrestha RK (2001) The choice of environmental policy instruments under correlated uncertainty. Resour Energy Econ 23(2):175–185CrossRefGoogle Scholar
  13. Stavins RN (1996) Correlated uncertainty and policy instrument choice. J Environ Econ Manag 30(2):218–232CrossRefGoogle Scholar
  14. Stranlund JK, Moffitt LJ (2014) Enforcement and price controls in emissions trading. J Environ Econ Manag 67(1):20–38Google Scholar
  15. U.S. Congressional Budget Office (2010) Managing allowance prices in a cap-and-trade programGoogle Scholar
  16. Weber TA, Neuhoff K (2010) Carbon markets and technological innovation. J Environ Econ Manag 60(2):115–132CrossRefGoogle Scholar
  17. Webster M, Wing IS, Jakobovits L (2010) Second-best instruments for near-term climate policy: intensity targets vs. the safety valve. J Environ Econ Manag 59(3):250–259CrossRefGoogle Scholar
  18. Weitzman M (1974) Prices vs. quantities. Rev Econ Stud 41(4):477–491CrossRefGoogle Scholar
  19. Yates A (2012) On the fundamental advantage of permits over taxes for the control of pollution. Environ Resour Econ 51(4):583–598CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2014

Authors and Affiliations

  1. 1.Department of Resource EconomicsUniversity of Massachusetts-AmherstAmherstUSA

Personalised recommendations