Hybrid scheme key to low-carbon economy

A ‘hybrid’ carbon trading model, mixing global carbon taxes and global emission trading schemes, is the answer to achieving the UK’s target of reducing emissions by more than 30% to 2020, analysis by PricewaterhouseCoopers suggests.

In its white paper, Carbon taxes versus carbon trading: Pros, cons and the case for a hybrid model, PwC suggests a hybrid model allows the greatest flexibility for business and the economy to make use of the advantages of committing to making the UK a low-carbon economy.

It believes a hybrid model could be applied in Europe with only minor modifications to the existing European Emission Trading Scheme (ETS), which sets annual carbon emission allowances for certain industries and permits them to buy and sell surplus allowances with other companies.

The modifications would mean the ETS can be easily linked to US markets and, in the longer term, would pave the way for Indian, Chinese and Brazilian markets to join the scheme.

Setting out the argument for a hybrid plan, the PwC report outlines the advantages:
• Volatility of carbon prices would be reduced with the tax creating greater stability;
• It can be incorporated with minimal adoption by adding onto pre-existing tax structures;
• It can raise revenues for governments with reasonable predictability;
• It is more politically acceptable and could make it easier to obtain international agreement on a globally-linked trading scheme;
• Trading schemes can quantify emission targets with greater clarity; and
• Price flexibility can be incorporated in times of economic uncertainty and can be managed through banking and borrowing.

“A hybrid trading scheme with price ceilings and floors offers a potentially attractive balance of price flexibility and predictability that we think merits serious consideration by governments as a potential alternative to either pure trading, or pure tax solutions,” says PwC’s head of macroeconomics, John Hawksworth.