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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.

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