The debate over an emissions trading system in Australia periodically refers to the claimed benefits of the so-called hybrid model of emissions trading developed by McKibbin and Wilcoxen. This model has not been subject to critical scrutiny, a gap this paper seeks to fill.
The hybrid model proposes a national system with two types of emissions permits. Big emitters would be allocated long-term or perpetual permits which would allow one tonne of carbon to be emitted each year in perpetuity. The authors suggest that the total number of perpetual permits could be set for each emitter at their 1990 emissions. The permits would be tradable within the national jurisdiction but not internationally.
In addition the Government would issue short-term or annual permits. These would be sold rather than auctioned at a fixed price, with $20 per tonne of carbon (equal to $5.45 per tonne of carbon dioxide) suggested. There would be no restriction on the number issued each year, so the annual permits work more like a carbon tax. They would not be traded because anyone can buy any amount from the government for a fixed price.
The hybrid system was developed as an alternative to the systems of targets and timetables embodied in the Kyoto Protocol. It is also contrasted with the cap-and-trade system of the European Emissions Trading Scheme (EU ETS). It is explicitly not an international emissions trading system but a series of domestic systems that may be linked by an agreement to harmonise the domestic price of annual emission permits. This is a deliberate feature of the system designed to prevent ‘shocks’ in one permit market spreading to another, and was initially motivated by claims that international emissions trading would cause severe global financial instability, a claim no longer emphasised by its proponents.
The inability of polluters to meet their emission reduction obligations by investing in cheaper options abroad means that the cost of cutting emissions would be higher, and in many countries substantially higher, than under a flexible international system as provided for by the Kyoto Protocol.
There are several reasons why the McKibbin-Wilcoxen model would fail the various tests of good policy. These are described in full in the text available from the link below.