Hybrid Policies for Emission Control Under Asymmetric Information: A Comparative Analysis

ABSTRACT We compare the effects of three potential hybrid policies (cap‐and‐trade system with a ceiling‐price collar, a floor‐price collar and bilateral price collars) and two basic instruments (cap‐and‐trade system and effluent tax) for emissions control when the regulator has asymmetric information about emissions abatement costs. The optimal mix for each hybrid policy is characterised. Given the linearity of both marginal abatement costs and marginal damage costs, all hybrid policies strictly outperform both basic instruments and a hybrid policy with bilateral price collars dominates those with a unilateral collar, which perform equivalently. A simple empirical illustration for China's national carbon market shows that all hybrid policies result in appreciable cost savings compared to the current cap‐and‐trade system, with the bilateral price collars policy achieving the lowest price volatility.