Hybridization ofTaxation and Trading

There are certain sectors of the economy, such as transportation, that are difficult to incorporate into an emissions trading scheme. These types of sectors are largely managed through taxation measures on liquid fuels aimed to promote conservation along with biofuels such as ethanol. Governments can promote other initiatives to reduce emissions, such as the investment in public transportation, and redistribute revenue collected by such schemes.

The combination of taxation in parallel to emissions trading is regarded as hybridization; however, a true hybridization of carbon tax and emissions trading is when an emissions trading scheme introduces a price cap, a price floor, or both. This enables government to sell credits at the price cap (which is effectively a tax) or purchase credits at the floor when the market price falls below the floor [13] .

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