The theoretical foundations for the hybrid carbon schemes were laid down by Roberts and Spence
(1976), and then further refined by McKibben and Wilcoxen (2002). A hybrid carbon scheme is essentially an integrated system that incorporates both carbon trading (through allowances) and carbon taxes as a method to reduce systematic volatility. The hybrid scheme presumes a twotiered national system of emissions permits. Large-scale emitters would be allowed long-term or perpetual permits that grant the right for a specified amount of carbon to be emitted per annum in perpetuity.
These permits would be restricted to being traded in the national jurisdiction, and not tradable in any other jurisdictions. Juxtaposing the long-term permit system are the short-term or annual permits. These short-term permits would operate more as a “carbon tax,” in the sense that they would be sold, not auctioned, at a fixed price. There would be no restriction on the number issued each year, and they would not be tradable, as any emitter could purchase the amount needed from the regulatory agency for a fixed price.
On a theoretical basis, the hybrid model’s main attraction is its capacity to stave off a price collapse if its carbon trading appendage implodes because of over-allocation, essentially as what occurred with the EU ETS Phase One. Under the hybrid scheme, firms trade allowances at prices that fluctuate within a stable price band, with a predefined ceiling and floor. The hybrid scheme represents a thorough fusion of the advantages and disadvantages of an unadulterated carbon tax and CaT frameworks. The narrower the price band, the more the scheme resembles a carbon tax, while a wider band would more resemble a CaT system.
The hybrid scheme moderates one of the major problems that haunt CaT schemes, namely, the potential for excessive volatility. The supporters of such a scheme argue that with the incorporation of a price floor, it promotes greater certainty for companies to invest in renewable energy technology, in contrast to the traditional CaT. But at the same time, many private sector representatives criticize hybrid emissions trading schemes as needlessly complex because of the bureaucracy required to manage what is essentially two systems grafted together.
The hybrid scheme was presented as an alternative to the timetables and target based systems set forth in the Kyoto Protocol. Any international carbon abatement systems incorporating a hybrid system would entail a series of closely interwoven domestic programs that could possibly be linked—in a very constrained way—to a global accord to harmonize the domestic price of annual emissions permits. The independence of the hybrid scheme from a global carbon scheme was thought necessary to shield and protect a domestic carbon scheme from the price instability that occurs if one system spreads out and infects carbon platforms in other jurisdictions.
A hybrid model may be especially difficult to establish in the Gulf, because of the need to create a complex regulatory environment on short notice, and the attendant high transaction costs, the ballooning bureaucracy to administer the system, and the lack of human capital. Gulf businesses generally support a permit-based trading model (CaT) with initial disbursements of free allowances, as the most viable carbon abatement system Gulf-based business and industrial groups tend to promote a CaT model, because it offers significant opportunities for emissions reductions in a multitude of carbon-intensive sectors and encourages technological innovation in uncapped sectors through the spread of technology and best practices.