Prices vs. Quantities: An Empirical Study of Firms’ Instrument Choice

A longstanding theoretical discussion on the merits of prices vs.quantities for regulating emissions under uncertainty exists in environmentalpolicy literature. However, empirical evidence w.r.t. instrumentchoice has not been put forward so far. In particular, verylittle is known about instrument preferences from the perspective offirms. Investigating Swiss climate policy provides an ideal field for encounteringboth of the above concerns. In Switzerland, firms can selfselectbetween a tax (with a wage-based tax exemption) and emissionstrading (with a grandfathering mode of permit allocation) to regulatetheir CO2 emissions. In our paper, we empirically investigate this selfselectionmechanism based on a cross section of Swiss firm-level data.Specific theory on Swiss policy design identifies the influential factorsas being permit allocation, wages, uncertainty in abatement costs andthe flexibility of firms’ abatement technologies. We confirm evidencefor the first two factors, but were unable to find evidence for the latterones. Moreover, high-abatement firms tend to choose permit trading.