Many countries are contemplating the design of institutions to address 'the greatest market failure the world has ever seen' (Stern, N. (2007) The Economics of Climate Change. Cambridge, UK: Cambridge University Press, p.xviii). Australia is currently considering introducing a carbon trading scheme and prominent amongst the proposals being discussed is the 'McKibbin?Wilcoxen hybrid scheme' (McKibbin and Wilcoxen, 2002, 2006, 2007). We examine the literature on this proposal. We conclude that provided long-term goals are not sacrificed, there is much to admire in the institutional arrangements suggested. Short-term permits can address concerns about employment impacts, whilst long-term permits facilitate business planning. Nevertheless, we do seriously question the theoretical framework advanced to justify the hybrid structure ? a framework that is also used in some sections of Stern (Stern, N. (2007) The Economics of Climate Change. Cambridge, UK: Cambridge University Press) and elsewhere. Short- and long-run optimal abatement theories are neither credible nor necessary. In an Australian context, we also argue that there is a strong case for supplementing credits with carbon sinks created in the agricultural sector.
Keywords: cap and trade, carbon offsets, carbon tax, carbon trading, Australia, ecological economics, climate change, market-based instruments, optimal abatement models, social cost of carbon, Stern report, carbon sinks, agriculture