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 envi-ronmental policy literature. However, empirical evidence w.r.t. in-strument choice has not been put forward so far. In particular, very little is known about instrument preferences from the perspective of firms. Investigating Swiss climate policy provides an ideal field for en-countering both of the above concerns. In Switzerland, firms can self-select between a tax (with a wage-based tax exemption) and emissions trading (with a grandfathering mode of permit allocation) to regulate their CO2 emissions. In our paper, we empirically investigate this self-selection mechanism based on a cross section of Swiss firm-level data. Specific theory on Swiss policy design identifies the influential factors as being permit allocation, wages, uncertainty in abatement costs and the flexibility of firms ’ abatement technologies. We confirm evidenc