A Symmetric Safety Valve
AbstractHow to set policy in the presence of uncertainty has been central in debates over climate policy. Concern about costs has motivated the proposal for a cap-and-trade program for carbon dioxide, with a “safety valve” that would mitigate against spikes in the cost of emission reductions by introducing additional emission allowances into the market when marginal costs rise above the specified allowance price level. We find two significant problems, both stemming from the asymmetry of an instrument that mitigates only against a price increase. One is that most important examples of price volatility in cap-andtrade programs have occurred not when prices spiked, but instead when allowance prices collapsed. Second, a single-sided safety valve may have unintended consequences for investment. We illustrate that a symmetric safety valve provides environmental and welfare improvements relative to the conventional one-sided approach.
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Bibliographic InfoPaper provided by Resources For the Future in its series Discussion Papers with number dp-09-06.
Date of creation: 27 Feb 2009
Date of revision:
emission allowance trading; climate change; safety valve; cost management; cap and trade; market-based policies;
Other versions of this item:
- Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
- L5 - Industrial Organization - - Regulation and Industrial Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-14 (All new papers)
- NEP-ENE-2009-03-14 (Energy Economics)
- NEP-ENV-2009-03-14 (Environmental Economics)
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