A Symmetric Safety Valve

Dallas Burtraw, Karen Palmer and Danny Kahn

RFF Working Paper Series from Resources for the Future

Abstract: How 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.

Keywords: emission allowance trading; climate change; safety valve; cost management; cap and trade; market-based policies (search for similar items in EconPapers)
JEL-codes: L5 L94 Q4 (search for similar items in EconPapers)
Date: 2009-02-27
New Economics Papers: this item is included in nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Journal Article: A symmetric safety valve (2010)
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