Setting trigger price in emissions permit markets equipped with a safety valve mechanism
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This study develops an analytical model of emissions markets equipped with a safety valve mechanism. It examines how a regulator can control emission reductions by emitters by setting two policy parameters: emission targets and trigger prices. I demonstrate that the capabilities of these two policy parameters are greatly affected by uncertainty regarding unconstrained aggregate emissions. I also show that there exists a specific combination of target and trigger-price settings that eliminates the need to consider uncertainty regarding unconstrained aggregate emissions when regulators set emission reduction goals. The model and its findings identify a rule for setting trigger prices with respect to the total design of tradable permit systems and thus offer practical guidance in designing a permit market.
KeywordsTradable permits Marketable permits Cap-and-trade systems Uncertainty Price cap
JEL ClassificationQ58 D23 H11
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