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Setting trigger price in emissions permit markets equipped with a safety valve mechanism

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Abstract

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.

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Authors and Affiliations

  1. College of Arts and Sciences, The University of Tokyo, 3-8-1 Komaba, Meguro-ku, Tokyo, 153-8902, Japan

    Akira Maeda

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  1. Akira Maeda
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Correspondence to Akira Maeda.

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Maeda, A. Setting trigger price in emissions permit markets equipped with a safety valve mechanism. J Regul Econ 41, 358–379 (2012). https://doi.org/10.1007/s11149-011-9168-x

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  • DOI: https://doi.org/10.1007/s11149-011-9168-x

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