Addressing Price Volatility in Climate Change Legislation
A symmetric safety valve can be expected to lower price volatility in a capand-trade program, thereby reducing unproductive economic disruptions. It can be expected to lower the hurdle rate for new investments in innovative technology, thereby reducing the overall cost of the program. And it provides a safeguard against potential manipulation of the market by limiting the potential payoff to such behavior.A cap-and-trade policy and an emissions tax can be designed to share a set of attributes that are often associated with the other. Whether the choice is a cap or a tax, it would be a mistake to adopt an inflexible policy. Both can be designed to automatically adjust to information about program performance, according to decision rules that can be transparent to investors.
