Tradable Permits Design Considerations: Safety Valves and Caps and Floors

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A “safety valve” mechanism allows the requirements of a cap-and-trade scheme to be relaxed — for example, increasing the total cap on emissions — if tradable permit prices rise above a certain level.

An upper limit (“ceiling”) allows higher emissions levels, at least temporarily, but also avoids extremely high prices that may force drastic and expensive emissions cuts.

Likewise, a lower limit (“floor”) avoids extremely low permit prices that would remove firms’ incentives to cut emissions at all.

A “price collar” or “symmetric safety valve” includes both a ceiling and floor, avoiding both extreme scenarios.