Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade

On efficiency grounds, the economics community has to date tended to emphasize price-based policies to address climate change, such as taxes or a safety-value price ceiling for cap-and-trade, while environmental advocates have sought a more clear quantitative limit on emissions. This paper presents a simple modification to the idea of a safety valve: a quantitative limit that we call the allowance reserve. Importantly, this idea may bridge the gap between competing interests and potentially improve efficiency to tax or other price-based policies.