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Emission permits: volatility is a bug, not a feature

By Gar Lipow @Gristmill

Back when I worked developing large software systems, every now and then we ran into a bug that management decided was too much trouble to fix — “It’s not a bug. It’s a feature!” This is the approach that Kevin Drum seems to be taking when it comes to volatility in cap-and-trade programs.

The short version of the volatility problem is that with a trading system, permit prices vary not only in response to how many permits are issued, but also in response to general economic conditions. As a result permit prices bounce up and down a lot. Kevin, like a number of cap-and-trade supporters argues that this volatility is a good thing, because permit prices drop during bad times when people don’t have money to invest, and they rise during times when they do. In short they argue that counter-cyclicality makes volatility positive rather than negative. But, just as in the software industry, I’m afraid it is still a bug, not a feature…

…The only solution I know of that is likely to be effective is to make a permit system more like a carbon tax in one respect. Put a minimum price on it, something close to what you expect the cap to produce. That gives investors a minimum return on emissions reductions, and gives you a chance that some capital investment will go towards such reductions, even in bad times, which in turn helps produce the infrastructure for future reductions. Link to full article

Posted in Land Taxation, News.

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