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
