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1 Emissions Permit Markets Equipped with a Safety Valve Mechanism

The study develops an analytical model of emissions markets equipped with a safety valve mechanism. It examines the regulator’s control of emission reductions by emitters by setting two policy parameters: emission targets and trigger prices. We show that the capabilities of these two policy tools are greatly affected by uncertainty regarding unconstrained aggregate emissions. We also show that there exists a specific combination of targetand trigger-price settings that frees emission reductions from dependence on the uncertainty of unconstrained emissions. The findings offer policy-makers practical guidance in designing a permit market.