Orszag on the “Safety Valve”

CBO’s Peter Orszag on the economics of putting a safety valve in a cap-and-trade bill:

One option for allowing firms flexibility in determining when to reduce emissions while also achieving compliance with a cumulative emissions target would be through setting both a ceiling—typically referred to as a safety valve—and a floor on the allowance prices each year. The price ceiling would allow firms to exceed the annual target when the cost of cutting emissions was high, while the price floor would induce firms to cut emissions more than the annual target in low-cost years. The price ceiling and floor could be adjusted periodically to ensure that emission reductions were on track for achieving the long-run target; such a dynamic price system could substantially reduce the cost of a cumulative emissions target.