Consider the position of those concerned about the environment. Their policy of choice is a tradable permit system where each permit gives the holder the right to emit a specified amount of GHG into the atmosphere. By limiting the number of permits, one can precisely control GHG emissions and guarantee they remain below the threshold for disastrous climate change. That is, the cost to society, in terms of higher prices for fuel and reduced productivity, varies greatly under a permit system. Within the business community, as well as among consumers in general, the ideal climate policy is one that sets an upper limit on climate related expenditures.
Businesses are interested in maintaining a stable environment for planning and investment.
The risk of unexpectedly high compliance costs under a strict permit system thwarts that stability. For that reason, most businesses would prefer some sort of contingent policy that would keep costs low and predictable. The hybrid system we propose would establish a fixed number of tradable permits based on an emission target. It would then provide additional permits at a pre-specified trigger price. As long as the cost of controlling a ton of GHG emissions remains below the trigger level, the emission target would be attained.