The first subtask addresses intensity-based targets. While the Kyoto Protocol and the EU ETS for carbon dioxide focus on a quantity-based system with fixed or absolute emission targets, theUnited Statesand Australia have embraced targets based on emission intensity - a quantity target indexed to economic activity. Canada has committed to a quantity-based target under the Kyoto Protocol, but it is pursuing an intensity-based target in its domestic program. Intensity-based targets are a form of performance standard. These forms of regulation allow the effective emission cap to adjust in response to changes in economic activity. This feature may have political appeal because it provides a way to set environmental standards that are less likely to be, or perceived to be, constraints on economic growth, either within a regulated sector or across the economy. However, the use of an intensity target does not limit absolute emission levels, at least in the near term. The purpose of this task will be to clarify tradeoffs in the use of intensity-based policies by identifying the key features of this problem, modeling the relative performance of fixed versus indexed quantity targets, and applying the resulting framework to country-level data relevant for climate policy.

The second subtask addresses the role for a safety valve and the determination of a carbon price. A safety valve provides important protection against unexpectedly high costs of controlling emissions by setting a cap on the price of emission credits. However, when the safety valve is triggered additional allowances are put into the market, thereby exceeding emission limits at least in the near term. We will extend previous research into the proper design and incorporation of such price caps in the design of emissions-trading systems as well as related polices governing renewable energy policies, such as renewable portfolio standards. One particular question that arises in this context is “what should the level of the safety valve be?"