This is the fourth post in five-part series on the details required to get carbon policy right. See also parts one, two, and three.
We now get into an issue that will seem a bit arcane, because no one's talking about it, at least not explicitly. But it's a real choice, and in many conversations about carbon policy we are implicitly getting it wrong.
Should we price carbon in spots, or strips? Or, to take it out of financial jargon, should we:
- set up markets such that people who are selling or buying emissions credits have to go to the market with each incremental ton to determine what the price will be (a "spot" market), or
- set up markets such that buyers and sellers can enter into long-term contracts for the emissions they will produce/reduce (a "strip" market)?