2) (15 points) Suppose that a hybrid cap and trade system has a safety valve price of $75 for a permit. The current market price has been $50 for quite some time. Then the market becomes volatile.

a) (4 points) The market price rises from $50 to $80, so the safety valve kicks in. Compare the effect of emissions in the cap-and-trade situation to one where the carbon tax is $50. Explain (or show) under which system (cap and trade or carbon tax) has a lower increase in emissions.

b) (4 points) The market price rises from $50 to $60. Compare the effect of emissions in the cap-and-trade situation to one where the carbon tax is $50. Explain under which system (cap and trade or carbon tax) will emissions rise less.

c) (4 points) The market price falls from $50 to $40. Compare the effect of emissions in the cap-and-trade situation to one where the carbon tax is $50. Explain under which system (cap and trade or carbon tax) will emissions rise less.

d) (3 points) Using your answers to parts a, b, and c, which system carbon tax or hybrid cap and trade will have less emission volatility when there is market volatility for emissions?