Smart Cap.

The article focuses on a novel "smart cap" and trade system designed to efficiently regulate greenhouse gas emissions under asymmetric information, where firms know their abatement costs but regulators do not. Unlike standard cap and trade or carbon tax systems, the smart cap endogenously adjusts the allowable emissions per certificate based on the market price of certificates, aggregating private information and responding optimally to technological and macroeconomic shocks. The authors develop a dynamic integrated assessment model showing that slow diffusion of technological innovations makes the optimal carbon price more sensitive to emissions than the traditional Social Cost of Carbon (SCC) suggests, challenging common assumptions favoring fixed-price instruments. The smart cap improves welfare by smoothing cost shocks, maintaining market stability, and offering practical implementation pathways that build on existing institutions while addressing political and informational constraints.