An Analysis and Recommendation for the Terms of the RECLAIM Trading Credit

Abstract

The South Coast Air Quality Management District (AQMD) has proposed an annual RECLAIM Trading Credit (RTC) with uniform issue and compliance dates as the trading instrument for its market-based regulatory program. The proposed design for this instrument carries potential problems for both RECLAIM facilities and AQMD, including market imbalances, price volatility, economic inefficiencies, and an increase in ambient emission peaks. These problems result directly from the design of the instrument, and they can be alleviated through the selection of alternate design variables and a change in the allocation of RTCs to RECLAIM facilities. Both the problems and the effectiveness of the solutions have been tested and documented in experiments conducted in the Laboratory for Experimental Economics and Political Science at the California Institute of Technology.