The Market for RECLAIM Trading Credits: A Theoretical and Empirical Investigation of Intertemporal Trading and Cost EffectivenessEPA Grant Number: R831773
Title: The Market for RECLAIM Trading Credits: A Theoretical and Empirical Investigation of Intertemporal Trading and Cost Effectiveness
Investigators: Moore, Michael R. , Holland, Stephen P.
Institution: University of Michigan
Current Institution: University of Michigan , University of North Carolina at Greensboro
EPA Project Officer: Hahn, Intaek
Project Period: November 1, 2004 through August 31, 2008
Project Amount: $119,498
RFA: Market Mechanisms and Incentives for Environmental Management (2003) RFA Text | Recipients Lists
Research Category: Economics and Decision Sciences
Two major cap-and-trade programs for air-pollution reduction were initiated in the 1990s: the federal sulfur dioxide (SO2) allowance program and southern California’s RECLAIM program for NOx (nitrogen oxides) and SO2 reduction. While policy lessons have been learned from the federal program, the RECLAIM program has not received similar evaluation. RECLAIM’s distinct features – a declining cap on an annual basis, nonbankable permits, and two overlapping cycles of permits – raise new questions about the design of tradable permit systems. We will assess the RECLAIM market for evidence of intertemporal trading and cost-effective abatement. The research has two objectives: (1) model the distinct features of the RECLAIM market to generate hypotheses about intertemporal permit use, intertemporal trading, and cost effectiveness; and (2) empirically analyze permit use, intertemporal trading, cost reduction, and cost effectiveness of the RECLAIM market.
First, the research will model intertemporal trading in the RECLAIM market with special attention to RECLAIM's unique trading opportunities and constraints. The model will draw on results from the economics of exhaustible resources to assess the cost-effectiveness of RECLAIM and to establish a framework for empirical investigation. Second, the research will establish basic facts on the extent and scope of intertemporal trading in RECLAIM and apply empirical tests of cost effectiveness and arbitrage that use RECLAIM market data. The data will include facility-level observations from 1994-2003 on emissions, initial permit allocations, all permit trades, and compliance.
We expect to learn whether firms can, and do, take advantage of RECLAIM’s opportunities for intertemporal permit use and trading to reduce abatement costs. We expect to compare cost savings relative to command-and-control regulation and also relative to a market without opportunities for intertemporal trading. At the same time, the RECLAIM program may fail to realize potential cost savings relative to a program with permits that can be banked and borrowed. Insights from this research will contribute to policy development for tradable permit programs in air and water pollution, and to understanding the risk-management issues associated with pollution “hotspots” in cap-and-trade programs.