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The Regional Clean Air Incentive Market (RECLAIM). September 2, 2014 David Porter. Outline. What is RECLAIM? Why tradable permits as policy? Policy Design Issue 1: The Property Right What is an Experiment? Policy Design Issue 2: The Market. RECLAIM.

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Presentation Transcript
outline
Outline
  • What is RECLAIM?
  • Why tradable permits as policy?
  • Policy Design Issue 1: The Property Right
  • What is an Experiment?
  • Policy Design Issue 2: The Market
reclaim
RECLAIM
  • SCAQMD was under pressure from EPA to meet clean air standards
    • LA Basin had the highest number of “high” pollution days of any city in US in the early 1990s
  • Prior to 1994, AQMD used the standard command and control method:
    • BACT – each piece of equipment is regulated
    • R&D firm disincentives and costs ignored (coatings)
    • Fails to offer any incentives for firms to cut back emissions any further than mandated percentages
reclaim1
RECLAIM
  • Rather than attempting to regulate each source, RECLAIM focuses on regulating the net pollution at the facility
    • Each facility is allotted pollution permits and is subject to severe fines if their annual emissions level is not within the fixed limit
  • Businesses which are able to reduce emissions by more that their allotted annual limit are then able to sell their excess reductions to other facilities
    • This creates a significant economic incentive to reduce net emissions, as those emissions credits are a relatively liquid asset
  • By allowing businesses to interact amongst themselves RECLAIM minimizes the costs associated with emissions reductions
policy design issue 1 the property right
Policy Design Issue 1: The Property Right
  • Fixed amount of pollution per year in basin
      • NOX, SOX and VOC
      • Allocate right to pollute Lbs per year
      • Zones (hot spots)
  • Reduce allocation by fixed percent per year
    • The cap declines annually (8.3% per year on average for NOx and 6.8% per year on average for SOx) from 1994 to 2003.
tradable credit
Tradable Credit
  • The Process considered had
      • Allocation of credits (pounds designated by year)
      • Trade credits (swaps, cash, portfolio, etc.)
      • Monitoring and Reporting (quarterly)
      • Restrictions – use only current year credits for current year pollution – NO BANKING
  • Reconciliation Period Created
      • End of year accounting (delay/uncertainty of use)
end of year effect
End of year effect?
  • At year end
      • Long or short
      • Rational Expectations?
  • Proposal to Stagger Credits

Jan. 1 to Dec 31 Credits

1997

1998

1999

2000

2001

2002

Jul. 1 to Jun 30 Credits

1997

1998

1999

2000

2001

microeconomic systems as an experimental science
Microeconomic Systems as an Experimental Science
  • A Microeconomic system is comprised of:
      • The Environment
      • The Institution
  • The Environment consists of:
      • The list of participants
      • The resources to be allocated among participants
      • Participant characteristics which are private information
the institution rules of the game
The Institution: Rules of the Game
  • The Institution consists of:
      • Language
      • Allocation rule which transforms messages into allocations
      • Pricing rule transforms messages into sums to be paid or received
slide10

Outcomes: allocations and prices

Institutions: language of the market, rules of communication and contract

Behavior: rational, bounded, etc.

Environment values, costs, information, resources

science of economics
Science of Economics
  • Control environment parameters
      • Induce value and costs (experimenter knows incentive structure)
      • Information can be controlled
      • The environment can be replicated
  • The Institution (rules) can be changed and outcomes observed and measured
      • Real people
      • Real Incentives
      • Replicable
slide12

Outcomes: allocations and prices

Treatments:

Change rules

Model Predictions

Institutions: language of the market, rules of communication and contract

Behavior: rational, bounded, etc.

Environment values, costs, information, resources

Controlled by Experimenter

experiments and public policy
Experiments and Public Policy
  • Typically, policy design is based on simple models of behavior or “gut-feel”
    • Models are based on conditions that are not faced in the field application
  • Policy impacts can be great if the design is not tested
    • Lab testing of the system to determine possible flaws are standard in engineering but ignored in public policy design
  • Sometimes seeing is believing (details can be important)
an experiment with annual and staggered credits
An Experiment with Annual and Staggered Credits

Year 1 Year 2 Year 3 Year 4 Year 5

policy design issue 2 the market
Policy Design Issue 2: The Market
  • The general market conditions that will be the focus of our design process are:
    • The RECLAIM market is thin with a small number of participants;
    • There is a need only to trade at quarterly compliance intervals when facilities can update their emission plans;
    • There is no history of market trades; and
    • Buyers and sellers would like to transact by selling whole portfolios of credits (all or nothing trading, economies of scale, complementary pollution emissions requirements, etc.)
order types
Order Types
  • A multi-market order for agent i is a vector <bi, qi1, ...., qin, Fi> where:
    • bi >0 means agent i is willing to pay at most bi for the order,
    • bi <0 means agent i is willing to accept at least bi for the order.
    • qij >0 means agent i wants to purchase up to qij units of j in the order,
    • qij <0 means agent i wants to sell up to qij units of j in the order,
    • Fi is a scale factor (0 < Fi< 1) which indicates that agent i is willing to accept any one order of the form <fi bi, fi qi1, ...., fi qin,> where fi [Fi,1].
experiments field
Experiments/Field
  • When there are complements or minimum fills the mechanism outperforms standard practice
  • Not much harm is done when demands are linear
  • During the summer of 2000 there was a drastic increase in the demand for power production.
  • The power industry purchased 67 percent of the available RTCs. Because power-producing facilities only comprise roughly 14 percent of RECLAIM allocations, the increased demand for RTCs led to a decrease in supply. For NOx RTCs in particular, prices increased from approximately $4,284 per ton traded in 1999 to roughly $39,000 per ton traded during the first ten months of 2000.
current condition
Current Condition
  • Energy crisis in California gave the Governor ammunition to let firms (mainly electricity producers) off the hook
    • RECLAIM “discontinued”
    • Smog alerts on the rise
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