The regional clean air incentive market reclaim
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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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The Regional Clean Air Incentive Market (RECLAIM)

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The regional clean air incentive market reclaim

The Regional Clean Air Incentive Market (RECLAIM)

September 2, 2014

David Porter


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


    The regional clean air incentive market reclaim

    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


  • The regional clean air incentive market reclaim

    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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