Testing the assumptions behind emissions trading in non-market goods: The RECLAIM program in Southern California

Emissions trading is, essentially, a policy instrument that is designed to simulate a market for an otherwise public good. Conceptually, its justification hinges on a number of key assumptions, namely the negligibility of local impacts, the ability to separate and commodify the good in question, and characteristics of a well-functioning market. The authors examine the performance of RECLAIM, a NO_x emissions trading program in Southern California, USA, and illustrate how to test these assumptions. There is some evidence that the trading of NO_x generates new externalities, such as the possibility that other air pollutants, e.g. volatile organics, are essentially traded along with it. Moreover, the RECLAIM program has recently begun to experience difficulties due to the fact that the market is relatively thin. This analysis provides ways to assess more deeply and reform these trading regimes, including opening up RECLAIM to public review. The case study speaks to a wider arena, as emissions trading is presently being considered in other parts of the world to address issues ranging from acid rain to non-point source pollution to greenhouse gases. The analytic approach, illustrated herein, is a general one that has a wider applicability than the particular case of NO_x trading. It is hoped that this kind of critical inquiry can lead to a more careful deliberation of the merits and challenges of emissions trading.