Experimental testbedding of a pollution trading system: Southern California's RECLAIM emissions market

Abstract

The efficient management of air quality through the use of pollution emissions trading systems is not a new idea (see Montgomery (1972)). However, the implementation of such systems is new. The design of the pollution permits being exchanged and the market in which the permits are traded requires the integration of environmental economics, game theory, operations research and experimental testing (see Ledyard (1993)). This chapter reports on experiments that were used to help design and testbed a novel pollution trading system used in Southern California. This system allows participants to trade two pollutants (nitrogen and sulfur oxides – NOx and SOx) across two zones (upwind and downwind) over 9 years separate years (1994-2003). The complexity associated with such an interdependent system of commodities makes the design of the trading system challenging. Testbedding new systems is standard fare in engineering but only recently has been applied to economics through the use of experiments (see Plott (1994)). Unlike experiments designed to test specific theories of behavior, testbedding is used when theory supplies little design advice and when the process is relatively new and there is no experience.

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