California RECLAIM's market failure: lessons for the Kyoto Protocol

Abstract

The failure of Los Angeles' RECLAIM emission trading market in the summer of 2000 uncovers important issues that have direct relevance for the various systems now emerging for exchanging greenhouse gas credits. Two primary causes for the breakdown of RECLAIM are apparent. On the one hand, RECLAIM did not succeed because of a series of unpredictable events that included manipulation of the market by brokers and the California energy shortage. On the other hand, several potentially foreseeable program design flaws contributed to the failure. This study examines the structure of RECLAIM and concludes that there was sufficient resilience to endure the two unexpected crises. However, the problematic program design features created a market that was fatally flawed and, regardless of impinging circumstances, was ultimately bound to collapse. We also investigate the status of the rapidly developing international greenhouse gas market and identify several lessons from the RECLAIM experience: the need for a holistic approach to market design that includes the role of a bank, the interface with project-based credits, the similarities of the industries enrolled in the program, and need to carefully consider how to handle the problems caused by the end of the trading period.