Rules of the Game: Examining Market Manipulation, Gaming and Enforcement in California's Cap-and-Trade Program

UCLA Emmett Center on Climate Change and the Environment, August 2011

UCLA School of Law Research Paper No. 12-14

82 Pages Posted: 25 Jun 2012

See all articles by W. Bowman Cutter

W. Bowman Cutter

affiliation not provided to SSRN

Michael Rhead Enion

California Air Resources Board

Ann E. Carlson

University of California, Los Angeles (UCLA) - School of Law

Cara Horowitz

Emmett Center on Climate Change and the Environment at UCLA School of Law

Date Written: 2011

Abstract

In this paper, we assess the adequacy of the measures that have been proposed by the California Air Resources Board (CARB) to limit risks of market manipulation and rules violations in its greenhouse gas (GHG) emissions trading program. We focus in particular on the extent to which CARB has created conditions to ensure transparency in the market and sufficient liquidity to reduce the risk of market domination by a single or small number of participants. We also address CARB’s ability to detect foul play, take necessary enforcement actions, and impose adequate penalties. In our analysis, we take a careful look at the experiences of regulators within other emissions trading programs and draw lessons from those experiences.


In general, we conclude that CARB has in fact crafted a market likely to be both transparent and liquid, though we have a series of recommendations to improve further these crucial market qualities. CARB has taken important steps to construct a liquid, efficient and transparent market by taking the best practices from other allowance trading programs. We think it is unlikely that CARB will experience market manipulation that can significantly affect the efficiency or fairness of the market. We do believe, however, that our recommendations would improve the provisions and therefore reduce the (small) risk of illiquid and inefficient markets.

Keywords: California, cap-and-trade, AB 32, climate change, carbon trading, market manipulation, emissions trading

Suggested Citation

Cutter, W. Bowman and Enion, Michael Rhead and Carlson, Ann E. and Horowitz, Cara, Rules of the Game: Examining Market Manipulation, Gaming and Enforcement in California's Cap-and-Trade Program (2011). UCLA Emmett Center on Climate Change and the Environment, August 2011, UCLA School of Law Research Paper No. 12-14, Available at SSRN: https://ssrn.com/abstract=2089626

W. Bowman Cutter (Contact Author)

affiliation not provided to SSRN ( email )

Michael Rhead Enion

California Air Resources Board ( email )

1001 I Street
Sacramento, CA 95814
United States
919-322-2467 (Phone)

Ann E. Carlson

University of California, Los Angeles (UCLA) - School of Law ( email )

385 Charles E. Young Dr. East
Room 1242
Los Angeles, CA 90095-1476
United States
310-206-9496 (Phone)
310-206-1234 (Fax)

Cara Horowitz

Emmett Center on Climate Change and the Environment at UCLA School of Law ( email )

385 Charles E. Young Dr. East
Room 1242
Los Angeles, CA 90095-1476
United States

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