Beyond Playing 'Banker': The Role of the Regulatory Agency in Emissions Trading

Abstract

Emissions "cap and trade" programs have the potential to redefine the environmental compliance roles of regulatory agencies and regulated entities. Regulatory agencies theoretically become the "bankers" or "accountants," responsible almost exclusively for tracking program data necessary to determine compliance status and imposing sanctions. Regulated entities become "strategic planners" or "entrepreneurs," who have the flexibility to find the most effective and efficient manner of complying. Through an empirical examination of the RECLAIM (Regional Clean Air Markets) program in Los Angeles, this Article shows that agencies and program participants were not able to effectively assume these roles. The Article argues that the agency may need to take on the additional roles of "market maker," "technical consultant," and "contingency planner" in order to enable program participants to adequately plan for compliance and achieve program goals. The need for these additional roles underscores the importance of the governmental role in cap and trade programs and the raises the possibility that cap and trade regulation may require more administrative resources than traditional command and control regulation.

Keywords: environmental law, administrative law, regulatory governance, market-based regulation

JEL Classification: K23, K32