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Rules of the Game

Examining Market Manipulation, Gaming and Enforcement in California's Cap-and-Trade Program


Rules of the Game

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.