A disturbing development in the Los Angeles smog-trading market points to the need for California to proceed with caution in its pursuit of a carbon-trading market, warned regional air quality regulators. Increasingly, the major holders of emissions credits in the Los Angeles area are investors, including mutual funds, who some fear may hoard pollution rights to drive up their price. "Investors provide much-needed capital for control equipment," said Carol Coy, South Coast Air Quality Management District deputy executive officer, during an April 25 meeting. But, she warned, many of them may also "hoard" credits. Coy said that since 2006, an increasing number of the market's investors have been located abroad. They are thus beyond the reach of the district's enforcement powers if they commit fraud. "Enforcement offshore is not possible," she said. Given the local air district's experience, Coy cautioned state regulators about foreign participation in any California carbon market. She is in charge of the regional smog-trading program at the air district. This week's meeting examined how the Los Angeles area smog market may be a model for a state carbon market under AB 32, California's new climate change law. In the Los Angeles market, regulated companies sell credits among themselves, but also to investors. Investors, in turn, sell credits to other regulated companies or to each other. Investor-to-investor sales in the region's smog market represent 26 percent of the value of credits traded in the market. Volume-wise, investors sell 11 percent of the credits traded to each other and 36 percent of the credits traded to regulated companies that need to cover their emissions. In an effort to gain some enforcement handle, Coy explained, the air district amended its rules earlier this month to require that foreign investors purchasing Los Angeles smog credits appoint local agents registered in the state of California. Under the change, should a foreign investor commit fraud, the district will be able to serve the investor's local agent with papers related to any enforcement lawsuit. Should foreign or out-of-state investors sell bogus credits in any California carbon market, the California Air Resources Board would take legal action against whoever bought them in California, said Mike Scheible, air board deputy executive officer. However, it is uncertain what recourse California would have should a foreign investor try to corner any state carbon market.