Topic Area: Air Pollution

Geographical Area: Los Angeles Basin

Focal Question: How has RECLAIM affected the Southern California emissions problem?

Sources:

(1) Internet Site- http://www.aqmd.gov/news1/Governing_Board/Bs1_19_01.htm#Spray_booth_rule (Board Meeting; January 19, 2001)

(2) Internet Site- http://www.aqmd.gov/news1/Archives/recaudit.html

(3) Goldenberg, Evan. (1993). "The Design of an Emissions Permit Market for RECLAIM: A Holistic Approach." UCLA Journal of Environmental Law and Policy 11(2): 297-328.

(4) The South Coast Air Management District, http://www.aqmd.gov/

Reviewer: P. Douglas Johnson, Colby College ’01

Review:

The environmental hazards created by the rising industrial emissions in Southern California began to attract increasing attention in the mid 1980’s. It had become clear that California's growing air pollution problem could not improve without substantial changes. The South Coast Air Quality Management District (SCAQMD) implemented the Regional Clean Air Management program (RECLAIM) in 1994 to address the issue of NOx, SOx, and reactive organic gas (ROG) emissions in the Los Angeles Basin. The RECLAIM program is an emissions permit-trading program in which RECLAIM Trading Credits (RTCs) are available for NOx and SOx. The program is designed to be phased into effect through 2003, by which time emissions are projected to cut by more than half. Because polluting facilities are required to cut their emissions by a specific amount each year, overall emissions are expected to be reduced by almost 80 percent by 2003.

 Traditional Command and Control regulation methods mandate that individual polluting facilities acquire emissions permits for each piece of polluting equipment within their facility, and also to implement specified emissions control equipment. This in essence restricts the methods by which facilities can reduce their emissions, thus in many ways stunting any potential research and development incentives businesses might have. While on one hand this traditional method places limitations and specified regulations on polluting facilities, it also fails to offer any incentives for firms to cut back emissions any further than mandated percentages or levels.

RECLAIM on the other hand regulates industrial facilities as if they were are enclosed in an imaginary bubble. Rather than attempting to regulate each source, RECLAIM focuses on regulating the net pollution in the bubble. Each facility is allotted pollution permits and is subject to severe fines if their annual emissions level is not within the fixed limit. Yet while traditional regulations mandate specific methods and equipment for emissions control, RECLAIM sets a factory-wide emissions limit for each business but allows businesses to choose what resources, materials and processes they will use to meet their emissions limit.

RECLAIM offers something else that makes it a unique regulatory program. Because businesses are different, some facilities may be able to reduce emissions at lower costs than others. Businesses which are able to reduce emissions by more that their allotted annual limit are then able to sell their excess reductions to other facilities. This creates a significant economic incentive to reduce net emissions, as those emissions credits are a relatively liquid asset.

In a perfectly competitive market the RECLAIM program greatly improves the efficiency and cost effectiveness of pollution control. By allowing businesses to interact amongst themselves RECLAIM minimizes the costs associated with emissions reductions. By not restricting the means by which emissions are reduced, RECLAIM not only encourages businesses to use the latest and most efficient technology, but also the development of new methods of reduction.

Some concerns arose that RECLAIM may in fact lead to what are commonly referred to as "hot-spots". This notion stems from the potential situation where several facilities in the same geographical location face similar difficulties in reaching their annual emissions limits. In order to combat their shortcomings they are forced to buy RTCs from other businesses. This may lead to specific concentrations of high emissions ("hot-spots"). SCAQMD addressed the issue by adopting zonal permit trading. The region was divided into two zones. Zone 1 is a coastal strip and zone 2 is located further inland. Facilities located in the two zones may only buy and sell RTCs from other businesses within their own specific zone. Detailed studies have shown that there have been no significant geographical shifts in emissions.

According to a 1996 RECLAIM audit, over 100,000 tons of NOx and SOx emissions had been exchanged by participation businesses for more than $10 million. 353 facilities are currently operating under RECLAIM restrictions, and reports show that those firms are on track to meeting the programs goals of reducing NOx emissions by 77 tons per day and Sox emissions by 15 tons per day by 2003.

Recently, however, RECLAIM participants have been forced to pay extremely high prices for RTCs. During the summer of 2000 there was a drastic increase in the demand for power production. The increase in demand was met by an equally large increase in production and of course the increase in production caused facilities to pollute more, thus pushing emissions beyond emissions caps.

In order to combat the expensive fines businesses would face, production facilities within the power industry was forced to buy 67 percent of the available RTCs. Because power-producing facilities only comprise roughly 14 percent of RECLAIM allocations, the effects were clear. The increased demand for RTCs led to a decrease in supply, thus driving prices far higher than usual. For NOx RTCs in particular, prices increased from approximately $4,284 per ton traded in 1999 to roughly $39,000 per ton traded during the first ten months of 2000.

Beginning in the fall of 2000 a group comprised of RECLAIM facility representatives, environmental groups and state and federal environmental agencies met to discuss proposals of how to stabilize RTC prices. Ideas included possible separating major power plants from the rest of RECLAIM, requiring that power producers adopt alternative emissions control equipment, and possibly in part funding the RECLAIM program with a loan. A tentative Board meeting is scheduled for May 2001 to finalize any decisions.

Despite this RTC demand side pricing dilemma, RECLAIM is still on course to meet its originally projected goals. RECLAIM’s potential success is largely due to the program’s use of market forces and economic incentives to encourage emissions reductions. As we have clearly seen, huge amounts of emissions credits are bought and sold every year. This indicates that a traditional command and control approach would have created an unequal distribution of costs across the region of participation. The cost minimization and compliance flexibility created by the RECLAIM program sets it apart from other emissions reduction programs.