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3.2.4. RECLAIM

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Savings from Economic Incentives

The highest ozone levels in the nation are recorded in the Los Angeles area, with readings often exceeding twice the national ambient air quality standard of 0.12 ppm. This is a one hour standard, not to be exceeded more than once a year (averaged over three years). The South Coast Air Quality Management District (SCAQMD or District) also fails to meet the particulate and CO standards, though not by such a large margin. Historically, the SCAQMD has relied on command and control rules to limit emissions of ozone precursors (as well as other pollutants).

Despite making substantial progress over the past three decades in improving air quality in the Los Angeles Basin, it was apparent to SCAQMD officials that further progress toward attaining federal standards would be prohibitively expensive using traditional regulatory approaches. By 1990 the marginal costs of NOx control for some sources in the District had reached $25,000 per ton at electric power plants, versus $500 to $5,000 nationally. Proposed SO2 controls on catalytic cracking units at refineries would have cost $32,000 per ton, versus national costs of under $500 per ton (see the section describing the Acid Rain allowance trading program). Consequently, the District began to investigate the feasibility of creating a marketable permit in the ozone precursors VOC and NOx as well as SO2 (the latter for its role in the formation of small particulate matter) as a means of accomplishing air quality goals at lower cost. (Selmi, Lentz).

The District initially proposed a marketable permits program termed RECLAIM (for Regional Clean Air Incentives Market) that would include about 2,000 sources of reactive organic gases (representing about 85 percent of permitted stationary source emissions), 700 sources (representing 95 percent of permitted NOx emissions), and about 50 sources of SO2 (representing about two-thirds of permitted stationary source emissions). Each market would start with an allocation of emissions equal to the 1994 emissions target in the District's Air Quality Management Plan (AQMP). Each marketable permit program would reduce emissions annually by amounts necessary to achieve the AQMP targets: attainment of air quality standards by 2003 for SO2 and NOx and VOC emissions goals by 2010.

For the NOx and SO2 programs, emissions originated at combustion sources with well-defined exit points to the environment. Emission monitoring would be based on stack gas measurement, a relatively simple task that increasingly is accomplished with remote sensing devices. For reactive organic gases (ROG) the market was based largely on evaporative emissions, which are inherently more difficult to measure. Prospective ROG trading also was complicated by the fact that ROG are not homogeneous; some react much more readily than others to form ozone. Further, some ROG also are classified as toxic pollutants and regulated separately. After about one year of analysis and discussion, RECLAIM officials decided to defer including ROG and concentrate on program design for NOx and SO2.

A basic issue for both programs was which facilities would be included. Despite the prospect for lower control costs that would accompany participation in a marketable permit program, a number of sources argued for exemptions due to concerns about the future price and availability of marketable permits. District officials eventually exempted sewage treatment plants, landfills, and three small municipally-owned power plants. These facilities asked for exemptions as "essential public services." Participation in RECLAIM could have required a temporary shutdown to install monitoring equipment, a situation incompatible with an essential service.

Baseline emission allocations proved contentious. According to the basic design features for RECLAIM, emission allocations would be based on the 1994 emission target for each source. This was computed in the AQMP by taking reported 1987 emissions and deducting projected reductions mandated by air quality regulations. Due to a recession in the early 1990s, emissions in 1991, 1992 and 1993 were lower for many sources than what the AQMP required. Many interest groups, including the affected sources, argued that baseline allocations should be based on the AQMP. Environmental groups argued that actual 1993 emissions should serve as the baseline for emission allocations. The compromise that was struck defines the emission cap for each source as the highest year of reported emissions between 1989 and 1991, less any reductions required by regulations implemented through 1993.

Monitoring and reporting issues also proved controversial, with lengthy debates over how emissions would be measured and how often reports would be filed. Industry sought to file one report per year, while public health agencies and environmentalists wanted daily or weekly reporting. The EPA sought assurance that the hourly NOx standard would not be violated. In an attempt to allay industry concerns that frequent monitoring would be too expensive, the AQMD developed a central computer that would accept data directly from the participating facilities in RECLAIM. Sources installed continuous emission monitors on every boiler emitting 10 tons annually or more. The CEM recorded pollutant readings minute by minute and sent the readings to a remote terminal that averaged the readings over fifteen minute periods and forwarded the number to the AQMD central computer. An artificial intelligence system analyzed the data and verified compliance by each boiler. When the system detected a potential problem, inspectors were dispatched to investigate further. For sources between 4 tons per year and 10 tons per year, the District allows sources to use default emission rates calculated by monitoring process variables, with periodic sampling and testing.

The District projected that the one-time costs of installing monitoring equipment would be approximately $13 million with negligible annual operating costs. Once RECLAIM was in place, operating and mantenance costs proved to be larger than anticipated. Further, CEMs have annualized costs on the order of $125,000. It is easy to see that monitoring costs are high on a per-ton basis for small sources. For example, a source emitting just over 10 tons per year would spend about $12,500 per ton monitoring the emissions. This is quite high relative to marginal control costs and suggests a need to lower monitoring costs for smaller sources.

The actual trading works as follows. Each source has a declining allocation of RECLAIM Trading Credits (RTC) for each year from 1994 to 2003. The District originally planned to have a single expiration date of December 31 each year for all allocations. Concern that there could be a "logjam" of trading near the expiration date led District officials to randomly divide facilities into two categories of equal size: Cycle One sources with calendar year compliance dates, whose credits would expire on December 31 of each year; and Cycle Two sources with a July 1 to June 30 compliance calendar, whose credits would expire on June 30. Sources in Cycle One are free to trade with those in Cycle Two, but the expiration dates on the credits do not change. After 2003 the balance remains constant. The RTC are denominated in pounds: one RTC equals one pound of emissions. Sources are free to trade RTCs for the current year or for future years; however, all RTCs are good only for the year for which they are issued. Trades in RTCs are limited by geographical factors; for a potential buyer, the number of credits required to offset a pound of emissions varies with the location of the seller. The District maintains records of all transactions in RTCs and shares that information with market participants.

Under RECLAIM rules, the District may impose penalties for net emissions (including trades) in excess of permitted amounts. One potential penalty is a reduction of next year's emission allocation by the amount of the exceedance. Other possible actions include civil penalties and the loss of the operating permit.

In 1994, the NOx and SO2 markets began with 370 sources and 40 sources, respectively. Both markets represented approximately 70 percent of stationary source emissions. Analysis shows that the program should reduce NOx emissions by an average of 8.3 percent per year (amounting to a cumulative reduction of 80 tons per day by 2003) and SO2 emissions by 6.8 percent per year (a cumulative 15 tons per day by 2003). The District projected that RECLAIM would lower annual compliance costs by 42 percent compared to a command and control approach: $80.8 million versus $138.7 million.

As a means of jump starting the market, the SCAQMD held an auction of RTCs on July 29, 1994. Utilities, which had by then installed new emission control equipment and did not need their full allocation, were large sellers of NOx credits. A total of 114,676 NOx credits and 9,400 SO2 credits changed hands at the auction. Prices for RTC were low for near years and much higher for more distant years. In all cases, though, the cost for a ton of credits was far lower than the marginal control costs from recently enacted or proposed command and control regulations. In a privately negotiated transaction in August 1995, Unocal reported paying Anchor Hocking $3.65 million for 8.6 million pounds of NOx emission credits. The per ton price ranged from less than $20 to $2000, depending upon the credit's year of validity, prices that are very much in line with the 1994 auction.

In June 1995, the SCAQMD proposed adding ROG emissions to RECLAIM; the initiative included almost 1,000 facilities in 14 industrial categories that generated 4 tons or more of ROG annually. In contrast to the NOx and SO2 programs that were scheduled for 7 years, the ROG program would last 14 years. Officials estimated that the program would reduce emissions from these sources from 53 tons a day, the projected level for 1996, to 15 tons a day by 2010.

The proposal met with fierce opposition from environmentalists who charged that the 1989 baseline selected for emissions could result in a huge increase in emissions over 1993 levels when the program starts. The Natural Resources Defense Council contended that basing emissions allocations on 1989 emission levels could result in an increase in emissions of up to 71 percent over 1993 levels. Regulators sought the 1989 baseline to avoid locking industry into emission levels associated with recessionary conditions in 1991 through 1993. Industry representatives note that the AQMP has a schedule for orderly reductions over time toward the 2010 goals. In their view, emissions increases from 1993 to 1996 as the economy pulls out of a recession are not relevant so long as emissions remain below the target levels in the AQMP.

Unable to resolve the baseline issue, the 12-member SCAQMD governing board set aside in January 1996 the proposed rule to include trading of ROGs within RECLAIM and directed its staff to develop a program to trade ROG emissions separately.

One innovation for reducing ozone precursor emissions offers tradable "smog credits" to lawn mower retailers for accepting and scrapping the 1.7 million gasoline-powered mowers in the District. The SCAQMD estimates that a single mower used for 20 hours a year emits as much ROG emissions as a new car driven 26,000 miles. Credits for scrapping lawn mowers would complement other means available to firms for earning credits, such as scrapping older cars and increasing employee use of car pools.

RECLAIM has won praise for its progress to date. A state-mandated performance review conducted found that the District has a state-of-the-art air quality program that is performing efficiently and effectively. RECLAIM demonstration projects to stimulate technological development and outreach and compliance programs have helped save or create over 10,000 jobs while achieving air quality improvement.

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