CALIFORNIA AGENCY ADOPTS MARKET INCENTIVE AIR POLLUTION APPROACH

California's South Coast Air Quality Management District (Scaqmd) Oct. 15 approved 11-1 a groundbreaking rule that dramatically revamps the way air pollution will be controlled in the Los Angeles basin. The Regional Clean Air Incentives Market (Reclaim) rule caps an intensive 3 year Scaqmd effort to give regulated companies flexibility on how to cut emissions. The most far reaching program of its kind to be adopted, Reclaim is seen as a blueprint for other plans across the U.S. to replace

Oct. 25, 1993

6 min read

The Regional Clean Air Incentives Market (Reclaim) rule caps an intensive 3 year Scaqmd effort to give regulated companies flexibility on how to cut emissions. The most far reaching program of its kind to be adopted, Reclaim is seen as a blueprint for other plans across the U.S. to replace traditional "command and control" regulations with market based incentives for controlling regulations.

At first drawing the ire of many in California's petroleum sector - and other industries - Reclaim since has been revamped to deal with many of those concerns. Now estimates are that the petroleum sector could save as much as $162 million in air emissions regulatory compliance before 2000.

Southern California Gas Co., however, remains opposed, and has threatened to sue to block the rule, which takes effect Jan. 1, 1994.

EMISSIONS TRADING

Centerpiece of Reclaim is establishment of a "smog exchange" that essentially lets firms covered by the rule buy and sell shares in a regional emissions trading market.

Under the plan, Scaqmd will allocate these shares each year in the form of emissions reduction credits to companies covered by the rule. The number of credits allocated will reflect the level of emissions of nitrogen oxides and sulfur oxides that Scaqmd permits a facility to generate.

Facilities that stay under the limit will have excess credits to sell. By allowing this, Scaqmd hopes to provide financial incentive for firms to develop innovative measures that will yield emissions cuts greater than the annually imposed pollution reduction targets. Companies having trouble meeting the targets or that want to postpone installation of new control technologies until they are more affordable can purchase credits.

"Basically, it lets us figure out the best and most cost effective ways to achieve emissions reductions," said Charles Aarni, regulatory agency liaison for Chevron U.S.A. "If it makes sense for a refiner to over control an FCC unit and under control heaters and boilers, Reclaim will allow us to do this."

WHO'S COVERED

Reclaim covers only a relative few of the almost 27,000 industrial facilities regulated by Scaqmd, but these generate the vast majority of NOx and SOx from stationary sources in southern California.

Most smaller firms will remain under command and control rules, unless they opt into Reclaim coverage.

As approved, Reclaim applies to 390 stationary sources that emit 4 tons/year or more of NOx and an overlapping 41 sources that emit the same level of SOx. Scaqmd approved the rule without major amendments, despite a move by SoCalGas to limit coverage to 87 Facilities that emit 50 tons/year or more of the criteria pollutants.

Instead of setting emissions limits on individual pieces of equipment within a facility, Reclaim sets individual facility caps on overall NOx and SOx emissions. The caps will drop each year through 2003, and it's up to the regulated company to decide how to stay within its caps.

Under the program, each of the 390 covered facilities will be given an annual allotment of tradable credits equal to their emissions cap. As the caps decline each year, so will the number of credits a facility receives. Credits can be used either in lieu of a control measure or to increase a facility's overall emission allocation. Companies cannot bank credits for future use.

Because the credits will be priced on the free market, no one really knows what they'll cost. Scaqmd estimates credits will stay less than $8,905/ton for NOx and $6,246 for SOx but will reassess the program if prices about triple.

Although reductions will vary, on average emissions from sources regulated under Reclaim are expected to drop by 8.3%/year for NOx and 6.8% for SOx. By 2003, Scaqmd expects the program will cut overall emissions of NOx and SOx by 83% and 65%, respectively, from current levels.

OIL SUPPORT STRENGTHENS

Oil companies are among a coalition of large concerns that pressed for the rule's adoption in recent months.

"We're extremely pleased that this has happened," said Western States Petroleum Association after the vote. "We hope all of the business community will embrace market incentives for cleaning the air."

Chevron's Aarni said, "I think the Reclaim market incentives are the next step in air quality control. In nonattainment areas, agencies will have to enlist the help of companies in figuring out how to reduce emissions."

The petroleum sector is among the revised rule's major beneficiaries. According to Scaqmd's most recent analysis, petroleum firms will save about $27 million/year during 1994-99 by switching to incentive rulemaking from command and control regulation. That's more than half the annual cost savings of $58 million Scaqmd projects for Reclaim.

It's been an uphill battle for Scaqmd to garner business support for the plan, and oil companies were not always solidly behind it. A key concern involved the baseline for calculating emissions cuts. In earlier drafts of the rule, some companies charged, the baselines would have started them at a deficit. Scaqmd then pegged the emissions baseline to each companies' highest levels of emissions in a given year.

An earlier version of the rule allowed refiners to increase emissions allocations by as much as 20%/year to provide for the production of reformulated gasoline. In the final version, the clean fuels adjustment was trimmed to 5%/year for all refiners except Ultramar Inc., which was allowed to retain the 20% increase. This change was of little concern to most companies, said George Walker, vice-president of health and safety for Unocal Corp,

SOCALGAS OPPOSITION

The changes did not appease SoCalGas, which claims the monitoring and reporting provisions in the rule remain too onerous.

SoCalGas was unsuccessful in its bid to ease these requirements as well.

The gas utility will decide within 30 days whether it will sue if Scaqmd adopts Reclaim. It contends the rule's cost savings are skewed unevenly toward oil and aerospace companies as well as the region's major electric utility, while some companies would pay more to operate under Reclaim.

SoCalGas reportedly is worried about losing customers to Southern California Edison Co. under the rule. The electric utility could collect emissions reduction credits by paying companies to shift to electric powered motors and other equipment, industry sources say.

Reclaim replaces 30 in place and 12 planned regulations, and Scaqmd maintains it would take 2 years to back pedal and implement those regulations. It plans to evaluate the effect of Reclaim on reduced air pollution and the area's economy each year, with a detailed audit every 5 years to determine consistency with state and federal clean air laws. Scaqmd also agreed to review the effectiveness of programs to scrap old model, high polluting cars to cut emissions.

Next, Scaqmd will propose another Reclaim style rule for control of reactive organic compound (ROC) emissions, slated for adoption sometime in 1994. It had included ROC emissions in the original Reclaim proposal, but deleted them after that proved too complex and controversial. Another 2,000 companies could be included in an ROC Reclaim rule.