Federal implementation plan proposes new controls on emissions.

On February 15, 1994, the Environmental Protection Agency released the long-awaited Federal Implementation Plan, or "FIP," designed to bring the Los Angeles area into attainment with federal air quality standards. In over 2,600 pages, the plan proposes to impose a variety of new mandates, fees, and restrictions on many aspects of Southern California life. Estimates of the costs that will be imposed on Southern California's sluggish economy vary from $3 to $10 billion. Given the importance of California to the Clinton Administration and the national economic recovery, EPA has indicated that it is looking for better, cheaper, and less disruptive ideas to replace those proposed in the FIP.

BACKGROUND

The EPA did not want the task of preparing and imposing a federal plan on Los Angeles. The federal Clean Air Act establishes national air quality standards, but then gives the states the responsibility for developing their own plans for meeting these standards. Because state and local air agencies failed to develop adequate state plans to meet federal standards by 1987 as required by the 1977 Clean Air Act, two environmental groups, the Coalition for Clean Air and the Sierra Club, filed suit to compel EPA to prepare a federal plan to remedy the state's failure. The FIP was implemented to comply with federal court orders that arose out this suit.

WHAT DOES THE FIP CONTAIN?

The plan contains a wide range of proposed new regulations affecting commercial and industrial facilities, gas stations, consumer and industrial products (such as pesticides, house paints and industrial coatings), on-road vehicles, lawn and garden equipments, farm and construction equipment, recreational vehicles, locomotives, interstate trucks, and the region's ports and airports. Most measures contained in the FIP consist of "command and control" mandates.

Examples of such mandates are requirements that gas stations install improved vapor recovery systems, requirements that house paints be reformulated to reduce pollutant emissions, and the establishment of new emission standards for a variety of gasoline-powered engines. Some measures will directly affect consumers, such as the proposal that automobiles without California pollution controls be prohibited from being registered in the state after 1999.

The EPA has attempted to include a number of "market incentives," but most of these measures rely on costly emission charges in an attempt to induce emitters to reduce pollution. An example is the proposal to charge the Port of Los Angeles a $10,000 per ton emissions fee beginning in 2001.

Other FIP measures "cap" emissions and require reductions from certain categories of sources but, because sources are not able to obtain credit for lower cost alternative pollution reduction strategies, the FIP imposes higher than necessary costs on Southern California industry and consumers.

For example, manufacturing facilities that emit more than 4 tons per year of certain pollutants are proposed to be required to reduce their emissions by 4% to 9% per year between 2001 and 2005. Under the plan, most facilities could not receive any credit for achieving comparable, and perhaps more cost-effective reductions elsewhere in the basin. Because the proposal does not fully incorporate such emission trading options, the region's manufacturing sector will face higher costs and the air basin is likely to experience greater job loss and higher consumer prices as a result.

The good news is that EPA is concerned about the FIP's potential impact on the Los Angeles-area economy and is willing to consider changes to the plan. Felicia Marcus, regional administrator for EPA's western region (who will be speaking at the Los Angeles Convention Center during ECO EXPO which runs April 7-10 and will also include the Secretary of the Department of Energy Hazel O'Leary), has indicated in numerous meetings with industry representatives that the FIP is a work in progress and that the agency welcomes recommendations for how the FIP can be made more cost-effective and less intrusive. Unfortunately, however, EPA has little room to maneuver.

The agency does not have any discretion to adopt a plan that results in less pollution reduction. Both the federal court order and the Clean Air Act require that EPA play a "zero sum" game. If reduction requirements are weakened in one area, EPA must make up the relaxation, with more stringent reduction requirements imposed on other sources.

Lessening the FIP's impact on the Los Angeles-area economy will therefore depend on the ability of the FIP to identify those measures with the lowest overall cost in the basin, rather than relaxing the rigor of the plan.

IS THERE A BETTER WAY?

While the opportunities are limited, the costs of the FIP can be reduced. One way would be to rely more on emissions trading strategies. The South Coast Air Quality Management District recently adopted such a program for nitrogen oxide emissions from large industrial facilities, known as the Regional Clean Air Incentives Market, or RECLAIM. Generally, facilities were given an emission allocation or cap based on the facility's recent emission levels.

Each year the cap decreases in order to contribute to cleaning up the air. Facilities are also permitted to trade their allocations.

This trading element results in the market identifying the lowest cost emission reduction strategies among those sources in the trading market. If a facility can control emissions cheaply at its facility, it will do so and sell its emissions allocations to those facilities that face relatively higher control costs. The higher cost facility can avoid or defer the installation of the most costly equipment.

For some categories of sources, it will not be appropriate to use cap-based systems. Even in such circumstances, however, the opportunity to trade surplus emission credits for going beyond emission reduction targets can save the region millions of dollars.

Replacing both proposed emission fees and command and control strategies with emission trading programs is one of the few potential ways to reduce the overall impact of the FIP on the basin.

For example, allowing the Port of Los Angeles to trade with a wide variety of other emission sources could enable the Port to achieve equivalent emission reductions at costs that are substantially lower than the $10,000 per ton emission fee that is currently proposed. Giving the Port this flexibility would benefit everyone in the Los Angeles area, because all sectors of the region's economy benefit from the Port's role as a premier world trading center.

In the mid-1970s, EPA proposed a FIP for Southern California that required gas rationing and other extreme measures.

Congress ultimately prevented that plan from ever taking effect. This time around, Congress is unlikely to save us and the EPA is looking for practical answers. While there are no cheap strategies, a broad-based emissions trading program could give Southern California a fighting chance to remain competitive and to achieve our clean air objectives.

AIR EMISSION PLANNING

Air emissions are serious business in Southern California. You are probably aware that its becoming more critical each and every day to pay proper attention to this very politically and economically charged environmental issue. Your near and long term future emission needs should be as much a part of your business strategic planning as market forecasting and capital planning. Indeed, if you are one of the "lucky" members of the RECLAIM Club (those who emit more than 4 tons per year of nitrogen or sulfur oxides and must meet an annual rate of reduction, or buy annual Reclaim Trading Credit or RTCs), emission and economic forecasting are one in the same. The South Coast Air Quality Management Districts revolutionary new plan to clean the air received a great amount of media attention during its development, and most members of the club are well aware of its requirements. I believe the most crucial component is the essential need for future emission planning.

The RECLAIM Program became law after a great amount of regulatory planning research, investigation, lobbying, consensus forming, and political discussion. The program is intended to cost Southern California businesses less money to reduce emissions. Many others believe if implemented properly RECLAIM should cost less than command and control regulations to achieve the same result -- greatly reduced emissions and cleaner air. By allowing the trading of annual emission "rights," companies with higher costs of control can benefit by funding (and in essence using) more economic controls of another company. Sounds great, until the marginal cost of control rises steeply after all the cheap options have been "used up," which will happen in the not so distant future. Okay then, the question you should be asking yourself now is: How can my company capitalize on the RECLAIM opportunity?

Paramount to the issue is an understanding of all of your potential emission control options, including trading. Prepare a marginal cost of control analysis for your facility, this will identify the price that you should consider for your trading options. Consider enlisting the help of a consulting firm with both engineering and air emission trading experience. Lack of knowledge and lack of planning will cost you more man a comprehensive strategy. Remember, plan now and pay less.

Mr. Zbur and Mr. Wyman are partners in the Los Angeles Office of Latham & Watkins. They specialize in environmental law and represent a coalition of Los Angeles-area businesses that support market-based pollution reduction strategies.