Pollution credits enter the market in L.A.

Los Angeles is known as a trendsetter, and the newest item to hit the market there is being watched closely by industries around the country--it's smog. In a move to use economic incentives to improve air quality, the South Coast Air Quality Management District (AQMD) voted in March to draw up rules creating a local market to buy and sell pollution credits. Although the specifics may take up to 10 months to work out, the Regional Clean Air Incentive Market (RECLAIM) is estimated to save industries up to $434 million over the next 10 years. Upon completion, the rules will be submitted to both the state and federal environmental protection agencies for approval.

The trading plan, which would affect nearly 2,000 businesses in the Los Angeles Basin, in modeled after the federal EPA's program to trade sulfur dioxide allowances between coal-burning utilities. That program started in the 1970s, but burdensome regulations nearly killed it. However, new regulations promulgated under the federal Clean Air Act will soon create a free market between facilities burning high sulfur content coal. The federal program currently focuses on more than 100 of these facilities in the Midwest and on the East Coast, and aims to halt acid rain while spreading the cost of cleaner air to utilities and customers across the country.

The AQMD will calculate a baseline emission level for each facility in the Los Angeles Basin based on previous levels of emissions. The RECLAIM program requires each facility to decrease its baseline emission level annually by 6 percent for hydrocarbons, 8 percent for nitrogen oxide and 8.5 percent for sulfur dioxide. Facilities that cannot meet these requirements can buy pollution credits from a facility that has successfully reduced more than its share of emissions. Therefore companies that invest in pollution reduction devices now can be reimbursed by other companies buying their left-over pollution credits.

Although environmentalists and industry representatives are willing to support the program, there are some outstanding issues they hope are resolved in the rule-making process. The Coalition for Clean Air and other environmental groups do not want AQMD to include hydrocarbons (called "reactive organic gases" in the proposal) in the emissions market until they can ensure that emission measurements are accurate. Environmental groups are also concerned about the enforcement of RECLAIM.

Industry officials, who want to keep the market as open and flexible as possible, object to AQMD rules that prohibit trading of different types of pollutants and the requirements that all credits bought in one quarter will have to be "used" in that same season.