Price of Pollution Grows Harder to Bear in L.A.

For scores of L.A.-area companies, the cost to pollute is skyrocketing.

That jump in the price of pollution credits in the nation's largest emissions trading program is forcing a number of firms to finally start making painful choices between buying those high-priced credits on the open market or installing expensive pollution-control equipment.

Spot-market prices for credits made available through the South Coast Air Quality Management District's RECLAIM program have gone up as much as 20-fold in the past 18 months, to about $5 a pound. And prices for longer-term credits have doubled in that same time frame, to about $2.25 a pound.

"Prices have jumped so dramatically that if more credits don't come on the market soon, we could have a panic on our hands," said Jim Bellmore, an emissions credit broker with Boston-based National Offsets Corp. "Some of my clients are seriously looking at spending tens of thousands of dollars to install pollution-control equipment rather than spending that much or more to buy credits. Either way, it's a sizeable expenditure."

The AQMD's Regional Clean Air Incentives Market program, or RECLAIM, was set up in 1994 as an alternative to the enforcement of pollution regulations on specific pieces of equipment. The program, which covers some 330 factories in Los Angeles and Orange counties and the Inland Empire, requires facilities to reduce overall emissions by about 7 percent a year or to buy "emission reduction credits" from companies that earned them by cutting their own pollution beyond the minimum requirement.

While many observers had long predicted the rise in credit prices, the speed and magnitude of the price jump has caught some off guard.

"This is getting us to reevaluate our plans," said Charlie Aarni, regulatory agency liaison for the Chevron Products Co. refinery in El Segundo. "It has changed the balance for us. Assuming the prices stay at these levels, we are probably going to install more pollution controls than we had planned over the next few years."

For the first four years of RECLAIM, spot-market credit prices were less than 50 cents a pound, presenting a cheap option for companies to comply with their emission reduction targets. The prices were low in part because companies were granted higher initial pollution allocations to allow them room to boost production as the economy came out of recession.

But about 18 months ago, prices started rising as factories boosted their output and their emissions. At the same time, companies rushed to buy up the cheapest available credits rather than install pollution-control equipment, like scrubbers and cleaner boilers.

"Eventually, the available credits became more limited and the demand for purchasing credits went up, which forced the price up," said Moshen Nazemi, assistant deputy executive officer with the AQMD.

Environmentalists rejoice

While prices went up on both the spot market and the longer-term future credits market, the increase has been most pronounced on the spot market. The price for these so-called "expiring credits" jumped from about 20 cents a pound two years ago to between $4.50 and $5 this month, according to Bill Van Amburg, spokesman for Automated Credit Exchange, which operates a trading market that accounts for about two-thirds of all RECLAIM trades.

Van Amburg said companies turn to the spot market when they need to buy credits in a hurry to make up for a shortfall in achieving their emission reduction targets. Companies using the longer-term market have more time to plan and may be able to wait to see if more credits come on the market.

With the economy booming, some companies are exceeding their expected output and thus generating more pollution.

"Some companies did not plan effectively and have been surprised at the (price) increases," Van Amburg said.

Environmental groups, which opposed the RECLAIM program from its start, welcome these developments, although they say they are long overdue.

"This is the moment we've been waiting for," said Gail Ruderman Feuer, senior attorney with the Natural Resources Defense Council. "It's still a major problem that it took six years to get to this point. With the traditional regulations, the cuts in emissions would have been made long ago."

Environmentalists believe the initial pollution allocations for each facility were set too high, meaning that factories did not have to cut their emissions significantly for the first few years of the program. The AQMD says the high levels were necessary to account for the fact that Southern California was mired in a deep recession and factories weren't running at full capacity.

But environmentalists contend the high allocations let the companies off the hook for several years.

'Buying on the cheap'

"The bottom line was that companies weren't making any emission reductions; they were just buying credits on the cheap," said Tam Carmichel, executive director of the Coalition for Clean Air.

Environmentalists are still somewhat skeptical that companies are going to actually spend the money to install pollution-control equipment. That's because of an effort by large polluters to expand the types of credits that can be used for RECLAIM. Manufacturers want to take other emission-reduction credits, such as those granted for converting truck fleets to alternative fuels, and make them apply to factory emissions.

"Companies are now frustrated because they have limited options for compliance," said Bob Wyman, an environmental attorney with the downtown law firm Latham & Watkins who represents a group of major oil and aerospace firms in the RECLAIM program. "When RECLAIM was first adopted, the AQMD governing board intended companies to have access to credits from other sectors, like mobile sources."

But Wyman said, the U.S. Environmental Protection Agency has not approved the AQMD's plan to allow companies to apply credits from other sources to RECLAIM.

In addition, some companies have been hit hard by an AQMD provision that has the effect of raising the emissions total for a facility. When a company doesn't have an approved monitoring plan to count the pounds of emissions from the plant, the agency assumes a certain "maximum level" of emissions that is usually higher than the actual emissions rate.

"All of a sudden, companies found they had more emissions than they thought, which forced them to go out and buy credits to make up the difference," Wyman said. "This had the effect of using up a lot of credits that might have been available to other companies and put a tighter squeeze on the marketplace."

After six years of operations, there is still no way to measure the effectiveness of the RECLAIM program. AQMD officials say it's impossible to tell whether firms in the program reduce their emissions because of RECLAIM or because of other AQMD regulations that are still in force.

"We do know that some of the largest RECLAIM emitters are adding and modifying equipment; we just can't make the direct tie to RECLAIM itself," Nazemi said.