City to Sell Its Pollution Credits to Help Cut the Deficit
Faced with a $1.2-million budget deficit, the city of South Gate has decided to sell one of its most valuable assets--permits to pollute the air.
Firms that buy the permits--called “emission reduction credits,” or ERCs--will be able to increase the amount of pollutants federal and state air quality regulators allow them to discharge into the air. Businesses need the credits if they want to expand, increase production or relocate.
South Gate acquired the ERCs in 1984 when it bought the former General Motors auto plant that sprawled across several blocks of the blue-collar community’s west end. The city hoped that the credits would help it attract new industries to replace giants such as GM, which shut down in 1982, and Firestone Tire & Rubber Co., which closed its South Gate plant two years earlier.
South Gate is believed to be the only municipality in the state that owns any ERCs, which have become so valuable that officials say the money would be a quick fix for the city’s financial woes.
“If we didn’t have the credits available this year,” said Mayor Gregory Slaughter, “our budget would not be balanced and we’d be forced to lay off employees and make severe cutbacks in either our police or our parks departments.”
All the city ever paid for the ERCs was a $1,500 renewal fee, and now, like a flea market find that commands a tidy sum at a Sotheby auction, the credits are worth at least $1.2 million in the smoggy Southland, air quality experts say.
Credits in the Los Angeles area are selling for between $500 and $4,000 per pound of pollutant per day, according to one firm that matches ERC buyers and sellers.
“The ERC credit trading market is not even comparable anywhere else in the United States,” said Melissa Horne, an environmental management analyst for AER*X. “This is a very valuable asset (the city has).”
AER*X is one of the ERC brokers vying for the right to market South Gate’s credits. Horne is in the Santa Monica office of the Washington-based firm.
The city possesses permits in varying amounts for three different pollutants--reactive organic gases, particulate matter and nitrogen oxides. Altogether, the credits total 1,327 pounds per day.
Credits for nitrogen oxide, an especially troublesome pollutant in the Los Angeles basin, reportedly are being sold here for as much as $2,000 to $2,500 per pound per day, said Nick Nikkila, director of engineering for the South Coast Air Quality Management District.
In the Midwest, air pollution credits for sulfur dioxide, a primary component in acid rain, are expected to become so valuable that the Chicago Board of Trade is proposing to open the first national market for them.
South Gate officials cannot be exactly sure how much they will get for their credits. “The value is in the eyes of the beholder,” City Administrator Todd W. Argow said.
He acknowledged that the value is somewhat diminished this year because of the recession. A slow economy means fewer firms expand or move into the areas in which the permits are good--Los Angeles, Riverside, Orange and San Bernardino counties.
On the other hand, even in a recession, city officials said, air quality experts believe that the city will make enough money on the credits to close its budget gap and still have change left over.
Also, the four-county air quality district is divided into 38 regions, another plus for South Gate. The AQMD decrees in which of the 38 areas it will allow certain pollution credits to be sold. South Gate’s credits are allowed in 37 of the 38 regions.
ERCs were created in 1976 in Los Angeles by state and federal regulators faced with increasingly poor air quality and a booming economy that was attracting more people and businesses.
“We’re trying to match two environments here,” the AQMD’s Nikkila said. The environment needs to be protected, but economic growth is a reality that cannot be denied, he said.
To balance the needs of the two, regulators came up with the ERC concept that allows companies to buy credits if they reduce their emissions to a level significantly below what they are allowed. For example, the reduction could come as a result of implementing new pollution control techniques.
In the case of South Gate, the ERCs are known as shutdown credits, meaning one plant’s shutdown has made room enough in the atmosphere to add pollutants from another source.
Since the time the ERCs were created, however, air quality standards have become stricter.
Last year, the AQMD devalued all outstanding credits by 80%. That lowered the value of the South Gate credits.
At the same time, however, the district made a decision that increased the value of the credits. It adopted a zero threshold. Until then, businesses that produced less than 75 pounds of some pollutants and 100 pounds of others did not have to have credits to expand. Now all businesses that emit pollutants and want to increase the amount must get credits.
South Gate’s decision to sell its pollution credits reflects more than a need to close its budget gap. It also reflects the death of the city’s dream of reviving its industrial base. Since the city bought the GM plant seven years ago, it has lured only a few warehouses to the site.
