AQMD Officials Propose Pollution Rights Market : Smog: Incentive concept would let emitters direct own cleanup efforts and, if successful, sell excess shares.

After two years of studying the pros and cons, the staff of the South Coast Air Quality Management District on Wednesday recommended establishing a revolutionary “smog exchange” that would replace many of the agency’s traditional stringent regulations with a trading market in pollution rights.

The prospect previously has generated dire warnings from environmentalists about gambling with public health and excited talk by industry about new freedom and economic relief for recession-weary businesses.

The AQMD staff believes a market would provide incentives to clean the air faster than under the current regulatory system, while saving industry hundreds of millions of dollars. The AQMD board must approve the concept for it to move forward. But if the go-ahead is given as expected in March, trading by 2,000 polluters could begin in 1994.

It would be by far the nation’s largest experiment ever in using financial incentives to cut pollution. The progress of the market would be watched closely across the country.

Even doubters on the AQMD board are convinced that the market proposal has gathered so much momentum that it will become reality.

“I feel like I’m over at the bottom of the Grapevine and there’s a 19-wheeler coming down and it’s got no brakes,” said board member Larry L. Berg, who has concerns about how the program will be enforced.

The big question now is what form the “smog exchange” will take, and at a meeting of an AQMD advisory group Wednesday, the staff revealed its blueprint.

About 2,000 facilities that emit hydrocarbons and 700 that emit nitrogen oxides would be eligible to trade under the plan. Some facilities emit both pollutants.

Only facilities in Los Angeles, Orange, San Bernardino and Riverside counties that emit four tons or more each year would be eligible. These are responsible for 85% of the region’s industrial hydrocarbon emissions and 95% of the nitrogen oxides.

Both environmental and industry representatives on the advisory committee had strong criticisms of the design. But after the meeting, Patricia Leyden, who heads the AQMD planning office, said she was “delighted with all the points where we have consensus.”

Mary Nichols, an attorney for the Natural Resources Defense Council, agreed that the concept is promising. “What is new,” Nichols said, “is that environmentalists are aware now that there are a lot of emissions out there that aren’t being reduced and this could be a way to change that.”

However, she added, “we still would denounce” the specific system envisioned by the staff because of fears about enforcement.

As the design is refined, said Berg, “I think we’re in for a period of indigestion.”

Hydrocarbons and nitrogen oxides react in sunlight to form ozone, a lung irritant that is the major component of smog.

In all, about 24,000 facilities send smog-forming pollutants into the region’s air. About 17,000 are regulated by the AQMD. The staff proposal suggests exemptions beyond those for polluters that emit less than four tons of hydrocarbons or nitrogen oxides.

Some public facilities, such as sewage treatment plants, as well as restaurants and dry-cleaners would continue to be regulated instead of being allowed entry into the market. Power plants, a major source of nitrogen oxides that were the target of recent strict regulation, may also be excluded, the AQMD’s Leyden said, although that is still open to debate.

Although the hydrocarbon and nitrogen oxides markets would be separate, they would work in essentially the same way: Polluters would be issued an initial number of shares, based on past emissions. Each share would be worth a pound of pollutant per month or per quarter--a detail yet to be decided.

Over the first 10 years, the value of each share would decline by 5.8% annually for hydrocarbons and by 8% for nitrogen oxides--in theory, forcing a cleanup.

In exchange for their participation in the market, businesses would no longer be subject to about 40 existing or proposed AQMD rules that specify certain equipment or methods to reduce pollutants. They could meet their emissions targets however they chose, giving them the flexibility they say they need.

Companies that find a way to reduce their emissions further than needed--through shutdowns or use of cleaner materials or better controls--would be able to sell those credits to a business that cannot meet its reduction target.

Polluters would have to continue maintaining and using control equipment already in place.

Some businesses would benefit more from a market than others, according to an analysis by the AQMD staff. The analysis found that refineries, for example, would spend $253 million less in 1994 under a market than under the regulatory structure. But the furniture industry, which has complained bitterly about the cost of complying with regulations, would spend about $92 million more in a market than in the current system. Under regulations now in place, furniture makers are allowed an escape hatch if cleaner wood coatings are not developed. The market would require continued emissions reductions regardless of available technology.

Regionwide, the agency predicts, compliance costs under a market system would fall by $427 million in 1994 alone.

Although environmentalists did not object to the nitrogen oxides market, they suggested postponing the market for hydrocarbons for two to three more years, saying it is too difficult to track those emissions.

Nitrogen oxides are formed during combustion--essentially, wherever there is a flame. They are relatively simple to detect and monitor. By contrast, hydrocarbons often reach the air through leaks. More than 40% of refinery hydrocarbon emissions result from seepage, Leyden said.

Also, some hydrocarbons cause cancer as well as smog. Although Leyden said market members would have to abide by regulations on emitting toxic substances, environmentalists would like to see more chemicals restricted before allowing hydrocarbon trades.

If more restrictions for toxic hydrocarbons are not enacted first, “that’s a deal-breaker for us,” said Tim Little, executive director of the Coalition for Clean Air.

Officials from the state Air Resources Board and the U.S. Environmental Protection Agency--which both must also approve a market--were enthusiastic about postponing hydrocarbon trading.

“We were concerned about the need for enforceability,” said David P. Howekamp, a regional air quality administrator for the EPA. “It would give us more time.”

Leyden said the AQMD would give the delay “serious consideration.”

But Robert A. Wyman, an attorney representing several large companies, said he opposed a postponement for hydrocarbons. Industry would be forced to invest in expensive control equipment required under rules taking effect in the interim, he said, and “they need economic help now.”