L.A. Scene : TRADING SMOG FOR CASH
The South Coast Air Quality Management District staff will spend the next year designing a “smog exchange”--a trading market in pollution rights among industries in Los Angeles, Orange, Riverside and San Bernardino counties. There may be at least three separate markets: one each in sulfur oxides, hydrocarbons and nitrogen oxides.
Another vote of the AQMD board will be necessary before trading can open. The California Air Resources Board and the U.S. Environmental Protection Agency also will have to approve a market before it can replace the more traditional system of regulations. AQMD officials, however, say that a market in some form is a near certainty.
Today, AQMD rules require many specific pieces of equipment and materials at the factories .
With a market, equipment already installed will have to be maintained and operated, but dozens of present and future AQMD regulations will no longer be enforced. Though most details are not available, AQMD officials have unveiled the outlines of the trading market they would like to establish in 1993.
WHO IS ELIGIBLE?
About 2,000 polluters emitting four or more tons of hydrocarbons annually. Examples: furniture factories, aerospace manufacturers.
About 700 polluters emitting four or more tons of nitrogen oxides annually. Example: electric power plants.
About 100 polluters emitting four or more tons of sulfur oxides annually. Example: oil refineries.
THE POLLUTANTS
Hydrocarbons result from incomplete combustion, or reach the air as vapors (leaking or evaporating) from paints and coatings. Many hydrocarbons cause cancer and birth defects as well as smog.
Nitrogen oxides result from combustion.
Hydrocarbons and nitrogen oxides react in sunlight to form ozone, the lung irritant that is the major component of smog. The region violates federal standards for ozone nearly six months of the year.
Sulfur oxides are responsible for acid rain and acid fog and are in fine dust that obscures visibility and can carry toxic particles into the lungs. The region meets sulfur oxides standards, but not fine dust standards.
HOW WILL TRADING WORK?
Companies will receive emissions allotments. They can stay within their allotments nearly any way they want, including purchase of pollution rights from other companies that have been able to reduce emissions more than their share. The allotments will shrink each year, forcing a cleanup of the smoggy skies.
Hydrocarbons must be reduced 5.8% a year.
Nitrogen oxides must be reduced 8% a year.
Sulfur oxides must be reduced 8.5% a year.
THE POTENTIAL ADVANTAGES
For the AQMD. The trading market should encourage technological breakthroughs because companies will be able to sell their emissions reductions.
There should be less of the fierce political resistance that has accompanied nearly every new regulation. The AQMD should be able to concentrate on enforcement and on decreasing non-industrial pollution because few industrial rules will have to be written.
For business. The trading market should save money for business as a whole by making pollution reduction more efficient--those that can do it cheaply will and sell credits to those that cannot. Companies would get more flexibility in deciding how to clean the air.
For environmentalists. Cleanup of the air could be faster. Businesses that are not yet regulated will be in a system that forces them to start cutting pollution.
THE POTENTIAL PITFALLS
Many businesses worry that automatic reductions may be possible in early years, but harder and more expensive to achieve as time goes on.
Labor worries that the market could actually encourage businesses to close operations, sell their credits and reopen outside the Los Angeles region.
Environmentalists worry that it will be easier to cheat under the market system than under the regulatory system. They have expressed doubts that the AQMD will be able to effectively monitor emissions reductions or catch fraud. They also worry that a hydrocarbon market could create neighborhood toxic “hot spots” if a factory buys credits and spews more cancer-causing material than would have been allowed under the current system. The AQMD says trades of toxics will be prohibited; there is debate over how toxics will be defined.
Both business and environmentalists want to allow smaller polluters in the market. Their presence would force more unregulated sources of pollution to cut emissions--and they are seen as likely sellers to large manufacturers.
A CASE STUDY IN SMOG RIGHTS
Here is a simplified example of how a trade in pollution rights could proceed.
BACKGROUND
Two factories each face a 100-ton limit of a particular pollutant.
The factories may be owned by the same company but have different kinds of equipment; they may be owned by two companies in the same industry, or they may be in different industries.
The cost differences could come from the type of equipment used, the type of fuel used, the amount of time equipment is used, the age of the equipment or the type of material used or many other variables.
If each share of the market cost $20,000 a ton:
Factory A
1. Spends $5,000 a ton to control emissions.
2. Factory A reduces pollution to 50 tons. It has had to spend $5,000 for each ton to be eliminated but for each ton below the limit . . .
3. . . . it can sell a credit for $20,000.
4. Factory A makes $15,000 on each credit.
Factory B
A. Spends $30,000 a ton to control emissions.
B. It makes economic sense not to reduce to the 100-ton limit. Instead, Factory B buys 50 tons of credits from Factory A . . .
C. . . . Spending $20,000 for each credit rather than spending $30,000 to reduce.
For each ton above the limit, Factory B saves $10,000.
THE BOTTOM LINE
Factory A has made $750,000.
Factory B has saved $500,000 over what would have been otherwise spent.
If each had to reduce to the limit, there would be 200 tons of pollutant in the air. With the market, there are still 200 tons of pollutant in the air during the first year.
Each year, the factory limits would be reduced further to cut pollution and trading would presumably continue.
SOURCE: National Economic Research Associates Inc., South Coast Air Quality Management District.
