AQMD Board Creates First U.S. ‘Smog Market’

Embarking on a revolutionary approach to combat smog, the Southland’s air quality board on Friday created the nation’s first “smog market,” a controversial program that allows industries to buy and sell pollution credits.

After three years of fine-tuning and months of acrimonious public debate, a slightly shrunken version of the program called RECLAIM was adopted by the South Coast Air Quality Management District board on an 11-1 vote. The program goes into effect Jan. 1.

“This is a very complex program, but it’s going to work,” said Henry Wedaa, a Yorba Linda city councilman who chairs the AQMD board. “In short, RECLAIM will enable us to have clean air and a healthy economy.”

The AQMD touts RECLAIM--Regional Clean Air Incentives Market--as a business-friendly, flexible and cheaper way to clean up the industrial pollution that contributes to smog. But the fight over the proposal was bitterly divisive, especially among business leaders.

The region’s largest industries--including oil and aerospace firms--strongly endorse RECLAIM, while some smaller businesses contend that it is unworkable and financially risky for all but the biggest polluters. Environmental groups also assailed it as a step backward in the region’s fight against smog.

In voting Friday, the AQMD board resisted intense pressure from some businesses and environmentalists to dramatically shrink the number of firms in the program and rejected nearly all of a dizzying array of last-ditch amendments.

The decision sets the course for how the four-county Los Angeles Basin, the nation’s smoggiest region, will clean its air through the year 2003. The program is being watched around the country as a potential model for dozens of other smoggy cities.

The program puts an annual limit on the amount of pollutants that each participating company can emit. Companies that reduce pollution more than required can sell credits to others that cannot easily meet their target.

In setting up the only free-market system for reducing smog, the AQMD has created an alternative to its traditional yet cumbersome approach, which was to enact hundreds of constantly evolving rules for industry.

For the past three years, the AQMD has made virtually no progress in cleaning up industrial air pollution because nearly all of its efforts have focused on developing RECLAIM. Dozens of planned anti-smog rules have been stalled to await the fate of the program.

The trading market will include 387 businesses in Los Angeles, Orange, Riverside and San Bernardino counties that are considered large sources of air pollution. Each emits more than four tons a year of nitrogen oxides or sulfur, two key pollutants contributing to Southern California’s unhealthful air.

The only board member to vote against RECLAIM was S. Roy Wilson, a Palm Desert councilman who wanted the program scaled back.

The board left the proposal intact except to exempt three cities--Burbank, Pasadena and Glendale--that operate power plants. The municipal officials argued that they had begun $75 million in projects to clean up air pollution at the plants, so RECLAIM would be an extra burden for them with little or no environmental benefits.

An effort by board chairman Wedaa to give a two-year reprieve to 144 smaller companies that emit less pollution failed by one vote. Many of those businesses wanted to be exempted because they feared that RECLAIM would be more costly and burdensome for them.

The board also rejected attempts led by the Southern California Gas Co. and several environmental groups to shrink the program even more to encompass only 95 companies--and make it voluntary for the rest.

Peter Jonker, manager of environmental issues for the Gas Co. called RECLAIM “a huge experiment” that could cripple an ailing economy.

“If this is such a great program and everyone will save so much money, then why do all the industries want to be out of it?” he said after the vote. “You’re talking about billions of dollars, and a lot of the economy will be at risk.”

But AQMD board member Marvin Braude, a Los Angeles city councilman, echoed the concerns of many other board members when he said that exempting smaller companies would “cut RECLAIM off at the knees right at the beginning.” He said too few companies would be left to create a viable pollution exchange market.

For several decades, the AQMD’s approach has been to force businesses to install the latest smog control technology on each piece of polluting equipment.

RECLAIM discards those piecemeal rules and instead sets an annual limit on the amount of two pollutants that each company can emit. Each firm’s allocation is based on its past emissions, and the limits decline 5% to 8% each year. By 2003, the goal is to have 75% fewer nitrogen oxides and 60% less sulfur come from those sources.

The companies can meet their limits however they choose, and those that reduce pollution more than required can sell credits to other companies. Businesses would have a financial incentive to find ways to clean up their pollution.

The AQMD contends that companies participating in RECLAIM will spend $81 million a year instead of $139 million to clean up the same amount of emissions.

James Lents, the agency’s executive officer, said he hopes to expand the program next year to include thousands more industries in Southern California, particularly ones that pollute the air with ubiquitous petroleum-based chemicals called hydrocarbons.

Although the concept of a free-market approach is supported by virtually all businesses and major environmental groups, they were firmly divided over the details, including how to monitor compliance. Endorsements came from the region’s most influential industries and largest polluters, including Chevron, Southern California Edison, Shell, Rockwell International and Hughes Aircraft Co., as well as Gov. Pete Wilson, Mayor Richard Riordan and the U.S. Environmental Protection Agency.

In large part, environmentalists oppose RECLAIM because it will delay smog cleanup in the early years of the program and could create “hot spots” of pollution around an industrial plant that chooses to buy credits. The starting pollution limits for the companies are based on recessionary years, when emissions were down, which means they will in some cases allow more pollution in 1994 than is occurring now.

“RECLAIM deals the public out of the process, instead insisting that we should let the polluters decide when, or even if, they will ever clean up their pollution,” said Jim Jenal of Citizens for a Better Environment.

But Robert Wyman, an attorney representing six oil refineries, TRW Inc., Northrop, Hughes Aircraft and other large businesses, said that the new market will clean the air but “cut costs, create choices and save jobs” in comparison to traditional smog rules.

“It does not make pollution control cheap but it does make it a lot less expensive,” he said.

Slicing Into Smog

Under its innovative smog-trading proposal, the AQMD sets pollution limits for 387 businesses in Southern California that are large sources of nitrogen oxides and sulfur. The limits decline each year, with the goal to reduce nitrogen oxides 75% and sulfur 60% by 2003. Companies able to cut emissions beyond their limits can sell pollution credits to others. This chart shows the region’s 12 greatest sources of nitrogen oxides and their air pollution allocations.

TONS PER YEAR 1994 2000 2003 Chevron USA 2,822 1,038 752 California Portland Cement Co. 2,210 543 393 L.A. Dept. of Water and Power 1,901 326 236 (Long Beach plant) Arco 1,853 996 722 Mobil Oil 1,851 716 519 Southern California Edison 1,763 485 352 (Long Beach plant) Union Oil Co. 1,518 530 384 Texaco Refining Inc. 1,499 478 346 Southern California Edison 1,270 376 273 (Redondo Beach plant) L.A. Dept. of Water and Power 820 147 106 (Los Angeles plant) Southern California Edison 742 185 134 (El Segundo plant) Unocal Oil Co. 646 204 148

SOURCE: South Coast Air Quality Management District