AQMD Expands Air Pollution Credit Market

In a creative expansion of its groundbreaking stock exchange for smog, the Southland’s air quality board Friday approved a program allowing investors to clean up small sources, such as household water heaters and furnaces, in exchange for pollution credits that can be sold on the open market.

The measure broadens the type of equipment, products and other smog sources that get credits under RECLAIM--the nation’s first smog market--which was created in 1993 by the South Coast Air Quality Management District.

With RECLAIM, 330 major Southland manufacturers must decrease their emissions annually through 2010. If they cut pollution beyond their limit in a given year, they can sell or trade surplus credits to other firms that have trouble meeting their limits.

Under development for 19 months before it was unanimously approved Friday, the new addition to the credit program is the AQMD’s latest effort to harness market forces in the pursuit of cleaner air.

The idea is to offer businesses financial incentives and flexibility in how they choose to clean up air pollution. AQMD officials say they want to promote new, cleaner technologies and accelerate the retirement of old, polluting equipment in Los Angeles, Orange, Riverside and San Bernardino counties.

For example, a small factory or giant oil refinery can pay to switch other businesses’ diesel pumps or residents’ water heaters to cleaner-burning fuels. In exchange, they earn smog credits they can sell to industries in the region that exceed their pollution limits. Or they can use the credits toward easing smog-fighting limits at their own operations.

Environmentalists originally opposed the program, fearing that it would undermine progress in reducing smog by eliminating emissions only on paper rather than in the air. But environmentalists, industry and AQMD staff reached a last-minute compromise Thursday after weeks of negotiations. For years, the two sides have battled over RECLAIM and all its attempted expansions.

Southland companies say the voluntary program broadens their choices, and could lower their costs, in combating smog.

“The more we can do to advance our technologies, the more likely we will achieve clean air, so that’s why with these incentive programs, to reward innovators is the very best strategy we can have,” said Los Angeles attorney Robert Wyman, who represents a coalition of major manufacturers, including oil refineries and aerospace plants, that strongly endorse pollution markets.

The new facet of the market program is aimed at so-called “area sources,” a broad mix of hundreds of thousands of machines and products in homes and businesses that would otherwise be left mostly unregulated by smog officials. Included are small pumps and motors, residential water heaters, central furnaces, boilers, refrigerator units, dryers and welding equipment.

Alone, such products are small polluters, but collectively they spew a large amount of nitrogen oxides and sulfur into the Los Angeles Basin’s air. The ones that come under the realm of the new program contribute 61 tons of nitrogen oxides a day, or about 5% of the region’s total contributing to smog.

The benefits of eliminating the polluting equipment are nearly offset by the selling of credits that allow other businesses to exceed their pollution limits. However, there should be a small net benefit in air quality because businesses will get credits for 10% fewer emissions than they actually eliminate, AQMD officials say.

Initially, some companies’ emissions could increase because the AQMD under state law must issue credits retroactively for elimination of old products and equipment dating back to 1991.

Electric power and natural gas utilities are especially enthusiastic about the new credits, because their fuels are relatively clean-burning. Southern California Edison hopes to electrify small diesel or gasoline-powered internal combustion engines--which are used by virtually every business--and help its customers trade the credits.

“There is nothing but good that comes out of this,” said Lyle Nelson, Southern California Edison’s manager of air quality programs.

William Quinn, vice president of the business group the California Council for Environmental and Economic Balance, said the new program “postpones--and, if successful, avoids--the need for . . . difficult and politically unpopular” smog rules for an array of small commercial and residential equipment.

Environmental groups worried that the program as initially drafted would have rewarded people who probably would be junking old products and equipment anyway. They also worried that credits would be awarded for switching to new equipment that wasn’t substantially better than the old equipment and wasn’t among the lowest-polluting technologies available.

But the AQMD staff won their support largely by narrowing the program to only two major pollutants--nitrogen oxides and sulfur oxides--removing a large group of sources such as paints, barbecues, cleaning solvents, commercial ovens and consumer products that troubled environmentalists the most. Industry groups agreed, although they prefer a broader program.

Because the new credit program is voluntary, AQMD officials say they cannot estimate how many firms might take advantage of it.