This Commodity’s Smokin’ : Companies Trade Smog Credits on Online Exchange
Palladium, pork bellies . . . and pollution?
As a market commodity, smog doesn’t much fire the imagination: It isn’t likely to spawn a host of investment books or get-rich-quick seminars. For one thing, speculators can’t dabble in the trading of noxious fumes, only Southland polluters can.
Nevertheless, a thriving market in smog has developed since the South Coast Air Quality Management District created a credit system called Reclaim in 1994 to give manufacturers an incentive--and set a timetable--for reducing toxic emissions in the Los Angeles basin.
Traded company to company or through brokers at first, most pollution credits are now being traded over an electronic system called Automated Credit Exchange (ACE) invented with Jet Propulsion Laboratory rocket science. The Pacific Exchange is even facilitating ACE by clearing and settling trades.
The emerging smog market is an outgrowth of the mandate that by 2004 Southern California polluters reduce their pollution by 70% and, in the meantime, meet annual reduction targets. Companies that beat their targets earn credits they can sell to other polluters. Those that pollute beyond their prescribed limit must buy credits, or face huge fines or closure.
Participants, which number 55 so far and include refiners Unocal and Chevron and manufacturers Owens Brockway Glass and Textron, log onto the ACE electronic trading floor and make trades themselves. During the weeklong trading session ended Friday, about 2.9 million pounds of smog were traded in volume worth about $2.2 million.
Credit prices during the session ranged from 2 cents a pound for this year to more than $1 a pound for the right to pollute in the year 2000, reflecting the premium value that credits take on with each passing year as AQMD tightens its controls. Participants can buy and sell credits as far in advance as 2010.
Participating companies say the Pasadena-based system has helped establish a stable, comprehensible market.
“It works absolutely wonderful,” said Terry Larson, now vice president for environment and safety at Santa Fe Pacific Pipeline in Orange and formerly environmental manager at Unocal. In his previous job, Larson frequently had to scramble, calling around to find companies with credits to sell. Now he can just log on to his computer.
The electronic trading system was devised by Anne Sholtz, a former economics instructor at Caltech and now ACE president. She licensed technology that her former Caltech colleagues used to develop the Cassini space vehicle for the National Aeronautics and Space Administration. Caltech operates JPL under contract to NASA. Cassini, scheduled for an October launch on a nearly seven-year journey to Saturn, will orbit Saturn for four years.
The Cassini software enabled engineers to trade credits they earned by beating weight, power and cost limits on the spacecraft’s various component instruments. Caltech earns a royalty on commissions generated by ACE, which conducts its market one week every three months.
Youth Movement
At Occidental Petroleum’s annual shareholder meeting Friday, one investor complained to Chairman Ray Irani about the ages of Oxy’s board members: four of 14 are 80 or over, vestiges of late Oxy Chairman Armand Hammer’s penchant for corporate elder statesmen like him. Hammer died in 1990 at age 92, still at the helm.
Irani replied that the Oxy board had passed a rule limiting future board elections to candidates 72 or younger.
“That’s no reflection on current members,” Irani said, referring to billionaire director John Kluge, 82; former U.S. Sen. Albert Gore, 88; attorney Arthur Groman, 82; and rancher George Nolley, 81, all seated on the dais.
Those octogenarians are grandfathered in by the rule and may stand for reelection.
There’s been another wrinkle since Hammer’s death: Oxy’s annual meetings are no longer held on his May 21 birth date, a tradition that would prompt shareholders to stand and sing happy birthday.
“May 21 is too late,” a post-Hammer spokesman says.
