Cost of Clean Air Credits Soars in Southland

Over the last five years, business has tripled at Custom Alloy Light Metals, a company in the city of Industry that turns scrap aluminum into ingots for auto makers.

As the company has grown, so has the volume of air pollutants its factory emits. To stay within Southern California’s strict emission limits, the company in the past turned to a pioneering program allowing firms that pollute more than the law allows to buy credits from other companies that are cleaner than the law requires.

Not now.

As the air in Southern California has gotten cleaner, and as the economy has boomed, the laws of supply and demand have sent the price of such legal pollution soaring.

Last year, a credit that carries the right to emit one pound of nitrogen oxide gas went for as little as 13 cents. By January, the price was up to $1.14. In July, the same credit sold for $37, according to the Automated Credit Exchange in Pasadena, which has processed more than two-thirds of the credits traded in Southern California.

By last week, prices had settled to about $13 per pound--100 times what they were a year ago.

Those increases, and other problems, have some Southern California businesses fuming as they scramble for credits in a booming economy and a deregulated energy market.

The price increases “make it hard to make any informed business decision,” said Nick Drakos, vice president of Custom Alloy Light Metals. Also, trading pollution credits “is not that bad an idea,” and the company may buy credits again, he said, “but it doesn’t allow for growth.”

“If a company is growing, it’s very difficult to get reductions when you’re burning more fuel, and they don’t have a way to get more credits into the system.”

Companies that cannot buy enough credits to cover their actual emissions must reduce production or face strict regulations and possible penalties.

Drakos is not alone in having problems with the trading system known as RECLAIM, for Regional Clean Air Incentives Market.

In August, the Los Angeles Department of Water and Power agreed to pay a record $14 million penalty and install extensive new control technologies at power plants because its emissions will exceed its pollution allocation by the end of the year.

The new equipment that the department agreed to install, beginning in January, is expected to slash emissions by at least 90%, said S. David Freeman, general manager at DWP. Although the price is high--about $40 million--it is cheaper than trying to buy credits on the market, he said.

“We tried to buy the credits, but we reached the point where there weren’t any more to be bought,” Freeman said. “The program is teetering and in shaky shape,” he added. The program “has run up against a brick wall. If people can’t trade, you run into a real dilemma.”

But air quality officials say the trading program is working as intended.

When the program was started in 1994, businesses demanded it as a flexible, cheaper alternative to edicts that the government used traditionally to fight pollution. It is the primary strategy for squeezing smokestack emissions from 340 sources, including power plants, oil refineries and manufacturers, to help the Los Angeles region meet federal clean-air goals.

The idea was that businesses would get flexibility in how they cleaned the air, but the amount of allowable pollution would still shrink each year. At the time, with the economy in recession, businesses focused on the lower compliance costs, not on the inevitable crunch that would come as the allowable amount of emissions shrank.

The reduction in the number of credits is about 8% a year for nitrogen oxides and 7% for sulfur oxides. As a result, the total amount of pollution allowed now under the credit program is only half of that allowed at the start. By 2003, emissions from all sources will have been sliced by 75%, according to the South Coast Air Quality Management District, which administers the program.

“Under this trading program, there is a ceiling on the amount of pollution, and that ceiling gets lowered each and every year until 2003,” said Barry R. Wallerstein, executive officer at the air quality district.

“That’s a benefit to the breathing public,” Wallerstein said. “What the companies get in return is flexibility in how to choose ways to stay under that ceiling. It’s a win for the environment and a win for the businesses.”

The pollution credit crunch peaked this summer when about 170 companies entered the market simultaneously to buy and sell smog credits. Their entry coincided with a heat wave that sent power companies into the market looking for ways to offset emissions for power plants that were working overtime.

“Companies didn’t think about what would happen to the market when they all jump into it together,” said Jane Hall, an economist at Cal State Fullerton. “People expected there would be a crunch. It was inevitable. But it’s come sooner than people thought.”

Companies that planned ahead, however, were able to sell credits for high prices and pocket a handsome windfall.

Libbey Glass Co., for example, employs 250 people at a plant making champagne glasses and other products. A few years ago, the company installed low-polluting burners at its factory in Walnut. Those burners lowered the plant’s emissions far below what the law required, freeing up nearly half its smog credits, which Libbey sold on the open market, said Kimberly Lagormarsino, the company’s environmental health and safety manager.

“It’s simple supply and demand, like the stock market,” Lagormarsino said. “A lot of facilities at the outset of [the program] didn’t plan ahead, but Libbey from the very beginning started looking at ways to fine-tune the process.”

“Our pollution has turned into a commodity, and I think it’s great. If you allow the companies with low cost to control [pollution] and sell the benefit to someone else, then you do it and it saves money,” she said.

Robert Wyman, an attorney for the Regulatory Flexibility Group, a business organization that led the push to establish the program, estimates that the free market trading has saved his clients about $400 million in compliance costs since it began. Among the companies that have taken advantage of the program are Disneyland, Hughes Aircraft Co., TRW Inc. and Anheuser-Busch Inc.

The program “is experiencing stress, but on the whole this program has been a resounding success,” Wyman said.