It was supposed to be a revolutionary way to clean up the environment, a business-friendly strategy to slash industrial emissions without the heavy hand of government.
But the Southland's market basket experiment has been a serious disappointment.
The Regional Clean Air Incentives Market, or RECLAIM, has fallen well short of expectations. Eight years into the program, smog cuts have been minimal, companies are failing to meet pollution reduction targets, and proposals to rescue the operation are mired in controversy.
Manufacturers, power plants and refineries have reduced emissions by a scant 16%--much less than was anticipated by this time. Businesses were given 10 years to eliminate about 13,000 tons of pollution annually, but as the program nears its end they have eliminated just 4,144 tons, according to projections by the South Coast Air Quality Management District.
Over the course of the program, the AQMD has received a trickle of applications from companies to upgrade pollution control capacity. Air quality officials say that if the number of retrofits doesn't dramatically increase, the program will fail.
So little progress has been made that the AQMD is now telling businesses to slash their air pollution at more than twice the rate they have over the last seven years. Meanwhile, the agency estimates that industry will emit an extra 3,373 tons of health-threatening pollutants into the air this year, 14% more than it is allowed under the program.
Business representatives are divided in their reactions to the program.
"We're going to see the benefits of RECLAIM. It's just taking a little longer than we expected," said Bill Quinn, vice president of the California Council for Environmental and Economic Balance, which represents business and labor groups.
But some companies are resisting pressure to reduce emissions. Some seek to eliminate the penalty they risk if they pollute beyond their limits. Others would like to escape the program entirely by paying a fee of $7.50 per pound of pollution, no matter how much smog they make. Many businesses are insisting on a fresh infusion of credits in return for cleaning up cars, boats and trucks instead of factories, smelters and refineries.
RECLAIM "hasn't done as well as the regulations it replaced," said Mike Scheible, deputy executive officer for the state Air Resources Board. "I don't think it has worked yet to achieve the emission-reduction goals that it set out to do. The reductions we've anticipated have been delayed and won't be achieved for a couple more years."
The program was launched in 1993 as the first market-driven system to clean urban air and quickly became a model for others around the world. The Los Angeles-area program, which relies on a system of trading pollution credits, was supposed to cut industrial pollution by stimulating technological innovation and reducing burdensome new costs on businesses.
Nearly 400 companies participate, including Walt Disney Co., ExxonMobil Corp. and Northrop Grumman Corp.
Each facility receives a certain number of credits representing a pound of pollution. Companies that do not pollute to maximum allowable levels can sell credits to firms that emit more than their limits. The total credit supply shrinks about 8% annually for a decade, thus trimming pollution.
The program was seriously compromised when power producers in the Los Angeles region operated far beyond pollution limits last year. Power companies gobbled emissions credits as they increased production to keep the lights on. That caused a pollution credit shortage.
The market price of a credit soared as demand outstripped supply. A credit for one pound of nitrogen oxide gas that cost an average of 25 cents in the early years of the program climbed to more than $50 late last year. Nitrogen oxide contributes to ozone and haze, the main ingredients in smog.
Local air quality officials and business advocates say the program was working fine until the electricity crisis.
But critics, including the U.S. Environmental Protection Agency, the state air board, environmentalists and some scholars, disagree. They say the energy crisis revealed structural flaws in the program that were bound to surface sooner or later. "The simplistic explanation as to why RECLAIM failed is [the market] was much more volatile than people expected and that is due to the electricity situation, an anomaly, an unmanageable spike rippling through the market. But that's not the whole story," said Tom Canaday, environmental engineer for the EPA.
Local air quality officials acknowledge that, from its inception, the program was embedded with powerful disincentives to cut smog. That is because they seeded it with too many credits, about 40% more than real-world emissions. Credits were so plentiful and cheap for so long that companies grew addicted to buying them instead of spending more for pollution controls. The system crashed last year when manufacturers returned to the marketplace expecting to find more cheap credits, but instead discovered that power companies had bought most of them, driving up prices for the few that were left over.
All the while, air quality officials did not push business to install controls and instead trusted them to make wise choices. Indeed, that was the very goal of the program.
"For seven years, the program did absolutely nothing," said an EPA official familiar with it. "Businesses got used to cheap credits. Nobody did what they were supposed to do: responsible planning."
RECLAIM was born during an economic downturn when business groups demanded a flexible alternative to traditional regulations. Many economists and conservative politicians continue to favor market-driven programs, and such approaches are expected to figure prominently in the Bush administration's attempt to have a clean environment for less cost and red tape.
Representatives of big businesses, which control about 85% of the nitrogen oxide credits, say RECLAIM has saved them money while contributing to record clean air the region experienced during the 1990s. Air quality officials ascribe most of that progress to cleaner car exhaust.
Companies saved an estimated 41% on compliance costs under RECLAIM compared to traditional regulations, although most of the savings occurred because pollution controls were delayed for so long.
At the Arco refinery in Carson, engineers searching for ways to reduce emissions under RECLAIM recently turned smog into cash. They rerouted propylene gas, a byproduct of oil refining, from boilers into a processing plant where they converted it to plastic pellets for water bottles, patio furniture and strawberry crates, reducing about 500 tons of pollutants annually.
"Now the polypropylene plant is a revenue-generating plant," said Susan Livingston, environmental manager for British Petroleum.
In trying to fix the program, AQMD officials face a difficult balancing act: They want to help lower credit prices by removing the power plants from the program. But if the credits become too cheap again, companies won't have any financial incentive to reduce emissions. It's the same scenario that made the program ineffective in the first place.
The agency's governing board meets May 11 to consider amendments to the program.
The agency is already planning to require 36 of the biggest polluters to begin submitting plans detailing how and when they will install additional pollution controls. Among those targeted are California Portland Cement in Colton, the Los Angeles Department of Water and Power, and Equilon Enterprises, which operates a refinery in Wilmington. Industry initially balked at the demand, but relented after air quality officials dropped a federal enforcement requirement.
The AQMD governing board also approved a regulation last month to allow companies to clean up heavy-duty diesel engines in exchange for emission credits for use at factories. The EPA has not approved similar rules by the AQMD, and state air quality officials frown on the practice.
Barry R. Wallerstein, executive officer of the AQMD, said proposed changes to RECLAIM should help restore confidence and improve the performance of the program.
"I don't think we're looking at Humpty Dumpty," he said. "The sorts of changes we are proposing will fix the difficulties the program has experienced over the last year. This is a bump in the road, a perturbation, and with rule amendments we will be back on the path of achieving the design objectives."