Southland Firms Feel Pollution Credit Pinch
Factory owner Bill Gorman thought he’d been hit with everything the energy crisis had to throw at him: soaring natural gas bills, skyrocketing electricity prices and the ever-present threat of blackouts.
Then he went shopping for pollution credits to meet emissions limits on his Vernon rendering plant. Electricity providers had snapped up so many of them to keep old plants running that Gorman found himself priced out of the pollution market. Credits he could have picked up for slightly more than $4,000 early last year will cost him about $73,000 to meet his current air quality mandates.
“It’s insanity,” said Gorman, president of West Coast Rendering Co., which recycles used cooking grease for use in animal feed and other products. Plagued by low margins, falling revenue and stratospheric energy costs, he said he can’t afford pricey credits or a huge new investment in anti-pollution technology to keep his boilers in compliance.
“Nobody saw this coming,” he said.
It’s one of the unintended consequences of the power crisis: Some of Southern California’s biggest industrial polluters are getting hit by the spiraling cost of emission credits.
The price explosion was ignited last summer as electricity producers began buying credits under the region’s pay-to-pollute program to run dirty generating plants full bore. Credits that sold on the open market for less than 50 cents two years ago shot above $50 as companies scrambled to purchase what had suddenly become a scarce commodity.
“Our profit plan was basically wiped out,” said Frank Sheets, spokesman for TXI Riverside Cement, which closed a kiln for most of December to curb emissions but still paid more than $111,000 for credits. “The market is out of whack.”
Responding to an industry outcry, the South Coast Air Quality Management District earlier this month revamped the program, temporarily removing deep-pocketed energy buyers from the market in an attempt to stabilize prices for everyone else.
Recent trading activity shows prices for current-year credits hovering around $33, well below the peak. But the move to ease prices has angered environmentalists, who say years of cheap credits have discouraged companies from making needed investments in antipollution technology.
And even without electricity generators throwing money around, almost no one foresees a return to the days of dirt-cheap credits. By design, the number of credits is shrinking each year to encourage polluters to clean up their acts. Companies that added pollution control equipment early are reaping a windfall by selling their excess credits for lofty prices while laggards are getting an expensive lesson in the price of procrastination.
“This is the reckoning,” said Carol Coy, AQMD deputy executive officer. “The business community wanted this program. Now they have to find a way to make it work.”
Buying the Right to Exceed Limits
RECLAIM, short for the Regional Clean Air Incentives Market, is one of the primary tools for cutting smog-forming factory emissions--principally nitrous oxide or oxides of nitrogen (NOx)--in Orange County and urban portions of Los Angeles, Riverside and San Bernardino counties. Nearly 400 large industrial polluters participate in the program, adopted in 1993 as a way to give companies some flexibility in meeting pollution reduction requirements.
Each participant is given a pollution cap based on past production and measured as one “credit” for each pound of allowed emissions. Those caps have been falling every year in an attempt to force participants to make significant NOx reductions by 2003. Companies that exceed their limits are subject to heavy fines. But instead of dictating what pollution control technology companies have to use and when they have to install it, the program gives firms the option of simply buying RECLAIM trading credits from other participants to offset any excess emissions.
Firms can deal directly with one another, use brokers or buy and sell through environmental exchanges now serving pay-to-pollute programs nationwide. Because RECLAIM is market-based, prices of credits fluctuate based on supply and demand.
Market watchers say NOx credit prices began rising in late 1999, when they broke the $1 barrier for the first time. That’s because the supply has been decreasing by about 8% a year, which was supposed to nudge companies toward purchasing pollution control equipment as gradually rising prices made credits less attractive. AQMD data show 1999 as the crossover point, when the credits available no longer exceeded reported emissions of RECLAIM participants--a signal that the days of pennies-per-pound credits had ended.
“We’ve been talking to companies about it for years,” said Anne Sholtz, president and chief executive of Automated Credit Exchange, a Pasadena-based environmental emissions exchange. The power crisis “just accelerated it.”
As a result, when power plants came in and gobbled up two-thirds of the available credits, the market shot up like Nasdaq during the dot-com boom.
“The credits just went through the roof,” said Charlie Botsford, air quality manager for the Pasadena office of Parsons Engineering Science, an environmental consulting firm. “It was a nasty situation.”
Under pressure from power producers, who claimed the high cost of NOx credits was helping drive up the price of electricity, the AQMD recently approved sweeping changes to the program. Among them, the agency removed power plants from the credit-trading market for three years, essentially allowing them to pollute more now in exchange for more cleanup later.
Agency officials predict that will help stabilize prices for smaller firms that were previously priced out of the market. But with the critical crossover point passed and uncertainty about the new rules keeping some would-be sellers out of the market, NOx credits for this year are still pricey, dashing the hopes of companies that were looking for quick relief.
Botsford says RECLAIM participants always have known that credits were supposed to grow more expensive over time--they just never counted on prices taking off so suddenly. Compounding the problem, he and others say, is that many industrial firms are reeling from the effects of the economic slowdown and a dramatic rise in energy prices. What’s more, it can take months, sometimes years, to plan and install some types of emission control equipment.
That has put companies such as TXI in the unenviable position of having to spend big money for credits while simultaneously trying to scrape up as much as $2 million to invest in antipollution technology that may not be ready for a year or more. That’s on top of the dramatic rise in electricity prices and frequent power interruptions that have sent TXI’s cost per ton soaring.
“It’s a frustrating combination of events,” Sheets said. “I’m starting to wonder if we could make more money selling NOx [credits] than cement.”
Early Switch to Cleaner Emissions Is Paying Off
Environmentalists have little sympathy for industry’s laments. So far, RECLAIM participants have cut their emissions by just 16%, far less than expected nearly a decade into the program.
“The higher the credit price, the greater the incentive to install” pollution control equipment, said Tim Carmichael, executive director of the Coalition for Clean Air. “A lot of these guys . . . sat on their hands” for years.
Not all companies have procrastinated. Libbey Inc. made the decision early to install low-NOx burners and other clean technology at its plant in Industry, where it makes glass tableware. The company could have purchased a stream of credits going years into the future, but management didn’t want to depend on a strategy that could leave the company vulnerable when the market finally turned, said Kimberly Lagomarsino, environmental, health and safety manager at the facility.
“We knew at some point just buying credits wasn’t going to cut it,” Lagomarsino said. “Basically, we wanted to be prepared.”
That decision has paid off handsomely. Since last year, the firm has sold more than 290,000 pounds of excess credits for about $6.3 million, about double what it has spent on pollution control technology.
Firms that didn’t have such foresight say they’re concerned about the impact of tight energy markets on the RECLAIM program. Though smaller companies are no longer competing against well-heeled power producers for credits, oil refiners continue to buy huge numbers of credits to feed the demand for gasoline.
As for Gorman of West Coast Rendering, he’s trying to reach an agreement with the AQMD to have more time to get into compliance and come up with the half-million dollars he figures he’ll need to purchase pollution control equipment. Meanwhile, his monthly natural gas bill has shot up 500% while his sales are declining.
“I still don’t know how I’m going to pay for it,” Gorman said. “I’m scrambling.”
