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Column: How refineries’ greed sank an environmental program that was saving them millions

ExxonMobil's Torrance refinery is among those subject to the failed RECLAIM cap-and-trade system.
(Michael Owen Baker / For The Times)

Just over a year ago, Southern California’s refinery industry was riding high. With a last-minute blitz in December 2015, the refineries had torpedoed a tough anti-pollution plan that had been painstakingly developed by regional environmental officials over the previous 37 months. The industry plan that was approved instead continued a cap-and-trade program that the refineries had successfully gamed for years, saving themselves as much as $1 billion in anti-pollution equipment they otherwise would have had to install.

But today, the consequences of their arrogance are plain for all to see. The cap-and-trade program will be shut down. It’s to be replaced by a “command-and-control” program that could require the installation of clean-air technology on a specific schedule for every facility. The refineries, which account for 59% of non-vehicular pollution emissions, are likely to be the first to come under the gun.

The South Coast Air Quality Management District (AQMD) board, which had treated the industry with indulgence in the past, has been remade with a much more industry-skeptical balance.

“At a policy level,” says Evan Gillespie of the Sierra Club, “this will result in the refineries finally installing lifesaving pollution controls. Politically, the oil industry’s overreach created a backlash over its watering down of a critical rule.”

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From RECLAIM, we learned a lot about how not to run a cap-and-trade program.

— Evan Gillespie, Sierra Club

The industry is facing the fallout from a strategy that blew up in its face. In an op-ed earlier this month in the Sacramento-based journal Capitol Weekly, Catherine Reheis-Boyd, head of the Western States Petroleum Assn., pleaded for “market-based solutions that have proven to both preserve economic growth while cleaning the air.” (WSPA is the lobbying arm for California refineries.)

Yet it was exactly such a “market-based” program that WSPA unwittingly placed beneath the guillotine.

That program, RECLAIM, for Regional Clean Air Incentive Market, was created by the AQMD in 1993 as California’s first cap-and-trade system. Rather than directly ordering every pollution-emitter to install specific clean-air technology, RECLAIM established a market in pollution credits. A power plant, cement plant or refinery could buy time by purchasing credits allowing them to exceed their permitted emissions from facilities that were beating their clean-air goals.

RECLAIM wasn’t supposed to give polluters a break on meeting clean-air standards, just more flexibility. But it didn’t work. By 2011, Southern California refineries had installed only four of the 51 catalytic reduction units needed to remove sufficient nitrogen oxides from emissions to meet clean-air goals. The reduction of those polluting gases came virtually to a halt in the refinery sector after 2002.

Pollution credits had become so plentiful and cheap in the RECLAIM market that refineries simply bought the credits instead of the equipment. The glut of credits came because the AQMD’s overall emission limits had been too liberal, and because the AQMD allowed credits assigned to shut-down factories to remain in the market.

In December 2015, the AQMD staff proposed a plan to rectify the glut. Its plan was to “shave” the total credits in the market by 14 tons of nitrogen oxides per day through 2022 while retiring all credits that had been held by shut-down emitters, especially cement plants. The goal was to force up the price of credits so they’d become more expensive than installing clean-air equipment.

Refineries are the largest polluters in Southern California among non-vehicular sources of smog.
(California Air Resources Board )

But WSPA struck back, hard. In a proposal made public the very morning of the AQMD vote, it proposed a shave of only 12 tons, back-loaded so that the most stringent reductions wouldn’t have to be made until after 2020. The board fell into line, and also accepted a WSPA proposal to refer the elimination of credits from closed facilities to a “working group,” which meant putting it off indefinitely.

The board’s capitulation drew near-universal condemnation from clean-air regulators and environmental experts. The California Air Resources Board warned the AQMD that it would reject its plan, because it was so weak it would violate federal law — “at a time when the South Coast needs every ton of achievable reductions to attain healthy air.”

The U.S. Environmental Protection Agency followed up last March by also rejecting the plan. The EPA gave the AQMD until Nov. 16 this year to revise its clean-air plan or face legal sanctions under the Clean Air Act. And the Sierra Club and Natural Resources Defense Council, along with two other environmental groups, sued to force the board to reverse its December 2015 vote.

Trading credits (red line) have exceeded emissions since 2001, allowing refineries to buy credits instead of installing anti-pollution equipment.
(California Air Resources Board )

Most importantly, WSPA’s successful intervention to save its members money underscored the flaws in RECLAIM. “Their greediness made it easier to show that the program was not working,” says Los Angeles County Supervisor Sheila Kuehl, a Democrat who in January replaced termed-out county Supervisor Mike Antonovich, a Republican, on the AQMD board.

AQMD staff officials say RECLAIM was showing its shortcomings even before the December 2015 vote. “As early as 2014, we were saying that a market cap-and-trade program would have to converge with command-and-control,” says Philip Fine, the AQMD’s deputy executive officer. In an analysis prepared for the board’s March 3 meeting, the staff acknowledged that “many of the program’s original advantages appear to be diminishing” and advocated its “orderly sunset.”

“Looking forward,” Fine says, “it was going to be harder to make it work.”

At its March 3 meeting, the board voted 7-6 to sunset the RECLAIM program and replace it with a command-and-control system.

As a result, progress on reducing refinery emissions has stagnated since 2002.
(California Air Resources Board )

How anti-pollution policy will progress from here — with a board much less sympathetic to the industry — is a bit uncertain. The district staff on Friday held its first working group meeting to unravel the program. Fine cautions that the process could take at least two years, although a transition to a command-and-control system for some industries could be imposed even before it’s shut down.

The program’s critics say it’s in the region’s interest to move promptly so long-delayed equipment finally can get installed. “I hope they’ll move expeditiously,” Kuehl says, “because leaving a useless program in place doesn’t help anyone.”

WSPA seems to be fighting a lost cause. In an email, Reheis-Boyd told me that RECLAIM “has been highly effective since its inception in 1994, achieving approximately 70% reduction in emissions.” That’s true but hardly the whole story, since that’s not enough to meet clean-air standards; it’s like saying that your ball club scored 12 runs so it must have won — except that the opposing team scored 15.

She says WSPA “intends to be collaborative” in analyzing “all of the potential environmental impacts, the economic costs, as well as a variety of legal factors,” as the AQMD moves forward. But in her Capitol Weekly article she called command and control a “heavy-handed … approach” and disparaged the AQMD board for moving hastily to “discard a successful program.”

The refineries can’t be counted out yet as political actors who could exert pressure for delays. “They have tremendous power,” observes AQMD board member Judith Mitchell, a Rolling Hills Estates councilwoman who introduced the resolution to sunset RECLAIM.

Environmentalists, however, say they’re confident that a command-and-control system will work much better to achieve clean-air goals than the old. “We don’t think we’re going to be stiffed,” says David Pettit, senior attorney for the Natural Resources Defense Council’s Southern California Air Program.

Another issue is what RECLAIM’s failure says about cap-and-trade programs generally. That’s important because California’s statewide cap-and-trade program, which covers the entire economy including vehicular fuels, remains an international model even as it faces legal and political challenges.

RECLAIM doesn’t undermine the argument for cap and trade, says the Sierra Club’s Gillespie. Quite the contrary: “From RECLAIM,” he says, “we learned a lot about how not to run a cap-and-trade program.”

Keep up to date with Michael Hiltzik. Follow @hiltzikm on Twitter, see his Facebook page, or email michael.hiltzik@latimes.com.

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