When the South Coast Air Quality Management District launched its new emissions reduction program in 1993, it knew that the publicly traded pollution credits at the heart of the program would likely increase in value over the years.
What it didn’t count on was the major difference in buying patterns between large and small companies participating in the agency’s Regional Clean Air Incentive Market (Reclaim) program.
While large companies have taken a more proactive approach, buying pollution credits with expiration dates well into the 21st century, smaller businesses have been shopping for credits on a year-to-year basis.
The result has been that many smaller firms in the Reclaim program could get priced out of the market if prices keep rising, which would force them to either cut back their production or install costly emissions-reducing equipment.
“I’m concerned that some small companies don’t understand how much credit prices are going to increase in the future,” said Anne Sholtz, president of the Automated Credit Exchange, one of two Reclaim credit traders in the program. “(The price increases) are ruling out one option that could have theoretically been cheaper for them.”
Under the Reclaim program, 330 Southern California companies receive a fixed number of pollution credits each year, based on the size of their operations. All companies that emit more than four tons of pollutants per year must participate in the program.
Companies that pollute below their quota can sell off their unused credits to companies that exceed their allotment. One Reclaim credit is equal to one pound of airborne emissions, meaning a company with 2,000 credits is allowed to release one ton of emissions that year. Each credit is earmarked for use by a designated year.
The program was designed to combine environmental protection with market-based incentives, enabling cleaner companies to install emissions-reducing technology and sell off their unused credits for cash on the open market. Meanwhile, companies that pollute beyond their quotas can do so, but only by purchasing additional credits on the open market.
Records from the Pacific Exchange show that the price of Reclaim credits has risen noticeably since the program began four years ago.
For instance, a nitrogen oxide pollution credit that expires in 2007 sold for 37 cents in June 1994, then jumped to 85 cents by September 1995, and was selling for 95 cents in January 1997.
Trading records from the AQMD show that nearly all credits traded on the open market for use after the year 2000 have gone to large companies, mostly oil refiners and electric utilties. Meanwhile, smaller firms have tended to focus their open-market purchases on the current year and in some cases on the year ahead.
Many of those smaller firms simply cannot afford to invest in credits that extend out five or 10 years, said Sholtz.
One such firm is Liston Brick Co. of Corona, according to Bob Hilovsky, a consultant hired by Liston to handle its Reclaim compliance issues.
“Liston is emitting more than what they’re alloted under the program,” Hilovsky said. “The problem is, they don’t have the money to look to the future.”
As a result, Liston will have to keep buying Reclaim credits on a year-to-year basis when its annual emissions exceed its official allotment, Hilovsky said.
The alternative would be to scale back production or purchase new, cleaner equipment if Reclaim credit prices keep rising and eventually become too expensive, he added.
Sholtz said many small firms would like to purchase credits for future use with borrowed money. The problem is that the concept of emissions credits as collateral is a difficult one for banks to swallow, since most lenders are unfamiliar with Reclaim and are unsure whether the credits will retain their value in the future, Sholtz added.
Sholtz is working with a handful of banks to see if some might be interested in lending to Reclaim credit buyers. One bank exploring the possibility is City National Bank, according to Roger Swart, manager of City National’s Pasadena office.
“We’ve never seen anything like this,” Swart said. “The credit administration of the bank would have to look at the collateral that is being pledged (i.e. the Reclaim credits) and the viability of that collateral.”
Meanwhile, AQMD air quality engineer Susan Tsai said the AQMD expected Reclaim credits to rise in price. Current levels are still within the projections set by the agency when the program was originally designed.
“We’ve seen a steady increase, but not an increase that’s alarming,” she said, adding that any dramatic jumps beyond certain pre-determined levels would trigger an automatic review of the program.