Trouble Erupts In California Pollution Trading Market

As the Bush Administration unveils a plan to expand the use of market approaches to reduce air pollution, a touch of Wall Street scandal has come to California, where environmental regulators have cited an air pollution credit trader in fashionable Old Town Pasadena for allegedly filing false reports with the greater Los Angeles smog control agency.
The citation by the South Coast Air Quality Management District comes on the heels of reports in the Los Angeles Times on July 30 that the trader, former California Institute of Technology economist Anne Sholtz, is facing a $4.3 million court judgment to make whole an electric power plant operator after allegedly failing to deliver air pollution credits the firm bought and then failing to refund the company’s money. The newspaper reported that Sholtz, president of Automated Credit Exchange, Inc., is facing at least two other similar suits by power companies.
While the local air district maintains that no excess pollution occurred, the development comes at the same time the White House has introduced a legislative proposal to place the nation’s electric power plants under an emissions credit market scheme similar to the Southern California program known as RECLAIM. That so-called “cap and trade” program has prevailed over industrial polluters in Southern California since 1994.
“This notice of violation stems from our ongoing investigation into ACE’s trading activities in the RECLAIM market,” said Barry Wallerstein, SCAQMD’s executive officer. “Although this violation alleges false reports in RECLAIM trades, no excess emissions occurred and the environment was not harmed.”
SCAQMD cited Automated Credit Exchange, Inc., and Automated Credit Exchange LLC, both of Pasadena, as well as Sholtz personally, for two counts on March 12 of allegedly violating an agency rule that requires prompt and accurate reporting of RECLAIM emission credit trades. Under California law, each count carries a maximum civil penalty of $10,000.
Wallerstein said that the agency is continuing its investigation and pledged to “vigorously prosecute” anyone who has been found to “have engaged in fraudulent trades.”
While news of the potential fraud in the market for RECLAIM air pollution credits may came as a surprise to some, it was yet another twist in a market that has been plagued by distortions for the past two years and largely has failed to meet its pollution control objectives.
As the scandal in Southern California’s air pollution credit market unfolded last week, President Bush and his chief environmental officials were busy in Washington unveiling the “Clean Skies Initiative,” which Republican members of Congress promptly introduced as legislation to amend the Clean Air Act.
In introducing the proposal, President George W. Bush promised Americans that the initiative “will cut power plant emissions by 70% -- much further, faster, more certainly, and more cost-effectively than current law.” Bush said, “Clear Skies will do this through the use of a market-based system that guarantees results while keeping electricity prices affordable to the American people.”
The Clear Skies Initiative would place the nation’s power plants under emissions caps for three major pollutants, which would decline over time. Plant operators that reduce their emissions below their cap would be able to bank credits they could sell to those over their cap or use themselves to meet emissions limits in later years. Bush’s proposal would allow trading for three pollutants:
· Nitrogen oxides, which form fine particles associated with premature death among people with respiratory diseases;
· Sulfur oxides, which also form fine particles, as well as stream- and lake-damaging acid rain; and
· Mercury, which accumulates in fish and is toxic to the human nervous system.
The White House says the Clear Skies Initiative will reduce emissions of toxic mercury from 48 tons a year to 15 tons in 2018, as well as dramatically cut emissions of sulfur oxides and nitrogen oxides.
Almost a decade earlier, the southern California air agency put its faith in the power of the market to clean up pollution from the region’s major industries by adopting the RECLAIM program. It’s stated goal was to reduce emissions of smog-forming nitrogen oxides by 8.3% a year between 1994 and 2003, or a total of 83%, and then keep nitrogen oxides from major industries at a constant level after that date.
President Clinton’s EPA approved the controversial program, which was fought vigorously by environmentalists, as a major cornerstone of Southern California’s plan to meet federal health standards for air pollution. An SCAQMD-proposed expansion of the program to cover other pollutants was scrapped later in the 1990’s over concerns about unequal protection of area residents from toxic hot spots.
Now, as the final 2003 deadline for industries under RECLAIM to reduce emissions looms, a review by the agency casts doubt on whether the program will meet its objectives.
As the California electricity crisis went critical in 2000 and residents paid rapidly escalating electricity bills, prices for air pollution credits also soared from an average $1,500 to $3,000 per ton of nitrogen oxides to more than $45,000 per ton, according to an SCAQMD analysis.
Meanwhile, in a 2001 review of the program, SCAQMD found that companies under RECLAIM had reduced little, if any, of their emissions. Instead were meeting program requirements with credits derived from initial pollution caps that were far higher than needed, as well as an influx of 2,070 tons of credits from several sources, including earlier plant shut downs, changes of technology standards, and scrapping of old cars.
Even with the influx of credits and their ability to pay high prices, power plant operators flush with cash from skyrocketing electric rates could not seem to purchase enough credits to cover their emissions. One firm, AES, which operates three plants in the Los Angeles area, exceeded its emissions cap for the third quarter of 2000 by more than 342 tons of pollution, leading AQMD in 2001 to levy a $17 million penalty against the firm. Wallerstein, the agency’s executive officer, called it "one of the most egregious air pollution violations” in his agency's history.
The problems at AES and numerous other companies covered by RECLAIM have forced the air pollution authorities in Los Angeles to put some firms under administrative enforcement orders, according to agency reports.
The agency also moved to salvage the market approach by exempting power generators from RECLAIM, allowing them instead to pay into a fund at the reduced market rate of $15,000 per ton of pollution. SCAQMD has been using the money to subsidize clean up of diesel trucks and buses.
When introducing his own market-based Clean Skies Initiative, President Bush remarked that environmental regulators “have learned a lot about what approaches work best. Now is the time to put those lessons to use.”