BOARD MEETING DATE: January 19, 2001
AGENDA NO. 23

Report on Potential Backstop Measures to Stabilize NOx RECLAIM Trading Credits Prices

SYNOPSIS: 

During the year 2000, the price of NOx RECLAIM Trading Credits (RTCs) traded in the RECLAIM market increased sharply from the previous years. The average price of 1999 and 2000 NOx RTCs increased above the backstop level of $15,000 per ton specified in Rule 2015 – Backstop Provisions. Rule 2015, Subdivision (d) requires the Executive Officer, upon discovery, propose that the Governing Board amend the program to address any specific problems. This report examines the issues associated with the recent increase in NOx RTC prices and makes recommendations for program improvements that may reduce and stabilize NOx RTC prices.

COMMITTEE: 

Stationary Source, December 1, 2000, Reviewed

RECOMMENDED ACTION:

1. Direct the staff to proceed with developing proposed rule amendments to the RECLAIM program pursuant to general Board direction received at the meeting.

Barry R. Wallerstein, D.Env.
Executive Officer

Background

The RECLAIM program was implemented in 1994. Facilities within the RECLAIM program have the option of complying with their allocation allowance by either installing control equipment or purchasing RTCs from other facilities. From the start of the program, the price of NOx RTCs remained relatively stable until summer 2000, at which time an increased demand for power generation resulted in the electric power industry purchasing a large quantity of RTCs. This action resulted in the depletion of available RTCs and caused the price of NOx RTCs for Compliance Year 2000 to increase from approximately $4,284 per ton traded in 1999 to approximately $39,000 per ton traded during the first ten months of 2000.

The District recognized this change in activity, and, at its October 20, 2000 meeting, the Governing Board directed staff to examine the issues affecting the high price of NOx RTC prices and recommend actions that can be taken to stabilize NOx RTC prices. Additionally, the Governing Board directed the Executive Officer to form an advisory committee to provide input on this issue as well. Staff has prepared the attached White Paper outlining recommendations made by all committee members, including a staff analysis and recommendations.

In developing proposals for the Governing Board’s consideration, staff’s first priority is to protect public health and ensure adequate progress toward meeting clean air mandates. At the same time, it is vital to ensure that air pollution regulations do not inadvertently hinder the State’s efforts to ensure adequate power supplies. Staff believes that stabilizing RTC prices will contribute significantly to both those goals.

A review of recent data indicates that increased demand for RTCs by power producers has played a significant role in the current situation. Power producers have purchased 67 percent of the NOx RTCs that were traded with price and that expired in December 2000. In contrast, power producers only account for approximately 14 percent of total RECLAIM allocations for Compliance Year 2000. Continued high demand from power producers would likely make it more difficult for other RECLAIM facilities to purchase needed RTCs and would increase pressure on RTC prices. At the same time, many RECLAIM facilities, relying on previous low RTC prices, did not begin installing controls until after RTC prices climbed dramatically. As a result, the RECLIAM program predictably reached the "cross-over point" where emissions equal allocations. This also has an effect of increasing prices.

The RECLAIM market has already started to respond to increased prices. A number of facilities, including power producers, have filed permit applications to install controls that will significantly reduce emissions and associated the demand for RTCs. This will ultimately cause RTC prices to drop. However, there is a lag time between the decision to install controls and actually operating the controls with associated reduced emissions. Unless refinements are made to the RECLAIM program, prices are likely to remain high until controls become operational.

Therefore, to provide needed RTC price stability in the short term, staff recommends convening a working group to develop rule amendments that will implement realistic, effective solutions. The working group will include power producers, other RECLAIM facilities, environmental groups, EPA, ARB, CEC, and interested legislative representatives. These rule amendments will be developed as quickly as possible to provide a fast-track response to the current situation, with Board hearings tentatively scheduled for May 2001.

Attachment

White Paper on Stabilization of NOx RTC Prices

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