South Coast Air Quality Management District

Merits of a Centralized Market for RECLAIM

SYNOPSIS: 

In May 2001, Regulation XX – RECLAIM was amended to help stabilize RTC prices and address California energy issues. The resolution for the amendments included direction to staff to work with economists and interested parties to evaluate the merits of a centralized trading market. This report summarizes progress in the evaluation and staff’s recommendations.

COMMITTEE: 

Stationary Source, October 26, 2001, Reviewed

RECOMMENDED ACTION:

Receive and File.

Barry R. Wallerstein, D.Env.
Executive Officer

Background

In May 2001, Regulation XX – RECLAIM was amended to help stabilize RECLAIM Trading Credit (RTC) prices and address California energy issues. The price for NOx RTCs remained relatively stable until June 2000 when the market began to experience sharp price increases for both 1999 and 2000 compliance year RTCs. The increase in price was attributed mainly to increased demand for power generation and delayed installation of controls by RECLAIM facilities. The May amendments temporarily bifurcated power plants from the rest of the RECLAIM facilities and introduced temporary credit assistance programs to reestablish price stability in the NOx RTC market. The programs included the Mitigation Fee Program for existing power producers, the RECLAIM Air Quality Investment Program for new power plants and structural buyers, and the State Emission Reduction Credit Bank for new or increased peaking capacity at new or existing power plants.

In addition, the May amendments addressed the issue of increasing RTC trading information availability, accuracy, and timeliness. Trades must now be reported jointly by the buyer and seller within five days of the trading transaction. Additional information to be reported includes:

• identification of the actual owner of RTCs when the seller is an agent, broker or other intermediary;
• RTC expiration date;
• actual date of the trading transaction;
• purchase agreement or transaction confirmation;
• amount and type of emissions involved in the transaction for each buyer, seller, and owner of RTCs; and
• origin of the RTCs, such as allocation issued by the District, converted from mobile source emission reduction credits, or converted from area source credits.

The amendments require reporting of agreements for contingent right to purchase RTCs and specify applicable procedures. Procedures are also included for cases where any of the RTCs in pooled transactions are subsequently invalidated. In addition to the rule amendments, AQMD committed to providing timely electronic information on trading. Current, detailed trading information is now available to the public and can be accessed through the AQMD website at http://www.aqmd.gov/reclaim/rtc_main.html.

During rule development for the May RECLAIM amendments, a request was made to evaluate the merits of centralized trading market. The Board Resolution in May included a directive to staff to consult with economists and interested parties to evaluate this concept and report back to the Board.

Current Market Structure

The current RECLAIM trading market is not centralized. Trades occur directly between individual RECLAIM companies, through brokers or agents, or through auctions. These activities are conducted independently of one another by various entities outside the AQMD. AQMD verifies the trading information that is submitted and approves trades if all information is valid. After a trade is approved, AQMD updates the RTC Listing to reflect the new balances.

Current Market Status

Since the adoption of the May RECLAIM Amendments, the prices of NOx RTCs have declined. Removing the influence of the power plants on the market has decreased the demand for credits from other RECLAIM facilities. The prompt reporting of trades and Internet access to trade data with timely updates has helped the public access market price information more expeditiously. Staff will continue to monitor the NOx RTC market to evaluate the effect of the rule changes.

Centralized Market

Unlike the current dispersed trading, a centralized market would require a single point of exchange for RTCs. This would create a single market clearing price and could potentially help to stabilize prices by providing readily accessible feedback on RTC availability and prices. RECLAIM companies or their agents would have less contacts or public records requests to locate RTCs, validate their availability, and agree on a price.

Since May, staff has examined various concepts for a centralized market. Something similar to the New York Stock Exchange would be the ideal situation because it provides information and liquidity. There is an issue of practicality, however, because of the small number of participants. That is, it would be expensive to operate and potentially could add excessive transaction costs.

Another alternative would be some mechanism, such as a District-operated bulletin board on the Internet where available credits could be posted. The buyer and seller could be connected in this way and once contact was established, they could work out the trade directly between the two parties. Brokers and agents are not likely to be supportive of such a system since their services would not be required or would be reduced. In order for this type of centralized market to work, RECLAIM facilities would have to be required, by rule, to post their available credits.

Any of these options has potential financial and resource implications for the District. Some models for a centralized market could also increase transaction costs for market participants.

Public Process

Since May 11, staff has conducted two RECLAIM Trading Working Group meetings during which staff requested input on the concept of a centralized market. The working group included economists and other interested individuals. A list of entities represented at the two meetings can be found in Attachment A. As a result of these discussions, staff received comments from two individuals, providing limited input. In recent meetings with CCEEB (California Council for Energy and Economic Balance), which has three large credit trading organizations as members, they recommended that staff explore streamlining the existing posting and processing system of RTC trades. CCEEB does not have a consensus position relative to a centralized market. AQMD agreed to continue to work with interested parties to evaluate the trading posting and processing system. A meeting occurred on October 18, 2001 with many of the major participants that provide trading services and other interested parties. The meeting included: review of the existing trade posting and processing system; discussion of recent and in progress enhancements; and input on additional suggestions to further enhance this process.

Recommendations

Staff will continue the ongoing efforts related to further streamlining and enhancement of trade posting and processing, and report back to the Stationary Source Committee regarding recommendations that result from these efforts.

If specific suggestions or conceptual models for a centralized market are submitted, staff will evaluate them and, as necessary, convene additional meetings of the RECLAIM Trading Working Group to solicit additional input. Staff will report back to the Stationary Source Committee when substantive progress is made regarding a centralized market and the effects of recent RECLAIM amendments and program improvements designed to improve market efficiency and accomplish the same objectives as a centralized market. Therefore, staff recommends:

• monitor implementation of the May RECLAIM amendments;
• continue the current effort in trade posting and processing streamlining;
• continue to solicit design concepts on a centralized market; and
• make periodic progress reports to the Stationary Source Committee to determine if additional rule amendments are necessary and whether creation of a centralized market should be further pursued.

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