BOARD MEETING DATE: March 2, 2007
AGENDA NO. 34

Annual RECLAIM Audit Report for 2005 Compliance Year

SYNOPSIS:

The annual report on the NOx and SOx RECLAIM program is prepared in accordance with Rule 2015 - Backstop Provisions.  The report assesses emission reductions, average annual price and availability of RECLAIM Trading Credits (RTCs), job impacts, compliance issues, and other measures of performance for the twelfth year of this program.  In addition, recent trends in trading future year RTCs are analyzed and presented in this report.  Further a list of facilities that were unable to reconcile their emissions for the compliance year is included with the report.

COMMITTEE:

Stationary Source, February 23, 2007

RECOMMENDED ACTIONS:

• Approve the attached annual report;
• Conclude that the average annual RTC price for Compliance Year 2010 NOx RTCs traded in Calendar Year 2006 exceeded $15,000 per ton;
• Direct staff to, within six months, perform an evaluation and review of the compliance and enforcement aspects of the RECLAIM program and prepare the results of such evaluation and review for the AQMD Governing Board’s consideration and submittal to the Air Resources Board and Environmental Protection Agency, pursuant to Rule 2015(b)(6);
• Direct staff to review and assess the need to amend the RECLAIM program pursuant to Health and Safety Code §39616(f); and
• Direct staff to assess the existing methodology for determining average annual prices, pursuant to Rule 2015(b)(1) and Health and Safety Code §39616(f), and propose a recommended methodology for determining average prices for infinite-year blocks of RTCs.

Barry R. Wallerstein, D.Env.
Executive Officer

Background

The Board adopted the RECLAIM program on October 15, 1993 to provide a more flexible compliance program for RECLAIM facilities, which represent the largest emitters of NOx and SOx pollutants.  RECLAIM was designed to meet all state and federal requirements for clean air programs and a variety of performance criteria to ensure protection of public health, air quality improvement, effective enforcement, implementation costs, and minimal job impacts.

RECLAIM represents a significant departure from traditional command-and-control regulations.  Therefore, the RECLAIM rules provide for annual program audits to verify that the program objectives are being met.  Rule 2015 – Backstop Provisions requires AQMD to conduct an annual program audit to assess various aspects of the program to verify that the program objectives are being met.  AQMD staff completed the audit of RECLAIM Compliance Year 2005.  The audit results showed that the aggregate NOx emissions were achieving programmatic compliance and were in fact 23 percent less than the aggregate NOx allocations for Compliance Year 2005.  Aggregate SOx emissions also continued to be less than aggregate SOx allocations, and they were 16 percent less for Compliance Year 2005. 

With the exception of Compliance Year 2010’s NOx RTCs, the average annual prices for all other NOx and all SOx RTCs traded in Calendar Year 2006 were below the program review threshold of $15,000 per ton.  During Calendar Year 2006, prices for NOx RTCs valid for Compliance Years 2007 and after, especially for those RTCs traded in multi-year streams, were increasing.  When compared to prices for NOx RTCs for the same Compliance Year traded in Calendar Year 2005, the annual average prices of NOx RTCs traded in Calendar Year 2006 were higher for RTCs valid for every Compliance Year except Compliance Years 2005, 2006, and 2007.

The annual average price for Compliance Year 2010 NOx RTCs traded in Calendar Year 2006 was $15,698 per ton (using the existing methodology for determining average annual prices for infinite-year blocks of RTCs).  This is in excess of the $15,000 per ton threshold specified for a program review pursuant to Rule 2015(b)(6) and Health and Safety Code §39616(f).  Accordingly, staff will conduct and “submit to the Air Resources Board and the Environmental Protection Agency the results of an evaluation and review of the compliance and enforcement aspects of the RECLAIM program, including the deterrent effect of Rule 2004 paragraphs (d)(1) through (d)(4)”, which address penalty assessment in cases of allocation exceedance.

Audit Findings

The audit of RECLAIM’s Compliance Year 2005 indicates that:

• Aggregate NOx and SOx emissions from RECLAIM facilities were below allocations.
  
• The RECLAIM universe consisted of 311 facilities at the end of the 2004 compliance year.  There was a net decrease of seven facilities in the RECLAIM universe during the 2005 compliance year.  Thus, there were 304 facilities in the RECLAIM universe at the end of the 2005 compliance year.
  
• Eight RECLAIM facilities shut down or were reported to be out of business during the 2005 compliance year and therefore are no longer active in the RECLAIM program.  These facilities shut down mainly due to economic reasons.  None of these facilities attributed the closing, in whole or in part, to RECLAIM.
  
• One new facility was added to the RECLAIM program by opting into the program.
  
• The vast majority of RECLAIM facilities (over 98 percent) complied with their Allocations during the 2005 compliance year.  At the time of preparation of this report, five facilities were determined to have exceeded their Allocations during the 2005 compliance year.  Failure to obtain sufficient RTCs to reconcile with emissions was the cause of exceedance.
  
• RECLAIM had minimal impact on employment during the 2005 compliance year, as in previous years.  An overall net loss of 4,005 jobs was reported by all RECLAIM facilities.   Only one facility (which moved part of its production to other facilities in the United States and Mexico) reported job losses ( 75 jobs lost) due to RECLAIM.  Two other facilities reported job gains (a total of four jobs gained) due to RECLAIM.
   
• The RTC trading market remained active.  A total of $ 863 million in RTCs have been traded since the adoption of RECLAIM, of which $83 million occurred in Calendar Year 2006.  Except for Compliance Year 2010 NOx RTCs, the annual average prices of NOx and SOx RTCs traded in Calendar Year 2006 were below the program review threshold of $15,000 per ton established in Rule 2015(b)(6).  Upon Board direction, staff will complete a program evaluation and review pursuant to Rule 2015(b)(6) and Health and Safety Code §39616(f) within the next six months because the average annual price for compliance Year 2010 NOx RTCs exceeded $15,000 per ton.  Prices for future year NOx RTCs, especially those traded in multi-year streams, increased during Calendar Year 2006.  The annual average prices for NOx RTCs valid for Compliance Year 2010 and after were the highest since the start of the program.  Annual average prices for NOx RTCs ranged from $2,353 per ton of Compliance Year 2005 through $14,391 per ton of Compliance Year 2008 to $15,698 per ton Compliance Year 2010.  RTCs valid for Compliance Years 2011 to 2022 were traded at average prices around $11,100 per ton.  In addition to individual year RTC trades, RTCs were also traded as blocks of RTCs valid for all years after a start year at a single price per pound for the whole block.  Average prices for these “infinite-year” RTC blocks were $28,827 and $4,213 per ton of NOx and SOx, respectively[1].  For comparison purposes, the annual average prices of RTCs traded during Calendar Years 2004, 2005, and 2006 are summarized in the attached Table 1 and Table 2.
   
• Staff believes that the high annual average prices presented above for NOx RTCs are the result of the existing calculation methodology that is not appropriate for the manner in which RTCs have been traded in recent years.  Specifically, the existing calculation methodology was not developed to handle trades of infinite-year blocks of RTCs.  Therefore, staff has begun investigating alternative calculation methodologies that treat infinite-year blocks more appropriately.  This topic will be investigated further during the recommended Rule 2015(b)(6) and Health and Safety Code §39616(f) program evaluation and review.
   
• Foreign entities started to trade RTCs in addition to the traditional RTC traders, such as RECLAIM facilities, brokers, commodity traders, private investors, and mutual funds during Calendar Year 2006.  To date, there have been two foreign entities that have participated in RTC trades.

Attachments (exe 288kb)
A.        Tables Comparing Annual Average Prices for RTCs
B.        Resolution
C.        Annual RECLAIM Audit Report for the 2005 Compliance Year

Appendices G & H (DOC 98.5MB) of the Annual RECLAIM Audit Report for the 2005 Compliance Year have been separated out for download due to their large size. 

[1]   These dollars per ton figures are not on the basis as the preceding dollars per ton per year figures and they cannot be meaningfully compared in terms of dollars per ton per year for an infinite year RTC block.  Therefore, they are only in dollars per ton.