BOARD MEETING DATE: February 1, 2008
AGENDA NO. 3B

PROPOSAL:

Report on Implementation of Chairman’s 2008 Initiative Regarding the Stabilization of ERC and RTC Prices

SYNOPSIS:

At the January 2008 Governing Board meeting, Chairman Burke introduced two initiatives for 2008. The goal of this initiative is to re-evaluate the NSR and RECLAIM trading programs with a focus on stabilizing credit prices, encouraging installation of clean technologies, and ensuring the efficient use of credits. 

COMMITTEE:

Not Applicable

RECOMMENDED ACTION:

Approve Work Plan.

Barry R. Wallerstein, D.Env.
Executive Officer

Background

At the January 4, 2008 Governing Board meeting, Chairman Burke introduced a 2008 initiative to re-evaluate the NSR and RECLAIM trading programs with a focus on stabilizing credit prices, encouraging installation of clean technologies, and ensuring the efficient use of credits. This board letter provides additional information about this initiative and a proposed workplan and schedule.

The SCAQMD’s Regulation XIII – New Source Review (NSR) Program is an emission reduction control strategy program that ensures any emission increases of nonattainment air contaminants from the operation of any relocated source or from the operation of any new or modified source does not impede the progress of attaining the national and state ambient air quality standards. Regulation XIII requires emission offsets (ERCs) to mitigate emission increases from four pollutants: NOx, SOx, VOC, and PM. ERC trading occurs between regulated NSR participants and third-party investors or brokers. While the SCAQMD oversees this trading, it is not involved in setting ERC price.

The Regional Clean Air Incentives Market (RECLAIM) program, adopted by the SCAQMD in October 1993 as Regulation XX, set an emissions cap and declining balance for many of the largest facilities emitting nitrogen oxides (NOx) and sulfur oxides (SOx) in the South Coast Air Basin. RECLAIM allows participating facilities to trade RECLAIM Trading Credits (RTCs) to meet their declining allocations. The RECLAIM market includes RTCs of NOx and SOx. The NSR and RECLAIM Trading markets are two separate trading markets. Similar to the trading of ERCs, RTCs are bought and sold by businesses in a trading market.

Stabilization of ERC and RTC prices

Over the past seven years the ERC market in the South Coast Air Quality Management District has shown signs of significant increase in the cost and decrease in the availability of ERCs. PM10 ERCs have shown the greatest change. Supply has decreased by over 60 percent while prices have increased by 20 times. While NOx ERC supply has remained relatively stable, prices have continued to increase and have been raised by more than 200 percent. SOx ERC supply has dropped by over 60 percent and prices have gone up by about 100 percent. Even in the case of VOC ERCs, the most plentiful pollutant ERCs, the cost has increased, rising by more than 75 percent just over the past 6 months. Only CO ERCs have remained stable from these dramatic price changes, and although supply has decreased by about 50 percent the prices of CO ERCs have remained relatively constant. However, South Coast Air Basin has been redesignated as attainment for CO, and there are no requirements for CO offsets anymore.

Regarding the RTC market, third party non-RECLAIM investors have increased their participation in the RECLAIM market.  These third party investors have been purchasing streams of RTCs otherwise known as infinite year block RTCs from RECLAIM facilities that have shutdown.  During the Compliance Year 2006, third party investors purchased more than 80 percent of these infinite block year RTCs from facility shutdowns.  This recent rise in holding of infinite year block RTCs by third party investors may represent a potential for further price increases for this type of RTC.  In addition, the average annual price of infinite year block RTCs increased by 30 % for NOx (from $150,000 to $195,000 per ton) 64 percent (from $14,600 to $24,000 per ton) for SOx from 2006 to 2007.

The SCAQMD staff is concerned that third-party participants or credit speculators may be stockpiling ERC and RTC credits. This may be resulting in unnecessarily high compliance costs and an impediment to business growth. For example, some of the largest holders of ERCs are third-party participants. As a result, Governing Board Chairman Burke has directed staff to develop rule amendments in order to better protect market participants from third-party stockpilers while at the same time ensuring continued improvements to air quality.

The objectives for this initiative regarding the stabilization of ERC and RTC prices are to re-evaluate both the ERC and RECLAIM programs with a focus on stabilizing credit prices, encouraging installation of clean technologies, and ensuring the efficient use of credits.

The process and schedule for this initiative are described below.

Proposed Workplan

To address the Chairman’s initiative, staff will work with stakeholders to develop the necessary mechanism through rule amendments to Regulation XIII and Regulation XX relative to credit holding and trading. Key components may include, but are not limited to the following:

1. Establish a working group to assist in the development of the necessary mechanisms and future rule amendments to Regulation XIII and XX. The working group would include agency, business, environmental, and community stakeholders.
2. Staff will evaluate NSR and RECLAIM trading programs examining trends in trading activities, buyers and sellers (including third-party participants), prices, credit use, credit generation, shutdown credit, market reserve, credit speculation, and short-term vs. long-term transactions.
3. Develop a Concept Paper based on the findings of the evaluation. The Concept Paper will include criteria to evaluate potential options and recommendations (including input from the working group) to modify Regulation XIII and Regulation XX.
4. Presentation of Concept Paper and initial outline for potential rule amendments to Regulations XIII and XX to the Governing Board seeking direction on potential rulemaking.
5. If the Board approves, proceed with rulemaking.

Schedule

Staff will begin working on this immediately, and will follow the following schedule:

1. Establish working group February 2008
2. Evaluation of existing markets February 2008 – April 2008
3. Develop Concept Paper with Input from March 2008 – April 2008
   Working Group
4. Present Findings to Board (Pre-Hearing) October 2008

CEQA and Socioeconomic Impacts

CEQA and socioeconomic impacts will be assessed with the rule development process.

AQMP and Legal Mandates

There are no AQMP or legal mandates for implementation of the Chairman’s initiatives.

Resource Impacts

Implementation of this initiative will require no additional staff resources and funding.