BOARD MEETING DATE: March 7, 2008
AGENDA NO. 39

REPORT:

Annual RECLAIM Audit Report for 2006 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, availability of RECLAIM Trading Credits (RTCs) and their average annual prices, job impacts, compliance issues, and other measures of performance for the thirteenth year of this program. This is the first annual RECLAIM audit report to employ the new price reporting and averaging methodology which analyzes discrete-year RTC trade price data separately from infinite-year block RTC trade price data. In addition, recent trends in trading future year RTCs are analyzed and presented in this report. Further, a list of facilities that did not reconcile their emissions for the compliance year is included with the report.

COMMITTEE:

Stationary Source, February 15, 2008

RECOMMENDED ACTIONS:

Approve the attached annual report.

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, no increase in implementation costs, and minimal job impacts.

RECLAIM represents a significant departure from traditional command-and-control regulations. Therefore, the RECLAIM regulation’s Rule 2015 – Backstop Provisions requires AQMD to conduct annual program audits 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 2006. The audit results show that both aggregate NOx and SOx emissions were achieving programmatic compliance with the program’s target emission levels (aggregate allocations). Aggregate NOx emissions were 27 percent less than the aggregate NOx allocations and aggregate SOx emissions were 16 percent less than aggregate SOx allocations during Compliance Year 2006.

At the September 7, 2007 AQMD Governing Board meeting, the Board approved the “Evaluation and Review of the RECLAIM Program and Assessment of RTC Price Reporting” Report and a new methodology for reporting RTC trade prices and for determining average RTC prices. This methodology evaluates price data for trades involving individual discrete years and trades involving blocks of RTCs extending into perpetuity (infinite-year blocks or IYBs) separately. Therefore, trade data based on this methodology are presented in the attached report.

Audit Findings

The audit of RECLAIM’s Compliance Year 2006 indicates that:

• Aggregate NOx and SOx emissions from RECLAIM facilities were below aggregate allocations.
  
• The RECLAIM universe consisted of 304 facilities as of June 30, 2006. There was a net decrease of 9 facilities in the RECLAIM universe during the period July 1, 2006 through June 30, 2007. Thus, there were 295 facilities in the RECLAIM universe on June 30, 2007:
   
  • Thirteen RECLAIM facilities shut down and one additional facility was excluded due to the operation being assumed by another RECLAIM facility at the same location. The majority of the shut downs were primarily due to economic reasons. Only one of the shutdown facilities indicated that RECLAIM was a factor in the decision to shut down.
  • Three existing facilities opted into the NOx RECLAIM program, and two additional facilities entered the RECLAIM program as a result from partial changes of operator at existing NOx RECLAIM facilities.
    
• The vast majority of RECLAIM facilities complied with their Allocations during the 2006 compliance year (96 percent of NOx facilities and 97 percent of SOx facilities). At the time of preparation of this report, staff had determined that thirteen facilities exceeded their Allocations during the 2006 compliance year. Staff is conducting audits of the reported emissions for Compliance Year 2006, so additional exceedances may be found.
  
• RECLAIM had minimal impact on employment during the 2006 compliance year, which is consistent with previous years. An overall net loss of 2,272 jobs representing 2.02 percent of total employment was reported by all RECLAIM facilities. Only one facility (one of the thirteen which shutdown) reported six jobs lost due to RECLAIM. Four facilities reported a total of seven jobs gained due to RECLAIM. No operating facilities reported any job losses specifically due to RECLAIM.
   
• The RTC trading market remained active. A total of $937 million in RTCs have been traded since the adoption of RECLAIM, of which $74 million occurred in Calendar Year 2007. Average annual prices for discrete year NOx RTCs ranged from $3,453 per ton for Compliance Year 2006 to $12,459 per ton for Compliance Year 2010. The average annual prices for discrete year SOx RTCs, ranged from $444 per ton for Compliance Year 2006 to $3,500 per ton for Compliance Years 2007 through 2010. The average annual prices of discrete year NOx and SOx RTCs traded in Calendar Year 2007 were below the program review threshold of $15,000 per ton established in Rule 2015(b)(6), as well as the $36,430 per ton for NOx and $26,230 per ton for SOx RTC program review thresholds established by the Governing Board pursuant to California Health and Safety Code §39616(f). For Calendar Year 2007 the average annual price for NOx IYB RTCs was $194,202 per ton and the average annual price for SOx IYB RTCs was $23,848 per ton. Average annual prices traded for NOx and SOx IYB during Calendar Year 2007 were below the Governing Board established predetermined program review price thresholds of $546,500 per ton of NOx IYB RTCs and $393,444 per ton of SOx IYB RTCs pursuant to California Health and Safety Code Section 39616(f). The average annual prices of RTCs traded during Calendar Years 2006 and 2007 based on the new price reporting methodology are summarized in Table 1 and Table 2 below:

Table 1 – Average Prices for Discrete Years’ RTCs during Calendar Years 2006 and 2007

Table 2 – Average Prices for IYB RTCs during Calendar Years 2006 and 2007

• The role of investors in the RTC market remains significant. Based on both trading values and number of trades, investor-involved trades constituted the majority of the trades recorded in Calendar Year 2007, particularly with respect to IYB trades. The RTC holdings from investors increased to 4.2 percent of total IYB NOx RTCs and 8.5 percent of total IYB SOx RTCs, up from 3.1 percent and 7.1 percent, respectively at the end of Calendar Year 2006. Concurrently, the average annual price of IYB RTCs increased by 29 % for NOx (from $150,665 to $194,202 per ton) 64 % (from $14,585 to $23,848 per ton) for SOx from 2006 to 2007.

Attachment (exe 1455kb)

A. Annual RECLAIM Audit Report for the 2006 Compliance Year