RECLAIM - Clean Air Incentive (US)

Background
The Regional Clean Air Incentives Market (RECLAIM) is an innovative trading scheme designed to tackle the severe air quality problems in Southern California. Regulators in the Los Angeles basin were developing RECLAIM in the early 1990's at the same time that the national Acid Rain Program was being developed. The RECLAIM Program was approved by the South Coast Air Quality Management District (SCAQMD) in October 1993 after a three year development programme. The RECLAIM Program was developed as an alternative and less expensive means of achieving air quality requirements (National Ambient Air Quality Standards) in the area. It has replaced source-by-source controls on emissions of nitrogen oxides (NOx) and sulphur oxides (SOx) with an emissions trading system for these pollutants, which limits the aggregate emissions within the area, and allows trading to determine the distribution of emissions across individual sources. During the 1980's the Los Angeles area had been one of the parts of the US in which there had been significant trading activity under the EPA's Emissions Trading Programme, allowing certain types of flexibility and trading for five principal air pollutants - hydrocarbons, carbon monoxide, SOx, NOx and particulate matter. The experience of emissions trading in Los Angeles was evaluated by Foster and Hahn (1994), who noted the major geographical restrictions on trade on the functioning of the market, and the high level of transactions costs associated with trades. RECLAIM covers a smaller number of pollutants (SOx and NOx) but is designed as a less-constrained market, with a clearly defined group of tradable commodities, and explicitly defined state-level aggregate limits on emissions. A significant influence on the development of RECLAIM was the parallel creation of the national trading regime for acid rain (Title IV of the 1990 Clean Air Act Amendments). RECLAIM has many similarities in terms of design with the national acid rain trading scheme, despite the focus on a specific regional area, and state-level policy relating to the area.

Aims
The RECLAIM program was designed to provide industry with flexibility to decide how to reduce emissions and advance pollution control technologies.

Coverage
The RECLAIM Program applies to all major sources of NOx and SO2 emissions - broadly those emitting four tonnes or more of these pollutants per year in 1990. The programme covers a hetrogenous group of participants including power plants, refineries, cement factories, and other industrial sources. Other facilities have the option of voluntary participation in the programme.

Geographical Scope
The RECLAIM Program applies to the area of southern California and the area around the Los Angeles Basin. The programme distinguishes between emissions in two geographic zones - an inland zone and a coastal zone. Since emissions from the Los Angeles Basin generally drift inland from the coast, sources located in the inland zone are allowed to purchase RTCs from facilities in either the inland or coastal zones, but sources located in the coastal zone can only purchase RTCs issued for facilities in the coastal zone. The original RECLAIM proposal included 38 separate trading regions, corresponding to the regions used for the "Offset Program". However, this detailed geographic division was abandoned as a result of the realistic fears that the trading markets would be too thin.

Trading Programme Classification
The RECLAIM Program is a cap-and-trade programme.

Introduced
The RECLAIM Program started on January 1, 1994 and is ongoing.

Unit
The unit of the RECLAIM Program is the "RECLAIM Trading Credit" (RTC). A RTC permits its holder to emit one tonne of NOx or SOx. UNIT ALLOCATON RTCs were allocate for free to participating sources and were distributed many years prior to when they would be used for compliance. Allocations are based on a sources' past level of activity (calculated as peak activity level over 1989 to 1992) and the emission control requirements for years 2000 and 2003 as specified by the 1991 Air Quality Management Plan. They are intended, therefore, to correspond to the emissions levels that sources would have been achieving if they had have been subject to command-and-control regulations that RECLAIM replaced. Allocations were made to each RECLAIM facility at the start of the programme, for each year from 1994 to 2010. The amounts allocated for each year showed a sharply declining time profile, to reflect the increasingly stringent emissions control required by the Air Quality Management Plan. The total NOx allocation began at 103 tonnes per day in 1994, declining to 35 in 2000 and 26 (one quarter of 1994 allocations) in 2003. The total SO2 allocation began at 25 tonnes per day in 1994, declining to 14 in 2000 and 10 (40 per cent of 1994 allocations) in 2003.

Banking and Borrowing
The RECLAIM program does not allow banking because of concerns that use of banked RTCs might lead to substantial increases in emissions in some future year, and thus delay compliance with ambient air quality standards. RECLAIM does provide limited temporal flexibility, however, by grouping sources into two 12-month reporting periods, one from January through December and the other from July through June, and by allowing trading between sources in overlapping periods. This provision effectively allowed the programme as a whole to bank or borrow RTCs six months before or after a given compliance period. (Individual participants can purchase RTCs in any vintage and thus effectively bank or borrow across any period.)

Performance
UNIT PERFORMANCE
Traded Volume The two tables below show the total volume of NOx and SOx RTCs (of all vintages) that were traded in each calendar year between 1994 and 1999. As of the end of 1999, RTC permits for about 265,000 tonnes of NOx and about 93,000 tonnes of SOx had been traded. The tables show volumes of RTCs traded without a price - which includes transfers from sellers to brokers, transfers within facilities with common ownership, and transfers as part of other transactions - as well as the number of RTCs traded between firms at various prices.
Year
Total Tonnes of NOx RTCs Traded without Price
Total Tonnes of NOx RTCs Traded with Price
1994
5,769
2,210
1995
66,820
11,681
1996
41,691
5,595
1997
38,652
9,176
1998
19,072
26,003
1999
29,171
8,917
(Source: South Coast Air Quality Management District[2002a])
Year
Total Tonnes of SOx RTCs Traded without Price
Total Tonnes of NOx RTCs Traded with Price
1994
286
4
1995
14,105
3,052
1996
19,118
5,172
1997
15,614
5,077
1998
7,892
1,780
1999
19,360
1,548
(Source: South Coast Air Quality Management District[2002a])

It is however important to be aware of the complexities that exist in the reporting of RTC trades. In an early review of RECLAIM, Burnside and Eichenbaum (1996) point out that there was a considerable double counting of trades because RTCs are recorded as sold for zero price when they are transferred to a broker for possible sale, and recorded again when they are sold or returned to the seller if no buyer is found.

Unit Price
The tables below show the average price per tonne for NOx and SOx RTCs between the period 1994-2001. Year Average Price($)per Tonne for NOx RTCs(All Vintages)

1994
679
1995
711
1996
786
1997
1,024
1998
1,373
1999
2,557
2000
21,308
2001
41,152
(Source: South Coast Air Quality Management District[2002a])The dramatic increase in the cost of NOx RTCs in the summer of 2000 was caused by a substantial increase in the demand for RTCs on the part of electric generators. The demand for electricity soared in California during the summer of 2000 while the availability of imported power from other states declined (Joskow 2001). The increased demand had to be met by running the large fleet of old in-state gas-fired generating units more intensively than in the recent past. Few of these old plants had yet installed NOx emissions controls and no new plants were completed until the summer of 2001. As a result, the demand for NOx RTCs and their prices increased significantly during summer 2000 as generation from the in-state gas fired power plants increased to balance supply and demand. The high price for NOx RTCs was one of several factors leading to the high wholesale electricity prices in California during 2000 (see Joskow and Kahn 2002 and Borenstein et al. 2002) Year Average Price($)per Tonne for SOx RTCs(All Vintages)
1994
2,000
1995
524
1996
1,063
1997
2,305
1998
618
1999
840
2000
2,108
2001
5,756
(Source: South Coast Air Quality Management District[2002a])The variation in average RTC price from year to year is much more pronounced in the NOx RTC market than in the SOx RTC market. However, RTC prices in the SOx market did increase substantially in 2000 and 2001.

Environmental Effectiveness
Notwithstanding the relatively lenient early caps and the extreme pressure of prices that increased ten-fold in the course of a few months of 2000, RECLAIM has been successful in achieving the caps that were set in 1993 when the program was passed. Based upon annual compliance audits for 1994 to 2000, the cap was exceeded only in 2000 for NOX. Moreover, when the effects of the limited banking/borrowing that is allowed are taken into account, the excess emissions in 2000 represent only a six percent increase. In addition, because this excess is reflected in fewer RTC allowances in future years, the emissions increases will be "made up" in the future; in essence, the 2000 excess represents a borrowing of emissions allowances rather than a net increase in overall program emissions. There is no reason to believe that a command-and-control alternative would have performed better than RECLAIM did under the circumstances. Indeed, since command-and-control mandates typically regulate emission rates-rather than overall emissions-a command-and-control alternative would likely have resulted in the same emissions increases but without the compensating measures taken as a result of exceeding the NOx RECLAIM cap. Put another way, the command-and-control alternative does not have a natural mechanism to provide for borrowing (or banking) of emissions reductions.

Economic Efficiency
One of the arguments in favour of using emissions trading is that it provides an opportunity for achieving an environmental goal in a cost effective manner. With regard to cost savings, the large number of RTC transactions suggests that trading has reduced the overall cost of meeting emissions targets; indeed, even in 2000, the RECLAIM market behaved as a market should. As the demand for NOx RTCs increased and their supply decreased in 2000, NOx prices increased as they should have. Moreover, the prices of an important product "using" NOX RTCs, wholesale electricity, also increased. This should have provided signals to affected sources to invest in emissions controls as well as signals to consumers to reduce consumption of electricity.

References
Harrison(Jr), David. 2003: Ex-Post Evaluation of the RECLAIM Emissions Trading Program for the Los Angeles Air Basin, presented at a Workshop on Ex-Post Evaluation of Tradable Permits: Methodological and Policy Issues, January 21-22,2003.
Harrison(Jr),David: "Turning theory into practice for emissions trading in the Los Angeles air basin". In (Sorrell,S and Skea,J eds.) Pollution for Sale, Edward Elgar.
Sterner, T. 2003. Policy Instruments for Environmental and Natural Resource Management. RFF, Washington.

Useful Information Sources
The following website provides additional information on the RECLAIM Program:
http://www.epa.gov/airmarkets/trading/index.html

Written by admin

Background

The Regional Clean Air Incentives Market (RECLAIM) is an innovative trading scheme designed to tackle the severe air quality problems in Southern California. Regulators in the Los Angeles basin were developing RECLAIM in the early 1990's at the same time that the national Acid Rain Program was being developed. The RECLAIM Program was approved by the South Coast Air Quality Management District (SCAQMD) in October 1993 after a three year development programme. The RECLAIM Program was developed as an alternative and less expensive means of achieving air quality requirements (National Ambient Air Quality Standards) in the area. It has replaced source-by-source controls on emissions of nitrogen oxides (NOx) and sulphur oxides (SOx) with an emissions trading system for these pollutants, which limits the aggregate emissions within the area, and allows trading to determine the distribution of emissions across individual sources. During the 1980's the Los Angeles area had been one of the parts of the US in which there had been significant trading activity under the EPA's Emissions Trading Programme, allowing certain types of flexibility and trading for five principal air pollutants - hydrocarbons, carbon monoxide, SOx, NOx and particulate matter. The experience of emissions trading in Los Angeles was evaluated by Foster and Hahn (1994), who noted the major geographical restrictions on trade on the functioning of the market, and the high level of transactions costs associated with trades. RECLAIM covers a smaller number of pollutants (SOx and NOx) but is designed as a less-constrained market, with a clearly defined group of tradable commodities, and explicitly defined state-level aggregate limits on emissions. A significant influence on the development of RECLAIM was the parallel creation of the national trading regime for acid rain (Title IV of the 1990 Clean Air Act Amendments). RECLAIM has many similarities in terms of design with the national acid rain trading scheme, despite the focus on a specific regional area, and state-level policy relating to the area.

Aims

The RECLAIM program was designed to provide industry with flexibility to decide how to reduce emissions and advance pollution control technologies.

Coverage

The RECLAIM Program applies to all major sources of NOx and SO2 emissions - broadly those emitting four tonnes or more of these pollutants per year in 1990. The programme covers a hetrogenous group of participants including power plants, refineries, cement factories, and other industrial sources. Other facilities have the option of voluntary participation in the programme.

Geographical Scope

The RECLAIM Program applies to the area of southern California and the area around the Los Angeles Basin. The programme distinguishes between emissions in two geographic zones - an inland zone and a coastal zone. Since emissions from the Los Angeles Basin generally drift inland from the coast, sources located in the inland zone are allowed to purchase RTCs from facilities in either the inland or coastal zones, but sources located in the coastal zone can only purchase RTCs issued for facilities in the coastal zone. The original RECLAIM proposal included 38 separate trading regions, corresponding to the regions used for the "Offset Program". However, this detailed geographic division was abandoned as a result of the realistic fears that the trading markets would be too thin.

Trading Programme Classification

The RECLAIM Program is a cap-and-trade programme.

Introduced

The RECLAIM Program started on January 1, 1994 and is ongoing.

Unit

The unit of the RECLAIM Program is the "RECLAIM Trading Credit" (RTC). A RTC permits its holder to emit one tonne of NOx or SOx. UNIT ALLOCATON RTCs were allocate for free to participating sources and were distributed many years prior to when they would be used for compliance. Allocations are based on a sources' past level of activity (calculated as peak activity level over 1989 to 1992) and the emission control requirements for years 2000 and 2003 as specified by the 1991 Air Quality Management Plan. They are intended, therefore, to correspond to the emissions levels that sources would have been achieving if they had have been subject to command-and-control regulations that RECLAIM replaced. Allocations were made to each RECLAIM facility at the start of the programme, for each year from 1994 to 2010. The amounts allocated for each year showed a sharply declining time profile, to reflect the increasingly stringent emissions control required by the Air Quality Management Plan. The total NOx allocation began at 103 tonnes per day in 1994, declining to 35 in 2000 and 26 (one quarter of 1994 allocations) in 2003. The total SO2 allocation began at 25 tonnes per day in 1994, declining to 14 in 2000 and 10 (40 per cent of 1994 allocations) in 2003.

Banking and Borrowing

The RECLAIM program does not allow banking because of concerns that use of banked RTCs might lead to substantial increases in emissions in some future year, and thus delay compliance with ambient air quality standards. RECLAIM does provide limited temporal flexibility, however, by grouping sources into two 12-month reporting periods, one from January through December and the other from July through June, and by allowing trading between sources in overlapping periods. This provision effectively allowed the programme as a whole to bank or borrow RTCs six months before or after a given compliance period. (Individual participants can purchase RTCs in any vintage and thus effectively bank or borrow across any period.)

Performance

UNIT PERFORMANCE

Traded Volume The two tables below show the total volume of NOx and SOx RTCs (of all vintages) that were traded in each calendar year between 1994 and 1999. As of the end of 1999, RTC permits for about 265,000 tonnes of NOx and about 93,000 tonnes of SOx had been traded. The tables show volumes of RTCs traded without a price - which includes transfers from sellers to brokers, transfers within facilities with common ownership, and transfers as part of other transactions - as well as the number of RTCs traded between firms at various prices.

Year	Total Tonnes of NOx RTCs Traded without Price	Total Tonnes of NOx RTCs Traded with Price
1994	5,769	2,210
1995	66,820	11,681
1996	41,691	5,595
1997	38,652	9,176
1998	19,072	26,003
1999	29,171	8,917

(Source: South Coast Air Quality Management District[2002a])

Year	Total Tonnes of SOx RTCs Traded without Price	Total Tonnes of NOx RTCs Traded with Price
1994	286	4
1995	14,105	3,052
1996	19,118	5,172
1997	15,614	5,077
1998	7,892	1,780
1999	19,360	1,548

(Source: South Coast Air Quality Management District[2002a])

It is however important to be aware of the complexities that exist in the reporting of RTC trades. In an early review of RECLAIM, Burnside and Eichenbaum (1996) point out that there was a considerable double counting of trades because RTCs are recorded as sold for zero price when they are transferred to a broker for possible sale, and recorded again when they are sold or returned to the seller if no buyer is found.

Unit Price

The tables below show the average price per tonne for NOx and SOx RTCs between the period 1994-2001. Year Average Price($)per Tonne for NOx RTCs(All Vintages)

1994	679
1995	711
1996	786
1997	1,024
1998	1,373
1999	2,557
2000	21,308
2001	41,152

(Source: South Coast Air Quality Management District[2002a])The dramatic increase in the cost of NOx RTCs in the summer of 2000 was caused by a substantial increase in the demand for RTCs on the part of electric generators. The demand for electricity soared in California during the summer of 2000 while the availability of imported power from other states declined (Joskow 2001). The increased demand had to be met by running the large fleet of old in-state gas-fired generating units more intensively than in the recent past. Few of these old plants had yet installed NOx emissions controls and no new plants were completed until the summer of 2001. As a result, the demand for NOx RTCs and their prices increased significantly during summer 2000 as generation from the in-state gas fired power plants increased to balance supply and demand. The high price for NOx RTCs was one of several factors leading to the high wholesale electricity prices in California during 2000 (see Joskow and Kahn 2002 and Borenstein et al. 2002) Year Average Price($)per Tonne for SOx RTCs(All Vintages)

1994	2,000
1995	524
1996	1,063
1997	2,305
1998	618
1999	840
2000	2,108
2001	5,756

(Source: South Coast Air Quality Management District[2002a])The variation in average RTC price from year to year is much more pronounced in the NOx RTC market than in the SOx RTC market. However, RTC prices in the SOx market did increase substantially in 2000 and 2001.

Environmental Effectiveness

Notwithstanding the relatively lenient early caps and the extreme pressure of prices that increased ten-fold in the course of a few months of 2000, RECLAIM has been successful in achieving the caps that were set in 1993 when the program was passed. Based upon annual compliance audits for 1994 to 2000, the cap was exceeded only in 2000 for NOX. Moreover, when the effects of the limited banking/borrowing that is allowed are taken into account, the excess emissions in 2000 represent only a six percent increase. In addition, because this excess is reflected in fewer RTC allowances in future years, the emissions increases will be "made up" in the future; in essence, the 2000 excess represents a borrowing of emissions allowances rather than a net increase in overall program emissions. There is no reason to believe that a command-and-control alternative would have performed better than RECLAIM did under the circumstances. Indeed, since command-and-control mandates typically regulate emission rates-rather than overall emissions-a command-and-control alternative would likely have resulted in the same emissions increases but without the compensating measures taken as a result of exceeding the NOx RECLAIM cap. Put another way, the command-and-control alternative does not have a natural mechanism to provide for borrowing (or banking) of emissions reductions.

Economic Efficiency

One of the arguments in favour of using emissions trading is that it provides an opportunity for achieving an environmental goal in a cost effective manner. With regard to cost savings, the large number of RTC transactions suggests that trading has reduced the overall cost of meeting emissions targets; indeed, even in 2000, the RECLAIM market behaved as a market should. As the demand for NOx RTCs increased and their supply decreased in 2000, NOx prices increased as they should have. Moreover, the prices of an important product "using" NOX RTCs, wholesale electricity, also increased. This should have provided signals to affected sources to invest in emissions controls as well as signals to consumers to reduce consumption of electricity.

References

Harrison(Jr), David. 2003: Ex-Post Evaluation of the RECLAIM Emissions Trading Program for the Los Angeles Air Basin, presented at a Workshop on Ex-Post Evaluation of Tradable Permits: Methodological and Policy Issues, January 21-22,2003.

Harrison(Jr),David: "Turning theory into practice for emissions trading in the Los Angeles air basin". In (Sorrell,S and Skea,J eds.) Pollution for Sale, Edward Elgar.

Sterner, T. 2003. Policy Instruments for Environmental and Natural Resource Management. RFF, Washington.

Useful Information Sources

The following website provides additional information on the RECLAIM Program:

http://www.epa.gov/airmarkets/trading/index.html