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Pacific Southwest, Region 9

Serving: Arizona, California, Hawaii, Nevada, Pacific Islands, Tribal Nations

Air Actions, California

Region 9's RECLAIM Evaluation Report (PDF) (123 pp, 440K)

An Evaluation of the South Coast Air Quality Management District's Regional Clean Air Incentives Market - Lessons in Environmental Markets and Innovation, November, 2002.

* Please note that the page formatting of the electronic version of our report may differ slightly from our paper copies of the report as a result of document coversion.

Note: EPA no longer updates this information, but it may be useful as a reference or resource.

EPA's Evaluation of the RECLAIM Program in the South Coast Air Quality Management District

The Regional Clean Air Incentives Market (RECLAIM) program, adopted by the South Coast Air Quality Management District (SCAQMD) in October 1993, 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 includes over 350 participants in its NOx market and about 40 participants in its SOx market. RECLAIM has the longest history and practical experience of any locally designed and implemented air emissions cap and trade (CAT) program. RECLAIM allows participating facilities to trade air pollution while meeting clean air goals.

The program was designed to provide industry with flexibility to decide how to reduce emissions and advance pollution control technologies. NOx and/or SOx allocations were issued to RECLAIM facilities based on their historical activity levels and applicable emission control levels specified in the subsumed rules or in the local Air Quality Management Plan. Facilities within the RECLAIM program have the option of complying with their allocation allowance by either reducing emissions or purchasing RECLAIM Trading Credits from other facilities. Facilities ranging from power producers to glass melters and facilities using industrial boilers participate in RECLAIM.

Why did EPA evaluate RECLAIM?

As a result of a variety of factors during 2000 and 2001, RECLAIM credit prices increased dramatically, while at the same time some facilities in the market had difficulty meeting their emission levels in RECLAIM. This resulted in reported emissions exceeding emissions allowed under RECLAIM. EPA decided to evaluate the causes of these events and to examine the effectiveness of the RECLAIM program. In our evaluation, we tried to answer a series of performance questions such as whether expected emission reductions had been achieved, what types of emission control strategies had been applied by market participants, and whether the program was cost-effective overall. Based on our evaluation, we believe that the SCAQMD has been effective managing RECLAIM and modifying the program to adapt quickly to changing conditions. We also believe that others will benefit from their experience.

What process did EPA use in evaluating RECLAIM?

EPA and a research team reviewed existing materials on the background of RECLAIM, its implementation, and reviews and evaluations of its performance. The primary source of this evaluation comes from a series of interviews conducted with over 20 stakeholders from regulated facilities, environmental organizations, regulatory agencies, and brokerage firms. It is important to note that the number of stakeholders interviewed as well as the composition and the variety of the views represented by our interviews is not necessarily representative of the variety of views that are held about the RECLAIM program.

There was little emphasis in the available literature that describes how the underlying theories of market based incentives programs can be practically tested. Accordingly, this evaluation focused in large part on the decision-making behavior by operators of the regulated sources, since it is these decisions that ultimately determine the outcome of the program. EPA views this analysis as contributing to the continued efforts to examine and improve RECLAIM and other innovative regulatory efforts. We have provided the SCAQMD the opportunity to comment on this report.

What are some of the lessons learned from RECLAIM's experience?

  • Market-based programs require significant planning, preparation, and management during development and throughout the life of the program.
  • Market information is a key factor affecting facility decision-making.
  • Regulators should strive to create confidence and trust in the market by making a full commitment to the program and ensuring consistency in the market and their policies.
  • Unforeseen external circumstances (like energy deregulation) can have dramatic impacts on market-based programs. Therefore, these programs must be designed to react quickly and effectively to unforeseen external factors.
  • Periodic evaluation, revisiting of program design assumptions, and contingency strategies are crucial to keeping programs on track.
  • RECLAIM's experience seems to demonstrate that cap and trade (CAT) can work with Clean Air Act (CAA) New Source Review (NSR). This may be a function of the types of sources included or the controls in place at many facilities.
  • Regulators need to have a strong understanding of the regulated facilities and the factors impacting their decision-making.

Contacts

Written requests for copies of the report or questions may be sent to:

Ken Israels (israels.ken@epa.gov)
Air Division (air-8)
U.S. EPA Region 9
75 Hawthorne Street
San Francisco, California 94105

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