Testimony of Pat Leyden, Deputy Executive Office
South Coast Air Quality Management District
Before a Hearing of United State Senate Committee on Environment and Public Works
Subcommittee on Clean Air, Wetlands, Private Property and Nuclear Safety
"Implementing the Proposed New Air Standards and the Use of Emission Trading Programs"
April 24, 1997

Good morning Mr. Chairman and members of the Committee. It is a pleasure to be here. My name is Pat Leyden and I am a Deputy Executive Officer at the South Coast Air Quality Management District in Southern California.

As the Senate considers the proposed new air pollution health standards, a number of important implementation issues warrant discussion. We need to understand:

-- what types of sources are likely to be subject to additional clean-up requirements:
-- how much time will be allowed to achieve the standards; and
-- how can we accomplish our objectives with equity and at the lowest possible cost.

I have had the honor of working for the District on air pollution abatement for the last eight years. I am responsible for rules, permits, and enforcement for all of the stationary sources in our air basin. Much progress has been made; but, we still have the worst air quality in the nation. Thus, my job involves a continuous effort to find the least painful path to clean air.

Without apology--I can tell you that I have written and implemented some of the toughest command-and-control air pollution regulations in the world. But, I am also here to tell you that I think there is a better way.

I'd like to take just a few moments and tell you about our success with the use of market-based strategies, such as emissions trading programs. In particular, I'll focus on our mass cap program, called RECLAIM. Then, I'll close with a few comments on the potential use of trading programs to achieve the proposed new health standards.

1. RECLAIM

RECLAIM is the nation's largest multi-industry emissions trading program. RECLAIM stands for Regional Clean Air Incentives Market. Over 330 of our largest pollution sources have a mass emissions facility cap that declines annually. The program covers facilities that emit four tons or more a year of either Nitrogen Oxide (NOx) or Sulfur Oxide (SOx). The types of industries included are: refineries, power plants, cement kilns, aerospace, food manufacturing, textiles, metal melting, hotels, and even amusement parks. Facilities under RECLAIM have the flexibility to choose the least expensive way to reduce emissions. If they reduce more than required, they can sell credits to other facilities. The program is mandatory and all reductions will be accomplished by the year 2003. RECLAIM replaced 32 command-and-control rules. In both the NOx and SOx markets, these facilities will cut their emissions by almost two-thirds. (Note, the specific emissions reductions are: 73% for the NOx market and 63% for the SOx market. )

This type of commitment to reducing pollution did not come from a vacuum or simple good will. Dirty air, political resolve and the cost of command-and-control rules created the momentum. For two years, over a thousand individuals, companies, and organizations worked with the District, the state, and EPA to forge the regulations. It goes without saying that there were major battles along the way, over every detail from starting allocations to emissions monitoring. In the end, EPA, the Governor of California, and over 80% of the companies affected urged the adoption of the regulation.

RECLAIM went into effect in January, 1994. After three years of implementation, the success of the program has exceeded our initial expectations. In brief, here is the report card.

Actual emissions are a third lower than allocations. (Note: Use of historic emissions allowed companies an allocation slightly higher than actual emissions for the first three years. Some groups were concerned that this would result in an increase in pollution. This has not been the case. )

Facility compliance is better than seen in many command and control rules. Actual Emissions are reported daily from computerized Continuous Emission Monitors for 85% of the market, smaller sources use non-resettable fuel meters. Public knowledge of total emissions is vastly superior to command-and-control. Compliance at the end of the first year was 87%, and rose to 92% at the end of the second year. Even higher compliance is anticipated at the end of the third year.

Trading of excess emissions to support increases in production and plant modernization has exceeded expectations. To date, more than $33 million have been traded. The cost per ton of each pollutant is well below national averages for the cost of emissions control. (Note: The price of NOx, for the year 2000 and beyond ranges from $1,500 to $1,700/ton; for the same period the price of SOx is $2,000/ton. )

Job loss attributed to RECLAIM has been dramatically lower than what was forecast for the command-and-control rules that it replaced. (Note: The job loss for the command-and-control rules was estimated at 2,013 jobs forgone annually. The RECLAIM job loss was less than 4% of the forecast in the first year, and less than 2% in the second year. )

Under RECLAIM, the cost of achieving emission reductions has been cut almost in half. The final story on actual costs won't be available until all emissions are reduced in the year 2003. However, based on the first three years of reductions, it appears that the initial estimate of an annual cost savings of 42% under-estimated reality. (Note: the command-and-control cost was estimated at $139 m/yr, compared to the RECLAIM estimated cost of $80 m/yr.)

RECLAIM works. It not only works for the companies now in the program, it suggests that the power of emissions trading in the marketplace should be used to lower the costs of compliance for other companies as well. To this end, the District has adopted numerous rules for voluntary excess credits to be produced from mobile and area sources. These credits can currently be used by RECLAIM sources. The District hopes to be able to broaden their use to other sources.

RECLAIM is a success story about reducing emissions from burning fuel. As the Senate assesses the new air pollution health standards, this consideration of what works is especially germane.

2. THE NEW STANDARDS AND ADDITIONAL EMISSION REDUCTIONS

In many parts of the country, the new standard may require sources to meet emission limits similar to those in place in California. Control strategies will vary region by region, depending on the composition of each area's emissions inventory, and the severity of the non-attainment problem.

The District's initial analysis of the proposed new standards leads to the conclusion that the driving force for additional emission reductions will come from the 2.5 particulate standard. After two years of inventory analysis, at a cost of $1.3 million, the South Coast Air Basin has some of the best data in the nation on what sources contribute to the small particulate problem. Meeting the new standard will require additional emission reductions from fuel combustion sources. In our region, we estimate that an additional 35% reduction may be required.

Our largest contributors are doing what is needed under RECLAIM. Additional reductions will need to be considered from other sources. High on the list of priorities will be diesel sources, including those regulated at the Federal level. A few examples are: ships, trains, planes, interstate trucks, and off-road construction and agricultural equipment.

In addition, many small sources have protected status under the Clean Air Act, even though their emissions can be lowered by today's technology. Some examples include: refrigerators, stoves, and small internal combustion engines. Although individually small, these sources add up. It has been estimated that the emissions from small internal combustion engines is today greater than the largest power plant in our air basin.

Our RECLAIM experience illustrates that compliance costs can be lowered when there are differential costs of control between sources in a market. The classic advice of economists is true. The market does incentivize the development and use of low-cost reductions. The procedures to verify emissions from fuel burning are now well-established for most types of sources. This allows emission

credits to be a blue chip investment in the marketplace.

3. CONCLUSIONS

Members of the Committee, I'll close with a few summary observations.

First, the South Coast Air Quality Management District supports the new standards. Our number one request is for adequate time to achieve the new target. We cannot be held to our current deadline of the year 2010. Additional time will be needed.

Secondly, trading programs are important tools to be used in implementing the proposed new standards. Trading programs are not a magic, painless potion. There are significant costs to cleaning our air. There will be hard trade-offs as we push for cleaner fuels, equipment, and products. Trading programs do not decrease government's work in developing plans or rules, permitting sources, or assuring compliance. But, they do give businesses much greater flexibility and offer the promise of significantly lowering the price tag.

For RECLAIM to have been adopted, a strong political will to clean up the air was required. For RECLAIM to be a success, a strong partnership was needed with business and the environmental community. The same will be true as the Senate considers the new standards.

Mr. Chairman and members of the Committee, thank you for the opportunity to speak.