A breath of fresh air - Southern California companies and their compliance with clean-air laws

Nation's Business, May, 1995 by Laura M. Litvan

In a Southern California experiment, some firms are free to determine how to comply with clean-air regulations.

Manufacturers in Southern California have struggled for decades under the weight of the nation's most stringent rules for cleaning the air. But if the region's heavy blanket of smog begins clearing over the next several years, the credit could go to the free market.

In an unusual experiment, local officials last year scrapped the traditional "command-and-control" approach to air-cleanup regulation. Undex that regimen, regulators established strict quotas on emissions and dictated how businesses were to meet them.

Under the new arrangement, the 400 companies taking part will still face increasingly tighter annual limits on emissions through 2003 as air-quality standards get tougher, but the local regulators no longer will toll businesses how they must achieve those limits. Moreover, companies that reduce their pollutant discharges below their annual maximums can sell excess emissions rights to other local manufacturers.

This Southern California project could prove advantageous to some small businesses, at least in the short term. For example, Deleo Clay Tile in Lake Elsinore could benefit from the program this year. State regulators gave the 48-employee company, which manufactures ceramic tiles, sufficient credits to emit 33,345 pounds of nitrogen oxides during 1995. This pollutant is released when the company burns fuel to fire its four kilns.

But Deleo Tile's current-year credits were calculated on the basis of emissions from several years ago, when demand for the company's products was stronger and production was about twice its present level. Cindy Deleo, general manager of the family-owned company, says the firm likely will attempt to soften the impact of its sales decline by selling emission credits it will not need this year.

Because the tile company's emission allowance will be reduced each year, the company at some point will be forced either to make its production process more fuel-efficient or to buy emissions credits from another firm, Deleo says.

The concept of an open marketplace in environmental credits has been popular among academics for almost 30 years, but California's Regional Clean Air Incentives Market (RECLAIM) is the most far-reaching effort yet to apply the idea. The program was spawned by a provision in the federal 1990 Clean Air Act amendments that allows states to experiment with free-market approaches. Massachusetts, Illinois, and Texas are among several states that may soon establish markets for environmental credits.

"We are very bullish about this approach as a compliance alternative," says Steve Harper, director of the U.S. Environmental Protection Agency's new Common Sense Initiative, a project that is exploring flexible ways to regulate industries.

Whether RECLAIM will be called a success or failure will be determined over the next eight years, the current span for the program, but California regulators are already promising big things. They say RECLAIM will prove to be a less costly system of regulation for industry and will result in pollution cutbacks at least as great as those forecast under the more rigid system.

The 400 companies in the RECLAIM program were selected because they emit the largest amounts of two targeted pollutants--nitrogen oxides and sulfur oxides, both of which are key ingredients in Southern California's smog. Both substances are emitted by manufacturers that burn large amounts of fuel, including companies that produce products containing clay, glass, or metal.

Under the system, each company receives emission credits, with allowances to release a certain amount of pollutants, based on its past emissions. The credit allowance is to decline about 8 percent a year for nitrogen-oxide emissions and almost 7 percent a year for sulfur-oxide emissions until the year 2003. No matter how many of the 400 companies sell or buy credits, the overall emissions ceiling for the Los Angeles region remains the same.

Next year, regulators will start phasing in about 1,000 additional companies as a third type of pollutant, called reactive organic compounds, is added to the program. These compounds are emitted by manufacturers that use solvents or paints.

It will cost industry an estimated $81 million annually to meet clean-air requirements under RECLAIM, or about 42 percent less than it would have cost under the old command-and-control system, according to an analysis by the South Coast Air Quality Management District, the local regulatory body overseeing RECLAIM.

Yet the smaller companies participating in RECLAIM are waiting to see if they will actually save on compliance costs. And with the program in its infancy, some are still struggling to adapt to a whole new way of doing things.

For example, Cindy Deleo says managers at the tile company have had a tough time fully understanding the new system of regulation and have had to hire consultants to help them sort out its ramifications.