BOARD MEETING DATE: September 7, 2007
AGENDA NO. 43

REPORT:

Report on RECLAIM Compliance, Enforcement and Reporting of Credit Prices

SYNOPSIS:

The average price of Compliance Year 2010 NOx RTCs traded in calendar year 2006 was $15,698 per ton, which exceeded the price threshold set under Rule 2015(b)(6). The high average price was partially caused by the way prices were reported for sales of blocks of RTCs which extend into perpetuity and the way AQMD averaged the reported price data. At its March 2007 meeting, the Board directed staff to recommend a more appropriate methodology for determining the average prices of such infinite-year block trades, to prepare a report to the CARB and the U.S. EPA pursuant to Rule 2015(b)(6), to reassess RECLAIM pursuant to California Health and Safety Code section 39616(f), and to recommend any necessary amendments to Regulation XX – Regional Clean Air Incentives Market (RECLAIM). This report is prepared in response to the Board’s directive and pursuant to the above mentioned requirements. It includes recommendation for a new price reporting and averaging methodology as well as for monitoring progress under Health and Safety Code 39616(f).

COMMITTEE:

Stationary Source, July 27, 2007, Reviewed

RECOMMENDED ACTIONS:

1. Approve the attached report;
2. Conclude that there is no need to amend paragraphs (d)(1) through (d)(4) of Rule 2004; and
3. Set the Section 39616(f) predetermined program review price thresholds for blocks of RTCs with a specified start year and continuing into perpetuity at fifteen times the predetermined levels previously set at the time of adoption of the RECLAIM program for discrete-year trades ($25,000 per ton of NOx RTCs and $18,000 per ton of SOx RTCs in 1994 dollars) with annual adjustments for changes in the consumer price index.

Barry R. Wallerstein, D.Env.
Executive Officer

Background

The Board found that the average annual price of Compliance Year 2010 RTCs traded in Calendar Year 2006 exceeded $15,000 per ton and therefore directed staff to perform an evaluation and review of the compliance and enforcement aspects of RECLAIM pursuant to Rule 2015(b)(6) during the March 7, 2007 Board Meeting. The Board further directed staff to prepare a report presenting the results of the evaluation and review for the Board’s consideration and submittal to the Air Resources Board and U.S. Environmental Protection Agency, to review and assess the need to amend the RECLAIM program pursuant to Health and Safety Code Section 39616(f), and to propose a recommended methodology for determining average prices for blocks of RTCs with a specified start year and continuing into perpetuity (infinite-year blocks or IYB of RTCs). This report presents the results of that effort.

The Evaluation and Review Process

Staff conducted the evaluation and review as a public process with significant input from the regulated community and other interested parties. This was accomplished through a series of RECLAIM Working Group meetings, to which all RECLAIM facilities, as well as other parties which have requested to be informed of RECLAIM issues, were invited. The key events involved in this process are itemized below:

• Price of 2010 NOx RTCs found to exceed $15,000 per ton March 2007
  
• Board directed staff to review compliance and enforcement of March 2007
  RECLAIM, as well as price reporting for IYB RTC trades
  
• Surveys regarding price reporting for IYB RTC trades sent April 2007
  to all RECLAIM facilities
  
• Working Group Meeting I April 2007
  
• Working Group Meeting II May 2007
  
• Working Group Meeting III June 2007
  
• Stationary Source Committee Meeting July 2007
  
• Working Group Meeting IV August 2007
  
• Public Hearing September 2007

Findings and Recommendations

The findings and recommendations resulting from the public process described above are summarized below and explained in greater detail in the attached report:

• RTC trades involving specific, discrete years should be reported to AQMD separately from those involving IYBs. The prices for discrete year trades should be reported in units of dollars per pound for each year traded while the prices for IYB trades should be reported as total dollars for total infinite pounds. AQMD should publish average RTC prices in terms of dollars per ton by year for discrete trades and dollars per ton for IYB trades. Of all potential reporting and averaging approaches identified, this is the most reflective of actual market behavior, poses the least potential for market manipulation, is the most acceptable to market participants, and imposes moderate administrative burden upon AQMD staff.
  
• The prices reported for swap trades (trades of RTCs for other RTCs or for other non-monetary assets) are arbitrary and including them in the calculation of annual average RTC prices decreases the meaningfulness of the average prices. Therefore, the prices reported for swap trades should be excluded from the calculation of annual average RTC prices.
  
• As a result of recommending a separate reporting procedure for IYB trades from discrete year trades, new review threshold levels as specified in Health and Safety Code 39616(f) need to be set for infinite-year block RTCs. Staff recommends that the Governing Board adopt, pursuant to Health and Safety Code 39616(f), predetermined price levels for IYB RTCs at 15 times the existing discrete levels of $25,000 per ton for NOx RTCs and 15 times $18,000 per ton for SOx RTCs, in 1994 dollars and adjusted annually for changes to the consumer price index. These thresholds are in addition to the existing ones set for discrete-year trades.
   
• The high average annual price of Compliance Year 2010 NOx RTCs traded in Calendar Year 2006 does not appear to have affected allocation compliance rates; in each of the last three compliance years (based on data collected as of June 30, 2007), only five to six percent of NOx facilities exceeded their allocations and the total amounts of those exceedances are much less than one percent of total allocations for each compliance year and are not increasing over the same time period. (These are the totals of the exceedances of individual facilities without consideration of surpluses at other facilities; there are no overall net programmatic exceedances for these years.)
  
• Based on data from January 2004 through June 2007, neither the number of facilities with monitoring, recordkeeping, and reporting (MRR) violations nor the number of notices to comply, notices of violation, or overall violations has increased in recent years. Therefore, MRR compliance has not been adversely impacted by the high cost of Compliance Year 2010 RTCs traded in Calendar Year 2006.
  
• Review of the range of penalties collected by AQMD for violations of Rules 2004(d)(1), 2004(f)(1), 2011 and 2012, after taking into consideration the prima facie elements and all relevant factors mandated by California Health and Safety Code Section 42403, indicate that the current statutory penalty structure is adequate to provide necessary deterrence of violations. None of the cases reviewed indicate that the penalties sought were artificially limited by the statutory maximums. Indeed, a number of the cases reviewed recovered civil penalties in excess of one million dollars.
  
• Compliance with RECLAIM’s emission allocations and MRR requirements continues to be high despite the increased cost of future year RTCs traded in Calendar Year 2006. Additionally, the maximum statutorily-available penalties have not limited the penalty assessments sought by AQMD, so there is room for the penalties assessed to increase as the cost of RTCs increases so as to ensure that noncompliance does not become a financially-attractive option for RECLAIM facilities. These factors combined indicate that RECLAIM continues to provide adequate and appropriate incentives for facilities to conform to their compliance obligations.
  
• The current requirements of Rules 2004(d)(1) through (d)(4), in conjunction with the current statutory penalty structure and other RECLAIM provisions, continue to be adequate to ensure compliance. Accordingly, it is recommended that paragraphs (d)(1) through (d)(4) of Rule 2004 be continued without change.

Attachments (exe 626kb)
A. Resolution
B. Evaluation and Review of the RECLAIM Program and Assessment of RTC Price Reporting