The Price of Pollution

Ventura County, CA (April 3, 2010)


April 3, 2010

When Halaco declared bankruptcy, the Oxnard metals recycling company that created so much hazardous material it was designated a Superfund site didn't have many assets anyone would want. The oceanfront property will cost tens of millions of dollars to clean up and the buildings are being torn down.

But there was one thing the company had that was extremely valuable now that it is no longer operating — a credit to pollute the air.

Companies legally permitted to emit certain types of air pollution can earn emission reduction credits, or ERCs, if they voluntarily reduce the amount of pollution they create. In Halaco's case, since the company was no longer producing its permitted air pollution, credits were created that would allow another company to pollute.

Credits can be sold on the open market or banked so a company can expand its operations in the future and offset the increased pollution. The system was set up decades ago under the federal and state clean air legislation to cap the amount of total air pollution and give companies an incentive to reduce pollution.

Buying and selling credits is usually a cloak-and-dagger operation in which the public doesn't know who is involved, how much is sold and at what price. Because Halaco was in bankruptcy court, the records are open to the public, offering a rare peek into a little-understood market based on the idea that the invisible hand of economics can be used to reduce pollution.

The demand was there
Aer Glan Energy LLC, a San Francisco-based emissions trading company, bought the rights to pollute reactive organic compounds and oxides of sulfur for about $19,000. Companies such as Aer Glan either buy them to sell later for profit or on behalf of a client needing a pollution offset. Procter & Gamble Paper Products in Oxnard also snatched up a credit for particulate matter pollution from Halaco for $60,000.

But such transactions are relatively few, The Star's review of data found. Companies that do create ERCs — most often by simply shutting down a part of their facility — are reluctant to sell them. Only 73 ERCs have been sold from 1993 to 2009 in Ventura County, compared to 167 transactions in Los Angeles County in 2007 alone.

The credits are often too valuable for a company to part with, said Samantha Unger, the director of the western environmental commodities market with Evolution Markets, which brokers sales of ERCs in Ventura County and around the state.

"They don't want to give them up in case they want future growth," Unger said.

In order for a new business that generates more than five tons of air pollution to move into the county, it must buy an ERC. Though some companies, such as Amgen, have been able to buy them, it isn't easy or cheap.

A savings account
The challenges of creating or buying ERCs are most dramatic in Southern California, where industry is the most dense and air pollution is the worst. Though it has gotten better over the years, Ventura County often gets failing grades for its air quality in the American Lung Association's annual reports.

Aera Energy, which owns oil fields around the county, has about 37 percent of the total banked ERCs for reactive organic compound pollution in the county. Southern California Edison and Vintage Production California, an oil company, each own about 30 percent of the total available NOx pollution credits, or oxides of nitrogen. Procter & Gamble Paper owns about half the available credits for particulate matter.

Before the ERC system, companies had permits to create the amount of pollution they emitted. When the ERC system was created, it capped the amount of pollution allowed in the county. For companies to earn a credit, they had to decrease their pollution voluntarily. Many have done so by using cleaner technology or simply shutting down part of their operations.

"It's like our savings account," said Kathleen Green, environmental systems leader for air quality with Procter & Gamble. "We are holding onto them, but we have no future plans to use them at this point. But we have no plans to get rid of them, either."

Aera Energy has much the same policy.

"We generally prefer to reserve ERCs for Aera business needs," said spokeswoman Susan Hersberger. The company has sold small amounts in the past to other companies.

'Hard to come by'
In recent years, regulators have clamped down on businesses and mandated they reduce their pollution, which takes away the ability for them to do it voluntarily and thereby earn a credit. That has compounded the challenges of creating credits.

"In Ventura County, they are hard to come by," Unger said.

Only companies that create more than five tons of an air pollutant need to produce or buy an ERC and the vast majority of businesses fall under that threshold. The gas station at Oxnard's Costco is an example of a facility that is just large enough to need such an offset.

The biggest challenge for the Ventura Regional Sanitation District's plans to build a facility that turns garbage into energy by superheating waste may not be raising the millions to pay for it, but getting the ERCs to offset the pollutants that lead to smog.

Problem for LNG project
Bill Buratto, executive director of Ventura County Economic Development Association, said when BHP Billiton wanted to build a liquefied natural gas facility off the Oxnard coast, it was having trouble getting the needed ERCs to offset the various types of air pollution it would have created. The project eventually died for other reasons.

Some question how long the system can remain in its current state.

"I don't know that it is sustainable," said Mike Villegas, director of the Ventura County Air Pollution Control District, which issues the credits in the county. "As the population keeps going up and people want to have jobs in the facilities that produce over five tons of pollution a year, it's going to be very difficult to get credit. Then what is going to happen?"

Unger said there is talk of re-examining how the ERC system works because the credits are so expensive and hard to get in some areas. In Los Angeles, an ERC for particulate matter can cost as much as $500,000. In Ventura, credits have sold for $46,500 per ton of ROC and $40,000 per ton of NOx.

Call for a change
"I think we could use some overhaul of the credit system," said Unger, to make more ways to create a credit. "What else can we do to create credits if we are working within the existing system? Where can you get a credit if you want to promote growth?"

But changes are not likely anytime soon. The program was established under the federal and state clean air acts and any alterations would have to come from above.

Though it still doesn't meet federal clean air standards, Ventura County has had continued improvement in its air quality over the past decade. It's impossible to tell how the ERCs have contributed to that improvement, Villegas said, because so many other factors also helped.

He thinks the biggest difference the ERCs have made may simply be making it hard for high-polluting companies to move into the area.

Kirby Zozula, who oversees the ERC program for the Air Pollution Control District, said the biggest advantage could be when companies create credits, but don't use or sell them, there is that much less pollution entering the air.

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