Dirty Air Deals

TO MAKE WAY FOR MORE fossil-fueled power plants and imports of oil and gas, the South Coast Air Quality Management District is preparing to sell air-pollution credits reserved for essential government services, like schools and water treatment, to big energy companies at a discount that will save these giants tens of millions of dollars.

The price break for Big Business undermines the region’s air-pollution-credit program just as pressure has been building for the industry to use sustainable technologies and improve energy efficiency to cut both air pollution and emissions of global-warming gases.

Not only does the AQMD’s plan contradict those efforts by promoting fossil fuel, it also threatens to create clouds of toxic pollution in neighborhoods that border new fossil-fuel plants enjoying the credit giveaway. “These are monster deep-pocket entities,” said Bill Powers, a member of Ratepayers for Affordable, Clean Energy, a coalition pushing for renewable power. “It’s set up so when the market gets tight, you get innovative. That’s not happening.”

Edison International, parent of just one of the companies that would benefit under the AQMD plan, had a profit of $1.1 billion in 2005. Under AQMD’s plan, its Edison Mission Energy subsidiary could save up to $41 million on the credits needed to build two new power plants, as compared to buying them on the open market at the most recent high price.

Mitsubishi Corp., a Japanese company that would gain under the plan, made a profit of $868 million in the last quarter of 2005. Its Sound Energy Solutions subsidiary, which is planning to build a liquefied natural-gas-import terminal at the Port of Long Beach, could save $5 million under AQMD’s scheme.

Many more energy companies could benefit too, under the AQMD credit bonanza.

The giveaway scheme comes just as the nation’s smoggiest region reaches the technological limits of controlling air pollution created by its fossil-fuel-based economy. Consequently, the availability of credits, also known as offsets, has plummeted and their cost has soared.

“At this point there are not enough available offsets in the air basin for anybody’s plants,” said Larry Kostrzewa, managing director at Edison Mission Energy, which is banking on credits from the district to construct two new natural-gas-fired power plants.

The federal Clean Air Act requires companies planning to build new plants that spew pollutants to first obtain credits to offset their emissions. Firms can earn the credits either by reducing pollution at their existing facilities more than is required, or by shutting down old equipment and plants. Companies that cannot do these things themselves can purchase air-pollution rights from other firms that have earned credits.

The requirements — enforced through AQMD’s so-called “new-source review” rules — are meant to keep air pollution from increasing as the economy grows, by giving companies an incentive to develop innovative clean-air technology.

“We do support the use of the cleanest technology, but being realistic, we know this is not going to happen overnight,” said Mohsen Nazemi, assistant deputy executive officer of the AQMD. He said that within a couple of years Southern California will face an energy shortage unless more power plants are built and more oil and liquefied natural gas are imported through the region’s ports.

Renewable energy and fuel efficiency are “a piece of the puzzle,” said Nazemi. “They are not the only solution.”

AQMD would sell credits for emissions of sulfur oxides for $18,000 a pound, and for particulate matter for $50,417 a pound, as compared with recent market highs of $18,000 and $74,250 per pound, respectively, for the pollutants. The price for credits for particulate matter — the region’s worst pollutant — represents a discount of 32 percent. AQMD also is considering making carbon-monoxide credits available.

Nazemi said AQMD’s proposed price for particulate is at market rate, characterizing the higher-priced trades as outliers. The board is expected to approve credits for the energy industry this summer.

However, Samantha Unger, Evolution Markets’ environmental broker, said AQMD’s proposed prices are low. “The particulate matter and sulfur oxides are below market,” said Unger. “There are still people who would pay more than that pricing.”

Companies building new plants must obtain 1.2 pounds of credits for each pound per day of pollutants they emit, based on the day of the year they would pump out the most pollution. For instance, Edison Mission Energy’s two proposed power plants together would emit 1,434 pounds of particulate matter under peak operation, so the company would need to obtain 1,721 pounds of credits. Based on the $23,833 discount Edison would enjoy at AQMD’s proposed price of $50,417 per pound, the company would save $41 million, as compared with purchasing credits at the open-market high price of $74,250.

All of the pollutants covered by the proposal present health hazards. Sulfur oxides irritate the respiratory system and form particles downwind. Particulate is considered the region’s worst air pollutant, linked to asthma and premature death from heart and respiratory disease. Carbon monoxide reduces the supply of oxygen in the body.

AQMD acquires credits when companies go out of business and do not bother to request certificates for their pollution rights. The agency then places the pollution rights in its priority reserve. The reserve normally is open only to public agencies that operate water-treatment plants, public transit, schools, police and fire stations, and hospitals, not to for-profit companies that must obtain credits on the open market.