California’s South Coast Air Quality Management District (SCAQMD) initiated the Regional Clean Air Incentives Market (RECLAIM) to control nitrogen oxide (NOx) and sulfur oxide emissions (SOx). The system operates on a one credit-to-one pound NOx emitted ratio. Reclaim credits are issued to all sources with annual emissions in excess of 8000 pounds at the beginning of the year.

RECLAIM has been in operation since 1993 and since its original adaptation there have been numerous refinements to the system. Reclaim was adopted as a cap-and-trade program, in accordance with the success of the national SO2 and regional NOx markets. Businesses emitting more than 4 tons of emissions a year were subject to reclaim and were allocated credits based on historical emissions. Since its adaptation, RECLAIM has been at the forefront of encouraging businesses to utilize new emissions control technology to reduce emissions by offering an incentive: any business that has effectively and permanently curbed emissions and has excess credits may sell them for a profit. The program originally included more than 300 facilities in the LA basin area, mostly heavy industry and power plant facilities. RECLAIM’s design as a cap-and-trade program aims to reduce emissions by creating a smaller number of credits each year. RECLAIM has resulted in the reduction of nearly 25,000 tons of NOx annually since the start of the program.

Credits in RECLAIM historically traded for very low prices, the daily average prior to 2000 was under $1 per credit. However, immediately following the California Energy Crisis, a huge increase in demand for NOx credits was created, as coal-fired utilities had to compensate for the lack of power by producing overtime. In slightly over six months, NOx credits had jumped from less than $1 per pound to over $30 and in 2001, credits were trading for over $60 per pound. Due to the extreme conditions imposed by the energy crisis and the drastic rise in prices, the program was re-examined and amended, resulting in two major changes.

The first major change was the mandated installation of emissions control technology in major power plants to reduce emissions. The second was legislation to have businesses that produced over 50 tons of NOx annually develop five year emissions plans based on historic emissions levels from the year 2000. The RECLAIM market has stabilized due to the removal of major fossil fuel-fired plants and most major emitters of pollution operating on five year plans, reducing demand to a level that cannot create the drastic price spikes seen during times of energy crisis.

RECLAIM’s price levels have since dropped back to prices reflecting those seen in the year 2000 and the governing board of the SCAQMD further reduced the supply of emissions credits. As of January 1st, 2007, major power plants that were taken out of the reclaim program are now full market participants again and may freely trade credits. Today’s RECLAIM market has about 34.2 tons of NOx RTCs daily, although the SCAQMD has created a program to reduce the daily emissions by about 22.5%, or 7.7 tons daily. This reduction will be implemented in stages, 4 tons daily supply reduction in 2007, followed by a 0.925 ton daily supply reduction annually from 2008-2011.

One type of RECLAIM-specific trade that is particularly noteworthy is the Infinite Year Block Trade (IYB) or perpetuities as they are known consist of a trade that continues to supply a business with a number of RECLAIM trading credits annually every year after the allocated one permanently for a set price. Perpetuities are an excellent long term investment for both parties, as they allow a definite buyer for a business with excess credits and can yield cheaper credits for the buyer over time if prices increase. Perpetuities continue from the year when they are enacted infinitely into the future.

Geographically, RECLAIM covers all of Los Angeles and is divided into two zones based on geography. Zone 1 is the coastal zone and includes areas of industrial development along the coast. Zone 2 is the inland portion of reclaim and covers all of Los Angeles. Reclaim operates on a system of two cycles. Cycle 1 credits are active on January 1st and expire on December 31st. Cycle 2 credits are active on July 1st and expire on June 30th of the following year.