Over a Dozen Years of RECLAIM Implementation: Key Lessons Learned in California’s First Air Pollution Cap-and-Trade Program South Coast Air Quality Management District June 2007 TABLE OF CONTENTS PREFACE EXECUTIVE SUMMARY PART ONE - RECLAIM DESIGN Chapter One – Program Conception..................................................................................................I-1-1 Feasibility Study ....................................................................................................................I-1-1 Rule Development Process ....................................................................................................I-1-2 Rules ......................................................................................................................................I-1-2 Lessons Learned.....................................................................................................................I-1-3 Chapter Two – Key Design Features.................................................................................................I-2-1 Basic Description...................................................................................................................I-2-1 Two-Cycle System.................................................................................................................I-2-1 Inclusion Criteria ...................................................................................................................I-2-1 Facility Permits ......................................................................................................................I-2-2 Monitoring, Reporting and Recordkeeping ...........................................................................I-2-2 Missing Data Provisions ........................................................................................................I-2-3 Inspections and Violations.....................................................................................................I-2-4 Program Assessments ............................................................................................................I-2-4 Periodic Assessments of BARCT ..........................................................................................I-2-5 Chapter Three – Legal Issues.............................................................................................................I-3-1 Introduction............................................................................................................................I-3-1 Federal and State Air Quality Requirements .........................................................................I-3-1 Federal Clean Air Act Compliance........................................................................................I-3-3 State Law Applicable to Market-Based Incentive Programs.................................................I-3-5 Enforceability Issues..............................................................................................................I-3-8 RECLAIM Trading Credits Were Not to Create a Property Right........................................I-3-11 Incorporating Mobile Source Credits.....................................................................................I-3-13 Prosecution Experience..........................................................................................................I-3-14 Lessons Learned.....................................................................................................................I-3-16 Chapter Four – Establishing Baselines and Reduction Targets.........................................................I-4-1 Allocation and Reductions Required .....................................................................................I-4-1 Lessons Learned.....................................................................................................................I-4-3 Chapter Five – What Makes a Robust Market?.................................................................................I-5-1 Lessons Learned.....................................................................................................................I-5-2 Chapter Six – Information Management Needs.................................................................................I-6-1 Lessons Learned.....................................................................................................................I-6-3 Chapter Seven – Other Considerations for Future Trading Programs...............................................I-7-1 Why Wasn’t a VOC RECLAIM Program Successful? .........................................................I-7-1 Other Factors to Consider ......................................................................................................I-7-1 PART TWO - RECLAIM IMPLEMENTATION Chapter One – Early Implementation ................................................................................................II-1-1 Allocation Reviews................................................................................................................II-1-1 Permitting ..............................................................................................................................II-1-2 Process for Resolving Issues..................................................................................................II-1-3 Certifying Compliance with MRR Provisions.......................................................................II-1-4 Lessons Learned.....................................................................................................................II-1-5 Chapter Two – On-Going Implementation........................................................................................II-2-1 Permitting...............................................................................................................................II-2-1 Emission Audits.....................................................................................................................II-2-1 CEMS Accuracy Verification and Re-Certification ..............................................................II-2-3 Source Testing and Emission Verification ............................................................................II-2-4 Violations...............................................................................................................................II-2-5 Lessons Learned.....................................................................................................................II-2-12 Chapter Three – Mid-Course Corrections..........................................................................................II-3-1 Amendments to Reduce RTC Demand from Power Producing Facilities.............................II-3-1 Other Amendments Affecting Non-Power Producing Facilities ...........................................II-3-5 Amendments Affecting the Market and RTC Supplies .........................................................II-3-5 Lessons Learned.....................................................................................................................II-3-5 Chapter Four – Market Issues............................................................................................................II-4-1 Tracking Mechanisms............................................................................................................II-4-4 Authenticating Trades............................................................................................................II-4-4 Trends in RTC Trades............................................................................................................II-4-4 Trade Reporting .....................................................................................................................II-4-6 Lessons Learned.....................................................................................................................II-4-7 Chapter Five – Information Management..........................................................................................II-5-1 Facility Permit........................................................................................................................II-5-1 Trading...................................................................................................................................II-5-1 Emission Monitoring .............................................................................................................II-5-2 Compliance ............................................................................................................................II-5-3 Lessons Learned.....................................................................................................................II-5-3 PART THREE – CONCLUSIONS AND RECOMMENDATIONS Conclusions............................................................................................................................III-1-1 Summary of the RECLAIM Experience – What Worked Well ............................................III-1-1 Summary of the RECLAIM Experience – What Could Have Been Improved .....................III-1-2 Summary of the RECLAIM Experience – General Observations .........................................III-1-4 Recommendations for Future Cap-and-Trade Programs .......................................................III-1-5 General Recommendations ....................................................................................................III-1-9