EPA Rule Limits Cap-and-Trade Markets

JULY 16, 2010

The U.S. Environmental Protection Agency (EPA) proposed new regulations last week that would impose tougher limits on power plant emissions of smog- and acid rain-forming sulfur dioxide (SO₂) and nitrogen oxides (NO_x). The revamped rules would rely less on emissions trading across state lines, striking a blow to the cap-and-trade system currently in place.

The proposed “Transport Rule” would require 31 states and the District of Columbia to reduce “transported” emissions, which can travel long distances over state lines. The new rule seeks to replace and improve the 2005 Clean Air Interstate Rule (CAIR)—the U.S. Court of Appeals for the D.C. Circuit ordered EPA to revise CAIR in July 2008, citing conflicts with existing Clean Air Act regulations.

EPA anticipates power plants can meet new reduction requirements by operating currently installed scrubbers, investing in more control equipment or using low-sulfur coal. The annual cost of compliance would reach $2.8 billion in 2014, according to EPA estimates. Emissions trading would be allowed within an individual state but limited between multiple states.

In 1993 trading began for 1995 SO₂ allowances, with an initial price of $131 per ton, according to Chicago Climate Exchange data. Prices spiked to $1,600 per ton in 2005. A steady decline brought prices to $15 per ton in early June; following EPA’s announcement last week, allowances were trading for as low as $3 per ton.

Market participants continually struggle to determine how ongoing regulatory changes will affect their power generation portfolio, according to Andy Whitesitt, director of financial trading for ACES Power Marketing.

“Uncertainty in regulations and a resulting lack of trading liquidity has led to significant price volatility in emission allowance markets,” Whitesitt said. “Until there are clear regulatory rules, emission allowance markets will continue to be volatile.”

EPA estimates that by 2014, the rule and other state and EPA actions would reduce SO₂ emissions by 71 percent over 2005 levels. NO_x emissions could drop by 52 percent. EPA is currently taking comments on the proposed rule, which would take effect in 2012.

States Affected by EPA’s Proposed Rule

Source: EPA