In his article, "Why Taxes Don't Distort Emissions Trading" (Dec. 1, 1994, p. 37), Michael Thomas suggests that utilities should flow through the proceeds of emission allowance sales to ratepayers...
for use during Phase II, when compliance will be more difficult. While the EPA expected a number of utilities to take advantage of this option, the response has been overwhelming: 350 units have been approved by EPA for Phase I election status (em one-third more than the 265 original Phase I units. Clearly, Phase I compliance is neither expensive nor difficult.
Although the CAAA prompted utilities to test burn low-sulfur western coals, coal plants have shifted to that supply region primarily for economic reasons. Coals from Wyoming and other western states are simply cheaper on a cents per million Btu basis than coals from the high-sulfur Illinois Basin states. Thus, many utilities are able to reduce their fuel costs and generate surplus allowances through overcompliance (em in effect, another windfall.
RDI projects that the Phase I bank may reach 15 million by 2000, more than the 9.5 million allowances that will be allocated that year. Massive overcompliance is flooding the market with allowances, which will depress allowance pricing and lower compliance costs through at least the end of Phase I. Market forces will not easily alter this trend because so much of the surplus derives from economics unrelated to the allowance market. The bottom line: CAAA market controls are producing superior compliance results at a minimal cost. t
Todd Myers is a senior consultant and Pamela Custode a senior associate at Resource Data International, Inc., an energy industry consulting and information management firm specializing in market and competitor analysis.
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