The Cost of Reducing SO2 (It?s Higher Than You Think)
any additional SO2 reductions were to come from local requirements laid on top of the present Title IV cap (as might be expected for regulations directed at ambient air quality), then this greater stringency would render the Title IV cap meaningless. The new NAAQS requirements would create a flood of allowances and would shrink the pool of potential buyers. Although allowance prices would plummet, costs to reduce SO2 would increase. Current allowance prices (which depend in part on future prices) would also fall.
CARBON DIOXIDE. Though less imminent, any cap imposed on carbon-dioxide emissions to address climate change would also likely affect SO2 allowance prices. The primary way to achieve CO2 cuts is to replace coal and oil with natural gas or renewable fuels or to improve energy efficiency. Both methods will reduce demand for coal-fired power and cause the baseline of SO2 emissions (and the demand for allowances) to drop. Overall, this result would dampen the growth in allowance prices but these lower prices would not be attributable to the benefits of allowance trading.
TRADING PROGRAMS. What if new NAAQS requirements were imposed through an entirely new emissions trading market, such as allowances for NOx or for CO2? Many lessons might be drawn from SO2 trading.
One key feature of the SO2 market would need to be present again. The SO2 cap was set at a level that left a wide range of options open to each individual source: an approximate 50-percent reduction was required in a situation where there was a technologically proven option that could achieve reductions of 95 percent. Combined with that was the presence of a wide continuum of lower percentage reductions possible via fuels with many different sulfur content levels. Thus, there was room for applying the most costly control measures on only a small fraction of the regulated units, where they would be truly cost-effective. This situation also laid the groundwork for substantial price competition among very different types of control options. A more stringent cap would have reduced the degree of flexibility to manage costs, and probably also the degree of price competition among suppliers of control options. The ability to take advantage of cheaper low-sulfur coals from the West would have been greatly diminished if aggregate SO2 reduction requirements were substantially greater than 50 percent.
Market-based regulatory approaches are here to stay. Emissions trading has proven an effective tool, but will not make the cost of controlling emissions disappear. It is not fair to say that the Title IV experience shows that initial cost estimates are not to be trusted for guiding policy decisions. As always, the main determinant of cost is the stringency of the measure. F
Anne E. Smith is vice president with Charles River Associates. Jeremy Platt is manager, fuel supply target, EPRI. A. Denny Ellerman is executive director of the Center for Energy and Environmental Policy Research, MIT. The authors drew on data and analyses performed independently at MIT and EPRI to provide an updated perspective on Title IV's costs and to contrast these current data appropriately with initial