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The Cost of Reducing SO2 (It?s Higher Than You Think)

Fortnightly Magazine - May 15 1998

1).

Starting in 2000, the beginning of Phase II will usher in a lower cap, marking the start of an era of "late compliance," as plant owners draw down the bank, allowing them to delay the full force of the Phase II cap. Current estimates say the bank will supplement compliance strategies until sometime between 2005 and 2012, depending on a variety of factors. %n3%n

Most of the historical cost estimates alluded to here apply to a fully implemented SO2 cap with no remaining bank. They do not necessarily show what Title IV may have cost to date. However, the experience gleaned from the allowance market during the past several years can prove useful in analyzing the actual costs of Title IV.

Today, the average cost actually experienced in Phase I is about $200 per ton. This figure falls within the range of the initial projections for Phase I. Today's most up-to-date estimates for Phase II average costs run about $185 to $220 per ton. This interval lies at the low end of the initial range of estimates for Phase II. Actual allowances trade much lower, but we will show that current prices nevertheless remain consistent with actual average costs of about $200 per ton.

Early Forecasts: Accounting for

Flexibility in Control Measures

The current lore is that initial cost estimates for Title IV exceeded $1,000 per ton. This perception appears to have been falsely created by confusion regarding the distinction between marginal and average costs (see sidebar, "Program Terminology").

Estimates in the range of $1,000 per ton or more have always been for the marginal costs, i.e., costs associated with the most difficult-to-control sources. That narrow focus overlooks the flexibility made possible through emissions trading.

For example, a paper from as long ago as 1985 clearly shows that control costs would exceed $1,000 per ton only for scrubbing of units that are already using lower sulfur fuels. %n4%n Barring emissions trading, many units had been estimated to face such high costs, yet it was readily acknowledged that a well-functioning allowance market would reach equilibrium at far less cost because the few units at the high-cost end of the range would have the flexibility to purchase allowances from lower-cost sources, who in turn would control more than would be required under the less flexible regulation.

Many of the proposals for legislation prior to 1987 did not envision much flexibility regarding what control measures might be selected by individual sources. Some of the proposals would have entailed widespread use of flue-gas desulfurization (FGD), which can be very costly for some power units. By the late 1980s, the idea of emissions trading had started to emerge from academic discussions as a political reality and proposals for legislation of SO2 became increasingly flexible in terms of implementation.

As flexibility became an increasingly important feature of regulatory proposals, it was viewed as less and less likely that any units might be forced into these more costly measures. In fact, when the Title IV legislation was being written, $1,500 per ton was viewed as such an unlikely