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...
How will the EPA's rulemaking affect U.S. energy markets?
With President Bush's Clear Skies program stalled in Congress, it is increasingly unlikely that a multi-pollutant regulatory package will receive congressional approval in the near future. In addition to providing another source of frustration for the Bush administration, the delay also forces the Environmental Protection Agency (EPA) to propose regulations controlling mercury emissions.
Constrained by an April 1998 court decision forcing the establishment of mercury emissions for utilities, the EPA was required to propose regulation by Dec. 15, 2003, setting emissions limits for mercury for all coal-fired and oil-fired units. Until recently, the EPA was expected to propose regulations that set emissions limits at a level that can be achieved through the installation of Maximum Achievable Control Technology (MACT). As such, compliance under a MACT command-and-control standard likely would be considerably more difficult and expensive for some than it would be under Clear Skies, which would allow for trading of mercury emissions credits between generating units. However, on Monday Dec. 15, right at the deadline, EPA Administrator Mike Leavitt issued a proposed rule that features a cap-and-trade provision similar to that proposed in Clear Skies.
By selecting a less stringent, market-based regulatory standard, EPA is certain to cause environmental groups and various state agencies to litigate the decision. Even if EPA should revert back to the MACT standard originally proposed, lawsuits brought by industry groups could be expected. (Some had guessed that EPA might propose both solutions and receive public comment before issuing final regulations.) Under any of those scenarios, the issue is likely to be left undecided for some time, adding even more uncertainty to the regulatory future. Furthermore, even if a MACT standard were issued and upheld in court, passage of Clear Skies or another multi-pollutant regulatory package that contains mercury limits prior to the MACT implementation deadline almost would certainly replace the MACT standard.
For the industry, the impacts associated with the various regulatory outcomes may be considerably different. Our analysis suggests that the effects on the electricity and emissions markets could be significant. Under a MACT standard rather than any of the discussed cap-and-trade programs, the lack of a trading market would have forced generating units to either retrofit emissions control equipment or shut down. This may benefit the units that remain from the forced retirements through increased prices as regional markets return to equilibrium more quickly. But, near-term margins for units that choose to comply are likely to be squeezed by the increase in capital expenditures associated with retrofitting the required emissions control technology. Potentially offsetting this decline for some will be a reduction in SO 2 costs if compliance with the mercury standard reduces SO 2 emissions to the point that the SO 2 markets collapse.
The question before owners of generating units is what the various regulations might mean to them. There will be winners and losers, but the breakdown is not entirely apparent. Given the long lead times associated with installing emissions control technologies and the importance of influencing the policy debate, generation owners need