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...
marginal cost of the compliance units increases, benefitting gas units by increasing the prices they receive in the market.
But all of these impacts would vary by region. Impacts in each region would be determined by the specific interaction of supply and demand, fuel mix and the cost of emissions control compliance. As demonstrated by changes in capacity factor shown in Figure 4, the impact of a mercury MACT standard on combined-cycle plants in gas-dominated Texas would be very different than that for a similar plant in Virginia (see Figure 4).
All market participants will need to carefully consider the strategic implications of a mercury MACT standard versus a cap-and-trade approach. Coal-fired and oil-fired generation owners first will have to determine if it is economically and technologically feasible to retrofit compliance technology and possibly switch to lower mercury coal, or shutdown their units. To determine the economic feasibility of retrofitting compliance technology, generation owners need to know how the mercury MACT regulation would affect market prices and the dispatch of their units.
Further, coal-fired and oil-fired generation owners would consider the impact of the mercury regulation on environmental strategies designed to minimize other pollutant costs. It is possible that litigation might bring back the MACT standard. For example, as previously discussed, many coal units that have switched to PRB coal for the low sulfur content may decide to switch back to a bituminous coal to comply with the mercury MACT regulation. This switch will obviously affect the SO 2 compliance strategy of the unit, suggesting that a fresh look at an integrated environmental strategy is now needed. Gas-fired generation owners will need to revisit their market strategies once they have a clear understanding of how their units are affected by any changes in dispatch order and market prices. Many new gas plants that are facing years of noncompensatory returns in overbuilt markets may find the economic picture improving much sooner. For some, this may mean the difference between continued postponement of unfinished projects and mothballing of completed projects versus full economic operation.
Considerable regulatory uncertainty surrounds a final EPA regulation. Furthermore, if a mercury MACT standard is proposed later as an alternative, implementation is likely to be delayed beyond the current 2007 deadline, adding more uncertainty to the mix. Many generation owners may make a different compliance decision if they're forced to comply with a mercury MACT standard versus a cap-and-trade alternative.
For coal-fired and gas-fired units, this choice (act now and retrofit with the required control technology or wait for more certainty) poses a strategic dilemma. Given the long lead time required to install compliance equipment (installation can take three or four years from design to completion), generation owners would have to start funding the installation of compliance technology in the next year or two to meet the 2007 compliance deadline. But if a generation owner starts funding based on the assumption that mercury MACT will be binding and Clear Skies or another cap-and-trade program is implemented, that same generation owner runs the risk of incurring additional costs through