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EPA's Big Bet on Green Trading

Environmental Emissions: The cost to power markets of the Clean Air Interstate Rule depends on the ability to trade mercury.

Fortnightly Magazine - June 2005

plant will face double the cost for coal.

Improved performance by Western railroads in 2005 and the memory of missed shipments in 2004 from Central Appalachian and other Eastern coal fields will encourage generators to at least try PRB coal. But if extra production can be squeezed out of the Illinois basin without pulling prices up too much, high-sulfur coals may be competitive even in markets where that fuel previously did not have many buyers.

The delivered cost of that coal will determine the ability to reverse the decade-long decline in high-sulfur production, which is especially dramatic when compared with the gains from producers in Wyoming ( see Figure 3, p. 79 ).

Some generators still may be weighing their options, though the continued rise in SO 2 allowances prices likely will convince those on the fence. Some smaller utilities had been waiting to see if the mercury limits would subsidize the other controls, but the initial 2010 cap is high enough not to affect near-term emissions-control decisions.

Still A Guessing Game

The mercury rules themselves, even if adopted in their entirety by states, will not create a shift in coal markets. The rules rely on the expectation that the installation of scrubbers and SCRs will trim mercury levels enough to meet the extremely soft 38-ton emissions cap. Therefore, the marginal compliance cost is covered under SO 2 and NOx, at least until 2018, when the level is expected to drop to a much tighter 18 tons.

Given the difficulty in measuring levels of mercury—there are no commercial continuous emissions monitors for mercury like there are for the other major pollutants—many utilities will be guessing at their projected levels of mercury output. The EPA decided to allow generators to trade around their mercury position rather than force installation of control technology that is also not yet commercially proven. To do so, it had to circumvent a decision made by the agency in 2000 that added mercury to a list of pollutants that require controls to be put on plants, which is one of the key issues in upcoming legal battles over the mercury rule.

If more units need to have mercury controls to come into compliance with the 2010 cap, then prices for those installations, or for the allowances under the cap-and-trade program, will affect the marginal cost of power production in the major coal-fired regions. As the mercury rule also sets a discount for different coal types, it could further the drive toward Western PRB coal, or at least encourage more blending of coal types over the next few years.