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Why You Should Care About CAIR

New provisions nearly eliminate the financial impacts of the rule’s ozone regulations.

Fortnightly Magazine - January 2007

The Clean Air Interstate Rule (CAIR) promulgated by the U.S. Environmental Protection Agency in 2005 is designed to reduce ozone transport and the atmospheric interstate transport of fine particulate matter (PM2.5). 1 Beginning in 2009, CAIR will regulate ozone transport by imposing limits on the emissions of NOx during the months of May through September, called the “ozone season,” and referred to hereafter as CAIR Ozone. These rules will expand and replace the current NOx Budget Trading Program (NBP), often referred to as the NOx SIP Call. Also beginning in 2009, CAIR will impose annual caps on NOx emissions, referred to hereafter as CAIR PM2.5. Most of the power plants in states east of the Mississippi River will be regulated under both sets of regulations. Although there are plants that only will be regulated under the CAIR Ozone rule, others only will be regulated under the CAIR PM2.5 rule. Several states west of the Mississippi River also will be regulated under the CAIR rules. 2

The authors have spent a considerable amount of time evaluating the implications of the CAIR Ozone and CAIR PM2.5 rules for numerous clients. A key finding of our analysis, and initially a surprising one, is that the provisions under CAIR PM2.5 nearly eliminate the financial impacts of CAIR Ozone. Moreover, through its impacts on NOx emissions, CAIR PM2.5 also will affect the NBP allowance market. The reason underlying these impacts is that CAIR PM2.5 is so restrictive it creates a strong financial incentive for generators with plants regulated under both CAIR provisions to reduce their NOx emissions during the ozone season. This substantially reduces the impact of CAIR Ozone, and therefore will lead to very low allowance prices under CAIR Ozone.

Because CAIR Ozone replaces the NBP, allowances issued under the NBP can be used under the CAIR Ozone program without flow control. The result is that the low allowance prices projected for CAIR Ozone, in turn, will affect NBP allowance prices. Specifically, the low allowance prices under the future CAIR Ozone provisions reduce the value of banking NBP allowances for use in complying with the CAIR Ozone. This, in turn, will drive down the NBP allowance prices in the coming years. Moreover, for owners of plants subject only to CAIR Ozone (plants in Massachusetts, Connecticut, and Arkansas), the burden of complying with the CAIR Ozone provisions will be relatively small compared to owners of plants subject to CAIR PM2.5.

In the following sections, we quickly review the key provisions under the current NBP as well as those under CAIR Ozone and CAIR PM2.5. We then evaluate how these rules interact with one another using our proprietary projections of NOx allowance prices to: (1) explain why we expect that CAIR Ozone allowance prices will be very low; and (2) discuss the implications from the

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