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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

generating additions for each of 43 interconnected electric markets, the mix of retrofit pollution control equipment, the use of new and existing generating equipment, as well as power flows among the 43 markets. In the process of projecting the mix of new builds and retrofits, EPMM also projects capacity and energy prices for each of the markets along with allowance prices under the various federal, state, and regional emission cap-type of environmental regulations.

In terms of NPB, column 1 of Table 3 shows E&MC’s projections of NBP prices in the absence of both CAIR Ozone and CAIR PM2.5 emissions caps. For 2008, we project an NBP allowance price of $970 per ton (all prices are in 2005 dollars). Recent market transactions suggest a price of around $900 for 2008. We also project that NBP prices would decline through 2015 as SCRs and SNCRs are retrofitted to existing plants and new, more efficient generating equipment enters service. After 2015, we expect prices to rise and reach $1,030 per ton by 2025. Once again, these prices are in the absence of the CAIR Ozone and CAIR PM2.5 as shown in columns (2) and (3) of Table 3.

How does CAIR Ozone affect the NOx allowance market and allowance prices during the ozone season? As noted earlier, in the first phase of CAIR Ozone—2009 through 2014—the ratio of allowances to regulated capacity is lower than under the NBP, suggesting that CAIR Ozone will be more restrictive in its first phase than under the NBP.

Our analysis shows that CAIR Ozone would increase ozone season allowance prices above the levels that would occur under the NBP. We project a 2009 allowance price under CAIR Ozone of $2,070 per ton, which is more than twice the price that we project would occur under the NBP in the pre-CAIR NOx world. By 2025, we would expect that the prices under CAIR Ozone would be close to four times as high as the prices under the NBP. This can be seen by comparing columns (1) and (5) in Table 3. The widening of the differential would be expected since the cap under CAIR Ozone becomes more restrictive beginning in 2015.

Moreover, the CAIR Ozone provisions will affect the prices of allowances under the current NBP prior to when CAIR Ozone takes effect. The reason is that the expected high prices for allowances under CAIR Ozone relative to prices under the NBP provide a strong economic incentive to bank NBP allowances and use them to comply with the regulations under CAIR Ozone. Also, elimination of flow control further increases the benefits from retaining NBP allowances and using them to comply with CAIR Ozone. In this hypothetical world of the NBP being replaced only by CAIR Ozone, we project that NBP allowance prices for 2008 would be twice as high as they would be in the absence of the implementation of the CAIR Ozone program. This can be seen by comparing columns (1) and (4) in Table 3.

The New Environment

So, what does CAIR PM2.5 add to this brew of