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Clean Air Rules: A New Roadmap for the Power Sector

How new market-based regulations fit with today’s programs.

Fortnightly Magazine - June 2007

require additional reductions in 2015.

The Acid Rain Program will continue to operate in addition to the new regional CAIR SO 2 trading program beginning in 2010. (Title IV NO X requirements also remain unchanged under CAIR.) Sources will use Title IV SO 2 allowances to demonstrate compliance with annual CAIR requirements as well as with annual Title IV requirements. As a result, banked Title IV allowances can be used for CAIR compliance, and sources in all states subject to CAIR for SO 2 will be subject to two SO 2 trading programs that share the same currency. Under CAIR, however, one allowance does not always cover one ton of emissions. Instead, for purposes of CAIR, SO 2 allowances of vintage 2009 and earlier will each cover one ton of emissions; vintage 2010 to 2014 allowances will authorize 0.50 tons of emissions; vintage 2015 or later allowances will authorize 0.35 tons of emissions. These ratios are necessary to achieve the more stringent reductions required under CAIR, and render acid-rain compliance a foregone conclusion with CAIR compliance while maintaining the value of acid-rain allowances.

The NO X Budget Trading Program will cease to operate with the start of the seasonal NO X trading program under CAIR in 2009. As a result, sources in most CAIR states will be subject to two separate NO X trading programs, both for purposes of compliance with CAIR. However, these two programs will not share currency, as NO X allowances are not interchangeable between the annual NO X program, which comprises part of the PM2.5 control strategy, and the seasonal NO X program for ozone control.

EPA will provide NO X emission allowances to each state according to the state budget for each program. States covered by both programs will allocate both annual and seasonal allowances to sources (or other entities).

The CAIR seasonal NO X program allows the use of banked allowances from the NO X SIP Call, just as the CAIR SO 2 program allows the use of banked allowances from the Acid Rain Program. The annual NO X trading program includes a limited compliance supplement pool for early reductions in 2007 and 2008, or to address issues of reliability of electricity supply in 2009.

The structure of the CAIR programs and, in particular, the provisions allowing use of banked allowances from the Acid Rain and NO X Budget Trading Programs, exemplify EPA’s effort to ensure an orderly transition to CAIR’s trading programs and strongly encourage early reductions. There is a substantial incentive for sources to begin complying with CAIR immediately, and emissions already have dropped as a result. Preliminary data for 2006, the first year following CAIR promulgation, shows an 800,000-ton reduction in SO 2 emissions from 2005.

CAIR Market Projections and State Activity

SO2 prices have ranged between $450 and $550 over the last year, an increase from four to five years ago largely due to CAIR increasing the value of today’s allowances. EPA’s modeling during rule development projected that pre-2010 vintage SO 2 allowances would be worth approximately $736 per allowance in