Various approaches to distributing emissions allowances spark a heated debate over costs and fairness, but the allocation methodology doesn’t determine whether a regulatory scheme will reduce...
EPA's Winding Road
How we got here and what to expect.
Over the past few years, new regulatory requirements from the United States Environmental Protection Agency’s (EPA) Clean Air Act (CAA) and recently the Cross-State Air Pollution Rule (CSAPR) have led U.S. electric generators to make substantial investments in emission control upgrades to reduce emissions of sulfur dioxide (SO 2) and nitrogen oxides (NO x). Continued EPA activity, including anticipated regulation of mercury, toxins, cooling water and ash residue, is leading to even more significant action, such as the cancellation and delay in construction of new coal generation.
Understanding the current and forthcoming emission regulations—and accurately forecasting emissions prices and energy prices—will help electric generators make the correct investment decisions today.
Clean Air Past and Present
In emission markets, as with anything, to fully comprehend our current situation and accurately forecast the future, one must understand the past. Therefore, let us cast a backward glance over the last few years to outline the process that has led to today’s circumstances.
Historically, both EPA regulations and congressional legislation have focused on the use of cap-and-trade mechanisms to reduce emissions. Based on experience with these mechanisms in both small and broad scales, it’s an economically more elegant way to achieve reductions in a least-cost manner than the command-and-control type of measure put forth recently by the EPA. For instance, despite issues around price stability and abatement results in the first year of Europe’s Emissions Trading System (ETS) begun in 2005, in recent years the ETS has produced promising results. Prices of allowances have stabilized—especially relative to major fuel sources like coal, oil and gas. And, investments in clean energy in European countries such as Germany—whose clean energy sector grew by more than 75 percent in the last five years—clearly demonstrate that EU nations are making significant moves to reduce carbon emissions. 1
We don’t have to look to the European continent to see examples of successful cap-and-trade programs in action, however. There are numerous examples here in the US.
• Acid Rain Program: Title IV of the CAA, the Acid Rain Program (ARP), was initiated in 1995 to reduce emissions of SO 2 and NO x, the primary precursors of acid rain, from fossil fuel-powered generators. The first phase affected the 110 highest emitting plants in the United States. Phase II started in 2000 with tighter emission limits and extended the program to include nearly all fossil fuel-burning generators with a size of 25 MW or larger. The ARP’s main vehicle for implementation is a cap-and-trade program for SO 2 under which individual generators may exceed their emission allocation, but the system as a whole remains below the cap. Emission reductions achieved can also be banked for use in later years, allowing for a gradual adjustment of emissions for individual generators.
According to the latest results from the EPA, ARP units have reduced annual SO 2 emissions by 70 percent compared with 1980 levels and