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EPA's Winding Road

How we got here and what to expect.

Fortnightly Magazine - November 2011

they have also proved to be economically feasible as well, despite initial volatility in some market-based programs. Consider the history of the ARP, CAIR, and CATR. Figure 2 shows the initial allowance allocations and subsequent year allocations plus bank as compared to actual emissions.

The initial allocation of SO allowances under the Acid Rain Program was 8.74 million tons to the Phase I facilities. In the first year, actual SO 2 emissions from these units were only 5.3 million tons, creating an initial bank of 3.44 million tons of SO allowances in the second year of the program. The cap for the Phase I units decreased from 1995 to 1999, but never was lower than actual emissions from these facilities. This allowed the bank to continue growing.

Once the Phase II units were added in 2000, the bank began to decrease as total SO 2 emissions were greater than the total cap. This remained the case until 2006, when the SO 2 emissions became lower than the cap. This was due to a large number of SO 2 control systems installed at facilities in the 2004 through 2008 time frame, as well as a switch to lower sulfur coal. At the end of 2008, the bank of SO 2 allowances was just under 7 million tons. In 2009, it was expected that the bank would increase further due to more scrubber installations and no lowering of the cap. Under the CAIR program, this bank could have been used in that program. With the introduction of CSAPR, this bank will continue to grow as the SO 2 allowances are greater than current emission levels.

The NO x history is similar to SO 2, but not as extreme, and demonstrates the ability of these systems over time to stabilize prices. There was a bank of NO x allowances in the second year of the SIP Call program, but the ozone season NO bank never represented more than 18 percent of total allocations in the market. The SO 2 bank of allowances was as high as 50 percent of total allocations in the market.

Figure 3 illustrates historical emission prices for SO 2, NO x ozone season, and NO x annual. Most of the volatility in prices came at the time the new CAIR rule was being debated. The uncertainty around what the rules would look like drove SO 2 prices as high as $1,600 per ton. Prices stabilized in 2007 once the rule was finalized, but then dropped again in 2008 when the courts vacated the ruling. With the introduction of CSAPR, these prices won’t rebound.

GHGs and Regional Regulation

Until the very end of 2009, national greenhouse gas (GHG) regulation seemed inevitable. With the 2010 campaign and subsequent election of a Republican majority in the House of Representatives, the likelihood of federal GHG legislation passing has drastically decreased. Still, while legislation has foundered on a national scale, regional initiatives to reduce GHG emissions are being deployed in the Northeastern U.S. and in California. Both of these programs utilize cap-and-trade mechanisms.