Title IV has two phases. Phase I specifically affects 256 coal and 5 oil units during the period 1995-1999. These units, the largest producers of SO2 emissions in the United States, will be subject to an annual tonnage cap calculated from the average heat input at each unit during the period 1985-1987 multiplied by 2.5 pounds of SO2 per million British thermal units. Phase II begins January 1, 2000, and affects all utility fossil units with a capacity greater than 75 megawatts. In this phase, the average 1985-1987 heat input is multiplied by 1.2 pounds of SO2 per million Btu to arrive at each unit's cap.
While the original Clean Air Act of 1970 and its first amendment in 1978 rely on "command and control" regulations, the CAAA relies on market controls. That is, each unit is annually assigned a number of "allowances" equal to its SO2 emission cap (one allowance for each ton of SO2). If the unit overcomplies, it may sell its surplus to an undercomplying unit, or "bank" the surplus for future years. The EPA is not concerned with how utilities reduce emissions, as long as at year's end they submit a number of allowances equal to their total emissions (notwithstanding any superseding regulations).
The big surprise for 1995 is that the number of banked surplus allowances will reach a staggering 4 million by year's end (em over 40 percent of all allowances allocated this year. The second big surprise is that the 1995 allowance allocation will easily exceed 9 million by the end of December (em far above the original base allocation of 5.7 million allowances (8.7 million have been allocated as of September). The additional allowances come from Phase I programs that assign extra allowances to units that retrofit scrubbers, and that allow utilities to elect Phase I status for units that would otherwise only be affected under Phase II.
This year, 1.35 million allowances have been allocated to utilities that plan to comply with Phase I by retrofitting EPA-approved emission reduction technology (i.e., scrubbers). The purpose of the extra allocation is to give utilities two extra years to install retrofits. However, utilities planning to scrub have brought their equipment on line in 1995. The 27 Phase I units scrubbing in 1995 will reduce emissions from 1.6 million tons in 1993 to 165,000 in 1995, banking about 750,000 allowances through overcompliance and another 1.35 million through extension windfalls.
As of September, EPA had assigned 1.14 million allowances to Phase II units electing Phase I status. By changing status, these units may generate surplus allowances for use during Phase II, when compliance will be more difficult. While the EPA expected a number of utilities to take advantage of this option, the response has been overwhelming: 350 units have been approved by EPA for Phase I election status (em one-third more than the 265 original Phase I units. Clearly, Phase I compliance is neither expensive nor difficult.
Although the CAAA prompted utilities to test burn low-sulfur western coals, coal plants have shifted to that supply region primarily for economic reasons. Coals from Wyoming and other western states are simply cheaper on a cents per million Btu basis than coals from the high-sulfur Illinois Basin states. Thus, many utilities are able to reduce their fuel costs and generate surplus allowances through overcompliance (em in effect, another windfall.
RDI projects that the Phase I bank may reach 15 million by 2000, more than the 9.5 million allowances that will be allocated that year. Massive overcompliance is flooding the market with allowances, which will depress allowance pricing and lower compliance costs through at least the end of Phase I. Market forces will not easily alter this trend because so much of the surplus derives from economics unrelated to the allowance market. The bottom line: CAAA market controls are producing superior compliance results at a minimal cost. t
Todd Myers is a senior consultant and Pamela Custode a senior associate at Resource Data International, Inc., an energy industry consulting and information management firm specializing in market and competitor analysis.
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