|
SO2 trading
NOx trading
CO2 trading
3-P and 4-P
New Source Review
The US is the only major world economic power that did not enter
the Kyoto agreement mandating greenhouse gas (GHG) emissions reductions
for all signatories based on their 1990
GHG levels. The central division between the US and its critics
concerns whether or not to set firm controls over emissions of
carbon dioxide (CO2). The US continues to reject the Kyoto
Protocol primarily because of its strict mandates over CO2
emissions.
US President George W Bush has consistently rejected the Kyoto
Protocol on the grounds that it would hurt the US economy. A large
chunk of any costs incurred by cutting CO2 emissions would land
at the feet of the US' giant coal-fired generation industry. Coal
generates just over half of all US electricity. Instead, Bush
said the US would control different emissions under its own environmental
policies.
US environmental policy has long been complicated by interwoven
federal and state jurisdictions over pollutant sources. The Bush
Administration sought to put its stamp on the policy with the
Clear
Skies Act (CSA), still pending in congressional committees.
The CSA would integrate, and establish countrywide for the first
time, federally mandated cap-and-trade programs for sulfur dioxide
(SO2), nitrogen oxide (NOx) and mercury. It would not limit CO2
emissions.
By keeping CO2 off the agenda, the administration has won over
few fans among environmental pressure groups. The administration
also angered the groups in August, when the Environmental Protection
Agency gave "regulatory certainty" to power plants and
other industrial emitters by adding definitions of maintenance
to its New Source Review (NSR) rules. The rules now allow maintenance
and component replacement costing up to 20% of a unit's value,
as long as basic design and operational parameters remain unchanged.
Maintenance had been undefined in NSR, leading to legal battles
since work beyond maintenance triggers costly requirements for
full compliance with air quality standards applicable to new plants.
But concern for the environment appears to have fallen in importance
among US voters in the run up to the 2004 presidential elections. Terrorist
attacks, the US-led wars in Afghanistan and Iraq, the US' sagging economy
and resurgent fears for the future of US medical care are dominating the
political discussion.
SO2 trading
The EPA oversees nationwide emissions trading for SO2
and NOx. Under its Acid
Rain Program in the Clean
Air Act Amendments of 1990, the EPA set a goal of reducing
SO2 emissions by 10-mil mt below 1980 levels and then keeping
emissions under the 1980 levels.
To achieve these goals, the 1990 amendments to the Clean
Air Act directed the EPA to design a trading program in SO2
emission allowances. Under the program, emitting facilities are
allocated allowances, which each permit emission of one short
ton of SO2, based on their historical fuel consumption and a gradually
reduced emission rate.
Every year, about 3% of allowances are held back and sold in
an auction administered by the Chicago Board of Trade. The program
also has a reserve of allowances it sells to companies at a fixed
price of $1,500 (in 1990 dollars, adjusted for inflation every
year). Each allowance permits a unit to produce 1 mt of SO2 during
or after a specified year. Allowances may be bought, sold, or
banked for future use. If a plant's annual emissions exceed the
number of allowances held, the owners must pay a $2,000 penalty
(also in 1990 dollars and adjusted for inflation) per excess ton
of emissions.
Most generating facilities have adjusted to the SO2 control regime,
adding sulfur controls or shifting the types of coal used, and
allowances were trading for less than $200 in the fall of 2003.
Click here for Platts emissions
indexes.
Through the end of 2001, more than 17,000 transfers had taken
place (both within participating entities and between entities),
involving more than 133-mil allowances. The program began operating
in 1994. In that year, 66 transactions took place between "economically
distinct" organizations, exchanging 0.9-mil allowances. In
2001, 2,330 such transactions took place, transferring 12.6-mil
allowances. That figure was slightly down from the 2,889 transactions
and 12.66-mil allowances transferred in 2000—the most active
year on record for the program.
The General Accounting Office (GAO) projected the allowance trading system
could save as much as $3-bil/year, or more than half the cost of meeting
the standards, the economic report said. Some analysts believe this number
is inflated.
NOx
trading
NOx emissions trading plans were first created in 1994 by a group
of 12 states (including Washington, D.C.), called the Ozone Transport
Commission (OTC). Trading began in 1999. EPA has expanded NOx
limits further with two programs: meeting petitions of downwind
states for pollution limits in upwind states under Rule 126, and
the 1998 issuance of the State Implementation Plan (SIP) Call
for much of the eastern US. The programs have endured substantial
litigation and vary in the states covered, and the EPA is now
trying to integrate the resulting regional trading programs.
The programs limit the amount of NOx that generating plants and
larger industrial boilers can emit during the prime ozone season,
May-September. Each allowance permits one short ton of NOx emissions.
The OTC was created under the Clean Air Act Amendments of 1990
to help states in the Northeast and Mid-Atlantic region meet the
National Ambient Air Quality Standard (NAAQS) for ground-level
ozone. Ground-level ozone, generally known as smog, is formed
when NOx and volatile organic compounds (VOC) react with sunlight,
aggravating respiratory conditions like asthma and damaging agricultural
crops, forests and buildings.
As of May 1, 2003, generating facilities in six of the 12 OTC
states and six new states were limited under the Rule 126 program
to average emissions of 0.15 lb/MMBtu of NOx, or a total of 143,000
tons. On the same date, the limits in the OTC states were lowered
from their initial level, effective in 1999, of 0.35 lb/MMBtu
to 0.15 lb/MMBtu.
On May 31, 2004 -- a deadline put off a month because of litigation
and delays in getting state plans approved -- another four states,
or portions of them, will become subject to the summertime NOx
limits, and two more on May 31, 2005, for a total of 21 eastern
states and Washington, D.C. in the SIP Call program, and 24 states
and Washington under NOx limits in at least one of the three programs.
The OTC NOx Budget Program was designed to imitate the generally
successful SO2 trading program created under the Acid Rain Program.
According to the 1999-2002 progress report on the NOx Budget Program
from the EPA and the OTC, "NOx Budget sources have reduced
their ozone season emissions approximately 60% below 1990 baseline
levels, well under target levels. Deep reductions have occurred
in all states across the region." In total, the EPA/OTC progress
report found that by 2002, sources covered by the NOx Budget Program
had reduced emissions by 280,000 tons during ozone season.
Prices for NOx allowances rose substantially early in 2003, particularly
for 2004 vintage allowances, as newly affected generators in particular
tried to ensure they were covered. Generators have until each
year's end to "true up" their allowances with actual
emissions. A recent
study by Platts' Research & Consulting (PR&C) warned
prices may stay high because there appears to be a shortage of
NOx credits for 2004 in particular, which is expected to lead
to more facilities adding selective catalytic reduction (SCR)
to their plants to reduce NOx emissions.
PR&C does note that SCR has unanticipated benefits: it removes more
mercury than expected, so facilities with SCR will be in a better position
should the Bush administration's "Clear Skies" or another program
with mercury limits take effect.
CO2
trading
While the US government has not legislated carbon limits or
carbon trading plans, some companies are taking steps toward creating
and trading carbon dioxide credits in hopes of eventually entering
a larger world market. The most recent attempt is a voluntary
carbon trading market project, the Chicago
Climate Exchange (CCX). Despite an initially promising list
including many of the US' largest energy companies, American Electric
Power was the only major energy company to sign up as a founding
member of the venture in 2002. Other founding members include
DuPont, Ford Motor Co, Manitoba Hydro and Waste Management, Inc.
Interest may have waned as the Bush administration has persisted
in maintaining that CO2 controls, especially in the shape of the
Kyoto Protocol, are just not on its agenda.
The CCX's stated goal is to reduce participants' greenhouse gas
emissions by 5% below 1999 levels over five years. The countries
that ratified the Kyoto Protocol must reduce emissions of carbon
an average of 5.2% below 1990 levels during the five-year period
2008 to 2012.
Trading was launched Sep 30, 2003 with formal auction of 100,000
2003 allowances and 25,000 2005 allowances, all withheld from
an initial allocation among CCX members. With no guarantee that
the credits being sold would be recognized in any future government-sponsored
regime, the offered credits went for less than $1/metric ton.
(With members from Canada, Mexico and Brazil, the CCX is working
in internationally recognized metric tons, rather than the short
tons more common in the US.)
Carbon trading is developing in Europe only under government
mandate, and many experts believe that unless the US government
also sets legal limits on greenhouse gas emissions, an active
trading market won't develop. The leader of the CCX project, Dr
Richard Sandor, chairman and CEO of Environmental Financial Products
LLC, testified before the US Senate Committee on Environment &
Public Works' Subcommittee on Clean Air, Wetlands & Climate
Change Jan 29, 2002, about the feasibility of his project. Read
more about Dr
Sandor's testimony.
The CCX says it has given itself until 2006 to secure commitments and
trading by participants, and hopes to expand international participation
as well.
3-P and 4-P
There is no shortage of proposals that include emissions trading
in front of the US Congress, with many featuring multipollutant
trading. They're generally divided into those involving SO2, NOx
and mercury, or 3-P proposals, and those that also include carbon
trading, or 4-P bills.
Differentiators among the bills are not just how much they propose
to reduce various pollutants, but the timing of reductions. Some
stretch out well beyond 10 years. The energy industry is far from
united on these proposals, which inherently affect the competitive
positions of generating fuels and of generators, depending on
their fuel mixes.
As the PR&C study summarized, generators vary on whether
carbon should be included in emissions caps, but generally hope
for "longer compliance deadlines, flexible cap-and-trade
programs, reduced compliance costs, regulatory certainty, no stranded
investments in pollution control technology, and distinctions
between the eastern and western parts of the US. The environmental
community would like to see earlier compliance deadlines, emissions
caps equal to or more stringent than existing regulations, a 4-P
rule…and no tradable allowances for mercury."
Chief among the 3-P bills is the Clear
Skies Act, introduced by Senator James Inhofe of Oklahoma
for President Bush. The Clear Skies bill has been introduced twice,
first in July 2002 and then in February 2003, but in neither case
has Congress passed it, and Capitol Hill staffers don't expect
it to even be reported out of committee this year, though Inhofe,
a powerful committee chairman, has said he wants it voted.
Clear Skies calls for reduction of SO2 by 73%, of NOx by 67%,
and of mercury by 69%, all by 2018, with intermediate caps for
NOx of 2.1-mil tons in 2008 and 1.7-mil tons in 2010. Carbon reductions
are not required, and some older industrial facilities continue
to be grandfathered. It would expand multipollutant trading to
the entire US in two zones, an eastern-central zone and a western
one, and terminate the NOx SIP Call trading program in 2008. The
Bush Administration has consistently argued that cap-and-trade
programs represent a more "efficient" form of environmental
regulation than the command-and-control style regulation represented
by New Source Review, making emissions trading a critical element
of its environmental policy.
A typical entry among the 4-P bills was legislation introduced
in September 2003 in the House of Representatives by Reps. Charles
Bass of New Hampshire, Jim Davis of Florida and Jim Cooper of
Tennessee and identical to "The Clean Air Planning Act"
introduced in the Senate by Delaware's Tom Carper earlier in the
year. The bill aims to cut power plant emissions of SO2, NOx and
mercury by 80% by 2013 while holding carbon dioxide to 2001 levels.
The measure includes a cap-and-trade provision.
Carper's proposal was originally an amendment to the Clean Power
Act introduced in 2001 and 2003 by Senators Jim Jeffords of Vermont
and Joe Lieberman of Connecticut. That bill has no grandfathering,
orders substantial cuts in SO2, NOx, mercury, and CO2 by 2007,
and allows no trading for mercury. Carper's amendment would have
phased in trading for all four emissions between 2008 and 2015.
None of these bills was expected to pass in 2003 either, as members focused
on getting through other legislation that's closer to passage, including
a comprehensive energy bill.
New Source Review
New Source Review was created as part of the 1977 Clean Air Act
Amendments, and NSR remains one of the biggest enforcement tools
in EPA's arsenal. It can be invoked even if a generator is meeting
air pollution limits with technology or with a trading program.
Under NSR, all new power plants and refineries must incorporate
the best pollution abatement technology available at the time
of construction—and if existing plants make significant
modifications, they also must add state-of-the-art pollution controls.
But the definitions of key terms like "new," "maintenance"
and "substantial upgrade" have been heavily contested.
Power generators have long complained that the government can
decide long after maintenance was performed that facilities should
have been upgraded and initiate costly lawsuits and enforcement
actions. Moreover, they say, the lack of any intermediate step
allowing older facilities to cut just part of their pollution
means many older facilities are not improved at all.
In his most recent economic report to Congress in February 2003,
President Bush agreed. He said, "NSR impedes or results in
the cancellation of projects that would maintain or improve the
reliability, efficiency, or safety of existing power plants and
refineries … The NSR permit process can add more than a
year to the time needed to review proposed modifications to a
plant and can cost over $1-mil. Such obstacles might lead firms
to delay or forgo plans to modernize their facilities in ways
that would benefit the environment."
But environmentalists have claimed generators evaded the law
by classifying major renovations as "maintenance." In
the late 1990s, the Clinton administration EPA took a number of
generators and refineries to court, claiming they had substantially
modified their plants under the guise of "maintenance."
Some have settled and agreed to improvements costing more than
$1-bil, while others are still fighting the lawsuits in court.
The Bush administration EPA in August 2003 tried to settle the
question by issuing definitions of maintenance it said would provide
"regulatory certainty." They allow component replacement
and repairs as long as the basic facility design remains the same,
total emission limits aren't exceeded, and the value of the work
doesn't exceed 20% of the facility's capital value. This appears
to allow upgrading to improve the efficiency and utilization of
units as long as their nominal capacity isn't increased.
Added to an NSR revision published Dec 31, 2002, which among
other things allowed facilities to set their own air emission
baselines based on actual emissions in a 24-month period during
the past ten years, the NSR changes under the Bush administration
have been fiercely controversial. A number of states are indicating
they'll take advantage of federal provisions allowing individual
states to adopt stricter rules than those in the federal law.
First up was California, which in a matter of weeks after the
EPA's decision enacted legislation barring the state's air pollution
control districts from adopting the new EPA definitions. Other
states have indicated they'll follow.
The stakes are not small: PR&C found some 38% of the installed US
coal-fired capacity was constructed prior to 1971. Many of those units
are not the most efficient in generators' fleets and produce power only
on margin in deregulated markets. NSR requirements for expensive retrofits
could precipitate generator decisions to shut that capacity down.
|
Printer-friendly format