By Robynn Andracsek, P.E., Burns & McDonnell and Contributing Editor
Cap and trade talk is all the rage in Washington, D.C. these days; but how should it work, does it work and will it work under the proposed climate change bill?
The basic premise behind cap and trade is that a line is drawn at a historical emissions tonnage level, which is then made the ceiling for all future emissions. Emissions below the ceiling become “allowances” and are traded like any other commodity. Over time the ceiling is lowered and fewer allowances are available. Individual power generation units pay to emit pollution, either by being granted allowances or by purchasing them. Units that reduce emissions can sell their reductions to other facilities. Thus, units are given a market incentive by being able to sell their allowances to other facilities, which can reduce payback times on emissions control projects.
The classic cap and trade example is Acid Rain, one of the most successful programs to come out of the Clean Air Act (CAA). The program’s goal was to reduce annual SO2 emissions by 10 million tons from fossil fuel-fired utility power plants greater than 25 MW. The program succeeded in driving SO2 below the target levels even as electricity production increased. Allowances under the program are well understood, available and well documented, allowing utility certainty in planning their compliance actions.
The “NOX Trading Program,” which encompassed both the Ozone Transport Commission NOX Trading Program and its successor, the “NOX SIP Call,” used a similar allowance program structure to reduce ozone season NOX emissions from utility power plants in 21 eastern states, until it was replaced and expanded by the Clean Air Interstate Rule (CAIR) NOX provisions at the end of the 2008 ozone season.
CAIR is a cap and trade program for both SO2 and NOX that tried to build off the success of the acid rain program and the NOX trading program. It addresses the problem of power plant emissions which drift into neighboring states. By reducing SO2 and NOX emissions, CAIR would help reduce transport of ozone and fine particulate (PM2.5) emissions in non-attainment areas. And then the lawsuits began. Two of the main issues were the fact that the Environmental Protection Agency was retiring Acid Rain allowances and that trading was allowed between states. In 2008, CAIR was vacated by the D.C. Circuit court, which pleased no one. Last December, the Court then reversed its own reverse and decided simply to remand the rule rather than vacate it. That means that “CAIR remains law while EPA develops its replacement” with the original deadlines in place. EPA is working on a replacement for CAPR and plans for a final rule by early 2011.
The legal back and forth has led to regulatory uncertainty for utilities subject to CAIR, as well as wide fluctuations in allowance prices. One example involves a Midwest utility and its recently cancelled plans to retrofit one of its units with low NOX burners and over fire air to reduce NOX emissions. CAIR’s revival in late 2008 caught the utility off guard and sent it looking for cost control measures. The NOX control project provided a way to reign in allowance costs and offered a two- to three-year simple payback. However, NOX allowance prices plummeted, extending the payback period to 10 or more years at a time of wide fluxuations in the Midwest power market, due in part to the national economy. The utility could no longer justify the project and it was cancelled. Plans now call for the utility to buy allowances until EPA rewrites the CAIR program.
Similar to CAIR was CAMR, the Clean Air Mercury Rule. Issued in 2005 and vacated in 2008, CAMR would have reduced mercury emissions from power plants through cap and trade. The major legal issue was whether EPA could move mercury from CAA regulation under Section 112 (hazardous air pollutants) to Section 111 (New Source Performance Standards). CAMR remains deceased, EPA having decided to develop power plant emissions standards under Section 112, consistent with the D.C. Circuit’s opinion.
And then there is carbon dioxide (CO2). Congress is debating legislation to regulate greenhouse gases through cap and trade. Under earlier cap and trade programs, utilities had a choice of proven pollution controls or a robust trading market which made it relatively certain allowances would be available. The general metrics to determine allowance pricing were fairly definable: weather, amount of fuel burned, cost of controls and the amount of pollution controls in service or being built.
The proposed climate change cap and trade program metrics are far less certain than previous EPA programs and raise several questions. What metrics will drive allowance pricing in an economy wide market? Will significant offsets be available? Will there be international competition for the international offsets? What will be the allowance costs?
CAIR’s trading program was found to be flawed in part because its region-wide focus on emission reductions did not factor in each state’s contribution to air pollution issues. Based on the legal challenges to CAIR and CAMR, it’s clear that Congress in writing CO2 legislation must embrace simplicity, accountability and transparency. CO2 cap and trade must be written robustly enough to withstand legal attacks and scrutiny on its international trading provisions. Let’s hope Congress writes legislation that continues to allow utilities to provide low cost, reliable and environmental friendly electricity.
Robynn Andracsek thanks Block Andrews, Burns & McDonnell, for his input to this column.