By Barclay Gibbs, Jake Zahniser-Word, and Dr. Ira Shavel
The Cross-State Air Pollution Rule (CSAPR) was stayed in December 2011 and vacated on Aug. 21, 2012.
The regulation that CSAPR was intended to replace, the Clean Air Interstate Rule (CAIR), has been in place since it was remanded without vacatur in December 2008. The shale gas revolution has had a large impact on relative fuel prices and consequently the U.S. power system’s dispatch.
Moreover, the EPA Mercury and Air Toxics Standards (MATS) are contributing to decisions to retire coal-fired generators.
As the legal challenges over interstate pollution transport policy continue, and the shale gas story unfolds, it is an interesting time to examine how SO2 and NOx emissions compare to both the CAIR and CSAPR caps.
Interstate Air Pollution Transport Policy background
The Clean Air Interstate Rule (CAIR) was issued in March 2005 as EPA’s solution to protecting downwind states’ ambient air quality. CAIR is a cap-and-trade policy that covers the SO2 and NOx emissions of 27 eastern states and the District of Columbia. SO2 and NOx emissions are precursors to secondary fine particulate matter, and seasonal (summer) NOx is a precursor to summer ground-level ozone.
After finding CAIR to have a number of fatal flaws and ordering EPA to vacate the rule in July 2008, the DC Circuit Court of Appeals decided to remand the rule without vacatur in December 2008. This action kept CAIR in place while requiring EPA to develop a rule responsive to CAIR’s flaws. A major flaw identified by the Court was a lack of state-specific emissions requirements. This meant that there was insufficient assurance that downwind states would be able to meet their National Ambient Air Quality Standards (NAAQS) for ozone and fine particulates. On July 6, 2011 – two and a half years after CAIR was remanded – the EPA issued the Cross-State Air Pollution Rule (CSAPR) as the replacement for CAIR.
Similar to CAIR, CSAPR would have established a cap-and-trade system for annual SO2, annual NOx, and ozone season NOx emissions. CSAPR’s geographic scope was somewhat different from CAIR and established two separate stringency-based trading groups for SO2 allowances (Group 1 and Group 2, with the former being more stringent). Before being stayed, CSAPR Phase I was scheduled for implementation during 2012 and 2013 and would have allowed unlimited interstate allowance trading within a group/policy. CSAPR Phase II, which was scheduled to begin in 2014, would have significantly tightened the caps and imposed assurance levels on individual states’ emissions, thereby restricting interstate trading.
On Dec. 30, 2011, the DC Circuit issued its ruling to stay CSAPR to provide more time for judicial review. The Court then vacated CSAPR in a 2-1 decision on Aug. 21, 2012 for two reasons: 1) upwind states were required to reduce emissions below the levels needed to bring downwind states into compliance with the NAAQS, and 2) states were not given an initial opportunity to implement the reductions required within their own borders. Instead, EPA specified the required reductions and simultaneously set forth Federal Implementation Plans. The Court rejected this approach. With the Court’s decision to vacate CSAPR, CAIR is left in place until the decision is overturned on appeal or yet another replacement rule is issued.
The CAIR caps are less stringent than those under CSAPR. If the set of states common to both policies are examined, the CAIR SO2 emissions cap is 10 percent greater than that under CSAPR in 2012 and 21 percent greater in 2015, the CAIR annual NOx emissions cap is 26 percent greater than the CSAPR cap in 2012 and 11 percent greater in 2015, and the CAIR seasonal NOx cap in 2012 is 14 percent greater than CSAPR and then approximately equals the CSAPR cap in 2015.
Natural Gas Developments
Outside of interstate transport rule policy, the natural gas outlook and other air pollution policy developments have already had significant impacts on the power sector. Sparked by widespread adoption of hydro-fracturing, the shale gas revolution has put large quantities of cheap natural gas on the market. The average price of natural gas at Henry Hub was $8.90 per MMBtu in 2008. By 2011, the average Henry Hub price had fallen to $4.00 per MMBtu and the current average during 2012 is lower still – around $2.50 per MMBtu. This has dramatically changed the economics for natural gas combined-cycle generators, which now have variable operating costs competitive with many coal-fired generators. The Energy Information Agency reported that, during April 2012, coal- and natural gas-fired generation was equal (on an MWh basis) for the first time since EIA began collecting the relevant data.
EPA’s MATS Policy
EPA’s Mercury and Air Toxics Standards (MATS) are putting further pressure on coal generators. MATS, set to be implemented over 2015 to 2017, caps emissions of mercury, acid gases, and particulates for existing and new coal units. The stringent emission limits require owners of many existing coal units either to retrofit them with pollution controls or to retire them. Some coal generators have already been retired, and owners have announced planned retirements of many more. Since the retiring units are generally those with the highest operating costs and, therefore, the lowest utilization, the overall emissions impacts of retirements are less significant than the retiring capacity on the system would imply.
Current Emissions Levels versus the Caps
Given the major changes in power sector economics and the uncertainties present in the interstate SO2 and NOx policies, it is interesting to examine how current emissions match up to the CSAPR and CAIR caps. Our comparisons provide perspective about how significant the CSAPR and CAIR policies are within the context of other key power sector drivers. Our approach is explained in the accompanying sidebar. We note that the banking mechanism allowed under the CAIR policy further increases the potential emissions from power plants, especially SO2 emissions for which the CAIR bank is sizeable.
The data show that emissions have decreased in 2012 to levels that are compliant with both the Phase I CAIR and CSAPR caps. All of the CAIR group caps are projected to be easily satisfied in 2012 and the allowance bank is likely to grow. Even with its stricter caps (and no existing bank balance), Phase I of CSAPR would likely have been satisfied in 2012. (See Figure 1.)
Although the EPA removed the restrictions on interstate trading in CSAPR Phase I, it is still informative to view state-level emissions in relation to their defined emission budgets. Our analysis shows that Ohio would have been the only state in SO2 Group 1 that would have exceeded its state budget in 2012; Texas would have been the only state to exceed its SO2 Group 2 state budget. Multiple states would have come close to exceeding or would have exceeded their annual NOx and/or seasonal NOx state budgets, but they would have required little or no change to status quo operations since the total policy-level emissions would still likely have been below the CSAPR caps in 2012.
Significantly tighter caps and restrictions on interstate trading under CSAPR Phase II would have required actual operational changes by the states in comparison to 2012. States in SO2 Group 1 would have required the most changes to comply with their individual assurance levels (shown by the black bars in Figure 2) and the group level cap (also see Figure 2). Our analysis shows that generators in Ohio, Indiana, Pennsylvania, Illinois, Kentucky, and Michigan would have had to significantly decrease their SO2 emissions from 2012 levels in order to be compliant under CSAPR Phase II. These states, spanning PJM, MISO, and non-RTO regions, rely heavily on coal-fired generation.
Regarding annual and seasonal NOx emissions, both CSAPR Phase II policies would have been met, though Missouri would have required small changes to status quo operations in order to comply with its individual assurance level for annual NOx and seasonal NOx, and Oklahoma would have required changes to comply with seasonal NOx. Compliance strategies for those states needing to decrease their SO2 and NOx emissions would have included retrofitting or retiring units as well as purchasing allowances from other market participants.
Importantly, no states require operational changes from 2012 status quo to meet the 2015 CAIR caps. We project that the 2015 caps will be met in 2012.
Finally, we note that CRA’s detailed modeling results (not discussed in this article) are generally consistent with the results reported here. The CAIR policy (Phase I and Phase II) is relatively weak given today’s outlook for fuels pricing and pollution control decisions (now driven primarily by MATS). While CSAPR Phase I would also have been relatively weak at the group/policy level, CSAPR Phase II would have required substantial modifications to the power system and its operations, particularly in the SO2 Group 1 states.
“It is an interesting time to examine how SO2 and NOx emissions compare to both the CAIR and CSAPR caps.”
Explanation of Analytic Approach
Our analysis is based on EPA Air Markets Program Data. The EPA had released SO2 and NOx emissions data only for January through June of 2012 at the time of writing. In order to proxy state-level monthly emissions for the second half of 2012, we multiplied each of the July through December monthly 2011 actual emissions by the ratio of 2012 to 2011 total emissions through June. This generated proxy July through December 2012 data at the state level.
For our Phase II analysis (2014/2015), CRA did not reduce the 2012 emissions data to reflect those retrofits and retirements which are already planned to occur by 2014/2015. On the other hand, CRA did not increase the 2012 emissions data to account for emissions increases that would be expected to accompany higher electricity demand and higher natural gas prices by 2014/2015.
Barclay Gibbs, Principal, Charles River Associates, Energy & Environment Practice, [email protected]
Jake Zahniser-Word, Consulting Associate, Charles River Associates, Energy & Environment Practice, [email protected]
Dr. Ira Shavel, Vice President, Charles River Associates, Energy & Environment Practice, [email protected]
Charles River Associates (CRA) is a leading economics, finance, and litigation consulting firm headquartered in Boston, Mass. CRA’s Energy & Environment Practice specializes in power system economics, valuation, strategic and transaction analysis, infrastructure development, and energy regulatory matters that affect its clients. The authors of this article are experts in modeling environmental policies that affect the U.S. power sector.