AIR POLLUTION:

Acid rain credits nosedive on CAIR concerns

Winning bids in U.S. EPA's annual cap-and-trade auction this week for pollutants that cause acid rain pollution plunged over uncertainty about federal policies for curbing power plant emissions.

Power plant owners, brokers and others participate in the auction, buying and selling allowances for the right to emit sulfur dioxide (SO2), a contributor to acid rain and a range of health problems.

This year, spot allowances -- those that can be used in 2009 -- sold for an average of $70 per ton, compared with last year's $390 per ton. And the advance allowances, which are good for seven years, sold for an average $6.65 this week, a steep decline from last year's average, $136 per ton.

The price drops reflect uncertainty about where EPA air regulations are headed after a federal appeals court last year sent the Clean Air Interstate Rule (CAIR) back to the agency for revision, said John Blaney, managing director of the climate and environmental strategies group at the consulting firm ICF International.

The Bush administration issued the CAIR cap-and-trade program in 2005 as a way to slash SO2 and nitrogen oxide emissions in the eastern United States. Because the rule involved banking SO2 allowances used under the acid rain program for meeting obligations under CAIR, average EPA auction prices shot up in 2005.

"CAIR changed the dynamic of what was happening in our acid rain program," said an EPA air office employee who spoke on background.

In 2005, EPA reported average spot SO2 allowances selling for $703 per ton and average seven-year advance allowances selling for $297.49 per ton. Those numbers were up from $273 per spot allowance and $128 per advance allowance in 2004.

But the U.S. Circuit Court of Appeals for the District of Columbia ruled last summer that CAIR's flexible cap-and-trade program to deal with the traditional air pollutants was "unlawful, because it does not connect states' emissions reductions to any measure of their own significant contributions."

In December, the court temporarily reinstated the program to avoid possible harmful consequences of having no program in place, but the judges told EPA to work quickly to craft a replacement program.

But with the future of a cap-and-trade program uncertain, power plants and emissions traders seemed hesitant to pay for emissions credits in this year's auction.

When the new rules -- which are likely to be more stringent than CAIR -- come out, "will you be able to use the banked allowances?" Blaney asked. "The fact that the SO2 prices are so low, I think, reflects the uncertainty about whether companies will be able to do that."

Other factors: economy, climate bill

Concerns about the economy and the uncertainty surrounding possible climate legislation also contributed to the low allowance prices, Blaney said.

With cash tight, investors are more reluctant to put it into something as uncertain as SO2 allowances, he said. And with climate change legislation a top priority for President Obama and Congress, industries are also waiting to see whether future laws to cut carbon emissions would also result in reduced SO2 emissions as a byproduct, he said.

Paul Tesoriero, director of emissions markets at Evolution Markets, said low electricity demand and a drop in natural gas prices were also likely factors in the price decline, because power plants are not emitting as much.

"The SO2 prices have plummeted for a variety of reasons, but having the regulatory uncertainty in the future is one of the big reasons," Tesoriero said.

Blaney predicted that regulatory uncertainty surrounding CAIR will likely result in fewer emissions reductions in the short term.

"This whole uncertainty about whether they can carry those banked allowances forward is going to be bad for the environment and bad for the U.S. economy because it undermines companies' willingness to make early reductions now and bank them forward," Blaney said.

Click here to see EPA's SO2 auction data.