ERCs
are used for offsets in various areas, which do not meet EPA’s
national ambient air quality standards (NAAQS). There are
a variety of air pollutants such as nitrogen oxides (NOx),
Volitile organic compounds (VOC), Carbon Monoxide (CO), Particulate
Matter (PM), and reactive organic gases (ROG). Each region
has different requirements for what constitutes a minor or
major source in relation to the various types of pollutants.
The threshold for these pollutants are regulated under NRS
(New Source Review) Typically Non-Attainment Areas have Environmental
Contribution ratios, which contribute directly to the improvement
of Air Quality.
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NOx Allowances
After
encompassing only 11 northeastern states and the District
of Columbia for nine years, the original Nitrogen Oxide (NOx)
trading program was superseded by the Federal NOx Budget Trading
Program (NOx SIP Call) on May 1, 2003. The changes include
an expansion in scope of the program to include 19 states.
Additionally, the new NOx SIP Call program calls for the number
of effected sources to be increased from 300 to 1,500 and
the number of allowances to be expanded from 135,000 to approximately
500,000 tons per year.
The
new NOx SIP Call program requires effected sources to make
35-40% reductions in their current levels of emissions as
emission standards are lowered from 0.23 lbs NOx/MMBTU to
0.15 lbs NOx/MMBTU. However, due to lawsuits filed against
the EPA in response to the expansion of the program, sources
in 11 of the 19 affected states will not be required to control
NOx levels until May 1, 2004. Nonetheless the sources in these
states will be required to control NOx to the same levels
as sources in the eight states that began the program in May
of 2003.
The
respective effected states will be responsible for implementing
the federally mandated NOx program. This in turn implies that
differences will exists in the approach that the NOx program
is implemented. Of the 19 affected states only 15 have finalized
regulations and allocated allowances. The remaining four states
are either revising their regulations or have not had their
regulations publicly enforced. The differences in implementation
include the allocation schedule and methodology. While some
states allocate allowances up front to the affected sources,
others allocate allowances a year at a time. In order to soften
the blow of compliance for the first two years a compliance
supplement pool was created. Essentially this is a cache of
credits only available for the first two years of the SIP
Call program.
The
table below is a summary of the different allocation schedule
of the effected states:
The
first NOx SIP Call trade between a steel company and an energy
marketer was a “forward settling” “stream
trade” at an average price per allowance of $3,700 per
ton. Several of these “stream trades” occurred
before a “spot” market of 2003 and 2004 vintage
allowances developed. Pricing of 2003 and 2004 vintage allowances
seemed to favor the 2004 vintage allowances until participants
discovered that 2003 vintage allowances could be used for
2004 vintage compliance.
Due
to the recent implementation of the NOx SIP program and the
fact that only eight states are participating in trading,
the volume of trades is not substantial. Furthermore, the
impact that NOx allowances prices on other energy markets
such as power, gas, oil and coal is attracting new field of
speculators to the emissions markets. The trade of predilection
appears to be options with a total quantity near 15,000 tons
traded in the last 12 months.
The
NOx SIP trading pricing appears to approach the initial EPA
estimates of $2000 to $2500 per ton as of 2007 vintages. This
is due in fact that few companies are positioned to pay today
for compliance three to four years out. Furthermore, the 2007
price reflects the view that all announced control equipment
installations will be up and running by that time.
With
its higher compliance costs, seasonal nature, shorter compliance
period and related higher price volatility, the NOx market
requires more active asset management than other environmental
markets.
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SO2
Emission Allowance
SO2
Emission Allowances are fully marketable commodities of the
EPA’s Acid Rain Program, which is a component of the
Clean Air Act that was created to achieve significant reductions
in the emissions of sulfur dioxide (SO2) and nitrogen oxide
(NOx). Under the Acid Rain Program, SO2 emissions in the U.S.
must be reduced by 10 million tons below the 1980 emission
levels, which effects nearly every major fossil fuel-burning
electric production facility in the country.
