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Update on
Cap and Trade Programs
for SO2 and NOX
Presentation for
Environmental Markets Association
11th Annual Fall Conference
Clean Air Markets Division
U.S. Environmental Protection Agency
Office of Air and Radiation
November 9, 2007
Coverage of ARP and NBP
NOx Budget Trading
Program (NBP)
covers ozone season
(summer) NOx emissions
in selected eastern states
for fossil-fuel generator
units (and other large
stationary sources). There is
also partial coverage of MO,
MI, and AL. Earlier
northeastern program
Acid Rain Program (ARP) covers fossil replaced beginning in 2004.
generation annual SO2 emissions and NOx
emissions of coal-fired generators >
25MWe in contiguous U.S. (shown in blue
and red). Largest SO2 and NOx emitters
faced control in 1995 and 1996,
respectively; all others in program in 2000.
CAIR Sets Stage for CAMR and CAVR
CAIR Emission Caps*
(million tons)
2009/2010 2015
Annual SO2 3.7 2.6
(2010)
Annual NOx 1.5 1.3
(2009)
Seasonal NOx .58 .48
(2009)
*For the affected region.
CAMR Emissions Caps
(tons)
2010 2018
Annual Mercury 38 15
States not covered by CAIR, which are covered by CAVR CAVR
States controlled for fine particles (annual SO2 and NOx) Outside of CAIR Region – BART
States controlled for both fine particles (annual SO2 and NOx) and ozone (ozone season NOx)
States controlled for ozone (ozone season NOx) Note: All States are covered by CAMR
SO2 Forecast with ARP and CAIR/CAMR/CAVR
Annual SO2 Emission (1,000 t/yr)
National Emissions of SO2
Thousand Tons
10,000
8,000
6,000
4,000
2,000
0
2006 2010 2015 2020
Year
NOx Forecast with ARP, NBP, and
CAIR/CAMR/CAVR
Annual NOX Emissions (1,000 t/yr)
National Emissions of NOX
Thousand Tons
4,000
3,000
2,000
1,000
0
2006 2010 2015 2020
Year
Where We Are on Implementation…
• CAIR State Implementation Plans
– All States plan to utilize trading program
– EPA is transferring NOX allowances into facility accounts this Fall
• Allowances are already in for 3 states (IA, LA, TN)
• As additional states are approved, allowances will be transferred
• For a handful of States, EPA anticipates using the Federal Plan allocations
(Final CAIR FIP NODA was published on Friday, November 2, 2007)
• CAIR Federal Plan (FP)
– FP in effect June 2006
• Litigation
– All briefs have been filed for CAIR, CAVR and CAMR
– Oral arguments are not scheduled for CAIR or CAVR
– CAMR oral arguments scheduled for December 6, 2007
Advanced Pollution Controls for SO2 and NOX that Are Installed,
Committed to, and Projected for Coal-fired Generation
Gigawatts
Gigawatts
300 300
250 Projected
2020
250
Projected SCR &
200 2015 Projected 200 Scrubber
2020 Projected SCR &
Projected 2020 Scrubber
SCR &
150 Committed
2015
Projected
150 Scrubber
Projected
2007-2010 2010 2015
Committed
100 2007-2010
100 SCR
Committed
SCR SCR
2007-2010
50 Installed by
2006 Installed by 50 Scrubber Scrubber Scrubber
2006 Installed by
2006
0 0
Scrubber SCR SCR & Scrubber Total 2010 Total 2015 Total 2020
The left bar graph provides the amount of coal-fired steam capacity that has either Scrubbers, SCRs, or both technologies in place by 2006 (from EPA’s
NEEDs database 2007), committed to be operational from 2007-2010 (largely from 2007 survey results), and forecasted by EPA (using IPM) to be
operating by the end of 2010, 2015, and 2020, respectively. In 2006, 2010, 2015, and 2020, the total coal-fired capacity is 318 GW, 320 GW, 335 GW
and 373 GW, respectively. The right bar graph shows for 2010, 2015, and 2020 the amount of coal-fired steam capacity with Scrubbers, SCRs, or both
controls. Both bar graphs included existing and new generation capacity. Virtually all coal-fired generation units have advanced particulate control
systems. Some additional units will have SNCR controls and EPA expects virtually all of these units to have NOx combustion controls and the vast
majority of the “nonscrubbed” units to use lower sulfur coals.
Private SO2 Allowance Transfers
Market is healthy based on volumes year-to-date – on track to approximate last year’s volume.
Breakdown of Private SO2 Allowance Transfers 1994-2007*
25
20
12.3
9.9
9.8
12.9
Allowances, Millions
15 9.9
12.5 8.4
7.3 4.0 7.8
10 14.8
13.9*
3.8 12.7 12.6
11.6
5 8.3 9.5 10.0 9.5
7.9 8.1 7.5
6.2
4.4
1.9
0.9
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
Allowances Transfered Between Related Parties
Allowances Transferred between Economically Distinct Parties
*Note: 2007 data includes all private allowance transfers from 1/1/2007 through 9/30/07. Classification not available
Historic Cumulative SO2 Transfers
Overall private transfers now top 350 million tons through Q3-07
Cumulative Allowance Transfers 1994-2007*
400
350
SO2 Allowances (millions)
EPA Transfers to Account
300
Private Transfers
250
200
150
100
50
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
* Note: Data for 2007 includes tranfers through September 30, 2007.
Historical Monthly SO2 Allowance
Prices & Transfer Volume
December 2005 price spike was accompanied by low to moderate transfer volumes
Average Monthly SO2 Allowance Price and Transfer Volume
$1,800 2.00
$1,600 1.80
1.60
$1,400
Transfer Volume (millions)
1.40
Allowance price ($/ton)
$1,200
1.20
$1,000
1.00
$800
0.80
$600
0.60
$400
0.40
$200 0.20
$0 0.00
Mar -94
Mar -95
Mar -96
Mar -97
Mar -98
Mar -99
Mar -00
Mar -01
Mar -02
Mar -03
Mar -04
Mar -05
Mar -06
Mar -07
Daily SO2 Allowance Spot Price
A detailed look at the last 2½ years finds prices are down following the
December 2005 price spike and relatively stable
Daily SO2 Allowance Spot Price for Promt Vintage
January 2005 - September 2007
$1,800
$1,600
$1,400
Price per Ton (dollars)
$1,200
$1,000
$800
$600
$400
$200
$0
5
6
7
200
200
200
Date
Data based on Cantor-CO2e MPI
Forecasted & Actual SO2 Allowance Prices
Current SO2 market compares favorably to forecast
EPA’s Forecast of Annual SO2 Allowance Price
Projected Price of an SO2 Allowance for CAIR Sources ($2006)
1000
900
$868
800 1 to 1 vintages
700
600 $671
$ /to n
500 $533 $434
400 $336
2 to 1 vintages
300
200 $267 $305
$235 2.86 to 1 vintages
100
0
2010 2015 2020
Historical NOX Allowance Prices (spot)
NOX Budget Program NOX Allowance Spot Price (Prompt Vintage)
January 2005 - September 2007
$4,000
$3,500
$3,000
Price ($/ton)
$2,500
$2,000
$1,500
$1,000
$500
$0
05
05
05
05
11 05
5
06
06
06
06
11 06
6
3/ 07
07
07
07
07
00
00
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
/2
/2
3/
3/
3/
3/
3/
3/
3/
3/
3/
3/
3/
3/
3/
3/
3/
/3
/3
1/
3/
5/
7/
9/
1/
3/
5/
7/
9/
1/
5/
7/
9/
Date
Notes:
1. Data Source: CantorCo2e's Market Price Indicator (MPI). See www.emissionstrading.com
2. Prompt vintage is the vintage for the "current" compliance year.
Historical 2009 CAIR NOX Annual Allowance Prices
$8,000
$7,000
$6,000
Price, $/ton
$5,000
$4,000
$3,000
$2,000
$1,000
$0
7
7
7
7
7
7
7
7
00
00
00
00
00
00
00
00
/2
/2
/2
/2
/2
/2
/2
/2
23
17
31
14
28
11
25
/9
10
/
7/
7/
8/
8/
9/
9/
10
Date
Source: CantorCO2e (www.emissionstrading.com)
Forecasted & Actual
CAIR Annual NOX Allowance Prices
EPA Projected Prices for October 2007 Spot Market
CAIR Annual Allowances Price Ranges
(2006 Dollars)
$3,900
$3,691
$1,716
$1,441
$1,144
2009 2015 2020 2009 CAIR Annual
CAIR Annual Allowance Market
Sources: Forecasted price, EPA, 2006; Spot market prices, CantorCO2e (10/1-10/23/2007).
CAIR Annual NOX Allowance Prices
• Fundamentals suggest to EPA that prices for 2009 annual NOX allowance
should be between $1,500 to $2,000 per ton
– Influenced by recent increases in capital costs
• Industry reports of capital costs doubling on some projects
• Labor and materials cost increases and shortages
• Competition for scarce resources
– NOX, SO2 and mercury programs implemented nationwide
– Demand from China and elsewhere
• Current market not driven by cost fundamentals
– A 400% capital cost increase would be needed for an SCR installation to approach
$3,000 per ton NOX removal (when compared to current IPM inputs)
– Risk aversion and lack of trading activity seem to be driving the market today
• Classic case of too much demand, too little supply
• Access to allocations may ease this pressure
Recent Market Events
• EPA market tracking and analysis of allowance holdings suggests no one
dominates the emission trading markets. FERC monitors this market and
shares EPA’s view
• EPA sees effective markets for SO2 and NOX allowances, although
participants note that relatively modest changes in the levels of trading
volumes tend to cause very noticeable allowance price changes
– E.g., new entrants acquiring positions.
• When there are “unanticipated” price movements, the markets work and
correct themselves over time
• On September 17, Senator Levin (D – MI) introduced a bill that could
enhance regulation of commodities “from the burning of fossil fuels”
including “carbon dioxide and sulfur dioxide”
• On September 18, the Commodities Futures Trading Commission
(CFTC) held a hearing on the potential for enhanced oversight of energy
markets, including emission markets
• On October 24, the House Committee on Agriculture, which oversees the
CFTC, held a hearing on oversight of Exempt Commercial Markets (ECMs)
Visit the Clean Air Markets Web Site
• Emissions data
• Allowance transfers
• Information on the acid rain and NOX
trading programs
• Program rules and guidelines
• Studies and reports
• NEW Google maps interface!
Clean Air Markets Division
www.epa.gov/airmarkets
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