A federal regulation with more restrictive ozone season NOx emissions limits takes effect today, but compliance will be easier for covered power plants this year than initially anticipated.
With its federal "good neighbor" plan to address interstate transport of NOx, the US Environmental Protection Agency (EPA) wanted to put power plants in 22 states into a more ambitious version of its Cross-State Air Pollution Rule (CSAPR) Group 3 ozone season trading program and to eventually impose NOx limits on industrial sources in 20 states. The plan is designed to help downwind areas meet the 2015 federal ozone air quality standards. But regulatory delays and a series of unfavorable court rulings have upended the agency's plans, offering a lifeline to coal-fired plants that struggled with high compliance costs last year.
Argus last assessed Group 3 allowances at $4,250/short ton and Group 2 allowances at $1,000/st, their lowest prices in over a year. A Group 3 allowance cost as much as $48,000/st last summer.
First, EPA published its final regulation well into the current ozone season, forcing the agency to prorate emissions budgets and leaving Group 3 states with more generous NOx allocations this year. More recently, various federal courts have blocked the agency from enforcing its plan in 10 states as legal challenges play out.
Demand would have been constrained regardless, with NOx emissions down significantly during the first two months of ozone season because of falling coal-fired generation. But the many enforcement complications this year have further eased obligations for power plants during ozone season, which lasts from May through September.
NOx on the rocks
EPA has clarified compliance responsibilities in six states and said in a Wednesday memo that it will take further action to ensure that "the status quo is maintained" in other states subject to judicial stays. Assuming no further court orders, 12 states are set to participate in the Group 3 market this year with a collective NOx budget of 89,200st, about 7pc higher than initially intended.
Ten states should participate in the less-stringent Group 2 market this year, which was designed to help states comply with the 2008 ozone standards, including three that EPA had planned to keep in the group and seven that EPA planned to put in Group 3 this year. While there will be some unique trading rules in Kentucky and Louisiana, these 10 states should collectively have a NOx cap of nearly 151,200st, when they would have faced a more stringent cap of 127,400st had the new federal plan taken effect without any legal hiccups in May.
And three states — Minnesota, Nevada, and Utah — were supposed to join the ozone season markets for the first time but might not have any obligations this year because of the court orders.
One complication is that power plants that remain in Group 3 this year and exceed their initial NOx allocations could have a harder time finding allowances since fewer power plants will participate. Critics of more ambitious CSAPR rules have argued that stay orders benefiting some states are unfair to sources in other states, in part because there might be thinner liquidity in the Group 3 market than EPA expected.
"This significantly limits the availability of allowances and makes it more difficult for electric generating units to comply with the final rule's requirements," a coalition of industry groups said in a legal filing this week asking the DC Circuit Court of Appeals to stay implementation of EPA's plan nationwide.
The effects of this year's legal complications could also prove short-lived. If current plans hold, the agency will start annually recalibrating the allowance bank next year to reduce an oversupply of allowances, which should limit the long-term effects of many sources easily meeting obligations this year.
And the most stringent parts of EPA's regulation do not start until 2026, theoretically giving the agency enough time to resolve legal issues before its most ambitious plans take force. Coupled with the Biden administration's other efforts to transition to a zero-emissions grid, utilities will still have to weigh the high potential costs of CSAPR compliance later this decade when planning future generation.
