Viewpoint: Legal woes to weigh on NOx allowances

Legal complications that have upended federal efforts to rein in ozone-forming pollution show no sign of abating, likely weighing further on Cross-State Air Pollution Rule (CSAPR) NOx allowances in 2024.

The US Environmental Protection Agency (EPA) finalized a "good neighbor" plan earlier this year to curtail interstate migration of NOx emissions that contribute to ground-level ozone and smog. It includes more-stringent CSAPR ozone season NOx caps for power plants. But various federal courts, responding to complaints that EPA acted unlawfully by rejecting state implementation plans for tackling the issue, have issued orders preventing the agency from enforcing new federal limits in 12 states — for now.

The orders have effectively shrunk the size of the CSAPR Group 3 NOx market and left more states than expected in the less-ambitious Group 2 market, which is tied to earlier ozone standards. Prices have plunged — particularly for Group 3 allowances, which peaked at $48,000/short ton (st) last year but were heard to trade for just $1,500/st in November. Power plants have found little reason to buy up allowances now when future compliance responsibilities are hazy and ozone season markets are well supplied.

Courts will provide more clues about the future of the CSAPR program in 2024, guiding EPA as it weighs state ozone plans it has not yet accepted, although progress could be staggered.

A significant decision is likely early in the year, with the US Supreme Court holding oral arguments in February to consider emergency requests to stay the plan nationwide. Lawyers say that it is rare for the court to schedule arguments in response to emergency petitions, which typically involve only written briefs and are handled quickly.

Federal courts have affirmed the legality of similar EPA regulations in the past, including the Supreme Court in 2014 and the US Court of Appeals for the District of Columbia Circuit earlier this year. Three judges on the current Supreme Court were in the 6-2 majority in the 2014 case, including chief justice John Roberts, while justice Clarence Thomas dissented.

Notably, that Supreme Court decision overrode a lower court order written by now-Supreme Court justice Brett Kavanaugh, who said CSAPR limits at the time overcontrolled emissions from upwind states.

Should the Supreme Court reject a nationwide stay, other courts could still add complexity to EPA's enforcement. Regional appeals courts that have temporarily blocked EPA's rejection of state ozone plans are weighing final decisions on varying timelines, creating the potential for contradictory orders, or at least decisions at different times next year.

"It will depend on what are the specific issues before the court, and what the court decides is the appropriate remedy," said Carrie Jenks, executive director of Harvard Law School's Environmental & Energy Law Program.

The courts could task EPA with taking a fresh look at the state plans or give states more time to revise their plans and submit new ones for review, she said.

The cases could resolve more quickly if they are transferred to the DC Circuit, which typically handles national Clean Air Act cases. But the other courts have so far resisted EPA's requests to do just that for the state plan cases. The DC Circuit is in the early stages of reviewing the federal plan's legality, but the court's current briefing schedule makes a final decision unlikely before next year's ozone season.

Stumbling blocks for NOx

As judicial stays effectively increase supply by keeping more power plants in the less-stringent Group 2 market, the faltering competitiveness of coal plants is simultaneously shrinking demand. Coal-fired generation dropped significantly in 2023, leading to an 18pc drop in ozone season NOx emissions among Group 3 power plants. The US Energy Information Administration forecasts a 10pc reduction in coal generation next year.

Absent a nationwide stay, obligations in the 10 participating Group 3 states will become harder in 2024 as more-restrictive budgets come into force, cutting the allowance supply by 8pc from its temporarily inflated levels this year and potentially putting upwards pressure on the record-low Group 3 price. EPA, targeting a Group 3 allowance bank that does not exceed 21pc of the states' 2024 caps, also plans to take thousands of unused allowances out of circulation next year.

But the threat of oversupply — a persistent feature of CSAPR markets, which also include annual programs for NOx and SO2 emissions — still looms large. Power plants in Group 3 emitted less than 49,200st during this year's ozone season, but they will have a budget of around 60,000 allowances next year. NOx budgets are not set to become significantly more stringent until 2026, and EPA might ultimately phase in the most ambitious provisions in particular states even if courts determine the federal plan is legal.

By then, CSAPR obligations could have less to do with the current legal fracas and more to do with which party prevails in the 2024 presidential election. Another term for President Joe Biden could mean new efforts to rein in power plant pollution and potentially tighter air quality standards for ozone, while Republicans have made no secret they see EPA rules, including the "good neighbor" plan, as regulatory overreach.

By Cole Martin