Acid Rain, Smog Rules to Spur CO2 Law, Traders Say

By Simon Lomax
(c) 2010 Bloomberg News
Monday, July 12, 2010; 12:00 AM

(Updates with Senate energy bill debate, Huetteman comments beginning in the eighth paragraph.)

July 12 (Bloomberg) -- The threat of power-plant closures under the Obama administration's planned limits on acid rain and smog pollution should revive efforts to pass legislation this year establishing a U.S. carbon market, an emissions trading group said today.

The rules, issued last week by the U.S. Environmental Protection Agency, "will increase the pressure on Congress to act" on legislation giving the owners of coal-fired plants pollution targets that are easier to meet in exchange for new limits on carbon dioxide, said David Hunter, U.S. policy director for the International Emissions Trading Association.

The Edison Electric Institute, a Washington-based trade association that represents power companies, has said the EPA's new acid-rain and smog regulations would require "dramatic" cuts in pollution from power plants.

The U.S. Senate is set to debate an energy bill this month. The proposals under discussion include cap-and-trade programs for acid rain, smog and carbon dioxide in which companies buy and sell a declining number of pollution allowances.

If Congress passes these cap-and-trade programs, a smaller number of the coal-fired plants that generate nearly half the electricity in the U.S. will likely have to be closed or upgraded right away, Hunter said in a telephone interview. The EPA was forced to issue tougher acid-rain and smog rules last week after a federal appeals court rejected a pollution trading plan put forward by the agency in 2005, he said.

"It shows the importance of Congress passing a clear law based on trading," Hunter said of the EPA's new rules. Without cap-and-trade programs for different pollutants, including carbon dioxide, "it gets to be a whole lot more expensive and you'll force premature closures" of power plants, he said.

The emissions trading group is based in Geneva and its members include Goldman Sachs Group Inc. and General Electric Co., according to its website.

A cap-and-trade plan to limit carbon dioxide and other greenhouse gases from nearly every sector of the U.S. economy narrowly passed the U.S. House last year. It stalled in the Senate as climate change took a back seat to overhauls of the health-care system and banking sector.

A group of Democrats, led by Senator John Kerry of Massachusetts, wants a revamped version of the House cap-and- trade bill included in energy legislation that Senate Majority Leader Harry Reid plans to bring up before lawmakers leave Washington in early August for a month to campaign in their home states before elections in November.

Reid, a Nevada Democrat, has said the energy bill will respond to the BP Plc oil spill in the Gulf of Mexico and boost "clean-energy" alternatives to fossil fuels like coal and oil.

Some Democrats are supporting a plan without carbon dioxide limits passed by the Senate Energy and Natural Resources Committee, which is led by New Mexico Democrat Jeff Bingaman, last year. The committee's bill would require utilities to buy more electricity from renewable sources like wind turbines and toughen energy-efficiency standards.

Kerry has offered to scale back the cap-and-trade proposal to the power sector, which accounts for roughly a third of U.S. greenhouse gases, to win the support of enough Democrats and Republicans to ensure that a carbon limit of some kind passes the Senate.

Bingaman, who supports carbon dioxide limits, has said he doubts a cap-and-trade program for power plants can pass this year.

Senator Tom Carper, a Delaware Democrat, has said a cap- and-trade law for power plants is still possible. Carper has proposed linking carbon dioxide limits with new requirements for acid-rain and smog pollution from power plants.

Carper's plan would cut power-plant emissions of sulfur dioxide, which causes acid rain, 80 percent and smog-causing nitrogen oxide 53 percent by 2018. Last week's proposed regulations from the EPA would cut sulfur dioxide emissions 71 percent and nitrogen oxide 52 percent by 2014 and impose limits on pollution trading.

Sulfur dioxide allowances, each representing one ton of the pollutant, have tumbled 39 percent to $5 on the Chicago Climate Futures Exchange since the EPA unveiled its proposed new regulations July 6.

This was "the last little fall off a very small cliff," said Thaddeus Huetteman, chairman of the Environmental Markets Association. Sulfur dioxide futures were trading on the exchange for about $300 a ton before the EPA's original plans were struck down by the U.S. Court of Appeals for the District of Columbia in July 2008.

The price crash in the existing cap-and-trade market isn't a "death knell for trading" in pollution rights, Huetteman said. Even if cap-and-trade legislation doesn't pass Congress this year, new federal regulations will spur lawmakers of both parties to support new laws that prevent sudden power-plant closures and create emission markets, he said.

© 2010 bloomberg.com