NOX Control Costs and Allowance Prices: Expectations and Outcomes

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NOX Control Costs and Allowance Prices
Expectations and Outcomes

• Alex Farrell
• Department of Engineering and Public Policy
• Carnegie Mellon University
• Support National Science Foundation
• afarrell_at_andrew.cmu.edu
• http//hdgc.epp.cmu.edu/

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Expectations

• Achieve public policy objectives
• Control costs
• Engineering economic studies
• Allowance prices
• Deterministic simulation models
• Marginal costs at equilibrium conditions with
  perfect information

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NOx Control Cost Forecasts

• STAPPA/ALAPCO (1995)
• 1,300 to 2,300 (0.15 lb/mmBTU, seasonal
  control)
• OTAG (1997)
• 600 to 4,000 (0.30 to 0.20 lb/mmBTU, seasonal
  control)
• NESCAUM (1998)
• 800 to 3,500 (0.15 lb/mmBTU, seasonal control)
• All estimates given in /ton NOX

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OTC NOx Allowance Price Forecasts

• ICF
• Phase 2 1,700
• Farrell, Carter and Raufer (1999)
• Phase 1 1,350
• Phase 2 2,100-2,500
• EPA (OTAG estimate)
• 800 - 1,150

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OTC NOx Market Data

• Whats available ?
• EPA data - NOX Allowance Tracking System (NATS)
• Broker/Trader data - some price information and
  some analysis
• Whats missing ?
• EPA data
• Forward transactions and derivative products
• Inter-company trading
• State programs (e.g. ERCs)
• Broker data
• Verification and completeness
• So what ?
• Increased uncertainty
• Only experts are the brokers/traders

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Features of the Early OTC NOx Market

• Total Allocation 397,869 tons (all
  vintages)
• Allowances Traded 33,279 (8)
• Sold
• By Sources 26,427 (7)
• By Others 6,852
• Bought
• By Sources 16,176 (4)
• By Others 16,103
• Geographic Distribution
• DE 690 Buying only
• MA - 215 Selling only
• NH - 9,669 Selling only
• NJ 3,965 Buying and selling
• NY - 4,199 Buying and selling
• PA - 823 Buying and selling
• 6/11/99 on EPA NATS website, all vintages

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Uncertainty and Compliance

• Restructuring Emissions Trading
• Shifts risk to shareholders
• Every compliance choice is an implicit position
  in the allowance market
• With no banked allowances, 99 allocations are
  like your last tank of gas
• Deterministic analysis and planning fail
• Mathematical programming, Computable General
  Equilibrium models
• Probabilistic analysis emerging
• Stochastic programming, Monte Carlo simulation
  analysis
• Risk management tools emerging
• Financial derivatives
• Objective in a risky world
• Robustness, not optimization

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Public Policy Issues

• NOx emissions and ozone formation have important
  spatial and temporal patterns
• Ozone episodes in non-attainment areas vs.
  seasonal compliance in a region
• Will compliance lead to attainment ?
• Need for policy analysis ?
• Brokers/Traders cant do this (too narrow,
  limited credibility)
• More price information

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Tentative Conclusions

• Directionality
• Control cost estimates are not good predictors of
  allowance prices in young emissions markets
• Short-term costs are a lower bound
• Even in mature markets, contextual factors may be
  more important than engineering economics
• Implications of uncertainty
• Information scarce
• Managing startup
• Better analytical tools needed (and emerging)
• Increasing market sophistication

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http//hdgc.epp.cmu.edu

• Center for the Integrated Study of the
  Human Dimensions of Global Change
• Department of Engineering and Public Policy
• Carnegie Mellon University

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OTC NOx MOU

• 12 northeastern States and the District of
  Columbia
• Stationary sources gt25MWe
• Seasonal (May - September) Cap Trade
• Phase 1 1999-2002, 0.25 lb NOX/mmBTU
• Phase 2 2003 , 0.15 lb NOX/mmBTU
• Individual State programs meant to work together