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NO X Control Costs and Allowance Prices: Expectations and Outcomes

NO X Control Costs and Allowance Prices: Expectations and Outcomes. Alex Farrell Department of Engineering and Public Policy Carnegie Mellon University Support: National Science Foundation afarrell@andrew.cmu.edu http://hdgc.epp.cmu.edu/. Expectations. Achieve public policy objectives

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NO X Control Costs and Allowance Prices: Expectations and Outcomes

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  1. 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@andrew.cmu.edu http://hdgc.epp.cmu.edu/

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

  3. 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

  4. 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

  5. OTC NOx Market Data • What’s available ? • EPA data - NOX Allowance Tracking System (NATS) • Broker/Trader data - some price information and some analysis • What’s 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

  6. 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

  7. 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

  8. 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 can’t do this (too narrow, limited credibility) • More price information

  9. 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

  10. 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

  11. OTC NOx MOU • 12 northeastern States and the District of Columbia • Stationary sources >25MWe • 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

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