Phase II Allowances Allocations and an Assessment of the Allowance Market in the West

Title IV of the Clean Air Act Amendments of 1990 establishes a unique “market-based“ approach to reduce national electric utility sulfur dioxide (SO₂) emissions during the next century by about 10 million tons/year below the corresponding level in 1980. This program is designed to provide utility operators with the flexibility to achieve the applicable SO₂ emissions limitations (total tons) using the most cost-effective approach. However, in reality, it is unlikely that many utility operators would have such operational flexibility, especially in the case of plants located in the Western United States. This is due to the fact that these sources may also be subject to other more stringent provisions of the Act, such as to protect public health and visibility, which override the Title IV provisions.

This paper examines the Phase II allowance allocations for the utility units located in the 11 western states and assesses the potential impacts of the current federal/state air quality regulatory programs on the allowance market in the West. This analysis shows that, even after accounting for the projected population growth and the accompanying growth in electric power demand during the next decade, the West should have a surplus of allowances, especially if new regulations are initiated to further reduce SO₂ emissions, mainly for the purpose of improving visibility in Western Class I areas.