The DC Circuit recently vacated the Clean Air Interstate Rule (CAIR). This decision not only suspends tightening federal NOx regulations which seemed so imminent, but it will likely lead to NOx reduction legislation that will be even more stringent and sweeping than CAIR.

 

Court finds CAIR has “fatal flaws”
The court case that triggered CAIR’s rejection was North Carolina, et al. v. EPA. In its ruling, the court stated: “Because we find more than several fatal flaws in the rule and the [EPA] adopted the rule as one, integral action, we vacate the rule in its entirety and remand to EPA to promulgate a rule that is consistent with this opinion.”

 

Essentially, the court found that CAIR is neither broad enough (e.g. states included) nor fast enough (in its phased approach) to be consistent with the Clean Air Act (CAA) and the Clean Air Act Amendments (CAAA). They ruled in favor of the State of Carolina, which two years ago promulgated state rules stricter than CAIR. The court also found that the EPA erred in relying on or otherwise interfering with the allowance trading system that was established to address acid rain while affirming their own powers to require interstate air pollution abatement to protect human health. The court also decided that the EPA unfairly credited coal-based utilities in their design of the program. And finally, the court rejected utility claims seeking to exclude Florida and west Texas from CAIR.

 

The current NOx allowance trading market has been left intact, and some forward trading has continued for CAIR’s Annual NOx market, despite the fact that the future of this market is uncertain. There hasn’t been enough time to get a firm handle on how allowance traders will ultimately respond, but the Cantor brokerage reported that forward trading CAIR annual NOx allowances have gone down from $5000/ton to $3000 since the decision was announced. This is somewhat amusing, since I have been using a long-run estimate of $1500/ton for months now (because the only thing certain about this market is that it will be volatile, and it is better to err on the conservative side when justifying technology investment). But suffice to say that industry reaction to the uncertain timing of legislation to remedy CAIR’s deficiencies has a greater downward effect on valuation than the undoubtedly more severe legislative replacement for the rule that was struck down. 

 

One potential scenario is that the U.S. Congress – recognizing that affected states, environmentalists, and the power industry alike are distressed at the current situation and would greatly prefer CAIR to go forward – simply enacts legislation providing EPA the required authority. Another is that individual states could revert to Best Available Reduction Technology (BART). BART can be applied to 48 states and is more stringent than CAIR. It’s also more “command and control” in nature, i.e. it requires NOx emission lb/mmBtu rates by boiler type. By the EPA’s analysis BART will, in aggregate, meet the new more stringent 75 PPM 2.5 micron Particulate Matter (PM 2.5) requirement embodied in the National Ambient Air Quality Standards (NAAQS). As former EPA Administrator Jeffery Helmstead has pointed out, all states need to take whatever action is required to comply with NAAQS, and without CAIR, BART or state-specific rules are the remaining alternatives.

 

States could quickly promulgate their own NOx and SO2 regulations, as Maryland and North Carolina did before CAIR. Both of these models exist, with functioning markets and more than six months of experience: they could easily be adopted or slightly modified by other states.

 

Two other possibilities exist. One is that the most recent and well-vetted alternative to the Clear Skies legislation - The Clean Air Planning Act of 2003, introduced by Senator Thomas Carper – gets quickly reintroduced and passed. Because this also addresses mercury and CO₂, it would please constituencies concerned about the recent vacating of the CAMR rule for mercury and the lack of federal legislation for CO2 as it concerns climate change. The overall severity of this bill, however – which requires greater NOx and SO₂ reductions on faster timeframe than CAIR, would likely encounter strong industry opposition.

 

One other possibility that had not occurred to me but was suggested as reasonably likely by Helmstead, is that the parties to the litigation that vacated CAIR appeal and quickly settle, in effect overturning the ruling through negotiation of the relatively small points each of the parties’ litigation were focused on.  

 

Whatever model is adopted, I expect it will happen fast. The urgency of fixing the CAIR problem at a Federal level was explicitly noted in the Court of Appeals ruling. The court agreed with North Carolina that the “EPA must consider faster reductions that better reflect states’ obligations to restore healthy air and making pollution cuts that help prevent states from backsliding into non-compliance with health-based standards.”

 

So what does this mean for optimization? Both the uncertainty of how long it will take Congress to act and the more stringent nature of what will replace CAIR are strong arguments for adopting optimization now (not to mention CO₂ and spiraling fuel costs).  The flexibility of optimization (e.g. the ability to manage tradeoffs as the value of differing objectives changes), combined with the ever-stronger benefits associated with increased fuel efficiency suggests that it is the best possible way to invest time and money while the impending NOx regulations are sorted out, whether by the EPA or Congress. I expect that this sort of economic rationality will prevail with the more progressive power generators. Unfortunately, others may take a “wait and see” approach, foregoing the immediate benefits to be gained, as well as the medium-term benefits of knowing a unit’s true baseline performance by the time the new regulations take effect.

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