The Cross-State Air Pollution Rule (CSAPR) NOx allowance markets will likely face a bearish year in 2025, as the incoming administration of president-elect Donald Trump creates uncertainty over the fate of the latest federal regulation to curb emissions.
The US Supreme Court halted implementation of the US Environmental Protection Agency's (EPA) "good neighbor" plan in June with a nationwide stay. This left an already stunted regulation to cut NOx emissions, a precursor to harmful ground-level ozone, obsolete for the foreseeable future.
EPA finalized a plan in March 2023 to help downwind states meet the 2015 national air quality standards by setting tighter ozone season NOx caps on power plants covered by CSPAR as well as new limits for industrial facilities in more than 20 upwind states.
But by the time the justices issued the stay, the number of covered states had already shrunk by more than half because of lower-court orders pausing implementation in 12 states.
Prices for seasonal NOx allowances have flatlined and the market has been illiquid over much of 2024 because of uncertainty over how numerous legal challenges against the good neighbor plan would play out. Argus has assessed Group 2 allowances at $775/short ton (st) and Group 3 allowances at a record low $1,250/st since January.
This could change, albeit at a slow pace, because EPA finalized an interim rule in November to comply with the nationwide stay. Power plants that had been covered by the good neighbor plan are now under less-stringent NOx budgets tied to older air quality standards, and the 10 states that had been participating in the Group 3 market prior to the stay are now reshuffled into Group 2 and a separate 12-state "expanded" Group 2 market.
All that remains is… uncertainty
In the new year, the market will wait to see how the Trump administration will deal with the good neighbor plan and the associated legal challenges in the US Court of Appeals for the DC Circuit and the US Supreme Court.
Because of the stay, there is no hurry for the new administration to address the legal woes, and it is unlikely the DC Circuit will soon rule on the legality of EPA's rejection of state ozone reduction plans.
The Trump EPA, following precedent of prior administrations, will likely ask the court to pause litigation until it decides whether to continue defending the plan, according to Jeff Holmstead, assistant administrator at the agency under former president George W Bush.
The agency will likely revoke the plan at some point and replace it with a rule that is more "modest" and would not significantly affect allowance prices, he said.
The EPA under Trump could ultimately decide that upwind states do not significantly contribute to interstate pollution, reversing a determination that has underpinned the good neighbor plan.That could lead to downwind states asking the agency to address specific sources that contribute to their air quality problems, said Carrie Jenks, executive director of Harvard Law School's Environmental and Energy Law Program.
The Supreme Court is also hearing a case to decide the proper court venue for Clean Air Act disputes, which involves the good neighbor plan.
The Trump administration likely will agree with various states and industry groups that say EPA's rejections of individual state plans are not a "nationally applicable" action and must be litigated in the regional circuit courts, but the Supreme Court is likely to continue the venue case, Jenks said. Oral arguments will likely be held early next year.
It is also unclear how Lee Zeldin, Trump's pick to lead EPA will affect the regulation. Zeldin is a moderate, given his history, and will likely "not want to impose significant new burdens on fossil fuel power plants", Holmstead said.
Trump's plans to downsize the federal bureaucracy could also affect future rulemakings, according to Jenks.
"Nobody really knows what's going to happen," she said.
As a result, market activity is likely to remain limited in the coming months as participants await legal and regulatory clarity.
In addition, markets are likely to be oversupplied now that power plants are under lighter NOx caps. Most states in the seasonal NOx markets were well below their limits for the 2024 ozone season, despite a 9.2pc increase in cumulative emissions in the expanded Group 2.
EPA will also allow some power plants to convert vintage 2021-23 Group 3 allowances to Group 2 or expanded Group 2 allowances, adding to supply.
With low demand and a potential oversupply, seasonal NOx allowances could see prices fall .
