Cross-State Air Pollution Rule (CSAPR) seasonal NOx allowances jumped to record highs in 2022 and could climb higher next year, depending on the final form of proposed changes to the program that aim to slash power plant emissions over the next few years.
The season NOx markets shot significantly higher this summer in the wake of a US Environmental Protection Agency (EPA) proposal to expand the CSAPR Group 3 program and set more aggressive emissions limits.
Group 3 NOx, which opened the year at $2,500/short ton, jumped as high as $48,000/st in August. That not only set a record high for the Group 3 program, but it was also considerably higher than any price reached in previous federal NOx trading programs.
Group 2 allowances climbed to $4,500/st in August after starting the year at $275/st.
The EPA plan, released in March, propelled the market higher, as it could soon tighten up what has been an oversupplied market.
The proposal, which also includes new NOx requirements for industrial sources outside of CSAPR, is just the latest shakeup to the seasonal NOx markets. EPA created Group 3 only last year in response to a series of federal court rulings.
In addition to new NOx caps, EPA proposed adding more states to the Group 3 market, including some that have never been covered by CSAPR before, and regularly recalibrating the allowance bank and emissions limits. The 25 states in the expanded Group 3 program would start with a NOx cap of nearly 210,300st in 2023, which could dip to about 129,500st by 2026.
In the eight Group 2 states poised to join Group 3 next year, power plant owners have also had to contend with the costs of joining the more stringent market. They may be able to collectively carry forward only about 18,500 allowances, if EPA requires them to convert Group 2 allowances into Group 3 at a 5.9:1 ratio, as currently planned.
The overall CSAPR program, which also includes annual markets for power plant NOx and SO2 emissions, is designed to help states in the eastern US meet federal air quality standards. The latest proposal is meant to help with the 2015 ozone standards. The ozone season runs from 1 May to 30 September.
The seasonal NOx markets have retreated over the past three months, as power plant owners await the final outcome of the EPA rulemaking. Argus last assessed Group 3 NOx at $16,500/st and Group 2 NOx at $2,050/st.
New year, new market
EPA is aiming to finalize the changes in March, just in time for the 2023 ozone season. Whether the final version differs significantly from the original proposal will help determine the direction of the market in 2023.
For example, EPA could modify the final emissions caps or the allowance conversion ratio so that Group 2 power plant owners would be able to carry over more allowances into Group 3.
EPA data suggest that most of the states that will be covered by the expanded Group 3 were near or above their 2023 emissions caps this year. Collectively, ozone season emissions this year from the 25 states that would be included totaled just over 224,000st, which would exceed the 2023 cap by nearly 14,000st, or about 7pc.
Some of that total may include smaller units that will not be subject to CSAPR and does not account for any forthcoming power plant retirements. But with the cap tentatively set to drop by nearly 81,000st, or more than 38pc, from 2023-26, any oversupply in the market now could dry up quickly as compliance demand increases.
In the near term, power-plant owners may also hold on to allowances, as they did this year, for future use or until they have a better understanding of their compliance needs. EPA's proposal only includes suggested budgets for 2025 and 2026. The actual limits will be determined later to account for retirements and other changes to the regulated power plant fleet.
Likely legal challenges could provide some uncertainty to the market once the propsal is finalized. EPA is still awaiting a federal court ruling on its previous CSAPR update.
The market will be closely watching all these program changes, as whatever form EPA's final plan takes will help shape allowance prices in 2023 and beyond.
