August 3, 2011 • Current Events, Energy Generation, Natural Gas, Sustainability

The Summer of Policy – Cross-State Air Pollution Ruling

by Eric Bickel

Summer 2011 is quickly becoming known as the Summer of Policy Initiatives (trademark: me) as the EPA have recently rolled out two emissions-related policies, while President Obama has just announced a brand new set of fuel economy standards.

Although these policies initially seem straightforward, the toughest part is establishing their indirect impact. Their direct effect on the energy world is usually apparent (as we will see), while the knock-on effects are generally more difficult to predict (as we will also see). So here is a step-by-step guide to the changing world of energy policy, covering these three current and relevant policies (in separate posts, for the sake of both your and my sanity):

  • Cross-State Air Pollution Ruling (CSAPR)
  • Oil and Natural Gas Air Pollution Standards (ONGAP)
  • The Obama Administration Fuel Economy Standards (FES)

So strap down, grab some coffee, and meet CSAPR:

A long, long time ago (well, 2005, so not really that long ago), the EPA put together an emissions reductions scheme known as the Clean Air Interstate Rule (deemed as “CAIR”, because that sounds way more huggable). In 2008, a court decision ruled to keep the requirements of CAIR in place until a better ruling was made to account for the transportation of pollution across state boundaries. So recently CSAPR (Cross-State Air Pollution Ruling), was announced to replace CAIR, requiring 27 states to reduce power plant emissions of sulfur dioxide (SO2), annual nitrogen oxide (NOx), as well as summertime (or “ozone-season”) NOx levels.

The key to CSAPR is that while it is ultimately a new ruling, it is not being created in a vacuum. It eliminates the requirements of CAIR, and replaces them with its own. As a result, when considering the restrictions of CSAPR, it is necessary to compare them to what was already ruled upon under CAIR.

When we do this, we can see that CSAPR actually provides fewer restrictions for most states than the CAIR ruling. The figure below shows the difference in allowed emissions between the two policies. Numbers above zero represent greater emissions allowed under CSAPR for power generators relative to CAIR.

However, the CSAPR ruling does restrict summertime NOx levels more-so than CAIR, as power generation typically picks up in the summer (especially in states such as TX and FL) to meet higher cooling demand. This increases the level of NOx emissions in these states, and CSAPR aims to account for that.

“What does this mean for me?”

Well, today, not much. But it could mean more very soon, as the ruling takes effect in January 2012. As mentioned, the restrictions are relatively loose compared to its predecessor for the majority of the year. However, in summertime, we could see power generation from coal lose steam (pun very much intended) and generation from other sources pick up the slack.

However, coal generation in the US has dropped from just over 50% of total generation in 2001 to just under 45% in 2010. Comparatively, we have seen natural gas generation jump from 17% to 24% in the same time-frame. So, what we could see is a continuation of that trend, especially as natural gas production continues to show strong growth prospects here in the US (more on that in the next post in the series).

“But really, what does THAT mean for me?”

There are two potential outcomes here. The first one is based on the theory that when you limit an option, you make things more expensive. By reducing emissions, there is corresponding move higher in prices.  But flip-side to this potential outcome is that if  you are not dependent on any one option, this opens up the possibility of competition, and you won’t necessarily see an increase in prices.

While there are many unknowns, CSAPR may actually be friendlier than first impressions may lead you to believe (sorry, couldn’t resist getting a Casper reference in at least once), as long as the natural gas market continues to maintain the low level of prices we have seen in recent times.

Industry Reaction

As can be imagined, you can find plenty of opinions about this ruling with the click of a mouse (try here, here, and here). As it stands, the industry is leaning very much against anymore regulation, but that’s not really coming as much of a surprise. However, the end result of the regulation may not be as bad as these guys are making it out to be (as we discussed), and the “for” side of the argument clearly isn’t as vocal yet. We’re still only a few weeks into the announcement of the ruling, and one very large political debate is just now ending, so let’s see where we go from here now that legislators have more time on their hands (and now that their twitter accounts are calming down).

So that’s CSAPR. Up next, we’ll talk about ONGAP and how these two policies relate, but  for now, feel free to take a nap and we’ll see you shortly.

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