Transcript hdgc.epp.cmu.edu

NOX Control Costs and Allowance Prices:
Expectations and Outcomes
Alex Farrell
Department of Engineering and Public Policy
Carnegie Mellon University
Support: National Science Foundation
[email protected]
http://hdgc.epp.cmu.edu/
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Cost per ton
SO2 Allowance Prices
$350
$300
$250
$200
$150
$100
$50
$0
Expectations
• Achieve public policy objectives
• Control costs
– Engineering economic studies
• Allowance prices
– Deterministic simulation models
– Marginal costs at equilibrium conditions with perfect information
NOx Control Cost Forecasts*
• STAPPA/ALAPCO (1995)
$1,300 to $2,300 (0.15 lb/mmBTU, seasonal control)
• OTAG (1997)
$600 to $4,000 (~0.30 to 0.20 lb/mmBTU, seasonal control)
• NESCAUM (1998)
$800 to $3,500 (0.15 lb/mmBTU, seasonal control)
*All estimates given in $/ton NOX
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$ / ton or $ / ton per year
NOx ERC and DER prices (CT, MA, NJ, NY, PA, TX)
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
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OTC NOx Allowance Price Forecasts
• ICF
– Phase 2: $1,700
• Farrell, Carter and Raufer (1999)
– Phase 1: $1,350
– Phase 2: $2,100-$2,500
• EPA (OTAG estimate)
– $800 - $1,150
OTC NOx Market Data
• What’s available ?
– EPA data - NOX Allowance Tracking System (NATS)
– Broker/Trader data - some price information and some analysis
• What’s missing ?
– EPA data
• Forward transactions and derivative products
• Inter-company trading
• State programs (e.g. ERCs)
– Broker data
• Verification and completeness
• So what ?
– Increased uncertainty
– Only experts are the brokers/traders
Features of the Early OTC NOx Market*
• Total Allocation
397,869 tons (all vintages)
• Allowances Traded 33,279 (8%)
– Sold
• By Sources 26,427 (7%)
• By Others
6,852
– Bought
• By Sources 16,176 (4%)
• By Others 16,103
• Geographic Distribution
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690 Buying only
MA - 215 Selling only
NH - 9,669 Selling only
NJ
3,965 Buying and selling
NY - 4,199 Buying and selling
PA
- 823 Buying and selling
*6/11/99 on EPA NATS website, all vintages
OTC NOx Allowance Trading Volume *
10,000
8,000
6,000
4,000
2,000
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* As reported on EPA NATS
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Cost per ton
OTC NOx Allowance Prices
$7,000
$6,000
1999
$5,000
2000 +
$4,000
$3,000
$2,000
$1,000
$0
Uncertainty and Compliance
• Restructuring + Emissions Trading =
– Shifts risk to shareholders
– Every compliance choice is an implicit position in the allowance market
– With no banked allowances, ‘99 allocations are like your last tank of gas
• Deterministic analysis and planning fail
– Mathematical programming, Computable General Equilibrium models
• Probabilistic analysis emerging
– Stochastic programming, Monte Carlo simulation analysis
• Risk management tools emerging
– Financial derivatives
• Objective in a risky world
– Robustness, not optimization
Public Policy Issues
• NOx emissions and ozone formation have important spatial
and temporal patterns
– Ozone episodes in non-attainment areas vs. seasonal compliance in
a region
– Will compliance lead to attainment ?
• Need for policy analysis ?
– Brokers/Traders can’t do this (too narrow, limited credibility)
• More price information
Tentative Conclusions
• Directionality
• Control cost estimates are not good predictors of allowance
prices in young emissions markets
– Short-term costs are a lower bound
• Even in mature markets, contextual factors may be more
important than engineering economics
• Implications of uncertainty
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Information scarce
Managing startup
Better analytical tools needed (and emerging)
Increasing market sophistication
Center for the Integrated Study of the
Human Dimensions of Global Change
Department of Engineering and Public Policy
Carnegie Mellon University
http://hdgc.epp.cmu.edu
OTC NOx MOU
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12 northeastern States and the District of Columbia
Stationary sources >25MWe
Seasonal (May - September) Cap & Trade
Phase 1: 1999-2002, ~0.25 lb NOX/mmBTU
Phase 2: 2003 + , ~0.15 lb NOX/mmBTU
Individual State programs meant to work together