Court Decision Striking Down CAIR Affect on SO2 Allowance Pricing

Implications:     The court decision striking down the Clean Air Interstate Rule will have an affect on SO2 allowances and the SO2 premium earned by coal suppliers.

Analysis:     The court’s decision struck down the Clean Air Interstate Rule, including the provision requiring the Eastern states to relinquish 2 SO2 allowances for every 1 ton of SO2 emissions in 2010 and 2.86 allowances for every 1 ton of SO2 emissions starting in 2018.  Instead the status quo requirement remains of 1 SO2 allowance for every 1 ton of SO2 nationwide under the existing Clean Air Act Amendment passed by Congress and signed by the first President Bush.
 
     Under the existing Clean Air Act Amendment, a SO2 allowance has a vintage-year for which it can be used to meet SO2 emissions.  If it is not used, it may be banked and used for emissions compliance in a later year.  The number of banked SO2 allowances currently stands at approximately 6.75 million allowances.  Actual SO2 emissions in 2007 were approximately 500,000 tons below the annual cap and likely to grow in future years with the scrubber retrofit projects underway.
 
     As a result of the court’s decision not requiring a 2:1 surrender rate in 2010 and 2.86:1 surrender rate in 2018, there are plenty of SO2 emissions allowance supplies to meet SO2 emissions.  As a result, the value of SO2 allowances fell to nearly an all-time low on the day of the court decision against CAIR (July 11).
 
    The destruction in the value of SO2 allowances will affect the realized price received by coal suppliers starting in Q3 2008 because they earn a premium for delivering coal with sulfur under the contractual guarantee and the value of this premium is tied to the monthly weighted-average of an SO2 emissions allowance.  For illustration purposes, the premium a PRB coal supplier earns on super-compliant coal is only about 30 cents per ton at the current low SO2 allowance prices.