SO2 Allowance Prices Drop: Is There a Lesson Here?

The results of EPA’s annual auction of sulfur dioxide (SO2) allowances under the acid rain program provide empirical support for a proposition that the regulated community repeatedly advances – certainty is critical to the success of complex regulatory regimes. Prices for 2009 allowances fell from last year’s average of $380/ton to $70/ton, or more than 80%. Prices in the 7 year advance auction fell even more dramatically, from $136/ton in 2008 to $6.65/ton, or more than 95%.

The short explanation for the crash in prices? Uncertainty over the fate of EPA’s Clean Air Interstate Rule. Although there may be a number of other factors in play, the consensus seems to be that CAIR is the primary culprit. Having a rule issued, challenged, struck down, vacated, and then temporarily reinstated does not provide much of a basis for rational investment planning by corporations that might need allowances.

The number and identity of the bidders are also interesting. Two bidders purchased more than 98% of the spot auction allowances. One bidder – JP Morgan Ventures Energy Corporation – purchased essentially 100% of the 7 year allowances. (Though you will all be comforted to know that “Bates College Environmental Econ” was able to purchase 2 allowances in both the spot and 7 year auctions.) Of course, most of the allowances are allocated to existing emitters; fewer than 3% of allowances are auctioned. Nonetheless, this seems like remarkably little interest.

Is there a lesson here for a CO2 cap and trade program? Don’t let the perfect be the enemy of the good might be one candidate. Another would simply be not to tinker too much. The importance of cost certainty in corporate planning may be obvious, but that does not mean that it doesn’t bear repeating in times such as these.