Flash: EU Environment Minister Cochet says EU to ratify Kyoto on March 4th.
EMISSIONS BROKERAGE DESK
President Bush Offers MultiPollutant Proposal
T
he Bush Administration issued its
long-awaited multi-pollutant proposal on February 14, 2002. The CLEAR
SKIES initiative establishes the general
framework for a proposal to reduce power
plant emissions of NOx, SO2, and mercury
over the next 16 years. Implementation of
this initiative will require amending the
Clean Air Act. This policy position is
intended to give the Administration a voice
in the debate over multi-pollutant legislation on Capitol Hill.
The legislative activity on reductions of
power plant emissions has centered on the
Senate Environment and Public Works
(EPW) Committee chaired by Senator
Jeffords (I-VT). In March 2001, Senator
Jeffords introduced legislation (S. 556) to
address emissions from power plants.
Senator Smith (R-ME), the ranking minority member of the committee, also supports multi-emissions legislation, as does
a majority of the committee. Mark-up of
S.556 could occur in April.
Several aspects of the CLEAR SKIES initiative deserve particular attention. The
CLEAR SKIES initiative has less stringent
reduction levels and more relaxed (later)
deadlines than Environmental Protection
(continued on page 6)
UK Emissions Trading Scheme
Auction Rescheduled
march 1, 2002
Volume 5, Issue 3
Phone: 212-232-5305
Fax: 212-232-5353
he UK Government has decided to
reschedule the incentive auction to
participate in the direct entry route
of the UK Emissions Trading Scheme from
February 25, 2002 to Monday March 11,
2002.
T
March 4, 2002 how much of the £215m
($308m) set aside will actually be committed during the auction, as well as the
level of the incentive cap—the maximum
percentage of the budget any one participant can take.
Of the 46 auction entrants, over half registered for entry in the final two weeks prior
to the February 1st deadline. After discussions with potential participants, the
Government decided to allow extra time in
order to resolve outstanding questions and
eligibility issues as effectively as possible.
The Government will also provide further
clarity to the auction by announcing on
The start of the scheme remains
unchanged from the beginning of April
2002, at which time allowances may be
transferred through the registry. As the
auction date approaches, Natsource continues to work with potential participants in developing trading structures
that assist their auction strategy.
Dear Clients and Friends,
With the first ever UK incentive auction for greenhouse gas reductions joining the longstanding annual SO2 allowance auction sponsored by US EPA, March is looking to be an interesting month for auction enthusiasts. While Natsource operates most frequently in the continuous auctions, such as that
for SO2 allowances, we are also ready and willing to assist our clients in developing bidding strategies for these auctions.
Sincerely,
Mike Intrator
In This Issue:
US SO2 Market
Page 2
OTC NOx Index
Page 3
NOx ERC Index
Page 4
Global/GHG News
Page 5
US Regulatory
Update
Page 6
S O 2
A L L O W A N C E
SO2 (UER bi-weekly spot)
12 weeks volatility
page 2
M A R K E T
SO2 Market Gets Bounce
From Bush Plan
80%
70%
60%
50%
T
40%
30%
20%
10%
Jan-02
Jul-01
Oct-01
Apr-01
Jan-01
Jul-00
Oct-00
Apr-00
Jan-00
Jul-99
Oct-99
Apr-99
Jan-99
Jul-98
Oct-98
Apr-98
Jan-98
Jul-97
Oct-97
Apr-97
Jan-97
Jul-96
Oct-96
Apr-96
Jan-96
0%
SO2 (UER bi-weekly spot)
1 year volatility
45%
40%
35%
raditionally, February is a fairly quiet month in the SO2 market. Compliance for the previous year, along with preparation for the EPA allowance auction upcoming in March, usually keeps traders heavily occupied, apart from a little early jockeying around to test market consensus before the auction. This
February has taken a different tone. There has been healthy price
movement and volume this month. One reason for the volume
may be the upcoming March 15th options expiration. For the past
several months, March options have continued to trade at all different strikes, particularly the $180 and $170 strikes.
30%
25%
The month began with the spot market trading between $156 and
$161. It seemed like there was some heavy selling pressure above
$160, but natural buyers continued to take all they could get below
$160. After a couple days of bouncing around, the market settled
in briefly around $162.
20%
15%
10%
5%
Jan-02
Oct-01
Jul-01
Apr-01
Oct-00
Jan-01
Jul-00
Apr-00
Oct-99
Jan-00
Jul-99
Apr-99
Jan-99
Jul-98
Oct-98
Apr-98
Jan-98
Jul-97
Oct-97
Apr-97
Oct-96
Jan-97
Jul-96
Apr-96
Jan-96
Oct-95
Jul-95
Apr-95
0%
(continued on page 3)
SO2 (UER bi-weekly spot)
3 Year Volatility
Bi-weekly Spot SO2 Price Indication
45%
$250
40%
35%
$200
30%
$150
25%
20%
$100
15%
10%
$50
5%
0%
Jan-02
Sep-01
Jan-01
May-01
Sep-00
Jan-00
May-00
Sep-99
Jan-99
May-99
Sep-98
Jan-98
May-98
Sep-97
Jan-97
May-97
Sep-96
Jan-96
May-96
Sep-95
Jan-95
May-95
Sep-94
May-94
Jan-02
Nov-01
Sep-01
Jul-01
Mar-01
May-01
Jan-01
Nov-00
Jul-00
Sep-00
Mar-00
May-00
Jan-00
Nov-99
Sep-99
Jul-99
Mar-99
May-99
Jan-99
Nov-98
Sep-98
Jul-98
May-98
Jan-98
Mar-98
Nov-97
Sep-97
Jul-97
May-97
$0
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Statements and information contained in Airtrends that are not historical facts are based on Natsource LLC’s opinions in light of information currently available, and should not be interpreted otherwise. Natsource price indices are intended for information purposes only and under no circumstances should they be considered offers to sell or solicitations to buy any commodity or asset. Any price
information in Airtrends is based on information we believe to be reliable but no guarantee is given as to its accuracy or completeness. Markets are volatile and therefore subject to rapid and unexpected price changes. Any person relying on information contained in Airtrends does so at their own risk entirely and no liability is accepted by Natsource LLC in respect thereof. Airtrends is the property of Natsource LLC and may not be reproduced or further circulated, in whole or in part, without the express written permission of Natsource LLC. The information contained herein is the property of Natsource and may not be reproduced or further circulated, in whole or in part, without the express written permission of Natsource.
N O x
page 3
M A R K E T S
NOx Update: SIP Call Rallies
NOx Allowance Mid-Market Prices ($/ton)
2500
Banked
1999 Vintage
2000 Vintage
2001 Vintage
2002 Vintage
2000
1500
1000
500
Mar-02
Feb-02
Jan-02
Dec-01
Nov-01
Oct-01
Sep-01
Aug-01
Jul-01
Jun-01
Apr-01
May-01
0
Mar-01
Increasingly, the end game for the OTC is a driving force for pricing. The spread between V2000/1 allowances and the vintage
1999s has remained significantly wider than that for the 2000 to
2002, approaching $150. This differential has arisen because
unused vintage 1999 OTC allowances will expire worthless at the
end of the 2002 true-up period while the others will be converted
into Compliance Supplement Pool allowances (though at a significant discount).
As of March 1, 2002
Feb-01
P
rices in the OTC NOx allowance market have dipped slightly since the end of January, with the spread between the
banked vintages 2000 and 2001 all but disappearing and the
premium of the spot to these two diminishing as well. Midmarket
for vintage 2002 is currently $900/ton, which is also where the last
trade occurred. The main banked vintages last traded at $700/ton
and have been maintaining a discount of about 25% to the spot
2002s.
NOx SIP Call Allowances Mid-Market Price
$7,000
SO2 Market Update
(continued from page 2)
Activity jumped on the morning of the 14th, when news of
President Bush's CLEAR SKIES plan began leaking into the market.
The spot market initially traded up in response, reaching $173 in an
orderly fashion, and settled in for an hour before falling off, just
as orderly back down to $165. (See "Bush Offers Multi-Pollutant
Plan" in this issue of Airtrends). The market gravitated back to $170
and above in the following days. This momentum continued with
some large blocks of 25,000 and 15,000 allowances trading above
$170. The market has seen significant support at $170 and has
remained in the $170-$176 range. Some vintage 2007 allowances
have traded recently as well helping to define price expectations
for the vintage 2009 allowances to be auctioned by the EPA on
March 25th. The vintage 2007 traded at $146 when spot was trading $173, and again $143 when spot was trading $171.
2003/4 Stream
2003/7 Stream
$6,000
$5,000
Allowance Price ($/ton)
$4,000
$3,000
$2,000
$1,000
Jan-02
Feb-02
Feb-02
Jan-02
Jan-02
Dec-01
Dec-01
Nov-01
Oct-01
Oct-01
Nov-01
Sep-01
Sep-01
Jul-01
Aug-01
Aug-01
Jul-01
Jul-01
Jun-01
Jun-01
May-01
Apr-01
May-01
Apr-01
Mar-01
Mar-01
Feb-01
Feb-01
Jan-01
Jan-01
$-
Jan-01
SIP Call allowances have continued to move upward from their
low in December and early January. The latest spurt occurred on
the last day of the month, as vintage 2004 allowances traded for
$5000/ton, a level not seen since September. A stream of 50 tons
per year of 2004-2007 vintage allowances was also reported to
trade for $3900/ton. This is a substantial premium to what we had
seen trade previously in the market and was further surprising
because of the abruptness of the price move. Should support at
this level develop, it would indicate a significant flattening of the
forward curve.
NOx Budget Market Mid-Market Prices
Ozone Transport Commission
1999 Vintage
$550/ton
2000 Vintage
$675/ton
2001 Vintage
$675/ton
2002 Vintage
$900/ton
SIP Call/Section 126 Market
2003/4 Vintage Stream
$4,800/ton
2003/7 Vintage Stream
$3,600/ton
With a large option expiration and the auction coming up in
March, the next few weeks should prove very active.
For more information on the details of the EPA auction, refer to
http://epa.gov/airmarkets/forms/auctions/howtobid02.pdf.
N O x
M A R K E T S
page 4
As of March 1, 2002
State
PERMANENT EMISSION REDUCTION CREDIT MARKETS
(New Source / Offsets)
Moderate
Serious
Connecticut
Severe
NOx
$6,500/tpy
$12,000/tpy
VOC
$4,000/tpy
$6,000/tpy
Massachusetts
NOx
$6,300/tpy
Maine
NOx
New Jersey
NOx
$1,800/tpy
VOC
$475/tpy
New York - Pennsylvania (linked)
Texas
Rhode Island
$6,000/tpy
NOx
$1,700/tpy
$12,000/tpy
VOC
$1,450/tpy
$6,000/tpy
NOx
$3,000/tpy
VOC
$6,000/tpy
NOx
$6,200/tpy
ERC Market Update
T
he main transactions of note recently are in the Discrete markets in New Jersey, where several transactions have gone through at
approximately $1,000/ton. Further in NJ, we are once again seeing interest in transacting on ERCs that are part of the large set
with expirations in April 2003. In California, PM and ROG (essentially equivalent to VOC in other markets) transactions have been
occurring in the L.A.'s South Coast Air Quality Management District. South Coast PM10 is trading in excess of $21,500 per pound per day;
meanwhile, ROG is $1,800 and seems to be falling. Other ERC markets have been slow this month.
COMPLIANCE MARKETS DERs/VERs
State
Ozone Season
Non-Ozone Season
Connecticut
$1,100/ton
$1,000/ton
Massachusetts
$750/ton
$500/ton
New Jersey
$1,000/ton
$950/ton
New Hampshire
$600/ton
$300/ton
Texas
$4,000/ton
N/A
G l o b a l
U p d a t e / G H G
N e w s
page 5
President Bush Announces New U.S. Climate Policy
O
n February 14th, President Bush
announced his administration's
long-awaited climate change policy. The policy sets a voluntary goal to
reduce the greenhouse gas (GHG) intensity
of the U.S. economy by 18% by 2012. If the
goal is achieved, the current GHG intensity
level—183 metric tons of carbon equivalent
(mtce) emissions per million dollars of
GDP in 2002—would be reduced to 151 mtce
per million dollars of GDP in 2012, according to the administration.
The plan allows the U.S. to demonstrate
progress against this metric through voluntary actions. At the same time, the plan
reflects the administration's view that
mandatory emissions caps, such as those
enshrined in the Kyoto Protocol, would
unduly constrain economic growth. The
administration's announcement states that
the GHG intensity target "sets America on
a path to slow the growth of GHG emissions, and as the science justifies, to stop
and then reverse that growth."
According to the administration's estimates, achieving the GHG intensity target
would reduce emissions in 2012 by 100 million mtce, or 4.5%, relative to business-asusual emissions in that year. Natsource
estimates that the administration's plan
would result in U.S. GHG emissions in 2012
that are approximately 13% above 2000 levels, 31% above 1990 levels, and 41% above
the U.S.' Kyoto Protocol target of 7% below
1990 levels.
In addition to the GHG intensity target, the
plan calls for the development of revisions
to the existing voluntary program for
reporting GHG emissions and emissions
reductions under section 1605b of the 1992
Energy Policy Act. Revisions will be aimed
at improving and standardizing measurement protocols for emission reductions and
carbon sequestration. Additional revisions
will seek to ensure that early reductions are
not penalized under future climate change
policies, and to provide "transferable credits" to companies that can achieve real
reductions.
Other measures in the President's plan
include:
• Tax credits totaling $555 million in 2003,
$4.6 billion over the next 5 years, and $7.1
billion over 10 years to spur investment in
solar, wind, and biomass energy sources,
hybrid and fuel cell vehicles, cogeneration,
and landfill gas. Many of these provisions
were included in the President's FY 2003
budget request.
(continued on page 6)
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U . S .
N a t i o n a l
page 6
U p d a t e
Bush Offers Multi-Pollutant Proposal
(continued from page 1)
Agency proposals that were the subject of
debate within the Administration. The
second phase deadline for reductions of all
three pollutants is 2018, 12 years later than
the S. 556 deadline (see accompanying
chart for details). In addition, the West
will have less stringent reductions for SO2
than the East. The Administration also
stated that there would be different reduction caps and separate East and West trading regions for NOx, though exact
East/West levels are not specified. The initiative also includes incentives for power
plants that install scrubbers early in the
program. Details for this early action
incentive program also have not been
released.
The CLEAR SKIES initiative includes a 15ton mercury cap (two-thirds reduction
from current emission levels) to be
achieved by 2018, apparently with trading.
However, EPA has started to develop what
could be a more stringent requirement,
through rulemaking. This regulatory
requirement is unlikely to allow for trading
and would be implemented by December
2007 under existing Clean Air Act authority. The CLEAR SKIES initiative would
replace the mercury regulatory requirement.
Cap and Trade Is Front and Center
A cornerstone of the CLEAR SKIES initiative
is cap and trade. The Administration estimates that a cap and trade program could
result in compliance costs savings of as
much as $1 billion annually and supports
trading for all three pollutants, including
mercury. While S. 556 provides for NOx
and SO2 trading, it would prohibit mercury
trading, reflecting concern within the environmental community that trading would
lead to localized "hot spots" of emissions.
Prospects for Legislation
Legislation on multi-emissions in this
Congress is very uncertain. Chairman
Jeffords likely has the votes to report "four
pollutant" legislation out of the Senate
committee. However, action in the full
Senate is not anticipated and passage of
any legislation with S.556-like levels and
dates is extremely unlikely. A key point to
watch will be whether Senators Smith and
Voinovich (R-OH) negotiate a compromise
with Senator Jeffords before or during
mark-up of S. 556. As we move closer to
the fall Congressional elections, Hill action
on this issue will become more unlikely.
Prospects for legislation in the next
Congress can be better assessed after the
next election.
(1) All reductions are achieved through a
cap and trade program except where
noted.
(2) All reductions are calculated from the
current levels in the table.
(3) S. 556 does not allow mercury trading.
CLEAR SKIES Initiative vs. S. 556
Annual Emissions (1)
Current
Levels
CLEAR SKIES Initiative
S. 556
2008
2010
2018
2007
NOx
(Million tons)
5
2.1
(58% red. (2))
--
1.7
(67% red.)
~1.5
(70% red.)
SO2
(Million tons)
11
--
4.5
(59% red.)
3
(73% red.)
~2.2
(80% red.)
Hg
(Tons)
48
--
26
(46% red.)
15
(69% red.)
~5(3)
(90% red.)
Bush Announces GHG Plan
(continued from page 5)
• Plans to recommend updated corporate
• Increased spending on climate-related
average fuel economy (CAFÉ) standards.
science and technology.
• An increase in funding from $1 billion to
• Assorted international projects geared
$3 billion to implement the conservation
title of the Farm Bill, which would result in
an additional 35.7 mmtc of sequestration
annually.
toward climate research, technology transfer to developing countries, and debt-fornature swaps.
• A pledge to consider additional measures if the U.S. is not on track to meet the
GHG intensity goal in 2012. Such measures
could include "a broad, market-based program".
A full summary and analysis of the Bush
administration's climate change plan is
provided in a special supplement to this
edition of Airtrends.
U . S .
N a t i o n a l
U p d a t e
page 7
Reduction in Auto Emissions Proposed in
California; CAFE Considered in U.S. Senate
O
n January 30th, the California State
Assembly passed bill 1058 requiring
the California Air Resources Board
(CARB), the air regulatory commission in
California, to develop measures to reduce
CO2 emissions from cars and light duty
vehicles by 2004. The proposed legislation, which now moves to the State Senate,
reflects a trend at the state level to push
forward with climate change policies in
advance of decisions at the national level.
The State Senate is likely to begin review
of AB 1058 in April. The bill is expected to
receive support from the Democratic
majority, though perhaps with some modifications. Opponents criticize the bill for
providing CARB with a "blank check" to
develop policies, while supporters favor
the bill's broad mandate to "develop and
adopt regulations that achieve the maximum feasible and cost-effective reduction
of carbon dioxide" emitted from cars and
light trucks. Auto manufacturers who
believe the legislation will harm productivity are also likely to contest the bill strongly.
If passed, AB 1058 could have far-reaching
effects on U.S. and global vehicle markets.
By requiring CO2 emission reductions from
vehicles, the bill is likely to encourage
improvements in fuel-efficiency standards
in the state. California has already taken
an initial step to increase fuel economy
performance in the state; in October 2001,
it enacted S. 1170, a law mandating the purchase of fuel-efficient vehicles for the
state-owned fleet. Approximately 10% of
new car sales in the U.S. occur in
California, where local and regional air
quality problems have often led to the
adoption of environmental policies more
stringent than national policies.
At the national level, the Bush administration hopes to allay criticism from environmentalists by introducing the first increase
in fuel-efficiency standards in 15 years. In
December 2001, the Bush Administration
lifted the ban on new federal CAFE rulemaking, opening the door for review and
debate of new standards. CAFE standards
are currently 27.5 miles per gallon (mpg)
for cars and 20.7 mpg for light trucks.
These standards were enacted in 1985 and
1987, respectively. The Administration's
recently unveiled climate proposal calls for
the Secretary of Transportation to issue
recommendations on establishing updated
CAFE standards, and to take into consideration the recommendations of a July 2001
National Academy of Sciences (NAS)
report. The administration highlighted
that the NAS report recommended allowing
manufacturers to trade fuel economy credits.
Senators John Kerry (D-MA) and John
McCain (R-AZ) favor a Congressionallymandated CAFE standard and have introduced competing bills, both of which
would establish a clear fuel-economy standard to be achieved within a defined period of time. Kerry's bill, S.1926, proposes a
CAFE standard of 38.3 mpg for cars and 32
mpg for light trucks by 2013, and an average
for fleets of 35 mpg. McCain's bill, S.1923,
proposes an average fuel-economy standard of 36 mpg for cars and light trucks by
2016. The Kerry bill has been included in
the Democrats' comprehensive energy bill,
which is now scheduled for debate by the
Senate.
Significantly, both legislative proposals
contain credit trading components, under
which manufacturers can earn credits for
exceeding the CAFE standards and then
trade these credits with other manufacturers. Senator Kerry's proposal would allow
for trading between manufacturers and
fleet types (car and light truck, domestic
and import). Senator McCain's bill would
allow manufacturers to purchase emissions
reduction credits, including credits earned
for exceeding CAFE standards, from a
national registry to offset up to 10% of the
fuel economy standard for any model year.
Inclusion of credit trading proposals in the
Senate bills, and the specific reference to
CAFE credit trading in the President's climate plan, suggest that market-based
incentives may be included as part of any
updated CAFE standards passed by
Congress.
EMISSIONS PORTFOLIO RISK MANAGEMENT
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