The Clean Air Act Acid Rain Program: Implications for Virginia’s Coal Producers

The Clean Air Act Amendments of 1990 (CAAA90) established a national program to control sulfur dioxide (SO₂) air emissions that contribute to acid rain formation. The program takes a market-based approach that includes trading and banking of emissions allowances. We have analyzed data describing electric utility compliance strategies for 1995, the program's first year. Results show that fuel switching and flue-gas desulfurization were the dominant means used by affected plants to achieve compliance. Over three million allowance credits (tons of S0₂ emissions) were banked by affected utilities in 1995, as emissions by the 261 original Phase I-affected units totaled 4.4 million tons. Projection of current trends to the year 1999, the conclusion of Phase I, indicate that 14 to 15 million allowance credits will have been banked by utilities for use during the program's Phase II, which will require stricter controls beginning in the year 2000. Factors contributing to the accumulation of a sizable allowance bank include increased use of western coal, falling prices for eastern low-sulfur coal and desulfurization equipment, and a presumed desire by utility planners to minimize financial risks inherent in CAAA90's more-stringent Phase II requirements. Cumulative consumption of allowances during the first decade of Phase II is forecast by EPA at less than 10 million tons. The reduction of S0₂ emissions well beyond expectations, combined with falling prices for allowance credits, can be viewed as a success for market-based environmental controls. The implications for Virginia's low-sulfur coal producers, however, are more mixed. On one hand, the principal southeastern markets for low-sulfur Virginia coals have not experienced major inroads by low-sulfur western coal, or by installation of flue-gas desulfurization scrubbers that make high-sulfur coal purchases possible. On the other hand, central Appalachian coal price differentials based on sulfur contents have declined noticeably since initiation ofCAAA90 Phase I in early 1995, and prospects for improved 1 pricing oflow-sulfur coals appear poor. Under CAAA90, coal purchasers can link SO₂ emissions allowances with high-sulfur coals as a substitute for compliance-grade lowsulfur coals, such as those produced by many Virginia mines. Wide availability of allowance credits make it unlikely that Virginia coal producers will be able to increase the "price premiums" commanded by low-sulfur products any time soon. Scrubbers and lowprice western coal sales effectively remove low-sulfur Appalachian producers from consideration as coal suppliers at a number of midwestern generating units, which has the effect of intensifying competition in the southeast. Electric utilities in states that are major purchasers of Virginia coal have been among the heaviest purchasers of allowances in the open markets.