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Thaddeus J. Huetteman
President
Power & Energy Analytic Resources, (PEAR) Inc.

What can nine U.S. states tell us about how the world might exchange obligations to reduce emissions of greenhouse gases? Several scholars^1,2 have already noted the similar issues confronting the designers of NOx trading programs among U.S. states addressing ozone transport problems and parties to the Kyoto Protocol (e.g., the problems of sovereign entities entering into voluntary agreements).

But now with three years of trading experience under our belts in the Northeast Ozone Transport Region (OTR), we know not only what design issues matter but more critically how market participants have adapted to the particularities of such trading programs:

• Key role of methods, other than control technology, to achieve reductions in uncertain early years and their impact on pricing;

• Ability of the market to accommodate restrictions on allowance "bank-ability" (through price discounts) and other trading limits; and

• Resilience of the markets in the face of non-cooperation from important participants (e.g., "rogue" states).

Each of these factors points out important ways in which the markets for greenhouse gas (GHG) credits may evolve in the early years, as well as how participants may want to structure initial purchase arrangements.

In February 1999 (the first compliance year for the OTR) NOx allowances traded at $7,600 per ton; by November of that year, they had famously fallen to $700. What is less well-known is that only one-quarter of the reductions recorded in 1999 were attributable to retrofits of NOx control technology. The source of reductions for the remaining three-quarters was split evenly between 1) increased power imports from non-affected regions and load shifting to cleaner sources, and 2) operational changes in utility boilers leading to lower emissions (which we have characterized as "stealth compliance"³).

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Also in this issue:

• Chairman's Corner
• Multipollutant Legislation for the Power Sector: A Better Approach to Clean Air

"Multi-Pollutant" - The New Catch Phrase

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