Sad news: SO2 is dead

Tim Haab reports from the Heartland that the teetering SO2 cap and trade market is "Elvis dead."

The story goes something like this: The SO2 market was designed as if SO2 was a uniformly mixed pollutant. This made trading easier. One ton of SO2 in Ohio could be traded for one ton in Illinois. But, the impacts of each of those tons is different. Those states who absorbed a disproportionate impact from SO2 trading sued the EPA. Congress issued the Clear Air Interstate Rules limiting interstate trades of SO2. SO2 prices crashed. EPA lost the lawsuit: Must scrap the SO2 market and start over. SO2 market dies quietly.

Leaving us without a textbook example of market-based environmental policy... and that is the least of it.

The fragile credibility of cap-and-trade markets

This isn't fresh news, but it's a powerful illustration of how sensitive cap-and-trade systems are to loss of political credibility. The SOx cap-and-trade market was a long-standing success story and talisman for those who sought to establish a similar, broader system for GHG emissions to curb climate change.

2005:

The current problems in the acid-rain market stem from 2005, when the EPA, with the backing of many utilities and environmental groups, announced major new reductions in smog-forming and soot-producing emissions, and expanded the reach of the cap-and-trade system in more than two dozen, mostly Eastern, states.

2008:

In response to lawsuits filed by a handful of utilities and North Carolina, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the EPA had overstepped its authority...

In response to the ruling, prices for the pollution allowances plunged to $130 a ton. Utilities held off on projects to clean up their plants.

2010:

Last week, the EPA issued new rules to comply with the court's decision. The new program will limit the use of the market and instead require most of the emission reductions to come from changes at the plants themselves. And millions of allowances that utilities now hold can't be used under the new program, which will issue its own allowances.

And unsurprisingly, prices have now fallen to essentially zero. A powerful cautionary tale.

Harmful emission trade-offs

How much CO2 is a ton of SO2 worth?

Valero's Benicia, Calif., refinery releases an additional 16,000 metric tons of carbon dioxide because of the extra energy needed to operate the ULSD unit for a year, while the "corresponding reduction in tailpipe emissions expressed as reduced SO2 [sulfur dioxide] is about 200 tons" for that fuel, Cuffel said.

A question for ecologists, environmental economists, and the broader public to contemplate together…