US NOx and SO2 prices rocket after CAIR reprieve
New York, 8 January: Prices soared in the major US emissions markets, after the DC Court of Appeals agreed to keep the Clean Air Interstate Rule (CAIR) in place while the Environmental Protection Agency (EPA) develops an alternative mechanism.

Despite its strong objections to CAIR, on 23 December the court declined to order that it be immediately ended, because many litigants claimed they never intended for the rule to be terminated. CAIR set limits on emissions of sulphur dioxide (SO2) and nitrogen oxides (NOx) across 28 eastern states and the District of Columbia.

“Everyone wanted CAIR to go forward, even though they had specific problems with it,” said James Braddock, a lawyer with Haynes and Boone based in Austin, Texas.

Utilities concerned about being short of allowances in 2009 quickly rushed into the NOx market after months of sitting on the sidelines, with prices spiking above $6,000 per ton, compared with $1,500 before the court’s announcement, brokers and traders said. Meanwhile, the SO2 market rallied briefly to $240 before settling in the $215-225 range, after trading around $140-150 prior to the decision, they said.

The decision had a greater impact on the annual NOx market than SO2, because the former would have been eliminated if the court ordered CAIR to be immediately voided. But now Phase 1 NOx begins this year as scheduled, while utilities can wait out the start of Phase 1 SO2 in 2010. “You would expect one to be more dramatic than the other,” said Eric Klein, senior emissions trader at Tradition in New York.

Despite the bullish market reaction, there are lingering questions about the future of CAIR.

The court maintained that CAIR is flawed and must be replaced with a programme that addresses the problems it outlined in its July decision invalidating the regulation , including the EPA’s formula for distributing allowances.

“The court did not back away at all,” Braddock said. “It means the rule can go forward as it is for the time being, but the EPA has to address the deficiencies of the rule the court found in its original decision. And it’s not going to be an easy task.”

The court declined to issue a deadline for the EPA to develop an alternative mechanism, giving president-elect Barack Obama’s EPA some latitude, although the petitioners can return to court if they feel the EPA is moving too slowly. Obama and Congress could also pursue new legislation to address the court’s stated objections or empower the EPA to implement the programme as originally envisioned by the agency.

“That’s kind of a question mark,” said Pete Zaborowsky, managing director of brokerage Evolution Markets in White Plains, New York. “I think that’s why there’s still some caution.”

Last year, members of Congress discussed creating a new statute, but failed to reach agreement with the Bush’s administration on a proposal. While the political environment may be more favourable for a legislative fix for CAIR this year, given the incoming Democratic administration and its expanded majority in Congress, the new government’s stated priority is dealing with the country’s economic crisis, Braddock said.