The Supreme Court’s decision to stay the Good Neighbor Rule (GNR) on June 27th was a seismic event that reverberated through the energy markets, causing a ripple effect on allowance prices in all U.S. emission markets. This decision, which is yet another twist in the Ozone Transport Rule saga, has thrust stakeholders into a new era of volatility and uncertainty. In this blog post, we will delve into the immediate and ongoing effects on allowance prices and dissect the market reactions following this pivotal judicial ruling.

Regional Greenhouse Gas Initiative

Allowance prices saw a steady climb until the third week of June, largely due to a severe heatwave that swept through the states covered by the Regional Greenhouse Gas Initiative (RGGI). This extreme weather event led to a substantial increase in power demand, which in turn resulted in higher emissions. The market also experienced some turbulence due to the uncertainty surrounding the Supreme Court’s decision on the GNR. Once the decision was made, the market recalibrated, leading to a drop in allowance prices.

California Cap and Trade Program

The last auction in late May 2024 saw a clearing price of $37.02 (well below market expectations), which resulted in market readjustment. Concurrently, the summer on the West Coast is off to a hot start, leading to higher operation of gas-fired power plants and a consequent increase in emissions. According to the EIA’s hourly grid monitor, the CAISO region reported a significant 37% month-over-month increase in gas generation from May to June 2024.

In California, industries’ emissions were previously regulated under the GNR. However, with the stay on GNR, these emissions are now solely under the purview of the state’s cap-and-trade program. This regulatory shift, combined with increasing demand, has pushed allowance prices higher post-GNR stay, signaling a significant realignment in the market.

Cross-State Air Pollution Rule

While Group 2 NOx prices remained stable following the stay of the GNR, Group 3 NOx prices dropped by $100, from $1,250 to $1,150, immediately after the GNR stay. This decline is attributed to the transition from the stricter Good Neighbor Plan, which imposed tight emission budgets in those states, back to the previous CSAPR limits, which are comparatively higher.

EPA issues allowances annually. States can utilize allowances from previous vintages for future compliance but cannot use future vintages to offset the previous year’s emissions. This is why the 2023 vintage price is lower than the 2024 vintage price. Additionally, the market was oversupplied with allowances in 2023 to cover that year’s emissions, leading to lower prices. However, as the program transitions to 2024 in the middle of the ozone season, with a reduced allocation due to annually decreasing budgets, there is uncertainty about the number of allowances needed to cover the emissions during the 2024 ozone season, leading to higher overall allowance prices.

Following the stay of the GNR, all states reverted to the budgets established by the CSAPR and resumed their original groupings as initially designated. Minnesota, Nevada, and Utah, which were previously included under the GNR, are no longer part of the CSAPR framework.

EVA’s recent blog post further details the possible impact of GNR stay. EVA also publishes a quarterly environmental publication delving into emission markets and prices, assessing the impact of these regulations on allowance markets. For further information and queries, please reach out to us at [email protected]