Environmental Markets Association

Preserving the SO2 market - review the recent challenge mounted by New York State against the US market in sulphur dioxide allowances

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The US District Court for the Northern District of New York recently struck down a New York State law that affected the US market for sulphur dioxide (SO2) allowances. In Clean Air Markets Group v Pataki,* the court ruled that New York’s law violated the Supremacy and Commerce Clauses of the US Constitution.

New York enacted the anti-trading law in May 2000 with the purported goal of reducing acid rain in New York’s “environmentally sensitive” areas such as the Adirondack Mountains. The law affected what it called “select credits” – those SO2 allowances originally issued by the Environmental Protection Agency (EPA) to New York electricity generators under Title IV of the Clean Air Act (the federal Acid Rain Program).The New York law effectively prohibited the sale of select credits to 14 targeted ‘upwind’ states (Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, and Wisconsin). If a select credit ultimately was used for Title IV compliance in any of these states, the seller would forfeit to New York 100% of the sale proceeds for that allowance. Only allowances with a ‘restrictive covenant’ preventing their use in the 14 states were exempt from the forfeiture requirement.

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