Washington (Platts Coal Trader)--May 23, 2005

Things were quiet in the US emissions markets last week except for a few heavy days of nitrogen oxide trading as the May-September ozone season moved into full swing.

Mid- and end-of-week NOx deals represented the bulk of US emissions trading last week, with total volume estimated between 2,000-3,000 tons.

The price gap between 2004 and 2005 NOx also narrowed significantly, a sign that the active days of 2004 trading may be numbered, according to traders and brokers.

Historically, prior year NOx stops trading when its price is roughly equal to the price of the current vintage. But up until recently, 2004 NOx was $1,000/allowance cheaper than spot NOx. The U.S. Environmental Protection Agency discounts the prior year NOx vintage to prevent unlimited banking of allowances and emissions spikes contributing to low-level ozone pollution during the hottest months of the year. During the last month, the differential has gotten steadily smaller and it stood last week at about $600/allowance.

“It looks like the market has plenty of supply right now,” stymieing 2004 trades that were once thought to be a compliance bargain, a trader said. “At some point, the prices will be the same and I think you’re starting to see the move in that direction.”

But a broker said there’s still active market players who see 2004 NOx as a good buy and may be interested in selling 2005 allowances and buying the prior year’s.

Meanwhile, 2005 NOx “is pegged in the $2,800 range,” the broker said. “I just think the whole system came off early in the week and there’s some adjustments going on because … 2006 didn’t follow.”

2005 NOx rallied to $2,875 Friday, prompting one broker to suggest that deals “covering a short [position] or buying long on spec” may be in the offing.

SO2 trading was light for the week, with market players estimating that between 10,000-20,000 tons changed hands. Amid the small SO2 volume, the price hovered steadily around $790 for the week.

Wisconsin Public Service was rumored Friday to be shopping around all of its SO2 allowances for its Dunbury power plant, a broker said. “There’s all sorts of questions,” he said. “Is it bullish? Is it bearish? Who buys?”

A rare 2007 SO2 forward trade occurred on Tuesday for a standard 2,500 ton-lot at the Platts published price of $770.