Hatfield's Ferry Power Station was a coal-fired power plant in Pennsylvania that ceased operations in 2013 due to competition from cheaper and cleaner natural gas and the incentives of the U.S. Clean Air Act. Despite the plant's closure, it continued to leave a legacy of smog pollution.

This is because a loophole in clean-air regulations allowed Hatfield’s Ferry to collect emissions allowances for five years under a cap-and-trade program after shutting down. The plant then sold these credits to other facilities that exceeded their own regulatory budget of allowances, which benefited the largest emitter of smog-causing gas in the power sector in the U.S.

Under this federal program, power plants receive a certain number of allowances from states annually. Each allowance permits one ton of nitrogen oxide emissions. Nitrogen oxide contributes to smog, which causes respiratory problems and premature death.

Coal-fired power plants that close down in the US can still sell their unused emissions allowances to other polluting facilities, according to a loophole in clean-air regulations.

The cap-and-trade programme allows plants to buy emissions allowances instead of installing expensive pollution-control equipment. Hatfield’s Ferry Power Station, a Pennsylvania coal-fired plant that closed in 2013, sold its unused allowances to other plants.

Its owner, FirstEnergy Corp, transferred most of the credits to other FirstEnergy-owned facilities. One batch worth an estimated $1.2m was sold to Missouri’s New Madrid Power Plant, which is the biggest emitter of nitrogen oxide in the US power sector. The Clean Air Act has failed to control nitrogen oxide emissions effectively, according to the US Environmental Protection Agency.

The new EPA rule will make it more difficult for retired power plants to sell their excess credits, and may therefore encourage more investment in pollution-control technologies. But some critics say the agency’s move was too little, too late.

“This issue is a vivid reminder of the problems of relying on markets and tradable permits to reduce pollution,” said Joe Goffman, executive director of the Environmental & Energy Law Program at Harvard Law School. “The only way to achieve reliable and permanent emissions reductions is to install and operate pollution controls.”

The allowance loophole has been criticized by environmental groups and downwind states, who say it allows former polluters to profit while continuing to harm public health. Meanwhile, investors in emissions trading, which includes banks and hedge funds, have profited from the credits, with some making millions of dollars buying and selling allowances.

The Trump administration also worked to bolster the market for retired-plant credits, a move that drew criticism from environmentalists. In 2019, the EPA proposed extending the time frame that retired plants could sell their allowances to 10 years, up from five. The proposal is now being challenged in court by a coalition of environmental groups.

As the world continues to grapple with the impact of climate change, the debate over the effectiveness of cap-and-trade systems in reducing emissions is likely to intensify. Some experts argue that the programs can provide a flexible and cost-effective way to reduce pollution, while others say they simply allow polluters to buy their way out of responsibility.

In order to eliminate an excess of NOx credits on the market, the EPA cut allowances for power plants in 12 states in 2021. Although the excess supply of credit caused credit prices to fall, this encouraged plant owners to halt their pollution controls and use low-cost credit to comply. According to the EPA, the credits for shut-down facilities had no impact on the aggregate number of credits granted to all American plants or the level of coal pollution in the country. The total volume of allocable allowances each ozone season and other design elements serve as a cap on overall pollution.

The EPA is under scrutiny for allowing closed coal plants to sell their unused pollution credits to other plants. While these credits were initially meant to incentivize the closure of inefficient facilities, the EPA's latest policy has led to a glut of credits flooding the market. The result is that coal plants that have upgraded their pollution controls are now producing more pollution, creating a dilemma for regulators. The EPA has responded by reducing the number of years retired facilities can collect allowances from five to two. Critics argue that this doesn't go far enough and that retired-plant allowances should be eliminated altogether. Constellation Energy Corp and other stakeholders have also voiced concerns that the glut of credits is deterring emissions reductions.

The retired-plant credits astonished Elena Krieger, who is in charge of the institute's scientific research at PSE Healthy Energy in California. She worries that trading these allowances may allow operating plants to increase their NOx emissions, endangering the public health of communities downwind and nearby.

Krieger stated, "I was not aware of the practice and am quite disturbed.

In 2021, the Hatfield's Ferry power plant traded more than 5,000 allowances to the owner of the New Madrid plant, AECI, according to EPA data. The sale terms were not disclosed, but NOx allowances traded at about $225 per ton at the time. The New Madrid plant, which has produced more NOx than any other U.S. power plant in the past five years, used credits to maintain compliance and cut back on pollution controls. AECI argued that advanced pollution controls limit a plant's electricity production and has taken New Madrid's selective catalytic reduction (SCR) offline to boost output, improving grid stability. However, AECI has agreed with Missouri regulators in October 2022 to operate the SCR pollution controls at least 95% of the time during the peak-ozone season, which the EPA is reviewing for approval.

However, AECI claims that the switch to renewable energy is being accelerated by federal regulators. According to the firm, the fast changeover comes "at the expense of stable and reliable electricity" and might have "very serious consequences" during power outages due to extreme weather.

Republican-controlled states and coal industry trade groups have been pushing back against the EPA's NOx-reduction regulations, arguing that they will lead to premature coal plant retirements and increase the risk of electricity shortages. The EPA's recent policy changes, including the Good Neighbor rule, have aimed to reduce the glut of pollution credits, resulting in a significant increase in allowance prices, which are now running at around $10,000 each. However, even at this price, coal plants can still profit from buying allowances, particularly during times of high natural gas and power prices. According to S&P Global Commodity Insights, some plants can still make money with allowance prices above $30,000.