The new sulfur dioxide "Cap and fade" program
Currently, there exists a surplus of allowances at a price of zero. The plants are likely to earn more substantial variable profits and by the time the benefits start to increase the levels of profits start to decrease this is similarly indicated by the supply and demand curves. The demand curve will indicate the level of demand for electricity by consumers while the supply curve will indicate the amount of power that the plants are willing to supply at the prevailing prices. Since the prices of allowances are zero, the producers will tend to supply more to the extent that the supply will be more than the amount or quantity demanded. This will affect the price of the commodity been produced as there will be more than enough in the market and hence the prices will also reduce significantly.
If the EPA allows firms to use allowances to emit sulphur dioxide as they had initially, the equilibrium of price would increase. It is because the allowances will have increased and would head back to the times when the equilibrium price had reached $1600. Any offer that attempts to introduce or increase the price for emissions would run the risk of dispatching capacity of these plant operators and possibly will end up selling less of their goods and services in the short term market than in the forward market. This will push the players to produce goods and sell them at prices closer to their marginal cost of production when are totally hedged out. It signifies that at lower allowances the electric plants will be in a much better position to make more profits than when they are exposed to the inducement.
