Acid Rain Program: SO2 Allowance Trading System Fact Sheet

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Courtesy of US EPA - Environmental Protection Agency

The innovative, market-based SO2 allowance trading component of the Acid Rain Program allows utilities to adopt the most cost-effective strategy to reduce SO2 emissions at units in their systems. The Acid Rain Program operating permit outlines the specific program requirements and compliance options chosen by each source. Affected utilities are also required to install systems that continuously monitor emissions of SO2, NOx, and other related pollutants in order to track progress, ensure compliance, and provide credibility to the trading component of the program. In any year that compliance is not achieved, excess emissions penalties will apply, and sources either will have allowances deducted immediately from their accounts or may submit a plan to EPA that specifies how the excess SO2 emissions will be offset.

Introduction
Allowance trading is the centerpiece of EPA's Acid Rain Program, and allowances are the currency with which compliance with the SO2 emissions requirements is achieved. Through the market-based allowance trading system, utilities regulated under the program, rather than a governing agency, decide the most cost-effective way to use available resources to comply with the acid rain requirements of the Clean Air Act. Utilities can reduce emissions by employing energy conservation measures, increasing reliance on renewable energy, reducing usage, employing pollution control technologies, switching to lower sulfur fuel, or developing other alternate strategies. Units that reduce their emissions below the number of allowances they hold may trade allowances with other units in their system, sell them to other utilities on the open market or through EPA auctions, or bank them to cover emissions in future years. Allowance trading provides incentives for energy conservation and technology innovation that can both lower the cost of compliance and yield pollution prevention benefits.
The market-based allowance trading system capitalizes on the power of the marketplace to reduce SO2 emissions cost-effectively and uses economic incentives to promote conservation and the development of innovative technology. The Acid Rain Program may establish a precedent for solving other environmental problems in a way that minimizes the costs to society and promotes new technologies.


Frequently Asked Questions About the Allowance System
What Are Allowances?
How Are Allowances Allocated?
How Else Can Allowances Be Obtained?
Who May Participate in Allowance Trading?
What Is the System for Keeping Track of Allowances?
What Information is Contained in ATS Accounts?
How Are Allowance Transfers Submitted?
How Will Compliance Be Determined?
How Can Allowance Allocation, Transfer, Sale, or Deduction Decisions Be Appealed?
What Are Allowances?
An allowance authorizes a unit within a utility or industrial source to emit one ton of SO2 during a given year or any year thereafter. At the end of each year, the unit must hold an amount of allowances at least equal to its annual emissions, i.e., a unit that emits 5,000 tons of S02 must hold at least 5,000 allowances that are usable in that year. However, regardless of how many allowances a unit holds, it is never entitled to exceed the limits set under Title I of the Act to protect public health.
Allowances are fully marketable commodities. Once allocated, allowances may be bought, sold, traded, or banked for use in future years. Allowances may not be used for compliance prior to the calendar year for which they are allocated.

How Are Allowances Allocated?

Allowances are allocated for each year beginning in 1995. In Phase I, EPA allocates allowances to each unit at an emission rate of 2.5 pounds of SO2/mmBtu (million British thermal units) of heat input, multiplied by the unit's baseline mmBtu (the average fossil fuel consumed from 1985 through 1987). These allowance allocations are listed in Table A of the Clean Air Act and codified in the Allowance System Regulations (Part 73, Table 1). Alternative or additional allowance allocations are made for various units, including affected units in Illinois, Indiana, and Ohio, which will be allocated a pro rata share of 200,000 additional allowances each year from 1995 to 1999.

In Phase II, which begins in the year 2000, the limits imposed on Phase I plants are tightened, and emissions limits are also imposed on smaller, cleaner units. Allowance allocation calculations are made for various types of units, such as coal- and gas-fired units with low and high emissions rates or low fuel consumption. EPA allocates allowances to each unit at an emission rate of 1.2 pounds of SO2/mmBtu of heat input, multiplied by the unit's baseline. During Phase II, the Act places a cap at 8.95 million on the number of allowances issued to units each year. This effectively caps emissions at 8.95 million tons annually and ensures that the mandated emissions reductions are maintained over time.

How Else Can Allowances Be Obtained?

In addition to annual allocations, allowances are also available upon aplication to three EPA reserves. In Phase I, units can apply for and receive additional allowances by installing qualifying Phase I technology (a technology that can be demonstrated to remove at least 90 percent of the unit's SO2 emissions) or by reassigning their reduction requirements among other units employing such technology. A second reserve provides allowances as incentives for units achieving SO2 emissions reductions through customer-oriented conservation measures or renewable energy generation. The third reserve contains allowances set aside for auctions, which are sponsored yearly by EPA. In addition, allowances are given as incentives for utilities that replace boilers with new, cleaner and more efficient technologies. The incentives also apply to small diesel fuel refiners that have exceeded the Clean Air Act requirements to remove sulfur from fuels.

Units that began operating in 1996 or later will not be allocated allowances. Instead, they will have to purchase allowances from the market or from the EPA auctions and direct sales to cover their SO2 emissions.

Who May Participate in Allowance Trading?
Allowances may be bought, sold, and traded by any individual, corporation, or governing body, including brokers, municipalities, environmental groups, and private citizens. The primary participants in allowance trading are officials designated and authorized to represent the owners and operators of electric utility plants that emit SO2. Other potential participants are utility power pools, or groups of units choosing to aggregate some or all of the allowances held by the individual units within the pool. The parties involved in the pool determine the details of these allowance-pooling arrangements.

What Is the System for Keeping Track of Allowances?
EPA's role in allowance trading is to record allowance transfers that are used for compliance and to ensure at the end of the year that a unit's emissions do not exceed the number of allowances it holds. To accomplish this, EPA maintains an Allowance Tracking System (ATS). Each affected utility unit, corporation, group, or individual holding allowances has an account in the ATS. Parties must notify EPA to have transfers recorded in their ATS account, but it is not necessary to record all transfers with EPA until such time that the allowances are to be used to meet a unit's SO2 emissions limitation requirement. ATS accounts are, however, the official records for allowance holdings and transfers used for compliance purposes. To facilitate tracking and recording, EPA assigns every account an identification number and every allowance a serial number.
EPA established accounts for utility units affected by both Phase I and Phase II. Each unit account consists of a compliance subaccount for allowances that may be used for compliance in the current year and future year subaccounts for allowances to be used in years to come.

Any person or group, including brokers and investors, wishing to purchase allowances may open an ATS account. To open a general ATS account, the interested party submits the Account Information Form to EPA.

What Information is Contained in ATS Accounts?
ATS accounts tracks the issuance of all allowances; the holdings of allowances in accounts; the holdings of allowances in various allowance reserves, such as the EPA Auction and Sale Reserve and the Conservation and Renewable Energy Reserve; the deduction of allowances for compliance purposes; and the transfer of allowances between accounts. Information in the ATS accounts is available to the public.
How Are Allowance Transfers Submitted?
Allowance transfer requests and all correspondence with EPA concerning compliance with the Acid Rain Program must be performed by authorized account representatives. For a unit account, the Designated Representative, who represents the owners and operators of that unit, performs this function. For a general account, the Authorized Account Representative is the person who represents the parties with an ownership interest in the allowances, and who signs the Account Information Form to open the account.
To request the transfer of allowances from one account to another, the Authorized Account Representative submits to EPA an Allowance Transfer Form. The Authorized Account Representatives of both the transferor and transferee must sign the form.

How Will Compliance Be Determined?
At the end of the year, units must hold in their compliance subaccounts a quantity of allowances equal to or greater than the amount of SO2 emitted during that year. To cover their emissions for the previous year, units must finalize allowance transactions and submit them to EPA by January 30 to be recorded in their unit accounts. The amount of emissions is determined in accordance with the monitoring and reporting requirements described in the Continuous Emission Monitoring Rule.
After the Januarv 30 deadline and the final submitted transfers are recorded, EPA deducts allowances from each unit's compliance subaccount in an amount equal to its SO2 emissions for that year. If the unit's emissions do not exceed its allowances, the remaining allowances are carried forward, or banked, into the next year's subaccount, which then becomes the current compliance subaccount. If a unit's emissions exceed its allowances, the unit must pay a penalty and surrender allowances for the following year to EPA as excess emission offsets. Unless otherwise provided in an offset plan, EPA deducts allowances from the compliance subaccount in an amount equal to the excess emissions.

How Can Allowance Allocation, Transfer, Sale or Deduction Decisions Be Appealed?
A person challenging an allowance, transfer, sale, or deduction decision may file a petition for review with the Environmental Appeals Board. Only the authorized account representative or certifying official involved may appeal such a decision. If EPA makes an error in the recordation of an allowance transfer, the authorized account representative may file a claim of error requesting EPA to correct the mistake. Where the claim of error procedure is applicable, the decision may not be appealed to the Environmental Appeals Board if a claim of error notification was not first submitted. Final agency actions may be appealed to the federal courts.

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