&EPA
United States
Environmental Protection
Agency
Air and Radiation
(6204J)
EPA430/F-92/017
December 1992
Acid Rain Program
Allowance Auctions and
Direct Sales
In order to reduce acid rain in the United States and Canada, Title IV of the Clean
Air Act Amendments of 1990 established the Acid Rain Program.'The program will
cut sulfur dioxide emissions in half and: substantially reduce nitrogen oxides
emissions from electric utility plants. This Fact sheet discusses the auctions and
sales provisions under the Acid Rain Program and'is one of a series containing
information about the program.
Introduction
TUFA'S Acid Rain Program estab-
. J—ilishes an innovative, market-based
allowance trading system to reduce
sulfur dioxide (SCfe) emissions, one of
the primary precursors of acid rain.
Under this system, fossil fuel-fired
power plants, the principal emitters of
SO2, will be allotted tradable allow-
ances based on their past fuel usage
and statutory emission limitations.
Each allowance entitles a unit to emit
1 ton of SO2 during or after the year
specified in the allowance serial num-
ber. At the end of the year, the number
of allowances a unit holds must equal
or exceed total emissions at that unit;
otherwise, stringent penalties will.ap-
ply. After the year 2000, the total num-
ber of allowances allocated each year
will be half of what the utility industry
emitted in 1980.
Allowances may be bought, sold, or
banked like any other commodity. If a
utility holds surplus allowances, it
may sell them to units whose emis-
sions levels exceed their allowance
supply, or it may save them for use in
future years. EPA envisions the, emer-
gence of an active allowance market in
the coming years, where brokers,
environmental groups, and utilities
alike will participate in allowance
transactions.
Because the availability of allow-
ances is crucial to ensure both the eco-
nomic efficiency of the emissions
limitation program and the addition of
new electric-generating capacity, Title
IV of the Clean Air Act Amendments
mandates that EPA hold or sponsor
yearly auctions and direct sales of al-
lowances for a small portion of the to-
tal allowances allocated each year. In
addition, Title IV requires that EPA
provide a written guarantee ensuring
priority for certain new independent
power producers (IPPs) in purchasing
allowances in the direct sales. The auc-
tions, sales, and IPP guarantee provi-
sions of Title IV help ensure that units,
including new IPPs, have a public
source of allowances beyond those al-
located initially to existing units. More-
over, the auctions are expected to help
signal price information to the allow-
ance market early in the regulatory
program.
Where Will the Allowances
Come From?
To supply the sales and auctions
with allowances, EPA has set aside
in a Special Allowance Reserve 2.8 per-
cent of the total annual allowances al-
located to all units. During Phase I,
when: the allowances allocated total'
5.7 million allowances annually,
150,000 allowances are available every
year -for auctions and" another 25,000
allowances are reserved for the direct
sales. During Phase II, when allowance
allocations total" 8.95 million allow-
ances yearly, 200,000 allowances are
earmarked annually for auctions and
50,000 designated for the direct sales.
Private allowance holders (such as
utilities or brokers) also may offer their
allowances for sale at the EPA auctions,
provided that the allowances are dated
for the year in which they are offered, "
for any previous year, or for 7 years in
the future. Authorized account repre-
. sentatives must notify the administra-
tor of the EPA auctions of their intent to
sell at least 15 business days prior to the
auctions. The account representatives
must specify the number of allowances
they are offering and their minimum,
price requirements.
Who Administers the EPA
Auctions and Sales?
The auctions and sales are con-
ducted for EPA by the Chicago
Board of Trade (CBOT). This authori-
zation is made possible by the Clean
Air Act Amendments that gave EPA
the authority to delegate the admini-
stration of the auctions and sales. After
an objective selection process, EPA
chose CBOT to run the auctions and
sales because of its demonstrated
ability in handling and processing fi-
nancial instruments and using transac-
tional information systems, and
because EPA believes a significant
benefit is created for the. allowance
market by having an auctioneer who is
active in facilitating the allowance
market. Because EPA is delegating to
CBOT (as opposed to contracting with
CBOT) to administer the auctidns and
sales, CBOT will not be compensated
by EPA for its services nor be allowed to
charge fees. CBOT will administer the
auctions and sales for a period of 3 years
beginning in January 1993, with a possi-
bility of extension. In addition, CBOT
will not be able to bid for allowances in
the auctions nor will itbe able to transfer
allowances in the EPA Allowance
Tracking System. Only the administra-
tive functions of the auctions and sales
programs will be delegated to CBOT;
all other aspects of the auctions and sales
will remain with EPA, as will all allow-
ance transfer functions.
How Are the Auctions
Conducted?
Auctions and direct sales com-
mence in 1993 and are held each
year thereafter. The auctions are held
i Printed on paper that contains at least 50% recycled fiber.
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BO later than March 31 of every year,
Auctions are divided into two segments:
(1) a spot allowance auction, in which
are sold that can be used in
thai same year for compliance pur-
and (2) an advance auction for
the sale of allowances that vriSL become
usable for compliance 7 years after the
transaction date, although they can be
traded earlier. Bidders must send sealed
offers containing information on the
number and type (spot or advance) of
allowances and the purchase
to CBQT no later than 3 business
prior to the auctions. Each bid must
also include a certified check or letter of
credit for the total bid cost (Other-farms
of payment may be permitted by EPA
upon'public notice.)
The auctions sell allowances from the
Special Allowance Reserve on the basis
of bid price starting with the highest
priced Md and continuing until all al-
have been sold or the number
of is exhausted. EPA may not set a
minimum price for allowances from the
Allowance Reserve,
Allowances are sold from the Spe-
cial Allowance Reserve before allow-
offered by private holders are
Offered allowances are sold in
ascending order, starting with the al-
lowances for which private holders
have set the lowest minimum price re-
quirements. Offered allowances are
until the allowance supply is de-
pleted^ bids are up? or the mini-
mum price for the next set of offered
allowances the purchase price
of the next bid.
EPA returns proceeds and unsold
allowances from the auctioning of re-
allowances on a pro mta basis to
units from which EPA originally
withheld allowances to create the Spe-
cial Allowance Reserve. Proceeds from
the of offered allowances will be
returned to private allowance holders
that contributed the allowances to the
auctions, EPA likewise returns pay-
ment from unsuccessful bids and al-
lowances from unsuccessful offers,
How Are the Direct Sales
Conducted?
TABLE 1. ALLOWANCES OFFERED AT AUCTIONS AND SALES
he direct of allowances begin
, on June 1 of each year and continue
until all allowances "are sold or until
January 30 (the last day allowances
may be for' purposes of
end-of-year compliance}? whichever
comes first Daring Phase 1, the direct
will oiler only advance allow-
ances Csee 1). From the year 2000
Year of
Purchase
1993
1994
1995
1996
1997
1998
1999
2000 and after
Spot Sale
25,000
Advance Sale*
25,000
25,000
25,000
25,000
25,000
25,000
25,000
25,000
Spot Auction
50,000**
50,000**
50,000
150,000
150,000
150,000
150,000
100,000
Advance
Auction*
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
*Not usable until 7 years after purchase
** Not usable until 1995
onward, organizations and individu-
als will also be able to purchase spot
allowances at the direct sales. Allow-
ances offered at the direct sales will be
sold for $1,500 each indexed to inflation,
Any individual or organization may
purchase allowances at the direct sales
by submitting the proper application
materials, which specify the number
and type (spot or advanced) of allow-
ances desired. Conditional approval is
considered and granted on applica-
tions based on order of receipt. Upon
approval, allowances are reserved un-
der the name of the applicant.
Approved applicants must tender
50 percent of the total payment within
6 months of the date on which their
request was affirmed; the second half
must be paid on or before January 30.
Payment defaults will result in a with-
drawal of purchase requests. EPA
transfers allowances only after full
payment is received. In the case that
requests exceed available allowances,
applicants will be placed on a waiting
list on a first-come, first-served basis.
If the allowances in the direct sales
have not been exhausted by January
30, they are offered at the next year's
auctions. Unsold advance allowances
are sold at an additional advance
auction; unsold spot allowances are
offered in the regular spot auction.
Similar to theauction program, EPA
apportions proceeds from the direct
sale of allowances on a pro mta basis to
those units from which EPA withheld
allowances to create the Special
Allowance Reserve.
What Are 1PP Written
Guarantees?
To maintain the total emissions cap
of 8.95 million tons of SOa, Title IV
requires new units (most units com-
mencing operation after passage of the
Act) to obtain allowances from existi ng
allowance holders or through the auc-
tions and sales programs. New IPPs
that can certify that their efforts to ac-
quire allowances from affiliate utilities
and all Phase I units that have been
unsuccessful may be eligible to apply
for an IPP wri tten guarantee. The gua r-
antee establishes an IPPs prerogative
to purchase allowances from the Spe-
cial Allowance Reserve for $1,500 be-
fore these allowances are made
available to other parties. Written
guarantees are intended to help secure
financing for new IPPs by assuring
lenders that new independent power
projects have access to the allowances
needed.
Easing Compliance,
Ensuring Growth
EPA's auctions and sales programs
can help ease compliance with the
emissions limitations established
under Title IV of the Clean Air Act
Amendments. The EPA auctions and
direct sales furnish utilities and other
groups with additional options for
purchasing allowances and convey
valuable allowance price information,
thereby enlarging and stimulating the
allowance trading market
For More Information
Write to:
U.S. EPA
Acid Rain Division (6204J)
- 401 M Street SW.
Washington DC 20460
If you would like to receive other
fact sheets on the Acid Rain Program,
call the Acid Rain Hotline at 617-674-
"377 or the EPA Public Information
Center (PIC) at 202-260-2080.
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