&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. ------- 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. ------- |