united Slates	Air and Radiation	EPA430/F-92/018
Environmental Protection	(6204J)	October 1992
Agency
<&EPA Acid Rain Program
Allowance System
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 allowance system provisions of the Acid Rain Program and
is one of a series containing information about the program.
The overall goal of the Acid
Rain Program is to achieve
significant environmental bene-
fits through reductions in emis-
sions of sulfur dioxide (SO2) and
nitrogen oxides (NOx), the pri-
mary causes of acid rain. To
achieve this goal at the lowest cost
to society, the program employs
both traditional and innovative,
market-based approaches for
controlling air pollution. In addi-
tion, the program encourages
energy efficiency and pollution
prevention.
Title IV of the Clean Air Act sets
as its primary goal the reduction
of annual SO2 emissions by 10
million tons below 1980 levels. To
achieve these reductions, the law
requires a two-phase tightening
of the restrictions placed on fossil
fuel-fired power plants.
Phase I begins in 1995 and af-
fects 110 mostly coal-burning
electric utility plants located in 21
eastern and midwestem states.
Phase II, which begins in the year
2000, tightens the annual emis-
sions limits imposed on these
large, higher emitting plants and
also sets restrictions on smaller
cleaner plants fired by coal, oil,
and gas. The program affects ex-
isting utility units with an output
capacity of 25 megawatts or
greater and new utility units
under 25 megawatts that use
fuel with a sulfur content greater
than 0.05 percent.
The Act also calls for a 2 million-
ton reduction in NOx emissions by
the year 2000. A significant portion
of this reduction will be achieved
by coal-fired utility boilers that will
be required to install low NOx
burner technologies and to meet
new emissions standards.
The innovative, market-based
SO2 allowance trading compo-
nent 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
also will be required to install sys-
tems that continuously monitor
emissions of SO2, NOx, and other
related pollutants in order to
track progress, ensure compli-
ance, and provide credibility to
the trading component of the pro-
gram. In any year that compli-
ance is not achieved, excess
emissions penalties will apply,
and sources either will nave
allowances deducted immedi-
ately 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 cen-
terpiece of EPA's Acid Rain Pro-
gram, and allowances are the
currency with which compliance
with the SO2 emissions require-
ments is achieved. Through the
market-based allowance trading
system, utilities regulated under
tne program, rather than a gov-
erning 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 emis-
sions by employing energy con-
servation 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 num-
ber 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 pro-
vides incentives for energy
conservation and technology
innovation that can both lower
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the cost of compliance and yield
pollution prevention benefits.
What Are Allowances?
An allowance authorizes a unit
within a utility or industrial
source to emit 1 ton of SO2 during
or following a given year. At the
end of each year, the unit must
hold an amount of allowances at
least equal to its annual emis-
sions, i.e., a unit that emits 5,000
tons of SO2 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 ex-
ceed the limits set under Title I of
the Act to protect public health.
Allowances are fully market-
able commodities. Once allo-
cated, 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 that has an emission
rate of 2.5 pounds of S02/mmBtu
(million British thermal units) of
heat input, multiplied by the
unif s baseline (the average fossil
fuel consumed from 1985 through
1987). These allowance alloca-
tions are listed in Table A of the
Clean Air Act and codified in the
Allowance System Regulations.
Alternative or additional allow-
ance 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, the limits imposed
on Phase I plants are tightened,
and emissions limits are also im-
posed on smaller, cleaner units.
Allowance allocation calcula-
tions are made for various types
of units, such as coal- and gas-
fired units with low and high
emissions rates or low fuel con-
sumption. 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 and ensures that the man-
dated emissions reductions are
maintained over time.
How Else Can Allowances
Be Obtained?
In addition to annual alloca-
tions, allowances are also avail-
able in three EPA reserves. In
Phase I, units can apply for and
receive additional allowances by
installing qualifying Phase I tech-
nology (a technology that can be
demonstrated to remove at least
90 percent of the unif s SO2 emis-
sions) or by reassigning their re-
duction requirements among
other units employing such tech-
nology. A second reserve pro-
vides allowances as incentives for
units achieving SO2 emissions re-
ductions through customer-ori-
ented conservation measures or
renewable energy generation.
The third reserve contains allow-
ances set aside for auctions and
direct sales, which are sponsored
yearly by EPA. In addition, allow-
ances are given as incentives for
utilities that replace boilers with
new, cleaner and more efficient
technologies, and for small diesel
fuel refiners.
Units that begin 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?
The primary participants in
allowance trading are officials
designated and authorized to
represent the owners and opera-
tors of electric utility plants that (
emit SO2. Allowances may be
bought, sold, and traded by any
individual, corporation, or gov-
erning body, including brokers,
municipalities, environmental
groups, and private citizens.
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. Even though the
allowance trading system is
based on unit-by-unit compli-
ance, allowance pools can be cre-
ated and operated. 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 unif s emissions do not ex-
ceed the number of allowances it
holds. To accomplish this, EPA
must maintain an Allowance
Tracking System (ATS). Each af-
fected unit, corporation, group, or
individual holding allowances
has an account in the ATS. Parties
must notify EPA to have transfers
recorded in their ATS accounts,
but it is not necessary to record
all transfers with EPA until such
time that the allowances are to
be used to meet a unif s SO2 emis-
sions limitation requirement. ATS
accounts are, however, the
official records for allowance
holdings and transfers used for
compliance purposes. To facili-
tate tracking ana recording, EPA
assigns every account a unique
identification number and every
allowance a unique serial
number.
EPA is establishing accounts
for units affected by both Phase I
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and Phase II. Each unit account
consists of a compliance subac-
count for allowances that may
be used for compliance in the cur-
rent year and separate future year
subaccounts for allowances to be
used in years to come.
Any person or group, includ-
ing brokers and investors, wish-
ing to purchase allowances may
open an ATS account. To open a
general ATS account, the inter-
ested party submits the Account
Information Form (or provides
the same information in a similar
format) to EPA.
What Information Is
Contained in ATS
Accounts?
ATS accounts include the
name and address of the author-
ized account representative; the
allowances in current and future
subaccounts; a record of allow-
ance transfers to and from the
account; and, for unit accounts,
the current year's total tonnage
of emissions as reported to date.
Information in the ATS accounts
is available to the public. In-
itially, the information will be
available only in written form
upon request, but EPA is devel-
oping a system of electronic
access to reduce paperwork and
to facilitate easy access to the
material.
How Are Allowance
Transfers Submitted?
Allowance transfer requests
and all correspondence with
EPA concerning compliance
with the Acid Rain Program
must be performed by author-
ized account representatives.
For a unit account, the Desig-
nated Representative, who repre-
sents the owners and operators of
that unit, performs this function.
For a general account, the author-
ized 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 allow-
ances from one account to an-
other, the authorized account
representative submits to EPA an
Allowance Transfer Form or a
written submission of the same
information. The authorized
account representatives of both
the transferor and transferee
must sign the form or written
submission.
How Will Compliance Be
Determined?
At the end of the year, units
must hold in their compliance
subaccounts 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 allow-
ance transactions and submit
them to EPA by January 30 to be
recorded. The amount of emis-
sions is determined in accordance
with the monitoring and report-
ing requirements described in the
Continuous Emission Monitor-
ing Rule.
After the January 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 emis-
sions for that year. If the unifs
emissions do not exceed its al-
lowances, the remaining allow-
ances are carried forward, or
banked, into the next year's
subaccount, which becomes the
current compliance subaccount.
If a unifs emissions exceed its
allowances, the unit must pay a
penalty and submit a plan to
EPA detailing how these excess
emissions will be offset the fol-
lowing year. Unless otherwise
provided in the 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 allow-
ance, transfer, sale, or deduction
decision must file a petition for
review with the Environmental
Appeals Board. Only the author-
ized 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 ap-
plicable, the decision may not £>e
appealed to the Environmental
Appeals Board if a claim of error
notification was not first submit-
ted. Final agency actions may be
appealed to the federal courts.
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 conserva-
tion and the development of
innovative technology. The
Acid Rain Program may estab-
lish a precedent for solving other
environmental problems in a
way that minimizes the costs to
society and promotes new
technologies.
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 617-674-7377 or the
EPA Public Information Center
(PIC) at 202-260-2080.
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