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 Printed on paper that contains at least 50% recycled fiber. ------- 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 2 ------- 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. 3 ------- |