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Annual Allowance Auction for Air Emissions Shows Continued Progress of Innovative Acid Rain Program

Release Date: 03/26/2003
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(03/26/03) EPA and the Chicago Board of Trade announced the results of the eleventh annual acid rain allowance auction on Tues., March 25th. The auction, which gives private citizens, brokers and power plants an opportunity to buy and sell sulfur dioxide (SO2) allowances, is part of EPA's innovative and successful program to reduce acid rain by cutting nationwide SO2 emissions from power generation by 50 percent.

“The annual allowance auction is a part of the reason that the Acid Rain Program’s cap and trade approach shows such remarkable results,” said EPA Administrator Christie Whitman. “The cap and trade mechanism under the Acid Rain Program has reduced emissions and improved human and environmental health earlier, and at less cost, than would have occurred with more conventional approaches.”

An EPA progress report on the Acid Rain Program released in November 2002 details the emissions reductions resulting from the program as of 2001. SO2 emissions from electric power generation continue to decline, down by close to 7.0 million tons since 1980. Preliminary results for 2002 reveal emission levels dropped more than 400,000 tons from the previous year.

“The market-based acid rain program has been so successful that it serves as a model for additional, national emissions reductions proposed under the President’s Clear Skies Act,” commented Whitman. “The Acid Rain cap and trade program has worked, and the Clear Skies Act promises even greater results in protecting the health of millions of Americans,” she continued.

Clear Skies was touted by President Bush in his recent State of the Union speech, and was reintroduced in the House and Senate in February 2003. The centerpiece of this ambitious program is mandatory emissions reductions of SO2, nitrogen oxides (NOx) and mercury from the power sector by approximately 70 percent.

A national emissions cap, combined with SO2 allowance trading, has been effective both in terms of cost reduction and human health and environmental benefits since it began in 1995. Current estimates indicate compliance costs 75 percent below those originally predicted by EPA. Emissions are already more than five million tons below 1990 levels, and acid deposition in the eastern United States has declined by as much as 30 percent, resulting in improvements in lakes and streams.

The Clean Air Act amendments of 1990, signed into law by President George H.W. Bush, established an annual national cap on SO2 emissions. Each year, EPA issues allowances to existing sources within that cap. In addition, the Clean Air Act mandates that a limited number of those allowances are withheld and auctioned.
The auctions help ensure that new electric generating plants have a source of allowances beyond those allocated
initially to existing units. Proceeds from the auctions are returned to sources in proportion to the allowances withheld. In addition to allowances offered by EPA, private parties may offer allowances for sale in the auction.

EPA emphasizes that no matter how many allowances a source purchases, the health-based national ambient air quality standards act as a backstop to ensure that local air quality is protected.

An allowance gives affected sources (mainly existing electric power plants) the right to emit one ton of SO2 per year. A plant's total annual emissions cannot exceed its allowances. Allowances are transferrable, allowing market forces to determine their price. If a source reduces its SO2 emissions more than required, it will have left-over allowances it can sell to another utility or bank for future use. By providing for such transactions, total emission reductions will be achieved in the most cost-effective manner, and the industry will have the flexibility to choose among various options for reducing emissions.

The auction, conducted by the Chicago Board of Trade, includes two "vintages" of allowances, which involves the earliest year an allowance may be applied against SO2 emissions. In addition to year 2003 allowances, the Clean Air Act mandated that EPA auction additional allowances seven years in advance to help provide stability in planning for capital investment. These advance allowances will be usable in 2010.

EPA has been working with the Chicago Board of Trade, as well as the power industry and brokers and traders, since the program’s inception. The result is a viable SO2 market and a demonstration that a mandatory emissions cap and trade approach can improve the environment with more certainty and at a lower cost than traditional control approaches.

Detailed results of this year's acid rain auction and information about how the trading program works are available on EPA's Web site: https://www.epa.gov/airmarkets/auctions.

Summary Results of the 2003 SO2 Allowance Auction:

Vintage	2003		2010
Offeror	EPA	Private	EPA	Private
Allowances Offered	125,000	10	125,000	--
Allowances Sold	125,000	10	125,000	--
Total Bids	82		40
Successful Bids	20		6
Clearing Price (lowest price at which a successful bid was made)	$ 171.80		$ 80.00
Bid Price Range	$ 2.06 - 250.00		$ 10.00 - 92.00
Average Price Paid	$ 171.81		$ 86.40