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CHICAGO AUCTION AIDS MARKET-BASED APPROACH TO ACID RAIN REDUCTION
Release Date: 03/29/2001
Contact Information:
FOR RELEASE: THURSDAY, MARCH 29, 2001
CHICAGO AUCTION AIDS MARKET-BASED
APPROACH TO ACID RAIN REDUCTION
Dave Ryan 202-564-7827 or e-mail: ryan.dave@epa.gov
EPA and the Chicago Board of Trade today announced the results of the ninth annual acid rain auction Monday. This auction is an important part of EPA’s innovative, market-based program that uses economic incentives to achieve cost-effective reductions in acid rain emissions.
“The auction is part of an innovative trading program that signals a shift from EPA’s historic mode of command and control regulation to one that harnesses the incentives of the free market to reduce acid rain emissions,”said EPA Administrator Christie Whitman. “This successful market approach has reduced acid rain emissions by 22 percent more than required by law. To build on this progress, we look forward to working with Congress on a strategy for utilities that will further reduce acid rain emissions by controlling SO2 and nitrogen oxides.”
The auction, which gives private citizens, brokers and power plants the chance to buy and sell sulfur dioxide (SO2) allowances, is part of EPA's program to significantly reduce acid rain by cutting nationwide SO2 emissions from power plants in half.
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 utility industry will have the flexibility to choose among various options for reducing emissions.
EPA emphasizes that no matter how many allowances a utility purchases, it will not be allowed to emit levels of SO2 that would violate national or state ambient health-protection standards.
SO2 allowance trading, combined with a national emissions cap, is cost-effective: current cost estimates are 75% lower than those originally predicted. Acid deposition in the eastern U.S. has declined, resulting in some improvements in lakes and streams.
Since EPA’s acid rain program began in 1995, it has reduced annual SO2 emissions from power plants by five million tons from 1990 levels. When fully implemented in 2010, the program will reduce SO2 emissions from power plants by 8.5 million tons annually.
The Clean Air Act established an annual national cap on SO2 emissions. Each year, EPA grants allowances to utilities to match that cap. However, a limited number of those allowances are withheld and auctioned. Proceeds from the auctions are returned to utilities in proportion to the allowances withheld. In addition to allowances offered by EPA, private parties may offer allowances for sale in the auction. Privately offered allowances are sold only after all EPA allowances are sold.
The auction, conducted by CBOT, included two "vintages" of allowances. Vintage describes the earliest year an allowance may be applied against SO2 emissions. In addition to year 2001 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 2008.
Summary Results of the 2001 SO2 Allowance Auction
| Vintage | 2001 |  | 2008 | |
| Offeror | EPA | Private | EPA | Private |
| No. of Allowances offered | 125,000 | 2,788 | 125,000 | 2,388 |
| No. of Allowances sold | 125,000 | 2,788 | 125,000 | 2,388 |
| Total bids | 85 | | 20 | |
| Successful bids | 14 | | 6 | |
| Clearing Price (lowest price at which a successful bid was made) | $173.57 | | $105.72 | |
| Price Range ($) | $105.00 - $225.00 | | $30.00 - $115.07 | |
| Average Price ($) (weighted by no. of allowances in winning bids) | $174.97 | | $110.75 | |
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/ For further technical information, call Jeffrey Levy of EPA’s Clean Air Markets Division at 202-564-9727.
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