In 1990, the Clean Air Act Amendment (CAAA) designed a cap and trade program to reduce the amount of SO2 emissions in the United States. The program is managed by the EPA and is set to reduce SO2 emissions by 10 million tons per year below the levels measured in 1980.
The Acid Rain Program or Title IV within the CAAA, consists of two implementation phases. Phase one ran from January 1, 1995 through December 31, 1999. This phase targeted large electric generators and allocated allowances to participating units based on an emissions rate. Phase two, where the US currently finds itself began January 1, 2000. This phase expanded its group of sources to include all generation units with a rated capacity of 25 MW or greater. Phase two of this program caps the number of allowances issued per annum at 8.95 million also based on an emissions rate.
A market participant interested in purchasing allowances has two possible avenues from which to source: the over the counter market and an EPA sponsored auction. Title IV of the CAAA provided for an annual auction of allowances to be managed by the Chicago Board of Trade. The auction is structured as a sealed bid process, with bids to purchase allowances required to be submitted by mid March and results made public during a press conference in early April. The auction provides for the sale of 125,000 current vintage year allowances, and the sale of 125,000 seven-year forward vintage allowances (i.e. 2010 vintage year in the 2003 auction). Prospective purchasers may bid for as few as one or as many as all 250,000 allowances.
The SO2 cap and trade program provides for banking, i.e., rolling an allowance not surrendered for compliance purposes in the year of its issue (i.e. vintage year) forward for use in subsequent years at no penalty. A prior vintage year allowance has the same value as a current vintage year allowance, and continues to be equivalent to one ton emitted of SO2. Therefore, although the current Phase Two cap calls for no more than 8.95 million allowances to be allocated per year, actual emissions of SO2 could well exceed this number, as generators use banked allowances to meet compliance requirements. However, upon depletion of banked allowances, the 8.95 million allocations of allowances becomes a hard cap, with actual emissions not to exceed this number. At no point are a generator’s actual emissions of SO2 permitted to be in excess of state permitted levels.
Compliance under the "cap and trade" program occurs at a unit specific level. The EPA requires all generators to monitor unit specific emissions of SO2 by maintaining Continuous Emissions Monitoring Systems ("CEMS"). Generators are responsible for volumes of SO2 emitted from January 1 through December 31. Upon year end, the EPA provides a 60 day grace period, during which time generators are responsible for insuring each unit's account has a number of allowances deposited greater than or equal to the actual SO2 emissions as reported by CEMS. On March 1, the EPA "locks down" the accounts, during which time, allowances can be neither sold nor moved, until the EPA has verified compliance by comparing account totals against CEMS reports.
Contacts:
Tom Gibson: +1 281-340-8300
Russell Harris +1 281-340-8300
Jeffrey Johnston +1 281-340-8300
Chris Konrad +1 281-340-8300