Technical Support Document (TSD) 

for the Transport Rule 

Docket ID No. EPA-HQ-OAR-2009-0491 

Analysis of Constellation Energy Group’s Allocation 

Suggestion that Uses Title IV Allowances 

U.S. Environmental Protection Agency 

Office of Air and Radiation 

July 2010 

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Background

In developing the Transport Rule proposal to replace the Clean Air Interstate Rule 

(CAIR), EPA carefully considered the proposed Transport Rule program’s impact on 

existing programs. These impacts included the impact of the proposed program on 

banked Title IV allowances in the Acid Rain Program. One of the specific issues 

considered was whether the proposed program would have the undesirable effect of 

promoting the use of the Title IV allowance bank. The Title IV allowance bank 

represents early reductions by sources in the Acid Rain Program. Further, source owners 

and operators made and implemented early reduction decisions on the assumption that 

banked Title IV allowances would continue to have value in the future. However, the 

proposed Transport Rule program could result in significantly reduced values for Title IV 

allowances before the start of the proposed program (i.e., January 1, 2012), thereby 

resulting in SO2 emissions increases before that date.1

 These policy considerations were 

weighed in light of legal, policy, and implementation concerns such as those discussed 

below. 

In a letter dated June 25, 2009, Constellation Energy Group (Constellation) 

outlined a number of concerns and suggestions regarding development of the rule to 

replace the CAIR. In a follow-up meeting, Constellation verbally elaborated on a 

possible SO2 allowance allocation methodology -- mentioned in the letter -- for the CAIR 

replacement program. Constellation stated that an SO2 allocation methodology could be 

created to reward sources that made early SO2 emission reductions and therefore banked 

 

1

 In fact, because the emission reduction requirements of the proposed Transport Rule 

program would result in nationwide SO2 emissions well below the 8.95 million ton cap 

under the Acid Rain Program, the proposed program would likely result in Title IV 

allowances having little or no value. 

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Title IV allowances. This document provides EPA’s summary and analysis of 

Constellation’s suggested approach. 

Constellation’s suggested approach for SO2 allowance allocation

Constellation’s suggested approach assumed that the CAIR replacement program 

would begin in 2015 and use trading that would rely on newly created SO2 allowances. 

EPA’s understanding is that, under this suggested approach, new SO2 allowances 

(comprising for each state that state’s budget) in the new program would be allocated to 

sources in the state as follows. 

First, after Title IV compliance determinations for 2014 are completed, EPA 

would allocate new SO2 allowances (for up to the first 5 vintage years, i.e., 2015-2019) to 

each source covered by the CAIR replacement program.2 The allocations would be 

based on the amount of pre-2015 Title IV allowances that were in the source’s allow

account as of the allowance transfer deadline for 2014 (i.e., March 1, 2015) and that 

remained unused after EPA deducted the amount necessary for compliance for 2014. 

Accumulation of banked pre-2015 Title IV allowances would be “voluntary” in that the 

CAIR replacement program rules would not bar the use of these allowances. EPA would 

select an allocation ratio for new SO2 allowances based on banked pre-2015 Title IV 

allowances (i.e., 1 new SO2 allowance for a specified amount of banked Title IV 

allowances). New SO2 allowances would be the only allowances that could be used for 

compliance in the new program. The total amount of new SO2 allowances allocated 

(including both those allocated based on banked Title IV allowances and any allocated 

ance 

 

2

 It is unclear from Constellation’s oral presentation whether a source holding banked 

Title IV allowances would qualify for and receive new SO2 allowances only once for the 

entire period, 2015-2019, or separately for each year during that period. 

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using any other methodology) to sources in a state for a vintage year could not exceed 

that state’s SO2 budget under the new program. Sources receiving new SO2 allowances 

based on their banked Title IV allowances would retain those Title IV allowances, which 

would remain usable for compliance with the Acid Rain Program for years after 2014.3 

 Second, to the extent any new SO2 allowances would remain in a state’s SO2

budget for a vintage year after completion of the allocations based on banked Title IV 

allowances, those remaining allowances would be allocated to sources in the state using 

some other allocation methodology. Constellation’s suggested approach did not specify 

any methodology for allocating the remaining allowances. 

Constellation stated that its suggested approach would provide an incentive to 

preserve Title IV allowance banks before the start of the CAIR replacement program. 

According to Constellation, sources would preserve the Title IV allowance banks by 

burning lower sulfur coal, operating existing scrubbers to maximize SO2 removal, 

increasing dispatch of low-emitting units, and investing in new scrubbers. With the 

commencement of the new program and the imposition of more stringent emission 

reduction requirements than under the Acid Rain Program for 2015 and thereafter, 

emissions by sources covered by the new program would be limited by the amount of 

new SO2 allowances that they held, and the covered sources would not be able to use 

their banked Title IV allowances to exceed that emissions limit. 

Assumptions for analysis

Constellation assumed that the CAIR replacement program would begin on 

January 1, 2015. EPA’s analysis evaluating Constellation’s suggested approach takes 

 

3

 However, the Title IV allowances would likely have little or no value once the CAIR 

replacement program began. See n.1. 

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into account that the proposed Transport Rule program would impose SO2 emission 

reduction requirements beginning on January 1, 2012. 

Analysis

Because of the following concerns about the legality, efficacy, and 

implementation of Constellation’s suggested approach, EPA did not include the 

suggested approach in the proposed Transport Rule remedy or in the detailed, alternative 

remedies discussed in the preamble of the proposed Transport Rule. 

Legal concerns

 EPA believes that there would be significant legal risk in using Constellation’s 

suggested approach for allocating new SO2 allowances in the proposed Transport Rule 

program. Specifically, EPA believes that, if this approach were adopted in a final rule, 

there is a significant risk that, on appeal, the Court would conclude that the approach was 

inconsistent with North Carolina v. EPA, 531 F.3d 896, 921-22 (D.C. Cir. 2008), where 

the Court held, among other things, that EPA lacked authority to modify or eliminate, 

through the CAIR program, the authorization to emit provided by a Title IV allowance 

for the purpose of harmonizing Titles I and IV. 

 First, Constellation’s suggested approach would effectively reward continued 

holding, and impose a heavy burden on current use, of Title IV allowances. Holding -- 

rather than using -- Title IV allowances would be the best way for a source owner or 

operator to ensure access to free, new SO2 allowances for up to the first 5 years of the 

proposed Transport Rule program (i.e., 2012-2016). In fact, in light of the reasonable 

possibility that the allocation of new SO2 allowances based on banked Title IV 

allowances would exhaust the SO2 budget for one or more States and prevent the 

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allocation of any new SO2 allowances in those States using any other allocation 

methodology, holding (i.e., not using) Title IV allowances could be the only way for 

sources in those States to get free, new SO2 allowances for the year involved. In 

summary, under the suggested approach, a source’s use of Title IV allowance bank could 

have the result of significantly reducing, or in some cases eliminating entirely, the 

source’s ability to obtain free, new SO2 allowances for the first 5 years of the proposed 

Transport Rule program. Consequently, because Constellation’s suggested approach 

could significantly burden the use of banked Title IV allowances, it could be seen as 

interfering with the use of banked Title IV allowances and therefore in effect modifying 

the Title IV allowances’ authorizations to emit. EPA recognizes that under 

Constellation’s suggested approach, sources would not be required to hold Title IV 

allowances, but instead would receive a benefit for allowances voluntarily held. 

However, because of the importance to sources of obtaining free, new SO2 allowances, 

EPA does not believe the voluntary nature of this provision would provide a sufficient 

basis for distinguishing the suggested approach from SO2 allowance allocation provisions 

reversed in North Carolina. 

Second, there is a significant risk that the Court would view the sole purpose of 

Constellation’s suggested approach as being the preservation of the emission reductions 

achieved by the Title IV program, rather than the implementation of the statutory 

mandate of section 110(a)(2)(D)(i)(I) of the Clean Air Act. There would not necessarily 

be any correlation between (1) the amount of banked Title IV allowances a source would 

hold after March 1, 2012, for which the source would receive free, new SO2 allowances 

and (2) either that source’s SO2 emissions in 2010 and 2011 or the degree to which total 

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emissions in 2010 and 2011 from the state where the source is located would contribute 

to nonattainment or interfere with maintenance in any downwind state. This is because 

sources could hold banked Title IV allowances for many reasons, including reasons 

having little or no connection with the sources’ emissions or total emissions in the 

sources’ state. For example, a source could hold banked Title IV allowances but be 

located in a state whose SO2 budget would likely be oversubscribed by other sources in 

the state that hold banked Title IV allowances. In order to maximize the total amount of 

free, new SO2 allowances that the owner of that source would receive, the owner could 

easily transfer, before March 1, 2012, banked Title IV allowances from that source to one 

of owner’s other sources in another state whose State SO2 budget would not likely be 

oversubscribed. In short, a source’s banked Title IV allowance holdings after March 1, 

2012 would not necessarily reflect emission reductions by the holding source or even by 

the sources in the state where the holding source is located. It is therefore doubtful that 

the Court would find that the allocation of new SO2 allowances based on banked Title IV 

allowances was related to, much less necessary for, implementation of Title I 

requirements. 

EPA is also concerned that the above-described legal risk would potentially put in 

jeopardy the first several years of the proposed Transport Rule program in exchange for 

relatively limited potential environmental benefit. Constellation’s suggested approach 

would potentially provide environmental benefit during the relatively short period 

remaining before the start of the proposed Transport Rule Program (i.e., mid-2010 (the 

time frame for issuance of the proposed rule) or mid-2011 (the projected time frame for 

issuance of a final rule) through the end of 2011) when sources could increase SO2

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emissions by using banked Title IV allowances. However, if adopted by EPA, the 

suggested approach would create significant legal risk for the proposed program for the 

entire period for which allocations of new SO2 allowances would be made using that 

approach, i.e., for up to 5 years (2012 through 2016). 

Policy and Implementation Concerns

EPA believes that the effectiveness of the Constellation proposal in discouraging 

use of the Title IV allowance bank is uncertain and questionable. Under the suggested 

approach, the owners and operators of a covered source would presumably compare the 

reasonably predictable savings from using higher sulfur coal or turning down or off 

existing controls during mid-2010 or mid-2011 through the end of 2011 to the more 

speculative benefit of receiving free, new SO2 allowances for certain years during the 

period, 2012 through 2016. 

The likelihood of receiving free, new SO2 allowances, and the amount that might 

be received, would likely vary from state to state, depending on several factors. These 

factors would include: the size of the State SO2 budget and so the amount of new SO2 

allowances available for allocation; the number and ownership of sources qualifying for 

new SO2 allowances, based on Title IV allowance holdings, in the state; and the levels of 

those sources’ Title IV allowance banks after March 1, 2012. For example, as discussed 

above, a state’s SO2 budget could be too small, as compared with the total amount of new 

SO2 allowances for which sources in the state would otherwise qualify. In that case, one 

or more sources with banked Title IV allowances in the state could receive fewer new 

SO2 allowances for a vintage year than the amounts for which those sources qualified. 

Source owners and operators would know the sizes of the State SO2 budgets when a final 

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Transport Rule was issued (e.g., projected to be mid-2011). However, the owners and 

operators could only speculate about how many new SO2 allowances might actually be 

received because the number and ownership of the sources eligible for new SO2

allowances and the sizes of their Title IV allowance banks would not be known until after 

March 1, 2012, long after decisions on banking Title IV allowances during mid-2010 or 

mid-2011 through the end of 2011 would have to be implemented. With, in addition, the 

above-discussed legal risk that adoption of Constellation’s suggested approach in a final 

rule could be reversed on appeal, it is likely that owners and operators would 

significantly discount the total value of the new SO2 allowances that they might be 

awarded based on banked Title IV allowances. EPA therefore believes that it is unlikely 

that a significant number of owners and operators would decide to take actions during 

mid-2010 or mid-2011 through the end of 2011 to maintain or reduce emission levels in 

order to qualify for free, new SO2 allowances. 

 Finally, EPA is concerned that Constellation’s suggested approach would 

significantly disrupt the market for the new SO2 allowances because this approach would 

result in delay of the allocation of all new SO2 allowances for the first year of the 

proposed Transport Rule program. New SO2 allowances could not be allocated for any 

vintage year (e.g., 2012) based on holdings of banked Title IV allowances until after the 

completion of Title IV compliance determinations for 2011, i.e., until around mid-2012. 

The same timing would apply to any new SO2 allowances remaining to be allocated by 

another methodology, which could only be implemented after EPA knew whether, and, if 

so, how many, new SO2 allowances were remaining. This would create a high level of 

uncertainty in the market for the new SO2 allowance by reducing the time for compliance 

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planning and allowance trading for 2012 and would likely raise allowance prices and the 

compliance cost of the proposed Transport Rule program. EPA typically tries to allocate 

allowances before the first year for which the allowances can be used for compliance.