Who Notifies EPA of
Allowance Transactions?

AD correspondence with EPA
concerning the transfer of
allowances among and between ac-
counts must be performed by
authorized account repre-
sentatives. For a unit account, the
designated representative, who
represents the owners and
operators of that unit, performs
that function. (Requirements and
responsibilities of designated rep-
resentatives are covered in the
Permits Rule).

For a non-unit account, the
authorized account representative
is the individual who signs and
submits the New Account/New
Authorized Account Repre-
sentative Form to EPA to open the
account. The certificate of repre-
sentation that accompanies this
form must list all owners of the ac-
count and include a statement cer-
tifying that the representative was
selected by an agreement among all
of the owners and has the necessary
authority to carry out his or her
responsibilities.

The use of an authorized account
representative for both unit and
non-unit accounts ensures that EPA
will receive information and in-
structions concerning transfers
from a reliable person for each ac-
count. This will allow transfers to
be completed efficiently and
without the need for secondary
confirmation.

How Are Allowance
Transfers Submitted?

Tr authorized account repre-
sentative submits to EPA a re-
quest to record the exchange of
allowances from one account to
another. There is no time limit for
notifying EPA of the transfer;
however, until EPA records the
allowances, they are not available
for use toward meeting the end-of-
year emissions requirements.

The request to record an
allowance transaction is made on
an SOQ2 Allowance Transfer Form.

Transfer information required on
the form includes:

¢ The identification numbers of
the transferor’s and the
transferee’s accounts.

« The serial number of each
allowance to be transferred.

Signatures of the authorized
account representatives of
both the transferor’s and
transferee’s accounts.

° Where the transferee does not
have an account in the
Allowance Tracking System,
information necessary (includ-
ing the proper form) for estab-
lishing a new account.

e Where the transferor is a unit
account, certification that the
unit will meet its annual emis-
sions requirement without the
allowances being transferred.

If EPA determines the transfer
request to be valid, the allowance
transaction will be recorded within
5 business days of receipt of the
transfer form. Within 5 business
days of recording the transfer or
rejecting it as invalid, EPA will
notify the transferor and transferee
either that the transfer has been
completed or that it has been deter-
mined to be invalid.

How Will Compliance Be
Determined?

tthe end of the year, units must

hold allowances equal to the
amount of SO2 emitted during that
year. By January 30, units must
finalize allowance transactions and
submit them to EPA for recordation
to cover their emissions for the pre-
vious year. The amount of emis-
sions will be determined by
monitoring equipment that must
be installed by all units participat-
ing in allowance trading (see the
Continuous Emission Monitoring
Rule).

After the January 30 deadline,
EPA will deduct allowances from
each unit’s compliance subaccount
in an amount equal to its SO2 emis-
sions for that year. If the unit’s

5

emissions did not exceed its
allowances, the remaining
allowances will be carried forward,
or “banked,” into the next year’s
subaccount. If a unit’s emissions
did exceed its allowances, the unit
must pay a penalty and submit a
plan to EPA detailing how these ex-
cess emissions will be offset the fol-
lowing year (see the Excess
Emissions Rule). Unless otherwise
provided in the offset plan, EPA will
deduct allowances from the account
in an amount equal to the excess
emissions.

Since allowances that have been
traded or purchased by a unit may
have differing accounting values,
EPA will give units the option of
choosing which allowances will be
deducted by submitting an SO2
Allowance Deduction Form. If the
unit does not submit this form by the
January 30 deadline, EPA will
deduct allowances on a first-in, first-
out basis.

Figure 3 presents important
dates for those participating in the
allowance system. Figure 4 is the
rulemaking schedule for develop-
ing the allowance system.

For More Information
FF” more information, write to:

US. EPA Office of Air and
Radiation

Acid Rain Division
(ANR-445)

Washington, DC 20460

If you would like to receive other
fact sheets in this series, call the
Acid Rain Hotline at (617) 641-5377
or the EPA Public Information
Center (PIC) at 202-260-2080.

Fact sheets are available on the
following subjects:

¢ Continuous Emission

Monitoring

Environmental Benefits

e Excess Emissions

¢ Permits

Proposed Acid Rain Rules


Fignne2, EAN Auctions end Sales Rrogrems.

To stimulate the market in allowance trading and establish a market price for allowances early on, EPAwill set aside
a Special Allowance Reserve for public auctions and sales. This reserve will consist of 2.8 percent of the total annual
allowances that would otherwise be allocated to existing units. Allowances offered for auction or sale will be divided
between spot allowances, which can be used in the year they are bought (except for allowances purchased in spot
auctions before 1995, which cannot be used for compliance until 1995), and advance allowances, which cannot be
used until 7 years after they are bought.

EPA will hold spot and advance auctions for allowances starting no later than March 31 of each year. To participate
in the auction, bidders will send EPA sealed bids specifying the number of allowances they would like to buy and their
stated price. There will be no minimum price: After all of the allowances in the EPA reserve have been auctioned off,
private allowance holders may offer their allowances for sale. These private holders must have their allowances
recorded by EPA prior to the auction. Private holders may specify a minimum price. The auction results will be published
in the Federal Register and the Commerce Business Daily.

EPAwill begin spot and advance sales no later than June 1 of each year and will continue until January 30 following
that year, the last day on which allowances may be transferred. Spot sales will begin in 2000, and advance sales will
begin in 1993, for use beginning in 2000. EPAwill sell 25,000 allowances each year in advance sales from 1993 through
1999 and 50,000 allowances per year split among spot and advance sales beginning in 2000. The allowances will be
sold on a first-come, first-served basis at $1,500 per allowance, with the price adjusted annually for inflation using the
Consumer Price Index (CPI).

Anyone can buy allowances inthe direct sale, but independent power producers (IPPs) can obtain written guarantees
from EPA stating that they will have first priority. These guarantees, which will be awarded on a first-come, first-served
basis, secure the option for qualified IPPs to purchase a yearly amount of allowances for the life of a new unit. This
provision enables IPPs to ensure lenders that they will have access to the allowances they need to build new units. To
continue to hold a guarantee, however, an IPP must certify a continuing need. EPA may also terminate the guarantee
if certain requirements are not fulfilled.

What Is the System for
Keeping Track of
Allowances?

PAs role in allowance trading

will be to record allowance
transfers that will be used for com-
pliance and to ensure at the end of
the year that a unit’s emissions do
not exceed the number of allow-
ances it holds. To accomplish this,
EPA will establish an Allowance
Tracking System (ATS) account for
each affected unit and for any cor-
poration, group, or individual hold-
ing allowances. Parties must notify
EPA to have transfers recorded in
these ATS accounts, but it is not
necessary to record all transfers with
EPA until such time as the allow-
ances are to be used to meet a unit’s
SQ2 emissions limitation require-
ment. For example, a broker buying
an allowance for transfer to another
party does not need to record this
transaction with EPA. The ATS ac-
counts will, however, be the official
records for allowance holdings and
transfers used for compliance pur-
poses. To facilitate tracking and
recording, EPA will assign every ac-
count a unique identification num-

ber and each allowance a unique
serial number.

EPA will establish accounts
for existing units affected under
both Phase I and Phase II by
January 30, 1993. Each unit ac-
count will consist of a
compliance subaccount for
allowances that may be used for
compliance in the current year
and separate future year subac-
counts for allowances to be used
in years to come. Each subac-
count, current and future, would
initially contain the number of
allowances that the Clean Air
Act authorizes EPA to allocate to
the unit for each year. Future
subaccounts will be kept for
each of the 30 calendar years
after 1995, when Phase I begins,
or for 30 years following the cur-
rent year, whichever is later.

After accounts have been estab-
lished for affected units, any person
or group, including brokers and in-
vestors, wishing to purchase
allowances may open an ATS ac-
count. To open a non-unit ATS ac-
count, the interested parties must
submit the proper form (discussed
below) to EPA. Non-unit accounts
also include subaccounts for the

4

current year and for 30 years into
the future.

What Information Is
Contained in ATS
Accounts?.

Et ATS account will include:

e The name, address, phone
number, and fax number of the
authorized account repre-
sentative.

¢ The serial numbers of all
allowances in the compliance
subaccounts and future subac-
counts.

e For unit accounts, the current
total tonnage of reporting
emissions for the year to date.

In addition, a list of all
allowance transfers to or from the
account may be included. Any in-
formation in the ATS accounts is
available to the public. Initially,
the information will be available
in written form, but EPA plans
develop asystem of electronic acc
to reduce paperwork and to
facilitate easy access to the
material.


Figuresi@CompliancerScheduley

Action

Date

Allowance Tracking System accounts established for affected units in

both Phase | and Phase lt

Allowance trading and submittal of transfers to EPA

for recordation begins

Allocation of allowances from Conservation and Renewable

Energy Reserve begins

Applicants for IPP guarantees for direct sales must apply for financing

to construct new units

EPA Spot and Advance Auctions begin

EPA Advance Sales begin

EPA Auction Allowances are first usable

EPA Sales Allowances are first usable

EPA Spot Sales begin
EPA may terminate direct sales

EPA may terminate auctions

Conservation and Renewable Energy Reserve terminates

No later than January 30, 1993
January 1, 1993
No earlier than January 1, 1993

No later than date of first 1993 auction
No later than March 31, 1993

No later than June 1, 1993

CY1995

cy2000

No later than June 1, 2000

No earlier than February 1, 2002

No earlier than January 1, 2005

No tater than January 2, 2010

Rigme4, Aowancs System Ruta,

Subpart Proposed Rule Final Rule
(Date Published) (Target Date for Publication)
A: Background December 1991 May 1992
B: Allocation March 1992 December 1992
C: Tracking December 1991 May 1992 :
D: Transfers December 1991 7 May 1992
E: Auction and Sales May 1991 December 1991
F: Conservation and Renewable December 1991 May 1992
Energy Reserve

G: Smail Diese! Refineries March 1992 December 1992



United States
Environmental Protection

Agency

Allowance System
Proposed Acid Rain Rule

400/1-91/034
December 1991

Air and Radiation
(ANR-445)

SEPA

The U.S. Environmental Protection Agency (EPA) has proposed
four rules containing the core acid rain requirements: the Per-
mits Rule (40 CFR Part 72), the Allowance System Rule (40 CFR
Part 73), the Continuous Emission Monitoring Rule (40 CFR Part
75), and the Excess Emissions Rule (40 CFR Part 77). EPA will

also propose additional rules at a future date. These rules will
include requirements for facilities that elect to opt in to the Acid

Rain Program (40 CFR Part 74) and for the nitrogen oxide (NOx)
control program (40 CFR Part 76. This fact sheet summarizes

the key components of EPA’s proposed Allowance S

Rule (40 CFR Part 73).

nder Title IV of the Clean Air Act
Amendments of 1990, Congress
authorized the U.S. Environmental
Protection Agency (EPA) to establish

) Acid Rain Program. The overall
goal of this program is to significant-
ly reduce sulfur dioxide (SO2) and
nitrogen oxide (NO ) emissions, the
precursors of acid rain. To achieve
this goal at the lowest cost, the
program will employ both tradition-
al and innovative, market-based ap-
proaches for controlling air
pollution. In addition, the program
will encourage energy conservation
and promote pollution prevention.

The legislation sets as its primary
goal the reduction of annual SO2
emissions by 10 million tons below
1980 levels. To achieve these SO2
reductions, the law requires a two-
phase tightening of the restrictions
placed on fossil fuel-fired power
plants.

Phase I begins in 1995 and affects
110 mostly coal-burning electric
utility plants located in 21 eastern
and midwestern states. Phase II,
which begins in the year 2000,

‘htens the annual emissions limits

on these large higher emit-
ting plants and also sets restrictions

on smaller and cleaner plants fired
by coal, oil, and gas.

All existing utility units with an
output capacity of 25 megawatts or
greater and all new utility units will
be affected in Phase II. In addition,
other sources of SO2 (such as in-
dustrial facilities) may elect to par-
ticipate in the Acid Rain SO2
Program by opting in.

The program will employ
both traditional and
innovative, market-based
approaches for
controlling air pollution.

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, which
will be required to install low-NOx
burner technologies and meet new
emissions requirements.

These requirements will also be
implemented in two phases. For
Phase I, EPA will establish emis-

ystem

sions limitations for two types of
utility boilers (tangentially fired
and dry bottom, wall-fired boilers).
For Phase II, regulations for all
other types of coal-fired boilers will
be issued by 1997, and must be met
beginning in the year 2000 by all
units not subject to the Phase I NOx
limits. Regulations for tangentially
fired and dry bottom, wall-fired
boilers not covered in Phase Imay be
tightened at this time.

The innovative, market-based
SO2 allowance trading component
of the Acid Rain Program allows
utilities to adopt the most cost-
effective strategy to reduce SO2
emissions at units in their system.
The Acid Rain Program operating
permit spells out the specific
program requirements and com-
pliance options chosen by each
source. Affected utilities also will
be required to install systems that
continuously monitor emissions of
SO2, NOx, and other related pol-
lutants in order to track progress,
ensure compliance, and provide
credibility to the trading program.
In any year that compliance is not
achieved, excess emissions penal-
ties will apply, and sources will be

& Printed on Recycled Paper.


required to submit a plan to EPA
that specifies how the excess SO2
emissions will be offset.

Introduction

Allowance trading is the
centerpiece of EPA’s Acid
Rain Program, and allowances are
the currency with which com-
pliance with the acid rain require-
ments is achieved. The Acid Rain
Allowance System Rule sets forth
the requirements for allocation,
transfer, and tracking of allowances
and establishes the procedures for
obtaining additional allowances
from three reserves administered
by EPA. EPA’s role in allowance
trading is to ensure compliance,
and the Allowance System Rule
reflects that emphasis. Through the
market-based allowance trading
system, affected utilities, rather
than a governing agency, decide the
most costeffective way to use avail-
able resources to comply with the
acid rain requirements of the Clean
Air Act. In addition, this system
provides incentives for energy con-
servation and technology innova-
tion that can both lower the cost of
compliance and yield pollution
prevention benefits.

What Are Allowances?

A allowance authorizes a unit
within a utility or industrial
source to emit one 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 emissions, i.e, a unit
that emits 5,000 tons of SO2 must
hold at least 5,000 allowances.

How Are Allowances
Allocated?

PA will allocate allowances

annually, beginning in 1995. In
Phase I, EPA will allocate allow-
ances to each unit based on a 2.5
Ibs/mmBtu (million British ther-
mial unit) emission rate, multiplied
by the unit’s “baseline,” the
average fossil fuel consumed
during 1985 through 1987. These
allowance allocations are listed in

Table A of the Clean Air Act.
However, alternative or additional
allowance allocations will be made
for various units, including af-
fected 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.

InPhase II, the limits imposed on
Phase] plants will be tightened and
emissions limits will also be im-
posed on smaller, cleaner units.
Allowance allocation calculations
will be made for various types of
units, such as coal- and gas-fired
units with low and high emissions
tates or low fuel consumption.
During Phase II, the Act places a
cap on the number of allowances
issued to units each year at 8.95
million. This effectively caps emis-
sions and ensures that the man-
dated emissions reductions will be
maintained over time.

In addition, bonus allowances
will be allocated to units in high-
growth states; certain municipally
owned power plants; states with
overall utility emissions rates at or
below 0.8 Ibs/mmBtu; units with
actual 1985 rates below 2.5
Ibs/mmBtu and capacity factors
less than 60 percent; and units that
converted to coal between 1980 and
1985 and that are located in states
with more than a 30-million
kilowatt installed electrical
generating capacity.

How Else Can
Allowances Be
Obtained?

L addition to annual allocations,
allowances are also available in
three EPA reserves. In Phase I, units
that apply for and are issued per-
mits to emit at higher levels in 1995
and 1996 will be allocated extra
allowances from the Phase I
Reserve to cover their additional
SO2 emissions during that time.
These units will be allocated
allowances for using a “qualifying
Phase I technology” (a technology
that can be demonstrated to remove
at least 90 percent of the unit’s SO2
emissions) or for reassigning their

2

reduction requirements among
other units employing such a tech-
nology. A second reserve provides
allowances as incentives for units
achieving SO2 emissions reduc-
tions through demand-side, ener;
conservation measures or rene
able energy generation; the third
reserve contains allowances set
aside for special auctions and sales
(see Figures 1 and 2).

Units that begin operating in
1996 and afterward will not be allo-
cated allowances. Instead they will
have to purchase allowances to
cover their SO2 emissions.

How Are Allowances
Used?

he allowance is a fully

marketable commodity. Once
allocated, allowances may be
bought, sold, traded, or banked for
use in future years. Allowances
may not be used prior to the calen-
dar year for which they are allo-
cated.

A unit with allowances that do
not cover its emissions has a num-
ber of options. The unit may obtaj
additional allowances by: "e

¢ Transferring allowances from
other units within its utility
system.

¢ Buying allowances on the open
market from another utility
anywhere in the country that
may have exceeded its control
requirements, and, thus, has
allowances to spare.

« Buying allowances from an in-
dustrial plant or unaffected
utility unit that elects to opt in
to the allowance system.

+ Buying allowances through
the EPA Auctions and Sales
Programs (see Figure 2).

Alternatively, a unit may
choose to reduce its emissions,
thereby reducing the number of
allowances needed. Emissions
reduction options include
employing energy conservation
measures, increasing reliance
renewable energy, reduci aD
utilization, employing pollution


FigurchiMmE PAISIE nergyiconservationfandinenewablelenerayResenves

EPAwill set aside a reserve of 300,000 allowances for utilities employing qualifying demand-side energy conserva-
tion measures at their customer's facilities or residences or for those relying on renewable energy generation
technologies, such as biomass, solar, geothermal, or wind. This reserve will be established by reducing Phase II
allocations by 30,000 allowances annually for 10 years, from 2000 to 2009.

The allowances from the Energy Conservation and Renewable Energy Reserve will be awarded annually in two
categories: (1) for savings obtained through energy conservation measures and (2) for savings obtained through
renewable energy generation. The number of allowances awarded per applicant will be equal to the tons of SO2
emissions the utility-is assumed to avoid by employing the new measures. (The formulas used to calculate this amount
for both energy conservation and renewable energy are reflected in the statute and rule.)

To be eligible for receiving allowances from the reserve in either category, an applicant must:

© Sell electricity.

* Own or operate, wholly or in part, an affected unit.

© Pay for the qualifying energy conservation measures or renewable energy directly, or purchase it through another
person.

« Adopt and implement a “least cost plan” for meeting future needs at the lowest system cost. This plan, which
must be reviewed by the regulatory commission, must consider all options relating to activities or technologies
affecting energy use by customers and options employed by the utility.

« Have an approved rate structure that mandates “net income neutrality,” if applying for allowances for conservation
measures. Net income neutrality means that the utility's rate structure is such that it makes as much money on
energy saved as on energy sold. The rate tariff will be certified by the Department of Energy. This provision
ensures that utilities.are not harmed financially by conservation investments.

To apply for allowances from the reserve, a certifying official for the utility must complete the Application for
Conservation and Renewable Energy Reserve Allowances. A certifying official may be an officer, partner, or proprietor
who performs the principal business function for the utility. The application includes, among other things:

 Adescription of the energy conservation measures implemented and/or the renewable energy generation sources
«used.

 Averification of energy savings or renewable energy used based on state or federal protocols.
* Acaiculation of the allowances to be allocated.

Utilities may begin applying for allowances from the reserve on January 1, 1993, and may continue to apply until all
300,000 allowances have been allocated or until the year 2010, when the reserve will be terminated. .

EPA will grant allowances on a first-come, first-served basis starting in 1995 for activities initiated after January 1,
1992. To ensure that the reserve will not be depleted solely in either the energy conservation or renewable energy
category, EPA will review the distribution after 240,000 of the 300,000 allowances have been awarded or by February
1, 1998, whichever comes first. If it appears that fewer than 60,000 allowances will be distributed to either category,
EPAwiil place a share of the remaining allowances into a subaccount for whichever category has not been sufficiently
tapped. :

controltechnologies,switchingto
lower sulfur fuel, or developing
other alternate strategies. Units
thatreducetheiremissions below
the number of allowances the
hold may trade allowances with
other units in their system, sell
themtootherutilitiesforaprofiton
the open market or through EPA
auctions, or bank them to cover
emissionsinfutureyears. (A unit
holding excess allowances for a
given year, however, is never en-
itled to exceed National Ambient
ir Quality Standard Limits.)

Who May Participate in
Allowance Trading?

Ty primary participants in
allowance trading are officials

designated and authorized to rep-
resent the owners and operators of
electric utility plants that emit SO2.
In addition, industrial plants and
otherwise unaffected utility units
that emit SO2 may elect to opt in to
the program to take advantage of
the potential economic benefits of
trading allowances on the open
market. Allowances may be
bought, sold, and traded by any

3

individual, corporation, or govern-
ing body, including brokers,
municipalities, environmental
groups, and private citizens. Other
potential participants are utility
power pools, or groups of units
choosing to aggregate some orall of
the allowances allocated to the in-
dividual units within the. pool.
Even though the allowance trading
system is based on unit-by-unit
compliance, allowance pools can
be created and operated. The par-
ties involved in the pool determine
the details of these allowance pool-
ing arrangements.