Allocation and Assurance in the 

Final Transport Rule

OMB Briefing

EPA

May 20, 2011
Outline

• Allowance Allocation

– States’ new unit set-asides

– Indian country new unit set-asides

– Existing unit FIP allocations

– CAIR NOXallowances and Title IV SO2allowances

– Pathways to state-determined allocations

• Assurance Provisions 

– Variability limits

– Assurance penalty assessment 

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States’ New Unit Set-Asides

• “New unit” is any unit not online by January 1, 2010

• Each state’s new unit set-aside equals:

– Basic amount of 2% of total state budget; plus

– Projected amount of emissions from committed units in that state (for example, committed 

units in Illinois are projected to emit 3% of the state’s SO2 budget and 6% of the state’s annual 

NOXand ozone-season NOX budgets)

• New units may receive allocations during their first year of operation

• Retiring units’ allocations are redistributed to the new unit set-asides

• If unallocated, set-asides are redistributed to unretired existing units 

before the compliance deadline

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Indian Country New Unit Set-Asides

• Allowances to new units locating in Indian Country would be 

allocated by EPA from an Indian Country new unit set-aside.

• EPA would continue to allocate such allowances even if a state 

submits a SIP to replace the FIP. 

• EPA is reserving 5% of basic amount of each state’s new unit 

set-aside for new units in Indian country within that state

– 5% of the basic 2% new unit set-aside equals 0.1% of total budget

• Unallocated allowances are returned to the state’s new unit 

set-aside

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Existing Unit FIP Allocations

• The final rule allocates allowances to existing units based on share of 

state’s heat input, but a unit’s allocation is not allowed to exceed its 

maximum historic emissions

– Uses highest three of the last five years for each unit to establish heat input 

baseline

– Constrains unit-level allocations not to exceed maximum emissions during 

2003-2010

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Demonstration of Existing Unit Allocations 

in a Three-Unit State With an 80 Ton State Budget

Initial Historic Heat

Input-based Allocation

Maximum Historic 

Baseline Emissions Final Allocation

Unit A 20 16 16

Unit B 30 50 32

Unit C 30 50 32

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Allocation Pattern by Primary Fuel

2014 Emissions and Allocations by Primary Fuel Type

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No Carryover of CAIR Allowance Programs

• EPA alerted CAIR participants that the Court’s remand undermined the long-term value of CAIR allowances

2012 Allowance Pools Anticipated

Remaining CAIR 

Allowances

Transport Rule 

Budgets

Remaining CAIR Allowances as 

Percent of Transport Rule Budgets

Annual NOX 460,000 1,245,869 37%

Ozone-Season NOX 440,000 580,172 76%

• EPA alerted CAIR participants that the Court’s remand undermined the long-term value of CAIR allowances

– “EPA's continued recording of CAIR NOX allowances does not guarantee or imply that any allowances will continue to be usable for 

compliance after a replacement rule is finalized or that they will continue to have value in the future.”

• Proposed Transport Rule further underscored Court-imposed challenges to carryover

• Carryover preserves beneficial or adverse effects on sources of EPA’s use of “fuel factors”, which were rejected by 

Court with regard to state budgets

• Not all remaining CAIR NOXallowances represent overcompliance; many are due to “compliance supplement pools” 

and subsequent NSR actions that freed up allowances

• Conversion of CAIR allowances into TR allowances would introduce new complexities and delay sizable portions of 

allowance allocations beyond the start of the programs

– CAIR compliance for 2011 will not be completed until mid-2012

– CAIR allowances may be held by sources or parties not covered by the Transport Rule

• EPA does not see a legal way to use title IV SO2allowances in the Transport Rule programs.

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Pathways to State-Determined Allocations

• States may replace existing unit FIP allocations as early as 2013 by 

submitting a simple table of units and allocations

• States may submit SIPs to determine allocations for 2014 and later 

with a lot of flexibility while respecting certain bounds aimed at 

sound program structure

– Total allocations for a year cannot exceed state budget (without variability) minus the Indian 

country new unit set-aside, which EPA continues to administer

– Existing and new unit allocations must be submitted by specified deadlines to EPA for recording 

in allowance accounts

– No other changes can be made to trading program provisions

– States may choose to SIP solely for allocation purposes for one or more Transport Rule 

programs, and they are free to allocate how they see fit (i.e., including set-asides and auctions)

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Variability Limits

• Transport Rule budgets reflect EGU operations in an “average year”

– Interconnected nature of power sector creates inherent year-to-year variability in 

state-level EGU operations

• EPA analyzed historic state EPA analyzed historic state-level heat input variability from 2002 heat input variability from 2002-2008 (as a 

proxy for emissions variability assuming constant emission rates)

– Most states’ historic variability levels were within 10%; a few approached 15% and 

three approached 20%

– Final rule establishes annual variability limits on each state budget at whichever level 

(10%, 15%, 20%) minimizes variability while covering historical level in that state

• State’s budget plus variability limit equals state’s “assurance level”

• Assurance provisions go into effect in 2012

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Assurance Penalty Assessment

• If a state exceeds its “assurance level” in a given year, an assurance penalty is assessed 

on the excess tons

– Final rule imposes a 2:1 penalty; each excess ton must be met with 1 allowance for normal compliance 

plus 2 additional allowances to satisfy the penalty

• Excess tons at the state level tons at the state level must be apportioned must be apportioned to the source to the source level to assess to assess penalties penalties

– Proposed rule apportioned by ownership; final rule apportions by designated representative

– A group of sources’ share of state’s excess tons is based on group’s emissions exceeding group’s 

allocations plus its share of the state variability limit.

• Assuming a 10% variability limit, a group’s emissions beyond 110% of its allocations would be used to calculate its 

share of state’s excess emissions if state assurance level is exceeded

• EPA analysis shows that state exceedances of assurance levels would be 

uneconomic (and thus exceedingly unlikely to occur)

• Penalty is designed to deter state-level emissions from exceeding assurance levels; 

there is no limit to the degree of interstate trading of allowances

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Assurance Provision Penalty Examples

Number of 

Allowances 

Allocated

Allocation plus share 

of variability limit

(“Penalty Position”)

Total 

Emitted

Number of Allowances

above Penalty Position

Share of 

Exceedance (%)

Penalty 

(Allowances) 

DR1 60 66 75 9 35% 17

DR2 20 22 35 13 50% 25

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• DR1, DR2, DR3, and DR4 are all in the same state.

• State budget plus 10% variability limit is 110 tons (100 + 10 = 110).

• State exceeded its assurance level by 25 tons (135 - 110 = 25). 

• Penalty is 50 allowances (2 x 25 = 50).

• Some numbers may not add up due to rounding

• If state had not exceeded its assurance level (i.e., if DR1 had emitted 50 tons rather than 75 tons), no 

penalties would have been incurred by any source.

DR3 10 11 15 4 15% 8

DR4 10 11 10 - - 0

TOTAL 100 110 135 25 100% 50