Instead, the Acid Rain Program introduces an allowance trading program that harnesses the incentives of the free market to reduce pollution. Under this system, affected utility units were allocated allowances based on their historic fuel consumption and a specific emissions rate. With regards to allocation, allowances are allocated each year beginning in 1995. An allowance authorizes a unit within a utility or industrial source to emit one ton of SO2 during a given year or any year thereafter. For each ton of SO2 discharged in a given year, one allowance is consumed, that is, it can no longer be used.
Allowances are fully marketable commodities.
After they have been allocated, allowances may be bought, sold, traded, or banked for use in future years. During Phase II of the program, the Act sets a permanent cap of 8.95 million allowances for total annual allowance allocations to utilities. This cap firmly restricts emissions and ensures that environmental benefits will be achieved and maintained. Utilities that reduce emissions through energy efficiency and renewable energy are able to sell, use, or bank, their surplus allowances. The Act also requires that EPA set aside a reserve of 300,000 allowances to stimulate energy efficiency and renewable energy generation.