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Remarks by Brian McLean
Fifth Annual SO2 Allowance Auctions
March 26, 1997
Today we are announcing the results of our 5th annual auctions of sulfur dioxide (SO2) allowances conducted for EPA by the Chicago Board of Trade (CBOT).
The Clean Air Act (CAA) of 1990 created the SO2 allowance trading program and encouraged the development of other market-based approaches to air quality management. Since 1990, EPA has established the rules for this program and industry has taken advantage of its flexibility by reducing SO2 in the most cost-effective ways possible.
SO2 emissions from electric power plants are now more than 4 million tons below their 1980 levels. Overall, SO2 emissions from all sources are more than 6 million tons below their 1980 levels. Not only are emissions reductions greater than expected, but compliance costs are now expected to be half that originally projected.
The flexibility offered by the SO2 allowance trading system deserves much of the credit; and this being the fifth year since the annual auctions began seemed like the right time to provide a brief retrospective on where the auctions and the allowance market have come.
Since 1993, the number of allowances bid for in the auctions has tripled from 600,000 to 1.9 million, even though the amount available has only doubled.
Also, the spread between the highest bid and the clearing price has dropped considerably from $319 to $14 indicating public knowledge of price information.
We have seen a growing interest in the last few years from brokers, school groups, and environmental organizations bidding in the auctions and bidding quite smartly. The auctions have truly provided the public access to the emissions allowance market.
Though the annual auctions provide a reliable price signal to the allowance market, they are by no means the only place trading is occurring. We have seen the volume of allowances transfered reported to our allowance management system (AMS) grow from less than 900,000 in 1994 to almost 4.5 million in 1996. By the end of 1996, AMS had recorded over 3,100 public and private transactions involving over 51 million allowances.
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