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Clean Air Markets

SO2 Allowance Auctions

Allowance Auction

Acid Rain Program Allowance Auction Fact Sheet

Because the availability of allowances is crucial to ensure both the economic efficiency of the emissions trading program and the addition of new electric-generating capacity, Title IV of the Clean Air Act Amendments mandates that EPA hold or sponsor yearly auctions of allowances for a small portion of the total allowances allocated each year. The auctions help ensure that new units have a public source of allowances beyond those allocated initially to existing units. Moreover, in the early stages of the regulatory program, the auctions helped provide price information to the allowance market.

Frequently Asked Questions on Allowance Auctions

  1. Where Do Allowances Come From?
  2. Who Administers the EPA Auctions?
  3. How are the Auctions Conducted?

Where Do Allowances Come From?

To supply the auctions with allowances, EPA set aside an Auction Allowance Reserve of approximately 2.8 percent of the total annual allowances allocated to all units. During Phase I, when the allocated allowances totaled 5.7 million allowances annually, 150,000 allowances were withheld every year for auctions. During Phase II, when allowance allocations totaled 8.95 million allowances annually, 250,000 allowances were withheld annually for auctions.

Private allowance holders (such as utilities or brokers) also may offer their allowances for sale at the EPA auctions, provided that the allowances are dated for the year in which they are offered, for any previous year, or for 7 years in the future. Authorized account representatives must notify the administrator of the EPA auctions of their intent to sell at least 15 business days prior to the auctions.

The account representatives must specify the number of allowances they are offering and their minimum price requirements.

Allowances Offered at Auctions
Year of Auction Spot Auction Advance Auction*
1998 150,000 125,000
1999 150,000 125,000
2000 and after 125,000 125,000

*Not usable until 7 years after purchase.

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Who Administers the EPA Auctions?

For the first 13 years, the auctions were conducted for EPA by the Chicago Board of Trade (CBOT). CBOT was not compensated by EPA for its services nor allowed to charge fees. Beginning with the fourteenth annual auction in March 2006, CBOT chose to stop administering the auctions for EPA. This means EPA now handles all aspects of the auctions.

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How Are the Auctions Conducted?

The auctions began in 1993 and are held annually, usually on the last Monday of March. Auctions are divided into two segments: (1) a spot allowance auction, in which allowances are sold that can be used in that same year for compliance purposes, and (2) an advance auction for the sale of allowances that will become usable for compliance 7 years after the transaction date, although they can be traded earlier. Bidders must submit bids electronically using EPA's CAMD Business System containing information on the number and type (spot or advance) of allowances desired and the purchase price to EPA, no later than 3 business days prior to the auctions. Each bid must also include a wire transfer, certified check, or letter of credit for the total bid cost.

The auctions sell allowances on the basis of bid price, starting with the highest priced bid and continuing until all allowances have been sold or the number of bids is exhausted. EPA may not set a minimum price for allowances from the Auction Reserve.

Allowances are sold from the Auction Reserve before allowances offered by private holders are sold. Offered allowances are sold in ascending order, starting with the allowances for which private holders have set the lowest minimum price requirements. Offered allowances are sold until the allowance supply is depleted, bids are used up, or the minimum price for the next set of offered allowances exceeds the purchase price of the next bid.

EPA returns proceeds and unsold allowances from the auctioning of reserve allowances on a pro rata basis to those units from which EPA originally withheld allowances to create the Auction Reserve. Proceeds from the sale of offered allowances are returned to private allowance holders that contributed the allowances to the auctions. EPA likewise returns payment from unsuccessful bids and allowances from unsuccessful offers.

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