Air Pollution: Allowance Trading Offers an Opportunity to Reduce Emissions at Less Cost
RCED-95-30
Published: Dec 16, 1994. Publicly Released: Dec 20, 1994.
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Highlights
Pursuant to a congressional request, GAO reviewed the Environmental Protection Agency's (EPA) emissions trading program, focusing on: (1) the extent to which allowance trading is expected to reduce sulfur dioxide emissions and compliance costs; (2) the status of the allowance trading market; (3) barriers to increased allowance trading; and (4) the implications for designing a similar approach to curb carbon dioxide emissions.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Environmental Protection Agency | To improve price information from EPA auctions and help clarify the regulatory treatment of allowances, the Administrator, EPA, should change the design of the auction so that it is a single-price auction. |
Closed – Not Implemented
On June 6, 1996, the Environmental Protection Agency published an Advance Notice of Proposed Rulemaking seeking comment on whether the allowance auction should be changed from the current discriminating price format to a single price format. Comments were due on August 5, 1996. Most of the commenters believed that the auction should remain as it is. Only two comments in support of a change were sent in. Generally, commenters believed that the allowance market has matured in the 2 years since GAO's recommendation, and a change is unnecessary. Although EPA has not yet made a public announcement, the agency does not plan to change the allowance auction due to the lack of support by market participants.
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| Environmental Protection Agency | To improve price information from EPA auctions and help clarify the regulatory treatment of allowances, the Administrator, EPA, should work with the Department of Energy's Utility Commission Proceedings Participation Program and Integrated Resource Planning teams to help state utility commissions and the Federal Energy Regulatory Commission (FERC) decide how to treat allowances in ratemaking. |
Closed – Implemented
EPA states that it agrees with this recommendation and that an EPA employee spends 2 days a week at DOE working with the Utility Commission Proceedings Participation Program and the Integrated Resource Planning teams. EPA anticipates that these groups will address allowance ratemaking issues and discuss appropriate ways to encourage action on these important matters. However, EPA did not mention how it will ensure, as opposed to anticipate, such actions.
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| Federal Energy Regulatory Commission | The Chairman, FERC, should require more frequent reporting of the number and prices of allowances traded. |
Closed – Implemented
FERC considered this issue when it issued its Emission Allowance Policy Statement in Docket No. PL95-1-000. In that case, FERC determined that extensive reporting requirements would be a costly and time-consuming burden for utilities and that there was no basis to conclude that this would enhance the development of the emission allowance trading market. Instead, the Commission adopted the proposal by Edison Electric Institute (EEI) to price emission allowances used in providing coordination service at the utility's replacement cost, based on a national index or average of indices. FERC determined that there were sufficient national indices to set a reasonable price. For example, Cantor Fitzgerald Brokerage, LP keeps a monthly summary regarding the availability and prices of allowance and disseminates it directly to over 350 parties following the market).
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| Federal Energy Regulatory Commission | The Chairman, FERC, should issue guidance on how FERC will treat allowances in ratemaking through a policy statement, notice of proposed rulemaking, or a ruling in one of the multistate utility cases on allowances currently before FERC. |
Closed – Implemented
On December 15, 1994, FERC issued a "Policy Statement and Interim Rule Regarding Ratemaking Treatment of the Cost of Emissions Allowance in Coordination Rates," in Docket No. PL95-1-000, in response to a filing by EEI. On December 30, 1994, FERC issued a ruling on multistate utility cases on allowances that were filed with FERC by Southern Company Services, Inc. and American Electric Power Service Corporation.
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