An Assessment of the EPA's SO2 Emission Allowance Tracking System

On November 8, 1996, various U.S. Environmental Protection Agency (EPA) officials, scholars and industry representatives gathered at Resources for the Future (RFF) to examine the EPA's method for classifying private SO2 allowance transactions by the Allowance Tracking System (ATS). The one-day workshop at RFF was designed to evaluate how well the EPA's classification scheme within the ATS currently meets the needs of constituencies with a vested interest in the allowance trading system, and to determine if other classifications would be more beneficial. The EPA has limited its collection of information to that which is necessary to ensure compliance with environmental goals. In particular, the EPA has interpreted its mission to be one of minimal interference in guiding the development of the allowance market and that its primary purpose is emission compliance and not the monitoring of transactions. Therefore, the goal of the ATS is to provide a central registry of recorded allowance transfers for the purpose of emission compliance. As a result, the ATS is unusual as a mechanism for monitoring market activity because it provides information about the buyer and seller of an allowance but does not provide price information. Furthermore, the EPA has limited its role so as not to exercise approval of individual allowance trades, and has excluded from consideration options for expanding the EPA's data collection effort. However, the EPA recognizes that the interests of Congress and the public extend beyond compliance with the environmental goals to include the development of allowance trading to help achieve these goals at the lowest possible cost. In addition, there is widespread interest in the development of SO2 emission allowance trading as a prototype for other potential trading programs, and the ATS provides a potential template for the oversight role of the environmental regulator in programs such as these. Therefore, another goal of the workshop at RFF was to assess how well the ATS performs in promoting the development of allowance trading in general, and with respect to the interests and needs of each of the constituencies interested in the SO2 allowance trading program. This discussion paper incorporates observations, suggestions and concerns expressed during this workshop. Furthermore, this discussion paper concludes with recommendations regarding the EPA's current classification methodology.