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Looking Back on SO2 Trading: What's Good for the Environment Is Good for the Market

Fortnightly Magazine - August 1997

Laboratory research resident at the U.S. Department of Energy. Melanie Dean is an environmental policy analyst with EPA's Acid Rain Program. Her work focuses on analysis of the SO2 allowance market and development of other market-based trading programs. The authors thank Brian McLean, Claire Schary, Janice Wagner, Dallas Burtraw, and Denny Ellerman for helpful comments. The views expressed here are solely the authors' and do not necessarily reflect the policies of the EPA.

Table 1. EPA's Classification Scheme

Transfers Between Economically Distinct Parties

Inter-Utility. Any transfer of allowances from one utility operating company's account to a different utility operating company's account, provided the operating companies are not controlled by the same parent company.

Broker/Trader to Utility. Any transfer from an allowance broker or trader to a utility.

Utility to Broker/Trader. Any transfer from a utility to an allowance broker or trader.

Fuel Company to Utility. Any transfer from a fuel supplier (e.g., coal, gas) to a utility.

Utility to Fuel Company. Any transfer from a utility to a fuel supplier.

Other. Any transfer between two unrelated parties that does not fit into any of the above categories. This class includes transfers involving environmental groups, nonutility accounts or individuals, Also included are broker to broker transfers, fuel supplier to broker transfers, etc.

Intra-Utility Transfers

Class I. Any transfer from one unit account to another unit account within the same operating unit.

Class II. Any transfer from one operating company's unit account to another's unit account within the same parent company.


Any transfer from a unit or general account of one operating company to a general account of the same operating company or a parent company (some may become intra-utility in the future), any pooling activity (e.g., Phase I extension redistributions), or any transfer in which the transferor is a partial owner of the transferee account, or vice versa.


1"Ecologists Criticize TVA Pollution Pact," Kentucky New Era, May 13, 1992.

2Knoxville News-Sentinel, May 17, 1992, p. A-2.

3Michael Gartner, "Polluters Ought to Pay, Not Deal," USA Today, May 27, 1992.

4See for example, Robert H. Hahn and Gordon L. Hester, "Marketable Permits: Lessons for Theory and Practice," Ecology Law Quarterly, Vol. 16, No. 2, 1989.

5For a discussion of early experience with emissions trading programs, see the comments of Dave Wojick in Kennedy P. Maize, "Uncertainties, Wide Price Swings Could Sabotage Emissions Trading," Electricity Journal, Volume 5, No. 3, April 1992, p. 7.

6See for example, Jim Johnston, "We Told You So," Regulation, No. 3, 1995.

7See Douglas R. Bohi and Dallas Burtraw, "Utility Investment Behavior and the Emission Trading Market," Resources and Energy, vol. 14, 129-153, 1992. Kenneth Rose, Public Utility Commission Implementation of the Clean Air Act's Allowance Trading Program, The National Regulatory Research Institute, Ohio State University, May 1992.

8See comments filed on behalf of the Chicago Board of Trade by George B. Javaras and Donald E. Rocap in response to IRS request for comments on tax issues of SO2 trading program.

9R.D. Lile, D.R. Bohi, and D. Burtraw, An Assessment of the EPA's SO2 Emission Allowance Tracking System,