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EPA’s Experience with Allowance Auctions

EPA’s Experience with Allowance Auctions. Brian McLean, USEPA Joe Kruger, National Commission on Energy Policy. Overview of EPA SO 2 Auction. Basics Purpose/goal of EPA auction Design of the EPA auction EPA’s experience with the auction Recent developments Conclusions/Lessons Learned.

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EPA’s Experience with Allowance Auctions

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  1. EPA’s Experience with Allowance Auctions Brian McLean, USEPA Joe Kruger, National Commission on Energy Policy

  2. Overview of EPA SO2 Auction • Basics • Purpose/goal of EPA auction • Design of the EPA auction • EPA’s experience with the auction • Recent developments • Conclusions/Lessons Learned

  3. Basics • Title IV of the Clean Air Act Amendments provides for a small SO2 auction (about 2.8%) • Auction proceeds are returned to sources • First auction was held in 1993 and the 14th auction was held last March • SO2 auctions are a very small part of the SO2 market

  4. Purpose of the EPA Auction • Provide source of allowances for new entrants • Early fears of “hoarding” • Title IV also included direct sales provision for the same purpose. • Support development of market • Price discovery • But not interfere with private market

  5. Design of EPA Auction • Form, vintages, frequency of auction decided by Congress • Price discriminating auction • Spot and 7-year advance auction • Annual auction, open participation

  6. Design of EPA Auction (continued) • EPA sought credibility for fledgling market • Initially tried to enlist Treasury Dept. • Decided to use a private exchange to administer • Put out a “no-cost” RFP • Chose Chicago Board of Trade (CBOT) (other applicants were NYMEX and Cantor-Fitzgerald) • EPA administers proceeds from auction and returns funds to companies

  7. Early Experience with Auctions • First auction in 1993 • Clearing price ($131) was about half of what was thought to be the “market” price • Some observers attributed low price to auction design (this was refuted by subsequent research) • Over the next year, the market and auction prices largely converged

  8. Allowance Price vs. Auction Clearing Price

  9. Who has been using auction? • Auctions open to everyone • Power producers have bought roughly 2/3 • Traders/brokers have bought roughly 1/3 • NGO’s/Schools/individuals <1% • Additional Provision: Allowances may be offered up for sale • Only 345,000 offered, with 15,000 successfully sold (most over first 4 years)

  10. Recent Developments • In 2005, CBOT decided to stop running auction • EPA took over administration and ran 2006 auction • EPA is integrating auction operation into allowance management software • Greater efficiency • Quicker turnaround

  11. Lessons Learned • The purpose of an auction should guide its design • Auctions important for price discovery in early years when there is limited information • Fears about market power and hoarding were unfounded • Speed, efficiency, accuracy, and transparency are important for ensuring credible administration

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