Air Pollution as a Commodity: Regulation of the Sulfur Dioxide Allowance Market







Prepared for Members and Committees of Congress



A number of congressional proposals to advance programs that reduce greenhouse gases (GHGs) th
have been introduced in the 110 Congress. Proposals receiving particular attention would create
market-based GHG reduction programs along the lines of the allowance trading provisions of the
current acid rain reduction program established by Title IV of the 1990 Clean Air Act
Amendments. Under the program, an allowance is limited authorization to emit a ton of pollutant.
However, there are several important differences. For example, the scope of the greenhouse gases
control program would be substantially greater than the Title IV program, involving more covered
sectors and entities. This diversity multiplies as the global nature of the climate change issue is
considered, along with the multiple GHGs involved. Thus, a carbon market is likely to involve far
greater numbers of affected parties from diverse industries than the current Title IV program.
It will also involve far greater numbers of tradeable allowances than the current Title IV program.
Under the current program, about 9 million allowances are allocated to over 2,000 emission
sources annually. In contrast, a greenhouse gas program that capped emissions in the electric
power, transportation, and industry sectors at their 1990 levels at some point in the future would
be allocating about 4.85 billion allowances annually. Trading activities under Title IV has been
increasing since 2005. However, it doesn’t approach the anticipated volumes that would occur if a
greenhouse gas cap-and-trade program was instituted. Likewise, the economic value of a future
carbon market is likely to be substantially greater than the Title IV program. Currently, the annual
allocation of SO2 allowances has a market value of about $4.5 billion. Using estimates of $15 to
$25 an allowance, the annual allocation of 4.85 billion allowances posited above for a greenhouse
gas program would have a market value of $72.8 billion to $121.3 billion.
Despite these differences in scope and magnitude, there are trends in Title IV trading that are
likely to continue in a carbon market. First, there is a trend toward more diverse, non-traditional
participants in the Title IV market. Like the Title IV market, the economic importance of a carbon
market will likely draw in entities not directly affected by the reduction requirements, such as
financial institutions. These entities’ motivations may be equally diverse, including facilitating
projects involving the need for allowances, portfolio balancing, intermediary fees, and trading
profits.
Second, as noted, there is a trend in the Title IV market toward using financial instruments to
manage allowance price risk. Given the greater economic stakes involved in a carbon market, this
trend toward more sophisticated financial instruments is likely to emerge early as a hedge against
price uncertainty. The emergence of entities well-versed in the use of these instruments may
reinforce the trend and make options, collars, strangles, and other structures as common in the
allowance market as they are in other commodity markets. With a more liquid and dynamic
market, a carbon market may look more like other energy markets, such as natural gas and oil,
than the somewhat sedate SO2 allowance market.






Introduc tion ..................................................................................................................................... 1
Overview: Title IV...........................................................................................................................2
Administering the Program: The Environmental Protection Agency (EPA)...................................3
Allowance Accounting..............................................................................................................3
Allowance Auctions..................................................................................................................4
Interface with Electricity Regulation: The Federal Energy Regulatory Commission
(FERC) and State Public Utility Commissions (PUCs)...............................................................5
Backgr ound ............................................................................................................................... 5
FERC Allowance Accounting...................................................................................................7
State Public Utility Commissions.............................................................................................7
Allowance Transactions..................................................................................................................8
Internal Transfers......................................................................................................................8
Over the Counter: Cash Market, Futures and Options..............................................................9
Regulation of Allowances as an Exempt Commodity: Commodity Futures Trading
Commission (CFTC)..................................................................................................................12
Defini ti on ..................................................................................................................... ........... 12
Regulation of Trading Venues.................................................................................................13
Observations .................................................................................................................................. 16
Table 1. Information Recorded by EPA’s Allowance Tracking System...........................................4
Table 2. EPA Official Allowance Transfers and Transactions: 1994-2003......................................9
Table 3. EPA 2007 Auction Results.................................................................................................9
Table 4. SO2 Futures Contract Specifications.................................................................................11
Table 5. Summary of Trading Venues for Exempt Commodities under the Commodity
Exchange Act (CEA)..................................................................................................................14
Author Contact Information..........................................................................................................17






A number of congressional proposals to advance programs that reduce greenhouse gases have th
been introduced in the 110 Congress. Proposals receiving particular attention would create
market-based greenhouse gas reduction programs along the lines of the trading provisions of the 1
current acid rain reduction program established by the 1990 Clean Air Act Amendments. These
“cap-and-trade” schemes would impose a ceiling (cap) on total annual emissions of greenhouse
gases and establish a market in pollution rights, called allowances, between affected entities. An
allowance would be a limited authorization by the government to emit one metric ton of carbon
dioxide equivalent (CO2e), and could be bought and sold (traded) or held (banked) by
participating parties.
These domestic proposals have parallels with the programs being implemented in Europe to meet
its obligations under the Kyoto Protocol. Specifically, the European Union (EU) has decided to
implement a cap-and-trade program, along with other market-oriented mechanisms permitted 2
under the Kyoto Protocol, to help it achieve compliance at least cost. The EU’s decision to use
emission trading to implement the Kyoto Protocol is at least partly based on the successful
emissions trading program used by the United States to implement its sulfur dioxide (acid rain) 3
control program contained in Title IV of the 1990 Clean Act Amendments.
These two operating cap-and-trade programs—the U.S.’s acid rain program and the EU’s climate
change program—may provide insights for the design of a domestic greenhouse gas reduction
scheme. However, while the experiences of the EU system directly relate to the greenhouse gas
reduction initiative of the domestic legislative proposals, it has operated only a short time (see
text box). The acid rain control program has a longer operating history, although the control
scheme differs in some important ways—e.g., it is internal to one nation and involves fewer types
of sources.
Among the lessons that Phase 1 of the European Trading System may have for a similar U.S. 4
program is that allowance prices are linked to the price of other energy commodities. Analysis of
ETS allowance prices during Phase 1 suggests the most important variables in determining 5
allowance price changes have been oil and natural gas price changes. This suggests that traders
will pursue arbitrage strategies involving simultaneous transactions in allowances and oil and gas
contracts. For example, a trader anticipating a rise in the price of oil might take a position in
allowances in the expectation that the two prices would move in tandem. Since there is

1 P.L. 101-549, Title IV (November 15, 1990).
2 Norway, a non-EU country, also has instituted a CO2 trading system. Various other countries and a state-sponsored
regional initiative located in the northeastern United States involving several states are developing mandatory cap-and-
trade system programs, but are not operating at the current time. For a review of these emerging programs, along with
other voluntary efforts, see International Energy Agency, Act Locally, Trade Globally (2005).
3 P.L. 101-549, Title IV (November 15, 1990).
4 For more on the EU-ETS, see CRS Report RL34150, Climate Change and the EU Emissions Trading Scheme (ETS):
Kyoto and Beyond, by Larry Parker.
5 For example, when natural gas, the cleaner fuel, becomes more expensive relative to oil, industrial users may switch
to oil, creating increased demand for allowances. Maria Mansanet-Bataller, Angel Pardo, and Enric Valor, “CO2 Prices,
Energy and Weather, 28 The Energy Journal 3 (2007), pp. 73-92. Powernext (a French energy exchange) has
described CO2 prices as the cornerstone of relative energy prices for generating electricity. See Jean-Francois CONIL-
LACOSTE, Chief Executive Officer, Powernext SA, Market Based Mechanisms to Fight Climate Change (2006).





widespread suspicion that excessive speculation by hedge funds and others has affected energy 6
prices in recent years, the possibility that the price of allowances could also be subject to
distortion or manipulation will be a policy concern.
Taking that hint from ETS, this report The EU’s Emissions Trading System (ETS) covers
examines the Title IV sulfur dioxide cap-and-more than 11,500 energy intensive facilities across the 27
trade program, with a focus on the market EU Member countries, including oil refineries, powerplants over 20 megawatts (MW) in capacity, coke
activity and the current regulatory overlay. ovens, and iron and steel plants, along with cement, glass,
From that discussion, observations are drawn lime, brick, ceramics, and pulp and paper installations.
about implications for a future greenhouse gas Covered entities emit about 45% of the EU’s carbon
trading scheme. No current U.S. proposal has dioxide emissions. The trading program covers neither
specific provisions with respect to carbon CO2 emissions from the transportation sector, which account for about 25% of the EU’s total greenhouse gas
allowance financial instruments or who would emissions, nor emissions of non-CO2 greenhouse gases,
regulate such a market or its participants. which account for about 20% of the EU’s total
greenhouse gas emissions. A “Phase 1” trading period
began January 1, 2005. A second, Phase 2, trading period
is scheduled to begin in 2008, covering the period of the Kyoto Protocol, with a third one planned for 2013. (For
further background on the ETS and its first year of
Title IV of the 1990 Clean Air Act operation, see CRS Report RL33581, Climate Change: The European Union’s Emissions Trading System (EU-ETS), by
Amendments supplements the sulfur dioxide Larry Parker. Relevant directives on the EU-ETS are
(SO2) command-and-control system of the available at http://ec.europa.eu/environment/climat/
Clean Air Act (CAA) by limiting total SO2 emission.htm#brochure.)


emissions from electric generating facilities to 7
8.95 million tons annually, beginning in the year 2000. Title IV essentially caps SO2 emissions at
individual utility sources operating before enactment of the CAA in 1990 (known as “existing
sources”) through a tonnage limitation, and at those plants beginning operation after enactment
(known as “new sources”) through an emissions offset requirement. SO2 emissions from most
existing sources are capped at a specified emission rate times a historical average fuel
consumption level. Beginning January 1, 2000, SO2 emissions from new plants commencing
operation after enactment must be offset—in effect, the emissions cap for new sources is zero.
Their allowances come from emissions reductions at existing facilities. The program was
implemented through a two-phase process with the final phase beginning in 2000.
To implement the SO2 reduction program, the law creates a comprehensive permit and emissions
allowance system (cap-and-trade program). An allowance is a limited authorization to emit a ton
of SO2 during or after a specified year. Issued by EPA, the allowances are allocated to existing
power plant units in accordance with formulas delineated in the law. The owner of the facility
receives the allowances for a given plant regardless of the actual operation of the plant. For
example, an owner may choose to shut down an existing power plant and use those allowances to
offset emissions from two newer, cleaner facilities. As noted, generally, a power plant that
commences operation after enactment receives no allowances, requiring new units to obtain
allowances from those with allowances, or purchase them at an EPA-sponsored auction, in order

6 See, e.g., Senate Permanent Subcommittee on Investigations, “Excessive Speculation in the Natural Gas Market
(Staff Report), June 2007, 135 p.
7 Clean Air Act Amendments of 1999, P.L. 101-549, Title IV. For a more detail discussion of the title, see Larry B.
Parker, Robert D. Poling, and John L. Moore, “Clean Air Act Allowance Trading,” 21 Environmental Law 2021-2068
(1991).



to operate after 2000. An owner may trade allowances nationally as well as bank allowances for
future use or sale.
If an affected unit does not have sufficient allowances to cover its emissions for a given year, it is
subject to an emission penalty of $2,000 (indexed to inflation) per ton of excess SO2 , and it
submits to EPA a plan for offsetting those excess emissions in the next year (or longer if EPA
approves). Further, EPA must deduct allowances equal to the excess tonnage from the source’s
allocation for the next year.
Another EPA responsibility is to provide for allowance auctions. For the post-2000 period, the
law sets aside a percentage of available allowances for auction. Anyone may participate in these
auctions as a buyer or seller, and those selling allowances may specify a minimum sale price. EPA
may delegate or contract the conduct of the auctions to other agencies, such as to the Department
of the Treasury, or even to nongovernmental groups or organizations. Two streams of allowances
are sold in the auctions. The first stream represents “spot sales” of allowances that must either be
used in the year they are sold or banked for use in a later year. The second stream represents
“advance sales” of allowances that must either be used in the seventh year after the year they are
first offered for sale or be banked for use in a later year. For 2000 and thereafter, Title IV provides
that 125,000 allowances be set-aside annually for spot sales, and 125,000 for advance sales.


It is EPA’s responsibility to administer the trading, banking, and auctioning of allowances.
EPA has developed an integrated system to track allowances (the Allowance Tracking System—8
ATS); to verify and record SO2 emissions from affected units (the Emission Tracking System—
ETS); and to reconcile (true-up) allowances and emissions at the end of the year. The Allowance
Tracking System is the official record of allowance transfers and balances used for compliance
purposes. Each participant in the system has an ATS account, and each account has an
identification number.
Table 1 identifies what the ATS tracks and does not track with respect to allowance activity. As
suggested, EPA primarily gathers information to ensure compliance with the emission limitations
of Title IV—the ATS is not a trading platform. Participants are not required to record all transfers
with EPA until the affected allowances are to be used for compliance. Participants must notify
EPA to have any transfers recorded in the ATS. When parties agree on a transaction that they want
recorded on the ATS, they provide information on the buyer and seller and the serial numbers of
the affected allowances to the ATS which records the transfer.

8 EPA has renamed the ATS the Allowance Management System (AMS), but ATS remains the commonly used term
and will be used in this report.





Table 1. Information Recorded by EPA’s Allowance Tracking System
ATS Records ATS Does Not Record
Allowances issued Allowance prices
Allowances held in each account Option trades
Allowances held in various EPA reserves Any allowance transaction not officially reported to EPA
Allowances surrendered for compliance purposes
Allowances transferred between accounts
To facilitate its primary compliance responsibility, EPA assigns each allowance allocated a unique

12-digit serial number that incorporates the first year it can be used for compliance purposes.


These allowances may be held in one of two types of ATS accounts. First, there are Unit Accounts
where allowances provided under Title IV allocation formulas are deposited and where
allowances are removed by EPA for compliance purposes. Second, there are General Accounts
that may be created by EPA for anyone wishing to hold, trade, or retire allowances. Participating
entities with General Accounts include (1) utilities who keep a pooled reserve of allowances not
needed immediately for compliance (i.e., an allowance bank); (2) brokers who need a holding
account for allowances in the process of being bought or sold; (3) investors holding allowances
for future sale; and (4) environmental and other groups holding allowances they wish to remove
from the market (i.e., retire).
A key provision of Title IV to ensure liquidity in the SO2 markets for new entrants is the EPA
allowance auction. As noted above, the EPA is required to auction 250,000 allowances annually in
two streams, spot and advance. The auctions began in 1993 and are held annually—usually on the
last Monday in March. Sealed bids entailing the number, type, and price, along with payment, are
sent to EPA no later than three business days before the auctions.
The auctions sell the allowances according to bid price, starting with the highest bid and
continuing down until all allowances are sold or there are no more bids. Unlike allowances
offered by private holders for auction, these EPA allowances do not have a minimum price.
For the first 13 years, the auctions were conducted by the Chicago Board of Trade (CBOT) for
EPA. CBOT received no compensation for the service, nor was it allowed to charge fees.
Beginning in March 2006, CBOT decided to stop administering the auctions, resulting in EPA
now conducting them directly.








The 1990 Clean Air Act Amendments were enacted during a time of transition in the electric
utility industry. There are three components to electric power delivery: generation, transmission,
and distribution. Historically, electricity service was defined as a natural monopoly, meaning that
the industry had (1) an inherent tendency toward declining long-term costs, (2) high threshold
investment, and (3) technological conditions that limited the number of potential entrants. In
addition, many regulators considered unified control of generation, transmission, and distribution
the most efficient means of providing service. As a result, most people (about 75%) were served
by vertically integrated, investor-owned utilities.
The Public Utility Holding Company Act (PUHCA)9 and the Federal Power Act (FPA) of 1935 10
(Title I and Title II of the Public Utility Act) established a regime for regulating electric utilities
that gave specific and separate powers to the states and the federal government. Essentially, a
regulatory bargain was made between the government and utilities. Under this bargain, utilities
must provide electricity to all users at reasonable, regulated rates in exchange for an exclusive
franchise service territory. State regulatory commissions address intrastate utility activities,
including wholesale and retail rate-making. Authorities of these commissions tend to be as broad
and varied as the states are diverse. At the least, a state public utility commission will have
authority over retail rates, and often over investment and debt. At the other end of the spectrum,
the state regulatory body will oversee many facets of utility operation. Despite this diversity, the
essential mission of the PUC is the establishment of retail electric prices. This is accomplished
through an adversarial hearing process complete with attorneys, briefs, witnesses, etc. The central
issues in such cases are the total amount of money the utility will be permitted to collect (revenue
requirement) and how the burden of the revenue requirement will be distributed among the 11
various customer classes (rate structure). This is commonly known as “rate of return” (ROR)
regulation.
Under the regime set up by FPA, federal economic regulation addresses wholesale transactions
and rates for electric power flowing in interstate commerce. Historically, federal regulation
followed state regulation and is premised on the need to fill the regulatory vacuum resulting from
the constitutional inability of states to regulate interstate commerce. In this bifurcation of
regulatory jurisdiction, federal regulation is limited and conceived to supplement state regulation.
The Federal Energy Regulatory Commission (FERC) has the principal functions at the federal
level for the economic regulation of the electricity utility industry, including financial
transactions, wholesale rate regulation, transactions involving transmission of unbundled retail

9 15 U.S.C. 79 et seq.
10 16 U.S.C. 791 et seq.
11 For a comprehensive discussion of state and federal regulation, see Robert Poling, et. al., Electricity: A New
Regulatory Order? Report for the Committee on Energy and Commerce, House of Representative (June 1991),
committee print.





electricity, interconnection and wheeling of wholesale electricity, and ensuring adequate and 12
reliable service. In addition, until passage of the 2005 Energy Policy Act (EPACT05), the
Securities and Exchange Commission (SEC) regulated utilities’ corporate structure and business
ventures under PUHCA to prevent a recurrence of the abusive practices of the 1920s (e.g., cross-
subsidization, self-dealing, pyramiding, etc.).
This comprehensive, cost-based approached to regulation began to undergo change in the 1970s 13
and 1980s as passage of the Public Utility Regulatory Policies Act of 1978 (PURPA) and the 14
Fuel Use Act of 1978 (FUA) helped establish independent electricity generators—electricity
producers who sold at wholesale and had no exclusive franchise area. Building on the perceived
success of these independent generators under PURPA, the Energy Policy Act of 1992
(EPACT92) created a new category of wholesale electric generators called Exempt Wholesale 15
Generators (EWGs) that are not considered utilities and not regulated under PUHCA. EWGs,
also referred to as merchant generators, were intended to create a competitive wholesale electric
generation sector. EPACT92 effectively initiated deregulated wholesale generation by creating a
class of generators that were able to locate beyond a typical service territory with open access to
the existing transmission system. EPACT05 continued this process by adding provisions to 16
address system reliability, repeal PUHCA, and modify PURPA.
The current status of these initiatives and resulting state responses is a mixture of states with
traditional, comprehensive ROR regulation of electricity and those with a restructured industry
with segmented generation, transmission, and distribution components. Over the past 20 years,
some States have truncated their ROR regulation to the extent they have chosen to restructure
their industry in response to Federal initiatives. In states that have not restructured, the system
operates as it has since enactment of the Federal Power Act, with retail consumers paying one
price that includes transmission, distribution, and generation. This is referred to as a bundled
transaction. In states that have restructured, consumers are billed for separate transmission,
distribution, and generation charges. This is referred to as unbundled electricity service. In those
states, retail consumers are allowed to choose their retail generation supplier; however, few states
actually have competitive markets for retail choice (exceptions include Texas and Massachusetts). 17
FERC regulates all transmission, including unbundled retail transactions.

12 P.L. 109-58.
13 P.L. 95-617, 16 U.S.C. 2601.
14 P.L. 95-620.
15 Exempt Wholesale Generators may sell electricity only at wholesale. EWGs may be located anywhere, including
foreign countries. Before enactment of EPACT05, utility generators were limited by the Public Utility Holding
Company Act of 1935 (PUHCA) to operate within one state.
16 In repealing PUHCA, EPACT05 provides that FERC and state regulatory bodies must be given access to utility
books and records. Also, FERC is given approval authority over the acquisition of securities and the merger, sale, lease,
or disposition of facilities under FERC’s jurisdiction with a value in excess of $10 million. With respect to PURPA,
EPACT05 repeals the PURPA mandatory purchase requirement for new contracts if FERC finds that a competitive
electricity market exists and a qualifying facility has adequate access to wholesale markets. Among its provisions to
address reliability, FERC is authorized to certify a national electric reliability organization (ERO) to enforce mandatory
reliability standards for the bulk power system. For more information on EPACT05, see CRS Report RL33248, Energy
Policy Act of 2005, P.L. 109-58: Electricity Provisions, by Amy Abel.
17 On October 3, 2001, the U.S. Supreme Court heard arguments in a case (New York et al. v. Federal Energy
Regulatory Commission) that challenged FERC’s authority to regulate transmission for retail sales if a utility unbundles
transmission from other retail charges. In states that have opened their generation market to competition, unbundling
occurs when customers are charged separately for generation, transmission, and distribution. Nine states, led by New
York, filed suit, arguing that the Federal Power Act gives FERC jurisdiction over wholesale sales and interstate
(continued...)





With the restructuring of the electric utility industry, FERC generally does not set cost-based rates
for electricity generation under its jurisdiction. Rather, FERC conducts a two-pronged horizontal
and vertical market power analysis to determine an entity’s eligibility for “market-based” 18
wholesale rates. If eligible, the entity may set its wholesale prices according to market demand,
not according to production costs.
Because of the market-based nature of FERC wholesale rates, allowances are an accounting issue,
not a ratemaking issue for FERC. Electric public utilities and licensees within FERC jurisdiction
are required to maintain their books and records in accordance with FERC’s Uniform System of 19
Accounts (USofA). The USofA guides the jurisdictional entity in understanding the information
it needs to report on various FERC forms. Included in the USofA are instructions on how to
account for allowances allocated to the entity under the 1990 Clean Air Act, or acquired by the
entity for speculative purposes. Allowances owned for other than speculative purposes are
accounted for at cost in either Account 158.1 (Allowance Inventory), or Account 158.2
(Allowances Withheld) as appropriate. Allowances acquired for speculative purposes are 20
accounted for in Account 124 (Other Investments).
By defining allowance value in terms of historic costs, allowances allocated by EPA to entities are
valued at zero. FERC does require that the records supporting Account 158.1 and 158.2 be
maintained “in sufficient detail so as to provide the number of allowances and the related cost by
vintage year.” Likewise, the Uniform System of Accounts also provides instruction on accounting
for gains and losses from selling allowances.
It should be noted that the Internal Revenue Service (IRS) also values allowances allocated by 21
EPA to an entity on a zero-cost basis.
In states with bundled rates, the valuing and disposition of allowances is more than an accounting
issue, it is also a ratemaking issue. During and after passage of Title IV, there was substantial
debate and studies were done on the role of the PUCs in facilitating (or hindering) allowance 22
trading. In Title IV, the regulatory treatment of allowances is left to the appropriate state and

(...continued)
transmission and leaves all retail issues up to the state utility commissions. Enron in an amicus brief argued that FERC
clearly has jurisdiction over all transmission and FERC is obligated to prevent transmission owners from discriminating
against those wishing to use the transmission lines. On March 4, 2002, the U.S. Supreme Court ruled in favor of FERC
and held that FERC has jurisdiction over transmission, including unbundled retail transactions.
18 FERC Order 697, Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and Ancillary Services by
Public Utilities, Docket No. RM04-7-000, Final Rule (issued June 21, 2007).
19 Code of Federal Regulations, Title 18, Conservation of Power and Water Resources, Part 101.
20 Code of Federal Regulations, Title 18, Conservation of Power and Water Resources, Part 101. Allowance accounting
is described under General Instructions Number 21.
21 Treatment of emission allowances under the Federal income tax is spelled out in Rev. Rul. 92-16, Internal Revenue
bulletin, No. 1992-12, March 23, 1992, p. 5 and Rev. Proc. 92-91, Internal Revenue Bulletin, No. 1992-46, November
16, 1992-13, p. 32-33. See also, Announcement 92-50, Internal Revenue bulletin, No. 1992-12, March 30, 1992, p. 32.
22 For example, see Kenneth Rose, et. al., Public Utility Implementation of The Clean Air Act’s Allowance Trading
Program, National Regulatory Research Institute, May 1992.





federal regulatory bodies. Title IV contains no mandated requirements regarding the treatment of
allowance transactions in state utility rate proceedings. Basically, Congress chose to leave the
state commissions free to apply any rate treatment they deem reasonable and appropriate.
The states responded in a diverse manner, some states issuing broad guidelines on treatment of
allowance transactions while others decided such events on a case-by-case basis. An analysis of
the interaction between PUCs and the allowance system made three general observations about
the resulting PUC treatment of allowances: (1) regulations tend to require 100% of both expenses
and revenues from allowances to be returned to ratepayers with net gains (losses) incurred used to
offset (or increase) fuel costs; (2) a few states have allowed utilities to retain some of the profits
as an incentive to sell excess allowances; (3) state regulations tend to be tailored to a state’s
specific circumstance—“allowance rich” states have regulations encouraging sales, “allowance 23
poor” states have regulations encouraging purchases. The focus of PUC decisions has not been
to encourage allowance transactions, but generally to ensure ratepayers and not shareholders
receive the benefits of the allowances. In some cases, PUCs have also used their authority to
encourage utilities to protect high-sulfur coal production, even if it is not the most cost-effective 24
control strategy.

When the 1990 Clean Air Act Amendments were enacted, about 75% of the allowances were
allocated to vertically integrated, ROR regulated entities. Today, that percentage has shifted with
more allowances allocated to independent generating entities as some utilities have divested
themselves of their generating assets. This diversification of ownership is reflected to some 25
degree in the ATS statistics on official transfers and transactions. As indicated by Table 2, in the
first two years of trading, transfers between economically unrelated entities were a small
percentage of total transfers. More recent data suggest that transfers between unrelated entities
account for about 50% of total transfers. However, it is clear that internal transfers remain a major
part of the allowance market, even in a restructured industry, and that the total number of official
transactions occurring is quite modest.
Internal transfers (i.e., transfers within or between economically related entities) tend to be
transacted in accordance with agreements that the utility and/or holding company has filed with 26
the appropriate state PUC, or FERC, or both.

23 Elizabeth M Bailey, Allowance Trading Activity and State Regulatory Rulings: Evidence from the U.S. Acid Rain
Program, MIT, March 1998, pp. 9-10.
24 See Ken-Ichi Mizobuchi, The Movements of PUC Regulation Effects in the SO2 Emission Allowance Market, Kobe
University, May 2004.
25 “Official here means that the transfer has been recorded by the ATS. The actual transfer of ownership may have
occurred earlier. As noted earlier, parties are not required to notify the ATS of any transfer within a specific time period
and may choose for some reason to delay informing the ATS of a transfer.
26 For example, see the now terminated agreement AEP System Interim Allowance Agreement filed with the FERC on
August 30, 1996 in Docket No ER96-2213-000 designated as Appalachian Power Company Supplement No. 9 to Rate
Schedule FPC No. 20; Columbus Southern Power Company Supplement No. 3 to Rate Schedule FPC No. 30; Indiana
Michigan Power Company Supplement No. 10 to Rate Schedule FPC No. 17; Kentucky Power Company Supplement
(continued...)





Table 2. EPA Official Allowance Transfers and Transactions: 1994-2003
Transfers
Total between economically Percent Total Transactions between Percent of
Year Transfers (millions of distinct of Total Number of economically Total
allowances) organizations (millions of Transfers Transactions distinct organizations Transactions
allowances)
1994 9.2 0.9 9.8% 215 66 30.7%
1995 16.7 1.9 11.4% 613 329 53.7%
1996 8.2 4.4 53.7% 1,074 578 53.8%
1997 15.2 7.9 52.0% 1,429 810 56.7%
1998 13.5 9.5 70.4% 1,584 942 59.5%
1999 18.7 6.2 33.2% 2,832 1,743 61.5%
2000 25.0 12.7 50.1% 4,690 2,889 61.6%
2001 22.5 12.6 56.0% 4,900 2,330 47.6%
2002 21.4 11.6 54.2% 5,755 2,841 49.4%
2003 16.5 8.1 49.1% 4,198 1,544 36.8%
2004 15.3 7.5 49.0% 20,000 n/a n/a
2005 19.9 10.0 50.3% 5,700 n/a n/a
Source: U.S. Environmental Protection Agency, 2007.
Beyond restructuring, other entities are emerging as participants in the allowance markets. This
increased diversity of interest in the allowance market is reflected in the most recent (2007) EPA
allowance auction. As indicated by Table 3, several brokerages have created positions in the
allowance market, both for themselves and their clients. This may suggest an increasing
importance of intermediaries to the functioning of the allowance market, the development of a
more liquid market, and to the maturing of that market.
Table 3. EPA 2007 Auction Results
(Winners of more than 20 allowances)
Percent of Total
Spot Market Bid Winners Quantity Allowances offered
(125,000)
Morgan Stanley 50,000 40.00%
KS&T, LP 30,575 24.46%

(...continued)
No. 6 to Rate Schedule FPC No. 11; and, Ohio Power Company Supplement No. 9 to Rate Schedule FPC No. 23.
Agreement terminated by FERC, effective January 1, 2002, in accordance with the mutual consent of the parties
thereto.





Saracen Energy LP 15,000 12.00%
Transalta Energy Marketing U.S. 9,900 7.92%
South Carolina Public Service Authority 7,500 6.00%
Alpha 5,004.00%
Constellation Energy Commodities Group, Inc. 2,500 2.00%
Merrill Lynch Commodities Inc. 2,500 2.00%
The Detroit Edison Company 2,000 1.60%
TOTAL SPOT 124,975 99.98%
Percent of Total
7 Year Advance Bid Winners Quantity Allowances offered
(125,000)
American Electric Power 80,000 64.00%
DTE 30,024.0
Cantor Fitzgerald Brokerage 10,000 8.00%
Bear Energy 4,986 3.99%
TOTAL ADVANCE 124,986 99.98%
Source: Environmental Protection Agency, 2007
The basic market for allowance trading is the Over-The-Counter (OTC) market. The most
common trading structure involves spot sales with immediate settlement accounting and delivery
into EPA’s Allowance Tracking System (ATS) with payment by wire transfer in three business 27
days. Daily spot trading volumes for immediate settlement are estimated in the 10,000 to 25,000 28
ton range. Forward settlement transactions are less common and are fairly short-dated—6 to 18
months out. Vintage swaps also occur in both markets with the difference in value usually paid in 29
additional allowances rather than cash. This preference for allowances reflects regulated
entities’ desire to keep these transactions non-taxable under current IRS regulations. Cash market
transactions are facilitated in some cases through available electronic trading platforms, such as
Intercontinental Exchange, Inc. (ICE) and TradeSpark (CantorCO2e), and by the emergence of a 30
number of allowance brokers. Currently, EPA lists a dozen allowance brokers on its website. A 31
similar list is available from the Environmental Markets Association—a trade association.
Brokers tend to be registered with the SEC and one or more Self-Regulatory Organizations, such
as FINRA; but participation in this market would not in itself make a firm subject to SEC
regulation. Four brokers—Cantor Fitzgerald, Evolution, ICAP Energy, and TFS Energy—form

27 Peter Zaborowsky, The Trailblazers of Emissions Trading, Evolution Markets Inc. (April 23, 2002).
28 Ibid. In September 2007, the monthly volume was estimated at 175,000-200,000 by Evolution Markets Inc., who
termed it low volume. Evolution Markets Inc., SO2 MarketsSeptember 2007 at http://www.evomarkets.com/assets/
mmu/mmu_so2_sep_07.pdf.
29 The first year an allowance may be used for compliance is called its “vintage.” This situation can result in entities
engaging in a “vintage swap.” For example, a “vintage swapmay occur because one entity has excess allowances in
the upcoming year (2008) but anticipates it will have insufficient allowances in 2009. Another entity may be in the
opposite position because of planning future emission reductions. The two entities agree to “swap allowances to
improve their allowance streams over these years.
30 EPA Website: http://www.epa.gov/airmarkets/trading/buying.html.
31 EMA Website: http://www.environmentalmarkets.org/page.ww?section=About+Us&name=Company+Directory.





the basis of the Platts emission price index. Argus AIR Daily also produces price indices through
daily phone surveys of active brokers.
Two exchanges provide SO2 future contracts as well as clearing services: New York Mercantile
Exchange (NYMEX) and Chicago Climate Futures Exchange (CCFE). The availability of
exchanges as a trading platform for allowances or to clear transactions was cheered by traders
when established in late 2004 and 2005. As stated by the Environmental Markets Association
with respect to NYMEX’s decision: “NYMEX does offer information on power, and any time
you have them expanding into our market, that’s going to create opportunities for people who 32
may be using other products to take a second look at emissions.” Both exchanges offer
standardized and cleared futures contracts, along with clearing services for off-exchange
transactions. As reported by Platts, futures volume on both exchanges have expanded greatly over
the past year. SO2 futures trading on the CCFE was nearly 1.9 million allowances in the first half
of 2007, compared with about 500,000 during the same time in 2006. For the NYMEX, volumes
in the first half of 2007 was 665,000 allowances—a more than three-fold increase over the first 33
half of 2006. Table 4 summarizes the basic features of the trading instruments.
Table 4. SO2 Futures Contract Specifications
NYMEX CCFE
Trading Platform ClearPort ICE
Clearing Organization NYMEX ClearPort Clearing The Clearing Corporation
(CCorp)
Self Regulatory NYMEX and National Futures Association National Futures Association
Organization (NFA) (NFA)
CFTC Regulatory Status Designated Contract Market Designated Contract Market
Contract size 100 SO2 allowances 25 SO2 allowances
Minimum Price Fluctuation $25 per contract $2.50 per contract
Settlement Physical through EPA’s ATS Physical through EPA’s ATS
Symbol RS SFI
Source: NYMEX and CCFE.
In April, 2007, the CCFE began offering SO2 options.34 For October 2007, the CCFE offers 35
European-style options on its futures contracts for expiration on the October 2007, November 36
2007, December 2007, April 2008, and December 2008 futures contracts. As with the futures
market, participants are required to settle their delivery obligations via the ATS. Volume remains
light with the CCFE reporting in July that there were 200 calls on July contracts, 5,315 calls and
411 puts on August 2007 contracts, 740 calls and 46 puts on September 2007 contracts, and 440

32 Comment of Matt Most, Emissions Market Association, as reported in Platts Emissions Daily,Emissions market
hails NYMEX move,” February 15, 2005, p. 1.
33 Platts Emissions Daily, “Emissions exchanges continue to grow SO2, NOx futures markets, August 10, 2007, p. 1.
34 Chicago Climate Futures Exchange, Chicago Climate Futures Exchange to Launch Options market on Sulfur
Financial Instrument Futures Contracts, Chicago, April 5, 2007.
35 An option that can only be exercised for a short, specified period of time just prior to its expiration, usually a single
day. “American options, however, may be exercised at any time before expiration.
36 For current options market data, see http://www.ccfe.com/mktdata_ccfe/sfi_options.jsf.





calls on the December 2007 contracts.37 The spike in calls and puts in the August 2007 contracts
in July may reflect a peak in allowance prices that occurred in July 2007 and future uncertainty 38
about allowance price direction over the summer. The NYMEX does not offer SO2 options.



The Commodity Exchange Act provides the basis for federal regulation of “derivative”
transactions in contracts based on commodity prices. Pursuant to the act, the Commodity Futures
Trading Commission (CFTC) regulates the futures exchanges, such as NYMEX, and certain other
derivative transactions that occur off-exchange. The CFTC’s authority varies according to the
identities of the market participants and the nature of the underlying commodity. In general, the
CFTC does not regulate spot (or cash) trades in commodities, or forward contracts that will be 39
settled by delivery of the physical commodity (which are also considered cash sales).
In terms of allowances, the CFTC’s jurisdiction is confined to trades that take place on those
markets it regulates. It has no jurisdiction over spot trades in allowances, full jurisdiction over
futures and options trades on regulated exchanges, and limited jurisdiction over derivatives trades
on certain other markets subject to lighter regulation than the exchanges.
Allowances are regulated by the CFTC as exempt commodities under the Commodity Futures 40
Modernization Act of 2000. The Commodity Exchange Act defines an exempt commodity as
any commodity other than an excluded commodity (e.g., financial indices, etc.) or an agricultural
commodity. Examples include energy commodities and metals. Emission allowances are related
to energy production. This designation has been supported by other federal entities. In a 2005
Interpretive Letter approving physically settled emission derivatives transactions, the Office of
the Comptroller of the Currency, Administrator of National Banks, states that physical settlement
of emission allowances do not pose the same risk as other physical commodities:
The proposed emissions derivatives transactions [e.g., futures, forwards, options, swaps,
caps, and floors] will be linked to three emission allowance markets: the U.S. SO2 (Sulfur
Dioxide) and NOx (Nitrogen Oxide) markets and the European Union’s CO2 (carbon
dioxide) market. These emissions markets are volatile and price fluctuates considerably.

37 CCFE Market Report, CCFE SFI Options, (July 2007), p. 3, table 4.
38 Traditional Financial Services (a brokerage firm) noted the peak in allowance prices in July because of higher than
expected storage in the natural gas markets. See TFS, Global Environmental Markets, August 2007, available at
http://www.tfsbrokers.com/pdf/global-reports/2007/tfs-ger-08-07.pdf.
39 The CFTC has occasionally brought enforcement actions for fraud in the spot market, but these are rare. The
legislative history does not suggest that Congress meant the CFTC to be a regulator of cash commodity markets.
40 See CFTC approval of CCFE application for designation as a Contract Market: Order of Designation: In the Matter
of the Application of the Chicago Climate Futures Exchange, LLC for Designation as a Contract Market, November 9,
2004.





Market participants manage price risk through the use of derivative structures, such as
forwards, futures, options, caps and floors. These derivatives are generally physically settled,
because the current emissions market is primarily physical in nature....
The OCC has previously concluded in a variety of contexts that national banks may engage
in customer-driven commodity transactions and hedges that are physically settled, cash-
settled and settled by transitory title transfer.... Similarly, the OCC permitted a national bank
to make and take physical delivery of commodities in connection with transactions to hedge
commodity price risk in commodity linked transactions....
In these decisions, the approved activities were subject to a number of conditions due to risks
associated with physical transactions in certain commodities. Those risks included storage
(e.g., storage tanks, pipelines), transportation (e.g., tankers, barges, pipelines), environmental
(e.g., pollution, fumigation, leakage, contamination) and insurance (e.g., damage to persons
and property, contract breach, spillage). Physical settlement of emissions derivatives and
hedging with physicals would not pose those risks, however. Emission allowances are not
tangible physical commodities, such as electricity or natural gas. Rather, they are intangible
rights or authorizations. They can be bought and sold like other commodities, but they exist 41
only as a book entry in an emissions account. [footnotes omitted]
The Federal Reserve also considers emission allowances as commodities for purposes of 42
trading.
The CFTC identifies four venues for trading exempt commodities under the Commodity
Exchange Act: (1) Designated Contract Markets (DCM), (2) Commercial Derivatives Transaction
Execution Facilities [none currently in operation], (3) Exempt Commercial Markets (ECM), and 43
(4) Over-the-Counter (OTC)—not on a trading facility. As suggested by the discussion above,
allowances are traded on three of these venues. Futures contracts and clearing services are
provided by NYMEX and CCFE—both DCMs—with options also available on the CCFE. ICE
and TradeSpark—both ECMs—are used by brokers and principals for allowance transactions.
Finally, principal-to-principal transactions and broker-assisted transactions are occurring OTC
without the use of a trading facility. Table 5 summarizes these venues and their regulation under
the Commodity Exchange Act.
For the three trading venues set out in Table 5, the degree of regulation varies, most significantly
according to the identities of the participants. Small public investors are allowed to trade only on
regulated exchanges (DCMs); these are subject to extensive self-regulation and CFTC oversight.
Electronic trading facilities, where small traders are not present, are subject to much less
regulation, because traders are assumed to be capable of protecting themselves from fraud.
However, if an electronic trading facility plays a significant price discovery role (that is, if the
prices it generates are used as reference points by the cash market or other derivatives markets),

41 Comptroller of the Currency, Administrator of National Banks, Interpretive Letter #1040: Emissions Derivatives
Proposal, September 15, 2005.
42 Board of Governors, Federal Reserve System, JPMorgan Chase & C. New York, New York: Order Approving
Notice to Engage in Activities Complementary to a Financial Activity, November 18, 2005.
43 See table entitled: Venues for the Trading of Exempt Commodities under the Commodity Exchange Act (CEA),
available on the CFTC website at http://www.cftc.gov/stellent/groups/public/@newsroom/documents/file/
exemptcommoditiesvenues_091207.pdf.





the CFTC may require disclosure of certain information about trading volumes, prices, etc. Where
trades are purely bilateral, negotiated, and executed between principals, the transaction is said to
occur in the OTC market, which is entirely exempt for CFTC regulation, with the exception of
certain provisions dealing with fraud manipulation.
Table 5. Summary of Trading Venues for Exempt Commodities under the
Commodity Exchange Act (CEA)
Designated Exempt OTC—Not on a Trading Facility
Contract Markets Commercial Markets (CEA Sec.
(CEA Sec. 5) (CEA Sec. 2(h)(3)-(5)) 2(h)(1)-(2))
Commodities No limitations Exempt commodities (e.g., Exempt
Permitted energy metals, chemicals, commodities (e.g.,
emission allowances, etc.,) energy metals,
chemicals, emission
allowances, etc.,)
Method of Trading can take place on an electronic Electronic multi-lateral trading Non-multi-lateral
Trading trading facility or by open outcry (i.e., many-to-many platforms) trading (e.g., dealer
markets;
individual ly-
negotiated, bilateral
transactions)
Notice Must apply to and receive prior Yes; simple notice containing None; exemption is
Requirement approval from CFTC; must satisfy contact information and self-executing
various non-prescriptive designation description of operations
criteria and core principles
Participants No limitations Eligible Commercial Entities Eligible Contract
only—subset of Eligible Participants (i.e.,
Contract Participants; excludes institutions, finds,
individuals but includes funds and wealthy,
sophisticated
individuals)
Intermediation Permitted None; principal-to-principal Limited; only if
trading only done through
another Eligible
Contract
Participant
Types of Futures and options Derivatives, including swaps, Derivatives,
Transactions futures and options (Note: including swaps,
ECMs often also trade products futures, and options
outside CFTC jurisdiction,
including spot and forward
contracts)
Standardized Yes Yes, terms set by the entity Usually yes when
Products? executed on a
dealer market.
Usually no, when
executed bilaterally





Designated Exempt OTC—Not on a Trading Facility
Contract Markets Commercial Markets (CEA Sec.
(CEA Sec. 5) (CEA Sec. 2(h)(3)-(5)) 2(h)(1)-(2))
Cleared? Transactions must be cleared through a Clearing not mandatory; if Can be if a
Derivatives Clearing Organization offered, it must be through an standardized
(DCO) approved by the CFTC SEC-registered clearing agency contract; many
or a DCO (many ICE traders choose to
transactions are cleared at LCH; clear trades at
other ECMs offer clearing at NYMEX or LCH
NYMEX Clearport or The
Clearing Corp.)
Transaction Subject to all provisions of the CEA Only anti-manipulation and anti-Only anti-
Prohibitions fraud manipulation and
anti-fraud (but anti-
fraud rules do not
apply to
transactions
between Eligible
Commercial
Entities)
Self-regulatory Yes, significant self-regulatory Minimal and they include None
responsibility responsibilities; must comply on a nothing that goes to the
ongoing basis with 8 designation criteria integrity of trading.
and 18 core principles. Must have Responsibilities include a
compliance and surveillance programs reporting requirement for
contracts over a minimum
volume threshold; ensuring
compliance with exemption
conditions; and dissemination of
contract activity information for
“price discovery” contracts
Responsibility Comply with designation criteria and Provide notice of operation and None
to CFTC core principles weekly transaction data for high-
volume contracts; report
manipulations and fraud
complaints; maintain and
provide access to records of
activity
CFTC Unlimited, including continuous and Limited (special calls); Sec 8a(9) None
Oversight ongoing market surveillance and trade emergency authority does not
Authority practice programs, ability to intervene apply
in markets (e.g., force
reduction/liquidations of position,
alter/supplement DCM rules). CFTC
receives large trader reports
transaction data and assesses DCMs’
compliance programs via rule
enforcement reviews.
Source: Venues for the Trading of Exempt Commodities under the Commodity Exchange Act (CEA), available on the
CFTC website at http://www.cftc.gov/stellent/groups/public/@newsroom/documents/file/
exemptcommoditiesvenues_091207.pdf.
Although allowances are regulated like any other commodity by the CFTC, it should be noted
that it is not a deep liquid cash market. As noted by emissions broker Evolution Markets LLC, the
affected source base for SO2 allowances is about 500 companies. The broker also estimated in





2005 that about 20 companies represented the bulk of trading activities.44 In recommending
CFTC approval of the CCFE as a DCM, the Staff memorandum noted the following:
In futures markets generally, the existence of a liquid market for a particular contract and
the ability of an FCM to liquidate positions therein which it may inherit from a defaulting
customer are important to the financial integrity of such an FCM and, in turn, its ability to
fulfill its obligations to other customers and to the clearing system. The EPA will
facilitate the delivery process of these contracts in a manner that makes cash positions
known and compensates for any current lack of a developed deep liquid cash market for
the contracts as compared to other futures contracts. Collectively CCorp, NFA, and EPA
will carry out financial surveillance, monitor situations, and provide information the
effect of which should counterbalance any disparate effects on financial integrity, which 45
might be imposed by the initial lack of trading history and prices.

Despite the tendency to view the Title IV program as a model for a future greenhouse gas
reduction scheme, there are several important differences. For example, the Title IV program
involves up to 3,000 new and existing electric generating facilities that contribute two-thirds of
the country’s SO2 and one-third of its nitrogen oxide (NOx) emissions (the two primary
precursors of acid rain). This concentration of sources makes the logistics of allowance trading
administratively manageable and enforceable with continuous emissions monitors (CEMs)
providing real time data. However, greenhouse gas emissions are not so concentrated. In 2005,
the electric power industry accounted for about 33% of the country’s GHG emissions, while the
transportation section accounted for about 28%, industrial use about 19%, agriculture about 8%, 46
commercial use about 6%, and residential use about 5%. Thus, small dispersed sources in
transportation, residential/commercial and agricultural sectors, along with industry, are far more
important in controlling GHG emissions than they are in controlling SO2 emissions. This
diversity multiplies as the global nature of the climate change issue is considered, along with the 47
multiple GHGs involved. Thus, a carbon market is like to involve far greater numbers of
affected parties from diverse industries than the current Title IV program.
It will also involve far greater numbers of tradeable allowances than the current Title IV program.
Under the current program, about 9 million allowances are allocated to participating entities
annually. In contrast, a greenhouse gas program that capped emissions in the electric power,
transportation, and industry sectors at their 1990 levels at some point in the future would be
allocating about 4.85 billion allowances annually. This is a two and a half orders-of-magnitude
increase over the Title IV program and double the Phase 2 allocations under the ETS. As

44 Evolution Markets LLC,An Overview of Trading Activity and Structures in the U.S. Emissions Markets,” NYMEX
Emissions Futures Seminar, July 28, 2005.
45 The Division of Market Oversight and The Division of Clearing and Intermediary Oversight, CFTC, DCM
Designation Memorandum: Application of Chicago Climate Futures Exchange, LLC (CCFE”) for Designation as a
Contract Market pursuant to Sections 5 and 6(a) of the Commodity Exchange Act (Act” or “CEA”) and Part 38 of
Commission regulations, November 3, 2004.
46 U.S. territories account for the remaining 1%. Data from EPA, Inventory of U.S. Greenhouse Gas Emissions and
Sinks: 1990-2005, April 15, 2007, p. ES-14.
47 The EU addresses this issue by having the ETS cover only 45% of its emissions and no non-carbon dioxide
emissions, as noted earlier. Still, it has 11,500 entities to oversee.





suggested here, trading activities under Title IV has been increasing since 2005. However, it
doesn’t approach the anticipated volumes that would occur if a greenhouse gas cap-and-trade
program was instituted.
Finally, the economic value of a future carbon market is likely to be substantially greater than the
Title IV program. With EPA’s pending implementation of the Clean Air Interstate Rule (CAIR), 48
the price of a Title IV allowance has increased to about $500. Thus, the annual allocation of SO2
allowances has a market value of about $4.5 billion. Using estimates of $15 to $25 an allowance,
the annual allocation of 4.85 billion allowances posited above for a greenhouse gas program 49
would have a market value of $72.8 billion to $121.3 billion. Unlike the Title IV market, a
carbon market may be quite liquid.
Despite these differences in scope and magnitude, there are trends in Title IV trading that are
likely to continue in a carbon market.
First, there is a trend toward more diverse, non-traditional participants in the Title IV market.
Like the Title IV market, the economic importance of a carbon market will likely draw in entities
not directly affected by the reduction requirements, such as financial institutions. The motivations
of these entities may be equally diverse, including facilitating projects involving the need for
allowances, portfolio balancing, and profits earned through intermediary fees or proprietary
trading.
Second, there is trend in the Title IV market toward using financial instruments to manage
allowance price risk. This trend is partly the result of the regulatory uncertainty introduced in the
allowance market by CAIR. Given the greater economic stakes involved in a carbon market, this
trend toward more sophisticated financial instruments is likely to emerge early as a hedge against
price uncertainty. The emergence of entities well-versed in the use of these instruments may
reinforce the trend and make options, collars, strangles, and other structures as common in the
allowance market as they are in other commodity markets. With a more liquid and dynamic
market, a carbon market may look more like other energy markets, such as natural gas and oil,
than the somewhat sedate SO2 allowance market.
Larry Parker Mark Jickling
Specialist in Energy and Environmental Policy Specialist in Financial Economics
lparker@crs.loc.gov, 7-7238 mjickling@crs.loc.gov, 7-7784





48 Based on data from Cantor Fitzgerald, October 2007.
49 Range based on EPA estimates for reducing emissions to 1990 levels by 2020 as required under S. 280. See EPA,
Analysis of The Climate Stewardship and Innovation Act of 2007, July 16, 2007. For reference, a Phase 2 ETS
allowance currently sells for about $32 . Data from the European Climate Exchange, http://www.ecxeurope.com/
default_flash.asp.