EPA in order to address acid rain pollution concerns implemented the Title IV section of the 1990 Clean Air Act. The primary goal of Title IV was the reduction of annual SO2 emissions by 10 million tons below 1980 levels. To achieve such reductions, the law requires two-phase tightening of the restrictions placed on fossil fuel-fired power plants. Beginning in 1995, Phase I affects 263 units at 110 mostly coal-burning electric utility plants located in 21 eastern and midwestern states. The market continued to expand with an additional 182 units, which joined Phase I as substitution or compensating units. Emissions data reveals that with the involvement of these facilities were reduced by approximately 40% below their required level.

Phase II begins in the year 2000 and tightens the annual emissions limits imposed on these large, higher emitting plants and also sets restrictions on smaller, cleaner plants fired by coal, oil, and gas, encompassing over 2000 units. The program will affects existing utility units serving generators with an output capacity of greater than 25 megawatts and all new utility units.

In order to establish the objectives set into by Title IV, the Acid Rain Program was implemented. This program established the allowance trading system, set forth in 40 C.F.R. Part 73, which creates low-cost rules of exchange that minimize government intrusion and make allowance trading a viable compliance strategy for reducing SO2. Allowance trading is the centerpiece of EPAís Acid Rain Program, and allowances are the currency with which compliance with the SO2 emissions requirements is achieved. The market-based allowance trading system capitalizes on the power of the marketplace to reduce SO2 emissions cost-effectively and uses economic incentives to promote conservation and the development of innovative technology.

The Acid Rain Program represents a dramatic departure from traditional command-and-control regulatory methods which establish specific, inflexible emissions limitations with which all affected sources must comply. Instead, the Acid Rain Program introduces an allowance trading program that harnesses the incentives of the free market to reduce pollution.

Under this system, affected utility units were allocated allowances based on their historic fuel consumption and a specific emissions rate. With regards to allocation, allowances are allocated each year beginning in 1995. An allowance authorizes a unit within a utility or industrial source to emit one ton of SO2 during a given year or any year thereafter. For each ton of SO2 discharged in a given year, one allowance is consumed, that is, it can no longer be used. Allowances are fully marketable commodities. After they have been allocated, allowances may be bought, sold, traded, or banked for use in future years.

During Phase II of the program, the Act sets a permanent cap of 8.95 million allowances for total annual allowance allocations to utilities. This cap firmly restricts emissions and ensures that environmental benefits will be achieved and maintained.

Utilities that reduce emissions through energy efficiency and renewable energy are able to sell, use, or bank, their surplus allowances. The Act also requires that EPA set aside a reserve of 300,000 allowances to stimulate energy efficiency and renewable energy generation. Those utilities that either implement demand-side energy conservation programs to curtail emissions or install renewable energy generation facilities may be eligible to receive bonus allowances from this reserve.

The Acid Rain Program is viewed around the world as a prototype for tackling environmental issues. The allowance trading system capitalizes on the power of the marketplace to reduce SO2 emissions in the most cost-effective manner possible.