Electric Utility Response to Allowances: From Autarkic to Market-Based Compliance

Allowances are a central feature of Title IV; and, from the time Title IV was enacted, there has been concern about how rate-regulated electric utilities would make use of this novel instrument for achieving environmental goals. In particular, many questioned whether utilities would use allowances in a manner that would achieve the cost savings associated with emissions trading. There is, in fact, no requirement to trade allowances. If they wished to do so, utilities could treat allowances simply as non-tradable permits and reduce emissions to match the allocation to each unit. That utilities have not done so is one of the most important facts about electric utility use of allowances in Phase I.