ffi iff$.':fiffluanasement District

21865 Copley Drive, Diamoncl Bar, CA 91765-U7a

(9O9) 396-200O' www.aqmcl.gov

BOARD MEETING DATE: November 5, 2010 AGENDA NO. 37

PROPOSAL: Proposed Amendments to SOx RECLAIM Program (Regulation XX)

SYNOPSIS: Proposed Amendments to Regulation XX RECLAIM will achieve

additional SOx reductions pursuant to the 2007 AQMP Control

Measure #2001CM8-02. The proposed amendments also address

requirements for demonstrating Best Available Retrofit Control

Technology equivalency in accordance with California Health and

Safety Code $40440.

COMMITTEE: Stationary Source Committee, June 20,2008, June 19, 2009,

November 20,2009,May 21,2010, Iuly 23,2010, and September

24, 2010, Reviewed. Refinery Committee, December 1 1, 2009,

August 18, 2010 and September 22,2010, October 14,2010,

Reviewed.

RECOMMENDED ACTIONS:

Adopt the attached resolution:

l. Certifying the Final Program Environmental Assessment (PEA) for Proposed

Amended Regulation XX - Regional Clean Air Incentives Market (RECLAIM); and

2. Amending Proposed Rule 2002 - Allocations for Oxides of Nitrogen (NOx) and

Oxides of Sulfur (SOx).

Barry R. Wallerstein, D.Env.

Executive Officer

LTT:JC:GQ:MHP

Introduction 6

The AQMD Board adopted the Regional Clean Air Incentives Market (RECLAIM)

program in October 1993. The purpose of the RECLAIM program is to reduce NOx and

SOx emissions through a market-based program. The program replaced a series of
existing and fufure command-and-control rules and was designed to provide facilities

with the flexibility to seek the most cost-effective solution to reduce their emissions.

AQMD staff is proposing amendments to Regulation XX - RECLAIM to achieve

additional SOx reductions pursuant to the 2007 AQMP Control Measure CMB-02 and

state law. Specifically, the proposed amendments address requirements for 1) Best

Available Retrofit Control Technology (BARCT) in accordance with California Health

and Safety (H&S) Code $40440, and2) a demonstration of equivalency to command-andcontrol regulations, as required under H&S Code $ 39616(cX1). Reductions in SOx will

help the Basin attain the federal annual average PM2.5 standard by 2075, and the federal

Z4-hour average standard by 2020. Other proposed rule amendments include

clarifications and changes to the protocols.

Public Process

In a three-yearule development process for the proposed amendments from 2008-2010,

staff conducted a Public Workshop on June 23,2009; an Informational Governing Board

Hearing on January 8, 2010, and a Public Consultation Meeting on September 8, 2010.

Staff held numerous Working Group meetings with the stakeholders, as well as

individual meetings with WSPA and the refineries to discuss issues related to the

proposed amended rule. Staff presented its proposal at six Stationary Source Committee

meetings and four Refinery Committee meetings for review. Staff released the first

Preliminary Draft Staff Report in April 2008. At the June 23,2009 Public Workshop,

staff released the Draft Staff Report, the Notice of Preparation of the Draft

Environmental Assessment, and the Draft Rule 2002. On August 18, 2010, staff released

its Draft Program Environmental Assessment for a 45-day public review. On October 1,

201A, staff released its revised Draft Staff Report and the Socioeconomic Analysis for a

30-day public review. Regarding feasibility and cost analyses, in 2008-2009, staff

contracted two consultants, ETS, Inc. and NEXIDEA to conduct independent feasibility

and cost analyses. In 2010, staff contracted a third consultant - Norton Engineering Inc.

(NEC) - to review the first two consultants' analyses. The consultants' non-confidential

reports are posted on the AQMD web page.

Affected Facilities

The proposed amendments will affect eleven major facilities: six refineries, a coke

calciner, two sulfuric acid plants, a container glass manufacturing plant, and a cement

plant. These eleven major facilities emitted 9.31 tons per day (93Vo of the total

emissions from the SOx RECLAIM universe.) These eleven facilities hold 10.21 tons

per day RTCs (877o of the total RTC holdings for the SOx RECLAIM universe.) The

refinery sector accounted for l6 7o of the total emissions and 13 7a of the total available

RTCs. ' Figure 1 shows the emission distribution at these eleven facilities. The majority

' The 2005 audited emissions for the entire SOx RECLAIM universe were 10.04 tons per day. The total RTC

Holdinss for the universe are 77.17 tons per day.

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of the emissions was generated from seven categories of sources: 1) fluid catalytic

cracking units; 2) sulfur recovery and tail gas treatment units; 3) refinery boilers and

heaters; 4) sulfuric acid manufacturing plants; 5) container glass melting furnace; 6) coke

calciner; andT) cement kilns and a coal fired steam boiler at a cement manufacturins

facility.

FIGURE 1

2005 Emission Distribution

Staff Proposal

BARCT Levels

Table 1 shows staff's proposed new BARCT levels, emission reductions estimated from

2005 baseline, and the average cost-effectiveness values estimated based on ETS/AEC,s

and NEXIDEA's recorrunendations (the first figure in the cost-effectiveness range), and

Norton Engineering's recommendations (the second figure in the cost effectiveness

range.) Figure 2 shows the present worth values for the 25-year equipment life,

estimated using the consultants' input. The total investments were estimated to be

approximately $630 millions to $750 millions dollars. The weighted average cosr

effectiveness spans between $16,000 per ton to $19,000 per ton SOx reduced for this

project. The cost effectiveness for individual source categories ranges from $2,000 per

ton to $50,000 per ton. It should be noted that WSPA strongly disagrees with the

analyses performed by staff and the consultants.

t\

Top 11 facilities. Top 7 sources-

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TABLE 1

Staff's Proposed New BARCT Levels

FIGURE 3

Present Worth Values (for 25 years) Based on Consultants'Input

(Excluding Cost-Ineffective Controls of >$50 K per Ton)

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SRLI/TG

Cefrrent Glass

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RTC Reductions

To implement the proposed BARCT levels, staff is recommending that RTC holdings be

reduced by 5 .7 tons per day or by 5 1 .4 percent beginning 2012 throu gh 2019. When

fully implemented, these RTC reductions are expected to resultin 5.4 tons per day actual

emission reductions. This proposal differs slightly than the staff proposal released on

October I,2010 and was crafted based on the latest available data and fully complies

with all legal requirements.

The 5.7 tons per day RTC reductions will be distributed among the 11 major facilities,

investors, and 3 facilities that have more RTCs holdings than originally allocated as of

New BARCT Emission

Reductions

(tons per dav)

Cost Effectiveness

($/ton;

FCCUs 5 ppmv 2.88 2AK - zlK

SRU/TGs 5 ppmv 0.73 31K - 45K

Sulfuric Acid 10 ppmv 1.03 2K- 3K

Coke Calciner 10 ppmv 0.28 10K - 23K

Container Glass 5 ppmv 0.19 5K

Cement Kilns 5 ppmv 0.25 t9K - 27K

Coal Fired Boiler 957o

reduction

0.00 4K

FCCU.

5360N4 -

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August 29,2009. Staff proposes not to shave the RTC holdings of the 18 remaining

facilities. Any RTCs traded after AugustZ9,2009 and prior to the Governing Board

hearing date will be subject to the proposed shave levels to ensure that no RTC holdings

are inappropriately traded or sheltered.

The 5.7 tons per day RTC reductions willbe implemented in four (4) phases over eight

(8) years. Staff will submit the first 4 tons per day of RTC reductions to EPA to satisfy

the SIP commitment and help the Basin meet the standard in2015, and will submit the

remaining 1.7 tons per day at a later phase.

Phase 1: 3.0 tons per day of reductions in compliance year 2013

Phase 2: 4.0 tons per day of reductions in compliance year 2014

Phase 3: 5.0 tons per day of reductions in compliance year 2017

Phase 4: 5.7 tons per day of reductions in compliance year 2Al9

In an effort to ensure early reductions for the RECLAIM Program, facilities will be

required to use SOx reducing catalysts in the FCCUs no later than July I,2011 to achieve

a limit of 25 ppmv. The use of alternative controls is also allowed.

Safety Valves

To safeguard the successful implementation of the SOx RECLAIM program, several

necessary "safety valves" are built in the proposed rule language: Staff is proposing setaside RTC accounts (i.e. non-tradable/non-usable)quivalent to the RTC reductions

called for by the specific compliance years that can potentially be made available to the

impacted facilities in the event RTC prices exceed the $50,000 per ton threshold

(discrete credit). Staff commits to monitor the l2-month rolling average RTC price and

in the event the SOx RTC price exceeds $50,000 per ton, staff will report to the

Governing Board at a public hearing to be held no more than 60 days from staff

determination. At the public hearing, the Governing Board will decide whether or not to

convert any portion of the non-tradable/non-usable RTCs to tradable/usable RTCs and

give that portion back to the facilities so that it can be used for compliance with the

facility cap. In addition, staff will not submit any of the post-2015 emission reductions

for inclusion into the State Implementation Plan until the reductions have been in effect

for one full compliance year.

Key Issues

Although staff resolved most of the outstanding issues relative to the staff proposal the

following discussion summarizes the key issues raised during the rule development

phase by the stakeholders: 1) costs for compliance and BARCT determination,2)

BARCT determination for Owens-Brockway glass container manufacturing facility in

Vernon; 3) water and wastewater,4) market viability, and 5) shaving methodology for
facilities that are not subject to new BARCT, and for facilities that are subject to new

BARCT. Staff's responses to these key issues are summarized below:

1) Costs for Compliance& BARCT Determination

As part of its proposal included in the Set Hearing Board Package released on October 1,

2010, staff proposed to reduce RTC by 6.1 tons per day (55Vo shave) representing 5.4

tons per day actual emission reductions by 2019. WSPA commented that staff should

not pursue the 6.1 tons per day RTC reductions because WSPA estimated the cost of

compliance with this shave to be $1.637 billion dollars, of which $836 million dollars

would be for emission reductions under WSPA's main strategy to comply with the

"programmatic" BARCT, and $S01 million dollars would be for "other" investments that

must be implemented to achieve additional reductions within WSPA member facilities to

comply with the 557o shave.

Staff's Response:

Staff has reviewed WSPA's analysis and concluded that WSPA's main strategy to meet

the "programmatic" BARCT is reasonable. However, staff also concluded that WSPA's

assumption for an additional $801 million investment to implement "other" measures to

meet the 55Vo shave would not be reasonable or necessary. Staff has identified

cost-effective off-site reductions which could be used to substitute for cost-ineffective

on-site controls as provided under a market-based cap-and-trade program such as

RECLAIM. However, to provide additional margin of safety, staff is proposing to

increase the compliance margin to 18-57o and reduce the shave from 557o to 51.4Vo.

Summary of staff's analysis is provided below.

WSPA's Main Strategy. Even though WSPA's main strategy2 is different than staff's

main strategy on an equipment-per-equipment basis, WSPA's strategy would result in

3.81 tons per day actual emission reductions at a cost of $836 million and a costeffectiveness of $24Kper ton. In comparison, staff's proposed main strategy would

result in3.92 tons per day actual emission reductions at a cost of between $561 million -

$638 million and a cost-effectiveness of $16K - $18K per ton. On this basis, staff

believes that the "programmatic" BARCT strategy proposed by WSPA is similar to

staff's proposal since it will achieve similar reduction levels through cost-effective

measures.

WSPA's "Other" Strategies. In its analysis presented to the Refinery Committee on

October 14,20IA, staff concluded that the two "other" control strategies for a SRUiTG

and fuel gas treatment proposed by WSPA at a cost-effectiveness of $213,000 per ton

T WSPA's main strategy includes 1) FCCUs would use 2 WGSs and SOx reducing additives to meet 5

ppmv - 35 ppmv; 2) SRU/TGs would use 2 WGSs and have process modifications to meet 5 ppmv - 25

ppmv; 3) I WGS and other process modification at other units.

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and $100,000 per ton would not be reasonable strategies to implement. However, two

"other" strategies proposed by WSPA related to CEMS improvements and RTC holdings

surrendered are very cost-effective at $1,686 - $6,805 per ton. The two "other"

cost-effective strategies amounted to $81 million dollars. With the main strategy and the

two "other" cost-effective strategies in combination, WSPA members could achieve 5.31

tons per day reductions at $917 million and at an average cost-effectiveness of $18,925

per ton. However, WSPA members would only need 5.17 tons per day reduction to meet

a 557o shave. Therefore, it is only reasonable to conclude that an investment of $917

million, not $1.637 billion estimated by WSPA, would be more than adequate to meet the

proposed 55Vo shave and would generate 0.14 tons per day surplus RTCs. Nevertheless,

to address concerns relative to safety margin, staff has modified its proposal to increase

the compliance margin to l.8.5Vo and reduce the shave from 557o to 51.4% which will

provide facilities with additional flexibility and the ability to meet the proposed reduction

target at less costs than those estimated above. In addition, staff estimated that there

would be approximately 1.45 tons per day potentially available surplus RTCs3 in the

market from other sources after the 5l.4Vo shave, which would raise the pool of surplus

credits to 1.6 tons per day.

2) BARCT Determinationfor Owens-Brockway Container Glass Facility in Vernon

Owens-Brockway commented that staff incorrectly determined the BARCT for glass

melting furnaces. BARCT for glass melting furnaces should be at807o not957o (or 5

ppmv). Owens-Brockway commented that the packed bed scrubbers recommended

would not work; the pressure drop introduced by the wet gas scrubbers was not

considered; the costs of $225,000 to handle waste water stream were inadequate; other

costs (e.g. CEMS, stack, permitting costs) were not included; and other analyses (e.g.

NSR for other pollutants, Rule 1401 requirements) were not analyzed.

t The 1 .47 tpd potentially available RTCs post-shave in the market comprised of:

o 0.21 tpd post-shave remaining unused RTCs (which is calculated as follows: The surplus RTCs

estimated from the 2005 baseline are 1.73 tpd(11.11- 10.04 = 1.73 tpd). WSPS already accounted

for 1.30 tpd surplus RTC in their strategy, therefore the remaining unused RTCs are 1.73 - 1.30 =

0.43 tpd pre-shave and (0.43 tpd)(0.486) = 0.21tpd post shave)

. 0.0009 tpd post shave hold by non-RECLAIM investors. (As of October 14,2010, there are only two

remaining investors that are non-RECLAIM facilities, and these two investors hold approximately

1,306 lbs of RTCs pre-shave or 0.002 tpd pre-shave or 0.0009 tpd post-shave.)

. 0. 60 tpd from non-refinery sector. (Assuming that the non-refineries would install control

technologies proposed by eitherWSPA to meet the 51.4Vo shave; and would have surplus RTCs to

sell in the market.)

. 0.66 tpd from refinery sector. (Assuming that the refineries would install control technologies

proposed by either WSPA to meet the 51.47o shave; and would have surplus RTCs to sell in the

market.)

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Staff's Response:

Staff disagrees with the commenter. Staff's feasibility analysis concludes that today's

BARCT is 5 ppmv (957o control efficiency or more). The proposed BARCT for glass

facility has been achieved in practice at a container glass manufacturing facility in Seattle

Washington. Relative to the control equipment configuration for the Owens-Brockway

facility in the South Coast basin, the consultant (ETS) recommended the removal of the

two dry scrubbers located upstream of the ESPs, and their replacement with two wet

scrubbers (packed bed) positioned downstream of the ESPs. The ESPs located upstream

of the packed bed scrubbers will be highly efficient in controlling particulate matter, and

thus would provide protection for the packed bed scrubbers from clogging. In the

consultant's analysis, a fan was provided to overcome the pressure drop across the wet

scrubbers and costs for a new stack were included. The cost effectiveness of this project

is about $5,198 per ton SOx removed, and therefore other marginal additional costs such

as adding new CEMS and permitting costs would not alter the project's cost-effectiveness

significantly. The consultant (ETS) estimated the equipment costs ($225,000) and annual

operating costs for a waste water treatment based on information provided by

Manufacturer D who cited from their relevant experience with a glass container facility in

Seattle, Washington. Nevertheless, to address concefirs expressed by Owens-Brockway

and other facilities relative to additional margin for safety, staff has modified its proposal

to increase the compliance margin to 78.5Vo and reduce the proposed shave from 55Vo to

51.47o. Relative to the issues such as NSR, staff recommends that they should be handled

at the permitting phase not at the rule development phase of this project. Staff commits to

help this and all other impacted facilities during permitting to ensure the successful

implementation of this very important program. Staff would further like to remind the

commenter that the District's NSR Program (Regulation XII| includes provisions that

shields installation of pollution control equipment from the applicability of certain other

NSR requirements.

3) Water & Wastewater Impacts

Stakeholders coffunented that the water and wastewater impacts of the project would be

significant.

Staff's Response: Industry argued that staff proposal will result in significant

increases on water demand and wastewater impacts due to the use of wet gas scrubbers.

If wet gas scrubbers are used to comply with the proposed rule, staff estimated that the

total water demand will increase by approximately 1 million gallons per day or 3 acre feet

per day, but increased water demand over cuffent water usage at affected facilities is well

below the SCAQMD's significance threshold of 5 million gallons per day of total

increased water demand (i.e. potable water, recycled water, and groundwater). The

information that staff received to date from the water purveyors and their 2005 Urban

Water Management Plans is that there are adequate supplies to meet the total water

demand, and use of recycled water is highly recommended ifavailable. Relative to the

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wastewater impact, staff's analysis indicates that the overall wastewater increase will be

less than 27o and that the facilities have adequate wastewater treatment capacity to treat

the increase, and no modifications to any existing wastewater discharge permits are

anticipated. WSPA continues to strongly disagree with staff's analyses.

3) Market Viability

Stakeholders cofl]mented that there were not enough trading pafiners, the SOx market

was very competitive and reserved, and there was an uneven distribution of RTC

holdings.

Staff s Response: For a market based incentive program, staff is required by the

H&S codes to conduct periodic BARCT reassessment and demonstrate equivalency with

command-and-control rules which would otherwise be developed as a result of BARCT

reassessment. To ease the issues identified by the stakeholders, staff is proposing to

return a portion of the reductions to the facilities as a compliance margin (l8.5%o).

Similar approach was also utilized as part of the 2005 NOx RECLAIM amendments.

Accounting for the fact that the SOx RECLAIM market is a lot less robust than the NOx

RECLAIM market, staff is proposing a compliance margin of 185%. In addition, staff

is proposing to establish a set-aside, non-tradable reserve that could be tapped in when

RTC value in the open market reach a certain level. Staff believes that compliance with

a facility cap still provides the facilities more operational flexibility than being subject to

stringent requirements in command-and-control rules and regulations.

4) Shaving Methodology

Facilities with no equipment subject to new BARCT commented that the uniform shave

was not equitable, would create significant difticulties for them to stay in compliance,

and indicated that they had limited ability to buy RTCs from large facilities. While

WSPA and the refineries that are subject to new BARCT argued strongly during the rule

development process in2008-2009 for the use of a shave methodology that was

consistent with that used during the 2005 NOx RECLAIM amendment. During the later

phase of the rule development process, they commented that staff should use the 2005 as

baseline for the shave, not shave the 1.98 tpd RTCs converted from ERCs and portion

reserved for Clean Fuel projects, and not set new BARCT for SRU/TGs and cement

kilns.

Staff's Response: Because of the non-uniform emissions and RTC distributions

in the SOx RECLAIM market (11 major facilities hold almost90To of the RTCs and

contribute more than 907o of emissions, and the remaining 2I facilities hold only 67o of

the RTCs and contribute about 67o of emissions), a uniform percent shave cross the

board is not the ultimate solution. The 21 facilities that have no equipment subject to the

new BARCT cannot reduce their emissions further, cannot sustain operation since they

had limited ability to buy RTCs from large facilities, and therefore cannot remain in

9
compliance after the shave. To keep the 2l facilities active in the SOx market, staff is

proposing to not shave the RTC holdings for these facilities if the RTC holdings are

below their initial allocations provided to them at the start of the RECLAIM program.

However, the amount of RTC holdings above their initial allocation will be shaved at the

same rate as other 11 facilities and investors. With this approach, staff estimated that the

1 1 facilities will have a shave of 51.47o, 18 of the 2I facilities will be exempt totally

from the shave, and 3 of the 2I facilities that have RTC holdings above their initial

allocations will be shaved accordingly. Any trading from August 29,2009 to the

Governing Board hearing date will also be subject to the shave to ensure that RTC

holdings are not inappropriately traded to or sheltered by a third party to avoid the shave.

California Environmental Quality Act (CEQA) Analysis

Pursuant to California Environmental Quality Act (CEQA) Guidelines 515252 and

$ 1 5 1 68 and AQMD Rule I 10, the SCAQMD has prepared a Program Environmental

Assessment (PEA) for proposed amended Regulation XX. Only the topics of air quality

and hydrology (water demand) were identified in the Draft PEA as exceeding the

SCAQMD's significance thresholds. The Draft PEA was released for a 45-day public

review and comment period from August 18, 2010 to October I,2010. Three comment

letters were received from the public relative to the Draft PEA.

Since the release of the Draft PEA, responses to the comments have been prepared and

included in the document. Also, minor modifications have been made to the document.

None of the modifications alter any conclusions reached in the Draft PEA, nor provide

new information of substantial importance relative to the draft document. Further, the

modifications do not constitute significant new information that would require

recirculation of the Draft PEA pursuant to CEQA Guidelines $15088.5. Therefore, the

document is a now a Final PEA and is included as an attachment to this Governing Board

package.

Socioeconomic Analysis

The socioeconomic analysis of the proposed amended SOx RECLAIM was based on the

55 percent shave of SOx RTC holdings. Eleven facilities would be affected, the majority

of which are located in Los Angeles County. The average annual compliance cost of the

55 percent shave ranged from $32 to $42 million with few job impacts on the local

economy. The new proposed 51.4 percent shave would lower the compliance cost. The

job impact of the new proposal would be within the noise of the economic model used for

the SOx RECLAIM analysis. WSPA prepared its own socioeconomic analysis, including

a scenario where a mid-size refiner closes. Staff reviewed this issue and pointed out a

number of mitigating factors relative to any potential job impacts.

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Implementation and Resources

It is expected that there will be a temporary workload increase due to applications

submitted for installing new control equipment or retrofitting/modifying existing

processes and there might be an increase in RTC trading activities. However, current

AQMD resources are adequate to implement the proposed rule.

Attachments

A. Summary of Proposal

B. Rule Development Process

C. Key Contact List

D. Resolution and Attachment 1

E. Rule Language for PAR 2002 -

F. Final Staff Report - SOx RECLAIM, Part 1 - BARCT Assessment & RTC

Reductions Analysis, and Part 2 - Summary of Consultants' Analyses

G. Program Environmental Assessment

H. Socioeconomic Analysis

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