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21865 CopleyDrive, 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 reductionspursuant 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 Healthand Safety Code $40440.

COMMITTEE: Stationary Source Committee,

June20,2008,June 19, 2009, November

20,2009,May 21,2010, Iuly 23,2010, andSeptember 24, 2010,Reviewed. RefineryCommittee, December

11, 2009, August 18,

2010andSeptember

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

througha market-based program. The program replaced a series ofexistingandfufure 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 2007AQMP 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,

asrequired

under H&S Code$ 39616(cX1). Reductions

in SOx will help the Basin attain

the federal

annualaverage

PM2.5 standard

by 2075,

and the federal Z4-houraverage

standard by 2020. Other proposed rule amendments

include clarifications

and changes

to the protocols.

Public Process In a three-year

ule development

process for the proposed

amendments

from 2008-2010, staff conducted

a Public Workshop

on June 23,2009; an Informational Governing

Board Hearingon January

8, 2010,and a Public Consultation Meeting on September 8, 2010. Staff held numerous

Working Group meetings with the stakeholders,

aswell as individual meetings

with WSPA andthe refineries to discuss

issues related to the proposed

amended

rule. Staff presented

its proposal

at six Stationary

Source Committee meetings

andfour RefineryCommittee meetings

for review. Staff released the first Preliminary

Draft Staff Reportin April 2008. At the June 23,2009 Public Workshop, staff released

the Draft Staff Report, the Notice of Preparation of the Draft Environmental

Assessment,

andthe Draft Rule 2002. On August 18, 2010,staff released its Draft Program

Environmental

Assessment

for a 45-daypublic review. On October 1, 201A, staff released

its revised

Draft Staff Reportandthe Socioeconomic Analysis

for a 30-day public review. Regarding feasibilityand cost analyses, in 2008-2009,

staff contracted

two consultants,

ETS, Inc. and NEXIDEA to conduct independent

feasibility and costanalyses.

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 thetotal 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 entireSOx RECLAIM universe were 10.04

tons per day. The total RTC Holdinss

for the universe

are77.17

tons perday.

-t-of the emissions was generated

from seven

categories

of sources:

1) fluid catalytic cracking units; 2) sulfur recovery andtail gastreatment

units; 3) refinery boilersand heaters; 4) sulfuric acid manufacturing plants; 5) container

glass meltingfurnace;

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,

andthe average

cost-effectiveness

values estimated

based on ETS/AEC,s and NEXIDEA's recorrunendations (thefirst figure in the cost-effectiveness range), and Norton Engineering's

recommendations

(the second

figure in the cost effectiveness range.) Figure2 shows the present

worth values

for the 25-year

equipment

life, estimated

usingthe 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 perton to $19,000

per ton SOx reduced

for this project. The costeffectiveness for individual source

categories

ranges from $2,000

per ton to $50,000

per ton. It shouldbe noted thatWSPA strongly

disagrees

with the analyses performed

by staff andthe consultants. t\

Top 11 facilities. Top 7 sources-

-3-

### 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)

Ca r c: ner s25N/ - ssgN1 

# ="1''"i'1.'::'fl

l

ryrttrrrrii-= .1 t: '.:::, SRLI/TG Cefrrent Glass

sa74r\4

- 5 aaTrvl

RTC Reductions To implement

the proposed

BARCT levels,

staff is recommending

that RTC holdingsbe reduced by 5 .7 tons per day or by 5 1 .4 percent

beginning

2012throu

gh 2019. When fully implemented,

these RTC reductions

are expected

to resultin 5.4 tons per day actual emission

reductions.This proposal differs slightly thanthe staff proposal released on October I,2010 and

wascrafted

based on the latest

available

data and fully complies with all legal requirements.

The 5.7 tonsper day RTC reductions will be distributed

among the 11 major facilities, investors,

and 3 facilities that have more RTCs holdings thanoriginally allocated as of 

### NewBARCT Emission

Reductions (tons per dav) Cost Effectiveness ($/ton;



### FCCUs 5 ppmv 2.88 

### 2AK - zlK SRU/TGs 5 ppmv 

### 0.73 31K - 45K SulfuricAcid 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
- 53s9f\/1

AAugust 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 levelsto ensure

that no RTC holdings
are inappropriately

tradedor 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 tonsper day of RTC reductions to EPA to satisfy the SIP commitment

and help the Basin meet the standard

in2015, andwill submitthe remaining 1.7tonsper day at a later phase.

Phase 1: 3.0 tonsper day of reductions in compliance

year2013 Phase 2: 4.0 tonsper day of reductions in compliance

year 2014 Phase 3: 5.0 tons per day of reductions in compliance

year2017 Phase 4: 5.7 tonsper 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 thanJuly I,2011 to achieve

a limit of 25 ppmv. The useof 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 proposingsetaside RTC accounts

(i.e. non-tradable/non-usable) quivalent

to the RTC reductions calledfor by the specific compliance

years that can potentially

be made available

to the impacted

facilities in the eventRTC 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 reportto the Governing

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

At the public hearing,

the Governing

Boardwill 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 submitany of the post-2015 emission

reductions for inclusioninto the State Implementation

Plan until the reductions havebeenin effect for onefull compliance year. Key Issues Although staff resolved mostof the outstanding issues relativeto 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 andwastewater,4) market viability, and 5) shaving methodology

forfacilities that are not subjectto new BARCT, and for facilities that are subjectto 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 HearingBoard 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 complywith 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 hasreviewed

WSPA's analysis

and concluded

that WSPA's main strategy to meet the "programmatic"

BARCT is reasonable. However,

staff alsoconcluded

that WSPA's assumption

for an additional

$801 million investment to implement

"other" measures

to meetthe 55Vo

shave would not be reasonable or necessary.

Staff hasidentified cost-effective

off-site reductions

which could be used

to substitute

for cost-ineffective on-site controls as providedundera market-based cap-and-trade

program suchas RECLAIM. However, to provide additional

margin of safety,

staff is proposing

to increase the compliance

marginto 18-57o

and reduce

the shave

from 557o

to 51.4Vo. Summary

of staff's analysis

is providedbelow.

WSPA's Main Strategy. Even though WSPA's main strategy2 is differentthan staff's main strategy

on an equipment-per-equipment basis, WSPA's strategy

would resultin 3.81 tons per day actual

emission

reductions

at a cost of $836 million anda costeffectiveness

of $24Kper ton. In comparison, staff's proposed

main strategy

would result in3.92 tons per day actual emission

reductions

at a costof between

$561 million

- $638million anda cost-effectiveness of $16K - $18K perton. 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 andfuel gastreatment

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 meet5 ppmv - 35 ppmv; 2) SRU/TGs would use 2 WGSs and haveprocess modifications

to meet 5 ppmv - 25 ppmv; 3) I WGS and other process modificationat other units.

-6-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

arevery cost-effective

at $1,686

- $6,805 per ton. The two "other" cost-effective

strategies

amounted

to $81 million dollars. With the main strategy andthe 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

5.17tons 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 meetthe proposed

55Vo shave andwould generate

0.14 tonsper day surplus RTCs. Nevertheless, to address

concerns

relative to safety margin,staff hasmodified its proposal to increase the compliance

marginto l.8.5Vo

and reduce

the shave

from 557o

to 51.4%

which will providefacilities with additional flexibility andthe ability to meet the proposed

reduction target at less costs thanthose

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

afterthe 5l.4Vo

shave, which would raise

the pool of surplus credits to 1.6tonsper day.
2) BARCT Determinationfor Owens-BrockwayContainer 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 gasscrubbers was not considered;

the costs

of $225,000

to handle

waste water stream

were inadequate;

other costs(e.g.CEMS, stack, permittingcosts)

were not included;

and other analyses

(e.g. NSR for otherpollutants, Rule 1401

requirements)

were not analyzed.

t The 1.47 tpd potentially available

RTCs post-shave

in the marketcomprised of:
o 0.21 tpd post-shave remaining unused RTCs (which is calculatedas follows: The surplus RTCs estimated

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

already accounted for 1.30 tpd surplusRTC in their strategy, therefore

the remaining unusedRTCs are 1.73 - 1.30 = 0.43 tpd pre-shave

and (0.43tpd)(0.486)

= 0.21tpd post shave)

. 0.0009

tpd post shave

hold by non-RECLAIM investors. (As of October 14,2010, thereare only two remaining investors

that are non-RECLAIM facilities, and thesetwo investorshold approximately 1,306 lbs of RTCs pre-shave or 0.002tpd 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.)

-1-Staff's Response:

Staff disagrees

with the commenter.Staff's feasibility analysis concludes

that today's BARCT is 5 ppmv (957o control efficiencyor more). The proposed BARCT for glass facility hasbeen

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 SouthCoast basin, the consultant

(ETS) recommended

the removal of the two dry scrubbers

located upstream

of the ESPs,

andtheir 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,

andtherefore

other marginaladditional costs such
as addingnew CEMS and permittingcosts would not alterthe project'scost-effectiveness significantly. The consultant (ETS) estimated

the equipment

costs ($225,000)

and annual operating

costs for a waste

watertreatment

based on information providedby 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

marginto 78.5Vo

and reduce

the proposed

shave from 55Vo

to 51.47o. Relative to the issues

suchas NSR, staff recommends that they shouldbe handled at the permittingphase not at the rule development phase of this project. Staff commits to help this and all other impactedfacilities during permitting to ensure the successful implementationof 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 projectwould be significant.

Staff's Response: Industryargued that staff proposal

will result in significant increases

on waterdemand

andwastewater

impacts due to the useof wet gasscrubbers. If wet gasscrubbers

are used to comply with the proposed rule, staff estimated

that the total waterdemand

will increase

by approximately

1 million gallons

per day or 3 acre

feet per day, but increased

waterdemand

over cuffent water usage at affected

facilities is well below the SCAQMD's significance threshold

of 5 million gallons

per day of total increased

waterdemand

(i.e. potable

water, recycled

water, and groundwater). The informationthat staff received to date from the water purveyors andtheir 2005 Urban Water Management

Plans is that there

are adequate

supplies to meetthe total water demand, and use of recycled

water is highly recommended if available.

Relative to the

-6-wastewater impact,staff's analysis indicates

that the overallwastewater increase will be lessthan 27o and

that the facilities have adequate wastewater

treatment

capacityto 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
wasvery competitive

and reserved,

andthere

was an uneven

distribution

of RTC holdings.

Staff s Response: For a marketbased incentive

program,

staff is required

by the H&S codes

to conduct

periodic BARCT reassessment anddemonstrate

equivalency

with command-and-control

ruleswhich would otherwise be developed

as a resultof 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 alsoutilized as part of the 2005 NOx RECLAIM amendments. Accounting

for the fact that the SOx RECLAIM marketis a lot less robust thanthe 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 openmarketreach 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 rulesand 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 themto stayin compliance, and indicated

that they had limited ability to buy RTCs from large facilities. While WSPA andthe refineries that are subject

to new BARCT argued strongly during the rule development

process in2008-2009

for the useof 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

usethe 2005 as baseline for the shave,

not shave

the 1.98 tpd RTCs converted

from ERCs and portion reserved for CleanFuel projects, and not setnew 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 RTCsand contribute

more than

907o of emissions,

andthe remaining

2I facilities hold only 67o of the RTCs and contribute about 67o of emissions),

a uniform percent

shave cross the boardis not the ultimatesolution. The 21 facilities that haveno 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,andtherefore cannot remainin

9compliance afterthe shave. To keep the2l facilities activein the SOx market, staff is proposing

to not shave

the RTC holdings

for these

facilities if the RTC holdingsare below their initial allocationsprovided 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 11facilities and investors. With this approach,

staff estimated

that the 11 facilities will havea shave of 51.47o, 18 of the 2I facilitieswill be exempt totally from the shave,

and3 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 alsobe subject

to the shave

to ensure

that RTC holdings are not inappropriately traded to or sheltered

by a third partyto avoid the shave.

California Environmental Quality Act (CEQA) Analysis Pursuant to California Environmental Quality Act (CEQA) Guidelines 515252 and $ 1 5 1 68 andAQMD Rule I 10,the SCAQMD hasprepared a Program

Environmental Assessment

(PEA) for proposed

amended

Regulation

XX. Only the topicsof 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-daypublic reviewandcomment

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

havebeen

prepared

and includedin the document.Also, minor modifications havebeen

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

costof the 55 percent

shave ranged from $32 to $42 million with few job impacts on the local economy.

The new proposed

51.4percent

shave would lowerthecompliance cost. The job impactof the new proposal would be within the noiseof the economic model used

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

wherea mid-sizerefiner closes. Staff reviewed this issue

andpointed

out a number of mitigatingfactorsrelative to any potential

job impacts.

-10-Implementation and Resources

It is expected

that there will be a temporaryworkload increase due to applications submitted

for installing new control equipmentor 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

-l l-