# JUL 21 2011

MEMORANDUM SUBJECT: Revised Policy to Address Reconsideration ofInterpollutant Trading Provisions for Fine Particles (PM2.5) FROM:

TO: Regional AIr Division Directors, Regions 1-10 The purpose ofthis memorandum is to announce a change in the policy that the U.S. Environmental Protection Agency originally set forth inthe 2008 PM2.5 New Source Review Implementations Rule (the 2008 final rule) concerning the development and adoption ofinterpollutanttrading (offset) provisions for PM2 .5 under state nonattainment area New Source Review (NANSR) programs for PM2.5. As a result ofour reconsideration ofthe policy, we no longer supportthe ratios provided inthe preamble to the 2008 final rule as presumptively approvable ratios for adoption in state implementationplan (SIPs) containing NA NSR programs for PM25. This revised policy does not affect the EPA rule provisions that allow states to adopt as part oftheir NA NSR programs for PM2.5 appropriately supported interpollutant offsetprovisions involving PM2 .5 precursors. In sum, the newpolicy is that any ratio involving PM2.5 precursors submitted to EPA for approval for use in a state's interpollutant offsetprogram for PM2.5 nonattainment areas must be accompanied by a technical demonstrationthat shows the net air quality benefits ofsuch ratio for the PM2.5 nonattainment area inwhich 

### itwill be applied.
Background: The 2008 final rule authorizes states to adopt provisions in theirNA NSR rules that would allow major stationary sources and major modifications locating in areas designated nonattainment for PM2 .5 to offset emissions increases ofdirect PM2.5 emissions or PM2.5 precursors with reductions ofeither direct PM2.5 emissions or PM2.5 precursors in accordance with offset ratios contained in the approved SIP for the applicable nonattainment area. The inclusion, in whole or in part, ofthe interpollutant offset provisions for PM2.5 is discretionary onthe part ofthe states. Inthe preamble to the 2008 final rule, the EPA included preferred or presumptive offset ratios, applicable to specific PM2.5 precursors that states may adopt in conjunction with the new interpollutant offset provisions for PM2.5, and for whichthe state couldrely onthe EPA's technical work to

### 2 demonstrate the adequacy ofthe ratios for use in any PM2 .5 nonattainment area. Alternatively, the preamble indicated that states may adopttheir own ratios, subjectto the EPA's approval, that would have to be substantiated by modeling or othertechnical demonstrations ofthe net air quality benefit for ambient PM2.5 concentrations. The preferred ratios were subsequently the subject ofa petition for reconsideration, which the Administrator granted. This memo is a result ofthat reconsideration and, as stated above, we no longer supportthe ratios provided in the preamble to the 2008 final rule as presumptively approvable ratios for adoption in SIPs containing NA NSRprograms for PM2 .5.

Additional Background: Section 173 ofthe Clean AirAct (CAA) sets forth certain requirements for obtaining a preconstruction permit for major stationary sourcesthat are located, orpropose to locate, in an area designated nonattainment for a NAAQS. One suchrequirement is that the proposed major stationary sources and major modifications must obtain emissions reductions ofthe affected nonattainmentpollutant from the same source or other sources in the areato offset the proposed emissions increase. CAA 

### § I73(c). The 2008 final rule included a provision in the nonattainment NSRregulations at 40 CFR 

### § 51.165 and 40 CFRPart 51, Appendix S thatprovided an option for meeting the offset requirement for PM2.5 with interpollutant (precursor) offsets. Underthe provision, states could allow reductions in direct PM2.5 emissionsto offset precursor emissions increases, emissions reductions ofone precursor to offset emissions increases ofanotherprecursor, and reductions inprecursor emissions to offset direct PM2.5 emissions increases. The provision further stipulates thatthe use ofa PM2 .5precursor offset must "comply with the interprecursor trading hierarchy andratio established inthe approved plan for a particular nonattainment area." 40 CFR § 51.165(a)(11). In the preamble to the 2008 final rule, the EPA issued "preferred" offset ratios that it recommended states use as part ofan interpollutant offsetprovision in their NSRrules. As part ofits policy authorizing states to implement the new PM2 .5 offset provision within their approved NSR SIPs, the EPAprovided a hierarchy and "preferred" ratios involving two PM2
.5precursors--sulfur dioxide (S02) and nitrogen oxides (NOx). Implementation ofthe New Source Review (NSR) Program for Particulate Matter Less Than 2.5 Micrometers (PM2.5), 73 Fed. Reg. 28321,28339-40 (May 16, 2008). We indicatedthat the preferred ratios were the result ofa technical assessment that we conducted to support use ofthe ratios. (The preamble clearly indicated that such ratios were for purposes ofoffsets only and not applicable to source netting for applicability purposes.) Thetechnical assessment, with details on data and modeling inputs, was fully described in a technical memo entitled "Details on Technical Assessment to Develop Interpollutant Trading Ratios for PM2 .5 Offsets," which was placed inthe docket to the 2008 final rule. We recommended that states use the EPA-preferred ratios intheirPM2 .5 SIPs for PM2.5 nonattainment areas, and that we would approve suchratios based on ourowntechnical demonstration, "absent a credible showing thatthe EPA's trading ratios are not appropriate for that location." We further stated that ifany states chose to develop their own hierarchies and ratios, then such states would have to "substantiate by modeling andlor other technical demonstrations of [sic] the net air quality benefit for PM2 .5 ambient concentrations, and suchtrading programs will have to be approved by.EP

### A." Ibid. In 2009, portions ofthe 2008 final rule, including the preferred interpollutant offset ratios for PM2.5 precursors, were the subject ofa Petition for Reconsideration filed by Earthjustice on behalfofNRDC and Sierra Club. On Apri124, 2009, the Administrator signed a letter granting the Petition for

### 3 Reconsideration and agreed to reconsiderportions ofthe 2008 final rule, including the preferred offset ratios discussed in the preamble. The reconsideration proceedings for the Interpollutant Trading Policy have resulted, inpart, inthe issuance ofthis policy memorandum.

Revised Policy on Preferred Ratios: We continue to support the basic policy that sources may offsetincreases in emissions ofdirect PM25 or ofany PM2
.Sprecursor in a PM25 nonattainrnent area with actual emissions reductions in direct PM2,5 or PM2.5 precursors in accordance with offset ratios as approved inthe SIP for the applicable nonattainrnent area. However, we will no longer consider the preferred ratios set forth in the preamble to the 2008 final rule for PM2.5 NSRimplementationto be presumptively approvable. Instead, any ratio involving PM2 .5 precursors adopted by the state for use in the interpollutant offset program for PM25 nonattainrnent areas must be accompanied by a technical demonstration that shows the net air quality benefits ofsuchratio for the PM25 nonattainrnent area in which itwill be applied. We have revised the policy based on our re-evaluation ofthe "preferred" ratios. We have reached several key conclusions. First, uponre-examination ofthe original data, we believe that the original preferred ratios are not sufficiently representative ofconditions in all areas ofthe country. Any preferred ratios would need to be considerably more conservative to be applied nationwide and to account for the inherent differences in the nature ofPM25 ambient concentrations across nonattainrnent areas and the associated variability in responsiveness to direct and precursor emissions changes. We believe that the 2008 preferred precursor offset ratios for PM2.5 are not sufficiently conservative to ensure the net air quality benefit for PM2 .S ambient concentrations across all areas ofthe country and, thus, to serve as presumptively approvable ratios for the EPA's general SIP approval in state PM25 NA NSRprograms. The EPA's original technical assessment only reflected nine urban areas in detail and therefore did not sufficiently account for the full spectrum ofdifferences across all nonattainrnent areas. As a result, the technical assessment did not adequately identify the offsetratios that would be needed to be considered presumptively approvable ratios. Second, we have determined that the ratios defined in the 2008 preamble are generally not suitable for application to offsets that address violations ofthe 24-hour primary PM2 .5NAAQS. The 2008 preamble did not distinguish between the annual and daily averaging periods to defme applicable offset ratios. One could have assumed that the offsetratios provided in the 2008 final rule would apply with respect to offsets for any averaging period. However, we have determined thatthose ratios are not adequate for addressing the precursor relationship for PM25 for the short-term averaging period, because the modeling setup that we used to develop the original preferred ratios does not adequately capture the local and seasonal nature ofthe short-term PM25 responsiveness to direct and precursor emissions changes. Daily PM2 .5 concentrations in the air are highly dependent onboth source and meteorological factors and are widely variable across and within urban and rural areas. Accordingly, states will be expected to develop separate PM2 .5precursor offsetratios that are demonstrated to be suitable for addressing the particular precursor's relationship with ambient PM2.5 concentrations for 24-hour averagingperiod(s) that are causing violations in that nonattainrnent area.4 As stated above, under the EPA's revised policy, the ratios contained inthe preamble to the 2008 final rule will no longer carry a presumptive approval status. While we believe that our original modeling analysis is valid and demonstrates the technical capability and approachto develop such ratios for areas across the country, states wishing to adopt any ofthose ratios contained inthe 2008 preamble must treat them as any otherratios that they may choose, such that each ratio will need to be supported by modeling or other technical demonstrationto showthat suchratio is suitable for the particular PM2
.5 nonattainment area(s) ofconcern, and will be subject to the EPA's evaluation prior to approval inthe state plan. Forthe nine urban areas included in the EPA's original technical assessment, that assessment may already contain the kind ofinformation that a state needs to support the ratios oftheir choosing.

General Guidance for Developing Case-specific Offset Ratios for 

### PM2• 5 Precursors: The July 23,2007 technical analysis entitled "Details on Technical Assessment to Develop Interpollutant Trading Ratios for PM2 .5 Offsets," provides details on the method used to establish the original "preferred" precursor offset ratios. We do not expect that the specific results from the EPA's 2007 technical assessment could be used generally by a state as part oftheir demonstration without additional technical demonstration specific to the area(s) within which the ratios would be applied, unless the area(s) is among the nine areas in the 2007 assessment. We expect EPA regional offices, with assistance from the EPA's Office ofAir Quality Planning and Standards, to assist states, as necessary, to structure appropriate technical demonstrations leading to the development ofarea-specific ratios for PM2 .5 nonattainment areas. We do not, however, planto develop new EPA-preferred orpresumptive ratios. We believe any presumptively approvable ratios at the national level that we might ultimately develop for use across the different PM2.5 nonattainment areas would need to be considerably more conservative, such that they likely wouldbe considered undesirable by most states and permit applicants for use in many, ifnot most, nonattainment areas' permitting scenarios. We expect existing models and techniques to be adequate for states to conduct local demonstrations leading to the development ofarea-specific ratios for PM2 .5 nonattainment areas. The general framework for such developmental efforts would include the following steps: 1) Define the geographic area(s) in which offsets between emission sources are allowed, i.e., nonattainment area(s). 2) Conduct a series ofsensitivity runs with appropriate air quality models to develop a database ofmodeled PM2
.5concentration changes associated withreductions ofdirect PM2.5 emissions and PM2 .5 precursor emissions (e.g., S02 and NOx) from anthropogenic point sources within the area ofinterest. For precursor emissions, a photochemical model (e.g., CMAQ, CAMx) at grid resolution of 12 kilometers (km) or less is recommended to predict changes in PM2.5 concentrations. For direct PM25 emissions, a dispersion model (e.g., AERMOD) or photochemical model at grid resolution of4 km or less is recommended to predict changes in PM2
.5concentrations. 3) Calculate the interpollutant offset ratios for PM2
.5 between direct PM2.5 emissions and precursor emissions in a manner similar to the EPA's 2007 technical assessment, i.e., the ratio ofimpact metrics from step 3, above.

### 5 4) Conduct quality assurance ofthe resulting ratios and evaluate their interpretation and appropriateness given the nature ofPM2.5 sources and formation inthe area ofinterest. This evaluation will likely require emissions inventory data and observed ambient data for PM2
.5 and its component species. Ifthere are questions about applying these steps we encourage states to contact their Regional Office modeling contact for further technical consultation.

Effects ofThis Revised Policy: This document is intended as a general statement ofthe EPA'spolicy with respect to the review and approval ofinterpollutant offset ratios to meet offset requirements for PM2.S in accordance with 40 CFR § 51.165(a)(11) and 40 CFRPart 51, Appendix S(IV)(G)(5). The preferred offset ratios described in the preamble to the 2008 final rule were not promulgated in the Code ofFederal Regulations, were not outlined in the proposed rule, and were not subject to public review and comment. The description ofthe preferred offsetratios in the preamble did not impose binding, enforceable requirements onthe states, butrather provided a statement ofthe EPA's policy. The 2008 preamble described how the EPA intended to exercise its discretion in reviewing ratios submitted to the EPA for approval in accordance with 40 CFR 

### § 51.165 and 40 CFR Part 51, Appendix S. This memorandum reflects the EPA'sreasoned reconsideration ofthat policy position. This document does not substitute for the statutory provisions orregulations, nor is it a regulation itself. Since each proposal to allow interpollutant offsets under a SIP orin accordance with 40 CFRPart 51, Appendix S will be considered on a case-by-case basis, this policy statement does not limit orrestrict any particular approach states may take to set appropriate interpollutant offset hierarchies and ratios. Thus, the policies set forth in this paper are intended solely as guidance, do not represent final agency action, and cannot be relied upon to create any rights or obligations enforceable by any party.

cc: Steve Page Anna Wood Scott Mathias Raj Rao Dan DeRoeck Tyler Fox Richard Wayland Brian Doster Stephanie Hogan