SOUTH COAST AIR QUALITY MANAGEMENT DISTRICT

SCAQMD’s Revised NSR Offset Tracking System

February 23, 2006

Prepared by:

Peter Greenwald, JD

Senior Policy Advisor

Mohsen Nazemi, PE

Assistant Deputy Executive Officer

Engineering and Compliance

Mitch Haimov, M.S.

Senior Air Quality Engineer

Engineering and Compliance

IN CONSULTATION WITH:

BARBARA BAIRD – PRINCIPAL DEPUTY DISTRICT COUNSEL

ELAINE CHANG, Dr.PH – DEPUTY EXECUTIVE OFFICER, PLANNING, RULE DEVELOPMENT, AND AREA 

SOURCES

WILLIAM THOMPSON, PE – SENIOR MANAGER, ENGINEERING AND COMPLIANCE

GARY L. TURNER, PE – AIR QUALITY ANALYSIS AND COMPLIANCE SUPERVISOR, ENGINEERING AND 

COMPLIANCE
CONTENTS

Background 1

Proposal Summary 2

SOURCES OF CREDITS 7

Technical Support Document 7

Pre-1990 Credits 10

Pre-1990 Permitting Program 10

Existing Pre-1990 Accounting 12

Proposed Adjustments to Pre-1990 Accounting 13

1990-2005 Credits 16

Existing 1990-2005 Accounting 16

Proposed Adjustments to 1990-2005 Accounting 16

Inventory Issues Related to Minor Source Orphan Shutdowns 18

Other Potential Credits 19

Post-2005 Credits 19

Existing Post-2005 Accounting 19

Proposed Post-2005 Accounting 19

Summary 23

USE OF CREDITS 29

TRACKING AND BACKSTOP 29

ATTACHMENT 1: SCAQMD’S NSR OFFSET TRACKING—FEDERAL 

RUNNING BALANCES

ATTACHMENT 2: LIST OF SOURCES EXEMPT FROM OFFSET 

REQUIREMENTS AND PROVISIONS COVERED BY 

EQUIVALENCY SHOWING

ATTACHMENT 3: REGULATION XIII NEW SOURCE REVIEW GUIDANCE 

MANUAL (October 1990)

ATTACHMENT 4: EXAMPLES OF AVAILABLE PRE-1990 PERMIT 

RECORDS

ATTACHMENT 5: AREA SOURCE INVENTORY METHODOLOGY

ATTACHMENT 6: STATUS REPORTS ON REGULATION XIII – NEW 

SOURCE REVIEW COVERING AUGUST 1999 THROUGH 

JULY 2002
PROPOSED SCAQMD NSR OFFSET TRACKING SYSTEM

BACKGROUND

In general, the Federal and California Clean Air Acts require that, among other things, 

emission increases of non-attainment air pollutants from new and modified major sources 

be offset with emissions reductions. The SCAQMD has implemented an NSR tracking 

system to demonstrate adequate emission reductions for sources exempt from emission 

offsets requirements under Regulation XIII – New Source Review, which are otherwise 

subject to offset requirements under federal and state NSR programs. SCAQMD staff 

has prepared annual reports which track credits and debits for each year and present the 

remaining balances of credits in SCAQMD’s offset accounts. The NSR tracking reports 

go back to the year 1990, which reflects the year when major amendments were made to 

SCAQMD’s Regulation XIII. A key source of credits in the tracking system has been 

―orphan‖ shutdowns of major sources. Other credit sources have been ―negative NSR 

balances‖ resulting from permit actions prior to 1990, and the ―BACT discount‖ currently 

required by Regulation XIII when banking emission reduction credits (ERCs).

In 2002 SCAQMD adopted an Offset Budget rule (Rule 1309.2 – Offset Budget) as part 

of SCAQMD’s NSR program to address some of the shortage problems with ERCs. As 

part of the discussions with EPA regarding Rule 1309.2, EPA has raised some questions

related to the credits in SCAQMD’s offset accounts for use in the Offset Budget rule. 

Among the key issues raised by EPA are the following:

creditability of pre-1990 emission reductions, particularly reductions for which no

records are currently available;

creditability of reductions resulting from the BACT discount of newly-banked 

ERCs, since the discount is presumably also used to satisfy the federal time of 

use discount requirement;

baseline calculation procedures to assure an ―actual‖ baseline;

surplus adjustment at time of use of credits in the tracking system; and

consistency of credit use with assumptions in the SIP.

EPA staff has stated that these issues must be resolved in order for the federal agency to 

approve amendments to Regulation XIII as a result of adoption of Rule 1309.2, which 

establishes an ―Offset Budget.‖ EPA staff has also requested that SCAQMD adopt a rule 

specifying how the tracking of debits and credits will occur in the future. The purpose of 

this document is to address issues raised by EPA with SCAQMD’s offset account credits 

and to propose an NSR offset tracking system to be used for the tracking of all future 

credits. Based on this, SCAQMD will then develop a new rule for tracking of NSR 

debits and credits and submit it to EPA so that EPA can SIP approve this rule along with 

Rule 1309.2 – Offset Budget.
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PROPOSAL SUMMARY

After numerous meetings and conference calls with EPA, SCAQMD staff agreed to 

review the offset accounts in consideration of EPA’s comments. Since that time, 

SCAQMD staff has spent over 6,000 person-hours reviewing the offset records in the 

NSR tracking system. In addition, SCAQMD Executive and senior management and 

other staff have spent hundreds of hours evaluating offset accounts and the tracking 

system. In order to resolve EPA’s comments, SCAQMD staff is proposing several 

modifications to procedures used in the tracking system. In the revised procedures 

SCAQMD has proposed elimination of all credits for which SCAQMD no longer retains

documentation. SCAQMD has also included additional classes of credits in the tracking 

system, namely orphan shutdowns of minor sources and other surplus reductions. As a 

result of these proposed modifications, and even with the inclusion of the minor source 

orphan shutdowns and other surplus reductions, SCAQMD’s previously-reported 2002 

NSR federal offset account balances for all pollutants, except for NOx, will be reduced, 

depending on the pollutant, by from about 12 % to 74 %. Several elements of the 

proposed revisions to SCAQMD’s tracking system contribute to these reductions, as 

discussed below, but the single element of the proposal with the greatest contribution is 

the reevaluation of pre-1990 credits and proposed elimination of all credits for which 

SCAQMD no longer retains documentation. As a result of this proposed change, 

SCAQMD’s pre-1990 credits will be reduced, depending on the pollutant, by from 7 % to 

92 %. The specific amounts of reductions for each pollutant for the pre-1990 credit 

account balances and the 2002 NSR federal offset account balances are shown in Table 1.

Table 1

Reductions in SCAQMD’s Pre-1990 Credit Account and 2002 

NSR Federal Offset Account Balances Resulting from

Implementation of Proposed Changes to the NSR Tracking System

VOC NOx SOx CO PM10

Reduction in SCAQMD’s Pre1990 Credit Account Balances 58 % 7 % 56 % 76 % 92 %

Reduction in SCAQMD’s 2002 

NSR Federal Offset Account 

Balances

34 % -40 % 44 % 67 % 83 %

The proposed modifications to SCAQMD’s NSR tracking procedure are described in 

more detail below. Also, the detailed line-by-line adjusted credit balances that result 

from the proposed modified procedures are shown in Attachment 1: SCAQMD’s NSR 

Offset Tracking—Federal Running Balances. We anticipate that changes to the 

SCAQMD’s NSR tracking procedures for all future credit accounting will be 

incorporated into a proposed tracking rule that will be subject to a public workshop prior 

to final adoption.
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In summary, the key elements of SCAQMD’s proposal are as follows:

Sources of Credits.

The tracking system uses credits derived from reductions not required by federal 

law. These primarily include ―orphan shutdowns,‖ i.e. real, permanent, 

enforceable, surplus, and quantifiable emission reductions resulting from 

shutdowns of sources for which no ERCs were issued. In addition, these will also 

include surplus emission reductions otherwise not required by the federal NSR 

program. SCAQMD has in the past only utilized orphan shutdowns of major 

sources as credits. This in part has been due to the fact that SCAQMD’s offset 

account has held a large balance of credits and there has been no need for 

additional sources of credits to fund the offset account. The current proposal, 

however, also includes use of credits derived from orphan shutdowns of nonmajor sources for which no ERCs were issued and other surplus emission 

reductions otherwise not required by the federal NSR program in order to better 

utilize the sources of credits used for SCAQMD’s offset accounts.

The proposed SCAQMD tracking system is also based on past use of a portion of 

the pool of credits which has been validated and generated through emission 

reductions at permitted stationary sources that occurred prior to 1990. As is 

described below, all of the pre-1990 CO and PM10 credits and a large portion of 

VOC and NOx pre-1990 credits were depleted in the mid 1990’s—prior to the 

time of EPA’s most recent SIP approval of Regulation XIII in 1996. On the other 

hand, only a small portion of the pre-1990 SOx credits has been consumed 

because there is little demand for SOx offsets from major non-RECLAIM 

sources. As part of this proposal and to address EPA’s comments regarding the 

use of pre-1990 credits, SCAQMD proposes retroactive elimination of all pre1990 credits for which SCAQMD no longer retains documentation and in addition 

not to utilize from now on any remaining pre-1990 credits.

Another source of credits used by SCAQMD in the past has been the BACT 

discount of the post-1990 ERCs issued by SCAQMD. As part of this new 

proposal, and specifically to address EPA’s comments, SCAQMD proposes to 

discontinue deriving credits from the ―BACT discount‖ of emission reductions

banked as ERCs. This credit was specifically authorized according to the 

Technical Support Document for EPA’s approval of Regulation XIII in 1996.

EPA, however, has brought up the point that the BACT discount is used for 

another purpose—in lieu of a time of use discount, and thus should not be used as 

a tracking system credit.

Furthermore, as part of this proposal and again specifically to address EPA’s 

comments, SCAQMD proposes from now on to further adjust the orphan 

shutdown credits by reducing their value to address EPA’s comments about actual 

emissions and to further adjust any orphan shutdown credits not used in the same 

time frame they are generated via a BARCT adjustment at time of use to address 

EPA’s comments regarding surplus adjustment at time of use.
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Use of Credits

The above-described credits will be used to fund the new Offset Budget as 

adopted by SCAQMD in Rule 1309.2, in addition to the previous use of credits to 

provide offsets for sources that are exempt from offset requirements under 

Regulation XIII (Rules 1304 – Exemptions and 1309.1 – Priority Reserve), which 

are otherwise subject to the offset requirements under federal NSR, as part of the 

demonstration of equivalence to federal NSR requirements. A complete list of 

Regulation XIII offset exemption provisions for which credits need to be used to 

demonstrate equivalency if offsets are otherwise required is included in 

Attachment 2.

Tracking and Backstop

SCAQMD will make an annual equivalency demonstration in two steps. In step 

one, SCAQMD proposes to make a preliminary annual determination of 

equivalency within twelve months of the close of each reporting period which will 

also be reflected in a tracking rule that it will develop and adopt. Such 

preliminary annual determination will be a very conservative determination based 

on the combined debits from the previous year but will not include the orphan 

shutdowns (credits) from that reporting period. Therefore, the preliminary annual 

determinations will represent ―worst case‖ analyses. Provided the preliminary 

annual determination demonstrates equivalency, the orphan shutdowns for each 

reporting period will be reported (and credited) in the subsequent preliminary 

annual determination, as illustrated in Figure 1. However, if the preliminary 

Figure 1

Equivalency Demonstration Timeline

(Preliminary Determination Demonstrates Equivalency)

annual determination does not demonstrate equivalency, SCAQMD proposes as 

step two to make a final annual determination of equivalency, which will include 

the reporting period’s orphan shutdown credits. The final equivalency 

determination will be prepared within six months of the preliminary equivalency 

determination time frame, as illustrated in Figure 2. For example, the preliminary 
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Figure 2

Equivalency Demonstration Timeline

(Preliminary Determination Does Not Demonstrate Equivalency)

annual determination for reporting year B (including all debits for years A and B 

and only orphan shutdown credits for year A) will be completed by the end of 

reporting year C. Provided this preliminary annual determination for year B 

demonstrates equivalency, the year B orphan shutdowns will be included in the 

preliminary annual determination for year C (to be completed by the end of year 

D). On the other hand, if the preliminary annual determination for year B does 

not demonstrate equivalency, a final annual determination incorporating year B’s 

orphan shutdown credits will be prepared within six months of the end of year C. 

The offset accounting will be conducted in the following order:

1. Year B’s debits are first subtracted from any remaining pre-1990 credits 

(1990-2005 timeframe only); then

2. Any debits remaining after step 1 are subtracted from any post-1990 credits 

remaining from year A; then

3a. If there are no remaining debits the post-1990 credits remaining from step 2 

are discounted as described in the discussion of Surplus Discount at Time of 

Use. Year B’s credits are then added to the discounted post-1990 credits 

remaining from the year A.
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3b. If there are any remaining debits from step 2 (meaning there are not any post -

1990 credits remaining) the year B’s remaining debits are subtracted from 

year B’s credits.

Each preliminary annual determination (and each final annual determination, as 

needed to demonstrate equivalency) will be presented to SCAQMD’s Governing 

Board in a report from the Executive Officer (―Board Letter‖) at a public meeting 

of the SCAQMD Governing Board. The annual equivalency determination will 

include the balance in SCAQMD’s offset account for each pollutant, as well as 

summaries of credit and debit data by category such as Priority Reserve, 

Community Bank, and Rule 1304 exemptions. 

In addition, SCAQMD proposes to evaluate the future availability of credits in 

SCAQMD’s offset accounts by conducting a two-year projection of debits, 

credits, and account balances in conjunction with (but not as a part of) each 

annual equivalency demonstration. This analysis will include projected debits, 

credits, and offset account balances for the two years following the period 

covered by the Board Letter for purposes of predicting if there will or will not be 

sufficient credits in SCAQMD’s offset accounts. The projection for each 

pollutant will be based on the average of the previous five years’ credits and 

debits for that pollutant. The Executive Officer will not make quarterly 

allocations to the Priority Reserve for any pollutant during a time when 

SCAQMD’s offset account for that pollutant is not projected to remain positive1. 

The purpose of the projections is to prospectively determine if sufficient offsets 

remain in SCAQMD’s accounts to continue funding the Priority Reserve; they are 

not intended to demonstrate equivalency retrospectively. SCAQMD is currently 

developing amendments to Rule 1309.1 – Priority Reserve which will clarify this 

procedure and authority for the Executive Officer and the tracking rule (also 

under development) will call for these projections and direct the Executive 

Officer to exercise this authority when equivalency is not projected.

SCAQMD will also propose, as part of the tracking rule, backstop provisions to 

be triggered in the event that the final annual determination does not demonstrate

equivalency. In such an event, the backstop provisions would require SCAQMD

to take one or more of the following actions to the extent necessary to correct the 

credit shortfall:

 

1 Offsets provided from the Priority Reserve are debited from SCAQMD’s offset accounts for the period 

during which the permit was issued (i.e., for the timeframe they are used) whereas the quarterly 

allocations made to the Priority Reserve pursuant to Rule 1309.1(a) do not constitute debits from 

SCAQMD’s offset accounts. The newly-proposed future years’ projections of balances in SCAQMD’s 

offset accounts will include projected use of Priority Reserve offsets as well as offsets used through the 

Community Bank and for sources exempted pursuant to Rule 1304. In addition, a significant portion of 

the quarterly allocations to the Priority Reserve are used by sources which are not subject to federal offset 

requirements (i.e., federal minor sources) and, therefore, do not need to be debited from SCAQMD’s 

offset accounts for the purpose of federal equivalency demonstration. Furthermore, the portion that is 

subject to federal offset requirements and which needs to be debited from SCAQMD’s offset accounts is 

already included in the two future years’ projections done with each annual equivalency demonstration.
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Provide additional credits within six months of the final annual determination; 

such credits could be derived through SCAQMD purchase of credits, through 

SCAQMD funding of emission reduction projects using quantification 

protocols approved by EPA on a case-by case or programmatic basis,

application of LAER in excess of federal requirements2, or other approved 

sources of credits.

Suspend issuance of both Priority Reserve and Offset Budget credits (Rules 

1309.1 and 1309.2) within 90 days and not resume the issuance of any such 

credits until SCAQMD has demonstrated that equivalency has been 

reestablished. Equivalency may be reestablished through procurement of 

additional offsets and/or appropriate program modifications.

Amend Rule 1304 to eliminate certain categories of offset exemptions to be 

identified during the rulemaking process.

The following is a more detailed description of the proposed changes.

SOURCES OF CREDITS

SCAQMD has described in its annual status reports on Regulation XIII a 1990 starting 

balance for federal and state offset accounts based on data available in 1990. While a 

large portion of pre-1990 credits were used years ago, EPA staff has requested an 

accounting of the validity of such credits to ensure that such credits were creditable. To

that end, EPA staff has raised questions about the availability of all records relating to the 

pre-1990 credits. To address the issues raised by EPA, SCAQMD staff spent several 

thousand staff hours reviewing and evaluating all available data for the pre-1990 credits 

in its 1990 starting balances. The following is a description of sources of credits in 

SCAQMD’s tracking system organized by time period of credit generation including: pre 

1990, 1990-2005, and post 2005. This division is due to differing provisions of 

SCAQMD rules applicable to generation of credits in these time periods, and to new 

tracking system elements proposed for post-2005 credits. 

Technical Support Document

EPA issued a Technical Support Document for EPA’s Notice of Final Rulemaking for the 

California State Implementation Plan South Coast Air Quality Management District New 

Source Review (TSD) October 24, 1996 in support of EPA’s approval of SCAQMD 1996 

New Source Review amendments into California’s State Implementation Plan (SIP). The 

TSD identifies specific sources of emission reductions and emission increases that are 

approved for inclusion in SCAQMD’s tracking system for purposes of demonstrating 

equivalency between the federal Clean Air Act (CAA) and SCAQMD’s SIP-approved 

 

2

Precise quantification of all surplus credits generated through application of LAER in excess of federal 

requirements may be extremely resource intensive. Therefore, SCAQMD may, with EPA approval, 

demonstrate that such application of LAER has generated at least enough surplus reductions to make up 

for the shortfall using very conservative assumptions to estimate the surplus reductions.
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NSR program. The various approved sources of emission decreases (credits) referred to 

throughout this document are briefly discussed below:

 Surplus Reductions Resulting from use of ERCs by Minor Sources

Rule 1303 – Requirements specifies that minor sources must offset their emission 

increases by surrendering ERCs unless otherwise exempt pursuant to Rule 1304 but 

the CAA does not require emission offsets from minor sources. Therefore, emission 

offsets supplied by minor sources in the form of ERCs represent creditable, surplus 

reductions. The TSD only specifically identifies this source of emission 

reductions/credits for minor VOC sources, but the underlying logic applies equally to 

minor sources of NOx, SOx, CO, and PM10. 

 Surplus Reductions Resulting from use of ERCs by Major Sources of SOx, CO, and 

PM10

Rule 1303 requires use of ERCs to offset increases of SOx, CO, and PM10 emissions 

from major sources at a 1.2 to 1.0 offset ratio while the CAA requires such increases 

to be offset at a ratio of at least 1.0 to 1.0. Therefore, the difference in ERCs 

surrendered as SOx, CO, and PM10 offsets between 1.0 to 1.0 and 1.2 to 1.0 is 

creditable.

 Surplus Reductions Resulting from Orphan Shutdown of Major and Minor Sources

When permitted equipment operating at a major source is shutdown it results in 

creditable emission reductions. If these reductions are not used internally by the 

source or banked as an ERC, they are creditable to SCAQMD’s tracking system. 

Similarly, when permitted equipment operating at a minor source is shutdown it 

results in creditable emission reductions. If these reductions are not used internally 

by the source or banked as an ERC, they are creditable to SCAQMD’s tracking 

system. Note that the TSD does not differentiate between major sources and minor 

sources with regard to orphan shutdowns, but simply states that ―emission reductions 

obtained from orphaned shutdowns‖ are creditable (page 17).

 Zero BACT Threshold

Rule 1303 requires that all new and modified sources resulting in an emission 

increase apply BACT (federal LAER), but the CAA only applies this requirement to 

major sources. That is, SCAQMD requires BACT (federal LEAR) on all sources (no 

matter how small) with any increase in emissions (no matter how small). This is 

distinct from SCAQMD’s application of BARCT requirements to minor sources 

(which makes SCAQMD eligible for a 1.2 to 1.0 offset ratio for ozone precursors 

rather than a 1.5 to 1.0 offset ratio). Therefore, SCAQMD staff believes that the 

emission reductions resulting from applying BACT (federal LEAR) to minor sources 

are creditable. However, as part of this proposal, SCAQMD is not requesting to use 

such credits and understands that when and if SCAQMD wants to use such credits it 

will be necessary to hold further discussions with EPA.

 Discounting Newly-Banked ERCs to BACT

Rule 1309 – Emission Reduction Credits and Short Term Credits specifies that the 

amount of emission reductions banked as a new ERC not be ―greater than the 
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equipment would have achieved if operating with current Best Available Control 

Technology (BACT).‖ No similar requirement exists in the CAA. Therefore, the 

amount of any otherwise qualifying emission reductions not issued as an ERC due to 

implementation of this provision are surplus. However, SCAQMD uses the BACT 

discount at time of use in lieu of the federally-required BARCT discount at time of 

use. Therefore, EPA has stated that SCAQMD cannot take credit into its offset 

accounts for the BACT discount of ERCs because doing so would constitute a form 

of double counting. On the other hand, the TSD specifically identifies ―Best 

Available Control Technology discounting (Rule 1306(c)) of emission reduction 

credits generated‖3as an approved source of emission reductions for the tracking 

system. Therefore, SCAQMD’s position is that BACT discount of ERCs should be 

creditable from 1990 through 2004 (when EPA made SCAQMD aware of EPA’s new 

position regarding this source of credits), but should not be creditable in the post2004 timeframe. Nevertheless, in the interest of reaching consensus with EPA and 

proceeding with the approval processes for the 2001 and 2002 amendments to 

Regulation XIII, SCAQMD agrees to retroactively remove all credits generated from 

BACT discount of ERCs from its tracking system, except such credits which 

SCAQMD has demonstrated (or demonstrates in the future) exceed the discount that 

would be required by approved SIP rules and rules scheduled to be approved by 

SCAQMD in the following year’s rule cycle4. SCAQMD shall notify EPA when

making this alternative discount. Specifically, SCAQMD has identified 6.67 tons of 

CO per day of BACT discount of ERC credits from 1991 in SCAQMD’s offset 

account which are beyond approved SIP rules and rules scheduled to be approved by 

SCAQMD in the following year’s rule cycle at the time of use5. SCAQMD will, 

therefore, retain these offsets (which were used in the early 1990s).

 

3

Page 17.

4

SCAQMD does not anticipate frequent use of BACT discount of ERCs based on demonstrations of 

reductions beyond approved SIP rules and rules scheduled for the following year’s rule cycle—in fact it 

is currently only seeking to use one project out of many hundreds of projects in the last fifteen years to 

generate BACT discount credits for AQMD’s offset accounts. However, it is conceivable that ERCs can 

be issued for the shutdown of a source where the BACT discount at the time of generation is beyond 

approved SIP rules and rules scheduled for the following year’s rule cycle. In such cases, because the 

BACT discount at the time of generation is used as a surrogate to the federally-required discount at time 

of use, it is appropriate to credit the difference between the BACT discount and the time of use discount

to our offset accounts. The determination that the BACT discount is beyond approved SIP rules and rules 

scheduled for the following year’s rule cycle at the time of use will be based on a first in/first out analysis 

to determine when the resulting credits are used—if they continue to be surplus at that time then they are 

creditable.

5

The 6.67 tons of CO per day that SCAQMD has claimed as BACT discount credits which were beyond

approved SIP rules and rules scheduled for the following year’s rule cycle at the time of use resulted from 

the shutdown of internal combustion engines (ICEs). In particular, Southern California Edison (SCE) 

arranged for various operators to remove their ICEs from service in 1991 as a means of mitigating the 

then-proposed merger between SCE and San Diego Gas and Electric. However, the PUC denied the 

merger request, so SCE applied for ERCs for the shutdown engines. According to the first in/first out 

analysis on the resulting BACT discount CO credits, the credits were completely used by the 1997-98 

reporting period. The rule limit for CO emissions from ICEs was 2,000 ppm during the 1991 through

1998 timeframe and all of the subject ICEs were in compliance with this limit prior to being removed 

from service. BACT for CO emissions from ICEs was 250 ppm during the same timeframe. 

Furthermore, there were not only no approved SIP rules and no rules scheduled for adoption in the 

following year’s rule cycle, but there were even no control measures in SCAQMD’s Air Quality 
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Pre-1990 Credits

Pre-1990 Permitting Program

SCAQMD had a robust stationary source permitting program for both major and minor 

sources in place well before 1990. Key elements of that program are summarized below:

 Permit Rules

Since prior to 1976, the year that SCAQMD adopted its initial NSR rules, virtually 

any construction or modification of a source has required the operator to obtain a 

permit to construct from SCAQMD (Rule 201 – Permit to Construct). The only 

exceptions to these permit requirements are, and at all times were, specified in 

SCAQMD Rule 219 – Equipment not Requiring a Written Permit Pursuant to 

Regulation II, which exempts certain equipment from permit requirements due to 

minimal potential to affect air quality. With the exception of the specific exemptions 

in Rule 219, there has never been an exemption from permit requirements for sources 

emitting even relatively small amounts of air contaminants; that is, all sources with 

potential to emit or control air contaminants, including all major and non-major 

sources, have been required to obtain permits when constructed or modified unless 

specifically exempted by Rule 219.

 New Source Review Rules

SCAQMD adopted its initial New Source Review rules in October, 1976 even prior to 

the adoption of the New Source Review requirements into the CAA. Originally 

included in Rule 213 – Standards for Permits to Construct: Air Quality Impact, the 

NSR rules were moved into a series of rules in Regulation XIII – New Source Review

in 1979. The rules required offsetting of emissions increases that exceeded certain 

thresholds. The thresholds were decreased over time pursuant to rule amendments. 

For example, for volatile organic compounds and nitrogen oxides, the offset threshold 

initially was 250 pounds per day, and was reduced by rule amendments during the 

1980’s to 150 pounds per day, 75 pounds per day, 30 pounds VOC per day and 40 

pounds NOx per day, and finally down to zero, requiring no net increase in emissions, 

unless specifically exempt from offset requirements pursuant to NSR rules.

 NSR Balance

Prior to 1990, in order to implement the offset requirements, SCAQMD kept a 

running ―NSR balance‖ for each facility with permitted sources. The NSR balance 

included an entry for every increase and every decrease in emissions at the facility 

that resulted from a permit action. The entries in the NSR balance were maximum 

allowable emissions, i.e. the maximum amount of emissions that a source could emit 

given its physical capabilities and permit limitations and rule requirements. 

However, the NSR balance was initially determined for each piece of equipment 

 

Management Plan seeking CO emission reductions from ICEs during that timeframe. Therefore, the 

1991 BACT discount of the resulting ERCs was available for credit to SCAQMD’s offset accounts at the 

time of use (1998 and earlier).
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which had not previously undergone NSR analysis (i.e., pre-NSR equipment) from an 

actual emissions baseline for that equipment. Any subsequent NSR activity for such 

equipment was conducted on a potential-to-potential basis. Therefore, a pre-NSR 

source modified under NSR would be subject to NSR on an actual-to-potential basis 

(i.e., actual pre-modification emissions to potential post-modification emissions)—a 

very conservative approach.

Prior to 1990, emissions offsets were required when a permit was sought for 

construction of a new source, or for modification of an existing source, that would 

cause the sum of increases and decreases at a facility (i.e. the NSR balance) to exceed 

the pre-1990 offset threshold levels. 

NSR balance entries had to be quantifiable and enforceable. Such entries only 

occurred pursuant to permit applications with sufficient substantiating data to ensure 

quantifiability, after evaluation by SCAQMD engineers and review by multiple 

supervisory staff pursuant to Regulation XIII rules and implementing policies 

established by the agency, and upon issuance of permits or permit modifications 

which were enforceable under state law. 

SCAQMD applied substantial resources to implementing these rules. For example, 

from 1985 through 1989 SCAQMD’s engineering staff which processed permits 

consisted of between 97 and 175 professional engineers and supervisory and 

management staff. In sum, at all times including, but not limited to, prior to 1990, 

SCAQMD has had a robust air quality permitting system—a system which we believe 

was qualitatively superior in terms of quantification and reliability to any other NSR 

permitting system in the nation. 

 Compliance with Federal NSR Requirements 

In addition to being reliable, the above-described pre-1990 SCAQMD NSR rules 

fully complied with all federal requirements. Indeed, SCAQMD’s NSR rules were 

more stringent than required by federal law in the following important respects: (1) 

offset thresholds were lower than required by federal law and a 1.2 to 1.0 offset ratio 

was used for all sources; (2) unlike federal requirements which allowed ―bubbling‖ or 

netting out of BACT, SCAQMD’s BACT requirement (equivalent to LAER) applied 

to any emissions increase from an individual piece of equipment; i.e., there was no 

netting out of LAER; (3) offset ratios for SOx, CO, and PM10 were greater than 1 to 

1 (i.e., were at 1.2 to 1); (4) SCAQMD had a zero BACT threshold; and (5) the fact 

that the NSR balance was initially based upon an actual emissions baseline ensured 

that any increase in potential emissions that exceeded the actual emissions baseline 

resulted in total potential emissions in excess of the offset threshold amount (which, 

again, was more restrictive than federally required) would be subject to NSR 

requirements. Additionally, EPA SIP-approved SCAQMD’s Rule 201 as amended 

January 5, 1990, and SCAQMD’s NSR rules as adopted or amended on the dates 

identified in Table 2.
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Table 2

SIP-Approved Revisions of SCAQMD’s NSR Rules

Rule SCAQMD Adoption Date(s)

213 10/8/1976 (Rescinded by SCAQMD 6/28/1990)

1300 (Rescinded by SCAQMD 6/28/1990)

1301 12/7/1995

1302 12/7/1995, 6/13/1997

1303 5/10/1996

1304 6/14/1996

1305 4/6/1984 (Rescinded by SCAQMD 6/28/1990)

1306 6/14/1996

1307 (Rescinded by SCAQMD 6/28/1990)

1308 10/5/1979 or 3/7/1980 or 4/4/1980 or 7/11/1980 (Rescinded by 

SCAQMD 6/28/1990)

1309 12/7/1995

1309.1 12/7/1995 (2001 and 2002 Amendments Pending SIP Approval)

1309.2 (Pending SIP Approval)

1310 12/7/1995

1311 10/5/1979 (Rescinded by SCAQMD 6/28/1990)

1312 (Rescinded by SCAQMD 6/28/1990)

1313 12/7/1995

 Negative Balances

By 1990, some facilities had negative NSR balances. These negative balances were 

the result of equipment shutdowns or process changes since October 1976 which 

resulted in reductions in emissions from a source. The majority of negative balances 

resulted from equipment shutdowns. Like all entries in the NSR balance, negative 

balances only occurred pursuant to permit actions—i.e. either modification of a 

SCAQMD permit or use of reductions for mitigations. Negative balances were 

quantified by SCAQMD engineers based upon the physical capabilities of the 

modified or shut down equipment and applicable permit requirements.

Existing Pre-1990 Accounting

SCAQMD’s offset accounts were established with starting balances based on pre-1990 

emissions reductions. The primary source of these pre-1990 reductions was a portion of 

facilities’ negative NSR balances which were discounted as specified in the 1990 

amendments to Regulation XIII (described below). The 1990 Regulation XIII 

amendments also directed the Executive Officer to recall all existing pre-1990 ERCs

which had resulted from shutdowns, discount them by eighty percent, and issue new 

ERCs at twenty percent of their original values. The eighty percent discount of the pre1990 shutdown ERCs was deposited into SCAQMD’s offset accounts along with the 

amounts derived from the discount of pre-1990 negative balances (further explanation of 

the implementation of the 1990 amendments to Regulation XIII is provided with the 

discussion of SCAQMD’s proposed revisions to its pre-1990 accounting). All of 

SCAQMD’s annual status reports prepared to date have included the starting 
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balances from these sources (discount of pre-1990 negative balances and pre-1990

shutdown ERCs); SCAQMD has not taken credit for any other pre-1990 sources of 

credits, such as the zero BACT threshold, use of ERCs by minor sources, or the 

additional 20 % of ERCs provided by major sources for SOx, CO, and PM10 at a 

ratio of 1.2 to 1.0 compared to 1.0 to 1.0.

Proposed Adjustments to Pre-1990 Accounting

SCAQMD is now proposing to significantly reduce (by more than 60 % overall) its pre1990 emission credits by eliminating any present or past use of any credits for which 

SCAQMD presently has no records and cannot re-verify the validity of such credits and 

to only utilize the portion of the previously-reported pre-1990 emission reductions which 

has been originally validated in 1990/91 and revalidated in 2004/05 as credits in its 

tracking system and for which SCAQMD has all or some records. Most of such NOx

reductions (almost 2/3) and all of such CO and PM10 reductions were utilized as offsets

in SCAQMD’s tracking system during the 1990’s; however, some of the pre-1990 NOx 

reductions and a significant portion of the pre-1990 VOC and SOx reductions remain in 

SCAQMD’s offset account. The emission reductions that underlie those credits occurred 

between 15 and 29 years ago, and not all records related to them are available today. In 

many cases, however, summary data based on previous analyses are available. While not 

all records are available, SCAQMD at all relevant times prior to and after 1990 had a 

sufficiently robust permitting program and record validation procedure to provide 

confidence regarding the validated emission reductions for which SCAQMD proposes to 

take pre-1990 credits. This conclusion is supported by the preceding discussion of 

SCAQMD’s pre-1990 permitting program and the following summary of the 1990 

Regulation XIII amendments and their implementation:

 1990 Regulation XIII Amendments

SCAQMD substantially modified Regulation XIII in 1990. The offset threshold was 

dropped to zero, although relatively small emitting facilities (e.g. less than 30 pounds 

per day of VOC or 40 pounds per day of NOx) were eligible to obtain needed credits

from a new ―Community Bank.‖ Under the 1990 amendments, negative balances 

were to be ―verified by the Executive Officer‖ and discounted by 80%. The rules 

specified that ―upon validation‖ the remaining amount was to be issued to the permit 

holder in the form of an ERC (Rule 1309(a)). 

 Implementation of 1990 Amendments

Shortly after adoption of the 1990 amendments to Regulation XIII, SCAQMD staff

drafted a detailed internal guidance document titled ―Regulation XIII – New Source 

Review Guidance Manual‖ (copy provided in Attachment 3) specifying how the 

amendments would be implemented by agency permit processing engineers. (Section 

1, Regulation XIII Transition). The required treatment of negative balances was 

described on pages 40 to 48 and page 68 of this document. The transition document 

specified that negative balances would have to be ―verified‖ in accordance with 

standard procedures. Page 68, titled ―NSR Database Validation,‖ specified that each 

facility’s NSR account would be searched by computer to determine if any 

―forgivenesses‖ (i.e. negative entries due to prior rule amendments lowering offset 
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thresholds) contributed to the facility’s negative balance. The document further 

provided that NSR balances ―shall be recalculated‖ since these forgivenesses were 

not ―real‖ emission reductions and therefore did not qualify for an ERC pursuant to

Rule 1309(b)(1) (p.40). The transition document also specified that any negative 

particulate matter emissions balances would be converted to PM10 by multiplying the 

particulate matter emissions by an average factor of 0.5 (p.40). Finally, the document 

stated that any facility with a negative balance of 500 pounds per day or greater was 

to have each negative entry ―confirmed by reviewing the application file which 

resulted in the negative NSR entry‖ (p. 68). The vast majority of negative balances at 

the time (in excess of 80%) were associated with facilities with negative balances 

exceeding 500 pounds.

In 1991, SCAQMD’s engineering staff commenced the verification and validation 

processes described in the transition document. The result of these processes was a 

substantial reduction in the amount of the negative balances for some pollutants, even 

prior to the 80% discount. These reductions were the result of (1) addressing the 

―forgivenesses,‖ (2) determinations that some reductions were required by SCAQMD

rules and thus ineligible for ERCs, and (3) in some cases simple data entry errors. 

Table 3 presents the 80 % portion of the 1990 negative balances that were deposited 

in SCAQMD’s offset accounts. The larger amount shown for each pollutant is the 

amount originally deposited as the result of this process in the early 1990s and which 

has been previously reported as the 1990 starting balance in the annual NSR status 

reports and the lower amount is revised based upon recent (2003) re-validation of 

these numbers by SCAQMD staff based on records that are still available to address 

EPA’s comments and consistent with EPA policy guidance which allows use of pre1990 credits that are explicitly included and quantified as growth in the SIP. Such 

guidance provides that the permitting agency must maintain information including, at 

a minimum, the name of the source that generated the credit, the source category, 

credit quantity, specific action that generated the credit, date the credit was generated 

and ―enough other information to determine the creditability . . . .‖ (Memorandum 

from John Seitz to David Howekamp August 26, 1994).

Table 3

Pre-1990 Credits Deposited in SCAQMD’s Offset Accounts

Tons per Day

VOC NOx SOx CO PM10 Overall

Previously-Reported Pre-1990 

Credits

92.4 25.8 18.4 34.9 34.5 206

Revised Pre-1990 Credits 

Verified with Records or 

Validation Procedures

38.46 23.92 8.04 8.45 2.67 81.5

Percent Reduction in Pre-1990 

Credits 58 % 7 % 56 % 76 % 92 % 60 %

Records for pre-1990 emission credits are from 15 to 29 years old. SCAQMD staff

recently conducted an extensive review of the pre-1990 credits and determined that 
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the types of records available today include printouts of NSR data captured in 

SCAQMD’s permitting database at the time of permit issuance and complete 

engineering files, which include the materials and documentation submitted by the 

applicant and SCAQMD’s engineering evaluation (refer to Attachment 4 for 

examples of available pre-1990 NSR data).

In this proposal, SCAQMD is proposing to only use the revised and verified pre-1990 

credits (as set forth in Table 3). There are pre-1990 credits which can reasonably be 

concluded to be creditable based on presently available records. In some cases, such 

conclusion can be reached because all of the information described in the 1994 Seitz 

memorandum is currently available. In other cases, all of such information is not 

currently available, but the above-described permitting procedures provide ―enough 

other information to determine the creditability . . . .‖ However, for the majority of 

the pre-1990 emission reduction credits (more than 60 % overall), the SCAQMD 

cannot substantiate the validity of the records based on the available records. 

SCAQMD is now proposing to significantly reduce its pre-1990 emission reduction 

credits by eliminating any past or present use of any credits for which SCAQMD 

presently cannot substantiate the validity of such records.

 Remaining Pre-1990 Credits

SCAQMD’s NSR tracking system has not previously specified the age of credits held 

in SCAQMD’s offset accounts. However, in response to EPA’s comments about the 

use of pre-1990 credits, staff has completed a ―First In/First Out‖ analysis of these 

accounts. This analysis shows that significant portions of the pre-1990 VOC and SOx

credits remain in SCAQMD’s accounts, about one quarter of the pre-1990 NOx 

credits remained in SCAQMD’s accounts as of July 2002, and all of the pre-1990 CO 

and PM10 credits were depleted by 19976. In order to address EPA’s comment

regarding continued use of pre-1990 credits from SCAQMD’s accounts, SCAQMD 

proposes to eliminate any unused pre-1990 VOC, NOx, and SOx credits remaining in

its account at the end of the 2004-2005 reporting period and not use any pre-1990 

credits in its accounts post 2005.

 Other Potential Credits

SCAQMD is not proposing to take any credits for pre-1990 sources of credits such as 

the zero BACT threshold, use of ERCs by minor sources, the additional 20% of ERCs 

provided by major sources of SOx, CO, and PM10 at a ratio of 1.2 to 1.0 compared to 

1.0 to 1.0.

 

6 All data for 1991 to 1997 is aggregated, so it is uncertain when in this time period the 1990 starting 

account balances for CO, and PM10 were depleted. However, by assuming that these credits were 

consumed at an approximately constant rate, it is estimated that PM10 was depleted in 1994, and CO was 

depleted in 1995.
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1990-2005 Credits

Existing 1990-2005 Accounting

SCAQMD’s NSR tracking system currently takes credit for orphan shutdowns from 

major sources but not from minor sources. The existing tracking system credits orphan 

shutdowns to SCAQMD’s offset accounts based upon the allowable permitted level of 

emissions of the shutdown source, and no further discount/adjustment is applied to the 

credits to specifically account for surplus at the time of use. It also does not take credit 

for surplus reductions of SOx, CO, or PM10 provided as ERCs by major sources as a 

result of the differences in federal and local offset requirements for these pollutants (local 

requirement is 1.2 to 1.0 while federal law does not specify an offset ratio in excess of 1.0 

to 1.0 for SOx, CO, or PM10) or for surplus reductions resulting from minor sources 

providing ERCs as emission offsets. The tracking system also does not take credit for 

SCAQMD’s zero BACT threshold. BACT discounts applied to newly-banked ERCs are 

credited to SCAQMD’s offset accounts. Offsets are debited from SCAQMD’s accounts 

at 1.2 to 1.0 for all five pollutants when major sources that are not exempt pursuant to the 

CAA are permitted using Rule 1304 exemptions or the Priority Reserve, including 

replacement of ODCs with VOC.

Proposed Adjustments to 1990-2005 Accounting

The proposed changes to the sources of credits to and debits from SCAQMD’s offset 

accounts for the 1990-2005 time period are summarized below:

 Minor Source Orphan Shutdowns

The NSR tracking system has only used ―orphan‖ shutdowns of major sources post1990 to fund SCAQMD’s offset accounts. However, shutdowns of permitted minor

sources also can meet the federal requirements that credits be real, permanent, 

enforceable, quantifiable, and surplus in the same way as do major source shutdowns. 

ERCs generated from minor sources are commonly used to fulfill the offset 

requirements for emission increases at major sources which are not exempt from 

offset requirements under SCAQMD’s NSR rules. Therefore, although SCAQMD 

has not previously used these credits due to the large balances available in its offset 

accounts, it is appropriate to include emission reductions from minor source orphan 

shutdowns as credits in SCAQMD’s offset accounts.

SCAQMD’s Rule 201 requires written authorization from the Executive Officer (i.e., 

a permit to construct) before a person may build, erect, install, alter or replace any 

equipment, the use of which may cause the issuance of air contaminants or the use of 

which may eliminate, reduce or control the issuance of air contaminants. Rule 203 –

Permit to Operate similarly prevents the operation or use of such equipment without a 

permit issued by the Executive Officer. The only exceptions to these requirements 

are specifically identified in Rule 219. However, all of the minor sources which 

SCAQMD proposes to use as sources of orphan shutdown credits as described above 

have been through the permitting process. In fact, such minor sources are subject to 
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the same Regulation IV - Prohibitions, Regulation XI - Source Specific Standards, 

and Regulation XIII rule requirements as are major sources. In some cases the 

operators of these sources go through the necessary steps to quantify and generate 

ERCs when they experience real, permanent, enforceable, quantifiable, surplus 

emission reductions (e.g., equipment or facility shutdown or modification). Such 

minor source ERCs are fully valid and eligible for use as major source offsets. 

Therefore, in cases where the operators do not go through the steps to generate ERCs 

from their emission reductions, it is appropriate for SCAQMD to treat these orphan 

shutdowns in the same manner as it does orphan shutdowns at major sources.

 Major Source Use of SOx, CO, and PM10 ERCs

The tracking system will be updated to include credit for the 20 % additional SOx, 

CO, and PM10 ERCs provided by major sources as emission offsets at a ratio of 1.2 

to 1.0 pursuant to Rule 1303 rather 1.0 to 1.0. The 20 % above a 1.0 to 1.0 offset 

ratio is creditable because the CAA only requires a 1.2 to 1.0 offset ratio for 

precursors to ozone; the required offset ratio for SOx, CO, and PM10 pursuant to the 

CAA and the TSD is ―at least 1 to 1‖ (TSD, pages 14 and 15).

 Offset Ratio for Exempt Major Sources of SOx, CO, and PM10

SCAQMD proposes to change the offset ratio for major sources of SOx, CO, and 

PM10 offset from SCAQMD’s offset accounts from 1.2 to 1.0 to 1.0 to 1.0. This 

change is consistent with the CAA and the TSD, which only require a 1.2 to 1.0 offset 

ratio to precursors of ozone.

 ERCs Provided by Minor Sources to Offset Emission Increases

The CAA does not require minor sources to provide offsets for their emission 

increases. Therefore, the ERCs that these sources provide to offset their increases 

pursuant to Rule 1303 are creditable to SCAQMD’s offset accounts.

 Discounting Newly-Banked ERCs to BACT

Rule 1309 – Emission Reduction Credits and Short Term Credits specifies that the 

amount of emission reductions banked as a new ERC not be ―greater than the 

equipment would have achieved if operating with current Best Available Control 

Technology (BACT).‖ No similar requirement exists in the CAA. Therefore, the 

amount of any otherwise qualifying emission reductions not issued as an ERC due to 

implementation of this provision are surplus. However, SCAQMD uses the BACT 

discount at time of use in lieu of the federally-required BARCT discount at time of 

use. Therefore, EPA has stated that SCAQMD cannot take credit into its offset 

accounts for the BACT discount of ERCs because doing so would constitute a form 

of double counting. On the other hand, the TSD specifically identifies ―Best 

Available Control Technology discounting (Rule 1306(c)) of emission reduction 

credits generated‖7as an approved source of emission reductions for the tracking 

system. Therefore, SCAQMD’s position is that BACT discount of ERCs should be 

creditable from 1990 through 2004 (when EPA made SCAQMD aware of EPA’s new 

position regarding this source of credits), but should not be creditable in the post-

 

7

Page 17.
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2004 timeframe. Nevertheless, in the interest of reaching consensus with EPA and 

proceeding with the approval processes for the 2001 and 2002 amendments to 

Regulation XIII, SCAQMD agrees to retroactively remove all credits generated from 

BACT discount of ERCs from its tracking system, except such credits which 

SCAQMD has demonstrated (or demonstrates in the future) exceed the discount that 

would be required by approved SIP rules and rules scheduled to be approved by 

SCAQMD in the following year’s rule cycle. SCAQMD shall notify EPA when

making this alternative discount. Specifically, SCAQMD has identified 6.67 tons of 

CO per day of BACT discount of ERC credits from 1991 in SCAQMD’s offset 

account which are beyond approved SIP rules and rules scheduled to be approved by 

SCAQMD in the following year’s rule cycle at the time of use. SCAQMD will, 

therefore, retain these offsets (which were used in the early 1990s).

Inventory Issues Related to Minor Source Orphan Shutdowns

Emissions from small permitted sources (i.e., less than 4 tpy of any criteria pollutant or 

100 tpy of CO) are treated as area sources in the AQMP inventory. A detailed 

description of the area source inventory methodology for each source category tracked in 

the AQMP is provided in Attachment 5. Typically, a base year inventory is prepared 

based on the historical activity data and projected to future years based on the 

socioeconomic data provided by SCAG. The surrogates used for emission growth 

projection are documented in Appendix III, Table 2-3 of the 2003 AQMP. The growth 

factors for source categories are mostly greater than 1 with a few exceptions. When the 

growth factor is greater than 1, emissions are projected to grow without taking into 

account any potential NSR constraint that offsets may not be available. By the same 

token, if the growth factor is less than 1, future emissions are estimated to be lower than 

the base year emissions.

EPA staff raised an issue that shutdown credits from source categories that are projected 

to decrease in the AQMP may not be appropriate to be used as offsets, since the AQMP 

has already reflected such decrease. This position suggests the potential for double 

counting in such situations. However, closer examination of the AQMP process and the 

assumptions made in the Plan reveals that use of shutdown credits from source categories 

with even negative projected growth does not result in double counting of emissions 

reductions. The AQMP assumes negative growth in some categories and positive growth 

in others. Further, the positive growth assumptions include no constraints on growth 

posed by cost or availability of emission offsets (and existing ERCs are also assumed to 

be ―in the air‖ independent of the growth projections). Inherent in these AQMP 

assumptions is the assumption that emission decreases, including decreases associated 

with negative growth, result in emission credits that can be used to offset emission 

increases. Therefore, movement of potential emissions from a negative growth category 

to a positive growth category via appropriately quantified and discounted credits is 

entirely consistent with the AQMP and its assumptions. Furthermore, even though 

SCAQMD has never experienced actual growth greater than that projected in the AQMP, 

SCAQMD reevaluates the AQMP with each AQMP revision and makes appropriate 

changes and corrections as a part of this process (and commits to continue to do so 

consistent with state law). Finally, there is no restriction on the generation of ERCs by 
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sources in categories with negative projected growth or on the use of such ERCs by 

sources within other categories. The standard for credits in SCAQMD’s accounts should 

not be higher than for privately held credits.

Other Potential Credits

SCAQMD is not proposing to take any credits for 1990-2005 sources of credits such as 

the zero BACT threshold or application of LAER in excess of federal requirements at this 

time. SCAQMD understands that, if it decides to pursue these sources of excess 

reductions in the future, further discussion with EPA will be required.

Post-2005 Credits

Existing Post-2005 Accounting

SCAQMD’s tracking system currently takes credit for orphan shutdowns from major 

sources but not from minor sources. It also does not take credit for surplus reductions of 

SOx, CO, or PM10 provided as ERCs by major sources as a result of the differences in 

federal and local offset requirements for these pollutants (the local requirement is 1.2 to 

1.0 while federal law does not specify an offset ratio in excess of 1.0 to 1.0 for SOx, CO,

or PM10) or for surplus reductions resulting from minor sources providing ERCs as 

emission offsets. The tracking system also does not take credit for SCAQMD’s zero 

BACT threshold. Pre-1990 credits remaining in SCAQMD’s offset accounts continue to 

be usable in the tracking system. BACT discounts applied to newly-banked ERCs are 

credited to SCAQMD’s offset accounts. The existing tracking system credits orphan 

shutdowns to SCAQMD’s offset accounts based upon the allowable permitted level of 

emissions of the shutdown source, and no further discount/adjustment is applied to the 

credits to specifically account for surplus at the time of use. SCAQMD’s portion of the 

California SIP does not include assumptions reflecting the NSR tracking system or 

commitments to make up any shortfall in SCAQMD’s offset accounts. Additionally, the 

tracking system does not take credit for surplus reductions resulting from modifications at 

major sources that do not constitute ―major modifications‖ pursuant to the new NSR 

Reform Regulations. Credits are withdrawn from SCAQMD’s accounts at 1.2 to 1.0 for 

all five pollutants when major sources that are not exempt pursuant to the CAA are 

permitted using Rule 1304 exemptions or Rule 1309.1 offsets, including replacement of 

ODCs with VOC.

Proposed Post-2005 Accounting

The proposed changes to the sources of credits to and debits from SCAQMD’s offset 

accounts for the post-2005 time period are summarized below:

 Minor Source Orphan Shutdowns

The tracking system will be updated to include credit for future (post-2005) minor 
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source orphan shutdowns adjusted to 80% of potential emissions to represent actual 

emissions, as described above for the 1990 to 2005 time period.

 Minor Source Use of ERCs

The tracking system will be updated to include credit for future ERCs provided by 

minor sources as emission offsets pursuant to Rule 1303 because such offsets are not 

required pursuant to the CAA.

 Major Source Use of SOx, CO, and PM10 ERCs

The tracking system will be updated to include credit for the 20 % additional SOx, 

CO, and PM10 ERCs provided by major sources as emission offsets at a ratio of 1.2 

to 1.0 rather 1.0 to 1.0 pursuant to Rule 1303. The 20 % above a 1.0 to 1.0 offset 

ratio is creditable because the CAA only requires a 1.2 to 1.0 offset ratio for 

precursors to ozone; the required offset ratio for SOx, CO, and PM10 pursuant to the

CAA and the TSD is ―at least 1 to 1‖ (TSD, pages 14 and 15).

 Pre-1990 Credits in SCAQMD’s Offset Accounts

Eliminate any future use of any remaining pre-1990 credits, even though records were 

re-verified by SCAQMD in 2004-05, in its offset accounts which remain unused at 

the end of the 2004-2005 reporting period rather than use them to offset future 

emission reductions.

 BACT Discount of ERCs

EPA has raised an issue about the use of the amount of BACT discounts from ERCs 

issued by SCAQMD as credits in SCAQMD’s offset accounts. Although SCAQMD 

believes that this provision was specifically approved by EPA to be used as credits in 

the TSD (page 17), in order to resolve the outstanding issues raised by EPA, 

SCAQMD proposes to no longer take any credits for BACT discount of ERCs in 

SCAQMD’s offset accounts except such credits which SCAQMD specifically 

demonstrates are beyond approved SIP rules and rules scheduled to be approved by 

SCAQMD in the following year’s rule cycle at the time of use.

 Surplus Discount at Time of Use

Credits in SCAQMD’s accounts that resulted from post-1990 orphan shutdowns and 

which, based on a first-in/first-out analysis, are not used in the same timeframe they 

are banked are proposed to be subject to a BARCT at the time of use adjustment. 

This will be accomplished based on rule control requirements that become effective 

each year. Specifically, SCAQMD is proposing that each year all credits in 

SCAQMD’s offset accounts carried over from the previous year be discounted by the 

amount of the percentage reduction in overall permitted emissions8projected to be 

achieved as a result of implementation of control requirements that become effective 

during the year for the pollutant in question. This analysis will be performed on an 

aggregate basis each year for credits carried over from the previous year.

 

8

Permitted emissions data is derived primarily from permitted facilities emitting more than four tons of 

VOC, NOx, SOx, or PM per year or more than 100 tons of CO per year.
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 Actual Emissions Baseline

It is not feasible for SCAQMD to discount orphan shutdown credits to actual 

emissions because the actual emission data generally are unavailable. Therefore, staff 

proposes to use an average discount factor to account for the difference between 

potential and actual emissions. Since 1997, SCAQMD has used a twenty percent 

discount to convert potential emissions to estimated actual emissions for purposes of 

compliance with state ―no net increase‖ requirements. This procedure has been used 

with concurrence of the California Air Resources Board. We propose to use the same 

factor for federal NSR tracking purposes. In light of the methodology used to 

quantify potential emissions (explained in more detail below), staff’s engineering 

judgment indicates that, on average, a twenty percent reduction from potential 

emissions is a reasonable estimate of actual emissions. Actual emissions for 

individual sources will range from the sources’ potential emissions down to less than 

eighty percent of potential emissions, but eighty percent of potential emissions 

represents an acceptable estimate of aggregate actual emissions. The use of eighty 

percent of potential emissions as a surrogate for actual emissions is well documented 

in SCAQMD’s annual status reports regarding Regulation XIII. The most recent 

three such reports are included in Attachment 6 (for example, refer to Table 7—

―Debits from AQMD’s State Offset Accounts‖—in each of these reports). 

Facilities with potential to emit in excess of the Rule 1304 exemption thresholds (4 

tons per year for VOC, NOx, SOx, and PM10 and 29 tons per year for CO), provide 

ERCs to offset their increases in potential emissions so they have a strong incentive to 

keep their potential emissions in line with actual emissions at times of high 

production. Smaller facilities with potential to emit below the exemption thresholds 

may be inclined to request permits based potential emissions at the exemption 

threshold levels because the offsets are provided by SCAQMD at no cost to the 

facility. However, SCAQMD engineers perform a thorough evaluation of each 

permit application prior to recommending issuance of a permit to construct or a 

permit to operate. These evaluations include a determination of the actual controlled 

emission rate (based on source test results, VOC content of coatings, or sulfur content 

of fuel, for example) or expected actual controlled emission rate (based on established 

emission factors or manufacturers’ guarantees, for example). This data is then 

combined with the maximum anticipated production rate to determine the 

equipment’s potential to emit. Note that the maximum production rate used in these 

calculations is based on what is reasonably expected for the facility and source in 

question during periods of high production and is not based on either ―24-7‖ 

operations (except for those facilities that actually do operate in such a manner) or an 

artificially highest permissible emission level for each source. Therefore, actual 

emissions are not expected to be considerably different than potential emissions and 

80 % of potential emissions provides a reasonable estimate of actual emissions. This 

conclusion is further supported by potential to emit data for facilities at or below the 

exemption thresholds. Table 4 shows that there are far more facilities with potentials 

to emit below the exemption thresholds than at the exemption thresholds.
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Table 4

Ratio of Numbers of Facilities with Potential to Emit (PTE) Below Exemptions 

Thresholds to Numbers of Facilities with PTE at Exemption Thresholds

Facility Count Ratio

(Below Threshold:

Pollutant PTE Range A1 PTE Range B2 PTE C3 At Threshold)

VOC 1,336 1,348 601 4.5:1

NOx 2,021 1,534 363 10:1

SOx 545 180 32 23:1

CO 2,789 330 10 310:1

PM10 1,686 940 188 14:1

1 PTE Range A is greater than zero but less than 2 tons per year for VOC, NOx, 

SOx, and PM10 and is greater than zero but less than 15 tons per year for CO.

2 PTE Range B is greater than or equal to two but less than four tons per year for 

VOC, NOx, SOx, and PM10 and is greater than 15 but less than 29 tons per year 

for CO.

3 PTE C is four tons per year for VOC, NOx, SOx, and PM10 and is 29 tons per year 

for CO.

 Offset Ratio for Exempt Major Sources of SOx, CO, and PM10

SCAQMD will provide offsets to major sources of SOx, CO, and PM10 which are

exempt from offset requirements pursuant to Rule 1304 or which receive Rule 1309.1 

offsets but which are not exempt from offset requirements pursuant to the CAA at a 

ratio of 1.0 to 1.0, rather than 1.2 to 1.0.

 SIP Inventory and Growth Assumptions

To date, the SCAQMD has incorporated a sufficient portion of available tracking 

system credits into the AQMP at the time of plan revision to assure that the growth 

assumptions in the plan are consistent with NSR credits used. In order to assure that 

the SIP assumes that all necessary credits are ―in the air,‖ the SCAQMD proposes to 

provide EPA an enforceable commitment to make up any shortfall in the amount of 

credits assumed to be ―in the air‖ at the time of the next triennial plan revision 

required by state law.

 Other Potential Credits

SCAQMD is not proposing to take any credits for post-2005 sources of credits such 

as application of LAER in excess of federal requirements9to any increase in 

emissions at a major stationary source for non-ozone precursors such as SOx, CO and 

PM10 or the zero BACT threshold. In this proposal SCAQMD is not requesting to 

use such credits and understands that when and if SCAQMD wants to use such credits 

it will be necessary to hold further discussions with EPA. SCAQMD is also not 

presently proposing to take any benefits for not having to deduct emission increases

resulting from modifications at major sources that do not constitute major 

modifications pursuant to the NSR Reform Regulations at this time. However, 

SCAQMD would like to be able to use such provisions if a project can be 

 
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demonstrated to not be subject to NSR since it is not a ―federal major modification‖ 

under NSR reform. SCAQMD is also currently investing funds resulting from the 

mitigation fees provided by electrical generating facilities pursuant to Rule 1309.1 –

Priority Reserve in various emission reduction projects. Therefore, SCAQMD may 

discuss mechanisms for taking credit for such emission reductions with EPA in the 

future.

Summary

SCAQMD believes that the proposed revisions to the NSR credit tracking procedures 

represent a very conservative proposal in an effort to address EPA’s questions related to 

credits used for Priority Reserve, Offset Budget, and NSR equivalency purposes. As 

indicated earlier, the proposed revisions will reduce SCAQMD’s previously-reported pre1990 credits from a 7 % reduction in NOx to a 92 % reduction in PM10 and will change

the previously-reported 2002 NSR federal offset account from a 40 % actual increase in 

NOx credits to an 83 % reduction in PM10 credits. The overall impact on emission 

credits resulting from the proposals described above are summarized in Table 5 for both 

the 1990 starting balance and July 2002 running balance.

Table 5

Summary of SCAQMD’s Offsets Account

Tons per Day

VOC NOx SOx CO PM10 

Previously-Reported 1990 Starting 

Balance 92.4 25.8 18.4 34.9 34.5

Final Proposed Revised 1990 Starting 

Balance

38.46 23.92 8.04 8.45 2.67

Reductions in SCAQMD’s Pre-1990

NSR Federal Account Balances 58 % 7 % 56 % 76 % 92 %

Previously-Reported 2002 Running 

Balance 107.65 21.60 18.76 24.09 41.24

Final Proposed Revised 2002 

Running Balance 70.60 30.16 10.56 7.89 6.92

Reductions in SCAQMD’s 2002 NSR 

Federal Account Balances 34.4 % -39.6 % 43.7 % 67.2 % 83.2 %

In addition, SCAQMD’s proposed post-2005 emission credits adjustments, as described 

above, will address all of the issues raised by EPA prospectively.

Table 6 summarizes the changes between SCAQMD’s existing and proposed revised 

NSR tracking systems. This table summarizes the existing and proposed revised NSR 

tracking system for pre-1990, 1990-2005, and post-2005 emission reductions.
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Table 6

Summary of Changes between SCAQMD’S Existing and

Proposed Revised NSR Tracking Systems

Pre-1990 Emission Reductions

SCAQMD’s Existing NSR Offset Account 

and Tracking System

SCAQMD’s Proposed Revised NSR Offset 

Account and Tracking System

 Starting Balance based on data generated 

in 1990 from facilities’ (both major and 

minor sources) emission reductions 

recorded as negative NSR balances. This 

data has been used and previously 

reported in all annual NSR status reports.

 Initial Starting Balance based on data from 

facilities’ (both major and minor sources) 

emission reductions recorded as negative 

NSR balances which were originally 

verified in 1990/91 and re-verified in 

2004/05 and all or some records currently 

exist.

 No credit taken for surplus reductions from 

SOx, CO, and PM10 offsets provided (at 

120 %) as ERCs for minor sources(1).

 No credit taken for surplus reductions from 

SOx, CO, and PM10 offsets provided (at 

120 %) as ERCs for minor sources(1). (No 

Change)

 No credit taken for the 20 % additional 

SOx, CO, and PM10 offsets (ERCs) for 

major sources provided at a ratio of 1.2 to 

1.0 compared to 1.0 to 1.0(2).

 No credit taken for the 20 % additional 

SOx, CO, and PM10 offsets (ERCs) for 

major sources provided at a ratio of 1.2 to 

1.0 compared to 1.0 to 1.0(2). (No Change)

 No credit taken for emission reductions 

created from the application of zero BACT 

threshold(1).

 No credit taken for emission reductions 

created from the application of zero BACT 

threshold at this time(1). (No Change)

(1) EPA’s Technical Support Document (TSD) dated 10/24/96 for EPA’s Notice of Final 

Rulemaking (Federal Register 12/4/96) for SIP Approval of SCAQMD NSR Rules allows for 

such credits, page 17.

(2)

TSD, pages 14 and 15.

1990-Present (2005) Emission Reductions

SCAQMD’s Existing NSR Offset Account 

and Tracking System

SCAQMD’s Proposed Revised NSR Offset 

Account and Tracking System

 BACT discount credit portion of newlyissued ERCs eligible for crediting to 

SCAQMD’s offset accounts (as previously 

approved by EPA)(1).

 No BACT-discount credits from newlyissued ERCs will be eligible for crediting to 

SCAQMD’s offset accounts except those 

for specific projects for which staff has 

demonstrated or will demonstrate that the 

BACT discount is beyond approved SIP 

rules and rules scheduled to be approved 

by SCAQMD in the following year’s rule 

cycle at the time of use of the credits.

 No credit taken for orphan shutdowns from 

minor sources.

 Orphan shutdowns include shutdowns of 

both major and minor sources.
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Table 6 continued

1990-Present (2005) Emission Reductions (continued)

SCAQMD’s Existing NSR Offset Account 

and Tracking System

SCAQMD’s Proposed Revised NSR Offset 

Account and Tracking System

 No further discount/adjustment for orphan 

shutdowns due to BARCT at time of use.

 All orphan shutdowns will be discounted/ 

adjusted to BARCT at time of use by 

discounting balances “carried over” from 

one year to the next.

 No further discount/adjustment applied to 

estimate actual emissions.

 All orphan shutdowns will be discounted/ 

adjusted to further reflect actual emissions.

 VOC and NOx offsets provided by 

SCAQMD for federal sources exempted by 

SCAQMD at a ratio of 1.2 to 1.0.

 VOC and NOx offsets provided by 

SCAQMD for federal sources exempted by 

SCAQMD at a ratio of 1.2 to 1.0. (No 

Change)

 No credit taken for surplus reductions from 

SOx, CO, and PM10 offsets provided by 

SCAQMD for federal sources exempted by 

SCAQMD at a ratio of 1.2 to 1.0 compared 

to 1.0 to 1.0.

 SOx, CO, and PM10 offsets provided by 

SCAQMD for federal sources exempted by 

SCAQMD at a ratio of 1.0 to 1.0(1).

 VOC offsets provided by SCAQMD at a 

ratio of 1.2 to 1.0 for federal sources 

exempted by SCAQMD which switch from 

ozone depleting compounds to VOCs.

 VOC offsets provided by SCAQMD at a 

ratio of 1.2 to 1.0 for federal sources 

exempted by SCAQMD which switch from 

ozone depleting compounds to VOCs. (No 

Change)

 No credit taken for surplus reductions 

created from offsets (ERCs) provided (at 

120 %) by minor sources which are not 

exempt from offset requirements under 

SCAQMD NSR rules (i.e., > 4 but < 10 TPY 

of VOCs and NOx, etc.).

 Credit taken for surplus reductions created 

from offsets (ERCs) provided (at 120 %) by 

minor sources which are not exempt from 

offsets requirements under SCAQMD

rules(2)(i.e., > 4 but < 10 TPY of VOCs and 

NOx, etc.).

 No credit taken for surplus reductions 

created from the 20 % additional SOx, CO, 

and PM10 offsets (ERCs) provided by 

major sources at 1.2 to 1.0 ratio compared 

to 1.0 to 1.0 ratio.

 Credit taken for surplus reductions created 

from the 20 % additional SOx, CO, and 

PM10 offsets (ERCs) provided by federal 

major sources at a ratio of 1.2 to 1.0 

compared to 1.0 to 1.0 ratio(1).

(1) EPA’s Technical Support Document (TSD) dated 10/24/96 for EPA’s Notice of Final 

Rulemaking (Federal Register 12/4/96) for SIP Approval of SCAQMD NSR Rules, pages 14, 

15, and 17.

(2)

TSD, page 17.

Future (Post-2005) Emission Reductions

SCAQMD’s Existing NSR Offset Account 

and Tracking System

SCAQMD’s Proposed Revised NSR Offset 

Account and Tracking System

 No credit taken for emission reductions 

created from the application of zero BACT 

threshold(2).Remaining pre-1990 credits still 

eligible for use.

 No credit taken for emission reductions 

created from the application of zero BACT 

threshold at this time(2). (No Change)No 

pre-1990 credits will be used post-2005.
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Table 6 continued

Future (Post-2005) Emission Reductions (continued)

SCAQMD’s Existing NSR Offset Account 

and Tracking System

SCAQMD’s Proposed Revised NSR Offset 

Account and Tracking System

 BACT discount credit portion of newlyissued ERCs eligible for crediting to 

SCAQMD’s offset accounts (as previously 

approved by EPA)(1).

 No BACT-discount credits from newlyissued ERCs will be eligible for crediting to 

SCAQMD’s offset accounts except those 

for specific projects for which staff 

demonstrates that the BACT discount is 

beyond approved SIP rules and rules 

scheduled to be approved by SCAQMD in 

the following year’s rule cycle at the time of 

use of the credits.

 Orphan shutdowns credited to SCAQMD’s 

offset accounts in the past only included

shutdowns of major sources.

 Post-1990 orphan shutdowns will include 

shutdown of both major and minor sources.

 No further discount/adjustment for orphan 

shutdowns due to BARCT at time of use.

 All orphan shutdowns will be discounted/ 

adjusted to BARCT at time of use by 

discounting balances “carried over” from 

one year to the next.

 No further discount/adjustment applied to 

estimate actual emissions.

 All orphan shutdowns will be discounted/ 

adjusted to reflect estimated actual 

emissions.

 VOC and NOx offsets provided by 

SCAQMD for federal sources exempted by 

SCAQMD at a ratio of 1.2 to 1.0.

 VOC and NOx offsets will be provided by 

SCAQMD for federal sources exempted by 

SCAQMD at a ratio of 1.2 to 1.0. (No 

Change)

 No credit taken for surplus reductions from 

SOx, CO, and PM10 offsets provided by 

SCAQMD for federal sources exempted by 

SCAQMD at a ratio of 1.2 to 1.0 compared 

to 1.0 to 1.0.

 SOx, CO, and PM10 offsets will be 

provided by SCAQMD for federal sources 

exempted by SCAQMD at a ratio of 1.0 to 

1.0(1).

 VOC offsets provided by SCAQMD at a 

ratio of 1.2 to 1.0 for federal sources 

exempted by SCAQMD which switch from 

ozone depleting compounds to VOCs.

 VOC offsets provided by SCAQMD at a 

ratio of 1.2 to 1.0 for federal sources 

exempted by SCAQMD which switch from 

ozone depleting compounds to VOCs. (No 

Change)

 No credit taken for surplus reductions 

created from offsets (ERCs) provided (at 

120 %) by minor sources which are not 

exempt from offset requirements under 

SCAQMD NSR rules (i.e., > 4 but < 10 TPY 

of VOCs and NOx, etc.).

 Credit will be taken for surplus reductions 

created from offsets (ERCs) provided (at 

120 %) by minor sources which are not 

exempt from offsets requirements under 

SCAQMD rules(2).

(1) EPA’s Technical Support Document (TSD) dated 10/24/96 for EPA’s Notice of Final 

Rulemaking (Federal Register 12/4/96) for SIP Approval of SCAQMD NSR Rules, pages 14, 

15, and 17.

(2)

TSD, page 17.
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Table 6 continued

Future (Post-2005) Emission Reductions (continued)

SCAQMD’s Existing NSR Offset Account 

and Tracking System

SCAQMD’s Proposed Revised NSR Offset 

Account and Tracking System

 No credit taken for surplus reductions 

created from the 20 % additional SOx, CO,

and PM10 offsets (ERCs) provided at 1.2 

to 1.0 ratio compared to 1.0 to 1.0 ratio.

 Credit will be taken for surplus reductions 

created from the 20 % additional SOx, CO,

and PM10 offsets (ERCs) provided by 

federal major sources at a ratio of 1.2 to 

1.0 compared to 1.0 to 1.0 ratio(1).

 No SIP adjustment for NSR tracking 

system.

 Appropriate assumptions in the SIP to 

reflect NSR tracking system with 

commitment to make up any shortfall in 

next AQMP revision pursuant to state law.

 No credit taken for emission reductions 

crated from application of zero BACT 

threshold(2).

 No credit taken for emission reductions 

crated from application of zero BACT 

threshold at this time(2). (No Change)

 No credit taken for surplus reductions 

created from offsets (ERCs) provided (at 

120 %) by modifications to major sources, 

which are otherwise not defined as “major 

modifications” to a major source pursuant 

to Rule 1306 – Federal Major 

Modifications.

 No credit will be taken for surplus 

reductions created from offsets (ERCs) 

provided (at 120 %) by modifications to 

major sources, which are otherwise not 

defined as “federal major modifications” to 

a major source pursuant to Rule 1306 –

Federal Major Modifications at this time, 

unless a specific determination of “nonmajor modification” is made for such a 

project.

 No credit taken for application of LAER in 

excess of federal requirements to any 

increase in emissions at a major stationary 

source for non-ozone precursors (SOx, 

CO, and PM10).

 No credit taken for application of LAER in 

excess of federal requirements to any 

increase in emissions at a major stationary 

source for non-ozone precursors (SOx, 

CO, and PM10) at this time. If SCAQMD 

decides to pursue use of such credits in the 

future, further discussions with EPA will be 

necessary.

(1) EPA’s Technical Support Document (TSD) dated 10/24/96 for EPA’s Notice of Final 

Rulemaking (Federal Register 12/4/96) for SIP Approval of SCAQMD NSR Rules, pages 14, 

15, and 17.

(2)

TSD, page 17.
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Table 6 continued

NSR Equivalency Demonstration

SCAQMD’s Existing NSR Offset Account 

and Tracking System

SCAQMD’s Proposed Revised NSR Offset 

Account and Tracking System

 Equivalency demonstration typically

completed within two years of the close of 

the reporting period.

 Preliminary (worst case) equivalency 

demonstration completed within one year 

of the close of the reporting period. If 

preliminary equivalency demonstration 

does not verify equivalency, final 

equivalency demonstration completed 

within six months of the preliminary 

equivalency demonstration timeframe.

 No projections of future equivalency done 

with annual equivalency demonstrations

 All annual equivalency demonstrations 

(preliminary and final) will be accompanied 

by projected NSR offset account balances 

for the two years following the subject 

reporting period. These projections are for 

the purpose of prospectively determining if 

sufficient offsets remain in SCAQMD’s 

accounts to continue providing Priority 

Reserve offsets and will not constitute a 

part of the equivalency demonstrations.

 Funding of Priority Reserve conducted 

quarterly on an automatic basis without 

utilization of any projections of SCAQMD’s 

offset account balances.

 Executive Officer to exercise the option to 

discontinue funding the Priority Reserve 

upon finding that SCAQMD’s offset 

accounts do not include sufficient credits. 

This will include discontinuation of funding 

when offset account balance projections in 

the most recent equivalency demonstration 

do not indicate equivalency for the current 

reporting period.
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Table 6 continued

Backstop Measures

SCAQMD’s Existing NSR Offset Account 

and Tracking System

SCAQMD’s Proposed Revised NSR Offset 

Account and Tracking System

No backstop measures identified for 

addressing potential shortfalls in SCAQMD’s 

offset accounts.

Several backstop provisions identified in a 

tracking rule, one or more to be implemented 

as needed to return SCAQMD’s NSR program 

to equivalency with federal NSR requirements 

and correct any credit shortfall:

 Provide additional credits within six months 

of the final annual determination; to be 

derived from SCAQMD purchase of credits, 

SCAQMD funding of emission reduction 

projects using quantification protocols 

approved by EPA, application of LAER in 

excess of federal requirements, or other 

EPA-approved credit sources.

 Suspend issuance of both Priority Reserve 

and Offset Budget credits within 90 days,

not to be resumed until equivalency has 

been reestablished.

 Amend Rule 1304 to eliminate certain 

offset exemptions.

USE OF CREDITS

The above-described credits will be used to fund the Offset Budget as adopted by 

SCAQMD in Rule 1309.2 in addition to the current use of credits to provide offsets for 

sources subject to federal offset requirements but which are exempt from offset 

requirements under SCAQMD Regulation XIII (Rule 1304) and to provide Priority 

Reserve offsets (Rule 1309.1) in order to provide equivalence to federal NSR 

requirements. As indicated earlier, a list of Regulation XIII provisions for which sources 

are exempt from offset requirements and SCAQMD uses its internal offset account

credits may be used to demonstrate equivalency is presented in Attachment 2. 

TRACKING AND BACKSTOP

SCAQMD will make an annual equivalency demonstration in two steps. In step one, 

SCAQMD proposes to make a preliminary annual determination of equivalency within 

twelve months of the close of each reporting period which will also be reflected in a 

tracking rule that it will develop and adopt. Such preliminary annual determination will 
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be a very conservative determination based on the combined debits from the previous 

year but will not include the orphan shutdowns (credits) from that reporting period. 

Therefore, the preliminary annual determinations will represent ―worst case‖ analyses. 

Provided the preliminary annual determination demonstrates equivalency, the orphan 

shutdowns for each reporting period will be reported (and credited) in the subsequent 

preliminary annual determination, as illustrated in Figure 1. However, if the preliminary 

annual determination does not demonstrate equivalency, SCAQMD proposes as step two 

to make a final annual determination, which will include the reporting period’s orphan 

shutdown credits. The final equivalency determination will be prepared within six 

months of the preliminary equivalency determination time frame, as illustrated in Figure 

2. For example, the preliminary annual determination for reporting year B (including all 

debits for years A and B and only orphan shutdown credits for year A) will be completed 

by the end of reporting year C. Provided this preliminary annual determination for year 

B demonstrates equivalency, the year B orphan shutdowns will be included in the 

preliminary annual determination for year C (to be completed by the end of year D). On 

the other hand, if the preliminary annual determination for year B does not demonstrate 

equivalency, a final annual determination incorporating year B’s orphan shutdown credits 

will be prepared within six months of the end of year C. The offset accounting will be 

conducted in the following order:

1. Year B’s debits are first subtracted from any remaining pre-1990 credits 

(1990-2005 timeframe only); then

2. Any debits remaining after step 1 are subtracted from any post-1990 credits 

remaining from year A; then

3a. If there no remaining debits the post-1990 credits remaining from step 2 are 

discounted as described in the discussion of Surplus Discount at Time of Use. 

Year B’s credits are then added to the discounted post-1990 credits remaining 

from the year A.

3b. If there are any remaining debits from step 2 (meaning there are not any post -

1990 credits remaining) the year B’s remaining debits are subtracted from 

year B’s credits.

Each preliminary annual determination (and each final annual determination, as needed to 

demonstrate equivalency) will be presented to SCAQMD’s Governing Board in a report 

from the Executive Officer (―Board Letter‖) at a public meeting of the SCAQMD 

Governing Board. The annual equivalency determination will include the balance in 

SCAQMD’s offset account for each pollutant, as well as summaries of credit and debit 

data by category such as Priority Reserve, Community Bank, and Rule 1304 exemptions. 

In addition, SCAQMD proposes to evaluate the future availability of credits in 

SCAQMD’s offset accounts by conducting a two-year projection of debits, credits, and 

account balances in conjunction with (but not as part of) each annual equivalency 

demonstration. This analysis will include projected debits, credits, and offset account 

balances for the two years following the period covered by the Board Letter for purposes 

of predicting if there will or will not be sufficient credits in SCAQMD’s offset accounts. 
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The projection for each pollutant will be based on the average of the previous five years’ 

credits and debits for that pollutant. The Executive Officer will not make quarterly 

allocations to the Priority Reserve for any pollutant during a time when SCAQMD’s 

offset account for that pollutant is not projected to remain positive10. The purpose of the 

projections is to prospectively determine if sufficient offsets remain in SCAQMD’s 

accounts to continue funding the Priority Reserve; they are not intended to demonstrate 

equivalency retrospectively. SCAQMD is currently developing amendments to Rule 

1309.1 – Priority Reserve which will clarify this procedure and authority for the 

Executive Officer and the tracking rule (also under development) will call for these 

projections and direct the Executive Officer to exercise this authority when equivalency 

is not projected.

SCAQMD will also propose, as part of the tracking rule, backstop provisions to be 

triggered in the event that the final annual determination does not demonstrate

equivalency. In such an event, the backstop provisions would require SCAQMD to take 

one or more of the following actions to the extent necessary to correct the credit shortfall:

Provide additional credits within six months of the final annual determination; such 

credits could be derived through SCAQMD purchase of credits, through SCAQMD 

funding of emission reduction projects using quantification protocols approved by 

EPA on a case-by case or programmatic basis, application of LAER in excess of 

federal requirements11, or other approved sources of credits.

Suspend issuance of both Priority Reserve and Offset Budget credits (Rules 1309.1 

and 1309.2) within 90 days and not resume the issuance of any such credits until 

SCAQMD has demonstrated that equivalency has been reestablished. Equivalency 

may be reestablished through procurement of additional offsets and/or appropriate 

program modifications.

Amend Rule 1304 to eliminate certain categories of offset exemptions to be identified 

during the rulemaking process.

 

10Offsets provided from the Priority Reserve are debited from SCAQMD’s offset accounts for the period 

during which the permit was issued (i.e., for the timeframe they are used) whereas the quarterly 

allocations made to the Priority Reserve pursuant to Rule 1309.1(a) do not constitute debits from 

SCAQMD’s offset accounts. The newly-proposed future years’ projections of balances in SCAQMD’s 

offset accounts will include projected use of Priority Reserve offsets as well as offsets used through the 

Community Bank and for sources exempted pursuant to Rule 1304. In addition, a significant portion of 

the quarterly allocations to the Priority Reserve are used by sources which are not subject to federal offset 

requirements (i.e., federal minor sources) and, therefore, do not need to be debited from SCAQMD’s 

offset accounts for the purpose of federal equivalency demonstration. Furthermore, the portion that is 

subject to federal offset requirements and which needs to be debited from SCAQMD’s offset accounts is 

already included in the two future years’ projections done with each annual equivalency demonstration.

11Precise quantification of all surplus credits generated through application of LAER in excess of federal 

requirements may be extremely resource intensive. Therefore, SCAQMD may, with EPA approval, 

demonstrate that such application of LAER has generated at least enough surplus reductions to make up 

for the shortfall using very conservative assumptions to estimate the surplus reductions.
ATTACHMENT 1

SCAQMD’S NSR OFFSET TRACKING—FEDERAL RUNNING BALANCES
ATTACHMENT 2:

LIST OF SOURCES EXEMPT FROM OFFSET REQUIREMENTS AND 

PROVISIONS COVERED BY EQUIVALENCY SHOWING

Rule 1304 - Exemptions:

(1) Replacements need to be tracked because of PTE Baseline in 1304 (a)(1)

Emissions will generally be lower due to BACT. SCAQMD will demonstrate 

through representative analysis that emission reductions from BACT exceed those 

needed for offsets pursuant to actual – potential analysis.

(2) Relocations need to be tracked because of PTE baseline in 1304(c)(1)

Emissions will generally be lower due to BACT.

(3) Abrasive Blasting Equipment

(4) Air Pollution Control Strategies

(5) Emergency Equipment

(6) Portable Internal Combustion Engines

(7) Methyl Bromide Fumigation

(8) Replacement of Ozone Depleting Compounds

(9) Portable Equipment

(10) Regulatory Compliance

(11) Regulatory Compliance for Essential Public Services

(12) Facility Exemption (VOC, NOx, SOx, or PM10 PTE less than 4 tons per year or 

CO PTE less than 29 tons per year)

(13) Resource Recovery

(14) Electric Utility Boilers Alt Energy

Rule 1309.1 - Priority Reserve

The Priority Reserve, which is funded from SCAQMD’s offset accounts, provides a 

source of emission offsets for certain priority categories of sources. Except as noted 

below, these offsets are provided by SCAQMD at no cost to the operator. The various 

categories of sources eligible to access the Priority Reserve are summarized below:

(1) Innovative Technology

Use of a technology that results in significantly lower emissions than would the 

use of BACT.
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(2) Research Operations

Projects with the purpose of ―investigation, [experimentation], or research to 

advance the state of knowledge or the state-of-the-art.‖ Limited to at most two 

years.

(3) Essential Public Service

Sources in the following categories located at facilities where all sources operate 

at or below BARCT levels

 Publicly-owned sewage facilities;

 Prisons;

 Police facilities;

 Fire fighting facilities;

 Schools;

 Hospitals;

 Construction/operation of landfill gas control or processing facility;

 Water delivery operations; and

 Public transit.

(4) Electrical Generating Facilities

Specified categories of facilities that generate electricity; meet BARCT for all 

sources; applicant has conducted a due diligence effort to acquire ERCs on the 

open market; applicant has applied for California Energy Commission 

certification or SCAQMD permit to construct during calendar years 2000, 2001, 

2002, or 200312; and applicant pays the following fee for each pound of Priority 

Reserve offsets obtained (ROG and NOx not available for these sources):

 $25,000 per pound PM10 and day;

 $8,900 per pound SOx per day; and

 $12,000 per pound CO per day.

Rule 1309.2 - Offset Budget

Sources that are not exempt from offset requirements pursuant to Rule 1304 and are not 

eligible to obtain offsets from the Priority Reserve may obtain offsets from the Offset 

Budget provided they meet certain criteria13:

(1) All sources the applicant owns or operates comply with BARCT;

(2) Applicant has conducted a due diligence effort to acquire ERCs on the open market;

(3) Applicant pays the appropriate mitigation fee (based on pollutant and pounds of 

offsets obtained) specified in Regulation III – Fees; and

(4) Applicant publishes a notice (prepared by SCAQMD’s Executive Officer) in a 

newspaper of general circulation in each of the four counties in SCAQMD, sends 

copies of the notice to the Administrator of EPA’s Region IX and the Executive 

 

12Staff is currently developing an amendment to Rule 1309.1 to expand the date range for applications 

eligible to receive Priority Reserve offsets for electrical generating facilities.

13The Offset Budget has not been implemented because it has not been approved into the State 

Implementation Plan.
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Officer of the California Air Resources Board, and responds to all public comments 

received within 30 days of publication.
ATTACHMENT 3:

REGULATION XIII NEW SOURCE REVIEW GUIDANCE MANUAL

(October 1990)
ATTACHMENT 4:

EXAMPLES OF AVAILABLE PRE-1990 PERMIT RECORDS
ATTACHMENT 5

AREA SOURCE INVENTORY METHODOLOGY
ATTACHMENT 6:

STATUS REPORTS ON REGULATION XIII – NEW SOURCE REVIEW COVERING 

AUGUST 1999 THROUGH JULY 2002