48972 Federal Register / Vol. 62, No. 181 / Thursday, September 18, 1997 / Proposed Rules

(ii) Any change in his or her pursuit

that would result in less than full-time

enrollment; and

(iii) Any interruption or termination

of his or her attendance.

(2) A veteran or servicemember not

described in paragraph (a)(1) of this

section must report without delay to

VA:

(i) Any change in his or her credit

hours or clock hours of attendance;

(ii) Any change in his or her pursuit;

and

(iii) Any interruption or termination

of his or her attendance.

(Authority: 38 U.S.C. 3680(g))

(b) Interruptions, terminations, or

changes in hours of credit or

attendance. (1) Except as provided in

paragraph (b)(2) of this section, an

educational institution must report

without delay to VA each time a veteran

or servicemember:

(i) Interrupts or terminates his or her

training for any reason; or

(ii) Changes his or her credit hours or

clock hours of attendance.

(2) An educational institution does

not need to report a change in a

veteran’s or servicemember’s hours of

credit or attendance when:

(i) The veteran or servicemember is

enrolled full time in a program of

education for a standard term, quarter,

or semester before the change;

(ii) The veteran or servicemember

continues to be enrolled full time after

the change; and

(iii) The tuition and fees charged to

the servicemember have not been

adjusted as a result of the change.

(Authority: 38 U.S.C. 3034, 3684)

(3) If the change in status or change

in number of credit hours or clock hours

of attendance occurs on a day other than

one indicated by paragraph (b)(4) or

(b)(5) of this section, the educational

institution will initiate a report of the

change in time for VA to receive it

within 30 days of the date on which the

change occurs.

* * * * *

[FR Doc. 97–24776 Filed 9–17–97; 8:45 am]

BILLING CODE 8320–01–P

ENVIRONMENTAL PROTECTION

AGENCY

40 CFR Parts 52 and 81

[MI 52–01–7260; FRL–5894–6]

Approval and Promulgation of

Implementation Plans; Michigan

AGENCY: Environmental Protection

Agency (EPA).

ACTION: Proposed rule.

SUMMARY: The Environmental Protection

Agency (EPA) is proposing approval of

the requested revisions to the Michigan

State Implementation Plan (SIP) for

ozone, carbon monoxide, sulfur dioxide,

nitrogen dioxide, particulate matter and

lead. The requested revisions are

Michigan’s Emissions Averaging and

Emission Reduction Credit Trading

Rules and supporting documents. These

rules were submitted by the State of

Michigan on April 17, 1996 as an

optional revision to the SIP. The EPA

has determined through its evaluation of

the rules that they can be approvable

upon submission of corrections to

certain deficiencies that are identified in

this notice.

DATES: Comments on this proposed

action must be received by October 20,

1997.

ADDRESSES: Written comments should

be addressed to: Carlton T. Nash, Chief,

Regulation Development Section, Air

Programs Branch (AR–18J), United

States Environmental Protection

Agency, Region 5, 77 West Jackson

Boulevard, Chicago, Illinois 60604.

Copies of the State’s submittal and

EPA’s analysis (Technical Support

Document) are available for inspection

at the following location: United States

Environmental Protection Agency,

Region 5, Air and Radiation Division, 77

West Jackson Boulevard, Chicago,

Illinois 60604. (Please telephone Alexis

Cain or Rick Tonielli before visiting the

Region 5 Office.)

FOR FURTHER INFORMATION CONTACT:

Alexis Cain at (312) 886–7018 or Rick

Tonielli at (312) 886–6068.

SUPPLEMENTARY INFORMATION:

I. Background

Michigan submitted these rules as a

SIP revision to allow sources of

emissions of ozone precursors (NOX and

VOCs) and non-ozone criteria pollutants

(CO, SO2, NO2, PM–10 and lead)

flexibility in complying with

requirements already in the SIP. The

program provides emissions sources

with a financial incentive to reduce

emissions below levels required by

applicable Federal and State

requirements and below their actual

emissions of the recent past. Sources

that make these extra reductions beyond

requirements generate emission

reduction credits (ERCs) that they can

use later or sell to other sources. ERCs

may be used by sources to comply with

emissions limits. The program is not a

means of limiting emissions; instead,

trading and averaging are meant to

provide an opportunity to comply with

existing emission limits in a more cost

effective manner. Michigan’s emissions

trading credit and averaging rules are

not a required SIP submission under the

Clean Air Act (the Act).

Outline of State Program

Michigan’s SIP submittal includes

both ‘‘open market’’ trading and

emissions averaging. In an open market

trading system, credits are first

generated, then subsequently traded, so

that generation and use of the credit are

separated in time. Open market

programs rely on continual credit

generation to ensure that use of

previously generated credits is balanced

by generation of new credits, so that

‘‘spikes’’ in emissions are not created by

credit use. Sources participating in an

open market trading program generate

discrete emission reductions, referred to

as emission reduction credits (ERCs) in

the Michigan program, by reducing

emissions below a baseline over a

discrete time period. The generation

baseline is established by existing

requirements, and is determined by the

lower of allowable emissions or actual

past emissions. Credits can either be

used at a later time by the generator

source or be sold to another source; the

use of credits allows a source to emit

above its emission limit while

remaining in compliance.

The Michigan program also allows

emissions averaging at sources that are

subject to Reasonably Available Control

Technology (RACT) requirements and

are under common ownership and

control. Under Michigan’s emissions

averaging provisions, one source can

exceed a permitted emissions limit, as

long as there is a simultaneous

reduction, equaling 110 percent of the

exceedance, at another source under the

same ownership or control, but not

necessarily at the same location. In both

the open market and emission averaging

provisions of Michigan’s rule, 10

percent of the emission reductions

generated are retired for an

environmental benefit.

Sources can trade and average

emissions of volatile organic

compounds (VOCs) as a group, nitrogen

oxides (NOX), and all criteria pollutants

other than ozone. VOC and NOX ERCs

must be designated as either ozone

season or non-ozone season credits;

VOC and NOX ERCs generated outside

of the ozone season cannot be used

during the ozone season.

Under the Michigan plan, sources

which generate ERCs or engage in

emissions averaging must provide the

Michigan Department of Environmental

Quality (MDEQ) with a notice that

includes information about the source
Federal Register / Vol. 62, No. 181 / Thursday, September 18, 1997 / Proposed Rules 48973

1For mobile source emissions, the baseline can be

established by the emissions projected in the

absence of an emissions reduction action, ‘‘where

a period of historical operations and actual

emission data or activity levels cannot be used to

determine emissions.’’ (Rule 1207(2)(b)(3))

generating the reductions, the methods

of generating the reductions, the amount

of reductions, and the methods used to

measure the reductions. An official

representative of the source must certify

that the information contained in the

notice is ‘‘true, accurate and complete,’’

that the emission reductions generated

are ‘‘real, surplus, enforceable,

permanent and quantifiable,’’ and that

the reductions have not been used

elsewhere for averaging or credit

generation. ERCs and averaging plans

are not valid until MDEQ certifies that

this notice is complete. The rule

requires MDEQ to make a determination

of completeness within 30 days.

Similarly, sources which wish to trade

or use ERCs must provide to MDEQ a

notice which includes information

about the source using the ERCs, the

number of ERCs to be used, the

requirements being complied with

through the use of ERCs, and a copy of

the generation notice for the ERCs that

will be used. A responsible official must

certify that the information is ‘‘true,

accurate, and complete’’ and that the

source will be operated in compliance

with all applicable requirements,

including requirements for the use of

ERCs.

As mentioned previously, the

Michigan program requires a retirement

of 10 percent of ERCs generated, and of

10 percent of the reductions used in an

emission averaging program, to create a

benefit for the environment. In addition,

VOC and NOX ERCs are discounted 10

percent per ozone season. All ERCs

expire five years after being generated.

Basis for Evaluation of SIP Revision

In 1994, EPA issued Economic

Incentive Program (EIP) rules and

guidance (40 CFR part 51, subpart U),

which outlined requirements for

establishing EIPs that States are required

to adopt in some cases to meet the

ozone and carbon monoxide standards

in designated nonattainment areas.

Michigan is not required to submit an

EIP, so its emission trading and

averaging program need not necessarily

follow the EIP rule; however, subpart U

also contains guidance on the

development of voluntary EIPs.

The EPA has also published a

proposed policy on open market trading

programs (60 FR 39668, August 3, 1995)

and a model open market trading rule

(60 FR 44290, August 25, 1995), which

will be published as guidance. This

guidance will describe the elements of

an open market trading program that

EPA considers to be desirable, and those

that are necessary for a program to be

approvable as a SIP revision. As of this

writing, this guidance has not been

finalized. Moreover, Michigan began to

develop its emissions trading program

prior to the proposed guidance on open

market trading. Therefore, EPA does not

expect Michigan’s rule to conform to

this guidance.

Michigan’s submittal is being

evaluated on the basis of whether it

meets the requirements of SIPs as

described in section 110 of the Act. In

particular, review focuses on whether

the SIP as revised would be enforceable,

whether the revision would negatively

affect the SIP’s ability to provide for

attainment and maintenance of the

National Ambient Air Quality Standards

(NAAQS), whether it would protect

against violations of Prevention of

Significant Deterioration (PSD)

increments, and whether it would

violate any other provisions of the Act.

II. Analysis of State Submittal

A. Size of Tradable Units

Under Michigan’s program, ERCs are

denominated in tons, but not

necessarily in whole tons. While the

rule itself does not specify the fractions

that can be used, MDEQ staff indicate

that credits may be denominated in

tenths of tons, if such precision is

merited by the measurement accuracy of

the quantification protocol. While it

would be preferable from EPA’s

perspective to denominate all credits in

whole tons, Michigan’s procedure is

acceptable. No procedure is identified

in the rule for rounding the amount of

credits generated or the amount used.

The EPA would suggest specifying that

ERC users round up to the nearest unit

when determining the amount of ERCs

needed, and ERC generators must round

down to the nearest unit when

determining the amount of ERCs

generated. Although it is not specified

in the rule, MDEQ staff have indicated

that they will require use of a similar

procedure.

B. Benefit Sharing With the

Environment

Michigan appropriately requires that

generators of ERCs retire 10 percent of

the ERCs generated as an environmental

benefit when providing notice of

generation.

C. Trading of Oxides of Nitrogen

While the intent of the trading rules

is clearly to allow trading of NOX, the

ozone precursor, as well as NO2, the

criteria pollutant, Rule 1203(2) indicates

that the program ‘‘applies only to

volatile organic compounds as a class of

compounds and all criteria pollutants,

except ozone.’’ In order to allow for

trading of NOX as well as NO2, this

statement must be changed to add NOX

to the list of compounds eligible for

trading.

D. Claiming Ownership of ERCs

Michigan’s rule does not include a

discussion specifying which parties are

eligible to generate credits in situations

where more than one party has a

potential claim. This issue is significant

because the rights to credits generated

by a particular credit generation strategy

will be unclear in some cases. For

instance, a manufacturer of a device that

reduces automobile emissions might

attempt to register credits based on the

sale of the device within Michigan.

However, an owner of a vehicle fleet

might also attempt to register credits

based on his or her installation of those

same devices within the fleet.

Registration of both sets of credits

would double count the emission

reductions, leading to excess credits

being generated.

MDEQ must address the issue of

ownership claims in its procedures for

approving notices of credit generation.

Guidance will be forthcoming on this

issue from EPA.

E. ERC Generation Issues

1. ERC Generation Baseline

Rule 1207 explains how the baseline

from which a source may generate

credits is determined. Calculations must

be based on the source’s emissions over

the most recent 2 years or most recent

2 ozone seasons, unless it can be shown

that another time period is more

representative of actual emissions.

Measurement must be based on

continuous emission monitoring (CEM)

or parametric monitoring if required by

applicable requirement or if practical

and reasonable; otherwise, measurement

for stationary sources will be based on

emission monitoring methods specified

by applicable requirement or approved

by MDEQ. The baseline is calculated

using an equation that includes the

lower of the actual or allowable

emission rate, a capacity utilization

factor representative of the historical

production rate of the source, and the

average actual operating hours of the

source.

The generation baseline is determined

by the emissions that occurred prior to

‘‘the initiation of an activity to reduce

emissions for the purposes of creating

emission reduction credits.’’ 1 (Rule

1207(1)) However, Michigan’s rule also
48974 Federal Register / Vol. 62, No. 181 / Thursday, September 18, 1997 / Proposed Rules

requires that reductions which generate

ERCs be ‘‘surplus,’’ defined as ‘‘those

emission reductions made below an

established source baseline which are

not required in the state implementation

plan, any applicable federal

implementation plan, any applicable

attainment demonstration, reasonable

further progress plan, or maintenance

plan and which are not mandated by

any applicable requirement.’’ Thus, the

generation baseline must be adjusted to

reflect new requirements.

The rules do not set any limit on the

age of emissions data that can be used

to establish a generation baseline,

although the requirement to show that

other data is more representative when

not using the previous 2 years as a

baseline should limit, in practice, how

far back a source could go. The EPA

strongly urges MDEQ to reject the use of

any baseline calculated based on data

from any date prior to November 15,

1990.

2. ERC Generation Start Date

Michigan’s emissions trading rules

allow credits to be generated from

actions dating back to 1991, accruing

starting in 1991. Allowing use of credits

generated prior to enactment of the

program has potentially troublesome

aspects. Credits generated prior to

enactment of the rule could flood the

market, creating widespread use of

cheap credits and discouraging the

generation of new credits. With

generation of new credits suppressed

and abundant old credits in use, total

emissions could exceed levels that

would have occurred in the absence of

the trading program.

However, several aspects of

Michigan’s program provide some

protection against this potential

problem. First, credits generated prior to

enactment of the rules are discounted 50

percent, rather than the usual 10

percent. Second, credits last only 5

years beyond the time that the

reductions occur. Therefore, reductions

generated in the early 1990s will have

a very limited life. Finally, credits

generated from early reductions must be

registered within 1 year of enactment—

by March 17, 1997, a date which has

already passed, allowing the State to

determine immediately the total number

of pre-enactment credits that are

registered and in circulation.

While EPA would prefer that the

program not allow credits to be

generated prior to enactment of the

trading rule, and that credits not be

generated from actions taken more than

1 year prior to enactment, it is willing

to accept Michigan’s approach,

contingent upon receipt from the State

of the following: an accounting of the

number of pre-enactment credits

generated and the remaining life of

these credits, and an analysis which

demonstrates to EPA’s satisfaction that

the potential use of these credits is

unlikely to have a detrimental effect on

attainment or maintenance of the

NAAQS or on any other requirement of

the Clean Air Act.

3. Credit Generation Through Activity

Level Reductions

Michigan’s program allows stationary

sources to generate ERCs through

curtailing production, provided that the

notice of generation is submitted prior

to the curtailment of operations. It also

allows sources which are shut down to

generate ERCs for 5 years following the

shutdown. Therefore, given the 5 year

limit on ERC life, shutdown credits

could be used a maximum of 10 years

after the shutdown occurs.

Maintenance and attainment plans

often rely upon emission reductions

caused by production decreases at some

sources (i.e., shutdowns and

curtailments) to help counteract

increased emissions caused by higher

levels of production at sources subject

to emission rate limits, where emission

increases are allowed to occur when net

production increases. Under Michigan’s

open-market trading system, however,

while increases in production at sources

with emission rate limits will still lead

to emissions increases, production

decreases will not generate offsetting

emissions reductions, since the

reductions resulting from production

decreases can generate ERCs that are

used to allow higher emissions

elsewhere. Therefore, overall emissions

may increase without a net increase in

production under the trading program;

this is clearly a detriment to the

environment.

Another problem potentially created

by use of shutdown credits is that loadshifting could occur among small

sources such as gas stations or print

shops. Such sources could reduce

emissions and generate ERCs by

shutting down or reducing production;

however, the economic activity of these

sources will likely be picked up by new

or existing sources in the same areas,

replacing the emissions for which ERCs

were just given. Since emissions created

by increased operating rates by other

existing sources are not limited, and

since new small sources are not subject

to an offset or cap requirement, the net

effect of allowing shutdowns and

curtailments to generate ERCs would be

to increase overall emissions.

Michigan’s rule 1207(5) provides

protection against load-shifting among

sources under common ownership or

control. However, it does not protect

against load shifting among sources

under different ownership or control.

Moreover, allowing generation of

ERCs from shutdowns and curtailments

could lead to generation of ERCs from

emissions reductions already relied

upon in an attainment or maintenance

plan, as mentioned previously.

Attainment and maintenance plans

represent an effort to prevent future

violations of the NAAQS by projecting

emissions increases that will result from

economic growth, factoring in the net of

shutdowns and curtailments, and

insuring that emissions controls will

constrain emissions adequately despite

net economic growth.

In order to correct this deficiency,

Michigan can pursue one of three

options. The simplest and best option,

from EPA’s perspective, is to prohibit

the generation of ERCs from shutdowns

and curtailments. A second option is to

prohibit the use of shutdown credits for

compliance with federal requirements

in any area that has or needs an

approved attainment or maintenance

demonstration. A third option is to

prohibit the use of shutdown credits for

compliance with federal requirements

in any area that needs but lacks an

approved attainment or maintenance

demonstration, while demonstrating to

EPA’s satisfaction that none of

Michigan’s approved maintenance and

attainment plans will be compromised

by the use of these credits. To make this

demonstration, it will be necessary to

show that these plans do not rely in any

way on emission reductions created by

source retirements or curtailments, and

that there is not an unacceptable level

of risk that these credits would interfere

with future attainment or maintenance

requirements. If it decides to pursue this

option, MDEQ must also seek public

comment on this form of credit

generation.

4. Overcompliance With an Alternative

RACT Determination

Emissions sources which cannot

comply with a RACT limit because it

would not be technically feasible or

economically reasonable can receive an

alternate RACT determination. Serious

equity concerns would be raised if such

sources were allowed to generate credits

by reducing emissions below their

alternative emission limit, while other

sources were required to base credit

generation on their RACT limit.

Therefore, Michigan’s rule appropriately

disallows the use of an alternative

emission limit above an applicable

RACT limit for the purpose of setting a

baseline. A source that has an
Federal Register / Vol. 62, No. 181 / Thursday, September 18, 1997 / Proposed Rules 48975

alternative emission limit can generate

credits only by reducing emissions

below the RACT limit.

F. ERC Emission Reduction

Quantification Protocols

The credibility of an emission trading

program depends on the ability of

sources and regulatory agencies to judge

the value of the currency—in

Michigan’s case, the emissions

reduction credits— used in the program.

Thus, it is vital that the criteria used for

judging the adequacy of emissions

quantification protocols be clearly

understood by all parties. Moreover, it

is important that sources understand the

elements of quantifying emissions

reductions in an emission trading

program (i.e., the need to establish a

baseline, the need to ensure that

reductions are not overestimated) that

do not arise when quantifying emissions

simply for the purpose of demonstrating

compliance. In a program where no

agency pre-certification of the validity

of credits takes place, it is vital that the

basis for an enforcement action against

generators and users of bad credits be

clearly delineated. Furthermore, while

EPA does not wish to delay the use of

emission trading for sources in

categories that do not have EPAapproved quantification protocols, a

source in a category that already has an

EPA-approved protocol must use it,

unless it gains EPA approval for use of

an equally-good protocol.

Michigan’s emission trading program

already contains the requirement that

emission reduction credits be real,

surplus, enforceable, permanent, and

quantifiable. In order to ensure that

these criteria are met, Michigan must

take two steps; first, incorporate into the

emissions trading rules a requirement

that sources in categories without EPAapproved protocols must follow a set of

EPA-approved protocol development

criteria that have been provided to

MDEQ (Letter from David Kee to Dennis

Drake, July 1, 1997) when developing

protocols for their source category, and

second, commit in the SIP to require use

of existing and future EPA-approved

protocols for quantifying emission

reductions at applicable sources, and to

allow sources to deviate from an EPA

protocol only if they first get the

approval of EPA.

G. Potential Uses of ERCs

1. RACT Compliance Alternative

The Michigan rule appropriately

allows ERCs to be used as a RACT

compliance alternative. The EPA

recommends that in conjunction with

its trading program, Michigan consider

halting alternative RACT

determinations/variances, given that

ERCs provide an alternative means of

compliance for sources that cannot

otherwise meet RACT. At a minimum,

the State should consider the cost and

availability of ERCs when making

economic feasibility-based alternative

RACT determinations.

2. New Source Review Requirements

a. Synthetic minor sources: A

‘‘synthetic minor’’ source is one that has

the potential to emit at major source

levels defined by the New Source

Review (NSR) program, but whose

emissions are artificially limited by its

permit to levels below those that would

subject it to the major source

requirements of NSR. Michigan’s Rule

1204(6) allows a synthetic minor source

to use ERCs to make a temporary

increase in emissions that would bring

its total emissions above the major

source threshold, without making the

source subject to the requirements that

would normally apply to sources which

exceed the threshold, such as New

Source Review and Title V. This

increase must not exceed major

modification levels as specified in 40

CFR 52.21; ‘‘temporary increase in

emissions’’ is defined in Rule 1201(ee)

as an increase ‘‘which occurs for less

than 12 months and which does not

occur more than once in a 24 month

period.’’

This provision is unacceptable

because of its potentially serious

environmental consequences. It would

allow sources that would otherwise be

required to undergo New Source Review

to use emission reduction credits to

avoid this requirement. For example,

assume that a synthetic minor source

with a potential to emit of 150 tons per

year (tpy) has agreed to a limit of 90

tons per year in order to avoid major

source status. Assume that this source

wishes to increase its emissions to 117

tpy. Under the Michigan program, the

source could purchase 27 tons of ERCs

to compensate for the increase. The 27

tons would have been generated by a

source or sources which reduced

emissions by 30 tons, leading to the

retirement of 10 percent of these

reductions for an environmental benefit.

Thus, the environment would see a net

improvement of 3 tons from the trade.

In the absence of the trading program,

however, a 90 tpy synthetic minor

source that increases its production

above 100 tpy would undergo New

Source Review; as a result, the source

would be required to comply with the

provisions of Best Achievable Control

Technology (BACT) or Lowest

Achievable Emission Rate (LAER),

which would frequently result in a

reduction of the source’s total emissions

by an amount substantially larger than

3 tons. This loss of reductions means

that the synthetic minor provisions of

the Michigan rule could, in many cases,

result in a significant loss of

environmental benefit. In summary,

emissions would be higher under the

synthetic minor program than they

would be without it, since the emission

reductions required by BACT or LAER

will usually be greater than the 10

percent reduction for the environment

that a trading program would achieve.

The EPA’s position is that ERCs may

be used to comply with, but not to

avoid, Clean Air Act requirements. This

policy applies to New Source Review

and Title V permit requirements. By

allowing this use of ERCs to avoid a

requirement, even temporarily, the

trading rule allows emissions to be

higher than they would be otherwise.

There is also an important legal basis

for finding this provision to be deficient.

According to 40 CFR 52.21(r)(4): ‘‘At

such time that a particular source or

modification becomes a major stationary

source or major modification solely by

virtue of a relaxation in any enforceable

limitation which was established after

August 7, 1980, on the capacity of the

source or modification otherwise to emit

a pollutant, such as a restriction on

hours of operation, then the

requirements or paragraphs (j) through

(s) of this section shall apply to the

source or modification as though

construction had not yet commenced on

the source or modification.’’

This deficiency can be corrected by

removing Rule 1204(6) from the SIP

submittal. In the absence of Rule

1204(6), synthetic minor sources in

Michigan will be prevented from using

trading to avoid requirements, but they

will still be allowed to use trading to

compensate for any emissions increases

that would not trigger new requirements

in the absence of the trading program.

b. Compliance with NSR and PSD

Emission Limits: Michigan’s rule

prohibits the use of credits in place of

installing equipment determined to

constitute BACT or LAER requirements

under the NSR program. However,

credits can be used for compliance with

the BACT or LAER emissions rate when

the required equipment has been

installed and is being properly

maintained, but the emissions rate is

nonetheless being exceeded. This

provision will allow a source that

exceeds permitted emissions, despite

installing and properly maintaining the

required equipment, to remain in

compliance until permit limits are

revised to reflect the emission
48976 Federal Register / Vol. 62, No. 181 / Thursday, September 18, 1997 / Proposed Rules

reductions actually achieved by the

required technology. The EPA believes

that this is an appropriate use of credits,

and suggests that the rule could be

strengthened by specifying what steps

will be taken by the State to limit the

amount of time the source remains out

of compliance with BACT or LAER.

c. Offsets and Netting: Michigan

allows use of credits for offsets or

netting at new or modified sources, with

the following restrictions:

i. New sources which use ERCs for

offsets must cover a minimum of 2.5

years of operation, and modified sources

must cover the period of time from

issuance of an NSR permit to the date

of issuance or renewal of an operating

permit.

ii. For renewal of an operating permit,

the source must obtain ERCs covering 5

years, or the term of the operating

permit.

iii. The NSR permit must contain an

enforceable commitment that the source

may not receive an operating permit or

operating permit renewal unless the

operating permit contains an

enforceable condition requiring the

source to obtain offsets for 5 years or the

period of time for which the permit is

issued.

iv. ERCs used as offsets or for netting

must be generated in the

‘‘nonattainment area where the new or

modified source is located or an

adjacent nonattainment area of equal or

higher classification or other area that

contributes to the exceedance of a

national ambient air quality standard in

the nonattainment area where the new

or modified source is located.’’ Also, use

must be in accordance with Clean Air

Act Section 182 and Michigan rule R

336.1220 (the State’s ‘‘major offset

rule’’).

Section 182 of the Clean Air Act

requires that offsets obtained from a

different nonattainment area must be

both from the same or higher

classification and must contribute to a

NAAQS exceedance in the relevant

nonattainment area. This contraction in

the rules appears to be an oversight;

Rule 1211(3)(a) must be modified to

reflect the language of Section 182 of the

Clean Air Act.

Michigan’s rule would allow ERCs to

be banked for the purpose of netting. As

stated in the technical support to the

SIP, ‘‘the reductions are still required to

be made at the same stationary source

and must be contemporaneous and of

sufficient quantity to qualify under NSR

regulations.’’ Under the current

definition of netting (40 CFR 52.21),

emissions increases and decreases

considered for the purpose of netting

must be ‘‘contemporaneous,’’ defined as

occurring within a period beginning 5

years before the date that construction is

expected to commence on the proposed

modification and ending when the

increase from the modification occurs.

Since ERCs expire 5 years after being

generated under the Michigan rule, the

contemporaneous requirement would

not be violated under Michigan’s rule.

For both offsets and netting, the

technical support to the trading rule SIP

submission indicates that MDEQ’s

intention is to allow ERCs to be used

only in a manner consistent with New

Source Review requirements. This

intention must be stated explicitly as an

enforceable requirement of the rules.

3. NESHAP and NSPS Requirements

Michigan’s rule appropriately

prohibits the use of credits to comply

with National Emission Standards for

Hazardous Air Pollutants (NESHAP)

and New Source Performance Standard

(NSPS) emission limitations or work

practice standards.

4. Certain Mobile Source Standards

Michigan’s rule appropriately

prohibits the use of credits to comply

with ‘‘Federally mandated mobile

source requirements.’’

5. Title IV Acid Rain Requirements

Michigan’s rule appropriately

prohibits Title IV sources that

participate in the Title IV acid rain capand-trade program from using SO2 and

NOX credits generated under Michigan’s

trading rule to fulfill Title IV

requirements.

H. ERC Use Requirements

1. Ownership of Credits Prior to Use

In open market trading programs, it is

vital that sources that use credits be

required to own the credits prior to use.

This requirement ensures that sources

will not be able to use trading to avoid

the need to maintain a compliance

margin by simply using credits to ‘‘true

up’’ after having exceeded their

emission limits. Clearly, it is the intent

of the Michigan program to require

ownership of credits prior to use—Rule

1208(7) requires that emission

reductions be generated prior to being

used or traded; Rule 1214(1) requires a

user source to submit a Notice of Use to

MDEQ (which includes a copy of the

Notice of Generation for the credits

being used); the price paid for credits

must be in the Notice of Use or

submitted separately to the State within

seven business days of the use or trade;

and Rule 1216(1) places liability upon

the source for assuring compliance with

all applicable requirements. However,

the rules do not contain a

straightforward requirement that credits

must be owned before use, nor do they

specify that failure to hold sufficient

credits is a violation. These deficiencies

must be corrected in the rules.

2. Use Baseline

A trading program must specify the

baseline for users of emissions

reduction credits, so that users know

how to calculate the number of credits

that will be needed for compliance.

While Michigan’s intention seems to be

that the baseline will be established by

allowable emissions—that is, the

maximum level of emissions that would

have occurred had the source met its

compliance obligations without the use

of emission reduction credits—the rules

do not make this intention explicit. The

rules must include a specific definition

of the user source baseline.

3. Temporal Requirements

The Michigan rule appropriately

prohibits use during the ozone season of

NOX and VOC ERCs generated outside

of the ozone season. The rule allows

ERCs generated during the ozone season

to be used during the entire year. This

provision is appropriate because it

could encourage sources to shift

emissions of ozone precursors from the

ozone season to the winter months,

creating environmental benefits.

4. Geographic Requirements

Emission trading involves shifting of

emissions from one area to another. An

emission trading program requires

restrictions on the geographic scope of

trading in order to ensure that localized

air quality problems are not created. In

particular, a trading program must

ensure that emission reductions

generated in areas of clean air are not

used to allow emissions increases in

areas of poor air quality. The nature of

the geographic restrictions needed

depends on the transport characteristics

of the pollutant being traded. Pollutants

that affect air quality long distances

from the location of their emission can

potentially be traded over a large area,

while pollutants that affect air quality in

a small area should not be traded

beyond that area.

The Michigan rule includes some

provisions to discourage the shifting of

emissions from low pollution areas to

areas with higher pollution. Under the

Michigan rule, trading can occur within

the same or a contiguous attainment

area, between contiguous nonattainment

areas of the same classification, or from

a nonattainment area to an attainment
Federal Register / Vol. 62, No. 181 / Thursday, September 18, 1997 / Proposed Rules 48977

area anywhere else in the state, on a 1:1

ratio. ERCs used in a nonattainment area

but generated in an attainment area or

a nonattainment area of lower

classification elsewhere in the state

must be discounted by the ratios

specified for the higher classification

area in section 182 of the Act, in

addition to the 10 percent discount for

the environment. For instance, there

would be a total 25 percent discount for

a trade from an attainment area to a

moderate nonattainment area (10

percent for the environment, 15 percent

for the geographic shift). The rule does

not specifically address the issue of

trades between noncontiguous areas of

the same classification.

Despite these provisions, the current

geographic restrictions in Michigan’s

SIP are not sufficient to ensure that

ERCs will be used in a manner that

would maintain or improve air quality.

EPA is concerned that sources in

attainment areas could generate large

numbers of ERCs by reducing emissions

from an uncontrolled baseline. These

ERCs could then be used to allow for

emissions increases or to forego

reductions in nonattainment and

maintenance areas where emission

controls are required and where

reductions are necessary to achieve

attainment. Moreover, it is unlikely that

these trades would be balanced by an

equal volume of trades in the opposite

direction, since sources in attainment

areas are subject to fewer requirements

and would have less need of ERCs than

sources located in nonattainment areas.

For example, Michigan has some VOC

RACT rules which apply only in

nonattainment and maintenance areas,

or that have lower applicability

thresholds in those areas. Sources

subject to these requirements could

potentially use VOC credits that were

generated outside the area from an

uncontrolled baseline. This would

result in a net decrease in air quality,

since credits would be shifted into the

more highly polluted area where the

requirements applied. For these reasons,

trading between attainment and

nonattainment areas may not balance

out, despite the required discounts for

attainment area ERCs used in

nonattainment areas.

Trading between nonattainment or

maintenance areas and attainment areas

could be acceptable in cases where the

State provides a demonstration that

pollution emitted in an attainment area

affects a nonattainment or maintenance

area. EPA feels that it would be difficult

to demonstrate that emissions from the

entire State affect air quality in

Michigan’s nonattainment areas for

ozone or for the other criteria pollutants.

However, EPA agrees with Michigan

that a more regional approach to

protecting air quality is needed.

a. Geographic Restrictions on Trading

of Ozone Precursors: EPA’s proposal for

an interim implementation policy (IIP)

for a potential new ozone standard (61

FR 65752–65762, December 13, 1996)

includes an example of a possible

regional approach to trading of VOCs

and NOX. This proposal suggests that

nonattainment areas be allowed to take

credit for reductions occurring within

an expanded area extending 100 km

from the nonattainment area boundary

for VOCs and 200 km from the

nonattainment area boundary for NOX.

While the IIP proposal would allow this

expanded geographic area to be used for

the purpose of meeting post-1996 and

post-1999 rate-of-progress requirements,

EPA believes that the same geographic

limits could be adopted to fit the trading

allowed in the Michigan rule. Revising

the Michigan rule to allow trading and

averaging of VOC and NOX emissions

within these geographic limits would

enable sources to escape the current

restrictions caused by attainment and

nonattainment area designations, while

also ensuring that the air quality in the

area where trading occurs will be, on

average, improved. Making this revision

would eliminate EPA’s transport-related

approvability issues for NOX and VOCs.

These geographic limits, of course, need

apply only to sources which use trading

to meet Federal, or SIP, requirements.

b. Restrictions on Trading of Criteria

Pollutants other than Ozone: Because of

the highly localized impacts that can be

created by emissions of the criteria

pollutants other than ozone, all trades

and averaging involving above de

minimus levels of these pollutants must

be evaluated for their localized impacts.

For these pollutants, trading between an

attainment area and a nonattainment or

maintenance area is unacceptable, and

trading above de minimus levels even

within areas is acceptable only if an

evaluation indicates that the trade will

not cause an air quality problem.

Trading of emissions of sulfur

dioxide, nitrogen dioxide, particulate

matter, carbon monoxide and lead, as

allowed under Michigan’s program,

creates concerns that do not arise in the

trading of ozone precursor emissions.

Trading of criteria pollutants other than

ozone raises questions about whether

the trading program would be

adequately protective of the National

Ambient Air Quality Standards

(NAAQS), given that stationary source

emissions of these pollutants can create

highly localized air quality problems

(CO and fine particulates can be either

an area-wide or a localized problem).

Moreover, a shift in emissions of these

pollutants from, for instance, a tall stack

to a short stack can make a major

difference in air quality. Therefore, for

criteria pollutants other than ozone,

special protections are needed to ensure

that use of ERCs does not lead to

NAAQS violations. Whereas attainment

and maintenance plans for ozone focus

on reducing the region-wide emissions

of ozone precursors, for the other

criteria pollutants, the specific location

of the emissions is of vital importance.

Rule 1204(1) provides some protection

against violations of the NAAQS or of

attainment or maintenance plans,

stating that:

emission averaging and the use of emission

reduction credits in an attainment area shall

not cause a violation of a national ambient

air quality standard, allotted prevention of

significant deterioration increments, or an

applicable attainment area maintenance plan.

Emission averaging and the use of emission

reduction credits in a nonattainment area

shall result in emission reductions consistent

with the requirements for reasonable further

progress for the nonattainment area and the

attainment demonstration and maintenance

plan specified in the state implementation

plan.

Michigan has developed procedures

to ensure proper State review of ERC

uses and emission averaging of criteria

pollutants other than ozone that could

cause concerns, and to ensure that

modeling is done to predict the air

quality impact of potentially

problematic ERC uses and averaging.

MDEQ’s procedures for review of

notices of use and emission averaging,

containing adequate modeling

requirements, must be submitted as part

of the SIP to provide added protection

against potential adverse environmental

impacts created by trading of criteria

pollutants other than ozone.

5. Intersector Trading

Michigan’s rule specifies that ERC

trading between mobile and stationary

sources is allowed. This provision is

appropriate, since it increases the

number of options for trading.

6. Interpollutant Trading

The Michigan rule appropriately

prohibits the use of ERCs for one criteria

pollutant or ozone precursor to allow for

increases in a different criteria pollutant

or ozone precursor, ‘‘except for

interstate trading where the use is

consistent with a regional ozone control

strategy and the state implementation

plan.’’

I. Notice and Recordkeeping

Requirements

The Michigan rule requires that

notices of generation or emission
48978 Federal Register / Vol. 62, No. 181 / Thursday, September 18, 1997 / Proposed Rules

averaging and notices of use and their

supporting documentation accompany

ERC trades, and establishes

responsibility with the ERC users and

generators, or emission averagers, to

store and maintain this information.

Michigan requires that copies of the

notices and their supporting

documentation be stored on site no less

than five calendar years after the date of

expiration of the emission averaging

plan or after the date the ERC is used,

expired, or retired. These recordkeeping

requirements are appropriate.

1. Notice of ERC Generation

The Michigan rule requires sources to

file a Notice of Intent to Generate

credits. For emission reductions

generated between January 1, 1991, and

the effective date of the rule, sources

have 1 year from the effective date of the

rule to file such Notices. For postenactment reductions, there is no

specified filing deadline, since credit

life is limited to 5 years after the year

of generation. The rule appropriately

requires that the Notice of Generation be

included in the Notice of Use.

The EPA suggests that Michigan

require notification of the relevant

Metropolitan Planning Organization in

the event of mobile source generation

activities, and that the Notice of Intent

to Generate include a certification that

the protocol used to quantify reductions

was acceptable.

MDEQ staff have developed a system

for tracking ERCs by serial number.

While the system assigns serial numbers

for each batch of ERCs generated, not for

each ton (as EPA would prefer), the

Michigan system seems adequate to

enable accurate tracking in the registry

of each credit throughout its life.

2. Notice of Intent to Use ERCs

Michigan requires that sources submit

to the State a Notice of Intent to Use.

The State then has 30 days to make a

completeness determination of the

notice. The notice requires a description

of the ‘‘source, process, or process

equipment’’ where the credits will be

applied. The EPA recommends that, to

simplify compliance determination, the

source, process, or process equipment

be identified by permit or identification

number.

The party using credits is required to

include the price paid for the credits,

either within the notice or by separately

notifying the State within seven

business days of the use or trade. The

Michigan rule does not require the user

to notify the State when credits are

used. However, the Notice of Intent to

Use is required to include the effective

dates of use of the emission credits

(1214(1)(h)). Any methods used and

operational changes made to

accommodate the use of credits become

legally enforceable upon the effective

date of the completeness notice issued

by the State. Furthermore, the rule

requires the State to create an emission

trading registry for ‘‘recording and

tracking emission averaging and the use

and trading of emission reduction

credits.’’ The EPA feels that these

provisions are adequate.

Michigan also requires that notices of

intent to use include identification of

‘‘the methods and procedures used to

quantify emissions and to determine

compliance with all applicable

requirements’’ and ‘‘calculations

demonstrating compliance through the

use of emission reduction credits.’’

3. Public Availability of Information

EPA policy is that any information

required to determine emissions and to

judge the quality of an ERC must be

publicly available and therefore not

designated confidential. Sources that

wish to use ERCs must have access to

this information, as must the general

public. Michigan Rule 1213(5) allows

portions of information in notices of

ERC use or generation to be determined

to be confidential under sections 11(2)

and (3) of Act No. 451 of the Michigan

Public Acts of 1994. However, Act No.

451 specifies in part that ‘‘data on the

quantity, composition, or quality of

emissions from any source’’ may not be

held confidential, and that ‘‘data on the

amount and nature of air contaminants

emitted from a source shall be available

to the public.’’ EPA feels that these

provisions in Act No. 451, as cited in

the trading rule, adequately guarantee

public access to the information needed

to determine emissions from sources

participating in trading and to evaluate

the quality of ERCs.

MDEQ must also ensure access to

information collected by sources as part

of an environmental self-audit that

demonstrated erroneous or willful

generation or use of invalid credits. As

discussed in the following section, these

sources may be eligible for a 30-day

reconciliation period under certain

circumstances; the state must be able to

review this information to verify that

such an opportunity is appropriate.

J. Enforcement and Compliance

Provisions

1. Compliance Certification

If either a generator or user of credits

under the Michigan rule self-reports to

the State errors in calculations,

methods, etc. resulting in the generation

or use of invalid credits, a reconciliation

period of up to 30 days is generally

permitted without penalty for the party

at fault to purchase valid credits or to

revise its planning to compensate for its

errors. This reconciliation period is

available to those who provide a notice

within 30 days of discovery that

includes an explanation that the

circumstances causing the credits to be

invalid have not occurred before, and a

description of corrective steps that will

be taken to ensure that the error does

not occur again.

The EPA would prefer that no

reconciliation period be granted, or that

some lesser penalty be identified for

those sources that self-report mistakes

than those who do not; allowing a

reconciliation period without any

penalty lessens the incentive for

generators and users of credits to ensure

that credits are valid. However, this

provision of Michigan’s rule is

acceptable because it limits the relief

provided by the reconciliation period; it

is available only to those sources selfreporting errors. In addition, granting of

a reconciliation period does not bring a

source into compliance with the

underlying requirement being violated,

leaving them subject to enforcement.

2. Violations and Penalties

Generators of credits which are

discovered by the State to be invalid

must purchase three times the amount

of the invalid credits, which are then

donated to the environment. The EPA

supports the use of this type of penalty

and the donation of the credits to the

environment, and also recommends that

provisions which address the

circumstance in which a user knowingly

uses invalid credits be added to the rule.

Donation of credits to the

environment under this subrule does

not exclude a party from other penalties:

‘‘A donation of emission reduction

credits under this subrule shall not be

considered to be a civil or criminal

penalty * * * a person may also be

subject to civil and criminal

enforcement actions, fines, and

imprisonment as provided under the

act.’’ (1216(3))

3. Assignment of Regulatory Liability

In an open market program where

credits are certified, the user can rely on

the State’s evaluation of credit quality

(which is in turn based on an evaluation

of the accuracy and validity of

quantification methods). Without this

certification, it falls upon the user to

evaluate the quality of quantification

techniques when determining how

many credits are needed for compliance

purposes, and upon the market to create
Federal Register / Vol. 62, No. 181 / Thursday, September 18, 1997 / Proposed Rules 48979

2The pollutants are mercury, alkylated lead

compounds, cadmium, arsenic, chromium,

polychlorinated biphenyls, chlordane,

octachlorostyrene, toxaphene, hexachlorobenzene,

benzo(a)pyrene, DDT and its metabolites, 2,3,7,8-

tetrachlorodibenzo-p-dioxin, and 2,3,7,8-

tetrachlorodibenzofuran.

financial value for credits based on their

quality.

The Michigan rule requires that a

credit be registered before use, but not

certified; the State performs only a

completeness determination of the

Notice of Generation. The EPA strongly

supports Rule 1216(1), which specifies

that both the generator and user are held

responsible for the generation of invalid

credits. This feature of Michigan’s rule

provides an added incentive to the user

to conduct the checks of credit validity

that are not performed due to the

absence of a credit certification process

in the rule.

This open market program design

places considerable importance on the

quality of quantification protocols, so

that accurate determinations of credit

value can be made by potential users.

For this reason, the trading rules should

include the provisions discussed in

Section II (F) of this action requiring

that Michigan follow EPA-approved

protocols and protocol development

criteria.

K. Effect of Trading on Hazardous Air

Pollutant Emissions

The Michigan rule 1204(3) prohibits

any use of ERCs or averaging that would

result in an increase in the maximum

hourly emission rate of a toxic air

contaminant from an existing stationary

source or area source, unless it can be

demonstrated to the MDEQ that the

increased rate will not cause or

exacerbate the exceedance of a toxic air

contaminant screening level based on

the methodology in State rule

R336.1230. This provision places the

burden on sources to determine whether

increased emissions of toxic air

contaminants will result from emission

averaging or ERC use. In addition, the

Michigan rule allows the MDEQ to

prohibit any use of credits or averaging

that would result in an increase in any

of a list of 14 toxic, persistent

pollutants, if it determines that the

increase would be ‘‘inconsistent with

the act or protection of public health,

safety or welfare.’’ 2 It would be up to

the MDEQ to determine when such an

inconsistency arose.

The Michigan approach is

considerably different from the one

favored by EPA. The EPA’s favored

approach would not restrict increases in

maximum hourly emissions of toxic

pollutants, or restrict total mass

increases of toxic, persistent pollutants,

but rather would require sources that

participate in open market trading to

disclose all estimated or measured

negative effects of credit trading on

emissions of the hazardous air

pollutants (HAPs) listed in section 112

of the Act.

Many VOCs are listed as hazardous

air pollutants (HAPs) in section 112 of

the Act, and emissions of particulate

matter may include hazardous air

pollutants. Emissions of these toxic

pollutants are often reduced

incidentally by compliance with VOC or

particulate matter limitations.

Accordingly, ERC generation could have

the effect of lowering toxic emissions

from a facility. However, trading could

also result in higher levels of toxic

emissions; if a facility that emits HAPs

uses ERCs to satisfy a VOC or

particulate matter requirement, the

facility’s emissions of HAPs could be

higher than if the facility had installed

controls. This would be an example of

a foregone decrease in toxics emissions.

Whether or not emissions of toxics are

increased or decreased at a given source

due to trading or averaging, Federal and

State air toxics standards must continue

to be achieved.

EPA believes that citizens have the

right to know if emissions trading may

adversely affect the emissions of HAPs

from a nearby facility, and therefore

have a possible impact on public health.

Disclosure of impacts on toxics

emissions would also assist the State in

determining if credit generation or use

would trigger any air toxics program

requirements at a particular facility and

would allow identification and potential

resolution of environmental justice

issues as required in Executive Order

12898. Therefore, EPA requires that a

State that implements an open market

trading program must, at a minimum,

require facilities to disclose the effect of

open market emissions trading on HAP

emissions. Disclosure must, at a

minimum, follow the Toxics Release

Inventory reporting requirements. States

must also examine the effects of the

open market trading program on HAP

emissions as part of the periodic

program performance audit.

Michigan’s Rule 1217(1)(c) requires

that audits address ‘‘whether the

program has caused any localized

adverse effects to the public health,

safety, or welfare or to the

environment.’’ We interpret this

provision to require examination of the

effects of trading on HAPs, as well as on

air quality impacts related to the criteria

pollutants. However, Michigan’s

program lacks a requirement that the

effects of trades also be disclosed to the

public at the time of registration of use

of credits. Michigan must include this

requirement in its SIP.

L. Interstate Trading

In order to accommodate a more

regional approach to air quality

management, it must be recognized that

traditional boundaries, such as state

lines, do not necessarily accurately

reflect the geographic areas that are

most relevant for emission trading

purposes. For this reason, EPA agrees

with Michigan’s intent to allow

interstate emissions trading.

However, allowing the exchange of

credits between two states that may

have considerably different air quality

management programs raises a variety of

issues that must be addressed.

Safeguards must prevent multiple uses

of the same ERC unit, ensure

enforceability of credits generated out of

state, and require that States properly

account for emission shifts in

attainment planning and Reasonable

Further Progress milestone

demonstrations. Michigan must provide

a federally enforceable commitment that

it will not allow the use of credits from

other states without first entering into

an adequate Memorandum of

Understanding (MOU) with that State.

Michigan may either submit an MOU

that addresses these concerns to EPA for

approval prior to undertaking trades

with another State, or include in its SIP

revision a list of items that the State

commits to address in each future

interstate MOU. With the latter option,

a future MOU need not undergo EPA

review and approval, but the SIP must

ensure that any subsequent MOU

addresses the consistency between key

trading rule elements in each State,

including:

1. The ERC identification system;

2. Sharing of required Notices and a

compatible credit tracking system;

3. Geographic limitations (for

instance, a VOC trade between Michigan

and Colorado should not be allowed);

4. Credit lifetimes and expiration

dates;

5. Record retention requirements;

6. The list of acceptable credit

generation and use activities;

7. Consistent treatment of credit

generation and use protocols;

8. Credit generation base case

definitions; and

9. Ozone season definition and any

other temporal requirements.

Additionally, an MOU must contain a

clear statement that each State will

enforce emission limitations under its

jurisdiction and a procedure for

incorporating emission shifts caused by

trading in each State’s attainment and
48980 Federal Register / Vol. 62, No. 181 / Thursday, September 18, 1997 / Proposed Rules

maintenance plans and demonstrations,

RFP plans and demonstrations. The

MOU must make a determination on

which State’s laws determine whether a

credit is valid. EPA agrees with MDEQ

that any out-of-State credit must comply

with the user State’s requirements.

M. Protection of Class I Areas

The EPA has a policy of providing

special protection for Class I areas

(pristine environments such as

international parks and large national

parks and wilderness areas), as required

under sections 160 through 169 of the

Clean Air Act. This policy includes

keeping Federal Land Managers

informed of activities that could affect

air quality in Class I areas. In

accordance with this policy, to receive

EPA approval, emissions trading

programs must include provisions

requiring that the relevant Federal Land

Manager be notified 30 days before any

ERC use activity occurs in, or within

100 km of, a Class I area. Michigan’s

rule contains no such notification

provisions. This deficiency could be

corrected by rule revision, or by

procedures submitted as part of the SIP

which require MDEQ staff to forward

notices of use or notices of emissions

averaging which involve increases

within 100 km of a Class I area to the

Federal Land Manager.

N. Federal Operating Permits

In order to allow for open market

emission trading, Michigan must revise

its federally required operating permit

program to cite the trading rule in order

to recognize ERC use as a compliance

alternative for permitted sources that are

covered by the emissions trading rule.

Prior to ERC use, every permitted source

that intends to use ERCs or emissions

averaging must possess a permit

containing language that references the

emissions trading and averaging rules

and allows ERCs to be used for

compliance demonstrations.

O. Open Market Program Audits

Michigan requires an evaluation of

the emission trading program and a

public report to be made at least every

3 years, or more frequently if deemed

necessary by the State. The EPA

supports the provisions that specify that

an audit evaluate:

—Whether the program is consistent

with achievement and maintenance of

the NAAQS and has resulted in

emission reductions consistent with

reasonable further progress toward

attainment;

—Whether monitoring, recordkeeping,

reporting, and enforcement have

resulted in a sufficiently high level of

compliance;

—Whether the program has caused any

localized adverse effects to public

health, safety, or welfare or the

environment;

—Whether the program is achieving

reductions across a spectrum of

sources, including area and mobile

sources; and

—Whether individual source audit

provisions have resulted in a

sufficient number of audits.

P. Contingency Measures

Michigan’s rule states that if, after the

triennial program evaluation, MDEQ

determines that program revisions are

necessary, it will revise the program and

submit a SIP revision to EPA within 6

months. This provision is appropriate.

EPA considers that program revisions

would be warranted if ERC generation

has been greater than ERC use, resulting

in emissions spiking on days of poor air

quality or failure to meet area wide

RACT-level or other required emission

reductions; if trading or averaging has

led to an increase in exposure to

hazardous air pollutants or criteria air

pollutants, or if Class I areas have been

adversely affected by the generation or

use of ERCs.

Q. Early NOX Reductions

For EPA to approve an open market

trading rule, it needs to be convinced

that ERC generation is likely to keep

pace with ERC use, so that there will not

be significant emissions ‘‘spikes’’

created by the use of a large number of

ERCs in a short period of time. For

VOCs, EPA has determined that the risk

that there will be such spikes is

sufficiently small that this issue can be

dealt with through periodic audits and

contingency measures. However, for

other pollutants, particularly NOX, EPA

has greater concerns. Under open

market trading, large NOX sources

which are not currently subject to any

emissions limits would be able to bank

large volumes of early reductions

generated through early compliance

with forthcoming Title IV Acid Rain

program requirements. When used later,

these large volumes of ERCs could

create spikes large enough to

compromise attainment.

Michigan’s program protects against

this problem within the State. Rule

1212(2) limits the life of credits

‘‘generated by emission reductions

which are necessary to comply with a

proposed applicable requirement and

which occur after the date the

applicable requirement is proposed but

before final compliance dates’’ to five

calendar years or to one calendar year

after the effective date of final

compliance, whichever comes first.

Therefore all NOX credits generated

through early compliance with Title IV

requirements will expire on January 1,

2002, or 1 year after the applicable

requirements become effective. As a

result of the limited life of these credits,

unless a market demand for NOX credits

within Michigan is created prior to

January 1, 2002, most or all of the

credits generated in this fashion will

result in early reductions without risk of

being used within Michigan.

Given this protection, EPA’s

remaining concern is that the NOX ERCs

generated through early compliance

with Title IV requirements not be used

in other States after January 1, 2002. To

allay this concern, MDEQ must outline

the existing procedures in the SIP, or

add such procedures, that insure that

these credits expire in accordance with

Michigan rules and cannot be used in

other States.

R. Property Rights

Michigan’s emissions trading program

does not contain a statement that

emission reduction credits do not

constitute a property right. All tradeable

emissions reduction credits or

allowances under the Act are limited

authorizations to emit pollutants, and

do not constitute a property right.

Section 403(f) of the Clean Air Act,

which deals with sulfur dioxide

allowances under the Acid Rain

program, states:

An allowance allocated * * * is a limited

authorization to emit sulfur dioxide * * *

Such allowance does not constitute a

property right. Nothing in this subchapter or

in any other provision of law shall be

construed to limit the authority of the United

States to terminate or limit such

authorization.

Congress included this requirement to

ensure that allowance holders

understood that they were barred from

claiming a governmental taking under

the 5th Amendment of the U.S.

Constitution. Property status could

produce undesired and perverse results,

such as requiring a government agency

to compensate the owner of a pollution

source when its emissions are limited.

The absence of property status

authorizes the participating air

pollution control agency to limit or

terminate credit use in extreme

circumstances. The same logic applies

to emission reduction credits.

States should actually terminate

credits only when other options have

failed to provide for meeting the State’s

underlying Act obligations. Although

EPA would not expect this to occur, and

would expect that the program will
Federal Register / Vol. 62, No. 181 / Thursday, September 18, 1997 / Proposed Rules 48981

achieve real and cost-effective emissions

reductions without having to resort to

credit limitation, this contingency

measure must be available to provide

confidence that States will make

continued progress toward their air

pollution control goals.

In order to ensure that sources cannot

claim that ownership of an ERC issued

under Michigan’s program grants them

a property right, Michigan must include

in its SIP a statement that ERCs do not

constitute a property right, either

directly in the rule or in the form of a

letter from the Attorney General.

III. Proposed Action

The EPA is proposing to approve this

revision to the Michigan SIP for the

reasons outlined above. EPA will not

take action toward final approval of this

SIP revision until the deficiencies

discussed in this document are

corrected. Nothing in this action should

be construed as permitting or allowing

or establishing a precedent for any

future request for revision to any state

implementation plan. Each request for

revision to the state implementation

plan will be considered separately in

light of specific technical, economic,

and environmental factors and in

relation to relevant statutory and

regulatory requirements.

Under the Regulatory Flexibility Act,

5 U.S.C. 600 et seq., EPA must prepare

a regulatory flexibility analysis

assessing the impact of any proposed or

final rule on small entities. 5 U.S.C. 603

and 604. Alternatively, EPA may certify

that the rule will not have a significant

impact on a substantial number of small

entities. Small entities include small

businesses, small not-for-profit

enterprises, and government entities

with jurisdiction over populations of

less than 50,000.

EPA’s proposed approval of the

Michigan’s request under section 110 of

the Act does not affect any existing

requirements applicable to small

entities. Any pre-existing Federal

requirements remain in place after this

approval. Federal approval of the state

submittal does not affect its stateenforceability. Moreover, EPA’s

approval of the submittal does not

impose any new Federal requirements.

Therefore, EPA certifies that this

approval action does not have a

significant impact on a substantial

number of small entities because it does

not remove existing requirements or

impose any new Federal requirements.

Under section 202 of the Unfunded

Mandate Reform Act of 1995

(‘‘Unfunded Mandates Act’’), signed

into law on March 22, 1995, EPA must

prepare a budgetary impact statement to

accompany any proposed or final that

includes a Federal mandate that may

result in estimated costs to State, local

or tribal governments in aggregate; or to

the private sector, of $100 million or

more. Under section 205, EPA must

select the most cost-effective and least

burdensome alternative that achieves

the objectives of the rule and is

consistent with statutory requirements.

Section 203 requires EPA to establish a

plan for informing and advising any

small governments that may be

significantly or uniquely impacted by

the rule.

EPA has determined that the approval

action proposed does not include a

Federal mandate that may result in

estimated cost of $100 million or more

to either State, local, or tribal

governments in the aggregate, or to the

private sector. This Federal action

maintains pre-existing requirements

under State or local law, and imposes

no new Federal requirements.

Accordingly, no additional cost to State,

local, or tribal governments, or to the

private sector, result from this action.

This action has been classified as a

Table 2 action for signature by the

Regional Administrator under the

procedures published in the Federal

Register on January 19, 1989 (54 FR

2214–2225), as revised by a July 10,

1995 memorandum from Mary Nichols,

Assistant Administrator for Air and

Radiation. The Office of Management

and Budget (OMB) has exempted this

regulatory action from Executive Order

12866 review.

List of Subjects in 40 CFR Part 52

Environmental protection, Air

pollution control, Carbon monoxide,

Sulfur dioxide, Particulate Matter, Lead,

Hydrocarbons, Intergovernmental

relations, Nitrogen dioxide, Ozone,

Reporting and recordkeeping

requirements.

Authority: 42 U.S.C. 7401–7671q.

Dated: September 4, 1997.

David A. Ullrich,

Acting Regional Administrator.

[FR Doc. 97–24836 Filed 9–17–97; 8:45 am]

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