Technical Support Document

for EPA's Notice of Proposed Rulemaking

for the California State Implementation Plan

South Coast Air Quality Management District

Rule 1315

– Federal New Source Review Tracking System

Prepared by:

Geoffrey L. Glass and Laura Yannayon

Reviewed by:

Gerardo Rios

Air Division, Permits Office United States Environmental Protection Agency, Region IX

San Francisco, California February 9 , 2012

### Table of Contents

I. Rules Addressed by EPA’s Rulemaking Action

................................ ................................ ....... 1

II. Background Information

................................ ................................ ................................ ........... 1

A. Applicable Federal Regulations

................................ ................................ .......................... 1

B. The District

................................ ................................ ................................ ......................... 2

C. State and Local Regulations

................................ ................................ ................................ 2

D. History of District’s Internal Offset Accounts

................................ ................................ .... 3

III. Adopted Rule 1315

................................ ................................ ................................ ................... 5

IV. EPA Evaluation

................................ ................................ ................................ ......................... 7

A. Federal Integrity Criteria

................................ ................................ ................................ ..... 7

B. Base Year Requireme nts

................................ ................................ ................................ ... 10

C. Aggregate Offset Equivalency

................................ ................................ .......................... 13

D. SIP Relaxation

................................ ................................ ................................ .................. 13

V. Recommendation

................................ ................................ ................................ .................... 14

VI. Attachments

................................ ................................ ................................ ............................ 14

Acronyms

AQMD (South Coast) Air Quality Management District (a. k.a. the District)

BACT Best Available Control Technology

BARCT Best Available Retrofit Control Technology

CAA Federal Clean Air Act

CARB California Air Resources Board

CFR Code of Federal Regulations

CO Carbon monoxide

EPA United States Envir onmental Protection Agency

ERC Emission Reduction Credit NAAQS National Ambient Air Quality Standards

NO 2 Nitrogen dioxide

NO

x Oxides of nitrogen

NSR New Source Review

PM 10 Particulate Matter with an aerodynamic diameter less than 10 micrometers

PM 2.5 Particulate Matter with an aerodynamic diameter less than 2.5 micrometers

SCAB South Coast Air Basin

SIP State Implementation Plan

SO 2 Sulfur dioxide

SO

x Oxides of sulfur

VOC Volatile Organic CompoundsFebruary 9, 2012 Technical Support Document Page 1

AQMD Rule 1315 

### I. Rules Addressed by EP A’s Rulemaking Action

The United States Environmental Protection Agency (EPA) is taking action on the South Coast Air Quality Management District (AQMD, or the District) Rule 1315

– Federal New Source Review Tracking System . AQMD’s Governing Board adopted Rule 1315 on February 4, 2011. The California Air Resources Board (CARB) submitted the rule to EPA for inclusion in the California State Implementation Plan (SIP) on March 3, 2011. On March 25, 2011, EPA found the submittal complete according to the crite ria in 40 CFR part 51, appendix V. On February 7, 2012, CARB supplemented the existing submittal by providing a copy of Rule 1315 for SIP approval which struck out the portions of the rule not intended for SIP submittal.

The purpose of District Rule 1315 is to prescribe a methodology for demonstrating that the District’s New Source Review (NSR) program is consistent with the federal NSR requirement to

offset increases in emissions of non

- attainment pollutants and precursors at new and modified major source s and modifications with appropriate reductions. Rule 1315 applies only to the nonattainment pollutants ozone and PM 10 ( particulate matter with an aerodynamic diameter less than or equal to 10 micrometers ) and their precursors (nitrous oxides and volatile organic compounds for ozone, and sulfur dioxide for PM 10 ), and the maintenance pollutant carbon monoxide, unless other pollutants are added later. PM 2.5 is specifically excluded from Rule 1315 and is regulated under a separate rule, Rule 1325

– Federal PM 2 .5 New Source Review Program

.



### II. Background Information

A. Applicable Federal Regulations

Section 110(a)(2)(C) of the CAA requires SIPs to include provisions to comply with Part D for nonattainment pollutants. Among the Part D requirements, s ection 172(c )(5) of the CAA requires SIPs for nonattainment areas to include a permitting program for new and modified major stationary sources of nonattainment air pollutants in accordance with section 173 (a)(1)(A) , which requires increases in such emissions over spe cified thresholds from a major stationary source to be offset by equal or greater reductions in emissions of the same pollutant. A permit authority may use an aggregate approach to demonstrate that their Part D permit program provides the required number of offsets. 1

D etails concerning the use of offsets can be found in EPA’s implementing regulations at 40 CFR § 51.165(a)(3). According to 40 CFR § 51.165(a)(3)(ii)(C)(1)( i ), offsets resulting from the shutdown or curtailment of existing emission units can only be credited if they are permanent, surplus, quantifiable, and federally enforceable.

Furthermore, according to 40 CFR § 51.165(a)(3)(ii)(C)(1)( ii ), the shutdown or curtailment must

1 See 61 FR 64292, Dec. 4, 1996 and Environmental Protection Agency, Region IX Air & Toxics Division Technical Support Document for EPA’s Notice of Final Rulemaking for the California State Implementation Plan

S outh Coast Air Quality Management District New Source Review by Gerardo C. Rios, October 24, 1996 (TSD).February 9, 2012 Technical Support Document Page 2

AQMD Rule 1315 have occurred after the last day of the base year for the SIP plann ing process unless t he projected emissions inventory used to develop the attainment demonstration explicitly includes the emissions from such previously shut down or curtailed emission units. However, in no event may credit be given for shutdowns that occu rred before August 7, 1977.

Appendix S to 40 CFR part 51

– Emission Offset Interpretative Ruling , explains EPA’s position on preconstruction review of major sources in nonattainment areas and provides some guidance on banking and using offsets . Although n o longer in effect in the District as it is superseded when specific NSR programs are SIP approved, Appendix S is generally accepted as setting forth EPA’s interpretation of the minimum requirements of a nonattainment NSR program. Appendix

S set s the gener al guidance of allowing, in Section IV.C.5, the banking of emission reductions for use as future offsets when such reductions exceed the requirements of reasonable progress toward attainment, provided SIP emission limits are applied at the time of use. The refore a key ongoing requirement for banked emissions reduction s is that they be adjusted to reflect current SIP requirements

– aka ―surplus adjusted at the time of use.‖



### B

. The District

The AQMD is the local authority appointed by the State of California to administer Clean Air Act (CAA) permitting programs in Los Angeles County, except the Antelope Valley area northeast of the San Gabriel Mountains; all of Orange County; southwestern San Bernardino County; and Riverside County, with the exception of the easternmost area bordering Arizona.

EPA has classified the South Coast Air Basin (SCAB), which constitutes the bulk of the AQMD’s jurisdictional area, as an extreme non

- attainment area for the revoked 1

- hour and

current 8

- hour ozone standards and a seriou s nonattainment area for PM 10 . The Coachella Valley in central Riverside County east of the SCAB is classified as a severe nonattainment area for 8

- hour ozone and a serious nonattainment area for PM 10

.



### C

. State and Local Regulations

District Rule 201

– P ermit to Construct , requires written authorization from the Executive Officer before building, erecting, installing, altering, or replacing any equipment that generates or controls air pollutants. Those installations deemed to have a de minimis effect on a ir quality are exempted from the requirement to obtain permits from the District under Rule 219

– Equipment not Requiring a Written Permit Pursuant to Regulation II

.

Preconstruction review requirements are set in District Regulation XIII

– New Source Revi ew , which consists of District Rules 1301 through 1325.

According to District Rule 1303

– Requirements , an application for a Permit to Construct will be denied unless offsets are obtained for each nonattainment pollutant, unless the source is exempted fr om this requirement by District Rule 1304

– Exemptions , or 1309.1

– Priority

Reserve

.

District Rule 1304

– Exemptions

, lists source types exempt from the requirement to obtainFebruary 9, 2012 Technical Support Document Page 3

AQMD Rule 1315 offsets. Examples of exempt sources include abrasive blasting equipment, emerg ency use equipment, portable equipment, essential public services (if the modification is required to comply with a District, State, or federal regulation and offsets from the Priority Reserve are not available), and sources at a facility with a net potent ial to emit less than 4 tons per year of NO

x , VOC, PM 10 , or SO

x , or less than 29 tons per year of CO.

District Rule 1309.1

– Priority Reserve

, established a Priority Reserve of emission reductions to be used to offset emission increases at certain high p riority sources including innovative low

emitting sources, research operations, essential public services, and electrical generating facilities that submitted a complete application to the California Energy Commission or the

District between 2000 and 2003. There are no pending applications for electrical generating facilities that still qualify for this provision.

District Rule 1309

– Emission Reduction Credits and Short Term Credits , requires all emission reductions to be creditable, e.g., the emission r eductions must be real, quantifiable, permanent

, federally enforceable and not greater than the equipment would have achieved if operating with current Best Available Control Technology (BACT)

. Therefore Emission Reduction Credits ( ERCs ) granted pursuant t o this rule meet the federal integrity criteria for offsets at the time they

are issued.



### D. History of District’s Internal Offset Accounts

Prior to 1990, the District maintained a computerized emissions balance for all sources that obtained permits. If a source made a change that decreased emissions, the District would record it as a negative NSR balance for the source. For sources that had received permits from the District, NSR balances were based on permitted emissions. For pre

- NSR sources

– the Distri ct’s NSR program dates back to 1976

– NSR balances were based on an analysis of actual emissions.

NSR balances were required to be quantifiable and enforceable. Entries only occurred pursuant to permit applications and substantiating data was reviewed by p ermitting engineers. Pursuant to District Regulation XIII, the District established its internal offset accounts with starting balances based on the pre

- 1990 emissions reductions. Emission reductions resulting from shutdowns were recalled, reduced by 20 pe rcent, and deposited into the District’s I nternal O ffset

A ccounts.

In 1996, EPA Region 9 approved the SIP submittal of District Regulation XIII noting that Regulation XIII differed from federal requirements but was, overall, equivalent to or not less

str ingent than the federal requirements . Region 9 did not require an offset tracking system as part of the SIP submittal, but did state in the preamble to the Federal Register notice that, because District Rules exempted some major sources from the requiremen t to provide offsets, the District would implement an offset tracking system to demonstrate consistency with federal NSR offset requirements. As a result, the District established a federal offset account initially populated with

pre

- 1990 emission reductio ns from the NSR negative balances that were validated. Because of the large existing balances in the accounts, not all of the eligible emission reductions were credited to the accounts. For example, in the pre

- 2006 tracking system, emission reductions

resu lting from orphan shutdowns at major sources, but not minor sources, were credited to the

accounts. From 1997 through 2005, the District submitted annual equivalency reports to itsFebruary 9, 2012 Technical Support Document Page 4

AQMD Rule 1315 Board for approval and provided copies to EPA Region 9. The public was gene rally invited to the District’s Board meetings at which the annual reports were approved and the annual equivalency reports were publicly available.

In 2002, when the District adopted new Rule 1309.2

– Offset Budget , which would allow sources

to access t he District’s internal offset accounts as an offset source of last resort, EPA informed the District that transparency of the account’s tracking system should be improved. In 2004

- 2005, the District determined that the best solution would be to draft regul atory language, now known as Rule 1315, which would lay out with clarity how offsets are credited and debited to the

District’s internal offset accounts.

In its discussions during 2002

- 2003, EPA also noted that the District’s use of the negative NSR

balan ces and other pre

- 1990 era offsets to fund the internal bank would be inconsistent with federal requirements unless the District had sufficient records for those offsets. The District responded to EPA’s request for documentation on offsets from the negativ e NSR balances by reviewing its offset account records. The District concluded that it did not readily have sufficient documentation for many of the emission reductions it had collected from the negative NSR balances and other pre

- 1990 era offsets. The Dis trict responded by eliminating pre

- 1990 credits without adequate documentation and proposing to retire all unused pre

- 1990 credits at the end of

the 2004

- 2005 reporting period. This resulted in a need for additional unclaimed emission

reductions and the Di strict proposed the following previously untapped sources of emission

reductions:

Orphan shutdowns and reductions at minor sources,

ERCs provided to offset emission increases at minor sources, and ERCs provided by major sources that are above the offset r atio required by the federal NSR program.

In 2005, t he District further proposed to quantify the actual emissions for orphan shutdowns by multiplying permitted emission limits by a factor of 0.8 to reflect factory utilization rates . They also proposed to reduce the O ffset A ccount balances annually by the percentage of emission reductions achieved by implementing control measures to reduce pollutant emissions. EPA and the District discussed further additional changes to the tracking system which resulted i n a letter dated February 23, 2006. The revisions primarily resolved issues EPA had raised and added a remedy if a shortfall in the offset accounts balance was projected. EPA Region 9 responded on April 11, 2006, indicating that the District’s proposed rev ised tracking system funded with emission reductions from minor orphan shutdowns and other sources appeared to be sufficient for EPA to propose approval of Rule 1315.

In September, 2006, the District Board adopted Rule 1315, which was challenged on Califo rnia Environmental Quality Act (CEQA) grounds. Subsequently, AQMD withdrew and then readopted the rule on August 3, 2007. However, a new lawsuit was filed challenging the August 2007 readoption, again on CEQA grounds. The petitioners prevailed in this case , and the Superior Court of the State of California, County of Los Angeles (Court) issued a writ of mandate ordering AQMD to, inter alia , set aside the August 2007 rule adoption. AQMDFebruary 9, 2012 Technical Support Document Page 5

AQMD Rule 1315 repealed Rule 1315 in January 2010. The current SIP submitted version of Rule 1315 was adopted by the District Board on February 4, 2011.



### III. Adopted Rule 1315

The purpose of Rule 1315 as stated in paragraph (a) is to maintain the District’s ability to issue permits requiring offsets to major sources that require emission of fsets under federal regulations but are exempted by local rules from this requirement, and to memorialize the procedures to establish the District’s NSR program equivalency with federal NSR offset requirements. Definitions of key terms used in the Rule are contained in paragraph (b). The Rule requires the

Executive Officer (or the District acting on his behalf) to establish and maintain separate offset accounts for each federal nonattainment pollutant. Offset Accounts may be established or

discontinued in t he future depending on future attainment status and maintenance plan requirements.

Paragraph (c) of the rule

– Offset Accounts for Federal NSR Equivalency , contains provisions for quantifying, crediting and debiting the offset accounts. The Rule requires these offset accounts to be debited whenever construction or modification requiring a federal non

- attainment major source NSR permit occurs and the project is either exempt from the requirement to obtain offsets pursuant to District Rule 1304 or is eligib le for an allocation of Priority Reserve offsets (offsets provided by the District) under District Rule 1309.1.

As discussed in Section II.D. of this TSD , the District Offset Accounts were originally established on October 1, 1990 with emission reduction s that occurred prior to that date. In 2005 the District reevaluated all credits deposited into the 1990 Offset Accounts and removed all credits for which sufficient records were no longer available to substantiate the emission

reduction. This work lead to revised beginning balance s as reported by the District in their ―Federal Running Balance‖ summary, 2 which are reflected in Table A of Rule 1315 as the

Internal District Offset Account Balances. The rule requir ed any remaining pre

- 1990 credits to

be remove d from the Offset Accounts after completion of the calendar year 2005 equivalency

demonstration.

Paragraph (c)(1) also specifies under what conditions the Executive Officer must establish additional accounts for any new nonattainment pollutants, and when the tracking of a pollutant may be discontinued. Finally it specifies the criteria for determining equivalency with the federal offset requirements

— the procedures specified in Rule 1315 must be followed and each Offset

Account balance must remain positive

.

Paragraph (c)(2)

– Tracking of Offset Account Debits for Federal NSR Equivalency, specifies

how the District shall track the amount of emissions to be debited, and which permit actions require debiting. It states that only emission increases from major polluting facilities that are not exempt from federal offset requirements must be debited. It also specifies the offset ratios required for each pollutant, which are consistent with federal CAA requirements.

2 See Rule 1315 Staff Report

, Appendix I: AQMD’s N SR Offset Tracking

— Updated Federal Running Balanc es.February 9, 2012 Technical Support Document Page 6

AQMD Rule 1315 Paragraph (c)(3)

– Tracking of Offset Account Credits for Federal NSR Equivalency , contains the provisions for crediting emission reductions to the Offset Accounts. This includes the types of emission reductions that may be quantified, how they must be quantified , and when tracking is no longer requir ed for specific pollutants.

Paragraph (c)(3)(A) specifies that offset accounts shall be credited with emission reductions that have occurred since October 1, 1990 that fall into one of the following categories:

1. Orphan reductions and shutdowns, i.e. emis sion reductions related to retirement or control of equipment at permitted sources where the permit holder does not apply for an ERC, quantified as 80 percent of the source’s NSR permitted emissions;

2. ERCs provided as emission offsets for sources at minor f acilities;

3. The difference between the quantity of ERCs provided as emission offsets for sources at major facilities at a 1.2:1.0 offset ratio, as required by District Rules, and the quantity that would be required under 40 CFR § 51.165(a)(9);

4. The amount of emission reductions for which a facility cannot apply for ERCs because the emissions were originally permitted through an allocation of offsets from AQMD (a.k.a. payback of offset debt);

5. The difference between actual daily emission reductions calculated w ith and without a BACT adjustment, as required by District Rules, when the emission reduction is submitted as part of an ERC banking application and EPA concurs that the BACT adjustment is surplus to what is required by the federal NSR program.

Paragraph (c)(3)(B) specifies how the identified emission reductions are to be quantified prior to being credited into the Offset Accounts. In particular, only 80% of the emission reductions

, based on permitted emissions from orphan reductions and shutdowns may be c redited. Paragraph (c)(3)(C) provides that on an ongoing basis, the District may elect not to track all creditable

emission reductions if it determines that sufficient credits remain in the Offset Accounts . For example, it may not be necessary to track the surplus emission reductions from the difference in offset ratios required by Rule 1303 and the offset ratio required by the CAA.

Paragraph (c)(4) requires the District to discount the remaining balance of credits annually on a pollutant

- by

- pollutant bas is, based on the percentage of emission reduction achieved from control requirements enacted in the previous year. Paragraph (c)(5) specifies the sequence of tracking actions, requiring that the Offset Account balance first be surplus adjusted consistent

w ith the provisions of paragraph (c)(4), then debits quantified under paragraph (c)(2) must be subtracted from the remaining balances, and finally the emission reductions quantified under paragraph (c)(3)(A) are added. Paragraph (c)(6) identifies how the Of fset Account credits used as

offset debits meet each of the federal Offset Criteria.

Paragraph (d)

– Federal NSR Equivalency Determination Reports, specifies the required reporting periods and the timing for completion and submission of Preliminary and F inal Determinations of Equivalency reports to the District’s Governing Board and EPA. P aragraph (d)(1) det ails the specific historic, current and future reporting periods for the Offset Accounts. Paragraph (d)(3) specifies that no later than 12 months afte r the end of a reporting period, the

District shall present a Preliminary Determination of Equivalency to the Governing Board andFebruary 9, 2012 Technical Support Document Page 7

AQMD Rule 1315 EPA

. The determination is preliminary because it only includes offsets that were debited from the Offset Accounts for the repo rting period and does not yet include any credits. Paragraph (d)(4) specifies that no later than 18 months after the end of a reporting period, the District shall

present a Final Determination of Equivalency to the Governing Board and EPA. This report

incl udes all of the emission reductions credited to the Offset Accounts during the reporting period

.

Paragraph ( e )

– Projection of District Offset Account Balances, requires the District to provide with each Equivalency Determination report, a projection of what the account balances will be at the end of the next two reporting periods. The paragraph also specifies how the projections are to be made and clarifies that they are not a part of either Equivalency Determination.

Paragraph ( f

)

– Projections of Dis trict Offset Account Balances

, states that if any Offset Account

show s a shortfall, the District must discontinue funding the Priority Reserve and discontinue issuing permits requiring offset account debits until the shortfall is rectified.

Paragraph (h)

– State Implementation Plan Submittals, states that paragraphs (b)(2), subdivisions (g) and (h) are not to be submitted for SIP approval. On February 7, 2012, the District provided a copy of Rule 1315 as adopted, but with these sections struck out to clea rly indicate which

sections will be included in the SIP revision. Since the District did not include these provisions as part of their SIP submittal, EPA is not considering these provisions in our evaluation and they will not be incorporated into any fina l SIP action.

Paragraph (i)

– Sunset Date for Permit Issuance, specifies a sunset date of January 1, 2031. This means that prior to that date, the District must adopt a new/revised tracking rule to demonstrate equivalency with federal NSR offset requirem ents.



### IV. EPA Evaluation

The following evaluation is based on EPA’s review of submitted Rule 1315

– Federal New Source Review Tracking System

. Our review focuses on several criteria. First, whether the

emission reductions credited to and debited from th e District Offset Accounts meet the federal integrity criteria of being permanent, surplus, quantifiable, and enforceable as required by 40 CFR § 51.165(a)(3) (ii)(C)(1)( i )

. Second that emission reductions that occurred before an Attainment Plan base year are included in the emission inventory used to model attainment as required by 40 CFR § 51.165(a)(3) (ii)(C)(1)( ii )

. Third, w hether Rule 1315 demonstrates that the District is providing the quantity of offsets which, in the aggregate, are at least equivale nt to the amount of credits required by the CAA for federal major sources and modifications. And finally whether this proposed SIP revision complies with 110(l) of the CAA, which provides that a SIP revision cannot be approved if it would interfere with at tainment, reasonable further progress (RFP) or any other CAA requirement.



### A. Federal Integrity Criteria

1. PermanentFebruary 9, 2012 Technical Support Document Page 8

AQMD Rule 1315 The federal integrity criteria require emission reductions used as offsets to be permanent emission reductions , meaning the emissions are no longer legally allowed

to be emitted

. The majority of emission reductions credited to the Offset Accounts are

from shutdown sources. The emission reductions from these permitted operations are considered permanent because the facilities no longer have p ermission to operate and emit specified pollutants. If a new source is constructed to carry out the same type of business activity, it would be required to provide new emission offsets prior to

construction. In cases where the emission reductions were crea ted by the use of additional emission controls, the operating permits must contain practicably and federally enforceable conditions to ensure the permanence of the credited emission

reductions. For each type of emission reduction source listed in (iii)

- (vi ), the emission reductions are all generated as ERC’s subject to Rule 1309

– Emission Reduction

Credits and Short Term Credits , which has its own requirement for the credits to be permanent prior to issuance of the ERC. Therefore these emission reductions are also permanent at the time they are credited to the Offset Accounts.

The emission reductions debited from the District Offsets Accounts are also permanent reductions because the Rule requires the District to subtract the debited quantity of emission reductions from the District’s Offset Account balances. The District must provide its Preliminary and Final Determinations of Equivalency annually to ensure there is a positive balance in each of the Offset Accounts. Rule 1315 also contains an equivalency backstop provision in case any Offset Account has a shortfall (e.g., negative balance).

2. Surplus The federal integrity criteria require emission reductions used as offsets to be surplus or in addition to, any other federal requirement to reduce emissio ns. Rule 1315(c)(3)(A) contains a list of the types of emission reductions that may be credited

to the Offset Accounts. Orphan shutdowns and reductions (listed as (i) and (ii)) are emission reductions that are not claimed by any source and which occur eith er from the shutdown of a permitted source or a revised permit limiting emissions, respectively, ―provided such reduction is not otherwise required by rule, regulation, law, approved Air Quality Management Plan Control Measure, or the State Implementation Plan and does not result in issuance of an ERC.‖ In both cases, the restriction that the emission reductions not be required by other rules and not result in the issuance of an ERC is sufficient to ensure the credits are surplus at the time they

are added to the Offset Account. For each type of emission reduction sources listed in (iii)

- (vi), the emission reductions are all generated as ERC’s subject to Rule 1309

– Emission Reduction Credits and Short Term Credits , which has its own requirement

for the cred its to be surplus prior to issuance of the ERC. Therefore these emission reductions are also surplus at the time they are credited to the Offset Accounts.

In order to ensure the emission reductions in the Offset Accounts are also surplus at the time they are debited, Rule 1315 (c)(4) requires the District to reduce the Offset Account balances annually ―based on the percentage reduction in overall permitted emissions projected to be achieved as a result of implementation of controlFebruary 9, 2012 Technical Support Document Page 9

AQMD Rule 1315 requirements that became effective during the previous calendar year for each specific nonattainment contaminant within the District.‖ This provision requires the District to calculate the amount of reductions expected from each rule adopted by the District to reduce emissions, e xpress the amount as a percentage of the total stationary source inventory for that pollutant and apply this same percentage to the Offset

Account balance for that pollutant. The effect of this adjustment is that the Offset

Account balance will be reduced annually to account for any newly adopted rules that control these pollutants, ensuring that the debits used as offsets are surplus at the time

of use.

3. Quantifiable Emissions The federal integrity criteria require emission reductions used as offsets t o be quantifiable

. The vast majority of emission reductions credited under Rule 1315 are from orphan shutdowns, which occur when the owner/operator of a shut down source does not apply for an Emission ERC under Rule 1309

– Emission Reduction Credits

and Sh ort Term Credits

. When a source ha s shut down and the operating permit has

been inactivated, the only emission data available to the District is the source’s permitted emissions limits, which represent s its potential to emit rather than its actual

emission s. In order to adjust these permitted emission limits to reflect actual emissions, Rule 1315 requires the District to reduce the permitted emissions by 20% before crediting these emissions to the Offset Accounts.

The District base s the 80% actual emissio ns factor on several considerations. The District has historically implemented the 80% actual emission factor for estimating actual emission reductions in its Regulation XIII annual reports to the California Air Resources Board after they concurred that th is was an accurate characterization. The District also stated in their Staff Report that using eighty percent of potential emissions as a calculation of actual emissions is supported by two cited Federal Reserve reports. 3 In addition to specific capacity and utilization data contained in the report, EPA notes that over the past 40 years the average total industry utilization rate was 80.4 percent. 4

The District’s justification for quantifying actual emission reductions is also supported by the inherent structure of the District’s NSR program. Every source that is operated in the District with emissions exceeding 4 tons per year (tpy) of any nonattainment pollutant, including precursors, was required to obtain ERCs to offset

those emissions. The cost of o btaining the ERCs provides ―a strong incentive to keep each source’s potential emissions in line with actual emissions during times of high production. ‖ For exempt and priority reserve sources that obtain their offsets from the District, the District limi ts the amount of offsets provided by including permit conditions that limit operations to actual operating scenarios. Data provided by the District pertaining to the emission limits for the very small exempt sources (emitting

3 Staff Report, p 17. See Footnotes.

4 Feder al Reserve Statistical Release G.17, Industrial Production and Capacity Utilization http://www.federalreserve.gov/releases/g17/cap_notes.htm as printed on February 7, 2011.February 9, 2012 Technical Support Document Page 10

AQMD Rule 1315 < 4 tpy of most pollutants) sh ows that f ifty percent of the VOC sources and over eighty percent of all other sources have permit emission limits which are less than

one

- half of the 4 tpy exemption threshold. 5

EPA believes that the justification s provided by the District, as discussed above, are adequate for quantifying the actual emissions from orphan shutdown sources. While some sources may have emission rates higher or lower than 80%, in the aggregate, the data and explanations provided by the District support the use of an overall 80%

actual emissions factor.

4. Enforceable The emission reductions credited to the Offset Accounts from orphan shutdown sources are enforceable reductions at the time they are credited to the accounts because the shutdown sources no longer have a valid p ermit allowing them to operate, which means the source is no longer allowed to operate/emit those pollutants. If such a source attempted to restart its operations, it would be required to obtain a new permit from the District and provide new offsets. In th e cases in which the orphan reductions were created by a source implementing additional emission controls, the operating permits contain practicably enforceable conditions to ensure the permanence and enforceability of the credited emission reductions. Thi s ensures that the emissions will be permanently retired or reduced.

For each of the other types of credits listed in Rule 1315 (c)(3)(A), the credits are based on ERCs that have been generated pursuant to Rule 1309, which also requires

that the emission reductions meet each of the federal integrity criteri a , including the requirement to be enforceable emission reductions.

5. Federal Integrity Criteria Summary

In the paragraphs above EPA has evaluated Rule 1315 in regards to whether the

emission reduct ions credited into and debited out of the Offset Accounts meet the federal integrity criteria. Based on this evaluation we have determined that the emission reductions are permanent and enforceable reductions in that the emissions are no longer legally all owed to be emitted; they are surplus to any other federal requirement to reduce these emissions; and they are quantifiable based on either actual emission data for reductions credited from ERCs or 80% of permitted emissions for orphan shutdown sources. The refore the emission reductions quantified, credited and debited as offsets pursuant to Rule 1315 meet the federal integrity criteria as required by 40 CFR § 51.165(a)(3) (ii)(C)(1)( i )

.



### B. Base Year Requirements

As discussed earlier in the evaluation crite ria, 40 CFR 52.165(a)(3)(i)(C) provides:

5 Table 5 o f Staff Report, p 18

.February 9, 2012 Technical Support Document Page 11

AQMD Rule 1315 Emissions reductions achieved by shutting down an existing emission unit or curtailing production or operating hours may be generally credited for offsets if . . . .(ii) [t]he

shutdown or curtailment occurred after the last day of the base year for the SIP planning process. For purposes of this paragraph, a reviewing authority may choose to consider a prior shutdown or curtailment to have occurred after the last day of the base year if the projected emissions inven tory used to develop the attainment demonstration explicitly includes the emissions from such previously shutdown or curtailed emission

units.

See also 40 CFR Part 50, Appendix S, IV.

Rule 1315 is being submitted by the District to demonstrate equivalenc y with the Part D requirements for ozone and PM 10 (and their precursor emissions). To evaluate Rule 1315’s compliance with the base year requirement for using offsets from emissions units being shut down or curtailed, EPA has determined that the most appr opriate attainment demonstrations to review are the District’s approved PM 10 and 8

- hour ozone Plans. Approval and Promulgation of [SIPs] for Air Quality Planning Purposes; California

- South Coast and Coachella, 70 FR 69081 (Nov. 14, 2005) (2003 Plan); Ap proval of Air Quality Implementation Plans; California; South Coast; Attainment Plan for 1997 8

- hour Ozone Standards, EPA

- R09

- OAR

- 2011

- 0622 (Signed Dec. 15, 201 1 ) (2007 Plan). The

District’s PM 10 Plan was adopted in 2003 and relies on a 1997 base year emi ssion inventory. 2003 Plans, Chapter 3 & Appendix III. For ozone, the Plan was adopted in 2007 and relies on a 2002 base year emission inventory. 2007 Plan, Chapter 3 & Appendix III.

The District provides a discussion in Appendix III of the 2007 plan r egarding ―SIP Set Aside Accounts‖ which are special accounts to track growth from new and modified sources, among other things. Growth from new and modified sources is estimated by reviewing historic usage and generation of ERCs in the open market and cre dits and

debits from the District’s NSR accounts. Table 2

- 10 shows the estimated annual emission increases from sources subject to NSR, based on ERC open market usage from

2003

- 2005. For all pollutants other than VOC, more ERC’s were generated (supply) t han used (demand). On average, the demand for VOC ERCs was 0.39 tpd higher than the supply. Assuming this trend holds through 2014, an additional 3.1 tpd of pre

- 2002 base year VOC ERC s from the open market will be needed t o satisfy demand (0.39 tpd

short age for each of 8 years from 2006

- 2014)

. A similar exercise was performed for credits in the District’s NSR Account, as shown in Table 2

- 11. In this case, historic supply has been significantly higher than demand, therefore the District projects that no

pre

- 2002 emission reductions from the District Accounts will be needed.

Line 2 of this table shows the amount of pre

- 2002 ERC’s are likely to be needed based on historic ERC generation and usage. The historic ERC trend is that in any one year more

emis sion reductions are credited as supply than are debited as demand. Attachment I of the District’s Staff Report shows that this trend remains constant for the years 2003

- 2008 (latest available data). This trend is explained in part by the fact that the Di stric t collects (credits) almost all of the valid available emission reductions that are surplus to federalFebruary 9, 2012 Technical Support Document Page 12

AQMD Rule 1315 requirements, while they debit only the portion of credits given to exempt and priority reserve sources that would otherwise be required to provide federal offsets if not for Rules 1304 and 1309.1. Only this amount is tracked and debited, because this amount represents the quantity of federally required offsets not otherwise provided by the District’s NSR program as approved in 1996. Rule 1315 requi res this amount to be debited annually from the District’s Offset Accounts, and for those accounts to maintain a positive balance to demonstrate equivalency with federal offset requirements for new and modified major sources.

In accordance with the base year requirements specified in 40 CFR 51.165, the District estimated that 3.1 tons per day (tpd) of pre

- 2002 base year VOC emission reductions may be needed to satisfy offset demand. 2007 Plan Appendix III. For ozone precursors, the

District added 27 and 2 tpd for VOC and NO

x , respectively, as growth , which is much higher than the amounts projected from historic use and is a conservative and appropriate way to meet the requirements of 40 CFR 51.165

. 6 Th e 27 tpd includes the 3.1 tpd of pre

2002 base year VOC emission reductions. While this is not the total amount of pre

- 2002 base year emission reductions available as debits pursuant to Rule 1315, (74.23 and 30.29 tpd of VOC and NOx, respectively), the District has demonstrated that adding 27 tpd of

VOC an d 2 tpd of NOx represents more than the highest amount of pre

- 2002 credits that are expected to be used as offsets prior to attainment of the ozone standard. 200 7 Plan Appendix III, pgs 28

- 34

.

Likewise, for PM 10 , the District provides a discussion in A ppendix III of the 2003 plan regarding ―SIP Set Aside Accounts.‖ Growth from new and modified sources is estimated by reviewing historic usage and generation of ERCs in the open market and

credits and debits from the District’s NSR accounts. Table 2

- 11 sh ows the estimated annual emission increases from sources subject to NSR, based on ERC open market usage from 1997

- 2001. On average, the demand for PM 10 ERCs was 0.03 tpd higher than the supply. Assuming this trend holds through 2014, an additional .23 tp d of pre

- 1997 base year PM 10 ERCs from the open market will be needed to satisfy demand (0.03 tpd shortage for each of 8 years from 2003

- 2010). A similar exercise was performed for credits in the District’s NSR Account, as shown in Table 2

- 13. In this ca se, historic supply has been significantly higher than demand, therefore the District projects that no

PM 10 pre

- 1997 emission reductions from the District Accounts will be needed.

In accordance with the base year requirements specified in 40 CFR 51.165, the District estimated that 0.03 tpd of pre

- 1 9 97 base year PM 10 emission reductions may be needed to satisfy offset demand. 2003 Plan Appendix III. For PM 10 , the District added 3.1 tpd as growth. 7 This amount includes the 0.23 tpd of pre

- 2002 base year PM 10 emission

reductions. While this is not the total amount of pre

- 1997 base year emission reductions

6 See 2007 Plan Appendix III, pgs 24

- 34. For Table 2.8, the District provided EPA with the point and area source data used to generate the summary data. EPA used this data to determine the amount of emission due to growth at

facili ties subject to NSR offset requirements.

7 See 2003 Plan Appendix III, pgs 25

- 35. For Table 2.8, the District provided EPA with the point and area source data used to generate the summary data. EPA used this data to determine the amount of emission due to growth at facilities subject to NSR offset requirements.February 9, 2012 Technical Support Document Page 13

AQMD Rule 1315 available as debits pursuant to Rule 1315 (3.94 tpd) , the District has demonstrated that this amount represents the highest amount of pre

- 1997 credits that are expected to be used as offsets prior to attainment of the ozone standard. 200 3 Plan Appendix III, pgs

25

- 35

.

This approach is consistent with EPA guidance that S tates must include pre

- base year credits to the ―extent that the State expects tha t such credits will be used for offsets...‖.

57 FR 13498

Therefore, even if the District Offset Accounts rely on pre

- base year emission reductions as offsets, the District’s Plans have adequately added pre

- base year emissions explicitly into the approp riate projected planning inventories. For these reasons, EPA is proposing to approve Rule 1315.



### C. Aggregate Offset Equivalency

Rule 1303

– Requirements , provides that certain specified sources are exempted from the requirement to provide offsets prior t o the issue of a Permit to Construct. As discussed in Section II.D of this TSD, EPA approved the District’s NSR program, including Rule
1303 into the SIP, but noted that because District Rules exempted some new and

modified major sources from the requireme nt to obtain offsets, the District would implement an offset tracking system to demonstrate consistency with federal NSR offset requirements. Rule 1315 is the codification of that offset tracking system. Paragraph (c)(2) of Rule 1315 requires the District to track the amount of offsets new and modified major sources are exempted from providing if those offsets are not otherwise exempt from federal offset requirements. Thus the amount of annual emission increases for which offsets are not provided by the app licant (source), but which are otherwise required

pur suant to the CAA, are tracked. Paragraph (d) of Rule 1315 requires the District to make an annual demonstration that the balance of all Offset Accounts is positive, which

shows that the District credited at least as many emission reductions as are debited pursuant to Rule 1315. This annual Final Demonstration of Equivalency demonstrates that in the aggregate, (emission offsets provided by major stationary sources and the District) provide an equivalent nu mber of offsets as are otherwise required by the CAA for federal major sources and modifications

.



### D

. SIP Relaxation

Under section 110(l) of the CAA, EPA may not approve any SIP revision that would interfere with attainment, reasonable further progress (R FP) or any other CAA requirement. For ozone, the District’s 2007 Plan’s attainment demonstration was

reviewed. For PM 10 , the District’s 2003 PM 10 Plans for both the Coachella Valley and the

South Coast Air Basin were reviewed. We have determined that inco rporation of Rule 1315 into the SIP will not interfere with attainment or RFP because the rule provides a regulatory mechanism setting forth the internal offset accounting system that the District has been relying on. In addition, the District does not rel y on the offsets in the District’s

Offset Accounts for attainment or RFP in the District’s most recent attainmentFebruary 9, 2012 Technical Support Document Page 14

AQMD Rule 1315 demonstrations for ozone or PM 10



### V. Recommendation

Rule 1315 has been submitted by the District to demonstrate equivalency with the Part D

, Section 173(a) requirements for ozone and PM 10 (and their precursor emissions). Our evaluation of the federal integrity criteria in Section IV of this TSD demonstrates that Rule 1315 ensures all

offsets debited from the Offset Accounts meet the requirement s of 40 CFR § 51.165(a)(3) (ii)(C)(1)( i ) , that such offsets be permanent, surplus, quantifiable, and enforceable

. Because Rule 1315 provides an accurate method for tracking and quantifying emission reductions which meet all of the federal integrity criteri a for offsets, EPA is satisfied tha t

– — in the aggregate, Rule 1315 demonstrates that the District is providing at least the same amount of credits otherwise required by the CAA for new and modified federal major sources

. Rule 1315 provides an adequate

admin istrative mechanism for verifying this demo nstration on an ongoing basis. Rule 1315 also complies with the requirement for pre

- base year shutdown credits to be explicitly added back in to the most recent applicable air quality plans. Therefore, we recommen d full approval of Rule

1315 into the South Coast portion of the California SIP.



### VI. Attachments

1. Rule 1315 SIP submittal letter, dated March 2, 2011

2. Rule 1315, adopted February 4, 2011 by SCAQMD

3. Rul e 1315 Staff report, dated January 7, 2011

4. Rule 1315, ad opted February 4, 2011; revised for SIP submittal on February 7, 2012

5. EPA Analysis of Staff Report Table 5 Data

6. 2007AQMP

- 2020 Stationary Baseline Emissions With Grow t h

- Apx I II (Table 2

- 8) Stationary Source Breakdowns

7. 2007AQMP

- 2020 Stationary Baselin e Emissions With No Growh

- Apx I II (Table 2

- 8) Stationary Source Breakdowns

8. 200 3 AQMP

- 20 1 0 Stationary Baseline Emissions With Grow t h

- Apx I II (Table 2

- 8) Stationary Source Breakdowns

9. 200 3 AQMP

- 20 1 0 Stationary Baseline Emissions With No Growh

- Apx I I I (Table 2

- 8) Stationary Source Breakdowns