UNITED STATES ENVIRONMENTAL PROTECTION AGENCY

REGION IX AIR DIVISION

Technical Support Document

for

EPA’s Rulemaking for the California State Implementation Plan

regarding

South Coast Air Quality Management District (SCAQMD) Regional Clean Air Incentives Market (RECLAIM)

SCAQMD Rule 200 5 New Source Review for RECLAIM

Prepared by: Lily Wong

November 8 , 20112

RULE IDENTIFICATION

Agency: South Coast Air Quality Management District

Current SIP Approved Rule: Adop ted: May 6

, 2005

Submitted: October 20, 2005 Approved: August 29, 2006

Submittal Subject to this TSD: Rule 200 5 New Source Review for RECLAIM Adopted: June 3, 2011

Submitted: September 27 , 2011

BACKGROUND

RECLAIM The RECLAIM program (Regul ation XX) was initially ad opted by SCAQMD in October 1993 and covers stationary sources emitting 4 tons or more per year of NO

x or SO

x in 1990 or in any subsequent year. The program establishe d a NO

x and SO

x emissions cap and trade program in

the South Co ast air basin , with the emissions cap declining o ver time until 2003

. SCAQMD

further amended RECLAIM to lower the NO

x and SO

x emissions caps in 2005 and 2010 respectively.

The program was designed to provide facilities with incentives to reduce emissio ns and advance pollution control technologies by giving facilities added flexibility in meeting emission reduction requirements. A NO

x or SO

x RECLAIM Trading Credit (RTC) is a limited authorization to emit one pound of NO

x or SO

x during a specified one ye ar period. A RECLAIM facility ’s emissions may not exceed its holding of RTCs for any compliance year. If a RECLAIM facility does not

hold sufficient RTCs to cover its emissions, it may choose among these compliance options: install control equipment to lower its emissions , modify its activities to lower emissions

, or it

may purchas e additional RTCs from other facilities to cover its emissions. T he RECLAIM program consists of Rules 2000 through 2020

.

Rule 2005 It was necessary to address how the Feder al Clean Air Act’s New Source Review ( NSR )

program requirements would be implemented in the context of a cap and trade program. Rule

2005

, “New Source Review for RECLAIM,” sets forth the pre

- construction review requirements for new or modified equipment o r processes at RECLAIM facilities. The purpose of the rule is to ensure that the RECLAIM program is equivalent to the federal and state NSR program requirements

. Rule 2005 provides three separate r equirements to meet the NSR programmatic equivalency . Sou rces causing emissions increases must : 1 ) be equipped with Best Available

Control T echnology (BACT), 2 ) demonstrate by m odeling that the operation will not result in a significant increase in the air quality concen tration of nitrogen dioxide (NO 2 ) if the facility total

emissions exceed its 1994 starting a llocation 1 plus non

- tradable credits, and 3 ) t he facility must

1 Rule 2002 “ Allocations for O xides of N itrogen (NO

x ) and Oxides of S ulfur ( SO

x ) ” at section (c) sets forth the3

hold sufficient RTCs to offset emission increases for one year prior to commencemen t o f operation and at the beginning of every compliance ye ar thereafter.

RULE SUMMARY

The amendment to Rule 2005 affects the offset requirements in section (f) (1) of the rule as follows : “(f) Offsets The Facility Permit for a new or modified facility shall require compliance with this subdivision, if appli cable. (1) Any facility which was required to provide offsets pursuant to paragraphs (b)(2), (c)(2), or subparagraph (c)(4)(B) or any new facility required to provide offsets pursuant to paragraph (c)(2) shall, at the commencement of each compliance year, hold RTCs in an amount equal to the amount of such required offsets...”

Rule 2005 distinguishes between “ n ew f acility ” (defined at Rule 2000(c) (51)

– “ a ny facility

which has received all District Permits to Construct on or after October 15, 1993 ” ) and “ e xi sting

f acility ” (defined at Rule 2000(c)( 35)

– “ a ny facility that submitted Emission Fee Reports pursuant to Rule 301

- Permit Fees, for 1992 or earlier years, or with valid District Permits to Operate issued prior to October 15, 1993, and continued to be i n operation or possess valid District permits on October 15, 1993”).

The amendment affects existing facilities subject to R ule 2005 whose annual a llocation s do not

exceed their 1994 starting a llocation s plus non

- trad able credits. While such facilities are

r equir ed to hold sufficient RTCs to offset emissions increases at the beginning of the first year of operation of the new or modified source

, 2 this rule amendment eliminates the requirement to
hold sufficient RTCs to offset emissions increases at the b eginning of the second and subsequent

years.

The SCAQMD staff report explains that the purpose of the amendment to Rule 2005 i s to alleviate the disincentive to existing facilities to modernize and replace older, more polluting equipment with newer, cle aner equipment. The former offset requirement of Rule 2005(f)(1) require d a facility to hold, prior to each compliance year, RTCs in the amount at least equal to the increase in the maximum daily potential to emit from new or modified sources. Most of th e time, however, facilities do not emit at their maximum permitted level on a daily basis. As a result, an artificially high demand of RTCs is created at the beginning of a compliance year to meet the holding requirements.

methodology for determining an existing facility’s 1994 starting allocation. An existing facility’s starting allocation is an important benchmark in the RECLAIM program. If a modification at an existing facility results in an emissions increase that exceeds the facility’s 1994 starting allocation, it triggers the applicability of several federal NSR requirements including the requirement to offset all emissions increases before the compliance year. Although South Coast Rule 2000(c)(3) defines “allocation” as “ the number of R ECLAIM Trading Credits (RTCs) [ as defined in paragraph (c)(63)] a RECLAIM facility holds for a specific compliance year, as refe renced in the Facility Permit,” the use of the term “starting allocation” in Rule 2002 and Rule 2005 clearly means the amount of RTCs that

were determined by the Executive Officer and assigned to the facility in 1994 consistent with Rule 2002(c).

2 See requirements at Rule 2005(c)(2), which were not revised.4

The rule amendment does not chan ge the RECLAIM program requirement for facilities to hold sufficient RTCs to cover their emissions by the end of each quarter and each compliance year pursuant to Rule 2004

– Requirements.

EPA REVIEW CRITERIA EPA generally uses the following four criter ia in evaluating state and local NO

x rules for approval into the SIP, and for th is rule a fifth criteria

.

1. Enforceability

- Section 110(a) of the Clean Air Act requires enforceable SIP requirements. Several EPA guidance documents are used to evaluate ru le enforceability, including the “Bluebook” ( Issues Relating to VOC Regulation Cutpoints, Deficiencies, and Clarification to Appendix D) , November 24, 1978, 52 FR 45044), and “the Little Bluebook” (Guidance Document for Correcting Common VOC & Other Rule D eficiencies ), EPA Region 9, August
21, 2001.

2. Rule Relaxation

- EPA must evaluate whether this SIP revision would interfere with any applicable requirement concerning attainment and reasonable further progress (RFP) or any requirement of the Act (CAA 110( l)) or modify, in a nonattainment area, any SIP

- approved control requirement in effect before November 15, 1990 (CAA 193 ).

3. Stringency

- Section 182(b)(2) of the Clean Air Act requires certain SIP rules to apply Reasonably Available Control Technology (RACT). Other sections of the Act require other

control levels.

4. State Implementation Plans; General Preamble for the Implementation of Title I of the Clean Air Act Amendments of 1990," 57 FR 13498 (April 16, 1992); 57 FR 18070 (April 28, 1992)

. State I mplementation Plans; Nitrogen Oxides Supplement to the General Preamble; Clean Air Act Amendments of 1990 Implementation of Title I; Proposed Rule,” (the NO

x Supplement), 57 FR 55620, November 25, 1992.

5. Economic Incentive Programs

- EPA published the guid ance, “Improving Air Quality with Economic Incentive Programs” on January 2001 (EPA

- 452/R

- 01

- 001). The g uidance

available at http://www.epa.gov/ttncaaa1/t1/meta/m1201.html

. This guidance applie s to discretionary economic incentive programs (EIPs) and represents the agency’s interpretation of what EIPs should contain in order to meet the requirements of the Clean Air Act. Because this guidance is non

- binding and does not represent final agency a ction, EPA is using the guidance as an initial screen to determine whether potential approvability issues arise.

EPA EVALUATION The submitted rules comply with the evaluation criteria as discussed below.

1. Enforceability

– The rules are generally clear and consistent with the Bluebook and the Little Bluebook and other relevant EPA guidance regarding enforceability.5

2. Rule Relaxation

– EPA believes that this SIP revision would comply with CAA sections 110(l) and 193, because it would not interfere with th e on

- going process for ensuring that requirements for RFP and attainment of the NAAQS are met

. EPA evaluated whether this amendment could be viewed as a relaxation since it eliminates the requirement to hold, at the beginning of the second and subsequent compliance years, sufficient RTCs to offset

emissions increases. In fact

, t his amendment has no effect on allowable emissions and would

not result in emissions increases. The amendment : i ) changes the time at which a facility

must hold sufficient RTCs f rom the beginning of the compliance year to the end of each quarter and the compliance year
, and ii) requires that the amount of RTCs to be held to be equal to actual emissions rather than its maximum potential to emit emissions for facilities

with emissio ns still below their starting allocation

. Furthermore, this amendment is consistent with EPA’s original understanding of how the NSR offset requirement would be implemented in the RECLAIM program. EPA’s November 8, 1996 limited approval and limited disap proval of RECLAIM (61 FR 57775) s tated, “The NSR offset requirements would only be triggered if a particular facility exceeded its initial RECLAIM allocation plus nontradeable emission allocation.” (see 61 FR 57777)

3. Stringency

– While the CAA RACT require ments do not specifically apply to Rule 2005 because Rule 2005 addresses the NSR permit program requirements, the RECLAIM program

as a whole is subject to the CAA RACT requirements. In EPA’s original approval of the RECLAIM program, EPA determined that th e program met the CAA RACT requirements.

Th is amendment do es not change EPA’ s previous determination.

4. General Preamble and NO

x Supplement

– In EPA’s original approval of the RECLAIM program, EPA determined that the program is consistent with the General Preamble and NO

x Supplement. These amendments do not change EPA’s previous determination.

5. EIP Guidance

– In EPA’s original approval of RECLAIM, EPA determined that the program was consistent EPA’s 1994 guidance for economic incentive programs at 40 CFR 5 1 Subpart U. These amendments do not significantly modify the operation of the SIP

- approved program and are generally consistent with EPA’s 2001 guidance as well.

EPA ACTION

EPA staff recommend s full approval o f the submitted revision to Rule 200 5 b ecause it compl ies with all relevant Clean Air Act requirements including those regarding enforceability and it is consistent with EPA’s guidance for economic incentive programs.

RECOMMENDATION While the RECLAIM program provides a definition of the term “allocation

, 3 ” the term is much

more nuanced and relies on the context

, specific RECLAIM rule , and adjectives (e.g., “annual allocation,” “starting allocation,” and whether annual allocations are RTCs assigned by SCAQMD or merely held by the facility )

. W e found the use s of the term confusing. We believe

t he program would benefit from additional clarifications in future actions.

3 See footnote number 1.6

REFERENCES SCAQMD SIP approved Rules 2000, 2002, & 2004 are available at EPA Region 9’s SIP website

under “ South Coast Air Qua lity Management District ” at: http://yosemite.epa.gov/r9/r9sips.nsf/Casips?readform&count=100&state=California