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# OAR Box 1787
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## y UNITE D STATE S ENVIRONMENTA L PROTECTIO N AGENC Y

Offic e o f Ai rQualit yPlannin g an d Standard s Researc h Triangl e Park

. Nort h Carolin a 2771 1



### MA R 3 I99 3

Mr . Bruc e S . Carhar t Executive Directo r Ozon e Transpor t Commissio n 44 4 Nort hCapito l Street , N..W . Suit e 60 4 Washington , D.C . 2000 1

Dea r Bruce : Thi s i s i n respons e t o your questions , raised i n you r Decembe r 30 , 199 2 lette r t o me , concernin g th e Ozon e Transpor t Commission' s (Commission ) investigatio no f the possibilit y o f a regionwid e nitroge n oxide (NO x ) offset s tradin

g program . Th e priorit y

th e Commissio

n ha s give n thi s progra m reflect s th e concer no f it s constituen t State s an d industrie s i nthe Ozon e Transpor t Regio n(OTR ) tha t emission s reduction s be achieved whil e minimizing the constraint s o n economi c growth . A s yo u know , th e Environmenta l Protectio n Agenc y (EPA) - share s thi s concernan

d ha s been evaluatin g a number o f market-based an d regiona l trading issues . O f course , w e als o shar e th e Commission' s desir e tha t an y suchtradin

g programs b e bot h environmentall y

an d legall y

sound . You r lette r expressed interes t i n the EPA' s respons e t o question s regarding market-based emission s tradin g programs raise d i na Jul y

29 , 199 2 lette r fro m Michae l Bradley

o f th e Northeas t State s for Coordinated Ai r Us e Managemen t (NESCAUM ) t o Willia m Rosenberg , forme r Assistan t Administrator fo r Ai r an d Radiation . Th e Agency i s continuin

g t o stud

y th e issue s raise d i nth e NESCAU

M lette r an

d intend s t o respon d t o th e question s raise d ther e i n th e nea r future . I naddition , your lette r requeste d the EPA' s views regarding specifi c element s o f a n approachth e Stationary/Are a Sourc e Committe e o f th e Commissio nha s develope

d regardin

g a n interstat e offse t system . You r lette r identifie s "th e tw o mai nstatutor

y requirement s fo r offsets " generall y a s follows : (1 ) offset s mus t b e obtaine d fro

m anare a wit hanequa l o r highe r nonattainmen t classificationa s the are a i nwhic hth e ne w sotirc e i s locating , an d (2 ) offset s mus t have a beneficia l ai r qualit y impac t o nth e are a i nwhic hth e ne w sourc e i s locating . Unde r the Committee' s approach , onl y

th e nonattainmen t classificatio nconstrain t nee d b e satisfie d o na case-by-cas e basis . Yo u reason that—becaus e Congres s created th e OTR a s a singl e an d unique ai r qualit yP. 3

plannin g region—offset s anywher e i n the OTRarguabl y "b y definitionprovid e a beneficia l ai r quality impact. " Also , unde r th e Committee' s approach , moderate , marginal , an d incomplete/n

o dat a nonattainmen t areas , a s wel l a s attainmen t area s withi nth e OTR , woul d al l b e considered moderat e area s for purpose s o f offsets . You explai n tha t thes e area s woul d thu s constitut e a "fre e trad e zone " i nth e OTR , whic hyou asser t i s consisten t wit h th e Clean Ai r Act' s (Act's ) treatmen t o f ozone transpor t regions . Finally , yo u not e tha t ne w source s i n seriou s area s coul d obtai n offset s fro

m an y seriou s or sever e are a i nthe OTR , an d thos e locatin g i nsever e area s cojil d obtai noffset s fro m an y sever e are a i nthe OTR . Th e EPA' s Offic e o f Ai r Qualit y Plannin

g an d Standard s ha s established a wor k grou p t o addres s issue s raised b y th e Committee' s approach . Th e followin g ar e our preliminar y conclusions . Statutor

y Provision s Section 173(c)(1 ) o f the Ac t set s ou t the term s unde r whic h source s may

trad e offsets . Wher e th e sourc e reducin g emission s t o provid e offset s i s locate d i n th e sam

e nonattainmen t are a a s the new source , n o specia l condition s o ntradin

g apply . Th e source s may

eve nb e locate

d i n differen t States . Wher e th e sourc e reducing emission s t o provid e offset s i s locate d i n a v differen t nonattainmen t are a than th e ne w source , tw

o specia l condition s apply . Unde r sectio n 173(c)(1 ) (A) , th e are a i n whic h the sourc e i s reducin g emission s t o provide offsets - mus t hav e a n equa l o r highe r nonattainmen t classificatio n a s th e are a wher e the new sourc e i s locating . Unde r sectio n173(c)(1)(B) , emission s fro

m th e are a i n whic hth e sourc e i s reducin g emission s mus t contribut e t o a violationo f th e nationa l ambien t ai r qualit y standard s (NAAQS ) i n the are a wher e the ne w sourc e i s locating . Section 184(b ) o f th e Ac t provide s tha t stationar y source s tha t emi t o r have : th e potentia l t o emi t 5 0 ton s pe r yea r (tpy ) o f volatil e organi c compound s (VOC ) shal l be considere d a majo r stationar

y sourc e an

d subjec t t o th e requirement s tha t woul d b e applicabl e t o i t i f th e are a wer e classifie d a s a moderat e nonattainmen t area . Unde r sectio n182(f) , the planprovision s required fo r majo r VO C source s als o appl y t o majo r NO , sources . Section182(b)(5 ) specifie s tha t th e offse t rati o applicabl e t o majo r source s i nmoderat e area s i s 1.15:1 . Ne w majo r NO , source s (i.e. , 10 0 tpy ) i nth e attainment , incomplete/n o data , margina l an d moderat e area s o f th e OT Rmus t satisfy thi s offse t ratio .P. 4

ffonafc-ha-JT-iment Classification for Offset s Purpose s

We d o no t believe tha t moderate , marginal , incomplete/n o dat a nonattainmen t areas , a s wel l a s attainmen t area s withi n the OTR , ma y b e considered moderat e area s for purpose s o f securing offsets . We recogniz e tha t source s i nthes e area s ar e al l subjec t t o th e requirement s tha t woul d be applicabl e t o the m i f th e area s wer e classified a s moderat e nonattainmen t areas . Nonetheless , sectio n173(c)(1 ) b

y it s term

s provide s tha t offset s mus t b e obtained fro m an are a o f equa l or highe r nonattainmen t classification , an d thes e area s have designated classification s unde r section10 7 tha t govern . We believ e tha t the genera l polic y o f section173(c)(1)—t o preven t offset s generated i nles s pollute d area s fro m being use

d fo r ne

w growt hi nmor e pollute d area s eveni f contributioni s demonstrated—applie s equall y i n th e OTR . W e d o no t thin k emission s reduction s i n anattainmen t are a ca n offse t ne w growt hi na designated nonattainmen t are a consisten t wit hsection 173(c)(1) . Offset s Trading i nNonattainmen t Area s o f the OTR Section173(c)(1 ) applie s b y it s term

s t o offset s tradin g betwee ndesignate d nonattainmen t areas . A s noted above , offset s may b e obtained fro

m an y locatio

n withi nthe sam

e nonattainmen t area . I f th e source s ar e no t i n th e sam e nonattainmen t area , however , th e designation an d contributio

ncondition s o f section- 173(c)(1)(A ) an

d (B ) mus t b e satisfied . Unde r (A) , th e offset s mus t b e obtained fro m a n area o f equa l o r highe r nonattainmen t classification . Unde r (B) , contributio nmus t exist . W e believe tha t sectio n173(c)(1)(B ) authorize s th e EPA t o establis ha reasonabl e contributio ntest , an

d tha t th e Agenc y

ha s broad discretion t o determine the applicabl e test , s o lon g a s i t i s technicall y

supportable . A t thi s time , we d o no t believe i t i s technicall y

feasibl e t o mode l th e NO , emission s contribution fo r ozon e fo r a singl e offse t transaction . A mor e genera l contributiontes t mus t therefor e b e adopted . On e possibl e tes t i s tha t th e new

sourc e migh t demonstrat e tha t th e sourc e tha t i s reducing emission s i s withi n2 day s transpor t upwin d o f th e new sourc e location . Alternatively , th e sourc e tha t i s reducing emission s migh t b e constrained t o b e withi n a specified upwin d distanc e fro

m th e ne w source , sucha s a defaul t valu e o f 20 0 kilometers . I nth e forme r case , th e source s woul d bea r th e burde no f thi s demonstration a s par t o f the approva l proces s fo r the trade . W e woul d welcom

e your comment s o

n thes e possibl e contributiontests , a s wel l a s an y suggestion s fo r othe r potentia l tests . O f course , the tes t adopte d fo r the OT R coul d have importan t implication s for th e tes t applicabl e i nothe r nonattainmen t area s elsewher e i nth e country .3

. 5

Offset s Tradin

g i nAttainmen t Area s o f the OTR
Th e terms o f sectio n173(c)(1 ) refe r t o nonattainmen t area s an d contributiont o a violationo f th e NAAQS , an

d therefor e d o no t appl y

literall y

t o offset s tradin

g betweendesignate d attainmen t areas . Th e EP A ha s discretio

nt o fil l thi s gap , consisten t wit hth e spiri t o f sectio

n173(c)(1), 1 the reason s ne w sourc e revie

w applie s t o source s i n the attainmen t area s o f th e OTRunde r sectio

n 184(b), 2 an

d the policie s reflected i n th e EPA' s EmissionOffse t Interpretiv e Ruling , 4 0 CFRpar t 51 , Appendi xS. 3 I nexercising-Jthi s discretion , th e EP A want s t o provid e a flexibl e approachtha t i s consisten t wit hth e overal l goal s o f th e Commission , i s environmentall y sound , an

d legall y supportable . Applying thes e consideration s t o th e uniqu e circumstance s o f offset s trading i n attainmen t area s o f th e OTR , our polic y preferenc e i s t o permi t th e State s t o allo w offset s trading withi nthos e attainmen t area s withou t furthe r limitations . Th e lega l suppor t fo r thi s approac hrest s o n th e purposes , structure , an d technica l assumption s underlyin g sectio

n184(b) . Congres s included attainmen t area s i n th e OT R based o n th e presumption tha t they

constitut e a sourc e o f emission s tha t contribute s t o nonattainmen t i n the OTR , subjec t t o remova l fro m th e OT R unde r section176A(a ) (2 ) i f th e Administrato r ha s reason t o believe a n are a doe s no t contribute . Contributionwa s no t established i n- .

1 Th e geographi c restriction s o f sectio n 173(c)(1 ) appea r t o reflec t Congress' s intent tha t th e emission s impac t du e t o new growt hb e offse t b y emission s reduction s tha t benefi t th e ai r qualit y wher e th e ne

w sourc e i s locating .

2 Congres s presumabl y included i n sectio n184(b ) control s o n emission s i nattainmen t area s withi n the OT Ri n orde r t o addres s ozon e violation s i nthe OTR' s nonattainmen t areas .

3 Th e Offse t Rulin

g wa s developed prio r t o the 199 0 Amendments , an

d thu s prio r t o th e extensio no f th e new

sourc e revie w offset s requirement s t o attainmen t areas , t o th e specification o f offse t ratios , an d t o th e specifi c geographi c limitation s o f sectio n173(c)(1) . The Offse t Ruling does , however , indicat e tha t offset s shoul d b e obtained "withi nth e broad vicinit y

o f the proposed ne w source, " an

d tha t offset s woul d b e "acceptabl e i f obtained fro m othe r area s tha t may b e contributin

g t o the ozone proble m a t th e proposed ne

w sourc e location. " Th e Offse t Ruling furthe r note s tha t "i t i s desirabl e t o obtai noffset s fro m source s locate

d a s clos e t o th e propose d ne w sourc e a s possible. " Thi s policy i s consisten t wit hth e apparen t inten t o f sectio n173(c)(1 ) t o ensur e tha t th e emission s reduction s offset s counterac t th e emission s impac t tha t th e ne w sourc e wil l cause .P. 6

fac t o r degre e fo r eachattainmen t are a included . Arguably , the sam e genera l approachcoul d carr y ove r whenemission s ar e rearranged an

d reduce

d overal l i nthe attainmen t area s throug h application o f the offset s program . A s overal l contributio nfro m attainmen t area s wa s sufficien t t o include the m i nthe OT R withou t consideratio no f specifi c location , overal l reduction s in emission s fro

m attainmen t area s shoul d likewis e b e sufficien t withou t consideratio no f specifi c location . I n a sense , thes e area s migh t b e viewed a s constitutin g a singl e are a for offset s purpose s unde r thi s approach . Thus , ensurin g tha t emission s reduction s offset s counterac t th e emission s impac t tha t the ne w sourc e wil l caus e i nth e OT Roveral l woul d als o satisf y the policie s o f sectio n173(c)(1 ) an

d the offse t rulin

g a s applied t o attainmen t are a control s i n th e OTR . Further , i t follow s tha t an y attainmen t are a coul d obtai nemission s offset s fro m an y nonattainmen t are a i nth e OT Rwithou t furthe r limitations . Th e EPA' s policy

preferenc e i s based , i npart , onou r recognitiontha t th e densit y o f majo r NO , source s i s greates t i n th e wester n an

d southwestern area s o f th e OTR—area s generall y upwin d o f mos t designated ozon e nonattainmen t area s i n th e OTR . W e expec t tha t emission s reduction s a t existin g facilities , t o offse t ne

w growt hi nth e OTR , woul d mos t oftencom e fro m thes e upwin d area s an

d thus , les s frequentl y fro m downwin

d o r to o fa r upwin d locations . The benefit s o f suchtrade s ar e cleares t whe n offset s com

e fro m nearb y upwin d sources . However , evenwhe n offset s com

e fro m downwin

d source s o r source s tha t ar e very fa r upwind , th e emission s reduction s stil l benefi t th e overal l OTR , eve ni f the

y ma y no t substantiall y

affec t the ozone nonattainmen t area s tha t th e ne

w sourc e wil l impact . Ther e is , however , a n alternativ e vie w tha t fo r offset s tradin g betwee ndesignated attainmen t area s withi n th e OTR , emission s fro

m the are a wher e th e offset s ar e generated mus t contribut e t o a violatio n o f th e NAAQ S i n a nonattainmen t are a tha t th e ne

w sourc e wil l impact. 4 Thi s alternativ e vie w incorporate s bot hthe implici t purpos e o f sectio n184(b ) t o protec t downwin

d nonattainmen t area s a s wel l a s th e provisiono f section173(c)(1 ) tha t th e loca l impact s o f ne w growt hb e connected t o offsettin g emission s reductions . Unde r thi s approach , emission s reduction s fro m downwin

d source s o r fro

m source s to o fa r upwin d coul d no t b e use d a s offsets . Suchan alternative vie

w coul d presumabl y

b e base

d o nthe sam

e kin d o f contributiontes t a s tha t applicabl e for tradin g i n nonattainmen t

Similarly , i f offset s ar e generated i na nonattainmen t are a fo r a ne

w sourc e locatin

g i n anattainmen t area , the nonattainmen t area' s emission s mus t contribut e t o a violation o f th e NAAQ S i n anothe r nonattainmen t are a tha t th e ne w sourc e wil l impact .P. 7

areas . W e woul d appreciat e furthe r analysi s and comment s fro m th e Commissio n o r it s constituen t State s regardin g thes e tw o approache s concernin g th e relativ e cost s o f applyin g th e contributio n test , th e relativ e environmenta l benefits , and th e lega l analysis

. W e ar e als o receptiv e t o considerin g an yothe r approache s tha t yo u develop

. I n anycase , pleas e not e tha t source s locatin g i n eithe r ozon e o r nitroge n dioxid e attainmen t area s o f th e OT R als o mus t compl ywit h th e requirement s o f th e preventio n o f significan t deterioratio n (PSD ) program . I n certai n limite d case s wher e source s mus t limi t ambien t impact s o n Clas s I area s o r increments , i f offset s secure d i n othe r area s d o no t sufficientl y impac t th e are a wher e th e ne w sourc e i s locating , th e ne w sourc e ma ynee d t o secur e othe r reduction s t o satisf ythes e PS D concerns . Beyon d th e polic yissue s discusse d above , i t i s importan t t o not e tha t ther e ar e enforceabilit yissue s relate d t o any interare a and/o r interstat e tradin g program s whic h wil l nee d t o b e satisfactoril yresolved

. A s you r programdevelopmen t progresses , w e wil l b e happ yt o wor k wit h yo u t o identif yan d addres s thes e enforcemen t issues

. Pleas e contac t m e i f yo u hav e an yquestion s o r comment s abou t thes e issues

. Afte r yo u hav e ha d a n opportunit yt o studyv thes e conclusion s wit h th e Stationary/Are a Sourc e Committe e an d th e Commission , w e loo k forwar d t o workin g closel ywit h yo u t o develo p a specifi c programan d t o resolv e an

youtstandin g issues

. Sincerely ,

Directo r Offic e o f Ai r Qualit yPlannin g

an d Standard s