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OAR Box 1787 

Prepped by Ollie Stewart 

Document Number: 

93) ll-C-51 

Docket Number: 

A-90-37 

Printed 11/4/2008 10:22:20 AM Sheet 93 of 147 
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY 

Office of Air Quality Planning and Standards 

Research Triangle Park. North Carolina 27711 

MAR 3 I993 

Mr. Bruce S. Carhart 

Executive Director 

Ozone Transport Commission 

444 North Capitol Street, N..W. 

Suite 604 

Washington, D.C. 20001 

Dear Bruce: 

This is in response to your questions, raised in your 

December 30, 1992 letter to me, concerning the Ozone Transport 

Commission's (Commission) investigation of the possibility of a 

regionwide nitrogen oxide (NOx) offsets trading program. The 

priority the Commission has given this program reflects the 

concern of its constituent States and industries in the Ozone 

Transport Region (OTR) that emissions reductions be achieved 

while minimizing the constraints on economic growth. As you 

know, the Environmental Protection Agency (EPA)- shares this 

concern and has been evaluating a number of market-based and 

regional trading issues. Of course, we also share the 

Commission's desire that any such trading programs be both 

environmentally and legally sound. 

Your letter expressed interest in the EPA's response to 

questions regarding market-based emissions trading programs 

raised in a July 29, 1992 letter from Michael Bradley of the 

Northeast States for Coordinated Air Use Management (NESCAUM) to 

William Rosenberg, former Assistant Administrator for Air and 

Radiation. The Agency is continuing to study the issues raised 

in the NESCAUM letter and intends to respond to the questions 

raised there in the near future. 

In addition, your letter requested the EPA's views regarding 

specific elements of an approach the Stationary/Area Source 

Committee of the Commission has developed regarding an interstate 

offset system. Your letter identifies "the two main statutory 

requirements for offsets" generally as follows: (1) offsets must 

be obtained from an area with an equal or higher nonattainment 

classification as the area in which the new sotirce is locating, 

and (2) offsets must have a beneficial air quality impact on the 

area in which the new source is locating. Under the Committee's 

approach, only the nonattainment classification constraint need 

be satisfied on a case-by-case basis. You reason that—because 

Congress created the OTR as a single and unique air quality 
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planning region—offsets anywhere in the OTR arguably "by 

definition provide a beneficial air quality impact." Also, under 

the Committee's approach, moderate, marginal, and incomplete/no 

data nonattainment areas, as well as attainment areas within the 

OTR, would all be considered moderate areas for purposes of 

offsets. You explain that these areas would thus constitute a 

"free trade zone" in the OTR, which you assert is consistent with 

the Clean Air Act's (Act's) treatment of ozone transport regions. 

Finally, you note that new sources in serious areas could obtain 

offsets from any serious or severe area in the OTR, and those 

locating in severe areas cojild obtain offsets from any severe 

area in the OTR. 

The EPA's Office of Air Quality Planning and Standards has 

established a work group to address issues raised by the 

Committee's approach. The following are our preliminary 

conclusions. 

Statutory Provisions 

Section 173(c)(1) of the Act sets out the terms under which 

sources may trade offsets. Where the source reducing emissions 

to provide offsets is located in the same nonattainment area as 

the new source, no special conditions on trading apply. The 

sources may even be located in different States. Where the 

source reducing emissions to provide offsets is located in a v 

different nonattainment area than the new source, two special 

conditions apply. Under section 173(c)(1) (A), the area in which 

the source is reducing emissions to provide offsets- must have an 

equal or higher nonattainment classification as the area where 

the new source is locating. Under section 173(c)(1)(B), 

emissions from the area in which the source is reducing emissions 

must contribute to a violation of the national ambient air 

quality standards (NAAQS) in the area where the new source is 

locating. 

Section 184(b) of the Act provides that stationary sources 

that emit or have: the potential to emit 50 tons per year (tpy) of 

volatile organic compounds (VOC) shall be considered a major 

stationary source and subject to the requirements that would be 

applicable to it if the area were classified as a moderate 

nonattainment area. Under section 182(f), the plan provisions 

required for major VOC sources also apply to major NO, sources. 

Section 182(b)(5) specifies that the offset ratio applicable to 

major sources in moderate areas is 1.15:1. New major NO, sources 

(i.e., 100 tpy) in the attainment, incomplete/no data, marginal 

and moderate areas of the OTR must satisfy this offset ratio. 
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ffonafc-ha-JT-iment Classification for Offsets Purposes 

We do not believe that moderate, marginal, incomplete/no 

data nonattainment areas, as well as attainment areas within the 

OTR, may be considered moderate areas for purposes of securing 

offsets. We recognize that sources in these areas are all 

subject to the requirements that would be applicable to them if 

the areas were classified as moderate nonattainment areas. 

Nonetheless, section 173(c)(1) by its terms provides that offsets 

must be obtained from an area of equal or higher nonattainment 

classification, and these areas have designated classifications 

under section 107 that govern. We believe that the general 

policy of section 173(c)(1)—to prevent offsets generated in less 

polluted areas from being used for new growth in more polluted 

areas even if contribution is demonstrated—applies equally in 

the OTR. We do not think emissions reductions in an attainment 

area can offset new growth in a designated nonattainment area 

consistent with section 173(c)(1). 

Offsets Trading in Nonattainment Areas of the OTR 

Section 173(c)(1) applies by its terms to offsets trading 

between designated nonattainment areas. As noted above, offsets 

may be obtained from any location within the same nonattainment 

area. If the sources are not in the same nonattainment area, 

however, the designation and contribution conditions of section -

173(c)(1)(A) and (B) must be satisfied. Under (A), the offsets 

must be obtained from an area of equal or higher nonattainment 

classification. Under (B), contribution must exist. 

We believe that section 173(c)(1)(B) authorizes the EPA to 

establish a reasonable contribution test, and that the Agency has 

broad discretion to determine the applicable test, so long as it 

is technically supportable. At this time, we do not believe it 

is technically feasible to model the NO, emissions contribution 

for ozone for a single offset transaction. A more general 

contribution test must therefore be adopted. One possible test 

is that the new source might demonstrate that the source that is 

reducing emissions is within 2 days transport upwind of the new 

source location. Alternatively, the source that is reducing 

emissions might be constrained to be within a specified upwind 

distance from the new source, such as a default value of 200 

kilometers. In the former case, the sources would bear the 

burden of this demonstration as part of the approval process for 

the trade. 

We would welcome your comments on these possible 

contribution tests, as well as any suggestions for other 

potential tests. Of course, the test adopted for the OTR could 

have important implications for the test applicable in other 

nonattainment areas elsewhere in the country. 
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Offsets Trading in Attainment Areas of the OTR 

The terms of section 173(c)(1) refer to nonattainment areas 

and contribution to a violation of the NAAQS, and therefore do 

not apply literally to offsets trading between designated 

attainment areas. The EPA has discretion to fill this gap, 

consistent with the spirit of section 173(c)(1),1 the reasons new 

source review applies to sources in the attainment areas of the 

OTR under section 184(b),2 and the policies reflected in the 

EPA's Emission Offset Interpretive Ruling, 40 CFR part 51, 

Appendix S.3 In exercising-Jthis discretion, the EPA wants to 

provide a flexible approach that is consistent with the overall 

goals of the Commission, is environmentally sound, and legally 

supportable. 

Applying these considerations to the unique circumstances of 

offsets trading in attainment areas of the OTR, our policy 

preference is to permit the States to allow offsets trading 

within those attainment areas without further limitations. The 

legal support for this approach rests on the purposes, structure, 

and technical assumptions underlying section 184(b). Congress 

included attainment areas in the OTR based on the presumption 

that they constitute a source of emissions that contributes to 

nonattainment in the OTR, subject to removal from the OTR under 

section 176A(a) (2) if the Administrator has reason to believe an 

area does not contribute. Contribution was not established in -. 

1 The geographic restrictions of section 173(c)(1) appear to 

reflect Congress's intent that the emissions impact due to new 

growth be offset by emissions reductions that benefit the air 

quality where the new source is locating. 

2 Congress presumably included in section 184(b) controls on 

emissions in attainment areas within the OTR in order to address 

ozone violations in the OTR's nonattainment areas. 

3 The Offset Ruling was developed prior to the 1990 

Amendments, and thus prior to the extension of the new source 

review offsets requirements to attainment areas, to the 

specification of offset ratios, and to the specific geographic 

limitations of section 173(c)(1). The Offset Ruling does, 

however, indicate that offsets should be obtained "within the 

broad vicinity of the proposed new source," and that offsets 

would be "acceptable if obtained from other areas that may be 

contributing to the ozone problem at the proposed new source 

location." The Offset Ruling further notes that "it is desirable 

to obtain offsets from sources located as close to the proposed 

new source as possible." This policy is consistent with the 

apparent intent of section 173(c)(1) to ensure that the emissions 

reductions offsets counteract the emissions impact that the new 

source will cause. 
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fact or degree for each attainment area included. Arguably, the 

same general approach could carry over when emissions are 

rearranged and reduced overall in the attainment areas through 

application of the offsets program. As overall contribution from 

attainment areas was sufficient to include them in the OTR 

without consideration of specific location, overall reductions in 

emissions from attainment areas should likewise be sufficient 

without consideration of specific location. In a sense, these 

areas might be viewed as constituting a single area for offsets 

purposes under this approach. Thus, ensuring that emissions 

reductions offsets counteract the emissions impact that the new 

source will cause in the OTR overall would also satisfy the 

policies of section 173(c)(1) and the offset ruling as applied to 

attainment area controls in the OTR. Further, it follows that 

any attainment area could obtain emissions offsets from any 

nonattainment area in the OTR without further limitations. 

The EPA's policy preference is based, in part, on our 

recognition that the density of major NO, sources is greatest in 

the western and southwestern areas of the OTR—areas generally 

upwind of most designated ozone nonattainment areas in the OTR. 

We expect that emissions reductions at existing facilities, to 

offset new growth in the OTR, would most often come from these 

upwind areas and thus, less frequently from downwind or too far 

upwind locations. The benefits of such trades are clearest when 

offsets come from nearby upwind sources. However, even when 

offsets come from downwind sources or sources that are very far 

upwind, the emissions reductions still benefit the overall OTR, 

even if they may not substantially affect the ozone nonattainment 

areas that the new source will impact. 

There is, however, an alternative view that for offsets 

trading between designated attainment areas within the OTR, 

emissions from the area where the offsets are generated must 

contribute to a violation of the NAAQS in a nonattainment area 

that the new source will impact.4 This alternative view 

incorporates both the implicit purpose of section 184(b) to 

protect downwind nonattainment areas as well as the provision of 

section 173(c)(1) that the local impacts of new growth be 

connected to offsetting emissions reductions. Under this 

approach, emissions reductions from downwind sources or from 

sources too far upwind could not be used as offsets. Such an 

alternative view could presumably be based on the same kind of 

contribution test as that applicable for trading in nonattainment 

Similarly, if offsets are generated in a nonattainment area 

for a new source locating in an attainment area, the 

nonattainment area's emissions must contribute to a violation of 

the NAAQS in another nonattainment area that the new source will 

impact. 
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areas. We would appreciate further analysis and comments from 

the Commission or its constituent States regarding these two 

approaches concerning the relative costs of applying the 

contribution test, the relative environmental benefits, and the 

legal analysis. We are also receptive to considering any other 

approaches that you develop. 

In any case, please note that sources locating in either 

ozone or nitrogen dioxide attainment areas of the OTR also must 

comply with the requirements of the prevention of significant 

deterioration (PSD) program. In certain limited cases where 

sources must limit ambient impacts on Class I areas or 

increments, if offsets secured in other areas do not sufficiently 

impact the area where the new source is locating, the new source 

may need to secure other reductions to satisfy these PSD 

concerns. 

Beyond the policy issues discussed above, it is important to 

note that there are enforceability issues related to any 

interarea and/or interstate trading programs which will need to 

be satisfactorily resolved. As your program development 

progresses, we will be happy to work with you to identify and 

address these enforcement issues. 

Please contact me if you have any questions or comments 

about these issues. After you have had an opportunity to study v 

these conclusions with the Stationary/Area Source Committee and 

the Commission, we look forward to working closely with you to 

develop a specific program and to resolve any outstanding issues. 

Sincerely, 

Director 

Office of Air Quality Planning 

and Standards