# Federal Register, Volume 59 Issue 67 (Thursday, April 7, 1994) 

# [Federal Register Volume 59, Number 67 (Thursday, April 7, 1994)] [Unknown Section] [Page 0] From the Federal Register Online via the Government Printing Office [ www.gpo.gov ] [FR Doc No: 94-6828] [[Page Unknown]] [Federal Register: April 7, 1994]

_______________________________________________________________________ Part II Environmental Protection Agency

_______________________________________________________________________ 40 CFR Part 51 Economic Incentive Program Rules; Final Rule ENVIRONMENTAL PROTECTION AGENCY 40 CFR Part 51 [FRL-4853-8] RIN 2060-AD58 Economic Incentive Program Rules AGENCY: Environmental Protection Agency (EPA).

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# ACTION: Final rule and guidance. ----------------------------------------------------------------------- SUMMARY: This action promulgates rules for economic incentive programs (EIP's) which either may or must be adopted by States for certain ozone (O3) and carbon monoxide (CO) nonattainment areas upon the failure of a State to submit an adequate showing that an applicable reasonable further progress (RFP) or a specific emissions reductions milestone has been met (in serious, severe, and extreme O3 and serious CO nonattainment areas) or upon the failure of a serious CO nonattainment area to attain the national ambient air quality standards (NAAQS) for CO. Under the Clean Air Act as amended in 1990 (Act), the EPA was required to promulgate final EIP rules for stationary, area, and mobile sources by November 15, 1992; this action is that rulemaking. The provisions of today's rules are also guidance for discretionary EIP's that any State may choose to adopt for any criteria pollutant, as explicitly allowed for in the Act. The Agency views this action as an opportunity to encourage the development and early implementation of appropriate EIP's. In so doing, the Agency hopes these rules and guidance will stimulate the adoption of incentive-based, innovative programs, where appropriate, that will assist States in meeting air quality management goals through flexible approaches which benefit both the environment and the regulated entities, allow for less costly control strategies, and provide stronger incentives for the development and implementation of pollution prevention measures and innovative emissions reductions technology. The EPA intends that the portion of the preamble and rules published today that concern discretionary EIP's constitute guidance, not final action. Final action with respect to discretionary EIP's will occur when the EPA approves or disapproves State implementation plan (SIP) revisions containing discretionary EIP's. EFFECTIVE DATE: The regulations in this rulemaking go into effect on April 7, 1994. ADDRESSES: The public docket for this action, A-91-56, including copies of the public comments on the EPA's February 23, 1993 proposed rulemaking, is available for public inspection and copying between 8 a.m. and 4 p.m., Monday through Friday, at the address listed below. A reasonable fee for copying may be charged. The address of the EPA Air Docket is EPA Central Docket Section, South Conference Center, room 4, 401 M Street, SW, Washington, DC 20460. FOR FURTHER INFORMATION CONTACT: Mr. Willis P. Beal, U.S. EPA, MD-12, Research Triangle Park, North Carolina 27711, telephone (919) 541-5667. SUPPLEMENTARY INFORMATION: The contents of today's preamble are listed in the following outline:

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# I. Background and Purpose A. Introduction B. Overview C. Principles and Regulatory Elements II. Summary of Rules and Guidance A. Applicability B. Definitions C. State Program Election and Submittal D. State Program Requirements E. Use of Program Revenues III. Discussion of Rules and Guidance A. Applicability B. Definitions C. State Program Election and Submittal D. State Program Requirements E. Use of Program Revenues IV. Discussion of Comments and Regulatory Changes A. Program Goals B. Interface With Reasonably Available Control Technology (RACT) and Other Statutory Requirements C. Program Baseline D. Emission Quantification E. Monitoring, Recordkeeping, Reporting (MRR) F. State Implementation Plan (SIP) Creditability G. Audit/Reconciliation Procedures H. Penalties for Noncompliance I. Interface With Existing Emission Trading Policies J. General Issues V. Administrative Requirements A. Executive Order 12866 B. Paperwork Reduction Act C. Regulatory Flexibility Act I. Background and Purpose A. Introduction The Act, as amended in 1990, broadly encourages the use of incentive-based approaches to control air pollution. This encouragement is reflected not only in the title IV acid rain program, but also in the title I general provisions for State and Federal implementation plans for achieving the NAAQS for criteria pollutants, as well as in the provisions for certain Federal O3 measures. In title I, incentive-based approaches are encouraged, and, in certain cases, mandated, through the use of what has been termed an ``economic incentive program.'' Today's notice promulgates rules and guidance for EIP's adopted by the States pursuant to title I of the Act. The Agency views this action as an opportunity to encourage and provide guidance on the early implementation of appropriate

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# discretionary EIP's, as well as to provide mandated rules for use by States after certain specific failures occur. The Agency hopes that this guidance will stimulate the early adoption of innovative, incentive-based approaches, where appropriate, that will assist the States in avoiding such failures, reaching attainment of the NAAQS faster than might otherwise occur solely through the use of traditional regulatory strategies, and lowering the cost of attaining and maintaining the NAAQS. Through this action, the Agency intends to encourage the development of EIP's which benefit both the environment and the regulated entities by increasing flexibility and stimulating the use of less costly strategies, as well as by providing stronger incentives for development and implementation of pollution prevention measures, innovative emissions reductions technology, and strategies beyond those specifically mandated through State and Federal standards and regulations. The Agency believes that these goals can be met by EIP's that also meet the standards of accountability and enforceability currently found in traditional regulatory programs. B. Overview Today's notice promulgates rules for EIP's which may be adopted by an authorized governing body, including States, local governments, and Indian governing bodies (henceforth State), for certain O3 and CO nonattainment areas pursuant to sections 182(g)(3), 182(g)(5), 187(d)(3), and 187(g) of the Act. These sections mandate for certain areas, and identify as one of three options for certain other areas, the use of EIP's in certain cases. An EIP is mandated upon the failure of a State to submit an adequate demonstration showing that the area has met applicable milestones for RFP in extreme O3 nonattainment areas (section 182(g)(5)). An EIP is identified as one of three options upon such failure in serious and severe O3 nonattainment areas (section 182(g)(3)). 1 Further, an EIP is also mandated upon the failure of a State to submit a milestone demonstration showing adequately that the area has met a required specific emissions reductions milestone or to attain the CO NAAQS in serious CO nonattainment areas (section 187(d)(3), 187(g)). --------------------------------------------------------------------------- \1\The other two options are to have the area reclassified to the next higher classification and to implement specific additional measures adequate to meet the next milestone as provided in the applicable contingency plan. --------------------------------------------------------------------------- Section 182(g)(4)(A) of the Act requires that EIP's adopted by States pursuant to the sections of the Act cited above, characterized in today's notice as statutory EIP's, be consistent with the Agency's final rules for EIP's. This section also requires that such EIP's be nondiscriminatory with regard to applicable laws regarding interstate commerce. In addition, section 182(g)(4)(B) imposes constraints on how any revenues generated by such programs shall be used. The scope of the EIP rules includes programs which may be adopted for ``reducing emissions from permitted stationary sources, area sources, and mobile sources.'' Other sections of title I also explicitly allow for EIP's to be

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# included as provisions in SIP's in general (section 110(a)(2)(A)), as well as specifically in nonattainment area SIP's (section 172(c)(6)). Economic incentives are allowable in Federal implementation plans (FIP's) by definition (section 302(y)), and in Federal O3 measures through the system of regulations for control of emissions from consumer or commercial products (section 183(e)(4)). Today's notice serves as the Agency's final guidance for EIP's adopted by States pursuant to the sections of the Act relating to general SIP provisions, characterized in today's notice as discretionary EIP's. Discretionary EIP's may be adopted for any criteria pollutant in both nonattainment and attainment areas. C. Principles and Regulatory Elements The rules and guidance in today's notice are broadly applicable to any type of statutory or discretionary EIP, respectively. This notice requires that EIP's submitted for approval to the EPA as part of a SIP for a nonattainment area contain design features that will ensure that the program will not interfere with other requirements of the Act and that emissions reductions credited to the program will be quantifiable; consistent with SIP attainment and RFP demonstrations; surplus to reductions required by, and credited to, other implementation plan provisions to avoid double counting of reductions; enforceable at both the State and Federal levels; and permanent over the entire duration of the program. 2 The Agency does not intend to limit flexibility and innovation beyond those constraints that are necessary to meet these requirements. --------------------------------------------------------------------------- \2\The program need not continue forever to generate permanent emissions reductions. Such reductions can be discrete or continuous, depending on the nature of the program. Discrete (i.e., temporary) reductions can be used to defer but not solely to satisfy continuous emission reduction requirements (e.g., RACT). --------------------------------------------------------------------------- This notice identifies key program provisions which must generally be included to ensure that the above requirements will be met. Adequate program designs will generally include the following elements: Clearly defined goals and an incentive mechanism that can be rationally related to accomplishing the goals; a clearly defined scope, which identifies affected sources and assures that the program will not interfere with any other applicable Federal regulatory requirements; a program baseline from which projected program results (e.g., quantifiable emissions reductions) can be determined; credible, workable, replicable procedures for quantifying emissions and/or emission-related parameters, as appropriate; source requirements, including those for MRR, that are consistent with specified quantification procedures and allow for compliance certification and enforcement; requirements for projecting program results and dealing with uncertainty; and an implementation schedule, administrative system, and enforcement provisions adequate for ensuring Federal and State enforceability of the program. All EIP's for which SIP credit is taken in attainment and RFP demonstrations must include additional elements, such as audit procedures to evaluate program implementation and track results, and, in certain cases, reconciliation procedures to trigger corrective or contingency measures to make up any shortfall between projected emissions reductions and emissions reductions actually achieved in practice. The rules are, of necessity, general in nature with regard to criteria for designing adequate program elements. This generality arises due to the large variety of EIP types and designs which may be



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submitted, and the Agency's goal of encouraging creativity and innovation on the part of the States developing such programs. There are three broad, interrelated aspects of any program design that significantly affect the approvability of an EIP: How the EIP relates to other SIP provisions, the level of certainty in quantifying emissions and projecting EIP results, and the nature and extent of MRR requirements for enabling determinations of compliance. For example, today's notice reflects the Agency's view that the scope and nature of MRR requirements, including the extent to which an EIP exceeds the minimum requirements for such, would be among the factors to be considered in assessing the adequacy of any demonstration of projected EIP program results. The Agency anticipates preparing additional guidance on specific aspects of program design as it gains experience with EIP's, partly through participation in feasibility and demonstration projects. Descriptions of a broad range of general types of incentive strategies which exemplify potential EIP's are appended to the final rules. These descriptions identify key provisions which distinguish the different model program types. These examples are general in nature so as to avoid limiting innovation on the part of the States in developing programs tailored to individual State needs. The EPA has placed in the docket support documents which survey a wide range of EIP's that have actually been implemented, as well as programs in the design stage. The EPA has also issued information and guidance, as required by section 108(f)(1)(A) of the Act, regarding the formulation and emissions reductions potential of various transportation control measures (TCM's). 3 --------------------------------------------------------------------------- \3\Further information on potential TCM's and other mobile source measures is also contained in a staff memorandum, ``Preliminary Mobile Source Economic Incentive Program Strategies,'' from P. Okurowski to P. Lorang, March 30, 1992, which is available in the docket. --------------------------------------------------------------------------- The EPA also published interim guidance on the generation of emissions reductions credits (ERC's) from mobile source control programs at the same time the EIP rule was proposed. 4 The EPA intends to respond to comments received on this interim guidance and publish final guidance in conjunction with other EIP-related guidance on ERC banking currently being developed. --------------------------------------------------------------------------- \4\Interim Guidance on the Generation of Mobile Source Emission Reduction Credits, 58 FR 11134, February 23, 1993. For information and copies of the associated technical addendum entitled Guidance for the Implementation of Accelerated Retirement of Vehicles Programs, please contact: Mr. Mark Simons, U.S. EPA, 2565 Plymouth Road, Ann Arbor, MI 48105, (313) 668-4417. For information and copies of the associated technical addenda entitled (1) Guidance for Emission Reduction Credit Generation by Clean Fuel Fleets and Vehicles or (2) Guidance for Mobile Emission Credit Generation by Urban Buses, please contact: Mr. Glenn Passavant, U.S. EPA, 2565 Plymouth Road, Ann Arbor, MI 48105, (313) 668-4408. --------------------------------------------------------------------------- The EPA intends that today's notice be consistent with other



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related rules and policies, either in place or under development, such as the title V operating permits rules, the title VII rules for enhanced monitoring, general guidance on the implementation of title I, and policies on emission trading. II. Summary of Rules and Guidance A. Applicability The rules promulgated in today's notice apply to any statutory EIP submitted to the EPA as a SIP revision to comply with sections 182(g)(3), 182(g)(5), 187(d)(3), or 187(g) of the Act, which either may or must be adopted by States upon the failure of a State either to meet or to submit an adequate showing that an applicable RFP or a specific emissions reductions milestone has been met (in serious, severe, and extreme O3 nonattainment areas, and serious CO nonattainment areas), or upon the failure of a serious CO nonattainment area to attain the NAAQS for CO. The provisions contained in these rules, except as explicitly exempted, also serve as the Agency's policy guidance on any discretionary EIP's submitted as SIP revisions. B. Definitions The term ``EIP'' is defined to include State established emission fees, marketable permits, State fees on the sale or manufacture of products the use of which contributes to O3 formation, TCM's, or any combination of such measures. C. State Program Election and Submittal Under today's rules, statutory EIP's submitted as SIP revisions, when applicable, must be sufficient, in combination with other elements of the plan, to achieve the next applicable milestone (for serious, severe, and extreme O3 nonattainment areas), or to reduce the total tonnage of emissions of CO in the area by at least 5 percent per year until attainment is achieved (for serious CO nonattainment areas). Discretionary EIP's must not interfere with any applicable requirement concerning attainment and RFP, or any other applicable requirement of the Act (section 110(l)). D. State Program Requirements Today's rules and guidance establish as a goal for all EIP's that they be designed to benefit both the environment and the regulated entities. In addition, EIP's must be State and federally enforceable, nondiscriminatory (with respect to interstate commerce), and consistent with the timely attainment and maintenance of NAAQS, all applicable RFP and visibility requirements, applicable prevention of significant deterioration (PSD) increments, and all other applicable requirements of the Act. Programs in nonattainment areas for which credit is taken in attainment and RFP demonstrations shall be designed to ensure that the effects of the program are quantifiable, and that the credit taken is limited to that which is surplus to other SIP-credited requirements. Statutory EIP's must be designed to result in quantifiable, significant



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reductions in actual emissions. A number of program elements are outlined in the rules which must be included, as applicable, as part of any EIP design. These elements are required to delineate program scope, to specify credible, workable, replicable emission quantification procedures and all affected source requirements, to project program results, to specify audit and, if appropriate, reconciliation procedures (to evaluate program implementation, track results, and, as appropriate, trigger corrective or contingency measures), and to define an implementation schedule, administrative procedures, and effective enforcement mechanisms. E. Use of Program Revenues The rules incorporate statutory restrictions on the use of revenues generated by statutory EIP's. Specifically, any such revenues may be used by a State for providing incentives for achieving emissions reductions, providing assistance (up to 75 percent of the costs) for the development of innovative technologies for the control of O3 air pollution and for the development of lower-polluting solvents and surface coatings, and funding (with up to 50 percent of the revenues) administrative costs of State programs under this Act. These restrictions on the use of revenues do not apply to discretionary EIP's. III. Discussion of Rules and Guidance This portion of the notice provides more detail on the provisions of the final rules and guidance. A. Applicability The rules published in today's notice apply to any statutory EIP submitted to the EPA as a SIP revision to comply with sections 182(g)(3), 182(g)(5), 187(d)(3), or 187(g) of the Act, which either may or must be adopted by States upon the failure of a State either to meet or to submit an adequate showing that an applicable RFP or a specific emissions reductions milestone has been met (in serious, severe, and extreme O3 nonattainment areas, and serious CO nonattainment areas), or upon the failure of a serious CO nonattainment area to attain the NAAQS for CO. The provisions contained in these rules, except as explicitly exempted, also serve as the Agency's policy guidance on any discretionary EIP's submitted as SIP revisions. Further, the EPA will use the provisions contained in these rules as guidance in preparing EIP's, when appropriate, for FIP's necessitated by State failures and for other Federal measures. The EPA intends to review EIP's submitted as plan revisions based on the general SIP review requirements contained in sections 110(k), 110(l), 182, and 187 of the Act, as applicable, and associated Agency policies. For statutory programs, the Agency intends to review the plan revision and either approve or disapprove all or part of the revision within 9 months after the date of the State's submission of the plan revision, consistent with section 182(g)(3) and 182(g)(5) of the Act. For discretionary EIP's, Agency action on plan revisions submitted for review will be taken according to the same schedule as is applicable to



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any other type of plan revision. An EIP submitted as a plan revision will be deemed to be approved only upon an affirmative decision by the Agency. B. Definitions The definitions in today's notice include many terms drawn from the Act or other regulations or guidance documents, as well as new terms relating to EIP's. Key new terms are discussed below. 1. Economic Incentive Program Consistent with section 182(g)(4)(A) of the Act, for purposes of today's rulemaking, ``EIP'' is defined to mean a program which may include ``State established emission fees or a system of marketable permits, or a system of State fees on sale or manufacture of products, the use of which contributes to O3 formation, or any combination of the foregoing or other similar measures.'' In addition, the Act expands this definition to include ``incentives and requirements to reduce vehicle emissions and vehicle miles traveled in the area, including any of the transportation control measures identified in section 108(f).'' For purposes of this rulemaking, this notice classifies EIP's into three broad categories: emission limiting, market response, and directionally-sound. This categorization is based on whether a quantifiable emission-related requirement is directly specified as an integral element of the program or whether the program depends upon marketplace decisions, in response to a program's incentive, to produce the intended emission-related objective of the program. Further, the categorization is a function of whether the results of the program are quantifiable. Emission-limiting strategies directly specify limits on total mass emissions, emission-related parameters (e.g., emission rates per unit of production, product content limits), or levels of emissions reductions relative to a program baseline that are required to be met by affected sources, while providing flexibility to sources to reduce the cost of meeting such limits. A marketable permits program (i.e., emission trading with source-specific mass emissions limitations, or caps) is a primary example of such a program. If every affected source in such a program complies with its emissions cap (taking into account both emissions generated by the source as well as any emissions trading), the program will necessarily achieve the specified emissions limits. A market-response strategy creates one or more incentives for affected sources to reduce emissions, without directly mandating emission-related requirements for individual sources or even for all sources in the aggregate. An emission fee program may be an example of a market-response strategy. In such a program, each source might be required to pay a fee on each unit of emissions. The response to the incentive, in terms of actions which affect emissions levels, will be determined by each source according to its abatement opportunities, costs, and other factors. Thus, each source has flexibility in determining its ultimate level of emissions (within any constraints imposed by other regulatory requirements). A consequence of programs based on market-response strategies isthat actual emissions from affected sources may differ from the preimplementation projected emissions level even if every affected source



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is in full compliance with the EIP requirements. This added degree of uncertainty in program results must be accounted for in designing such a strategy (see paragraph III.D.6.). Directionally-sound strategies do not yield quantifiable emissions reductions creditable towards RFP or attainment demonstrations. Such strategies may be included in an area's attainment plan, without credit, or in a maintenance plan if the strategy contributes to the area coming into or maintaining attainment. Emissions reductions from such programs are not creditable towards RFP or attainment demonstrations because the program lacks one or more of the basic program elements, such as a quantifiable program baseline or adequate emissions quantification procedures. However, a State may want to pursue such a strategy as a part of their overall program to attain and maintain the NAAQS. Directionally-sound strategies must not be used as the primary basis for any statutory EIP submitted pursuant to sections 182(g)(3), 182(g)(5), 187(d)(3), and 187(g) of the Act. A number of different types of incentive strategies have been identified upon which EIP's could be based. Appendix X contains descriptions of different types of strategies, together with a listing of the TCM's included in section 108(f) of the Act. There is not, however, in all cases a direct correspondence between a type of strategy and the regulatory categories described above, since program design details can in some cases make a difference in the extent to which program results are quantifiable or dependent on market response. 2. Program Baseline The determination of a program baseline is the first step in projecting program results. Results from EIP's can be projected in terms of quantifiable emissions reductions, or, in the case of directionally-sound programs, in terms of other emission-related parameters. Further, some types of incentive strategies depend upon the establishment of a program baseline, in terms of a level of mass emissions or emission-related parameter(s), for each affected source or aggregated overall affected sources, as a starting point for the incentive program mechanism. For example, a marketable emissions permit program could be initialized by a program baseline that allocates to each source a cap on mass emissions that serves as its starting point for any emissions trading transactions or future emissions reductions requirements. For other types of programs, this program baseline could be defined in terms of emission-related parameters, such as average emission rates, solvent content, or vehicle ridership factors. 3. Nondiscriminatory Section 182(g)(4) provides that statutory EIP's must be ``nondiscriminatory'' and must be ``consistent with applicable law regarding interstate commerce.'' The EPA interprets these requirements to mean that a statutory EIP must not discriminate in favor of intrastate commerce and against interstate commerce. In addition, an EIP must meet any other applicable limitations under the Commerce Clause of the U.S. Constitution. For example, State taxes must meet the requirements, to the extent applicable to the tax, set out by the U.S. Supreme Court in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). There, the Court stated that a State tax will pass scrutiny under the Commerce Clause only if ``the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.'' Id. at 279. Under the



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EPA's interpretation, Congress did not intend, by the provisions authorizing EIP's, either statutory or discretionary, to delegate its authority under the Commerce Clause to the States, and thereby release State EIP's from the limitations that would apply under the Commerce Clause had Congress not specifically authorized the EIP; rather, Congress intended to maintain those limitations. C. State Program Election and Submittal The mandated schedules for the development, submittal, review/ approval, and implementation of statutory EIP's, submitted pursuant to sections 182(g)(3), 182(g)(5), 187(d)(3), and 187(g) of the Act, may leave as little as 6 months for the EIP to be operational prior to the next milestone requirement. Thus, in these cases, the time available to develop, implement, and achieve emissions reductions from an EIP will be extremely limited if a State waits until a milestone failure occurs to initiate the selection and development of a statutory EIP. As a result, the EPA encourages States to initiate development of an EIP as soon as they determine that a milestone failure is likely, or even sooner, as part of their SIP. States are encouraged to consider inclusion of discretionary EIP's, where appropriate, in the SIP's (or SIP revisions) due within the first 4 years after enactment of the amended Act (e.g., sections 182 (b)(1) and (c)(2), 187(a)(1)). Submittal at that time would more likely allow sufficient time to develop, implement, and evaluate the effectiveness of the program. If such an early EIP submittal is made, States must account for the effects of the EIP in any subsequent required SIP submittals. Nothing in today's notice precludes a State from revisiting and amending its original EIP, or any other pre-existing rules, as necessary, to ensure consistency with any subsequent required SIP submittals. The requirements of section 182(g)(3) and 182(g)(5) of the Act apply any time that a State fails to submit an adequate milestone compliance showing, or when the EPA determines that a milestone has been missed by an area covered by these provisions. For example, if such a milestone is not met by a serious or severe O3 nonattainment area, the area may elect among three options, including an EIP. The Act does not provide any additional or different requirements that would apply when a State that missed one milestone, and makes a proper election, misses a subsequent milestone. Accordingly, if a subsequent milestone is missed, the same choices are available, including the election of an EIP. Thus, the imposed requirements or specified options apply not only the first time that a milestone is missed, but also if subsequent milestones are missed even if an EIP had previously been implemented. Similarly, the EPA interprets section 187(g) (requiring serious CO nonattainment areas that fail to attain to adopt an EIP) as applying even if the area previously missed a milestone and adopted an EIP pursuant to section 187(d)(3). A second missed-milestone program must provide reductions beyond the reductions from a first statutory program. The second EIP may either be a new program or a substantive revision of the first program. D. State Program Requirements



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Under today's rules, EIP's must be State and federally enforceable; nondiscriminatory (with respect to interstate commerce); and consistent with the timely attainment and maintenance of NAAQS, all applicable RFP and visibility requirements, applicable PSD increments, and all other applicable requirements of the Act. Programs in nonattainment areas for which credit is taken in attainment and RFP demonstrations shall be designed to ensure that the effects of the program are quantifiable andthat the credit taken is limited to that which is surplus to other SIPcredited requirements. Statutory EIP's must be designed to result in quantifiable, significant reductions in actual emissions. Each of the program elements that must be included, as applicable, in an EIP submitted to the EPA as a plan revision are described below. For EIP's that allow trading to meet existing source requirements, the EPA will consider a two-step process for State submittal and EPA review of the program elements outlined below. Under such a step-wise process, the initial submittal shall include both a framework for all the general elements of program design, as well as all the specific regulatory details for a source-specific trade or for an entire source category, which trade or source category is representative, with respect to all program elements, of the types of trading to be allowed under the general framework. For example, for an EIP designed to directly implement trading within source categories, the initial submittal shall include the full details of all program elements for at least one source category. Alternatively, for an EIP designed to implement trading on a source-by-source basis, with EPA review of each trade, the initial submittal shall include the full details of all program elements for at least one source-specific trade. Thus, required specific aspects of the emission quantification procedures and MRR requirements for additional sources and/or source categories could be submitted at a later time to allow the State to phase-in the application of the program to other individual sources or source categories. Because adequate enforceability elements--including emissions quantification procedures, test methods, and MRR requirements--are integral to any SIP program, approval by the EPA of a framework for trading would constitute approval only of the framework elements included as part of the initial submission and of trading for those sources or within those source categories submitted with the framework and approved for trading by the EPA. Trading involving other sources or source categories could not occur until all elements, including enforceability elements, were approved by the EPA through a subsequent step in the process. The EPA will apply the same criteria in reviewing step-wise submittals of emission quantification and MRR requirements as in reviewing such requirements submitted together with the other program elements. Thus, a subsequent submittal must be fully compatible with all the elements in the initial submittal, and, taken together, both submittals must meet all the requirements of the EIP rules and guidance. The EPA does not intend to consider use of this step-wise process for EIP's that mandate new requirements for affected sources (e.g., requiring mass emission caps on sources previously required to meet emission rate limits). 1. Program Goals and Rationale An acceptable EIP must clearly define the goals of the program and provide a rationale relating how the program design will accomplish the goals. These final rules and guidance establish as a goal for all EIP's that they be designed to benefit both the environment and the regulated



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entities. The final rules and guidance require States to design programs that will meaningfully meet this goal, while providing flexibility to the States to determine how best to accomplish such ``benefits sharing'' in the context of each specific program. The term ``benefits'' is broadly defined to include not only economic benefits, such as cost savings and compliance flexibility for the regulated sources, but also environmental benefits that will result in States reaching attainment of the NAAQS faster than might otherwise occur solely through the use of traditional strategies. Environmental benefits can be created most directly by EIP's that require increased or more rapid emissions reductions beyond those that would be achieved through a traditional regulatory program. Specifically, a 10 percent increase in emissions reductions would presumptively meet this benefits sharing goal. Alternatively, environmental benefits can also be achieved by programs that incorporate, for example, improved administrative mechanisms (e.g., that achieve emissions reductions from sources not readily controllable through traditional regulation), reduced administrative burdens on regulatory agencies that result in increased environmental benefits through other regulatory programs, improved emissions inventories that enhance and lend increased certainty to State planning efforts, and the adoption of emission caps which over time constrain or reduce growth-related emissions beyond traditional regulatory approaches. Statutory EIP's will benefit the environment as a result of the requirement that they be designed to result in significant reductions in actual emissions. For discretionary EIP's, no standard formula for benefit sharing is specified, although the EPA encourages States, to the extent practicable, to design such programs so as to create most directly increased or more rapid emissions reductions (see paragraph IV.A.2). The EPA notes that any incentive-based program has the potential to create incentives for pollution prevention and technological innovation. Such an inherent potential benefit can only meaningfully meet the goal of providing benefits to the environment if the program is specifically designed to allocate some of the effects of such innovation to enhancing environmental progress. Likewise, for the other ways listed above in which environmental benefits can be accomplished, the EPA intends that these approaches be meaningfully implemented so as to produce real environmental benefits. A well-designed EIP will achieve a number of different kinds of environmental benefits. For instance, a marketable emissions permit program, with mass emissions caps declining over time, may achieve several results. The declining cap aspect of the program can result in real emissions reductions creditable towards RFP milestones and attainment (to the extent that actual emissions are reduced). The marketable aspect of the program allows emission sources facing differing costs of further emission control to trade, lowering overall control costs. Such programs also encourage sources already able to meet their mass emissions caps to find ways of further reducing emissions beyond what would otherwise be required by traditional regulatory programs (e.g., through pollution prevention, technological innovation, or changes in operational procedures). Statutory EIP's, submitted because of failures in achieving required emissions reductions, must make a significant contribution to the required reductions, while not necessarily bearing the full burden



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# Federal Register, Volume 59 Issue 67 (Thursday, April 7, 1994)

of achieving all the required reductions or mandating any specific percentage reduction. A program producing no additional emissions reductions or one based solely on a directionally-sound strategy, without quantifiable benefits, would not satisfy these criteria for an acceptable statutory EIP. For discretionary EIP's, the final guidance relies upon the new State planning, quantitative progress, and attainment requirements in the Act to ensure expeditious attainment of the NAAQS, regardless of the type of programs that States may choose to include in their SIP's. Any EIP should include a rationale for how the incentive mechanism(s) will achieve the stated goal(s). A State can create a better overall program design by carefully examining and explaining the linkage between a program's provisions and the desired outcome. The provisions of a program must be sufficient to ensure the program goals are successfully achieved without creating unintended detrimental side effects. 2. Program Scope As with any regulatory program, an EIP must identify the affected sources covered by the program. The affected sources may be defined on the basis of source type (e.g., manufacturing operations), activity type (e.g., fuel storage tanks), location, firm size, quantity of emissions, or other such characteristics. In addition, a State may choose to grant exemptions from program requirements to sources meetingspecified criteria. For example, States may consider exempting zeroemitting vehicles from a new parking price program. In establishing the affected source criteria, a State must assure that the resultant program is nondiscriminatory within the meaning given that term in these rules. The program must establish procedures for dealing with sources entering or exiting affected source categories. In order to promote economic growth consistent with achieving environmental goals, a regulatory program should not create unwarranted barriers to entry for new or expanding business entities. In addition, the program must establish criteria and procedures for sources voluntarily choosing to opt-in to or to be exempted from the program, to the extent that the program design allows for such movement into or out of the universe of affected sources. For example, the title IV acid rain allowance trading program includes provisions for sources not originally in the program to opt-in to the program in order to sell sulfur dioxide (SO2) emission allowances to sources already in the program. Certain EIP's may also provide criteria for exempting sources such that they can leave the program; such criteria must be described and the procedures for leaving the program must be included in the EIP. Any such procedures must ensure that movement into or out of the program will not interfere with other statutory requirements nor result in an increase in area-wide emissions that is not reflected in the plan's attainment or RFP demonstrations. Finally, the opt-in program language must specify that it will not allow sources to opt-in if the net result of the opt-in program as a whole is to increase area emissions, unless such increase has been accounted for in the development of the EIP, and is consistent with attainment and maintenance of the NAAQS, RFP, and all other SIP requirements. Affected sources in an EIP may also be covered by other Federal regulatory requirements. An EIP may not interfere with applicable requirements concerning attainment and RFP, or any other applicable



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# Federal Register, Volume 59 Issue 67 (Thursday, April 7, 1994)

requirements of the Act. Thus, the program scope must be defined so as not to interfere with any other Federal regulatory requirements which apply to the affected sources. Such requirements for stationary sources may include, but are not limited to, reasonably available control technology (RACT), PSD and new source review (NSR) offset requirements, lowest achievable emission rate (LAER), best available control technology (BACT), new source performance standards (NSPS), national emissions standards for hazardous air pollutants (NESHAP's), acid deposition program requirements, reasonably available control measures (RACM), and best available control measures (BACM). Such requirements for mobile sources may include, but are not limited to, programs integral to vehicle inspection and maintenance (I/M), clean-fueled fleets, reformulated gasoline, oxygenated fuels, employee commute options (ECO), TCM's, and Federal motor vehicle controls. In general, sources subject to these statutory requirements may participate in emissions trades pursuant to an EIP as long as, apart from their participation in such trades, they continue to meet the statutory requirements. Thus, if these sources reduce their emissions below what the applicable statutory requirements call for, the reductions beyond the requirements may furnish credits for the EIP. 5 Following is a more specific discussion of the interplay of the EIP rules with several of the statutory provisions listed above. --------------------------------------------------------------------------- \5\For example, since VOC reductions that occur as a result of controls put in place to meet NESHAP's are creditable to RFP, such VOC reductions cannot be considered as surplus to supply VOC credits through an EIP. However, if in such a case greater than required reductions are made, the incremental VOC reductions could furnish credits through an EIP. --------------------------------------------------------------------------- RFP Requirements. Credits for emissions reductions from stationary, mobile, or area sources may generally be used to meet the ``progress'' requirements of the nonattainment provisions of the Act. The SIP's for O3 nonattainment areas classified as moderate or higher under section 181(a)(1) are required to provide for reductions in volatile organic compounds (VOC) of at least 15 percent from baseline emissions by 1996, and areas classified as serious or higher are required to provide for reductions of at least 3 percent each year (averaged over a 3-year period) thereafter until the attainment date (section 182(b)(1), 182(c)(2)(B)). Emissions reductions from all sources may be used to meet these progress requirements, except for those reductions attributable to Federal motor vehicle programs and RACT and NSR corrections (section 182(b)(1) (C)-(D)). RACT. An EIP may allow sources subject to the RACT requirement to attain RACT-level emissions reductions in the aggregate, and thereby trade among themselves. In designing such RACT trading programs (to implement new and/or previously existing RACT requirements), as with any EIP, States are encouraged, to the extent practicable, to meet the benefits sharing goal directly, by requiring increased emissions reductions beyond those that would be achieved through a traditional RACT program.



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# Federal Register, Volume 59 Issue 67 (Thursday, April 7, 1994)

In addition, today's rules and guidance authorize emissions trading between the stationary sources subject to the RACT requirement (``RACT sources'') and any sources (i.e., stationary, mobile, and area sources) not subject to the RACT requirement (``non-RACT sources'') when such trading results in an exceptional environmental benefit, e.g., a level of reductions that is significantly greater than RACT-level amounts. With respect to the level of emissions reductions required from the non-RACT sources, the appropriate amount of emissions reductions generally should be set at a level that takes into account the severity of the nonattainment status in a given area. Today's rules establish the statutory offset ratios for nonattainment areas as the determinant of the amount of emissions reductions that would be required from non-RACT sources generatingcredits for RACT sources. The offset ratios are lower for lowerclassified areas (e.g., compare section 182(a)(4), with a 1.1 to 1 offset ratio for marginal areas, and section 182(d)(2), with a 1.3 to 1 offset ratio for severe areas). Looking to offset ratios is instructive because offsets are an aspect of emissions trading that is directly addressed in the Act. The offset ratios provide a suitable analogy because they represent the most substantial benefit to the environment for a given area that is required in this statutory context of emissions trading. However, today's rules authorize emissions trading between RACT and non-RACT sources at less than the offset ratios if exceptional environmental benefits are otherwise demonstrated, such as, for example, an emissions trade that promoted the market penetration of emissions reduction measures for non-RACT sources, such that future emissions reductions from the universe of non-RACT sources would be expected to increase over time. Such measures could include new vehicle technologies that utilize alternative fuels, provided that such technologies meet all relevant EPA standards and guidelines. Where a lower trading ratio is authorized in order to promote the market penetration of an environmentally-beneficial, new control measure, a lower bound for the trading ratio of 1.1 to 1 will assure that in all events some additional benefit will accrue to the environment. In setting the appropriate ratio for trades between RACT and non-RACT sources, States may also take into account additional State and federally-enforceable emissions reductions that are achieved as a result of other exceptional environmental features of an EIP (such as a separate ``environmental bonus'' provision, as discussed in EPA's Interim Guidance on the Generation of Mobile Source Emissions Reduction Credits). In no case, however, can a trading ratio be lower than 1 to 1, and in no case can the effective trading ratio be less than the appropriate offset ratio (or such ratio, as low as 1.1 to 1.0, as maybe authorized to promote the market penetration of environmentallybeneficial, new control measures). Offsets. Credits for emissions reductions generated by stationary, mobile, or area sources may be used for purposes of meeting the offset requirement for major new and modified sources in nonattainment areas so long as they meet the restrictions imposed on offsets by section 173 of the Act and the EPA's new source review regulations (40 CFR 51.165 and part 51, appendix S). Under the nonattainment provisions, new or modified major stationary sources may not receive permits for



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# Federal Register, Volume 59 Issue 67 (Thursday, April 7, 1994)

construction and operation in a nonattainment area unless, among other things, their new emissions are offset by reductions from other sources in the area (section 172(c)(5), 173(a)(1)(A)). For O3 nonattainment areas, minimum offset ratios range from 1.1 to 1 for marginal areas to 1.5 to 1 for extreme areas (section 182(a)(4), 182(b)(5), 182(c)(10), 182(d)(2), 182(e)(1)). However, the Act does not require that offsets be secured by the new source. Rather, any portion of the necessary offsets may be generated by the local air quality district or by the State. In other words, a jurisdiction may set up an offset ``bank'' to supply new sources with sufficient emissions reductions to satisfy their offset obligations. To satisfy the requirements set forth in section 173, each time a new source commences operations, the jurisdiction must have already generated the necessary emissions reductions to offset the new emissions. This means that the jurisdiction must be able to demonstrate that the program has secured sufficient excess emissions reductions to offset all new emissions at the proper ratio. If the source itself is only held responsible for securing emissions reductions in an amount equal to its new emissions (i.e., a 1 to 1 ratio), the SIP must generate sufficient reductions to cover the extra reductions required (e.g., 1.2 to 1 in serious O3 nonattainment areas). The Act limits offsets to emission reductions not ``otherwise required by this Act.'' As part of the ``General Preamble for the Implementation of Title I of the Clean Air Act Amendments of 1990,'' the EPA described certain circumstances under which reductions would not be creditable for offset purposes because those reductions are required by other provisions of the Act (57 FR 13498, 13553 (April 16, 1992)). In addition, the EPA intends to provide additional guidance regarding offsets in the near future. BACT and LAER. Both the PSD program and the nonattainment NSR program contain technology-based emission limitations that are source specific. The Act expressly requires that these emissions limitations (i.e., BACT in the case of PSD and LAER in the case of NSR) be met by the proposed major new source or major modification itself as a condition of permit issuance. Consequently, neither of these requirements can be met through emissions trading. Regarding BACT, section 165(a) of the Act provides that no major new source or major modification may be constructed in a PSD area unless the requirements in section 165(a)(1)-(8) are met. Section 165(a)(1) specifies that among these requirements is ``a permit * * * setting forth emission limitations for such facility which conform to the requirements of this part.'' Section 165(a)(3)(C) further specifies that the proposed facility must demonstrate that emissions from the facility will not exceed any applicable emission standard under the Act. 6 The applicable emissions limitations are those provided in section 165(a)(4), which provides that the proposed facility must ``be subject to the best available control technology for each pollutant subject to regulation under this Act emitted from, or which results from, such facility.'' 7

--------------------------------------------------------------------------- \6\Section 302(k) of the Act defines the terms ``emission



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# Federal Register, Volume 59 Issue 67 (Thursday, April 7, 1994)

limitation'' and ``emission standard'' interchangeably. \7\Section 169(3) in turn defines BACT as ``an emission limitation based on the maximum degree of reduction of each pollutant subject to regulation under this Act emitted from or which results from any major emitting facility, which the permitting authority, on a case-by-case basis, taking into account energy, environmental, and economic impacts and other costs, determines is achievable for such facility.''

--------------------------------------------------------------------------- The Act sets forth a similar statutory scheme with respect to LAER. Section 173(a) provides that the permit program applicable to major new sources or major modifications, which is required to be included in part D SIP's under section 172(b)(5), 8 shall provide that permits to construct and operate may be issued only if the requirements set forth in section 173(a)(1)-(5) are met. Among these enumerated requirements is section 173(a)(2), which specifies that ``the proposed source is required to comply with the lowest achievable emission rate.'' 9

--------------------------------------------------------------------------- \8\Section 173(a) incorrectly refers to the ``permit program required by section 172(b)(6).'' Section 172(b)(6) was renumbered as section 172(b)(5) by the 1990 Amendments. Apparently, this change was not picked up by the drafters of revised section 173. \9\Section 171(3) defines LAER as ``that rate of emissions which reflects'' either ``the most stringent emission limitation which is contained in (any SIP) for such class or category of source,'' or ``the most stringent emission limitation which is achieved in practice by such class or category of source, whichever is more stringent.''

--------------------------------------------------------------------------- The statutory provisions addressing both BACT and LAER clearly require the permitting authority to set, and the source owner to comply with, the applicable technology-based emission limitation. There is no provision in the statute for lawfully complying with BACT or LAER through obtaining emissions reductions at other sources that would result in an equivalent reduction of emissions or ambient concentrations. Inspection and Maintenance Programs. The I/M provisions of the Act require a vehicle I/M program that meets specified performance standards. The requirements of the I/M provisions cannot be met by obtaining ERC's from sources other than vehicles, or from vehicles through means other than I/M of the vehicle. An EIP may not substitute entirely for an enhanced or basic periodic vehicle I/M program. This view is based on the provisions of the Act that set forth requirements for a basic I/M program, as well as certain provisionsrelating to enhanced I/M programs. Sections 182(a)(2)(B)(i) (I/M ``fix

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# Federal Register, Volume 59 Issue 67 (Thursday, April 7, 1994)

ups'' for O3 nonattainment areas classified marginal and higher), 182(b)(4) (I/M ``catch-ups'' for O3 nonattainment areas classified moderate and higher), and 187(a)(4) (I/M ``fix-up'' requirement for CO nonattainment areas classified moderate and higher) each require a SIP revision that includes provisions for a ``vehicle inspection and maintenance program'' that meets a specified performance standard. The provision for an enhanced I/M program for CO nonattainment areas classified as moderate and with a design value higher than 12.7 ppm, or classified as serious, requires the SIP to include provisions for ``an enhanced vehicle inspection and maintenance program as required in section 182(c)(3) (concerning serious O3 nonattainment areas)'' (section 187(a)(6)). This provision confirms that the required I/M program is in fact a vehicle I/M program. The primary provision for an enhanced I/M program for O3 nonattainment areas classified as serious or higher does not include a comparable ``inspection and maintenance'' phrase (i.e., requires the SIP ``to provide for an enhanced program to reduce hydrocarbon emissions and nitrogen oxides (NOX) emissions from in-use motor vehicles''), but it further includes specific requirements for various types of testing, inspections, etc., that make clear that the program must obtain reductions from vehicle I/M (section 182(c)(3)). Nevertheless, both the basic I/M program and the enhanced I/M program requirements authorize a substantial degree of flexibility in program design. The Act directs the EPA to require a specific amount of emissions reductions, but also authorizes the State to design the program in a manner that meets the EPA established performance standard through different means. The EPA's final rule on I/M programs describes the EPA's performance standards and the ways that States can meet those standards (57 FR 52950-53014). In so doing, the State can take advantage of economic efficiencies (e.g., have a better test on more older cars to get greater performance, in exchange for some relaxation in another element). In addition, States could address mal-maintenance in the vehicle fleet in part by including an old car scrappage program as an element of the overall package used to meet the performance standard. However, the SIP must include a program obtaining the required reductions through vehicle inspections. 3. Program Baseline An EIP baseline must be fully defined within the EIP, and used as a basis for projecting program results and, if applicable, for initializing the incentive mechanism. States have flexibility in defining the program baseline for EIP's that implement new RACT requirements for previously unregulated source categories through trading programs, as long as the new RACT requirements reflect, to the extent practicable, increased emissions reductions beyond those that would be achieved through a traditional RACT program. States may also use a flexible baseline for EIP's that allow trading with respect to newly imposed RACT requirements on previously unregulated sources in a previously regulated source category (e.g., sources newly covered by lower applicability cut-offs), as long as the EIP, in the aggregate,



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# Federal Register, Volume 59 Issue 67 (Thursday, April 7, 1994)

yields reductions in actual emissions at least equivalent to those which would result from source-by-source compliance with the existing RACT limit for that source category. This requirement can be satisfied by using existing data on actual and allowable emissions from the previously regulated sources in the affected source category (see paragraph IV.C.). A State also has flexibility in defining the program baseline for any EIP submitted in conjunction with, or subsequent to, the submission of any complete areawide progress plan due at the time of EIP submittal (e.g., the 15 percent RFP plan (section 182(b)(1)) and subsequent 3 percent plans (section 182(c)(2))), and/or an attainment demonstration. In all such cases, the flexible program baseline may be based on actual, allowable, or some other intermediate 10 or lower level of emissions, provided the State demonstrates that the program baseline is consistent with and reflected in the associated RACT rule, progress plans, or attainment demonstration. Further, for EIP's submitted prior to the submittal of a required progress or attainment demonstration, the State must include with its EIP submittal a commitment that its subsequent attainment demonstration and all future progress plans will be consistent with the EIP baseline in effect at that time, as well as a discussion of how the baseline will be integrated into the State's attainment demonstration. Further, in this discussion, the State should take into account the potential that emission reduction credits issued prior to the attainment demonstration may no longer be surplus relative to the attainment demonstration. 11

---------------------------------------------------------------------------\1\0A typical intermediate baseline may consist of a SIPallowable emission rate and an actual level of production. \1\1For example, the State could establish an escrow account or a formula for pro rata reductions of credits to cover credits that subsequently are no longer surplus.

--------------------------------------------------------------------------- Conversely, for EIP's that do not meet the above conditions relating to RACT and progress requirements, the program baseline must be set no higher than the lower of actual or allowable emissions. Actual emissions are to be taken from the most appropriate inventory, such as the 1990 actual emission inventory (which was due for submission in November 1992), and allowable emissions are the lower of SIP allowable emissions or the level of emissions consistent with source compliance with all Federal requirements related to attainment and maintenance of the NAAQS. In addition, following submission of an EIP that incorporates a flexible baseline, if the State fails to submit a complete attainment demonstration, or if the EPA disapproves the attainment demonstration on the grounds that it does not provide for attainment of the NAAQS, the EPA may require the State to incorporate in the EIP a program



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# Federal Register, Volume 59 Issue 67 (Thursday, April 7, 1994)

baseline set no higher than the lower of actual or allowable emissions. The baseline for an EIP submitted in conjunction with an attainment demonstration must be consistent with the assumptions employed in the attainment demonstration, including the location of emissions assumed in the photochemical grid modelling, if applicable. In considering emissions trading, the EPA continues to focus on the aspect of trading that involves the relaxation of a control requirement on a particular emissions-producing unit (the credit-receiving unit). Under trading programs, this relaxation is offset by tightening thecontrol requirements on another emissions-producing unit (the creditgenerating unit). Under section 110(l), this relaxation is authorized only if it, taken in conjunction with the tighter control requirements, does not interfere with the ability of the SIP to meet the various requirements of the Act--most importantly, for present purposes, the RACT requirement and the requirements for progress (e.g., for RFP in O3 nonattainment areas, 15 percent reductions in VOC emissions by 1996; and 3 percent-per-year over each 3-year period until the attainment date), as well as attainment requirements. It is understood that when the credit-generating unit's actual emissions are below the level mandated by the applicable control requirement, relaxing a control requirement on the credit-receiving unit in exchange for tightening the requirement on the credit-generating unit may result in an increase in aggregate actual emissions. Under these circumstances (i.e., trading from an allowables baseline), the relaxation and its resulting increase in actual emissions could, in some circumstances, jeopardize RFP and attainment. As described above, notwithstanding the chance of actual emissions increases, EIP's may authorize trading from an allowables baseline when the EIP is submitted in conjunction with, or following, the submission of the applicable progress plans, and the allowables baseline is consistent with those plans. Under these circumstances, trading on the basis of allowables would not jeopardize the progress requirements. In some cases, the EPA will permit trading to occur on the basis of allowables prior to submission of the attainment demonstration SIP. However, once the State has submitted any applicable progress plans due at the time of EIP submission, the State has made significant progress towards attainment. This significant progress, coupled with the sanctions provisions that provide strong safeguards that the State will develop a SIP requiring any subsequent progress plans and an attainment demonstration, provide, in the EPA's judgment, sufficient evidence that an EIP authorizing an allowables baseline submitted in conjunction with an applicable progress plan will not jeopardize continued progress or attainment. In addition, States and sources should be aware that any emission limit relaxations approved through an EIP may be subject to ongoing scrutiny, and further tightening, if it is unexpectedly necessary to do so as part of an attainment demonstration. In addition, as described above, the EPA will permit EIP's that authorize trading from an allowables baseline in the case of source



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# Federal Register, Volume 59 Issue 67 (Thursday, April 7, 1994)

categories, or portions of source categories, that are newly subjected to the RACT requirement under the RACT ``catch-up'' provisions ofsection 182(b)(2). Under these circumstances, the imposition of RACTlevel controls meets the RACT requirement, as described above, and is expected to result in emissions reductions with respect to the affected source categories or sources taken as a whole, even if some of the affected sources conduct emissions trades based on allowables. The fact that overall emissions from these source categories or sources will be reduced indicates that with respect to these source categories, progress is being made towards attainment. This progress provides adequate assurance that any such trades on an allowables basis will not jeopardize progress or attainment requirements. If a SIP does not include a required RACT emission limit for a source, that source may not participate in an EIP until an appropriate RACT limit is determined. The provisions described above apply as well in the case of a statutory EIP. That is, under the circumstances described above, a statutory EIP may incorporate a flexible baseline as long as the EIP as a whole provides the required reductions. A State may define a program baseline to address a variety of equity considerations, such as differing degrees of emission control among affected sources prior to the start of the EIP. While emissions reductions creditable towards a specific required demonstration will be calculated according to the requirements for that demonstration, the EIP may use a different baseline. For example, a declining value marketable permits program, submitted in conjunction with an areawide RFP or attainment plan, could initially allocate mass emissions caps on the basis of allowable emissions. However, to the extent that such a program baseline exceeds the aggregate actual emissions for the sources covered by the program, the EIP baseline allocation would be required to decline at a rate consistent with achieving the areawide RFP milestone as measured against the RFP baseline. The EIP must clearly specify whether the program baseline applies to aggregate emissions from all affected sources (similar to the RFP baseline) or to individual sources (similar to source-specific LAER requirements, for example). If historic emissions are relevant in setting the program baseline, the time period must be specified in the program. Provisions must be made for determining baselines for sources not active during the specified baseline time period. Also, the averaging time associated with a program baseline for emissions must be specified. 4. Quantification Procedures An EIP must describe how emissions and changes in emissions will be quantified for SIP credit. If other measurable factors are essential to an EIP, the quantification procedures for those must be specified in the program. For instance, if emissions reductions are generated by reducing total usage of a type of solvent, procedures for measuring solvent usage are critical. The program must specify the minimum



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# Federal Register, Volume 59 Issue 67 (Thursday, April 7, 1994)

required credible, workable, replicable procedures for quantifying emissions, which could include emission factor calculations, direct emission monitoring, calculation procedures which are a function of process parameters, production practices or volume, or inventory usage, or other procedures, as appropriate. Criteria for selecting quantification methods and time-averaging considerations are discussed below. States must carefully consider matching their environmental goals with various aspects of the program when determining adequate quantification procedures. For example, a procedure wholly adequate for determining compliance with long-term mass emissions caps may be clearly inadequate for a program aimed at limiting peak daily emissions. An EIP must establish procedures for quantifying emissions reductions arising from sources that shut down or curtail production. A State may not take credit for such emissions reductions as part of an EIP if the same reductions have already received credit in the SIP's attainment or RFP demonstrations. For example, SIP demonstrations may include assumptions about equipment turnover rates and normal operating levels which may already credit some assumed rate of source shutdowns and curtailments. Credit also cannot be taken for shutdowns or curtailments that do not result in a decrease in an area's aggregate emissions. Changes in emissions at one source may merely increase emissions at another. For example, if one retail operation goes out of business, the total level of retail business will not necessarily change. Instead, customers may shift their business to other merchants in the area. The effect on aggregate emissions of such ``demand shifting'' will depend upon the nature of the business, and should be considered in the design of the EIP. An EIP also must establish procedures for quantifying emissions from sources with uneven emission patterns due to batch, seasonal or cyclical operations. The appropriate procedure for handling these expected fluctuations in emissions will depend in part on the emissions averaging time upon which the EIP is based. The EPA recognizes that the development of quantitative procedures for mobile sources can present significant challenges. Such procedures must consider, as appropriate, the factors which will affect or determine the level of participation in a transportation program, as well as how much and where vehicles are driven. Such procedures should clearly address how double-counting will be avoided across various mobile source programs (e.g., not double-counting I/M program reductions in quantifying credits from an accelerated vehicle scrappage program). Any assumptions or models which States may use to predict behavioral modifications as a result of the implementation of an economic incentive strategy must be presented as support information with the EIP submittal. The EPA views the development of sound incentive-based mobile source programs as an opportunity for the design of better, more rigorous tools for accounting for and encouraging



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# Federal Register, Volume 59 Issue 67 (Thursday, April 7, 1994)

mobile source emissions reductions beyond those required by traditional programs. The final rules allow for long-term averaging, while requiring that States make statistical showings that any such averaging is consistent with applicable RACT, RFP, and short-term NAAQS. Any State that wishes to use long-term averaging must include, with the plan revision submittal, a statistical showing that the aggregate effect of the specified averaging time is consistent with attaining the O3 NAAQS and satisfying applicable RFP requirements on the basis of typical summer day emissions; and, if applicable, a statistical showing that aggregate daily emissions from all affected sources covered by a Federal RACT requirement (net of any RACT/non-RACT trades) are no greater than the aggregate daily emissions from such sources that would result from the implementation of all applicable source-specific RACT requirements (see paragraph IV.D.2.). 5. Monitoring, Recordkeeping and Reporting Each affected source in an EIP must comply with requirements imposed by the program, and must implement the MRR procedures necessary to assure compliance with such requirements and to provide State and Federal enforceability. Requirements imposed by an EIP could include meeting mass emissions limits (either directly or through trading marketable permits), paying an emission fee, using specified products or procedures, providing product content labeling, or other measures specified by the program. Thus, the final rules allow for a wide range of alternative MRR procedures that provide sufficiently reliable and timely information for determining compliance. Criteria to be considered in the development of such procedures include representativeness, accuracy, precision, reliability, frequency, and timeliness. All source-specific program requirements must be structured in such a way that both inspectors and facility owners can judge the compliance status of a facility at any time, or, in the case of long-term emissions limits, at the end of the compliance period. This will require an authoritative, reliable repository of all relevant information at each facility. 6. SIP Creditability and Audit/Reconciliation Procedures A SIP revision that contains an EIP must include projections of the emissions reductions the State expects to achieve through the implementation of the program. The projections may be based onfederally-enforceable limits on mass emissions or on other emissionrelated parameters, estimates of market response, economic modelling, or other relevant information. The State does not have to project emission changes for each source, unless that is how the State chooses to estimate the emissions reduction from the program. All EIP submittals must include documentation which clearly states how sources in an EIP are or will be addressed in the emissions inventory, RFP plan, and attainment or maintenance plan, as applicable. This documentation should include a description of the assumptions used in



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measuring emissions and emissions reductions from affected sources. Credit in a nonattainment SIP may be taken for emission limiting programs (e.g., emissions trading) and market-response programs (e.g., emissions fees). Credit may not be taken for directionally-sound programs until experience with such programs makes quantification possible, at which time the program could be reclassified into one of the other categories for which credit may be taken. For determining SIP credit, the projected emissions reductions must be adjusted to reflect the uncertainties inherent in EIP's. This adjustment is currently done for traditional stationary source control measures through the use of a rule effectiveness factor, developed from experience with traditional regulatory control programs. For EIP's, the State must use two uncertainty adjustment factors, as appropriate, to calculate creditable emissions reductions. The sources of uncertainty that must be separately addressed are compliance uncertainty (i.e., the extent to which sources will actually comply with program requirements) and programmatic uncertainties (e.g., the extent to which voluntary market responses to incentives actually occur and/or the use of various quantification methods with differing confidence levels). These sources of uncertainty must be accounted for through the use of a rule compliance factor and a program uncertainty factor, respectively. The State must specify values for rule compliance and program uncertainty factors, based on program elements such as the quantification and enforcement procedures, and on the predictive quality of the information used by the State to develop the projected emissions reductions. Inherent in the way in which these factors are defined, the value of either factor must be less than or equal to one. The State must include with its EIP submittal a justification for the values assigned to these factors. The State must use these factors in determining the SIP credit for the program as a whole, or for each source-specific trade, if appropriate, to ensure that quantification uncertainties not lessen a source's emissions reductions requirements. The uncertainty factors should be developed and justified by the State by taking into account various aspects of the design of the EIP, including but not limited to, the type of incentive mechanism upon which the program is based; the variability in emissions from affected sources and the nature and extent of uncertainty in the emissions quantification procedures required by the program; the frequency and type of MRR required by the program; sanctions for noncompliance; the frequency, scope and committed responses to program audits; and the nature of administrative procedures to be used by the State in implementing and enforcing the program (see paragraph IV.F.). Unless otherwise provided in program-specific guidance issued by the EPA, EIP's for which SIP credit is taken must also contain program audit procedures designed to evaluate program implementation and track program results in terms of both actual emissions reductions and, to the extent practicable, cost savings realized during program implementation. The auditing methods and the timing of the audits must



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# Federal Register, Volume 59 Issue 67 (Thursday, April 7, 1994)

be specified in the EIP. The maximum time interval for conducting such audits is 3 years, although States are encouraged to consider more frequent audits. Further, the State must provide timely post-audit reports to the EPA. For emission-limiting EIP's, program audit provisions must include a State commitment to ensure timely implementation of programmatic revisions or other measures which the State, in response to the audit, deems necessary for the successful operation of the program (see paragraph IV.G.). Program audit provisions for market-response EIP's must be accompanied by reconciliation procedures, designed to compare credited emissions (i.e., adjusted projected emissions) with actual emissions achieved through the implementation of the program. The reconciliation procedures must specify a range of appropriate actions (e.g., invoke part of a general SIP contingency plan or a program-specific contingency), revisions to the program requirements (e.g., increase the fee, include more sources) that will make up for any shortfall between credited and actual emissions revealed by the audit, or reductions in the credit taken for the EIP in the SIP (provided that RFP and attainment requirements continue to be satisfied area-wide based on such reduced EIP credits in combination with the effects of all other SIP programs). Such measures must be automatically executing to the extent necessary to make up the shortfall, with State action required only to identify which of the specified actions are necessary to make up the shortfall. Such measures must not require a revision to the implementation plan to be effectuated once identified by the State; rather, the measures must be built into the original EIP design (or incorporated by reference). Greater burdens should not necessarily be imposed on EIP's, compared to traditional regulatory programs, by virtue of the audit and reconciliation requirements. These audit and reconciliation procedures are consistent with the general approach to implementing the Act being taken by the EPA, as illustrated in the Agency's rules for vehicle I/ M 12 and for reformulated gasoline, 13 and in the Agency's general guidance on the implementation of title I dealing with the rule effectiveness of stationary source control measures. 14 Further, in appropriate cases, routine ongoing air program management procedures may be sufficient to fulfill the audit and reconciliation requirements. In designing audit procedures, the State should consider the relative uncertainty associated with the EIP and specify the scope and extent of the audit procedures to be commensurate with that level of uncertainty.

--------------------------------------------------------------------------- \1\2Inspection/Maintenance Program Requirements, 57 FR 52950, November 5, 1992. \1\3Regulation of Fuels and Fuel Additives: Standards for Reformulated and Conventional Gasoline, 59 FR 7716, February 16, 1994. \1\4Rule Effectiveness Guidance: Integration of Inventory,



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Compliance, and Assessment Applications, EPA-452/4-94-001, January 1994.

--------------------------------------------------------------------------- 7. Implementation Schedule An EIP must contain a schedule for implementing the program. The schedule must include dates for notifying potentially affected sources, as early as possible, about the impending EIP; program initialization and start-up procedures; compliance and submittal requirements for affected sources; and audit and reconciliation processes, including subsequent actions required to make up for any shortfall that occurs. 8. Administrative Procedures As part of any EIP design, the State must establish appropriate administrative procedures, specific to the type of incentive strategy, necessary to implement all of the elements of the EIP. For example, in a fee program a State must assure the proper administration of the fee collection process, and if rebate provisions are included, the administration of the rebate distribution process. Administrative procedures specific to marketable emissions permit programs which the State must address in a program design are the mechanisms required for conducting, approving, verifying, recording, and tracking trades. The EIP must clearly describe the administrative system, and any State commitments to implement and maintain the system, that enables market participants to conduct valid and legally protected transactions. The State must design the program to ensure that all program requirements are met by sources involved in trades, such that the trades result in enforceable changes in allowable emissions levels. A well-designed EIP will include the minimum amount of transactional oversight, approval, recording, and tracking provisions necessary to create a verifiable and enforceable system. Unnecessary or excessive administrative requirements in a trading system increase the cost of the program and inhibit trading. An active trading market increases the opportunities for cost-savings. However, a State must establish sufficient administrative procedures to ensure that the environmental goals of the EIP are met, and that the program is adequately enforceable (see paragraph IV.J.2. and the discussion of emissions trading markets in Appendix X). 9. Enforcement Mechanisms An EIP must include adequate enforcement consequences for noncompliance with any source requirements, including MRR requirements. Each program must include provisions ensuring that State/local and Federal statutory maximum penalties preserve the deterrent effect of traditional regulatory programs. Enforcement provisions should preserve the criminal sanctions (for knowing violations) authorized in the Act for violations of SIP requirements per se. Traditional regulatory programs provide for enforcement against noncompliance with emissions limits at both the Federal and State/local



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# Federal Register, Volume 59 Issue 67 (Thursday, April 7, 1994)

levels. The statutory maximum Federal penalties under the Act are $25,000 per day, per source in violation. To preserve the existing level of deterrence under the Act, an EIP that imposes multiday and/or multisource emission limits must define violations of those limits in such a way that the violations will translate into some combination of sufficient numbers of violations, sources in violation, and days of violation. One possible approach would be for the EIP to authorize predetermined penalties based on the amount of an exceedance of such a cap, provided the predetermined amounts are sufficiently large (see paragraph IV.H.). The EIP's that impose multisource emissions limits must require facilities to develop enforceable plans for remedying noncompliance in those cases where facilities have exceeded emissions limits for the specified averaging period. Such plans must identify appropriate and enforceable control measures or other procedures or strategies sufficient to achieve and maintain compliance with applicable emissions limits. Further, for sources subject to title V requirements, the elements of such plans must, at a minimum, be consistent with any applicable title V permit requirements concerning compliance plans. Compliance with MRR requirements is critical to the integrity and success of EIP's. Thus, an EIP must include enforcement provisions that establish a regulatory structure which clearly and effectively deters inadequate or improper MRR, providing for both State/local and Federal penalties. Further, the enforcement provisions must include methods for determining required data when MRR violations result in missing, inadequate, or erroneous monitoring and recordkeeping data. These methods must ensure that sources have a sufficiently strong incentive to properly perform monitoring and recordkeeping in the first place. E. Use of Program Revenues Today's rules incorporate statutory restrictions on the use of revenues generated by statutory EIP's. These restrictions are mandated by section 182(g)(4)(B) of the Act on the use of revenues generated by statutory EIP's submitted pursuant to sections 182(g)(3), 182(g)(5), 187(d)(3), and 187(g) of the Act. Revenues may be generated by an EIP from a wide variety of fees or charges, including emission or permit fees, fees associated with approving and recording trades, application fees associated with labelling or sources opting into an EIP, and fees or charges associated with TCM's. Specifically, any such revenues may be used by a State for providing incentives for achieving emissions reductions, providing assistance (up to 75 percent of costs) for the development of innovative technologies for the control of O3 air pollution and for the development of lower-polluting solvents and surface coatings, and funding (with up to 50 percent of the revenues) administrative costs of State programs under the Act. These restrictions on the use of revenues do not apply to discretionary



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# Federal Register, Volume 59 Issue 67 (Thursday, April 7, 1994)

EIP's. Because the use of revenues from discretionary programs is not constrained, some or all of the revenues generated by discretionary EIP's may be rebated in order to create a revenue-neutral program, or one with less revenue retained by the State. Rebate provisions of revenue-generating EIP's can be designed to reduce the total cost to the affected sources without diminishing the incentive to reduce emissions created by the EIP. For example, an emission fee program could place a fee on total emissions from affected sources, and rebate an amount based on average emissions or percentage emissions reductions of the affected sources. In a program with a large number of sources, each source would only have a minor influence on the average emissions. Thus, the rebate is not dependent on a source's own actions, and would not distort the incentive of the fee on every unit of emissions created by the source. IV. Discussion of Comments and Regulatory Changes This portion of the preamble is organized according to the ``Discussion of Issues'' section in the proposal, with additional discussion of general issues raised in public comments. The following discussion highlights the changes and clarifications made in the final rules in response to the public comments on these issues. A. Program Goals 1. Statutory Programs Statutory EIP's are those programs submitted pursuant to sections 182(g)(3), 182(g)(5), 187(d)(3), and 187(g) of the Act, generally because of failures in achieving required emissions reductions. The Act does not specify the extent to which the EIP must, in and of itself, make up for the specific failure in achieving the emissions reductions necessary to meet the next milestone requirement. Rather, the provisions specify only that the EIP ``shall be sufficient, in combination with other elements'' of the plan, or together with a ``transportation control plan,'' to achieve the necessary reductions. In the proposal, the EPA solicited comments on whether to require that some specified minimum percentage of the required reductions be met by a statutory EIP. Most commenters, including State and local agencies, industry, and an environmental group, felt that EIP's should not be required to meet a specified minimum percentage of emission reductions. These comments were generally based on the premise that opportunities for such reductions will vary because of potential differences between nonattainment areas that may implement EIP's. A specified minimum percentage would not provide recognition of these differences nor the flexibility that needs to be an inherent part of EIP's. On the other hand, an environmental group commented that a



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specified minimum percentage of required reductions should be met by a statutory EIP, equivalent to the percentage difference between what the SIP is achieving and what the next milestone requires. The final rules retain the requirement that a statutory EIP make a significant contribution to the required emissions reductions, without mandating any percentage reduction requirement or that the EIP assume the entire burden of making up for the shortfall. This position is most consistent with statutory intent that the States have flexibility in determining how best to combine an EIP with other emission reduction programs to achieve the necessary emissions reductions. Further, this position is consistent with meeting the benefits sharing goal established for all EIP's. 2. Discretionary Programs In explicitly allowing for discretionary (i.e., nonstatutory) EIP's to be included as SIP provisions, the Act does not impose any specific emissions reductions requirements on such programs (sections 110(a)(2)(A) and 172(c)(6)). Thus, the proposed rules imposed no specific emissions reductions requirements on discretionary EIP's. The proposal relied upon the new State planning, quantitative progress, and attainment requirements in the Act to ensure expeditious attainment of the NAAQS, regardless of the type of emissions reductions programs that States may choose to include in their SIP's. Comments were received from an environmental group in support of an alternative view outlined in the proposal. The alternative view is that any savings in compliance costs resulting from discretionary EIP's (relative to nonincentive-based programs) should be shared between two accounts: the regulated sources should retain only as much savings as is sufficient to maintain the incentive to participate in the EIP, with the remainder of the savings being used by the State to reachattainment more quickly than would be practicable under a nonincentivebased plan. This alternative view is based on the statutory requirement that States should attain the NAAQS as expeditiously as practicable. In contrast, other commenters from State and local agencies, industry, and a joint environmental/industry work group agreed with the proposal that the EPA should not require discretionary EIP's to achieve more rapid progress than other regulations. A joint environmental/ industry work group emphasized that EIP's should be designed to increase flexibility and cost effectiveness, and should not be held to any stricter standard than traditional programs. Several industry commenters felt that requiring more rapid progress towards attainment in exchange for a more flexible program appears to be a penalty provision. These commenters felt that, while EIP's should be structured to produce reductions equivalent to traditional SIP rules that the EIP's replace, the addition of further reductions as the price for entry into an EIP will discourage participation and reduce benefits that might otherwise result from broad participation. A State agency disagreed with requiring greater emission reductions from discretionary



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EIP's since different types of environmental benefits can be achieved by EIP's, such as technological innovation, more available capital for other control measures, conservation of natural resources, and increased commitment from the regulated sources. Another State agency believes that EIP's which replace traditional SIP requirements should be equally effective, equitable, and enforceable as the program it replaces. The final rules take into account the broad array of benefits that can result from the use of discretionary EIP's, the statutory requirement for expeditious attainment, and the fact that EIP's are relatively new and controversial in principle as well as in practice. Further, current experience with EIP's makes clear that successful adoption and implementation of EIP's requires some degree of consensus among the interested groups that both the regulated entities and the environment will benefit from such programs. Thus, the final rules and guidance establish as a goal for all EIP's that they be designed to benefit both the environment and the regulated entities. In so doing, the final rules and guidance require States to meet this benefits sharing goal, while providing flexibility to the States to determine how best to do so. As a result, EIP's will increase flexibility, lower the cost of attaining and maintaining the NAAQS, and provide stronger incentives for the development and implementation of pollution prevention measures and innovative technologies. Benefits from discretionary EIP's can be defined in various terms, as discussed in paragraph III.D.1. While the EPA encourages that discretionary EIP's be designed to produce environmental benefits directly, through increased or more rapid emissions reductions, States should consider these and other benefits in designing a program to meet the goal of sharing benefits between the regulated entities and the environment. In many cases, benefits in terms of cost savings will not be quantifiable prior to program implementation, due to the complex market decisions that sources participating in an EIP will need to make and changes in market conditions during the course of the program. Thus, the final rules and guidance include analysis of control cost savings, to the extent practicable, as a part of the required program audit. However, the difficulty of quantifying cost savings and the extent to which those cost savings constitute an incentive to trade leads the EPA to conclude that it is not practicable to require that all EIP's discount trades or otherwise require increased or more rapid emissions reductions that directly benefit the environment. The authorization for discretionary EIP's in sections 110(a)(2)(A) and 172(c)(6) may be interpreted to indicate Congress' view that such programs may help achieve emissions reductions more effectively or efficiently, but not necessarily more expeditiously, than traditional regulatory requirements. The final rules reflect that it most appropriately falls to the



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States to determine the type and extent of benefits sharing that is practicable and appropriate, given the unique circumstances that any particular discretionary EIP is designed to address. Therefore, the final rules do not require any specific formula for benefit sharing. However, the final rules do recognize that the issue of benefits sharing will be part of the political consensus building process associated with designing a discretionary EIP. In assessing this issue, States should not confuse this sharing with accounting for uncertainty in an EIP. Since uncertainty is to be accounted for through compliance and programmatic uncertainty factors (see paragraph III.F.), determining a degree of sharing based on weighing the uncertainty in an EIP would in essence be accounting twice for the same uncertainty. One commenter also argued that the requirements for attainment as expeditiously as practicable [section 181(a)(1)] and for imposition of reasonably available control measures [section 172(c)(1)] mandate the inclusion of emission fees in EIP's. The EPA encourages States to consider emissions fees, but does not believe that, at present, their impacts are sufficiently well understood in all cases to conclude that, for all EIP's, they are either practicable or reasonably available. B. Interface With Reasonably Available Control Technology (RACT) and Other Statutory Requirements

1. RACT The proposal was based on an interpretation of the statutory RACT requirements that authorizes sources subject to the statutory RACT requirements (RACT sources) to meet their RACT obligations in the aggregate (i.e., through trading among themselves), and, when such trading results in an exceptional environmental benefit, by acquiring emissions reductions from non-RACT sources (as discussed in paragraph II.D.2.). Further, the proposal defined exceptional environmental benefits in terms of the statutory offset ratios for nonattainment areas and other demonstrations of exceptional long-term environmental benefits. With regard to meeting RACT in the aggregate, all but one commenter agreed with the proposed position that trading be allowed among all RACT sources. Further, these commenters generally felt that such RACT trading should produce emissions reductions that are equivalent tothose that would be obtained if each source met its source categoryspecific RACT limit. On the other hand, one environmental group disagreed with the proposed position allowing all sources covered by RACT requirements to trade among themselves. This commenter stated that nothing in the Act specifically authorizes substituting any trading regime for source-specific RACT requirements. However, if the EPA allows trading to meet RACT requirements, only trading within a given RACT source category should be allowed since section 182(b)(2) addresses RACT by source categories. Further, this commenter stated



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that since RACT limits have historically been set based on sourcespecific economic and technical constraints, ``tradeable'' RACT limits must be based on an analysis of the cost savings achievable by meeting RACT through whatever trading approach is permitted in the RACT rule. Since trading approaches provide increased compliance flexibility and cost savings, the commenter believes that any ``tradeable'' RACT limits should be lower than source-specific RACT limits. With regard to RACT/non-RACT trading in general, most commenters, including industry, State and local agencies, and an environmental group, supported such trading. Some stated that any regulation which requires certain reductions to be obtained at specified sources, and nowhere else, contradicts a ``market-based'' approach. They felt that the broadest possible participation in a trading market should be encouraged so as to achieve the most benefits from the program. Some commenters felt that allowing RACT/non-RACT trading encourages the development of new technologies and facilitates obtaining controls on previously unregulated sources and source categories. Limiting trades to particular source categories was thought by some to substantially reduce both the incentives and savings available. Such comments were premised on the belief that trading between different source categories (involving both RACT and non-RACT categories) can have sufficient controls and safeguards built in to ensure compliance. On the other hand, other environmental groups opposed RACT/non-RACT trading. One such commenter asserted that statutory language regarding RACT ``sources'' only refers to stationary sources, such that trading between RACT sources and mobile sources would violate the Act. Further, this commenter asserted that such trading would make it impossible for States to manage mobile source and stationary source budgets properly for purposes of demonstrating RFP and attainment. The other environmental group commended the EPA's objectives, and approved its means in theory, of allowing trades between mobile and stationary sources, but concluded that the time for trading between stationary and mobile sources has not arrived. This conclusion was premised in part on the belief that trading between RACT sources and mobile sources violates the Act, because it is impossible to determine whether a given mobile source emission reduction is truly surplus. Further, both commenters felt that mobile source emissions reductions could not be reliably quantified. As to the conditions under which RACT/non-RACT trading may occur, many commenters from industry expressed the view that such trading should be allowed at a 1-to-1 ratio, i.e., that no exceptional environmental benefit was required to justify RACT/non-RACT trading. These commenters felt that any trading ratio greater than 1 to 1 would limit the economic, technological, and environmental benefits that could be derived from innovations brought about by RACT/non-RACT trading. Other commenters, including State and local agencies and some industries and environmental groups, supported the concept of requiring



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RACT/non-RACT trades to achieve an exceptional environmental benefit in general, and the use of the proposed statutory offset ratios in particular. However, some of these commenters expressed concern that the offset ratios may have a chilling effect on such trading, and encouraged the EPA to identify justifiable circumstances under which trading ratios could be lower than the offset ratios. The final rules continue to allow RACT to be met in the aggregate. In addition, the final rules continue to allow RACT/non-RACT trading, provided that an exceptional environmental benefit is achieved. Under the 1977 Act, the requirements specific to nonattainment SIP's were found in part D of title I of the Act. Section 172 specified the attainment date and the required SIP measures. Subsection (a) of section 172 required that nonattainment SIP's provide for attainment by specified dates; subsection (b)(2) required that those SIP's ``provide for the implementation of all reasonably available control measures (RACM) as expeditiously as practicable.'' Subsection (b)(3) required that the SIP's provide for RFP, including RACT: (Nonattainment SIP's must) require, in the interim (prior to the attainment date) reasonable further progress * * * including such reduction in emissions from existing sources as may be obtained through the adoption, at a minimum, of reasonably available control technology. The EPA took the position that RACT requirements do not require each affected emissions unit to achieve a prescribed amount of reductions in emissions from its own processes, but rather require the affected sources to achieve in the aggregate the reductions that would be achieved if each applied RACT controls to itself. Under the EPA's interpretation, the application of the requirement to impose RACT upon ``existing sources'' meant that RACT applied in the aggregate, as opposed to source by source. This interpretation, which is reflected in the Emissions Trading Policy Statement (51 FR 43814 (December 4, 1986), the ``Bubble Policy''), was upheld in NRDC v. EPA, 33 ERC 1657 (4th Cir. 1991), an unpublished decision. There, the Court of Appeals for the Fourth Circuit upheld as reasonable EPA's approval of a Maryland SIP revision for the American Cyanamid Company relaxing the SIP limit on several lines in exchange for tighter limits on other lines. The EPA reasoned that the RACT requirement was met by the subject lines in the aggregate. The Act revamped part D of title I by updating the general requirements applicable to all nonattainment SIP's, placing those requirements in subpart 1 of part D, and adding subparts 2-5 to cover pollutant-specific nonattainment SIP's. Subpart 2 concerns ozone SIP's. Under the 1990 Amendments, the 1977 Act's requirements for nonattainment SIP's were generally retained in subpart 1, but were combined differently--the RACM and attainment date requirements were



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consolidated into one provision and the RACT requirement was shifted to the RACM provision. Those provisions (section 172(c)(1)-(2)) now read: (1) In General--Such (nonattainment SIP) provisions shall provide for the implementation of all reasonably available control measures as expeditiously as practicable (including such reductions in emissions from existing sources in the area as may be obtained through the adoption, at a minimum, of reasonably available control technology) and shall provide for attainment of the national primary ambient air quality standards. (2) RFP--Such plan provisions shall require reasonable further progress. In addition, subpart 2 contains several RACT provisions. Most importantly, section 182(b)(2) sets out the RACT requirement for areas classified moderate or higher, as follows: The State shall submit a revision to the applicable implementation plan to include provisions to require the implementation of reasonably available control technology under section 172(c)(1) with respect to each of the following: (A) Each category of VOC sources in the area covered by a CTG document issued by the Administrator between the date of enactment of the Clean Air Act Amendments of 1990 and the date of attainment. (B) All VOC sources in the area covered by any CTG issued before the date of the enactment of the Clean Air Act Amendments of 1990. (C) All other major stationary sources of VOC's that are located in the area. Each revision described in subparagraph (A) shall be submitted within the period set forth by the Administrator in issuing the relevant CTG document. The revisions with respect to sources described in subparagraphs (B) and (C) shall be submitted by 2 years after the date of the enactment of the Act, and shall provide for the implementation of the required measures as expeditiously as practicable but no later than May 31, 1995. Under the 1990 Act, the EPA continues to take the position established under the 1977 Act that RACT applies in the aggregate because the RACT requirement of section 172(c)(1) of the Act is phrased identically to the RACT requirement of the 1977 Act (vis., ``existing sources''). EPA does not read section 182(b)(2) to indicate to the contrary. Rather, the cross-reference to section 172(c)(1) contained in section 182(b)(2) indicates that RACT is to be interpreted in the same manner under section 182(b)(2) as under section 172(c)(1). In addition, the EPA interprets the RACT requirement to authorize emissions trading among the stationary sources subject to the RACT requirement (``RACT sources'') and those not subject (``non-RACT



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sources'') when emissions reductions result in an amount that provides an exceptional environmental benefit, e.g., a level of reductions that is significantly greater than RACT-level amounts. This interpretation entails viewing the RACT requirement as generally requiring a specified level of reduction of emissions from stationary sources subject to RACT, but as authorizing those sources to substitute significantly greater emissions reductions credits from non-RACT sources in lieu of putting controls on themselves. The EPA acknowledges that the statute permits different interpretations, including the interpretation that the universe of sources subject to RACT must themselves implement RACT-level controls, and therefore may not trade with non-RACT sources. However, the EPA believes that its interpretation allowing such trading is permissible, based on the language of section 172(c)(1). The EPA's interpretation emphasizes that the RACT requirement is an emissions reduction requirement for stationary sources that is designed to yield reductions to facilitate the ultimate attainment of the NAAQS and, in the interim, RFP towards attainment (sections 172(c)(1)-(2)). Section 172(c)(1), as quoted above, requires SIP provisions to provide ``such reductions in emissions from existing sources in the area as may be obtained through the adoption, at a minimum, of reasonably available control technology. This provision requires an amount of emissions reductions that equates to the amount that would result from the imposition of ``RACT'', but does not require the imposition of any particular set of controls or technologies. Further, the term ``RACT'' is not defined in the statute. In light of the function of this term--to identify the level of required emissions reductions--the EPA believes the term may be defined either as a specified level of emissions to be reduced from the RACT source itself, or as little as a zero level of reductions from the RACT source, coupled with the acquisition by the RACT source of emissions reductions from sources other than RACT sources in an amount that will yield an exceptional environmental benefit. With respect to the level of emissions reductions required from the RACT source itself, the EPA believes that if the RACT source acquires an appropriate amount of emissions reductions ``credits'' from non-RACT sources, it is not reasonable to require additional reductions from the source itself. Under these circumstances, control technology needed to produce such reductions from the source itself is not ``reasonably available''. With respect to the level of emissions reductions required from the non-RACT sources, the final rules retain the proposed approach to define such a benefit in terms of the statutory offset ratios in general, although flexibility is provided if exceptional environmental benefits are otherwise demonstrated, with a lower bound for the trading ratio of 1.1 to 1 in such cases. EPA believes that these additional amounts of reductions are required because it is ``reasonable''--within



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the meaning of the amount of reductions required through ``RACT''--to forego reductions that could be obtained at the RACT source itself only when the trading program will result in an exceptionally strong benefit to the environment. In addition, requiring substantial additional emissions reductions credits from non-RACT sources is consistent with the underlying purpose of the RACT requirement--to assure reductions that result in an important step towards fulfilling the RFP and attainment requirements. The EPA incorporated statutory offset ratios because offsets are an aspect of emissions trading, and thus provide an indication of Congress' view of benefits to the environment to be required in this context of emissions trading. Section 182(b)(2), quoted above, does not alter EPA's analysis. Section 182(b)(2) mandates ``the implementation of reasonably available control technology under section 172(c)(1) with respect to (threecategories of stationary sources).'' The EPA interprets the crossreference to section 172(c)(1) to incorporate into section 182(b)(2) the definition of the phrase ``reasonably available control technology'' and the RACT requirement generally under section 172(c)(1). In addition, the EPA interprets the phrase ``with respect to'' to authorize RACT sources to acquire emissions reductions credits in the manner described above, and not to mandate the imposition of controls directly on the RACT sources. The EPA believes that this provision may be interpreted to identify the source categories responsible for securing RACT-level reductions, and to mandate the time-frame for them to do so; but does not mandate that those sources themselves implement the emissions reductions measures. The EPA believes that its interpretation is permissible under Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984), because the relevant statutory provisions are not defined in the statute in a manner that makes clear whether sources subject to RACT may acquire the necessary emissions reductions from other sources in lieu of imposing the controls themselves. As a result, the EPA may proceed to interpret the provision in a manner that is reasonable and consistent with the purpose of the statute. (See generally sections 110(a)(2)(A) and 172(c)(6) (authorizing SIP measures to include ``economic incentives such as * * * marketable permits'').) As discussed above in paragraph IV.A.2., the final rules and guidance require that EIP's be designed to meet the goal of sharing benefits between the environment and the regulated entities. For EIP's that allow trading or other types of compliance flexibility to meet RACT requirements, as with any EIP, the EPA encourages States, to the extent practicable, to meet this benefits sharing goal most directly by requiring increased emissions reductions beyond those that would be achieved through a traditional RACT program. Increased reductions could be created in a number of ways, such as by including more sources in the program or requiring a greater than 1-to-1 trading ratio. Depending



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on the scope and nature of an EIP, compliance flexibility might include not only emissions trading between sources, but also alternative compliance methods such as pollution prevention, energy conservation, and fuel switching. RACT/non-RACT trading programs must, of course, also meet the other requirements in the final rules, such as those that relate to credible, workable, and replicable quantification methods and to monitoring, recordkeeping, and reporting that allow for compliance determinations and State and Federal enforceability. The EPA recognizes that several commenters raised concerns about the technical workability of emissions trades involving mobile sources. Congress arguably contemplated that EIP's could incorporate trades involving mobile sources, as indicated by the definition of an EIP in section 182(g)(4)(A) to include ``incentives and requirements to reduce vehicle emissions and vehicle miles traveled in the area, including any of the transportation control measures identified in section 108(f).'' The EPA will address technical concerns raised by commenters when it finalizes guidance on the generation of ERC's from mobile source control programs. Beyond the requirements in the final rules, the EPA is developing more specific guidance on the use of emissions trading to implement new NOX RACT requirements. This guidance will address issues such as setting tradeable NOX RACT limits and baselines, and is consistent with the general RACT trading principles set out in paragraphs III.D.2. and III.D.3. The EPA intends to work with States who want to develop trading-based RACT programs to incorporate the requirements of the EIP rules and related guidance into EIP's that are environmentally sound and administratively efficient. 2. Offsets The EPA received a number of comments specifically dealing with NSR offset issues. These covered a range of issues, but focused primarily on offsets banking. Such issues are beyond the scope of this EIP rulemaking, but the EPA intends to address them in the near future in guidance on ERC banking currently being developed. In the interim, the EPA intends to work with States who want to develop offset banking programs. 3. ECO Programs The EPA received a number of comments dealing with ECO programs which are beyond the scope of this EIP rulemaking. The EPA has previously issued guidance on ECO programs and anticipates the development of additional guidance. Final action with respect to ECO programs will occur when the EPA acts on SIP revisions concerning ECO programs. C. Program Baseline The proposed rules were based on the premise that a State can only take credit in attainment and RFP demonstrations for emissions



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reductions from EIP's that are surplus to what is otherwise required and credited to other elements of a federally-approved SIP. This restriction is necessary to ensure that a State does not double count emissions reductions in SIP demonstrations. The general requirements for program baselines are intended to ensure that such double counting does not occur, while still providing as much flexibility as possible. The proposal solicited comments on the conditions under which States should have the flexibility to use an ``allowable'' baseline. In particular, comments were solicited on the proposed approach to accept an ``allowable'' baseline in an EIP submitted in conjunction with the submission of an applicable progress plan (e.g., 15 percent RFP plan and/or subsequent 3 percent-per-year plans), prior to the submission of an attainment demonstration. Further, comments were solicited on approaches for achieving consistency between EIP's with ``allowable'' program baselines and statutory RACT, RFP, and attainment requirements. There were many comments from industry and State and local agencies in support of the proposed flexibility in setting baselines. These comments generally supported the concept of considering the use of allowable emissions in setting EIP baselines, provided the EIP is consistent with RFP and attainment demonstrations. The commenters did not, however, address how such consistency could be achieved or demonstrated. Some State agencies commented that if allowable emissions baselines are used, they should not lead to more actual emissions, in the aggregate area-wide, than allowed under a traditional plan. The commenters felt that this flexibility would allow States to select baselines that were the most practicable and equitable to all sources involved. An alternative view was expressed by an environmental group which advocated that the final rules should require an actual emissions baseline for all EIP's until the attainment demonstration is approved. This comment was premised on the belief that an allowable emissions baseline would violate the requirements for attainment as expeditiously as possible and for noninterference with attainment. The commenter asserted that relying only on a RFP demonstration and a commitment by the State that a future attainment demonstration would be consistent with the EIP baseline was a wholly inadequate constraint to ensure expeditious as practicable attainment. Further, this commenter expressed the view that ``surplus'' reductions should be defined relative to those reductions which are necessary to achieve attainment. As a result, the commenter concluded that the EPA should not approve any EIP's based on emissions trading prior to approval of an attainment demonstration. The final rules and guidance focus on consistency between progress plans and EIP baselines. The rules recognize that RFP requirements are defined in terms of actual areawide emissions reductions and annual progress. Although such consistency and requirements may be made more difficult by the use of an EIP baseline which incorporates allowable



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emissions, the final rules provide States flexibility in designing an EIP to achieve these requirements. Further, the final rules encourage the development of EIP's as part of an overall attainment strategy that lowers the cost of attainment. The final rules recognize that attainment strategies that incorporate EIP's can reflect both environmentally and economically sound policy choices. Therefore, the final rules retain the proposed baseline flexibility and definition of surplus, while requiring States to demonstrate in their EIP submittal that the EIP baseline is consistent with their progress plans 15 and RACT requirements, when applicable, and to commit that such consistency will be reflected in any subsequent progress plans and attainment demonstrations. The State should describe how the EIP baseline will be integrated into a subsequent attainment demonstration. The EPA takes the position that an allowables baseline, when consistent with a submitted, complete, and potentially approvable RFP plan generally is permissible. It is true, as one commenter emphasized, that consistency with RFP does not automatically assure consistency with attainment when additional reductions are needed for attainment. However, the EPA takes the position that an allowables baseline that is consistent with an RFP submittal does not specifically interfere with attainment under section 110(l). The State's commitment that the attainment demonstration, when submitted, will be consistent with the allowables baseline lends additional support to the EPA's position. The inducement to States to complete the attainment demonstration that is presented by the sanctions/FIP requirement, as well as the fact that emissions limits allowed under the EIP may be tightened if they unexpectedly develop into impediments to attainment, further support the EPA's positions.

--------------------------------------------------------------------------- \1\5EPA has concluded that it is not necessary in this notice to define RFP with any greater specificity than found in the statute; that is, it is not necessary to identify the extent, if any, of annual emissions reductions needed to comply with the statutory RFP requirements.

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As stated above in paragraph IV.B.1., the EPA is developing guidance that addresses baselines for EIP's implementing new NOX RACT requirements. Further, the EPA intends to work with States who want to develop trading-based RACT programs to incorporate the requirements of the EIP rules and related guidance into EIP's that are environmentally sound and administratively efficient.

D. Emission Quantification

1. Criteria for Adequacy of Approach

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The proposed rules and guidance were based on the premise that the development and use of credible, workable, and replicable methods to quantify emissions are necessary elements of any quantifiable EIP. The proposed rules require EIP quantification methods to have a level of certainty comparable to that for source-specific standards and traditional methods of control strategy development. The proposal explicitly allowed States to develop alternative approaches to meet these emissions quantification requirements. The proposal solicited comments on adequacy criteria for various types of source categories, recognizing that no one approach is the most appropriate, or even technically feasible, for all source categories. Most comments received on this issue were supportive of the general requirements in the proposal. Of those supporting the general requirements, no commenters offered any specific criteria for levels of certainty or accuracy by which quantification approaches should be evaluated. On the other hand, an environmental group commented that, for trading programs, the EPA should require the use of the most accurate available continuous emissions monitors (CEM's) on every source in an emissions trading program, and, where such direct emissions quantification is not possible, no emissions trading should be allowed. The final rules reflect the importance of both ensuring environmental protection with an adequate degree of accountability and fostering the development of innovative and flexible programs. Innovation and flexibility would be unduly restricted if the use of the most accurate available CEM's were a prerequisite for all sources to be included in any emissions trading program. The final rules recognize that other approaches may be more appropriate for various source categories. The final rules reflect that credible approaches necessarily entail levels of accuracy and precision sufficient to determine compliance and allow for effective enforcement of all emission limits in any EIP. Subject to these enforceability considerations, the final rules address uncertainty in emission quantification in determining SIP credit through the use of a programmatic uncertainty factor. A commenter stressed that the need to assure accuracy in trading would further burden State agencies, and argued that EPA could not approve an EIP absent a demonstration that the State agency has adequate resources to handle the additional workload. Many of the additional requirements Congress imposed on States through the Clean Air Act Amendments of 1990 would place additional burdens on State agencies--EPA intends to implement the Act's requirements that States have sufficient resources (e.g., section 110(a)(2)(E)) in the context of EIP submissions in the same manner as EPA implements these requirements in the context of other SIP submissions. 2. Extended Averaging Times The proposed rules recognize that long-term averaging by individual



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sources can significantly relax standards that require compliance on a short-term basis and jeopardize RFP and attainment demonstrations that are based on ``typical summer day'' emissions. The proposal also recognized that EIP's which require a number of sources to comply with total emissions caps or average emission rate limits could potentially mitigate this type of rule relaxation. In such programs, random daily positive fluctuations in emissions that are likely to occur from any given source (i.e., emission ``spikes'' that could jeopardize attainment) may tend to be compensated for by random daily negative fluctuations from other sources. Thus, the proposal allowed long-term averaging, provided a statistical showing is made that the long-term caps or limits are consistent with applicable demonstrations of RFP on the basis of typical summer day emissions, demonstrations of attainment of short-term NAAQS, and RACT requirements. The proposed approach provided increased flexibility to sources and to States in their plan development without undermining the EPA's traditional control programs or the validity of RFP or attainment demonstrations. The proposal recognized the need for additional guidance on such statistical ``equivalency'' showings. The proposal also solicited comments on specific approaches for RACT equivalency showings, including the use of a presumptive norm discount factor of 70 percentto be applied to a RACT limit averaged over 30 days, other rulespecific discount factors determined by States to represent RACTequivalency, and the use of short-term caps in conjunction with longterm caps or limits. Many commenters supported the proposed flexibility to allow for long-term averaging. One State commenter strongly supported the provision to allow States to relate long-term averaging to daily emissions by statistical analysis. Another State agreed that the use oflong-term averaging should not come at the expense of attaining shortterm standards or demonstrations of compliance. Other States noted the need for consistency in the EPA's RACT guidance on averaging times. Industry commenters endorsed the allowance of long-term averaging, although they expressed differing views about the need for statistical showings to demonstrate consistency with RACT and short-term standards. Some felt that any such showing should not be burdensome, while others disagreed that any such showing was necessary. An environmental group agreed that increasing averaging periods can significantly relax standards and threaten RFP and attainment. This group commented, however, that the proposal understated the difficulties which would flow from such a relaxation, and felt that discount factors would not provide adequate protection against spikes in emissions which could prevent attainment of short-term NAAQS. With regard to long-term averaging and RACT equivalency, many commenters disagreed with the use of a presumptive 30-day RACT equivalency factor, such as the 70 percent factor mentioned in the proposal. One commenter felt that a RACT equivalency showing should not



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be required if some statistical information was provided showing that long-term averaging would not interfere with RFP or the attainment demonstration. Many regulatory agency and industry commenters supported allowing States flexibility in determining RACT equivalency factors. The final rules retain the proposed allowance for long-term emissions averaging, as well as requirements that States make statistical showings that any such emissions averaging is consistent with applicable RACT, RFP, and short-term NAAQS. These statistical showings are necessary to show equivalency to, or noninterference with, each of these statutory requirements, although as a practical matter the same showing may suffice to assure consistency with more than one of the requirements. The statistical showings should take into account the extent to which emissions variations from an individual source or from all sources are random or systematic and, thus, the extent to which the variations can be considered to be independent. The showings must demonstrate that the pattern of emissions resulting from relaxed averaging periods would approximate the pattern of emissions that would occur without relaxed averaging periods to an extent sufficient to reasonably conclude that the relaxed averaging periods would not interfere with the statutory requirements. The final rules do not include any presumptive RACT discount factor, on the basis that no one factor can adequately account for the variations that may occur across different programs. However, the EPA remains open-minded to discount factors, especially for specific industries, that are substantiated by State analyses. The EPA will work with States that want to develop EIP's that incorporate long-term averaging requirements to ensure that such a program does not interfere with RFP and the attainment of short-term standards. The EPA anticipates that more general guidance will be developed in the course of working with States on statistical approaches for such equivalency demonstrations. In the case of EIP's implementing RACT requirements, the guidance referenced above in paragraph IV.B.1. addresses long-term averaging for NOX RACT.

E. Monitoring, Recordkeeping, Reporting (MRR)

The proposed rules were based on the premise that EIP's depend more strongly than traditional control programs on MRR to ensure compliance and to allow for adequate enforcement because they are inherently more flexible and less prescriptive than traditional technology or performance standards. The proposal recognized that while a wide range of MRR approaches are available that can be used to show compliance for different types of sources, no one approach is necessarily the most appropriate, or even technically feasible, for all types of sources that may be included in an EIP. Thus, the proposal explicitly allowed for alternative monitoring methods, while soliciting comments on criteria for adequate MRR requirements for EIP's.



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Public comments focused on whether EIP's do depend more strongly on MRR and on whether CEM's should be required for any or all sources covered by an EIP. Several industry commenters disagreed with the premise that EIP's depend more strongly on MRR to ensure compliance, and, therefore, felt that no more stringent MRR requirements should be required in EIP's than those required in traditional programs. These commenters supported the provision allowing a range of MRR requirements to be used in EIP's. One State commented that EIP's should be limited to source categories for which emission quantification and compliance methods are available and reasonably accurate. This State felt that the use of CEM's was the optimal monitoring method, although it recognized that other unit-specific field monitoring methods could be acceptable. An environmental group commented that the rules should require use of the most accurate available CEM's on every source involved in any emissions trading program. Further, this group felt that the maximum amount of CEM measurement inaccuracy should be reflected in a program discount factor. On the other hand, some industry commenters urged that EIP's not require the use of CEM's for any sources. The final rules retain the proposed flexibility for alternative monitoring approaches that allow for adequate compliance determinations and provide for effective State and Federal enforcement. As discussed above (see paragraph IV.D.1.), innovation and flexibility would be unduly restricted if CEM's were a prerequisite for all sources in any emissions trading program. In the development of adequate MRRrequirements, criteria should be considered to assure that qualityassured, representative monitoring data will be obtained that can be used to determine compliance. The EPA recognizes that special consideration should be given to developing MRR requirements for small sources to avoid undue burdens, consistent with assuring that all EIP sources are required to comply with adequate and effective MRR requirements. For mobile source programs, the State should refer to program-specific guidance from EPA, if applicable.

F. State Implementation Plan (SIP) Creditability

The proposed rules identify various types of uncertainties associated with different categories of EIP's, and required that States apply discount factors in calculating SIP credit based on the uncertainties inherent in the design of any given EIP. The proposal separately addressed compliance-related uncertainty, through a rule compliance factor, and programmatic uncertainties associated with quantification methods and projected market responses, through a program uncertainty factor. The proposal compared the need for a rule compliance factor to the historical use of a rule effectiveness factor, generally set at 80 percent for traditional stationary source SIP



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programs. The proposal identified an option of setting presumptive norms for these factors in lieu of the requirement that the State develop and justify program-specific factors. The proposal solicited comments on criteria for the development of such factors. Many commenters expressed different concerns with the proposed approach to dealing with uncertainty. Some commenters interpreted the proposal as allowing credit only for emission-limiting programs (e.g.,emission trading), and argued that credit should be allowed for marketresponse programs (e.g., emission fees) and even directionally-sound programs (e.g., those that benefit the environment but cannot be quantified). One such commenter, an environmental group, urged not only that credit be given for emission fee programs, but that they must be encouraged since they offer the most attractive opportunity for environmental progress. In fact, the proposed and final rules allow credit for market-response as well as emission limiting programs, and encourage States to consider all such types of programs. The proposed and final rules also encourage the use of directionally-sound programs, but specify that SIP credit cannot be taken until sufficient experience with the program results in the ability to adequately quantify the results. Some State commenters expressed general concern with the use of any up-front discounting of SIP credit, urging instead that alternative approaches be allowed to account for uncertainty. In particular, some State commenters recommended that the program audit procedures be used to provide information on actual emissions reductions resulting from program implementation. Such audit results would feed back into updated emissions inventories, be compared to initially projected program results, and if appropriate, result in additional credit or the need for additional reductions if the audited results differ from those credited to the EIP in the SIP. One State commenter recommended that the State be allowed to adopt various back-up provisions in an EIP instead of applying up-front discount factors. Some industry commenters disagreed with the use of two discount factors, on the basis that such an approach would double count uncertainty. These commenters also expressed the view that a presumptive norm of 80 percent for a rule compliance factor is too low. On the other hand, an environmental group commented that a presumptive norm of 80 percent was too high. This commenter also urged that credit not be given for prior reductions or for plant shutdowns and slowdowns which would have occurred in the absence of a control program. The final rules generally retain the proposed approach of requiring the State to develop and apply discount factors to account for compliance-related and programmatic design uncertainties. In addition, however, the final rules also include further guidance and criteria for developing and justifying such factors. In particular, various aspects of program design should be considered in developing such factors, including but not limited to the type of incentive mechanism upon which



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the program is based; the variability in emissions from affected sources and the nature and extent of uncertainty in the emissions quantification procedures required by the program; the type and frequency of MRR required by the program; sanctions for noncompliance; the frequency, scope, and committed responses to program audits; and the nature of administrative procedures to be used by the State in implementing and enforcing the program.

G. Audit/Reconciliation Procedures

The proposed rules specify that program audits be made at least every 3 years, consistent with intervals associated with RFP milestones and emission inventory requirements. Alternatively, the State could specify a shorter period, so as to allow time to make programmatic corrections or adjustments (in either direction) to SIP credited emissions reductions, before an RFP milestone is reached. The proposal solicited comments on the appropriate audit frequency. Several comments were received on the general issue of programs audits. Most such comments were generally supportive of a requirement for ongoing program tracking and feedback, although the commenters differed on the role that the audit should have relative to other EIP requirements. Some State commenters felt that ongoing audits should serve as an alternative to many of the proposed regulatory requirements for up-front technical analyses. Another State supported the use of audits to assess EIP adequacy and the need to take corrective actions. An environmental group recommended that the EPA require for all EIP's contingency measures to compensate for shortfalls revealed through the audits. Other State, environmental, and industry commenters felt that requiring audits was reasonable, but expressed varying degrees of concern that audits not become so burdensome as to serve as a disincentive for developing an EIP. On the other hand, one industry commenter felt that EIP's ought not be subject to any special audit requirements different from those applicable to traditional programs. On the issue of audit frequency, most commenters generally agreed with the proposed 3-year interval. One State commenter felt that annual audits should be conducted to assess progress, with a summary of such audits to be incorporated in triennial SIP RFP reports. The final rules and guidance retain the proposed requirements for program audit and reconciliation procedures, and establish 3 years as the maximum time interval for conducting such audits. The final rules recognize that the State has flexibility in establishing the frequency (within the 3-year constraint) and scope of audit provisions. Further, the final rules recognize that there is an interplay between the frequency, scope, and other design features of the audit provisions and the nature and scope of other program design elements (such as the justification for uncertainty factors). In addition, to better define the benefits from EIP's, the final rules include analysis of control



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cost savings, to the extent practicable, as a part of the required program audit.

H. Penalties for Noncompliance

The proposed rules recognize that determination of statutory maximum penalties for noncompliance is significantly complicated in thecase of EIP's that incorporate multisource emissions caps and/or longterm averaging times, since Federal statutory maximum penalty authority is specified on a per-day, per-source basis. While establishing the principle that such penalty provisions must create a deterrent effect comparable to that of traditional programs, the proposal solicited comment on criteria for the development of such penalty provisions. Commenters generally agreed with the principle of equivalent deterrence. Several industry commenters opposed any criteria that would suggest that any multisource emissions cap violation should be considered to have occurred at each source. Some commenters recommended that penalty provisions be based on the amount of the exceedence of a cap, and one commenter suggested that the final rules should recommend predetermined minimum penalties. Another commenter recommended that penalty provisions differentiate between violations that are willful or negligent and those that are determined not to be willful or negligent. The final rules and guidance continue to allow for a variety of approaches to specifying statutory maximum penalties, although exceedance-based approaches are encouraged. Thus, for example, where emission limits are specified in units of mass emissions, statutory maximum penalties can be specified as a function of the degree to which the limits are exceeded, as measured in terms of some increment of mass emissions. Alternatively, statutory maximum penalties could be specified as a function of the cost of credits or allowances in trading programs. The final rules and guidance require that EIP's be structured in conjunction with applicable enforcement authorities, in such a way that violations of multisource and/or multiday emission limits translate into sufficient numbers of some combination of violations, sources in violation, and days of violation. There are no criteria that suggest that this requirement should necessarily be met by considering that the violation occurred at each such source. The final rules further identify supplemental provisions that may enhance deterrence, such as mandatory minimum penalties, or address uncertainties inherent in the design of a program, such as penalty triggers linked to measures of compliance tracked through the program audit. The following criteria have been established for assessing the adequacy of the deterrent effect of EIP penalty provisions. The primary focus is on an assessment of the adequacy of the statutory maximum penalties in the EIP, through an evaluation of deterrence ratios (i.e., the ratio of the maximum penalty per violation to the cost of compliance). In a program with tradeable emission allowances or ERC's,



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the cost of compliance will be related to the market value of allowances or credits. Under a range of foreseeable noncompliance circumstances, this deterrence ratio must be high enough to deter noncompliance to a degree comparable to traditional programs. Other aspects of deterrence should also be considered in evaluating the adequacy of penalty provisions. These aspects include the likelihood that noncompliance will be detected and the credibility and predictability of responses to noncompliance. These aspects should be considered in light of administrative procedures and resources established within the EIP, as well as other program design elements related to emission quantification and monitoring, recordkeeping, and reporting.

I. Interface With Existing Emission Trading Policies

The EIP rules and guidance, being broadly applicable to any kind of EIP, generally cover the same type of emission trading programs that have historically been addressed by the EPA's previously released guidance on emission trading, primarily contained in the Emissions Trading Policy Statement (ETPS) and its appendices (51 FR 43831, Dec. 4, 1986). Although based upon the same general principles, the EIP rules and guidance provide both greater flexibility and more comprehensive programmatic requirements for such programs. The proposal defined the relationship between the EIP rules and the ETPS such that the provisions of the ETPS which apply to trading between existing sources (i.e., the bubble and generic bubble provisions) would represent one particular model for how States could choose to design such a program that would be approvable under the EIP rules. The proposal, however, in no way constrained EIP's involving emission trading to the specific provisions of the ETPS. The proposal solicited comments on this proposed relationship. Only a few commenters addressed this issue. Two commenters agreed with the proposed approach. Another commenter disagreed with retaining the elements of the ETPS that are now addressed by the EIP rules, on the basis that such ETPS provisions are rendered obsolete by the new rules, and the EPA should not encourage the use of less flexible policies. Another commenter recommended that the ETPS should be updated to include the flexibility contained in the EIP rules and that it should then continue to be applied to trading done for the purpose of meeting other statutory requirements (e.g., RACT/non-RACT trading). The final rules retain the proposed relationship between the ETPS and the EIP rules. The final rules do not encourage States to limit their design of EIP's to meet the specific provisions in the ETPS. However, the final rules recognize that States may want to implement emission trading without embarking on the design of new approaches to emission trading. Retaining the ETPS provides a known regulatory option for those States that want to apply it.



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J. General Issues

1. Detailed vs. General Guidance Some commenters felt that the EIP proposal was overly specific and limited flexibility. These commenters contended that it would be difficult for EPA guidance to anticipate and identify all of the specific elements of proposed programs that might be approvable until actual programs are developed and adopted. They felt that the final EIP rules should be limited to a detailed policy statement and discussion of principles and criteria to which EIP's must adhere rather than specific guidance on how EIP programs should be designed and administered. Other commenters, including a State and an environmental group, felt that the final rules should include more detailed guidance. One such commenter felt that without more detailed guidance, technical questions such as how to calculate emissions reductions or to establish baselines might be so daunting as to discourage attempts to develop EIP's. This commenter felt that the need for such guidance is particularly great for EIP's relying on area and mobile source emissions reductions. Another such commenter felt that without more detailed guidance spelling out appropriate design criteria and policy and legal limitations, States will succumb to pressures to develop EIP's that do not effectively implement the requirements of the Act. Some commenters on both sides of this issue recommended that the EPA provide examples of successful, appropriate EIP's. Such commenters recommended that such information be provided through supplemental documentation or through an EPA-established EIP information clearinghouse. Just as an individual State EIP rule should balance flexibility with specificity, the EPA's final EIP rules should do the same. Thus, the final rules retain the balance between general statements of principles and criteria and specific detailed guidance on technical requirements that was reflected in the proposal. The final rules provide sufficient detail to allow States to design and implement EIP's that will effectively implement the requirements of the Act without defeating the purpose of capturing the benefits of market-based regulatory approaches. Although the final rules do not include specific examples of EIP's that have been successfully implemented, the EPA agrees that such information is a useful and important aspect of encouraging the development of such programs. For the last 3 years, the EPA has funded grants to support market-based initiatives by State, regional and local agencies. 16 All such initiatives have included strong involvement from the State, affected local interests, and the relevant EPA Regional Office(s). Final reports from these projects are available from the States to further the EPA's goal of disseminating information about the



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design and implementation of EIP's.

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\1\6The docket contains summaries of such programs and contacts for information.

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Beyond this grant program, the EPA is committed to working with individual States as they develop EIP's. In addition to the program survey documents which have been placed in the docket, the EPA is developing plans for future outreach activities to make information about successful EIP initiatives as broadly available as possible. 2. Administrative Simplicity Several commenters agreed that administrative complexity can be one of the greatest impediments to a regulation and urged the EPA to simplify the terms and processes of these rules. Such commenters felt that undue administrative complexity would stifle the development of EIP's and provide a significant disincentive for participation in trading programs. These commenters generally felt that the EIP rules should minimize regulatory barriers because they interfere with the functioning of desirable market mechanisms which are necessary for the success of the EIP. One type of complexity cited by two State commenters related to excessive government process, and the associated lack of timeliness, in the review of individual emissions trades. These commenters recommended that individual emissions trading transactions not be required to be submitted to the EPA for review once a State's generic trading rule has been approved by the EPA. Further, one such commenter recommended more focus on the audit and evaluation of an EIP program, rather than on administrative burdens upfront in implementing emissions trades. This commenter felt that the EPA should have the authority to conduct periodic audits of emissions trading transactions approved by the States to assure the integrity of the program. In seeking to provide States with the flexibility to implement emissions trading programs effectively, the final EIP rules retain the proposed requirement for the State to establish appropriate administrative procedures for conducting, approving, verifying, recording, and tracking trades. As part of an EIP program, these procedures would then be reviewed by the EPA in the course of EPA review of the SIP revision incorporating the EIP into the SIP. Thus, the EIP does not necessarily envision single-source SIP revisions for each trade conducted in the context of an EPA-approved generic emissions trading program. Of course, EPA approval of such programs is predicated on the program containing all the appropriate environmental safeguards that are required by the EIP rules. One such safeguard is the inclusion of program audits, to be conducted by the State, to evaluate program implementation and track program results. The EIP



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rules require that the State provide post-audit reports to the EPA, and that the State commits to implement timely programmatic revisions or other measures necessary for the successful operation of the program. Additionally, the rules require that State and Federal enforceability must be preserved, such that when ERC's generated within an emissions trading program are used to offset increases in emissions from other sources, the EIP must contain a mechanism for ensuring State and Federal enforceability of the measures taken to generate the credits. The EPA is currently developing additional guidance on such issues associated with banking of ERC's. The EPA intends to complete this additional guidance as quickly as possible, and, in the interim, to work with States developing EIP's involving banking of ERC's. 3. Regional and Interstate Trading Neither the proposal nor final rules specifically address the issue of regional and interstate emissions trading. Several commenters raised this issue, however, particularly in the context of trading of emissions offsets. Most such commenters felt that the EPA should encourage interstate trading by establishing consistent rules and prohibiting States from creating interstate barriers. One State group felt that the final rules should provide for the fullest possible implementation of trading strategies on a regional basis within the Northeast Ozone Transport Region. One environmental group urged that the final rules remind States of the statutory geographical constraints on trading. The EPA has developed some preliminary guidance on this issue as it relates to NOx offsets in the Northeast Ozone Transport Region. 17 Additional guidance on interstate or regional trading will be developed in the context of the EPA's working with interested States in program development activities.

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\1\7This guidance is contained in a March 31, 1993 letter from Mr. John Seitz, Director of the EPA's Office of Air Quality Planning and Standards, to Mr. Bruce Carhart, Executive Director of the Ozone Transport Commission, which includes all or portions of the northeastern States from Washington, DC, to the New England States. This letter is available in the docket for this rule.

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V. Administrative Requirements

A. Executive Order 12866

Under Executive Order 12866, (58 FR 51735 (October 4, 1993)) the Agency must determine whether the regulatory action is ``significant'' and therefore subject to OMB review and the requirements of the Executive Order. The Order defines ``significant regulatory action'' as



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one that is likely to result in a rule that may: (1) Have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities; (2) Create a serious inconsistency or otherwise interfere with an action taken or planned by another Agency; (3) Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients

thereof; or (4) Raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in the Executive Order.'' It has been determined that these rules are not a ``significant regulatory action'' under the terms of Executive Order 12866. This action was submitted to OMB for review. Changes made in response to OMB suggestions or recommendations will be documented in the public record.

B. Paperwork Reduction Act

These rules do not contain any information collection requirements subject to review by the OMB under the Paperwork Reduction Act of 1980, 44 U.S.C. 3501, et seq.

C. Regulatory Flexibility Act

The Regulatory Flexibility Act of 1980 and applicable EPA guidelines revised in 1992 require Federal agencies to identify potentially adverse impacts of Federal rules upon small entities. Small entities include small businesses, organizations, and governmental jurisdictions. In instances where significant impacts are possible on a substantial number of these entities, agencies are required to perform a Regulatory Flexibility Analysis (RFA). This rule does not of itself impose any requirements on small entities, nor require or exclude small entities from any EIP's which may be implemented in the future. As a result, the EPA has determined that these rules will not have a significant impact on a substantial number of small entities. Therefore, as required under section 605 of the RFA, 5 U.S.C. 601 et seq., I certify that these rules do not have a significant impact on a substantial number of small entities.

List of Subjects in 40 CFR Part 51

Administrative practice and procedure, Air pollution control, Carbon monoxide, Intergovernmental relations, Lead, Nitrogen dioxide,



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Ozone, Particulate matter, Reporting and recordkeeping requirements, Sulfur oxides, Volatile organic compounds.

Dated: March 15, 1994. Carol M. Browner, Administrator.

For reasons set out in the preamble, 40 CFR part 51 is amended as

follows:

PART 51--REQUIREMENTS FOR PREPARATION, ADOPTION, AND SUBMITTAL OF

IMPLEMENTATION PLANS

1. The authority citation for part 51 continues to read as follows:

Authority: 42 U.S.C. 7401-7671q.

2. Part 51 is amended by adding a new subpart U, consisting of Secs. 51.490 through 51.494, to read as follows:

Subpart U--Economic Incentive Programs

Sec. 51.490 Applicability. 51.491 Definitions. 51.492 State program election and submittal. 51.493 State program requirements. 51.494 Use of program revenues.

Subpart U--Economic Incentive Programs

Sec. 51.490 Applicability.

(a) The rules in this subpart apply to any statutory economic incentive program (EIP) submitted to the EPA as an implementation plan revision to comply with sections 182(g)(3), 182(g)(5), 187(d)(3), or 187(g) of the Act. Such programs may be submitted by any authorized governmental organization, including States, local governments, and Indian governing bodies. (b) The provisions contained in these rules, except as explicitly exempted, shall also serve as the EPA's policy guidance on discretionary EIP's submitted as implementation plan revisions for any purpose other than to comply with the statutory requirements specified in paragraph (a) of this section. 

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Sec. 51.491 Definitions.

Act means the Clean Air Act as amended November 15, 1990. Actual emissions means the emissions of a pollutant from an affected source determined by taking into account actual emission rates associated with normal source operation and actual or representative production rates (i.e., capacity utilization and hours of operation). Affected source means any stationary, area, or mobile source of a criteria pollutant(s) to which an EIP applies. This term applies to sources explicitly included at the start of a program, as well as sources that voluntarily enter (i.e., opt into) the program. Allowable emissions means the emissions of a pollutant from an affected source determined by taking into account the most stringent of all applicable SIP emissions limits and the level of emissions consistent with source compliance with all Federal requirements related to attainment and maintenance of the NAAQS and the production rate associated with the maximum rated capacity and hours of operation (unless the source is subject to federally enforceable limits which restrict the operating rate, or hours of operation, or both). Area sources means stationary and nonroad sources that are too small and/or too numerous to be individually included in a stationary source emissions inventory. Attainment area means any area of the country designated or redesignated by the EPA at 40 CFR part 81 in accordance with section 107(d) as having attained the relevant NAAQS for a given criteria pollutant. An area can be an attainment area for some pollutants and a nonattainment area for other pollutants. Attainment demonstration means the requirement in section 182(b)(1)(A) of the Act to demonstrate that the specific annual emissions reductions included in a SIP are sufficient to attain the primary NAAQS by the date applicable to the area. Directionally-sound strategies are strategies for which adequate procedures to quantify emissions reductions or specify a program baseline are not defined as part of the EIP. Discretionary economic incentive program means any EIP submitted to the EPA as an implementation plan revision for purposes other than to comply with the statutory requirements of sections 182(g)(3), 182(g)(5), 187(d)(3), or 187(g) of the Act. Economic incentive program (EIP) means a program which may include State established emission fees or a system of marketable permits, or a system of State fees on sale or manufacture of products the use of which contributes to O3 formation, or any combination of the foregoing or other similar measures, as well as incentives and requirements to reduce vehicle emissions and vehicle miles traveled in the area, including any of the transportation control measures identified in section 108(f). Such programs may be directed toward stationary, area, and/or mobile sources, to achieve emissions



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reductions milestones, to attain and maintain ambient air quality standards, and/or to provide more flexible, lower-cost approaches to meeting environmental goals. Such programs are categorized into the following three categories: Emission-limiting, market-response, and directionally-sound strategies. Emission-limiting strategies are strategies that directly specify limits on total mass emissions, emission-related parameters (e.g., emission rates per unit of production, product content limits), or levels of emissions reductions relative to a program baseline that are required to be met by affected sources, while providing flexibility to sources to reduce the cost of meeting program requirements. Indian governing body means the governing body of any tribe, band, or group of Indians subject to the jurisdiction of the U.S. and recognized by the U.S. as possessing power of self-government. Maintenance plan means an implementation plan for an area for which the State is currently seeking designation or has previously sought redesignation to attainment, under section 107(d) of the Act, which provides for the continued attainment of the NAAQS. Market-response strategies are strategies that create one or more incentives for affected sources to reduce emissions, without directly specifying limits on emissions or emission-related parameters that individual sources or even all sources in the aggregate are required to

meet. Milestones means the reductions in emissions required to be achieved pursuant to section 182(b)(1) and the corresponding requirements in section 182(c)(2) (B) and (C), 182(d), and 182(e) of the Act for O3 nonattainment areas, as well as the reduction in emissions of CO equivalent to the total of the specified annual emissions reductions required by December 31, 1995, pursuant to section 187(d)(1). Mobile sources means on-road (highway) vehicles (e.g., automobiles, trucks and motorcycles) and nonroad vehicles (e.g., trains, airplanes, agricultural equipment, industrial equipment, construction vehicles, off-road motorcycles, and marine vessels). National ambient air quality standard (NAAQS) means a standard set by the EPA at 40 CFR part 50 under section 109 of the Act. Nonattainment area means any area of the country designated by the EPA at 40 CFR part 81 in accordance with section 107(d) of the Act as nonattainment for one or more criteria pollutants. An area could be a nonattainment area for some pollutants and an attainment area for other pollutants. Nondiscriminatory means that a program in one State does not result in discriminatory effects on other States or sources outside the State with regard to interstate commerce. Program baseline means the level of emissions, or emission-related parameter(s), for each affected source or group of affected sources, from which program results (e.g., quantifiable emissions reductions)



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shall be determined. Program uncertainty factor means a factor applied to discount the amount of emissions reductions credited in an implementation plan demonstration to account for any strategy-specific uncertainties in an

EIP. Reasonable further progress (RFP) plan means any incremental emissions reductions required by the CAA (e.g., section 182(b)) and approved by the EPA as meeting these requirements. RFP baseline means the total of actual volatile organic compounds or nitrogen oxides emissions from all anthropogenic sources in an O3 nonattainment area during the calendar year 1990 (net of growth and adjusted pursuant to section 182(b)(1)(B) of the Act), expressed as typical O3 season, weekday emissions. Replicable refers to methods which are sufficiently unambiguous such that the same or equivalent results would be obtained by the application of the methods by different users. Rule compliance factor means a factor applied to discount the amount of emissions reductions credited in an implementation plan demonstration to account for less-than-complete compliance by the affected sources in an EIP. Shortfall means the difference between the amount of emissions reductions credited in an implementation plan for a particular EIP and those that are actually achieved by that EIP, as determined through an approved reconciliation process. State means State, local government, or Indian-governing body. State implementation plan (SIP) means a plan developed by an authorized governing body, including States, local governments, and Indian-governing bodies, in a nonattainment area, as required under titles I & II of the Clean Air Act, and approved by the EPA as meeting these same requirements. Stationary source means any building, structure, facility or installation, other than an area or mobile source, which emits or may emit any criteria air pollutant or precursor subject to regulation

under the Act. Statutory economic incentive program means any EIP submitted to the EPA as an implementation plan revision to comply with sections 182(g)(3), 182(g)(5), 187(d)(3), or 187(g) of the Act. Surplus means, at a minimum, emissions reductions in excess of an established program baseline which are not required by SIP requirements or State regulations, relied upon in any applicable attainment plan or demonstration, or credited in any RFP or milestone demonstration, so as to prevent the double-counting of emissions reductions. Transportation control measure (TCM) is any measure of the types listed in section 108(F) of the Act, or any measure in an applicable implementation plan directed toward reducing emissions of air pollutants from transportation sources by a reduction in vehicle use or changes in traffic conditions. 

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Sec. 51.492 State program election and submittal.

(a) Extreme O3 nonattainment areas. (1) A State or authorized governing body for any extreme O3 nonattainment area shall submit a plan revision to implement an EIP, in accordance with the requirements of this part, pursuant to section 182(g)(5) of the Act, if: (i) A required milestone compliance demonstration is not submitted within the required period. (ii) The Administrator determines that the area has not met any applicable milestone. (2) The plan revision in paragraph (a)(1) of this section shall be submitted within 9 months after such failure or determination, and shall be sufficient, in combination with other elements of the SIP, to achieve the next milestone. (b) Serious CO nonattainment areas. (1) A State or authorized governing body for any serious CO nonattainment area shall submit a plan revision to implement an EIP, in accordance with the requirements of this part, if: (i) A milestone demonstration is not submitted within the required period, pursuant to section 187(d) of the Act. (ii) The Administrator notifies the State, pursuant to section 187(d) of the Act, that a milestone has not been met. (iii) The Administrator determines, pursuant to section 186(b)(2) of the Act that the NAAQS for CO has not been attained by the applicable date for that area. Such revision shall be submitted within 9 months after such failure or determination. (2) Submittals made pursuant to paragraphs (b)(1) (i) and (ii) of this section shall be sufficient, together with a transportation control program, to achieve the specific annual reductions in CO emissions set forth in the implementation plan by the attainment date. Submittals made pursuant to paragraph (b)(1)(iii) of this section shall be adequate, in combination with other elements of the revised plan, to reduce the total tonnage of emissions of CO in the area by at least 5 percent per year in each year after approval of the plan revision and before attainment of the NAAQS for CO. (c) Serious and severe O3 nonattainment areas. If a State, for any serious or severe O3 nonattainment area, elects to implement an EIP in the circumstances set out in section 182(g)(3) of the Act, the State shall submit a plan revision to implement the program in accordance with the requirements of this part. If the option to implement an EIP is elected, a plan revision shall be submitted within 12 months after the date required for election, and shall be sufficient, in combination with other elements of the SIP, to achieve the next milestone. 

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(d) Any nonattainment or attainment area. Any State may at any time submit a plan or plan revision to implement a discretionary EIP, in accordance with the requirements of this part, pursuant to sections 110(a)(2)(A) and 172(c)(6) and other applicable provisions of the Act concerning SIP submittals. The plan revision shall not interfere with any applicable requirement concerning attainment and RFP, or any other applicable requirements of the Act.

Sec. 51.493 State program requirements.

Economic incentive programs shall be State and federally enforceable, nondiscriminatory, and consistent with the timely attainment of NAAQS, all applicable RFP and visibility requirements, applicable PSD increments, and all other applicable requirements of the Act. Programs in nonattainment areas for which credit is taken in attainment and RFP demonstrations shall be designed to ensure that the effects of the program are quantifiable and permanent over the entire duration of the program, and that the credit taken is limited to that which is surplus. Statutory programs shall be designed to result in quantifiable, significant reductions in actual emissions. The EIP's shall include the following elements, as applicable: (a) Statement of goals and rationale. This element shall include a clear statement as to the environmental problem being addressed, the intended environmental and economic goals of the program, and the rationale relating the incentive-based strategy to the program goals. (1) The statement of goals must include the goal that the program will benefit both the environment and the regulated entities. The program shall be designed so as to meaningfully meet this goal either directly, through increased or more rapid emissions reductions beyond those that would be achieved through a traditional regulatory program, or, alternatively, through other approaches that will result in real environmental benefits. Such alternative approaches include, but are not limited to, improved administrative mechanisms, reduced administrative burdens on regulatory agencies, improved emissions inventories, and the adoption of emission caps which over time constrain or reduce growth-related emissions beyond traditional regulatory approaches. (2) The incentive-based strategy shall be described in terms of one of the following three strategies: (i) Emission-limiting strategies, which directly specify limits on total mass emissions, emission-related parameters (e.g., emission rates per unit of production, product content limits), or levels of emissions reductions relative to a program baseline that affected sources are required to meet, while providing flexibility to sources to reduce the cost of meeting program requirements. (ii) Market-response strategies, which create one or more



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incentives for affected sources to reduce emissions, without directly specifying limits on emissions or emission-related parameters that individual sources or even all sources in the aggregate are required to

meet. (iii) Directionally-sound strategies, for which adequate procedures to quantify emissions reductions are not defined. (b) Program scope. (1) This element shall contain a clear definition of the sources affected by the program. This definition

shall address: (i) The extent to which the program is mandatory or voluntary for

the affected sources. (ii) Provisions, if any, by which sources that are not required to be in the program may voluntarily enter the program. (iii) Provisions, if any, by which sources covered by the program may voluntarily leave the program. (2) Any opt-in or opt-out provisions in paragraph (b)(1) of this section shall be designed to provide mechanisms by which such program changes are reflected in an area's attainment and RFP demonstrations, thus ensuring that there will not be an increase in the emissions inventory for the area caused by voluntary entry or exit from the

program. (3) The program scope shall be defined so as not to interfere with any other Federal requirements which apply to the affected sources. (c) Program baseline. A program baseline shall be defined as a basis for projecting program results and, if applicable, for initializing the incentive mechanism (e.g., for marketable permits programs). The program baseline shall be consistent with, and adequately reflected in, the assumptions and inputs used to develop an area's RFP plans and attainment and maintenance demonstrations, as applicable. The State shall provide sufficient supporting information from the areawide emissions inventory and other sources to justify the baseline used in the EIP. (1) For EIP's submitted in conjunction with, or subsequent to, the submission of any areawide progress plan due at the time of EIP submission (e.g., the 15 percent RFP plan and/or subsequent 3 percent plans) or an attainment demonstration, a State may exercise flexibility in setting a program baseline provided the program baseline is consistent with and reflected in all relevant progress plans or attainment demonstration. A flexible program baseline may be based on the lower of actual, allowable, or some other intermediate or lower level of emissions. For any EIP submitted prior to the submittal of an attainment demonstration, the State shall include the following with its EIP submittal: (i) A commitment that its subsequent attainment demonstration and all future progress plans, if applicable, will be consistent with the EIP baseline. (ii) A discussion of how the baseline will be integrated into the



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subsequent attainment demonstration, taking into account the potential that credit issued prior to the attainment demonstration may no longer be surplus relative to the attainment demonstration. (2) Except as provided for in paragraph (c)(4) of this section, for EIP's submitted during a time period when any progress plans are required but not yet submitted (e.g., the 15 percent RFP plan and/or the subsequent 3 percent plans), the program baseline shall be based on the lower-of-actual-or-allowable emissions. In such cases, actual emissions shall be taken from the most appropriate inventory, such as the 1990 actual emission inventory (due for submission in November 1992), and allowable emissions are the lower of SIP-allowable emissions or the level of emissions consistent with source compliance with all Federal requirements related to attainment and maintenance of the NAAQS. (3) For EIP's that are designed to implement new and/or previously existing RACT requirements through emissions trading and are submitted in conjunction with, or subsequent to, the submission of an associated RACT rule, a State may exercise flexibility in setting a program baseline provided the program baseline is consistent with and reflected in the associated RACT rule, and any applicable progress plans and attainment demonstrations. (4) For EIP's that are designed to implement new and/or previously existing RACT requirements through emissions trading and are submitted prior to the submission of a required RFP plan or attainment demonstration, States also have flexibility in determining the program baseline, provided the following conditions are met. (i) For EIP's that implement new RACT requirements for previously unregulated source categories through emissions trading, the new RACT requirements must reflect, to the extent practicable, increased emissions reductions beyond those that would be achieved through a traditional RACT program. (ii) For EIP's that impose new RACT requirements on previously unregulated sources in a previously regulated source category (e.g., RACT ``catch-up'' programs), the new incentive-based RACT rule shall, in the aggregate, yield reductions in actual emissions at least equivalent to that which would result from source-by-source compliance with the existing RACT limit for that source category. (5) A program baseline for individual sources shall, asappropriate, be contained or incorporated by reference in federallyenforceable operating permits or a federally-enforceable SIP. (6) An initial baseline for TCM's shall be calculated by establishing the preexisting conditions in the areas of interest. This may include establishing to what extent TCM's have already been implemented, what average vehicle occupancy (AVO) levels have been achieved during peak and off-peak periods, what types of trips occur in the region, and what mode choices have been made in making these trips. In addition, the extent to which travel options are currently available



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within the region of interest shall be determined. These travel options may include, but are not limited to, the degree of dispersion of transit services, the current ridership rates, and the availability and usage of parking facilities. (7) Information used in setting a program baseline shall be of sufficient quality to provide for at least as high a degree of accountability as currently exists for traditional control requirements for the categories of sources affected by the program. (d) Replicable emission quantification methods. This program element, for programs other than those which are categorized as directionally-sound, shall include credible, workable, and replicable methods for projecting program results from affected sources and, where necessary, for quantifying emissions from individual sources subject to the EIP. Such methods, if used to determine credit taken in attainment, RFP, and maintenance demonstrations, as applicable, shall yield results which can be shown to have a level of certainty comparable to that for source-specific standards and traditional methods of control strategy development. Such methods include, as applicable, the following

elements: (1) Specification of quantification methods. This element shall specify the approach or the combination or range of approaches that are acceptable for each source category affected by the program. Acceptable approaches may include, but are not limited to: (i) Test methods for the direct measurement of emissions, either continuously or periodically. (ii) Calculation equations which are a function of process or control system parameters, ambient conditions, activity levels, and/or throughput or production rates. (iii) Mass balance calculations which are a function of inventory, usage, and/or disposal records. (iv) EPA-approved emission factors, where appropriate and adequate. (v) Any combination of these approaches. (2) Specification of averaging times. (i) The averaging time for any specified mass emissions caps or emission rate limits shall be consistent with: attaining and maintaining all applicable NAAQS, meeting RFP requirements, and ensuring equivalency with all applicable RACT requirements. (ii) If the averaging time for any specified VOC or NOX mass emissions caps or emission rate limits for stationary sources (and for other sources, as appropriate) is longer than 24 hours, the State shall provide, in support of the SIP submittal, a statistical showing that the specified averaging time is consistent with attaining the O3 NAAQS and satisfying RFP requirements, as applicable, on the basis of typical summer day emissions; and, if applicable, a statistical showing that the longer averaging time will produce emissions reductions that are equivalent on a daily basis to source-specific RACT requirements. (3) Accounting for shutdowns and production curtailments. This



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accounting shall include provisions which ensure that: (i) Emissions reductions associated with shutdowns and production curtailments are not double-counted in attainment or RFP demonstrations. (ii) Any resultant ``shifting demand'' which increases emissions from other sources is accounted for in such demonstrations. (4) Accounting for batch, seasonal, and cyclical operations. This accounting shall include provisions which ensure that the approaches used to account for such variable operations are consistent with attainment and RFP plans. (5) Accounting for travel mode choice options, as appropriate, for TCM's. This accounting shall consider the factors or attributes of the different forms of travel modes (e.g., bus, ridesharing) which determine which type of travel an individual will choose. Such factors include, but are not limited to, time, cost, reliability, and convenience of the mode. (e) Source requirements. This program element shall include all source-specific requirements that constitute compliance with the program. Such requirements shall be appropriate, readily ascertainable, and State and federally enforceable, including, as applicable: (1) Emission limits. (i) For programs that impose limits on total mass emissions, emission rates, or other emission-related parameter(s), there must be an appropriate tracking system so that a facility's limits are readily ascertainable at all times. (ii) For emission-limiting EIP's that authorize RACT sources to meet their RACT requirements through RACT/non-RACT trading, such trading shall result in an exceptional environmental benefit. Demonstration of an exceptional environmental benefit shall require either the use of the statutory offset ratios for nonattainment areas as the determinant of the amount of emissions reductions that would be required from non-RACT sources generating credits for RACT sources or, alternatively, a trading ratio of 1.1 to 1, at a minimum, may be authorized, provided exceptional environmental benefits are otherwise

demonstrated. (2) Monitoring, recordkeeping, and reporting requirements. (i) An EIP (or the SIP as a whole) must contain test methods and, where necessary, emission quantification methodologies, appropriate to the emission limits established in the SIP. EIP sources must be subject to clearly specified MRR requirements appropriate to the test methods and any applicable quantification methodologies, and consistent with the EPA's title V rules, where applicable. Such MRR requirements shall provide sufficiently reliable and timely information to determine compliance with emission limits and other applicable strategy-specific requirements, and to provide for State and Federal enforceability of such limits and requirements. Methods for MRR may include, but are not limited to: 

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(A) The continuous monitoring of mass emissions, emission rates, or process or control parameters. (B) In situ or portable measurement devices to verify control system operating conditions. (C) Periodic measurement of mass emissions or emission rates using

reference test methods. (D) Operation and maintenance procedures and/or other work practices designed to prevent, identify, or remedy noncomplying conditions. (E) Manual or automated recordkeeping of material usage, inventories, throughput, production, or levels of required activities. (F) Any combination of these methods. EIP's shall require that responsible parties at each facility in the EIP program certify reported information. (ii) Procedures for determining required data, including the emissions contribution from affected sources, for periods for which required data monitoring is not performed, data are otherwise missing, or data have been demonstrated to have been inaccurately determined. (3) Any other applicable strategy-specific requirements. (f) Projected results and audit/reconciliation procedures. (1) The SIP submittal shall include projections of the emissions reductions associated with the implementation of the program. These projected results shall be related to and consistent with the assumptions used to develop the area's attainment demonstration and maintenance plan, as applicable. For programs designed to produce emissions reductions creditable towards RFP milestones, projected emissions reductions shall be related to the RFP baseline and consistent with the area's RFP compliance demonstration. The State shall provide sufficient supporting information that shows how affected sources are or will be addressed in the emissions inventory, RFP plan, and attainment demonstration or maintenance plan, as applicable. (i) For emission-limiting programs, the projected results shall be consistent with the reductions in mass emissions or emissions-related parameters specified in the program design. (ii) For market-response programs, the projected results shall be based on market analyses relating levels of targeted emissions and/or emission-related activities to program design parameters. (iii) For directionally-sound programs, the projected results may be descriptive and shall be consistent with the area's attainment demonstration or maintenance plan. (2) Quantitative projected results shall be adjusted through the use of two uncertainty factors, as appropriate, to reflect uncertainties inherent in both the extent to which sources will comply with program requirements and the overall program design. (i) Uncertainty resulting from incomplete compliance shall be addressed through the use of a rule compliance factor. (ii) Programmatic uncertainty shall be addressed through the use of



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a program uncertainty factor. Any presumptive norms set by the EPA shall be used unless an adequate justification for an alternative factor is included in supporting information to be supplied with the SIP submittal. In the absence of any EPA-specified presumptive norms, the State shall provide an adequate justification for the selected factors as part of the supporting information to be supplied with the SIP submittal. (3) Unless otherwise provided in program-specific guidance issued by the EPA, EIP's for which SIP credit is taken shall include audit procedures to evaluate program implementation and track program results in terms of both actual emissions reductions, and, to the extent practicable, cost savings relative to traditional regulatory program requirements realized during program implementation. Such audits shall be conducted at specified time intervals, not to exceed three years. The State shall provide timely post-audit reports to the EPA. (i) For emission-limiting EIP's, the State shall commit to ensure the timely implementation of programmatic revisions or other measures which the State, in response to the audit, deems necessary for the successful operation of the program in the context of overall RFP and attainment requirements. (ii) For market-response EIP's, reconciliation procedures that identify a range of appropriate actions or revisions to program requirements that will make up for any shortfall between credited results (i.e., projected results, as adjusted by the two uncertainty factors described above) and actual results obtained during program implementation shall be submitted together with the program audit provisions. Such measures must be federally enforceable, as appropriate, and automatically executing to the extent necessary to make up the shortfall within a specified period of time, consistent with relevant RFP and attainment requirements. (g) Implementation schedule. The program shall contain a schedule for the adoption and implementation of all State commitments and source requirements included in the program design. (h) Administrative procedures. The program shall contain a description of State commitments which are integral to the implementation of the program, and the administrative system to be used to implement the program, addressing the adequacy of the personnel, funding, and legislative authority. (1) States shall furnish adequate documentation of existing legal authority and demonstrated administrative capacity to implement and enforce the provisions of the EIP. (2) For programs which require private and/or public entities to establish emission-related economic incentives (e.g., programs requiring employers to exempt carpoolers/multiple occupancy vehicles from paying for parking), States shall furnish adequate documentation of State authority and administrative capacity to implement and enforce the underlying program. 

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(i) Enforcement mechanisms. The program shall contain a compliance instrument(s) for all program requirements, which is legally binding and State and federally enforceable. This program element shall also include a State enforcement program which defines violations, and specifies auditing and inspections plans and provisions for enforcement actions. The program shall contain effective penalties for noncompliance which preserve the level of deterrence in traditional programs. For all such programs, the manner of collection of penalties must be specified. (1) Emission limit violations. (i) Programs imposing limits on mass emissions or emission rates that provide for extended averaging times and/or compliance on a multisource basis shall include procedures for determining the number of violations, the number of days of violation, and sources in violation, for statutory maximum penalty purposes, when the limits are exceeded. The State shall demonstrate that such procedures shall not lessen the incentive for source compliance as compared to a program applied on a source-by-source, daily basis. (ii) Programs shall require plans for remedying noncompliance at any facility that exceeds a multisource emissions limit for a given averaging period. These plans shall be enforceable both federally and by the State. (2) Violations of MRR requirements. The MRR requirements shall apply on a daily basis, as appropriate, and violations thereof shall be subject to State enforcement sanctions and to the Federal penalty of up to $25,000 for each day a violation occurs or continues. In addition, where the requisite scienter conditions are met, violations of such requirements shall be subject to the Act's criminal penalty sanctions of section 113(c)(2), which provides for fines and imprisonment of up to 2 years.

Sec. 51.494 Use of program revenues.

Any revenues generated from statutory EIP's shall be used by the State for any of the following: (a) Providing incentives for achieving emissions reductions. (b) Providing assistance for the development of innovative technologies for the control of O3 air pollution and for the development of lower-polluting solvents and surface coatings. Such assistance shall not provide for the payment of more than 75 percent of either the costs of any project to develop such a technology or the costs of development of a lower-polluting solvent or surface coating. (c) Funding the administrative costs of State programs under this Act. Not more than 50 percent of such revenues may be used for this purpose. The use of any revenues generated from discretionary EIP's shall not be constrained by the provisions of this part. 3. Part 51 is amended by adding a new appendix X to read as



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follows:

Appendix X to Part 51--Examples of Economic Incentive Programs

I. Introduction and Purpose

This appendix contains examples of EIP's which are covered by the EIP rules. Program descriptions identify key provisions which distinguish the different model program types. The examples provide additional information and guidance on various types of regulatory programs collectively referred to as EIP's. The examples include programs involving stationary, area, and mobile sources. The definition section at 40 CFR 51.491 defines an EIP as a program which may include State established emission fees or a system of marketable permits, or a system of State fees on sale or manufacture of products the use of which contributes to O3 formation, or any combination of the foregoing or other similar measures, as well as incentives and requirements to reduce vehicle emissions and vehicle miles traveled in the area, including any of the transportation control measures identified in section 108(f). Such programs span a wide spectrum of program designs. The EIP's are comprised of several elements that, in combination with each other, must insure that the fundamental principles of any regulatory program (including accountability, enforceability and noninterference with other requirements of the Act) are met. There are many possible combinations of program elements that would be acceptable. Also, it is important to emphasize that the effectiveness of an EIP is dependent upon the particular area in which it is implemented. No two areas face the same air quality circumstances and, therefore, effective strategies and programs will differ among areas. Because of these considerations, the EPA is not specifying one particular design or type of strategy as acceptable for any given EIP. Such specific guidance would potentially discourage States (or other entities with delegated authority to administer parts of an implementation plan) from utilizing other equally viable program designs that may be more appropriate for their situation. Thus, the examples given in this Appendix are general in nature so as to avoid limiting innovation on the part of the States in developing programs tailored to individual State needs. Another important consideration in designing effective EIP's is the extent to which different strategies, or programs targeted at different types of sources, can complement one another when implemented together as an EIP ``package.'' The EPA encourages States to consider packaging different measures together when such a strategy is likely to increase the overall benefits from the program as a whole. Furthermore, some activities, such as information



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distribution or public awareness programs, while not EIP's in and of themselves, are often critical to the success of other measures and, therefore, would be appropriate complementary components of a program package. All SIP emissions reductions credits should reflect a consideration of the effectiveness of the entire package.

II. Examples of Stationary and Mobile Source Economic Incentive Strategies

There is a wide variety of programs that fall under the general heading of EIP's. Further, within each general type of program are several different basic program designs. This section describes common types of EIP's that have been implemented, designed, or discussed in the literature for stationary and mobile sources. The program types discussed below do not include all of the possible types of EIP's. Innovative approaches incorporating new ideas in existing programs, different combinations of existing program elements, or wholly new incentive systems provide additional opportunities for States to find ways to meet environmental goals at

lower total cost.

A. Emissions Trading Markets

One prominent class of EIP's is based upon the creation of a market in which trading of source-specific emissions requirements may occur. Such programs may include traditional rate-based emissions limits (generally referred to as emissions averaging) or overall limits on a source's total mass emissions per unit of time (generally referred to as an emissions cap). The emissions limits, which may be placed on individual emitting units or on facilities as a whole, may decline over time. The common feature of such programs is that sources have an ongoing incentive to reduce pollution and increased flexibility in meeting their regulatory requirements. A source may meet its own requirements either by directly preventing or controlling emissions or by trading or averaging with another source. Trading or averaging may occur within the same facility, within the same firm, or between different firms. Sources with lower cost abatement alternatives may provide the necessary emissions reductions to sources facing more expensive alternatives. These programs can lower the overall cost of meeting a given total level of abatement. All sources eligible to trade in an emissions market are faced with continuing incentives to find better ways of reducing emissions at the lowest possible cost, even if they are already meeting their own emissions requirements. Stationary, area, and mobile sources could be allowed to participate in a common emissions trading market. Programs involving emissions trading markets are particularly effective at reducing



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overall costs when individual affected sources face significantly different emissions control costs. A wider range in control costsamong affected sources creates greater opportunities for costreducing trades. Thus, for example, areas which face relatively high stationary source control costs relative to mobile source control costs benefit most by including both stationary and mobile sources in a single emissions trading market. Programs involving emissions trading markets have generally been designated as either emission allowance or emission reduction credit (ERC) trading programs. The Federal Acid Rain Program is an example of an emission allowance trading program, while ``bubbles'' and ``generic bubbles'' created under the EPA's 1986 Emission Trading Policy Statement are examples of ERC trading. Allowance trading programs can establish emission allocations to be effective at the start of a program, at some specific time in the future, or at varying levels over time. An ERC trading program requires ERC's to be measured against a pre-established emission baseline. Allowance allocations or emission baselines can be established either directly by the EIP rules or by reference to traditional regulations (e.g., RACT requirements). In either type of program, sources can either meet their EIP requirements by maintaining their own emissions within the limits established by the program, or by buying surplus allowances or ERC's from other sources. In any case, the State will need to establish adequate enforceable procedures for certifying and tracking trades, and for monitoring and enforcing compliance with

the EIP. The definition of the commodity to be traded and the design of the administrative procedures the buyer and seller must follow to complete a trade are obvious elements that must be carefully selected to help ensure a successful trading market that achieves the desired environmental goal at the lowest cost. An emissions market is defined as efficient if it achieves the environmental goal at the lowest possible total cost. Any feature of a program that unnecessarily increases the total cost without helping achieve the environmental goals causes market inefficiency. Thus, the design of an emission trading program should be evaluated not only in terms of the likelihood that the program design will ensure that the environmental goals of the program will be met, but also in terms of the costs that the design imposes upon market transactions and the impact of those costs on market efficiency. Transaction costs are the investment in time and resources to acquire information about the price and availability of allowances or ERC's, to negotiate a trade, and to assure the trade is properly recorded and legally enforceable. All trading markets impose some level of transaction costs. The level of transaction costs in an emissions trading market are affected by various aspects of the design of the market, such as the nature of the procedures for



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reviewing, approving, and recording trades, the timing of such procedures (i.e., before or after the trade is made), uncertainties in the value of the allowance or credit being traded, the legitimacy of the allowance or credit being offered for sale, and the long-term integrity of the market itself. Emissions trading programs in which every transaction is different, such as programs requiring significant consideration of the differences in the chemical properties or geographic location of the emissions, can result in higher transaction costs than programs with a standardized trading commodity and well-defined rules for acceptable trades. Transaction costs are also affected by the relative ease with which information can be obtained about the availability and price of allowances or credits. While the market considerations discussed above are clearly important in designing an efficient market to minimize the transaction costs of such a program, other considerations, such as regulatory certainty, enforcement issues, and public acceptance, also clearly need to be factored into the design of any emissions trading program.

B. Fee Programs

A fee on each unit of emissions is a strategy that can provide a direct incentive for sources to reduce emissions. Ideally, fees should be set so as to result in emissions being reduced to the socially optimal level considering the costs of control and the benefits of the emissions reductions. In order to motivate a change in emissions, the fees must be high enough that sources will actively seek to reduce emissions. It is important to note that not all emission fee programs are designed to motivate sources to lower emissions. Fee programs using small fees are designed primarily to generate revenue, often to cover some of the administrative costs of a regulatory program. There can be significant variations in emission fee programs. For example, potential emissions could be targeted by placing a fee on an input (e.g., a fee on the quantity and BTU content of fuel used in an industrial boiler) rather than on actual emissions. Sources paying a fee on potential emissions could be eligible for a fee waiver or rebate by demonstrating that potential emissions are not actually emitted, such as through a carbon absorber system on a coating operation. Some fee program variations are designed to mitigate the potentially large amount of revenue that a fee program could generate. Although more complex than a simple fee program, programs that reduce or eliminate the total revenues may be more readily adopted in a SIP than a simple emission fee. Some programs lower the amount of total revenues generated by waiving the fee on some



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emissions. These programs reduce the total amount of revenue generated, while providing an incentive to decrease emissions. Alternatively, a program may impose higher per-unit fees on a portion of the emissions stream, providing a more powerful but targeted incentive at the same revenue levels. For example, fees could be collected on all emissions in excess of some fixed level. The level could be set as a percentage of a baseline (e.g., fees on emissions above some percentage of historical emissions), or as the lowest emissions possible (e.g., fees on emissions in excess of the lowest demonstrated emissions from the source category). Other fee programs are ``revenue neutral,'' meaning that the pollution control agency does not receive any net revenues. One way to design a revenue-neutral program is to have both a fee provision and a rebate provision. Rebates must be carefully designed to avoid lessening the incentive provided by the emission fee. For example, a rebate based on comparing a source's actual emissions and the average emissions for the source category can be designed to be revenue neutral and not diminish the incentive. Other types of fee programs collect a fee in relation to particular activities or types of products to encourage the use of alternatives. While these fees are not necessarily directly linked to the total amount of emissions from the activity or product, the relative simplicity of a usage fee may make such programs an effective way to lower emissions. An area source example is a construction permit fee for wood stoves. Such a permit fee is directly related to the potential to emit inherent in a wood stove, and not to the actual emissions from each wood stove in use. Fees on raw materials to a manufacturing process can encourage product reformulation (e.g., fees on solvent sold to makers of architectural coatings) or changes in work practices (e.g., fees on specialty solvents and degreasing compounds used in manufacturing). Road pricing mechanisms are fee programs that are available to curtail low occupancy vehicle use, fund transportation system improvements and control measures, spatially and temporally shift driving patterns, and attempt to effect land usage changes. Primary examples include increased peak period roadway, bridge, or tunnel tolls (this could also be accomplished with automated vehicle identification systems as well), and toll discounts for pooling arrangements and zero-emitting/low-emitting vehicles.

C. Tax Code and Zoning Provisions

Modifications to existing State or local tax codes, zoning provisions, and land use planning can provide effective economic incentives. Possible modifications to encourage emissions reductions cover a broad span of programs, such as accelerated depreciation of capital equipment used for emissions reductions, corporate income



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tax deductions or credits for emission abatement costs, property tax waivers based on decreasing emissions, exempting low-emitting products from sales tax, and limitations on parking spaces for office facilities. Mobile source strategies include waiving or lowering any of the following for zero- or low-emitting vehicles: vehicle registration fees, vehicle property tax, sales tax, taxicab license fees, and parking taxes.

D. Subsidies

A State may create incentives for reducing emissions by offering direct subsidies, grants or low-interest loans to encourage the purchase of lower-emitting capital equipment, or a switch to less polluting operating practices. Examples of such programs include clean vehicle conversions, starting shuttle bus or van pool programs, and mass transit fare subsidies. Subsidy programs often suffer from a variety of ``free rider'' problems. For instance, subsidies for people or firms who were going to switch to the cleaner alternative anyway lower the effectiveness of the subsidy program, or drive up the cost of achieving a targeted level of emissions reductions.

E. Transportation Control Measures

The following measures are the TCM's listed in section 108(f): (i) Programs for improved public transit; (ii) Restriction of certain roads or lanes to, or construction of such roads or lanes for use by, passenger buses or high occupancy vehicles; (iii) Employer-based transportation management plans, including incentives; (iv) Trip-reduction ordinances; (v) Traffic flow improvement programs that achieve emission reductions; (vi) Fringe and transportation corridor parking facilities serving multiple-occupancy vehicle programs or transit service; (vii) Programs to limit or restrict vehicle use in downtown areas or other areas of emission concentration particularly during periods of peak use;(viii) Programs for the provision of all forms of highoccupancy, shared-ride services; (ix) Programs to limit portions of road surfaces or certain sections of the metropolitan area to the use of non-motorized vehicles or pedestrian use, both as to time and place; (x) Programs for secure bicycle storage facilities and other facilities, including bicycle lanes, for the convenience and protection of bicyclists, in both public and private areas;



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(xi) Programs to control extended idling of vehicles; (xii) Programs to reduce motor vehicle emissions, consistent with title II, which are caused by extreme cold start conditions; (xiii) Employer-sponsored programs to permit flexible work

schedules; (xiv) Programs and ordinances to facilitate non-automobile travel, provision and utilization of mass transit, and to generally reduce the need for single-occupant vehicle travel, as part of transportation planning and development efforts of a locality, including programs and ordinances applicable to new shopping centers, special events, and other centers of vehicle activity; (xv) Programs for new construction and major reconstruction of paths, tracks or areas solely for the use by pedestrian or other non-motorized means of transportation when economically feasible and in the public interest. For purposes of this clause, the Administrator shall also consult with the Secretary of the Interior;

and (xvi) Programs to encourage the voluntary removal from use andthe marketplace of pre-1980 model year light-duty vehicles and pre1980 model light-duty trucks.

[FR Doc. 94-6828 Filed 4-6-94; 8:45 am]

BILLING CODE 6560-50-P 

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