+(,121/,1(

Citation: 59 Fed. Reg. 16690 1994 

Content downloaded/printed from 

HeinOnline (http://heinonline.org)

Wed Aug 14 16:22:51 2013

-- Your use of this HeinOnline PDF indicates your acceptance

 of HeinOnline's Terms and Conditions of the license

 agreement available at http://heinonline.org/HOL/License

-- The search text of this PDF is generated from 

 uncorrected OCR text.
16690 Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

ENVIRONMENTAL PROTECTION

AGENCY

40 CFR Part 51

[FRL-4853-8]

RIN 2060-AD58

Economic Incentive Program Rules

AGENCY: Environmental Protection

Agency (EPA).

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 (03) 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 03 and serious CO

nonattainment areas) or upon the failure

of a seribus 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:

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, 6s 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 03 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 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 03 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 area's, 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 03 nonattainment

areas (section 182(g)(5)). An EIP is

identified as one of three options upon

such failure in serious and severe 03

nonattainment areas (section 182(g)(3)).1

Further, an EIP is also mandated upon

the failure of a State to submit a

I 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.
Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

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)). 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 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 03 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

2The program need not continue forever to

generate permanent emissions reductions. Such

reductions can be discrete or continuous,

Agency does not intend to limit

flexibility and innovation beyond those

constraints that are necessary to meet

these requirements.

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 inclule

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, oi necessity, general in

nature with regard to criteria for

designing adequate program elements.

This generality arises due to the large

yariety of EIP types and designs which

may be 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

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).

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

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.

The EPA intends that today's notice

be consistent with other 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

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.

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.

16691
16692 Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

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 03 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 03 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 03 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(1)).

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 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 03 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 EJP's.

HI. 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 ElF 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 03 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(1), 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 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 03

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(0."'

For purposes of this rulemaking, this

notice classifies ElP'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
Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

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 emisions 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 is that actual

emissions from affected sources may

differ from the pre-implementation

projected emissions level even if every

affected source 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(0 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 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 eflsure

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

16693
W-694 Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

milestone is not met by a serious or

severe 03 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, indluding

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 missedmilestone 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

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 and that the

credit taken is limited to that which is

surplus to other SIP-tredited

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 ontlined 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 sourcespecific 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 requirementsare 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 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 E1P'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 incentivebased 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
Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

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'so 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 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

meeting specified 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 (SO 2) 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 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 (UM), 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.

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 03

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.

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 ElP. However, if in

such a case greater than required reductions are made, the incremental VoC reductions could

furnish credits through an EIP.

16695
16696 Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

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 ("nonRACT 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 , generating credits 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 nonRACT 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 may be

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 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 03

nonattainment areas, minimum offset

ratios range from 1.1 to I 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 I to

1 ratio), the SIP must generate sufficient

reductions to cover the extra reductions

required (e.g., 1.2 to 1 in serious 03

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

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 302(k) of the Act defines the terms .emission limitation" and "emission standard"

interchangeably.

7Section 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."

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.
Federal Register I Vol. 59, No. 67 1 Thursday, April 7, 1994 / Rules and Regulations

section 173(a)(2), which specifies that

"the proposed source is required to

comply with the lowest achievable

emission rate." 9

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 IIM 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

provisions relating to enhanced I/M

programs. Sections 182ja)(2)(B)(i) (I/M

"fix-ups" for Os nonattainment areas

classified marginal and higher),

162(b)(4) (I/M "catch-ups" for 03

nonattainment areas classified moderate

and higher), and 187(a)[4) (LIM "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 JYM

program for CO nonattaintment 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 03 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 03

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

9Section 1tSt3) defines LAER as "that rate of

emissions which reflects" either "the most stringent

emission limitation which'iscontained in (any SIP)

for such class or category of sdurce," or "the most

stringent emission limitation which is achieved in

practice by such class or category of source,

whichever is more stringent."

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 IIM

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 malmaintenance 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,yields reductions

in actual emissions at least equivalent to

those which would result from sourceby-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. I

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 ELP 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 RIP a program

baseline set no higher than the lower of

actual or allowable emissions.

leA typical intermediate baseline may consist of

a SIP-allowable emission rate and an actual level of

production.

" For example, the State could establish an

escrow account or a formula for pro rats reductions

of credits to cover credits that subsequently are no longer surplus.

16697
16698 Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

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 creditreceiving unit). Under trading programs,

this relaxation is offset by tightening the

control requirements on another

emissions-producing unit (the creditgenerating unit). Under section 110(1),

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 03 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 creditgenerating unit's actual emissions are

below the level mandated by the

applicable control requirement, relaxing

a control requirement on the creditreceiving 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 froman

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 continiied 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 categories, or portions

of source categories, that are newly

subjected to the RACT requirement

under the RACT "catch-up" provisions

of section 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 sourcespecific 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 toan

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

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 ElP 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
Federal Register /Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

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 mobile source

emissions reductions beyond those

required by traditional programs. The finalrules 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 03 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 sourcespecific 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 on federally-enforceable limits on .mass emissions or on other emissionrelated parameters, estimates of market

response, economic modelling, or other

relevant information. The State doe '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 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 marketresponse 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 sourcespecific 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

16699
16700 Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994. / Rules and Regulations

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 V.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 be specified in the EIP. The

maximum time interval for conducting7 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-limitingEIP'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 marketresponse-EIP's mustbe 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 (eg., 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

nles 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 stationarysource control measures, 4 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 considerthe relative uncertainty

associated with the EIP and specify the

scope and extent of the audit procedures

to be commensurate with that level of

uncertainty.

7. Implementation Schedule

An ElF 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- submittalrequirements, for affected sources, and

audit and reconciliation processes, including subsequent actions required

to make up for any shortfall that occurs.

8. AdministrativeoProcedures

As part of any Ei'design, the State

must establish appropriate

administrative procedures, specific to

the type of incentive strategy; necessary

to implement all ofthe elements ofthe

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 mechanismsrequired for 'conducting; approving, verifying, recording, and tracking trades.

The EIP must clearly describe the

admt1histrative system, and any State

commitments to implement and

maintain the system, that enables'

market participants to conduct valid

and legally protected transactions. The

12 Inspection/Maintenance Program

Requirements,,57 FR 52950, November5, 1992. 13 Regulation of Fuels-and Fuel 'Additives:

Standards for Reformulated and Convetional

Gasoline, 59 FR 7716, February 16, 1994.

14Rule Effectiveness Guiidance: Integration or

Inventory, Compliance, and Assessment'

Applications, EPA,-452/4-94-O01, January 1994.

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 welldesigned EIP will include the minimum

amount of transactional oversight, approval, recording, and tra'cking provisions necessary totcreate a

verifiable and enforceable system.

Unnecessaryor excessive administrative

requirements in a trading system increase the cost of the program and

inhibit trading. An active trading market

increases the opportunities for costsavings. 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 enfbrceable (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 St'ate/'

local and Federal statutory maximumpenalties 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'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. Oe

possible approach would be for the EP

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-thespecified&

averaging period. Such plans must

identify appropriate and enforceable,

control measures or other procedures or

strategies sufficient toachieve and

maintain compliance with applicable
Federal Register / Vol. 59, No. 67 1 Thursday, April 7, 1994 / Rules and Regulations

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

Ell'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 03 air pollution and for the

development of lower-polluting solvents

and surface coatings, and funding (with

up to 50 percent of the i-evenues)

administrative costs of State programs

under the Act. These restrictions on the

use of revenues do not apply to

discretiona EIP's.

Because 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 revenueneutral 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, ail 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 EU'. 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 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 reach attainment more

quickly than would be practicable under

a nonincentive-based 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

16701
16702 Federal Register / VoL 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

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 SIFrules 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

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'swhich 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 forthe 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 II.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 sharingbenefits between the regulated entities

and the environment. In many cases,

benefits in tPrms of cost savings will.not

be quantifible 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 ofco ntrol 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 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 IL F.), determining a degreeof sharing based on weighing the

uncertainty in an ElP would in essence

be accounting twice forthesame

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 T72(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 understoodi 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 ILD.2J. Further,

the proposal defined exceptional

environmental benefitsin 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 reductionsthat are equivalent

to those that would be obtained if each source met its source category-specific

RACT limiL Onthe 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 that

since RACT limits have historically

been. set based on source-specific

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 focal

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.
Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules. and Regulations

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 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 atfainment 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 I

of part D, and adding subparts 2-5 to cover pollutant-specific nonattainment

SIP's. Sub part 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

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., I (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

siibparagraphs (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

16703
16704 Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

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 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 nonRACT 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 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 (three categories 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 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

enforceibility. The EPA recognizes that

several commenters raised concerns

about the technicalworkability 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(o." The EPA

will address technical concerns raised
Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

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 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 SP 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 RAT, 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

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 allowablesbaseline that

is consistent with an RFP submittal does

not specifically interfere with

attainment under section 110(1). 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. 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.

1 EPA 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.

16705
16706 Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

D. Emission Quantification

1. Criteria for Adequacy of Approach

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

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

percent to be applied to a RACT limit

averaged over 30 days, other rulespecific discount factors determined by

States to represent RACT equivalency,

and the use of short-term caps in

conjunction with long-term caps or

limits.

Many commenters supported the

proposed flexibility to allow for longterm 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 of long-term averaging

should not come at the expense of

attaining short-term 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 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
Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

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.

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 MRR requirements, criteria

should be considered to assure that

quality-assured, representative

monitoring data will be obtained that

can be used to determine compliance. The EPA recognizes that special

consideration should be given to

developilig 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 rulesidentify 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 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 emissionlimiting programs (e.g., emission

trading), and argued that credit should

be allowed for market-response.

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 directionallysound 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 upfront 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.

16707
16708 Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

.The final rules generally retain the

proposed approach of requiring the

State to develop and apply discount

factors to account for compliancerelated 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 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 directioni 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 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 the case of

EIP's that incorporate multisource

emissions caps and/or long-term

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 ommenters 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 encourage87. 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,

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 rures and guidance, being

broadly applicable to any kind of EIP.
Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

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., ihe 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.

]. 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 EU' 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 commenterfelt 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 EPAestablished EP 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 marketbased 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 marketbased 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

16The docket contains summaries of such

programs and contacts for information.

EPA's goal of disseminating information

about the design and implementation of

EIP's.

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 EP 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

16709
16710 Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

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 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 ETP 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. Severalcommenters 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 NO,, 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.

"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.

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 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 Regulator 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 maybe 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., f

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, Ozone,

Particulate matter, Reporting and

recordkeeping requirements, Sulfur

oxides, Volatile organic compounds.

Dated: Karch 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§g51.490

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

§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.

§ 51.491 Definitfons.

Act means the Clean Air Act as

amended November 15, 1990.

Actual emissions means the emissions

of a pollutant from an affected source
Federal Register I Vol. 59, No. 67 1 Thursday, April 7, 1994 / Rules and Regulations,

determined by taking into account

actual emission rates associated with

normar source operation and actual or

representative production rates (i.e.,

capacity utilization and hours of

operation).

Affected sourcemeans any stationary,.

area, or mobile sourcer of a criteria

pollutant(s) to which, an ElP applies.. This term applies to sources explicitly included at the start of a program, as

well as sources that vohntarity 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)l')(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 stautory requirements of sections

182(g)(3). 182(g)5), 187(d)(3),.or 18.7(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:r sale or

manufacture of products the use of

which contributes to 03 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(. Such

programs may be directed toward

stationary, area, and/or mobile sources,

to achieve emissions 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 ofany tribe, band, or

group of Indians subject to the

jurisdiction of the U.S. and recognized

by the U.S- as possessing power of selfgovernment.

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 fore03 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, offroad 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) shallbe

determined.

Program uncertainty factor means a,

factor applied to discount the amount of

emissions reductions credited in an

implementation plan demonstratior to

account for any strategy-specific

uncertainties in an EIPR

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 03 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 O season, weekday emissions.

Replicable refers to methods which

are safficiently 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. Indian16711

16711
16712 Federal Register /, Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

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.

§ 51.492 State program election and

submittal.

(a) Extreme 03 nonattainment areas.

(1) A State or authorized governing body

for any extreme 03 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 Adinistrator 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 temonstration 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 03

nonattainment areas. If a State, for any

serious or severe 03 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.

(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.

§ 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 growthrelated 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.

(i) Market-response strategies, which

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.

(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.
Federal Register / VOl. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

(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.

Cc) 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 EtP.

{A) 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 I5

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

emissionasFor any EIP submitted prior

to the submittal Qf an attainment.

demonstration, the State shall include

the following with its EIP submittalh

(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 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-orallowable emissions. In, such cases,

actual emissions shall be taken from the

fost 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, as appropriate, be

contained or incorporated by reference

in federally-enforceable 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

regibn, and what mode choices have

been made in making these trips. In

addition, the extent to which travel

options are currently available 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 arecategorized. as directionally-sound, shall

include credible, workable, and

replicable methods for projcting

program resuts frome' 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. I. (2). Specificatio of averaging times.

(i) The averaging time for any

specified mass emissions caps or

emission rate limits shallbe 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

16713
16714 Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

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 03

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

reguirements.

(3) Accounting for shutdowns and

production curtailments. This

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) Accouriting 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/nonRACT 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 minimummay 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 strategyspecific requirements, and to provide

for State and Federal enforceability of

such limits and requirements. Methods

for MRR may include, but are not

limited to:

(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

xrith 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 emissionrelated 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 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
Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations 16715

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.

(i) 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 ad)quate

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.

(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 enf6rcement 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 a's

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.

§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 03 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 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

5f.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

03 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 thepart 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 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.
16716 Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

H. 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 tq 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 overall costs

when individual affected sources face

significantly different emissions control

costs. A wider range in control costs among

affected sources creates greater opportunities

for cost-reducing 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 (ERG) 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 d6fined as

efficient if it achieves the environmental goal

it 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 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 welldefined 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 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
Federal Register / Vol. 59, No. 67 / Thursday, April 7, 1994 / Rules and Regulations

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 i 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. Primbry 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 tax

deductions or credits for emission abatement

costs, property tax waivers based on decreasing emissions, exempting lowemitting 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 high-occupancy, 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 ana private areas;

(xi) Programs to control extended idling of

vehicles;

(xii) Programs to reduce motor vehicle

emissions, consistent with title 11, 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 and the marketplace of pre- 1980 model year light-duty vehicles and pre- 1980 model light-duty trucks.

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

BILLING CODE 6560-60-P

16717