Early Action Credits and Control Techniques Guidelines and Implications for Natural Gas Systems Fiji George, Southwestern Energy

I. Regulatory Background:

The Clean Air Act (CAA) requires all ozone nonattainment areas classified as moderate or higher to meet requirements of §172(c ) ( 1) and §182(b ) ( 2). Section 172(c)(1) requires that the state implementation plan (SIP) for such an area incorporate all “ reasonably available control measures ”
, including reasonably available control technology (RACT), for sources of the relevant ozone pollutants
, which are Nitrogen Oxides (NOx) and Volatile Organic Compounds (VOCs)

. Section 182(b)(2) requires the state to submit a SIP revision that i mplements RACT for all sources of VOCs addressed that are identified in a control techniques guideline (CTG) document issued by EPA and all non

- CTG major sources of VOCs

.
Section 108(b ) ( 1) of the Clean Air Act outlines EPA’s authorities in issuing CTGs. In general,
t he EPA provides states with the flexibility to determine the most technologically and economically feasible RACT requirements for a nonattainment area. EPA guidance on RACT indicates that states can choose to implement the CTG recommendation s, implement an alternative approach, or demonstrate that additional control for the CTG emission source category is not technologically or economically feasible in the area. 1
To help define RACT, CTGs include information on the: cost of installation and operation of emission control technology; energy requirements; emission reduction benefits; environmental impacts of certain technologies; available technology, alternative methods of prevention; control of air pollution; data on alternative fuels; and/or operating procedures.
To summarize, RACT rules are only required for major 2 facilities in moderate and above ozone
non

- attainment areas. Ozone SIP planning is complicated and state s will model the impact of new regulations that will be going into effect in 2016 (CPP, Mercury MACT, Tier 3 standards) in their attainment demonstration s before mandating new RACT rules.

1 See, e.g.
, U.S. Environmental Protection Agency, Control Technique Guidelines for Automobile and Light

- Dutry Truck Assembly Coatings, EPA

- 453/R

- 08

- 006 (September 2008), available at http://www.epa.gov/groundlevelozone/SIPToolkit/ctg_act/200809_voc_epa453_r

- 08

- 006_auto_ldtruck_assembly_coating.pdf . Page 1 of the guidance states:

States can use the recommendations in this CTG to inform their own determination as to what constitutes RACT for VOCs for automobile and light

- duty truck assembly coatings in their particular nonattainment areas. There are several hazardous air pollutants (HAPs) that are also VOCs. The information contained in this document is provided only as guidance. This guidance does not change, or substitute for, requirements specified in applicable sections of the CAA or EPA's regulations; nor is it a regulation itself. This document does not impose any legal ly binding requirements on any entity. It provides only recommendations for State and local air pollution control agencies to consider in determining RACT. State and local pollution control agencies are free to implement other technically

- sound approaches that are consistent with the CAA and EPA's implementing regulations.

2 CAA § 182 (b)(1)(A)(ii)(I)‘‘major stationary source’’ shall include ... any stationary source or group of sources located within a contiguous area and under common control that emits, or has the potential to emit, at least 5 tons per year of volatile organic compound sThis paper aims to briefly explain the regulatory structure behind R ACT, CTGs and potential for early action credits from voluntary programs that are based on performance

- based actions , such as ONE Future

.

II. Early Action Credit (EAC) versus Emission Reduction Credits (ERC) : ERCs can be used for RACT compliance, EAC are needed for “de facto” compliance
Early actions by companies that voluntarily accept p erformance

- based commitments can potentially generate emission reduction credits (ERCs) f or VOCs as a collateral benefit to achieving the company’s pro

- rata share of 1% by 2025

. ERCs are credits that can be used by the facility itself or transferred to another facility. To be certified as an ERC, the state must determine that the reduction meets the following criteria: (1) r eal : an ERC must be a reduction in actual emissions and not a reduction due to change in emission factors or acceptance of a lower permit limit (2) s urplus : the reduction is surplus in the sense of not being required by current regulations in the State Implementation Plan (SIP); (3) e nforceable; (4) permanent; and (5) q uantifiable.
The use of ERCs as offsets is mainly by new facilities that are subject to nonattainmen t NSR (NNSR) permitting requirements. Again, this only applies to certain large sources of emissions that exceed the NSR thresholds established for the area (ranging from 25 tons/year potential to 100 tons/year of NOx, and less for VOCs )

. Other uses of E RCs include:

• Delayed or alternative compliance with RACT requirements

• Compliance with certain air permit or rule requirements

• Operational flexibility

• Temporary increases in emissions below major source or major modification thresholds

• Compliance margin : A source may purchase excess ERCs in advance for use to ensure compliance

• The state could purchase and retire ERCs to assure attainment and maintenance of NAAQS

• State agencies could promote economic development by purchasing and donating ERCs to businesses to reduce the offset requirement burdens

• Purchase by environmental groups or others to improve air quality

• As a Supplemental Environmental Project (SEP) component to mitigate enforcement action

III. Use of E arly A ction C redits (EAC) under future RACT rulesEarly Action Credits ( EAC) essentially are reductions that meet the criteria of ERCs in addition to application as a n ERC for compliance with RACT and NNSR programs. T he regulatory pathway of employing reductions from voluntary programs for RACT rules ra ises a number of issues for early action. First, to be sure, there is a possibility that early actors in a particular state would reduce VOC emissions sufficiently that the state would avoid nonattainment status altogether. This would be a positive outco me for the early actors, but it would also be a positive outcome shared by the laggards in the same state.
If early action was not sufficient to avoid nonattainment, and the state must impose additional VOC reductions in order to close the gap between curr ent air quality levels and attainment, then the question is whether and how there could be recognition for the early actors in the state SIP. Put another way: early actors would want to avoid a situation in which the state asks them to do the same amount of new abatement as the laggards.
A strategy to e nsure that performance

- based voluntary actions are credited under a future regulation must ensure that the voluntary efforts are recognized and that such efforts do not simply subject the actor to additional burdens

. The EPA could establish a regulatory design under which compliance with the emissions standard or limit is designed such that the companies carrying out these performance

- based voluntary initatives are already ac hieving compliance. A n example is the standards for pneumatic controllers for NSPS OOOO. By establishing the regulatory requirement of low bleed continuous controllers, firms who had changed out their high bleed controllers earlier were essentially in compliance with the emis sion standards

. 3 Similarly, CTG’s could be established at the rates or levels that are common for these performance based program s and therefore the states could simply develop their RACT rules aro und these rates/technologies. An example of such effort is compliance with the RACT rules in New York under Subpart 227

- 2 4

. A system

- wide averaging plan under Subpart 227

- 2.5(b) is permissible whereby facilities are permitted to employ “ a weighted average permissible emission rate ”

. Similarly, if the voluntary performance

- based initiatives have to meet a system

- wide average rate of X% methane leakage for the sub

- sector (e.g. natural gas production), then as long as this average rate is less than the reduction levels that could be achieved by applying t he CTG at each affected source, then the operator ’ s averaging plan is valid for RACT compliance.

Hence, those oil and gas facilities in moderate or higher non

- attainment areas and the OTC region that are subject to RACT rules would not be subject to addi tional capital expenditure.

IV. CTG Design and RACT rules : Precedence in allowing Performance

- based voluntary initatives performance based avera ging designs for RACT compliance

3 NSPS Subpart OOOO imposed new monitoring, reporting and recordkeeping requirements and their associated legal enforceability were new as part of the Subpart OOOO regulations for most companies.
4 http://www.dec.ny.gov/regs/4217.htmlEPA can and has integrate d substantial flexibility into a CTG

- based regulatory regime for VOCs. Previously, the Agency has provided guidance to states on how they can allow sources subject to RACT requirements to meet those requirements through “economic incentive programs.” Under this guidance, a source subject to a RACT would be able to trade or average with another source subject to RACT (including a source within the same facility or company) if the first source lowers its emissions (or emission rate) below the RACT

- required lev el. Several states have adopted “emission reduction credit” or “averaging” programs based on this concept, including Texas 5 , Pennsylvania 6

, North Carolina 7 , New Hampshire 8 , Ohio 9 etc

. In addition, the approach of using emission averaging or trading approaches as an alternative to

source

- specific RACT requirements has an analogue in EPA’s implementation of the Clean Air Act’s provisions addressing regional haze. Those provisions generally require a state contributing to regional haze problems to impo se “best available retrofit technology” (BART) standards on each stationary source that has the potential to emit 250 tons or more of a visibility

- creating pollutant (referred to as “BART

eligible sources”). However, EPA’s regional haze regulations provid e that, once a state has determined a BART emissions level or rate for a BART

- eligible source, the state is permitted to meet the requirement through an emissions averaging or trading approach among a group of BART

- eligible sources, provided that the appro ach achieves a level of emissions performance

. Therefore, it is likely that a Performance

- based voluntary initatives performance based approach (i.e. averaging) could be adopted as part of the s tate RACT rules

.

V. Form and Recognition of Early Action : Need fo r a Registry Calculating the form and amount of “recognition” also raises a number of issues. First, both EPA and the state presumably would want to recognize only VOC reductions that occur in the relevant state, not reductions achieved in other states (e .g., through intra

- company averaging for a multi

- state company). Second, the state presumably would be interested only in reductions in VOCs, not reductions in methane. So, any early actions would have to be measured in terms of tons of VOC reductions. To make this demonstration, both the state and the early actor would need information about: (1) baseline VOC emissions at particular sources in the state ; and (2) the reductions that would be achieved from particular RACT measures in the state . This information would help the early actor calculate the amount of early VOC reductions achieved from “over

- controlling” certain sources.
Therefore, EPA should include in its CTGs: (1) clear recommendations that states recognize early action ; (2) enc ouragement for flexible performance

- based measures ; and ( 3 ) information on recognition could be calculated. S uch information would make it much easier for early actors to work with state regulators

. Therefore , it would be very important to establish, as soon as possible, a registry (e.g. enhanced eGRT) that would record

– on a state

- by

- state basis

– the VOC reductions achieved by early actors, and provide third

- party verification for those reductions. Such a registry would provide credibility and transp arency that would help ensure recognition of the re ductions under a later regulatory program.

5 TX §117.540
6 PA § 129.94.
7 15A NCAC 2D .1410
8 Section 125

- J:5
9 3745

- 110

- 03VI. Conclusions and next steps

The EPA is in the process of lowering of the current ozone standards and also developing control technique guidelines for oil and gas sources. O nly those counties that are moderate or higher will require RACT controls. As part of the SIP planning process, a state can take credit for reductions due to the C lean Power Plan rule , Tier 3 rule and Mercury and Air Toxics Standards rule as demonstration of progress towards meeting the requirements for the non

- attainment areas in the State. Should EPA conclude that additional reductions are needed beyond what are already planned , oil and gas sources could be targeted, but these facilities have to be major sources and current statute has a 5 tons per year (tpy) VOC potential threshold (it may be lower in certain counties depending on the severity of the non

attainment status). Pe rhaps most impactful for the production sector is how EPA redefines the aggregation rules under the CAA statue to aggregate well

- sites and this may have significant impact to the production sector.

EPA and states have quite often provided flexibility to the affected industry in their RACT rules through emissions averaging and performance

- based programs. The p erformance

- based voluntary initiatives design could be incorporated into many s tate RACT programs consistent with these preceden ts

. Early action cre dits generated through voluntary actions like p erformance

- based voluntary programs will be important for members to ensure that future regulations do not cause additional burdens for such program participants. It is essential that to facilitate such credits, EPA sets up a registry to ensure early action reductions are accounted and registered and that the agency provide clear guidance to the states on how to recognize registered reductions