[Federal Register Volume 70, Number 192 (Wednesday, October 5, 2005)]
[Proposed Rules]
[Pages 58112-58118]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-19995]


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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 52

[R06-OAR-2005-TX-0023; FRL-7981-3]


Approval and Promulgation of Air Quality Implementation Plans; 
Texas; Emissions Banking and Trading Revisions for the Mass Emissions 
Cap and Trade Program for the Houston/Galveston/Brazoria Ozone 
Nonattainment Area

AGENCY: Environmental Protection Agency (EPA).

ACTION: Proposed rule.

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SUMMARY: EPA is proposing to approve revisions to the Texas State 
Implementation Plan (SIP) concerning the Mass Emissions Cap and Trade 
(MECT) program for emissions of nitrogen oxides (NO<INF>X</INF>) in the 
Houston/Galveston/Brazoria (HGB) ozone nonattainment area. 
Additionally, EPA is proposing approval of several subsections of 
Chapter 116 of the Texas Administrative Code (TAC) (Control of Air 
Pollution by Permits for New

[[Page 58113]]

Construction or Modification) that provide cross-references to the MECT 
Program.

DATES: Comments must be received on or before November 4, 2005.

ADDRESSES: Submit your comments, identified by Regional Materials in 
EDocket (RME) ID No. R06-OAR-2005-TX-0023, by one of the following 
methods:
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the on-line instructions for submitting comments.
    <bullet> Agency Web site: http://docket.epa.gov/rmepub/ RME, EPA's 
electronic public docket and comment system, is EPA's preferred method 
for receiving comments. Once in the system, select ``quick search,'' 
then key in the appropriate RME Docket identification number. Follow 
the on-line instructions for submitting comments.
    <bullet> U.S. EPA Region 6 ``Contact Us'' Web site: http://epa.gov/region6/r6coment.htm. Please click on ``6PD'' (Multimedia) and select 
``Air'' before submitting comments.
    <bullet> E-mail: Mr. David Neleigh at <a href="/cdn-cgi/l/email-protection#9cf2f9f0f9f5fbf4b2f8fdeaf5f8dcf9ecfdb2fbf3ea"><span class="__cf_email__" data-cfemail="f29c979e979b959adc9693849b96b2978293dc959d84">[email protected]</span></a>. Please 
also cc the person listed in the FOR FURTHER INFORMATION CONTACT 
section below.
    <bullet> Fax: Mr. David Neleigh, Chief, Air Permitting Section 
(6PD-R), at fax number 214-665-6762.
    <bullet> Mail: Mr. David Neleigh, Chief, Air Permitting Section 
(6PD-R), Environmental Protection Agency, 1445 Ross Avenue, Suite 1200, 
Dallas, Texas 75202-2733.
    <bullet> Hand or Courier Delivery: Mr. David Neleigh, Chief, Air 
Permitting Section (6PD-R), Environmental Protection Agency, 1445 Ross 
Avenue, Suite 1200, Dallas, Texas 75202-2733. Such deliveries are 
accepted only between the hours of 8 a.m. and 4 p.m. weekdays except 
for legal holidays. Special arrangements should be made for deliveries 
of boxed information.
    Instructions: Direct your comments to RME ID No. R06-OAR-2005-TX-
0023. EPA's policy is that all comments received will be included in 
the public file without change, and may be made available online at 
http://docket.epa.gov/rmepub/, including any personal information 
provided, unless the comment includes information claimed to be 
Confidential Business Information (CBI) or other information the 
disclosure of which is restricted by statute. Do not submit information 
through RME, regulations.gov, or e-mail if you believe that it is CBI 
or otherwise protected from disclosure. The EPA RME Web site and the 
Federal regulations.gov are ``anonymous access'' systems, which means 
EPA will not know your identity or contact information unless you 
provide it in the body of your comment. If you send an e-mail comment 
directly to EPA without going through RME or regulations.gov, your e-
mail address will be automatically captured and included as part of the 
comment that is placed in the public file and made available on the 
Internet. If you submit an electronic comment, EPA recommends that you 
include your name and other contact information in the body of your 
comment and with any disk or CD-ROM you submit. If EPA cannot read your 
comment due to technical difficulties and cannot contact you for 
clarification, EPA may not be able to consider your comment. Electronic 
files should avoid the use of special characters, any form of 
encryption, and be free of any defects or viruses. Guidance on 
preparing comments is given in the SUPPLEMENTARY INFORMATION section of 
this document under the General Information heading.
    Docket: All documents in the electronic docket are listed in the 
RME index at http://docket.epa.gov/rmepub/. Although listed in the 
index, some information is not publicly available, i.e., CBI or other 
information the disclosure of which is restricted by statute. Certain 
other material, such as copyrighted material, is not placed on the 
Internet and will be publicly available only in hard copy form. 
Publicly available docket materials are available either electronically 
in RME or in the official file, which is available at the Air 
Permitting Section (6PD-R), Environmental Protection Agency, 1445 Ross 
Avenue, Suite 700, Dallas, Texas 75202-2733. The file will be made 
available by appointment for public inspection in the Region 6 FOIA 
Review Room between the hours of 8:30 a.m. and 4:30 p.m. weekdays 
except for legal holidays. Contact the person listed in the FOR FURTHER 
INFORMATION CONTACT paragraph below to make an appointment. If 
possible, please make the appointment at least two working days in 
advance of your visit. There will be a 15 cent per page fee for making 
photocopies of documents. On the day of the visit, please check in at 
the EPA Region 6 reception area at 1445 Ross Avenue, Suite 700, Dallas, 
Texas.
    The State submittal is also available for public inspection at the 
State Air Agency listed below during official business hours by 
appointment: Texas Commission on Environmental Quality, Office of Air 
Quality, 12124 Park 35 Circle, Austin, Texas 78753.

FOR FURTHER INFORMATION CONTACT: Ms. Adina Wiley, Air Permitting 
Section (6PD-R), Environmental Protection Agency, Region 6, 1445 Ross 
Avenue, Suite 700, Dallas, Texas 75202-2733, telephone (214) 665-2115; 
fax number 214-665-6762; e-mail address <a href="/cdn-cgi/l/email-protection#9ee9f7f2fbe7b0fffaf7f0ffdefbeeffb0f9f1e8"><span class="__cf_email__" data-cfemail="0b7c62676e72256a6f62656a4b6e7b6a256c647d">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION: Throughout this document wherever ``we,'' 
``us,'' or ``our'' is used, we mean the EPA.

Outline

I. Mass Emissions Cap and Trade Program
    A. What is EPA proposing to approve?
    B. Summary of MECT program revisions
    1. What is the MECT program that has been Federally approved 
into the Texas SIP?
    2. How has TCEQ revised the MECT program?
    C. EPA's Analysis
    1. How did EPA review the MECT program revisions?
    2. What criteria did EPA use to analyze the MECT program 
revisions?
    3. What is EPA's evaluation of the changes related to the switch 
from 90 percent control to 80 percent control of NO<INF>X</INF> 
emissions from industrial sources?
    4. What is EPA's evaluation of the changes in applicability in 
the MECT program?
    5. What is EPA's evaluation of the use of DERCs and MDERCs in 
the MECT program?
    6. What is EPA's analysis of the other revisions to the MECT 
program?
    7. What is EPA's analysis of the Chapter 116 rule language?
    8. What is EPA's analysis of the MECT program with respect to 
section 110(l) of the Clean Air Act?
    D. Conclusion
II. General Information
III. Statutory and Executive Order Reviews

I. Mass Emissions Cap and Trade Program

A. What is EPA proposing to approve?

    The EPA is proposing to approve revisions to the MECT program for 
NO<INF>X</INF> emissions in the HGB ozone nonattainment area 
(consisting of Brazoria, Chambers, Fort Bend, Galveston, Harris, 
Liberty, Montgomery, and Waller counties) published at Texas 
Administrative Code (TAC) Title 30, Chapter 101 General Air Quality 
Rules, Subchapter H, Division 3, sections 101.350-101.354, 101.356-
101.360, and 101.363. EPA is also proposing approval of the subsections 
in 30 TAC Chapter 116, Control of Air Pollution by Permits for New 
Construction or Modification, which provide cross-references to the 
MECT program. The sections of Chapter 116 we are proposing to approve 
are sections 116.111(a)(2)(L), 116.115(b)(2)(C)(iii), 116.176, 
116.610(a)(6), and 116.615(5)(C). These revisions were provided in SIP 
revisions

[[Page 58114]]

submitted to EPA on April 12, 2001; January 31, 2003; and December 6, 
2004. The revisions make the following changes to the MECT:
    <bullet> The revisions make changes necessary to accomplish the 
shift in attainment strategy from 90 percent control of industrial 
sources to 80 percent control in the HGB area. For a further discussion 
of this change in control strategy, please see the supporting record 
for our separate action on the attainment demonstration (RME Docket 
R06-OAR-2005-TX-0018).
    <bullet> The revisions expand the applicability of the MECT to 
additional sources.
    <bullet> The revisions provide for the use of discrete emission 
reduction credits (DERCs) and mobile source DERCs (MDERCs) in lieu of 
MECT allowances, subject to our separate action on the Discrete 
Emission Credit Banking and Trading program as explained below.
    <bullet> The revisions include a variety of minor changes to 
correct grammar and reorganize the rule text for readability.
    <bullet> The revisions to the Texas Commission on Environmental 
Quality's (TCEQ's) Chapter 116 permitting rules incorporate cross-
references to the MECT program in Chapter 101.
    The MECT program is a significant element of the control strategy 
for the HGB area to comply with the Clean Air Act (CAA) requirements to 
achieve the ozone attainment standard. As such, the revisions to the 
MECT and the corresponding sections in Chapter 116 must be evaluated as 
an integral component of the HGB control strategy to reduce 
NO<INF>X</INF> emissions. We are proposing approval of these revisions 
to the rules that establish the MECT program, but because of the 
relationship of the rules to the attainment demonstration, we will not 
finalize approval of the rules until the revisions to the attainment 
demonstration are approved. Further revisions allowing DERC and MDERC 
use in the MECT program will not be fully approved until the rules for 
DERC and MDERC generation and use have been approved. The rules for 
DERC and MDERC use and generation and the attainment demonstration are 
being considered in separate Federal Register notices. If our separate 
actions on the DERC program and the attainment demonstration cannot be 
finally approved, the MECT program will continue to operate as outlined 
in our November 14, 2001, final approval of the program (66 FR 57252).

B. Summary of MECT program revisions

1. What is the MECT program that has been Federally approved into the 
Texas SIP?
    The MECT program was adopted as a State regulation on December 6, 
2000. The program is mandatory for stationary facilities that emit 
NO<INF>X</INF> in the HGB area which are subject to emission 
specifications in TCEQ NO<INF>X</INF> rules at 30 TAC Chapter 117.106, 
117.206 and 117.475, and which are located at a site where they have a 
collective design capacity to emit 10 tons per year or more of 
NO<INF>X</INF>. The program sets a cap on NO<INF>X</INF> emissions 
beginning January 1, 2002, with a final reduction to the cap occurring 
in 2007. Facilities are required to meet NO<INF>X</INF> allowances on 
an annual basis. An allowance is the authorization to emit one ton of 
NO<INF>X</INF> during a control period; a control period is the 
calendar year. Facilities may purchase, bank or sell their allowances. 
The amount of NO<INF>X</INF> allowances is determined by a formula 
which uses emission rates established in 30 TAC Chapter 117. These 
emission rates and resulting emission reductions were relied on in the 
HGB attainment demonstration submitted in 2000. The rules at that time 
were to reduce overall industrial NO<INF>X</INF> emissions by 
approximately 90 percent. The MECT program has a provision to allow a 
facility to use emission reduction credits (ERCs) generated through the 
TCEQ Emission Credit Banking and Trading program to permanently 
increase the allowances for the individual facility subject to the MECT 
if the credits were generated for NO<INF>X</INF> in the HGB area before 
December 1, 2000. The MECT also has a provision to allow a facility to 
use DERCs and MDERCs generated through the TCEQ Discrete Emission 
Credit Banking and Trading program in lieu of allowances if they are 
generated in the HGB area. EPA published a final rule approving the 
MECT program (except for the use of DERCs and MDERCs in the MECT, which 
we deferred acting on until our action on the DERC program) on November 
14, 2001 (66 FR 57252). Texas has subsequently revised the MECT program 
in SIP submittals dated July 15, 2002, January 31, 2003, and December 
6, 2004.
2. How has TCEQ revised the MECT program?
    The TCEQ submitted a MECT revision to EPA on July 15, 2002, 
establishing a new section 101.357, to allow the use of emission 
reductions generated through the Texas Emission Reduction Program as 
MECT allowances. EPA is not reviewing or proposing to act on this 
revision to the MECT program in this document.
    Today's action does address several revisions to the MECT that TCEQ 
submitted to EPA on January 31, 2003, and December 6, 2004. These 
revisions made changes to support the shift from 90 percent control of 
industrial sources to 80 percent control in the HGB ozone nonattainment 
area, expanded the applicability of the MECT, updated and revised the 
provision of the MECT allowing for the use of DERCs and MDERCs in lieu 
of MECT allowances, and included a variety of non-substantive changes 
to correct grammar and reorganize the rule text for readability.
    The shift from 90 percent to 80 percent control of industrial 
sources in the HGB nonattainment area is one of a number of changes 
made in Texas' mid-course review of the HGB ozone attainment plan. The 
current plan was approved on November 14, 2001, and called for 
approximately a 90 percent control of industrial NO<INF>X</INF> 
emissions. As a result of a review of the modeling and data, including 
an intensive summer study in 2000, TCEQ has revised the plan to 
decrease the importance of NO<INF>X</INF> reductions and to add 
controls on highly-reactive volatile organic compounds. The MECT, in 
section 101.353, has been revised to support the shift in attainment 
strategy from approximately 90 percent to approximately 80 percent 
NO<INF>X</INF> reductions.
    To determine the approvability of the change from 90 percent to 80 
percent, EPA must consider its impact on the area's attainment plan, 
and whether it is consistent with section 110(l) of the Clean Air Act. 
We are examining these questions in our separate action on the 
revisions to the HGB attainment demonstration, which is being processed 
concurrently with this action. EPA will not take final action on the 
changes to the MECT related to the change from 90 percent to 80 percent 
until final approval of the attainment demonstration is published. 
Please note that although the MECT was developed as part of the one-
hour ozone attainment demonstration, and EPA has revoked the one-hour 
ozone standard, the MECT remains a necessary component of the SIP under 
EPA's anti-backsliding provisions of the Phase I rule (40 CFR 
51.905(a)(1)). For a further discussion and review of how the anti-
backsliding provisions are being met and other issues related to the 
change in ozone attainment strategy from 90 percent to 80 percent 
NO<INF>X</INF> control, please see the supporting record for our 
separate

[[Page 58115]]

action on the attainment demonstration (RME Docket R06-OAR-2005-TX-
0018).
    The next revisions we are addressing in this action involve the 
expansion of the applicability of the MECT to cover all facilities in 
the HGB ozone nonattainment area that are either at a site that meets 
the definition of major source at 30 TAC section 117.10, or at a site 
where they collectively have an uncontrolled design capacity to emit 
ten tons or more of NO<INF>X</INF> per year. Additionally, once a 
source has become classified as a major source the source will always 
be subject to the MECT.
    The final substantive revision to the MECT that we are considering 
in this action involves the sections of the MECT providing for the use 
of DERCs and MDERCs in lieu of MECT allowances. Under the Texas 
Discrete Emission Credit Banking and Trading program (referred to as 
the DERC program), a source can generate short-term emission credits by 
reducing its emissions. Reductions from stationary sources are 
generated as discrete emission reduction credits (DERCs), and 
reductions from mobile sources are generated as mobile discrete 
emission reduction credits (MDERCs). DERCs and MDERCs are quantified, 
banked and traded in terms of mass (tons) and may be generated and used 
statewide. Sources can certify reductions of all criteria pollutants, 
with the exception of lead, but the MECT rules only allow 
NO<INF>X</INF> and VOC DERCs and MDERCs to be used in lieu of MECT 
allowances. The EPA and the TCEQ Executive Director must approve a 
demonstration that the use of VOC DERCs or MDERCs would be equivalent 
to the use of NO<INF>X</INF> allowances in reducing ozone. In our 
November 14, 2001, Federal Register action, EPA deferred acting on 
these provisions until we proposed action on the DERC program. EPA is 
now considering action on the DERC program in a separate action (RME 
Docket R06-OAR-2005-TX-0029). TCEQ's revisions to section 101.356 of 
the MECT establish limits on the quantity of DERCs that can be used in 
a given control period and on the quantities that TCEQ can allow a 
given source to use for demonstrating compliance. The use of DERCs and 
MDERCs in the MECT program will not be Federally approved until the 
approval of both the revisions to section 101.356 being reviewed here 
and of the DERC program generally, which is being reviewed in a 
separate action.

C. EPA's Analysis

1. How did EPA review and evaluate the MECT program revisions?
    Generally, SIP rules must be enforceable and must not relax 
existing requirements. See Clean Air Act sections 110(a), 110(l), and 
193.
    A guidance document that we used to define evaluation criteria is 
``Improving Air Quality with Economic Incentive Programs'' (EPA-452/R-
01-001, January 2001) (EIP Guidance). This guidance applies to 
discretionary EIPs adopted to attain national ambient air quality 
standards (NAAQS) for criteria pollutants, but the EIP Guidance is not 
EPA's final action on discretionary EIPs. Final action as to any such 
EIP occurs when EPA acts on it after its submission as a SIP revision. 
Because the EIP Guidance is non-binding and does not represent final 
agency action, EPA is using the guidance as an initial screen to 
determine whether potential approvability issues arise. A more detailed 
review of the MECT revisions as compared to the EIP Guidance is in the 
Technical Support Document (TSD) for the TCEQ Mass Emissions Cap and 
Trade Program for the HGB Nonattainment Area. The TSD is available at 
the location given in the ADDRESSES section of this document.
2. What criteria did EPA use to analyze the MECT program revisions?
    As described in detail in the EIP Guidance, EPA has identified 
three fundamental principles that apply to all EIPs: integrity, equity, 
and environmental benefit. The integrity principle provides that 
emission reductions in EIPs must be surplus, enforceable, quantifiable, 
and permanent. The equity principle consists of both general equity and 
environmental justice. The third principle provides that all EIPs 
should show environmental benefit, whether through faster attainment, 
more rapid reductions, or greater emission reductions. In our previous 
approval action, EPA evaluated the MECT against these three principles, 
specific concerns applicable to multi-source cap-and-trade programs, 
and applicable CAA requirements. See 66 FR 38231 (July 23, 2001); 66 FR 
57252 (Nov. 14, 2001). In the current action, to evaluate the MECT 
revisions EPA conducted a line-item comparison of the Federally 
approved and newly adopted state rule language. This comparison 
included a discussion of applicable EIP Guidance provisions and CAA 
requirements. Our complete analysis of the MECT revisions is contained 
in the TSD for this action.
3. What is EPA's evaluation of the changes related to the switch from 
90 percent control to 80 percent control of NO<INF>X</INF> emissions 
from industrial sources?
    To support the shift from a 90 percent to an 80 percent 
NO<INF>X</INF> control strategy, TCEQ revised the MECT at section 
101.353 to include new emission reduction factors for the allocation of 
allowances. The changes to the reduction factors are based on the 
corresponding changes to the HGB attainment demonstration. The analysis 
behind the new reduction factors is evaluated in the TSD reviewing the 
revisions to the attainment demonstration (RME Docket R06-OAR-2005-TX-
0018). EPA will not finally approve these changes until the attainment 
demonstration revisions including the relaxation of NO<INF>X</INF> 
control to 80 percent are approved. Comments on the appropriateness of 
the changes from 90 to 80 percent should be directed to the attainment 
demonstration docket.
4. What is EPA's evaluation of the changes in applicability in the MECT 
program?
    The revisions to MECT applicability at sections 101.350 and 101.351 
are approvable because they are not inconsistent with the CAA and 
because they strengthen the SIP in two ways. First, applicability is 
now based on the uncontrolled design capacity. By basing the inclusion 
of facilities on the uncontrolled design capacity, TCEQ has 
strengthened the cap by preventing sources from installing control 
equipment to remain outside of the cap. Second, TCEQ has established 
that once a source is subject to the MECT it will always be subject to 
the MECT. Combined, these revisions will help ensure that the intended 
emission reductions will occur and also establish a more viable 
allowance trading market by increasing and maintaining the number of 
sources subject to the MECT.
5. What is EPA's evaluation of the use of DERCs and MDERCs in the MECT 
program?
    In our initial MECT approval (66 FR 57252, Nov. 14, 2001), EPA 
deferred action on the use of DERCs and MDERCs for compliance with the 
MECT until our action on the DERC rule. In addition to the original 
MECT submission, TCEQ has submitted revisions to section 101.356 twice 
since EPA's approval of the MECT program. In this document and the 
corresponding TSD, we are reviewing and proposing to approve the use of 
DERCs and MDERCs in TCEQ's MECT program for the HGB area. We will 
review and act on TCEQ's

[[Page 58116]]

rules for generation and use of DERCs and MDERCs in a separate action 
(RME Docket R06-OAR-2005-TX-0029). The use of DERCs and MDERCs in the 
MECT program will not be Federally approved until the approval of both 
the revisions to section 101.356 being reviewed here and the DERC 
program in 30 TAC Chapter 101, Subchapter H, Division 4 being reviewed 
in a separate action. Here, EPA is only taking specific comment on the 
use of DERCs and MDERCs as allowances in the MECT program. Under the 
Texas program, DERCs and MDERCs can be used for a variety of other 
purposes. Comments on the generation of DERCs or MDERCs or on the use 
of DERCs or MDERCs for purposes other than as MECT allowances should be 
directed to the docket on the DERC rule (RME Docket R06-OAR-2005-TX-
0029).
    The DERC and MDERC program is what EPA describes as an open market 
trading (OMT) program. Section 4.1 of the EIP Guidance explains that 
certain types of EIPs may not be combined because their characteristics 
and requirements are incompatible. By way of example, it states that an 
OMT program and a multi-source cap-and-trade program are incompatible 
and thus should not be combined. Therefore, the fact that the MECT 
program provides for the use of DERCs and MDERCs in lieu of allowances 
at section 101.356(h), with corresponding provisions in the DERC rule 
at section 101.376(b), is contrary to the statement in the EIP 
Guidance.
    The EIP Guidance discourages the use of OMT credits in a multi-
source cap-and-trade program based on concerns that the use of OMT 
credits in the cap program could potentially undermine the integrity of 
the cap, thus preventing the goals that the cap was established to 
achieve. EPA is concerned that including OMT credits in a cap-and-trade 
system could lead to:
    <bullet> The possibility that more OMT credits will be used in a 
given year than are generated;
    <bullet> The possibility that sources will shift production from 
one source to another, generating credits at the reduced source while 
no real net benefit in air quality is achieved; and
    <bullet> The possibility that reductions at unregulated sources 
will not be real reductions and that they will be used to offset 
increases at regulated sources.
    When a program includes elements that are not consistent with the 
approaches outlined in our guidance, EPA may still approve the rule if 
it is consistent with CAA requirements and the rationales underlying 
the provisions in EPA guidance. In this case, we must determine whether 
the use of OMT credits (DERCs or MDERCs) in lieu of allowances will, 
because of the above concerns, undermine the goal of the MECT program, 
which is attainment of the one-hour ozone standard in the HGB area. EPA 
should also consider whether there are adequate safeguards to ensure 
that the additional flexibility provided by the interplay between the 
DERC and MECT programs will not undermine the HGB rate or progress 
(ROP) plan and attainment demonstration. We approved the HGB ROP plan 
on February 14, 2005 (70 FR 07407). The HGB area met its ROP target by 
a wide margin (over 100 tons per day) so the institution of DERCs in 
the MECT would not be expected to interfere with ROP.
    The reduction in industrial NO<INF>X</INF> emissions relied on in 
the attainment demonstration is achieved by the MECT program, which 
provides a finite cap on NO<INF>X</INF> emissions. Beginning in 2005, 
the amount of allowances (the authorization to emit one ton of 
NO<INF>X</INF> during a control period, which is the calendar year) 
under the cap decreases to the final cap level in 2007. The final 2007 
cap level was established based on photochemical modeling and other 
evidence as necessary for the area to meet the one-hour ozone standard. 
Even after the change from 90 percent to 80 percent NO<INF>X</INF> 
control strategy, the final MECT level is among the most stringent 
levels of NO<INF>X</INF> controls on industrial emissions in the United 
States.
    Because of the stringency of the needed NO<INF>X</INF> controls, 
Texas linked the DERC and MECT programs, in an effort to provide 
additional flexibility to sites subject to the program while 
encouraging the development and use of cleaner technologies to reduce 
NO<INF>X</INF> emissions from sources not covered by the cap-and-trade 
program. Only DERCs and MDERCs generated in the HGB area are available 
for use in lieu of allowances.
    At the time the MECT rules were developed, the number of DERCs 
available for use in the HGB area totaled over 37,000 tons (all 
generated by stationary sources; no MDERCs had been generated). 
Additionally, sources had the ability to make early reductions and 
continue banking DERCs until the January 1, 2002, implementation date 
of the MECT. After implementation of the MECT, sources subject to the 
cap no longer had the ability to generate DERCs because those 
reductions would take the form of unused allowances. The potential for 
capped sites to hold these banked DERCs for use in 2005 and beyond was 
significant enough to negatively impact the HGB ROP plan and attainment 
demonstration. To guard against more DERCs being used in a given year 
than are being generated, which might affect the goal of attainment, 
Texas included the following provisions in the MECT rule limiting the 
use of NO<INF>X</INF> DERCs in lieu of allowances.
    First, beginning in 2005, annual use of DERCs within the MECT is 
limited to 10,000 DERCs collectively for all sites within the HGB area. 
This provision eliminates the potential for sites subject to the MECT 
to use a large quantity of DERCs in a single year and negatively impact 
the HGB ROP plan and attainment demonstration. All requests to use 
DERCs (or MDERCs) in the MECT must be made by October 1 of the control 
period for which the DERCs (or MDERCs) would be used. In terms of the 
10,000 DERC limit, TCEQ will approve requests to use DERCs in the 
amount of 250 tons or less for a given control period. After October 1, 
when all requests to use DERCs have been received, TCEQ determines how 
to respond to any requests to use DERCs in an amount exceeding 250 
tons. TCEQ may reduce any such request so that the total amount of all 
DERCs used collectively does not exceed 10,000. If all the requests to 
use DERCs in a given control period are less than the 10,000 limit, 
TCEQ will then address requests for more than 250 tons. For these 
requests, TCEQ determines the number of remaining DERCs under the 
10,000 limit that were not approved in the requests of 250 tons or 
less. These extra DERCs may be apportioned based on the percentage of 
DERCs in excess of 250 requested for use by those sites relative to the 
total amount of extra DERCs available.
    Second, depending on when the DERCs were generated, the MECT rule 
requires the use of DERCs at specified ratios. Beginning in 2005, DERCs 
generated before January 1, 2005, are required to be used at a ratio of 
four DERCs to one allowance. The ratio of DERCs to allowances increases 
to a 10 to 1 ratio for DERCs generated before 2005 and used in the 
2007, or subsequent, control periods. By way of example, if DERC usage 
equaling the full 10,000 limit is approved for use in the 2007 control 
period, the overall cap would be increased by 1,000 allowances. Any 
DERCs generated after January 1, 2005, are available for use within the 
MECT at a one to one ratio, but are still included in the 10,000 DERC 
collective limit. We believe these ratios guard against the possibility 
that the availability of historic reductions would permit the use of 
more DERCs in a year than are generated, which could

[[Page 58117]]

interfere with attainment or reasonable further progress.
    As a further safeguard against the possibility of undermining the 
attainment demonstration by allowing the use of more DERCs in any given 
year than are generated, TCEQ added an additional 2.7 tons per day into 
the attainment model beyond the emissions that would be allowed based 
on source allocations. This additional 2.7 tons per day represents the 
maximum amount of pre-2005 DERCs available for use in the attainment 
year 2007. To arrive at this number, TCEQ divided the 10,000 DERC limit 
by 10 to yield a total of 2.7 tons per day that could be reintroduced 
into the cap. DERCs generated after 2005 by sources outside of the cap 
could not be quantified as those reductions would be generated through 
voluntary measures. TCEQ therefore assumed that all DERCs that would be 
used in the 2007 control period were pre-2005 DERCs. Including these 
added emissions in the attainment modeling is analogous to cap-and-
trade programs that set aside a percentage of the modeled emissions for 
new source growth or other purposes.
    The MECT program also provides that MDERCs can be used in lieu of 
allowances at a ratio of one MDERC to one allowance. MDERCs are not 
included in the 10,000 DERCs limit in any given control period. TCEQ 
incorporated MDERCs into the MECT to provide incentives for mobile 
reductions. Although there is no set limit for MDERC usage under the 
MECT, from our experience with open market trading programs, we can 
reasonably predict that a relatively small quantity of MDERCs will be 
generated. Consistent with our prediction, we note that only 60 tons of 
MDERCs have been banked as of August 1, 2005.
    TCEQ has also committed to making certain revisions to the DERC 
program to ensure that the DERCs used are real, surplus, and consistent 
with the assumptions in the attainment demonstration. These revisions 
will include:
    <bullet> Prohibiting the generation of DERCs from permanent 
shutdowns (See RME Docket R06-OAR-2005-TX-0029);
    <bullet> Ensuring that reductions can only come from process 
changes or the installation of control equipment that result in less 
emissions per unit of production, thus preventing reductions from 
production shifting as a method of DERC generation;
    <bullet> Clarifying the provisions that allow for public comment 
and EPA approval of quantification protocols to ensure that the 
reductions used for DERC generation are quantifiable.

A more complete description of the criteria for DERC generation is 
included in the supporting documents for the DERC rule.
    Additionally, section 101.363 requires TCEQ to audit the MECT 
program every three years. If the use of DERCs or MDERCs is shown to 
negatively impact attainment, TCEQ will remove this flexibility from 
the program.
    With the restrictions outlined above, we believe that permitting 
the use of DERCs and MDERCs in lieu of allowances provides additional 
flexibility in compliance with the MECT program without undermining the 
goal of attaining the one-hour ozone standard in the HGB area. EPA also 
believes that the restrictions placed on the use of DERCs and MDERCs in 
the MECT will prevent such use from damaging the integrity of the MECT 
program and the HGB attainment demonstration. Because the basis for the 
use of DERCs and MDERCs in the MECT is, in part, the modeling and 
attainment demonstration for the HGB area, EPA cannot grant a final 
approval of this provision of the MECT program until EPA issues a final 
approval of the attainment modeling provided as a mid-course review SIP 
revision. The attainment demonstration and DERC program are being 
concurrently proposed for approval (RME Dockets R06-OAR-2005-TX-0018 
and R06-OAR-2005-TX-0029).
6. What is EPA's Analysis of the Other Revisions to the MECT Program?
    The additional revisions to the MECT at sections 101.352, 101.354, 
101.359, and 101.360 are also approvable because they are consistent 
with the EIP Guidance and meet the requirements of section 110(l) of 
the Clean Air Act as explained below. In section 101.352(b), the TCEQ 
changed the date for the true-up period from February 1st following the 
control period to March 1st, beginning with the first control period of 
January 1, 2003. This revision corrected a typographical error in the 
Federally approved MECT that ended the true-up period on February 1st 
and determined compliance with the cap on March 1st. Section 7.4 of the 
EIP Guidance also recommends a true-up period of 60 days for control 
periods up to a year. The revision to section 101.352(e) further 
refines the group of facilities that can use MECT allowances for the 
correlating one to one portion of NSR offsets as only new or modified 
facilities that are not considered existing facilities under section 
101.350(e). The majority of the revisions to section 101.354 are 
corrections to grammar and section numbering. The new section 
101.354(e) is a measure to strengthen the SIP by discouraging demand 
shifting. If a facility subject to the MECT shifts production or 
activity to a facility not subject to the MECT, the TCEQ will deduct 
allowances from the MECT facility equal to the increase in emissions 
that resulted from the demand shifting. The revisions to section 
101.359 establish expanded reporting requirements for facilities 
subject to the MECT and provide for the imposition of penalties on 
facilities that miss reporting deadlines. The revisions to section 
101.360 provide more detail on the requirements for level of activity 
reporting. Our full review of these revisions can be found in the TSD.
7. What is EPA's Analysis of the Chapter 116 Rule Language?
    The new subsections of Chapter 116, sections 116.111(a)(2)(L), 
116.115(b)(2)(C)(iii), 116.176, 116.610(a)(6), and 116.615(5)(C), 
submitted by TCEQ on April 12, 2001, are approvable. These subsections 
establish the permitting requirements for the facilities subject to the 
MECT. Collectively, these subsections reinforce the requirements of the 
MECT program by stating that facilities must possess allowances before 
operation and that an owner or operator of a new facility must identify 
the source of allowances it will rely on in the permit.
8. What is EPA's Analysis of the MECT Program With Respect to Section 
110(l) of the Clean Air Act?
    Section 110(l) of the Clean Air Act states:

    Each revision to an implementation plan submitted by a State 
under this Act shall be adopted by such State after reasonable 
notice and public hearing. The Administrator shall not approve a 
revision of a plan if the revision would interfere with any 
applicable requirement concerning attainment and reasonable further 
progress (as defined in section 171), or any other applicable 
requirement of this Act.

    As a general matter, the satisfaction of the environmental benefit 
principle and the other integrity principles applicable to trading 
programs will tend to demonstrate that a trading program will be 
consistent with section 110(l). Here, however, as previously noted, the 
revisions to the MECT are a part of a revised ozone attainment strategy 
for the HGB area. In addition, we are reviewing the limited use of 
DERCs in the MECT. The revised strategy's reduced level of industrial 
NO<INF>X</INF> control and the effect of the use of DERCs in the MECT 
are being evaluated separately in the HGB attainment demonstration for 
the 1-hour ozone standard. The section 110(l) analysis for our action 
on the MECT

[[Page 58118]]

therefore relies on the analysis conducted for the HGB attainment 
demonstration.

D. Conclusion

    EPA reviewed the MECT program revisions with respect to the 
expectations of the EIP Guidance document and the requirements of the 
Clean Air Act. EPA has concluded after review and analysis that the 
revisions to the MECT program are approvable. EPA is proposing to 
approve the revisions to sections 101.350-354, and 101.360 submitted by 
TCEQ on January 31, 2003, for rule log number 2002-044-101-AI; and the 
revisions to sections 101.356 and 101.359 submitted by TCEQ on December 
6, 2004, for rule log number 2003-064-101-AI. EPA has also reviewed the 
subsections in 30 TAC Chapter 116 which provide cross-references to the 
MECT program, and has concluded that these subsections are necessary 
for the implementation of the MECT program. We are proposing to approve 
sections 116.111(a)(2)(L), 116.115(b)(2)(C)(iii), 116.176, 
116.610(a)(6), and 116.615(5)(C) submitted by TCEQ on April 12, 2001, 
for rule log number 2000-047-116-AI.
    We will not take final action on these rules, however, until we 
finally approve the attainment demonstration. In addition, revisions 
allowing DERC use in the MECT program will not be fully approved until 
the rules for DERC generation and use have been approved. The rules for 
DERC generation and use and the attainment demonstration are being 
considered in separate actions.

II. General Information

A. Tips for Preparing Your Comments

    When submitting comments, remember to:
    1. Identify the rulemaking by File ID number and other identifying 
information (subject heading, Federal Register date and page number).
    2. Follow directions--The agency may ask you to respond to specific 
questions or organize comments by referencing a Code of Federal 
Regulations (CFR) part or section number.
    3. Explain why you agree or disagree; suggest alternatives and 
substitute language for your requested changes.
    4. Describe any assumptions and provide any technical information 
and/or data that you used.
    5. If you estimate potential costs or burdens, explain how you 
arrived at your estimate in sufficient detail to allow for it to be 
reproduced.
    6. Provide specific examples to illustrate your concerns, and 
suggest alternatives.
    7. Explain your views as clearly as possible, avoiding the use of 
profanity or personal threats.
    8. Make sure to submit your comments by the comment period deadline 
identified.

B. Submitting Confidential Business Information (CBI)

    Do not submit this information to EPA through regulations.gov or e-
mail. Clearly mark the part or all of the information that you claim to 
be CBI. For CBI information in a disk or CD ROM that you mail to EPA, 
mark the outside of the disk or CD ROM as CBI and then identify 
electronically within the disk or CD ROM the specific information that 
is claimed as CBI). In addition to one complete version of the comment 
that includes information claimed as CBI, a copy of the comment that 
does not contain the information claimed as CBI must be submitted for 
inclusion in the official file. Information so marked will not be 
disclosed except in accordance with procedures set forth in 40 CFR part 
2.

III. Statutory and Executive Order Reviews

    Under Executive Order 12866 (58 FR 51735, October 4, 1993), this 
proposed action is not a ``significant regulatory action'' and 
therefore is not subject to review by the Office of Management and 
Budget. For this reason, this action is also not subject to Executive 
Order 13211, ``Actions Concerning Regulations That Significantly Affect 
Energy Supply, Distribution, or Use'' (66 FR 28355, May 22, 2001). This 
proposed action merely proposes to approve state law as meeting Federal 
requirements and imposes no additional requirements beyond those 
imposed by state law. Accordingly, the Administrator certifies that 
this proposed rule will not have a significant economic impact on a 
substantial number of small entities under the Regulatory Flexibility 
Act (5 U.S.C. 601 et seq.). Because this rule proposes to approve pre-
existing requirements under state law and does not impose any 
additional enforceable duty beyond that required by state law, it does 
not contain any unfunded mandate or significantly or uniquely affect 
small governments, as described in the Unfunded Mandates Reform Act of 
1995 (Public Law 104-4).
    This proposed rule also does not have tribal implications because 
it will not have a substantial direct effect on one or more Indian 
tribes, on the relationship between the Federal Government and Indian 
tribes, or on the distribution of power and responsibilities between 
the Federal Government and Indian tribes, as specified by Executive 
Order 13175 (65 FR 67249, November 9, 2000). This action also does not 
have Federalism implications because it does not have substantial 
direct effects on the States, on the relationship between the national 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government, as specified 
in Executive Order 13132 (64 FR 43255, August 10, 1999). This action 
merely proposes to approve a state rule implementing a Federal 
standard, and does not alter the relationship or the distribution of 
power and responsibilities established in the Clean Air Act. This 
proposed rule also is not subject to Executive Order 13045 ``Protection 
of Children from Environmental Health Risks and Safety Risks'' (62 FR 
19885, April 23, 1997), because it is not economically significant.
    In reviewing SIP submissions, EPA's role is to approve state 
choices, provided that they meet the criteria of the Clean Air Act. In 
this context, in the absence of a prior existing requirement for the 
State to use voluntary consensus standards (VCS), EPA has no authority 
to disapprove a SIP submission for failure to use VCS. It would thus be 
inconsistent with applicable law for EPA, when it reviews a SIP 
submission, to use VCS in place of a SIP submission that otherwise 
satisfies the provisions of the Clean Air Act. Thus, the requirements 
of section 12(d) of the National Technology Transfer and Advancement 
Act of 1995 (15 U.S.C. 272 note) do not apply. This proposed rule does 
not impose an information collection burden under the provisions of the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.).

List of Subjects in 40 CFR Part 52

    Environmental protection, Air pollution control, Intergovernmental 
relations, Nitrogen oxides, Ozone, Reporting and recordkeeping 
requirements, Volatile organic compounds.

    Authority: 42 U.S.C. 7401 et seq.

    Dated: September 27, 2005.
Richard E. Greene,
Regional Administrator, Region 6.
[FR Doc. 05-19995 Filed 10-4-05; 8:45 am]
BILLING CODE 6560-50-P


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