[Federal Register Volume 60, Number 35 (Wednesday, February 22, 1995)]
[Proposed Rules]
[Pages 9810-9812]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-4296]



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ENVIRONMENTAL PROTECTION AGENCY
40 CFR Part 52

[MA-29-01-6537; A-1-FRL-5156-9]


Approval and Promulgation of Air Quality Implementation Plans; 
Massachusetts; Emission Banking, Trading, and Averaging

AGENCY: Environmental Protection Agency (EPA).

ACTION: Proposed rule.

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SUMMARY: EPA is proposing the approval of a State Implementation Plan 
(SIP) revision submitted by the State of Massachusetts. This revision 
establishes a program of emission reduction credit (ERC) banking and 
trading whereby companies who reduce emissions below the level required 
by State and federal regulation can ``bank'' the surplus reductions for 
use at a later date or for transfer to another party. This program has 
been adopted as a voluntary economic incentive program pursuant to 
EPA's interim guidance on Economic Incentive Programs. The intended 
effect of this action is to facilitate cost-effective compliance with 
other emission reduction requirements required by the Massachusetts 
SIP. This action is being taken under the Clean Air Act.

DATES: Comments must be received on or before March 24, 1995.

ADDRESSES: Comments may be mailed to Linda M. Murphy, Director, Air, 
Pesticides and Toxics Management Division, U.S. Environmental 
Protection Agency, Region I, JFK Federal Bldg., Boston, MA 02203-2211. 
Copies of the State submittal and EPA's technical support document are 
available for public inspection during normal business hours, by 
appointment at the Air, Pesticides and Toxics Management Division, U.S. 
Environmental Protection Agency, Region I, One Congress Street, 10th 
floor, Boston, MA and the Division of Air Quality Control, Department 
of Environmental Protection, One Winter Street, 8th Floor, Boston, MA 
02108.

FOR FURTHER INFORMATION CONTACT: Steven A. Rapp, (617) 565-9024.

SUPPLEMENTARY INFORMATION:

Background

    On February 23, 1993, EPA published proposed rules for Economic 
Incentive Programs (58 FR 11110). The proposal set forth Economic 
Incentive Program (EIP) rules which could be adopted by certain ozone 
and carbon monoxide nonattainment areas which were mandated by sections 
182(g)(3), 182(g)(5), 187(d)(3), and 187(g) of the Clean Air Act (Act) 
to use or consider as one of three options the use of an economic 
incentive program to correct attainment plan deficiencies. The notice 
also served as interim guidance for States to develop discretionary 
EIPs which is allowed for any criteria pollutant in all areas.
    On February 9, 1994, the Massachusetts Department of Environmental 
Protection (DEP) submitted 310 CMR 7.00 appendix B: Emission Banking, 
Trading, and Averaging as a revision to its State Implementation Plan 
(SIP). This regulation was submitted as a discretionary EIP and is 
described as emission limiting due to the fact that the regulation 
places limits on total mass emissions, emission related parameters, or 
specifies levels of emission reductions that participating sources must 
meet. The regulation is designed to utilize a federally enforceable 
permit mechanism or single-source SIP revisions to ensure the 
enforceability of the ERCs. It replaces the former 310 CMR 7.00 
appendix B which dealt exclusively with emissions averaging.
    The regulation deals separately with ERC banking and trading and 
with emissions averaging. Section 310 CMR 7.00 appendix B(3) 
establishes the requirements of the ERC banking and trading portion of 
the program by which persons and companies who reduce emissions below 
the level required by State and federal regulation can ``bank'' the 
surplus reductions for use at a later date or for transfer to another 
party. The goal of this part of the program is to encourage the 
creation and trading of surplus ERCs for the purpose of offsets, 
netting, and cost-effective compliance without interfering with any 
applicable requirements concerning attainment, reasonable further 
progress, or any other applicable air pollution control requirements. 
As such, 310 CMR 7.00 Appendix B(3) is intended to promote innovative 
and cost-effective [[Page 9811]] approaches to emission reduction 
requirements adopted by Massachusetts.
    Section 310 CMR 7.00 appendix B(4) is the portion of the program 
designated for emissions averaging, or bubbling. However, that portion 
of the regulation was not part of the February 9, 1994 SIP submittal. 
Section 310 CMR 7.00 appendix B(4) of the regulation has been reserved 
and is expected to be submitted in the coming months for inclusion into 
the Massachusetts SIP.

EPA Evaluation and Proposed Action

    As submitted, 310 CMR 7.00 appendix B is approvable as a non-
generic<SUP>1 Economic Incentive Program (EIP). This means that 
although these regulations provide the general requirements for 
applying for and implementing an approvable trade under the EIP 
guidance, the use of all Emission Reduction Credits (ERCs) must be made 
federally enforceable through a second step, such as the issuance of a 
federally enforceable permit or as a case-specific SIP revision. Due to 
a lack of specificity in the emission quantification, compliance 
assurance, and public participation procedures, these regulations do 
not qualify as a fully generic EIP for emissions banking and trading. 
Therefore, this approval does not provide Massachusetts with the 
authority to issue documents to make ERC generation or use federally 
enforceable. At a minimum, EPA will still need to review and concur on 
any documents which are issued by the DEP for ERC use.

    \1\EPA's Emission Trading Policy Statement (ETPS) promulgated on 
December 4, 1986, defines ``generic rule'' as a rule that assures 
that emissions trades otherwise requiring case-by-case SIP revisions 
under sections 110(j) and 110(a)(3) of the Clean Air Act will be 
evaluated under State procedures that are sufficiently replicable in 
operation to guarantee that emission limits produced under the rule 
will not interfere with the timely attainment and maintenance or 
jeopardize PSD increments or visibility (51 FR 43850).
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    In addition to case-specific SIP revisions, there are several 
available mechanisms for making State documents federally enforceable 
in the absence of a fully generic EIP. Since documents issued under any 
of these mechanisms would include public participation procedures, 
Region I would be able to ensure that replicable and enforceable 
procedures are incorporated as part of each trade. Other than case-
specific SIP revisions, the following three mechanisms could be used 
for making State documents federally enforceable in the absence of a 
fully generic EIP. However, as indicated in 310 CMR 7.00 appendix 
B(3)(g), ERCs generated from the application of mobile source or 
demand-side management measures would need to be approved through the 
source-specific SIP revision process, to the extent the specific 
emissions quantification, compliance assurance, and public 
participation procedures have not already been approved by EPA as part 
of the SIP.
    First, in the case where Massachusetts issues a preconstruction 
permit to the owner/operator of a facility seeking to generate and/or 
use ERCs as offsets under their SIP-approved New Source Review (NSR) 
program (310 CMR 7.00 appendix A), these banking and trading 
regulations would be sufficient for the State to set the necessary 
federally enforceable conditions. Second, at such time as Massachusetts 
has an EPA-approved title V operating permit program, the State could 
also use those permits at subject sources to make the necessary 
conditions of ERC generation or use federally enforceable. However, 
since Massachusetts does not yet have an approved title V operating 
permit program, this is not an option.
    Alternatively, in the case where state operating permits are issued 
pursuant to a program which has been approved into the SIP as meeting 
EPA's June 28, 1989 guidance, ``Requirements for the Preparation, 
Adoption, and Submittal of Implementation Plans'' (54 FR 27274), the 
State could also use those permits to set the federally enforceable 
conditions for ERC generation or use. At the time Massachusetts 
proposed changes to 310 CMR 7.00 appendix B, they also proposed changes 
to 310 CMR 7.02: Plan Approval and Emission Limitations to allow the 
State to issue to existing sources permits which would meet the EPA's 
June 1989 guidance. However, since these changes have not been adopted 
by the State, this is not a viable option at this time.
    One issue with the approval of 310 CMR 7.00 appendix B as an EIP 
framework concerns the provisions which appear to allow a source to 
accumulate and potentially use ERCs, during years other than the year 
in which the credits were generated (i.e., inter-temporal use of 
credits). Historically, EPA has only considered continuous streams of 
ERCs to be eligible for banking and use on a fixed tons per year basis. 
In the event that a portion of the continuous stream of credits was not 
used in a given year, that unused portion of total yearly credit was 
not normally allowed to be accumulated for use in later years. 
Similarly, where emission credits were generated by actions which 
produced only a limited stream of credits, such discrete ERCs were 
normally only considered surplus during the period of their generation.
    As submitted, the Massachusetts' banking and trading regulations 
deal almost exclusively with the creation (i.e., banking) of ERCs. 
However, appendix B(3)(d)(2)(d) of 310 CMR 7.00 appears to allow ERCs 
generated from an action of limited duration (e.g., the use of natural 
gas instead of coal at a powerplant for one summer season), or the 
unused portion of ERCs generated from ongoing actions (e.g., reductions 
from the installation of control equipment), to be banked for use in 
any future year, including years other than the one in which the credit 
was generated. Appendix B (3)(d)(2)(d) also specifically states that 
the use of such accrued credits will be limited by the limits defined 
by 310 CMR 7.00, which include the requirement that reductions be 
surplus (i.e., not relied upon for any applicable attainment or 
reasonable further progress (RFP) milestone demonstration). Therefore, 
the question of whether accumulated reductions in emissions are surplus 
only arises with the use of such ERCs.
    Under 310 CMR 7.00 appendix B, there are essentially two eligible 
uses of ERCs: to meet New Source Review (NSR) emissions offsetting 
requirements and to meet Reasonably Available Control Technology (RACT) 
limits. Currently, Massachusetts' NSR regulations explicitly require 
that offsetting credits be consistent with RFP. As for using ERCs to 
average between sources to meet RACT requirements, Massachusetts 
currently has no generic authority to allow emissions averaging. 
Therefore, in either case, the use of ERCs will still need to be made 
federally enforceable through a second step in the process which 
involves EPA review and concurrence. EPA's approval of any inter-
temporal ERC trade will be predicated on the State documenting how such 
use of ERCs is consistent with the RFP and attainment plans and 
areawide RACT requirements applicable at that time. Therefore, since 
310 CMR 7.00 appendix B deals almost exclusively with the creation 
(i.e., banking) of ERCs, and since this notice proposes only to approve 
310 CMR 7.00 appendix B as a non-generic EIP, the credit accumulation 
provisions do not pose any contradiction to the requirements of the 
Clean Air Act.
    Similarly, for the State to receive full approval of an emissions 
banking and trading EIP, including the generic authority to issue 
federally enforceable trading documents with inter-temporal banking and 
trading, they would need to meet an additional requirement to those 
[[Page 9812]] deficiencies listed above (i.e., specification of 
emission quantification, compliance assurance, and public participation 
procedures). Namely, the State would need to demonstrate that any 
potential one-time or carry-over ERCs are or will be consistent with 
the applicable attainment plan or demonstration, reasonable further 
progress (RFP) plan or milestone demonstration, and surplus to any 
applicable areawide RACT emission reduction requirements.
    Essentially, this means that the State would need to submit 
documentation showing that the SIP requires, or will require, 
reductions equivalent to all potential one-time or carry-over ERCs 
beyond those reductions required from any applicable RACT, RFP, and/or 
attainment plan regulations, during the year(s) in which such ERCs are 
allowed to be used. Alternatively, the State could show that their 
adopted RACT, RFP, and/or attainment control strategies provide for 
equivalent reductions below the appropriate RFP or attainment target 
levels, and any applicable areawide RACT requirements. For example, if 
a State wanted to allow the use of 10 tons per typical summer day from 
a previous year, the State would need to show that its adopted control 
strategies provide for reductions that would create a 10 ton per day 
excess below the appropriate RFP or attainment target level and RACT 
requirements.
    Additionally, appendix B(3)(g)(5) of the rule generally allows the 
bank to retain credits without confiscation from the State. However, 
the regulations also provide the State with the authority to make 
adjustments, including confiscation, to banked credits if needed for 
Rate-of-Progress (ROP), Reasonable Further Progress (RFP), or 
attainment requirements, as stated in appendix B(3)(l). According to 
appendix B(3)(l), the State would need to revise the SIP to take such 
action. EPA approves these provisions.
    Finally, as mentioned above, although subsection (4) of the 
regulation has been reserved for the emissions averaging (bubbling) 
provisions, it was not submitted as part of the February 10, 1994 
submittal. Therefore, until such time as a separate SIP revision 
allowing emissions averaging is approved, no generic emissions 
averaging would be allowed by approval of these rules.
    Based on the issues discussed above, EPA is proposing to approve 
this revision to the Massachusetts SIP. EPA is soliciting public 
comments on the issues discussed in this proposal or on other relevant 
matters. These comments will be considered before taking final action. 
Interested parties may participate in the Federal rulemaking procedure 
by submitting written comments to the EPA Regional office listed in the 
ADDRESSES section of this action.

Proposed Action

    EPA is proposing approval as a non-generic economic incentive 
program of 310 CMR 7.00 appendix B, as submitted to the EPA on February 
9, 1994, as part of the Massachusetts SIP.

Regulatory Process

    This action has been classified as a Table 2 action by the Regional 
Administrator under the procedures published in the Federal Register on 
January 19, 1989 (54 FR 2214-2225), as revised by an October 4, 1993, 
memorandum from Michael H. Shapiro, Acting Assistant Administrator for 
Air and Radiation. A future document will inform the general public of 
these tables. The Office of Management and Budget has exempted this 
action from review under Executive Order 12866.
    Under the Regulatory Flexibility Act, 5 U.S.C. 600 et seq., EPA 
must prepare a regulatory flexibility analysis assessing the impact of 
any proposed or final rule on small entities. 5 U.S.C. 603 and 604. 
Alternatively, EPA may certify that the rule will not have a 
significant impact on a substantial number of small entities. Small 
entities include small businesses, small not-for-profit enterprises, 
and government entities with jurisdiction over populations of less than 
50,000.
    SIP approvals under section 110 and subchapter I, part D of the CAA 
do not create any new requirements, but simply approve requirements 
that the State is already imposing. Therefore, because the federal SIP-
approval does not impose any new requirements, I certify that it does 
not have a significant impact on any small entities affected. Moreover, 
due to the nature of the federal-state relationship under the CAA, 
preparation of a regulatory flexibility analysis would constitute 
federal inquiry into the economic reasonableness of state action. The 
CAA forbids EPA to base its actions concerning SIPs on such grounds. 
Union Electric Co. v. U.S. E.P.A., 427 U.S. 246, 256-66 (S.Ct. 1976); 
42 U.S.C. 7410 (a)(2).
    Nothing in this action should be construed as permitting or 
allowing or establishing a precedent for any future request for 
revision to any State implementation plan. Each request for revision to 
the State implementation plan shall be considered separately in light 
of specific technical, economic, and environmental factors and in 
relation to relevant statutory and regulatory requirements.
    The Administrator's decision to approve or disapprove the SIP 
revision will be based on whether it meets the requirements of sections 
110(a)(2) (A)-(K) and 110(a)(3) of the Clean Air Act, as amended, and 
EPA regulations in 40 CFR part 51.

List of Subjects in 40 CFR Part 52

    Environmental protection, Air pollution control, Carbon monoxide, 
Hydrocarbons, Incorporation by reference, Intergovernmental relations, 
Nitrogen dioxide, Ozone, Reporting and recordkeeping requirements.

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

    Dated: January 31, 1995.
John P. DeVillars,
Regional Administrator, Region I.
[FR Doc. 95-4296 Filed 2-21-95; 8:45 am]
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