[Federal Register Volume 66, Number 26 (Wednesday, February 7, 2001)]
[Proposed Rules]
[Pages 9264-9278]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-3164]


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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 52

[MI-52-01-7260, FRL-6939-6]


Approval and Promulgation of Implementation Plans; Michigan; 
Emission Trading Program

AGENCY: Environmental Protection Agency (EPA).

ACTION: Proposed rule.

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SUMMARY: The Environmental Protection Agency (EPA) is proposing to 
approve Michigan's State Implementation Plan (SIP) revision for ozone, 
carbon monoxide, sulfur dioxide, nitrogen dioxide, particulate matter 
and lead. EPA is proposing to approve the revision under section 110 of 
the Clean Air Act (Act). This SIP revision, submitted July 21, 1999 
relates to Michigan's Emission Averaging and Emission Reduction Credit 
Trading Rules, which provide sources with flexibility in meeting 
regulatory requirements for reducing emissions of ozone precursors and 
criteria air pollutants other than ozone. This proposed approval would 
allow sources in Michigan to use emission averaging and trading for 
compliance with SIP requirements. EPA will not publish final approval 
until receiving some revisions to the SIP that Michigan will provide.

DATES: Comments on this proposed action must be received by March 9, 
2001.

ADDRESSES: You should address written comments to: Carlton T. Nash, 
Chief,

[[Page 9265]]

Regulation Development Section, Air Programs Branch (AR-18J), United 
States Environmental Protection Agency, Region 5, 77 West Jackson 
Boulevard, Chicago, Illinois 60604.
    Copies of the State's submittal for this rulemaking are available 
for inspection at the following location: United States Environmental 
Protection Agency, Region 5, Air and Radiation Division, 77 West 
Jackson Boulevard, Chicago, Illinois 60604. (Please telephone Alexis 
Cain before visiting the Region 5 Office.)

FOR FURTHER INFORMATION CONTACT: Alexis Cain at (312) 886-7018.

SUPPLEMENTARY INFORMATION:

Overview

    The Environmental Protection Agency (EPA) is proposing to approve 
the Michigan Department of Environmental Quality's (Michigan's) 
Emissions Averaging and Emissions Credit Trading Rules. In a previous 
action (62 FR 48972, September 18, 1997), EPA proposed approval of an 
earlier version of this program (submitted as an optional revision to 
the SIP on April 17, 1996) ``upon correction of certain deficiencies'' 
that were identified in the proposed action. EPA believes that Michigan 
has corrected these deficiencies in a SIP revision submitted July 21 
1999. EPA is proposing approval, rather than publishing final approval, 
to give opportunity for public comment on the revised SIP submission. 
In addition, upon further review, EPA has identified additional areas 
requiring clarification or deficiencies that need Michigan must 
correct. EPA will not finalize approval until receiving these 
clarifications and corrections from Michigan.
    The following table of contents describes the format for this 
SUPPLEMENTARY INFORMATION section:

EPA's Action

What Action is EPA Proposing Today?
What is Emissions Trading?
What is Open Market Emissions Trading?
What is Emission Averaging?
What Guidance did EPA Use to Evaluate Michigan's Program?
What is EPA's Evaluation of Michigan's Program?
    Environmental Protection
    Trading of Oxides of Nitrogen
    Ownership Claims
    ERC Generation Start Date
    Activity Level Reductions
    Quantification Protocols
    Synthetic Minor Sources
    Offsets and Netting
    Ownership Prior to Use
    Use Baseline
    Geographic Restrictions on Use of Ozone Precursor ERCs
    Geographic Restrictions on Use of Criteria Pollutant ERCs
    Public Availability of Information
    Hazardous Air Pollutant Emissions
    Interstate Trading
    Protection of Class I Areas
    Operating Permits
    Early NO<INF>X</INF> Reductions
    Property Rights
    Transportation Conformity
    Issues to be Addressed before Final Approval
How Does EPA Respond to Public Comments on the September 18, 1997 
Proposed Approval?
When was Michigan's Program Adopted?
When was Michigan's Program Submitted to EPA and What Did it 
Include?
Conclusion
Administrative Requirements

EPA's Action

What Action Is EPA Proposing Today?

    EPA is proposing approval of Michigan's revision to the State 
Implementation Plan (SIP) submitted to EPA on June 21, 1999. This SIP 
revision relates to Michigan's Emissions Averaging and Emission 
Reduction Credit Trading Rules (Michigan's trading program).

What Is Emissions Trading?

    Air emission trading is a program where one source reduces its 
emissions below the level it is required to meet, and below the level 
it has been meeting. This source then sells or trades these reductions 
as credits to another source that is then allowed to release emissions 
above its required levels. In return for this flexibility, the second 
source must purchase additional credits beyond those needed to comply, 
therefore reducing overall emissions. Emissions trading uses market 
forces to reduce the overall cost of compliance for sources, while 
maintaining emission reductions and environmental benefits.

What Is Open Market Emissions Trading?

    In an open market emission trading program, a source generates 
short-term emission reduction credits, by reducing its emissions. EPA 
generally refers to such credits as ``discrete emission reductions,'' 
but this proposal uses the term ``emission reduction credits (ERCs)'' 
since this is the term used under Michigan's trading program. The 
source may then use these credits at a later time, or trade them to 
another source to use at a later time. Open market programs rely on 
many sources continuing to generate new credits to balance emissions 
increases caused by other sources using previously generated credits.

What Is Emission Averaging?

    Emission averaging provides a source or group of sources (typically 
stationary sources) flexibility in complying with a rate-based 
regulatory limit. Under an emission averaging program, a source that 
exceeds its rate limit could comply with that limit by averaging its 
emissions with a second source emitting below its limit.

What Guidance Did EPA Use To Evaluate Michigan's Trading Program?

    EPA's basis for evaluating Michigan's trading program is whether it 
meets the SIP requirements described in section 110 of the Act. The 
primary guidance used to determine whether the program meets these 
requirements is EPA's September 18, 1997 Proposed Action on Michigan's 
Trading Rules. This proposed approval identified the actions that 
Michigan needed to take prior to receiving full approval.
    The proposed approval was guided by EPA policy on emission trading 
as expressed in 1994 and 1995 guidance. In 1994, EPA issued Economic 
Incentive Program (EIP) rules and guidance (40 CFR part 51, subpart U), 
which outlined requirements for establishing EIPs that states are 
required to adopt in some cases to meet the ozone and carbon monoxide 
standards in designated nonattainment areas. There is no requirement 
for Michigan to submit an EIP, so Michigan's program need not 
necessarily follow the EIP rule. Nonetheless, subpart U also contains 
guidance on the development of voluntary EIPs, which EPA has used in 
the evaluation of Michigan's program.
    EPA has also published an August 3, 1995 proposed policy on open 
market trading programs (60 FR 39668)and an August 25, 1995 model open 
market trading rule (60 FR 44290). EPA's proposed policy describes the 
elements of an open market trading program that EPA considers to be 
desirable and necessary for a program to be approvable as a SIP 
revision. The proposed policy, which was never finalized, also allowed 
states to adopt rules that varied from the proposed model rule. In a 
March 10, 1998-letter from Richard D. Wilson, Acting Assistant 
Administrator for Air and Radiation to Congressman Thomas J. Bliley, 
EPA clarified its policy on open market trading. The letter says EPA 
will work with states to develop open market programs tailored to their 
individual circumstances, using the August 1995 proposal as guidance.
    Subsequently, on September 15, 1999, EPA published a revised 
proposed Economic Incentive Program guidance (64 FR 50086) which 
contains additional guidance on open market trading. EPA has not yet 
released a final revision to the EIP of 1994. Since EPA

[[Page 9266]]

had not proposed revised guidance when Michigan sent its SIP revision 
request, EPA is not using the revised guidance (with one exception) in 
reviewing Michigan's program. EPA is using one part of the proposed EIP 
guidance in the evaluation of Michgan's program: the guidance on 
hazardous air pollutants (HAPs) as a result of trading of VOC, to 
clarify Michigan's obligations with regard to this issue, which was 
identified in the September 18, 1997 Federal Register. This guidance is 
in section 17.2 of the EIP proposed on September 15, 1999.
    Due to EPA's lack of experience with open market trading programs 
and the many issues that such programs raise, EPA will use the final 
EIP guidance as a basis for re-evaluating Michigan's trading program, 
in coordination with the State, to ensure that its operation is 
consistent with the Clean Air Act and federal regulation. EPA will 
notify the State of any deficiencies, within 18 months after EPA issues 
a final EIP guidance. As with any SIP, EPA may require Michigan to 
revise the trading program where necessary and re-submit it according 
to the requirements and deadlines under section 110(k)(5) of the Act. 
According to section 110(k)(5), Michigan may have up to 18 months to 
revise and re-submit the trading program after EPA notifies the State 
of any deficiencies.

What Is EPA's Evaluation of Michigan's Program?

    EPA believes that Michigan's program is approvable as a revision to 
the SIP, and proposes to approve the SIP revision of July 21, 1999, 
upon receipt of additional materials from Michigan. This July 21, 1999 
submittal replaces the April 17, 1996 submittal that was the subject of 
prior proposed rulemaking. EPA provided a description and evaluation of 
Michigan's trading program in the September 18, 1997 Federal Register. 
This proposal provides a brief description of some of the features of 
the program that are particularly important to environmental 
protection, then describes the resolution of issues identified in the 
September 18, 1997 proposal.
Environmental Protection
    Michigan's trading program allows both emission averaging and open 
market trading. It includes several features designed to prevent 
averaging or trading from harming air quality. In deciding to propose 
approval of Michigan's trading program, EPA has considered the overall 
structure of the program and the various elements designed to protect 
the environment. EPA has determined that the program is likely to 
result in environmental improvement, with little risk of environmental 
degradation. Some features of Michigan's program may not be approvable 
within an emission trading program that has a different overall design 
or that lacks all of the environmental protections Michigan's program 
contains.
    A significant number of emission reductions generated under 
Michigan's program will expire without being used to allow offsetting 
emission increases. Under Rule 1212, ten percent of emission reductions 
generated under Michigan's program must be retired to protect the 
environment, with VOC and NO<INF>X</INF> ERCs used for compliance with 
an ozone season limitation discounted an additional ten percent 
annually until expiration. All ERCs expire after five calendar years 
beyond the year of generation. Under Rule 1205, NO<INF>X</INF> and VOC 
ERCs cannot be used during the ozone season unless they were generated 
during the ozone season.
    Rule 1204(1) prohibits use of ERCs or emissions averaging that 
would cause a violation of the National Ambient Air Quality Standards 
(NAAQS) or other requirements of the Clean Air Act. Rule 1204(13) 
requires that ERCs be ``real, surplus, enforceable, permanent, and 
quantifiable,'' and generated using an accurate, reliable and 
replicable quantification method. These requirements are backed by 
notice review procedures that allow Michigan to identify cases where 
these requirements are not met, before ERCs are generated or used.
    Credits cannot be generated by emission reductions that are already 
required by regulation. Rule 1204(1) requires that the use of credits 
be consistent with reductions required for reasonable further progress 
and attainment demonstrations. Moreover, reductions cannot generate 
credit unless they are ``surplus,'' defined in Rule 1201(hh) as 
reductions below an established source baseline (of actual emissions) 
not mandated by any applicable requirement, including the SIP, an 
attainment demonstration, reasonable further progress plan, or 
maintenance plan. Michigan staff have indicated that the intention of 
this definition is to exclude from eligibility for generation of 
emission reduction credit all reductions that are relied upon (as well 
as mandated) by an attainment demonstration, reasonable further 
progress plan, or maintenance plan. EPA expects, as a condition of 
approval, to receive clarification of this position in writing.
    Under Rules 1213(5) and 1214(5), ERCs cannot be generated or used 
until Michigan declares a notice of generation or use to be 
``complete.'' A completeness determination does not constitute 
``approval,'' leaving sources liable for generation or use of bad 
credits or for failure to comply with a requirement. However, the 
completeness determination gives Michigan a significant opportunity to 
prevent generation of ERCs that are not adequate and to prevent ERC 
uses that create a risk of violating the NAAQS or other Clean Air Act 
provisions, including prevention of significant deterioration (PSD) 
increments, attainment plans, maintenance plans, reasonable further 
progress, and transportation conformity. Moreover, the completeness 
review includes a determination of whether trading will result in 
increased emissions of toxic pollutants at levels that create risk to 
public health.
    EPA has determined Michigan's July 21, 1999 SIP revision satisfies 
the conditions for approval proposed in the September 18, 1997 Federal 
Register. These conditions are as follows:
    Trading of Oxides of Nitrogen: EPA stated that while the intent of 
Michigan's trading program seemed to be to allow trading of 
NO<INF>X</INF>, the ozone precursor, as well as NO<INF>2</INF>, the 
criteria pollutant, the rules fail to specify that NO<INF>X</INF> is 
eligible for trading. For NO<INF>X</INF> to be eligible for trading, 
EPA proposed that Michigan must add it to the list of compounds 
eligible for trading.
    The July 21, 1999 SIP revision makes this change.
    Ownership claims: EPA noted that circumstances could arise in which 
ownership of emissions reductions is unclear, for instance if the 
manufacturer of a device that reduces auto emissions and the owner of 
an auto fleet that utilized these devices both claimed credit for the 
same reductions. EPA proposed that Michigan ``must address the issue of 
ownership claims'' in its procedures for determining the completeness 
of notices of credit generation.
    The July 21, 1999 SIP revision includes the State's Notice of ERC 
Generation Review Procedures, which require Michigan staff to review 
notices to determine whether ``all or a part of the emission reductions 
being claimed have previously been used for emission averaging (NOA) or 
for ERC generation.'' If so, then a finding of ``incomplete'' must be 
rendered under Rules 1213(4)(b) and (c), which require ERC generators 
to certify that emission reductions being claimed have not previously 
been used for emission

[[Page 9267]]

averaging or ERC generation. Thus, Michigan has effectively adopted a 
``first-come, first-served'' approach to the issue of who owns emission 
reductions which might have competing ownership claims.
    ERC Generation Start Date: EPA expressed concern about provisions 
of Michigan's trading program that allow credits to be generated prior 
to the enactment of the program (March 16, 1996), from actions starting 
in 1991. Michigan allowed such credits to be registered, after being 
discounted 50 percent, although no such credits can be registered after 
March 16, 1997. These credits, like all credits generated in Michigan's 
program, would expire five years beyond the year the reductions 
occurred. EPA noted that credits generated from actions occurring prior 
to the enactment of the rule ``could flood the market, creating 
widespread use of cheap credits and discouraging the generation of old 
credits.'' Thus, EPA proposed that Michigan must provide ``an 
accounting of the number of pre-enactment credits generated and the 
remaining life of these credits, and an analysis which demonstrates to 
EPA's satisfaction that the potential use of these credits is unlikely 
to have a detrimental impact on attainment or maintenance of the NAAQS 
or any other requirement of the Clean Air Act.''
    Michigan has provided an analysis that shows that 8,309 
NO<INF>X</INF> ERCs were generated in 1995, of which none have been 
used. These ERCs expired on January 1, 2001. In addition, 3,143 
NO<INF>X</INF> ERCs were registered in 1996, prior to program 
enactment, of which 1,711 have been used or retired, and the balance of 
which will retire January 1, 2002. None of these NO<INF>X</INF> ERCs 
have been used to allow emissions increases in Michigan (all of the 
NO<INF>X</INF> ERCs used have been retired under consent decrees or 
used as voluntary demonstrations of emission trading). Moreover, it is 
highly unlikely that these NO<INF>X</INF> ERCs will be used in Michigan 
given that there is no regulatory incentive to use NO<INF>X</INF> ERCs 
prior to 2004.
    For CO, 74 pre-enactment ERCs have been generated, all of which 
will be used in 1999 ``to temporarily satisfy offset requirements as 
ordered by a Federal Judge.'' This use of CO credits does not lead to 
an emission increase that would not otherwise have occurred, and could 
not have a detrimental impact on air quality.
    For VOCs, 11 ERCs expired, unused, on January 1, 1999. Twenty-nine 
VOC ERCs have been used, 89 expired at the end of 1999, and 66 will 
expire either at the end of 2000 or 2001. These amounts of VOC credits 
are negligible, and their use poses no threat to air quality.
    EPA agrees that use of pre-enactment ERCs so far and the potential 
future use of remaining pre-enactment ERCs will not have a detrimental 
impact on attainment or maintenance of the NAAQS or any other 
requirement of the Clean Air Act.
Activity Level Reductions
    EPA proposed that provisions of Michigan's rule that allowed use of 
credits generated through activity level reductions (production 
curtailments or shutdowns) were unacceptable. Use of such credits could 
cause emissions to be higher than they would be in the absence of the 
trading program, threatening the integrity of Michigan's attainment and 
maintenance plans. EPA suggested three different options that Michigan 
could use to correct this program deficiency: prohibiting generation of 
shutdown and curtailment credits; prohibiting use of shutdown credits 
in nonattainment and maintenance areas; and, demonstrating that use of 
such credits would not be contrary to Michigan's attainment and 
maintenance plans. Michigan has chosen to incorporate in its trading 
program rules a prohibition against use of shutdown credits in 
nonattainment and maintenance areas.
    Michigan's rule contains additional unique protections against the 
negative consequences of shutdown and curtailment credits, through 
limiting both their generation and their use. Michigan's program 
creates significant barriers to the generation of credits through 
shutdowns and especially through curtailment. Production curtailment 
credits can be generated only if the generator informs MDEQ of this 
credit-generation strategy ahead of time (Rule 1208(5)). Thus, to 
generate credits during a production slowdown, the source would have to 
plan the slowdown and would have to adopt an enforceable requirement 
not to increase production. As a result, no credits were successfully 
generated through production curtailment in Michigan during the first 
three and half years of program operation, a period when 5,789 tons of 
VOC reductions were registered. In addition, no source has provided the 
notice required under Rule 1208(5) to generate credits through 
production curtailment in the future. Moreover, generation of credits 
from curtailment (and shutdowns) is prohibited if the shutdown or 
curtailment leads to emissions shifting among sources under common 
ownership or control (see Rule 1207(5)). An additional limitation on 
generation of shutdown credits is that such credits can be generated 
for only five years after the shutdown occurs (see Rule 1208(6)).
    In addition to these limits on generation of credits from shutdowns 
and curtailment, Michigan is unlike most open market programs in that 
it limits the ability of sources to generate credit while increasing 
production. Michigan bases credit generation on reductions in emissions 
below prior actual levels, as opposed to reductions from what emissions 
would have been based on activity levels during the generation period. 
In other words, most open market programs create a baseline for 
reductions based on historical emissions rates times activity level 
during the period of generation, while Michigan's program creates a 
baseline based on actual emissions. Thus, in comparison with other open 
market programs, Michigan's program limits credit generation at sources 
that increase production, partially offsetting the potential generation 
of credits from sources that reduce production.
    Moreover, as noted above, unless approved by EPA, Michigan's 
program prohibits the use of credits generated from production 
shutdown, except as offsets, in nonattainment and maintenance areas 
(see Rule 1204(7)), eliminating the concern that use of such credits 
could compromise attainment and maintenance demonstrations. This 
exception for offsets is acceptable, since use of reductions based on 
activity level reductions is already allowed under the new source 
review program.
    As a result of these protections, curtailment credits have not been 
generated, and shutdown credits have been generated but not traded in 
Michigan, apparently because of the limitations on their use. Thus, EPA 
concludes that no damage to the environment has or will occur as the 
result of shutdown and curtailment credits in Michigan. EPA expects to 
review this aspect of Michigan's SIP again after finalizing the EIP 
guidance.
Quantification Protocols
    EPA noted the importance of high quality emissions quantification 
protocols to ensure that ERCs are based on real reductions, surplus to 
all applicable requirements, that are enforceable, permanent, and 
quantifiable. To assure the quality of emissions quantification 
protocols, EPA proposed that Michigan must ``incorporate into the 
emissions trading rules a requirement that sources in categories 
without EPA-approved protocols must follow a set of EPA-approved 
protocol development criteria * * * and second, commit in the SIP to

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require use of existing and future EPA-approved protocols for 
quantifying emission reductions at applicable sources, and to allow 
sources to deviate from an EPA protocol only if they first get the 
approval of EPA.'' EPA provided the protocol development criteria to 
Michigan in a July 1, 1997 letter from David Kee to Dennis Drake.
    The July 21, 1999 SIP revision makes the changes that EPA 
specified. Rule 1209 now requires any source that generates or uses 
credits to use a protocol that has been federally-approved for the 
purpose of emission reduction credit trading, where one exists for the 
relevant source category. Where a federally-approved protocol does not 
exist, the source must use either: a protocol that the State or EPA has 
approved for purposes of demonstrating compliance with applicable 
requirements, provided that this protocol also meets a list of criteria 
specified in the rules; or a new or alternate emission monitoring and 
quantification protocol which Michigan has approved for purposes of 
emission averaging or emission reduction credit trading. All emissions 
quantification protocols must be consistent with promulgated state and 
federal procedures.
    Michigan has recently revised its procedures for the review of 
notices of generation to require, in cases where reductions will be 
quantified based on a quantification technique that is not in a Title V 
source's operating permit, that the source will not be able to generate 
credits until the permit is revised to reflect the new technique. Thus, 
for Title V sources, credit generation must always be based on a 
measurement method specified in the permit. This revised procedure was 
not included in the July 21, 1999 SIP submission; Michigan must submit 
this revised procedure prior to receiving final approval.
    Mobile source credits must additionally be consistent with 
federally approved mobile models for the emission reduction credit 
generation year, and consistent measurement and calculation methods 
which Michigan or EPA have approved.
Synthetic Minor Sources
    A ``synthetic minor'' source is one that has the potential to emit 
at major source levels defined by the New Source Review (NSR) program, 
but whose emissions are limited by its permit to levels below those 
that would subject it to the major source requirements of NSR. 
Synthetic minor permits frequently limit production or hours of 
operation to limit emissions. The version of Michigan's trading rules 
reviewed in the September 18, 1997 proposed rulemaking allowed 
synthetic minor sources temporarily to increase emissions above major 
source thresholds, without being subject to major source requirements.
    EPA noted that allowing sources to exceed major source thresholds 
without being subject to major source requirements could lead to a loss 
of the significant emission reduction benefits that can occur when 
sources are subject to New Source Review. Therefore, EPA proposed that 
Michigan must remove this provision from the trading rules.
    The July 21, 1999 SIP revision makes this change, as requested.
Offsets and Netting
    EPA proposed that Michigan's rules must state that ERCs may be used 
for offsets and netting only in a manner consistent with New Source 
Review requirements. This is to ensure that Michigan's trading rule 
regulations are bound by the offset and netting requirements of the New 
Source Review program. For instance, this includes the requirement that 
offsets must be permanent, quantifiable, and federally enforceable, as 
these terms are defined in the New Source Review regulations.
    The July 21, 1999 SIP revision makes this change in Rule 1204(8), 
and also removes netting from the list of appropriate uses of credits.
Ownership Prior to Use
    EPA proposed that Michigan's rules must require ERCs to be owned 
prior to use, and to specify that failure to hold sufficient credits is 
a violation. Without such provisions, sources could stay in compliance 
simply by ``trueing up'' after having exceeded their emission limits.
    The July 21, 1999 SIP revision makes these changes, in Rule 
1216(5).
Use Baseline
    EPA proposed that Michigan's rules must include a definition of 
user source baseline.
    The July 21, 1999 SIP revision makes this change, defining user 
source baseline in Rule 1201(e) as ``the allowed level of emissions 
specified by the applicable requirement with which emission reduction 
credits will be used to maintain compliance.''
Geographic Restrictions on Use of Ozone Precursor ERCs
    The version of Michigan's trading rules reviewed in the September 
18, 1997 Federal Register lacked geographic restrictions on trading, 
and would have allowed sources in nonattainment and maintenance areas 
to use ERCs generated in distant attainment areas. EPA proposed that 
geographic restrictions on trading were required, to prevent use in 
areas of poor air quality of credits generated in areas of good air 
quality. EPA proposed prohibiting use in nonattainment or maintenance 
areas of VOC ERCs generated more than 100 kilometers beyond the area 
boundary, and of NO<INF>X</INF> ERCs generated more than 200 kilometers 
beyond the area boundary.
    For VOC, the July 21, 1999 SIP revision establishes the suggested 
geographic restrictions, slightly modified, in Rules 1211(6) and (7). 
For the purpose of these geographic restrictions, adjacent 
nonattainment and maintenance areas are counted as a single area, and 
the boundary for trading extends to the entirety of any county that 
lies partly within 100 kilometers of the nonattainment or maintenance 
area. EPA believes that these modifications do not threaten air quality 
in nonattainment or maintenance areas, and that they serve the goals of 
administrative simplicity and establishing healthier markets for 
trading.
    For NO<INF>X</INF>, Rule 1211 (4) allows trading within Michigan 
without geographic restrictions, as long as the use area is not a 
nonattainment area for NO<INF>2</INF>. EPA is now willing to accept 
this aspect of Michigan's trading program because of modeling done by 
the Ozone Transport Assessment Group showing that NO<INF>X</INF> 
trading throughout the eastern United States would not have a 
detrimental impact on ozone concentrations in nonattainment areas.
Geographic Restrictions on Use of Criteria Pollutant ERCs
    EPA noted that trading criteria pollutants other than ozone, even 
between adjacent sources, could lead to air quality problems. Emissions 
of these pollutants have highly localized effects, and ambient 
concentrations depend not only on the emission rate but also on factors 
such as stack height. Therefore, EPA proposed to require inclusion in 
the SIP of procedures that the State would follow to prevent uses of 
credits or emission averaging that would cause violations of the NAAQS 
or other relevant provisions of the Clean Air Act.
    The July 21, 1999 SIP submission includes procedures for reviewing 
notices of ERC use and notices of emission averaging. These procedures 
require a review of proposed uses of ERCs or of emissions averaging 
above de minimus levels. These de minimus levels are: VOC-40 tons; 
NO<INF>X</INF>/NO<INF>2</INF>-40 tons; CO-100 tons; SO<INF>2</INF>-40 
tons; PM<INF>10</INF>-15 tons, and lead-0.6 tons. For CO, 
SO<INF>2</INF>,

[[Page 9269]]

PM<INF>10</INF> and lead, this review includes a modeling analysis. The 
State will not find the notice complete if the review reveals that the 
proposed use would result in a NAAQS violation or overconsumption of 
PSD increment, or be inconsistent with an attainment demonstration, 
maintenance plan, or any applicable requirement. The State will also 
find the notice incomplete if the source does not provide sufficient 
information to make this determination. These requirements address the 
concern identified in EPA's prior proposed rulemaking.
Public Availability of Information
    EPA proposed that Michigan ``must ensure access to information 
collected by sources as part of an environmental self-audit that 
demonstrated erroneous or willful generation or use of invalid 
credits.''
    In a December 12, 1997 letter to Russell J. Harding, Director of 
the Michigan Department of Environmental Quality, from Steven A. 
Herman, EPA stated that ``the changes to [the Michigan audit privilege 
and immunity law] * * * along with the Michigan Department of 
Environmental Quality's commitment in your July 1 letter on the use of 
confidentiality agreements and the interpretations by the Attorney 
General, address the U.S. Environmental Protection Agency's (EPA) 
concerns regarding the effect of [the audit law] on delegated, 
authorized and approved programs.'' Therefore, EPA believes that 
Michigan's self audit law no longer poses a barrier to access to 
information, collected during environmental audits, regarding 
generation or use of invalid credits.
Hazardous Air Pollutant Emissions
    EPA noted that trading of VOC and particulate matter can affect 
emissions of hazardous air pollutants (HAPs). Trading could result in 
increased overall emissions of HAPs, or creation of localized ``toxic 
hotspots.'' EPA proposed that prior to final approval, Michigan must 
require facilities to divulge the effect of emission trading on HAP 
emissions, and to examine the effects of the trading program on HAP 
emissions as part of the periodic program performance audit.
    Since publication of the September 18, 1997 proposal, EPA has 
developed additional guidance on treatment of HAP emissions in trading 
programs, related specifically to HAP emissions that are VOC. This 
guidance is in section 17.3 of the proposed revisions to EIP guidance 
(62 FR 50086). EPA is applying this supplemental guidance because of 
the significance of this issue and the lack of prior guidance. Under 
this guidance, VOC trading programs must contain the following: 
Consideration in program design of options for prevention and/or 
mitigation of unacceptable impacts from VOC trades; sufficient 
publicly-available information available to allow for meaningful public 
review and participation; public participation in program design, 
implementation and evaluation; and periodic program evaluations to 
evaluate the impact of VOC trades on the health and environment of 
local communities.
    The emissions trading program includes provisions that directly 
protect against significant localized increases in HAP emissions. Rule 
1204(3) states that emissions averaging or credit use is prohibited if 
it would cause an increase in the maximum hourly emission rate of any 
toxic air contaminant (TAC),\1\ unless it can be demonstrated that the 
increase will not ``cause or exacerbate'' an exceedance of a TAC 
screening level set under Michigan's air toxics rules. Air contaminant 
screening levels are ambient air pollution concentrations that are 
protective of public health. To determine whether a source has exceeded 
a screening level, the State performs a modeling analysis that 
predicts, using conservative assumptions, the maximum ambient air 
concentration that would result from a source's emissions of the toxic 
air contaminant.
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    \1\ TACs, under Michigan's air toxics rules, are defined as any 
air contaminant for which there is no national ambient air quality 
standard and which is or may become harmful to public health or the 
environment when present in the outdoor atmosphere in sufficient 
quantities and duration. Forty substances are specifically exempt 
from the definition of toxic air contaminant, including such things 
as inert gases, nuisance particulates, and substances that have 
relatively low toxicity. HAPs are included.
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    Rule 1204(3) applies to increases in TACs that result from use of 
credits, but not to foregone decreases. However, VOC RACT has already 
been implemented statewide in Michigan, so there is negligible 
potential for existing sources to use credits to forego reductions in 
VOCs that would otherwise be required.
    Rule 1204(3) could create incentives for some sources to reduce 
emissions of toxic pollutants, to become eligible to use ERCs for 
compliance with VOC emission limits. In the absence of the emissions 
trading program, Michigan's air toxics rules are invoked only when 
sources apply for a permit to install. Thus, existing sources 
constructed prior to the toxics rules becoming effective (in 1992) may 
emit toxic air contaminants in amounts that exceed a screening level. 
As a result of this provision of Michigan's trading program, such 
sources would be unable to use ERCs that would result in any increase 
in maximum hourly emissions of that TAC (since such an increase would 
``exacerbate'' an exceedance).
    Moreover, Rule 1204(4) allows Michigan to prohibit emission 
averaging or ERC uses that would result in increased emissions of a 
list of pollutants that are of particular concern in Michigan and in 
the Great Lakes region generally. Michigan can prohibit such uses if it 
determines that they would be inconsistent with the Clean Air Act or 
``the protection of public health, safety, or welfare.'' These 
pollutants are: Mercury; alkylated lead compounds; cadmium; arsenic; 
chromium; polychlorinated biphenyls; chlordane; octachlorostyrene; 
toxaphene; hexachlorobenzene; benzo(A)pyrene; DDT and its metabolites; 
2,3,7,8-tetrachlorodibenzo-p-dioxin; 2,3,7,8-tetrachlorodibenzofuran.
    The structure of Michigan's program makes it likely that emissions 
trading will lead to decreases in HAP emissions, including in 
overburdened communities. In addition to the direct protections against 
HAP increases in the trading program, the program creates incentives 
for overall reductions in HAP emissions by encouraging reductions of 
VOC. Besides the ten percent reduction in all ERCs registered, VOC (and 
NO<INF>X</INF>) ERCs used to comply with an ozone season limitation are 
reduced a further ten percent each year until expiration. Expiration of 
ERCs after five years also makes it likely that reductions will be 
generated without being used. Moreover, the availability of ERCs as a 
cost-effective means of compliance will allow the State to refuse to 
grant exemptions from regulatory requirements based on economic or 
technical infeasibility. Thus, sources that would not be required to 
make any VOC reductions in the absence of the program can be required 
to purchase reductions from other sources. In addition, it should be 
noted that Rule 1204(2)(a) prohibits use of credits to comply with 
federal or State limits on emissions of toxic pollutants, including 
federal new source performance standards, national emission standards 
for hazardous air pollutants, or ``a maximum achievable control 
technology requirement established for a hazardous air pollutant under 
section 112 of the federal clean air act.'' This provision prevents use 
of credits for compliance with any MACT standard, whether established 
through a national standard or on a case-by-case basis.

[[Page 9270]]

    The public will have access to substantial information about the 
effects of emissions trading on HAPs. Information about trading 
activity, including quantity of credits generated, traded and used by 
any source, is posted electronically on Michigan's web site. This 
information allows tracking of VOC trades and use not only at the 
aggregate level, but at individual companies or sources. Any member of 
the public that wishes to find out about the effects of a particular 
trade or group of trades on HAPs can request additional data from the 
Michigan Department of Environmental Quality. Michigan has committed in 
the SIP to ``make the data, calculations, and results of any cumulative 
or individual (e.g., even individual screening level checks * * *) air 
toxics analysis available to the general public upon request.'' Such 
information will include speciation of TACs that are increased as a 
result of credit use.
    Sources will be required to submit sufficient information for air 
toxics analyses to be performed. No source can use credits without 
submitting a notice of use to the State and the State declaring the 
notice to be ``complete.'' The State's notice of use review procedures 
require that for credit uses that would result in an increase in 
emissions of a TAC, ``the notice submittal must, at a minimum, include 
sufficient information * * * to make the evaluation,'' including period 
of use, the pollutants in question, the current and proposed emission 
rates of the relevant pollutants, as well as facility information 
needed for modeling.
    With regards to public participation, Michigan has satisfied the 
notice and comment requirements for SIP revisions, and has gone beyond 
them by soliciting comments on multiple drafts of the trading program 
design, and by holding numerous meetings with a public stakeholder 
group, consisting of both industry and environmental groups.
    The public can participate in the implementation of Michigan's 
program by reviewing State evaluations of toxics increases, performing 
their own analyses, and providing these to the state. In cases where a 
citizen's analysis reveals that the use of credits is violating 
Michigan's toxics rules, the Department could prohibit the use of the 
credits. If a citizen's analysis revealed use of invalid credits, the 
State would require replacement of invalid credits with three times the 
number of required credits.
    The program requires periodic (every three years) program 
evaluations that assess ``whether the program has caused any localized 
adverse effects to the public health, safety, or welfare or to the 
environment.'' Michigan has revised its rules to state that this 
evaluation shall include ``an analysis of the effects of emission 
trading on air toxic emissions.'' EPA expects that this analysis will 
include an assessment of whether use of ERCs is preventing HAP 
reductions that would otherwise have occurred in communities already 
overburdened with HAP emissions.
    Rule 1217(2) requires MDEQ to prepare a report based on its 
evaluation, to seek public input on the findings of the report, to 
provide public notice and comment, and a public hearing. Moreover, the 
procedures for general program evaluation, included in the SIP, promote 
input from communities that are potentially most affected by HAP 
emissions. The general program evaluation procedures state that public 
hearing on Michigan's Program Evaluation Report ``shall be held in the 
geographic area which has had the greatest volume of ERCs used in the 
state during the period covered by the evaluation. Similar education 
and outreach activities shall also focus on these areas, and the input 
of Environmental Justice (EJ) organizations shall be sought.'' If the 
Program Evaluation Report identifies a need for program revisions, then 
the program will be revised within six months.
Interstate Trading
    EPA noted that interstate exchange of credits raises issues that 
must be addressed, including potential for multiple uses of the same 
ERC, enforceability of credits generated out of state, and proper 
accounting of emission shifts in emissions budgets. EPA proposed that 
Michigan must not allow interstate emissions trading without a 
Memorandum of Understanding (MOU) with the other relevant state that 
``addresses the consistency between key trading rule elements in each 
State, including: 1. The ERC identification system; 2. Sharing of 
required Notices and a compatible credit tracking system; 3. Geographic 
limitations * * * 4. Credit lifetimes and expiration dates; 5. Record 
retention requirements; 6. The list of acceptable credit generation and 
use activities; 7. Consistent treatment of credit generation and use 
protocols; 8. Credit generation base case definitions; and ozone season 
definition and any other temporal requirements.''
    The July 21, 1999 SIP revision makes these changes. The revised 
rules, however, state that trading of ERCs ``under an emission cap or 
budget established for a region or as part of a national air pollution 
control strategy'' will not require an MOU. Thus, an interstate MOU 
will be required except under a federally-approved program that creates 
an exemption from the MOU requirement.
Protection of Class I Areas
    EPA proposed that to protect Class I areas (pristine environments 
such as international parks, large national parks, and wilderness 
areas), provision must be made in Michigan's program to inform Federal 
Land Managers (FLMs) of credit uses that could affect air quality in 
Class I areas. EPA proposed that this notification should take place 30 
days prior to ERC use activity in, or within 100 km of, a Class I area.
    The July 21, 1999 SIP revision includes procedures for reviewing 
notices of ERC use and notices of emission averaging. These procedures 
require Michigan staff to determine whether the use or averaging would 
take place within 100 km of a Class I area, and if so to ``provide 
immediate notification of the proposed ERC use or emission averaging 
increases to the FLM,'' and to state ``that any input the FLM would 
like to provide regarding the proposal will be considered during the 
review process, where such input is provided within 15 days of 
notification.'' In most cases, immediate notification would lead to 
nearly, but not quite, 30 days notice prior to use of credits, since 
the rules give Michigan 30 days to determine the completeness of 
notices.
    While this response does not meet the 30-day notification 
requirement proposed by EPA, EPA believes that it provides equivalent 
opportunity for FLMs to have an impact on trading that may affect Class 
I areas. Rather than pro-forma notification within 30 days, with no 
provision for considering FLM comments, Michigan is providing a 15-day 
opportunity for FLMs to influence whether or not ERC use is allowed to 
proceed.
Operating Permits
    EPA proposed that Michigan must revise its federally required 
operating permit program to cite the trading rule in order to recognize 
ERC use as a compliance alternative for permitted sources that are 
covered by the emissions trading rule. EPA further proposed that before 
a source with a federally-required operating permit is allowed to use 
emission averaging or ERCs, its permit must reference the emission 
averaging and trading rules and contain language allowing averaging or 
ERCs to be used to demonstrate compliance.

[[Page 9271]]

    MDEQ responded to these issues by including the following statement 
in its implementing procedures for ERC use and for emission averaging: 
``where ERCs [or emission averaging] are to be used under a Renewable 
Operating Permit (ROP or title V permit), the reviewer shall coordinate 
with the permit engineer to ensure that the ROP contains enabling 
language which provides for ERC use [or emission averaging] as a 
compliance option under the ROP. * * * Note that the use of ERCs [or 
emission averaging] under a ROP is only allowed where the ROP rules 
reference the emission trading program rules, and where the ROP 
specifically provides for such use.''
    With respect to the title V program authority issues, Michigan's 
rule 213(2) requires that operating permits include limits and 
standards that ensure compliance with all applicable requirements. 
Further, Michigan's rule 101(o)(i) defines applicable requirements to 
include requirements in the Michigan SIP. These provisions allow ROPs 
to include trading rule requirements for title V sources that choose to 
participate in Michigan's trading program. However, although MDEQ's 
title V regulations do generally allow for the incorporation of the 
trading program provisions into title V permits, MDEQ has committed to 
revise its operating permit program rules to clearly state that trading 
program provisions, including averaging and ERC use, can be used as 
compliance alternatives for SIP provisions to the extent provided by 
the SIP approved trading rule.
    With respect to the title V permit content issues, MDEQ provided 
only a general commitment to include trading program enabling language 
in title V permits, and did not address title V permit content 
requirements in any detail. Under the title V program, the State must 
ensure that operating permits contain all applicable requirements, 
including detailed compliance provisions necessary to assure compliance 
with each applicable requirement.
    It is also important to note that the title V program requirements 
are distinct from any trading rule provisions incorporated under the 
separate authority of the title I SIP. Thus, title V program 
requirements, such as permit modification requirements, must not be 
subsumed, overridden, or otherwise affected by requirements of a 
discretionary trading program approved into an implementation plan. The 
trading program provisions applicable to a source become part of the 
underlying applicable requirements of the source's title V operating 
permit. Thus, the permit becomes a valuable tool to ensure compliance 
with the requirements of the trading program. In this way, title V 
permits help ensure the trading program's integrity. Title V permits 
provide a mechanism to create detailed, practically enforceable, and 
often unique requirements and procedures that are critical to 
implementing the trading program for each subject source.
    Trading program provisions that are applicable to a source are 
included in sources' title V permits in much the same way as all other 
applicable requirements. If a source's title V operating permit 
limits--or does not address--participation in a trading program, the 
source must obtain a formal permit revision prior to participating. If 
the permit includes terms and conditions necessary to implement the 
trading program in its title V operating permit, the source may 
typically exercise these provisions without the need for future formal 
permit revisions. Relevant notices of use, transfer, and generation 
must be included in the permit file. However, neither EPA nor state 
permitting authorities have had extensive experience with trading 
programs and the incorporation of trading program provisions in title V 
permits, and few discretionary trading programs have been approved to 
date. As such, EPA cannot comprehensively address all potential permit 
revision or content issues that could arise during the implementation 
of trading program provisions. Therefore, EPA and MDEQ will need to 
work together to ensure that title V permits contain up-to-date, clear, 
practically enforceable terms that reflect the requirements of the 
trading program, while requiring permit revisions only when necessary. 
Generally, permit content will be largely dictated by the individual 
trading program provisions being implemented, and whether they address 
trading, use, generation, averaging, etc. For additional information on 
title V and trading program interface issues, including permit content, 
see EPA's draft EIP guidance, which is available electronically at 
http://www.epa.gov/ttn/oarpg.
    Michigan's operating permit rules do address the State's trading 
program in the operational flexibility provisions, which address what 
types of changes can be made without a permit revision. Specifically, 
rule 215(2)(b) provides that a person may make any changes allowed by 
an applicable emissions trading program approved into Michigan's SIP 
without a revision to the permit, provided (1) the person meets the 
notification requirements, (2) the changes are not a modification under 
title I of the Act, and (3) the actual emissions resulting from the 
changes to do not exceed the emissions allowed under the ROP. EPA notes 
that the Michigan rule provision combines the 40 CFR part 70 provisions 
of operational flexibility that address within source trades [40 CFR 
70.4(b)(12)] and general economic incentive trading programs that allow 
trading between sources [40 CFR 70.6(a)(8)].\2\ MDEQ has committed to 
revising its rules to distinguish between these different trading 
provisions, in accordance with the federal regulations.
---------------------------------------------------------------------------

    \2\ Note that the term ``emissions allowed under the renewable 
operating permit'' is defined in Michigan's rule consistent with the 
40 CFR 70.2 definition of ``emissions allowable under the permit''. 
However, this term as used in the federal regulations addresses 
operational flexibility within a single source [40 CFR 70.4(b) 
(12)], whereas the Michigan rule broadly applies the concept to 
interstate or regional trading programs. Although the term as used 
in part 70 specifically prohibits the use of operational flexibility 
provisions for within-source trading where the emissions exceed the 
emissions allowable under the permit, the State rule's broader use 
of the term can allow for changes provided that the changes meet the 
requirements of the SIP approved trading program, and the applicable 
trading program provisions are included in (and therefore allowed 
by) the operating permit. Also note that the federal economic 
incentives trading provision [40 CFR 70.6(a)(8)] also requires that 
any such changes be specifically provided for in the permit.
---------------------------------------------------------------------------

Early NO<INF>X</INF> Reductions
    EPA expressed concern about NO<INF>X</INF> ERCs generated under 
Michigan's trading program through early compliance with the 
NO<INF>X</INF> reduction requirements of the Acid Rain provisions of 
the Clean Air Act. Under Michigan's program, such credits expire five 
calendar years ``after the first year of generation, or one calendar 
year after the effective date of final compliance, whichever occurs 
first.'' Thus, NO<INF>X</INF> ERCs generated through early compliance 
will expire by January 1, 2002, since affected sources must be in 
compliance with the requirements for Phase II NO<INF>X</INF> reductions 
under the Acid Rain program by 2000. Given that these ERCs will expire 
prior to imposition of NO<INF>X</INF> reduction requirements in 
Michigan, EPA stated that its only remaining concern was to assure that 
other states would be able to determine that these credits had expired, 
so that sources outside of Michigan could not use these ERCs after 
January 1, 2002.
    Michigan has demonstrated that its electronic registry makes clear 
when ERCs expire, assuring that other states will be able to determine 
that these

[[Page 9272]]

early NO<INF>X</INF> reductions cannot be used after January 1, 2002.
Property Rights
    EPA proposed that prior to approval, Michigan must establish that 
ERCs do not constitute a property right. This protection is necessary 
to ensure that ERC holders, and courts, understand that ERCs are 
limited authorizations to emit pollutants that under some circumstances 
could be revoked.
    The July 21, 1999 SIP submission makes this change, by providing a 
certification by the Attorney General of the State of Michigan, dated 
June 29, 1999, that ERCs do not constitute a property right.
Transportation Conformity
    This issue was not raised in the September 18, 1997 proposal, but 
is dealt with here because the July 21, 1999 SIP revision makes 
possible the use of ERCs for conformity purposes. Previously, 
Michigan's rules stated that ERCs ``shall not be used to comply with 
federally mandated mobile source requirements.'' The July 21, 1999 SIP 
revision adds the clause ``except conformity where the emission 
reduction credits were generated in the conformity area'' (Rule 
1204(10).
    Michigan's procedures for reviewing notices of ERC generation 
include provisions to protect against ``double counting'' of mobile 
source emission reductions in the trading program and in conformity 
demonstrations. The procedures include checking existing transportation 
conformity projects to ensure that the emission reductions have not 
already been used for transportation conformity. In addition, under 
these procedures the Michigan Department of Environmental Quality will 
notify the Michigan Department of Transportation that ``the mobile 
source sector ERC generation proposal may go forward under the emission 
trading program, and that these emission reductions should not be used 
for emission reduction credit in any future transportation conformity 
project.''
    Transportation conformity is an appropriate use of ERCs. Michigan's 
procedures for reviewing notices of generation contain appropriate 
protections against double counting emission reductions in the trading 
and conformity programs.
Issues To Be Addressed Before Final Approval
    As noted above, EPA will not publish a final approval of Michigan's 
trading program until Michigan submits several changes or 
clarifications. Required changes mentioned above are:
    <bullet> Revised procedures for staff review of notices of 
generation, incorporating a procedure that for Title V sources staff 
would find ``incomplete'' any notice of credit generation based on 
reductions quantified using a technique not specified in the source's 
Title V permit, as well as any other procedures for review of notices 
required under the program.
    <bullet> A confirmation from Michigan that emission reduction 
credits cannot be generated by reductions that are relied upon by an 
attainment demonstration, reasonable further progress plan, or 
maintenance plan.
    In addition, Michigan must submit changes to the SIP submittal 
regarding the use of credits related to best available control 
technology (BACT) or lowest achievable emission rate (LAER) 
requirements for new sources, and to clarify the limits to the 
enforcement relief created by self-reporting provisions. Rule 
1204(2)(b) prohibits the use of credits for compliance with BACT or 
LAER requirements for new sources. However, this provision provides an 
exception for instances in which the required control technology has 
been properly installed and is being properly operated and maintained, 
but the source nonetheless cannot meet the permit limit. The purpose of 
this provision is to allow sources that have an incorrectly-set BACT or 
LAER permit limit to remain in compliance with the permit limit until 
the permit is revised. The September 18, 1997 proposed approval 
proposed to allow this provision. However, upon further consideration, 
EPA has determined that there is a possibility that this provision 
might be used for compliance with BACT or LAER in circumstances other 
than an incorrectly-set permit limit, and that a preferable way to 
accommodate sources with incorrectly-set permits is through enforcement 
discretion. Michigan has agreed to re-submit the SIP, removing from 
EPA's consideration the sentence in Rule 1204(2)(b) that creates an 
exception to prohibition on use of credits for BACT or LAER compliance. 
EPA will not provide final approval until receipt of this change.
    Rule 1216(2) allows a source that has generated or used credits 
that are not ``real, surplus, enforceable, permanent and quantifiable'' 
to withdraw the credits or, if the credits have been used or traded, to 
replace the bad credits with good credits. To make use of this 
reconciliation provision, a source must notify the department within 30 
days of discovering that the credits were bad, and must provide the 
reconciliation and replace the bad credits, if necessary, within 30 
days from the date of notice. According to Rule 1216(4), use of this 
provision can bring a source into compliance with rule 1208(1)(c), 
which requires that reductions that generate credits must be ``real, 
surplus, enforceable, permanent and quantifiable.'' The rules do not 
say, however, that a source that used bad credits for compliance with 
an emissions limit would be in compliance with that emissions limit as 
the result of reconciliation. Therefore, EPA's understanding is that 
this provision does not shield sources that have used bad credits from 
enforcement for violation of the underlying requirement. Michigan staff 
have confirmed this interpretation, and have indicated that Michigan 
will assert this interpretation in a letter to EPA. EPA will not 
finalize approval until it receives this letter.

How Does EPA Respond to Public Comments on the September 18, 1997 
Proposed Approval?

    EPA received numerous comments from the public on the September 18, 
1997 proposed approval, which we considered in the development of this 
action. The public comments opposing the proposed action, or raising 
substantial questions about it, are summarized here, along with EPA's 
responses.
    Comment: The Michigan Department of Environmental Quality commented 
with ``commitments to complete rule changes and procedural changes to 
address the approvability issues.''
    Response: These changes have been made, and EPA now proposes to 
approve the program.
    Comment: The Coalition to Advance Emission Trading (Coalition) and 
Michigan requested that EPA propose a direct final action to approve 
Michigan's SIP revision, as soon as the deficiencies identified in the 
September 18, 1997 proposed action were corrected. The Coalition would 
like to expedite approval of Michigan's SIP to provide for the 
possibility of trading to meet SIP requirements as soon as possible.
    Response: While EPA understands the desire to implement emission 
trading quickly, it believes that, given the complexity of the 
emissions trading program and of the program revisions made in response 
to the September 18, 1997 proposed action, the public should have an 
additional opportunity to comment on EPA's proposed approval of the SIP 
revision prior to final approval being granted.
    Comment: The Coalition argued that EPA should not require Michigan 
to impose geographic restrictions on trading as a condition of 
approval, since ``in Michigan, the area most likely to be

[[Page 9273]]

the State's most significant non-attainment areas--Detroit--lies 
downwind of the most likely sources of attainment ERCs--cities like 
Flint, Lansing, Saginaw and Grand Rapids.'' Thus, the Coalition and 
Michigan urged EPA to accept ``at the very minimum'' extension of the 
100 km and 200 km trading boundaries for VOCs and NO<INF>X</INF> to 
include the boundary of any affected county and to allow contiguous 
nonattainment or maintenance areas to be combined for trading purposes 
into a single area. Preferably, trading should be allowed across 
attainment/maintenance area boundaries state-wide. Moreover, the 
Coalition ``believes that there is no reason to prohibit trades of non-
ozone precursors from attainment to non-attainment areas as well.''
    Response: EPA proposes to approve the State's extension of the 100 
km and 200 km trading boundaries for VOCs and NO<INF>X</INF> to include 
the boundary of any affected county and to allow combining contiguous 
nonattainment or maintenance areas for trading purposes into a single 
area. Under this SIP, VOC trading will be allowed between Detroit and 
Flint, Lansing or Saginaw (though not Grand Rapids). While emissions of 
VOC may have some impact on ozone more than 100 km downwind, EPA 
believes that it is wise to maintain the 100 km boundary, since 
increasing emissions in the Detroit maintenance area in exchange for 
emission decreases more than 100 km upwind of Detroit could diminish 
air quality in the Detroit maintenance area. Similarly, the local 
impact of emissions of criteria air pollutants makes it unwise to allow 
long-distance trades of these pollutants that could harm air quality in 
a nonattainment or maintenance area.
    Comment: The Coalition noted that the market has not been flooded 
with credits created prior to enactment of the trading program.
    Response: EPA agrees, and accepts the State's analysis that use of 
pre-enactment credits does not threaten air quality or the integrity of 
the program.
    Comment: The Coalition commented that credits based on production 
shutdowns and curtailments are the most permanent and quantifiable of 
all credits. Michigan's program protects against the load-shifting at 
commonly-owned sources, and through the requirement that credits must 
be ``surplus,'' and not relied upon in an attainment demonstration, RFP 
plan or maintenance plan. Furthermore, the Coalition and Michigan noted 
that Michigan's attainment plans and maintenance plans do not rely on 
emissions reductions from activity level reductions, since these plans 
do not include ``emission reductions resulting from economic 
downturn.'' The Coalition also objected to the statement in the 
September 8, 1997 proposed approval that Michigan should seek 
additional public comment on the use of activity level reductions to 
generate credit. This has been done; doing so again would serve no 
purpose.
    Response: EPA agrees that credits based on production shutdowns and 
curtailments are permanent and quantifiable. However, they may not be 
surplus; despite the requirements in Michigan's rules, the version of 
the program reviewed in the September 18, 1997 SIP revision contained 
no means to ensure that such reductions are not relied upon in 
attainment or maintenance plans, except for the protection against load 
shifting among sources under common ownership. The fact that Michigan's 
attainment demonstrations and maintenance plans do not rely on 
emissions reductions resulting from general economic downturn does not 
mean that these plans do not rely on production decreases at some 
sources. Even within a growing economy, some sources cease or reduce 
production, while other sources start up or increase production. 
Allowing sources that decrease production to generate credit within an 
open market program (with no emissions cap) could cause emissions to 
increase above what they otherwise would be and to compromise 
attainment or maintenance plans. EPA requested that Michigan obtain 
additional public comment because of the complexity of this issue, and 
the potential interest of the public.
    Comment: General Motors commented that sources ought to be able to 
generate emission reduction credits through activity level reductions, 
to increase industry's ability to respond quickly to market 
fluctuations, and that Michigan's rules had sufficient protections 
against load shifting among sources under common ownership or control. 
For sources not under common ownership or control, General Motors 
argues that it is impossible to protect against load shifting.
    Response: Since it is very difficult to protect against load 
shifting among sources not under common ownership or control, EPA 
believes that it was appropriate for Michigan to change its rules to 
prevent sources in areas that have or need an attainment or maintenance 
demonstration from using credits generated through activity level 
reductions. This is the best way to protect the integrity of Michigan's 
attainment and maintenance plans.
    Comment: The Coalition, Michigan and General Motors commented that 
they are concerned about the requirement that sources must use EPA-
approved emissions quantification protocols, where available, or a 
method that follows EPA protocol development criteria. If such a 
protocol is inconsistent with current compliance demonstration methods, 
confusion will result.
    Response: EPA believes that most protocols for quantifying ERCs 
will use the same emission measurement methods as used for other 
applicable requirements. In those cases where ERC quantification 
requires different measurement methods, EPA believes that confusion 
will be manageable.
    Comment: The Coalition argues that EPA's draft protocol development 
criteria are unreasonably long, especially for use by small sources. 
Moreover, delays in finalizing the protocol guidance documents could 
delay implementation, and testing procedures to verify some of the 
emission quantification protocols for mobile sources have not been 
developed. The Coalition and Michigan commented that Michigan's program 
had adequate provisions for requiring adequate protocols.
    Response: EPA believes that changes Michigan has made to its 
trading rule provisions dealing with emissions quantification protocol 
improve the program significantly, and were needed to establish clear 
standards for judging the validity of emission reductions. Open market 
trading is a relatively new concept; EPA has drafted, but not 
finalized, guidance for development of protocols to quantify emission 
reductions used to generate credit in open market trading programs. EPA 
believes that it is appropriate for Michigan to require quantification 
of ERCs using state and federal procedures that might be promulgated in 
the future. Such a requirement does not delay implementation, and EPA 
believes that small sources will still be able to generate credits.
    Comment: General Motors commented that synthetic minor sources that 
temporarily violate a synthetic minor permit condition should be 
allowed to avoid major source status temporarily through the use of 
emissions reduction credits. The emissions impact of allowing sources 
to utilize the program in this way is likely to be small. The Coalition 
and Michigan argue that the provisions of Michigan's program for 
synthetic minor sources are consistent with federal New Source Review 
regulations.

[[Page 9274]]

    Response: EPA encourages emissions trading that provides 
alternative means of compliance with existing regulatory requirements. 
However, EPA cannot accept programs that allow sources, even 
temporarily, to avoid regulatory requirements. To do so would allow 
trading programs to increase emissions above what they would be in the 
absence of trading. The earlier version of Michigan's program reviewed 
in the September 18, 1997 proposal would have allowed sources to use 
credits to violate conditions in synthetic minor permits designed to 
ensure that sources do not emit above major sources thresholds, thereby 
potentially avoiding requirements that otherwise would have applied. In 
response to EPA's concerns, Michigan removed this provision.
    Comment: GM commented that trading for non-ozone precursor 
emissions should be allowed between attainment and nonattainment areas, 
``approved on a case-by-case basis which demonstrates their benefit.''
    Response: EPA agrees, and proposes to accept the provisions of 
Michigan's program that allow use in a nonattainment area of criteria 
pollutant ERCs generated in ``an adjacent area that contributes to the 
relevant air quality problem in the proposed use areas.''
    Comment: The Air Bank commented that requiring the use of EPA 
protocol development criteria will impose excessive requirements on 
small sources. Instead, sources should use EPA-approved protocols where 
they exist, with Michigan having latitude to review and implement 
alternative protocols.
    Response: EPA believes that it is necessary to apply protocol 
development criteria to judge the adequacy of protocols that are 
developed as part of an open market trading system. Without such 
criteria, sources would have no basis for knowing whether emissions 
reductions would be considered valid, and it would be difficult to 
enforce against generators and users of bad credits. Alternative 
protocols can be implemented through SIP revisions.
    Comment: Michigan, the Air Bank and the Coalition commented that 
interstate trading should be allowed without a Memorandum of 
Understanding (MOU) between the affected states. MOUs are not required 
by federal law and do not enhance federal enforceability. States may be 
reluctant to develop MOUs, and they may be too narrowly written to 
foster development of a robust market.
    Response: MOUs are needed not to enhance federal enforceability, 
but to ensure state enforceability of interstate trades. MOUs are 
needed to ensure that states have adequate access to information, and 
to address consistency between key EIP elements in each of the states 
that are involved. While it may be time-consuming to negotiate an MOU 
with other states, states participating in the NO<INF>X</INF> cap and 
trade program will not need to develop MOUs for interstate trading. 
NO<INF>X</INF> is the pollutant most likely to be traded between 
states.
    Comment: The Coalition disagreed that it is necessary for Michigan 
to outline the procedures that will ensure that NO<INF>X</INF> ERCs 
generated though early compliance with title IV of the Clean Air Act 
will expire prior to January 1, 2002, and that they will not be 
utilized in other states. The Coalition points out that Michigan's 
rules already require such credits to expire, and that Michigan can do 
nothing beyond that to ensure that such credits are not used in other 
states.
    Response: EPA agrees that Michigan's rules will require 
NO<INF>X</INF> ERCs generated through early compliance with title IV to 
expire prior to January 1, 2002. Michigan's only responsibility to 
other states is to ensure that such credits are removed from the 
trading registry. EPA is now satisfied that Michigan's program 
accomplishes this removal.
    Comment: Michigan and the Coalition objected to the condition that 
Michigan must require sources that participate in trading ``to disclose 
all estimated or measured negative effects of trading on emissions of 
the hazardous air pollutants (HAPs) listed in section 112 of the Act.'' 
This condition would create requirements in trading programs beyond 
those in current command and control regulations, and are unnecessary 
because Michigan's program allows only de minimis increases in HAP 
emissions. Moreover, the disclosure requirement would create an 
impediment to emission trading by requiring firms to quantify every 
increase in HAP emissions (rather than simply verifying that such 
increases were below allowed levels).
    Response: As the Coalition points out, Michigan's program already 
requires verification that toxic emissions thresholds are not being 
exceeded. What EPA requires is that the information generated through 
such verification be made available to the public. Michigan has agreed 
to make this information available to any citizen who requests it, and 
to evaluate the overall impact of the trading program on HAP emissions 
in its publicly available tri-annual review of the program. EPA 
believes that these extra protections are not onerous, and are needed 
so that the public can be aware of the impact on localized HAP 
emissions of the use of ERCs, particularly for compliance with VOC 
RACT.
    Comment: Michigan objected to the proposed requirement that the SIP 
include a statement that ERCs do not constitute a property right. 
Unlike trading programs in which credits are government-certified, 
there is no implication in the Michigan program that credits might 
constitute a property right, and no ability of sources to demand 
restitution from the State if credits are canceled. However, Michigan 
will provide an Attorney General statement to the effect that ERCs do 
not constitute a property right.
    Response: EPA agrees with Michigan's interpretation of this issue, 
and believes that the Attorney General's statement helps clarify the 
legal status of ERCs.
    Comment: Citizen's Commission for Clean Air in the Lake Michigan 
Basin (CCCA-LMB) commented that until the rule receives full approval, 
sources using ERCs for SIP compliance are potentially subject to 
citizen suits for non-compliance with SIP requirements, and the State 
of Michigan is potentially subject to citizen suit for non-
implementation of the SIP. Moreover, the program raises the possibility 
of complaints and suits under Title VI of the Civil Rights Act. EPA 
should communicate that trades under Michigan's trading program are 
unacceptable and illegal.
    Response: EPA believes that Michigan's program will achieve 
environmental benefits through the retirement of ten percent of all 
ERCs and by allowing Michigan to require RACT at sources that could not 
comply with RACT except by using ERCs. While it is true that sources 
that use Michigan's emissions trading rules for compliance with SIP 
requirements could be subject to enforcement action, EPA does not wish 
to discourage environmentally beneficial trades under the program.
    Comment: CCCA-LMB comments that proposed approval of Michigan's 
trading program was inappropriate, given the deficiencies that were 
identified with the program. Upon correction of the deficiencies, EPA 
should re-propose its rulemaking action, ``to allow the public a chance 
to review and comment on the program in appropriate context.''
    Response: EPA agrees that the public should have an additional 
opportunity to comment, given the significance of the changes to 
Michigan's trading program since publication of the September 18, 1997 
proposal. EPA is providing such an opportunity with this action.

[[Page 9275]]

    Comment: CCCA-LMB commented that the basis for EPA's rulemaking is 
unclear, and that EPA has declined to review the program against 
previous guidance.
    Response: EPA has used both the 1994 EIP guidance and the 1995 
proposed Open Market trading guidance in its evaluation of Michigan's 
program.
    Comment: CCCA-LMB commented that Michigan's program defines 
``surplus'' inadequately, and fails to require that ERCs be based on 
emissions reductions beyond those required in the SIP or presumed in 
the applicable attainment, progress, or maintenance plans. The 
regulations fail to ``require either the source or the State to 
determine if the reductions have been otherwise presumed in the 
applicable plans.'' Moreover, inadequacies in parts of Michigan's SIP 
other than the trading program undermine the validity of the open 
market trading program, since attainment demonstrations predict 
continued ozone NAAQS violations and rely on overly optimistic emission 
budget projections. Moreover, several areas in Michigan are in 
violation of the one and eight hour ozone NAAQS.
    Response: Michigan's rules define surplus as emissions reductions 
made below an established baseline and not required by the SIP, federal 
implementation plan, attainment demonstration, reasonable further 
progress plan, or maintenance plan. EPA is requiring a statement from 
Michigan that the surplus concept applies to all reductions relied upon 
in applicable plans. Program rules require sources that register ERCs 
to certify that reductions are surplus. This rulemaking addresses the 
adequacy of Michigan emissions trading program, and not the other 
elements of Michigan's SIP. The trading program has environmental 
benefits and satisfies applicable requirements irrespective of any 
alleged deficiencies in Michigan's attainment demonstrations.
    Comment: CCCA-LMB commented that EPA's proposed action does not 
ensure compliance with executive orders on environmental justice, and 
that CCCA-LMB is concerned that the program will lead to increases or 
foregone reductions in emissions of toxics in industrial minority and 
low income communities. The State's rulemaking has not provided 
adequate opportunities for CCCA-LMB and its partners to comment on its 
concerns regarding environmental justice and the impact of trading on 
HAP emissions. The East Michigan Environmental Action Council expressed 
concern that the program could result in the creation of toxic hot 
spots.
    Response: Michigan's program protects against credit uses that 
would cause significant localized increases in HAP emissions, large 
enough to cause or exacerbate a violation of a toxic air contaminant 
health based screening level. Moreover, the program creates incentives 
for overall reductions in VOCs, reducing the probability of a localized 
increase in HAPs. These are the program's first line of defense against 
creating unacceptable concentrations of HAPs, including in minority and 
low income communities. The program has added a second line of defense: 
triennial program review to determine the impact of the program on air 
toxics emissions. EPA expects that the State will take action if this 
review reveals the program has contributed to the creation of toxic hot 
spots, or that it has prevented the elimination of a toxic hot spot. 
The State has satisfied the requirements to provide opportunity for the 
public to express concerns about the program.
    Comment: CCCA-LMB commented that some provisions of Michigan's 
program lack needed public comment and review. Provisions identified as 
needing public comment and review include the development of a 
triennial report evaluating the effectiveness of the program and the 
``decision making on adequacy of ERC generation and usage.''
    Response: Rule 1217(2) states that Michigan ``shall seek public 
input on the findings contained in the evaluation report and shall 
provide for the public notice of the findings, a public comment period 
on the findings, and an opportunity for a public hearing on the 
findings contained in the report.'' EPA believes that Michigan's 
program provides adequate opportunity for public review of the 
triennial evaluation report. EPA does not believe that public comment 
and review on the adequacy of each generation or use of ERCs is 
necessary; in fact, requiring such comment and review would seriously 
hamper the operation of the program.
    Comment: CCCA-LMB commented that EPA should require Michigan to 
submit detailed audit and reconciliation procedures, rather than the 
general provisions that require assessment of whether the program is 
consistent with attainment and maintenance of the NAAQS. For instance, 
the program's impact on the temporal and spatial assumptions in 
attainment, progress, and maintenance plans should be evaluated, as 
stated in the proposed guidance on Open Market Trading Programs.
    Response: EPA believes that the general provisions on evaluating 
the program's consistency with attainment, progress, and maintenance 
plans, as well as provisions requiring assessing compliance, impact on 
public health and the environment, achievement of reductions across a 
spectrum of sources, and the sufficiency of source audits, are 
adequate. EPA believes that to accomplish such an evaluation, Michigan 
would need to assess the program's impact on the temporal and spatial 
assumptions in attainment, progress, and maintenance plans. Michigan 
should refer to all relevant EPA guidance when developing its program 
audit report.
    Comment: CCCA-LMB commented that inter-sector trading in Michigan's 
program ``lacks even cursory consideration of appropriate baselines, 
allocation, enforcement, etc.''
    Response: EPA believes that these provisions in Michigan's program 
are adequate.
    Comment: CCCA-LMB requested that EPA disapprove Michigan's program, 
and that EPA ``issue guidance for review and comment clarifying the 
appropriate use of such programs before reconsideration of this rule.''
    Response: EPA is developing revised guidance on emissions trading 
programs, but is still obligated under the Clean Air Act to review SIP 
revisions submitted by the State in a timely manner. EPA believes that 
Michigan's program is approvable under applicable existing guidance.
    Comment: The East Michigan Environmental Action Council (EMEAC) 
commented that it is troubling that emissions trading treats the right 
to pollute as a commodity ``which can be monetized and traded.''
    Response: Emission trading does not create a right to pollute. 
Instead the program modifies an existing set of restrictions on 
allowable emission rates to authorize alternative restrictions that EPA 
views as collectively more stringent.
    Comment: EMEAC objected to the fact that the program will allow 
older facilities to buy credits in lieu of reducing emissions. EMEAC 
commented that the program should be restructured to encourage emission 
reductions from older industrial facilities in urban areas, rather than 
creation of credits in ``greenfield'' areas which could be ``sold to 
innercity industries to delay pollution prevention measures 
indefinitely.''
    Response: While Michigan's program will allow some older facilities 
in urban areas to use emission reduction credits in lieu of reducing 
emissions, EPA believes that on balance the program creates incentives 
for emissions reduction in urban areas. New facilities

[[Page 9276]]

in ``greenfields'' generally have to be controlled with best available 
control technology or meet the lowest achievable emission rate. 
Therefore, such facilities are unlikely to have surplus emissions to 
reduce. Thus, EPA expects that most credit generation will be in urban 
areas and other areas with older facilities.
    Comment: EMEAC commented that a five-year lifetime for VOC credits 
``is unacceptable and undercuts the goal of environmental protection.'' 
A lifetime of two ozone seasons is more appropriate.
    Response: EPA considers a five-year lifetime for VOC credits to be 
acceptable. The proposed guidance on open market trading would allow an 
indefinite credit lifetime. Michigan's program discounts older credits 
by requiring VOC (and NO<INF>X</INF>) ERCs used for ozone season 
compliance to be discounted 10 percent annually until retirement.
    Comment: EMEAC commented that the Michigan program lacks ``flow 
control'' provisions that would prevent credits from being consumed 
faster than they are created. Absent such provisions, emission spikes 
could occur, creating an exceedance of the NAAQS.
    Response: EPA believes that in a program of this nature, available 
ERCs are likely to represent a small percentage of the total inventory, 
reducing the possibility of spiking. Moreover, credit discounts and 
notice review procedures reduce the probability of emissions spiking. 
Nonetheless, EPA recognizes that the open market trading creates a 
potential for emissions spiking. Thus, Michigan is expected to perform 
an analysis of whether spiking has occurred under the triennial program 
evaluation provisions requiring assessment of whether the program is 
consistent with maintenance of the NAAQS.
    Comment: EMEAC noted that VOCs differ in their toxicity and 
reactivity (ozone-forming potential). Yet, Michigan's program would 
allow trading of VOCs with no consideration of their differing 
reactivities and inadequate consideration of their differing 
toxicities.
    Response: EPA believes that it is unlikely that VOC trading will 
have a tendency to increase emissions of highly reactive VOCs; 
safeguarding against this unlikely possibility would place a 
significant burden on a trading program. EPA believes that Michigan's 
program adequately protects against increases in emissions of toxic air 
contaminants in amounts that could be damaging to the public health.
    Comment: EMEAC commented that it might be preferable for Michigan 
to adopt a ``mandatory'' program with an emissions cap that would 
assure continued attainment with the NAAQS. Such a program might fit 
better with interstate trading efforts.
    Response: EPA would welcome submission of a cap-and-trade program 
as part of Michigan's SIP. Moreover, EPA encourages Michigan to 
participate in the regional NO<INF>X</INF> cap-and-trade system. 
Nevertheless, EPA believes that voluntary programs can be 
environmentally beneficial.
    Comment: EMEAC commented that ``credits should not be used by any 
facility currently in violation of any rule or permit requirement.''
    Response: There is no law, policy or guidance prohibiting emission 
trading at sources that are in violation of a rule or permit 
requirement. In fact, requiring sources to purchase ERCs in settlement 
of enforcement action can be an effective way to discourage violations 
and to stimulate the market for emission reductions. Michigan's trading 
program appropriately prohibits generation of credits through 
reductions made to correct violations.
    Comment: The Environmental Defense Fund (EDF) commented that cap 
and trade programs are superior to open market trading programs, such 
as Michigan's, and that EPA should not approve ``substandard'' programs 
that do not guarantee environmental performance as successfully as 
well-designed cap and trade programs. Cap and trade programs set an 
overall emissions cap consistent with achievement of air quality 
objectives, and allow emissions trading under that cap.
    Response: EPA agrees that cap and trade programs can be effective 
means of gaining emissions reductions, while providing flexibility to 
sources. However, EPA disagrees that open market trading programs are 
necessarily ``substandard,'' and believes that with inclusion of 
appropriate protections, they can provide flexibility for sources and 
maintain or even improve environmental performance.
    Comment: EDF commented that EPA should not allow Michigan's program 
to apply to criteria pollutants other than ozone.
    Response: EPA was concerned that trading of criteria pollutants 
other than ozone under Michigan's program could create attainment or 
maintenance problems, given the potential for localized ``hot spots'' 
of these pollutants. Therefore, in the September 18, 1997 proposed 
action, EPA identified a need for procedures in the SIP that would 
require modeling analysis to ensure identification of credit uses that 
might lead to such problems. Michigan has included such procedures in 
its SIP, and will disallow credit uses when modeling reveals potential 
problems. Therefore, EPA is satisfied that trading in Michigan for 
criteria pollutants other than ozone is acceptable and will be 
environmentally beneficial.
    Comment: EDF commented that open market trading programs such as 
Michigan's fail to create adequate incentives for continual, sustained, 
credit generation to balance use of previously-generated credits, since 
they lack emissions caps to drive demand for credits.
    Response: The demand for credit generation under open market 
trading is driven not by emissions caps but by an anticipated market 
for credits that can be used to comply with existing and future 
regulations. Thus, if sources use ERCs, it will imply a future market 
for additional ERCs, creating an incentive for additional credit 
generation.
    Comment: EDF commented that Michigan's trading program would fail 
to achieve and maintain the NAAQS, and fail to ensure that emissions 
reductions are surplus. The program's lack of an emissions cap would 
mean that emissions might exceed those anticipated in an area's 
emissions budget. Thus, trading would not ensure compliance with the 
NAAQS. If emissions credits are used in a circumstance in which an 
emissions budget has been exceeded, the credits are no longer surplus.
    Response: Unlike cap and trade programs, open market trading 
programs are not designed to achieve overall programmatic reductions. 
Instead, they allow flexibility in complying with existing regulations. 
While an open market emissions trading program must not interfere with 
attainment of the NAAQS, the primary responsibility for limiting 
emissions to ensure that NAAQS and other Clean Air Act requirements are 
met belongs to the other elements of the SIP, and the State's 
attainment, progress and maintenance plans. In an open market program, 
emissions reductions cannot generate credit unless they are surplus to 
the SIP and attainment, progress, and maintenance plans. If these plans 
are inadequate, then they, not the trading program, must be corrected. 
However, Michigan's program does provide additional protections against 
NAAQS violations and uses of credits that would exceed an attainment or 
maintenance plan emissions budget; the rules state that credit use may 
not result in a violation of the NAAQS, PSD increments, maintenance 
plan, RFP, or

[[Page 9277]]

attainment. This provision is backed by procedures (which have been 
submitted for inclusion in the SIP) that require, for credit uses above 
de minimis levels, evaluation of whether the proposed use would result 
in a violation of the NAAQS, attainment progress, or maintenance plans.
    Comment: EDF and EMEAC commented that generation of credits based 
on shutdowns and curtailments should not be allowed. EMEAC expressed a 
concern that allowing such credits will create an economic incentive 
for sources to leave existing sites in urban areas and reopen in 
``greenfield'' sites, creating urban sprawl.
    Response: EPA agrees that it is problematic to allow use of credits 
based on shutdowns and curtailments under an open market trading 
program, since use of such credits could compromise attainment and 
maintenance of the NAAQS. EPA's preferred option, as stated in the 
September 18, 1997 proposed action, would be to prohibit generation of 
such credits. However, there is another acceptable option, which 
Michigan has selected: to allow shutdown and curtailment credits to be 
generated, but protect against the possibility that use of such credits 
could compromise attainment or maintenance by prohibiting their use 
inside an area that has or needs an attainment or maintenance plan. 
Sources will be able to use such credits in nonattainment or 
maintenance areas only for offsetting (which is already allowed under 
the federal new source review program), or if EPA determines that such 
uses are acceptable. EPA does not believe that the economic gains from 
generating credits through activity level reductions provide an 
economic incentive sufficient to promote shutdowns or curtailments that 
would not otherwise occur.
    Comment: EDF objected to the liability scheme in Michigan's trading 
program, in which credit users are liable for the validity of the 
credits that they use, even if those credits were generated by another 
source. EDF commented that ``the agency should re-cast the proposed 
rule to rely on generator liability with prior certification of 
emissions reduction credits.'' Detection and punishment of non-
compliance are made more difficult by this liability scheme, since 
assessment of a user source's compliance requires determining not only 
whether sufficient credits are held to cover emissions, but also 
determining whether the credits themselves are valid. Determining 
whether credits are valid will be particularly difficult to make if the 
credits are years-old. Moreover, the using source may have little 
incentive to assure the quality of the credits that it uses, since in 
enforcement cases it could invoke ``good faith reliance'' on 
representations made by the credit generator.
    Response: EPA appreciates EDF's concerns, but believes that the 
liability scheme in Michigan's rule will be effective. Prior 
certification of emission reduction credits, as EDF favors, could 
strain state staff resources, potentially leading to certification of 
invalid credits. Under Michigan's program, incentives for generators to 
assure the validity of credits that they register will be provided by 
state audits of generating sources combined with user source efforts to 
assess credit validity. EPA believes that the recordkeeping 
requirements of Michigan's program will help in this assessment, even 
for credits that are several years old. Moreover, user sources will not 
be able to invoke ``good faith reliance'' in an enforcement case, given 
that Rule 1216(1) states that ``notwithstanding another person's 
liability, negligence, or false representation, a person who owns or 
operates a source * * * shall be solely responsible to ensure that any 
affected source * * * under his or her ownership or control is in 
compliance with all applicable emission standards and limitations.'' 
Thus, the rules provide that user sources are responsible for the 
validity of credits that they use.
    Comment: EDF commented that the proposed rule would impose 
liability only for false or deficient certification of credits on 
generators, while failing to alter the generator's emissions limitation 
requirements to reflect credit generation.
    Response: Rule 1213(6) states that ``the methods used and 
operational changes made to reduce emissions and the conditions and 
requirements for emission averaging or the generation of emission 
reduction credits'' become ``legally enforceable operating 
requirements'' for the generating source.
    Comment: EDF commented that Michigan's program would ``undermine 
development of comprehensive trading programs and strategies for 
addressing long-range pollution transport,'' specifically the 
NO<INF>X</INF> budget trading rule for the 22 states, including 
Michigan. A provision in Michigan's program addressing the interface 
between the program and potential interstate cap and trade programs is 
``inadequate and exposes a fundamental misunderstanding of how 
emissions trading works.'' Baseline and inter-temporal features of 
Michigan's program make it incompatible with the 22-state 
NO<INF>X</INF> reduction program.
    Response: Michigan's program will not undermine interstate trading 
programs, including the 22-state NO<INF>X</INF> budget program. EPA is 
implementing this program and will not allow interstate trading to meet 
NO<INF>X</INF> requirements except through the EPA-administered 
program. Other potential regional programs will define their 
requirements, either to include or to exclude use of ERCs generated 
under Michigan's trading program and other trading programs, as 
appropriate.

When Was Michigan's Program Adopted?

    Michigan provided public notification of proposed revisions to the 
Emission Averaging and Emission Reduction Credit Trading Rules on June, 
4, 1998 and held a public hearing on July 8, 1998, with written comment 
requested on the same day. Michigan's revised Emission Averaging and 
Emission Reduction Credit Trading Rules were adopted on March 26, 1999, 
became effective April 13, 1999, and were corrected on April 30, 1999.

When Was Michigan's Program Submitted to EPA and What Did It 
Include?

    Michigan submitted its revised emission trading SIP revision to EPA 
on July 21, 1999. EPA determined the submittal administratively and 
technically complete on August 23, 1999.
    Michigan's emissions trading program SIP revision included the 
following elements:
    <bullet> Part 12 Emission Averaging and Emission Reduction Credit 
Trading Rules, as amended April 13, 1999 and including changes made 
pursuant to a notification of obvious correction from Michigan 
Department of Environmental Quality Office of Regulatory Reform 
Regulatory Reform Officer to Michigan Legislative Services Bureau Legal 
Counsel;
    <bullet> A June 29, 1999 Certification by the Michigan Attorney 
General that ERCs do not constitute a property right;
    <bullet> An analysis of ERCs generated prior to the effective date 
of the original Part 12 Rules (March 16, 1999);
    <bullet> Notice of ERC Generation (NOG) Review Procedures, 
including State-Approved NOG Form;
    <bullet> Notice of ERC Transfer/Trade (NOT) Review Procedures, 
including State-Approved NOT Form;
    <bullet> Notice of ERC Use or Retirement (NOU) Review Procedures, 
including State-Approved NOU Form;

[[Page 9278]]

    <bullet> Notice of Emission Averaging (NOA) Review Procedures, 
including State-Approved NOA Form; and
    <bullet> General Program Evaluation Procedures.

Conclusion

    EPA is proposing to approve the Michigan SIP revision for ozone, 
carbon monoxide, sulfur dioxide, nitrogen dioxide, particulate matter 
and lead. This SIP revision implements Michigan's Emission Averaging 
and Emission Reduction Credit Trading Rules.
    EPA is requesting public comment on the issues discussed in today's 
action. EPA will consider all public comments 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.

Administrative Requirements

    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. This proposed action merely approves 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 (Pub. L. 104-4). For the same reason, this proposed rule also does 
not significantly or uniquely affect the communities of tribal 
governments, as specified by Executive Order 13084 (63 FR 27655, May 
10, 1998). This proposed rule will 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), because it merely approves 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 (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. As required by section 3 
of Executive Order 12988 (61 FR 4729, February 7, 1996), in issuing 
this proposed rule, EPA has taken the necessary steps to eliminate 
drafting errors and ambiguity, minimize potential litigation, and 
provide a clear legal standard for affected conduct. EPA has complied 
with Executive Order 12630 (53 FR 8859, March 15, 1988) by examining 
the takings implications of the rule in accordance with the ``Attorney 
General's Supplemental Guidelines for the Evaluation of Risk and 
Avoidance of Unanticipated Takings'' issued under the executive order. 
This 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, Carbon monoxide, 
Emission trading, Hydrocarbons, Lead, Incorporation by reference, 
Intergovernmental relations, Nitrogen dioxide, Ozone, Particulate 
matter, Reporting and recordkeeping requirements, Sulfur dioxide, 
Volatile organic compounds.

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

    Dated: January 19, 2001.
David A. Ullrich,
Acting Regional Administrator, Region 5.
[FR Doc. 01-3164 Filed 2-6-01; 8:45 am]
BILLING CODE 6560-50-U