Document ID: EPA-HQ-OAR-2003-0053-2218
Agency: epa
Document Type: Supporting & Related Material
Title: 
Posted Date: 2005-12-02T05:00Z

11­
10­
05
DRAFT
DO
NOT
QUOTE
OR
CITE
1
II.
Today's
Action
A.
Grant
of
Reconsideration
In
this
notice,
EPA
is
announcing
its
decision
to
grant
reconsideration
on
four
issues
raised
in
the
petitions
for
reconsideration.
This
notice
initiates
that
reconsideration
process
and
requests
comment
on
the
issues
to
be
addressed.

Given
the
intense
public
interest
in
this
rule,
EPA
has
decided
to
provide
this
additional
opportunity
for
public
comment.
At
this
time,
however,
EPA
does
not
believe
that
any
of
the
information
submitted
to
date
demonstrates
that
EPA's
final
decisions
were
erroneous
or
inappropriate.

Therefore,
we
are
not
proposing
any
modifications
to
the
final
CAIR.

The
first
issue
on
which
EPA
is
requesting
comment
relates
to
analysis
done
by
EPA
to
address
petitioner's
claims
regarding
alleged
inequities
resulting
from
the
application
of
the
SO2
allowance
allocation
methodology
an
element
of
the
model
rules
for
the
CAIR
SO2
trading
program,

specifically
the
SO2
allocation
methodology
that
States'

choosing
to
participate
in
the
trading
program
would
use
to
allocate
SO2
allowances
to
sources.
The
second
issue
relates
to
EPA's
use
of
specific
fuel
adjustment
factors
to
establish
NOx
budgets
for
each
State.
The
third
issue
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05
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NOT
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CITE
2
relates
to
modeling
inputs
used
by
EPA
to
determine
whether
emissions
from
Minnesota
should
be
included
in
the
CAIR
region
for
PM2.5.
And
the
fourth
issue
relates
to
EPA's
determination
that
the
State
of
Florida
should
be
included
in
the
CAIR
region
for
ozone.
Each
issue
is
described
in
greater
detail
in
Section
III
of
this
notice.

The
EPA
is
requesting
comment
only
on
the
issues
specifically
described
in
Section
III.
We
are
not
taking
comment
on
any
other
provisions
in
the
CAIR
or
otherwise
reopening
any
other
issues
decided
in
the
CAIR
for
reconsideration
or
comment.

B.
Schedule
for
Reconsideration
For
the
four
issues
addressed
in
this
notice,
EPA
expects
to
take
final
action
on
reconsideration
by
March
15,

2006.
By
that
date,
EPA
will
finalize
the
process
of
reconsideration
by
issuing
a
final
rule
or
proposing
a
new
approach.
EPA
also
expects,
by
March
15,
2006,
to
issue
decisions
on
all
remaining
issues
raised
in
the
petitions
for
reconsideration.

III.
Discussion
of
Issues
A.
SO2
Allocation
Methodology
in
the
CAIR
Model
Trading
Rules
One
petitioner
argues
that
the
SO2
allowance
allocation
methodology
in
the
CAIR
model
trading
rules
is
unreasonable
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and
inequitable,
and
asks
EPA
to
establish
a
different
approach.
According
to
the
Petitioner,
the
methodology
is
inequitable
because
it
results
in
owners
of
units
that
have
lower
emission
rates,
historically,
buying
allowances
from
historically
higher
emitting
units
that
install
new
emission
controls.
The
Petitioner
requests
that
EPA
reconsider
using
an
allocation
methodology
for
SO2
allowances
analogous
to
the
sample
allocation
methodologies
finalized
for
NOx
under
CAIR
and
for
mercury
under
CAMR.
EPA
does
not
accept
the
petitioner's
characterization
of
this
issue.
EPA
continues
to
believe
that
the
methodology
selected
is
reasonable
for
the
reasons
explained
below.
Furthermore,
numerous
opportunities
for
public
comment
on
this
issue
were
provided,
and
a
full
discussion
of
the
allowance
allocation
options
occurred
during
the
rule
development
process.

Nonetheless,
given
the
intense
public
interest
in
this
issue,
EPA
has
decided
to
grant
the
Petition
for
Reconsideration
insofar
as
it
raises
issues
regarding
alleged
inequities
resulting
from
the
application
of
the
reconsider
whether
changes
to
the
SO2
allowance
allocation
methodology
are
warranted.

As
explained
below,
EPA
has
conducted
additional
analyses
concerning
the
impact
of
the
SO2
allowance
allocation
approach
adopted
in
the
model
rules,
comparing
11­
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DRAFT
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4
this
approach
to
various
other
alternatives
considered
during
the
rulemaking
process.
These
analyses
further
illustrate
that
the
approach
selected
produces
a
reasonable
result,
not
the
inequities
alleged
in
the
Petition
for
Reconsideration.
,
and
Therefore
EPA
is
not
proposing
any
changes
to
the
CAIR
at
this
time.
We
are
taking
comment
on
the
analyses
conducted
and
our
discussion
of
the
petitioner's
concerns.

Title
IV
and
CAIR
The
CAIR
model
SO2
trading
program
relies
on
the
use
of
title
IV
SO2
allowances
for
compliance
with
the
allowanceholding
requirements
of
CAIR.
Title
IV
SO2
allowances
have
already
been
allocated
on
a
unit­
by­
unit
basis
in
perpetuity,
based
on
formulas
set
forth
in
section
405
and
406
of
title
IV,
which
where
implemented
through
final
regulations
issued
in
1998
(
Sec
42
U.
S.
C.
7651d
and
7651e;

and
18
CFR
73.10(
b)).
The
statutory
formula
for
SO2
allocations
was
generally
based
on
unit
data
for
1985­
1987
and,
for
some
units,
data
for
years
up
to
1995.
For
the
title
IV
SO2
trading
program,
each
allowance
authorizes
one
ton
of
SO2
emissions.

For
the
CAIR
SO2
trading
program,
SO2
reductions
would
be
achieved
by
generally
requiring
CAIR
sources
to
retire
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05
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more
than
one
title
IV
allowance
for
each
ton
of
their
SO2
emissions
for
2010
and
thereafter.
Specifically,
each
title
IV
SO2
allowance
issued
for
2009
or
earlier
would
be
used
for
compliance
by
CAIR
sources
at
a
ratio
of
one
allowance
per
ton
of
SO2
emissions
and
would
authorize
one
ton
of
SO2
emissions.
Each
title
IV
allowance
of
vintage
2010
through
2014
would
be
used
for
compliance
under
CAIR
at
a
two­
to­
one
ratio
and
authorize
0.5
tons
of
SO2
emissions.
Each
title
IV
allowance
of
vintage
2015
and
later
would
be
used
at
a
2.86­
to­
1
ratio
and
authorize
0.35
tons
of
SO2
emissions.

See
discussion
in
the
preamble
to
the
final
CAIR
in
section
VII
(
70
FR
25255­
25273)
and
section
IX
(
70
FR
25290­
25291).

SO2
Allocation
Options
in
CAIR
A
variety
of
SO2
allowance
allocation
methodologies
were
raised
and
analyzed
during
the
rulemaking
process,

including
the
one
EPA
selected.
Alternative
methodologies
analyzed
included
allocating
on
the
basis
of
historic
tonnage
emissions,
heat
input
(
with
alternatives
based
on
heat
input
from
all
fossil
generation,
and
heat
input
from
coal­
and
oil­
fired
generation
only)
and
output
(
with
alternatives
based
on
all
generation
and
all
fossil­
fired
generation).
While
every
allocation
methodology
suggested
by
commenters
during
the
rulemaking
process
has
its
advantages
and
disadvantages
for
different
companies
and
11­
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05
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6
States,
EPA
explained
in
the
final
rule
that
its
chosen
methodology
is
reasonable
on
several
grounds.
First,
EPA
believes
that
"
achieving
SO2
reductions
for
EGUs
using
the
title
IV
allowances
is
necessary
in
order
to
ensure
the
preservation
of
a
viable
title
IV
program"
(
Response
to
Comments
(
RTC)
at
511,
section
X.
A.
26,
2005).
See
also
discussion
in
preamble
to
the
final
CAIR
in
section
IX
(
70
FR
25290­
25291).
Second,
in
using
the
title
IV
allowances,

EPA
relied
on
the
selection
by
Congress
of
the
permanent
allocation
methodology
established
in
title
IV
for
purposes
of
reducing
SO2
emissions.
As
stated
in
the
RTC
(
p.
512),

"
Congress
clearly
did
not
choose
a
policy
to
regularly
revisit
and
revise
these
allocations,
believing
that
its
allocations
methodology
for
title
IV
allowances
would
be
appropriate
for
future
time
periods."

Third,
title
IV
allowance
allocations
provide
a
logical
and
well
understood
starting
point
from
which
additional
EGU
SO2
emission
reductions
can
be
achieved
for
Acid
Rain
units,

which
account
for
over
90%
of
the
SO2
emissions
from
CAIR
EGUs.
are
the
vast
majority
of
affected
CAIR
EGUs.
Finally,

EPA's
State­
by­
State
analysis
of
several
methods
for
SO2
allocations
shows
that
the
use
of
title
IV
allowances
to
develop
state
budgets
creates
a
reasonable
result
(
See
RTC,

section
X.
A.
26).
The
policy
decision
to
base
the
CAIR
SO2
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7
budgets
on
the
existing
title
IV
allowance
system,
and
EPA's
demonstration
that
the
result
of
using
the
system
is
reasonable
fully
support
the
use
of
an
allocation
system
based
on
title
IV
allowances.

Analysis
of
SO2
Allocation
Options
As
a
part
of
this
reconsideration,
EPA
performed
additional
analyses,
explained
below,
to
evaluate
the
SO2
allocation
methodology
in
the
final
CAIR
rule
in
light
of
the
petitioner's
concerns.
In
these
analyses,
EPA
compared
three
alternative
SO2
allowance
allocation
methodologies
to
the
methodology
in
the
final
CAIR
to
see
how
companies
fared
in
terms
of
the
amount
of
allowances
allocated
relative
to
their
projected
SO2
emissions.
The
allocation
allowance
methodologies
evaluated
by
EPA
were
the
ones
referred
to
by
the
petitioner
in
the
Petition
for
Reconsideration.
EPA
believes
that,
for
purposes
of
evaluating
the
various
allocation
methodologies,
computing
allocations
on
a
company­
by­
company
basis
is
more
appropriate
than
comparing
allocations
on
a
unit­
by­
unit
basis.
This
is
because,
while
one
unit
could
be
allocated
fewer
allowances
under
one
methodology,
another
unit
owned
by
the
same
company
could
be
allocated
more
allowances,
which
may
offset
the
smaller
allocation
of
the
first
unit.

The
three
alternative
allowance
allocation
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8
methodologies
EPA
analyzed
were
suggested
by
various
commenters
during
the
rulemaking
process.
Also
note
that
methodologies
2
and
3
were
suggested
by
the
petitioner.

These
methodologies
are:

1.
Allocating
allowances
based
on
more
recent
heat
input
data;

2.
Allocating
allowances
based
on
more
recent
heat
input
data
adjusted
for
fuel
type
(
e.
g.

coal,
oil
and
gas);

3.
Allocating
allowances
based
on
more
recent
heat
input
data
adjusted
both
for
fuel
type
(
e.
g.
coal,
oil
and
gas)
and
for
coal
type
(
e.
g.
bituminous,
sub­
bituminous
and
lignite).

In
comparing
the
CAIR
final
SO2
allocation
methodology
and
the
three
alternative
methodologies,
EPA
took
into
account
certain
factors
that
are
applicable
to
the
CAIR
final
allocation
methodology
but
not
to
the
three
alternative
methodologies.
For
all
four
methodologies,
EPA
analyzed
the
resulting
total
allowance
allocations,
and
the
total
projected
emissions,
for
companies'
sources
located
in
the
States
subject
to
CAIR.
In
addition,
for
all
the
methodologies,
EPA
analyzed
the
relationship
between
allowances
and
emissions
in
two
ways.
In
the
first,
EPA
calculated
the
ratio
of
allowances
to
total
projected
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9
emissions
before
CAIR
controls
(
base
case).
This
measures
how
much
each
company
falls
short
of
allowance
needs.
Then,

in
the
second
approach,
EPA
calculated
the
ratio
of
allowances
to
total
projected
emissions
with
CAIR
controls
installed
(
control
case).
This
way
measures
how
many
allowances
a
company
would
need
to
purchase
after
controls
are
installed.

For
the
CAIR
final
methodology,
EPA
also
considered
both
the
allowance
allocations
and
emissions
for
companies'

sources
both
in
the
CAIR
region
and
outside
the
CAIR
region.

EPA
believes
that
this
is
appropriate
because,
under
the
CAIR
final
methodology,
if
a
company's
sources
outside
the
CAIR
region
have
more
title
IV
allowances
than
needed
to
cover
their
emissions
under
the
Acid
Rain
Program,
the
company
could
transfer,
at
little
or
no
net
cost,
excess
allowances
to
the
company's
sources
in
the
CAIR
region
for
use
to
cover
emissions
under
the
CAIR
trading
program.

Under
the
three
alternative
methodologies,
which
would
require
creating
new
CAIR
SO2
allowances
independent
of
the
existing
title
IV
allocations,
CAIR
sources
could
not
use
title
IV
for
compliance
with
the
CAIR
SO2
allowance
holding
requirements.

Further,
in
the
analysis
of
the
CAIR
final
methodology,

EPA
considered
the
allocation
of
title
IV
allowances
to
CAIR
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region
units
that
are
not
currently
in
the
Acid
Rain
Program
but
that
could
opt
into
the
Acid
Rain
Program
and
receive
title
IV
allowances
(
see
42
U.
S.
C.
7651i
and
18
CFR
part
74).
This
analysis
assumed
that
companies
owning
non­
Acid
Rain
units
affected
by
CAIR
would
opt
into
the
Acid
Rain
Program
because
they
would
receive
title
IV
allowances
to
cover
a
portion
of
the
units'
emissions
under
CAIR.
EPA
believes
this
assumption
is
reasonable
because
there
is
very
little
cost
associated
with
opting
into
the
Acid
Rain
Program.
1
In
contrast,
the
analysis
of
the
three
alternative
methodologies
did
not
consider
Acid
Rain
Program
opt­
in
allowances
because
these
approaches
do
not
use
title
IV
allowances
for
CAIR
compliance.

EPA's
analyses,
of
which
a
detailed
description
is
available
in
the
docket,
encompassed
112
(
control
case)
to
114(
base
case)
parent/
holding
companies
with
sources
covered
by
the
CAIR.
These
112
to
114
companies
represent
about
twothirds
of
the
total
number
of
CAIR
plants,
over
95
percent
of
total
annual
allocations
for
all
methodologies
during
2015,
and
about
97
percent
of
the
total
projected
emissions
1
The
greatest
cost
associating
with
opting
in
to
the
Title
IV
program
is
the
cost
of
monitoring.
Since
these
sources
are
already
required
to
monitor
using
the
same
monitoring
methodologies
that
would
be
required
if
they
were
to
opt
in,
their
costs
for
opting
in
are
significantly
reduced.
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in
the
CAIR
region
in
2015.2
While
allocations
vary
from
company
to
company
under
the
four
methodologies,
overall,
the
distributions
of
allowances
that
companies
received
relative
to
their
projected
emissions
for
both
the
base
case
and
control
case
are
very
similar.
In
other
words,
no
methodology
stands
out
as
providing
a
more
reasonable
method
of
allocation
across
all
companies
when
examining
allowance
needs
under
either
the
base
case
or
control
case.
Figures
1
and
2,
below,
show
the
distribution
of
values
for
each
methodology
under
the
two
cases,
and
support
this
conclusion.
EPA
repeated
these
analyses
for
2010,
which
show
similar
results.
Separate
analyses
of
owner/
operating
company
allowances
compared
to
emissions
in
2010
and
2015,
show
similar
results,
as
well.

See
TSD
Memo,
"
Technical
Support
Document
for
Clean
Air
Interstate
Rule
Response
to
Petition
for
Reconsideration."

Figure
1.
Note:
A
small
number
of
the
companies
in
the
analysis
are
not
shown
because
they
are
outliers
­­
receiving
allocations
greater
than
four
times
their
projected
2015
emissions
 
and
if
included,
render
the
figure
extremely
difficult
to
understand.
See
table
in
the
TSD
for
details.

2
According
to
EPA
inventory
data,
there
are
a
total
of
921
CAIR
affected
plants.
EPA
did
not
have
complete
owner,
parent
company
information
for
all
of
these
plants.
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DO
NOT
QUOTE
OR
CITE
12
Ratio
of
SO2
Allowance
Allocations
to
CAIR
Base
Case
Emissions
(
without
Controls)
in
2015
for
114
Companies
under
CAIR
Method
and
Alternatives
0.00
1.00
2.00
3.00
4.00
1
10
19
28
37
46
55
64
73
82
91
100
109
Cumulative
Number
of
Parent/
Holding
Companies
Ratio
of
SO2
Allowance
Allocations
to
CAIR
Base
Case
in
2015
Pure
Heat
Input
HI
w/
Fuel
Factors
HI
w/
FF
&
Coal
Type
EPA
Method
(
w/
non­
CAIR
+
opt­
ins
Figure
2.
11­
10­
05
DRAFT
DO
NOT
QUOTE
OR
CITE
13
EPA
also
notes
that,
while
the
Petitioner
states
that
the
CAIR
final
allocation
methodology
is
"
inequitable"

because
lower
emitting
units
would
buy
allowances
from
higher
emitting
units
that
install
emission
controls,
it
is
unclear
why
such
a
result
would
actually
be
inequitable.
On
the
contrary,
the
owner
of
each
of
the
units
involved
would
be
choosing
to
adopt
the
most
economic
compliance
strategy
in
light
of
the
unit's
emission
control
costs
and
the
market
value
of
allowances.
The
ability
of
the
owners
to
make
such
choices
reflects
the
flexibility
provided
by
a
cap
and
trade
program.
Ratio
of
Allowance
Allocations
to
Projected
Emissions
in
2015
for
112
Companies
under
EPA
CAIR
Method
and
Alternatives
0.00
1.00
2.00
3.00
4.00
1
10
19
28
37
46
55
64
73
82
91
100
109
Cumulative
number
of
parent/
holding
companies
Ratio
of
Allowance
Allocation
to
Projected
Emissions
in
2015
Pure
Heat
Input
HI
w/
Fuel
Factors
HI
w/
FF
+
Coal
Type
EPA
Method
(
w/
non­
CAIR
+
opt­
ins)
11­
10­
05
DRAFT
DO
NOT
QUOTE
OR
CITE
14
EPA
requests
comment
on
its
analyses
of
the
four
allocation
methodologies
and
on
the
above
discussion
of
the
Petitioner's
concerns.