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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
FEB 28 1992
OFFICE OF
AIR AND RADIATION
James M. Lents, Ph.D.
Executive Officer
South Coast Air Quality Management District
21865 E. Copley Drive
Diamond Bar, CA 91765
Dear Dr. Lents:
This letter responds to your recent request for guidance regarding
EPA's interpretation of several provisions of the federal Clean
Air Act. We understand that these interpretations are key to your
assessment of the feasibility of a stationary source emissions trading
program for the South Coast air basin.
First I want to note how pleased I am with the fruitful working
relationship our staffs have developed through the meetings of the
Technical Working Group that we established when we met last Spring.
I believe we have made real progress on the issues raised in your
letter and other aspects of how your program could be designed.
As you continue to develop the concept of marketable permits (which
we understand is now called the Regional Clean Air Incentives Market
- RECLAIM), I hope this group will continue to meet and resolve
issues that bear on the approvability of the program.
The attached response to your specific questions is EPA's interpretation
of how the federal Clean Air Act would apply to the RECLAIM program
as we understand the current proposal. EPA encourages areas to be
creative and develop innovative programs such as RECLAIM. To this
end, our interpretations reflect a fundamental principle we are
is using to guide the implementation of the new amendments: to the
extent that projected emissions reductions will be both quantifiable
and enforceable, and to the extent permissible by law, EPA will
be flexible and allow areas to demonstrate that their particular
control strategies are equivalent to the specific requirements of
the statute.
We appreciate the recognition in your letter that RECLAIM must
result in quantifiable and enforceable emission reductions. We agree
that it will be necessary for you to demonstrate that RECLAIM will
lead to such results and emphasize that our responses to your questions
are predicated on a successful demonstration. To facilitate the
resolution of these issues, we have also attached a discussion of
the elements we believe will be necessary to make RECLAIM quantifiable
and enforceable. We look forward to working with your staff to develop
the details to implement this aspect of your program.
Sincerely,
William G. Rosenberg
Assistant Administrator for
Air and Radiation
Attachments
cc: James M. Strock, Secretary for Environmental Protection
California Environmental Protection Agency
Jananne Sharpless, Chairwoman
California Air Resources Board
Response to South Coast Questions
RACT
May the RACT requirement be complied with by aggregating emissions
from all stationary sources?
May emissions from mobile sources be aggregated with emissions
from stationary sources in order to demonstrate compliance with
the RACT requirement? If so, are there any limitations upon such
aggregation?
Response: Emissions may be aggregated, for purposes of meeting
the RACT requirement, by sources covered by a RACT requirement.
These include sources covered by a CTG (issued either before or
after enactment of the Clean Air Act Amendments of 1991) or major
sources (in extreme areas, this includes sources with the potential
to emit 10 ton or more per year of NOx or VOC). Emissions may
not be aggregated, for purposes of meeting the RACT requirement,
between these RACT sources and other stationary (non- RACT), mobile
or area sources.
The universe of CTG and major sources in the South Coast must,
in the aggregate, achieve the equivalent of RACT level emission
reductions on a daily basis. As long as they continue to do
so, a RACT source may participate in a bubble or trading system
with stationary sources not covered by RACT, mobile and area
sources. The state will be required to demonstrate that, despite
any trading among RACT and non-RACT sources, the SIP achieves
the equivalent of the required RACT-level daily emission reductions
from the universe of CTG and major sources by the applicable
compliance dates.
Must RACT requirements be periodically made more stringent as
new control technology develops?
Response: RACT is determined when: (1) EPA develops a CTG, the
State promulgates SIP limits based on the CTG, and EPA approves
the SIP limits, or (2) the State promulgates a SIP that includes
an alternative to CTG guidelines (which EPA terms "alternate"
or "alternative" RACT), or, in the case of non-CTG major sources,
includes source- or category-specific RACT requirements, and EPA
approves those SIP requirements. After EPA has approved RACT requirements
in specific SIPS, EPA may review specific RACT requirements --
based on more current information concerning control effectiveness,
costs, etc...-- through the same process. For example, EPA
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may review and revise the CTGs, and require SIP revisions
based on the updated CTGs. However, the statute contains no
requirement that EPA initiate the process of updating RACT requirements
for any source as soon as EPA receives information that could
be construed to suggest that the existing requirements may no
longer be RACT.
The District may desire to develop a program which requires
each source subject to a federal control techniques guideline
(CTG) to comply with such CTG. May the District demonstrate compliance
with a CTG that establishes a concentration limit by imposing
a mass emissions limit which results in an equivalent level of
control?
Response: As a legal matter, EPA has broad discretion in defining
RACT. Accordingly, EPA has the authority to redefine RACT in terms
of mass emissions limits instead of emission rate limits or accept
demonstrations of equivalency. As indicated in our response to
the question of RACT aggregation above, EPA is open to demonstrations
of equivalency to source-specific concentration limits.
Attainment Demonstration
Must each emissions trade be subject to spatial restrictions, or
would it be permissible to establish a program which merely tracks
changes in location of emissions and imposes remedial measures if
shifts occur which might impact attainment?
Must each emissions trade be examined for changes in the reactivity
of emissions, or would it be permissible to establish a program
which merely tracks changes in reactivity and imposes remedial
measures if increases in reactivity occur which might affect attainment?
Response: Section 182 (c)(2)(A) requires ozone nonattainment areas
classified Serious or above to develop an attainment demonstration
-- showing attainment by the year 2010 (for extreme areas) --
based on photochemical grid modeling (or the equivalent). This
type of modeling incorporates both the location of emission sources
and the reactivity of different VOC emissions.
Therefore, the South Coast will need to project the impact
of the trading program on both the spatial distribution of emissions
and the reactivity of VOC emissions in order to develop its
attainment demonstration. Since different outcomes of the trading
market may affect the spatial distribution of emissions and/or
the reactivity of VOC emissions, the attainment
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demonstration should be supported with an analysis of the
sensitivity of the attainment strategy to various trading outcomes.
No spatial or reactivity restrictions must be imposed on trading
as long as the South Coast agrees, as part of its SIP, to: 1)
establish a program to track over time changes in the spatial
distribution of emissions and the reactivity of VOC emissions,
2) remodel the effect of changes in the spatial distribution
or reactivity of emissions on the attainment strategy (periodically
or triggered by preestablished thresholds being exceeded), and
3) implement remedial measures if modelling shows that changes
have occurred which might affect the attainment strategy.
Assuming that attainment on a daily basis can be demonstrated
statistically, may the program employ a mass emission limit for
ROG which is based upon cumulative or average emissions over a
period longer than one day, e.g., 30 days?
Response: Yes. A time-averaged mass emission limit must continue
to meet or be consistent with the statutory requirements of: 1)
RACT equivalence, 2) periodic emissions reductions to satisfy
reasonable further progress, and ultimately 3) attainment of the
ozone NAAQS on a daily basis.
Currently, EPA generally considers instantaneous, hourly,
or daily emission rate limits to be RACT. If the South Coast
can demonstrate that a mass emission limit averaged over a longer
period will produce equivalent emission reductions on a daily
basis, EPA would allow longer-term averaging for RACT requirements.
The ozone NAAQS is, in effect, a daily standard. EPA has long
been concerned that longer-term averaging could allow sources
to increase emissions on one particular day, and thereby jeopardize
attainment on that day. However, EPA is open to longer than
daily averaging if the South Coast can demonstrate, presumably
through statistical methods, that requirements to demonstrate
attainment and reasonable further progress will be equally well
satisfied on a typical summer day basis (as defined in EPA guidance
documents).[See footnote 1] We understand that the South Coast
is considering whether and how to integrate various safeguards
into the RECLAIM program which may aid in making such equivalency
demonstrations.
_______________
Footnote 1. The determination that an area has complied with the reasonable
further progress requirements will made upon a demonstration (to the
satisfaction of the Administrator) that the area's SIP submittals
meet the requirements specified in the federal Clean Air Act for periodic
emission reductions including any prescribed requirements (e.g. Clean-Fuel
Vehicle Program). (182(b)(1), and (c)(2)(A) and (B))
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EPA expects these demonstrations to be substantial exercises.
We are currently examining the elements that should be part of
an equivalency demonstration. We plan to offer guidance on this
issue as we complete our examination and as the South Coast program
develops more fully.
Do the provisions of the 1986 EPA Emission Trading Statement
which establish requirements for baselines and 20 percent excess
emissions reductions apply to the Marketable Permits Program?
Response: At present, EPA policy which guides decisions regarding
emission trades is embodied in the Emission Trading Policy Statement
(ETPS). The ETPS would therefore be used to assess the approvability
of a Marketable Permits Program (now called RECLAIM). However,
the ETPS gives the South Coast the opportunity to show that a
general principle of the ETPS does not apply to their particular
circumstance or could be satisfied using approaches other than
those described within the provisions of the ETPS.
When taken as a whole, the proposed requirements in RECLAIM,
such as an emissions cap and declining balance emission limit,
could be used as part of a showing that the general principles
of the ETPS will be met. We are currently examining the elements
that should be part of such a showing. We plan to offer guidance
on this issue as we continue to evaluate the ETPS in light of
the 1990 Clean Air Act Amendments, develop the economic incentive
rules required by the Amendments, and as the South Coast program
develops more fully.
New Source Review
Must each new or modified major stationary source comply with the
greater than one-to-one offset ratio requirements of Section 182(e),
or may a program not incorporating such ratios be approved if it
achieves equivalent emission levels through other means? If equivalency
is allowed, may it be demonstrated using reductions from all sources,
including existing sources, or only through limitations applicable
to new and modified sources (e.g. zero offset threshold)? Note:
We intend to require all new and modified sources and discrete units
to comply with LAER.
Response: EPA can approve a program that does not require individual
sources to secure offsets in the ratios mandated by section 182(e)
of the Federal Clean Air Act so long as the South Coast ensures
that an equivalent total of creditable emission reductions are
secured from other reduction strategies. Section 173(c) places
a number of restrictions on the types of emissions reductions
which can be used for offsets -- including requirements that
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offsetting reductions be enforceable, in effect at the time
the new source commences operations and will result in reductions
of "actual" emissions in the appropriate amount.
However, the Federal Clean Air Act does not require that offsets
be secured by the new source. Rather, any portion of the necessary
offsets may be generated by the efforts of the local air quality
planning agency. Thus, each time a new source commences operations,
the RECLAIM program must have already generated sufficient emission
reductions such that the South Coast can demonstrate at that
point in time that the program has secured sufficient excess
emissions reductions to offset the source's new emissions at
the mandated ratio. If the source itself is only held responsible
for securing emission reductions in an amount equal to its new
emissions (a 1:1 ratio), the South Coast plan must generate
sufficient reductions to cover the extra reductions required
by the act in section 182(e) (a total offset ratio of 1.5:1
in extreme areas or 1.2:1 if the South Coast requires BACT on
all existing major stationary sources).
Section 173(c)(2) of the federal Clean Air Act limits offsets
to emission reductions not"otherwise required by this Act."
EPA staff will be pleased to assist the South Coast in its efforts
to identify the specific types of emission reductions that could
be available for offsets.
Does EPA policy requiring shutdown credits to be contemporaneous
apply to trades for new or existing sources under the Marketable
Permits Program?
Response: EPA's current regulations limit the use of shutdowns
as credits for the purpose of offsets if the State does not have
an approved attainment demonstration. Specifically, without an
approved attainment demonstration, 40 CFR 51.165(a)(3)(ii)(C)
limits shutdown credits to those situations where the shutdown
occurs after the date the source seeking to use the credit submits
its NSR permit application or where the new unit replaces the
shutdown unit. The South Coast does not currently have an approved
attainment demonstration and thus, for purposes of offset credits,
this regulation would apply to the RECLAIM program.
Since the promulgation of this regulation, the amendments
to the federal Clean Air Act provided South Coast with a new
attainment deadline and periodic emission reduction and specific
control technology requirements. Further, EPA is aware that
the RECLAIM program is intended to be a comprehensive regulatory
program for the South Coast and will be part of an ozone attainment
plan. Under this circumstance, EPA would be willing to consider,
during its review of the RECLAIM program, a regulatory exception
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which would allow South Coast to use shutdown credits to the
same extent as a jurisdiction with an approved attainment demonstration.
Would federal new source review requirements be triggered if a source
subject to the RECLAIM program applies to raise its facility-wide
emissions limit solely due to an increase in rate of production
or hours of operation?
Response: In general, the federal Clean Air Act specifies that
a physical or operational change that results in an increase in
emissions constitutes a "modification" and triggers new source
review. (Sections 111(a)(4) and 171(4)) However, EPA regulations
exclude from the definition of physical or operational change
"[a]n increase in the hours of operation or in the production
rate, unless such change is prohibited under any federally enforceable
permit condition." 40 CFR 51.165(a)(1)(v)(C)(6) The regulation
further specifies that the types of permits that might limit this
exclusion include all types of NSR permits (whether issued by
EPA or a state) issued under programs that are intended to fulfill
federal NSR requirements. Thus a mere increase in production rates
or hours of operation that does not exceed existing NSR permit
limits does not trigger new source review. Such a source would
only need to purchase additional emission credits in the appropriate
amount under a program such as RECLAIM. Conversely, increases
in production rates or operating hours that cannot be accommodated
under the existing federally enforceable new source review permit
do not qualify for this exclusion and would trigger new source
review even if the source purchased sufficient additional emission
credits.
Enforceability Considerations
Readily Ascertainable Emission Limits
An essential element of an enforceable trading program is that
the emission limits to which each facility is subject be readily
ascertainable at all times. This will require, inter alia, an authoritative,
reliable repository of all information concerning emission trades,
in addition to reliable information regarding the default emission
limits (i.e., the emission limits in the absence of trades) for
each facility. We understand that the South Coast's current proposal
is for this latter information to be contained in each facility's
Title V operating permit.
Emission Quantification Methodologies
We believe that it is necessary for any emission control program
that is based on facility-wide, time-averaged mass emissions caps
to have credible, replicable and workable emission quantification
methodologies. Ideally, the methodologies used to determine source
emissions on an ongoing basis should be the same as those used to
determine the baseline emissions. To the extent this is infeasible
to achieve in practice, an acceptable procedure for correlating
baseline and subsequent emissions must be developed.
EPA understands that the South Coast plans to develop emission
quantification methodologies through a protocol working group (discussed
below) including EPA and other interested parties. Further, we understand
that the South Coast may wish to begin by assessing existing emissions-
estimation procedures currently employed by sources to calculate
annual permit fees. EPA looks forward to working with the South
Coast and other parties to determine the extent to which the District's
existing procedures for calculating permit fees are credible, replicable
and workable, and to develop such additional or alternative methodologies
as may be necessary.
Monitoring, Recordkeeping and Reporting (MRR) Requirements
We believe that RECLAIM must provide for sufficient monitoring
and recordkeeping requirements to support whatever specific emissions
quantification procedures are put into place. There must also be
reporting provisions that require information submittals on a sufficiently
frequent basis. It is our position, in light of the critical importance
of monitoring, recordkeeping and reporting procedures to the integrity
of a trading program, that facility owners not be permitted to change
such procedures without prior approval as a permit modification.
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Enforcement Sanctions
There must be adequate enforcement consequences for noncompliance
with emission limits and with monitoring, recordkeeping and reporting
(MRR) requirements. This includes both federal and state enforcement
sanctions. The enforcement system developed for RECLAIM must preserve
the level of deterrence embodied in the existing federal, state
and local regulatory systems.
Penalties for Violation of Emission Limits: The existing regulatory
system provides for enforcement against noncompliance with emission
limits at both the federal and local levels. The statutory maximum
penalties under the Federal Clean Air Act are $25,000 per day per
source in violation. To preserve the existing level of deterrence
under the federal Clean Air Act, RECLAIM must define violations
of emissions caps in such a way that these violations will translate
into sufficient numbers of source-days of violation. We note that
federal enforceability of the emission caps presupposes that the
emission limits are made part of the SIP and/or the facility's Title
V operating permit. RECLAIM must also ensure that the penalties
collectible by the South Coast under local law create a deterrent
effect comparable to that of the existing regulatory system. Using
the acid rain program as an example, a predetermined penalty based
on the amount of an exceedance is one possible approach, provided
the predetermined amounts are sufficiently large.
We believe that facility owners should be required to develop
enforceable compliance plans as a remedial measure in those cases
where a facility has exceeded its emission cap for a given averaging
period. By "compliance plan", we mean a comprehensive statement
of how each emissions source within the facility will be operated
in order to ensure compliance with the facility's overall emissions
cap. Compliance plans, as we envision them, would include appropriate
schedules for implementing additional emissions control equipment
or other procedures at a sufficient number of emissions sources
to bring the overall facility into compliance.
Penalties for Violations of MRR Requirements: Compliance with
MRR requirements is critical to the integrity and success of an
emission control program which relies on declining emission caps
to achieve emission reductions. RECLAIM must establish a regulatory
structure which clearly and effectively deters inadequate or improper
monitoring, recordkeeping and reporting. To ensure compliance, it
is necessary that there be effective penalties, at both the federal
and local level, for violations of MRR requirements. RECLAIM must
incorporate both civil and criminal sanctions for violations of
requirements per se and must include a mechanism for determining
facility emissions when adequate MRR data is not available. These
same principles are embodied in the federal acid rain trading program.
On the civil side, EPA believes that RECLAIM should be structured
so that monitoring and recordkeeping requirements can be enforced
on a daily basis, both at the federal and local levels. We believe
that failure to properly perform monitoring and recordkeeping should
subject a facility owner to a separate penalty for each emissions
source
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and for each day that the violation occurs. In cases where the
impropriety is of a systematic nature, monitoring and recordkeeping
should be presumed to have been improperly performed, for all days
for which the facility owner fails to carry the burden of demonstrating,
by clear and convincing evidence, that prior days of monitoring
and recordkeeping in the same emissions averaging period were performed
properly.
On the criminal side, Section 113 (c)(2) of the Federal Clean
Air Act allows for federal criminal sanctions in cases where monitoring
and/or recordkeeping is knowingly performed in an improper manner
or not at all, provided that the MMR requirements were imposed under
the SIP and/or the Title V operating permits. RECLAIM must impose
MMR requirements in a manner that preserves the ability to impose
criminal sanctions at the federal level. The extent of the South
Coast's current legal authority to proceed criminally against violators
of MRR requirements is not clear to EPA. We believe that, in order
to ensure that MRR requirements are routinely complied with, the
South Coast must have authority to readily and expeditiously invoke
criminal sanctions for violations of MMR requirements warranting
criminal treatment. EPA would support the South Coast in seeking
enhancements to its current criminal authorities if any such are
necessary to achieve the foregoing objective.
Finally, RECLAIM must contain a mechanism for determining facility
emissions when violations result in the problem of missing, inadequate
or erroneous monitoring and recordkeeping data. This mechanism must
ensure that facility owners have a strong incentive to properly
perform monitoring and recordkeeping in the first instance. We believe
that RECLAIM should provide that the emissions from each source
for each day on which monitoring or recordkeeping data is missing,
inadequate or erroneous should be presumed to be the maximum emissions
which the source was capable of generating for the day in question,
subject to a demonstration by the facility owner, by clear and convincing
evidence, that the emissions did not exceed some lesser amount.
Protocol and Enforcement Sanctions Workgroup
We understand that the South Coast intends to set up one or more
workgroups to work on protocols (emissions quantification methodologies
and MMR requirements) and enforcement sanctions issues. This is
a very welcome and creative development. EPA will be pleased to
work with your staff and other parties to develop federally-approvable
program elements. We look forward to hearing more about the plans
for this work in the near future.
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