DRAFT
July 13, 1981
CONTROLLED TRADING POLICY STATEMENT:
GUIDANCE CONCERNING THE CREATION, BANKING
AND USE OF EMISSION' REDUCTION CREDITS
AGENCY: Environmental Protection Agency
•
ACTION: Proposed Policy Statement
SUMMARY: This Proposed Policy Statement sets forth guidance
that EPA proposes to use in evaluating State Control-
led Trading activity. Controlled Trading is a term
EPA uses to describe a number of different voluntary
approaches to controlling pollution under the Clean
Air Act. It covers the bubble, offsets, netting, and
banking of emission reductions for future -use. This
policy statement, also implements changes to the
Bubble Policy announced by EPA on January 16, 1981
and represents EPA's proposed formal guidance on
emission reduction banking and trading. By simplify-
ing and consolidating EPA's policies governing these
closely related programs, today's proposed action
should facilitate significant economic savings while
simplifying and reducing the administrative complexity
of compliance with the Clean Air Act and of the Agency's
Controlled Trading initiatives.
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Finally, today's action sets forth criteria EPA
proposes to apply in evaluating State activities
which relate to the creation, banking or use of emis-
sion reduction credits (ERCs). ERCs are reductions
in emissions beyond those that would otherwise be
legally required. Emission reduction credits can
be used in bubbles, offsets, or netting.
Upon its adoption, this policy statement will
replace the existing Bubble Policy (44 PR 71779,
Dec. 11, 1979) and replace the banking guidance
published in the January 16, 1979 Offset Ruling
(40 CPR Part 51, Appendix S, Section IV.C.5.).
It eliminates a number of the restrictions on the
use of the bubble contained in the existing Bubble
Policy. It also provides guidance for the development
of State Controlled Trading rules under which emission
reduction credits can be created and used in specified
circumstances without individual SIP revisions. How-
ever, in accord with current statutory requirements
and existing EPA regulations, it does not allow use
of Controlled Trading to avoid meeting New Source
Performance Standards (NSPS) or other technology-
based requirements specifically applicable to new
major stationary sources.
States may want to consult model banking,
bubble and integrated Controlled Trading (i.e., a
combined banking and bubble rule) rules which
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have been developed by EPA based on this guidance and
are included as Appendix B of this document. States
can use these models to develop rules governing
Controlled Trading activities in their Jurisdictions.
Although today's action is issued as a proposal,
EPA urges States to begin the process of adopting
Controlled Trading rules that are consistent with
this guidance. In this interim period before
taking final action on this Policy Statement, EPA
intends to evaluate State rules by the criteria set
forth in this proposal.
EFFECTIVE
DATE:
ADDRESSES:
The deadline for submitting written comments is
[45 days after publication in the Federal Register].
Comments should be sent in triplicate, if possible,
to:
Central Docket Section (A-130)
U.S. Environmental Protection Agency
Washington, DC 20460
Attn: Doc. No. G-81-2
DOCKET:
EPA has established a docket for this action.
It bears docket number G-81-2. This docket is an
organized and complete file of all significant
information submitted to or otherwise considered
by EPA during this action. The docket is avail-
able for public inspection and copying between
8:00 a.m. and 4:00 p.m., Monday through Friday,
at EPA's Central Docket Section. A reasonable fee
may be charged for copying.
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FURTHER
INQUIRIES:
SUPPLEMENTARY
INFORMATION:
Ivan Tether, (PM-223), Regulatory Reform Staff,
U.S. Environmental Protection Agency, 401 M Street,
S.W., Washington, B.C. 20460 202/287-0750
Leo Stander, Office of Air Quality Planning and
Standards, Research Triangle Park, North Carolina
27711, 919/541-5365
Under Executive Order 12291, EPA must judge
whether this policy statement is "major" and
therefore subject to the requirement of..a
Regulatory Impact Analysis. This policy state-
ment is not major because: it is not expected
to cause an annual effect on the economy of
$100 million, or more; it will not cause a major
increase in costs or prices for consumers,.
individual industries, Federal, State, or local
government agencies, or geographic regions;
and it will not cause significant adverse effects
on competition, employment, investment, produc-
tivity, innovation, or on the ability of United
States-based enterprises to compete with foreign-
based enterprises in domestic or export markets.
The policy statement will reduce costs of comply-
ing with the Clean Air Act by allowing flexibility
in meeting requirements... Furthermore, it will
reduce administrative complexity by reducing the
number of transactions which must be approved by
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EPA and it will stimulate innovation in pollution
control. This regulation was submitted to the
Office of Management and Budget for review as
required by Executive Order 12291. Any comments
from OMB to EPA in response to those comments are
available for public inspection in Docket No.
G-81-2, which is located at the U.S. Environmental
Protection Agency, Central Docket Section,
401 M Street, SW, Washington, DC.
Pursuant to the provisions of 5 U.S.C. §605(b), I
hereby certify that the attached rule will not,
if promulgated, have a significant economic
impact on a substantial number of small entities.
As a policy designed to allow firms flexibility
and to reduce administrative complexity, this
policy will impose no burdens on either small or
large entities.
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TABLE' OP' CONTENTS
PAGE
I INTRODUCTION: RATIONALE FOR AN INTEGRATED CONTROLLED
TRADING POLICY STATEMENT 9
A. Why' Issue' this' policy' statement? 14
1. Achieving economic savings 15
2. Reduced administrative complexity 20
3. Relaxation of past constraints . . 22
B. Relationship' to existing' rules' and policies 23
1. The bubble policy 24
2. The banking policy 25
3. New source rules .29
C. Possible' actions' states' can' take 30
D. Today1 s' action' is' issued as' a' proposed
policy stateme'hl' I I I I I T~T T~I T~" 32
•»
II. CONTROLLED TRADING POLICY STATEMENT 33
A. Orgahizatibh' of' policy' statement 33
B. Definition' of terms 35
C. Creating' emission' reduction' credits 42
1. Surplus reductions 43
a. Use of "actual" or "allowable reduc-
tions in emissions as the baseline for
qualifying for credit 45
b. Double counting of reductions must be
prohibited 50
(i) Restrictions on pre-existing
emissions reductions . 51
(11) Restrictions on the use of
reductions from shutdowns 52
(ill) Prohibition on multiple use
of ERCs 54
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PAGE
c. Surplus reductions in the absence
of complete SIPs 55
d. Granting reductions from unlnventoried
sources . 59
2. All reductions must be enforceable ...... 62
a. All reductions must be federally
enforceable . 62
b . All reductions must be enforceable
in practice 65
3. All emission reductions must be permanent ... 67
4. All emission reductions must be quantifiable . 72
a. Measuring the reduction 72
b. Describing the reduction 73
D. Using' emission reduction' credits 74
1. Substantive limits on using ERCs ....... 75
a. Proposed uses of ERCs must involve
only the same pollutant 75
b. Proposed uses of ERCs must not
increase hazardous pollutants ....... 76
c. No increase in actual emissions in
nonattalnment areas 77
d.- Proposed trades cannot be used to
meet technology-based requirements .... 78
e. All uses of ERCs must satisfy ambient
tests 79
2. Procedural steps in using ERCs 84
a. Requirements for SIP revisions 84
(1) De minimis cases 86
(11) Hydrocarbon and NO3 transactions . . 87
(ill) Trades involving pollutants
other than hydrocarbons and NOg . • 88
(iv) Other mechanisms for exempting
transactions from individual
SIP revisions . 89
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PAGE
b. Enforcing emission limits in the
absence of SIP revisions 93
c. Existence of a compliance agreement ... 95
d. Extensions of compliance deadlines. ... 96
e. Deferral of noncompliance penalties ... 97
f. Public participation 97
E. Banking' emission' reduction' credits 98
1. Banking rules must designate an
administering agency 99
2. Only ERCs may be- banked 99
3. Procedures for banking ERCs 100
4. Banking rules must establish ownership
rights 101
5. Banking rules must establish a banking
file , 102
6. Possible adjustments to ERCs 104
7. Banking rules must provide for
accommodation of changes in SIP
requirements . 105
P. ERG' transactibhs' hot' covered'by' state
controlled trading rules 7~\ I I T 108
APPENDIX A List of EPA Regional Office Contacts
APPENDIX B Model State Controlled Trading Rules
APPENDIX C List of Supplemental Materials . . ,
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I. INTRODUCTION: RATIONALE FOR AN
INTEGRATED CONTROLLED TRADING
POLICY' STATEMENT'
This proposed policy statement sets forth the criteria EPA will
use in evaluating proposed State activities which fall within the
scope of the Agency's Controlled Trading program. Controlled Trading
activities include the bubble, emission offsets, netting and emission
reduction banking and trading.
These voluntary approaches all rest on allowing use of sur-
plus emission decreases at one emission .point to comply with an
emissions limit at a second point. The second emissions point in
effect takes credit for these extra reductions, rather than reducing
emissions or being prohibited from adtling new emissions. The Clean
Air Act and EPA,'s regulations presently .allow such controlled trades
as an alternative means of meeting SIP requirements, or in con-
nection with review of the construction of major new sources of air
pollution. Controlled trades to meet SIP requirements are called
"bubbles"; those in connection with new,source review are called
either "offsets" or "netting," depending on the exact transaction
involved.
Whatever the exact name, these Controlled Trading trans-
actions open the way to more efficient emission reductions by
encouraging relatively greater control on sources where control is
cheap, in exchange for relatively less control on sources where
control is expensive -
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10
The bubblel/ applies specifically to existing sources for
use in developing lower cost compliance plans to meet existing
or newly imposed emission limits. EPA's Bubble Policy (44 PR
71779, Dec. 11, 1979) is simply a way to encourage States to
use their freedom under the Clean Air Act to develop a cost-effective
means of achieving the emission reductions required of sources
to comply with the national ambient air quality standards (NAAQS).
Under the bubble, firms can increase controls at one emission
point where control costs are inexpensive in return for an equiva-
lent relaxation in controls where costs are high. Sources cannot,
however, use the bubble to meet new source performance standards
or related technology-based standards required of new sources, with
the exception of requirements developed under §lll(d) of the
Clean Air Act.
The emission' off se'bl/ provisions of the Clean Air Act permit
industrial growth in nonattalnment areas without compromising progress
toward cleaner air by requiring new or expanding major stationary
sources to arrange for "offsetting" emission reductions from existing
sources.
!/ The Bubble Policy was issued on December 11, 1979 (44 PR
71779). Recent changes to the policy were proposed in the context
of New Jersey's state bubble rule for VOCs on November 24, 1980
(45 PR 77459)- Final action on the New Jersey proposal was
taken on April 6, 1981 (46 PR 20551).
I/ EPA published its original offset policy on December 21,
1976, (41 PR 55524).. Revisions to this ruling were published
on January 16, 1979 (44 PR 3274), May 13, 1980 (45 PR 31304)
and on August 7, 1980 (45 PR 52676).
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The history of the emission offset policy can be traced back
to the 1970 Clean Air Act, which required all areas of the country
to attain the air quality standards by 1975 at the latest. As
the 1975 deadline approached, a regulatory dilemma arose because
the statute prohibited new construction in nonattainment areas
unless the air quality standards were achieved on schedule.
EPA's solution to this problem, which it announced in late
1976, was its Offset Ruling, 41 PR 55534 (now revised and codi-
fied as Appendix S to 40 CPR Part 51). Under the Offset Ruling,
new sources would be allowed to construct in areas that did not
meet air quality standards if they met three conditions.
Specifically, (1) the source had to install high performance
control technology that could meet a control standard termed the
"lowest achievable emission rate" (LAER), (ii) all other sources
owned, operated or controlled by the same company in the same
air quality control region had to be in compliance or on a
schedule leading to expeditious compliance with the applicable
emission limits, and (111) the source had to induce other sources
In the same area to reduce their emissions by an additional amount
beyond what the law already required. This amount had to be enough
to "offset" the additional emissions due to the new source.
In the 1977 Amendments to the Act, Congress added to
the statute provisions similar to those in EPA's 1976 Offset
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12
Ruling and required States to develop their own plans
for allowing new sources in nonattainment areas and to incorporate
these provisions into their SIPsJL/
Netting!/ applies only to modifications that lead to emissions
increases at existing sources. Under these regulations sources
can avoid the requirements of new source review by reducing
existing emissions at the same source sufficiently to compensate
for those increased emissions.
Offsets, bubbles and netting all involve the immediate use
of emission reductions at one point to balance emission increases
at another. Banking,2/ on the other hand, involves the creation
of a system to allow firms to store or "bank" emission reductions •
that have been certified by the responsible reviewing authority
I/ EPA amended the Offset Ruling on January 16, 1979 to con-
form to the 1977 Amendments to the Clean Air Act. See 44 PR 3274.
In these revisions, EPA for the first time allowed sources to
"bank" surplus emission reductions, or store them for future
use. However, in practice not many sources have taken advan-
tage of this opportunity. EPA believes that this reluctance
is an entirely understandable reaction to a lack of regulatory
certainty and is proposing today's action to help correct this.
JL/ Rules governing the use of netting were published on August 7,
1980 (45 PR 52676). EPA has recently proposed to expand the use
of netting in nonattainment by broadening the definition of
source. See 46 PR 16280 (March 12, 1981).
EPA first allowed States the option of permitting sources to
bank emission reductions as part of its Emission Offset Inter-
pretative Ruling. See 44 PR 4285 (Jan. 16, 1979).
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13
These "banked" reductions then can later be used as an offset,
in netting, or as part of a bubble.
The common element of each of these regulatory actions is
that firms are reducing their emissions beyond what is legally
required of them. These extra reductions can then be used to
allow an emissions increase somewhere else beyond what the law
otherwise allows. Before sources can use these reductions
in a controlled trade to meet or avoid a regulatory requirement,
the amount of the reduction must be quantified and certified by
the appropriate reviewing authority. Only when an emission
reduction has been quantified and certified will sources have
the certainty that such reductions could be used to satisfy a
permit requirement.
This policy statement refers to any emission reduction, that
can be used in a Controlled Trade or that can be banked, as an
emission reduction credit (ERG). ERCs can be used by the creating
firm as part of a bubble, offset or netting transaction, either
now or in the future. Alternatively, they can be sold to another
firm for similar use with the limited restrictions discussed
later in this policy statement.
Today's action proposes comprehensive guidance for States
and industry to use in undertaking Controlled Trading activities.
It describes the minimum criteria EPA proposes to use in evaluating
State controlled trading rules and activities governing the
creation, holding (or banking), and use of emission reduction
credits.
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A. WT ISSUE'THIS' POLICY' STATEMENT?
EPA has already published a policy statement governing the
use of the bubble and rules governing offsets and netting. In
large part, these published notices provide adequate guidance
concerning the creation and use of emission reductions in
various regulatory contexts. The official guidance for each
of these programs discusses such Issues as establishing a baseline
for measuring, quantifying and evaluating the use of emission
reductions — the same issues discussed In this guidance. And
in many cases, existing State rules should satisfy the criteria
for State programs described in today's action.
Nonetheless, consolidated guidance is needed because the
interrelationship between the several components of Controlled
Trading has not been adequately addressed in previous Federal
announcements. Furthermore, during the last six months the Con-
trolled Trading program has evolved rapidly and there Is a need
to consolidate current policies in one document. Given the
close relationship between the various Controlled Trading pro-
grams, Integrating them all in one document should significantly
reduce administrative complexity and make the program as a
whole easier to understand and to implement.
In addition, EPA has never Issued any comprehensive guidance
covering "banking," even though it is in many ways both the most
fundamental part of the Controlled Trading program and the one
subject to the most uncertainty. States and sources have been
reluctant to create banks or deposit surplus emissions in them in
the absence of regulatory assurances regarding the form and opera-
ting rules of the banking system. This policy statement is
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15
designed to help correct that situation by defining the minimum
legal standards for banking systems, and by offering suggestions
as to what policy choices states might make beyond those minimum
requirements that, in EPA's view, would most likely result in
workable and useful banking programs.
Once States have incorporated banking, bubble or compre-
hensive Controlled Trading rules into their State Implementation
Plans, the regulatory framework will exist for firms to signifi-
cantly reduce their costs of complying with air quality regulations
1. Achieving' Economic' Savings
The primary objective of EPA's Controlled Trading
program is to minimize the costs of achieving the goals of the
Clean Air Act. Controlled Trading can accomplish this objective
by allowing firms to create or purchase low-cost emission'reduc-
*
tion credits from one emission point and to apply these reductions
to meet or avoid a regulatory requirement at a different emission
point where control costs are high.
A regulatory program that allows sources the flexibility to
develop lower cost compliance strategies is a significant change
from the historical approach to achieving air quality. Under the
current regulatory program, each source must comply with an
emission limit specified by the State or, occasionally by EPA,
at each point of pollution. Although States take costs into con-
sideration in setting these emission limits, regulatory agencies
have only a limited ability to identify and require controls at
the lowest cost points of emissions. As a result, under the
current regulatory approach, marginal control costs vary widely
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16
be tween source categories and across emission points within the
same source categories. These differences are the result of varia-
tions in age, size, plant configuration and other factors affecting
an Individual plant's costs of control. By allowing firms to increase
controls where costs are low in return for relaxing controls where
costs are high, use of the Controlled Trading program could sharply
reduce a firm's compliance expenditures. For example, based on the
first 70 bubble applications being developed, firms are projecting
average savings of $2 million over the costs of installing the con-
trols required by the traditional regulatory approach, with savings
of some individual bubbles far exceeding that amount.
While the bubble allows existing sources to reduce their costs
of control, the offset and netting programs serve an analogous func-
tion for new or expanding sources by allowing them to locate cost-
effectively in nonattainment or PSD areas without violating ambient
air quality restrictions. Since the inception of the offset policy
in 1976, more than 1000 firms have used the program to build or
expand their facilities.
To take full advantage of these potential benefits from
Controlled Trading, firms must be willing to Invest in reduction
credits even when they have no immediate need for them. While
substantial savings (estimated to exceed several hundred million
dollars from bubbles approved this year) may still be achieved
in the absence of such investment, only if investment occurs
will a market develop where firms regularly buy and sell ERCs.
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Firms will only actively participate to create a market for ERCs
if sufficient certainty exists to minimize their risks and to
protect their investments. For example, firms will be reluctant
to create ERCs in advance of their need unless an area has adopted
a banking provision which gives them some assurance that these
ERCs will be recognized as having a definite regulatory value
and will not arbitrarily be taken to meet new emission control
requirements. Firms, in the absence of such assurances will not
create reductions until they are ready to use them, and thus
lose the opportunity to reduce emissions at the most cost-
effective time.
Investments in additional controls generally can be made at
least cost when a firm must reduce emissions to meet an applicable
State Implementation Plan (SIP) requirement. If the source waits
until later to apply additional retrofit technology, then the
same total reduction may be considerably more expensive. In short,
fl>
under' the current system, firms may often ignore the economies of
scale and timing involved in producing reductions beyond what the
SIP requires, thereby losing a valuable opportunity for more cost-
effective emission reductions.
The history of the offset and bubble programs demonstrates
that the willingness of firms to buy and sell ERCs is not yet
widespread. While bubbles and offsets between two different
plants or two different firms are currently allowed, the vast
majority of trades to date have Involved "internal" exchanges, in
which the firm creating the reduction also uses it to meet a
regulatory requirement at a different emission point within the
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same plant. Although substantial cost savings have been achieved
using emission reductions internally, control cost differentials
vary even more widely across industries. Therefore, interplant
and interfirm use of the bubble and offsets should result in
even more significant savings .£/
By providing a mechanism for firms to secure credit for creat-
ing ERCs and the potential to profit from their sale, Controlled
Trading, and banking in particular, should result in a long-term
improvement in the cost-effectiveness of our current regulatory
framework. Under the existing program, there is no incentive for
firms to seek out low-cost techniques for controlling emissions
beyond what is legally required of them. As a result firms have
no reason" to explore innovative ways of controlling greater
amounts of emissions. Even though it may sometimes be possible
to install a new technology that is only slightly more costly
than the traditional controls but which can capture significantly
more emissions, in the absence of a banking system little Justi-
fication exists for doing so. Firms will only make these additional
investments in controls if they are provided the necessary legal
protection and regulatory framework for the creation, storage
and use of ERCs.
.§/ In a number of instances a firm may have little choice but
to seek emission reduction credits from other firms. Sources
with only one emission point or with multiple points with simi-
lar control costs are likely to seek other firms in the area in
contemplating use of the bubble. Firms seeking to locate at a
new location in a nonattainment area will necessarily need to
obtain offsets from other firms.
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Many States have delayed adoption of their bubble and banking
programs awaiting formal EPA guidance. Similarly, industry has
been reluctant to participate fully in the program until the legal
framework was clearly established. To deal with industry's con-
cerns, a State Controlled Trading program must address the concerns
that ERCs will be confiscated and the concern that the administrative
process may result in costly delays. Today's policy statement
presents a proposed framework for State programs which should
alleviate these concerns. It presents the minimum administrative
requirements and restrictions on the use of Controlled Trading that
are, in EPA's view, consistent with the Clean Air Act. EPA invites
comment on whether it has understated or overstated these minimum
legal requirements.
The emission reduction credit (ERG) is the underlying link
between the different elements of the Controlled Trading program.
Much of the policy statement provides guidance for States concerning
what qualifies as an ERG and the rights associated with owning
or using ERCs. Under the framework proposed today, the ERG
would become a standardized commodity, which has already been
quantified and certified by the reviewing authority. During the
time between certification and use, the ERG would be "banked"
and prospective buyers would know of its characteristics and
existence. The risk to firms interested in investing In creating
or purchasing this commodity will be significantly reduced by
the existence of an official system for setting forth the charac-
teristics and rights associated with ERCs. Because it can be
more freely and easily used as an offset, in a bubble or to "net
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out" of new source review, the demand for its use should be
significantly enhanced.
2. Reduced' Administrative' Complexity
In addition to providing firms with the opportunity to
achieve significant economic savings by reducing their costs of
controlling emissions, today's proposed guidance should also
significantly reduce the administrative complexity and costs of
using Controlled Trading itself.
a. Consolidation'''of' Past' Policies
By simplifying, consolidating and making consistent
existing policy statements and rules, today's actions should clarify
the minimum requirements and significantly reduce the administrative
complexity of the Controlled Trading program. States interested
in developing a program and sources seeking to determine relevant
Federal policy will generally only have to review this policy state-
ment to obtain the information necessary to initiate these actions..!/
b . Increased''Authority' to' States'
This policy statement establishes the principles and
circumstances under which EPA will allow Controlled Trading without
requiring individual State Implementation Plan (SIP) revisions for
certain transactions. By adopting State banking and bubble rules
i/ In developing a set of comprehensive rules, States may wish to
review EPA regulations concerning offsets 44 PR 3253 (Jan. 16, 1979)
and netting 45 PR 5276 (Aug. 7, 1980).
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consistent with the criteria established by this policy statement,
States and industry can avoid the delay, time and resources involved
in case-by-case SIP revisions for many individual bubble, offset,
or banking transactions.
Under Section 110 of the Clean Air Act, States have primary
responsibility for developing and implementing a program that
"attains and maintains" the national ambient air quality standards.
EPA's primary responsibility is to review the adequacy of these
State Implementation Plans (SIPs) (Section 110(a)(2),172(b)), to
approve changes to them (Sections 110(a)(3) and 110(i)), and to
oversee their enforcement (Section 113) • Thus, under the statute
EPA is required to review actions taken by States which create
or modify provisions of a SIP. EPA has determined that in several
specific circumstances, Controlled Trading activities under State
rules approved under this policy statement are not changes that
need to be reviewed on a case-by-case basis and therefore need
not be submitted and approved by EPA as individual SIP revisions.
The specific circumstances for which SIP revisions are not required
are explained in detail in Section D.2.(a) of the accompanying
policy statement.
By not requiring SIP revisions for many bubble, banking and
offset transactions, this action will substantially reduce the
potential administrative complexity, uncertainty and delay associated
with use of this program. It also represents a shift from EPA's
past use of detailed examination of each controlled trade to an
effort to manage air quality by exception and through post-hoc EPA
audit of State programs for certain types of controlled trades, s,o
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1'ong as the safeguards described in these guidelines are incor-
porated into the State's program.
This policy statement therefore includes a number of specific
requirements which State programs should contain to insure EPA can
properly and effectively exercise this oversight role. For example,
one of the criteria used to evaluate the acceptability of a
State program is whether it contains an adequate system for
recording and tracking the creation, banking, and use of'emission
reduction credits. In addition to performing other functions,
this ERG registry will enable EPA to perform auditing activities,
and will assist States in tracking PSD increments and in preventing
the use of the same ERCs .to meet more than one permit requirement,
all of which will help assure that air quality is not adversely
affected by the Controlled Trading program.
3. Relaxation' of Past' Constraints
This action proposes to modify and reinterpret existing
EPA policy in several critical areas. These proposed changes will
give States and sources expanded opportunities to participate in
the Controlled Trading program with significantly reduced adminis-
trative burdens. Specific proposals incorporated into this action
include:
0 A procedure allowing firms generally to use the bubble
in nonattalnment areas that lack SIPs which demonstrate
attainment of ambient standards;
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0 Procedures reducing the extent to which modeling is
required to determine the ambient air quality impact of
most proposed bubbles, netting or offset transactions;
0 A change in policy which allows states to extend com-
pliance deadlines, in areas which have received attainment
extensions from 1982-1987, for sources proposing hydrocarbon
bubbles where the extension will be environmentally
beneficial;
0 A change in policy by which on a case-by-case basis EPA
may defer issuance of a noncorapllance penalty notice
under Section 120 of the Clean Air Act if a firm has
proposed a bubble which is likely to be approved;
0 A change in policy allowing sources to use the bubble
to come into compliance, instead of having to be on a
compliance schedule with original SIP limits to be
eligible to bubble;
0 A change in policy allowing broader use of reductions
from shutdown;
0 Provisions eliminating the past ban on bubbles in non-
attainment areas for volatile organic compounds involving
different control technique guidance (CTG) categories.
These and other changes,£/ along with EPA's revised policy
concerning SIP revisions, are explained in greater detail in the
text of the policy statement.
B. RELATIONSHIP" TO'EXISTING-'RULES' AND' POLICIES
EPA's Controlled Trading Initiatives began with the Agency's
Emission Offset Interpretative Ruling published on December 21,
1976 (41 PR 55524). Rules and policies governing additional
components of the Controlled Trading program include the revised
Offset Ruling (Jan. 19, 1979) (44 PR 3274); the Bubble Policy
(Dec. 11, 1979) (44 PR 71780); and new source review rules,
£/ EPA's intent to make several of these changes was previously
announced on January 16, 1981. This proposed policy statement
implements that announcement and constitutes an Interim step in
issuing formal guidance referenced in those releases.
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Including provisions affecting offsets and netting (Aug. 7, 1980)
(45 PR 52676). To avoid confusion, the following sections explain
the specific effect of this policy statement on each of these
existing programs.
1. The"'Bubble' Policy
In using the bubble a source is proposing to reduce
emissions at one point beyond what is legally required in return
for an equivalent relaxation of controls at another point. Thus,
in evaluating the bubble proposal, two key elements are considered.
The reviewing agency must evaluate both the proposed emission
reduction that constitutes part of the bubble and must determine
that the reduction is equivalent to the proposed increase in
emissions both in terms of ambient air quality impacts and enforce-
abillty. The Bubble Policy presented guidance for States and
EPA to use In evaluating the acceptability of proposed reductions
and corresponding increases.
This policy statement proposes to supersede the Bubble Policy.
It Incorporates the essential parts of that earlier action, while
proposing to provide sources greater opportunity to benefit from
use of the bubble. Each bubble application necessarily involves
counterbalancing emission increases and decreases. The first part
of this Policy Statement (Section C) proposes criteria governing
what qualifies as an acceptable emission reduction. In order to
be consistent with other elements of the Controlled Trading program,
as set out in this policy statement, emission reductions that
qualify for use In a bubble are termed ERCs. The second part of
this proposed policy statement Includes EPA's guidance governing .
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the use of ERCs in bubbles. This section discusses such factors
as the ambient test used to evaluate proposed bubbles, the use
of modeling, and restrictions on trades involving hazardous emis-
sions. This section also presents the criteria EPA proposes to
use to determine whether a SIP revision is required for a particular
bubble transaction. All bubble activities proposed by industry
and States will hereafter be evaluated on the basis of the criteria
established in this policy statement.
2. The" Banking Policy
In its revised January 16, 1979 Emission Offset Interpre-
tative Ruling, EPA authorized States to establish banking programs
as part of their SIPs. For the first time, EPA allowed firms to
receive credit for reducing their emissions beyond legal require-
ments without requiring them to use these reductions at the same time
they were created. The preamble to that ruling called for States to
establish rules governing the rights to and ownership of banked
emission reductions and a registry to track their creation, sale
and use. The preamble also requested comments on how this
program should be implemented. Based on the experiences of
States and Industry during the period since publication of that
notice, EPA is proposing guidance to States through this policy
statement to assist them in- evaluating and adopting acceptable
banking programs,
With publication of this policy statement, EPA has altered its
previously announced Intention to publish a Federal rule governing
emission reduction banking. This policy statement represents the"
vehicle for providing formal guidance for States and industry.
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State rules governing banking of ERCs should balance two
important factors. The first factor that must be considered in
drafting a banking rule is the requirement that this program
be consistent with the Clean Air Act. A banking program cannot
interfere with a State's efforts to achieve and maintain the
national ambient air quality standards. Thus, if additional
emission reductions are required to attain the standards, or to
correct for a violation of a PSD increment, the existence of
banked ERCs must not interfere with that effort. To insure that
no such interference occurs, States must include a provision
in their banking rules stating exactly how ERCs will be affected
should additional controls be required. The rule must also pro-
vide for an adequate system for tracking the creation and use of
ERCs, preventing use of the same banked ERG more than once and
guarding against multiple claims of ownership.
Secondly, State banking rules should provide adequate certainty
to industry that the investments they make in producing ERCs will
not be in Jeopardy. This is not to suggest, however, that the
decision to bank ERCs must be risk-free. Industry is used to deal-
ing with some degree of risk in most of its investment decisions.
The degree of risk with regard to banking can be minimized by the
adoption of a detailed set of rules specifying restrictions on what
reductions qualify to be banked, how they can be used, and any pos-
sible future changes affecting their value.
Although more than a dozen States have already proposed banking
provisions as part of their SIPs, with a few notable exceptions
these provisions simply authorize banking in a few sentences.
These provisions do not contain sufficiently detailed rules
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governing banking to provide adequate certainty to industry or
to satisfy the basic requirements of the 1979 Offset Interpretative
Ruling, nor do they provide adequate safeguards to insure proper
functioning of a banking program in terms of assuring and main-
taining ambient air quality.
Several Jurisdictions, including Louisville, Puget Sound and
San Francisco, have adopted more comprehensive banking provisions.
These rules appear generally to be consistent with this policy
statement, but for the banked ERCs to be federally enforceable and
to be legally protected, they must be incorporated in the relevant
SIPS. That will allow EPA to determine, as the law requires,
whether the specific banking system is consistent with the basic
goals of the Clean Air Act to attain and maintain air quality
standards. Banking activity that has previously occurred under
•»
these provisions should generally not be affected. EPA will assist
these jurisdictions in making any prospective changes to their
banking provisions to insure consistency with the requirements
of the Clean Air Act.
State banking rules that fail to comply with the basic safe-
guards proposed in this policy statement cannot be approved by EPA
b/ecause they would interfere with the requirement under the Act
that State Implementation Plans maintain and attain ambient air
quality standards. Moreover, actions taken under banking provisions
that are deficient will not effectively alter original SIP emis-
sion limitations unless they are submitted and reviewed as indivi-
dual SIP revisions.
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Banked emission reductions, by definition, represent reductions
that go beyond what State Implementation Plans and the Clean Air Act
require at the time they are created and deposited. Accordingly,
States could establish ERG banks under their own state laws without
EPA approval. Such banking systems would, however, be of limited
utility for several reasons. Sources banking ERCs in these Juris-
dictions would not necessarily have the protection from arbitrary
confiscation that can be provided under Federally approved banking
rules. Moreover, because these reductions have not been certified
under EPA-approved guidelines, when they are proposed for use in
a controlled trade, they would necessarily undergo greater
scrutiny. Sources in Jurisdictions without EPA-approved banking
rules can only obtain this protection and increased certainty by
submitting proposed reductions as individual SIP revisions.
The creation of banked emission reduction credits in States
with rules that are consistent with the criteria established by
this policy statement and that have been incorporated into their
SIP will not require individual SIP revisions for each individual
banking transaction. To provide the flexibility and certainty
essential to developing a viable trading program and to minimize
the administrative requirements to bank by eliminating the require-
ments for individual SIP revisions, States should act quickly to
make any necessary changes to their existing regulations to satisfy
the criteria proposed in this policy statement. The model rules
included in this document as Appendix B should provide a useful
starting point for States in developing their banking programs.
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3 . New' Source Rules
EPA has published regulations governing new source
review rules for the construction of major new facilities
and modifications of existing ones as part of its revised offset
ruling (Jan. 16, 1979) and in response to the Alafiama' Power case
on May 13, 1980 and August 7, 1980. These rules govern new or
expanding sources locating in either PSD or nonattainment areas.
In response to these regulations, States are currently modifying
their new source review rules governing the use of emission
reductions as offsets, and drafting rules governing their use in
netting to avoid triggering new source review. This proposed
policy statement is designed to consolidate existing rules governing
the creation and use of emission reductions, including those
used in netting and offsets. As a policy statement, it will
not alter EPA's regulations issued on August 7, 1980, nor will it
require States to make changes in their existing new source review
programs. Instead, it provides guidance to States seeking to Inte-
grate Controlled Trading into their on-going new source review
program. This guidance simply explains the types of actions
EPA encourages States to take which are consistent with Federal
regulatory requirements and which will facilitate the use of Con-
trolled Trading opportunities to reduce compliance costs and to
Improve environmental quality. This policy statement also proposes
certain interpretations of provisions in the existing regulations
which are unclear or where an inconsistency exists among current
Federal rules. For example, in the August 1980 PSD rules the
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problem of tracking the creation and use of emission reductions
that are available for use as PSD offsets OP in netting is
highlighted Ji2/ Lack of a tracking system to determine what
emission reductions qualify to be used in this context increases
uncertainty for industry and makes it considerably more difficult
for EPA to effectively audit the increment program. By incorpor-
ating PSD netting and offsets into an ERG registry, States adopt-
ing Controlled Trading rules will be able to avoid this problem.
EPA urges States to consider conforming their new source
rules to the criteria outlined in this policy statement by making,
what for most will be only minor modifications in their current
rules as part of their SIP revision establishing a banking and bubble
program.
C. POSSIBLE' ACTIONS'STATES' CAN'TAKE
This proposed ..policy statement provides States several options
for Incorporating Controlled Trading activities into their regulatory
programs. No action is required of States by this policy statement.
In those States that elect to do nothing, offsets will continue
to be reviewed by the State reviewing authority as they arise and
must be negotiated in the absence of a banking system. Similarly,
individual bubbles and banking actions may occur, but they must
be handled on a case-by-case basis as separate SIP revisions.
For a further discussion of double-counting of emission
reductions in PSD areas, see 45 PR 52722 (August 7, 1980).
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However, States that adopt the program detailed in this policy
statement will be taking an important affirmative step to reduce
the burden on their local economies of meeting air quality regula-
tions. They will also minimize the need for individual SIP revi-
sions and provide greater flexibility and legal certainty for firms
interested in the cost-saving opportunities offered through
Controlled Trading.
States may decide to issue a separate banking rule,•a separate
bubble rule, a rule permitting all trades but not allowing banking,
or a combined Controlled Trading (i.e., both bubble and banking)
rule. Whatever approach is adopted, these rules must set condi-
tions governing the creation, storage (banking), trading, and use
of emission reduction credits that are consistent with this policy
statement. EPA has prepared a set of model rules for use by inter-
ested States and is committed to acting on proposed SIP revisions
containing Controlled Trading rules as quickly as possible.
States whose SIPs already contain banking or bubble provisions
should re-examine these provisions in light of this policy statement
and work with EPA Regional Offices in proposing any actions that
may be necessary to expand their potential usefulness.
Finally, at the same time, States should examine their offset
and netting provisions in light of this policy statement to
determine what changes, if any, may be useful to provide for
consistent treatment of Controlled Trading activities in order
to maximize the economic and air quality benefits possible through
this program.
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D;. TODAYS" ACTION' IS' ISSUED AS^A' PROPOSED' POLICY"'STATEMENT
Today's action takes the form of a proposed policy statement.
EPA is issuing this guidance first as a proposal because sub-
stantial segments of Controlled Trading, particularly the use of
banking, raise a number of complex administrative and legal issues
which have yet to be fully explored through the notice and comment
process. EPA urges interested parties to address any relevant
issues in their comments. EPA is particularly interested in
receiving comment and technical support for the criteria the Agency
should adopt for determining the types of controlled trades which
should require individual SIP revisions and those that cannot
Jeopardize an area's plan to achieve and maintain air quality
goals under State rules and therefore need not be submitted for
EPA review on a case-by-case basis.
Although EPA is issuing this statement as a proposal, until
final action is taken the Agency intends to use the criteria
established in this document as interim guidance in evaluating
Controlled Trading activities, including the adoption of State
banking and bubble rules. Many states are currently drafting
such rules and they should continue to do so. EPA will review
them in the context of today's proposal.
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II. CONTROLLED TRADING POLICY STATEMENT:
Guidance Concerning the
Creation, Banking and Use of
Emission Reduction Credits
This policy statement sets forth criteria EPA will use in
evaluating proposed State Controlled Trading activity. These
criteria provide guidance to States regarding the creation,
banking, trading, and use of emission reduction credits (ERCs)
in bubble, offsets and netting transactions, in both nona-ttain-
raent and PSD areas. States should consider the full array of
available options in designing a Controlled Trading program best
suited to their local economic conditions and air quality manage-
ment concerns.li/ This policy statement presents the minimum
conditions EPA considers necessary under the Clean Air. Act,
Sections 110, 165, 172 and 173, to insure minimum compliance
with that statute.
A. ORGANIZATION OF POLICY STATEMENT
This policy statement is organized into the following five
sections:
1. Definitions
This section defines the key terms used in the Controlled
Trading program. It explains existing terms that are relevant to
L States are free to place more stringent limitations on the
creation or use of ERCs than those required by this policy state-
ment. For example, States are not required to treat all ERCs in the
same manner, either at time of creation or use. Possible classi-
fication schemes based on the size of the source, the method used
to create the reduction, or any of a number of factors are discussed
in the Emission Reduction Banking Manual. See Appendix C.
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Controlled Trading activities and new terms that have been Intro-
duced specifically for the purposes of this program.
2. Creating Emission Reduction Credits
This section presents the necessary conditions for an emis-
sion reduction to qualify as an "emission reduction credit" and
therefore be eligible to be banked or used in a controlled trade.
To qualify for credit, an emission reduction must be surplus,
enforceable, permanent and quantifiable.
3. Using Emission Reduction Credits
This section discusses the various regulatory contexts
(i.e., offsets, bubbles and netting) In which ERCs can be used.
Procedures and tests to evaluate the ambient impact of proposed
uses are also discussed. Finally, this section sets forth the
circumstances in which an Individual SIP revision can be dis-
pensed with or Is still required for particular controlled trades.
4. Banking Emission Reduction Credits
For a variety of economic and planning reasons, sources
may wish to reduce their emissions below current requirements
and hold those reductions for future use or sale. This section
presents EPA guidance for developing a State banking rule governing
deposits of ERCs. By banking an ERC, a source can obtain a binding
regulatory statement of the nature and quantity of that ERC and,
also, a measure of protection against future regulatory actions
that might diminish its worth.
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5. Controlled Trading Activity In the Absence of a
State Rule or Outside the Scope of a State Rule
Some States may elect not to incorporate banking or bubble
rules into their SIPs. Even where jurisdictions adopt such rules,
individual bubble or offset applications may fall outside the
scope of the rule, and therefore must be submitted as a distinct
SIP revision. Any banking activity in the absence of an approved
State rule must also be submitted as an individual SIP revision.
This section explains EPA's criteria for evaluating such "SIP
revision transactions."
For each of these sections, this policy statement explains
the rationale supporting relevant criteria, defines key concepts,
and presents EPA's guidance for State rules to satisfy Clean Air
Act requirements.
B. DEFINITION OP TERMS*
For the purpose of this policy statement, the following
definitions are applicablerii/
1. "Actual emissions"
Actual emissions means the actual rate of emissions of a
pollutant from an emissions unit as determined in accordance with
the following:
In general, actual emissions as of a particular date (e.g.,
the date of application for credit) shall equal the average rate,
in tons per year, at which the unit actually emitted the pollutant
_ To be consistent with existing Federal policies, where possible,
these definitions have been taken from past EPA actions. -Thus, the
definitions of actual emissions, allowable emissions, Federal enforce-
ability, potential to emit and stationary source are all drawn from
EPA'S August 7, 1980 Federal Register notice (45 FR 52676).
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during a two-year period which precedes the particular date and
which is representative of normal source operation. The reviewing
authority shall allow the use of a different time period upon a
determination that it is more representative of normal source
operation. Actual emissions shall be calculated using the unit's
actual operating hours, production rates, and types of materials
processed, stored, or combusted during the selected time period.
The reviewing authority may presume that the source-pspecific
allowable emissions for the unit are equivalent to the actual
emissions of the unit..!!/
For any emissions unit which has not yet begun normal opera-
tions on the particular date on which an application for credit
is submitted, actual emissions shall equal the potential to emit
of the unit on that date.
2. "Allowable emissions"
Allowable emissions means the emissions rate of a stationary
source calculated using the maximum rated capacity of the source
and the most stringent of the following:
a. The applicable standards set forth in 40 CFR
Parts 60 or 61;
b. Any applicable State Implementation Plan
emissions limitation including those with a future
compliance date; or
!!/ See 45 PR 52718 (August 7, 1980) for a more detailed
discussion of the limited circumstances where this presumption
would apply. Generally, this presumption would only apply where
EPA or a State has devoted the necessary resources to evaluate and
adopt a source specific emission limit tailored to the specific .
design and operations of a plant.
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c. The emissions rate with any established restrictions
on hours of operation or operating hours as specified as a
Federally enforceable permit condition, including those with
a future compliance date.
3. Banking
Banking is the regulatory process through which firms can store
emission reduction credits for future use or sale. Only. ERCs cer-
tified by the reviewing authority can be banked. The legal status
of banked ERCs is defined by State and local rules governing their
creation, storage, and use.
4. Baseline Emissions
The level of baseline emissions serves as the starting point
for measuring the amount of ERCs a source has created. Only emis-
sion reductions below the baseline may qualify as ERCs. Baseline
emissions will generally be determined by a source's actual emis-
sions, but in some cases may be based on allowable emissions. See
Section II. C.I.a of this policy statement. This policy statement
Incorporates existing definitions of baseline emissions contained
in prior EPA guidance.
5. Bubble
Through the use of a bubble existing sources can propose an
alternative means to comply with a set of emission limits. Under
the bubble, sources can control more than required at one emission
point where control costs are relatively low (thus creating an
emission reduction credit) in return for a relaxation of controls
at a second emission point where costs are high. To use the bubble,
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sources must demonstrate that emission limits contained in the bub-
ble are equivalent to the existing SIP limits in terms of both their
effect on ambient air quality and enforceability. The Bubble Policy
was first issued on December 11, 1979 (44 PR 71780).
6. Compliance Instrument
A document which contains the federally enforceable emission
limits developed under a Controlled Trading program. The compliance
instrument could take the form of any one of a number of existing
methods of imposing enforceable limitations, including an operating
permit developed under a State Controlled Trading rule; a SIP emis-
sion limit; a preconstruction permit; or a consent decree. It
must specify hours of operation (if limited), input parameters,
test methods to determine compliance, emission limits for each
emission point, and any other operating characteristics relevant
to enforcing control requirements.
7. Controlled Trade
A controlled trade involves the use of emission reductions at
one emission point to meet or avoid a regulatory requirement at a
second emission point. Netting, emission offsets and bubbles are
the three types of controlled trades currently permitted by EPA.
8. Emission Reduction Credit
Netting, offsets, and bubbles each involve the use of an
emission reduction to balance against an emission increase. The
emission reduction credit constitutes an emission reduction that has
been approved, quantified and certified for use in such a controlled
trade. Only those emission reductions that are surplus, permanent,
quantifiable and enforceable will qualify for credit.
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9. Emission Reduction Credit Registry
Each state adopting a Controlled Trading rule must establish an
ERG registry. If a state does not have a banking system, the regis-
try need only reflect who made each emission reduction involved in
a controlled trade, when and where it was made, when and where it
was used, and the nature of the controlled trade to which it has
been committed. If a state does have a banking system, these regis-
try requirements still apply to ERCs that are being used in a control-
led trade. In addition, banked ERCs must be registered under a some-
what more comprehensive system required to meet the needs of tracking
ERCs held over time. When a banked ERC is used in a controlled
trade, it should be removed from the "banking" file and entered on
that part of the "registry" that tracks active ERCs. The ERC regis-
try can also be used as an aid by states in tracking increment base-
line and consumption in attainment areas.
10. Federally Enforceable
All changes to emission limits involved in a controlled trade
transaction must be federally enforceable. Generally, to be federally
enforceable, an emission limit must be required by any applicable
State Implementation Plan, or by any permit requirements established
pursuant to 40 CFR 52.21 (new source permits for sources locating in.
PSD areas) or 40 CPR 51.18 (new source permits for sources locating
in nonattainment areas) or 51.24 (State PSD new source permits). An
emission limit can be established by an applicable implementation
plan if it is either contained in an individual SIP revision or
developed under an approved State controlled trading rule. See
Section II.C.(2)(a) of this policy statement.
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11. Growth Margin
Under Section 173 (1) of the Clean Air Act, States have the op-
tion of requiring new or expanding sources to arrange for offsets on
a case-by-case basis or of creating a growth margin by requiring more
stringent controls on existing sources in excess of those required to
reach attainment. In these States the growth margin would be used
to compensate for increases in emissions from new or expanding sources,
States adopting growth margins are frequently referred to as having
"accommodative SIPs".
12. Netting
Expanding sources in PSD areas, and in limited cases in nonat-
tainment areas, can avoid new source review by reducing emissions at
various emission points at the source to compensate for any increased
emissions from a modification to that same source. Decreases used in
netting must qualify as ERCs and must occur at the same source seeking
fl>
to expand,its facilities. Rules governing netting are presented at
45 PR 52676 (August 7, 1980). EPA has proposed to expand the use of
netting in nonattainment areas. See 46 PR 16280 (March 12, 1981).
13. Offsets
Offsets may be required of new or expanding sources locating in
nonattainment areas and in PSD areas where an Increment violation may
occur. These sources must arrange for compensating decreases in emis-
sions from existing sources in order to ensure that progress toward
cleaner air is maintained. Rules governing offsets can be found at 44
PR 3274 (Jan. 16, 1979) and 45 PR 52676 (Aug. 7, 1980).
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14. Potential to Emit
Potential to emit means the maximum capacity of a stationary
source to emit a pollutant under its physical and operational
design. Any physical or operational limitation on the capacity
of the source to emit a pollutant, Including air pollution control
equipment and restrictions on hours of operation or on the type
or amount of material combusted, stored, or processed, shall be
treated as limiting potential to emit if the limitation or the
effect it would have on emissions is federally enforceable.
Secondary emissions do not count in determining the potential
to emit of a stationary source.
15. Reviewing Authority
The reviewing authority is responsible for evaluating and acting
on particular activities relating to a Controlled Trading program.
This authority will generally be the State or local air pollution
control agency, or other organizations with the necessary legal
authority and resources to effectively operate the program.
16. Stationary Source
Any building, structure, facility or installation which emits or
may emit any air pollutant subject to regulation under the Clean
Air Act. The definition of source is explained more fully in the
August 7, 1980 new source review regulations (45 PR 52676) and
may be modified by EPA's recent proposed change to the definition
of source (45 PR 16280, March 12, 1981).
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C.. CREATING EMISSION REDUCTION CREDITS
Bubbles, offsets and netting each involve the use of emission
reductions at one point to satisfy a regulatory requirement at
another emission point. In evaluating any of these controlled
trades, the reviewing authority must determine what types of
emission reductions qualify to be used in any of these contexts
and must establish rules for quantifying those usable reductions.
For example, State rules!!/ must address such issues as whether
reductions from shutdowns qualify and how to determine the quantity
of emission reductions created by a source. To ensure that all
controlled trades achieve the goal of less costly pollution
control without undermining requirements of the Clean Air Act,
only those reductions which are surplus, enforceable, permanent
and quantifiable can qualify as. emission reduction credits and
be used in such trades. As discussed later in this policy
(Section II.D.), the criteria for using an ERC away from the
place where the emission reduction occurred may cause the use
value of an ERC to be different from the value of the ERC at the
place it was created.
The text of this policy statement refers throughout to "State"
bubble, banking or controlled trading rules. These rules can, how-
ever, be adopted, implemented or applied to regional or local Juris-
dictions . The only requirements are that they be incorporated into
the SIP and that the reviewing authority at the local or regional
level of government have the proper legal authority and necessary.
resources to administer the program.
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1. Surplus Reductions
Only emission reductions that are not required by law can be
considered surplus and therefore qualify to be banked or used in
a controlled trade. The first step in determining whether a
reduction is surplus is the establishment of a level of baseline
emissions. The baseline determination identifies the level of
emissions beyond which reductions must occur for a source to
receive credit. This policy statement follows existing rules
and policies establishing the level of baseline emissions for
calculating reductions. In PSD areas the baseline will be actual
emissions — only those emission reductions in excess of a source's
actual level of historical emissions can be considered surplus.!5/
In nonattainment areas, the baseline will generally depend on
what level of emissions was assumed in.the development of the
SIP.M/ Where a source's allowable level of emissions served
as the basis for the design of the area's sfifctainment strategy,
the baseline will be allowable emissions. In those nonattainment
areas where actual emissions were used in designing the area's
For a discussion of baseline emissions in PSD areas, see
45 PR 52700 (Aug. 7, 1980). This discussion explains why actual
emissions must be used as the emissions baseline in PSD areas.
l See 40 CPR Sec. 51.18(J) (3) . The emissions baselines for
offsets are discussed in detail at 45 PR 52728 (Aug. 7, 1980).
Two exceptions exist to this definition of baseline emissions
in nonattainment areas. For the purposes of netting the
baseline will always be actual emissions (See 45 PR 52714).
For those circumstances in which the Emission Offset Interpreta-
tive Ruling applies, the baseline as described in that regulation.
will apply. See 40 CFR 51, Appendix S.
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demonstration of attainment, that level of emissions will be
used as the baseline. Moreover, in defining what qualifies as a
surplus reduction, States should include as part of their emissions
baseline any future reductions that have been committed in their
SIP to achieving reasonable further progress and therefore not
grant credit to reductions committed in their SIPs to reasonable
further progress.
In developing their Controlled Trading rules, at a minimum
States need only cross-reference the emissions baseline used in
their existing PSD and nonattainment regulations. Although this
approach may in the short-terra be simpler, it may lead to a
problem where an ERG was originally calculated on the basis of
allowable emissions, but is proposed for use in a netting trans-
action which must be based on reductions in actual emissions.
To avoid this potential problem EPA encourages States to develop
a consistent baseline using actual emissions for creating ERCs
thoughout the State. By doing so, a State could avoid having to
recalculate the quantity of ERCs created by a source when evalu-
ating its use in a proposed controlled trade because a different
emissions baseline is applicable. In drafting their controlled
trading rules, States should evaluate their definition of an
emissions baseline, both in terms of necessary consistency with
their assumptions used in SIP planning and in terms of the useful-
ness of a single baseline for all regulatory contexts. The
rationale behind the choice of baseline is explained more fully
in the following paragraphs.
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a. Use of "Actual" or "Allowable" Reductions
in Emissions As the Baseline for Qualifying
for Credit
Rules governing the emissions baseline for calculat-
ing offsets under §173 (DCA) of the Act are described in detail
in the August 7, 1980 Federal Register notice (45 PR 52728). In
general these rules define the emissions baseline as actual or
allowable level of emissions depending on which was used in
developing the area's demonstration of attainment. In some non-
attainment areas, reductions beyond the levels required of sources
in State Implementation Plans (i.e. SIP allowable emission levels)
may not qualify as surplus. In these areas, if all sources
emitted up to their "allowable" levels, a demonstration of attain-
ment would not be possible. Because these SIPs would not. demonstrate
attainment if all sources emitted up to their allowable level of
emissions, actual levels of emissions must serve as the baseline
in these areas. The rationale behind this policy is that "allow-
able" emission limits generally assume continuous operation and
are in most cases much larger than actual emissions. If credit
were allowed for "paper" reductions—credit given sources for
the difference between SIP allowable levels and their actual
emissions—air quality would worsen with their use and reasonable
further progress toward attainment would be Jeopardized. For
example, under the terms of its SIP, a source's SIP allowable
emission limits may permit it to emit up to 600 tons per year of
particulates, but because it operates only 'on an eight-hour
hour shift, its total emissions have only been 200 tons per year..
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If, In designing the SIP's demonstration of attainment, the State
had assumed that source would emit its historical level of 200 tons,
instead of its SIP allowable level of 600 tons, the source should
only be able to get credit for reductions below its actual level.
If reductions were granted (i.e., if 600 tons were used as the
baseline), the area's demonstration of attainment would be threat-
ened and air quality would suffer.
In cases where actual emissions serve as the emissions
baseline, but where a source is in violation of its SIP allowable
emissions limits, the appropriate emission baseline would be the
lower level of actual or SIP allowable emissions.
Some State nonattalnment SIPs, particularly those for sulfur
dioxide, were designed to attain on the basis of allowable emis-
sions. In designing their SIPs, these States used more complex
air quality models in developing their demonstration of attainment.
Using these models, States evaluated alternative SIP allowable
emission limits for major sources and determined the required
limits necessary to demonstrate attainment. Thus, in these
States which demonstrated attainment on the basis of modeling
SIP allowable levels, a source, by binding itself to a lower
level of allowable emissions, can use its SIP allowable emissions
limit as the baseline for calculating surplus reductions.
States should examine their SIP's attainment strategy to
determine whether actual or allowable levels of emissions were
used and should state in their Controlled Trading rules which of
the two will serve as the basis for granting credit for sources
in nonattainment areas.
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An example might help clarify the difference between using
actual emissions and using allowable emissions as the basis for
determining what qualifies as a surplus reduction. Assume a
source's emission limit in a SIP allows emissions of 100 tons per
year (tpy) based on 24 hours of operation and the SIP had used
actual emissions as the basis for determining the quantity of
emission reductions needed to attain air quality standards. If
the source had historically operated_.at this 100 tpy level when
the SIP was approved, but then reduced emissions to 80 tpy, a
surplus reduction of 20 tpy would qualify for credit. On the
other hand, if its actual emissions at the time the SIP was
developed had been 50 tpy, based on an average actual daily
operation of 12 hours, a downward adjustment of the source's
legally enforceable hours to 12 would create a "paper" reduction
of 50 tpy, but an actual reduction of zero. Giving a source •
credit for 50 tpy, for reducing its potential emissions by
changing a piece of paper would undermine the SIP; use of that
credit to offset real Increases in emissions of 50 tons from
a new source without any corresponding and real decrease in
emissions would result in a deterioration of air quality and
would contravene the Clean Air Act.
There are two exceptions to the general rule that the
emissions baseline for calculating emission reductions in non-
attainment areas will be linked to whether actuals or allowables
were used in SIP design. The first exception involves offset
transactions governed by the Emission Offset Interpretative
Ruling and Section 129 of the Clean Air Act. These offset cases
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48
are likely to be few in number because the offset ruling has
been replaced in States by the adoption of their own Part D
SIPs which include rules specifying the emissions baseline for
offsets.!!/ But the Emission Offset Interpretative Rule still
applies in certain limited circumstances to new sources needing
offsets in those areas newly designated as nonattainment (i.e.,
areas have 18 months to adopt a Part D SIP); to sources requiring
offsets in areas outside of a nonattainment area but significantly
affecting that area; to secondary nonattainment areas; and to off-
set cases, involving interstate pollution. The rules governing
emissions baseline determinations for offsets in these limited
circumstances are explained at 44 PR 3284 (Jan. 16, 1979).
"The second exception involves the use of internal emission
reductions by sources in nonattainment areas to "net out" of new
source review. Actual emissions were established as the baseline
for netting by the August 7, 1980 regulations (45 PR 52700). By
using only reductions in actual emissions as the baseline for
netting, efforts to protect air quality in those areas currently
in violation of ambient standards will be enhanced. Under
the current regulation, netting can only be used in limited cir-
cumstances in nonattainment areas. EPA has, however, proposed
to expand the opportunity for sources to avoid triggering new
source review in these areas. See 46 PR 16280 (March 17, 1981).
. Those states that have not yet adopted Part D SIPs are
now subject to the construction moratorium authorized by
Section 110(a)(2)(I) of the Clean Air Act.
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In attainment areas, the baseline for determining what
qualifies as a surplus emission reduction will always be actual
emissions. The only exception to this rule is where a source's
actual emissions exceed its SIP allowable limits. In this situa-
tion the emission baseline would be the lower, SIP allowable
level of emissions. The use of actual emissions as the baseline
follows directly from the existing regulatory structure which
limits new emissions in the area to incremental increases to the
existing level of pollution. The use of increments in PSD areas
provides for new source growth while limiting the amount of new
emissions that are permitted in the area. In establishing the
incremental increase in emissions that new or expanding sources
can introduce into an area, it is necessary to first define the
base against which any increases must be measured. Regulations
adopted under Section l65(e)(2) of the Clean Air Act specify that
existing air quality be used as the basis for evaluating future
increment consumption.!^/ Moreover, Section 169(4) of the Act
specifies that the time of the first source requiring a PSD permit
should serve as the starting point for measuring consumption of
the increment.197 By using actual air quality as the basis
for determining increment consumption, these rules also establish
actual emissions as the basis for the area's maintenance strategy.
ii/ See 45 PR 52717 (Aug. 7, 1980).
.19/ por a discussion of the applicable date for determining the
air quality used in establishing the PSD increment baseline,
see 45 PR 52714. (Aug. 7, 1980).
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If sources were granted credit for "paper reductions" — the
difference between actual and allowable levels of emissions,
air quality would suffer.
b. Double-Counting of Reductions Must Be Prohibited
In designing their SIP nonattainment strategies,
States sometimes have assumed, either explicitly or implicitly,
that certain emission reductions would take place, and have
taken credit for those reductions as part of their demonstration
of reasonable further progress and eventual attainment by the
statutory deadlines. If individual sources were also allowed
credit for these reductions, the validity of the SIP's demon-
stration of attainment would be violated. For example, if the
SIP assumed 100 tons of reductions from a source meeting a
required emission limit as part of meeting requirements for
reasonable further progress, the State could only allow that
source credit for reductions in excess of that amount.
Double-counting—granting credit for the same emission
reduction, once to the State to use in its air quality plan, and
a second time to a source for use in a controlled trade—can
also occur in attainment areas.^2/ Credit must not be granted to
sources for emission reductions that were already assumed to
have occurred and therefore are not counted as part of the area's
PSD baseline. Double-counting in PSD or nonattainment areas may
The potential double-counting problems in attainment areas
are discussed at length at 45 PR 52722 (Aug. 7, 1980).
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51
occur in several different contexts:
(i) Restrictions on Pre-Existlng Emissions Reductions
In nonattainment areas emission reductions made prior
to or during the time for which monitoring data was
collected for use in SIP planning cannot be considered
surplus because emissions from these sources were
monitored at levels reflecting these reductions.
Since these "actual" emissions did not exist at this
time ambient concentrations were measured and therefore
are not reflected in the data used for defining the
SIP's attainment requirements, they have already
been assumed by the State in calculating the size of
the reductions needed to reach the National Ambient
Air Quality Standards (NAAQS). Thus, only emission
reductions created after the period during which the
monitoring occurred can qualify as surplus .^l/
States should identify in their rules, the date
before which reductions will not qualify for credit.
The earliest possible baseline date States can adopt
would be the year of the most recent emission
inventory used in planning the Part D SIP revisions
(i.e., nonattainment plans) required by the Clean
The one possible exception to this prohibition against
crediting reductions that occurred prior to the date of monitoring
used in nonattainment SIP design would be if the State specifi-
cally used allowable emissions in designing the SIP and the
emissions from a particular source, though not occurring at the
time, had nonetheless been Included in calculating the quantity
of reductions needed for attainment. Only under these circumstances
would reductions occurring before the date air quality was
monitored qualify for credit.
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52
Air Act Amendments of 1977.
Similarly, emission reductions in attainment areas
that occurred before the emissions baseline for PSD
purposes was established cannot qualify for credit.
These reductions have already been assumed by States
and if credited and later used would undermine the
area's strategy to maintain air quality and would vio-
late the specifications of the Clean Air Act which require
that all reductions in PSD attainment areas be measured
from the actual level of pollution existing at the
time the first major new source locates in the area.Zi/
Emission reductions occurring after that date are
the only ones that will actually increase the amount •
of available increment.
(ii) Restrictions on the Use of
Reductions from Shutdowns
In some cases, States may have already taken credit
for future shutdowns in designing their SIP attainment
strategies. For example, some SIPs are based on pro-
jections of future levels of emissions which assume a
set number of new plant openings and existing plant shut-
downs and offsets, and incorporate into their attainment
strategy only the net difference in emissions (due to the
fact that the new sources are cleaner than those that
were shutdown). The double-counting problem would arise
.22X por additional discussion of this baseline date in PSD areas,
see 45 PR 52716 (Aug. 7, 1980).
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53
if a specific source received credit for reductions from
such a shutdown in these States since the source would
be receiving credit for a reduction already assumed in
the SIP's demonstration of attainment. To avoid double-
counting emission reductions from shutdowns, States
should demonstrate that the total amount of reductions
from shutdowns assumed in the SIP have in fact occurred
before granting credit for any additional emission
reductions resulting from shutdowns. In developing
Controlled Trading rules, States should deal specifically
with the issue of credit from source shutdowns.
Under current EPA policy, the use of reductions
from shutdowns as offsets has been severely restricted
to cases involving replacement facilities or use .occurring
contemporaneously with the plant closure. The use of
emission reductions from shutdowns in bubbles was also
prohibited by a reference to the Offset Ruling that was
incorporated into the Bubble Policy. EPA will propose
to expand the opportunity for sources to use
reductions from shutdowns in offset trades, (
FR_, ), and this statement proposes Immediate
removal of such shutdown restriction for bubbles.
Assuming these reductions have not already been accounted
for in developing an area's attainment strategy, they
represent an appropriate source of reductions. Moreover,
by not granting credit for reductions from shutdowns
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until they were proposed for use as offsets, previous
policy had Inadvertently provided an Incentive for firms
to continue operating older, dirtier facilities beyond
what would have otherwise been their useful life.
In establishing rules governing shutdowns, States
should also carefully consider their policy regarding
curtailments. If credit from shutdowns is prohibited,
sources may seek to earn ERCs by reducing emissions by
curtailing operations. States could prohibit ERCs
created in this manner, but to do so would also eliminate
an Inexpensive source of ERCs.
(ill) Prohibition on Multiple Use of ERCs
Once surplus reductions are created and cred-
ited, States must guard against their multiple use. The
same ERCs must not be banked or sold twice or used to
satisfy two or more different regulatory requirements at
the same time. A source using an ERG in a PSD area must
be prevented from using it once to net out of review and
later as a PSD offset to avoid creating an increment vio-
lation. To prevent this form of double-counting, States
should adopt an ERC registry which tracks and accounts
for the creation, banking, transfer and use of all ERCs.
This registry will also provide information critical for
evaluating the future use of ERCs and provide parties
with a central place to learn about any ERCs available
for purchase by firms interested in proposing a bubble
or in need of offsets.
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Thus, the ERG registry can also be employed by States
to account for the use of emission reduction credits in
netting, and the creation and use of PSD offsets. The
need for an increment tracking system was recognized in
the August 7, 1980 PSD regulations. (See 45 PR 52722).
For example, suppose an existing source (Source A) re-
duced its emissions after the baseline was established,
and a new source (Source B) proposed to use this decrease
when modeling increment consumption. Later Source A
applies to use its earlier reduction to net out of review,
or as a PSD offset. Both sources A & B would be receiving
credit for the same reduction. In the absence of a system
to record ownership of emission reductions, States will
%
find it very difficult to prevent this problem. By
receiving credit for its prior reduction through a banking
program, Source A will be able to establish a legitimate
claim to use Its emission reductions. Under this system,
Source B could only use A's reductions if it arranged to
purchase them. Moreover, only through an ERG Registry
will the reviewing authority be able to effectively track
and account for the creation and use of emission reductions
and therefore avoid dual claims of ownership.
c. Surplus Reductions in the Absence of Complete SIPs
There is one important exception to the principle
that only those reductions in excess of the emissions limits
specified in the SIP can qualify as a surplus reduction. In a
number of Jurisdictions SIPs are still incomplete. These States
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56
have yet to develop a strategy which demonstrates attainment by
the statutory deadlines. For example, some States have committed
to unspecified controls on source categories not yet regulated,
such as controls on fugitive emissions and transportation control
measures. In other instances, States have not yet adopted enforc-
eable emission limits based on reasonably available control
technology (RACT) for specific industrial processes. In these
situations, additional controls on these sources will generally
be required to reach attainment. Thus, the question is how
"surplus" should be defined for these categories of sources in
these jurisdictions.
With the;exception of some VOC bubbles, the Bubble Policy
generally prohibited sources from using the bubble unless they
were subject to a SIP that demonstrated attainment by the statutory
deadlines.^l/ To provide greater flexibility for State agencies
and sources to move toward cleaner air at lower cost, EPA now
proposes to change this prohibition and to allow States to permit
the creation of surplus reductions (and therefore use of bubbles
and banking) in areas without fully or conditionally approved SIPs.
The criteria for allowing Controlled Trading under these circum-
stances differ for large and small sources, in the following manner:
The one exception to this previous restriction allowed sources
within CTG categories to bubble in a nonattalnment area. 44 PR
71782 (Dec. 11, 1979) • This policy statement proposes to eliminate
the prohibition on cross-CTG trades letting many more firms bubble
in nonattalnment areas.
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MEMORANDUM
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON. D.C. 20460
JCT 3 0. 1981
OFFICE OF
ENVIRONMENTAL PROTECTION POLICY AND RESOURCE MANAGEMENT
AGENCY
MOV 5 1881
LIBRARY SERVICES OFFICE
SUBJECT: July 13 Draft Proposed Controlled
Trading Policy Statement
•*
FROM: Michael H. Levin, Chief, Regulatory Reform
Staff, Office of Policy and Resource Management (PM-223)
TO: Addressees
The attached draft is provided per your request. We are
currently making substantial revisions in this version, but would
welcome your comments at any time. In any case, you will have a
formal opportunity to comment on the revised version which will,
if approved, be proposed in the Federal Register.
If you have any questions or comments on this draft, please
contact:
Ivan J. Tether
Regulatory Reform Staff
Office of Policy and Resource
Management (PM-223)
401 M Street, S.W.
Washington, D.C. 20460
(202) 382-2745
We appreciate your interest in Controlled Trading and want to continue
the nationwide dialogue which has begun.
Attachment
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57
0 Sources with the potential to emit 100 tons per year can
create a surplus reduction, where RACT has not already
been defined in the SIP, by agreeing with the State and
EPA to an acceptable RACT emission level requirement for
the emission point at which the proposed reduction will
occur. The surplus then consists of any reductions in
excess of the RACT emission level. To use a surplus
reduction, a source must also agree to a RACT level at
'the emission point at which that reduction is being
applied to meet an emission limit, if RACT has not yet
been defined there. If the proposed use involves two or
more sources, only those sources whose combined total poten-
tial to emit exceeds 100 tpy need agree to a RACT level for
points involved in the controlled trade for which a RACT
level has not been defined.
0 For sources with a potential to emit of under 100 tpy and
"not yet subject to a RACT requirement, a surplus reduction
can be created and used in the manner described above. It
is EPA's policy, based on considerations both of adminis-
trative efficiency and of encouraging these environmentally
beneficial agreements, not to reexamlne such agreed-upon
emission levels or request state reexamination of such
emission levels for five years from the date of agreement
between the source, the State and EPA unless there is no
other practical way to achieve the requirements of the
Clean Air Act. Even if a state changes the emission
standards, generally applicable to an identified category.
of sources, EPA encourages that state not to change such
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58
levels for specific sources within that category which
have agreed to acceptable RACT emission levels in advance
of the general change.
Alternatively, a source with a potential to emit of
under 100 TPY can use its current actual emissions (at
points where RACT has not been defined) as the basis for
measuring any proposed surplus reduction, so long as it
is committed to find or produce reductions equivalent to
any future RACT requirements at the time the State imposes
them.
The only exception to allowing sources to create and
use surplus reductions in the absence of an approved SIP
involves particulate emissions from open dust, paved road,
parking lots, storage piles or similar sources of non-
process, fugitive emissions. Until acceptable methods of
quantifying and evaluating reductions from these sources
are available, sources seeking to use open dust trades in
lieu of controls on other stationary soures will generally
be required to agree in a federally enforceable way to
meet the equivalent of RACT requirements, to install
these open dust controls, and to monitor the results before
credit for any reductions will be granted.
By permitting sources increased flexibility to
create and use ERCs in the absence of fully approved SIPs, this
change in policy should encourage clean-up at a lower cost and
at the earliest possible date.
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d. Granting Reductions from Uninventoried Sources
Under a Controlled Trading program, it is possible that
sources not included on an area's emission Inventory may apply
for credit. Granting credit to uninventoried sources would very
possibly result in an air quality problem. First, sources not in
the emissions inventory may not have been Included in evaluating
and designing the State's attainment strategy. If reductions from
these sources which are not calculated as part of the area's ambient
air quality were credited and then used in a controlled trade as a
replacement for reductions that were required to reach attainment,
the SIP's demonstration of attainment might be placed in Jeopardy.
The result of such a trade would be more pollution than originally
calculated in designing the attainment strategy of the SIP. For
example, Source A emitting 30 tons per year Is not on the States
emission inventory and was not included in the design of the area's
demonstration of attainment. It proposes to voluntarily install
controls and to reduce its emissions to 10 tons per year and seeks
credit for 20 tons. If granted, these ERCs could be used in a
controlled trade as a substitute for reductions required under the
SIP. The net result would be 20 more tons of pollution than cal-
culated under the SIP's demonstration of attainment. Granting
uninventoried sources credit for reductions would also provide
the undesired Incentive for them to avoid becoming part of the
inventory and therefore avoid control requirements until the
time that they could get credit for installing what would otherwise
be a required control.
States could simply prohibit sources not on their Inventories
from receiving credit for reductions. Since most major sources
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60
are Included on State inventories, this restriction would not
severely restrict participation, but it would eliminate a source
of potentially Inexpensive reductions. In those areas where
reductions are very expensive or difficult to find, uninventoried
sources may offer an important supply of ERCs.
As an alternative to this prohibition, States could take steps
to include these sources on their inventories, subject them to con-
trol requirements and grant credit only for reductions in excess of
of these required controls. There^are two possible approaches to
granting credit to sources not on the inventory. First, the State
could require the source to install RACT controls and only award
credit for reductions in excess of that level of control. In review-
ing its inventory and in setting RACT levels of controls, a SIP
revision would be required.
As a second approach, where States used* an area-wide emissions
reduction model (e.g., as was typically used for hydrocarbons) as
as opposed to site specific modeling to demonstrate attainment,
a relatively simple discounting procedure could be used to allow
uninventoried sources credit for reductions. In designing their
SIPs, States determined the level of reductions required based on
ambient air monitoring and then developed a plan for achieving
attainment by requiring additional controls on sources in their
emissions inventory. For example, assume that the state needed a
20/5 reduction in emission. If the VOC emissions inventory was
200,000 tons, additional control requirements totaling reductions
of 40,000 tons would be assigned to specific sources. If an un-
inventoried source of 50 tons proposed to reduce its emissions
to 25 tons, 20 per cent of 50 or 10 tons, would be deducted and
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61
credited to the State to preserve Its demonstration of attainment.
Only the remaining 15 tons would be surplus and thus eligible to
become an ERG.
Where more complex modeling was used in developing an attain-
ment strategy, as was typically the case for S02, States will gen-
erally be required to use a similar level of detailed modeling to
demonstrate that the emission from a source added to the Inventory,
along with the credits granted to that previously unlnventoried
source, will not cause an ambient violation or prevent the planned
removal of an existing violation. A SIP revision would generally
be required to evaluate this modeling demonstration.
In attainment areas, inventories ordinarily do not play as
significant a role in serving as the baseline for demonstrating
attainment or for calculating surplus reductions as they do in
nonattainment areas, because a source's actual emissions serve
directly as the PSD baseline which is typically determined by
measured ambient quality and Is not based on emissions Included
in the State's inventory. Thus, in attainment areas, all sources,
regardless of whether they have been included in an inventory, may
qualify to create an ERG using actual emissions as the baseline
for measuring reductions. All that is required is that the emis-
sions a source proposes to reduce are included in the area's PSD
baseline.
EPA is particularly interested in receiving comments on alter-
native methods for allowing sources not on the emissions inventory
to receive credit for reductions without Jeopardizing reasonable
further progress toward ataining national ambient air quality
standards.
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63
to 40 CFR Parts 60 and 61, requirements within any applicable
State Implementation Plan, and any permit requirements established
pursuant to [the Offset Ruling, 40 CPR 52.21, or under regulations
approved pursuant to 40 CFR 51.18 or 51.24]. See 45 PR 52742,
52745, 52732, and 52737 (Aug. 7, 1980) which provide specific
provisions for EPA and State new source permits. EPA anticipates
that most "netting" transactions will be made Federally enforceable
through State permits issued under 40 CPR 51.18.
Bubbles
Bubble transactions will be of two types: those that are
governed by generic State bubble rules which have been approved by
EPA and those that are not governed by such rules. Bubble trans-
actions that are not covered by generic State rules must be sub-
mitted to EPA as SIP revisions. Such emission limitations will
become federally enforceable by being incorporated into the SIP
through a case-by-case revision.
Bubble transactions covered by EPA-approved generic State
bubble rules are federally enforceable as part of the SIP even
though they do not require individual SIP revisions. In approving
generic State rules EPA will be approving in advance, as part of
the SIP, each valid transaction conducted under those rules.
Therefore, the alternative emission limitations approved under
generic state rules are considered the applicable requirements
of the SIP and will be enforceable by EPA and private citizens
under Sections 113 and 304(a) of the Clean Air Act.M/
- For a more detailed discussion of this rationale in the
context of EPA's final action on New Jersey's bubble rule,
see 46 PR 20551 (April 6, 1981).
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64
Offsets
When a source uses offsetting emission reductions to obtain
a new source permit in a nonattainment area or In an attainment
area to avoid an increment violation, the emission reductions must
be federally enforceable. See, e.g., Section 173 of the Clean Air
Act. If the offsets are obtained from a source other than the
one obtaining the new source permit, unless created and used
under a State Controlled Trading rule, the new emission limitations
must be submitted as a SIP revision. Only in this manner would
they become enforceable by EPA.
If the offsets are obtained within the source applying
for the new source permit, the new emission limitations should be
incorporated into the new source permit. In this way they also
become federally enforceable.
Banking
When a source banks ERCs, it will be assigned a new emission
limitation which will reflect its decreased emissions. The new
emission limitation should generally become applicable to the source
at the time the credits are banked, not at the time they are
used.
Emission limits imposed under State banking rules are federally
enforceable if the banking rules have been approved by EPA and
Incorporated in the SIP. As is the case with bubble rules, when
EPA approves generic banking rules it will be approving in advance
any combination of banked ERCs plus lowered emission limitations
that would equal the source's original level of emissions. EPA
will not require ERCs to be federally enforceable when they are
banked. However, at the time they are withdrawn and used in a
controlled trade, they must be or become federally enforceable on
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65
the same terras as any other ERG used in that type of controlled
trade. Thus, although no SIP revision would be required to bank
an ERG, one might be necessary when banked ERCs are used to meet
a permit requirement.
b. All Reductions Must Be Enforceable in Practice
All emission limits created by any action under a controlled
trading rule must be incorporated into a compliance instrument
which is legally binding and federally enforceable. Depending on
the circumstances, this document could take the form of a SIP
revision, a compliance agreement between a source and the State
agency, an operating or preconstruction review permit, or a consent
decree. For a few States, agreements and permits currently in use
may be an acceptable means for exercising the necessary authority
over ERCs and trades. For most states, however, existing permits
and procedures will need to.' be augmented to ensure that they pro-
vide adequate information to allow states and EPA to enforce
emission limits and compliance plans created as part of a Con-
trolled Trading program. Such augmentation need only occur, how-
ever, on a case-by-case basis as applications for Controlled Trades
are submitted, and should not involve substantial resources.
The legally binding compliance instrument must contain point
specific emission limits as a means of facilitating inspection
and enforcement. The limits must allow officials to quickly deter-
mine mine compliance through continuous monitoring of emissions or
operating parameters that the source demonstrates can be correlated
to actual emissions. Without point specific emission limits en-
forcement officials would be required to test simultaneously every
stack or vent involved in a controlled trade to determine if these
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66
sources meet their emission limits—a burden that is often techno-
logically impossible and that, even if possible, would significantly
impede effective enforcement. Thus, sources seeking to benefit
from the use of a controlled trade must maintain specific emission
limits for each emission point involved in the trade. One exception
to this requirement is that in limited circumstances a source can
request an overall emissions limitation that applies to a group of
emission points that can and will be monitored simultaneously on
a continuing basis. Simultaneous monitoring will generally require
either an approved system of continuous emission monitoring of
actual emissions on all affected emission points, or a reliable
means of determining compliance on the basis of production or input
factors.H/ The only other exception is for sources where control
requirements must, of necessity, be expressed in some form other
than emission limits. Examples are storage tanks and loading facil-
ities -where control requirements are specified in terms of equipment
requirements and operating practices. In such cases, control require-
ments must be expressed so that an inspector visiting the facility
can readily determine compliance. It is suggested that separate
compliance Instruments be used for each emission point or facility
involved in a trade to facilitate subsequent enforcement. Separate
compliance instruments would allow selective suspension of permits
if necessary.
Finally, to be enforceable, the emission limit, permit or
equivalent, must specify an enforceable test method that can be
257 Continous production facilities such as can coating lines are
one example, where emission limits can be more effectively set and
enforced on the basis of production or input factors for multiple
emission points. See 45 PR 80824 (Dec. 8, 1980).
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67
used to determine compliance. If emission limits include restric-
tions on hours of operation in the compliance instrument and
production rates or input rates, these must be written in such a way
that they will be enforceable. To be enforceable, the emission
limits should state the time period in terms of minimum applicable
units. For example, the limitation must be stated as hours/day,
production rate/day, production rate/hour, input/day, input/hour,
etc. Similarly, if a source is limited to seasonal operation, the
compliance instrument must specify which days, weeks, or months
the source will not operate. Recordkeeping and reporting require-
ments should also be clearly stated in the document and an enforce-
able method to test compliance must be specified.
3. All Emission Reductions Must Be Permanent
For an emission reduction to qualify as an emission
reduction credit, it must be a permanent reduction in the level
of pollution emitted by a source. Controlled Trading necessarily
assumes that reductions that are credited will at some point be
used as a substitute for a required reduction or as an offset
to meet a permit requirement. If the ERG is not a permanent
reduction, its eventual use will adversely affect air quality.
Both the increased emissions from the point at which the
reduction was created and the increased emissions where the ERCs
are eventually used would be emitted into the air.
Instead of requiring that all ERCs be permanent, States have
the option of insisting only that all trades involve emission
Increases and decreases that are equal in duration. This is
the minimum requirement in that it ensures that all controlled
trades will not adversely affect air quality. For example, a
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68
spurce in need of an ERG to use in a bubble might want to purchase
or even lease such a reduction for ten years if it plans to close
the faciliclty at the end of that time period. Instead of pur-
chasing a permanent reduction and holding title to that reduction
after the plant closes, the source might find it more desirable
to negotiate the use of a reduction for the ten years it plans
to continue to operate that facility. States allowing the creation
and use of reductions that are equal in duration instead.of
requiring permanence will require a more sophisticated system to
track the time period of these reductions and considerably
greater enforcement resources to insure that emission Increases
and decreases occur at the time they are required.
A second issue that arises when ERCs are used for a limited
period of time involves determining control of the ERCs once
their use in a controlled trade has ended. For example, assume
Firm A purchases ERCs from Firm B and uses them in a bubble.
When some time later, A decides to shutdown that facility, an
issue that arises is what happens to the ERCs used in that
bubble. Ownership of ERCs could remain with A or they could revert
to Source B. EPA recommends that A be granted ownership. However,
any State controlled trading rule that provides with specificity
the disposition of these ERCs will be acceptable. The reasoning
behind designating Source A the owner is that Source A has control
over the use of those ERCs.
EPA also recommends that whatever general provision States
adopt, they allow parties to a controlled trade to alter its owner-
ship requirements by private contract. The only legal restriction
that would be placed on those contracts is that they be filed
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publicly as part of the record of the controlled trade.
Concern for the permanence of ERCs is particularly relevant
to reductions created by shutdowns, production cutbacks and fuel
switches.
In the case of fuel switching, to meet the requirement of
permanence, sources should be required to demonstrate that an ade-
quate, long-term supply of the lower polluting fuel is available,
that the source can quickly shift back to another equivalent con-
trol strategy or that equivalent ERCs will be provided. Should a
mandatory requirement to switch back to a more polluting fuel be
imposed upon the source at a later date, the source would still be
required to produce an equivalent amount of ERCs to compensate for
the increase in emissions from the fuel shift,26/ For.example,
suppose a large Industrial boiler gets credit for reductions by
voluntarily shifting from coal to natural gas and later is required
to shift back to coal. The source must commit as part of their
compliance agreement to find ERCs sufficient to assure that total
emissions will not increase from burning coal, as a condition for
obtaining certification of ERCs for its earlier voluntary fuel
switch.
Sources may also apply for credit for reductions from shut-
downs and production cutbacks (e.g., a reduction from 3 to 2
workshlfts). To secure credit for reductions in operations, a
source must have its permit or other compliance agreement altered
This provision is also contained in the Emission Offset
Interpretative Ruling. See 44 PR 3284 (Jan. 16, 1979) and
40 CPR 51-18(5)(3).
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to reflect the curtailment in production and provide adequate
records for the State to effectively monitor compliance. The
permit must also clearly require the source to supply offsetting
ERCs as a precondition for returning to higher production levels.
In the case where a source received credit for reductions result-
ing from a shutdown and later seeks to start up that facility,
it must also be required to obtain sufficient ERCs to compensate
for the increased emissions.
It is particularly difficult to insure permanence of emission
reductions from small sources (typically those with emissions
under 100 tpy) and sources in attainment areas (because they are
generally not required to offset new or expanded facilities).
Suppose Dry Cleaner A closes down and sells the resulting emission
reductions to another firm. A's customers go to Dry Cleaner B,
located around the corner from A. Due to its expanded business, B
increases its hours of operations and therefore its emissions, with-
*
out violating its existing SIP limit (if there is one), and also
without triggering a requirement for offsets. The result is that
air quality suffers; both emissions from the firm that purchased
A's ERCs and B's increased emissions are added to the air.
This potential problem of shifting demand for goods and
services (from small sources not subject to production constraints
or offsets) is likely to affect several common sources of emissions.
In addition to dry cleaners, paint shops and gas stations are other
examples of sources from which proposed ERCs must be carefully
scrutinized to determine if they are permanent.
State Controlled Trading rules must address this question
satisfactorily. They could deal with it by simply prohibiting the
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creation of ERCs by certain classes of small sources or, for example
0 By limiting ERCs from small sources to those industry
categories identified in the State rule which gener-
ally are not subject to shifting demand; or
0 By requiring offsets for new and expanding firms of
relatively small size (e.g., 10-ton sources) in
source categories likely to be affected by this
problem.
EPA believes that the second alternative is the one that
has the best promise of actually working in practice. EPA particu-
larly requests public comment on this issue.
A final aspect of the requirement that all emission
reductions be permanent is the prohibition against the creation
of reductions using intermittent controls. The Clean Air Act
precludes using intermittent controls as a means of achieving
ambient air levels, requiring a continuous reduction in emissions
from sources (Section 110(J)). The prohibition on intermittent
controls should not, however, be confused with reductions result-
ting from seasonal controls for VOC sources or changes in
operating hours. To determine if an intermittent control strategy
is being employed, the reviewing authority must determine if the
proposed technological controls are adequate to meet the applicable
emission limit.
4. All Emission Reductions Must Be Quantifiable
Before an emission reduction can be credited, entered
on an ERG registry, and used, it must first be quantified.
Quantifying an ERG involves two aspects: establishing the
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basis for measuring the amount of the reductions and describing
the characteristics of the reduction.
a. Measuring the Reduction
To quantify the ERG, emissions must be calculated
both before and after the reduction. Although many different
methods of calculation exist and could be used (e.g., emission
factors, stack tests, monitored values, production or process in-
puts, etc.), to ensure that no bias is Introduced into the process,
the same method of calculation should be used to quantify emissions
before and after the reduction.
The baseline for measuring emissions before the reduction
should be based on the standards set forth in Section II.C.I. of
this policy. Where actual emissions are used as the baseline,
generally, data documenting emissions for the last two years prior
to the claimed reduction should be used as the appropriate measure.
Sources may, however, present data for shorter periods of time, at
the discretion of the State, if it can be shown to be representative
of the source's historical level of actual emissions.H/
For reductions from non-process, fugitive sources, current
methods are generally inadequate to predict the effectiveness
of controls. To quantity reductions from these sources, a firm
will generally be required to install the controls and to measure
the changes In emission levels, using techniques approved by the
State and EPA.
.27/ For a further discussion concerning the rationale for
determining the appropriate baseline, see 45 FR 52719 for PSD
and netting and 45 PR 52728 for offsetsTAug. 7, 1980).
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b. Describing the Reduction
Emission reduction credits are created by firms to
use themselves, or to sell to someone else to use to meet a regula-
tory requirement. They could also eventually be used to satisfy
a requirement in either a PSD or nonattainment area. Thus, in
creating an ERG, it is important to document whatever informa-
tion may be useful in evaluating its subsequent use in a particular
context. If an ERG is used at the time of creation, only those
characteristics necessary in the context of that proposed use
need to be described.
Where the ERG is to be banked and its eventual use not yet
known, a more detailed description would be necessary. Simply
stating that a firm has created an ERG of 100 tons of particulates
is of limited value in evaluating potential uses of those reductions
which might be affected by such factors as a short-term standard,
location, or seasonal restrictions. Thus, a detailed profile of
emissions,^,/ describing an ERG should contain the following
information to facilitate its later use: location, stack parameters
and emission characteristics, particle size (for particulates),
and chemical composition. The description of the emission reduction
should also state whether it was calculated using either an
actual or allowable baseline. By including this information,
sources will minimize any future restrictions and be better able
to evaluate proposed uses of their ERCs.
In addition to tons per year, the description of an emission
reduction credit should include short-term emission rates and any
significant daily or seasonal variations.
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D. USING EMISSION REDUCTION CREDITS
Emission reduction credits can be used by sources in a
variety of regulatory contexts. ERCs can be used in a bubble by
existing sources to meet either current emission limits or newly
imposed requirements such as RACT.H/ They can be used by new
or expanding sources as offsets in nonattainment areas or to avoid
creating an Increment violation in a PSD area. Finally, ERCs can
be used by expanding sources to compensate for increased emissions
in order to "net out" of new source review in both attainment and,
in limited situations, nonattainment areas. Whatever the regula-
tory context, the use of an ERG must be approved by the reviewing
authority (and sometimes EPA—see Section II.D.2. of this policy)
and is subject to the requirements of the Clean Air Act.
Review of a proposed use of an ERG is particularly important
because of the nature of a controlled trade. When an ERG is quan-
tified and certified, a source receives -credit for a reduction
specified as a number of tons per year of that pollutant. This
does not mean, however, that a source can automatically use that
same quantity of emissions to meet a requirement at another emission
point. The proposed use of an ERG must be approved by the reviewing
In effect, there are two situations in which a firm might
want to use a bubble. In one instance a firm is faced with
existing emission limits and proposes an alternative mix of
controls, (i.e., use of a bubble) to meet these requirements.
The second regulatory context for use of the bubble is where
States impose new emission limits (e.g., a new round of RACT
requirements), and a source proposes an alternative mix of reduc-
tions to meet this requirement. New Jersey's VOC bubble rule
(46 FR 20551, April 6, 1981) is an example of the second type of -
bubble.
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authority and must be evaluated in terms of its ambient effects.
For example, an ERG of 100 tons of TSP created at one site might
only be equivalent in terms of its Impact on ambient air quality
to an 80 ton relaxation in controls at another site located two
miles down the road. In effect, an ERG is not only a quantity of
tons, but must also be evaluated in terms of its location, its
stack height, and any other factors which will affect its ambient
impact and therefore its use in a controlled trade. This section
explains several criteria Involving both substantive and procedural
considerations affecting the use of ERCs, which should be contained
in State Controlled Trading programs.
1. SUBSTANTIVE LIMITS ON USING ERCS
a. Proposed Uses of ERCs Must Involve Only
the Same Pollutant
The Clean Air Act requires States to develop plans to
achieve and maintain the national ambient air quality standards
for each criteria pollutant. Thus, sources cannot receive approval
for proposed controlled trades involving different criteria pollut-
ants; e.g., they cannot trade SC-2 against hydrocarbons. All
individual offsets, bubbles and netting cases must involve the
same pollutant. Only emission reductions of TSP can substitute
for increases of TSP, SOx , for SOx, etc.
b. Proposed Uses of ERCs Must Not Increase
Hazardous Pollutants
When pollutants are traded, there can be no Increase
in listed hazardous (Section 112) pollutants and coke oven
emissions. In all cases, sources must meet applicable Section
112 regulations. Except as permitted under specific Section 112
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regulations, a source may not use a bubble to meet these requirements
nor may it increase emissions beyond the levels that the applicable
Section 112 regulation allows.
The only trades that will be permitted involving Section 112
pollutants are those for which no regulations have yet been developed
and the trade involves equivalent increases and decreases of the
same pollutant at emission points located at the same location or at
a contiguous location. Moreover, previously approved trades involv-
ing newly designated Section 112 pollutants must not interfere with
the requirements under any new Section 112 regulation. Finally,
ERCs for a nonhazardous pollutant cannot be used to balance
increased hazardous emissions; the hazardous emissions reductions
can only be used to compensate for increases of a less hazardous
emissions of the same criteria pollutant. For example, a source
may equally trade vinyl chloride with any non-hazardous hydrocarbon
if it reduces the vinyl chloride emissions.
c. No Increase in Actual Emissions in Nonattainment Areas
For nonattainment areas Congress required States to achieve
reasonable further progress (RFP) to ensure that emissions were
reduced each year, on a timely basis, as planned to achieve ambient
standards. In most areas, RFP is measured by an areawide quantity
of reduced emissions. Consequently, no controlled trades under
state rules can be allowed in nonattainment areas in which fewer
emission reduction credits are made (i.e. emissions decreased)
than emissions increased, because that would fail to reduce areawide
emissions as required by RFP.
Trades proposing to increase total emissions can only occur _
as individual SIP revisions in which the RFP demonstration is
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changed as part of the revision. EPA may approve such revisions
under a variance procedure if it determines that NAAQS, the reason-
able further progress demonstration, and increment consumption
will not be violated. (See Section E for a discussion of trades
requiring SIP revisions.)
There are two possible exceptions to this general prohibition
against trades under State Controlled Trading rules increasing
emissions in nonattainment areas. The first would be in those
Jurisdictions where a growth margin exists. In these areas
existing sources were required to reduce their level of emissions
beyond the amount required to bring the area into attainment.
In doing so, a growth "cushion" or margin was created which can
be allocated at the discretion of the reviewing authority and
might be used to compensate for such increases in emissions.
The second possible exception might be in those areas which used
"allowable" emissions in designing their SIPs. In these States .
an increase in actuals up to but below the allowable levels
might be possible, depending on the manner in which they have
calculated RFP.
Trades increasing total emissions could be permitted in
attainment areas, but might result either in the consumption of
some or all of the increment or in triggering PSD review, or
both.
d. Proposed Trades' Cannot Be Used to Meet Technology-
Based Requirements for New or Expanding Sources
The Clean Air Act specifically requires categories of
new or expanding sources to meet new source performance standards
(NSPS). This requirement has been interpreted by the Courts in
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ASARCO v. EPA (578 P.2d 319 (D.C. Cir. 1978)) to prohibit the
use of emission reduction credits to avoid technology-based new
source emission limitations. As a result of this case, sources
cannot use the bubble to meet NSPS, or related technology-based
requirements for best available control technology (BACT) in PSD
areas, or lowest achievable emission rates (LAER) in nonattainment
areas. Thus, sources must meet technology-based emission limits
(NSPS, BACT or LAER) by installing controls or processes and
cannot use emission reduction credits to satisfy these requirements.
Expanding sources can, however, use internal emission reductions
to reduce increases in emissions sufficiently to avoid new source
review through the use of netting..!?/ In doing so, sources must
still meet NSPS through the Installation of controls but can
avoid BACT in attainment areas and may in the future be able to
»
avoid new source requirements, including the installation of LAER
in nonattainment areas .31/ Once technology based standards for
new sources have been met (i.e., NSPS, BACT or LAER), sources are
also prohibited from altering their compliance strategy at some
future date by meeting these requirements through the use of a
bubble.
.32/ See Federal Register notice published on August 7, 1980
(45 PR 52676). It is important to note that sources cannot
use reductions purchased from other firms or from their own
facilities at a different location for netting. Thus, netting
can only occur within a source, as that term is defined in the
new source review regulations. EPA has proposed to modify the
definition of source to be the same in nonattainment areas as it
is in PSD areas. See 46 PR 16280 (March 12, 1981).
I!/ EPA has recently proposed to significantly expand the use
of netting in nonattainment areas by broadening the applicable
definition of "source." Note 30, supra.
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The limits on use of ERCs being used to meet technology-
based standards apply only to new or expanding sources. Thus,
ERCs may be used to meet technology requirements developed by
states for existing sources pursuant to §lll(d) of the Clean Air
Act. Under §lll(d), states develop standards for non-criteria
pollutants from existing sources which would have been regulated
if the existing source were a new source. EPA believes that be-
cause the act allows states discretion in developing §111(d)
standards, it is appropriate to allow the state to use a controlled
trading program to meet the standards if it so chooses.
e. All Uses of ERCs Must Satisfy Ambient Tests
The Clean Air Act requires that all areas throughout the
country be subject to emission restrictions which attain and main-
tain national ambient air quality standards.. All controlled
trades are, of course, also subject to these ambient constraints.
In nonattainment areas, the use of ERCs cannot contribute to a
violation of a standard nor prevent the planned removal of an
existing violation. In attainment areas, the use of ERCs cannot
cause an Increment or standards violation.
Ambient considerations are particularly critical to the effec-
tive functioning of a Controlled Trading program because the ambient
air quality impact for S02, particulates, and carbon monoxide of
a given controlled trade will vary and must be scrutinized on
the basis of where the emission increases and decreases occur.
One hundred tons of ERCs for these pollutants created at one site
may serve to completely balance the ambient impact of a 100-ton
emission increase at a site close to where the reduction occurred,
but may only balance the effect of an 80-ton increase at a second
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site further away. In addition to distance between points of
emission Increases and decreases, stack parameters, pollutant
characteristics, meterology, and topography must also be considered
in evaluating the ambient impact of a proposed use of ERCs in a
controlled trade.
EPA requires all bubble applications to demonstrate ambient
"equivalence ".32/ and all offset transactions to show reasonable
further progress toward attainment..I!/ For netting, the ambient
test is incorporated into the regulations in the following manner:
"A decrease in actual emissions Is creditable only to the extent
that: It has approximately the same qualitative significance
for public health and welfare as that attributed to the Increase
32/ The ambient test used in the Bubble Policy simply required
that the ambient Impact of the distribution of emissions before the
bubble and the one after it be "equivalent." The policy also stated
general rules for when air quality modeling would be required to
determine if emission increases and decreases were equivalent.
(44 PR 71783). The modeling screen explained in the text of to-
day's proposed policy statement simplifies these requirements and
should be used in place of the past Bubble Policy guidance in
evaluating the ambient equivalency of future bubble proposals.
33/ EPA's policy concerning the use of modeling to evaluate offset
transactions is discussed at 44 PR 3285 (Jan. 16, 1979) States
have the option to use the modeling screen presented in this policy
statement as the basis for interpreting and Implementing the use
of modeling for offsets.
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from the particular change." (45 FR 52736, Aug. 7, 1980). To
effectively Implement this requirement and to be consistent
with related EPA policy concerning offsets and bubbles, States
have the option of evaluating netting transactions in light of
the modeling screen presented below.
In the past air quality modeling was used as the basis for
evaluating the ambient effects of many controlled trades. More
recent experience indicates that EPA can limit the cases in
which full-scale modeling Is required. In this policy statement,
EPA is proposing a three-tiered screen with increasingly stringent
requirements for modeling linked to the likely significance of the
ambient air quality Impact of the proposed trade. The objective
here is threefold: to reduce the number of trades requiring
full-scale modeling to only those situations where a significant
Impact on air quality occurs; to give States and sources greater
predictability regarding the type of ambient demonstration and
resource demands likely to be involved; and to limit the require-
ment for a SIP revision where full-scale modeling Is not required.
(See Section II.D. 2.(A) of this policy for further discussion.)
The following screening tests may be used to determine the
level of review required for a proposed trade among point sources.
Because of the difficulty in evaluating ambient impacts of fugitive
emissions, only point source emissions from stacks or flues may
be given limited scrutiny under Level I or Level II screening tests,
(i) Level I; No modeling is necessary if the proposed
use of an ERG does not result In an Increase in
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actual or allowable emissions!!/ and if the emissions
points involved are located in the same immediate
vicinity and are of similar effective stack height.
State rules incorporating such terms should utilize
specific objective definitions of these terms based
on air quality considerations. One set of objective
definitions which EPA would approve is to define
"same immediate vicinity "as sources being no more
-than 100 meters apart and "similar effective stack
height" as heights which differ by no more than 10%.
States may, of course, propose other objective defini-
tions. Because EPA does not require modeling for
hydrocarbon and N02 trades, at the discretion of the
State, Level I may also be applied to all trades
involving*" these pollutants.
(ii) Level II; Only limited modeling entailing the
• specific emission points involved in the controlled
trade will be necessary in situations not Included
in Level I, if actual or allowable emissions do not
increase as•a result of the proposed ERG use and if
,._.._ the changes in emissions involved in the proposed
In nonattainment areas whether actual or allowable emissions
should be used as the basis for determining if an increase in
emissions has occurred will depend on which level of emissions
was used as the basis for the design of the SIP. (See Section
C.I. (A). Where actual emission levels were used, no increase in
actuals would be permitted in Level 1 or 2. If allowables were
used, increases in actuals up to the point of allowables would be
permitted without triggering a requirement for more stringent
analysis. In PSD areas, actual emissions should always be used
as the basis for determining if an increase in total emissions
has occurred.
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ERG use will not cause a significantly different air
quality impact from the original emission limitations.
Other sources in the area which are not part of the
controlled trade need not be included in the model.
In determining whether there is a "significantly"
different impact, sources should, use the significance
levels initially set out in the Emission Offset
Interpretative Ruling, 40 CFR 51.18 Appendix S,
Section III A, as amended May. 13, 1980 (45 PR 31311),
which are presented in Exhibit 1:
Exhibit 1
SIGNIFICANCE LEVELS
Pollutant Annual 24-Hour 8-Hour 3-Hour 1-Hour
S02 1.0 ug/m3 5 ug/m3 25 ug/m3
TSP 1.0 ug/m3 5 ug/m3
N02 1.0 ug/m3
CO '0.5 mg/m3 2 mg/m3
(lii) Level III; Pull diffusion modeling, considering
all sources in the area of impact, is required if
actual or allowable emissions increase as a result
of the proposed ERG use or if the proposed use will
have a significant impact on air" quality at any
receptor of concern (i.e., the receptor showing
maximum ambient impact). Again, "significant impact"
should be calculated by reference to Exhibit 1..
This modeling policy should adequately insure that the air
quality impact of all uses of ERCs will be equivalent to the impact
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o'f the original SIP limits, while avoiding in many cases the delays
and uncertainty inherent in full-scale modeling. Proposed ERG uses
falling into the Level I category involve simple trades of emissions;
i.e., the increased emissions need be set off only by an equal de-
crease, and modeling simply is not necessary. Level II trades need
to be modeled to demonstrate equivalence because they involve differ-
ent kinds of emission points with different ambient effects (e.g.,
different stack heights), but the extent of detail contained in the
modeling need only be enough to show the proposed use of ERCs will
not have a significant impact on ambient air quality. Only Level
III cases must be fully modeled, because they will have a significant
impact on ambient air quality or will increase emissions, and so
must be evaluated in detail to insure that the impact is no different
from existing SIP limits and will not interfere with attainment and
maintenance of ambient air quality standards.
2. PROCEDURAL STEPS IN USING ERCS
a. Requirements for SIP Revisions
Sections 110 (a)(3) and 110(i) of the Clean Air Act require
EPA to review all changes to State Implementation Plans to ensure
that they will not interfere with attainment and maintenance of the
national ambient air quality standards. Through the SIP revision
process any change to the SIP is first approved by the State and
then reviewed by EPA.
.357 Under current EPA policy, netting and internal offsets transr
actions can be made Federally enforceable through new source permits
issued under 40 CPR Sec. 51.18 and do not require individual SIP
revisions. This policy statement does not alter that procedure.
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EPA's original policy was to require States to submit all bubble
applications as SIP revisions. As EPA recently explained in the
Federal Register on April 6, 1981 (46 PR 2055D, where the Agency
approved a New Jersey bubble regulation for volatile organic com-
pounds without requiring case-by-case SIP revisions, this requirement
was intentionally conservative until industry, States and EPA had
more experience with use of the bubble policy.
On the basis of EPA's first year of experience in reviewing
bubble applications, in addition to its experience with the use
of emission reductions in the offset program, the Agency through
this action is interpreting the Clean Air Act to allow certain
classes of bubble and offset transactions to take place without
SIP revisions and case-by-case Federal review in four distinct
situations.
These four cases all illustrate the same principle—that
EPA interprets the Act to .allow ERCs to be used in bubbles or
offsets without SIP revisions where su'ch uses cannot Interfere
with the State's plan to reach and maintain ambient standards.
To comply with this basic principle, States must incorporate a
Controlled Trading provision (i.e., banking, bubble or Controlled
Trading rule) consistent with this:policy guidance as part of their
SIPs. In effect, by approving these Controlled Trading provisions,
EPA is pre-approving all changes to emission limits that fall
within the bounds established by that rule. These provisions must
limit the discretion States have in altering the emission limits
established in their SIP and must establish procedures governing
the creation and use of ERCs. Without such rules, EPA will have
no assurance that adequate steps are being taken to attain and
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maintain ambient air quality standards, nor would the emission
limits established through controlled trades- be federally enforce-
able. Once such rules are part of the SIP, EPA believes that at
least four specific classes of ERG uses can proceed without indi-
vidual SIP revisions and without interfering with a State's effort
to attain and maintain the NAAQS.
i. De Minimis Cases
Where bubbles or offsets involve small sources whose
total potential to emit is less than 100 tons per year, and where
total emissions do not increase as a result of the trade, such trades
may proceed without a SIP revision. The basis for the exemption is
stated in Alabama Power v. Costle; "on the assessment of particular
circumstances . . . there is likely a basis for an implication of
die minimis authority to provide exemption where the burdens of regula-
tion yield a gain of trivial or no value." 13 ERG 1993, 2010 (B.C.
Cir, 1979) EPA believes that trades at such sources will have at
most a de minimis Impact on air quality. Because only relatively
small quantities of emissions are involved in these controlled trades,
modifications to emission limits occurring under this exemption will
result in only insignificant changes in ambient air quality at a
particular point.!£/ Moreover, because only trades that demonstrate
no net increase in emissions are exempt, overall air quality generally
should not suffer. In comparison, the administrative requirements
3J1/ Although States may exempt de mimimus trades from SIP
revisions requirements, these trades are still subject to ambient-
tests and therefore should be evaluated in the context of the modeling
screen.
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for evaluating the trades would be significant and could best be
reallocated to evaluate actions that have a greater bearing on
air quality.
ii. Hydrocarbon and NO? Transactions
Where hydrocarbons and N02 emissions are concerned,
ambient impacts are area-wide, rather than source specific.
This means that all such emissions within a broad area are considered
comparable, regardless of stack height, topography, or related
factors. The key factor in approving a proposed use of an ERG
is whether the ambient impact of that use falls within the require-
ments of the existing SIP, increment limits and the reasonable
further progress requirement. Thus, the ambient air quality
Impact of a proposed use of ERCs involving hydrocarbon or N02
emissions will by definition be equivalent to that of the sum of
the SIP emission limits for those points. Therefore, as long as
the sum of the emissions is not exceeded, the requirements for
each specific point can be reallocated without adversely affecting
air quality .H/ This essentially arithmetical task is so mechani-
cal that hydrocarbon or N02 bubbles and offsets developed in this
manner cannot interfere with attainment and maintenance so long
as no net increase in eraisssions occurs. See 46 PR 20551
(April 6, 1981). By approving State rules for hydrocarbon and
37/ A more detailed discussion of the rationale supporting the
policy of permitting hydrocarbon and N02 controlled trades under
State rules to occur without SIP revisions is presented in EPA's
approval of the New Jersey bubble rule. See 46 PR 20551
(April 6, 1981).
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N02 controlled trades, EPA, in effect, is pre-approving the set of
all changes to specific emission points that produce equivalent
reductions. Thus, all uses of ERCs of hydrocarbons or N02 con-
sistent with the application of a mechanical formula and the State's
generic rule, and which result in no net increase in emissions, may
occur under a State rule without individual SIP revisions,H/
since by approving that rule EPA has approved in advance all
possible emission limits which satisfy that rule.
iii. Trades Involving Pollutants Other than Hydrocarbons
and NO?
In the case of controlled trades involving S02, CO
and TSP, it is far more difficult to develop a mechanical means of
insuring that any proposed use cannot interfere with attainment
and maintenance of the standards.
The ambient air quality impact of these pollutants is dependent
upon a variety of site-specific factors, such as the, topography
of the region, stack parameters and emissions characteristics,
and distance between stacks. This means generally that equal
emissions from two different stacks will have different effects on
ambient air quality, and modeling will be necessary to determine
those effects. However, if the stacks are close together and are
of the same effective height, then emissions from those stacks
35 States may, however, impose geographic limits on trades involving
hydrocarbons and N02 emissions. . The Emission Offset Interpretative
Ruling required all trades generally to be within the same air quality
control control region. To the extent that the distance increases
between the sources involved in the controlled trade, a larger ratio
of decreases to increases may be required to achieve a compensating
effect on ambient air quality. See 44 PR 3279, Jan. 16, 1979«
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will have a comparable ambient air quality impact. Thus, equal emis-
sions from such stacks will be equivalent in their ambient effects.
(See Section II. D.l.(e), Level 1 of the Modeling Screen.) As a
result, proposed uses of ERCs involving emission points which are
close together and of similar effective stack height—which fall
within Level 1 of the modeling screen—may be treated in the same
manner as proposed uses of hydrocarbon ERCs. Because of the dif-
ficulty of evaluating the ambient impact of fugitive emissions,
all trades Involving fugitive emissions (other than de minimis,
hydrocarbon and NOX cases described above) must be processed
as SIP amendments.
iv. Other Mechanisms for Exempting
Transactions from Individual SIP Revisions
EPA will allow States further flexibility to develop
Controlled Trading rules that exempt transactions involving TSP
and SC-2, from individual SIP revisions if they can adequately
demonstrate that the procedures set forth cannot create new
violations of attainment or interfere with the planned removal
of existing ones. Such proposals will only be acceptable to
EPA if they limit the discretion involved in altering existing
SIP limits, so that attainment and maintenance of air quality
standards under a State program will not be Jeopardized. Thus,
these State rules must specify procedures which are sufficiently
mechanical in nature to assure that no trades which satisfy the
requirements of the rule will interfere with attainment and
maintenance. To eliminate the need for EPA review, these
procedures must produce results that can be replicated by EPA.
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This requirement of replicability can only be achieved if specific
procedures for modeling are prescribed and States have limited
discretion in applying these procedures to specific controlled
trades. EPA is particularly interested in receiving comments and
technical support for alternative approaches that satisfy this
basic requirement of the Act, but which give States and Industry
the flexibility to use controlled trades without individual SIP
revisions. Three possible approaches commenters should discuss
and States might consider include:
(a) Developing SIP rules which have the effect of
providing sources with an array of specific
emission limits, any one of which is consistent
with attainment and maintenance" of the ambient
*
standards. For example, States through a modeling
demonstration could develop a formula for two or
more specific emission points, the sum total of
which would satisfy the requirements of the SIP and
allow sources to determine and agree in a permit to
a particular set of limits at each point source.
This formula would have to be adopted as part of
the SIP and specifically approved by EPA. In doing
so, EPA would, in effect, be pre-approving the
acceptability of changes to emission limits adopted
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that are consistent with the formula contained in
the SIF.36/
(b) Allowing all uses of ERCs that rely on and are
consistent with the same modeling assumptions and
inputs used in the SIP's original demonstration of
attainment. This approach would be mechanical because
the only changes to the modeling demonstration would
be the emission limits at the two or more points
involved in the proposed controlled tade. Under
this approach the State would be required to have
its initial SIP modeling demonstration fully documented
and approved by EPA, but would afterwards be allowed
to approve many ERG transactions that fall within
Level 2 of the modeling screen without individual SIP
revisions. In no case, however, would a proposed
trade which increased emissions be exempt from the
SIP revision requirements. With the possible exception
of some S02 SIPs, few States are likely to be able
The Federally promulgated sulfur dioxide SIP for Ohio contains
provisions which illustrate this procedure. For example, the
emission limitations for the four stacks at the Stuart Power Plant
in Adams County in Ohio are set at 3-16 pounds per million BTU at
each stack, or, at the plant owner's choice (after notification to
EPA), at any limit in pounds per BTU which satisfy the following
equation: 0.0791 (EL2 + EL2 + EL3 + ELjj) <: 1. 40 CFR 5-1881(11).
Again, EPA here approved any set of emission limitations satisfying
that condition; should the source decide to adopt limitations other
than 3.16 pounds per million BTU which satisfy the formula, and so
notify EPA, it need not obtain approval of that change from EPA,
since EPA has already approved the new emission limitations appli-
cable to that power plant.
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reconstruct adequately past SIP modeling demonstra-
tions that meet this requirement. Nevertheless,
States should consider this option in developing and
submitting future SIP demonstrations of attainment.
(c) Developing criteria for the use of simplified model-
ing under Level II of the modeling screen for specified
types of controlled trades. (See section II.D.I.e.
(ii) of this policy)
[NOTE: EPA IS EXPLORING OPTIONS IN THIS AREA AND SOLICITS
COMMENT ON THE FOLLOWING POSSIBLE APPROACH:
This approach would exempt those controlled trades
which (1) can be modeled in a predescribed manner
with a minimum of discretion in evaluating ambient
impacts and (2) will not have a significant loca-
lized ambient impact. The state may adopt procedures
which are consistent with modeling procedures in
Guidelines for Air Quality Maintenance Planning
and Analysis, Volume 10 (Revised); Procedures for
Evaluating Air Quality Impact of New Stationary
Sources, EPA 450/4-77-001, Oct., 1977 (OAQPS No.
1.2-029R). Adherence to the Phase 1 and Phase 2
modeling procedures in those Guidelines will mini-
mize discretion in selecting and applying models.
To determine whether a trade will have significant
localized impact the state procedures should assess
whether the change in emissions at the increasing
source has the potential to cause an Increase of
more than 5 ug/m3 over a 24-hour period or more
than 25 ug for a 3-hour period for 303. Where a
trade involves more than one increasing source, it
must be approved as a SIP amendment.]
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EPA will evaluate State rules containing these and similar
proposals on a case-by-case basis. Moreover, EPA encourages com-
ments on this proposal and efforts by States to develop additional
generic approaches which insure that proposed uses of ERCs without
SIP revisions cannot interfere with attainment and maintenance.
b. Enforcing Emission Limits in the Absence of
SIP Revisions
Although many specific uses of ERCs to meet regulatory
requirements will no longer require individual SIP revisions,
they must nonetheless satisfy the requirements of the Clean Air
Act and must be federally enforceable. To be federally enforce-
able, States should include a provision in their Controlled Trading
rules which specifies that any alternative emission limits
established in accordance with the Controlled Trading rule become
the applicable requirements under the SIP for the purpose of
Section 113 of the Clean Air Act and are enforceable by EPA and
by citizens under Section 304 in the same manner as other requirements
of the SIP. In its action to approve a State controlled trading
rule, EPA will also specifically state that emission limits adopted
under that rule will be federally enforceable.
States must also forward notice of all transactions to EPA at
the time they are proposed and after they have been formally
approved in order that EPA will be able to comment on an action and
will know what emission limitation is applicable.
While EPA recognizes that it is very unlikely that the
States will allow invalid transactions, EPA has a responsibility
to monitor the States' administration of these programs. See
Section 110(a)(2)(H) of the Act. EPA will do so by reviewing
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94
the information supplied by the State on each transaction, and
it reserves the right to request additional relevant information.
Should EPA determine transactions have been approved which violate
provisions of the State Controlled Trading rule included in the SIP,
it will notify the State and specify any necessary remedial
measures ..!!/ These procedural steps will provide the necessary
safeguards to insure that Controlled Trading programs are effec-
tively operated by States with minimum interference from EPA, yet
will allow the Agency to perform its statutory mandate of assuring
attainment and maintenance of the NAAQS.
EPA will perform periodic audits of Controlled Trading
programs to insure the proper procedures are followed. Moreover,
any State approvals of ERG transactions that fall outside the scope
of a State rule will be deemed invalid.by EPA, which reserves
the right to take remedial action, including enforcing the SIP
emission limits in existence before the ERC transaction was
approved..!?/
3£/ To the extent that EPA audits individual transactions,
it will attempt to do so and notify the source of any signifi-
cant deficiencies within 60 days of State approval. This
approach will afford sources maximum certainty that their trans-
actions are consistent with the SIP, while minimizing the chance
of reliance on transactions which may be invalid because they
are not consistent with State rules.
A controlled trade which does not satisfy the requirements
of a State SIP rule is not part of an SIP and by definition
cannot replace prior valid emission limits in the SIP. See 46
PR 20554-5 (April 6, 1981) for EPA's explanation of this policy
in the context of New Jersey's rule.
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c. Existence of a Compliance Agreement
Under its Bubble Policy, EPA restricted use of the bubble
to those point sources already subject to a compliance agreement
which specified an emission limit and timetable for required
compliance.JJi/ The basis of this restriction was EPA's concern
that negotiations in the absence of a compliance agreement would
confuse and delay efforts to meet control requirements. The
result of this restriction has been that sources not yet under a
compliance agreement had to go through the exercise of first
agreeing to meet existing requirements, and only as a second
step proposing to meet those requirements using an alternative
mix of controls (i.e. a bubble). This two-step process in
itself has increased the time and uncertainty for sources seeking
to develop plans for compliance and precluded those sources most
in need of the bubble from using it.
The two key elements in developing a compliance agreement are
S
the resolution of the applicable emission limits and the timetable
for meeting these requirements. Once these have been resolved,
sources should not be required to develop specific control plans
to come into compliance without the use of a bubble, if in fact
they intend to use the bubble approach in meeting these require-
ments. Today's action proposes to remove this restriction in
the Bubble Policy by allowing sources not yet in compliance to
propose the use of a bubble to come into compliance once alter-
native emission limits have been established. The removal of
this restriction should provide sources with greater flexibility
li/ See 44 PR 71781 (Dec. 11, 1979).
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96
in developing their compliance strategies and result in faster
compliance with required emission limits.
d. Extensions of Compliance Deadlines
To allow existing sources additional time to make use
of Controlled Trading approaches, EPA proposes to alter the
original Bubble Policy to allow, on a case-by-case basis, States
to extend compliance deadlines for hydrocarbon sources, as part
of bubble approvals. The grant of a compliance extension will be
limited to sources which demonstrate genuine need for more time
to use a bubble, which are located in areas which have received
attainment extensions from 1982 to 1987, and whose bubble will
be environmentally beneficial. This latter requirement generally
means that the proposed use of the ERG must produce either more
or faster overall control than that which would have occurred
assuming timely compliance with the applicable existing regula-
tions. In these limited circumstances, State bubbles rules may
also allow compliance extensions without case-by-case SIP revisions,
but must do so in a manner which is consistent with reasonable
further progress requirements.
No proposed, use of the bubble will be permitted involving a
source which is presently subject to a federal enforcement action
unless EPA (and where necessary the appropriate court) approves
the proposal and the schedule for compliance contained in it.
This restriction applies to civil actions filed under Clean Air
Act Sec. 113(b), criminal actions filed under Sec. 113(c), a notice
imposing noncompliance penalties issued under Sec. 120, or a citizen
suit filed under Sec. 304 where EPA has intervened.
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e. Deferral' of Nbhc'bmpliahce' Penalties
Where existing firms propose to use ERCs as part of
bubble applications and the bubble seems likely to be approved,
EPA may defer issuance of a noncompliance penalty notice for a
stated period of time on a case-by-case basis.
f. Public" Participation
Notice of the proposed action and an opportunity for pub-
lic comment are required for emission offsetM/ and netting trans-
actions!!/ as part of complying with the requirement that all
emission reductions be federally enforceable. The Bubble Policy,
by originally requiring all alternative emission limits to be
submitted as SIP revisions, also implicitly required notice and
comment. For netting and offsets transactions occuring under
State Controlled Trading rules, these requirements for public
•
participation remain applicable. The same requirements apply
to bubble transactions under such rules.
Sections 113 (EPA enforcement) and 304 (citizen suits) of
Clean Air Act, require that, at a minimum, States publish any
changes to emission limits occurring as the result of a Controlled
Trade and must also provide EPA notice of a proposed trade at the
same time notice is given to the general public.
/ See 44 FR 3285 (Jan. 16, 1979).
See the definition of federally enforceable in Aug. 7, 1980
regulations. (45 PR 52676). This definition, by requiring
reductions to be included as part of a new source permit, in
effect, requires public participation.
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E. BANKING" EMISSION REDUCTION CREDITS
State Controlled Trading rules may include a banking provision
which provides for the ownership and holding of ERCs over time.
In many ways, such a provision is necessary if Controlled Trading
is to become an increasingly important part of the regulatory
program under the Clean Air Act. The two objectives of a banking
system are, first, to give firms that create ERCs an official
approval of their existence and characteristics before they are
used in a controlled trade and, second, to afford firms a measure
of protection against future regulatory change that would diminish
the ERC's value. By granting firms credit for reductions prior to
their use, banking gives industry considerably greater flexibility
to develop long run control strategies. Without such a provision,
firms risk losing any reductions they create beyond those required
of them should a major SIP revision or new set of control require-
ments be instituted. However, the degree of protection that can
legally be afforded ERCs must be limited by future adjustments
that may be necessary to carry out the requirements of the Clean
Air Act.
The bank itself constitutes the key element of this aspect
of Controlled Trading. The bank is responsible for accepting and
evaluating requests to certify an ERG (in effect, to "make a
deposit"), for serving, at least in the first Instance, as a store-
house of information on the quantity and types of credits currently
being held on deposit and for accounting for transfers and with-
drawals of ERCs. The role of the bank will generally be performed
by the reviewing authority and must be closely coordinated with
use of banked ERCs in controlled trades after this "withdrawal."
Criteria specifying the nature of the protection afforded
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99
a, source's ERCs and the possibility for future adjustments, as well
as in the interest of administrative workability, are presented in
the following sections.
1. Banking' Rules' Must' Designate" ah' Administering' Agency
State banking rules must identify what organization is responsi-
ble for performing specific functions related to banking. Generally,
the reviewing authority (e.g. the State or local air pollution con-
trol agency) will be responsible for verifying and processing requests
for banking. In some States, however, all or part of this responsi-
bility may be delegated to another organization. Such organ!zation(s)
must possess the resources and legal authority to properly implement
any delegated activities. States, local or regional agencies may
be responsible for administering the program.
2. Only' ERCs' May' be" Banked
Before an emission reduction can qualify to be banked, it must
meet all the substantive requirements of an emission reduction credit.
States may impose additional limits on what qualifies to be banked,
but at a minimum the reduction must be surplus, permanent, quantifiable
and enforceable.H/ Banked ERCs have some degree of protection that
One type of restriction currently used in several banking
programs involves restricting the time period the creator of
an ERG has the right to hold or use its reduction. Time periods
placed on ERCs now vary from 2 years to, more commonly, an inde-
finite life. This is a design option for States to decide. The
only Federal restriction is that under netting, all emission
reductions must be "contemporaneous." This is defined by EPA to
be 5 years, but States are free to provide for any reasonable
period of time and must do so explicitly in their rules. (See 45
PR 52698-9.) This time restriction was imposed to insure that
proposed emission reductions were closely related to increases in
order to be used to net out of review. EPA believes that a banking
rule provides these safeguards and will interpret any ERCs that
are banked to be "contemporaneous" when used for the purpose of
netting.
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future SIP changes will not arbitrarily result in their being con-
fiscated. The extent to which these ERCs can be altered will be
governed by the specific provisions in the State banking rule.
Instead of requiring that reductions take place before being
credited, States also have the option of granting credit for reduc-
tions before they have actually occurred. To protect air quality,
all that is required is for the actual reduction to have occurred
before it is used (i.e., traded against an increase in emissions)
in a controlled trade; but not before it is banked. In effect,
the State would be issuing a conditional ERG to the source stating
that the credit can be used in a controlled trade should the source
decide to actually make the reduction. Because of the difficulty
in quantifying most reductions before they occur, States selecting
this option will have considerably greater difficulty in crediting
such reductions, and will be faced with greater administrative.
resource requirements. Moreover, a considerable degree of uncer-
tainty will be introduced into the program. Sources seeking to
sell ERCs before the reductions have occurred will not know the
exact quantity of the reduction they are offering for sale.
3. ProceduresTfor' Banking" ERCs
When an emission reduction credit is "banked," the State
in effect certifies that it possesses certain characteristics that
will make it useful for a controlled trade in the future. In a
sense, the State has approved in advance a portion of a future
controlled trade.
For this reason, EPA believes that States should provide
an opportunity for public notice and comment in connection with the
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creation of an ERG Just as they would for its use in a controlled
trade. At that time, States should make the contents of the file
for the proposed ERG (see Section II. D.5, below) available for
public examination.
The State banking rule should also clearly establish the
procedures for sources to use in perfecting (e.g., obtaining legal
title through the certification process) their claim to an ERG.
These procedures should identify the criteria the State will use
in evaluating whether proposed emission reductions can be credited
and banked, the nature of the information required of sources to
demonstrate their claim for credit, and the forms required to submit
an application. States may also elect to charge sources a fee for
using the banking system based on their costs of operating the
programJL§/
4. Banking"Rules' Must' Establish" Ownership' Rights
State banking rules must specify who can own ERCs. A number
of options are available to States. Generally, State rules will
specify the source creating the ERG as the owner. But rules could
designate municipalities or the State as the owner of specified
classes of ERCs (e.g., those created by transportation control
measures or shutdowns) or limit ownership to major sources, sources
in plant-wide or state-wide compliance, or other potential recip-
ients. To prevent two entities from claiming credit for the
!!/ This fee may be assessed as a percent of ERCs rather than a
monetary amount. By assessing the fee in this manner, the state
or locality could accumulate potentially valuable ERCs to attract'
new industry or to assist existing firms to reduce their costs of
control.
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same ERCs, State rules must specifically identify ownership rights.
EPA is particularly interested in receiving public comments on what
types of ownership rights would be appropriate to a functioning
Controlled Trading program.
5.
The Banking Pile Is a critical element of any State program
to allow sources to hold ERCs over time. It provides a mechanism
for reviewing agencies to track the ownership and transfer of all
banked ERCs. State banking rules must provide that no transfer of
title to a banked ERG will take effect until the banking file and
the ERG Registry are amended to reflect such a transaction. This
tracking system is essential to minimize disputes over ownership.
It also provides the information essential to evaluating any proposed
use of a banked ERG.
»• *
The banking file will generally be an extension of the ERG
registry which is a critical element of all controlled trading
programs (See Section II. C.I .(b) (ill) ) . Whereas the ERC registry
provides information about reductions that have been used and aids
state and local Jurisdictions In air quality management (e.g.,
tracking PSD baseline, increments, offsets, netting), the banking
file provides information dealing specifically with the storage
and use of ERCs over time.
More detailed information is required for banked ERG then
will generally be necessary for an ERC registry. When an ERC is
banked, it can later be used In any of a number of contexts. To
expedite any evaluation of its proposed use, any information which
might be needed to evaluate the nature and amount of a banked ERC
should be set down In writing at the time of creation. Each time
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an ERG Is banked a file for that deposit must be created. The file
should include details concerning the location of the source creating
the ERCs, its stack parameters, the temperature and velocity of
its plume, particle size, the existence of any hazardous pollutants,
daily and seasonal emission rates, and any other information which
might be necessary to evaluate a proposed use of ERCs. This file
will provide the exclusive data base for calculating the "worth"
of banked ERCs in terms of their ability to substitute for emis-
sion increases when used in a controlled trade.
In nonattainment areas the banking file also provides a record
of ERCs for the reviewing authority to use in calculating any
adjustments to RPP or in evaluating the quantity of reductions
needed to come into attainment. In PSD areas, banked ERCs listed
in the file must be Included In the evaluation of PSD baseline
and Increment consumption. In both instances the reviewing authority
must assume that all banked ERCs currently on deposit will eventually
fl>
be used and include them (at the site of their creation) in evaluating
and developing future SIP strategies.
The banking file should be designed to trace the life of a
banked ERG through each stage of Its existence and should be coor-
dinated with the State's permitting procedures. It should record
all transfers and uses of banked ERCs in offset, bubble or netting
transactions. Thus, when a banked ERG is used, It would be eliminated
from the ERG account of the source, but reappear as part of the
user's permit.
Finally, the banking file serves as an important source of
information for firms Interested in using Controlled Trading. It
provides a centralized listing of certified and quantified ERCs
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which might be on the market and therefore available for purchase
and use. Sources in need of reductions to use as offsets or in a
bubble can consult the banking file to determine the possible
availability of appropriate banked ERCs and to identify the person
to contact.
To successfully perform these functions, the banking file
must be accessible to the public. States should make copies of the
contents of the banking file available at convenient locations and
times and may want to periodically publish a summary of all banked
ERCs .
The banking file itself should include entries organized both by
pollutant and by source. By aggregating this information by pollu-
tant, a source's efforts to locate ERCs for a particular project
will be facilitated. Moreover, the information organized in this
manner will be essential to states having to evaluate RPP or the
imposition of new controls. Each source will also want to have a
file containing information on all if its banked ERCs. This file
will aid sources in evaluating their future compliance plans.
6.
State rules should explain what changes may occur to ERCs
once they have been created, banked and used. Generally, once
an ERG has been used to meet a permit requirement, any violation
that occurs in the conditions under which that credit was created
would result in an enforcement action against the source producing
that emission reduction. The purchaser and user of the ERG would
not be affected. The creating source would be violating its permit,
not the source using the ERCs. If a State elected instead to bring
an action against the source using the purchased ERCs, a complex
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105
set of third party lawsuits would probably ensue and sources
would be very unlikely to purchase ERCs in the future. If,
however, a source creates a reduction for itself, and uses it to
meet a permit requirement, there is no question but that an
enforcement action should be brought against the source for any
violations of the revised emission limits established when the
ERG was created.
Suppose however, that a source creates and banks an ERG, but
stiir'owns it at the time the violation occurs. Here, States may
change the quantity of the ERG by regulatory action without
Jeopardizing the effectiveness of the program. In this circumstance,
States have the responsibility for bringing an enforcement action
against the source in the context of which they may also adjust
the source's ERCs to reflect its increase in emissions. States
should include explicit provisions in their rules addressing this
question of what actions they will pursue should a source violate
the conditions of a controlled trade.
7 «•*?"• '* f* *i s> f* o A * i <*« /• *-*/•- 4±t i f f_> f i M *"> f* » ' h> '^ »' t • *»' ' ''' f' '•*'•- '• f^ '"• • > f f'+ o 1*1 v f * * i
• Banking ftules Muse Provide for Accommodation
of "Changes" in SIP' Requirements
It may be necessary in the future for States to adjust ERCs
because additional emission reductions are required from sources
as a result of the area's failure to attain and maintain the national
ambient standards, because of an increment violation, or because new
RACT requirements are being imposed on specific source categories
pursuant to a schedule in the State's plan. Under the Clean Air
Act, States must be able to obtain adequate reductions to attain
and maintain the national standards. Thus, to be consistent with
requirements of the Act, the existence of banked ERCs must not
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106
interfere with obtaining these additional reductions. Although an
unlikely event, this might occur if significant quantities of ERCs
had been banked and under the terms of the State rule were no
longer available to meet reasonable further progress requirements
or to cure an increment violation. At the same time, firms will
be reluctant to invest in additional controls to create ERCs if
they believe their banked ERCs may be confiscated in the future.
To be consistent with the Clean Air Act while providing
potential sources with banked ERCs the certainty they require,
State banking provisions must contain a provision specifically
describing how ERCs will be treated should additional controls
be required. While a number of options are legally available to
States, only a few are consistent with the policy objectives of
developing a workable, dynamic trading system which fully realizes
Controlled Trading's potential benefits.
a. ERCs' are' fully' preserved, but their use is prohibited
until the State has committed additional reductions from other
sources necessary to reestablish reasonable further progress toward
attainment or to cure an Increment violation. With such a moratorium
on the use of ERCs, air quality is not further threatened and
sources retain their entire quantity of ERCs. However, this approach
may be undesirable because of the uncertainty at the time of imposi-
tion of the length of the prohibition on use and the potential to
interfere with user's optimal planning strategies.
. b. ERCs'"are'f'6rfeitea. Under this option, all ERCs would be
committed to the State's demonstration of attainment. For example,
if sources had banked 200 tons of ERCs, these would be confiscated
by the State and assumed in its demonstration strategy. If this
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107
provision were selected by a State, it is unlikely that significant
banking activity would occur.
c. Forfeiture' by' Selective' Regulation. States can confiscate
all or part of those reductions from sources for which new control
requirements are being imposed. For example, if a source installed
new equipment to create an ERG in 1980, and a year later this type
of control were required on all such sources, these particular
reductions would be confiscated if they had not already been sold
or used.
d. AcW3s-th'e-B6ara''Di3c'6uhEing. Under this option, all ERCs
in the bank would be discounted by the same factor. For example,
if a 10/5 additional reduction is required from a category of sources
for the SIP's demonstration of attainment, the State would discount
all banked ERCs from those types of sources by 10/5, while imposing
a 10/5 total reduction on sources in the inventory. Although the
quantity of ERCs held by a firm will be reduced, the overall supply
also has decreased, while demand has Increased. Therefore, the
value of the remaining ERCs held by a source is likely to be enhanced.
Indeed, sources of "unbanked" emissions may purchase banked ERCs
to meet the 10% extra reductions levied on them. This option is
relatively straightforward for hydrocabons and N02 because areawide
pollution models were generally used to demonstrate attainment.
For SC-2 and TSP more detailed, source specific modeling would
generally be required in calculating and allocating the required
discount necessary to demonstrate attainment. In these cases, the
emissions from specific sources would have to be modeled and dis-
counts assessed as needed to satisfy air quality requirements.
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The last two options provide for more equitable treatment of
emissions that have been banked and those that are still on the
State's inventory. Selective forfeiture generally provides greater
certainty for State regulators, while across-the-board discounting
will provide more of an incentive for industry to bank.
States have the option of adopting any of these four methods
of accommodating the need of additional controls. They can also
develop any equivalent procedure that achieves the same objectives.
EPA seeks comment on which of these or other methods is suitable
for insuring that banked ERCs do not interfere with the requirements
of the Clean Air Act.
P. ERC''TRMSACTIONS'NOT''COVERED''SY'STaTE<'CONTROLLED''irRaDINQ''RULES
EPA encourages States to adopt Controlled Trading rules.
However, in the absence of a State Controlled Trading rule, sources
may continue to utilize the SIP revision process in order to use an
offset or the bubble as an alternative means of compliance with a
set of emission limits. Morever, individual controlled trades may
fall outside the scope of a State rule and therefore must still
be submitted as an individual SIP revision.
In general, the criteria described in this policy state-
ment will also be applied by States and EPA in evaluating these
bubble and offset applications. Because of the ability of the SIP
revision process to take account of individual variations, many
trades which could not be accomplished under a State Controlled
Trading rule may be acceptable when proposed as an SIP revision.
For example, through the SIP revision process, proposed
bubbles could result in a net increase in emissions so long as
the requirements for attainment and maintenance are not violated.
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In submitting such a bubble application, the State would have to
revise its reasonable further progress demonstration to account
for the increase in emissions and EPA would review the proposal to
determine if the demonstration of attainment and RFP were satis-
factory. Unless a federally approved variance is granted, an
increase in total emissions would only be acceptable if compen-
sating additional controls were required elsewhere in the SIP.
External offset transactions not covered by State generic rules
will also be reviewed on the basis of State new source provisions,
and EPA regulations, Including the Interpretative Order and the
August 7, 1980 notice.
In order to expedite review of individual bubbles and other
trades submitted as SIP revisions, EPA will make reasonable
efforts to take action on proposals within 90 days after a State
has ruled on the application and submitted it to the Agency. To
expedite the process wherever possible, EPA will encourage
"parallel processing" of proposals, with EPA and state officials
conducting concurrent review so that both agencies can give public
notice of proposed action at the same time. Under parallel pro-
cessing, EPA can then take final action promptly after the State
completes its proceedings, provided that the State does not sub-
stantially alter the bubble after public notice.
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APPENDIX A
Regional Controlled Trading Bubble Coordinators
-------
Draft
June 17, 1981
MODEL COMPREHENSIVE CONTROLLED TRADING RULES
(A set of rules establishing a comprehensive system
for creating surplus emission reductions, storing
them over time and using them for offsets, netting
and bubbles)
CHAPTER 100: Use of Surplus Emission Reductions
§101 Purpose
§102 Scope
§103 . Definitions
§104 Application Procedures
§105 Creation of Emission Reduction Credits
§106 Special Requirements for Creation of ERCs
in Certain Non-Attainment Areas
§107 Future Control Requirements
§108 Banking of Emission Reduction Credits
§109 Transfer of Emission Reduction Credits
§110 Use of Emission Reduction Credits
§111 Air Quality Modeling Requirements for Use
of Particulate Matter (PM) and Sulfur
Dioxide (303) Emission Reduction Credits
§112 Use of Emission Reduction Credits in Offsets
§113 Use of Emission Reduction Credits to Establish
Alternative Emission Standards (Bubbles)
§114 Transmittals to EPA
§115 Amendment £f the State Implementation Plan
§101 Purpose
The purpose of this Chapter is to establish procedures for
the creation, holding, transfer and use of surplus emission
reductions. The procedures are intended to encourage develop-
ment of innovative pollution control technology, to lower the
cost of meeting emission control requirements and to reduce the
need for site-specific amendment of the State Implementation Plan,
§102 Scope
This chapter applies to the following emissions in all
areas of the State: [IDENTIFY POLLUTANTS WHICH ARE INCLUDED IN
THE PROGRAM, E.G., TOTAL SUSPENDED PARTICULATES (TSP), SULFUR
DIOXIDE (SOa), VOLATILE ORGANIC COMPOUNDS (VOC), NOX, CARBON
MONOXIDE (CO), ETC.]*
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§103 Definitions
"Emission reduction credit" ("ERG") means a surplus emis-
sion reduction registered by the Department in accordance with
the requirements of this Chapter which represents a decrease in
the quantity of a pollutant discharged from a source below the
level used in the State Implementation Plan demonstration or
otherwise required by federal or state law.
"Banking" means a system for recording ERCs so that they
may used or transferred for used at a future date.
"Bubble" means an alternative emission control strategy
where several sources are regarded as being placed under a hypo-
thetical dome which produces a single emission point. Sources
under a bubble may reallocate emission decreases and increases
so long as the requirements of this Chapter are met.
"Netting" means use of an ERG to avoid new source review
requirements by reducing emissions to compensate for any in-
creased emissions at the same source.
"Offset" means use of an ERG obtained from an existing source
to counterbalance, the increase in emissions from a new or modified
source in a nonattalnment area and to maintain reasonable further
progress toward attainment of national ambient air quality standards
["SOURCE" - NOTE: AS USED IN THIS MODEL RULE "SOURCE" MEANS
ANY BUILDING, STRUCTURE, FACILITY, OR INSTALLATION WHICH EMITS OR
MAY EMIT AIR POLLUTION. IP A DIFFERENT WORD OF SIMILAR MEANING IS
DEFINED IN STATE LAW, IT SHOULD BE SUBSTITUTED FOR "SOURCE" THROUGH-
OUT THIS CHAPTER]
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"State Implementation Plan" ("SIP") means the most recently
prepared plan or revision thereof required by 42 USC §7410 which
has been approved by the U.S. EPA.
§104 Application Procedures
(a) Any person who owns or operates a source at which a
reduction in emissions has occurred or will occur
may apply for creation of an ERG in accordance with
the requirements of this Chapter.
(b) A person shall apply for creation of an ERG on
appropriate forms supplied by the Department.2
(c) Applications requesting creation of an ERG based
on emission reductions that have already occurred
are subject to the following time limits:
(1) No application may be submitted for emission
reductions which occurred prior to
[INSERT MOST RECENT DATE USED FOR SIP PLANNING
OR OTHER APPROPRIATE DATE SUCH AS EFFECTIVE
DATE OF CONTROL REQUIREMENTS. THE STATE, AT
ITS OPTION, MAY WISH TO PROVIDE FOR CASE BY
CASE DETERMINATIONS ON WHETHER EMISSION REDUC-
TIONS WERE RELIED ON IN THE STATE SIP.]
(2) [OPTIONAL] For emission reductions which occur-
red between [SAME DATE AS IN (1), SUPRA] and
the effective date of this Chapter, applications
must be submitted within [A REASONABLE PERIOD,
E.G., 6 MONTHS] after the effective date of
.this Chapter.
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(3) [OPTIONAL] For emission reductions which occur
after the effective date of this Chapter,
applications must be submitted within
[A REASONABLE PERIOD, E.G., ONE YEAR] .
(d) Applications requesting an ERG for emission reductions
that have not occurred at the time of application
will be reviewed by the Department and contingently
approved or denied. An ERG will be registered how-
ever, only after the reduction has taken place.
(e) Before an ERG may be created, the source owner must
obtain a revised operating permit [OR OTHER LEGALLY
ENFORCEABLE APPROVAL] which includes specific quanti-
fiable emission limits reflecting the reduced emissions
§105 Creation of Emission Reduction Credits
*
(a) No ERG may be created unless the following criteria
are met:
(1) The emission level after the reduction must
be enforceable by means of a consent
order or permit condition [OR EQUIVALENT LEGAL
INSTRUMENT];
(2) The emission reduction must represent a real and
permanent decrease in emissions below the appli-
cable baseline level. The baseline used for re-
viewing emission reductions will be determined
as follows:
(1) For areas designated attainment under 42 USC
section 7407(d)(l) the baseline for each emission"
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point will be actual emissions determined as
follows:
(a) If emissions from the source are separately
identified in an emission inventory used in
the State's SIP, the baseline will be the
emissions attributed to the source in the SIP.
(b) If emissions from the source are not separately
identified in the State SIP demonstration of
attainment of national ambient air quality
standards, the baseline will be average emis-
sions calculated from the operating history
of the source for a representative period
of time (e.g., TWO or THREE YEARS) before
the application is filed. If historical
data are deemed inadequate by the State,
action on an application may be deferred
for up to one year while operating data
are compiled by the applicant.
(11) For areas designated as non-attainment under
42 USC section 7W(d)(l) the baseline for each
emission point will be the lower of:
(a) Actual emissions determined under (a)(2.)
(i) of this section, or
(b) Allowable emissions under applicable state
regulations [CITE STATE SIP REGULATIONS]
[NOTE: THE STATE MAY MODIFY THIS SUBSECTION (B)
TO USE "ALLOWABLES" WHICH EXCEED "ACTUAL" EMIS-
SIONS ONLY IF THE SIP USED ALLOWABLE EMISSIONS
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IN MAKING THE STATE AMBIENT AIR QUALITY DEMON-
STRATION]
(3) An applicant proposing an emission decrease from
process curtailments or source shutdowns must
demonstrate that the proposed decrease will not
be negated by countervailing emission increases
occurring at other sources in the same area
in response to the applicant's process
curtailment or shutdown [THIS IS ONE OP SEVERAL
OPTIONS - SEE FOOTNOTE] .3
(b) Confirmation of Emission Reduction Credits
(1) To confirm emission reductions, the Department
may require source tests, continuous monitors
or any other acceptable means of measurement.
(2) In cases where the Department determines that the
emission reduction estimates made by the appli-
cant are uncertain, the Department reserves the
.right to grant ERCs for a smaller quantity of
emission reductions than requested.
(3) Where reductions in open dust emissions are pro-
posed, the Department will require that controls be
Installed and that emissions before and after control
be monitored as a precondition for creating an ERG.
(c) After all of the requirements of this Chapter have
been met and the emission reduction has actually occurred,
the Department will register an ERG in the records kept
for that purpose.
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§106 Special Requirements for Creation of ERCs in Certain
Non-Attainment Areas
(a) [DESIGNATE THE NONATTAINMENT AREAS FOR WHICH THERE IS
NOT A SIP DEMONSTRATING ATTAINMENT OP NATIONAL AMBIENT
AIR QUALITY STANDARDS].
(b) Owners of sources whose potential emissions exceed 100
tons per year (after meeting currently applicable
control requirements) must agree to a level of control
approved by the U.S. Environmental Protection Agency
which represents Reasonably Available Control Technology
("RACT") for all sources to be used in creating an ERG
where RACT has not already been defined. The RACT level
of.control must be used as the baseline for computing the
ERG. If the transaction covers two or more plants, only
those plants whose combined potential emission exceed 100
.tons per year must use RACT emission levels as the basis
for calculating ERCs.
(c) Owners of sources whose potential emissions are equal to
or less than 100 tons per year (after meeting currently
applicable control requirements) may either:
(1) agree to RACT limits in accordance with subsection
(b) which will be used as the baseline for calcu-
lating ERCs, or
(2) use the baseline established under §105(a)(2). If
the source owner uses the baseline under §105(a)(2)
he will be deemed to acknowledge that he must produce
emission reductions or ERCs equivalent to any future
RACT requirements imposed on the source.
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(d) [OPTIONAL: STATE GUARANTEE THAT NO NEW LIMITS WILL BE
IMPOSED FOR 5 YEARS ON SOURCES AGREEING TO RACT
UNDER SECTION (c)(l).]
§107 Planned Future Control Requirements
[NOTE: THIS IS ONLY ONE ALTERNATIVE FOR RECOGNIZING FUTURE
CONTROL REQUIREMENTS WHICH A STATE AGENCY HAS DEVELOPED AND
IS PLANNING TO IMPOSE IN THE NEAR FUTURE - SEE FOOTNOTE]1*
(a) The Department will publish a list in the [STATE
GAZETTEER] every twelve months which contains the
air quality control tactics and technologies which
it is considering adopting as future control
requirements for identified categories sources.
(b) Any tactic or technology which has been on the pub-
lished list for two years and has not been formally
•» "
proposed as a regulation, will be deemed to be
removed from the list,
(c) Any tactic or technology which has not been adopted
within one year of having been proposed as a regu-
lation will be deemed to be removed form the list.
(d) If a proposed ERG Involves emission reductions result-
ing from a tactic or technology listed under this
section, the Department will grant credit only for
reductions which exceed those which would result from
application of the listed tactic or technology.
§108 Banking of Emission Reduction Credits
(a) An ERG may be used at the time it is registered or
may be held for future transfer or use.
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(b) [OPTIONAL] If an ERG is not used within
years [SPECIFY TIME, E.G., 5 YEARS], control of the
ERG will revert to the state. [NOTE: THE STATE MAY
WISH TO AUCTION OFF UNUSED ERCs TO OTHER PRIVATE
HOLDERS.]
(c) During the time that an ERG is held in the emissions
banking system its quantity (expressed in tons per
year) will be subject to the following:
[NOTE: THIS IS ONLY ONE OP SEVERAL OPTIONS -
SEE FOOTNOTE]5
(1) Any ERG will be discounted by the Department when
a control requirement is adopted after registra-
tion of the ERG which requires additional con-
trol of the same type of emission from the same
type of source as represented by the ERG. The
percent reduction in amount of an ERG will be equal
to the difference between the percent reduction
required by the new control requirements and the
percent reduction required by the previous control
requirements. Similarity between types of sources
will be determined on the basis of Standard Indus-
trial Classifications or any other means deemed
appropriate by the Department.
(2) If new information becomes available to the Depart-
ment which results in more accurate emissions esti-
mates, the Department will adjust the value of
affected ERCs accordingly, and
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Page 10
(3) If a person who created an ERG fails to comply with
the requirements resulting from creating the ERG,
the Department may adjust the quantity of ERCs
registered in the banking system for that person.
§109 Transfer of Emission Reduction Credits
An ERG may be transferred in whole or in part by any means of
conveyance permitted by the laws of this state. The role of the
Department in trading of an ERG will be limited to providing
information on the documentation and registration of ERCs and to
providing technical assistance with regard to possible future
use of the ERCs being sold or transferred. No transfer shall be
effective until the Department is notified thereof in writing,
confirms receipt of the notice, and notes the transfer of owner-
ship in the Department registry for that purpose.
§110 Use of Emission Reduction Credits
(a) Registered ERCs may be used in accordance with this
Chapter to establish alternative emission limits (bubbles),
to offset increased emissions from new or modified
sources or to net out of new source review.
(b) Application for use of ERC's shall be made on forms
provided by the Department."
(c) Before an ERG may be used, the source owner must obtain
a revised operating permit [OR OTHER LEGALLY ENFORCE-
ABLE APPROVAL] which includes specific quantifiable
emission limits.
(d) Use of an ERG will be allowed only in transactions
where emissions being exchanged are in the same
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criteria pollutant category.7 Hazardous and non-
hazardous emissions may only be traded against
each other if the hazardous emission is decreased.
Coke oven emissions may only be traded against other
particulate emissions if the coke oven emissions
decrease.
(e) No use of an ERG may allow a new or modified source
to exceed New Source Performance Standards (NSPS) estab-
lished under 42 USC §7411, National Emission Standards
for Hazardous Air Pollutants (NESHAPS) established under
42 USC §7412, the requirements for Lowest Achievable
Emission Rate (LAER) under 42 USC §7503, or the require-
ment for Best Available Control Technology (BACT) under
42 USC §7475.
» •
§111 Air Quality Modeling Requirements for Use of Particulate
Matter (PM) and Sulfur Dioxide (SO?) Emission Reduction
Credits ~
(a) [OPTIONAL] No air quality modeling or SIP revision
under §116 of this chapter will be required for use of
ERC's representing stack emissions of PM and S02 if
all of the following conditions are met:
(1) Use of an ERG produces no net increase in
a c t ual emi s s1ons.
(2) The relevant emission points are in the same
immediate vicinity [WITHIN 100 METERS OR OTHER
EPA APPROVED OBJECTIVE DEFINITION], and
(3) The relevant emission points are of similar
effective stack height [PLUS OR MINUS 1056 OR OTHER
EPA APPROVED OBJECTIVE DEFINITION],
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Page 12
(b) [OPTIONAL] Only limited modeling will be necessary for
use of EEC's for trades where total emissions do not
increase, and will not cause a significantly different
air quality impact from the original emission points.
The limited modeling need only include the emission
points involved in creating and using the ERG.
A "significantly different impact" is one that equals
or exceeds the levels specified in the following table:
SIGNIFICANCE LEVELS
Pollutant Annual
SO 2
TSP
N02
CO
1.0 ug/m^
1.0 ug/m3
1.0 ug/m^
24-Hour 8-Hour 3-Hour 1-Hour
5 ug/ra^ 25 ug/m^
5 ug/m3
0.5 mg/m^ 2 mg/m^
(c) [NOTE: IP OPTIONS (A) AND (B) ARE NOT USED, THIS
GENERAL REQUIREMENT SHOULD APPLY TO ALL PM AND S02
TRADES.] For use of all other ERCs representing
emissions which do not meet the conditions of sub-
sections (a) or (b) of this section, diffusion modeling
considering all sources in the area of impact will
be required as follows:
(1) Modeling must show that use of .the ERG will neither
create a new ambient violation nor interfere with
reasonable further progress toward attaining
national ambient air quality standards as planned -
in the SIP, and
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Page 13
(2) Modeling must show that use of the ERG will not
create an increment violation in a PSD area.
§112 Use of Emission Reduction Credits in Offsets and Netting
[NOTE: MOST STATES HAVE SEPARATE REGULATIONS SPECIFYING
OFFSET REQUIREMENTS FOR NEW OR MODIFIED SOURCES LOCATED
IN AREAS WHICH FAIL TO MEET AMBIENT AIR QUALITY STANDARDS.
THOSE REGULATIONS MAY BE INCORPORATED AT THIS POINT IN
THE CHAPTER. ALTERNATIVELY, STATES MAY SIMPLY WISH TO
INSERT A CROSS-REFERENCE IN THEIR CURRENT NEW SOURCE
REVIEW REGULATIONS WHICH PROVIDES, E.G.:
"EMISSION REDUCTION CREDITS (ERG) SHALL BE USED
TO OFFSET THE EMISSIONS FROM A NEW OR MODIFIED
SOURCE. CREATION AND USE OF ERCs SHALL BE IN
»
ACCORDANCE WITH CHAPTER OF THIS TITLE"]
[THE OPTIONS FOR NETTING ARE SPECIFIED IN EXISTING FEDERAL
REGULATIONS 45 FR 52676 (AUG. 7, 1980) AND PROPOSED REGU-
LATIONS 46 FR 16280 (MARCH 12, 1981). STATES MAY WISH TO
CROSS REFERENCE TO THE FEDERAL REGULATIONS.]
§113 Use or Emission Reduction Credits to Establish Alternative
Emission Standards (Bubbles)
(a) The owner of a source, or the owners of two or more
different sources, may propose a bubble which estab-
lishes alternative standards for the sources included
in the bubble.
(b) Total allowable emissions from a bubble will be deter-
mined as follows:
(1) The total emissions from a bubble excluded from
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Page 14
SIP revision requirements under §116 of this
Chapter may not exceed the arithmetic sum of the
baseline level of emissions determined for each
source under §105(a)(2) or §106.
(2) Total emissions from a bubble approved as a SIP
revision may exceed the sum of the baseline level
of emissions determined for each source under
§105(a)(2) or §106.
(c) The total emission limit determined under subsection
(b) of this section may be reallocated among sources
included in the bubble in accordance with the require-
ments for creating, transferring, and using Emission
Reduction Credits contained in this Chapter.
(d) Source specific alternative emission standards
^
shall be incorporated into operating permits [OR
EQUIVALENT DOCUMENT] for the affected sources.8
(e) Compliance status of sources:
(1) Only sources which are in compliance with all
applicable air quality regulations and requirements
may apply for alternative emission limits under this
regulation. To be in compliance a source owner must:
(1) Demonstrate that all emission points involved
in the proposed trade are in compliance at the
time an application is submitted, or
(ii) Demonstrate that the source is meeting the
requirements of a legally enforceable compliance
schedule which conforms with the requirements
of the federal Clean Air Act (42 USC 7401, et
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Page 15
seq.) for all emission points involved in
the proposed trade^, or
(ill) Agree to a legally enforceable compliance
schedule which insures compliance with alter-
native standards for all emission points
involved in the proposed trade and otherwise
meets the requirements of the federal Clean
Air Act (42 USC 7401, et seq.)
(2) Submission of an application for a bubble will not
affect any existing obligation of a source to comply
with applicable laws, regulations and orders unless
the Department issues an order specifically extend-
ing a compliance schedule. No such order may extend
compliance dates beyond mandatory attainment dates
in the Clean Air Act (42 USC §7502(a)),
or interfere with reasonable further progress as
required by the Clean Air Act (42 USC §§7503(1)
and 7501(1)).
(3) No alternative emission standard will be established
for a source which is presently subject to federal
enforcement action unless the U.S. Environmental
Protection Agency approves the alternative standard
and the schedule for meeting it. As used in this
paragraph, "federal enforcement action" means an
order issued under 42 USC §74l3(a), a civil action
filed under 42 USC §74l3(b), a criminal action
filed under 42 USC §7413(c), a notice imposing
non-compliance penalties Issued under 42 USC §7420,
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Page 16
or a citizen suit filed under 42 USC §7604 to
which EPA is a party.
(d) Upon receiving notice from the Department that a new or
more restrictive emission standard has become applicable
to any source included in a bubble under this section,
the owner or owners of those sources shall submit revised
permit applications [OR EQUIVALENT DOCUMENTS]. The
revised applications must demonstrate either reductions
in total bubble emission or use of ERCs which are equal
to or are greater than the reduction required by the
new emission standards. If the owner or owners of an
affected installation do not submit permit applications
that demonstrate the necessary reductions, the Depart-
ment will issue an Order requiring compliance with the
new or more restrictive emission standards. [NOTE:
AS SUGGESTED UNDER §106(d) STATES ARE ENCOURAGED TO
NOT IMPOSE ADDITIONAL REQUIREMENTS ON SOURCES THAT
AGREE TO RACT IN ADVANCE OP FORMAL ADOPTION OP NEW
REGULATIONS],
§114 Public Notice
[IT IS ASSUMED THAT THE STATE HAS EXISTING PROCEDURES TO PRO-
VIDE PUBLIC NOTICE AND OPPORTUNITY FOR COMMENT ON PROPOSALS TO
CHANGE EMISSION LIMITS APPLICABLE TO A SOURCE. PUBLIC NOTICE OP.
FINAL ACTIONS IS ALSO REQUIRED. IF SUCH PROCEDURES DO NOT EXIST,
THEY MUST BE DEVELOPED FOR USE OF ERCs.]
§115 Transmittals to EPA
The Department will transmit copies of the following
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Page 17
documents to the U.S. Environmental Protection Agency promptly after
the documents are prepared:
(a) Copies of public notices relating to proposed Depart-
ment action on applications for use of an ERG.12
(b) Copies of permits [OR OTHER DOCUMENTS] reflecting
Department approval of use of an ERG, including data on
emission limits before and after the approval.
§116 Amendment of the State Implementation Plan; Requirements
and Exemptions
(a) The Department will approve proposed use of an ERG
without action to formally amend the State Implemention
Plan if all of the following conditions are met:
(1) The proposal complies with all of the require-
ments of this Chapter,
(2) Total emissions do not increase.
(3) The sources affected by the proposal are included
in the SIP emission inventory,
(4) The proposal has been exempted from modeling
requirements under §111(a) or involve sources
whose combined total potential to emit is less than
100 tons per year (after currently applicable
cont rols), and
(5) The proposal includes only stack emissions.
(b) The Department will approve use of an ERG withhout
action to formally amend the State Implementation
Plan if the transaction involves hydrocarbons or
NOX emissions, if total actual allowable emissions
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Page 18
do not increase, and if all other requirements of
this chapter are met.
(c) All other proposals for using ERCs, including any
proposal involving fugitive emissions, must be
submitted to the U.S. Environmental Protection Agency
and approved as an amendment to the State Implementa-
tion Plan pursuant to 42 USC §7410.
[NOTE: EPA HAS SOLICITED COMMENT ON POSSIBILITIES
TO EXCLUDE OTHER TRANSACTIONS PROM THE SIP REVISION
REQUIREMENT. STATES SHOULD CONSIDER DEVELOPING PROPO-
SALS DISCUSSED IN SECTION II.D.2.a.(iv) OP THE PRO-
POSED POLICY STATEMENT, INCLUDING ARRAYS OP ALTERNATE
LIMITS, USE OF THE SAME MODEL PROM THE ORIGINAL SIP
DEMONSTRATION AND SIMPLIED LEVEL II MODELING.]
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Page 19
FOOTNOTES
1. Each state should carefully consider the "scope" section of its
regulation and use that section to structure its program to
meet its own needs. A state may choose to start a controlled
trading program only for sources subject to new emission stan-
dards. New Jersey, for example, adopted a bubble regulation
which can be used to reduce the economic burden of a -new program
to regulate volatile organic compounds.
2. The form should contain the name and address of the applicant
and complete source data including: types of emissions dis-
charged prior to the reduction in emissions and their compo-
nent analyses (including the size distribution of particulate
matter); quantity of emissions discharged prior to the reduction
which was used as the basis for calculating the ERG; length
of time that the emissions were monitored before the reduction;
normal operating schedule and seasonal distribution of through-
put; type of emissions involved in the reduction and their
component analyses (including size distribution for particulate
matter and reactivity of hydrocarbons); the date the reduction
occurred; quantity of the reduction (based on hourly emission
rates and annual hours of operation) reported as tons per year
or the metric equivalent; description of how the emissions are
produced; method of control prior to the reduction and the
changes which caused the reduction; location of discharge
point of emissions, including UTM coordinates; methods of
monitoring, testing or modeling which were used before and
after the reduction; length of time the reduced emissions have
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Page 20
been monitored; stack data, including stack height and diameter,
stack gas temperature, and stack gas flowrate in cubic feet
per minute; fule burning rate or process rate; and maximum
emission rate in pounds per hour or metric equivalent.
3. This is one of several ways of dealing with the requirement
that reductions be "permanent." Other options include
requiring offsets for new or expanding firms of relatively
small size. See Policy Statement II.C.3.
4. Other alternatives include: (1) a moratorium on banking
certain types of ERCs during a period when the Department
is developing additional control requirements or (2) imposing
a higher use ratio (Increasing the amount of ERG required to
offset a given emission). Whatever approach is used, the
state must have a regulation which prevents creation of an ERG
when the Department knows that the "surplus" emission reduction
will imminently be required by an anticipated SIP amendment.
5. Other options include preserving ERCs at full value but
imposing a moritorium on their use or -totally forfeiting
ERCs.
6. Because the different possible uses vary widely, various exist-
ing state forms should be used. For example, use of an ERG
as an offset to allow construction of a new source would be
reflected by the issuance of a permit for the new source. Use
of an ERG to establish alternative standards through a "bubble"
would be reflected through modification of permits or orders
applicable to the affected sources.
7. For example, an ERG representing a reduction in hydrocarbon
emissions must be used in a transaction involving other
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Page 21
hydrocarbon emissions— it could not be used in a transaction
involving sulfur oxide emissions.
8. States which do not have operating permit programs must
include some other legally enforceable mechanism, such as
an administrative order, for approving alternative standards.
9. In this subparagraph and in subparagrah 113(e)(ill) "meeting
the requirements of the federal Clean Air Act" means that the
schedule must require compliance no later than the dates
specified for attainment of nati'onal ambient air quality
standards in 45 USC §7502(a). For some sources, earlier
compliance will be necessary to meet the "reasonable further
progress" requirement imposed by 42 USC §§7503(1) and 7501(1),
-------
Draft
June 17, 1981
MODEL BANKING RULES
(Rules providing for storage of surplus emission
reductions for use as offsets)
NOTE: These rules are an adjunct to state programs for
regulating industrial growth in areas which have failed to
meet ambient air quality standards. State regulations appli-
cable to non-attainment areas impose strict "LAER" emission
limits on new or expanding sources. They also require that
existing emissions in the area be lowered to offset new growth.
Without a banking provision, an industry must find an off-
setting emission reduction at the time it seeks to expand or
locate in an area. A banking provision allows emission
reductions to be registered and saved until they are needed
to offset industrial growth. This model banking rule is
designed to be incorporated into state regulations which
specify LAER emission limits and require that offsets be
obtained. The circumstances when an offset must be submitted
as a SIP revision are set forth in 40 CPR Part 51, Appendix S.
Adoption of this type of regulation will Indirectly facili-
tate other transactions, including "netting" by sources to avoid
new source review requirements and "bubbles" which may be proposed
as site-specific SIP revisions.
*
CHAPTER 200: Banking of Surplus Emission Reductions
§201 Purpose
§202 Scope
§203 Definitions
§204 Application and Permit Procedures
§205 Creation of Emission Reduction Credits
§206 Special Requirements for Creation of
ERCs in Certain Non-Attainment Areas
§207 Future Control Requirements
§208 Banking of Emission Reduction Credits
§209 Transfer of Emission Reduction Credits
§210 Use of Emission Reduction Credits
§2ll Air quality Modeling Requirements for Use of
Particulate Matter (PM) and Sulfur Dioxide
(S02) Emission Reduction Credits
§201 Purpose
The purpose of this Chapter is to establish procedures for
the creation, holding, transfer and use of surplus emission
reductions to offset new industrial growth.
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§202 Scope
This chapter applies to the following emissions in all areas
of the state: [IDENTIFY POLLUTANTS WHICH ARE INCLUDED IN THE
PROGRAM, E.G., TOTAL SUSPENDED PARTICULATE MATTER (TSP), SULFUR
DIOXIDE (S02), VOLATILE ORGANIC COMPOUNDS (VOC), NOX, CARBON
MONOXIDE (CO), ETC.]1 •
§203 Definitions
"Emission reduction credit" ("ERG") means a surplus
emission reduction registered by the Department in accordance
with the requirements of this Chapter which represents a
decrease in the quantity of a pollutant discharged from a source
below the level used in the State Implementation Plan demonstra-
tion or otherwise required by federal or state law.
"Banking" means a system for recording ERCs so that they
may be used or transferred for use at a future date.
"Netting" means use of an ERG to avoid new source review.
requirements by reducing emissions to compensate for any in-
creased emissions at the same source.
"Offset" means use of an ERG obtained from an existing source
to counterbalance the Increase in emissions from a new or modified
source in a nonattainment area and to maintain reasonable further
progress toward attainment of national ambient air quality standards,
["SOURCE" - NOTE: AS USED IN THIS MODEL RULE "SOURCE" MEANS
ANY BUILDING, STRUCTURE, FACILITY, OR INSTALLATION WHICH EMITS OR
MAY EMIT AIR POLLUTION. IF A DIFFERENT WORD OF SIMILAR MEANING
IS DEFINED IN STATE LAW, IT SHOULD BE SUBSTITUTED FOR "SOURCE"
THROUGHOUT THIS CHAPTER]
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"State Implementation Plan" ("SIP") means the most recently
prepared plan or revision thereof required by 42 USC §7410 which
has been approved by the U.S. EPA.
§204 Application and Permit Procedures
(a) Any person who owns or operates a source at which a
reduction in emissions has occurred or will occur
may apply for creation of an ERG in accordance with
the requirements of this Chapter.
(b) A person shall apply for creation of an ERG on
appropriate forms supplied by the Department.2
(c) Applications requesting creation of an ERG based
on emission reductions that have already occurred
are subject to the following time limits:
(1) No application may be submitted for emission
reductions which occurred prior to
[INSERT MOST RECENT DATE USED FOR SIP PLANNING
OR OTHER APPROPRIATE DATE SUCH AS EFFECTIVE
DATE OF CONTROL REQUIREMENTS. THE STATE, AT
ITS OPTION, MAY WISH TO PROVIDE FOR CASE BY
CASE DETERMINATIONS ON WHETHER EMISSION REDUC-
TIONS WERE RELIED ON IN THE STATE SIP.]
(2) [OPTIONAL] For emission reductions which occurred
between [SAME DATE AS IN CD, SUPRA] and the
effective date of this Chapter, applications must
be submitted within [A REASONABLE
PERIOD, E.G., 6 MONTHS] after the effective date
of this Chapter.
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(3) [OPTIONAL] For emission reductions which occur
after the effective date of this Chapter, applica-
tions must be submitted within [A REASON-
ABLE PERIOD, E.G., ONE YEAR].
(d) Applications requesting an ERG for emission reductions
that have not occurred at the time of application will
be reviewed by the Department and contingently approved
or denied. An ERG will be registered however, only
after the reduction has taken place.
(e) At the time the Department approves an ERG, it will
issue appropriate permit modifications or orders [OR
OTHER LEGALLY EQUIVALENT DOCUMENTS] to assure that the
emission reduction which served as the basis for the
ERG will be legally enforceable.
§205 Creation of Emission Reduction Credits
(a) No ERG may be created unless the following criteria
are met:
(1) The emission level after the reduction in emissions
must be enforceable by means of a consent
order or permit condition [OR EQUIVALENT LEGAL
INSTRUMENT];
(2) The emission reduction must represent a real and
permanent decrease in emissions below the appli-
cable baseline level.3 The baseline used for re-
viewing emission reductions will be determined
as follows:
(i) For areas designated attainment under 42 USC
section 7407(d)(l) the baseline for each emission
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Page 5
point will be actual emissions determined as
follows:
(A) If emissions from the source are separately
identified in an emission inventory used in
the State's SIP, the baseline will be the
emissions attributed to the source in the SIP.
(B) If emissions from the source are not separately
identified in the State SIP demonstration of
attainment of national ambient air quality
•>
standards, the baseline will be average emissions
calculated from the operating history of the
source for a representative period of time
(e.g., TWO or THREE YEARS) before the applica-
tion is filed. If historical data are deemed
inadequate by the State, action on an applica-
tion may be deferred for up to one year while
operating data are compiled by the applicant.
(ii) For areas designated as non-attainment under
42 USC section 7407(d)(l) the baseline for each
emission point will be the lower of:
(A) Actual emissions determined under (a)(2)
(1) of this section, or
(B) Allowable emissions under applicable state
regulations [CITE STATE SIP REGULATIONS].
[NOTE: THE STATE MAY MODIFY THIS SUBPARAGRAPH (11)
TO USE "ALLOWABLES'" WHICH EXCEED "ACTUAL" EMIS-
SIONS ONLY IF THE SIP USED ALLOWABLE EMISSIONS
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IN MAKING THE STATE AMBIENT AIR QUALITY DEMON-
STRATION]
(3) An applicant proposing an emission decrease from
process curtailments or source shutdowns must
demonstrate that the proposed decrease will not
be negated by countervailing emission increases
occurring at other sources in the same area in
response to the applicant's process curtailment or
shutdown4 [THIS IS ONE OP SEVERAL OPTIONS - SEE
FOOTNOTE] .
(b) Confirmation of Emission Reduction Credits
(1) To confirm emission reductions, the Department
may require source tests, continuous monitors,
or any other acceptable means of measurement.
(2) In cases where the Department determines that the
emission reduction estimates made by the appli-
cant are uncertain, the Department reserves the
right to grant ERCs for a smaller quantity of
emission reductions than requested*
(3) Where reductions in open dust emissions are pro-
posed, the Department will require that controls
be Installed and that emissions before and after
control be monitored as a precondition for
creating an ERG.
(c) After all of the requirements of this Chapter have been
met and the emission reduction has actually occurred,
the Department will register an ERC in the records kept
for that purpose.
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§106 Special Requirements for Creation of ERCs in Certain Non-
Attainment Areas
(a) [DESIGNATE THE NONATTAINMENT AREAS FOR WHICH THERE IS
NOT A SIP DEMONSTRATING ATTAINMENT OP NATIONAL
AMBIENT AIR QUALITY STANDARDS],
(b) Owners of sources whose potential emissions exceed 100
tons per year (after meeting currently applicable
control requirements) must agree to a level of control
approved by the U.S. Environmental Protection Agency
which represents Reasonably Available Control Technology
("RACT") for all sources to be used in creating an ERG
where RACT has not already been defined. The RACT level
of control must be used as the baseline for computing
the ERC. If the transaction covers two or more plants,
only those plants whose combined potential emission
exceed 100 tons per year must use RACT emission levels
as the basis for calculating ERCs.
(c) Owners of sources whose potential emissions are equal to
or less than 100 tons per year (after meeting currently
applicable control requirements) may either:
(1) agree to RACT limits in accordance with sub-
section (b) which will be used as the baseline for
calculating ERCs, or
(2) use the baseline established under §205(a)(2).
If the source uses the baseline under §205(a)(2)
the source owner will be deemed to acknowledge
that he must produce emission reductions or
ERCs eqivalent to any future RACT requirements
Imposed on the source.
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(d) [OPTIONAL: STATE GUARANTEE THAT NO NEW LIMITS WILL BE.'
IMPOSED FOR 5 YEARS ON SOURCES AGREEING TO RACT UNDER
SECTION (C)(l).[
§207 Planned Future Control Requirements
[NOTE: THIS IS ONLY ONE ALTERNATIVE FOR RECOGNIZING FUTURE
CONTROL REQUIREMENTS WHICH A STATE AGENCY HAS DEVELOPED AND
IS PLANNING TO IMPOSE IN THE NEAR FUTURE - SEE FOOTNOTED
(a) The Department will publish a list in the [STATE
GAZETTEER] every twelve months which contains the
air quality control tactics and technologies which
it is considering adopting as future control
requirements for identified categories sources.
(b) Any tactic or technology which has been on the pub-
lished list for two years and has not been formally
proposed as a regulation, will be deemed to be
removed from the list,
(c) Any tactic or technology which has not been adopted
within one year of having been proposed as a regu-
lation will be deemed to be removed from the list.
(d) If a proposed ERG involves emission reductions result-
/ ing from a tactic or technology listed under this
section, the Department will grant credit only for
reductions which exceed those which would result from
application of the listed tactic or technology.
§208 Banking of Emission Reduction Credits
(a) An ERC may be used at the time it is registered or may
be held for future transfer or use.
(b) [OPTIONAL] If an ERC is not used within
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years [SPECIFY TIME, E.G., 5 YEARS], control of the •
ERG will revert to the state. [NOTE: THE STATE MAY
WISH TO AUCTION OFF UNUSED ERCs TO OTHER PRIVATE
HOLDERS.]
(c) During the time that an ERG is held in the emissions
banking system its quantity (expressed in tons per
year) will be subject to the following:
[NOTE: THIS IS ONLY ONE OF SEVERAL OPTIONS - SEE
FOOTNOTE]6
(1) Any ERG will be discounted by the Department
when a control requirement is adopted after regi-
stration of the ERG which requires additional
control of the same type of emission from the same
type of source as represented by the ERG. The
percent reduction in amount of an ERG will be equal
*
to the difference between the percent reduction
required by the new control requirements and the
percent reduction required by the previous control
requirements. Similarity between types of sources
will be determined on the basis of Standard Indus-
trial Classifications or any other means deemed
appropriate by the Department.
(2) If new information becomes available to the Depart-
ment which results in more accurate emissions
estimates, the Department will adjust the value of
affected ERCs accordingly, and
(3) If a person who created an ERG fails to comply
with the requirements resulting from creating the "
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Page 10
ERG, the Department may adjust the quantity of ERCs
registered in the banking system for that person.
§209 Transfer of Emission Reduction Credits
An ERG may be transferred in whole or in part by any means of
conveyance permitted by the laws of this state. The role of the
Department in trading of an ERG will be limited to providing
information on the documentation and registration of ERCs and to
providing technical assistance with regard to possible future use of
the ERCs being sold or transferred. No transfer shall be effec-
tive until the Department is notified thereof in writing and
confirms receipt of the notice, and notes the transfer of owner-
ship in the Department registry for that purpose.
§210 Use of Emission Reduction Credits
(a) Registered ERCs may be used in accordance with this
Chapter to offset increased emissions from new
or modified sources or to net out of new source review.
(b) Application for use of.ERG's shall be made on forms
provided by the Department.7
(c) Before an ERRC may be used, the source owner must
obtain a revised operating permit [OR OTHER LEGALLY
ENFORCEABLE APPROVAL] which includes specific quanti-
fiable emission limits.
(d) Use of an ERG will be allowed only in transactions
where emissions being exchanged are in the same
criteria pollutant category.8 Hazardous and non-
hazardous emissions may only be traded against each
other if the hazardous emission is decreased. Coke
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Page 11
oven emissions may only be traded against other
particulaae emissions if the coke oven emission
decrease.
(e) No use of an ERG may allow a new or modified source
to exceed New Source Performance Standards (NSPS)
established under 42 USC §7411, National Emission
Standards for Hazardous Air Pollutants (NESHAPS)
established under 42 USC §7412, the requirements for
Lowest Achievable Emission Rate (LAER) under 42 USC
§7503, or the requirement for Best Available Control
Technology (BACT) under 42 USC §7475.
[NOTE: MOST STATES HAVE SEPARATE REGULATIONS SPECIFYING
OFFSET REQUIREMENTS FOR NEW OR MODIFIED SOURCES LOCATED
IN AREAS WHICH FAIL TO MEET AMBIENT AIR QUALITY STANDARDS.
THOSE REGULATIONS MAY BE INCORPORATED AT THIS POINT IN
THE CHAPTER. ALTERNATIVELY, STATES MAY SIMPLY WISH TO
*
INSERT A CROSS-REFERENCE IN THEIR CURRENT NEW SOURCE
REVIEW REGULATIONS WHICH PROVIDES, E.G.:
"EMISSION REDUCTION CREDITS (ERG) SHALL BE
USED TO OFFSET THE EMISSIONS FROM A NEW OR
MODIFIED SOURCE. CREATION AND USE OF ERCs
SHALL BE IN ACCORDANCE WITH CHAPTER 200 OF
THIS TITLE".]
[THE OPTIONS FOR NETTING ARE SPECIFIED IN EXISTING FEDERAL
REGULATIONS 45 PR 52676 (Aug. 7, 1980) AND PROPOSED REGU-
LATIONS 46 PR 16280 (March 12, 1981). STATES MAY WISH TO
CROSS REFERENCE TO THE FEDERAL REGULATIONS.]
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Page 12
FOOTNOTES
Each state should carefully consider the "scope" section of its
regulation and use that section to structure its program to
meet its own needs.
The form should contain the name and address of the applicant
and complete source data including: types of emissions dis-
charged prior to the reduction in emissions and their compo-
nent analyses (including the size distribution of particulate
matter); quantity of emissions discharged prior to the reduction;
which was used as the basis for calculating the ERG; length of
time that the emissions were monitored before the reduction;
normal operating schedule and seasonal distribution of through-
put; type of emissions involved in the reduction and their
component analyses (including size distribution for particulate
matter and reactivity of hydrocarbons); the date the reduction
occurred; quantity of the reduction (based on hourly emission
rates and annual hours of operation) reported as tons per year
or the metric equivalent; description of how the emissions are
produced; method of control prior to the reduction and the
changes which caused the reduction; location of discharge
point of emissions, including DTM coordinates; methods of
monitoring, testing or modeling which were used before and
after the reduction; length of time the reduced emissions have
been monitored; stack data, including stack height and diameter,
stack gas temperature, and stack gas flowrate in cubic feet
per minute; fule burning rate or process rate; and maximum
emission rate in pounds per hour or metric equivalent.
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Page 13
3. Determination of the baseline may be modified to allow use of
"allowable" emissions which exceed "actual" emissions only if
the SIP used allowable emissions in making the ambient air
quality demonstration
4. This is one of several ways of dealing with the requirement
that reductions be "permanent." Other options include re-
quiring offsets for new or expanding firms of relatively
small size. See Policy statement II.C.3.
5. Other alternatives include: (1) a moratorium on banking
certain types of ERCs during a period when the Department
is developing additional control requirements or (2)
imposing a higher use ratio (Increasing the amount of ERG
required to offset a given emission. Whatever approach is
used, the state must have a regulation which prevents.
creation of an ERG when the Department knows that the "surplus"
emission reduction will imminently be required by an
anticipated SIP amendment.
6. Other options include: (1) preserving ERCs at full value
but imposing a moritorium on their use or (2) totally
forfeiting ERCs.
7. Because ERCs may be used in a variety of ways, various
state forms might be used. Most likely, use of an ERG
as an offset to allow construction of a new source would be
reflected by the Issuance of a permit for the new source.
8. For example, an ERG representing a reduction in hydrocarbon
emissions must be used in a transaction involving other
hydrocarbon emissions—it could not be used in a transaction
involving sulfur oxide emissions.
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Draft
June 17, 1981
MODEL BUBBLE RULE
(A rule allowing managers of existing plants to propose
alternative ways of meeting emission standards)
REGULATION 300: Alternative Emission Standards ("Bubble")
(a) Purpose
(b) Scope
(c) Availability of "Bubble"
(d) Application and permit Procedures
(e) Time Limits
(f) Compliance Status of Sources
(g) Baseline for Computing Alternative Standards
(h) Criteria for Approval
(i) Air Quality Modeling Requirements for Alter-
native Emission Standards for Particulate
Matter (PM) and Sulfur Dioxide (S02)
Emissions
(J) Special Requirements for Bubbles in Certain
Non-Attainment Areas
(k) New Control Requirement's
(1) Public Notice
(m) Transmittal's to EPA
(n) Amendment of the State Implementation Plan
(a) Purpose
The purpose of this regulation is to encourage the development
of innovative pollution control technology, to lower the cost of
meeting emission control requirements and to reduce the need for
site-specific amendment of the State Implementation Plan.
(b) Scope
This rule applie.s to the following emissions in all areas
of the State: [IDENTIFY POLLUTANTS WHICH ARE INCLUDED IN
THE PROGRAM, E.G., TOTAL SUSPENDED PARTICULATES (TSP), SULFUR
DIOXIDE (S02), NOX, VOLATILE ORGANIC COMPOUNDS (VOC), CARBON
MONOXIDE (CO), ETC.]1
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(c) Availability of "Bubble"
The owner of a source, or different owners of two or more
sources, may propose alternative ways of meeting emission stan-
dards contained in this Title. Proposals may treat several sources
as being placed under a hypothetical dome ("bubble") with one
emission point. Emission levels within the bubble may be increased
and decreased so long as the total emissions from the bubble do
not increase and other requirements of this regulation are met.
[NOTE: AS USED IN THIS MODEL RULE "SOURCE" MEANS ANY BUILDING,
STRUCTURE, FACILITY, OR INSTALLATION WHICH EMITS OR MAY EMIT AIR
POLLUTION. IP A DIFFERENT WORD OF SIMILAR MEANING IS DEFINED IN
STATE LAW, IT SHOULD BE SUBSTITUTED FOR "SOURCE" THROUGHOUT THIS
CHAPTER]
(d) Application and Permit Procedures
(1) Proposals for alternative emission standards shall
be submitted on forms provided by the Department.2
(2) Before alternative emission standards may become effec-
tive, a source owner must obtain a new or revised operating
permit3 [OR LEGALLY EQUIVALENT DOCUMENT] under [CITE
APPROPRIATE SECTION OF STATE AIR LAW] that requires compli-
ance with the alternative emission standards. The permit
will contain all conditions necessary to assure that the
source will operate in accordance with the alternative
emission standards.
(e) Time Limits
(1) No application may be submitted for emission reduc-
tions which occurred prior to [INSERT MOST
RECENT DATE USED FOR SIP PLANNING OR OTHER APPROPRIATE
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Page 3
DATE SUCH AS EFFECTIVE DATE OF CONTROL REQUIREMENTS.
THE STATE, AT ITS OPTION, MY WISH TO PROVIDE FOR CASE
BY CASE DETERMINATIONS ON WHETHER EMISSION REDUCTIONS
WERE RELIED ON IN THE STATE SIP.)
(2) [OPTIONAL] For emission reductions which occurred
between [SAME DATE AS IN (1), SUPRA] and the
effective date of this regulation, applications must be
submitted within [A REASONABLE PERIOD, E..G.,
6 MONTHS] after the effective date of this regulation.
(3) [OPTIONAL] For emission reductions which occur after the
effective date of this regulation, applications must be
submitted within [A REASONABLE PERIOD, E.G.,
ONE YEAR].
(f) Compliance Status of Sources
(1) Only sources which are in compliance with all appli-
cable air quality regulations and requirements may apply
for alternative emission standards under this regulation.
To be in compliance a source must:
(1) Demonstrate that all emission points involved in
the proposed trade are in compliance at the time
an application is submitted, or
(11) Demonstrate that the source is meeting the require-
ments of a legally enforceable compliance schedule
which conforms with the requirements of the federal
Clean Air Act (42 USC 7401, et seq.)4, for all
emission points involved in the proposed trade, or
(ill) Agree to a legally enforceable compliance schedule
which Insures compliance with alternative standards
for all emission points involved in the proposed
trade and otherwise meets the requirements of the
Clean Air Act (42 USC 7401, et seq.)
(2) Submission of an application for a bubble will not
affect any existing obligation of a source to comply with
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Page 4
applicable laws, regulations and orders unless the Department
issues an order specifically extending a compliance schedule.
No such order may extend compliance dates beyond mandatory
attainment dates in the Clean Air Act (42 USC §7502(a))
or interfere with reasonable further progress required by
the Clean Air Act (42 USC §§7502(a) and 7501(1)).
(3) No alternative emission standard will be established
for a source which is presently subject to federal enforcement
action unless the U.S. Environmental Protection Agency approves
the alternative standard and the schedule for meeting it.
As used in this paragraph, "federal enforcement action" means
an order issued under 42 USC §74l3(a), a civil action filed
under 42 USC §7413(b>, a criminal action filed under 42 USC
§74l3(c), a notice imposing non-compliance penalties issued
under 42 USG §7420, or a citizen suit filed under-42 USC
§7604 to which EPA is a party.
(g) Baseline for Computing Alternative Standards
The baseline for reviewing proposed decreases or increases of
emissions for sources included in a bubble will be determined as
follows:
(1) For areas designated attainment under 42 USC section
7407(d)(l) the baseline for each emission point will be
actual emissions determined as follows:
(1) If emissions from the source are 'separately
identified in an emission inventory used in
the State's SIP, the baseline will be the emissions
attributed to the source in the SIP.
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(ii) If emissions from the source are not separately
Identified in the State SIP demonstration of
attainment of national ambient air quality standards,
the baseline will be the average emissions calculated
from the operating history of the source for a
representative period of time (e.g., TWO or THREE
YEARS) before the application is filed. If histor-
ical data are deemed inadequate by the State, action
on an application may be deferred for up to one year
while operating data are compiled by the applicant.
(2) For areas designated as non-attainment under 42 USC
section 7407(d)(l) the baseline for each emission
point will be the lower of:
(i) Actual emissions determined under (g)(l) of
this section or.
(11) Allowable emissions under applicable state
regulations [CITE STATE SIP REGULATIONS]
[NOTE: THE STATE MAY MODIFY THIS SUBSECTION (2) TO
USE "ALLOWABLES" WHICH EXCEED "ACTUAL" EMISSIONS
ONLY IF THE SIP USED ALLOWABLE EMISSIONS IN MAKING THE
STATE AMBIENT AIR QUALITY DEMONSTRATION]
(h) Criteria for Approval
(1) The total emissions from sources in a bubble excluded
from SIP revision requirements under subsection (m) of this
regulation may not exceed the arithmetic sum of the baseline
level of emissions determined for each source under subsection
(g) of this regulation.
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Page 6
(2) Total emissions from a bubble approved as a SIP revision
under subsection (n) of this regulation may exceed the sum
of baseline emissions determined for each source under sub-
section (g) of this regulation.
(3) Each bubble must involve emissions in the same criteria
pollutant category.5 Hazardous and non-hazardous emissions
may only be used in the same bubble if the hazardous emission
is decreased. Coke oven emissions may only be traded against
other particulate emissions if the coke oven emissions
decrease.
(4) No alternative emission standard may allow a new or
modified source to exceed New Source Performance Standards
(NSPS) established under 42 USC §7411, National Emission
Standards for Hazardous Air Pollutants (NESHAPS) established
under 42 USC 7412, the requirement for Lowest Achievable
Emis-sion Rate (LAER) under 42 USC §7503> or the requirement
for Best Available Control Technology (BACT) under 42
USC §7475.
(5) An applicant proposing an emission decrease from process
curtailments or source shutdowns must demonstrate that the
proposed decrease will not be negated by countervailing emis-
sion increases occurring at other sources in the same area in
response to the applicant's process curtailment or shutdown.
[THIS IS ONE OP SEVERAL OPTIONS - SEE FOOTNOTE]6
(6) Confirmation of Emission Reductions
(i) To confirm emission reductions to be used in a
bubble, the Department may require source tests,
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rage
continuous monitors, or any other acceptable means of
measurement.
(ii) In cases where the Department determines that the
emission reduction estimates made by the applicant are
uncertain, the Department reserves the right to calculate
alternative emission limitations based on other estimates,
(iii) Where reductions in open dust emissions are pro-
posed, the Department will require that controls be
Installed and that emissions before and after control be
monitored as a precondition for approving alternative
emission standards.
(i) Air Quality Modeling Requirements for Alternative Emis-
slon Standards for Particulate Matter (PM) and Sulfur
Dioxide (SO?) Emissions
(a) [OPTIONAL] No air quality modeling or SIP revision under
subsection (n) of the regulation will be required for
use of bubbles representing stack emissions of PM and
SO2 if all of the following conditions are met:
(1) Use of a bubble produces no net increase in actual
emissions.
(2) The relevant emission points are in the same
immediate vicinity [WITHIN 100 METERS OR OTHER
EPA APPROVED OBJECTIVE DEFINITION], and
(3) The relevant emission points are of similar
effective stack height [PLUS OR MINUS 10* OR
OTHER EPA APPROVED OBJECTIVE DEFINITION].
(b) [OPTIONAL] Only limited modeling will be necessary for
use of bubbles for trades where total emissions do not
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Page 8
increase, and will not cause a significantly different
air quality impact from the original emission points.
the limited modeling need only include the emission
points involved in creating and using the ERG. A
"significantly different impact" is one that equals
or exceeds the levels specified in the following table:
Pollutant
SO 2
TSP
N02
CO
SIGNIFICANCE LEVELS
Annual 24-Hour 8-Hour 3-Hour 1-Hour
1.0 ug/m^ 5 ug/ra-3 25 ug/m^
1.0 ug/m3 5 ug/m3
1.0 ug/m^ 0.5 mg/m^ 2 mg/m^
(c) [NOTE: IP OPTIONS (A) AND (B) ARE NOT USED, THIS GENERAL
REQUIREMENT SHOULD APPLY TO ALL PM AND S02 TRADES.] For
use of all other bubbles representing emissions which do not
meet the conditions of subsections (1) or (2) of this section,
diffusion modeling considering all sources in the area of
impact will be re.qulred as follows:
(1) Modeling must show that use of the bubble will neither
create a new ambient violation nor interfere with
reasonable further progress toward attaining national
ambient air quality standards as planned in the SIP,
and
(2) Modeling must show that use of the bubble will not
create an increment violation in a PSD area.
(J) Special Requirements for Bubbles in Certain Non-
Attainment Areas
(1) [DESIGNATE THE NONATTAINMENT AREAS FOR WHICH THERE IS
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Page 9
NOT A SIP DEMONSTRATING ATTAINMENT OF .NATIONAL AMBIENT
AIR QUALITY STANDARDS],
(2) Owners of sources whose potential emissions exceed 100
tons per year (after meeting currently applicable
control requirements) must agree to a level of con-
trol approved by the U.S. Environmental Protection
Agency which represents Reasonably Available Control
Technology ("RACT11) for all sources to be used in
creating a bubble where RACT has not already been
defined. The RACT level of control must be used as
baseline for computing the bubble. If the transaction
covers two or more plants, only those plants whose
combined potential emission exceed 100 tons per year
must use RACT emission level's as the basis for cal-
culating bubbles.
(3) Owners of sources whose potential emissions are equal
to or less than 100 tons, per year (after current controls)
may either:
(i) agree to RACT limits in accordance with sub-
section, (2) which will be used as the baseline
for calculating bubbles, or
(il) uae the baseline established under subsection (g)
of this section. If the source owner uses the
baseline under subsection (g) of this section he
will be deemed to acknowledge that he must produce
emission reductions equivalent to any future
RACT requirements imposed on the source.
(4) [OPTIONAL: STATE GUARANTEE THAT NO NEW LIMITS WILL BE
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Page 10
IMPOSED FOR 5 YEARS ON SOURCES AGREEING TO RACT UNDER
(k) New Control Requirements
Upon receiving notice from the Department that a new or more
restrictive emission standard has become applicable to any source
included in a bubble, the owner or owners of those sources shall
submit revised permit applications [OR EQUIVALENT DOCUMENTS]
demonstrating reductions in total bubble emissions equal .to or
greater than the reduction required by the new emission standards,
If the owner of an affected installation does not submit permit
applications that demonstrate the necessary reductions, the
Department will issue an order requiring compliance with
the new or more restrictive standards. [NOTE: IP A STATE HAS
A BANKING RULE IT CAN INDICATE THAT CREDITS PROM THE BANK MAY
BE USED TO MEET NEW REQUIREMENTS.]
[NOTE: AS SUGGESTED UNDER SUBSECTION (J) STATES ARE ENCOURAGED
TO NOT IMPOSE ADDITIONAL REQUIREMENTS ON SOURCES THAT AGREE TO
RACT IN ADVANCE OP FORMAL ADOPTION OP NEW REGULATIONS.]
(1) Public Notice
[IT IS ASSUMED THAT THE STATE HAS EXISTING PUBLIC NOTICE AND
OPPORTUNITY FOR COMMENT PROCEDURES WHICH WOULD APPLY TO BUBBLE
PROPOSALS AND TO FINAL BUBBLE APPROVALS. IP SUCH PROCEDURES DO
NOT EXIST, THEY MUST BE DEVELOPED FOR THE BUBBLE PROGRAM.]
(m) Transmittals to EPA
The Department will transmit copies of the following docu-
ments to the U.S. Environmental Protection Agency promptly after
the documents are prepared.
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(1) Copies of public notices relating to proposed Depart-
ment action on applications for alternative emission
standards.
(2) Copies of permits [OR OTHER DOCUMENTS] reflecting
Department approval of alternative emission standards,
including data on emission limits before and after
the approval.
(n) Amendment of the State Implementation Plan; Requirements
and Exemptions
(a) The Department will approve proposed use of a bubble
without action to formally amend the State Implementation
Plan if all of the following conditions are met:
(1) The proposal complies with all of the require-
ments of this Regulation,
(2) Total emissions do not increase,
(3) The sources affected by the proposal are included
in the SIP emission inventory,
(4) The proposal has been exempted from modeling
requirements under subsection (i)(l) or involve
sources whose combined total potential to emit
is less than 100 tons per year (after currently
applicable controls), and
(5) The proposal includes only stack emissions.
(b) The Department will approve use of an ERG without
action to formally amend the State Implementation
Plan if the transaction involves hydrocarbons or
NOX emissions, if total actual allowable emissions
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do not increase, and if all other requirements of this
Regulation are met.
(c) All other proposals for using bubbles, including any
proposal involving fugitive emissions, must be
submitted to the U.S. Environmental Protection Agency
and approved as an amendment to the State Implementation
Plan pursuant to 42 USC §7410.
[NOTE: EPA HAS SOLICITED COMMENT ON POSSIBILITIES
TO EXCLUDE OTHER TRANSACTIONS (INVOLVING LEVEL II
MODELING) PROM THE SIP REVISION REQUIREMENT. STATES
SHOULD CONSIDER DEVELOPING PROPOSALS DISCUSSED IN
SECTION II.D.2.a.(iv) OP THE PROPOSED POLICY STATEMENT.]
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stack gas flow rate In cubic feet per minute; and maximum emis-
sion rate in pounds per hour or metric equivalent.
3. States may use some other legally enforceable mechanism, such
as an administrative order, for approving alternative limits.
4. In this subparagraph and in subparagraph (f)(l)(lii) "meeting
the requirements of the federal Clean Air Act" means that the
schedule must require compliance no later than the dates
specified for attainment of national ambient air quality
standards in 45 USC §7502(a). For some sources, earlier
compliance will be necessary to meet the "reasonable further
progress" requirement imposed by 42 USC §§7503(1) and 7501(1).
5. For example, a reduction in hydrocarbon emissions must be
used in a bubble involving other hydrocarbon emissions—
it could not be used in a bubble involving sulfur oxide
emissions.
6. This is one of several ways of dealing with the requirements
that reductions be "permanent." Other options include
requiring offsets for new or expanding firms of relatively
small size. See policy statement section II.C.3*
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113
APPENDIX C
RELATED CONTROLLED TRADING MATERIALS
[RESERVED]
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RELATED CONTROLLED TRADING MATERIALS
The following materials are or soon
will be available through:
Regulatory Reform Staff
U.S. Environmental Protection Agency (PM-223)
Washington/ D.C. 20460
202-287-0750
"Controlled Trading: How to Lower the Costs
of Pollution Control."
A general brochure which briefly described
the Controlled Trading concept and its
specific application in the Bubble,
Offset/ and Banking policies/ as well as
the relations between these policies.
"The Bubble Policy and Its Use with
Emission Reduction Banking and Trading."
April 1981. 8 pages.
Describes relationships between
the bubble policy and the
banking program/ shows how
banking can facilitate bubbles/
and provides detailed examples
of cost-saving opportunities.
"An Introduction to Emission Reduction
Credit Trading." January 1981. 24 pages.
An overview of banking and trading
and their role in enhancing bubble/
netting and offset activities. Dis- .
cusses pros and cons of three model
trading systems-Private Trading/
Public Auction/ and Central Trading—
from industry/ State agency/ and
community perspectives.
The following publications will be available
through the National Technical Information
Service (NTIS)/ 202-287-4650
"Emission Reduction Banking Manual."
September 1980. 39 pages.
Reviews design alternatives for
workable banking systems/ including
processes a state or locality may
employ in developing and adminis-
tering a banking program. Also
treats ERC financing and administrative
requirements.
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"Plant and Industry Guide to the Bubble
Policy." August 1981. pages.
, Detailed descriptions of how plant managers
can use the bubble to reduce
compliance costs, including industry
specific methods for identifying bubble
opportunities and evaluating costs,
benefits and alternative compliance
strategies. For companies
submitting bubble applications, the
guide includes: whom to contact,
when, documentation needs, and time
requirements.
"Brokering Emission Reduction Credits:
A Handbook." January 1981. 200 pages.
NTIS Accession No. PB81 214249
Discusses emission reduction credits
(ERCs) in depth from a potential
ERG broker's perspective. Nine
sections deal with different aspects
of banking and trading ERCs, including
one broker's experience, market
analysis (a methodology to determine
ERC supply and demand), types of
ERC market options, and tax issues
relating to ERC transactions.
"Emission Reduction Credit Financing:
Public & Private Sources of Funding."
November 1980. pages.
Manual on public and private options
for financing the creation or purchase
of ERCs. Catalogs options by sources
of funds, financing costs, qualifying
requirements, management restrictions,
legal and political implications,
historical uses, and application
procedures. Includes a framework
for evaluating each option against
specific company resources and needs.
"Emission Reduction Credit Trading:
Public Auction, Central Exchange, and
Private Trading Manual." September 1980.
pages.
Explains each of three trading
systems in detail. Discusses design
options, financing considerations,
and institutional concerns.
"Legal Issues Relating to Creation,
Banking and Use of ERCs: Federal
Tax, Taking, Equal Protection, and
Public Trust Doctrines." August 1981.
pages.
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Page 10
IMPOSED FOR 5 YEARS ON SOURCES AGREEING TO RACT UNDER
(k) New Control Requirements
Upon receiving notice from the Department that a new or more
restrictive emission standard has become applicable to any source
included in a bubble, the owner or owners of those sources shall
submit revised permit applications [OR EQUIVALENT DOCUMENTS]
demonstrating reductions in total bubble emissions equal "to or
greater than the reduction required by the new emission standards
If the owner of an affected installation does not submit permit
applications that demonstrate the necessary reductions, the
Department will issue an order requiring compliance with
the new or more restrictive standards. [NOTE: IP A STATE HAS
A BANKING RULE IT CAN INDICATE THAT CREDITS PROM THE BANK MAY
BE USED TO MEET NEW REQUIREMENTS.]
[NOTE: AS SUGGESTED UNDER SUBSECTION (J) STATES ARE ENCOURAGED
TO NOT IMPOSE ADDITIONAL REQUIREMENTS ON SOURCES THAT AGREE TO
RACT IN ADVANCE OP FORMAL ADOPTION OP NEW REGULATIONS.]
(1) Public Notice
[IT IS ASSUMED THAT THE STATE HAS EXISTING PUBLIC NOTICE AND
OPPORTUNITY FOR COMMENT PROCEDURES WHICH WOULD APPLY TO BUBBLE
PROPOSALS AND TO FINAL BUBBLE APPROVALS. IF SUCH PROCEDURES DO
NOT EXIST, THEY MUST BE DEVELOPED FOR THE BUBBLE PROGRAM.]
(m) Transmittals to EPA
The Department will transmit copies of the following docu-
ments to the U.S. Environmental Protection Agency promptly after
the documents are prepared.
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Page 11
(1) Copies of public notices relating to proposed Depart-
ment action on applications for alternative emission
standards.
(2) Copies of permits [OR OTHER DOCUMENTS] reflecting
Department approval of alternative emission standards,
including data on emission limits before and after
the approval.
(n) Amendment of the State Implementation Plan; Requirements
and Exemptions
(a) The Department will approve proposed use of a bubble
without action to formally amend the State Implementation
Plan if all of the following conditions are met:
(1) The proposal complies with all of the require-
ments of this Regulation,
(2) Total emissions do not Increase,
(3) The sources affected by the proposal are included
in the SIP emission inventory,
(4) The proposal has been exempted from modeling
requirements under subsection (i)(l) or involve
sources whose combined total potential to emit
is less than 100 tons per year (after currently
applicable controls), and
(5) The proposal includes only stack emissions.
(b) The Department will approve use of an ERG without
action to formally amend the State Implementation
Plan if the transaction involves hydrocarbons or
NOX emissions, if total actual allowable emissions
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rage
do not Increase, and if all other requirements of this
Regulation are met.
(c) All other proposals for using bubbles, including any
proposal involving fugitive emissions, must be
submitted to the U.S. Environmental Protection Agency
and approved as an amendment to the State Implementation
Plan pursuant to 42 USC §7410.
[NOTE: EPA HAS SOLICITED COMMENT ON POSSIBILITIES
TO EXCLUDE OTHER TRANSACTIONS (INVOLVING LEVEL II
MODELING) PROM THE SIP REVISION REQUIREMENT. STATES
SHOULD CONSIDER DEVELOPING PROPOSALS DISCUSSED IN
SECTION II.D.2.a.(iv) OP THE PROPOSED POLICY STATEMENT.]
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Page 13
FOOTNOTES
1. Each state should carefully consider the "scope" section of its
regulation and use that section to structure its program to
meet its own needs. A state may choose to start a bubble pro-
gram only for sources subject to new emission standards. New
Jersey, for example, adopted a bubble regulation which can be
used to reduce the economic burden of a new program to regulate
volatile organic compounds.
2. The form should contain the name and address of the applicant
and complete source data including: types of emissions dis-
charged prior to the reduction in emissions and their compo-
nent analyses (including the size distribution of particulate
matter); quantity of emissions discharged prior to the reduc-
tion; length of time that the emissions were monitored before
the reduction; normal operating schedule and seasonal distri-
bution of throughput; type of emissions involved in the
reduction and their component analyses (including size distri-
bution for particulate matter) the date the reduction occurred;
quantity of the reduction (based on hourly emission rates and
annual hours of operation) reported as tons per year or the
metric equivalent; description of how the emissions are produced;
method of control prior to the reduction and the changes which
caused the reduction; location of discharge point of emissions,
including UTM coordinates; methods of monitoring, testing or
modeling which were used before and after the reduction; length
of time the reduced emissions have been monitored; stack data,
including stack height and diameter, stack gas temperature, and
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Page 14
stack gas flow rate In cubic feet per minute; and maximum emis-
sion rate in pounds per hour or metric equivalent.
3. States may use some other legally enforceable mechanism, such
as an administrative order, for approving alternative limits.
4. In this subparagraph and in subparagraph (f)(l)(iii) "meeting
the requirements of the federal Clean Air Act" means that the
schedule must require compliance no later than the dates
specified for attainment of national ambient air quality
standards in 45 USC §7502(a). For some sources, earlier
compliance will be necessary to meet the "reasonable further
progress" requirement imposed by 42 USC §§7503(1) and 7501(1).
5. For example, a reduction in hydrocarbon emissions must be
used in a bubble involving other hydrocarbon emissions—
it could not be used in a bubble involving sulfur oxide
emissions.
6. This is one of several ways of dealing with the requirements
that reductions be "permanent." Other options include
requiring offsets for new or expanding firms of relatively
small size. See policy statement section II.C.3*
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