United States
Environmental Protection
Office of
Planning and Management
Washington, DC. 20460
September 1980
First Edition
Emission Reduction Banking and Trading Publication No. BG200
Emission  Reduction
Banking Manual

Emission Reduction
Banking Manual
Prepared by: ICF Incorporated
1850 K Street, N.W.
Washington, D.C. 20006

In conjunction with: Emission Reduction Banking and Trading Project
U.S. Environmental Protection Agency (PM-220)
401 M Street, S.W.
Washington, D.C. 20460

                   TABLE  OF CONTENTS

    1.1 The Purpose of the Banking Manual                                1
    1.2 What is "Banking"?                                             1
    1.3 The Advantages of Banking                                       4
    1.4 Who Should Develop a Banking Program                             5
    1.5 How to Use This Manual                                          7
DESIGNING A BANKING SYSTEM                                        8

    2.1 Component 1:  Qualifying Emission Reduction                      10
    2.2 Component 2:  Quantifying Emission Reduction                     16
    2.3 Component 3:  Certifying Emission Reduction Credits               19
    2.4 Component 4:  Banking and Accounting for Emission
                     Reduction Credits                                 23
    2.5 Component 5:  Using Banked Emission Reduction Credits             27
ADMINISTERING AN ERC BANKING PROGRAM                            30

    3.1  Implementing an ERC Banking System                               30
    3.2  Operating an ERC Banking System                                 31
    3.3  Technical Assistance to Users of the Banking System               34
    3.4  Relationship of Banking to Trading                               35
APPENDIX A: Glossary                                                  37

APPENDIX B: Selected Annotated Bibliography                             39

                       LIST OF EXHIBITS
EXHIBIT 1:  Creating an Emission Induction Credit                         2

EXHIBIT 2:  Tne Several Uses of ERCs                                      4

EXHIBIT 3:  How Banking Can Reduce the Direct Costs of Control             6

EXHIBIT 4:  Organizations Responsible for Developing Banking Programs      7

EXHIBIT 5:  Banking Process Overview:  An Example                         9

EXHIBIT 6:  Only Actual Emissions  will be Eligible in Mast Cases         11

EXHIBIT 7:  Eligibility of "Pamper" Reductions                            12

EXHIBIT 8:  Development of Banking Qualifications                        14

EXHIBIT 9:  Confirming and Quantifying Emission Reductions               17

EXHIBIT 10: Certifying Emission Reduction Credits                        20

EXHIBIT 11: Sample Emission Reduction Credit Register                    22

EXHIBIT 12: Sample Emission Reduction Credit Certificate                 24

EXHIBIT 13: BanKing ana Accounting for ERCs                              25

EXHIBIT 14: Procedure for Regulating the Use of ERCs                     28

EXHIBIT 15: Use of Sufficiency Tests                                     29

EXHIBIT 16: Implementing  an ERC Banking Program                          31

EXHIBIT 17: Tiie Five Components of tlie Banking System                    32

EXHIBIT Itf: Expanding a Banking System to Include Trading                36

                    AN INTRODUCTION TO BANKING
   An emission reduction banking  system
offers communities and industry an attrac-
tive means of reducing the  burden of meeting
air quality goals.  By providing  both new
and existing firms with increased flexibil-
ity in meeting pollution control  require-
ments, a banking system works  to  reduce both
the direct and indirect (e.g., uncertainty
and delay) costs of compliance with the Clean
Air Act.  A banking-system  enables firms to
receive credit for reducing their emissions
beyond required levels of control, therefore
providing an incentive for  additional invest-
ment in pollution abatement.  A banking sys-
tem also provides a mechanism  for communities
to encourage economic development without
compromising efforts to improve air quality.
 A  banking system enables .firms to receive
 credit  for reducing  their emissions beyond
 required levels of control.
   A banking system is simply an  extension
of an air pollution control agency's ongoing
regulatory efforts.  Banking builds on this
base by establishing accounting and adminis-
trative procedures related to the creation
and certification of surplus emission reduc-
tions that can be "banked" or stored by  firms
and used for:

•  Offsets—to allow firms to locate and
   expand in nonattainment areas  without
   degrading air quality;

•  Bubbles—to allow existing firms to
   reduce their costs of meeting  cur-
   rent emission limitations; and

•  Prevention of Significant Deterio-
   ration (PSD)--to allow  new firms
   locating in attainment  areas to
   satisfy new source requirements.

   A number of communities (e.g., Louisville,
Seattle, San Francisco)  already have incorpo-
rated banking into their regulatory programs.
Many more are now in the process  of develop-
ing a set of banking rules designed to meet
the specific needs of their communities.

   This manual draws on  the experience of
these initial efforts to develop  banking
systems.  It is designed to serve as a guide
to state and local agencies and industry in
developing banking orograms for their
1.1  The Purpose of

     the Banking Manual

   Banking is a flexible  program, containing
a number of important  design options.  Before
adopting a banking  rule,  a community will
want to closely examine  the  implications of
alternative designs in the context of its
particular pollution and  economic develop-
ment characteristics.
The U.S.  Environmental  Protection Agency
has issued a start notice for a federal regula-
tion concerning banking.
   This regulation will not require state
and local governments  to adopt a banking and
trading program.  Banking is strictly an
optional program.  Nor will the regulation
impose a specific design on localities elect-
ing to adopt a banking program.  Rather, it
sets forth basic principles inherent in the
Clean Air Act (e.g., the maintenance of Rea-
sonable Further Progress, demonstration of
attainment)  that cannot be violated by the
operations of a 'banking and trading program.
The federal regulation will provide a bench-
mark against which state and local govern-
ments can evaluate the legality of the design
of their proposed banking programs, while
also providing industry some degree of
assurance that their investments in
pollution control will be protected.

   This manual serves  primarily as guidance
to state and local agencies developing bank-
ing programs.  It explains the basic adminis-
trative steps and design options that fall
within the bounds and  conditions that will
be specified by the  upcoming EPA banking
regulation.  The alternatives discussed in
this manual, however,  are not exhaustive and
localities are encouraged to explore innova-
tive banking designs as long as they comply
with Clean Air Act  requirements.
1.2 What is 'Banking?*

    "Banking" is an important regulatory
reform recently initiated by the  EPA  that
seeks to encourage greater economic effi-
ciency in meeting the requirements of the
Clean Air Act.

   A banking program establishes  the  adminis-
trative process by which a firm can receive
credit for reducing its emissions beyond the
baseline level required in the State
Implementation Plan (SIP).  The resulting
"Emission Reduction Credit" forms the basis
for a banking program.   (See Exhibit  1.)
Rules governing the creation, and use of
Emission Reduction Credits constitute the
banking system.
   Emission Reduction Credits (SRCs)  becoae
an important asset to a firm for  a number of
reasons.  A firm has the option of earning a
profit on its investment in  pollution control

                                       EXHIBIT 1

                                              - 3 -
by selling its ERCs to another firm, or it
can use these credits itself—as offsets, in
a bubble application, or to satisfy PSD
 A banking system establishes the rules by
 which firms can create and use Emission Re-
 duction Credits.
Banking and Emission Offsets

   The emission offset program developed from
the need to allow for industrial growth with-
out adversely affecting air Quality.  Under
the Clean Air Act, EPA established health-
based ambient air quality standards and iden-
tified areas of the country which violated
these standards.  For those areas designated
as "nonattainment," states were required to
develop and enforce implementation plans
calling for reductions in emissions necessary
to achieve the desired level of air quality
by 1982 for most pollutants, with a possible
extension to 1987 for automobile-related

   Efforts to reduce emissions from existing
sources have generally progressed well.  In
most areas, the air is getting cleaner.  But
in many places, major metropolitan areas in
particular, air quality still violates
healthful levels.

   Because of technological limitations,
even with the most effective pollution abate-
ment eauipment new industrial development
necessarily adds to the pollution problem in
nonattainment areas.  The original Clean Air
Act adopted in 1970 offered a simple but not
very practical solution to this problem—it
prevented new industrial growth in all non-
attainment areas.  In 1976, EPA adopted an
attractive alternative.  Under the emission
offset policy, new sources wanting to locate
in nonattainment areas must install the most
advanced control technology possible and(must
arrange for equivalent reductions in emis-
sions from existing sources that more than
"offset" its own emissions.  This policy was
incorporated into the 1977 amendments to the
Clean Air Act and has been adopted by many
states as a means of allowing new industrial
growth in nonattainment areas without compro-
mising efforts to attain cleaner air.!/
1/EPA issued an interpretative order on
January 16, 1979 explaining the Section 173
offset provisions in the Clean Air Act.  See
Federa1 Register, Vol. 44, p. 3274.  This
federal policy was only in effect until
states issued their own nonattainment stra-
tegies as part of their 1979 SIP revisions.
Many states, however, incorporated the basic
elements of EPA's interpretative order into
their own rules.
   Emission Reduction Credits provide a ready
supply of emission offsets.  They represent
reductions in emissions from existi-.g sources
that have already been certified by the air
pollution control agency and can be applied
to offset emissions from new development in
nonattainment areas.  Their use as offsets
should significantly aid a firm's search for
acceptable offsets.  In areas with a bar.'.ing
program, firms in need of offsets can sitr.ply
examine the central ERC registry to deter-
mine the availability and source of offsets.

   Banking and the Bubble

   The "bubble" provides existing firms with
increased flexibility in complying ^ith cur-
rent emission reauirements.2/  It is a major
variation of the conventional regulatory
approach that sets specific emission restric-
tions at each emission point within a facil-
ity.  Under this program reform, a firm can
construct a "bubble" around emission points
and arrange controls so that its overall
limits are satisfied.  Thus, the bubble
allows plant managers the option of reducing
emissions beyond existing requirements (i.e.,
create an Emission Reduction Credit) at enis-
sions points where control costs are rela-
tively low in lieu of reducing emissions from
points where controls are expensive.
  Firms are permitted to bubble within a facility
  or across facilities. Two different firms can
  even arrange to bubble between their facilities.
   The bubble offers sources the opportunity
to capture potentially significant savings.
Firms are permitted to bubble within a facil-
ity or across facilities.  Two different
firms can even arrange to bubble between
their facilities.  All that is necessary is
a demonstration that the surplus emission
reduction is enforceable and compensates for
the corresponding relaxation of controls.

   To bubble, a firm must first reduce its
emissions from one of its sources beyond the
required amount.  By doing so, the firm is
in effect creating an Emission Reduction
Credit.  Banking provides for the systematic
treatment of that surplus emission reduction.
It reduces the uncertainty involved in apply-
ing to use the bubble, gives firms greater
flexibility in deciding when to bubble, and
provides a vehicle for bringing together
firms that may want to bubble between theic
plants.  By adopting a banking program, a
community will be taking a significant step
towards assisting local industry's use of
the bubble to reduce its costs of pollution
1/EPA's Bubble Policy was published in
the Federal Register on December 11, 1979
(Vol. 44, p. 71780).

                                            - 4 -
Ban Icing  and Prevention of Significant

   In order to insure that air quality is
not significantly degraded, new  or expanding
sources  locating in attainment areas must
satisfy  the requirements of the  prevention of
significant deterioration (PSD)  program.I/
There are  two potential uses for Emission
Reduction  Credits in the context of this
program.   ERCs created within a  plant could
be used  by firms contemplating expansions or
modifications in their existing  facilities
to reduce  the net change in total emissions
to a point below the threshold level trig-
gering PSD new source review. In cases where
PSD requirements are imposed, ERCs can also
be used  to satisfy offset requirements that
result from violations of increment

   Once  an ERC has been created  and banked,
firms have maximum flexibility in deciding
how best to use this asset—as an offset, in
a bubble application, or to satisfy PSD
requirements.  See Exhibit 2. Regardless of
the use  it selects, a firm is better able to
plan for future expansion and to minimize
the costs  of its compliance strategy by
having these emission reductions on hand.
1.3 The  Advantages of Banking

   Firms have  arranged for offsets and  have
applied to use a bubble in the absence  of a
banking system.  How then can a banking pro-
gram aid in the use of these programs?  By
providing  for  a systematic treatment  of emis-
sion reductions, a formal banking program
offers a number of distinct advantages  for
both air pollution control agencies and

   From an air pollution control agency's
perspective, banking:

•  increases the agency's flexibility in
   developing  and implementing a plan to
   achieve and maintain air quality

•  establishes a set procedure for evalu-
   ating new source review and bubble
   applications--one that insures consis-
   tency with  Clean Air Act requirements;

•  provides an incentive for firms to
   reduce  their emissions beyond existing
                                         EXHIBIT 2
                      THE SEVERAL USES OF ERCs
                                                                EMISSION  OFFSETS
                                                                BUBBLE APPLICATIONS
                                                                PSD REQUIREMENTS
I/Specific rules  concerning the use of
emission reductions  in the context of PSD
 requirements are explained in EPA's final
 regulations that are  forthcoming in July.
 These regulations reflect changes in the
 program in order to comply with the
 Alabama Power v. Costie decision.
   From the standpoint of industry,  a banking
 system is also attractive.   Banking:

 •  provides an economic reward for a
   source that lowers its emissions  below
   the required level;

 •  encourages technological innovation?

 •  reduces uncertainty and delay and
    therefore allows firms to plan ahead
    for future plant expansions, knowing
    that emission offsets are in hand; and

 •  facilitates the use of the bubble,
    therefore allowing existing firms to
    minimize the cost of complying with
    current and future emission standards.

    Banking may also lower the overall costs
 of achieving a specified standard.  When
 firms are required to reduce their emissions,
 they will have the option of evaluating dif-
 ferent levels of investment in pollution
 abatement equipment.  They may elect a con-
 trol system more effective than required, if
 they can bank the resulting surplus emission
 reductions.  Exhibit 3 illustrates how it is
 generally less expensive to install the most
 efficient controls possible, rather than
 adding additional controls in the future
 should that be necessary.  Pollution abate-
 ment equipment typically cannot be designed
>and installed incrementally--to achieve addi-
 tional reductions, production processes must
 be halted and existing control systems must
 often be scrapped.  To avoid the unnecessary
 costs associated with two-stage retrofits,
 firms have the option of installing the most
 cost-effective equipment available and will
 receive credit for any surplus emission
 reductions that result.

    Because of these advantages, the adoption
 of a banking program will:

 •  facilitate greater cooperation among
    air pollution control agencies and the
    sources they regulate;

 •  improve the efficiency of achieving
    and maintaining environmental quality;

 •  remove some of the existing impedi-
    ments to economic development.

    Despite these advantages, in localities
 that adopt a banking program, a question
 arises as to whether firms will come forward
 to bank and receive credit for the emissions
 reductions they create, rather than simply
 holding onto them until the time they plan
 to sell or use them.  In the absence of a
 detailed set of equitable rules, firms will
 not invest in controls to create Emission
 Seduction Credits.  Without a clear set of
 rules that provide some measure of protec-
 tion for Emission Reduction Credits stored
 in the bank--particularly a provision that
 safeguards banked ERCs in the case of further
 controls required to meet ambient air quality
 standards—it is unlikely that  firms  will
 declare and bank their emission reductions..!/

    If some degree of protection for banked
 ERCs is clearly established  in  the locality's
 banking rules, a number  of reasons exist  for

 I/See Section 2.4 of the manual for  a dis-
 cussion of design options for handling banked.
 ERCs in the event of a SIP adjustment to
 re-establish Reasonable Further Progress.
firms to participate  in the banking
By banking their surplus emission
firms have a means  to  protect the^e emissic,-.
reductions.  In the future,  if additional
abatement is required  to achieve ambient air
quality standards,  existing  surplus enssie".
reductions would likely be  incorporated ir.co
the State's revised control  strategy.  Sur-
plus emission reductions not banked and
credited to a firm  will not  be protected and
will likely be included as  part of the
revised demonstration  of attainment.  More-
over, under Section 172(b) (4) of the Clear.
Air Act, states are required to annually
update their emission  inventories  to reflect.
"actual" emissions. Thus,  states  are
required to incorporate  into their air qual-
ity plans any voluntary  reductions by firms.
 Emission Reduction Credits will be protected
 by the rules of the banking system.
   By  banking and receiving credit for their
 surplus emission reductions, firms will
 legitimize their hold on these emission
 reductions.  Perhaps, more importantly, the
 future use of these emission reductions will
 be facilitated because their validity and
 size will already have been confirmed by the
 air pollution control agency prior to the
 time when they are sold or apolied to a
 permit application.

 1.4 Who Should  Develop

     a Banking Program?

   The first question a state or locality
 should ask of itself is whether a banking
 program would significantly enhance its
 efforts to satisfy the requirements of the
 Clean  Air Act.  Different communities have
 different pollution problems and different
 economic development goals, and in some
 situations, banking may not contribute to
 their  clean-up efforts.

   The impetus for a banking and trading
 program could arise from a number of sources.
 Firms  considering a change in their produc-
 tion processes or their compliance strategies
 may inquire about the possibilities of bank-
 ing surplus emission reductions which result
 from these actions.  Economic development
 agencies  interested  in finding  new ways to
 remove any environmental  constraints in
 attracting industry  to their  communities are
 a second group likely  to  be interested in
 banking.  New firms  in search of  offsets, or
 existing firms seeking to bubble  in order to
 reduce their cost  of meeting  current require-
 ments  may also be  the  driving force behind
 the creation of a  banking system.
    Experience has  shown that  several candi-
 date organizations could  take the lead  in
 designing and developing  a banking  progcaa.
 (See Exhibit 4.)   For  example,  in San Fran-
 cisco, the local Air Quality  Management
 District along with  the regional business

                      EXHIBIT 3
  COST B TO C = $ 6000 PER TON
  COST A TO C = $ 4000 PER TON
        A EXISTING
Banking gives firms  the option of controlling emissions more
than required to satisfy a standard based on reasonably available
control technology (RACT).

    (1) The difference between RACT and more stringent controls
        can be banked and becomes a valuable asset.

    (2) If control requirements are further tightened, the banked
        emission reductions may be used to satisfy the new emissions
        limit at a substantial saving (here $.5  million) to the firm.

                                            - 7 -
association was responsible for the adoption
of a banking program.

   In designing a banking system,  both the
characteristics of the existing air  program
              during the design stage of develosir.c th<*

                 Operating  the banking program primarily
              involves regulating the creation and use oi
                                         EXHIBIT 4
           LOUISVILLE, KY
           SAN FRANCISCO, CA

           SEATTLE, WA
and the economic development needs of the
locality should be carefully considered.   For
example, in older industrial cities,  where
preserving jobs from existing industry will
probably have  a higher pay-off than seeking
    Several Indicators a community should examine to
    determine whether banking would be a useful
    extension of its ongoing air pollution control
    programs include:

     • the existence of a significant number of medium
       to large industrial firms with facilities of varying

     * a concern that industrial firms are closing down
       and leaving the area;

     • a desire to assist new firms wanting to locate in
       the area;

     • a concern that existing firms are selecting
       alternative locations to expand;

     • some likelihood that ambient air quality stan-
       dards may not be achieved by the legislated
       deadlines; and

     • a desire to modernize the industrial base by
       encouraging more rapid replacement of existing
to attract new  industry, a banking program
should be designed both to help economic
development officials attract new industry,
and to facilitate the use of the bubble to
aid existing firms to reduce their costs of
control.   The use of ERCs in the bubble
should also serve to save jobs by prolonging
the life  of existing facilities without
degrading air quality.  To assure that the
design of the banking system meets the needs
of all affected parties, steps should be   .v
taken to  incorporate their views and concerns
              Emission Reduction Credits.  These functions
              fall squarely within the purview of the air
              pollution control agency. Air pollution
              control agencies should not, generally,  become
              involved in  the actual trading of Emission
              Reduction Credits (e.g., setting prices,
              bringing together buyers and sellers).
              Trading activities—and using banking as a
              means of encouraging economic growth—should
              be undertaken by economic development agen-
              cies, metropolitan planning organizations,
              and industry associations.
              A trading system can expand the benefits
              of banking.
              1.5  How To Use This Manual

                 The organization of this manual  distin-
              guishes between the design of the bankir.c
              system and the start-up and operation of the

                 Part 2 presents an overview of the design
              of a banking system and then discusses in

              detail its five basic components.   It also
              presents many of the design options possible
              for each component.

                 Part 3 focuses on the process a  state or
              SIP designated locality will employ in devel-
              oping and administering a banking prograot.
              It explores possible avenues for financing
              the start-up of a system, and discusses the
              administrative resources required for

                 The appendices include a glossary of key
              terns used in this manual and an annotated
              bibliography describing related publications
              available from EPA.

   Before presenting  the details of an emis-
sion reduction  banking  system, a brief over-
view may be helpful.  The  introductory sec-
tion presents:

•  a discussion of  the  nature of the com-
   modity, "Emission  Reduction Credits,"
   that serves  as the basis  for the bank-
   ing system;  and

•  a summary of the five components of
   the system.

Defining Emission Reduction  Credits

   There is an  important distinction between
the "emission reductions"  (the physical
reduction of emissions  by  a  source) and Emis-
si i Reduction  Credits  (the  commodity that is
to be banked).   Because a  source reduces its
emissions by 100 tons,  this  does not neces-
sarily mean that either it or another source
that purchases  these  credits has the right to
pollute an additional 100  tons.  The use of
Emission Reduction  Credits is subject to the
rules governing the particular permit context
(e.g., offsets  or bubble applications) to
which it is applied.  In order to  avoid con-
fusion between  the  physical  pollution units
and the intangible  commodity which is banked
and ultimately  used,  the former are termed
"emission reductions" and  the latter are
termed "Emission Reduction Credits".
 Credit will only be issued for emission reductions that are:

    REAL—only reductions In actual emissions;
    PERMANENT—only reductions that will be maintained
    over time; and
    ENFORCEABLE—only reductions that legally bind the
    source and can be administered by the regulatory

 Although APCAs have considerable flexibility in defining
 what is acceptable as an ERC, the basic principles of real,
 permanent and enforceable must not be violated.
   Credits will entitle  sources to meet ce
tain requirements in State  Implementation
Plans for either obtaining  new source permits
or for meeting emission  limits at .existing
sources.  The use of ERCs must meet suffi-
ciency and equivalency tests.  Credits do
not automatically entitle sources to increase
their pollution; nor are these credits abso-
lute entitlements or property rights of
interminable duration.  Major SIP revisions
necessary to meet ambient air quality stand-
ards may require the regulatory agency to
make adjustments in the  amount of credit
which has been granted to sources that have
created surplus emission reductions.   Provi-
sions in a banking system must take into
account this possibility.

   Any necessary adjustments in banked emis-
sion reductions must be equitable.   It is
essential that the value of a credit  be made
as certain as possible if the banking oppor-
tunity is to attract additional investment in
pollution controls.  For example, if  there
were a SIP revision necessitating some
adjustment, a rule requiring similar  percent
reductions from the quantity of banked
credits and from uncontrolled emissions that
are part of the inventory would be equitable
and would safeguard the value of the  credits
to a firm.
The Components of a Banking  Process

   There are five components of  a  banking
system.  Exhibit 5 presents  a  simulated over-
view of the banking process.   This process  is
summarized below in the context  of its  five
distinct components:


   This reauires the  reduction  of  emissions
by a source below  the  baseline  amount of
actual emissions implied  in  the  approved
SIP's demonstration of attainment.   This  can
be done by installing  controls,  altering
operating parameters  or  inputs,  or cutting
back or closing operations.  Only  those emis-
sion reductions that  satisfy explicit quali-
fications will receive banking  credit.


   Some formal administrative  mechanism is
needed to  verify and  endorse the quantity of
emission  reductions created  by the source.  A
source would apply to have  its permit changed
to reflect the lower  emission  reduction level
which it  had achieved, thereby legally bind-
ing itself to emit at the lower level.


   During  this component,  the  emission reduc-
tions will be converted  into Emission Reduc-
tion Credits  (ERCs) and  entered into the  SIP.
To be certified, an emission reduction must
be real,  permanent, and  legally enforceable.
ERCs represent the actual commodity  being  <
banked.   The ERCs  are certified and  credited
to the source by entry on a  central  registry.

              THE  ERCs

   This,  in effect,  is the means by  which a
source  "stores"  its ERCs for later use.
While ERCs remain  on  the registry, appearing
in the account of  the creating source, the
ERCs are  "banked".   If a SIP revision is
necessary to demonstrate attainment  with
Clean Air Act  standards,  the quantity of
ERCs may  need  to be adjusted.

                                                  EXHIBIT 5
reductions s
 (50 tons/
                          Banking begins
                                                ERCs are "banked"
                                                                                      "Banking" ends If
                                                                                      ACME uses up all
                                                                                      of Its ERCs
ACME applies .
for permit
change lowering
Its emissions •
>v | (confirmed
(50 tons/yea
(SO tons/

ACME decides s
to expand and, ^
applies to its A.P
for a permit |
entered on registry i
Shows what ERCs
are In the "bank"
s. ACME uses its
N. banked ERCS
.C.A. to satisfy
offset re-


_ "• .
— ^ •

sufficiency „ _ -fc,
is made Reflects
toaaaure change in
S^8"™ the "bank" of
 An example may help. ACME has Installed a solvent recovery sys-
 tem and has reduced its emissions (by 50 tons per year) below
 the baseline. ACME applies for a permit change (I.e., to require
 the reduced emissions) and thereby becomes involved in "bank-
 Ing." The real size of the emission reducf'on that will result from
 the controls proposed (not the changing of the permit) must be
 calculated.  The confirmed ERs are converted  Into ERCs, are
 entered into the central registry, and the SIP Is changed. ACME'S
 ERCs are now "banked" and ACME is still involved In "banking."
 The ERCs (ACME'S and those of others) that are credited on the
                                                     central  registry are the "bank" of ERCs.  At some later date,
                                                     ACME decides to expand its facilities and uses some or all of its
                                                     ERCs to satisfy offset requirements necessitated by the expan-
                                                     sion. The use of the ERCs to expand is reflected in the permit, and
                                                     ACME'S ERG account in the central registry will be debited for the
                                                     amount of credits used to satisfy permit requirements. When this
                                                     is done, ACME'S ERCs which have been used cease to exist {and
                                                     thus are no longer banked), and if ACME has used up all its ERCs,
                                                     it no longer Is engaged In banking. However, the bank of ERCs still
                                                     exists (i.e., with all the remaining  ERCs which sources have not

                                                 - 10  -
               REDUCTION CREDITS

   The source  which  has "banked"  its ERCs
can subsequently  use these ERCs to satisfy
emission limitations or new source review
requirements.  ERCs  are converted into phys-
ical pollution allowances;  the permit or its
equivalent emission  limitation  in the SIP is
changed to reflect the  amount of  ERCs being
used by the source;  and the ERCs  used are
extinguished and  debited to the source's
account in the central  registry.

   The following  five sections present each
of the essential  components of a  banking
system in more detail.   For each  component
there is first presented a  discussion of its
rationale, followed  by  an explanation of its
key issues, and a summary.

2.1  Component  1:

      Qualifying the

      Emission Reduction

   The initial component of a banking system
requires the  establishment of rules govern-
ing the qualification of emission  reductions

   In establishing rules for the qualifica-
tion of emission reductions, the principal
objective is to encourage their production
without jeopardizing the attainment and
maintenance of ambient air quality and
without creating an undue administrative
burden.  The key to the successful design of
the first component of a banking system is
to achieve the proper balance among these

   Rules governing the qualifications of
emission reductions are necessary because not
all sources and not all reductions in emis-
sions will be  acceptable for the purpose of
banking.  For  an emission reduction to be
banked the Air Pollution Control Agency
(APCA) must be assured that it is real, per-
manent , and enforceable; was created  in a
manner acceptable under the banking rules;
and was created from a source which is eli-
gible to bank.  In designing a banking rule,
three issues relating to possible qualifi-
cations for banking should be addressed:

•  What types  of emission reductions  can
   qualify for banking?

•  What sources are eligible to bank
   emission reductions?

•  What is the role of_t_he_APCA in
   qualifying  emission  reductions?

   Not all emission  reductions can qualify
for banking.   Agencies  should develop and
publish rules  or  guidelines to discourage
uninformed or  frivolous proposals.
    There are a number of reasons why certain
 types of emission reductions will not qualify
 for banking.  The Clean Air Act  (CAA) and its
 requirements set minimum qualifications for
 what emission reductions can be banked.  The
 manner in which the SIP was designed also
 sets eligibility limits.  It is essential
 that qualifications be clearly established
 in advance and available to all those poten-
 tially interested so that every party is
 treated fairly.

    Clean Air Act Requirements.  Implicit in
 the Clean Air Act are requirements that emis-
 sion reductions must be real, permanent, and
 enforceable in order to qualify for banking.
 Failure to comply with these principles would
 result in a violation of reasonable further
 progress and the SIP's demonstration of
 attainment.  In general:

 •  A "real" emission reduction means that
    actual air emissions are reduced.

 •   A  "permanent"  emission reduction means
    a  reduction  that  is  not  temporary,
    intermittent,  or  short-lived (e.g.,
    emission reductions  from carpooling
    are  frequently only  temporary).

 •   An "enforceable"  emission reduction  is
    more than a  "promise"  of  a  reduction.
    It must  be an action  and  a  commitment
    that is  legally binding and  enforce-
    able in  the courts and by the  regula-
    tory agency.

    These requirements set threshold qualifi-
cations for emission reductions.  Other tests
may have to be met as well in order to get
credit for surplus emission  reductions.

 Actual vs.  Paper Emission Reductions;   SIP
 Design Affects  Eligibility.   In designing
 its SIP, a  state has effectively  set limits
 on  the eligibility of certain  classes of
 emissions.  Eligibility limits include:
    emission reductions from sources
    not included in the SIP; and

    emission reductions already
    included in the SIP (explicitly
    or implicitly).
  For example, many sources have typically emitted pollu-
  tion at levels below the "allowable" level specified In
  the SIP or In their permits. In almost every case, the am-
  bient air value used for the SIP design and the demon-
  stration of attainment were based on actual emissions. If
  these sources have their permits changed to allow only
  the lower level of existing actual emissions and can bank
  the difference between allowable and actual emissions,
  this would be a "paper" emission reduction—not a real
  one. This limitation is illustrated In Exhibit 6.

                                            - 11  -
                                         EXHIBIT 6
                       WILL  BE ELIGIBLE IN MOST  CASES

                                                        NO CREDIT ALLOWED--

                                                        A "PAPER" REDUCTION
                                                      ^EMISSION  REDUCTION
                                                           CREDIT  ISSUED
   Eligibility of"Paper" Reductions.  In
most cases, only actual reductions  in emis-
sions will be eligible for banking.  "Paper"
reductions can not receive Emission Reduction
Credits.  "Paper" reductions are a change in
permits (or other documentation) that does
not reflect a reduction in actual emissions.

   If Emission Reduction Credits were given
for "paper" reductions, actual  ambient air
quality would be worsened when  the ERCs were
finally used.  This would clearly contradict
the Reasonable Further Progress requirement.
   /,-!:  ception

   There is one situation where agencies may certify
   changes In allowables for banking credit. That Is
   where a SIP used "potential ambient air" (e.g., the
   SIPs demonstration was modeled on the basis of
   allowable and not actual emissions) as a basis for
   its emission control strategy. Some state SOz and
   paniculate plans may have this feature. This feature
   results in an Implicit built-in margin for firms
   banking any reductions in their permits below the
   maximum allowable level and can still be consistent
   with meeting ambient air standards. If a source
   wishes to condition its permit, It could be credited
   for banking without endangering attainment.
                                       Host State Implementation Plans are
                                    designed on the basis of monitoring ambient
                                    air and therefore take into account actual
                                    levels of emissions and not those (higher)
                                    levels allowed by source permits.  Thus,
                                    because the ambient air used in the SIP's
                                    demonstration of attainment had not
                                    incorporated allowable emissions, Emission
                                    Reduction Credits could not be issued to a
                                    source solely for the difference between its
                                    permitted emissions and its actual ones.  To
                                    insure compliance with the Clean Air Act, in
                                    almost all cases, the baseline for calculat-
                                    ing ERCs will be actual emissions.  (See
                                    Exhibit 7.)
                                      For example, a source has a permit
                                      allowing. 500 tons of emissions per day
                                      but at the  time the SIP was designed
                                      it regularly emitted only 400 tons.
                                      This source would not be eligible to
                                      have the 100 ton difference between
                                      its allowed emissions and its actual
                                      emissions to be certified as credits.
                                      If this were done and the credits later
                                      used as an  emissions allowance, the
                                      state would violate its SIP.
                                      Therefore, use of paper  credits must
                                      be prohibited.   A state that tries to aoopt
                                      a rule that allows paper credits will
                                      be creating a basis for disapproval of
                                      its SIP.

                                  EXHIBIT 7
      Eligibility of pre-existing or paper reductions for banking as Emission
      Reduction Credits depends on whether the SIP was based on actual or allowable
     In most states, SIPs are based on actual emissions (i.e., ambient air quality monitoring).
     Thus, paper reductions cannot be converted to ERCs and banked.
                Allowable  {
                Emissions }
  Not included
  in the SIP
  Used as Basis
  for the SIP
cannot be
banked as ERCs

Reductions can
be Banked
In a few instances, the ambient values used to design the SIP included the difference between
actual emissions and allowables through modelling. Only if that difference were established by
the agency and modeled can firms receive credit for reductions based on allowable emissions.
              ! Allowable
              j Emissions

   Used as Basis
h  for the SIP
 Any reduction
 can be banked

                                             - 13 -
•  If, alternatively, the ambient values
   used to develop a SIP were based on
   sources' allowable emissions (as
   specified in their permits), the
   situation would be different.  Here,
   the difference between allowable and
   actual emissions could be certified
   as credits without violating the SIP.

In its rule, the APCA must determine for each
pollutant which of the two cases is appli-
cable and whether allowing the difference
between actual and allowable emissions as
ERCs would affect its ability to achieve and
maintain ambient air quality standards.
Without such a determination, a banking
program would be in violation of provisions
of the Clean Air Act.
   Eligibility of emision reductions already
in the SIP.  Any emission reduction already
included as part of  the SIP's strategy  for
reaching attainment  would not be eligible
for banking.  For example, some SIPs base
their demonstration  of attainment on  (among
other factors) certain assumptions about the
replacement or a change in the mix of major
industrial facilities.  In this case, plant
closings may have already been accounted for
in the SIP and could not be credited again
for banking.

   Similarly, an emission reduction that
occured prior to the development of the SIP,
would in general already be incorporated or
accounted for, and thus could not be certi-
fied for credit.  This is because most SXPs
are based on measurements of actual ambient
air quality--these measurements already
incorporate any existing emission reductions.

   In many instances, emission reductions may
have occurred after  the design of the SIP,
but before the inclusion of a SIP provision
allowing banking.  Such reductions may, at
the option of the state, be eligible for
credit after the banking rule has been
enacted.  That type  of ER represents a real
emissions reduction--in terms of how the SIP
was designed—and would not interfere with
Clean Air Act requirements, but may be
excluded by the APCA for administrative or
other reasons.

   Eligiblity to bank emission reductions
may be limited by more than the requirements
placed on types of emission reductions.
State and local agencies may impose further
optional limitations on the sources them-
selves, as distinguished from the emission
reductions created by the source.

Qualifying Minor and Nonconventional Sources

   The possibility of qualifying minor
sources for banking  is an attractive option
as a means of avoiding the placement of adde'd
control burdens on major stationery sources.
Minor sources also represent a potentially
inexpensive supply of ERCs.
   Bringing minor sources into the banking
system may require considerable additional
administrative resources, but may nonethe-
less be desirable in certain localities.
Two basic steps are necessary:

(1) The baseline for the source must be
    established, and the source must pro-
    vide some documentation that this
    baseline accurately represents its
    normal level of operation.

(2) A permit must be devised for the
    source so that the emission reduction
    achieved is enforceable.

   Some legally enforceable and administra-
tively acceptable mechanism must be employed
to assure that reductions in a  single minor
source's emissions lead to a reduction in
total emissions from such sources, as opposed
to merely a shift in emissions  from one minor
source (that receives credit)  to another.
For example, if one dry cleaner reduced its
emissions by shutting down, the likely result
would be a shift in business and increased
emissions from nearby dry cleaners.

   After these two steps are satisfied, the
usual administrative steps associated with
the banking system can be taken.

   The inclusion of nonconventional sources
in the banking system presents  a more diffi-
cult situation.  A large quantity of certain
pollutants (e.g., participates, hydrocarbons)
are the result of nonpoint sources, including
roadways and construction sites.  These pol-
lutants are difficult to control, and from
the standpoint of an agency confirming a
reduction in emissions, they are difficult to
measure.  Traditional forms of  measurement
such as engineering analysis and stack tests
are inapplicable.  Without the  ability to
measure current emissions and the level of
proposed abatement, any award of ERCs to the
source would be arbitrary.  Yet reductions
from these sources do result in improved air
quality, may be relatively cost effective to
achieve (compared to additional controls on
existing major sources), and may be essential
to reaching ambient air quality standards.
    Nonconventional  sources  would  be very
difficult  to bring  under  the banking system.
The following  three conditions  should  be  met
as a condition of allowing  nonconventional
sources to qualify  for  banking.

 (1) only permanent  changes  that can be
    verified are eligible—Cor  example,
    the paving of a dirt  road;

 (2) the quantity of emission reductions
    confirmed  must  be determined  by
    ambient air monitoring  or by  some
    other  equally effective means; and

 (3) the use of ERCs from  these  sources
    might  be limited to conditions simi-
    lar to those from which the ERC was
    In areas where few major  sources exist or
where those that do exist  are tightly con-
troled, to achieve ambient air quality stand-
ards it may be necessary to  bring minor and
nonconventional sources into the banking
system.  Often local governments or
quasi-governmental bodies  can best capture
nonconventional reductions.  Because
determination of who is  entitled to claim a
class of emission reductions is a question

                                         - 14 -
of state discretion,  it may be  advantageous
to give eights to these reductions to such
bodies  when the state develops  its rule.

Optional Source Qualifications  For Banking

   An emission  reduction may be eligible for
   Ownership Options

   There are a number of different options which states
   can use In fashioning ownership rules for banking
   programs. For example, certain classes of emission
   reductions (e.g., area sources) might be reserved
   for the state or local government. Reductions in
   emissions from major sources should generally be
   reserved for the major sources themselves. Without
   explicit ownership rights, such sources would get
   nothing from the production of emission reductions
   and therefore would not likely reduce their
   emissions beyond required levels.
banking  if it is consistent with the require-
ments of the Clean Air  Act and with the pro-
visions  and design of the SIP.  However,
state and local agencies are  free to enact
other eligibility qualifications.   (See
Exhibit  8.)  These are optional and relate
to both  the type of emission  reduction and
who can  receive credits.

   Optional eligibility requirements can
further  define which  emission reductions and
source owners are qualified to participate
in banking and which  are not.  Such optional
qualifications can be based on a number of
different factors. These include:
•  method by which the reduction was
   created (e.g., closings);
•  sources for which  a baseline cannot be
•  compliance status  of source;
•  size  of source or  emission reduction;
•  forthcoming controls or requirements
   under study; and
•  ownership restrictions.


   .  REAL
                              DESIGN  OF BANKING
                 SIP PROVISIONS
                 AND DESIGN
                 ,  AMBIENT vs
                   POTENTIAL AIR
                 ,  GROWTH  ALLOWANCE
                 ,  TURNOVER
                                                                    WHO  CAN BANK
                                                                    WHAT CAN BE BANKED

                                             - 15 -
   Receiving credit  for emission reduction
banking  is authorized  by the state within
limits set by  (1)  the  Clean Air Act and its
requirements  (2)  the SIP and its design, and
(3) state and  local  law.  This gives states
substantial discretion to establish qualifi-
cations  based  on  the above factors.  However,
such qualifications  will need to be objective
and rational.

ShouldShutdowns  be  Allowed to Qualify
as ERCs?  The  Prosand Cons

   There has been much discussion concerning
whether or not emission reductions which
result from shutdowns  should be allowed to
qualify as ERCs.   Here are some of the
arguments on this issue:

Shutdowns Should  not be Allowed
as Sources of  ERCs

   1. Shutdowns often  do not result in real
reductions in  emissions.  Often, other
facilities in  the area will pick up the
plant's customers if it is shutdown.  The
increased emissions  of the other plants in
the area would result  in degrading air
quality when ERCs from the shutdown are
ultimately used.
   2. Shutdowns may already be taken into
   account in  the  SIP.   It is true that most
   shutdowns are not specifically provided for,
   but they may have  already been considered  in
   in the original demonstration of attainment
   used in the  design of the SIP.  If this were
   the case, to certify ERCs from shutdowns
   would  result in double counting and a
   worsening of air quality.
Shutdowns Should  be  Allowed
as Sources for ERCs

1. A shutdown  is  nothing more than a 100 per-
cent reduction in output.   If a 99 percent
reduction can  qualify  as an ERC, then so
should a 100 percent reductioVi.   A shutdown
is merely one  end of a continuum from no
reduction to total reduction,  and every
point along ,that  continuum deserves similar
treatment.         '                         '

2. If shutdowns do not qualify for ERC
status, then a "marginal"  firm will have no
incentive to close.  Instead this firm, will
limp along until  it  can use the emission
reductions itself.   This will only impede
efforts to improve air quality,  as well as
create economic inefficiency.

3. Shutdowns that are  not  used by a firm for
replacement facilities could be qualified
with a portion of the  credits going to the
state to satisfy  Reasonable Further Progress
or to be used  to  attract new investment to
the community.  The  importance of jobs to a
community may  suggest  that,  when jobs are
lost, ERCs from plant  closings should be
used to attract replacement companies.

4. Shutdowns may  be  a  cost-effective way to
control pollution that raises capital for
firms to continue in business, invest,  or
meet other control requirements.  Not giving
credit for shutdowns may increase areawide
   It is important that the APCA explicitly
establish the  eligibility  rules  and that all
sources are made  aware that restrictions may
be placed on having their emission r<	.
qualified as ERCs.  Once the rules of the
banking system are established, including z
set of source eligibility criteria,  it
should be published for comment and, if
possible, mailed directly to all potentially
affected parties.
    Classes  of ERCs

   One alternative to restricting eligibility entirely is
   to establish different classes of ERCs. Many
   economic development agencies are particularly
   interested in obtaining publicly controlled Emission
   Reduction Credits. Plant closings are one source
   sometimes discussed as a likely candidate for
   public control. It should be recognized that
   creating separate classes of ERCs complicates the
   system and may affect firms' incentives to reduce
   emissions. For example, a firm might be reluctant
   to shutdown a facility If it were not to receive credit
   fpr its reduction in emissions. The more complex
   the system the less likely it is to work.
   No source  is prohibited  from  reducing
emissions  more than  required;  the  eligibil-
ity restrictions are  imposed when  a  source
goes before the APCA to  have the emission
reductions converted  into ERCs.  This  process
will be discussed  in  detail in Part  2.2.

What is the Role of  the  APCA in
Qualifying Emission  Reductions?

   The responsibility for actually creating
an emission reduction falls entirely OR a
source.  It is a voluntary  decision.  Emis-
sion reduction can be achieved by  various
means.  Some  of the  more conventional  means
include installing control  technology  (e.g.,
scrubbers  or  precipitators), changing  input
practices  (e.g., using natural gas in  place
of oil), or curtailing operations  (e.g.,
shutting down a source).  Individual sources
are most likely to create ERs  by:

•  changes in abatement  equipment;

•  changes in industrial processes;

e  shut-downs or cutbacks in operations
   that are no longer financially  viable,

•  shifts  in  fuels used  for energy needs.

   In eaoh of these  situations,  a  source
would weigh the potential advantages gained
by creating an emission  reduction  (for future
use) against  the costs associated  with pro-
ducing it.  Sources need to be aware of eli-
gibility restrictions on particular  methods
of creating emission  reductions.

   It is the  APCA's responsibility to  estab-
lish rules concerning the qualification of
emission reductions.   The role of  the  APCA
does not end, however, after the promulgation
and publication of these rules;  the  APCA can
facilitate use of  the banking  system by
making a nonbinding estimate of  the  credit
that It expects to give  a source if  it Beets

                                              - 16 -
certain conditions.  The conditions may
include factors such as operation and design
of process and equipment, and requirements
for post-control monitoring.   The APCA may
also estimate the contingent  reductions in
BRCs which will occur if various conditions
are violated.  All of this should help the
source to decide whether to proceed.

   The first component of the banking  system
involves the development of a clear set of
rules governing participation in the banking
program.  The actual physical creation of
the emission reduction by the source is but
the culminating step in this component.
Briefly, Component 1 of the banking system
involves three basic activities:

(1) APCAs must promulgate eligibility  and
    ownership rules (i.e., qualifications)
    for banking.  These are based on three

    •  Clean Air Act requirements;

    •  SIP provisions and design assump-
       tions; and

    •  local preferences and needs.

(2) Individual sources must determine
    whether or not they could qualify  a
    proposed emission reduction—APCAs
    should be prepared to respond to

(3) APCAs may make an estimate of probable
    ERCs which could be certified based
    on certain explicit assumptions and

   The third point becomes the focus of the
next component—The Quantification of
Emission Reductions.
2.2  Component 2:

      Quantifying the

      Emission Reduction

   After an emission reduction is  created  by
a source, the reduction must  be officially
"quantified" by the  APCA before it can  be
certified as a credit and banked.

   The function of this component  is  three-
fold :

(1) To verify the quantity of the  emission
    reduction created;   The exact  quantity
    may be in question because the tech-
    niques used to measure emission
    reductions are inexact.

(2) To verify the permanence  of the emis-
    sion reduction;   Permanence of an
    emission reduction is absolutely
    essential; if a  reduction is not
    permanent, it cannot be banked.
(3)  To bind the source to the reduced
  '  levelof emissions:  Ideally,  this
    will.be achieved through  the existing
    permit system.   The permit provides  an
    administrative  record which clearly
    identifies the  source, quantity, and
    characteristics of emission reduc-
    tions.  A firm  must either be  oper-
    ating under a permit or be brought
    under a permit  to participate  in the
    banking system.  The permit serves
    the dual functions of:

    •  establishing a baseline against
       which proposed reductions can be
       measured; and

    •  providing a  legally enforceable

The change in a permit or creation of a  new
permit must also be incorporated into the SIP
to be legally enforceable under the Clean Air

   As discussed in the previous section, only
actual reductions  in emissions will qualify,
in most cases,  for banking.   If more credits
are awarded than justified by the actual
reduction, air  quality will suffer when the
ERCs are eventually used.  The demonstration
of attainment of Clean Air Act standards may
also be jeopardized.   Thus, accurate measure-
ment must be  part  of a banking program.

   To quantify an emission reduction, an
APCA must:

(1)  determine the initial baseline of
    actual emissions; and

(2)  determine the proposed reduction  in

   If an emission reduction cannot be mea-
sured and quantified, it cannot be certified
and banked.  Under  4 banking  program, there
must be strict accounting for ERCs.  Thus,
some way for an emission reductions to be
quantified must be developed.  This will be
the most difficult aspect of banking.  Where
there is uncertainty, APCAs must  insist
that all claims be verified.

   The process of quantifying emission  reduc-
tions is described  in Exhibit 9.   The APCA  is
to determine the quantity and the  acceptabil-
ity of the emission reductions proposed  by  a
source.   In most states major sources have
specific emission limitations written into
their permits or into the SIP.  However,
these permit  limitations will rarely be  use-
able for calculating the emission reductions
produced by a particular control.   Where a
permit specifies an emission limitation, it
would be appropriate for use as the baseline
only if the source  has historically emitted
at that level  (i.e., if its actual emissions
were equivalent to  its allowables).  This is
infrequently  the case.

•  Permits themselves may not be suffi-
   cient documentation of actual past

                             EXHIBIT 9
                    EMISSION REDUCTIONS
                                                             Size of ER
                                                             Issue (New)
                                                             Change SIP

                                            - 18 -
   levels of emissions.   In many states,
   peraits do not specify operating con-
   ditions, but only address  technology
   requirements, or  hourly rates.  For
   this reason, permits  specify only
   allowable limits  and  may not accu-
   rately describe actual emissions.  As
   discussed earlier,  only actual  reduc-
   tions can be certified in  most  cases.

   Furthermore, in some  situations a source
may not be subject to a  permit  (e.g., a minor
source or a source in a  state without a per-
miting system), the  terms of  the permit may
not specify a definite level  of emissions
that readily translates  into  an emission
limitation (e.q.,  the permit  specifies oper-
ating procedures,  work practices,  operation
of equipment),  or the permit  may not reflect
existing emissions at the time the SIP design
value was calculated.
                            In situations
                                              To determine the baseline in these situ-
                                           ations,  some  form of engineering analysis,
                                           monitoring, or other form of audit is
                                           required.  Because emission reductions must
                                           be  real, permanent, and enforceable, the
                                           establishment of "before-and-afterw baselines
                                           is  an important function.  Although the onus
                                           is  clearly on the source to produce evidence
                                           documenting the creation of an emission
                                           reduction, the APCA must be able to
                                           or  verify this information.
                                           where this is not possible, it may be neces-
                                           sary to  deny  a source's claim that it has
                                           created  a certifiable emission reduction.

                                              To determine actual annual operating
                                           hours, APCAs could ask sources to submit
                                           records, bills, and other documents which
                                           can substantiate the claim.  Similarly,
                                           throughput on an annual basis can be esti-
                                           mated using engineering analyses.  Estab-
                                           lishment of a baseline will probably need to
                            Four steps are involved in the process of
                                quantifying an emission reduction.
If the source is not operating under
a permit, one must be issued.   In some
states, permits may not have been
issued for all major sources,  or the
permits may not specify an exact emis-
sion standard for the source (e.g.,
it may specify a work practice,
percent removal).

In these situations it is imperative
for the APCA to establish a baseline
of current emissions before determin-
ing the magnitude of emission  reduc-
tions created by a source.  For the
source to engage in banking, it is
essential that an operating permit be
established based on the revised emis-
sion limits which result from creating
and confirming an emission reduction.

The APCA must establish the baseline
and confirm the magnitude and  perma-
nence of the reduction claimed. This
key step should not require the APCA
to perform elaborate monitoring and
measurement activities.  The burden
for documentation should be placed on
the applying source.  The APCA should
clearly specify what type of informa-
tion and documentation will be
required.  If additional supporting
evidence is necessary, the APCA should
require the source to obtain it; or,
where desirable, the APCA could per-
form the tests itself, but impose the
    financial  cost  on  the  source.   It is
    necessary, of course,  that the  APCA
    review the documentation  received.

(3)  The  source's  emission  reduction permit
    must be legally enforceable.  The APCA
    quantifies the  source's emission
    reductions and  rewrites the permit  to
    reflect a  lower (by the amount  of con-
    firmed emission reductions)  emissions
    level (or  a new control requirement
    that assures  actual reductions) for
    the  source.  This  has  the effect of
    legally binding the source to emit  at
    or below this new  level.   The permit
    change also should reflect any  addi-
    tional requirements that  the source
    must meet  to  assure the permanency of
    the  emission  reduction—for example,
    periodic measurements, continuous
    monitoring, submission of input data--
    to verify  that  the new lower baseline
    is not being  exceeded.
                                                    (4) The change must be made SIP
                                                       enforceable.  Under provisions of the
                                                       Clean Air Act, all major sources must
                                                       come under federally enforceable
                                                       emission limits.  This requirement is
                                                       satisfied by the incorporation of
                                                       source-specific emission limits or
                                                       state operating permits as part of

                                             -  19  -
be done on a case-by-case basis  in most
instances.  The burden of proof  must be  on
the applicant to convincingly demonstrate and
substantiate a baseline of actual emissions.

   There are a variety of options which
state agencies can use in developing base-
lines.  For example, baseline levels could
be defined as two-year averages  of actual
emissions.  What is important is that agen-
cies use consistent measurement  or estima-
tion techniques to determine baselines and
emission reductions.

   Estimates of the actual emission reduc-
tion achieved by particular kinds of control
equipment are subject to wide margins of
error.  Because precision is not possible,
alternative requirements must be used to
assure that emission reductions are accu-
rately measured.  For example, parameter
measures may be used to indirectly indicate
the actual level of emissions.V  Similarly,
some emission reduction  techniques are  moni-
tored  rather than  the  emission  reductions
they are presumed  to create.  Such techniques
would  include changes  in  work practices, pro-
cesses, and inputs.  The  reductions achieved
by these techniques may  not be  subject  to
accurate measurement,  but the techniques
themselves are  subject  to precise
 The change in a permit or creation of a new
 permit for banking must be incorporated into
 the SIP  to be legally enforceable under the
 Clean Air Act.
   Sources will want to consult with the APCA
before deciding to create emission reductions
with the anticipation of converting them into
ERCs.  As noted earlier, a source contemplat-
ing efforts to create ERCs will want to
obtain from the APCA an estimate of how much
credit its efforts will produce.  The changes
in the source's permit and the SIP revision
formalize what the APCA has confirmed.  These
formalities must be satisfied before the
emission reduction qualifies for banking
credit.  The certification process will be
discussed in the next component.

   Component 2 requires that the creating
source notify the APCA and provide adequate
documentation that a specific emission reduc-
tion has been or will be made.  To insure the
enforceability of the reduction, changes are
5/For example, the reduction can be measured
indirectly by gauging the temperature, pres-
sure, or other physical characteristics of
the process affected by the control equipment.
made in the source'"  permit and  in tne Sir-
Only those emission  reductions wnich are
clearly identifiable  measurable,  s-.d certain
will be confirmed and,  hence, available for
conversion to ERCs.   The  steps,  acain, are:

fl) If the source is  not  operating jn-ier
    a permit, it must be  brought under a
    permit  reflecting  the proposed
    emission  reduction.

(2) The APCA  must officially establish the
    baseline  and confirm the magnitude and
    permanence  of the  reduction danced.

(3) The source's permit  must be changed
    to reflect  reduced,  actual  emissions.

(4) The SIP must be  changed to  reflect the
    permit  change.
2.3  Component 3:
      Certifying Emission
      Reduction Credits
   An accounting system is necessary to
maintain order in the creation and use of
ERCs.  Specifically, such a system should:

•  impede fraudulent use of ERCs;

•  reduce carelessness in banking ERCs;

•  facilitate the APCA's oversight of
   banking activities; and

•  provide legal protection to owners of

   ERC certification should coincide with
emission reduction permitting and SIP revi-
sions in order to achieve maximum efficiency
and accuracy.  Administratively, it should
be relatively easy to establish one set of
books (i.e., a'registry) which would include
the information necessary to account for the
creation and use of ERCs.

   The process of certification is illus-
trated by Exhibit 10.  The formal certifica-
tion (or issuance]  of ERCs requires an APCA
to determine that the source and emission
reduction are-fully qualified to receive a
number of ERCs.  Once credits are issued
they vest certain privileges in the owner
and may receive limited protection in the
event of a SIP change (see Component 4).

   Sources are always free under the law to
control their emissions more than required.
However, no legal status attaches to those
reductions.  When the reductions are certi-
fied and converted into ERCs, sources are
bound legally to emit a lower quantity of
pollution.  In exchange,  sources receive an
intangible though valuable asset--ERCs.

   While valuable,  an ERC is not a "right to
pollute."  It entitles the owner to certain

                          - 20 -
                         EXHIBIT 10
                ER PERMIT
                IN ERC LOG


                                             •- 21  -
administrative privileges but does nor
circumvent the requirements for obtaining
valid emission permits for using the public's
air.  To avoid misunderstanding, state agen-
cies should make this distinction clear and
explicit.  For example, language in the cer-
tificate should state that the ownership of
credits does not exempt a source from any
permit requirements.  Use of credits, how-
ever, can help a firm satisfy permit
   One important rule needs to be  emphasized:
a grant of Emission  Reduction Credits cannot
be greater than the  actual magnitude of  the
emissions reduced.   However,  reductions  in
actual emissions can be credited at  less than
one-for-one.   If this is done, it  must be on
the  basis of explicit rules that are applied
in a consistent, rational manner.  Thus  dif-
ferent "conversion  ratios" can be  developed
for  various classes  of emission  reductions
which reflect  valid  public policy  concerns
and  measurement uncertainty.  Alternatively,
credits could  be certified on a  less than
one-for-one basis  for two other  reasons:
 (1)  to accumulate publicly-owned ERCs  to be
used in accordance  with public purposes, or
  Options for  Limiting
  the Life of ERCs
  States are not required to certify ERCs as valid in
  perpetuity. Instead, states may specify a definite period
  within which ERCs must be used, traded or forfeited. This
  could be done in order to discourage hoarding or monopo-
  lization of ERCs. However, such a restriction may create
  perverse Incentives and may discourage production of
  emission reductions.
(2) to help drive Reasonable Further  Pro-
gress.  In both of these instances, a less
than one-for-one conversion ratio would be
likely to severely discourage the production
of voluntary emission reductions.     (

   ERG Registry.  A central registry  must be
established.  Much like the way claims to
land ace  registered, ERCs  exist and belong  to
some entity when registered.  This allows the
tracking  and accountability essential for
banking  (and trading) purposes.  One  set of
books  must be set up as the repository of
information about  the creation and use of
ERCs.  The APCA should maintain the  registry.
Use of an Emission  Reduction Credits Register
by an  APCA will provide the most efficient
mechanism of tracking and accounting for
Emission  Reduction  Credits.  The sample reg-
ister  presented in  Exhibit 11 allows an APCA
to track  the certifying, banking, and use  of
ERCs.  The sample  register has three parts—a
log for  recording  entries, a cumulative tally
of banked ERCs  by  type of pollutant, and an
"account" for each  user of the banking pro-
gram.  Together,  these three parts provide
pertinent management and control ir.for-a-.c.'.
about the banking program.
The ERC Log (Part 1).  The log is esser.
tially a sequential summary of ir.fc.r-a-
relating to the certifying and cancelI:.
(i.e., the use) of ERCs.  The log perri
the tracking of Emission Reduction Cred
by referencing the permit which  i-corpc
rates the creation of  the emission reoj
tion.  The log summary also contains su
information as the identity of tr.e owr.e
of the credits, the location of  the
source, the amount of  the credits, the
pollutant involved, and the source clas
(if any) .  Detailed information  ccncerr.
the characteristics of the emission red
tion is essential in order to evaluate
future effects on air  quality at the ti
the ERC is used.  Emission levels for
reductions should be given in tons/hour
%ons/month, and tons/year and emissions
during the month of highest ambient con
centration should also be specified.
   In addition to cross-referencing  the  per-
   mit which incorporates  the confirmed  emis-
   sion reduction,  the  log also  provides for
   the entry of subsequent information about
   the use of ERCs.   Later entries document-
   ing the use or adjustment of  the  ERC  can
   be cross-referenced.  This allows the APCA
   to reconstruct the entire chain of events
   surrounding the  creation, banking and use
   of particular ERCs.
 *   The  Cumulative  Tally (Part 2).   These
    tallies  provide a  cumulative overview of
    the  amount  of banked emissions  for each
    pollutant.   This account gets credited
    whenever an ERC is issued.  Conversely,
    the  account is  debited  whenever an ERC is
    used to  provide an emissions allowance.
    The  "Entry  No." functions as a  cross-
    reference back  to  the ERC Log and the
    information contained there.
   The  Individual  Accounts  (Part  3).   When
   an ERC certificate  is  first  issued  to a
   source, an account  is  opened in the
   owner's name.   Subsequent ERCs are
   credited to  that  individual  owner's
   account.  If ERCs are  used in  permits,  the
   owner's account must be  debited.  This
   part of the  Registry allows  the APCA to
   determine quickly whether a  source  owner
   has enough credits  in  its account to cover
   a proposed use  (or  sale)  of  ERCs.
    Each  time an ERC  is certified an initial
 entry  in the registry should be made.  The
 actual entry requirements should present a
 relatively minor administrative burden.  In
 addition, the APCA should provide the source
 with some documentation.  Three kinds of

                                               EXHIBIT 11
        Part 1: ERC Log
                                   Part 2: Banked ERCs By Pollutant      Part 3: Banked ERCs By Owner

    80-1  Certificate No. 80-1
        Issued  to (owner)
        Source 1 OCati onjaddress]_
        For (amount)	
        Of (pollutant)	
        Source Class	
        Permit Ref..
        Certificate Ref.
    80-2 Certificate No.80-2
        Issued to (owner)
Source location (address)
For (amount)	
Of (pollutant)	
Source Class	
Permit Ref..
        Certificate Ref,
                                 ERC  REGISTRY:(POLLUTANT)
                                 ENTRY NO. AMOUNT
                                        80-1      +1000 tons 1000 tons
                                        80-9      +1200 tons 2200 tons
                                        80-10     +520 tons  2720 tons
                                        80-15     -900 tons  1820 tons
                                        81-2      +300 tons  2120 tons
                                        81-11     -520 tons  1600 tons
                                                                                 ERC REGISTRY: (OWNER)

                                                                              ENTRY NO.  POLLUTANT AMOUNT
                                                                      81 -11

+1000 tons  *•
+817 tons   '
+520 tons
-520 tons
                       An Emission Reduction Credit (ERC) Register Allows An APCA
                       To Track And Account For The Certifying, Banking, And Use Of ERCs

documentation are:   (1)  a letter that  affirms
the amount of ERCs  created and mentions  the
possibility of future adjustment to that
amount; (2) a copy  (carbon or photostat)  of
the' relevant registry page(s); and (3) an
ERC certificate (see Exhibit 12).

   Each time ERCs are used,  a subsequent
entry must be made.  Again,  it is absolutely
essential that the  central registry be kept
up-to-date.  Therefore,  if ERCs are adjusted
an entry should be  made  debiting the owner's
account and noting  the reason for the  adjust-
ment.  Similarly, each time a source uses
some of its ERCs, an entry should be made
debiting the account to  reflect the applica-
tion of the ERC to  a permit and its deletion
from the account.  Debit entries also  should
be confirmed by letter.


   To guard against possible misuse of the
banking system, careful "tracking" of ERCs is
necessary.  The  registry is analogous to the
system of  recording the ownership of real
•forward.  It applies to the holding  period
which begins after ERCs are certified  and
registered and ends when ERCs are extin-
guished by conversion into physical  polljtior.
allowances and applied to the conditions of
a permit.  The ERCs are banked until they
ace used—that is, converted into p.v/sica.
pollution .allowances, at which time  ene ERCs
are extinguished.

   As ERCs are certified, traded, and used,
the appropriate entries must be made in the
registry.   (See Exhibit 13.)
   Any adjustments to ERCs must also be
entered into the registry.  Tnis situation
will not commonly occur, but it is a possi-
bility.  During the period after ERCs are
certified and registered, and before they
are used, an adjustment to reflect changes
in the state's overall SIP or ambient air
quality standards could be assessed against
banked ERCs.

   Afa issue of great importance to sources
which might want to bank ERCs is the security
     If trading of ERCs is to be 'ostered, it is essential to separate the validity of the ERC
     from the reduced enforceable emissions limit on the producing source. A good faith
     buyer should not be penalized if the producing source fails to satisfy its legal
estate and its transfer.  A registration sys-
tem for ERCs should be centrally compiled so
that conflicts or discrepancies can be mini-
mized or more easily located and resolved.
For information purposes, duplicate sets
could be placed in key locations throughout
the banking region.  Presence on the registry
should be an invariable requirement for the
use of an ERC.  To recap, the four steps in
this component are:

(I)  A central  registry  must  be  established
    including  provisions  for an ERC log,  a
    cumulative tally  of ERCs by pollutant,
    and the individual  account  of  each  '

(2)  A ratio for converting emission reduc-
    tions into ERCs must  be  determined.
    (This generally will  be  1.0.)

(3)  Each time  an ERC  is certified,  an
    initial entry should  be  made.

(4)  Each time  ERCs are  used, a  subsequent
    entry must be made.
2.4  Component 4:   Banking
      and Accounting for
      Emission  Reduction Credits
   The actual "banking" or storage component
of the system is quite simple and straight-
a new form of "entitlement" sources may have
concerns that the credit could be revoked in
whole or part under specific circumstances.
To address this uncertainty, APCAs should
spell out in their banking regulations tr.e
specific circumstances under which ERCs say
be reduced.  The folio-, ing situations will
be discussed here:

   •  What happens to ERCs if the reduced
      baseline on which they depend
      (e.g., on enforceable permit) is

   •  What happens to SRCs if the SIP is
      changed in a direction of fewer
      allowable emissions?

Permit Violations and ERCs

   ERCs, by virtue of being certified, are
separate from the emission reductions that
justified them.  This means that ERCs gener-
ally should not be constrained or reduced if
the creating source violates its (reduced)
emission limits.  Agencies must enforce those
limits,  of course.  The violation should be
treated like any other violation.

   It may be possible to establish rules
which penalize the producing source for vio-
lations.  If the source still has possession
of the ERCs in the bank,  such a penalty could
take the form of a reduction in the number of
the ERCs.  However, once ERCs are traded, the
buyer must be protected against any di«inu-
tion of its ERCs because of violations on the
part of the seller.

                               EXHIBIT 12
                    CREDIT CERTIFICATE
          Issued To: _      Date     : _
          Pollutant: _      Permit    _
                                     Reference :
          Amount   : _
          Register                    Class £
          Entry No. : _      location : _
      This certificate represents  ownership of  the  above amount of emis-
sion  reduction credits for the specified pollutant.   The emission reduction
was produced  by  (method of creation)  and  confirmed by  (APCA).    See Permit
(permit  reference  no.).   Subject  to the rules established by  (APCA)  for
emission reduction credit  banking and use, these credits may be used  to meet
requirements  for a  new source permit or to comply with emissions limits
required in the SIP.   Use  of some or  all of these credits to satisfy permit
requirements is subject to the approval of  (APCA) according to its rules.  All
emission reduction credits  are subject to pro rata adjustment in the event of
changes in national  ambient air quality standards or modification of the state
implementation plan.  No  credits  may be transferred without the express
approval of (APCA).
           (official signature)          (official  signature)

             For Official Use Only:  Summary of Use History

Certificate No.               withdrawn  for use in Permit  No.
Certificate No.  	 reissued for  remaining credits.  See Registry
Entry No. 	.

                          -. 25 -
          EXHIBIT 13

                  IN LOG
                  OPTION TO
                  BE USED?



                                              - 26 -
SIP Changes and ERCs

   At some time during the existence of an
ERC bank, it may be necessary  to  revise the
SIP in order to satisfactorily demonstrate
attainment or Reasonable Further  Progress
(RFP).  It is important that banking rules
address the issue of what can  happen to
banked ERCs if RFP is not maintained or if
attainment is not accomplished as scheduled.

   There are several options available:

(1) a moratorium on use of SRCs until RFP
    is demonstrated;

(2) increased  ratios of ERCs needed to
    meet different SIP requirements;

(3) ERCs may be discounted pro rata? and

(4) all rights to ERCs may be  forefeited.

   One or more of these options must be
addressed in the banking rules as a contin-
gency in the event that RFP is violated or
attainment cannot be demonstrated.  As stated
earlier, ERCs are not an absolute right to
pollute.  They are granted to  sources which
reduce emissions to the degree not already
required to meet ambient air standards or
RFP.  If this assumption on which the ERCs
were granted is not satisfied, the state
must take corrective action.
    For example, if there were a total of 500 ERCs
    banked and a SIP revision required a 10 percent
    reduction in emissions, every ERC would be
    reduced by 10 percent. Thus, if a source had 100
    tons of ERCs, it would have 90 after the reduction;
    but those 90 would still represent 20 percent of the
    450 total ERCs banked.
    In demonstrating  attainment,  states must
consider all banked  ERCs.   Even  though they
do  not  represent  actual  emissions,  ERCs rep-
resent  potential  emissions  that  will affect
air quality.  They are like individual growth
allowances, premised on  the assumption that
Clean Air Act standards  will still  be met if
the ERCs are used.   If the  premise  underlying
the SIP proves  false, ERCs  are subject to the
adjustments needed to restore the validity of
the SIP.

    Any  of the above-listed  options  can be
used to meet SIP  requirements under the Clean
Air Act.  Each  option has different strengths
and weaknesses  which are discussed  next.
    The  discounting of banked ERCs offers a
practicable way to accommodate SIP changes.
Under this option, each  block of ERCs in the
bank  is diminished to the  same degree that
uncontrolled emissions  in  the inventory must
 be reduced.  The  amount  of discounting
 depends on the  reductions required for all
 emissions of that pollutant,  including those
banked, to satisfy RFP or  attainment  (e.g.,  a
10 percent discount).  The banked  ERCs would
bear an equitable part of  the  burden  for  re-
establishing RFP--existing sources also would
be required to reduce emissions  as part of
the effort to meet the new SIP requirements.
In addition, although the  quantity of banked
ERCs held by firms would be diminished,
because air resources have become  scarcer,
their relative value would likely  increase.

   The moratorium on use of ERCs does not
reduce theamount of ERCs  granted. Thus,
under this option, sources are guaranteed
that the value (i.e., tons/ year)  of  ERCs
will not be diminished.  In exchange  for
this, however, sources may be  unable  to use
these ERCs until RFP has been  demonstrated.
   An alternative to a moratorium which also
focuses on the use of ERCs is to increase
allowance ratios.  This means that, when RFP
or attainment is in jeopardy, the APCA will
Require more ERCs to satisfy the same  emis-
sion reduction requirement.  Thus,  in  the
context of offsets transactions, the ratio
of new emissions to reductions  in existing
emissions may be increased significantly so
as to drive RFP and attainment.

   The wholesale forfeitof ERCs when  a new
SIP is developed would be an extremely unwise
choice.  The effects of such a  rule would
likely be devastating on banking programs.
Any of the other options should be  preferred
to this one.

   In conclusion, for most communities dis-
counting appears to be the preferred alterna-
tive for accommodating banked ERCs  to  changes
in SIPs.

   The process of accounting  for  ERCs
requires the maintenance of a log and
entries whenever an  ERC is created,  traded,
or used.  In addition, adjustments to  ERCs
may be entered as discounts if necessary to
satisfy RFP.

   An APCA has a number of options for
dealing with ERCs should it be necessary to
obtain additional reduction to satisfy the
Reasonable Further Progress requirement.  It
could develop a discounting or adjustment
procedure whereby the number  of ERCs in.the,
bank would be reduced by the  same proportion
as the amount of additional controls   '   I
required from the emissions inventory.
 For example, if 100 additional tons of control were
 required when 200 tons were banked and 800 tons were on
 the inventory, 80 tons of control would be assessed against
 current emissions and 20 tons against the banked ERCs.
 It  may  increase the necessary trade-off  rate.
 Alternatively,  it may place a temporary  mora-
 torium  on the use of banked ERCs until Rea-
 sonable Further Progress is again attained.

                                             - 27 -
    A fourth option—the confiscation of
 ERCs--is  also possible, but would severely
 inhibit banking  activity and undermine the
 potential benefits  of  the program.  Whatever
 option is provided, it must be clearly
 stated in the banking  rules.
2.5   Component 5:
       Using  Banked

       Emission Reduction Credits
   The final component of a banking system
concerns the use of the banked ERCs.   The
APCA must establish both the administrative
steps which will be required when a source
seeks to use an ERC against a permit  require-
ment and the appropriate regulatory contexts
for the use of ERCs.  The APCA's primary
goal during this component is to establish
procedures which:

•  insure the integrity of the banking

•  facilitate the use of banked ERCs;

•  minimize the administrative burden; and

•  insure the attainment and maintenance
   of ambient air quality.

It is extremely important that requirements
placed on the use of ERCs do not create an
undue burden on either the AFCA or the source
seeking to use its ERCs.

   As discussed in Part 1, ERCs may be used
as offsets, in bubble applications, or to
satisfy PSD requirements.

   It should be recognized that banking does
not bring the complex task of determining
the acceptability of using specific ERCs
into the air pollution control system.  It
is already required for new source offsets
and existing source bubbles.  Banking  may
increase the demand for these determinations,
which are now done on a case-by-case method.
Agencies may then find it more efficient to
develop basic guidelines or rules of thumb
for use determinations.  This could reduce
workloads if the guidelines do an adequate
job of estimating ambient air effects.

Specific Steps in Dsing Banked ERCs

   There are three specific steps in using

(1) The source must propose the use of
    ERCs to the APCA.  ERCs may be used
    by a source in several contexts:

    •  to satisfy an existing emission
       limitation (i.e., a bubble);

    •  to satisfy a recently instituted,
       more stringent emission require-
       ment; and

    •  to satisfy an offset or PSD
       requirement for a planned new
       or expanded facility  (i.e., new
       source review).
   Regardless of the context, the respon-
   sibility of proposing that an £?c txe
   used to satisfy a permit requirement
   clearly falls on the source.  Each of
   these uses has its own specific
   requirements that must be satisfied.

(2)  The APCA must evaluate the proposed
    use.   It is the responsibility of the
    APCA to review and  rule on the partic-
    ular  use of ERCs proposed by a source.
    The agency should take several steps
    to minimize the administrative burden
    of evaluating these proposals.  The
    use of  ERCs will be limited to those
    situations in which:   (1) the pollut-
    ant characteristics of the ERC and the
    proposed use are equivalent  (e.g.,
    same  pollutant type and equivalent
    dispersion effects) and  (2) the use
    must  not interfere with the demonstra-
    tion of attainment by the state.  The
    burden  for satisfying these require-
    ments falls squarely on the source
    proposing  the use.  When the proposed
 '   use involves a facility different from
    the one at which the ERC was created,
    air quality modeling may be required
    at the  discretion of the APCA.  Never-
    theless, APCAs are advised to include
    a fair  and consistent decision rule in
    their banking regulation for determin-
    ing sufficiency, rather than relying
    on a  case-by-case assessment.

   The APCA should publish review guide-
    lines  for  ERC use.  These guidelines
    should  specify:   (1) the contexts in
   which  banked ERCs may be used;
    (2)  limits based on pollutant charac-
    teristics; and  (3) tests  required of
   sources to demonstrate the effect on
   ambient air quality of using a banked
   ERC.   These guidelines should allow a
    source  in  its early planning stages
    (i.e.,  before significant time and
    resources  are expended) to determine
   whether an ERC could be used to par-
    tially  satisfy a new source or permit
    requirement.  In many instances, it
   might  also be useful for  the source
    and the APCA to hold a preliminary
   conference to discuss the likelihood
    that  a  proposed use will be accept-
    able  and the specific tests required
    to gain approval.  The process by
   which  a source determines the eligi-
    bility  of  a proposed use of an ERC  is
    illustrated in Exhibit 14.

(3) The permit is issued and  the SIP
   changed to reflect use of the ERCs.
   The APCA is responsible for maintain-
    ing accurate records of the creation
   and use of ERCs and also  for insuring
    that  ERCs  are reflected in source per-
   mits  and the SIP.  The use of SRCs  is
    similar to that of withdrawing funds
    from  a  bank account; at the time ERCs
   are used,  they are extinguished from
    the ERC registry.  To insure consis-
   tency with Clean Air Act  requirements,
    the APCA must take the necessary steps
   to alter its SIP to reflect these

                           - 28 -
                          EXHIBIT 14
 Plans To
 Use ERCs
                      APCA GUIDELINES
                      (1) USES OF ERCs
                      (2) LIMITS TO USE
                      (3) EQUIVALENCE
                         METHODS OF
                         AMBIENT AIR
                         QUALITY EFFECTS
Source Meets With
APCA To Discuss
Proposed Use Of ERCs
To Permit

                                        EXHIBIT 15
                        USE OF SUFFICIENCY TESTS
                        CRITERIA FOR SELECTING TEST
                        TYPE OF REDUCTION
                        AMBIENT AIR PROBLEM
                        SAMPLE TYPE OF TESTS
                        Simple Ratios
                        Complex Ratios

                        Simple Modeling
                        Complex Modeling
     1.1 to 1.0
     1.1 within 5 kilometers
     1.5 for longer distances
     Limited to the two sources
     All sources using a refined grid

   This final component, the use of the ERCs,
involves three basic steps:
(1) The source proposes to the APCA that
   ERCs be used to partially satisfy the
   requirements of a permit.

(2) The APCA reviews the proposed use to
   make certain that the ERCs will be
   properly used, but should take steps
   to minimize the administrative burden
   associated with this activity.
(3)  The ERC is applied to the permit,  the
    SIP is altered, and the SRC isextin-
    guished from the ERC registry.

   Possible contexts for which an ERC could
be.used include a more stringent emission
limitation at the source site, an existing
emission limitation (i.e., use of the bub-
ble) , a proposed expansion at the source
site, and a proposed expansion involving
offsets or PSD limitations.

                                                   30  -
    The success of an ERC banking program
 depends not only on good ideas and design,
 but also on good implementation and adminis-
 tration.  The best rule will  fail if poorly
 administered.  Two things are necessary:
 (1) an explicit administrative process and
 (2) an administrative capability (staff,
 resources).  Regulatory personnel and poten-
 tial users of the program need to know how
 banking will be implemented,  including the
 flow, timing, and criteria for technical
 decisions and appeals,   well-planned sched-
 ules, forms, and procedural charts will ful-
 fill this need when coupled with good tech-
 nical training and administrative skills.

    This part of the manual describes the
 steps for setting up and operating a banking
 program.  The administration of the banking
 program is closely allied with the program
 design discussed in Part 2.  However, Part 3
 deals exclusively with  how best to implement
 and operate the program design selected.
3.1  Implementing an
      ERC Banking System
   There are three major requirements for
implementing a successful banking progcara:
(1) legal requirements must be satisfied;
(2) the foundation of the banking system
must be established; and (3) a vigorous
effort should be undertaken to encourage
participation in the program.  These require-
ments are summarized in Exhibit 15.

Developing a SIP Rule for Banking

   There are three steps that must be taken
to build a proper legal foundation for a
banking system.

•  A banking rule must be developed by
   the state orSIP designated locality.

•  The SIP must be revised  to include
   this new rule.

•  The SIP revision roust be approved by

   A rule authorizing a banking program must
be incorporated  in the State  Implementation
Plan to form the  legal basis  for creating
Emission Reduction Credits.   This  legal
authorization must not be inconsistent with
the Clean Air Act, and should address all
foreseeable contingencies  (e.g., a tightening
of the SIP) so that  rational  investment deci-
sions can be made.   This rule could  include
or be supplemented by  regulations  to govern
the creation, banking, and  use of  ERCs.  It
should specify eligibility  and ownership
qualifications and the protection  that wouxd
be accorded banked ERCs  in  the event of a SIP
revision.  The specification of the rules
serve to enhance the certainty essential to
firms considering investments  in  creating
   Many states authorized  banking in their
1977 Part D (i.e.,  nonattainment) SIP revi-
sions.  Few of these states, however, provide
the detailed program descriptions essential
to a successful banking program.  It will be
necessary for most  states  to expand their
banking rules and incorporate these revisions
into the SIP.
   In developing  a detailed banking rule as
part of their SIPs,  states and areas with
delegated SIP authority have a number of
options.  The banking  rule could apply:

•  to any area in the  state developing a

•  to only one or more specified areas in
   the state; or

•  different rules could apply to dif-
   ferent areas in the state.

To provide for consistency and prevent
"jurisdiction shopping," states would be
advised not  to adopt the last alternative.
Establishing the Foundations
of the Banking System

   There are two steps  that should be taken
to establish the foundations of the banking
system.  These steps will affect the banking
system rules and how the support for the
system is structured.

•  Assemble an advisory group to provide
   input in designing the banking system
   rules.  The purpose  of this step is to
   provide broad-based  input to the rules
   which govern how an  ERC may be created,
   who may create an ERC, and under what
   circumstances ERCs may be used.  Organ-
   izations that should be represented in
   this advisory group  include the
   regional air quality planning body, ,
   the council of governments or metro-
   politan planning organization, the
   state or local economic development
   agency, industry associations, and
   environmental groups.  If a trading
   program is later initiated, it is
   likely that one of these organizations
   would be the sponsor.

•  Obtain the necessary financing for
   implementing the banking system.
   Financing is needed  primarily to fund
   the initial study of the system's
   design.  This need not be an elaborate

                                             - 31 -
                                       EXHBIT 16

                 1                        2                        3

analysis quantifying the benefits of
banking to a community.  Instead, it
Should focus on assessment of the area
needs and select among the number of
optional elements of the banking system
described in this manual.  Support for
the actual operations of the system
should rely exclusively on user fees
assessed against sources seeking to
bank and use Emission Reduction
An elaborate study will not produce a good
system. Involving all affected parties early in
the design process and compromising to meet
all needs will.

Supporting the Banking System

   A  good rule and good administrative pro-
cedures are necessary but not sufficient
conditions for a successful banking  program.
Firms need to be informed of the opportuni-
ties  of banking and may require assistance
in order to use the banking system.

   As its primary marketing tool,  the air
pollution control agency or cosponsoring
organization (e.g., COG, business  associa-  t
          tion) should develop an  information packet to
          send to firms that lays  out a step-by-step
          flow chart, along with checklists, example
          forms, and other pertinent information
          describing how the system operates.  Expected
          processing times for each of the administra-
          tive steps should be estimated,  along with a
          list of contact personnel in the agency who
          can provide further information. The APCA
          itself should develop a  flow chart of steps,
          personnel responsibilities, and  trackina
          systems to keep applications moving in an
          orderly and timely fashion.

          3.2  Operating an

          ERC Banking System

            There are three major requirements for
          successfully operating an ERC banking system:
          (1) effective administration of  the system;
          (2) technical assistance to current and
          potential participants,  and; (3) feedback
          from participants about  ways the banking
          system can be improved.

          Effective Administration of the  Svstea

            The interrelation of  the five comoonents
          of the banking system make the administration
          of each component important to the others.
          An administrative system should  be defined
          for each component to insure that the banking

                     EXHIBIT 17
Key Key
Activities Activities Activities Activities
(1) APCA must (1)
APCA must (1) APCA must (1) APCA must (1) APCA must
quantify convert
keep the
Ownership & reduction reductions registry
and make into credits
it legally and issue
binding certificates. (2)
(2) Firms must

decide to
in the SIP. /rt.

(2) APCA must
\ / *

establish a

reaistrv to

track all

APCA must

rules for (2)

SIP changes

or new RFP

issued or


to banked
rules for
using the

Firms must

decide how
& when to

use the





                                                 - 33 -
system as a whole will operate effectively.
Exhibit 16 summarizes the administrative
tasks facing the agency  in operating  a
banking program.

   1. Qualifying Emission Reductions.   There
are several steps the APCA performsin  admin-
istering this component.  These  require the
APCA to establish rules  about  how an  accept-
able emission reduction  can  be created  and
who may create emission  reductions that will
be eligible for certification  as ERCs.

   The APCA must go  through  a  rule-making
procedure that will  provide  notice of the
proposed rules to affected parties and  will
give them an opportunity to comment.  When
the rules are in final form, copies should be
sent to all interested parties and should be
included as part of any marketing efforts.
The appropriate qualifications for partici-
pating in banking should be clearly stated
in the banking rules.

   In summary, the first component's admin-
istrative structure should include the

(1) plans to disseminate proposed banking
    rules including provisions regarding

(2) schedule of hearings to receive
    comments on proposed rules;  and

(3) plans to disseminate final rules.

   2. Confirming Emission Reductions.  There
are six steps which the APCA performs in
administering this component.  These steps
involve responding to requests from sources
and quantifying the emission reductions for
conversion into ERCs.

   The source, if it is not operating under
a permit, must establish an existing baseline
of actual emissions against which emission
reductions may be measured.

   The next step involves providing sources
with an estimate of what amount  of emission
reductions will be confirmed.  This estimate
must be made by the staff of the APCA, .but
should, where possible, be calculated using
rules of thumb.

   After creating an emission reduction, a
source must notify the APCA to apply for
ERCs.  This notification should  be made on a
form containing information such as owner-
ship, location, type of pollutant, how the
emission reduction was created,  and the
estimated amount of emission reduction
created.  After the source has taken the
initiative and contacted the APCA, the APCA
should use its expertise, through  its staff
members, to confirm the magnitude and perma-
nence of the emission reduction  (the source
would be notified of the documentation it
would have to provide).

   The reduction would be made enforceable
by altering the source's permit  and seeking
incorporation of the permit change into the
SIP.  The SIP change  is  not  something  tr.e
source applicant can  effect  unilaterally.
The source,  however,  is  responsible  for pro-
viding the necessary  documentation to  state
and EPA officials.
    In summary,  the  second component's admin-
 istrative structure should  include  the

 (1)  procedures  for  determining an emis-
     sions baseline, including a  form
     which can be  used  by a  source to
     request an  operating permit  from the

 (2)  procedures for  individual sources to
     request and obtain an estimate of the
     ERCs to be granted as the result of a
     proposed emission control action;

 (3)  a form by which a source can notify
     the APCA that  an emission reduction
   *  has been created;

 (4)  procedures for officially confirming
     the magnitude  and permanence of the
     emission reduction, including guide-
     lines about what information and
     documentation  should be provided by
     the source;

 (5)  procedures for  changing a permit to
     reflect the emission reduction created
     by the source;  and

 (6)  guidelines including what documenta-
     tion is necessary, for seeking a SIP
   3. Certifying Emission Reduction Credits.
 Three steps must be  taken by the APCA in
 administering this component.  All are
 related to an accounting and recording pro-
 cedure which is designed to provide the
 official record of  BRCs created,  banked, and
 used.  The APCA must establish a central
 registry as the official repository of this
 information.  (See  Part 2.3 for greater

   In limited cases the APCA may want to
 apply a ratio to convert emission reductions
 into ERCs.  When used, this ratio must not
 be arbitrary and should be based on criteria
 relating to the accuracy of the estimate and
 the kind, source, and pollutant class of the
 emission reduction created.  The ratio should
 be determined on the basis of such concerns
 as the uncertainty  in measurement and the
 effect of geographical characteristics on
 ambient air quality.

   The primary action in this step is the
 certification and registration of BRCs to
 the account of the producing source.

   In summary, the third component's admin-
 istrative structure should include the

 (1) the APCA must establish • central
    registry to serve as the official
    record of BRC creation (and use);

                                           - 34 -
 (2)  if applicable, an appropriate conver-
     sion  ratio should be developed and
     applied  for classes of emission
     reductions; and

 (3)  the ERCs must  be entered  into the
     central  registry.

    4.  Banking the  ERCs.  Banking begins when
 the  ERC is registered and continues until  it
 is withdrawn and used.  During  this period,
 some events  may occur which require certain
 adjustments  to be  made  in the quantity of
 ERCs registered.   These adjustments gener-
 ally will be on a  pro rata basis and can be
 made with little difficulty.   The only admin-
 istrative requirements are that the  registry
 be maintained on a continuing  basis  and that
 someone enter any pro rata adjustments which
 may  occur.   If trading is  allowed, ownership
 changes must also be entered  in the  registry.

   In  summary, the fourth  component's  admin-
 istrative structure will include:

 (1)  continual maintenance  of  the central
     registry, to account for  all ERCs; and

 (2)  specific responsibilities  assigned to
     the designated registrar  to enter
     adjustments in the registry as needed
     to satisfy RFP or a  new SIP.

   5. Dsing  the ERCs.  The  APCA is  respon-
 sible  for administering  five  aspects of this
 component.  The APCA must  provide ERC  holders
 with guidelines about the  use  (when, how,
 where, by whom)  of ERCs.   These guidelines
 should be promulgated as formal rules  by
 which  the APCA is bound.   The  APCA must.pro-
 vide a convenient means  for ERC holders to
 notify the APCA of their proposed  use  of the
 credits.  As in the second  component,  a form
 can  be devised precisely for  this purpose.
 The  APCA  should have some  internal procedures
 established  for evaluating  the proposed use
 in light  of  the established  rules.

   The appropriate permit change must  be made
 and  debits entered into  the central  registry
 when the  APCA approves the  proposed provi-
 sion.  Finally,  the SIP  must  be revised to
 reflect the changed permit.
   In summary, the fifth component's admin-
 istrative structure should  include:

 (1)  regulations regarding  the use of ERCs
     should be incorporated into the
     original banking rule  and the SIP;

 (2)  a  form to be used by ERC holders when
     notifying the APCA of a proposed use;

 (3)  internal APCA procedures  for accommo-
     dating proposed uses with the estab-
     lished rules;

 (4)  procedures for making permit changes;

 (5)  processing of SIP revision.

   This administrative framework, based on  the
five components of  the ERC banking system,   is
illustrated i'n Exhibit  16.   Administrative
effectiveness is necessary  in  operating  the
banking system,  but  the provision  of  technical
assistance also helps assure its success.

 3.3   Technical Assistance

        to Users  of the

        Banking System

    The lack  of  familiarity  with the  banking
 system on the part  of  most  potential partici-
 pants will require  widespread technical
 assistance as soon  as the banking system has
 been  introduced.  Presumably, as  the banking
 system is used and  experience in  its opera-
 tion  grows,  less technical assistance will
 be necessary.  However, there always will be
 individual users who  need to  solve a unique
 problem or who have not been  reached by ini-
 tial  educational efforts.   Some examples of
 technical assistance  include:

 •  Helping sources  obtain the necessary
    funding.   The APCA may want to provide
    potential buyers and sellers with
    written guidance about opportunities
    for financing the  production of ERCs.
    EPA currently is developing financing
    manuals which can  be used  for  this

 •  Informing sources  of methods of pro-
    ducing ERCs.  The  APCA could make
    general information available  to
    sources explaining  different methods
    of producing ERCs.

    There will be many  particular  issues that
 could confuse a potential user of the banking
 system.   To  the extent that the APCA is pre-
 pared to help resolve  this confusion,  the
 banking system*s potential for success is

 Feedback From Participants

    Administrative systems usually can be
 improved if experience under the  system is
 frequently reviewed to correct previously
 undetected shortcomings.  During  the design
 and implementation stage, it is difficult to
 anticipate every need which the banking sys-
 tem should address or to identify errors
 made in the planning  and implementation
 stages.  For this reason, the APCA  should
 develop a feedback or review mechanism and
 make it an integral part of the banking sys-
 tem.   This mechanism does not have  to ^involve
 an elaborate evaluation of the banking, sys-
 tem.   Instead, it should answer two basici

  (1) Is the banking system meeting the
     needs of those who have used the

  (2) Has  the banking system met the  goals
     for which  it was  established?

  In part  1.3, several  reasons for establishing
 a banking system were suggested.  During the
  review process, it should  be useful to make

                                             -  35 -
 specific inquiries whether these advantages
 have been realized in practice:

 •   Has banking provided the APCA with
    greater flexibility in developing and
    implementing a SIP?

 •   Has banking provided the APCA a means
    to promote economic growth without
    impairing  environmental quality?

 •   Has banking proved  to  be an  incentive
    for firms  to reduce emissions  below
    the required level?

 •   Has banking encouraged innovation  in
    air pollution control  technology?

 •   Have firms  found banking useful  in
    their planning  efforts?

 •   Has banking enabled firms  to minimize
    the cost of complying  with emission

    These questions suggest a  two-tiered feed-
 back  mechanism:   the appraisal of sources who
 have  used  or considered using the banking
 system and the appraisal  of involved  APCA
 staff.   It is  not  necessary that  the  ques-
 tions  all  be answered  favorably;  the  exercise
 is  supposed to pinpoint where the system is
 not performing as  expected.  When the mal-
 functions  are  identified,  remedial  measures
 can be  taken.

    For  purposes  of illustration, one  approach
 to providing feedback  is  outlined below.

 •   Input from  users or potential users of
    the  banking  system  could be sought at
    two  different points in time.

    (1)  Immediately after  a banking  trans-
        action  has been completed/ the
        source  involved could be given the
        opportunity to  suggest changes in
        the banking process.  This input
       can be  standardized by development
        of  a form soliciting suggestions
        and asking specific questions.

    (2) On a regular basis  (for example,
        semi-annually), an advisory panel
       of source representatives could be
       convened to provide input about
        the effectiveness of the banking
       system.  Membership can be on  a
        rotating basis, but some members of
       the panel should be from sources
       which have had recent experience
       with the banking system.

*  Internal review by APCA staff should
   be an ongoing process.

    (1) A staffer should be designated to
       handle the input from users of the
       system.  This would coordinate the
       individual and collective inputs
       from sources.

   (2) A regular review session  (quarterly
       or semi-annually) should  be con-
       ducted with input from  all  relevant
       APCA staff.  The overall oerfor-
       mance of the banking system should
       be assessed, problem areas identi-
       fied, and changes proposed.

   Regardless of how it is structured, sore
review mechanism should be established so
that the banking system can be kept respon-
sive to the goals for which it was designed.
 3.4   The Relationship of

       Banking to Trading

   This manual has presented the components
 of bankingr a process by which firms creating
 surplus emission reductions can "bank" them
 for later  use to satisfy permit requirements.
 The focus of the manual has intentionally
 been  limited to the  banking of Emission
 Deduction Credits.   At the same time, the
 proposed banking system has been constructed
 in a  manner which facilitates the trading or
 transfer of ERCs between different legal

   The only significant difference between a
 system which allows  for banking and a system
 which allows both banking and trading of ERCs
 is that the latter entails a comprehensive
 program for encouraging the sale of ERCs
 between sources.

   Exhibit 17 illustrates the additional step
 required to allow trading.  Following the
 certifying, registering, and banking of ERCs,
 a firm possessing ERCs would be permitted to
 sell  these to another legal entity.  This
 transfer of ownership could occur directly
 through a private sale, or through some form
 of public auction.  The APCA could directly
 control the trading or simply be responsible
 for establishing trading rules and performing
 an oversight function.
   For a thorough discussion of the mechanics
of designing and implementing a trading sys-
tem,  the reader is referred to « brochure
that explains trading in greater detail and
to three separate manuals available from the
EPA Banking and Trading Project.   Each or
these manuals explains a distinct .trading
system—a private trading system using
brokers,  a public auction system,  and a
central trading system.   (See Appendix B.)

   In designing its  banking system,  the APCA
should not overlook  the potentially signifi-
cant  benefits  of extending the system to
include trading.   A system which  includes
both  banking and trading offers several
additional advantages:

•  The Achievement of Environmental
   Quality atLower Total Cost!Firms
   would be able to purchase Emission
   Reduction Credits from other firms in
   situations where the costs are less
   expensive than creating their own ERCs.
   The  Establishing of a More Robust
   Market  for ERCs:  By allowing fins to
                   a market for ERCs
                      More buyers and
sell their ERCs,
should be created.

                               - 36 -
sellers should mean increased price
competition and less delay and
uncertainty in obtaining ERCs.

Permit New Firms to Enter a Market;
Firms not currently located in an area
may be required to purchase offsets to
satisfy nonattainment or PSD
requirements. The availability of
ERCs for purchase should facilitate
their entry into a region.
                                Because of the advantages of trading,  it
                             behooves the APCA to work with other groups
                             in their areas and to move forward as
                             quickly as possible to extend banking to
                             include the development of a system for
                             trading of ERCs. Economic development
                             agencies, regional planning organizations,
                             and industry associations are examples of
                             groups likely to take the lead in organizing
                             a trading program.
                             EXHIBIT 18
                    TO INCLUDE TRADING
                  ARE AVAILABLE FROM THE EPA.

                                                 - 37 -
                                  APPENDIX A:   Glossary
   Key terms, as used in this manual,  are
defined below.

•  Actual Emissions;  The level of pollution
   emitted by a source.  Actual emissions
   may differ from "allowable" emissions,
   which is the level specified in a source's
   permit or in the State Implementation
   Plan (SIP).  Whether allowable or actual
   emissions is used in determining the base-
   line against which emissions reductions
   ace measured will depend on the manner in
   which the SIP was developed (see Exhibits
   6 and 7 and accompanying text).  In almost
   every state, actuals will form the base-
   line for measuring emission reductions.

•  Air Pollution Control Authority (APCA).
   The public agency at the state and/or
   local level which has primary responsibil-
   bility for implementing the Clean Air Act.
   The APCA is the most likely institution to
   implement a banking system—this manual
   reflects that assumption.  It is possible
   however for a distinct body, e.g., the
   Chamber of Commerce, air quality planning
   organization, or an economic development
   agency, to develop a banking program, but
   only with the close cooperation and sup-
   port of the APCA which will be responsible
   for implementing the program.

•  Allowable Emissions.  The level of emis-
   sions permitted by the terms of a source's
   permit or in the SIP.  The question is
   whether allowable emissions is the appro-
   priate baseline for measuring emission re-
   ductions.  Only if current  (i.e., actual)
   emissions are less than allowable emis-
   sions and the State Implementation Plan
   was designed using the emission levels
   specified in permits, would a source be
   allowed credit for this difference.

•  Allowance Ratio.  This ratio  is applied
   during the process by which banked ERCs
   are converted for use to partially satisfy
   the terms of a permit requirement.  The
   allowance ratio is a reduction in the
   quantity of ERCs to satisfy ambient air
   quality requirements.

•  Bank.  The term and its derivatives are
   used in three different senses in this
   manual.  The term is not used to describe
   an institution where deposits, withdraw-
   als, and other transactions are consum-
   mated.  Therefore, there is not any one
   institution which can be described as the
   Emission Reduction Credit "bank". The
   three uses are:

     (1) Banking is used to describe the
        process by which a firm  initially
        reduces its emissions and applies
        for ERCs.  The banking process
        continues until ERCs are
        extinguished through use.
    (2)  Banked refers to the status of an
        ERC after it has been certified,
        but before it has been used.

    (3)  Bank refers to the pool of ERCs
        currently entered in the  central

•  Baseline.  The level of emissions  below
   which a source must reduce its emissions
   in order to constitute an "emission
   reduction."  Generally, it is  the  more
   stringent requirement of actual or allow-
   able emissions.  But this will depend on
   how the State Implementation Plan  was
   developed and the specific policy  of that
   locale in satisfying the requirements of
   the Clean Air Act.
•  Bubble.  EPA's alternative emission reduc-
   tion option which, when incorporated into
   a State Implementation Plan, allows a
   source to reduce control requirements at
   one point by increasing controls corre-
   spondingly at another.  The bubble can be
   applied both within a single plant and
   between different plants in the same area.
   The policy is explained in detail  in the
   Federal Register, Vol. 44, p.  71780  (Dec.
   11, 1979).

•  Certificate.  The air pollution control
   agency issues certificates representing
   ownership of specific ERCs which appear on
   the register and thus are banked.  These
   certificates are for recordkeeping pur-
   poses and are not legally transferable.

•  Confirmation.  Air pollution control
   agency's verification given to a source's
   creation of an emission reduction. Con-
   firmation is the second component  of the
   banking process and comes only after all
   questions about the emission reduction
   (i.e., quantity, permanence, how created,
   etc.) have been resolved.  A confirmed
   reduction in emissions would result in a
   change in the terms of a source's  permit.

•  Controls.  The means by which  an emission
   reduction is achieved.  Generally  this
   would be used in reference to  the  techno-
   logical controls installed by  a source—
   scrubbers, electrostatic precipitators,
   or other abatement equipment.  However,
   it includes any measure taken  to create
   emission reductions—shutdowns, cutbacks,
   altered work practices, alteration of
   inputs or production processes, etc.

•  Conversion Ratio.  The ratio is applicable
   to the process whereby an emission reduc-
   tion is converted to an emission reduction
   credit (ERC).  It is the fraction  or per-
   centage used to determine the  number of
   ERCs which will be credited to an  account.
   The ratio will generally be 1.0, and is
   determined after considering many  factors

   including any classification schemes
   applied to sources and pollutants, the
   characteristics of the ER, measurement
   certainty, etc.                      >

•  Emission Offset.   A regulatory  device
   designed to allow economic growth  in an
   area where a national  ambient air  quality
   standard (NAAQS)  has not  been attained.
   The actual offset is obtained by securing
   a decrease in an  existing source's emis-
   sions to compensate for emissions  of a
   new or expanding  source seeking to locate
   in a nonattainment area  (see Section 173
   of the Clean Air  Act.)

•  Emission Reductions (Efts).  The physical
   reduction of emissions by a source.  To be
   eligible for conversion into ERCs,  this
   reduction must be below the measurable
   baseline or currently  required  level of
   emissions and must be  permanently

•  Emission Reduction Credits  (ERCs).  The
   commodity which is "banked" and can later
   be used by a source to satisfy  the
   required emission limits  contained in its
   permit.  The ERC  is the end product of
   the conversion of emission reductions.
   ERCs are used by  being converted back
   into physical pollution units using an
   allowance ratio in a manner consistent
   with other requirements  (e.g.,  new or
   expanding source  emission offsets,  bub-
   ble).  It is crucial that the distinction
   between emission  reductions and ERCs be
   maintained—they  are not  synonymous.

•  Minor Source.  A subcategory of sources
   with emissions below some threshold
   defined by states in their SIPs (e.g., 25
   tons per year).  This  subcategory  of
   existing sources  is typically excluded
   from permit requirements, and thus lack a
   baseline against which emission reduc-
   tions can be ascertained.

*  Monitoring.  The  measurement and recorda-
   tion of emissions which occurs  over time.
   The purpose of monitoring is both  to
   obtain a measurement and  to ensure the
   permanency of the emission reduction.
   Monitoring can involve in-stack devices
   which measure emissions or devices which
   measure input or  output parameters.

•  Nonattainment Area. A  geographic area
   designated by EPA to be  in violation of
   national ambient air quality standard
   (NAAQS).  A major new  or  expanding source
   seeking to locate in a nonattainment area
   must arrange for sufficient offsets to
   insure that Reasonable further  Progress
   toward attainment of NAAQS  is achieved.
Nonconventional Sources.  A subcategory of
sources characterized by emissions which
are not directly measurable.  Nonconven-
tional sources include roads, storage
piles, and the like.  Because of this
characteristic, these sources are gener-
ally not subject to permits and an APCA
may decide to exclude them from the
banking system.

Permit.  The emission restrictions placed
by the Air Pollution Control Authority on
a specific source.  The permit may specify
a specific emission limit, require a per-
cent removal of a pollutant, or.dictate a
particular work practice.  Where possible,
the permit conditions should be used as
the baseline for evaluating emission
reduction.  The permit terms are also
generally related to the SIP and thus any
change in a permit requires a corre-
sponding change in the SIP.

Reasonable Further Progress orRFP.  The
requirement under the Clean Air Act that
areas designated nonattainment achieve
annual incremental steps toward satisfy-
ing ambient air quality standards by the
designated deadlines.

Registry.  The books in which the banking
system's activities are recorded and which
serve as the accounting record for the
issuance and use of ERCs.  In a banking
system, these books generally will be
maintained by the APCA.  They clarify
ownership issues and facilitate the
search process for needed reductions.

Source.  A source is any building, struc-
ture, facility, or installation which
emits any air pollutant.  A source may
include several specific emitting points,
but is limited to those owned by a single
legal entity.

State Implementation Plan  (SIP).  The
legal mechanism, subject to EPA approval,
by which a state proposes to achieve and
maintain the ambient air quality require-
ments of the Clean Air Act.

Trade.  The transfer or sale of ERCs from
one legal entity to another in some kind
of market situation subject to APCA review
and approval.  Companion manuals deal with
the potential for trading ERCs and how
such a system complements the banking
system.                             '

User Fee.  Charges levied against sources
that make use of the banking system.  The
charges can be used to defray operating
expenses or to fully fund the operation
of the banking program.

                                             -  39  -
       APPENDIX  B:   Selected Annotated  Bibliography
   The following titles, along with a more
extensive annotated biblography are avail-
able by mailing in the enclosed form or by
contacting directly:

Emission Reduction Banking and Trading Project
U.S. Environmental Protection Agency (PM-220)
401 M Street, S.W.
Washington, D.C.  20460

AA001  Emission Reduction Banking and Trading
Project, Office of Planning and Evaluation,
U.S. Environmental Protection Agency.
Annotated Biblography.

   A complete listing and explanation of
publications dealing with banking, the
bubble, and other economic incentives to
control air pollution.

BA120  Hoffman, John S.  Economic Advantages
of Emission flanking Systems.  Prepared for
the U.S Environmental Protection Agency.

   Examines why emission reduction banking
and trading systems save firms money, and
offers a few design options available to
states and localities in developing cost-
effective systems.

BA200  ICF Incorporated.  Emission Reduction
Banking & Trading;  Concept Paper.  Prepared
for the Emission Reduction Banking and Trad-
ing Project, Office of Planning and Evalua-
tion, the U.S. Environmental Protection
Agency, January 1, 1980.

   An excellent introduction and overview of
banking and trading.  Divided into three
parts, the first section of this paper
generally discusses the*concepts of banking
and trading, their key terms, and analogies
and precedents.  The second part describes
in detail the five stages of an emissions
reduction, banking and trading system.  The
final part discusses the advantages and dis-
advantags of three trading systems:  public
auction, central trading system, and private

BG250  ICP Incorporated.  An Introduction to
Trading.  Prepared for  the Emission Reduction
Banking and Trading Project, Office of
Planning and Evaluation, U.S. Environmental
Protection Agency, October 1980.

   This document presents a detailed
discussion of the role  of trading in a
banking system.   It explains the many
advantages of trading and summarizes and
compares the alternative designs for trading

BG30Q  ICF Incorporated.  Public Auction
Trading System Manual.  Prepared for the
Emission Reduction Banking and Trading
Project Office,  Office of Planning and
Evaluation, U.S. Environmental Protection
Agency, October  1980.

BG400  ICF Incorporated.  Central Price  Trad-
ing System Manual.   Prepared for the Emission
Reduction Banking and Trading Project Office,
Office of Planning and Evaluation,  U.S.
Environmental Protection Agency.
BG500  ICF Incorporated.  Private/Brokerage
Trading System Manual.  Prep^reo for  cne
Emission Reduction and Trading Project
Office, Office of Planning and Evaluation,
U.S. Environmental Protection Agency.

   These three trading manuals explain  the
specific steps required to design and operate
a trading system.  They discuss the many
design options, financing considerations, and
institutional concerns in developing  a
trading program.

BG600  Emission Reduction Banking and Trading
Project, Office of Planning and Evaluation,
U.S. Environmental Protection Agency.   Issues
Paper on Shutdowns.

   This issues paper discusses tne options
available to states and localities in treat-
ing emission reductions from shutdowns.   It
explores the legal, economic, and policy
implications of these alternatives.

BA700  Emission Reduction Banking and Trading
Project, Office of Planning and Evaluation,
U.S. Environmental Protection Agency.   Model
Banking Rule.

   This model rule illustrates and explains
specific provisions that can be included  as
part of a banking system.  Examples of  bank-
ing rules already adopted by communities  are

AH100  Public Financing Manual for the  Crea-
tion and Purchase of Emission Reduction
Credits.  Prepared by Economic Analysis Divi-
sion, Office of Planning and Evaluation,  U.S.
Environmental Protection Agency.

   Firms and communities investigating  avail-
able public options for financing the creation
and purchase of emission reductions will  find
this manual especially useful.  For each
option, the manual discusses the following
program issues and requirements:  objective,
funding level, form of funding, eligibility
requirements, eligible activities, the  range
and average level of financial assistance,
the funding cycle, and examples of previously
funded activities.  The manual also includes a
brief framework for evaluating the individual

AH110  Putnam, Hayes & Bartlett, Inc.   Private
Financing Manual for the Creation and Purchase
of Emission Reduction Credits.  Prepared  by
Economic Analysis Division, Office of Planning
and Evaluation, U.S. Environmental Protection

   Some of the feasible private alternatives
this manual identifies for financing emission
reductions are stock options,  limited partner-
ships, bank loans, stock,  leveraged leasing,
pollution control revenue bonds, and deben-
tures.  The manual catalogs these options by
sources of funds,  financing costs,  qualifying
requirements, management restrictions*  legal
and political implications,  historical  uses
of the financing option,  and option execution
procedures.   It also presents criteria  for
evaluating the options.

Send to:
        Emission Reduction Banking & Trading Project
        U.S. Environmental Protection Agency (PM-220)
        401 M Street, S.W.
        Washington, D.C. 20460

Phone _
  . Occupation
     AA001 Annotated Bibliography
     BA120 Economic Advantages Paper
     BA200 Banking and Trading Concept
     BA600 Issues Paper on Shutdowns
     BA700 Model Banking Rule
 BA250 An Introduction to Trading
. BA300 Public Auction Trading System
 BA400 Central Trading System Manual
 BA500 Private/Brokerage Trading
       System Manual
 AH100 Public Financing Manual
 AH 110 Private Financing Manual
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