United States
Environmental Protection
Agency
Office of
Planning and Management
Washington, DC. 20460
September 1980
First Edition
Emission Reduction Banking and Trading Publication No. BG200
Emission Reduction
Banking Manual
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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
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TABLE OF CONTENTS
AN INTRODUCTION TO BANKING
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
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LIST OF EXHIBITS
Page
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
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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
localities.
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
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EXHIBIT 1
CREATING AN EMISSION REDUCTION CREDIT
UNCONTROLLED
EMISSIONS
EMISSION CONTROLS
REQUIRED BY SIP
FURTHER ABATEMENT
CREATES AN EMISSION
REDUCTION CREDIT
EMISSION REDUCTION
CREDITS CAN BE BANKED
FOR FUTURE USE OR SALE
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by selling its ERCs to another firm, or it
can use these credits itself—as offsets, in
a bubble application, or to satisfy PSD
requirements.
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
emissions.
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
control.
1/EPA's Bubble Policy was published in
the Federal Register on December 11, 1979
(Vol. 44, p. 71780).
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Ban Icing and Prevention of Significant
Deterioration•
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
limitations.
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
industry.
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
standards;
• establishes a set procedure for evalu-
ating new source review and bubble
applications--one that insures consis-
tency with Clean Air Act requirements;
and
• provides an incentive for firms to
reduce their emissions beyond existing
requirements.
EXHIBIT 2
THE SEVERAL USES OF ERCs
EMISSION
REDUCTION
BANK
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?
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-5-
• 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;
and
• 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
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EXHIBIT 3
HOW BANKING CAN REDUCE
THE DIRECT COSTS OF CONTROL
EXISTING—PACT—LAER
EXISTING-rLAER
COST B TO C = $ 6000 PER TON
COST A TO C = $ 4000 PER TON
A EXISTING
SIP
REQUIRED
BETTER
THAN
SIP
CONTROL
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.
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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<*
program.
Operating the banking program primarily
involves regulating the creation and use oi
EXHIBIT 4
ORGANIZATIONS RESPONSIBLE FOR
DEVELOPING BANKING PROGRAMS
LOUISVILLE, KY
SAN FRANCISCO, CA
SEATTLE, WA
COUNTY AIR POLLUTION CONTROL BOARD
LOCAL AIR AGENCY/REGIONAL BUSINESS
ASSOCIATION
REGIONAL AIR POLLUTION CONTROL AGENCY
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
ages;
* 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
facilities.
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
system.
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
operation.
The appendices include a glossary of key
terns used in this manual and an annotated
bibliography describing related publications
available from EPA.
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PART 2: DESIGNING A BANKING SYSTEM
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
agency.
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:
COMPONENT 1; QUALIFYING EMISSION REDUCTIONS
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.
COMPONENT 2; QUANTIFYING .EMISSION REDUCTIONS
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.
COMPONENT 3: CERTIFYING THE ERCs
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.
COMPONENT <8 BANKING AND ACCOUNTING FOR
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.
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EXHIBIT 5
BANKING PROCESS OVERVIEW: AN EXAMPLE
ACME
V
Solvent
Recovery
System
creating
emission
reductions s
(50 tons/
years)
ACME
Banking begins
t
ERCs are "banked"
I
"Banking" ends If
ACME uses up all
of Its ERCs
ERCs
extinguished
A-
&
ACME applies .
for permit
change lowering
Its emissions •
limit
>v | (confirmed
A.P.C.A.
A.P.C.A.
confirms
ERs
(50 tons/yea
(SO tons/
year)
L
CEN1
REGIS
•RAL
5TRY
ACME =
"X"ERCs
ACME decides s
to expand and, ^
applies to its A.P
A.P.C.A.
for a permit |
ERCs
entered on registry i
Shows what ERCs
are In the "bank"
s. ACME uses its
N. banked ERCS
.C.A. to satisfy
offset re-
Iquirements.
CENTRAL
REGISTRY
_ "• .
— ^ •
WTCB^TS
ACME
expands
1
sufficiency „ _ -fc,
is made Reflects
toaaaure change in
S^8"™ the "bank" of
RFP- ERCs
h
A
4
:ME
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
used).
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- 10 -
COMPONENT 5; USING BANKED EMISSION
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
(ERs).
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
factors.
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?
WHAT TYPES OF EMISSION REDUCTIONS
CAN QUALIFY FOR BANKING?
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.
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- 11 -
EXHIBIT 6
ONLY ACTUAL EMISSION REDUCTIONS
WILL BE ELIGIBLE IN MOST CASES
tons/year
500—ALLOWABLE LEVEL OF EMISSIONS
300
0)
200
— ACTUAL LEVEL OF EMISSIONS .
— REDUCED LEVEL OF EMISSIONS _
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.
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EXHIBIT 7
ELIGIBILITY OF "PAPER" REDUCTIONS
Eligibility of pre-existing or paper reductions for banking as Emission
Reduction Credits depends on whether the SIP was based on actual or allowable
emissions.
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 }
Actual
Emissions
Not included
in the SIP
Design
Used as Basis
for the SIP
Design
Reductions
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
Actual
Emissions
Used as Basis
h for the SIP
Design
Any reduction
can be banked
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- 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.
WHAT SOURCES ARE ELIGIBLE
TO BANK EMISSION REDUCTIONS?
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
created.
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
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- 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
determined;
• compliance status of source;
• size of source or emission reduction;
• forthcoming controls or requirements
under study; and
• ownership restrictions.
EXHIBIT 8
DEVELOPMENT OF BANKING QUALIFICATIONS
CLEAN AIR ACT
REQUIREMENTS
. REAL
. PERMANENT
, ENFORCEABLE
LOCAL NEEDS OR
PREFERENCES
. OWNERSHIP
. ELIGIBILITY
DESIGN OF BANKING
RULES
SIP PROVISIONS
AND DESIGN
ASSUMPTIONS
, AMBIENT vs
POTENTIAL AIR
, GROWTH ALLOWANCE
, TURNOVER
(UNIFICATIONS
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
closings.
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,
and;
• 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
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- 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.
SUMMARY
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
considerations:
• 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
inquiries.
(3) APCAs may make an estimate of probable
ERCs which could be certified based
on certain explicit assumptions and
conditions.
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
instrument.
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
Act.
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
emissions.
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
CONFIRMING AND QUANTIFYING
EMISSION REDUCTIONS
DOES TYPE
OF ER
QUALIFY?
CAN ER
BE ENFORCED?
CAN ER
BE MEASURED?
yes
Determine
Initial
Baseline
Determine
Size of ER
I
Issue (New)
Permit
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.
confirm"
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.
(2)
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
SIPs.
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- 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
verification.
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.
SUMMARY
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
ERCs.
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
CERTIFYING EMISSION REDUCTION CREDITS
APCA
ESTABLISHES
CONVERSION.
RATIO(S)
CONVERT
CONFIRMED
ERs INTO
ERCs
ADD
CREDITS
TO
REGISTRY
ISSUE
ERC
CERTIFICATE
(OPTIONAL)
DIFFERENT
RATIOS FOR
DIFFERENT
ER CLASSES
(OPTIONAL)
REFERENCE
ER PERMIT
IN ERC LOG
CREDIT
POLLUTANT
BANK
ACCOUNT
CREDIT
OWNER'S
ACCOUNT
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•- 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
requirements.
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.
s
ir.c
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
SAMPLE EMISSION REDUCTION CREDIT (ERC) REGISTER
Part 1: ERC Log
Part 2: Banked ERCs By Pollutant Part 3: Banked ERCs By Owner
ENTRY
No, ERC REGISTRY LOG
80-1 Certificate No. 80-1
Issued to (owner)
Source 1 OCati onjaddress]_
For (amount)
Of (pollutant)
Source Class
Permit Ref..
Certificate Ref.
3:
80-2 Certificate No.80-2
Issued to (owner)
3s
i5
Source location (address)
For (amount)
Of (pollutant)
Source Class
Permit Ref..
Certificate Ref,
ERC REGISTRY:(POLLUTANT)
£
>
I
ENTRY NO. AMOUNT
TOTAL
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
80-1
80-2
80-10
81 -11
VOC
TSP
VOC
VOC
+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
-------
23
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.
SUMMARY
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
obligations.
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 '
owner.
(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
violated?
• 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.
-------
24
EXHIBIT 12
SAMPLE EMISSION REDUCTION
CREDIT CERTIFICATE
a
EMISSION REDUCTION CREDIT CERTIFICATE No. 80- —
Issued To: _ Date : _
Pollutant: _ Permit _
Reference :
Amount : _
Source
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
BANKING AND ACCOUNTING FOR ERCs
CREDIT
OWNER'S
ACCOUNT
ARE ERCs
BEING
CERTIFIED?
ARE
ERCs
BEING
TRADED?
ENTER
DETAILS
IN LOG
MUST
ERCs BE
ADJUSTED
FOR
RFP?
IS
DISCOUNT
OPTION TO
BE USED?
DEBIT
POLLUTANT
BANK
»-»
DEBIT
OWNER'S
ACCOUNT
DISCOUNT
OWNER'S
ACCOUNTS
-------
- 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.
SUMMARY
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
system;
• 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
ERCs.
(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
changes.
-------
- 28 -
EXHIBIT 14
PROCEDURE FOR REGULATING THE USE OF ERCs
Source
Plans To
Use ERCs
APCA GUIDELINES
(1) USES OF ERCs
(2) LIMITS TO USE
(3) EQUIVALENCE
STANDARDS
METHODS OF
ESTIMATING
AMBIENT AIR
QUALITY EFFECTS
Source Meets With
APCA To Discuss
Proposed Use Of ERCs
Source
Proposes
Use
APCA
Reviews
Proposal
ERC
Applied
To Permit
±
ERC
Extinguished]
SIP
Change
-------
29
EXHIBIT 15
USE OF SUFFICIENCY TESTS
CRITERIA FOR SELECTING TEST
SIZE
LOCATION
POLLUTANT
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
SUMMARY
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 -
PART 3: ADMINISTERING AN ERG BANKING SYSTEM
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
EPA.
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
ERCs.
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
program;
• 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
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- 31 -
EXHBIT 16
IMPLEMENTING AN ERC BANKING PROGRAM
1 2 3
ASSEMBLE
ADVISORY
GROUP
DEVELOP
BANKING
RULES
OBTAIN
NEEDED
FUNDING
INCLUDE
IN
SIP
PERFORM
DESIGN
STUDY
OBTAIN
FEDERAL
APPROVAL
DEVELOP
OUTREACH
PLAN
PREPARE
MATERIALS
DESIGNATE
AGENCY
CONTACTS
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
Credits.
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
THE FIVE COMPONENTS OF THE BANKING SYSTEM
1
QUALIFYING \
THE \
EMISSION /
REDUCTIONS /
Key
QUANTIFYING\
THE \
EMISSION /
REDUCTION /
CERTIFYING \
THE \
REDUCTION /
CREDITS /
Key Key
BANKING \
THE \
REDUCTION /
CREDITS /
Key
Activities Activities Activities Activities
(1) APCA must (1)
establish
USING
BANKED
REDUCTION
CREDITS
Key
Activities
APCA must (1) APCA must (1) APCA must (1) APCA must
quantify convert
keep the
Ownership & reduction reductions registry
Eligibility
qualifications.
and make into credits
current.
it legally and issue
binding certificates. (2)
(2) Firms must
decide to
in the SIP. /rt.
(2) APCA must
\ / *
establish a
participate.
reaistrv to
track all
APCA must
establish
rules for (2)
applying
SIP changes
or new RFP
credits
issued or
requirements
to banked
establish
rules for
using the
banked
credits.
Firms must
decide how
& when to
use the
credits.
used.
credits.
I
LJ
-------
- 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
following:
(1) plans to disseminate proposed banking
rules including provisions regarding
qualifications;
(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
following:
(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
APCA;
(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
change.
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
detail)•
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
following:
(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;
and
(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
purpose.
• 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
enhanced.
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
questions:
(1) Is the banking system meeting the
needs of those who have used the
system?
(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
standards?
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
entities.
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
EXPANDING A BANKING SYSTEM
TO INCLUDE TRADING
QUALIFYING
EMISSION
REDUCTIONS
\
QUANTIFYING.
EMISSION
REDUCTIONS
\
CERTIFYING
AND
REGISTERING
\
/
BANKING
OF
ERCs
\
TRADING
OF
ERCs
\
USING
ERCs
MANUALS DESCRIBING ALTERNATIVE TRADING SYSTEMS
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
registry.
• 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
-------
-38-
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
enforceable.
• 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.
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- 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
trading.
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
systems.
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
included.
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
options.
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
Agency.
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.
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BANKING AND TRADING ORDER BLANK
Send to:
Emission Reduction Banking & Trading Project
U.S. Environmental Protection Agency (PM-220)
401 M Street, S.W.
Washington, D.C. 20460
Name
Address.
Phone _
. Occupation
AA001 Annotated Bibliography
BA120 Economic Advantages Paper
BA200 Banking and Trading Concept
Paper
BA600 Issues Paper on Shutdowns
BA700 Model Banking Rule
BA250 An Introduction to Trading
. BA300 Public Auction Trading System
Manual
BA400 Central Trading System Manual
BA500 Private/Brokerage Trading
System Manual
AH100 Public Financing Manual
AH 110 Private Financing Manual
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