# Supplemental Notice for the Proposed National Emission Standards for Hazardous Air Pollutants; and, in the Alternative, Proposed Standards of Performance for New and Existing Stationary Sources: Electric Utility Steam Generating Units

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URL: https://www.frixlaw.com/law-library/documents/fr%3A04-4457

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** March 16, 2004
- **Citation:** 69 FR 12398

## Text

ENVIRONMENTAL PROTECTION AGENCY
40 CFR Parts 60, 72, and 75
[OAR-2002-0056; FRL-7628-8]
RIN 2060-AJ65
Supplemental Notice for the Proposed National Emission Standards for Hazardous Air Pollutants; and, in the Alternative, Proposed Standards of Performance for New and Existing Stationary Sources: Electric Utility Steam Generating Units

AGENCY:

Environmental Protection Agency (EPA).

ACTION:

Supplemental notice of proposed rulemaking (SNPR).

SUMMARY:

Today's action is a SNPR to a notice of proposed rulemaking (NPR) published on January 30, 2004. The NPR proposed to: set national emission standards for hazardous air pollutants (NESHAP) pursuant to section 112 of the Clean Air Act (CAA); alternatively, to revise the regulatory finding EPA made by notice dated December 20, 2000 pursuant to CAA section 112(n)(1)(A); and if the December 2000 finding is revised as proposed, to set standards of performance, under CAA section 111, for mercury (Hg) for new and existing coal-fired electric utility steam generating units (Utility Units), as defined in CAA section 112(a)(8), and for nickel (Ni) for new and existing oil-fired Utility Units. Thus, regardless of whether it would base its action on section 111 or 112, EPA intends to require reductions in the emissions of Hg and Ni from coal- and oil-fired utility units, respectively.

Today's SNPR includes proposed rule language for the action proposed in the NPR published on January 30, 2004, proposed state plan approvability criteria, and a proposed model cap-and-trade rule. EPA is also proposing to revise regulations to establish methodologies to measure mercury (Hg) emissions from new and existing coal-fired electric utility steam generating units. Today's SNPR and the associated NPR are part of a broader effort to issue a coordinated set of emissions limitations for the power sector.

DATES:

Comments.
Submit comments on or before April 30, 2004.

Public Hearing.
The EPA will hold a public hearing. The details of the public hearing, including the time, date, and location, will be provided in a future
Federal Register
notice and announced on EPA's Web site for this rulemaking
http://www.epa.gov/interstateairquality.

ADDRESSES:

Comments.
Comments may be submitted by mail (in duplicate, if possible) to EPA Docket Center (Air Docket), U.S. EPA West (6102T), Room B-108, 1200 Pennsylvania Ave., NW., Washington, DC 20460, Attention Docket ID No. OAR-2002-0056. By hand delivery/courier, comments may be submitted (in duplicate, if possible) to EPA Docket Center, Room B-108, U.S. EPA West, 1301 Constitution Ave., NW., Washington, DC 20460, Attention Docket ID No. OAR-2002-0056. Also, comments may be submitted electronically according to the detailed instructions as provided in the
SUPPLEMENTARY INFORMATION
section.

Docket.
The official public docket is available for public viewing at the EPA Docket Center, EPA West, Room B-108, 1301 Constitution Ave., NW., Washington, DC 20460.

FOR FURTHER INFORMATION CONTACT:

For general information on today's SNPR and specific information on today's action under CAA section 112, contact William Maxwell, Combustion Group (mail stop C439-01), Emission Standards Division, Office of Air Quality Planning and Standards, U.S. EPA, Research Triangle Park, NC 27711, telephone number (919) 541-5430, fax number (919) 541-5450, electronic mail (e-mail) address,
maxwell.bill@epa.gov.
For information on section 111 Hg Model Trading Rule contact Mary Jo Krolewski, U.S. EPA, 1200 Pennsylvania Ave (MC 6204J), Washington, DC 20460, telephone number (202) 343-9847, fax number (202) 343-2358, electronic mail (e-mail) address,
krolewski.maryjo@epa.gov.
For information on the part 75 Hg monitoring requirements contact Ruben Deza, U.S. EPA, 1200 Pennsylvania Ave (MC 6204J), Washington, DC 20460, telephone number (202) 343-3956, fax number (202) 343-2358, electronic mail (e-mail) address,
deza.ruben@epa.gov.

SUPPLEMENTARY INFORMATION:

Regulated Entities.
Categories and entities potentially regulated by this action include the following:

Category

NAICS code
1

Examples of potentially regulated entities

Industry
221112
Fossil fuel-fired electric utility steam generating units.

Federal government

2
22112

Fossil fuel-fired electric utility steam generating units owned by the Federal government.

State/local/tribal government

2
22112

Fossil fuel-fired electric utility steam generating units owned by municipalities.

921150
Fossil fuel-fired electric utility steam generating units in Indian Country.

1
North American Industry Classification System.

2
Federal, State, or local government-owned and operated establishments are classified according to the activity in which they are engaged.

This table is not intended to be exhaustive, but rather provides a guide for readers regarding entities likely to be regulated by this action. This table lists examples of the types of entities EPA is now aware could potentially be regulated by this action. Other types of entities not listed could also be affected. To determine whether your facility, company, business, organization, etc., is regulated by this action, you should examine the applicability criteria in § 63.9981 of the proposed rule or §§ 60.45a and 60.46a of the proposed NSPS amendments. If you have any questions regarding the applicability of this action to a particular entity, consult the person listed in the preceding
FOR FURTHER INFORMATION CONTACT
section.

Docket.
The EPA has established an official public docket for this action including both Docket ID No. OAR-2002-0056 and Docket ID No. A-92-55. The official public docket consists of the documents specifically referenced in this action, any public comments received, and other information related to this action. Not all items are listed under both docket numbers, so interested parties should inspect both docket numbers to ensure that they are aware of all materials relevant to the proposed rule. The official public docket is available for public viewing at the EPA Docket Center (Air Docket), EPA West, Room B-108, 1301 Constitution Ave., NW., Washington, DC. The EPA Docket Center Public Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal holidays. The telephone number for the Reading Room is (202)

566-1744, and the telephone number for the Air Docket is (202) 566-1742. A reasonable fee may be charged for copying docket materials.

Electronic Access.
You may access this
Federal Register
document electronically through the Internet under the “Federal Register” listings at
http://www.epa.gov/fedrgstr/.

An electronic version of the public docket is available through EPA's electronic public docket and comment system, EPA Dockets. You may use EPA Dockets at
http://www.epa.gov/edocket/
to submit or view public comments, access the index listing of the contents of the official public docket, and access those documents in the public docket that are available electronically. Once in the system, select “search,” then key in the appropriate docket identification number.

Certain types of information will not be placed in EPA Dockets. Information claimed as confidential business information (CBI) and other information whose disclosure is restricted by statute, which is not included in the official public docket, will not be available for public viewing in EPA's electronic public docket. The EPA's policy is that copyrighted material will not be placed in EPA's electronic public docket but will be available only in printed paper form in the official public docket. To the extent feasible, publicly available docket materials will be made available in EPA's electronic public docket. When a document is selected from the index list in EPA Dockets, the system will identify whether the document is available for viewing in EPA's electronic public docket. Although not all docket materials may be available electronically, you may still access any of the publicly available docket materials through the EPA Docket Center.

For public commenters, it is important to note that EPA's policy is that public comments, whether submitted electronically or on paper, will be made available for public viewing in EPA's electronic public docket as EPA receives them and without change, unless the comment contains copyrighted material, CBI, or other information whose disclosure is restricted by statute. When EPA identifies a comment containing copyrighted material, EPA will provide a reference to that material in the version of the comment that is placed in EPA's electronic public docket. The entire printed comment, including the copyrighted material, will be available in the public docket.

Public comments submitted on computer disks that are mailed or delivered to the docket will be transferred to EPA's electronic public docket. Public comments that are mailed or delivered to the Docket will be scanned and placed in EPA's electronic public docket. Where practical, physical objects will be photographed, and the photograph will be placed in EPA's electronic public docket along with a brief description written by the docket staff.

For additional information about EPA's electronic public docket, visit EPA Dockets online or see 67 FR 38102 (May 31, 2002).

You may submit comments electronically, by mail, or through hand delivery/courier. To ensure proper receipt by EPA, identify the appropriate docket identification number in the subject line on the first page of your comment. Please ensure that your comments are submitted within the specified comment period. Comments received after the close of the comment period will be marked “late.” The EPA is not required to consider these late comments. However, late comments may be considered if time permits.

Electronically.
If you submit an electronic comment as prescribed below, EPA recommends that you include your name, mailing address, and an e-mail address or other contact information in the body of your comment. Also include this contact information on the outside of any disk or CD-ROM you submit, and in any cover letter accompanying the disk or CD-ROM. This ensures that you can be identified as the submitter of the comment and allows EPA to contact you in case EPA cannot read your comment due to technical difficulties or needs further information on the substance of your comment. The EPA's policy is that EPA will not edit your comment, and any identifying or contact information provided in the body of a comment will be included as part of the comment that is placed in the official public docket and made available in EPA's electronic public docket. If EPA cannot read your comment due to technical difficulties and cannot contact you for clarification, EPA may not be able to consider your comment.

Your use of EPA's electronic public docket to submit comments to EPA electronically is EPA's preferred method for receiving comments. Go directly to EPA Dockets at
http://www.epa.gov/edocket
and follow the online instructions for submitting comments. To access EPA's electronic public docket from the EPA Internet home page, select “Information Sources,” “Dockets,” and “EPA Dockets.” Once in the system, select “search,” and then key in Docket ID No. OAR-2002-0056. The system is an anonymous access system, which means EPA will not know your identity, e-mail address, or other contact information unless you provide it in the body of your comment.

Comments may be sent by e-mail to
a-and-r-docket@epa.gov,
Attention Docket ID No. OAR-2002-0056. In contrast to EPA's electronic public docket, EPA's e-mail system is not an anonymous access system. If you send an e-mail comment directly to the Docket without going through EPA's electronic public docket, EPA's e-mail system automatically captures your e-mail address. E-mail addresses that are automatically captured by EPA's e-mail system are included as part of the comment that is placed in the official public docket and made available in EPA's electronic public docket.

You may submit comments on a disk or CD-ROM that you mail to the mailing address identified below. These electronic submissions will be accepted in WordPerfect or ASCII file format. Avoid the use of special characters and any form of encryption.

By Mail.
Send your comments (in duplicate if possible) to EPA Docket Center (Air Docket), U.S. EPA West (6102T), Room B-108, 1200 Pennsylvania Ave., NW., Washington, DC, 20460, Attention Docket ID No. OAR-2002-0056. The EPA requests a separate copy also be sent to the contact person listed above (
see
FOR FURTHER INFORMATION CONTACT
).

By Hand Delivery or Courier.
Deliver your comments (in duplicate, if possible) to EPA Docket Center, Room B-102, U.S. EPA West, 1301 Constitution Ave., NW., Washington, DC, 20460, Attention Docket ID No. OAR-2002-0056. Such deliveries are only accepted during the Docket's normal hours of operation as identified above.

By Facsimile.
Fax your comments to (202) 566-1741, Attention Docket ID No. OAR-2002-0056.

CBI.
Do not submit information that you consider to be CBI electronically through EPA's electronic public docket or by e-mail. Send or deliver information identified as CBI only to the following address: Mr. William Maxwell, c/o OAQPS Document Control Officer (Room C404-2), U.S. EPA, Research Triangle Park, 27711, Attention Docket ID No. OAR-2002-0056. You may claim information that you submit to EPA as CBI by marking any part or all of that information as CBI (if you submit CBI on disk or CD-ROM, mark the outside of the disk or CD-ROM as CBI and then identify electronically within the disk or CD-ROM the specific

information that is CBI). Information so marked will not be disclosed except in accordance with procedures set forth in 40 CFR part 2.

In addition to one complete version of the comment that includes any information claimed as CBI, a copy of the comment that does not contain the information claimed as CBI must be submitted for inclusion in the public docket and EPA's electronic public docket. If you submit the copy that does not contain CBI on disk or CD-ROM, mark the outside of the disk or CD-ROM clearly that it does not contain CBI. Information not marked as CBI will be included in the public docket and EPA's electronic public docket without prior notice. If you have any questions about CBI or the procedures for claiming CBI, please consult the person identified in the
FOR FURTHER INFORMATION CONTACT
section.

Public Hearing.
Persons interested in presenting oral testimony should contact Ms. Kelly Hayes, Combustion Group (C439-01), Emission Standards Division, Office of Air Quality Planning and Standards, U.S. EPA, Research Triangle Park, North Carolina 27711, telephone (919) 541-5578, at least 2 days in advance of the public hearing. If no requests to present oral testimony are received by this date, EPA will cancel the hearing and announce the cancellation on the Web site for this rulemaking,
http://www.epa.gov/interstateairquality.

The public hearing will provide interested parties the opportunity to present data, views, or arguments concerning the proposed rule. If a public hearing is requested and held, EPA will ask clarifying questions during the oral presentation but will not respond to the presentations or comments. Written statements and supporting information will be considered with the same weight as any oral statement and supporting information presented at a public hearing.

Outline.
The information presented in this preamble is organized as follows:

I. Background

A. Summary of January 30, 2004 NPR

B. Overview of today's action

II. Standards of Performance Requirements

A. Introduction

B. Performance Standard Approvability Criteria

C. Best Demonstrated Technology—Activated Carbon Injection

1. Mercury Control Technologies

a. Sorbent Injection Technologies

b. Enhanced Conventional Technologies

c. Multi-Pollutant Capture Technologies

d. Novel Approaches to Mercury Control

2. Longer-Term Field Tests

3. Initial Mercury Demonstration Projects

4. The Timing of Technology Development and Commercialization

D. Compliance Date for Nickel Controls

III. Emission Guidelines and Compliance Times for Coal-Fired Electric Utility Steam Generating Units

A. Program Summary

B. Hg Budget Trading Program

1. General Provisions

a. Overview and Purpose

b. Definitions, Measurements, Abbreviations and Acronyms

c. Applicability

i. Monitoring

ii. Responsible Party

d. Retired Unit Exemption

e. Standard Requirements

f. Computation of Time

2. Hg Authorized Account Representative (AAR)

3. Permits

a. General Requirements

b. Hg Budget Permit Application Deadlines

c. Hg Budget Trading Program Permit Application

d. Hg Budget Permit Issuance

e. Hg Budget Permit Revisions

4. Compliance Certification

5. Hg Allowance Allocations

a. State Trading Program Budget

b. Timing Requirements

c. Options for Hg Allowance Allocation Methodology Recommendation

6. Safety Valve Provision

7. Hg Allowance Tracking System

a. Compliance Accounts

b. Compliance

c. General Accounts

8. Banking

9. Allowance Transfers

10. Emissions Monitoring and Reporting

11. Program Audits

12. Administration of Program

C. Approvability of Trading Rule within a State Plan

1. Necessary Common Components of the trading Rule

2. Revisions to Regulations

D. Co-Proposal of Cap- and Trade Program under CAA Section 112

IV. Statutory and Executive Order Reviews

Appendix A to the Preamble—Proposed Changes to Parts 72 and 75

Appendix B to the Preamble—Unit Allocations

I. Background

A. Summary of January 30, 2004 NPR

In a notice of proposed rulemaking (NPR) published on January 30, 2004 (69 FR 4651), EPA proposed: (1) Set national emission standards for hazardous air pollutants (NESHAP) pursuant to section 112 of the Clean Air Act (CAA); (2) alternatively, to revise the regulatory finding that it made on December 20, 2000 (65 FR 79825) pursuant to CAA section 112(n)(1)(A) (December 2000 Finding); and (3) if the December 2000 finding is revised as proposed, to set standards of performance pursuant to CAA section 111 for both mercury (Hg) for new and existing coal-fired electric utility steam generating units (Utility Units), as defined in CAA section 112(a)(8); and nickel (Ni) for new and existing oil-fired Utility Units. Thus, regardless of whether it would base its actions on section 111 or 112, EPA intends to require reductions in the emissions of Hg and Ni from coal- and oil-fired utility units, respectively. The January 30, 2004 NPR, and today's SNPR, are part of a broader effort to issue a coordinated set of emissions limitations for the power sector.

The December 2000 Finding consisted of a finding, pursuant to CAA section 112(n)(1)(A), that regulation of coal- and oil-fired Utility Units under CAA section 112 is appropriate and necessary. The section 112 “MACT” rule proposed in the January 30, 2004 NPR would require coal- and oil-fired Utility Units to meet hazardous air pollutant (HAP) emissions standards reflecting the application of the maximum achievable control technology (MACT) determined pursuant to the procedures set forth in CAA section 112(d). In the January 30, 2004 NPR, EPA also co-proposed and solicited comment on implementing a cap-and-trade program under section 112, similar to that proposed under section 111 of the CAA.

The proposed NPR CAA section 112 MACT rule would limit emissions of Hg from coal-fired EGUs and Ni from oil-fired EGUs. Exposure to Hg or Ni above identified thresholds has been demonstrated to cause a variety of adverse health effects. The NPR also proposed an alternative to regulate Hg from coal-fired EGUs and Ni from oil-fired EGUs under Section 111.

In the January 30, 2004 NPR, EPA also proposed, in the alternative, standards of performance under CAA section 111 to establish a mechanism by which Hg emissions from new and existing coal-fired Utility Units would be capped at specified, nation-wide levels. A first phase cap would become effective in 2010 and a second phase cap would become effective in 2018. Facilities would demonstrate compliance with the standard by holding one “allowance” for each ounce of Hg emitted in any given year. Allowances would be readily transferrable among all regulated facilities. EPA believes that such a “cap and trade” approach to limiting Hg emissions is the most cost effective way to achieve the reductions in Hg emissions from the power sector that are needed to protect human health and the environment.

The added benefit of this cap-and-trade approach is that it dovetails well with the sulfur dioxide (SO
2
) and nitrogen oxides (NO
X
) Interstate Air

Quality Rule (IAQR) that was also proposed through a notice January 30, 2004 (69 FR 4565). That proposed rule would establish a broadly-applicable cap and trade program that would significantly limit SO
2
and NO
X
emissions from the power sector. The advantage of regulating Hg at the same time and using the same regulatory mechanism as for SO
2
and NO
X
is that significant Hg emissions reductions can and will be achieved by the air pollution controls designed and installed to reduce SO
2
and NO
X
. In other words, significant Hg emissions reductions can be obtained as a “co-benefit” of controlling emissions of SO
2
and NO
X
. Thus, the coordinated regulation of Hg, SO
2
, and NO
X
allows Hg reductions to be achieved in a cost effective manner. This is consistent with Congress' intent expressed in CAA section 112(n), that EPA would regulate HAP emissions from Utility Units only after taking into account compliance with other CAA programs.

B. Overview of Today's Action

Today's action is a SNPR augmenting EPA's January 30, 2004 NPR. This SNPR includes proposed rule language for the action proposed in the NPR and proposed state plan approvability criteria. This SNPR also includes a model cap-and-trade rule, including the proposed CFR rule language for the basic elements of the proposed Hg Budget Trading Program. The rule language is located at the end of the preamble.

In today's SNPR, EPA is proposing that each state impose control requirements that demonstrate it will meet its statewide Hg emissions budget, proposed in the NPR. States may join the trading program by adopting or referencing the model trade rule in State regulations or adopting regulations that mirror the necessary components of the model trading rule. Today's SNPR identifies the necessary common components of state rule rules and identifies EPA and state responsibilities for administering a Hg trading program. Today's notice also discusses the program elements of the model trading program, including applicability, allowance allocations, banking, compliance, and enforcement.

EPA is also proposing to revise Parts 72 and 75 to establish methodologies to measure mercury (Hg) emissions from new and existing coal-fired electric utility steam generating units. In today's proposed rule, EPA would add subpart I to Part 75. Subpart I would provide mercury monitoring requirements that could be adopted by State agencies (or, if necessary, by EPA) as part of any regulatory requirements included in the final rules. Proposed Subpart I sets forth general procedures for measuring total vapor phase mercury mass emissions from fossil fuel-fired electric generating units, using continuous emission monitoring systems or sorbent trap monitoring systems. In addition to adding Subpart I to Part 75, today's proposed rule would revise the regulatory language at several places in Parts 72 and 75 to include specific mercury monitoring definitions and provisions.

II. Standard of Performance Requirements

A. Introduction

The January 30, 2004 NPR explained that under the section 111 co-proposal each State would be required to submit a state plan demonstrating “that each State will meet the assigned statewide mercury emission budget.” Each state plan should include fully-adopted State rules for the mercury reduction strategy with compliance dates providing for controls by 2010 and 2018.

The purpose of this section is to identify criteria for determining approvability of a State submittal in response to the performance standard requirements. In addition, this section describes the actions the Agency intends to take if a State fails to submit a satisfactory plan.

B. Performance Standard Approvability Criteria

As discussed in the NPR, Section 111(a) and (d)(1) authorizes EPA to promulgate a “standard of performance” that States must apply to existing sources through a State plan. As also discussed in the NPR, EPA is interpreting the term “standard of performance”, as applied to existing sources, to include a cap-and-trade program.

The State budgets are not an independently enforceable requirement. Rather, each State must impose control requirements that the State demonstrates will limit state-wide emissions from affected new and existing sources to the amount of the budget. EPA believes that the best way to assure this emission limitation is for the State to assign to each affected source—new and existing—an amount of allowances that sum to the state budget. Therefore, EPA proposes that all regulatory requirements be in the form of a maximum level of emissions—that is, a cap—for the sources. Also, consistent with the IAQR, EPA is proposing that States may meet their Statewide emission budget by allowing their sources to participate in a national cap-and-trade program. That is, a State may authorize its affected sources to buy and sell allowances out of state, so that any difference between the State's budget and the total amount of statewide emissions will be offset in another State (or States).

EPA notes that the January 30, 2004 NPR stated that States not participating in the trading program would be required to make the individual source allocations specified in the NPR (as noted above) as the basis for the Statewide budget. In today's supplemental notice, EPA is proposing that each State must submit a demonstration that it will meet its assigned Statewide emission budget, but that regardless of whether the State participates in a trading program, the State may allocate its allowances by its own methodology rather than following the method used by EPA to derive the state emissions budgets. This alternative approach is consistent with the approach in the IAQR (
see
69 FR 4565).

Moreover, States remain authorized to require emissions reductions beyond those required by the State budget, and nothing in today's SNPR or the associated NPR would preclude the States from requiring such stricter controls.

In addition, EPA proposes today that sources would be required to comply with the 40 CFR part 75 requirements proposed today. EPA believes that compliance with these requirements are necessary to demonstrate compliance with a mass emissions limit.

If a State fails to submit a State plan as proposed to be required in the January 30, 2004 NPR and today's SNPR, EPA would prescribe a Federal plan for that State, under CAA section 111(d)(2)(A). EPA proposes today's model rule as that Federal plan. By the same token, as discussed below, EPA proposes today's model rule (with some changes) as the regulatory requirements under section 112(n)(1)(A), as co-proposed in the NPR as the basis for Hg regulation.

C. Best Demonstrated Technology—Activated Carbon Injection

Mercury-specific air pollution control device development has made major strides since the EPA announced its Information Collection Request in 1998. Currently, there are a broad range of technologies under consideration, consistent with the view that the EPA believes a portfolio approach is required to adequately and effectively implement significant reductions in mercury emissions from coal-fired power plants. In selecting a Hg emissions control

technology approach, there are temporal relationships between research and development projects, technology demonstration projects, and commercial deployment of new technologies, which must be taken into consideration when designing and proposing long-term regulatory development programs similar to the section 111 Trading Program of this proposal.

1. Mercury Control Technologies

Ongoing Hg Research and Development (R&D) programs recognize that conventional air pollution control technologies (
e.g.,
scrubbers, SCRs and fabric filters) remove about one-third of the potential Hg emissions from today's coal-fired power plants. EPA's Office of Research and Development (ORD) has published an excellent report that describes these technologies and their effectiveness in reducing Hg emissions.
1

Additionally, they have recently completed a memo which updates the status of Hg control technologies relative to coal-fired power plants.
2

These existing criteria pollutant control technologies are commercially deployed today, but generally show inconsistent levels of mercury control from plant to plant. These R&D programs focus on ways to make these existing technologies more effective and more consistent at controlling Hg emissions, and on altogether new approaches for Hg emissions control. The Department of Energy (DOE) is committed to an aggressive R&D program in support of EPA's commitment to significantly reduce Hg emissions from coal-fired power plants.
3

1

See Control of Mercury Emissions from Coal-fired Electric Utility Boilers: Interim Report,
EPA-600/R-01-109, April 2002.

2

See
“Control of Mercury Emissions from Coal-fired Electric Utility Boilers”, U.S. EPA, Office of Research and Development memorandum, February 2004.

3

See
Mercury Control Technologies, U.S. Department of Energy memorandum, January 8, 2004.

There are two overarching goals for the DOE R&D program: (1) to develop control technologies capable of 50-70% Hg capture for commercial demonstration at bituminous coal-fired power plants by 2005, and at lower rank coal-fired power plants by 2007 and (2) to develop lower cost control technologies capable of 90% Hg capture for commercial demonstration by 2010. The DOE R&D program takes technologies from a conceptual level through bench scale and pilot scale proof of concept. For the more promising technologies, defined in terms of performance and cost, full-scale field tests are conducted to generate the information necessary for a multi-year demonstration project. In addition to funding for the Hg R&D program, DOE is also provided funds by Congress to conduct such full-scale technology demonstrations under the Clean Coal Power Initiative.

Several categories of technologies are now under development and evaluation at DOE and ORD, which EPA has considered in proposing regulations for Hg emissions from coal-fired power plants. These include sorbent injection technologies, technologies that enhance the Hg capture of traditional pollutant controls, such as SO
2
“scrubbers” and electrostatic precipitators (ESPs), multi-pollutant control technologies, and novel concepts.

a.
Sorbent Injection Technologies.
DOE and ORD have supported sorbent injection projects at the bench, pilot, and commercial-scale. This type of technology has the greatest promise for taking Hg control beyond the performance of conventional (non-Hg) technologies in the near-term. During short-term tests, these technologies have achieved emissions reductions as high as 90% of inlet Hg levels on bituminous coals. Performance on subbituminous coals has been as high as 65% reduction. In addition, systems with supplemental fabric filters have been more effective than those with ESPs. Although full scale sorbent injection tests have focused on activated carbon injection, DOE is also sponsoring pilot scale research on lower cost sorbents. DOE is now engaged in longer-term studies of sorbent injection technologies in order to gain the information needed to conduct multi-year commercial demonstrations of this technology. Given the differences in the effectiveness of this technology on coals of different rank and chlorine content, it is likely that several demonstration projects will be necessary to establish predictable cost and performance for this type of Hg control.

b.
Enhanced Conventional Technologies.
Air pollution systems designed to capture emissions of sulfur dioxide (SO
2
) and particulate matter (PM) generally capture some Hg emissions as well. DOE is investigating methods to enhance the performance of such systems on Hg emissions capture. In general, these systems seek to increase the oxidized fraction of Hg present in the power plant's flue gas, and decrease the fraction of elemental Hg, which is more difficult to capture. DOE has had mixed results from injecting chemicals to enhance the Hg removal by wet scrubbers designed for SO
2
capture. URS Corporation is working with DOE to develop catalytic approaches to oxidizing elemental Hg in flue gases. This program began in 2001 and will continue through 2004.

c.
Multi-Pollutant Capture Technologies.
Multi-pollutant approaches have potential synergies which could increase pollution reduction and lower control costs. Work with the Electro-catalytic oxidation process under development by Powerspan Corporation was initiated in 2001 and will continue through 2004. Early pilot-scale results have been encouraging, but the inlet Hg for these tests was much lower in elemental Hg than levels expected at many commercial sites. Additional elemental Hg is being added to the test system to simulate removal at other sites.

Calcium-based sorbents and oxidizing agents are being evaluated under a cooperative agreement between DOE and the Southern Research Institute. These systems could remove both SO
2
and Hg, and could be helpful particularly with lower rank coals.

d.
Novel Approaches to Mercury Control.
It has long been observed that poorly tuned coal burners generate higher levels of unburned carbon in coal ash than properly tuned burners. This unburned carbon, although undesirable from an efficiency perspective, can function like activated carbon injection and adsorb Hg emissions. DOE has patented a process to take advantage of this phenomenon by extracting partially combusted coal from the furnace, and reinjecting it in the flue gas after the air preheater. Pilot-scale tests have been very promising.

DOE is also investigating the ability of a specific wavelength of ultraviolet light to oxidize elemental Hg to a form more easily captured by conventional air pollution control equipment.

2. Longer-Term Field Tests

In contrast to most of DOE's short-term Hg R&D projects, in September 2003, DOE initiated a series of eight longer-term, large-scale field tests that will investigate the potential for improvements and more wide-spread applicability of Hg control using one or more of the approaches outlined above. The actual testing varies by project, but generally will begin in early 2004 and last for several months. Technologies to be evaluated include both sorbent-based approaches, like activated carbon injection, as well as oxidation-based approaches intended to improve Hg collection by more traditional air pollution control technologies.

3. Initial Mercury Demonstration Projects

As discussed above, the DOE and ORD R&D programs are complemented by a demonstration program within the Clean Coal Power Initiative. In January 2003, DOE announced the first awards under this program,
4

including the following two projects that would demonstrate Hg emissions reduction technologies:

4

See http://www.fe.doe.gov/news/techlines/03/tl_ccpi_2003sel.html.

Wisconsin Electric Power Company's Presque Isle plant will evaluate the TOXECON process combined with chemical additives as an integrated Hg, particulate matter, SO
2
, and NO
X
emissions control system. In this project, sorbents, including powdered activated carbon for Hg control and chemicals for NO
X
and SO
2
control, will be injected into flue gas for subsequent reaction with pollutants and collection in a pulse-jet baghouse that is installed downstream of the existing particulate control device. The TOXECON configuration allows for separate treatment or disposal of the ash collected in the primary particulate control device. The duration of the project is estimated to be 5 years, and its overall cost is $75 million.

The City of Colorado Springs is teaming with Foster Wheeler to demonstrate an advanced circulating fluidized bed combustor, with integrated pollution controls expected to reduce Hg emissions by over 90 percent. This 6-year project carries a total cost of just over $300 million.

These projects evidence the commitment of project participants, including DOE and ORD, to invest the resources needed to bring promising Hg control concepts to commercial readiness. We believe the nature of the Hg control challenge is so complex that a number of additional demonstration projects will be needed, but we are confident that resources will be made available to pursue those projects and solutions will be developed that have broad application.

4. The Timing of Technology Development and Commercialization

The normal flow of development of new technologies is R&D at the bench scale and pilot scale (typically 2 to 4 years), followed by large scale testing (typically one year under a range of operating conditions and technology configurations at a facility), followed by one or more cycles of full-scale demonstrations (typically 6 years each).

In implementing the Clean Coal Technology Program, DOE has gained extensive experience with the process of demonstrating emerging air pollution control technologies. Based on SO
2
and NO
X
retrofit technology demonstrations, the typical project required a little over 6 years from selection of the project to reports on its technical performance. This time period excluded the administrative time needed to solicit and evaluate proposals. In addition, the actual project duration was truncated for one-half of these projects to exclude unusually lengthy reporting periods following completion of the technology testing period.

Although pursuit is continuing on some Hg emissions control technologies at the bench and pilot scale, much work has already been completed at these smaller scales. However, some technologies, like sorbent injection, have entered the large scale field testing stage, and we have initiated a full-scale demonstration project for sorbent injection technology. It appears that these technologies, with at least 50-70% Hg emissions reduction, will be ready for broader full-scale demonstration on bituminous coal in 2005, and on subbituminous coal and lignite in 2007. If these demonstrations are successful, commercial deployment could occur on a large scale after 2010, or perhaps later. Assuming two years to permit and construct such commercial units, large scale operation of the technology is feasible by 2013 and 2015. It is important to note that reliable and predictable performance will be achieved only if such demonstration projects can be completed on a range of coal types with a range of characteristics (such as Hg, chlorine, and sulfur content), and at plants with a range of hardware (ESPs of varying relative sizes; spray dryers on coals with low chlorine content). Additional technologies, perhaps much lower in costs, should follow in 2-4 additional years.

Greater Hg emissions reduction performance is an integral part of DOE's and ORD's Hg emissions control technology development programs. A second wave of technologies operating at 90% reduction should be ready for full-scale demonstration by 2010, leading to effective reductions after 2018. An important caveat to these time projections is that they could be extended if the same units being retrofit for Hg emissions must contemporaneously focus on installing separate pollution control systems for other pollutants. The significance of this potential problem will vary with the type of control technologies being installed.

Substantial progress in Hg control technology development has been achieved through a partnership between government (both ORD and DOE) and industry. A broad portfolio of technologies is beginning to emerge, and EPA is confident these technologies will most likely be able to provide 50 to 70% reduction of Hg emissions in the period after 2015, with up to 90% reduction of Hg emissions on many applications after 2018. Thus, EPA is proposing a Phase II cap of 15 tons in this supplemental notice, which will take full advantage of the emerging, demonstrated technologies that are outlined above. More details and actual demonstration data are available in the docket related to this rulemaking effort.

D. Compliance Date for Nickel Controls

In the January 30, 2004 NPR, EPA proposed that the compliance date for Ni controls under section 111(d) correspond to the 2010 compliance date for the Phase I Hg controls. EPA concluded that the compliance dates for the two sets of controls should be synchronized. The oil-fired unit population is limited (the number of existing units is approximately 130) and their primary use is in providing peak shaving power during periods of high electricity demand. Moreover, current industry guidance indicates that the viability of new oil-fired generation is extremely limited due to the economic and generation efficiencies afforded by natural gas-fired simple- and combine-cycle stationary combustion turbine units.

III. Emission Guidelines and Compliance Times for Coal-Fired Electric Utility Steam Generating Units

In the January 30, 2004 NPR to reduce national mercury emissions, EPA stated that it would develop and administer a national Hg trading program to assist States in the achievement of these goals; today's notice proposes such a program. This program employs a cap on total emissions in order to ensure that emissions reductions are achieved, while providing the flexibility and cost effectiveness of a market-based system. This Section provides background information and a description of the Hg Budget Trading Program, as well as an explanation of how the trading program would interface with other State and Federal programs. In addition, a model rule for the trading program is proposed. States can voluntarily choose to participate in the Hg Budget Trading Program, and they may do so by adopting the model rule, which is a fully approvable control strategy for achieving emissions reductions required under the mercury reduction rulemaking. States may submit rules

other than the model rule, but EPA will need to review such rules. States who do not adopt the model trading rule cannot participate in the inter-state trading program administered by EPA.

More specifically, States that choose to participate in the Hg Budget Trading Program must adopt all the provisions of the model rule, except that they have the flexibility with respect to the requirements for allocating allowances to their sources. The applicability of the model trading rule is discussed more fully below. EPA must review these State rules through notice-and-comment rulemaking, but this rulemaking will be expedited for, at the least, those State rules that mirror the model rule. If a State does not choose to participate in the Hg Budget Trading Program (that is, it does not wish to allow its sources to participate in inter-state trading, and it may or may not wish allow its sources to participate in intra-state trading), then the State may submit rules other than the model rule, and EPA will evaluate these rules in the regular course of notice-and-comment rulemaking.

A. Program Summary

As discussed in the January 30, 2004 NPR, the trading program establishes, for affected utility units, a first phase Hg cap at a level that reflects the Hg reductions expected as co-benefits accompanying the SO
2
and NO
X
caps in the IAQR in 2010 and 2015 and a Phase II cap of 15 tons starting in 2018. The new trading program for Hg would require sources to hold allowances covering emissions beginning January 1, 2010. EPA is also proposing that the owner or operator must hold allowances for all the affected Utility Units at a facility at least equal to the total Hg emissions for those units during the year. Compliance with the requirement to hold allowances will thus be determined on a facility-wide basis. In the January 30, 2004 NPR, EPA proposed a methodology for unit allocations for existing units (
see
69 FR 4651). New units will also be covered under the Hg cap of the trading program and will be required to hold allowances.

B. Hg Budget Trading Program

1. General Provisions

Today's proposed Hg Budget Trading Rule will be incorporated into the 40 CFR part 60 as a new subpart HHHH. The new sections in subpart HHHH of 40 CFR part 60 are described below. The provisions of 40 CFR part 60 subpart HHHH will become effective and apply to sources only if a State incorporates 40 CFR part 60 subpart HHHH by reference into the State's regulation or adopts regulations that are in accordance with 40 CFR part 60 subpart HHHH.

a.
Overview and Purpose.
Section 60.4100 through 60.4106 of today's proposed Hg Budget Trading Rule includes Sections describing: to whom the Hg trading program would apply; the standard requirements for participants in the program (permitting, Hg allowances, monitoring, excess emissions, and liability provisions); exemptions for retired units from the program requirements; definitions, measurements, and abbreviations; and computation of deadlines stated within the proposal.

b.
Definitions, Measurements, Abbreviations, and Acronyms.
Many of the definitions, measurements, abbreviations, and acronyms are the same as those used in 40 CFR part 60, in order to maintain consistency among programs. However, certain terms specific to the Hg Budget Trading Program, including Hg Budget unit (a unit subject to the emissions limitation under the Hg Budget Trading Program) and several others are added. Key definitions are discussed in relevant Sections below describing the rule.

c.
Applicability.
The EPA proposes that the Hg Budget Trading Rule be applicable to coal-fired Utility Units. The term “electric utility steam generating unit” means any fossil fuel fired combustion unit that serves a generator of more than 25 MW that produces electricity for sale. A unit that cogenerates steam and serves a generator that supplies more than one-third of its potential electric output capacity and more than 25 MW electrical output to any utility power distribution system for sale shall be considered an Utility Unit.

i.
Monitoring.
In general, sources that participate in a cap-and-trade program must have the ability to accurately and consistently account for their emissions. Accuracy is an important design parameter because it ensures that emissions for all sources covered by the trading program are within the cap. In addition, because each Hg allowance will have economic value, it is important to ensure that emissions (and thus allowances used) are accurately quantified. Consistency is an important feature because it ensures that accuracy is maintained from source to source and year to year. It also ensures that the sources in the trading program are treated equitably. Finally, consistency facilitates administration of the program for both the regulated community and State and Federal agencies.

Consistent and accurate quantification of emissions ensures the integrity of a Hg reduction program. The continuous emissions monitoring methods must incorporate rigorous quality assurance testing and substitute data provisions for times when monitors are unavailable because of planned and unplanned outages. In addition, there must be requirements for record keeping and electronic reporting. Provisions like these are contained in 40 CFR part 75, and are used in both the Acid Rain and NO
X
SIP Call programs, for SO
2
and NO
X
, but not currently for Hg.

As discussed further below, EPA is proposing revisions to 40 CFR part 75 to establish requirements for mercury emission monitoring, quality assurance, substitute data, record keeping, and reporting and to include a requirement for States to require year-round part 75 monitoring and reporting for all sources. EPA believes that emissions will then be consistently and accurately monitored and reported from unit to unit and from State to State.

ii.
Responsible Party.
Another critical element of a trading program is to be able to identify a responsible party for each regulated source. The responsible party for a source covered by the trading program would be required to demonstrate compliance with the provisions of the Hg Budget Trading Program. In general, the coal-fired electric Utility Units included in the proposed trading program have readily identifiable owners and operators that would serve as the responsible party.

d.
Retired Unit Exemption.
Section 60.4105 of today's proposal provides an exemption from Hg Budget Trading Program requirements for retired units. The purpose of this provision is to free retired Hg Budget units from unnecessary requirements (
e.g.
, emissions monitoring and reporting). The EPA proposes an exemption beginning on the day the unit permanently retires, requiring no notice and comment period regarding the retirement. This provision proposes that the mercury authorized account representative (Hg AAR) (
i.e.
, the person authorized by the owners and operators to make submissions and handle other matters) submit notification to the permitting authority of the Hg Budget unit's retirement within 30 days of the cessation of activity. In response, the permitting authority would amend the operating permit in accordance with the exemption and notify EPA of the unit's status as exempt. Criteria within this provision ensure that all program requirements prior to the exemption are fulfilled and records are kept on site to verify the non-emitting status of the retired unit. A retired unit could continue to hold Hg allowances

previously allocated or be allocated Hg allowances in the future depending on the allocation provisions adopted by the State where the retired unit is located. The number of future year Hg allowances that a retired unit would be allocated would be dependent on the given State's allocation system. The Hg allowance allocations are discussed below in Section II.B.5 of this preamble.

In order to resume operation without violating program requirements (
i.e.
, an exemption requires that the unit's permit language be changed to reflect that it would not emit any Hg emissions), the Hg AAR of the Hg Budget unit must submit a permit application to the permitting authority no less than 18 months (or less, if so specified by the applicable State permitting regulations) prior to the date on which the unit is first to resume operation, to allow the permitting authority time to review and approve the application for the unit's re-entry into the program. If a retired unit resumes operation, EPA proposes to automatically terminate the exemption under this part.

e.
Standard Requirements.
Today's proposal delineates, in proposed § 60.4106, the standard requirements that Hg budget units and their owners, operators, and Hg AARs must meet under the Hg Budget Trading Program. This provision sets forth and provides references to other portions of the trading rule for the full range of program requirements: permits, monitoring, Hg emissions limitations, excess emissions, recordkeeping and reporting, liability, and effect on other authorities. For example, the permitting, monitoring, and emissions limit requirements are discussed in general and the relevant Sections of the trading rule are cited. The liability provisions state that the requirements of the trading program must be met, and any knowing violations or false statements are subject to enforcement under the applicable State or Federal law. Violations and the associated liability are established on a facility-wide basis. The provision addressing the effect on other authorities establishes that no provision of the trading program can be construed to exempt the owners or operators of a Hg Budget source from compliance with any other provision of the applicable SIP, any federally enforceable permit, or the CAA. This provision ensures, for example, that a State may set a binding source-specific Hg limitation and, regardless of how many allowances a Hg Budget source holds under the trading program, the emissions limit established in the SIP cannot be violated.

f.
Computation of Time.
Proposed § 60.4107 clarifies how to determine the deadlines referenced in the proposal. For example, deadlines falling on a weekend or holiday are extended to the next business day. These are the same computation-of-time provisions as are in the regulation for the other emissions trading programs.

2. Hg Authorized Account Representative (AAR)

Sections 60.4110 through 60.4114 of today's proposed Hg Budget Trading Rule establishes the process for certifying the Hg AAR and describes his or her duties. A Hg AAR is the individual who is authorized to represent the owners and operators of each Hg Budget unit at a Hg Budget source in matters pertaining to the Hg Budget Trading Program. Because the Hg AAR is representing the owners and operators of all the Hg Budget units at a Hg Budget source, the Hg AAR must certify that he or she was selected by an agreement binding on all such owners and operators and is authorized to act on their behalf. The Hg AAR's responsibilities include: the submission of permit applications to the permitting authority, submission of monitoring plans and certification applications, holding and transferring Hg allowances, and submission of emissions data and compliance reports.

The Agency recognizes that the Hg AAR cannot always be available to perform his or her duties. Therefore, the rule proposes to allow for the appointment of one alternate Hg AAR (alternate Hg AAR) for a Hg Budget source. The alternate Hg AAR would have the same authority and responsibilities as the Hg AAR. Therefore, unless expressly provided to the contrary, whenever the term “Hg authorized account representative” is used in the rule, it should be read to apply to the alternate Hg AAR as well. While the alternate Hg AAR would have full authority to act on behalf of the Hg AAR, all correspondence from EPA, including reports, would be sent only to the Hg AAR.

Today's proposal requires the completion and submission of the account certificate of representation form in order to certify a Hg AAR for a Hg Budget source and all Hg Budget units at the source. There would be one standard form which would be submitted by sources to EPA. The EPA would establish a compliance account for each source in the mercury allownce tracking system (MATS). The form would include: the plant name, State, and identifying number (ORIS or facility code); the identifying number of each Hg budget unit at the source; the Hg AAR name, the Hg AAR identification number (if already assigned), address, phone, fax, and e-mail (as well as similar information for the alternate Hg AAR, if applicable); the name of every owner and operator of the source and each Hg Budget unit at the source; and certification language and signature of the Hg AAR and alternate, if applicable.

In order to change the Hg AAR, alternate Hg AAR, or list of owners and operators, EPA is proposing that a new complete account certificate of representation be submitted. The EPA believes the Hg AAR requirements afford the regulated community with flexibility, while ensuring source accountability and simplifying the administration of the trading program. These submissions can be made electronically to EPA.

3. Permits

a.
General Requirements.
The EPA has attempted to minimize the number of new procedural requirements for Hg Budget permitting and to defer, whenever possible, to the permitting programs already established by the permitting authority. The proposed Hg Budget Trading Program regulations assume that the Hg Budget permit would be a portion of a federally enforceable permit issued to the Hg Budget source and administered through permitting vehicles such as operating permits programs established under title V of the CAA and 40 CFR part 70. The term “Hg Budget permit” throughout this preamble and the Hg Budget Trading Program regulations therefore refers to the Hg Budget Trading Program portion of the permit issued by the permitting authority to a Hg Budget source.

b.
Hg Budget Permit Application Deadlines.
The proposed rule sets the initial Hg Budget permit application deadlines for units in operation before January 1, 2007 so that the permits will be issued by January 1, 2010. January 1, 2010 is the beginning of the first control period for the Hg Budget Trading Program, and therefore also the date by which initial Hg Budget permits for existing units must be effective. Application submission deadlines are based on the permitting authority's title V permitting regulations. For instance, if a permitting authority's permitting regulations allowed 12 months for final action by the permitting authority on a permit application, the application deadline for units in operation before 2007 governed by the permitting rule would be January 1, 2009 (12 months prior to January 1, 2010). The same principle applies to Hg Budget units

commencing operation on or after January 1, 2007, except that the application submission deadline is the later of the date the Hg Budget unit commences operation or January 1, 2010. The Hg Budget permit renewal application deadlines are the same as those that apply to permit renewal applications in general for sources under title V. For instance, if a permitting authority requires submission of a title V permit renewal application by a date which is 12 months in advance of a title V permit's expiration, the same date would also apply to the Hg Budget permit application.

c.
Hg Budget Trading Program Permit Application.
The Hg Budget Trading Program requires that a Hg Budget permit application properly identify the source and include the standard requirements under proposed § 60.4121. The Hg Budget Trading Program permit application should include all elements of the program (including the standard requirements). Such an approach allows the permitting authority to incorporate virtually all of the applicable Hg Budget Trading Program requirements into a Hg Budget permit by including as part of such permit the Hg Budget permit application submitted by the source. Directly incorporating the Hg Budget permit application into the Hg Budget permit and, thus, into the source's operating permit or the overarching permit minimizes the administrative burden on the permitting authority of including the Hg Budget Trading Program applicable requirements.

d.
Hg Budget Permit Issuance.
As stated earlier, most of the procedures needed by a permitting authority to issue Hg Budget permits have already been established by the permitting authority through permitting vehicles such as operating permits programs under title V and 40 CFR part 70 or 71. Generally, the permits regulations promulgated by the permitting authority cover: permit application, permit application shield, permit duration, permit shield, permit issuance, permit revision and reopening, public participation, and State and EPA review. The proposed Hg Budget Trading Program permit regulations generally require use of the procedures under these other regulations and add some requirements such as Hg Budget permit application submission and renewal deadlines, Hg Budget permit application information requirements and permit content, and initial Hg Budget permit effective dates.

e.
Hg Budget Permit Revisions.
For revisions to the Hg Budget permit, the Hg Budget Trading Program again defers to the regulations addressing permits revisions promulgated by the permitting authority under title V and 40 CFR part 70 or 71. The proposal also provides that the allocation, transfer, or deduction of Hg allowances is automatically incorporated in the Hg Budget permit, and does not require a permit revision or reopening by the permitting authority. The Hg Budget permit must, however, expressly state that each source must hold enough Hg allowances to account for Hg emissions by the allowance transfer deadline for each control period. The EPA believes that requiring the permitting authority to revise or reopen a Hg Budget permit each time a Hg allowance allocation, transfer, or deduction is made would be burdensome and unnecessary.

4. Compliance Certification

Sections 60.4130 through 60.4131 of today's proposed Hg Budget Trading Rule sets forth the requirements concerning certification by the Hg AAR at the end of each control period that the Hg Budget units at the facility were in compliance with the emissions limitation and other requirements of the Hg Budget Trading Program. The Hg AAR must submit a compliance certification report for the Hg Budget units at each facility by March 1 following the control period, to both the permitting authority and the Administrator. This report must identify the Hg Budget units and the Hg Budget source, and include a compliance certification statement. The compliance certification statement must indicate whether all of the applicable requirements of the Hg Budget Trading Program, including the requirement to hold allowances greater than or equal to emissions and the requirement to monitor and report according to the provisions in § 60.4106 of today's proposal, were met by the unit for the most recent control period. The report also allows the Hg AAR to specify which allowances (by serial number) should be deducted from the Hg Budget facility's compliance account.

5. Hg Allowance Allocations

Sections 60.4140 through 60.4142 of today's proposed model rule addresses the allocation of Hg allowances to Hg Budget units. Within each participating State, the Hg Budget Trading Program would establish a State trading program budget (
i.e.,
a cap of annual Hg emissions for all units included in the program), which is the total number of Hg allowances that each State may allocate to its Hg Budget units for each control period. Section 60.4141 of today's proposed rule sets timing requirements for when the allocations should be completed by each State and submitted to EPA for inclusion into the MATS and provides an option for how States may allocate Hg allowances to the Hg Budget units. States have the flexibility to allocate their state budget to individual units however they choose.

a.
State Trading Program Budget.
The January 30, 2004 NPR proposed a formula for determining the total amount of emissions for the Budget Trading Program within a specific Sate for 2010, and, using that same mechanism, proposed the amount of emissions for the Program within each State for 2018. That formula is, in essence, the sum of the hypothetical allocations to each affected Utility Unit in the State, and that allocation, in turn, is based on the proportionate share of their baseline heat input to total heat input of all affected units. For purposes of this hypothetical allocation of the allowances, each unit's baseline heat input is adjusted to reflect the ranks of coal combusted by the unit during the baseline period. Adjustment factors of 1 for bituminous, 1.25 for subbituminous, and 3 for lignite coals were proposed in the NPR. These adjustment factors and the methodology for determining the State budgets are described in the memorandum entitled “Allocation Adjustment Factors for the Proposed Mercury Trading Rulemaking” in the docket. Alternatively, for purposes of this hypothetical allocation of allowances to Utility Units which where used to calculate the State budgets, EPA could have used the proposed MACT emission rate proposed in the NPR and the proportionate share of their baseline heat input to total heat input of all affected units. EPA solicits comment on this alternative to calculate State budgets. As noted above, the sum of the unit emission allowances in a State would comprise the State's emissions budget.

EPA proposes today that each State be required to submit a state plan under section 111(d) that assures that the State budget is met by capping emissions, through the allocation of allowances, from each affected Utility Unit. The State may allocate allowances to Utility Units in any manner it wishes, as long as the total number of allowances does not exceed the State budget. The State is not required to allocate allowances to each affected Utility Unit in accordance with the allocation option proposed in Section III.B.4.c below or the formula used to determine the State budget. Those unit-specific allocations are hypothetical and determined solely for accounting purposes.

EPA does, however, solicit comment on whether to require the State to allocate allowances to each affected Utility Unit in accordance with this hypothetical allocation. EPA recognizes that statements in the NPR may be read to propose a requirement that the State must allocate allowances to each affected Utility Unit in accordance with this hypothetical allocation. Today's SNPR is proposing that the State may allocate allowances in accordance with its own methodology. EPA solicits comment on whether to authorize the State to have flexibility in the allowance allocation methodology, or whether to mandate that the State allocate allowances in accordance with the hypothetical allocation, depending on whether the State (i) authorizes its sources to participate in the interstate trading program, (ii) authorizes its sources to participate in only intra-state trading, or (iii) does not authorize its sources to trade allowances. Allocating allowances to sources using the hypothetical allocation methodology satisfies the requirements for States to meet the Standard of Performance required by section 111(d) because the hypothetical allocation is consistent with the State budgets and would ensure that the State budget and therefore the Standard of Performance is met. The docket for today's action includes a memorandum that describes in more detail the basis for EPA's proposed allocation methods.

Finally, it should be noted that the State may decide to allocate fewer total allowances to its sources than the amount of its budget.

b.
Timing Requirements.
Today's proposed rule sets minimum requirements for when a State would finalize Hg allowance allocations for each control period in the Hg Budget Trading Program and submit them to EPA for inclusion into the MATS. The proposed timing requirements ensure that all Hg Budget units would have sufficient time and the same minimum amount of time to plan for compliance for each control period and to trade Hg allowances. Finalizing allowances for less than three years in advance may restrict a Hg Budget unit's ability to plan for compliance by creating uncertainty year to year about the amount of future allocations that the Hg Budget unit would receive. It would also prevent a Hg Budget unit from officially transferring future year allowances because the MATS only contains the very near term years' allowances.

The timing requirements would also contribute to the efficient administration of the Hg Budget Trading Program. By establishing this schedule at the outset of the trading program, both the States and EPA would be able to develop internal procedures for effectively implementing the Hg allowance provisions of the trading program. This is particularly important for EPA with its role as administrator of the MATS for all participating States. The timing requirements would ensure that EPA would be able to record in the MATS the time sensitive Hg allowance allocations for the Hg Budget units in all participating States at the same time for each control period.

States may choose any of a number of options for the timing of issuing allowances, beyond the three year requirement, and that choice will interact to a great extent with the state's choice of method for allocating allowances. The timing options generally range from: (1) Year-by-year allocations, in which the Hg allowance allocations would be placed into the MATS on an annual basis for future control periods; (2) 5 to 10 year allocations where Hg allowance allocations would be periodically placed into the MATS for 5 to 10 consecutive control periods; and (3) a single, permanent allocation where the Hg allowance allocations would be set only once at the beginning of the trading program and recorded in the MATS for an extended, rolling block of time (
e.g.,
a rolling 30-year period). These timing options can apply to both an auctioning and a permanent allocation mechanism.

Timing options which provide an opportunity to periodically update the allocation of Hg allowances to Hg budget units might have certain advantages. These advantages include that an allocation regime which is periodically updated would provide an opportunity to reallocate allowances based on changes in the electricity industry that may significantly affect the mix of electricity generators that produce electricity in the future. Depending on the formula that is used to allocate the allowances, trading programs that periodically update the allocations may provide an opportunity to reward energy efficiency improvements at specific Hg Budget units. They could also facilitate the introduction of more efficient, new generation.

Permanent allocations provide a long planning horizon for the Hg Budget units that receive an allocation. Permanent allocations would not create incentives for the owners or operators of high emitting units to continue operating only for the sake of continuing to receive allowances, but would result in retired units receiving allowances in perpetuity. Additionally, permanent allocations provide an incentive to improve a Hg Budget unit's energy efficiency and require fewer resources to administer as compared to updating allocation systems. Nonetheless, these incentives would not affect the total emissions over time because the emissions are restricted by the cap, regardless of the allocation system. In a permanent allocation system, all allowances are allocated to Hg Budget units at the beginning of the trading program. New Hg Budget units that begin operations after the allocation of allowances would be required to obtain allowances from the market in order to comply with the trading program requirements (which may impede competition by hindering the entry of new units into the market), or there would need to be a new source set-aside that increased from year to year, coupled with a declining allocation to existing sources.

EPA is leaving the choice of timing of allocations largely up to the states, requiring only that they be finalized in the Hg Budget Trading Program and submitted to EPA for inclusion into the MATS three years in advance. This would ensure that all Hg Budget units would have sufficient time and the same minimum amount of time to plan for compliance for each control period and to trade Hg allowances. EPA is soliciting comments on this timing requirement.

A rolling annual updating system, determining allocations for a single control period six years in advance, has been developed in coordination with the example allocation approach provided in the subsequent section. The full example allocation approach is presented in the regulatory text. This example is offered as guidance and not as an implied requirement for the States to take part in the model trading program. At the start of the program, initial allocations would be made for the first five control periods of the program. Afterwards, annual updating would determine the allocations for the control period six years in advance. Consequently, units would always have in their accounts five years of allowances going forward, which would facilitate the operation of an efficient liquid allowance market and provide greater certainty to unit's compliance planning decisions, but might leave limited allowances in the near term for new units.

c.
Options for Hg Allowance Allocation Methodology Recommendation.
Allowance allocations decisions in a cap-and-trade program largely reflect distributional issues, as economic forces would be expected to result in economically

efficient and environmentally similar outcomes (except in cases of market failure). Consequently, the EPA is proposing to give states the flexibility to choose an allocations method most appropriate for their particular circumstances.

States have many different possible options and combinations in the development of an allocations methodology. The key design differences are: (1) Auction or free distribution of allowances; (2) permanent or updated allowances; and (3) allowances based on input-basis, output basis, or based on emission reductions. These options would differ in terms of the amount of allowances different sources receive, whether states generate revenue from the allowances, in their treatment of new coal-fired generation, in their difficulty of administration, and in their coordination with a safety valve mechanism.

Today's proposal allows the state to decide whether it will allocate allowances to sources for free, or hold an auction to sell them to bidders. Auctions, at which allowances would be offered for sale, would ensure all parties access to allowances, and would be efficient since sources would bid their perceived value for allowances. The pool of allowances to be auctioned would be created by specified procedures, such as setting aside a fixed or incremented percentage of allocations each year, or auctioning all available allowances. For example, in the current Acid Rain Program, one percent of available allowances could be used for auctions. The auctions would be open to any person (including sources or third-party entities), who would submit bids according to auction procedures, a bidding schedule, a bidding means, and requirements for financial guarantees specified in the regulations. Winning bids, and required payments, for allowances would be determined in accordance with the regulations. Auctions could be held regularly for single compliance periods, or less frequently for a block of years at a time. An auctioning method of allocations would work well with a safety valve mechanism, where allocations would be reduced from future budgets to reflect allowances purchases via the safety-valve. Auctions would also eliminate any potential disadvantage to new units in the market for allowances. Responsibility for managing auctions would fall to the individual states, which would also have full discretion as to the use of auction revenues. EPA solicits comment on whether it would have authority to charge purchasers for allowances, in the case of Federal plans promulgated under 111(d)(2)(A) (if the State fails to submit a State plan under section 111(d)(1)) or 112(n)(1)(A) (if EPA concludes that this provision provides regulatory authority). Any amounts collected by EPA would be deposited in the general revenues under the Miscellaneous Receipts Act.

However, requiring controlled sources to both reduce emissions and pay for allowances for their remaining emissions could impose significant costs on the emitting sources. Allocating allowances for free could provide assistance to the entities incurring most of the costs of complying with the necessary mercury reductions, lessening the financial impact of the program on these sources. It would also give states the ability to determine who would be the initial allowance recipients.

If a state decided to allocate allowances for free, the state would need to decide between permanent and updating allocations. As mentioned above, permanent allocations provide a long planning horizon and would not create incentives for the owners or operators of high emitting units to continue operating. However, since they are based on a historic baseline period, permanent allocations would not reflect changes in the industry going forward and sources would continue to receive allowances even after they retire. Permanent allocations do not provide for allowances to new Hg Budget units that begin operations after the allocation of allowances and these units would be required to obtain allowances from the market in order to comply with the trading program requirements. This could inhibit the entry of new units into the market.

A new source set-aside (taking away allowances from existing sources) could be created if there is a desire to encourage new generation and concern about the availability of allowances on the market. Alternately, a portion of allowances could be set aside and sold through an auction to make these allowances accessible. A drawback of these approaches is that it can be difficult to forecast the amount of the new sources over time and thus the appropriate size of the set-aside. Allowance requests resulting from the entry of numerous new sources could, in time, exceed the amount of allowances set aside.

Updating allocations provide an opportunity to reallocate allowances based on changes in the industry that may significantly affect the mix of generators that produce electricity in the future. By updating allocations, states would periodically review their basis for allocations and reallocate allowances to sources. Updating would include new generating units as they enter service and develop baseline data (input or output) for calculation of allocations. However, updating might also provide a subsidy to all generation, rewarding units for generating by providing them allocations based on generation (either input or output). Slightly different incentives would be provided depending on whether the updating is input or output-based. This may result in a slight distortion in the price of electricity, and might also encourage older units not to retire, although the total number of allowances (and thus emissions) are capped either way. Any such effects would be less pronounced with the lengthening of the period of time between the base-line and the actual receipt of the allocations.

Updating may be done annually for a period in advance, or periodically, with updates for several years at a time. The less frequent the updating, the more this program becomes like a permanent allocation. Updating also works well with a safety valve mechanism, as it provides the opportunity to reduce allocations from a future budget before they are allocated to reflect allowances purchases via the safety-valve mechanism.

This SNPR proposes to allow states to decide the basis for their allocation decisions, whether allocating through a permanent or updating method. Generally, allocations have considered using a baseline heat input (mmBtu of coal burned) or baseline generating output (kWh). In a permanent allocation, this decision has consequences that are purely distributional, with the output method favoring more efficient existing plants. If states want to have allocations reflect the difficulty of controlling for mercury, they might consider multiplying baseline data by ratios based on coal type (1.0 for bituminous, 1.25 for subbituminous, 3.0 for lignite for a heat input basis), similar to the methodology proposed in the NPR for determining state budgets.

Finally, states may consider hybrid systems, combining various aspects of the general approaches outlined above, in their choice of plan. In summary, the EPA is providing states with the flexibility to develop a plan which is best suited to their circumstances.

Included below is an example (offered for informational guidance) of an allocations methodology that includes allowances for new generation, addresses the safety-valve mechanism, and is administratively straightforward. The method involves input-based

allocations for existing coal units (with different ratios based on coal-type), with updating to take into account new coal generation on a modified output basis (without coal-type ratios). The method described for allocating to existing sources is also consistent with the hypothetical allocations relied on for determining the state budgets and described in the January 30, 2004 NPR and the memorandum entitled “Allocation Adjustment Factors for the Proposed Mercury Trading Rulemaking” in the docket.

Initial allocations for existing sources could be made for the first five control periods at the start of the program, on the basis of heat input and with different ratios based on coal-type. After the first 5 years, the budget will be distributed on an annual basis, taking into account data from new units.

As new units enter into service and establish a baseline, they begin to pick up allowances in relation to their generation. Allowances allocated to existing plants slowly decline as their share of total heat input decreases with the entry of new plants. In this EPA example methodology, existing units as a group would not update their heat input numbers. This would eliminate the potential generation subsidy (and efficiency loss) as well as an incentive for less efficient (and higher ratio) units to generate more. This methodology would also be easier to implement since it would not require the updating of existing units' baseline data. However, retiring units would continue to receive allowances indefinitely.

Through this EPA example methodology, new units as a group would only update their heat input numbers once—in the initial baseline period when they start operating. This would eliminate any potential generation subsidy and be easier to implement, since it would not require the collection and processing of data needed for regular updating.

EPA believes that allocating based on heat input data (rather than output data) for existing units is desirable because accurate protocols exist for monitoring this data and reporting it to EPA and several years of certified data are available for most of the affected sources. However, allocating on the basis of input for new sources would serve to subsidize less-efficient new generation. For a given generation capacity, the most efficient unit would have the lowest fuel input or heat input. Allocating to new units based on heat input may encourage the building of less efficient units since they would get more allowances than an efficient, lower heat input unit. The modified output approach, as described below, would encourage new clean generation and would not reward inefficient or high-emission new units.

Allowances would be allocated to new units on a modified output basis. Once new units have an adequate operating baseline (in the EPA example methodology, EPA proposes taking the average of the highest three years out of five years of operations), the total annual heat input of the affected units would be updated by adding the calculated new unit modified-output to the original existing coal-type-adjusted unit heat input. For purposes of including data from new units in the updated allocation calculation, new units would calculate their heat input by multiplying their gross output by a heat rate conversion factor of 8,000 btu/kWh. The 8,000 btu/kWh conversion factor was chosen as a mid-point between expected heat-rates for new pulverized coal plants and new IGCC coal plants as assumed in EPA's economic modeling analysis (IPM documentation at
http://www.epa.gov/airmarkets/epa-ipm/attachment-h.pdf
). This would create level benefits for new coal units based on their output and provide incentives for efficiency (rather than favoring higher heat-rate new units). A higher heat-rate conversion number would provide more incentive for new generation, and we are asking for comment as to the appropriate number. To calculate their modified output number, new coal-fired cogeneration units would add together their electric output and half of their equivalent electrical output energy in the unit's process steam and multiply this total by 8,000 btu/kWh. Allocations would be allocated to all units in proportion to their share of the updated, adjusted total heat input.

New units that have entered service, but have not yet established a baseline output and have not yet started receiving allowances through the update, could receive allowances each year from a new source set-aside. In the example methodology described in the model rule, EPA has proposed a new source set-aside representing two percent of the State's mercury trading program budget.

Allowances in the new source set-aside could be distributed in a number of different ways. For example, as described in today's model rule, the new source allowances could be distributed based on a unit's utilization/output and the unit's mercury emission NSPS rate limitation presented in the January 30, 2004 NPR. Because the proposed NSPS rates vary across coal types, this allocation method could provide new coal plant investors with varying incentives depending upon the coal type. While this set-aside would help new sources relative to no set-aside, because the demand for allowances for future sources is unknown, it is difficult to know beforehand what should be the appropriate size of the set-aside pool.

EPA is taking comment on a number of alternatives for distributing the new source set-aside in the example methodology. For example, a single emissions rate for all new coal plants may be used together with utilization/output levels to calculate allowance allocations for new coal units before they begin receiving allowances through the update. Alternatively, the lower of the NSPS rates for the respective coal types and a rate representing the proposed mercury cap in 2018 divided by projected 2018 total affected unit generation may be used to calculate allowance allocations for new coal units before they begin receiving allowances through the update. This alternative would ensure that new sources should receive allowances at the same rate as that applied to existing sources and no greater than their proposed NSPS. We ask for comment on these various proposals, and for any other alternatives commenters may wish to raise.

In today's proposed example allocation methodology, these new units would be granted allowances from the set-aside for the control period, initially based on the unit's full utilization rates. At the end of the year, the actual allowance allocation will be adjusted to account for actual unit utilization/output, and excess allowances will be returned and redistributed, first taking into account new unit requests that were not able to be addressed. Any subsequent unused set-aside allowances would be redistributed to existing units based on their existing allocations. An alternate method for allocating these allowances would provide new sources with allowances at the end of the relevant control period, based on their actual utilization. This would eliminate the need for returning and redistributing allowances, but would also deprive sources of the ability to trade those allowances during the course of the year. EPA is soliciting comment on the timing and method of allocating allowances from the set aside in the example methodology.

While EPA recognizes States' flexibility in choosing their allocations method and is proposing that States be allowed to determine their own method for allocating allowances to sources in their state, EPA is also asking for

comment on all aspects of this example allocations proposal.

6. Safety Valve Provision

In the January 30, 2004 NPR, EPA is proposing a safety valve provision that sets the maximum cost purchasers must pay for Hg emissions allowances. This provision addresses some of the uncertainty associated with the cost of Hg control.

Under the safety valve mechanism, the price of allowances is effectively (although not legally) capped. Sources may purchase allowances from subsequent year budgets at the safety-valve price at any time. However, it is unlikely they would do so unless the market allowance price exceeded the safety valve price. EPA proposes a price of $2,187.50 for a Hg allowance (covering one ounce) and this price will be annually adjusted for inflation. The permitting authority will deduct corresponding allowances from future allowance budgets. EPA solicits comment on whether it would have authority to charge purchasers this amount for allowances, in the case of Federal plans promulgated under 111(d)(2)(A) (if the State fails to submit a State plan under section 111(d)(1)) or 112(n)(1)(A) (if EPA concludes that this provision provides regulatory authority). Any amounts collected by EPA would be deposited in the general revenues under the Miscellaneous Receipts Act.

The purpose of this provision is to minimize unanticipated market volatility and provide more market information that industry can rely upon for compliance decisions. The safety valve mechanism ensures the cost of control does not exceed a certain level, but also ensures that emissions reductions are achieved. The future year cap is reduced by the borrowed amount, ensuring the integrity of the caps.

The safety valve mechanism would need to be incorporated into a state's chosen allocations methodology to ensure the availability of un-distributed allowances from which purchasers could borrow. Making allowances available through the safety valve without taking them away from future budgets would undermine the integrity of the cap. The safety valve mechanism would be easiest to incorporate into a system where allowances are periodically auctioned or updated because at least some portion of the State budgets would not have been previously allocated to individual units (which might not be the case in a permanent, historically based allocation method). Within EPA's example allocations methodology, the safety valve allowances borrowed from future budgets would be taken out of the pool of allowances available for units that have been generating for at least five years (not from the new source set aside) in the subsequent updating calculation of allocations. Under this allocation methodology, the future budget for the State would be lowered by the amount borrowed through the safety valve mechanism for the control period six years in advance.

We ask for comment on the need for a safety valve and the viability of our example approach, and solicit suggestions for other viable approaches.

7. Hg Allowance Tracking System

Sections 60.4150 through 60.4157 of today's proposed trading rule covers the mercury allowance tracking system (MATS). The proposed rule is intended to be reasonably consistent with the allowance tracking systems developed for the NO
X
SIP Call and Acid Rain Program. Such consistency would help to allow the integration of the a mercury trading program with the existing trading programs under the NO
X
SIP Call and Acid Rain Program and possible other NO
X
and SO
2
trading programs (under the IAQR) in the future. It would also save industry and government the time and resources necessary to develop new tracking systems.

The MATS would be an automated system used to track Hg allowances held by Hg Budget units under the Hg Budget Trading Program, as well as those allowances held by other organizations or individuals. Specifically, the MATS would track the allocation of all Hg allowances, holdings of Hg allowances in accounts, deduction of Hg allowances for compliance purposes, and transfers between accounts. The primary role of MATS is to provide an efficient, automated means of monitoring compliance with the Hg Budget Trading Program. The MATS would also provide the allowance market with a record of ownership of allowances, dates of allowance transfers, buyer and seller information, and the serial numbers of allowances transferred. Although today's proposal assigns each allowance a unique serial number, EPA requests comments on the necessity of serial numbers and on whether the administrative burden to allowance holders and EPA of tracking and reporting serial numbers outweighs the benefits of serial numbers for tax and accounting purposes.

The EPA is proposing that MATS contain two primary types of accounts: Compliance accounts and general accounts. Compliance accounts are created for each Hg Budget source with one or more Hg Budget units, upon receipt of the account certificate of representation form. General accounts are created for any organization or individual upon receipt of a general account information form.

a.
Compliance Accounts.
As part of the implementation of the Hg Budget Trading Program, EPA is proposing to establish compliance accounts for each Hg Budget source upon receipt of the account certificate of representation form. These accounts would be identified by a 12-digit account number incorporating the plant's Office of Regulatory Information System's (ORIS) code or facility identification number. Allocations for the first six years (2010-2015), as prescribed by each State, would be transferred into these compliance accounts prior to the first control period in 2010. Prior to the second control period, in 2011, and each year thereafter, allocations for the new sixth year, as prescribed by each State, would be transferred into each compliance account (
e.g.
, in 2011, year 2016 Hg allowances would be allocated). As for the deadline for transferring Hg allowances to cover emissions in the control period (
i.e.
, the Hg allowance transfer deadline of midnight on March 1 following the control period), each compliance account must hold sufficient Hg allowances to cover the Hg Budget source's Hg emissions for the prior year's control period. Utility companies may use general accounts to hold surplus allowances (as has been done in the Acid Rain Program) for trading and banking. Brokers and other entities use general accounts to hold allowances that are intended to be traded.

b.
Compliance.
Once a control period has ended, Hg Budget source would have a window of opportunity (
i.e.
, until the Hg allowance transfer deadline of midnight on March 1 following the control period) to evaluate their reported emissions and obtain any additional Hg allowances (including safety valve allowances) they may need to cover the emissions during the year. On March 1 following each control period, the Hg AAR must also submit a compliance certification report for each Hg Budget source. Should the Hg Budget source not obtain sufficient Hg allowances to offset emissions for the season, three Hg allowances for each ounce of excess emissions would be deducted from the source's compliance account for the following control period. EPA believes that it is important to set up this automatic offset deduction because it ensures that non-compliance with the Hg emission limitations of this

part is a more expensive option than controlling emissions. EPA required the same offset deduction of three to one in the NO
X
SIP call, and is taking comment on the use of the same ratio is today's proposed rule. The automatic offset provisions do not limit the ability of the permitting authority or EPA to take enforcement action under State law or the CAA.

c.
General Accounts.
Today's proposal allows any person or group to open a general account in MATS. These accounts would be identified by the “9999” that would compose the first four digits of the MATS account number. Unlike compliance accounts, general accounts cannot be used for compliance but can be used for holding or trading Hg allowances (
e.g.
, by Hg allowance brokers or owners of multiple Hg Budget units or sources). General accounts are currently used for both SO
2
allowances in the Acid Rain Program and NO
X
allowances in the NO
X
Budget Trading Program.

To open a general account, a person or group must complete the standard general account information form, which is similar to the account certificate of representation that precedes the opening of a compliance account and any overdraft account. The form would include: the Hg AAR name, phone, fax, and e-mail (as well as similar information for the Alternate Hg AAR, if applicable); Hg AAR mailing address; the names of all parties with an ownership interest with the respect to the Hg allowances in the account; and certification language and signatures of the Hg AAR and alternate, if applicable.

Revisions to information regarding an existing general account are made by submitting a new general account information form which would be sent to EPA in all cases, whether the form is used to open a new account, or revise information on an existing one. The EPA would notify the Hg AAR cited on the application of the establishment of his or her account in the MATS or of the registration of requested changes.

8. Banking

Banking is the retention of unused allowances from one control period for use in a later control period. Banking allows sources to create reductions beyond required levels and “bank” the unused allowances for use later. Generally speaking, banking has several advantages: It can encourage earlier or greater reductions than are required from sources, stimulate the market and encourage efficiency, and provide flexibility in achieving emissions reduction goals (
e.g.
, by allowing for periodic increased generation activity that may occur in response to interruptions of power supply from non-Hg emitting sources). In addition, a banked allowance is one less ounce of pollutant emitted in a given year. On the other hand, banking may result in banked allowances being used to allow emissions in a given year to exceed a State's trading program budget.

EPA is proposing that banking of allowances after the start of the Hg trading program be allowed with no restriction. Banking after a program starts and the budget is imposed allows sources to retain any allowances not surrendered for compliance at the end of each control period. Once the trading program budget is in place, sources may over-control for one or more seasons and withdraw from the bank in a later season. This type of banking provides the general advantages as described above (encourages early reductions, stimulates the market, and provides flexibility to sources), while also potentially causing Hg emissions in some control periods to be greater than the allowances allocated for those seasons.

9. Allowance Transfers

The EPA is proposing that once a Hg AAR is appointed and an account is established in the MATS, Hg allowances can be transferred to or from the accounts with the submission of an allowance transfer form to EPA. Transfers can occur between any accounts at any time of year with one exception: transfers of current and past year allowances into and out of compliance accounts are prohibited after the Hg allowance transfer deadline (March 1 following each control period) until EPA completes the annual reconciliation process by deducting the necessary allowances.

There would be one standard Hg allowance transfer form. This form would be submitted to the EPA in all cases. This form can be submitted electronically. The form would include: the transferror and transferee MATS account numbers; the transferror's printed name, phone number, signature, and date of signature; and a list of allowances to be transferred, by serial number.

10. Emissions Monitoring and Reporting

Monitoring and reporting of an affected source's emissions are integral parts of any cap-and-trade program. Consistent and accurate measurement of emissions ensures that each allowance actually represents one ounce of emissions and that one ounce of reported emissions from one source is equivalent to one ounce of reported emissions from another source. This establishes the integrity of each allowance and instills confidence in the market mechanisms that are designed to provide sources with flexibility in achieving compliance.

Given the variability in the type, operation, and fuel mix of sources in the proposed Hg cap-and-trade program, EPA believes that emissions must be monitored continuously in order to ensure the precision, reliability, accuracy, and timeliness of emissions data that support the cap-and-trade program. The EPA is proposing to allow two methodologies for continuously monitoring mercury emissions: (1) Mercury continuous emission monitoring systems (CEMS); and (2) sorbent trap monitoring systems. Based on preliminary evaluations, EPA believes it is reasonable to expect that both technologies will be well-developed by the time a mercury emissions trading program is implemented.

The EPA is proposing, and solicits comment on, two alternative approaches for the continuous monitoring of Hg emissions, as described below and discussed in more detail in section II.B of the Appendix A to this preamble.

In the first alternative, most sources would be required to use CEMS, with low-emitting sources having Hg emissions at or below a specified threshold value being allowed to use sorbent trap monitoring systems. The proposed threshold value is 9 lb (144 ounces) of Hg emissions per year (based on a 3-year average), although EPA is taking comment on three alternative thresholds of 29, 46, and 76 lb/yr.

Alternative 1 represents EPA's traditional approach to implementing an emissions trading program. The Acid Rain Program, as established by Congress in the 1990 Amendments to the Act, required the use of CEMS or an alternative monitoring system that is demonstrated to provide information with the same precision, reliability, accuracy, and timeliness as a CEMS. In implementing that program, as well as the NO
X
Budget Trading Program, EPA has allowed alternatives to CEMS only where the emissions contributed by a particular category of affected sources are at a low level in comparison to the emissions cap for the program, or where an alternative monitoring system has been demonstrated, according to specified criteria, to meet the standard Congress set.

In the second alternative, all sources would be allowed to use either CEMS or sorbent trap monitoring systems. Those sources whose Hg emissions are above the specified emission threshold would

choose between CEMS and sorbent trap monitoring with quality assurance (QA) procedures comparable to a CEMS, to ensure the accuracy of measurements made for program compliance.

The QA requirements for the Acid Rain Program mandated by Congress under the Act have been codified in Appendices A and B of the Acid Rain Continuous Monitoring Regulation (40 CFR part 75). Part 75 specifies that each CEMS must undergo rigorous initial certification testing and periodic quality assurance testing thereafter, including the use of relative accuracy test audits (RATAs). A standard set of data validation rules and substitute data procedures apply to all of the CEMS. These stringent requirements provide an accurate accounting of the mass emissions from each affected source, and provide prompt feedback if the monitoring system is not operating properly. This ensures a level playing field among the regulated sources with accurate accounting for every ton of emissions, which inspires confidence in the trading of allowances.

For the purposes of a Hg emissions trading program, EPA believes that the same high level of QA should be required for both CEMS and sorbent trap monitoring systems, particularly for the higher-emitting sources that are responsible for the bulk of the Hg emissions. To achieve this, proposed Alternative 2 would require that for the sources with Hg emissions above the specified threshold value, a minimum of one substantive QA test of each monitoring system would be performed each quarter. A quarterly linearity check of each CEMS would be required, as well as an annual RATA. For the sorbent trap systems, which cannot accept calibration gas and, therefore, cannot be tested for linearity, an annual RATA and three quarterly 3-run relative accuracy audits (RAAs) would be required. This general approach to quality-assurance of continuous monitoring systems is consistent with both Part 75, Appendix B, and with Appendix F to 40 CFR part 60. However, the EPA is willing to consider replacing the RAA requirement with another type of substantive quarterly QA test, if commenters who favor the use of sorbent trap systems are aware of, and can provide details of, any such test or procedure.

For affected sources with Hg emissions at or below the specified threshold value, Alternative 2 would still require quarterly linearity checks and annual RATA for Hg CEMS, but for the sorbent trap monitoring systems, only an annual RATA would be required—the quarterly RAA requirement would be dropped.

The use of sorbent trap monitoring systems as an alternative to CEMS for monitoring Hg emissions has been proposed by EPA for determining compliance under either of the alternative non-trading approaches in the NPR for regulating Hg emissions from coal-fired utility units. The proposed QA requirements for CEMS and sorbent trap systems in Alternative 2 above are more stringent than the proposed QA requirements for monitoring compliance with the non-trading compliance alternatives in the NPR. This difference in the level of required QA reflects a fundamental difference in the purposes of monitoring for an emissions trading program compared to monitoring for an emissions limitation program. Monitoring for the trading program requires frequent assessments of the accuracy of the measurement method, because each unit of emissions measured is tied to an allowance which is tradeable at any time throughout the year. It is important for source owners to know how much “money is in the bank” at any given time. This need was recognized by Congress when it required the use of CEMS in the Acid Rain Program, which serves as the model for both the NO
X
Budget Trading program and the proposed Hg trading program. Monitoring for a non-trading standard may not require such frequent assessment of monitoring system performance, because the compliance determination is done on an annual or semi-annual basis, using data that has been collected over a long period of time, and is designed only to determine if the emission limit has been met. The amount that a unit is below or above a non-trading standard does not translate into a tradeable commodity which can be bought or sold throughout the year.

Consistent with the current requirements in Part 75 for the Acid Rain and the NO
X
SIP Call programs, the proposed rule would allow sources, under Section 60.4175 of Subpart HHHH of Part 60 and under Section 75.80(h) of Subpart I of Part 75, to petition for an alternative to any of the specified monitoring requirements in the rule. This provision provides sources with the flexibility to petition to use an alternative monitoring system under Subpart E of Part 75 or variations of the proposed ones as long as the requirements of existing Section 75.66 are met. Proposed amendments to 40 CFR part 75 (Part 75), as summarized in Appendix A to this preamble, set forth the specific monitoring and reporting requirements for Hg mass emissions and include the additional provisions necessary for a cap and trade program. Part 75 is used in both the Acid Rain and the NO
X
Budget Trading programs, and most sources affected by this rulemaking are already meeting the requirements of Part 75 for one or both of those programs.

In order to ensure program integrity, EPA proposes to require states to include year round Part 75 monitoring and reporting for Hg for all sources. Proposed deadlines for monitor certification and other details are specified in the model trading rule. EPA believes that emissions will then be accurately and consistently monitored and reported from unit to unit and from State to State.

Part 75 also specifies reporting requirements. As is currently required for sources subject to both the Acid Rain program and the NO
X
Budget Trading program, EPA proposes to require year round reporting of emissions and monitoring data from each unit at each affected facility. As required for the Acid Rain program and the NO
X
Budget Trading program, this data would be provided to EPA on a quarterly basis in a format specified by the Agency and submitted to EPA electronically using EPA provided software. We have found this centralized reporting requirement necessary to ensure consistent review, checking, and posting of the emissions and monitoring data at all affected sources, which contributes to the integrity and efficiency of the trading program.

11. Program Audits

The EPA would publish a report annually, commencing after the first year of compliance, that would contain, for each Hg budget unit, the control period Hg emissions and the number of Hg allowances deducted for all reasons. This would be done in order for States to track emissions and Hg allowance transaction activity in neighboring States.

12. Administration of Program

The administration of this program would be somewhat different from the administration of a typical State program. This is both because of the trading aspects of the program and because of the national nature of the trading program. In order for the market forces underlying the trading program to work, the sources that participate in the trading program must have confidence in the market. This confidence stems from a number of factors including: a belief that all of the sources included in the program are following the same set of rules, and a belief that trades can be

made easily, quickly, and with a great deal of confidence that they will not be altered or denied. Several things can help to foster these beliefs and thus a confidence in the market. The first is to start with a consistent set of rules. This can be done by developing a model rule and having all States and sources that participate in the trading program abide by the ground rules set forth in the model rule. The second is to implement those rules in a consistent and efficient manner. Because of the multi-state nature of the program, it would be difficult for any individual State to do that by itself. Therefore, EPA is proposing that this program be implemented jointly by EPA and the States that choose to participate in the program. As part of this joint implementation, States would have specific roles, EPA would have specific roles, and there would be roles that States and EPA would perform jointly.

States would be responsible for developing and promulgating rules consistent with the model rule and for submitting those rules as part of the State plan States would also be responsible for identifying sources subject to the rule, issuing new or revised permits as appropriate, and determining Hg allowance allocations. In addition, they would be responsible for receiving, reviewing and, where appropriate, approving most monitoring plans and monitoring certification applications, observing monitor certification and ongoing quality assurance testing and performing audits. The final primary area of State responsibility would be enforcement of the trading program. If violations occur, the State would take the lead in pursuing enforcement action. However, once the rules are approved as part of the State plan, they would also become federally enforceable, and EPA could also take enforcement action.

The EPA would have two primary roles in administration of the program. The first role would be EPA's traditional role in the approval and oversight of the State plan . The second would be a more unique role for EPA, in which EPA would administer significant portions of the program.

In EPA's traditional role in the State plan process, EPA would be responsible for taking action to approve or disapprove the State plan revision once it was submitted to EPA. Once the State plan revision was approved, EPA would play an oversight role in ensuring that the State plan was properly implemented. This oversight role might include audits of the State program, or taking enforcement action, if EPA believed that sources were violating the State plan .

In EPA's more unique role as administrator of portions of the program, EPA would run both the system to receive, store program related data, and verify total emissions for the control period, and the MATS. The EPA would use the same system that it is currently using to track emissions data from the Acid Rain Program and the NO
X
SIP Call. There are a number of advantages to the sources, States, and EPA to using this existing system. Since many units are already reporting to the system for purposes of the Acid Rain Program and NO
X
Budget Trading Program, using this existing system will represent little change for many units and EPA. This will help to reduce administrative costs for both units and EPA and will help to minimize startup problems associated with a new program. It also means that each State will not need to develop, maintain and operate such a system.

In addition to receiving the emissions data, quality assuring it, and providing reports to both States and units about the emissions data, EPA would have several other responsibilities as the administrator of the data system. The EPA would be involved in approval of any petitions for alternatives to the allowable monitoring methods. The EPA would also be involved in providing units and States assistance in using the data system. This assistance may include: Answering individual questions from units and States, providing guidance documents and training for units and States, and providing software to assist in the submittal of program related data.

As the administrator of MATS, EPA would be responsible for receiving applications for Hg AARs, tracking all official transfers of Hg allowances, and using the end of control season emissions data and Hg allowance data to determine compliance for the control season. In order for EPA to play this role, each State would have to provide EPA with its Hg allowance allocations consistent with a prescribed schedule and format. The Hg AARs for individual sources would have to provide EPA with information about all official Hg allowance transfers in a prescribed format. The Hg AAR's would also have to provide EPA with an end of control period compliance certification. At the end of the control period, EPA would use all of this data to determine how many Hg allowances should be deducted from each source's compliance account. In the event that there were not enough Hg allowances to cover a source's emissions for a control period, EPA would notify the State and would automatically deduct Hg allowances for the next control period according to the emissions offset provisions set forth in the proposed trading rule.

The main joint role that EPA and States would have is for the approval of alternatives to the allowable monitoring methods. This role is more fully discussed in Section V.C.9 of the preamble on monitoring.

C. Approvability of Trading Rule Within a State Plan

1. Necessary Common Components of Trading Rule

The EPA intends to approve the portion of any State's plan submission that adopts the model rule, provided: (1) The State has the legal authority to adopt the model rule and implement its responsibilities under the model rule, and (2) the state plan submission accurately reflects the Hg reductions to be expected from the State's adoption of the model rule. Provided a State meets these two criteria, then EPA intends to approve the model rule portion of the State's plan submission.

State adoption of the model rule would ensure consistency in certain key operational elements of the program among participating States, while allowing each State flexibility in other important program elements. Uniformity of the key operational elements is necessary to ensure a viable and efficient trading program with low transaction costs and minimum administrative costs for sources, States, and EPA. Consistency in areas such as allowance management, compliance, penalties, banking, emissions monitoring and reporting and accountability are essential.

The EPA's intent in issuing a model rule for the Hg Budget Trading Program is to provide States with a model program that serves as an approvable strategy for achieving the required reductions. States choosing to participate in the program will be responsible for adopting State regulations to support the Hg Budget Trading Program, and submitting those rules as part of the state plan. There are two alternatives for a State to use in joining the Hg Budget Trading Program: incorporate 40 CFR part 60, subpart HHHH by reference into the State's regulations or adopt State regulations that mirror 40 CFR part 60, subpart HHHH, but for the potential variations described below.

Some variations and omissions from the model rule are acceptable in a State rule. This approach provides States

flexibility while still ensuring the environmental results and administrative feasibility of the program. EPA proposes that in order for a state plan to be approved for State participation in the Hg Budget Trading Program, the State rule should not deviate from the model rule except in the area of allowance allocation methodology. Allowances allocation methodology includes any updating system and any methodology for allocating to new units.

State plans incorporating a trading program that is not approved for inclusion in the Hg Budget Trading Program may still be acceptable for purposes of achieving some or all of a State's obligations provided the general criteria. However, only States participating in the Hg Budget Trading Program would be included in EPA's tracking systems for Hg emissions and allowances used to administer the multi-state trading program.

In terms of allocations, States must include an allocation section in their rule, conform to the timing requirements for submission of allocations to EPA that are described in this preamble, and allocate an amount of allowances that does not exceed their State trading program budget. However, States may allocate allowances to budget sources according to whatever methodology they choose. The EPA has included an optional allocation methodology but States are free to allocate as they see fit within the bounds specified above, and still receive state plan approval for purposes of the Hg Budget Trading Program.

2. Revisions to Regulations

Today's action proposes revisions to the regulatory provisions in 40 CFR 60.21 and 60.24 to make clear that a standard of performance for existing sources under section 111(d) may include an allowance program of the type described today.

D. Co-Proposal of Cap- and Trade Program under CAA Section 112(n)

In the January 30, 2004 NPR, EPA has taken comment on a proposal to promulgate, under section 112(n)(1)(A), a cap-and-trade program for Hg from coal-fired Utility Units. The model rule proposed here for Section 111 would serve as the Federal trading rule if the EPA decides to promulgate a cap-and-trade program under CAA Section 112. In general, a trading program under Section 112(n)(1)(A) would be federally implemented with the EPA serving as the permitting authority, unlike Section 111 which has the States serving as the permitting authority. Today's proposed model trading rule would be implemented the same for each state with no opportunity for flexibility for certain operational aspects of the trading program (
i.e.
, allocation methodologies) among different States.

In implementing this program under section 112(n), EPA would adopt caps and establish deadlines similar to those published on January 30, 2004 under the section 111 cap and trade proposal. EPA would allocate these cap levels of annual emissions across coal-fired units using the proposed MACT emission limits presented in the NPR and the proportionate share of their baseline heat inpu

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A04-4457. Public record. Not legal advice.