# Economic Incentive Program Rules; Final Rule ENVIRONMENTAL PROTECTION AGENCY

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URL: https://www.frixlaw.com/law-library/documents/fr%3A94-6828

## Record

- **Collection:** Federal Register
- **Document type:** Uncategorized Document
- **Published:** April 7, 1994

## Text

SUMMARY: This action promulgates rules for economic incentive programs
(EIP's) which either may or must be adopted by States for certain ozone
(O3) and carbon monoxide (CO) nonattainment areas upon the failure
of a State to submit an adequate showing that an applicable reasonable
further progress (RFP) or a specific emissions reductions milestone has
been met (in serious, severe, and extreme O3 and serious CO
nonattainment areas) or upon the failure of a serious CO nonattainment
area to attain the national ambient air quality standards (NAAQS) for
CO. Under the Clean Air Act as amended in 1990 (Act), the EPA was
required to promulgate final EIP rules for stationary, area, and mobile
sources by November 15, 1992; this action is that rulemaking.
The provisions of today's rules are also guidance for discretionary
EIP's that any State may choose to adopt for any criteria pollutant, as
explicitly allowed for in the Act. The Agency views this action as an
opportunity to encourage the development and early implementation of
appropriate EIP's. In so doing, the Agency hopes these rules and
guidance will stimulate the adoption of incentive-based, innovative
programs, where appropriate, that will assist States in meeting air
quality management goals through flexible approaches which benefit both
the environment and the regulated entities, allow for less costly
control strategies, and provide stronger incentives for the development
and implementation of pollution prevention measures and innovative
emissions reductions technology.
The EPA intends that the portion of the preamble and rules
published today that concern discretionary EIP's constitute guidance,
not final action. Final action with respect to discretionary EIP's will
occur when the EPA approves or disapproves State implementation plan
(SIP) revisions containing discretionary EIP's.

EFFECTIVE DATE: The regulations in this rulemaking go into effect on
April 7, 1994.

ADDRESSES: The public docket for this action, A-91-56, including copies
of the public comments on the EPA's February 23, 1993 proposed
rulemaking, is available for public inspection and copying between 8
a.m. and 4 p.m., Monday through Friday, at the address listed below. A
reasonable fee for copying may be charged. The address of the EPA Air
Docket is EPA Central Docket Section, South Conference Center, room 4,
401 M Street, SW, Washington, DC 20460.

FOR FURTHER INFORMATION CONTACT:
Mr. Willis P. Beal, U.S. EPA, MD-12, Research Triangle Park, North
Carolina 27711, telephone (919) 541-5667.

SUPPLEMENTARY INFORMATION: The contents of today's preamble are listed
in the following outline:

I. Background and Purpose
A. Introduction
B. Overview
C. Principles and Regulatory Elements
II. Summary of Rules and Guidance
A. Applicability
B. Definitions
C. State Program Election and Submittal
D. State Program Requirements
E. Use of Program Revenues
III. Discussion of Rules and Guidance
A. Applicability
B. Definitions
C. State Program Election and Submittal
D. State Program Requirements
E. Use of Program Revenues
IV. Discussion of Comments and Regulatory Changes
A. Program Goals
B. Interface With Reasonably Available Control Technology (RACT)
and Other Statutory Requirements
C. Program Baseline
D. Emission Quantification
E. Monitoring, Recordkeeping, Reporting (MRR)
F. State Implementation Plan (SIP) Creditability
G. Audit/Reconciliation Procedures
H. Penalties for Noncompliance
I. Interface With Existing Emission Trading Policies
J. General Issues
V. Administrative Requirements
A. Executive Order 12866
B. Paperwork Reduction Act
C. Regulatory Flexibility Act

I. Background and Purpose

A. Introduction

The Act, as amended in 1990, broadly encourages the use of
incentive-based approaches to control air pollution. This encouragement
is reflected not only in the title IV acid rain program, but also in
the title I general provisions for State and Federal implementation
plans for achieving the NAAQS for criteria pollutants, as well as in
the provisions for certain Federal O3 measures. In title I,
incentive-based approaches are encouraged, and, in certain cases,
mandated, through the use of what has been termed an ``economic
incentive program.'' Today's notice promulgates rules and guidance for
EIP's adopted by the States pursuant to title I of the Act.
The Agency views this action as an opportunity to encourage and
provide guidance on the early implementation of appropriate
discretionary EIP's, as well as to provide mandated rules for use by
States after certain specific failures occur. The Agency hopes that
this guidance will stimulate the early adoption of innovative,
incentive-based approaches, where appropriate, that will assist the
States in avoiding such failures, reaching attainment of the NAAQS
faster than might otherwise occur solely through the use of traditional
regulatory strategies, and lowering the cost of attaining and
maintaining the NAAQS. Through this action, the Agency intends to
encourage the development of EIP's which benefit both the environment
and the regulated entities by increasing flexibility and stimulating
the use of less costly strategies, as well as by providing stronger
incentives for development and implementation of pollution prevention
measures, innovative emissions reductions technology, and strategies
beyond those specifically mandated through State and Federal standards
and regulations. The Agency believes that these goals can be met by
EIP's that also meet the standards of accountability and enforceability
currently found in traditional regulatory programs.

B. Overview

Today's notice promulgates rules for EIP's which may be adopted by
an authorized governing body, including States, local governments, and
Indian governing bodies (henceforth State), for certain O3 and CO
nonattainment areas pursuant to sections 182(g)(3), 182(g)(5),
187(d)(3), and 187(g) of the Act. These sections mandate for certain
areas, and identify as one of three options for certain other areas,
the use of EIP's in certain cases. An EIP is mandated upon the failure
of a State to submit an adequate demonstration showing that the area
has met applicable milestones for RFP in extreme O3 nonattainment
areas (section 182(g)(5)). An EIP is identified as one of three options
upon such failure in serious and severe O3 nonattainment areas
(section 182(g)(3)).1 Further, an EIP is also mandated upon the
failure of a State to submit a milestone demonstration showing
adequately that the area has met a required specific emissions
reductions milestone or to attain the CO NAAQS in serious CO
nonattainment areas (section 187(d)(3), 187(g)).
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\1\The other two options are to have the area reclassified to
the next higher classification and to implement specific additional
measures adequate to meet the next milestone as provided in the
applicable contingency plan.
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Section 182(g)(4)(A) of the Act requires that EIP's adopted by
States pursuant to the sections of the Act cited above, characterized
in today's notice as statutory EIP's, be consistent with the Agency's
final rules for EIP's. This section also requires that such EIP's be
nondiscriminatory with regard to applicable laws regarding interstate
commerce. In addition, section 182(g)(4)(B) imposes constraints on how
any revenues generated by such programs shall be used. The scope of the
EIP rules includes programs which may be adopted for ``reducing
emissions from permitted stationary sources, area sources, and mobile
sources.''
Other sections of title I also explicitly allow for EIP's to be
included as provisions in SIP's in general (section 110(a)(2)(A)), as
well as specifically in nonattainment area SIP's (section 172(c)(6)).
Economic incentives are allowable in Federal implementation plans
(FIP's) by definition (section 302(y)), and in Federal O3 measures
through the system of regulations for control of emissions from
consumer or commercial products (section 183(e)(4)). Today's notice
serves as the Agency's final guidance for EIP's adopted by States
pursuant to the sections of the Act relating to general SIP provisions,
characterized in today's notice as discretionary EIP's. Discretionary
EIP's may be adopted for any criteria pollutant in both nonattainment
and attainment areas.

C. Principles and Regulatory Elements

The rules and guidance in today's notice are broadly applicable to
any type of statutory or discretionary EIP, respectively. This notice
requires that EIP's submitted for approval to the EPA as part of a SIP
for a nonattainment area contain design features that will ensure that
the program will not interfere with other requirements of the Act and
that emissions reductions credited to the program will be quantifiable;
consistent with SIP attainment and RFP demonstrations; surplus to
reductions required by, and credited to, other implementation plan
provisions to avoid double counting of reductions; enforceable at both
the State and Federal levels; and permanent over the entire duration of
the program.2 The Agency does not intend to limit flexibility and
innovation beyond those constraints that are necessary to meet these
requirements.
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\2\The program need not continue forever to generate permanent
emissions reductions. Such reductions can be discrete or continuous,
depending on the nature of the program. Discrete (i.e., temporary)
reductions can be used to defer but not solely to satisfy continuous
emission reduction requirements (e.g., RACT).
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This notice identifies key program provisions which must generally
be included to ensure that the above requirements will be met. Adequate
program designs will generally include the following elements: Clearly
defined goals and an incentive mechanism that can be rationally related
to accomplishing the goals; a clearly defined scope, which identifies
affected sources and assures that the program will not interfere with
any other applicable Federal regulatory requirements; a program
baseline from which projected program results (e.g., quantifiable
emissions reductions) can be determined; credible, workable, replicable
procedures for quantifying emissions and/or emission-related
parameters, as appropriate; source requirements, including those for
MRR, that are consistent with specified quantification procedures and
allow for compliance certification and enforcement; requirements for
projecting program results and dealing with uncertainty; and an
implementation schedule, administrative system, and enforcement
provisions adequate for ensuring Federal and State enforceability of
the program. All EIP's for which SIP credit is taken in attainment and
RFP demonstrations must include additional elements, such as audit
procedures to evaluate program implementation and track results, and,
in certain cases, reconciliation procedures to trigger corrective or
contingency measures to make up any shortfall between projected
emissions reductions and emissions reductions actually achieved in
practice.
The rules are, of necessity, general in nature with regard to
criteria for designing adequate program elements. This generality
arises due to the large variety of EIP types and designs which may be
submitted, and the Agency's goal of encouraging creativity and
innovation on the part of the States developing such programs. There
are three broad, interrelated aspects of any program design that
significantly affect the approvability of an EIP: How the EIP relates
to other SIP provisions, the level of certainty in quantifying
emissions and projecting EIP results, and the nature and extent of MRR
requirements for enabling determinations of compliance. For example,
today's notice reflects the Agency's view that the scope and nature of
MRR requirements, including the extent to which an EIP exceeds the
minimum requirements for such, would be among the factors to be
considered in assessing the adequacy of any demonstration of projected
EIP program results. The Agency anticipates preparing additional
guidance on specific aspects of program design as it gains experience
with EIP's, partly through participation in feasibility and
demonstration projects.
Descriptions of a broad range of general types of incentive
strategies which exemplify potential EIP's are appended to the final
rules. These descriptions identify key provisions which distinguish the
different model program types. These examples are general in nature so
as to avoid limiting innovation on the part of the States in developing
programs tailored to individual State needs. The EPA has placed in the
docket support documents which survey a wide range of EIP's that have
actually been implemented, as well as programs in the design stage. The
EPA has also issued information and guidance, as required by section
108(f)(1)(A) of the Act, regarding the formulation and emissions
reductions potential of various transportation control measures
(TCM's).3
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\3\Further information on potential TCM's and other mobile
source measures is also contained in a staff memorandum,
``Preliminary Mobile Source Economic Incentive Program Strategies,''
from P. Okurowski to P. Lorang, March 30, 1992, which is available
in the docket.
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The EPA also published interim guidance on the generation of
emissions reductions credits (ERC's) from mobile source control
programs at the same time the EIP rule was proposed.4 The EPA
intends to respond to comments received on this interim guidance and
publish final guidance in conjunction with other EIP-related guidance
on ERC banking currently being developed.
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\4\Interim Guidance on the Generation of Mobile Source Emission
Reduction Credits, 58 FR 11134, February 23, 1993. For information
and copies of the associated technical addendum entitled Guidance
for the Implementation of Accelerated Retirement of Vehicles
Programs, please contact: Mr. Mark Simons, U.S. EPA, 2565 Plymouth
Road, Ann Arbor, MI 48105, (313) 668-4417. For information and
copies of the associated technical addenda entitled (1) Guidance for
Emission Reduction Credit Generation by Clean Fuel Fleets and
Vehicles or (2) Guidance for Mobile Emission Credit Generation by
Urban Buses, please contact: Mr. Glenn Passavant, U.S. EPA, 2565
Plymouth Road, Ann Arbor, MI 48105, (313) 668-4408.
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The EPA intends that today's notice be consistent with other
related rules and policies, either in place or under development, such
as the title V operating permits rules, the title VII rules for
enhanced monitoring, general guidance on the implementation of title I,
and policies on emission trading.

II. Summary of Rules and Guidance

A. Applicability

The rules promulgated in today's notice apply to any statutory EIP
submitted to the EPA as a SIP revision to comply with sections
182(g)(3), 182(g)(5), 187(d)(3), or 187(g) of the Act, which either may
or must be adopted by States upon the failure of a State either to meet
or to submit an adequate showing that an applicable RFP or a specific
emissions reductions milestone has been met (in serious, severe, and
extreme O3 nonattainment areas, and serious CO nonattainment
areas), or upon the failure of a serious CO nonattainment area to
attain the NAAQS for CO. The provisions contained in these rules,
except as explicitly exempted, also serve as the Agency's policy
guidance on any discretionary EIP's submitted as SIP revisions.

B. Definitions

The term ``EIP'' is defined to include State established emission
fees, marketable permits, State fees on the sale or manufacture of
products the use of which contributes to O3 formation, TCM's, or
any combination of such measures.

C. State Program Election and Submittal

Under today's rules, statutory EIP's submitted as SIP revisions,
when applicable, must be sufficient, in combination with other elements
of the plan, to achieve the next applicable milestone (for serious,
severe, and extreme O3 nonattainment areas), or to reduce the
total tonnage of emissions of CO in the area by at least 5 percent per
year until attainment is achieved (for serious CO nonattainment areas).
Discretionary EIP's must not interfere with any applicable requirement
concerning attainment and RFP, or any other applicable requirement of
the Act (section 110(l)).

D. State Program Requirements

Today's rules and guidance establish as a goal for all EIP's that
they be designed to benefit both the environment and the regulated
entities. In addition, EIP's must be State and federally enforceable,
nondiscriminatory (with respect to interstate commerce), and consistent
with the timely attainment and maintenance of NAAQS, all applicable RFP
and visibility requirements, applicable prevention of significant
deterioration (PSD) increments, and all other applicable requirements
of the Act. Programs in nonattainment areas for which credit is taken
in attainment and RFP demonstrations shall be designed to ensure that
the effects of the program are quantifiable, and that the credit taken
is limited to that which is surplus to other SIP-credited requirements.
Statutory EIP's must be designed to result in quantifiable, significant
reductions in actual emissions.
A number of program elements are outlined in the rules which must
be included, as applicable, as part of any EIP design. These elements
are required to delineate program scope, to specify credible, workable,
replicable emission quantification procedures and all affected source
requirements, to project program results, to specify audit and, if
appropriate, reconciliation procedures (to evaluate program
implementation, track results, and, as appropriate, trigger corrective
or contingency measures), and to define an implementation schedule,
administrative procedures, and effective enforcement mechanisms.

E. Use of Program Revenues

The rules incorporate statutory restrictions on the use of revenues
generated by statutory EIP's. Specifically, any such revenues may be
used by a State for providing incentives for achieving emissions
reductions, providing assistance (up to 75 percent of the costs) for
the development of innovative technologies for the control of O3
air pollution and for the development of lower-polluting solvents and
surface coatings, and funding (with up to 50 percent of the revenues)
administrative costs of State programs under this Act. These
restrictions on the use of revenues do not apply to discretionary
EIP's.

III. Discussion of Rules and Guidance

This portion of the notice provides more detail on the provisions
of the final rules and guidance.

A. Applicability

The rules published in today's notice apply to any statutory EIP
submitted to the EPA as a SIP revision to comply with sections
182(g)(3), 182(g)(5), 187(d)(3), or 187(g) of the Act, which either may
or must be adopted by States upon the failure of a State either to meet
or to submit an adequate showing that an applicable RFP or a specific
emissions reductions milestone has been met (in serious, severe, and
extreme O3 nonattainment areas, and serious CO nonattainment
areas), or upon the failure of a serious CO nonattainment area to
attain the NAAQS for CO. The provisions contained in these rules,
except as explicitly exempted, also serve as the Agency's policy
guidance on any discretionary EIP's submitted as SIP revisions.
Further, the EPA will use the provisions contained in these rules as
guidance in preparing EIP's, when appropriate, for FIP's necessitated
by State failures and for other Federal measures.
The EPA intends to review EIP's submitted as plan revisions based
on the general SIP review requirements contained in sections 110(k),
110(l), 182, and 187 of the Act, as applicable, and associated Agency
policies. For statutory programs, the Agency intends to review the plan
revision and either approve or disapprove all or part of the revision
within 9 months after the date of the State's submission of the plan
revision, consistent with section 182(g)(3) and 182(g)(5) of the Act.
For discretionary EIP's, Agency action on plan revisions submitted for
review will be taken according to the same schedule as is applicable to
any other type of plan revision. An EIP submitted as a plan revision
will be deemed to be approved only upon an affirmative decision by the
Agency.

B. Definitions

The definitions in today's notice include many terms drawn from the
Act or other regulations or guidance documents, as well as new terms
relating to EIP's. Key new terms are discussed below.
1. Economic Incentive Program
Consistent with section 182(g)(4)(A) of the Act, for purposes of
today's rulemaking, ``EIP'' is defined to mean a program which may
include ``State established emission fees or a system of marketable
permits, or a system of State fees on sale or manufacture of products,
the use of which contributes to O3 formation, or any combination
of the foregoing or other similar measures.'' In addition, the Act
expands this definition to include ``incentives and requirements to
reduce vehicle emissions and vehicle miles traveled in the area,
including any of the transportation control measures identified in
section 108(f).''
For purposes of this rulemaking, this notice classifies EIP's into
three broad categories: emission limiting, market response, and
directionally-sound. This categorization is based on whether a
quantifiable emission-related requirement is directly specified as an
integral element of the program or whether the program depends upon
marketplace decisions, in response to a program's incentive, to produce
the intended emission-related objective of the program. Further, the
categorization is a function of whether the results of the program are
quantifiable.
Emission-limiting strategies directly specify limits on total mass
emissions, emission-related parameters (e.g., emission rates per unit
of production, product content limits), or levels of emissions
reductions relative to a program baseline that are required to be met
by affected sources, while providing flexibility to sources to reduce
the cost of meeting such limits. A marketable permits program (i.e.,
emission trading with source-specific mass emissions limitations, or
caps) is a primary example of such a program. If every affected source
in such a program complies with its emissions cap (taking into account
both emissions generated by the source as well as any emissions
trading), the program will necessarily achieve the specified emissions
limits.
A market-response strategy creates one or more incentives for
affected sources to reduce emissions, without directly mandating
emission-related requirements for individual sources or even for all
sources in the aggregate. An emission fee program may be an example of
a market-response strategy. In such a program, each source might be
required to pay a fee on each unit of emissions. The response to the
incentive, in terms of actions which affect emissions levels, will be
determined by each source according to its abatement opportunities,
costs, and other factors. Thus, each source has flexibility in
determining its ultimate level of emissions (within any constraints
imposed by other regulatory requirements).
A consequence of programs based on market-response strategies is
that actual emissions from affected sources may differ from the pre-
implementation projected emissions level even if every affected source
is in full compliance with the EIP requirements. This added degree of
uncertainty in program results must be accounted for in designing such
a strategy (see paragraph III.D.6.).
Directionally-sound strategies do not yield quantifiable emissions
reductions creditable towards RFP or attainment demonstrations. Such
strategies may be included in an area's attainment plan, without
credit, or in a maintenance plan if the strategy contributes to the
area coming into or maintaining attainment. Emissions reductions from
such programs are not creditable towards RFP or attainment
demonstrations because the program lacks one or more of the basic
program elements, such as a quantifiable program baseline or adequate
emissions quantification procedures. However, a State may want to
pursue such a strategy as a part of their overall program to attain and
maintain the NAAQS. Directionally-sound strategies must not be used as
the primary basis for any statutory EIP submitted pursuant to sections
182(g)(3), 182(g)(5), 187(d)(3), and 187(g) of the Act.
A number of different types of incentive strategies have been
identified upon which EIP's could be based. Appendix X contains
descriptions of different types of strategies, together with a listing
of the TCM's included in section 108(f) of the Act. There is not,
however, in all cases a direct correspondence between a type of
strategy and the regulatory categories described above, since program
design details can in some cases make a difference in the extent to
which program results are quantifiable or dependent on market response.
2. Program Baseline
The determination of a program baseline is the first step in
projecting program results. Results from EIP's can be projected in
terms of quantifiable emissions reductions, or, in the case of
directionally-sound programs, in terms of other emission-related
parameters. Further, some types of incentive strategies depend upon the
establishment of a program baseline, in terms of a level of mass
emissions or emission-related parameter(s), for each affected source or
aggregated overall affected sources, as a starting point for the
incentive program mechanism. For example, a marketable emissions permit
program could be initialized by a program baseline that allocates to
each source a cap on mass emissions that serves as its starting point
for any emissions trading transactions or future emissions reductions
requirements. For other types of programs, this program baseline could
be defined in terms of emission-related parameters, such as average
emission rates, solvent content, or vehicle ridership factors.
3. Nondiscriminatory
Section 182(g)(4) provides that statutory EIP's must be
``nondiscriminatory'' and must be ``consistent with applicable law
regarding interstate commerce.'' The EPA interprets these requirements
to mean that a statutory EIP must not discriminate in favor of
intrastate commerce and against interstate commerce. In addition, an
EIP must meet any other applicable limitations under the Commerce
Clause of the U.S. Constitution. For example, State taxes must meet the
requirements, to the extent applicable to the tax, set out by the U.S.
Supreme Court in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274
(1977). There, the Court stated that a State tax will pass scrutiny
under the Commerce Clause only if ``the tax is applied to an activity
with a substantial nexus with the taxing State, is fairly apportioned,
does not discriminate against interstate commerce, and is fairly
related to the services provided by the State.'' Id. at 279. Under the
EPA's interpretation, Congress did not intend, by the provisions
authorizing EIP's, either statutory or discretionary, to delegate its
authority under the Commerce Clause to the States, and thereby release
State EIP's from the limitations that would apply under the Commerce
Clause had Congress not specifically authorized the EIP; rather,
Congress intended to maintain those limitations.

C. State Program Election and Submittal

The mandated schedules for the development, submittal, review/
approval, and implementation of statutory EIP's, submitted pursuant to
sections 182(g)(3), 182(g)(5), 187(d)(3), and 187(g) of the Act, may
leave as little as 6 months for the EIP to be operational prior to the
next milestone requirement. Thus, in these cases, the time available to
develop, implement, and achieve emissions reductions from an EIP will
be extremely limited if a State waits until a milestone failure occurs
to initiate the selection and development of a statutory EIP. As a
result, the EPA encourages States to initiate development of an EIP as
soon as they determine that a milestone failure is likely, or even
sooner, as part of their SIP.
States are encouraged to consider inclusion of discretionary EIP's,
where appropriate, in the SIP's (or SIP revisions) due within the first
4 years after enactment of the amended Act (e.g., sections 182 (b)(1)
and (c)(2), 187(a)(1)). Submittal at that time would more likely allow
sufficient time to develop, implement, and evaluate the effectiveness
of the program. If such an early EIP submittal is made, States must
account for the effects of the EIP in any subsequent required SIP
submittals. Nothing in today's notice precludes a State from revisiting
and amending its original EIP, or any other pre-existing rules, as
necessary, to ensure consistency with any subsequent required SIP
submittals.
The requirements of section 182(g)(3) and 182(g)(5) of the Act
apply any time that a State fails to submit an adequate milestone
compliance showing, or when the EPA determines that a milestone has
been missed by an area covered by these provisions. For example, if
such a milestone is not met by a serious or severe O3
nonattainment area, the area may elect among three options, including
an EIP. The Act does not provide any additional or different
requirements that would apply when a State that missed one milestone,
and makes a proper election, misses a subsequent milestone.
Accordingly, if a subsequent milestone is missed, the same choices are
available, including the election of an EIP. Thus, the imposed
requirements or specified options apply not only the first time that a
milestone is missed, but also if subsequent milestones are missed even
if an EIP had previously been implemented. Similarly, the EPA
interprets section 187(g) (requiring serious CO nonattainment areas
that fail to attain to adopt an EIP) as applying even if the area
previously missed a milestone and adopted an EIP pursuant to section
187(d)(3). A second missed-milestone program must provide reductions
beyond the reductions from a first statutory program. The second EIP
may either be a new program or a substantive revision of the first
program.

D. State Program Requirements

Under today's rules, EIP's must be State and federally enforceable;
nondiscriminatory (with respect to interstate commerce); and consistent
with the timely attainment and maintenance of NAAQS, all applicable RFP
and visibility requirements, applicable PSD increments, and all other
applicable requirements of the Act. Programs in nonattainment areas for
which credit is taken in attainment and RFP demonstrations shall be
designed to ensure that the effects of the program are quantifiable and
that the credit taken is limited to that which is surplus to other SIP-
credited requirements. Statutory EIP's must be designed to result in
quantifiable, significant reductions in actual emissions.
Each of the program elements that must be included, as applicable,
in an EIP submitted to the EPA as a plan revision are described below.
For EIP's that allow trading to meet existing source requirements, the
EPA will consider a two-step process for State submittal and EPA review
of the program elements outlined below. Under such a step-wise process,
the initial submittal shall include both a framework for all the
general elements of program design, as well as all the specific
regulatory details for a source-specific trade or for an entire source
category, which trade or source category is representative, with
respect to all program elements, of the types of trading to be allowed
under the general framework. For example, for an EIP designed to
directly implement trading within source categories, the initial
submittal shall include the full details of all program elements for at
least one source category. Alternatively, for an EIP designed to
implement trading on a source-by-source basis, with EPA review of each
trade, the initial submittal shall include the full details of all
program elements for at least one source-specific trade. Thus, required
specific aspects of the emission quantification procedures and MRR
requirements for additional sources and/or source categories could be
submitted at a later time to allow the State to phase-in the
application of the program to other individual sources or source
categories. Because adequate enforceability elements--including
emissions quantification procedures, test methods, and MRR
requirements--are integral to any SIP program, approval by the EPA of a
framework for trading would constitute approval only of the framework
elements included as part of the initial submission and of trading for
those sources or within those source categories submitted with the
framework and approved for trading by the EPA. Trading involving other
sources or source categories could not occur until all elements,
including enforceability elements, were approved by the EPA through a
subsequent step in the process. The EPA will apply the same criteria in
reviewing step-wise submittals of emission quantification and MRR
requirements as in reviewing such requirements submitted together with
the other program elements. Thus, a subsequent submittal must be fully
compatible with all the elements in the initial submittal, and, taken
together, both submittals must meet all the requirements of the EIP
rules and guidance. The EPA does not intend to consider use of this
step-wise process for EIP's that mandate new requirements for affected
sources (e.g., requiring mass emission caps on sources previously
required to meet emission rate limits).
1. Program Goals and Rationale
An acceptable EIP must clearly define the goals of the program and
provide a rationale relating how the program design will accomplish the
goals. These final rules and guidance establish as a goal for all EIP's
that they be designed to benefit both the environment and the regulated
entities. The final rules and guidance require States to design
programs that will meaningfully meet this goal, while providing
flexibility to the States to determine how best to accomplish such
``benefits sharing'' in the context of each specific program.
The term ``benefits'' is broadly defined to include not only
economic benefits, such as cost savings and compliance flexibility for
the regulated sources, but also environmental benefits that will result
in States reaching attainment of the NAAQS faster than might otherwise
occur solely through the use of traditional strategies. Environmental
benefits can be created most directly by EIP's that require increased
or more rapid emissions reductions beyond those that would be achieved
through a traditional regulatory program. Specifically, a 10 percent
increase in emissions reductions would presumptively meet this benefits
sharing goal. Alternatively, environmental benefits can also be
achieved by programs that incorporate, for example, improved
administrative mechanisms (e.g., that achieve emissions reductions from
sources not readily controllable through traditional regulation),
reduced administrative burdens on regulatory agencies that result in
increased environmental benefits through other regulatory programs,
improved emissions inventories that enhance and lend increased
certainty to State planning efforts, and the adoption of emission caps
which over time constrain or reduce growth-related emissions beyond
traditional regulatory approaches.
Statutory EIP's will benefit the environment as a result of the
requirement that they be designed to result in significant reductions
in actual emissions. For discretionary EIP's, no standard formula for
benefit sharing is specified, although the EPA encourages States, to
the extent practicable, to design such programs so as to create most
directly increased or more rapid emissions reductions (see paragraph
IV.A.2).
The EPA notes that any incentive-based program has the potential to
create incentives for pollution prevention and technological
innovation. Such an inherent potential benefit can only meaningfully
meet the goal of providing benefits to the environment if the program
is specifically designed to allocate some of the effects of such
innovation to enhancing environmental progress. Likewise, for the other
ways listed above in which environmental benefits can be accomplished,
the EPA intends that these approaches be meaningfully implemented so as
to produce real environmental benefits.
A well-designed EIP will achieve a number of different kinds of
environmental benefits. For instance, a marketable emissions permit
program, with mass emissions caps declining over time, may achieve
several results. The declining cap aspect of the program can result in
real emissions reductions creditable towards RFP milestones and
attainment (to the extent that actual emissions are reduced). The
marketable aspect of the program allows emission sources facing
differing costs of further emission control to trade, lowering overall
control costs. Such programs also encourage sources already able to
meet their mass emissions caps to find ways of further reducing
emissions beyond what would otherwise be required by traditional
regulatory programs (e.g., through pollution prevention, technological
innovation, or changes in operational procedures).
Statutory EIP's, submitted because of failures in achieving
required emissions reductions, must make a significant contribution to
the required reductions, while not necessarily bearing the full burden
of achieving all the required reductions or mandating any specific
percentage reduction. A program producing no additional emissions
reductions or one based solely on a directionally-sound strategy,
without quantifiable benefits, would not satisfy these criteria for an
acceptable statutory EIP. For discretionary EIP's, the final guidance
relies upon the new State planning, quantitative progress, and
attainment requirements in the Act to ensure expeditious attainment of
the NAAQS, regardless of the type of programs that States may choose to
include in their SIP's.
Any EIP should include a rationale for how the incentive
mechanism(s) will achieve the stated goal(s). A State can create a
better overall program design by carefully examining and explaining the
linkage between a program's provisions and the desired outcome. The
provisions of a program must be sufficient to ensure the program goals
are successfully achieved without creating unintended detrimental side
effects.
2. Program Scope
As with any regulatory program, an EIP must identify the affected
sources covered by the program. The affected sources may be defined on
the basis of source type (e.g., manufacturing operations), activity
type (e.g., fuel storage tanks), location, firm size, quantity of
emissions, or other such characteristics. In addition, a State may
choose to grant exemptions from program requirements to sources meeting
specified criteria. For example, States may consider exempting zero-
emitting vehicles from a new parking price program. In establishing the
affected source criteria, a State must assure that the resultant
program is nondiscriminatory within the meaning given that term in
these rules.
The program must establish procedures for dealing with sources
entering or exiting affected source categories. In order to promote
economic growth consistent with achieving environmental goals, a
regulatory program should not create unwarranted barriers to entry for
new or expanding business entities.
In addition, the program must establish criteria and procedures for
sources voluntarily choosing to opt-in to or to be exempted from the
program, to the extent that the program design allows for such movement
into or out of the universe of affected sources. For example, the title
IV acid rain allowance trading program includes provisions for sources
not originally in the program to opt-in to the program in order to sell
sulfur dioxide (SO2) emission allowances to sources already in the
program. Certain EIP's may also provide criteria for exempting sources
such that they can leave the program; such criteria must be described
and the procedures for leaving the program must be included in the EIP.
Any such procedures must ensure that movement into or out of the
program will not interfere with other statutory requirements nor result
in an increase in area-wide emissions that is not reflected in the
plan's attainment or RFP demonstrations. Finally, the opt-in program
language must specify that it will not allow sources to opt-in if the
net result of the opt-in program as a whole is to increase area
emissions, unless such increase has been accounted for in the
development of the EIP, and is consistent with attainment and
maintenance of the NAAQS, RFP, and all other SIP requirements.
Affected sources in an EIP may also be covered by other Federal
regulatory requirements. An EIP may not interfere with applicable
requirements concerning attainment and RFP, or any other applicable
requirements of the Act. Thus, the program scope must be defined so as
not to interfere with any other Federal regulatory requirements which
apply to the affected sources. Such requirements for stationary sources
may include, but are not limited to, reasonably available control
technology (RACT), PSD and new source review (NSR) offset requirements,
lowest achievable emission rate (LAER), best available control
technology (BACT), new source performance standards (NSPS), national
emissions standards for hazardous air pollutants (NESHAP's), acid
deposition program requirements, reasonably available control measures
(RACM), and best available control measures (BACM). Such requirements
for mobile sources may include, but are not limited to, programs
integral to vehicle inspection and maintenance (I/M), clean-fueled
fleets, reformulated gasoline, oxygenated fuels, employee commute
options (ECO), TCM's, and Federal motor vehicle controls.
In general, sources subject to these statutory requirements may
participate in emissions trades pursuant to an EIP as long as, apart
from their participation in such trades, they continue to meet the
statutory requirements. Thus, if these sources reduce their emissions
below what the applicable statutory requirements call for, the
reductions beyond the requirements may furnish credits for the
EIP.5 Following is a more specific discussion of the interplay of
the EIP rules with several of the statutory provisions listed above.
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\5\For example, since VOC reductions that occur as a result of
controls put in place to meet NESHAP's are creditable to RFP, such
VOC reductions cannot be considered as surplus to supply VOC credits
through an EIP. However, if in such a case greater than required
reductions are made, the incremental VOC reductions could furnish
credits through an EIP.
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RFP Requirements. Credits for emissions reductions from stationary,
mobile, or area sources may generally be used to meet the ``progress''
requirements of the nonattainment provisions of the Act. The SIP's for
O3 nonattainment areas classified as moderate or higher under
section 181(a)(1) are required to provide for reductions in volatile
organic compounds (VOC) of at least 15 percent from baseline emissions
by 1996, and areas classified as serious or higher are required to
provide for reductions of at least 3 percent each year (averaged over a
3-year period) thereafter until the attainment date (section 182(b)(1),
182(c)(2)(B)). Emissions reductions from all sources may be used to
meet these progress requirements, except for those reductions
attributable to Federal motor vehicle programs and RACT and NSR
corrections (section 182(b)(1) (C)-(D)).
RACT. An EIP may allow sources subject to the RACT requirement to
attain RACT-level emissions reductions in the aggregate, and thereby
trade among themselves. In designing such RACT trading programs (to
implement new and/or previously existing RACT requirements), as with
any EIP, States are encouraged, to the extent practicable, to meet the
benefits sharing goal directly, by requiring increased emissions
reductions beyond those that would be achieved through a traditional
RACT program.
In addition, today's rules and guidance authorize emissions trading
between the stationary sources subject to the RACT requirement (``RACT
sources'') and any sources (i.e., stationary, mobile, and area sources)
not subject to the RACT requirement (``non-RACT sources'') when such
trading results in an exceptional environmental benefit, e.g., a level
of reductions that is significantly greater than RACT-level amounts.
With respect to the level of emissions reductions required from the
non-RACT sources, the appropriate amount of emissions reductions
generally should be set at a level that takes into account the severity
of the nonattainment status in a given area.
Today's rules establish the statutory offset ratios for
nonattainment areas as the determinant of the amount of emissions
reductions that would be required from non-RACT sources generating
credits for RACT sources. The offset ratios are lower for lower-
classified areas (e.g., compare section 182(a)(4), with a 1.1 to 1
offset ratio for marginal areas, and section 182(d)(2), with a 1.3 to 1
offset ratio for severe areas). Looking to offset ratios is instructive
because offsets are an aspect of emissions trading that is directly
addressed in the Act. The offset ratios provide a suitable analogy
because they represent the most substantial benefit to the environment
for a given area that is required in this statutory context of
emissions trading.
However, today's rules authorize emissions trading between RACT and
non-RACT sources at less than the offset ratios if exceptional
environmental benefits are otherwise demonstrated, such as, for
example, an emissions trade that promoted the market penetration of
emissions reduction measures for non-RACT sources, such that future
emissions reductions from the universe of non-RACT sources would be
expected to increase over time. Such measures could include new vehicle
technologies that utilize alternative fuels, provided that such
technologies meet all relevant EPA standards and guidelines. Where a
lower trading ratio is authorized in order to promote the market
penetration of an environmentally-beneficial, new control measure, a
lower bound for the trading ratio of 1.1 to 1 will assure that in all
events some additional benefit will accrue to the environment. In
setting the appropriate ratio for trades between RACT and non-RACT
sources, States may also take into account additional State and
federally-enforceable emissions reductions that are achieved as a
result of other exceptional environmental features of an EIP (such as a
separate ``environmental bonus'' provision, as discussed in EPA's
Interim Guidance on the Generation of Mobile Source Emissions Reduction
Credits). In no case, however, can a trading ratio be lower than 1 to
1, and in no case can the effective trading ratio be less than the
appropriate offset ratio (or such ratio, as low as 1.1 to 1.0, as may
be authorized to promote the market penetration of environmentally-
beneficial, new control measures).
Offsets. Credits for emissions reductions generated by stationary,
mobile, or area sources may be used for purposes of meeting the offset
requirement for major new and modified sources in nonattainment areas
so long as they meet the restrictions imposed on offsets by section 173
of the Act and the EPA's new source review regulations (40 CFR 51.165
and part 51, appendix S). Under the nonattainment provisions, new or
modified major stationary sources may not receive permits for
construction and operation in a nonattainment area unless, among other
things, their new emissions are offset by reductions from other sources
in the area (section 172(c)(5), 173(a)(1)(A)). For O3
nonattainment areas, minimum offset ratios range from 1.1 to 1 for
marginal areas to 1.5 to 1 for extreme areas (section 182(a)(4),
182(b)(5), 182(c)(10), 182(d)(2), 182(e)(1)).
However, the Act does not require that offsets be secured by the
new source. Rather, any portion of the necessary offsets may be
generated by the local air quality district or by the State. In other
words, a jurisdiction may set up an offset ``bank'' to supply new
sources with sufficient emissions reductions to satisfy their offset
obligations. To satisfy the requirements set forth in section 173, each
time a new source commences operations, the jurisdiction must have
already generated the necessary emissions reductions to offset the new
emissions. This means that the jurisdiction must be able to demonstrate
that the program has secured sufficient excess emissions reductions to
offset all new emissions at the proper ratio. If the source itself is
only held responsible for securing emissions reductions in an amount
equal to its new emissions (i.e., a 1 to 1 ratio), the SIP must
generate sufficient reductions to cover the extra reductions required
(e.g., 1.2 to 1 in serious O3 nonattainment areas).
The Act limits offsets to emission reductions not ``otherwise
required by this Act.'' As part of the ``General Preamble for the
Implementation of Title I of the Clean Air Act Amendments of 1990,''
the EPA described certain circumstances under which reductions would
not be creditable for offset purposes because those reductions are
required by other provisions of the Act (57 FR 13498, 13553 (April 16,
1992)). In addition, the EPA intends to provide additional guidance
regarding offsets in the near future.
BACT and LAER. Both the PSD program and the nonattainment NSR
program contain technology-based emission limitations that are source
specific. The Act expressly requires that these emissions limitations
(i.e., BACT in the case of PSD and LAER in the case of NSR) be met by
the proposed major new source or major modification itself as a
condition of permit issuance. Consequently, neither of these
requirements can be met through emissions trading.
Regarding BACT, section 165(a) of the Act provides that no major
new source or major modification may be constructed in a PSD area
unless the requirements in section 165(a)(1)-(8) are met. Section
165(a)(1) specifies that among these requirements is ``a permit * * *
setting forth emission limitations for such facility which conform to
the requirements of this part.'' Section 165(a)(3)(C) further specifies
that the proposed facility must demonstrate that emissions from the
facility will not exceed any applicable emission standard under the
Act.6 The applicable emissions limitations are those provided in
section 165(a)(4), which provides that the proposed facility must ``be
subject to the best available control technology for each pollutant
subject to regulation under this Act emitted from, or which results
from, such facility.''7
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\6\Section 302(k) of the Act defines the terms ``emission
limitation'' and ``emission standard'' interchangeably.
\7\Section 169(3) in turn defines BACT as ``an emission
limitation based on the maximum degree of reduction of each
pollutant subject to regulation under this Act emitted from or which
results from any major emitting facility, which the permitting
authority, on a case-by-case basis, taking into account energy,
environmental, and economic impacts and other costs, determines is
achievable for such facility.''
---------------------------------------------------------------------------

The Act sets forth a similar statutory scheme with respect to LAER.
Section 173(a) provides that the permit program applicable to major new
sources or major modifications, which is required to be included in
part D SIP's under section 172(b)(5),8 shall provide that permits
to construct and operate may be issued only if the requirements set
forth in section 173(a)(1)-(5) are met. Among these enumerated
requirements is section 173(a)(2), which specifies that ``the proposed
source is required to comply with the lowest achievable emission
rate.''9
---------------------------------------------------------------------------

\8\Section 173(a) incorrectly refers to the ``permit program
required by section 172(b)(6).'' Section 172(b)(6) was renumbered as
section 172(b)(5) by the 1990 Amendments. Apparently, this change
was not picked up by the drafters of revised section 173.
\9\Section 171(3) defines LAER as ``that rate of emissions which
reflects'' either ``the most stringent emission limitation which is
contained in (any SIP) for such class or category of source,'' or
``the most stringent emission limitation which is achieved in
practice by such class or category of source, whichever is more
stringent.''
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The statutory provisions addressing both BACT and LAER clearly
require the permitting authority to set, and the source owner to comply
with, the applicable technology-based emission limitation. There is no
provision in the statute for lawfully complying with BACT or LAER
through obtaining emissions reductions at other sources that would
result in an equivalent reduction of emissions or ambient
concentrations.
Inspection and Maintenance Programs. The I/M provisions of the Act
require a vehicle I/M program that meets specified performance
standards. The requirements of the I/M provisions cannot be met by
obtaining ERC's from sources other than vehicles, or from vehicles
through means other than I/M of the vehicle. An EIP may not substitute
entirely for an enhanced or basic periodic vehicle I/M program.
This view is based on the provisions of the Act that set forth
requirements for a basic I/M program, as well as certain provisions
relating to enhanced I/M programs. Sections 182(a)(2)(B)(i) (I/M ``fix-
ups'' for O3 nonattainment areas classified marginal and higher),
182(b)(4) (I/M ``catch-ups'' for O3 nonattainment areas classified
moderate and higher), and 187(a)(4) (I/M ``fix-up'' requirement for CO
nonattainment areas classified moderate and higher) each require a SIP
revision that includes provisions for a ``vehicle inspection and
maintenance program'' that meets a specified performance standard.
The provision for an enhanced I/M program for CO nonattainment
areas classified as moderate and with a design value higher than 12.7
ppm, or classified as serious, requires the SIP to include provisions
for ``an enhanced vehicle inspection and maintenance program as
required in section 182(c)(3) (concerning serious O3 nonattainment
areas)'' (section 187(a)(6)). This provision confirms that the required
I/M program is in fact a vehicle I/M program. The primary provision for
an enhanced I/M program for O3 nonattainment areas classified as
serious or higher does not include a comparable ``inspection and
maintenance'' phrase (i.e., requires the SIP ``to provide for an
enhanced program to reduce hydrocarbon emissions and nitrogen oxides
(NOX) emissions from in-use motor vehicles''), but it further
includes specific requirements for various types of testing,
inspections, etc., that make clear that the program must obtain
reductions from vehicle I/M (section 182(c)(3)).
Nevertheless, both the basic I/M program and the enhanced I/M
program requirements authorize a substantial degree of flexibility in
program design. The Act directs the EPA to require a specific amount of
emissions reductions, but also authorizes the State to design the
program in a manner that meets the EPA established performance standard
through different means. The EPA's final rule on I/M programs describes
the EPA's performance standards and the ways that States can meet those
standards (57 FR 52950-53014). In so doing, the State can take
advantage of economic efficiencies (e.g., have a better test on more
older cars to get greater performance, in exchange for some relaxation
in another element). In addition, States could address mal-maintenance
in the vehicle fleet in part by including an old car scrappage program
as an element of the overall package used to meet the performance
standard. However, the SIP must include a program obtaining the
required reductions through vehicle inspections.
3. Program Baseline
An EIP baseline must be fully defined within the EIP, and used as a
basis for projecting program results and, if applicable, for
initializing the incentive mechanism. States have flexibility in
defining the program baseline for EIP's that implement new RACT
requirements for previously unregulated source categories through
trading programs, as long as the new RACT requirements reflect, to the
extent practicable, increased emissions reductions beyond those that
would be achieved through a traditional RACT program. States may also
use a flexible baseline for EIP's that allow trading with respect to
newly imposed RACT requirements on previously unregulated sources in a
previously regulated source category (e.g., sources newly covered by
lower applicability cut-offs), as long as the EIP, in the aggregate,
yields reductions in actual emissions at least equivalent to those
which would result from source-by-source compliance with the existing
RACT limit for that source category. This requirement can be satisfied
by using existing data on actual and allowable emissions from the
previously regulated sources in the affected source category (see
paragraph IV.C.).
A State also has flexibility in defining the program baseline for
any EIP submitted in conjunction with, or subsequent to, the submission
of any complete areawide progress plan due at the time of EIP submittal
(e.g., the 15 percent RFP plan (section 182(b)(1)) and subsequent 3
percent plans (section 182(c)(2))), and/or an attainment demonstration.
In all such cases, the flexible program baseline may be based on
actual, allowable, or some other intermediate10 or lower level of
emissions, provided the State demonstrates that the program baseline is
consistent with and reflected in the associated RACT rule, progress
plans, or attainment demonstration. Further, for EIP's submitted prior
to the submittal of a required progress or attainment demonstration,
the State must include with its EIP submittal a commitment that its
subsequent attainment demonstration and all future progress plans will
be consistent with the EIP baseline in effect at that time, as well as
a discussion of how the baseline will be integrated into the State's
attainment demonstration. Further, in this discussion, the State should
take into account the potential that emission reduction credits issued
prior to the attainment demonstration may no longer be surplus relative
to the attainment demonstration.11
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\1\0A typical intermediate baseline may consist of a SIP-
allowable emission rate and an actual level of production.
\1\1For example, the State could establish an escrow account or
a formula for pro rata reductions of credits to cover credits that
subsequently are no longer surplus.
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Conversely, for EIP's that do not meet the above conditions
relating to RACT and progress requirements, the program baseline must
be set no higher than the lower of actual or allowable emissions.
Actual emissions are to be taken from the most appropriate inventory,
such as the 1990 actual emission inventory (which was due for
submission in November 1992), and allowable emissions are the lower of
SIP allowable emissions or the level of emissions consistent with
source compliance with all Federal requirements related to attainment
and maintenance of the NAAQS.
In addition, following submission of an EIP that incorporates a
flexible baseline, if the State fails to submit a complete attainment
demonstration, or if the EPA disapproves the attainment demonstration
on the grounds that it does not provide for attainment of the NAAQS,
the EPA may require the State to incorporate in the EIP a program
baseline set no higher than the lower of actual or allowable emissions.
The baseline for an EIP submitted in conjunction with an attainment
demonstration must be consistent with the assumptions employed in the
attainment demonstration, including the location of emissions assumed
in the photochemical grid modelling, if applicable.
In considering emissions trading, the EPA continues to focus on the
aspect of trading that involves the relaxation of a control requirement
on a particular emissions-producing unit (the credit-receiving unit).
Under trading programs, this relaxation is offset by tightening the
control requirements on another emissions-producing unit (the credit-
generating unit). Under section 110(l), this relaxation is authorized
only if it, taken in conjunction with the tighter control requirements,
does not interfere with the ability of the SIP to meet the various
requirements of the Act--most importantly, for present purposes, the
RACT requirement and the requirements for progress (e.g., for RFP in
O3 nonattainment areas, 15 percent reductions in VOC emissions by
1996; and 3 percent-per-year over each 3-year period until the
attainment date), as well as attainment requirements. It is understood
that when the credit-generating unit's actual emissions are below the
level mandated by the applicable control requirement, relaxing a
control requirement on the credit-receiving unit in exchange for
tightening the requirement on the credit-generating unit may result in
an increase in aggregate actual emissions. Under these circumstances
(i.e., trading from an allowables baseline), the relaxation and its
resulting increase in actual emissions could, in some circumstances,
jeopardize RFP and attainment.
As described above, notwithstanding the chance of actual emissions
increases, EIP's may authorize trading from an allowables baseline when
the EIP is submitted in conjunction with, or following, the submission
of the applicable progress plans, and the allowables baseline is
consistent with those plans. Under these circumstances, trading on the
basis of allowables would not jeopardize the progress requirements. In
some cases, the EPA will permit trading to occur on the basis of
allowables prior to submission of the attainment demonstration SIP.
However, once the State has submitted any applicable progress plans due
at the time of EIP submission, the State has made significant progress
towards attainment. This significant progress, coupled with the
sanctions provisions that provide strong safeguards that the State will
develop a SIP requiring any subsequent progress plans and an attainment
demonstration, provide, in the EPA's judgment, sufficient evidence that
an EIP authorizing an allowables baseline submitted in conjunction with
an applicable progress plan will not jeopardize continued progress or
attainment. In addition, States and sources should be aware that any
emission limit relaxations approved through an EIP may be subject to
ongoing scrutiny, and further tightening, if it is unexpectedly
necessary to do so as part of an attainment demonstration.
In addition, as described above, the EPA will permit EIP's that
authorize trading from an allowables baseline in the case of source
categories, or portions of source categories, that are newly subjected
to the RACT requirement under the RACT ``catch-up'' provisions of
section 182(b)(2). Under these circumstances, the imposition of RACT-
level controls meets the RACT requirement, as described above, and is
expected to result in emissions reductions with respect to the affected
source categories or sources taken as a whole, even if some of the
affected sources conduct emissions trades based on allowables. The fact
that overall emissions from these source categories or sources will be
reduced indicates that with respect to these source categories,
progress is being made towards attainment. This progress provides
adequate assurance that any such trades on an allowables basis will not
jeopardize progress or attainment requirements.
If a SIP does not include a required RACT emission limit for a
source, that source may not participate in an EIP until an appropriate
RACT limit is determined.
The provisions described above apply as well in the case of a
statutory EIP. That is, under the circumstances described above, a
statutory EIP may incorporate a flexible baseline as long as the EIP as
a whole provides the required reductions.
A State may define a program baseline to address a variety of
equity considerations, such as differing degrees of emission control
among affected sources prior to the start of the EIP. While emissions
reductions creditable towards a specific required demonstration will be
calculated according to the requirements for that demonstration, the
EIP may use a different baseline. For example, a declining value
marketable permits program, submitted in conjunction with an areawide
RFP or attainment plan, could initially allocate mass emissions caps on
the basis of allowable emissions. However, to the extent that such a
program baseline exceeds the aggregate actual emissions for the sources
covered by the program, the EIP baseline allocation would be required
to decline at a rate consistent with achieving the areawide RFP
milestone as measured against the RFP baseline.
The EIP must clearly specify whether the program baseline applies
to aggregate emissions from all affected sources (similar to the RFP
baseline) or to individual sources (similar to source-specific LAER
requirements, for example). If historic emissions are relevant in
setting the program baseline, the time period must be specified in the
program. Provisions must be made for determining baselines for sources
not active during the specified baseline time period. Also, the
averaging time associated with a program baseline for emissions must be
specified.
4. Quantification Procedures
An EIP must describe how emissions and changes in emissions will be
quantified for SIP credit. If other measurable factors are essential to
an EIP, the quantification procedures for those must be specified in
the program. For instance, if emissions reductions are generated by
reducing total usage of a type of solvent, procedures for measuring
solvent usage are critical. The program must specify the minimum
required credible, workable, replicable procedures for quantifying
emissions, which could include emission factor calculations, direct
emission monitoring, calculation procedures which are a function of
process parameters, production practices or volume, or inventory usage,
or other procedures, as appropriate. Criteria for selecting
quantification methods and time-averaging considerations are discussed
below.
States must carefully consider matching their environmental goals
with various aspects of the program when determining adequate
quantification procedures. For example, a procedure wholly adequate for
determining compliance with long-term mass emissions caps may be
clearly inadequate for a program aimed at limiting peak daily
emissions.
An EIP must establish procedures for quantifying emissions
reductions arising from sources that shut down or curtail production. A
State may not take credit for such emissions reductions as part of an
EIP if the same reductions have already received credit in the SIP's
attainment or RFP demonstrations. For example, SIP demonstrations may
include assumptions about equipment turnover rates and normal operating
levels which may already credit some assumed rate of source shutdowns
and curtailments. Credit also cannot be taken for shutdowns or
curtailments that do not result in a decrease in an area's aggregate
emissions. Changes in emissions at one source may merely increase
emissions at another. For example, if one retail operation goes out of
business, the total level of retail business will not necessarily
change. Instead, customers may shift their business to other merchants
in the area. The effect on aggregate emissions of such ``demand
shifting'' will depend upon the nature of the business, and should be
considered in the design of the EIP.
An EIP also must establish procedures for quantifying emissions
from sources with uneven emission patterns due to batch, seasonal or
cyclical operations. The appropriate procedure for handling these
expected fluctuations in emissions will depend in part on the emissions
averaging time upon which the EIP is based.
The EPA recognizes that the development of quantitative procedures
for mobile sources can present significant challenges. Such procedures
must consider, as appropriate, the factors which will affect or
determine the level of participation in a transportation program, as
well as how much and where vehicles are driven. Such procedures should
clearly address how double-counting will be avoided across various
mobile source programs (e.g., not double-counting I/M program
reductions in quantifying credits from an accelerated vehicle scrappage
program). Any assumptions or models which States may use to predict
behavioral modifications as a result of the implementation of an
economic incentive strategy must be presented as support information
with the EIP submittal. The EPA views the development of sound
incentive-based mobile source programs as an opportunity for the design
of better, more rigorous tools for accounting for and encouraging
mobile source emissions reductions beyond those required by traditional
programs.
The final rules allow for long-term averaging, while requiring that
States make statistical showings that any such averaging is consistent
with applicable RACT, RFP, and short-term NAAQS. Any State that wishes
to use long-term averaging must include, with the plan revision
submittal, a statistical showing that the aggregate effect of the
specified averaging time is consistent with attaining the O3 NAAQS
and satisfying applicable RFP requirements on the basis of typical
summer day emissions; and, if applicable, a statistical showing that
aggregate daily emissions from all affected sources covered by a
Federal RACT requirement (net of any RACT/non-RACT trades) are no
greater than the aggregate daily emissions from such sources that would
result from the implementation of all applicable source-specific RACT
requirements (see paragraph IV.D.2.).
5. Monitoring, Recordkeeping and Reporting
Each affected source in an EIP must comply with requirements
imposed by the program, and must implement the MRR procedures necessary
to assure compliance with such requirements and to provide State and
Federal enforceability. Requirements imposed by an EIP could include
meeting mass emissions limits (either directly or through trading
marketable permits), paying an emission fee, using specified products
or procedures, providing product content labeling, or other measures
specified by the program. Thus, the final rules allow for a wide range
of alternative MRR procedures that provide sufficiently reliable and
timely information for determining compliance. Criteria to be
considered in the development of such procedures include
representativeness, accuracy, precision, reliability, frequency, and
timeliness.
All source-specific program requirements must be structured in such
a way that both inspectors and facility owners can judge the compliance
status of a facility at any time, or, in the case of long-term
emissions limits, at the end of the compliance period. This will
require an authoritative, reliable repository of all relevant
information at each facility.
6. SIP Creditability and Audit/Reconciliation Procedures
A SIP revision that contains an EIP must include projections of the
emissions reductions the State expects to achieve through the
implementation of the program. The projections may be based on
federally-enforceable limits on mass emissions or on other emission-
related parameters, estimates of market response, economic modelling,
or other relevant information. The State does not have to project
emission changes for each source, unless that is how the State chooses
to estimate the emissions reduction from the program. All EIP
submittals must include documentation which clearly states how sources
in an EIP are or will be addressed in the emissions inventory, RFP
plan, and attainment or maintenance plan, as applicable. This
documentation should include a description of the assumptions used in
measuring emissions and emissions reductions from affected sources.
Credit in a nonattainment SIP may be taken for emission limiting
programs (e.g., emissions trading) and market-response programs (e.g.,
emissions fees). Credit may not be taken for directionally-sound
programs until experience with such programs makes quantification
possible, at which time the program could be reclassified into one of
the other categories for which credit may be taken.
For determining SIP credit, the projected emissions reductions must
be adjusted to reflect the uncertainties inherent in EIP's. This
adjustment is currently done for traditional stationary source control
measures through the use of a rule effectiveness factor, developed from
experience with traditional regulatory control programs. For EIP's, the
State must use two uncertainty adjustment factors, as appropriate, to
calculate creditable emissions reductions. The sources of uncertainty
that must be separately addressed are compliance uncertainty (i.e., the
extent to which sources will actually comply with program requirements)
and programmatic uncertainties (e.g., the extent to which voluntary
market responses to incentives actually occur and/or the use of various
quantification methods with differing confidence levels). These sources
of uncertainty must be accounted for through the use of a rule
compliance factor and a program uncertainty factor, respectively.
The State must specify values for rule compliance and program
uncertainty factors, based on program elements such as the
quantification and enforcement procedures, and on the predictive
quality of the information used by the State to develop the projected
emissions reductions. Inherent in the way in which these factors are
defined, the value of either factor must be less than or equal to one.
The State must include with its EIP submittal a justification for the
values assigned to these factors. The State must use these factors in
determining the SIP credit for the program as a whole, or for each
source-specific trade, if appropriate, to ensure that quantification
uncertainties not lessen a source's emissions reductions requirements.
The uncertainty factors should be developed and justified by the State
by taking into account various aspects of the design of the EIP,
including but not limited to, the type of incentive mechanism upon
which the program is based; the variability in emissions from affected
sources and the nature and extent of uncertainty in the emissions
quantification procedures required by the program; the frequency and
type of MRR required by the program; sanctions for noncompliance; the
frequency, scope and committed responses to program audits; and the
nature of administrative procedures to be used by the State in
implementing and enforcing the program (see paragraph IV.F.).
Unless otherwise provided in program-specific guidance issued by
the EPA, EIP's for which SIP credit is taken must also contain program
audit procedures designed to evaluate program implementation and track
program results in terms of both actual emissions reductions and, to
the extent practicable, cost savings realized during program
implementation. The auditing methods and the timing of the audits must
be specified in the EIP. The maximum time interval for conducting such
audits is 3 years, although States are encouraged to consider more
frequent audits. Further, the State must provide timely post-audit
reports to the EPA. For emission-limiting EIP's, program audit
provisions must include a State commitment to ensure timely
implementation of programmatic revisions or other measures which the
State, in response to the audit, deems necessary for the successful
operation of the program (see paragraph IV.G.).
Program audit provisions for market-response EIP's must be
accompanied by reconciliation procedures, designed to compare credited
emissions (i.e., adjusted projected emissions) with actual emissions
achieved through the implementation of the program. The reconciliation
procedures must specify a range of appropriate actions (e.g., invoke
part of a general SIP contingency plan or a program-specific
contingency), revisions to the program requirements (e.g., increase the
fee, include more sources) that will make up for any shortfall between
credited and actual emissions revealed by the audit, or reductions in
the credit taken for the EIP in the SIP (provided that RFP and
attainment requirements continue to be satisfied area-wide based on
such reduced EIP credits in combination with the effects of all other
SIP programs). Such measures must be automatically executing to the
extent necessary to make up the shortfall, with State action required
only to identify which of the specified actions are necessary to make
up the shortfall. Such measures must not require a revision to the
implementation plan to be effectuated once identified by the State;
rather, the measures must be built into the original EIP design (or
incorporated by reference).
Greater burdens should not necessarily be imposed on EIP's,
compared to traditional regulatory programs, by virtue of the audit and
reconciliation requirements. These audit and reconciliation procedures
are consistent with the general approach to implementing the Act being
taken by the EPA, as illustrated in the Agency's rules for vehicle I/
M12 and for reformulated gasoline,13 and in the Agency's
general guidance on the implementation of title I dealing with the rule
effectiveness of stationary source control measures.14 Further, in
appropriate cases, routine ongoing air program management procedures
may be sufficient to fulfill the audit and reconciliation requirements.
In designing audit procedures, the State should consider the relative
uncertainty associated with the EIP and specify the scope and extent of
the audit procedures to be commensurate with that level of uncertainty.
---------------------------------------------------------------------------

\1\2Inspection/Maintenance Program Requirements, 57 FR 52950,
November 5, 1992.
\1\3Regulation of Fuels and Fuel Additives: Standards for
Reformulated and Conventional Gasoline, 59 FR 7716, February 16,
1994.
\1\4Rule Effectiveness Guidance: Integration of Inventory,
Compliance, and Assessment Applications, EPA-452/4-94-001, January
1994.
---------------------------------------------------------------------------

7. Implementation Schedule
An EIP must contain a schedule for implementing the program. The
schedule must include dates for notifying potentially affected sources,
as early as possible, about the impending EIP; program initialization
and start-up procedures; compliance and submittal requirements for
affected sources; and audit and reconciliation processes, including
subsequent actions required to make up for any shortfall that occurs.
8. Administrative Procedures
As part of any EIP design, the State must establish appropriate
administrative procedures, specific to the type of incentive strategy,
necessary to implement all of the elements of the EIP. For example, in
a fee program a State must assure the proper administration of the fee
collection process, and if rebate provisions are included, the
administration of the rebate distribution process.
Administrative procedures specific to marketable emissions permit
programs which the State must address in a program design are the
mechanisms required for conducting, approving, verifying, recording,
and tracking trades. The EIP must clearly describe the administrative
system, and any State commitments to implement and maintain the system,
that enables market participants to conduct valid and legally protected
transactions. The State must design the program to ensure that all
program requirements are met by sources involved in trades, such that
the trades result in enforceable changes in allowable emissions levels.
A well-designed EIP will include the minimum amount of transactional
oversight, approval, recording, and tracking provisions necessary to
create a verifiable and enforceable system. Unnecessary or excessive
administrative requirements in a trading system increase the cost of
the program and inhibit trading. An active trading market increases the
opportunities for cost-savings. However, a State must establish
sufficient administrative procedures to ensure that the environmental
goals of the EIP are met, and that the program is adequately
enforceable (see paragraph IV.J.2. and the discussion of emissions
trading markets in Appendix X).
9. Enforcement Mechanisms
An EIP must include adequate enforcement consequences for
noncompliance with any source requirements, including MRR requirements.
Each program must include provisions ensuring that State/local and
Federal statutory maximum penalties preserve the deterrent effect of
traditional regulatory programs. Enforcement provisions should preserve
the criminal sanctions (for knowing violations) authorized in the Act
for violations of SIP requirements per se.
Traditional regulatory programs provide for enforcement against
noncompliance with emissions limits at both the Federal and State/local
levels. The statutory maximum Federal penalties under the Act are
$25,000 per day, per source in violation. To preserve the existing
level of deterrence under the Act, an EIP that imposes multiday and/or
multisource emission limits must define violations of those limits in
such a way that the violations will translate into some combination of
sufficient numbers of violations, sources in violation, and days of
violation. One possible approach would be for the EIP to authorize
predetermined penalties based on the amount of an exceedance of such a
cap, provided the predetermined amounts are sufficiently large (see
paragraph IV.H.).
The EIP's that impose multisource emissions limits must require
facilities to develop enforceable plans for remedying noncompliance in
those cases where facilities have exceeded emissions limits for the
specified averaging period. Such plans must identify appropriate and
enforceable control measures or other procedures or strategies
sufficient to achieve and maintain compliance with applicable emissions
limits. Further, for sources subject to title V requirements, the
elements of such plans must, at a minimum, be consistent with any
applicable title V permit requirements concerning compliance plans.
Compliance with MRR requirements is critical to the integrity and
success of EIP's. Thus, an EIP must include enforcement provisions that
establish a regulatory structure which clearly and effectively deters
inadequate or improper MRR, providing for both State/local and Federal
penalties. Further, the enforcement provisions must include methods for
determining required data when MRR violations result in missing,
inadequate, or erroneous monitoring and recordkeeping data. These
methods must ensure that sources have a sufficiently strong incentive
to properly perform monitoring and recordkeeping in the first place.

E. Use of Program Revenues

Today's rules incorporate statutory restrictions on the use of
revenues generated by statutory EIP's. These restrictions are mandated
by section 182(g)(4)(B) of the Act on the use of revenues generated by
statutory EIP's submitted pursuant to sections 182(g)(3), 182(g)(5),
187(d)(3), and 187(g) of the Act. Revenues may be generated by an EIP
from a wide variety of fees or charges, including emission or permit
fees, fees associated with approving and recording trades, application
fees associated with labelling or sources opting into an EIP, and fees
or charges associated with TCM's. Specifically, any such revenues may
be used by a State for providing incentives for achieving emissions
reductions, providing assistance (up to 75 percent of costs) for the
development of innovative technologies for the control of O3 air
pollution and for the development of lower-polluting solvents and
surface coatings, and funding (with up to 50 percent of the revenues)
administrative costs of State programs under the Act. These
restrictions on the use of revenues do not apply to discretionary
EIP's.
Because the use of revenues from discretionary programs is not
constrained, some or all of the revenues generated by discretionary
EIP's may be rebated in order to create a revenue-neutral program, or
one with less revenue retained by the State. Rebate provisions of
revenue-generating EIP's can be designed to reduce the total cost to
the affected sources without diminishing the incentive to reduce
emissions created by the EIP. For example, an emission fee program
could place a fee on total emissions from affected sources, and rebate
an amount based on average emissions or percentage emissions reductions
of the affected sources. In a program with a large number of sources,
each source would only have a minor influence on the average emissions.
Thus, the rebate is not dependent on a source's own actions, and would
not distort the incentive of the fee on every unit of emissions created
by the source.

IV. Discussion of Comments and Regulatory Changes

This portion of the preamble is organized according to the
``Discussion of Issues'' section in the proposal, with additional
discussion of general issues raised in public comments. The following
discussion highlights the changes and clarifications made in the final
rules in response to the public comments on these issues.

A. Program Goals

1. Statutory Programs
Statutory EIP's are those programs submitted pursuant to sections
182(g)(3), 182(g)(5), 187(d)(3), and 187(g) of the Act, generally
because of failures in achieving required emissions reductions. The Act
does not specify the extent to which the EIP must, in and of itself,
make up for the specific failure in achieving the emissions reductions
necessary to meet the next milestone requirement. Rather, the
provisions specify only that the EIP ``shall be sufficient, in
combination with other elements'' of the plan, or together with a
``transportation control plan,'' to achieve the necessary reductions.
In the proposal, the EPA solicited comments on whether to require
that some specified minimum percentage of the required reductions be
met by a statutory EIP. Most commenters, including State and local
agencies, industry, and an environmental group, felt that EIP's should
not be required to meet a specified minimum percentage of emission
reductions. These comments were generally based on the premise that
opportunities for such reductions will vary because of potential
differences between nonattainment areas that may implement EIP's. A
specified minimum percentage would not provide recognition of these
differences nor the flexibility that needs to be an inherent part of
EIP's. On the other hand, an environmental group commented that a
specified minimum percentage of required reductions should be met by a
statutory EIP, equivalent to the percentage difference between what the
SIP is achieving and what the next milestone requires.
The final rules retain the requirement that a statutory EIP make a
significant contribution to the required emissions reductions, without
mandating any percentage reduction requirement or that the EIP assume
the entire burden of making up for the shortfall. This position is most
consistent with statutory intent that the States have flexibility in
determining how best to combine an EIP with other emission reduction
programs to achieve the necessary emissions reductions. Further, this
position is consistent with meeting the benefits sharing goal
established for all EIP's.
2. Discretionary Programs
In explicitly allowing for discretionary (i.e., nonstatutory) EIP's
to be included as SIP provisions, the Act does not impose any specific
emissions reductions requirements on such programs (sections
110(a)(2)(A) and 172(c)(6)). Thus, the proposed rules imposed no
specific emissions reductions requirements on discretionary EIP's. The
proposal relied upon the new State planning, quantitative progress, and
attainment requirements in the Act to ensure expeditious attainment of
the NAAQS, regardless of the type of emissions reductions programs that
States may choose to include in their SIP's.
Comments were received from an environmental group in support of an
alternative view outlined in the proposal. The alternative view is that
any savings in compliance costs resulting from discretionary EIP's
(relative to nonincentive-based programs) should be shared between two
accounts: the regulated sources should retain only as much savings as
is sufficient to maintain the incentive to participate in the EIP, with
the remainder of the savings being used by the State to reach
attainment more quickly than would be practicable under a nonincentive-
based plan. This alternative view is based on the statutory requirement
that States should attain the NAAQS as expeditiously as practicable.
In contrast, other commenters from State and local agencies,
industry, and a joint environmental/industry work group agreed with the
proposal that the EPA should not require discretionary EIP's to achieve
more rapid progress than other regulations. A joint environmental/
industry work group emphasized that EIP's should be designed to
increase flexibility and cost effectiveness, and should not be held to
any stricter standard than traditional programs. Several industry
commenters felt that requiring more rapid progress towards attainment
in exchange for a more flexible program appears to be a penalty
provision. These commenters felt that, while EIP's should be structured
to produce reductions equivalent to traditional SIP rules that the
EIP's replace, the addition of further reductions as the price for
entry into an EIP will discourage participation and reduce benefits
that might otherwise result from broad participation. A State agency
disagreed with requiring greater emission reductions from discretionary
EIP's since different types of environmental benefits can be achieved
by EIP's, such as technological innovation, more available capital for
other control measures, conservation of natural resources, and
increased commitment from the regulated sources. Another State agency
believes that EIP's which replace traditional SIP requirements should
be equally effective, equitable, and enforceable as the program it
replaces.
The final rules take into account the broad array of benefits that
can result from the use of discretionary EIP's, the statutory
requirement for expeditious attainment, and the fact that EIP's are
relatively new and controversial in principle as well as in practice.
Further, current experience with EIP's makes clear that successful
adoption and implementation of EIP's requires some degree of consensus
among the interested groups that both the regulated entities and the
environment will benefit from such programs. Thus, the final rules and
guidance establish as a goal for all EIP's that they be designed to
benefit both the environment and the regulated entities. In so doing,
the final rules and guidance require States to meet this benefits
sharing goal, while providing flexibility to the States to determine
how best to do so. As a result, EIP's will increase flexibility, lower
the cost of attaining and maintaining the NAAQS, and provide stronger
incentives for the development and implementation of pollution
prevention measures and innovative technologies.
Benefits from discretionary EIP's can be defined in various terms,
as discussed in paragraph III.D.1. While the EPA encourages that
discretionary EIP's be designed to produce environmental benefits
directly, through increased or more rapid emissions reductions, States
should consider these and other benefits in designing a program to meet
the goal of sharing benefits between the regulated entities and the
environment. In many cases, benefits in terms of cost savings will not
be quantifiable prior to program implementation, due to the complex
market decisions that sources participating in an EIP will need to make
and changes in market conditions during the course of the program.
Thus, the final rules and guidance include analysis of control cost
savings, to the extent practicable, as a part of the required program
audit.
However, the difficulty of quantifying cost savings and the extent
to which those cost savings constitute an incentive to trade leads the
EPA to conclude that it is not practicable to require that all EIP's
discount trades or otherwise require increased or more rapid emissions
reductions that directly benefit the environment. The authorization for
discretionary EIP's in sections 110(a)(2)(A) and 172(c)(6) may be
interpreted to indicate Congress' view that such programs may help
achieve emissions reductions more effectively or efficiently, but not
necessarily more expeditiously, than traditional regulatory
requirements.
The final rules reflect that it most appropriately falls to the
States to determine the type and extent of benefits sharing that is
practicable and appropriate, given the unique circumstances that any
particular discretionary EIP is designed to address. Therefore, the
final rules do not require any specific formula for benefit sharing.
However, the final rules do recognize that the issue of benefits
sharing will be part of the political consensus building process
associated with designing a discretionary EIP. In assessing this issue,
States should not confuse this sharing with accounting for uncertainty
in an EIP. Since uncertainty is to be accounted for through compliance
and programmatic uncertainty factors (see paragraph III.F.),
determining a degree of sharing based on weighing the uncertainty in an
EIP would in essence be accounting twice for the same uncertainty.
One commenter also argued that the requirements for attainment as
expeditiously as practicable [section 181(a)(1)] and for imposition of
reasonably available control measures [section 172(c)(1)] mandate the
inclusion of emission fees in EIP's. The EPA encourages States to
consider emissions fees, but does not believe that, at present, their
impacts are sufficiently well understood in all cases to conclude that,
for all EIP's, they are either practicable or reasonably available.

B. Interface With Reasonably Available Control Technology (RACT) and
Other Statutory Requirements

1. RACT
The proposal was based on an interpretation of the statutory RACT
requirements that authorizes sources subject to the statutory RACT
requirements (RACT sources) to meet their RACT obligations in the
aggregate (i.e., through trading among themselves), and, when such
trading results in an exceptional environmental benefit, by acquiring
emissions reductions from non-RACT sources (as discussed in paragraph
II.D.2.). Further, the proposal defined exceptional environmental
benefits in terms of the statutory offset ratios for nonattainment
areas and other demonstrations of exceptional long-term environmental
benefits.
With regard to meeting RACT in the aggregate, all but one commenter
agreed with the proposed position that trading be allowed among all
RACT sources. Further, these commenters generally felt that such RACT
trading should produce emissions reductions that are equivalent to
those that would be obtained if each source met its source category-
specific RACT limit. On the other hand, one environmental group
disagreed with the proposed position allowing all sources covered by
RACT requirements to trade among themselves. This commenter stated that
nothing in the Act specifically authorizes substituting any trading
regime for source-specific RACT requirements. However, if the EPA
allows trading to meet RACT requirements, only trading within a given
RACT source category should be allowed since section 182(b)(2)
addresses RACT by source categories. Further, this commenter stated
that since RACT limits have historically been set based on source-
specific economic and technical constraints, ``tradeable'' RACT limits
must be based on an analysis of the cost savings achievable by meeting
RACT through whatever trading approach is permitted in the RACT rule.
Since trading approaches provide increased compliance flexibility and
cost savings, the commenter believes that any ``tradeable'' RACT limits
should be lower than source-specific RACT limits.
With regard to RACT/non-RACT trading in general, most commenters,
including industry, State and local agencies, and an environmental
group, supported such trading. Some stated that any regulation which
requires certain reductions to be obtained at specified sources, and
nowhere else, contradicts a ``market-based'' approach. They felt that
the broadest possible participation in a trading market should be
encouraged so as to achieve the most benefits from the program. Some
commenters felt that allowing RACT/non-RACT trading encourages the
development of new technologies and facilitates obtaining controls on
previously unregulated sources and source categories. Limiting trades
to particular source categories was thought by some to substantially
reduce both the incentives and savings available. Such comments were
premised on the belief that trading between different source categories
(involving both RACT and non-RACT categories) can have sufficient
controls and safeguards built in to ensure compliance.
On the other hand, other environmental groups opposed RACT/non-RACT
trading. One such commenter asserted that statutory language regarding
RACT ``sources'' only refers to stationary sources, such that trading
between RACT sources and mobile sources would violate the Act. Further,
this commenter asserted that such trading would make it impossible for
States to manage mobile source and stationary source budgets properly
for purposes of demonstrating RFP and attainment. The other
environmental group commended the EPA's objectives, and approved its
means in theory, of allowing trades between mobile and stationary
sources, but concluded that the time for trading between stationary and
mobile sources has not arrived. This conclusion was premised in part on
the belief that trading between RACT sources and mobile sources
violates the Act, because it is impossible to determine whether a given
mobile source emission reduction is truly surplus. Further, both
commenters felt that mobile source emissions reductions could not be
reliably quantified.
As to the conditions under which RACT/non-RACT trading may occur,
many commenters from industry expressed the view that such trading
should be allowed at a 1-to-1 ratio, i.e., that no exceptional
environmental benefit was required to justify RACT/non-RACT trading.
These commenters felt that any trading ratio greater than 1 to 1 would
limit the economic, technological, and environmental benefits that
could be derived from innovations brought about by RACT/non-RACT
trading. Other commenters, including State and local agencies and some
industries and environmental groups, supported the concept of requiring
RACT/non-RACT trades to achieve an exceptional environmental benefit in
general, and the use of the proposed statutory offset ratios in
particular. However, some of these commenters expressed concern that
the offset ratios may have a chilling effect on such trading, and
encouraged the EPA to identify justifiable circumstances under which
trading ratios could be lower than the offset ratios.
The final rules continue to allow RACT to be met in the aggregate.
In addition, the final rules continue to allow RACT/non-RACT trading,
provided that an exceptional environmental benefit is achieved.
Under the 1977 Act, the requirements specific to nonattainment
SIP's were found in part D of title I of the Act. Section 172 specified
the attainment date and the required SIP measures. Subsection (a) of
section 172 required that nonattainment SIP's provide for attainment by
specified dates; subsection (b)(2) required that those SIP's ``provide
for the implementation of all reasonably available control measures
(RACM) as expeditiously as practicable.'' Subsection (b)(3) required
that the SIP's provide for RFP, including RACT:

(Nonattainment SIP's must) require, in the interim (prior to the
attainment date) reasonable further progress * * * including such
reduction in emissions from existing sources as may be obtained
through the adoption, at a minimum, of reasonably available control
technology.

The EPA took the position that RACT requirements do not require
each affected emissions unit to achieve a prescribed amount of
reductions in emissions from its own processes, but rather require the
affected sources to achieve in the aggregate the reductions that would
be achieved if each applied RACT controls to itself. Under the EPA's
interpretation, the application of the requirement to impose RACT upon
``existing sources'' meant that RACT applied in the aggregate, as
opposed to source by source. This interpretation, which is reflected in
the Emissions Trading Policy Statement (51 FR 43814 (December 4, 1986),
the ``Bubble Policy''), was upheld in NRDC v. EPA, 33 ERC 1657 (4th
Cir. 1991), an unpublished decision. There, the Court of Appeals for
the Fourth Circuit upheld as reasonable EPA's approval of a Maryland
SIP revision for the American Cyanamid Company relaxing the SIP limit
on several lines in exchange for tighter limits on other lines. The EPA
reasoned that the RACT requirement was met by the subject lines in the
aggregate.
The Act revamped part D of title I by updating the general
requirements applicable to all nonattainment SIP's, placing those
requirements in subpart 1 of part D, and adding subparts 2-5 to cover
pollutant-specific nonattainment SIP's. Subpart 2 concerns ozone SIP's.
Under the 1990 Amendments, the 1977 Act's requirements for
nonattainment SIP's were generally retained in subpart 1, but were
combined differently--the RACM and attainment date requirements were
consolidated into one provision and the RACT requirement was shifted to
the RACM provision. Those provisions (section 172(c)(1)-(2)) now read:

(1) In General--Such (nonattainment SIP) provisions shall
provide for the implementation of all reasonably available control
measures as expeditiously as practicable (including such reductions
in emissions from existing sources in the area as may be obtained
through the adoption, at a minimum, of reasonably available control
technology) and shall provide for attainment of the national primary
ambient air quality standards.
(2) RFP--Such plan provisions shall require reasonable further
progress.

In addition, subpart 2 contains several RACT provisions. Most
importantly, section 182(b)(2) sets out the RACT requirement for areas
classified moderate or higher, as follows:

The State shall submit a revision to the applicable
implementation plan to include provisions to require the
implementation of reasonably available control technology under
section 172(c)(1) with respect to each of the following:
(A) Each category of VOC sources in the area covered by a CTG
document issued by the Administrator between the date of enactment
of the Clean Air Act Amendments of 1990 and the date of attainment.
(B) All VOC sources in the area covered by any CTG issued before
the date of the enactment of the Clean Air Act Amendments of 1990.
(C) All other major stationary sources of VOC's that are located
in the area.
Each revision described in subparagraph (A) shall be submitted
within the period set forth by the Administrator in issuing the
relevant CTG document. The revisions with respect to sources
described in subparagraphs (B) and (C) shall be submitted by 2 years
after the date of the enactment of the Act, and shall provide for
the implementation of the required measures as expeditiously as
practicable but no later than May 31, 1995.

Under the 1990 Act, the EPA continues to take the position
established under the 1977 Act that RACT applies in the aggregate
because the RACT requirement of section 172(c)(1) of the Act is phrased
identically to the RACT requirement of the 1977 Act (vis., ``existing
sources''). EPA does not read section 182(b)(2) to indicate to the
contrary. Rather, the cross-reference to section 172(c)(1) contained in
section 182(b)(2) indicates that RACT is to be interpreted in the same
manner under section 182(b)(2) as under section 172(c)(1).
In addition, the EPA interprets the RACT requirement to authorize
emissions trading among the stationary sources subject to the RACT
requirement (``RACT sources'') and those not subject (``non-RACT
sources'') when emissions reductions result in an amount that provides
an exceptional environmental benefit, e.g., a level of reductions that
is significantly greater than RACT-level amounts. This interpretation
entails viewing the RACT requirement as generally requiring a specified
level of reduction of emissions from stationary sources subject to
RACT, but as authorizing those sources to substitute significantly
greater emissions reductions credits from non-RACT sources in lieu of
putting controls on themselves.
The EPA acknowledges that the statute permits different
interpretations, including the interpretation that the universe of
sources subject to RACT must themselves implement RACT-level controls,
and therefore may not trade with non-RACT sources. However, the EPA
believes that its interpretation allowing such trading is permissible,
based on the language of section 172(c)(1). The EPA's interpretation
emphasizes that the RACT requirement is an emissions reduction
requirement for stationary sources that is designed to yield reductions
to facilitate the ultimate attainment of the NAAQS and, in the interim,
RFP towards attainment (sections 172(c)(1)-(2)).
Section 172(c)(1), as quoted above, requires SIP provisions to
provide ``such reductions in emissions from existing sources in the
area as may be obtained through the adoption, at a minimum, of
reasonably available control technology. This provision requires an
amount of emissions reductions that equates to the amount that would
result from the imposition of ``RACT'', but does not require the
imposition of any particular set of controls or technologies. Further,
the term ``RACT'' is not defined in the statute. In light of the
function of this term--to identify the level of required emissions
reductions--the EPA believes the term may be defined either as a
specified level of emissions to be reduced from the RACT source itself,
or as little as a zero level of reductions from the RACT source,
coupled with the acquisition by the RACT source of emissions reductions
from sources other than RACT sources in an amount that will yield an
exceptional environmental benefit.
With respect to the level of emissions reductions required from the
RACT source itself, the EPA believes that if the RACT source acquires
an appropriate amount of emissions reductions ``credits'' from non-RACT
sources, it is not reasonable to require additional reductions from the
source itself. Under these circumstances, control technology needed to
produce such reductions from the source itself is not ``reasonably
available''.
With respect to the level of emissions reductions required from the
non-RACT sources, the final rules retain the proposed approach to
define such a benefit in terms of the statutory offset ratios in
general, although flexibility is provided if exceptional environmental
benefits are otherwise demonstrated, with a lower bound for the trading
ratio of 1.1 to 1 in such cases. EPA believes that these additional
amounts of reductions are required because it is ``reasonable''--within
the meaning of the amount of reductions required through ``RACT''--to
forego reductions that could be obtained at the RACT source itself only
when the trading program will result in an exceptionally strong benefit
to the environment. In addition, requiring substantial additional
emissions reductions credits from non-RACT sources is consistent with
the underlying purpose of the RACT requirement--to assure reductions
that result in an important step towards fulfilling the RFP and
attainment requirements.
The EPA incorporated statutory offset ratios because offsets are an
aspect of emissions trading, and thus provide an indication of
Congress' view of benefits to the environment to be required in this
context of emissions trading.
Section 182(b)(2), quoted above, does not alter EPA's analysis.
Section 182(b)(2) mandates ``the implementation of reasonably available
control technology under section 172(c)(1) with respect to (three
categories of stationary sources).'' The EPA interprets the cross-
reference to section 172(c)(1) to incorporate into section 182(b)(2)
the definition of the phrase ``reasonably available control
technology'' and the RACT requirement generally under section
172(c)(1). In addition, the EPA interprets the phrase ``with respect
to'' to authorize RACT sources to acquire emissions reductions credits
in the manner described above, and not to mandate the imposition of
controls directly on the RACT sources. The EPA believes that this
provision may be interpreted to identify the source categories
responsible for securing RACT-level reductions, and to mandate the
time-frame for them to do so; but does not mandate that those sources
themselves implement the emissions reductions measures.
The EPA believes that its interpretation is permissible under
Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837
(1984), because the relevant statutory provisions are not defined in
the statute in a manner that makes clear whether sources subject to
RACT may acquire the necessary emissions reductions from other sources
in lieu of imposing the controls themselves. As a result, the EPA may
proceed to interpret the provision in a manner that is reasonable and
consistent with the purpose of the statute. (See generally sections
110(a)(2)(A) and 172(c)(6) (authorizing SIP measures to include
``economic incentives such as * * * marketable permits'').)
As discussed above in paragraph IV.A.2., the final rules and
guidance require that EIP's be designed to meet the goal of sharing
benefits between the environment and the regulated entities. For EIP's
that allow trading or other types of compliance flexibility to meet
RACT requirements, as with any EIP, the EPA encourages States, to the
extent practicable, to meet this benefits sharing goal most directly by
requiring increased emissions reductions beyond those that would be
achieved through a traditional RACT program. Increased reductions could
be created in a number of ways, such as by including more sources in
the program or requiring a greater than 1-to-1 trading ratio. Depending
on the scope and nature of an EIP, compliance flexibility might include
not only emissions trading between sources, but also alternative
compliance methods such as pollution prevention, energy conservation,
and fuel switching.
RACT/non-RACT trading programs must, of course, also meet the other
requirements in the final rules, such as those that relate to credible,
workable, and replicable quantification methods and to monitoring,
recordkeeping, and reporting that allow for compliance determinations
and State and Federal enforceability. The EPA recognizes that several
commenters raised concerns about the technical workability of emissions
trades involving mobile sources. Congress arguably contemplated that
EIP's could incorporate trades involving mobile sources, as indicated
by the definition of an EIP in section 182(g)(4)(A) to include
``incentives and requirements to reduce vehicle emissions and vehicle
miles traveled in the area, including any of the transportation control
measures identified in section 108(f).'' The EPA will address technical
concerns raised by commenters when it finalizes guidance on the
generation of ERC's from mobile source control programs.
Beyond the requirements in the final rules, the EPA is developing
more specific guidance on the use of emissions trading to implement new
NOX RACT requirements. This guidance will address issues such as
setting tradeable NOX RACT limits and baselines, and is consistent
with the general RACT trading principles set out in paragraphs III.D.2.
and III.D.3. The EPA intends to work with States who want to develop
trading-based RACT programs to incorporate the requirements of the EIP
rules and related guidance into EIP's that are environmentally sound
and administratively efficient.
2. Offsets
The EPA received a number of comments specifically dealing with NSR
offset issues. These covered a range of issues, but focused primarily
on offsets banking. Such issues are beyond the scope of this EIP
rulemaking, but the EPA intends to address them in the near future in
guidance on ERC banking currently being developed. In the interim, the
EPA intends to work with States who want to develop offset banking
programs.
3. ECO Programs
The EPA received a number of comments dealing with ECO programs
which are beyond the scope of this EIP rulemaking. The EPA has
previously issued guidance on ECO programs and anticipates the
development of additional guidance. Final action with respect to ECO
programs will occur when the EPA acts on SIP revisions concerning ECO
programs.

C. Program Baseline

The proposed rules were based on the premise that a State can only
take credit in attainment and RFP demonstrations for emissions
reductions from EIP's that are surplus to what is otherwise required
and credited to other elements of a federally-approved SIP. This
restriction is necessary to ensure that a State does not double count
emissions reductions in SIP demonstrations. The general requirements
for program baselines are intended to ensure that such double counting
does not occur, while still providing as much flexibility as possible.
The proposal solicited comments on the conditions under which
States should have the flexibility to use an ``allowable'' baseline. In
particular, comments were solicited on the proposed approach to accept
an ``allowable'' baseline in an EIP submitted in conjunction with the
submission of an applicable progress plan (e.g., 15 percent RFP plan
and/or subsequent 3 percent-per-year plans), prior to the submission of
an attainment demonstration. Further, comments were solicited on
approaches for achieving consistency between EIP's with ``allowable''
program baselines and statutory RACT, RFP, and attainment requirements.
There were many comments from industry and State and local agencies
in support of the proposed flexibility in setting baselines. These
comments generally supported the concept of considering the use of
allowable emissions in setting EIP baselines, provided the EIP is
consistent with RFP and attainment demonstrations. The commenters did
not, however, address how such consistency could be achieved or
demonstrated. Some State agencies commented that if allowable emissions
baselines are used, they should not lead to more actual emissions, in
the aggregate area-wide, than allowed under a traditional plan. The
commenters felt that this flexibility would allow States to select
baselines that were the most practicable and equitable to all sources
involved.
An alternative view was expressed by an environmental group which
advocated that the final rules should require an actual emissions
baseline for all EIP's until the attainment demonstration is approved.
This comment was premised on the belief that an allowable emissions
baseline would violate the requirements for attainment as expeditiously
as possible and for noninterference with attainment. The commenter
asserted that relying only on a RFP demonstration and a commitment by
the State that a future attainment demonstration would be consistent
with the EIP baseline was a wholly inadequate constraint to ensure
expeditious as practicable attainment. Further, this commenter
expressed the view that ``surplus'' reductions should be defined
relative to those reductions which are necessary to achieve attainment.
As a result, the commenter concluded that the EPA should not approve
any EIP's based on emissions trading prior to approval of an attainment
demonstration.
The final rules and guidance focus on consistency between progress
plans and EIP baselines. The rules recognize that RFP requirements are
defined in terms of actual areawide emissions reductions and annual
progress. Although such consistency and requirements may be made more
difficult by the use of an EIP baseline which incorporates allowable
emissions, the final rules provide States flexibility in designing an
EIP to achieve these requirements. Further, the final rules encourage
the development of EIP's as part of an overall attainment strategy that
lowers the cost of attainment. The final rules recognize that
attainment strategies that incorporate EIP's can reflect both
environmentally and economically sound policy choices. Therefore, the
final rules retain the proposed baseline flexibility and definition of
surplus, while requiring States to demonstrate in their EIP submittal
that the EIP baseline is consistent with their progress plans15
and RACT requirements, when applicable, and to commit that such
consistency will be reflected in any subsequent progress plans and
attainment demonstrations. The State should describe how the EIP
baseline will be integrated into a subsequent attainment demonstration.
The EPA takes the position that an allowables baseline, when consistent
with a submitted, complete, and potentially approvable RFP plan
generally is permissible. It is true, as one commenter emphasized, that
consistency with RFP does not automatically assure consistency with
attainment when additional reductions are needed for attainment.
However, the EPA takes the position that an allowables baseline that is
consistent with an RFP submittal does not specifically interfere with
attainment under section 110(l). The State's commitment that the
attainment demonstration, when submitted, will be consistent with the
allowables baseline lends additional support to the EPA's position. The
inducement to States to complete the attainment demonstration that is
presented by the sanctions/FIP requirement, as well as the fact that
emissions limits allowed under the EIP may be tightened if they
unexpectedly develop into impediments to attainment, further support
the EPA's positions.
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\1\5EPA has concluded that it is not necessary in this notice to
define RFP with any greater specificity than found in the statute;
that is, it is not necessary to identify the extent, if any, of
annual emissions reductions needed to comply with the statutory RFP
requirements.
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As stated above in parag

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-6828. Public record. Not legal advice.