Approval and Promulgation of Implementation Plans; California State Implementation Plan Revision, South Coast Air Quality Management District

Federal RegisterNov 8, 1996

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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 52

[CA 078-2-0016; FRL-5642-8]

Approval and Promulgation of Implementation Plans; California

State Implementation Plan Revision, South Coast Air Quality Management

District

AGENCY: Environmental Protection Agency (EPA).

ACTION: Final rule.

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SUMMARY: EPA is finalizing a limited approval and a limited disapproval

of revisions to the California State Implementation Plan (SIP) proposed

in the Federal Register on February 28, 1995. The revisions concern

rules from the South Coast Air Quality Management District (SCAQMD).

This final action will incorporate these rules into the federally

approved SIP. The intended effect of approving these rules is to

regulate emissions of oxides of nitrogen (NOX) and oxides of

sulfur (SOX) in accordance with the requirements of the Clean Air

Act, as amended in 1990 (CAA or the Act). The rules concern the control

of NOX emissions from facilities in the SCAQMD with four or more

tons of NOX or SOX emissions per year from permitted

equipment. The subject facilities, in order to meet annual emission

reduction requirements, will participate in an economic incentive

program (EIP) in order to reduce emissions at a significantly lower

cost. This document also serves to respond to comments received from

the public on the February 28, 1995 notice of proposed rulemaking

(NPRM).

EFFECTIVE DATE: This action is effective on December 9, 1996.

ADDRESSES: Copies of the rule revisions and EPA's evaluation report for

each rule are available for public inspection at EPA's Region 9 office

during normal business hours. Copies of the submitted rule revisions

are available for inspection at the following locations:

[[Page 57776]]

Rulemaking Section (A-5-3), Air and Toxics Division, U.S. Environmental

Protection Agency, Region IX, 75 Hawthorne Street, San Francisco, CA

94105.

Environmental Protection Agency, Air Docket (6102), 401 ``M'' Street,

S.W., Washington, D.C. 20460.

California Air Resources Board, Stationary Source Division, Rule

Evaluation Section, 2020 ``L'' Street, Sacramento, CA 92123-1095.

South Coast Air Quality Management District, 21865 E. Copley Drive,

Diamond Bar, CA 91765-4182.

FOR FURTHER INFORMATION CONTACT: Kenneth Israels, Rulemaking Section,

(A-5-3), Air and Toxics Division, U.S. Environmental Protection Agency,

Region IX, 75 Hawthorne Street, San Francisco, CA 94105, Telephone:

(415) 744-1194.

SUPPLEMENTARY INFORMATION:

Background

On February 28, 1995 in 60 FR 10819, EPA proposed granting limited

approval and limited disapproval of the following rules into the

California SIP: South Coast Air Quality Management District, Regulation

XX, NOX and SOX Regional Clean Air Incentives Market

(RECLAIM). Regulation XX was adopted by SCAQMD on October 13, 1993.

This rule was submitted by the California Air Resources Board to EPA on

March 21, 1994. These rules were adopted as part of South Coast Air

Quality Management District's efforts to achieve the National Ambient

Air Quality Standards (NAAQS) for ozone and in response to section

182(f) NOX reasonably available control technology (RACT)

requirements of the Clean Air Act (CAA). A detailed discussion of the

background for each of the above rules and nonattainment areas is

provided in the NPRM cited above.

In the NPRM, EPA proposed conditionally approving RECLAIM provided

that the SCAQMD submitted an enforceable commitment within one year of

publication of the NPRM to correct the deficiencies cited. EPA did not

receive an enforceable commitment from SCAQMD within one year of the

publication of the NPRM, therefore EPA is finalizing, as proposed in

the alternative in the NPRM, a simultaneous limited approval and

limited disapproval under CAA provisions regarding plan submissions and

requirements for nonattainment areas. As a result of this limited

disapproval EPA will be required to impose highway funding or emission

offset sanctions under the CAA unless the State submits and EPA

approves corrections to the identified deficiencies within 18 months of

the effective date of this disapproval. Moreover, EPA will be required

to promulgate a Federal implementation plan (FIP) unless the

deficiencies are corrected within 24 months of the effective date of

this disapproval.

On August 28, 1996 the State of California submitted revisions to

EPA which EPA believes address all of the deficiencies cited in the

February 28, 1995 NPRM. Therefore, EPA is proposing elsewhere in the

Federal Register today to approve into the SIP the August 28, 1996

submittal which addresses the cited deficiencies. The final approval of

the August 28, 1996 submittal will supersede the limited disapproval of

the March 21, 1994 submittal and remove the possibility of sanctions

associated with this limited approval/limited disapproval noted above.

EPA has evaluated the above rule for consistency with the

requirements of the CAA and EPA regulations and EPA's interpretation of

these requirements as expressed in the various EPA policy guidance

documents referenced in the NPRM. EPA is finalizing the limited

approval of these rules in order to strengthen the SIP and finalizing

the limited disapproval requiring the correction of the remaining

deficiencies. The NOX and SOX RECLAIM program contains the

following deficiencies:

the program allows the use of variances to avoid

compliance with program requirements; this results in the program

failing to meet the requirements of section 110(i) of the Act,

the program does not meet certain new source review (NSR)

requirements of the Act and Part D,

the program allows the use of Executive Officer discretion

in the implementation of certain emissions monitoring provisions; this

results in the program failing to meet the requirements of section

110(i) of the Act,

the program's references to other programs, notably those

involving the use of mobile source emission reduction credits (MERCs)

is inconsistent with section 110(i) of the Act, and

the submittal does not provide all of the necessary

demonstrations to ensure that the requirements of EPA's EIP rules are

being met.

A detailed discussion of the rule provisions and evaluations has

been provided in the NPRM and in the technical support document (TSD)

available at EPA's Region IX office (TSD dated February, 1995). On

August 28, 1996 the State of California submitted revisions to EPA

which EPA believes address all of the deficiencies cited in the

February 28, 1995 NPRM. Therefore, EPA is proposing elsewhere in the

Federal Register today to approve into the SIP the August 28, 1996

submittal which addresses the cited deficiencies.

Response to Public Comments

A 30-day public comment period was provided in 60 FR 10819. EPA

received comments on a wide range of issues including the approval of

the overall program. Four industry commentors supported full approval

of the program, one environmental group opposed approval of the

program, and one regulatory agency supported resolving program issues

identified by EPA in the conditional approval and approving the

program. EPA agrees with the commentors supporting approval of a

federally enforceable RECLAIM program and is optimistic that such a

program will lead to emission reductions necessary to achieve

attainment of the ozone national ambient air quality standard (NAAQS)

in the SCAQMD.

EPA also received specific comments from the public on the

following issues: (1) program definitions, (2) NSR, (3) the use of

variances in the program, (4) the use of MERCs in the program, (5) EIP

rule demonstrations, (6) monitoring requirements, (7) environmental

justice, (8) planning requirements, (9) public participation, (10) the

program's penalty structure, and (11) RACT. Following are EPA's

responses to these more specific comments:

1. Program Definitions

Comments: Two industry groups disagreed with EPA's request to

modify or add definitions to RECLAIM to ensure that federal

requirements relating primarily to NSR were being met.

Response: EPA believes that the definitions cited are necessary to

demonstrate that the fundamental requirements of NSR programs are being

met. For example, the construction-related definitions cited as

deficiencies in the NPRM are necessary to ensure that the statutory

offset provisions found in Section 182 of the CAA are being met.

Throughout the TSD, EPA cited the appropriate federal requirements to

ensure that the rationale for requiring modification or addition of key

definitions was clear.

With respect to specific comments made regarding construction

definitions, EPA believes that there is a fundamental need to address

such definitions, via rule language or legal interpretation, in

programs like RECLAIM which implement NSR requirements via trading

mechanisms.

[[Page 57777]]

2. NSR Issues

a. Offset Ratios and Tracking System:

Comments: One environmental group commented that the NSR offset

ratio for South Coast sources should be greater than 1:1. Two industry

commentors commented that a tracking system is not necessary to ensure

that the statutory offset ratio is being met by sources in South Coast

in the aggregate.

Response: EPA believes that the statutory offset ratios (1.5:1 or

1.2:1 if all major sources apply best available control technology--

BACT) in an extreme ozone nonattainment area should be maintained. EPA

believes that this requirement can be met on an aggregate basis. [See

discussion in EIP preamble at 59 FR 16696, dated April 7, 1994] In

order to meet this requirement, as EPA noted in its NPRM, a tracking

system is necessary to demonstrate that the statutory offset ratios are

met. The purpose of the tracking system would be to demonstrate that a

balance of reductions between non-major and major sources both in

RECLAIM and outside of RECLAIM achieved the statutory NSR offset ratio

(considering factors such as the RECLAIM declining mass emissions cap).

b. NSR Analysis on a Trade-by-trade Basis:

Comment: One industry commentor stated that EPA's proposed approval

would lead to a NSR analysis on a trade-by-trade basis in RECLAIM.

Response: EPA's understanding of RECLAIM NSR is that NSR

requirements do not, with respect to the need to purchase offsetting

emissions, need to be examined on a trade-by-trade basis. The NSR

offset requirements would only be triggered if a particular facility

exceeded its initial RECLAIM allocation plus nontradeable emission

allocation. However, the NSR lowest achievable emission rate (LAER)

requirement is one which needs to be examined on a trade-by-trade basis

when such trades increase emissions at an emissions unit. In these

instances, while NSR offsets may not be necessary, LAER must still be

applied to the emissions unit.

c. Incorporation of the Requirements of 40 CFR 51.164 into RECLAIM:

Comment: One industry commentor did not believe that the Stack

height procedures found in 40 CFR 51.164 needed to be incorporated into

the RECLAIM rules.

Response: NSR regulations must state that sources may not affect

their emissions by erecting a stack that does not meet the Stack height

requirements found in Section 123 of the CAA and in 40 CFR 51.164. EPA

disagrees with the commentor.

3. The Use of Variances in the RECLAIM Program

Comment: Two industry commentors want the use of variances from

program requirements in the program while one environmental group wants

the use of variances out of the program.

Response: Section 110(i) of the Clean Air Act prohibits the use of

variances to change the federally-enforceable SIP. EPA agrees with the

environmental group commentor in that the use of such mechanisms in a

market system may be detrimental to the system's achievement of clean

air goals.

4. The Use of Mobile Source Emission Reduction Credits (MERCs) in the

Program

Comment: One industry group does not believe MERC rules need to be

SIP approved prior to being used in RECLAIM while one environmental

group believes that MERCs can not be used in RECLAIM regardless of SIP

approval.

Response: EPA believes that MERCs can be used in the RECLAIM

program as a means of compliance with the RECLAIM mass emissions cap.

However, the use of MERCs generated using rules which have not been SIP

approved raises an issue of whether such uses are consistent with the

federally-enforceable SIP. EPA believes that if the underlying rules

used to generate MERCs for RECLAIM compliance purposes have not been

SIP-approved, the credits are not federally-enforceable. EPA believes

that the District and EPA can work out a satisfactory solution on this

issue which provides facilities using such unapproved MERCs notice that

such credits are not federally enforceable (until the particular MERC-

generating rule(s) are approved into the SIP) and consequently users of

such credits may be subject to federal enforcement action.

5. EIP Rule Demonstrations

Comment: One industry group does not believe that the environmental

benefit demonstration found at 40 CFR 51.493(e)(1)(ii) is needed as

other program elements address this issue while one environmental group

does not believe that the program as a whole meets the EIP

requirements.

Response: With respect to the environmental benefit demonstration,

the package EPA proposed for action on February 28, 1995 did not

address this issue and therefore did not meet the EIP requirements.

However, EPA believes that, given the RECLAIM declining caps' rate of

reduction goes beyond existing RACT requirements, the environmental

benefit provision in the EIP can be met as a result of the program's

design.

With respect to the program as a whole meeting the EIP

demonstration requirements, EPA agrees that some of the requirements

were not met and therefore cited these demonstrations in the NPRM and

February, 1995 TSD as deficiencies.

6. Monitoring Requirements

Comment: One industry commentor did not support using the SIP-

approval mechanism to incorporate changes to RECLAIM monitoring

requirements into the federally-approved SIP.

Response: EPA intends to use the SIP-approval mechanism to

incorporate changes to monitoring requirements in RECLAIM into the

federally-enforceable SIP. In the future, if a generic set of criteria

to determine the approvability of monitoring changes is developed, EPA

may reconsider its position, provided such criteria are SIP-approved.

Section 110(i) of the Clean Air Act does not allow such changes to

become federally-enforceable without a SIP revision.

7. Environmental Justice

Comment: One environmental group does not believe that EPA

considered RECLAIM's environmental justice impacts in its proposed

action.

Response: RECLAIM is a program designed to reduce ozone precursor

emissions from stationary sources. As such, it is designed to address

the area-wide ozone issue in the Los Angeles area, not the localized

toxics impacts issue. As the SCAQMD develops regulations which regulate

toxic emissions, EPA will review those regulations under section 112 of

the Clean Air Act. With respect to the concern that RECLAIM may

incidentally increase toxic emissions as a result of trading, the

RECLAIM program, as noted in the NPRM, meets the requirements of

Section 182(e)(3) of the CAA which requires clean fuels or advanced

controls for boilers which emit greater than 25 tons per year of

NOX (see the February, 1995 TSD). The majority of emissions which

can potentially be traded in RECLAIM are covered by this clean fuels/

advanced controls requirement (see RECLAIM supporting documentation).

As a result, the bulk of RECLAIM emissions (including toxic emissions)

will be controlled to a high degree through compliance with Section

182(e)(3) of the CAA, which can not be met through trading. Further,

SCAQMD examined the toxic impacts of RECLAIM (see pages EX-14 and 15

and EX-29 and 5-31 of Volume 1 of the RECLAIM documentation); this

analysis

[[Page 57778]]

shows that there will be no increase in toxic air pollutants as a

result of the trading of NOX and SOX under the RECLAIM

program. EPA has reviewed the SCAQMD analysis and agrees with its

conclusions that there will be little, if any, impact on local

communities as a result of trading in RECLAIM as most of the products

of incomplete combustion (combustion is the primary source of NOX

emissions in RECLAIM) are not classified as hazardous air pollutants

(HAPs). For those incomplete combustion products which are classified

as HAPs, their impact on local communities will be addressed in the

SCAQMD's and EPA's toxic control strategies (see Section 112 of the

CAA). EPA believes that, as a result of each of these factors (Section

182(e)(3) of the CAA controls and State, local, and federal measures to

control toxics) in the program design, EPA's approval of RECLAIM is

consistent with the goals set out in Executive Order 12898, which

provides the framework for federal agencies to address environmental

justice issues.

8. Planning Requirements

a. RECLAIM and the 1991 Air Quality Management Plan (AQMP) and

reasonable further progress (RFP):

Comment: One environmental group believes that the program is less

effective than the 1991 AQMP and that it will not show RFP.

Response: EPA's decision to approve NOX/SOX RECLAIM is

based on the District's lack of federally approved rules regulating

these source categories, not on the 1991 AQMP which had, at the time of

submittal, not been approved. The RECLAIM program, from this

perspective, strengthens the federally enforceable SIP and is more

effective than measures in an unapproved attainment plan. Further, the

test for the effectiveness of an attainment plan under Section

182(c)(2) does not rely on a single measure to demonstrate attainment,

but relies on all of the measures in the plan used to achieve

attainment. As with the comment regarding RECLAIM and the 1991 AQMP,

the RECLAIM program alone does not have to demonstrate compliance with

the CAA's RFP requirements. In Section 182(c)(2)(B) of the CAA, RFP is

defined over the period of 1990 to 1996 in terms of VOC emission

reductions; after 1996, NOX emission reductions may be substituted

for VOC emission reductions. EPA disagrees with the commentor that

RECLAIM does not meet RFP requirements as individual measures do not

shoulder the burden of meeting requirements taken on by an entire

progress showing.

b. Baselines:

Comment: One environmental group believes that the baselines have

been inflated causing the program to fail to meet planning

requirements.

Response: EPA recognizes the need for EIPs to address economic

inequities in the design of such programs. In the case of RECLAIM, as

the commentor has pointed out, baselines for some facilities may have

been established in recognition of such inequities. Provided that

increases in emissions resulting from the recognition of these

inequities are addressed, then there should be no failure of the SCAQMD

to meet the CAA planning requirements. As noted elsewhere in this

notice, individual measures in an attainment plan need not meet

specific CAA planning requirements as long as the plan as a whole

demonstrates attainment.

9. Public Participation

Comment: One environmental group believes that the program does not

provide enough public participation.

Response: EPA believes that RECLAIM afforded the public ample

opportunity to comment during the design of the program and affords the

public ample opportunity to participate during the implementation of

the program via the permitting and auditing processes. The development

of RECLAIM used a public process almost unprecedented in the history of

air quality regulatory development. Over a three year period a steering

committee, an advisory committee, and a myriad of workgroups dealing

with such issues as socio-economic impacts, allocations (baselines),

and energy impacts met on a regular basis. RECLAIM was adopted by the

SCAQMD Governing Board after a two-session hearing, during which issues

such as the baseline-setting procedures, environmental justice, NSR,

public participation, and enforcement were discussed. In addition, the

RECLAIM permitting process conforms to the CAA's NSR and Title V

permitting requirements for public review.

10. Penalty Structure

Comment: One environmental group believes that the penalty

structure is too lenient.

Response: In crafting the RECLAIM emission violation penalty

structure, EPA, the SCAQMD, and members of the RECLAIM Steering

Committee conducted a thorough analysis of what penalties for such

violations are appropriate. In this analysis, the group sought to

define appropriate penalties by examining the level of deterrence

necessary to discourage noncompliance with applicable emission limits.

EPA examined the history of enforcement of a variety of federal CAA

programs to discover what level of deterrence has been historically

effective. The group also linked the market mechanism to the amount of

statutory maximum penalties in the RECLAIM program. EPA believes that a

penalty structure which is based on the mass exceedance of the emission

cap like the one in RECLAIM is suitable for this particular type of

program. The results of this analysis led to the RECLAIM penalty

scheme.

11. RACT

a. RACT aggregation:

Comment: One environmental group believes that RACT aggregation

violates the Act.

Response: EPA disagrees with the commentor. This issue was

thoroughly explored in the final EIP rule. In the preamble to the final

EIP rule EPA states:

``An EIP may allow sources subject to the RACT requirement to

attain RACT-level emissions reductions in the aggregate, * * *''

[See 59 FR 16695, dated April 7, 1994]

Further, the EIP preamble states:

``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.'' [See 59 FR 16703, dated April 7, 1994]

Finally, the final EIP rule preamble states:

``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).'' [See 59 FR 16703-16704, dated April 7, 1994]

b. Long term averaging to meet RACT:

Comment: One environmental group believes that long term averaging

to meet RACT violates the Act.

Response: EPA disagrees with the commentor. In the preamble to the

final EIP rule EPA states:

``The final rules retain the proposed allowance for long-term

emissions

[[Page 57779]]

averaging, as well as requirements that States make statistical

showings that any such emissions averaging is consistent with

applicable RACT, RFP, and short-term NAAQS. These statistical showings

are necessary to show equivalency to, or noninterference with, each of

these statutory requirements, although as a practical matter the same

showing may suffice to assure consistency with more than one of the

requirements. The statistical showings should take into account the

extent to which emissions variations from an individual source or from

all sources are random or systematic and, thus, the extent to which the

variations can be considered to be independent. The showings must

demonstrate that the pattern of emissions resulting from relaxed

averaging periods would approximate the pattern of emissions that would

occur without relaxed averaging periods to an extent sufficient to

reasonably conclude that the relaxed averaging periods would not

interfere with the statutory requirements.'' [See 59 FR 16706, dated

April 7, 1994]

EPA Action

EPA is finalizing a limited approval and a limited disapproval of

the above-referenced rule. The limited approval of these rules is being

finalized under section 110(k)(3) in light of EPA's authority pursuant

to section 301(a) to adopt regulations necessary to further air quality

by strengthening the SIP. The approval is limited in the sense that the

rules strengthen the SIP. However, the rules do not meet the section

182(a)(2)(A) CAA requirement because of the rule deficiencies which

were discussed in the NPRM. Thus, in order to strengthen the SIP, EPA

is granting limited approval of these rules under sections 110(k)(3)

and 301(a) of the CAA. This action approves the rules into the SIP as

federally enforceable rules.

At the same time, EPA is finalizing the limited disapproval of

these rules because they contain deficiencies that have not been

corrected as required by section 182(a)(2)(A) of the CAA, and, as such,

the rules do not fully meet the requirements of Part D of the Act. As

stated in the NPR, upon the effective date of this NFR, the 18 month

clock for sanctions and the 24 month FIP clock will begin. Sections

179(a) and 110(c). If the State does not submit the required

corrections and EPA does not approve the submittal within 18 months of

the NFR, either the highway sanction or the offset sanction will be

imposed at the 18 month mark. It should be noted that the rule covered

by this NFRM has been adopted by the SCAQMD and is currently in effect

in the SCAQMD. EPA's limited disapproval action will not prevent SCAQMD

or EPA from enforcing this rule.