Approval and Promulgation of Implementation Plans; Michigan

ENVIRONMENTAL PROTECTION AGENCY

40 CFR Parts 52 and 81

[MI 52-01-7260; FRL-5894-6]

Approval and Promulgation of Implementation Plans; Michigan

AGENCY: Environmental Protection Agency (EPA).

ACTION: Proposed rule.

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SUMMARY: The Environmental Protection Agency (EPA) is proposing

approval of the requested revisions to the Michigan State

Implementation Plan (SIP) for ozone, carbon monoxide, sulfur dioxide,

nitrogen dioxide, particulate matter and lead. The requested revisions

are Michigan's Emissions Averaging and Emission Reduction Credit

Trading Rules and supporting documents. These rules were submitted by

the State of Michigan on April 17, 1996 as an optional revision to the

SIP. The EPA has determined through its evaluation of the rules that

they can be approvable upon submission of corrections to certain

deficiencies that are identified in this notice.

DATES: Comments on this proposed action must be received by October 20,

1997.

ADDRESSES: Written comments should be addressed to: Carlton T. Nash,

Chief, Regulation Development Section, Air Programs Branch (AR-18J),

United States Environmental Protection Agency, Region 5, 77 West

Jackson Boulevard, Chicago, Illinois 60604.

Copies of the State's submittal and EPA's analysis (Technical

Support Document) are available for inspection at the following

location: United States Environmental Protection Agency, Region 5, Air

and Radiation Division, 77 West Jackson Boulevard, Chicago, Illinois

60604. (Please telephone Alexis Cain or Rick Tonielli before visiting

the Region 5 Office.)

FOR FURTHER INFORMATION CONTACT: Alexis Cain at (312) 886-7018 or Rick

Tonielli at (312) 886-6068.

SUPPLEMENTARY INFORMATION:

I. Background

Michigan submitted these rules as a SIP revision to allow sources

of emissions of ozone precursors (NOX and VOCs) and non-

ozone criteria pollutants (CO, SO2, NO2, PM-10

and lead) flexibility in complying with requirements already in the

SIP. The program provides emissions sources with a financial incentive

to reduce emissions below levels required by applicable Federal and

State requirements and below their actual emissions of the recent past.

Sources that make these extra reductions beyond requirements generate

emission reduction credits (ERCs) that they can use later or sell to

other sources. ERCs may be used by sources to comply with emissions

limits. The program is not a means of limiting emissions; instead,

trading and averaging are meant to provide an opportunity to comply

with existing emission limits in a more cost effective manner.

Michigan's emissions trading credit and averaging rules are not a

required SIP submission under the Clean Air Act (the Act).

Outline of State Program

Michigan's SIP submittal includes both ``open market'' trading and

emissions averaging. In an open market trading system, credits are

first generated, then subsequently traded, so that generation and use

of the credit are separated in time. Open market programs rely on

continual credit generation to ensure that use of previously generated

credits is balanced by generation of new credits, so that ``spikes'' in

emissions are not created by credit use. Sources participating in an

open market trading program generate discrete emission reductions,

referred to as emission reduction credits (ERCs) in the Michigan

program, by reducing emissions below a baseline over a discrete time

period. The generation baseline is established by existing

requirements, and is determined by the lower of allowable emissions or

actual past emissions. Credits can either be used at a later time by

the generator source or be sold to another source; the use of credits

allows a source to emit above its emission limit while remaining in

compliance.

The Michigan program also allows emissions averaging at sources

that are subject to Reasonably Available Control Technology (RACT)

requirements and are under common ownership and control. Under

Michigan's emissions averaging provisions, one source can exceed a

permitted emissions limit, as long as there is a simultaneous

reduction, equaling 110 percent of the exceedance, at another source

under the same ownership or control, but not necessarily at the same

location. In both the open market and emission averaging provisions of

Michigan's rule, 10 percent of the emission reductions generated are

retired for an environmental benefit.

Sources can trade and average emissions of volatile organic

compounds (VOCs) as a group, nitrogen oxides (NOX), and all

criteria pollutants other than ozone. VOC and NOX ERCs must

be designated as either ozone season or non-ozone season credits; VOC

and NOX ERCs generated outside of the ozone season cannot be

used during the ozone season.

Under the Michigan plan, sources which generate ERCs or engage in

emissions averaging must provide the Michigan Department of

Environmental Quality (MDEQ) with a notice that includes information

about the source

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generating the reductions, the methods of generating the reductions,

the amount of reductions, and the methods used to measure the

reductions. An official representative of the source must certify that

the information contained in the notice is ``true, accurate and

complete,'' that the emission reductions generated are ``real, surplus,

enforceable, permanent and quantifiable,'' and that the reductions have

not been used elsewhere for averaging or credit generation. ERCs and

averaging plans are not valid until MDEQ certifies that this notice is

complete. The rule requires MDEQ to make a determination of

completeness within 30 days. Similarly, sources which wish to trade or

use ERCs must provide to MDEQ a notice which includes information about

the source using the ERCs, the number of ERCs to be used, the

requirements being complied with through the use of ERCs, and a copy of

the generation notice for the ERCs that will be used. A responsible

official must certify that the information is ``true, accurate, and

complete'' and that the source will be operated in compliance with all

applicable requirements, including requirements for the use of ERCs.

As mentioned previously, the Michigan program requires a retirement

of 10 percent of ERCs generated, and of 10 percent of the reductions

used in an emission averaging program, to create a benefit for the

environment. In addition, VOC and NOX ERCs are discounted 10

percent per ozone season. All ERCs expire five years after being

generated.

Basis for Evaluation of SIP Revision

In 1994, EPA issued Economic Incentive Program (EIP) rules and

guidance (40 CFR part 51, subpart U), which outlined requirements for

establishing EIPs that States are required to adopt in some cases to

meet the ozone and carbon monoxide standards in designated

nonattainment areas. Michigan is not required to submit an EIP, so its

emission trading and averaging program need not necessarily follow the

EIP rule; however, subpart U also contains guidance on the development

of voluntary EIPs.

The EPA has also published a proposed policy on open market trading

programs (60 FR 39668, August 3, 1995) and a model open market trading

rule (60 FR 44290, August 25, 1995), which will be published as

guidance. This guidance will describe the elements of an open market

trading program that EPA considers to be desirable, and those that are

necessary for a program to be approvable as a SIP revision. As of this

writing, this guidance has not been finalized. Moreover, Michigan began

to develop its emissions trading program prior to the proposed guidance

on open market trading. Therefore, EPA does not expect Michigan's rule

to conform to this guidance.

Michigan's submittal is being evaluated on the basis of whether it

meets the requirements of SIPs as described in section 110 of the Act.

In particular, review focuses on whether the SIP as revised would be

enforceable, whether the revision would negatively affect the SIP's

ability to provide for attainment and maintenance of the National

Ambient Air Quality Standards (NAAQS), whether it would protect against

violations of Prevention of Significant Deterioration (PSD) increments,

and whether it would violate any other provisions of the Act.

II. Analysis of State Submittal

A. Size of Tradable Units

Under Michigan's program, ERCs are denominated in tons, but not

necessarily in whole tons. While the rule itself does not specify the

fractions that can be used, MDEQ staff indicate that credits may be

denominated in tenths of tons, if such precision is merited by the

measurement accuracy of the quantification protocol. While it would be

preferable from EPA's perspective to denominate all credits in whole

tons, Michigan's procedure is acceptable. No procedure is identified in

the rule for rounding the amount of credits generated or the amount

used. The EPA would suggest specifying that ERC users round up to the

nearest unit when determining the amount of ERCs needed, and ERC

generators must round down to the nearest unit when determining the

amount of ERCs generated. Although it is not specified in the rule,

MDEQ staff have indicated that they will require use of a similar

procedure.

B. Benefit Sharing With the Environment

Michigan appropriately requires that generators of ERCs retire 10

percent of the ERCs generated as an environmental benefit when

providing notice of generation.

C. Trading of Oxides of Nitrogen

While the intent of the trading rules is clearly to allow trading

of NOX, the ozone precursor, as well as NO2, the

criteria pollutant, Rule 1203(2) indicates that the program ``applies

only to volatile organic compounds as a class of compounds and all

criteria pollutants, except ozone.'' In order to allow for trading of

NOX as well as NO2, this statement must be

changed to add NOX to the list of compounds eligible for

trading.

D. Claiming Ownership of ERCs

Michigan's rule does not include a discussion specifying which

parties are eligible to generate credits in situations where more than

one party has a potential claim. This issue is significant because the

rights to credits generated by a particular credit generation strategy

will be unclear in some cases. For instance, a manufacturer of a device

that reduces automobile emissions might attempt to register credits

based on the sale of the device within Michigan. However, an owner of a

vehicle fleet might also attempt to register credits based on his or

her installation of those same devices within the fleet. Registration

of both sets of credits would double count the emission reductions,

leading to excess credits being generated.

MDEQ must address the issue of ownership claims in its procedures

for approving notices of credit generation. Guidance will be

forthcoming on this issue from EPA.

E. ERC Generation Issues

1. ERC Generation Baseline

Rule 1207 explains how the baseline from which a source may

generate credits is determined. Calculations must be based on the

source's emissions over the most recent 2 years or most recent 2 ozone

seasons, unless it can be shown that another time period is more

representative of actual emissions. Measurement must be based on

continuous emission monitoring (CEM) or parametric monitoring if

required by applicable requirement or if practical and reasonable;

otherwise, measurement for stationary sources will be based on emission

monitoring methods specified by applicable requirement or approved by

MDEQ. The baseline is calculated using an equation that includes the

lower of the actual or allowable emission rate, a capacity utilization

factor representative of the historical production rate of the source,

and the average actual operating hours of the source.

The generation baseline is determined by the emissions that

occurred prior to ``the initiation of an activity to reduce emissions

for the purposes of creating emission reduction credits.'' 1

(Rule 1207(1)) However, Michigan's rule also

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requires that reductions which generate ERCs be ``surplus,'' defined as

``those emission reductions made below an established source baseline

which are not required in the state implementation plan, any applicable

federal implementation plan, any applicable attainment demonstration,

reasonable further progress plan, or maintenance plan and which are not

mandated by any applicable requirement.'' Thus, the generation baseline

must be adjusted to reflect new requirements.

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\1\ For mobile source emissions, the baseline can be established

by the emissions projected in the absence of an emissions reduction

action, ``where a period of historical operations and actual

emission data or activity levels cannot be used to determine

emissions.'' (Rule 1207(2)(b)(3))

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The rules do not set any limit on the age of emissions data that

can be used to establish a generation baseline, although the

requirement to show that other data is more representative when not

using the previous 2 years as a baseline should limit, in practice, how

far back a source could go. The EPA strongly urges MDEQ to reject the

use of any baseline calculated based on data from any date prior to

November 15, 1990.

2. ERC Generation Start Date

Michigan's emissions trading rules allow credits to be generated

from actions dating back to 1991, accruing starting in 1991. Allowing

use of credits generated prior to enactment of the program has

potentially troublesome aspects. Credits generated prior to enactment

of the rule could flood the market, creating widespread use of cheap

credits and discouraging the generation of new credits. With generation

of new credits suppressed and abundant old credits in use, total

emissions could exceed levels that would have occurred in the absence

of the trading program.

However, several aspects of Michigan's program provide some

protection against this potential problem. First, credits generated

prior to enactment of the rules are discounted 50 percent, rather than

the usual 10 percent. Second, credits last only 5 years beyond the time

that the reductions occur. Therefore, reductions generated in the early

1990s will have a very limited life. Finally, credits generated from

early reductions must be registered within 1 year of enactment--by

March 17, 1997, a date which has already passed, allowing the State to

determine immediately the total number of pre-enactment credits that

are registered and in circulation.

While EPA would prefer that the program not allow credits to be

generated prior to enactment of the trading rule, and that credits not

be generated from actions taken more than 1 year prior to enactment, it

is willing to accept Michigan's approach, contingent upon receipt from

the State of the following: an accounting of the number of pre-

enactment credits generated and the remaining life of these credits,

and an analysis which demonstrates to EPA's satisfaction that the

potential use of these credits is unlikely to have a detrimental effect

on attainment or maintenance of the NAAQS or on any other requirement

of the Clean Air Act.

3. Credit Generation Through Activity Level Reductions

Michigan's program allows stationary sources to generate ERCs

through curtailing production, provided that the notice of generation

is submitted prior to the curtailment of operations. It also allows

sources which are shut down to generate ERCs for 5 years following the

shutdown. Therefore, given the 5 year limit on ERC life, shutdown

credits could be used a maximum of 10 years after the shutdown occurs.

Maintenance and attainment plans often rely upon emission

reductions caused by production decreases at some sources (i.e.,

shutdowns and curtailments) to help counteract increased emissions

caused by higher levels of production at sources subject to emission

rate limits, where emission increases are allowed to occur when net

production increases. Under Michigan's open-market trading system,

however, while increases in production at sources with emission rate

limits will still lead to emissions increases, production decreases

will not generate offsetting emissions reductions, since the reductions

resulting from production decreases can generate ERCs that are used to

allow higher emissions elsewhere. Therefore, overall emissions may

increase without a net increase in production under the trading

program; this is clearly a detriment to the environment.

Another problem potentially created by use of shutdown credits is

that load-shifting could occur among small sources such as gas stations

or print shops. Such sources could reduce emissions and generate ERCs

by shutting down or reducing production; however, the economic activity

of these sources will likely be picked up by new or existing sources in

the same areas, replacing the emissions for which ERCs were just given.

Since emissions created by increased operating rates by other existing

sources are not limited, and since new small sources are not subject to

an offset or cap requirement, the net effect of allowing shutdowns and

curtailments to generate ERCs would be to increase overall emissions.

Michigan's rule 1207(5) provides protection against load-shifting among

sources under common ownership or control. However, it does not protect

against load shifting among sources under different ownership or

control.

Moreover, allowing generation of ERCs from shutdowns and

curtailments could lead to generation of ERCs from emissions reductions

already relied upon in an attainment or maintenance plan, as mentioned

previously. Attainment and maintenance plans represent an effort to

prevent future violations of the NAAQS by projecting emissions

increases that will result from economic growth, factoring in the net

of shutdowns and curtailments, and insuring that emissions controls

will constrain emissions adequately despite net economic growth.

In order to correct this deficiency, Michigan can pursue one of

three options. The simplest and best option, from EPA's perspective, is

to prohibit the generation of ERCs from shutdowns and curtailments. A

second option is to prohibit the use of shutdown credits for compliance

with federal requirements in any area that has or needs an approved

attainment or maintenance demonstration. A third option is to prohibit

the use of shutdown credits for compliance with federal requirements in

any area that needs but lacks an approved attainment or maintenance

demonstration, while demonstrating to EPA's satisfaction that none of

Michigan's approved maintenance and attainment plans will be

compromised by the use of these credits. To make this demonstration, it

will be necessary to show that these plans do not rely in any way on

emission reductions created by source retirements or curtailments, and

that there is not an unacceptable level of risk that these credits

would interfere with future attainment or maintenance requirements. If

it decides to pursue this option, MDEQ must also seek public comment on

this form of credit generation.

4. Overcompliance With an Alternative RACT Determination

Emissions sources which cannot comply with a RACT limit because it

would not be technically feasible or economically reasonable can

receive an alternate RACT determination. Serious equity concerns would

be raised if such sources were allowed to generate credits by reducing

emissions below their alternative emission limit, while other sources

were required to base credit generation on their RACT limit. Therefore,

Michigan's rule appropriately disallows the use of an alternative

emission limit above an applicable RACT limit for the purpose of

setting a baseline. A source that has an

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alternative emission limit can generate credits only by reducing

emissions below the RACT limit.

F. ERC Emission Reduction Quantification Protocols

The credibility of an emission trading program depends on the

ability of sources and regulatory agencies to judge the value of the

currency--in Michigan's case, the emissions reduction credits-- used in

the program. Thus, it is vital that the criteria used for judging the

adequacy of emissions quantification protocols be clearly understood by

all parties. Moreover, it is important that sources understand the

elements of quantifying emissions reductions in an emission trading

program (i.e., the need to establish a baseline, the need to ensure

that reductions are not overestimated) that do not arise when

quantifying emissions simply for the purpose of demonstrating

compliance. In a program where no agency pre-certification of the

validity of credits takes place, it is vital that the basis for an

enforcement action against generators and users of bad credits be

clearly delineated. Furthermore, while EPA does not wish to delay the

use of emission trading for sources in categories that do not have EPA-

approved quantification protocols, a source in a category that already

has an EPA-approved protocol must use it, unless it gains EPA approval

for use of an equally-good protocol.

Michigan's emission trading program already contains the

requirement that emission reduction credits be real, surplus,

enforceable, permanent, and quantifiable. In order to ensure that these

criteria are met, Michigan must take two steps; first, incorporate into

the emissions trading rules a requirement that sources in categories

without EPA-approved protocols must follow a set of EPA-approved

protocol development criteria that have been provided to MDEQ (Letter

from David Kee to Dennis Drake, July 1, 1997) when developing protocols

for their source category, and second, commit in the SIP to require use

of existing and future EPA-approved protocols for quantifying emission

reductions at applicable sources, and to allow sources to deviate from

an EPA protocol only if they first get the approval of EPA.

G. Potential Uses of ERCs

1. RACT Compliance Alternative

The Michigan rule appropriately allows ERCs to be used as a RACT

compliance alternative. The EPA recommends that in conjunction with its

trading program, Michigan consider halting alternative RACT

determinations/variances, given that ERCs provide an alternative means

of compliance for sources that cannot otherwise meet RACT. At a

minimum, the State should consider the cost and availability of ERCs

when making economic feasibility-based alternative RACT determinations.

2. New Source Review Requirements

a. Synthetic minor sources: A ``synthetic minor'' source is one

that has the potential to emit at major source levels defined by the

New Source Review (NSR) program, but whose emissions are artificially

limited by its permit to levels below those that would subject it to

the major source requirements of NSR. Michigan's Rule 1204(6) allows a

synthetic minor source to use ERCs to make a temporary increase in

emissions that would bring its total emissions above the major source

threshold, without making the source subject to the requirements that

would normally apply to sources which exceed the threshold, such as New

Source Review and Title V. This increase must not exceed major

modification levels as specified in 40 CFR 52.21; ``temporary increase

in emissions'' is defined in Rule 1201(ee) as an increase ``which

occurs for less than 12 months and which does not occur more than once

in a 24 month period.''

This provision is unacceptable because of its potentially serious

environmental consequences. It would allow sources that would otherwise

be required to undergo New Source Review to use emission reduction

credits to avoid this requirement. For example, assume that a synthetic

minor source with a potential to emit of 150 tons per year (tpy) has

agreed to a limit of 90 tons per year in order to avoid major source

status. Assume that this source wishes to increase its emissions to 117

tpy. Under the Michigan program, the source could purchase 27 tons of

ERCs to compensate for the increase. The 27 tons would have been

generated by a source or sources which reduced emissions by 30 tons,

leading to the retirement of 10 percent of these reductions for an

environmental benefit. Thus, the environment would see a net

improvement of 3 tons from the trade.

In the absence of the trading program, however, a 90 tpy synthetic

minor source that increases its production above 100 tpy would undergo

New Source Review; as a result, the source would be required to comply

with the provisions of Best Achievable Control Technology (BACT) or

Lowest Achievable Emission Rate (LAER), which would frequently result

in a reduction of the source's total emissions by an amount

substantially larger than 3 tons. This loss of reductions means that

the synthetic minor provisions of the Michigan rule could, in many

cases, result in a significant loss of environmental benefit. In

summary, emissions would be higher under the synthetic minor program

than they would be without it, since the emission reductions required

by BACT or LAER will usually be greater than the 10 percent reduction

for the environment that a trading program would achieve.

The EPA's position is that ERCs may be used to comply with, but not

to avoid, Clean Air Act requirements. This policy applies to New Source

Review and Title V permit requirements. By allowing this use of ERCs to

avoid a requirement, even temporarily, the trading rule allows

emissions to be higher than they would be otherwise.

There is also an important legal basis for finding this provision

to be deficient. According to 40 CFR 52.21(r)(4): ``At such time that a

particular source or modification becomes a major stationary source or

major modification solely by virtue of a relaxation in any enforceable

limitation which was established after August 7, 1980, on the capacity

of the source or modification otherwise to emit a pollutant, such as a

restriction on hours of operation, then the requirements or paragraphs

(j) through (s) of this section shall apply to the source or

modification as though construction had not yet commenced on the source

or modification.''

This deficiency can be corrected by removing Rule 1204(6) from the

SIP submittal. In the absence of Rule 1204(6), synthetic minor sources

in Michigan will be prevented from using trading to avoid requirements,

but they will still be allowed to use trading to compensate for any

emissions increases that would not trigger new requirements in the

absence of the trading program.

b. Compliance with NSR and PSD Emission Limits: Michigan's rule

prohibits the use of credits in place of installing equipment

determined to constitute BACT or LAER requirements under the NSR

program. However, credits can be used for compliance with the BACT or

LAER emissions rate when the required equipment has been installed and

is being properly maintained, but the emissions rate is nonetheless

being exceeded. This provision will allow a source that exceeds

permitted emissions, despite installing and properly maintaining the

required equipment, to remain in compliance until permit limits are

revised to reflect the emission

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reductions actually achieved by the required technology. The EPA

believes that this is an appropriate use of credits, and suggests that

the rule could be strengthened by specifying what steps will be taken

by the State to limit the amount of time the source remains out of

compliance with BACT or LAER.

c. Offsets and Netting: Michigan allows use of credits for offsets

or netting at new or modified sources, with the following restrictions:

i. New sources which use ERCs for offsets must cover a minimum of

2.5 years of operation, and modified sources must cover the period of

time from issuance of an NSR permit to the date of issuance or renewal

of an operating permit.

ii. For renewal of an operating permit, the source must obtain ERCs

covering 5 years, or the term of the operating permit.

iii. The NSR permit must contain an enforceable commitment that the

source may not receive an operating permit or operating permit renewal

unless the operating permit contains an enforceable condition requiring

the source to obtain offsets for 5 years or the period of time for

which the permit is issued.

iv. ERCs used as offsets or for netting must be generated in the

``nonattainment area where the new or modified source is located or an

adjacent nonattainment area of equal or higher classification or other

area that contributes to the exceedance of a national ambient air

quality standard in the nonattainment area where the new or modified

source is located.'' Also, use must be in accordance with Clean Air Act

Section 182 and Michigan rule R 336.1220 (the State's ``major offset

rule'').

Section 182 of the Clean Air Act requires that offsets obtained

from a different nonattainment area must be both from the same or

higher classification and must contribute to a NAAQS exceedance in the

relevant nonattainment area. This contraction in the rules appears to

be an oversight; Rule 1211(3)(a) must be modified to reflect the

language of Section 182 of the Clean Air Act.

Michigan's rule would allow ERCs to be banked for the purpose of

netting. As stated in the technical support to the SIP, ``the

reductions are still required to be made at the same stationary source

and must be contemporaneous and of sufficient quantity to qualify under

NSR regulations.'' Under the current definition of netting (40 CFR

52.21), emissions increases and decreases considered for the purpose of

netting must be ``contemporaneous,'' defined as occurring within a

period beginning 5 years before the date that construction is expected

to commence on the proposed modification and ending when the increase

from the modification occurs. Since ERCs expire 5 years after being

generated under the Michigan rule, the contemporaneous requirement

would not be violated under Michigan's rule.

For both offsets and netting, the technical support to the trading

rule SIP submission indicates that MDEQ's intention is to allow ERCs to

be used only in a manner consistent with New Source Review

requirements. This intention must be stated explicitly as an

enforceable requirement of the rules.

3. NESHAP and NSPS Requirements

Michigan's rule appropriately prohibits the use of credits to

comply with National Emission Standards for Hazardous Air Pollutants

(NESHAP) and New Source Performance Standard (NSPS) emission

limitations or work practice standards.

4. Certain Mobile Source Standards

Michigan's rule appropriately prohibits the use of credits to

comply with ``Federally mandated mobile source requirements.''

5. Title IV Acid Rain Requirements

Michigan's rule appropriately prohibits Title IV sources that

participate in the Title IV acid rain cap-and-trade program from using

SO2 and NOX credits generated under Michigan's

trading rule to fulfill Title IV requirements.

H. ERC Use Requirements

1. Ownership of Credits Prior to Use

In open market trading programs, it is vital that sources that use

credits be required to own the credits prior to use. This requirement

ensures that sources will not be able to use trading to avoid the need

to maintain a compliance margin by simply using credits to ``true up''

after having exceeded their emission limits. Clearly, it is the intent

of the Michigan program to require ownership of credits prior to use--

Rule 1208(7) requires that emission reductions be generated prior to

being used or traded; Rule 1214(1) requires a user source to submit a

Notice of Use to MDEQ (which includes a copy of the Notice of

Generation for the credits being used); the price paid for credits must

be in the Notice of Use or submitted separately to the State within

seven business days of the use or trade; and Rule 1216(1) places

liability upon the source for assuring compliance with all applicable

requirements. However, the rules do not contain a straightforward

requirement that credits must be owned before use, nor do they specify

that failure to hold sufficient credits is a violation. These

deficiencies must be corrected in the rules.

2. Use Baseline

A trading program must specify the baseline for users of emissions

reduction credits, so that users know how to calculate the number of

credits that will be needed for compliance. While Michigan's intention

seems to be that the baseline will be established by allowable

emissions--that is, the maximum level of emissions that would have

occurred had the source met its compliance obligations without the use

of emission reduction credits--the rules do not make this intention

explicit. The rules must include a specific definition of the user

source baseline.

3. Temporal Requirements

The Michigan rule appropriately prohibits use during the ozone

season of NOX and VOC ERCs generated outside of the ozone

season. The rule allows ERCs generated during the ozone season to be

used during the entire year. This provision is appropriate because it

could encourage sources to shift emissions of ozone precursors from the

ozone season to the winter months, creating environmental benefits.

4. Geographic Requirements

Emission trading involves shifting of emissions from one area to

another. An emission trading program requires restrictions on the

geographic scope of trading in order to ensure that localized air

quality problems are not created. In particular, a trading program must

ensure that emission reductions generated in areas of clean air are not

used to allow emissions increases in areas of poor air quality. The

nature of the geographic restrictions needed depends on the transport

characteristics of the pollutant being traded. Pollutants that affect

air quality long distances from the location of their emission can

potentially be traded over a large area, while pollutants that affect

air quality in a small area should not be traded beyond that area.

The Michigan rule includes some provisions to discourage the

shifting of emissions from low pollution areas to areas with higher

pollution. Under the Michigan rule, trading can occur within the same

or a contiguous attainment area, between contiguous nonattainment areas

of the same classification, or from a nonattainment area to an

attainment

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area anywhere else in the state, on a 1:1 ratio. ERCs used in a

nonattainment area but generated in an attainment area or a

nonattainment area of lower classification elsewhere in the state must

be discounted by the ratios specified for the higher classification

area in section 182 of the Act, in addition to the 10 percent discount

for the environment. For instance, there would be a total 25 percent

discount for a trade from an attainment area to a moderate

nonattainment area (10 percent for the environment, 15 percent for the

geographic shift). The rule does not specifically address the issue of

trades between noncontiguous areas of the same classification.

Despite these provisions, the current geographic restrictions in

Michigan's SIP are not sufficient to ensure that ERCs will be used in a

manner that would maintain or improve air quality. EPA is concerned

that sources in attainment areas could generate large numbers of ERCs

by reducing emissions from an uncontrolled baseline. These ERCs could

then be used to allow for emissions increases or to forego reductions

in nonattainment and maintenance areas where emission controls are

required and where reductions are necessary to achieve attainment.

Moreover, it is unlikely that these trades would be balanced by an

equal volume of trades in the opposite direction, since sources in

attainment areas are subject to fewer requirements and would have less

need of ERCs than sources located in nonattainment areas. For example,

Michigan has some VOC RACT rules which apply only in nonattainment and

maintenance areas, or that have lower applicability thresholds in those

areas. Sources subject to these requirements could potentially use VOC

credits that were generated outside the area from an uncontrolled

baseline. This would result in a net decrease in air quality, since

credits would be shifted into the more highly polluted area where the

requirements applied. For these reasons, trading between attainment and

nonattainment areas may not balance out, despite the required discounts

for attainment area ERCs used in nonattainment areas.

Trading between nonattainment or maintenance areas and attainment

areas could be acceptable in cases where the State provides a

demonstration that pollution emitted in an attainment area affects a

nonattainment or maintenance area. EPA feels that it would be difficult

to demonstrate that emissions from the entire State affect air quality

in Michigan's nonattainment areas for ozone or for the other criteria

pollutants. However, EPA agrees with Michigan that a more regional

approach to protecting air quality is needed.

a. Geographic Restrictions on Trading of Ozone Precursors: EPA's

proposal for an interim implementation policy (IIP) for a potential new

ozone standard (61 FR 65752-65762, December 13, 1996) includes an

example of a possible regional approach to trading of VOCs and

NOX. This proposal suggests that nonattainment areas be

allowed to take credit for reductions occurring within an expanded area

extending 100 km from the nonattainment area boundary for VOCs and 200

km from the nonattainment area boundary for NOX. While the

IIP proposal would allow this expanded geographic area to be used for

the purpose of meeting post-1996 and post-1999 rate-of-progress

requirements, EPA believes that the same geographic limits could be

adopted to fit the trading allowed in the Michigan rule. Revising the

Michigan rule to allow trading and averaging of VOC and NOX

emissions within these geographic limits would enable sources to escape

the current restrictions caused by attainment and nonattainment area

designations, while also ensuring that the air quality in the area

where trading occurs will be, on average, improved. Making this

revision would eliminate EPA's transport-related approvability issues

for NOX and VOCs. These geographic limits, of course, need

apply only to sources which use trading to meet Federal, or SIP,

requirements.

b. Restrictions on Trading of Criteria Pollutants other than Ozone:

Because of the highly localized impacts that can be created by

emissions of the criteria pollutants other than ozone, all trades and

averaging involving above de minimus levels of these pollutants must be

evaluated for their localized impacts. For these pollutants, trading

between an attainment area and a nonattainment or maintenance area is

unacceptable, and trading above de minimus levels even within areas is

acceptable only if an evaluation indicates that the trade will not

cause an air quality problem.

Trading of emissions of sulfur dioxide, nitrogen dioxide,

particulate matter, carbon monoxide and lead, as allowed under

Michigan's program, creates concerns that do not arise in the trading

of ozone precursor emissions. Trading of criteria pollutants other than

ozone raises questions about whether the trading program would be

adequately protective of the National Ambient Air Quality Standards

(NAAQS), given that stationary source emissions of these pollutants can

create highly localized air quality problems (CO and fine particulates

can be either an area-wide or a localized problem). Moreover, a shift

in emissions of these pollutants from, for instance, a tall stack to a

short stack can make a major difference in air quality. Therefore, for

criteria pollutants other than ozone, special protections are needed to

ensure that use of ERCs does not lead to NAAQS violations. Whereas

attainment and maintenance plans for ozone focus on reducing the

region-wide emissions of ozone precursors, for the other criteria

pollutants, the specific location of the emissions is of vital

importance. Rule 1204(1) provides some protection against violations of

the NAAQS or of attainment or maintenance plans, stating that:

emission averaging and the use of emission reduction credits in an

attainment area shall not cause a violation of a national ambient

air quality standard, allotted prevention of significant

deterioration increments, or an applicable attainment area

maintenance plan. Emission averaging and the use of emission

reduction credits in a nonattainment area shall result in emission

reductions consistent with the requirements for reasonable further

progress for the nonattainment area and the attainment demonstration

and maintenance plan specified in the state implementation plan.

Michigan has developed procedures to ensure proper State review of

ERC uses and emission averaging of criteria pollutants other than ozone

that could cause concerns, and to ensure that modeling is done to

predict the air quality impact of potentially problematic ERC uses and

averaging. MDEQ's procedures for review of notices of use and emission

averaging, containing adequate modeling requirements, must be submitted

as part of the SIP to provide added protection against potential

adverse environmental impacts created by trading of criteria pollutants

other than ozone.

5. Intersector Trading

Michigan's rule specifies that ERC trading between mobile and

stationary sources is allowed. This provision is appropriate, since it

increases the number of options for trading.

6. Interpollutant Trading

The Michigan rule appropriately prohibits the use of ERCs for one

criteria pollutant or ozone precursor to allow for increases in a

different criteria pollutant or ozone precursor, ``except for

interstate trading where the use is consistent with a regional ozone

control strategy and the state implementation plan.''

I. Notice and Recordkeeping Requirements

The Michigan rule requires that notices of generation or emission

[[Page 48978]]

averaging and notices of use and their supporting documentation

accompany ERC trades, and establishes responsibility with the ERC users

and generators, or emission averagers, to store and maintain this

information. Michigan requires that copies of the notices and their

supporting documentation be stored on site no less than five calendar

years after the date of expiration of the emission averaging plan or

after the date the ERC is used, expired, or retired. These

recordkeeping requirements are appropriate.

1. Notice of ERC Generation

The Michigan rule requires sources to file a Notice of Intent to

Generate credits. For emission reductions generated between January 1,

1991, and the effective date of the rule, sources have 1 year from the

effective date of the rule to file such Notices. For post-enactment

reductions, there is no specified filing deadline, since credit life is

limited to 5 years after the year of generation. The rule appropriately

requires that the Notice of Generation be included in the Notice of

Use.

The EPA suggests that Michigan require notification of the relevant

Metropolitan Planning Organization in the event of mobile source

generation activities, and that the Notice of Intent to Generate

include a certification that the protocol used to quantify reductions

was acceptable.

MDEQ staff have developed a system for tracking ERCs by serial

number. While the system assigns serial numbers for each batch of ERCs

generated, not for each ton (as EPA would prefer), the Michigan system

seems adequate to enable accurate tracking in the registry of each

credit throughout its life.

2. Notice of Intent to Use ERCs

Michigan requires that sources submit to the State a Notice of

Intent to Use. The State then has 30 days to make a completeness

determination of the notice. The notice requires a description of the

``source, process, or process equipment'' where the credits will be

applied. The EPA recommends that, to simplify compliance determination,

the source, process, or process equipment be identified by permit or

identification number.

The party using credits is required to include the price paid for

the credits, either within the notice or by separately notifying the

State within seven business days of the use or trade. The Michigan rule

does not require the user to notify the State when credits are used.

However, the Notice of Intent to Use is required to include the

effective dates of use of the emission credits (1214(1)(h)). Any

methods used and operational changes made to accommodate the use of

credits become legally enforceable upon the effective date of the

completeness notice issued by the State. Furthermore, the rule requires

the State to create an emission trading registry for ``recording and

tracking emission averaging and the use and trading of emission

reduction credits.'' The EPA feels that these provisions are adequate.

Michigan also requires that notices of intent to use include

identification of ``the methods and procedures used to quantify

emissions and to determine compliance with all applicable

requirements'' and ``calculations demonstrating compliance through the

use of emission reduction credits.''

3. Public Availability of Information

EPA policy is that any information required to determine emissions

and to judge the quality of an ERC must be publicly available and

therefore not designated confidential. Sources that wish to use ERCs

must have access to this information, as must the general public.

Michigan Rule 1213(5) allows portions of information in notices of ERC

use or generation to be determined to be confidential under sections

11(2) and (3) of Act No. 451 of the Michigan Public Acts of 1994.

However, Act No. 451 specifies in part that ``data on the quantity,

composition, or quality of emissions from any source'' may not be held

confidential, and that ``data on the amount and nature of air

contaminants emitted from a source shall be available to the public.''

EPA feels that these provisions in Act No. 451, as cited in the trading

rule, adequately guarantee public access to the information needed to

determine emissions from sources participating in trading and to

evaluate the quality of ERCs.

MDEQ must also ensure access to information collected by sources as

part of an environmental self-audit that demonstrated erroneous or

willful generation or use of invalid credits. As discussed in the

following section, these sources may be eligible for a 30-day

reconciliation period under certain circumstances; the state must be

able to review this information to verify that such an opportunity is

appropriate.

J. Enforcement and Compliance Provisions

1. Compliance Certification

If either a generator or user of credits under the Michigan rule

self-reports to the State errors in calculations, methods, etc.

resulting in the generation or use of invalid credits, a reconciliation

period of up to 30 days is generally permitted without penalty for the

party at fault to purchase valid credits or to revise its planning to

compensate for its errors. This reconciliation period is available to

those who provide a notice within 30 days of discovery that includes an

explanation that the circumstances causing the credits to be invalid

have not occurred before, and a description of corrective steps that

will be taken to ensure that the error does not occur again.

The EPA would prefer that no reconciliation period be granted, or

that some lesser penalty be identified for those sources that self-

report mistakes than those who do not; allowing a reconciliation period

without any penalty lessens the incentive for generators and users of

credits to ensure that credits are valid. However, this provision of

Michigan's rule is acceptable because it limits the relief provided by

the reconciliation period; it is available only to those sources self-

reporting errors. In addition, granting of a reconciliation period does

not bring a source into compliance with the underlying requirement

being violated, leaving them subject to enforcement.

2. Violations and Penalties

Generators of credits which are discovered by the State to be

invalid must purchase three times the amount of the invalid credits,

which are then donated to the environment. The EPA supports the use of

this type of penalty and the donation of the credits to the

environment, and also recommends that provisions which address the

circumstance in which a user knowingly uses invalid credits be added to

the rule.

Donation of credits to the environment under this subrule does not

exclude a party from other penalties: ``A donation of emission

reduction credits under this subrule shall not be considered to be a

civil or criminal penalty * * * a person may also be subject to civil

and criminal enforcement actions, fines, and imprisonment as provided

under the act.'' (1216(3))

3. Assignment of Regulatory Liability

In an open market program where credits are certified, the user can

rely on the State's evaluation of credit quality (which is in turn

based on an evaluation of the accuracy and validity of quantification

methods). Without this certification, it falls upon the user to

evaluate the quality of quantification techniques when determining how

many credits are needed for compliance purposes, and upon the market to

create

[[Page 48979]]

financial value for credits based on their quality.

The Michigan rule requires that a credit be registered before use,

but not certified; the State performs only a completeness determination

of the Notice of Generation. The EPA strongly supports Rule 1216(1),

which specifies that both the generator and user are held responsible

for the generation of invalid credits. This feature of Michigan's rule

provides an added incentive to the user to conduct the checks of credit

validity that are not performed due to the absence of a credit

certification process in the rule.

This open market program design places considerable importance on

the quality of quantification protocols, so that accurate

determinations of credit value can be made by potential users. For this

reason, the trading rules should include the provisions discussed in

Section II (F) of this action requiring that Michigan follow EPA-

approved protocols and protocol development criteria.

K. Effect of Trading on Hazardous Air Pollutant Emissions

The Michigan rule 1204(3) prohibits any use of ERCs or averaging

that would result in an increase in the maximum hourly emission rate of

a toxic air contaminant from an existing stationary source or area

source, unless it can be demonstrated to the MDEQ that the increased

rate will not cause or exacerbate the exceedance of a toxic air

contaminant screening level based on the methodology in State rule

R336.1230. This provision places the burden on sources to determine

whether increased emissions of toxic air contaminants will result from

emission averaging or ERC use. In addition, the Michigan rule allows

the MDEQ to prohibit any use of credits or averaging that would result

in an increase in any of a list of 14 toxic, persistent pollutants, if

it determines that the increase would be ``inconsistent with the act or

protection of public health, safety or welfare.'' 2 It would

be up to the MDEQ to determine when such an inconsistency arose.

---------------------------------------------------------------------------

\2\ The pollutants are mercury, alkylated lead compounds,

cadmium, arsenic, chromium, polychlorinated biphenyls, chlordane,

octachlorostyrene, toxaphene, hexachlorobenzene, benzo(a)pyrene, DDT

and its metabolites, 2,3,7,8-tetrachlorodibenzo-p-dioxin, and

2,3,7,8-tetrachlorodibenzofuran.

---------------------------------------------------------------------------

The Michigan approach is considerably different from the one

favored by EPA. The EPA's favored approach would not restrict increases

in maximum hourly emissions of toxic pollutants, or restrict total mass

increases of toxic, persistent pollutants, but rather would require

sources that participate in open market trading to disclose all

estimated or measured negative effects of credit trading on emissions

of the hazardous air pollutants (HAPs) listed in section 112 of the

Act.

Many VOCs are listed as hazardous air pollutants (HAPs) in section

112 of the Act, and emissions of particulate matter may include

hazardous air pollutants. Emissions of these toxic pollutants are often

reduced incidentally by compliance with VOC or particulate matter

limitations. Accordingly, ERC generation could have the effect of

lowering toxic emissions from a facility. However, trading could also

result in higher levels of toxic emissions; if a facility that emits

HAPs uses ERCs to satisfy a VOC or particulate matter requirement, the

facility's emissions of HAPs could be higher than if the facility had

installed controls. This would be an example of a foregone decrease in

toxics emissions. Whether or not emissions of toxics are increased or

decreased at a given source due to trading or averaging, Federal and

State air toxics standards must continue to be achieved.

EPA believes that citizens have the right to know if emissions

trading may adversely affect the emissions of HAPs from a nearby

facility, and therefore have a possible impact on public health.

Disclosure of impacts on toxics emissions would also assist the State

in determining if credit generation or use would trigger any air toxics

program requirements at a particular facility and would allow

identification and potential resolution of environmental justice issues

as required in Executive Order 12898. Therefore, EPA requires that a

State that implements an open market trading program must, at a

minimum, require facilities to disclose the effect of open market

emissions trading on HAP emissions. Disclosure must, at a minimum,

follow the Toxics Release Inventory reporting requirements. States must

also examine the effects of the open market trading program on HAP

emissions as part of the periodic program performance audit.

Michigan's Rule 1217(1)(c) requires that audits address ``whether

the program has caused any localized adverse effects to the public

health, safety, or welfare or to the environment.'' We interpret this

provision to require examination of the effects of trading on HAPs, as

well as on air quality impacts related to the criteria pollutants.

However, Michigan's program lacks a requirement that the effects of

trades also be disclosed to the public at the time of registration of

use of credits. Michigan must include this requirement in its SIP.

L. Interstate Trading

In order to accommodate a more regional approach to air quality

management, it must be recognized that traditional boundaries, such as

state lines, do not necessarily accurately reflect the geographic areas

that are most relevant for emission trading purposes. For this reason,

EPA agrees with Michigan's intent to allow interstate emissions

trading.

However, allowing the exchange of credits between two states that

may have considerably different air quality management programs raises

a variety of issues that must be addressed. Safeguards must prevent

multiple uses of the same ERC unit, ensure enforceability of credits

generated out of state, and require that States properly account for

emission shifts in attainment planning and Reasonable Further Progress

milestone demonstrations. Michigan must provide a federally enforceable

commitment that it will not allow the use of credits from other states

without first entering into an adequate Memorandum of Understanding

(MOU) with that State. Michigan may either submit an MOU that addresses

these concerns to EPA for approval prior to undertaking trades with

another State, or include in its SIP revision a list of items that the

State commits to address in each future interstate MOU. With the latter

option, a future MOU need not undergo EPA review and approval, but the

SIP must ensure that any subsequent MOU addresses the consistency

between key trading rule elements in each State, including:

1. The ERC identification system;

2. Sharing of required Notices and a compatible credit tracking

system;

3. Geographic limitations (for instance, a VOC trade between

Michigan and Colorado should not be allowed);

4. Credit lifetimes and expiration dates;

5. Record retention requirements;

6. The list of acceptable credit generation and use activities;

7. Consistent treatment of credit generation and use protocols;

8. Credit generation base case definitions; and

9. Ozone season definition and any other temporal requirements.

Additionally, an MOU must contain a clear statement that each State

will enforce emission limitations under its jurisdiction and a

procedure for incorporating emission shifts caused by trading in each

State's attainment and

[[Page 48980]]

maintenance plans and demonstrations, RFP plans and demonstrations. The

MOU must make a determination on which State's laws determine whether a

credit is valid. EPA agrees with MDEQ that any out-of-State credit must

comply with the user State's requirements.

M. Protection of Class I Areas

The EPA has a policy of providing special protection for Class I

areas (pristine environments such as international parks and large

national parks and wilderness areas), as required under sections 160

through 169 of the Clean Air Act. This policy includes keeping Federal

Land Managers informed of activities that could affect air quality in

Class I areas. In accordance with this policy, to receive EPA approval,

emissions trading programs must include provisions requiring that the

relevant Federal Land Manager be notified 30 days before any ERC use

activity occurs in, or within 100 km of, a Class I area. Michigan's

rule contains no such notification provisions. This deficiency could be

corrected by rule revision, or by procedures submitted as part of the

SIP which require MDEQ staff to forward notices of use or notices of

emissions averaging which involve increases within 100 km of a Class I

area to the Federal Land Manager.

N. Federal Operating Permits

In order to allow for open market emission trading, Michigan must

revise its federally required operating permit program to cite the

trading rule in order to recognize ERC use as a compliance alternative

for permitted sources that are covered by the emissions trading rule.

Prior to ERC use, every permitted source that intends to use ERCs or

emissions averaging must possess a permit containing language that

references the emissions trading and averaging rules and allows ERCs to

be used for compliance demonstrations.

O. Open Market Program Audits

Michigan requires an evaluation of the emission trading program and

a public report to be made at least every 3 years, or more frequently

if deemed necessary by the State. The EPA supports the provisions that

specify that an audit evaluate:

--Whether the program is consistent with achievement and maintenance of

the NAAQS and has resulted in emission reductions consistent with

reasonable further progress toward attainment;

--Whether monitoring, recordkeeping, reporting, and enforcement have

resulted in a sufficiently high level of compliance;

--Whether the program has caused any localized adverse effects to

public health, safety, or welfare or the environment;

--Whether the program is achieving reductions across a spectrum of

sources, including area and mobile sources; and

--Whether individual source audit provisions have resulted in a

sufficient number of audits.

P. Contingency Measures

Michigan's rule states that if, after the triennial program

evaluation, MDEQ determines that program revisions are necessary, it

will revise the program and submit a SIP revision to EPA within 6

months. This provision is appropriate. EPA considers that program

revisions would be warranted if ERC generation has been greater than

ERC use, resulting in emissions spiking on days of poor air quality or

failure to meet area wide RACT-level or other required emission

reductions; if trading or averaging has led to an increase in exposure

to hazardous air pollutants or criteria air pollutants, or if Class I

areas have been adversely affected by the generation or use of ERCs.

Q. Early NOX Reductions

For EPA to approve an open market trading rule, it needs to be

convinced that ERC generation is likely to keep pace with ERC use, so

that there will not be significant emissions ``spikes'' created by the

use of a large number of ERCs in a short period of time. For VOCs, EPA

has determined that the risk that there will be such spikes is

sufficiently small that this issue can be dealt with through periodic

audits and contingency measures. However, for other pollutants,

particularly NOX, EPA has greater concerns. Under open

market trading, large NOX sources which are not currently

subject to any emissions limits would be able to bank large volumes of

early reductions generated through early compliance with forthcoming

Title IV Acid Rain program requirements. When used later, these large

volumes of ERCs could create spikes large enough to compromise

attainment.

Michigan's program protects against this problem within the State.

Rule 1212(2) limits the life of credits ``generated by emission

reductions which are necessary to comply with a proposed applicable

requirement and which occur after the date the applicable requirement

is proposed but before final compliance dates'' to five calendar years

or to one calendar year after the effective date of final compliance,

whichever comes first. Therefore all NOX credits generated

through early compliance with Title IV requirements will expire on

January 1, 2002, or 1 year after the applicable requirements become

effective. As a result of the limited life of these credits, unless a

market demand for NOX credits within Michigan is created

prior to January 1, 2002, most or all of the credits generated in this

fashion will result in early reductions without risk of being used

within Michigan.

Given this protection, EPA's remaining concern is that the

NOX ERCs generated through early compliance with Title IV

requirements not be used in other States after January 1, 2002. To

allay this concern, MDEQ must outline the existing procedures in the

SIP, or add such procedures, that insure that these credits expire in

accordance with Michigan rules and cannot be used in other States.

R. Property Rights

Michigan's emissions trading program does not contain a statement

that emission reduction credits do not constitute a property right. All

tradeable emissions reduction credits or allowances under the Act are

limited authorizations to emit pollutants, and do not constitute a

property right. Section 403(f) of the Clean Air Act, which deals with

sulfur dioxide allowances under the Acid Rain program, states:

An allowance allocated * * * is a limited authorization to emit

sulfur dioxide * * * Such allowance does not constitute a property

right. Nothing in this subchapter or in any other provision of law

shall be construed to limit the authority of the United States to

terminate or limit such authorization.

Congress included this requirement to ensure that allowance holders

understood that they were barred from claiming a governmental taking

under the 5th Amendment of the U.S. Constitution. Property status could

produce undesired and perverse results, such as requiring a government

agency to compensate the owner of a pollution source when its emissions

are limited. The absence of property status authorizes the

participating air pollution control agency to limit or terminate credit

use in extreme circumstances. The same logic applies to emission

reduction credits.

States should actually terminate credits only when other options

have failed to provide for meeting the State's underlying Act

obligations. Although EPA would not expect this to occur, and would

expect that the program will

[[Page 48981]]

achieve real and cost-effective emissions reductions without having to

resort to credit limitation, this contingency measure must be available

to provide confidence that States will make continued progress toward

their air pollution control goals.

In order to ensure that sources cannot claim that ownership of an

ERC issued under Michigan's program grants them a property right,

Michigan must include in its SIP a statement that ERCs do not

constitute a property right, either directly in the rule or in the form

of a letter from the Attorney General.

III. Proposed Action

The EPA is proposing to approve this revision to the Michigan SIP

for the reasons outlined above. EPA will not take action toward final

approval of this SIP revision until the deficiencies discussed in this

document are corrected. Nothing in this action should be construed as

permitting or allowing or establishing a precedent for any future

request for revision to any state implementation plan. Each request for

revision to the state implementation plan will be considered separately

in light of specific technical, economic, and environmental factors and

in relation to relevant statutory and regulatory requirements.

Under the Regulatory Flexibility Act, 5 U.S.C. 600 et seq., EPA

must prepare a regulatory flexibility analysis assessing the impact of

any proposed or final rule on small entities. 5 U.S.C. 603 and 604.

Alternatively, EPA may certify that the rule will not have a

significant impact on a substantial number of small entities. Small

entities include small businesses, small not-for-profit enterprises,

and government entities with jurisdiction over populations of less than

50,000.

EPA's proposed approval of the Michigan's request under section 110

of the Act does not affect any existing requirements applicable to

small entities. Any pre-existing Federal requirements remain in place

after this approval. Federal approval of the state submittal does not

affect its state-enforceability. Moreover, EPA's approval of the

submittal does not impose any new Federal requirements. Therefore, EPA

certifies that this approval action does not have a significant impact

on a substantial number of small entities because it does not remove

existing requirements or impose any new Federal requirements.

Under section 202 of the Unfunded Mandate Reform Act of 1995

(``Unfunded Mandates Act''), signed into law on March 22, 1995, EPA

must prepare a budgetary impact statement to accompany any proposed or

final that includes a Federal mandate that may result in estimated

costs to State, local or tribal governments in aggregate; or to the

private sector, of $100 million or more. Under section 205, EPA must

select the most cost-effective and least burdensome alternative that

achieves the objectives of the rule and is consistent with statutory

requirements. Section 203 requires EPA to establish a plan for

informing and advising any small governments that may be significantly

or uniquely impacted by the rule.

EPA has determined that the approval action proposed does not

include a Federal mandate that may result in estimated cost of $100

million or more to either State, local, or tribal governments in the

aggregate, or to the private sector. This Federal action maintains pre-

existing requirements under State or local law, and imposes no new

Federal requirements. Accordingly, no additional cost to State, local,

or tribal governments, or to the private sector, result from this

action.

This action has been classified as a Table 2 action for signature

by the Regional Administrator under the procedures published in the

Federal Register on January 19, 1989 (54 FR 2214-2225), as revised by a

July 10, 1995 memorandum from Mary Nichols, Assistant Administrator for

Air and Radiation. The Office of Management and Budget (OMB) has

exempted this regulatory action from Executive Order 12866 review.

List of Subjects in 40 CFR Part 52

Environmental protection, Air pollution control, Carbon monoxide,

Sulfur dioxide, Particulate Matter, Lead, Hydrocarbons,

Intergovernmental relations, Nitrogen dioxide, Ozone, Reporting and

recordkeeping requirements.

Authority: 42 U.S.C. 7401-7671q.

Dated: September 4, 1997.

David A. Ullrich,

Acting Regional Administrator.

[FR Doc. 97-24836 Filed 9-17-97; 8:45 am]

BILLING CODE 6560-50-U