1
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
VIII.
Model
NOx
and
SO2
Cap
and
Trade
Programs
A.
What
Is
the
Overall
Structure
of
the
Model
NOx
and
SO2
Cap
and
Trade
Programs?

The
EPA
is
finalizing
model
rules
for
the
CAIR
annual
NOx,
CAIR
ozone­
season
NOx,
and
SO2
trading
programs
that
States
can
use
to
meet
the
emission
reduction
requirements
in
the
CAIR.
These
rules
are
designed
to
be
referenced
by
States
in
State
rulemaking.
State
use
of
the
model
cap
and
trade
rules
helps
to
ensure
consistency
between
the
State
programs,
which
is
necessary
for
the
market
aspects
of
the
regional
trading
program
to
function
properly.
It
also
allows
the
CAIR
Program
to
build
on
the
successful
Acid
Rain
Program.
Consistency
in
the
CAIR
requirements
from
Stateto
State
benefits
the
affected
sources,
as
well
as
EPA,

which
administers
the
program
on
behalf
of
States.

This
section
focuses
on
the
structure
which
maintains
the
existing
NOx
SIP
Call
rules
(
in
part
96,
subparts
A
through
J)
while
adding
parallel
rules
for
the
CAIR
annual
NOx
(
in
subparts
AA
through
II),
CAIR
SO2
(
in
subparts
AAA
through
III),
and
the
CAIR
ozone­
season
NOx
(
in
subparts
AAAA
through
IIII)
of
the
model
rules.
Commenters
generally
supported
the
proposed
structure
of
the
model
rules,
as
well
as
the
use
of
the
cap
and
trade
approach,
which
are
2
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
maintained
in
the
final
rules.
Later
sections
of
today's
rule
discuss
specific
aspects
of
the
model
rules
that
have
been
modified
or
maintained
in
response
to
comment.

The
EPA
designed
the
model
rules
to
parallel
the
NOx
SIP
Call
model
trading
rules
(
part
96)
and
to
coordinate
with
the
Acid
Rain
Program.
Mirroring
the
structure
of
existing
part
96
in
the
final
CAIR
NOx
and
SO2
model
rules
will
ease
the
transition
to
the
CAIR
rules
as
many
States
and
sources
are
already
familiar
with
the
layout
of
the
NOx
SIP
Call
rule.
In
addition,
because
the
EPA
proposed
new
CAIR
model
trading
rules
 
separate
from
the
existing
NOx
SIP
Call
model
rule
in
part
96
 
States
can
continue
to
reference
part
96
(
subparts
A
through
J)
through
2008.
The
CAIR
ozone­
season
NOx
cap
and
trade
program
that
the
EPA
has
included
in
today's
final
rule
is
intended
for
use
by
CAIR
ozone­
affected
sources
as
well
as
those
subject
to
the
NOx
SIP
Call
in
2009
and
beyond.
Those
States
that
wish
to
use
an
EPA­
administered,
ozone­
season
cap
and
trade
program
to
achieve
the
reductions
mandated
by
the
CAIR
or
the
NOx
SIP
Call,
must
use
the
CAIR
ozone­
season
NOx
model
rule
(
subparts
AAAA
through
IIII)
in
2009
and
beyond.

The
model
rules
rely
on
the
detailed
unit­
level
emissions
monitoring
and
reporting
procedures
of
part
75
and
3
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
consistent
allowance
management
practices.
(
Note
that
full
CAIR­
related
SIP
requirements,
i.
e.,
part
51,
are
discussed
in
section
VII
of
today's
preamble.)
Additionally,
section
IX.
B
of
today's
preamble
discusses
the
final
revisions
to
parts
72
through
77
in
order
to,
among
other
things,

facilitate
the
interaction
of
the
title
IV
Acid
Rain
Program's
SO2
cap
and
trade
provisions
and
those
of
the
CAIR
SO2
trading
program.

Road
Map
of
Model
Cap
and
Trade
Rules
The
following
is
a
brief
"
road
map"
to
the
final
CAIR
NOx
and
SO2
cap
and
trade
programs.
Please
refer
to
the
detailed
discussions
of
the
CAIR
programmatic
elements
throughout
today's
rule
for
further
information
on
each
aspect.

State
Participation
­


States
have
flexibility
to
achieve
emissions
reductions
however
they
chose,
including
developing
and
implementing
their
own
trading
program.


States
may
elect
to
participate
in
an
EPA­
managed
cap
and
trade
program.
To
participate,
a
State
must
adopt
the
model
cap
and
trade
rules
finalized
in
this
section
of
today's
rule
with
flexibility
to
modify
sections
regarding
NOx
allocations
and
whether
to
include
4
1
Rhode
Island
(
RI)
is
the
only
State
currently
participating
in
the
NOx
SIP
Call
cap
and
trade
program
that
is
not
affected
by
today's
ozone
finding.
As
is
explained
in
section
IX,
RI
may
join
the
CAIR
ozone­
season
trading
program
as
a
means
of
satisfying
its
NOx
SIP
Call
requirements.

Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
individual
unit
opt­
in
provisions.


States
may
participate
in
EPA­
managed
cap
and
trade
programs
for
either
the
annual
NOx,
the
ozone­
season
NOx,
the
SO2,
or
any
combination.
The
State
can
only
choose
to
participate
in
the
EPA­
administered,
CAIR
cap
and
trade
program(
s)
that
is(
are)
relevant
to
thier
finding(
s).


The
annual
NOx
model
rule
is
to
be
used
by
only
those
States
that
are
affected
by
the
CAIR
PM2.5
finding.


The
ozone­
season
NOx
model
rule
is
designed
to
be
used
by
those
States
that
are
affected
by
the
CAIR
ozone
finding
as
well
as
take
the
place
of
the
NOx
SIP
Call
requirements1.
The
CAIR
ozone­
season
NOx
program
will
be
the
only
ozone­
season
NOx
program
that
EPA
will
administer.
Because
the
EPA
will
no
longer
run
a
NOx
SIP
Call
trading
program,
States
may
include
their
NOx
SIP
Call
sources
if
they
adopt
the
EPA­
administered
CAIR
ozone­
season
NOx
program.


The
SO2
model
rule
is
designed
to
satisfy
the
ongoing
5
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
statutory
requirements
of
the
title
IV
Acid
Rain
SO2
cap
and
trade
program
 
with
simultaneous
compliance
with
title
IV
and
the
CAIR
 
for
sources
in
the
CAIR
region
that
are
affected
by
both
the
Acid
Rain
Program
and
the
CAIR.

Trading
Sources
­


States
must
achieve
all
of
the
mandated
emission
reductions
from
EGUs
to
participate
in
EPA­
managed
cap
and
trade
programs.
States
may
include
other
NOx
SIP
Call
trading
sources
in
the
ozone­
season
CAIR
NOx
cap
and
trade
program
and
still
participate
in
EPA­
managed
cap
and
trade
programs.


States
may
participate
in
EPA­
managed
cap
and
trade
programs
whether
or
not
they
adopt
the
optional
individual
opt­
in
provisions
of
the
model
rule.

However,
if
the
State
chooses
to
allow
individual
sources
to
opt­
in,
the
opt­
in
requirements
must
reflect
the
requirements
of
the
model
rule.

Emission
Allowances
­


The
CAIR
annual
NOx
cap
and
trade
program
will
rely
upon
CAIR
annual
NOx
allowances
allocated
by
the
States.
The
NOx
SIP
Call
allowances
and
CAIR
ozoneseason
NOx
allowances
cannot
be
used
for
compliance
6
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
with
the
annual
CAIR
reduction
requirement.
(
Note
that
allowances
from
the
Compliance
Supplement
Pool
(
CSP)

will
be
CAIR
annual
NOx
allowances.)


The
CAIR
ozone­
season
NOx
cap
and
trade
program
will
rely
upon
CAIR
ozone­
season
NOx
allowances
allocated
by
the
States.
In
addition,
pre­
2009
NOx
SIP
Call
allowances
can
be
banked
into
the
program
and
used
by
CAIR­
affected
sources
for
compliance
with
the
CAIR
ozone­
season
NOx
program.
The
NOx
SIP
Call
allowances
of
vintages
2009
and
later
can
not
be
used
for
compliance
with
any
EPA­
administered
cap
and
trade
programs.


The
CAIR
SO2
cap
and
trade
program
will
rely
upon
title
IV
SO2
allowances
but
may
also
include
additional
CAIR
SO2
allowances,
should
a
State
not
require
all
of
their
SO2
emissions
reductions
from
EGUs
in
their
budget
demonstration.
Pre­
2010
title
IV
SO2
allowances
can
be
used
for
compliance
with
the
CAIR.


Sulfur
dioxide
reductions
are
achieved
by
requiring
sources
to
retire
more
than
one
allowance
for
each
ton
of
SO2
emissions.
The
emission
value
of
an
SO2
allowance
is
independent
of
the
year
in
which
it
is
used,
but
is
based
upon
it's
vintage
(
i.
e.,
the
year
in
7
2
The
200,000
total
includes
the
share
of
the
CSP
that
DE
and
NJ
would
receive
if
the
EPA
finalizes
a
parallel
rule
finding
that
they
are
significant
contributors
for
PM2.5.

Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
which
the
allowance
is
issued).
Sulfur
dioxide
allowances
of
vintage
2009
and
earlier
offset
one
ton
of
SO2
emissions.
Vintages
2010
through
2014
offset
0.5
tons
of
emissions.
And,
vintages
2015
and
beyond
offset
0.35
tons
of
emissions.

Allocation
of
Allowances
to
Sources
­


For
SO2
allowances,
sources
have
already
received
allowances
through
title
IV.


NOx
allowances
(
for
both
the
annual
and
ozone­
season
programs)
will
be
allocated
based
upon
the
State's
chosen
allocation
methodology.
The
EPA's
model
NOx
rules
have
provided
an
example
allocation,
complete
with
regulatory
text,
that
may
be
used
by
State's
or
replaced
by
text
that
implements
a
States
alternative
allocation
methodology.

Compliance
Supplement
Pool
(
CSP)
­


Each
State
will
have
a
share
of
the
CSP
that
is
comprised
of
200,0002
CAIR
annual
NOx
allowances
of
vintage
year
2009.
The
State
may
distribute
the
CSP
allowances
based
upon
the
criteria,
found
in
the
SIP
Approvability
section
of
today's
rule,
for
early
8
3
Compliance
with
the
title
IV
Acid
Rain
Program
will
be
determined
separately
from
CAIR
compliance.

Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
reductions
and
need.

Emission
Monitoring
and
Reporting
by
Sources
­


Sources
monitor
and
report
their
emissions
using
part
75.
This
includes
individual
sources
that
opt­
in
to
the
program.


Source
information
management,
emissions
data
reporting,
and
allowance
trading
is
done
through
online
systems
similar
to
those
currently
used
for
the
Acid
Rain
SO2
and
NOx
SIP
Call
Programs.


Emission
monitoring
and
reporting
for
both
the
CAIR
annual
and
ozone­
season
NOx
cap
and
trade
programs
will
use
part
75.

Compliance
and
Penalties
­


Compliance
for
the
annual
and
ozone­
season
NOx
cap
and
trade
programs,
as
well
as
the
SO2
program,
will
be
determined
separately.
3

For
the
NOx
and
SO2
cap
and
trade
programs,
any
source
found
to
have
excess
emissions
must:
(
1)
surrender
allowances
sufficient
to
offset
the
excess
emissions;

and,
(
2)
surrender
allowances
from
the
next
control
period
equal
to
three
times
the
excess
emissions.
9
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
Comments
Regarding
the
Use
of
a
Cap
and
Trade
Approach
and
the
Proposed
Structure
Commenters
overwhelmingly
supported
the
use
of
a
cap
and
trade
approach
and
the
overall
framework
of
the
model
rules
to
achieve
the
mandated
emissions
reductions.
Some
supported
the
use
of
cap
and
trade
for
achieving
regional
emissions
reductions
but
noted
the
need
to
have
additional
measures
that
ensure
that
emission
reductions
take
place
in
nonattainment
areas.
This
is
in
line
with
the
EPA's
strategy
of
reducing
transported
SO2
and
NOx
through
a
regionwide
cap
and
trade
approach
and
encouraging
States
to
take
complementary
measures
to
address
their
particular,

persistent
nonattainment
issues.
(
Note
that
comments
on
specific
mechanisms
within
the
cap
and
trade
program
are
discussed
in
the
topic­
specific
sections
that
follow.)

B.
What
Is
the
Process
for
States
to
Adopt
the
Model
Cap
and
Trade
Programs
and
How
Will
It
Interact
with
Existing
Programs?

1.
Adopting
the
Model
Cap
and
Trade
Programs
States
may
choose
to
participate
in
the
EPAadministered
cap
and
trade
programs,
which
are
a
fully
approvable
control
strategy
for
achieving
all
of
the
10
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
emissions
reductions
required
under
today's
rulemaking
in
a
highly
cost­
effective
manner.
States
may
simply
reference
the
model
rules
in
their
State
rules
and,
thereby,
comply
with
the
requirements
for
statewide
budget
demonstrations
detailed
in
section
VII.
B
of
today's
preamble.
Affected
States
for
both
PM2.5
and
ozone
can
adopt
the
annual
NOx
and
SO2
cap
and
trade
programs
in
part
96,
subparts
AA
through
II,
part
96
subparts
AAA
through
III,
and
AAAA
through
IIII.

States
with
ozone­
season
only
CAIR
requirements
(
i.
e.,

Arkansas,
Connecticut,
Delaware,
Massachusetts,
and
New
Jersey)
can
adopt
the
ozone­
season
CAIR
NOx
program
(
subparts
AAAA
through
IIII).
Part
96
subparts
AA
through
II
and
AAA
through
III
can
be
used
by
States
that
are
affected
for
only
PM2.5
(
i.
e.,
Georgia,
Minnesota,
and
Texas).
States
that
elect
to
achieve
the
required
reductions
by
regulating
other
sources
or
using
other
approaches
will
follow
alternate
State
requirements,
also
described
in
section
VII.
B
of
today's
preamble.

As
proposed,
the
EPA
is
requiring
States
that
wish
to
participate
in
the
EPA­
managed
cap
and
trade
program
to
use
the
model
rule
to
ensure
that
all
participating
sources,

regardless
of
which
State
in
the
CAIR
region
they
are
located,
are
subject
to
the
same
trading
and
allowance
11
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
holding
requirements.
Further,
requiring
States
to
use
the
complete
model
rule
provides
for
accurate,
certain,
and
consistent
quantification
of
emissions.
Because
emissions
quantification
is
the
basis
for
applying
the
emissions
authorization
provided
by
each
allowance
and
emissions
authorizations
(
in
the
form
of
allowances)
are
the
valuable
commodity
traded
in
the
market,
the
emissions
quantification
requirements
of
the
model
rule
are
necessary
to
maintain
the
integrity
of
the
cap
and
trade
approach
of
the
program
and
therefore,
to
ensure
that
the
environmental
goals
of
the
program
are
met.

For
States
Electing
to
Participate
in
the
EPA­
Administered
Ozone­
Season
CAIR
NOx
Cap
and
Trade
Program
States
that
wish
to
achieve
their
CAIR
ozone­
season
requirements
through
an
EPA­
administered
ozone­
season
NOx
cap
and
trade
program
will
adopt
the
CAIR
model
rule
in
subparts
AAAA
through
IIII.
(
Note
that
the
EPA­
administered
annual
NOx
CAIR
cap
and
trade
program
is
independent
of
ozone­
season
CAIR
NOx
model
rule.)
Because
the
EPA
will
no
longer
administer
the
trading
program
for
the
NOx
SIP
Call,

States
that
wish
to
continue
to
meet
their
NOx
SIP
Call
obligations
through
an
EPA­
administered
cap
and
trade
program
will
also
adopt
the
CAIR
ozone­
season
model
rule.
12
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
NOx
SIP
Call
States
will
"
sun
set"
their
NOx
SIP
Call
rules
for
sources
that
will
move
into
the
CAIR
NOx
ozone­
season
program.
Part
96,
sections
A
­
J
(
i.
e.,
the
NOx
SIP
Call
trading
rule)
will
continue
to
be
available
for
the
NOx
SIP
Call
and
will
not
be
removed
for
the
CAIR.
The
CAIR
model
rules
specifically
address
how
NOx
SIP
Call
allowances
carry
forward
into
the
CAIR
NOx
ozone­
season
program.
(
Section
IX.
A
provides
additional
discussion
of
interactions
between
the
CAIR
and
the
NOx
SIP
Call).

For
States
Electing
to
Participate
in
the
EPA­
Administered
Annual
NOx
Cap
and
Trade
Program
States
that
are
PM2.5
affected
and
wish
to
participate
in
an
EPA­
administered
annual
NOx
cap
and
trade
program
will
adopt
the
CAIR
model
rule
in
subparts
AA
through
II.
States
may
participate
by
either
adopting
the
model
rule
provisions
by
reference
or
codifying
the
model
rule
in
their
State
regulations.

For
States
Electing
to
Participate
in
the
EPA­
Administered
SO2
Cap
and
Trade
Program
States
may
simply
adopt
new
provisions,
whether
by
incorporating
by
reference
the
CAIR
SO2
cap
and
Trade
rule
(
part
96,
subparts
AAA
through
III)
or
codifying
the
provisions
of
the
CAIR
SO2
cap
and
trade
rules,
in
order
to
13
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
participate
in
the
EPA­
administered
SO2
cap
and
trade
program.
The
CAIR
SO2
model
rule
works
in
conjunction
with
the
Acid
Rain
Program
provisions,
which
are
implemented
at
the
Federal
level
and
will
stay
in
place.
Today's
action
also
finalizes
some
revisions
to
the
Acid
Rain
Program
(
i.
e.,
parts
72,
73,
74,
75,
and
78).
(
Section
IX.
B
of
today's
preamble
provides
additional
discussion
of
interactions
between
the
CAIR
and
the
Acid
Rain
Program
and
changes
to
the
Acid
Rain
Program).

Comments
Regarding
the
Process
for
Adopting
the
Model
Rules
Commenters
supported
the
EPA's
proposed
process
and
emphasized
the
importance
of
workable
model
rules,
because
States
with
limited
resources
are
likely
to
incorporate
them
by
reference
or
heavily
rely
on
them
as
the
basis
for
State
rules.

2.
Flexibility
in
Adopting
Model
Cap
and
Trade
Rules
It
is
important
to
have
consistency
on
a
State­
to­
State
basis
with
the
basic
requirements
of
the
cap
and
trade
approach
when
implementing
a
multi­
State
cap
and
trade
program.
Such
consistency
ensures
the:
preservation
of
the
integrity
of
the
cap
and
trade
approach
so
that
the
required
emissions
reductions
are
achieved;
smooth
and
efficient
operation
of
the
trading
market
and
infrastructure
across
14
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
the
multi­
State
CAIR
region
so
that
compliance
and
administrative
costs
are
minimized;
and
equitable
treatment
of
owners
and
operators
of
regulated
sources.
However,
the
EPA
believes
that
some
limited
differences
are
possible
without
jeopardizing
the
environmental
and
other
goals
of
the
program.
Therefore,
the
final
rule
allows
States
to
modify
the
model
rule
language
to
best
suit
their
unique
circumstances
in
a
few,
specific
areas.

First,
States
have
the
flexibility
to
include,
as
full
trading
partners,
all
trading
sources
affected
by
the
NOx
SIP
Call
in
the
ozone­
season
CAIR
NOx
cap
and
trade
program.

This
is
an
outgrowth
of
the
development
of
the
CAIR
ozoneseason
NOx
program,
which
will
be
the
only
ozone­
season
NOx
cap
and
trade
program
administered
by
the
EPA.

In
addition,
States
may
develop
their
own
NOx
allocations
methodologies,
provided
allocation
information
is
submitted
to
the
EPA
in
the
required
timeframe.
(
Section
VIII.
D
of
today's
preamble
discusses
unit­
level
allocations
and
the
related
comments
in
greater
detail.
This
includes
a
discussion
of
the
provisions
establishing
the
advance
notice
States
must
provide
for
unit­
by­
unit
allocations).

Lastly,
States
using
the
model
cap
and
trade
rules
may
elect
to
include
provisions
that
allow
individual
units
to
15
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
"
opt­
in"
to
the
cap
and
trade
programs.
States
that
wish
to
include
this
mechanism
must
adopt
provisions
discussed
in
section
VIII.
G
of
today's
rulemaking.
Adopting
the
individual
unit
opt­
in
provisions,
which
would
allow
non­

EGUs
that
meet
the
opt­
in
requirements
to
enter
into
the
EPA­
managed
cap
and
trade
programs,
does
not
preclude
a
State
from
participating
in
the
EPA­
administered
cap
and
trade
programs.

C.
What
Sources
Are
Affected
under
the
Model
Cap
and
Trade
Rules?

In
the
January
2004
NPR,
the
EPA
proposed
a
method
for
developing
budgets
that
assumed
reductions
only
from
EGUs.

Electric
Generating
Units
were
defined
as:
fossil
fuelfired
non­
cogeneration
EGUs
serving
a
generator
with
a
nameplate
capacity
of
greater
than
25
MWe;
and
fossil
fuelfired
cogeneration
EGUs
meeting
certain
criteria
(
referred
to
as
the
"
1/
3
potential
electric
output
capacity
criteria").
In
the
SNPR,
we
proposed
model
cap
and
trade
rules
that
applied
to
the
same
categories
of
sources.
We
are
finalizing
the
nameplate
capacity
cut­
off
that
we
proposed
in
the
NPR
for
developing
budgets
and
that
we
proposed
in
the
SNPR
for
the
applicability
of
the
model
trading
rules.
We
are
also
finalizing
the
"
fossil
fuel­
16
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
fired"
definition
and
the
1/
3
electric
output
capacity
criteria
that
were
proposed.
The
actual
rule
language
in
the
SNPR
describing
the
sources
to
which
the
model
rules
apply
is
being
slightly
revised
to
be
clearer
in
response
to
some
comments
that
the
proposed
language
was
not
clear.

1.
25
MW
Cut­
Off
The
EPA
is
retaining
the
25
MW
cut­
off
for
EGUs
for
budget
and
model
rule
purposes.
The
EPA
believes
it
is
reasonable
to
assume
no
further
control
of
air
emissions
from
smaller
EGUs.
Available
air
emissions
data
indicate
that
the
collective
emissions
from
small
EGUs
are
relatively
small
and
that
further
regulating
their
emissions
would
be
burdensome,
to
both
the
regulated
community
and
regulators,

given
the
relatively
large
number
of
such
units.
For
example,
NOx
and
SO2
emissions
from
EGUs
of
25
MW
or
less
in
the
CAIR
region
represent
approximately
one
percent
and
two
percent
of
total
NOx
and
SO2
emissions
from
EGUs,

respectively.
There
are
over
4000
EGUs
of
25
MW
or
less
in
the
CAIR
region.
Consequently,
EPA
believes
that
administrative
actions
to
control
this
large
group
with
small
emissions
would
be
inordinate
and
thus
does
not
believe
these
small
units
should
be
included.
This
approach
of
using
a
25
MW
cut­
off
for
EGUs
is
consistent
with
17
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
existing
SO2
and
NOx
cap
and
trade
programs
such
as
the
NOx
SIP
Call
(
where
existing
and
new
EGUs
at
or
under
this
cutoff
are,
for
similar
reasons,
not
required
to
be
included)

and
the
Acid
Rain
Program
(
where
this
cut­
off
is
applied
to
existing
units
and
to
new
units
combusting
clean
fuel).

Also,
EPA's
New
Source
Performance
Standards
use
an
applicability
threshold
of
approximately
25
MW
under
subpart
Da.

One
commenter
suggested
a
plant­
wide
cut­
off
of
250
MW.

This
commenter
suggested
that
including
units
between
25
and
250
MW
would
cause
these
units
to
shutdown
but
failed
to
provide
any
analysis
to
support
its
claim.
Such
a
cut­
off
would
be
inconsistent
with
other
existing
SO2
and
NOx
cap
and
trade
programs
as
noted
above.
The
EPA
estimates
that
approximately
1/
3
of
the
SO2
reductions,
and
30
percent
of
the
NOx
reductions,
required
under
today's
rule
come
from
plants
between
25
MW
and
250
MW.
Our
modeling
shows
that
some
units
below
250
MW
will
put
on
controls
as
part
of
our
highly
cost­
effective
set
of
control
actions.
The
units
also
have
the
option
to
coal­
switch,
alter
dispatch,
and/
or
purchase
allowances.

Another
commenter
suggested
that,
in
lieu
of
the
language
proposed
in
the
SNPR,
the
EPA
adopt
a
definition
18
4
For
example,
certain
cogeneration
units
and
new
units
25
MW
or
less
that
burn
only
clean
fuel
are
exempt
from
the
Acid
Rain
Program.

Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
for
EGU
that,
according
to
the
commenter,
is
the
Acid
Rain
Program's
definition
of
affected
utility.
The
commenter
stated
that
the
Acid
Rain
definition
of
EGU
is
"
all
fossil
fuel­
fired
units
with
a
nameplate
capacity
greater
than
25
MW
supplying
more
than
1/
3
of
potential
electrical
output
to
the
grid."
However,
the
commenter
misstated
the
Acid
Rain
definition
and
confused
the
Acid
Rain
applicability
provisions
concerning
utility
units
in
general
with
those
provisions
concerning
cogeneration
units
in
particular.
The
Acid
Rain
Program
covers,
with
certain
exceptions,
4
all
existing
fossil
fuel­
fired
units
greater
than
25
MW
that
produce
any
electricity
for
sale;
and
new
fossil
fuel­
fired
units
that
produce
any
electricity
for
sale.
The
language
referenced
by
the
commenter
concerning
potential
electrical
output
applies,
in
the
Acid
Rain
Program,
only
to
cogeneration
units,
not
all
fossil
fuel­
fired
units.
For
non­
cogeneration
units,
there
is
no
exemption
from
Acid
Rain
Program
requirements
based
on
the
unit
selling
a
"
small"

amount
of
electricity
for
sale.
The
provisions
in
the
NPR
and
the
SNPR
concerning
cogeneration
units
are
discussed
below.
19
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
2.
Definition
of
Fossil
Fuel­
Fired
The
EPA
is
finalizing
the
proposed
definition
of
fossil
fuel­
fired,
i.
e.,
where
any
amount
of
fossil
fuel
is
used
at
any
time.
This
is
the
same
definition
that
is
used
in
the
Acid
Rain
Program.
One
commenter
suggested
that
the
proposed
definition
is
too
broad
and
that
the
EPA
should
use
in
the
CAIR
Program
the
same
definition
that
is
used
in
the
NOx
SIP
Call,
i.
e.,
where
a
unit
uses
fossil
fuel
for
at
least
50
percent
of
its
annual
heat
input
during
a
specified
period.
The
same
commenter
also
proposed
excluding
large
wood­
fired
boilers
and
black
liquor
recovery
furnaces.
The
commenter's
definition
would
result
in
units
already
subject
to
the
Acid
Rain
Program
in
a
given
State
being
excluded
from
the
CAIR
Program
and
the
model
cap
and
trade
rules
applicable
in
that
State.
Such
exclusion
would
make
it
more
difficult
to
coordinate
the
Acid
Rain
Program
and
the
CAIR
Program.
Consequently,
the
EPA
rejects
the
commenter's
more
restricted
definition
of
fossil
fuel­
fired.

The
EPA
recognizes
that
new
(
i.
e.,
post
1990)
units
that
are
25
MW
or
less
and
burn
other
than
clean
fuels
are
subject
to
the
Acid
Rain
Program
but
not
to
the
CAIR
Program.
However,
there
are
very
few
such
units,
and
EPA
has
decided
to
exclude
any
units
that
are
25
MW
or
less
on
20
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
other
grounds
discussed
above.

3.
Exemption
for
Cogeneration
Units
As
proposed,
EPA
is
finalizing
an
exemption
from
the
model
cap
and
trade
programs
for
cogeneration
units,
i.
e.,

units
having
equipment
used
to
produce
electricity
and
useful
thermal
energy
for
industrial,
commercial,
heating,

or
cooling
purposes
through
sequential
use
of
energy
and
meeting
certain
operating
and
efficiency
standards
(
discussed
below).
The
EPA
is
adopting
the
proposed
definition
of
cogeneration
unit
and
the
proposed
criteria
for
determining
which
cogeneration
units
qualify
for
the
exemption
from
the
model
cap
and
trade
programs.

The
CAIR
trading
program
has
different
applicability
provisions
for
non­
cogeneration
units
and
cogeneration
units.
If
a
unit
initially
qualifies
as
a
cogeneration
unit,
and
for
the
exemption
from
the
trading
program
for
certain
cogeneration
units,
but
subsequently
loses
its
cogeneration­
unit
status
(
e.
g.,
due
to
changes
in
operation),
such
unit
loses
the
cogeneration­
unit
exemption
and
becomes
subject
to
the
applicability
criteria
for
noncogeneration
units,
regardless
of
any
future
changes
in
the
unit
or
its
operations.
If,
under
the
non­
cogeneration
unit
applicability
criteria,
the
unit
becomes
subject
to
the
21
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
trading
program,
the
unit
will
remain
subject
to
the
program
in
the
future.
Conversely
if
a
unit
initially
does
not
qualify
as
a
cogeneration
unit,
such
unit
becomes
subject
to
the
applicability
criteria
for
non­
cogeneration
units,

regardless
of
any
future
changes
in
the
unit.
If,
under
such
criteria,
the
unit
is
subject
to
the
trading
program,

the
unit
will
remain
subject
to
the
program
in
the
future.

This
approach
to
applicability
means
that
units
(
other
than,

in
some
cases,
opt­
in
units)
cannot
go
in
and
out
of
the
trading
program,
which,
if
allowed,
would
make
it
difficult
for
the
EPA,
States,
and
owners
or
operators
to
determine
which
units
should
be
complying
with
trading
program
requirements,
and
during
what
years,
and
would
likely
result
in
more
non­
compliance
problems.

a.
Efficiency
Standard
for
Cogeneration
Units
The
EPA
proposed
operating
and
efficiency
standards
(
i.
e.,
the
useful
thermal
energy
output
of
the
unit
must
be
no
less
than
a
certain
percent
of
the
total
energy
output
and,
in
some
cases,
useful
power
must
be
no
less
than
a
certain
percent
of
total
energy
input)
in
the
SNPR
that
a
unit
must
meet
in
order
to
qualify
as
a
cogeneration
unit.

If
the
unit
qualifies
as
a
cogeneration
unit,
then
it
may
be
eligible
for
exemption
from
the
CAIR,
depending
upon
whether
22
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
it
meets
additional
operating
criteria,
discussed
below.
As
discussed
in
the
NPR,
the
EPA
proposed
the
same
operating
and
efficiency
standards
for
all
fossil
fuel­
fired
units
(
regardless
of
whether
they
burn
coal,
oil,
or
gas).
In
addition,
not
applying
the
operating
and
efficiency
standards
to
coal­
fired
units
would
be
counter
productive
to
the
EPA's
efforts
to
reduce
SO2
and
NOx
emissions
under
this
proposed
rule
because
of
the
relatively
high
SO2
and
NOx
emissions
from
coal­
fired
units.
In
particular,
without
application
of
the
efficiency
standards
to
coal­
fired
units,

highly
inefficient
coal­
fired
units,
which
have
particularly
high
emissions
per
MWhr
generated,
could
be
exempt
from
the
CAIR
Program.
In
addition,
if
coal­
fired
units
were
not
subject
to
the
operating
standard,
the
potential
would
exist
for
a
coal­
fired
unit
to
provide
only
a
token
amount
of
useful
thermal
energy
and
still
qualify
for
a
cogeneration
unit
exemption
from
the
CAIR
Program,
despite
having
relatively
high
emissions.

One
commenter
suggested
that
the
EPA
should
not
use
the
efficiency
standards
for
solid
fuel­
fired
cogeneration
units,
because
it
may
require
some
coal­
fired
cogeneration
units
that
were
exempt
from
the
Acid
Rain
Program
to
purchase
CAIR
allowances.
However,
the
EPA
analysis
23
5
The
range
included
solid
fuel­
fired
cogeneration
units
from
25
MW
to
250
MW.

Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
indicates
that
most
existing
solid
fuel­
fired
cogeneration
units
affected
by
this
rule
will
meet
the
proposed
standard.

See
TSD
entitled
"
Cogeneration
Unit
Efficiency
Calculations"

in
the
docket.
To
the
extent
any
solid
fuel­
fired
cogeneration
units
cannot
meet
the
efficiency
standard
and
become
affected
units
under
the
CAIR,
the
EPA
believes
that,

considering
their
relatively
high
emissions
of
SO2
and
NOx
compared
to
oil
and
gas­
fired
units,
it
is
important
to
require
these
sources
to
meet
the
efficiency
standards
or
be
subject
to
the
emission
limits
under
the
CAIR
Program.

Another
commenter
suggested
that
the
efficiency
standards
should
not
apply
to
solid
fuel­
fired
cogeneration
units
because
solid
fuel­
fired
unit
efficiency
is
based
on
HHV
(
higher
heating
value)
while
gas,
or
oil­
fired
unit
efficiency
is
based
on
LHV
(
lower
heating
value).
The
EPA
analyzed
a
range5
of
solid
fuel­
fired
cogeneration
units
and
calculated
their
efficiencies
to
see
if
they
would
meet
the
minimum
efficiency
standard.
All
of
the
units
selected
satisfied
the
proposed
efficiency
standard.
See
TSD
entitled
"
Cogeneration
Unit
Efficiency
Calculations"
in
the
docket.
As
a
result,
the
EPA
believes
that
most
solid
fuel­
24
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
fired
cogeneration
units
will
meet
the
proposed
efficiency
standard.
The
efficiency
standard
the
EPA
is
adopting
is
the
Public
Utility
Regulatory
Act
(
PURPA)
of
thermal
efficiency
of
42.5
percent.
See
TSD
entitled,
"
Cogeneration
Unit
Efficiency
Calculations"
for
further
discussion,
is
based
on
LHV.
If
the
efficiency
of
a
solid­
fuel­
fired
unit
is
expressed
in
terms
of
HHV,
it
can
easily
be
converted
to
LHV
for
purposes
of
determining
whether
it
meets
the
efficiency
standard.
Therefore,
the
reason
given
by
the
commenter
(
that
solid
fuel­
fired
unit
efficiency
is
expressed
in
terms
of
HHV)
is
not
grounds
for
not
applying
an
efficiency
standard
to
these
units.
One
commenter
supported
applying
the
same
efficiency
standard
to
solid
fuel­
fired
units
as
the
EPA
proposed.
The
EPA
is
finalizing
its
proposed
cogeneration
unit
definition,
which
applies
the
same
operating
and
efficiency
standards
to
all
units
regardless
of
the
type
of
fossil
fuel
burned.

b.
One­
third
Potential
Electric
Output
Capacity
The
EPA
is
finalizing
the
1/
3
potential
electric
output
capacity
criteria
in
the
NPR
and
SNPR.
Under
the
proposals,

the
following
cogeneration
units
are
EGUs:
any
cogeneration
unit
serving
a
generator
with
a
nameplate
capacity
of
greater
than
25
MW
and
supplying
more
than
1/
3
potential
25
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
electric
output
capacity
and
more
than
219,000
MW­
hrs
annually
to
any
utility
power
distribution
system
for
sale.

These
criteria
are
similar
to
those
used
in
the
Acid
Rain
Program
to
determine
whether
a
cogeneration
unit
is
a
utility
unit
and
the
NOx
SIP
Call
to
determine
whether
a
cogeneration
unit
is
an
EGU
or
a
non­
EGU.
The
primary
difference
between
the
proposed
criteria
and
the
1/
3
potential
electric
criteria
for
the
Acid
Rain
and
NOx
SIP
Call
Programs
is
that
these
programs
applied
the
criteria
to
the
initial
operation
of
the
unit
and
then
to
3­
year
rolling
average
periods
while
the
proposed
CAIR
criteria
are
applied
to
each
individual
year
starting
with
the
commencement
of
operation.
The
EPA
believes
that
using
an
individual
year
approach
would
streamline
the
application
and
administration
of
this
exemption.
No
adverse
comments
were
received
on
using
an
individual
year
approach
as
opposed
to
a
3­
year
rolling
average.
In
addition,
the
criteria
under
the
Acid
Rain
Program
and
the
NOx
SIP
Call
are
applied
somewhat
differently
to
units
commencing
construction
on
or
before
November
15,
1990
and
units
commencing
construction
after
November
15,
1990.
Several
commenters
suggested
exempting
all
cogeneration
units
under
the
PURPA
instead
of
using
the
proposed
criteria
and
cite
the
high
efficiency
of
26
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
cogeneration
as
a
reason
for
a
complete
exemption.
The
EPA
believes
it
is
important
to
include
in
the
CAIR
Program
all
units,
including
cogeneration
units,
that
are
substantially
in
the
business
of
selling
electricity.
The
proposed
1/
3
potential
electric
output
criteria
described
above
are
intended
to
do
that.

Inclusion
of
all
units
substantially
in
the
electricity
sales
business
minimizes
the
potential
for
shifting
utilization,
and
emissions,
from
regulated
to
unregulated
units
in
that
business
and
thereby
freeing
up
allowances,

with
the
result
that
total
emissions
from
generation
of
electricity
for
sale
exceed
the
CAIR
emissions
caps.
The
fact
that
units
in
the
electricity
sales
business
are
generally
interconnected
through
their
access
to
the
grid
significantly
increases
the
potential
for
utilization
shifting.

One
commenter
suggested
that
the
1/
3
of
potential
electric
output
capacity
criteria
be
applied
on
an
annual
basis.
The
EPA
agrees
that
the
criteria
should
be
applied
annually.
The
proposed
and
final
model
cap
and
trade
rules
adopt
that
approach.

c.
Clarifying
"
For
Sale"

Several
commenters
requested
the
EPA
confirm
that,
for
27
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
purposes
of
applying
the
1/
3
potential
electric
output
criteria,
simultaneous
purchases
and
sales
of
electricity
are
to
be
measured
on
a
"
net"
basis,
as
is
done
in
the
Acid
Rain
Program.
At
least
one
commenter
suggested
that
the
net
approach
also
be
applied
to
purchase
and
sales
that
are
not
simultaneous.
For
purposes
of
applying
the
1/
3
potential
electric
output
criteria
in
the
CAIR
Program
and
the
model
cap
and
trade
rules,
EPA
confirms
that
the
only
electricity
that
counts
as
a
sale
is
electricity
produced
by
a
unit
that
actually
flows
to
a
utility
power
distribution
system
from
the
unit.
Electricity
that
is
produced
by
the
unit
and
used
on­
site
by
the
electricity­
consuming
component
of
the
facility
will
not
count,
including
cogenerated
electricity
that
is
simultaneously
purchased
by
the
utility
and
sold
back
to
such
facility
under
purchase
and
sale
agreements
under
the
PURPA.
However,
electric
purchases
and
sales
that
are
not
simultaneous
will
not
be
netted;
the
1/
3
potential
electric
output
criteria
will
be
applied
on
a
gross
basis,

except
for
simultaneous
purchase
and
sales.
This
is
consistent
with
the
approach
taken
in
the
Acid
Rain
Program.

d.
Multiple
Cogeneration
Units
Some
commenters
suggested
aggregating
multiple
cogeneration
units
that
are
connected
to
a
utility
28
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
distribution
system
through
a
single
point
when
applying
the
1/
3
potential
electric
output
capacity
criteria.
These
commenters
suggested
that
it
is
not
feasible
to
determine
which
unit
is
producing
the
electricity
exported
to
the
outside
grid.
The
EPA
proposed
to
determine
whether
a
unit
is
affected
by
the
CAIR
on
an
individual­
unit
basis.
This
unit­
based
approach
is
consistent
with
both
the
Acid
Rain
Program
and
the
NOx
SIP
Call.
The
EPA
considers
this
approach
to
be
feasible
based
on
experience
from
these
existing
programs,
including
for
sources
with
multiple
cogeneration
units.
The
EPA
is
unaware
of
any
instances
of
cogeneration
unit
owners
being
unable
to
determine
how
to
apply
the
1/
3
potential
electric
output
capacity
criteria
where
there
are
multiple
cogeneration
units
at
a
source.

In
a
case
where
there
are
multiple
cogeneration
units
with
only
one
connection
to
a
utility
power
distribution
system,
the
electricity
supplied
to
the
utility
distribution
system
can
be
apportioned
among
the
units
in
order
to
apply
the
1/
3
potential
electric
output
capacity
criteria.
A
reasonable
basis
for
such
apportionment
must
be
developed
based
on
the
particular
circumstances.
The
most
accurate
way
of
apportioning
the
electricity
supplied
to
the
utility
power
distribution
system
seems
to
be
apportionment
based
on
29
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
the
amount
of
electricity
produced
by
each
unit
during
the
relevant
period
of
time.

Exemption
for
Independent
Power
Production
(
IPP)
Facilities:

Some
commenters
stated
that
certain
IPP
facilities
are
exempt
from
the
Acid
Rain
Program
and
that
they
should
also
be
exempt
from
the
CAIR
Program
and
model­
cap
and
trade
rules.
Under
the
Acid
Rain
Program,
an
IPP
facility
that
has,
as
of
November
15,
1990,
a
qualifying
power
purchase
commitment
(
including
a
sales
price)
to
sell
at
least
15
percent
of
planned
net
output
capacity
and
has
installed
net
output
capacity
not
exceeding
130
percent
of
planned
net
output
capacity
is
exempt.
However,
if
the
power
purchase
commitment
changes
after
November
15,
1990
in
a
way
that
allows
the
cost
of
compliance
with
the
Acid
Rain
Program
to
be
shifted
to
the
purchaser,
then
the
IPP
facility
loses
the
exemption.
For
example,
expiration
or
termination
of
the
power
purchase
commitment
or
modification
so
that
the
price
is
increased
(
e.
g.,
changed
to
a
market
price)
results
in
loss
of
the
exemption.
The
purpose
of
the
exemption
is
to
protect
IPP
facilities
subject
to
contract
prices
that
were
set
before
passage
of
the
CAA
Amendments
of
1990
(
including
the
Acid
Rain
Program
in
title
IV)
and
that
did
not
allow
passthrough
of
the
costs
of
Acid
Rain
Program
compliance.
30
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
However,
the
EPA
maintains
that
this
exemption
was
aimed
at
easing
the
transition
of
such
facilities
into
the
Acid
Rain
Program
and
that
there
is
no
basis
for
maintaining
this
exemption
for
every
subsequent
cap
and
trade
program.
In
addition,
this
exemption
was
not
used
in
the
NOx
SIP
Call.

D.
How
Are
Emission
Allowances
Allocated
to
Sources?

It
is
important
to
have
consistency
on
a
State­
by­
State
basis
with
the
basic
requirements
of
the
cap
and
trade
approach
when
implementing
a
multi­
State
cap
and
trade
program.
This
will
ensure
that:
the
integrity
of
the
cap
and
trade
approach
is
preserved
so
that
the
required
emissions
reductions
are
achieved;
the
compliance
and
administrative
costs
are
minimized;
and
source
owners
and
operators
are
equitably
treated.
However,
the
EPA
believes
that
some
limited
differences,
such
as
allowance
allocation
methodologies
for
NOx
allowances,
are
possible
without
jeopardizing
the
environmental
and
other
goals
of
the
program.

1.
Allocation
of
NOx
and
SO2
Allowances.

Each
State
participating
in
EPA­
administered
cap
and
trade
programs
must
develop
a
method
for
allocating
(
i.
e.,

distributing)
an
amount
of
allowances
authorizing
the
emissions
tonnage
of
the
State's
CAIR
EGU
budget.
For
NOx
31
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
allowances,
each
State
has
the
flexibility
to
allocate
its
allowances
however
they
choose,
so
long
as
certain
timing
requirements
are
met.

For
SO2,
as
noted
in
the
January
2004
proposal,
States
will
have
no
discretion
in
their
allocation
approach
since
the
CAIR
SO2
cap
and
trade
program
uses
title
IV
SO2
allowances,
which
have
been
already
allocated
in
perpetuity
to
individual
units
by
title
IV
of
the
CAA.

a.
Required
Aspects
of
a
State
NOx
Allocation
Approach.

While
it
is
the
EPA's
intent
to
provide
States
with
as
much
flexibility
as
possible
in
developing
allocation
approaches,
there
are
some
aspects
of
State
allocations
that
must
be
consistent
for
all
States.
All
State
allocation
systems
are
required
to
include
specific
provisions
that
establish
when
States
notify
the
EPA
and
sources
of
the
unit­
by­
unit
allocations.
These
provisions
establish
a
deadline
for
each
State
to
submit
to
the
EPA
its
unit­
by­
unit
allocations
for
processing
into
the
electronic
allowance
tracking
system.
Since
the
Administrator
will
then
expeditiously
record
the
submitted
allowance
allocations,
sources
will
thereby
be
notified
of,
and
have
access
to,
allocations
with
a
minimum
lead
time
(
about
3
years)
before
the
allowances
can
be
used
to
meet
the
NOx
32
6
If
the
deadline
for
States
to
submit
SIPs
is
September
of
2006,
then
this
would
result
in
notification
period
of
less
than
3
years
for
the
first
year
of
CAIR.

Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
emission
limit.

Today's
action
finalizes
the
proposal
to
require
States
to
submit
unit­
by­
unit
allocations
of
allowances
for
a
given
year
no
less
than
3
years
prior
to
January
1
of
the
allowance
vintage
year,
which
approach
was
supported
by
commenters.
6
Requiring
States
to
submit
allocations
and
thereby
provide
a
minimum
lead
time
before
the
allowances
can
be
used
to
meet
the
NOx
emission
limit
ensures
that
an
affected
source
 
regardless
of
the
State
in
the
CAIR
region
in
which
the
unit
is
located
 
will
have
sufficient
time
to
plan
for
compliance
and
implement
their
compliance
planning.

Allocating
allowances
less
than
3
years
in
advance
of
the
compliance
year
may
reduce
a
CAIR
unit's
ability
to
plan
for
and
implement
compliance
and,
consequently,
increase
compliance
costs.
For
example,
a
shorter
lead
time
would
reduce
the
period
for
buying
or
selling
allowances
and
could
prevent
sources
from
participating
in
allowance
futures
markets,
a
mechanism
for
hedging
risk
and
lowering
costs.

Further,
requiring
a
uniform,
minimum
lead­
time
for
submission
of
allocations
allows
the
EPA
to
perform
its
allocation­
recordation
activities
in
a
coordinated
and
33
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
efficient
manner
in
order
to
complete
expeditiously
the
recordation
for
the
entire
CAIR
region
and
thereby
promote
a
fair
and
competitive
allowance
market
across
the
region.

These
minimum
requirements
apply
to
the
NOx
allocation
approach
and
are
not
relevant
for
the
SO2
cap
and
trade
program,
which
relies
on
title
IV
allowances.

b.
Flexibility
and
Options
for
a
State
NOx
Allowance
Allocations
Approach.

Allowance
allocation
decisions
in
a
cap­
and­
trade
program
raise
essentially
distributional
issues,
as
economic
forces
are
expected
to
result
in
economically
efficient
and
environmentally
similar
outcomes
regardless
of
the
manner
in
which
allowances
are
initially
distributed.
Consequently,

for
CAIR
NOx
allowances,
States
are
given
latitude
in
developing
their
allocation
approach.
NOx
allocation
methodology
elements
for
which
States
will
have
flexibility
include:


The
cost
of
the
allowance
distribution
(
e.
g.,
free
distribution
or
auction);


The
frequency
of
allocations
(
e.
g.,
permanent
or
periodically
updated);


The
basis
for
distributing
the
allowances
(
e.
g.,

heat­
input
or
power
output);
and,
34
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite

The
use
of
allowance
set­
asides
and
their
size,
if
used
(
e.
g.,
new
unit
set­
asides
or
set­
asides
for
energy
efficiency,
for
development
of
Integrated
Gasification
Combined
Cycle
(
IGCC)
generation,
for
renewables,
or
for
small
units).

Some
commenters
have
argued
against
giving
States
flexibility
in
determining
NOx
allocations,
citing
concerns
about
complexity
of
operating
in
different
markets
and
about
the
robustness
of
the
trading
system.
The
EPA
maintains
that
offering
such
flexibility,
as
it
did
in
the
NOx
SIP
Call,
does
not
compromise
the
effectiveness
of
the
trading
program.

A
number
of
commenters
have
argued
against
allowing
(
or
requiring)
the
use
of
allowance
auctions,
while
others
did
not
believe
that
the
EPA
should
recommend
auctions.
For
today's
final
action,
while
there
are
some
clear
potential
benefits
to
using
auctions
for
allocating
allowances
(
as
noted
in
the
SNPR),
the
EPA
believes
that
the
decision
regarding
utilizing
auctions
should
ultimately
be
made
by
the
States.
Therefore,
EPA
is
not
requiring,
restricting,

or
barring
State
use
of
auctions
for
allocating
allowances.

A
number
of
commenters
supported
allowing
the
use
of
allowance
set­
asides
for
various
purposes.
In
today's
final
35
Section
VIII
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25/
05
DRAFT
Do
Not
Quote
or
Cite
action,
the
EPA
is
leaving
the
decision
on
using
set­
asides
up
to
the
States,
so
that
States
may
craft
their
allocation
approach
to
meet
their
State­
specific
policy
goals.

i.
Example
Allowance
Allocation
Methodology
In
the
SNPR,
EPA
included
an
example
(
offered
for
informational
guidance)
of
an
allocation
methodology
that
includes
allowances
for
new
generation
and
is
administratively
straightforward.
In
today's
preamble,
EPA
is
including
in
today's
preamble,
this
"
modified
output"

example
allocations
approach,
as
was
outlined
in
the
SNPR.

The
EPA
maintains
that
the
choice
of
allocation
methodology
does
not
impact
the
achievement
of
the
specific
environmental
goals
of
the
CAIR
Program.
This
methodology
is
offered
simply
as
an
example,
and
individual
States
retain
full
latitude
to
make
their
own
choices
regarding
what
type
of
allocation
method
to
adopt
for
NOx
allowances
and
are
not
bound
in
any
way
to
adopt
the
EPA's
example.

This
example
method
involves
input­
based
allocations
for
existing
fossil
units,
with
updating
to
take
into
account
new
generation
on
a
modified­
output
basis.
It
also
utilizes
a
new
source
set­
aside
for
new
units
that
have
not
yet
established
baseline
data
to
be
used
for
updating.

Providing
allowances
for
new
sources
addresses
a
number
of
36
Section
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05
DRAFT
Do
Not
Quote
or
Cite
commenter
concerns
about
the
negative
effect
of
new
units
not
having
access
to
allowances.

Under
the
example
method,
allocations
are
made
from
the
State's
EGU
NOx
budget
for
the
first
five
control
periods
(
2009
through
2013)
of
the
model
cap
and
trade
program
for
existing
sources
on
the
basis
of
historic
baseline
heat
input.
Commenters
expressed
some
concern
regarding
the
proposed
January
1,
1998
cut­
off
on­
line
date
for
considering
units
as
existing
units.
The
cut­
off
on­
line
date
was
selected
so
that
any
unit
meeting
the
cut­
off
date
would
have
at
least
5
years
of
operating
data,
i.
e.,
data
for
1998
through
2002
(
which
was
the
last
year
for
which
annual
data
was
available).
The
EPA
is
still
concerned
with
ensuring
that
particular
units
are
not
disadvantaged
in
their
allocations
by
having
insufficient
operating
data
on
which
to
base
the
allocations.
The
EPA
believes
that
a
5
year
window,
starting
from
commencement
of
operation,
gives
units
adequate
time
to
collect
sufficient
data
to
provide
a
fair
assessment
of
their
operations.
Annual
operating
data
is
now
available
for
2003.
The
EPA
is
finalizing
January
1,

2001
as
the
cut­
off
on­
line
date
for
considering
units
as
existing
units
since
units
meeting
the
cut­
off
date
will
have
at
least
5
years
of
operating
data
(
i.
e.,
data
for
37
Section
VIII
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05
DRAFT
Do
Not
Quote
or
Cite
2001
through
2005).

The
allowances
for
2014
and
later
will
be
allocated
from
the
State's
EGU
NOx
budget
annually,
6
years
in
advance,
taking
into
account
output
data
from
new
units
with
established
baselines
(
modified
by
the
heat
input
conversion
factor
to
yield
heat
input
numbers).
As
new
units
enter
into
service
and
establish
a
baseline,
they
are
allocated
allowances
in
proportion
to
their
share
of
the
total
calculated
heat
input
(
which
is
existing
unit
heat
input
plus
new
units'
modified
output).
Allowances
allocated
to
existing
units
slowly
decline
as
their
share
of
total
calculated
heat
input
decreases
with
the
entry
of
new
units.

After
5
years
of
operation,
a
new
unit
will
have
an
adequate
operating
baseline
of
output
data
to
be
incorporated
into
the
calculations
for
allocations
to
all
affected
units.
The
average
of
the
highest
3
years
from
these
5
years
will
be
multiplied
by
the
heat­
input
conversion
factor
to
calculate
the
heat
input
value
that
will
be
used
to
determine
the
new
unit's
allocation
from
the
pool
of
allowances
for
all
sources.

Under
the
EPA
example
method,
existing
units
as
a
group
will
not
update
their
heat
input.
This
will
eliminate
the
potential
for
a
generation
subsidy
(
and
efficiency
loss)
as
38
Section
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05
DRAFT
Do
Not
Quote
or
Cite
well
as
any
potential
incentive
for
less
efficient
existing
units
to
generate
more.
This
methodology
will
also
be
easier
to
implement
since
it
will
not
require
the
updating
of
existing
units'
baseline
data.
Retired
units
will
continue
to
receive
allowances
indefinitely,
thereby
creating
an
incentive
to
retire
less
efficient
units
instead
of
continuing
to
operate
them
in
order
to
maintain
the
allowances
allocations.

Moreover,
new
units
as
a
group
will
only
update
their
heat
input
numbers
once
­
for
the
initial
5­
year
baseline
period
after
they
start
operating.
This
will
eliminate
any
potential
generation
subsidy
and
be
easier
to
implement,

since
it
will
not
require
the
collection
and
processing
of
data
needed
for
regular
updating.

The
EPA
believes
that
allocating
to
existing
units
based
on
a
baseline
of
historic
heat
input
data
(
rather
than
output
data)
is
desirable,
because
accurate
protocols
currently
exist
for
monitoring
this
data
and
reporting
it
to
the
EPA,
and
several
years
of
certified
data
are
available
for
most
of
the
affected
sources.
The
EPA
expects
that
any
problems
with
standardizing
and
collecting
output
data,
to
the
extent
that
they
exist,
can
be
resolved
in
time
for
their
use
for
new
unit
calculations.
Given
that
units
keep
39
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
track
of
electricity
output
for
commercial
purposes,
this
is
not
likely
to
be
a
significant
problem.

A
number
of
commenters
expressed
support
for
the
EPA's
proposal
in
the
SNPR
that
the
heat
input
data
for
existing
units
be
adjusted
by
multiplying
it
by
different
factors
based
on
fuel­
type.
Contrary
to
some
commenters'
claims,

determining
allocations
with
fuel
factors
would
not
create
disincentives
for
efficiency.
With
the
use
of
a
single
baseline
for
existing
units,
neither
adjusted
input,
nor
input,
nor
output
based
allocations
would
provide
additional
incentives
for
energy
efficiency.
All
sources
have
incentives
to
reduce
emissions
(
improving
efficiency
is
a
way
of
doing
this)
as
a
result
of
the
cap
and
trade
program,

not
because
of
the
choice
of
an
allocation
based
on
a
single
historic
baseline.

The
EPA
acknowledges
that
since
allowances
have
value,

different
allocations
of
allowances
clearly
do
impact
the
distribution
of
wealth
among
different
generators.
However,

in
general,
the
economics
of
power
generation
dictate
that
generators
selling
power
will
seek
to
operate
(
and
burn
fuel)
to
meet
energy
demand
in
a
least­
cost
manner.
The
cost
of
the
power
generated
(
reflecting
the
bid
price
per
megawatt
hour)
will
include
the
cost
of
allowances
to
cover
40
Section
VIII
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25/
05
DRAFT
Do
Not
Quote
or
Cite
emissions,
whether
the
generator
uses
allowances
that
it
already
owns,
or
whether
it
needs
to
purchase
additional
allowances.
With
a
liquid
market
for
allowances,

allocations
for
existing
sources
(
whose
baseline
does
not
change)
are
a
sunk
benefit
or
sunk
cost,
not
impacting
the
existing
generator's
behavior
on
the
margin.
Thus,
the
use
of
fuel
factors
in
our
allocating
method
would
not
be
expected
to
result
in
changes
in
generators'
choices
for
fuel
efficiency.

In
its
example
allocation
approach,
the
EPA
is
including
adjustments
of
heat
input
by
fuel
type
based
on
average
historic
NOx
emissions
rates
by
three
fuel
types
(
coal,
natural
gas,
and
oil)
for
the
years
1999­
2002.
As
noted
in
the
SNPR,
such
calculations
would
lead
to
adjustment
factors
of
1.0
for
coal,
0.4
for
gas
and
0.6
for
oil.
The
factors
would
reflect
the
inherently
different
emissions
rates
of
different
fossil­
fired
units
(
and
consequently
also
reflect
the
different
burdens
to
control
emissions.

However,
allocating
to
new
(
not
existing)
sources
on
the
basis
of
input
(
and
particularly
fuel­
adjusted
heat
input)
would
serve
to
subsidize
less­
efficient
new
generation.
For
a
given
amount
of
generation,
more
41
7
Energy
Information
Administration,
"
Annual
Energy
Outlook
2004,
With
Projections
to
2025",
January
2004.
Assumptions
for
the
NEMS
model.
http://
www.
eia.
doe.
gov/
oiaf/
archive/
aeo04/
assumption/
tbl38.
h
tml
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
efficient
units
will
have
the
lower
fuel
input
or
heat
input.
Allocating
to
new
units
based
on
heat
input
could
encourage
the
building
of
less
efficient
units
since
they
would
get
more
allowances
than
an
equivalent
efficient,

lower
heat­
input
unit.
The
modified
output
approach,
as
described
below,
will
encourage
new,
clean
generation,
and
will
not
reward
less
efficient
new
coal
units
or
less
efficient
new
gas
units.

Under
the
example
method,
allowances
will
be
allocated
to
new
units
of
each
fuel­
type
with
an
appropriate
baseline
on
a
"
modified
output"
basis.
The
new
unit's
modified
output
will
be
calculated
by
multiplying
its
gross
output
by
a
heat
rate
conversion
factor
of
7,900
btu/
kWh
for
coal
units
and
6,675
btu/
kWh
for
oil
and
gas
units.
The
7,900
btu/
kWh
value
for
the
conversion
factor
for
new
coal
units
is
an
average
of
heat­
rates
for
new
pulverized
coal
plants
and
new
IGCC
coal
plants
(
based
upon
assumptions
in
EIA's
Annual
Energy
Outlook
(
AEO)
20047).
The
6,675
btu/
kWh
value
for
the
conversion
factor
for
new
gas
units
is
an
average
of
heat­
rates
for
new
combined
cycle
gas
units
(
also
based
upon
42
Section
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25/
05
DRAFT
Do
Not
Quote
or
Cite
assumptions
in
EIA's
AEO
2004).
A
single
conversion
rate
for
each
fuel­
type
will
create
consistent
and
level
incentives
for
efficient
generation,
rather
than
favoring
new
units
with
higher
heat­
rates.

For
new
cogeneration
units,
their
share
of
the
allowances
will
be
calculated
by
converting
the
available
thermal
output
(
btu)
of
useable
steam
from
a
boiler
or
useable
heat
from
a
heat
exchanger
to
an
equivalent
heat
input
by
dividing
the
total
thermal
output
(
btu)
by
a
general
boiler/
heat
exchanger
efficiency
of
80
percent.

New
combustion
turbine
cogeneration
units
will
calculate
their
share
of
allowances
by
first
converting
the
available
thermal
output
of
useable
steam
from
a
heat
recovery
steam
generator
(
HRSG)
or
useable
heat
from
a
heat
exchanger
to
an
equivalent
heat
input
by
dividing
the
total
thermal
output
(
btu)
by
the
general
boiler/
heat
exchanger
efficiency
of
80
percent.
To
this
they
will
add
the
electrical
generation
from
the
combustion
turbine,
converted
to
an
equivalent
heat
input
by
multiplying
by
the
conversion
factor
of
3,413
btu/
kWh.
This
sum
will
yield
the
total
equivalent
heat
input
for
the
cogeneration
unit.

Steam
and
heat
output,
like
electrical
output,
is
a
useable
form
of
energy
that
can
be
utilized
to
power
other
43
Section
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25/
05
DRAFT
Do
Not
Quote
or
Cite
processes.
Because
it
would
be
nearly
impossible
to
adequately
define
the
efficiency
in
converting
steam
energy
into
the
final
product
for
all
of
the
various
processes,

this
approach
focuses
on
the
efficiency
of
a
cogeneration
unit
in
capturing
energy
in
the
form
of
steam
or
heat
from
the
fuel
input.

Commenters
expressed
concern
about
a
single
conversion
factor,
arguing
for
different
factors
for
different
fuels
and
technologies.
The
EPA
recognizes
these
concerns
and
agrees
that
different
new
fossil­
generation
units
have
inherently
different
heat
rates,
largely
dictated
by
the
technology
needed
to
burn
different
fuels.
A
single
conversion
rate
for
all
units
would
provide
new
gas­
fired
combined
cycle
units
with
relatively
more
allowances,

relative
to
their
emissions,
than
it
would
for
new
coalfired
units.

The
EPA
maintains
that
providing
each
new
source
an
equal
amount
of
allowances
per
MWh
of
output,
given
the
fuel
it
is
burning,
is
an
equitable
approach.
Since
electricity
output
is
the
ultimate
product
being
produced
by
EGUs,
a
single
conversion
factor
for
each
fuel,
based
on
output,

ensures
that
all
new
sources
burning
a
particular
fuel
will
be
treated
equally.
44
8
Some
commenters
stated
that,
if
allocations
were
provided
for
non­
emitting
new
generation,
they
also
should
be
provided
to
all
such
generation,
including
nuclear
units.

9
For
instance,
would
the
addition
of
a
single
new
wind
turbine
at
a
wind­
farm
constitute
a
"
new
unit"?

Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
Some
commenters
support
allocating
allowances
to
all
new
generation,
not
just
fossil
fuel­
fired
CAIR
units.
The
EPA
notes
that
including
new
non­
CAIR
and
non­
fossil
units
in
the
allowance
distribution
would
raise
issues,
about
which
the
EPA
lacks
sufficient
information
for
resolution
at
this
time
for
the
EPA's
example
method.
It
would
be
necessary
to
clearly
define
what
types
of
generating
facilities
that
could
participate
and
what
would
constitute
"
new"
non­
fossil
generation.
8
Commenters
did
not
provide
any
analysis
of
the
impact
of
possible
definitions
on
generation
mix,
or
electricity
markets.
Further,
in
order
to
include
all
generation,
there
would
be
a
need
to
establish
application
and
data
collections
procedures
and
determine
appropriate
size
cut­
offs
and
boundaries
of
this
generation
­
since
in
many
such
instances
there
is
no
clear
analog
to
discrete
fossil
"
units".
9
There
also
are
associated
issues
about
developing
appropriate
measurement
and
data
reporting
requirements
for
such
sources.

Commenters
supporting
this
approach
did
not
address
any
of
45
Section
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05
DRAFT
Do
Not
Quote
or
Cite
these
matters
in
any
detail.
However,
the
EPA
encourages
States
that
are
interested
in
including
such
units
in
their
updating
allocations
to
consider
potential
solutions
and
include
them
in
their
SIPs.
Under
the
example
method,
new
units
that
have
entered
service,
but
have
not
yet
started
receiving
allowances
through
the
update,
will
receive
allowances
each
year
from
a
new
source
set­
aside.
The
new
source
allowances
from
the
set­
aside
will
be
distributed
based
on
their
actual
emissions
from
the
previous
year.

Such
an
allocation
approach
will
generally
provide
new
units
sufficient
allowances
to
cover
their
emissions
during
the
interim
period
before
the
units
are
allocated
allowances
on
the
same
basis
as
existing
units.

Today's
example
method
includes
a
new
source
set­
aside
equal
to
5
percent
of
the
State's
emission
budget
for
the
years
2009­
2013
and
3
percent
of
the
State's
emission
budget
for
the
subsequent
years.
In
the
SNPR,
the
EPA
proposed
a
level
2
percent
set­
aside
for
all
years.

Commenters
noted
their
concern
that
the
amount
of
the
set­
aside
in
the
early
years
of
the
program
should
be
higher
to
reflect
the
fact
that
the
set­
aside
will
initially
need
to
accommodate
all
new
units
entering
into
service
from
1998
46
10
As
noted
earlier
in
this
section,
the
EPA
is
now
considering
new
units
to
be
those
that
went
online
after
January
1,
2001
rather
than
1998.

Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
through
2010.10
In
order
to
estimate
the
need
for
allocations
for
new
units,
the
EPA
looked
at
the
NOx
emissions
from
units
that
went
online
starting
in
1999
as
projected
by
the
Integrated
Planning
Model
(
IPM)
runs
modeling
CAIR
for
the
years
2010
and
2015.
These
IPM
emissions
projections
indicated
over
57,000
tons
of
NOx
emissions
in
2010
and
about
74,000
tons
of
NOx
emission
by
2015
from
new
sources
need
to
be
covered
under
set­
asides
throughout
the
CAIR
region.
The
2010
number
represents
almost
4
percent
of
the
Phase
I
NOx
regional
cap,
while
the
2015
number
represents
about
6
percent
of
the
Phase
I
regional
cap.
Consequently,
today's
example
method
includes
a
5
percent
set­
aside
for
the
initial
period
(
2009­
2013).

It
should
be
noted
that
by
2014,
the
set­
aside
would
need
to
cover
new
sources
from
the
entire
period
2004­
2013.

The
choice
of
a
3
percent
new
source
set­
aside,

starting
in
2014,
reflects
concerns
that
adequate
allowances
be
provided
for
the
10
years
of
new
units
to
be
covered
by
the
set­
aside
in
2014
and
subsequent
years.
(
The
set
aside
in
2014,
for
example,
would
need
to
accommodate
all
units
that
went
on­
line
between
2004
and
2013).
47
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
Individual
States
using
a
version
of
the
example
method
may
want
to
adjust
this
initial
5
year
set­
aside
amount
to
a
number
higher
or
lower
than
5
percent
to
the
extent
that
they
expect
to
have
more
or
less
new
generation
going
online
during
the
2001­
2013
period.
They
may
also
want
to
adjust
the
subsequent
set­
aside
amount
to
a
number
higher
or
lower
than
3
percent
to
the
extent
that
they
expect
more
or
less
new
generation
going
on­
line
after
2004.
States
may
also
want
to
set
this
percentage
a
little
higher
than
the
expected
need,
since,
in
the
event
that
the
amount
of
the
set­
aside
exceeds
the
need
for
new
unit
allowances,
the
State
may
want
to
provide
that
any
unused
set­
aside
allowances
will
be
redistributed
to
existing
units
in
proportion
to
their
existing
allocations.

For
the
example
method,
the
EPA
is
finalizing
the
approach
that
new
units
will
begin
receiving
allowances
from
the
set­
aside
for
the
control
period
immediately
following
the
control
period
in
which
the
new
unit
commences
commercial
operation,
based
on
the
unit's
emissions
for
the
preceding
control
period.
Thus,
a
source
will
be
required
to
hold
allowances
during
its
start­
up
year,
but
will
not
receive
an
allocation
for
that
year.

States
will
allocate
allowances
from
the
set­
aside
to
all
new
units
in
any
given
year
as
a
group.
If
there
are
48
11
With
the
alternate
approach
from
the
NOx
SIP
Call,
States
could
distribute
a
new
source
set­
aside
for
a
control
period
based
on
full
utilization
rates,
at
the
end
of
the
year
the
actual
allowance
allocation
would
be
adjusted
to
account
for
actual
unit
utilization/
output,
and
excess
allowances
would
be
returned
and
redistributed,
first
taking
into
account
new
unit
requests
that
were
not
able
to
be
addressed.
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
more
allowances
requested
than
in
the
set­
aside,
allowances
will
be
distributed
on
a
pro­
rata
basis.
Allowance
allocations
for
a
given
new
unit
in
following
years
will
continue
to
be
based
on
the
prior
year's
emissions
until
the
new
unit
establishes
a
baseline,
is
treated
as
an
existing
unit,
and
is
allocated
allowances
through
the
State's
updating
process.
This
will
enable
new
units
to
have
a
good
sense
of
the
amount
of
allowances
they
will
likely
receive
­

in
proportion
to
their
emissions
for
the
previous
year.

This
methodology
will
not
provide
allowances
to
a
unit
in
its
first
year
of
operation;
however
it
is
a
methodology
that
is
straightforward,
reasonable
to
implement,
and
predictable.

In
the
SNPR,
the
example
method
from
the
NOx
SIP
Call
model
rule
was
proposed
as
an
alternate
approach.
11
However,
the
EPA
has
found
this
approach
to
be
complicated
for
both
the
States
and
the
EPA
to
implement.
Additionally,

the
NOx
SIP
Call
approach
would
introduce
a
higher
level
of
uncertainty
for
sources
in
the
allocation
process
than
49
12
Auctions
could
provide
States
with
a
non­
distortionary
source
of
revenue.
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
necessary.

While
the
EPA
is
offering
an
example
allocation
method
with
accompanying
regulatory
language,
the
EPA
reiterates
that
it
is
giving
States'
flexibility
in
choosing
their
NOx
allocations
method
so
they
may
tailor
it
to
their
unique
circumstances
and
interests.
Several
commenters,
for
instance,
have
noted
their
desire
for
full
output­
based
allocations
(
in
contrast
to
the
hybrid
approach
in
the
example
above).
In
the
past,
EPA
had
sponsored
a
work
group
to
assist
States
wishing
to
adopt
output­
based
NOx
allocations
for
the
NOx
SIP
Call
and
believes
it
is
a
viable
approach
worth
considering.
Documents
from
meetings
of
this
group
and
the
resulting
guidance
report
(
found
at
http://
www.
epa.
gov/
airmarkets/
fednox/
workgrp.
html)
together
with
additional
resources
such
as
the
EPA­
sponsored
report
"
Output­
Based
Regulations:
A
Handbook
for
Air
Regulators"

(
found
at
http://
www.
epa.
gov/
cleanenergy/
pdf/
output_
rpt.
pdf)

can
help
States,
should
they
choose
to
adopt
any
outputbased
elements
in
their
allocation
plans.

As
an
another
alternative
example,
States
could
decide
to
include
elements
of
auctions
into
their
allowance
allocation
programs.
12
An
example
of
an
approach
where
CAIR
50
13
5
percent
of
the
allowances
would
go
to
a
new
source
setaside
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
NOx
allowances
could
be
distributed
to
sources
through
a
combination
of
an
auction
and
a
free
allocation
is
provided
below.

During
the
first
year
of
the
trading
program,
94
percent
of
the
NOx
allowances
could,
for
example,
be
allocated
to
affected
units
with
an
auction
held
for
the
remaining
1
percent
of
the
NOx
allowances13.
Each
subsequent
year,
an
additional
1
percent
of
the
allowances
(
for
the
first
20
years
of
the
program),
and
then
an
additional
2.5
percent
thereafter,
could
be
auctioned
until
eventually
all
the
allowances
are
auctioned.
With
such
a
system,
for
the
first
20
years
of
the
trading
programs,
the
majority
of
allowances
would
be
distributed
for
free
via
the
allocation.
Allowances
allocated
for
these
earlier
years
are
generally
more
valuable
than
allowances
allocated
for
later
years
because
of
the
time
value
of
money.
Thus,
most
emitting
units
would
receive
relatively
more
allowances
in
the
early
years
of
the
program,
when
they
are
facing
the
expenses
of
taking
actions
to
control
their
emissions.
Even
though
the
proportion
of
allowances
allocated
to
existing
sources
declines
in
the
later
years
of
the
program,
these
sources
receive
for
free
a
very
significant
share
of
the
51
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
total
value
of
allowances
(
because
the
discounted
present
value
of
allowances
allocated
in
the
early
years
of
the
program
is
greater
than
the
discounted
present
value
of
the
allowances
auctioned
later).

Auctions
could
be
designed
by
the
State
to
promote
an
efficient
distribution
of
allowances
and
a
competitive
market.
Allowances
would
be
offered
for
sale
before
or
during
the
year
for
which
such
allowances
may
be
used
to
meet
the
requirement
to
hold
allowances.
States
would
decide
on
the
frequency
and
timing
of
auctions.
Each
auction
would
be
open
to
any
person,
who
would
submit
bids
according
to
auction
procedures,
a
bidding
schedule,
a
bidding
means,
and
by
fulfilling
requirements
for
financial
guarantees
as
specified
by
the
State.
Winning
bids,
and
required
payments,
for
allowances
would
be
determined
in
accordance
with
the
State
program
and
ownership
of
allowances
would
be
recorded
in
the
EPA
Allowance
Tracking
System
after
the
required
payment
is
received.

The
auction
could
be
a
multiple­
round
auction.

Interested
bidders
would
submit
before
the
auction,
one
or
more
initial
bids
to
purchase
a
specified
quantity
of
NOx
allowances
at
a
reserve
price
specified
by
the
State,

specifying
the
appropriate
account
in
the
Allowance
Tracking
System
in
which
such
allowances
would
be
recorded.
Each
bid
52
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
would
be
guaranteed
by
a
certified
check,
a
funds
transfer,

or,
in
a
form
acceptable
to
the
State,
a
letter
of
credit
for
such
quantity
multiplied
by
the
reserve
price.
For
each
round
of
the
auction,
the
State
would
announce
current
round
reserve
prices
for
NOx
and
determine
whether
the
sum
of
the
acceptable
bids
exceeds
the
quantity
of
such
allowances,

available
for
auction.
If
the
sum
of
the
acceptable
bids
for
NOx
allowances
exceeds
the
quantity
of
such
allowances
the
State
would
increase
the
reserve
price
for
the
next
round.
After
the
auction,
the
State
would
publish
the
names
of
winning
and
losing
bidders,
their
quantities
awarded,
and
the
final
prices.
The
State
would
return
payment
to
unsuccessful
bidders
and
add
any
unsold
allowances
to
the
next
relevant
auction.

In
summary,
today's
action
provides,
for
States
participating
in
the
EPA­
administered
CAIR
NOx
cap
and
trade
program,
the
flexibility
to
determine
their
own
methods
for
allocating
NOx
allowances
to
their
sources.
Specifically,

such
States
will
have
flexibility
concerning
the
cost
of
the
allowance
distribution,
the
frequency
of
allocations,
the
basis
for
distributing
the
allowances,
and
the
use
and
size
of
allowance
set­
asides.

E.
What
Mechanisms
Affect
the
Trading
of
Emission
Allowances?
53
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
1.
Banking
a.
The
CAIR
NPR
and
SNPR
Proposal
for
the
Model
Rules
and
Input
from
Commenters
Banking
is
the
retention
of
unused
allowances
from
1
calendar
year
for
use
in
a
later
calendar
year.
Banking
allows
sources
to
make
reductions
beyond
required
levels
and
"
bank"
the
unused
allowances
for
use
later.
Generally
speaking,
banking
has
several
advantages:
it
can
encourage
earlier
or
greater
reductions
than
are
required
from
sources,
stimulate
the
market
and
encourage
efficiency,
and
provide
flexibility
in
achieving
emissions
reductions
goals.

When
sources
reduce
their
SO2
and
NOx
emissions
in
the
early
phases,
the
cap
and
trade
program
creates
an
emissions
"
glide
path"
that
provides
earlier
environmental
benefits
and
lower
cost
of
compliance.
This
"
glide
path"
does
allow
emissions
to
exceed
the
cap
and
trade
program
budget
 
especially
in
the
initial
years
after
the
adoption
of
a
more
stringent
cap.
The
use
of
banked
allowances
from
the
Acid
Rain
and
NOx
SIP
Call
Programs
in
the
CAIR
NOx
and
SO2
cap
and
trade
programs
is
discussed
below
in
section
VIII.
F
of
this
preamble.

The
January
30,
2004
CAIR
NPR
and
June
10,
2004
CAIR
SNPR
proposed
that
the
CAIR
NOx
and
SO2
cap
and
trade
programs
allow
banking
and
the
use
of
banked
allowances
54
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
without
restrictions.
Allowing
unrestricted
banking
and
the
use
of
banked
allowances
is
consistent
with
the
existing
Acid
Rain
SO2
cap
and
trade
program.
The
NOx
SIP
Call
cap
and
trade
program,
however,
has
some
restrictions
on
the
use
of
banked
allowances,
a
procedure
called
"
flow
control,"

described
in
detail
in
the
June
10,
2004
CAIR
SNPR.

Comments
Regarding
Unrestricted
Banking
after
the
Start
of
the
CAIR
NOx
and
SO2
Cap
and
Trade
Programs
Many
commenters
supported
the
EPA's
proposal
to
allow
unrestricted
banking
and
the
use
of
banked
allowances
for
both
SO2
and
NOx,
agreeing
that
flow
control
is
a
complex
and
confusing
procedure
with
undemonstrated
environmental
benefit.
Further,
they
agreed
that
banking
with
no
restrictions
on
use
will
encourage
early
emissions
reductions,
stimulate
the
trading
market,
encourage
efficient
pollution
control,
and
provide
flexibility
to
affected
sources
in
meeting
environmental
objectives.

Other
commenters
objected
to
the
EPA's
proposal
to
allow
unrestricted
use
of
banked
allowances.
All
of
these
commenters
supported
some
use
of
flow
control
in
the
CAIR
cap
and
trade
programs,
most
supporting
its
use
for
both
SO2
and
NOx.

Some
commenters
disagreed
with
the
EPA's
assessment
that
the
use
of
flow
control
in
the
Ozone
Transport
55
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
Commission
(
OTC)
cap
and
trade
program
was
complicated
to
understand
and
implement
and
caused
market
complexity.
One
commenter
further
elaborated
that
flow
control
was
accepted
by
industry.
Another
commenter
claimed
that
the
EPA
has
not
analyzed
the
impact
of
the
flow
control
mechanism.

Some
commenters
supportive
of
flow
control
stated
that
flow
control
was
"
successful"
in
the
OTC
and
NOx
SIP
Call
trading
programs
and
"
worked
well"
and
"
achieved
the
desired
effect,"
without
supporting
those
statements.

b.
The
Final
CAIR
Model
Rules
and
Banking
The
EPA
acknowledges
that
the
OTC
NOx
cap
and
trade
program
has
functioned
for
several
years
despite
the
complexity
introduced
by
the
flow
control
procedures.

Industry
and
other
allowance
traders
have
adapted
to
these
complex
procedures,
yet
there
are
ongoing
questions
from
the
regulated
community
about
how
the
procedures
actually
work.

As
an
example,
one
commenter,
while
disagreeing
with
the
EPA's
assertion
that
flow
control
is
overly
complex,
goes
on
to
describe
incorrectly
the
implementation
of
flow
control.

The
NOx
SIP
Call
cap
and
trade
program
includes
similar
procedures
but
flow
control
was
not
triggered
in
the
first
2
years
of
the
program
(
2003
and
2004),
so
there
is
no
experience
to
be
drawn
from
that
program.

The
EPA
maintains
that
the
benefits
of
utilizing
these
56
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
complex
procedures
is
questionable.
The
EPA
has
analyzed
the
use
of
the
flow
control
procedures
in
a
paper
released
in
March
2004,
"
Progressive
Flow
Control
in
the
OTC
NOx
Budget
Program:
Issues
to
Consider
at
the
Close
of
the
1999
to
2002
Period."
The
lessons
learned
from
this
analysis
were
as
follows:

1)
Flow
control
can
create
market
pricing
complexity
and
uncertainty.
The
need
for
implementation
of
flow
control
for
a
particular
control
period
is
not
known
more
than
a
few
months
in
advance,
and
the
value
of
banked
allowances
varies
from
year
to
year,
depending
on
whether
flow
control
has
been
triggered
for
the
particular
year.

Therefore,
when
deciding
how
much
to
control,
a
source
has
some
increased
uncertainty
about
the
value
of
any
excess
allowances
it
generates.

2)
Flow
control
can
have
a
bigger
impact
on
small
entities
than
on
large
entities.
Large
firms
with
multiple
allowance
accounts
can
shift
banked
allowances
among
those
accounts
to
minimize
the
number
of
banked
allowances
surrendered
at
a
discounted
rate.

3)
Flow
control
does
not
directly
affect
short­
term
emissions,
so
it
may
not
serve
the
environmental
goals
for
which
it
was
created.

Incorporating
these
lessons
learned,
the
EPA
is
57
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Do
Not
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or
Cite
finalizing
the
CAIR
NOx
and
SO2
cap
and
trade
programs
with
no
flow
control
mechanism.

2.
Interpollutant
Trading
Mechanisms
a.
The
CAIR
NPR
Proposal
for
the
Model
Rules
and
Input
from
Commenters
Mechanisms
for
interpollutant
trading
allow
reduced
emissions
of
one
pollutant
to
be
exchanged
for
increased
emissions
of
another
pollutant
where
both
pollutants
cause
the
same
environmental
problem
(
e.
g.,
are
precursors
of
a
third
pollutant).
Interpollutant
trading
mechanisms
are
typically
based
upon
each
precursor's
contribution
to
a
particular
environmental
problem
and
are
often
controversial
and
scientifically
difficult
to
design
because
of
the
complexities
of
environmental
chemistry.
Determination
of
conversion
factors
(
i.
e.,
transfer
ratios
that
relate
the
impact
of
one
pollutant
to
the
impact
of
another
pollutant)

can
be
dependent
upon
location,
the
presence
of
other
pollutants
that
are
necessary
for
chemical
reactions,
the
time
of
emissions,
and
other
considerations.

The
January
30,
2004
CAIR
NPR
did
not
propose
a
specific
interpollutant
trading
mechanism
but
rather
took
comment
on
interpollutant
trading
in
general
as
well
as
the
following
specific
issues:

(
1)
What
would
be
the
exchange
rate
(
i.
e.,
the
transfer
58
Section
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DRAFT
Do
Not
Quote
or
Cite
ratio)
for
the
two
pollutants
(
2)
How
can
the
transfer
ratio
best
achieve
the
goals
of
PM2.5
and
ozone
reductions
in
downwind
States
and,

(
3)
How
would
the
interpollutant
trading
accommodate
the
different
geographic
regions
of
the
PM2.5
and
ozone
programs?

Comments
Regarding
the
Potential
Interpollutant
Trading
The
EPA
received
several
comments
on
interpollutant
trading
with
the
most
commenters
generally
opposed
to
including
provisions
to
allow
for
the
interchangability
of
SO2
and
NOx
allowances.

Several
commenters
pointed
out
that
the
CAIR
ozone
attainment
benefits
result
from
the
NOx
emissions
reductions,
and
contend
that
the
EPA
has
not
shown
that
SO2
emissions
impact
ozone.
Therefore,
the
commmenters
conclude
that
it
would
be
inappropriate
for
SO2
allowances
to
be
traded
and
used
for
compliance
with
the
NOx
cap.
Some
commenters
supported
the
consideration
or
use
of
interpollutant
trading
if
it
was
one­
directional,
i.
e.,
NOx
allowances
could
be
used
for
compliance
with
the
SO2
allowance
holding
requirements,
but
not
vice
versa.
This
could
result
in
fewer
NOx
emissions
and
more
SO2
emissions.

Some
commenters
supported
the
consideration
or
use
of
interpollutant
trading
and
emphasized
the
scientific
59
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Do
Not
Quote
or
Cite
difficulty
in
developing
accurate
transfer
ratios.
Of
these
commenters,
some
added
that
interpollutant
trading
would
be
appropriate
if
the
EPA
conducted
a
thorough
analysis
of
the
potential
impacts
that
interpollutant
trading
would
have
on:

nonattainment
areas'
ability
to
come
into
attainment;
the
allowance
markets
and
prices;
and
the
integrity
of
the
NOx
caps
in
light
of
the
potentially
large
SO2
allowance
bank
that
might
be
carried
forward
into
the
CAIR
trading
programs.

A
few
commenters
noted
that
the
EPA
is
directed
by
the
CAA
to
study
interpollutant
trading
and
has
approved
SIPs
that
allow
the
trading
of
ozone
precursors
under
specific
circumstances.

b.
Interpollutant
Trading
and
the
Final
CAIR
Model
Rules
Interpollutant
trading
can
provide
some
additional
compliance
flexibility,
and
potentially
lower
compliance
costs,
if
appropriately
applied
to
multiple
pollutants
that
have
reasonably
well
known
impacts
on
the
same
environmental
problem.
The
EPA
acknowledges
that
it
has
the
authority
to
create
interpollutant
trading
programs
and
has
done
so,
in
other
regulatory
contexts,
in
the
past.
However,
for
several
reasons,
the
EPA
determined
that
direct
interpollutant
trading
is
not
appropriate
in
the
CAIR.

The
final
CAIR
includes
separate
annual
SO2
and
annual
60
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05
DRAFT
Do
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Quote
or
Cite
NOx
model
rules
to
address
PM2.5
precursor
emissions,
and
an
ozone­
season
NOx
model
rule
to
address
summertime
ozone
precursor
emissions.
The
EPA
believes
it
is
not
appropriate
for
the
CAIR
model
rules
to
allow
annual
SO2
or
NOx
allowances
to
be
used
for
compliance
with
ozone­
season
NOx
allowance
holding
requirements
because
this
has
the
potential
to
adversely
impact
the
ozone­
season
emissions
reductions
and
ozone
air
quality
improvements
from
CAIR.

This
is
significant
because
the
EPA,
as
required
by
the
CAA,

has
promulgated
a
national
air
quality
standard
for
8­
hour
ozone
based
on
a
determination
that
the
standard
is
necessary
to
protect
public
health.
Section
110(
a)
2(
D)

requires
States
to
prohibit
emissions
in
amounts
that
will
significantly
contribute
to
nonattainment
in,
or
interfere
with
maintenance
by,
any
other
State
with
respect
to
any
air
quality
standard,
including
ozone.
In
this
rule,
EPA
has
designed
the
annual
(
SO2
and
NOx)
and
ozone­
season
(
NOx)

emission
caps
to
achieve
the
emissions
reductions
necessary
to
address
each
State's
significant
contribution
to
downwind
PM2.5
and
ozone
nonattainment,
respectively,
and
to
prevent
interference
with
maintenance.
If
sources
were
permitted
to
use
annual
SO2
or
annual
NOx
allowances
for
compliance
with
ozone­
season
NOx
allowance
holding
requirements
(
i.
e.,
the
ozone­
season
NOx
cap),
then
there
would
be
no
assurance
that
61
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or
Cite
upwind
States'
ozone­
season
NOx
reduction
obligations
would
be
met,
and
CAIR's
projected
ozone
improvements
in
downwind
nonattainment
areas
could
be
significantly
reduced.
As
a
result,
should
interpollutant
trading
be
permitted
between
the
annual
and
ozone­
season
programs,
the
EPA
could
not
demonstrate
that
the
use
of
a
CAIR
ozone­
season
cap
and
trade
program
would
result
in
the
emissions
reductions
necessary
to
satisfy
upwind
States'
obligations
under
section
110(
a)
2(
D)
to
reduce
NOx
for
ozone
purposes.

The
EPA
believes
it
is
also
inappropriate
to
use
annual
NOx
allowances
for
compliance
with
the
annual
SO2
allowance
holding
requirements,
and
vice
versa.
The
EPA
agrees
with
commenters
that
emphasize
that
the
chemical
interactions
for
PM2.5
precursors
are
scientifically
complex
and
must
be
accurately
reflected
in
any
transfer
ratio
in
order
to
maintain
the
integrity
of
the
market.
For
example,
EPA
analysis
has
shown
(
see
January
30,
2004
NPR)
that
PM2.5
precursors,
such
as
NOx
and
SO2,
may
have
non­
linear
interactions
in
the
formation
of
PM2.5.
Any
uniform,

interpollutant
transfer
ratio
would
have
to
be
an
average
and
would
introduce
significant
variability
concerning
the
impact
of
interpollutant
trading
on
emissions
and
significant
uncertainty
concerning
the
achievement
of
the
CAIR
Program's
emission
reduction
goals.
The
EPA
did
not
62
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DRAFT
Do
Not
Quote
or
Cite
receive
a
response
to
the
request
in
the
January
30,
2004
NPR
for
information
on
an
appropriate
value
for
a
potential
transfer
ratio.
While
the
EPA
did
receive
one
comment
that
recommended
the
use
of
a
trading
ratio
of
two
NOx
allowances
for
one
SO2
allowance,
no
comments
presented
supporting
analysis
that
could
be
used
to
develop
transfer
ratios.

While
many
commenters
supportive
of
allowing
interpollutant
trading
in
the
CAIR
claimed
that
it
would
provide
additional
compliance
flexibility
to
sources,
the
EPA
contends
that
use
of
the
newly
created
CAIR
trading
markets
is
sufficiently
flexible.
Sources
may
develop
integrated,
multi­
pollutant
control
strategies
and
use
the
separate
allowance
markets
to
mitigate
differences
in
control
costs
(
within
the
boundaries
of
emissions
caps).
In
other
words,
a
source
can
choose
the
level
to
which
they
can
cost
effectively
control
one
pollutant
and,
if
necessary,

buy
or
sell
emission
allowances
of
the
other
pollutant
to
compensate
for
any
expensive
or
inexpensive
control
cost.

When
markets
are
used
to
provide
for
trading
of
multiple
pollutants,
sources
benefit
from
the
additional
compliance
flexibility
while
the
caps
assure
the
achievement
of
the
overarching
environmental
goals.

In
the
June
10,
2004
SNPR,
the
EPA
solicited
comment
on
how
an
interpollutant
trading
mechanism
might
accommodate
63
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DRAFT
Do
Not
Quote
or
Cite
the
slightly
different
geographic
regions
found
to
be
significant
contributors
for
PM2.5
and
ozone
under
the
CAIR.

No
commenters
provided
supporting
analysis
or
input
on
this
issue.

In
summary,
the
EPA
received
comments
that
generally
opposed
including
a
specific
interpollutant
trading
mechanism.
No
commenters
provided
analysis
to
demonstrate
the
benefit
of
including
a
specific
interpollutant
trading
mechanism
nor
was
there
analysis
provided
in
response
to
the
EPA's
solicitation
in
the
June
10,
2004
SNPR
for
input
on:

transfer
ratios,
addressing
two
different
environmental
issues,
and
having
slightly
different
annual
NOx
and
ozone
season
NOx
control
regions.
Furthermore,
because
the
NOx
and
SO2
markets
provide
very
flexible
mechanisms
for
trading
of
the
two
pollutants,
the
EPA
does
not
believe
there
is
a
compelling
need
to
go
further
at
this
time.
Therefore,
EPA
is
not
finalizing
provisions
in
the
CAIR
model
rules
that
specifically
address
interpollutant
trades.

F.
Are
There
Incentives
for
Early
Reductions?

When
sources
reduce
their
SO2
and
NOx
emissions
during
the
first
phase
of
a
multi­
phase
cap
and
trade
program,
it
creates
the
emissions
"
glide
slope"
of
a
cap
and
trade
approach
that
provides
early
environmental
benefit
and
64
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Do
Not
Quote
or
Cite
lowers
the
cost
of
compliance.
Early
reduction
credits
(
ERCs)
can
provide
an
incentive
for
sources
to
install
and/
or
operate
controls
before
the
implementation
dates.

Allowing
emission
allowances
from
existing
programs
to
be
used
for
compliance
in
the
new
program
is
another
mechanism
to
encourage
early
reductions
prior
to
the
start
of
a
cap
and
trade
program.
This
section
discusses
the
potential
use
of
mechanisms
to
provide
incentives
for
early
reductions
in
the
CAIR.

1.
Incentives
for
Early
SO2
Reductions
a.
The
CAIR
NPR
and
SNPR
Proposal
for
the
Model
Rules
and
Input
from
Commenters.

The
January
30,
2004
CAIR
NPR
and
June
10,
2004
CAIR
SNPR
acknowledge
the
benefit
of
early
reductions
and
provide
for
the
use
of
title
IV
SO2
allowances
of
vintage
years
2009
and
earlier
to
be
used
for
compliance
in
the
CAIR
at
a
oneto
one
ratio.
In
other
words,
title
IV
allowances
can
be
banked
into
the
CAIR
Program.
This
provides
incentive
for
title
IV
sources
to
reduce
their
emissions
in
years
2009
and
earlier
because
these
allowances
may
be
used
for
CAIR
compliance
without
being
discounted
by
the
retirement
ratios
applied
to
the
2010
and
later
SO2
allowances.
No
other
mechanism,
such
as
SO2
ERCs
were
proposed
by
the
EPA.

Comments
Regarding
the
Incentives
for
Early
SO2
Reductions
65
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or
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The
EPA
received
comments
on
incentives
for
early
SO2
reductions
with
the
majority
supporting
the
EPA
proposal
to
encourage
early
emission
reductions
by
allowing
the
CAIR
sources
to
use
2009
and
earlier
vintage
title
IV
SO2
allowances
for
CAIR
compliance.
Some
supporters
noted
concerns
in
meeting
the
CAIR's
stringent
Phase
I
SO2
requirements
as
another
reason
to
allow
the
banking
of
undiscounted
title
IV
allowances
into
the
CAIR.

Some
commenters
expressed
concern
that
achieving
the
SO2
caps
would
be
delayed
if
a
large
number
of
SO2
allowances
were
being
banked
into
the
CAIR.
Based
upon
experience
with
implementing
the
Acid
Rain
Program,
the
EPA
acknowledged
in
the
SNPR
that
crediting
early
reductions
does
create
a
glide
slope
 
where
emissions
are
reduced
below
the
baseline
before
the
implementation
date
and
"
glide"
down
to
the
ultimate
cap
level
sometime
after
the
program
begins.
This
gradual
reduction
in
emissions
is
a
key
component
to
cap
and
trade
programs
having
lower
cost
of
compliance
than
command­
and­
control
approaches.
One
commenter
proposed
that
the
EPA
needs
to
assess
the
likelihood
that
allowing
the
banking
of
undiscounted
title
IV
allowances
would
delay
the
attainment
of
the
Phase
I
SO2
cap
until
Phase
II.
Because
the
EPA
included
this
mechanism
(
i.
e.,
the
use
of
2009
and
earlier
vintage
SO2
allowances
66
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or
Cite
for
compliance
in
the
CAIR)
in
the
policy
case
modeled
as
part
of
this
rulemaking,
EPA
analysis
includes
the
benefits
and
costs
that
would
result
from
the
level
of
SO2
reductions
that
would
take
place
with
banking
of
undiscounted
title
IV
allowances.

One
commenter
advocated
the
use
of
SO2
ERCs.
It
was
not
clear
whether
these
would
be
awarded
in
addition
to
banking
title
IV
allowances
into
the
CAIR
or
the
ERC
mechanism
would
take
the
place
of
banking
SO2
allowances
into
the
CAIR.

b.
SO2
Early
Reduction
Incentives
in
the
Final
CAIR
Model
Rules.

The
CAIR
SO2
model
rule
allows
CAIR
sources
to
use
title
IV
SO2
allowances
of
vintage
2009
and
earlier
for
compliance
with
the
CAIR
at
a
one­
to­
one
ratio.
This
approach
was
part
of
the
CAIR
policy
case
assumptions
used
in
the
rulemaking
modeling
and
the
EPA
has
shown
that
the
SO2
cap
and
trade
program,
with
this
early
incentive
mechanism,
will
achieve
the
level
of
SO2
reductions
needed
to
meet
the
CAIR
goals.
These
reductions
take
place
on
a
glide
slope
that
includes
early
emissions
reductions
as
well
as
some
use
of
the
SO2
allowance
bank
as
sources
gradually
reduce
emissions
toward
the
cap
levels.

The
EPA
did
not
include
SO2
ERCs
because
the
Acid
Rain
67
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
Program
cap
and
trade
program,
which
affects
a
large
segment
of
the
CAIR
source
universe,
makes
it
impossible
to
determine
whether
sources
are
reducing
their
SO2
emissions
below
levels
required
by
existing
(
i.
e.,
the
Acid
Rain
Program)
programs.
Furthermore,
given
that
most
sources
with
substantial
emissions
receive
SO2
emission
allowances
under
the
Acid
Rain
Program,
a
significant
number
of
SO2
allowances
are
expected
to
be
banked
into
the
CAIR.
These
banked
allowances
would
be
available
to
CAIR
sources
in
the
early
years
of
the
program
and
make
ERCs
largely
unnecessary.

2.
Incentives
for
Early
NOx
Reductions
a.
The
CAIR
NPR
and
SNPR
Proposal
for
the
Model
Rules
and
Input
from
Commenters.

In
the
June
10,
2004
SNPR,
the
EPA
proposed
to
provide
incentives
for
early
NOx
reductions
by
allowing
the
use
of
NOx
SIP
Call
allowances
of
vintage
2009
and
earlier
to
be
used
for
compliance
in
the
CAIR.
Further,
the
EPA
did
not
propose,
but
solicited
comment
on
the
potential
use
of
NOx
ERCs
to
provide
an
additional
incentive
for
sources
to
reduce
NOx
emissions
prior
to
CAIR
implementation.
In
addition
to
the
general
solicitation
for
comment
on
NOx
ERCs,
the
EPA
solicited
input
on
the
following
specific
approaches
that
could
be
utilized:
(
1)
the
EPA
could
68
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
maintain
the
NOX
SIP
Call
requirements
and
allow
sources
to
use
ERCs
only
for
compliance
with
the
annual
limitation,
to
ensure
that
ozone­
season
NOX
limitations
are
met.
Under
this
scenario,
the
additional
States
subject
to
the
CAIR
that
have
been
found
to
significantly
contribute
to
ozone
nonattainment
may
also
have
to
be
included
in
the
ozone
season
cap;
(
2)
the
EPA
could
limit
the
period
of
time
during
which
ERCs
could
be
created
and
banked;
(
3)
the
EPA
could
cap
the
amount
of
ERCs
that
can
be
created;
and
(
4)

the
EPA
could
apply
a
discount
rate
to
ERCs.

Comments
Regarding
the
Incentives
for
Early
NOx
Reductions
The
EPA
did
not
receive
comment
on
the
proposed
use
of
NOx
SIP
Call
allowances
of
vintage
years
2009
and
earlier
for
compliance
in
the
CAIR.
In
fact,
several
commenters
characterized
the
CAIR
proposal
as
not
including
any
incentives
for
early
NOx
emissions
reductions.

The
EPA
received
several
comments
on
the
potential
use
of
NOx
ERCs
with
the
majority
in
favor
of
some
sort
of
ERC
mechanism.
Several
commenters
advocated
the
use
of
ERCs
to
mitigate
concerns
that
they
would
not
be
able
to
meet
the
stringent
Phase
I
CAIR
reduction
requirements.
One
commenter
wanted
early
reductions
to
facilitate
the
ozone
attainment
in
2010
but
believed
2010
attainment
could
only
be
helped
if
there
were
some
restrictions
on
the
number
of
69
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
ERCs
that
could
be
created.

Some
ERC
supporters
wanted
credit
for
wintertime
emissions
reductions
only,
while
a
few
believed
that
credit
should
be
given
for
reductions
at
any
time
of
year.
One
commenter
advocated
providing
ERCs
for
wintertime
reductions
only
as
part
of
a
broader
proposal
to
create
a
bifurcated
NOx
trading
system
(
i.
e.,
separate
wintertime
and
summertime
allowances
and
trading
markets.)

Many
of
the
commenters
supporting
the
use
of
ERCs
advocated
that
they
be
distributed
from
a
pool
of
allowances
similar
to
the
CSP
used
in
the
NOx
SIP
Call.
(
The
NOx
SIP
Call
CSP
was
a
fixed
pool
of
NOx
allowances
that
were
distributed
on
a
first
come­
first
serve,
prorated,
or
need
basis,
depending
upon
the
State).
Commenters
noted
that
the
CSP
approach
has
already
been
part
of
a
litigated
rulemaking
and
provides
the
added
benefit
of
limiting
the
total
number
of
allowances
that
can
be
distributed
for
early
reductions.

Other
commenters
proposed
that
should
the
final
approach
use
a
pool
of
allowances,
this
pool
should
not
remove
allowances
from
the
existing
State
NOx
budget.
Another
commenter
suggested
that
allowances
from
a
CSP
could
be
distributed
based
upon
a
NOx
emission
rate,
such
as
0.25
lbs/
mmBtu.

Allowances
could
be
distributed
to
any
source
emitting
below
the
target
emission
rate.
70
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
Several
commenters
were
concerned
that
too
many
NOx
ERCs
(
as
well
as
NOx
SIP
Call
allowances)
could
be
introduced
into
the
CAIR
and
the
ability
of
the
NOx
cap
and
trade
program
to
meet
the
annual
and
ozone­
season
reduction
goals
could
be
compromised.
Some
commenters
suggested
that
crediting
early
reductions
at
a
discount
(
e.
g.,
two
tons
of
NOx
reductions
earn
1
ERC)
could
mitigate
this
concern.

Other
commenters
noted
that
a
CSP­
style
mechanism
also
provides
safeguards
against
an
overabundance
of
ERCs.

Another
commmenter
noted
that
restrictions
on
the
use
of
ERCs
similar
to
the
progressive
flow
control
(
PFC)
mechanism
used
in
the
NOx
SIP
Call
 
PFC
restricts
the
use
of
banked
NOx
allowances
for
compliance
in
years
where
the
NOx
bank
is
greater
than
10
percent
of
the
allocations
 
could
help
to
ease
concerns
of
flooding
the
market
with
NOx
ERCs.

One
commenter
believed
that
the
EPA's
projection
that
the
potential
pool
of
NOx
ERCs
could
be
as
large
as
3.7
million
tons
(
presented
in
the
June
10,
2004
SNPR)
is
unrealistically
high.
The
commenter
contended
that
technical
limitations
of
Selective
Catalytic
Reduction
(
SCR)

operation
would
not
permit
facilities
to
simply
run
all
of
their
SCRs
year­
round.
More
specifically,
the
commenter
believes
the
lower
operating
loads,
typically
of
the
wintertime
dispatch,
would
not
meet
the
minimum
conditions
71
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
necessary
for
SCR
operation
(
i.
e.,
at
lower
capacity
the
stack
gas
temperatures
will
not
support
the
use
of
the
catalyst).
Fewer
wintertime
opportunities
to
operate
the
SCRs
is
believed
by
the
commenter
to
result
in
a
smaller
projected
ERC
estimate.
This
was
an
estimate
used
for
discussion
purposes
and
was
not
directly
used
in
the
development
of
the
CSP.

A
few
commenters
advocated
providing
credits
to
any
source
that
reduced
emission
rates
below
those
used
to
determine
the
CAIR
State
budgets.
One
commenter
suggested
that
the
rates
be
based
on
those
rates
used
to
determine
the
NOx
SIP
Call
caps.

A
few
commenters
proposed
that
the
EPA
should
develop
a
strategy
for
crediting
NOx
reductions
from
sources
that
have
implemented
control
measures
in
response
to
State­
level
regulations
that
are
more
stringent
than
the
NOx
SIP
Call.

Another
commenter
advocated
only
providing
ERCs
in
States
subject
to
both
the
NOx
SIP
Call
and
the
CAIR.

Some
commenters
did
not
support
the
use
of
NOx
ERCs
in
any
form.
These
commenters
believe
that
the
use
of
ERCs
would
delay
attainment
of
the
CAIR
emission
caps.

b.
NOx
Early
Reduction
Incentives
in
the
Final
CAIR
Model
Rules.

The
CAIR
ozone­
season
NOx
cap
and
trade
rule
will
allow
72
14
The
200,000
ton
pool
includes
the
1,503
tons
that
would
be
DE
and
NJ's
share.
Section
V
of
today's
action
describes
in
detail
the
State­
by­
State
apportionment
of
the
total
CSP.
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
the
proposed
use
of
NOx
SIP
Call
allowances
of
vintage
years
2008
and
earlier
for
compliance
in
the
CAIR.
This
mechanism
would
provide
incentive
for
sources
in
NOx
SIP
Call
States
to
reduce
their
ozone­
season
NOx
emissions
and
bank
additional
allowances
into
the
CAIR.
Because
today's
final
ozone­
season
cap
and
trade
rule
includes
a
mandatory
ozoneseason
NOx
cap
in
2009
(
this
modification
is
discussed
in
section
IV),
the
provisions
to
allow
the
banking
of
NOx
SIP
Call
allowances
into
the
CAIR
are
adjusted
to
reflect
this
implementation
date.

The
CAIR
annual
NOx
cap
and
trade
rule
will
provide
additional
incentives
for
early
annual
NOx
reductions
by
creating
a
CSP
for
CAIR
States
from
which
they
can
distribute
allowances
for
early,
surplus
NOx
emissions
reductions
in
the
years
2007
and
2008.
The
earning
of
CAIR
CSP
allowances
for
NOx
emission
reductions
does
not
begin
until
2007
because
this
is
the
first
year
after
the
State
SIP
submittal
deadlines.
The
CAIR
CSP
will
provide
a
total
of
200,00014
CAIR
annual
NOx
allowances
of
vintage
2009
in
addition
to
the
annual
CAIR
NOx
budgets.

The
CAIR's
CSP
is
patterned
after
the
NOx
SIP
Call's
73
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
CSP,
which
is
part
of
an
established
and
extensively
litigated
rulemaking.
Similarities
include:
limiting
the
total
number
of
allowances
that
can
be
distributed;
limiting
the
years
in
which
CSP
allowances
can
be
earned;
populating
the
CSP
with
allowances
vintaged
the
first
compliance
year;

and
using
distribution
criteria
of
early
reductions
and
need.

The
EPA
will
apportion
the
CSP
to
the
States
based
upon
their
share
of
the
final,
regionwide
NOx
CAIR
reductions.

Similar
to
the
NOx
SIP
Call,
States
may
distribute
these
CAIR
NOx
allowances
to
sources
based
upon
either:
(
1)
a
demonstration
by
the
source
to
the
State
of
NOx
emissions
reductions
in
surplus
of
any
existing
NOx
emission
control
requirements;
or
(
2)
a
demonstration
to
the
State
that
the
facility
has
a
"
need"
that
would
affect
electricity
grid
reliability.
Sources
that
wish
to
receive
CAIR
CSP
allowances
based
upon
a
demonstration
of
surplus
emissions
reductions
will
be
awarded
one
CAIR
annual
NOx
allowance
for
every
ton
of
NOx
emissions
reductions.
(
Should
a
State
receive
more
requests
for
allowances
than
their
share
of
the
CAIR
CSP,
the
State
would
pro­
rate
the
allowance
distribution.)
Determination
of
surplus
emissions
must
use
emissions
data
measured
using
part
75
monitoring.

The
EPA
elected
to
include
the
CSP
in
response
to
74
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
several
comments
noting
the
benefit
of
early
NOx
reductions
and
some
commenters
concerns
in
complying
with
the
stringent
Phase
I
CAIR
NOx
cap.
While
EPA
analysis
has
shown
that
sources
had
sufficient
time
to
install
NOx
emission
controls,
the
EPA
does
believe
that
it
would
be
appropriate
to
provide
some
mechanism
to
alleviate
the
concerns
of
some
sources
which
may
have
unique
issues
with
complying
with
the
2009
implementation
deadline.
In
addition
to
mitigating
some
of
the
uncertainty
regarding
the
EPA
projections
of
resources
to
comply
with
CAIR,
the
CAIR
CSP
also
effectively
provides
incentives
for
early,
surplus
NOx
reductions.

The
EPA
agrees
with
the
comments
that
advocate
allowing
sources
to
earn
CAIR
annual
NOx
allowances
only
for
those
reductions
that
are
in
surplus
of
the
sources'
existing
NOx
reduction
requirements.
By
allowing
sources
in
NOx
SIP
Call
and
non­
NOx
SIP
Call
States
to
demonstrate
that
their
yearround
early
reductions
are
truly
"
surplus"
and,
therefore,

deserving
of
CSP
allowances,
the
EPA
is
responding
to
comments
that
the
EPA
should
allow
sources
in
non­
NOx
SIP
Call
States
to
receive
credit
for
early
reductions.
Some
commenters
advocated
crediting
sources
in
the
ozone­
season
NOx
cap
and
trade
program
that
emitted
below
the
emission
rate
used
to
determine
the
ozone­
season
budget.
The
EPA
did
not
accept
this
recommendation
because
a
source
that
is
75
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
allowed
to
bank
NOx
SIP
Call
allowances
into
the
CAIR
ozoneseason
NOx
program
and
receive
early
reduction
credit
from
CAIR's
CSP
would
be
essentially
"
double­
counting"
that
emission
reduction.

The
EPA
did
not
restrict
the
use
of
the
NOx
allowances
awarded
from
the
CSP
because
several
aspects
of
the
CSP
already
address
concerns
that
too
many
total
credits
would
be
distributed
and
that
they
would
flood
the
markets.

First,
the
CSP
is
a
finite
pool
of
NOx
allowances.
Second,

by
requiring
sources
to
reduce
one
ton
of
NOx
emissions
for
every
NOx
allowance
awarded
from
the
CSP
ensures
that
significant
reductions
are
made
prior
to
the
CAIR
implementation
date.

G.
Are
There
Individual
Unit
"
Opt­
In"
Provisions?

In
the
SNPR,
EPA
described
a
potential
approach
for
allowing
certain
units
to
voluntarily
participate
in,
or
"
opt­
in,"
to
the
CAIR.
Originally,
EPA
proposed
to
have
no
opt­
in
provision
but
included
language
in
the
SNPR
on
what
a
potential
opt­
in
provision
may
look
like.
This
"
potential"

opt­
in
provision
would
have
allowed
non­
EGU
boilers
and
turbines
that
exhaust
to
a
stack
or
duct
and
monitor
and
report
in
accordance
with
part
75
to
opt
into
the
CAIR
The
opt­
in
unit
would
have
been
required
to
opt­
in
for
both
SO2
and
NOx.
The
allocation
method
for
opt­
ins
assumed
a
76
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
percentage
SO2
reduction
from
a
baseline
and
for
NOx,

allocations
were
equal
to
a
baseline
heat
input
multiplied
by
a
specified
NOx
emissions
rate,
the
same
NOx
emissions
rate
EGUs
were
subject
to
in
the
assumed
EGU
budgets.

Allocations
were
updated
annually
and
after
opting
in
units
would
have
had
to
stay
in
the
CAIR
for
a
minimum
of
5
years.

The
EPA
received
many
comments
in
favor
of
and
very
few
comments
against
including
an
opt­
in
provision
in
the
final
rule.
As
a
result,
EPA
is
including
an
opt­
in
provision
in
this
final
rule
that
is
based
on
the
approach
described
in
the
SNPR
but
includes
several
modifications
and
additions
in
response
to
comments
as
described
below.
In
general,
EPA
believes
there
is
value
to
including
an
opt­
in
provision
but
believes
that
sources
that
opt­
in
should
be
responsible
for
a
certain
level
of
reduction
below
its
baseline
because
of
the
additional
flexibility
provided
to
that
source
by
opting
into
a
regional
trading
program
and
because
of
the
possibility
that
participation
in
the
CAIR
may
reduce
or
eliminate
future
potential
required
reductions.
Therefore,

the
following
opt­
in
approach
has
as
its
goals
to
provide
more
flexibility
to
the
units
opting
in
as
well
as
to
potentially
provide
more
cost­
effective
reductions
for
the
affected
EGUs
but
also
to
ensure
a
certain
level
of
reduction
from
the
units
opting
into
the
program.
77
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
1.
Applicability
Some
commenters
suggested
that
the
opt­
in
provision
not
be
limited
to
boilers
and
turbines
but
should
be
open
to
any
unit.
The
EPA
strongly
believes
that
any
unit
participating
in
an
emissions
trading
program
be
subject
to
accurate
and
reliable
monitoring
and
reporting
requirements.
This
is
the
purpose
of
part
75.
The
EPA
has
developed
criteria
for
boilers
and
turbines
to
satisfy
the
requirements
of
part
75
but
has
not
developed
criteria
for
all
non­
boilers
and
turbines
and,
therefore,
cannot
be
confident
their
emissions
can
be
monitored
with
the
high
degree
of
accuracy
and
reliability
required
by
a
cap­
and­
trade
program.
Continuous
Emissions
Monitoring
Systems
or
"
CEMS"
are
typically
what
is
required
by
EPA
to
participate
in
a
cap­
and­
trade
program.

In
response
to
comments
received
suggesting
that
non­
boilers
and
turbines
be
allowed
to
opt­
in,
EPA
is
expanding
applicability
of
the
opt­
in
provision
to
include,

in
addition
to
boilers
and
turbines,
other
fossil
fuel­
fired
combustion
devices
that
vent
all
emissions
through
a
stack
and
meet
monitoring,
recordkeeping,
and
recording
requirements
of
part
75.

2.
Allowing
Single
Pollutant
Some
commenters
suggested
that
sources
should
be
allowed
to
opt­
in
for
only
one
pollutant
instead
of
78
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
requiring
the
source
to
opt­
in
for
both
SO2
and
NOx
as
EPA
proposed.
These
commenters
argued
that
some
sources
may
only
emit
significant
amounts
of
one
of
the
two
regulated
pollutants
and
that
it
would
not
make
sense
to
require
reductions
in
both
pollutants
from
such
a
source.
The
EPA
agrees
with
this
comment
and
will
allow
units
to
opt­
in
for
one
pollutant,
i.
e.,
NOx,
SO2,
or
both.
Another
commenter
suggested
that
EPA
allow
non­
EGUs
subject
to
the
NOx
SIP
Call
to
opt
into
the
CAIR
for
NOx
only
without
requiring
any
reductions
in
SO2.
This
commenter
argued
that
these
non­
EGUs
could
simply
turn
on
their
SCRs
during
the
non­
ozone
season
and
easily
achieve
significant
NOx
reductions.
The
EPA
agrees
that
the
relatively
small
number
of
non­
EGUs
subject
to
the
NOx
SIP
Call
that
have
SCRs
could
achieve
significant
NOx
reductions
by
operating
their
SCRs
during
the
non­
ozone
season.
As
stated
above,
EPA
is
allowing
sources
to
opt­
in
for
one
pollutant
and
thus
non­

EGUs
subject
to
the
NOx
SIP
call
may
opt­
in
for
NOx
only.

3.
Allocation
Method
for
Opt­
Ins
In
the
SNPR,
EPA
proposed
allocating
allowances
to
optin
units
on
a
yearly
basis.
The
amount
of
allowances
allocated
would
be
calculated
by
multiplying
an
emission
rate
by
the
lesser
of
a
baseline
heat
input
or
the
actual
79
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
heat
input
monitored
at
the
unit
in
the
prior
year.

The
baseline
heat
input
would
be
calculated
by
using
the
most
recent
3
years
of
quality­
assured
part
75
monitoring
data.
When
less
than
3
years
of
quality­
assured
part
75
monitoring
data
is
available,
the
heat
input
would
be
based
on
quality­
assured
part
75
monitoring
data
from
the
year
before
the
unit
opted
in.

For
SO2,
EPA
proposed
that
the
emission
rate
used
to
calculate
allocations
would
be
the
lesser
of,
the
most
stringent
State
or
Federal
SO2
emission
rate
that
applied
in
the
preceding
year
or
the
emission
rate
representing
50
percent
of
the
unit's
baseline
SO2
emission
rate
(
in
lbs/
mmBtu)
for
the
years
2010
through
2014
and
35
percent
of
the
unit's
baseline
SO2
emission
rate
(
in
lbs/
mmBtu)
for
2015
and
beyond.
For
NOx,
EPA
proposed
that
the
emission
rate
would
be
the
lower
of
the
unit's
baseline
emission
rate,
the
most
stringent
State
or
Federal
NOx
emission
limitation
that
applies
to
the
opt­
in
unit
at
any
time
during
the
calender
year
prior
to
opting
into
the
CAIR
Program,
or
0.15
lb/
mmBtu
for
the
years
2010
through
2014
and
0.11
lbs/
mmBtu
for
the
years
2015
and
beyond.

In
today's
final
rule,
EPA
is
making
a
number
of
changes
to
its
proposed
methodology
for
calculating
allocations
for
opt­
in
units.
80
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
With
regards
to
baseline
heat
input,
EPA
is
requiring
that
sources
may
only
use
part
75
monitored
data
for
years
in
which
they
have
maintained
at
least
a
90
percent
monitor
availability.
The
EPA
is
making
this
change
because
part
75
contains
missing
data
provisions
that
require
substitution
of
data
when
monitors
are
unavailable.
When
units
have
low
monitor
availability,
units
are
required
to
report
more
conservative
(
e.
g.,
higher)
heat
input
values.
This
is
to
provide
an
incentive
to
maintain
high
monitor
availability
(
since
under
a
cap
and
trade
program
sources
would
be
required
to
turn
in
more
allowances
if
they
reported
higher
emissions).
When
setting
baselines,
sources
have
the
opposite
incentive,
reporting
a
higher
heat
input
would
result
in
a
higher
baseline
and
thus
a
greater
allocation.

With
regards
to
the
SO2
emission
rate
used
to
calculate
allocations,
EPA
is
requiring
that
the
emission
rate
used
to
calculate
allocations
would
be
the
lesser
of,
the
most
stringent
State
or
Federal
SO2
emission
rate
that
applies
to
the
unit
in
the
year
that
the
unit
is
being
allocated
for,

or
the
emission
rate
representing
70
percent
of
the
unit's
baseline
SO2
emission
rate
(
in
lbs/
mmBtu).
The
EPA
is
changing
the
percentage
emission
reduction
upon
which
allocations
are
based
because
some
commenters
suggested
that
instead
of
using
percentage
emission
reduction
requirements
81
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
that
are
the
same
as
the
requirements
for
EGUs
as
a
basis
for
allocating
to
opt­
ins,
EPA
should
require
emissions
reductions
based
on
similar
marginal
cost
of
control.
The
EPA
agrees
with
the
basic
concept
that
emissions
reductions
for
opt­
ins
should
be
based
on
similar
marginal
costs.
One
commenter
submitted
results
from
a
study
of
industrial
boiler
NOx
and
SO2
control
costs
that
indicated
the
use
of
similar
marginal
cost
of
control
would
result
in
approximately
a
30
percent
reduction
in
NOx
and
SO2
by
2010.

While
the
commenter
provided
limited
data
to
allow
EPA
to
evaluate
the
commenter's
estimates,
EPA
is
using
this
percentage
reduction
requirement
for
the
opt­
in
provision.

The
same
commenter
stated
that
it
may
be
possible
to
achieve
more
than
a
30
percent
reduction
in
SO2
and
NOx
by
2015
by
employing
future
unspecified
technology
advances.
Because
these
future
technology
advances
are
not
specified
nor
demonstrated,
EPA
is
not
requiring
more
than
a
30
percent
reduction
in
SO2
and
NOx
in
2015
and
beyond
for
opt­
ins.

The
EPA
is
changing
the
requirement
to
use
the
lowest
required
emission
rate
for
the
year
preceding
the
year
in
which
allowances
are
being
allocated
to
the
lowest
emission
rate
for
the
year
in
which
allowances
are
being
allocated.

The
EPA
is
making
this
change
because
EPA
believes
that
such
data
should
be
available
and
that
this
more
accurately
82
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
reflects
the
intent
of
the
rule
to
ensure
that
the
source
is
not
being
allocated
a
greater
number
of
allowances
than
the
emissions
a
source
would
be
allowed
to
emit
under
the
regulations
it
is
subject
to
in
the
year
the
allocations
are
being
made.
The
EPA
is
finalizing
parallel
provisions
with
respect
to
NOx.

4.
Alternative
Opt­
In
Approach
Some
commenters
suggested
that
EPA
include
an
alternative
approach
to
opting
into
the
CAIR.
This
alternative
would
allow
units
to
opt­
in
as
early
as
2010
and
receive
allocations
at
their
current
emission
levels
in
return
for
a
commitment
to
make
deeper
reductions
by
2015
than
would
be
required
under
the
general
opt­
in
provision
described
above.
Therefore,
for
the
years
2010
through
2014,
the
unit
would
be
allocated
allowances
based
on
the
same
heat
input
used
under
the
general
opt­
in
provision
(
e.
g.,
the
lesser
of
the
baseline
heat
input
or
the
heat
input
for
the
year
preceding
the
year
in
which
allocations
are
being
made)
multiplied
by
an
emission
rate.
This
emission
rate
would
be
the
lower
of
the
emission
rate
for
the
year
or
years
before
the
unit
opted
in
or
the
the
most
stringent
State
or
Federal
emission
rate
required
in
the
year
that
the
unit
opts
in.
For
SO2
for
the
years
2015
and
beyond,
the
unit
would
be
allocated
allowances
based
on
the
83
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
same
heat
input
multiplied
by
an
emission
rate.
This
emission
rate
would
be
the
lower
of
a
90
percent
reduction
from
the
baseline
emission
rate
or
the
most
stringent
State
or
Federal
emission
rate
required
in
the
baseline
year.
For
NOx,
the
same
methodology
would
be
used,
except
that
the
emission
rate
used
for
the
years
2015
and
beyond
would
be
the
lower
of
0.15
lbs/
mmBtu
or
the
most
stringent
State
or
Federal
emission
rate
required
in
the
baseline
year.
The
EPA
believes
the
environmental
benefit
of
achieving
deeper
emissions
reductions
in
the
future
(
2015)
from
sources
that
may
otherwise
not
make
such
deep
emissions
reductions
is
worth
including
in
this
final
rule.

5.
Opting
Out
In
the
SNPR,
EPA
proposed
that
opt­
in
units
be
required
to
remain
in
the
program
a
minimum
of
5
years
after
which
time
they
could
voluntarily
withdraw
from
the
CAIR.
Some
commenters
expressed
concern
over
this
proposed
approach,

arguing
that
because
EGUs
affected
by
the
CAIR
are
not
allowed
to
voluntarily
withdraw
from
the
CAIR
that
opt­
in
sources
should
not
be
allowed
to
voluntarily
withdraw
either.
The
EPA
recognizes
that
opt­
in
sources
such
as
industrial
boilers
and
turbines
tend
to
be
more
sensitive
to
changing
market
forces
than
EGUs.
As
a
result,
EPA
believes
it
is
appropriate
to
allow
opt­
in
sources
who
voluntarily
84
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
participate
in
an
emissions
reductions
program
to
be
able
to
end
their
participation
or
("
opt­
out")
after
a
specified
period
of
time.
As
proposed,
EPA
believes
a
period
of
5
years
is
appropriate
and
is
finalizing
a
rule
to
allow
optin
sources
to
opt­
out
after
participating
in
the
CAIR
for
5
years.
This
option
to
opt­
out
after
5
years
does
not
apply
to
sources
that
opt­
in
under
the
alternative
approach.

Sources
that
opt­
in
under
the
alternative
approach
may
not
opt­
out
at
any
time.

6.
Regulatory
Relief
for
Opt­
in
Units
The
CAIR
does
not
offer
relief
from
other
regulatory
requirements,
existing
or
future,
for
units
that
opt­
in
to
the
CAIR
cap
and
trade
program.
Any
revision
of
requirements
for
other,
non­
CAIR
programs
would
be
done
under
rulemakings
specific
to
those
programs.

As
discussed
above,
EPA
is
including
two
different
approaches
for
opt­
in
units
to
follow,
a
general
and
an
alternative
approach.
The
EPA
is
including
both
approaches
in
this
final
rule
in
response
to
comments
supportive
of
including
an
alternative
means
and
to
provide
greater
flexibility
for
sources
to
participate
in
the
CAIR
trading
program.
Opt­
in
sources
may
select
which
approach
is
more
appropriate
for
their
particular
situation.
An
opt­
in
source
may
not
switch
from
one
approach
to
the
other
once
in
85
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
the
program.
States
have
the
flexibility
to
choose
to
include
both
of
these
approaches,
one
of
these
approaches,

or
none
of
them
in
their
SIPs.
EPA
is
not
requiring
States
to
include
an
individual
unit
opt­
in
provision
because
the
participation
of
individual
opt­
in
units
is
not
required
to
meet
the
goals
of
the
CAIR.
However,
States
cannot
choose
to
have
an
individual
unit
opt­
in
approach
different
than
what
EPA
has
finalized
in
this
rule
and
still
participate
in
the
inter­
State
trading
program
administered
by
EPA.

H.
What
Are
the
Source­
Level
Emissions
Monitoring
and
Reporting
Requirements?

In
the
NPR,
the
EPA
proposed
that
sources
subject
to
the
CAIR
monitor
and
report
NOx
and
SO2
mass
emissions
in
accordance
with
40
CFR
part
75.

The
model
trading
rules
incorporate
part
75
monitoring
and
are
being
finalized
as
proposed.
The
majority
of
CAIR
sources
are
measuring
and
reporting
SO2
mass
emissions
year
round
under
the
Acid
Rain
Program,
which
requires
part
75
monitoring.
Most
CAIR
sources
are
also
reporting
NOx
mass
emissions
year
round
under
the
NOX
SIP
Call.
The
CAIRaffected
Acid
Rain
sources
that
are
located
in
States
that
are
not
affected
by
the
NOx
SIP
Call
currently
measure
and
report
NOx
emission
rates
year
round,
but
do
not
currently
report
NOx
mass
emissions.
These
sources
will
need
to
86
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
modify
only
their
reporting
practices
in
order
to
comply
with
the
proposed
CAIR
monitoring
and
reporting
requirements.

Because
so
many
sources
are
already
using
part
75
monitoring,
there
were
very
few
comments
on
the
source­
level
monitoring
requirements
in
this
rulemaking.
The
comments
the
EPA
received
related
to
sources
not
currently
monitoring
under
part
75.
Commenters
suggested
that
alternative
forms
of
monitoring
(
e.
g.,
part
60
monitoring)
would
be
appropriate
for
these
sources.
The
EPA
disagrees.

Consistent,
complete
and
accurate
measurement
of
emissions
ensures
that
each
allowance
actually
represents
one
ton
of
emissions
and
that
one
ton
of
reported
emissions
from
one
source
is
equivalent
to
one
ton
of
reported
emissions
from
another
source.
Similarly,
such
measurement
of
emissions
ensures
that
each
single
allowance
(
or
group
of
SO2
allowances,
depending
upon
the
SO2
allowance
vintage)

represents
one
ton
of
emissions,
regardless
of
the
source
for
which
it
is
measured
and
reported.
This
establishes
the
integrity
of
each
allowance,
which
instills
confidence
in
the
underlying
market
mechanisms
that
are
central
to
providing
sources
with
flexibility
in
achieving
compliance.

Part
75
has
flexibility
relating
to
the
type
of
fuel
and
emission
levels
as
well
as
procedures
for
petitioning
for
87
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
alternatives.
The
EPA
believes
this
provides
the
requested
flexibility.

Should
a
State(
s)
elect
to
use
the
example
allocation
approach,
the
EPA
would
modify
the
part
75
monitoring
and
reporting
requirements
to
collect
information
used
in
determining
the
allowance
allocations
for
Combined
Heat
and
Power
(
CHP)
units.
More
specifically,
provisions
for
the
monitoring
and
reporting
of
the
BTU
content
of
the
steam
output
would
be
added
to
the
existing
requirements.
The
information
on
electricity
output
currently
reported
under
part
75
would
not
need
to
be
revised
to
allow
States
to
implement
the
example
allowance
allocation
approach.

In
the
SNPR,
the
EPA
proposed
continuous
measurement
of
SO2
and
NOX
emissions
by
all
existing
affected
sources
by
January
1,
2008
using
part
75
certified
monitoring
methodologies.
New
sources
have
separate
deadlines
based
upon
the
date
of
commencement
of
operation,
consistent
with
the
Acid
Rain
Program.
These
deadlines
are
finalized
as
proposed.

I.
What
is
Different
between
CAIR's
Annual
and
Seasonal
NOx
Model
Cap
and
Trade
Rules?

Today's
action
finalizes
not
only
the
proposed
CAIR
annual
NOx
program
and
annual
SO2
program,
but
also
a
CAIR
88
Section
VIII
1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
ozone­
season
NOx
program.
Because
the
CAIR
ozone­
season
NOx
program
is
the
only
ozone­
season
NOx
cap
and
trade
program
that
the
EPA
will
administer,
NOx
SIP
Call
States
wishing
to
meet
their
NOx
SIP
Call
obligations
through
an
EPAadministered
regional
NOx
program
will
also
use
the
CAIR
ozone­
season
rule.
The
EPA
believes
that
States
and
affected
sources
will
benefit
from
having
a
single,

consistent
regional
NOx
cap
and
trade
program.
This
section
of
today's
action
highlights
any
key
differences
between
the
CAIR
ozone­
season
NOx
model
rule
and
the
NOx
SIP
Call
model
rule,
as
well
as
the
CAIR
annual
and
ozone­
season
NOx
model
rules.

Differences
Between
the
CAIR
Ozone­
Season
NOx
Model
Rule
and
the
NOx
SIP
Call
Model
Rule
While
the
CAIR
ozone­
season
NOx
model
rule
closely
mirrors
the
NOx
SIP
Call
rule
(
as
does
the
other
CAIR
rules),
the
EPA
has
incorporated
into
the
CAIR
model
rules
its
experience
with
implementing
trading
programs
(
including
seasonal
NOx
programs).
These
modifications
include
the
following.


Unrestricted
banking:
The
CAIR
ozone­
season
NOx
model
rule
will
not
include
any
restrictions
on
the
banking
of
NOx
SIP
Call
allowances
(
vintages
2008
and
earlier)

or
CAIR
ozone­
season
NOx
allowances.
The
NOx
SIP
Call
89
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1/
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DRAFT
Do
Not
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or
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rules
include
"
progressive
flow
control"
provisions
that
reduce
the
value
of
banked
allowances
in
years
where
the
bank
is
above
a
certain
percentage
of
the
cap.
(
See
section
VIII.
E.
1
of
today's
rule
for
a
detailed
discussion).


Facility
level
compliance:
The
CAIR
ozone­
season
NOx
model
rule
will
allow
sources
to
comply
with
the
allowance
holding
requirements
at
the
facility
level.

The
NOx
SIP
Call
rules
required
unit­
by­
unit
level
compliance
with
certain
types
of
allowance
accounts
providing
some
flexibility
for
sources
with
multiple
affected
units.
(
See
the
June
2004
SNPR,
section
IV
for
a
detailed
discussion).

The
EPA
believes
that
these
changes
improve
the
programs
and
that
both
CAIR
and
NOx
SIP
Call
affected
sources
will
benefit
from
complying
with
a
single,
regionwide
cap
and
trade
program.

Differences
Between
the
CAIR
Ozone­
Season
and
Annual
NOx
Model
Rules
The
CAIR
ozone­
season
and
annual
NOx
model
rules
are
designed
to
be
identical
with
the
exception
of
(
1)

provisions
that
relate
to
compliance
period
and
(
2)
the
mechanism
for
providing
incentives
for
early
NOx
reductions.

For
compliance
related
provisions,
the
EPA
attempted
to
90
Section
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DRAFT
Do
Not
Quote
or
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maintain
as
much
consistency
as
possible
between
the
CAIR
annual
and
ozone­
season
NOx
model
rules.
For
example,

reporting
schedules
remain
synchronized
(
i.
e.,
quarterly
reporting)
for
both
of
the
CAIR
NOx
model
rules.
For
the
annual
and
ozone­
season
NOx
model
rules,
the
EPA
did
define
12
month
and
5
month
compliance
periods,
respectively.

Incentives
for
early
NOx
reductions
differ
between
the
CAIR
annual
and
ozone­
season
programs.
For
the
annual
NOx
program,
early
reductions
may
be
rewarded
by
States
through
a
CSP.
(
See
section
VIII.
F.
2
of
today's
action
for
a
detailed
discussion.)
The
CAIR
ozone­
season
NOx
model
rule
provides
incentive
for
early
emissions
reductions
by
allowing
the
banking
of
pre­
2009
NOx
SIP
Call
allowances
into
the
CAIR
ozone­
season
program.

J.
Are
There
Additional
Changes
to
Proposed
Model
Cap
and
Trade
Rules
Reflected
in
the
Regulatory
Language?

The
proposed
and
final
rules
are
modeled
after,
and
are
largely
the
same
as,
the
NOx
SIP
Call
model
trading
rule.

Today's
final
rule
includes
some
relatively
minor
changes
to
the
model
rules'
regulatory
text
that
improve
the
implementability
of
the
rules
or
clarify
aspects
of
the
rules
identified
by
the
EPA
or
commenters.
(
Note
that
sections
VIII.
B
through
VIII.
H
of
today's
action
highlight
the
more
significant
modifications
included
in
the
final
91
Section
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1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
model
rules).

One
example
of
a
relatively
minor
change
is
the
inclusion
of
language
in
the
SO2
model
rule
that
implements
the
retirement
ratio
(
2.00)
used
for
allowances
allocated
for
2010
to
2014
and
the
retirement
ratio
(
2.86)
used
for
allowances
allocated
for
2015
and
later,
that
clarifies
the
compliance
deduction
process
and
that
provides
for
roundingup
of
fractional
tons
to
whole
tons
of
excess
emissions.

More
specifically,
the
definition
of
"
CAIR
SO2
allowance"

states
that
an
allowance
allocated
for
2010
to
2014
authorizes
emissions
of
0.50
tons
of
SO2
and
that
an
allowance
allocated
for
2015
or
later
authorizes
emissions
of
0.35
tons
of
SO2
 
which
corresponds
with
the
2.86
retirement
ratio.

Other,
less
significant
modifications
were
also
included
in
the
regulatory
text
of
the
final
model
rules.

These
include:


Units
and
sources
are
identified
separately
for
NOx
and
SO2
programs
(
e.
g.,
CAIR
NOx
units,
CAIR
Nox
ozone
season
units,
and
CAIR
SO2
units)
since
States
can
participate
in
one,
two,
or
three
trading
programs;


The
definition
of
"
nameplate
capacity"
is
clarified;


The
language
on
closing
of
general
accounts
is
clarified;
and,
92
Section
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25/
05
DRAFT
Do
Not
Quote
or
Cite

Process
of
recordation
of
CAIR
SO2
allowance
allocations
and
transfers
on
rolling
30­
year
periods
is
added
to
make
it
consistent
with
Acid
Rain
regulations.

Another
example
of
where
today's
final
model
trading
rules
incorporate
relatively
minor
changes
from
the
proposed
model
trading
rules
involves
the
provisions
in
the
standard
requirements
concerning
liability
under
the
trading
programs.
The
proposed
CAIR
model
NOX
and
SO2
trading
rules
include,
under
the
standard
requirements
in
§
96.106(
f)(
1)

and
(
2)
and
§
96.206(
f)(
1)
and
(
2),
provisions
stating
that
any
person
who
knowingly
violates
the
CAIR
NOx
or
SO2
trading
programs
or
knowingly
makes
a
false
material
statement
under
the
trading
programs
will
be
subject
to
enforcement
action
under
applicable
State
or
Federal
law.

Similar
provisions
are
included
in
§
96.6(
f)(
1)
and
(
2)
of
the
final
NOx
SIP
Call
model
trading
rule.
The
final
CAIR
model
NOx
and
SO2
trading
rules
exclude
these
provisions
for
the
following
reasons.
First,
the
proposed
rule
provisions
are
unnecessary
because,
even
in
their
absence,

applicable
State
or
Federal
law
authorizes
enforcement
actions
and
penalties
in
the
case
of
knowing
violations
or
knowing
submission
of
false
statements.
Moreover,
these
proposed
rule
provisions
are
incomplete.
They
do
not
purport
to
cover,
and
have
no
impact
on,
liability
for
93
Section
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1/
25/
05
DRAFT
Do
Not
Quote
or
Cite
violations
that
are
not
knowingly
committed
or
false
submissions
that
are
not
knowingly
made.
Applicable
State
and
Federal
law
already
authorizes
enforcement
actions
and
penalties,
under
appropriate
circumstances,
for
non­
knowing
violations
or
false
submissions.
Because
the
proposed
rule
provisions
are
unnecessary
and
incomplete,
the
final
CAIR
model
NOx
and
SO2
trading
rules
do
not
include
these
provisions.
However,
the
EPA
emphasizes
that,
on
their
face,
the
provisions
that
were
proposed,
but
eliminated
in
the
final
rules,
in
no
way
limit
liability,
or
the
ability
of
the
State
or
the
EPA
to
take
enforcement
action,
to
only
knowing
violations
or
knowing
false
submissions.
