

[Federal Register: April 28, 2006 (Volume 71, Number 82)]
[Rules and Regulations]               
[Page 25303-25326]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28ap06-14]                         


[[Page 25303]]

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Part III





Environmental Protection Agency





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40 CFR Parts 51 and 96



Rule To Reduce Interstate Transport of Fine Particulate Matter and 
Ozone (Clean Air Interstate Rule): Reconsideration; Final Rule


[[Page 25304]]


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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Parts 51 and 96

[OAR 2003-0053; FRL-8047-9]
RIN 2060-AN57

 
Rule To Reduce Interstate Transport of Fine Particulate Matter 
and Ozone (Clean Air Interstate Rule): Reconsideration

AGENCY: Environmental Protection Agency (EPA).

ACTION: Final notice of reconsideration.

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SUMMARY: On May 12, 2005, EPA published in the Federal Register the 
final ``Rule to Reduce Interstate Transport of Fine Particulate Matter 
and Ozone'' (Clean Air Interstate Rule or CAIR). The CAIR requires 
certain upwind States to reduce emissions of nitrogen oxides 
(NOX) and/or sulfur dioxide (SO2) that 
significantly contribute to nonattainment of, or interfere with 
maintenance by, downwind States with respect to the fine particle and/
or 8-hour ozone national ambient air quality standards (NAAQS). 
Subsequently, EPA received 12 petitions for reconsideration of the 
final rule. On December 2, 2005, EPA published a notice of its decision 
to grant reconsideration of four issues raised in the petitions for 
reconsideration, and granted an additional opportunity for public 
comment. On December 29, 2005, EPA published a notice of its decision 
to grant reconsideration of an additional issue raised by a petition 
for reconsideration, and again granted an additional opportunity for 
public comment. In this notice, EPA is announcing its final decisions 
on the five specific issues addressed in the December 2005 notices.

DATES: Effective Dates: This reconsideration is effective June 27, 
2006.

FOR FURTHER INFORMATION CONTACT: For general questions concerning 
today's action, please contact Carla Oldham, U.S. EPA, Office of Air 
Quality Planning and Standards, Air Quality Strategies and Standards 
Division, Mail Code C504-03, Research Triangle Park, NC 27711, phone 
number (919) 54l-3347, e-mail address oldham.carla@epa.gov. For 
questions concerning the analyses described in section III of this 
notice, please contact Chitra Kumar, U.S. EPA, Office of Atmospheric 
Programs, Clean Air Markets Division, Mail Code 6204J, 1200 
Pennsylvania Avenue, NW., Washington, DC 20460, telephone (202) 343-
9128, e-mail address kumar.chitra@epa.gov. For legal questions, please 
contact Sonja Rodman, U.S. EPA, Office of General Counsel, Mail Code 
2344A, 1200 Pennsylvania Avenue, NW., Washington, DC 20460, telephone 
202-564-4079, e-mail address rodman.sonja@epa.gov.

SUPPLEMENTARY INFORMATION:

Does This Action Apply to Me?

    The CAIR does not directly regulate emissions sources. Instead, it 
requires States to develop, adopt, and submit SIP revisions that would 
achieve the necessary SO2 and NOX emissions 
reductions, and leaves to the States the task of determining how to 
obtain those reductions, including which entities to regulate.

How Can I Get Copies of This Document and Other Related Information?

    1. Docket. EPA has established a docket for action related to the 
CAIR under Docket ID No. EPA-HQ-OAR-2003-0053. All documents in the 
docket are listed in the http://www.regulations.gov index. Although 

listed in the index, some information is not publicly available, e.g., 
CBI or other information whose disclosure is restricted by statute. 
Certain other material, such as copyrighted material, will be publicly 
available only in hard copy. Publicly available docket materials are 
available either electronically in http://www.regulations.gov or in 

hard copy at the EPA Docket Center (Air Docket), EPA/DC, EPA West, Room 
B102, 1301 Constitution Ave., NW., Washington, DC. The Public Reading 
Room is open from 8:30 a.m. to 4:30 p.m., Monday through Friday, 
excluding legal holidays. The telephone number for the Public Reading 
Room is (202) 566-1744.
    2. Electronic Access. You may access this Federal Register document 
electronically through the EPA Internet under the ``Federal Register'' 
listings at http://www.epa.gov/fedrgstr/ In addition, the EPA has established a Web site for the CAIR at http://www.epa.gov/.

cleanairinterstaterule or more simply http://www.epa.gov/cair/.


Outline

I. Background
II. Today's Action
III. Discussion of Issues
    A. SO2 Allocation Methodology in the CAIR Model 
Trading Rules
    B. Fuel Adjustment Factors Used to Set State NOX 
Budgets
    C. PM2.5 Modeling for Minnesota
    D. Inclusion of Florida in the CAIR Region for Ozone
    E. Impact on CAIR Analyses of D.C. Circuit Decision in New York 
v. EPA
IV. Statutory and Executive Order Reviews
    A. Executive Order 12866: Regulatory Planning and Review
    B. Paperwork Reduction Act
    C. Regulatory Flexibility Act
    D. Unfunded Mandates Reform Act
    E. Executive Order 13132: Federalism
    F. Executive Order 13175: Consultation and Coordination With 
Indian Tribal Governments
    G. Executive Order 13045: Protection of Children From 
Environmental Health and Safety Risks
    H. Executive Order 13211: Actions That Significantly Affect 
Energy Supply, Distribution or Use
    I. National Technology Transfer Advancement Act
    J. Executive Order 12898: Federal Actions to Address 
Environmental Justice in Minority Populations and Low Income 
Populations
    K. Congressional Review Act
    L. Judicial Review

I. Background

    On May 12, 2005, the EPA (Agency or we) published the final ``Rule 
to Reduce Interstate Transport of Fine Particulate Matter and Ozone'' 
(Clean Air Interstate Rule or CAIR) (70 FR 25162). In this action, EPA 
found that 28 States and the District of Columbia contribute 
significantly to nonattainment of, and interfere with maintenance by, 
downwind States with respect to the NAAQS for fine particles 
(PM2.5) and/or 8-hour ozone. The CAIR requires these upwind 
States to revise their State implementation plans (SIPs) to include 
control measures to reduce emissions of SO2 and/or 
NOX. Sulfur dioxide is a precursor to PM2.5 
formation and NOX is a precursor to PM2.5 and 
ozone formation. By reducing upwind emissions of SO2 and 
NOX, CAIR will assist downwind PM2.5 and 8-hour 
ozone nonattainment areas in achieving the NAAQS.
    The CAIR implements the ``good neighbor'' provision of the Clean 
Air Act (CAA), section 110(a)(2)(D), which establishes State 
obligations to address interstate transport of pollution. The EPA 
conducted extensive air modeling to determine the extent to which 
emissions from certain upwind States were impacting downwind 
nonattainment areas. All States found to contribute significantly to 
downwind PM2.5 nonattainment and maintenance problems are 
included in the CAIR region for PM2.5 and are required to 
reduce annual emissions of SO2 and NOX. All 
States found to contribute significantly to downwind 8-hour ozone 
nonattainment and maintenance problems are included in the CAIR region 
for ozone and are required to reduce NOX emissions during 
the 5-month ozone season (May-

[[Page 25305]]

September). The CAIR establishes regional emission reduction 
requirements for annual SO2 and NOX emissions and 
seasonal NOX emissions. The reduction requirements are based 
on performance of control technologies which are known to be highly 
cost effective for reducing emissions of electric generating units 
(EGUs). The first phase of NOX reductions starts in 2009 
(covering 2009-2014) and the first phase of SO2 reductions 
starts in 2010 (covering 2010-2014). The second phase of both 
SO2 and NOX reductions starts in 2015 (covering 
2015 and thereafter).
    Each State covered by CAIR may independently determine which 
emission sources to control, and which control measures to adopt. 
States that choose to base their programs on emissions reductions from 
EGUs may allow their EGUs to participate in an EPA-administered cap and 
trade program. The CAIR includes model rules for multi-State cap and 
trade programs for annual SO2 and NOX emissions, 
and seasonal NOX emissions. States may choose to adopt these 
rules to meet the required emissions reductions in a flexible and 
highly cost-effective manner. To learn more about the CAIR and its 
impacts, the reader is encouraged to read the preamble to the CAIR (70 
FR 25162; May 12, 2005).
    The CAIR was promulgated through a process that involved 
significant public participation. The EPA published a notice of 
proposed rulemaking on January 30, 2004 (69 FR 4566) and a supplemental 
notice of supplemental proposed rulemaking on June 10, 2004 (69 FR 
32684). The EPA also published a notice of data availability on August 
6, 2004 (69 FR 47828). The Agency held public hearings on the January 
2004 proposed rule on February 25 and 26, 2004, and an additional 
hearing on the supplemental proposal on June 3, 2004. In addition, the 
EPA received thousands of comments on the proposals. We responded to 
all significant public comments in the preamble to the final rule and 
in the final response to comments document available in the CAIR docket 
(Docket No. OAR-2003-0053-2172).
    Following publication of the final rule, the Administrator received 
twelve petitions requesting reconsideration of certain aspects of the 
final CAIR. These petitions were filed pursuant to section 307(d)(7)(B) 
of the CAA. Under this provision, the Administrator is to initiate 
reconsideration proceedings if the petitioner shows that an objection 
is of central relevance to the rule and either that it was 
impracticable to raise the objection to the rule within the public 
comment period, or that the grounds for the objection arose after the 
end of the public comment period but before the time for seeking 
judicial review had expired. The petitions for reconsideration of the 
CAIR asked EPA to reconsider several specific aspects of the final 
rule, and many of the petitions made similar requests.
    By letters dated August 1, 2005, EPA granted reconsideration of the 
definition of ``electric generating unit'' or ``EGU'' as it relates to 
solid waste incinerators (and particularly municipal waste 
incinerators).\1\ The EPA explained that the issue would be addressed 
in the proposed rule signed the same day. That proposed rule, entitled 
``Rulemaking on Section 126 Petition from North Carolina to Reduce 
Interstate Transport of Fine Particulate Matter and Ozone; Federal 
Implementation Plans to Reduce Interstate Transport of Fine Particulate 
Matter and Ozone; Revisions to the Clean Air Interstate Rule; Revisions 
to the Acid Rain Program; Proposed Rule,'' was published on August 24, 
2005 (70 FR 49708). In that proposal, EPA reconsidered the definition 
of ``EGU'' in the final CAIR as it relates to solid waste incinerators 
(70 FR at 49738). We proposed revisions to the definition of ``EGU'' 
and requested comment on that issue.
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    \1\ These letters are available in the CAIR Docket. (OAR-2003-
0053-2209 and 2210).
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    On December 2, 2005, EPA published a notice of its decision to 
grant reconsideration of four additional issues presented in the 
petitions for reconsideration, and solicited public comment on those 
issues. On December 29, 2005, EPA published a notice of its decision to 
grant reconsideration of one additional issue raised by petition for 
reconsideration, and again solicited public comment on that issue. In 
those two notices EPA did not propose any modifications to the final 
CAIR, as we did not believe that any of the information that had been 
submitted demonstrated that EPA's final decisions in the CAIR 
rulemaking were erroneous or inappropriate.
    The EPA requested comment only on the issues specifically described 
in Section III of each December 2005 notice. We did not reconsider or 
re-open for further comment any other provisions in the CAIR.
    The EPA also received three limited requests to stay CAIR. The 
implementation of the CAIR in limited geographic areas pending 
resolution of this reconsideration process. One petitioner requested a 
stay of implementation of the CAIR in the State of Florida, and one 
petitioner requested a stay of implementation of the CAIR in the State 
of Minnesota, and one petitioner requested a stay of CAIR for a limited 
subset of affected sources. By letter dated August 1, 2005, EPA 
declined to stay implementation of the CAIR in Florida.\2\
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    \2\ This letter is also available in the CAIR Docket (OAR-2003-
0053-2208).
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    Finally, in addition to petitions for reconsideration, fourteen 
petitions for judicial review of the final rule were filed with the 
U.S. Court of Appeals for the District of Columbia.\3\ The fourteen 
cases have been consolidated into a single case, State of North 
Carolina v. EPA (No. 05-1244) (D.C. Cir). Many of the parties who 
petitioned EPA for reconsideration of the CAIR also petitioned for 
judicial review of the rule.
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    \3\ State of North Carolina v. EPA (No. 05-1244); Minnesota 
Power v. EPA (No. 05-1246); ARIPPA v. EPA (No. 05-1249); South 
Carolina Public Service Authority et al. v. EPA (No. 05-1250); 
Entergy Corp. v. EPA (No. 05-1251); Florida Ass'n of Electric 
Utilities (No. 05-1252); FPL Group v. EPA (No. 05-1253); Northern 
Indiana Public Service Co. v. EPA (No. 05-1254); South Carolina 
Electric & Gas Co. v. EPA (No. 05-1256); Integrated Waste Services 
Ass'n v. EPA (No. 05-1257); AES Corp v. EPA (No. 05-1259); City of 
Amarillo, Texas et al. v. EPA (No. 05-1260); Appalachian Mountain 
Club et al. v. EPA (No. 05-1246); Duke Energy v. EPA (No. 05-1246).
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II. Today's Action

    This notice addresses the five specific issues upon which we 
granted reconsideration and solicited comment in the December 2, 2005 
and December 29, 2005 notices. Today's action is one of three actions 
EPA is taking today to resolve all remaining issues relating to the 
petitions for reconsideration of CAIR.
    This notice takes action only with respect to the five issues 
identified in the December 2005 notices. In those notices, we announced 
our decision to grant reconsideration and solicited comments on the 
specific issues to be reconsidered. We did not, however, propose any 
changes to the CAIR or re-open for comment any other issues determined 
in the CAIR. In this action, we take final action on the five issues 
identified in the notices of reconsideration and respond to comments 
received during the reconsideration process. The first issue addressed 
in the December 2, 2005 notice relates to analyses done by EPA to 
address petitioner's claims regarding alleged inequities arising from 
the application of the SO2 allowance allocation approach to 
be used by States choosing to participate in the EPA-administered 
SO2 trading program. The second issue relates to EPA's use 
of specific fuel adjustment factors to establish NOX budgets 
for each State. The third issue relates to modeling

[[Page 25306]]

inputs used by EPA to determine whether emissions from Minnesota should 
be included in the CAIR region for PM2.5. The fourth issue 
relates to EPA's determination that the State of Florida should be 
included in the CAIR region for ozone. The issue raised in the December 
29, 2005 notice relates to the potential impact of a recent judicial 
opinion, New York v. EPA, 413 F.3d 3 (D.C. Cir. 2005), certain analyses 
done for the CAIR relating to the identification of highly cost-
effective controls and the timing of CAIR deadlines. New York v. EPA, 
413 F.3d 3 (D.C. Cir. 2005) was decided on June 24, 2005--after the 
final CAIR was published but before the time for judicial review of the 
rule had run. Each issue is described in greater detail in Section III 
of this notice.
    EPA also is taking two additional actions relating to the petitions 
for reconsideration of CAIR. First, EPA is sending nine separate 
letters to the petitioners with outstanding requests for 
reconsideration. These letters address their requests that EPA 
reconsider the following ten issues: (1) The 0.2[mu]g/m3 
threshold used to determine if a state's emissions contribute 
significantly to PM2.5 nonattainment and maintenance 
problems in downwind states (multiple requests for reconsideration 
arguing both that the threshold is too high and that it is two low); 
(2) the inclusion of the full state of Florida in the CAIR region for 
PM2.5 (two requests for reconsideration challenging EPA's 
decision to determine significant contribution on a statewide basis); 
(3) the inclusion of the full state of Texas in the CAIR region for 
PM2.5 (two requests for reconsideration challenging EPA's 
decision to determine significant contribution on a statewide basis); 
(4) the NOX budget allocated to the State of Connecticut 
(two requests for reconsideration); (5) the treatment of previously 
allocated 2009 NOX Budget Trading Program allowances; (6) 
the SO2 retirement ratio for Title IV allowances as applied 
to units that receive, through 2009, ``bonus'' allocations under 
section 405(a)(2) of the Clean Air Act; (7) the phase I NOX 
compliance date of 2009; (8) EPA's interpretation of the ``interfere 
with maintenance'' prong of section 110 of the Clean Air Act; (9) the 
method used to identify downwind nonattainment areas; and (10) the 
creation of a compliance supplement pool for the annual NOX 
trading program. Finally, the petitions for reconsideration contain two 
outstanding requests to stay CAIR: One asking for CAIR to be stayed in 
the state of Minnesota and one asking that CAIR be stayed only for the 
subset of sources that has either already received 2009 NOX 
Budget Trading Program allowances or is currently receiving ``bonus'' 
allowances under section 405(a)(2) of Title IV of the Clean Air Act.
    EPA has carefully considered each of these requests for 
reconsideration. We have concluded that reconsideration of these issues 
is not warranted under section 307(d)(7)(B) of the Clean Air Act. EPA 
is therefore denying all remaining requests for reconsideration. In 
addition, EPA is denying the remaining requests to stay CAIR. These 
decisions are fully explained in the letters to petitioners which are 
available in the CAIR docket (EPA-HQ-OAR-2005-0053). In a separate 
action signed today, EPA is taking final action on the request for 
reconsideration discussed in the August 1, 2005 Federal Register 
notice. This action is taken as part of our final action responding to 
North Carolina's section 126 petition and promulgating Federal 
implementation plans for all states in the CAIR regions. In that 
action, we also take final action on the request reconsider EPA's 
treatment in CAIR of solid waste incinerators (particularly municipal 
waste combustors), and finalize the revisions to the definition of 
``EGU'' proposed in response to that request. This action, titled 
``Rulemaking on Section 126 Petition from North Carolina to Reduce 
Interstate Transport of Fine Particulate Matter and Ozone; Federal 
Implementation Plans to Reduce Interstate Transport of Fine Particulate 
Matter and Ozone; Revisions to the Clean Air Interstate Rule; Revisions 
to the Acid Rain Program,'' \4\ will be published shortly in the 
Federal Register.
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    \4\ See http://www.regulations.gov, Docket ID No. EPA-HQ-OAR-

2003-0053.
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III. Discussion of Issues

A. SO2 Allowance Allocation (& State Budget) Approach in the CAIR Model 
Trading Rules

    As noted above, EPA decided to grant reconsideration on six issues 
related to the final CAIR. The first of these issues relates to the 
SO2 allocation approach in the CAIR model rules. EPA 
received one petition for reconsideration that asked EPA to reconsider 
the SO2 allocation approach to be used by States 
participating in the EPA-administered CAIR SO2 trading 
program. This petitioner argued that the SO2 allowance 
allocation approach is unreasonable and inequitable. The petitioner 
argued that the approach is unreasonable because other approaches would 
be more appropriate. According to the petitioner, the approach is 
inequitable because it results in owners of units that have 
historically lower emission rates being forced to buy allowances from 
historically higher emitting units that install new emission controls. 
The petitioner asked EPA to establish a different approach. As 
described in the Notice of Reconsideration, EPA does not agree with 
petitioner's conclusions about this issue. EPA continues to believe 
that the approach selected is reasonable for the reasons explained in 
the CAIR final rule and further discussed below. Furthermore, numerous 
opportunities for public comment on this issue were provided, and a 
full discussion of the allowance allocation options occurred during the 
rule development process. Nonetheless, given the intense public 
interest in this issue, EPA decided to grant the petition for 
reconsideration insofar as it raised issues regarding alleged 
inequities resulting from the application of EPA's SO2 
allowance allocation approach.
    In the Notice of Reconsideration, EPA announced its decision to 
reconsider this issue and solicited additional public input. EPA also 
solicited comment on additional analyses it conducted in response to 
the petition for reconsideration concerning the impact of the 
SO2 allowance allocation approach adopted in the CAIR model 
trading rule. This additional analysis compared the SO2 
allocation approach in CAIR to various alternatives EPA also considered 
during the rulemaking process. In response to comment on the Notice of 
Reconsideration, EPA has further refined some of its analyses and 
carefully considered the arguments of the petitioner. EPA continues to 
believe that these analyses show that EPA's selected approach to 
SO2 allowance allocations is appropriate, given the 
objectives of CAIR and other relevant considerations. Moreover, EPA 
believes that the Agency's approach produces a reasonable result in 
terms of equity. Therefore, in this Notice of Final Action on 
Reconsideration, EPA is not altering the approach taken in CAIR for 
SO2 allowance allocation. EPA's response to public comments 
on the analyses presented in the Notice of Reconsideration and further 
discussion of the petitioner's concerns are provided below (and in the 
Technical Support Document, ``CAIR SO2 Allocation Approach 
Analysis'' and the Response to Comments).
Considerations Relevant To Choosing an Allocation Approach
    While EPA did not explicitly define a distinct set of principles 
that should be

[[Page 25307]]

used in developing State budgets under a region-wide cap and trade 
program, EPA has made it clear throughout this process that it has 
relied upon several consistent, important factors in developing both 
the SO2 and NOX budgets.
    The first is the impact of allowance allocations on the specific 
environmental objectives and overall cost of the rule, as well as any 
potential adverse effects. In general, while the chosen allocation or 
State budget calculation approach can affect the distribution of 
compliance costs under a cap-and-trade program, it will have little 
effect on overall compliance costs or environmental outcome. This is 
because the incentives provided by cap-and-trade encourage economically 
efficient compliance over the entire region. However, this may not 
always hold where there are interactions with existing environmental 
policies. In the case of NOX, EPA did not find this 
consideration to be restrictive because there was not an existing 
annual NOX trading program and the SIP Call ozone season 
trading program could be easily integrated into the CAIR ozone season 
trading program. As a result, a number of budget methodologies were 
compatible. For SO2, this consideration played a larger role 
because depending upon how the program was integrated within the 
existing Title IV structure, it could impact emissions before the 
program went into effect as well as emissions in regions not affected 
by the program.
    Another important consideration is that an allocation methodology 
must be consistent with the existing regulatory and legislative 
structure. Once again for NOX, this consideration could be 
satisfied with a wide range of budget methodologies. However, for 
SO2, reductions for EGUs using Title IV allowances is 
necessary in order to ensure the preservation of a viable Title IV 
program (70 FR 72272). Linking the two programs maintains the trust and 
confidence that has developed in the functioning market for title IV 
allowances. The EPA recognizes this familiarity and confidence 
(especially in a market-based approach) as a key source of the 
program's success.
    A third factor is equity. In the absence of other considerations, 
EPA believes that it is in the public interest that the distribution of 
allowances under a cap and trade program be as equitable as possible. 
For NOX, since the other considerations could be satisfied 
with a number of different methodologies, this factor was the primary 
one. For SO2, where the other considerations were more 
limiting, this factor was not as central to our decisions, especially 
since the Title IV allocation structure was erected by Congress for the 
long term.
Title IV and CAIR
    The CAIR model SO2 trading program relies on the use of 
title IV SO2 allowances for compliance with the allowance-
holding requirements of CAIR. Title IV SO2 allowances have 
already been allocated on a unit-by-unit basis in perpetuity, based on 
formulas set forth in sections 405 and 406 of the Clean Air Act (CAA), 
which EPA implemented through final regulations issued in 1998 (See 42 
U.S.C. 7651d and 7651e; and 18 CFR 73.10(b)). The statutory formulas 
for allocation of title IV SO2 allowances were based on unit 
data for 1985-1987 and, for some units, data for years up to 1995. For 
the title IV SO2 trading program, each allowance authorizes 
one ton of SO2 emissions.
    For the CAIR SO2 trading program, SO2 
reductions will be achieved by generally requiring CAIR sources to 
retire more than one title IV allowance of 2010 and later vintages for 
each ton of SO2 emissions in 2010 and thereafter. 
Specifically, each title IV SO2 allowance issued for 2009 or 
earlier will be used for compliance by CAIR sources at a ratio of one 
allowance per ton of SO2 emissions and would authorize one 
ton of SO2 emissions. Each title IV allowance of vintage 
2010 through 2014 will be used for compliance under CAIR at a two-to-
one ratio and authorize 0.5 tons of SO2 emissions. Each 
title IV allowance of vintage 2015 and later will be used at a 2.86-to-
1 ratio and authorize 0.35 tons of SO2 emissions. See 
discussion in the preamble to the final CAIR in section VII (70 FR 
25255-25273) and section IX (70 FR 25290-25291).
Response to Comments on EPA's Statutory Authority
    Several commenters expressed support of EPA's chosen allocation 
approach, arguing that EPA was entirely within its legal authority to 
use title IV allowances to implement the SO2 trading program 
under CAIR. These commenters generally argued that EPA's use of title 
IV allowances to implement CAIR reductions was necessary to maintain 
the viability of the program and continued confidence in cap-and-trade 
programs.
    A few commenters on the Notice of Reconsideration assert that EPA 
has exceeded its statutory authority under title IV of the CAA by tying 
CAIR SO2 allocations to title IV allowances. In addition, a 
few commenters argue that EPA's final CAIR SO2 allocation 
approach unlawfully limits States' discretion under section 110 of the 
CAA to determine how to meet their ``good neighbor'' obligations and to 
meet national ambient air quality standards. These same concerns were 
also raised during the CAIR rulemaking process and EPA provided a 
detailed justification for its use of title IV allowances under CAIR, 
including direct responses to these comments in the CAIR preamble (70 
FR 25290-25296). EPA maintains that its approach of using title IV 
allowances in the CAIR SO2 trading program and imposing an 
allowance-retirement requirement on States that do not adopt the CAIR 
SO2 trading program is within its statutory authority and is 
a reasonable exercise of that authority. Additionally, there is nothing 
in section 110 of the CAA that would bar the use of title IV allowances 
to accomplish attainment goals under 110(a)(2)(d).
    One commenter suggests that EPA's SO2 allocation 
approach using title IV allowances is in violation of CAA section 
110(a)(2)(d) because it distributes allowances among States in a way 
that would effectively result in different emissions rates among 
States, and different resulting control costs. The commenter argues for 
an approach that results in an equal effective emissions rate across 
States. The commenter then cites section 102(a) of the CAA, arguing 
that the provision ``directs EPA to promote the development of air 
pollution control laws at the state and local level that are as 
`uniform' from jurisdiction to jurisdiction as practicable.'' The 
commenter then proceeds to argue that EPA's use of title IV allowance 
allocations for SO2 allowance allocations under CAIR 
violates this notion of parity without reason and is therefore 
unlawful.
    EPA disagrees with the commenter's interpretation of these two CAA 
provisions. First, nothing in section 110(a)(2)(d) indicates how EPA 
should allocate allowances under a cap-and-trade program. Second, while 
the commenter suggests that an allocation approach that results in a 
uniform effective emissions rate across all States would remedy the 
inequities the commenter perceives in EPA's application of 
110(a)(2)(d), the allocation approach that the commenter actually 
recommends does not result in this outcome. Third, section 102(a) of 
the CAA indicates that ``The Administrator shall * * * encourage the 
enactment of improved and, so far as practicable in the light of 
varying conditions and needs, uniform State and local laws relating to 
the prevention and control of air pollution''. As is discussed

[[Page 25308]]

throughout this section of the CAIR Notice of Final Action on 
Reconsideration, the existence of title IV creates a set of conditions 
under which it is not ``practicable'' to create a new set of allowance 
allocations for SO2 for the purposes of CAIR. Finally, the 
use of the phrase ``The Administrator shall encourage'' in section 
102(a) indicates that this provision is in no way a directive that 
requires the Agency to obtain any specific result during its 
rulemakings. Finally, the use of a cap-and-trade program assures that 
the marginal cost paid for a ton of emission reduction should be close 
to the observed allowance price, assuring a uniform marginal cost from 
State to State.
SO2 Allocation Options Discussed in CAIR
    EPA considered and analyzed a variety of SO2 allowance 
allocation methodologies during the CAIR rulemaking process. After 
careful analysis, EPA decided to use the allocation approach chosen by 
Congress in title IV of the Clean Air Act. EPA also considered the 
following alternative approaches, which are explained in the final CAIR 
``Corrected Response to Significant Public Comments on the Proposed 
Clean Air Interstate Rule,'' Corrected April 2005 (Docket Number OAR-
2003-0053):

--Allocations based on historic tons of actual emissions from more 
recent years;
--Allocations based on heat input (with alternatives based on heat 
input from all fossil generation, and heat input from coal- and oil-
fired generation only); and
--Allocations based on electricity output (with alternatives based on 
all generation and all fossil-fired generation).

    In addition to these alternatives, EPA has analyzed other heat 
input-based allocation approaches in the reconsideration process, 
explained below. Each allocation approach suggested by the petitioner 
and other commenters during the CAIR rulemaking and reconsideration 
process has advantages and disadvantages for different companies and 
States. However, as explained in the final CAIR, EPA believes that the 
approach used in the final CAIR is the most appropriate among the 
alternatives for several reasons.
    First, EPA believes--based on strong policy and air quality 
concerns--that it is necessary to use the existing title IV allowances 
in order to preserve the viability and emissions reductions of the 
highly successful title IV program. The disruption of the title IV 
SO2 trading program would also potentially result in 
increased emissions outside of the CAIR region starting in 2010 
because, with title IV allowances having little or no value, the title 
IV program would no longer constrain SO2 emissions in those 
States. Further, if title IV allowances are not used for compliance in 
the CAIR SO2 trading program, the likely result will be: a 
significant surplus of title IV allowances; a collapse of the price of 
title IV allowances; and a title IV SO2 trading program 
that, contrary to Congressional intent, no longer provides incentives 
to minimize emissions control costs and encourage pollution prevention 
and innovation.
    If EPA adopts an approach that does not preserve the structure of 
the title IV allowance market and the value of those allowances, the 
confidence in the cap-and-trade policy instrument and allowance markets 
in general, and in the CAIR cap-and-trade programs in particular, would 
likely decline. Such an outcome could result in a reduced willingness 
of the owners of sources in cap-and-trade programs to invest in control 
technologies that would generate excess allowances for sale, or to 
purchase allowances for compliance, for fear that the rules might 
change. If owners were to ignore the incentives provided by cap-and-
trade in such a manner, efficiency and cost-savings provided by these 
programs would be lost. The preservation of title IV allowances for use 
in CAIR, then, is integral to the viability and effectiveness of both 
title IV and the CAIR trading programs. See discussion in preamble to 
the final CAIR in section IX (70 FR 25293-25295).
    Second, EPA relied on the permanent allocation methodology 
established by Congress in title IV for purposes of reducing 
SO2 emissions. Congress chose a policy of not revisiting and 
revising these allocations and, apparently, believed that its 
allocation methodology for title IV allowances would be appropriate for 
future time periods.
    Third, title IV allowance allocations provide a logical and well 
understood starting point from which additional electric generation 
unit (EGU) SO2 emission reductions can be achieved for Acid 
Rain units, which account for over 90 percent of the SO2 
emissions from CAIR EGUs.
    Finally, in response to comments on the proposed CAIR, EPA 
performed an analysis comparing the title IV methodology to other 
methodologies. At the outset, EPA notes that the objective of CAIR is 
not to ensure that each State receives the maximum amount of 
SO2 allowances possible under any approach. The goal of CAIR 
is to achieve the SO2 emissions reductions through the 
region-wide budgets. As EPA has noted, selecting the most appropriate 
SO2 allowance allocation approach for CAIR has required 
addressing a number of different considerations. The policy and air 
quality concerns specific to the CAIR SO2 trading program 
and noted by EPA above necessitate that EPA implement the CAIR 
SO2 program using the existing structure of title IV. 
Nevertheless, EPA has analyzed the impact of using title IV allocations 
on States relative to other possible allocation approaches, and found 
that this approach produces a reasonable result (See CAIR Corrected 
Response to Comments, section X.A.26, Docket : EPA-HQ-OAR-
2003-0053-2172, and ``CAIR SO2 Allocation Approach 
Analysis'' Technical Support Document available in the docket).
    In summary, EPA's use of title IV allowances in the CAIR 
SO2 trading program is supported by: (1) EPA's determination 
that this approach is necessary to maintain the efficacy of the title 
IV program and to prevent erosion of confidence in cap-and-trade 
programs in general; and (2) EPA's analysis showing that the 
allocations resulting from this approach are reasonable. Nevertheless, 
as a part of this reconsideration, EPA performed additional analyses, 
explained below, to evaluate the SO2 allocation approach in 
the final CAIR in light of the petitioner's concerns.
Equitability of CAIR SO2 Allocation Approach
    While the petitioner stated that the CAIR final allocation approach 
is ``inequitable'' because lower emitting units would buy allowances 
from higher emitting units that install emission controls, it is 
unclear why such a result would actually be inequitable. On the 
contrary, the owner of each of the units involved would be choosing to 
adopt the most economic compliance strategy in light of the unit's 
emission control costs and the market value of allowances. The ability 
of the owners to make such choices reflects the flexibility, inherent 
cost-effectiveness, and promotion of least-cost compliance for all 
program participants provided by a cap-and-trade program.
Response to Comments on the Equitability of CAIR SO2 
Allocation Approach
    One commenter argued that EPA should use the same metrics and 
methodologies used to evaluate NOX

[[Page 25309]]

allowance allocation approaches to evaluate SO2 allowance 
allocation approaches. The commenter suggests that the metrics by which 
EPA assessed NOX allocations included (1) whether the EPA 
method avoids penalizing coal-fired generation units that already have 
installed emissions controls and (2) whether, relative to the 
alternative allocation approaches, the EPA method better minimizes for 
each State the disparity between allowances provided and projected 
emissions, and argued that EPA cites these rationales in justifying its 
chosen NOX allocation approach. This commenter also suggests 
that EPA's use of title IV allowances penalizes new units and 
independent power producers (IPPs) and results in large wealth 
transfers from low-emitting to high-emitting States.
    While EPA agrees that the Agency considered these factors (among 
several others) in choosing its allocation approach under the CAIR 
NOX trading programs, EPA does not fully agree with the 
commenter's characterization of EPA's considerations. EPA believes that 
the commenter has omitted some of the significant context and caveats 
that were included in the discussion of NOX allocations and 
the use of fuel adjustment factors in the reconsideration notice, as 
well as a number of other factors that EPA must consider, particularly 
in the context of SO2 allocations. First, EPA noted in the 
June 10, 2004 Supplemental Notice of Proposed Rulemaking and in the 
Notice of Reconsideration that, ``in contrast to allocations based on 
historic emissions, the factors would also not penalize coal-fired 
plants that have already installed pollution controls'' (69 FR 32869, 
70 FR 72276, emphasis added). This language explains that 
NOX allocations using historic heat input adjusted for fuel 
type, while providing additional allowances to coal-fired units that 
will likely install controls under CAIR, would not simultaneously 
penalize coal-fired units that had already made investments in 
emissions controls. An approach based on historic emissions, on the 
other hand, would also provide additional allowances to units that 
would likely have to install controls, but would simultaneously 
penalize units that had already done so. While EPA makes this argument 
in support of its chosen approach for NOX allocations, the 
Agency does not raise this point to establish a criterion for 
evaluating allowance allocation approaches. Rather, it simply notes 
that its chosen approach for NOX allocations can provide an 
advantage to one set of coal-fired units without disadvantaging another 
set of coal-fired units.
    Second, while the commenter is correct in noting that EPA stated in 
its discussion of NOX allocations in the Notice of 
Reconsideration that it is in the public interest to attempt to 
minimize the disparity between individual State budgets and projected 
emissions for each State, EPA did not set this goal as one of only two 
primary criteria for adoption of a given allocation strategy, as the 
commenter suggests. Rather, EPA notes that ``In the absence of other 
considerations, EPA believes that it is in the public interest to 
reduce the disparity between the number of allowances in a State budget 
and total projected State EGU emissions'' (70 FR 72276, emphasis 
added). As EPA has noted, the Agency had to weigh many considerations 
in choosing an SO2 allowance allocation approach. In 
particular, unlike in the case of NOX, EPA had to consider 
an existing, nationwide trading program implemented by statute in the 
case of SO2.
    Third, as EPA discussed in the CAIR Response to Comments, while 
commenters express concern about the availability of allowances for 
non-Acid Rain units, it should be noted that not all sources covered 
under the Acid Rain program received allowances. By the design of the 
title IV program (as outlined by Congress), because of the permanent 
allocation of allowances, new units beginning commercial operation 
after 1995 or beginning construction after 1990 did not receive title 
IV allowances. Thus, Congress recognized that, over time, new units 
would be built and covered under the program, but felt it reasonable 
that such units would obtain title IV allowances either through the 
auction or from the market. Under the auction, 250,000 title IV 
allowances are be auctioned annually (half for the current compliance 
year and half for the compliance year seven years in advance), and 
these allowances can be used for compliance with CAIR. The availability 
of these allowances ensures that all sources, including new units and 
non-title IV sources, will have access to a pool of allowances. 
Finally, IPPs have the option of opting in to title IV until their 
exemption expires in order to obtain title IV allowances. EPA addresses 
other issues specific to IPPs in section VI.E of today's CAIR FIP 
Notice of Final Rulemaking preamble.
    Fourth, while the commenter asserts that EPA's use of title IV 
allowances in the CAIR SO2 trading program will result in 
significant wealth transfers from low-emitting to high-emitting States, 
EPA's analysis of SO2 coverage ratios (the ratio of 
allowances to projected emissions, discussed to some degree in this 
section and presented in the ``CAIR SO2 Allocation Approach 
Analysis'' Technical Support Document, available in the docket), is not 
suggestive of this trend. In fact, looking at the differences in 
States' projected emissions and coverage ratios between the base case 
and CAIR, it becomes evident that both lower- and higher-emitting 
States are projected to make investments in emissions controls under 
CAIR, reducing their demand for allowances, or freeing up allowances 
for sale, in the process. States that might be categorized as high-
emitting are not always projected to be net sellers of allowances, and 
States that might be categorized as low-emitting are not always 
projected to be net purchasers of allowances.
    Another commenter argues that smaller units would be forced to 
purchase SO2 allowances from the market in order to comply 
with CAIR. This commenter argues that the SO2 allowance 
market is not efficient and subjects some participants to endure an 
undue amount of financial burden and/or risk. EPA believes that the 
commenter's claims about the state of the SO2 allowance 
market are unfounded. As is discussed in the Acid Rain Program Report 
(EPA 43-R-05-012, October 2005), about 20,000 allowance transactions, 
affecting about 15.3 million allowances were recorded in the EPA 
Allowance Tracking System in 2004. In addition, title IV compliance 
costs have been much lower than projected and allowance prices in the 
SO2 allowance market have generally reflected this. Finally, 
as discussed earlier in this section, sources have the option of 
purchasing allowances directly from the annual auction.
    Further, in raising equity concerns, a couple of commenters argue 
for conflicting measures of equity within their own comments. These 
commenters argue that an equitable emissions allocation approach will 
result in an equivalent effective emissions rate across States. These 
commenters then point to EPA's chosen CAIR NOX emissions 
allocation approach as an exemplary allocation approach because it 
limits the disparity between individual State budgets and projected 
emissions. However, the commenters fail to realize that EPA's 
NOX allocations approach does not actually result in an 
equivalent emissions rate across States. In other words, choosing a 
CAIR SO2 allocation approach with the goal of minimizing the 
disparities between State budgets and projected emissions would result 
in the selection

[[Page 25310]]

of a different approach than would the goal of equating effective 
emissions rates across States.
    Finally, some commenters argued that the use of title IV allowance 
allocations penalizes sources who have already installed scrubbers 
prior to the start of the Acid Rain Program. This is because, in 
general, allowances under title IV were allocated to units that had not 
installed controls at a higher rate relative to units that had 
installed controls. The title IV approach, in that sense, is somewhat 
similar to the approach taken for NOX under CAIR, in that it 
provides additional allowances for units expected to install controls 
under the rule. EPA believes that the commenters' arguments that the 
continued use of title IV allowances penalizes sources that installed 
controls prior to the Acid Rain Program are unfounded. First, these 
controls were installed over 20 years ago and were completed within a 
regulated electricity sector, such that in most cases the cost of 
installing these controls should have been recovered through 
electricity price rate increases. Second, these controls were installed 
in response to requirements separate from both CAIR and the Acid Rain 
Program. Third, Congress was clearly aware of the issues raised by 
commenters when designing the SO2 trading program in 1990, 
and consciously used a formula for future allocations for the length of 
time it believed was reasonable. In general, the Acid Rain Program has 
enjoyed 10 years of operation without substantial concern over this 
issue and with industry at-large appreciating the program's merits in 
providing a cost-effective, flexible, and balanced way to provide 
environmental protection. Finally, analysis by one of these two 
commenters, which estimates the windfall of allowances that a 
hypothetical unscrubbed coal-fired unit would attain by installing a 
scrubber and reducing emissions, neglects the fact that this unit would 
have to bear the costs of installing controls. Thus, the ostensible 
windfall would be significantly smaller than was suggested by the 
commenter.
Analysis of SO2 Allocation Options Presented in the Notice 
of Reconsideration
    In the Notice of Reconsideration, EPA compared three alternative 
SO2 allowance allocation methodologies to the approach in 
the final CAIR. In these analyses, EPA examined how allowances would be 
distributed to individual companies instead of examining how they would 
be distributed to States. According to the petitioner, the allowance 
distribution will result in the petitioner's relatively low-emitting 
units being forced to buy allowances from other companies' relatively 
high-emitting units. The petitioner thus argues the allocation approach 
used in CAIR is per se inequitable and unreasonable. To evaluate this 
concern, EPA compared projected allocations not to individual units, 
but to individual parent and operating companies who own these units 
under various methodologies relative to projected SO2 
emissions of all the units owned by those companies. Figures and tables 
from the analysis presented in the Notice of Reconsideration can be 
found in the docket, EPA-HQ-OAR-2003-0053, ``SO2 Allowance 
Allocation Methodology Comparative Analysis Data Files'').
    The three alternative allowance allocation methodologies EPA 
analyzed were suggested by various commenters during the rulemaking 
process and this reconsideration process. These methodologies are:

--Allocating allowances based on more recent heat input data;
--Allocating allowances based on more recent heat input data adjusted 
for fuel type (e.g., coal, oil and gas); and
--Allocating allowances based on more recent heat input data adjusted 
both for fuel type and for coal type (e.g., bituminous, sub-bituminous 
and lignite).

    In comparing the CAIR SO2 allocation approach and the 
three alternative methodologies, EPA took into account certain factors 
that are applicable to the CAIR final allocation approach but not to 
the three alternative methodologies. For all four methodologies, EPA 
analyzed the resulting total allowance allocations, and the total 
projected emissions, for companies' sources located in the States 
subject to CAIR. In addition, for all the methodologies, EPA analyzed 
the relationship between allowances and emissions in two ways. First, 
EPA calculated the ratio of allowances to total projected emissions 
before CAIR controls (base case emissions). This provides a reasonable 
estimate of the extent to which each company's future emissions will 
exceed its allowances and, thus, indicates how much effort a company 
must expend for compliance either by purchasing allowances or 
installing controls. Second, EPA calculated the ratio of allowances to 
total projected emissions after the installation of CAIR controls 
(control case emissions). This provides a reasonable estimate of the 
number of allowances a company would need to purchase or would be able 
to sell after any controls are installed. Some companies with low-
emitting units may have excess allowances to sell even if no controls 
are installed.
    In its analysis of the CAIR approach, EPA also considered both the 
allowance allocations and the emissions for companies' units both 
within the CAIR region and outside the CAIR region. EPA believes that 
this is appropriate because, under the CAIR approach, if a company's 
units outside the CAIR region have more title IV allowances than needed 
to cover their emissions under the Acid Rain Program, the company might 
be able to transfer, at little or no net cost, excess allowances to the 
company's units in the CAIR region for use to cover emissions under the 
CAIR trading program. Under the three alternative methodologies, all of 
which would require creating new CAIR SO2 allowances 
independent of the existing title IV allocations, CAIR sources could 
not use title IV allowances held for sources outside (or inside) the 
CAIR region for compliance with the CAIR SO2 allowance 
holding requirement.
    Further, in the analysis of the CAIR approach, EPA considered the 
allocation of title IV allowances to CAIR units that are not currently 
in the Acid Rain Program but that could opt in to the Acid Rain Program 
and receive title IV allowances (see 42 U.S.C. 7651i and 18 CFR part 74 
and the discussion below concerning the ability of units to opt in). 
This analysis assumed that companies owning non-Acid Rain units subject 
to CAIR would elect to opt in to the Acid Rain Program because they 
would receive title IV allowances to cover a portion of the units' 
emissions under CAIR. EPA believes this assumption is reasonable 
because any of these units has the option of becoming an Acid Rain 
Program opt-in unit and thereby providing the company additional 
allowances at little or no additional cost, and the value of title IV 
allowances could be substantial. In contrast, the analysis of the three 
alternative methodologies did not consider the impact of Acid Rain 
Program opt-ins because these approaches do not use title IV allowances 
for CAIR compliance.
    EPA's analysis indicated that while allocations vary from company 
to company under the four methodologies, overall the distributions of 
allowances that companies received relative to their projected 
emissions for the CAIR control case are very similar. EPA came to 
similar conclusions when looking at the base case.

[[Page 25311]]

Response to Comments on EPA's Analysis
    EPA received several comments on various aspects of the 
SO2 allocation analyses presented in the Notice of 
Reconsideration. A few commenters claimed that EPA should have focused 
its analyses on State budgets rather than on projected allocations to 
companies because, with an alternative allocation approach, States 
would have the responsibility for allocating allowances to their 
respective affected sources and could meet control requirements 
differently than assumed in EPA's analyses. Further, these commenters 
claimed a State-by-State analysis is more consistent with the analysis 
of NOX allocation methodologies in the Notice of 
Reconsideration and the final CAIR itself. Finally, one commenter noted 
that company-specific analysis can obscure state-by-state variation and 
may not be reliable given continual shifts in ownership structure.
    EPA agrees with the commenters that one method of evaluating the 
reasonableness of SO2 allocation approaches is (in addition 
to company-by-company analyses) to compare State budgets calculated 
according to various methodologies. Despite one commenter's assertion 
that company-level analysis is made unreliable by constantly changing 
corporate structures, EPA believes that such an analysis remains 
instructive. A State-level analysis provides additional perspective on 
the impact of various allocation approaches, though it will, of course, 
obscure some of the potential company-level variability among allowance 
approaches.
    EPA presented such a State-by-State analysis in the final CAIR RTC 
(final CAIR ``Corrected Response to Significant Public Comments on the 
Proposed Clean Air Interstate Rule,'' Corrected April 2005 (Docket 
Number OAR-2003-0053)). EPA recognizes that the analysis prepared for 
the CAIR RTC did not consider two of the alternative allocation 
approaches discussed above. For today's notice, EPA has analyzed State 
budgets calculated under eight different approaches (title IV and seven 
alternatives). These eight approaches are described in Table IIIA.1, 
below.

  Table III.A.1.--Description of Allocation Approaches Included in EPA
                                Analysis
------------------------------------------------------------------------
           Approach name                   Description of approach
------------------------------------------------------------------------
EPA Title IV......................  Title IV allocations adjusted for
                                     the 2 to 1 allowance retirement
                                     ratio in 2010-2014 and the 2.86 to
                                     1 allowance retirement ratio in
                                     2015 and thereafter. EPA's chosen
                                     approach.
Average 1999-2002 (Pure) Heat       For each State, calculates the
 Input.                              average heat input over the years
                                     1999-2002. Apportions the region-
                                     wide SO2 cap to individual States
                                     based on each State's share of the
                                     total region-wide average for those
                                     years.
1999-2002 Heat Input w/Fuel         For each State, calculates the
 Factors.                            average adjusted heat input over
                                     the years 1999-2002. Adjusts heat
                                     input using factors of 1.0 for
                                     coal, 0.009 for natural gas, and
                                     0.3 for oil. Apportions the region-
                                     wide SO2 cap to individual States
                                     based on each State's share of the
                                     total region-wide average adjusted
                                     heat input for those years.
1999-2002 Heat Input w/Fuel         For each State, calculates the
 Factors & Coal Type.                average adjusted heat input over
                                     the years 1999-2002. Adjusts heat
                                     input using factors of 2.6 for
                                     bituminous coal, 1.0 for
                                     subbituminous and lignite coals,
                                     0.2 for natural gas, and 0.7 for
                                     oil. Apportions the region-wide SO2
                                     cap to individual States based on
                                     each State's share of the total
                                     region-wide average adjusted heat
                                     input for those years.
Average 1999-2002 Heat Input Coal   For each State, calculates the
 + Oil.                              average heat input from coal- and
                                     oil-fired units over the years 1999-
                                     2002. Apportions the region-wide
                                     SO2 cap to individual States based
                                     on each State's share of the total
                                     region-wide average heat input from
                                     these units for those years.
Average 1999-2002 SO2 Emissions...  For each State, calculates the
                                     average emissions over the years
                                     1999-2002. Apportions the region-
                                     wide SO2 cap to individual States
                                     based on each State's share of the
                                     total region-wide average emissions
                                     for those years.
Average 1999-2002 Generation        For each State, calculates the
 Output (all sources fossil and      average output over the years 1999-
 non-fossil).                        2002. Apportions the region-wide
                                     SO2 cap to individual States based
                                     on each State's share of the total
                                     region-wide average output for
                                     those years.
1999-2002 Generation Output         For each State, calculates the
 (Fossil-fuel-fired units only).     average output from fossil fuel-
                                     fired units over the years 1999-
                                     2002. Apportions the region-wide
                                     SO2 cap to individual States based
                                     on each State's share of the total
                                     region-wide average output from
                                     these units for those years.
------------------------------------------------------------------------

    As is shown in Table III.A.2, the first component of EPA's State-
level analysis compared the individual State shares of total region-
wide SO2 allocations under the various approaches. The 
revised analysis is consistent with EPA's original findings. As can be 
seen from Table III.A.2, 80 percent of States get neither the most nor 
the least allowances relative to what they receive under the other 
allocation approaches, under the title IV approach. (See ``Sulfur 
Dioxide Allowance Allocation Methodology Comparative Analysis'' 
Technical Support Document (Docket ID: EPA-HQ-OAR-2003-0053)). 
Furthermore, when compared specifically to the methods supported by 
commenters (pure heat input, heat input with fuel factors, heat input 
with fuel factors and coal type, coal and oil heat input and average 
output all), distribution of State budgets using title IV allocations 
results in an individual State receiving its smallest or greatest share 
of total SO2 allocations relative to what the individual 
State receives under the alternative approaches the same number of 
times as the pure heat input methodology and fewer times than the other 
methodologies supported by commenters (see the last three rows of Table 
III.A.2). Such results support EPA's argument that its chosen 
allocation approach is reasonable. While the coal and oil heat input 
approach appears to perform best in this analysis, this approach 
received more limited commenter support.
    In examining the results of this analysis for the States where 
commenters that submitted adverse comments on the use of title IV own 
generating units (FL, IN, MD, MN, NY, NC, PA, SC, TX), it becomes 
apparent that each allocation approach makes some States better off and 
others worse off. (See ``CAIR SO2 Allocation Approach 
Analysis'' Technical Support Document available in the docket.) \5\

[[Page 25312]]

While using a heat input with fuel factors approach would provide an 
advantage to many of the States that provided adverse comments on title 
IV, shifting to this approach would disadvantage 10 of the 23 States 
(DC is not counted) relative to the title IV approach.
---------------------------------------------------------------------------

    \5\ Also, it is worth noting that these many of the commenters 
are all in cost-of-service States, where they should be able to pass 
through costs. In other words, sources in these States are likely to 
recover their cost of compliance, and the rate impact in these 
States, spread over all generation, transmission, and distribution 
is likely to be minimal. EPA's Regulatory Impact Analysis for CAIR 
forecasts an increase of only about 2.0 percent and 2.7 percent in 
average electricity prices in the CAIR region in 2010 and 2015, 
respectively. Florida is projected to experience an increase in 
retail electricity prices of 0.8 percent in 2010 and 1.4 percent in 
2015. Also, the region containing North Carolina and South Carolina 
is forecast to have retail electricity price increases lower than 
the regional average increases under CAIR in 2010 and 2015.

                                       Table III.A.2.--States Share of Budget Under Various Allocation Approaches
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                          1999-2002
                                                                 Average     1999-2002    Heat input    Average      Average      Average      Average
                      State                        EPA title    1999-2002    Heat input     w/fuel     1999-2002    1999-2002    1999-2002    1999-2002
                                                       IV      (pure) heat     w/fuel     factors &    heat input   emissions    output all     output
                                                                  input       factors     coal type    coal + oil                               fossil
--------------------------------------------------------------------------------------------------------------------------------------------------------
AL..............................................         4.4%         4.3%         4.9%         5.2%         4.7%         5.0%         4.7%         4.2%
DC..............................................         0.0%         0.0%         0.0%         0.0%         0.0%         0.0%         0.0%         0.0%
FL..............................................         7.0%         7.7%         5.6%         6.7%         7.3%         6.0%         7.2%         7.7%
GA..............................................         5.9%         4.1%         4.7%         5.3%         4.5%         5.2%         4.5%         4.2%
IA..............................................         1.8%         1.9%         2.4%         1.2%         2.3%         1.4%         1.5%         1.8%
IL..............................................         5.3%         4.7%         5.4%         4.4%         5.2%         4.7%         6.6%         4.4%
IN..............................................         7.0%         6.5%         7.9%         7.9%         7.5%         8.6%         4.6%         6.2%
KY..............................................         5.2%         4.9%         6.0%         7.3%         5.8%         5.8%         3.5%         4.5%
LA..............................................         1.7%         3.3%         1.6%         1.0%         1.5%         1.1%         3.4%         3.6%
MD..............................................         2.0%         1.8%         1.9%         2.3%         2.0%         2.7%         1.9%         1.7%
MI..............................................         4.9%         4.2%         4.4%         3.7%         4.3%         3.7%         4.1%         4.2%
MN..............................................         1.4%         1.9%         2.3%         1.1%         2.2%         1.0%         1.9%         1.7%
MO..............................................         3.8%         3.6%         4.3%         2.3%         4.1%         2.4%         2.9%         3.4%
MS..............................................         0.9%         1.4%         1.0%         1.0%         1.1%         1.2%         1.6%         1.6%
NC..............................................         3.8%         3.7%         4.5%         5.5%         4.3%         4.7%         4.5%         3.8%
NY..............................................         3.7%         4.0%         2.2%         2.7%         3.4%         2.7%         5.3%         3.9%
OH..............................................         9.2%         6.4%         7.9%         9.6%         7.5%        12.2%         5.4%         6.5%
PA..............................................         7.6%         6.0%         7.1%         8.4%         6.9%         9.5%         7.4%         6.1%
SC..............................................         1.6%         2.0%         2.3%         2.9%         2.2%         2.1%         3.4%         2.0%
TN..............................................         3.8%         3.0%         3.7%         4.4%         3.5%         4.0%         3.5%         3.0%
TX..............................................         8.9%        15.3%         9.4%         5.5%         9.0%         6.0%        13.9%        16.6%
VA..............................................         1.8%         2.3%         2.5%         3.1%         2.5%         2.3%         2.8%         2.3%
WI..............................................         2.4%         2.5%         2.9%         1.8%         2.8%         2.0%         2.2%         2.2%
WV..............................................         6.0%         4.4%         5.4%         6.7%         5.2%         5.8%         3.4%         4.5%
                                                 -------------------------------------------------------------------------------------------------------
    Total.......................................         100%         100%         100%         100%         100%         100%         100%         100%
Number of times method provides least allowances            3            4            1            7            0            2            4            4
Number of times method provides most allowances.            2            1            5            6            0            4            4            4
                                                 -------------------------------------------------------------------------------------------------------
    Total (most + least)........................            5            5            6           13            0            6            8            8
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: EPA, 2006.


    Note: For NOX, EPA calculated a separate region-wide 
budget for New Jersey and Delaware using the same approach that was 
used to calculate the larger CAIR region-wide budget. This region-
wide budget was then apportioned to individual State budgets using 
the same approach used in CAIR. Because New Jersey and Delaware were 
treated separately in the context of NOX allocations, EPA 
has not included them in the SO2 analysis.


    Two commenters performed alternative analyses of State budgets, 
modeled after the calculations done for the CAIR Reconsideration 
related to NOX budgets (CAIR Statewide NOX Budget 
Calculations, EPA Docket Number OAR-2003-0053, December 2005). The 
commenters claim that their analysis proves that EPA's SO2 
allowance allocation approach is inferior to a fuel-adjusted heat input 
method, such as the allocation approach used in the CAIR NOX 
model trading rule. They assert that EPA's analysis of NOX 
allocation methodologies is also the appropriate way to compare the 
reasonableness of the SO2 allocation alternatives.
    As EPA explained in the Technical Support Document for the Agency's 
NOX budget analysis (``CAIR Statewide NOX Budget 
Calculations,'' available in the docket), to quantitatively evaluate 
whether the fuel factor approach is providing States with annual 
NOX budgets that more closely reflected their projected 
emissions, EPA calculated the arithmetic mean of the (absolute) 
difference between the ratio of each State's allowance allocation under 
each approach to its projected emissions under CAIR (coverage ratio), 
and 1.0 (i.e., the value representing a State's projected emissions 
matching the State's CAIR NOX budget). In other words, EPA 
calculated how far off the State's coverage ratio was from 1.0, and 
then determined the average value of this difference for each approach.
    One commenter performed a similar analysis of State budgets, 
comparing each State's projected emissions to its projected allowances 
under each allocation approach. The commenter analyzed the results in 
relation to a coverage ratio of 1.0 (as EPA did in its

[[Page 25313]]

NOX analysis) and averaged the values for each approach. 
Another commenter performed a similar analysis but presented the 
results as the cumulative value (sum) of absolute differences between 
the coverage ratios and 1.0.
    EPA disagrees with the commenter's assertion that the methodology 
that the Agency used to evaluate State NOX allocations 
should be the primary means by which to evaluate the reasonableness of 
the SO2 allocation methodology. As explained in the CAIR 
preamble, in the case of SO2, EPA needs to balance various 
considerations, including the need to allocate SO2 
allowances in a way that is less disruptive to the title IV program. In 
light of these considerations, minimizing the disparity between a 
State's allocation and projected emissions cannot be the primary 
objective. For SO2, there is a pre-existing national trading 
program (the Acid Rain SO2 trading program) that Congress 
intended to continue as a viable program into the future and under 
which allowances have been allocated in perpetuity. For NOX, 
there is no pre-existing national trading program where efficiency and 
effectiveness would be jeopardized by creating new CAIR NOX 
allowances. There is, of course, a pre-existing regional NOX 
ozone-season program covering a portion of the CAIR region (the 
NOX Budget Trading Program, established by regulation, 
rather than directly by Congress). Under the existing NOX 
ozone-season program, no State has allocated allowances past 2009 (and 
only a handful of States have allocated allowances past 2008). 
Therefore, in contrast with EPA's determination concerning 
SO2 allocations, evaluation of potential approaches to 
NOX allocations did not involve concerns about Congressional 
intent to preserve an existing trading program and about preserving the 
value of allowances already allocated in perpetuity. For 
NOX, EPA does not need to consider other important policy 
concerns that are important for SO2.
    While the methodology used by EPA to evaluate NOX 
allocation methodologies for CAIR can be applied to analysis of 
SO2 allocations, EPA believes that the commenters performed 
their State-by-State analyses incorrectly, overlooking a fundamental 
difference between the CAIR NOX and SO2 trading 
programs, which is the existence of a significant bank of pre-2010 
allowances that will be eligible for use for compliance with CAIR. 
Because of the existence of a SO2 allowance bank, EPA 
believes that the commenter's comparison of allocation approaches using 
a coverage ratio of 1.0, which would assume that in a given year total 
SO2 emissions in the region are equal to the total region-
wide SO2 budget, is not appropriate for evaluating the 
SO2 State budgets resulting from the various SO2 
allocation methodologies. A State that had a coverage ratio of 1.0 
would have enough allowances to cover its emissions, and, while this 
ratio would be a meaningful target in the context of the CAIR 
NOX trading program, it is not for SO2, because 
2010 and 2015 emissions will be higher than the region-wide cap due to 
the use of banked allowances. For SO2, the region-wide 
ratios of allowances to projected emissions are 0.70 for 2010 and 0.60 
for 2015. On average, one would expect States to have coverage ratios 
similar to the region-wide average.
    While in both the NOX annual and NOX ozone 
season trading programs some allowances beyond the State Budgets (i.e., 
compliance supplement pool allowances in the annual program and banked 
allowances from the NOX Budget Trading Program in the ozone-
season program) will be available to sources, the amount of these extra 
allowances will be too small to affect the State-by-State 
NOX analysis. Consequently, EPA believes that a more 
appropriate way to evaluate SO2 allocation methods is to use 
the 0.70 (for 2010) and 0.60 (for 2015) coverage ratios, rather than a 
ratio of 1.0. Further, because each allocation approach results in 
allocations that are advantageous for different companies and States, 
EPA believes that the reasonableness of a given allocation approach 
should be judged by its overall impact on companies and States, not its 
specific impact on any single company or State or on a few companies or 
States.
    EPA has redone the commenters' analysis, using the methodology used 
by EPA in its analysis of NOX allocations and corrected 
coverage ratios described above. This analysis is presented in the 
``CAIR SO2 Allocation Approach Analysis'' Technical Support 
Document available in the docket. While the title IV SO2 
allocation approach does not perform the best of the allocation 
approaches considered using this metric, the differences observed among 
the approaches are of a lower magnitude than those suggested by the 
commenters. The commenters did not provide any benchmark in their 
analysis for assessing whether or not a given allocation approach was 
reasonable. Further, although the commenters discuss some of the 
implications of the differences observed between an allocation approach 
based on fuel factors and the allocation approach based on title IV, 
they do not conclude their analyses with any meaningful arguments that 
EPA's approach is not reasonable.
    As EPA noted earlier in this section, there are a number of ways by 
which to assess the equitability of a given allowance allocation 
approach. For a further understanding of the overall relative impacts 
of the various allocation approaches, EPA believes that it is useful to 
apply the statistical concepts of (1) bias and (2) consistency. EPA 
determined that an appropriate statistic for examining the bias of a 
given allocation approach is the average difference between a State's 
coverage ratio and the coverage ratio for the entire region (e.g., 0.70 
for 2010 or 0.60 for 2015). The degree of bias inherent in a given 
allocation approach cannot be discerned from the absolute value 
statistic, because it ignores the degree to which positive and negative 
differences cancel each other out. A perfectly unbiased distribution 
under a given allocation approach would be one that resulted in an 
average difference of zero, meaning that on average a State-by-State 
coverage ratio higher than the regional coverage ratio is balanced out 
by a ratio below. Another useful statistic is the percent of instances 
in which the allocation approach yields a State coverage ratio that is 
high (or low) relative to the regional coverage ratio. Lack of bias 
would be indicated if 50 percent of the State coverage ratios are 
higher than the regional coverage ratio and 50 percent are lower.
    EPA evaluated the four allocation approaches considered during the 
CAIR rulemaking (title IV, pure heat input, heat input with fuel-
factors, and heat input with fuel factors and coal type factors) along 
these metrics. From EPA's calculations (Table III.A.3), all the 
approaches are biased high for 2010 and all but one is biased high for 
2015 (with CAIR controls). The average differences for EPA's approach, 
0.06 in 2010 and 0.17 in 2015, are among the closest to zero compared 
to the alternatives examined. The one approach (heat input with fuel 
and coal adjustment factors) that exhibits less bias than the title IV 
approach in 2010 exhibits bias of the same magnitude (but opposite 
direction) as the title IV approach in 2015. In addition, the percent 
of positive differences for EPA's approach for 2010 and 2015 are near 
50 percent and do not greatly vary from the alternative methods 
analyzed. This demonstrates that EPA's approach provides a reasonable 
result.

[[Page 25314]]



                      Table III.A.3.--Evaluation of Bias and Consistency of Four Different SO2 Allocation Approaches, 2010 and 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         2010                                                2015
                                                 -------------------------------------------------------------------------------------------------------
                                                                                          1999-2002                                           1999-2002
                                                                 Average     1999-2002    heat input                 Average     1999-2002    heat input
                                                   EPA title    1999-2002    heat input     w/fuel     EPA title    1999-2002    heat input     w/fuel
                                                       IV      (pure) heat     w/fuel     factors &        IV      (pure) heat     w/fuel     factors &
                                                                  input       factors     coal type                   input       factors     coal type
--------------------------------------------------------------------------------------------------------------------------------------------------------
Average Difference..............................         0.06         0.11         0.06         0.05         0.17         0.18         0.14        -0.17
Percent Positive................................          43%          39%          52%          48%          43%          43%          43%          52%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: EPA 2006.

Potential for Regional Emissions Increases
    As discussed above and in the CAIR preamble, another important 
reason for use of the title IV allowances is to avoid SO2 
emissions increases in 2010 and thereafter in non-CAIR States. If title 
IV allowances were not used in the CAIR SO2 trading program, 
the resulting reduction in the value of title IV allowances would 
result in an increase in emissions in non-CAIR States. EPA estimates 
that emissions ``leakage'' of title IV allowances from the CAIR region 
into the non-CAIR region would be approximately 260,000 tons annually 
in 2010 and thereafter (See 70 FR 25293).
    One commenter argues that EPA has not sufficiently evaluated and 
compared the impact of the potential for increases in CAIR region 
emissions under the approach of using title IV allowances that could 
result from allocations to title IV opt-in units and title IV 
allowances traded into the CAIR region from non-CAIR States to the 
potential for emissions increases in non-CAIR States from ``leakage'' 
of title IV allowances from CAIR States to non-CAIR States under an 
allocation approach that does not rely on title IV.
    EPA has, in fact, considered the issue of emissions ``leakage'' 
outside of the CAIR region throughout its analysis of CAIR and has also 
analyzed the potential increases outside of the CAIR region if EPA were 
to not use an allocation system based on title IV. EPA estimates, based 
on its CAIR analysis, that title IV allowances from the non-CAIR region 
equivalent to about 150,000 tons of SO2 emissions may be 
traded into the CAIR region in 2010, which represent about 4 percent of 
the projected CAIR region emissions in 2010. This compares to 
approximately 260,000 title IV allowances, representing that many tons 
of SO2 emissions, that sources in non-CAIR States would have 
incentive to use to cover emissions at little to no cost, if we chose 
an alternative system that is not based on title IV (an increase equal 
to about 30 percent of the 0.9 million tons of emissions EPA projects 
for non-CAIR region). This increase would occur because title IV 
allowances would have no economic value.
    EPA has also considered the impact of opt-in unit allocations and 
projects that in 2010 allowances equivalent to approximately 25,000 
tons could be generated by units opting into the Acid Rain Program and 
used for compliance in the CAIR SO2 trading program. This is 
less than one percent of the projected CAIR region-wide emissions in 
2010. (See the spreadsheet ``SO2 Allocation Analysis Data--
Owner and Parent Comparison'' available in the docket). Thus, EPA 
believes that the effect of selecting the title IV allocation approach 
for SO2 under CAIR will not significantly affect the overall 
SO2 emission reduction objectives of the rule.
    It should also be noted that an alternative to including non-title 
IV sources under CAIR and allowing them to use opt-in allowances from 
title IV would be excluding these units altogether from CAIR. In 
choosing to opt into title IV to provide allowances for use under CAIR, 
these units would have to reduce emissions from the baseline at which 
they were allocated in order to generate excess title IV allowances. 
Thus, actual cumulative net emissions increases within the CAIR region 
from title IV opt-in sources subject to CAIR are unlikely. 
Alternatively, excluding these units from CAIR and keeping the same 
SO2 allowance retirement ratios (and the same State budgets) 
would achieve many, but not all, of the highly cost-effective 
SO2 reductions and could result in emissions leakage within 
the CAIR region at these sources, as generation (and thus emissions) 
shift from the EGUs covered by the cap to EGUs not covered by the cap.
Opting Into the Acid Rain Program
    As discussed above, EPA's analyses of the distribution of 
allowances under EPA's allocation approach included allowances 
allocated to CAIR units that can opt into the title IV Acid Rain 
Program. The statutory and regulatory provisions governing Acid Rain 
Program opt-in units allow units that are subject to CAIR, but not to 
the Acid Rain Program, to opt into the Acid Rain Program. Under section 
410(a) of the Clean Air Act, the owner or operator of any unit that 
emits SO2 and ``is not, nor will become, an affected unit'' 
under the general applicability provisions of CAA title IV (i.e., 
starting in 2000, CAA sections 403(e)(for new units) and 405 (for 
existing units)) may apply to have the unit become an opt-in unit under 
the Acid Rain Program. 42 U.S.C. 7651i(a). (The separate treatment of 
``process sources'' under sections 410(a) and (e) is not applicable to 
electric generating units covered by CAIR.) Section 410 was added to 
the Clean Air Act by the Clean Air Act Amendments of 1990, which were 
enacted on November 15, 1990.
    EPA interprets section 410(a) to allow any SO2-emitting 
unit not currently covered by the general applicability provisions to 
opt into the Acid Rain Program and receive SO2 allowances, 
provided that certain requirements (e.g., emissions monitoring and 
reporting requirements under part 75 of the Acid Rain regulations) are 
met. The use of two separate terms, one to refer to a unit that ``is 
not'' an affected unit, and the other to refer to a unit that ``will 
not become'' an affected unit reflects the fact that there are two 
separate applicability provisions, section 405 applying to units in 
existence and generating electricity for sale when the CAA Amendments 
were enacted and section 403(e), applying to units to be constructed at 
some later date. In short, section 410(a) included language using both 
a verb in the present tense (i.e., ``is not'') to refer to existing 
units and a verb in the future tense (i.e., ``nor will become'') to 
refer to begin generation or begin construction in the future. EPA does 
not interpret the term ``nor will become'' to bar, from opting in, 
currently operating units that are not covered by the generally 
applicability

[[Page 25315]]

provisions but that may become subject to those provisions sometime in 
the future. Consequently, a unit that currently has an exemption from 
the general applicability provisions (e.g., an exempt cogeneration unit 
under CAA section 402(17)(C) or 405(g)(6)(A)), may opt in under section 
410(a)) even if the exemption may be lost sometime in the future. Such 
a unit may become and remain an opt-in unit until the unit loses its 
exemption.
    This interpretation of section 410(a) is reflected in the 
implementing regulations. For example, Sec.  74.2 states that the opt-
in regulations apply to units that ``are not affected units under Sec.  
72.6 [the general applicability provisions] * * * and that are 
operating and are located in the 48 contiguous States of the District 
of Columbia''. 40 CFR 74.2. The opt-in regulations do not exclude 
operating units that are currently exempt from the general 
applicability provisions but that may subsequently lose their 
exemption. Moreover, Sec.  74.46(b)(iii) specifically addresses how to 
treat opt-in allowance allocations for operating units that opt in but 
subsequently become subject to the general applicability provisions. 
The provision explains how to treat such allowance allocations for the 
year in which the units lose their exemption and for subsequent years. 
This supports EPA's interpretation that currently exempt units may 
become opt-in units even though they may lose their exemption in the 
future.
    EPA notes that the additional cost for CAIR units of opting into 
the Acid Rain Program will be minimal. The major cost for any unit to 
opt in is the cost of meeting emissions monitoring and reporting costs 
under part 75. Whether or not they become Acid Rain Program opt-in 
units, all units under CAIR already have to meet, and incur the costs 
of, part 75 emissions monitoring and reporting requirements. EPA also 
notes that currently under the Acid Rain Program only a small number of 
units have opted into the program. Because EPA anticipates that the 
existence of the CAIR program will result in more units opting in, EPA 
will work with potential opt-in sources to consider opportunities to 
improve the opt-in program.

B. Fuel Adjustment Factors Used to Set State NOX Budgets

    As described in the December 2, 2005 Notice of Reconsideration for 
CAIR, EPA received several petitions for reconsideration asking EPA to 
reconsider its decision to use fuel adjustment factors (FAF) to 
establish NOX budgets for State in the CAIR region. 
Petitioners contended that the Agency did not provide adequate notice 
and that the use of the FAF approach adversely impacted States with 
large gas- and oil-fired generation portfolios. Given the significant 
public interest in this issue, EPA granted reconsideration and 
solicited additional public comment on this issue.
    The Notice of Reconsideration explained that EPA believes that it 
provided adequate notice both that the fuel adjustment factors might be 
used and of the calculation procedures that it would use to determine 
the specific factors. Nevertheless, in light of the significant public 
interest in this issue, EPA granted reconsideration on the the use FAFs 
(i.e., 1.0 for coal, 0.4 for gas, and 0.6 for fuel oil) in the 
development of statewide NOX budgets. The Notice of 
Reconsideration provided an additional opportunity for public comment 
on the issue and presented additional analysis that EPA conducted to 
further explain the impact of these factors on State annual 
NOX budgets. That additional analysis demonstrated that the 
factors selected are reasonable and decrease the disparity between most 
States' projected electric generation unit (EGU) emissions and their 
State NOX budgets. The Notice of Reconsideration did not 
propose to change any aspect of how the CAIR apportions the regionwide 
NOX budget among States.
    Today's action responds to public comment received on the Notice of 
Reconsideration and presents some additional analysis that supports the 
analysis presented in the Notice of Reconsideration.
Background on the Use of NOX FAFs in the Statewide 
NOX Budgets
    The CAIR establishes regional emission budgets for annual and 
seasonal NOX emissions. These regional budgets are then 
further divided into State budgets, with a share of each total 
regionwide budget apportioned to each State in the corresponding CAIR 
region. The CAIR determines each State's pro-rata share of the 
regionwide budget by using that State's share of the regionwide heat 
input, as adjusted by the FAFs (i.e., 1.0 for coal, 0.4 for gas, and 
0.6 for fuel oil). Petitioners asked EPA to reconsider this 
methodology.
    As explained in the Notice of Reconsideration, States choosing to 
participate in the trading program may allocate their statewide budgets 
to sources in their respective State. In a cap-and-trade system, 
however, the methodology used to allocate allowances in any given year 
would not affect where control technologies are installed.\6\ Rather, 
the determinant would be the cost of adding controls compared to the 
cost of buying, or the profit from selling, allowances. Controls are 
expected to be installed where it is relatively less expensive, without 
regard to which units received the initial allocation of allowances. 
Further, the total cost to industry of controlling emissions and the 
total amount of reductions achieved would not be affected by the 
allocation methodology in a given year (for a permanent system). The 
allocation method, however, could have financial impacts on individual 
units and companies. A unit that receives more allocations than it has 
emissions would get a benefit at the expense of a unit that does not 
receive enough allocations to cover its emissions. While States 
choosing to participate in the cap-and-trade program can determine how 
to allocate allowances among their units, companies in States whose 
budgets exceed projected EGU emissions would likely receive a financial 
benefit while companies in States whose budgets are lower than their 
EGU emissions would likely incur additional costs. In the absence of 
other considerations, EPA believes that it is in the public interest to 
reduce the disparity between the number of allowances in a State budget 
and total projected State EGU emissions. In the case of NOX 
allowances, there are no considerations that offset the desirability of 
reducing the disparity between a State's budget and projected 
emissions. This contrasts with the case of SO2 allowances, 
as described above, where there are counter-balancing considerations, 
such as the importance of preserving the efficacy of the existing title 
IV SO2 trading program.
---------------------------------------------------------------------------

    \6\ A permanent allocation approach, such as the CAIR allocation 
methodology in the model trading rules, should not affect where 
controls are installed. This is true regardless of the type of 
approach used to permanently allocate allowances (e.g., heat input, 
adjusted heat input, or output). The use of an updating allocation 
system, on the other hand, could have some impact future generation.
---------------------------------------------------------------------------

1. Summary of Additional Analysis Presented in the Notice of 
Reconsideration
    The Notice of Reconsideration presented two analyses that EPA 
conducted to evaluate the potential impact of using the adjusted heat 
input method versus the simple heat input method on State annual 
NOX budgets: one regionwide analysis and a second State-by-
State analysis.
    The regionwide analysis of the potential impacts compared 
regionwide budgets using both approaches (i.e., simple heat input and 
fuel factor) to the

[[Page 25316]]

regionwide projected emissions of units fired with that fuel.\7\ That 
analysis illustrated that: under either approach, the portion of the 
State budgets derived from the heat input from the gas-fired units 
generally exceeds both the historical and the future projected 
emissions from these units; the fuel factor approach generally provides 
additional allowances to States with large amounts of coal-fired units 
that are making the majority of the investments in emission control 
measures and technologies; and, using the fuel factor approach, the 
disparity between the number of allowances provided to each type of 
fossil fuel-fired electric generation and the projected emissions for 
each fossil fuel type is less than under the simple heat input method.
---------------------------------------------------------------------------

    \7\ It should be noted that simple heat input or adjusted heat 
input are used to set State budgets and do not imply that States 
would allocate allowances to units in that manner. In the proposal, 
EPA gives States flexibility in the distribution of allowances.
---------------------------------------------------------------------------

    The second analysis presented in the Notice of Reconsideration 
examined the potential impacts of the two approaches for developing 
Statewide budgets (i.e., simple heat input and fuel factor) on a State-
by-State basis. That analysis showed that States receiving fewer 
allowances using a fuel factor approach, generally still receive 
Statewide budgets that are greater than their projected emissions in 
2009 and 2015. This results because a substantial portion of their 
generation portfolio consists of gas-fired sources with generally low 
NOX emission levels. More specifically, the analysis 
illustrated that while States dominated by gas-fired generation (i.e., 
District of Columbia, Florida, Louisiana, Mississippi, New York, and 
Texas) receive fewer allowances under a fuel factor approach, they are 
provided with reasonable Statewide budgets that are comparable to their 
projected emissions in 2009 and 2015. In addition, this analysis shows 
that, relative to the simple heat input method, the fuel factor method 
reduces the disparity between projected State emissions and State 
budgets, e.g., allocating State budgets that are generally closer to 
projected State emissions.
    EPA conducted the same analyses for the annual NOX 
programs proposed for Delaware and New Jersey, which are being included 
in the CAIR PM2.5 finding of significant contribution in a 
separate rulemaking published today. This analysis showed results 
similar to that found for the other CAIR PM2.5 States.
    Finally, to ensure that our estimates appropriately reflect the 
distribution of emissions in the case of higher electricity demand and 
increased gas and oil prices, the Notice of Reconsideration presented 
EPA analysis based upon a sensitivity run using EIA's forecast of 
higher electricity demand and gas and oil prices. This run produced 
very similar emissions results to the original NOX analysis, 
showing that EPA's original analysis is robust enough to support the 
fuel adjusted heat input approach finalized in CAIR. (See the ``CAIR 
Statewide NOX Budget Calculations Technical Support 
Document, EPA 2005, for additional discussion of the analysis.)
2. Public Comments on Analysis Presented in the Notice of 
Reconsideration
    Many commenters supported the EPA analysis presented in the Notice 
of Reconsideration that demonstrated that:
     Under either approach, the portion of the State budgets 
derived from the heat input from the gas-fired units generally exceeds 
both the historical and the future projected emissions from these 
units;
     The fuel factor approach generally provides additional 
allowances to States with large amounts of coal-fired units that are 
making majority of the investments in emission control measures and 
technologies; and
     Using the fuel factor approach, the disparity between the 
number of allowances provided and the emissions is less than under the 
simple heat input method.
Adverse Comments on the Notice of Reconsideration
    a. Comments on EPA's Characterization of Operational Costs for Low-
Emitting Generation in Analysis
    Some commenters contended that EPA analysis of the projected 
impacts on different types of power generation (i.e., coal-fired, gas- 
and oil-fired units) was inaccurate because it did not reflect inherent 
differences in the cost (e.g., fuel costs) to operate each type of 
unit. Specifically, the commenters claim that gas-fired units ``have 
incurred historical costs to burn a cleaner but higher-priced fuel.'' 
The commenter continues with ``while gas-fired plants have continually 
paid the price for cleaner fuels, under CAIR these owners may be 
penalized with additional costs of purchasing allowances.'' The 
commenters believed that, as a result, EPA analysis of the potential 
impacts of using the FAF approach--which was based on comparing CAIR 
NOX allowances to the projected emissions--has not properly 
considered the economic impacts to these units and their customers.
    EPA disagrees that higher fuel costs of oil- and gas-fired units 
are not properly considered in the analysis of potential impacts of 
using the FAF method in developing statewide NOX budgets. In 
projecting which sources would install advanced controls under CAIR, 
EPA modeling factored-in the operating characteristics of each source, 
including fuel costs.\8\ This modeling showed that coal-fired units--
not gas- and oil-fired units--would make the significant investment in 
advanced controls in order to achieve the CAIR mandated emission 
reductions. The commenter did not demonstrate that EPA modeling, used 
in the development of CAIR and the Notice of Reconsideration analysis, 
mischaracterized the operating costs of these units. Further, the 
commenter did not explain how a decision to build a gas-or oil-fired 
unit prior to CAIR that has high operating costs, warrants an award of 
valuable allowances to offset operating costs that they would have with 
or without CAIR. Notably, although natural gas inherently burns with 
lower NOX emissions, its choice in the CAIR region 
historically is based much more on the economics to meet electric 
demand requirements--electric generation from natural gas has been the 
cheapest approach.
---------------------------------------------------------------------------

    \8\ IPM modeling uses ``model plants'' to represent the 
characteristics of a group of actual facilities.
---------------------------------------------------------------------------

    In addition, it is not clear why the commenter believes that using 
the FAF approach would result in gas-fired units having to purchase 
NOX allowances. Analysis presented in the Notice of 
Reconsideration showed that, in general, States with predominantly gas- 
and oil-fired generation are provided with reasonable statewide budgets 
that are comparable to their projected emissions in 2009 and 2015. If 
the States were to directly pass through allowances to their gas-fired 
units, these units would still have excess allowances. Furthermore in 
most cases, these States still receive a larger budget than they need 
to cover their projected emissions.
    In conclusion, EPA believes the projected emission levels used in 
EPA's analysis of the potential impacts of using a FAF method to 
apportion statewide NOX budgets appropriately considers the 
operational costs of oil- and gas-fired units.
b. Comments on EPA Projections of Oil- and Gas-Fired Boilers Retirement 
and Impacts on Analysis
    A few commenters believed that EPA inaccurately accounted for their 
projected emissions because the IPM modeling did not consider

[[Page 25317]]

requirements, outside of environmental regulatory programs, to maintain 
reserve electricity generation capacity. The commenter claims that, as 
a result, there are oil-fired units that would continue to operate even 
though IPM projects that they would retire because they are no longer 
economical to run. The commenter believes that this potential 
underestimation of projected NOX emissions is significant 
enough to change the outcome of EPA's analysis which demonstrated that 
predominantly gas-fired States would receive CAIR NOX 
allowances sufficient to account for their future NOX 
emissions.
    EPA disagrees with the commenters' contention that the potential 
underestimation of emissions for oil-fired boilers would significantly 
impact the EPA's analysis comparing apportioning statewide 
NOX budgets using simple heat input and the FAF approach. 
The EPA analysis showed that Florida, the State of concern to the 
commenter, has coverage ratios (i.e., the ratio of the statewide 
NOX budget and the projected NOX emissions) of 
1.45 and 1.35 under CAIR in 2009 and 2015, respectively. In other 
words, the statewide NOX budget provides 145 percent of the 
allowances that Florida sources would need to account for their 
projected emissions.
    EPA modeling projected that approximately 11 percent of the oil- 
and gas-fired generation capacity (other than coal-fired generation and 
combined-cycle turbines) would retire early in both 2009 and 2015, 
respectively. These retirements comprise 4 and 5 percent of Florida's 
total capacity in 2009 and 2015, respectively. Even if it was necessary 
for all of these units to remain in operation to comply with 
requirements for reserve capacity, it is not clear that this relatively 
small portion of the total capacity would emit enough NOX to 
significantly change the outcome of the EPA analysis. Should all or 
some portion of these units remain in service, Florida's NOX 
budget--which is 45 percent and 35 percent above their projected 
emissions according to EPA analysis--would have a surplus of allowances 
that it could provide to these units to offset emissions. Further, 
these units could choose to reduce their emissions using a range of 
advanced control options that, in some cases, achieve greater emission 
reduction levels than found in coal-fired units.
3. Public Comment on the Notice of Reconsideration Discussion of Notice
    Several commenters supported EPA's position that adequate notice 
was provided on the use of FAFs in the development of the statewide 
NOX budgets. Many of these commenters also supported the 
analysis EPA presented in the Notice of Reconsideration (discussed 
below.)
    Other commenters maintained that the final CAIR did not provide 
sufficient notice on the use of the FAF approach to developing 
statewide budgets. The methodology used for developing the statewide 
budgets, the FAFs, and the actual statewide budgets were discussed in 
detail in the CAIR NFR (70 FR 25230) and supporting documentation.\9\ 
By granting reconsideration and, thereby, requesting public comment on 
this issue in response to the Notice of Reconsideration, the Agency has 
provided an additional opportunity for public involvement. As a result, 
EPA believes that it provided ample notice and opportunity for comment 
on the use of fuel adjustment factors, the calculation procedures used 
to determine the specific factors, and the specific factors themselves.
---------------------------------------------------------------------------

    \9\ Both the ``Corrected Response to Significant Public Comments 
on the Proposed Clean Air Interstate Rule'' (pp. 520-576) and the 
``Technical Support Document for the Clean Air Interstate Rule 
Notice of Final Rulemaking, Regional and State SO2 and 
NOX Emissions Budgets'' include information on the use of 
FAFs for developing the statewide NOX budgets.
---------------------------------------------------------------------------

4. Use of FAF Approach To Determining Statewide NOX Budgets 
in the Final CAIR
    Today's action does not change the use of the FAF methodology to 
determine the statewide NOX budgets for the CAIR. While EPA 
believes that adequate notice was provided on the use of the FAF 
approach and the specific FAFs, EPA granted the petitions on this issue 
in consideration of general public interest in the matter. EPA believes 
that today's action, in conjunction with the Notice of Reconsideration, 
adequately responds to concerns raised by the petitioners.

C. PM2.5 Modeling for Minnesota

    One Petition for Reconsideration asked EPA to reconsider whether 
emissions from Minnesota significantly contribute to downwind 
nonattainment of the PM2.5 NAAQS. The petitioner (Minnesota 
Power, or MP) asserted that EPA's modeling failed to account for 
certain emissions reductions required by State programs (especially 
those required under the Minnesota Emissions Reduction Program, or 
MERP). In granting reconsideration, EPA explained that it was aware of 
the emission reductions in question when it made the significant 
contribution determinations in the final CAIR. EPA had accounted for 
these reductions during the rulemaking by conducting a sensitivity 
analysis (available in the CAIR docket), but had not conducted revised 
air quality modeling (70 FR at 72279-72280). In response to the 
reconsideration petition, EPA conducted revised air quality modeling 
which used the inputs reflecting emission reductions required by the 
MERP. This modeling showed (consistent with the sensitivity analysis) 
that Minnesota contributes a maximum of 0.20 [mu]g/m\3\ to the downwind 
PM2.5 nonattainment area of Chicago-Gary-Lake County, IL-IN. 
This modeling thus supported EPA's conclusion that Minnesota's 
contribution met the criteria in CAIR for determining ``significant 
contribution.'' Id. This revised air quality modeling used the same 
modeling platform used for all of the air quality modeling in CAIR. In 
the Notice of Reconsideration, EPA solicited comment on the inputs used 
to model Minnesota emissions, but declined to reconsider or reopen for 
public comment issues relating to the air quality modeling platform 
itself. Id. at 72280.
    Most of the comments received on this issue in response to the 
Notice of Reconsideration supported EPA's conclusion. These include 
comments from the Minnesota Pollution Control Agency (MPCA), the entity 
with the most direct knowledge of emission reductions required by state 
programs. EPA also received no adverse comments from Xcel Energy, the 
entity that entered into the MERP with the MPCA and whose projected 
emission levels were the centerpiece of the reconsideration petition. 
In fact, no other power generation source in Minnesota besides 
Minnesota Power offered adverse comments.\10\ EPA views these comments 
as confirmation of the reasonableness of the modeling approach used by 
EPA to assess significance of contribution of the State. EPA also views 
these comments as confirmation that its revised modeling accurately 
accounts for the MERP reductions.
---------------------------------------------------------------------------

    \10\ Another power company in the Midwest region, Midwest 
Generation, supported EPA emissions assessment for Minnesota.
---------------------------------------------------------------------------

    Minnesota Power (MP) did not comment on the revised emissions 
modeling done for power sector units in Minnesota and instead directed 
its comments to the original emissions modeling done for the Final CAIR 
that did not fully account for the MERP reductions. MP does not 
directly challenge EPA's conclusion that the revised modeling 
accurately accounts for the emission reductions required by

[[Page 25318]]

the MERP. MP claims, nonetheless, that the model inputs for the final 
CAIR modeling (not the modeling done for the Notice of Reconsideration, 
as just noted) contain errors. To the extent these alleged errors 
relate to the MERP, EPA has corrected the errors as explained 
above.\11\ The additional ``errors'' of which MP complains relate to 
inputs regarding the projected 2010 emissions for certain units in 
Minnesota. Although MP states that EPA has mischaracterized emissions 
from some units, EPA believes that the emissions projections done to 
provide inputs for the revised air quality modeling described in the 
Notice of Reconsideration are appropriate.
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    \11\ The revised IPM modeling performed for the reconsideration 
fully accounted for emission reductions attributable to the MERP. 
These include emission reductions from the repowering of the two 
units at the Riverside plant from coal to natural gas and the 
retirement of a third coal unit at the plant. The inputs to the 
revised modeling for the Notice of Reconsideration also accounted 
for emission reductions from retrofit of the coal unit at the Allen 
S. King plant with advanced pollution controls (scrubber for 
SO2 removal and selective catalytic reduction technology 
for NOX removal) and for emission reductions from re-
powering of two units at the High Bridge plant that will be re-
powered from coal to natural gas. It should be noted that MP has 
submitted revised projected emission levels for certain Xcel units 
covered by the MERP. These projections do not correspond precisely 
with the projections EPA used in its revised modeling (but are very 
similar). However, as explained below, EPA believes the projections 
for these units used by EPA are more accurate than the projections 
MP suggests should be used.
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    EPA believes its method of projecting power sector emissions for 
units in Minnesota reflects a more accurate and robust method for 
projecting emissions than the method used by MP. MP presents a method 
for projecting 2010 emissions for certain select units using the 
combination of a 2001 emission rate (based on Title IV data) and EPA's 
projected 2010 heat input projection under the 2010 base case (no 
CAIR). MP applies this method to several of its own units and several 
owned by Xcel Energy.
    MP claims that if these lower emissions were used as inputs to the 
PM2.5 modeling, that modeling would show that Minnesota's 
contribution is below the PM2.5 significance threshold of 
0.2 [mu]g/m3. However, the petitioner was selective in its 
application of its methodology for projecting emissions. MP applies 
their method only for units where that method results in emissions 
projections that are lower than the original EPA emissions projections.
    Application of this approach to all units in Minnesota would result 
in emissions levels for several units in 2010 that are above EPA's 
projections. In such cases, however, MP relies upon the lower EPA 
projections. It is also unclear why Minnesota Power used 2001 data to 
develop 2010 emission levels, rather than 2004 data, for example. Data 
from 2004 (as opposed to 2001 data), used in the manner MP has done, 
would produce different emissions levels of SO2 and 
NOX in 2010 for every unit in Minnesota. Selectively 
developing projections in this manner is an insufficient approach for 
developing power sector forecasts (see further discussion on IPM 
below).
    MP also comments that ``EPA had erroneously assigned 2010 sulfur 
dioxide emission rates on scrubbed Minnesota units at values as much as 
double that of the performance levels posted in 2001.''MP Comment p. 4. 
After reviewing the modeling results, EPA is unable to find any 
instances in Minnesota where EPA projected SO2 emission 
rates of scrubbed units from the revised power sector modeling that are 
double that of the 2001 performance level. Id. Although the emission 
rates are higher in EPA 2010 projections for the 3 Sherburne County 
Plant units than 2001 levels, they are well within permitted levels at 
those units and reflect projected changes in unit operations to 
maximize efficiency (see further discussion on IPM below).
    MP also claims that ``NOX emission rates deviated 
between 2001 and 2010 without supportive operating rationale.''  Id. 
The difference in NOX rates that MP alludes to is again 
based upon the modeling for the Final CAIR, not for the Notice of 
Reconsideration. In addition, MP's characterization is inaccurate. 
First and most important, EPA's 2010 projections of NOX 
emission rates are generally lower than 2001 NOX emission 
rate data for Minnesota units. EPA's projections show that for the 7 
non-MERP units in Minnesota where MP provided revised NOX 
emission estimates, 4 units have lower emission rates in 2010 under EPA 
projections and only 3 units will have higher emission rates (compared 
to 2001 data). Of the 3 units where the 2010 emission rate values are 
higher for those units in EPA revised emissions modeling versus 2001 
data, EPA finds that one unit is higher by 2 percent and two units are 
higher by about 7 percent. Differences in emission rates of this 
magnitude can occur for a variety of reasons and without significant 
operational changes to a particular unit. Also, the petitioner has also 
failed to demonstrate that EPA's projected NOX emission 
rates are inaccurate.
    Another comment from MP stated that ``the EPA IPM modeling had 
shifted heat input from large, lower emission units to higher emission 
units.'' Id. A comparison of the historical data from 2001 with the 
revised emissions modeling does not support this broad conclusion. Heat 
input usage does not change significantly, and although there are some 
shifts in heat input usage between 2010 EPA projections and the 2001 
data, these shifts occur where the IPM projects it will be cost-
effective to make relatively small changes to where electricity is 
produced. In addition, EPA does not accept the suggestion that because 
a certain rate applied in 2001 it should be applied in 2010. This 
argument is not adequate and ignores the many other factors that may 
change in the future which could cause a change in the way a unit 
produces electricity. These include (among others) fuel supply and 
demand dynamics, the cost of technologies to reduce emissions, relative 
performance changes in power generation technologies, and the price of 
an allowance. EPA used a version of IPM completed in 2004 that 
incorporated the best available data for EPA's power sector database 
and the most recent cost and performance of technologies at that time, 
focusing on what emissions and emission rates are likely to occur in 
2010 with full consideration of all the key factors of power plant 
operations that can influence future emission levels.
    The power sector is a complicated, interrelated, and interdependent 
system of operation, and must be looked at holistically to ascertain 
the sector's response to a certain set of conditions or constraints. 
The petitioner's approach selectively chooses the methodology for 
determining emissions at certain units and ignores the changes that may 
occur at other units as a result. In addition, it is easy to question 
the choices or assumptions that one makes for selective forecasts of 
this nature, since methodologies can be developed to support foregone 
conclusions, like lower emission levels in a future year. For this 
reason, EPA uses the Integrated Planning Model to develop its power 
sector emissions projections.
    IPM is a detailed, sophisticated, and comprehensive electric power 
sector model that is used to derive all manner of projections for the 
power sector and is used to develop the power sector emissions 
projections that are used in air quality modeling. The model accurately 
reflects the power sector and contains millions of variables to best 
ascertain how specific facilities will produce electricity to meet 
demand in the most cost-effective manner possible. The variables are 
based upon the best available data, both current and anticipated, and 
include permitted emission rates for units, unit efficiency,

[[Page 25319]]

cost data, and operational constraints. This model has been used to 
support the development of Title IV of the Clean Air Act (the Acid Rain 
Program), the NOX SIP Call, the Clean Air Interstate Rule, 
the Clean Air Mercury Rule, and the Clean Air Visibility Rule. In 
addition, it is used by the Federal Energy Regulatory Commission, 
private sector, non-profits, research groups, States, and regional 
planning organizations for power sector projections. The model has 
undergone extensive peer-review and scrutiny, and EPA believes it is an 
appropriate tool for use in developing power sector emission 
projections and better accounts for the many dynamics that exist in the 
power sector (http://www.epa.gov/airmarkets/epa-ipm/index.html).

    MP does not challenge the use of IPM for developing power sector 
emission projections for certain units, but comments that at other 
units, a revised methodology should be used. EPA believes that a 
holistic approach is necessary and using a modeling tool that reflects 
the integrated nature of the power sector as accurately as possible is 
the most rational approach to forecasting emissions for all units 
comprehensively.
    To its credit, MP also points out that emissions from the Taconite 
Harbor Facility (a facility that was recently converted from an 
industrial source to an electricity generating source) were not 
included by EPA in either the power sector emissions data or in other 
emissions inventory used for CAIR modeling. EPA will include the 
facility in the next version of the IPM. If the facility had been 
included in the inventory, emissions in Minnesota would have been 
higher by almost 2,000 tons of SO2 and about 1,150 tons 
NOX than what EPA projected (according to the commenter). 
Since EPA did not include this facility, EPA believes that its own 
projections of emissions in Minnesota underestimate likely future 
emissions.
    MP also stated that it is ``noteworthy that there are other 
reductions that Minnesota Power has not modeled that should warrant 
consideration by EPA, including those resulting from emission controls 
provided on Minnesota BART eligible units for the regional haze 
program.'' MP Comment p. 6. The Regional Haze program requires Best 
Available Retrofit Technology or BART to be installed and operational 
on sources that the State finds subject to BART within five years after 
EPA approves a State's regional haze SIP. These SIPs are due in 
December 2007. EPA does not believe that States will require the 
installation or operation of BART controls before 2010. Thus, it is 
highly unlikely that 2010 emissions would be affected by the BART 
requirements. In addition, MP does not quantify any reductions it 
believes will occur due to the application of BART in Minnesota. Thus, 
MP has not established that there will be additional reductions due to 
BART that must be taken into account when projecting 2010 emissions for 
units in MN. It is also important to note that EPA has determined that 
CAIR achieves greater progress than BART, and may be used by States in 
the CAIR region as an alternative to BART.
    In sum, EPA continues to believe its emission projections have 
reasonably accounted for emission trends within Minnesota and fully 
account for emission reductions attributable to the MERP. EPA believes 
the inputs used for the modeling discussed in the Notice of 
Reconsideration are reasonable and rational projections of 2010 
emissions in Minnesota.\12\ For these reasons, EPA is not making any 
additional changes to the inputs to the PM2.5 modeling for 
Minnesota, beyond those changes described in the Notice of 
Reconsideration.
---------------------------------------------------------------------------

    \12\ Another power company in the Midwest region, Midwest 
Generation, supported EPA emissions assessment for Minnesota.
---------------------------------------------------------------------------

    For more detail on EPA's characterization of power sector units in 
Minnesota and power sector emission inputs to the air quality modeling, 
please see the Technical Support Document titled ``Emissions in 
Minnesota: Additional Analysis as Part of the CAIR Reconsideration'' 
that is part of the record for this proceeding.
    Minnesota Power also raised a new issue in its comments on the 
Notice of Reconsideration, which is that EPA should use a more recent 
version of its modeling platform to conduct air quality modeling. MP 
argues that if EPA had done so, Minnesota would be below the 
PM2.5 significance threshold. EPA's modeling for the entire 
final CAIR (as well as the revised Minnesota air quality analysis) used 
the Community Multiscale Air Quality (CMAQ) model 4.3. Minnesota Power, 
however, advocates use of the post-CAIR CMAQ 4.5. The commenter states 
that the CMAQ 4.5 includes corrections to a mass stability problem in 
the version (4.3) used by EPA.
    As noted earlier, EPA stated when granting reconsideration that it 
was not reopening any issues dealing with the modeling platforms used 
for the revised Minnesota modeling. We reiterate that position here. 
EPA used CMAQ 4.3 for all of the air quality analyses conducted for the 
final CAIR, and provided full notice and opportunity to comment on the 
appropriateness of the model. See 69 FR 47828 (August 6, 2004) 
(announcing plan to use CMAQ 4.3 for the final rule); see also 70 FR 
25234-36 (summarizing the use of CMAQ 4.3). There was ample opportunity 
to comment on any issues regarding the adequacy of the model during the 
rulemaking. Nor is the existence of a new iteration of the model 
``grounds for * * * objection ar[ising] after the period for public 
comment'' (CAA section 307(d)(7)(B)). Predictive models are of course 
open to the possibility of updating and so are often adjusted. Such 
adjustments do not normally occasion new opportunities for comment, 
particularly after the close of a rulemaking. Indeed, doing so would 
create a perverse incentive to leave models unadjusted. The ultimate 
issue is whether the model used in the rulemaking bears a ``rational 
relationship to the characteristics of the data to which it is 
applied''. Appalachian Power v. EPA, 249 F. 3d 1032, 1052 (D.C. Cir. 
2001). There has already been full opportunity to comment on this 
issue.
    Accordingly, after careful examination of Minnesota Power's 
petition, as well as all comments submitted in response to EPA's 
notice, EPA continues to find that Minnesota emissions contribute 
significantly to downwind nonattainment of the PM2.5 NAAQS. 
EPA is therefore not amending the rule to remove Minnesota from the 
CAIR PM2.5 region.

D. Inclusion of Florida in the CAIR Region for Ozone

    Several petitioners sought reconsideration of EPA's determination 
to include Florida within the CAIR ozone region. Although there were 
substantial arguments that EPA had already provided adequate notice on 
this issue (see 70 FR at 72280; several commenters also indicated that 
this issue had already been noticed), EPA decided to grant the 
petition.
    EPA included Florida within the CAIR ozone region because emissions 
passed all of the contribution metrics EPA uses to evaluate 
significance of contribution for ozone, and because highly cost 
effective controls are available to control NOX emissions 
from the state. Specifically, Florida contributes significantly to 
nonattainment of the 8-hour ozone NAAQS in Fulton County, Georgia 
(which includes Atlanta). See 70 FR at 25249 (Table VI-9).
    Many commenters agreed with EPA's analysis. The petitioners and 
other commenters argued that Florida should

[[Page 25320]]

not be included within the CAIR ozone region at all, or that at most, 
only the northern portion of the State should be included. Although the 
reconsideration petitions originally challenged EPA's factual basis for 
including Florida within the CAIR ozone region, the petitioners were 
able to duplicate EPA's modeling results relating to magnitude of 
contribution, frequency of contribution, and relative amount of 
contribution (the three factors EPA evaluated in determining whether an 
upwind State's contribution to a downwind State could be considered 
significant), and therefore are not pursuing this claim. ``Assessment 
of the Contribution of Florida Emissions to Ozone Nonattainment Under 
EPA's Clean Air Interstate Rule'' (Morris, Tai, Tesche, and McNally) 
(October, 2005) (``Ozone Report'') at pp. 4-6 to 4-7; see also 
Supplemental Brief of Florida Power and Light in North Carolina v. EPA 
(D.C. Cir. No. 05-1244) at p. 9; Supplemental Brief of Florida Electric 
Utilities in the same case at pp. 5-6. Rather, the commenters are now 
challenging how to interpret the relative amount of contribution 
factor, which is one of the initial screening factors used by EPA to 
assess if it is appropriate to further analyze the significance of a 
State's contribution to downwind ozone nonattainment areas.
    In assessing relative amount of contribution, EPA stated that the 
amount would not be considered to contribute significantly if it was 
``less than one percent of total nonattainment in the downwind area''. 
70 FR at 25191 (at 70 FR 25175 and 70 FR 25246, EPA incorrectly 
described the metric as ``the average contribution is greater than one 
percent''; the correct formulation is as quoted above).\13\ The average 
percent contribution of Florida to nonattainment in Fulton County is 
0.81%. Document OAR-2003-0053-2214.\14\ Commenters argued that because 
0.81% is less than one percent, the relative amount of contribution is 
too small and therefore should not create a significant contribution 
linkage.
---------------------------------------------------------------------------

    \13\ See also CAIR Air Quality Modeling Technical Support 
Document at 32 (``[t]his initial screening was based on * * * a 
percent of total nonattainment of less than 1 percent'').
    \14\ There are three parts to the calculation of the average 
percent of nonattainment metric. In step 1, the ozone values for 
each of the exceedance periods in a particular downwind area (here, 
Fulton Co.) are summed over the three episodes. In step 2, the total 
ozone from the previous step that is due to anthropogenic sources is 
calculated based on the source apportionment results. In step 3, the 
contributions from a given source region to this downwind area are 
summed over the exceedance periods. The total contribution 
calculated in step 3 is then divided by the total nonattainment 
ozone resulting from manmade sources in step 2 to determine the 
fraction of ozone that is due to emissions from the upwind source 
area. The fractional value is multiplied by 100 to express the 
metric in terms of percent. The values in steps 1 and 2 are reported 
to the nearest integer. The value in step 3 is reported with one 
digit to the right of the decimal place. The final average percent 
of nonattainment value is reported to the nearest integer.
    Applied to Florida NOX emissions to Fulton County, 
this methodology yields the following:
    Step 1: Over the three episodes modeled, there was 120,511 ppb 
of ozone greater than or equal to 85.0 ppb (the level of the 8-hour 
NAAQS) in Fulton County.
    Step 2: From source apportionment modeling, 96,067 ppb of the 
ozone in Fulton Co. was determined to be of anthropogenic origin.
    Step 3: 781.0 ppb of the 8-hour ozone greater than or equal to 
85.0 ppb was determined via the source apportionment approach to be 
from emissions in Florida. Thus the average percent nonattainment is 
0.81 percent. This value was rounded to 1 percent.
    See generally the spreadsheet found in Document OAR-2003-0053-
2214.
---------------------------------------------------------------------------

    For all relative amount of contribution calculations (not just 
those involving Florida and Fulton County), EPA rounded the average 
percent of contribution figure up or down to the nearest integer value, 
so that values 0.5% and higher were rounded up to one percent, and 
values less than 0.5% were rounded down to zero.\15\ EPA agrees with 
the petitioners (and other commenters) that it would have been 
preferable if EPA had stated this rounding protocol explicitly.\16\ 
That being said, however, it is commonplace to round fractions up or 
down to the nearest integer.
---------------------------------------------------------------------------

    \15\ These commenters also correctly identified a small 
discrepancy in the final rule's technical analysis for assessing 
significance of upwind states' contribution to downwind states' 
ozone nonattainment. However, as we now explain, this discrepancy 
does not affect the ultimate conclusions as to which States should 
be included in the CAIR ozone control region. Values of the average 
percent contribution metric that were less than 1% after rounding to 
the nearest integer were determined not to be significant and were 
dropped from further evaluation. For the final CAIR modeling, values 
of this metric were calculated to one place to the right of the 
decimal, after rounding. In a later step of the process, EPA then 
rounded these data to the nearest integer. The net effect was an 
inappropriate ``double rounding'' for values that were between 0.450 
and 0.499 percent. EPA has recalculated the values for the average 
percent contribution metric without the inappropriate double 
rounding. Twenty upwind State-to-downwind nonattainment area 
linkages had average percent contribution values between 0.450 and 
0.499 percent that were erroneously rounded to 1% (rather than 0%). 
Of these twenty linkages, 19 did not pass other screening criteria, 
so the linkages were correctly categorized as not significant 
despite the ``double rounding'' in the calculation of the average 
percent contribution metric. The remaining linkage (Mississippi's 
contribution to Fulton Co., GA) did pass the other screening tests, 
but was subsequently determined in the post-screening aggregate 
determination of significance not to be significant based on EPA's 
evaluation of all of the contribution metrics. EPA has corrected the 
ozone contribution metrics tables in Appendix G of the CAIR Air 
Quality Modeling Technical Support Document.
    \16\ Nor is this the only instance of where EPA used the 
rounding protocol in applying the average percent of contribution 
metric. In total, nine of the 226 significant linkages in the entire 
CAIR ozone region using this metric had average percent 
contributions greater than or equal to 0.5 and less than 1.0 
percent. Two of these nine linkages, involving Massachusetts' 
average percent contribution, were between 0.5 and 1.0 percent and, 
like Florida's, were rounded up to 1 percent. See Revised Appendix G 
to Air Quality Modeling TSD.
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    These same commenters argued that due to the rounding convention, 
EPA's screening criteria was really .5% rather than one per cent and 
that this is too low a level to be considered significant. This comment 
appears to misapprehend critical aspects of EPA's significance 
determination process. As described on pp. 32-35 of the CAIR Air 
Quality Modeling Technical Support Document, this process contains four 
steps: (1) Evaluation of contributions against screening criteria, (2) 
evaluation of contributions from zero out modeling, (3) evaluation of 
contributions from source apportionment modeling, and (4) a final 
aggregate determination of significance. The average percent 
contribution metric is an initial screening step (a step to screen out 
contributions that are ``clearly small'', see id. at 32), which does 
not by itself identify a contribution as significant but rather 
determines whether further analysis of significance is justified. It is 
customary and appropriate for such initial screening steps to be 
conservative, that is, to cast a wider net, with further winnowing to 
occur in the subsequent steps when more detailed analysis is applied. 
EPA views the average percent of contribution screening level of one 
percent, with customary rounding, as reasonable to serve this screening 
function. This is confirmed by the further analysis applied to assess 
Florida contributions to nonattainment of the 8-hour NAAQS in Fulton 
County. In the case of the Florida contribution, steps 2 and 3 of the 
determination process indicated that there are large and frequent 
contributions from that State to elevated ozone concentrations in 
Fulton Co. EPA's CAIR modeling estimates that Florida can contribute as 
much as 3--5 ppb, depending on the modeling technique, toward modeled 
eight hour ozone exceedance periods in Fulton Co. Further, it was 
determined that between 10--13 percent of the modeled periods above 85 
ppb in Fulton Co. were affected by at least 2 ppb of ozone that 
resulted from emissions from Florida.\17\ This means that emissions 
from Florida can cause as much as 6 percent (5 ppb/

[[Page 25321]]

85 ppb) of the ozone in Fulton County during an exceedance period, and 
these emissions contribute at least 2 ppb during 10 per cent or more of 
Fulton County's exceedance periods, a contribution that reasonably can 
be regarded as significant. Accordingly, based on the magnitude and 
frequency, but not the relative amount of contribution, EPA determined 
that Florida's contribution to nonattainment in Fulton County, Georgia 
is significant.\18\
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    \17\ The criteria used to distinguish which values comprise a 
significant contribution are set out at p. 40 of the Air Quality 
Modeling TSD.
    \18\ As explained on p. 33 of the Air Quality Modeling TSD, for 
linkages in which the three contribution factors were not unanimous, 
we required that two of the three factors had to indicate high 
magnitude, frequent, and/or relatively large contributions in order 
to find that the linkage was significant. EPA applied this approach 
consistently to each of the linkages for which it made a 
significance determination.
---------------------------------------------------------------------------

    Commenters further argued that EPA was applying the rounding 
protocol inconsistently because in other instances, which they view as 
comparable, EPA truncates fractional digits (i.e. simply eliminates 
them), rather than rounds them. The examples given are the ozone 
magnitude of contribution metric (actual amount of ozone contributed by 
emissions in the upwind State to nonattainment in the downwind area), 
and the annual average PM2.5 contribution threshold.
    EPA does truncate when applying each of these metrics. The ozone 
magnitude of contribution metric quantifies a maximum impact (in parts 
per billion) on predicted exceedances for a downwind nonattainment 
area. The exceedance level--i.e. the level of the standard--for the 8-
hour ozone NAAQS is 85 parts per billion (`ppb') which is obtained by 
``report[ing] parts per million values to the third decimal place, with 
additional digits to the right being truncated''. 40 CFR part 50 App. I 
(``Interpretation of the 8-Hour Primary and Secondary National Ambient 
Air Quality Standard for Ozone'') at 2.1.1. The truncation protocol 
used in the magnitude of contribution metric is thus directly related 
to the form of the NAAQS itself. Because the magnitude of contribution 
metric is tied directly to the 8-hour NAAQS exceedance level, EPA uses 
the identical truncation protocol as is used in the NAAQS. In contrast, 
the average percent of nonattainment metric is not directly related to 
the form of the 8-hour ozone NAAQS (indeed, it is not related at all). 
As stated earlier, and illustrated in note 14 above, the metric 
assesses overall impacts which are expressed by aggregating all the 
impacts of a State on a downwind receptor divided by the total impacts 
from all anthropogenic emissions. Since there is no direct comparison 
with the ozone NAAQS, there is no reason to utilize the conventions 
used in expressing that NAAQS.
    The comments also maintain that EPA used a different protocol to 
evaluate when an upwind State's contribution to downwind nonattainment 
of the PM2.5 NAAQS is significant. EPA's metric for 
determining significant contribution to PM2.5 NAAQS 
nonattainment is 1 % of the standard, or .15 [mu]g/m3 which EPA rounds 
up to 0.2 [mu]g/m3. 70 FR at 25191. EPA took this step to avoid 
expressing the contribution metric using a greater level of precision 
(i.e. a greater number of digits) than is used in the NAAQS itself. Id. 
Since the PM2.5 contribution metric is expressed as a direct 
percentage of the NAAQS itself, it is appropriate that it conform to 
the form of the NAAQS. The percent of nonattainment metric at issue 
here, as explained above, is not directly related to the form of the 8-
hour ozone NAAQS, so there is no reason to adopt the conventions which 
are part of that form. For the same reason, there is no inconsistency 
in EPA's approach in choosing for purposes of PM contribution expressed 
in terms of a percent of the PM2.5 NAAQS to use the 
conventions used in the form of that NAAQS.
    The comments go on to say that even if it is reasonable to include 
Florida within the CAIR ozone region, only a portion of the state (the 
northern portion as delineated in the comments) should be included 
rather than the entire state.
    The commenters have the burden of demonstrating that EPA's approach 
of assessing significant contribution based on the collective emissions 
from the entire state lacks rationality. Appalachian Power v. EPA, 249 
F. 3d 1032, 1050 (D.C. Cir. 2001); see also State of Michigan v. EPA, 
213 F. 3d 663, 683-84 (D.C. Cir. 2000) (burden is on the party seeking 
to exclude a portion of a State to demonstrate that the portion is 
``innocent of material contribution''). As EPA explained in responding 
to these same commenters' motions for a stay of the rule in the D.C. 
Circuit (which response is part of the administrative record for this 
proceeding), not only have the commenters failed to carry their burden, 
but their modeling confirms that Florida represents a classic instance 
of collective contribution to downwind nonattainment. The commenters' 
report shows that both the (posited) northern and southern regions 
contribute substantial portions of the total ozone loading from Florida 
to Fulton County, namely 69 percent from the northern region and 31 
percent from the southern region. Ozone Report at 5-3. Nor does there 
appear to be any basis for the north-south divisions put forward in the 
comments. Not only does the report underlying the comments itself 
concede that there are a multitude of potential divisions (the Report 
suggests six ozone subregions in various permutations, and the Report 
further states that ``clearly numerous other ones could be also be 
constructed'' (Ozone Report at 5-1)), but that the ones put forward 
were done so essentially to show that the (posited) northern portion 
met significance criteria but the (posited) southern portion(s) does 
not. Ozone Report at 3-2. Accordingly, EPA does not agree with the 
commenters' arguments that contribution must be assessed on a different 
basis than EPA used in the rule.

E. Impact on CAIR Analyses of D.C. Circuit Decision in New York v. EPA

    As described in the December 29, 2005 CAIR Supplemental Notice of 
Reconsideration, ``Rule To Reduce Interstate Transport of Fine 
Particulate Matter and Ozone (Clean Air Interstate Rule): Supplemental 
Notice of Reconsideration'' (70 FR 77101-77113), EPA decided to grant 
Petitioner's request that EPA reconsider the impact of New York v. EPA, 
413 F.3d 3 (D.C. Cir. 2005) on certain analyses prepared for the final 
CAIR. One petitioner claimed that this June 2005 opinion of the D.C. 
Circuit raised questions about the sufficiency of certain analyses 
prepared for the CAIR. Among other things, the opinion vacated a 
provision of the New Source Review (NSR) regulations, commonly known as 
the pollution control project (PCP) exclusion. The CAIR Supplemental 
Notice of Reconsideration explained that EPA reviewed the petition for 
reconsideration and analyzed the potential impact of New York v. EPA on 
CAIR analyses regarding cost-effectiveness and timing. This analysis 
indicated that, as a result of the New York v. EPA decision, some 
electric generating units (EGUs) that install SO2 and/or 
NOX controls for CAIR may incur relatively minor additional 
costs and a few such units may be subject to additional permitting 
requirements, but that these potential impacts will neither affect the 
highly cost-effective determination that the Agency made in CAIR nor 
impact the timeframe for CAIR reductions.
    The CAIR Supplemental Notice of Reconsideration presented this and 
concluded that the potential impacts of the D.C. Circuit Decision in 
New York v. EPA do not alter the final highly cost-

[[Page 25322]]

effective determination made in the final CAIR and do not affect the 
feasibility of implementing the CAIR reductions in the required 
timeframe. Thus, the CAIR Supplemental Notice of Reconsideration did 
not propose any modifications to the final CAIR.
    Today's action finalizes EPA's determination that no modifications 
to the final CAIR are needed to address this issue and responds to 
public comments received on the CAIR Supplemental Notice of 
Reconsideration.

1. Background on the Impact on CAIR Analyses of D.C. Circuit Decision 
in New York v. EPA

    For background information on this issue, please refer to the CAIR 
Supplemental Notice of Reconsideration (70 FR 77103-77113).

2. Additional Analysis on the Impact on CAIR Analyses of D.C. Circuit 
Decision in New York v. EPA Presented in the CAIR Supplemental Notice 
of Reconsideration

    The CAIR Supplemental Notice of Reconsideration presented analysis 
that EPA conducted to evaluate the potential impact on CAIR Analyses of 
the D.C. Circuit Decision in New York v. EPA. The analysis first 
examined the potential cost and timing impacts of the decision, 
assuming units would take measures to mitigate any potential 
significant collateral increases in emissions of NSR-regulated 
pollutants. Then, the analysis examined the potential impact of NSR 
permitting on the CAIR cost-effectiveness and timing analyses.
    First, the analysis looked at the potential costs and timing 
implications of measures that could be taken to mitigate collateral 
emission increases and thus avoid NSR permitting. As part of the 
analysis, EPA made several assumptions it believes to be generally very 
conservative. However, the analysis still showed that the potential 
impacts would neither affect the highly cost-effective determination 
that the Agency made in the CAIR nor impact the timeframe for CAIR 
reductions. (See 70 FR 77105-77109).
    Second, the analysis examined the potential impact of NSR 
permitting. It showed that, although sources installing controls for 
CAIR generally will have options to avoid triggering NSR for collateral 
increases, some sources may conduct projects that could result in a net 
emissions increase despite possible mitigation measures. These sources 
might therefore apply for and obtain the necessary NSR permits to 
address such increase. EPA's analysis showed, however, that the impact 
of permitting of such sources on EPA's CAIR analyses is minimal. The 
Agency believes that the impacts of choosing to undertake NSR for these 
units are not substantial enough to affect the CAIR highly cost-
effective determination or the feasibility and timing analysis. (See 70 
FR 77109-77111).
    Overall, the analysis presented in the CAIR Supplemental Notice of 
Reconsideration showed that the decision to vacate the PCP exclusion 
under NSR does not require any modification of the final CAIR. The 
Notice thus did not propose any changes to the CAIR.

3. Public Comment on the CAIR Supplemental Notice of Reconsideration

    EPA received several comments on the Supplemental Notice of 
Reconsideration.\19\ Most of the commenters supported the conclusions 
in EPA's analysis regarding the impact of the New York v. EPA decision 
on both the cost-effectiveness analysis and timing analysis prepared 
for CAIR. Some commenters, however, did disagree with some aspects of 
the analysis that EPA performed in coming to its conclusion.
---------------------------------------------------------------------------

    \19\ These documents are available in the docket for the CAIR 
(EPA-OAR-2003-0053).
---------------------------------------------------------------------------

    One commenter, who generally agreed with EPA's conclusion that the 
potential impacts of D.C. Circuit Decision in New York v. EPA do not 
alter the final highly cost-effective determination made in the final 
CAIR and do not affect the feasibility of implementing the CAIR 
reductions in the required timeframe, disagreed with several points in 
the supporting analysis. First, the commenter does not believe that the 
emissions increases associated with coal switching identified in two 
categories of controls in EPA's analysis would be considered in 
calculating collateral emission increases. While EPA agrees that in 
most cases coal switching would not be included in calculating 
collateral emission increases for a PCP, this inclusion/exclusion is 
dependent upon the specific permit of the affected source. In its 
analysis, EPA made the conservative assumption that coal switching 
would be included in calculating collateral emission increases for PCPs 
involving SCR and/or FGD retrofits.
    In its cost-effectiveness analysis, EPA also made the conservative 
assumptions that all EGUs that will install SCR and/or wet FGD will 
experience a significant emissions increase in sulfuric acid mist and 
that all of those EGUs will install a wet ESP to mitigate those 
emissions. The commenter believes these assumptions are unrealistic. 
The Agency agrees that these assumptions lead to an overestimate of the 
cost impact of the decision in New York v. EPA, since the number of 
EGUs with collateral increases in sulfuric acid mist will be much 
smaller than the universe assumed in EPA's analysis and that the BACT 
determinations in those cases with significant increases in sulfuric 
acid mist may not involve the installation of wet ESP due to its high 
cost. As mentioned in the CAIR Supplemental Notice of Reconsideration, 
historically, BACT for sulfuric acid mist at combustion sources 
generally has been switching to lower sulfur coal or installation of 
wet FGD.
    The commenter argued that EPA improperly assumed that condensable 
emissions are regulated as a component of PM, and suggested that EPA's 
analysis was flawed in this respect. It should also be noted that EPA 
is not taking action to change the manner in which EPA treats 
condensable emissions. Further, the status of condensable emissions as 
a regulated NSR pollutant does not change the outcome of the Agency 
analysis discussed here. This analysis, which assumed that sulfuric 
acid mist would be regulated as a component of particulates, concludes 
that the New York v. EPA decision will not change the conclusions of 
the cost-effectiveness and timing analyses prepared for CAIR.\20\ If 
EPA were to assume, as the commenter suggests, that these emissions are 
not regulated as NSR pollutants, the conclusion of EPA's analysis would 
only be strengthened.\21\
---------------------------------------------------------------------------

    \20\ The commenter challenges these conclusions and says they 
only hold true if condensables are not regulated. However, the 
commenter offers no analysis to support this assertion or to 
identify any errors in EPA's analysis to support this argument.
    \21\ The commenter further notes that it would disagree with the 
conclusions in EPA's analysis if it assumes condensables are 
regulated; however, it does not provide any analysis to demonstrate 
that EPA's conclusions are flawed. As explained above and in the 
Supplemental Notice of Reconsideration, EPA's analysis shows that, 
even when very conservative assumptions are made, the court decision 
does not alter the conclusions of the analyses supporting the CAIR.
---------------------------------------------------------------------------

    The same commenter also suggested that for some large EGUs burning 
high sulfur coal and installing wet FGD, sulfuric acid mist emissions 
may exceed the NSR threshold. While this may be true in some cases, EPA 
does not feel that this will undermine the conclusions of the analysis 
in the CAIR Supplemental Notice of Reconsideration because of the very 
conservative assumptions made throughout the analysis (For purposes of 
its cost

[[Page 25323]]

analysis, EPA assumed that these units installed wet ESP). It is 
difficult to estimate the number of such units without permit 
information for all units at which this may occur. Further, as 
mentioned in the CAIR Supplemental Notice of Reconsideration, much of 
the SO3 produced by SCR does not reach the stack; SCR 
conditions favor a reaction between SO3 and ammonia that 
produces ammonia bisulfate, which condenses to form solid PM, the 
majority of which will be captured in the unit's particulate control 
device. Thus, EPA does not feel that many such units will reach the NSR 
threshold for sulfuric acid mist.
    Another commenter disagreed with EPA's assessment of potential 
collateral increases in CO from low NOX burners (LNB). While 
EPA believes that installing combustion control systems can lead to 
collateral increases in CO, triggering NSR, generally LNB will not 
significantly affect the combustion process and production of CO. It is 
the Agency's position that increases in CO can be minimized through 
adjustments of combustion control systems (e.g., good combustion 
practices), and at this time there are no other cost-effective control 
options for reducing CO. Therefore, even in cases where NSR is 
triggered, no significant additional control costs would be incurred.
    A third commenter asserts that ``based upon EPA's discussion in the 
Reconsideration Decision, [the commenter] understands that only those 
analyses performed by EPA and described in the Reconsideration Decision 
are needed to assess whether a PCP undertaken for CAIR compliance would 
increase emissions of any NSR regulated pollutant in an amount that 
exceeds the applicable NSR significance level. If there are other 
methods or means by which EPA believes a PCP performed for CAIR 
compliance would trigger NSR, or if, using EPA emission increase 
methodologies, EPA believes or would find that other air pollutant 
emissions would increase above an applicable NSR significance level as 
a result of PCPs that are expected to be performed for CAIR compliance, 
then the Reconsideration Decision is deficient.''
    The analysis presented in the CAIR Supplemental Notice of 
Reconsideration addresses only those general categories of projects 
that would have qualified as PCPs under the NSR rules vacated by the 
court and that we believe have the potential to increase collateral 
emissions of NSR regulated pollutants enough to trigger NSR. It is not 
our intent, nor is it within the scope of our analysis, to consider at 
this time what permitting requirements might apply to all categories of 
pollution control activities (including those that were not listed as a 
PCP under the NSR rules) that might be undertaken by EGUs attempting to 
comply with the CAIR requirements. The analysis was conducted to 
determine whether the elimination of the PCP exemption would impact the 
cost-effectiveness and timing analyses for the CAIR. Potential 
permitting requirements for categories of activities that would not 
have been subject to that exemption are not relevant to that 
analysis.\22\
---------------------------------------------------------------------------

    \22\ The analysis addresses all relevant categories of PCPs of 
which EPA is currently aware. The commenter failed to identify any 
concrete problems that they were concerned about facing or other 
relevant categories of PCPs. Moreover, in addressing the relevant 
general categories of PCPs, EPA does not purport to make 
determinations about whether NSR would be triggered in any specific 
PCPs undertaken to comply with the CAIR, EPA will consider, and make 
determinations based on, the specific circumstances of those 
projects.
---------------------------------------------------------------------------

    On all other major points, commenters agreed with EPA's analysis, 
and half of the commenters also explicitly agreed with EPA's conclusion 
that impacts of D.C. Circuit Decision in New York v. EPA do not alter 
the final highly cost-effective determination made in the final CAIR 
and do not affect the feasibility of implementing the CAIR reductions 
in the required timeframe. It should also be noted that other than the 
four commenters, no other affected parties offered problems associated 
with the impacts of D.C. Circuit Decision in New York v. EPA that might 
undermine the final CAIR cost-effective determination and timing of 
compliance dates.
    Today's action does not modify the final CAIR. In the CAIR 
Supplemental Notice of Reconsideration, EPA announced that it would 
reconsider the impact of the New York v. EPA decision on cost-
effectiveness and timing analyses prepared for the CAIR. The EPA 
analyzed the potential impact of the decision and solicited, considered 
and responded to public comment on that analysis. The EPA's analysis 
shows that the D.C. Circuit Decision in New York v. EPA does not 
significantly impact either the CAIR cost-effectiveness determination 
or the compliance dates. For that reason, EPA has determined that 
modifications to the final CAIR are not warranted. The Agency believes 
that installation of emission controls for CAIR, as well as other 
programs, is extremely beneficial and is working on ways to minimize 
permitting issues associated with installation of these devices in a 
way that is consistent with the D.C. Circuit Decision in New York v. 
EPA.

IV. Statutory and Executive Order Reviews

A. Executive Order 12866: Regulatory Planning and Review

    Under Executive Order 12866 (58 FR 51735, October 4, 1993), the 
Agency must determine whether the regulatory action is ``significant'' 
and, therefore, subject to Office of Management and Budget (OMB) review 
and the requirements of the Executive Order. The Order defines 
``significant regulatory action'' as one that is likely to result in a 
rule that may:
    (1) Have an annual effect on the economy of $100 million or more or 
adversely affect in a material way the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or Tribal governments or 
communities;
    (2) Create a serious inconsistency or otherwise interfere with an 
action taken or planned by another agency;
    (3) Materially alter the budgetary impact of entitlements, grants, 
user fees, or loan programs or the rights and obligations of recipients 
thereof; or
    (4) Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
the Executive Order.
    Pursuant to the terms of Executive Order 12866, OMB has determined 
that this is a significant regulatory action in view of its important 
policy implications. As a result, this action was submitted to OMB for 
review. However, this action does not promulgate any modifications to 
the CAIR. Therefore a regulatory impact analysis was not prepared.

B. Paperwork Reduction Act

    This action does not promulgate information collection request 
requirements under the provisions of the Paperwork Reduction Act, 44 
U.S.C. 3501 et seq. Therefore, an information collection request 
document is not required.
    Burden means the total time, effort, or financial resources 
expended by persons to generate, maintain, retain, or disclose or 
provide information to or for a Federal agency. This includes the time 
needed to review instructions; develop, acquire, install, and utilize 
technology and systems for the purposes of collecting, validating, and 
verifying information, processing and maintaining information, and 
disclosing and providing information; adjust the existing ways to 
comply with any previously applicable instructions and requirements; 
train personnel to be able to respond to a collection of

[[Page 25324]]

information; search data sources; complete and review the collection of 
information; and transmit or otherwise disclose the information.
    An agency may not conduct or sponsor, and a person is not required 
to respond to a collection of information unless it displays a 
currently valid OMB control number. The OMB control numbers for EPA's 
regulations in 40 CFR are listed in 40 CFR part 9.

C. Regulatory Flexibility Act

    EPA has determined that it is not necessary to prepare a regulatory 
flexibility analysis in connection with this final rule.
    For purposes of assessing the impacts of today's notice on small 
entities, small entity is defined as: (1) A small business that is a 
small industrial entity as defined in the U.S. Small Business 
Administration (SBA) size standards. (See 13 CFR part 121.); (2) a 
governmental jurisdiction that is a government of a city, county, town, 
school district or special district with a population of less than 
50,000; and (3) a small organization that is any not-for-profit 
enterprise which is independently owned and operated and is not 
dominant in its field.
    After considering the economic impacts of today's notice on small 
entities, I have concluded that this action will not have a significant 
economic impact on a substantial number of small entities. This notice 
does not impose any requirements on small entities. This notice does 
not promulgate any modifications to the CAIR.

D. Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public 
Law 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and Tribal 
governments and the private sector. Under section 202 of the UMRA, EPA 
generally must prepare a written statement, including a cost-benefit 
analysis, for proposed and final rules with ``Federal mandates'' that 
may result in expenditures by State, local, and Tribal governments, in 
the aggregate, or by the private sector, of $100 million or more in any 
1 year. Before promulgating an EPA rule for which a written statement 
is needed, UMRA section 205 generally requires EPA to identify and 
consider a reasonable number of regulatory alternatives and adopt the 
least costly, most cost-effective, or least-burdensome alternative that 
achieves the objectives of the rule. The provisions of section 205 do 
not apply when they are inconsistent with applicable law. Moreover, 
section 205 allows EPA to adopt an alternative other than the least-
costly, most cost-effective, or least-burdensome alternative if the 
Administrator publishes with the final rule an explanation why that 
alternative was not adopted. Before EPA establishes any regulatory 
requirements that may significantly or uniquely affect small 
governments, including tribal governments, it must have developed, 
under section 203 of the UMRA, a small government agency plan. The plan 
must provide for notifying potentially affected small governments, 
enabling officials of affected small governments to have meaningful and 
timely input in the development of EPA's regulatory proposals with 
significant Federal intergovernmental mandates, and informing, 
educating, and advising small governments on compliance with the 
regulatory requirements.
    The EPA has determined that today's notice does not contain a 
Federal mandate that may result in expenditures of $100 million or more 
for State, local, and Tribal governments, in the aggregate, or the 
private sector in any 1 year. Today's notice does not add new 
requirements that would increase the cost of the CAIR. Thus, today's 
notice is not subject to the requirements of sections 202 and 205 of 
the UMRA. In addition, EPA has determined that today's notice does not 
significantly or uniquely affect small governments because it contains 
no requirements that apply to such governments or impose obligations 
upon them. Therefore, today's notice is not subject to section 203 of 
the UMRA.

E. Executive Order 13132: Federalism

    Executive Order 13132, entitled ``Federalism'' (64 FR 43255, August 
10, 1999), requires EPA to develop an accountable process to ensure 
``meaningful and timely input by State and local officials in the 
development of regulatory policies that have federalism implications.'' 
``Policies that have federalism implications'' is defined in the 
Executive Order to include regulations that have ``substantial direct 
effects on the States, on the relationship between the national 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government.''
    This action does not have federalism implications. It would not 
have substantial direct effects on the States, on the relationship 
between the national government and the States, or on the distribution 
of power and responsibilities among the various levels of government, 
as specified in Executive Order 13132. The CAA establishes the 
relationship between the Federal Government and the States, and this 
action would not impact that relationship. Thus, Executive Order 13132 
does not apply to this action.

F. Executive Order 13175: Consultation and Coordination With Indian 
Tribal Governments

    Executive Order 13175, entitled ``Consultation and Coordination 
with Indian Tribal Governments'' (65 FR 67249, November 9, 2000), 
requires EPA to develop an accountable process to ensure ``meaningful 
and timely input by Tribal officials in the development of regulatory 
policies that have Tribal implications.''
    For the same reasons stated in the final CAIR \23\, today's notice 
does not have Tribal implications as defined by Executive Order 13175. 
It does not have a substantial direct effect on one or more Indian 
Tribes, since no Tribe has implemented a federally-enforceable air 
quality management program under the CAA at this time. Furthermore, 
this action does not affect the relationship or distribution of power 
and responsibilities between the Federal government and Indian Tribes. 
The CAA and the Tribal Air Rule establish the relationship of the 
Federal government and Tribes in developing plans to attain the NAAQS, 
and today's notice does nothing to modify that relationship. Because 
this notice does not have Tribal implications, Executive Order 13175 
does not apply.
---------------------------------------------------------------------------

    \23\ http://www.epa.gov/cair.

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

    If one assumes a Tribe is implementing a Tribal implementation 
plan, the CAIR could have implications for that Tribe, but it would not 
impose substantial direct costs upon the Tribe, nor would it preempt 
Tribal Law.
    Although Executive Order 13175 does not apply to the CAIR or this 
notice of final action on reconsideration of the CAIR, EPA consulted 
with Tribal officials in developing the CAIR.

G. Executive Order 13045: Protection of Children From Environmental 
Health and Safety Risks

    Executive Order 13045: ``Protection of Children From Environmental 
Health and Safety Risks'' (62 FR 19885, April 23, 1997) applies to any 
rule that (1) is determined to be ``economically significant'' as 
defined under Executive Order 12866, and (2) concerns an environmental 
health or safety risk that EPA has reason to believe may have 
disproportionate effect on children. If the regulatory action meets 
both criteria, the Agency must evaluate the

[[Page 25325]]

environmental health or safety effects of the planned rule on children, 
and explain why the planned regulation is preferable to other 
potentially effective and reasonably feasible alternatives considered 
by the Agency.
    This notice is not subject to Executive Order 13045 because it does 
not involve decisions on environmental health risks or safety risks 
that may disproportionately affect children. The EPA believes that the 
emissions reductions from the CAIR will further improve air quality and 
children's health.

H. Executive Order 13211: Actions That Significantly Affect Energy 
Supply, Distribution, or Use

    Executive Order 13211 (66 FR 28355, May 22, 2001) provides that 
agencies shall prepare and submit to the Administrator of the Office of 
Regulatory Affairs, OMB, a Statement of Energy Effects for certain 
actions identified as ``significant energy actions.'' Section 4(b) of 
Executive Order 13211 defines ``significant energy actions'' as ``any 
action by an agency (normally published in the Federal Register) that 
promulgates or is expected to lead to the promulgation of a final rule 
or regulation, including notices of inquiry, advance notices of final 
rulemaking, and notices of final rulemaking (1)(i) that is a 
significant regulatory action under Executive Order 12866 or any 
successor order, and (ii) is likely to have a significant adverse 
effect on the supply, distribution, or use of energy; or (2) that is 
designated by the Administrator of the Office of Information and 
Regulatory Affairs as a significant energy action.'' The final CAIR is 
a significant regulatory action under Executive Order 12866, and EPA 
concluded that the final CAIR rule may have a significant adverse 
effect on the supply, distribution, or use of energy. The impacts are 
detailed in the final CAIR (70 FR 25315). Today's notice is a 
significant action under Executive Order 12866, but it is not a 
rulemaking action and does not revise the final CAIR rule in any way. 
Therefore this action does not change EPA's previous conclusions 
regarding the energy impacts of CAIR. EPA's analysis of these impacts 
is explained in the preamble to the CAIR (70 FR 25315-16) and in the 
Regulatory Impact Analysis for the Final CAIR (March 2005).

I. National Technology Transfer Advancement Act

    Section 12(d) of the National Technology Transfer Advancement Act 
of 1995, Public Law No. 104-113, section 12(d) (15 U.S.C. 272 note) 
directs EPA to use voluntary consensus standards in its regulatory 
activities unless to do so would be inconsistent with applicable law or 
otherwise impractical. Voluntary consensus standards are technical 
standards (e.g., materials specifications, test methods, sampling 
procedures, and business practices) that are developed or adopted by 
voluntary consensus standards bodies. The National Technology Transfer 
Advancement Act of 1995 directs EPA to provide Congress, through OMB, 
explanations when the Agency decides not to use available and 
applicable voluntary consensus standards.
    Today's notice does not involve technical standards. Therefore, the 
National Technology Transfer and Advancement Act of 1995 does not 
apply.

J. Executive Order 12898: Federal Actions To Address Environmental 
Justice in Minority Populations and Low-Income Populations

    Executive Order 12898, ``Federal Actions to Address Environmental 
Justice in Minority Populations and Low-Income Populations,'' requires 
Federal agencies to consider the impact of programs, policies, and 
activities on minority populations and low-income populations. 
According to EPA guidance,\24\ agencies are to assess whether minority 
or low-income populations face risks or a rate of exposure to hazards 
that are significant and that ``appreciably exceed or is likely to 
appreciably exceed the risk or rate to the general population or to the 
appropriate comparison group.'' (EPA, 1998).
---------------------------------------------------------------------------

    \24\ U.S. Environmental Protection Agency, 1998. Guidance for 
Incorporating Environmental Justice Concerns in EPA's NEPA 
Compliance Analyses. Office of Federal Activities, Washington, DC, 
April, 1998.
---------------------------------------------------------------------------

    In accordance with Executive Order 12898, the Agency has considered 
whether the CAIR may have disproportionate negative impacts on minority 
or low income populations. The EPA expects the CAIR to lead to 
reductions in air pollution and exposures generally. Therefore, EPA 
concluded that negative impacts to these sub-populations that 
appreciably exceed similar impacts to the general population are not 
expected. For the same reasons, EPA is drawing the same conclusion for 
today's notice to reconsider certain aspects of the CAIR.

K. Congressional Review Act

    The Congressional Review Act, 5 U.S.C. 801 et seq., as added by the 
Small Business Regulatory Enforcement Fairness Act of 1996, generally 
provides that before a rule may take effect, the agency promulgating 
the rule must submit a rule report, which includes a copy of the rule, 
to each House of the Congress and to the Comptroller General of the 
United States. The EPA will submit a report containing this notice and 
other required information to the U.S. Senate, the U.S. House of 
Representatives, and the Comptroller General of the United States prior 
to publication of the notice in the Federal Register. A major rule 
cannot take effect until 60 days after it is published in the Federal 
Register. This action is not a ``major rule'' as defined by 5 U.S.C. 
804.

L. Judicial Review

    Section 307(b)(1) of the CAA indicates which Federal Courts of 
Appeal have venue for petitions of review of final actions by EPA. This 
section provides, in part, that petitions for review must be filed in 
the Court of Appeals for the District of Columbia Circuit if (i) the 
agency action consists of ``nationally applicable regulations 
promulgated, or final action taken, by the Administrator,'' or (ii) 
such action is locally or regionally applicable, if ``such action is 
based on a determination of nationwide scope or effect and if in taking 
such action the Administrator finds and publishes that such action is 
based on such a determination.''
    Final actions described in this Notice of Final Action on 
Reconsideration are ``nationally applicable'' within the meaning of 
section 307(b)(1). This Notice explains the final actions EPA is taking 
on the petitions for reconsideration of the CAIR. It describes EPA's 
final action on the six issues for which EPA previously granted 
reconsideration, and provides notice of EPA's decision to deny 
reconsideration of several additional issues. EPA has determined that 
all of these actions are of nationwide scope and effect for purposes of 
section 307(d)(1) because the actions directly affect the CAIR, which 
previously was found to be of nationwide scope and effect. Thus, any 
petitions for review of the final described in this Notice must be 
filed in the Court of Appeals for the District of Columbia Circuit 
within 60 days from the date this Notice is published in the Federal 
Register.

List of Subjects

40 CFR Part 51

    Administrative practice and procedure, Air pollution control, 
Intergovernmental relations, Nitrogen oxides, Ozone, Particulate 
matter, Regional haze, Reporting and

[[Page 25326]]

recordkeeping requirements, Sulfur dioxide.

40 CFR Part 96

    Administrative practice and procedure, Air pollution control, 
Electric utilities, Nitrogen oxides, Reporting and recordkeeping 
requirements, Sulfur dioxide.

    Dated: March 15, 2006.
Stephen L. Johnson,
Administrator.
[FR Doc. 06-2693 Filed 4-27-06; 8:45 am]

BILLING CODE 6560-50-P
