UNITED STATES ENVIRONMENTAL PROTECTION AGENCY

REGION III

	1650 Arch Street

	Philadelphia, Pennsylvania  19103

DATE:	September 17, 2007

SUBJECT:	Technical Support Document for the Notice of Proposed
Rulemaking - Virginia; Clean Air Interstate Rule Budget Trading Programs


FROM:	Marilyn Powers, Environmental Engineer

Air Quality Planning Branch 

TO:		File

A.  BACKGROUND

EPA promulgated new, more protective national ambient air quality
standards (NAAQS) for 8-hour ozone and fine particulate matter (PM2.5)
in July 1997.  States were required to submit SIP revisions for the new
standards three years after promulgation.  In June 2004, EPA designated
the areas that are not attaining the new ozone standard, and in December
2004 designated the areas that are not attaining the new PM2.5 standard.
 However, EPA determined that transported emissions from upwind states
constitute a major fraction of the 8-hour ozone and PM2.5 problem in the
eastern portion of the U.S.  Section 110(a)(2)(D) of the Clean Air Act
requires that States eliminate transported emissions that are
significantly contributing to or interfering with maintenance of
nonattainment areas in downwind states.  As in the NOx SIP Call (63 FR
57356 dated October 27, 1998), eliminating significant contribution is
not designed to eliminate all contributions to transport, but rather to
balance the burden for achieving attainment between regional-scale and
local-scale control programs.

The Clean Air Interstate Rule (CAIR) was published by EPA on May 12,
2005 (70 FR 25162).   In this rule, EPA, based on air quality modeling
analyses and cost analyses, determined that 28 States, including
Virginia, and the District of Columbia contribute significantly to
nonattainment and interfere with maintenance of the NAAQS for PM2.5 and
/or 8-hour ozone in downwind States in the eastern part of the country. 
As a result, EPA required those upwind States to revise their SIPs to
include control measures that reduce emissions of SO2, which is a
precursor to PM2.5 formation, and/or NOX, which is a precursor to both
ozone and PM2.5 formation.  For jurisdictions that contribute
significantly to downwind PM2.5 nonattainment, CAIR sets annual
State-wide emission reduction requirements (i.e., budgets) for SO2 and
annual State-wide emission reduction requirements for NOX.  Similarly,
for jurisdictions that contribute significantly to 8-hour ozone
nonattainment, CAIR sets State-wide emission reduction requirements for
NOX for the ozone season (May 1st to September 30th).  These emission
reductions were established using an approach based on application of
controls that EPA has determined to be highly cost effective.   For
CAIR, EPA has determined that highly cost effective controls are
available on electric generating units (EGUs).  This approach for
determining the state budgets was used in the NOx SIP Call, a program
that has proven to be a successful program for addressing regional
emissions.  

Under CAIR, States may implement these reduction requirements by
participating in the EPA-administered cap-and-trade programs or by
adopting any other control measures.  CAIR lays out to subject States
what must be included in SIPs to address the requirements of section
110(a)(2)(D) of the Clean Air Act (CAA) with regard to interstate
transport with respect to the 8-hour ozone and PM2.5 NAAQS.

  EPA made national findings, effective on May 25, 2005, that the States
had failed to submit SIPs meeting the requirements of section
110(a)(2)(D).  The SIPs were due in July 2000, 3 years after the
promulgation of the 8-hour ozone and PM2.5 NAAQS.  These findings
started a 2-year clock for EPA to promulgate a Federal Implementation
Plan (FIP) to address the requirements of section 110(a)(2)(D).  Under
CAA section 110(c)(1), EPA may issue a FIP anytime after such findings
are made and must do so within two years unless a SIP revision
correcting the deficiency is approved by EPA before the FIP is
promulgated.  

	

	On April 28, 2006, EPA promulgated FIPs for all States covered by CAIR
in order to ensure the emissions reductions required by CAIR are
achieved on schedule.  Each CAIR State is subject to the FIPs until the
State fully adopts, and EPA approves, a SIP revision meeting the
requirements of CAIR.  The CAIR FIPs require EGUs to participate in the
EPA-administered CAIR SO2, NOX annual, and NOX ozone season trading
programs, as appropriate.  The CAIR FIP SO2, NOX annual, and NOX ozone
season trading programs impose essentially the same requirements as, and
are integrated with, the respective CAIR SIP trading programs.  The
integration of the FIP and SIP trading programs means that these trading
programs will work together to create effectively a single trading
program for each regulated pollutant (SO2, NOX annual, and NOX ozone
season) in all States covered by the CAIR FIP or SIP trading program for
that pollutant.  The CAIR FIPs also allow States to submit abbreviated
SIP revisions that, if approved by EPA, will automatically replace or
supplement certain CAIR FIP provisions (e.g., the methodology for
allocating NOX allowances to sources in the State), while the CAIR FIP
remains in place for all other provisions.  

On April 28, 2006, EPA published two additional CAIR-related final rules
that added the State of Delaware and New Jersey to the list of States
subject to CAIR for PM2.5 and announced EPA’s final decisions on
reconsideration of five issues, without making any substantive changes
to the CAIR requirements.

B.  EPA REQUIREMENTS

CAIR establishes State-wide emission budgets for SO2 and NOX and is to
be implemented in two phases.  The first phase of NOX reductions starts
in 2009 and continues through 2014, while the first phase of SO2
reductions starts in 2010 and continues through 2014.  The second phase
of reductions for both NOX and SO2 starts in 2015 and continues
thereafter.  CAIR requires States to implement the budgets by either:
(1) requiring EGUs to participate in the EPA-administered cap-and-trade
programs; or (2) adopting other control measures of the State's choosing
and demonstrating that such control measures will result in compliance
with the applicable State SO2 and NOX budgets. 

The May 12, 2005 and April 28, 2006 CAIR rules provide model rules that
States must adopt (with certain limited changes, if desired) if they
want to participate in the EPA-administered trading programs.  The model
rules apply to stationary fossil fuel-fired boilers or stationary fossil
fuel-fired turbines serving at any time, since the start-up of the
unit’s combustion chamber, a generator with a nameplate capacity of
more than 25 megawatt (MWe) producing electricity for sale.  They also
apply to units that qualify as cogeneration units that serve at any time
a generator with a 25 MWe capacity and supplying more than one-third of
the units potential electric output capacity or 219,000 MWe, whichever
is greater, to any utility power distribution system.

With two exceptions, only States that choose to meet the requirements of
CAIR through methods that exclusively regulate EGUs are allowed to
participate in the EPA-administered trading programs.  One exception is
for States that adopt the opt-in provisions of the model rules to allow
non-EGUs individually to opt into the EPA-administered trading programs.
 The other exception is for States that include all non-EGUs from their
NOX SIP Call trading programs in their CAIR NOX ozone season trading
programs.

States have the flexibility to choose the type of control measures they
will use to meet the requirements of CAIR.  EPA anticipates that most
States will choose to meet the CAIR requirements by selecting an option
that requires EGUs to participate in the EPA-administered CAIR
cap-and-trade programs.  For such States, EPA has provided two
approaches for submitting and obtaining approval for CAIR SIP revisions.
 States may submit full SIP revisions that adopt the model CAIR
cap-and-trade rules.  If approved, these SIP revisions will fully
replace the CAIR FIPs.  Alternatively, States may submit abbreviated SIP
revisions.  These SIP revisions will not replace the CAIR FIPs; however,
the CAIR FIPs provide that, when approved, the provisions in these
abbreviated SIP revisions will be used instead of or in conjunction
with, as appropriate, the corresponding provisions of the CAIR FIPs
(e.g., the NOX allowance allocation methodology). 

A State submitting a full SIP revision may either adopt regulations that
are substantively identical to the model rules or incorporate by
reference the model rules.  CAIR provides that States may only make
limited changes to the model rules if the States want to participate in
the EPA-administered trading programs.  A full SIP revision may change
the model rules only by altering their applicability and allowance
allocation provisions to:

Include  NOX SIP Call trading sources that are not EGUs under CAIR in
the CAIR NOX ozone season trading program;

Provide for State allocation of  NOX annual or ozone season allowances
using a methodology chosen by the State;

Provide for State allocation of  NOX annual allowances from the
compliance supplement pool (CSP) using the State’s choice of  allowed,
alternative methodologies; or

Allow units that are not otherwise CAIR units to opt individually into
the CAIR SO2, NOX annual, or NOX ozone season trading programs under the
opt-in provisions in the model rules. 

An approved CAIR full SIP revision addressing EGUs’ SO2, NOX annual,
or NOX ozone season emissions will replace the CAIR FIP for that State
for the respective EGU.

The CAIR NOX annual and ozone season budgets were developed from
historical heat input data for EGUs.  Using these data, EPA calculated
annual and ozone season regional heat input values, which were
multiplied by 0.15 lb/mmBtu, for Phase 1, and 0.125 lb/mmBtu, for Phase
2, to obtain regional NOX budgets for 2009-2014 and for 2015 and
thereafter, respectively. EPA derived the State NOX annual and ozone
season budgets from the regional budgets using State heat input data
adjusted by fuel factors.

	The CAIR State SO2 budgets were derived by discounting the tonnage of
emissions authorized by annual allowance allocations under the Acid Rain
Program under title IV of the CAA.  Under CAIR, each allowance allocated
in the Acid Rain Program for the years in phase 1 of CAIR (2010 through
2014) authorizes 0.5 ton of SO2 emissions in the CAIR trading program,
and each Acid Rain Program allowance allocated for the years in phase 2
of CAIR (2015 and thereafter) authorizes 0.35 ton of SO2 emissions in
the CAIR trading program

C.  EVALUATION OF STATE SUBMITTAL:

	On March 30, 2007, the Virginia Department of Environmental Quality
(VADEQ) submitted a SIP revision consisting of adopted amendments to
regulation 9 VAC 5-140 entitled “Regulation for Emissions Trading”. 
This regulation, submitted to meet the requirements of CAIR, is
comprised of three parts:  its NOx Annual Trading Program 9 VAC
5-140-1010 through 1880, its NOx Ozone Season Trading Program (9 VAC
5-140-2010 through 2880), and its Annual SO2 Trading Program (9 VAC
5-140-3010 through 3880).  

On April 30, 2007, VADEQ submitted a supplement to its CAIR regulation,
consisting of an errata notice, that corrected publication printing
errors that were made in the original March 19, 2007 Virginia Register
notice.  On June 14, 2007, VADEQ submitted another supplement to revise
the initial NOx allowance allocations that were included in the March
30, 2007 submittal to demonstrate compliance with the Commonwealth’s
NOx budget.

EPA believes that Virginia clearly intends, by its SIP submittal, to
replace the CAIR FIP with a State plan that is based on the CAIR model
rule and allow sources that are subject to CAIR, non-EGUs from its NOx
SIP Call budget trading program, and opt-in units meeting the CAIR
opt-in criteria to participate in the EPA-administered regional CAIR
trading program.  However, EPA also believes that there are some
provisions of the amendments to 9 VAC 5-140 that could be interpreted in
a way that might be inconsistent with the Commonwealth’s intent. 
These provisions are 1) the definitions for  “CAIR NOx Annual Trading
Program”, “CAIR NOx Ozone Season Trading Program”, “CAIR SO2
Trading Program”, and “Permitting authority”  set forth in 9 VAC
5-140-1020, 9 VAC 5-140-2020, and 9 VAC 5-140-3020 pertaining to
Virginia’s participation in the regional CAIR trading program, 2) the
definitions for “Commence commercial operation”, “Commence
operation”, and “Fossil fuel-fired” set forth in 9 VAC 5-140-2020
pertaining to the Commonwealth’s election to bring its non-EGUs from
its NOx SIP Call budget trading program into CAIR as trading sources,
and 3) the definition of “Most stringent state or federal NOx
emissions limitation,” in 9 VAC 5-140-1020 and 9 VAC 5- 140-2020
pertaining to the most stringent emission limit that will be used for
determining opt-in units’ allocations when those units have a permit
that allows the use of more than one fuel.  

On September 12, 2007, EPA sent a letter asking Virginia to confirm that
EPA correctly understood how to interpret these regulatory definitions. 
In response to the letter, VADEQ sent a letter, dated September 17,
2007, confirming in writing its interpretations of these regulatory
provisions.  EPA has reviewed VADEQ’s interpretations and has
determined that they clarify and are consistent with the language of the
Virginia regulations.  EPA has also determined that they are consistent
with having the EPA-administered CAIR trading program become effective
in Virginia.  In addition, the letter accepts EPA’s recommendation
that the Commonwealth amend these provisions at the earliest possible
time to codify regulations with clarifying language.

EPA’s evaluation of Virginia’s SIP revision as it pertains to the
four areas that States have flexibility in making changes to the model
rule is as follows:

1.  Inclusion of NOX SIP Call trading sources that are not EGUs under
CAIR in the CAIR NOX ozone season trading program

	Virginia has chosen to include the non-EGUs that are trading sources
under its NOx SIP Call trading program (9 VAC 5-140 Regulation for
Emissions Trading) into its CAIR NOx ozone season trading program.  The
NOx SIP Call non-EGUs being brought in are listed in 9 VAC 5-140- 2430
of the CAIR NOx ozone season trading program. 

	To effect the inclusion of these units into CAIR, the Commonwealth has
added the applicability provisions pertaining to non-EGUs into its NOx
SIP Call trading program (9 VAC 5-140-40) into the CAIR NOx ozone season
applicability provisions at 9 VAC 5-140-2040(C) to apply expressly to
the non-EGUs and to assure that all affected sources are covered by the
rule as required under the NOx SIP Call.  The Commonwealth has also
included the applicability provisions for EGUs under the NOx SIP Call to
ensure that any EGUs that are subject to the NOx SIP Call but may
potentially be exempt under CAIR, are also brought into CAIR.  Also, the
definitions of “fossil fuel” and “cogeneration unit” differ
between the NOx SIP Call and CAIR.   The Commonwealth has included these
definitions in its CAIR NOx ozone season trading program to apply only
for purposes of determining applicability under 9 VAC 5-140-2040(C) for
units that are not EGUs as defined in CAIR.   Finally, the Commonwealth
has supplemented the definition of “commence commercial operation”
to address the fact that non-EGUs may not generate electricity, and so,
would never “commence commercial operation” as defined under the
CAIR NOx ozone season trading rule.  With this additional language,
Virginia’s CAIR NOx ozone season trading program will cover all large
industrial boilers and combustion turbines that the State currently
requires to be in the NOx SIP Call trading program.

Provide for State allocation of  NOX annual or ozone season allowances
using a methodology chosen by the State

	Virginia has chosen to modify the model rule allocation methodology in
two ways.  First, instead of January 1, 1999, it has chosen to use a
date of January 1, 2006 for the commencement of operation date that is
used for purposes of calculating a unit’s baseline heat input.  The
baseline heat input for units that commenced operation before this date
is calculated in accordance with the model rule for units that were in
operation for five consecutive years prior to January 1, 2006 , i.e. the
average of the three highest amounts of the unit’s control period heat
input for the five years prior to the allocation year.  For units that
operated each calendar year for at least one but less than five
consecutive calendar years, one year, or, the average of the two highest
amounts of the unit’s control period heat input over the consecutive
years of operation.

	Similarly, for units that commence operation after January 1, 2006, the
baseline heat input for a unit that operated each calendar year during a
period of five or more consecutive calendar years, the calculation is
consistent with the model rule.  However, for units that operated less
than five consecutive calendar years, a baseline heat input is
calculated for units that operated for at least three but less than five
consecutive years, and a baseline is calculated for units that operated
for at least one but less than five consecutive years.  

	Second, Virginia has chosen to modify the type and amount of set aside
allocations.  Virginia has established a new unit set aside, but has
modified the amount of the set aside to 4 percent for the control
periods in 2009 through 2013, and one percent for the control periods in
2014 and after.  It has also established a set aside for energy
efficiency and/or renewable energy projects in the Commonwealth, in an
amount equal to one percent of the total state budget.  The rule sets
forth the methodology for allocation to these units.  The State has also
established a set-aside for public health that would be voluntarily
populated with allowances from any holder of NOx allowances.  Any
allowances placed into this set-aside would be retired.

	Finally, Virginia has established an emissions cap for EGUs in the
northern Virginia portion of the DC Nonattainment area.  Such a cap is
within the flexibilities of CAIR.  The cap limits emissions of sources
to the amount of allowances originally allocated by the Commonwealth. 
During the proposal phase of Virginia’s rulemaking, EPA commented on
the nonattainment area provisions, and Virginia modified the language
pertaining to the emissions cap to address EPA’s comments.  However,
Virginia has chosen not to submit its nonattainment provisions as part
of its CAIR SIP revision, and EPA is not taking action on this portion
of regulation 9 VAC 5-140.  It is only mentioned here to note that the
state-only provision does not interfere with the trading program under
CAIR.

3.  Provide for State allocation of  NOX annual allowances from the
compliance supplement pool (CSP) using the State’s choice of  allowed,
alternative methodologies

	Virginia has chosen to allocate the NOx annual allowances from the
compliance supplement pool, using a modified approach from the
methodology in the model rule.  The model rule allows use of the CSP to
reward sources that have reduced emissions prior to the 2009 compliance
date of the NOx annual trading program, or to be given out to sources
that experience unforeseen difficulty in complying during the 2009
control period.

	The provisions pertaining to the CSP are in 9 VAC-5-140-1420 of the NOx
annual trading program.  The 5,134 tons of allowances in the State’s
CSP will be allocated to units identified as early reduction credit
(ERC) units, which are defined in Virginia’s rule as CAIR NOx units
that are part of a group of units under single ownership with combined
emissions of NOx that exceeded 40,000 tons in 2004.  The rule stipulates
that these units must collectively reduce emissions in 2007 and/or 2008
that equal the amount of allowances in the CSP.  The CSP allowances to
be allocated to each ERC unit is determined by multiplying the total
amount of allowances in the CSP by the ratio of the baseline heat input
of each ERC unit to the total amount of baseline heat input of all
affected ERC units, using a baseline heat input for the calendar year
2004 as determined in accordance with 40 CFR Part 75 to the extent the
unit was otherwise subject to the requirements of 40 CFR Part 75 for
that year, or if the unit was not subject to 40 CFR Part 75, based on
the best available data reported to the State.  A compliance
demonstration is required to be submitted in the aggregate for ERC units
under single ownership by May 1, 2009, and penalty provisions apply if
the reductions are not achieved as required.

4.  Allow units that are not otherwise CAIR units to opt individually
into the CAIR SO2, NOX annual, or NOX ozone season trading programs
under the opt-in provisions in the model rules. 

	

	Virginia has chosen to adopt the model rule provisions for individual
unit opt-ins for all three trading programs.  These provisions are set
forth in 9 VAC 5-140-1800, 9 VAC-5-140-2800, and 9 VAC 5-140-3800,
respectively.

D.  CONCLUSIONS AND RECOMMENDED AGENCY ACTION:

Virginia has adopted regulations that are substantively identical to
EPA’s model rule, with modifications that are consistent with the
limited changes allowed in order for a State to participate in the
EPA-administered CAIR trading program. The SIP revision strengthens the
Virginia SIP and is recommended for approval.

 PAGE  8 

