DRAFT - FOR DISCUSSION PURPOSES special permits or variances tailored to the specific circumstances affecting a particular plant, the process for issuing such individualized variances is resource-intensive and has historically required state and EPA approval through a notoriously slow "SIP revision" process. 25/ EPA took steps in 1986 to streamline the process for relaxing SIP requirements through plant-specific emissions control strategies by issuing its Emissions Trading Policy Statement (ETPS).26/ The ETPS articulates the so-called "bubble policy" under which existing plants are treated as if they were located within an imaginary "bubble." Within the "bubble", an operator can implement voluntary emissions reductions at one part of the plant, in place of the installation of controls that would otherwise be mandated by a general SIP regulation for equipment at another part of the same plant. The ETPS establishes basic ground rules for this type of emissions trading to ensure that specific trades do not interfere with other requirements of the Act, and that individual trades will (1) be quantifiable; (2) be consistent with NAAQS attainment demonstrations; (3) not allow credit for reductions required by and credited to other implementation plan provisions (to avoid double counting of reductions); (4) be enforceable at both the State and Federal levels; and (5) ensure that emission reductions are permanent within the timeframe specified by the requirement for which compliance is being achieved through the trade. 27/ These basic ground rules for emissions trades do not necessarily place an undue hardship on companies which seek to utilize the bubble policy as a SIP compliance option. However, one significant difficulty facing such companies has been and continues to be the necessity of securing approval of each trade through the case-by-case SIP revision process. The SIP revision process essentially involves notice and comment rulemaking which can consume several months or even years, and the uncertainty of the process has seriously undercut the practical benefits of the ETPS.28/ The ETPS expressly provides for state "generic" bubble approval procedures. Under a generic bubble rule states are allowed to approve plant-specific plans that waive or relax SIP requirements without having to submit those plans to EPA for "SIP revision" approval. Typically, a state generic bubble rule involves an EPA-approved, state-administered program under which individual plants are allowed to develop and secure state approval of enforceable plans to achieve the emission reduction and air quality improvement objectives of a particular SIP requirement in an "alternative" manner. 25 See 57 FR 13568, April 16, 1992; See also 57 FR 32259, July 21, 1992. 51 FR 43814, December 4, 1986. 271 See 51 FR 43837, December 4, 1986. See also 58 FR 11111, February 23, 1993 which restates the agency's policy on emissions trading criteria. 28/ Id. DRAFT - FOR DISCUSSION PURPOSES By approving generic bubble rules, EPA approves in advance an array of acceptable SIP emission limits so that further EPA SIP revision approval is not required for trades which meet the terms of the state's approved rule. Although EPA may comment on trades proposed by the state under generic rules and may conduct audits of trades actually approved under those rules, the time-consuming and uncertain process of seeking an individual SIP revision from EPA for each individual trade can be avoided. Relatively few generic bubble regulations have been submitted to or approved by EPA. In our opinion, generic SIP bubble provisions hold great promise under the 1990 CAA Amendments and offer one of the most attractive options available for encouraging innovation and flexibility. further, by streamlining the process, generic bubbles could allow emission reductions to begin sooner, resulting in a net environmental benefit. The Clean Air Act's new Title V operating permit program (scheduled for implementation by the states beginning in 1994-95) could provide an ideal procedural mechanism through which SIP generic bubble regulations could be codified into individual plant operating permits, thereby allowing such plants to implement specified types of emissions trades on their own -- without having to modify their permit and without having to wade into the SIP revision process. 29/ EPA's July, 1992 operating permit regulations expressly provide this option to the states as they begin to implement the new operating permit requirements of the 1990 Amendments. 30/ The 1990 CAA Amendments expressly require the inclusion of economic incentive programs in all state implementation plans. EPA has recently proposed its new Economic Incentive Program (EIP) regulations for implementing this new CAA requirement and has acknowledged that this new statutory directive will effectively require the Agency to broaden its Emissions Trading Policy. 32 Since EPA guidelines and procedures for generic bubble programs have been in place for several years, such programs should be among the most attractive alternatives available to EPA and the states for complying with the new economic incentive requirements. In those relatively few jurisdictions which have adopted them, such programs have a proven track record of enabling plants to implement cost-effective plantspecific SIP compliance strategies in a matter of months, rather than years. 29/ See 57 FR 32258, July 21, 1992. 30/ 40 CFR §§ 70.4(b)(12)(ii), 70.6(a)(8); See 57 FR 32266, July 21, 1992. 31/ CAA § 110(a)(2)(A). 32/ See 57 FR 13559, April 16, 1992; 58 FR 11110, February 23, 1993. DRAFT-FOR DISCUSSION PURPOSES EPA's new "EIP" rule33 should further encourage states to develop and implement other market incentives in their state implementation plans as a means of achieving and maintaining compliance with ambient air quality standards for ozone and carbon monoxide. The EIP rule will afford states three general option categories for using economic incentives. One category covers tradeable permit systems similar to the acid rain emission allowance trading program discussed above and the reformulated gasoline/oxygenated fuels marketable credit programs being implemented by EPA under Title II of the Act.34 Another category will include financial incentives to change industry/business/public behavior, such as fees or taxes on emissions or emission-producing products or activities. The third category will include indirect incentives for "behavioral changes", such as downtown parking restrictions to encourage use of mass transit or carpooling. The EIP proposal allows states to use a wide range of economic incentives within these three broad categories. Taxes and subsidies that encourage environmentally beneficial practices and lifestyles are proposed, as are early emission reduction strategies which provide regulatory incentives for plants to achieve required reductions earlier than called for by regulations. Many states have already adopted or are actively considering adoption of these and other innovative incentives to reduce air pollution. For example, California regulators are nearing completion of a regional clean air incentives market program known as RECLAIM.35/ The full range of opportunities under the CAA for emissions trading between mobile and stationary sources has not yet been fully explored or tapped by EPA. Titles I and II of the amended Clean Air Act contain numerous provisions which will lead to significant reductions in emissions from new and existing motor vehicles. Some of the more significant of these provisions include employer trip reduction programs, clean fuels requirements, clean car standards, stage II vapor recovery for gasoline stations and enhanced vehicle inspection and maintenance programs. To the extent that Title II programs and revised nonattainment area SIPs are able to achieve substantial reductions in mobile source emissions, the burden on the stationary source sector to generate emissions reductions may be correspondingly relaxed. In many 33/ 58 FR 11110, February 23, 1993; to be codified at 40 CFR Part 51, Subpart S. 34 See 57 FR 4419(1992). 35 See Inside EPA, Clean Air Report, April 8, 1993. DRAFT - FOR DISCUSSION PURPOSES urban areas, mobile source reductions in VOC and NO, could supply a large percentage of the reductions needed to demonstrate attainment. 36/ There is no statutory impediment to extending stationary source emission reduction credit for voluntary initiatives by private parties to bring about mobile source emissions reductions that would not otherwise result from the SIP. One increasingly popular idea is auto scrappage - a program for which emissions reduction credit is provided for retiring older, higher-emitting cars. Such scrappage programs may generate emissions reduction "credits" that can be applied toward compliance with stationary source VOC or NO, reduction obligations at the facility implementing the program. 37 Considering the wide variety of mobile source/transportation control strategies that have not yet been attempted in many urbanized nonattainment areas, this approach to emissions trading offers many exciting possibilities. 38/ On February 23, 1993, EPA published Interim Guidelines on the Generation of "Mobile Source Emission Reduction Credits" (MERC).39 These guidelines supplement the Agency's proposed EIP rules. According to EPA's MERC guidance document, MERCs can be employed to satisfy (1) general SIP emission reduction requirements (2) RACT and other general emissions reduction requirements in nonattainment areas and (3) emissions offsets requirements for purposes of nonattainment new source review. However, EPA's guidance takes the position that MERCS may not be used to satisfy the requirements of PSD Best Available Control Technology (BACT), Lowest Achievable Emission Rate technology (LAER), New Source Performance Standards (NSPS), Federal Inspection and Maintenance for In-Use Motor Vehicles (I/M), and Employer Trip Reduction (ETR) programs. With respect to BACT and LAER, EPA takes the position that these requirements are technology-based emissions limitations that must be met, where applicable, by specific stationary sources without reliance on emissions trading or averaging.40/ While BACT and LAER have historically been technology-based requirements, they are defined in the Act in terms of emission reductions or limitations. Nothing in the Clean 36 See 57 FR 13503, April 16, 1992. 371 See 58 FR 11134, February 23, 1993. 38/ Another concept that might warrant further investigation is the possibility that individual petroleum companies could be awarded nationwide emissions reduction credits for developing fuels that exceed mandated "low emissions" characteristics. 39/ 58 FR 11134. 40 See 58 FR 11135, February 23, 1993. DRAFT - FOR DISCUSSION PURPOSES Air Act expressly precludes EPA from allowing facilities to comply with these requirements through emissions trading strategies (i.e., strategies that would allow for less stringent control on emissions from new or modified units in return for additional [offsetting] control of other sources of the same pollutant). The relevant statutory provisions simply require new and modified major emitting facilities to be "subject to" or "comply with" the requisite level of control (BACT in the case of PSD; LAER in the case of nonattainment area NSR).41/ In the case of physical/operational changes at existing facilities (i.e., modifications), the statute imposes these technology-based emissions control requirements on "the proposed facility" (see CAA § 165(a)(4)) or "the proposed source" (see CAA § 173(a)(2)). The BACT and LAER requirements, as interpreted by EPA regulations, apply to the new or altered equipment that triggers NSR requirements. However, the statute does not mandate such a limited interpretation. Congress clearly understands the difference between the terms "source" and "facility," which have historically authorized broad or narrow EPA definitions as appropriate to achieve specific policy objectives, 42 and less expansive terms such as "unit," "discrete operation" or "pollutant emitting activity" which are employed for requirements that are to be achieved on an equipment-specific basis and for which EPA is not authorized to provide for facility-wide emissions averaging strategies. Had Congress intended to preclude EPA from utilizing emissions trading as a BACT or LAER compliance option, it would presumably have imposed such a limitation by specifying that these requirements were to apply to the specific "units, operations or activities" being constructed or modified at the facility or source in question. Indeed, in the 1990 CAA Amendments, Congress imposed just such a limitation on the ability of modification projects to "net out" of NSR requirements in ozone nonattainment areas designated as serious, severe or extreme.43/ In such areas, if a physical or operation change occurs at any major stationary source of volatile organic compounds (VOC) and that change results in any increase (other than a de minimis increase) in emissions of VOC from any discrete operation, unit, or other pollutant emitting-activity at the source, the increase shall be considered a "modification" for purposes of the Act's nonattainment NSR provisions. However, §182(d)(7-8) provides that such an increase will not be considered a modification (and hence may avoid NSR) if the owner or operator of the source elects to offset the increase by a greater reduction in emissions of VOC from other operations, units or activities within the source at an internal offset ratio of at least 1.3 to 1. 41 See CAA §§ 165(A)(4), 173(a)(2). 42 Chevron supra at 863. 43 CAA § 182(d)(7-8). |