Approval and Promulgation of Implementation Plans; Texas; Emissions Banking and Trading Revisions for the Mass Emissions Cap and Trade Program for the Houston/Galveston Ozone Nonattainment Area

Related Material

Other Related Documents

Note: EPA no longer updates this information, but it may be useful as a reference or resource.

[Federal Register: July 23, 2001 (Volume 66, Number 141)]
[Proposed Rules]
[Page 38231-38247]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23jy01-50]

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ENVIRONMENTAL PROTECTION AGENCY
40 CFR Part 52
[TX-133-1-7499; FRL-7016-9]

Approval and Promulgation of Implementation Plans; Texas;
Emissions Banking and Trading Revisions for the Mass Emissions Cap and
Trade Program for the Houston/Galveston Ozone Nonattainment Area

AGENCY: Environmental Protection Agency (EPA).
ACTION: Proposed rule.

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SUMMARY: Through parallel processing, the EPA is proposing to approve a
revision to the Texas State Implementation Plan (SIP). We are proposing
approval of the NO_X Mass Cap and Trade program for the
Houston/Galveston (HGA), one-hour ozone nonattainment area. If the
State makes significant changes between the versions being parallel
reviewed and the final adopted versions, other than those changes
resulting from issues discussed in this proposed rulemaking, EPA will
issue an additional proposed rulemaking prior to taking final action.
If there are no significant changes (other than changes resulting from
issues discussed in this proposed rulemaking) to the parallel-processed
versions and Texas submits the final versions by October 1, 2001, the
EPA will proceed with final rulemaking. The MECT program will
contribute to attainment of the 1-hour ozone National Ambient Air
Quality Standard (NAAQS) in the HGA ozone nonattainment area.

DATES: Written comments must be received on or before August 22, 2001.

ADDRESSES: Written comments should be addressed to Mr. Thomas H. Diggs,

[[Page 38232]]

Chief, Air Planning Section (6PD-L), at the EPA Region 6 Office listed
below. Copies of documents relevant to this action including the
Technical Support Document (TSD) are available for public inspection
during normal business hours at the following locations. Anyone wanting
to examine these documents should make an appointment with the
appropriate office at least two working days in advance.
Environmental Protection Agency, Region 6, Air Planning Section
(6PD-L), 1445 Ross Avenue, Dallas, Texas 75202-2733. Texas Natural
Resource Conservation Commission, Office of Air Quality, 12124 Park 35
Circle, Austin, Texas 78753.

FOR FURTHER INFORMATION CONTACT: Merrit Nicewander, Air Planning
Section (6PD-L), EPA Region 6, 1445 Ross Avenue, Dallas, Texas 75202-
2733, telephone (214)665-7519.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Mass Emissions Cap and Trade Program
A. Proposed Action
B. MECT EIP Contents
C. EPA's Analysis
D. Conclusion
II. Background
A. Date of State's SIP Submission
B. General Requirements for an EIP
III. Administrative Requirements

Throughout this document ``we,'' ``us,'' and ``our'' means EPA.

I. Mass Emissions Cap and Trade Program

A. Proposed Action

What Action Are We Taking?
The EPA is proposing to approve the NO_X Mass Cap and
Trade program for the Houston/Galveston one-hour ozone nonattainment
area. The HGA ozone nonattainment area is required to attain the one-
hour ozone standard of 0.12 parts per million (ppm) by November 15,
2007.
The rule adopted and submitted as this SIP revision by letter of
the Governor dated December 22, 2000 is one element of the control
strategy for the HGA nonattainment area to comply with the requirements
of the Clean Air Act (CAA) and achieve attainment for ozone. The HGA
ozone nonattainment area will need to reduce nitrogen oxides
(NO_X) to reach attainment with the one-hour standard. The
MECT emissions banking rule was evaluated as an integral component of
the HGA control strategy to reduce NO_X emissions.

B. MECT EIP Contents

What Is the TNRCC MECT Program That Has Been Submitted for Approval as
Part of the Texas SIP?
The proposed SIP revision submitted by the TNRCC is the Mass
Emission Cap & Trade Program (30 Texas Administrative Code (TAC)
Chapter 101, Subchapter H, Division 3). The MECT regulation is found at
sections 101.350 through 101.363. The MECT program is mandatory for
stationary facilities that emit NO_X in the HGA ozone
nonattainment area (at sites that have a collective design capacity of
10 tons per year or more) and which are subject to the TNRCC
NO_X rules as found at 30 TAC Chapter 117. NO_X is
a precursor gas that reacts with volatile organic compounds (VOCs) in
the presence of sunlight to form ground-level ozone. The program sets a
cap on NO_X emissions beginning on January 1, 2002 with a
final reduction to the cap occurring in 2007.
Facilities are required to meet NO_X allowances on an
annual basis. Facilities may purchase, bank or sell their allowances.
The program has a provision to allow a facility to use discrete
emission reduction credits (DERCs) and mobile discrete emission
reduction credits (MDERCs) in lieu of allowances if they are generated
in the HGA area. Although EPA is today proposing to approve the MECT
rules, EPA notes that the MECT rules were submitted along with rules
authorizing the generation and use of DERCs and MDERCs. These rules are
found in 30 TAC Chapter 101, Subchapter H, Division 4. The MECT rules
authorize use of DERCs and MDERCs generated pursuant to the rules in
Division 4 to meet the cap. EPA is not today proposing action on the
rules in Division 4, but intends to act on them in a separate
rulemaking at a later date. This schedule of action on the submitted
Emissions Banking and Trading rules has been discussed with and is
acceptable to the State.
The MECT EIP is mandatory for facilities in that if they meet the
above conditions they must participate in the cap. However, the MECT
program is a discretionary EIP since it is not a requirement of the
Clean Air Act that it be adopted by the State.
TNRCC proposed revisions to the MECT rule on May 30, 2001. The EPA
is proposing through parallel processing to approve the State's
proposed revisions to the MECT rule submitted by the Governor on June
15, 2001. The proposed rule revision contains the inclusion of emission
quantification protocols, the inclusion of an annual compliance summary
report to EPA and the public, and a revised schedule of emission
reduction factors. The proposed changes strengthen certain elements of
the MECT SIP submittal.
What Is Parallel Processing?
Parallel processing means that EPA proposes action on a state rule
before it becomes final under state law. Under parallel processing, EPA
takes final action on its proposal if the final, adopted state
submission is substantially unchanged from the submission on which the
proposed rulemaking was based, or if significant changes in the final
submission are anticipated and adequately described in EPA's proposed
rulemaking or result from needed corrections determined by the State to
be necessary through review of issues described in EPA's proposed
rulemaking.
We cannot finalize action on the MECT EIP program unless and until
the Governor submits the finally adopted regulation. The State has
begun its rulemaking process and submission of the final rule is
anticipated in September 2001. Significant changes between the versions
being parallel reviewed and the final adopted versions, other than
those changes resulting from issues discussed in this proposed
rulemaking, will result in a new EPA proposed rulemaking. If there are
no significant changes to the parallel-processed versions and they are
submitted by October 1, 2001, the EPA will proceed with final
rulemaking.
Has the MECT Rule Been Revised by TNRCC Since It Was Submitted To EPA
as a SIP Revision?
Yes, the MECT rule was revised by TNRCC after it had been submitted
to EPA as part of the Texas SIP on December 22, 2000. Rule Log # 2001-
015-101-AI which clarified the applicability requirements of the rule
at Sec. 101.351 was adopted on May 23, 2001. This rule revision was
effective on June 13, 2001. A SIP revision incorporating this
clarification was submitted by the Governor on July 2, 2001. The TNRCC
clarified section 101.351 to specify that the requirement to operate
under the cap and trade program applied to all NO_X emitting
facilities in the HGA area with emission standards under Chapter 117,
Control of Air Pollution from Nitrogen Compounds, and which are located
at a site where their collective design capacity to emit NO_X
is ten tons or more per year. We are also proposing to approve this
minor revision in this action.

[[Page 38233]]

What Areas of Texas Will Be Affected by the MECT Program?
The HGA ozone nonattainment area contains Brazoria, Chambers, Fort
Bend, Galveston, Harris, Liberty, Montgomery, and Waller counties in
Texas.
What Is an Economic Incentive Program?
An economic incentive program is a regulatory program that achieves
an air quality objective by providing market-based incentives or
information to emission sources. A uniform emission reduction
requirement, based for instance on installation of a required emission
control technology, does not take account of variations in processes,
operations, and control costs across sources even of the same type,
such as electric utilities, or petroleum refiners. By providing
flexibility in how sources meet an emission reduction target, an EIP
empowers sources to find the means that are most suitable and most
cost-effective for their particular circumstances.
What Is a CAP?
A cap is the total emission limitation for all participating
sources in the EIP. The NO_X cap will be established at
levels demonstrated as necessary and feasible to allow HGA to attain
the NAAQS for ozone. The cap will consist of the summation of
individual allowances allocated to each facility in the MECT EIP. The
cap will be enforced by the allocation, trading, and banking of
allowances. Each facility will be required to hold allowances in its
compliance account on March 1 of each year equal to or greater than the
total emissions of NO_X emitted during the previous control
period.
What Sources Are Subject to the MECT Program?
The MECT program is mandatory for stationary facilities that emit
NO_X in the HGA ozone nonattainment area and which are
subject to the emission specifications under sections 117.106, 117.206
and 117.475 and which are located at a site where they collectively
have a design capacity to emit of 10 tons per year or more of
NO_X. If an individual stack is not subject to or is exempt
from the requirements of 30 TAC Chapter 117, that stack is not subject
to the MECT program regardless of its design NO_X capacity.
Other stacks at the same facility may be subject to the MECT program if
they are subject to Chapter 117.
It should be noted that section 117.203(a)(1)historically provided
exemptions for any new units that were placed in service after November
15, 1992, since these sources would have been subject to Best Available
Control Technology (BACT) and /or Lowest Achievable Emission Reduction
(LAER) new source review (NSR) requirements. These NSR requirements are
typically more restrictive than the section 117 requirements. However,
new section 117.203(b) revokes the exemption and the sources are
subject to the MECT program. EPA approved 117.203(b) on September 1,
2000.
What Is the Definition of the Term, Facility?
The MECT regulation states that it applies to stationary
facilities. The term, facility, however, is not defined in the rule.
Facility is defined in at least two different places in the permitting
regulations. TNRCC defines facility at 30 TAC 116.10(4) as ``a discrete
or identifiable structure, device, item, equipment, or enclosure that
constitutes or contains a stationary source, including appurtenances
other than emission control equipment. A mine, quarry, well test, or
road is not a facility.'' TNRCC further defines ``building, structure,
facility, or installation'' at 30 TAC 116.12(4) as ``All of the
pollutant-emitting activities which belong to the same industrial
grouping, are located in one or more contiguous or adjacent properties,
and are under the control of the same person (or persons under common
control) except the activities of any vessel. Pollutant-emitting
activities shall be considered as part of the same industrial grouping
if they belong to the same ``major group'' (i.e., which have the same
two-digit code) as described in the Standard Industrial Classification
Manual, 1972, as amended by the 1977 supplement.'' The technical review
and proposed approval of the MECT rule is based upon the definition of
the term, facility, as defined in 30 TAC 116.10(4). Facility within the
context of the MECT rule is interpreted by the State and EPA to mean
equipment that is vented to a stack.
What Is an Allowance?
Allowance means the authorization to emit one ton of NO_X
per year. One compliance account shall be used for multiple sources
located at the same site and under common ownership or control. The
commission will maintain a registry of the allowances in each
compliance account.
What Is a Control Period?
A control period or a compliance period is the 12-month period
beginning January 1 and ending December 31 of each year. The initial
control period will begin January 1, 2002.
When Will the cap Be Implemented?
The cap will be implemented on January 1, 2002 at historical
emission levels, with three mandatory reductions increasing over time
until achieving the final cap by January 1, 2007. These sections also
require all new or modified sources in HGA to obtain unused allowances
from other sources already participating under the cap to offset any
increased NO_X emissions.
How Will the cap Be Determined?
The MECT rules at section 101.353 describe how allowances will be
allocated to individual facilities. Initially, for any facility
operating prior to January 1, 1997, allowances will be based on the
average of its actual level of activity from 1997, 1998, and 1999
multiplied by the facility's actual emission factors from 1997, 1998,
and 1999 (not to exceed any applicable federal or state regulation,
rule, or permit limit).
How Will the cap Be Adjusted to the Level Relied Upon in the Attainment
Demonstration?
All facilities in the MECT EIP program will have periodic
reductions in allowances until 100% of the reductions is achieved in
2007. There are two categories of sources for which the reduction
schedule has been developed. The first category is boilers, auxiliary
steam boilers, and stationary gas turbines within an electric power
generating system. The second category is all other sources. Beginning
April 1, 2007 and for all subsequent control periods, allowances will
be reduced by 100% of the required reductions.
TNRCC proposed revisions to the MECT rule on May 30, 2001 which is
being parallel processed by this document. The proposed rule revision
contains a potential revised schedule of emission reduction factors
depending upon the results of a TNRCC study that is to be completed by
2002 and requires EPA approval. The EPA is proposing approval of the
revisions to the MECT rule submitted to us on June 15, 2001 which we
are parallel processing but not that portion of the proposed rule
containing a potential modification to the reduction schedule.
Specifically, we are not taking action on section 101.353(a)(3)(B) and
(D) in this document.
Are There Allowances for New Sources in the cap?
No, any new or modified facility will not be allocated any
allowances if that

[[Page 38234]]

facility has submitted a NSR permit application which has determined to
be administratively complete on or after January 2, 2001.
How Will New Sources Participate in the MECT cap?
The new or modified facilities will be required to obtain
allowances from other facilities already participating in the cap and
trade program or by obtaining DERCs or MDERCs.
Can Allowances Be Used in Other Programs?
Allowances are valid only for MECT program purposes. An allowance
does not constitute a security or a property right. Allowances cannot
be used to exceed any NSR permit limitation or any other applicable
rule or law. Allowances can be used for the 1:1 portion of NSR
offsetting under section 101.352(e). Allowances can not be used for
netting under the NSR program.
What Happens to a Facility That Has Less NO_X Emissions Than
Allowances for a Compliance Period?
Allowances may generally be banked for future use or traded during
the control period for which they are allocated or the following
control period.
What Happens to a Facility That Has More NO_X Emissions Than
Allowances for a Compliance Period?
If a facility emits more NO_X than was held in the
compliance account on March 1 following the control period, allowances
for the next control period will be reduced by the amount equal to the
emissions exceeding the compliance account plus an additional 10%. This
does not preclude additional enforcement action by the TNRCC and/or
EPA.
Can Unused Allowances Be Banked for Future Use?
Yes, allowances may generally be banked for future use or traded
during the control period for which they are allocated or the following
control period. Any allowance not used for compliance may be banked or
traded for use in the following control period. Allowances that are not
expired or used can be traded at any time after they have been
allocated.
How Are Trades of Allowances Conducted?
Only authorized account representatives may trade allowances. Trade
requests are to be made through the submittal of a completed ECT-2
Form, Application for Transfer of Allowances. The completed form,
including the price paid per allowance, will be submitted to TNRCC 30
days prior to the allowances being deposited into the account. Trades
will be completed through the TNRCC executive director and will be
considered complete when the executive director issues a letter
finalizing the trade.
Will the Program Be Audited?
Yes, an audit of the cap and trade program will be conducted by
TNRCC every three years. The audit will evaluate the impact of the
program on the state's attainment demonstration, the availability and
cost of allowances, compliance by the participants, and other elements.
The TNRCC Executive Director will recommend measures to remedy any
problems identified in the audit. The trading of allowances, discrete
emission reduction credits, and/or mobile discrete emission reduction
credits may be discontinued as a remedy for problems identified in the
program audit. The audit data and results will be completed and
submitted to the EPA and made available for public inspection within
six months after the audit begins.
How Will Emissions Be Monitored by the Facilities in Order To Determine
Compliance With the cap?
The proposed revision to the MECT EIP rule which is being parallel
processed contains a revision to section 101.354 Allowance Deductions.
The revision requires allowance deductions to be based upon the
emission quantification protocols established in 30 TAC Chapter 117.
The EPA is proposing to approve the Chapter 117 monitoring methodology
in this action as the emission quantification protocols for the MECT
program.
How Will a Facility Report Compliance With the Cap?
Facilities are required by March 31 of each year to submit a
completed ECT-1 Form to TNRCC with the amount of actual NO_X
emissions for the preceding control period. Also included are the
methods used in determining the emissions and a summary of all final
trades.

C. EPA's Analysis

How Did EPA Review and Evaluate the TNRCC MECT EIP SIP Submittal?
The document, Improving Air Quality with Economic Incentive
Programs, (EPA-452/R-01-001) January 2001 is the EPA guideline for
reviewing and approving discretionary EIP submittals for SIP credit. It
will be referred to as the EPA EIP Guidance throughout this notice. The
guidance pertains to discretionary EIPs that will be measures in State
implementation plans. The guidance applies to the establishment of a
discretionary EIP for attaining the NAAQS for criteria pollutants. The
EPA technical review of the MECT SIP submittal against the expectations
of the EPA EIP Guidance is contained in the Technical Support Document
for the TNRCC Mass Emissions Cap and Trade Program for the HGA
Nonattainment Area dated April 2001. The technical support document is
available as specified in the section of this document identified as
ADDRESSES.
What Does the EPA Mean by Guidance?
The EPA stated that the EIP guidance applies to discretionary EIPs,
but does not represent the EPA's final action regarding discretionary
EIPs. Final action occurs when the EPA has approved or disapproved the
discretionary EIP submitted as a SIP revision. Congress did not address
specific requirements for EIPs in the CAA. Consistent with our mandate,
the EPA has interpreted what an EIP should contain in order to meet the
requirements of the CAA. The document is a guidance document that sets
forth EPA's non-binding policy for EIPs. The document does not
represent final EPA action on the requirements for EIPs. Rather, the
document identifies several different types of economic incentive
programs, and proposes elements for each type that, if met, EPA
currently believes would assure that the program would meet the
applicable CAA provisions.
The guidance phrases these elements in the imperative--that is,
using the terms ``must'' or ``shall.'' This is done only to signify
that EPA would propose to approve a SIP submittal of a program
containing the indicated elements on grounds that under section 110(l)
of the CAA, the SIP revision does not interfere with any applicable
requirement concerning attainment, reasonable further progress, or any
other applicable requirement.
Was the EPA EIP Guidance a Final Agency Action?
Because it is a guidance document, the EPA EIP Guidance does not
represent the EPA's final action for any discretionary EIP. Final
action occurs when the EPA has approved or disapproved the
discretionary EIP submitted as a SIP revision.
Once an EIP SIP revision is submitted, EPA will take action through
notice-and-comment rule making to determine if the statutory
requirements have been

[[Page 38235]]

met. Only action taken after the conclusion of that rulemaking would
constitute final Agency action. The EPA would take steps to expedite
its proposed approval in the case of SIP revisions containing programs
that contain the elements of the EPA EIP guidance.
If a program that does not contain the elements of the EPA EIP
guidance for that type of program is submitted, EPA would still seek to
determine whether the applicable CAA requirements were met, and, if so,
EPA would approve the submission. The EPA would make the determination
through notice-and-comment rulemaking.
What Criteria Did EPA Use To Analyze the MECT SIP Submittal?
There are three fundamental principles that apply to all EIPs;
integrity, equity and environmental benefit. The MECT was evaluated
against the Clean Air Act requirements for all three of these
principles. The EPA EIP guidance contained elements for trading EIPs as
well as provisions specific to mass cap and trade EIPs. Each of these
principles, elements and provisions are addressed in this notice.
Fundamental EIP Principle One--Integrity
There are four elements that make up the EIP principle of
integrity. The fundamental principle of integrity consists of the
qualities of surplus, enforceable, quantifiable and permanent.
Integrity Element One--Surplus
The element of surplus as it applies to MECT EIPs provides that
programmatic emission reductions are surplus as long as they are not
otherwise relied on in any of the following air quality-related
programs such as the SIP, SIP-related requirements such as
transportation conformity, other adopted TNRCC air quality programs not
in the SIP, and federal rules that focus on reducing precursors of
criteria pollutants such as new source performance standards (NSPS),
rules for reducing VOCs promulgated under section 183 of the CAA, and
statutorily mandated mobile source requirements.
In multi-source emission cap-and-trade EIPs, the programmatic
fundamental element of surplus, as used with reference to the EIP as a
whole, has a special meaning. A program that conforms to the EIP
Guidance will show that the cap on all emissions is below the threshold
that would have been set before the program was implemented for the
affected sources. It should be noted that the fundamental element of
surplus does not apply to sources participating in multi-source
emission cap-and-trade EIPs, only to the programmatic emission
reductions.
EPA concluded that the TNRCC MECT SIP submittal at section
101.353(a)(3) demonstrated declining reductions of NO_X
emissions over time in order to reach attainment. The cap is at least
80% lower than the emission level that existed prior to the
implementation of the MECT EIP. In addition the MECT EIP will ensure
lower NO_X emissions than implementation of 30 TAC Chapter
117 emission standards for the HGA attainment demonstration will
ensure, since the MECT program limits mass emissions based on
historical activity levels, and reduces the mass cap over time based on
emission rate specifications in section 117. The Chapter 117 Emission
Specifications for Attainment Demonstrations (ESAD) limitations are
rate based and do not limit mass emissions. Thus, the programmatic
surplus provision for the MECT EIP that the cap on all emissions be
below the threshold that would have otherwise been set for the affected
sources has been met. EPA concluded that the TNRCC MECT EIP SIP
submittal meets the Clean Air Act requirements and EPA EIP guidance
expectations for the integrity element of surplus.
Integrity Element Two--Enforceable
Emission reduction use, generation, and other actions are
enforceable on a programmatic basis, if they are independently
verifiable, define program violations and identify those liable for
violations. The EPA EIP expectation for enforceable also is that the
state and the EPA maintain the ability to apply penalties and secure
appropriate corrective actions where applicable. Citizens should also
have access to all the emissions-related information obtained from the
source so that citizens can file suits against sources for violations.
Required actions are enforceable on a programmatic basis if they are
practicably enforceable in accordance with other EPA guidance on
practicable enforceability.
In multi-source emission cap-and-trade EIPs, the source-specific
fundamental elements of enforceable, and quantifiable, as used with
reference to the actions of the individual sources participating in the
EIP, have special meanings. Source-specific actions are enforceable if
each source owner/operator is responsible for owning enough allowances
to cover its emissions for the given time period and for providing
clear title to the allowances it transfers.
On a source specific basis as spelled out in Sec. 4.1(b), actions,
emission reductions or emission limits as required by the MECT EIP are
enforceable if the source is liable for any violations, the liable
party is identifiable and the state, the public, and the EPA can
independently verify a source's compliance. The expectation for
enforcement elements common to all trading EIPs is that certain
enforcement elements will be incorporated into all trading EIP rules
submitted as a SIP revision. These include provisions for assessing
liability, provisions to assess penalties against participating
sources, and provisions for sources with title V permits.
1. Enforceable Element--Liability Assessment
The expectation for provisions for assessing liability common to
all trading EIPs is discussed at section 6.1(a) of the EPA EIP guidance
document. A program that conforms to the EIP Guidance will include
provisions for assessing liability. Unlike traditional CAA regulatory
mechanisms, emission trading involves more than one party. These
parties can include those who own or operate the sources participating
in the trade and sometimes another party who facilitated the trade
(such as a broker).
To ensure there is integrity in the trading system, parties are
also normally responsible for ensuring the validity of the trades or
their use of emission reductions. At a minimum, each party is
responsible for the truth, accuracy, and recording of all the
information it provides to make the trade happen. The TNRCC MECT EIP
rule should contain provisions to make users responsible for ensuring
the validity of their use of emission reductions.
Traded emissions reductions are valid if they are true and
accurate, generally meet all requirements of the MECT EIP rule, are
properly measured in keeping with quantification protocols, satisfy
monitoring, recordkeeping and reporting (MRR) provisions, and adhere to
all other provisions for trading, such as no double counting. Sources
using traded emission reductions are the main parties which will be
held liable for any violations of applicable emission limitations.
However, to discourage any possible collusion between sources,
generators, and third parties, EPA may also hold other parties liable
as explained in the EIP Guidance.
The revision to the MECT rule which is being parallel processed by
this notice submitted the emission quantification protocols in 30 TAC
Chapter 117. EPA is reviewing the submitted protocols in

[[Page 38236]]

accordance with the principles discussed herein, and CAA requirements.
The revised section 101.354 speaks to the Executive Director approving
other methods instead of the protocols in Chapter 117. Any use of a
method other than the Chapter 117 protocols must be submitted to, and
approved by, EPA.
The EIP states that in any enforcement action, the parties bear the
burden of proof on each of their respective responsibilities. The MECT
EIP submittal did not specifically address the assessment of liability
for generators, third parties and users. EPA concluded that the MECT
EIP rule itself did not contain the EPA EIP guidance specific
expectation for liability assessment.
However, the TNRCC enforcement statute & rule are not typically in
individual rules but have their own codification elsewhere. The Texas
Water Code Chapter 7 contains the statutory provisions for enforcement
of the MECT EIP regulation. The TNRCC enforcement rule is found at 30
TAC section 70.5. It provides remedies found in the state statutes
(Texas Water Code and the Texas Health and Safety Code). It includes
referrals to the EPA for civil, judicial or administrative action.
Nothing in chapter 70 shall preclude the TNRCC executive director from
seeking any remedy in law or equity not specifically mentioned in the
rules. The Office of the Attorney General of the State of Texas cited
State laws and regulations that regulate, at a minimum, the same
sources as the Clean Air Act and do so with standards that are no less
stringent than those specified by the CAA. The cited laws and
regulations are: Texas Health and Safety Code Ann. sections 382.016
(Monitoring Requirements, Examination of Records), 382.021 (Sampling
Methods and Procedures), 382.0514 (Sampling, Monitoring and
Certification); 30 TAC sections 122.132 (Application and Required
Information for Initial Permit Issuance, Reopening, Renewal, or General
Operating Permits), 122.134 (Complete Application), 122.136
(Application Deficiencies), 122.142 (Permit Content Requirements),
122.143 (General Terms and Conditions), 122.144 (Recordkeeping Terms
and Conditions), 122.145 (Reporting Terms and Conditions), 122.146
(Compliance Certification Terms and Conditions), 122.165 (Certification
by Responsible Official; 30 TAC sections 101.8 (Sampling), 101.9
(Sampling Ports).
The MECT rules do not establish the number of days of violation
when the cap is exceeded. Although not specifically included in the
MECT EIP submittal, if the State can demonstrate to EPA's satisfaction
that it has adequate authority regarding this issue, the enforcement
expectations of the EPA EIP are met.
Other TNRCC programs requiring enforcement provisions consistent
with the Clean Air Act have not been found deficient by EPA. The 40 CFR
part 70, Title V operating permits program and the 40 CFR part 63,
National Emission Standards for Hazardous Air Pollutants (NESHAPs) are
two such programs. The Office of the Attorney General of the State of
Texas has provided written opinions for these programs. The opinions
state that TNRCC has the necessary legal authority to implement and
enforce the programs. TNRCC has the authority to have reasonable
requirements for measuring and monitoring air emissions and to require
owners and operators of sources to make and maintain records of the
emissions. The Attorney General has determined that TNRCC is allowed to
prescribe sampling methods and procedures to be used to determine
violations of and compliance with the TNRCC rules and orders. EPA
concluded that the TNRCC MECT EIP SIP submittal will meet the Clean Air
Act requirements and EPA EIP guidance expectations for liability
assessment in the integrity element of enforceable if the State
demonstrates to EPA's satisfaction adequate authority regarding the
number of days of violation, and the rules are amended to provide that
any use of monitoring protocols other than those specified in Chapter
117 will be approved by EPA.
2. Enforceable Element--Penalties and Corrective Action
The expectation for provisions for penalties and corrective actions
common to all trading EIPs is that the monetary and non-monetary
penalty provisions in the MECT emission trading EIP will include
mechanisms that enable TNRCC to assess monetary penalties and impose
corrective actions against the sources participating in the EIP. These
mechanisms include making up any emission shortfall, paying a monetary
penalty based on statutory penalties for source noncompliance, and
surrender an additional punitive amount of emission reductions. They
also include implementing corrective actions to ensure the violation
will not occur in the future and to compensate for the environmental
damage caused by an emissions violation. These corrective actions may
consist of such items as better monitors, more effective emissions
controls, more frequent monitoring and reporting and better monitoring
procedures. The EIP Guidance expectation for penalty policy is
described in section 5.1(c) and section 6.1(b).
The EIP Guidance expectation for penalty provisions includes
provisions for imposing penalties when a source is in violation of MECT
allowances, and record keeping. A program that conforms with the EIP
Guidance will define a violation, establish the procedure for
determining the magnitude of a violation, set potential penalties, and
maintain the ability to impose a maximum monetary penalty of at least
$10,000 per day per violation. Title V of the CAA currently requires
States to have a maximum penalty authority of at least $10,000 per day
per violation. The Federal CAA maximum is $27,500 per day per
violation.
The MECT EIP SIP submittal at section 101.353(c) requires that if
actual emissions of NO_X during a control period exceed the
amount of allowances held in a compliance account on February 1
following the control period, allowances for the next control period
will be reduced by an amount equal to the emissions exceeding the
allowances in the compliance account plus an additional 10%. This does
not preclude additional enforcement action by the TNRCC executive
director.
The MECT EIP submittal was silent with respect to the authority for
monetary penalty provisions up to the CAA statutory maximum on a per
day and per unit basis. The Office of the Attorney General of the State
of Texas has provided written opinions for the Title V operating
permits program and the NESHAP program. The opinions of the Texas
Attorney General indicate that TNRCC has the necessary legal authority
to implement and enforce the programs in accordance with the
requirements of the Clean Air Act. EPA concluded that the TNRCC MECT
EIP SIP submittal meets the Clean Air Act requirements and EPA EIP
guidance expectations for penalties and corrective action in the
integrity element of enforceable.
3. Enforceable Element--Monitoring, Recordkeeping and Reporting
The expectation for monitoring, recordkeeping and reporting
procedures is to ensure source compliance and State and Federal
enforceability. Monitoring ensures the operator of the source that
compliance is being achieved at all times. It also ensures an inspector
that compliance has been achieved at times when the inspector is not on
site to observe behavior. Retention of monitoring records ensures that
the records are available for review by inspectors or source
supervisors who are determining compliance.

[[Page 38237]]

Periodic and annual reports are also essential to summarize the
compliance picture for State planning purposes, for review by the EPA
and the public, as well as by source managers who wish to oversee the
progress of their participation in the EIP. The EIP guidance provides
the following as examples of MRR procedures: Continuous or periodic
monitoring of emissions, production, activity levels, or emission
control equipment operation; measurement devices to verify emission
rates and operating conditions; measurement of mass emissions or
emission rates using the EPA-approved reference test methods; operating
and maintenance procedures or other work practices and record keeping
of material usage, inventories, or throughput.
The MECT EIP SIP submittal at section 101.358 requires sources
conducting compliance monitoring to use emission quantification
methods. A condition for all sources in the MECT program is that they
be subject to 30 TAC Chapter 117. For each source category in Chapter
117, there is a corresponding section covering the requirements for the
initial demonstration of compliance, the continuous demonstration of
compliance, as well as the requirements for notification, recordkeeping
and reporting requirements. The following table cross references these
requirements by source category.
TNRCC has submitted a revision to the MECT rule which is being
parallel processed with this notice that is the submission of emission
quantification protocols. The protocols in 30 TAC Chapter 117 specify
initial and continuous monitoring methodologies. These requirements in
Chapter 117 have met the public notice provisions for protocols. EPA
concluded that the TNRCC MECT EIP SIP submittal will meet the Clean Air
Act requirements and EPA EIP guidance expectations for emission
quantification protocols, monitoring, recordkeeping and reporting in
the integrity element of enforceable, if, as was discussed above, any
use of protocols other than those specified in Chapter 117 will be
approved by EPA.

----------------------------------------------------------------------------------------------------------------
Cross Reference of MECT Source Category by Compliance, Notification, Recordkeeping, and Reporting Requirements
-----------------------------------------------------------------------------------------------------------------
Continuous Notification,
30 TAC Chapter 117 Source Categories Initial Demonstration Demonstration of Recordkeeping and
of Compliance Compliance Reporting Requirements
----------------------------------------------------------------------------------------------------------------
Utility Boilers, Auxiliary Steam Sec. 117.111.......... Sec. 117.113.......... Sec. 117.119
Boilers & Stationary Gas Turbines.
Industrial, Commercial and Sec. 117.209.......... Sec. 117.213.......... Sec. 117.219
Institutional Boilers, Process
Heaters, Stationary Gas Turbines,
I.C. Engines, FCCs, BIFs, Duct
Burners, Recovery Furnaces, Lime
Kilns, Lightweight Aggregate Kilns,
Heat Transfer Furnaces, Magnesium
Chloride Fluidized Bed Dryers &
Incinerators.
Acid Manufacturing--Adipic Acid Sec. 117.311.......... Sec. 117.113.......... Sec. 117.319
Manufacturing.
Acid Manufacturing--Nitric Acid Sec. 117.411.......... Sec. 117.413.......... Sec. 117.419
Manufacturing.
Small Combustion Sources--Water Emission Specifications Certification 117.469
Heaters, Small Boilers and Process Sec. 117.465. Requirements Sec.
Heaters. 117.467.
Small Combustion Sources--Boilers, Emission Specifications Operating Requirements Sec. 117.479
Process Heaters, and stationary Sec. 117.475. Sec. 117.478.
Engines at Minor Sources.
----------------------------------------------------------------------------------------------------------------

4. Enforceable Element--Evaluation
The EIP evaluation procedure is the process of retrospectively
assessing the performance of the EIP. The primary purpose of program
evaluation is to determine the overall effects of the MECT EIP on
emissions and measure other aspects of program performance, such as
increased flexibility or reduced costs.
The EIP performance procedures may include tracking and evaluating
program performance measures that were raised by the stakeholders
during the rule development process. The EIP Guidance includes program
evaluation procedures. A program that conforms to the EIP Guidance will
include procedures that make the public aware that the program is being
evaluated, and give the public ample opportunity to help evaluate the
program. The EIP Guidance specifies that a program evaluation will be
conducted at least every 3 years. The schedule coincides with other
periodic reporting provisions such as those applicable to emission
inventory revisions required by the CAA. The EIP Guidance expectation
is that the state will submit the results of the EIP program evaluation
to EPA.
The evaluation program should include inspections to allow
assessment of the implementation of the program and to confirm
assumptions. Annual evaluation of the program is appropriate for at
least 2 years, until the projected emissions have been adequately
confirmed.
The MECT EIP SIP submittal at Sec. 101.363 requires program audits
every three years. The audit will evaluate the impact of the program on
the state's attainment demonstration, the availability and cost of
allowances, compliance by the participants, and any other elements the
TNRCC executive director may choose to include. EPA concluded that the
TNRCC MECT EIP SIP submittal meets the Clean Air Act requirements and
EPA EIP guidance expectations for evaluation in the integrity element
of enforceable.
5. Enforceable Element--Reconciliation
The expectation for EIP evaluation procedures is a commitment to
develop and implement reconciliation procedures if the EIP evaluation
determines that source emissions exceed the allowances for a control
period. The primary purpose of conducting a program reconciliation is
to correct any differences between allowances versus actual emissions.
This allows for the opportunity to make mid-course corrections to the
program.
A program that conforms to the EIP Guidance will include an
enforceable commitment that if the program evaluation shows a problem
with the EIP such as emissions exceeding allowances, the problem will
be corrected as expeditiously as possible. The commitment to correct
the problem should be based on what may be achieved using reasonable,
sustained efforts within the context of the TNRCC's rule making
process. Corrections should include any revisions to the program to
ensure that subsequent problems do not occur. The EIP Guidance
specifies that any problem will be corrected as soon as practicable,

[[Page 38238]]

but no later than the next triennial program evaluation.
The MECT EIP SIP submittal at section 101.363 requires program
audits every three years. The audit will evaluate the impact of the
program on the state's attainment demonstration, the availability and
cost of allowances, compliance by the participants, and any other
elements the TNRCC executive director may choose to include. The
revised attainment demonstration submittal which is being parallel
processed includes a TNRCC study to be completed in 2002 which will
evaluate and potentially adjust Chapter 117 emission limitations. In
addition, the 2004 mid-course correction by TNRCC will evaluate control
measures and enforceable commitments necessary to reach attainment in
2007. There will be an opportunity at both of these occasions to adjust
allowances to reach attainment if the audit results indicate that all
issued allocations are higher than assumed in the attainment
demonstration. The proposed revisions to the MECT rule have a different
percent reduction if section 117.106(c)(5) and section 117.206(c)(18)
apply. EPA concluded that the TNRCC MECT EIP SIP submittal meets the
Clean Air Act requirements and EPA EIP guidance expectations for
reconciliation procedures in the integrity element of enforceable.
6. Enforceable Element--Public Disclosure
The public disclosure provisions of an EIP were developed pursuant
to the CAA (section 114(c)) and implementing regulations (40 CFR 2.301)
which specify procedures and criteria for determining what information
is available to the public and what information may be withheld from
the public as confidential business information. These procedures and
criteria apply to information in EIPs, just as they apply to
information in other CAA programs.
Congress has recognized that regulatory failures can and do occur.
To provide another avenue of protection, Congress ensured that the
public has the right to access information and file suit in a Federal
court. Because citizens have the right to bring legal actions under the
CAA, a program that conforms to the EIP Guidance will ensure that the
public has access to emission information. The public needs to be able
to see the data in order to adequately judge the effectiveness of the
EIP and exercise the right to file suit.
A program that conforms to the EIP Guidance will ensure that--
Information will be disclosed in a manner that is
transparent, allowing the public to easily and accurately calculate the
emissions of each participating source,
Facilities participating in the EIP will disclose
violations to the state in an annual certification of compliance or
non-compliance,
Sources that violate permits will notify the affected
community of the violation and of potential health and environmental
impacts,
The state will compile these disclosures into an annual
comprehensive report on emissions and violations,
The state will submit the report to EPA and make it
available to the public, and
The state will obtain from the participating sources and
disclose to the public all information necessary to calculate every
source's or source category's emissions.
The MECT EIP SIP submittal stipulates at section 101.352(i) that
TNRCC will maintain a registry of allowances in each compliance
account. Section 101.359 requires facilities with a compliance account
to submit an ECT-1 form annually for each control period to TNRCC with
account emissions and transfers. TNRCC rules at 30 TAC section 1.5
require public disclosure of information held by the agency, presumably
including the annual report. There are, however, exemptions for
information relating to trade secrets and ``economics of operation.''
If these provisions are interpreted to cover activity levels, it could
impede the public from obtaining information necessary to determine
emissions from some units. Activity levels are necessary to determine
mass emissions from sources without monitoring devices such as
continuous emission monitoring systems (CEMS). This issue regarding
confidentiality of records has been transmitted to TNRCC as a comment
on the proposed MECT rule revisions which are being parallel processed.
The proposed revision to the MECT rule that is being parallel
processed contains a new section 101.363, Program Audits and Reports.
The rule at section 101.363(b) requires TNRCC to annually develop and
make available to EPA and the public a report that includes the number
of allowances allocated to each compliance account, the number of
actual NO_X allowances subtracted from each compliance
account based on the actual NO_X emissions from the site and
a summary of all trades completed. If the State demonstrates to EPA's
satisfaction that the confidentiality provisions will not prevent
public disclosure of activity level data necessary to determine
emissions under the cap program, the TNRCC MECT EIP SIP submittal will
meet the Clean Air Act requirements and EPA EIP guidance expectations
for public disclosure procedures in the integrity element of
enforceable.
7. Enforceable Element--Sources With Title V Permits
The EPA EIP expectation for sources with Title V permits is that
the facility's operating permit will be modified to include the
detailed compliance provisions necessary to assure compliance with the
EIP. Thus, the permit becomes a valuable tool to ensure the source
meets the requirements of the CAA. Also, Title V program requirements,
such as permit modification requirements, may not be subsumed,
overridden, or otherwise affected by requirements of a discretionary
EIP approved into a SIP.
Once the Title V permit includes terms and conditions necessary to
implement the EIP, the source may typically make individual trades
under the EIP without the need for future formal permit revisions. This
is true because most trading activity under such a permit would already
be addressed and allowed by the specific terms and conditions of the
permit and such trading would not normally conflict with the permit.
This is the principle expressed by 40 CFR 70.6(a)(8), which states that
permit revisions are not required for trading program changes that are
``provided for'' in the permit.
Concerning permit content, the MECT EIP program would--in order to
conform to the EIP Guidance--provide that sources subject to title V
place a copy of any notices specified by the EIP in the operating
permit file, and make these notices available to the public. These
notices should be designed to provide meaningful information in the
permitting context, and should help the public to determine the lawful
emissions credits generated by or available to the source at any given
time.
This expectation centers upon the requirement that a facility's
Title V operating permit list all of the CAA requirements that apply to
that facility, including monitoring and other provisions necessary to
assure compliance with the MECT EIP. By identifying MECT EIP
requirements as alternate operating scenarios, for instance, the
modifications of the permit can be held to a minimum.

[[Page 38239]]

Requirements of the MECT EIP to be included in the Title V permit
include the compliance, monitoring, record keeping, reporting and
public notice provisions. The TNRCC MECT EIP SIP submittal did not
include a showing that the TNRCC title V operating permit regulations
do not interfere with the incorporation of MECT EIP provisions into
title V permits as specified by section 16.8 of the EIP guidance. Since
the Title V program is outside the SIP process, the expectations of
this section, if not met by the facility, do not serve as grounds for
not approving the MECT EIP SIP submittal and/or the attainment
demonstration SIP.
8. Enforceable Element--Tracking Mechanisms
The expectations for setting up tracking mechanisms in a multi-
source emission cap-and-trade EIP are to facilitate a full and open
trading of allowances. The EIP Guidance expectation is that the MECT
EIP will have an efficient, effective method to track and record
allowance transfers. The TNRCC MECT SIP submittal at section 101.353
established the allocation of allowances procedure in the MECT EIP. The
allowance and authorized account representative will initially be
identified by TNRCC by January 1, 2002. A secure data management
system, enforceable procedure for data reporting, and time frame
establishment are required by section 101.359. EPA concluded that the
TNRCC MECT EIP SIP submittal meets the Clean Air Act requirements and
EPA EIP guidance expectations for tracking mechanisms in the integrity
element of enforceable.
Integrity Element Three--Quantifiable
The EPA EIP guidance at section 4.1(a) defines the EIP expectations
for the integrity element of quantifiable for all EIPs on a
programmatic basis. The EIP states that the creation and use of
emission reductions are quantifiable if the source can reliably
calculate the amount of emissions and/or emission reductions occurring
during implementation of the program, and replicate the calculations.
It further states that when quantifying results, sources will use same
methodology used to measure baseline emissions, unless there are good
technical reasons why this is not appropriate. The only source specific
expectation for quantifiable in MECT EIPs found at section 4.1(b) is
that sources will quantify total emissions per unit of time.
The EIP quantification procedures should ensure that these
fundamental elements are applied throughout the life of the EIP. For
the MECT EIP, the source of the data used in quantification of
allowances includes using data already reported or available. The
expectation is that quantification will be performed continuously
throughout the compliance period to demonstrate compliance with the
allowances. A program conforming to the EIP Guidance will also include
quantification protocols--the technical plans and procedures used to
quantify emissions during the control period.
1. Quantifiable Element--Predicting Results
The expectation for predicting EIP results is that the program
include projections of the emission reductions associated with program
implementation. These projected results would be based on technical
assumptions related to and consistent with the assumptions used to
develop the area's attainment demonstration, and provide sufficient
supporting information showing what the impact would be on the
applicable inventory. The MECT EIP may not interfere or be inconsistent
with SIP or SIP-related requirements including the attainment plan or
maintenance plan, reasonable further progress, and rate of progress.
Reliable and replicable forecasts of HGA's pre- and post-EIP emission
levels are part of EPA's evaluation of the SIP submittal.
The TNRCC SIP narrative for the attainment demonstration contains
the emission reduction projections associated with MECT EIP
implementation. The EIP SIP submittal at section 101.353(a)(3)
demonstrates that the MECT has increasing reductions of NO_X
emissions over time in order to reach attainment. The MECT implements
an approximate reduction in NO_X emissions of over 80%. The
reductions are achieved by implementation of the emission factors
required for applicable stationary sources as found at 30 TAC sections
117.106, 117.206 and 117.475. These reduction levels were developed to
support, and are consistent with, the attainment demonstration. EPA
concluded that the TNRCC MECT EIP SIP submittal meets the Clean Air Act
requirements and EPA EIP guidance expectations for predicting results
in the integrity element of quantifiable.
2. Quantifiable Element--Uncertainty
The expectation for addressing uncertainty is to provide greater
rule effectiveness, elimination of alternative emission limits, and
other environmental benefits. However, implementing any type of EIP may
result in higher or lower emissions than projected, due to geographic
or timing uncertainties in emission distributions. A program that
conforms to the EIP Guidance will provide a range of estimates of the
emission reductions attributable to the EIP, judge the likelihood that
the EIP will interfere with state air quality planning requirements and
demonstrations, demonstrate that emission projections in the air
quality management plan have been adjusted and determine whether that
level of uncertainty is acceptable and document the decision.
The regulation for the MECT EIP was submitted with other control
measure implementing regulations to be approved as part of the SIP.
These implementing SIP approved rules have been determined to be
necessary for the implementation of the attainment demonstration SIP.
The SIP narrative for the attainment demonstration contains the degree
of uncertainty associated with reaching attainment. Enforceable
commitments and other measures have been incorporated in the attainment
demonstration SIP. Thus the MECT EIP is an integral part of the air
quality planning procedure and the measures necessary to reach
attainment of the NAAQS. The MECT rules therefore will not interfere
with attainment of the NAAQS, they are part of the strategy to attain
those standards. Although not submitted with the MECT EIP SIP
submittal, the EPA EIP guidance expectations for addressing uncertainty
have been incorporated into other attainment demonstration SIP
submittals.
Uncertainty is addressed in the EIP guidance at section 6.4(c).
With respect to uncertainty in emissions measurement, the Chapter 117
monitoring provisions are adequate to reduce uncertainty to a
reasonable level. In particular, the larger sources are required to
have monitoring with the least uncertainty--CEMS and parametric
emission monitoring systems (PEMS). This section of the EIP focuses on
the different levels of uncertainty associated with using reductions
from one type of source at another type of source, which is very
relevant to using MDERCS and DERCS in the MECT. The MECT rules
authorize the use of DERCS and MDERCS generated pursuant to 30 TAC
Chapter 101, Subchapter H, Division 4 to comply with the annual cap.
The DERC and MDERC rules are being reviewed for conformance with the
EIP Guidance section 6.4(c) as part of EPA's evaluation of Subchapter
H, Division 4. EPA will shortly propose action on the rules in
Subchapter H,

[[Page 38240]]

Division 4. MDERCS and DERCS may not be utilized for compliance with
MECT program annual caps until the DERC and MDERC rules are approved by
EPA. EPA concluded that the TNRCC MECT EIP SIP submittal meets the
Clean Air Act requirements and EPA EIP guidance expectations for
uncertainty in the integrity element of quantifiable.
3. Quantifiable Element--Approving Quantification Protocols
EIPs rely on emission quantification protocols to determine source
compliance and overall program performance. An EIP quantification
protocol is the technical procedure a source uses to calculate the
amount of emissions associated with that source's activities under an
EIP.
TNRCC has submitted a revision to the MECT rule which is being
parallel processed with this notice that is the submission of emission
quantification protocols. The protocols which are contained in 30 TAC
Chapter 117 specify initial and continuous monitoring methodologies.
These requirements in Chapter 117 have met the public notice provisions
for protocols. The Chapter 117 rules do not, however, contain missing
data provisions establishing how to determine emissions when required
NO_X monitoring equipment is not functioning properly. EIP
section 5.2(c) states that protocols should contain such provisions.
EPA concluded that the TNRCC MECT EIP SIP submittal will meet the
CAA requirements and EPA EIP guidance expectations for approving
emission quantification protocols, if the rules are revised to specify
missing data provisions as described in EIP guidance section 5.2(c).
4. Quantifiable Element--Selecting Emission Measurement Protocols
The expectation for the hierarchy for selecting emission
measurement protocols is based upon site-specific information almost
always being more reliable as an indicator of emissions than emission
factors. Sources should use site-specific data whenever available or
feasible. The EPA EIP guidance document recommends the following
emission quantification approaches in the priority order described in
the hierarchy below:
a. CEMS data on the unit generating the emissions during the
generation.
b. CEMS data on the unit generating the emissions at a time other
than the generation, but at representative conditions.
c. Multiple emission tests at the affected unit(s) at
representative conditions.
d. Emission test at the affected unit(s) at representative
conditions.
e. Emission test at maximum load or stack tests at identical unit.
f. Emission factors (where allowed) or material balance.
The proposed approval of this notice is based upon the review that
the hierarchy for selecting emission measurement protocols has been
consistent with the EPA EIP guideline document. EPA concluded that the
TNRCC MECT EIP SIP submittal meets the Clean Air Act requirements and
EPA EIP guidance expectations for selecting emission measurement
protocols in the integrity element of quantifiable.
Integrity Element Four--Permanent
The EPA EIP guidance defines the expectations for the integrity
element of permanent for all EIPs on a programmatic basis. The EIP
states that emission reductions are permanent if a source commits to
actions or achieves reductions for a future period of time as defined
in the EIP.
For compliance flexibility EIPs, the results of an EIP are
permanent if you are able to ensure that no emission increases
(compared to emissions if there was no EIP) occur over the time defined
in the SIP. For programmatic reduction EIPs, the results of an EIP are
permanent if the EIP is able to ensure that the programmatic reductions
occur over the duration of the EIP rule, and for as long as they are
relied on in the SIP or SIP-related requirements. The only source
specific provision for permanent in MECT EIPs found at section 4.1(b)
is that the integrity element of permanent does not apply to emission
reductions made by sources
The TNRCC MECT EIP SIP submittal at section 101.352(b) requires for
every control period, each site to hold allowances equal to or greater
than the total NO_X emissions. EPA concluded that the TNRCC
MECT EIP SIP submittal meets the Clean Air Act requirements and EPA EIP
guidance expectations for the integrity element of permanent.
Fundamental EIP Principle Two--Equity
Equity issues can be caused by an uneven distribution of emissions,
or other non-emission effects. Some communities are considered
communities of concern, because they have historically experienced
higher emission levels than other communities in the same locale. These
higher emissions often result in less healthy air quality. Equity
issues may need resolution if the EIP continues or exacerbates existing
pollutant concentrations in existing communities of concern, or causes
new communities to experience higher emission levels than other
communities in the same locale. There are two elements that comprise
the fundamental principle of equity in EIPs. They are general equity
and environmental justice.
Equity Element One--General Equity
General equity means that an EIP ensures that all segments of the
population are protected from public health problems, and no segment of
the population receives a disproportionate share of a program's
disbenefits. The MECT EIP SIP submittal consists of an overall
reduction of NO_X emissions of 80%. Although allowances can
be traded annually to meet compliance requirements, the overall trend
at all sources will be a reduction of NO_X levels. In
addition, the TNRCC submittal at section 101.353(c) requires for a
source, exceeding the allowances in the compliance account, allowances
for the next control period to be reduced by a like amount plus an
additional 10%. EPA concluded that the TNRCC MECT EIP SIP submittal
meets the Clean Air Act requirements and EPA EIP guidance expectations
for general equity in the fundamental principle of equity.
Equity Element Two--Environmental Justice
The environmental justice element applies if the MECT EIP covers
VOCs, and could disproportionately impact communities populated by
racial minorities, people with low incomes, and/or Tribes. The
localized hazardous air pollutant (HAP) provisions of an EIP could
occur if the EIP allowed VOC HAPs to be shifted from one facility to
another. Although the TNRCC MECT EIP SIP submittal is a mass cap and
trade program for NO_X stationary sources only, section
101.356(f) provides for sites to use VOC DERCs and MDERCs in place of
allowances for compliance provided a demonstration has been made and
approved by TNRCC and EPA. The use of VOC reductions in place of
NO_X allowances will only drive the VOC emissions lower. The
MECT EIP rule does not allow VOC HAPs to be shifted from one facility
to another. There is no likelihood under the MECT EIP for
disproportionate impact on communities of concern. EPA concluded that
the TNRCC MECT EIP SIP submittal meets the Clean Air Act requirements
and EPA EIP guidance expectations for environmental justice in the
fundamental principle of equity.

[[Page 38241]]

Fundamental Principle Three--Environmental Benefit
EPA EIP expectations for the fundamental principle of environmental
benefit are that a MECT EIP ensures a declining budget or emission caps
that set an absolute limit on mass emissions which would otherwise have
increased or would have increased at a greater rate. The TNRCC MECT EIP
SIP submittal at section 101.353(a)(3) provides for increasing
reductions of NO_X emissions over time in order to reach
attainment. In addition the MECT EIP will ensure lower NO_X
emissions than the implementation of 30 TAC Chapter 117 emission
standards for the HGA attainment demonstration will ensure, since the
MECT program limits mass emissions based on historical activity levels,
and reduces the mass cap over time based on the emission rate
specifications in section 117. The Chapter 117 ESAD limitations are
rate based and do not limit mass emissions. Thus, the environmental
benefit expectation for the MECT EIP cap on all emissions to be below
the level that would have otherwise been set for the affected sources
has been met. EPA concluded that the TNRCC MECT EIP SIP submittal meets
the Clean Air Act requirements and EPA EIP guidance expectations for
the fundamental principle of environmental benefit.
Other Elements of All Trading EIPs
The other provisions of a trading EIP are discussed at Sec. 6.5 of
the EPA EIP guidance document. These include provisions for geographic
trading across boundaries, provisions for notifying the relevant
Federal Land Manager (FLM) in a Class I area, accounting for emission
reductions that occur prior to the approval of the EIP, and restricting
use of Alternative Emission Limits (AELs).
1. Other Trading EIP Elements--New Source Review and Trading
The expectation is for trading EIPs to contain provisions that
include new source review and trading since the NSR program may affect
implementation of a trading EIP and, in turn, the EIP may affect
implementation of some portions of the NSR program. To meet this
expectation, sources allowed to comply with offset or netting
requirements with EIP emission reductions may only use those emission
reductions which independently meet relevant NSR requirements in the
CAA, EPA NSR regulations and guidance, and provisions of the EPA EIP
guidance document. The EIP expectation is that TNRCC will ensure that
major sources and major modifications are not exempted from any NSR or
Prevention of Significant Deterioration of Air Quality (PSD)
requirement because of the implementation of the MECT EIP. Another
expectation is that a major source or major modification may not avoid
NSR review by using an EIP except for the use of emission reductions
that meet the NSR/PSD requirements for netting when the EIP emission
reductions occur contemporaneously with their use and occur at the same
source as the emission increase.
The TNRCC MECT SIP submittal at section 101.352(d) states that
allowances cannot be used for netting requirements under 30 TAC Chapter
116, Subchapter B, Divisions 5 and 6 which relate to Nonattainment
Review and Prevention of Significant Deterioration Review. However,
section 101.352(e) does permit allowances to occur simultaneously to
satisfy the correlating one to one portion of the offset requirements
for new or modified facilities subject to federal nonattainment NSR
requirements as provided at 30 TAC Chapter 116, Subchapter B, Division
7 relating to Emission Reductions Offsets. It is understood that the
use of allowances for the offset requirements will be accomplished by a
permanent transfer of the allowances to the source undergoing
permitting. The proposed MECT revision which is being parallel
processed by EPA in this notice contains the new section 101.356(c)
which provides for the permanent selling of the annual allowances. The
permanent transfer of the allowances would meet the requirements of
section 116.115(b)(2)(C)(iii) for the life of the source. EPA concluded
that if the State clarifies that the new source will have to obtain
offsets for the life of the source the TNRCC MECT EIP SIP submittal
will meet the Clean Air Act requirements and EPA EIP guidance
expectations for new source review and trading for the category of
other trading EIP elements.
2. Other Trading EIP Elements--Limitations on Emission Reduction Use
The expectations are for trading EIPs to provide limitations on
emission reduction use to be consistent with provisions of the CAA and
other existing EPA policies. A program that conforms to this
expectation will not allow the use of NO_X emission
reductions generated outside the modeling domain, emission reductions
to meet NSPS, BACT, LAER, NSR offset requirements, title IV Acid Rain
requirements, and any air toxic requirement under section 112 of the
CAA. Nor would emission reductions be used to meet various statutorily-
mandated mobile source requirements, including exhaust and evaporative
emission standards for both highway and non-road vehicles and engines;
Federal Reid Vapor Pressure (RVP), reformulated gasoline (RFG), anti-
dumping and detergent additive requirements, emission reductions to
meet the municipal waste combustion rules and federally-mandated
inspection/maintenance (I/M) program requirements.
The TNRCC MECT SIP submittal at section 101.351 limits the MECT EIP
to only stationary sources within the eight county Houston Galveston
ozone nonattainment area. The MECT EIP rule at section 101.356 does not
allow the use of NO_X emission reduction credits (ERCs) from
30 TAC Chapter 101, Subchapter H, Division 1 ERC EIP program for MECT
banking and trading. Likewise, section 101.352(c) allows unused
allowances to be used as ERCs but the use of ERCs as allowances is not
permitted. DERCs or MDERCs allowed for use as allowances would by
definition be surplus to the statutory mobile source, NSPS, BACT, LAER,
NSR, sulfur in fuel Tier II, and municipal waste combuster (MWC)
requirements. EPA concluded that the TNRCC MECT EIP SIP submittal meets
the Clean Air Act requirements and EPA EIP guidance expectations for
limitations on emission reduction use for the category of other trading
EIP elements.
3. Other Trading EIP Elements--Banking Emission Reductions
The expectations for trading EIPs for banking emission reductions
center on emission spiking. The expectation is that, if the banking of
emission reductions is allowed in the EIP, an evaluation would be
performed to examine how likely it is that emission spiking will occur,
and that safeguards would be included in the EIP to prevent emission
spiking commensurate with the probability that spiking will occur.
The TNRCC MECT SIP submittal at section 101.356(a) allows a source
participating in the EIP to bank the allowances not used in one control
period to be used in the following control period. The MECT EIP also
requires that the oldest allowances must be used first. This also tends
to prevent carryover for more than one year and thus prevent emission
spiking. The MECT rules so restrict ``banking'' that any potential for
emissions ``spiking'' would be minimal. Banking is limited to just one
year, and the chance of carryover to subsequent years is

[[Page 38242]]

minimized by section 101.354(b) (requiring Executive Director to debit
most recently allocated allowances before banked allowances--thus
increasing likelihood that banked allowances will expire). Use of the
banking provision will be random, and with the significantly declining
cap, chances of spiking should be minimal. EPA concluded that the TNRCC
MECT EIP SIP submittal meets the Clean Air Act requirements and EPA EIP
guidance expectations for banking emission reductions for the category
of other trading EIP elements.
4. Other Trading EIP Elements--General Conformity
The expectations for trading EIPs for general conformity are to
ensure that a federal entity can not use emission reductions generated
by an EIP to meet the offset or mitigation options of the general
conformity requirements. The general conformity requirements will be
contained in the revised general conformity rules that EPA will propose
shortly. The EIP guidance will be revised as appropriate following
promulgation of the general conformity rules. The EIP guidance does not
specify that the MECT rules contain any provision on general
conformity, so the MECT meets this EIP expectation on general
conformity.
5. Other Trading EIP Elements--Specific Pollutant Effects
The expectation for provisions to address specific pollutant
effects may need to be included in the EIP SIP submittal. If
NO_X is in the MECT EIP, provisions for localized increases
in emissions of criteria pollutants in section 16.11 of the EPA EIP
guidance may apply. If VOCs are in the MECT EIP, provisions for
localized increases in HAPs in section 16.2 may apply. If inter-
precursor trading is included in the MECT EIP, provisions for ozone
inter-precursor trading in section 16.9 may apply.
With respect to localized increases on NO_X, the
expectation applies to trading EIPs which can potentially exceed the
annual significant emissions increase threshold of 40 tons per year
(tpy). This increase applies only to emission increases above what the
source was emitting before the implementation of the EIP. Since the
MECT EIP will result in a substantial overall emissions decrease it is
highly unlikely that this provision will be triggered.
With respect to VOCs, if the MECT EIP could cause localized
increases in HAPs, the provisions of section 16.2 of the EPA EIP
guidance would be applicable. Since the only potential VOC
participation in the EIP is the use of DERCs and MDERCs, there could be
no increase in VOCs above the baseline. For this reason the Hazardous
Air Pollutant (HAP) framework is not applicable to the MECT EIP. For
the same reasons the expectations of section 16.9 of the EIP guidance
for provisions for ozone inter-precursor trading are not applicable to
the MECT EIP submittal. EPA concluded that the TNRCC MECT EIP SIP
submittal meets the Clean Air Act requirements and EPA EIP guidance
expectations for specific pollutant effects for the category of other
trading EIP elements.
6. Other Trading EIP Elements--Transportation Conformity
The expectations for trading EIPs to ensure consistency with
transportation conformity are that the MECT EIP rule contain
requirements that mobile sources generating mobile discrete emission
reductions credits certify the reductions are not used to meet
transportation conformity requirements. To meet the expectation, the
EIP rule would require notification to TNRCC, the HGA Metropolitan
Planning Organization (MPO), and the Texas Department of Transportation
of the generator's intention to generate MDERCs. Once notified, the MPO
may not use these MDERCs to satisfy the requirement for transportation
conformity. The expectation is that the generator will provide enough
information to the MPO about the likely emission reductions from the
activity to allow the MPO to adjust its regional conformity analyses
appropriately. TNRCC must also include provisions for assessing
penalties against sources that use EIP MDERCs that are not surplus to
transportation conformity requirements.
The MECT rules do not require notification to the MPO as stated in
the EIP guidance. It is understood that any MDERC to be traded must be
surplus to any state or federal law, regulation or agreed order. This
would mean that the MDERC has to be surplus to the conformity analysis
relied upon in the SIP attainment demonstration which is required by a
federal rule. The TNRCC MECT SIP submittal at section
101.356(f)requires any MDERCs traded must be surplus in accordance with
the emission quantification protocols established in 30 TAC Chapter
101, Subchapter H, Division 4. If the State commits to EPA's
satisfaction to provide for notification of MDERC generation to the
MPO, EPA will conclude that the TNRCC MECT EIP SIP submittal meets the
Clean Air Act requirements and EPA EIP guidance expectations for
transportation conformity for the category of other trading EIP
elements.
7. Other Trading EIP Elements--Inter-Credit Trading
The expectations for trading EIPs to contain provisions for inter-
credit trading center on the acquisition and use of an emission
reduction generated under one EIP to meet the requirements of another
EIP. The expectation is that if the EIP includes inter-credit trading,
the provisions of section 16.12 will be met. The TNRCC MECT SIP
submittal at section 101.356(f) requires any DERCs or MDERCs traded
must be generated in accordance with the emission quantification
protocols established in 30 TAC Chapter 101, Subchapter H, Division 4.
The DERC and MDERC rules are being reviewed for conformance with the
EIP section 16.12 as part of EPA's evaluation of 30 TAC Chapter 101,
Subchapter H, Division 4. EPA will shortly propose action on the rules
in Subchapter H, Division 4. MDERCs and DERCs may not be utilized for
compliance with MECT program annual caps until the DERC and MDERC rules
are approved by EPA.
EPA concluded that the TNRCC MECT EIP SIP submittal meets the Clean
Air Act requirements and EPA EIP guidance expectations for inter-credit
trading for the category of other trading EIP elements.
8. Other Trading EIP Elements--EIPs That Include Reasonably Available
Control Technology (RACT) Sources
The expectations for trading EIPs that include RACT sources are
that if the EIP covers RACT sources, the provisions of the EIP guidance
document section 16.13 be met. Sources with an alternative RACT limit
usually are allowed to emit at a higher rate than sources covered under
the presumptive RACT limit. Sources subject to presumptive and
alternative RACT limits may generate reductions for use in a trading
EIP. However, in a program that conforms to the EIP Guidance, the
amount of the reduction would be based on application of the
presumptive RACT limit rather than the alternative RACT limit.
Sometimes alternative RACT determinations are considered a type of
Alternative Emission Limitation. Once the MECT EIP is adopted TNRCC may
not issue any new AELs.
The RACT and ESAD for the HGA area in Chapter 117 are as stringent
if not more stringent than the presumptive limits contained in the
Control Technology Guideline (CTG) documents. Therefore these
presumptive national limits will be above the rates used to establish
MECT

[[Page 38243]]

allowances. EPA concluded that the TNRCC MECT EIP SIP submittal meets
the Clean Air Act requirements and EPA EIP guidance expectations for
EIPs that include RACT sources for the category of other trading EIP
elements.
9. Other Trading EIP Elements--Geographic Trading Across Jurisdictional
Boundaries
The expectations for trading EIPs for geographic trading across
jurisdictional boundaries does not provide additional geographic
restrictions to trading if the MECT EIP only covers areas that are not
needing and lacking an attainment demonstration. In this case the
geographic restrictions contained in the approved SIP will apply to the
MECT EIP. The TNRCC MECT SIP submittal at section 101.351 limits the
MECT EIP only to stationary sources within the eight county Houston
Galveston ozone nonattainment area. EPA concluded that the TNRCC MECT
EIP SIP submittal meets the Clean Air Act requirements and EPA EIP
guidance expectations for geographical trading across jurisdictional
boundaries for the category of other trading EIP elements.
10. Other Trading EIP Elements--Federal Land Manager (FLM) Notification
The expectations for trading EIPs for Federal Land Manager
notification in PSD Class I areas is found at section 16.6 for trading
EIPs located in or within 100 km of a PSD Class I area. The nearest PSD
Class I area to the HGA area is Breton Island National Wildlife
preserve off the coast of Louisiana. It is more than 300 kilometers
from the HGA area. EPA concluded that the TNRCC MECT EIP SIP submittal
meets the Clean Air Act requirements and EPA EIP guidance expectations
for FLM notification for the category of other trading EIP elements.
11. Other Trading EIP Elements--Tracking Systems and Market
Clearinghouses
The expectations for trading EIPs for tracking systems and market
clearinghouses is that both TNRCC and the sources participating in
trading EIPs will obtain accurate information about market activities
related to trading emission reductions. Specifically, the State will
obtain information that would allow the tracking of generation/use of
emission reductions, ensure compliance, target enforcement resources
and conduct periodic EIP performance audits. A tracking system is
needed to meet these provisions. The information would be made readily
available to the public.
The TNRCC MECT SIP submittal at section 101.356(e) requires all
trades to be completed by the TNRCC executive director following the
submittal of a completed TNRCC ECT-2 form, Application for Transfer of
Allowances. The completed ECT-2 shall include the price paid per
allowance. The ECT-2 shall be submitted to TNRCC at least 30 days prior
to the allowances being deposited into the transferee's broker or
compliance account. The TNRCC executive director will issue a letter to
the purchaser and seller reflecting the trade. The trade will be
considered finalized upon issuance of the letter. The MECT SIP
submittal at section 101.363 requires each source to report trades
annually in the compliance report using TNRCC form ECT-1. Performance
audits of allowance trading is required by section 101.363. EPA
concluded that the TNRCC MECT EIP SIP submittal meets the Clean Air Act
requirements and EPA EIP guidance expectations for tracking systems and
market clearinghouses for the category of other trading EIP elements.
12. Other Trading EIP Elements--Multi-Claimants
The expectations for trading EIPs concerning multi-claimants
focuses on certain situations where ownership of an EIP emission
reduction strategy could be claimed by more than one party. When these
situations occur, it is important that the MECT EIP ensure that
ownership is successfully claimed by only one party to avoid double
counting of reductions. From the MECT EIP SIP submittal, all sources in
the cap must participate by receiving allocations of allowances as per
section 101.353. The banking and trading of allowances are specified by
section 101.356. The allocation, banking and trading of allowances is
controlled by TNRCC at each phase by the submission and approval of
forms such that there should be no practical question of ownership of
allowances. EPA concluded that the TNRCC MECT EIP SIP submittal meets
the Clean Air Act requirements and EPA EIP guidance expectations for
multi-claimants for the category of other trading EIP elements.
13. Other Trading EIP Elements--Emission Reductions Prior to EIP
Approval
The expectations for trading EIPs address the condition that there
may be sources that reduce emissions before the development of an EIP.
Some generators may want these old emission reductions to participate
in the trading EIP. Any emission reductions that result from emission
reduction strategies that were started before November 30, 1990 may not
be allowed to participate in a trading EIP. In the MECT EIP SIP
submittal at section 101.353, all sources in the cap must participate
by receiving allocations of allowances. The allocations are based upon
the level of activity and emission rates of all sources for the annual
periods of 1997, 1998 and 1999. There is no provision for ERCs to occur
prior to the approval of the EIP or outside the process of initial
allocation of allowances. EPA concluded that the TNRCC MECT EIP SIP
submittal meets the Clean Air Act requirements and EPA EIP guidance
expectations for emission reductions prior to EIP approval for the
category of other trading EIP elements.
14. Other Trading EIP Elements--Compliance Margins
The expectation for trading EIPs for provisions for compliance
margins is that the MECT trading EIP will include provisions to account
for compliance margins when sources participating in an EIP are
initially complying with an emission limit. The provision for
compliance margins is for sources participating in an EIP to comply
with an emission limit. Since the MECT EIP is based upon allowances
consisting of mass emissions determined from historical actual
emissions, the provision does not apply. The eighty percent reduction
of emissions from historical levels will leave little if any room for
compliance margins. EPA concluded that the TNRCC MECT EIP SIP submittal
meets the Clean Air Act requirements and EPA EIP guidance expectations
for compliance margins for the category of other trading EIP elements.
15. Other Trading EIP Elements--Alternative Emission Limits
The trading EIPs expectation is for provisions restricting the use
of alternative emission limits. Under traditional air quality
management approaches, sources are required by regulation to meet
emission limitations. In some cases, sources may find it difficult to
meet these requirements by the required deadline. In such events,
States have granted sources some form of relief (e.g., waivers,
exemptions, compliance deadline extensions, and temporary relaxations
to the regulatory requirements). These forms of relief are known as
alternative emission limits, or AELs. While AELs may be necessary in
limited cases, widespread use of AELs ultimately means that expected
emission reductions will be delayed. A benefit of trading EIPs is that
they provide sources an alternative means for obtaining required
emission reductions

[[Page 38244]]

on time. This means that in many cases, sources will not need AELs as a
means of regulatory relief.
The TNRCC MECT EIP SIP submittal at section 101.353 specifies that
all allowances are based upon the level of activity and emission rates
of all sources in the cap for the annual periods of 1997, 1998 and
1999. Once the MECT EIP is operational, if a source cannot meet the
allowance limitation additional allowances must be purchased. The EIP
Guidance expectation is that the MECT program will prohibit the
issuance of AELs which would raise the annual cap unless the source
demonstrates that it can not purchase allowances. The MECT program
contains no explicit prohibition against issuance of AELs. EPA
concluded that the TNRCC MECT EIP SIP submittal will meet the Clean Air
Act requirements and EPA EIP guidance expectations for alternative
emission limits for the category of other trading EIP elements, if the
state demonstrates how existing provisions will prevent issuance of an
AEL that increases an annual allocation, or the state commits not to
issue such an AEL, unless the source demonstrates that it cannot
acquire allowances.
Provisions for a Multi-Source Emission Cap-and-Trade EIP
The expectations for additional provisions needed for a multi-
source emission cap-and-trade EIP are found in the EPA EIP guidance
document. A multi-source emission cap-and-trade EIP is an emission
trading EIP that limits the total emissions from a group of sources to
a level needed for an area to attain a NAAQS, and allows sources
flexibility in complying with their emission limits.
The following list presents several conditions that an EIP that
conforms to the Guidance would meet to ensure the integrity of the
emission cap. It also includes references to the TNRCC MECT SIP
submittal which ensure the integrity of the emission cap.
Sources have the ability to measure and report all capped
emissions. TNRCC has revised the MECT rule by submitting emission
quantification protocols that meet the EPA EIP guidance.
Each affected source must designate an authorized account
representative as per section 101.356(d) who is responsible for the
source's emissions, trading and allowances.
The SIP submittal demonstrated that sources cannot shift a
significant amount of production, and therefore emissions, to non-
affected sources outside the EIP since all regulated stationary sources
of NO_X in the HGA area must participate in the MECT.
Penalties for non-compliance are known in advance, are
automatic when a unit's emissions in the control period exceed its
allowances, and are equivalent to traditional CAA penalties as per
TNRCC's enforcement statutes, regulations and policies.
All the emissions, allowance, and transaction information
are to be publicly available on the TNRCC world wide web site.
The MECT EIP covers sources with RACT requirements. Rather
than allow RACT sources to comply using the EIP, the MECT EIP has
incorporated the RACT and limitations to reach attainment into the
allowances of the EIP.
The MECT EIP rule can not increase localized emissions of
HAPs since the only use of VOCs allowed to be traded are reductions
below the baseline for the attainment demonstration.
EPA concluded that the TNRCC MECT EIP SIP submittal meets the Clean
Air Act requirements and EPA EIP guidance expectations for additional
provisions needed for a multi-source emission cap and trade EIP.
1. Other Multi-Source Cap & Trade Provisions--Setting the Budget
The expectations for setting the budget for a multi-source emission
cap-and-trade EIP are that the program baseline for the cap-and-trade
program will be no greater than the sum of the historical average
emissions of the participating sources.
The MECT program baseline is based almost entirely on the sum of
historical emissions from sources in the program. For some newer
sources, allocations are based on allowable emissions for two years,
but this is only until an actual emissions baseline is established as
required by 30 TAC 101.353(a)(2)(B) and (4)(B).
EPA concluded that the TNRCC MECT EIP SIP submittal meets the Clean
Air Act requirements and EPA EIP guidance expectations for setting the
budget needed for a multi-source emission cap and trade EIP.
2. Other Multi-Source Cap & Trade Provisions--Defining the Affected
Sources
The expectations for defining the affected sources for a multi-
source emission cap-and-trade EIP are found at section 7.4(c) of the
EPA EIP guidance document. A multi-source emission cap-and-trade EIP
contains a certain set of sources. The aggregate emissions from these
sources are capped. The emission cap aspect of a multi-source emission
cap-and-trade EIP will be compromised, however, if TNRCC defines the
population of sources in a way that allows production from sources
covered under the EIP to shift to those that are not covered. The TNRCC
MECT SIP submittal at section 101.351 establishes the MECT EIP cap for
stationary sources with emissions greater than 10 tpy. Significant
emission shifts are unlikely since any sources with emissions less than
10 tpy whose sources increase above 10 tpy are required to obtain
allowances from other sources and become part of the cap. Section
101.353(b) requires new or modified sources not in the cap to obtain
allowances for each control period from sources participating in the
MECT EIP. EPA concluded that the TNRCC MECT EIP SIP submittal meets the
Clean Air Act requirements and EPA EIP guidance expectations for
defining the affected sources for a multi-source emission cap and trade
EIP.
3. Other Multi-Source Cap & Trade Provisions--Opt-in Sources
The expectations for provisions for opt-in sources in a multi-
source emission cap-and-trade EIP are found at section 7.4(d) of the
EPA EIP guidance document. Additional sources may want to ``opt-in'' to
the multi-source cap-and-trade EIP. These additional sources could be
smaller, located in a different geographic area, or represent another
sector than the originally defined affected sources. All trading units
are within the HGA area. There is no provision for opt-ins. Section
101.353(b) requires new or modified sources not in the cap to obtain
allowances for each control period from sources participating in the
MECT EIP. The TNRCC MECT SIP submittal at section 101.353(b) requires
new or modified sources not in the cap to obtain allowances for each
control period from sources participating in the MECT EIP. EPA
concluded that the TNRCC MECT EIP SIP submittal meets the Clean Air Act
requirements and EPA EIP guidance expectations for opt-in sources for a
multi-source emission cap and trade EIP.
4. Other Multi-Source Cap & Trade Provisions--Distributing Allowances
The expectations for provisions for distributing allowances in a
multi-source emission cap-and-trade EIP are found at section 7.4(e) of
the EPA EIP guidance document. The expectation is that after the
emission budget is set, the population of covered sources would receive
a share of the emission budget. Factors that may be used to assign a
share of the budget include historical,

[[Page 38245]]

current or projected emission levels and existing control technology
requirements. The TNRCC MECT SIP submittal at section 101.351 applies
to all stationary NO_X facilities subject to TNRCC Rule 117
emission specifications at sites with emissions design capacity above
10 tpy in the HGA ozone nonattainment area. The emission budget in the
MECT EIP was established based on historical emission levels. From
section 101.351(a), the initial allowances in the MECT EIP will be
based on the actual historical emissions for each source from 1997,
1998 and 1999. Section 101.351(a)(3) requires three steps from January
1, 2002 through April 1, 2007 where the allowances are reduced to reach
the final goal of approximately 80% overall reduction from the
historical levels. The program will be audited every three years to
evaluate its impact on the attainment demonstration. The TNRCC
Executive Director will recommend any measures necessary to remedy
problems.
The revised attainment demonstration submittal which is being
parallel processed includes a TNRCC study to be completed in 2002 which
will evaluate and potentially adjust Chapter 117 emission limitations.
In addition the 2004 mid-course correction by TNRCC will evaluate
control measures and enforceable commitments necessary to reach
attainment in 2007. There will be an opportunity at both of these
occasions to readjust allowances to reach attainment if the audit
results indicate that all issued allocations are higher than assumed in
the attainment demonstration.
Section 101.353(g) of the MECT Rules states that in ``extenuating
circumstances'' the TNRCC executive director may deviate from the
requirements for determining the amount of allowances to be issued to a
facility. TNRCC explained the purpose of this provision as being to
``prevent significantly low allocations'' in ``extraordinary
circumstances, for example a catastrophe which required a facility to
shut down during the historic period upon which allocations would
normally be based.'' TNRCC Chapter 101 Rule Log No. 1998-089-101-AI, at
74. Existing sources that wish to utilize section 101.353(g) were
required by paragraph (1) of the rule to file applications by June 30,
2001. We are informed that approximately 15 sources filed applications
by the deadline, and that their NO_X emissions represent
approximately one half of one percent of total emissions regulated by
the MECT program.
Section 101.353(g) allows executive director discretion. It is
expected, however, that prior to the time that EPA takes final action
on the MECT rules, the state will have made decisions on all
applications that were submitted by June 30, 2001. In order for EPA to
approve the MECT rules, the state must demonstrate prior to final EPA
action that any allocations issued pursuant to section 101.353(g)(1)
are not inconsistent with the attainment demonstration, and comply with
the CAA.
Paragraph (2) of section 101.353(g) allows a finite group of
relatively new sources to submit applications after June 30, 2001. In
order for EPA to approve the MECT rules, the state must either (1)
demonstrate that the allocations that could be issued pursuant to
section 101.353(g)(2) would not be inconsistent with the attainment
demonstration and would comply with the CAA, or (2) modify the rule to
eliminate executive director discretion or require EPA approval of any
allocation issued pursuant to paragraph (g)(2).
EPA concluded that the TNRCC MECT EIP SIP submittal will meet the
Clean Air Act requirements and EPA EIP guidance expectations for
distributing allowances for a multi-source emission cap and trade EIP,
if the above-described demonstrations or modifications are made.
5. Other Multi-Source Cap & Trade Provisions--Emissions Banking
The TNRCC MECT SIP submittal at section 101.356(a) allows a source
participating in the EIP to bank the allowances not used in one control
period to be used in the following control period. The EIP Guidance
expectation at section 16.15 is that a banking EIP would safeguard
against emissions spiking. The MECT rules so restrict ``banking'' that
any potential for emissions ``spiking'' would be minimal. Banking is
limited to just one year, and the chance of carryover to subsequent
years is minimized by section 101.354(b)(requiring Executive Director
to debit most recently allocated allowances before banked allowances--
thus increasing likelihood that banked allowances will expire). Use of
the banking provision will be random, and with the significantly
declining cap, chances of spiking should be minimal. EPA concluded that
the TNRCC MECT EIP SIP submittal meets the Clean Air Act requirements
and EPA EIP guidance expectations for emissions banking for a multi-
source emission cap and trade EIP.
6. Other Cap & Trade Provisions--Allowing Shutdowns to Generate
Reductions
Shutdowns may be allowed to generate emission reductions within the
context of a multi-source cap-and-trade program if the emissions
reductions resulting from the shutdown are still in the applicable
emissions inventory and the EIP has provisions to address shifting
demand. The MECT EIP at section 101.353(h) states that if allowances
are being allocated based on allowable emissions and the facility does
not achieve two complete consecutive calendar years of actual level of
activity data, then allowances will not continue to be allocated if the
facility ceases operation or is not built. EPA concluded that the TNRCC
MECT EIP SIP submittal meets the Clean Air Act requirements and EPA EIP
guidance expectations for allowing shutdowns to generate reductions for
a multi-source emission cap and trade EIP.
7. Other Cap & Trade Provisions--Shifting Demand
Shifting of activity levels is a potentially serious problem for
all multi-source cap-and-trade EIPs. A source in a cap could decide to
shift production to a source outside the cap within the same non-
attainment area. Shifting demand from sources within the cap to sources
outside the cap is unlikely to occur due to the fact that the regulated
industries (refineries, petrochemical, chemical, etc.) are made up of
relatively large sources. In other words, all significant sources that
could do the work performed by capped sources are also within the cap.
The under 10 ton sources just are not capable of assuming any
significant portion of the activity. If emissions at a non-capped
source increase to over ten tons per year, it will become regulated
under the cap. It was concluded that significant shifting of demand is
unlikely to occur, due to the nature of the EIP. EPA concluded that the
TNRCC MECT EIP SIP submittal meets the Clean Air Act requirements and
EPA EIP guidance expectations for shifting demand for a multi-source
emission cap and trade EIP.
8. Other Cap & Trade Provisions--True-up Period
Within the context of a multi-source emission cap-and-trade EIP a
source may be allowed to obtain emission allocations after the end of
the compliance period. The time between the end of the compliance
period and when the source would demonstrate compliance is called the
true-up period.

[[Page 38246]]

The length of a true-up period should be based on the length of the
compliance period. In general, for a compliance periods of several
months up to a year the true-up period should not be more than 60 days.
For shorter compliance periods the true-up period should be shorter
than 60 days. The MECT EIP at section 101.352(b) and at section
101.354(d) requires each site no later than March 1 of each year to
hold a quantity of allowances in its compliance account that equals or
exceeds the total emissions of NO_X emitted during the
control period just ended. This requirement will begin March 1, 2003.
This ``true up'' period is 60 days. EPA concluded that the TNRCC MECT
EIP SIP submittal meets the Clean Air Act requirements and EPA EIP
guidance expectations for a true-up period for a multi-source emission
cap and trade EIP.

D. Conclusion

EPA reviewed the TNRCC MECT SIP submittal with respect to the
expectations of the EPA EIP Guidance document and the requirements of
the Clean Air Act. Overall EPA has concluded, after review and
analysis, that the TNRCC MECT EIP regulation can provide a positive
contribution toward the attainment of the one-hour ozone standard in
the HGA area. EPA proposes to conclude that the program will satisfy
all requirements of the Clean Air Act, if certain modifications and/or
demonstrations described above are made.

II. Background

A. Date of State's SIP Submission

What Was the Date of the State's SIP Submission?
EPA received the proposed MECT SIP revision submitted by the TNRCC
on December 22, 2000. The MECT SIP revision consisted of new sections
to 30 TAC Chapter 101, Subchapter H, Division 3 which had been
promulgated by TNRCC in December 2000. The MECT regulation is found at
new sections 101.350 through 101.363. The Governor submitted revisions
to the MECT submittal by letter dated June 15, 2001 and requested
parallel processing of the revisions.
Was the TNRCC MECT Rule Subject to Public Notice?
The TNRCC held public hearings on the proposed MECT rules at the
following locations: September 18, 2000, in Conroe and Lake Jackson;
September 19, 2000 in Houston (2 hearings); September 20, 2000, in Katy
and Pasadena; September 21, 2000, in Beaumont, Amarillo, and Texas
City; September 22, 2000, in Dayton, El Paso, and Arlington; and
September 25, 2000, in Austin and Corpus Christi. The comment period
closed at 5 p.m. on September 25, 2000. Fifteen individuals opposed the
cap and trade concept. Eight individuals expressed general support for
the cap and trade concept. The public input was incorporated into the
final TNRCC regulation.
What Are the Sections of the MECT Rule?
New section 101.350 contains definitions of terms used in the rule.
Other sections are: section 101.351 Applicability, section 101.352
General Provisions, section 101.353 Allowances, section 101.354,
Allowance Deductions, section 101.356 Allowance Banking and Trading,
section 101.358 Emission Monitoring and Compliance Demonstration,
section 101.359 Reporting and section 101.360 Level of Activity
Certification. The revised MECT rule contains section 101.363, Program
Audits and Reports.

B. General Criteria for an EIP

What Are the General Criteria for an EIP?
The document, Improving Air Quality with Economic Incentive
Programs, (EPA-452/R-01-001) January 2001 is the EPA guideline for
discretionary EIP submittals for SIP credit. As previously stated, the
guidance document does not represent the EPA's final action for any
discretionary EIP. Final action occurs when the EPA has approved or
disapproved the discretionary EIP submitted as a SIP revision.
What Is the Applicability of Previous EPA EIP Regulations and Guidance?
The EPA EIP Guidance will take precedence over the discretionary
EIP guidance provided in prior documents such as the 1994 EIP
(published at 59 FR 16690) and the guidance in the emission trading
policy statement (ETPS) (published on December 4, 1986 at 51 FR 43813).
In addition, the guidance represents the EPA's final action on the
Open-Market Trading Rule (OMTR) (proposed in August 3, 1995 at 60 FR
39668, and on August 25, 1995 at 60 FR 44290). While the proposed OMTR
rule was never made final, the EPA EIP Guidance addresses the public
comments received for that proposal, and provides guidance on other
types of EIPs as well. These previously published documents provide
supplementary information and useful background for designing an EIP.
The requirements for mandatory EIPs remain in the Code of Federal
Regulations (CFR), title 40, part 51, subpart U (59 FR 16690).
How Does the EPA EIP Guidance Affect the EPA's 1994 EIP Rule?
The EPA's 1994 EIP rule established requirements for mandatory
EIPs, and guidance for discretionary EIPs. The rule still remains in
effect for mandatory EIPs. The new EPA EIP document updates the
guidance the EPA's 1994 EIP rule provides for developing discretionary
EIPs. The EPA removed Sec. 51.490(b) of the EPA's 1994 EIP rule when
the final version of the EIP guidance was published.
Why Was the EPA EIP Guidance Developed?
The EPA intended for the EPA EIP to be the primary guidance for use
in EIP development. The EPA intended for the EIP guidance to achieve
the following:
Update the existing guidance using a new plain language
format.
Tie together, for reference purposes, all of the existing
related guidance in one document.
Provide additional information on issues not discussed in
previously existing guidance.
The EPA EIP guidance document provides strategic advice on choosing
a program and determining which sources to include in the program. It
provides information on using emission reductions attributable to a
discretionary EIP to meet the air quality-related programs such as SIP
or SIP-related requirements. It also discusses the important tasks in
program implementation such as tracking and evaluation.
What Are the Goals of the EPA EIP Guidance?
The goals of the EPA EIP guidance are as follows:
Define economic incentive programs.
Select the best type of EIP for a given situation.
Provide help in understanding the process for getting an
EIP rule approved as part of the SIP.
Provide the information needed to implement an approved
EIP.
Provide information regarding evaluation and updating an
approved EIP.
Describe other guidance that might applicable.
Is the EPA EIP Guidance Information on the Program-Level or the Source-
Level?
Both, the guidance provides information at two levels, a program-
level and a source-level. Program-level

[[Page 38247]]

guidance applies to the EIP as a whole. States are primarily
responsible for implementing these provisions. Source-level guidance
applies to specific sources participating in the EIP. While the State
is responsible for establishing the appropriate requirements for
sources in the rule, the sources themselves are responsible for
implementing these other provisions. Program-level and source-level
guidance will apply to the majority of EIPs, but there are some
exceptions where source-level guidance is not applicable. The EPA
intended the guidance to be a ``living document,'' and plans to update
the guidance periodically as the EPA establishes new policies and
standards.
How Will EPA Act on an EIP SIP Submittal?
Once an EIP SIP revision is submitted, EPA will take action through
notice-and-comment rule making to determine if the statutory
requirements have been met. Only action taken after the conclusion of
that rulemaking would constitute final Agency action. The EPA would
take steps to expedite its proposed approval in the case of SIP
revisions containing programs that contain the elements of the EPA EIP
guidance.
If a program that does not contain the elements of the EPA EIP
guidance for that type of program is submitted, EPA would still seek to
determine whether the applicable CAA requirements were met, and, if so,
EPA would approve the submission. The EPA would make the determination
through notice-and-comment rule making.

III. Administrative Requirements

Under Executive Order 12866 (58 FR 51735, October 4, 1993), this
proposed action is not a ``significant regulatory action'' and
therefore is not subject to review by the Office of Management and
Budget. For this reason, this action is also not subject to Executive
Order 13211, ``Actions Concerning Regulations That Significantly Affect
Energy Supply, Distribution, or Use'' (66 FR 28355, May 22, 2001). This
proposed action merely proposes to approve state law as meeting federal
requirements and imposes no additional requirements beyond those
imposed by state law. Accordingly, the Administrator certifies that
this proposed rule will not have a significant economic impact on a
substantial number of small entities under the Regulatory Flexibility
Act (5 U.S.C. 601 et seq.). Because this rule proposes to approve pre-
existing requirements under state law and does not impose any
additional enforceable duty beyond that required by state law, it does
not contain any unfunded mandate or significantly or uniquely affect
small governments, as described in the Unfunded Mandates Reform Act of
1995 (Public Law 104-4). This proposed rule also does not have a
substantial direct effect on one or more Indian tribes, on the
relationship between the Federal Government and Indian tribes, or on
the distribution of power and responsibilities between the Federal
Government and Indian tribes, as specified by Executive Order 13175 (65
FR 67249, November 9, 2000), nor will it 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 (64 FR 43255, August 10, 1999), because it
merely proposes to approve a state rule implementing a federal
standard, and does not alter the relationship or the distribution of
power and responsibilities established in the Clean Air Act. This
proposed rule also is not subject to Executive Order 13045 (62 FR
19885, April 23, 1997), because it is not economically significant.
In reviewing SIP submissions, EPA's role is to approve state
choices, provided that they meet the criteria of the Clean Air Act. In
this context, in the absence of a prior existing requirement for the
State to use voluntary consensus standards (VCS), EPA has no authority
to disapprove a SIP submission for failure to use VCS. It would thus be
inconsistent with applicable law for EPA, when it reviews a SIP
submission, to use VCS in place of a SIP submission that otherwise
satisfies the provisions of the Clean Air Act. Thus, the requirements
of section 12(d) of the National Technology Transfer and Advancement
Act of 1995 (15 U.S.C. 272 note) do not apply. As required by section 3
of Executive Order 12988 (61 FR 4729, February 7, 1996), in issuing
this proposed rule, EPA has taken the necessary steps to eliminate
drafting errors and ambiguity, minimize potential litigation, and
provide a clear legal standard for affected conduct. EPA has complied
with Executive Order 12630 (53 FR 8859, March 15, 1988) by examining
the takings implications of the rule in accordance with the ``Attorney
General's Supplemental Guidelines for the Evaluation of Risk and
Avoidance of Unanticipated Takings'' issued under the executive order.
This proposed rule does not impose an information collection burden
under the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C.
3501 et seq.).

List of Subjects in 40 CFR Part 52

Environmental protection, Air pollution control, Intergovernmental
relations, Nitrogen dioxide, Nonattainment, Ozone, Reporting and
recordkeeping requirements, Volatile organic compounds.

Dated: July 16, 2001.
Gregg A. Cooke,
Regional Administrator, Region 6.
[FR Doc. 01-18318 Filed 7-20-01; 8:45 am]
BILLING CODE 6560-15-P

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Approval and Promulgation of Implementation Plans; Texas; Emissions Banking and Trading Revisions for the Mass Emissions Cap and Trade Program for the Houston/Galveston Ozone Nonattainment Area

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