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D)F~  ~; ~  ~~]~H  ~  Xh  XX b X E8#W4  p(AC7#Page  of 4b#f\  PC+&P# Figure 1  Figure 1 y! XXddECOSLOGO.EPS<y$XX%%%%!X$yA!!X:?ddOTAG1.CGMj<y,%%!!!XA!%, !XA!%  ] !XA!%' DESIGN PROPOSAL FOR PERFORMANCE ACCOUNTABILITY ă !XA!%7(April 7, 1997) !XA!% !!]XX%%#&G\  P+&P# The Trading and Incentives Workgroup has been analyzing different marketbased systems that may be used to implement future NOx emissions budgets. For whichever system is chosen, we want to ensure that the affected sources comply with the applicable emissions assignments. This paper reviews the process by which affected sources would demonstrate compliance under each of the proposed systems. The process for demonstrating and verifying compliance includes both the specific information that affected sources submit to the regulatory authority and the timing of when this information is used. This paper builds upon the analysis provided in the "Design Proposal for Emission Assignments" paper. The process for the "initial" emission assignments involves distributing each affected state's NOx emissions budget to individual sources. This paper looks at the process for demonstrating and verifying compliance once the initial emission assignments are made and the program is operational. This paper does not address working proposal 13 (variable trueup ratios). There is no point in addressing this proposal until we know whether differential emission reductions will be applicable within the OTAG area.  S  Compliance Demonstration Considerations Demonstrating compliance is the process by which sources affected by an emission assignment confirm to the regulatory authority that they have complied with the requirements. The design of a regulatory program's process for demonstrating and verifying compliance affects how efficiently the program will operate. The effectiveness of environmental programs can be reduced by not setting clear and easily measured compliance standards in the program design. Without this clarity, regulators and sources may be unsure as to the source's exact responsibilities making compliance and enforcement difficult and laborious and diminishing the likelihood that the intended environmental goals are achieved. To address these concerns, a regulatory program should set clear and simple requirements and establish valid and consistent measurement techniques for evaluating compliance with the requirements. The design of marketbased systems provides an opportunity to set clear and consistent compliance requirements for all sources because these systems can avoid case by case determination of compliance criteria (often been the case under command and control). Standardized and well defined compliance requirements not only limit the subjectivity and analysis required by the regulatory authority to verify compliance, it shifts more of the compliance demonstration process to the sources. This reduces administrative burden for both the sources and the regulatory authority while providing more certainty to the sources. This section describes the specific data elements and procedures required to demonstrate and verify compliance for each of the four marketbased systems being analyzed by the Trading and Incentives Workgroup. This analysis does not include the information requirements to set the initial emission assignments as described in the "Design Proposal for Emission Assignments" paper. 1.RateBased System All sources would submit their actual emissions rates to the regulatory authority at the end of each season so that the regulatory authority could verify compliance. Sources electing to use emission credits for compliance would also need to submit: actual utilization, a calculation of emission credits, and actual emission credits. The calculation for emission credits is as follows:ƀ% XXEmission credits = (Actual Emissions Rate Regulatory Emissions Rate) x Actual Utilizationƀ% XXSources acquiring and using emission credits may also want to verify the validity of the emission credits by reviewing the quantification protocol used for their creation. This review process could be resource intensive in order to provide enough certainty for the user (though possibly less resource@,/..XX!XX/!!X%%A@ intensive if the regulatory authority has required and ensures compliance with specific quantification protocols). However, even if credits are created under the regulatory authority's sanctioned protocols, under this system, a source using purchased credits for compliance won't necessarily know if the purchased credits are valid until after the selling source has been through a compliance/audit determination by the regulatory authority.ƀ% XXThe regulatory authority would need to verify/QA the actual emissions rate for every source within the program. For sources using emission credits for compliance, the regulatory authority would also need to verify/QA: their actual utilization, their calculation for the amount of emission credits required, the amount of emission credits held, and their demonstration of the validity of those credits.ƀ%  SH X2.XRateTonnage System  Sources in this program would be required to submit the same information (independent of whether the source uses emissions trading or not) in a two step process after the ozone season is completed. In the first step, the source would submit its actual utilization data and its actual mass emissions to the regulatory authority to verify/QA the data. Then the regulatory authority would calculate allowances (actual utilization multiplied by regulatory emissions rate) and allocate the allowances to each source. In order to keep the timing of this step to a minimum and to provide certainty for allowance holders, the regulatory authority's allowance allocation would need to be exempt from legal challenges. ƀ% XXIn the second step, the source would then have an opportunity to trade allowances/trueup to ensure that the amount of allowances held are no less than their actual mass emissions. The regulatory authority would then complete the compliance process by verifying that allowances equaled or exceeded emissions. Because all allowances are allocated by the regulatory authority and all sources must demonstrate compliance with the amount of allowances held, the regulatory authority would not be required to investigate the validity of allowances to ensure the integrity of the program. This entire process for demonstrating compliance must take place after completion of the ozone season. The compliance demonstration might not be finished until well after the start of the next ozone season because of the multiple steps involved with the process.ƀ%  SP X 3.XCap and Credit System The process for demonstrating and verifying compliance for the cap and credit system is similar to the ratebased system. Sources would submit their actual emissions rates to the regulatory authority at the end of each season for verification. Sources using emission credits for compliance would also need to submit: actual utilization, a calculation of emission credits, and actual emission credits. The same calculation for emission credits is used as for the ratebased system:ƀ% XXEmission credits = (Actual Emissions Rate Regulatory Emissions Rate) x Actual Utilizationƀ% XXSources acquiring and using emission credits may also want to verify the validity of the emission credits by reviewing the quantification protocol used for their creation. As in the ratebased system, this review process could be resource intensive and the source using purchased credits won't necessarily know if the purchased credits are valid until after the seller has been through a compliance/audit determination by the regulatory authority. The regulatory authority would need to verify/QA the actual emissions rate for every source within the program. For sources using emission credits for compliance, the regulatory authority would also need to verify/QA: their actual utilization, their calculation for the amount of emission credits required, the amount of emission credits held, and their demonstration of the validity of those credits. The cap and credit system also requires the regulatory authority to evaluate the actual utilization data for all sources to determine if adjustments are required to the performance standard (regulatory emissions rate). Periodic or yearly adjustments to the performance standard is the method that the cap and credit system uses to account for growth, thus ensuring that the systemwide emissions stay within the emissions budget.ƀ% X4.XCap and Allocate System At a minimum, a cap and allocate system would require each source to submit to the regulatory authority both actual mass emissions and an amount of allowances equal to its,/..XX emissions. Sources could derive their emissions by using actual emissions rate and utilization data (and using the product). The regulatory authority would verify/QA the mass emissions and verify that the amount of allowances held are no less than the emissions. Similar to the ratetonnage system, the regulatory authority would not be required to verify the validity of allowances because it issues all allowances and all sources must demonstrate compliance with the amount of allowances held.ƀ%  S  Summary of data elements required by the four systems at the end of each ozone season for demonstrating  S compliance ^ ddx !XTTT. """"^ B B  <#&G\  P+&P#Data Elements "$ RateBased "4RateTonnage "E.Cap and Credit "ZCap and YAllocateB B  Allowable/Regulatory Emissions Rate ) X :X L&X ]B j   Actual Emissions Rate ) X : L&X ]j j   Actual Utilization) X:XL&X]j B   Calculation of Emission Credits2) X2:2L&X2]B B  Actual Number of Emission Credits Heldt) Xt:tL&Xt]B j 2 Actual Mass Emissions)( :XLh]Xj R     t Actual Number of Allowances Held0)( 0:X0Lh0]XR    S Consequences for Noncompliance Policy Issue System integrity would be affected by excess emissions from a participating source during a control period. Working Proposal 14 Suitable compensation for excess emissions will be obtained from sources so that authorized versus actual emissions balance out. The effectiveness of a regulatory program is enhanced by establishing clear and indisputable consequences for noncompliance within the design of the program. Most existing environmental programs use monetary penalties as the means for encouraging compliance. These penalties are important for deterrence and are still used within marketbased programs. But marketbased programs may provide an additional tool for ensuring that noncompliance does not jeopardize the integrity of the environmental goal. A noncomplying source can be required to offset its excess emissions (i.e., at least 1:1 offset ratio) to ensure the environment is compensated. In this way, the market system is made whole and there is assurance that the target emissions level will be achieved.  S%  Recommendations X*XOTAG recommends that a market system for implementing emissions budgets include the following characteristics for demonstrating and verifying compliance:ƀ% XX1.X` ` Compliance demonstration should be based on valid and consistent measurement techniques.ƀ%` XX2.X` ` Rules for compliance demonstration should be known in advance, employ uniform criteria, and be clearly understood by both the regulatory authority and regulated sources.ƀ%`  -/..XXԌXX3.X` ` Subjectivity and analysis required by the regulatory authority to verify compliance should be limited.ƀ%` XX4.X` ` Burden of demonstration should be on affected sources.ƀ%` X*XThe program should include a provision that requires a noncomplying source to provide at least onetoone compensation for excess emissions.ƀ%