Proposal:

Set Public Hearing April 11, 1997 to Adopt Proposed Rule 2501 - Air Quality Investment Program

Synopsis:

Proposed Rule 2501 will provide an alternative compliance option to sources subject to source-specific AQMD rules and regulations by creating an air quality investment fund. Source operators with specific emission limitations under Regulation IV, XI, or Rule 2202 can voluntarily participate in the program by submitting a specified fee into the AQIP. This fee would be used to fund stationary and mobile source projects that would produce emission reductions equivalent to, or greater than, emission reductions required by the source-specific rules.

Committee:

Mobile Source, February 28, 1997, Reviewed

Recommended Action:

Set Public Hearing April 11, 1997 to Adopt Proposed Rule 2501 - Air Quality Investment Program.

James M. Lents, Ph.D.
Executive Officer

In March 1996, AQMD staff presented to the Board a set of policy recommendations to develop an Intercredit Trading Program. As part of the overall recommendation to develop a universal trading market to allow broader trading of mobile and stationary source emission credits, AQMD staff also recommended that an expanded AQIP be developed. An expanded AQIP would complement a universal trading market and would be consistent with the objective of the Intercredit Trading Study to increase compliance flexibility and promote the commercialization of advanced pollution control technologies. Based on these policy recommendations, the Board directed staff to initiate rule development for an Intercredit Trading Program.

The AQMD currently is developing a series of market incentive rules under Proposed Regulation XXV - Intercredit Trading Program to implement the recommendations from the Intercredit Trading Study. This proposed regulation will initially include four rules: Rule 2500 - Intercredit Trading; Rule 2501 - AQIP; Rule 2505 - Credit Generation for Permitted Stationary Sources; and Rule 2506 - Credit Generation for Area Sources. Proposed Rule 2500 is an umbrella rule that creates the universal trading market, specifies the provisions for trading of credits, credit use, program audits, and backstop measures. Proposed Rule 2505 and Proposed Rule 2506 identify credit-generating provisions for permitted stationary sources and unpermitted area sources, respectively.

Proposal

The Proposed Rule 2501 will absorb and expand the existing AQIP under Rule 2202. Under Proposed Rule 2501 there are two AQIP participants: (1) Clean Air Investors, and (2) Emission Reduction Providers.

AQIP Clean Air Investors (Investors) are those regulated sources that meet the applicability requirements of this proposed rule and voluntarily elect to pay a specified Investment Fee to fund AQMD-approved emission reduction projects as an alternative to compliance with a specific emissions limitation requirement. The investment fee would be used to fund mobile and stationary projects that will achieve emission reductions equivalent to, or greater than, those which would have otherwise been required by the source under the applicable AQMD rule or regulations. In addition, after control strategies that achieve equivalent emission reductions are selected, any remaining investment fees acquired through the AQIP will be used to fund projects that will (1) promote the advancement and commercialization of technologies consistent with the AQMD's AQMP objectives to achieve air quality goals, and/or (2) generate additional emission reductions/air quality improvement to benefit the environment.

Prior to participating in the AQIP, an Investor who meets the applicability requirements of Proposed Rule 2501 must submit an AQIP Plan Registration and the appropriate Investment Fee. Upon approval of the AQIP Plan Registration, the Investor can use the AQIP emission reductions.

AQIP Emission Reduction Providers (Providers) are interested parties that implement AQMD-approved air quality projects thereby providing the emission reductions that are needed by the Investors. Providers would implement control strategy proposals to generate emission reductions equivalent to, or greater than, those needed by the Investors. To ensure emission reductions used by Investors are real, quantifiable, surplus, permanent, and enforceable, these emission reduction projects must be quantified using an AQMD-approved emissions quantification protocol.

In addition, this proposed rule includes provisions to establish a consultation committee to provide guidance regarding implementation of the AQIP, program audits and status reports, and corrective measures to correct potential problems identified through either the status report or program audits.

Policy Issues

To date, public comment on Proposed Rule 2501 has focused chiefly on policy issues of liability; applicability; surplus definition; and toxic criteria, summarized as follows.

Liability - One issue raised is the regulatory liability associated with allowing use of AQIP emission reductions prior to generation. The AQMD staff has received comments from U.S. EPAEPA and ARB that a program based on allowing use of emission reductions prior to generation violates U.S. EPAEPA’s trading guidance and civil penalties would be needed to deter noncompliance. reductions were to be used prior to generation, the liability for Providers must be sufficient to ensure stated emission reductions would occur. AQMD staff has received comments from EPA and ARB that if emission reductions are used prior to generation, civil penalties would be needed to provide greater enforcement of liability for Providers. Members of the business community have commented that although they agree that Providers should be responsible for achieving stated emission reductions, imposing civil penalties may discourage providers from participating in the AQIP. Based on these comments, AQMD staff is proposing that upon verification, achieved reductions would be placed in an Emission Reduction Reserve ready for use. Since reductions would be generated and verified prior to their use, the Reserve would be pre-funded with surplus emission reductions that have already been achieved, but not yet used for SIP purposes. The Reserve will provide a safety reserve of emission reductions that could be used to ensure equivalent emission reductions would be achieved. In addition, under Proposed Rule 2501, in the event stated emission reductions cannot be achieved, the Provider will be responsible for either achieving emission reductions at the Provider's expense or obtaining emission credits that have been pre-approved or pre-certified under an AQMD rule or regulation. This is to ensure that the AQIP Reserve will be replenished.

Applicability - The business community has commented that the current proposal needs broader applicability. Specifically, these commentors believe Proposed Rule 2501 should include Regulation XIII- New Source Review, Regulation XX- NOx and SOx RECLAIM, and be less restrictive concerning AQIP participation in lieu of existing Best Available Retrofit Control Technologies (BARCTs). AQMD staff agrees in principle that a voluntary emission trading program should be as inclusive and broad as possible. However, the proposed AQIP is only one element of the overall trading programs and it is necessary to take into account available AQMD resources to implement the program and U.S. EPA guidance. Therefore, it is recommended that the program initially be limited in scope and expanded in the future, as appropriate, based on the program audits.

Surplus Definition - emission reductions. The U.S. EPA and members of the environmental community have commented that the surplus definition must be based on the SIP-approved AQMP. However, since the SIP approval process can take several years, AQMD staff is concerned that such a definition may not be representative of the most recent data associated with rapidly evolving pollution control technologies, control measures, and implementation dates. Thus, Proposed Rule 2501 defines surplus emission reductions relative to the most recent District-approved AQMP, provided that if any portion of the District-approved plan is less stringent in control efficiency than the SIP-approved plan, the latter will be applicable until the local plan is approved by U.S. EPA.

Toxic Criteria - Another comment issue pertains to the criteria that Investors must meet to use AQIP emission reductions as an alternative to compliance with an existing emission limitation requirement; specifically, potential localized toxic air emissions. AQMD staff has received comments that the toxic emissions thresholds used in Proposed Rule 2501 are not stringent enough to protect public heath. AQMD staff believes that the toxic thresholds used in Proposed Rule 2501, for incremental as well as cumulative increases, are appropriate health and are consistent with previous AQMD Board actions.

A more detailed discussion of these issues and other comments received is contained in the Staff Report. AQMD staff will continue to work with interested parties on identified issues.

AQMP & Legal Mandates

Proposed Rule 2501 will implement 1997 AQMP Control Measure #97FLX-02: AQIP. CM #97FLX-02 would allow sources subject to AQMD rules and regulations to voluntarily invest in AQIP emission reductions as an alternative to compliance with specific emission limitations. Although no direct emission reductions were targeted by this measure in the 1997 AQMP, implementation of this proposed rule is expected to produce a net air quality benefit and provide for the commercialization of advanced pollution control technologies that will be needed to achieve the Basin’s air quality attainment goals.

CEQA & Socioeconomic Analysis

Pursuant to CEQA and the AQMD’s Certified Regulatory Program (Rule 110), the AQMD has prepared a Draft Subsequent Environmental Assessment (EA) for the proposed rule. The Draft Subsequent EA for the proposed rule included an analysis of potential adverse impacts to the following environmental areas: air quality, including an analysis of criteria and hazardous air pollutants; water quality; and human health hazard impacts. The Draft Subsequent EA was released on November 25, 1996, for a 45-day review and comment period. Responses to all written comments received on the Draft Subsequent EA will be included in the Final Subsequent EA. After the Draft Subsequent EA was released for public review and comment, minor modifications were made to the proposed rule as a result of public input. An analysis of the modified proposal and its effect on the environmental analysis contained in the Draft Subsequent EA will also be included in the Final Supplemental EA.

AQMD staff conducted a socioeconomic impact assessment for Proposed Rule 2501. In summary, Proposed Rule 2501 is likely to lower compliance costs since facilities can elect to purchase emission reductions through the AQIP when it is more cost-effective than direct compliance with applicable source-specific rules or regulations. In addition, the program provides an incentive for the development of innovative control technologies and provides an initial foundation for a broader private market under the Proposed Universal Trading Market.

Implementation Plan

AQMD staff will conduct an expanded outreach program to solicit proposals for the AQIP, building on other existing outreach efforts. In addition, the AQMD staff will conduct a public outreach program to educate and inform small businesses about this proposed program.

Resource Impacts

The proposed rule will require development of emissions quantification protocols for generating and using AQIP emission reductions, and approval of AQIP Plan Registrations. In addition, Proposed Rule 2501 will require additional AQMD staff workloads to review, certify, and select control strategy proposals. Sufficient resources have been budgeted in the AQMD Three-Year Budget Forecast.

Attachments
Attachment G
Attachement K
Attachment P
Attachments F & V

A. Rule Development Process
B. Rule Language
C. Staff Report
D. Socioeconomic Analysis and CEQA Review