South Coast Air Quality Management District

Annual Audit Report and Three-Year Program Evaluation Report for Area Source Credit Rule 2506

SYNOPSIS: 

Rule 2506 - Area Source Credits for NOx and SOx requires that the Executive Officer present to the Board annual program audits and a one-time three-year audit. The annual audit report addresses the amount of Area Source Credits (ASCs) issued for NOx; types of parties to whom ASCs were issued; types of sources from which emissions were reduced; emission reduction strategies used; trading of ASCs, including prices; use of ASCs; compliance issues; and other measures of performance. No adjustments to the program are recommended. The three-year program evaluation report includes an evaluation of environmental benefits and a recommendation that the Area Source Credits program be continued.

COMMITTEE: 

Stationary Source, June 22, 2001, Reviewed

RECOMMENDED ACTION:

1. Approve the Annual Audit and Three-Year Program Evaluation Reports.
   
   
2. Receive and file; forward to CARB and U.S. EPA

Barry R. Wallerstein, D.Env.
Executive Officer

Background

The AQMD Governing Board adopted Rule 2506 - Area Source Credits (ASCs) for NOx and SOx on April 11, 1997. This rule established a voluntary emission reduction credit program for unpermitted sources in order to accelerate the introduction of lower-emitting technologies and provide regulated companies with alternative methods of compliance with AQMD regulations. Rule 2506 provides for the issuance of marketable ASCs to entities who voluntarily reduce emissions of oxides of nitrogen (NOX) and oxides of sulfur (SOx) from area sources. Regulated companies could convert ASCs into RECLAIM Trading Credits (RTCs) or use them as an alternative means of compliance with other AQMD regulations that allow use of ASCs, such as Rule 2202 compliance – On-Road Motor Vehicle Mitigation Options. The rule created a mechanism to generate emission reductions from stationary sources that do not require AQMD operating permits and are surplus to SIP commitments or applicable rules and regulations into marketable emission credits. It should be noted that this rule has not been approved by the U.S. EPA.

Rule 2506 requires an annual program audit to verify that the program objectives are met. The rule also requires a three-year Program Evaluation Report from the date of first adoption of this rule (April 1997). The three-year Report provides a summary of all annual audit information, evaluation of technology advancements and environmental benefits resulting from the Area Source Credits program, and recommendations regarding the continuation and/or modification of the program. The three-year Program Evaluation Report covering April 1997 through March 2000 is provided.

Since the adoption of Rule 2506, AQMD received two ASC Plans for ASCs: one from Vinyard Engine Systems, Inc. which was denied by AQMD due to insufficient data, and the second from Southern California Edison (SCE) which was approved in November 2000.

The annual audit and the three-year program evaluation report were delayed because there was no activity to report until now. The review and evaluation of the SCE’s ASC Plan was completed in December 1999. As required pursuant to Rule 2506, ASC Plan cannot be approved if EPA or CARB provides written objections. US EPA requested additional clarification and did not complete their evaluation until November 2000.

The Annual Audit and the three-year Program Evaluation Reports are provided as follows:

I.      Annual Audit Report
The following addresses issues with respect to issuance of ASCs that are required under this annual audit report:

Types of parties to whom the ASCs were issued:

• A utility company (Southern California Edison), which paid the users of the equipment to replace the higher emitting pollutant equipment, was issued ASCs for NOx emission reduction credits.

Types of sources from which emissions were reduced:

• Twenty-five (25) diesel and natural gas fired internal combustion reciprocating agricultural engines were replaced with electric motors to generate NOx emission reductions. Sixteen (16) of the engines are located in Riverside County, six (6) are in San Bernardino County and the remaining three (3) are in Orange County.

Types of emission reduction strategies used:

• Internal combustion engines (ICEs) were replaced with electric motors. Post-reduction emission rates for NOx would be zero for this strategy with the use of electric motors.

Amount of ASCs issued:

• SCE’s ASC Plan was approved in November 2000.
• 151,520 lbs/yr of NOx ASCs were issued for each of the Fiscal Years 1992-93 through 2002-03, expiring on June 30^th of each of the fiscal years. At the time of issuance, only credits between 2000 and 2003 are active and usable for the RECLAIM Program.
• SCE subsequently requested conversion of ASCs to RTCs. Current Rule 2506 allows conversion of ASCs to RTCs. Based on the discount factor of 0.9, 136,368 lbs/yr (68 tons/yr) of NOx RTCs were issued in November 2000 for FY 2000-01 through 2002-03.

Trading and use of ASCs, including prices:

• 70,775 lbs of NOx ASCs from FY 1998-99 and 151,520 lbs of NOx ASCs from FY 1999-00 were transferred from the SCE (Account No. 016352) to Market-Based Solutions, Inc. (Account No. 107337), at $2.25/lb. for compliance with Rule 2202 - On-Road Motor Vehicle Mitigation Options.
• 2,078 lbs of NOx RTCs, converted from ASCs, were sold to Global West Networks, Inc. January 2001 for use as State Lands Commission EIR Mitigation for cable laying at Manhattan Beach, California for $10/lb with an expiration date of June 30, 2001.
• 134,290 lbs of NOx RTCs, converted from ASCs, were sold to Market-Based Solutions, Inc. at $10/lb on June 19, 2001 with an expiration date of June 30, 2001.

Any proposed adjustments or additions to the emission rates in Table 1 of Rule 2506:

• Rule 2506 was amended on December 10, 1999 which lowered the emission rate from 450 lbs. NOx/1000 gallons to 291 lbs. NOx/1000 gallons for diesel-fired ICEs. This amendment was based on source tests conducted by SCE on diesel-fired ICEs.
• With the adoption of Rule 2507-Pilot Credit Generation for Agricultural Pumps in May 2001, and EPA’s commitment to SIP-approve the rule, staff recommends that future ASC generation from agricultural pumps be in accordance with Rule 2507 instead of Rule 2506.

An evaluation of whether the recordkeeping and enforcement provisions of this rule have produced a strong compliance program and adequate deterrence of violations:

• The AQMD has approved only one ASC Plan (from SCE) for NOx emission reductions, subject to conditions as required by this rule. SCE is required to submit annual written certification of the continued existence on-site of each electric motor that replaced the ICE listed in the ASC Plan, and whether the motor has been replaced by any other emission source. SCE has certified in writing that they are in compliance with the rule requirements. It should be noted that additional recordkeeping and penalty provisions are in Rule 2507 for ASC to be used in the RECLAIM program.

An evaluation of the potential for the ASC program to encourage an increase in activity levels above what would be economically viable in the absence of the ASC program for the purpose of generating additional ASCs:

• In the case of SCE’s application, the credits were issued based on the historical activity level. Therefore, there is no incentive for those agricultural pumps to operate above the level needed for the purpose of generating additional ASCs.

An evaluation of whether the secondary increase in emissions of other air contaminants will interfere with the attainment of any ambient air quality standards:

• There are no secondary increases in emissions of other air contaminants for the activities at the locations approved for the ASCs under Rule 2506. Diesel-fueled and natural gas fueled ICEs were replaced with zero emissions emitting electric motors.

An evaluation of Table 1, subsequent to the 1997 AQMP, for each source category for which ASCs have been issued under this rule:

• Only one source category (i.e. reciprocating internal combustion-diesel-fired engine) was evaluated prior to issuing NOx ASCs to SCE under this rule.
• Evaluation of Table 1 (Rule 2506) led to changing the emission rate for diesel-fired ICEs from 450 lbs. NOx/1000 gallons to 291 lbs NOx/1000 gallons (6.6 g/bhp-hr) (Rule 2506 amendment, December 10, 1999). The revised emission factor for ICE-diesel fuel is lower than the emission factor in the 1997 AQMP (10-13 g/bhp-hr) and Rule 2507 (6.9 g/bhp-hr) for diesel fired ICEs.
• There were no changes in regulatory requirements or AQMP control measures applicable to this source category subsequent to the 1997 AQMP.

II.     Three-Year Program Evaluation Report

Summary of all annual audit information:

• This item is covered above under I – Annual Audit Report.

Recommendations for standard protocols, if needed:

• The District has evaluated only one application dealing with one type of source (ICEs). There is no new information in the ASC plan that will lead to any change in standard protocols for emission reduction quantification of the baseline emission rate and post-reduction emission rate. The District will evaluate this item in the future when more ASC plans are received and evaluated.

Evaluation of technology advancements:

• As indicated above, ICEs were replaced with electric motors (zero emission sources). While electric motors do not represent an advanced or new technology, its application to agricultural engines has not been widespread.

Evaluation of environmental benefit:

• Under this program, ASCs can be converted to RTCs using a 0.9 discount factor. This results in 10% of the retired ASCs benefiting the environment. SCE has converted 75 tons/yr of NOx ASCs to 68 tons/yr of NOx RTCs for three fiscal years (2000-01 to 2002-03). It is expected that emission reductions will result in long-term air quality benefits due to the fact that the old ICEs which were replaced by electric motors will not be operating again after the ASCs (or RTCs) have expired. Expired ASCs from 1992 to 1997 were in essence retired to benefit the environment. In addition, concurrent emission reductions for VOCs, CO, SOx, and PM are achieved, but are not eligible for credits. Also, diesel toxic exposure is eliminated with respect to the diesel engines.

Recommendations on the continuation and/or modification of the ASC program:

• It is recommended that this program be continued. Staff will continue to work with USEPA to resolve Rule 2506 SIP approvability issues and where appropriate, develop source-specific pilot credit programs for individual sources to enhance SIP approvability.
• In the meantime, credits generated under existing Rule 2506 will continue to receive a warning that they have not been approved by the USEPA.
• Future credit generation for NOx from diesel-fired agricultural pumps are to be subsumed by Rule 2507 – Pilot Credit Generation Program for Agricultural Pumps.

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