BOARD MEETING DATE: March 16, 2001 AGENDA NO. 33

Over the past decade, the South Coast Air Quality Management District has been developing and adopting market incentive programs. Under the AQMD’s Regulation XVI, a series of mobile source credit generation rules have been developed over the past eight years. These rules, however, have not been approved by the United States Environmental Protection Agency (EPA).

Proposed Rule 1612.1 is a pilot program that will create opportunities to generate NO_x MSERCs for use in RECLAIM. This voluntary pilot program is being developed with input from ARB and EPA to ensure that the program meets state and federal requirements. In addition, the program is limited in scope and applications must be submitted before January 1, 2003.

The AQMD staff is currently working on a series of four additional credit generation rules, similar to Proposed Rule 1612.1 that will address other source categories. These proposed rules will cover repowering and hotelling of marine vessels, the electrification of truck/trailer refrigeration units, and replacement of diesel-fueled agricultural pumps. These proposed rules are scheduled for a public hearing at the May 2001 Governing Board meeting.

Through the rule development of Proposed Rule 1612.1, the AQMD staff has been working with a Credit Trading Working Group that includes business, environmental and agency representatives. The Credit Trading Working Group evolved from the Credit Trading Enhancement Committee that is a subcommittee of the AQMD’s Home Rule Advisory Group. Over the past eight months, the AQMD staff has met nine times with the Credit Trading Working Group.

In addition, a Public Workshop and Public Consultation Meeting were held on September 20, 2000 and January 11, 2001, respectively. Comments from these Workshops and Meetings helped develop the current rule proposal. Responses to comments are included in the Staff Report.

Proposed Rule 1612.1 will provide opportunities to generate NO_x MSERCs that may be used in the RECLAIM program. Sources that meet the requirements of the proposed rule can generate NO_x MSERCs through the replacement of a diesel-fueled heavy-duty vehicle or yard hostler with a similar-type new clean technology powered vehicle. Exclusions under Proposed Rule 1612.1 include vehicles used to transport passengers, fleets subject to an AQMD fleet rule (Rule 1190 series rule) or emission reductions from projects funded with public monies.

Proposed Rule 1612.1 is applicable to new projects, where a purchase contract for a new vehicle is signed on or after to January 1, 2001. In addition, MSERCs are issued prospectively where sources electing to generate MSERCs under Proposed Rule 1612.1 must submit an Application prior to generating credits. Under the proposed rule, MSERCs will be issued to the year 2006. Credits may be issued after 2006, after reviews conducted by the AQMD, ARB, and EPA to assess if any future reductions remain surplus.

Proposed Rule 1612.1 includes monitoring, recordkeeping, and reporting requirements and reconciliation provisions. Proposed Rule 1612.1 includes specific penalties and remedies for making up potential emissions shortfalls.

Proposed Rule 1612.1 requires that a program review be conducted to assess the pilot program. The program review would be conducted prior to March 2002 and will evaluate the amount of credits generated and used as well as quantification of the amount and type of emission reductions that are retired to benefit the environment. In addition, the program review will include information regarding the location of generators and users.

Proposed Rule 1612.1 will provide localized air quality improvements to those neighborhoods where diesel-fueled vehicles are removed and replaced with clean technology powered vehicles. In addition, Proposed Rule 1612.1 is designed to produce an emissions benefit. These benefits include a reduction in particulate and toxic air contaminant emissions associated with the use of heavy-duty diesel engines and the accelerated and increased replacement of heavy-duty diesel vehicles with vehicles powered with clean technologies. Under the proposed rule, a 9 percent environmental discount is applied to all credits generated and all non-NO_x or toxic air contaminant emission reductions will be retired to benefit the environment. An additional 1 percent of credits generated may be used to fund Rule 518.2 – Federal Alternative Operating Conditions offset program. If the Rule 518.2 funding is not needed, these credits will be retired for the benefit of the environment.

In accordance with the California Environmental Quality Act (CEQA), AQMD staff prepared a Draft Environmental Assessment (EA) for the proposed project. The analysis concluded that project implementation would not result in significant adverse environmental impacts. Comments received on the Draft EA and staff’s responses are included in the Final EA. The Final EA for Proposed Rule 1612.1 is included as Attachment H of this Governing Board package.

AQMD staff has also analyzed economic impacts. Implementation of the proposed rule will provide an option for MSERC generation. The cost-effectiveness of Proposed Rule 1612.1 depends on which replacement project is being implemented, cost of implementation, and lifetime emission benefits. Overall, a cost savings is expected for RECLAIM facilities that elect to use credits generated under Proposed Rule 1612.1.

Proposed Rule 1612.1 was developed through an extensive process that included ARB, EPA, industry groups and environmental representatives to help identify and resolve issues to facilitate state and federal review and approval. Through the rule development process, a number of issues have been resolved such as ensuring credits generated are surplus, credit issuance, and the overall process for generating credits. Environmental representatives, however, remain consistent in their position that they do not support mobile source credits for use in RECLAIM. In addition, there still remains several key additional issues, such as the sunset date and the environmental benefit associated with implementing the proposed rule, which are described below.

Some environmental representatives have commented that they do not support the use of mobile source credits for use in RECLAIM under any circumstances. Other environmental representatives have commented that use of mobile source credits for use in RECLAIM may be acceptable under limited conditions.

Proposed Rule 1612.1 is a mobile source credit generation rule where use of these credits is addressed in the RECLAIM program. The proposed rule is a pilot program that is limited in scope that has been carefully designed to ensure real and surplus emission reductions. In addition, the proposed rule includes specific monitoring, reporting, and recordkeeping requirements and penalty provisions to ensure any potential shortfalls in emission reductions are made up. The proposed rule also requires a source category evaluation to ensure future credits remain surplus and a program review to assess the efficacy of the pilot program.

Representatives from the business community have indicated that the duration of the pilot program is too short, and Proposed Rule 1612.1 should allow submittal of applications up to January 1, 2004. EPA and ARB have commented that applications for credit generation should not be allowed beyond January 1, 2003 because it is a pilot program. This date could be extended in the future through a rule amendment after the Program Review.

Representatives from the environmental community have commented that Proposed Rule 1612.1 should require a 10 percent environmental benefit. Other discounts such as for Rule 518.2 should not be counted towards the 10 percent, but should be in addition to the 10 percent environmental benefit.

Implementation of Proposed Rule 1612.1 will result in environmental benefits associated with retiring 9 percent of the NO_x MSERCs generated, and retiring non-NO_x emission reductions that are a result of implementing Proposed Rule 1612.1 projects. In addition, implementation of the proposed rule is expected to accelerate the turnover of diesel-fueled heavy-duty vehicles and yard hostlers with vehicles powered with clean technologies thereby producing environmental and health benefits in the neighborhoods in which the vehicles are used.

Proposed Rule 1612.1 – Mobile Source Credit Generation Pilot Program

Issue
Representatives from the business community have indicated that the duration of the pilot program is too short, and Proposed Rule 1612.1 should allow submittal of applications up to January 1, 2004.

Response
Proposed Rule 1612.1 has been designed to ensure approval from EPA and ARB and both agencies have commented that submittal of applications for credit generation should not be allowed beyond January 1, 2003. This date could be extended in the future through a rule amendment after the Program Review.

Issue
Some environmental representatives have commented that they do not support mobile source credits for use in RECLAIM under any circumstances. Other environmental representatives that mobile source credits for use in RECLAIM may be allowed under limited conditions.

Response
Proposed Rule 1612.1 is a mobile source credit generation rule where use of these credits is addressed in the RECLAIM program. Proposed Rule 1612.1 is a pilot program that is limited in scope that has been carefully designed to ensure real and surplus emission reductions and provides MRR requirements and penalty provisions. Proposed Rule 1612.1 would be expected to provide local air quality benefits to community members who live in and around areas where participating vehicles operate. These benefits include a reduction in particulate and toxic air contaminant emissions associated with the use of heavy-duty diesel engines. Regional air quality benefits would accrue from 1) the rule provision that automatically retires nine percent of MSERCs generated for the benefit of the environment, 2) the non-credited reduction of diesel emissions components other than NO_x, and 3) the accelerated and increased replacement of heavy-duty diesel vehicles with alternative clean fuel vehicles.

Issue
Representatives from the environmental community have commented that Proposed Rule 1612.1 should require a 10 percent environmental benefit.

Response
Implementation of Proposed Rule 1612.1 will result in environmental benefits associated with retiring 9 percent of the NO_x MSERCs generated, and retiring non-NO_x emission reductions that are a result of implementing Proposed Rule 1612.1 projects. In addition, Proposed Rule 1612.1 would be expected to provide local air quality benefits to community members who live in and around areas where participating vehicles operate. These benefits include a reduction in particulate and toxic air contaminant emissions associated with the use of heavy-duty diesel engines.

A Resolution of the Governing Board of the South Coast Air Quality Management District (Governing Board) certifying the Final Environmental Assessment prepared for Proposed Rule 1612.1 – Mobile Source Credit Generation Pilot Program.

A Resolution of the Governing Board adopting Proposed Rule 1612.1 – Mobile Source Credit Generation Pilot Program.

WHEREAS, the Governing Board has determined that Proposed Rule 1612.1 – Mobile Source Credit Generation Pilot Program, is a ‘project" pursuant to the terms of the California Environmental Quality Act (CEQA); and

WHEREAS, the South Coast Air Quality Management District has had its regulatory program certified pursuant to Public Resources Code, Section 21080.5 and has conducted CEQA review pursuant to such program (AQMD Rule 110); and

WHEREAS, the AQMD staff has prepared a Draft Environmental Assessment (EA) with no significant adverse environmental impacts pursuant to its certified regulatory program and state CEQA Guidelines Section 15252, setting forth the potential environmental consequences of Proposed Rule 1612.1 – Mobile Source Credit Generation Pilot Program; and

WHEREAS, no significant adverse environmental impacts were identified from Proposed Rule 1612.1 - Mobile Source Credit Generation Pilot Program; and

WHEREAS the Draft EA was circulated for a 30-day public review and comment period from January 23, 2001 to February 23, 2001. Comments received on the Draft EA and staff’s responses are included in the Final EA; and

WHEREAS, it is necessary that the adequacy of the Final EA be determined by the Governing Board prior to its adoption; and

WHEREAS, a Mitigation Monitoring Plan pursuant to Public Resources Code Section 21081.6, has not been prepared since no mitigation measures are necessary; and

WHEREAS, the AQMD Governing Board voting on this Resolution has reviewed and considered the Final EA for Proposed Rule 1612.1 – Mobile Source Credit Generation Pilot Program including the responses to comments received; and

WHEREAS, the Governing Board has determined that the socioeconomic impact assessment of the Proposed Rule 1612.1 – Mobile Source Credit Generation Pilot Program; is consistent with the Governing Board March 17, 1989 and October 14, 1994 resolutions and the provisions of Health and Safety Code Sections 40440.8, 40728.5 and 40920.6; and

WHEREAS, the Governing Board has reviewed and considered the staff's findings related to cost impacts of Proposed Rule 1612.1 – Mobile Source Credit Generation Pilot Program as set forth in the Staff Report, and hereby finds and determines that cost impacts are as set forth in that assessment; and

WHEREAS, an economic impact assessment concluded that Proposed Rule 1612.1 – Mobile Source Credit Generation Pilot Program will not impose any additional compliance costs on affected sources, and as such, will not result in any adverse economic impacts; and

WHEREAS, the Governing Board has determined that Proposed Rule 1612.1 – Mobile Source Credit Generation Pilot Program is not a control measure in the 1997 Air Quality Management Plan (AQMP) in 1999 and thus was not ranked by cost-effectiveness relative to other AQMP control measures in the 1997 AQMP; and

WHEREAS the Governing Board has determined that a need exists to adopt Proposed Rule 1612.1 to implement a pilot program that will create opportunities to generate NOx MSERCs for use in RECLAIM while meeting state and federal approvability requirements; and

WHEREAS, the Governing Board of the South Coast Air Quality Management District obtains its authority to adopt, amend, or repeal rules and regulations from California Health and Safety Code Sections 39002, 39650 et seq., 40000, 40001, 40440, 40441, 40463, 40702, 40725 through 40728, 41508, 41700, and 42303; and

WHEREAS, the Governing Board has determined that Proposed Rule 1612.1 – Mobile Source Credit Generation Pilot Program has been written or displayed so that its meaning can be easily understood by the persons affected by it; and

WHEREAS, the Governing Board has determined that Proposed Rule 1612.1 – Mobile Source Credit Generation Pilot Program, as proposed to be, is in harmony with, and not in conflict with or contradictory to, existing federal or state statutes, court decisions, or regulations; and

WHEREAS, the Governing Board has determined that Proposed Rule 1612.1 – Mobile Source Credit Generation Pilot Program, as proposed to be, does not impose the same requirements as any existing state or federal regulation and the proposed rule is necessary and proper to execute the powers and duties granted to, and imposed upon, the District; and

WHEREAS, the Governing Board has determined that Proposed Rule 1612.1 – Mobile Source Credit Generation Pilot Program, as proposed to be, references the following statutes which the AQMD hereby implements, interprets or makes specific: Health and Safety Code Sections 40702 and 40440(a); and

WHEREAS, the Governing Board has determined that Proposed Rule 1612.1, will not affect the findings made by this Board pursuant to California Health and Safety Code Section 39616; and

WHEREAS, a public hearing has been properly noticed in accordance with the provisions of Health and Safety Code Section 40725; and

WHEREAS, the Governing Board has held a public hearing in accordance with all provisions of law; and

WHEREAS, the AQMD specifies the manager of Proposed Rule 1612.1 - Mobile Source Credit Generation Pilot Program as the custodian of the documents or other materials which constitute the record of proceedings upon which the adoption of this proposed amendment is based, which are located at the South Coast Air Quality Management District, 21865 E. Copley Drive, Diamond Bar, California; and

NOW, THEREFORE, BE IT RESOLVED, the Governing Board directs staff to report applications approved and RTCs used annually as part of the annual RECLAIM audit report; and

BE IT FURTHER RESOLVED, that the Governing Board directs staff to work with EPA and ARB to ensure expedited approval of Proposed Rule 1612.1 - Mobile Source Credit Generation Pilot Program; and

BE IT FURTHER RESOLVED, that the Governing Board does hereby certify the Final Environmental Assessment for Proposed Rule 1612.1 – Mobile Source Credit Generation Pilot Program which was completed in compliance with CEQA and AQMD Rule 110 provisions; and finds that the Final EA was presented to the Governing Board, whose members reviewed, considered and approved the information therein prior to acting on Proposed Rule 1612.1 – Mobile Source Credit Generation Pilot Program; and

BE IT FURTHER RESOLVED, that the Governing Board does hereby adopt, pursuant to the authority granted by law, Proposed Rule 1612.1 – Mobile Source Credit Generation Pilot Program, as set forth in the attached and incorporated herein by reference.

For the benefit of the reader, changes and additions to the February 2001 Proposed Rule and Draft Staff Report are indicated in underline (new) and strikeout (deleted) format.