BOARD MEETING DATE: May 11, 2001 AGENDA NO. 36

On March 16, 2001, the AQMD Governing Board adopted Rule 1612.1 – Mobile Source Credit Generation Pilot Program, which represented the first rule in a series of pilot credit generation rules. Proposed Rules 1631, 1632, 1633, and 2507 are designed to provide opportunities to generate NO_x MSERCs and ASCs that can be used by RECLAIM facilities. Each of the proposed rules applies to a specific mobile or area source category. Since the proposed rules are part of a pilot program, applications to generate MSERCs or ASCs must be submitted to the AQMD by January 1, 2004.

The proposed pilot credit generation rules are being developed in tandem with proposed amendments to the RECLAIM program. One element of the RECLAIM proposed amendments is a reserve of NO_x emission reductions. NO_x MSERCs and ASCs from these proposed credit generation rules can be used directly by RECLAIM facilities or through the proposed Reserve, provided the RECLAIM facility meets specific use requirements.

The objective of the proposed rules is to develop a pilot program for generation of NO_x MSERCs or ASCs that will meet state and federal requirements. To achieve this objective, the AQMD staff has been working with a Credit Trading Working Group that includes business, environmental and agency representatives. Over the past year, the AQMD staff has met 12 times with the Credit Trading Working Group and has had numerous conference calls with environmental representatives and EPA and ARB. In addition, a Public Workshop was held on March 20, 2001. Comments from the Workshop and meetings helped develop the current rule proposals. Responses to comments are included in the Staff Report.

The four proposed pilot credit generation rules are voluntary and are applicable to a specific type of mobile or area source emission reduction project, as summarized below:

Each of the four proposed rules excludes emission reductions from public air quality related funding programs or emission reductions that are required through or used to comply with a law, rule, or regulation. For Proposed Rule 1631, marine vessel repowering, no credits will be issued after June 30, 2005 to account for emission reductions claimed in the approved State Implementation Plan. For the remaining proposed rules, credits will be issued up to an Evaluation Year, which is 2010 for marine vessel hotelling, and 2006 for both truck and trailer refrigeration and agricultural pumps. At the Evaluation Year the AQMD, ARB, and EPA will assess if future credits should be discontinued or discounted to ensure emission reductions remain surplus.

Under the proposed credit generation rules, a credit generator is required to submit an Application documenting the emission reduction project, demonstrate equipment for the credit generation projects is not purchased before a specified date, implement the credit generation project, and comply with monitoring, reporting and recordkeeping (MRR) requirements. In addition, the proposed rules establish requirements to either annually reconcile MSERCs or quarterly validate emission reductions depending if MSERCs are issued prospective or retrospective to their generation. The proposed credit generation rules also include penalty provisions for the generator and users. Beginning April 2003, each of the proposed rules requires that a program review be conducted every two years to assess the efficacy of the pilot program.

Proposed Rules 1631, 1632, 1633, and 2507 will provide localized air quality improvements to those areas where diesel emissions are reduced or displaced with use of a cleaner technology. In addition, under the proposed rules, an environmental discount is applied to all NO_x credits generated. Proposed Rules 1632 and 1633 include additional discounts beyond an environmental discount, to ensure emission reductions are surplus. In addition, one percent of NO_x 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. Implementation of the proposed credit generation rules will also reduce particulate matter and diesel toxic emissions. Regional air quality benefits will result relative to ozone and PM levels as well.

In accordance with the California Environmental Quality Act (CEQA), AQMD staff prepared a Draft Environmental Assessment (EA) for the proposed project. Comments received on the Draft EA and staff’s responses are included in the Final EA. The Final EA for Proposed Rules 1631, 1632, 1633, and 2507 is combined with the Final EA for the Proposed Amendments to the RECLAIM program, and is included in the RECLAIM Governing Board package.

AQMD staff has also analyzed economic impacts. Implementation of the proposed rule will provide an option for MSERC and ASC generation. The cost-effectiveness of Proposed Rules 1631, 1632, 1633, and 2507 depends on which replacement project is being implemented, cost of implementation, and number of years credits can be obtained and the price those credits receive. Overall, a cost savings is expected for RECLAIM facilities that elect to use credits generated under proposed pilot credit generation rules. The socioeconomic impact analysis for the proposed rules was prepared and is combined with the Draft Socioeconomic Impact Analysis to the RECLAIM program.

Proposed Rules 1631, 1632, 1633, and 2507 were 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. Some key issues may still be discussed at the Board Meeting, including how emissions from marine operations can be considered surplus, preserving PM10 reductions for NSR, and the inclusion of pre-existing projects under Proposed Rule 2507.

The EPA has commented that the emission reductions anticipated from projects implemented under Proposed Rule 1631 (marine vessel repower) and 1632 (hotelling operations) must be surplus relative to the latest approved SIP. The 1997 SIP (Measure M13) relies upon emission control strategies from marine vessels and any emission credits issued from marine vessel operations must go beyond the emission reductions from Measure M13 in order to be surplus.

To ensure such credits are surplus, AQMD staff has modified Proposed Rule 1631 to limit credit issuance up to 2005. In regards to Proposed Rule 1632, the ARB has indicated that the credits issued under this proposed rule would be surplus until 2010. Proposed Rule 1632 requires that an evaluation be conducted prior to 2010 to determine if credits remain surplus up until this year as part of the periodic RECLAIM audits required under Regulation XX.

Some representatives from the business community have commented that concurrent PM10 emission reductions that occur from implementation of credit generation projects should be preserved for future economic growth, specifically new power plants. The AQMD staff is aware of the need for PM10 emission reductions for new sources. Proposed Rule 1632, marine fuel cells, has been revised and does not commit that PM10 reductions will be retired to benefit the environment. Proposed Rules 1631, 1633, and 2507 do indicate, however, that any reductions other than NO_x that result from implementation of projects are to be retired to benefit the environment.

The EPA has commented that since the proposed credit generation rules are part of a "pilot" program, the scope should be narrow, where credit use is for the RECLAIM NO_x market. Through the program review, the AQMD staff will be tracking and reporting the amount of concurrent non-NO_x emission reductions that are generated under the pilot program. Information from the program review, in combination with the availability of PM10 credits will be used to further assess the need for additional PM10 credit supply. Rule language would need to be developed to enable PM credit issuance. This would occur through a full public process.

Some representatives of the business community have commented that pre-existing projects where diesel engines were replaced with electric motors to power agricultural pumps should be allowed under Proposed Rule 2507. The EPA has commented that emission reductions generated from existing projects represent reductions that would occur regardless of implementation of the proposed rule, and therefore should not be credited under the proposed rule. The EPA has indicated that inclusion of existing projects will likely jeopardize the ability for EPA to approve Proposed Rule 2507 (See Attachment B). Therefore, the AQMD staff has revised the proposed rule to not include pre-existing projects.

Proposed Rules 1631, 1632, 1633, and 2507 – Pilot Credit Generation Programs for Marine Vessels, Hotelling Operations, Truck/Trailer Refrigeration Units, and Agricultural Pumps

Voluntary pilot program that allows sources to generate NO_x MSERCs or ASCs that can be used in RECLAIM.
Credit generation under Proposed Rule 1631 is based on repowering an existing diesel-fueled marine engine with a new diesel-fueled marine engine.
Credit generation under Proposed Rule 1632 is based on use of electric power in lieu of auxiliary diesel engines to provide power for hotelling operations on marine vessels anchored or docked within District waters.
Credit generation under Proposed Rule 1633 is based on use of electric power in lieu of diesel engines to provide cooling for truck or trailer refrigeration units while at distribution centers.
Credit generation under Proposed Rule 2507 is based on replacement of diesel engines with electric motors to power agricultural pumps.
Requirements for generating credits include: submittal and approval of an Application, implementation of credit generation project, compliance with monitoring, recordkeeping, and recording requirements, and either quarterly validation or annual reconciliation provisions.
Credits will be issued until the evaluation year, which varies by rule. An evaluation by the AQMD, ARB, and EPA will be conducted to assess if any future credits remain surplus.
Under Proposed Rule 1631, no credits will be issued after June 30, 2005.
An environmental discount will be applied to all MSERCs or ASCs generated.
Proposed Rules 1632 and 1633 require discounts in addition to the environmental discount to ensure emission reductions remain surplus.
Penalty provisions apply to the generator and user of credits.

Proposed Rules 1631, 1632, 1633, and 2507 – Pilot Credit Generation Programs for Marine Vessels, Hotelling Operations, Truck/Trailer Refrigeration Units, and Agricultural Pumps

Issue
The EPA has commented that emission reductions from Proposed Rules 1631 and 1632 may not be surplus due to anticipated requirements in the 1997 SIP.

Response
The ARB has partially resolved the surplus issue by clarifying that credits from Proposed Rules 1631 and 1632 will be surplus until 2005 and 2010, respectively. Proposed Rule 1631 has been revised so that credits will not be issued beyond July 2005. The AQMD staff will periodically evaluate whether credits from Proposed Rule 1632 remain surplus as part of the biennial RECLAIM audits.

Issue
Some representatives from the business community have commented that concurrent PM10 emission reductions be preserved for future economic growth.

Response
The EPA has commented that the scope of the proposed pilot programs should be limited to the RECLAIM NO_x market. PM10 reductions from the proposed rules will be retired to benefit the environment, except for Proposed Rule 1632 – Pilot Credit Generation Program for Hotelling Operations. However, it requires a separate rulemaking to generate or use PM10 credits from this source category. Information from the program review in combination with the availability of PM10 credits for new sources, will be used to further assess the need for PM10 credits from new sources.

Issue
Some representatives of the business community have commented that pre-existing projects where diesel engines were replaced with electric motors to power agricultural pumps should be allowed under Proposed Rule 2507.

Response
The EPA has commented that emission reductions generated from existing projects should not be credited since these reductions occurred prior implementation of the proposed rule. The EPA has indicated that inclusion of existing projects will likely jeopardize approval of Proposed Rule 2507. The proposed rule therefore does not include pre-existing projects to expedite SIP approval as well as to allow new projects to move forward.

WHEREAS, the Governing Board has determined that Proposed Rules 1631 – Pilot Credit Generation Program For Marine Vessels, 1632 - Pilot Credit Generation Program For Hotelling Operations, 1633 - Pilot Credit Generation Program For Truck/Trailer Refrigeration Units, and 2507 - Pilot Credit Generation Program For Agricultural Pumps, are 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 Draft EA was circulated for a 30-day public review and comment period from March 27, 2001 to April 25, 2001. Comments received on the Draft EA and staff’s responses are included in the Final EA; and

WHEREAS, it is necessary that the AQMD prepare a Statement of Findings and Statement of Overriding Considerations pursuant to state CEQA Guidelines Section 15091 and 15093, respectively, regarding adverse environmental impacts that cannot be mitigated to insignificance; and a Mitigation Monitoring Plan pursuant to Public Resources Code Section 21081.6, regarding the mitigation included in the Final EA; and

WHEREAS, the AQMD Governing Board voting on Proposed Rules 1631 – Pilot Credit Generation Program for Marine Vessels, 1632 - Pilot Credit Generation Program for Hotelling Operations; 1633 - Pilot Credit Generation Program for Truck/Trailer Refrigeration Units; and 2507 - Pilot Credit Generation Program for Agricultural Pumps, has reviewed, considered, and hereby certifies the Final EA and approves the Statement of Findings, the Statement of Overriding Considerations, and the Mitigation Monitoring Plan; and

WHEREAS, the Governing Board has determined that the socioeconomic impact assessment of the Proposed Rules 1631 – Pilot Credit Generation Program For Marine Vessels, 1632 - Pilot Credit Generation Program For Hotelling Operations, 1633 - Pilot Credit Generation Program For Truck/Trailer Refrigeration Units, and 2507 - Pilot Credit Generation Program For Agricultural Pumps; is consistent with the Governing Board March 17, 1989 and October 14, 1994 resolutions and the provisions of Health and Safety Code Section 40920.6; and

WHEREAS, the Governing Board has reviewed and considered the staff's findings related to cost impacts of Proposed Rules 1631 – Pilot Credit Generation Program For Marine Vessels, 1632 - Pilot Credit Generation Program For Hotelling Operations, 1633 - Pilot Credit Generation Program For Truck/Trailer Refrigeration Units, and 2507 - Pilot Credit Generation Program For Agricultural Pumps 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 Rules 1631 – Pilot Credit Generation Program For Marine Vessels, 1632 - Pilot Credit Generation Program For Hotelling Operations, 1633 - Pilot Credit Generation Program For Truck/Trailer Refrigeration Units, and 2507 - Pilot Credit Generation Program For Agricultural Pumps 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 Rules 1631 – Pilot Credit Generation Program For Marine Vessels, 1632 - Pilot Credit Generation Program For Hotelling Operations, 1633 - Pilot Credit Generation Program For Truck/Trailer Refrigeration Units, and 2507 - Pilot Credit Generation Program For Agricultural Pumps 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 Rules 1631 – Pilot Credit Generation Program For Marine Vessels, 1632 - Pilot Credit Generation Program For Hotelling Operations, 1633 - Pilot Credit Generation Program For Truck/Trailer Refrigeration Units, and 2507 - Pilot Credit Generation Program For Agricultural Pumps to implement a pilot program that will create opportunities to generate NOx MSERCs or ASCs 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, 40000, 40001, 40440.1, 40702, 40714.5, and 42303; and

WHEREAS, the Governing Board has determined that Proposed Rules 1631 – Pilot Credit Generation Program For Marine Vessels, 1632 - Pilot Credit Generation Program For Hotelling Operations, 1633 - Pilot Credit Generation Program For Truck/Trailer Refrigeration Units, and 2507 - Pilot Credit Generation Program For Agricultural Pumps 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 Rules 1631 – Pilot Credit Generation Program For Marine Vessels, 1632 - Pilot Credit Generation Program For Hotelling Operations, 1633 - Pilot Credit Generation Program For Truck/Trailer Refrigeration Units, and 2507 - Pilot Credit Generation Program For Agricultural Pumps, 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 Rules 1631 – Pilot Credit Generation Program For Marine Vessels, 1632 - Pilot Credit Generation Program For Hotelling Operations, 1633 - Pilot Credit Generation Program For Truck/Trailer Refrigeration Units, and 2507 - Pilot Credit Generation Program For Agricultural Pumps, 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 Rules 1631 – Pilot Credit Generation Program For Marine Vessels, 1632 - Pilot Credit Generation Program For Hotelling Operations, 1633 - Pilot Credit Generation Program For Truck/Trailer Refrigeration Units, and 2507 - Pilot Credit Generation Program For Agricultural Pumps, as proposed to be, references the following statutes which the AQMD hereby implements, interprets or makes specific: Health and Safety Code Sections 40440.1, 40702, 40714.5, and 40725 through 40728; and

WHEREAS, the Governing Board has determined that the California Health and Safety Code Section 39616 findings are not altered by these amendments; 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 Rules 1631 – Pilot Credit Generation Program For Marine Vessels, 1632 - Pilot Credit Generation Program For Hotelling Operations, 1633 - Pilot Credit Generation Program For Truck/Trailer Refrigeration Units, and 2507 - Pilot Credit Generation Program For Agricultural Pumps 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 AQMD Governing Board directs staff to track each of the source categories applicable to the proposed rules separately in the AQMP and to closely monitor credit generation and use.

BE IT FURTHER RESOLVED, that the AQMD Governing Board hereby certifies, pursuant to the authority granted by law, the Final EA for Proposed Rules 1631 – Pilot Credit Generation Program for Marine Vessels, 1632 - Pilot Credit Generation Program for Hotelling Operations; 1633 - Pilot Credit Generation Program for Truck/Trailer Refrigeration Units; and 2507 - Pilot Credit Generation Program for Agricultural Pumps.

BE IT FURTHER RESOLVED, that the AQMD Governing Board hereby approves the Statement of Findings and Statement of Overriding Considerations pursuant to state CEQA Guidelines Sections 15091 and 15093, respectively, regarding adverse environmental impacts that cannot be mitigated to insignificance; and the Mitigation Monitoring Plan pursuant to Public Resources Code Section 21081.6, regarding the mitigation included in the Final EA, which are included in Attachment 1, attached and incorporated herein by reference.

BE IT FURTHER RESOLVED, that the Governing Board does hereby adopt, pursuant to the authority granted by law, Proposed Rules 1631 – Pilot Credit Generation Program For Marine Vessels, 1632 - Pilot Credit Generation Program For Hotelling Operations, 1633 - Pilot Credit Generation Program For Truck/Trailer Refrigeration Units, and 2507 - Pilot Credit Generation Program For Agricultural Pumps, as set forth in the attached and incorporated herein by reference.

DATE:_______________________ ____________________________
Clerk of the District Board