South Coast Air Quality Management District
South Coast Air Quality Management District
BOARD MEETING DATE: November 1, 2002 AGENDA NO. 34
Amend Regulation XIII – New Source Review
SYNOPSIS:
Proposed amendments to Regulation XIII will improve the effectiveness of AQMD's New Source Review program by providing new and expanding stationary sources with additional options to offset emissions increases. The proposed amendments are in response to Chairman Glover's Strategic Alliance Initiative #1, approved by the Board in May 2002. The proposed amendments provide additional flexibility for existing sources; promote the generation and use of short-term credits; increase the time to file for Emission Reduction Credits; and create a new emissions budget as a backstop for those unable to obtain credits elsewhere.
COMMITTEE:
Stationary Source, September 27, 2002, Reviewed
RECOMMENDED ACTION:
Adopt the attached resolution:
- Certifying the Notice of Exemption (NOE) for Proposed Amended Regulation XIII – New Source Review; and
- Amending Rule 1302 – Definitions
Rule 1303 – Requirements
Rule 1306 – Emission Calculations
Rule 1309 – Emission Reduction Credits and Short Term Credits
- Adopting Rule 1309.2 – Offset Budget.
Barry R. Wallerstein, D.Env.
Executive Officer
Background
AQMD Regulation XIII – New Source Review (NSR), sets forth the federal and state mandated pre-construction review program for new, modified, or relocated sources in the AQMD jurisdiction. NSR is a critical component of the AQMD’s attainment strategy and ensures that all new and modified sources install Best Available Control Technology (BACT) and their emission increases are fully offset with creditable emission reductions. Over the past few years, the increased demand for emission reduction credits (ERCs) for NSR compliance has resulted in low supplies of ERCs and high costs. The availability of ERCs at reasonable costs is important to ensure that existing sources can modernize their facilities and that economic growth in the region is not negatively impacted.
In general, facilities with emissions greater than or equal to four tons per year of volatile organic compounds (VOC), oxides of nitrogen (NOx), oxides of sulfur (SOx), or particulate matter (PM10) or 29 tons per year of carbon monoxide (CO), must obtain offsets from the open market, which includes individual credit holders. Recently, offsets have become scarce and more expensive. This trend was exacerbated by the electricity crisis and the large demand for open market offsets. Although the AQMD amended its rule to facilitate the siting of power plants without impacting open market offsets, there remain concerns with the availability of open market offsets.
Chairman’s Initiatives
At the February 1, 2002 Board meeting, the Board approved a series of eight strategic initiatives introduced by Chairman Norma Glover. The objective of Strategic Alliance Initiative #1 is to improve the current ERC system in response to increased prices and diminished availability of open market ERCs. At the May 3, 2002 Governing Board meeting staff presented a White Paper entitled Emission Reduction Credit System Modernization, to assess the availability of ERCs under the AQMD’s Regulation XIII – New Source Review program and identify options that would improve the future supply of ERCs necessary for economic growth.
The key recommendations from the White Paper were as follows:
Expand the use of short-term credits
All ERC time-sharing
Creation of a SIP Offset Budget.
Based on the recommendations contained in the White Paper staff has developed a series of rule amendments to Regulation XIII and is proposing a new rule for an Offset Budget, PAR 1309.2 –Offset Budget.
Public Process
During the rulemaking process, AQMD staff formed a working group of stakeholders to develop the amendments to Regulation XIII. The stakeholders included members from industry, the environmental community, consultants and regulatory agencies. There were six working group meetings, a public workshop on September 4, and a public consultation meeting on October 15. In addition, there were several inter-agency meetings or conference calls with CARB and U.S. EPA. The proposal was also reviewed by the NSR Subcommittee of the Home Rule Advisory Group.
Proposal
Staff’s proposal consists of three components:
1. Short Term Credits (STCs)
Proposed Amendments to Rule 1303 – Requirements and Rule 1309 – Emission Reduction Credits and Short Term Credits, define and allow for the use of short term credits as offsets for stationary sources. Short term credits are discrete, non-permanent offsets and include permanent emission reduction credits (ERCs) which have been split for a period of one to seven years (STERCs) and credits derived from mobile sources (MSERCs) and area sources
(ASERCs).
There are several design features that have been incorporated into the generation and use of short term credits:
ASERCs and MSERCs are credits generated from federally approved programs which provide for their use as stationary source offsets. Other California air districts have already used such credits for permitting of stationary sources. ASERCs and MSERCs will further expand the universe of available credits and create opportunities for innovation. The existing credit trading rules will require amendment and approval by U.S. EPA for use of ASERCs and MSERCs as offsets under Regulation XIII. These amendments to regulation set the framework for their use. However, proposed rulemaking for the individual credit trading rules will be done separately at a later date.
2. Providing More Time for Sources to File for ERCs
Currently, sources apply for an ERC within 90 days after modification or shutdown under Rule 1309 – Emission Reduction Credits. The proposal will extend that time to 180 days to allow for more time for sources to file for ERCs. This will allow for some sources to file for ERCs which otherwise would miss the filing period. All ERCs are calculated based on the most current two years of data, so delays in filing result in fewer credits being generated.
3. Offset Budget
"A bank of last resort" to provide offsets to sources that otherwise cannot obtain offsets is being created in Proposed Rule 1309.2 – Offset Budget. Strict eligibility requirements are placed on the offset budget. Only those sources which are not exempt from offsets under Rule 1304 – Exemptions; and not eligible for offsets under Rule 1309.1 – Priority Reserve; can apply for offset budget credits. Other eligibility criteria include a facility having all sources at or below BARCT and conducting a good faith effort to obtain open market offsets. Finally, a non-refundable mitigation fee is required for each pound of credits obtained.
The Offset Budget will be funded by expired permit source shutdown credits, emissions reductions from projects funded by mitigation fees collected, and other methods approved by the Executive Officer, CARB and U.S. EPA. The initial funding of the Offset Budget will be from expired permit source shutdown credits for the years 2000 through 2002. Staff will amend the Status Report on Regulation XIII – New Source Review, approved by the Board on August 2, 2002 to adjust the AQMD’s State Offset Account balances to ensure there is no potential for double counting of the shutdown credits allocated to the Offset Budget.
Further, to address concerns expressed by U.S. EPA, a rule will be developed to formalize the emissions tracking system for Regulation XIII.
Key Policy Issues
Short Term Credits required for initial and subsequent permitting:
The proposed rule requires that initial and subsequent credit streams each be in five year increments. This is to help ensure that offsets can reasonably be expected to be available for the project to continue operation. Also, too short a period could result in excess administrative costs. It is U.S. EPA’s policy position to require the five year period as a minimum. Industry believes the periods should be shorter (i.e. 3 years), particularly the subsequent credit streams. The concern is the long periods will unnecessarily restrict use of viable short term credits.
Offset Budget Funding:
Specification of the specific funding mechanism for the Offset Budget has been stated to be a condition of rule approvability by U.S. EPA. As a result, PR 1309.2 has been revised to include specific language that describes the funding mechanism of the Offset Budget. Furthermore, staff has developed an algorithm that describes how funding and allocations from the Offset Budget would be tracked on a continuous basis. As suggested by U.S. EPA, staff is committing to develop a rule in 2003 to certify the tracking system for NSR. Further, staff is recommending that the NSR tracking report approved in August 2002 be modified to adjust the AQMD Offset account balances to ensure credits used to initially fund the Offset Budget were not also used to demonstrate equivalence with State NSR requirements.
Offset Budget credit pricing and effects on open market credit pricing:
There is concern that if credit pricing by the AQMD is set too high it will drive the open market price of credits. If, on the other hand, the credit price is set too low, it may eliminate the open market altogether. Staff agrees with the concerns and has factored them in selecting the credit pricing levels. Furthermore, to ensure that the pricing levels reflect realistic levels, Staff is committing to review and adjust this level on at least an annual basis as part of the Regulation III – Fees amendment process.
U.S. EPA Comments
Subsequent to the Set Hearing package, U.S. EPA provided comments to clarify and improve the enforceability and implementation of the proposed amendments. The comments are administrative in nature and do not change the intent or objectives of the proposed amendments. The rules have been revised to reflect those comments with changes highlighted by a double underline or double strikethrough. In concurrence with the U.S. EPA comments, staff is recommending that the Temporary Internal Netting provision of Rule 1306 be withdrawn.
Since the changes to rule language were technical clarifications, no revision to the Staff Report is necessary, except that the Temporary Internal Netting section is deleted without any impact on the remaining report.
CEQA Analysis
Pursuant to State California Environmental Quality Act (CEQA) Guidelines, AQMD is the Lead Agency and will prepare a Notice of Exemption for the project identified above.
The AQMD has reviewed the proposed project pursuant to State CEQA Guidelines §15002 (k) (1), the first step of a three-step process for deciding which document to prepare for a project subject to CEQA. Since it can be seen with certainty that the proposed project has no potential to adversely impact air quality or any other environmental area, it is exempt from CEQA pursuant to state CEQA Guidelines 15061(b)(3) - Review for Exemption.
The Notice of Exemption has been prepared pursuant to state CEQA Guidelines Section 15062 - Notice of Exemption. The Notice of Exemption will be filed with the county clerks of Los Angeles, Orange, Riverside and San Bernardino counties immediately following the adoption of the proposed project.
Socioeconomic Impacts
The purpose of the proposed amendments to Regulation XIII is to enhance the availability, liquidity, and accessibility of ERCs for new and modified stationary sources in the AQMD. The proposed amendments are likely to lower the cost of compliance for facilities subject to the NSR requirements, and would promote a balance between economic growth in the region and a continual progress toward air quality goals.
AQMP and Legal Mandates
The California Health and Safety Code requires the AQMD to adopt an Air Quality Management Plan to meet state and federal ambient air quality standards in the South Coast Air Basin. In addition, the California Health and Safety Code requires that the AQMD adopt rules and regulations that carry out the objectives of the AQMP. While Proposed Amended Regulation XIII is not a control measure included in the AQMP, its requirements are consistent with the AQMP objectives.
Implementation Plan
All known affected sources have been noticed on the proposed amendments. No major implementation problems are anticipated at this time. Additional actions will be taken as needed consistent with the rule requirements.
Resource Impacts
The proposed amendments to Rules 1302, 1303, 1306 and 1309 are not projected to substantially impact staff resources. Proposed Rule 1309.2 may require additional resources to implement and administer the Offset Budget. Staff will initially endeavor to accommodate the pre-funding of the Offset Budget by re-allocating available resources and has builtin 25% administrative cost in the credit price.
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