BOARD MEETING DATE: October 4, 2002 AGENDA NO. 26

In 2001, the AQMD Governing Board adopted six pilot credit generation rules for mobile and area sources. NO_x mobile and area source credits generated from these pilot programs can be used in the RECLAIM program. Rule 1631 - Pilot Credit Generation Program for Marine Vessels allows NO_x mobile source emission reduction credits (MSERCs) to be generated by any person who voluntarily repowers a captive marine vessel with an engine that meets or exceeds specified standards. U.S. EPA formally approved Rule 1631 as an amendment to the SIP in February 2002, and it became effective on March 11, 2002.

Rule 1631 has been used extensively to provide the necessary protocols for generating emission reductions under the RECLAIM Executive Order (EO) Emissions Mitigation Program established in 2001 by Executive Order and Rule 2020 – RECLAIM Reserve. Approximately 40 marine vessels have either been repowered or are pending repowering using the monies collected under these programs. In addition to these programs, two marine vessels have been repowered using private-sector funding to generate tradeable credits.

During the implementation of Rule 1631, issues were raised regarding the necessity of requiring all participating marine vessels to remain captive to district waters during the entire credit generation period, and whether engine remanufacturing can be considered as credit generating strategy.

Rule 1631 requires all participating marine vessels to be captive to district waters during the time credits are being generated. Under Rule 1631, district waters extend out 25 nautical miles from the coast and include Santa Catalina Island. This requirement ensured that all emission reductions generated under the Pilot Credit Generation Program occurred in local waters which would directly impact inland areas of the Basin. This requirement also meant that any maintenance or repair on participating marine vessels would occur at facilities located in the Basin. During the course of implementing Rule 1631, the AQMD staff became aware that only two local marine vessel maintenance and repair facilities were available for use by participating marine vessels. This was primarily due to recent closures of other competing facilities. Because of the lack of available dry dock space at the remaining two facilities, participating marine vessels will occasionally be required to travel beyond district waters for maintenance or repair. The original Rule 1631 language does not allow marine vessels that go outside the area to generate credits.

In order to generate credits under the original Rule 1631, participating marine vessels must be repowered with a new marine engine that is at or below a specified emission level. Credits cannot be generated by rebuilding engines or replacing engines with reused marine engines. During the implementation of Rule 1631 it became apparent that equivalent emissions reductions could be obtained from remanufacturing existing engines in captive marine vessels in less time and at less cost than traditional repowers. Remanufacturing marine engines is the process by which all engine components, except for the existing engine block, are replaced with new original equipment manufacturer (OEM) parts. Engines which usually undergo remanufacture rather than being replaced completely as in a repower, are between 8 to 12 years old, while marine vessels with engines between 25 to 30 years old, typically undergo a repower. The average cost of a typical repower varies, but recent marine vessel repower projects proposed for funding through the District’s RECLAIM EO Emissions Mitigation Program had an average repower cost of $438,000 per engine, while the average of cost for engine remanufacturing from those same projects was estimated to be $286,000 per engine. In addition, engine remanufactures can usually be completed in less than 3 months, while repowers take more than 6 months to complete.

Throughout the development of Proposed Amended Rule 1631, AQMD staff has been working with CARB and U.S. EPA, along with the Credit Generation Subcommittee of the Home Rule Advisory Group and a working group. The AQMD staff has worked closely with CARB and U.S. EPA staff to propose amendments that will meet state and federal requirements.

Two public meetings were held during the rule development process to solicit comments from potentially affected parties and the public. A public workshop was held on March 26, 2002 and a public consultation meeting was held on August 7, 2002. No unresolved issues remain from these meetings.

Proposed Amended Rule 1631 will allow marine vessels to travel beyond district waters twice per calendar year for the purpose of maintenance or repair. Credits cannot be generated as a result of this travel and any travel beyond district waters must be properly documented. In addition, the credit generator must provide a signed declaration that the marine vessel did not conduct any commercial activities during the travel time outside district waters. The AQMD staff is proposing travel outside district waters twice per year because it recognizes the special circumstances surrounding the limited availability of marine vessel repair yards in the District. This proposed amendment is similar to the requirements of Rule 1612.1 – Mobile Source Credit Generation Pilot Program, which allows vehicles to travel outside district boundaries once per year. As part of the existing requirements, all participating marine vessels are equipped with Global Positioning Systems (GPS) or equivalent devices to monitor and record when the vessels travel outside district waters.

The AQMD staff is also proposing that in addition to marine vessel repowering, credits may be generated from engine remanufacture. Engine remanufactures are a viable and cost-effective alternative to generate credits under Proposed Amended Rule 1631. In order to ensure that engine remanufacturing produces credits which are state and federally approvable, engine remanufacturing is subject to additional requirements under Proposed Amended Rule 1631. To avoid the potential use of on-road engine components, only engines that are 500 horsepower or above can participate. To ensure that remanufactured engines maintain their emission levels throughout the entire credit generation period, two additional source tests will be conducted approximately half-way through the project life and prior to the end of the project life. In addition, the AQMD may conduct unannounced inspections of specified emission-related engine parameters such as engine ignition timing, to ensure that these parameters remain unchanged from their original settings. Proposed Amended Rule 1631 will also require that operators follow the OEM’s recommended type and frequency of maintenance on emission-related components in order to ensure that the engine’s emission-related components are kept in good operating condition.

The proposed amendments also include several editorial changes for clarification and a requirement that replaced marine engines be prohibited from use in stationary sources as well as any mobile source.

Proposed Amended Rule 1631 represents a change to existing requirements that may have limited the participation of marine vessels and their potential to provide emission reductions for use under RECLAIM. The proposed amendments will provide additional flexibility to credit generators by allowing participating marine vessels to travel beyond district waters twice per calendar year for purposes of maintenance or repair and allow a more cost-effective and less time-consuming method of generating credits. Since the credits issued under Proposed Amended Rule 1631 expire after 2005, implementation of the projects under the proposed amended rule will continue to produce long-term emission reduction benefits beyond the mandatory program end date.

In accordance with CEQA Guidelines, the AQMD has reviewed the proposed project. The proposed project involves no loss of potential emission reductions or other change in impacts and thus, it can be seen with certainty that there is no possibility that the project in question may have a significant effect on the environment. Therefore, the project is not subject to CEQA. A Notice of Exemption will be prepared in accordance with CEQA Guidelines for the proposed project and will be filed with the county clerks immediately following the adoption of the proposed amendments to the rule. A sample copy of the Notice of Exemption and cover letter explaining the rational for the Notice of Exemption are included as Attachment F.

Proposed Amended Rule 1631 is a voluntary program where credit generation will occur where it is found beneficial to the credit generator. The cost-effectiveness of Proposed Rule 1631 depends on which credit generation project is being implemented, cost of implementation, and lifetime emission benefits. Because of the voluntary nature of the pilot program, a cost savings is expected for RECLAIM facilities that elect to use credits generated under the proposed rule.

At its August 2002 board hearing, the AQMD’s Board directed staff to reevaluate the disposition of replaced marine engines and the associated costs involved with requiring all replaced marine engines to be scrapped. Rule 1631 requires that a marine vessel operator provide a written notification or certification that the replaced marine engine must not be operated in the state of California. In addition, the Rule 1631 requirement to report the final disposition of the replaced marine engines is a contractual requirement for projects funded by AQMD. Any marine engine that is sold to a marine vessel operator who conducts commercial operations off South Coast waters would be in violation of the contract terms, as well as the rule requirements, and would be subject to penalties.

The marine engines that have been replaced as part of the Rule 1631 Pilot Credit Generation Program have either been sold or are in the process of being sold. Those marine engines that have been sold have been sold to parties outside the state of California, principally located in Mexico, Hong Kong, Louisiana, Texas, Seattle, or Oregon. The sale price for replaced marine engines that have been sold varied significantly, depending on engine age, size, and condition. The marine engines that are pending sale are in storage waiting for a buyer. The AQMD staff is not aware of any marine engines in the Rule 1631 Pilot Credit Generation Program that have been destroyed or scrapped. The prices received from the sale of replaced marine engines range from $3,000 to $95,000.

The AQMD staff is not recommending adding a scrapping requirement at this time to Proposed Amended Rule 1631 for the following reasons. If the costs of a scrapping program were paid by district funds, less funds would be available to repower existing marine vessels with lower emitting engines. This would result in lower emission reduction benefits to the SIP after the Pilot Credit Generation Program expires in 2005. In addition, since Rule 1631 is a Pilot Credit Generation Program and the program expires in 2005 the amount of time remaining before Rule 1631 credits can no longer be generated limits the probability that replaced marine engines will make their way back into marine vessels operating in district waters. It is also likely that for any marine engines eventually making their way back into district waters, emissions would not necessarily increase. Since marine engines can be continually rebuilt for 40 to 45 years, and the age of replaced marine engines participating in the Pilot Credit Generation Program is between 25 and 30 years and remanufactured engines is between 8 and 12 years, it is likely that the replaced and remanufactured marine engines would themselves replace existing engines that are older and higher in emissions.

Staff does recognize the desire to have complete certainty that replaced engines or parts will not be reused within the state waters and would continue to monitor the issue (e.g., periodic survey). Furthermore, for AQMD projects, the District has the discretion through its contractual agreements to require scrapping of engines without rule amendments.

Proposed Amended Rule 1631 – Pilot Credit Generation Program for Marine Vessels

Allow participating marine vessels to travel outside district waters for the purpose of maintenance or repair no more than twice per calendar year. No credits will be generated for travel outside district waters.
Engine remanufacturing will be included as an option for credit generation.
In order to qualify for credits, the emissions from a remanufactured engine must meet or be below a specified emission level. Credits will be quantified using the specified emission level as the optional emission factor.
Additional maintenance, monitoring, and recordkeeping requirements are specified for remanufactured engines.
Replaced engines resulting from marine vessel repowers will be prohibited from reuse in any stationary source within the state of California.
Several editorial changes are included for clarity.

Proposed Rule 1631 – Pilot Credit Generation Program for Marine Vessels

Issue

Should marine engines replaced during a repower be permanently destroyed and scrapped to prevent them from eventually making their way back into district waters?

Response

The AQMD staff is not recommending adding a scrapping requirement to Proposed Amended Rule 1631. The marine engines that have been replaced as part of the Rule 1631 Pilot Credit Generation Program have either been sold or are in the process of being sold. Those marine engines that have been sold have been sold to parties outside the state of California, principally located in Mexico, Hong Kong, Louisiana, Texas, Seattle, or Oregon. Rule 1631 is a Pilot Credit Generation Program and the amount of time remaining before Rule 1631 credits can no longer be generated limits the probability that replaced marine engines will make their way back into marine vessels operating in district waters. It is also likely that for any marine engines eventually making their way back into district waters, emissions would not necessarily increase. Since marine engines can be continually rebuilt for 40 to 45 years, and the age range of replaced marine engines participating in the Pilot Credit Generation Program is between 25 and 30 years, it is likely that the replaced marine engines would themselves replace existing engines that are older and higher in emissions.

If Proposed Amended Rule 1631 were to require that all replaced marine engines be scrapped, additional funding would be requested from AQMD to cover both the cost of scrapping and offset the financial loss from not selling the replaced marine engines, which have ranged from $3,000 to $95,000. If these costs were allocated to fund future repower projects, the projects would be less cost-effective and may result in lower emission reductions as a result of some projects not being funded due to the increase in costs.

A Resolution of the Governing Board of the South Coast Air Quality Management District (Governing Board) certifying the Notice of Exemption prepared for Proposed Amended Rule 1631 – Pilot Credit Generation Program for Marine Vessels.

A Resolution of the Governing Board adopting Proposed Amended Rule 1631 – Pilot Credit Generation Program for Marine Vessels.

WHEREAS, the Governing Board has determined that Proposed Amended Rule 1631 – Pilot Credit Generation Program for Marine Vessels is a "project" pursuant to the terms of the California Environmental Quality Act (CEQA); and

WHEREAS, the South Coast Air Quality Management District has reviewed the proposed project and determined that the project is not subject to the requirements of CEQA pursuant to state CEQA Guidelines, Section 15061 (b)(3); and

WHEREAS, a Notice of Exemption has been prepared in accordance with CEQA Guidelines, Section 15062; and

WHEREAS, the South Coast Air Quality Management District will file the Notice of Exemption with the county clerks immediately following certification of the Notice of Exemption and adoption of Proposed Amended Rule 1631 – Pilot Credit Generation Program for Marine Vessels; and

WHEREAS, the South Coast Air Quality Management District has concluded that Proposed Amended Rule 1631 – Pilot Credit Generation Program for Marine Vessels 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 Amended Rule 1631 - Pilot Credit Generation Program for Marine Vessels is not a control measure in the 1997 Air Quality Management Plan (AQMP) or in the 1999 update to the AQMP and thus was not ranked by cost-effectiveness relative to other AQMP control measures in the 1997 AQMP and 1999 update to the AQMP; and

WHEREAS the Governing Board has determined that a need exists to adopt Proposed Amended Rule 1631 - Pilot Credit Generation Program for Marine Vessels in order to provide additional flexibility to credit generators by allowing participating marine vessels to travel beyond district waters twice per calendar year for purposes of maintenance or repair, and to allow use of remanufactured engines; 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, and 40714.5, and

WHEREAS, the Governing Board has determined that Proposed Amended Rule 1631 - Pilot Credit Generation Program for Marine Vessels 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 Amended Rule 1631 - Pilot Credit Generation Program for Marine Vessels, as proposed, 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 Amended Rule 1631 - Pilot Credit Generation Program for Marine Vessels, as proposed, 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 Amended Rule 1631 - Pilot Credit Generation Program for Marine Vessels, as proposed, 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 Amended Rule 1631 - Pilot Credit Generation Program for Marine Vessels 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, that the AQMD Governing Board hereby certifies, pursuant to the authority granted by law, the Notice of Exemption for Proposed Amended Rule 1631 – Pilot Credit Generation Program for Marine Vessels; and

BE IT FURTHER RESOLVED, that the Governing Board does hereby adopt, pursuant to the authority granted by law, Proposed Amended Rule 1631 - Pilot Credit Generation Program for Marine Vessels, as set forth in the attached and incorporated herein by reference.

Dated:______________ _________________________________________
Clerk of the District Board