BOARD MEETING DATE: September 13, 2002 AGENDA NO. 25

In 2001, the Board adopted six pilot credit generation rules: Rule 1612.1 – Mobile Source Credit Generation Pilot Program, Rule 1631 – Pilot Credit Generation Program for Marine Vessels, Rule 1632 – Pilot Credit Generation Program for Hotelling Operations, Rule 1633 – Pilot Credit Generation Program for Truck/Trailer Refrigeration Units, Rule 1634 – Pilot Credit Generation Program for Truck Stops, and Rule 2507 – Pilot Credit Generation Program for Agricultural Pumps. As part of the final adoption resolution, the Board directed staff to provide a status report each month on the implementation of the pilot credit generation programs to the Stationary Source and Mobile Source Committees, and a report to the Governing Board every six months.

All six pilot credit generation rules have been submitted to U.S. EPA for inclusion in the State Implementation Plan (SIP). The first five pilot credit generation rules, Rules 1612.1, 1631, 1632, 1633 and 2507 have been approved by CARB and U.S. EPA. U.S. EPA published their final approval of the five pilot credit generation rules on February 19, 2002. Rule 1634 was submitted to CARB and U.S. EPA after its adoption in November 2001. Rule 1634 is currently under review by U.S. EPA.

NOx emission reductions generated from these pilot credit generation programs can be used in the RECLAIM program directly or through the RECLAIM Reserve for the Mitigation Fee Program for power producing facilities or Air Quality Investment Program (AQIP) for specific RECLAIM facilities. The table below summarizes credit generation projects funded through the Mitigation Fee Program and AQIP, and also includes a privately-funded marine vessel repowering project that was submitted for credit generation under Rule 1631.

	Project Description	Pilot Program	Project Cost	Projected NOx Reduction (tpy)	Estimated Program NOx Reduction * (tons)
Mitigation Fee Program	Marine Vessel Repowering (38 vessels)	Rule 1631	$9.82 Million	470	1301
Mitigation Fee Program	Agricultural Pumps (29 pumps)	Rule 2507	$1.76 Million	147	560
AQIP	Marine Vessel Repowering (3 vessels)	Rule 1631	$1.48 Million	155	458
Market-Based Solutions, Inc.	Marine Vessel Repowering (2 vessels)	Rule 1631	Privately- Funded	77	308
* Based on emission reductions generated through the sunset date or evaluation year of the applicable credit generation protocol (i.e., June 30, 2005 for Rule 1631, and July 1, 2006 for Rule 2507).

Since January 2001, AQMD has received approximately $21.5 million under the Mitigation Fee Program with a total of 1,433 tons of NOx emission reductions requested and $2 million designated for use to pre-fund the AQIP. To date, $11.58 million of Mitigation Fee Program funds and $1.48 million of AQIP funds have been designated to fund marine vessel repowering projects. Project costs shown in the table reflect total costs for the credit generation projects. The resulting cost-effectiveness for the marine vessel projects funded under the Mitigation Fee Program and AQIP, which is based on emission reductions generated over the duration of the credit generation project, is less than $7.50 per pound of NOx. Due to the current cost-effectiveness of these marine vessel repowering projects, the anticipated emission reductions from these projects will exceed the amount obligated for the moneys expended under the Mitigation Fee Program and AQIP. Additional Projects will be funded in the near future to fulfill reductions obligated for additional moneys received under the Mitigation Fee Program.

At this time, the majority of credit generation projects involve marine vessel repowering pursuant to Rule 1631; however, the AQMD is proposing to fund a project involving the electrification of agricultural pumps pursuant to Rule 2507. No projects applicable to the other four pilot credit generation programs (Rules 1612.1, 1632, 1633 and 1634) have been funded through the RECLAIM Reserve or submitted for credit generation. The agricultural pumps are expected to be repowered and generating credits in the 3^rd and 4^th quarters of this year. The privately-funded marine vessels identified as part of the Rule 1631 credit generation strategy have been repowered. RTCs were issued for one of these vessels (Islander Express) on February 28, 2002. The application for the second vessel (Catalina Express) is currently under review.

Federal and state approval of the five pilot credit generation rules represents a significant milestone in market incentives programs as they are the first mobile source credit generation rules to receive federal approval. These rules will provide an important option to RECLAIM facilities if the demand for RTCs increases and enable AQMD to use these credits to mitigate excess emissions from power plants.

South Coast Air Quality Management District