BOARD MEETING DATE: October 3, 2003 AGENDA NO. 21

Six pilot credit generation rules were adopted by the Board in 2001 to generate mobile source (MSERC) or area source (ASC) NOx emission reductions that can be converted to RECLAIM Trading Credits (RTCs) and used in the RECLAIM program. The rules include:

As part of the final adoption resolution, the Board directed staff to provide a status report on implementation of the pilot credit generation programs to the Stationary Source and Mobile Source Committees each month and to the Board every six months. This status report will satisfy the requirement of the semi-annual report to the Board.

All of the originally adopted pilot credit generation rules have been approved by U.S. EPA for inclusion in the State Implementation Plan (SIP), with the exception of Rule 1634 which is currently being reviewed by U.S. EPA. Rule 1631 was amended in October 2002 to allow engine remanufacturing, in addition to engine replacement, and to allow participating marine vessels to travel beyond district waters twice per year for maintenance or repair. The Rule 1631 amendments are also currently being reviewed by EPA for inclusion in the SIP.

NOx emission reductions generated from these pilot credit generation programs can be used for the RECLAIM program either directly or through the RECLAIM Reserve (Rule 2020). Table 1 summarizes the credit generation projects funded through the Mitigation Fee Program, and also includes a privately-funded marine vessel repowering project that was submitted for credit generation under Rule 1631.

Program	Project Description	Pilot Program	Project Cost	Estimated Annual NOx Reduction (tons)
Mitigation Fee Program	Marine Vessel Repowering (49 vessels)	Rule 1631	$12.1 million	658
Mitigation Fee Program	Agricultural Pumps (34 pumps)	Rule 2507	$1.76 million	60
Mitigation Fee Program	Class 7/8 Heavy-Duty Vehicles (37 CNG Trucks)	Rule 1612.1	$1.37 million	25
Market-Based Solutions, Inc.	Marine Vessel Repowering (2 vessels)	Rule 1631	Privately-Funded	110

The Mitigation Fee Program currently includes a total of 49 marine vessels. Thirteen of these marine vessels generated credits in 2002. The 2002 emission reductions generated from marine vessel projects are provided in the Program Review for Pilot Credit Generation Rules, presented to the Board on March 7, 2003. Currently, a total of twenty-seven marine vessels have been repowered and are generating credits. Table 2 shows the estimated NOx emission reductions from marine vessel projects for the first and second quarter of 2003.

Project Description	No. of Marine Vessels	Pilot Program	Estimated NOx Reduction (tons) *
			Qtr 1, 2003	Qtr 2, 2003
Marine Vessel Repowering (Mitigation Fee Program)	27	Rule 1631	49	97

By the end of 2003, additional marine vessels are expected to be repowered and will produce additional NOx emission reductions. Although no emission reductions have been generated under the other five pilot credit generation rules thus far, the Governing Board approved additional projects in February 2003 for the Mitigation Fee Program. These additional projects include the replacement of diesel-fueled agricultural pumps with electric motors pursuant to Rule 2507, and the replacement of Class 7/8 diesel-fueled trucks with CNG-fueled refuse haulers pursuant to Rule 1612.1. These additional projects will generate additional NOx emission reductions for the Mitigation Fee Program. It is projected that the agricultural pumps and CNG Class 7/8 refuse haulers will generate approximately 60 and 25 tons per year of NOx emission reductions, respectively.

To date, the AQMD has received approximately $23 million in mitigation funds to offset power plant emissions. Of these funds, approximately $15.3 million has been allocated to projects for the generation of NOx emission reductions. A total of $4 million was approved by the Board in years 2002 and 2003 for purchasing NOx RTCs. To date, approximately $1 million worth of credits have been purchased. The Board also approved $0.8 million from the Executive Officer Mitigation Account (Fund 27) to support a five-year enforcement enhancement program for Rule 1631 and other mitigation account and/or power plant emission related activities. Staff will continue to investigate potential pilot credit generation projects and recommend eligible projects to the Board as needed.

The private party project includes the repower of two marine vessels, Islander Express and Catalina Express. The Islander Express was repowered and generated approximately 85 tons of NOx RTCs in 2002. This marine vessel is projected to generate additional NOx emission reductions of approximately 77 tons per year for the next three years, of which 10% will be retired to the benefit of the environment. The Catalina Express is projected to generate approximately 25 tons per year of NOx emission reductions for the next three years with 10% being retired to the benefit of the environment.

As reported in March 2003, there were some problems encountered initially with the software for the Global Positioning Systems (GPS) and this was successfully resolved. Currently, the GPS are experiencing some other difficulties, such as frequency interference from transmitters located on other marine vessels. AQMD staff are working closely with all involved parties to resolve these remaining issues. AQMD staff are also working with the Marine Exchange as an independent source to verify the location of the marine vessels.

Random inspections are continuing in order to verify that the engine re-powering projects have been completed and the vessels are operated in compliance with the program requirements.

The marine vessel repowering projects have been successful in generating NOx emission reductions for use by RECLAIM facilities. Ongoing projects under Rules 1631, Rule 1612.1 and 2507 are expected to generate additional reductions in 2003 and beyond. Compliance and implementation issues have been resolved satisfactorily. It is recommended that the Board receive and file this report.