federal plan in a state that does not choose to determine its own
allowance-distribution approach. The EPA requests comment on all of
these, and any other, approaches to distribute allowances.
    The initial allowance allocation approach that is based on
historical data does not affect the environmental results of the
program or generation patterns; regardless of the manner in which
allowances are initially distributed, the finite total number of
allowances limits allowable emissions across all affected EGUs.
Allowance allocations also are not intended to prescribe or suggest any
unit-level compliance requirements nor do they limit unit-level
operational flexibility, because a mass-based trading program provides
operators of affected EGUs with the flexibility to buy, sell, or bank
allowances. Allowance allocation is simply a procedure by which
allowances are distributed into the marketplace so that they may be
available for affected EGUs to acquire as desired to authorize
emissions under the program. However, because these allowances are
finite in number and thus a limited resource, they have value, and as a
result, initial allowance allocations may raise issues of equity among
recipients.
    Thus the agency recognizes that its choice of allocation
methodology is important from the perspective of distributional
effects, and the importance of selecting an approach that is fair and
reasonable in light of this consideration and the overall purpose of
CAA section 111 informs the agency's thinking in this proposal. We also
invite comment on these considerations, and on any other factors or
considerations which commenters believe should inform the allocation
method.
    The EPA believes that the most reasonable basis for an initial
allowance allocation procedure is an approach that uses historical data
reported by the affected EGUs subject to the requirement to hold
allowances under this program. This approach relies on known data
rather than future projections. The EPA believes this approach is
preferable because any approach tied to future indicators (e.g., the
expected future EGU-level pattern of emissions or the ultimate use of
allowances) would depend on future outcomes that the EPA cannot project
with perfect certainty in advance. Basing allocation on historical data
is also consistent with the EPA's approach to initial allowance
allocation under previously established mass-based trading programs.
    The EPA proposes to allocate most CO2 emission
allowances to existing affected EGUs in each state covered by a final
mass-based trading federal plan, with set-asides for a portion of
allowances (discussed in more detail below). For each compliance
period, the agency would distribute CO2 allowances in each
covered state in the amount of the state's CO2 ``mass goal''
(i.e., the state's CO2 statewide mass-based emission goal as
promulgated in the Clean Power Plan EGs) for that compliance period.
For example, if a compliance period is 3 years long, the EPA would
aggregate and distribute allowances for all 3 years at the same time.
The agency is not proposing to allocate allowances to new EGUs, which
do not have a compliance obligation under this proposed federal plan.
For each year of the program, the agency proposes to allocate most of
the allowances directly to affected EGUs using a historical-generation-
based approach. The EPA is also proposing three set-asides of
allowances, which are detailed below.
    Although the EPA cannot anticipate the future EGU-level pattern of
emissions, it is possible to consider potential future emission
patterns at the source subcategory level. In developing the Clean Power
Plan EGs, the agency conducted analysis of emission reduction potential
in the two affected EGU source subcategories, i.e., electric utility
steam generating units (steam generating units) and NGCC units. With
that analysis as a basis, the EPA requests comment on an alternative
allocation approach that would first divide the total number of
allowances from each state's mass goal into source subcategories based
on analysis done in developing the source category-specific
CO2 emissions performance rates promulgated in the EGs and
then allocate to affected EGUs within each category based on shares of
historical generation. This alternative is described later in this
section.
    The EPA recognizes that states may prefer different approaches to
distribute CO2 allowances from the EPA's approach and that
there may be advantages in having states tailor and apply their own
allocation approach. Therefore, the agency is proposing that a state
may choose to replace the federal plan allowance-distribution
provisions with its own allowance-distribution provisions, using any
approach to distribute allowances that the state chooses, including
methods that the EPA is not proposing here, provided that the state's
approach addresses emissions leakage and includes a Clean Energy
Incentive Program. The proposed requirements for addressing leakage, as
well as how the EPA proposes to implement the Clean Energy Incentive
Program for the mass-based federal plan, are detailed in sections V.E
and V.D.4 of this preamble, respectively.\93\ The EPA proposes that a
state could choose its own method for distributing allowances for any
compliance period including the first period that would commence in
2022. The proposed process for a state to replace federal plan
allowance-distribution provisions with its own allowance-distribution
provisions is detailed in section V.E of this preamble.
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    \93\ As detailed in section V.E in this preamble, we propose
that a state that chooses to determine its own allowance-
distribution approach under the proposed federal plan must address
leakage through its allocation strategy (such as the set-aside
approaches in section V.D.3 of this preamble). We request comment on
whether a state may make a justification regarding leakage as
detailed in section V.E of this preamble.
---------------------------------------------------------------------------

    The following sections discuss and request comment on the EPA's
proposed approach to allocate CO2 allowances to affected
EGUs based on shares of historical generation, the proposed timing of
allowance recordation, three proposed allowance set-asides, allocations
to units that change status, and the proposed approach for states to
replace federal plan allocation provisions with their own allowance-
distribution approaches. In addition, we

request comment on alternative allowance distribution approaches--such
as auctioning or allocations to load-serving entities--that the EPA or
states might adopt. The EPA requests comment on all of these aspects of
allowance distribution.
1. Proposed Allocation Approach and Alternatives
    The EPA proposes to allocate most of the CO2 allowances
in the mass-based trading program to affected EGUs based on historical
generation (output) data. The EPA also proposes three allowance set-
asides. The first would set aside a portion of allowances in each state
from the first compliance period only; this set-aside is for a proposed
Clean Energy Incentive Program that is detailed in section V.D.4 of
this preamble. The second would set aside a portion of allowances in
each compliance period except for the first period; the EPA proposes to
distribute allowances from this set-aside to affected EGUs via an
updating output-based approach as detailed in section V.D.3 of this
preamble). The third would set aside 5 percent of allowances in each
state, in all compliance periods, to be distributed to RE projects as
detailed in section V.D.3 of this preamble. In summary, the proposed
set-asides include:

    (1) Clean Energy Incentive Program. This set-aside would be of
first compliance period allowances only.
    (2) Output-based allocation set-aside. This set-aside would
start in the second compliance period and continue for each
compliance period.
    (3) Renewable energy set-aside. This set-aside would be
implemented in all compliance periods.

    This section describes the proposed historical-generation-based
approach that the agency would use to allocate all allowances except
for the set-aside allowances. The EPA is proposing affected-EGU-level
allocations (based on available data) in every state. Further detail on
this proposed allocation approach is provided in the Allowance
Allocation Proposed Rule TSD in the docket. The affected-EGU-level
allocations resulting from this proposed historical-generation-based
approach are provided in the docket in an appendix to the TSD. The
agency requests comment on the proposed historical-generation-based
allocation approach and on other allocation approaches.
    The EPA proposes to allocate the historical-generation-based
portion of the allowances (i.e., the mass goal minus the set-asides)
\94\ to individual affected EGUs based on each affected EGU's share of
the state's historical generation, using 2010 through 2012 data. The
calculation steps for this proposed historical-generation-based
allocation approach are as follows:
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    \94\ In the first compliance period this would be the mass goal
minus the Clean Energy Incentive Program set-aside and the RE set-
aside. In all other compliance periods this would be the mass goal
minus the output-based allocation set-aside and the RE set-aside.
---------------------------------------------------------------------------

    (1) For each unit in the list of likely affected EGUs in each
state, identify annual net generation values for the historical period
of 2010 through 2012 (reflecting affected-EGU-specific generation
assumptions incorporated in the data adjustments, e.g., assumed
capacity factor for ``under construction'' units). For a year for which
an affected EGU has no generation data (e.g., a year before the year
when a unit started operating), assign the affected EGU a value of
zero.\95\ (See step 2, below, for how zero values would be treated in
the calculations.)
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    \95\ The EPA proposes that for affected EGUs that were under
construction and began operation during 2012 or after 2012 (and thus
don't have a full year of generation data from the 2010 through 2012
period), the allocation calculations be based on the same 2012
generation estimate as the agency used in the Clean Power Plan EGs
for the goal-setting calculations. That is, the EPA proposes to
estimate 2012 generation for such units based on a unit's net summer
capacity and assuming a 55 percent capacity factor for gas units and
a 60 percent capacity factor for steam units.
---------------------------------------------------------------------------

    The EPA proposes to use a 3-year historical period (i.e., 2010
through 2012) to reflect unit-level operations over time. In the Clean
Power Plan EGs, the EPA identified a reasonable basis for using
aggregate data at the regional level largely based on the most recent
data year (in that case, 2012) to inform the establishment of category-
wide EGs (as opposed to individual, unit-specific parameters). As a
distinct matter, in this context the EPA is considering data at the
unit level to inform unit-specific initial allowance allocations;
notwithstanding that these allowance allocations do not impose any
unit-level compliance requirements in and of themselves, the EPA finds
it reasonable to consider a multi-year data period to inform unit-level
initial allocations in order to consider a broader range of unit-
specific operations over time.
    (2) Determine each affected EGU's average generation value by
averaging all (non-zero) 2010 through 2012 annual generation values for
the unit. The proposed approach would use only non-zero values in
calculating a unit's average generation. For example, if generation
data for a unit were available for only 2011 and 2012 then the EPA
would only use the 2011 and 2012 values to determine the unit's
unadjusted average generation value. The EPA included generation from
all units in the historical data set in the proposed allowance
calculations and calculated allowances for all such units; the agency
requests comment on the treatment of generation from and allocations to
units that operated in the historical data set but retire before the
start of the program.
    (3) In each state, sum the average generation values from all
affected EGUs to obtain that state's ``total average historical
generation.''
    (4) Divide each affected EGU's average generation value by the
state's total average historical generation to determine that affected
EGU's share of the state's total average historical generation.
    (5) Multiply each affected EGU's share of the state's total average
historical generation by the historical-generation-allocation portion
of the state's mass goal (i.e., the state's mass goal minus the set-
asides) to determine that affected EGU's allocation.
    The agency believes that this proposed historical-generation-based
allocation approach is a reasonable approach for several reasons:
     The agency believes that the proposed historical-
generation-based approach maximizes transparency and clarity of
allowance allocations. The EPA has placed in the docket the historical
generation data and the calculations used to determine the proposed
affected-EGU-level allocations. The agency also placed the proposed
affected-EGU-level allocations, resulting from these calculations, into
the docket. These calculations can be relatively easily replicated.
     To calculate allocations, the EPA proposes to use
historical affected-EGU-level net generation data compiled using a
methodology similar to the Emissions & Generation Resource Integrated
Database methodology. The proposed calculation approach is described
further below and in the Allowance Allocation Proposed Rule TSD in the
docket. The historical-data methodology is described in the
CO2 Emission Performance Rate and Goal Computation TSD for
Clean Power Plan Final Rule. The majority of the generation-unit-level
data in this approach are from reports that emissions sources submit to
the EPA under 40 CFR part 75 and to the EIA on forms EIA-860 and EIA-
923. The EPA believes these are the best data available to the agency
at the time of this proposed rule for calculating affected-EGU-level
allocations.
     Allocating based on historical data (as opposed to data
not yet reported)

allows for the distribution of allowances prior to the start of the
program, which can facilitate compliance planning.
    The proposed approach is transparent, based on reliable data, and,
like the approaches used in the NOX SIP Call, the ARP, and
CSAPR, based on historical data. For all these reasons, the agency
believes that it is appropriate to use a historical-generation-based
allocation methodology in this proposed rule. The EPA also requests
comment on a historical-data approach based on historical emissions.
    The proposed historical-data-based allocations approach would not
generally affect the ultimate pattern of generation across individual
power plants, as compared to other methods of allocation. The
combination of plants, and their contributing generation, that will be
used to meet a particular demand for electric power will be based on
the relative efficiency (cost of production) of available plants. The
relevant measure of this efficiency is the marginal cost of generation,
which for a particular power plant would be the sum of the cost of
additional fuel to generate an additional MWh, additional maintenance
costs to increase output by an additional MWh, and costs associated
with the additional emissions that result from generating an additional
MWh. In a mass-based trading program, additional emissions must be
covered by additional allowances, so the cost of emitting is the price
of the allowances that must be consumed to authorize those emissions.
These emissions-related costs of electricity production are the same
regardless of whether the allowances used to cover those emissions were
initially allocated to the user or whether they were acquired
subsequently in the marketplace.
    The same concept applies to any other cost of electricity
production. For example, a coal-fired EGUs operator would account for
the cost of consuming coal to produce generation whether or not the
coal was discovered already on-site, given to the unit at ``no
charge'', or purchased from the marketplace; in all cases, the
combustion of that coal consumes its value (i.e., it can no longer be
sold). Similarly, the approach taken to distribute allowances does not
affect the cost accounting for emissions at units because the use of
any tradable allowance has an opportunity cost--a firm loses the
opportunity of selling an unneeded allowance when it emits an
additional ton. Because a firm loses the opportunity of selling an
unneeded allowance when it emits an additional ton, even the emission
of a ton covered by a ``free'' allowance causes the generator to incur
the cost of emissions based on the market price of allowances the owner
must forgo by emitting that ton and using that allowance.
    The proposed historical-data-based allocation approach would not be
expected to have any effect on freely competitive electricity markets,
because the marginal cost of emitting under the mass-based trading
program is determined by the level of the overarching mass goals and is
not affected by the distribution of the underlying allowances. This
marginal cost of emitting is what will inform prices, outputs, and
competition among power plants. While cost-of-service markets are
structured differently from competitive markets, the regulated utility
still makes the dispatch decision on the basis of marginal costs among
the units in its fleet, which is not affected by the amount of
allowances that any particular unit in that fleet was initially
allocated (assuming a competitive allowance market).
    The EPA recognizes that some stakeholders are concerned about the
potential future distribution of emissions at the facility level, and
possible effects on communities. However, for the reasons discussed in
the above paragraphs, allowance allocations that do not change based on
future activity (such as allocations under the proposed historical-
generation-based approach) do not affect the distribution of emissions
under the program. This proposed rule is expected to achieve
significant emission reductions across the electric power sector; see
section IX of this preamble for discussion of anticipated broad
benefits to communities.
    In addition to the proposed historical-data-based allocations
approach, the EPA also requests comment on other allocation approaches.
One alternative approach on which the agency requests comment is
similar to the proposed approach in that it allocates allowances based
on historical generation. However, this alternative approach would
divide the total number of allowances from a state's mass goal (minus
the set-asides) into affected EGU source categories--based on analysis
done in developing the source category-specific CO2
emissions performance rates promulgated in the Clean Power Plan EGs--
before determining unit-level allocations. The EPA requests comment on
this alternative approach because dividing the allowances in a state by
source category in this manner may result in an initial distribution of
allowances that would be closer at the source-category level to the
future category-level pattern of emissions, and thus to allowances
ultimately used, than the proposed approach. To the extent that this
category-level division of allowances is a reasonable proxy for the
future category-level emissions pattern under the program, this
approach may reduce wealth transfer between parties that occurs as a
consequence of a less-anticipatory initial allocation procedure. The
EPA cannot observe in advance the future affected-EGU-level pattern of
emissions.
    In this alternative approach, for each state the EPA would multiply
historical steam-generating-unit generation by the steam-generating-
unit source category-specific CO2 emissions performance
rate, and multiply historical NGCC-unit generation by the NGCC-unit
source category-specific CO2 emissions performance rate. The
EPA would do these calculations for each of the compliance periods in
the Interim Period using the glide path interim performance rates, and
for the Final Period using the final performance rates. These
performance rates are shown in Table 6 in section IV.B of this
preamble, above. The EPA established the source category-specific
emissions performance rates in the Clean Power Plan EGs (see section VI
of the final EGs); these rates are not within the scope of this
proposed federal plan rulemaking. Next, for each compliance period the
EPA would split the total number of allowances from the state's mass
goal (minus the set-asides) into affected-EGU source categories in
proportion to the values resulting from the above calculation. The EPA
would then allocate the steam-generating-unit portion of the allowances
to individual SGUs using the same historical-generation-based approach
described above, and would also allocate the NGCC-unit portion of the
allowances to individual NGCC units using the historical-generation-
based approach.
    The EPA notes that there are multiple approaches that policymakers
may use to distribute allowances, beyond the proposed or alternative
allocation approaches we included in this proposed rule. Examples of
other allocation approaches include allocating based on historical heat
input (fuel) or historical emissions data, rather than historical
generation data. The choice to use historical data for allocation
(e.g., generation, heat input, or emissions) means that the
distribution of allowance value will be based on past behavior. For
example, allocations based on historical emissions would benefit those
that have historically been the largest emitters, whereas allocations
based on historical heat input or generation (output) would benefit
those that have

historically used the most fuel or generated the most electricity.\96\
Alternatively, allocations could be distributed based on projected or
observed future activity (e.g., generation, heat input, or emissions).
---------------------------------------------------------------------------

    \96\ Tools of the Trade, A Guide to Designing and Operating a
Cap and Trade Program for Pollution Control, EPA, 2003.
---------------------------------------------------------------------------

    The proposed and alternative allocation approaches would determine
most of the allocations before the start of the program. Other
potential allocation approaches would change allocations for future
compliance periods based on future activity--referred to as
``updating'' allocations. This proposed rule includes an updating-
allocation component, as we are proposing to set aside a portion of the
allowances in each state for distribution using an updating output-
based approach as detailed in section V.D.3 of this preamble. The EPA
requests comment on the use of other updating allocation approaches.
    Another allowance allocation approach that could minimize the
difference between the initial allowance allocation and the ultimate
distributional pattern of allowance use for compliance is to conduct an
auction, a process whose express intent is to align the allocation of a
scarce good (in this case, the limited authorization to emit
CO2) with the parties most willing to pay for its use. Many
ascribe benefits, in terms of economic efficiency, to the use of
auctioning as a means of allocating allowances. The EPA notes that some
states (e.g., RGGI participating states) have used auctions to
distribute allowances and have used auction revenues for a variety of
purposes, including the implementation of demand-side EE measures
intended to help reduce electricity rate impacts and overall program
costs, as well as targeted investments in low-income communities. The
EPA believes that if it conducted allowance auctions, any revenue from
such auctions received by the agency must be deposited in the U.S.
Treasury under federal law.\97\ As a result, the EPA notes that states
implementing state plans may have greater flexibility than the federal
government would to direct auction funds for particular activities. The
agency requests comment on the idea of auctioning all, or a portion of,
each state's allowances in the proposed federal plan, on how much of
each state's allowances to auction if not the entire amount, on the
frequency (e.g., yearly or every few years), design of auctions (e.g.,
spot or advance; first, second-price or other) and who may participate
in the auction.
---------------------------------------------------------------------------

    \97\ The EPA believes authority to conduct auctions is located
in CAA section 111 alone, as well as by its reference to CAA section
110(c) FIPs. The statutory definition of a FIP authorizes
``techniques (including economic incentives, such as marketable
permits or auctions of emissions allowances).'' 42 U.S.C. 7602(y).
---------------------------------------------------------------------------

    The EPA requests comment on an alternative approach, which is
allocating a portion of the allowances to load-serving entities (LSEs)
rather than to affected EGUs. LSEs are the entities responsible for
delivering power to retail consumers.
    Allocation to LSEs can help mitigate bill impacts on electricity
consumers when applied in concert with certain additional design
features. In particular, if LSEs commit and/or are required to pass
through to ratepayers the value from their selling of the allocated
allowances, this approach can mitigate the impact of electricity bill
increases on consumers that might otherwise result from application of
the federal plan. As described in the Allowance Allocation TSD, this
type of approach can also help to avoid or mitigate the potential for
windfall profits for affected EGUs. The EPA could apply this approach
by conditioning the receipt of allowances by LSEs on the pass through
to consumers of any allowance value if necessary.
    The EPA requests comment on the design and utility of allocating
allowances to LSEs to help mitigate electricity price impacts. In
particular, the EPA requests comment on options to establish conditions
requiring pass through of allowance value and verification of such
pass-through, whether it would be appropriate to identify any
conditions related to equitable distribution of allowance value among
ratepayer categories, as well as the EPA's legal authority to apply any
such conditions.
    The EPA requests comment on the additional design aspects of any
potential allocation to LSEs, including but not limited to the
following questions: In particular, what metric should provide the
basis for LSE allocation, e.g., electricity demand served by the LSE,
population served by the LSE, emissions associated with generation
serving the LSE, or some other metric. If emissions are used as the
basis for such allocation, what approach should be taken: On a
historical basis or a continually updated basis, on the basis of
estimated emissions for the relevant region or some other basis, and
using what data to calculate such emissions. Also, the EPA requests
comment on the form by which LSEs may distribute the allowance value to
rate-payers, e.g. as a fixed amount, through reduced rates, etc.
Finally, the EPA requests comment on what share of the total number of
allowances should be distributed to LSEs and what monitoring and
reporting requirements may be necessary to support an effective
program.
    The EPA also requests comment on the proposed historical-
generation-based allocation approach, the alternative approach that
divides total allowances from a mass goal into source subcategories
before allocating to individual affected EGUs within each source
category based on historical generation, and on the other alternative
approaches described in this section. The EPA also requests comment on
allocating allowances to all generation in a state (including non-
emitting generation) using a historical-generation-based approach. The
agency also requests comment on the proposed allowance set-asides,
which are detailed below. The agency requests comment on allocation
approaches that may minimize the impact of this proposed rule on small
entities. The EPA also requests comment on any other approaches to
distribute allowances. The agency notes that we propose to provide that
any state may choose to replace the federal plan allocation provisions
with an allocation approach of its choosing as discussed below.
Finally, with regard to alternative allocation methodologies (either
those specifically mentioned in this proposal or other allocation
methodologies), the EPA requests comment on how those alternatives
would satisfy the requirement that in a mass-based program where new
sources are not included as part of the program, the allocation
methodology must address leakage to new fossil fuel-fired sources.
2. Timing of Allowance Recordation
    The proposed historical-data-based allocation approach--which the
EPA proposes to use to allocate all of the allowances in each state
except for the set-aside allowances--is a one-time determination that
is not updated. The allocations resulting from this approach would be
determined prior to the start of the program. The EPA proposes to
record the historical-data-based allowances for each compliance period
in source accounts prior to the start of each compliance period, and to
record allowances for one compliance period at a time. Recording
allowances prior to the start of a compliance period provides certainty
to affected EGUs of their allocations in advance of when the allowances
are needed for compliance and can facilitate long-term planning.

Recording allowances for one compliance period at a time provides
flexibility for a state to replace the federal plan with its own plan
in a timely way. As discussed in section V.F of this preamble, the EPA
proposes to allow a state to replace the federal plan with its own
approved state plan, for a compliance period for which allowances have
not yet been recorded (the proposed schedule for allowance recordation
is detailed below). The EPA also proposes that a state could choose to
replace the federal plan allocations to its affected EGUs (and other
entities) with its own allocations approach, for a compliance period
for which allowances have not yet been recorded as detailed in section
V.E of this preamble.
    The agency proposes to record allowances for the mass-based trading
program in accounts of affected EGUs 7 months prior to the start of
each compliance period. For example, if compliance periods are 3 years
long and the first compliance period comprises the years 2022, 2023,
and 2024, the EPA would record allowances for 2022, 2023, and 2024 by
June 1, 2021. The EPA requests comment on the proposed approach of
recording allowances 7 months prior to the start of each compliance
period, and on an alternative of recording allowances 13 months prior
to the start of each compliance period. See section V.D.3 of this
preamble for timing of recordation of allowances from the proposed set-
asides.
3. Allowance Set-Asides To Address Leakage to New Sources
    In addition to the general allocation method proposed above, the
EPA is proposing two additional components of allowance allocation
under a mass-based federal plan. These two set-asides are being
proposed to satisfy the requirement in the final guidelines that mass-
based plans demonstrate that they have addressed the risk of leakage to
new unaffected units, as specified below.\98\
---------------------------------------------------------------------------

    \98\ The EPA is also proposing a third set-aside, for a Clean
Energy Incentive Program, which is detailed in section V.D.4 of this
preamble, below.
---------------------------------------------------------------------------

    The final EGs specify the concern of leakage, which is defined in
section VII.D of the final EGs preamble as the potential of an
alternative form of implementation of the BSER (e.g., the rate-based
and mass-based state goals) to create a larger incentive for affected
EGUs to shift generation to new fossil fuel-fired EGUs relative to what
would occur when the implementation of the BSER took the form of
standards of performance incorporating the subcategory-specific
emission performance rates representing the BSER. The final EGs
specified that mass-based plan approaches must address leakage, because
the form of the mass goals may ultimately impact the relative
incentives to generate and emit at affected EGUs as opposed to shifting
generation to new sources, with potential implications for whether the
mass goal implements or is consistent with the BSER and overall
emissions from the sector. These circumstances are much less likely to
be present under a rate-based plan approach, where the form of the goal
ensures sufficient incentive to affected existing EGUs to generate and
thus avoid leakage, similar to the CO2 emission performance
rates. By requiring mass-based plan components that address leakage,
the final EGs ensure that mass goals are equivalent to the
CO2 emission performance rates and are thus an equivalent
expression of the BSER. Section VII.D of the final EGs details the
requirement for addressing leakage and why it is needed, and section
VIII.J of the final EGs specifies options for mass-based state plan
components that address leakage. We are proposing, as part of the mass-
based approach under the federal plan and model rule, to implement
allowance allocation approaches to address leakage, specifically
through establishing an output-based allocation set-aside and a set-
aside that encourages the installation of RE.
    As noted in the EGs, if a state were to adopt allowance set-aside
provisions exactly as they are outlined in this model rule once it is
finalized, the requirement for that state plan to address leakage would
be considered presumptively approvable.
    Section VIII.J of the final EGs provides a discussion of how set-
asides can effectively address leakage in a mass-based plan approach.
That section of the final EGs also describes why the allowance
allocation alternative for addressing leakage must be chosen for the
federal plan instead of the option to regulate new non-affected fossil
fuel-fired EGUs. This is because the EPA does not have authority to
extend regulation of and federal enforceability to new fossil fuel-
fired sources under CAA section 111(d), and therefore we cannot include
new sources under a federal mass-based plan approach.
    The set-asides we are proposing--described in detail below--would
establish a pool of allowances that would be allocated to affected EGUS
or other entities based upon criteria designed to address leakage.
    These set-asides are essentially a type of ``economic incentive''
authorized by the CAA as a means of pollution prevention and control,
and the expected benefits of this particular type of economic incentive
to address leakage make it appropriate here.\99\ The EPA believes these
set-aside programs are both authorized and consistent with the purpose
of the Clean Power Plan under CAA section 111(d) and the specific
requirements specified in the final guidelines. They do not have the
effect of increasing the stringency of the federal plan because the
overall budget of allowances (representing allowable emissions) remains
the same.
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    \99\ In designing a federal plan under CAA section 111(d), the
EPA recognizes its authority as being, in some sense, the same as
that available under CAA section 110(c), where the use of economic
incentives is authorized. See CAA section 302(y), 42 U.S.C. 7602(y)
(authorizing use of ``economic incentives'' in FIPs).
---------------------------------------------------------------------------

    The EPA is aware of the successful use of set-asides and similar
programs in other emissions trading programs. The following are
examples of set-asides and similar programs used in other federal air
quality rules.
    The EPA has previously established set-asides of emissions
allowances in FIPs under CAA section 110. For example, in the CSAPR,
the EPA used a 5 percent set-aside for new units, because we believed
it was ``important to have a small new unit set-aside in each state to
cover new units within the budget that was set aside in order to
address the state's significant contribution and interference with
maintenance.'' (75 FR 45310; August 2, 2010). This was important, in
the EPA's view, because it allowed for growth in the electric utility
sector consistent with the EPA's modeling, where new units showed up in
the modeling output as surrogate facilities representing potential new
EGUs that come online in future years in response to demand increases
or other market drivers.\100\ As between a choice of requiring these
new units to purchase their allowance on the open market, versus being
treated in the same manner as existing--and generally understood to be
less efficient and more polluting--units, i.e., by being eligible to
receive an initial allowance allocation out of the new unit set-aside,
the EPA chose the latter.
---------------------------------------------------------------------------

    \100\ See also EPA, Allowance Allocation Final Rule TSD, EPA-HQ-
OAR-2009-0491, at 3-4 (June 2011).
---------------------------------------------------------------------------

    As part of the ARP under Title IV of the 1990 CAA Amendments,
Congress established a ``conservation and renewable energy reserve''
account. See CAA section 404(f), 42 U.S.C. 7651c(f). This is in essence
a set-aside account of

SO2 allowances which the regulated utilities could earn by
undertaking ``qualified energy conservation measures'' and ``qualified
renewable energy'' projects. The size of the reserve was set at 300,000
allowances, and utilities could earn one SO2 allowance for
every 500 MWh of energy saved through demand-side EE savings or RE
generation. In the first years of the program, utilities received bonus
allowances equivalent to close to 3,000 tons of avoided SO2
emissions, while achieving co-benefits from reductions in other
pollutants, and, in the words of one industry representative,
``creating a culture change where utilities are looking for
opportunities everywhere.'' \101\ The reserve program was nonetheless
undersubscribed, and the EPA and other parties have learned from this
case and made adjustments to similar programs to promote participation.
This proposal seeks to minimize the administrative burden associated
with participation in this rule's proposed set-asides.
---------------------------------------------------------------------------

    \101\ U.S. EPA, Acid Rain Program, Conservation and Renewable
Energy Reserve, EPA 430-R-94-010 (November 1994).
---------------------------------------------------------------------------

    In the NOX SIP Call, the EPA encouraged states to
consider including energy efficiency and renewables as a strategy in
meeting their emission budgets through the use of set-asides. See 63 FR
57356, 57438 (October 27, 1998). A number of states created RE and
demand-side EE set-asides in their SIPs in response, and later, for the
implementation of CAIR. A ``roundtable'' meeting with 25 states in 2006
indicated that states that had established these programs were
generally having success with them, and provided a forum for exchanges
of ideas on how to handle a variety of implementation issues, such as
over- and under-subscription, application issues, compliance and
verification, the appropriate size of a set-aside account, how to
garner public input on which projects are selected, and other
issues.\102\ In general, the EPA believes its experience and those of
the states with these set-aside programs support the view that they are
an effective means to spur clean energy projects, which in turn we
believe can help to reduce the risk of leakage in this instance.\103\
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    \102\ U.S. EPA, State Clean Energy-Environment Technical Forum
Roundtable on State NOXAllowance EE/RE Set Aside
Programs, Call Summary (June 6, 2006), available at http://www.epa.gov/statelocalclimate/documents/pdf/summary_paper_nox_allowance_6-6-2006.pdf.
    \103\ The agency has extensive experience in the design and
establishment of set-aside programs. See, e.g., Guidance on
Establishing an Energy Efficiency and Renewable Energy (EE/RE) Set-
Aside in the NOX Budget Trading Program (March 1999),
available at http://www.epa.gov/statelocalclimate/documents/pdf/ee-re_set-asides_vol1.pdf; Creating an EE and RE Set-aside in the
NOX Budget Trading Program: Designing the Administrative
and Quantitative Elements (April 2000), available at http://www.epa.gov/statelocalclimate/documents/pdf/ee-re_set-asides_vol2.pdf; Creating an EE and RE Set-aside in the
NOX Budget Trading Program: Evaluation, Measurement, and
Verification of Electricity Savings for Determining Emission
Reductions from Energy Efficiency and Renewable Energy Actions (July
2007), available at http://www.epa.gov/statelocalclimate/documents/pdf/ee-re_set-asides_vol3.pdf.
---------------------------------------------------------------------------

    Below, the EPA describes two potential allowance set-asides. First,
the EPA proposes a set-aside for allowances distributed to existing
NGCC units based on output (i.e., output-based allocation) to mitigate
emission leakage to new sources. Second, the EPA proposes a set-aside
for electricity generation from qualifying renewables. This set-aside
also addresses the potential for leakage to new sources, as increased
RE capacity can serve electricity demand in place of new sources. The
EPA also solicits comment on other set-aside options that could address
leakage, including a set-aside that provides an incentive for demand-
side EE. The EPA seeks comment on all aspects of the set-aside options
specified in this section. This includes the inclusion of a set-aside,
the method for allocation of allowances to set-asides, the size of the
set-asides, the requirements for the process of distribution,
eligibility requirements for receiving set-aside allowances, the
proposed process for redistribution of undistributed allowances from
each set-aside, and any other appropriate set-asides.
a. Set-Asides for Output-Based Allocation
    The EPA is proposing a set-aside approach referred to as output-
based allocation, which provides targeted allocations of a limited
portion of allowances to existing NGCC units as a means of mitigating
leakage. The EPA believes that this proposed set-aside would reduce
incentives for generation to shift away from EGUs covered under mass-
based plans to new unaffected EGUs. We seek comment on all aspects of
this proposal and its underlying rationale.
    Under the output-based allocation approach we are proposing,
beginning with the second compliance period, a portion of the total
allowances within each mass-based federal plan state would be allocated
to existing NGCC units based, in part, on their level of electricity
generation in the previous compliance period. Each eligible EGU would
get a larger allowance allocation from this set-aside if it generates
more, such that owner/operators of eligible EGUs will have an incentive
to generate more in order to receive more allowances. Because the total
number of allowances is limited, this allocation approach will not
exceed the overall emission goal. Instead, it merely modifies the
distribution of allowances in a manner designed to align the generation
incentives for eligible EGUs in mass-based states with new emitting
EGUs that are not subject to a mass-based limit, mitigating emissions
leakage.
    The EPA is inviting comment on key parameters for the appropriate
design of the output-based allocation approach used for this proposed
set-aside. Key parameters to be identified under the output-based
allocation approach include which affected EGUs receive the allocation,
the timing of the set-aside's allocation procedure, the allocation
rate(s), and the size of the set-aside. The EPA also invites comment on
what other parameters may be relevant for design of an appropriate
output-based set-aside.
    The EPA first solicits comment on which EGUs should be eligible to
receive output-based allocation from the set-aside. The EPA proposes
that only NGCC units subject to the final EGs receive output-based
allocation from the set-aside. The EPA recognizes that performance of
output-based allocation may be improved by targeting which units
receive this additional incentive. In particular, this approach can
most effectively address emission leakage if targeted to those affected
EGUs subject to a mass goal that face the greatest difference in their
incentive to generate relative to otherwise similar EGUs that are not
subject to a mass goal. As noted in the discussion of the allocation
rate below, new combustion turbines (i.e., NGCC units and simple cycle
combustion turbines) would be expected to generate more absent this
set-aside. Therefore, the difference in generation incentives between
affected stationary combustion turbines subject to a mass goal and
otherwise similar new stationary combustion turbines that are not
subject to a mass goal is likely one of the most salient deviations in
production incentives to address.
    The EPA also requests comment on extending output-based allocation
from this set-aside to affected SGUs. Output-based allocation for SGUs
may increase generation subject to the mass limit, leading to reduced
generation and emissions from new emitting sources. However, the EPA
does not propose this approach because it is not as effective as
output-based allocation to NGCC units.

This is because output-based allocation to SGUs would incentivize
generation from relatively high-emitting EGUs, which would likely
increase allowance prices as other emission reductions are made to
respect the overarching mass limit. This approach would thus strongly
counteract the intended effect of lowering the production cost from
sources subject to the proposed mass-based federal plan (compared to
emitting sources not subject to the plan). The EPA also requests
comment on extending output-based allocation from this set-aside to
zero-emitting generators (including both renewable and nuclear
generation), and how the design of the OBA set-aside for such
generators would differ relative to the NGCC approach (e.g., the amount
of allowances earned per MWh, the capacity-factor threshold, the size
of the total set-aside).
    The EPA also proposes that this approach be targeted towards
marginal generation that may not have otherwise occurred absent this
set-aside, by providing allocations under this set-aside only to
eligible EGUs that exceed a 50 percent capacity factor on a net basis
over the compliance period, and only for the portion of their
generation that exceeds that capacity factor.\104\
---------------------------------------------------------------------------

    \104\ Effectively, the allocation rate (defined below) of
output-based allocation is zero up until this average capacity
factor.
---------------------------------------------------------------------------

    The EPA also solicits comment on the timing of the output-based
allocation set-aside's allocation procedure, which involves the
relationship between the time at which eligible generation occurs and
the vintage year(s) of the allowances allocated from this set-aside to
recognize that generation. The EPA is proposing a lagged accounting
procedure for this set-aside, where eligible generation that occurs
during a given compliance period would receive allowances through this
set-aside taken from vintage years in the subsequent compliance period.
In keeping with this lagged accounting procedure, the EPA is proposing
not to reserve any allowances of vintage years during the first
compliance period (2022-2024) for allocation through this set-aside;
eligible generation that occurs during the first compliance period
would be recognized through this set-aside with allowances of vintage
years from the second compliance period (2025-2027).
    The EPA is proposing this lagged accounting procedure because the
amount and location of eligible generation in any given compliance
period remains uncertain until the compliance period has ended and the
relevant data has been reported and verified. Without this lagged
accounting procedure, the EPA would have to withhold an amount of
allowances for this set-aside from certain vintage years even as the
corresponding compliance period was already underway. Given the size of
this proposed output-based allocation set-aside in certain states, the
EPA believes it would be more advantageous for affected EGUs to know in
advance how many allowances they will be allocated in a given period,
inclusive of allowances allocated through this output-based allocation
set-aside.\105\
---------------------------------------------------------------------------

    \105\ The EPA recognizes that under this lagged accounting
procedure, if the federal plan is replaced by a state plan in a
future compliance period, the incentive to create eligible
generation in the last compliance period subject to the federal plan
is potentially diminished.
---------------------------------------------------------------------------

    The EPA requests comment on options for the allocation rate under
this approach. The allocation rate is the number of allowances, in an
amount equal to a specific amount of emissions, that the affected EGU
receives per one net MWh of generation eligible for the set-aside. The
EPA proposes to set the allocation rate equal to the rate-based
emission standard (on a net basis) for new NGCC units under 111(b), in
order to align the generation incentives across EGUs eligible for the
set-aside and the type of new emitting source that would generate more
absent this set-aside. Specifically, an additional MWh of eligible
generation would earn the affected EGU allowances equal to the level of
emissions permitted per MWh of net generation under the 111(b) new
source standard, which is 1,030 lbs/MWh-net (Carbon Pollution Standards
for new, modified, and reconstructed EGUs). The EPA requests comments
on other values for the allocation rate. For example the allocation
rate may be the expected net emissions rate of newly constructed NGCC
units, the historical average emissions rate from NGCC units, or the
NGCC or fossil steam source category-specific emissions performance
rates promulgated in the Clean Power Plan EGs (see section VI of the
final EGs).
    The EPA proposes to calculate an NGCC unit's capacity factor based
on the previous compliance period's net generation and the net summer
capacity of the unit. The EPA is proposing to require affected EGUs to
report net generation to the agency.\106\ The EPA proposes to use net
summer capacity as reported to EIA. In the alternative, the EPA
proposes to require that NGCC units report net summer capacity directly
to the EPA by adding it as a required data field in the certificate of
representation that a unit's owner or operator would submit to the
agency (see section V.G of this preamble). The EPA notes that the EIA
net summer capacity data is reported at the generator level; if we add
this data point to the certificate of representation it would be
reported at the affected-EGU level, which would facilitate calculation
of capacity factors. The EPA also requests comment on whether the
``maximum load value,'' which is a parameter that EGUs report to the
EPA in their monitoring plans, is a reasonable proxy for EGU-level net
summer capacity for these calculations. The EPA also requests comment
on an alternative approach of basing the capacity-factor calculation on
nameplate capacity instead of net summer capacity, or other approaches
to the calculation.
---------------------------------------------------------------------------

    \106\ See section V.H of this preamble for proposed monitoring
and reporting requirements. The EPA proposes to make the reported
generation data available to the public on the agency's Web site.
---------------------------------------------------------------------------

    The EPA proposes to determine the size of the output-based set-
aside once, before the start of the program, and not to change the size
thereafter. The EPA proposes to determine the size of the set-aside
assuming that it would incentivize existing NGCC to increase
utilization to a 60 percent capacity factor. The assumed 60 percent
capacity factor offers a way to limit the size of this set-aside, which
allows the remainder of the allowances in a given compliance period to
be allocated through the historical-generation approach (as detailed
above) and the other proposed set-asides (as detailed below).
Furthermore, limiting the size of the set-aside avoids the risk of
incentivizing too much generation from eligible sources, as discussed
further in the Allowance Allocation Proposed Rule TSD.
    The EPA proposes to determine the size of the output-based set-
aside using 2012 baseline data from the Clean Power Plan EGs.\107\ The
EPA would calculate the size of the set-aside as 10 percent of the NGCC
capacity in the state \108\ multiplied by the hours in a year
multiplied by the allocation rate for the set-aside. The EPA requests
comment on the proposed capacity data used as the basis for determining
the size of the output-based set-aside, and alternative sources of
capacity data that may be used for determining its size.
---------------------------------------------------------------------------

    \107\ CO2 Emission Performance Rate and Goal
Computation TSD for the Clean Power Plan Final Rule.
    \108\ The sum of net summer capacity for affected NGCC units in
the 2012 baseline for the Clean Power Plan EGs (CO2
Emission Performance Rate and Goal Computation TSD for the Clean
Power Plan Final Rule).

---------------------------------------------------------------------------

    The set-asides resulting from this proposed approach are shown in
Table 9 of this preamble. The set-asides in the table would apply to
every compliance period except for the first compliance period for
which there would be no output-based set-aside. Although the size of
the set-aside would remain the same for each compliance period, as the
mass goals decrease with each step in the Interim Period and to the
Final Period, the set-asides would constitute an increasing share of a
state's mass goal. The Allowance Allocation Proposed Rule TSD further
details the proposed approach to determine the size of the set-aside.
The EPA requests comment on a potential limit for the size of the set-
aside in a compliance period based on a percentage of the state's total
allowances for the compliance period.

     Table 9--Proposed Size of Output-Based Set-Aside for the Second
                       Compliance Period and Later
                              [Short tons]
------------------------------------------------------------------------
                                                           Allowances in
                          State                            output-based
                                                             set-aside
------------------------------------------------------------------------
Alabama.................................................       4,185,496
Arizona.................................................       4,197,813
Arkansas................................................       2,102,538
California..............................................       8,458,604
Colorado................................................       1,348,187
Connecticut.............................................       1,090,811
Delaware................................................         649,190
Florida.................................................      12,102,688
Georgia.................................................       3,563,104
Idaho...................................................         246,638
Illinois................................................       1,598,615
Indiana.................................................       1,106,150
Iowa....................................................         492,510
Kansas..................................................          62,257
Kentucky................................................         288,730
Lands of the Fort Mojave Tribe..........................         248,127
Lands of the Navajo Nation..............................               0
Lands of the Uintah and Ouray Reservation...............               0
Louisiana...............................................       2,207,879
Maine...................................................         563,925
Maryland................................................         103,762
Massachusetts...........................................       2,439,991
Michigan................................................       2,105,786
Minnesota...............................................         909,724
Mississippi.............................................       3,132,671
Missouri................................................         815,210
Montana.................................................               0
Nebraska................................................         144,635
Nevada..................................................       2,326,529
New Hampshire...........................................         542,721
New Jersey..............................................       3,413,100
New Mexico..............................................         627,085
New York................................................       3,815,381
North Carolina..........................................       2,120,178
North Dakota............................................               0
Ohio....................................................       1,757,326
Oklahoma................................................       3,121,167
Oregon..................................................       1,291,027
Pennsylvania............................................       4,392,931
Rhode Island............................................         778,307
South Carolina..........................................       1,029,366
South Dakota............................................         130,831
Tennessee...............................................         632,949
Texas...................................................      15,990,657
Utah....................................................         825,586
Virginia................................................       3,011,811
Washington..............................................       1,383,060
West Virginia...........................................               0
Wisconsin...............................................       1,181,175
Wyoming.................................................          45,114
------------------------------------------------------------------------

    Given the proposed limit on the total size of the set-aside, and
the amount of potential generation eligible for the set-aside, there
may be fewer allowances available in the set-aside than can be earned
at the allocation rate. The EPA proposes that, if the amount of total
generation eligible for the set-aside multiplied by the allocation rate
exceeds the size of this set-aside, then the allowances in this set-
aside would be allocated to eligible generation on a pro-rata basis.
    The EPA proposes that if the number of allowances allocated from
the set-aside is less than the size of this set-aside, then the
remaining allowances would be distributed to all affected EGUs using
the historical-generation-based approach described above.
    The EPA proposes to provide notice of the capacity and generation
data used to calculate allocations from the set-aside, and the
resulting allocations, by August 1 of the first year in each compliance
period, e.g., by August 1, 2025 for the compliance period that
commences in 2025 (and based on the data from the prior compliance
period). The agency proposes to provide 30 days for comment on the data
and allocations, until August 31, and to provide notice of the final
set-aside allocations by November 1 of the same year and record the
allocations in the source accounts at that time. The EPA requests
comment on other approaches to providing notice of the data and
allocations.
    The EPA requests comment on all aspects of the proposed approach to
calculate output-based set-aside allocations. Further details are in
the Allowance Allocation Proposed Rule TSD in the docket.
b. Set-Asides for Renewable Energy Projects
    The EPA proposes to provide a set-aside of allowances for
distribution to RE projects in each state covered by the proposed mass-
based federal plan, and is also proposing this for the mass-based model
rule. The agency also requests comment on whether distribution should
extend to DS-EE, CHP, and other types of projects. Under this program,
the EPA would reserve a percentage of each state's allowances in a set-
aside account for each state. Developers of RE projects could apply to
receive set-aside allowances based on the projected generation from
eligible RE capacity.
    This set-aside is expected to address concerns regarding leakage by
lowering the marginal cost of production of the incented clean energy
technologies within the state. This will make RE more competitive
against new sources, reducing the potential for leakage to new sources.
While the proposed set-asides would provide additional incentive for
the creation of additional RE capacity, it should also be noted that
the proposed mass-based trading program itself would provide incentive
for new and existing low and zero-emitting generation.
    In the context of the proposed federal plan, the EPA is proposing
that it would create a unique set-aside for each state covered by a
mass-based federal plan. Under a model rule, the state would create
this set-aside. The allowances in each set-aside would be reserved from
each vintage of the assigned mass goal to that state prior to
allocation of allowances to sources. The EPA is proposing that 5
percent of allowances will be reserved from the allocation for each
state for the purpose of the set-aside. We are also requesting comment
on options for a percentage of allowances to be reserved ranging from 1
to 10 percent of total allowances in each state. The proposed
percentage has been determined to provide a meaningful additional
incentive for RE activities in each state, while ensuring that the vast
majority of allowances are freely allocated to affected EGUs. The EPA
made this conclusion based upon determining an appropriate volume of
set-aside resources that, at a range of possible allowance prices, are
projected to incent the development of additional RE projects. The
analysis is provided in the docket as part of the Renewable Energy Set-
aside TSD. We note that, under the proposed framework, these allowances
would be available to affected EGUs either in the marketplace or
through subsequent distribution of unclaimed set-aside allowances, and

thus the provision of these set-asides does not affect the overall
stringency of the program.
    In section V.D.5 of this preamble, below, the EPA is proposing that
the size of the RE set-asides may grow over time as certain units shift
out of the program.
    We are proposing, as part of the mass-based federal plan and model
rule, that a project is eligible to receive set-aside allowances if it
is RE that meets the eligibility requirements for rate-based ERC
issuance as specified in section IV.C of this preamble and section
VIII.K of the final EGs. This includes, for example, the requirement
that only capacity incremental to 2012 is eligible for the set-aside.
The agency requests comment on an additional potential condition that
would limit eligibility to project providers that are also the owners
or operators of affected EGUs. This approach has precedent in the
eligibility requirements for the ARP set-aside, and would limit the
entities eligible to receive set-aside allowances to those that are
subject to the federal plan.
    The EPA is proposing that eligible RE capacity must meet the
following conditions regarding geographic eligibility for both the
federal plan and model rule. Eligible RE projects must be located in
the mass-based state for which the set-aside has been designated. The
agency invites comment on whether capacity outside the state should be
recognized, and how that could be implemented. The EPA also proposes
that the generation for which an entity receives allowances from the
set-aside would not be eligible for ERC issuance in rate-based states.
    As specified in section IV.C of this preamble, the EPA is proposing
that the same RE measures are eligible to receive set-aside allowances
under a mass-based federal plan as would be eligible for ERC issuance
under a rate-based federal plan and the model rule. Specifically, the
following RE measures are eligible: On-shore wind, solar, geothermal
power, and hydropower. The RE measure must also have the capacity to
provide data quantified by a revenue-quality meter, a requirement that
is further discussed in section IV.D.8 of this preamble. New nuclear
units and capacity uprates at existing nuclear units are not proposed
to be eligible to receive set-aside allowances. We do not think a set-
aside used as an incentive for incremental nuclear capacity is a useful
way to address leakage to new sources during the performance period,
due to unique costs and development timelines for incremental nuclear
power. All other proposed aspects of the RE eligible measure types
described in section IV.C of this preamble and the requests for comment
included within that section also apply in the mass-based set-aside
context for both the proposed mass-based federal plan and the proposed
mass-based model rule. For example, we are requesting comment on the
inclusion of other RE measures, incremental nuclear, demand-side EE
measures, CHP and any other emission reduction measures beyond those
mentioned here, as long as they meet the eligibility requirements
outlined in the final EGs for rate-based crediting, as eligible
measures to receive set-aside allowances. We particularly request
comment on how a set-aside to provide an incentive from these
particular measures will serve to address leakage to new sources. We
also request comment on the implications of the inclusion of such
technologies for the streamlined implementation of projection-based
EM&V requirements of the set-aside specified below in a federal plan
context across the applicable jurisdictions, while still maintaining
necessary rigor. We request comment on the appropriateness of the
biomass treatment requirements offered for comment in section IV.C.3 of
this preamble in the context of a mass-based set-aside. We request
comment on requirements for the treatment of CHP and WHP, in the
context of the mass-based set-aside. We also request comment on
appropriate processes through which, after the federal plan is
finalized, the EPA and/or stakeholders could make a demonstration of
the appropriateness of new measure types and the EPA could evaluate and
approve the demonstration so that a new measure type can be considered
eligible for the set-aside.
    To demonstrate that an RE project meets the requirements proposed
above, in the context of a mass-based federal plan, it is proposed that
the project proponent must provide the following: Documentation of the
nature of the project and that it meets eligibility requirements,
documentation that it will be located within the state in question, and
a projection of expected annual MWh generation for an RE project. The
EPA must approve the documentation of eligibility and the projection of
MWh before the project becomes eligible for a distribution of the set-
aside allowances. In addition, the proponent must register for a
general account in the EPA tracking system where the allowances would
be recorded. See 40 CFR 62.16320 for the requirements to establish a
general account. While the EPA is proposing to allow eligible resources
to use a general account to receive any allowances allocated under this
section, the EPA requests comment on extending the designated
representative provisions in 40 CFR 62.16290 to eligible resources
instead of the general account provisions. Requiring eligible resources
to submit information similar to that collected in the certificate of
representation in 40 CFR 62.16305 and to appoint a designated
representative to act on behalf of all owners/operators for all
projects requesting allowances may improve the EM&V process by making
the eligible resources more accountable. The EPA requests comment on
what documentation would be required if other measure types were
considered eligible to receive set-aside allowances. We propose that
the same process for approval of projects be applied in a model rule,
with the state taking the approving role instead of EPA.
    The EM&V requirements for the mass-based set-aside differ from
those for rate-based ERC issuance, particularly because it is based
upon projections provided prior to generation rather than metered data
provided after the generation occurs (though we are proposing that the
projections will be checked against ex-post metered data). The
projection method enables the distribution of set-aside allowances
prior to the year during which the generation occurs. The EPA feels
this still provides sufficient rigor because the set-aside does not
directly affect program stringency. The reason that stringency is not
affected is because of key differences between issuance of credits and
distribution of set-aside allowances. Under rate-based implementation,
each decision to issue an ERC based on a quantification of RE
generation affects the ultimate amount of allowable CO2
emissions, because the number of ERCs is determined by the amount of
MWhs approved as eligible for ERC issuance and the ERC does not exist
until the issuance decision is made. Thus the amount of ERCs that are
issued can affect the stringency of the rule. As a result, the EPA has
laid out specific requirements (including EM&V procedures) in the final
Clean Power Plan, and in this proposed federal plan and model rule, to
assure the environmental reliability of measures qualifying for ERC
recognition under rate-based implementation. In contrast, any decision
to recognize RE with set-aside allowance allocations under a mass-based
approach does not affect the validity of the allowance itself and does
not affect the CO2 emissions outcome because the ultimate
amount of

allowable CO2 emissions is determined by the total number of
allowances initially created (regardless of how they are distributed).
As a result, while the EPA believes it is reasonable to consider a
minimum set of qualifications for recognizing RE through these
allowance set-asides to assure that the RE generation that is incented
is actually produced, the EPA does not believe the overall integrity of
mass-based implementation is significantly affected by the robustness
of whatever eligibility requirements the EPA ultimately sets for RE
recognition through allocation from these set-asides. This being said,
the agency is proposing to require robust demonstrations of the
eligibility and EM&V projections for RE generation submitted for the
set-aside, demonstrations that are based on the best practices of
existing programs. This is necessary to assure the delivery of RE as a
result of the set-aside.
    The EPA proposes that the projections of MWh provided will be the
basis of the distribution of set-aside allowances. A satisfactory
demonstration of the future RE generation from an eligible project must
use technically sound quantification methods that are reliable,
replicable, and accompanied by underlying analytical assumptions and
verifiable data sources used to demonstrate future performance. These
methods, assumptions and data sources must be specified in
documentation accompanying the projections. These projections and
supporting documentation should all be provided in the set-aside
project application, and that application must be approved by a third-
party verifier. The EPA invites comment on these proposed requirements
for projections. We also request comment on whether set-asides should
be distributed proportional to actual MWh provided by the installation
in a prior year or compliance period, or another form of historical
generation data. This type of allocation method could also be similar
to the structure proposed for the output-based allocation set-aside. We
propose that the same projection-based distribution basis be applied in
a model rule, with the state taking the approving role instead of EPA.
    The EPA is proposing the following process for distribution of RE
set-aside allowances. Starting prior to the compliance period, and
going forward through the compliance period, RE providers in each state
will have an opportunity to apply to the EPA or a designated agent to
be approved as eligible to receive set-aside allowances in their state.
This application must include all the requirements outlined above,
including projections of expected MWh of generation. The EPA is
proposing to accept RE set-aside project applications up to a deadline
of June 1 in the year prior to the year during which the RE generation
occurs (the ``generation year''). The EPA or its agent will review and
approve the project as eligible and it will be entered into the pool of
projects that will receive set-asides in any compliance period. If
approved, the number of projected MWh in each generation year will be
the basis of the number of allowances the provider will receive, as an
input to the methodology specified below. The providers will have an
opportunity to update projections for future generation years, these
projections must be received by June 1 of the year prior to the
generation year in question.
    On December 1 of the year prior to each year of the compliance
period in question, the EPA is proposing to distribute allowances from
the set-aside to approved providers. The agency is proposing to
distribute set-aside allowances to approved RE providers pro-rata, with
the number of allowances distributed to each provider according to the
percentage of total approved RE MWh for that state that the approved
MWhs from their project represent. This method is proposed because it
treats all eligible RE projects equally in the distribution of set-
aside allowance. It also inherently provides a more significant
incentive in states with less eligible RE generation, but will become
less significant as RE generation increases. We also request comment on
whether to restrict projects to a maximum number of allowances they can
receive per MWh of generation, such as 1 allowance per MWh.
    After each generation year, RE providers receiving allowances will
have to provide an M&V report with the MWhs of RE generation actually
produced, to assure that they have met the projected level of
generation. These M&V reports need to document that the generation was
by an approved project, and the report should be approved by a third
party verifier. As discussed in section IV.D.8 of this preamble (EM&V
section for the rate-based approach), these data should be readily
available from existing metering. The EPA requests comment on the
process for submitting M&V reports with actual generation.
    If the project or program does not reach the MWhs projected in a
particular generation year, the unfulfilled MWhs will be subtracted
from that RE provider's MWhs eligible for the set-aside in the next
generation year, or multiple years if the deficit exceeds the MWhs
projected for the upcoming year. If this deficit is greater than 10
percent in a particular year, the provider will need to provide an
explanation of the deficit and will be required to reevaluate their
projections for future years. If such deficits continue through all
years of the relevant compliance period, the provider will be
disqualified from receiving future set-asides for the following
compliance period. We also request comment on whether a provider with
continuing deficits should also be disqualified from receiving ERCs for
the generation in question from states with rate-based plans. The
agency requests comment on all of the specified aspects of this
distribution process.
    The EPA is proposing that once allowances have been distributed to
all approved providers, any remaining allowances in the set-aside, such
as set-aside allowances designated for projects that no longer exist,
will be redistributed to affected EGUs in the state in a pro rata
fashion on the same distribution basis as their initial allocations
were made. It is proposed that this will occur immediately after the
distribution of set-aside allowances to eligible RE providers on
December 1 of the year prior to the generation year in question. The
EPA requests comment on this approach.
    We propose that the same distribution process as outlined above be
applied in a model rule, with the state taking the approving role
instead of the EPA.
    The EPA is also seeking comment, in the context of the proposed
rate-based federal plan and model rule, on whether a portion of this
set-aside should be targeted to RE projects that benefit low-income
communities. This benefit could be in the form of MWh provided to the
low-income community, financial proceeds from the project primarily
benefiting the low-income community, or the project lowering utility
costs of low-income rate-payers. The EPA seeks comment on how a low-
income community should be defined as eligible under this set-aside. We
seek comment on how much of the set-aside should be designated as
targeted at low-income communities. We also request comment on whether
the methods of approval and distribution of allowances to projects that
benefit low-income communities should differ from the methods that are
proposed to apply to other RE projects.
    The EPA seeks comment, in the context of the proposed rate-based
federal plan and model rule, on all aspects of this proposed RE
allowance set-aside program, including whether it should be included as
part of a mass-

based federal plan, the structure of the set-aside reserve, eligibility
requirements for receiving set-aside allowances, demonstration of
eligibility, and the process for distribution of allowances.
4. Provisions To Encourage Early Action
    For purposes of the proposed mass-based federal plan, the EPA
proposes to implement the Clean Energy Incentive Program (CEIP) on
behalf of a state by issuing early action allowances for eligible
actions located in or benefitting the state. Eligible projects must
commence construction in the case of RE or commence operations in the
case of low-income EE after September 6, 2018, and will receive
incentives based on the zero-emitting MWh they generate, or the energy
savings they achieve, during 2020 and/or 2021.\109\ These early action
allowances would be drawn from a third set-aside of allowances from the
general distribution methodology. The EPA believes it is reasonable to
establish the total amount of the early action set-aside in an amount
equal to the pool of matching allowances. Thus, the EPA proposes that
the total early action set-aside would be of an amount equal to the
pool of matching allowances: No more than 300 million CO2
allowances, depending on how many states are subject to a federal plan.
---------------------------------------------------------------------------

    \109\ As discussed in section VIII.B.2 of the final emission
guidelines, in the case of a state that submits a final state plan
including requirements for the state's participation in the CEIP,
eligible RE projects may commence construction, and eligible EE
projects may commence implementation, following the date of
submission of a final state plan to the EPA. These projects must be
implemented in or benefit the state that submitted the final state
plan to the EPA, and may receive awards for the zero-emitting MWh
they generate or the end-use energy savings they achieve during 2020
and/or 2021.
---------------------------------------------------------------------------

    The EPA proposes to distribute the 300 million early action set-
aside allowances among the states based upon the amount of the
reductions from 2012 levels each state must achieve relative to that of
the other participating states. The EPA proposes to calculate these
values as each state's proportional share of the total difference
between the 2012 baseline and the 2030 mass goals.\110\ See Table 10 of
this preamble for the proposed set-asides for each state under the
mass-based federal plan. The agency proposes to set aside 100 million
early action allowances from each of the 3 years in the first
compliance period (2022, 2023, and 2024) for a total of 300 million
allowances to be set aside. While the table shows set-asides for every
state, the EPA proposes to implement this set-aside, according to the
amounts listed in Table 10, only for those states for whom the EPA is
implementing the mass-based federal plan. The EPA also requests comment
on other approaches for determining the size of this set-aside in the
mass-based federal plan.
---------------------------------------------------------------------------

    \110\ The 2012 baseline is from the CO2 Emission
Performance Rate and Goal Computation TSD for the Clean Power Plan
Final Rule. Where a state's relative share of the reductions from
2012 levels would yield a set-aside of less than zero, the EPA
proposes to assign such a state a set-aside equal to one percent of
the state's 2030 mass goal and adjust the remaining state set-asides
accordingly.
---------------------------------------------------------------------------

    For the purposes of the mass-based federal plan, the EPA is
proposing to award early action allowances to two types of eligible
projects that are located in or benefit the state for which the EPA is
implementing a federal plan:
     RE investments that generate metered MWh from any type of
wind or solar resources; and
     Demand-side EE programs and measures implemented in low-
income communities that result in quantified and verified electricity
savings (MWh).
    Eligible RE projects must commence construction, and eligible EE
projects must commence implementation, after September 6, 2018 for
those states on whose behalf the EPA is implementing the federal plan.
These projects will receive incentives for the MWh they generate or the
end-use energy demand reductions they achieve during 2020 and/or 2021.
    The EPA proposes the following framework to implement the CEIP in
the mass-based federal plan. First, the EPA proposes to create a set-
aside of early action allowances for all federal plan states, as
described above. Second, the agency proposes to create an account of
``matching'' allowances for each state participating in the CEIP--
regardless of whether a state is implementing a state plan or the
agency is implementing a federal plan on its behalf. This distribution
would reflect each state's pro rata share of a federal pool of
additional allowances--based on the amount of the reductions from 2012
levels the affected EGUs in the state are required to achieve relative
to those in the other participating states \111\--which would be
limited to the equivalent of 300 million short tons of CO2
emissions. Thus, states whose EGUs have greater reduction obligations
will be eligible to secure a larger proportion of the federal
allocation upon demonstration of quantified and verified MWh of RE
generation or demand side-EE savings from eligible projects realized in
2020 and/or 2021. The EPA intends that a portion of these matching
allowances would be reserved for eligible wind and solar projects, and
a portion would be reserved for eligible EE projects implemented in
low-income communities. The agency recognizes that there have been
historical economic, logistical and information barriers to
implementing EE programs in these communities, and therefore believes
it is appropriate to reserve a portion of the federal pool to
incentivize investment in these programs. The EPA requests comment on
the size of reserve of matching allowances for eligible low-income EE
programs as well as for eligible wind and solar projects. The EPA is
proposing that unused allowances in either reserve would be
redistributed among participating states. This redistribution could be
executed according to the pro-rata method discussed above.
Alternatively, unused matching EE or RE allowances could be swept back
into a federal pool and distributed to project providers on a first-
come, first served basis. The EPA requests comment on these ideas as
well as alternative proposals regarding the method for redistributing
matching allowances, as well as the appropriate timing for such a
redistribution.
---------------------------------------------------------------------------

    \111\ This is the same distribution method proposed above for
the allocation of early action set-aside allowances to mass-based
federal plan states.
---------------------------------------------------------------------------

    Following the effective date of a federal plan for a state, the
agency will create an account of matching allowances for the state that
reflects the pro rata share of the 300 million short ton CO2
emissions-equivalent matching pool that the state is eligible to
receive. Any matching allowances that remain undistributed after
September 6, 2018 \112\ will be distributed to those states with
approved state plans that include requirements for CEIP participation,
as well as to those states on whose behalf the EPA is implementing a
federal plan. These allowances will be distributed according to the pro
rata method outlined above. Unused matching allowances that remain in
the accounts of states participating in the CEIP on January 1, 2023,
will be retired by the EPA. The EPA seeks comment on whether the number
of matching allowances available to a state under the mass-based
federal plan should be limited to a number equal to the number of early
action allowances included in each federal plan state's early action
set-aside.
---------------------------------------------------------------------------

    \112\ This may occur because not all states may elect to include
requirements for CEIP participation in their state plans.
---------------------------------------------------------------------------

    Third, for any state subject to a federal plan, the EPA proposes to
award early action allowances and matching allowances to eligible
projects as

follows, based upon the quantified and verified MWh of generation or
savings achieved by the projects in 2020 and/or 2021:
     For RE projects that generate metered MWh from any type of
wind or solar resources: For every two MWh generated, the project will
receive a number of allowances equivalent to one MWh from the state
early action allowance set-aside, and a number of matching allowances
equivalent to one MWh from the EPA.
     For EE projects implemented in low-income communities: For
every two MWh in end-use demand savings achieved, the project will
receive a number of allowances equivalent to two MWh from the state
early action allowance set-aside, and a number of matching allowances
equivalent to two MWh from the EPA.
    The EPA will address implementation details of the CEIP in a
subsequent action. Allowances awarded by the EPA pursuant to the CEIP
may be used for compliance by an affected EGU with its emission
standards in any compliance period and are fully transferrable prior to
such use. The EPA proposes to distribute any remaining early action
set-aside allowances in a state--after distribution to all eligible
projects in the state--to the affected EGUs in the state on a pro-rata
basis in proportion to the initial allocations made to those EGUs under
the mass-based federal plan.
    As discussed in section V.E of this preamble, the EPA proposes to
allow any state where a federal plan is being implemented to take
responsibility for distributing allowances. This will allow a state to
tailor its allowance-distribution approach to the characteristics and
preferences of the state. The EPA proposes that a state that chooses to
replace the federal plan allocations with a state-determined approach
must include a CEIP set-aside, as authorized in section VIII.B.2 of the
final EGs. The EPA intends that such a state would have the same
flexibilities as a state implementing a full state plan with respect to
implementation of the CEIP. That is, the state would not be required to
implement a set-aside of the same size as proposed in Table 10 of this
preamble, but rather could choose how many of its allowances to set-
aside for the CEIP.
    The EPA requests comment on all aspects of implementing the CEIP
under a mass-based federal plan approach, including (1) The size of the
early action allowance set-aside; (2) the approach for distributing the
early action allowance set-aside among states; (3) the timing of
distribution of set-aside and matching allowances; (4) the amount of
allowances awarded per eligible MWh generated or avoided; (5) the
criteria for eligible projects, including criteria for awards to EE
projects implemented in low-income communities; (6) the mechanism for
reviewing project submittals and issuing early action allowances; (7)
EM&V requirements for eligible projects; and, (8) the number of early
action and matching allowances that should be awarded for each ton of
emissions reduced from eligible generation or low-income efficiency
projects to ensure a robust response to the program. The EPA also seeks
comment on how states, tribes and territories for whom goals have not
yet been established in the final EGs may be able to participate in the
CEIP in the future.
    The EPA also requests comment on the proposed approach of requiring
states to implement this program as a condition of a state choosing to
determine its own allocation approach via a partial state plan or a
delegation of the federal plan.

Table 10--Proposed Clean Energy Incentive Program Early Action Allowance
                Set-Aside in the Mass-Based Federal Plan
                              [Short tons]
------------------------------------------------------------------------
                                                          Set-aside 2022
                          State                            through 2024
------------------------------------------------------------------------
Alabama.................................................       3,122,306
Arizona.................................................       1,719,618
Arkansas................................................       2,187,230
California..............................................         218,846
Colorado................................................       2,223,192
Connecticut.............................................          69,415
Delaware................................................         138,392
Florida.................................................       3,230,248
Georgia.................................................       2,755,623
Idaho...................................................          14,929
Illinois................................................       5,968,721
Indiana.................................................       5,754,076
Iowa....................................................       2,191,183
Kansas..................................................       2,115,630
Kentucky................................................       4,952,862
Lands of the Fort Mojave Tribe..........................           5,885
Lands of the Navajo Nation..............................       1,623,066
Lands of the Uintah and Ouray Reservation...............         175,509
Louisiana...............................................       1,497,428
Maine...................................................          20,739
Maryland................................................         972,775
Massachusetts...........................................         170,471
Michigan................................................       3,727,861
Minnesota...............................................       2,002,903
Mississippi.............................................         357,307
Missouri................................................       3,771,322
Montana.................................................       1,310,344
Nebraska................................................       1,481,695
Nevada..................................................         336,288
New Hampshire...........................................         107,798
New Jersey..............................................         446,005
New Mexico..............................................         823,049
New York................................................         557,771
North Carolina..........................................       2,674,590
North Dakota............................................       2,150,635
Ohio....................................................       4,788,372
Oklahoma................................................       2,067,006
Oregon..................................................         154,353
Pennsylvania............................................       5,039,346
Rhode Island............................................          35,674
South Carolina..........................................       1,652,802
South Dakota............................................         264,207
Tennessee...............................................       2,178,084
Texas...................................................      10,400,192
Utah....................................................       1,401,189
Virginia................................................       1,386,546
Washington..............................................         751,434
West Virginia...........................................       3,506,890
Wisconsin...............................................       2,393,870
Wyoming.................................................       3,104,324
------------------------------------------------------------------------

5. Allocations to Units That Change Status
    Units that retire. The EPA proposes that, if an affected EGU does
not operate for 2 consecutive calendar years, the unit would continue
to receive allocations for a limited number of years after it ceases
operation, after which the allowances that would otherwise have been
allocated to that unit would be allocated to the RE set-aside for the
state in which the retired unit is located.\113\ Continuing allocations
to non-operating units for a period of time reduces the incentive to
keep a unit operating simply to avoid losing the allowance allocations
for that unit (e.g., a unit that would otherwise be retired due to age
and inefficiency). On the other hand, non-operating units are no longer
emitting and so do not need allowances. The EPA believes that the
proposed approach of allocating allowances for a specified, but
limited, period after a unit ceases operating is a reasonable middle
ground approach. The proposed approach also allows the RE set-asides to
grow over time.
---------------------------------------------------------------------------

    \113\ This is similar to the approach taken in CSAPR of
continuing allocations to retired units for four years and then
allocating the allowances to a set-aside; in CSAPR the set-aside is
for new units.
---------------------------------------------------------------------------

    The EPA proposes to record allowances for each year of a multi-year
compliance period at once, 7 months prior to the start of each
compliance period, as discussed above. The agency proposes that, if an
affected EGU does not operate for 2 full calendar years, then starting
with the next compliance

period for which allowances have not yet been recorded, the allowances
that would otherwise have been allocated to the unit would be allocated
to the RE set-aside. As a result, the number of years of non-operation
for which a retired unit would receive allocations would vary depending
on when a unit retires. For example, if an affected EGU does not
operate for the first two calendar years of a 3-year compliance period,
then starting with the next compliance period the allowances that would
otherwise have been allocated to that unit would be allocated to the RE
set-aside--in other words the unit would receive allocations for 3
years of non-operation. As a further example, if an affected EGU does
not operate for both calendar years of a 2-year compliance period, then
starting with the compliance period after the next compliance period
the allowances would be allocated to the RE set-aside--in other words
the unit would receive allocations for 4 years of non-operation.
    The agency requests comment on this approach for treatment of
allocations to affected EGUs that retire, including on the number of
years of non-operation for which a unit would continue to receive
allocations. The EPA also requests comment on an alternative of
distributing such allowances to the set-aside for output-based
allocations, or to the remaining affected EGUs in the state in a pro-
rata fashion (on the same distribution basis as the initial allocations
were made), instead of allocating such allowances to the state's RE
set-aside. The agency requests comment on a further alternative
approach, which would be to continue allocations to the retired units.
The EPA also requests comment on treatment of allocations to units that
are in long-term cold storage.
    Units that are modified or reconstructed. Similar to the approach
for an affected EGU that retires, the EPA proposes that, if a unit is
modified or reconstructed such that it is no longer an affected EGU,
then starting with the next compliance period for which allowances have
not yet been recorded, the allowances that would otherwise have been
allocated to the unit would be allocated to the RE set-aside. The EPA
requests comment on this proposed approach, including on the number of
years for which a unit would continue to receive allocations. The
agency also requests comment on an alternative of distributing such
allowances to the set-aside for output-based allocations, or to the
remaining affected EGUs in the state in a pro-rata fashion (on the same
distribution basis as the initial allocations were made), instead of
allocating such allowances to the state's RE set-aside. The agency
requests comment on a further alternative approach, which would be to
continue allocations to the modified or reconstructed units.

E. State-Determined Allowance Distribution

    The EPA proposes to allow any state to replace the EPA-determined
federal plan allowance-distribution provisions in the mass-based
trading program with state-developed allowance-distribution provisions.
In this way, a state could choose how to distribute initial allowance
allocations among its affected EGUs (and other entities).
    The EPA believes that this option may offer significant appeal,
because it will allow a state to tailor its allocation approach to the
characteristics and preferences of the state. A state would be able to
design its allocation approach to address its particular state
priorities, whether they are protecting low-income consumers,
supporting local industries, or other goals. The EPA anticipates that a
state would have great flexibility in its allowance distribution
approach and could take advantage of allocation options discussed in
this proposal as well as other allocation options a state might prefer.
States could auction allowances and rebate the revenue to consumers, or
allocate all allowances to load-serving entities, while mandating that
the value be passed through to vulnerable consumers. The EPA believes
that the state-determined allocation approach offers significant
advantages and solicits comment on how to ease its application by
states. This is similar to the approach taken in CSAPR and CAIR where
the EPA adopted rules allowing states to submit SIPs with provisions
replacing the allowance-distribution provisions in the CSAPR or CAIR
FIPs, respectively, while remaining in the trading programs under those
FIPs (76 FR 48208; August 8, 2011, 71 FR 25328; April 28, 2006). In
both CSAPR and CAIR, some states have chosen to determine their own
allocations under the FIPs. This form of SIP that can replace the
allowance-distribution provisions in CSAPR or CAIR is termed an
``abbreviated SIP revision.'' In this proposed mass-based trading
federal plan, the EPA proposes that a state may choose to submit a
``state allowance-distribution methodology'' (analogous to an
abbreviated SIP revision) to replace the federal plan allowance-
distribution provisions with allowance-distribution provisions of its
choosing.
    The mechanism the agency envisions is in the nature of a partial
state plan or (for any future changes in a state's allocation
methodology) a partial state plan revision. (We request comment below
on the advantages and disadvantages of allowing a state to handle
allocations via a delegation of federal plan authority.) In general,
under the proposed approach, the procedural requirements states and the
agency must follow, including public notice requirements, for the
submission and approval of state plans, would be required here.
    The EPA intends to provide the states with substantial flexibility
in choosing approaches to distribute their allowances in a state
allowance-distribution methodology. The EPA proposes that a state may
choose any approach, including auctions or other methods the EPA is not
proposing here, provided the state's approach addresses leakage and
also implements the Clean Energy Incentive Program. The EPA is also
requesting comment on any other appropriate constraints to impose on
state allowance-distribution methodologies.
    The Clean Power Plan EGs require mass-based state plans to include
a demonstration that they have addressed the risk of leakage, and the
EGs provide several options for doing so (see sections VII.D and VIII.J
of the final EGs). One of the options provided in the EGs is to address
leakage through an allowance distribution approach that provides
incentive to counteract leakage. In the mass-based trading federal
plan, the EPA's proposed approach to allocate allowances would address
leakage using two allowance set-asides, one for output based allocation
and one for RE projects, as detailed in section V.D.3 of this preamble.
The EPA believes that a state allowance-distribution methodology, which
would replace the federal plan allocation provisions, must also address
leakage. The EPA proposes that a state allowance-distribution
methodology must address leakage by providing incentive to counteract
leakage, e.g., by including allowance set-asides like the output-based
allocation and RE set-asides detailed in section V.D.3 of this
preamble, or other allocation approaches designed to counteract
leakage. The EPA requests comment on this proposed approach for
addressing leakage in a state allowance-distribution methodology and on
any other approaches for doing so. The EGs provide an additional option
for state plans to address leakage, where a state would provide a
demonstration that leakage will not occur (without implementing any of
the strategies specified in the EGs) due to specified

characteristics of the state (section VIII.J of the final EGs). In this
federal plan proposal, the EPA requests comment on an alternative
option where a state that chooses to submit a state allowance-
distribution methodology could provide a demonstration that leakage
will not occur (without implementing the allocation strategies
specified here) due to specific characteristics of the state; the EPA
proposes that such demonstration must meet the requirements in the
final EGs, including support by credible analysis, for such a
demonstration (see final EGs section VII.D). The EPA notes that a
state's allowance-distribution methodology may also include other set-
aside approaches that are not designed to counteract leakage.
    The Clean Power Plan EGs established a Clean Energy Incentive
Program (section VIII of the final EGs). The EPA proposes that a state
allowance-distribution methodology, which would replace the federal
plan allocation provisions, must also include a Clean Energy Incentive
Program, as detailed in section V.D.4 of this preamble.
    Under the proposed approach of providing for states to determine
their allowance distribution approaches in the federal plan mass-based
trading program, the affected EGUs in a state that submitted a state
allowance-distribution methodology, which the EPA approved, would
participate in the federal plan mass-based trading program, but with
allowance distribution determined by the state instead of by the EPA.
    The EPA proposes that a state must submit to the Administrator
tables specifying the unit-level allowances in an electronic format
specified by the Administrator and by the specified deadlines
applicable to each compliance period (see Table 11 of this preamble for
proposed submission deadlines).
    The EPA proposes that a state may submit a state allocation
methodology for any compliance period, including the first compliance
period, which would comprise the years 2022, 2023, and 2024. The EPA
proposes that a state submitting a state allowance-distribution
methodology to modify the federal plan allowance-distribution
provisions must do so for all years within a compliance period (e.g.,
for all 3 years in a 3-year compliance period).
    The EPA proposes that, if the state's allowance-distribution
provisions meet certain requirements and the state allowance-
distribution methodology does not change any other provisions in the
proposed mass-based trading program, then the agency would likely
approve the state allowance-distribution methodology. In the state
allowance-distribution methodology, the state could distribute
allowances to affected EGUs or other entities (such as RE facilities)
or could auction some or all of the allowances. The agency proposes
that for EPA approval, the state allowance-distribution methodology
provisions would have to meet the following requirements. The
provisions would have to address leakage as discussed above. The
provisions would have to provide that, for each year for which the
state allowance-distribution provisions would apply, the total amount
of allowances distributed could not exceed the applicable mass goal for
that state for that year. A state's methodology under this proposed
approach could provide that the total amount of allowances distributed
is less than the applicable mass goal.\114\ The EPA proposes that a
state's allowance-distribution provisions would replace the EPA's
allocation provisions completely--a state would not have the option of
implementing only a portion of its allocations (e.g., only set-asides)
and having the EPA implement the remainder of its allocations.
Additionally, the EPA proposes that a state allowance-distribution
methodology must provide for allowances to be issued in short tons.
---------------------------------------------------------------------------

    \114\ A state allowance-distribution methodology under this
proposed approach, which is analogous to an abbreviated SIP
revision, could provide that the total amount of allowances
distributed is less than the applicable mass goal, pursuant to the
reserved authority to states to set emission standards more
stringent than federal standards under CAA section 116.
---------------------------------------------------------------------------

    The allocation (or auction) of allowances would be final and could
not be subject to modification. Additionally, the state's provisions
could not change any other provisions of the proposed mass-based
trading program with regard to the allowances (e.g., the deadlines for
allocation recordation, or requirements for transfer or use of
allowances) or any other aspect of such trading programs.
    In order for a state allowance-distribution methodology's
provisions to replace the EPA's allowance-distribution provisions for a
given compliance period, a state would have to submit the state
allowance-distribution methodology by a deadline that would provide the
agency sufficient time to review and approve it, and to submit the
allowance table meeting the specified electronic format by a deadline
that would provide sufficient time to record the unit-by-unit
allowances in source accounts. The EPA believes that about 12 months--
starting from the date of receipt of a state allowance-distribution
methodology--is sufficient to complete the agency's review and approval
process, which would have to provide an opportunity for public comment
on the approval (or disapproval) action. Thus, the EPA proposes the
following deadlines, in Table 11 of this preamble, for submission to
the agency of state allowance-distribution methodologies and unit-level
allowances, and for the EPA's recordation of allowances, for each
compliance period. The EPA would review and approve state allowance-
distribution methodologies in the 12 months between the proposed
deadline for states to submit their methodologies and the proposed
deadline for states to submit unit-level allowance tables. The proposed
deadline for submission of allowance tables is 3 months before the
proposed deadline for the agency to record allowances in source
accounts. The EPA proposes to record allowances in source accounts by
the recordation deadlines.

    Table 11--Proposed Deadlines for Submission of State Allowance-Distribution Methodologies and Unit-Level
                                         Allowances and for Recordation
----------------------------------------------------------------------------------------------------------------
                                     Deadline for submittal
 First compliance period for which     of state allowance-   Deadline for submittal    Deadline for the  EPA to
  allowances would be  distributed        distribution           of  unit-level           record  allowances
                                          methodologies          allowance table
----------------------------------------------------------------------------------------------------------------
2022, 2023, 2024...................  March 1, 2020.........  March 1, 2021.........  June 1, 2021.
2025, 2026, 2027...................  March 1, 2023.........  March 1, 2024.........  June 1, 2024.
2028, 2029.........................  March 1, 2026.........  March 1, 2027.........  June 1, 2027.
2030, 2031 *.......................  March 1, 2028 *.......  March 1, 2029.*.......  June 1, 2029 *
----------------------------------------------------------------------------------------------------------------
* This pattern of deadlines would hold for successive 2-year compliance periods.

    The proposed deadlines for submission of state allowance-
distribution methodologies are later than the state plan submission
deadlines promulgated in the Clean Power Plan EGs. The agency
anticipates that it can complete the approval process relatively
quickly for a state allowance-distribution methodology due to its
narrow scope.
    The agency proposes to record the EPA-determined federal plan
allocations only in the absence of an approved state plan or approved
state allowance-distribution methodology. The EPA proposes to record in
source accounts allowances that are determined by any state as soon as
feasible after approval of a state allowance-distribution methodology
and submission of the unit-level allowance table, and not to wait until
the allowance recordation deadline to do so.
    In section V.D.2 of this preamble, the EPA proposes that the
allowance recordation deadline be 7 months prior to the start of the
compliance period (i.e., June 1 of the prior year) and also requests
comment on a recordation deadline 13 months prior to the start of the
compliance period (i.e., December 1 of the year, 2 years before the
compliance period starts). If the EPA adopted the earlier recordation
deadline on which it requests comment or any other deadline, then we
would adjust the deadlines for submission of state allowance-
distribution methodologies and submission of unit-level allowance
tables accordingly.
    The EPA proposes that a state may not replace EPA-determined
allocations for a compliance period for which federal plan allocations
have already been recorded, for the same reasons that the agency
proposes that a state may not replace a mass-based trading federal plan
with a state plan for a future compliance period for which allowances
have already been recorded, as discussed below in section V.F of this
preamble.
    The agency requests comment on the proposed approach to allow
states to determine allocations via state allowance-distribution
methodologies and replace the federal plan allowance-distribution
provisions. The EPA requests comment on the proposed schedule for
submitting state allowance distribution methodologies to the agency,
for submitting the resulting unit-level allowance tables to the agency,
and for the agency to record allowances. The EPA requests comment on
its proposed approach of not replacing EPA-determined allocations for a
compliance period for which allowances have already been recorded. The
agency also requests comment on an alternative approach where a state
could notify the EPA of its intent to submit a state allowance-
distribution methodology in advance, in which case the agency would
hold off on recording EPA-determined allocations to allow more time for
state-determined allowances to be recorded, similar to the alternative
timing approach discussed in section V.F of this preamble.
    The EPA is also requesting comment on an alternative approach to
provide the opportunity for a state to determine its allowance-
distribution provisions in the federal plan mass-based trading program.
The alternative approach on which the agency requests comment is to
provide for a partial delegation of the federal plan--limited to the
allowance-distribution provisions--to a state that wishes to determine
its allowance-distribution provisions. The EPA requests comment on the
relative efficiency and ease of implementation of the two approaches
(the state allowance-distribution methodology described above, or the
partial delegation). The agency requests comment on whether the partial
delegation approach would provide sufficient flexibility for a state to
choose any method to distribute its allowances including approaches
that the EPA is not proposing here. See further discussion of
delegations in section VI of this preamble.

F. Treatment of States Entering or Exiting the Trading Program

    If the EPA implements a mass-based trading program federal plan for
any state, the agency will work with a state that wishes to replace the
federal plan with an approved state plan to provide a smooth
transition. The EPA proposes that a mass-based trading federal plan
could only be replaced by a state plan for a future compliance period
for which allowances have not yet been recorded. For example, if a 3-
year compliance period comprises 2022, 2023, and 2024, the EPA would
record allowances in source accounts for 2022, 2023, and 2024 prior to
2022. Once 2022, 2023, and 2024 allowances had been recorded, the first
compliance period for which a state could replace the federal plan with
its own plan would be for the period commencing in 2025. The EPA is
proposing this stipulation for the timing of replacing a federal plan
with a state plan due to the need to avoid disruption to sources
already subject to the mass-based trading federal plan. Without this
stipulation, a state might withdraw from the mass-based trading program
in the middle of a compliance period even though allowances that
authorize emissions throughout that entire compliance period would
already be in circulation. In that circumstance, the EPA would then
need to address whether and how to remove those allowances from
circulation to prevent inflation of the allowable emissions at affected
EGUs in the remaining states subject to the federal plans beyond the
levels specified in the Clean Power Plan EGs. The EPA believes it is
more reasonable to avoid this potential disruption by requiring that
the replacement of a federal plan with a state plan be scheduled to
coincide with the conclusion of the last compliance period for which
allowances under the federal plan have already been recorded for that
state. The EPA requests comment on other approaches to provide a smooth
transition from federal plan implementation to implementation by state
plans, and on its proposed approach of not replacing a federal plan for
any compliance period for which allowances were already recorded.
    The agency requests comment on an alternative of providing for a
state to give notice to the EPA of its intent to submit a state plan to
replace the federal plan (or a state allowance-distribution methodology
to replace federal plan allocations), and for the agency to delay
recording federal plan allocations for sources in that state until a
later date than proposed. The EPA requests comment on whether this
alternative would help smooth the transition from federal plan
implementation to state plan implementation, and on the trade-off
between recording allowances in a timely way and providing this
increased timing flexibility.

G. Allowance Tracking, Compliance Operations, and Penalties

    The EPA proposes that the mass-based trading program use an ATCS
operated essentially the same way as the existing systems that are
currently in use for CSAPR and the ARP under Title IV. Under the
proposed mass-based trading program, the CO2 program would
be a separate trading program maintained in the EPA's existing data
system. ATCS would be used to track the trading of CO2
allowances held by covered affected EGUs in facility level compliance
accounts, as well as such allowances held by other entities or
individuals. Specifically, ATCS would track the allocation of all
CO2 allowances, holdings of CO2 allowances in
compliance accounts (i.e., a facility level account for all affected
EGUs at the facility) and general accounts (i.e., accounts for other
entities such as companies and brokers), deduction of CO2
allowances for compliance

purposes, and transfers of allowances between accounts. The primary
role of ATCS is to provide an efficient, automated means for affected
EGUs to comply, and for the EPA to determine whether affected EGUs are
complying, with the emissions limitations and any other requirements of
the mass-based trading program. ATCS would also provide data to the
allowance market and the public, including a record of ownership of
allowances, dates of allowance allocations, allowance transfers, buyer
and seller information, serial numbers of allowances transferred,
emissions, and compliance information. This information would be
publicly available on the EPA's Web site and in annual progress
reports.
1. Designated Representatives and Alternate Designated Representatives
    The EPA proposes to establish procedures for certifying and
authorizing the designated representative, and alternate designated
representative, of the owners and operators of an affected EGU and for
changing the designated representative and alternate designated
representative. The proposed provisions describe the designated
representative's and alternate designated representative's
responsibilities and the process through which he or she could delegate
to an agent the authority to make electronic submissions to the
Administrator. These provisions are patterned after the provisions
concerning designated representatives and alternates in prior EPA-
administered trading programs.
    Under the proposed provisions, the designated representative would
be the individual authorized to represent the owners and operators of
each affected EGU in matters pertaining to the mass-based trading
program. One alternate designated representative could also be selected
to act on behalf of, and legally bind, the designated representative
and thus the owners and operators. Because the actions of the
designated representative and alternate would legally bind the owners
and operators, the designated representative and alternate would have
to submit a certificate of representation certifying that each was
selected by an agreement binding on all such owners and operators and
was authorized to act on their behalf.
    The designated representative and alternate would be authorized
upon receipt by the Administrator of the certificate of representation.
This document, in a format prescribed by the Administrator, would
include: Specified identifying information for the affected EGU and for
the designated representative and alternate; the name of every owner
and operator of the affected EGU; and certification language and
signatures of the designated representative and alternate. All
submissions (e.g., monitoring plans, monitoring system certifications,
and allowance transfers) for an affected EGU would have to be
submitted, signed, and certified by the designated representative or
alternate. Further, upon receipt of a complete certificate of
representation, the Administrator would establish a compliance account
in the ATCS for each facility with an affected EGU involved.
    In order to change the designated representative or alternate, a
new certificate of representation would have to be received by the
Administrator. A new certificate of representation would also have to
be submitted to reflect changes in the owners and operators of the
affected EGU involved. However, new owners and operators would be bound
by the existing certificate of representation even in the absence of
such a submission.
    In addition to the flexibility provided by allowing an alternate to
act for the designated representative (e.g., in circumstances where the
designated representative might be unavailable), additional flexibility
would be provided by allowing the designated representative and
alternate to delegate authority to make electronic submissions on his
or her behalf. The designated representative and alternate could
designate agents to submit electronically certain specified documents.
The previously-described requirements for designated representatives
and alternates would provide regulated entities with flexibility in
assigning responsibilities under the mass-based trading program, while
ensuring accountability by owners and operators and simplifying the
administration of the proposed mass-based trading program.
2. Allowance Tracking and Compliance System
    The proposed mass-based trading program rules include procedures
and requirements for using and operating the ATCS (which is the
electronic data system through which the Administrator would handle
allowance allocation, holding, transfer, and deduction), and for
determining compliance with the allowance-holding requirements in an
efficient and transparent manner. Under the proposed rules, the ATCS
would also provide the allowance markets with a record of ownership of
allowances, dates of allowance transfers, buyer and seller information,
and the serial numbers of allowances transferred. Consistent with the
approach in prior EPA-administered trading programs, allowance price
information would not be included in the ATCS. The EPA's experience is
that private parties (e.g., brokers) are in a better position to obtain
and disseminate timely, accurate allowance price information than is
the EPA. For example, because not all allowance transfers are
immediately reported to the Administrator for recordation, the
Administrator would not be able to ensure that any reported price
information associated with the transfers would reflect current market
prices.
3. Compliance and General Accounts
    The proposed provisions addressing compliance and general accounts
describe two types of ATCS accounts: Compliance accounts, one of which
the Administrator would establish for each facility with an affected
EGU upon receipt of the certificate of representation for the facility;
and general accounts, which could be established by any entity upon
receipt by the Administrator of an application for a general account. A
compliance account would be the account in which any allowances used by
an affected EGU for compliance with the emissions limitations would
have to be held. The designated representative and alternate for the
affected EGU would also be the authorized account representative and
alternate for the compliance account. Using facility-level, rather than
EGU-level accounts, would provide owners and operators more flexibility
in managing their allowances for compliance, without jeopardizing the
environmental goals of the mass-based trading program, because the
facility-level approach would avoid situations where an EGU would hold