In addition, we believe the permit review component of the framework also fulfills the goals and purposes set forth in section 160( 4) of the Act. As incorporated through section 166( c) of the Act, section 160( 4) calls on EPA to establish PSD regulations that prevent one State from 93 interfering with the PSD program for any other State. This goal is also one that we believe can be best implemented through individual permit review when we use an increment system. In the course of such a review, a source must demonstrate that it does not cause or contribute to an increment violation in any area subject to part C of the Act. See § 165( a)( 3)( A). These areas include areas in other States. Thus, we do not propose to further consider the goal in section 160( 4) in our reevaluation of the characteristics of the NO2 increments. We believe the existing permit evaluation procedures incorporated into the framework of our existing PSD regulations for NOx operate to satisfy the goal in section 160( 4) and do not require further analysis for the increment option.

d. Additional Impacts Analysis.

One particular aspect of the permit review procedures described above is worthy of more particular attention because it also helps fulfill the substantive criteria and goals and purposes in sections 166( c) and section 160.

Where applicable, the additional impact analysis required under section 165( e)( 3)( B) and the PSD regulations ( 51.166( o), 52.21( o)) provides a case by case review of the potential harm that a pollutant may cause to certain resources in all classes of areas. The following type of analysis is required to be conducted by the permit 94 applicant:

( 1) The owner or operator shall provide an analysis of the impairment to visibility, soils and vegetation that would occur as a result of the source or modification, and general commercial,

residential, industrial and other growth associated with the source or modification. The owner or operator need not provide an analysis of the impact on vegetation having no significant commercial or recreational value.

( 2) The owner or operator shall provide an analysis of the air quality impact projected for the area as a result of general commercial,

residential, industrial, and other growth associated with the source or modification.

Section 165( e)( 3)( B). The Additional Impacts Analysis requirements are the most relevant in this rulemaking action to Class II and Class III areas which are not subject to the additional FLM review that applies in Class I areas.

e. Federal Land Manager review.

In the 1988 rulemaking addressing PSD for NOx, EPA extended the FLM review procedures set forth in sections 51.166( p) and 52.21( p) to cover NO2. 53 FR at 3704. These FLM review procedures were established based on section 165( d), and they were originally applied only in the context 22 In response to concerns that Class I increment would hinder growth in areas surrounding the Class I area, Class I increments were established as a means of determining where the burden of proof should lie for a demonstration of adverse effects on AQRVs. See Senate Debate, June 8, 1977 ( 3 LH at 725).

95 of the statutory increments for PM and SO2. However,

because they also address many of the factors applicable under section 166( c) of the Act, EPA also applied them to NOx through regulation. Under an increment approach, we view the FLM review procedures as an additional measure that helps to satisfy the factors in section 166( c) and 160( 2)

which require that EPA's PSD regulations for NOx protect air quality values and parks and other special areas.

Section 165( d) creates a scheme under which the FLM has an affirmative responsibility to protect the AQRVs in Class I areas, and may object to or concur in the issuance of a PSD permit based on the impact or lack thereof on any affected AQRV that the FLM has identified, irrespective of whether the increment is exceeded. The exceedance of the increment determines only where the burden of proof lies. 22 That is, if the proposed source will cause or contribute to a violation of a Class I increment, the permit shall not be issued unless the owner or operator demonstrates to the satisfaction of the FLM that there will 23 Even if such a waiver of the Class I increment is allowed upon a finding of no adverse impact, the source must comply with such emissions limitations as may be necessary to ensure that the Class II increment for SO2 or PM is not exceeded. Section 165( d)( 2)( C)( iv). In 1988, EPA made this provision applicable to the NO2 PSD provisions, with a cap of 25 µ g/ m3  the NO2 Class II increment. 53 FR at 3704; 40 CFR 51.166( p)( 4) and 52.21( p)( 5).

96 be no adverse impact on AQRVs. 23 Section 165( d)( 2)( C)( ii).

On the other hand, if the proposed source does not cause or contribute to a violation of a Class I increment, the FLM may prevent issuance of the permit by demonstrating to the satisfaction of the permitting authority that the source will have an adverse impact on AQRVs.

Incorporating these FLM procedures into the PSD regulations for NOx helps to provide protection for parks and special areas ( which are generally the Class I areas subject to this review) and air quality values ( which are factors considered in the review). Section 166( d) on its face provides that measures other than increments may be promulgated to satisfy the duty under section 166.

Legislative history indicates that the FLM provisions of section 165( d) were intended to provide another layer of protection, beyond that provided by increments. The Senate committee report stated the following: " A second test of protection is provided in specified Federal land areas ( Class I areas), such as national parks and wilderness areas; these areas are also subjected to a review process 97 based on the effect of pollution on the area's air quality related values." S. Rep. 95 127, at 17, 4 Legislative History at 1401.

f. Installation of Best Available Control Technology.

Finally, another important element of the existing framework of PSD regulations applicable to NOx emissions is the requirement that a permit applicant apply BACT when constructing a new source or making a major modification to an existing source. This requirement, based on section 165( a)( 4) of the CAA, is included in EPA's PSD regulations and thus is also part of the regulatory framework for the Agency's pollutant specific regulations for NOx. 40 CFR 52.21( j); 40 CFR 51.166( j). Our existing regulations define " best available control technology as " an emission limitation ... based on the maximum degree of reduction for each pollutant subject to regulation under the Act ... which the Administrator, on a case by case basis, taking into account energy, environmental, and economic impacts and other costs, determines is achievable for such source through application of production processes or available methods, systems, and techniques ... ." 40 CFR 52.21( b)( 12); 40 CFR 52.166( b)( 12). This pollutant control technology requirement is rigorous and in practice has required significant reductions in the pollutant emissions from new and modified sources. Thus, the BACT requirement 24 We paraphrase these factors here and in the sections that follow to facilitate the explanation of our reasoning. However, we recognize that the statutory language is broader than the short hand we use here for convenience.

98 is an additional measure in the framework of PSD regulations applicable to NOx that helps to satisfy the factors in sections 166( c), 160( 1), and 160( 2), which require that EPA's PSD regulations for NOx protect air quality values,

public health and welfare, and parks and other special areas.

2. Proposed Actions Regarding Characteristics of NO2 Increments We believe our review of the characteristics of the existing increment should apply the following four factors applicable under section 166( c) : ( 1) protect air quality values; ( 2) protect public health and welfare from adverse effects from air pollution that occur even if in attainment;

( 3) protect air quality in parks and special areas; and ( 4)

ensure economic growth consistent with preservation of clean air resources. 24 As noted earlier, we believe sections 166 and 160 direct that we balance the fourth factor ( fostering economic growth) against the other three environmentally protective factors listed above. The other four factors identified in section 166( c) and 160 of the Act do not appear to relate to the characteristics of the increment and are more appropriately considered when establishing the 99 overall framework for PSD regulations. As described above,

we believe that the framework adopted for the PSD regulations for NOx satisfies the other factors. Since EPA is not reconsidering the entire framework in this proposed option, we do not believe that it is appropriate to further consider these other four factors.

a. Level of increment.

Consistent with the " contingent safe harbor" approach described above, our analysis of the appropriate levels for NO2 increments begins by establishing a " safe harbor"

increment level that is " at least as effective as" the increments established by Congress in section 163 of Act.

42 U. S. C. 7476( d). The court in EDF v. EPA recognized that this standard from section 166( d) of the Act is satisfied when we establish increments using the percentage of NAAQS approach that Congress used to establish the statutory increments. See 898 F. 2d at 188. This approach involves using the same percentages that Congress used to calculate the PM and SO2 increments from the NAAQS in effect at that time for these pollutants.

Because the only nitrogen oxide for which we have a NAAQS is NO2, we can only utilize the percentage of NAAQS approach to establish a " safe harbor" increment level for NO2. We consider below whether we should establish an increment for other forms of NOx. 100 Because Congress used different percentages to calculate the Class I increments for PM and SO2, we must determine which of these percentages is appropriate for the Class I NO2 increment. For the reasons described in the 1988 rulemaking, we believe that it is appropriate for NO2 increments to be derived using the same percentages that Congress used for SO2 because NO2 more closely resembles SO2 than PM in its characteristics and sources. See 53 FR 3698,

3700 ( February 8, 1988). Thus, we begin our analysis with a " safe harbor" increment level for each class of area that is set at the same percentage of the NO2 NAAQS as the SO2 increment is of the SO2 NAAQS. Because the NO2 increment has not changed since 1988, the percentage of NAAQS approach yields the same levels that we derived in 1988. Thus, using this approach, the " safe harbor" level for the Class I increment for NO2 is 2.5 µ g/ m3 ( annual average), a level that is 2.5 percent of the NO2 NAAQS. For the Class II increment for NO2, the " safe harbor" level is 25 µ g/ m3   25 percent of the NO2 NAAQS. For the Class III increment for NO2, the " safe harbor" level is 50 µ g/ m3   50 percent of the NO2 NAAQS.

Under our interpretation of the Act, these " safe harbor" levels establish the minimum stringency levels ( or highest concentration levels) that we may use as the increments for NO2. Our next step is to consider the 101 factors applicable under section 166( c) and evaluate whether we need to revise the " safe harbor" level to satisfy these factors. Thus, under the increment option in this proposed rulemaking, to satisfy the requirements of section 166 of the Act, we believe we must evaluate whether it is necessary to adjust the increments for NO2 to a level more stringent than the " safe harbor" level we derived using the percentage of NAAQS approach. In this analysis of the level of the increment, we propose to apply the four factors applicable under section 166( c) that have not already been satisfied by the regulatory framework described above.

Thus, we consider whether a different level of increment is necessary to ( 1) protect air quality values; ( 2) protect public health and welfare from any effects occurring at levels below the NAAQS;( 3) protect parks and special areas;

and ( 4) ensure economic growth consistent with preservation of clean air resources.

( 1) An increment is an allowable marginal increase in air pollution. Increments represent the maximum allowable level of increase in an area that is in attainment with the NAAQS or unclassifiable. Thus, increments are essentially a marginal level of increase in air pollution that is allowable for particular areas. The statutory increments are expressed as concentration rather than mass values.

Thus, in applying the factors applicable under section 102 166( c), we believe section 166 of the Act requires that we analyze the impacts on air quality values, health and welfare, and parks and special areas that may occur as a result of some marginal increase in the concentration of air pollution in an area.

Using the " contingent safe harbor" approach, we first derive the highest level of marginal increase that may be permitted for each class of areas using the percentage

ofthe NAAQS approach. We must then consider whether this level of marginal increase satisfies the factors applicable under section 166( c). If the marginal increase in concentration allowed by the " safe harbor" level does not adequately protect against these effects and ensure economic growth consistent with preservation of clean air resources,

then we must attempt to identify an alternative level of marginal increase that will satisfy the factors applicable under section 166( c).

As noted earlier, EPA does not interpret the PSD program to require it to set increments at a level where there will be no adverse effects from a marginal increase in air pollution in the amount of the increment. Congress did not anticipate that an increment would be a level of increase below which there would be no effects. An increment is the level that defines " significant"

deterioration but does not prohibit all deterioration of air 103 quality. The PSD program allows for some increase in effects when necessary to ensure that economic growth may continue to occur consistent with the preservation of clean air resources.

( 2) Increment is not intended to remedy existing effects but to maintain levels of air quality achieved by other programs. Because an increment is an allowable level of increase, it does not function to reduce existing air pollution. The PSD program is intended to protect against significant deterioration of the air quality in attainment and unclassifiable areas from the construction and operation of new and modified sources of a particular size. Thus, the PSD program limits increases in emissions from these sources but does not seek to reduce emissions or ambient air pollutant concentrations to a particular level. The increments established by Congress were only intended to define the allowable levels of marginal increase in air pollution above a baseline concentration that are established in each area when the first major source applies for a PSD permit in that area. 42 U. S. C. 7479( 4). As a result, we do not believe we are required to set increments at a level intended to alleviate existing adverse effects.

An increment is a marginal level of increase in air pollutant concentrations that functions to prevent significant deterioration of air quality. Thus, in 25 When the visibility provisions were enacted, the House committee report specifically recognized that the " visibility problem is caused primarily by emission into the atmosphere of sulfur dioxide, oxides of nitrogen, and particulate matter . . ." H. R. Rep. 95 294, at 204, reprinted in 4 Legislative History at 2671. NOx may result in visibility impairment either locally ( a brown plume effect) or contributing to regional haze, which has been recognized as primarily a fine particle phenomenon. 1995 SP at 89. For the reasons discussed earlier, we do not believe we need to consider PM effects in this reevaluation of the increments for NOx.

104 evaluating the level of increment that is necessary to prevent significant deterioration, we consider that there are other programs authorized under the CAA that are operating ( or will be operating) to reduce the adverse effects from existing air pollution sources. If we use an increment approach, these programs will serve the role of bringing existing emissions down, while increments included in our PSD regulations established under section 166 of the Act will be designed to limit increases in emissions from the construction of new major sources and the modification of existing ones.

For example, existing visibility problems are being addressed through implementation of the Regional Haze Program under sections 169A and 169B of part C. 25 Section 169A establishes as a national goal " the prevention of any future, and the remedying of any existing, impairment of visibility in mandatory Class I Federal areas which impairment results from manmade pollution." 42 U. S. C. 105 7491( a). In the 1990 Amendments, Congress added section 169B, which called for additional research into the visibility problem and directed EPA to issue regional haze rules taking into account such studies and reports within 18 months after receipt of a final report from the Grand Canyon Transport Visibility Commission. The EPA promulgated these regulations on July 1, 1999. 64 FR 35714 (" Regional Haze rule"). The main components of this rule require States to:

( 1) submit SIPs that provide for " reasonable progress"

toward achieving " natural visibility conditions" in Class I areas; ( 2) provide for an improvement in visibility in the 20 percent most impaired days; ( 3) ensure no degradation in visibility occurs on the 20 percent clearest days; and ( 4)

determine the annual rate of visibility improvement that would lead to " natural visibility" conditions in 60 years.

At the time that the Regional Haze Program was established, a Congressional committee recognized that the PSD program was not necessarily created to alleviate existing adverse effects resulting from contributions by existing sources. When it was writing section 169A of the Act at the same time that it established the PSD program,

the House recorded the following observations in a committee report:

[ T] he committee recognizes that one mechanism which has been suggested for protecting these areas, the 106 mandatory Class I increments of new section 160 (' Prevention of Significant Deterioration') do not protect adequately visibility in Class I areas. First,

inadequately controlled, existing gross emitters such as the Four Corners plant would not be affected by the significant deterioration provisions of the bill.

Their emissions are part of the baseline, and would not be required to be reduced by new section 160 of the act.

H. Rep. 95 294, at 205, 4 Legis. History at 2672 ( emphasis added). This statement indicates that protection of air quality values under section 166( c) is provided when an increment limits significant deterioration of air quality,

but does not require an increment that eliminates all adverse impacts on air quality values, such as visibility,

that may be caused by existing sources.

In addition, in the 1990 Amendments, Congress enacted title IV to address the problem of acid deposition. We believe this supports an interpretation that the PSD measures called for in section 166 need not eliminate acid deposition impacts that may be caused by existing sources.

Rather, under an increment approach, our view is that the PSD program is intended to focus on establishing a marginal level of increase in emissions that will prevent significant air quality deterioration and, in conjunction with AQRVs 107 identified by the FLM, provide protection against increases in adverse effects resulting from acid deposition.

Reduction of NOx emissions from existing sources is also required under EPA's NOx SIP Call and the proposed CAIR. Under both programs, emissions of NOx are regulated as a precursor of either ozone or fine PM, or both. The programs are based on State obligations to address interstate transport of pollution under section 110( a)( 2)( D)

of the Act, which is discussed in more detail above in the section on our legal authority. The NOx SIP Call requires the affected States and the District of Columbia to submit SIP revisions that reduce NOx emissions by specified amounts by a specified date. The EPA has projected that over 1 million tons of NOx per ozone season will be reduced as a result of this particular program. As proposed, the CAIR requires that emissions reductions be implemented in two phases, with the first phase in 2010 and the second phase in 2015. The EPA's estimates of the NOx reductions that would result from the CAIR proposal are 1.5 million tons by 2010 and an additional 0.3 million tons by 2015 ( for a total of 1.8 million tons).

In areas where the PSD baseline has not yet been established, the emissions reductions achieved by these programs may result in lower baselines being established when triggering does occur. Then, the increments we are 108 reevaluating in this rulemaking will operate as intended as an allowable level of marginal increase that prevents the significant deterioration of air quality in attainment areas. This approach is consistent with Congressional intent that the baseline concentration, representing the air quality in an attainment area subject to PSD, be established on the date of the first application for a permit by a PSD source affecting that area. 42 U. S. C. 7479( 4). See also,

Alabama Power v. Costle, 606 F. 2d 1068, 1088 89 ( D. C. Cir.

1979).

( 3) Increment should be uniform across the nation. When we use the framework of an area classification system in PSD regulations for a particular pollutant, we believe that we must establish a single increment for each class of area such that this allowable level of increase applies uniformly to all areas in the nation with that particular classification. This is necessary to ensure equitable treatment by allowing the same level of economic growth for all regions of the country that a State elects to classify in a particular manner. We believe that Congress intended for the PSD program to allow air quality in each area of the country with the same classification to change by the same amount in order to avoid a disproportionate impact on growth that might disadvantage some communities. The following statement from the legislative history of the PSD program 109 supports our interpretation:

Some suggestions were made that the pollution increments should be calculated as a function of existing levels of pollution in each area. But the inequities inherent in such an approach are readily evident... . The committee's approach   increments calculated as a percentage of the national standard   eliminates those inequities.

All areas of the same classification would be allowed the same absolute increase in pollution,

regardless of existing levels of pollution."

H. Rep. 95 294, at 153, 4 Legis. History at 2620. See also S. Rep. 95 127, at 30, 3 Legislative History at 1404 (" These increments are the same for all nondeterioration areas, thus providing equity for all areas."). This indicates that Congress did not intend to impose more stringent restrictions under the PSD program on particular areas of the country based on their current levels of air pollution,

unless, of course, the current levels are so near the NAAQS that the full amount of incremental change cannot be allowed.

Instead, Congress generally left it up to the States to determine the areas where a greater or lesser level of protection was needed. Although Congress established certain parks and wilderness areas as mandatory Class I 110 areas, it classified all other areas as Class II areas and gave the States the power to reclassify these areas to Class I or Class III to provide for greater protection of air quality or allow more growth, depending on the values of the State and the community in that area. This allows the States to make their own choices about which areas require more protection of air quality and which areas should be allowed more growth consistent with the protection of air quality. See H. R. Rep. 95 294, at 153 154, 4 Legislative History at 2620 2621.

We believe that the same equitable considerations are applicable when we establish PSD regulations containing increments and area classifications under section 166 of the Act. Since Congress did not intend for the increments it established to impose a disproportionate impact on particular areas, we do not believe it intended to grant EPA the power to do so under section 166 of the Act. Thus, to treat all areas of the country in an equitable manner, it is necessary for us to establish uniform increments for NO2 that establish the same maximum allowable increase for each class of area.

However, we must also weigh these equitable considerations against the unique variability in ecosystem effects that may be result from NOx emissions. In our review of the NAAQS for NO2, we observed that " a great 111 degree of diversity exists among ecosystem types, as well as in the mechanism by which these systems assimilate nitrogen inputs." 60 FR at 52881. As a result, we concluded, " the relationship between nitrogen deposition rates and their potential environmental impact is to a large degree site or regionally specific and may vary considerably over broader geographical areas or from one system to another because of the amount, form, and timing of nitrogen deposition, forest type and status, soil types and status, the character of the receiving waterbodies, the history of land management and disturbances across the watersheds and regions, and exposure to other pollutants." Id. Consistent with these earlier conclusions, our more recent review in this rulemaking action of the studies on the effects of NOx indicates that some levels of air pollution resulting from emissions of NOx may cause or contribute to adverse effects on welfare, air quality values, and parks in some areas of the country while not necessarily causing the same degree of effects on similar ecosystems and receptors in other areas of the country.

In light of the equitable considerations discussed earlier, we believe the best way to address the potential regional variability in the occurrence of effects attributable to NOx emissions is to retain uniform national increments that accommodate growth and provide a basic 112 degree of protection across the country, but to augment this with a procedural review that will require permitting authorities to consider adverse effects that may occur in more sensitive areas before the increment is consumed. This approach, which we believe is reflected in existing regulations, allows EPA to achieve the equity of setting a uniform increment level for all areas with a particular classification, while directing that permitting authorities conduct a more intensive, site specific review to identify effects that might occur in a more sensitive area but not necessarily in all areas of the country with that classification.

This approach is embodied in the framework for the NOx PSD regulations that we adopted in 1988. As described above, each permit application is subject to an " additional impacts" analysis that allows the permitting authority to consider the sensitivity of a particular area. In Class I areas, the FLM review procedures provide further protection,

notwithstanding the existence of a Class I increment, for the air quality values and the national parks and wilderness areas included in Class I areas.

As we noted earlier, we believe our ultimate obligation under section 166 of the Act is to establish a system of regulations containing provisions that collectively satisfy the content requirements in section 166( c) and 166( d) of the 113 Act. Thus, we think that Congress contemplated that we would consider the entire framework of regulations when establishing particular aspects of those regulations. As a result, we believe it is appropriate and consistent with our statutory obligations to consider the protection provided by the additional impacts analysis and the FLM review of AQRVs when evaluating the level of NO2 increments. Therefore, to achieve equity and protect against effects that are variable across regions of the country, we believe each of the NO2 increments should be set at a level that reasonably protects air quality values, health and welfare, and parks and special areas across the country while also balancing the need to allow economic growth. To the extent necessary, the case by case additional impact analysis and FLM review should provide additional protection of air quality in particular areas that may be more sensitive to nitrogen loadings resulting from NOx emissions.

Because of the equitable considerations and State prerogatives to classify areas described above, we do not believe that Congress intended to create a federally imposed system of regional or locally based measures or to authorize EPA to do so to address any variability in potential effects. Likewise, we do not believe it is permissible or appropriate for us to establish increments at a level that prevents any adverse impact on the most sensitive receptors 114 in any part of the country. Although such a " lowest common denominator" approach might achieve uniformity across all areas, it would not necessarily achieve equity because it would unduly restrict growth in those areas of the country where adverse effects may not occur at a higher level. In addition, as discussed further below, the available research on the effects of NOx does not readily provide sufficient information to identify that level of increase below which significant effects would not occur to the most sensitive receptors in any area of the country.

Thus, EPA believes that the factors applicable under section 166( c) of the Act are met when we establish a uniform national increment for NO2 for each class of area that is augmented by an additional case by case procedural review to identify and protect against variable effects that could occur in especially sensitive areas before the increment is fully consumed.

( 4) Evaluation of effects at levels of increase below the " safe harbor" level. With the above considerations in mind,

we have reviewed the available effects information to determine whether there is a basis for using it to either support the existing increments or to find them inadequate for satisfying the criteria, goals, and purposes set forth in sections 166( c) and 160 of the Act. Selecting a framework for applying the criteria is an important first 115 step. Because the increments define an allowable change in air quality rather than establish a uniform air quality " ceiling" for a particular pollutant, we believe that the basis for determining the adequacy of the increments should be a comparison of the maximum allowable pollutant increase or change ( ambient pollutant concentration that would result from full increment consumption) with the pollutant concentrations at which the effects of concern ( particularly the adverse effects associated with air quality values under section 166( c) of the Act) may occur. This approach relies upon the premise that in specific attainment areas where adverse effects caused by existing emissions may be experienced, specific control strategies designed to adequately reduce current levels of emissions ( and air pollution) will be evaluated and the most appropriate course of action determined independently from the PSD program.

The problem that EPA immediately faces in trying to make the necessary comparative analysis of the " safe harbor"

level and a lower increment level is that for the adverse effects identified, in most instances the pollutant concentrations at which the effects may occur are not well defined. Based on the availability of scientific and technical information available during the period when the NO2 increments were promulgated in 1988 as well as for the periodic review of the NO2 NAAQS completed in 1996, there is 116 great uncertainty about the specific relationship between the pollutant and its precise role in causing the effect.

Moreover, while more recent research and studies have shed new light on the mechanisms by which NO2 contributes   both directly and indirectly   to known adverse environmental effects, efforts to establish quantitative relationships ( as explained further below) are only now under way.

Nevertheless, what is already known about some of these cause effect relationships is also helpful in enabling us to reach a conclusion about the adequacy of the current increment levels.

As described earlier in the preamble under the discussion of environmental effects, many of the adverse effects indirectly related to emissions of NOx ( NO and NO2)

are caused ( or contributed to) largely by nitrogen compounds ( e. g., nitrates, nitric acid) which are the result of chemical transformations from NO2 while in the atmosphere.

Thus, in order to attempt to determine an acceptable level of increase for ambient NO2 concentrations, it is necessary to understand the quantitative relationship between the emissions of NO2 and the adverse effect. This, in part,

requires an understanding of the intermediate transformation processes, the deposition patterns and total quantities of those nitrogen compounds which may cause the effect of concern, as well as the nitrogen contribution to ecosystems 117 from natural geobiochemical processes. Unfortunately, the atmospheric chemistry associated with NOx is significantly more complex than that for SO2. In addition to wet and dry nitric acid and nitrate aerosols such as ammonium nitrate ( NH4NO3), emissions of NOx can also produce other end products, such as peroxyacetyl nitrates ( PAN). Also, NOx may result, either directly or indirectly, in the formation of oxidant species such as the OH radical, O3, and H2O2,

which alter transformation rates of NOx. ( Butler, 2003).

The difficulty of establishing these relationships is further illustrated by EPA's experience in evaluating the feasibility of setting an acid deposition standard. Under section 404 of the 1990 Amendments, Pub. L. 101 549,

Congress directed EPA to conduct a study of the feasibility and effectiveness of an acid deposition standard( s), to report to Congress on the role that a deposition standard( s)

might play in supplementing the acidic deposition program adopted in title IV, and to determine what measures would be needed to integrate an acid deposition standard with that program. The EPA completed this study, " Acid Deposition Feasibility Study, Report to Congress ( 1995), which concluded that current scientific uncertainties associated with determining the level of an acid deposition standard( s)

are significant," and did not recommend setting an acid deposition standard. See State of New York v. Browner, 50 118 F. Supp. 2d 141, 149 ( N. D. N. Y. 1999) ( rejecting States'

claim that section 404 required that the report include a deposition standard that would be sufficient to protect sensitive aquatic and terrestrial resources, and affirming EPA interpretation that duty was limited to " consideration of a description" of such standards). While EPA has recognized that programs, such as the proposed CAIR ( 69 FR 4566, Jan. 30, 2004)), that are intended to achieve NOx reductions pursuant to other statutory provisions, will help mitigate acid deposition problems, none of those programs purport to set an acid deposition standard.

Some recent studies are attempting to address the various parameters that together could establish a quantitative relationship between emissions of NOx and the adverse environmental effects resulting from nitrogen deposition and acidic deposition from nitrates. While some study results provide evidence of a relationship between NOx emissions and precipitation ( wet deposition) NO3 , the results of efforts to establish a quantitative relationship between NOx emissions and total ( wet and dry) nitrogen deposition have been inconclusive ( Butler, 2000, 2003).

Other recent studies examine the various sources of the nitrogen input ( industry, transportation, agriculture) the geographical location of different nitrogen loadings, trends in deposition rates, as well as the specific effects of 119 nitrogen deposition on specific ecosystems. These studies in general emphasize the importance of reducing current emissions of NOx as part of a strategy for reducing observed impacts and promoting ecosystem recovery. However, such studies have not yielded the type of information needed to adequately evaluate different levels of maximum allowable pollutant increases with respect to the specific impacts such levels would have on the ecosystems.

We have evaluated whether the concept of a " critical load," as described more fully in section VII of this preamble, could be used to identify an alternative increment level, but we believe our current knowledge about critical loads for nitrogen does not provide a sufficient basis for establishing a uniform, national standard such as a PSD increment. Because of the vastly differing sensitivities and potential effects associated with ecosystem resources in different regions of the country, we believe that critical loads do not represent an appropriate tool for setting a single, uniform, national standard, such as a PSD increment level. Even in cases where the deposition rate of a pollutant is relatively consistent from one location to another, the sensitivity of individual ecosystems varies greatly depending on a number of different variables,

including climate, diversity of species, history of land use, and the existence of other natural and anthropogenic 120 stresses.

Identifying the cause effect relationship of nitrogen deposition on various ecosystems can be problematic for a number of other reasons as well. Some effects are believed to be the result of combined pollutant impacts, such as the acidification of lakes from both sulfur and nitrogen deposition. Some water systems have exhibited high levels of nitrogen in the absence of anthropogenic sources. In addition, some effects of changing deposition may take years before the ecosystem comes into balance with the cumulative amounts of nitrogen inputs. A noted problem in the West is that nitrogen deposition can include the combined contributions of emissions from NOx ( nitrates and nitric acid) and ammonia ( ammonium).

For the above reasons, we believe that it is not technically or practicably feasible to identify a basis for concluding that the existing NO2 increments are inadequate to provide protection against the types of adverse effects on ecosystems that may occur in some areas notwithstanding compliance with the NAAQS. In particular, it is not possible to determine a different level of increment protection that would define an significance level for ecosystem effects associated with emissions of NOx.

Currently available information does not provide a nationally applicable, quantitative basis for revising the 121 current levels of the NO2 increments. The EPA solicits comment on possible approaches that should be considered,

including the concept of critical loads, for further evaluating the existing NO2 increments. However, under today's action, we are not proposing any changes to those increments.

( 5) Qualitative consideration of factors. Because we cannot use the effects data to quantify an alternative level of increase to the " safe harbor" that protects air quality values, health and welfare, and parks while ensuring economic growth consistent with the preservation of clean air resources, we must instead make a qualitative judgment whether the existing increment or some alternative meets the applicable factors. In this situation, we believe that determining the level of increment that satisfies the factors applicable under section 166( c) is ultimately a policy choice that the Administrator must make, similar to the policy choice the Administrator must make in setting a primary NAAQS " with an adequate margin of safety." See Lead Industries Ass'n v. EPA, 647 F. 2d 1130, 1147 ( D. C. Cir.

1980) ( where information is insufficient to permit fully informed factual determinations, the Administrator's decisions rest largely on policy judgments ). Using a similar approach is warranted because both section 109 and section 166 place great weight " in the Administrator's 122 judgment" in making choices regarding an adequate margin of safety or protecting against any effects that may still occur   both areas of inquiry characterized by great uncertainty. Thus, in the process for setting NAAQS, the Administrator looks to factors such as the uncertainty of the science, the seriousness of the health effects, and the magnitude of the environmental problem ( isolated or commonplace). E. g., 62 FR 38652 ( July 18, 1997) ( PM2.5 NAAQS).

A pure environmental protection analysis ( protecting AQRVs, health and welfare, and parks) might suggest that we permit no or minimal increases in some areas because there are some data indicating that an effect may be attributable to NOx emissions. However, as explained earlier, we do not believe that Congress intended for the PSD program to eliminate all adverse effects. Thus, rather than just seeking to eliminate all effects, we must attempt to identify a level of increase at which any effects would be " significant" and protect against those potential effects.

Furthermore, we need to ensure that our increments provide room for economic growth. Congress intended for EPA to weigh these considerations carefully and establish regulations that balance economic growth and environmental protection.

In making this policy judgment, we give particular 123 weight to the policy judgment that Congress made when it set the statutory increments as a percentage of the NAAQS. In section 166 of the Act, Congress directed that EPA study the establishment of PSD regulations for other pollutants for which Congress did not wish to set standards at the time.

Congress' own reluctance to set increments for NOx, and the provisions ensuring time for Congressional review and action, suggest that Congress intended for EPA to avoid speculative judgments about the science where data is lacking. Having conducted such a study and finding difficulty establishing a direct relationship between adverse effects and particular levels of increase in pollution, we believe it is appropriate to consider the approach that Congress used. Thus, in the absence of specific data showing that a marginal increase of a particular level below the " safe harbor" would better protect health, welfare, parks, and air quality values, we give weight in our qualitative analysis of the factors applicable under section 166( c) to the method that Congress used to establish the statutory increments.

In making this qualitative judgment, we also consider the overall regulatory framework that we have established in the PSD regulations for NOx. This framework includes a case by case analysis of each permit application to identify additional impacts ( e. g., soils and vegetation), a special 124 review by the FLM of potential adverse effects on air quality values in parks and special areas, and a requirement that all new and modified sources install BACT. In addition, the area classification system ensures that there will be economic growth in particular areas that are consistent with the values of each State and individual communities within States.

When coupled with the overall framework of PSD regulations applicable to NOx, we believe the " safe harbor"

approach for setting the level of increment is sufficient to satisfy the factors applicable under section 166( c). This approach ensures economic growth and that each area receives a basic level of protection consistent with Congressional policy and an additional case by case review of effects on air quality values and parks and special areas. Under this circumstance, we see no basis to deviate from approach established by Congress for the statutory increments. Thus,

we propose to retain the existing increments for NO2 that were established at the " safe harbor" level using the percentage of NAAQS approach. We request comment on this proposal, the supporting analysis, and reasoning described above.

b. Additional increments.

( 1) Pollutant for which increment is set. Another disputed issue in the EDF v. EPA case was EPA's action in 1988 to 125 establish an increment for only one form of nitrogen oxides   nitrogen dioxide. We promulgated an increment for NO2 in 1988 because this was the only form of NOx for which we had established a NAAQS at that time. However, in EDF v. EPA,

the court held that subsection 166( c) of the Act " commands the Administrator to inquire into a pollutant's relation to the goals and purposes of the statute, and we find nothing in the language or legislative history suggesting that this duty could be satisfied simply by referencing the ambient standards." 898 F. 2d at 190. Thus, in this rulemaking action on remand, we must evaluate whether, considering the factors applicable under section 166( c), we should promulgate additional increments for other forms of NOx.

Under the " contingent safe harbor" approach discussed above, we begin our analysis with a " safe harbor" increment that only addresses increases in ambient NO2 concentrations.

Since 1988, EPA has not identified a basis to establish a NAAQS for any form of NOx other than NO2. Thus, it remains the case today that the only NAAQS established for NOx are the current NO2 NAAQS which have not changed since 1971. We believe that an increment based on the same pollutant for which we have a NAAQS is the " safe harbor" for purpose of this rulemaking. Establishing an increment for this form of NOx is " at least as effective" as the statutory increments in section 163 of the Act. Congress established statutory 26 Since that time, we have refined the original NAAQS for PM ( then measured as TSP) to focus on coarse ( PM10) and fine ( PM2.5) particulate matter. We subsequently established an increment for PM10 under in accordance with section 166( f) of the Act. 58 FR 31622, June 3, 1993. We are considering establishing an increment for PM2.5.

126 increments in section 163 for only those forms of PM and sulfur oxides for which we had promulgated a NAAQS. 26 As discussed above, the need for an increment necessarily derives from the establishment of a NAAQS, which is the basic measure of air quality under the CAA. Thus, an increment based on this basic measure of air quality is " at least as effective" as the statutory increments in section 163 of the Act. The court in EDF v. EPA rejected the argument that an increment based on the same form of NOx as the NAAQS was not " as effective as" the increments in section 163. 898 F. 2d at 190.

We noted earlier in this preamble that seven oxides of nitrogen are known to occur in the atmosphere. ( See footnote 9.) Among these, EPA recognizes the significant role that nitrates play in many of the indirect welfare effects of NO2. Nitrate is a principal contributor to the effects on ecosystems of both nitrogen deposition ( eutrophication and acidic deposition) and visibility impairment ( regional haze). As such, nitrates conceivably could represent a form of NOx which should be considered for regulation under the PSD increments. For several reasons, 27 Another source of nitrates, not associated with emissions of NOx, is the nitrification of ammonium by bacteria in stream beds.

127 however, EPA believes that it is not necessary to adopt individual increments for nitrate.

First, nitrate compounds found in the atmosphere generally are formed from the oxidation of NO and NO2 as they are transported in the atmosphere. 27 Thus, the existing NO2 increment can generally can be viewed as a limiting factor in the formation of nitrate concentrations downwind. By limiting the allowable increase in ambient concentrations of NO2 in the immediate area surrounding proposed new or modified PSD source, some limit can effectively be placed on downwind NO3  formation as well.

Another consideration is that ambient nitrate can often exist in the atmosphere in particulate form, e. g., ammonium nitrate or nitric acid vapor. Nitric acid ( a nitrate formed through the gas phase reaction of NO2 and OH), which plays a key role in acid rain, in its gaseous phase can also react with airborne particle surfaces to form nitrate salts. When ambient concentrations of ammonia and nitric acid are sufficiently high, ammonium nitrate can be formed. Nitrate particulates contribute to regional haze. The EPA believes that it can more effectively regulate nitrates particulate under the PM program. In fact, the effects of nitrate 128 particulate were considered in setting the NAAQS for PM2.5 and will be considered in the development of the upcoming PSD increments for PM2.5 as well.

Finally, EPA does not believe that sufficient information is available to adequately establish levels for nitrate increments, even if it were to determine that the establishment of increments for nitrate are necessary to satisfy the factors applicable under section 166( c). We described the difficulties of establishing alternative increment levels using the available information in the previous section.

In the absence of information showing that an increment based on the same pollutant of the NAAQS fails to protect air quality values, health and welfare, and parks and special areas, from emissions increases associated with new and modified PSD sources, we propose to retain the " safe harbor" increment for NO2 without adopting additional increments. Under these circumstances, the NAAQS provides a reasonable benchmark for identifying the pollutant to be used in an increment. Section 160( 1) of the Act is expressed by using the NAAQS as a benchmark and also uses standards that mirror the standards applicable to the NAAQSsetting process   " protect public health and welfare." The court in EDF v. EPA rejected use of the NAAQS as the " sole basis" for deriving the increment but did not preclude EPA 129 from adopting only an increment based on the same pollutant as the NAAQS when EPA has determined that such an increment is sufficient to satisfy the special values embodied in the factors applicable under section 166( c) of the Act. See 898 F. 2d at 190.

Thus, we propose to retain the increment for NO2 and do not propose to establish additional increments for other forms of NOx. We request comment on this proposed action and our basis for it.

( 2) Time periods for increments. In accordance with the court's opinion in EDF v. EPA, we have also evaluated whether we should promulgate additional NO2 increments based on a short term averaging time. In the 1988 rule, EPA did not set short term increments for NO2 because a short term NAAQS for NO2 that would define short term air quality for NO2 did not exist. However, the court directed us to evaluate whether, considering the factors applicable under section 166( c), we should promulgate additional increments for short term averaging times. 898 F. 2d at 190.

Under the " contingent safe harbor" approach discussed above, we begin our analysis with a " safe harbor" increment that is based on the same annual averaging time used in the NAAQS. Since 1988, EPA has not found cause to promulgate a NAAQS for any averaging time shorter than annual. Thus,

since this is the only averaging time used in the current 130 NAAQS, we consider an increment that employs this averaging time to be a " safe harbor" that is " at least as effective"

as the statutory increments in section 163 of the Act. The increments listed in section 163 of the Act are based on the same averaging times that were contained in the NAAQS at the time Congress adopted this provision. The NAAQS are the basic measure of air quality under the CAA. Therefore, an increment that uses this standard as a benchmark is " at least as effective" as the statutory increments in section 163 of the Act. The court in EDF v. EPA rejected the argument that an increment based on the same averaging time as the NAAQS was not " as effective as" the increments in section 163. 898 F. 2d at 190.

We have further analyzed whether a short term increment is necessary to satisfy the factors applicable under section 166( c) of the Act. Based on this review, we believe that an annual average increment for NO2 is sufficient to protect air quality values, health and welfare, and parks and special areas from potential short term effects. Thus, we propose to retain the existing annual increments for NO2 and do not propose to adopt additional increments for shorter time periods.

The same reasons that supported our decision not to set a short term NAAQS for NO2 weigh against setting a shortterm NO2 increment. We have not identified health effects 131 from short term exposure to NO2 that occur in areas in attainment with the NAAQS. In addition, we do not have sufficient information to conclude that the welfare effects within the scope of our review are caused solely by shortterm NOx concentrations.

In our last ( 1995 1996) NAAQS review for NO2, EPA reviewed the short term effects of NO2 on human health and concluded that a short term standard was not justified.

With regard to public health, the Administrator concluded that the annual standard of 0.053 ppm NO2 provides " substantial protection" against the identified health effects ( mild changes in pulmonary function or airway responsiveness in sensitive individuals) associated with short term peaks occurring in the range of 0.2 to 0.5 ppm

almost one order of magnitude higher than the annual standard. 60 FR 52875, 52879 80 ( October 11, 1995). The adequacy of the annual standard to protect against these potential short term effects was further supported by the absence of documented effects in some studies at higher concentrations ( 3 ppm to 4 ppm). The Administrator also took into account that where the annual NO2 standard is attained   currently all areas of the country   the occurrence of 1 hour NO2 values greater than 0.15 ppm would be unlikely. Id.

With respect to public welfare effects from NO2, the 132 Administrator also concluded that the impact on terrestrial vegetation from short term exposures to NO2 under existing ambient levels is insignificant and did not warrant a shortterm standard ( 1995 SP, p. 91). The Administrator also considered the welfare impacts from nitrates during the last NO2 NAAQS review. Although we believe we are not required to consider these PM impacts in selecting measures for prevention of significant deterioration from NOx under section 166( a), we find it noteworthy that none of the welfare impacts from nitrates were attributed to short term exposure to nitrates and that significant uncertainties in the data were recognized. Even in those cases where nitrogen deposition was shown to cause episodic or "

shortterm effects, the problem was typically the result of a long term accumulation of nitrogen compounds that were released suddenly to the ecosystem ( e. g., snowmelt runoff to lakes and streams) rather than the result of short term concentrations of nitrogen compounds in the air.

Additionally, independent of the short term exposure issue, as discussed in another section of this preamble, EPA has previously identified problems that preclude the establishment of a national standard to protect against eutrophication and acid deposition. These include: ( a) the site specific nature of such impacts ( e. g., existing levels of nitrogen in the ecosystem and sensitivity of vegetation 133 to additional inputs), which cannot be addressed by a uniform national standard; and ( b) significant uncertainties over the level of contribution of NOx sources to nitrogen deposition, determining whether an ecosystem was nitrogen saturated, and a lack of data establishing the quantitative levels of concern. 60 FR 52874, 52884 ( October 11, 1995).

The conclusions from the last NAAQS review regarding the lack of a quantitative basis for establishing any shortterm NO2 standard were also reported in an EPA document issued in 1997, entitled " Nitrogen Oxides: Impacts on Public Health and the Environment." Id. at 33 (" While short term effects from NO2 are documented in the scientific literature, the available information is insufficient to provide an adequate scientific basis for establishing any specific short term standard.")

EPA has also recognized that NOx results in the formation of ozone and nitrate particulates under certain conditions. Although ozone, PM10, and PM2.5 have short term NAAQS to protect against public health effects associated with short term exposure to these pollutants, EPA does not consider the impacts from these criteria pollutants, because it interprets section 166 to require consideration of these criteria pollutants separate and distinct from the duty to consider NOx.

Thus, considering the factors applicable under section 134 166( c), EPA's proposed option 1 is to retain the annual average increment and not establish any additional increment based on a shorter averaging time. We request comment on this option and our basis for proposing it.

B. Regional Cap and Trade Program EPA's second proposed option for achieving the goals and objectives set forth in the Act to prevent significant deterioration of air quality for NOx is to create an incentive for the States to implement a market based cap and trade program to achieve the goals and purposes of PSD.

Under this approach, we would permit States that adopt a cap and trade program under specific CAA programs being considered by EPA to implement this cap and trade program in lieu of the NO2 increment system. Thus, States would avoid the need to require source specific compliance demonstrations for the NO2 increments under their PSD regulations. This cap and trade program would have to be included in the EPA approved SIP for each affected State and would have to satisfy the requirements of section 166( c) and 166( d) of the Act.

Under this option, we propose a finding that a cap and trade program with specific elements and characteristics would be sufficient to fulfill the requirements of section 166, and thus obviate the need for States to implement the NO2 increments and conduct case by case analyses of whether 135 a proposed new or modified major source would cause or contribute to an exceedance of an increment. We propose to allow States to request elimination of the NO2 increment system from their PSD programs following their submission of a SIP revision that contains a cap and trade program with these specific elements.

EPA believes that the requirements of section 166 to prevent significant deterioration from emissions of NOx could be satisfied if States were to adopt the model EGU cap and trade program proposed for States in the eastern U. S. in the CAIR. Under the CAIR proposal, specific States in the East and Midwest would be required to submit SIPs that contain controls sufficient to eliminate specified amounts of NOx emissions in order to reduce emissions contributing to nonattainment of the PM2.5 and ozone NAAQS in downwind States. The EPA indicated in the CAIR proposal that States subject to CAIR have the option to achieve these reductions by participating in a regional cap and trade program for EGUs that would be administered by EPA. Because this cap and trade program would require statewide reductions in emissions of NOx from specific sources, we believe it would be equivalent to or better than the existing NO2 increment approach which allows increases in emissions. Thus, to encourage States to participate in the model cap and trade program, EPA would determine that States participating in 136 this program could rely upon it as a substitute for implementing the traditional NO2 increments system.

EPA does not propose to adopt or require the States to implement such a cap and trade program under legal authority contained in the statutory provisions for PSD. However, we believe the air quality benefits that such a program would provide could serve to ensure that no significant air quality deterioration will occur. Based on our analysis for the CAIR proposal, we believe the CAIR model cap and trade program will achieve reductions in NOx emissions from EGUs that are sufficient to compensate for projected increases in NOx emissions from new or modified major sources in other source categories.

We also requested comment in the CAIR proposal on whether we should develop a similar cap and trade approach,

under the Regional Haze program, for the States not subject to the CAIR ( generally those in the western U. S.). To the extent we adopt such a program for such States, we request comment on whether this kind of program could meet the objectives of PSD in other parts of the country.

1. Description of Cap and Trade Programs A cap and trade program is a market based system that is designed to achieve required emissions reductions as needed to reach a particular emissions goal or cap within a predetermined geographical area. The basis for the overall 137 emissions cap is typically to meet specific air quality objectives for the area or an affected downwind area. The emissions " cap" limits the total mass emissions for the area of interest by providing a limited number of emission allowances   each allowance authorizing the emission of a specific amount ( e. g., one Acid Rain Program allowance authorizes the emission of one ton of SO2). Setting the emissions cap properly is key to achieving the desired environmental outcome. The allowance trading market provides a flexible mechanism for sources to find the leastcost reductions necessary to meet the cap.

For example, a source with a total of 400 allowances ( 400 tons of NOx emissions) that is currently emitting 700 tpy of NOx could, factoring in economic considerations, meet its total allowances by ( 1) directly reducing current emissions by 300 tons via the installation of controls, fuel switching, legally enforceable operating limitations, etc.,

( 2) purchasing allowances in the form of emissions reductions credits from other capped sources within the prescribed region that have controlled their emissions beyond the level needed to meet their allowances, or ( 3)

some combination of these two approaches.

In the case of the NOx SIP Call, the regionwide emissions cap was apportioned to individual States, thereby creating State level " emission budgets." Typically, the 138 emissions from an entire sector are " capped" to ensure that emissions are not simply shifted from one unit to the next.

Once an emissions goal or cap is established for an area, the regulating authority allocates emission allowances to individual sources. In the case of the Acid Rain Program and the NOx SIP Call, EPA and individual States,

respectively, allocate the emission allowances to the sources. Sources comply with cap and trade programs by holding enough allowances in their account to cover their reported emissions. This is independent of the allocation process, as the allowance trading market allows sources to reduce their emissions or purchase additional emission allowances.

A cap and trade program is more cost effective when sources are eligible to participate and allowances can be freely traded. For example, in a regionally based cap and trade program, when affected States allow the sources within their jurisdiction to participate in the opportunity for emissions trading anywhere within the defined region, this trading affords the flexibility needed to enable sources to achieve established emission goals at lowest possible cost and encourage least cost compliance over the entire region.

EPA and States have had considerable success achieving specific air quality goals through the implementation of cap and trade programs. Title IV of the 1990 Amendments 28 The Acid Rain Program requires a phased reduction of emissions of SO2 ( and, to a lesser extent, NOx) from power generators that sell electricity.

139 established the Acid Rain Program to address the deposition of acidic particles and gases. 28 The Acid Rain Program utilizes a market based cap and trade approach to require power plants to reduce SO2 emissions to 50 percent of the 1980 emission levels. At full implementation after 2010,

emissions will be limited ( i. e., " capped") to 8.95 million tons in the contiguous U. S. Individual existing units are directly allocated their share of the total emissions allowances   each allowance being an authorization to emit a ton of SO2   in perpetuity.

The cap and trade program under the Acid Rain Program has created financial incentives for electricity generators to look for new and low cost ways to reduce emissions, and to improve the effectiveness of pollution control equipment,

at costs much lower than predicted. The cap on emissions,

automatic penalties for noncompliance, and stringent emissions monitoring and reporting requirements ensure that environmental goals are achieved and sustained, while allowing for flexible compliance strategies that take advantage of trading and banking. The level of compliance under the Acid Rain Program continues to be quite high,

measuring over 99 percent. 29 The jurisdictions are: Alabama, Connecticut, Delaware, District of Columbia, Georgia, Illinois, Indiana, Kentucky, Maryland, Massachusetts, Michigan, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Virginia, West Virginia, and Wisconsin.

30 See " Finding of Significant Contribution and Rulemaking for Certain States in the Ozone Transport Assessment Group Region for Purposes of Reducing Regional Transport of Ozone; Final Rule," 63 FR 57356 ( October 27, 1998). The EPA also published two Technical Amendments revising the NOx SIP Call emission reduction requirements ( 64 FR 26298, May 14, 1999; and 65 FR 11222, March 2, 2000).

31 Under the NOx SIP Call, States are only required to provide for the prescribed emissions reductions during the summer ozone season, and not year round.

140 In 1998, EPA promulgated a rule determining that 22 States29 and the District of Columbia in the eastern half of the country significantly contribute to 1 hour and 8 hour ozone nonattainment problems in downwind States. 30 This rule, generally known as the NOx SIP Call, required those affected jurisdictions to revise their SIPs to include NOx control measures to mitigate the significant ozone transport. The NOx SIP Call requires ozone season NOx reductions which EPA determined by projecting NOx emissions to 2007 for all source categories, and then reducing those emissions through controls that EPA determined to be highly cost effective. 31 The affected States were required to submit SIPs providing the resulting amounts of emissions reductions.

Under the NOx SIP Call, States have the flexibility to 141 determine the mix of controls to meet their emissions reductions requirements. However, the rule provides that if the SIP controls EGUs, then the SIP must establish a budget,

or cap, for EGUs. The EPA recommended that each State authorize a trading program for NOx emissions from EGUs.

Consequently, each State chose to adopt a cap and trade program based on a model rule developed by EPA. Some States essentially adopted EPA's full model rule " as is," while other States adopted the model rule with changes to the sections that EPA specifically identified as areas in which States may have some flexibility.

Following the NOx SIP Call, EPA carried out a broader assessment to determine the role of transported emissions from upwind States in contributing to unhealthy levels of fine particles ( PM2.5) and 8 hour ozone in downwind States.

As a result, on January 30, 2004, at 69 FR 4566, EPA proposed to find that 29 States and the District of Columbia contribute significantly to nonattainment of the NAAQS for fine particles ( PM2.5) and/ or 8 hour ozone in downwind States through transport of both NOx and SO2 emissions. In this proposal, originally known as the IAQR, EPA expressed its intent to assist States to attain the NAAQS in a way that is timely, practical, and cost effective, by proposing emissions reduction requirements for NOx and SO2, that would apply to upwind States. 32 Clean Air Act section 110( a)( 2)( D) requires SIPs to contain adequate provisions prohibiting air pollutant emissions from sources or activities in those States that contribute significantly to nonattainment in, or interfere with maintenance by, any other State with respect to a NAAQS. EPA proposed the IAQR requiring SIP revisions in 28 States and the District of Columbia to reduce SO2 and/ or NOx emissions, which are important precursors of PM2.5 ( NOx and SO2) and ozone ( NOx).

142 The proposed IAQR ( now known as the CAIR) requires certain States in the eastern portion of the U. S. to submit SIP measures to ensure that emissions reductions are achieved as needed to mitigate transport of PM2.5) and/ or ozone pollution and its main precursors   SO2 and NOx   across State boundaries. 32 The proposed CAIR focuses on States whose emissions are significantly contributing to fine particle and ozone pollution on other downwind States in the eastern half of the U. S. The EPA identified emissions control requirements in the form of emissions budgets for 29 States and the District of Columbia on the basis of their contribution to nonattainment problems in the eastern half of the U. S. In determining States' emissions reduction requirements, EPA considered both the level and timing of the emissions budgets for the electric power industry at a regional level and State level. The EPA calculated the amount of each State's NOx emissions reduction requirement based on reductions that were determined to be highly cost effective 33 EPA based its emissions reduction requirements on reductions from large EGUs, i. e., boilers and turbines serving an electric generator with a nameplate capacity exceeding 25 MW and producing power for sale. EPA further proposed that its model regional cap and trade program would apply to these units.

143 for large electric generating units ( EGUs). 33 EPA's selection of the electric power industry resulted in part from the fact that we had relatively complete information with respect to a number of key factors for that industry, that was not available for other sources. In addition, the electric power industry emits relatively large amounts of the relevant emissions. This factor was considered particularly important in a case where the Federal government was proposing a multi State regional approach to reducing transported pollution.

As proposed, each affected State may independently determine which emissions sources to subject to controls,

and which control measures to adopt to satisfy its reduction requirements. Alternatively, States were given the opportunity to participate in a regional cap and trade program to cap emissions from EGUs. The EPA indicated that it would administer the cap and trade program in a manner similar to the NOx SIP Call program.

If the State chooses to control EGUs, then it must establish a budget   that is, an emissions cap   for those sources. The State may allow them to participate in the 144 interstate cap and trade program, and, if so, the State must follow EPA rules for allocating allowances ( including significant automatic penalties for noncompliance), and for year round emissions monitoring and reporting for each source. If a State wants to control EGUs but does not want to allow EGUs to participate in the interstate cap and trade program, the State has flexibility in allocating, but it must cap EGUs.

A supplemental notice, issued on June 10, 2004 ( 69 FR 32684), provided additional detail on establishing State emissions budgets ( i. e., emissions reductions requirements)

and significant additional information concerning EPA's model cap and trade program for EGUs, including, among other things, requirements for adopting the model cap and trade rules, flexibility afforded to States in adopting certain program features, and proposed regulatory language covering monitoring, recordkeeping, and reporting requirements.

The emission reductions for NOx expected under the CAIR are significant. Under the CAIR, EPA proposes to implement highly cost effective reductions in two phases, with a Phase I compliance date of January 1, 2010, and a Phase II compliance date of January 1, 2015. When fully implemented,

NOx emission reductions would be substantial, measuring about 1.5 million tons in 2010 and 1.8 million tons in 2015.

This represents a reduction approximately 65 percent below 34On June 5, 2003, EPA revised its Regional Haze rule to incorporate certain provisions for western States 145 current NOx levels.

Believing that the emissions reductions resulting from the proposed program would also help the affected States in making substantial progress toward meeting the goals and requirements of the Regional Haze rules in the East, EPA's January 30, 2004, proposal also requested comments on the potential applicability of the cap and trade approach for addressing regional haze problems in other parts of the country. We indicated that a similar approach could be applied to areas identified in the final Regional Haze Rule ( 64 FR 35714, July 1, 1999). Thus, we indicated that we might be able to expand the concept of the cap and trade nationwide by considering two separate NOx emissions levels and cap and trade zones for NOx. At this time, however, no formal proposal of a cap and trade program for the West currently exists as a result of the CAIR proposal. 34 2. Using a Cap and Trade Program for Prevention of Significant Deterioration of Air Quality for NOx a. Cap and trade program would meet requirements of section 166.

We believe that EPA's obligations to promulgate pollutant specific PSD regulations for NOx under section 166 of the CAA could be satisfied by giving States the option to 146 implement a cap and trade regulatory framework for sources of NOx that achieves the objectives of the PSD program.

More specifically, we believe that a State cap on EGU NOx emissions at the level described in the CAIR proposal for that State would achieve emissions reductions that would prevent significant deterioration of air quality from emissions of NOx. By participating in this program and establishing a cap on NOx emissions from EGUs at such a level, we believe States could achieve emissions reductions that produce ambient air quality levels equivalent to or better than the air quality allowed by the existing NO2 increments and associated regulations. Moreover, a marketbased cap and trade system would provide greater certainty that a specific level of emissions and air quality will be attained and maintained. Thus, we believe this may be an effective alternative to an increment system for the prevention of significant air quality deterioration.

( 1) Cap and trade framework fulfills obligations under section 166. A cap and trade framework has many elements that satisfy the requirements of section 166( c), and such an approach would qualify as an " other measure" that is permissible under section 166( d). Thus, we propose to allow States, in lieu of an increment approach, to implement a cap and trade framework that, in combination with specific program elements, would meet the requirements of section 147 166( c) and 166( d).

A cap on emissions that is allocated to States through budgets and to individual sources in the form of tradeable allowances provides a numerical measure against which permit applications can be judged. Under a cap and trade approach,

States could prohibit the issuance of a PSD permit to a new or modified source that is subject to the cap unless the source can ensure that it will have a sufficient number of allowances to cover its proposed emissions increase. In evaluating a permit application for such a source, a permit writer would only need to verify that the applicant holds a sufficient number of allowances. This would not only satisfy the " numerical measure" requirement but, for those sources subject to the cap, would also be much more efficient and less time consuming than the current process of conducting a source impact analysis to make sure the proposed emissions increase will not cause or contribute to an increment violation. Where a cap is used to achieve emissions reductions necessary to offset future growth by sources not subject to the cap, the permit writer would need to verify that emissions from the sources subject to the cap remain below required levels in order to issue a permit to a source not covered by the cap.

A cap and trade framework could also provide a powerful stimulus for improved control technology at those sources 148 subject to the cap, particularly if allowances under the program are distributed only to existing sources subject to the cap. If new and modified sources subject to the cap were required to obtain emissions allowances from existing sources subject to the cap, this would, in many cases, have a technology forcing effect. Even if new major sources and major modifications subject to the cap still have to meet requirements for BACT, the cost of acquiring allowances from another source subject to the cap could cause the proposed facility to select a more stringent BACT than would normally be selected, in order to minimize the costs associated with acquiring the necessary allowances. This, in turn, could also have a carry over effect for subsequent BACT determinations involving other new sources that are not under the cap and trade program.

By allowing States to implement a regional cap and trade system, we could address the goal in section 160( 4) of the Act to assure that emissions in one State do not interfere with the PSD program in another State. By first developing an overall cap for an entire region and then allocating that cap to States in the form of a statewide budget, we can take interstate transport issues into account when deciding how much of the cap should be allocated to sources in each State. Thus, an emissions cap could provide assurance to downwind States that emissions from upwind 149 States will be effectively managed over time.

A cap and trade approach that operates in concert with the PSD preconstruction permit program would continue to fulfill the PSD goal in section 160( 5) that any decision to permit increased air pollution not be made without careful evaluation and public participation. Major new sources and major modifications will still require preconstruction permits and will have to comply with existing requirements for BACT. Thus, the public will have an opportunity to comment on each permit. However, the total allowable emissions from sources subject to the cap would be determined by regulatory authorities at the time that the cap is first developed. This process would still involve the evaluation required under section 160( 5), but it would be conducted in up front modeling to demonstrate the effectiveness of the cap, well in advance of any case

bycase permit review for sources subject to the cap that must obtain allowances and other sources outside the cap and trade system that could not be permitted without verification that emissions from affected sources do not exceed the cap. The public would have the opportunity to comment on the cap and thus could participate in any decision to establish a cap that allows increased air pollution. However, we are proposing to permit States to adopt a cap and trade program that would achieve overall 150 reductions in NOx emissions by reducing emissions from certain sources to offset expected increases from other sources.

In order to fulfill the minimum requirements of section 166( d) under the " contingent safe harbor" approach, the cap selected for the cap and trade program would have to be at least as effective as the increments established by statute for PM and SO2 in each affected State. As discussed above,

these statutory increments were established as a percentage of the NAAQS, which are expressed as an ambient concentration of air pollution. As a result, the PM and SO2 increments are also expressed in ambient concentration form and reflect the maximum marginal increase in air pollution concentration allowed in an attainment area. Under the cap and trade approach, we would allow States to establish a cap on total NOx emissions from specific sources, expressed in terms of mass ( tons) rather than an ambient concentration ( e. g., micrograms per cubic meter). To show that a particular emissions cap on specific sources is as effective as the concentration based increments for PM and SO2, we could rely on ambient air quality modeling that projects the concentration in each part of a State that would result from achieving a particular cap. A cap that maintains ambient concentrations of NO2 within a certain percentage of the pre cap NO2 levels in most areas ( assuming no increment 151 violations currently exist) could then be demonstrated to be at least as effective as the statutory increments. However,

to the extent that modeling is not available or is insufficient to make such a showing, we request comment on how we might use qualitative measures to identify whether a particular cap is at least as effective as the increments for PM and SO2.

A cap at a level that is as effective as the increments for PM and SO2 would represent the " safe harbor" cap under the " contingent safe harbor" interpretation we are proposing today for section 166 of the Act. Under the cap and trade option, once the safe harbor is identified in this manner,

we would then analyze whether it satisfies the requirements of section 166( c) by using the same balancing test discussed above. We would use this balancing test to determine whether a cap other than the " safe harbor" cap is needed to protect public health and welfare, as well as air quality values, while also allowing for economic growth consistent with the preservation of existing clear air resources.

We believe a cap and trade framework is particularly well suited for striking the required balance between effective environmental protection at a cost that is not detrimental to economic growth. The capping of total emissions of pollutants throughout a geographic region, and over a period of time, ensures achievement of the 152 environmental goal while allowing economic growth ( new sources or increased use of existing sources). In an uncapped system ( where, for example, sources are required only to demonstrate that they meet a given emission rate),

the addition of new sources to the regulated sector or an increase in activity at existing sources can increase total emissions even though the desired emission rate control is in effect.

( 2) Cap on NOx emissions proposed in the CAIR would satisfy PSD requirements. Using this analytical approach, we propose to find that a cap and trade program that caps NOx emissions at the levels proposed in the CAIR would fulfill the requirements of section 166 of the Act. We believe a cap on NOx of this magnitude would strike the required balance between the environmental protection and the economic growth goals of the PSD program.

The proposed cap on NOx emissions contained in the CAIR would be established, under the authority of section 110( a)( 2)( D) of the Act, on the basis of emissions reductions that can be achieved by installing highly costeffective controls on EGUs. We believe a cap on NOx emissions at this " highly cost effective" level would meet the objectives of PSD by providing the most protection for AQRVs, health and welfare, and parks and other special areas, while also ensuring economic growth. 153 Our analysis in the CAIR proposal showed that a cap on NOx emissions of this magnitude in the relevant region would produce improvements in visibility and reduce acid deposition and eutrophication of water bodies in the eastern U. S. See 69 FR 4566, 4642 ( Jan. 30, 2004) ( Section X:

Benefits of Emissions Reductions in Addition to the PM and Ozone NAAQS). A more detailed discussion of these beneficial effects is provided in a document prepared for the CAIR and is entitled, " Benefits of the Proposed Interstate Air Quality Rule ( January 2004)."

Allowing States to improve ecosystem health in this manner, through a cap and trade approach, would satisfy our obligation to develop regulations under section 166 of the Act that provide protection for AQRVs, health and welfare,

and parks. Our analysis to date indicates that a cap on NOx emissions equivalent to the reductions proposed in the CAIR for the eastern U. S. would reduce adverse effects on AQRVs,

health and welfare, and parks in this region.

As noted above, visibility is an important AQRV that is affected by emissions of NOx. Reductions in emissions of NOx at the level required in the CAIR proposal are expected to contribute to substantial visibility improvements in many parts of the eastern U. S., including Class I areas such as the Great Smoky Mountains. On the other hand, preliminary modeling in the West ( based on impacts from combined 154 reductions of both SO2 and NOx) shows improvements in visibility in Class I areas, but not to the extent shown in the East. Clearly any improvements in the East or West will necessarily depend upon the caps that EPA establishes in the two regions.

NOx emissions may also contribute to effects on AQRVs,

welfare, and parks resulting from the deposition of nitrogen onto land and water. The reductions in NOx emissions required in the CAIR proposal are anticipated to reduce nitrogen deposition. Reductions in nitrogen deposition will, in turn, reduce acidification and eutrophication of water bodies and have a positive impact upon current eutrophic conditions in estuaries and coastal areas in the eastern region of the country. We would expect similar benefits from a cap in the western region of the country.

Reductions in nitrogen deposition are likely to have positive effects on the health and productivity of forest systems as well. Furthermore, reductions of this magnitude would reduce deposition that damages cultural monuments and other materials.

In the CAIR proposal, we assessed the quantitative impacts of the proposed levels of NOx and SO2 reductions on the acidification of water bodies. Areas especially sensitive to acidification include portions of the Northeast ( particularly the Adirondack and Catskill Mountains, 155 portions of New England, and streams in the mid Appalachian highlands) and Southeastern streams. Modeling for the CAIR indicated that as a result of the proposed reductions in SO2 and NOx, lakes in the Northeast and Adirondack Mountains would improve in acid buffering capacity. Specifically, we found that no lakes in the Adirondack Mountains were projected to be categorized as chronically acidic in 2030 as a result of the reductions proposed for the CAIR. In contrast, 12 percent of these lakes were projected to be chronically acidic without the emissions reductions envisioned in the CAIR proposal. For Northeast lakes in general, 6 percent of the lakes were anticipated to be chronically acidic before implementation of the proposal.

The NOx and SO2 reductions called for in the CAIR proposal are expected to decrease the percentage of chronically acidic lakes in the Northeast to 1 percent.

We believe State implementation of caps on NOx emissions at the levels set forth in the CAIR proposal would provide sufficient protection for AQRVs in all the Class I areas in the eastern half of the U. S. However, we request comment on whether, even with caps of this magnitude, States would need to implement additional measures under the model cap and trade program to guard against site specific degradation in Class I areas.

( 3) Cap and trade approach would provide ambient air quality 156 analysis for all sources. Under this cap and trade program for EGUs, we do not believe it will be necessary for any sources to conduct a site specific ambient air quality analysis for NOx in order to satisfy the requirements of section 165( a)( 3) of the Act by showing that the source will not cause or contribute to air pollution in excess of the NAAQS or an increment. In order to permit States to adopt the CAIR model cap and trade program in lieu of NO2 increments, EPA or the States would have to perform an ambient air quality analysis to show that the NOx caps applicable to each State achieve enough reductions to ensure that increases in NOx emissions from all new our modified sources will not result in an exceedance of the NO2 NAAQS or cause significant deterioration of air quality.

If States adopt a cap and trade system and are not required to enforce the increment, sources would not be required under section 165( a)( 3) to show that they would not cause or contribute to a violation of the NO2 increment.

Instead, the cap and trade program would fulfill the function of the increment to prevent significant deterioration. However, the requirements of section 165( a)( 3) would still be satisfied because EPA, rather than each individual source, would demonstrate that the proposed cap is sufficient to prevent significant deterioration or a violation of the NAAQS. Thus, it would be redundant and 157 unnecessarily costly to require an individual source to conduct a site specific air quality analysis under a cap and trade approach. A source subject to the cap would only need to show that it has enough allowances to cover its emissions. The total amount and distribution of allowances would already reflect the results of an air quality analysis conducted by the regulatory authority.

b. Using a cap and trade program to streamline the PSD permitting process.

The discussion above illustrates some ways in which a cap and trade program can enable substantial streamlining of the PSD permit process. Such streamlining, allowing applicants to avoid various preconstruction review requirements, could significantly reduce both the resources needed to acquire the necessary construction permit and the time required to complete the permitting process. Both are important ways in which the PSD permit program can be improved so long as adverse impacts on the environment are not allowed to occur as a result.

Even though the model cap and trade program, as presently conceived, would apply only to certain electric power plants, the benefits of the streamlined PSD permitting process would be shared with all PSD applicants because of the inherent ability of the cap and trade program to enable a reduction in total statewide NOx emissions from EGUs 158 sufficient to compensate for increases in NOx emissions in the State from other source categories of NOx emissions.

Under the approach being proposed today, States have the option to revise their implementation plans to include the necessary regulations to enable participation in and implementation of the EPA administered cap and trade program for NOx under CAIR. Once the necessary revisions are in place and in effect under the applicable SIPs, EPA would respond affirmatively to State requests to use the cap and trade program in lieu of source specific compliance demonstration for the NO2 increments. The State would not be required to conduct source specific increment analyses so long as the State continues to implement the cap and trade program.

The cap and trade program would not provide a full exemption from the PSD permitting process. All new major stationary sources and major modifications, including both EGUs directly affected by the cap and trade program and non

EGU major sources, would still have to undergo some preconstruction review for a PSD permit prior to commencing construction on new projects that result in a significant net emissions increase for NOx. Such permits would still need to include emissions limitations based on BACT. The primary benefit comes from the fact that a source specific increment and NAAQS analysis would not be required, as 35 State participation in a cap and trade mechanism would not replace the statutory requirement to meet the NAAQS for NO2 at the local level, but rather helps achieve this requirement through significant reductions in background concentrations. While States will continue to have the obligation and the authority under the Act to assure that the NAAQS for NO2 is being met, we do not believe this needs to be done on a source specific basis under the PSD permitting program, but rather through the ongoing monitoring of ambient air quality using EPArecognized monitoring sites ( showing current attainment status) and possibly periodic modeling assessments, in conjunction with the initial modeling demonstration showing downward emissions trends and air quality levels resulting from the overall cap and trade program.

159 described in the above subsection. 35 The EPA believes other requirements pertaining to air quality analyses might also become unnecessary under a cap and trade approach. For example, statewide air quality improvements shown to result from a cap and trade program,

as described elsewhere in this preamble, may eliminate the need for source specific FLM review in Class I areas. In its 1988 PSD regulations for NOx, EPA applied this process to NOx on the basis of section 166. We also propose to retain this requirement under the increment option discussed above. However, we do not interpret section 165( d)( 2)( C) to require this process for NOx regulations established under section 166. Section 165( d)( 2)( C) appears to be limited by its terms to only PM and SO2. Nevertheless, we believe we have the authority to apply this FLM review process to NOx on the basis of section 166. However, if the requirements 160 of section 166 are otherwise fulfilled by a cap and trade approach, we believe section 166 would give us the discretion not to employ the FLM review process described in section 165( d)( 2)( C).

We are also evaluating, and request comment on, whether certain source specific preconstruction requirements could be satisfied by a cap and trade approach. These include ( 1)

the air quality impact analysis required under section 165( a)( 6) that is codified in regulations as the additional impacts analysis ( see, e. g., 40 CFR 52.21( o)); ( 2) the analysis of air quality, climate and meteorology, terrain,

soils and vegetation, and visibility required under section 166( e)( 3)( B); and ( 3) the air quality monitoring requirement in section 165( a)( 7). In the latter case, PSD applicants,

where applicable, must set up air quality monitoring stations and begin collecting relevant air quality data up to 12 months in advance of their submittal of a complete PSD application.

c. What are some issues that still need to be resolved?

EPA recognizes certain significant issues that still need to be resolved before a comprehensive proposal can be set forth for public review and comment. These issues are presented here for public consideration.

( 1) Failure to show ongoing statewide downward trend in NOx emissions. The EPA recognizes that it may not be possible 161 to show that NOx emissions decreases in every State from CAIR at least offset the expected contribution of NOx emissions that non EGU sources make in the State.

Consequently, in States where the amount of NOx reductions achieved through regulating EGUs under the proposed cap and trade program does not more than compensate for increases at other sources of NOx, it may be difficult to justify the use of the proposed cap and trade program in lieu of the existing NO2 increment system.

Preliminary air quality modeling by EPA indicates that total NOx emissions will generally decline on a statewide basis across the nation. " Total NOx emissions" includes contributions from electric utilities, non utilities, area sources, and mobile sources ( onroad, nonroad). As proposed,

the statewide emissions budgets for NOx apply only to affected EGUS. Sources not covered under the regional cap and trade program may face emissions limitations stemming from other Federal or State programs ( e. g., Federal Motor Vehicle Emissions Reduction Program) but would not typically be restricted from potential increases under any kind of cap for the source category in general.

Thus, in cases where EPA's modeling cannot initially show a downward trend in statewide NOx emissions for a particular State because increases from another source sector are exceeding the reductions being generated by EGUS 162 under the cap and trade program, EPA tentatively intends to announce the continued applicability of the NO2 increment system for that State as part of the final rulemaking for today's proposed action.

As part of the comprehensive modeling demonstration that EPA intends to carry out to support this cap and trade option, we will assess the likelihood that total statewide NOx emissions will continue to exhibit a downward trend for future years. The EPA believes that it will be necessary to conduct periodic assessments ( e. g., 10 year intervals) of air quality trends for NOx in order to continue justifying the cap and trade program as a substitute for the increment system for preventing significant air quality deterioration for NOx. The EPA seeks comments on the frequency of any necessary periodic assessment, as well as other possible mechanisms for determining when adjustments may need to be made to the cap and trade program to retain its viability as a replacement for the NO2 increment system or other means of preventing significant air quality deterioration for NOx.

( 2) Potential for localized adverse impacts resulting from emissions increases from new and modified sources. The EPA is mindful of the potential for localized impacts of proposed sources and modifications even where statewide emissions are shown to be declining. In response to this concern, we note that the January 30, 2004, CAIR notice of 163 proposed rulemaking addressed the issue of localized adverse impacts. In that notice, EPA indicated that experience under the title IV Acid Rain Program shows that " the combination of trading with a stringent emissions cap results in substantial reductions throughout the region,

with the greatest reductions achieved in the areas where pollution was originally the highest." ( 69 FR 4629 30) The notice further stated that other independent analyses have supported the finding that emissions trading under this type of program has not resulted in the creation of localized air quality problems.

We believe that this trend will continue to occur as a result of the extended use of a cap and trade program, so that localized air quality problems generally will not occur. Nevertheless, there may be the potential for localized adverse impacts, especially around Class I areas,

particularly when a source of NOx locating near a Class I area is not subject to a cap. We believe this situation is unlikely to occur and are allowing States that participate in one of the cap and trade programs under consideration ( East or West) to avoid all case by case source impact analyses under the preconstruction review for PSD. We solicit comments on whether there is any need for a limited source specific analysis under certain circumstances.

( 3) Role of the Federal Land Manager in the PSD permit 164 process. The Act provides that the FLMs have an affirmative responsibility to protect any AQRVs that have been identified for the Class I areas under their control.

Section 165( d)( 2)( B). Section 52.21( p) of the PSD regulations requires notification of the applicable FLM when there is a potential for adverse Class I area impacts, and it authorizes direct involvement by the FLM in cooperation with the applicable permitting authority to identify any adverse effects on any known AQRVs.

Although the cap and trade program would significantly diminish the possibility that PSD sources would adversely impact a Class I area, in light of the overall NOx reductions that would occur, the potential for some adverse impacts could still exist. In the absence of individual source specific air quality analyses, which include data that may be reviewed by the FLM early in the permitting process to determine the potential for adverse impacts, FLMs would have to rely upon other means of detecting such adverse impacts at a point in the permitting process when remedial action could be sought.

One possible remedy to this potential problem is for EPA to include specific criteria that, if not satisfied by a particular PSD applicant, could enable the FLM, in cooperation with the permitting authority, to call for an analysis of source impacts on the Class I area. For 165 example, regulatory procedures could be established which authorize an FLM to call for a source impact analysis when a proposed new or modified source locates within 150 kilometers of a particular Class I area and ( 1) NOx ( and possibly nitrate) concentrations are not decreasing for the region, as determined by ambient monitoring data, or ( 2) a significant level of source ( major or minor) growth has been documented within the 150 kilometer area surrounding the Class I area. The EPA seeks public input on the most effective way to ensure continued protection against localized adverse impacts from source growth under a cap and trade program.

( 4) States that are not affected by the proposed CAIR.

Many States are not subject to the proposed CAIR. We believe that States that are not part of a regionally based cap and trade program could develop a State cap and trade program that could be considered to meet the goals and purposes of the Act for prevention of significant deterioration for NOx. The EPA solicits comments on the best way to address States that are not subject to CAIR but that wish to participate in an EPA administered cap and trade program, or that wish to develop a State cap and trade program to replace the NO2 increment system currently in their State PSD program.

C. State Planning Approach 166 As a third option, we propose to allow a State to submit a demonstration that its SIP contains measures, in conjunction with Federal requirements, that would prevent significant deterioration of air quality for NOx. Under this option, we would establish a procedure for a State to submit a SIP demonstration to EPA to fulfill the requirements of section 166( c) and 166( d) of the Act. If EPA determines that the SIP demonstration meets the requirements of section 166, then we would approve the demonstration and allow the State to implement the SIP in lieu of an increment system for NO2. Thus, the State planning approach, like the cap and trade approach, would provide States with an incentive to implement a program to prevent significant deterioration of air quality for NOx that may be more effective than an increment system.

The State planning approach will be implemented through States' SIPs. Any State choosing this option could submit a demonstration that its SIP establishes a clear planning goal, of the State's own design, to satisfy the section 166 PSD requirements for NOx. To achieve the goal of its SIP, a State could impose NOx emission limitations on any emissions sources it chooses, whether new or existing, or demonstrate that existing Federal and SIP limitations have the appropriate effect.

While this approach gives States more flexibility to 167 design a program to prevent significant deterioration for NOx using a system other than increments, the EPA review and approval process would be more time and data intensive.

Under this approach, the State would need to provide a rigorous demonstration that its planning goal and measures ( in conjunction with Federal requirements) for meeting that goal are at least as effective in preventing significant air quality deterioration for NOx as the increments for PM and SO2 ( fulfilling the safe harbor requirement of section 166( d)) and are consistent with the criteria in section 166( c) and the goals and purpose of PSD in section 160 of the Act.

In contrast to the cap and trade option described above, under this State planning option, we are not proposing that the State must demonstrate that the SIP includes a specific type of program that we have already found to be sufficient to satisfy the requirements of section 166. However, under this State planning option, we could establish a specific planning goal that we find to be sufficient to satisfy the requirements of section 166.

Thus, if the State demonstrates that its SIP achieves our recommended planning goal, this could streamline EPA action on the plan. However, if we do not establish such a goal, a State would have to define this on its own and demonstrate to EPA how a program that achieves that goal would satisfy 168 the requirements of section 166 of the Act.

An example of a State planning goal that we believe could meet the requirements of section 166 would be a goal that statewide NOx emissions from all sources would remain below the level observed in a specific baseline year that,

in turn, is identified to be equivalent to the level of emissions that results in significant deterioration. A State could propose to achieve such a goal by tracking and managing the inventory of emissions from all sources in the State to ensure that statewide emissions of NOx do not increase above this level. This approach would in effect authorize a State to replace the NOx increment requirement by demonstrating that its SIP measures, in conjunction with Federal measures, achieve reductions in NOx emissions from all sources that are sufficient to offset projected increases from all types of new and modified sources. We believe this approach could be an effective alternative to an increment system. This kind of a State planning approach would prevent significant deterioration with a goal that effectively permits no emissions increases from a specific baseline date. The State would have to track its inventory of emissions and establish control measures on all types of sources ( new and existing) as appropriate to meet the goal.

1. Description of State Planning Approach This State planning option allows States to achieve 169 prevention of significant deterioration for NOx through specific statewide control strategies. In developing its approach, the State may consider broad scientific research and assessment of various means of meeting air quality management goals ( visibility progress, emission density requirements, or other markers).

The State planning approach may be workable for source categories such as mobile and area sources, for which a budget approach is unproven and for which the available emissions quantification techniques are too imprecise to support the budget approach. As stated before, a State may achieve its SIP goal by controlling NOx emissions from any emissions sources it chooses.

The State's control requirements, when implemented,

must result in the prevention of significant deterioration from NOx emissions.

Under this option, a State may choose to develop its own NOx emissions cap, with approval based on the cap's meeting the requirements of sections 166( c) and 166( d).

That is, for purposes of this proposed rule, the State would not be subject to an EPA determined NOx budget. The State would be responsible for tracking its NOx emissions and for identifying and reacting to needed corrections in its allowable NOx emissions.

Under the State planning option, SIPs could include 170 emission targets that provide for growth from new and modified sources. SIPS should be required to track actual emissions increases from new and modified sources and provide mechanisms for addressing areas that exceed these projected increases. The State is manager of the air quality resource and decides how much growth it will allow consistent with the requirement to prevent significant deterioration.

a. SIP requirements.

Under the State planning option, a State may impose NOx emissions control requirements in the form of a NOx emission rate limit, a specified type of technology, or even a cap on NOx emissions. However, to demonstrate that its plan is at least as effective as the increments for PM and SO2, the State must demonstrate through its emissions inventory that its control requirements are adequate from an air quality standpoint.

Critical to SIP planning are the elements of accountability and emissions tracking. To ensure that the SIP goal is achieved, the State planning approach requires an accurate baseline emissions estimate. Then, to demonstrate the amount of emissions control from the controlled sources, the State must take into account the amount of emissions attributable to the sources or source category both in the base case year and in the control case. 171 The SIP must include monitoring, recordkeeping, and reporting requirements. Unlike under the cap and trade option ( option 2), under the State planning option ( option 3), the State must bear the responsibility for monitoring progress and tracking emissions.

The EPA is soliciting comment on what requirements are needed to ensure that the SIP goal is met. Overarching considerations include whether the requirements: ( 1) provide certainty that all emissions that are controlled pursuant to this option are adequately controlled; ( 2) ensure that controls will continue to be adequate in future years; and ( 3) ensure that the control requirements can be feasibly implemented.

Pursuant to section 166( c), the State goal must provide specific numerical measures against which permit applications may be evaluated. Under option 3, we propose that each SIP demonstration must include a NOx emissions inventory for its baseline year ( 1990 or other). The State will have to weigh its projected reductions against its projected increases ( so as to allow for growth) over the next 10 years. Each State will need to demonstrate that the objectives of the statutory PSD program for NOx are being met, for example, by demonstrating that NOx increases are less than or equal to NOx reductions at the end of a 10 year period, or by some other scheme that can accommodate 172 significant growth of emissions, which is particularly anticipated in the western U. S. Based on the State's demonstration through statewide modeling and analysis that it will meet the SIP goal, the State would be permitted to waive some of the case by case analysis for new and modified major sources subject to PSD preconstruction permitting.

b. Benefits of State planning approach.

The State planning approach could effectively serve in the same way that an increment system does to prevent significant air quality deterioration, with the added benefit of eliminating the need for some types of case

bycase source analyses as currently required for sources applying for preconstruction permits under State PSD programs. Depending on how a program is designed by the State, a State planning approach could not only prevent significant air quality deterioration but also provide substantial improvements in air quality over time as any required controls are installed on sources in order to meet the State goal. For example, reductions in NOx will contribute to visibility improvements ( 69 FR June 10, 2004,

at 37205 6) and will also help to reduce acidification and eutrophication of water bodies ( 69 FR January 30, 2004, at 4642 3).

2. Using State Planning Program for Prevention of Significant Deterioration of Air Quality from NOx Emissions 173 a. State planning approach can meet requirements of section 166 of Clean Air Act.

We believe EPA's obligation under section 166 to promulgate pollutant specific regulations for NOx could be satisfied by permitting States to demonstrate that " other measures" besides increments will prevent significant deterioration, so long as those measures are consistent with the requirements of sections 166( c) and 166( d) of the Act.

The EPA could satisfy these requirements by establishing a planning goal based on the requirements of these provisions and then providing a process for States to demonstrate how the measures in their SIPs would achieve this goal.

( 1) State planning framework fulfills many of the factors applicable under section 166. A State planning framework has many characteristics that satisfy the requirements of section 166( c), and such an approach could qualify as an " other measure" that is permissible under section 166( d). A State planning program framework, in combination with the specific measures in the State SIP and other Federal measures, could fulfill the requirements of sections 166( c)

and 166( d).

Under a State planning framework, an emissions inventory could function as a specific numerical measure that could be used to evaluate permit applications. The inventory could be expressed in terms of a mass of total 174 emissions ( tons) across the State rather than an air quality concentration ( µ g/ m3) as is the case with increments and NAAQS. The State permitting authority could evaluate the permit application against the inventory of total emissions for all sources and determine if there was room in the inventory for a new source or an increase in emissions from a modified source. If so, then a preconstruction permit could be issued without causing emissions to exceed the level of the inventory. If there was not room in the inventory for emissions from a new or modified source, then the permit applicant would have to obtain offsetting reductions from other sources. This type of numerical measure could also streamline permitting because the evaluation of a permit application against an emissions inventory would be a relatively simple exercise that does not require extensive air quality modeling by the permit applicant.

A State planning framework that utilizes an emissions inventory would also stimulate improvements in control technology at both new and existing sources. In order to make room in the inventory for growth from new sources or modifications to existing sources, a State may elect to establish additional control measures on existing sources.

This would stimulate improvements in control technology at those sources. However, a State might instead elect to 175 require that new and modified sources bear a greater burden of controlling emissions and thus stimulate these sources to make improvements in control technology. Major new and modified sources would still have to install BACT under this option, but the State could also establish limitations that give minor sources incentive to employ improved control technology to keep emissions below the inventory. A State could also develop some combination of these approaches that balances the burdens across new and existing sources. Thus,

a State planning approach of this nature would stimulate improvements in control technology while also providing the States with the flexibility to identify the sources in that State that can most cost effectively install improved controls.

A State planning framework could also address the goal in section 160( 4) of the Act to assure that emissions in one State do not interfere with the PSD program in another State. The EPA could adopt this goal as a criterion that must be met in order for the State planning process to prevent significant deterioration for NOx. Thus, in addition to showing that emissions would not exceed the inventory, States might have to demonstrate that their SIPs will not cause the inventory to be exceeded in neighboring or downwind States. The EPA would not approve a SIP that does not meet this goal and could thereby ensure that 176 emissions from upwind States are effectively managed to prevent significant deterioration in other States. This goal is to a large extent already embodied in the State planning process based on section 110( a)( 2)( D)( i)( II) of the CAA. This section requires that SIPs contain adequate provisions to prohibit emissions from any source from interfering with the part C ( PSD) program in another State.

Thus, we may not need to make any changes to our SIP planning regulations to satisfy the section 160( 4) goal if we allowed States to use the State planning approach to satisfy section 166 of the Act.

With respect to the PSD goal in section 160( 5) that any decision to increase air pollution be made only after careful evaluation and public participation, the evaluation would be conducted and opportunities for public participation would occur when the baseline year for the statewide emissions inventory is established by EPA or the State. Any decision to permit an increase in air pollution would be reflected in this decision that significant deterioration would result if emissions exceeded the levels in this baseline year. The EPA or the State would thus conduct a careful evaluation at this time and provide an opportunity for public comment. Once the inventory baseline is established, it will guide future permit evaluations. If a project subject to the permit requirement would not cause 177 statewide emissions to exceed this level, the permit could be issued without as extensive a review at the permitting stage as would be required under the increment system. The careful evaluation conducted at the time the baseline year is selected will have already established whether an emissions increase could be allowed without preventing significant deterioration. In addition, major sources will still need to obtain permits and achieve BACT, so there would continue to be some case by case review and public participation under a State planning framework.

To satisfy the minimum requirements of section 166( d)

under the " contingent safe harbor" approach, the baseline inventory selected for a State planning program would have to represent a level that is at least as effective as the increments for PM and SO2. As discussed above, these statutory increments were established as a percentage of the NAAQS, which are expressed as a concentration of air pollution. To make a quantitative showing that the massbased emissions inventory is as effective as the concentration based increments for PM and SO2, EPA or the States ( depending on who establishes the inventory) could conduct ambient air quality modeling to predict the statewide concentrations of NO2 achieved by maintaining the inventory of emissions at a specific level. The EPA or the State might then be able to show that the selected emissions 178 inventory will maintain NO2 concentrations within a certain percentage of the ambient concentrations of NO2 as of the applicable baseline date ( or dates) in the area. However,

to the extent this type of modeling is not available or is too resource intensive, we request comment on other approaches ( both qualitative and quantitative) that we might use to show that maintaining statewide emissions at a specific level is at least as effective as the increments for PM and SO2.

The statewide emissions level that is as effective as the increments for PM and SO2 would represent the " safe harbor" under the contingent safe harbor interpretation of section 166 of the Act. Once the safe harbor level is identified in this manner, we would conduct further review to determine whether it satisfies the requirements of section 166( c) by using the same balancing test discussed above. We would use this balancing test to determine whether an emissions level other than the " safe harbor"

level should be maintained to protect air quality values,

public health and welfare, and parks and other special areas, while also ensuring economic growth consistent with the preservation of existing clear air resources.

( 2) A SIP that permits no increase in NOx above 1990 levels could satisfy section 166 requirements. To achieve both the environmental protection and the economic growth goals of 179 the PSD program in our pollutant specific PSD regulations for NOx, we propose, under this State planning option, to establish a goal that the State maintain an emissions inventory at the level of NOx emissions observed in 1990.

We believe maintaining emissions at this level in most States would prevent significant deterioration and protect AQRVs, health and welfare, and parks and other special areas, while also ensuring economic growth. However, we also solicit comment on whether, under this State planning option, we should permit a State to select a baseline year later than 1990.

Maintaining NOx emissions at the 1990 level would serve to maintain ecosystem health and provide protection for AQRVs, health and welfare, and parks. In addition, such a level of emissions would permit reasonable economic growth to continue.

There are two additional reasons why we propose a goal to maintain the inventory at 1990 levels. First, 1990 is a year for which we have developed sound NOx emissions inventories for all States as a result of our work on the CAIR proposal. In addition, 1990 levels would reflect a reasonable and conservatively low approximation of the existing PSD baselines for NOx across States, as explained below.

Under the PSD regulations for NOx that EPA first 180 promulgated in 1988, we established 1988 as the trigger date for NOx. Thus, the earliest that a minor source baseline date could have been triggered was in 1988. Once the trigger date passed, minor source baseline dates for NOx were established in specific PSD baseline areas at the time of the first application for a PSD permit by a major source that emitted NOx in significant amounts. Thus, the PSD baselines for NOx have been triggered across the country at various times from 1988 to the present. Because these permit applications and increment consumption analyses have generally been reviewed by the States, we do not have specific data on when baseline dates were triggered in each State. However, we can assume that most baseline dates were established in the 1990s. Thus, we propose to conservatively establish a goal to maintain emissions at 1990 levels to ensure that this level is generally not higher than the emissions that occurred on the existing PSD baseline dates that were established in the 1990s. Since the increment system permits increases in pollutant concentrations above baseline concentrations, using a 1990 emissions level would not necessarily allow more emissions than would be permitted under an increment system when the baseline concentration was established in 1988. To the extent that the 1990 date allows emissions in a particular area to increase over emissions on the date the PSD baseline 181 was triggered, this would be balanced out by other areas in the State where baseline dates were triggered with emissions at higher levels than in 1990 or areas in which baselines have yet to be established.

( 3) State planning approach satisfies ambient air quality review requirements. If we permit States to employ a State planning framework in lieu of increment to meet requirements of section 166 for NOx, we believe it will no longer be necessary for sources to conduct a site specific ambient air quality analysis for NO2 to comply with the requirements of section 165( a)( 3) of the Act. If there is room under a properly derived emissions inventory for a particular new or modified source, it will already be clear that the source will not cause or contribute to air pollution in excess of the NAAQS. Before the permit is evaluated, EPA or the State will have already performed an ambient air quality analysis across the State to show that holding emissions at the chosen level is sufficient to prevent significant deterioration or an exceedance of the NAAQS. The statewide emissions level would fill the role of the increment, so section 165( a)( 3) would be satisfied without a sourcespecific showing that a source's proposed emissions increase does not cause or contribute to air pollution increases in excess of the increment. The permit applicant would only need to show that there is room in the State's emissions 182 inventory for its emissions. As with the cap and trade approach discussed above, it would become redundant and unnecessarily costly to require an individual source to conduct a site specific air quality analysis if EPA or the State has already established that maintaining emissions at a specific level does not cause air pollution to exceed standards and meets the goals and purposes of PSD and the requirements of section 166.

b. Using a State planning approach to streamline the PSD permitting process.

If a State makes the necessary demonstration under this option, we would not require the State to implement some of the existing PSD preconstruction permitting requirements for NOx. A source specific ambient air quality, increment, and NAAQS analysis would not be required, as described in the above subsection. However, as with the cap and trade program option described above, we do not propose for this State planning approach to replace all aspects of the PSD permitting process.

All new major stationary sources and major modifications would still have to obtain a permit prior to commencing construction on new projects that result in a significant net emissions increase for NOx. These sources will also have to comply with emissions limitations based on BACT. 183 We request comment on whether other elements of the preconstruction analysis would remain necessary under this approach. If a State can maintain emissions at levels that prevent significant deterioration, this might also eliminate the need for source specific FLM review in Class I areas.

See 40 CFR 52.21( p). As discussed above in the cap and trade option, we propose to interpret the Act not to require this process for NOx but to permit EPA in its discretion to require the process, as necessary, to meet the requirements of section 166. To the extent the State planning goal protects AQRVs, this process may not be necessary under this option for NOx. We also request comment on whether the additional impacts analysis ( see CAA 165( a)( 6) and 40 CFR 52.21( o)) could be performed through the State planning process and then not be required on each individual permit application. Likewise, we request comment on whether, under this State planning option, it is necessary to require applicants to collect pre application air quality monitoring data over a 12 month period preceding the submittal date of an application. We believe that this kind of data may need to be gathered by the States in order to demonstrate that a SIP planning goal meets the PSD requirements.

c. What are some issues that still need to be resolved?