On November 7, 1986, EPA restructured CFR Part 51 and renumbered many of that Part's sections ( 51 FR 40656). Because most readers will be more familiar with prior designations, today's notice contains citations based on the organization of Part 51 as it existed before this restructuring. Interested parties may use Appendix F of today's Technical issues Document to convert today's Part 51 citations to the corresponding new ones.

Netting's scope is determined by the definition of " source" for review of major modifications. In general, PSD areas use a single, plantwide definition, allowing actual emission reductions anywhere in a contiguous plant to compensate for potential emission increases at individual emitting units within the plant. Nonattainment areas can choose either this single, plantwide definition or a dual definition, so long as the definition selected does not interfere with attainment and maintenance of NAAQS and is consistent with progress towards attainment. Under the plantwide definition, significant net actual increases at the plant as a whole will trigger new source review. Under the dual definition, significant increases at either the plant as a whole or individual emitting units will trigger new source review.

In addition to these federal definitions for major new sources and modifications, state preconstruction permits for major or minor new sources and modifications may be required under 40 CFR 51.18( a), and some states preclude netting.

D. Emission Offsets In nonattainment areas, major new stationary sources and major modifications are subject to a presconstruction permit requirement that they secure sufficient surplus emission reductions to more than " offset" their emissions. This requirement is designed to allow industrial growth in nonattainment areas without interfering with attainment and maintenance of ambient air quality standards. It is currently implemented through SIP regulations adopted by states to meet the requirements of 40 CFR 51.18( j).

In attainment areas, some new sources and modifications might not otherwise be able to be constructed because their emissions would result in an exceedance of the applicable PSD increment or ambient air quality standard, would significantly contribute to a violation of an ambient air quality standard in a designated primary nonattainment area, or would significantly contribute to visibility impairment in a Federal Class I area. These sources may use emissions offsets to allow desired growth while protecting that increment, standard, or visibility. Page 32 51 FR 43814 E. Emission Reduction Banking Firms may store qualified emission reduction credits ( ERCs) in EPA approvable banks for later use in bubble, offset or netting transactions. Depending on the bank's rules, banked ERCs may also be sold or transferred to other firms which seek to meet certain regulatory requirements by use of emissions trades.

EPA's revised Offset Ruling ( 40 CFR Part 51, Appendix S) allows states to establish banking rules as part of their SIPs. This Policy Statement and accompanying Technical Issues Document detail the necessary components of a complete state banking rule approvable under the Clean Air Act. While many areas also allow banking of emission reductions for various purposes through various formal or informal banking mechanisms, banks which do not meet today's criteria ( e. g., by not making banked emission reductions enforceable by the state by the time the reductions are actually banked, or by not assuring that deposits are taken explicitly into account for SIP planning purposes) cannot qualify emission reductions as ERCs, and may offer substantially less protection in the event of future SIP corrections or changes in ambient attainment status.

F. Generic Trading Rules Generic rules adopted as part of the SIP can authorize states to approve certain types of individual transactions without the need for case by case SIP revisions or associated federal review prior to approval. The first state generic bubble rule was approved by EPA April 6, 1981 ( 46 FR 20551). For the current scope of permissible rules, see Section III below.

G. Effect of This Policy Statement Emissions trading is largely voluntary: no source is required to trade, and no state is required by EPA to approve a particular trade or to adopt a generic rule. Trading merely offers states and stationary sources alternative ways to meet regulatory requirements. For example, states are free to adopt generic rules or continue to implement trades as individual SIP revisions. They may adopt rules which incorporate all or any combination of the above trading approaches. n4 n 4 Some requirements underlying emissions trading are not voluntary. For example, construction of a major new source or major modification in a nonattainment area requires sufficient existing source reductions to constitute " reasonable progress toward attainment" despite the new emissions ( 40 CFR 51.18( j); Part 51, Appendix S). However, where the area has an established " growth margin" of extra reductions in a SIP which is currently approved by EPA, the state may provide the offsets from that growth margin rather than require them from the source, so long as it reduces the margin accordingly. See Clean Air Act section 173( 1)( A) and ( B)

This Policy Statement is accompanied by a Technical Issues Document for use by states and industry in further understanding emissions trading. The Document offers elaboration and important detail on requirements and available options under the Clean Air Act.

This notice reflects the current Clean Air Act and existing EPA regulations. A policy statement cannot legally alter such requirements. However, this notice establishes EPA policy in areas not governed by applicable regulations and sets out general principles which may help states and industry apply those regulations in individual cases. Federal or state rulemaking in response to, e. g., future litigation or changes in ambient standards, attainment status, or SIP validity, may affect states or firms that plan to engage or have engaged in emissions trading activities.

Nothing in today's notice alters EPA new source review requirements or exempts owners or operators of stationary sources from compliance with applicable preconstruction permit regulations in accord with 40 CFR 51.18, 51.24, 51.307, 52.21, 52.24, 52.27, and 52.28. Interested parties should, however, be aware that bubble trades are not subject to preconstruction review or regulations where these trades do not involve construction, reconstruction, or modification of a source.

EPA intends to apply changes made by today's policy prospectively ( e. g., not to actions which have already been approved as case by case SIP revisions or under generic rules). If, however, ambient Page 33 51 FR 43814 violations are discovered in an area where EPA has approved a trade, or if other violations of Clean Air Act requirements are discovered in that area, sources involved in the trade should be aware that they are potentially subject to requirements for additional emission reductions, just as are all other sources in the area.

This policy requires that substantial additional reductions ( at least 20%) in emissions remaining beyond applicable baselines be produced by future bubbles in primary nonattainment areas which require but lack approved demonstrations of attainment. However, applications for bubbles in such areas which are still pending at EPA without formal action under the 1982 policy, or which were previously submitted to EPA Regions under the 1982 policy but not accepted for evaluation, will be reexamined and processed for approval if they meet the requirements of the 1982 policy and contribute to progress towards attainment. " Progress towards attainment" means some extra reduction beyond equivalence to a lowest of actual SIPallowable or RACT allowable emissions baseline, with this baseline applied as of the time applicants originally sought credit. Pending bubbles in attainment areas and nonattainment areas with approved demonstrations of attainment will be processed for approval if they meet the requirements of the 1982 policy and show that ambient standards, PSD increments and visibility will not be jeopardized.

For further discussion on pending bubbles see Section I. A. 1. b.( 4) of the Technical Issues Document. n5 n 5 EPA encourages states or sources which submitted bubbles that were returned without evaluation by EPA to resubmit them under these criteria, provided they can document ( a) formal, timely submittal of an application to EPA in accord with normal EPA procedures and ( b) that the application was returned without evaluation, rather than rejected for failure to meet the terms of the 1982 policy. Bubble applications which were accepted for evaluation but rejected for failure to meet the 1982 policy will be treated as new applications under today's notice.

II. Requirements for Creating, Using, or Banking Emission Reduction Credits n6 n 6 Because this Policy Statement and accompanying Technical Issues Document reflect general Clean Air Act principles, states, individual sources, or commenters on specific rulemaking actions are free to show that a general principle does not apply to particular circumstances or could be satisfied using approaches other than those described. States, sources and commenters have this option under current law, and nothing in this Policy Statement or the Technical Issues Document restricts their opportunity to make such showings.

A. Creating Emission Reduction Credits Emission reduction credits ( ERC's) are the common currency of all trading activity. ERCs may be created by reductions from either stationary, area, or mobile sources. To assure that emissions trades do not contravene relevant requirements of the Clean Air Act, only reductions which are surplus, enforceable, permanent, and quantifiable can qualify as ERCs and be banked or used in an emissions trade.

1. Surplus. At minimum, only emission reductions not required by current regulations in the SIP, not already relied on for SIP planning purposes, and not used by the source to meet any other regulatory requirement, can be considered surplus. To determine the quantity of emission reductions that are surplus, the state must first establish an appropriate emissions baseline from which surplus reductions can be calculated. Baseline emissions for any source are the product of three factors  emission rate, capacity utilization, and hours of operation. n7 n 7 For further discussion of these factors as they relate to baseline calculations, see Appendix B of the Technical Issues Document. Page 34 51 FR 43814 In attainment areas, the lower of actual or allowable values must generally be used for each of these baseline factors. However, allowable values for one or more of these factors, when higher than actual values, may be used in calculating the baseline emissions, provided those values are shown to be used or reflected in an approved demonstration. n8 The burden of meeting this test by written evidence rests with the state or applicant which seeks to use an allowable value.

n 8 This statement does not apply to netting, where " contemporaneous" actual emissions are always the baseline. See, e. g., 40 CFR 51.24( b)( 3).

Bubbles in areas with demonstrations based only on qualitative judgments ( e. g., the " example region" approach or no technical support) ordinarily may not rely, without appropriate modeling, on allowable values in calculating baseline emissions. However, bubbles in areas with demonstrations based on rollback or dispersion modeling may use allowable values that are reflected in the demonstration. In certain circumstances an allowable baseline value specified in a preconstruction permit may be deemed equivalent to one used or reflected in an approved demonstration. See Technical Issues Document, n. 7.

For further definition of " actual" and " allowable" see today's Technical Issues Document, Section I. A. I. a. and Appendix B.

When allowable values for one or more baseline factors are not used or reflected in an approved demonstration, such values may still be used in calculating baseline emissions. However, in such cases applicants must perform appropriate modeling to demonstrate that allowable values which are higher than actual values will not delay or jeopardize attainment and maintenance of ambient standards. n9 n 9 This demonstration would require a Level II modeling analysis, in accord with the modeling screen discussed below, using actual emissions for the pre bubble case, unless, for bubbles processed as case by case SIP revisions, the Region determines that additional technical support is needed to protect applicable standards or increments. For discussion of Level II modeling, see Technical Issues Document, section I. B. 1. b.( 3). For further discussion of additional technical support which Regions may require in these circumstances, see Technical Issues Document, Section I. A. 1. a. For a discussion of parallel modeling requirements for use of such higher allowable values in attainment areas under generic rules, see Technical Issues Document, n. 31.

In attainment areas where the PSD baseline has been triggered, credit may be granted consistent with the PSD baseline concentration as specified in 40 CFR 51.24( b)( 13) and 52.21( b)( 13). This will generally require use of actual values for each of the baseline factors. However, states may use allowable values if they show through appropriate modeling n10 that attainment and maintenance of neither the ambient standards nor applicable PSD increments will be jeopardized, and quantify the amount of increment consumed.

n 10 See n. 9 above.

In nonattainment areas with approved demonstrations of attainment, the baseline must be consistent with assumptions used to develop the area's demonstration. This generally means that actual values must be used for each baseline factor where actual values were used for such demonstrations, and that higher allowable values for these factors may be used where allowable values were used for such demonstrations. n11 The burden of showing that an allowable value was used or reflected in the approved demonstration rests with the state or applicant which seeks to use an allowable value. In the absence of written evidence to that effect, full Level III modeling would be required to make use of an allowable value in baseline calculations. n12 n 11 For netting, " contemporaneous" actual emissions are always the baseline. See, e. g., 40 CFR 51.18( j)( l)( vi). Page 35 51 FR 43814 n 12 For further discussion of Level III modeling, see Technical Issues Document, section I. B. 1. b( 4).

In primary nonattainment areas which need but lack approved demonstrations of attainment, states must show that bubbles meet special " progress" requirements designed to produce a net air quality benefit. This must be demonstrated by ( 1) using the lowest of actual SIP allowable or RACT allowable emissions baseline for each source involved in the trade; n13 ( 2) meeting the ambient equivalence tests outlined in sections II. B. 2 of this Policy and I. B. 1. b. of the Technical Issues Document; and then ( 3) producing a substantial net reduction in actual emissions ( i. e., a reduction of at least 20% in the emissions remaining after application of the baseline specified above). The state must also provide assurances that the bubble is consistent with ambient progress and future air quality planning goals. n14 n 13 For purposes of today's notice, the " lowest of actual SIP allowable or RACT allowable" emissions baseline means the product of ( 1) the lowest of the actual emission rate, the SIP or other federally enforceable emission limit, or a RACT emission limit, and ( 2) the lower of actual or allowable capacity utilization and hours of operation. For further discussion of this baseline, see Appendix B of today's Technical Issues Document.

n 14 The specific assurances may be found in the Technical Issues Document at I. A. 1. b.( 3). EPA will not second guess such state assurances, provided they are: ( 1) A substantial test applied by the state to each bubble, and ( 2) the state has explained how the proposed bubble is consistent with the area's projected attainment strategy. This authority has not been delegated with EPA. See Clean Air Act section 301( a)( 1), 42 U. S. C. 7601( a)( 1).

2. Enforceable. To assure that Clean Air Act requirements are met, each transaction which revises any emission limit upward must be approved by the state and be federally enforceable. Means of making emission limits federally enforceable include SIP revisions ( see section IV below), EPA approved generic bubble rules ( see Section III below), and new source preconstruction permits issued by states under EPAapproved SIP regulations pursuant to provisions of 40 CFR 51.18, 51.24, or 51.307, as well as construction permits issued by EPA or delegated states under 52.21. n15 Bubbles should be incorporated in an enforceable compliance instrument which requires recordkeeping based on the averaging period over which the bubble is operating, so it may easily be determined over any single averaging period that bubble limits are being met.

n 15 EPA is also considering generic steps which would make state operating permits federally enforceable. Prior to use, banked credits need not be made federally enforceable. See Section II. C. below.

3. Permanent. Only permanent reductions in emissions can qualify for credit. Permanence may generally be assured by requiring federally enforceable changes in source permits or applicable state regulations to reflect a reduced level of allowable emissions.

4. Quantifiable. Emission reductions must be quantifiable both in terms of estimating the amount of the reduction and characterizing that reduction for future use. Quantification may be based on emission factors, stack tests, monitored values, operating rates and averaging times, process or production inputs, modeling, or other reasonable measurement practices. The same method of calculating emissions should generally be used to quantify emission levels both before and after the reduction.

B. Using Emission Reduction Credits ERCs may be used by sources in bubble, offset or netting transactions. The general principles below will assure that all uses of ERCs are consistent with ambient attainment and maintenance considerations under the Clean Air Act. They are further articulated in the accompanying Technical Issues Document.

1. Emissions trades must involve the same criteria pollutant. An emission reduction may only be traded against an increase in the same criteria pollutant. For example, only reductions of SO 2 can be substituted for increases of SO 2 . Page 36 51 FR 43814 2. All uses of ERCs must satisfy applicable ambient tests. The Clean Air Act requires that all areas throughout the country attain and maintain national ambient air quality standards and meet applicable ambient requirements relating to PSD increments and Class I protection, including visibility. The ambient effect of a trade depends on the dispersion characteristics of the pollutant involved. With the exception of visibility for NO X , dispersion considerations will generally not affect trades involving VOC or NO X , whose impacts occur across broad geographic areas. For these pollutants " pound for pound" trades may be treated as equal in ambient effect where all sources involved in the trade are located in the same control strategy demonstration area, or where the state otherwise shows such sources to be sufficiently close that a " pound for pound" trade can be justified. However, dispersion characteristics are important for bubble and offset trades of SO 2 , particulates, CO, or lead, whose ambient impact may vary with where the emission increases and decreases occur. To assure ambient equivalence, such trades of these pollutants must satisfy ambient tests under the modeling screen discussed in the Technical Issues Document or under a similar, equally effective approach. 1 n6 n 1 6 For similar reasons, bubbles of these pollutants must involve sources which are in the same or adjacent control strategy demonstration areas within the same general air basin.

See section II. A. 1. above and Technical Issues Document, Section I. A. 1. a regarding additional technical support required for certain trades in attainment areas.

While bubbles in primary nonattainment areas which need but lack approved demonstrations of attainment must produce a net air quality benefit, this does not entail additional ambient tests. Such bubbles must first meet the general tests under the modeling screen showing ambient equivalence for bubbles, prior to producing the required additional reductions. They must then produce additional reductions of at least 20% beyond the applicable baseline emissions used to demonstrate ambient equivalence. Since these additional reductions will necessarily reduce ambient concentrations below equivalence at some receptors, while continuing to meet the tests for ambient equivalence at all others, a net air quality benefit should occur and no additional ambient showings, beyond those generally required for all bubbles, are required.

3. Bubbles must not increase hazardous pollutants. Bubbles may not be used to meet applicable requirements of National Emissions Standards for Hazardous Air Pollutants ( NESHAPs) promulgated under section 112 of the Clean Air Act, to increase emissions at any source beyond the levels applicable NESHAPs prescribe, or to create any net increase in baseline emissions of a pollutant regulated under section 112. The applicable baseline for regulated sources is the lower of actual or NESHAPs allowable emissions of the hazardous pollutant.

Where a NESHAP has been proposed but not yet promulgated for a source category which emits a pollutant listed under section 112, the proposal will serve as an interim guideline for evaluating the effects of any proposed emissions trade involving a source that would be subject to the proposed standard. In general, such trades will be approvable with respect to the emissions component of the trade subject to the proposal, so long as they result in emission limits at each source emitting the relevant pollutant which are equivalent to or lower than those the proposed NESHAP would have required if already promulgated. 1 n7 n 1 7 The allowable emission rate for a source subject to a proposed NESHAP is the limit stipulated in the proposal.

Where a pollutant has been listed under section 112 or where EPA has published a Notice of Intent to List, but no regulations for the source category involved in the trade have yet been proposed or promulgated, the trade will generally be acceptable with respect to the emissions component of the trade subject to notice or listing, if there is no net increase in actual emissions of that pollutant as a result of the trade. 1 n8 n 1 8 Where EPA has issued a " Notice of Intent Not to Regulate" one or more source categories for a listed pollutant, emissions of that pollutant from the unregulated source category Page 37 51 FR 43814 will nevertheless be treated the same as emissions of any other listed pollutant. Under limited circumstances, similar treatment will be given to pollutants for which a " Notice of Intent Not to List" has been published. See the Technical Issues Document, section I. B. 1. d.

Any trade involving sources or source categories subject to the preceding subparagraphs must take place within a single plant or contiguous plants, and must credit only reductions below current actual or NESHAPs  allowable emissions, whichever is lower. But cf. generally n. 6 above and today's Technical Issues Document, section I. B. l. d.

Trades which do not meet the special restrictions discussed in this section may also be approved where surplus reductions in the pollutants addressed above compensate for increases in non hazardous emissions of the same criteria pollutant ( e. g., benzene, a hazardous VOC, is reduced to create credits for an increase in non hazardous VOC emissions.) As long as such a trade would not result in an increase in either actual or allowable emissions of a pollutant subject to the preceding paragraphs at any source, it would not differ in nature or requirements from a trade involving only nonhazardous VOC emissions.

4. ERCs from existing sources cannot be used to meet technology based requirements applicable to new sources. Under Clean Air Act section 111 and EPA implementing regulations, new affected facilities must satisfy technology based New Source Performance Standards ( NSPS), regardless of the attainment status of the area in which they are located. Under sections 165 and 173 and EPA implementing regulations, new or modified major stationary sources must also satisfy technology based control obligations associated with pre construction permits. These requirements prohibit use of credits from existing sources to meet or avoid applicable NSPS, and bar use of such credits to meet applicable new source review requirements for best available control technology ( BACT) in PSD areas, or lowest achievable emission rate control technology ( LAER) in nonattainment areas. 1 n9 n 1 9 But cf. sections I. C. and I. D. above.

Today's notice does not address whether or under what circumstances facilities subject to NSPS, BACT or LAER may surpass applicable permit limits reflecting such requirements in order to create credits for existing source trades.

5. States may approve bubbles in primary nonattainment areas which require but lack approved demonstrations of attainment, provided such trades meet requirements designed to produce a net air quality benefit and the state provides certain assurances. See section II. A. 1. above and the Technical Issues Document, section I. A. 1. b. Bubbles which meet these objective requirements will be processed for approval by EPA.

6. Sources need not be subject to binding compliance schedules based on current SIP requirements before they can apply for a bubble which would supersede those requirements. Sources that are already subject to binding compliance schedules should be aware, however, that such schedules remain fully enforceable until a bubble affecting the schedule has been approved by EPA or under a state generic rule and the schedule has been modified accordingly. Sources subject to compliance schedules in administrative orders or judicial decrees must obtain prior approval from EPA or the relevant court, as appropriate, to be relieved from the schedule contained in the order or decree. Sources that are subject to SIP requirements remain responsible for meeting those requirements unless and until a bubble has become effective under Federal law. See section II. B. 12 below.

7. States may extend certain compliance schedules. States may no longer grant compliance extensions under new or revised generic rules in nonattainment areas, whether or not such areas have demonstrations. n20 However, states may continue to grant compliance date extensions under generic rules in attainment areas, provided EPA has approved the extension provisions of the generic rule as being adequate to comply with the Clean Air Act, including requirements for attainment and maintenance of ambient air quality standards.

n 20 Existing generic rules applicable to these areas must be revised to comport with this principle where they contain such generic extension provisions. EPA will publish Federal Register Page 38 51 FR 43814 notices identifying any generic rules which require formal modification. Failure to resolve deficiencies identified in such a notice within the prescribed time period may result in EPA rescinding approval of the existing generic rule or issuing a notice of SIP deficiency. EPA expects states to ensure in the interim, so far as feasible, that compliance date extensions under existing generic rules are not granted to sources located in nonattainment areas. See section III below and section II. E. 4. of the Technical Issues Document.

States that wish to give sources in nonattainment areas, and sources in attainment areas for which there is no applicable generic SIP provision, more time to implement bubbles by granting compliance extensions, must receive EPA approval of the extensions through case by case SIP revisions. Requests for such compliance date extensions, whether in attainment or nonattainment areas, may be submitted to EPA together with bubbles, as part of a single SIP revision package. EPA will separately evaluate the time extension portion of these SIP revision packages in accord with the Agency's normal criteria for review of time extensions, including consistency with the Act's requirements for expeditiousness, reasonable further progress, and attainment and maintenance. Sources should be aware that disapproval of such time extension requests may result in disapproval of the entire package ( i. e., both post trade limits and the time extension) or only part of it, depending on whether the state views these components of the proposed SIP revision as separable.

8. States may approve bubbles involving open dust sources of particulate emissions, based on modeling demonstrations. Open dust trades may be approved through individual SIP revisions based on acceptable modeling and/ or monitoring demonstrations, provided sources agree to post approval monitoring to determine if predicted air quality results have been realized and make an enforceable commitment to achieve necessary additional reductions if predicted results do not materialize.

9. Trade involving lead. Unlike other criteria pollutants, EPA does not designate nonattainment areas for lead. However, the Regional Administrator will review lead trades, as all other trades, to assure that they do not interfere with attainment and maintenance of NAAQS.

10. Trades involving ERCs from mobile source measures. ERCs from mobile source measures may be used to meet SIP requirements applicable to existing stationary sources, so long as such reductions are surplus, permanent, quantifiable, and enforceable. Reductions from certain types of mobile source measures ( e. g., mechanical conversion of existing vehicle fleets to cleaner fuels such as methanol) may satisfy these criteria more readily than those from other transport related measures. However, due to possible difficulties in determining whether specific mobile source reductions fully meet these criteria, all such trades must be implemented as case by case SIP revisions.

11. Interstate trades. Trades involving sources located in neighboring states may be approved, provided they meet all other requirements of today's notice. However, in order to avoid complex SIP accounting issues, where state trading requirements differ EPA will require that such trades meet the substantive requirements of the more stringent state. In general, EPA will deem ERCs created in one state to contribute to progress in the state where used to the extent of that use, provided that applicable ambient tests ( section II. B. 2 above) are met. Interstate trades must be implemented through case by case SIP revisions.

12. Bubbles must not impede enforcement. In general, bubbles are a form of SIP revision which should be treated neither more nor less stringently than other SIP revisions. Bubbles should not become a shield against enforcement actions for sources which have failed to take necessary steps to meet required control obligations on time.

Sources seeking trades should note that they remain subject to enforcement of existing ( pre trade) SIP limits until the bubble is approved. EPA will use the same principles and procedures for deciding whether to initiate enforcement actions in these circumstances as the Agency applies to any other source which is subject to a proposed or final SIP revision.

Under established EPA policy, regulated sources must be subject to an applicable, enforceable emission limit at all times. Accordingly, sources which have approved bubbles with emission limits effective at a future date, and which are not in compliance with their pre trade limits prior to that effective date, may be subject to enforcement action, which could include penalties based on a failure to meet the pre trade limits. Sources in these situations may wish to minimize the chance that capital expenditures may Page 39 51 FR 43814 be required to meet pre trade limits, either by ( a) agreeing to post trade compliance dates which are substantially similar to their pre trade compliance dates, or ( b) accelerating their compliance with posttrade limits.

In accord with the general principle that bubbles should be treated neither more nor less stringently than other SIP actions, implementation of this Policy Statement will be neutral with respect to EPA enforcement of pre trade emission limits. This means that EPA will not specifically select for enforcement action noncompliant sources seeking to use a bubble either to come into compliance or to restructure traditional compliance. However, it also means that EPA will not withhold or defer enforcement simply because a source is seeking alternative emission limits through a bubble. In exercising its enforcement discretion, EPA will apply the same considerations to noncompliant sources which seek to comply through bubbles as to those which do not.

C. Banking Emission Reduction Credits Only emission reductions that are surplus, permanent, quantifiable, and enforceable can qualify as ERCs and be deposited in EPA approvable banks. n21 Such banks offer sources legal recognition that qualifying reductions meet these ERC requirements. However, the fact that an ERC has been banked does not relieve it from the need to meet all criteria of the specific regulatory program under which it is to be used. n22 Because some trades have special limitations ( e. g., only reductions occurring at the same major stationary source can be used for netting), banks do not guarantee the validity or specific amount of particular banked ERCs for all potential uses or for all time. To provide maximun protection for the environment and sources and to avoid potential legal problems, state banking rules may specify the types of sources eligible to bank ERCs and any additional conditions placed on certifying, holding or using banked ERCs.

n 21 Under today's notice emission reductions must be made enforceable by the state in order to qualify as ERCs and be deposited in EPA approvable banks. However, because mere deposit of a reduction cannot result in emissions increases elsewhere, banked reductions need not be made federally enforceable until used.

n 22 States may, however, expand opportunities for use of banked credits beyond those of current SIP programs ( e. g., extend the " contemporaneous" period for netting), by submitting revised regulations addressing the banking and use of such credits, for approval as SIP revisions.

State banking rules may establish ownership rights. However, any such rights must be consistent with Clean Air Act requirements, including the requirement that SIPs provide for expenditious attainment and maintenance of ambient air quality standards and protect PSD increments and visibility. To be approvable by EPA, such banking rules must also treat banked reductions as current actual emissions " in the air" at the source of their creation, in order to protect the integrity of future air quality planning. Failure to track the ambient effects of such banked reductions ( e. g. by not including them in a new or updated inventory used for SIP planning purposes, or by relying on those reductions to secure attainment redesignations) would ordinarily preclude their use as ERCs, due to double counting. Nevertheless, states have considerable latitude in meeting these requirements, and may guarantee banked ERCs against full or partial reduction in quantity, so long as that guarantee does not undermine attainment redesignations or interfere with progress and attainment should ambient standards change or additional emission reductions be required. The Technical Issues Document, section I. C. 9, outlines ways such guarantees may be made effective consistent with these requirements.

In many states, banking could be an extension of ongoing preconstruction permit activities. The state or its designee could accept and evaluate requests to certify an ERC, maintain a publicly available ERC registry or similar instrument describing the quantity and types of banked credits, and track transfers and withdrawals of ERCs.

Because banked reductions do not increase emissions at any source, they need not be made federally enforceable until used. For administrative or other reasons states may, however, choose to make them federally enforceable upon deposit. How the state makes a reduction federally enforceable for banking will Page 40 51 FR 43814 depend on the type of source at which the reduction occurs. In some states, reductions associated with other modifications at a source can be included in federally enforceable preconstruction permits issued under rules approved pursuant to 40 CFR 51.18, 51.24 or 51.307. States with EPA approved generic rules can use their rules' procedures to make reductions occurring at existing sources federally enforceable. See Section III below. Since these transactions involve only reductions, air quality modeling is generally not required to assure that new emission limits do not interfere with attainment and maintenance of ambient standards, protection of applicable PSD increments, or impairment of visibility in mandatory federal class I areas. Such reductions will automatically meet the generic rule's test of whether a particular limit is within EPA's preapproved array of acceptable emission limits. n23 n 23 Modeling will be necessary when a banked ERC is later evaluated for use in a trade, to the extent modeling is generally required for that particular type of emissions trade.

States without EPA approved generic rules can adopt rules limited to banking transactions, or can use the standard SIP revision process to make reductions federally enforceable at existing sources. General state preconstruction permit or review programs that have received EPA approval may also be used for this purpose, since permits issued through such programs are federally enforceable. See 40 CFR 51.18; 51.24; 51.307. n24 n 24 In primary nonattainment areas which need but lack approved demonstrations, use for bubble purposes of banked credits produced by shutdowns or curtailments will continue to be allowed on the same terms as use of other banked credits, provided their use is subject to stringent qualitative review to assure technical, legal and programmatic consistency with SIP planning goals ( e. g., avoidance of doublecounting or " shifting demand"). However, sources which seek to use banked credits from shutdowns or curtailments for bubble purposes after publication of today's notice must show that a written application was submitted to make the shutdown/ curtailment stateenforceable through or concurrent with use of a formal bank or informal banking mechanism, prior to the time the shutdown/ curtailment occurred. For sources which banked or sought to bank credits from shutdowns or curtailments in these nonattainment areas prior to publication of today's notice, written evidence must be provided showing either that an application to deposit the credits in a formal bank was submitted to the state prior to the time the shutdown/ curtailment occurred, or that the state acknowledged, before or at the time the shutdown/ curtailment occurred, both the existence of that shutdown/ curtailment, and the source's intent to use the resulting credits in a future trade. For additional detail on banking and use of credits resulting from shutdowns or curtailments in these or other areas, see Technical Issues Document, Sections I. A. I. c.( 3) and I. C.

III. State Generic Trading Rules Use of emission reduction credits under state regulations approved by EPA as generic for identified classes of trades will not require individual SIP revisions for those trades. The Technical Issues Document explains acceptable generic procedures which states may adopt to reduce the need for individual SIP revisions.

Emissions trades can be approved without case by case SIP revisions if evaluated by the state under EPA approved procedures which assure that no trade which meets their terms will interfere with timely attainment and maintenance of ambient standards, protection of applicable PSD increments, or visibility provisions. State generic rules are approvable only if their procedures are sufficiently replicable in operation to meet this test. By approving the generic rule, EPA approves in advance an array of SIPcompatible emission limits, and no further case by case Federal review or approval is required for individual trades which meet the terms of the rule.

In order to ensure that generic rules are properly implemented, EPA intends to ( a) examine and comment on, together with any other public commenter, the information which must be provided for individual trades proposed by states under a generic rule, ( b) conduct reviews of individual bubbles Page 41 51 FR 43814 approved under a generic rule, and ( c) periodically audit the general implementation of generic rules, as part of its National Air Audit System reviews of state air programs. n25 n 25 See, e. g., National Air Audit System Guidelines for FY 1984, Office of Air Quality Planning and Standards, EPA 450/ 2 83 007 ( November 1983). State approved generic trades that do not meet the terms of the relevant generic rule do not alter underlying SIP requirements, which remain fully enforceable. Generic rules found to be generally deficient in substance or implementation could ultimately result in notices of SIP deficiency or in rulemaking to rescind EPA's approval of the rule. For more detail on EPA oversight of generic rules, see Technical Issues Document, Section II. E.

Any trade under a generic rule will involve emission increases at some sources and extra emission decreases at others. For trades to be approvable under a generic rule, the sum of these increases and decreases ( beyond applicable net baseline emissions) must be zero or less. Subject to this requirement, states may adopt generic rules which exempt from individual SIP revisions: ( 1) De minimis trades where total increases in emissions from all increasing sources ( which must be balanced by equal or greater emissions decreases from other sources) are less than 25 tons per year ( TPY) of particulates, 40 TPY of SO 2 , 100 TPY of CO, or 0.6 TPY of lead, after applicable control requirements; ( 2) large classes of trades involving VOC or NO X emissions; n26 ( 3) trades between certain types of SO 2 sources, between certain types of CO sources, between certain types of stationary lead sources, or between certain types of particulate sources, for which it can reasonably be assumed that " pound for pound" trades will produce ambient effects equivalent to those which approved air quality models would predict; and ( 4) other SO 2 , CO, Pb or particulate trades which do not increase baseline emissions and for which carefully defined modeling predicts no significant increase in ambient concentrations.

n 26 Where visibility impairment due to elevated NO X emissions is a concern, generic trades involving NO X must ordinarily be subject to ambient requirements similar to those applicable to generic trades involving TSP, SO 2 , CO or Pb.

States and sources should, however, be aware that because of replicability problems inherent in modeling, generic rules which rely on preapproved procedures for modeled demonstrations of ambient equivalence may be difficult to draft or implement, and many trades may not be approvable under such rules. For these reasons generic rules covering only the first three classes of trades above will often prove easiest to secure. EPA encourages states to work closely with EPA Regional Offices to formulate and adopt approvable rules or develop alternative approaches that equally assure attainment and maintenance of ambient standards and protection of PSD increments and visibility. See Section II of the Technical Issues Document, which details criteria under which such generic rules may be approved.

To the extent general state procedures for rulemaking or permit changes do not assure reasonable public notice of proposed and final limits or effective opportunity for comment on proposed trades, states must incorporate such provisions in their generic rules.

In primary nonattainment areas which need but lack approved demonstrations, new generic rules must require, and existing generic rules must, as requested by EPA, be revised to require bubbles to use lowestof actual SIP allowable or RACT allowable emissions baselines, and produce a net air quality benefit ( as described below). New or revised generic rules in these nonattainment areas must be accompanied by certain assurances of consistency with air quality planning goals as well as a commitment to make certain additional assurances when the state approves individual bubbles under the rule. Bubbles approved under existing generic bubble rules before the effective date of this policy will not be affected by these requirements. Because EPA approved state regulations have independent legal force, future bubbles submitted under existing generic rules may also be approved by states in accord with those rules, until such rules are modified to meet the criteria below. n27 n 27 In the interim, EPA expects states to ensure, so far as feasible, that future bubbles approved under existing generic rules are consistent with this policy as well as the terms of their Page 42 51 FR 43814 EPA approved rules. States should be aware that without this or similar precautions, continued approval of bubbles under existing generic rules containing identified deficiencies may create or accentuate plan deficiencies that may have to be corrected at a later date or compensated for by other means. See section II. E. 4. of the Technical Issues Document.

Existing generic rules in these areas must be modified to assure that bubbles produce an overall emission reduction at least equal ( in percentage terms) to the overall emission reduction from controllable sources ( in percentage terms) needed to attain in the area. Criteria for modifying generic rules are set forth in Section II. D. of the Technical Issues Document, including a requirement for a reduction equal to the greater of either the percentage reduction required for attainment, or a 20% reduction in emissions remaining after application of appropriate baselines. New and pending applications for generic bubble rules which meet these criteria will be processed for approval.

EPA will publish Federal Register notices identifying any generic rules applicable to these areas which require formal modification in order to meet the progress requirements above or other requirements of EPA's current Emissions Trading Policy. These notices will identify specific deficiences and means for correcting them, and will specify a schedule for submittal and review or modified rules. Failure to resolve deficiencies identified in these notices within the prescribed time period may result in EPA rescinding its previous approval or issuing a notice of SIP deficiency. n28 n 28 Such notices may also be issued for existing generic rules in attainment areas and nonattainment areas with approved demonstrations, if these generic rules are found to require procedural revision in order to make them consistent with the current Emissions Trading Policy. See Technical Issues Document, section II. E. 4.

EPA recognizes the additional timing burden which may be imposed on bubble applicants in areas where new generic rules cannot be or have not been developed to meet the specific air quality benefit requirements described above, and will attempt, so far as feasible, to ameliorate that burden in implementing this policy. See, e. g., n. 6 and section II B 12. above and related Preamble discussion, at n. 48 and accompanying text.

IV. Bubbles Which Require Case By Case SIP Revisions States and sources must use the case by case SIP revision process to implement bubbles which are not covered by a generic rule. Because the case by case SIP revision process can take account of many more individual variations, numerous trades which could not be accomplished through generic rules or similar means may still be approvable as case by case SIP revisions.

EPA will take action on generic rules and individual trades submitted as SIP revisions as quickly as circumstances permit after a state has adopted a SIP revision and submitted the action to EPA. EPA encourages " parallel processing" of such SIP revisions, with EPA and the state conducting concurrent review so that both agencies can propose and take final action at roughly the same time. EPA will also publish noncontroversial SIP revisions as immediate final actions, converting them to proposals only if requests to submit adverse comments are received within 30 days ( see 46 FR 44477, September 4, 1981). In all bubble actions EPA will clearly identify ( or require states to identify, as appropriate) both pre and post trade actual and allowable emissions for each source involved in the trade, so that the ambient effects of each bubble may be known.

V. Conclusion This Policy Statement sets out basic principles for approving individual trades and generic trading rules. It tightens many requirements in order to better ensure SIP integrity and environmental progress, while offering ample opportunities for use of approvable, environmentally sound trades. EPA encourages states and sources to use these principles as a framework and refer to the accompanying Technical Issues Document for further discussion and examples. EPA also encourages states to develop other approaches which satisfy these principles while meeting their specific needs. Page 43 51 FR 43814 As a policy statement, this notice does not establish conclusively how EPA will resolve issues in individual cases. EPA will accept public comment on specific SIP changes submitted under it, and will review individually each generic rule and those emissions trades submitted as SIP revisions to determine their acceptability under the Clean Air Act. Interested parties will have full opportunity to scrutinize application of these principles in specific cases, and to seek subsequent judicial review of such cases after EPA has taken final action on particular trades or generic rules.

Dated: November 18, 1986.

Lee M. Thomas,

Administrator.

Emissions, Trading: Technical Issues Document Table of Contents I. Elements of Emissions Trading A. Creating Emission Reduction Credits 1. All Reductions Must Be Surplus a. Use of Actual or Allowable Emissions as the Baseline: Attainment Areas and Nonattainment Areas with Approved Demonstrations of Attainment ( including Rural Ozone Nonattainment Areas)

b. Special Progress Requirements for Bubbles in Primary Nonattainment Areas Which Need But Lack Approved Demonstrations of Attainment ( 1) Objective Tests For All Applications ( 2) Where These Special Progress Requirements Will Apply ( 3) State Assurances ( 4) Treatment of Pending Bubble Applications c. No Double Counting of Reductions ( 1) Crediting Pre Existing Emission Reductions ( 2) Crediting Reductions From Shutdowns ( 3) Use of Banked Credits from Shutdowns or Other Actions for Bubble Purposes d. Multiple Use of ERCs e. Reductions from Uninventoried Sources 2. Alternative Emission Limits Must Be Enforceable 3. All Reductions Must Be Permanent 4. All Reductions Must Be Quantifiable a. Calculating the Reduction b. Describing the Reduction B. Using Emission Reduction Credits 1. Substantive Principles for Using ERCs a. Emissions Trades Must Involve the Same Pollutant b. All Uses of ERCs Must Satisfy Ambient Tests Page 44 51 FR 43814 ( 1) De Minimis ( 2) Level I ( 3) Level II ( 4) Level III c. Bubbles Should Not Increase Applicable Net Baseline Emissions d. Bubbles Should Not Increase Emissions of Hazardous or Toxic Air Pollutants e. Existing Source Credits Cannot Be Used to Meet Applicable Technology Based Requirements for New Sources f. Trades Involving Open Dust Emissions g. Interstate Trades h. Trades near PSD Class I Areas i. Effect on Trades of Subsequently Discovered Clean Air Act Problems: Revisitation Considerations 2. Procedural Steps for Using ERCs a. Effect of Existing Compliance Schedules b. Extensions of Compliance Deadlines c. Pending Enforcement Actions C. Banking Emission Reduction Credits 1. Banking Rules Must Designate an Administering Agency 2. Only ERCs May be Banked 3. Possible Limitations on Use of ERCs for New Source Permitting 4. Sources Should Apply to Bank Surplus Reductions As Soon As They Decide to Make Them 5. Procedures for Banking Surplus Emission Reductions Should Be Defined 6. Banking Rules May Establish Ownership Rights 7. Banking Rules Must Establish an ERC Registry or Its Equivalent 8. Possible Adjustments to ERCs Based on Enforcement Considerations 9. Possible Adjustments to ERCs Based on Ambient Attainment Considerations a. ERCs Generated Prior to the Design or Baseline Year Could Be Eliminated b. ERCs Could Be Guaranteed Against Adjustment c. Use or Deposit of ERCs Could Be Temporarily Suspended d. Across the Board Discounting II. Trades Covered by State Generic Rules A. General Principles for Evaluating Generic Rules B. Scope of Generic Rules 1. VOC or NO X , Trades 2. Particulate, SO 3 , CO or Pb Trades 3. Limits on Trades Exempt From SIP Revisions Under Generic Rules Page 45 51 FR 43814 4. Other Generic Mechanisms for Exempting Particulate, SO 2 , CO or Pb Trades From Case by Case SIP Revisions C. Enforcing Emission Limits Under Generic Rules D. Generic Bubble Rules in Primary Nonattainment Areas Which Lack Approved Demonstrations of Attainment E. EPA Oversight of Generic Rules 1. EPA Comment on Trades Proposed Under Generic Rules 2. Reviews of Individual Bubbles Approved Under Generic Rules 3. EPA Audits of the Implementation of Generic Rules 4. Deficient Generic Trades 5. Deficient Generic Rules F. Public Comment G. EPA Notification H. Rulemaking on Generic Rules III. Trades Not Covered by State Generic Rules Appendix A: Regional EPA Emissions Trading Coordinators Appendix B: Definitions of " Actual," " Allowable" and " Baseline" Emissions For Purposes of Emissions Trading Appendix C: Approvable Modeling Approaches Appendix D: Approvable Averaging Times for VOC Trades Appendix E: Radii of Significant Impact for Approving " Complex Terrain" PM, SO 2 and CO Trades Under Level I Modeling Approaches Appendix F: CFR Part 51 Conversion Table EMISSIONS TRADING: TECHNICAL ISSUES DOCUMENT This Document offers more detail on technical issues for firms and pollution control agencies seeking to implement individual emissions trades or generic trading rules that meet the principles in EPA's final Emissions Trading Policy Statement. It describes both the legal requirements for emissions trades under the Clean Air Act, and a range of legal options which states n1 and sources may consider. States and firms may pursue other approaches consistent with those discussed here.

n 1 " States" includes any entity properly delegated authority to administer relevant parts of a State Implementation Plan ( SIP) under the Clean Air Act.

Section I of this Document explains general principles governing all emissions trading. Section II explains principles governing state generic rules. Section III discusses special considerations for emissions trades which must be implemented as case by case SIP revisions.

Because these sections reflect general Clean Air Act principles, states, individual sources or public commenters remain free to show that a general principle does not apply to particular circumstances or can be satisfied using another approach. States, sources and commenters have this option under current law, and nothing in the Policy Statement or this Document restricts their opportunity to make such showings.

Nothing in today's notice alters EPA new source review requirements or exempts owners or operators of stationary sources from compliance with applicable preconstruction permit regulations in accordance Page 46 51 FR 43814 with 40 CFR 51.18, 51.24, 51.307, 52.21, 52.24, 52.27, and 52.28. Interested parties should, however, be aware that bubble trades are not subject to preconstruction review or regulations where these trades do not involve construction, reconstruction or modification of a source within the meaning of those terms in the regulations listed above.

I. Elements Of Emissions Trading The basic elements of any emissions trade are the creation of an emission reduction credit ( ERC), its use in a trade and its possible storage in a bank prior to use.

A. Creating Emission Reduction Credits States may grant credit only for those emission reductions that are surplus, enforceable, permanent, and quantifiable. Otherwise use of ERCs might degrade air quality, threaten the viability of the area's SIP, and make more stringent control requirements necessary.

1. All Reductions Must Be Surplus At minimum, only emission reductions not required by current regulations in the SIP, not already relied on for SIP planning purposes, and not used by the source to meet any other regulatory requirement can be considered surplus and substituted for required reductions as part of an emissions trade.

The first step in qualifying a reduction as " surplus" is to establish a level of baseline emissions. This baseline represents the level of required emissions beyond which reductions must occur for a source to be eligible for credit. Three baseline factors  emission rate, capacity utilization, and hours of operation  must be used to compute and compare pre trade and post trade emission levels. n2 n 2 For further discussion of these factors as they relate to the calculation of baseline emissions, see Appendix B.

The baseline for each source must be established both on an annual basis and for all other averaging periods consistent with the relevant NAAQS and PSD increments. This approach is necessary to protect the ambient standards and PSD increments on a short term as well as an annual basis. The baseline will generally be determined by the attainment status of the area, n3 by the way the state developed its SIP, and by whether the area is subject to PSD requirements.

n 3 Unclassified areas are treated as attainment areas for permitting and emissions trading purposes.

Unlike other criteria pollutants, EPA does not designate nonattainment areas for lead. However, the Regional Administrator will review lead trades, as all other trades, to assure that they do not interfere with attainment and maintenance of the NAAQS.

a. Use of Actual or Allowable Emissions as the Baseline: Attainment Areas and Nonattainment Areas With Approved Demonstrations of Attainment ( including rural ozone nonattainment areas). In attainment areas, baseline emissions must generally be calculated using the lower of actual or allowable values n4 for all three baseline factors. However, allowable values corresponding to one or more of these factors, when higher than corresponding actual values, may be used in calculating baseline emissions, provided those values are shown to be used or reflected in an approved demonstration. n5 The burden of meeting this test rests with the state or applicant. Where the State or applicant cannot show by written evidence n6 that the demonstration assumed an allowable value for a given baseline factor, appropriate modeling would be required in order to use an allowable value for that factor in calculating baseline emissions for the source. n7 This will require a Level II modeling analysis as specified in the modeling screen described below, using actual emissions for the pre trade case, unless the appropriate EPA Regional Office (" the Region") determines that additional technical support is necessary to protect the NAAQS, PSD increments or visibility. Additional technical support may be necessary because crediting the difference between actual Page 47 51 FR 43814 and allowable values for even one of these factors may produce a post trade increase in actual emissions sufficient to jeopardize applicable standards, increments or visibility.

n 4 For the definition of " actual" and " allowable" values, and further discussion on calculation of baseline emissions, see Appendix B.

n 5 This statement does not apply to netting, where " contemporaneous" actual emissions are always the baseline. See, e. g., 40 CFR 51.24( b)( 3).

Bubbles in areas with demonstrations based solely on qualitative judgements ( e. g., the " example region" approach or no technical support) ordinarily may not rely, without appropriate modeling, on allowable values in calculating baseline emissions. However, bubbles in areas with demonstrations based on rollbacks or dispersion modeling may use allowable values that are reflected in the demonstration.

n 6 For example, the demonstration calculations themselves, accompanying materials, or affidavits from those who constructed the demonstration.

n 7 In certain circumstances an allowable baseline value specified in a preconstruction permit will be deemed equivalent to one used or reflected in an approved demonstration. For example, a source in an attainment area where a PSD baseline has been triggered may use allowable values consistent with its preconstruction permit, if that source's emissions are not reflected in the PSD ambient baseline concentration. ( However, if modeling using allowable emissions predicts a PSD increment violation, then additional analyses must be done to assure that the PSD increment is protected.) A source in a nonattainment area may use allowable values consistent with its preconstruction permit to calculate its baseline, provided that permit post dates the nonattainment designation, SIP call, design year, or baeline inventory year, whichever is applicable.

Additional technical support is not necessarily limited to determining the impact of the increases from the trade. The Region may require such additional technical support, up to and including full Level III modeling, as is necessary to assure that applicable NAAQS, PSD increments and visibility requirements will be protected. It may require the determination of background concentrations to which the impacts of possible emissions increases that would otherwise fall below Level II significance values must be added. Background concentrations should be determined in a manner consistent with EPA's Guidelines on Air Quality Models.

In attainment areas where the PSD baseline has been triggered, the trading baseline for a source must generally be computed using actual values for all three baseline factors ( i. e., only reductions below a source's actual emissions can be considered surplus). Because 40 CFR 51.24 and 52.21 specify that increses in actual emissions occurring after the PSD baseline date consume PSD increment, any trades based on allowable emissions which would potentially crease actual emissions must perform at least a Level II modeling analysis using actual emissions for the pre trade case, and provide additional technical support if deemed necessary by the Region, to demonstrate that they protect the relevant increment ceiling, NAAQS, and visibility.

In nonattainment areas with approved demonstrations, baseline emissions for a source may be calculated using either allowable values or actual values for the three baseline factors, depending on the assumptions used in developing the area's demonstration. n8 n 8 This statement does not apply to netting, where " contemporaneous" actual emissions are always the baseline. See, e. g., 40 CFR 51.18( j)( 1)( vi). See also Appendix B for detailed discussion of " actual" and " allowable" emissions.

Some states relied on allowable values for certain sources in developing their SO 2 and TSP attainment plans. In these nonattainment areas, sources may use allowable values in calculating baseline emissions, to the extent the state used or assumed those allowable values as the basis for its demonstration. The burden of showing that an allowable value was used or reflected in an approved demonstration rests with the state or applicant which seeks to use an allowable value. n9 Page 48 51 FR 43814 n 9 See n. 6 and 7 above.

Other nonattainment areas either used inventories based on actual emissions, or relied on measured ( and therefore " actual") ambient air quality values, as the primary basis for determining SIP emission limits needed to demonstrate attainment. In some areas, SIP demonstrations were based merely on qualitative judgments ( e. g., " example region" approaches). Baseline emissions for sources in all these other areas must generally be calculated using the lower of actual or allowable values for each baseline factor. However, states may approve, on a case by case basis, use of allowable values in calculating baseline emissions, where they explicitly demonstrate that such use comports with reasonable further progress and will neither create a new ambient violation nor delay the planned removal of an existing violation. Such demonstrations require full Level III modeling and must be submitted to EPA as case by case SIP revisions.

EPA deems designated Rural Ozone Nonattainment Areas to possess acceptable demonstrations of attainment provided they have an approved new source review rule and require RACT controls for all major VOC sources for which EPA has issued Control Technique Guidance ( CTG) documents. ( See, e. g., 43 FR 21673 ( May 19, 1978)). Because these areas' nonattainment is generally caused by emissions from sources in a nearby urban area, control of emissions from that area is expected to bring the rural area into attainment. Put differently, EPA does not require rural areas to cure problems due to transport from pollution generating areas which rural areas cannot control. However, EPA believes that further clarifications are required for bubbles in these areas.

Sources involved in such bubbles must use RACT emission limits in calculating baseline emissions, if subject to Group I or II CTGs under the EPA approved SIP for these areas. Sources subject to other SIP emission limits must use those limits in calculating baseline emissions. Other baseline factors must also be consistent with the applicable SIP requirements, and will generally be actual historical values. Where a source is not regulated by the EPA approved SIP its baseline will be actual emissions in the year EPA approved the Part D plan for the affected rural area. In those approvals, EPA presumed that controls for sources in the upwind urban areas, as well as RACT on GTC sources in the rural area, would bring about attainment in the rural area, and that non CTG sources in the area, unless regulated by the SIP, could continue to emit at actual, non RACT levels without interfering with attainment in those areas. See also 43 FR 21673 ( May 19, 1978).

b. Special Progress Requirements for Bubbles In Primary Nonattainment Areas Which Need But Lack Approved Demonstrations of Attainment. EPA will approve bubbles which are consistent with the attainment needs of these areas, which produce a net air quality benefit, and which therefore secure interim progress towards attainment. 1 n0 n 10 While not all of today's new requirements for bubbles in these areas are strictly " baseline" matters, all basic requirements for these bubbles are set out here for simplicity. New requirements also apply to generic bubble rules in these areas. See Section II. D below.

( 1) Objective Tests For All Applications. Bubble applications in primary nonattainment areas which require but lack approved demonstrations of attainment will be deemed to produce a net air quality benefit and will be processed for approval if they:

( a) Use lowest of actual SIP allowable or RACT allowable emissions baselines. Such baselines are calculated using either:

( i) The actual emission rate, the SIP or other federally enforceable emission limit, or the applicable RACT emission limit, 1 n1 whichever is lower, to compute the baseline for each source involved in the trade. This baseline factor shall be determined as of the date of the source's application to bank or trade, whichever is earlier.

n 1 1 Where an emission limit for a source involved in the trade has not previously been approved by EPA as RACT, a baseline reflecting a negotiated RACT emission rate must be agreed upon by the source, state and EPA for the source in question. Page 49 51 FR 43814 ( ii) The lower of actual or allowable capacity utilization and hours of operation to compute the baseline for each source involved in the trade. Actual values shall generally be based on the two years of operation preceding the application to bank or trade, unless another two year period is shown to be more representative of actual operations. Sources which shut down prior to the application to bank or trade have zero emissions, and therefore no credit is available.

For sources which banked or sought to bank credit in these nonattainment areas prior to publication of today's notice, the " date of application to bank" is the date of written application to the states to bank credit through a formal bank or informal banking mechanism for use in future trades. For sources which seek to bank credit in these areas following publication of today's notice, the date of application to bank will be the date of written application to the state to make a reduction state enforceable through or concurrent with use of a formal bank or informal banking mechanism.

( b) Using baseline emissions defined above, meet applicable de minimis, Level I, Level II or Level III modeling tests for ambient equivalence, as appropriate.

( c) Produce a substantial net reduction in actual emissions ( i. e., a reduction of at least 20% in the emissions remaining after application of the baselines specified above).

( d) Are accompanied by the assurances of consistency with ambient progress and air quality planning goals specified in section I. A. 1. b.( 3) below.

( 2) Where These Special Progress Requirements Will Apply. The following primary nonattainment areas need but lack approved demonstrations, and bubbles within them are therefore subject to the special progress requirements in section I. A. 1. b.( 1) above:

( a) Areas that are designated primary non attainment areas under section 107 for the pollutant involved in the trade and which failed to submit a 1979 Part D attainment demonstration or which submitted one that has not yet received full EPA approval. This includes primary total suspended particulate ( TSP) nonattainment areas which submitted a SIP that did not include an actual demonstration of attainment but still received EPA approval ( i. e., a " RACT plus studies" SIP).

( b) Extension nonattainment areas which failed to submit a 1982 SIP demonstration, or which submitted one that has not yet received EPA approval. Also included are those ozone nonattainment areas that are unable to demonstrate attainment by 1987, unless a demonstration of attainment for the area is subsequently approved by EPA.

( c) Areas that have received either: ( 1) A section 110( a)( 2)( H) notice of deficiency based on failure to attain or maintain the National Ambient Air Quality Standards ( NAAQS), in the form of a SIP call or a new section 107 or 171( 2) nonattainment designation; or ( 2) a notice of failure to implement an approved SIP.

( d) Areas which received notice from EPA that they have failed to meet conditions in their EPAapproved SIPs, including commitments to adopt particular regulations by specified dates. The one exception would occur where the only portion of the SIP ( including the attainment demonstration) lacking full approval is the inspection/ maintenance provision for mobile sources. In these circumstances, stationary source bubbles will be treated as if the area had a fully approved SIP.

( e) Any area that does not have an EPA approved or EPA promulgated plan for lead.

( 3) State Assurances. EPA will not approve a bubble in primary nonattainment areas needing but lacking approved demonstrations unless the state provides assurances that the proposed trade will be consistent with its efforts to attain the ambient standard. The state must make the following representations to the EPA Regional Office in or with the letter formally submitting the bubble as a revision to the SIP:

( a) The resulting emission limits are consistent with EPA requirements for ambient air quality progress, as specified in Section I. A. l. b.( 1) above.

( b) The bubble emission limits will be included in any new SIP and associated control strategy demonstration.

( c) The bubble will not constrain the state or local agency's ability to obtain any additional emission reductions needed to expeditiously attain and maintain ambient air quality standards. Page 50 51 FR 43814 ( d) The state or local agency is making reasonable efforts to develop a complete approvable SIP and intends to adhere to the schedule for such development ( including dates for completion of emissions inventory and subsequent increments of progress) stated in or with the letter formally submitting the bubble or previous such letters.

( e) The baseline used to calculate the bubble emission limits is consistent with the baseline requirements in section I. A. l. b.( 1) above.

These state assurances must be made in writing by the appropriate state or local authority ( e. q., State Air Director, Air Pollution Control Board, or Legislative Committee). EPA will not second guess such state representations, provided: ( 1) They are a substantial test applied by the state to each bubble, and ( 2) the state has explained how the proposed bubble is consistent with the area's projected attainment strategy. Nor will EPA examine, or expect states to examine in making such representations, any specific source's subjective motivation in making claimed reductions.

( 4) Treatment of Pending Bubble Applications. " Pending bubbles" means those which are currently pending at EPA Regions or Headquarters, as well as any bubble applications which were formally submitted to EPA Regions under the 1982 policy but returned without action because final bubble criteria had not yet been issued. In primary nonattainment areas needing but lacking demonstrations, these bubbles should contribute to progress towards attainment. " Progress towards attainment" means some extra reduction beyond equivalence, with the lowest of actual SIP allowable or RACT allowable emissions baseline applied as of the time applicants originally sought credit. In other areas these bubbles must show that applicable standards, increments, and visibility requirements will not be jeopardized. Pending bubbles which meet these tests and all other applicable requirements of the 1982 policy will be processed for approval.

Pending bubbles may undergo limited modification by the states or sources which submitted them in order to meet the new requirements outlined above ( e. g., it may be necessary to recalculate the applicable baseline emissions of certain bubbles in nonattainment areas needing but lacking demonstrations and to reconfigure those bubbles in response to the reduced credit which may be allowed under the new more stringent requirements). However, pending bubbles which prior to final EPA approval are changed to the extent that they no longer reasonably resemble the original proposal qualifying for pending bubble status ( e. g., those which are substantially expanded in scope or changed to involve primarily different sources of emission reduction credit) will be considered new bubbles subject to all of the requirements of today's notice.

Bubble applications which were submitted to EPA Regions by states, but which were withdrawn ( or rejected) as inadequate under the 1982 policy, are not " pending." These bubbles, if reformulated and resubmitted, must meet all requirements of today's notice applicable to new bubble applications.

( c.) No Double Counting of Reductions. At minimum, to be considered surplus an emission reduction cannot already have been claimed as part of a demonstration or updated emission inventory by any state air quality plan or have been used by the source to meet any other regulatory requirement. Double counting of reductions  granting credit for the same emission reduction, e. g., once to the state as part of its nonattainment SIP demonstration or PSD baseline, and a second time to a source for use in an emissions trade, must be addressed in the following situations.

( 1) Crediting Pre Existing Emission Reductions. In nonattainment areas credit generally cannot be granted for emission reductions made before monitoring data is or was collected for use in current SIP planning. Because monitored ambient levels already reflect these emission decreases, such decreases may have been assumed in calculating the further reductions needed to attain ambient standards. States must clearly show that the existence of these reductions has been accounted for in their calculations in order to gain credit for these reductions.

States should also clearly identify the inventory baseline date before which reductions will not qualify for credit. The earliest acceptable baseline date would normally be the year of the most recent emissions inventory used in planning Part D SIP revisions under the Clean Air Act Amendments of 1977. n12 Where emissions inventories or other data are updated for tracking RFP and correction of Part D SIPs, the new inventories must treat banked emissions reductions as current actual emissions " in the air" at the source where created, so that corrected SIPs do not inadvertently rely on these prior reductions and cause them to Page 51 51 FR 43814 be lost for use. If inventories do not treat these banked emissions as " in the air," or if they are otherwise relied upon for SIP planning purposes, such reductions can no longer be credited for trading. n13 n 12 For baselines and base year dates in rural ozone nonattainment areas, see section I. A. l. a. above.

n 13 In order to help avoid such results, states may wish to make sources responsible to report banked emission reductions when responding to the states' inventory reporting requirements.

In primary nonattainment areas which need but lack approved demonstrations of attainment, emission reductions achieved prior to application to bank or trade ( whichever is earlier) will not be credited for use in bubbles. See section I. A. 1. b.( 1) above. Regardless of whether they meet other baseline tests, such reductions were not reasonably elicited by the opportunity to trade in a practical, objective sense determined by timing, and cannot be used to meet existing source SIP requirements absent a demonstration. n14 n 1 4 In all nonattainment areas, emission reductions achieved by shutting down or permanently curtailing an existing source prior to application for a new source permit cannot generally be used as offsets. See 40 CFR 51.18( j)( 3)( ii)( c). EPA proposed on August 25, 1983 to remove this restriction. See 48 FR 38742, 38751. However, it remains in effect unless and until EPA takes final action on that proposal.

In attainment areas, reductions at major stationary sources which commenced construction after January 1, 1975 may be able to qualify for credit whether such reductions occurred before or after the PSD baseline triggering date. See 40 CFR 51.24( b)( 13)( ii) ( 45 FR 52719 20; August 7, 1980). Other emission reductions ( e. g., at minor sources) cannot qualify for credit where the PSD baseline date is or has been triggered and such reductions occurred prior to the trigger date, unless these reductions are not assumed in the PSD baselines. Since banked emission reduction credits must be considered to be " in the air" for all planning purposes, if the baseline date is triggered before banked credits are actually used, such banked credits will be considered as part of the baseline and will not consume increment when used in an emissions trade.

In attainment areas where the PSD baseline has not been triggered as of the date EPA or the permitting authority takes relevant final action on the trading transaction, reductions below current SIP or permit limits generally may be used without special restrictions in bubble or banking transactions, provided they are otherwise creditable and there is assurance that NAAOS will not be violated due to any potential increase in actual emissions. 1 n5 n 1 5 However, reductions at sources other than major stationary sources on which construction commenced before January 1, 1975 may not be used to balance increases at such pre 1975 major sources.

( 2) Crediting Reductions From Shutdowns. Shutdowns are generally treated for purposes of emissions trading like any other type of emissions reduction. 1 n6 For example, the same limitations on pre existing reductions ( section I. A. 1. c.( 1), above) apply to shutdowns where they apply to any other type of emissions reduction. However, under current federal New Source Review requirements for major sources, shutdowns that occur prior to application for a new source permit can be used as offsets only for equipment replacing on site productive capacity which was shut down. 1 n7 n 1 6 For use of banked shutdown credits for bubbles in primary nonattainment areas needing but lacking approved demonstrations, see section I. A. 1. c( 3) below.

n 1 7 See n. 14 above. Page 52 51 FR 43814 Shutdowns are of general concern with respect to double counting where a state may have relied directly or indirectly on shutdowns in a SIP demonstration of attainment. ( Where a primary nonattainment area needs but lacks an approved demonstration of attainment, the progress requirements of subsection I. A. 1. b. above apply to bubbles involving shutdowns as well as to bubbles involving other types of emission reductions. These requirements generally bar use of reductions from shutdowns which occurred before application to bank or trade.)

In general, a state may credit reductions from shutdowns if the SIP has not already assumed credit for these reductions in its attainment strategy. So long as reductions from shutdowns have not already been counted in developing an area's attainment strategy, they are a potential source of surplus reductions.

Some SIPs assumed a set quantity of reductions from the overall difference in emissions due to new plant openings and existing plant shutdowns. These SIPs incorporated into their attainment strategy a net " turnover" reduction in emissions because new sources are generally cleaner than those that shut down. Double counting would occur if a specific source received credit for reductions from such a shutdown, since that reduction was already assumed in the SIP's demonstration of attainment.

These states have at least two options for granting sources credit for shutdowns without this kind of double counting. First, they may reexamine any " turnover" reductions relied on in their SIP and decide not to take credit for these reductions. This approach would require EPA approval of a revised demonstration of attainment or a SIP revision showing consistency with the existing demonstration. Such an action can be processed by EPA concurrently with a bubble or generic rule. Alternatively, these states may allow credit only after the total quantity of shutdown reductions relied on in the SIP has occurred.

In all cases where net turnover reductions have been quantified and relied on as part of attainment demonstrations, states which seek to grant shutdown credit for use in trading must be prepared to show clearly and unequivocally on the basis of SIP documents or tracking that the credit has not been doublecounted or otherwise relied on for SIP planning purposes.

( 3) Use of Banked Credits From Shutdowns or Other Actions for Bubble Purposes. 1 n8 In primary nonattainment areas which need but lack approved demonstrations, ERCs intended for bubble purposes may generally be banked and used with the same lowest of actual SIP allowable or RACT allowable baseline used for other bubble transactions. 1 n9 This baseline should be applied as of the time banked credit is or was initially sought, with the 20% reduction applied to both sources in the trade if these credits are later used for bubbles. The lowest of actual SIP allowable or RACT allowable baseline plus the 20% discount will also apply to the source using that credit in a bubble, as of the time of such subsequent bubble application.

n 1 8 ERCs used for netting and offset purposes ( including those derived from banks) must comply with relevant NSR and PSD requirements.

n 1 9 For further discussion related to the use of banked credits in these nonattainment areas, see section I. C. 9. below.

Banked credits produced by shutdowns and curtailments may be used for bubbles in these areas on the same terms as use of other banked credits, provided their use is subject to stringent qualitative review to assure technical, legal, and programmatic consistency with SIP planning goals ( e. g., avoidance of doublecounting and " shifting demand"). This review will not examine any source's motivation in shutting down a facility or curtailing production. However, the source must show that a written application was submitted to make the shutdown/ curtailment state enforceable through or concurrent with use of a formal bank or informal banking mechanism, prior to the time the shutdown/ curtailment occurred. Submittal of such an application to make proposed reductions from a shutdown or curtailment state enforceable will constitute the relevant definition of " application to bank" for timing purposes related to the evaluation of bubble credits in these nonattainment areas ( see section I. A. 1. b( 1) above). 2 n0 The shutdown/ curtailment must be made federally enforcement when it is used in a bubble. Page 53 51 FR 43814 n 2 0 For sources which banked or sought to bank credits from shutdowns or curtailments in these nonattainment areas prior to publication of today's notice, written evidence must be provided showing either that an application to deposit the credits in a formal bank was submitted to the state prior to the time the shutdown/ curtailment occurred, or that the state acknowledged, before or at the time the shutdown/ curtailment occurred, both the existence of that shutdown/ curtailment, and the source's intent to use the resulting credits in a future trade.

Use for bubble purposes of nonbanked credits resulting from current shutdowns or curtailments will be allowed in these areas if the lowest of actual SIP allowable or RACT allowable baseline plus the 20% additional reduction are applied to determine the amount of credit.

No special baseline or additional reduction requirements will apply to these credits in other areas.

d. Multiple Use of ERCs. Once surplus reductions are credited, states must prohibit their multiple use. The same pound of reduction must not be simultaneously banked by two different entities or used to satisfy two different regulatory requirements at the same time. To prevent these results, states must adopt an ERC registry or equivalent means of accounting for the creation, banking, transfer, or use of ERCs. See Section I. C. 6 below. States must also ensure that past reductions used in bubble, netting or offset transactions are not later credited in newly established banks.

e. Reductions from Uninventoried Sources. Sources not included in an area's SIP emission inventory may apply for emission reduction credit. Such applications may enhance state air quality planning capabilities. Where such sources are already subject to SIP emission limits, those emission limits must be used as the basis for determining emission reduction credit, unless a more stringent baseline would normally be required ( see sections I. A. 1. a. and I. A. 1. b. above). 2 n1 n 2 1 Where a given source was not subject to mandatory RACT regulation due to the fact that it was not included in the inventory ( e. g., where no RACT regulation for a source category was adopted because the state, unaware of the source, issued a declaration that no source existed in that source category, or where an uninventoried, non CTG source of greater than 100 TPY emissions is located in an ozone extension area), a baseline reflecting a negotiated RACT emission rate must be agreed upon between the source, the state and EPA for the uninventoried source in question.

In attainment areas states may grant bubble credit to sources regardless of whether they have been included in an inventory, based on use of actual values for each of the three baseline factors, so long as those sources are not subject to lower allowable values for those factors. Allowable values, when higher than actual values, may alternatively be used in calculating the baseline, provided sources show that any resulting potential increase in actual emissions does not jeopardize applicable ambient standards, PSD increments, or visibility. ( See 40 CFR 51.24 and 52.21 for specific requirements concerning PSD increments and visibility.)

In nonattainment areas with approved demonstrations of attainment, whether sources not on the inventory can create bubble credit will turn on how the approved demonstration of attainment was designed. Some states first monitored ambient values to determine required reductions for the SIP, then required a proportionate reduction in emissions from certain general source categories ( i. e., a " rollback") in order to attain. States may grant credit for reductions from uninventoried sources in these areas in at least two ways.

( 1) They could require the average of percentage reductions imposed on all inventoried sources, and grant credit only for reductions in excess of that amount. In this case, baseline emissions should be based on the percentage reduction in actual emissions for the year in which the baseline data for the rollback was gathered. Where such sources are already subject to lower SIP emisssion limits, those limits must be used to determine credit.

( 2) They could require the source to use a RACT emission rate and the lower of actual or allowable capacity utilization and hours of operation to calculate the baseline, and grant credit only for reductions below that baseline. This RACT baseline would have to result in a reduction at least as great as the percentage reduction assumed in the rollback. As discussed above, where sources are already subject to lower SIP emission limits, those limits must be used as the basis for determining credit. Page 54 51 FR 43814 Other areas developed SIP demonstrations based on dispersion models rather than area wide proportionate reductions. To the extent these SIPs demonstrated ambient attainment through reductions required from specific inventoried sources, incorporated emissions from uninventoried sources in the background or area source totals, and projected attainment by modeling the effects of those reductions, reductions from sources not on the inventory can be credited using the lower of actual or allowable values for each of the baseline factors.

In primary nonattainment areas which need but lack an approved demonstration of attainment, the progress requirements of Section I. A. 1. b. above apply to bubbles which seek to use credit from uninventoried sources. These include a lowest of actual SIP allowable or RACT allowable emissions baseline. Where a RACT emission limit has not already been adopted for an uninventoried source, such a limit must be agreed upon between the source, the state and EPA before the baseline can be determined.

States which grant credit from uninventoried sources not subject to permits, offset requirements, or enforceable production constraints should address the possibility that reductions from one such source may be followed by equal or greater increases from similar nearby sources due to shifting demand. These states must clearly demonstrate that ERCs from the uninventoried source are surplus and permanent. Interested parties should be aware that some uninventoried sources may not readily meet these tests. For example, reductions resulting from shutdown of a dry cleaner will generally not be creditable, unless the state subjects such sources to offset requirements or other measures addressing this problem. However, reductions due to improved control at such a dry cleaner would generally be creditable, since shifting demand is not implicated.

Baselines for Open Dust Trades. Fugitive dust regulations generally consist of generic work practices and operating procedures. The specifics of a fugitive dust program are generally contained in an operating permit or fugitive dust program. It is generally not possible to identify the appropriate emissions baseline from a general state open dust regulation. Therefore, for any open dust trade a negotiated RACT baseline must generally be agreed upon between the source, state and USEPA for the open dust source in question.

2. Alternative Emission Limits Must Be Enforceable Each bubble, netting, offset or banking transaction must be approved by the state and must be federally enforceable at the time an ERC is used. Reviewing authorities may be able to use existing procedures ( including preconstruction permits issued by states pursuant to 40 CFR 51.18, 51.24, 51.307 or 52.21) or EPA approved generic rules to make reductions federally enforceable. The former possibility exists because permits issued under a federally approved new source review program are federally enforceable. However, many preconstruction permit programs have been federally approved strictly for sources subject to NSR, and therefore may not be capable of use for transactions that do not trigger NSR requirements, or that involve sources not already subject to preconstruction permits.

With respect to the latter possibility, any enforceable compliance instrument imposing emission limits within the scope of an EPA approved generic rule is deemed federally enforceable as part of the SIP.

Emission limits established by a trade must be incorporated in a compliance instrument which is legally binding and practicably enforceable by EPA.

Trades involving individual SIP revisions automatically satisfy this requirement. For trades under generic rules a compliance instrument culd take the form of an agreement between the source and state, a preconstruction permit ( if one is applicable), a consent decree, a state operating permit, or any other compliance instrument judicially enforceable by the state. To assure state enforceability, the generic rule should state that sources subject to these instruments are required to meet the emission limits contained therein. Such instruments would then automatically become federally enforceable via an EPA approved generic rule, provided they are issued as, or part of, the compliance instrument specifically required by the generic rule.

Compliance instruments must ensure that enforcement personnel do not have to test simultaneously every emission source involved in a trade. This generally requires source specific emission limits. However, states may use pre specified combinations of source specific emission limits which are enforceable. States may also use an overall limit that applies to a group of emission sources which can be evaluated simultaneously, where there is a reliable and enforceable method of determining compliance ( e. g., through Page 55 51 FR 43814 production records, input factors, or other indirect means, or through use of a continuous emissions monitor.) See, e. g., 45 FR 80824, December 8, 1980.

The compliance instrument should also specify applicable restrictions on hours of operation, production rates or input rates; enforceable test methods for determining compliance; and necessary recordkeeping or reporting requirements. To be enforceable, these limits must state the minimum time period over which they will be averaged ( e. g., lbs/ hour, lbs/ MBtu averaged over 24 hours, production rate/ day). n22 Unless such enforceable restrictions are or have been placed on capacity utilization and hours of operation, or on overall emissions, maximum values for capacity utilization and hours of operation must generally be used in calculating post trade emission limits and in ambient modeling of the post trade case.

n 22 Many state permits or permit procedures may need revisions to assure that they provide adequate compliance information. However, such revisions need only occur on a case by case basis as individual trades are approved.

3. All Reductions Must Be Permanent All emission increases in a trade must be compensated by emission reductions that are permanent ( i. e., assured for the life of the corresponding increase, whether unlimited or limitied in duration). n23 This requirement may generally be met by enforceable permit limitations confirming the amount and duration of the decrease. If reductions with a limited life are used, the life of the trade must be limited accordingly, so that the trade will automatically terminate with expiration of those reductions. The date of termination may be specified in the notice of approval. Alternatively, source( s) may agree to provide formal written notification to EPA and the state before such reductions may be discontinued and the trade terminated.

n 23 Permits or other compliance instruments for limited duration trades must clearly state such limits.

Permanence may present special but resolvable " shifting demand" problems for reductions from small sources not subject to permits, offset requirements, or enforceable production constraints. States which grant credit from these source categories must address the possibility that reductions from one source may result in equal or greater increases from similar nearby sources. n24 n 24 States can address such potentially " shifting demand" among such sources as dry cleaners, paint shops and gas stations by, for example ( 1) prohibiting creation of ERCs due to shutdown or curtailment of such small sources; ( 2) limiting ERCs from small sources to categories determined not to be subject to shifting demand; or ( 3) requiring offsets for increases in emissions from such small sources. Cf. section I. A. 1. e. above.

In order to use, in a bubble trade, emission reduction credits derived from reductions in operations beyond those consistent with the baseline ( e. g., a reduction from 3 to 2 workshifts), a source must have its preconstruction permit or other federally enforceable compliance instrument altered to reflect the curtailment in production records reflecting such curtailment ( see section I. A. 2 above). n25 Future increases in production beyond the permit amount may trigger new source review or require approval of a new emissions trading application which includes compensating emission reductions. As with other types of noncompliance, any source which exceeds permitted production limits would be subject to potential noncompliance penalties.

n 25 Under EPA's NSR regulations, prior curtailments are subject to the same restrictions for offset purposes as prior shutdowns. See n. 14 above.

4. All Reductions Must be Quantifiable Page 56 51 FR 43814 Before an emission reduction can be credited it must be quantified. This generally means the state must establish a reliable basis for calculating the amount and rate of the reduction and describing its characteristics.

a. Calculating the Reduction. To quantify the amount of emission reductions eligible as ERCs, emissions must be calculated both before and after the reduction ( i. e., assuming the post reduction limits). Although many different methods of calculation are available ( e. g., emission factors, stack tests, monitored values, production or process inputs), the same method and averaging time should generally be used to quantify emissions both before and after the reduction. n26 n 26 In general, states may not approve VOC trades in ozone nonattainment areas where such trades would incorporate averaging times longer than one day. However, where VOC sources show that daily VOC emissions cannot be determined or application of RACT is not technically or economically feasible on a daily basis, longer averaging times may be permitted. See Appendix D.

b. Describing the Reduction. If an ERC will be used at the time of creation, only characteristics necessary to evaluate that proposed use need be described. Where the ERC will be banked and its eventual use is not yet known, a more detailed description should be provided in order to facilitate its later evaluation for a particular use.

B. Using Emission Reduction Credits This section explains the substantive and procedural principles applicable to use of ERCs, primarily for existing source bubbles. Many of these principles also apply to use of ERCs in netting or offset transactions. However, those transactions are governed by EPA's New Source Review regulations ( 40 CFR Parts 51 and 52) or state rules reflecting them.

1. Substantive Principles for Using ERCs a. Emissions Trades Must Involve the Same Pollutant. The Clean Air Act requires states to develop separate plans to attain and maintain the national ambient air quality standard for each criteria pollutant. Thus, all individual bubble, netting or offset transactions must involve the same pollutant. Only reductions of particulates can substitute for increases of particulates, reductions of SO 2 for increases in SO 2 , etc.

b. All Uses of ERCs Must Satisfy Ambient Tests. Because the Clean Air Act requires that all areas throughout the country attain and maintain ambient standards, protect applicable PSD increments, and protect visibility in mandatory Federal Class I ( PSD) areas, bubbles must generally be equivalent in ambient effects to the baseline emission levels which they replace. n27 In nonattainment areas, use of ERCs cannot create a new violation of an ambient standard or delay the planned removal of an existing violation. In attainment areas, use of ERCs cannot violate an increment or ambient standard. Use of ERCs in either type or area cannot adversely affect visibility in any mandatory Federal Class I area.

n 27 In primary nonattainment areas needing but lacking an approved demonstration of attainment, bubbles must achieve a net air quality benefit. See Section I. A. 1. b. above.

The ambient effect of a trade generally depends on the dispersion characteristics of the pollutant involved.

VOC or NO X Trades. Trades involving VOC or NO X need consider only emissions. Since the ambient impact of these pollutants is areawide rather than localized, one pound of increased emissions will be balanced in ambient effect by one pound of decreased emissions within the same broad geographic area, and the precise location of those increases and decreases ordinarily does not matter. For VOC and NO X such " pound for pound" trades may therefore be treated as equal in ambient effect where all sources involved in the trade are located in the same control strategy demonstration area or the state otherwise shows such source to be sufficiently close that a " pound for pound" trade can be justified. n28 Page 57 51 FR 43814 n 28 The discussion in this paragraph does not apply to NO X trades involving visibility impacts of elevated plumes.

Particulate Matter, SO 2 , CO or Lead Trades. Ambient considerations are critical for trades involving emissions of sulfur dioxide, particulates, carbon monoxide, or lead, whose air quality impacts may vary with where the emission increases and decreases occur. For example, one hundred pounds of ERCs for such a pollutant created at one source may balance the ambient impact of a 100 pound increase at a source nearby, but may only balance the effect of an 80 pound increase at a source further away. In addition to distance between sources, plume parameters, pollutant characteristics, meteorology, and topography will also affect the ambient impact of such trades. n29 n 29 The ambient equivalence considerations elaborated in this and following paragraphs also apply to NO X trades involving visibility impacts of elevated plumes. See n. 28 above.

This Document authorizes the use of four alternative methods of determining ambient equivalence, with the degree of required modeling linked to the likely ambient impact of the proposed trade. The following sections describe use of these alternatives to evaluate for approval many bubble or offset trades without full scale ambient dispersion modeling. n30 Use of these alternatives under generic rules is discussed in section II below.

n 30 Modeling is generally not required for new source netting, whose purpose is to avoid expending resources where adverse emission or ambient impacts from changes at a source are extremely unlikely. See, e. g., 45 FR 52677 78 ( August 7, 1980).

( 1) De Minimis. In general no modeling is needed to determine the ambient equivalence of trades in which applicable net baseline emissions do not increase n31 and in which the sum of the emissions increases, looking only at the increasing sources, totals less than 25 tons per year ( TPY) for particulate matter, 40 TPY for sulfur dioxide, 100 TPY for carbon monoxide, 40 TPY for NO X ( where visibility impacts are of concern), or 0.6 TPY for lead, after applicable control requirements. Such trades will have at most a de minimis impacts on local air quality because no net increase in emissions will be produced and the amount of emissions being shifted is less than designated significance levels in associated EPA regulations ( see, e. g., 40 CFR 51.18( j)( 1)( x) and 51.24( b)( 23)( i)). n32 n 31 Interested parties should, however, be aware that in some circumstances modeling may be required to justify using certain emissions baselines, prior to the trade. Where a bubble in a nonattainment area seeks to employ allowable values greater than corresponding actual values in the calculation of baseline emissions, and where such allowable values are not shown to be used or reflected in an approved demonstration, a full Level III modeling analysis will be required. Where a bubble in an attainment area seeks to employ allowable values greater than corresponding actual values in the calculation of baseline emissions, and where such allowable values are not shown to be used or reflected in an approved demonstration, a Level II modeling analysis ( see below) using actual emissions for the pre bubble case will be required unless, for bubbles processed as case bycase SIP revisions, the Region determines that additional technical support is necessary to protect applicable standards or increments. Where allowable values are used to calculate baseline emissions for such a case by case SIP revision bubble in an attainment area where the PSD baseline has been triggered, the Region will require the technical support necessary to protect PSD increments.

Where allowable values higher than actual values are not shown to be used or reflected in an approved demonstration, states that wish to authorize their use in attainment areas under generic bubble rules must either state, or develop replicable procedures addressing, background values and how they will be evaluated in conjunction with the actual changes in ambient concentration predicted by the Level II analysis. These steps must be sufficient to protect standards and increments and must be approved by EPA as part of a generic rule. Page 58 51 FR 43814 For further discussion regarding calculation of baseline emissions and related modeling requirements, see Section I. A. 1. above and Appendix B below.

n 32 This paragraph should not be construed to imply that new sources and modifications need not meet all applicable requirements, including those specified under 40 CFR 51.18 or parallel EPA approved state rules.

( 2) Level I. In general no modeling to determine ambient equivalence is needed if:

( a) The trade does not result in an increase in applicable net baseline emissions; n33 n 33 See n. 31 above.

( b) The relevant sources are located in the same immediate vicinity ( within 250 meters of each other);

( c) No increase in baseline emissions occurs at the source with the lower effective plume height as determined under EPA's Guidelines on Air Quality Modeling;

( d) No complex terrain n34 is within the area of significant impact of the trade n35 or 50 kilometers, whichever is less; n36 n 34 Complex terrain is broadly defined by EPA as terrain greater in height than the physical stack height of a source. For bubble purposes, this definition is applicable only to sources with increasing baseline emissions.

n 35 For guidance on determining " area of significant impact," see Appendix E below. The graph in Appendix E, or EPA approved alternative approaches, may be incorporated in generic rules to make this aspect of Level I analysis replicable and operational. See Section II below.

n 36 Generally, trades involving complex terrain as defined above may not be exempt from modeling under a Level I analysis. However, EPA will consider on a case by case basis additional criteria for determining whether a particular trade involving complex terrain, but otherwise meeting the requirements specified above, does not present a problem of potential plume impaction and may be approved under a Level I analysis. These additional criteria would include such factors as source height and emission rates, distance between stacks and elevated features, rate of topographical rise, and other considerations which may be appropriate for the particular geographic area. States are encouraged to work with EPA to determine where and how such additional criteria can be developed and applied to individual trades.

( e) Stacks with increasing baseline emissions are sufficiently tall to avoid possible downwash situations, as determined by the formula described at 50 FR 27892 ( July 8, 1985) ( to be codified at 40 CFR Part 51); and ( f) The trade does not involve open dust sources.

For such Level I trades it can reasonably be assumed that " pound for pound" trades will produce ambient effects equivalent to those which EPA approved air quality models would predict. Therefore modeling to determine ambient equivalence is not required.

Trades between fugitive process sources and stack sources ( i. e., process for process or process forstack can acceptably be evaluated and approved under Level I as long as the maximum distance between any emitting sources in the trade is less than 250 meters and all other Level I criteria are met.

( 3) Level II. Bubble trades which are neither de minimis nor Level I may nevertheless be evaluated for approval based on modeling to determine ambient equivalence limited solely to the impacts of the specific emission sources involved in the trade, if there is no increase in applicable net baseline emissions, 3 n7 if the potential change in emissions before and after the trade will not cause a significant increase in pollutant concentrations at any receptor for any averaging time specified in an applicable ambient air quality standard, 3 n8 and if such an analysis does not predict any increase in ambient concentrations in a mandatory Federal Class I area. 3 n9 The change in concentration from the before trade case to the after Page 59 51 FR 43814 trade case must in general be modeled using refined models such as MPTER and ISC for each appropriate averaging time for the relevant national ambient air quality standards for each receptor, using the most recent full year of meteorological data. 4 n0 n 3 7 See n. 31 above.

n 3 8 In determining " significant" impact for Level II bubble trades, states may use the following significance values to identify trades whose potential ambient impact need not be further evaluated before approval:

10 mu g/ m 3 for any 24 hour period for particulate matter;

5 mu g/ m 3 for any annual period for particulate matter;

13 mu g/ m 3 for any 24 hour period for SO 2 ;

46 mu g/ m 3 for any 3 hour period for SO 2 ;

3 mu g/ m 3 for an annual period for SO 2 ;

575 mu g/ m 3 for any 8 hour period for CO;

2300 mu g/ m 3 for any 1 hour period for CO;

0.1 mu g/ m 3 for any 3 month period for Pb.

See 45 FR 52709 ( August 7, 1980). For offset transactions, any required modeling must follow procedures consistent with EPA's new Source Review regulations in 40 CFR 51.18 or Part 51, Appendix S, or parallel EPA approved state regulations. " Significant" impact under 40 CFR Part 51, Appendix S is defined as 1 mu g/ m 3 annual average for particulates, SO 2 or NO 2 ; 5 mu g/ m 3 24 hour average for particulates and SO 2 ; 25 mu g/ m 3 3 hour average for SO 2 ; and 0.5 mg/ m 3 8 hour average and 2 mg/ m 3 one hour average for CO.

n 3 9 However, a bubble ordinarily may not be approved under Level II where other evidence related to background  i. e., formally validated ambient air quality monitoring data or previously established background values  clearly indicates that the bubble would create a new violation of an ambient standard or PSD increment, or would delay the planned removal of an existing violation.

n 40 Other techniques may be approved where sources show they equally well protect NAAQS, applicable PSD increments, and visibility. For example, in limited circumstances conservative screening models may be acceptable in lieu of MPTER and ISC. In such cases, use of a full year of meteorological data may not be necessary. Such screening models may be acceptable where: ( a) The screening model shows that all the emissions from the stack( s) with increasing emissions would not produce exceedances of the Level II significance values described in n. 38 above, or ( b) the stack parameters at the stack( s) with increasing emissions do not change and the screening model shows that the increase in emissions at the increasing stack( s) would not produce exceedances of these significance values.

( 4) Level III. Full dispersion modeling considering all sources affecting the trade's area of impact is required to determine ambient equivalence if applicable net baseline emissions will increase as a result of the trade, 4 n1 or if the trade cannot meet criteria for approval under de minimis, Level I or Level II.

n 41 See discussion in I. B. 1. c. below.

However, a geographically limited Level III analysis may be used in some cases where a Level II analysis predicts one or more exceedances of the Level II significance values. While this analysis will be limited in terms of geographic scope, it must otherwise meet the modeling requirements for a full Level III analysis, including consideration of all sources affecting the limited geographical area. In many situations this approach may permit the receptor area to be smaller than the trade's entire area of impact. Because of Page 60 51 FR 43814 the unique nature of each situation, the appropriate limited geographic area must be determined in accord with EPA guidelines on modeling, and through case by case evaluation.

Bubble trades are approvable under either type of Level III analysis if they do not cause a new violation of NAAQS or PSD increments, significantly contribute to or delay the planned removal of an existing violation, or adversely affect visibility in mandatory Federal Class I areas. n42 n 42 Where a Level III modeling analysis submitted to support a voluntary trading application indicates an exceedance of an ambient requirement, EPA will review such applications on a common sense case by case basis, seeking to encourage disclosure of such exceedances and avoid undue delay of decisions on the trade, while adequately ensuring protection of public health, the integrity of the SIP process ( including the state's prerogatives in determining how to remedy nonattainment), and the prompt and effective remedy of any condition of nonattainment. In its review, the Agency will take into account such factors as the degree of exceedance, the contribution of the trading sources and the trade itself to the exceedance, and the degree to which such sources would be part of any solution remedying the exceedance.

This three tiered modeling approach is both reasonable and conservative. It will assure that the ambient impact of trades is at least equivalent in effect to original SIP emission limits, while conserving government resources and shortening approval times for many individual trades.

c. Bubbles Should Not Increase Applicable Net Baseline Emissions. Ordinarily, bubbles may not result in an increase in applicable net baseline emissions. Such a bubble would require a case by case SIP revision, and may only be approved based upon a combined Level III and Level II modeling analysis ( i. e., an analysis sufficient to show that all applicable requirements of a full Level III analysis ( as described above) are met, and that the bubble would not result in any exceedance of significance values specified for a Level II analysis at any receptor for any averaging time specified in an applicable ambient air quality standard. n43 n 43 Where a proposed bubble increasing net baseline emissions cannot meet this test of ambient equivalence, it may not be approved as a bubble under the Emissions Trading Policy. However, sources may still submit such revised limits for approval under the general requirements applicable to SIP revisions.

Where such a bubble is proposed in a nonattainment area, the state must demonstrate that the trade is consistent with the progress demonstration under an approved demonstration of attainment, revise its EPAapproved progress demonstration as part of the proposed SIP revision, or otherwise show ( e. g., by modeling and any necessary compensating emission reductions) that the proposed trade comports with the EPA approved emissions and ambient progress demonstration.

d. Bubbles Should Not Increase Emissions of Hazardous or Toxic Air Pollutants. Under the Clean Air Act all sources must meet applicable section 112 ( NESHAPs) requirements for control of hazardous air pollutants. Sources may neither use a bubble to meet these requirements, nor increase emissions beyond the levels they prescribe. Where a source wishes to generate or use emission reduction credit for a criteria pollutant, and where a NESHAPs pollutant is part of the criteria pollutant stream, the emissions baseline for emissions of the hazardous pollutant from that source would be the lower of actual or NESHAPsallowable emissions of that pollutant, applied as of the time of application for credit. Where EPA has proposed to regulate a source category for emissions of a pollutant under section 112, but has not yet promulgated a NESHAP for that source category, the proposal will serve as the interim guideline for evaluating the potential effects of any proposed emissions trade involving sources to which the proposed standard would apply. The emissions baseline for such a pollutant emitted by a source subject to the proposed NESHAP would be lower of actual or proposed NESHAPs allowable emissions for that pollutant.

In general, such trading proposals will be approved so long as they ( 1) result in emission limits for each source emitting the relevant pollutant which are equivalent to or less than those that the approved NESHAP requires or the proposed NESHAP would require if promulgated, ( 2) rely only on reductions Page 61 51 FR 43814 below actual or allowable levels ( whichever is less) of that pollutant, and ( 3) take place within a single plant or contiguous plants.

Where a pollutant has been listed under section 112 or EPA has published a Notice of Intent to List, but no NESHAP has been promulgated or proposed for a source which emits that pollutant, states may generally allow trades consisting of equivalent increases and decreases of actual emissions of that pollutant within a single plant or contiguous plants. Once the relevant NESHAP is promulgated, every source, regardless of any previously approved trade involving emissions of that pollutant, must meet the requirements of that promulgation.

Where EPA has decided that one or more source categories which emit a listed pollutant do not require regulation solely because of limited national exposure, emissions of that pollutant will continue to be treated the same as emissions of any other pollutant listed under section 112.

Where EPA has issued a formal Notice of Intent Not to List a pollutant under section 112, that pollutant will ordinarily be treated as non hazardous. However, where the decision not to list or not to regulate was based on limited national exposure, but the individual risk was sufficiently high that EPA committed in the announcement of its decision to support ( through some formal mechanism such as a Memorandum of Understanding ( MOU)) state level efforts to develop regulations, the pollutant will be treated as listed for trading purposes in order to assure that such state efforts are not compromised. The model for the intended scope of this classification is EPA's acrylonitrile decision. ( 50 FR 24319; June 10, 1985).

If a substance is neither listed nor regulated as hazardous under section 112, nor meets any of the other conditions specified above, but has been formally listed or regulated as toxic under any comparable healthbased federal statute, the Administrator may consider this fact in evaluating trades which may increase emissions of that substance. This authority has not been delegated within EPA by the Administrator. See Clean Air Act section 301( a)( 1), 42 U. S. C. 7601( a)( 1). n44 n 44 Trades involving emission streams partially or wholly composed of any pollutants subject to special considerations under this section must meet two separate and distinct tests to be approved. First, such trades must be approvable under the criteria and principles which apply to all trades, as discussed throughout this policy ( i. e., such trades must meet baseline and other requirements for the relevant criteria pollutant). Second, such trades must be approvable with respect to the hazardous pollutant fraction of the criteria pollutant emission stream. This means that there must be no net increase in emissions of the pollutants addressed in this section, as a result of such trades. Where a NESHAP has been promulgated or proposed, the baseline for determining whether such an increase has occurred is the lower of actual or NESHAPs allowable emissions for the hazardous component of the trade, for the source which emits that component. The promulgated or proposed NESHAP limit not only is used to define the allowable emissions for that source, but serves as an absolute ceiling on the source as well. Where a NESHAP has not yet been promulgated or proposed, the baseline for determining whether such an increase has occurred is generally actual emissions for the hazardous pollutant component of the trade. But cf. today's Policy Statement at n. 6.

Exception. Trades which involve the pollutants addressed in this section but do not meet the special restrictions discussed above, may also be approved where surplus reductions in those pollutants compensate for increases in non hazardous emissions of the same criteria pollutant. For example, a source emitting benzene may trade with a source emitting a non hazardous VOC without meeting these special restrictions, if the benzene emissions are reduced as a result of the trade ( i. e., " traded down"). As long as such a trade would not result in an increase in either actual or allowable emissions of a pollutant subject to the preceding paragraphs at any source, it would not differ in nature or requirements from a trade involving only non hazardous VOC emissions.

e. Existing Source Credits Cannot Be Used to Meet Applicable Technology Based Requirements for New Sources. Under Clean Air Act section 111 and EPA implementing regulations, new affected facilities must satisfy technology based New Source Performance Standards ( NSPS), regardless of the attainment status of the area in which they are located. Under sections 165 and 173 and EPA implementing regulations, new or modified major sources must also satisfy technology based control requirements associated with Page 62 51 FR 43814 preconstruction permits. These requirements prohibit use of credits from existing sources to meet or avoid applicable NSPS, and bar use of such credits to meet applicable new source review requirements for best available control technology ( BACT) in PSD areas, or lowest achievable emission rate control technology ( LAER) in nonattainment areas. 4 n5 n 4 5 Today's notice does not address whether or under what circumstances facilities subject to NSPS, BACT or LAER may surpass applicable permit limits reflecting such requirements in order to create credits for existing source trades.

However, modifications of existing major sources in PSD and nonattainment areas with an EPAapproved " plantwide" definition of source can use " contemporaneous" reductions in actual emissions from within the same source to " net out of" New Source Review. 4 n6 Under such " netting," sourcewide increases in potential emissions that do not exceed designated levels of significance ( see 40 CFR 51.18( j)( 1)( x), 51.24( b)( 23), and 52.21( b)( 23)) will not be considered " major modifications" of the source under 40 CFR 51.18, 51.24, 51.22, 51.307, 52.26, or 52.27. Thus, while these source changes must still meet applicable NSPS, NESHAPs, preconstruction applicability review requirements under 40 CFR 51.18 ( a)( h) and ( l), and SIP requirements, they are not subject to new source review requirements for major modification because they are not considered " major." 4 n7 n 4 6 " Contemporaneous" means a reasonable period for accumulating increases and decreases in emissions, as specified by the state. See 40 CFR 51.18( j)( 1)( vi) and 51.24( b)( 3)( b) ( ii).

n 4 7 Netting also applies under the narrower " dual definition" of " source" in certain circumstances. For example, firms may use reductions within the plant to compensate for increases at several emitting units which, while not individually significant, might otherwise add up to a significant increase plantwide.

Under current EPA regulations, if a nonattainment area is subject to a moratorium on new preconstruction permits for major sources or modifications and the area does not have an approved New Source Review program, then the area automatically uses a plantwide definition. See 40 CFR 52.24.