7/ 29/ 05 Draft  Do Not Quote or Cite 1 6560 50 P ENVIRONMENTAL PROTECTION AGENCY 40 CFR Parts 51, 52, 72, 73, 74, 78, 96, and 97 [ OAR 2004 0076; FRL ]

RIN 2060 AM99 Rulemaking on Section 126 Petition from North Carolina to Reduce Interstate Transport of Fine Particulate Matter and Ozone; Federal Implementation Plans to Reduce Interstate Transport of Fine Particulate Matter and Ozone; Revisions to the Clean Air Interstate Rule; Revisions to the Acid Rain Program AGENCY: Environmental Protection Agency ( EPA).

ACTION: Notice of Proposed Rulemaking ( NPR).

SUMMARY: Today, EPA is proposing actions to address the interstate transport of emissions of nitrogen oxides ( NOx)

and sulfur dioxide ( SO2) that contribute significantly to nonattainment and maintenance problems with respect to the national ambient air quality standards ( NAAQS) for fine particulate matter ( PM2.5) and 8 hour ozone. As one part of today's action, EPA is proposing its response to a petition submitted to EPA by the State of North Carolina under section 126 of the Clean Air Act ( CAA). The petition requests that EPA find that SO2 and/ or NOx emissions from electric generating units ( EGUs) in 13 States are 7/ 29/ 05 Draft  Do Not Quote or Cite 2 significantly contributing to PM2.5 and/ or 8 hour ozone nonattainment and maintenance problems in North Carolina,

and requests that EPA establish control requirements to prohibit such significant contribution. The EPA's proposed response is based on extensive analyses conducted for the recently issued Clean Air Interstate Rule ( CAIR). The EPA is proposing to deny the petition for sources in States not shown to be linked to nonattainment and maintenance problems in North Carolina under the CAIR. For sources in States that are linked to North Carolina under the CAIR, EPA is proposing in the alternative to deny the petition if EPA promulgates Federal implementation plans ( FIPs) to address the interstate transport no later than the final section 126 response or to grant the petition if EPA does not promulgate the FIPs prior to or concurrently with the section 126 response. The EPA's preferred option is to promulgate the FIP concurrently with the final section 126 response.

In today's action, EPA is also proposing FIPs for all jurisdictions that are covered by the CAIR. The FIPs would regulate EGUs in the affected States and achieve the emissions reductions requirements established by the CAIR until States have approved State implementation plans ( SIPs)

to achieve the reductions. The EPA intends the FIP to 7/ 29/ 05 Draft  Do Not Quote or Cite 3 satisfy the concerns cited in the section 126 petition and provide a Federal backstop for the CAIR. In no way should the FIP for CAIR be viewed as a sign of any concern about States meeting the SIP responsibilities under CAIR.

As the control requirements for both the section 126 action and the FIP, EPA is proposing Federal NOx and SO2 trading programs that provide emissions reductions equal to those required under the CAIR in affected States.

The Section 126 and FIP actions would not constrain States in their selection of control strategies to meet the CAIR. The EPA intends to withdraw section 126 or FIP requirements in a State if that State submits and EPA approves a SIP meeting the requirements of CAIR.

Today's action also proposes revisions to the CAIR in order to address the interaction between the EPAadministered Federal CAIR trading programs proposed today and the EPA administered State CAIR trading programs that will be created by any State that elects to submit a SIP establishing such a trading program to meet the requirements of the CAIR. In addition, EPA is proposing revisions to the CAIR to correct certain minor errors.

Today's action also proposes revisions to the Acid Rain Program in order to make the administrative appeals 7/ 29/ 05 Draft  Do Not Quote or Cite 4 procedures, which currently apply to final determinations by the Administrator under the EPA administered State CAIR trading programs, also apply to the EPA administered trading programs under the section 126 and FIP actions. In addition, we are proposing certain minor revisions to the Acid Rain Program that would apply to all affected units.

DATES: Comments must be received on or before [ INSERT 60 DAYS AFTER PUBLICATION IN THE FEDERAL REGISTER]. Public hearings will be held on September 15, 2005 in Washington,

D. C. and on September 14, 2005 in Research Triangle Park,

North Carolina. Please refer to SUPPLEMENTARY INFORMATION for additional information on the comment period and the public hearings.

ADDRESSES: Submit your comments, identified by Docket ID No. OAR 2004 0076, by one of the following methods:

Federal eRulemaking Portal: http:// www. regulations. gov.

Follow the on line instructions for submitting comments.

Agency Website: http:// www. epa. gov/ edocket. EDOCKET,

EPA's electronic public docket and comment system, is EPA's preferred method for receiving comments. Follow the on line instructions for submitting comments.

E mail: A and R Docket@ epa. gov 7/ 29/ 05 Draft  Do Not Quote or Cite 5

Mail: Air Docket, Attention: Docket No. OAR 2004 0076,

Environmental Protection Agency, Mailcode: 6102T, 1200 Pennsylvania Ave., NW, Washington, DC 20460.

Hand Delivery: EPA Docket Center, 1301 Constitution Avenue, NW, Room B102, Washington, DC. Such deliveries are only accepted during the Docket's normal hours of operation, and special arrangements should be made for deliveries of boxed information.

Instructions: Direct your comments to Docket ID No.: OAR

2004 0076. The EPA's policy is that all comments received will be included in the public docket without change and may be made available online at http:// www. epa. gov/ edocket,

including any personal information provided, unless the comment includes information claimed to be Confidential Business Information ( CBI) or other information whose disclosure is restricted by statute. Do not submit information that you consider to be CBI or otherwise protected through EDOCKET, regulations. gov, or e mail. The EPA EDOCKET and the Federal regulations. gov websites are " anonymous access" systems, which means EPA will not know your identity or contact information unless you provide it in the body of your comment. If you send an e mail comment directly to EPA without going through EDOCKET or 7/ 29/ 05 Draft  Do Not Quote or Cite 6 regulations. gov, your e mail address will be automatically captured and included as part of the comment that is placed in the public docket and made available on the Internet. If you submit an electronic comment, EPA recommends that you include your name and other contact information in the body of your comment and with any disk or CD ROM you submit. If EPA cannot read your comment due to technical difficulties and cannot contact you for clarification, EPA may not be able to consider your comment. Electronic files should avoid the use of special characters, any form of encryption,

and be free of any defects or viruses. For additional information about EPA's public docket visit EDOCKET on line or see the Federal Register of May 31, 2002 ( 67 FR 38102).

For additional instructions on submitting comments, go to the SUPPLEMENTARY INFORMATION section of this document.

Docket: All documents in the docket are listed in the EDOCKET index at http:// www. epa. gov/ edocket. Although listed in the index, some information is not publicly available, i. e., CBI or other information whose disclosure is restricted by statute. Certain other material, such as copyrighted material, is not placed on the Internet and will be publicly available only in hard copy form. Publicly available docket materials are available either 7/ 29/ 05 Draft  Do Not Quote or Cite 7 electronically in EDOCKET or in hard copy at the EPA Docket Center, EPA West, Room B102, 1301 Constitution Avenue, NW,

Washington, DC. The Public Reading Room is open from 8: 30 a. m. to 4: 30 p. m., Monday through Friday, excluding legal holidays. The telephone number for the Public Reading Room is ( 202) 566 1744, and the telephone number for the Air Docket is ( 202) 566 1742.

FOR FURTHER INFORMATION CONTACT: For general questions concerning today's section 126 action, please contact Carla Oldham, U. S. EPA, Office of Air Quality Planning and Standards, Air Quality Strategies and Standards Division,

C539 02, Research Triangle Park, NC, 27711, telephone ( 919)

541 3347, e mail at oldham. carla@ epa. gov. For general questions concerning today's FIP action, please contact Tom Coda, U. S. EPA, Office of Air Quality Planning and Standards, Air Quality Strategies and Standards Division,

C539 02, Research Triangle Park, NC, 27711, telephone ( 919)

541 3037, e mail at coda. tom@ epa. gov. For legal questions concerning the section 126 action, please contact Steven Silverman, U. S. EPA, Office of General Counsel, Mail Code 2344A, 1200 Pennsylvania Avenue, NW, Washington, DC, 20460,

telephone ( 202) 564 5523, e mail at silverman. steven@ epa. gov. For legal questions concerning 7/ 29/ 05 Draft  Do Not Quote or Cite 8 the FIP action, please contact Sonja Petersen, U. S. EPA,

Office of General Counsel, Mail Code 2344A, 1200 Pennsylvania Avenue, NW, Washington, DC, 20460, telephone ( 202) 564 4097, e mail at petersen. sonja@ epa. gov. For questions regarding the cap and trade programs and emissions budgets, please contact Meg Victor, U. S. EPA, Office of Atmospheric Programs, Clean Air Markets Division, Mail Code 6204J, 1200 Pennsylvania Avenue, NW, Washington, DC, 20460,

telephone ( 202) 343 9193, e mail at victor. meg@ epa. gov. For questions regarding the revisions to the CAIR and Acid Rain Programs, please contact Dwight Alpern, U. S. EPA, Office of Atmospheric Programs, Clean Air Markets Division, Mail Code 6204J, 1200 Pennsylvania Avenue, NW, Washington, DC, 20460,

telephone ( 202) 343 9151, e mail at alpern. dwight@ epa. gov.

For questions regarding analyses required by statutes and executive orders, please contact Ron Evans, U. S. EPA, Office of Air Quality Planning and Standards, Air Quality Strategies and Standards Division, Mail Code C339 01,

Research Triangle Park, NC, 27711, telephone ( 919) 541 5488,

e mail at evans. ron@ epa. gov.

SUPPLEMENTARY INFORMATION:

I. Does this Action Apply to Me?

Categories and entities potentially regulated by this action 7/ 29/ 05 Draft  Do Not Quote or Cite 9 include the following:

Category NAICS code1 Examples of potentially regulated entities Industry 221112 Fossil fuel fired electric utility steam generating units.

Federal government 2 221122 Fossil fuel fired electric utility steam generating units owned by the Federal government.

State/ local/ Tribal government 2 221122 921150 Fossil fuel fired electric utility steam generating units owned by municipalities. Fossil fuel fired electric utility steam generating units in Indian Country.

1 North American Industry Classification System. 2 Federal, State, or local government owned and operated establishments are classified according to the activity in which they are engaged.

This table is not intended to be exhaustive, but rather provides a guide for readers regarding entities likely to be regulated by this action. To determine whether your facility could potentially be affected by this action, you should examine the definitions and applicability criteria in § § 72.2, 72.6, 72.7, 72.8, and 74.2 for purposes of the Acid Rain Program revisions and proposed § § 97.102, 97.104,

97.105, 97.202, 97.204, 97.205, 97.302, 97.304, and 97.305 for purposes of the section 126 and FIP actions. If you have any questions regarding the applicability of this action to a particular entity, consult the person listed in the 7/ 29/ 05 Draft  Do Not Quote or Cite 10 preceding section under FOR FURTHER INFORMATION CONTACT.

II. What Should I Consider as I Prepare My Comments for EPA?

1. Submitting CBI. Do not submit comments that include CBI to EPA through EDOCKET, regulations. gov or e mail. Clearly mark the part or all of the information that you claim to be CBI. For CBI information in a disk or CD ROM that you mail to EPA, mark the outside of the disk or CD ROM as CBI and then identify electronically within the disk or CD ROM the specific information that is claimed as CBI. In addition to one complete version of the comment that includes information claimed as CBI, a copy of the comment that does not contain the information claimed as CBI must be submitted for inclusion in the public docket. Information so marked will not be disclosed except in accordance with procedures set forth in 40 CFR part 2. Send or deliver information identified as CBI only to the following address: Roberto Morales, U. S. EPA, Office of Air Quality Planning and Standards, Mail Code C404 02, Research Triangle Park, NC 27711, telephone ( 919) 541 0880, e mail at morales. roberto@ epa. gov, Attention Docket ID No. OAR 2004

0076.

2. Tips for Preparing Your Comments. When submitting 7/ 29/ 05 Draft  Do Not Quote or Cite 11 comments, remember to:

vi. Identify the rulemaking by docket number and other identifying information ( subject heading, Federal Register date and page number).

vii. Follow directions  The agency may ask you to respond to specific questions or organize comments by referencing a Code of Federal Regulations ( CFR) part or section number.

viii. Explain why you agree or disagree; suggest alternatives and substitute language for your requested changes.

ix. Describe any assumptions and provide any technical information and/ or data that you used.

x. If you estimate potential costs or burdens, explain how you arrived at your estimate in sufficient detail to allow for it to be reproduced.

xi. Provide specific examples to illustrate your concerns,

and suggest alternatives.

xii. Explain your views as clearly as possible, avoiding the use of profanity or personal threats.

xiii. Make sure to submit your comments by the comment period deadline identified.

III. Availability of Related Information 7/ 29/ 05 Draft  Do Not Quote or Cite 12 The EPA has conducted a separate rulemaking that contains actions and information related to this proposal,

" Rule to Reduce Interstate Transport of Fine Particulate Matter and Ozone ( Clean Air Interstate Rule)" ( see proposal at 69 FR 4566, January 30, 2004; supplemental proposal at 69 FR 32684, June 10, 2004; notice of data availability at 69 FR 47828, August 6, 2004; and final rule at 70 FR 25162; May 12, 2005). Documents related to the CAIR are available for inspection in docket OAR 2003 0053 at the address and times given above. The EPA has established a website for the CAIR at http:// www. epa. gov/ cleanairinterstaterule or more simply http:// www. epa. gov/ cair/ which will also include information on the section 126 rulemaking actions. The rulemaking docket for the CAIR contains information and analyses that are relied upon in today's proposed actions. Therefore, EPA is including by reference the entire CAIR record for purposes of the section 126 and FIP rulemakings. The EPA is not accepting comment on the CAIR or otherwise reopening any issue decided in the CAIR for reconsideration or comment,

except that we are taking comment specifically on the revisions to CAIR that EPA is proposing in today's action.

Section VII in this preamble discusses the proposed changes to CAIR. 7/ 29/ 05 Draft  Do Not Quote or Cite 13 IV. Public Hearing The EPA will be holding two public hearings on today's proposal. On September 14, 2005, a public hearing will be held at the EPA, Building C, Room C111A B, 109 T. W.

Alexander Drive, Research Triangle Park, North Carolina,

27709. On September 15, 2005, a public hearing will be held at EPA Headquarters, 1200 Pennsylvania Ave, NW, Room 1117 ( EPA East), Washington, D. C. The metro stop is Federal Triangle. Because these hearings are being held at U. S.

government facilities, everyone planning to attend one of the hearings should be prepared to show valid picture identification to the security staff in order to gain access to the meeting room.

The public hearings will begin at 9 a. m. and continue until 5 p. m., if necessary, depending on the number of speakers. The EPA may end the hearing early if all registered speakers have had an opportunity to speak, but no earlier than 2: 00 p. m. Persons wishing to present oral testimony that have not made arrangements in advance should register by 2: 00 p. m. the day of the hearing. Oral testimony will be limited to 5 minutes per commenter. The EPA encourages commenters to provide written versions of their oral testimonies either electronically ( on computer 7/ 29/ 05 Draft  Do Not Quote or Cite 14 disk or CD ROM) or in paper copy. Verbatim transcripts and written statements will be included in the rulemaking docket. If you would like to present oral testimony at the hearing, please notify Joann Allman, U. S. EPA, Office of Air Quality Planning and Standards, C539 02, Research Triangle Park, NC 27711, telephone ( 919) 541 1815, e mail allman. joann@ epa. gov, by September 8, 2005. For updates and additional information on the public hearings, please check EPA's website for this rulemaking at http:// www. epa. gov/ cair.

The public hearings will provide interested parties the opportunity to present data, views, or arguments concerning the proposed rules. The EPA may ask clarifying questions during the oral presentations, but will not respond to the presentations or comments at that time. Written statements and supporting information submitted during the comment period will be considered with the same weight as any oral comments and supporting information presented at a public hearing.

Outline I. Background and Summary of Proposal A. Summary of Proposal B. General Background on PM2.5 and Ozone 1. The PM2.5 Problem 7/ 29/ 05 Draft  Do Not Quote or Cite 15 2. The 8 Hour Ozone Problem 3. Other Environmental Effects Associated with SO2 and NOx Emissions C. What Is the Statutory and Regulatory Background for Today's Action? 1. What Is the " Good Neighbor" Provision? 2. What Is the CAA Section 126 Provision? 3. What Is EPA's Previous Section 126 Rulemaking? 4. What Is the Clean Air Interstate Rule? 5. What Are the Findings of Failure to Submit for the Section 110( a)( 2)( D) Plans? D. Summary of North Carolina Section 126 Petition 1. What Sources Does the Petition Target? 2. What Control Remedy Does the Petition Request? 3. What Is the Technical Support for the Petition? E. What Is the Litigation on Section 126 Rulemaking Schedule? F. How Is EPA Addressing the Section 126 Related Comments Received During the CAIR Rulemaking? II. What Is EPA's Legal and Analytical Approach for the Section 126 Petition? III. What Is EPA's Proposed Action on the Section 126 Petition? A. What Is EPA's Proposed Action With Respect to the 8 Hour Ozone NAAQS? B. What Is EPA's Proposed Action With Respect to the PM2.5 NAAQS? C. What Are the Proposed Requirements for Sources for Which EPA Makes a Section 126( b) Finding? D. When and How Would EPA Withdraw Section 126 Findings and Control Requirements in a State if EPA Approves a SIP to Meet the CAIR? IV. What Is the Proposed Federal Implementation Plan for the CAIR? A. What Is the Legal Framework for the Proposed FIP? B. What Is the Timing and Scope of the CAIR FIP Action? C. What Are the FIP Control Measures? D. When and How Would EPA Remove the FIP Requirements if EPA Approves a SIP to Meet the CAIR? V. Emission Reduction Requirements for the Proposed CAIR FIP and Proposed Section 126 Response A. Overview of Emission Reduction Requirements B. What Is EPA's Approach for Determining Regionwide NOx and SO2 Emissions Caps and State Emissions Budgets? 1. Determination of Regionwide Caps for SO2 and NOx 2. Determination of State by State Emissions Budgets for SO2 and NOx 7/ 29/ 05 Draft  Do Not Quote or Cite 16 a. Determination of State SO2 Emissions Budgets b. Determination of State Annual and Ozone Season NOx Emissions Budgets C. What Are the State EGU Emission Budgets for the CAIR FIP and the Section 126 Response? 1. What Are the Annual State EGU SO2 Emissions Budgets? 2. What Are the Annual State EGU NOx Emissions Budgets? a. For States Affected by the CAIR FIP b. For States Affected by the Section 126 Response 3. What Are the Ozone Season EGU NOx Emissions Budgets? a. For States Affected by the CAIR FIP b. For States Affected by the Section 126 Response 4. What Are the Amounts of Allowances Available in the State Annual NOx Compliance Supplement Pools? VI. Proposed Federal CAIR NOx and SO2 Cap and Trade Programs for EGUs A. Purpose of Federal CAIR NOx and SO2 Cap and Trade Programs and Relationship to the Section 126 Petition and the CAIR B. Overall Structure of the Proposed Federal CAIR Cap and Trade Programs 1. SO2 Program 2. NOx Program 3. Ozone Season NOx Program C. Sources Affected Under the Proposed Federal CAIR Cap and Trade Programs D. Allocation of NOx Emission Allowances to Sources E. Allocation of SO2 Emission Allowances to Sources F. Allowance Banking G. Incentives for Early Reductions 1. SO2 Program 2. NOx Program 3. Ozone Season NOx Program H. Monitoring and Reporting Requirements I. Differences Between the Proposed Federal CAIR Cap and Trade Programs and the CAIR SIP Rules J. Coordination Between the Proposed Federal CAIR Cap and Trade Programs and CAIR SIPs K. Relationship of Emissions Trading Programs to Section 126 Relief L. Interactions with Other CAA Programs VII. What Are the Revisions to the CAIR? VIII. What Are the Revisions to the Acid Rain Program? IX. Statutory and Executive Order Reviews 7/ 29/ 05 Draft  Do Not Quote or Cite 17 A. Executive Order 12866: Regulatory Planning and Review B. Paperwork Reduction Act C. Regulatory Flexibility Act D. Unfunded Mandates Reform Act E. Executive Order 13132: Federalism F. Executive Order 13175: Consultation and Coordination with Indian Tribal Governments G. Executive Order 13045: Protection of Children from Environmental Health and Safety Risks H. Executive Order 13211: Actions that Significantly Affect Energy Supply, Distribution, or Use I. National Technology Transfer Advancement Act J. Executive Order 12898: Federal Actions to Address Environmental Justice in Minority Populations and Low Income Populations CFR Amendments and Additions ( Regulatory Text)

51 52 72 73 74 78 96 97 I. Background and Summary of Proposal A. Summary of Proposal Today, EPA is proposing two actions to address the interstate transport of emissions of NOx and SO2 that contribute significantly to nonattainment and maintenance problems with respect to the NAAQS for PM2.5 and 8 hour ozone. First, EPA is proposing its response to a petition submitted to EPA by the State of North Carolina under section 126 of the CAA. The petition requests that EPA 7/ 29/ 05 Draft  Do Not Quote or Cite 18 establish control requirements for EGUs in 13 States based on findings that these sources are significantly contributing to PM2.5 and/ or 8 hour ozone nonattainment and maintenance problems in North Carolina. ( See Petition,

Docket No. OAR 2004 0076 0002.)

The EPA's proposed response is based on extensive analyses conducted for the CAIR ( 70 FR 25162; May 12, 2005).

The EPA is proposing to deny the petition for sources in States not shown in the CAIR to be linked to ( that is, to significantly contribute to) nonattainment and maintenance problems in North Carolina. For sources in States that are linked to North Carolina under the CAIR for the PM2.5 NAAQS,

EPA is proposing in the alternative ( 1) to deny the petition in the event that EPA promulgates FIPs no later than the final section 126 response to address the interstate transport or ( 2) to grant the petition if EPA does not promulgate a FIP prior to or concurrently with the section 126 response. The EPA's preferred approach is to promulgate the FIP concurrently with the final section 126 response and deny the petition. The FIP would control the significant transport from sources in States named in the petition as well as from sources in the other CAIR States, in the event that the States do not have approved SIPs meeting the CAIR 7/ 29/ 05 Draft  Do Not Quote or Cite 19 requirements. The States named in the petition with respect to the PM2.5 NAAQS are: Alabama, Georgia, Illinois,

Indiana, Kentucky, Michigan, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, and West Virginia. Of these,

Illinois and Michigan are not linked to North Carolina in the final CAIR. The EPA is proposing to deny the petition with respect to the 8 hour ozone NAAQS, because there are no States linked to North Carolina under the CAIR for that NAAQS. The States named in the petition with respect to the 8 hour ozone NAAQS are: Georgia, Maryland, South Carolina, Tennessee, and Virginia.

In today's action, EPA is also proposing FIPs to address interstate transport of NOx and SO2 under section 110( a)( 2)( D) for all jurisdictions that are covered by the CAIR. In the CAIR, EPA determined that 28 States and the District of Columbia contribute significantly to nonattainment of the NAAQS for PM2.5 and/ or 8 hour ozone in downwind States. The CAIR explains EPA's basis for determining significant contribution to downwind nonattainment and maintenance problems. In that rule, the EPA required the affected upwind States to revise their SIPs to include control measures to reduce emissions of SO2 and/ or NOx. Sulfur dioxide is a precursor to PM2.5 7/ 29/ 05 Draft  Do Not Quote or Cite 20 formation, and NOx is a precursor to both ozone and PM2.5 formation.

In an action published on the same day as the final CAIR, EPA proposed to find that Delaware and New Jersey contribute significantly to PM2.5 nonattainment and maintenance problems in downwind States considering these States as a single entity ( 70 FR 25408; May 12, 2005).

These States were included in the final CAIR only with respect to their impacts on downwind 8 hour ozone problems.

Today's FIP proposal includes emissions reductions requirements for Delaware and New Jersey that would address their significant contribution to nonattainment or maintenance problems for the PM2.5 NAAQS if EPA ultimately finds that these States significantly contribute to PM2.5 problems in downwind States based on the approach in the proposed rule cited above.

The FIPs would regulate EGUs in the affected States and achieve the emissions reductions required by the CAIR until States have approved SIPs to achieve the reductions. The CAIR emissions budgets were based on control requirements that are highly cost effective for EGUs.

The EPA intends the CAIR FIPs to satisfy the concerns cited in the section 126 petition and to provide a Federal 7/ 29/ 05 Draft  Do Not Quote or Cite 21 backstop for CAIR. In no way should the FIPs for CAIR be viewed as a sign of any concern about States meeting the SIP responsibilities under CAIR. There are no sanctions associated with these FIPs and EPA does not intend CAIR FIPs to have any other negative consequences for the affected States. The EPA is proposing FIP approaches that are flexible and intended to provide States options for getting their SIPs in place.

As the control remedy for both the section 126 action ( should EPA make positive findings under section 126( b)) and the FIP, EPA is proposing Federal NOx and SO2 cap and trade programs that provide the emissions reductions required by the CAIR. The trading programs are designed after the model cap and trade programs that EPA provided as a control option for States to meet the CAIR. The EPA intends to integrate the Federal trading programs with the EPA administered State CAIR trading programs that are based on the model rules so that sources could trade with one another under the respective emissions caps.

The EPA emphasizes that the section 126 response and FIP would not limit the options available to States to meet the requirements of the CAIR. We do not intend to record NOx allocations in sources' allowance accounts ( or take any 7/ 29/ 05 Draft  Do Not Quote or Cite 1 The CAIR requires affected sources to begin monitoring one year before the initial control periods ( i. e., sources begin monitoring in 2008 for the NOx programs and begin monitoring in 2009 for the SO2 program). Note that EPA would take any necessary actions to implement the monitoring provisions of the proposed Federal trading rules in time for monitoring to begin in 2008. To the extent that a State chooses to control EGUs to meet its CAIR obligations, the monitoring requirements would be identical whether EPA regulated EGUs through the proposed Federal trading programs or the State regulated EGUs through their SIP.

22 other steps to implement the section 126 or FIP requirements that could impact a State's ability to regulate their sources in a different manner) until more than a year after the CAIR SIP submission deadline. 1 This would allow EPA time to take rulemaking action to approve timely SIPs and,

thus, the FIP or section 126 requirements would not go into place. In addition, States could replace the FIP or section 126 requirements at a later time.

In today's action, EPA is also proposing revisions to the CAIR in order to address the interaction of EPAadministered NOx and SO2 trading programs under the CAIR and under the section 126 and FIP actions. In addition, EPA is proposing some revisions to the CAIR in order to correct certain minor errors.

The EPA is also proposing revisions to the Acid Rain Program in order to make the administrative appeals procedures ( in 40 CFR part 78), which currently apply to 7/ 29/ 05 Draft  Do Not Quote or Cite 23 final determinations by the Administrator under the EPAadministered States CAIR trading programs, also apply to the EPA administered trading programs under the section 126 and FIP actions. In addition, EPA is proposing some minor revisions that would apply to all affected units under the Acid Rain Program.

For purposes of the section 126 and FIP rulemakings,

the EPA is not accepting comment on the CAIR or otherwise reopening any issue decided in the CAIR for reconsideration or comment, except that we are taking comment specifically on revisions to the CAIR that EPA is proposing in today's action. Section VII of this preamble discusses the proposed changes to the CAIR.

B. General Background on PM2.5 and Ozone 1. The PM2.5 Problem In an action published on July 18, 1997, we revised the NAAQS for particulate matter ( PM) to add new standards for fine particles, using as the indicator particles with aerodynamic diameters smaller than a nominal 2.5 micrometers, termed PM2.5 ( 62 FR 38652). We established health and welfare based ( primary and secondary) annual and 24 hour standards for PM2.5. The annual standard is 15 micrograms per cubic meter, based on the 3 year average of 7/ 29/ 05 Draft  Do Not Quote or Cite 24 annual mean PM2.5 concentrations. The 24 hour standard is 65 micrograms per cubic meter, based on the 3 year average of the annual 98th percentile of 24 hour concentrations.

The annual standard is generally considered the more limiting.

Fine particles are associated with a number of serious health effects including premature mortality, aggravation of respiratory and cardiovascular disease ( as indicated by increased hospital admissions, emergency room visits,

absences from school or work, and restricted activity days),

lung disease, decreased lung function, asthma attacks, and certain cardiovascular problems. ( See EPA, Air Quality Criteria for Particulate Matter ( EPA/ 600/ P 99/ 002bF, October 2004) at <IP_ADDRESS>). The EPA has estimated that attainment of the PM2.5 standards would prolong tens of thousands of lives and would prevent, each year, tens of thousands of hospital admissions as well as hundreds of thousands of doctor visits, absences from work and school, and respiratory illnesses in children.

Individuals particularly sensitive to fine particle exposure include older adults, people with heart and lung disease, and children. More detailed information on health effects of fine particles can be found on EPA's website at: 7/ 29/ 05 Draft  Do Not Quote or Cite 25 http:// www. epa. gov/ ttn/ naaqs/ standards/ pm/ s_ pm_ index. html.

The secondary or welfare based PM2.5 standards are designed to protect against major environmental effects caused by PM such as visibility impairment   including in Class I areas which include national parks and wilderness areas across the country   soiling, and materials damage.

As discussed in other sections of this preamble, SO2 and NOx emissions both contribute to fine particle concentrations. In addition, NOx emissions contribute to ozone concentrations, described in the next section.

The PM2.5 ambient air quality monitoring for the 2001

2003 period shows that areas violating the standards are located across much of the eastern half of the United States and in parts of California and Montana. The EPA published the PM2.5 attainment and nonattainment designations on January 5, 2005 ( 70 FR 944).

2. The 8 hour Ozone Problem In an action published on July 18, 1997, we promulgated identical revised primary and secondary ozone standards that specified an 8 hour ozone standard of 0.08 parts per million ( ppm). Specifically, under the standards, the 3 year average of the fourth highest daily maximum 8 hour average ozone concentration may not exceed 0.08 ppm. In general, 7/ 29/ 05 Draft  Do Not Quote or Cite 26 the revised 8 hour standards are more protective of public health and the environment and more stringent than the preexisting 1 hour ozone standards.

Short term ( 1 to 3 hour) and prolonged ( 6 to 8 hour)

exposures to ambient ozone have been linked to a number of adverse health effects. Short term exposure to ozone can irritate the respiratory system, causing coughing, throat irritation, and chest pain. Ozone can reduce lung function and make it more difficult to breathe deeply. Breathing may become more rapid and shallow than normal, thereby limiting a person's normal activity. Ozone also can aggravate asthma, leading to more asthma attacks that require a doctor's attention and the use of additional medication.

Increased hospital admissions and emergency room visits for respiratory problems have been associated with ambient ozone exposures. Longer term ozone exposure can inflame and damage the lining of the lungs, which may lead to permanent changes in lung tissue and irreversible reductions in lung function. A lower quality of life may result if the inflammation occurs repeatedly over a long time period ( such as months, years, a lifetime). Recent epidemiological studies have shown a correlation between acute ozone exposures and increased risk of premature death. 7/ 29/ 05 Draft  Do Not Quote or Cite 27 People who are particularly susceptible to the effects of ozone include people with respiratory diseases, such as asthma, and people with unusual sensitivity to ozone. Those who are exposed to higher levels of ozone include adults and children who are active outdoors.

In addition to causing adverse health effects, ozone affects vegetation and ecosystems, leading to reductions in agricultural crop and commercial forest yields; reduced growth and survivability of tree seedlings; and increased plant susceptibility to disease, pests, and other environmental stresses ( e. g., harsh weather). In long lived species, these effects may become evident only after several years or even decades and have the potential for long term adverse impacts on forest ecosystems. Ozone damage to the foliage of trees and other plants can also decrease the aesthetic value of ornamental species used in residential landscaping, as well as the natural beauty of our national parks and recreation areas. The economic value of some welfare losses due to ozone can be calculated, such as crop yield loss from both reduced seed production ( e. g., soybean)

and visible injury to some leaf crops ( e. g., lettuce,

spinach, tobacco), as well as visible injury to ornamental plants ( i. e., grass, flowers, shrubs). Other types of 7/ 29/ 05 Draft  Do Not Quote or Cite 28 welfare loss may not be quantifiable ( e. g., reduced aesthetic value of trees growing in heavily visited national parks). More detailed information on health effects of ozone can be found at the following EPA website:

http:// www. epa. gov/ ttn/ naaqs/ standards/ ozone/ s_ o3_ index. html .

Presently, wide geographic areas, including most of the nation's major population centers, experience ozone levels that violate the NAAQS for 8 hour ozone. These areas include much of the eastern part of the United States and large areas of California. The EPA published the 8 hour ozone attainment and nonattainment designations in the Federal Register on April 30, 2004 ( 69 FR 23858).

3. Other Environmental Effects Associated with SO2 and NOx Emissions In addition to the enumerated human health and welfare benefits resulting from reductions in ambient levels of PM2.5 and ozone, reductions in NOx and SO2 will contribute to substantial visibility improvements in many parts of the eastern United States. Reductions in these pollutants will also reduce acidification and eutrophication of water bodies in the region. In addition, reducing emissions of NOx and SO2 from EGUs can be expected to reduce emissions of 7/ 29/ 05 Draft  Do Not Quote or Cite 29 mercury. Reduced mercury emissions in turn may reduce mercury loadings in lakes and thereby potentially decrease both human and wildlife exposure to fish containing mercury.

C. What Is the Statutory and Regulatory Background for Today's Action?

1. What Is the " Good Neighbor" Provision?

Following promulgation of new or revised NAAQS, the CAA requires all areas, regardless of their designation as attainment, nonattainment, or unclassifiable, to submit SIPs containing provisions specified under section 110( a)( 2).

Among these requirements are those specified by the socalled " good neighbor" provision section 110( a)( 2)( D) which addresses interstate transport of air pollution.

Section 110( a)( 2)( D) requires that a SIP contain adequate provisions

( i) prohibiting, consistent with the provisions of this title, any source or other type of emissions activity within the State from emitting any air pollutant in amounts which will

( I) contribute significantly to nonattainment in, or interfere with maintenance by, any other State with respect to [ any] national primary or secondary ambient air quality standard, or ( II) interfere with measures required to be included in the applicable implementation plan for any other State under part C to prevent significant deterioration of air quality or to protect visibility. 7/ 29/ 05 Draft  Do Not Quote or Cite 30 ( ii) insuring compliance with the applicable requirements of sections 126 and 115 ( relating to interstate and international pollution abatement);

Section 110( a)( 2)( D) is the underlying provision for EPA's CAIR and today's proposed section 126 and FIP actions.

Under the CAIR, EPA established the amount of SO2 and NOx emissions that each CAIR affected State must prohibit through SIP revisions to address interstate transport with respect to the PM2.5 and 8 hour ozone NAAQS.

2. What Is the CAA Section 126 Provision?

Subsection ( a) of section 126 requires, among other things, that SIPs require major proposed new ( or modified)

stationary sources to notify nearby States for which the air pollution levels may be affected by the fact that such sources have been permitted to commence construction.

Subsection ( b) provides:

Any State or political subdivision may petition the Administrator for a finding that any major source or group of stationary sources emits or would emit any air pollutant in violation of the prohibition of section 110( a)( 2)( D)( ii) . . . or this section....

Subsection ( c) of section 126 states that

[ I] t shall be a violation of this section and the applicable implementation plan in such State [ in which the source is located or intends to locate]

( 1) for any major proposed new ( or modified) 7/ 29/ 05 Draft  Do Not Quote or Cite 2While the text of section 126 refers to section 110( a)( 2)( D)( ii), EPA believes that this cross reference is a scrivener's error that occurred during the 1990 Amendments to the CAA and that Congress intended to refer to section 110( a)( 2)( D)( i). ( See 64 FR 28267.) The EPA's interpretation was upheld in Appalachian Power Co. v. EPA, 249 F. 3d 1032, 1040 44 ( D. C. Cir. 2001).

31 source with respect to which a finding has been made under subsection ( b) to be constructed or to operate in violation of this section and the prohibition of section 110( a)( 2)( D)( ii) 2 or this section, or ( 2) for any major existing source to operate more than three months after such finding has been made with respect to it.

However, subsection ( c) further provides that EPA may permit the continued operation of such major existing sources beyond the 3 month period, if such sources comply with EPApromulgated emissions limits within 3 years of the date of the finding.

3. What Is EPA's Previous Section 126 Rulemaking?

The EPA has previously taken action under section 126 to address interstate ozone transport ( 64 FR 28250; May 25,

1999) and ( 65 FR 2674; January 18, 2000). Because there are many parallels between that earlier action and today's proposal, we briefly discuss our earlier action here.

Like the present rulemaking, EPA's previous section 126 rulemaking, dealing with interstate transport of NOx,

occurred essentially in conjunction with an EPA rulemaking 7/ 29/ 05 Draft  Do Not Quote or Cite 32 dealing with interstate transport of the same pollutants,

the NOx SIP Call ( 62 FR 60318; November 7, 1997). As in today's rule, EPA concluded that section 126 and section 110( a)( 2)( D)( i) are integrally connected ( due to the reference to the section 110( a)( 2)( D) prohibition found in section 126 ( b)). Thus, the interstate transport problem at issue could be addressed under either provision, and once the underlying section 110( a)( 2)( D) SIP deficiency is eliminated, there no longer is a basis for EPA to make a positive finding under section 126. ( See sections II and III below for a more detailed discussion.) In the earlier rulemaking, we therefore concluded that emissions reductions sufficient to eliminate a section 110( a)( 2)( D) SIP deficiency would also be sufficient to satisfy section 126.

The NOx SIP Call required SIP revisions eliminating the amount of emissions that contribute significantly to nonattainment in downwind States, the amount of emissions reductions corresponding to the quantity of emissions that could be eliminated by the application of highly costeffective controls on specified sources in each upwind State. The section 126 remedy consequently called for the same set of highly cost effective controls for the section 126 source categories, based on the record of the NOx SIP 7/ 29/ 05 Draft  Do Not Quote or Cite 33 Call. We are adopting this same conceptual approach in today's rulemaking.

There are also parallels between our earlier section 126 action and this action with regard to timing of actions in the section 126 proceeding and in the closely related interstate transport proceeding under section 110( a)( 2)( D).

Because a section 126 finding turns on the existence of a section 110( a)( 2)( D) deficiency, in the May 1999 Section 126 Rule, we determined which petitions had technical merit, but we stopped short of granting the findings for the petitions.

Instead, we stated that because we had promulgated the NOx SIP Call, as long as an upwind State remained on track to comply with that rule, EPA would defer making the section 126 findings. Thus, the Section 126 Rule included a provision under which the rule would be automatically withdrawn for sources in a State once that State submitted and EPA fully approved a SIP that complied with the NOx SIP Call or if EPA promulgated a FIP to achieve the emissions reductions. ( See 64 FR 28271 28274.) The reason for this withdrawal would be the fact that the affected State's SIP revision or EPA's promulgated FIP would fulfill the section 110( a)( 2)( D) requirements, so that there would no longer be any basis for the section 126 finding with respect to that 7/ 29/ 05 Draft  Do Not Quote or Cite 34 State. Later judicial action staying the NOx SIP Call rule resulted in EPA granting the section 126 petitions at issue,

but the new rule retained the basic linkage between section 126 and section 110( a)( 2)( D) by providing that EPA would withdraw the section 126 findings upon EPA approval of a SIP satisfying the emission reduction requirements of the NOx SIP Call rule or upon EPA's promulgation of a FIP that achieved the emissions reductions. ( See 65 FR at 2683 and Appalachian Power v. EPA, 249 F. 3d 1032, 1039 ( D. C. Cir.

2001).) Similarly, in today's rulemaking, we are proposing to deny the section 126 petition if we approve SIPs which satisfy the emission reduction requirements of the CAIR, or if we promulgate a FIP which includes the emission reduction requirements of the CAIR.

Finally, in the earlier section 126 rule, EPA adopted as a remedy for section 126 a Federal NOx cap and trade program patterned after the model NOx cap and trade program that EPA developed for States as an option to meet their NOx SIP Call requirements. The EPA is proposing the same approach here in the event that it grants North Carolina's section 126 petition.

4. What is the Clean Air Interstate Rule?

The EPA developed the Clean Air Interstate Rule ( CAIR) 7/ 29/ 05 Draft  Do Not Quote or Cite 3When we use the term " transport" we mean to include the transport of both fine particles ( PM2.5) and their precursor emissions and/ or transport of both ozone and its precursor emissions.

35 to address interstate pollution transport with respect to the newly adopted PM2.5 and 8 hour ozone NAAQS. The EPA published the proposals for CAIR ( previously referred to as the Interstate Air Quality Rule) on January 30, 2004 ( 69 FR 4566) and June 10, 2004 ( 69 FR 32684), a notice of data availability on August 6, 2004 ( 69 FR 47828), and the final rule on May 12, 2005 ( 70 FR 25162). The EPA is providing this description of the CAIR to help place today's proposal in context. As stated above, EPA is not accepting comment on the CAIR or otherwise reopening any issue decided in the CAIR for reconsideration or comment, except that EPA is taking comment specifically on the revisions to CAIR that EPA is proposing in today's action ( Section VII in this preamble discusses the proposed changes to CAIR).

In the CAIR, based on air quality modeling analyses and cost analyses, EPA concluded that SO2 and NOx emissions in certain States in the eastern part of the country, through the phenomenon of air pollution transport, 3 contribute significantly to PM2.5 and/ or 8 hour ozone nonattainment and maintenance problems in downwind States. The CAIR establishes emission reduction requirements for the affected 7/ 29/ 05 Draft  Do Not Quote or Cite 36 upwind States under CAA section 110( a)( 2)( D). The affected States and the District of Columbia have until September 11,

2006 to adopt and submit SIP revisions to achieve these required reductions. The SIP revision must contain measures that will assure that sources in the State reduce their SO2 and/ or NOx emissions sufficiently to eliminate the amounts of SO2 and NOx that contribute significantly to nonattainment downwind. Reducing upwind precursor emissions will assist the downwind PM2.5 and 8 hour ozone areas in achieving and maintaining the NAAQS. Moreover, attainment will be achieved in a more equitable, cost effective manner than if each nonattainment area attempted to achieve attainment by implementing local emissions reductions alone.

The EPA specified that the CAIR emissions reductions be implemented in two phases. The first phase of NOx reductions starts in 2009 ( covering 2009 2014) and the first phase of SO2 reductions starts in 2010 ( covering 2010 2014);

the second phase of reductions for both NOx and SO2 starts in 2015 ( covering 2015 and thereafter). The emissions reduction requirements are based on controls that are known to be highly cost effective for EGUs, however States have the flexibility to determine what measures to adopt to achieve the necessary reductions. In the CAIR, EPA provided 7/ 29/ 05 Draft  Do Not Quote or Cite 4It should be noted that the banking provisions of the cap and trade program which encourage sources to make significant reductions before 2010 also allow sources to operate above these cap levels until all of the banked allowances are used, therefore EPA does not project that these caps will be met in 2010 or 2015.

37 model SO2 and NOx trading programs for EGUs that States can choose to adopt to meet the emissions reduction requirements in a flexible and highly cost effective manner.

If EPA ultimately includes Delaware and New Jersey in the CAIR with respect to the PM2.5 NAAQS ( see proposal at 70 FR 25408), EPA estimates that the CAIR would reduce SO2 emissions by 3.6 million tons in 2010 and by 3.9 million tons in 2015; and would reduce annual NOx emissions by 1.2 million tons in 2009 and by 1.5 million tons in 2015.

( These numbers reflect the annual SO2 and NOx requirements.)

If all these States ( including Delaware and New Jersey for the PM2.5 NAAQS) choose to achieve these reductions through EGU controls, then EGU SO2 emissions in the affected States would be capped at 3.7 million tons in 2010 and 2.6 million tons in 2015; 4 and EGU annual NOx emissions would be capped at 1.5 million tons in 2009 and 1.3 million tons in 2015.

Based on the promulgated CAIR ( 70 FR 25162), EPA estimates that the required SO2 and NOx emissions reductions would, by themselves, bring into attainment 52 of the 79 counties that are otherwise projected to be in nonattainment 7/ 29/ 05 Draft  Do Not Quote or Cite 38 for PM2.5 in 2010, and 57 of the 74 counties that are otherwise projected to be in nonattainment for PM2.5 in 2015. The EPA further estimates that the required NOx emissions reductions would, by themselves, bring into attainment 3 of the 40 counties that are otherwise projected to be in nonattainment for 8 hour ozone in 2010, and 6 of the 22 counties that are projected to be in nonattainment for 8 hour ozone in 2015. In addition, the CAIR will improve PM2.5 and 8 hour ozone air quality in the areas that would remain nonattainment for those two NAAQS after implementation of the CAIR. Because of CAIR, the States with those remaining nonattainment areas will find it less burdensome and less expensive to reach attainment by adopting additional controls. The CAIR will also reduce PM2.5 and 8 hour ozone levels in attainment areas, providing significant health and environmental benefits in all areas of the eastern United States.

For a more complete description of the CAIR and its impacts, the reader is encouraged to review the preamble to the CAIR.

5. What Are the Findings of Failure to Submit for the Section 110( a)( 2)( D) Plans?

In a final rule published on April 25, 2005 ( 70 FR 7/ 29/ 05 Draft  Do Not Quote or Cite 39 21147), we made national findings that States have failed to submit SIPs required under section 110( a)( 2)( D) to address interstate transport with respect to the 8 hour ozone and PM2.5 NAAQS.

The April 25, 2005 findings started a 2 year clock for EPA to promulgate a Federal implementation plan ( FIP) to address the requirements of section 110( a)( 2)( D). Under section 110( c)( 1), EPA may issue a FIP any time after such findings are made and must do so unless a SIP revision correcting the deficiency is approved by EPA before the FIP is promulgated. The EPA intends to issue guidance regarding how States outside the CAIR region could satisfy the section 110( a)( 2)( D) requirement. For States affected by CAIR, an approved SIP meeting the CAIR requirements would satisfy the requirement and turn off the FIP clock. As discussed below in section IV, EPA is today proposing a FIP for States affected by the CAIR. The EPA intends to promulgate the CAIR FIP by March 15, 2006 along with the final section 126 response. However, EPA intends to withdraw the FIP in a State in coordination with approval of a SIP for the State that meets the CAIR requirements.

The findings do not start a sanctions clock pursuant to section 179 because the findings do not pertain to a part D 7/ 29/ 05 Draft  Do Not Quote or Cite 40 plan for nonattainment areas required under section 110( a)( 2)( I) and because the action is not a SIP Call pursuant to section 110( k)( 5).

D. Summary of North Carolina's Section 126 Petition 1. What Sources Does the Petition Target?

The North Carolina petition requests relief from certain emissions from large EGUs located in 13 States.

With respect to the PM2.5 NAAQS, the petition requests that EPA find that NOx and SO2 emissions from large EGUs in 12 States ( Alabama, Georgia, Illinois, Indiana, Kentucky,

Michigan, Ohio, Pennsylvania, South Carolina, Tennessee,

Virginia, and West Virginia) are significantly contributing to nonattainment in, or interfering with maintenance by,

North Carolina. With respect to the 8 hour ozone NAAQS, the petition requests that EPA find that NOx emissions from large EGUs in 5 States ( Georgia, Maryland, South Carolina,

Tennessee, and Virginia) are significantly contributing to nonattainment in, or interfering with maintenance by, North Carolina ( Petition, p. 1.)

The petition defines the term " EGUs" as all facilities meeting the criteria described in the proposal for the CAIR.

( See 69 FR 4566, 4610; January 30, 2004.) In the proposal for the CAIR, we defined EGUs as " fossil fuel fired boilers 7/ 29/ 05 Draft  Do Not Quote or Cite 5 As noted in section VII below, EPA is proposing to amend the definition of EGU to remove certain ambiguities regarding the definition's application to solid waste incinerators and to existing units that formerly generated electricity for sale but have not done so since before November 15, 1990. We understand the North Carolina section 126 petition as applying only to the sources included in the clarified definition and not to sources we are proposing to exclude from the definition of EGU.

41 and turbines serving an electric generator with a nameplate capacity of greater than 25 megawatts ( MW) producing electricity for sale." ( Id.) ( See section VII of today's preamble for clarification of the EGU definition. 5)

2. What Control Remedy Does the Petition Request?

In its petition, North Carolina states that compliance with the NOx and SO2 emissions budgets in the proposal for the CAIR would satisfy the requirements of the petition.

These emissions budgets were based on controls that are highly cost effective for EGUs. North Carolina also states that it does not oppose the flexibility discussed by EPA ( 69 FR at 4622) to allow equivalent reductions from other source categories in given States, so long as those reductions are real and enforceable ( Petition, p. 24).

In the CAIR, EPA provided model NOx and SO2 cap and trade programs for EGUs as control options for States to choose to meet the CAIR emissions reductions requirements.

The trading programs allow interstate trading among sources 7/ 29/ 05 Draft  Do Not Quote or Cite 42 in all States subject to the CAIR that adopt the programs.

In its petition, North Carolina said it recognizes the value of allowing sources flexibility to reduce their emissions in the most cost effective manner consistent with the statute.

However, North Carolina expressed concerns about a regional trading program that could operate to deprive North Carolina of the benefits of the control remedy in the subset of States that affect North Carolina ( Petition, pp. 25 28). We address this issue below in section VI.

3. What Is the Technical Support for the Petition?

To support its claim that EGUs outside North Carolina are contributing significantly to nonattainment and maintenance problems in the State, North Carolina relies largely on EPA's technical analyses for the proposed CAIR.

Therefore, as discussed above, the petition targets sources in the same States that EPA linked to North Carolina in the proposed CAIR. As additional support, North Carolina cites analyses conducted by the Southern Appalachian Mountains Initiative ( SAMI) on PM2.5 transport, North Carolina's further evaluation of the SAMI's analyses, as well as back trajectory analyses performed by the North Carolina Division of Air Quality from PM2.5 monitors in two counties. ( See Petition, pp. 13 17.) 7/ 29/ 05 Draft  Do Not Quote or Cite 43 E. What Is the Litigation on the Section 126 Rulemaking Schedule?

On March 19, 2004, EPA received a petition from the State of North Carolina filed under CAA section 126.

Section 126( b) requires EPA to make the requested finding,

or to deny the petition, within 60 days of receipt. It also requires EPA to provide a public hearing before acting on the petition. In addition, EPA's action under section 126 is subject to the procedural requirements of section 307( d)

of the CAA. ( See section 307( d)( 2)( 5).) One of these requirements is that EPA conduct notice and comment rulemaking. Section 307( d)( 10) provides for a time extension, under certain circumstances, for rulemakings subject to that provision. Specifically, it allows statutory deadlines that require promulgation in less than 6 months from proposal to be extended to not more than 6 months from proposal to afford the public and the Agency adequate opportunity to carry out the purposes of section 307( d). In an action published on May 26, 2004 ( 69 FR 30038), EPA extended the deadline for EPA to take action on the North Carolina petition by the full 6 months, to November 18, 2004.

On February 17, 2005, the State of North Carolina and 7/ 29/ 05 Draft  Do Not Quote or Cite 44 the citizen group Environmental Defense filed complaints against EPA seeking to compel EPA to take action on the State's section 126 petition: State of North Carolina v.

Johnson, No. 5: 05   CV   112 ( E. D. N. C.) and Environmental Defense v. Johnson, No. 5: 05   CV   113 ( E. D. N. C.). The EPA,

North Carolina, and Environmental Defense filed a proposed consent decree that would establish a schedule for EPA to act on the petitions. Pursuant to CAA section 113( g), the EPA solicited comments on the proposed consent decree, by notice dated March 2, 2005 ( 70 FR 10089). The comment period closed April 1, 2005 without EPA receiving negative comment. On May 9, 2005, the court entered a slightly modified version of the consent decree.

The schedule in the consent decree requires that no later than August 1, 2005, EPA must sign for publication the proposed action to grant or deny the petition. If EPA proposes to approve any part of the petition, the proposal must include the proposed remedy. No later than March 15,

2006, EPA must take final action to grant or deny the petition. If EPA grants any part of the petition ( i. e.,

makes a section 126( b) finding), the final action must include the remedy. The consent decree also requires EPA to hold a public hearing on the proposal during the week of 7/ 29/ 05 Draft  Do Not Quote or Cite 45 September 12, 2005 in North Carolina. Today's proposal meets the first deadline set forth in the consent decree.

The EPA has scheduled two public hearings during the week of September 12, 2005, one to be held in North Carolina and the other in Virginia ( see DATES above for further information on the hearings).

F. How Is EPA Addressing the Section 126 Related Comments Received During the CAIR Rulemaking?

In the January 30, 2004 CAIR proposal, EPA set forth its general view of the approach it expected to take in responding to any section 126 petition that might be submitted that relies on essentially the same record as the CAIR ( 69 FR at 4580). That approach is the one EPA used in addressing section 126 petitions that were submitted to EPA in 1997 while EPA was developing the NOx SIP Call to control ozone transport ( as discussed in section I. C. 3. above).

The EPA received comments on the CAIR proposal regarding its intended approach for acting on any future section 126 petitions that might be filed. Many commenters expressed support for the approach that EPA had outlined.

Other commenters raised issues regarding the timing of emissions reductions under a new section 126 action. Some pointed out that the CAIR compliance date would be later 7/ 29/ 05 Draft  Do Not Quote or Cite 46 than the 3 years allowed for compliance under section 126.

Some were concerned that the proposed CAIR compliance date was later than many attainment dates and, therefore, States may need section 126 petitions in order to get earlier upwind reductions in order to meet their attainment dates.

Some questioned the legal basis for linking the two rules.

Several commenters expressed concern that EPA would be restricting the use of or weakening the section 126 authority. A number of commenters urged EPA not to prejudge any petition, but to evaluate each on its own merit. Some thought that any petitions submitted prior to designations or before States had had the opportunity to prepare SIPs would be premature and should be denied. Others suggested that the CAIR might not solve all the transport problems and that States would need to retain the section 126 tool to seek further reductions.

As discussed above, after issuing the CAIR proposal,

EPA received, on March 19, 2004, the section 126 petition from North Carolina. In the final CAIR, we stated that when we propose action on the North Carolina petition, we would set forth our view of the interaction between section 110( a)( 2)( D) and section 126 . Section II below explains EPA's view of this interaction. 7/ 29/ 05 Draft  Do Not Quote or Cite 47 In addition, we said we would take into consideration and respond to the section 126 related comments we received on the CAIR. The EPA has reviewed all the comments and will be providing responses to the relevant ones in the docket for this rulemaking action.

II. What Is EPA's Legal and Analytical Approach for the Section 126 Petition?

As described in section I. C. 2 above, section 126 of the CAA is integrally related to the CAA's " good neighbor"

provision, section 110( a)( 2)( D), which requires States to adopt implementation plans to prohibit emissions from sources within the State that significantly contribute to other States' nonattainment of a NAAQS, or which interfere with other States' ability to maintain a NAAQS. Under section 126, a downwind State " may petition the Administrator for a finding that any major source or group of stationary sources emits or would emit any air pollutant in violation of CAA section 110( a)( 2)( D)." Should EPA make a finding that a source or group of sources is emitting in violation of the section 110( a)( 2)( D) prohibition, existing sources in violation may operate no longer than 3 months unless the sources comply with emission limitations and compliance schedules provided by the Administrator which 7/ 29/ 05 Draft  Do Not Quote or Cite 48 bring about compliance " as expeditiously as practicable, but in no case later than three years after the date of such finding." See section 126( c).

The EPA's determination whether or not to grant a section 126 petition consequently turns on whether SIPs are in violation of section 110( a)( 2)( D). See Appalachian Power v. EPA, 249 F. 3d 1032, 1045 46 ( D. C. Cir., 2001), holding that the determination of whether the " prohibition" on excessive interstate transport of air pollutants is being violated is the same under section 110( a)( 2)( D) and section 126; see also North Carolina Petition p. 22 (" the operative legal standard under sections 110 and 126 is identical").

Moreover, because of this interrelation and identity, EPA has construed section 126 as applying on a statewide contribution basis when dealing with issues of interstate transport of ozone precursors. This means that a finding by EPA that a SIP is in violation of section 110( a)( 2)( D)( i) is a sufficient basis for a finding that sources within that State are in violation of that prohibition for purposes of section 126( b) ( 64 FR at 28282). No more individualized determination for a source or group of sources is necessary.

Id. This is because sources' contribution to nonattainment is collective, so that even relatively small individual 7/ 29/ 05 Draft  Do Not Quote or Cite 49 contributions are significant in the aggregate. Id. Thus,

"[ i] f State wide emissions contribute significantly to nonattainment downwind, then the State's section 126 sources may be subject to SIP controls; if State wide emissions do not contribute significantly, then the State's section 126 sources would not be subject to SIP control." Id.; see Appalachian Power, 249 F. 3d 1049 50 ( upholding this determination). Under this approach, therefore, if EPA determines that a State's SIP fails to meet the requirements of section 110( a)( 2)( D)( i) with respect to a downwind State,

it follows that the prohibition in section 126 is also violated with respect to that downwind State.

In the CAIR, EPA defined " significant contribution" as consisting of an air quality factor reflecting an upwind State's ambient impact on downwind nonattainment areas, and the cost factor of availability of highly cost effective controls ( 70 FR at 25174). The reductions required are expressed as Statewide budgets of PM2.5 and ozone precursors ( SO2 and NOx for PM2.5, and NOx for ozone) susceptible to reduction by highly cost effective controls. For PM2.5, an upwind State must contribute at least 0.2  g/ m3 PM2.5 to at least one downwind nonattainment area ( the " link") to satisfy the air quality part of the test. Id. at 25191. 7/ 29/ 05 Draft  Do Not Quote or Cite 50 For ozone, the air quality component is satisfied if the maximum contribution by an upwind State is at least 2 parts per billion, the average contribution is greater than one percent, and certain other numerical criteria are met. Id.

at 25175. The CAIR rule also stated that an upwind State's emissions can interfere significantly with a downwind State's maintenance of a NAAQS when EPA, or a State, can reasonably project based on available data that in the absence of CAIR controls, a current or projected nonattainment area will revert to nonattainment, after having achieved attainment, due to continued emissions growth or to other relevant factors. Id. at 25193; see also the response to comments document for the CAIR, section III. C. 17, docket number OAR 2003 0053 2165.

The EPA is adopting this same approach in the present rulemaking. This, of course, is a consequence of EPA's interpretation ( just explained) that a violation of 110( a)( 2)( D)( i) also indicates that sources are emitting in violation of the section 110( a)( 2)( D) prohibition for purposes of section 126( b). For the same reason, EPA is adopting the highly cost effective component of the test from the CAIR rule, with the consequent emission budgets.

Once EPA finds under section 126( b) that a source ( or 7/ 29/ 05 Draft  Do Not Quote or Cite 51 sources) is operating in violation of the section 110( a)( 2)( D)( i) prohibition, the violation would be eliminated ( assuming that sources continue to operate) by EPA approving a SIP containing provisions eliminating the significant contribution, or by EPA itself adopting a FIP which contains provisions eliminating that contribution, by the deadline for the section 126 sources. This means that a section 126( b) violation no longer exists once EPA approves a timely SIP, or adopts a timely FIP, requiring each State contributing significantly ( in this case, to North Carolina)

to reduce emissions to the levels reflecting elimination of the State's significant contribution, as specified in the CAIR. This result is again a consequence of the integral relationship of section 126( b) and section 110( a)( 2)( D).

The EPA intends to apply these same principles in responding to future section 126 petitions from States in the CAIR region addressing CAIR pollutants. Thus, we would deny these petitions with respect to any State having an approved SIP meeting the CAIR emissions reductions requirements and with respect to States for which EPA has promulgated a CAIR FIP. In such a case there would be no underlying section 110( a)( 2)( D) violation, and such a violation is the predicate for granting a section 126 7/ 29/ 05 Draft  Do Not Quote or Cite 52 petition.

III. What Is EPA's Proposed Action on the Section 126 Petition?

As discussed in the preceding section, EPA is proposing to rely on the conclusions drawn in the final CAIR in determining whether emissions from sources in the States named in the petition contribute significantly to 8 hour ozone and/ or PM2.5 nonattainment and maintenance problems in North Carolina. As discussed in section I above, North Carolina based its petition in large part on the analyses for the proposed CAIR identifying EGUs in the same upwind States that EPA proposed to link to North Carolina. The EPA conducted new modeling analyses using updated emissions inventories for the final CAIR. The EPA also applied a different value for the threshold contribution level for the air quality portion of the significant contribution determination for PM2.5 in the final CAIR. Therefore, the upwind State to downwind State linkages differed in the final CAIR from the proposal.

A. What Is EPA's Proposed Action with Respect to the 8

Hour Ozone NAAQS?

In its petition, North Carolina requested that EPA make findings that large EGUs in Georgia, Maryland, South 7/ 29/ 05 Draft  Do Not Quote or Cite 53 Carolina, Tennessee, and Virginia contribute significantly to nonattainment in, or interfere with maintenance by, North Carolina with respect to the 8 hour ozone NAAQS. In the proposed CAIR, EPA linked these States to 8 hour ozone air quality problems in Mecklenburg County, North Carolina. In the final CAIR, EPA's updated analyses project all of North Carolina to be in attainment for 8 hour ozone in the CAIR 2010 base case. Therefore, EPA did not link any upwind States to North Carolina with respect to the 8 hour ozone NAAQS in the final CAIR ( See preamble Table VI 9; 70 FR at 25249). Consequently, EPA is proposing to deny the section 126 petition with respect to the 8 hour ozone NAAQS.

B. What Is EPA's Proposed Action with Respect to the PM2.5 NAAQS?

In its petition, North Carolina also requested that EPA make findings that large EGUs in Alabama, Georgia, Illinois,

Indiana, Kentucky, Michigan, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia and West Virginia contribute significantly to nonattainment in, or interfere with maintenance by, North Carolina with respect to the PM2.5 NAAQS. In the proposed CAIR, these 12 States were linked to PM2.5 nonattainment problems in North Carolina. In the final CAIR, as noted, EPA used different, updated modeling 7/ 29/ 05 Draft  Do Not Quote or Cite 54 and also applied a 0.2  g/ m3 contribution threshold level rather than the proposed 0.15  g/ m3 for the air quality portion of the significant contribution determination ( 70 FR 25190 25191). Based on the updated modeling and the 0.2  g/ m3 contribution threshold level, EPA determined in CAIR that the following 10 States are significantly contributing to PM2.5 air quality problems in North Carolina: Alabama,

Georgia, Indiana, Kentucky, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, and West Virginia ( see preamble Table VI 8; 70 FR at 25248 25249). As explained in section II above, under the collective contribution approach, this means for purposes of section 126( b) that sources within these States for which EPA determined highly cost effective controls are available are also contributing significantly to PM2.5 nonattainment problems in North Carolina.

In determining what action to propose in response to the PM2.5 portion of the section 126 petition, EPA is taking into consideration the FIP that is being proposed today in conjunction with this section 126 action ( see section IV below). The FIP proposes control requirements for each of the States affected by the CAIR in order to achieve the emissions reductions required to address interstate 7/ 29/ 05 Draft  Do Not Quote or Cite 55 transport. The EPA plans to issue the final FIP at the same time as the final section 126 action. Therefore, for EGUs in States linked to North Carolina in CAIR ( and therefore,

for which EPA is proposing a FIP), EPA is proposing in the alternative ( 1) to deny the petition if EPA issues the final FIP to address the interstate transport no later than the final section 126 response or ( 2) to grant the petition and make section 126 findings if EPA does not promulgate the FIP prior to or concurrently with the final section 126 response. Because the FIP would fully address the PM2.5

related interstate transport problem identified in CAIR and thus eliminate the section 110( a)( 2)( D) violation, there would no longer be a basis for the section 126 findings. As discussed in section VI, we are proposing the Federal CAIR NOx and SO2 cap and trade programs as the control remedy for both the section 126 action and the FIP. Therefore, whether the upwind sources in these 10 States are regulated under the section 126 action or the FIP, the emissions reductions requirements and compliance deadlines would be the same.

For EGUs located in Illinois and Michigan, which are not linked to North Carolina in the final CAIR with respect to the PM2.5 NAAQS ( 70 FR 25247 48), EPA is proposing to deny the petition. 7/ 29/ 05 Draft  Do Not Quote or Cite 56 The EPA notes that it is not including any regulatory text for the proposed findings because EPA's preferred alternative is to promulgate the CAIR FIP and fully deny the North Carolina section 126 petition.

C. What Are the Proposed Requirements for Sources for Which EPA Makes a Section 126( b) Finding?

The EPA is proposing, in sections V and VI below, NOx and SO2 Federal cap and trade programs that would apply to any new or existing EGU for which EPA ultimately makes a section 126( b) finding in response to the North Carolina petition. The proposed Federal cap and trade programs are largely the same as the model trading rules for EGUs that EPA provided in the CAIR as control options for States,

although EPA is proposing certain differences that are primarily intended to account for Federal implementation and to facilitate transfer from the proposed Federal programs to State programs. ( See section VI for a description of the differences). The same EGU budgets and compliance dates would apply.

As in the CAIR, the NOx and SO2 reductions would occur in two phases. The first phase of NOx reductions would start in 2009 ( covering 2009 2014) and the first phase of SO2 reductions would start in 2010 ( covering 2010 2014); the 7/ 29/ 05 Draft  Do Not Quote or Cite 57 second phase of reductions for both NOx and SO2 would start in 2015 ( covering 2015 and thereafter).

Section 126( c) states, in relevant part, that:

it shall be a violation of this section and the applicable implementation plan in such State ( 1) for any major proposed new ( or modified)

source with respect to which a finding has been made under subsection ( b) to be constructed or to operate in violation of this section and the prohibition of section 110( a)( 2)( D)([ i]) or this section, or ( 2) for any major existing source to operate more than three months after such finding has been made with respect to it.

The Administrator may permit the continued operation of a source referred to in paragraph ( 2) beyond the expiration of such three month period if such source complies with such emission limitations and compliance schedules ( containing increments of progress) as may be provided by the Administrator to bring about compliance 7/ 29/ 05 Draft  Do Not Quote or Cite 58 with the requirements contained in section 110( a)( 2)( D)([ i]) as expeditiously as practicable, but not later than three years after the date of such finding.

The Federal cap and trade programs that EPA is proposing would satisfy the section 126 requirements. The control requirements would ensure that the sources do not emit in violation of the section 110( a)( 2)( D)( i) prohibition and would serve as the alternative set of requirements that the Administrator may apply for the purpose of allowing existing sources subject to a section 126( b) finding to operate for more than 3 months after the finding is made.

Under the consent decree, described in section I above,

EPA must sign the final action on the petition by March 15,

2006. If EPA makes any findings at that time, and they become effective 60 days later, consistent with section 126( c), compliance with the control remedy must be required no later than May 14, 2009. The control remedy that EPA is proposing would satisfy the 3 year compliance period in section 126( c). First, the remedy would commence within the 3 year maximum timeframe set out in section 126( c), since as just explained, the phase I NOx control requirements would 7/ 29/ 05 Draft  Do Not Quote or Cite 59 take effect on January 1, 2009. Further controls on SO2 and NOx would be required as soon as technically feasible. The EPA views the proposed NOx and SO2 emissions reduction requirements as a single action, but one that cannot be fully implemented in 2009 and instead must be implemented in phases solely for reasons of feasibility. In analyses conducted for the CAIR, EPA determined that part of the NOx and SO2 emissions reductions cannot feasibly be implemented until 2015 and the first phase of SO2 emission reductions cannot feasibly be implemented until 2010. In this regard,

we note that section 126( c) on its face contemplates that control measures satisfying both section 126 and section 110( a)( 2)( D) may stretch out beyond a 3 year period.

Section 126( c) states that sources that are subject to a section 126( b) finding may continue to operate if they comply with " emissions limitations and compliance schedules ( containing increments of progress) provided by [ EPA]"

( emphasis added); the reference to increments of progress can describe a situation where compliance is stretched out over periods exceeding 3 years provided initial action ( i. e., an initial increment of progress) occurs within 3 years. See also North Carolina Petition at pp. 28 29 supporting a phased approach to compliance and noting that a 7/ 29/ 05 Draft  Do Not Quote or Cite 60 stepwise approach to regional emissions reductions is " consistent with the requirement that a section 126 remedy ` contain[] increments of progress...'" Section VII of this preamble describes the proposed section 126 control requirements in greater detail.

D. When and How Would EPA Withdraw Section 126 Findings and Control Requirements in a State if EPA approves a SIP to the Meet the CAIR?

Under today's proposal, by March 15, 2006, EPA would take final action to either make section 126 findings for sources in 10 States contributing significantly to North Carolina's nonattainment and maintenance problems for the PM2.5 NAAQS or promulgate a FIP for all CAIR States for the PM2.5 and/ or 8 hour ozone NAAQS. The CAIR requires States to submit SIP revisions by September 11, 2006. Therefore,

the Federal CAIR trading programs would be promulgated in advance of the SIP submission deadline. As stated previously, the section 126 response and FIP would not limit the options available to States to meet the requirements of CAIR. The EPA intends to withdraw the section 126 or the FIP requirements in a State in coordination with approval of a implementation plan for the State that meets the CAIR requirements. In the timing of the SIP approval, EPA would 7/ 29/ 05 Draft  Do Not Quote or Cite 6The CAIR requires affected sources to begin monitoring 1 year before the initial control periods ( i. e., sources begin monitoring in 2008 for the NOx programs and begin monitoring in 2009 for the SO2 program). Note that EPA would take any necessary actions to implement the monitoring provisions of the proposed Federal trading rules in time for monitoring to begin in 2008. To the extent that a State chooses to control EGUs to meet its CAIR obligations, the monitoring requirements would be identical whether EPA regulated EGUs through the proposed Federal trading programs or the State regulated EGUs through their SIP.

61 take into consideration whether the SIP approval would occur before or after EPA has begun recording allowances in source accounts under Federal CAIR trading programs.

It is EPA's preference that States regulate sources to control the interstate transport, including making decisions regarding NOx allocations, should a State choose to participate in the State CAIR trading programs.

Consequently, EPA does not intend to record NOx allocations in sources' allowance accounts ( or take any other steps to implement the section 126 or FIP requirements that could impact a State's ability to regulate their sources in a different manner) until December 1, 2007, more than a year after the CAIR SIP submission deadline. 6 This would allow EPA time to take rulemaking action to approve timely,

compliant SIPs and withdraw the section 126 or FIP requirements.

If a SIP is approved that includes the EPA administered 7/ 29/ 05 Draft  Do Not Quote or Cite 62 State CAIR trading programs after EPA has recorded allowances for the Federal CAIR trading programs, EPA would work with the State to ensure a smooth transition from the Federal trading programs to the State trading programs. To preserve the integrity of the trading program budgets, once Federal allocations are recorded in source accounts for a particular control period, EPA does not intend to approve overlapping State allocations for the same control period.

Rather, EPA will work with the States to approve State allocations for control periods that begin upon the expiration of a control period for which Federal allocations have been recorded in source accounts.

In section VI below, EPA proposes the schedule for recording Federal NOx allocations in source accounts. Under this schedule, EPA seeks to balance two goals: ( 1) to provide adequate time for States to submit and for EPA to approve SIPs containing the NOx allocations, and ( 2) to provide certainty to sources regarding their CAIR NOx allocations in adequate time for sources to make compliance decisions. Under this schedule, EPA would record the allowances 1 year at a time for the first two control periods. Thus, for SIPs approved after EPA has recorded the 2009 allocations on December 1, 2007, but before EPA has 7/ 29/ 05 Draft  Do Not Quote or Cite 63 recorded the 2010 allocations on December 1, 2008, EPA would time the withdrawal of the FIP or section 126 requirements such that allocations would be made under the State CAIR trading program for the 2010 control period. There would be another opportunity for transitioning from the Federal to State trading programs for the 2011 control period. As discussed in section VI below, EPA is proposing to record NOx allowances in source accounts by December 1, 2009 for the 2011 2013 control periods. Therefore, for SIPs approved after December 1, 2009, the transition from the Federal to State program would not occur until the 2014 control period.

The EPA believes it is unlikely that there would be any outstanding SIPs to be approved after December 1, 2009.

The EPA intends to work with States to help ensure that NOx allowances can be allocated under the State CAIR trading programs beginning with the initial 2009 control period. In order to expedite the approval of the SIP allowance allocation methodology and provide additional flexibility to States, EPA is proposing an abbreviated SIP option as discussed in section VI. See section VI for a detailed discussion of EPA's proposed schedule for recording Federal NOx allocations in source allowance accounts.

For States that choose to implement the CAIR 7/ 29/ 05 Draft  Do Not Quote or Cite 64 requirements using a method other than the EPA administered State CAIR trading programs, the EPA would also carefully consider the timing of the transition from the Federal trading programs to the State implemented programs to avoid disruption of the Federal trading programs within any annual or ozone season control period.

IV. What Is the Proposed Federal Implementation Plan for the CAIR?

A. What Is the Legal Framework for the Proposed Federal Implementation Plan?

Section 110( c)( 1) of the CAA requires the Administrator to promulgate a Federal Implementation Plan ( FIP) within 2 years of: ( 1) finding that a State has failed to make a required submittal, ( 2) finding that a submittal received does not satisfy the minimum completeness criteria established under section 110( k)( 1)( A), or ( 3) disapproving a SIP submittal in whole or in part. The EPA may issue a FIP any time after making one of these findings or issuing a SIP disapproval and it must do so within 2 years. However,

EPA is relieved of this obligation if a SIP revision correcting the deficiency identified is approved by EPA before such a FIP is promulgated.

As discussed in paragraph I. D. 5, in a final rule signed 7/ 29/ 05 Draft  Do Not Quote or Cite 65 the same day as CAIR, EPA found that States have failed to submit SIPs to satisfy the interstate transport requirement under section 110( a)( 2)( D)( i) of the CAA for the PM2.5 and 8 hour ozone NAAQS ( 70 FR 21147). These findings started the 2 year clock for the promulgation of a FIP. They did not start a " sanctions clock" as there are no mandatory sanctions associated with the FIP or the finding of State failure to submit SIPs to satisfy 110( a)( 2)( D)( i).

The EPA has broad authority to act when it has identified deficiencies in SIPs. This authority is of three general types. First, EPA may promulgate any measure which it is permitted to issue pursuant to pre existing independent statutory authority for example, the provisions of title II. That is, EPA may promulgate any measure which it has authority to issue in a non FIP context, without reliance on section 110( c). Second, EPA may invoke section 110( c)' s general FIP authority and act to cure a SIP deficiency in any way not clearly prohibited by statute.

Third, under section 110( c), the courts have held that EPA may exercise all authority that the State may exercise under the CAA.

The first type of authority, EPA's general authority is independent of section 110( c). It is not dependent on or 7/ 29/ 05 Draft  Do Not Quote or Cite 66 altered by finding a deficiency in a SIP.

The second type of authority, EPA's general authority under section 110( c), is essentially remedial. The EPA has broad power under that section to cure a defective State plan. Thus, in promulgating a FIP, EPA may exercise its own, independent regulatory authority under the CAA in any way not clearly prohibited by an explicit provision of the CAA. When EPA has promulgated a FIP, courts have not required explicit authority for specific measures: " We are inclined to construe Congress' broad grant of power to the EPA as including all enforcement devices reasonably necessary to the achievement and maintenance of the goals established by the legislation." ( South Terminal Corp. v.

EPA, 504 F. 2d 646, 669. ( 1st Cir., 1974)). See also City of Santa Rosa v. EPA, 534 F. 2d 150, 153 154 ( 9th Cir., 1976)

( upholding the Administrator's authority to promulgate a FIP imposing gas rationing in Los Angeles on a massive scale).

" The authority to regulate pollution carries with it the power to do so in a manner reasonably calculated to reach that end." Id. at 155.

In addition, when EPA has determined that a State has not completely discharged its primary responsibility to protect its air quality, EPA is compelled to assume this 7/ 29/ 05 Draft  Do Not Quote or Cite 67 task and thus the powers of the defaulting State accrue to EPA. As the Ninth Circuit has held, when EPA acts in place of the State pursuant to a FIP under section ll0( c), EPA " stands in the shoes of the defaulting State, and all of the rights and duties that would otherwise fall to the State accrue instead to EPA," Central Arizona Water Conservation District v. EPA, 990 F. 2d 1531, at 1541 9th Cir., 1993).

The First Circuit, in an early FIP case, agreed:

the Administrator must promulgate promptly regulations setting forth an implementation plan for a State should the State itself fail to propose a satisfactory one. The statutory scheme would be unworkable were it read as giving to EPA when promulgating an implementation plan for a State, less than those necessary measures allowed by Congress to a State to accomplish Federal clean air goals. We do not adopt any such crippling interpretation.

South Terminal Corporation v. EPA, 504 F. 2d 668 ( 1st Cir.,

1974).

In the case of Federally recognized Indian Tribes, as we explained in the CAIR,( 70 FR 25167 68) Tribes are subject to section 110( a)( 2)( D), but are not required to submit implementation plans. The EPA is required to promulgate FIPs for Indian country as necessary or appropriate to protect air quality. See 40 CFR 49.11( a). Presently, there are no emissions sources in Indian country within the region 7/ 29/ 05 Draft  Do Not Quote or Cite 68 affected by CAIR which would make a FIP necessary or appropriate. In the event of the planned construction of such a source within Indian country in the 28 State region subject to CAIR, EPA will work with the relevant Tribal government to regulate the source through a Tribal or Federal implementation plan. In the case of an EGU, the EPA anticipates that the Tribal implementation plan ( TIP) or FIP would involve the participation of the EGU in the EPA administered cap and trade program. The EPA will also work with the Tribe and affected States to determine how allowances allocated to the Indian country source will affect State allowance allocations. Because any FIPs for Indian country will necessarily be tailored to the specific circumstances, today's proposal contains no such FIP. The reader is referred to the CAIR for a more detailed discussion of the interaction of the CAIR with Indian country ( 70 FR 25167 68, 25315).

B. What Is the Timing and Scope of the CAIR FIP Action?

As described in the CAIR, EPA views seriously its responsibility to address the issue of regional transport of ozone and ozone precursor emissions. Decreases in NOx and SO2 emissions are needed in the States identified in the CAIR to enable downwind States to develop and implement 7/ 29/ 05 Draft  Do Not Quote or Cite 69 plans to achieve and maintain the PM2.5 and 8 hour ozone NAAQS. The CAIR identified the specific amount of emissions reductions necessary for each State identified in the CAIR to meet their section 110( a)( 2)( D) interstate transport obligations. Implementation of these reductions is necessary to enable downwind States to achieve the NAAQS in order to provide clean air for their residents.

Therefore, EPA is proposing FIPs today in conjunction with the proposed action regarding North Carolina's section 126 petition concerning transport of PM2.5 and 8 hour ozone precursors as discussed in section III of this proposal.

The EPA intends to promulgate these FIPs at the same time as its response to North Carolina's section 126 petition, which must be finalized no later than March 15, 2006 in accordance with a judicially enforceable consent decree. The EPA believes it is appropriate to coordinate these two rulemakings because they both address interstate transport,

both will apply to EGUs, and because the States covered by the response to the section 126 petition are a geographical subset of the States covered by CAIR. In today's action,

EPA is not proposing to promulgate FIPs for any States not covered by CAIR.

The EPA believes it is appropriate to finalize the FIP 7/ 29/ 05 Draft  Do Not Quote or Cite 70 in March 2006 on the same schedule as EPA's response to the section 126 petition. Moving quickly to promulgate a FIP is consistent with Congress' intent that attainment occur in these downwind nonattainment areas " as expeditiously as practicable" ( sections 181( a), 172( a)). The FIP will help ensure that all emissions reductions required by CAIR, and the associated environmental benefits, will be achieved by the CAIR deadlines. In addition, the FIP will ensure that sources in all States covered by CAIR, regardless of whether they are affected by the North Carolina section 126 petition, will be required to achieve emissions reductions at the same time.

By proposing and finalizing the FIP well before the deadline for States to submit their CAIR SIPs, EPA is providing States an additional option for complying with the requirements of CAIR. States planning to adopt the model trading programs contained in the CAIR rule, could accept the FIP and significantly reduce the State resources needed to establish a program to implement the CAIR. Since there are no punitive consequences for States associated with the FIP or the finding of failure to submit SIPs to satisfy section 110( a)( 2)( D)( i), some States could avoid much of the time and expense of revising their SIPs to comply with CAIR. 7/ 29/ 05 Draft  Do Not Quote or Cite 71 Some States, particularly those subject to the NOx SIP Call,

may need to prepare minor SIP revisions regardless of whether they accept the FIP implementing the requirements of CAIR; yet the time and expense involved would be significantly reduced.

The Agency proposes to provide States that are subject to today's proposed Federal requirements with the option to submit abbreviated SIP revisions covering specific elements of the Federal trading programs without submitting full SIP revisions to meet the requirements of CAIR. By proposing to accept such abbreviated SIP revisions, the Agency intends to increase the options available for States to comply with CAIR. A State could choose to retain control of these specific elements of the trading programs, without submitting a full SIP revision to meet the requirements of CAIR. As there are no sanctions associated with the proposed FIP, EPA anticipates that some States may prefer to avoid spending the time and money necessary to submit a full SIP revision.

The Agency would accept abbreviated SIP revisions for any or all of the following 4 specific elements of the Federal trading programs: ( 1) provisions for non EGUs to opt in to the Federal trading programs, ( 2) allocating annual and/ or ozone season NOx allowances to individual 7/ 29/ 05 Draft  Do Not Quote or Cite 72 sources in the State, ( 3) allocating allowances from the annual NOx Compliance Supplement Pool ( CSP) to individual sources in the State, and ( 4) including NOx SIP Call trading sources that are not EGUs under CAIR in the Federal CAIR ozone season NOx cap and trade program. Upon approval of any such SIP revisions, EPA anticipates that the corresponding portions of the FIP for that State would be replaced or their application to sources would be modified.

In offering a framework for abbreviated SIP revisions the Agency anticipates that many States will wish to retain control over the allocation of allowances to sources in their State and may wish to meet their NOx SIP Call obligations by allowing NOx budget units ( that is, units in the NOx SIP Call trading program) that are not EGUs under CAIR to participate in the CAIR ozone season trading program.

The EPA requests comment on the proposed option for States to submit abbreviated SIPs covering specific elements of the Federal trading programs. A more complete discussion of the proposed abbreviated SIP provisions is found in Section VI.

Thus, the FIP will increase the options available for a State to comply with CAIR. Through the CAIR rulemaking actions, EPA has provided States with a great deal of data 7/ 29/ 05 Draft  Do Not Quote or Cite 73 and analyses concerning air quality and control costs, as well as a determination whether upwind sources contribute significantly to downwind nonattainment under section 110( a)( 2)( D). The EPA recognizes that States would face great difficulties in developing transport SIPs to meet the requirements of section 110( a)( 2)( D) without these data and policies. Indeed, EPA acknowledged in the CAIR that the Agency's extensive analyses and data, including the multiyear operation of a federally funded monitoring system ( and the considerable information generated through that system)

was a necessary element in the Agency's conclusion that is was appropriate to impose such stringent requirements on States ( 70 FR 25267).

States have 18 months from the signature date of the CAIR, or until September 11, 2006, to develop, adopt, and submit revisions to their SIPs that meet the requirements of CAIR. We remain ready to work with the States to develop fully approvable SIPs. The FIP will not be promulgated for any State that has an approved SIP implementing the CAIR requirements in place prior to promulgation of the FIP. In addition, EPA will withdraw the FIP for any State once EPA approves a SIP that meets the CAIR requirements in that State. 7/ 29/ 05 Draft  Do Not Quote or Cite 74 Having the FIP in place early will provide for a transition to a CAIR trading program with the greatest continuity, administrative ease, and cost savings for States that would otherwise develop a program identical to the model trading program. The EPA's goal is to have approvable programs in place that meet the requirements of the CAIR whether they are in the form of a SIP or a FIP. By finalizing a FIP, EPA would in no way preclude a State from developing its own SIP to either adopt the trading rule with any discretionary elements allowed by the CAIR, or to meeting the State emissions budget through different measures of the State's choosing. The EPA will carefully consider the timing of each element of the FIP process to make sure to preserve each State's freedom to develop and implement SIPs. In this way, EPA will enhance each State's options for complying with the requirements of the CAIR while ensuring that all the emissions reductions and environmental benefits of the CAIR are realized.

C. What Are the FIP Control Measures?

In contrast to the SIP process where selection and implementation of control measures is the primary responsibility of the State in the case of a FIP, it is EPA's responsibility to select the control measures for 7/ 29/ 05 Draft  Do Not Quote or Cite 75 sources and assure compliance with those measures. Thus,

while the FIP would be designed by EPA to achieve the same total emissions reductions described in the CAIR, the specific control measures assigned in the FIP could be different from what a State might choose.

In selecting the control measures for the FIP, EPA is proposing the same measures used in the CAIR for calculating the required emissions reductions. In the CAIR, EPA is requiring States to achieve specified levels of emissions reductions based on levels that are achievable through implementation of highly cost effective controls on EGUs.

See the discussion in section IV of the CAIR, " What Amounts of SO2 and NOx Emissions Did EPA Determine Should Be Reduced?" The EPA is including by reference the technical basis and supporting rationale for EPA's conclusions as to the highly cost effective strategy developed for the CAIR.

The SO2 and NOx cap and trade programs for the FIP are discussed below in section VI. The unit allocations will be provided in a later action and will meet the State EGU budgets that are established in the CAIR for States that choose to meet the required emissions reductions by controlling EGUs only.

D. When and How Would EPA Remove the FIP Requirements if 7/ 29/ 05 Draft  Do Not Quote or Cite 76 EPA Approves a SIP to Meet the CAIR?

As discussed previously, EPA intends to finalize the FIP by March 15, 2006, concurrently with EPA's response to the section 126 petition from North Carolina. The EPA intends to withdraw the FIP in a State in coordination with EPA's approval of a SIP for that State that meets the CAIR requirements. It is EPA's preference that States regulate sources to control the interstate transport, therefore EPA will work with States to help ensure that the FIP would not need to be implemented. The EPA's intended process for withdrawing the FIP or section 126 requirements is discussed above under section III. D.

V. Emission Reduction Requirements for the Proposed CAIR FIP and Proposed Section 126 Response A. Overview of Emission Reduction Requirements In the CAIR ( 70 FR 25162), EPA determined that SO2 and NOx emissions from sources in the District of Columbia and the following 23 States contribute significantly to downwind PM2.5 nonattainment: Alabama, Florida, Georgia, Illinois,

Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan,

Minnesota, Mississippi, Missouri, New York, North Carolina,

Ohio, Pennsylvania, South Carolina, Tennessee, Texas,

Virginia, West Virginia, and Wisconsin.

In the CAIR, the Agency also determined that the 7/ 29/ 05 Draft  Do Not Quote or Cite 77 District of Columbia and the following 25 States contribute significantly to downwind 8 hour ozone nonattainment:

Alabama, Arkansas, Connecticut, Delaware, Florida, Illinois,

Indiana, Iowa, Kentucky, Louisiana, Maryland, Massachusetts,

Michigan, Mississippi, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee,

Virginia, West Virginia, and Wisconsin.

The EPA established CAIR annual SO2 and NOx emission reduction requirements for States that contribute significantly to downwind PM2.5 nonattainment and established ozone season NOx emission reduction requirements for States that contribute significantly to downwind 8 hour ozone nonattainment. The CAIR requires upwind States to revise their State implementation plans ( SIP) to include control measures to reduce emissions of SO2 and/ or NOx to meet the requirements in CAIR ( SO2 is a precursor to PM2.5 formation, and NOx is a precursor to both ozone and PM2.5 formation).

The CAIR requires that the emission reductions be implemented in two phases. The first phase of CAIR NOx reductions starts in 2009 ( covering 2009 2014) and the first phase of CAIR SO2 reductions starts in 2010 ( covering 2010

2014); the second phase of CAIR reductions for both NOx and SO2 starts in 2015, covering 2015 and thereafter.

The EPA determined the required amounts of CAIR 7/ 29/ 05 Draft  Do Not Quote or Cite 7 The amounts of State by State emission reductions required by CAIR are determined based on State EGU emission budgets. Determination of a State's emission reduction requirements depends on the source categories that the State chooses to control and, if the State controls only EGUs, on whether it chooses to participate in the EPA administered EGU emissions cap and trade programs. See section V in the CAIR NFR preamble ( 70 FR 25229) as well as the technical support document entitled " Regional and State SO2 and NOx Emissions Budgets," March 2005, for detailed discussion of the relationship between CAIR EGU emissions budgets and the State emission reduction requirements. Also see § 51.123 and § 51.124 ( 70 FR 25319 25333).

78 emission reductions based on the application of highly costeffective controls on electric generating units ( EGUs). The States have flexibility in how to achieve the CAIR emission reductions. 7 The CAIR includes model rules for regionwide EGU emission cap and trade programs, which States can choose to adopt to obtain the required reductions in a flexible and cost effective manner ( the CAIR SIP model trading rules).

Today, EPA is proposing FIPs that are substantively the same as the CAIR SIP model cap and trade programs. The proposed FIPs would achieve the NOx and SO2 emission reductions required under the CAIR, by requiring EGUs in the affected States to reduce emissions through participation in Federal CAIR NOx and SO2 cap and trade programs. The EPA intends to integrate these Federal trading programs with the model trading programs that States may choose to adopt to meet the CAIR ( see section VI. J in this preamble for a 7/ 29/ 05 Draft  Do Not Quote or Cite 79 discussion of coordination between today's proposed Federal cap and trade programs and CAIR SIP cap and trade programs).

The proposed Federal CAIR cap and trade programs would achieve the emission reductions required by CAIR by the deadlines established in that rule, with the same highly cost effective EGU control measures forming the basis for the emission budgets.

For States affected by the proposed section 126 remedy ( see section III for affected States), the Federal CAIR cap and trade programs would achieve the required emission reductions. As explained in section I of this preamble, for sources in States that the Agency found to be contributing significantly to nonattainment or maintenance in North Carolina under CAIR, the Agency is proposing to deny the petition for sources in any such State if, prior to or concurrently with the final section 126 response, EPA promulgates a FIP to address the interstate transport from that State. The Agency is proposing, in the alternative, to grant the petition. The Agency intends to promulgate FIPs concurrently with the final section 126 response.

The regionwide emission reduction requirements and State emission budgets that are the basis for today's proposal were established in the CAIR rulemaking. The EPA is not requesting comment on its determination of the CAIR 7/ 29/ 05 Draft  Do Not Quote or Cite 80 regionwide emission reduction requirements or State emission budgets, nor is the EPA requesting comment on the CAIR regionwide requirements or State budgets themselves.

On May 12, 2005, the Agency proposed to find that Delaware and New Jersey contribute significantly to downwind PM2.5 nonattainment and thus proposed to require annual SO2 and NOx controls in these two States ( 70 FR 25408). ( In the CAIR NFR, the Agency found Delaware and New Jersey to contribute to downwind 8 hour ozone nonattainment but not to downwind PM2.5 nonattainment). Based on the proposal to require annual SO2 and NOx controls in Delaware and New Jersey, today's FIP proposal includes requirements for annual SO2 and NOx control in these two States. The EPA determined these required amounts of emission reductions based on the application of highly cost effective controls on EGUs, and the proposed FIP would achieve these reductions by requiring EGUs to participate in the Federal CAIR cap and trade programs.

The proposed CAIR FIP would require annual SO2 and NOx and ozone season NOx emission reductions ( and the proposed section 126 remedy would require annual SO2 and NOx reductions) from EGUs in affected States, through participation in regionwide Federal cap and trade programs.

The Agency intends the applicability provisions in today's proposal to be identical to the applicability provisions in 7/ 29/ 05 Draft  Do Not Quote or Cite 81 the CAIR model cap and trade programs. As discussed elsewhere in today's preamble, the Agency is proposing two revisions to the applicability provisions in the CAIR model cap and trade programs. The applicability provisions that EPA is proposing in today's action for the FIP and section 126 remedy would be identical to the applicability provisions in the CAIR model programs if the two proposed revisions to the applicability provisions in the CAIR model programs are finalized. ( See section VI. C in today's preamble for a discussion of the proposed applicability provisions for today's action, and see section VII for the proposed revisions to the applicability provisions in the CAIR model programs.)

In this section, EPA describes the approaches for determining regionwide emission caps and State emission budgets taken in the CAIR rulemaking. In section VI in this preamble, the Agency explains in detail the proposed Federal CAIR cap and trade programs for the CAIR FIP and section 126 response.

In today's action, the Agency is proposing a federallyadministered program to meet the CAIR emission reduction requirements on the timeline established in CAIR. Today's proposal does not establish those emission reduction requirements or schedule, which were established by the CAIR rulemaking. Thus, the Agency is not requesting comment on 7/ 29/ 05 Draft  Do Not Quote or Cite 82 the emission reduction requirements or the schedule for implementing the emissions reductions.

The Agency is taking this action to satisfy the concerns of North Carolina cited in its section 126 petition and to provide a Federal backstop for CAIR where all States may not be able to develop and submit timely, approvable SIP revisions. In no way should the FIP for CAIR be viewed as a sign of any concern about States ultimately making the emission reductions required under CAIR. There are no sanctions associated with these FIPs, and EPA does not intend CAIR FIPs to have any other negative consequences for the affected States. To the contrary, EPA is proposing FIP approaches that are flexible and allow States a full opportunity to get their SIP revisions in place, with minimal disruption in transitioning from Federal to State implementation.

B. What Is EPA's Approach for Determining Regionwide NOx and SO2 Emissions Caps and State Emissions Budgets?

1. Determination of Regionwide Caps for SO2 and NOx In the preamble to the CAIR NFR, the Agency explained how it determined regionwide SO2 and NOx emissions caps.

See section IV in the CAIR NFR preamble ( 70 FR 25195 25229).

In determining the amounts of SO2 and NOx emissions that must be eliminated for compliance with CAIR, EPA evaluated the amounts of SO2 and NOx emissions in upwind States that 7/ 29/ 05 Draft  Do Not Quote or Cite 8 The IPM is a multiregional, dynamic, deterministic linear programming model of the U. S. electric power sector. The Agency uses IPM to examine costs and, more broadly, analyze the projected impact of environmental polices on the electric power sector in the 48 contiguous States and the District of Columbia.

83 contribute significantly to downwind PM2.5 nonattainment and the amounts of NOx emissions in upwind states that contribute significantly to downwind 8 hour ozone non attainment. The EPA determined the amounts of emissions that must be reduced to eliminate significant contributions from upwind States, by applying highly cost effective control measures to EGUs and determining the emissions reductions that would result ( 70 FR 25195 25229).

EPA used the Integrated Planning Model ( IPM) to analyze the cost effectiveness of the CAIR emission reduction requirements. 8 The EPA modeled the cost effectiveness of CAIR assuming interstate emissions trading. While the Agency does not require States to participate in the CAIR SIP regionwide interstate EGU cap and trade programs, we believe it is reasonable to evaluate control costs assuming States choose to participate in such programs since participation will result in less expensive emission reductions. The Agency modeled the CAIR requirements as three regionwide EGU cap and trade programs ( an annual SO2 program, an annual NOx program, and an ozone season NOx 7/ 29/ 05 Draft  Do Not Quote or Cite 84 program). Section IV. A. 1 in the CAIR NFR preamble provides more discussion of EPA's cost modeling methodology for the CAIR rulemaking ( 70 FR 25196 25197). The Agency also evaluated the feasibility of achieving the CAIR emission reduction requirements in the CAIR time frame, as discussed in section IV. C. in the CAIR NFR preamble ( 70 FR 25215 25225).

For SO2, the regionwide annual cap for 2015 and later ( the second CAIR phase) is based on a 65 percent reduction of title IV Phase II allowances allocated to units in the 23 States and the District of Columbia that are required by CAIR to implement annual SO2 controls. The regionwide annual SO2 cap for the years 2010 2014 ( the first CAIR phase) is based on a 50 percent reduction from those same title IV allocation amounts. The EPA determined these regionwide caps to be highly cost effective by analyzing the cost of controlling emissions from EGUs. Details of EPA's analysis are in section IV in the CAIR NFR preamble ( 70 FR 25195 25229).

Both the annual and the ozone season NOx regionwide caps were determined by applying uniform NOx emission rates to recent historic heat input for EGUs in the affected States ( 23 States and the District of Columbia for annual NOx, 25 States and the District of Columbia for ozone season 7/ 29/ 05 Draft  Do Not Quote or Cite 85 NOx). For 2015 and later ( the second CAIR phase), the Agency applied an emission rate of 0.125 lb/ mmBtu to recent historic heat input. For the years 2009 2014 ( the first CAIR phase) the Agency applied an emission rate of 0.15 lb/ mmBtu. The heat input amounts used in these calculations were the highest annual heat input ( or ozone season heat input for the ozone season caps) from Acid Rain Program units for any year from 1999 to 2002 for each State. The EPA determined the resulting regionwide caps to be highly cost effective by analyzing the cost of controlling emissions from EGUs. Details of EPA's analysis are in section IV in the CAIR NFR preamble ( 70 FR 25195 25229).

2. Determination of State by State Emissions Budgets for SO2 and NOx a. Determination of State SO2 Emissions Budgets In CAIR, the EPA determined State annual SO2 emissions budgets for 2015 and later based on a 65 percent reduction from title IV Phase II allowances allocated to units in the affected States and the District of Columbia, and for the years 2010 2014 based on a 50 percent reduction from the title IV allocation amounts. Section V. A. 1. a of the CAIR NFR preamble, 70 FR 25229 25230, describes the approach for determining State budgets. The Agency is not inviting comment on the CAIR State SO2 budgets. The EPA employed the same approach to determining proposed State SO2 budgets for 7/ 29/ 05 Draft  Do Not Quote or Cite 9 See section V in the CAIR NFR preamble ( 70 FR 25229 25233) as well as the technical support document entitled 86 Delaware and New Jersey in its proposal to include these two States in CAIR for annual SO2 controls ( 70 FR 25416).

Today's proposed FIP and section 126 remedy would achieve the required SO2 emission reductions through a regionwide Federal SO2 cap and trade program for EGUs. As discussed further in section VI, below, the Federal CAIR SO2 cap and trade program would rely on title IV allowances,

which sources would retire at specified ratios greater than 1 to 1 for compliance with the proposed Federal CAIR program. Congress has already allocated title IV SO2 allowances to sources in perpetuity. State SO2 emissions budgets would not affect the distribution of SO2 allowances and are not directly relevant for today's proposal.

The CAIR State SO2 budgets were established to provide States flexibility in selecting a control remedy to meet the requirements of CAIR. States can choose to participate in the EPA administered CAIR SO2 trading program, in which case sources would comply by retiring title IV allowances at the specified retirement ratios, and the CAIR State SO2 budgets would not be directly relevant. For States that do not choose to participate in the EPA administered SO2 trading program, however, the CAIR State SO2 budgets are used to determine the State's emission reduction requirements. 9 7/ 29/ 05 Draft  Do Not Quote or Cite " Regional and State SO2 and NOx Emissions Budgets," March 2005, for detailed discussion of the relationship between CAIR EGU emissions budgets and the State emission reduction requirements. Also see § 51.123 and § 51.124 ( 70 FR 25319 25333).

87 The EPA determined title IV allowance retirement ratios for the CAIR SIP model SO2 trading program based on the ratio of the total of all States' CAIR SO2 budgets ( for 2010 and 2015) to the total of such States' title IV Phase II allowance levels.

In the CAIR FIP and 126 remedy, the EPA is proposing to use a Federal SO2 trading program approach that is substantively identical to the CAIR SIP SO2 model trading rule and relies on retirement of title IV allowances at the same specified ratios. Thus, State SO2 emission budgets would not affect the distribution of SO2 allowances and are not directly relevant for today's proposal.

For further discussion regarding achieving the required SO2 reductions in today's proposed Federal program through retirement ratios for title IV allowances, see section VI in today's preamble. Also see the CAIR NFR preamble in section V. A. 1. c ( 70 FR 25230) as well as section VII ( 70 FR 25255

25273).

b. Determination of State Annual and Ozone Season NOx Emissions Budgets In CAIR, EPA determined State annual and ozone season 7/ 29/ 05 Draft  Do Not Quote or Cite 88 NOx emissions budgets by apportioning the CAIR regionwide annual and ozone season NOx caps to States based on each State's share of fuel adjusted average recent historic heat input. For each CAIR State, for each year ( 1999 through 2002), the Agency summed heat input by fuel type, adjusted the heat input using fuel adjustment factors, and determined the average fuel adjusted heat input for each State. The fuel adjustment factors that the Agency used to adjust heat input are 1.0 for coal, 0.4 for gas, and 0.6 for oil.

The EPA summed the average adjusted heat inputs for each State in the CAIR region ( either the annual NOx region or the ozone season NOx region, as appropriate), and divided each State's average adjusted heat input by the regionwide total average adjusted heat input, to determine each State's proportion of the total. The Agency multiplied each State's proportion by the regionwide caps, to determine each State's proportional share of the regionwide caps. The EPA used the same methodology to determine both annual and ozone season NOx State budgets, except that for annual budgets the annual heat input was used, whereas for ozone season budgets the ozone season heat input was used. ( See section V of the CAIR NFR preamble for discussion of the Agency's determination of CAIR State emissions budgets, 70 FR 25229 25233.) The Agency is not inviting comment on the CAIR State annual and ozone season NOx budgets. 7/ 29/ 05 Draft  Do Not Quote or Cite 10 As in CAIR, an annual NOx allowance would authorize the emission of a ton of NOx during a calendar year and an ozone season NOx allowance would authorize the emission of a ton of NOx during an ozone season. See section VI in this 89 For its proposal to include Delaware and New Jersey in CAIR for annual NOx controls, the Agency proposed to determine annual State NOx budgets for these two States by first calculating a total " regional" cap for the two States,

using the same methodology used in CAIR to develop regionwide NOx caps ( the regionwide NOx cap methodology is described above). The EPA proposed to determine State annual NOx budgets for these two States by apportioning the regional Delaware and New Jersey cap back to the two States using the same fuel adjusted heat input basis as was used in the CAIR NFR, as described above ( also see section IV. B. in the proposal to include Delaware and New Jersey in CAIR for PM2.5 purposes, 70 FR 25416).

In today's proposed Federal CAIR NOx cap and trade programs for EGUs, the State annual and ozone season EGU NOx budgets are the same as the budgets in the CAIR NFR ( annual NOx budgets for Delaware and New Jersey in today's proposal are the same as the annual NOx budgets for these two States in the proposal to include them in CAIR for PM2.5 purposes).

For each State affected by the proposed Federal CAIR NOx trading programs, the State NOx budgets are the total amount of allowances10 that the Agency will allocate to 7/ 29/ 05 Draft  Do Not Quote or Cite preamble for further discussion and see the proposed regulatory text for definitions.

90 sources in the State. See section VI in this preamble for EPA's proposed methodology for allocating NOx allowances to affected sources. The EPA's proposed allocation methodology for NOx allowances in the annual NOx and the ozone season NOx cap and trade programs is in contrast with the approach taken in the case of SO2 allowances, which are already allocated under title IV of the Clean Air Act to sources in perpetuity, as explained above.

C. What Are the State EGU Emission Budgets for the CAIR FIP and the Section 126 Response?

1. What Are the Annual State EGU SO2 Emissions Budgets?

As explained above, the required SO2 emission reductions would be achieved solely based on the requirement that sources retire title IV SO2 allowances ( which were already allocated to sources by Congress) at specified ratios greater than 1 to 1. Because State SO2 emission budgets do not affect the distribution of SO2 allowances and are not directly relevant for today's proposal, the Agency is not including State SO2 budgets in today's proposal. See section VI in this preamble for discussion of the proposed Federal CAIR SO2 trading program.

2. What Are the Annual State EGU NOx Emissions Budgets? 7/ 29/ 05 Draft  Do Not Quote or Cite 91 a. For States Affected by the CAIR FIP For the proposed Federal CAIR annual NOx cap and trade program, State NOx emissions budgets B for the 23 States and the District of Columbia that are required by CAIR to control annual NOx B are provided in Table V 1, below.

These annual NOx budgets are the same as the budgets shown in Table V 2 of the CAIR NFR preamble ( 70 FR 25231). Table V 1, below, also includes annual NOx budgets that EPA proposed for Delaware and New Jersey ( these are the same budgets that were included in Table IV 1 in " Inclusion of Delaware and New Jersey in the Clean Air Interstate Rule:

Proposed Rule" ( 70 FR 25416)). See section VI in this preamble for EPA's proposed methodology for allocating annual NOx allowances to sources in the Federal CAIR cap and trade programs.

Table V 1. CAIR Annual Electric Generating Units NOx Budgets ( tons)

State State NOx Annual Budget 2009 2014 State NOx Annual Budget 2015 and thereafter Alabama 69,020 57,517 Delaware 4,166 3,472 District of Columbia 144 120 Florida 99,445 82,871 Georgia 66,321 55,268 Illinois 76,230 63,525 Indiana 108,935 90,779 Iowa 32,692 27,243 Kentucky 83,205 69,337 Louisiana 35,512 29,593 Maryland 27,724 23,104 Michigan 65,304 54,420 7/ 29/ 05 Draft  Do Not Quote or Cite 92 Minnesota 31,443 26,203 Mississippi 17,807 14,839 Missouri 59,871 49,892 New Jersey 12,670 10,558 New York 45,617 38,014 North Carolina 62,183 51,819 Ohio 108,667 90,556 Pennsylvania 99,049 82,541 South Carolina 32,662 27,219 Tennessee 50,973 42,478 Texas 181,014 150,845 Virginia 36,074 30,062 West Virginia 74,220 61,850 Wisconsin 40,759 33,966 Total 1,521,707 1,268,091 b. For States Affected by the Section 126 Response For the proposed Federal CAIR annual NOx cap and trade program B for the ten States affected by the proposed section 126 remedy ( see section III in this preamble for affected States) B the annual State NOx emissions budgets are the same as the budgets shown in Table V 1, above. See section VI in this preamble for EPA's proposed methodology for allocating annual NOx allowances to sources in the Federal CAIR cap and trade programs.

3. What Are the Ozone Season EGU NOx Emissions Budgets?

a. For States Affected by the CAIR FIP For the proposed Federal CAIR ozone season NOx cap and trade program, State EGU NOx emissions budgets B for the 25 States and the District of Columbia that are required to control ozone season NOx B are shown by State in Table V 2,

below. These ozone season budgets are identical to the budgets in Table V 4 in the CAIR NFR preamble ( 70 FR 25233). 7/ 29/ 05 Draft  Do Not Quote or Cite 93 See section VI in this preamble for EPA's proposed methodology for allocating ozone season NOx allowances to individual sources for the Federal CAIR ozone season NOx cap and trade program.

Table V 2. CAIR Ozone Season Electricity Generating Unit NOx Budgets ( tons)

State* State NOx Ozone Season Budget 2009 2014 State NOx Ozone Season Budget 2015 and thereafter Alabama 32,182 26,818 Arkansas 11,515 9,596 Connecticut 2,559 2,559 Delaware 2,226 1,855 District of Columbia 112 94 Florida 47,912 39,926 Illinois 30,701 28,981 Indiana 45,952 39,273 Iowa 14,263 11,886 Kentucky 36,045 30,587 Louisiana 17,085 14,238 Maryland 12,834 10,695 Massachusetts 7,551 6,293 Michigan 28,971 24,142 Mississippi 8,714 7,262 Missouri 26,678 22,231 New Jersey 6,654 5,545 New York 20,632 17,193 North Carolina 28,392 23,660 Ohio 45,664 39,945 Pennsylvania 42,171 35,143 South Carolina 15,249 12,707 Tennessee 22,842 19,035 Virginia 15,994 13,328 West Virginia 26,859 26,525 Wisconsin 17,987 14,989 CAIR Region Total 567,744 484,506 * For States that have lower EGU budgets under the NOx SIP Call than their 2009 CAIR budget, table V 2 includes their SIP Call budget. For Connecticut, the NOx SIP Call budget is also used for 2015 and beyond.

b. For States Affected by the Section 126 Response As explained in section III in this preamble, the EPA 7/ 29/ 05 Draft  Do Not Quote or Cite 94 is proposing to deny the ozone portion of the section 126 petition. Therefore, the Agency is not proposing ozone season NOx State budgets for purposes of the section 126 remedy.

4. What Are the Amounts of Allowances Available in the State Annual NOx Compliance Supplement Pools?

The CAIR established State Compliance Supplement Pools ( CSP) of annual NOx allowances of vintage 2009. Under CAIR,

a State that elects to achieve its CAIR annual NOx reduction requirements by creating an annual NOx cap and trade program can allocate CSP allowances ( using mechanisms specified in CAIR) to its sources for use in complying with such an annual NOx program ( see section VII in the CAIR NFR preamble for discussion, 70 FR 25255 25273).

Today's proposed Federal CAIR annual NOx cap and trade program includes the same State CSP amounts as were established in CAIR. See section V in the CAIR NFR preamble ( 70 FR 25231 25232), as well as the technical support document entitled " Regional and State SO2 and NOx Emissions Budgets," March 2005 ( in the CAIR docket) for discussion of the Agency's process for determining the annual NOx CSP amounts for each CAIR State. The Agency is not inviting comment on the CSPs established in CAIR.