Page 1 51 FR 43814 LEXSEE 51 FR 43814 ENVIRONMENTAL PROTECTION AGENCY AGENCY: Environmental Protection Agency.

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51 FR 43814 December 4, 1986 Emissions Trading Policy Statement; General Principles for Creation, Banking and Use of Emission Reduction Credits ACTION: Final policy statement and accompanying technical issues document.

SUMMARY: This Policy Statement replaces the original bubble policy ( 44 FR 71779, December 11, 1979) and makes final revisions in an Interim Emissions Trading Policy which was published April 7, 1982 ( 47 FR 15076) and on which further comments were requested August 31, 1983 ( 48 FR 39580).

The policy describes emissions trading and sets out general principles EPA will use to evaluate emissions trades under the Clean Air Act and applicable federal regulations. Emissions trading includes bubbles, netting, and offsets, as well as banking ( storage) of emission reduction credits ( ERCs) for future use. These alternatives do not alter overall air quality requirements; they give states and industry more flexibility to meet those requirements. EPA endorses emissions trading and encourages its sound use by states and industry to help meet the goals of the Clean Air Act more quickly and inexpensively.

However, EPA also recognizes that without strict accounting practices and other safeguards, emissions trades may cause potential environmental harm. Accordingly, this policy provides more explicit guidance on baselines and related tests for environmental equivalence and environmental progress. It includes numerous tightenings and clarifications meant to assure the future environmental integrity of bubbles and other trading transactions.

Among other general steps, the policy states that the lower of actual or allowable emissions must usually be used as the baseline for emissions trades. Divergences from this baseline will be allowed only where the state or applicant shows that any potential increase in actual emissions will not jeopardize National Ambient Air Quality Standards ( NAAQS), PSD increments or visibility protection.

General showings to this effect may be made only by establishing that allowable values were clearly incorporated in or assumed by an approved demonstration of attainment or maintenance. Specific showings to this effect may be made only in narrow circumstances described in the accompanying Technical Issues Document.

Other general matters addressed and significantly clarified by this policy include requirements for air quality modeling and approvable state generic bubble rules, additional enforcement safeguards, and additional safeguards related to bubbles involving pollutants listed, regulated or proposed to be regulated under Section 112 of the Act.

This policy also sets forth new, tighter requirements for bubbles in primary nonattainment areas which require but lack approved demonstrations that national ambient standards for healthy air will be attained. In addition to requiring lowest of actual SIP allowable or RACT allowable emissions baselines in these areas, use of past shutdowns, curtailments or other reductions which occurred before application for credit is essentially eliminated, and a further reduction of at least 20 percent beyond the baseline is required. Broadly speaking, sources may secure bubble credit in these areas only if claimed reductions meet these baseline and further reduction requirements; were reasonably, objectively elicited by the opportunity to trade; and are accompanied by state assurances that the trade is consistent with the state's efforts to attain the ambient air quality standard. EPA will approve bubbles which meet these requirements because they Page 2 51 FR 43814 are consistent with the attainment needs of these areas and will yield a net air quality benefit. Such bubbles can produce economic savings and environmental improvement at the same time.

The policy announced today does not constitute final action of the Agency within the meaning of section 307( b) of the Clean Air Act, and therefore is not judicially reviewable. Rather, it establishes general guidance on approvable voluntary trades. EPA will implement this guidance in later rulemaking actions that will be judically reviewable. Applicants for emissions trades remain free, following publication of today's notice, to advance the appropriateness of different trading requirements in the context of rulemaking actions on their individual trades.

EFFECTIVE DATE: This Policy Statement is effective December 4, 1986.

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FOR FURTHER INFORMATION CONTACT: Inquiries regarding the general implementation of this policy may be directed to: Barry Gilbert, Office of Air Quality Planning and Standards ( MD 15), Research Triangle Park, NC 27711, ( 919) 541 5516.

Inquiries regarding specific applications to use this policy may be directed to the appropriate EPA Regional Office ( see Appendix A of the Technical Issues Document).

Inquiries regarding the development and basis of this policy may be directed to: Barry Elman, Regulatory Reform Staff ( PM 223), U. S. Environmental Protection Agency, 401 M Street SW., Washington, DC 20460, ( 202) 382 2727.

TEXT: SUPPLEMENTARY INFORMATION: Under Executive Order 12291, EPA must judge whether this action is " major" and therefore subject to the requirement of a Regulatory Impact Analysis. This action is not major because it establishes policies, as opposed to regulations, and can substantially reduce the costs of complying with the Clean Air Act.

This Policy Statement was submitted to the Office of Management and Budget for review. Any comments from OMB to EPA are available for public inspection in Docket G 81 2. Pursuant to U. S. C. 605( b), I hereby certify that this action will not have a significant economic impact on a substantial number of small entities. As a policy designed to allow firms flexibility to meet previously established regulatory requirements, it will impose no burdens on either small or large entities.

The contents of today's preamble are indicated in the following outline. The outline is followed by the preamble itself, and then by the Policy Statement and accompanying Technical Issues Document.

Table of Contents: Preamble I. Introduction II. Major Issues A. Baselines 1. Determining Baselines  General Guidance 2. Comments on Baselines in Nonattainment Areas with Approved Demonstrations of Attainment 3. EPA's Resolutions on Baselines in Nonattainment Areas with Approved Demonstrations of Attainment B. Baseline and Other Requirements for Bubbles in Primary Nonattainment Areas Which Require But Lack Approved Demonstrations of Attainment 1. EPA's Resolutions Regarding Baseline and Other Requirements a. Specific " Progress" Requirements Page 3 51 FR 43814 b. Additional " Progress" Requirement: State Assurances 2. Basic Rationale 3. Additional Considerations Regarding the Benefits of Bubbles III. Additional Policy Changes and Clarifications A. Generic Bubble Rules 1. Substantive Progress Requirements 2. Procedural Requirements B. Bubbles Involving Hazardous or Toxic Air Pollutants C. Banking Emission Reduction Credits ( ERCs)

D. OBERS Projections and Double Counting E. Improved Modeling and De Minimis Requirements 1. De Minimis Levels 2. Modeling Requirements F. Enforcement Issues PREAMBLE  EMISSIONS TRADING POLICY STATEMENT I. Introduction Today's policy makes final the Agency's prior guidance on general principles for creating, storing ( banking) and using emission reduction credits in trading actions under the Clean Air Act. This preamble responds to written comments EPA received on major issues raised by its proposed emissions trading policy statement ( 47 FR 15076, April 7, 1982) and subsequent request for further comment ( 48 FY 39580, August 31, 1983). It also explains the Agency's principal decisions on these issues.

Today's notice is the primary source of EPA guidance on existing source bubbles, state generic bubble rules, and emission reduction banking. It replaces the original bubble policy ( 44 FR 71779, December 11, 1979) as well as the proposed emissions trading policy statement, which was effective April 7, 1982 as interim guidance. The notice addresses how emission reduction credits ( ERCs)  the currency of trading  may be used for bubbles, as well as for netting or offsets. Netting and offsets are part of emissions trading, but are governed by EPA and state regulations for new source review. n1 n 1 See, e. g., 40 CFR 51.18, 51.24, 51,307, 52.21, 52.24, 52.27 and 52.38.

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

Nothing in today's notice alters EPA new source review requirements or exempts owners or operators of stationary sources from compliance with applicable preconstruction permit regulations in accord with 40 CFR 51.18, 51.24, 51.307, 52.21, 52.24, 52.27 and 52.28. Interested parties should, however, be aware that bubble trades are not subject to preconstruction review or regulations where these trades do not involve construction, reconstruction, or modification or a source within the meaning of those terms in the regulations listed above. Page 4 51 FR 43814 The policy announced today does not constitute final action of the Agency within the meaning of section 307( b) of the Clean Air Act, and therefore is not judicially reviewable. Rather, it establishes general guidance for reviewing and approving voluntarily submitted trades. EPA will implement this guidance in later rulemaking actions that will be judicially reviewable. Applicants for emissions trades remain free, following publication of today's notice, to advance the appropriateness of different trading requirements in the context of rulemaking actions on their individual trades.

Under today's notice, EPA continues to authorize use of bubbles, banks, and generic bubble rules in all areas of the country, and provides for the fair and prompt processing of bubble applications which have been pending before EPA under the 1982 policy. However, based on experience under the 1982 policy, and in order to ensure the environmental integrity of future emissions trades, today's notice significantly tightens requirements applicable to certain trading actions, particularly existing source bubbles in primary nonattainment areas which require but lack demonstrations of attainment. It also clarifies approval criteria in ways which should make review and approval of environmentally sound trades more rapid and predictable. Among other safeguards or safeguarding clarifications, it requires that:

 Bubbles may no longer result in any increase in applicable net baseline emissions in any area, whether attainment or nonattainment, except under stringent conditions which assure that ambient equivalence will nevertheless be achieved; n2 n 2 This change constitutes a significantly more stringent definition of what may be considered a bubble under the Emissions Trading Policy. Specific ambient tests which must be met to qualify for an exception from this restriction can be found in the Technical Issues Document, Section I. B. 1. c Actions which may no longer be treated as bubbles under today's notice must be processed under general EPA criteria applicable to SIP revisions.

 Baselines for sources participating in a bubble in any area must take into account all three factors relevant to total emissions ( i. e., emission rate, capacity utilization, and hours of operation) in order to provide an accurate accounting of emissions before and after the trade;

 Bubbles in primary nonattainment areas needing but lacking approved demonstrations of attainment must use the lowest of actual SIP allowable or RACT allowable emissions baseline, as described below, for each source involved in the trade;

 Bubbles in primary nonattainment areas needing but lacking approved demonstrations must contribute to progress toward attainment by providing a 20% net reduction in emissions remaining after application of the baseline above to all sources involved in the trade or, if the bubble is being processed under a state generic rule, the greater of a 20% net reduction or the percent reduction which would be required from all controllable stationary sources in that area ( e. g., taking into account expected mobile source reductions and disregarding area source contributions) in order to achieve attainment;

 Bubbles in attainment areas and nonattainment areas with approved demonstrations must use the lower of actual or allowable values for each of the three baseline components, unless allowable values higher than corresponding actual values are clearly used or reflected in the demonstration or otherwise shown not to jeopardize ambient standards, PSD increments or visibility;

 In all areas, emission reductions must be made state enforceable in order to qualify as ERCs and be deposited in an EPA approvable bank;

 In all areas, bubbles must meet more stringent tests for ambient equivalence, including additional ambient significance levels, more protective air quality modeling requirements, and more conservative definitions of de minimis trades;

 In all areas, the total of any incidental emissions of hazardous or potentially hazardous air pollutants associated with a criteria pollutant in a bubble trade must remain equal or be decreased, whether such hazardous pollutants have been regulated, proposed for regulation, listed, or the subject of a notice ofintent to list under Clean Air Act 112;

 States must provide assurances to EPA that bubbles submitted for EPA approval in primary nonattainment areas needing but lacking approved demonstrations are consistent with the state's SIP Page 5 51 FR 43814 planning and attainment objectives. For generic rules, the state must make certain assurances in conjunction with its submittal of the generic rule to EPA, and certain additional assurances with the state's proposed and final approval of each individual bubble under that rule;

 Bubbles in such primary nonattainment areas may not use credit from reductions made before application to bank or trade such credit;

 Where sources in such areas seek to bank credits in the future, " application to bank," for purposes of evaluating credits for use in bubbles, means the time of filing an application to make the proposed credits state enforceable through or concurrent with use of a formal or informal banking mechanism;

 Bubbles must not impede compliance or enforcement ( e. g., the policy states that compliance extensions may no longer be granted under generic rules in any nonattainment area, and that bubble applications do not per se suspend underlying SIP limits or defer source obligations to achieve those limits);

 Generic rules in all areas will be subject to increased EPA oversight, including EPA participation in the state's public notice and comment process prior to state approval of individual bubbles, subsequent reviews of individual generic approvals, and reviews of the general implementation of the rules themselves, in order to assure that approved rules are being properly implemented; and  EPA or state notices of proposed and final bubble approvals, in all areas, must clearly indicate any changes in actual as well as allowable emissions at all sources involved in the bubble, so the ambient effects of these trades may be known.

These and other changes announced today will generally be applied to all SIP revision bubbles and state generic bubble rules that have not been approved by EPA as of this date. n3 n 3 See, however, discussion of " pending bubbles" in Section I. G. of today's Policy Statement and Section I. A. 1. b.( 4) of today's Technical Issues Document.

On June 25, 1984 the Supreme Court unanimously ruled that EPA may allow states to use a single, plantwide definition of " stationary source" for new source review ( NSR) purposes in nonattainment areas as well as attainment areas, provided use of that definition would not interfere with attainment and maintenance of national ambient air quality standards ( NAAQS). n4 Under the " plantwide" definition, increases and decreases occurring anywhere on plant property from emission units within the same twodigit SIC code are generally eligible for netting, n5 and may be used to balance each other without triggering preconstruction permit requirements for major new sources or modifications, so long as actual plantwide emissions would not significantly increase.

n 4 Chevron U. S. A., Inc. v. Natural Resources Defense Council, 104 S. Ct. 2778, 14 ELR 20507, overruling Natural Resources Defense Council, Inc. v. Gorsuch, 685 F. 2d 718, 12 ELR 20942 ( D. C. Cir. 1982).

n 5 SIC Code means codes described in the Standard Industrial Classification Manual, 1972, amended 1977 ( U. S. Government Printing Office, stock numbers 4101 0066 and 003 005 00176 0, respectively).

States and sources considering the use of netting should, however, be aware that applicable New Source Performance Standards ( NSPS), preconstruction review requirements under 40 CFR 51.18 ( a)( h) and ( 1), NESHAPS, and SIP limits continue to apply to such modifications. EPA is currently developing guidance for states that wish to adopt a plant wide definition of " source" for nonattainment areas into their new source review regulations. n6 n 6 Many states currently employ the so called " dual definition" of " statutory source," under which both the plant and each emitting piece of equipment within it are " stationary sources." Under this definition, when any individual piece of equipment is large enough in terms of potential Page 6 51 FR 43814 emissions to be defined as a " major stationary source," only increases and decreases in actual emissions from that individual unit are eligible to " net."

While the plantwide definition provides greater opportunity for netting in general, netting is also allowed under the dual definition. Indeed, where no individual piece of emitting equipment is a " major stationary source," the " dual definition" allows the same opportunity to " net" as the " plantwide" definition.

Pending or future litigation or rulemaking, particularly final resolution of the settlement agreement arising from the industry challenge to ERA's 1980 promulgation of revised NSR rules ( Chemical Manufacturers Association v. EPA, No. 79 1112, D. C. Cir., February 1982), may alter aspects of this policy, especially regarding certain transactions under EPA new source review regulations. See 48 FR 28742 ( August 25, 1983) ( proposed revisions). However, unless and until EPA finally revises the relevant regulations, the current requirements remain in effect.

II. Major Issues A. Baselines The baseline for a given source is that level of emissions below which any additional reductions may be counted ( credited) for use in trades. Questions relating to appropriate bubble baselines for particular emitting sources or types of sources in nonattainment areas generated the principal issues resolved by today's notice. EPA's resolutions strengthen SIP integrity and states' ability to make progress toward attainment by ( a) identifying more precisely the three factors which must be addressed in calculating baseline emissions; ( b) reaffirming that for bubbles in nonattainment areas with demonstrations of attainment that have been approved and not subsequently found by EPA to be substantially inadequate to attain ambient standards, the baseline must be consistent with assumptions used to develop the area's demonstration or must otherwise be shown by appropriate ambient dispersion modeling to protect air quality standards; and ( c) specifying a number of special " progress" requirements for bubbles in primary nonattainment areas needing but lacking approved demonstrations of attainment, including stringent new baseline requirements, a ban on the use of reductions produced before application to bank or trade, and a mandatory extra reduction of at least 20% beyond applicable baseline emissions. Together with tightened criteria for modeled demonstrations of ambient equivalence, a well as other new requirements for bubbles, banks, and generic rules, these resolutions will assure continued environmental progress through trades.

1. Determining Baselines  General Guidance A source's baseline emissions are calculated by multiplying three factors: the source's emission rate ( usually expressed as emissions per quantity of production or throughput); its hours of operations or hourly usage over some representative time period; and its capacity utilization ( e. g., the units of production per hour of use). n7 All three factors must be addressed, since a source's emissions for a given period may vary widely despite a constant emission rate, depending, for example, on whether it is operated at low capacity for a small number of hours or utilized near full capacity for a large number of hours. The product of this baseline calculation is generally expressed in pounds of emissions per day or tons of emissions per year ( TPY), or both.

n 7 For detailed discussion of baseline emissions and baseline factors, see Technical Issues Document, Appendix B.

Today's policy clarifies EPA's original intent regarding appropriate methods for determining these three baseline factors. In general, in nonattainment areas with approved demonstrations, a source's baseline emissions for bubble purposes must be calculated using the lower of it actual emission rate or allowable emission limit, plus the lower of its actual or allowable capacity utilization and hours of operation. That is, baseline emissions in these areas must generally be calculated using lower of actual or allowable values for all three baseline factors. n8 Page 7 51 FR 43814 n 8 Netting and offset transactions are governed by EPA's regulations at 40 CFR 51.18, 51.24, 51.307, 52.21, 52.24, 52.27 and 52.28. Accordingly, this discussion of baseline applies only to bubbles.

Actual values for these factors are based on some representative historical time period ( generally the average of the two years preceding the source's application to bank or trade).

However, where the state or applicant shows that the SIP, a source specific preconstruction permit, or an equivalent document clearly assumes or specifies allowable values which are higher than corresponding actual values for one or more baseline factors, and that document post dates the baseline inventory year for a SIP's attainment demonstration, these values may replace actual values for calculating the bubble baseline. Where only one value ( typically the emission rate) is specified, the other two baseline factors must generally be based on actual levels. n9 n 9 See Section I. A. 1 and Appendix B of today's Technical Issues Document for further details on baseline calculation.

Such showings must be based on either data from the SIP or data used in SIP preparation. n10 Applicants may alternatively perform appropriate modeling to demonstrate that use of allowable values which are higher than actual values will not delay or jeopardize attainment and maintenance of ambient standards, protection of PSD increments, or visibility. Upon either type of showing, these allowable values may be used. n11 n 10 This could include documentation such as the demonstration calculations themselves, accompanying materials, or affidavits from those who constructed the demonstration.

n 11 Use of such higher allowable values which must be justified by modeling because they are not shown to be clearly reflected in or assumed by the demonstration or an equivalent document, would require such bubbles in nonattainment areas with approved demonstrations to be processed as SIP revisions, since Level III modeling would be required for their justification under today's modeling screen. In addition, the SIP's reasonable further progress ( RFP) calculations would generally have to be revised.

The principal difference between use of such higher allowable values in these nonattainment areas and in attainment areas is that in attainment areas, ambient evaluations more limited than Level III modeling may justify use of such allowable values. However, for bubbles processed as case by case SIP revisions in attainment areas, the Region retains discretion to require additional technical support, where limited air quality dispersion modeling is proposed to justify use of such allowable baseline values. See Section I. A. 1. a. of today's Technical Issues Document.

All bubbles in attainment areas relying on allowable values not used or reflected in an approved demonstration must be evaluated for ambient impact based on a comparison of before trade actual emissions and post trade allowable emissions ( i. e., the " worst case"), in order to assure that any potential increase in actual emissions are identified and that their effects are consistent with applicable Clean Air Act requirements. See today's Technical Issues Document, Section I. A. 1. a.

This approach is required because control of existing sources through approved SIP measures is the Clean Air Act's principal mechanism for timely attainment, and because many approved demonstrations either do not contain stated assumptions regarding all three baseline factors, or were based on combinations of actual and allowable values for these factors. It recognizes that bubble baselines must accurately reflect the SIP assumptions for all three baseline factors in order to maintain SIP integrity.

Under this approach, determination of bubble baselines consistent with approved demonstrations is a sequential, tiered process. That process was implicit in both EPA's 1982 policy and its 1983 request for further comment, as well as actual practice in bubble actions under those notices. EPA is making it explicit in response to concerns that " paper trades" might undermine attainment demonstrations because approved SIPs do not always state all assumptions on which their demonstrations rely. By requiring that unstated or ambiguous values for all baseline factors be resolved in favor of lower actual values, today's notice Page 8 51 FR 43814 provides additional assurance that bubbles in nonattainment areas with approved demonstrations will not threaten ambient standards, PSD increments, or visability protection.

2. Comments on Baselines in Nonattainment Areas With Approved Demonstrations of Attainment Comments on baselines in these areas indicated wide disagreement over where EPA require states to set this baseline level. The 1982 policy noted that " In nonattainment areas with approved demonstrations of attainment, the baseline must be consistent with assumptions used to develop the area's SIP." That policy generally required that where approved SIP demonstrations relied on actual emission levels at particular sources, those actual levels would have to be reflected in bubble baselines. Where SIP demonstrations were based on allowable emissions, the 1982 policy authorized baselines reflecting such allowable levels, despite the fact that some sources' actual emissions are currently or historically lower than their " allowables." n12 n 12 See n. 13 below.

The great majority of commenters supported this SIP foundation for trading baselines, noting that SIPs are the cornerstone of the Act's approach to air quality management. These commenters also asserted that regardless of sources' actual emissions, measuring reductions from allowable levels assumed in a valid SIP demonstration was entirely appropriate for use in trading, since the area would still attain ambient standards in a timely manner. See, e. g., 48 FR 39582 ( August 31, 1983).

However, other commenters asserted this approach was either " too loose" or " too tight." The first group stated that credit should only be granted for reductions below current actual emissions, provided actual emissions met applicable SIP limits. n13 They advanced various reasons for this position, including assertions that reliance on past reductions, while consistent with approved plans for attainment, might not comport with " broader" clean air goals. Some felt that SIPs were insufficently precise to serve as a basis for trading.

n 13 The 1982 policy assumed, but did not specify, the components of " actual" emissions, such as capacity usage or number of hours of operation of a particular source. It also assumed, but did not expressly require, that actual emission levels must be reduced to compliance levels before further reductions were eligible for credit.

A second group of comments went in the opposite direction, asserting that baselines should always be maximum allowable source emissions, regardless of assumptions used in SIP development. These commenters noted that emission rates ( e. g., emissions per volume of throughput or unit of production) specified in SIP emission limits are generally the only enforceable limits applicable to existing sources. Since existing sources can legally emit up to annual levels equivalent to maximum output and round theclock operations so long as they meet these SIP emission rate limitations, these commenters reasoned, companies should receive credit for agreeing to binding limits on output or hours of operations which forgo such production flexibility.

Today's notice responds in two principal ways to these concerns. First, it clarifies the components of baselines, how these are to be determined, and who bears the burden of demonstrating that a proposed baseline is consistent with a particular SIP. Several comments indicated that confusion related to the determination of baselines may have generated unnecessary concern over use of allowables baselines under approved SIPs. Second, it reiterates and further supports EPA's position that where SIP demonstrations are approved as adequate, the Clean Air Act simply requires trading to be consistent with assumptions used to develop the area's SIP.

3. EPA's Resolutions on Baselines in Nonattainment Areas With Approved Demonstrations of Attainment Where a state has demonstrated it will attain an ambient standard, and EPA has approved the demonstration and not subsequently found it substantially inadequate to assure attainment, bubbles relying on baseline levels used or reflected in that demonstration amount to routine SIP revisions. The state then has discretion to maintain its demonstration through any alternative combination of emission reductions, so Page 9 51 FR 43814 long as these are adequate for attainment and maintenance of the ambient standards. Since EPA cannot require states to do more than demonstrate timely attainment and maintain ambient standards, EPA will approve such trades as long as they are enforceable and do not undermine the demonstration. See, e. g., Train v. NRDC, 421 U. S. 60, 79 80 ( 1975); Union Electric Co. v. EPA, 427 U. S. 246 ( 1976). This means that credits must not be doubled counted, that they must be calculated from a baseline consistent with the approved demonstration, and that tests of air quality equivalence to the original SIP emission limits must be met.

In short, under the Clean Air Act an approved attainment demonstration creates a legal and logical boundary. The state has met its statutory responsibility and can substitute reductions not relied on in the SIP for those assumed by the SIP, so long as air quality impacts are equivalent. This holds true for all types of emission reductions  whether derived from process changes, extra pollution control equipment, improved operating or maintenance procedures, or other actions  as long as the substitute reductions have not been relied on in the approved SIP. 1 n4 n 1 4 It also holds true where the Agency may suspect, but has not formally indicated, that a previously approved SIP demonstration is no longer adequate to assure timely attainment. For reasons of policy continuity, regulatory predictability and fair notice, until EPA makes a formal finding of SIP inadequacy, the approved demonstration controls. See Clean Air Act section 110( a)( 2)( H), 110( c)( 1); 48 FR 39582 ( August 31, 1983).

EPA accordingly reaffirms the general principle that states may grant sources credit for reductions below levels assumed by approved demonstrations. This generally means that where actual values for emission rate, capacity utilization and hours of operation form the basis for an approved demonstration, sources proposing a bubble must use the lower of actual or allowable values for those factors in calculating baseline emissions, and that where an approved demonstration was based on allowable values which are higher than corresponding actual values for any of these baseline factors, those allowable values may be used for such factors in calculating the baseline.

B. Baseline and Other Requirements for Bubbles in Primary Nonattainment Areas Which Require But Lack Approved Demonstrations of Attainment EPA's 1982 policy proposed two baseline mechanisms for bubbles in primary nonattainment areas needing but lacking approved demonstrations of attainment. These areas needed additional emission reductions to attain national ambient health standards, but had not yet fully determined what amount of reductions would be necessary for attainment or which sources would be required to produce them. Nevertheless, that policy said, states could allow existing sources in these areas to trade on an interim basis, either ( 1) by using baselines reflecting Reasonably Available Control Technology ( RACT) provisions which EPA had already approved, or ( 2) where EPA had not yet approved general state RACT provisions, by using " negotiated RACT" baselines agreed to between the source, the state and EPA. 1 n5 Both the 1982 policy and subsequent notices advanced detailed programmatic and environmental rationales for this approach, including the fact that RACT was the Act's most stringent general requirement for existing sources in nonattainment areas; that appropriately determined RACT baselines were consistent with current attainment needs; and that trades using such baselines could produce faster interim progress by providing incentives for sources voluntarily to define RACT, disclose better emissions or ambient data, or take other steps to do more than the minimum required. See, e. g., 47 FR 15076, 15080 81; 48 FR 39582 83, 39585.

n 1 5 The 1982 policy also authorized limited use of higher actual ( rather than RACT allowable) baselines in certain nonattainment " extension" areas which did not then have complete approved SIPs. See 47 FR 15077, 15080 ( April 7, 1982). Expiration of the July 1982 statutory deadline for submitting such SIPs vitiated this third baseline option. See, e. g., 48 FR at 39580 and n. 2, 39582 and n. 7, 39584 85 ( August 31, 1983).

Many commenters on the 1982 policy approved this " negotiated RACT" approach, finding it innovative and acceptable. However, two groups of commenters again asserted that it was either " too Page 10 51 FR 43814 restrictive" or " insufficiently constrained." The first group maintained that for reasons of administrative efficiency, bubbles should be based either on existing SIP reduction requirements or on actual emissions, without the need to negotiate new source specific RACT baselines. Since trading sources in these areas would eventually be subject to RACT requirements in any case, they reasoned, no new interim baseline should be required. In partial support of this position some alluded to the one instance in which Congress has explicitly addressed such baseline issues  its 1977 declaration that in nonattainment areas without adequate demonstrations, existing SIP limits would for the next several years be the baseline for offset transactions, which were then the only types of emissions trades. 1 n6 n 1 6 See, e. g., Clean Air Act Amendments of 1977, section 129, codified at 42 U. S. C. 7502 note; 3 Legislative History of the Clean Air Act Amendments of 1977, pp. 537, 713; 44 FR 2174 75 ( January 16, 1979). This Congressional mandate was largely superseded by eventual state adoption of supervening SIP limits. Under current EPA regulations such SIP allowable emission rates may ordinarily be used to compute the baseline for offsets only where an approved SIP demonstration used inventoried allowable emissions in its demonstration of reasonable further progress. See Clean Air Act 173( 1)( A), 42 U. S. C. 7503( 1)( A).

The second group asserted that no bubbles should be allowed in such areas, since regulators could not know which reductions were surplus until demonstrations were completed and approved.

In August 1983, " in light of formal comments on the [ 1982] Policy, the NRDC v. Gorsuch decision [ since reversed] . . . and the need to further articulate the Policy's approach in this area," EPA requested further comment on certain issues relating to credit from plant shutdowns or production curtailments for use in existing source bubbles, particularly bubbles in primary nonattainment areas requiring but lacking demonstrations. 48 FR 39580. While most comments on the 1982 policy supported continued use of such credits without further restrictions, some commenters had special concerns about shutdowns in these areas. These commenters stated that shutdowns can hasten attainment, and suggested that granting credit for shutdowns that ' might have happened anyway' might not be consistent with the Act's requirement for attainment " as expeditiously as practicable."

In the August 1983 notice EPA addressed these concerns in detail, noting that:

. . . Unlike surplus reductions from additional pollution control or less polluting process changes, shutdowns produce a total reduction of emissions, 100% of which might benefit air quality if credit were not allowed. Granting full or partial credit for their use in existing source bubbles might reduce that benefit . . . at least where the source would have shut down anyway. This reasoning [ reflecting a desire to avoid granting credit for reductions that may not be " surplus" because they would have occurred in any event] underlies some commenters' suggestions that credit be allowed only if credit were a sole or principal reason for the shutdown . . .

Unfortunately the issue is not this simple. So long as it has not been double counted and a proper RACT baseline is applied, the shutdown does contribute to air quality progress, since much less than 100% credit will be granted. Moreover, the opportunity for credit may improve air quality by encouraging early shutdown of high polluting facilities that might otherwise be kept running, either because replacement is too expensive or to preserve credit for further plant expansion.

In addition, these commenters' suggestion of a test based on subjective motive appears administratively unworkable. EPA and states would find it exceedingly difficult to evaluate or rebut source evidence that a shutdown was motivated by credit and that the shutdown facility would otherwise have operated [, e. g.,] for twenty or forty years. Thus this approach would likely result in either de facto approval of all such credits ( undermining the reason for the test), or a burden of proof so stringent that none would be approved ( penalizing sources whose shutdowns were elicited by trading). More straightforward approaches might either ban shutdown bubbles until a demonstration of attainment, or acknowledge their uncertain nature by applying a margin of safety  e. g., a requirement that such bubbles produce substantial air quality improvement  sufficient to compensate for any uncertainties and protect the integrity of current or future SIPs. 48 FR at 39583 84 ( footnotes omitted.) Page 11 51 FR 43814 EPA then suggested seven specific alternatives to the 1982 policy for bubbles in these areas, including: a prohibition on bubble credit from shutdowns; a requirement of substantial air quality benefit from bubbles proposing to use shutdown credit; or a requirement of substantial air quality benefit from all bubbles, with no special restrictions on shutdown credit. In partial support of this last proposed alternative, EPA indicated the administrative benefits of avoiding special definition or treatment of " shutdowns" and " curtailments," and stated that:

. . . Requiring substantial progress from each bubble . . . could accelerate momentum toward attainment, directly improve air quality through each trade, and provide an objective margin of safety against uncertainties associated with some individual shutdowns, while leaving to the state the task of final SIP development. It would also maintain the incentive within the [ 1982] Policy for industry to shut down high polluting, economically marginal sources . . . . The more each existing source bubble contributes directly to accelerated air quality progress, the stronger the justification for use of surplus reductions for such bubbles in the absence of a demonstration. Moreover, requiring all bubbles to produce a substantial air quality improvement, beyond RACT baselines and RACT equivalence, could provide a margin of safety sufficient to make special treatment of shutdowns unnecessary . . . 48 FR at 39585 86 ( footnotes omitted).

Thus, while the issue explicitly raised by the August 1983 notice was use of bubble credit from shutdowns in primary nonattainment areas which lack approved demonstrations, the underlying issue was use of any type of bubble credit in these areas. Since emission reductions have the same effect on air quality whether produced by less polluting process changes, more efficient operation of installed control equipment, additional pollution controls, or shutdowns or production curtailments, the fundamental question was whether all such reductions or none of them should be prohibited or subject to special requirements when used for bubbles in these areas. That question reflected a further choice. Should EPA defer bubbles in these areas until a compete demonstration was finally approved? Or should EPA authorize continued use of bubbles, in order to secure interim emission reductions?

Comments responding to the August 1983 notice were essentially the same as earlier ones. A large majority of industries and state pollution control agencies commenting at that time supported continued opportunity for bubbles ( including those using credit from shutdowns) in nonattainment areas with or without approved demonstrations. Virtually all industries and states commenting with respect to areas that have approved demonstrations supported continued use of the 1982 policy, without change. 17 n Of 13 state agencies commenting with respect to areas that do not have approved demonstrations, ten urged that shutdown credits be retained for these areas as well. 18 n However, many comments also supported or acknowledged the appropriateness of a requirement for a net air quality benefit  in the range of 20% extra reductions in emissions remaining beyond a baseline reflecting RACT emission limits  from each bubble, so long as that requirement was objective and easily administered. 19 n To the extent they addressed this issue, these comments generally opposed efforts to test bubbles by examining the subjective motives underlying reductions. 20 n Two state of local agencies asked that bubbles be prohibited in these areas until complete demonstrations were approved by EPA.

n 17 E. g., Allegheny County ( PA) Health Department, Bureau of Air Pollution Control; Air Pollution Control District of Jefferson County ( Louisville), KY. Cf. Dayton ( OH) Regional Air Pollution Control Agency. See also, e. g., comments of Chevron USA.

n 18 E. g., Memphis Health Department; Colorado Dept. of Health, Air Pollution Control Division. Cf. comments of Illinois EPA.

Many industrial commenters also asserted the importance of continuing to allow shutdown credits in these nonattainment areas. See, e. g., Chevron USA; Champlin Petroleum.

n 19 E. g., Bay Area ( CA) Air Quality Management District. See also Southern California Gas Co.

n 20 E. g., Massachusetts Department of Environmental Quality Engineering; South Coast ( CA) Air Quality Management District. Page 12 51 FR 43814 Several commenting environmental groups asserted that EPA should not permit any bubbles in nonattainment areas lacking adequate demonstrations. One argued that EPA cannot determine that emission reductions are " surplus," and therefore creditable, in these areas because to do so would violate the statutory requirement to attain standards " as expeditiously as practicable." Moreover, this group claimed, using RACT as a baseline would not solve this problem because RACT limits are minimum measures, not a substitute for a SIP providing timely attainment. This group also asserted that crediting shutdowns would conflict with states' duty to meet air quality standards " as expeditiously as practicable" because, by " resurrecting" emissions that have already ceased, it would accomplish less emission reduction than is practicable within a given period of time. Another group asserted that allowing shutdown credits in these areas would strain efforts to progress toward attainment. One environmental group went a step further and urged that opportunity for bubbles be restricted solely to attainment areas which have already met national air quality standards. 2 n1 n 2 1 In oral or written submissions to the Administrator made in early 1986 while final decisions on today's policy were still pending, representatives of seven states and the State and Territorial Air Pollution Program Administrators and the Association of Local Air Pollution Control Officers ( STAPPA/ ALAPCO) similarly urged that bubbles no longer be authorized in primary nonattainment areas until a complete attainment demonstration was submitted or approved. This position was generally echoed by a coalition of environmental groups. Since this position and related underlying issues had been raised and articulated at length by earlier comments, it is addressed as part of the Agency's final response below.

At the same time, comments filed on Federal Register proposals to approve individual bubbles as SIP revisions under the 1982 policy 2 n2 raised related issues. Several of these proposed bubbles were also located in primary nonattainment areas which required but lacked approved demonstrations. The issue raised related to bubbles of two types: ( 1) Those which relied on reductions from shutdowns that occurred long before any application to bank or trade; and ( 2) those which relied on extra reductions produced by routine installation of required control equipment, long before application to bank or trade. Both types of bubbles raised the larger question of whether SIP integrity and environmental progress might better be assured in primary nonattainment areas which require but lack approved demonstrations of attainment by allowing no bubble credit, or allowing bubble credit only for reductions beyond actual emission levels already achieved as of the time sources applied to bank or trade.

n 2 2 Cf., e. g., Union Carbide Corp. ( Texas City), 47 FR 21533 ( May 19, 1982); B. F. Goodrich ( Avon Lake), 49 FR 4796 ( February 8, 1984).

The final policy strikes what EPA believes to be a reasonable, environmentally sound balance between all these views, and establishes numerous tightening clarifications and new requirements to implement that balance. These changes and the rationales supporting them are set forth below.

1. EPA's Resolutions Regarding Baseline and Other Requirements In primary nonattainment areas which require but do not, at the time of a bubble application, have EPA approved demonstrations that ambient health standards will be attained, bubbles will generally be approved if they do not rely on reductions which occurred before application for credit; if they meet other criteria for baselines, ambient equivalence, and consistency with future planning efforts; and if they produce at least a 20% net reduction in emissions remaining after appropriate baselines have been applied. These objective tests both respond to previous comments on certain individual bubble applications, and go substantially beyond alternatives discussed in EPA's August 1983 notice. At the same time they assure greater predictability and ambient progress, without imposing so heavy a burden on voluntary bubble transactions that the environmental benefits of such trades are forgone. They reflect the general principle that because such properly structured bubbles provide continuing incentives for sources to deliberately overshoot regulatory marks ( rather than plan merely to meet them), bubble trades in these areas can produce interim progress beyond current SIP requirements, and should be approved. Page 13 51 FR 43814 a. SPECIFIC " PROGRESS" REQUIREMENTS. Applications for existing source bubbles in primary nonattainment areas which require but lack approved demonstrations of attainment will be deemed to produce a net air quality benefit and will be processed for approval if they:

( i) Use " lowest of actual SIP allowable or RACT allowable" emissions baselines. Such baselines must be calculated using  Either the actual emission rate, the SIP or other federally enforceable emission limit, or a RACT emission limit, whichever is lowest, for each source involved in the trade. This baseline factor shall be determined as of the time of the source's application to bank or trade, whichever is earlier.

 The lower of actual or allowable capacity utilitization and hours of operation for each source involved in the trade. These baseline factors shall generally be based on the two years of operation preceding the application to bank or trade, unless another two year period is shown to be more representative of normal source operations;

( ii) Meet the general ambient equivalence tests outlined in today's policy ( see Section I. B. 1. b of the Technical Issues Document) using the baselines described above and, for the post bubble case, emission levels that reflect overall emissions equivalence; and ( iii) Produce a substantial net reduction in actual emissions  i. e., a reduction of at least 20% in the emissions remaining after application of the stringent new baselines described above. ( A reduction of greater than 20% may be required for bubbles approved under generic rules in some of these nonattainment areas. See discussion in Section III. A. 1.( d) of this Preamble, below.)

With respect to sources which seek to bank emission reductions after publication of today's notice, " application to bank," for purpose of evaluating credit for use in bubbles, means the time of filing of an application to make such reductions state enforceable through or concurrent with use of a formal or informal banking mechanism. However, in order to avoid needless disruption and inequitable retroactivity, this definition does not apply to reductions which sources have previously applied to bank. See Section I. A. 1. b.( 1) of the Technical Issues Document.

b. Additional " Progress" Requirement: State Assurances. In concluding that properly structured bubbles as defined above can produce valuable interim progress in primary nonattainment areas which require but lack approved demonstrations, EPA also considered whether other showings might be necessary to assure that individual bubbles do produce such progress. The Agency has concluded that few such showings, whether bubble related or otherwise, are practicable or workable. It did, however, conclude that certain representations meant to assure each bubble's consistency with SIP planning goals, by requiring states to take a meaningful look at such consistency in each bubble approval, would help assure that progress is achieved.

Under circumstances detailed in the final Policy and Technical Issues Document, today's notice therefore requires the appropriate state authority to provide the following written assurances to accompany each bubble which is approved ( either directly by EPA as a case by case SIP revision, or by states under an EPA approved generic rule) in these areas:

1. The resulting emission limits are consistent with EPA requirements for ambient air quality progress, as specified in today's notice.

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

3. The bubble will not constrain the state or local agency's ability to obtain any traditional emission reductions needed to expeditiously attain and maintain ambient air quality standards.

4. The state or local agency is making reasonable efforts to develop a complete approval SIP and intends to adhere to the schedule for such development ( including dates for completion of emissions inventory and subsequent increments of progress) stated in the letter accompanying the bubble approval or in previous such letters.

5. The baseline used to calculate the bubble emission limits is consistent with the baseline requirements in the Emissions Trading Policy Statement and Technical Issues Document. Page 14 51 FR 43814 Such assurances need not be verified by, e. g., detailed quantifications, comparison with year by year progress projections, or showings that all reductions needed for area wide progress or attainment have been identified and targeted for regulation. They are, however, expected to be based upon meaningful review by the state and to be consistent with the documentation supporting the bubble. EPA will not second guess such state representations, provided they are a substantial test applied by the state to each bubble and the state has explained how the proposed bubble is consistent with the area's projected attainment strategy. Nor will EPA examine, or expect states to examine in making such representations, any specific soyrce's subjective motivation in making claimed reductions. The combined effect of these requirements will be ( a) to deny bubble credit for reductions which occurred before application for credit, in recognition of the fact that reductions produced before any application to bank or trade are unlikely to have been elicited in any way whatsoever by the opportunity to trade; ( b) to help assure that only actual reductions in current emissions are relied upon to satisfy pending control requirements in these areas; ( c) to more systematically encourage efforts by soyrces to produce and permanently maintain these additional reductions, by granting them predictable bubble credit where specified baseline and other tests have been applied; and ( d) to assure that these bubbles will not interfere with these areas' attainment efforts. Any other approach would enmesh EPA and state agencies in lengthy, resource intensive, and uncertain efforts to determine subjective company motives for making particular claimed reductions  efforts which appear unlikely to provide greater environmental protection than the criteria articulated here. Cf, e. g., 48 FR at 39584 and n. 15, 39585 86.

2. Basic Rationale EPA believes that Congress would clearly have intended the Agency to approve bubbles that, despite the lack of a complete attainment demonstration for the affected areas, nevertheless produce progress toward attainment in those areas. Section 172( b) of the Clean Air Act does require states to formulate complete control strategies to attain the standards in these areas as expeditiously as practicable and, in the case of primary standards, by certain fixed dates. It also requires these areas to demonstrate reasonable further progress toward attainment in the interim. However, SIPs and attainment demonstrations are composed of dozens, if not hundreds, of regulations and commitments adopted at the state or local level, following proceedings that often are time consuming and overlap in sequence. If EPA were to wait until every such provision were adopted and submitted by the state before acting on any of them, substantial environmental benefits that would otherwise accrue from having each available requirement promptly incorporated in a binding manner into the SIP and made federally enforceable would be forgone. Such an " all or nothing" approach would produce less expeditious progress toward attainment than a combination of ( a) EPA approvals of state provisions submitted sequentially and ( b) appropriate use of sanctions authorized by the statute to effect the adoption and submittal of remaining necessary provisions. Given the strong emphases in the statute as enacted, it is doubtful that Congress would have intended the former, less progressive approach. 2 n3 n 2 3 See, e. g., Chevron USA v. NRDC, supra n. 4.

For these reasons, EPA has decided to approve in these areas bubbles which individually produce progress, both beyond preexisting plan requirements and in the air itself, and which do not interfere with these areas' efforts to construct complete strategies that provide for attainment as expeditiously as practicable.

Today's notice accordingly disallows use in bubbles of reductions made prior to any application to bank or trade, but allows appropriate use of reductions made after such application. Where a source voluntarily proposes to make creditable reductions as part of and following a banking or trading application, the stringent lowest of actual SIP allowable or RACT allowable baselines must be applied if a bubble is involved, and that bubble must meet appropriate ambient tests, using emission levels that produce overall equivalence to the emissions baseline. The " net 20%" discount in remaining emissions then applies to all sources in the bubble, and provides an additional safety margin to assure ambient progress from bubbles in these areas. 2 n4 Finally, the state assurances will indicate whether approval of the bubble is likely to remove rather than enhance any important opportunities to construct complete attainment strategies. Page 15 51 FR 43814 n 2 4 This " net 20%" requirement is also supported by evidence indicating that for most extension area SIPs addressing ozone pollution  the most widespread remaining nonattainment health problem  a net 85% reduction ( 81% RACT + 20% of remaining VOC emissions) appears sufficient to produce ambient attainment, if those areas could secure such reductions from all controllable stationary sources of VOC emissions which remain after implementation of stringent controls already in place. See, e. g., " o 3 Attainment Status of 33 Areas Under Different Degrees of Stationary Source Control" ( Feb. 1984)); Letter, Richard A. Liroff, The Conservation Foundation, to Hon. Lee M. Thomas, March 12, 1986 [" The trial calculation... indicates the staff's attentiveness to the limited control possibilities available, and appears to support their conclusion about the contribution RACT plus 20 percent can make to attainment."].

EPA believes that bubbles meeting the special progress requirements described above will produce both progress beyond preexisting plan requirements and progress in the air. First, with respect to preexisting plan requirements, each bubble would achieve a net tightening of at least 20 percent. Trades that result in a permanent 20 percent reduction beyond actual emission levels ( which are already below what the plan allows), would produce even greater progress beyond preexisting requirements. Moreover, state assurances that must accompany each bubble will help ensure that approval does not represent a step backward in the process of developing a plan providing for timely attainment.

Each such bubble would also produce net progress in the air, since each increment of required control forgone as a result of the trade would be more than compensated by a greater reduction which was not required, and which may reasonably be presumed to have been elicited by the trading opportunity. Neither EPA nor anyone else can prove that all reductions which occur after filing of an application for credit were elicited in whole or in part by the trading opportunity. Decisions in the real world, whether corporate or otherwise, always arise from multiple motives which are not easily disentangled, any strand of which may have " tipped" the balance toward or precipitated a particular action. However, the Agency has concluded that this presumption is reasonable. First, it is plausible that such reductions were elicited at least in part by that opportunity, especially where, as here, sources must affirmatively decide to surrender something of value and constrain purely private decisionmaking ( e. g., enforceably commit to change production processes) in order to create a cognizable reduction. Second, this presumption is the sole practical alternative to the administratively difficult and uncertain approach of attempting to determine the intent and motives of source owners making these reductions.

EPA has also concluded that bubbles meeting these new requirements will not interfere with the statutory mandate that states attain standards as expeditiously as practicable. Each such bubble would produce progress in the air that, for the reasons just described, would likely not have been achieved absent the trading opportunity. 2 n5 n 2 5 The Agency has determined that these conclusions also apply where the post application reduction on which the applicant relies for credit happens to be a shutdown or production curtailment. Because multiple motives similarly affect, and can determinatively " tip," decisions to close a facility or restrict its productive capacity, shutdowns that occur after the source owner applies for credit, no less than other types of post application reductions, may be presumed reasonably elicited by the opportunity to trade. This is particularly true because the source operator, whatever its antecedent motives, must make a deliberate decision to forgo an item of substantial value  either by surrendering its operating permit or by accepting binding production limits  in order to create credit. Since it would be administratively difficult, if not impossible, to prove or disprove that opportunity to trade was the driving force or a subjective motive behind the shutdown, such a presumption is amply justified.

3. Additional Considerations Regarding the Benefits of Bubbles Individual bubbles approved under today's special progress requirements for primary nonattainment areas which lack demonstrations will produce progress in the SIP and in the air. Moreover, the mere existence of the opportunity to trade has independent progressive effects.

As some commenters suggested, lack of such demonstrations usually results from one of two general causes: Either the state does not know where or how to obtain sufficient further emission reductions, or it Page 16 51 FR 43814 has identified sources of such reductions but is unable to implement new regulatory requirements because of their cost. Moreover, regulated firms may often be reluctant to disclose information that may be used to require further retrofits against them. Even where such information is obtained, it may not be sufficiently precise to allow EPA and the state to resolve remaining ambient problems. While a vigorous regulatory response remains critical in these areas, that response is likely to be hampered by the very information barriers that discouraged a demonstration of attainment in the first place. See, e. g., 48 FR 39582 ( August 31, 1983).

Bubbles can help break such deadlocks over the feasibility of obtaining further reductions, by providing an incentive for plant managers to find economical ways to go beyond current regulatory requirements. The opportunity to trade may also encourage sources to come forward in order to establish the quantifiable and enforceable emission limits on which credit must be based.

Bubbles may achieve substantial reductions even without special " progress" requirements, since sources not otherwise subject to or not yet meeting RACT requirements with future effective dates in such nonattainment areas must first reduce emissions to RACT allowable levels before they can begin to accrue credit. 2 n6 Where modeled showings of ambient equivalence are required, bubbles may also help identify and correct remaining nonattainment problems. In addition, bubbles may help produce ( a) faster compliance with RACT limits already defined in partially approved SIPs, ( b) faster RACT definitions for sources not subject to currently approved portions of SIPs, ( c) incentives for plant managers to disclose uncontrolled or uninventoried sources, and ( d) incentives for such managers to control emissions earlier than required. Perhaps most important, because of their potential to elicit better information on sources, emissions, control performance and ambient effects, bubbles may enhance states' ability to secure future reductions, if and when such reductions are required. For example, EPA experience has documented cases in which bubble or similar trading applications have improved federal and state air quality management capabilities by improving data on emissions, ambient impacts, and unregulated or uninventoried sources. 2 n7 Through all these mechanisms, bubbles can achieve substantial emission reductions and air quality planning benefits, even without special " progress" requirements.

n 2 6 See, e. g., 47 FR 15077, 15080; 48 FR 39580 and n. 2, 39582 and n. 7.

RACT levels are generally at least 80% or more below uncontrolled emission levels, depending on the pollutant. Where pre trade actual emissions are higher than RACT baseline levels this requirement directly accelerates air quality progress, since no credit can be secured for the difference.

n 2 7 Trade applications submitted over the last several years have, among other things, helped establish and verify emissions factors for nontraditional sources, as well as provide detailed emissions profiles of such sources ( see, e. g., application of Shenango Iron and Steel Co., approved 46 FR 62894 ( December 29, 1981)); have provided current emissions data not otherwise available to EPA through the Agency's National Emissions Data System ( 50 FR 25093, June 17, 1985); and have disclosed the existence of sources ( or in at least one case an entire plant) that had been wholly missed in development of the state's emissions inventory. Other applications have identified and reduced previously unsuspected threats to PSD increments; helped correct substantial discrepancies between inventoried and actual emissions, or between SIP emission limits and attainment demonstrations; and helped improve enforcement procedures in certain state programs. In addition to such case specific examples, opportunity to trade appears to reduce traditional reasons for sources to underestimate their emissions, resulting in better inventory and planning data. For example, Massachusetts requires firms to provide data on their two years of highest emissions since the design year of the SIP, in order to establish a daily emissions cap under the state's VOC bubble rule. This requirement has produced baseline data for previously unquantified emission years for some sources.

Nowithstanding these independent progressive effects, EPA believes that it may approve bubbles in these nonattainment areas only if they meet the specific progress requirements described above and do not interfere with the affected areas' efforts to develop and implement complete attainment strategies. Such bubbles can help adjust existing inadequate regulations on a source specific basis, help make progress Page 17 51 FR 43814 toward a full approved demonstration, and help improve air quality, without " freezing" inadequate SIP requirements that are currently in place.

Accordingly, EPA has decided to approve " progress" bubbles which are consistent with the attainment needs of these areas, which produce a net air quality benefit, and which may therefore secure faster interim progress toward attainment and more rapid development of complete attainment plans.

III. Additional Policy Changes and Clarifications Today's notice makes numerous additional changes in response to comments on and following the 1982 policy. The most important of these changes or clarifications are discussed below.

A. Generic Bubble Rules Today's notice recognizes the special position of EPA approved state generic bubble rules. Such rules may provide clearer approval criteria and may result in more rapid bubble approvals with reduced expenditure of EPA and state resources, by eliminating the need for case by case Federal rulemaking on each bubble as an individual SIP revision.

Today's policy affirms that states may continue to use generic rules to approve bubbles within the scope of such rules in all areas of the country, including primary nonattainment areas needing but lacking approved demonstrations of attainment. It also establishes specific procedures to ensure opportunity for public comment on individual generic actions and for regular EPA oversight of state administration of all such rules. Finally, it spells out additional " progress" requirements that new generic rules must satisfy to be approvable for primary nonattainment areas needing but lacking demonstrations of attainment.

State generic bubble rules approved by EPA as SIP revisions have independent force of law and further Congress' intent that " the prevention and control of air pollution at its source [ remains] the primary responsibility of States and local governments." Clean Air Act, § 101( a)( 3). EPA has approved or proposed to approve 10 such rules for 9 different states, and at least 12 others are being developed. Few approved rules currently apply to primary nonattainment areas which require but lack approved demonstrations. However, today's notice requires that all generic rules meet certain additional procedural requirements in order to assure effective EPA oversight of their administration and to identify any deficiencies in individual approvals or state implementation procedures before substantial numbers of stateapproved bubbles may be put at risk. To the extent these requirements require modification of existing generic rules, they may apply to rules affecting any area, not just primary nonattainment areas which need but lack demonstrations.

Today's policy is meant to assure these rules' smooth continued operation, both now and through any future transition periods, without undermining the considerable investment states have already made in generic approaches. At the same time, the policy is designed to assure that actions under generic rules will meet the policy's substantive and procedural objectives.

Basically, bubbles approved by states under existing EPA approved generic rules before the effective date of this policy will not be affected or revisited due to today's changes. Because EPA approved generic rules possess independent validity and may only be changed upon completion of specific procedures for altering such SIP provisions ( see, e. g., Clean Air Act sections 110( a)( 2)( H), 110( i)), states may also continue to approve bubbles in accord with such rules, unless and until those rules are finally changed in response to an EPA notice requesting and establishing a specific timetable for their modification. However, in order to provide maximum assurance of SIP integrity and minimize any need for future SIP corrections, EPA expects states to assure so far as feasible that generic bubbles they approve are consistent with applicable terms of today's policy as well as their generic rules. New or pending generic rules must all meet the terms of today's notice.

All existing generic rules which require modification to conform to this policy must, as requested by EPA, be promptly revised. EPA will review such rules to determine their consistency with today's requirements, and will publish Federal Register notices identifying generic rules requiring modification. These notices will identify specific deficiencies and means for correcting them, and set forth a schedule for both submittal and EPA review of revised rules. Where states fail to resolve identified deficiencies in such Page 18 51 FR 43814 rules within the prescribed period, EPA may either rescind its previous approval of the rule, or issue a notice of SIP deficiency under section 110( a)( 2)( H) of the Act.

1. Substantive " Progress" Requirements Generic bubble rules applicable to primary nonattainment areas which need but lack approved demonstrations must provide that all generic bubbles in these areas:

( a) Use lowest of actual SIP allowable or RACT allowable emissions baselines, as described above, for all sources involved in the trade;

( b) Grant credit only for those reductions occurring after an application to bank or trade credit ( whichever is earlier) has been made;

( c) Incorporate replicable procedures which assure that all trades preapproved by EPA as meeting the rule will also satisfy applicable ambient equivalence tests ( see Technical Issues Document, Section II. B. 2.); and ( d) Produce an overall emission reduction at least equal to a net 20% reduction in emissions remaining after application of the above baselines, or at least equal ( in percentage terms) to the overall emission reduction ( in percentage terms) needed to attain in the area ( i. e., at least equal to the source by source emission reductions that would be required for a full demonstration of attainment, taking into account " uncontrollable" stationary [ e. g., area] sources and expected emissoin reductions from mobile sources), whichever is larger. 2 n8 This last determination must be submitted with the rule, and must use the same type and quality of analysis required for an EPA approvable SIP. In no event may the overall emission reduction required of generic bubbles in such areas be less than 20% of the emissions remaining after application of the baselines specified above; and n 2 8 For example, assume air quality analysis indicates the area must decrease its base year emissions by 45% to attain the relevant NAAQS. Further assume:

Therefore the reductions needed from controllable stationary sources are 9,450 5,500= 3,950 tons/ yr.

And the percent emission reduction required from controllable stationary sources to attain is Thus the net overall reduction required from each generic bubble would be 94% ( i. e., the reductions produced by applicable baselines [ e. g., application of a RACT emission rate] plus whatever percent reduction in emissions remaining after this RACT limit is sufficient to yield the 94% total).

States that wish to avoid case be case SIP revisions for sources for which RACT has not yet been defined in an approved SIP provison may incorporate " presumptive RACT" values ( e. g., 80% reduction for VOC) in their generic rules. Sources would than have the option of accepting these RACT values for generic bubble purposes, or negotiating different RACT values through the caseby case SIP revison process. However, where a source involved in a trade is one for which EPA has issued a CTG, but the state has not yet adopted the CTG specified emission rate as RACT and no RACT has yet been specified by the state for that source, the presumptive or negotiated RACT values for the trade must be at least as restrictive as the CTG specified emission rate for that source.

TPY ( a) For the base year: Uncontrollable stationary source emissions ( e. g., residential combustion sources) 2,500 Controllable stationary source emissions 3,500 Mobile source emissions 4,000 Total 10,000 Target emissions for attainment 10,000 X ( 1.0 0.45) 5,500 Page 19 51 FR 43814 TPY ( b) For the projected attainment year ( before additional controls): Uncontrollable stationary source emissions 2,500 X 1.1 2,750 Controllable stationary source emissions 3,500 X 1.2 4,200 Mobile source emissions 2,500 Total 9,450 ( 3950 X 100= 94% ) ( 4200 )

( e) provide assurances, in conjunction with the state's submittal of the generic rule to EPA, that the state ( i) is making reasonable efforts to develop a complete approvable SIP that will achieve the percent emission reduction from controllable sources described in the previous paragraph and ( ii) intends to adhere to the schedule for development of such a SIP ( including dates for completion of emissions inventory and subsequent increments of progress), as stated in the letter accompanying the submittal or in previous letters. EPA believes that the numerical determination and progress requirement discussed in the previous paragraph is the functional equivalent of the additional assurances described earlier in this notice ( see Section II. B. l. b above) for bubbles needing case by case EPA approval, since bubbles meeting this requirement will produce attainment level reductions. For that reason, EPA does not believe that it must require the state to make those additional assurances when it submits the generic rule. However, to assure that generic approvals continue to complement and do not interfere with attainment planning, EPA will require the state to include all of those assurances in or with its notices of proposed and final approval of each bubble issued under the rule in such a nonattainment area.

Generic rules meeting these requirements will assure that each state approved bubble produces reductions at least equal to those which would be required under an approved demonstration of attainment. Their availability can also encourage states and sources to take significant further steps towards such demonstrations. Since reductions sufficient for timely attainment are all EPA can require for approval of State Implementation Plans under section 110 and Part D of the Clean Air Act, Train v. NRDC, supra, further Agency scrutiny of individual bubble reductions is not required.

2. Procedural Requirements Today's notice includes tightened requirements designed to assure, with minimal burdens on states, that EPA's responsibility to monitor the implementation of all generic rules incorporated in SIPs ( see section 110( a)( 2)( A)( H)) is more efficiently and effectively carried out. EPA will fulfill this responsibility by ( a) examining and commenting on, together with any other public commenter under applicable state law, the information provided for individual trades subject to proposed action under generic rules, ( b) conducting reviews of individual trades approved under such rules; and ( c) periodically auditing implementation of the rule itself as part of its National Air Audit System investigations of state air pollution control programs, including indepth file audits of actions under such generic rules. These activities will cover state actions of disapproval as well as approval, and will examine whether rules are being interpreted or applied within the scope of their approval by EPA.

To be considered valid by EPA, a trade approved under a generic rule must ( 1) be one of a class of trades authorized by the rule, ( 2) be approved by the state after the rule has been approved by EPA, and ( 3) meet all the provisions of the EPA approved rule. State approvals which do not meet these requirements are Page 20 51 FR 43814 not considered part of the SIP and do not replace prior valid SIP limits, which remain enforceable and may make such trades the subject of remedial action after due notice by EPA to the state and source.

In addition to requiring that generic rules or other state provisions assure meaningful notice to EPA by the first day of the public comment period on proposed generic actions, and immediately upon final generic actions, today's policy also requires that state generic rules or other state provisions provide the general public adequate notice and opportunity to comment, including opportunity for judicial review sufficient to make comment effective. Existing state generic rules, statutes or regulations will generally satisfy this requirement. However, some jurisdictions, for example, deny judicial review to commenters who do not possess a direct financial stake in individual permits. Such jurisdictions will have to modify their generic rule, or other provisions, to meet this requirement.

B. Bubbles Involving Hazardous or Toxic Air Pollutants EPA reaffirms and extends its 1982 determination that bubbles in any area must not increase emissions of hazardous or toxic air pollutants. Bubbles cannot be used to meet or avoid National Emission Standards for Hazardous Air Pollutants ( NESHAPs) that have been finally promulgated under Section 112 of the Act. Where NESHAPs have been proposed but not promulgated for emitting sources which are the subject of a bubble application, the proposed NESHAP will generally serve as the baseline for determining creditable bubble reductions, and the trade must produce reductions at least as great as those which the proposed NESHAP would produce, if promulgated. Moreover, no source emitting a pollutant subject to such a proposed NESHAP may exceed emissions allowed under the proposed NESHAP as a result of the trade. Where a bubble involves a pollutant which is listed under Section 112, but no NESHAP has yet been proposed for the relevant source category, or a pollutant for which EPA has issued a Notice of Intent to List, there must be no net increase in actual emissions of the noticed or listed pollutant. 2 n9 In general, all bubbles involving emissions of pollutants described above must use lower of actual or NESHAPsallowable emissions baselines, and must take place within a single plant or contiguous plants. 3 n0 n 2 9 In some limited circumstances additional pollutants may be treated as listed pollutants. See Technical Issues Document, Section I. B. 1. d.

n 3 0 The one exception involves bubbles in which surplus reductions in the emissions of pollutants subject to regulation, proposed regulation, listing, or Notice of Intent to List as hazardous emissions compensate for increases in non hazardous emissions. ( E. g., where a source decreases benzene emissions below the baseline specified above, in exchange for corresponding increases elsewhere in a non hazardous VOC.) As long as such a trade would not result in an increase in either actual or allowable emissions of a pollutant subject to the special restrictions discussed above at any source, it would not differ in nature of requirements from a trade involving only non hazardous emissions.

Commenters who addressed this issue divided into two general groups. One group asserted that hazardous/ toxic restrictions should extend beyond pollutants currently regulated, proposed to be regulated, or listed under Section 112. These comments generally maintained that restrictions should also apply to all pollutants the Agency is " actively considering" for listing. A second group asserted that neither volatile organic compound ( VOC) nor particulate emissions should be traded unless there is clear evidence that specific substances present in such VOC or particulate emissions are " relatively innocuous."

EPA has determined that for reasons of policy and administrative practicality these suggestions, while laudable in intent, should not be adopted. Bubbles are alternative means of compliance which should generally be treated no differently than other compliance strategies, provided basic SIP requirments of consistency with ambient needs, PSD increments, and interim progress are met. EPA's statutory authority to further restrict trades on the basis of hazardous substances which may be present in a particular criteria pollutant stream ( e. g., VOCs) and which may be subject to a listing, notice of intent to list or proposed NESHAP, but are not as yet regulated under § 112, is limited. Generalized attempts to exercise such authority based on the presence of substances on which the Agency has taken no formal action whatever would be still more tenuous. Moreover, the inherent ambiguity of such terms as " actively considering" or " relatively innocuous" militates against such tests. States remain free to adopt further restrictions consistent Page 21 51 FR 43814 with local laws and needs. However, with respect to national requirements EPA has concluded that clear decision points based on actions pursuant to the deliberative process and record evidence underlying section 112 determinations are to be preferred.

Interested parties should be aware, however, that under today's policy the Administrator reserves discretion to consider on a case by case basis whether bubble proposals involve pollutants which, while not regulated, listed or otherwise noticed under section 112, are regulated as toxic under other federal healthbased statutes, and to require further analysis before approving such proposals.

One commenter expressed concern over the 1982 policy's use of the term " reasonably close" to indicate the distance which may be covered by bubbles involving pollutants listed or proposed to be regulated under section 112. EPA agrees this term is ambiguous, and with the exception of bubbles which affirmatively decrease such pollutants below the lower of actual or NESHAPs allowable baseline, has substituted the more protective and certain requirement that such trades occur within a single plant or contiguous plants. In order to assure that such trades do not produce adverse health or environemental effects, today's notice also requires that they rely only on reductions below current actual or section 112 allowable emissions as of the trading application, whichever is lower, in pollutant streams containing a substance which has been noticed, listed, or proposed to be regulated under section 112.  12/ 2/ 86% 118.0 Fol. 281/ 4 J. 094 999 F. A04DE3.066

Several of these provisions  notably the proposed NESHAPs baseline and source specific proposed NESHAPs emissions cap, the inclusion of pollutants subject to Notices of Intent to List, and the general limitation to contiguous plants and lower of actuals or § 112 allowables baselines  represent substantial tightenings over the 1982 policy.

C. Banking Emission Reduction Credits ( ERCs)

EPA approvable emission reduction banks may allow sources to store ERCs for their own future use or use by others. Today's notice reiterates that states are by no means required to adopt banking procedures, but notes that banks may help states and communities realize important planning and environmental benefits. n31 Banks may encourage firms to create inexpensive extra reductions at earlier, optimal times ( e. g., when replacing outworn control equipment or deciding how to meet new requirements) and disclose such information to state agencies. They may help create a central pool of identifiable, readily available reductions which can ease plant modernizations or expansions, new source siting, or existing source compliance. Properly structured banks may reduce incentives for sources to delay, conceal or hoard actual or potential reductions until an immediate use arises. Banks may also produce other, interim environmental benefits, since banked ERCs remain out of the air ( although they must be treated for SIP planning purposes as " in the air") until used. In addition, banks can help state agencies manage their permit workloads more efficiently, because portions of new source or existing source compliance transactions may be prepermitted or reviewed in advance. Banks may also help states systematically assure that all unused surplus reductions are treated as " in the air" for SIP planning purposes, avoiding potential inconsistencies which might cause those reductions to be lost.

n 31 See e. g., 47 FR 15083 84 ( April 7, 1982).

Comments indicated some confusion over whether, in addition to meeting other ERC requirements, reductions must be made federally enforceable to be formally credited for banking. The answer is no. However, in order to qualify as emission reduction credits and be deposited in EPA approvable banks, emission reductions must be made enforceable by the state. Reductions must be made enforceable by the state by their time of deposit in order, e. g., to better ensure the integrity of the state's air quality planning process by preventing sources from banking reductions of emissions which their permits do not preclude them from continuing to emit. This requirement will also prevent undue reliance by parties or potential parties on emission reductions which have not actually occurred. n32 However, because these actions merely create extra reductions in actual or allowable emissions which cannot by themselves produce any adverse effects on air quality, they need not be made federally enforceable until used. n33 Where states wish to make banked emission reductions federally enforceable at the time they are banked, several mechanisms may be available for doing so without case by case SIP revisions. States with EPA approved Page 22 51 FR 43814 PSD, NSR, visibility and preconstruction review programs can issue permits to credit reductions from emission units currently subject to these preconstruction permits. n34 States with EPA approved generic rules may also be able to use those rules' procedures to make reductions at existing sources federally enforceable. Since only reductions in applicable emission limits are involved at the banking stage, modeling should not be required. Moreover, these reductions should automatically meet the requirement that changes in emission limits under generic rules not jeopardize ambient standards or PSD increments.

n 32 In primary nonattainment areas which need but lack approved demonstrations, emission reductions made prior to application to bank or trade ( whichever is earlier) will not be credited for use in bubbles ( see Section I. A. 1. c.( 1) of today's Technical Issues Document). Following publication of today's notice, the " date of application to bank" will be the date the source submits an application to the state to make a reduction state enforceable through or concurrent with use of a formal bank or informal banking mechanism ( see section I. A. 1. b.( 1) of today's Technical Issues Document).

In other areas, although emission reductions cannot qualify as ERCs or be deposited in EPAapprovable banks until they are made enforceable by the state, emission reductions banked through other formal or informal banking mechanisms which do not make reductions state enforceable by the time of deposit will still be eligible for use in future trades, so long as those reductions are made federally enforceable at time of use and all applicable requirements of the regulatory program under which they will be used are met.

Since states may have to revise their regulations or permit procedures in order to implement this new state enforceability requirement, full implementation will not be expected until one year after publication of today's notice. However, all credits not made enforceable when banked during this interim period, together with all credits deposited prior to today's notice, should be made stateenforceable within eighteen months from the date of this policy.

n 33 Cf. 47 FR 15076, 15081 at col. 2.

n 34 Some jurisdictions may also use general state preconstruction review programs that have received EPA approval to credit reductions at existing sources if such reductions are covered under the program, since requirements under these programs are federally enforceable.

Since some trades have special requirements, banks do not guarantee the validity of particular banked ERCs for all potential uses or for all time. For example, because only actual reductions occurring at the same major stationary source are eligible for netting, banked reductions created at other stationary sources cannot be used for netting transactions. However, banked credits resulting from reductions at other stationary sources may be used as offsets or in bubbles, so long as this notice's other requirements for appropriate use of credits are observed and applicable offset requirements are satisfied.

Because of differing regulatory requirements, the amount of credit actually derived from particular emission reductions may also differ from one regulatory program to another. For example, in primary nonattainment areas needing but lacking approved demonstrations, the amount of credit available from a given reduction for bubble purposes may be less than that available from the same reduction for netting or offset purposes, since special progress requirements apply to bubbles in these areas.

Because the use of credits will change ( rather than merely reduce) emission levels if approved, such proposals should be carefully evaluated to assure they meet all of today's criteria for appropriate use. For similar reasons proposals to use banked credits will usually require additional approval procedures ( e. g., additional modeling for certain TSP or SO 2 trades), whether such proposals are evaluated as case by case SIP revisions, under EPA approved generic rules, or under EPA approved new source review programs.

One commenter asked how banked ERCs would be treated if a nonattainment area is being redesignated to attainment. Redesignation will have no effect on the banked ERCs, so long as state planning considered those ERCs to be in the air ( i. e., in the inventory) at the site of their creation. Because local recessions or shifts in industrial patterns can temporarily affect air quality without regard to the adequacy of state emission control efforts, EPA guidance requires that redesignation not be based solely on monitored air quality. In addition to considering factors such as the state of the particular economy and its Page 23 51 FR 43814 effect on emissions, EPA may consider the number, type, and state inventory treatment of banked credits. Such procedures will help assure that reliably banked reductions are not reduced or otherwise adversely affected by shifts in an area's designated attainment status.

Some commenters asserted it is overly cautious to require that all banked emissions be considered as " in the air." One commenter asked that state planning be required to include as " in the air" only a portion of banked emissions analogous to a " reserve requirement." This comment drew parallels with financial banking to assume that, given withdrawals and deposits, a certain " float" quantity of ERCs would always remain in the bank and out of the air. EPA recognizes that reductions placed in banks may tend to keep the air cleaner through a relatively constant level of deposits. However, EPA cannot allow states to consider less than their full amount of banked deposits as " in the air." To do so could jeopardize air quality planning and attainment. n35 n 35 In order not to defeat banking's purpose of encouraging the earliest possible disclosure and production of potential extra emission reductions, use of banked credits for bubble purposes in primary nonattainment areas which lack approved demonstrations will continue to be allowed, provided these credits meet all baseline and other applicable requirements of today's notice for these areas. This generally includes the lowest of actual SIP allowable or RACT allowable emissions baseline, applied as of the date of written application to the state to bank such reductions through a formal bank or informal banking mechanism for use in future trades. It also includes that 20% net reduction requirement and state assurances specified above, at the time such credits are approved for use in bubbles. Banked credits resulting from plant shutdown or production curtailments may be used for bubbles in these areas on the same terms as use of other banked credits, provided their use is subject to stringent qualitative review to assure legal, technical and programmatic consistency with SIP planning goals ( e. g., avoidance of " shifting demand"). See today's Policy at n. 24 and Section I. A. 1. c( 3) of the Technical Issues Document. ( Banked credits resulting from certain shutdowns or production curtailments may, however, be subject to special restrictions for offset purposes. See today's Technical Issues Document at n. 14).

The special restrictions discussed above do not apply under today's notice to use of banked credit for bubble purposes in other areas.

D. OBERS Projections and Double Counting In its August 1983 notice EPA asked for further comment on whether some SIPs' translation of general economic growth projections provided by OBERS ( Department of Commerce) directly into projected emissions growth, left " no straightforward way to disaggregate the projections into shutdowns and new plant openings." Whether such SIP demonstrations were fully or only partly approved, the notice continued, such use of OBERS might make it impossible to distinguish which shutdowns were already relied on in the demonstration. Therefore, it might be " difficult or impossible for states whose SIPs rest on OBERS projections to grant credit from shutdowns for use in existing source bubble trades, consistent with the Clean Air Act." 48 FR 39581.

Most industry and several state commenters asserted that where OBERS data were used to project needed SIP reductions, use of shutdown credits in bubbles was not a problem, since OBERS figures substantially overestimate the total amount of emission reduction needed to attain. For example, one industry commenter noted that " emissions growth will not be directly proportional to economic growth because of the installation of new environmentally efficient technologies. Therefore, SIPs which used " OBERS" projections already have an inherent growth potential built into them, and allowing ERCs for shutdowns in these areas will not jeopardize a state's ability to demonstrate attainment." A local agency agreed that " demonstrations . . . based on such emission projections would over estimate attainment because some growth will occur from [ wholly] new sources, new sources replacing existing sources, or modified existing sources, [ all of] which would be subject to . . . New Source Review rules, rather than the less stringent [ SIP] requirements assumed in the emission projections."

Several state commenters also stressed that while use of OBERS projections is not widespread, the underlying question is whether the area's SIP process incorporates conditions sufficient to prevent double Page 24 51 FR 43814 counting of shutdown credits. One local agency recommended that shutdown credits be prohibited where the source involved is within an industrial category projected to go through an economic downturn, asserting that in such cases the SIP implicitly relies on the expected shutdowns. An environmental group went a step further, and urged that all shutdown credits for bubbles in areas using OBERS projections be completely prohibited.

EPA has concluded that the requirements of the 1982 policy are sufficient to prevent double counting of shutdown credits, and should be retained without further special restrictions. First, use of OBERS or any other projection is relevant only where an area has an approved attainment demonstration. Today's notice generally disallows bubble credit for pre application reductions ( including reductions from shutdowns or curtailments) in primary nonattainment areas which require but lack such demonstrations. Thus today's notice largely moots any issue of double counting for past shutdowns, in the areas for which this issue has been raised with the greatest concern. Second, use of OBERS projections in areas with approved demonstrations does not appear nearly so common as was assumed in EPA's 1983 request for further comment. Even where such projections were used in approved demonstrations, they generally overestimate the amount of emissions forecast to exist in the year of projected attainment. They therefore tend to assume substantially less overall reductions from source turnover than will actually occur. n36 n 36 This is so because OBERS based SIP projections assume that units of production ( and hence emissions) in particular SIC Codes will keep pace with projected trends in earnings and/ or employment in those SIC codes, without regard to changing distributions between new and existing sources. See, e. g., 1980 OBERS: BEA Regional Projections, Volume 1: Methodology, Concepts and State Data, p. ( xi), U. S. Department of Commerce ( July 1981).

Finally, even if such projections did not overestimate emissions, under today's notice the state must show that use in bubbles of any reductions created by shutdowns is consistent with its attainment demonstration and that those reductions were not already assumed in its SIP. For example, the state must show that it did not implicitly or explicitly rely on a " turnover rate" from the difference in emissions between existing sources and better controlled new sources for part of the reductions required in its SIP from that industrial category. Alternatively, it must show that if a " turnover rate" was assumed, the shutdown credits used in an individual trade result from reductions in excess of that turnover rate. Where a state regulated the sources in a standard industrial classification ( SIC) without explicitly relying on turnovers, then bubble credit for a shutdown within that SCI category would not in general be doublecounted n37 n 37 Such credits must of course meet all other requirements of today's notice, including application of appropriate baselines and other criteria defining surplus reductions, before they may be used in a bubble trade.

States which expressly relied on OBERS projections may also show that no double counting occurred by demonstrating that they did not implicitly rely on any turnover credits. This showing should not be difficult to make because OBERS assume that emissions will evenly increase at each plant and production line, proportionate to growth in earnings and employment potential for that SIC code. Cf. n. 36 above. This assumption neither anticipates nor relies on the fact that any shutdown will occur.

The one exception to these general principles could occur where a SIP relied on OBERS projections for an SIC category predicted to undergo a quantified future economic downturn, without taking explicit affirmative steps to preclude reliance on that downturn. In these circumstances the state would either have to show that a proposed shutdown credit from a source within that SIC category was not double counted ( e. g., by showing that more shutdown reductions than projected for the SIC category had already occurred), or deny credit.

These requirements should fully protect states and sources against adverse environmental or SIP effects. Page 25 51 FR 43814 E. Improved Modeling and de Minimis Requirements Bubble applicants must show that their proposed trades are at least equivalent in ambient effect to the SIP ( or other) emission limits the bubble would replace. For some criteria pollutants ( e. g., VOC or NO X ) this test may generally be met by showing equal reductions in emissions. n38 For other pollutants ( e. g., SO 2 , TSP or CO) it was traditionally met, prior to the 1982 policy, through ambient dispersion modeling.

n 38 Interested parties should, however, be aware that ambient equivalence considerations which apply to SO 2 , TSP and CO, as described below, also apply to NO X trades involving visibility impacts from elevated plumes. See Section I. B. 1. b. of today's Technical Issues document.

The 1982 policy made available several alternatives to the use of full scale dispersion modeling where such modeling was not needed to protect air quality. These alternatives could, in appropriate, carefullylimited circumstances, be used to demonstrate ambient equivalence for bubbles involving particulate matter or other pollutants whose ambient effects were not linearly related to emissions. They included de minimis levels and the use of other screening criteria to identify circumstances in which full scale modeling was unnecessary, either for bubbles processed as SIP revisions or those approved under generic rules.

Today's notice both tightens some of these screening criteria and expands the circumstances in which such criteria can be used.

Today's notice also specifies certain conditions and types of case by case SIP revision bubbles for which EPA Regional Offices may require additional technical support, beyond basic modeling requirements, deemed necessary to protect NAAQS, PSD increments or visibility where allowable values used to calculate baseline emissions are not clearly used or reflected in an approved demonstration, or may not reasonably be assumed consistent with the need to protect PSD increments or visibility. See Technical Issues Document, Section I. A. 1. a.

1. De Minimis Levels Under the 1982 policy, trades in which net baseline emissions did not increase and in which the sum of emission increases, looking only at the increasing sources, totaled less than 100 tons per year ( TPY) after applicable control requirements, could be exempted from SIP revisions under an approved generic rule. The rationale for this approach was that EPA regulations implementing the Clean Air Act already allow some exemptions from NSR requirements for new sources which are not defined as " major"  i. e., which do not have potential emissions greater than 100 TPY. See e. g., CAA section 302( j) and 40 CFR 52.21( b)( 1) and 51.18( j)( 1)( v). Thus trades which merely shift lesser amounts of emissions, and which are accompanied by compensating decreases, should not be subject to more stringent requirements. As the 1982 notice put it, " Such trades will have at most a de minimis impact on local air quality because only minor quantities of emissions are involved . . . the Federal resources required to evaluate these trades could best be used to evaluate actions that have a potential impact on air quality." 47 FR at 15085. n39 n 39 The 1982 document did, however, note that such "[ generic] trades are still subject to ambient tests [ at the state level, and] . . . should accordingly be evaluated by the state under the modeling screen . . . or an equivalent approach." 47 FR 15085 at n. 7.

One commenter asserted that this 100 TPY limitation was unnecessary, since the trades to which it applied were already required to produce no net increase in emissions. However, four state and environmental commenters urged that de minimis levels for such trades be the same as those triggering federally mandated review of emissions increases in PSD areas. These comments primarily noted that EPA had already defined more relevant " cutoff" levels in its regulations for PSD, for NSR preconstruction permits in nonattainment areas, and in visibility permit regulations, and that emission shifts of 100 TPY from one source to another might still be too large to go unexamined for certain types of emissions and situations.

In order to ensure prosecution of ambient air quality, today's notice adopts more protective de minimis levels  derived from those for PSD; NSR permits in nonattainment areas; and the visibility permit regulations  of 100 TPY for CO, 40 TPY for SO 2 , 25 TPY for particulate matter, and 0.6 TPY for lead. Page 26 51 FR 43814 Because of this action, state ambient evaluation of de minimis trades will no longer be required for generic bubble rules to be approvable by EPA. n40 Trades involving sources of substantial size may still be implemented as de minimis under today's provisions, as long as the quality of ERCs traded by these sources is below the levels specified above.

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

2. Modeling Requirements n41 n 41 The following discussion summarizes both interim improvements made in the 1982 modeling screen ( see Technical Issues Document, Appendix C) and EPA's responses to major comments on modeling issues.

Numerous comments were received on the 1982 policy's three level approach to demonstrating ambient equivalence. The vast majority sought added clarification, stating, for example, that the 1982 policy did " not adequately delineate the level of modeling necessary in each instance." Today's notice tightens and clarifies the conditions under which ambient equivalence may be demonstrated with less than full scale modeling.

a. Level I Criteria. Under the 1982 document no modeling was generally required of SO 2 , TSP, or similar trades where applicable net baseline emissions did not increase, sources were located in the same immediate vicinity ( generally within 250 meters of each other), and the taller stack was the one which increased its emissions. These conditions were believed sufficient to assure that local ambient concentrations of the relevant criteria pollutants would not increase as a result of the trade.

EPA has added two criteria to those specified in 1982, in order to provide additional assurance that trades approved under Level I will have no adverse ambient effect. First, there must be no complex ( e. g., mountainous) terrain within 50 kilometers of the trading sources or within the trade's area of significant impact, whichever is less. ( For simplified methods of determining " area of significant impact," see today's Technical Issues Document, Appendix E). Second, stacks with increasing baseline emissions must be sufficiently tall to avoid downwash.

Some industry commenters objected to the 250 meter limitation, advocating use of either trade ratios for sources beyond that distance, or an 800 meter limit extrapolated from unrelated EPA regulations. n42 EPA has retained the 250 meter limit as substantially more consistent with the modeling screen's original intent of simplifying modeling requirements for trades which could not jeopardize ambient equivalence. n43 n 42 See e. g., 47 FR 5864, 5865 ( February 8, 1982).

n 4 3 Trade ratios may already be used under general provisions inviting states to design other equivalent approaches which adequately address ambient concerns. See., e. g., 47 FR at 15077 and n. 2, 15078. However, to be approved by EPA such ratios would generally have to be defined through area wide advance modeling of all sources, as well as those likely to trade.

Several comments also objected to the requirement that Level I trades not increase emissions from the source with the lower effective plume height. These comments noted that under various conditions similar stacks could so vary in effective plume height that neither would consistently be " higher" or " lower." One also suggested this limitation might encourage use of tall stacks to cure local exceedances.

Today's notice retains this Level I requirement unchanged. That two sources may be virtually indistinguishable in effective stack height should not delay approval of Level I trades, since the limitation's purpose  preventing potentially significant increases in ground level ambient concentrations due to shifts of emissions from " higher" to " lower" stacks  will still be satisfied. Page 27 51 FR 43814 Moreover, since such trades cannot increase net baseline emissions, this limitation merely ensures they will not create new ambient violations. Because other EPA regulations address the use of excessively tall stacks to cure existing ambient violations, no further restriction in this Level I requirement appears required.

b. Level II Criteria. Trades of SO 2 , TSP, CO, Pb and NO X ( for visibility purposes) may also be approved through limited Level II modeling of the ambient effects solely of sources involved in the trade, where applicable net baseline emissions do not increase and designated ambient significance levels are not exceeded.

Today's notice confirms, clarifies, and in certain cases extends various 1983 improvements made to increase certainty and better assure that such Level II trades result in ambient equivalence. In particular, " significant ambient impact" may no longer be measured solely by changes at the " receptor of maximum predicted impact" before and after the trade. Instead such changes must be measured at every affected receptor for every averaging period relevant to the particular pollutant, throughout the year. Under this approach no Level II trades will be approved without further scrutiny, involving full or limited Level III modeling, if they result in a significant net ambient effect at any modeling point for any such averaging period during a modeled year.

Today's notice also specifies Level II significance levels for all averaging periods consistent with all current national ambient air quality standards, not just the 24 hour averaging periods for SO 2 and PM or the 8 hour averaging period for CO. 4 n4 Refined models such as MPTER and ISC must generally be used to measure changes resulting from the trade at each receptor, using the most recent full year of meteorological data. 4 n5 n 4 4 For further discussion of these significance levels and the increased assurance of environmental equivalence they provide in conjunction with today's more sophisticated Level II modeling approach, see Fleckenstein, " Modeling Criteria; The Key to Major Reforms for Emissions Trades," APCA Paper 84 65.2 ( San Francisco, California, June 28, 1984).

n 4 5 Under some limited conditions, conservative screening models may be substituted for these refined models, and in these cases a full year of meteorological data may not be necessary. See Technical Issues Document, Section I. B. l. b.( 3).

These modeling requirements assure that bubbles which pass applicable Level II tests and meet all other requirements of today's policy will result in air quality equal to or better than that produced by pretrade emission limits, and may be approved. Because refined models have now been approved by EPA and their parameters may be specified with greater certainty and confidence, these requirements also provide a firmer basis for approving state generic rules incorporating Level II. 4 n6 n 4 6 Interested parties should, however, be aware that because of replicability concerns related to application of any approach requiring use of case specific ambient dispersion modeling, such Level II generic rules may be more difficult to draft and implement than rules incorporating only de minimis and Level I approaches for SO 2 , TSP, CO or Pb. During and after issuance of the 1982 interim policy EPA staff drafted and informally circulated, at the request of state and local air agency directors, model generic rules which provided more detail to help interested states acceptably address these concerns. The Agency plans to update and recirculate those model rules as quickly as possible after publication of today's notice. EPA encourages parties wishing to develop generic rules to use these new models and work closely with relevant Regional staff, so that potential problems may be promptly identified and resolved.

c. Level III Criteria. Trades which are not de minimis and do not satisfy Level I or Level II above must generally be evaluated by full scale ambient dispersion modeling. Two air pollution control agencies recommended fixed trading ratios in lieu of such modeling, asserting this would reduce cost and uncertainty while continuing to meet the goals of the Clean Air Act. EPA recognizes the legitimacy of these concerns but has concluded that trades which do not satisfy Level I or II raise the kinds of air quality Page 28 51 FR 43814 issues which appropriately require full scale modeling, unless such trading ratios have been justified by similar area wide modeling conducted in advance of the trade.

Today's notice does, however, modify Level III to provide states and sources more flexibility in this regard. Where a trade meets all other criteria of Level II, but Level II modeling has shown significant potential increases at particular receptors, modeling analyses under Level III may under appropriate circumstances be limited to a receptor area smaller than the trade's entire area of impact, so long as it includes emissions from all sources which contribute to ambient concentrations in that limited geographic area. Because of the unique nature of each situation, the appropriate limited geographic area must be determined in accord with EPA guidelines on modeling and case by case evaluation. This " limited Level III" approach may conserve significant resources, while allowing states and sources to focus on specific geographic areas of concern. n47 n 47 Today's notice also requires bubble trades in certain primary nonattainment areas needing but lacking approved demonstrations to produce a " net air quality benefit," which shall consist at minimum of a 20% reduction in emissions remaining after application of the lower of actual SIPallowable or RACT allowable emissions baselines to all sources involved in the bubble. See, e. g., Section II. B above. This requirement does not entail any modeling different than or in addition to the modeling approaches discussed above. It is merely intended to ensure that where appropriate levels of modeling indicate that prescribed baseline values are not sufficient to produce ambient equivalence, additional reductions which assure such equivalence, prior to the 20% net discount in baseline emissions, will be required.

F. Enforcement Issues Several commenters noted that while sources should, as provided in the 1982 policy, be allowed to use bubbles to come into compliance, bubble applications might also be used to delay compliance or enforcement without compensating environmental benefits. Some of these commenters alluded to language in the 1982 notice which, while not authorizing or intended to authorize such results, could have been interpreted to allow them. Such unacceptable delay might, for example, arise where a source facing an imminent compliance deadline suddenly advances a bubble application and asserts that more time is needed to develop and evaluate that application before compliance with original SIP limits should be required.

Both bubbles and generic rules can be important means of allowing environmentally sound compliance. Generic rules may be more expeditious than case by case SIP revision bubbles. They may also preserve the very opportunity to bubble when the time needed to process a case by case SIP revision might extend beyond the source's original SIP compliance date. At the same time, bubble applications should not become a shield against enforcement actions for sources which have failed to take necessary steps to meet required control obligations on time. Bubbles are simply alternative means of complying at less cost. They should be treated neither more nor less stringently than other, more traditional methods of compliance. Bubbles offer innovative ways to meet emission reduction obligations. They should not become devices to avoid such obligations.

Today's notice substantially clarifies and tightens the 1982 policy to better implement these principles. Among other steps, compliance extensions will no longer be granted under generic rules in any nonattainment area, and may be granted generically in attainment areas only where EPA has approved the time extension portion of the rule as consistent with relevant Clean Air Act requirements, including expeditious attainment and maintenance of ambient standards. Cf. 47 FR at 15078 col. 2. This will generally mean that requests for time extensions as part of bubble applications must be separately reviewed as individual SIP revisions, subject to criteria EPA normally applies to such requests.

Today's notice also re emphasizes that as a matter of law and sound policy, sources seeking bubbles remain subject to enforcement of existing ( pre trade) SIP limits until the bubble is finally approved. Sources which possess approved bubbles with future effective dates remain subject to similar enforcement of pre trade limits until either those limits or the new ones are met, and may wish to take steps identified in the notice, including accelerated compliance with bubble limits, to minimize that possibility. See Technical Issues Document, section I. B. 2. a. Page 29 51 FR 43814 Under today's notice, EPA will not specifically select such sources for enforcement action. Nor will EPA withhold or defer enforcement simply because a source is seeking alternative emission limits through a bubble. In exercising its inherent enforcement discretion, EPA will apply the same considerations to noncompliant sources which seek to comply through bubbles, as to those which do not. n48 n 48 States and sources should, however, be aware that under current EPA guidance, such discretion is most likely to be exercised where a SIP revision bubble has been formally proposed for approval at the state level and EPA staff have concluded that it appears approvable under current EPA policy. In these circumstances initiation of action to enforce pre trade limits that would soon be replaced by a valid bubble reconfiguration would likely consume limited EPA enforcement resources to little environmental end.

Emissions Trading Policy Statement Table of Contents: Policy Statement I. Introduction: Basic Elements of Emissions Trading A. What is Emissions Trading?

B. The Bubble C. Netting D. Emission Offsets E. Emission Reduction Banking F. Generic Trading Rules G. Effect of This Policy Statement II. Requirements for Creating, Using, or Banking Emission Reduction Credits A. Creating Emission Reduction Credits 1. Surplus 2. Enforceable 3. Permanent 4. Quantifiable B. Using Emission Reduction Credits 1. Emissions Trades Must Involve the Same Criteria Pollutant 2. All Uses of ERCs Must Satisfy Applicable Ambient Tests 3. Bubbles Must Not Increase Hazardous Pollutants 4. ERCs From Existing Sources Cannot Be Used to Meet Technology Based Requirements Applicable to New Sources 5. States May Approve Bubbles in Primary Nonattainment Areas Which Require But Lack Approved Demonstrations of Attainment 6. Sources Need Not Be Subject to Binding Compliance Schedules Based on Current SIP Requirements 7. States May Extend Certain Compliance Schedules 8. States May Approve Bubbles Involving Open Dust Sources of Particulate Emissions Page 30 51 FR 43814 9. Trades Involving Lead 10. Trades Involving ERCs From Mobile Source Measures 11. Interstate Trades 12. Bubbles Must Not Impede Enforcement C. Banking Emission Reduction Credits III. State Generic Trading Rules IV. Bubbles Which Require Case by Case SIP Revisions V. Conclusion EMISSIONS TRADING POLICY STATEMENT I. Introduction: Basic Elements of Emissions Trading This statement details EPA policy on emissions trading. It sets out conditions EPA considers necessary for emissions trades to satisfy the Clean Air Act. It also clarifies and otherwise makes final the Interim Policy proposed on April 7, 1982 ( 47 FR 15076). It is accompanied by a Technical Issues Document which elaborates and provides greater detail on principles set forth below. Finally, it addresses new issues, and incorporates certain additional safeguards as a result of past trading experience, to better assure the environmental integrity of future trades.

A. What is Emissions Trading?

Emissions trading consists of bubbles, netting, emission offsets, and emission reduction banking. These steps involve creation of surplus emission reductions at certain stacks, vents or similar sources of emissions and use of these emission reductions to meet or redefine pollution control requirements applicable to other emission sources. Such emissions trades can provide more flexibility to meet environmental requirements, and may therefore be used to reduce control costs and encourage faster compliance. Moreover, by developing " generic" trading rules ( see Section III below) states n1 may be able to expedite bubble approvals by eliminating the need for case by case SIP revisions n2 and by providing more predictable approval criteria.

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

n 2 " Case by case SIP revision" means case by case approval by EPA as a SIP revision. This is the traditional mechanism by which bubbles and other SIP changes have been approved by EPA.

B. The Bubble EPA's bubble lets existing plants ( or groups of plants) increase emissions at one or more emission sources in exchange for compensating extra decreases in emissions at other emission sources. Approved bubbles give plant managers the ability to implement less costly ways of meeting air quality requirements. To be approvable, each bubble must produce results which are equivalent to or better than the baseline emission levels in terms of ambient impact and enforceability. Thus, bubbles should jeopardize neither ambient standards nor applicable PSD increments and visibility requirements. Under EPA's bubble, emission reductions from existing sources can not be used to meet technology based requirements applicable to new or modified stationary sources. Page 31 51 FR 43814 This Policy Statement replaces EPA's original bubble policy ( December 11, 1979; 44 FR 71779) and Interim Emissions Trading Policy ( 47 FR 15076). It tightens general bubble principles as well as requirements for bubbles in primary nonattainment areas which require but lack demonstrations of attainment, and requires bubbles in these areas to produce progress towards attainment, beyond equivalence to stringent emission limits. By specifying EPA's requirements for bubbles in all areas, this Policy Statement should make the development, review and approval of environmentally sound bubbles more rapid and predictable.

C. Netting Netting may exempt " modifications" of existing major sources from certain preconstruction permit requirements under New Source Review ( NSR), so long as there is no net emissions increase within the major source or any such increase falls below significance levels. n3 By " netting out," the modification is not considered " major" and is therefore not subject to associated preconstruction permit requirements for major modifications under 40 CFR 51.18, 51.24, 52.21, 52.24, 52.27, or 52.28. The modification must nevertheless meet applicable new source performance standards ( NSPS), national emissions standards for hazardous air pollutants ( NESHAPs), preconstruction applicability review requirements under 40 CFR 51.18( a)( h) and ( l), and SIP requirements.

n 3 See, e. g., 40 CFR 51.18( j)( 1)( x), 51.24( b)( 23), 52.21( b)( 23). See also today's Technical Issues Document, n. 47 and accompanying text.