Similarly, several states ( OAR 2002 0056 3437,  3449,  4139) did not support the safety valve provision. One commenter ( OAR 2002 0056 3437) stated safety valves have not been needed in the Acid Rain or NO x programs, and they would require EPA to speculate about too many uncertainties, such as the allowance price. One commenter ( OAR 2002 0056 3449) submitted the safety valve provision to avoid controls if the cost is greater than $ 35,000/ lb is inappropriate and arbitrary. The commenter noted the dollar value was not linked to the environmental cost which result from excess mercury emissions. The commenter believed that it appeared to be linked to EPA's arbitrary notion of what level of cap is supported by the proposed rule. The commenter also believed costs of control over $ 100,000/ lb were justified based on the economic loss of fish, sports fishing industry, and the lifetime economic loss of brain damaged people due to in utero exposure.

Response:

EPA is not finalizing a safety valve provision in CAMR. EPA maintains that the safety valve mechanism is not necessary to address market volatility associated with the Hg reduction requirements. This issue is discussed in detail in section IV of today's preamble.

One commenter ( OAR 2002 0056 4139) submitted that allowing sources to purchase allowances under a safety valve price guarantee may discourage companies from seeking more cost effective means to control mercury. The commenter pointed out this could inhibit advancement of new technologies because sources would control only to a set dollar amount regardless of advances in control technology.

Response:

EPA is not finalizing a safety valve provision in CAMR. EPA maintains that the safety valve mechanism is not necessary to address market volatility associated with the Hg reduction requirements. This issue is discussed in detail in section IV of today's preamble.

Comment: 5 159 Public interest group comprehensive comments ( OAR 2002 0056 3459) stated that the safety valve provision should be discarded because it would permit pollution levels to remain artificially high and because EPA expects it to be used to avoid pollution controls. Even though purchased safety valve allowances would be deducted from the next year's allocation, there does not seem to be any limit on using the provision to borrow again year after year and avoiding controls indefinitely. The commenters noted that EPA's own IPM modeling showed it is bad environmental policy that would increase emissions in the years 2023 2030 beyond the cap of 15 tpy ( to 22 tpy). It also would have the potential to delay controls if the price were cheaper than controls. The commenters observed that EPA did not even address the possibility of local problems resulting from the safety valve provision. It also would create a huge paradox associated with the continual borrowing of future allowances without ever reconciling the borrowed allowances from future compliance periods. As written, the commenters submitted the proposed provision would allow a plant to comply by purchasing allowances into the future.

Response:

EPA is not finalizing a safety valve provision in CAMR. EPA maintains that the safety valve mechanism is not necessary to address market volatility associated with the Hg reduction requirements. This issue is discussed in detail in section IV of today's preamble.

Comment:

One commenter ( OAR 2002 0056 2897) expressed concern about the proposed safety valve mechanism and suggested that this concept be revisited, as it seemed to undermine the market value concept of Title IV. The commenter noted that the concept suggests that there would be unlimited allowances available at a fixed and arbitrary price unrelated to market conditions and that these allowances could be borrowed against ad finitum into the future. The commenter questioned whether this truly incentivizes commercialization of technology.

Response:

EPA is not finalizing a safety valve provision in CAMR. EPA maintains that the safety valve mechanism is not necessary to address market volatility associated with the Hg reduction requirements. This issue is discussed in detail in section IV of today's preamble.

Comment:

The commenter ( OAR 2002 0056 2897) stated that borrowing of future allowances may be acceptable if there will be only minor noncompliance issues in the years immediately following initial implementation. The commenter asserted that, however, this could not be guaranteed and continued borrowing of out year allowances would be extremely problematic. The commenter stated that an alternative approach may be to allow utilities to purchase off system reductions from outside the electricity generating sector, if their control costs exceed the safety valve value. According to the commenter, this would eliminate the risk that utilities face from excessive control costs while continuing to reduce the mercury emitted to the environment. The commenter 5 160 believed over time, the depletion of these off system reductions would help incentivize mercury control technology.

Response:

EPA is not finalizing a safety valve provision in CAMR. EPA maintains that the safety valve mechanism is not necessary to address market volatility associated with the Hg reduction requirements. This issue is discussed in detail in section IV of today's preamble.

Comment:

Several commenters ( OAR 2002 0056 2180,  2375,  2519,  2547,  2718,  2721,  2830,  2835,  2850,  2861,  2922,  2948,  3509,  3522,  3565,  4891) supported the establishing of a safety valve. Several commenters ( OAR 2002 0056 2375,  2718,  2903,  3522) supported an enhanced, appropriately designed safety valve provision because it could solve critical problems of implementing the trading program while ensuring compliance with and the integrity of the Phase I and II caps. Specifically, the commenters supported a Phase I safety valve set at $ 15,000/ lb. and a Phase II safety valve set at $ 35,000/ lb. However, the commenters objected to EPA's proposal to deposit safety valve funds into the general treasury and to deduct safety valve allowances from future years. The commenters proposed that safety valve funds should go into a Mercury Reduction Fund ( MRF) and be used to fund the development of innovative technologies and/ or purchase additional off utility system mercury reductions. The commenters proposed that because the MRF could yield net mercury reduction benefits, there would be no need to confiscate safety valve credits from future years.

Response:

EPA is not finalizing a safety valve provision in CAMR. EPA maintains that the safety valve mechanism is not necessary to address market volatility associated with the Hg reduction requirements. This issue is discussed in detail in section IV of today's preamble. Further, it should be noted that under section 111 where state plans have been approved, funds from the sale of safety valve allowances would have been collected by the States, not EPA.

Comment:

One commenter ( OAR 2002 0056 4891) stated the safety valve provision is intended to and would, in fact, minimize some of the uncertainty and unanticipated market volatility that may be associated with the cost of mercury rule compliance. The price of allowances would be capped such that, if the allowance price exceeds the " safety valve" amount, sources would be authorized to borrow allowances from following years to have access to more allowances available at that price. The commenter submitted that perhaps the primary benefit of this provision is that it would render the cost of complying with the mercury rule requirements somewhat predictable and limited, though extremely costly.

Response: 5 161 EPA is not finalizing a safety valve provision in CAMR. EPA maintains that the safety valve mechanism is not necessary to address market volatility associated with the Hg reduction requirements. This issue is discussed in detail in section IV of today's preamble.

Comment:

One commenter ( OAR 2002 0056 2835) emphasized that the success of a safety valve mechanism would depend on the design of the state allocation system   i. e., the availability of undistributed allowances from which the sources could borrow   and highlighted the need for consistent allocation methods across the various state programs.

Response:

EPA is not finalizing a safety valve provision in CAMR. EPA maintains that the safety valve mechanism is not necessary to address market volatility associated with the Hg reduction requirements. This issue is discussed in detail in section IV of today's preamble.

Comment:

One commenter ( OAR 2002 0056 3431) noted that EPA has proposed a safety valve provision that sets the maximum cost purchasers must pay for mercury emission allowances. The commenter observed that EPA proposed a price of $ 2,187.50 for a mercury allowance ( one ounce); this price would be adjusted annually for inflation. The commenter stated that safety valve allowances could be used to cover any shortfall between reported emissions and the allowances needed to cover those emissions. The commenter observed that as proposed, allowances purchased by a power plant through the safety valve mechanism would come out of the budget for future years from the state within which the power plant is located and, in EPA's example, would be taken out of the pool of allowances available for units that have been generating for at least five years. The commenter stated that this would result in reduced future allocations for all plants in that state. According to the commenter, it would be unwarranted and inequitable for other plants in the state to be penalized as a consequence of another plant taking advantage of the safety valve mechanism. The commenter stated that this potentially is an especially problematic issue for plants in states that have a small number of coal fired power plants. To address this problem, the commenter suggested that the mechanism be revised to have the " borrowed" safety valve allowances come out of the overall nationwide budget, not individual state budgets. The commenter also suggested that alternatively, the mechanism could be changed to allow plants to use future year allowances for compliance in an earlier compliance year, at no charge, but on a discounted basis. According to the commenter, this would eliminate the problem of penalizing plants for the use of the safety valve mechanism by other plants in its state, while making sure there isn't excess " borrowing" of future years' allowances through the discount provision.

Response: 5 162 EPA is not finalizing a safety valve provision in CAMR. EPA maintains that the safety valve mechanism is not necessary to address market volatility associated with the Hg reduction requirements. This issue is discussed in detail in section IV of today's preamble.

Comment:

One commenter ( OAR 2002 0056 2634) believed that the EPA's safety valve provision is not a true safety valve in that it requires the confiscation of future years' allowances. The commenter stated that the purpose of the safety valve is to ensure reliability in the electrical system by providing units a means of compliance even if technology does not develop at the rate currently anticipated. The commenter believed confiscation of future years allowances would only exacerbate the problem. The commenter suggested that if EPA ultimately decides that the safety valve provision will include borrowing of future years allowances, allowances should be borrowed from the general pool and not against an individual units account. If the safety valve were triggered, it would not be the result of any business decisions made at a unit level, rather it would be a reflection of the state of technology across the industry. Therefore, the cost burden should also be spread across the industry.

Response:

EPA is not finalizing a safety valve provision in CAMR. EPA maintains that the safety valve mechanism is not necessary to address market volatility associated with the Hg reduction requirements. This issue is discussed in detail in section IV of today's preamble.

Comment:

One commenter ( OAR 2002 0056 1969) was unclear how a safety valve will be an effective tool to minimize unanticipated market volatility if the future year cap is reduced by the borrowed amount. The commenter stated that it certainly could alleviate compliance concerns at the point in time when the safety valve is triggered, but also noted that, on the other hand, triggering the safety valve in multiple years could compound future compliance requirements unless industry were able to effectively reduce future mercury emissions within a reasonable time frame.

Similarly, one commenter ( OAR 2002 0056 2850) supported the safety valve if it does not involve replacement of credits from future allocations. The commenter believed an interim phase buyout price of $ 10,000 per pound mercury should be considered, shifting to EPA's proposed $ 35,000 per pound value at the final phase of the program ( 2018). The commenter stated that the price cap is critical considering that there is no commercially demonstrated control technology. The commenter suggested that the pay back component be eliminated, since that only serves to make future year compliance all the more difficult while emerging technology is commercialized. 5 163 One commenter ( OAR 2002 0056 2861) suggested that some restriction is needed on the use of the safety valve to assure that borrowed allowances do not affect the future allocations of sources that met compliance without the need to borrow.

One commenter ( OAR 2002 0056 2180) suggested that proceeds from the safety valve should be returned to other allowance holders or held in escrow until the user of the safety valve can return the borrowed allowances.

Several commenters ( OAR 2002 0056 2948,  3565) requested EPA to modify their proposal to enable a unit to borrow from its own future year allowance account ( resulting in fewer allowances available to that unit in future years). Commenter OAR 2002 0056 2948 stated this would avoid a situation where units that did not borrow allowances are forced to bear part of the burden of a reduced number of available allowances in future years. Commenter OAR 2002 0056 3565 recommended that the unit borrowing from its own future year allowance still pay EPA the $ 2,187.50 per allowance for the privilege to borrow against future years. The commenter believed the unit should not be borrowing from the general pool of allowances available to all units within the state as EPA has proposed. The commenter stated that this would result in fewer allowances available for allocation in future years, not just to the units that borrowed allowances, but to all units. The commenter noted that EPA also proposes that funds received from the purchase of safety valve allowances be deposited in the United States Treasury. The commenter requested that these funds instead be provided to the United States Department of Energy to assist in the development of innovative mercury emissions control projects, such as Powerspan's Electro Catalytic Oxidation technology.

Response:

EPA is not finalizing a safety valve provision in CAMR. EPA maintains that the safety valve mechanism is not necessary to address market volatility associated with the Hg reduction requirements. This issue is discussed in detail in section IV of today's preamble.

Comment:

One commenter ( OAR 2002 0056 3443) stated that EPA has asked for comments on the need for a safety valve mechanism under which the price of allowances is effectively capped. See 69 FR 12397 and 12410. The commenter can support the inclusion of such a mechanism in the trading rule but contended that an early reduction credit program would be a more effective tool for dampening the market volatility that could result from implementation of a cap and trade program. The commenter believed an early reduction program would be a better policy and market tool since it would grant credit for reductions made early rather than grant credit for the promise of greater future reductions. The commenter noted early reduction allowance programs have been part of previous cap and trade programs, and are better suited to dampen market volatility by making emission credits available ahead of compliance deadlines. The commenter pointed out that the safety valve mechanism, by contrast, would attempt to artificially restrain the market price of allowances. The market price of an emission allowance obtained via a safety valve provision could vary greatly depending on the final source of that emission allowance, 5 164 creating situations in which the safety valve would have little effect on dampening market volatility or facilitating compliance decisions.

Response:

EPA is not finalizing a safety valve provision in CAMR. EPA maintains that the safety valve mechanism is not necessary to address market volatility associated with the Hg reduction requirements. This issue is discussed in detail in section IV of today's preamble. See the discussion of early reduction credits in following section.

Comment:

One commenter ( OAR 2002 0056 1842) offered the following " variable mercury safety valve plan," based on the mercury cap and trade proposal.

Proposition: Variable mercury safety valve allowance pricing should be included in the proposed mercury and cap and trade rule.

Purpose: To eliminate the impasse over feasability. This impasse is largely based on the question of mercury technology performance. Variable pricing eliminates the need to address this question.

Proposition Specifics: Present proposals call for absolute diminishing caps with a fixed safety valve price approach. This should be changed to single cap target ( 5 to 10 tpy) with safety valve allowance prices which start low but increase yearly. The result is that the achievement of the target is probable but the maximum cost is predictable.

Background: Much of the debate centers on the amount of mercury removal which should be achieved in various years. The differences are not about the goal but about the cost of obtaining the goal. Power plants in the U. S. presently emit 48 tons ( 96,000 lb) of mercury/ yr. Environmentalists contend that 90 percent of the mercury can be removed with known technology and are calling for a five ton mercury cap in 2007. Power plant owners believe there is no reliable technology available and are questioning whether a 26 ton cap in 2010 is too onerous. However, both agree that by 2018 it is necessary to remove between 70 90 percent of the mercury.

Mercury is bio accumulative. Therefore mercury removed in earlier years will benefit those living in 2018. Since there is broad agreement to reduce mercury exposure in 2018, there must be agreement that cost effective earlier reduction of mercury is also desirable. The problem is that there is great disagreement on what will be cost effective when.

The proposed rule attempts to allay power plant concerns about cost through a " safety valve" provision. A 34 ton cap is proposed for 2010. 68,000 pounds of 5 165 mercury allowances would be allocated to the 300,000 MW of generating capacity. The average 300 MW plant would have an allowance of 68 pounds. Should he emit more than 68 lbs in 2010 he can buy allowances on the open market. If he cannot buy allowances on the open market for less he can buy them from EPA for $ 35,000/ lb. The average 300 MW plant emits 96 lbs/ yr of mercury. Therefore the worst case scenario is a 2010 cost of 28 lbs x $ 35,000 = $ 980,000. Impasse Analysis: There is no supplier with deep pockets guaranteeing to remove 90 percent of the mercury at $ 5,000/ lb of mercury in 2007. So while environmentalists claim that this can be done utilities can justifiably ask: what if we install lots of equipment which does not work and then still end up not meeting the limits? They argue that by 2018 solutions will be available at a reasonable cost. So let's wait.

Argument over an unknown is fatal to any progress. Since the cost of removal at any point in time is not certain, progress can only be made by eliminating the relevance of this " unknown." Variable safety valve allowance pricing does precisely this.

Proposition Details: The safety valve concept is undeniably a positive addition. Environmentalists who anticipate allowances selling for $ 5,000/ lb will not object to a $ 35,000 safety valve price. Utilities which anticipate much higher costs are relieved that there is a cost ceiling. But this high priced safety valve which is only applicable at a 34 ton cap in 2010 does little to break the impasse. However, the basic idea can be exploited to completely eliminate the Impasse.

The plan entails a fixed cap with variable price allowances. Under this proposal the ultimate cap, whether it is 5 tons or 10 tons, would be utilized from the first date of promulgation. This means that the average 300 MW utility would have an allowance of 10 to 20 pounds from some date starting in 2006 through 2010. The plant would buy allowances for yearly emissions above this figure. However, if the allowances exceeded some price, e. g. $ 1,000 5,000 in the first year, they could be purchased for that amount from EPA. This price would rise each year. So for example the price could start at $ 1,000/ lb in 2007 and rise to $ 7,000/ lb in 2010. A 2018 price of $ 25,000/ lb instead of the proposal of $ 35,000 could be set.

This mechanism favors all parties. Environmentalists who are confident that 90 percent removal will be achieved at $ 5,000 lb would back a variable price at this amount at the earliest time they can negotiate. Utilities who are already anticipating spending up to $ 35,000/ lb in 2018 will see themselves much better off under this provision. Suppliers will be spurred to massive R and D programs because they can target specific years when they are confident their technology will be more cost effective than the safety valve price. The public will be better off because the private sector will shoulder the development costs. EPA and DOE will be relieved that the burdens are transferred elsewhere. 5 166 Summary: The fixed cap/ variable safety valve allowance prices for mercury would eliminate the impasse in Clear Skies passage and would result in a very cost effective solution to the mercury removal problem. Since many suppliers believe they have solutions which will remove mercury at low cost, but who do not see any market until 2018, this provision would trigger immediate development of technology. In the past, government funded development of air pollution control technology has proven to be expensive and not as productive as private funding. Revenues generated by the safety valve option could be funneled directly to mercury technology development. So this provision will be an important addition to the proposed legislation.

The commenter then offered an example of how the variable mercury safety valve plan would work for a 300 MW plant.

Response:

EPA is not finalizing a safety valve provision in CAMR. EPA maintains that the safety valve mechanism is not necessary to address market volatility associated with the Hg reduction requirements. This issue is discussed in detail in section IV of today's preamble.

Comment:

One commenter ( OAR 2002 0056 2918) believed that an enhanced, appropriately designed " Safety Valve" provision could resolve several critical problems related to implementation of a mercury cap and trade program for the coal fired power plant industry. The commenter stated a properly designed safety valve mechanism could ensure compliance with, and the integrity of, the Phase I ( 2010) and Phase II ( 2018) mercury emission caps while providing the flexibility to address the current uncertainty about mercury emissions and their control.

The commenter proposed that EPA enhance the safety valve provision and design it to address the following critical cap and trade implementation issues:

° Significant uncertainty exists over the accuracy of EPA's ICR and NATEMIS national emissions database inventories, as well as the accuracy of EPA's 34 ton co benefits based Phase I mercury emissions cap. Therefore, the coal fired power plant industry sees significant uncertainty whether sufficient mercury allowances will be available for compliance after the co benefit controls are installed under EPA's proposed CAIR.

° In addition to the potential Phase I shortfall of mercury allowances, the compliance issue is exacerbated for one or more coal ranks if EPA's allowance multipliers are not set appropriately.

° EPA's proposed confiscation of future year " borrowed" mercury allowances in its safety valve proposal presents serious potential system reliability and future compliance problems. As currently understood by industry, if significant advancements in mercury 5 167 control technology do not develop at a commercial level by Phase II ( 2018), the confiscation of future year allowances will simply " dig the hole deeper."

° Finally, the safety valve needs to materially contribute to actual achievement of the Phase II 15 ton/ yr mercury emissions cap. The commenter prepared a " Hg Co Benefits and CSA Phase I and II Analysis" that demonstrated ( based on EPA's ICR II and NATEMIS national emissions inventory data) that after application of co benefit control technology required to meet the CSA requirements, and with the application of all feasible ACI mercury control ( assuming it becomes commercially available), national mercury emissions from power plants would remain at about 19 tons/ year by Phase II.

The commenter believed that a safety valve must be properly designed to maximize mercury emission reductions, while enabling the operators of coal fired power plants to comply with the Phase I and Phase II caps at an acceptable cost. The commenter submitted that a properly designed safety valve could also accelerate the development of commercially available mercury control technologies necessary to achieve the proposed Phase II 15 ton/ year cap. The commenter stated that the aforementioned co benefits analysis was performed principally with the use of EPA's IPM modeling assumptions about the effectiveness of mercury control technologies, including ACI.

The commenter recommended that EPA revise its proposed safety valve provision to include the following design elements for both Phase I and Phase II of the mercury cap and trade program:

° Allow a lower $/ lb mercury safety valve fee for compliance during Phase I ( 2010 2017). The safety valve fee during Phase I could be set at $ 15,000 per pound. Covered facilities would pay the fee in lieu of using mercury allowances for compliance in the event that the mercury allowance price exceeds $ 15,000 per pound.

° Allow payment of EPA's currently proposed $ 35,000/ lb fee during Phase II, in lieu of using mercury allowances for compliance in the event that the allowance market price exceeds $ 35,000 per pound.

° Do not confiscate future year mercury allowances under either the Phase I cap, or under the Phase II cap. Facilities paying the fee would not be allowed to use any Phase I or Phase II " banked" emission credits. This feature would ensure that banked emissions must be used, or placed on the market ( likely at a price lower than the fee), before compliance is allowed by payment of the safety valve fee, to preserve the integrity of the mercury caps to the maximum extent possible.

° Establish a Mercurv Reduction Fund from the safety valve fees collected, and disburse the funds ( with no more than a 5percent administrative cost) to achieve mercury reductions and advancing mercury control technologies, by contracting for and funding: ( 1) Project proposals to make mercury reductions from other mercury emissions sources " off the utility system"; and, ( 2) Project proposals that demonstrate advanced mercury control 5 168 technologies, including commercial level generating unit demonstrations ( i. e., units at 25MW to 750MW capacity).

° Conduct a mercury cap and trade program " reasonable progress" review at years 2015, 2018, and 2021 to assess the actual mercury emissions reduction progress occurring from electric generating units ( EGUs) under the cap and trade program, compared with the Phase I and Phase II mercury caps. The purpose of a " reasonable progress" review would be to determine whether any program adjustments need to be promulgated by rule revision, to ensure that the mercury reduction caps are achieved   given the state of development of mercury emission reduction technologies, and the reliability of the national electric supply grid system.

The commenter stated that the safety valve proposal would guarantee a maximum price at which regulated sources would be able to purchase mercury allowances for Phase I and Phase II, market pressures notwithstanding. The safety valve also would minimize unanticipated allowance market volatility by ensuring that the price for allowances would not exceed a fixed ceiling. According to the commenter, EPA thereby would provide industry with reliable market information for strategic compliance planning. Even more importantly, in the event that it proved more costly and difficult to achieve the Phase I and Phase II mercury emissions reduction targets than is now projected, the marginal cost of the mercury control program could not exceed $ 15,000 per pound in Phase I and $ 35,000 per pound in Phase II. The commenter stated that this would protect consumers from unanticipated and unjustifiable costs. For these reasons, the commenter supported the creation of a safety valve mechanism for both Phase I and Phase II of the proposed mercury cap and trade program to ensure that emissions reductions will be achieved, but that control costs would not exceed a predetermined level.

The commenter further supported the creation of a Mercury Reduction Fund as an effective means for maximizing the economic efficiency of achieving the Phase I and Phase II mercury reduction caps. First, safety valve funds could be used to stimulate the development of innovative control technologies, by providing capital to potential innovators that is otherwise unavailable due to the scale of the required investment, the delay in return, or the degree of risk involved. Second, the fund could act as a safety net or relief valve by making it easy for sources with limited or no emissions control capability to obtain needed reductions from off line sources that can reduce emissions more efficiently.

The commenter pointed out that a safety valve fund could enhance compliance with emissions standards in several ways. The commenter continued that the fund also would promote regulatory certainty by guaranteeing a cap on removal costs. This would help owners and operators of regulated sources better plan for the future. The commenter submitted that the fund also would enable EPA to target sources for cost effective emissions reductions that EPA otherwise would lack the statutory authority to regulate. Armed with safety valve funds, the commenter believed EPA could act as a market participant and procure additional reductions from any entity willing to be paid in return. 5 169 The commenter added that a safety valve fund could also significantly benefit the environment. For example, if the safety valve were set at an appropriate marginal control cost level as described above, regulated sources would be discouraged from paying into the fund to cover emissions. Rather, sources would be encouraged to develop innovative ways to reduce emissions more efficiently. Further, the commenter stated a safety valve fund would encourage the aggregation of capital for larger, strategic investments by reducing associated transaction costs. The commenter suggested EPA could then use the capital at its disposal to invest in a variety of technological innovations, including low risk, low return investments as well as higher risk and potentially higher return investments.

In conclusion, the commenter urged EPA to establish Phase I and Phase II safety valve fees at appropriate marginal cost level ( as proposed above) that would be high enough to discourage sources from choosing payment into the fund as their means of control, but low enough so sources that could not obtain controls for a reasonable cost would not be penalized. The commenter further recommended that EPA use safety valve proceeds to purchase additional cost effective off utility ( EGU) sector reductions, not to purchase or confiscate mercury allowances from future years. By implementing the recommended safety valve provision, the commenter believed EPA could prevent delay in important air quality achievements. Moreover, the commenter supported the use of any excess safety valve funds to provide capital for the development of better, more efficient mercury controls.

Response:

EPA is not finalizing a safety valve provision in CAMR. EPA maintains that the safety valve mechanism is not necessary to address market volatility associated with the Hg reduction requirements. This issue is discussed in detail in section IV of today's preamble.

Comment:

One commenter supported the proposed safety valve price level as a means of capping the overall economic impact of controlling mercury emissions. The commenter submitted the price cap would be critical considering that there is no commercially demonstrated control technology. The commenter agreed that EPA's cap and trade program would effectively address alleged mercury hot spots and concluded that most cost effective reductions will be made at the larger, higher emitting sources. The commenter also agreed the remaining uncontrolled emissions would be largely elemental mercury that is not as likely to be deposited locally as is the particulate and oxidized mercury. ( 69 FR 4703.)

However, the commenter was unclear how a safety valve would be an effective tool to minimize unanticipated market volatility if the future year cap were reduced by the borrowed amount. The commenter believed that while it may alleviate compliance concerns, at some point in time triggering the safety valve in multiple years could compound future compliance requirements unless industry were able to effectively reduce future mercury emissions within a reasonable time frame. 5 170 The commenter recommended that if the safety valve is triggered, the annual allocations to the plant withdrawing from the safety valve pool should be decreased at a rate of 0.5 ounces for every ounce of mercury it purchased under the safety valve. ( 69 FR 4704.)

Response:

EPA is not finalizing a safety valve provision in CAMR. EPA maintains that the safety valve mechanism is not necessary to address market volatility associated with the Hg reduction requirements. This issue is discussed in detail in section IV of today's preamble.

5.8.3 Early Reduction Credits and Incentive Pools Comment:

One commenter ( OAR 2002 0056 3531) further suggested, if the EPA were to create an early reduction credit program, significant reductions prior to 2010 would still be achieved by units coming on line early to earn the ERCs. The commenter concluded that as a result, early mercury reductions will be achieved while still allowing for a reasonable cost effective installation schedule.

Response:

The first phase Hg cap is set at a level that requires no additional installation of controls relative to CAIR, because it is set at a level that represents projected cobenefit mercury reductions that will occur as a result of NO x and SO 2 control technologies installed under CAIR. Acid Rain Program units and SIP call units can bank excess NO x and SO 2 reductions achieved prior to 2010 for use under CAIR. Further, EPA is finalizing that banking be allowed without restriction from the start of the Hg cap and trade program. Banking of allowances will provide flexibility to sources, encourage earlier or greater reductions than required, stimulate the market, and encourage efficiency.

Comment:

One commenter ( OAR 2002 0056 3444) stated that the proposed initial compliance date of 2010 creates a large uncertainty in the ability of the Electric Generating Industry to achieve the reductions required by the initial mercury cap. To assist the industry and the EPA in achieving these target reductions the commenter believed it would be necessary to implement an Early Reduction Credit ( ERC) program to create incentives for coal fired Utility Units to install controls well before the 2010 target date. The commenter submitted that to effectively achieve early mercury reductions the following elements should be part of the proposed ERC program: 1) Installation of controls must be accomplished prior to 2009; 2) Continuous Mercury Emissions Monitoring Systems must be installed with a minimum demonstrated data availability of 90 percent; 3) Installed control efficiency must meet or exceed the co benefit removal efficiency target for the type of coal being combusted; 4) ERC's allocated to sources must be used prior to the 2018 final budget compliance date. 5 171 Response:

The first phase Hg cap is set at a level that requires no additional installation of controls relative to CAIR, because it is set at a level that represents projected cobenefit mercury reductions that will occur as a result of NO x and SO 2 control technologies installed under CAIR. Acid Rain Program units and SIP call units can bank excess NO x and SO 2 reductions achieved prior to 2010 for use under CAIR, and sources will be allowed to bank starting at beginning of the first phase of the Hg cap and trade program.

Comment:

One commenter ( OAR 2002 0056 4891) added emissions reductions credits should be provided to facilities subject to the rule for commissioning projects that achieve mercury emissions reductions from other mercury emission sources.

Response:

The ability to accurately measure emissions reductions, and thus guarantee the value of an allowance, is essential to a successful cap and trade program. Allowing credit to be used in the Hg cap and trade program for utilities from off sector reductions that may not have adequate Hg emissions monitoring, would jeopardize the certainty behind the value of an allowance, and thus the functioning of the trading program.

Comment:

One commenter ( OAR 2002 0056 3446) recommended that EPA develop a technology incentive pool, a mechanism in which allowances from the first compliance period would be distributed early to plants that deploy advanced mercury control technology. This would spread the risks of technology development and help build confidence in the performance and cost of advanced control technologies. The commenter stated that an IPM modeling run found a 2.6 ton/ yr incentive pool ( with a 26 ton Phase I cap and a 15 ton Phase II cap) would achieve a total penetration of 31 GW of ACI in 2010 and 48 GW of ACI in 2015   11 and 5 GW of ACI penetration more than a program with no technology incentive pool. The commenter added that this added technology penetration would be achieved at an incremental net present value cost of $ 400 million or 0.6 percent of total 3 pollutant compliance costs.

Response:

While the proposed technology incentive pool has merit for the potential to stimulate earlier adoption of Hg control technology, EPA believes that the market forces at work under the Hg cap and trade program will act to promote the development of Hg control technology, and the technology incentive pool is not necessary.

Comment: Several commenters ( OAR 2002 0056 2181, 2519) noted the EPA has indicated that it is examining a possible incentive within the cap and trade program that would 5 172 provide and set aside allowances that would be used to develop so called " technology incentive pools." EPA appears particularly concerned with providing a technology assist for the development and deployment of activated carbon injection ( ACI) systems. The commenters had serious concerns about applying such a system in the context of a cap and trade program because it would conflict with the goal of a system that allows market forces to set the cost of compliance. The commenters stated that in a trading program, an appropriately set cap should be the signal that will drive the appropriate economic response, which may include any number of market driven reactions, such as new technology investments, fuel choices or efficiency standards. One of the primary advantages of the cap and trade approach is the ability to drive the development of new technology solutions that are not foreseen in the program design. The commenters believed that any technology set aside within the context of a trading program would tend to predetermine an economic outcome, generally at the expense of alternative choices that may provide consumers with lower cost solutions, a more aggressive environmental benefit, or both. The commenters submitted that this has been well documented in earlier cap and trade programs in which new and lower cost solutions that were not expected or predicted during the program design period successfully evolved and were deployed. The future success of the program should not be constrained by trying to anticipate future technology or market solutions. The commenters stated the program will find the right answers if it is designed to treat all sources equally and reward efficiency and low emissions.

Response:

While the proposed technology incentive pool has merit for the potential to stimulate earlier adoption of Hg control technology, EPA believes that the market forces at work under the Hg cap and trade program will act to promote the development of Hg control technology, and the technology incentive pool is not necessary.

Comment:

Many commenters ( OAR 2002 0056 1608,  1673,  1814,  2163,  2180,  2224,  2375,  2718,  2725,  2835,  2843,  2845,  2850,  2861,  2862,  2900,  2907,  2922,  2948,  2951,  3431,  3444,  3521,  4132) suggested that EPA should provide for early reduction credits. One commenter ( OAR 2002 0056 2180) stated that to encourage development and implementation of technologies that reduce mercury emissions, and to help insure a workable cap and trade program, there should be a crediting program for early mercury reductions. One commenter ( OAR 2002 0056 2725) believed that early reductions reduce the overall mercury loading in the environment and, to the extent power plant reductions will have a positive impact on public health, achieve those benefits earlier. In particular, for the proposed trading program, the commenter supported setting the " baseline" from which reductions will be measured at an earlier date and protecting the ability to bank allowances throughout the program.

Response:

EPA is not finalizing an early reduction program. The first phase Hg cap is set at a level that requires no additional installation of controls relative to CAIR, because it is set at a level 5 173 that represents projected cobenefit mercury reductions that will occur as a result of NO x and SO 2 control technologies installed under CAIR. Acid Rain Program units and SIP call units can bank excess NO x and SO 2 reductions achieved prior to 2010 for use under CAIR, and sources will be allowed to bank starting at beginning of the first phase of the Hg cap and trade program. EPA believes that the cap and trade program, by relying on market forces, will provide incentives for the development of mercury control technologies.

Comment:

Several commenters ( OAR 2002 0056 2862,  2922) supported the creation of an early reduction credit feature as part of the mercury trading program to aid in the development of mercury emissions control technologies. One commenter ( OAR 2002 0056 2922) stated that EPA should create a small reserve of early reduction credits for units that install mercury specific control technology by 2014. The commenters ( OAR 2002 0056 2862,  2922) submitted that EPA should limit the program to mercury specific controls; no credits should be given for the installation of scrubbers, SCRs, or other controls designed primarily to reduce emissions of NO x, SO 2, or other non mercury emissions. The commenters believed EPA should award credits only for reductions of mercury emissions that result from mercury specific controls that go beyond the reductions achieved as co benefits from NO x or SO 2 controls.

Response:

EPA is not finalizing an early reduction program. EPA believes that the cap and trade program, by relying on market forces, will provide incentives for the development of mercury control technologies. Additionally, the ability of sources to bank allowances starting at the beginning of the Hg cap and trade program, will provide flexibility to sources, encourage earlier or greater reductions than required, stimulate the market, and encourage efficiency.

Comment:

Commenter OAR 2002 0056 2861 stated that under the recommended alternate cap and trade proposal ( first cap and allocations begin in 2015), the commenter recommended an early reduction credit program that provides credit only for reductions attributed to technologies designed specifically to capture mercury. The utility would provide a demonstration of the removal efficiency and would be provided credit for the difference between actual mercury emissions and emissions that would have occurred without the use of the technology. The commenter suggested the operating permit would specify conditions to verify control technology performance.

If EPA establishes a cap and trade program that begins in 2010, then commenter OAR 2002 0056 2861 believed an early reduction credit program would be even more important and should include credit for reductions achieved as a co benefit of SO 2 and NO x controls. The commenter suggested that in order to earn early reduction credits, EPA would need to require only that the facility install appropriate monitoring technology to quantify emissions and the level of mercury removal resulting from the installation of emission controls for SO 2 and NO x or 5 174 demonstration technologies specifically aimed at removing mercury. The commenter noted that the level of " co benefits" associated with SO 2 and NO x controls is uncertain and variable, and utilities will need to work with the technologies to develop ways to enhance their removal efficiencies. The commenter submitted that compliance by 2010 will also be very difficult, and providing an early reduction credit program will help facilitate compliance while preserving the nation's fuel diversity. Early reduction credits would provide an incentive for companies to install and operate emissions controls and achieve reductions sooner than they otherwise would. The commenter suggested that if EPA has concerns that too many early reduction credits would be banked, it can create a " Compliance Supplement Pool" similar to the program used in the NO x SIP Call, thus limiting the number of allowances that could be earned through early reductions.

Response:

EPA is not finalizing an early reduction program. The first phase Hg cap is set at a level that requires no additional installation of controls relative to CAIR, because it is set at a level that represents projected cobenefit mercury reductions that will occur as a result of NO x and SO 2 control technologies installed under CAIR. Acid Rain Program units and SIP call units can bank excess NO x and SO 2 reductions achieved prior to 2010 for use under CAIR, and sources will be allowed to bank starting at beginning of the first phase of the Hg cap and trade program.

Comment:

Several other commenters ( OAR 2002 0056 1608,  2850,  3521) also stated that EPA should provide early reduction credits for mercury specific add on controls. Several of these commenters ( OAR 2002 0056 2907,  3521) stated early reduction credits should be awarded units that implement mercury specific controls prior to 2015. Several of these commenters ( OAR 2002 0056 2907,  2850) also supported early reduction credits for coal plant closures. Similarly, one commenter ( OAR 2002 0056 4132) stated that EPA must provide early reduction credits for plants shutting down. The commenter noted that the economic burden of this mercury initiative may force the shutdown of some of the oldest EGUS. If these units shutdown, yielding early reductions in mercury emissions, it is important that early reduction credits be provided. The commenter emphasized that the final regulations should expressly and properly acknowledge this approach to early reductions.

Response:

EPA is not finalizing an early reduction program. EPA believes that the cap and trade program, by relying on market forces, will provide incentives for the development of mercury control technologies. Additionally, the ability of sources to bank allowances starting at the beginning of the Hg cap and trade program, will provide flexibility to sources, encourage earlier or greater reductions than required, stimulate the market, and encourage efficiency. Further, EPA is not projecting that any additional coal fired capacity will be uneconomic to maintain relative to CAIR under the combination of CAIR and CAMR.

Comment: 5 175 One commenter ( OAR 2002 0056 1673) stated that the IAQR and mercury rules should provide utilities with the incentive to undertake early reduction measures, such as year round operation of SCRs currently operated during the ozone season. This would provide immediate NO x and mercury reduction benefits. Another commenter ( OAR 2002 0056 1814) submitted that early reduction credits would provide an incentive for companies to install and operate emissions controls and achieve these co benefits earlier. The commenter believes these credits are also important in aiding companies in meeting very aggressive schedules for installation of equipment. A third commenter ( OAR 2002 0056 2845) stated that credits for early reductions could be coupled with additional early SO 2 reductions in the CAIR proposal. The commenter believed the proposed rule should provide credit for reductions achieved from the installation and/ or modification of emission or combustion control technologies like early installation and operation of scrubbers, SCR, and ACI. The commenter stated that credit should not be available for reductions required under federal regulations.

Response:

EPA is not finalizing an early reduction program. The first phase Hg cap is set at a level that requires no additional installation of controls relative to CAIR, because it is set at a level that represents projected cobenefit mercury reductions that will occur as a result of NO x and SO 2 control technologies installed under CAIR. Acid Rain Program units and SIP call units can bank excess NO x and SO 2 reductions achieved prior to 2010 for use under CAIR, and sources will be allowed to bank starting at beginning of the first phase of the Hg cap and trade program. See the CAIR preamble for discussion of early reduction credits under that rule.

Comment:

Several commenters ( OAR 2002 0056 2224,  2835) noted that an early reduction credit system is consistent with the concept of " banking" surplus reductions under a market based, cap and trade regulatory approach. Commenter OAR 2002 0056 2224 noted that in order to facilitate this action, details pertaining to the baseline, measurement, deadline and time line mechanisms would need to be sorted out in the final rule. Commenter OAR 2002 0056 2835 believed that an early reduction credit would not compromise the environmental integrity of the trading program because only a small number of sources would be able to take advantage of this feature. According to the commenters, from a policy perspective, early mercury reductions should be encouraged because they deliver an important environment benefit in advance of the regulatory control program. The commenters further added that credit should only be granted where a facility can demonstrate that the reductions are real and quantifiable. The commenter also added that any early reduction credit scheme should not penalize a facility for such reductions by reducing the allocations the facility would receive under the trading program.

Response:

EPA is not finalizing an early reduction program. The first phase Hg cap is set at a level that requires no additional installation of controls relative to CAIR, because it is set at a level 5 176 that represents projected cobenefit mercury reductions that will occur as a result of NO x and SO 2 control technologies installed under CAIR.

Comment:

One commenter ( OAR 2002 0056 2163) noted that cost effective implementation of any new technology requires experience with full scale installations over extended periods of operation. The commenter stated there are always forward thinking utilities who are interested in early adoption of new pollution control strategies. The commenter believed these utilities should be offered incentives to promote this early adoption strategy and to encourage the refinement and deployment of control technology options. Such incentives could include bankable and/ or salable emissions credits. The commenter strongly encouraged EPA to work with these early adopters to creatively develop a strategy that offers broad incentives for early implementation.

Response:

EPA believes that the market forces at work under the Hg cap and trade program will provide incentives for the development of Hg control technology. This incentive will be further strengthened by the ability of sources to bank allowances from excess mercury reductions starting at the beginning of the Hg cap and trade program.

Several commenters ( OAR 2002 0056 2375,  2718) proposed that sources be able to earn ERCs before the Phase I deadline in 2010. To address concerns that such a provision may jeopardize the integrity of the Phase I and Phase II caps, commenter OAR 2002 0056 2375 submitted that ERCs should be discounted at a 2 to 1 ratio upon registration into the mercury bank. Sources would be permitted to use ERCs without discount during Phase I and Phase II. The commenter ( OAR 2002 0056 2375) asserted that an ERC program is supportable on public policy grounds. The commenter believed an ERC provision in the final rule would encourage sources not yet equipped with mercury controls to install and operate them before the January 2010 deadline, where feasible, so that greater reductions would be achieved earlier. The commenter's proposal that ERCs be discounted at a 2 to 1 rate upon registration in the mercury bank would achieve added benefits by ensuring that sources would be permitted to emit only one ounce of mercury after Phase I takes effect for every two ounces of mercury reduced prior to January 2010. The commenter believed in addition, an ERC provision would provide sources with much needed compliance flexibility for meeting the Phase I deadline. Similarly, commenter 2718 proposed that affected sources that implement mercury CEMs monitoring be permitted to earn ERCs at a 2 to 1 ratio such that one credit would issue for every two ounces of mercury emissions reduced from the source's baseline. Sources using other methods, such as stack testing or look up tables, would be subject to a 3 to 1 issuance ratio.

Response:

EPA is not finalizing an early reduction program. EPA believes that the cap and trade program, by relying on market forces, will provide incentives for the development of mercury control technologies. Additionally, the ability of sources to bank allowances starting at the 5 177 beginning of the Hg cap and trade program, will provide flexibility to sources, encourage earlier or greater reductions than required, stimulate the market, and encourage efficiency.

One commenter ( OAR 2002 0056 2907) participated in programs to voluntarily reduce emissions from its facilities prior to adoption of mandatory programs. The commenter believed EPA should not penalize the commenter's efforts and the efforts of similar proactive companies by reducing mercury allowance allocations to companies that make emission reductions prior to the compliance dates required by this rule. Instead, EPA should encourage and support early reductions by not restricting the banking of allowances created by early reduction programs. The commenter believed all reductions completed prior to the compliance date should be credited toward meeting the proposed cap.

Response:

EPA is not finalizing an early reduction program. The first phase Hg cap is set at a level that requires no additional installation of controls relative to CAIR, because it is set at a level that represents projected cobenefit mercury reductions that will occur as a result of NO x and SO 2 control technologies installed under CAIR. Acid Rain Program units and SIP call units can bank excess NO x and SO 2 reductions achieved prior to 2010 for use under CAIR, and sources will be allowed to bank starting at beginning of the first phase of the Hg cap and trade program. See the CAIR preamble for discussion of early reduction credits under that rule.

Comment:

One commenter ( OAR 2002 0056 2900) noted that Phase I of the Program is scheduled to begin in 2010, to coincide with the first phase of the CAIR. In addition, EPA proposes to set the Phase I mercury cap according to the co benefits achieved from the SO 2 and NO x reductions mandated by the CAIR. However, it is not clear to the commenter what that level should be and, if EPA is mistaken in the level of the Phase I mercury cap, it is possible that coal fired EGUs will not meet the cap even with the installation of stringent SO 2 and NO x controls on each affected unit. To alleviate this potential problem, the commenter recommended that EPA allow coal fired EGUs to generate early reduction credits that could be used during Phase 1. Specifically, the commenter recommended that EPA grant mercury early reduction credits to sources that demonstrate that their mercury emissions are below the amount they are allocated under Phase 1. The commenter also recommended sources should be allowed to generate early reduction credits beginning with adoption of the Program until the start of Phase I, unless the units are retired or repowered. They would not be eligible for early reduction credits until they have met the Program's initial certification procedures for mercury monitoring.

Response:

EPA is not finalizing an early reduction program. The first phase Hg cap is set at a level that requires no additional installation of controls relative to CAIR, because it is set at a level that represents projected cobenefit mercury reductions that will occur as a result of NO x and SO 2 control technologies installed under CAIR. Acid Rain Program units and SIP call units can 5 178 bank excess NO x and SO 2 reductions achieved prior to 2010 for use under CAIR, and sources will be allowed to bank starting at beginning of the first phase of the Hg cap and trade program. See the CAIR preamble for discussion of early reduction credits under that rule.

Comment:

To ensure that such early reduction credits would not simply expand the Phase I cap and indefinitely put off achievement of the Phase II cap, the commenter ( OAR 2002 0056 2900) suggested that such early reduction credits expire in 2014, although the commenter advocated unlimited banking for mercury allowances that are allocated to affected sources under each phase of the program. The commenter believed that early reduction credits would help sources make the transition to the Program. They also would improve the robustness of the market and would offer EUSGUs an incentive to achieve reductions earlier than otherwise required. Finally, the commenter believed early reduction credits will help avoid the need for sources to use the safety valve that the Agency is proposing.

Response:

EPA is not finalizing an early reduction program. The first phase Hg cap is set at a level that requires no additional installation of controls relative to CAIR, because it is set at a level that represents projected cobenefit mercury reductions that will occur as a result of NO x and SO 2 control technologies installed under CAIR. Additionally, the ability of sources to bank allowances starting at the beginning of the Hg cap and trade program, will provide flexibility to sources, encourage earlier or greater reductions than required, stimulate the market, and encourage efficiency.

Comment:

One commenter ( OAR 2002 0056 2951) stated that to maximize the social benefits from utility mercury emission limitations, the regulatory scheme needs the earliest possible compliance date. The commenter called this the " Average Control Date." The commenter added that just as important, to minimize social costs we need the earliest possible date that utilities can get credit for making technology based mercury reductions. The commenter called this the " Mercury Credit Date."

The commenter stated that on their own, utilities have no incentives to reduce any mercury emissions one minute before they have to. The commenter added that indeed, top utility executives could be sued by their shareholders if they spent any money on mercury reductions any earlier than required; that money should theoretically go to the shareholders.

The commenter stated that nationally, it is obviously advantageous to have orderly mercury technology implementation, rather than the inefficiencies resulting from all of the utilities and their subcontractors competing to have controls in place on all 1,100 boilers at the same date. The commenter believed, however, that social benefits are lost with any delay. The commenter stated that, consequently, utilities should be able to make mercury reductions at some of their 5 179 units early, ahead of the Average Control Date, and get credit that they can trade off by beginning reductions at an equivalent amount of their units late. According to the commenter, as net mercury emissions would be the same, society should be largely indifferent to such " banking." The commenter believed if the tougher, more costly sites come last, society even gains a bit.

The commenter suggested that to maximize the benefits of such flexibility, the temporal trade off period should be designed to be as wide as possible ( and it need not necessarily be symmetrical). The commenter stated that in particular, it should begin at the earliest conceivable " Mercury Credit Date" because any early technology adopters benefit everyone else by leading the industry down the learning curve, resulting in lower total costs for everyone. The commenter added that unfortunately, however, any early adopters would inevitably see higher costs and greater risks than those who wait until the last minute, and they would be unable to capture the social benefits of their pioneering, thus creating a classical market failure.

The commenter stated that consequently, there should be special incentives for early technology based mercury reductions. The commenter added that for example, early technology driven mercury reductions could receive extra credit, perhaps at 2X, for banking purposes. The commenter stressed that the positive social externalities of early technology adopters are very real and very significant and efforts should be made to encourage them in constructing any utility mercury regulatory framework.

The commenter further stated that there are no positive externalities with early switches to lower Hg coal or for scrubbing co benefit based reductions or other non innovative technology based Hg reductions. According to the commenter, while these types of reductions could conceivably be banked, they might be difficult to substantiate or result in zero sum losses in unobserved parts of the system. The commenter believed they should not be advantaged.

Response:

EPA believes that the cap and trade program, by relying on market forces, will provide incentives for the development of mercury control technologies. Additionally, the ability of sources to bank allowances starting at the beginning of the Hg cap and trade program, will provide flexibility to sources, encourage earlier or greater reductions than required, stimulate the market, and encourage efficiency. Therefore, EPA does not believe it is necessary to add any additional provisions to the rule to promote technology adoption.

One commenter ( OAR 2002 0056 2843) stated that if a cap and trade program is promulgated, two essential elements must be preserved if new coal fired units are to remain viable resources for the future. First, because compliance with either emission rates or reductions necessary under a " cap and trade" environment are uncertain at best, there must be a reliable and readily available source of allowances available for purchase at a pre determined price. The commenter suggested that early reduction credits might be an available resource for these allowances. Second, the commenter believed there should be a reservation of allowances for 5 180 allocation to new units. These should be available on a first come, first served basis until exhausted.

Response:

EPA is not finalizing an early reduction program. The first phase Hg cap is set at a level that requires no additional installation of controls relative to CAIR, because it is set at a level that represents projected cobenefit mercury reductions that will occur as a result of NO x and SO 2 control technologies installed under CAIR. Additionally, the ability of sources to bank allowances starting at the beginning of the Hg cap and trade program, will provide flexibility to sources, encourage earlier or greater reductions than required, stimulate the market, and encourage efficiency.

Under the Hg cap and trade program, States determine how to allocate allowances to sources. EPA provides an example allocation methodology in the model rule, which provides for a new source set aside.

Comment:

One commenter ( OAR 2002 0056 2850) achieved about 17 percent reduction in mercury stack emissions in 2000 compared to 1990 levels through optimizing fuel sourcing and plant operation. The commenter's coal units are also over 70 percent wet scrubbed for particulate and sulfur dioxide removal, which combined with other voluntary mercury reduction activities has reduced base line emissions relative to 1990 and compared to other utility units. Consequently, the commenter stated that an equitable allocation of mercury reduction requirement stringency, either through unit specific requirements or cap and trade program allowance allocation methodology would be important for assuring reasonable credit for early action. The commenter supported an equitable cap and trade approach as the preferred option for regulating electric power sector mercury emissions, as that provides the most flexibility for achieving compliance using new and often unproven technology.

Response:

EPA agrees with the commenter about the advantages of using cap and trade for achieving mercury emissions reductions from the power sector. Under the Hg cap and trade program, States have the authority to allocate allowances to sources. EPA's example allocation methodology is outlined in the preamble. EPA is not finalizing an early reduction credit provisions. See the comments above regarding this issue.

Comment:

One commenter ( OAR 2002 0056 3431) believed the market will send the proper signals to influence early reductions that will drop mercury emissions at a sharp and steady rate as the first phase compliance deadline approaches. The commenter stated that credit for such early reductions can be patterned after the provisions of the NO x SIP Call and NO x budget rules and 5 181 could be granted for reductions in total mercury in coal from as fired analyses and consumption information. The commenter added that such information could be verified with annual stack testing prior to installation of Hg Continuous Emission Monitoring Systems ( CEMS). According to the commenter ERCs are a " win win" for EPA, industry, and the environment; the opportunity to receive ERCs improves environmental performance, reduces cumulative compliance costs and provides flexibility to deal with uncertainty in the trading market.

Response:

EPA is not finalizing an early reduction program. The first phase Hg cap is set at a level that requires no additional installation of controls relative to CAIR, because it is set at a level that represents projected cobenefit mercury reductions that will occur as a result of NO x and SO 2 control technologies installed under CAIR. Additionally, the ability of sources to bank allowances starting at the beginning of the Hg cap and trade program, will provide flexibility to sources, encourage earlier or greater reductions than required, stimulate the market, and encourage efficiency.

Comment:

One commenter ( OAR 2002 0056 2067) stated that the proposed alternative Cap and Trade approach would rely heavily on achieving mercury reductions through the co benefits of future installation of scrubbers to meet SO 2 and NO x. The commenter added that however, the Cap and Trade proposal failed to take into account that there are existing Utility Units that have already achieved this Phase I reduction, and are currently operating with significantly lower mercury emissions than the industry as a whole. The commenter asserted that instead, Cap and Trade would subject these plants, such as the commenter's primary generating resource ( which has been controlling mercury emissions for nearly 25 years), to the same cap as the majority of Utility Units and provide allocations based on the assumption that existing scrubbers do not exist, creating an unrealistically low emissions level. The commenter stated that Cap and Trade would fail to give appropriate credit to power plants that already are reducing mercury emissions, and that indeed, it would create a greater burden on scrubbed plants because it would effectively require scrubbed plants to achieve the same level of reductions as unscrubbed plants. The commenter stated that this is a significant issue in the western United States where it has been estimated that up to two thirds of Utility Units are presently scrubbed. According to the commenter, this approach imposes a disproportionately high burden on power plants that are already scrubbed, such as the commenter's primary generating resource, and is a fundamental flaw of Cap and Trade that is avoided under MACT.

The commenter stated that, in the event EPA selects the Cap and Trade approach to regulating mercury, key modifications would be necessary to make Cap and Trade workable. According to the commenter, the net effect is that while Cap and Trade is designed to achieve a total reduction of 70 percent from current levels, units that have existing scrubbers will be required to achieve this 70 percent reduction on top of existing reductions of nearly 70 percent. The commenter stated that it is fundamentally unfair for the EPA to give credit for mercury reductions to utilities that install scrubbers for SO 2 and NO x in the future, while not providing the 5 182 same credit to those who installed the technology and have been reducing emissions for 25 years. The commenter asserted that in the event EPA adopts a Cap and Trade approach, EPA should address this fundamental unfairness that would penalize utilities that have taken early steps to reduce emissions. The commenter recommended that, at a minimum, Utility Units that have existing scrubbers should be exempt from mercury reduction requirements through Phase I, and should only be subjected to additional requirements in Phase II when the future co benefits have been recognized, and the next level of control is required.

Response:

EPA is not finalizing an early reduction program. The first phase Hg cap is set at a level that requires no additional installation of controls relative to CAIR, because it is set at a level that represents projected cobenefit mercury reductions that will occur as a result of NO x and SO 2 control technologies installed under CAIR. Acid Rain Program units can bank excess SO 2 reductions achieved prior to 2010 for use under CAIR, and sources will be allowed to bank starting at beginning of the first phase of the Hg cap and trade program. See the CAIR preamble for discussion of early reduction credits under that rule.

Comment:

One commenter ( OAR 2002 0056 3469) recommended that EPA should implement a vigorous research and development program to develop economically viable technology solutions   and allow work on existing programs to be concluded   for all fuel sub categories.

Response:

EPA's Office of Research and Development currently participates in a program with Department of Energy and industry representatives to assess mercury control technology options. See the revised ORD White Paper on Hg control technology, available in the docket.

Comment:

One commenter ( OAR 2002 0056 4891) recommended that EPA provide an option that allows entities subject to the cap and trade program to " earn" emissions reduction credits for commissioning or funding projects that result in the reduction of mercury emissions from other mercury emissions point sources ( e. g., fuel combustion; waste incineration; industrial processes; and metal ore roasting, refining, and processing).

Response:

The ability to accurately measure emissions reductions, and thus guarantee the value of an allowance, is essential to a successful cap and trade program. Allowing credit to be used in the Hg cap and trade program for utilities from off sector reductions that may not have adequate Hg emissions monitoring, would jeopardize the certainty behind the value of an allowance, and thus the functioning of the trading program. 5 183 5.8.4 Other Model Trading Rule Requirements Comment:

One commenter ( OAR 2002 0056 4139) supported the need for two primary types of accounts compliance accounts and general accounts. Compliance accounts would be created for each Mercury Budget source with one or more Mercury Budget units upon receipt of the account certificate of representation form. General accounts would be created for any organization or individual upon receipt of a general account information form.

Response:

Today's final rule contains provisions for the establishment of compliance accounts and general accounts.

Comment:

One commenter ( OAR 2002 0056 2287) suggested that the cap and trade system be open to all interested parties, including communities and environmental groups so that they could also bid for credits to use as they please.

Response:

Under the final rule, States are given the authority to allocate Hg allowances as they see fit. However, individuals and groups that are not affected sources are allowed to hold Hg allowances by establishing a general account.

Comment:

One commenter ( OAR 2002 0056 3509) stated that to the extent that the final Utility Mercury Rule does require controls of small municipal generators via allowance trading or other requirements, EPA should provide these units with other compliance flexibility options to reduce the cost of such compliance. Specifically, the commenter supported several of the proposals made by EPA, including for facility wide emissions averaging, measurement of emissions using 12 month rolling averages, the ability to bank mercury allowances without restriction, and the ability to use " safety valve" allowances when the price of allowances exceed a reasonable cost threshold.

Response:

EPA is finalizing a number of provisions as part of the cap and trade program in order to provide flexibility to sources. Under the final rule, compliance will be assessed at the facility level, and on a 12 month rolling average basis. Additionally, EPA is finalizing that banking be allowed without restriction, beginning at the start of the first phase of the program. EPA is not 5 184 finalizing a safety valve provision, for reasons discussed in the preamble, and section 5.8.2 of this document.

Comment:

One commenter ( OAR 2002 0056 2181) believed there were several key components of the proposed rules that could set broad precedents within the electric power sector beyond just the control of mercury, specifically in regard to the design of trading programs and allowance allocation systems.

Response:

EPA believes that the final design of the Hg Budget Trading Program will result in an efficient and effective program.

Comment:

One commenter ( OAR 2002 0056 2067) expressed significant concern regarding what entity actually receives the allocations in the Cap and Trade approach. The commenter stated that if a Cap and Trade alternative is selected, it is important that emission allowances be awarded to the owners of Utility Units, not the operators of such units. As a relatively small wholesale power producer, the commenter is not able to economically construct, own and operate its own baseload facilities. Rather, the commenter is a joint owner with other utilities in its primary generating resource and would expect to utilize the same type of arrangement for any future baseload coal additions to its resource portfolio. The commenter asserted that allowances should be allotted to the unit owners on the basis of their ownership interest and should not be awarded to the operators of the unit( s).

Response:

Hg allowances will be allocated by States to Hg Budget sources. Each Hg Budget source affected under the Hg cap and trade program is required to have 1 Hg designated representative, with regard to all matters under the trading program concerning the source or any Hg Budget unit at the source. This representative shall be selected by an agreement binding on the owners and operators of the source and all Hg Budget units at the source.

Comment:

One commenter ( OAR 2002 0056 3537) stated that CAA § 408( i) sets out an approach regarding the holding and distribution of Title IV SO 2 allowances and the proceeds of transactions involving allowances, where there are multiple holders of a legal or equitable title to or a leasehold interest in an affected unit. That provision in pertinent part provides that: " No permit shall be issued under this section to an affected unit until the designated representative of the owners or operators has filed a Certificate of Representation with regard to matters under this subchapter, including the holding and distribution of allowances and the proceeds of transactions 5 185 involving allowances. Where there are multiple holders of a legal or equitable title to, or a leasehold interest in such unit, or where a utility or industrial customer purchases power from an affected unit ( or units) under life of the unit, firm power contractual arrangements, the certificate shall state ( 1) that allowances, and the proceeds of transactions involving allowances will be deemed to be held or distributed in proportion to each holder's legal, equitable, leasehold or contractual reservation or entitlement, or ( 2) if such multiple holders have expressly provided for a different distribution of allowances by contract, that allowances and the proceeds of transactions involving allowances, will be deemed to be held or distributed in accordance with the contract. A passive lessor, or a person who has an equitable interest through such lessor, whose rental payments are not based, either directly or indirectly, upon the revenues or income from the affected unit shall not be deemed to be a holder of a legal, equitable, leasehold, or contractual interest for the purpose of holding or distributing allowances as provided in this subsection, during either the term of such leasehold or thereafter, unless expressly provided for in the leasehold agreement." CAA § 408( I).

The commenter submitted that clearly, when enacting Title IV of the CAAA, Congress considered how allowances should be distributed to multiple owners of an affected unit. It concluded that allowance allocations ( or the proceeds from auctions) should track the ownership interest in affected units, absent an agreement between the parties to the contrary. The commenter believed there is nothing in the proposed mercury rule that would justify following a different approach to the ultimate distribution of mercury allowances under EPA's current proposal. The commenter suggested, therefore, when proposing and promulgating regulatory language to implement the requirements of the mercury cap and trade rule, EPA should encourage States that promulgate cap and trade rules pursuant to CAA section 111 to use the approach followed in CAA § 408( i) as the method for allocating allowances among multiple owners of a Utility Unit. The commenter also suggested that should EPA promulgate a cap and trade program under CAA § 112, then EPA should, as part of its method for allocating allowances, follow the approach set forth in CAA § 408( I).

Response:

Regarding the commenter's concerns about rules and guidance on allocations, the model trading rules already include provisions analogous to section 408( i) of the Clean Air Act.

Comment:

One commenter ( OAR 2002 0056 2898) opposed EPA's proposal to confiscate future year allowances in the event a source does not have enough allowances to offset emissions. Rather, the commenter proposed that a fee be assessed for each pound of mercury that a source exceeds its available allowances. The commenter suggested this source of revenue would fund mercury control technology research and demonstration projects. The commenter added also, these monies could be used to achieve off utility system mercury reductions.

Response: 5 186 EPA is finalizing that three Hg allowances for each ounce of emissions would be deducted from a source's compliance account for the following control period, in the event that an affected source does not hold sufficient Hg allowances to offset emissions for the season. EPA believes that it is important to set up this automatic offset deduction because it is ensures that non compliance with the Hg emission limitations of this rule is a more expensive option than controlling emissions. EPA required the same offset deduction of three to one in the NO x SIP call. The automatic offset provisions do not limit the ability of the permitting authority or EPA to take enforcement action under State law or the CAA.

Comment:

One commenter ( OAR 2002 0056 3478) did not see the benefit to having a 3 to l offset for allowance shortages. The commenter believed the 1 to 1 offset penalty and deduction from the next year's subaccount in Acid Rain provides adequate control for shortages.

Response:

EPA is finalizing that three Hg allowances for each ounce of emissions would be deducted from a source's compliance account for the following control period, in the event that an affected source does not hold sufficient Hg allowances to offset emissions for the season. EPA believes that it is important to set up this automatic offset deduction because it is ensures that non compliance with the Hg emission limitations of this rule is a more expensive option than controlling emissions. EPA required the same offset deduction of three to one in the NO x SIP call. The automatic offset provisions do not limit the ability of the permitting authority or EPA to take enforcement action under State law or the CAA.

Comment:

One commenter ( OAR 2002 0056 4132) noted that EPA has proposed that the Mercury Budget Trading Program utilize source wide compliance rather than unit by unit compliance. The commenter noted in particular, EPA proposed that sources would be allocated allowances rather than individual units and, accordingly compliance would be source wide rather than unit by unit. The commenter strongly supported this concept. This would simplify the administrative activities associated with ensuring that each unit account has sufficient allowances by the end of the allowance transfer deadline.

Response:

EPA is finalizing that compliance with CAMR be assessed at the facility level.

Comment:

One commenter noted that EPA proposes to require compliance on a facility wide basis rather than on a unit by unit basis. Each facility would have a " compliance" account, which would need to hold enough allowances to cover mercury emissions for an entire facility. The commenter 5 187 believed this makes practical sense from a technology perspective, and simplifies program accounting requirements.

Response:

EPA concurs, and is finalizing that compliance with CAMR be assessed at the facility level.

Comment:

One commenter ( OAR 2002 0056 4239) recommended using serial numbers of some mechanism for tracking and reporting mercury emissions. The commenter stated the program must be transparent to all entities. The commenter believed serial numbers encourage transparency and benefits derived for tax and accounting purposes.

Response:

Under CAMR, each Hg allowance will be assigned a serial number for the purpose of tracking allowances.

Comment: Several commenters ( OAR 2002 0056 2634,  2830,  2835) requested that the EPA include facility wide averaging in the section 111 Emission Guidelines for existing sources as an additional compliance alternative. States should be encouraged to allow such flexible compliance alternatives if states decline to adopt a section 111 trading program, if that option is selected by the EPA. By including this type of flexibility mechanism, the EPA will ensure that those facilities located in States opting out of the trading program will retain some degree of flexibility when complying with the requirements of the Emission Guidelines. Similarly, facility wide emissions averaging provides a flexible compliance alternative to a cap and trade program in the event that neither cap and trade option can be authorized under the statute. Varying operational modes or combination of systems, e. g., wet/ dry scrubber, ESP or fabric filter, could be employed to provide the greatest potential to economically reduce Hg emissions to meet compliance requirements.

Response:

As discussed in the final preamble, States must submit a demonstration that it will meet ist assigned emissions budget through reductions from coal fired power plants. There are no restrictions on states using facility wide averaging.

5.8.5 Title V Permits Comment:

One commenter ( OAR 2002 0056 4139) stated that a Title V permit incorporates applicable requirements that are created under other authorities, but does not directly establish 5 188 specific standards unless explicitly provided by the CAA ( such as periodic monitoring). In the case of mercury budget program requirements, the proposed rule appeared to require permitting authorities to directly create mercury permit requirements in Title V permits. The commenter questioned what authority under the CAA allows the mercury budget rule to change Title V program requirements and allow Title V to directly create mercury program permitting requirements?

One commenter ( OAR 2002 0056 4139) submitted the proposed general permit requirement in 40 CFR 60.4120 specified that the Mercury Budget portion of the Title V permit is to be administered according to the permit authority's Title V operating permits regulations. However, the proposed rule did not comport with existing permit content requirements particularly for monitoring requirements. The commenter stated that the Title V permit must directly identify the applicable limits or operational restrictions and what monitoring, recordkeeping, and reporting requirements will be used to demonstrate compliance. The commenter pointed out the proposed Mercury Budget permit portion does not include that same level of detail.

One commenter ( OAR 2002 0056 4139) noted the proposed general permit requirement in 40 CFR 60.4120 specifies that the Mercury Budget portion of the Title V permit is to be administered according to the permit authority's Title V operating permits regulations. The commenter submitted, however, the proposed rule did not comport with the Title V schedule requirements for revising a permit to include new requirements. The proposed general permit requirement in 40 CFR 60.4121 specified that the Mercury Budget permit application must be submitted 18 months before January 1, 2010, ( or the date the Mercury Budget unit commences operation for new units). The commenter stated, however, 40 CFR 70.6( f) of the Title V operating permits rules does not require that the source submit an application to revise a Title V permit for new promulgated requirements. The permitting authority must reopen the permit for cause if there are 3 or more years remaining before the current Title V permit expires.

One commenter ( OAR 2002 0056 4139) noted the proposed rule did not comport with the Title V permit renewal schedule. The proposed general permit requirement in 40 CFR 60.4121 ( c) specified that the Mercury Budget authorized account representative must submit a complete mercury budget permit application according to the permitting authority's Title V operating permit regulations for permit renew. However, most of the commenter's Title V permits for the listed Mercury Budget sources will not be due for renewal during the specified Mercury Budget time frame. The commenter asked how does the Mercury Budget permit renewal synchronize with the Title V renewal schedule? The commenter found the proposed wording far too vague to adequately address the nuances of the renewal process.

One commenter ( OAR 2002 0056 4139) stated that the proposed general permit requirement in 40 CFR 60.4120 specified that the Mercury Budget portion of the Title V permit is to be administered according to the permit authority's Title V operating permits regulations. All submittals pursuant to the Title V permit program must be certified by a responsible official, with specific compliance certification requirements for annual and semiannual reports. The commenter submitted, however, 40 CFR 60.4130 of the proposed rule would require data report and 5 189 compliance certification submittals by the authorized account representative for different information and based on schedules that do not mesh with the Title V time frame.

Response:

Under the Hg Budget model trading rule, a Hg Budget source that is already required to have a title V operating permit is required to submit an application to the permitting authority for a Hg Budget permit, which will become a complete and separable part of the title V permit. Sources not required to have title V permits do not have to apply for Hg Budget permits. For a source required to have title V permit, the requirements of the model trading rule are applicable requirements that, under title V , must be incorporated into the source's title V permit because the requirements of the model trading rule are requirements under section 111 of the CAA. See 40 C. F. R. 70.2 ( definition of " applicable requirement"). In short, contrary to the commenter's statements, the title V permit is incorporating the requirements established by the Hg model trading rule, which incorporation is analogous to the way the title V permit incorporates the requirements established by other programs ( e. g., the NOx SIP Call model trading rule) under CAA.

Comment:

One commenter ( OAR 2002 0056 2922) suggested, as a general matter, that EPA pattern the mercury cap and trade program on the Title IV Acid Rain Program. In that regard, EPA, as it does in the Title IV program, should not require Title V operating permits to be reopened or revised for allocation, transfer, or deduction of allowances. The commenter recommended in addition, EPA should assign serial numbers to mercury allowances. The commenter believed that although tracking and reporting serial numbers would result in some administrative burden, that burden would be significantly outweighed by the benefits that serial numbers would provide for tax and accounting purposes for regulated companies and other market participants.

Response:

EPA agrees that requiring title IV operating permits to be reopened or revised for allocation, transfer, or deduction of allowances would create an unnecessary administrative burden, and is finalizing that these be automatically incorporated in the Hg budget permit. Also, EPA is assigning serial numbers to Hg allowances for the purpose of tracking.

5.9 IMPLEMENTATION 5.9.1 State Plan Requirements Comment:

One commenter ( OAR 2002 0056 2247) noted the proposed trading program would require a state to submit its first plan by 2006 for distributing allocations for 2010 2014. The commenter's state cannot meet this deadline. The commenter stated that mercury control rules 5 190 and allowance distribution will be controversial; implementation will require having the legal framework in place, sufficient administrative resources, and time for input from the industry and the public. The commenter believed that at least 2 years would be needed after emission guideline promulgation to complete a rule with more time needed to actually distribute allowances. The commenter stated submittal of plans should be required at least 24 months after federal rule promulgation.

Response:

EPA is requiring a state to submit its plan for distributing allocations for 2010 2014 by October 21, 2006. As discussed in the final rule preamble, EPA believes this lead time is necessary ensures that an affected source, regardless of the State in which the unit is located, will have sufficient time to plan for compliance and implement their compliance planning.

Comment:

One commenter ( OAR 2002 0056 3543) noted states would be required to submit a SIP type plan to regulate existing mercury sources; the plan would include unit specific standards for new units under section 111( b). It was unclear to the commenter what type of plan EPA is requesting and if it will become part of a an air quality SIP.

Response:

EPA is requiring the submission of a State plan under section 111 of the CAA. Detailed language describing the requirements of the State plan has been added to the regulatory text.

Comment:

One commenter ( OAR 2002 0056 1678) submitted that relying on SIP to establish mercury reduction levels would be administratively cumbersome and time consuming and likely to result in disparate regulation.

Response:

EPA is requiring the submission of a State plan under section 111 of the CAA. Detailed language describing the requirements of the State plan has been added to the regulatory text. EPA has provided a model rule that States can adopt in order to limit the administrative burden on States and to create a uniform program among participating States.

Comment:

One commenter ( OAR 2002 0056 2841) believed that if EPA establishes a cap and trade program under the authority of section 112( n)( 1)( A) and/ or 112( d), EPA should amend the definition of " emission standard" in 40 CFR 63.2 to read " pursuant to sections 112( d), 112( h), 112( f) or 112( n) of the Act." Additionally, the commenter believed EPA should amend 40 CFR 5 191 63.1( e) to read " If the Administrator promulgates an emission standard under section 112( d), ( h), or ( n) of the Act. . ."

Response:

EPA is finalizing a cap and trade program under section 111. See preamble for more detail.

5.9.2 Approvability of Trading Rule Comment:

Several commenters ( OAR 2002 0056 2219,  2519,  3431) opposed allowing states to decide the allocation of trading units and the time line for updating the allocations. One commenter ( OAR 2002 0056 2519) noted that states will have the right allocate mercury emission allowances to individual sources or to choose any other allocation scheme a state deems appropriate. In the event a state fails to submit its SIP, the model rule would become the SIP for that state. The commenter believed the SIP process could result in some sources in one state getting allowances much less than what was envisioned under the EPA's state budgets while a source in an adjoining state could receive more allowances than under the proposal. Under such a situation, the first source would have to purchase allowances from the second or apply emission controls. The commenter points out that such a scenario could result in an inefficient trading program or unfair competitive issues among sources. Furthermore, preparation and submittal of SIP must follow certain processes mandated by state Constitution, and that could result in some delay in adopting the rule governing the trading program. The commenter stated that additional time would consume part of the time allowed for compliance planning to achieve the emission caps. The commenter submitted therefore, it is critical that EPA adopt a uniform program throughout the country, much like the existing Acid Rain Control Program, rather than a patchwork of differing requirements among various states. Accordingly, if EPA decides on a cap and trade program rather than a MACT program, the commenter prefers the CAA section 112 approach over the CAA section 111 approach.

Another commenter ( OAR 2002 0056 3431) believed a major problem with utilizing a CAA section 111 standard of performance approach to cap and trade would be that it requires further decision making at the state level regarding allowance allocation. According to the commenter, the experience of the Northeast states with the NO x budget rule, which similarly left the intrastate allocations to the affected states, was that the allocation process was extremely contentious and subject to political influence. The commenter stated that for example, if the prevailing view within a state was to rid the state of coal fired utilities, the allocation scheme would provide a powerful tool for making coal fired units prohibitively expensive to run, to the detriment of important national objectives of maintaining fuel diversity. Consequently, the commenter favored a uniform allocation scheme imposed at the national level, based on the heat input criteria expressed by EPA, but determined in a way that does not favor one coal type over another. 5 192 Several commenters ( OAR 2002 0056 0730,  1682,  2064,  2108,  4139) supported the CAA section 111( d) approach because it would allow more state and local input. Several commenters ( OAR 2002 0056 0730,  1682,  2064) submitted states are in the best position to make allocations that protect the environment and address hot spots. One commenter ( OAR 2002 0056 2108) preferred to develop its own system for allowance allocation, flow control, banking, and other trading issues. Another commenter ( OAR 2002 0056 4139) supported the proposed flexibility to choose what allowance allocation methodology states will use to determine their mercury budgets: auction or free distribution of allowances, permanent or updated allowances, and allowances based on input, output, or emission reductions. The commenter stated that for interstate trade, however, the rule should specify that the trade is allowable only if the section 111( d) limits for existing sources are as stringent or more stringent in the selling state as for the facility in the purchasing state. The commenter believed that while this is more complicated because of the different subcategories, a matrix to represent appropriate exchanges could be developed.

One commenter ( OAR 2002 0056 3437) stated that in the NPR and SNPR states are allowed to establish their own allocation methodology. The commenter assumed this would include existing and new sources and any set asides. EPA then requested comment on whether an allocation methodology should be mandated depending on whether a state participates in an interstate trading program, an intrastate trading program, or no trading program. The commenter believed states should have the flexibility in addressing the allocations under the cap irrespective of participation in a particular program.

One commenter ( OAR 2002 0056 3552) commented on whether to require the State to allocate allowances to each unit in accordance with the model cap and trade rule. According to the proposal, a state may allocate allowances using its own method. The commenter requested the flexibility not to follow EPA's methodology if the state determines it is not stringent enough to protect the public health. The commenter submitted that many states are limited in their rulemaking authority to be no stricter than federal standards.

One commenter ( OAR 2002 0056 2181) noted that while EPA uses a heat input rate adjusted by subcategories by fuel source for determining State budgets, States may choose how they will allocate allowances to each affected Utility Unit. The commenter agreed that States should not be mandated to use the proposed hypothetical allocation method when budgeting to specific units. Among the choices the EPA recognized, States may consider a baseline heat input or baseline power output, updating or permanent allocation, and auction programs. The commenter believed that while on the one hand, EPA is careful to encourage States to utilize an approach that is best suited for specific State circumstances, on the other, it notes that those who adopt its method can count on a quick approval by the Agency. The commenter submitted this could bias certain States toward adopting the EPA approach without offering thorough consideration of the benefits of alternative allocation strategies. The commenter recommended that EPA eliminate this inherent bias. 5 193 Several commenters ( OAR 2002 0056 1671,  2064) submitted that the rule should allow states to permanently retire mercury credits. The commenters added that credits should expire by a final compliance date.

One commenter ( OAR 2002 0056 2898) suggested that EPA could provide a mechanism for units to petition EPA to provide fair and accurate allocations to existing units. The commenter supported the comments submitted to EPA on this issue by the National Rural Electric Cooperative Association.

One commenter ( OAR 2002 0056 2721) noted that EPA is leaving the options to the individual states to determine if the allowances would be permanently issued: 1) year by year, 2) 5 10 year allocations where mercury allowance allocations would be periodically placed into the Mercury allowance Trading system for 5 10 consecutive control periods, or 3) a single permanent allocation where the mercury allowance allocation would be set only once in the beginning of the trading program. The commenter supported the permanent issuance of allowances. The commenter stated this would allow utilities to be better prepared for planning for the future. This planning would allow them to put in place the appropriate removal technologies without jeopardizing electrical generation and other balance of plant issues. The commenter stated that new units after initial allocation would be required to go to the marketplace to gain allowances under option 3. Under options 1 and 2 the new unit would be allocated allowances only with a corresponding reduction from an existing unit. The commenter submitted that the uncertainty is in what allocation plan each state chooses. The commenter believed that leaving the choice up to the states would weaken the overall trading program and place an unfair financial burden on these facilities, especially for units in a state with few allowances.

Response:

State adoption of the model rule will ensure consistency in certain key operational elements of the program among participating States, while allowing each State flexibility in other important program elements. Uniformity of the key operational elements is necessary to ensure a viable and efficient trading program with low transaction costs and minimum administrative costs for sources, States, and EPA. Consistency in areas such as allowance management, compliance, penalties, banking, emissions monitoring and reporting and accountability are essential.

The EPA's intent in issuing a model rule for the Hg Budget Trading Program is to provide States with a model program that serves as an approvable strategy for achieving the required reductions. States choosing to participate in the program will be responsible for adopting State regulations to support the Hg Budget Trading Program, and submitting those rules as part of the State Plan. There are two alternatives for a State to use in joining the Hg Budget Trading Program: incorporate 40 CFR part 60, subpart HHHH by reference into the State's regulations or adopt State regulations that mirror 40 CFR part 60, subpart HHHH, but for the potential variations described below. 5 194 Some variations and omissions from the model rule are acceptable in a State rule. This approach provides States flexibility while still ensuring the environmental results and administrative feasibility of the program. EPA finalizes that in order for a State Plan to be approved for State participation in the Hg Budget Trading Program, the State rule should not deviate from the model rule except in the area of allowance allocation methodology. Allowances allocation methodology includes any updating system and any methodology for allocating to new units. Additionally, States may incorporate a mechanism for implementing more stringent controls at the State level within their allowance allocation methodology.

State plans incorporating a trading program that is not approved for inclusion in the Hg Budget Trading Program may still be acceptable for purposes of achieving some or all of a State's obligations provided the general criteria. However, only States participating in the Hg Budget Trading Program would be included in EPA's tracking systems for Hg emissions and allowances used to administer the multi state trading program.

In terms of allocations, States must include an allocation section in their rule, conform to the timing requirements for submission of allocations to EPA that are described in this preamble, and allocate an amount of allowances that does not exceed their State trading program budget. However, States may allocate allowances to budget sources according to whatever methodology they choose. EPA has included an optional allocation methodology but States are free to allocate as they see fit within the bounds specified above, and still receive State Plan approval for purposes of the Hg Budget Trading Program.

5.9.3 State Authority under 111 Comment:

Several commenters ( OAR 2002 0056 1692,  1802,  2911,  2915,  3432,  3445,  3454,  3463,  3543,  3556,  4191,  4891) stated a preference for a national trading program. One commenter ( OAR 2002 0056 1692) stated that the flexibility inherent in well designed emission trading programs, such as the Title IV acid rain program, is preferable to the rigidities of unit or source specific controls. The commenter believed however, in order to secure the benefits of this flexibility, either of the alternative regulatory vehicles EPA proposed under sections 111( d) or 112( n)( 1) must lend itself to a truly national emissions trading program, with certainty in the assignment of emission allowances   essential for planning and executing cost effective emission control strategies. The commenter stated that the " opt in" nature of state participation in the 111( d) proposal, which provides too much leeway to individual state SIP determination processes, and the open ended potential for risk based assessment of mercury reduction requirements under the 112( n)( 1) alternative, jeopardizes the benefits associated with a well designed emissions trading regime. ( Many commenters expressed concerns with the opt in nature of state participation in the CAA 111( d) proposal; see comment below in this section.)

One commenter ( OAR 2002 0056 3543) stated that a national program is needed to control mercury emissions to help restore Texas water bodies since evidence exists that some significant portion of the mercury originates beyond Texas borders. Several commenters 5 195 ( OAR 2002 0056 2915,  4191) submitted that mercury allowances trading should be allowed to occur throughout the nation to make the cap and trade program as viable as possible. The commenters believe a nation wide trading market would reduce mercury emissions faster and more cost effectively because there would be increased opportunities and demand for early mercury reductions that could be " banked" for later use. Several commenters ( OAR 2002 0056 3432,  3445) stated that EPA must not allow individual states to interfere with an emission trading compliance option. Commenter ( OAR 2002 0056 3445) added that in order for a mercury trading program to be successful, a robust marketplace is necessary. The commenter believed that if trading is restricted, the efficiencies of a cap and trade system would be lost.

Several commenters ( OAR 2002 0056 1673,  2929) submitted that trading should be allowed over the broadest interstate region or largest area possible. One commenter ( OAR 2002 0056 2929) stated that this would capitalize on all efficiencies. The commenter believed EPA should make every attempt to promote unfettered emissions trading in the final mercury rule.

One commenter ( OAR 2002 0056 2160) submitted that if EPA chooses a cap and trade approach, allowances should be tradable across state boundaries.

One commenter ( OAR 2002 0056 2161) stated both the MACT and Cap and Trade approaches have attributes and problems. Whichever approach EPA chooses, the commenter felt it would be imperative that EPA continue to recognize in any regulation the inherent problems with controlling mercury for plants burning subbituminous coal. The commenter believed the proposed MACT level of control for subbituminous plants is appropriate; if EPA deemed it necessary to appreciably change this level, the commenter strongly urged EPA to re propose this regulation. The commenter submitted that if EPA chose a Cap and Trade program, it should be patterned after the highly successful Title IV SO 2 program. The commenter urged EPA to ensure that this program is applied in a consistent manner across the states. Differences in program design or implementation by individual states must be minimized. The commenter agreed that as EPA discussed in their proposal for an NSPS cap and trade program, the Title IV program has demonstrated that it is an effective program and has substantially reduced emissions of acid rain precursors.

Many commenters ( OAR 2002 0056 1802,  1859,  2224,  2264,  2422,  2452,  2560,  2835,  2850,  2897,  2911,  2948,  3452,  3463,  3514,  4891) expressed concern that the " opt in" nature of state participation in the CAA section 111( d) program would provide too much uncertainty associated with individual SIP determination processes. Specific concerns stated by the commenters included the following: states may not participate in a national trading program; arbitrary confiscation or other limitations on the use of emission allowances; reallocation of emission allowances among non emitting source sectors, e. g., non coal fired EGUs; patchwork of programs varying from state to state; states promoting premature emission allowance retirement; time required for review and approval of separate SIP by state approval authorities, including the necessary notice and public hearings, followed by the necessary review by the EPA will likely extend to a number of years; and a fragmented trading system would not allow sufficient trading 5 196 to be economical for smaller facilities. The commenters felt that for trading programs to be efficient, equitable, and effective, they must by uniformly applied over broad geographic regions.

Several commenters ( OAR 2002 0056 2251,  2332,  2560,  2818,  2835,  2862,  2915,  2948,  3431,  3469,  3514,  4191) believed that state participation in a mercury cap and trade program should be mandatory or that states should be prohibited from interfering with the cap and trade program. One commenter ( OAR 2002 0056 3431) stated EPA should require participation by all states in a mercury cap and trade program to create a robust and efficient market system. The commenter stated that a national cap and trade program offers the most certainty, flexibility and cost effectiveness for the industry as a whole. According to the commenter, past experience with the Acid Rain program demonstrated that for a cap and trade program to be successful, it must have broad based participation by the states. The commenter stated that even the NO x Budget Rule in the Northeast, which allowed for some state variation from a model rule, was slow to develop into a robust market with readily available interstate trades. According to the commenter, only when is there a robust market is the development of cost effective control technologies incentivized. The commenter believed if states are given the option not to participate in a cap and trade program or to create significant variation in their rule pursuant to a CAA § 111 SIP approach, the overall target mercury reduction may not be achieved and non participating states would disadvantage generation in their state by increasing generation costs and reducing system reliability. One other commenter ( OAR 2002 0056 2560) cited success of the Title IV Acid Rain SO 2 program being attributed to mandatory participation. One commenter ( OAR 2002 0056 3514) stated they would only support regulation under CAA section 111 if states are required to fully participate in the section 111 interstate cap and trade program.

One commenter ( OAR 2002 0056 2862) believed a federal mercury emission program would be most appropriate for an emission that is national and global in scope. The commenter submitted that if EPA decides to proceed to regulate mercury under a section 111 Cap and Trade alternative, states must be required to participate in the interstate cap and trade program. With this alternative, the federal performance standard would be implemented as a state specific emissions cap.

One commenter ( OAR 2002 0056 2948) stated that in order for the trading program to be successful, EPA would need to prohibit states from interfering with any mercury cap and trade program. The commenter added that although states are permitted under the Act to impose more stringent emissions limitations on sources within their borders, states must be expressly prohibited from restricting the ability of sources to sell or trade mercury allowances. The commenter also stated that similarly, EPA needs to prohibit states from interfering with the EPA established cap on mercury emissions. According to the commenter, in the final rule, EPA needs to make clear that states cannot require sources within their borders to surrender more allowances than federally required and cannot place restrictions on the sale of mercury allowances by sources within their borders. Another commenter ( OAR 2002 0056 2835) recommended that EPA reduce the opportunity for widely diverging state plans by prescribing the manner in which states allocate allowances to sources participating in the trading program. Similarly, several commenters ( OAR 2002 0056 2252,  2332) stated that a mercury trade program that is state run will lead to 5 197 state to state differences in implementation. These commenters asserted that it is not clear that this method is consistent with the goal of allowances that are " readily transferable between all regulated utilities" ( 69 FR 4652 Summary dated, January 30, 2004). One commenter ( OAR 2002 0056 2818) suggested that, if EPA determines that a cap and trade program is the best way to reduce mercury emissions, then EPA should administer the program so it is available to all utility units.

Several commenters ( OAR 2002 0056 2862,  2948) disagreed with the amount of flexibility states will have under the CAA section 111 cap and trade program. One commenter ( OAR 2002 0056 2862) noted that EPA's section 111 cap and trade proposal would allow states the flexibility to determine how to allocate the capped mercury allowances to in state sources. State implementation plans must, however, allocate the full emissions cap, and all of the EPA issued allowances must be issued to in state sources. The commenter submits that because the state cap is essentially the CAA section 111 performance standard, states choosing not to allocate all of their allowances would essentially be " opting out" of the section 111 program, and modifying the underlying federal standard of performance. The Clean Air Act does not permit this.

The second commenter ( OAR 2002 0056 2948) disagreed with EPA's proposal to allow states to opt out of a CAA section 111 trading program. According to the commenter, because promulgation of a section 111 trading program would necessitate a determination by EPA that the program is the " best system" for reducing mercury emissions from coal fired power plants, states cannot interfere with that determination. The commenter believed that although states do have some authority under section 111, they lack authority to change the standard of performance set by EPA. According to the commenter, if EPA permits states to opt out of a section 111 trading program, this will in essence allow states to change the standard of performance, which the CAA does not authorize. The commenter added that similarly, states cannot issue only a portion of the allowances available within the state because this would also permit that state to modify the federally determined standard of performance.

Several commenters ( OAR 2002 0056 0598,  3449,  3543) believed states should be allowed to opt out of the CAA section 111 cap and trade program. One commenter ( OAR 2002 0056 3449) submitted that states should have authority not to participate in emission trading programs and to require emission reductions beyond those specified in state budgets.

One commenter ( OAR 2002 0056 2721) believed that States should be required to participate in the inter State trading program. The commenter submitted that in instances where there are few or only one utility in a State ( i. e., South Dakota), the utility would be at an extreme economic disadvantage relative to a utility in a neighboring state that has multiple affected units when allowing each state to determine independently the amount of new source set aside or allocations of allowances to other industry sources.

One commenter ( OAR 2002 0056 2922) stated that EPA must make clear that states cannot interfere with the cap and trade program. The commenter offered as example, states should be expressly prohibited from requiring units to surrender more allowances than required by 5 198 EPA's one allowance per ounce rule or from placing restrictions on the intrastate or interstate transfer of allowances. The commenter urged EPA to include provisions in its rules that expressly prohibit states from interfering with the cap and trade program in the ways described above or in any other way.

One commenter ( OAR 2002 0056 2224) had concerns about potential adverse impacts that might occur through an inflexible, unit specific regulatory control program. Specifically, the commenter was concerned that the benefits and flexibility of a market based program could be entirely lost if it were determined that a national cap and trade program is not legally authorized or, if states declined to implement the cap and trade option under section 111 alternative. According to the commenter, to anticipate these concerns, EPA should allow states to establish flexible procedures for implementing the mercury reduction requirements under the " section 111" option. The commenter stated that in addition to the cap and trade program proposed in the supplement notice, these procedures should allow states to implement the reductions through emissions averaging or trading on at least a facility wide basis. The commenter noted that one alternate control program, which was specifically provided for in the nationwide MACT alternative, would be the emissions averaging program modeled after the NO x acid rain program. The commenter asserted that the rule should clarify that this provision should also specifically be provided for under the section 111 implementation approach for states that may elect not to participate in the nationwide cap and trade program. Another alternative that the commenter strongly urged EPA to adopt was a state wide, mass emissions ( i. e., ounces/ year) approach that would involve mass emissions caps set for each facility ( calculated based on the rule's emission rates). The commenter asserted that providing at least this much flexibility would be essential to enable electric generators to develop least cost strategies for controlling mercury. According to the commenter, among other things, it would provide significant additional compliance flexibility for multi unit stations while meeting the overall reduction goals of the program. The commenter stated that section 111( d) provides states with broad latitude in designing the mercury control program, and emissions averaging would thus be an appropriate implementation mechanism that should be available to states so long as the state program achieves the mercury reductions required under the final EPA rule.

Response:

As discussed in the final preamble, each State must impose control requirements that the State demonstrates will limit Statewide emissions from affected new and existing sources to the amount of the budget. Consistent with CAIR, EPA is finalizing that States may meet their Statewide emission budget by allowing their sources to participate in a national cap and trade program. That is, a State may authorize its affected sources to buy and sell allowances out of State, so that any difference between the State's budget and the total amount of Statewide emissions will be offset in another State ( or States). Regardless of State participation in the national cap and trade program, EPA believes that the best way to assure this emission limitation is for the State to assign to each affected source, new and existing, an amount of allowances that sum to the State budget. Therefore, EPA is finalizing that all regulatory requirements be in the form of a maximum level of emissions ( i. e., a cap) for the sources. 5 199 As proposed in the SNPR, EPA is finalizing that each State must submit a demonstration that it will meet its assigned Statewide emission budget, but that regardless of whether the State participates in a trading program, the State may allocate its allowances by its own methodology rather than following the method used by EPA to derive the state emissions budgets. This alternative approach is consistent with the approach in the CAIR.

States remain authorized to require emissions reductions beyond those required by the State budget, and nothing in today's final rule will preclude the States from requiring such stricter controls and still being eligible to participate in the Hg Budget Trading Program.

Comment:

Several commenters ( OAR 2002 0056 1611,  3909) stated that the proposed rules should not override more stringent State requirements. One commenter ( OAR 2002 0056 2835) stated that States are always free to adopt mercury control requirements more stringent than the federal requirements to address any adverse local impacts from EGU emissions.

One commenter ( OAR 2002 0056 3199) asked EPA to consider provisions that would allow states to control individual plants in the event there is a demonstrated mercury hot spot. Similarly, another commenter ( OAR 2002 0056 2909) stated that EPA rules must provide the explicit right and authority for States to deal with residual local issues.

Response:

Moreover, States remain authorized to require emissions reductions beyond those required by the State budget, and nothing in today's final rule will preclude the States from requiring such stricter controls and still being eligible to participate in the Hg Budget Trading Program.

Comment:

One commenter ( OAR 2002 0056 2430) stated that EPA must clearly define its role in overseeing a cap and trade program if a state elects to participate. The commenter submitted that States are unable to evaluate the cost associated with implementation of the rule without clearly stated commitments.

Response:

States may elect to participate in an EPA managed cap and trade program for coal fired Utility Units greater than 25 MW. To participate, a State must adopt the model cap and trade rules finalized in this section of today's rule with flexibility to modify sections regarding source Hg allocations. For States that elect not to participate in an EPA managed cap and trade program, their respective State Hg budgets will serve as a firm cap. 5 200 In a system run by EPA, source information management, emissions data reporting, and allowance trading is done through on line systems similar to those currently used for the Acid Rain SO2 and NOx SIP Call programs Comment:

Several commenters ( OAR 2002 0056 2264,  2422) claimed that CAA section 111( d) cap and trade program would place an unfair burden on many States that are already required to develop and approve controversial ozone and PM 2.5 SIPs. Moreover, the inclusion of mercury emission programs within often time consuming State SIP submission and approval processes would effectively reduce the time available for source compliance planning and control strategy implementation. In this regard, the commenters noted that the proposed section 111( d) SIP based trading program has been rejected in principle by 11 of the 12 northeastern states of the Ozone Transport Commission ( OTC). Eleven of the 12 OTC states voted to oppose any cap and trade program for mercury, with Virginia abstaining. The commenters pointed out that other states have voiced similar concerns about emissions trading for mercury. The commenters believed these developments underscore the potential difficulties associated with an emission trading plan implemented through section 111( d).

Response:

EPA is committed to assist states in the implementation of the program. States may elect to participate in an EPA managed cap and trade program for coal fired Utility Units greater than 25 MW. To participate, a State must adopt the model cap and trade rules finalized in this section of today's rule with flexibility to modify sections regarding source Hg allocations. For States that elect not to participate in an EPA managed cap and trade program, their respective State Hg budgets will serve as a firm cap.