1 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite IX. Interactions with Other Clean Air Act Requirements A. How Does this Rule Interact with the NOx SIP Call?

A majority of States affected by the CAIR are also affected by the NOx SIP Call. This section addresses the interactions between the two programs.

EPA proposed that States achieving all of the annual NOx reductions required by the CAIR from only EGUs would not need to continue to impose seasonal NOx limitations on EGUs from which they required reductions for purposes of complying with the NOx SIP Call. EPA also proposed that States would have the option of retaining such seasonal NOx limitations. EPA also proposed to keep the NOx SIP Call in place for non EGUs currently subject to the NOx SIP Call and to continue working with States to run the NOx SIP Call Budget Trading Program for all sources that would remain in the program. In response to commenters, EPA is making several modifications to its proposed approach.

States Affected by the CAIR for Ozone and PM2.5 Will Be Subject to a Seasonal and an Annual NOx Limitation A number of commenters recommended leaving the current NOx SIP Call ozone season NOx limitation in place as a way to ensure that ozone season NOx reductions from EGUs required by the NOx SIP Call would continue to be achieved. 2 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite Some commenters argued this would also help non EGUs currently subject to the NOx SIP Call by allowing them to continue trading with EGUs in a seasonal NOx program. Many of the same commenters suggested a dual season or bifurcated CAIR trading program as a mechanism for maintaining an ozone season NOx limitation for EGUs under the CAIR. In response to these commenters, EPA is requiring that States subject to the CAIR for PM2.5 be subject to an annual limitation and that States subject to the CAIR for ozone be subject to an ozone season limitation. This means that States subject to the CAIR for both PM2.5 and ozone are subject to both an annual and an ozone season NOx limitation. The annual and ozone season NOx limitations are described in section IV.

States subject to the CAIR for ozone only are only subject to an ozone season NOx limitation. To implement these NOx limitations, EPA will establish and operate two NOx trading programs, i. e., a CAIR annual NOx trading program and a CAIR ozone season NOx trading program. The CAIR ozone season NOx trading program will replace the current NOx SIP Call as discussed in more detail later in this section.

What Will Happen to Non EGUs Currently in the NOx SIP Call?

A number of commenters were concerned that the cost of compliance for non EGUs in the NOx SIP Call would increase 3 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite if they were not allowed to continue to trade with EGUs. In response to these commenters, EPA is modifying its proposed approach. EPA is allowing States affected by the NOx SIP Call that wish to use EPA's model trading rule to include non EGUs currently covered by the NOx SIP Call in the CAIR ozone season NOx trading program. This will ensure that non EGUs in the NOx SIP Call will continue to be able to trade with EGUs as they currently do under the NOx SIP Call.

This will not require States to get additional reductions from non EGUs. Budgets for these units would remain the same as they are currently under the NOx SIP Call. States will however be required to modify their existing NOx SIP Call regulations to reflect the replacement of the NOx SIP Call with the CAIR ozone season NOx trading program. EPA will continue to operate the NOx SIP Call trading program until implementation of the CAIR begins in 2009. EPA will no longer operate the NOx SIP Call trading program after the 2008 ozone season and the CAIR ozone season NOx trading program will replace the NOx SIP Call trading program. If States affected by the NOx SIP Call do not wish to use EPA's CAIR ozone season NOx trading program to achieve reductions from non EGU boilers and turbines required by the NOx SIP Call, they would be required to submit a SIP Revision 4 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite deleting the requirements related to non EGU participation in the NOx SIP Call Budget Trading Program and replacing them with new requirements that achieve the same level of reduction.

Compliance with the NOx SIP Call for States that Are Subject to Both the CAIR Ozone Season NOx Reduction Requirements and the NOx SIP Call If the only changes a State makes with respect to its NOx SIP Call regulations are: 1) to bring non EGUs that are currently participating in the NOx SIP Call Budget Trading Program into the CAIR ozone season program using the same non EGU budget and applicability requirements that are in their existing NOx SIP Call Budget Trading Program and 2) to achieve all of the emission reductions required under CAIR from EGUs by participating in the CAIR ozone season NOx trading program, EPA will find that the State continues to meet the requirements of the NOx SIP Call.

If the only changes a State makes with respect to its NOx SIP Call regulations are not those described above, see section VII for a discussion of how the State would satisfy its NOx SIP Call obligations.

States in the NOx SIP Call but not Affected by the CAIR ( Rhode Island) 5 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite Rhode Island is the only State in the NOx SIP Call that is not affected by the CAIR. To continue meeting its NOx SIP Call obligations in 2009 and beyond, Rhode Island will have two choices. It may either modify its NOx SIP Call trading rule to conform to the new CAIR ozone season NOx trading rule if it wishes to allow its sources to continue to participate in an interstate NOx trading program run by EPA or, it will need to develop an alternative method for obtaining the required SIP Call reductions. In either case,

Rhode Island must continue to meet the budget requirements of the existing NOx SIP Call.

Use of Banked SIP Call Allowances in the CAIR Program As explained earlier in today's notice, banked allowances from the NOx SIP Call may be used in the CAIR ozone season NOx trading program.

Other Comments and EPA's Response One commenter wrote that because attainment demonstrations for early action compacts were made based on having EGUs and non EGUs together in the NOx SIP Call, EPA could not allow EGUs to leave the NOx SIP Call and still have valid early action compacts ( EAC). As discussed above,

EPA is allowing States to keep EGUs and non EGUs in the NOx SIP Call together in one ozone season program ( CAIR ozone 6 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite season trading program). The NOx reductions required by the CAIR ozone season trading program are slightly more stringent than the reductions required by the NOx SIP Call.

As a result, the attainment demonstrations for EACs would remain valid under the CAIR. Having said that, the EAC program will have ended ( April 2008) before the CAIR rule is implemented. Thus, the compacts will no longer be applicable when the CAIR takes effect.

Another commenter proposed to have non EGUs under the NOx SIP Call subject to an annual NOx cap similar to EGUs under the CAIR so that non EGUs could continue to trade with EGUs. By adopting a CAIR ozone season trading program that includes non EGUs covered by the NOx SIP Call, non EGUs will be able to continue to trade with EGUs.

B. How Does this Rule Interact with the Acid Rain Program?

As EPA developed this regulatory action, much consideration was given to interactions between the existing title IV Acid Rain Program and today's action designed to achieve significant reductions in SO2 emissions beyond title IV. Requiring sources to reduce emissions beyond what title IV mandates has both environmental and economic implications for the existing title IV SO2 cap and trade program. In the absence of an approach for taking account of the title IV 7 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite program, a new program ( i. e., the CAIR) that imposes a significantly tighter cap on SO2 emissions for a region encompassing most of the sources and most of the SO2 emissions covered by title IV would likely result in a significant excess in the supply of title IV allowances, a collapse of the price of title IV allowances, disruption of operation of the title IV allowance market and the title IV SO2 cap and trade system, and the potential for increased SO2 emissions. The potential for increased emissions would exist in the entire country for the years before the CAIR implementation deadline and would continue after implementation for States not covered by the CAIR. These negative impacts, particularly those on the operation of the title IV cap and trade system, would undermine the efficacy of the title IV program and could erode confidence in capand trade programs in general.

Title IV has successfully reduced emissions of SO2 using the cap and trade approach, eliminating millions of tons of SO2 from the environment and encouraging billions of dollars of investments by companies in pollution controls to enable the sale of allowances reflecting excess emission reductions and in allowance purchases for compliance. In view of these already achieved reductions and existing 8 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite investments under title IV, the likelihood of disruption of the allowance market and the title IV cap and trade system,

and the potential for SO2 emission increases, it is necessary to consider ways to preserve the environmental benefits achieved under title IV and maintain the integrity of the market for title IV allowances and the title IV capand trade system. EPA maintains that it is appropriate to provide States the opportunity to achieve the SO2 emission reductions required under today's action by building on, and avoiding undermining, this existing, successful program.

The EPA has developed, in the model SO2 cap and trade rule, an approach to build on and coordinate with the title IV SO2 program to ensure that the required reductions under today's action are achieved while preserving the efficacy of the title IV program. The EPA's approach provides States the opportunity to impose more stringent control requirements for EGUs' SO2 emissions than under title IV through an EPA administered cap and trade program that requires the use of title IV allowances for compliance at a ratio of 2 allowances per ton of emissions for allowances allocated for 2010 through 2014 and 2.86 allowances per ton of emissions for allowances allocated for 2015 or thereafter. ( The program also allows the use of banked 9 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite title IV allowances allocated for years before 2010 to be used at a ratio of 1 allowance per ton of emissions.) Title IV allowances continue to be freely transferable among sources covered by the Acid Rain Program and sources covered by the model SO2 cap and trade program under CAIR. However,

each title IV allowance used to comply with a source's allowance holding requirement in the CAIR model SO2 cap

andtrade program is removed from the source's allowance tracking system account and cannot be used again for compliance, either in the CAIR model SO2 cap and trade program or the Acid Rain Program.

In addition, as discussed above, if a State wants to achieve the SO2 emission reductions required by today's action through more stringent EGU emission limitations only but without using the model cap and trade program, then EPA is requiring that the State include in its SIP a mechanism for retiring the excess title IV allowances that will result from imposition of these more stringent EGU requirements.

In this case, the State must retire an amount of title IV allowances equal to the total amount of title IV allowances allocated to the units in the State minus the amount of title IV allowances equivalent to the tonnage cap set by the State on SO2 emissions by EGUs, and the State can choose 10 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite what retirement mechanism to use.

Further, as discussed above, if a State wants to meet the SO2 emissions reduction requirement in today's action through reductions by both EGUs and non EGUs, then EPA is also requiring the State's SIP to include a mechanism for retiring excess title IV allowances. In that case, the amount of title IV allowances that must be retired equals the total amount of title IV allowances allocated to the units in the State minus the amount of title IV allowances equivalent to the tonnage cap set by the State on EGU SO2 emissions, and the State can choose what retirement mechanism to use.

Finally, as discussed above, if the State wants to achieve the SO2 emissions reduction requirement in today's action through reductions by non EGUs only, then EPA is not imposing any requirement to retire title IV allowances.

1. Legal Authority for Using Title IV Allowances in CAIR Model SO2 Cap and Trade Program.

EPA maintains that it has the authority to approve and administer, if requested by a State in the SIP submitted in response to today's action, the new CAIR model SO2 cap

andtrade program meeting the SO2 emission reduction requirement in today's action that requires use of title IV allowances 11 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite to comply with the more stringent allowance holding requirement of the new program and retirement under the CAIR SO2 cap and trade program and the Acid Rain Program of title IV allowances used for such compliance. Some commenters claim that EPA's establishment of such a cap and trade program using title IV allowances that sources must hold generally at a ratio of greater than one allowance per ton of SO2 emissions is contrary to title IV. Most of these commenters prefer the approach of allowing States to use a new EPA administered cap and trade program to meet lawful emission reduction requirements under title I and of allowing ( but not requiring) sources to use title IV allowances in the new program. However, these commenters argue that title IV prohibits requiring sources to use title IV allowances in such a program, whether at the same tonnage authorization ( i. e., one allowance per ton of emissions)

established in title IV or at a different tonnage authorization. Other commenters state that title IV does not bar EPA from establishing a new cap and trade program that requires the use of title IV allowances.

EPA maintains that it has the authority under section 110( a)( 2)( D) and title IV to establish a new cap and trade program requiring the use of title IV allowances at a 12 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite different tonnage authorization than under the Acid Rain Program and the retirement of such allowances for purposes of both programs. First, as discussed in Section V above,

EPA has the authority under section 110( a)( 2)( D) to establish a new SO2 cap and trade program, administered by EPA if requested in a State's SIP, to prohibit emissions that contribute significantly to nonattainment, or interfere with maintenance, of the PM 2.5 NAAQS. Further, EPA notes that under section 402( 3), a title IV allowance is:

an authorization, allocated to an affected unit by the Administrator under this title [ IV], to emit,

during or after a specified calendar year, one ton of sulfur dioxide. 42 U. S. C. 7651( a)( 3).

However, section 403( f) states that:

An allowance allocated under this title is a limited authorization to emit sulfur dioxide in accordance with the provision of this title [ IV]. Such allowance does not constitute a property right.

Nothing in this title [ IV] or in any other provision of law shall be construed to limit the authority of the United States to terminate or limit such authorization. Nothing in this section 13 1 EPA's interpretation is based on the language of section 403( f) and the legislative history of the provision. The language in CAA section 403( f) contrasts with language that was in section 503( f) of the House bill  but was excluded from the final version of the Clean Air Act Amendments of 1990  referring to the authority of the " United States" to terminate or limit such authorization " by Act of Congress" and stating that "[ a] llowances under this title may not be extinguished by the Administrator." U. S. Senate Committee on Environment and Public Works, A Legislative History of The Clean Air Act Amendments of 1990 ( Legis. Hist. of CAAA), S. Prt. 38, 103d Cong., 1st Sess., Vol. II at 2224 ( Nov. 1993). Further, unlike CAA section 403( f), the House bill did not state that an allowance did not constitute a property right. Section 403( f) of the Senate bill that was considered, along with the House bill, in conference committee had language different than both CAA section 403( f) and the House bill and stated that " allowances may be limited, revoked or otherwise modified in accordance with the provisions of this title or other authority of the Administrator" and that an allowance " does not constitute a Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite relating to allowances shall be construed as affecting the application of, or compliance with, any other provision of this Act to an affected unit or source, including the provisions related to applicable National Ambient Air Quality Standards and State implementation plans. 42 U. S. C.

7651b( f). EPA interprets the reference in section 403( f) to the authority of the " United States" to terminate or limit the authorization otherwise provided by a title IV allowance to mean that EPA ( acting in accordance with its authority under other provisions of the CAA), as well as Congress, has such authority. 1 Therefore, EPA maintains that it has the 14 property right." Legis. Hist. of CAAA, Vol. III at 4598. While the scope of the reference to the " United States" in CAA section 403( f) is not clear, EPA maintains that the term is clearly broad enough to include the Administrator. Moreover, even if the term were considered ambiguous with regard to the Administrator, EPA believes that interpreting the term to include the Administrator is reasonable. Specifically, EPA maintains that, by eliminating the explicit House bill language that required Congressional action and including the general reference to the " United States" and the " not a property right" language, CAA section 403( f) essentially adopted the Senate's approach and allows the United States  either through Congressional or administrative ( i. e., EPA) action  to terminate or limit the allowance authorization. See Legis. Hist. of CAAA, Vol. I at 754, 1034, and 1084 ( Oct. 27, 2000 floor statements of Sen. Symms, Sen. Baucus, and Sen. McClure indicating EPA has authority to take such action); but see Cong. Rec. at E 3672 ( Nov. 1, 2000)( extension of remarks of Cong. Oxley indicating that only Congress has such authority).

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite authority to establish a new cap and trade program in accordance with section 110( a)( 2)( D) that requires: the holding of title IV allowances under a more limited authorization ( i. e., 2 or 2.86 allowances per ton of emissions) by sources in States participating in the new program; and the termination of the authorization through retirement under the new program and the Acid Rain Program of those title IV allowances used to meet the allowanceholding requirement of the new program.

Commenters' arguments based on title IV.

The commenters claiming that EPA is barred by title IV from requiring use of title IV allowances at a reduced tonnage authorization in a new cap and trade program rely on 15 2 As discussed below, today's action revises the Acid Rain Program regulations to provide for source based, instead of unit based, compliance with the allowance holding Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite the above noted provision in section 402( 3) stating that an allowance is an authorization to emit one ton of sulfur dioxide. However, this provision does not bar EPA from requiring either: use of title IV allowances in a new capand trade program under a different title of the CAA at a reduced tonnage authorization; or retirement in this new program and the Acid Rain Program of allowances used in this manner.

At the outset, it should be noted that the CAIR model SO2 cap and trade program does not change the tonnage authorization of individual title IV allowances for purposes of the Acid Rain Program until such an allowance is used to meet the allowance holding requirement of the CAIR SO2 program. The authorization provided by each title IV allowance for a source to emit one ton of SO2 emissions, as well as the requirement that each source hold title IV allowances covering annual SO2 emissions, continue to be in effect in the Acid Rain Program whether or not the source is also covered by the CAIR SO2 program. In fact, the Acid Rain Program regulations continue to reflect both this tonnage authorization and this allowance holding requirement. 2 See final revisions to 40 CFR § 73.35 16 requirement. These revisions are adopted for reasons independent of the adoption of the CAIR model SO2 cap andtrade program, as well as to facilitate the coordination of these two SO2 trading programs.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite adopted in today's action. Moreover, the CAIR model SO2 cap and trade rule coordinates the determinations  made by EPA for sources subject to both title IV and CAIR  of compliance with the title IV and CAIR allowance holding requirements so that such determinations are made in a multi step, end of year process of comparing allowances held and emissions. First, EPA determines whether the source holds sufficient title IV allowances to comply with the oneallowance per ton of emissions requirement in the Acid Rain Program as provided in § 73.35; and subsequently EPA determines whether the source holds the additional title IV allowances that, when added to those held for Acid Rain Program compliance, are sufficient to meet the CAIR allowance holding requirement. Violations of the Acid Rain allowance holding requirement will result in imposition of the penalty for excess emissions ( i. e., the one allowance offset plus $ 2,000 ( inflation adjusted) per ton of excess emissions) under CAA section 411 and § § 73.35( d) and 77.4.

See final § 96.254( b)( 1) adopted in today's action. Thus,

the Acid Rain allowance holding requirement continues as a 17 3 The commenters' assertion that the sources in a State that does not participate in the CAIR SO2 cap and trade program will be cut off from the Acid Rain cap and trade program is incorrect on its face. Such a source will continue to be subject to the allowance holding requirement and the compliance process in § 73.35 and will not be subject to the allowance holding requirement and the compliance process in the CAIR model SO2 cap and trade rule.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite separate requirement and reflects the one allowance per

tonof emissions authorization under section 402( 3). 3 In contrast with the one allowance per ton of emissions requirement under the Acid Rain Program, the CAIR SO2 capand trade program requires each source generally to hold 2 or 2.86 Acid Rain allowances for each ton of SO2 emissions.

Contrary to the commenters' claim, this CAIR allowanceholding requirement is not barred by the definition of the term " allowance" in section 402( 3). While section 402( 3)

defines the term " allowance" as an authorization to emit one ton of SO2, this provision expressly applies the definition to the term "[ a] s used in this title [ IV]" and therefore does not apply to the treatment of title IV allowances in a different program under a different title of the CAA.

Moreover, as noted above, section 403( f) allows EPA to limit ( or terminate) the authorization to emit that an allowance otherwise provides under section 402( 3). Consequently, the allowance definition in section 402( 3) does not bar the treatment of a title IV allowance as authorizing less than 18 4 The commenters also seem to argue that the allowance definition itself bars EPA from requiring use of Acid Rain allowances in the CAIR SO2 trading program even on a oneallowance per ton of emissions basis. However, as noted above, the definition is silent on whether title IV allowances may or may not be used outside the Acid Rain Program.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite one ton of SO2 emissions under the CAIR SO2 cap and trade program established under title I. 4 Once a title IV allowance is used to meet the more stringent allowance holding requirement in the CAIR SO2 program, that allowance is deducted from the source's allowance tracking system account and cannot be used again,

either in the CAIR SO2 program or the Acid Rain Program. As noted above, EPA has the authority under section 403( f) to require this termination of such a title IV allowance's tonnage authorization for purposes of the Acid Rain Program.

In addition to referencing section 402( 3) to support claims that EPA is barred from adopting the CAIR model capand trade program provisions on the use of title IV allowances, the commenters rely on other title IV provisions that they characterize as setting a " title IV cap" on SO2 emissions. Stating that the requirement to use title IV allowances in the CAIR model SO2 cap and trade program has the effect of reducing the " title IV cap", these commenters indicate, with little explanation, that such requirement is unlawful. In mentioning the title IV cap, the commenters 19 5 Similarly, to the extent title IV allowances are used in the CAIR SO2 trading program by non Acid Rain sources, the " title IV cap" seems to be effectively reduced because more allowances are used in the CAIR SO2 trading program and effectively removed from use in the Acid Rain Program.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite are apparently referring to the fact that section 403( a)( 1)

( requiring allowance allocations resulting in emissions not exceeding 8.90 million tons of SO2) and section 405( a)( 3)

( requiring additional allocations of 50,000 allowances)

require EPA to allocate annually, starting in 2010, a total amount of allowances authorizing no more than 8.95 million tons of SO2 emissions. The commenters' argument about how the CAIR model SO2 cap and trade program effectively reduces the " title IV cap" appears to be that elimination of the ability to use, in the Acid Rain Program, title IV allowances that will be used for compliance in the CAIR model SO2 cap and trade program has the effect of reducing the annual 8.95 million ton cap on SO2 emissions. This effective reduction of the " title IV cap" seems to occur when title IV allowances are used in the CAIR SO2 trading program with a reduced tonnage authorization so that more title IV allowances are deducted per ton of emissions than would be deducted for compliance with the Acid Rain Program. 5 The commenters claim that such a reduction in the 8.95 million ton cap is contrary to title IV. 20 6 In light of this provision, the statement in the NPR ( particularly as it is interpreted by the commenters) that EPA lacks authority to tighten the requirements of title IV ( 69 FR 4618, col. 1) is overly broad and is not repeated or adopted in today's preamble.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite In asserting an overarching principle that EPA is barred from adopting any requirement that would have the effect of reducing the 8.95 million ton cap under title IV,

the commenters do not point to any specific statutory provision in support. EPA maintains that not only are there no such supporting provisions, but also certain title IV provisions contradict this purported principle.

Specifically, while sections 403 and 405 require annual allowance allocations authorizing no more than 8.95 million tons of emissions, section 403( f) provides, as noted above,

that EPA may terminate or limit the one allowance per

tonof emissions authorization for a title IV allowance. 6 Because any termination or limitation of the tonnage authorization provided by a title IV allowance for purposes of the Acid Rain Program would have the effect of reducing the total tonnage of emissions allowed by the allowance allocations ( i. e., the 8.95 million ton cap) under sections 403 and 405, the commenters' claim that EPA is barred from adopting any provision that has such an effect is wrong on its face. 21 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite Commenters' argument based on Clean Air Markets Group case The commenters also state that the CAIR model SO2 capand trade program is unlawful under the court's holding in Clean Air Markets Group v. Pataki, 338 F. 3d 82 ( 2d Cir.

2003). According to the commenters, the required use of title IV allowances in the CAIR SO2 program constitutes an unlawful interference with the operation of the interstate title IV SO2 trading program, presumably similar to the unlawful interference found by the court in Clean Air Markets Group. However, the commenters provide little explanation of how such use of title IV allowances ( with or without a reduced tonnage authorization) purportedly interferes with interstate operation of the Acid Rain Program and how the holding in Clean Air Markets Group applies to the CAIR SO2 program.

In Clean Air Markets Group, the Court reviewed a State law that imposed a monetary assessment on any title IV allowance sold by a New York utility to a utility in any of 14 specified States or subsequently transferred to such a utility, with the assessment equaling the proceeds received in the allowance sale. The law also required that each allowance sold include a covenant barring subsequent 22 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite transfer of the allowance to a utility in any of those States. The Court held that the State law was pre empted by title IV because the State law impermissibly interfered with the method chosen by Congress in title IV to reduce utilities' SO2 emissions, i. e., the opportunity for nationwide trading of title IV allowances. Id. at 87 88.

In particular, the Court found that the assessment of 100 percent of sale proceeds " effectively bans" sales of any allowance by New York utilities to utilities in the specified States and that the restrictive covenant " indisputedly decreases" the value of the allowances. Id.

at 88.

EPA maintains that today's action is distinguishable from the facts and holding in Clean Air Markets Group. In particular, EPA believes that the exercise of its explicit authority under section 403( f) to limit the tonnage authorization of a title IV allowance in the CAIR SO2 capand trade program and to terminate the tonnage authorization in the Acid Rain Program once the allowance is used in the CAIR SO2 program is consistent with  and necessary to preserve  the operation of the Acid Rain Program. EPA therefore concludes that its approach of limiting and terminating of the tonnage authorization of title IV 23 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite allowances does not impermissibly interfere with the interstate operation of the Acid Rain Program and is reasonable.

Unlike the circumstances in Clean Air Markets Group,

under EPA's approach in today's action, each title IV allowance is freely transferable nationwide unless and until a source uses the allowance to meet the allowance holding requirements of the CAIR SO2 program, at which time the allowance is deducted from the source's allowance tracking system account and retired for purposes of both the CAIR SO2 program and the Acid Rain Program. Further, EPA expects that the ability to use title IV allowances to meet the more stringent emission limitation under the CAIR SO2 program to maintain or increase ( not decrease) the value of each title IV allowance, until the allowance is used to meet the CAIR SO2 program allowance holding requirement and is retired.

Of course, this retirement of title IV allowances once they are used to meet the CAIR allowance holding requirement means that they cannot thereafter be transferred to any person or be used again, e. g., to meet the Acid Rain Program allowance holding requirement. As noted by the Court in Clean Air Markets Group, section 403( b) provides that title IV allowances " may be transferred among designated 24 7 While section 403( b)( as well as section 403( d)) refer specifically to the allowance system regulations required to be promulgated by the EPA Administrator within 18 months of November 15, 1990 ( the enactment date of the CAA), the EPA Administrator has authority under section 301 to amend such regulations " as necessary to carry out his functions under [ the CAA]." 42 U. S. C. 7601.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite representatives of owners or operators of affected sources under [ title IV] and any other person who holds such allowances, as provided by the allowance system regulations"

promulgated by EPA. 7 42 U. S. C. 7651b( b). Moreover, section 403( d)( 1) requires that the allowance system regulations " specify all necessary procedures and requirements for an orderly and competitive functioning of the allowance system." 42 U. S. C. 7651b( d). In the context of these statutory requirements, EPA maintains that, on balance, the retirement of title IV allowances used for compliance in the CAIR model SO2 cap and trade program does not constitute impermissible interference with the interstate operation of the Acid Rain Program, but rather is consistent with, and necessary to preserve, the operation of the Acid Rain Program.

As noted above, the imposition of an SO2 emission limitation ( such as in today's action) that is significantly more stringent than the one under title IV and covers most of the sources and emissions covered by title IV    but without addressing the impact on the Acid Rain Program  25 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite would likely have several adverse consequences. These adverse consequences would be: a significant excess of title IV allowances; a collapse of the price of title IV allowances; disruption of the title IV allowance market and the title IV SO2 cap and trade system; and potential SO2 emission increases, particularly in States outside the CAIR SO2 region. EPA modeling indicates that, in 2010, EGU SO2 emissions in States not affected by the CAIR SO2 program would increase by about 220,000 tons ( or about 24 percent of the approximately 0.9 million tons of SO2 emissions projected for the non CAIR SO2 region in 2010) in the absence of an approach for addressing the impact of the CAIR SO2 program on title IV. This is because, with the imposition of the more stringent CAIR SO2 emission limitation in the CAIR SO2 region, this more stringent limitation becomes the binding limitation for sources in that region. These CAIR SO2 sources must comply with, and cannot use title IV allowances to exceed, the CAIR SO2 emission limitation. Consequently, the portion of the title IV allowances that equals the difference between the CAIR and the title IV emission limitations is excess and would be available for use only by Acid Rain sources that are outside the CAIR SO2 region. 26 8 The surpluses for 2010 and 2015 respectively are calculated as: 7.3 million allowances minus (( 100 percent minus the percentage reduction requirement for the year) times 7.3 million allowances).

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite This excess amount of title IV allowances is potentially very significant. Today's action requires that the States in the CAIR SO2 region achieve an amount of SO2 emission reductions in 2010 and 2015 equal to 50 percent and 65 percent, respectively, of the amount of title IV allowances ( about 7.3 million allowances out of the total nationwide allocation of 8.95 million allowances) allocated to the units in the CAIR SO2 region. If the States achieve all the required CAIR SO2 reductions through emission reductions by EGUs ( which are largely the same units that are subject to the Acid Rain Program) and if EGUs held only one title IV allowance for each ton of SO2 emissions as required in the Acid Rain Program, the amount of surplus allowances allocated to the States in the CAIR SO2 region would be about 3.65 million allowances and 4.75 million allowances respectively in 2010 and 2015.8 Moreover, the vast majority of EGUs nationwide ( about 90 percent) and of EGU SO2 emissions nationwide ( about 90 percent) are covered by the CAIR SO2 program. The net result would be a large surplus of title IV allowances that would not be usable in the CAIR SO2 region and would be usable only by the small 27 9 The 4.8 million ton figure is the sum of: 3.65 million tons of emissions ( equal to the tonnage equivalent of the allowance allocations in the CAIR SO2 region); plus about 0.9 million tons of emissions in the non CAIR SO2 region with the retirement of surplus title IV allowances; plus 220,000 tons of increased non CAIR SO2 region emissions if the surplus title IV allowances are not retired.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite subset of EGUs ( about 10 percent) located in non CAIR SO2 region States. Looking at the nation as a whole ( both CAIR and non CAIR SO2 States) in 2010, there would be total allocations in the Acid Rain Program of 8.95 million title IV allowances but, according to EPA modeling and analysis of CAIR without a requirement to retire surplus title IV allowances, total projected SO2 emissions for EGUs of only about 4.8 million tons. 9 Based on the principles of supply and demand, EPA concludes that, with the amount of allowances allocated nation wide exceeding SO2 emissions for EGUs nationwide in 2010 by about 86 percent ( i. e., 8.95 million allowances minus 4.8 million tons divided by 4.8 million tons), the value of title IV allowances would fall to zero, and all but 220,000 of the surplus allowances would have no market and so, as a practical matter, would not be transferable.

EPA notes that this effect on allowances would occur no matter how the State implements the more stringent SO2 emission limitation required under CAIR, e. g., whether implementation is through a new cap and trade program ( like 28 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite in the model rule) or through a fixed ( command and control)

tonnage emission limit imposed on each individual source.

Consequently, the alternatives faced by EPA are either: ( 1)

to establish a CAIR model cap and trade program ( or allow States to use another means of achieving CAIR SO2 emission reductions) that does not retire the 3.65 million surplus allowances and that results in the devaluation of all title IV allowances to zero and the effective non transferability of all but 220,000 of the 3.65 million surplus allowances in 2010; or, as provided in today's action, ( 2) to adopt a CAIR SO2 model cap and trade program ( or another means of achieving reductions) that retires the 3.65 million surplus allowances and that results in the non transferability of the entire 3.65 million surplus of title IV allowances and ensures the remaining, unused title IV allowances have market value. Thus, with regard to the impact on the transferability of title IV allowances, EPA's decision to adopt the second alternative of retiring the surplus allowances adversely affects the transferability of only a relatively small amount ( 220,000 out of 8.95 million per year) of allowances, as compared to the amount of allowances whose transferability would be adversely affected under the first alternative. 29 10 See Sen. Rep. No. 101 228, 101st Cong., 1st Sess. at 324 ( Dec. 20, 1989)( stating that "[ a] llowances are intended to function like a currency that is sufficiently valuable to stimulate efforts to acquire it through innovative and aggressive efforts to reduce emissions more than required" and that, in the event of " inflation in the currency", the incentives to " reduce pollution... will be seriously weakened." In the instant case, without a requirement to retire excess title IV allowance, the currency would be inflated to a value of zero. See also Legis. Hist. of CAAA, Vol. I at 1033 ( Oct. 27, 1990 floor statement of Sen. Baucus explaining that "[ s] ince units can gain cash revenues from Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite Moreover, with the total collapse of the title IV allowance price in the Acid Rain Program, the nationwide cap and trade system under title IV  which would be the binding cap and trade system only for sources in the States outside the CAIR SO2 region  would lose all efficacy. The title IV cap and trade system operates by: making owners of sources pay for the authorization to emit SO2 by surrendering, to EPA, allowances that have a market value;

and by allowing owners ( e. g., those who choose to reduce emissions) to sell unused allowances. Whether the sources'

allowances were originally allocated to the sources or were purchased, the owners must decide the extent to which it is more efficient to give up the market value of such allowances or to reduce emissions. If title IV allowances were to have no market value, the title IV cap and trade system would no longer affect the choice of whether to emit or to reduce emissions. 10 30 the sale of allowances they do not use, they will have a financial incentive both to make greater than required reductions and/ or reductions earlier than required" and that " incentives created by the allowance market should stimulate innovations in the technologies and strategies used to reduce emissions" including energy efficiency).

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite EPA maintains that such a result is contrary to Congressional intent. The purposes of title IV include not only reductions of annual SO2 emissions from 1980 levels,

but also the encouragement of " energy conservation, use of renewable and clean alternative technologies, and pollution prevention as a long range strategy, consistent with the provisions of this title, for reducing air pollution and other adverse impacts of energy production and use." 42 U. S. C. 7651( b). Reflecting these purposes, Congress required EPA to promulgate allowance system regulations for the Acid Rain Program that would promote " an orderly and competitive functioning of the allowance system." 42 U. S. C.

7651b( d)( 1). See Sen. Rep. No. 101 228, 101st Cong., 1st Sess. at 320 ( explaining that " the allowance system is intended to maximize the economic efficiency of the program both to minimize costs and to create incentives for aggressive and innovative efforts to control pollution").

As discussed above, if title IV allowances were to have no market value, the cap and trade system under title IV would no longer affect owners' decisions on whether to emit or to 31 11 While the title IV cap and trade system could be replaced by a new CAIR SO2 cap and trade system that did not address the problems caused by surplus title IV allowance, that new cap and trade system would not be nationwide like the title IV cap and trade system and so would not cover sources outside the CAIR SO2 region.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite control emissions and so would no longer provide encouragement ( e. g., incentives for innovation) for avoidance or reduction of SO2 emissions. 11 In addition, EPA is concerned that such disruption of the title IV allowance market and the title IV SO2 cap

andtrade system would significantly erode confidence in capand trade programs in general and the CAIR model cap

andtrade programs in particular. As noted above, under the Acid Rain Program, companies have made billions of dollars of investments in emission controls in order to be able to sell excess title IV allowances and in purchasing title IV allowances for future compliance ( e. g., under annual,

oneday allowance auctions held by EPA, one as recently as March 22, 2004 when title IV allowances were purchased for about $ 50 million). While in a market based program like the Acid Rain Program, investments are necessarily subject to the vagaries of the market, EPA believes that it should try, to the extent possible consistent with statutory requirements,

to avoid taking administrative actions that would cause such extensive disruption of the Acid Rain Program. Allowing 32 12 EPA notes that the potential for increased emissions within the CAIR SO2 region would occur before the implementation of the CAIR SO2 program and is addressed by allowing pre 2010 banked title IV allowances to be used to meet the CAIR allowance holding requirement beginning in 2010.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite such disruption to occur could significantly reduce the willingness of owners of sources in new cap and trade programs to invest in measures that would result in excess allowances for sale or to purchase allowances for compliance. To the extent owners would ignore the allowance trading option and simply control emissions to the level equal to their source's allocations, this would obviate the incentives for innovation, and hamper realization of the potential for cost savings, that would otherwise be provided by new cap and trade programs ( such as the CAIR model cap and trade programs).

Finally, as noted above, such disruption of the Acid Rain Program would potentially result in significantly increased SO2 emissions ( about 24 percent in 2010) in States covered by the Acid Rain Program but outside the CAIR SO2 region. 12 This would have the effect of reversing, at least in part, the beneficial effect that the Acid Rain Program has had on SO2 emissions in those States, even though the overall goal of nationwide SO2 emission reductions would still be met. See 42 U. S. C.( a)( 1) ( Congressional finding 33 13 While the potential for increased emissions outside the CAIR SO2 region supports EPA's conclusion, EPA maintains that, even in the absence of any such increase, the other considerations discussed above are sufficient to justify the conclusion that the retirement of title IV allowances does not impermissibly interfere with the Acid Rain Program and is reasonable.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite that " the presence of acidic compounds and their precursors in the atmosphere and in deposition from the atmosphere represents a threat to natural resources, ecosystems,

materials, visibility, and public health").

In light of these considerations, 13 EPA concludes, on balance, that structuring the CAIR model SO2 cap and trade program in a way that avoids such extensive disruption of the Acid Rain Program ( i. e., by requiring retirement from the Acid Rain Program of title IV allowances used for compliance in the CAIR SO2 program) does not constitute impermissible interference with the interstate operation of the Acid Rain Program. Rather, this approach in the model SO2 cap and trade rule is consistent with, and preserves,

such operation  while providing States a tool for imposing the more stringent SO2 emission limitations required under title I  and is a reasonable exercise of EPA's authority under section 403( f) to terminate or limit the tonnage authorization of title IV allowances. 34 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite 2. Legal Authority for Requiring Retirement of Excess Title IV Allowances if State Does Not Use CAIR Model SO2 Cap and

Trade Program.

As discussed above, a State has the additional options of achieving the SO2 emission reductions required by today's actions through: EGU emission reductions only but without using the model SO2 cap and trade rule; some EGU and some non EGU emission reductions; or non EGU reductions only.

The requirement to retire excess title IV allowances applies only in the first and second of these three additional options. The State must retire an amount of title IV allowances equal to the total amount of title IV allowances allocated to units in the State minus the amount of allowances equivalent to the tonnage cap set by the State on EGUs' SO2 emissions and can choose what mechanism to use to achieve such retirement. EPA has the authority to require that the State include in its SIP a mechanism for retiring the excess title IV allowances that will result under these two options.

As discussed above, EPA has the authority under section 403( f) to terminate or limit the authorization to emit otherwise provided by a title IV allowance. Specifically,

EPA has the authority to: require that any EGU SO2 emission 35 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite reduction program, chosen by a State to meet ( in full or in part) the requirements of section 110( a)( 2)( D), include provisions for retiring excess title IV allowances resulting from the implementation of the more stringent emission reduction requirement under the State program; and to require that such retired title IV allowances cannot be used in the Acid Rain Program. As discussed above, the commenters' claims that such a retirement requirement is barred by title IV ( relying on, e. g., the section 402( 3)

definition of " allowance" and on the " title IV cap") lack merit. Also, for the reasons discussed above, the retirement requirement is not unlawful under Clean Air Markets Group and is a reasonable exercise of EPA's authority under section 403( f) to terminate or limit the tonnage authorization of title IV allowances.

Some commenters also claim that the retirement requirement unlawfully constrains the States' authority to determine in the first instance the control measures to use in meeting emission reduction requirements necessary to comply with section 110( a)( 2)( D). According to the commenters, since only EGUs are subject to title IV, the requirement to retire title IV allowances is in effect a mandate that the State control EGU emissions. 36 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite However, EPA is imposing the requirement for a State mechanism to retire title IV allowances only if the State decides in the first instance to require any EGU SO2 emission reductions to meet the emission reduction requirements under today's action. A State that decides not to require any EGU SO2 emission reductions for this purpose is not required to retire title IV allowances. Further, the amount of the required allowance retirement is limited to the amount of EGU SO2 emission reductions that the State decides in the first instance to require from EGUs ( i. e.,

the total title IV allowance allocations in the State minus the tonnage amount of the cap set by the State for EGUs' SO2 emissions). In short, the allowance retirement requirement echoes the State's decision in the first instance concerning the amount of SO2 emission reductions to require from EGUs in the State. EPA simply requires the State to implement the State's EGU SO2 emission reduction requirement decision in a manner that avoids the otherwise likely, extreme disruption of the title IV SO2 cap and trade system that is described above. Further, the State may choose what mechanism to include in its SIP revision for achieving the required allowance retirement, and EPA will review the effectiveness of the mechanism in achieving such retirement, 37 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite and approve and adopt the mechanism if appropriate, in an EPA rulemaking concerning the SIP revision. Therefore, EPA concludes that the allowance retirement requirement is lawful and is a reasonable condition for EPA approval of those State SIPs that require EGU SO2 emission reductions without using the CAIR model SO2 trading program.

EPA notes that the requirement to retire excess title IV allowances  where a State adopts the CAIR model SO2 trading program or where a State SIP obtains EGU emission reductions through some other means  is reflected in provisions in both the proposed rules in the SNPR ( i. e., in proposed § § 51.124( p) and 96.254( b)) and in the final rules adopted by today's action ( i. e., in final § § 51.124( p) and 96.254( b)). In reviewing the proposed rules in light of the comments received, EPA has concluded that, for consistency and clarity, the Acid Rain Program regulations should also reference this same retirement requirement. Consequently,

today's action adds a new paragraph ( a)( 3) to § 73.35 of the Acid Rain Program regulations that reiterates the requirement  addressed in the preamble and regulations in both the SNPR and today's action  that title IV allowances previously used to meet the allowance holding requirement in the CAIR model trading program in § 96.254( b) or otherwise 38 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite retired in accordance with § 51.124( p) cannot be used to meet the allowance holding requirement in the Acid Rain Program. Additional revisions of the Acid Rain Program regulations are discussed below.

3. Revisions to Acid Rain Regulations.

In the SNPR, EPA proposed to revise the Acid Rain Program regulations, effective July 1, 2005, to implement the allowance holding requirement on a source by source,

rather than on a unit by unit, basis. Instead of requiring each unit to hold an amount of allowances in its Allowance Tracking System account ( as of the allowance transfer deadline) at least equal to the tonnage of SO2 emissions for the unit in the preceding calendar year, the proposal required each source to hold an amount of allowances in its Allowance Tracking System account at least equal to the tonnage of SO2 emissions for all affected units at the source for such calendar year. Because language reflecting or referencing the unit by unit compliance approach is included in many provisions of the Acid Rain Program regulations, a significant number of proposed rule revisions 39 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite were necessary to implement source by source allowance holding.

In today's final rule, EPA is adopting, with minor modifications, the proposed rule revisions implementing source by source compliance with the allowance holding requirement. As explained in detail in the SNPR ( 69 FR 32698 32701), EPA finds that: title IV is ambiguous with regard to whether unit by unit compliance is required and so EPA has discretion in this matter; it is important to provide additional compliance flexibility by allowing a unit at a source to use allowances from any other unit at the same source; and many other, non allowance holding provisions of title IV evidence a unit by unit orientation.

Further, as discussed in the SNPR, EPA concludes that the adoption of source level compliance reasonably balances these considerations. In balancing these considerations,

EPA also concludes that company level compliance is not appropriate because it represents too much of a deviation from the unit by unit orientation in the non

allowanceholding provisions of title IV and is likely to require much more dramatic changes in the operation of the Acid Rain Program. See 69 FR 32699 700. It is important to note that the final rule revisions, like the proposed revisions, 40 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite change only the allowance holding requirement and not the emissions monitoring and reporting requirements, which continue to be applied unit by unit.

In today's action, EPA is making the source

levelcompliance rule revisions effective July 1, 2006, which is one year later than proposed. The shift from unit level to source level compliance will require software changes and testing to ensure that the Allowance Tracking System operates properly. EPA is currently in the process of conducting a general review and re engineering the Allowance Tracking System and Emissions Tracking System and anticipates completing the process in 2006. The process of shifting the Allowance Tracking System to source level compliance will be much more efficient and less likely to have adverse results on the system if the shift is coordinated with the general review and re engineering and therefore implemented starting July 1, 2006. Further, as discussed below, this delay of implementation for one additional year will give owners additional time to make changes that they determine are necessary in order to adapt to source level compliance.

Some commenters support the shift to source by source allowance holding, and some oppose the change. One 41 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite commenter opposing the change claims that a source by source allowance holding requirement is " contrary to market based principles." According to the commenter, market based systems give operators the tools for achieving compliance through allowance transfers, but with source level compliance the operators do not have to take any action to maintain sufficient allowances because EPA will move the allowances around for them.

The commenter's argument is based on an incorrect premise. Whether compliance is unit by unit or source

bysource the owner or owners of the affected units at each source must take the same types of actions in order to comply with the applicable allowance holding requirement.

In particular, under source level compliance, such owner or owners must reduce emissions, retain allowances allocated to such units, obtain additional allowances, or take a combination of these actions to ensure that the Allowance Tracking System account for the source holds enough allowances to cover the total emissions of the affected units at the source. The owner or owners also have the option of reducing emissions below allocations so that there are extra allowances available to hold for future use or sale. If the owner or owners do not have enough allowances 42 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite to cover the emissions from the source, EPA will not move,

on its own initiative, allowances into the source's compliance account from other sources' accounts or from general accounts, even if there are extra allowances in the other accounts. The only difference between the types of actions owners must take under the unit level and sourcelevel approaches is that, under unit level compliance, the owners must transfer allowances from one unit at a source to a second unit at that source in order to use the first unit's allowances for compliance by the second unit while,

under source level compliance, any allowance held for compliance for first unit can be used  without a transfer  for compliance by the second unit. This difference is reflected in the Allowance Tracking System, which, under the unit level approach, includes a separate account for each unit and, under the source level approach, includes a single account for all the affected units at a single source.

In summary, the mechanism, and the owners'

responsibilities, for achieving compliance with the allowance holding requirements are analogous under unit

byunit and source by source compliance, except that, under source by source compliance, allowances need not be transferred among units at the same source. EPA does not 43 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite believe that the source by source approach is any less market based than the unit by unit approach. Owners will still have the ability to reduce emissions or purchase or sell allowances and the responsibility to take actions ( including the holding of extra allowances) to ensure they have enough allowances to cover emissions. Moreover, the market price of allowances will still play a crucial role in owners' decisions on what actions to take. EPA's adoption of source by source compliance preserves market based principles, while reasonably balancing of the ambiguity of title IV, the need for additional compliance flexibility,

and the unit by unit orientation of many provisions in title IV. See 69 FR 32699 700.

The commenter also argues that having a source level allowance holding requirement in the Acid Rain Program ( and the CAIR model cap and trade program) is inconsistent with unit level compliance in the NOx SIP Call cap and trade program. However, other than pointing out this difference,

the commenter fails to explain why the programs must be identical in this regard. Based on experience with the Acid Rain Program ( as well as the NOx SIP Call trading program),

EPA concludes that a source level allowance holding requirement will result in a somewhat less complicated 44 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite program and a reduced likelihood of inadvertent, minor errors, while achieving the program's environmental goals.

See 69 FR 32699 700.

The commenter suggests that, instead of adopting source level compliance, EPA revise the Acid Rain Program regulations to allow for source over draft accounts, like those allowed in the NOx SIP Call cap and trade program.

Under the NOx SIP Call program, each source may have a source over draft account, in which may be held extra allowances that may be used for compliance by any affected unit at the source. However, EPA believes that source level compliance is a better approach than unit level compliance with over draft accounts. Relatively few owners in the NOx SIP Call cap and trade program actually put allowances in over draft accounts, and achievement of compliance is made more complicated by the ability of all units at a source to draw on the over draft account ( if any allowances are put in it) but the inability of any unit to use extra allowances held instead by another unit at the source. Consequently,

rather than adopting in the Acid Rain Program the unit level approach with over draft accounts, EPA is today adopting the source level approach in the Acid Rain Program and may consider in the future, as appropriate, adopting the source 45 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite level approach in other programs using unit level compliance.

One commenter states that EPA should revise the Acid Rain Program regulations to allow owners, each year, the option of choosing whether to use unit level or source level compliance. According to the commenter, significant investments have been made to monitor and report emissions and surrender allowances under the existing Acid Rain Program regulations, and shifting to source level compliance will require substantial resources and time. The commenter also states that unit based compliance should be retained as an option " to accommodate joint ownership and other special arrangements that may not affect an entire facility."

EPA rejects the suggestion of allowing each owner the option, for each year and for each source, of choosing between unit level and source level compliance. Such an approach would significantly complicate the achievement by sources, and the determination by EPA, of compliance. The potential for error ( e. g., due to erroneous assumptions about whether unit or source level compliance would be applicable to a particular source for a particular year) on the part of owners or EPA would be significantly increased.

Moreover, this complicated approach would result in 46 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite inconsistent treatment from source to source and year to year. Further, the commenter provided only vague assertions about the benefits of unit based compliance in certain circumstances and did not assert  much less show  that source level compliance cannot be accommodated under those circumstances. EPA maintains that the only reasonable options for the allowance holding requirement in the Acid Rain Program are either generally requiring compliance by all sources each year on a unit level basis ( as in the existing regulations) or requiring compliance by all sources each year on a source level basis ( as in the proposed revisions to the regulations). For the reasons discussed above, EPA believes that source level compliance for the allowance holding requirement is preferable. By postponing until July 1, 2006 the effective date of the rule revisions shifting to source level compliance ( with the result that 2006 is the first year of source level compliance), EPA is providing owners a reasonable amount of time to make any necessary adjustments, such as those claimed by the commenter. Further, as noted above, the rule revisions change only the allowance holding requirement and not the emissions monitoring and reporting requirements. This should limit the scope of adjustments necessary for owners 47 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite to implement source level compliance and will preserve the availability of reliable, unit level emissions data.

Because unit level compliance is reflected throughout the Acid Rain Program regulations, numerous revisions of the regulations are necessary to implement source level compliance. ( None of these changes are to the emissions monitoring and reporting provisions in part 75 since monitoring and reporting continue to be on a unit basis.)

One commenter requested that EPA provide " more in depth detail" on the proposed revisions. However, in the SNPR,

EPA described the types of, and reasons for, revisions that are necessary for source level compliance ( 69 FR 32700 01)

and set forth all of the specific, proposed changes ( 69 FR 3273 41). Moreover, no commenters stated that they did not understand any specific, proposed revision or the reason for any specific revision. EPA notes that in reviewing the proposed Acid Rain rule revisions in light of the comments,

EPA found some additional references in the Acid Rain rules to unit level compliance that should be revised to reflect source level compliance. EPA is adopting in today's action revisions of these additional references ( e. g., changing references to a " unit's account" or a " unit account" to a 48 14 This approach is consistent with the SNPR, where EPA proposed to convert all references, including any initially missed in the SNPR, from unit to source level compliance. 69 FR 32700.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite source's " compliance account") that are analogous to the revisions specifically identified in the SNPR. 14 Another commenter opposed the rule revisions implementing source level compliance on several other grounds. The commenter claims, without citing any statutory support, that the Acid Rain Program is based on " control of emissions at the unit level" so that, in the event of excess emissions, the " source as a whole would not be punished" and " corrective action could take place" at the particular unit. According to the commenter, source level compliance will: make it harder to determine which unit caused excess emissions; make the existing Acid Rain permits meaningless;

make the individual unit allowance allocations meaningless;

and cause confusion over which units at a source are affected units.

While there are many non allowance holding provisions in title IV that have a unit by unit orientation, EPA disagrees with the commenter's basic assertion that the purpose of the Acid Rain Program is to control emissions on a unit by unit basis and that there is a need to " distinguish" the compliance of each individual unit. The 49 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite provisions concerning application of the allowance holding requirement are ambiguous as to whether EPA must implement the requirement on a unit level or a source level, and the environmental benefits of the Acid Rain Program will still be realized with source level compliance. See 69 FR 32699

700. Further, while EPA will determine compliance on a source by source basis, nothing in the regulations prevents owners ( e. g., owners of units at sources with multiple units and multiple owners or owners of units with multiple owners and exhausting through a common stack) from determining by agreement which owners will bear any excess emissions penalties that occur at the plant and have to take correction actions. Indeed, owners are likely to have already these types of agreements in cases of units or sources with multiple owners. This is because the Acid Rain Program regulations already allow a unit at a multi unit source to use some allowances from other units at the source ( albeit to cover most but not all of the potential excess emissions) and already allow one unit exhausting from a common stack to use allowances from another unit at that stack ( without any limitation on such use). See 40 CFR 73.35( b)( 3) and ( e). In addition, while the Acid Rain permits will have to be revised in the future to reflect 50 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite source level compliance, today's rule does not make sourcelevel compliance effective until 2006. Permits will not have to be revised until around the end of 2006, which should provide States a reasonable opportunity to amend the permits. Contrary to the claims of the commenter,

sourcelevel compliance does not make the unit by unit allocations meaningless; the unit by unit allocations ( set forth in Table 2 of § 72.10) will determine the amount of allocations reflected in each Allowance Tracking System source account,

which amount will equal the sum of the allocations for all affected units at the source. Finally, the commenter failed to explain how the source level allowance holding requirement could cause " confusion" over which units are affected units. This source level requirement does not change the applicability provisions, which are still applied unit by unit.

As discussed in the SNPR, EPA proposed  in addition to the rule revisions to implement source level compliance  other revisions of the Acid Rain Program regulations in order to facilitate coordination of the Acid Rain Program and the CAIR SO2 cap and trade program. These additional revisions were described and explained in the SNPR ( 69 FR 32701). EPA is adopting these revisions for the reasons in 51 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite the SNPR, as amplified below. Most of these revisions are supported, or not opposed, by commenters, but some commenters objected to certain revisions.

For example, EPA noted that it had recently changed the " cogeneration unit" definition in § 72.2 in June 2002 ( 67 FR 40394, 40420, June 12, 2002). The original definition in § 72.2 had been used since the commencement of the Acid Rain Program. The only significant difference between the original and revised definitions is that the former refers to a unit " having the equipment used to produce" electricity and useful thermal energy through sequential use of energy, while the latter simply refers to a unit " that produces" electricity and useful thermal energy in that manner. The reason that EPA gave for revising the definition in June 2002 was to conform with the definition in the section 126 rule. However, the section 126 rule ( and the NOx SIP Call) did not actually specify a " cogeneration unit" definition. Consequently, there is no reason to use the June 2002 revised definition. Moreover, EPA is concerned that the change in the definition of " cogeneration unit" as of June 2002 may cause confusion or raise question about what units qualify for exemptions for " cogeneration units" from the Acid Rain Program. Under these 52 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite circumstances, EPA concludes that the definition should be changed back to the original definition in § 72.2 and, in any event, intends to interpret the June 2002 revised definition as having the same meaning as the original definition. One commenter raised concerns that EPA did not provide any " detailed analysis" of the implications of changing the " cogeneration unit" definition. However, as discussed above, the change simply reinstates the definition that had been used in the Acid Rain Program from the initial promulgation of implementing regulations in 1993 until 2002.

No commenter asserted that reverting to the longstanding,

original definition would be disruptive.

Another Acid Rain Program rule revision proposed in the SNPR is the elimination of the requirement for owners and operators to submit an annual compliance certification report for each source. One commenter expressed concern because the purpose of the annual certification is to ensure that the designated representative is " aware and has assured the quality of the data" being submitted to EPA. However,

as noted in the SNPR, designated representatives must evidence such awareness and compliance by submitting, with each quarterly emissions report, a certification that the monitoring and reporting requirements under part 75 of the 53 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite Acid Rain Program regulations have been met. See 40 CFR 75.64( c). Quarterly emissions reports are available on line to the public and the States. In addition, owners and operators of sources subject to the Acid Rain Program must submit, under title V of the CAA, annual compliance certification reports concerning all CAA requirements ( including Acid Rain Program requirements). Under these circumstances, EPA maintains that the separate Acid Rain Program annual compliance certification reports are duplicative and unnecessary. EPA notes that it appears that few, if any, requests for copies of these Acid Rain Program reports have been made by States or any other persons since the commencement of the Acid Rain Program. Apparently,

other certifications and submissions required of owners and operators have been sufficient for the purposes cited by the commenter.

The SNPR also included proposed revisions eliminating the requirement under the Acid Rain Program for a one day newspaper notice for designation of designated representatives and authorized account representatives. One commenter suggests that this notice should be replaced by a requirement to notify the State permitting authority. EPA notes that information on designated representatives and 54 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite authorized account representatives is already available to State permitting authorities through on line access to the Allowance Tracking System. Moreover, EPA is in the process of developing, and anticipates establishing in the near future, the ability to send State permitting authorities ( at their request) on line notices of changes in designated representatives ( who are also the authorized account representatives for affected sources' accounts).

Other proposed Acid Rain Program rule revisions on which EPA received adverse comment are the removal of § 73.32 ( prescribing the contents of an allowance account) and § 73.51 ( prohibiting the transfer of allowances from a future year subaccount to a subaccount for an earlier year).

Section 73.32 sets forth a rather self evident list of information that must be recorded in an allowance account in the Allowance Tracking System, such as the name of the authorized account representative, the persons represented by the authorized account representative, and the transfers of allowances in and out of the account. This section also references information on compliance or current year subaccounts and future year subaccounts, as well as emissions information. As discussed in the SNPR, several items on the list of informational contents for allowance 55 15 In reviewing the proposed Acid Rain Program rule revisions, EPA found some additional references to " subaccounts" that were not specifically noted in the SNPR. For consistency and clarity in the Acid Rain Program rules, EPA is adopting in today's action revisions ( e. g., changing the term " subaccount" to " compliance account") of these additional references, which revisions are analogous to those specifically set forth in the SNPR. This approach is consistent with the SNPR, where EPA proposed to convert all references, including any initially missed in the SNPR, from subaccount to compliance account. 69 FR 32700.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite accounts are out of date in that they do not reflect how the electronic Allowance Tracking System operates or will operate in the near future. For example, the electronic Allowance Tracking System does not currently use or refer to subaccounts, which will continue to be unnecessary in the context of source level compliance. 15 See 69 FR 32700 01.

In addition, while § 73.32 states that emissions data are reflected in the Allowance Tracking System account, such data are currently available instead through the electronic Emissions Tracking System. Because the information list in § 73.32 contains either self evident items or items that are out of date and because the NOx Allowance Tracking System has been operating successfully even though the model NOx Budget cap and trade rule and State cap and trade rules under the NOx SIP Call lack a provision analogous to § 73.32, EPA is removing § 73.32. EPA notes that the removal of the section will not mean that the information contained 56 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite in allowance accounts " can be changed at will." The format for allowance accounts is set forth in the electronic Allowance Tracking System and implements the requirements in the Acid Rain Program regulations concerning the holding,

transferring, recording, and deducting of allowances.

Section 73.51 prohibits the transfer of allowances from a future year subaccount to a subaccount for an earlier year. The removal of this section is consistent with the elimination throughout the rest of the Acid Rain Program regulations, as discussed in the SNPR ( id.), of any references to such subaccounts. Further, the prohibition on using allowances allocated for a year to meet the allowanceholding requirement for a prior year is retained in other provisions of the Acid Rain Program regulations.

Consequently, EPA is removing § 73.51.

C. How Does the Rule Interact with the Regional Haze Program?

This section discusses the relationship of the CAIR cap and trade program for EGUs with the regional haze program under sections 169A & 169B of the Act, in particular the requirements for Best Available Retrofit Technology ( BART)

for certain source categories including EGUs. The legislative and regulatory background of the BART provisions 57 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite were presented in some detail in the SNPR. See 69 FR 32684,

32702   704, June 10, 2004. In brief, BART regulations consist of two components. The first, promulgated in 1980,

addresses visibility impairment that can be " reasonably attributed" to a single source or small group of sources.

45 FR 80085, December 2, 1980, codified at 40 CFR 51.302.

The second component addresses BART in relation to regional haze ( visibility impairment caused by a multitude of broadly distributed sources) and was promulgated as part of the Regional Haze Rule. 64 FR 35714, July 1, 1999. Certain parts of the BART provisions in that rule were vacated by the U. S. Court of Appeals for the DC Circuit in American Corn Growers et al. v. EPA, 291 F. 3d 1 ( DC Cir., 2002). To address that decision, in May 2004 EPA proposed changes to the Regional Haze Rule and reproposed the Guidelines for BART Determinations ( originally proposed in 2001). 69 FR 25185, May 5, 2004.

On February 18, 2005, the DC Circuit decided another case dealing with BART and a BART alternative program,

Center for Energy and Economic Development v. EPA,

[ citation] (" CEED v. EPA"). In this case the court granted a petition challenging provisions of the regional haze rule governing the optional emissions trading program for certain 58 16 Arizona, California, Colorado, Oregon, Idaho, Nevada, New Mexico, Utah, Washington, and Wyoming, 17 The trading program is referred to as a " backstop" because under the WRAP Annex, States have the opportunity to achieve specified emission milestones using voluntary measures, with the trading program coming into effect only if those milestones are exceeded.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite western States and tribes ( the " WRAP Annex Rule"). The holdings of the case are relevant to today's action in several respects.

Most importantly for purposes of the CAIR, CEED v. EPA affirmed EPA's interpretation of CAA 169A( b)( 2) as allowing for non BART alternatives where those alternatives make greater progress than BART. [ Slip op. at 13] ( finding that EPA's interpretation of CAA 169( a)( 2) as requiring BART only as necessary to make reasonable progress passes the twopronged Chevron test).

The particular provisions involved in CEED v. EPA applied, on an optional basis, only to nine western States16 ( none of which are in the CAIR region). The provisions,

contained in 40 CFR 51.309 (" § 309") required among other things that States choosing to participate in a " backstop" 17 cap and trade program must demonstrate that the emissions reductions under the program resulted in greater progress towards the national visibility goals than would BART. At issue was the particular methodology required for this 59 18 The methodology is prescribed in 40 CFR 51.308( e)( 2) and incorporated into § 309 by reference at 40 CFR 51.309( f).

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite demonstration. Specifically, EPA's rule required that visibility improvements under source specific BART   the benchmark for comparison to the cap and trade program   must be calculated based on the application of BART controls to all sources subject to BART. 18 Although American Corn Growers had vacated this cumulative visibility approach in the context of determining BART for individual sources, the EPA believed that it was still permissible to require this methodology in the context of a BART alternative program.

The DC Circuit in CEED v. EPA held otherwise, stating: " EPA cannot under § 309 require states to exceed invalid emission reductions ( or, to put it more exactly, limit them to a § 309 alternative defined by an unlawful methodology)." [ Slip Op. at 14].

Thus, CEED v. EPA firmly established two principles:

( 1) the CAA allows States to substitute other programs for BART where the alternative achieves greater progress, and ( 2) EPA may not require States to evaluate visibility improvement on a cumulative basis as a condition for approval of a BART alternative. The first principle validates EPA's proposal to allow CAIR to substitute for BART. The second principle is not at issue in the CAIR 60 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite context, because EPA is not proposing to impose the cumulative visibility methodology upon States, nor to require States to treat CAIR as having satisfied their BART obligations.

Nonetheless, the EPA has determined that it is premature to make a final determination regarding the sufficiency of CAIR as a BART alternative, primarily because ( 1) the guidelines for source specific BART determinations,

in response to American Corn Growers have not been finalized, and ( 2) there is now a need to revise the regional haze rule and the guidelines for BART alternative programs in response to CEED v. EPA. The source specific BART guidelines will be finalized on or before April 15,

2005, under a consent decree. The rule changes and revisions to the BART alternative guidelines will be proposed soon thereafter.

Therefore we are making no final determination in today's action. The EPA continues to believe, however, that CAIR will result in greater progress in visibility improvement than BART, as explained below.

1. How Does this Rule Relate to Requirements for Best Available Retrofit Technology ( Bart) under the Visibility Provisions of the CAA? 61 19 The SNPR preamble used the term " exemption" in describing this policy. As clarified below, and as consistent with the proposed regulatory language, the better than BART policy is not actually an exemption but rather an alternative means of compliance.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite a. Supplemental Notice of Proposed Rulemaking In the SNPR, we proposed that States which adopt the CAIR cap and trade program for SO2 and NOx would be allowed to treat the participation of EGUs in this program as a substitute for the application of BART controls for these pollutants to affected EGUs. 19 To give this option effect,

we proposed an amendment to the Regional Haze Rule which would add a section at 40 CFR 51.308( e)( 3), as follows:

( 3) A State that opts to participate in the Clean Air Interstate Rule cap and trade program under part 96 AAA EEE need not require affected BARTeligible EGUs to install, operate, and maintain BART. A State that chooses this option may also include provisions for a geographic enhancement to the program to address the requirement under § 51.302( c) related to BART for reasonably attributable impairment from the pollutants covered by the CAIR cap and trade program.

This proposal is consistent with currently existing provisions which allow States to develop cap and trade 62 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite programs or other alternative measures in lieu of the application of BART on a source specific basis. See 40 CFR 51.308( e)( 2) and 64 FR 35714, 35741   35743, July 1, 1999.

The proposal was based on the application of the proposed two pronged test for whether an alternative to BART is " better than BART" which was proposed in the 2001 BART guidelines and reproposed without changes in our May, 2004 proposed guidelines for BART determinations. 69 FR 25184,

May 5, 2004.

Specifically, the re proposed BART Guidelines provide that if the geographic distribution of emission reductions is anticipated to be similar under both programs, the trading program ( or other alternative measure) must be shown to achieve greater overall emissions reductions than the application of source specific BART. If the trading program is anticipated to result in a different geographic distribution of emissions reductions than would sourcespecific BART, the trading program must be shown to result in no decline in visibility at any Class I area, and in an overall improvement in visibility on an average basis over all affected Class I areas. 69 FR 25184, 25231. Because we have not yet determined whether there is a difference in the geographic distribution of emission reductions between the 63 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite CAIR and the application of source specific BART in the CAIR region, we assessed the difference between the two programs by evaluating the visibility impacts of each program, using this proposed two pronged test.

The emissions projections and air quality modeling used to demonstrate that CAIR satisfies this proposed two pronged test were presented in a document entitled Supplemental Air Quality Modeling Technical Support Document ( TSD) for the Clean Air Interstate Rule ( May 4, 2004). In brief, we found that CAIR would not result in a degradation of visibility from current conditions at any Class I Area nationwide.

Within the CAIR affected States and New England, the EPA found that CAIR would produce greater visibility benefits   specifically, an average improvement of 2.0 deciviews, as compared to 1.0 for BART. The EPA also found that average visibility improvement for Class I Areas nationwide would be 0.7 deciviews under CAIR, compared to 0.4 deciviews under BART. The EPA noted in the SNPR and the TSD that because the emissions scenarios used in these analyses were developed for different purposes, the scenarios varied slightly from the scenarios which would be ideal for this test. The EPA committed to conduct additional analyses, and those analyses have now been done. The new modeling and 64 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite results are discussed in more detail in section IX. C. 2 below.

b. Comments and EPA's Responses Several commenters argued that a categorical exclusion of sources from BART would violate the CAA, as interpreted by the U. S. Court of Appeals for the DC Circuit in American Corn Growers v. EPA, 291 F. 3d 1, 2002, by illegally constraining the discretion Congress conferred to States in making BART determinations and by depriving States of an adequate opportunity to evaluate the emission reductions in light of the BART requirement. Some States also expressed a desire to retain their discretion to require BART.

Additionally, some commenters asserted that EPA could not offer an exemption to BART unless the conditions for exemptions provided by CAA 169A( c) are met, including a showing that the source in question will not, alone or in combination with other sources, emit any pollutant which may reasonably be anticipated to cause or contribute to impairment at any Class I area, and the concurrence of the appropriate Federal Land Manager with the exemption determination.

The EPA agrees that under the CAA and the American Corn Growers case, EPA may not preclude a State from conducting 65 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite its own BART analysis, nor from requiring BART controls at individual sources as determined appropriate through such analysis. Accordingly, as noted above, the proposed regulatory change to the Regional Haze Rule would provide that a CAIR affected State " need not require affected BARTeligible EGUs to install, operate, and maintain BART" if such State opts to participate in the CAIR cap and trade program. The optional nature of this language (" need not"

rather than " may not") is consistent with the American Corn Growers decision, because it does not attempt to mandate that States must consider CAIR as having met the requirements of BART.

The SNPR preamble summarized the proposal by stating that " EPA proposes that BART eligible EGUs in any State affected by CAIR may be exempted from BART controls for SO2 and NOx if that State complies with the CAIR requirements through adoption of the CAIR cap and trade programs for SO2 and NOx emissions." 69 FR at 32702 ( emphasis added). That statement accurately reflected the optional nature of the better than BART substitution policy, by providing that sources " may" be granted such regulatory flexibility.

However, the use of the term " exempted" in this context was somewhat imprecise. The EPA agrees that sources may not be 66 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite " exempt" from BART requirements unless the requirements of 169A( c) are fulfilled. The better than BART policy is not an " exemption" from BART; it is an alternative regulatory program that would allow Congressionally required emission reductions from BART eligible sources to be made in a more cost effective manner. Moreover, as explained elsewhere in the SNPR and again below, BART eligible EGUs would not be " exempt" from BART because, until the emission reductions required by CAIR are fully realized, such sources would remain subject to the possibility of being required to install BART controls if deemed necessary to meet requirements regarding reasonably attributable visibility impairment, as provided by 40 CFR 51.302.

Several commenters asserted that because Congress singled out 26 source categories for the application of BART, there is no basis in law for EPA to " exempt" some of these categories. These comments amount to facial challenges of EPA's authority to approve SIPs which contain alternative strategies, rather than source specific BART requirements, for BART eligible sources.

The EPA's authority to approve alternative measures to BART, where those measures achieve greater reasonable progress than would BART, was recently upheld by the D. C. 67 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite Circuit in CEED v. EPA, [ citation, at 13]. See also Central Arizona Water Conservation District v. EPA, 990 F. 2d 1531,1543, ( 1993)( Upholding EPA's interpretation of CAA 169A( b)( 2) as providing discretion to adopt implementation plan provisions other than those provided by BART analyses in situations where the agency reasonably concludes that more reasonable progress will thereby be attained).

Similarly, some commenters stated that CAIR could not substitute for BART because CAIR and BART are authorized by separate parts of the CAA. They argue that allowing reductions required by a provision of the Act not linked to visibility improvement to substitute for BART would alter Congress's " mandate" that certain source categories make reductions for visibility in excess of what other CAA provisions require of those sources. Commenters also point to Regional Haze Rule section 308( e)( 2) as evidence that reductions from other programs such as Title IV and the NOx SIP call must be achieved in addition to, and not as a substitute for, BART. Commenters also argue that EPA ( and States) will need all available tools, including BART, to meet visibility and NAAQS requirements.

Again, under our interpretation of CAA § 169A( b)( 2) as upheld in CEED v. EPA and Central Arizona Water, Congress 68 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite did not " mandate" that emission reductions from certain source categories be obtained by the installation of BART controls. Instead, the Act allows for alternative measures to BART   whether for EGUs or non EGUs   where those measures result in greater reasonable progress, and as explained below, we have determined that greater reasonable progress can be obtained from the EGU sector through the use of the CAIR cap and trade program. However, if a State believes more progress can be made at affected Class I areas by utilizing BART, the State need not make the determination that CAIR substitutes for BART in that State.

Therefore the EPA is not eliminating any tools available to the States.

With respect to regional haze rule section 308( e)( 2),

the EPA also does not believe that this section provides any support for the notion that emissions reductions from other programs must be in addition to, not substitute, for BART.

We first note that the decision in CEED v. EPA necessitates revisions to 308( e)( 2), at least in the provisions requiring visibility to be evaluated on a cumulative basis in defining the BART benchmark for comparison to BART alternative programs. It remains to be seen whether 308( e)( 2)( iv),

which requires that emissions reductions from the BART 69 20 See " 2002 Base Year Emission Inventory SIP Planning: 8 hr Ozone, PM2.5 and Regional Haze Programs, " November 8, 2002, Guidance Memorandum, http:// www. epa. gov/ ttn/ oarpg/ t1/ memoranda/ 2002bye_ gm. pdf 21 The purpose of providing a cut off year for SIP measures to which the alternative must be surplus is to prevent an untenable situation where programs being developed simultaneously must be surplus to each other. Establishing a baseline year allows States to continue to make reductions between that baseline date and the submittal of regional haze SIPs without being " penalized" for those reductions by not being allowed to count them as contributing to reasonable progress towards the national visibility goal.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite alternative be " surplus to reductions resulting from measures adopted to meet requirements as of the baseline date of the SIP", will be changed. Even if that section remains unchanged, CAIR complies with it. The baseline date of Regional Haze SIPs is 2002.20 Since any emissions reduction requirements to meet CAIR would necessarily be adopted after 2002, CAIR required reductions would be surplus to measures adopted as of the baseline year. 21 Several commenters argued that the question of whether BART is better than CAIR is properly addressed in the BART rulemaking, not in today's action, and that the better than

BART determination is otherwise premature. While EPA believes that our current analysis demonstrates that CAIR is better than BART, based on the criteria in our May 2004 BART proposal, and that the range of uncertainty regarding the presumptive BART controls for EGUs to be finalized in the BART guidelines is not likely to alter that demonstration, 70 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite we agree that we cannot make a final determination that CAIR is better than BART until the changes to the regional haze regulations required by both American Corn Growers and CEED v. EPA are finalized.

Several commenters felt CAIR should be considered better than BART for a State whether or not that State participates in the CAIR cap and trade program, as long as the State achieves its emission reduction requirement under CAIR. Conversely, one commenter felt that CAIR reductions should be considered better than BART only when a State does not participate in the cap and trade program, thereby ensuring that the reductions will occur in state.

Our preliminary demonstration that CAIR results in more reasonable progress than BART for EGUs is based on a comparison of emissions reductions from EGUs, and attendant air quality effects, under CAIR as compared to under BART as proposed in May, 2004. If emissions reductions are achieved from other source sectors, a similar analysis would have to be conducted for those sector( s) before it could be determined that the reductions were better than BART for affected source categories. For example, if a State either wants to use EGU emission reductions under CAIR to substitute for BART for non EGUs, or use non EGU emission 71 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite reductions to substitute for BART for EGUs, that could be allowed as an alternative measure to BART provided a similar " better than BART" determination is made for the sectors involved.

A few commenters believed EPA should not limit the substitution of CAIR for BART to States that are required to meet CAIR for both SO2 and NOx on an annual basis, but rather should also allow it for States which are only required to reduce NOx during the ozone season. Because the modeling scenarios were based on the pollutants covered by CAIR in each affected State, our better than BART demonstration is limited to those scenarios. A State subject to the CAIR for NOx purposes only would have to make a supplementary demonstration that BART has been satisfied for SO2, as well as for NOx on an annual basis.

A few commenters believed that CAIR should satisfy BART for purposes of reasonably attributable visibility impairment as well as BART for purposes of regional haze.

Several others commented that it was appropriate or legally necessary to preserve the authority of FLMs and States to certify impairment and make reasonable attribution determinations, which could subject a source to BART requirements even if the source is a participant in the CAIR 72 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite cap and trade program. These commenters supported the use of a strategy similar to that employed by the Western Regional Air Partnership, which relies upon a Memorandum Of Understanding between the FLMs and the States regarding the criteria by which certifications of impairment may be made,

along with the possibility of " geographic enhancements" to the cap and trade program to accommodate the imposition of source specific BART control requirements on a source within the cap and trade program.

As proposed in the SNPR, the EPA continues to believe that reasonably attributable visibility impairment determinations under 40 CFR 51.302 must continue to be a viable option in order to insure against any possibility of hot spots. We believe that a certification of reasonably attributable visibility impairment is fairly unlikely, given that there have been few such certifications since 1980, and given that the reductions from CAIR and other recent initiatives will make such certifications decreasingly likely. We believe sources can be given sufficient regulatory certainty to enable effective participation in a cap and trade program through the use of MOUs and geographic enhancement provisions. 73 22 The question of whether section 169A( b)( 2) requires BART based on contribution to impairment at any Class I area is separate from the question of whether this section requires source specific BART under all circumstances. As noted earlier, we interpret section 169A ( b)( 2) as requiring BART only as needed to make reasonable progress, thus allowing for alternative measures which make greater reasonable progress.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite Some commenters believe that because section 169A( b)( 2)( A) requires BART for an eligible source which may reasonably be anticipated to cause or contribute to any impairment of visibility in any Class I area, EPA is without basis in law or regulation to base a better than

BART determination on an analysis that does not evaluate visibility improvement at each and every Class I Area, or one that uses averaging of visibility improvement across different Class I Areas.

The criteria we applied in our present analysis   that greater reasonable progress is defined as no degradation at any Class I area, and greater overall average improvement   has not been finalized. However, we disagree with comments that 169A( b)( 2)' s requirement of BART for sources reasonably anticipated to contribute to impairment at any Class I area22 means that an alternative to BART program must be shown to create improvement at each and every Class I Area. Even if a BART alternative is deemed to satisfy BART for regional haze purposes, based on average overall improvement as 74 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite opposed to improvement at each and every Class I Area,

169A( b)( 2)' s trigger for BART based on impairment at any Class I area remains in effect, because a source may become subject to BART based on " reasonably attributable visibility impairment" at any area. ( The EPA believes it is unlikely that a State or FLM will have need to certify RAVI with respect to any EGU in the CAIR region, but nevertheless believes it is necessary to preserve this safeguard).

We also received a number of comments regarding the broader relationship between CAIR and regional haze,

including whether CAIR meets reasonable progress requirements, as well as BART, for affected States; whether EPA should allow non CAIR states to opt in to the CAIR capand trade program to meet their BART requirements; and whether regional haze provisions should be used as a basis for expanding the CAIR rule to the rest of the States which were not included on the basis of contribution to PM2.5 and ozone non attainment. The EPA's responses to comments on these broader issues, which are not germane to the issue of whether CAIR may substitute for BART for affected EGUs, are contained in the Response to Comment Document.

c. Today's Action 75 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite As discussed above, EPA has the authority to approve SIPs which rely upon a cap and trade program as an alternative to BART. However, at this time we are deferring a final determination that, in EPA's view, CAIR is better than BART for CAIR affected States until such time as the BART guidelines for EGUs and the criteria for BARTalternative programs are finalized. At that time, contingent upon supporting analysis and our final rules governing the regional haze program, the EPA will make a final determination as to whether CAIR is better than and can be relied as an alternative measure in lieu of BART.

2. What improvements did EPA make to the BART versus CAIR modeling, and what are the new results?

a. Supplemental Notice of Proposed Rulemaking For the better than BART analysis in the SNPR, we used the Integrated Planning Model ( IPM) to estimate emissions expected after implementation of a source specific BART approach and after implementation of the CAIR cap and trade program for EGUs. We then used the Regional Modeling System for Aerosols and Deposition ( REMSAD) air quality model to project the visibility impact of these IPM emissions predictions for both the CAIR and the nationwide sourcespecific BART scenarios. Specifically, EPA evaluated the 76 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite model results for the 20 percent best days ( that is, least visibility impaired) and the 20 percent worst days at 44 Class I areas throughout the country. Thirteen of these Class I areas are within States affected by the CAIR proposal, and 31 Class I areas are outside the CAIR region   29 in States to the west of the CAIR region, and 2 in New England States northeast of the CAIR region.

As explained in the SNPR, the " CAIR" scenario modeled was imperfect for purposes of this analysis in that it assumed SO2 reductions on a nationwide basis ( rather than in the CAIR region only) and assumed NOx reductions requirements in a slightly different geographic region than covered by the proposed CAIR. The ideal scenario would have correctly represented the geographic scope of CAIR SO2 and NOx reduction requirements, and included source specific BART controls in areas outside the CAIR region. ( This corrected scenario has been modeled for the NFR, as explained below).

The SNPR REMSAD modeling showed that under the proposed two pronged test, CAIR controls achieved greater visibility improvement than the application of source specific BART to EGUs nationwide. The modeling predicted that the CAIR capand trade program will not result in degradation of 77 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite visibility, compared to existing ( 1998 2002) visibility conditions, at any of the 44 Class I areas considered. It also indicated that CAIR emissions reductions as modeled produce significantly greater visibility improvements than source specific BART. Specifically, for the 15 Eastern Class I areas analyzed, the average visibility improvement ( on the 20 percent worst days) expected solely as a result of the CAIR was 2.0 deciviews, and the average degree of improvement predicted for source specific BART was 1.0 deciviews. Similarly, on a national basis, the visibility modeling showed that for all 44 class I areas evaluated, the average visibility improvement, on the 20 percent worst days, in 2015 was 0.7 deciviews under the CAIR cap and trade program, but only 0.4 deciviews under the source specific BART approach.

b. Comments and EPA Responses Several commenters noted that EPA did not model the " correct" emissions scenarios to compare CAIR and BART controls. They suggested that a model run with CAIR controls in the East and BART controls in the West should be compared to a model run with nationwide BART controls.

EPA agrees ( as we have already noted in the SNPR) that the suggested comparison of model runs is a more appropriate 78 23 Because the presumptive controls in the BART guidelines are applicable to coal fired EGUs, the BART analysis does not assume controls on oil and gas fired units. However, NOx emissions from all ( not just BART eligible) oil and gas steam plants and simple cycle turbines in the CAIR region in the 2010 base case are projected to be about 40,000 tons, or less than 1.5% of the projected total 2010 EGU emissions . By comparison, the modeling of the scenario of CAIR ( with BART in the non CAIR region) resulted in 640,000 tons of NOx per year less than the projected emissions under a nationwide BART scenario. Therefore, even if the 40,000 tons of NOx emissions from oil and gas EGUs were reduced to zero under the BART scenario, CAIR will still produce significantly greater emission reductions than BART. Also, not all of the oil and gas units associated with those 40,000 tons would be eligible for BART. IPM does not Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite comparison of CAIR and BART. The SNPR better than BART analysis was limited by the availability of the model results at the time. For the NFR we have modeled nationwide BART for EGUs as proposed in the May 2004 guidelines and a separate scenario consisting of CAIR reductions in the CAIRaffected States plus BART reductions in the remaining States ( excluding Alaska and Hawaii). Additionally, we have improved the BART control assumptions ( in both scenarios) by increasing the number of BART eligible units included.

Specifically, in the SNPR analysis, controls were " required"

( i. e., assumed by the model) for BART eligible EGUs greater than 250 MW capacity, for both NOx and SO2. For today's action, BART controls are assumed for SO2 for all BART eligible EGU units greater than 100 MW, and NOx controls for all BART eligible EGU units greater than 25 MW. 23 This, 79 predict any difference in SO2 emissions from oil or gas fired units between CAIR and BART. 24 See " Memo From Perrin Quarles Associates, Inc. Re Follow Up on Units Potentially Affected by BART, July 19, 2004," as Appendix A to the " Better than BART" TSD. 25 Some Class I areas do not have IMPROVE monitors and are represented by nearby IMPROVE sites.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite along with a review of potentially BART eligible EGUs, has expanded the universe of units assumed subject to BART in the modeling from 302 to 491.24 Several commenters noted that the better than BART visibility analysis only covered 44 Class I areas and did not adequately address visibility in all areas of the country.

For the NFR, we have significantly expanded the number of Class I areas covered by the analysis. The NPR and SNPR visibility analysis was limited by the availability of observed data from Inter agency Monitoring of Protected Visual Environments ( IMPROVE) monitors during the meteorological modeling year of 1996. There was complete IMPROVE data at 44 IMPROVE sites which represented 68 Class I areas25. All of the regions of the country ( as defined by IMPROVE) were represented by at least one site, except the Northern Great Lakes region. For the final rule, the modeling has been updated to use a meteorological year of 2001. Therefore, the IMPROVE data for 2001 was used for the 80 26 This is the number of IMPROVE sites that are located at or represent Class I areas. There are additional IMPROVE protocol monitoring sites that are not located at Class I areas. 27 There are 5 Class I areas in the East and 33 Class I areas in the West ( outside of the CAIR control region) that do not have complete IMPROVE data for 2001.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite NFR better than BART analysis. For 2001, there were 81 IMPROVE sites with complete data, 26 representing 116 Class I areas. The NFR analysis accounts for visibility changes at 80 percent of the active IMPROVE sites in the lower 48 States. More importantly for today's rulemaking, the number of Class I areas in the East has been increased from 15 to 29 and now covers all IMPROVE defined visibility regions within the CAIR affected States, including the Northern Great Lakes. 27 We therefore believe the expanded geographic scope of Class I areas covered is sufficient for purposes of this analysis.

c. Today's Action We have compared the two model runs ( BART nationwide and BART in the West with CAIR in the East) using the proposed two pronged better than BART test. The results were analyzed at the 116 Class I areas that have complete IMPROVE data for 2001 or are represented by IMPROVE monitors with complete data. Twenty nine of the Class I areas are in the East and 87 are in the West. Detailed modeling results 81 28 " Demonstration that CAIR Satisfies the " Better than BART" Test As proposed in the Guidelines for Making BART Determinations," December 2004 29 See Better than BART TSD for results at each Class I Area.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite for all 116 Class I areas are contained in the Better than

BART TSD. 28 Results applicable to the better than BART proposed two pronged test are summarized below.

The updated visibility analysis reaffirms that under the proposed two pronged test, CAIR controls are better than BART for EGUs. The modeling predicts that the CAIR cap

andtrade program will not result in degradation of visibility on the 20% best or 20% worst days compared to the 2015 baseline conditions, at any of the 116 Class I areas considered. 29 With respect to the greater average improvement prong,

the modeling indicates that CAIR emissions reductions in the East produce significantly greater visibility improvements than source specific BART. Specifically, for the 29 Eastern Class I areas analyzed, the average visibility improvement,

on the 20 percent worst days, expected solely as result of the CAIR applied in the East and BART applied in the West is 1.6 dv, as compared to the average degree of improvement predicted for nationwide source specific BART of 0.7 dv.

Similarly, on a national basis, the visibility modeling showed that for all 116 class I areas evaluated, the average 82 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite visibility improvement, on the 20 percent worst days, in 2015 was 0.5 dv under the CAIR cap and trade program in the East and BART in the West, but only 0.2 deciviews under the nationwide source specific BART approach.

The modeling showed similar results for the 20% best visibility days, although there is less visibility improvement on the best days compared to the worst days.

For the 29 Eastern Class I areas analyzed, the average visibility improvement, on the 20 percent best days,

expected solely as result of the CAIR applied in the East and BART applied in the West is 0.4 dv, as compared to the average degree of improvement predicted for nationwide source specific BART of 0.2 dv. On a national basis, the visibility modeling showed that for all 116 class I areas evaluated, the average visibility improvement, on the 20 percent best days, in 2015 was 0.1 dv under both the CAIR cap and trade program in the East and BART in the West, and under the nationwide source specific BART approach. The results are summarized in table x. x.

Table x. x Average Visibility Improvement in 2015 vs. 2015 Base Case ( deciviews) 83 30 Eastern Class I areas are those in the CAIR affected states, except areas in west Texas which are considered western and therefore included in the national average, plus those in New England.

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite CAIR + BART in West Nationwide BART Class I Areas East* 30 National East* National 20% Worst Days 1.6 0.5 0.7 0.2 20% Best Days 0.4 0.1 0.2 0.1 The results clearly indicate that CAIR will achieve greater reasonable progress than BART as proposed, measured by the proposed better than BART test. At this time, we can foresee no circumstances under which BART for EGUs could produce greater visibility improvement than CAIR. However,

for the reasons noted in section IX. C. 1. above, we are deferring a final determination of whether CAIR makes greater reasonable progress than BART until the BART guidelines for EGUs and the criteria for BARTalternative programs are finalized.

D. How Will EPA Handle State Petitions Under Section 126 of the CAA?

Section 126 of the CAA authorizes a downwind State to petition EPA for a finding that any new ( or modified) or existing major stationary source or group of stationary sources upwind of the State emits or would emit in violation of the prohibition of section 110( a)( 2)( D)( i) because their emissions contribute significantly to nonattainment, or 84 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite interfere with maintenance, of a national ambient air quality standard in the State. If EPA makes such a finding,

EPA is authorized to directly regulate the affected sources.

Section 126 relies on the same statutory provision that underlies the CAIR.

In the January 30, 2004 CAIR proposal, EPA set forth its general view of the approach it expected to take in responding to any section 126 petition that might be submitted which relies on essentially the same record as the CAIR. That approach is the one EPA used in addressing section 126 petitions that were submitted to EPA in 1997 while EPA was developing the NOx SIP Call to control ozone transport. In the NOx SIP Call rule, we determined under section 110( a)( 2)( D) that the SIP for each affected State ( and the District of Columbia) must be revised to eliminate the amount of emissions that contributes significantly to nonattainment in downwind States. The emissions reductions requirement was based on the quantity of emissions that could be eliminated by the application of highly costeffective controls on specified sources in that State. In May 1999, shortly after promulgation of the NOx SIP Call,

EPA took final action on the section 126 petitions ( 64 FR 28250; May 25, 1999). The Section 126 action relied on 85 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite essentially the same record as the NOx SIP Call. In addition, we established a section 126 remedy based on the same set of highly cost effective controls. In the May 1999 Section 126 Rule, we determined which petitions had technical merit, but we stopped short of granting the findings for the petitions. Instead, we stated that because we had promulgated the NOx SIP Call  a transport rule under section 110( a)( 2)( D)  as long as an upwind State remained on track to comply with that rule, EPA would defer making the section 126 findings. The findings would be triggered at either of two future dates if specified progress had not been made by those times. The Section 126 Rule included a provision under which the rule would be automatically withdrawn for sources in a State once that State submitted and EPA fully approved a SIP that complied with the NOx SIP Call. ( See 64 FR 28271 28274; May 25, 1999.) The reason for this withdrawal would be the fact that the affected State's SIP revision would fulfill the section 110( a)( 2)( D)

requirements, so that there would no longer be any basis for the section 126 finding with respect to that State. In this manner, the NOx SIP Call and the Section 126 Rules would be harmonized. 86 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite Under the CAIR proposal, EPA received comments regarding its intended approach for acting on any future section 126 petitions that might be filed. Many commenters expressed support for the approach that EPA had outlined.

Other commenters raised issues regarding the timing of emissions reductions under a new section 126 action. Some pointed out that the CAIR compliance date would be later than the 3 years allowed for compliance under section 126.

Some were concerned that the proposed CAIR compliance date is later than many attainment dates and States may need section 126 petitions in order to get earlier upwind reductions in order to meet their attainment dates. Some questioned the legal basis for linking the two rules.

Several commenters expressed concern that EPA would be restricting the use of or weakening the section 126 provision. A number of commenters urged EPA not to prejudge any petition, but to evaluate each on its own merit. Some thought that any petitions submitted prior to designations or before States had had the opportunity to prepare SIPs would be premature and should be denied. Others suggested that CAIR might not solve all the transport problems and that States would need to retain the section 126 tool to seek further reductions. 87 Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite After issuing the CAIR proposal, EPA received, on March 19, 2004, a section 126 petition from North Carolina seeking reductions in upwind NOx and SO2 for purposes of reducing PM2.5 and 8 hour ozone levels in North Carolina. The petition relies in large part on the technical record for the proposed CAIR.

When we propose action on the North Carolina petition,

we will set forth our view of the interaction between section 110( a)( 2)( D) and section 126. In that proposal, we will take into consideration and respond to the section 126

related comments we received on the CAIR. The EPA will provide a comment period and opportunity for a public hearing on the specifics of that section 126 proposal,

including an opportunity to comment on our view of the interaction of the 2 statutory provisions.

E. Will Sources Subject to CAIR Also Be Subject To New Source Review?

The EPA did not propose any provisions in the CAIR related to new source review ( NSR). Nonetheless, we received some comments on the relationship between CAIR and the NSR provisions that may apply to emissions sources also impacted by the CAIR. Many commenters indicated that if an EGU is part of an EPA administered regional cap and trade 88 31See 40 CFR 51.165( a)( 1)( xxv) and 51.165( e), 40 CFR 51.166 ( b)( 31) and 51.166( v), and 40 CFR 51.21( b)( 32) and 52.21( z).

Section IX 3/ 2/ 2005 DRAFT Do Not Quote or Cite program for NOx and SO2, then that EGU should be exempted from NSR for the covered pollutants. The commenters cited Clear Skies legislation as containing provisions affecting NSR for covered sources. In this final rule EPA is not addressing or revising the provisions of NSR.

It should be noted that pollution control measures implemented by EGUs in compliance with the CAIR may be eligible for an exemption under the NSR pollution control project provision. 31 These provisions provide an exemption from major NSR for controls such as SCR for NOx control and wet scrubbers for SO2 control, provided that certain conditions identified in the provisions are met.