The commenter believed that the Agency's methodology for establishing unit allocations under the proposed cap and trade approach may rely exclusively on data collected in accordance with 40 CFR Part 75 monitoring standards. Although Acid Rain Program data may be the best available data for many electric utility steam generating units, the majority of the commenter's facilities have been exempted from the program, including its monitoring provisions, since the program's inception. The commenter's facilities generally began to monitor emissions in accordance with Part 75 requirements during 2002, pursuant to implementation of the NO x SIP Call Rule. In fact, EPA has accepted monitoring data collected by the commenter's facilities under 40 CFR Part 60 for purposes of all other federal allocation programs, including even the initial allocation under the NO x SIP Call Rule.

Notwithstanding the availability of more complete historic heat input data for the commenter's facilities ( which the Agency utilized in the context of the NO x SIP Call), the Agency utilized only one year of heat input in establishing a baseline value for the commenter's facilities. In fact, while the Agency identified both 2002 and 1999 heat input data for most the commenter's facilities, the Agency only utilized the 1999 data, even where the 2002 data demonstrated a higher heat input. This would pose a significant disadvantage to the commenter's facilities, which do not have the benefit of averaging the three highest years of heat input, and inexplicably have been limited to 1999 heat input data. The commenter submitted further, to the extent that the Agency has relied on heat input data that reflected an aberrational operating condition, the baseline heat input value may be inappropriately low.

For these reasons, the commenter requested an opportunity to submit complete and accurate heat input data for the years 1998 through 2002, from which the Agency could determine appropriate baseline heat input values, and mercury allocations, for the commenter's facilities.

Response:

EPA is finalizing a formula to be used to develop budgets for each state and Tribes for 2010 and 2018. That formula is, in essence, the sum of the hypothetical allocations to each affected Utility Unit in the State or Tribe, and that allocation, in turn, is based on the proportionate share of their baseline heat input to total heat input of all affected units. For purposes of this hypothetical allocation of the allowances, each unit's baseline heat input is adjusted to reflect the ranks of coal combusted by the unit during the baseline period. 5 119 Commenters indicated inaccurate data in the hypothetical unit allocations used to determine the emission budgets, but have not pointed to specific errors or provided corrected data. Thus, EPA is unable to address the commenters claim's. EPA believes that its methodology for determining the state emission budgets is accurately described in its emission budget technical support document and in the companion spreadsheet file, both in the rulemaking docket ( see Technical Support Document for the Clean Air Mercury Rule Notice of Final Rulemaking, State and Tribal Emissions Budgets, EPA, March 2005 and electronic spreadsheet file: Final CAMR Unit Hg Allocations. xls, which contains the unit level allocations).

The use of one years worth of data was done for non Acid Rain units, because this was the only available data. Non Acid Rain units in the Hg ICR inventory do not uniformly report annual heat input to EPA's Clean Air Market Division ( some OTC NO x Budget Program units may have reported ozone season heat input for 1999 2002). Baseline heat input information was collected by the Hg ICR for 1999. The fuel use and heat content data from the ICR were used to calculate 1999 annual heat input, and this single year was used as the baseline heat input ( see Budget TSD for more discussion).

With regard to commenter's request to submit more appropriate data for 1998 2002, EPA notes that it requested at proposal for commenters to submit such data. For commenters who submitted such data, EPA adjusted hypothetical unit allocations accordingly. In most instances, corrections to baseline heat input data at the unit level allocation are not likely to result in significant changes to the overall State or Tribal emissions budgets. Under the model trading rule, EPA notes that States and Tribes have the authority to allocate at the unit level and commenters can submit corrected baseline heat input to the State or Tribe prior to the allocation process.

Comment:

Several commenters ( OAR 2002 0056 2915,  3478,  4191) supported the 1999 coal type use as the basis for the adjustment of the baseline for establishing plant mercury allocations. Commenter OAR 2002 0056 3478 stated that this is the year upon which the 48 ton electric utility mercury emissions were based. Several of the commenters ( OAR 2002 0056 2915,  4191) believed using 1999 as the fuel baseline is needed to provide certainty. The commenters added, 1999 is the only year for which EPA already has data for all the coal fired EGUs throughout the country.

Several commenters ( OAR 2002 0056 2180,  2816,  2900,  2948,  3537,  3546,  3556,  3565) stated that basing plant mercury allocations on the coal rank used in 1999 would not reflect coal type switches that have occurred since the coal rank year. One commenter ( OAR 2002 0056 2180) pointed out that, therefore, units that have switched coal type since 1999 would not receive an appropriate or relevant allocation of allowances for future operation, as the allowance adjustment factor would be based on historical coal type, not the current coal type. The commenter was a joint owner of two coal units that have switched coal rank since 1999 and stated that they would be adversely affected by the proposed method for determining the allowance adjustment factor and mercury allowances. The units represented about two thirds of 5 120 the commenter's total coal capacity. These units switched coal rank from bituminous coal to sub bituminous coal to comply with the NO x SIP Call. According to the commenter, using sub bituminous coal in these units reduced the NO x emission rate by about 50 percent. The commenter stated that switching coal type was not simply a matter of ordering a different type of coal. The commenter emphasized that to use sub bituminous coal at its units, they made significant and necessary investments to the units' systems for coal transportation, coal handling, dust suppression, fire protection, particulate emissions control, and ash handling. The commenter stated that the coal switch qualified as a pollution control project under New Source Review regulations, and the decision to switch coal type came about long before the mercury cap and trade rule was proposed. The commenter asserted that the mercury trading rule's application of allowance adjustment factors should be revised to reflect coal type switches that have occurred since the baseline coal rank year, and especially for coal type switches that were done towards complying with Clean Air Act requirements and where the decision to switch coal type occurred prior to the proposed mercury rule. The commenter stated that for such situations, the final rule should enable the use of the adjustment factor for currently used coal. According to the commenter, this recommended revision would not affect the total number of national mercury allowances, only the allocation of the allowances among affected units, and would only have a very minor change in allowances allocated to other affected units. Another commenter ( OAR 2002 0056 2948) suggested that EPA should permit units that had a significant change in their coal type usage since 1999 to provide EPA with that information before allocations are finalized.

A third commenter ( OAR 2002 0056 3537) stated that in anticipation of new regulatory requirements, two Utility Units co owned by the commenter switched from eastern bituminous to western sub bituminous coal to lower NO x emissions. In 2001, the decision was made by the Corporation ( and the other co owners) to switch to sub bituminous coal, in anticipation of imminent new regulatory requirements for Georgia. According to the commenter even though the units in question were originally designed to burn this type of coal, some engineering and design work was needed to facilitate the switch. This was started in late 2001 and construction began in early 2002, in order to fully implement the switch in 2004. The commenter stated the units began to operate fully on sub bituminous coal at the beginning of 2004. The commenter noted if EPA uses the coal type used by each unit in 1999, however, to determine the adjustment factor, then no adjustment to these units' baseline will be made. Further, when Georgia ( under CAA section 111) or EPA ( under CAA section112) allocates back to these units from Georgia's mercury trading program budget, likely that same multiplier ( i. e., 1.0) instead of the higher ratio for subbituminous coal would be used. The commenter submitted that the result would be a lower allocation of mercury allowances to such units than would otherwise occur had those units been given credit for the fuel that is actually being burned. The commenter believed that such units will be " short changed," since they would not receive the amount of mercury allowances needed for the coal they are now burning   coal whose mercury emissions are by their very nature harder to control than the type combusted in 1999. The commenter claimed that such units would automatically be at a distinct competitive disadvantage vis a vis other units, who were fortunate enough not to have switched to a lower ranked coal since 1999. The commenter asserted that the result would be patently inequitable, in essence punishing the affected units for taking steps to comply with an important State and federal program for the control of a criteria pollutant, by 5 121 failing to allocate to them the allowances that correspond to actual coal usage. The commenter believed EPA should not allow these units to be so unfairly prejudiced. EPA should correct this inequity for those Utility Units that switched fuels for environmentally beneficial reasons, by allowing a unit that switched to a lower ranked coal for reasons other than the Mercury Rule to use the year the Mercury Rule is finalized as the year to determine the adjustment ratio to be used, both when computing State budgets and when allocating mercury allowances to units within the State. The commenter suggested alternatively, EPA could allow owners of those few units in this position to petition it ( or the relevant State) for use of a different adjustment ratio that matches the real world coal use at such units.

Several other commenters ( OAR 2002 0056 2911,  3546,  3556) cited circumstances leading to fuel switches that would be inequitable to the Utility Unit. One of these commenters ( OAR 2002 0056 3546) believed EPA should permit units that had a significant change in their coal type usage in connection with mine closures or environmental purposes to provide EPA with that information before allocations are finalized so that EPA could use the adjustment factors that more accurately reflect the coal actually being used at a unit.

The other commenters ( OAR 2002 0056 2911,  3556) stated that allocations of allowances based on the 1999 fuel blend would be detrimental to those units that have increased the percentage of western fuel burned, as mercury from western coal is harder to remove, therefore a larger allocation is necessary to prevent fuel bias. The commenter recommended that more recent and representative data be used to allocate allowances. The commenter believed this would ensure that allocations to the states, with units that have switched to western coal, would be done in a manner that would not to create a competitive disadvantage due to an inappropriate allocation of allowances.

One of these commenters ( OAR 2002 0056 2911) included a graph showing the substantial changes to fuel blends that have occurred since 1999 due to the lower cost and compliance with the Acid Rain provisions of the Clean Air Act.

One commenter ( OAR 2002 0056 3565) had seven units located at three different plants, which burned bituminous coal in 1999 but switched to sub bituminous coal in 2000, which they continue to burn today. The commenter stated that these seven units should receive the higher heat input allocation factor 1.25 for sub bituminous units and not the 1.0 factor for bituminous units. The commenter strongly urged EPA to use the year 2003, or even 2004, to determine coal type usage.

One commenter ( OAR 2002 0056 2816) noted that EPA proposed to use 1999 Information Collection Request ( ICR) data to determine the coal type usage patterns of units subject to regulation. The commenter stated that these data are important because they determine the factors that will be used to adjust heat input based on coal type. The commenter submitted that using 1999 data to determine coal usage patterns would result in incorrect information regarding coal use by a majority of the commenter's units, as well as the units of other companies that switched from high sulfur bituminous coals to low sulfur sub bituminous coal during and after 1999 in order to comply with requirements for reducing SO 2 emissions for Phase II of the Title IV 5 122 Acid Rain Program. The commenter submitted that incorrect identification of the coals actually being used by these units would result in significant penalty in allocating allowances to any such unit. The commenter submitted that to more fairly and accurately represent the coal type usage pattern for such units, EPA should implement one of the following proposals:

° EPA should permit companies with units that had a significant change in their coal type usage during or after 1999 to provide that information to EPA before allocations are finalized. EPA should revise its coal type usage data for those units and use the adjustment factors that accurately reflect the coal actually being used at such units. EPA could limit manipulation of the factors by restricting coal type usage data to an annual period before December 31, 2004; or ° Rather than using the ICR data to set allowance allocations, EPA should use the most recent publicly available fuel data ( 2004) such as that provided to the Department of Energy on Forms 423 or 906. These data specify the type of fuel used at each coal fired power generating facility on a current basis.

One commenter ( OAR 2002 0056 2900) noted the proposed 2018 allowance allocations are based on the coal burned at the affected units during the baseline period, which is the average of the three years of highest heat input from 1998 2002. EPA proposed it would use this same methodology to set 2010 allowance allocations. The commenter stated that subsequent to the proposed baseline period of 1998 2002, many coal fired EUSGUs have switched or are in the process of switching from the use of bituminous coal to sub bituminous coal to meet the requirements of other programs. The commenter believed EPA must allow such units the option of establishing a different baseline for allowance allocations. According to the commenter, failure to do so would result in a highly inequitable system that severely penalizes units that recently have switched to lower sulfur coal.

For units that switched or partially switched from bituminous to sub bituminous coal following the proposed baseline period of 1998 2002, the commenter urged EPA to consider an adjustment when establishing the 2010 cap and to revise the proposed 2018 allocations. The commenter suggested this could be accomplished by allowing units to choose an alternative three year baseline that encompasses the switch. For units that only partially switched to sub bituminous coals, the heat input could be proportioned to reflect the amount of sub bituminous and bituminous coal burned during the revised baseline period when any blending occurred, similar to the MACT provision allowing mercury emissions to be weighted proportionally by fuel type when blending.

The commenter understood that, if EPA establishes a cap in 2010, then the Phase I allowance allocations would be included in the final rule. The commenter noted that this would not allow units that have switched to sub bituminous coal to select an alternative baseline period. Therefore, for Phase I, the commenter proposed that EPA deal with any additional allowance allocations to alternative baseline units through the establishment of an allowance set aside. For Phase II, the commenter proposed that EPA revise the allowance allocations once units have submitted their alternative baseline to EPA. The commenter further recommended that alternative 5 123 baseline units be required to use the lower heat input from the 1998 2002 time period or the alternative baseline period. Specifically, units would demonstrate an alternative baseline for purposes of determining the coal type on which their Phase II allowance allocations should be based and their eligibility for the Phase I alternative baseline allowance set aside. However, for determining heat input, the commenter recommended the unit would be required to use the lower of the baseline selected by EPA from the 1998 2002 time frame ( EPA used the average of the highest three years of heat input from the 1998 2002 time frame in determining the proposed Phase II allowance allocations for the SNPR) or the alternative baseline. The commenter believed this requirement would prevent units from gaming the system.

The commenter did not have a specific recommendation as to the size of the alternative baseline allowance set aside that would be appropriate for Phase I but believed that EPA could readily determine this information by sending out a request and reopening the comment period on this narrow issue to determine which units have switched to sub bituminous coal or are in the process of switching. The commenter submitted the responses would provide EPA with a reasonable estimate of the amount of allowances needed for the set aside.

Response:

EPA agrees with commenters that 1999 coal type is appropriate for the use as the basis for the adjustment of the baseline for establishing plant mercury allocations. 1999 is the only year for which EPA already has data for all the coal fired power plants throughout the country, is the year upon which the 48 ton electric utility mercury emissions estimate was based, and the emissions EPA examine in developing its coal adjustment factors.

EPA is finalizing a formula to be used to develop budgets for each state and Tribes for 2010 and 2018. That formula is, in essence, the sum of the hypothetical allocations to each affected Utility Unit in the State or Tribe, and that allocation, in turn, is based on the proportionate share of their baseline heat input to total heat input of all affected units. For purposes of this hypothetical allocation of the allowances, each unit's baseline heat input is adjusted to reflect the ranks of coal combusted by the unit during the baseline period. Commenters did not provide data that indicated how coal switching since 1999 would impact, if at all, the state emissions budgets.

Under the model trading rule, EPA notes that States and Tribes have the authority to allocate at the unit level and they can use a different baseline year for coal type used to determine unit level allocations.

Comment:

One commenter ( OAR 2002 0056 3431,  3400) stated that upon review of Appendix B to the Preamble ( Unit Allocations) and EPA's April 5, 2004 memorandum to the Docket titled " Revisions to Unit Level Allocations and State Emissions Budgets for the Proposed Mercury Trading Rulemaking" it appeared that the commenter's Warrior Run allocation ( 21 ounces) was incorrect and should be greater. ( The commenter noted that Warrior Run was a 180 MW 5 124 coal fired power plant located in Maryland.) The commenter noted that in the April 5, 2004 memo, EPA stated that the figures in the spreadsheet that accompanied the memo would replace the hypothetical unit allocations in Appendix B and the state emission budgets in the regulatory text of the Supplemental Rulemaking. The commenter stated that if they are interpreting the spreadsheet correctly, EPA's spreadsheet showed zero ( 0) heat input for the plant trom 1998 to 2001 and 15,587,456 mmBtu in 2002. The correct heat input ( mmBtu) at Warrior Run trom coal was as follows:

1999 2000 2001 2002 2003 1,128,625 14,890,200 15,495,345 15,222,786 15,579,265 The commenter stated that start up operations commenced in 1999, explaining the low heat input for that year. The commenter believed that because EPA did not record any heat input for 1999 to 2001, the baseline data that EPA used to calculate the commenter's allocation was probably incorrect. The commenter requested that EPA verify its heat input information for Warrior Run and update the information and calculations used to calculate Warrior Run's allocations and Maryland's state emissions budgets.

The commenter observed that as provided for in the Supplemental Notice of Proposed Rulemaking, the other plants' allowance allocations were based on their proportion of the total state's heat input. The commenter stated for example, the combined heat input for the three units at Dickerson Station was approximately 11 percent of the total Maryland heat input, and the station was allocated 647 allowances which was 11 percent of the total Maryland 2018 mercury allocation. Based on the commenter's heat input figures above, Warrior Run's heat input was approximately 5 percent of the total Maryland heat input and therefore the commenter should receive roughly 5percent of the total Maryland budget, or approximately 296 allowances. The commenter stated that however, the allocation for Warrior Run in the April 2004 memo was only 21 allowances   0.35 percent of the total Maryland budget instead of the 5percent that should have been provided.

The allocation issue was of great concern to independent power producers ( IPPs) such as the commenter. The commenter stated that passing through increased costs to comply with new environmental regulation in rates could rectify shortfalls in allowance allocations for power plants owned by traditional utilities; however, IPPs would not have this luxury and must absorb such increased costs against the plant's bottom line.

Response:

EPA updated the heat input data for 1 plant based on commenter input. EPA data was missing heat input for the AES Warrior Run plant in Maryland for the years 1998 2001. The data submitted by the commenter is highlighted in the heat input data spreadsheet available in the docket ( see electronic spreadsheet file: Final CAMR Unit Hg Allocations. xls, which contains the unit level allocations). 5 125 5.6.4 Tribal Emission Budgets Comment:

Several commenters ( OAR 2002 0056 2010,  2118,  2380,  3413,  3469,  3549,  3550,  3551) opposed cap and trade, but stated that if EPA adopts this approach the rule must make provisions for tribal allowances.

One commenter ( OAR 2002 0056 3469) stated that in the event a cap and trade program is implemented by the EPA to reduce SO 2, NO x or mercury, future tribal energy development projects and existing power plants burning Indian country coal that has a higher sulfur content than SPRB coal, i. e., more than 1.2lb SO 2/ mmBtu, will be allocated allowances ( a) as ultimately determined by EPA for NO x and mercury and ( b) as currently scheduled under Title IV for SO 2 or otherwise under a separate CAIR program, depending on its structure. These new projects and plants would be permitted to use these allowances according to the following formula:

° 1 allowance for 2 tons of SO 2 effective immediately through 12/ 31/ 05 ° 1 allowance for 3 tons of SO 2 effective 1/ 1/ 06 forward ° 1 allowance for 2 tons of NO x effective with CAIR implementation ° 1 allowance for 2 ounces of Mercury effective with CAIR and Mercury Rule implementation The commenter noted that the SO 2 formula above would only apply to noncompliance coal ( i. e. greater than 1.21b SO 2/ mmBtu). The commenter believed the accelerated schedules for the SO 2 formulae above are justified given that the mere announcement of the CAIR proposal is having real and immediate impacts on the Title IV SO 2 allowance market with real and current impacts on Indian country coal. ( Allowance prices have already increased by 80 percent largely due to announcement of the proposal). The commenter submitted that granting these preferential allowance ratios will have no negative impact on national emissions. SO 2 emissions at plants using Indian country coal will not increase emissions nationally as these plants are already scrubbed and compliant with NSPS. The commenter also noted the SO 2 ratio is based upon the greater amount of sulfur content in Montana Indian country coal when compared to SPRB coal. EPA intends to increase the market price of Title IV allowances by reducing available supply, thus providing economic justification for power plants to retrofit emission control technology. The commenter stated that by intertwining the CAIR with Title IV, the proposal would increase SO 2 costs for all plants across the country, not just in the 29 states and D. C. The commenter believed that volatility in the SO 2 allowance market could drive changes in fuel choices at clean plants using Indian coal, or could even cause plants to shut down, depriving the tribes of coal sales royalty and tax revenues, employment, and other economic benefits they currently rely on to sustain their nations.

Response: 5 126 EPA has provided budgets to tribes in the final rule that have existing sources on their land. Requirements for new tribal sources under CAMR are discussed in the preamble.

EPA understands and is sympathetic to the economic situation of the specific tribe's comments. EPA staff and officials have met with one of the commenters regarding their concerns regarding the CAIR rulemaking, and considered the comments and proposals put forth by the commenters. EPA's analysis of the Crow tribe's economic situation, and discussions with the commenters, suggest that the Tribe should not experience adverse economic impacts as a result of the NO x caps under CAIR. Rising SO 2 prices, however, may lead to the erosion of the competitive advantage currently held by coal from Absaloka mine, and could potentially force the mine to shut down. However, the erosion of this competitive advantage is not a direct effect of CAIR, as the price advantage held by Absaloka coal is likely to disappear under title IV alone.

The EPA has determined that we can not implement the commenters recommendation for the following reasons: The proposed Hg allowance retirement ratios would undermine both the environmental certainty and economic stability of the cap and trade program. If EPA were to allow power plants burning Indian country coal, and future tribal energy development projects to retire allowances at a less than one to one ratio, the certainty of the cap level, and the resulting knowledge of the value of an allowance would be jeopardized. This lack of certainty about the cap is unacceptable for a cap and trade program, which function most successfully when environmental and economic certainty have been established.

Comment:

Several commenters ( OAR 2002 0056 2380,  3413,  3457) noted that Tribal organizations opposed cap and trade, but asked EPA to include these provisions. Commenter OAR 2002 0056 2380 suggested: ( 1) Tribes should be included where they are omitted. ( 2) Restrict trading. EPA should set an appropriate ceiling for the number of credits any source may hold and use at a given time. ( 3) Require a higher trading ratio for facilities with high emissions to encourage sooner installation of controls. It should cost more to buy credits than to not install controls. Commenter OAR 2002 0056 3457 recommended that any allowance system forbid trading and require allowances to expire or be discounted over time.

Response:

In the final rule, EPA has established Hg emission budgets for tribes with existing sources. Requirements for new tribal sources under CAMR are discussed in the preamble. EPA believes that a cap and trade program for Hg will provide for an efficient means of achieving the necessary level of emissions reductions. Allowing for trading maximizes the cost effectiveness of emissions reductions. Sources that can reduce emissions most cheaply will do so, and sell any remaining allowances to sources that cannot. Sources have an incentive to endeavor to reduce their emissions below their allowance allocation; if they can do so cost effectively, they may then sell their excess allowances on the market. In practice, the sources that can reduce emissions cost effectively under a cap and trade program are the largest ( and frequently high emitting) sources. 5 127 Comment:

Several commenters ( OAR 2002 0056 2380,  3413) noted that the tribal authority rule allows tribes to adopt parts of air programs without being subject to deadlines or other requirements imposed on states. The commenters submitted the proposed rule should include a mechanism for tribes to enter the cap and trade program if and when they want. At minimum, tribes need allocations for plants already located on Indian land or planning to do so. The commenters also submitted that in absence of adequate resources for a tribe to enter the program ( i. e., inability to develop and implement a tribal implementation plan), EPA should develop a Federal Implementation Plan for them.

Response:

EPA has provided budgets to tribes in the final rule that have existing sources on their land. The requirements of tribes under CAMR are discussed in the preamble.

Comment:

One commenter ( OAR 2002 0056 3469) stated that if CAA provisions do not permit an exemption for new plants in Indian country, the EPA should make available to developers or new consumers of Indian country energy a pool of SO 2, NO x and mercury allowances equal to 5 percent of all allocations at set prices. The commenter suggested that these prices would be established as follows:

° 50 percent of the mercury price modeled by EPA;

° Average SO 2 allowance price 2000 2003; and ° 50 percent of the NO x price modeled by EPA.

Response:

EPA has allocated allowances to States and tribes on the basis of heat input and coal type. States have the authority to determine how to allocate allowances to sources within the State. Allocations to States and tribes are discussed in section IV of the preamble.

Comment:

Several commenters ( OAR 2002 0056 1961,  3469) recommended that new Tribal plants be exempted from the requirement to purchase allowances as long as they have NSPS Subpart Da technology operational when they initiate operations and they adhere to monitoring and reporting requirements, demonstrating continuous compliance. One commenter ( OAR 2002 0056 3469) submitted given that lignite units and the small number of new plants that could be built by the Tribes will contribute a minute amount of mercury to the global pool, exempting new plants will not materially affect any caps adopted by the EPA. One commenter ( OAR 2002 0056 1961) 5 128 added that if EPA does not exempt them, EPA should make an energy pool available for mercury allowances equal to 5 percent of all allocations at set prices ( 50 percent of mercury prices modeled by EPA). This will help tribes who have developed their coal reserves.

Response:

In the final CAMR, new sources will be covered under the Hg cap of the trading program, and will be required to hold allowances equal to their emissions. EPA maintains that is essential to include new sources under the cap to ensure that environmental goal of reducing mercury emission is achieved. With new sources under the cap, the environmental goal continues to be achieved despite future growth in the electric power sector, as older coal fired generation is retired and replaced new coal fired generation. Requirements of new tribal sources under CAMR are discussed in the preamble.

5.7 ALLOCATION METHODOLOGY 5.7.1 Allocation Mechanisms Comment:

One commenter ( OAR 2002 0056 2860) recommended that a parallel allowance allocation methodology similar to that used under the IAQR should be used. The commenter believed this would promote consistency among programs.

Response:

EPA agrees with commenter and has provided an example unit allocation methodology for the Hg model trading rule as consistent as possible to the CAIR NO x allocation methodology.

Comment:

One commenter ( OAR 2002 0056 1608) believed that in order to establish consistency across the country, the EPA should develop the model trading rules in a way that maximizes appeal to all of the states affected. The commenter however urged the EPA to assure that any allocation methodology developed for mercury allowances under a trading program does not penalize sources that are already achieving co benefit reductions through the operations of existing control equipment.

Response:

EPA believes its example allocation methodology should appeal to all states. EPA also maintains that coal adjustment factors for existing units address commenters concerns with regard to co benefit reductions.

Comment: 5 129 Several commenters ( OAR 2002 0056 2830,  2835,  2915,  3440,  3469,  3478,  3546,  4191,  4891) stated that allowances should be allocated only to affected EGUs. Four of the commenters ( OAR 2002 0056 2915,  3440,  3478,  4191) explicitly stated that mercury allowances under the mercury rule should be allocated to coal fired EGUs only.

Response:

The final CAMR requires reductions from coal fired power plants and as such States can only allocate to these affected units.

Comment:

One commenter ( OAR 2002 0056 2180) stated that allowance allocations should be periodically updated to reflect changes in capacity utilization ( capacity factor), unit retirements, commencement of operation of new units, and changes in coal rank. The commenter suggested that an appropriate first update might be when Phase II of the cap comes into effect, with at least a three year lead time for beginning the updated allocation. Thereafter, allowances could be allocated only for specific future periods, e. g. 5 to10 years.

Response:

Under its example allocation methodology, EPA has finalized for the model rule a " modified output" approach. This example method involves input based allocations for existing coal units ( with different ratios based on coal type), with updating to take into account new generation on a modified output basis. It also utilizes a new source set aside for new units that have not yet established baseline data to be used for updating.

Under the EPA example method, existing units as a group will not update their heat input. This will eliminate the potential for a generation subsidy ( and efficiency loss) as well as any potential incentive for less efficient existing units to generate more. This methodology will also be easier to implement because it will not require the updating of existing units' baseline data. Retired units will continue to receive allowances indefinitely, thereby creating an incentive to retire less efficient units instead of continuing to operate them in order to maintain the allowance allocations. Moreover, new units as a group will only update their heat input numbers once   for the initial 5 year baseline period after they start operating. This will reduce any potential generation subsidy and be easier to implement, because it will not require the collection and processing of data needed for regular updating. See preamble for further discussion of example methodology.

This methodology is offered simply as an example, and individual States retain full latitude to make their own choices regarding what type of allocation method to adopt for Hg allowances and are not bound in any way to adopt the EPA's example.

Comment: 5 130 Several commenters ( OAR 2002 0056 2862,  2911,  2922,  2948,  3546,  3556,  3565) supported permanent mercury allowance allocations. One commenter ( OAR 2002 0056 2948) believed permanent allocations of mercury allowances would provide units with the greatest amount of certainty, would provide units with an incentive to improve energy efficiency, and would require fewer resources to administer than an updated allocation system. Several commenters ( OAR 2002 0056 2911,  3556) believed that such a system would provide units with certainty regarding their allowances, facilitating planning for the implementation of controls and turnover of the generating fleet  all of which would work towards the reduction of mercury emissions while maintaining the reliability of the power supply and the integrity of the grid.

One commenter ( OAR 2002 0056 2862) stated that a permanent allowance allocation would provide certainty and aid in planning. The commenter added that a necessary part of a permanent allocation scheme would be to include a new source set aside. The commenter believed a permanent allocation approach coupled with a new source set aside would be less complicated than EPA's proposed updating approach and would provide units with the greatest amount of certainty while providing a mechanism for new sources to receive allowances.

The commenter ( OAR 2002 0056 2721) supported free distribution of allowances that are permanently assigned to the affected unit. The commenter stated that allowing a periodically ( 5 years in EPA example) allocation methodology that would incorporate new units would cause uncertainty in planning for environmental compliance strategies. The commenter believed that allowances should be issued on a heat input basis using the established baseline.

Response:

As discussed in the final rule preamble, under its example allocation methodology, EPA has finalized for the model rule a " modified output" approach. This example method involves input based allocations for existing coal units ( with different ratios based on coal type), with updating to take into account new generation on a modified output basis. It also utilizes a new source set aside for new units that have not yet established baseline data to be used for updating. EPA is offering States flexibility regarding allocation of allowances to sources. This includes the flexibility to create new source set asides and/ or to issue allowances on a permanent basis. As discussed in the preamble, EPA does not believe these flexibilities impact the total cost or environmental benefits of the overall rule.

The commenter is also inconsistent in supporting a new source set aside while condemning programs that adjust allowance allocations periodically. A new source set aside ( where unused allowances are returned to existing sources) effectively adjusts allocations periodically.

Comment:

One commenter ( OAR 2002 0056 2721) recommended that the allocations of allowances are based on the baseline heat input. 5 131 Response:

As discussed in the final rule preamble, under its example allocation methodology, EPA has finalized for the model rule a " modified output" approach. This example method involves heat input based allocations for existing coal units ( with different ratios based on coal type), with updating to take into account new generation on a modified output basis. It also utilizes a new source set aside for new units that have not yet established baseline data to be used for updating. EPA is offering States flexibility regarding allocation of allowances to sources.

Comment:

One commenter ( OAR 2002 0056 2181) agreed with EPA that there are significant benefits associated with an allocation method that allows for updating and felt that the rolling annual updating system, determining allocation for a single control period six years in advance, would be a reasonable time period ( given the approximate amount of time required to permit and construct a coal fired power plant) and one that the commenter would encourage States to adopt. The commenter submitted however, that the updating approach has one major flaw in that the initial allocation baseline does not change over time. This means that existing plants would continue to receive allowances in future years, even if they are shut down. On the other hand, new plants would receive allocations forever based on their initial years of operation, which could be significantly less than their ultimate operating levels due to operation and competitive limitations. The commenter believed strongly that an updating mechanism with responsive adjustments that would reflect the actual operation both in the near term and future years is the appropriate method that EPA should adopt.

Response:

Under the EPA example method, existing units as a group will not update their heat input. This will eliminate the potential for a generation subsidy ( and efficiency loss) as well as any potential incentive for less efficient existing units to generate more. This methodology will also be easier to implement because it will not require the updating of existing units' baseline data. Retired units will continue to receive allowances indefinitely, thereby creating an incentive to retire less efficient units instead of continuing to operate them in order to maintain the allowance allocations. Moreover, new units as a group will only update their heat input numbers once   for the initial 5 year baseline period after they start operating. This will reduce any potential generation subsidy and be easier to implement, because it will not require the collection and processing of data needed for regular updating. See preamble for further discussion of example methodology.

Comment:

One commenter ( OAR 2002 0056 2547) supported EPA's requirement that all states adopt the " hypothetical" hybrid allowance allocation approach it describes in the preamble of the Supplemental Rule. The commenter submitted that since many facilities are exploring the use of Powder River Basin coals to meet reduced SO 2 emission requirements of the proposed CAIR 5 132 rule, the mercury allocation method should be structured so as not to disadvantage units that switch to this higher mercury content fuel after promulgation of the mercury rule. The commenter believed options to consider would be not using adjustment factors at all, or if a facility switches fuels between the three listed fuel types   bituminous, sub bituminous, and lignite, that the facility notify the state agency requesting additional allowances be allocated ( or forfeiting allowances where appropriate) based upon the difference between the average heat inputs calculated in 60.4142( a)( 1)( i)( A C) for the fuel type for which the allocations were initially determined and for the new fuel type. The commenter stated this should be done in the spirit of promoting multi pollutant emission reduction, and to aid in achieving the goals of the CAIR.

Response:

As discussed in the final rule preamble under EPA's example allocation methodology, EPA is finalizing that if states want to have allocations reflect the difficulty of controlling Hg, they might consider multiplying the baseline heat input data by ratios based on coal type, similar to the methodology used to establish the State Hg budgets in today's final rulemaking. In today's rulemaking for the purposes of establishing State budgets, EPA is using the coal adjustment factors of 1.0 for bituminous coals, 1.25 for subbituminous coals and 3.0 for lignite coals. In this example allocation methodology for States, EPA is also using these adjustment factors. EPA is offering States flexibility regarding allocation of allowances to sources. This includes the flexibility to not use coal adjustment factors.

Commenter:

The commenter ( OAR 2002 0056 2181) believed that in its discussions of allowance allocation methodology, the EPA argued, " allowance allocation decisions in a cap and trade program largely reflect distributional issues, as economic forces would be expected to result in economically efficient and environmentally similar outcomes." The commenter disagreed with this conclusion, and believed that allocation choices could have a significant impact on economic and environmental outcomes. The commenter claimed that several studies supported this position and discussed the potential economic " co benefits" of an output allocation standard. For example, a study by the Northeast Midwest Institute concluded that an output based allocation standard could " advance an array of innovative technologies that would offer enormous potential to improve efficiency and enhance the environment." Likewise, a policy report by the Pew Center for Climate Change concluded that an output based allocation standard " could significantly affect the ability of new, highly efficient generation technologies to enter the market." Conversely, the Report also concluded that input allocation would " put new investments in clean technologies at a competitive disadvantage."

The commenter noted that the allocation approach recommended by the EPA would be a hybrid approach that would include some of the desirable components but would be lacking in other areas. EPA first recommended that existing sources follow an input based system with different allocation ratios based on coal type. Next, it recommended accommodating new sources through updates to the allocation on a modified output basis, without differentiating between coal types. The commenter welcomed the second approach that EPA selected for new sources as a 5 133 step towards a full output based allocation system. The commenter believed that output based allocation would be the appropriate method for all sources, new and existing. While the commenter appreciated that the hybrid is an attempt to introduce a compromise approach, the commenter believed the result would perpetuate a disturbing trend toward developing two sets of environmental rules within the nation's power sector  one for existing power sources and one for new sources. Such a two tiered system not only would create inequities among competitors, it would send market signals that may, in the long run, lead to unintended consequences to market structures within the power sector such as favoring existing generators over new entrants and regulated utilities over independent producers.

Several commenters ( OAR 2002 0056 3437,  4139) recommended that allowances be set based on energy output. Commenter OAR 2002 0056 3437 stated that would reward and encourage efficiency. Similarly, Commenter OAR 2002 0056 4139 submitted an energy output model would reward conservation and renewable energy sources and encourage cleaner technology development.

Response:

As discussed in the final rule preamble, under its example allocation methodology, EPA has finalized for the model rule a " modified output" approach. This example method involves heat input based allocations for existing coal units ( with different ratios based on coal type), with updating to take into account new generation on a modified output basis. It also utilizes a new source set aside for new units that have not yet established baseline data to be used for updating.

The EPA believes that allocating to existing units based on a baseline of historic heat input data ( rather than output data) is desirable, because accurate protocols currently exist for monitoring this data and reporting it to EPA, and several years of certified data are available for most of the affected sources. EPA expects that any problems with standardizing and collecting output data, to the extent that they exist, can be resolved in time for their use for new unit calculations. Given that units keep track of electricity output for commercial purposes, this is not likely to be a significant problem.

EPA is giving States flexibility with regards to the allocations of the its Hg budgets to sources. EPA notes that its example " modified output" allocations approach incorporates key aspects of an output based updating system and provides incentives for efficient new units. Additionally, EPA reiterates that use of output based allocation methodologies, if not updated, do not provide incentives for behavior or for new generation. They only provide a one time transfer amongst existing sources.

Comment:

One commenter ( OAR 2002 0056 3443) stated that the model rule lays out a rational program for periodic redistribution to individual sources. The commenter suggested that the initial allocation period be extended from 5 to 8 years since that would align with the 2018 Phase 5 134 II compliance date. This would avoid an unnecessary reallocation prior to the 2018 Phase II compliance date. The commenter noted that the model rule proposed that allocations after the initial allocation period be on an annual basis using the original baseline heat inputs for existing units. For new units, these allocations would be based on the average of the high three year heat inputs ( calculated from generation and an 8000 Btu/ kwh heat rate). The commenter believed that a proposal with an 8 year initial allocation would provide a sufficient planning horizon for responding to changes in allocations. In the same vein, the commenter supported EPA's proposal to make allocations in perpetuity to retired units as it would provide owners an incentive to retire higher emitting sources, creating a multi pollutant ( SO 2, NO x and Hg) reduction benefit.

Another commenter ( OAR 2002 0056 3444) stated to ensure that companies are able to recover investments made in control equipment and use of clean technologies, the commenter believed the initial allocation of allowances should be fixed for the existing sources for the period from 2010 until 2020. The commenter stated that the certainty associated with control equipment and construction investment decisions rely on a source's ability to realize anticipated allowance excesses to generate revenue required for those investments. The commenter maintained that by allocating on a 10 year basis EPA will maintain a minimal level of certainty in Utility Unit investments and also provide a mechanism for mercury allowances to encourage new coal fired Utility Unit entrants. The commenter believed that maintaining fuel flexibility is key to the security and reliability of the electrical grid and national energy supply.

One commenter ( OAR 2002 0056 4132) stated that EPA must provide allocations, which align with the long term nature of the emission control system investments. The commenter submitted the strategic and financial planning process involved with the industry installing billions of dollars of new pollution control equipment would be very complex. The commenter added that forecasting the value of emission allowances ( sale or purchase) would be difficult. The commenter believed that if there is no certainty in the number of allowances provided in later years, the economic analysis for such projects becomes speculative.

The commenter strongly encouraged that EPA allocate mercury emission allowances for a time period that would align with the economic considerations of the air pollution control equipment required for this air quality improvement. The commenter submitted a perpetual allocation consistent with the current Clean Air Act SO 2 allocation would be appropriate and necessary for utilities to determine the proper investment strategy. The commenter also submitted that early reduction credits should be awarded and could be allocated for a lesser time period. The commenter also believed the cap and trade system should not be subject to flow control. The commenter stated flow control would greatly reduce incentives for early reductions and hinder economic analysis.

Response:

As discussed in the final rule preamble, under its example allocation methodology, EPA has finalized for the model rule a " modified output" approach. Under the example method, allocations are made from the State's Hg budget for the first five control periods ( 2010 through 2014) of the model cap and trade program for existing sources on the basis of historic baseline 5 135 heat input. The allowances for 2015 and later will be allocated from the State's Hg budget annually, six years in advance, taking into account output data from new units with established baselines ( modified by the heat input conversion factor to yield heat input numbers). EPA believes this 5 year period provides enough certainty and planning time horizon.

Comment:

One commenter ( OAR 2002 0056 2267) noted that EPA discussed whether allocations should be based on baseline heat input or baseline generating output under the cap and trade approach. 69 FR 12408. The commenter objected to a strict output based allocation method. The commenter submitted that the smaller boilers and generators owned and operated by municipalities generally are less efficient in terms of energy output per heat input than the large boilers and generators operated by the large utilities. The commenter believed municipal power generators would be placed at an additional competitive disadvantage by the budgets being set on this basis. Adding this to the disadvantage of a smaller customer base over which to spread the emission control costs, municipal power generators would face multiple competitive disadvantages relative to large electric utilities.

Ensuring that new units have fair access to allowances was a concern for the commenter ( OAR 2002 0056 2068). In concert with the EPA's " example methodology," the commenter suggested allocations be determined according to the baseline heat input of affected units. As outlined in the Supplemental Notice, initial allocations for existing sources should be made for the first five control periods at the start of the program on the basis of heat input and take into consideration coal type. After the first five years, the budget should be distributed on an annual basis, taking into account data from new units. The baseline heat input for units should be determined by averaging the three highest heat input years out of a five year period, and allowances should be reallocated after each subsequent five year period.

Response:

As discussed in the final rule preamble, under its example allocation methodology, EPA has finalized for the model rule a " modified output" approach. This example method involves heat input based allocations for existing coal units ( with different ratios based on coal type), with updating to take into account new generation on a modified output basis. It also utilizes a new source set aside for new units that have not yet established baseline data to be used for updating.

Comment:

One commenter ( OAR 2002 0056 2862) stated that allocations to retired units should be permanent. The commenter noted that EPA's definition of the baseline for calculating cap and trade emission allowances does not address the issue of how to treat units retired since the 1998 2002 proposed baseline period ( 69 FR 4703 and proposed 40 CFR 60.4105 of the SNPR). The commenter submitted that treatment of retired units is, however, very important. The commenter's position was that units retired since the baseline period should receive budget 5 136 allowances. The commenter believed if allocations were not made to retired units, the rule effectively would discourage utility system modernization and penalize environmental improvement efforts.

The commenter stated ideally, EPA's rules should provide incentives for utilities to retire existing coal fired generating plants and replace them with plants that are more efficient and equipped with state of the art environmental controls. At a minimum, utilities that retire units that were operating during the baseline period should not be penalized. The commenter explained this means that owners should be allowed to hold allowances for retired units that were operating during the baseline period, and be able to apply those allowances as eligible emission currency in the cap and trade program. The commenter concluded that a permanent allocation system would ensure that retired units retain their allowances.

One commenter ( OAR 2002 0056 4139) stated that future allocations should be set at less than the shutdown facility if that facility is replaced. The replacement facility should meet a new source limit to emit less mercury than the shutdown plant it replaced. The commenter submitted that if permitting and construction is not begun in a specified reasonable time, there should be a decrease over time in the allocation for the shut down declining to zero. The commenter added the overall state budget should also be decreased as described.

Response:

As discussed in the final rule preamble, under its example allocation methodology, EPA is finalizing January 1, 2001 as the cut off on line date for considering units as existing units. Under the EPA example method, existing units as a group will not update their heat input. This will eliminate the potential for a generation subsidy ( and efficiency loss) as well as any potential incentive for less efficient existing units to generate more. This methodology will also be easier to implement because it will not require the updating of existing units' baseline data. Retired units will continue to receive allowances indefinitely, thereby creating an incentive to retire less efficient units instead of continuing to operate them in order to maintain the allowance allocations.

Comment:

One commenter ( OAR 2002 0056 2519) encouraged EPA to incorporate a provision to update allowance allocations to reflect changes in electricity generation. The commenter offered for example, the West is one of the fastest growing regions of the country, and the increasing population growth will mean increased electricity demand. In order to keep coal as a viable option for such new generation, the allowance allocation should be updated periodically to match increases and shifts in power generation at existing sources and new sources. Toward that end the commenter recommended that the allowance allocation should be updated every five years.

Response: 5 137 As discussed in the final rule preamble, under its example allocation methodology, EPA has finalized for the model rule a " modified output" approach. This example method involves heat input based allocations for existing coal units ( with different ratios based on coal type), with updating to take into account new generation on a modified output basis. It also utilizes a new source set aside for new units that have not yet established baseline data to be used for updating.

Comment:

One commenter ( OAR 2002 0056 2267) requested that EPA make a change to the rule to allocate additional allowances to the entities in recognition of the their foresight and progressive in investment in hydroelectric power ( or other green power) when cheaper energy choices could have been made. As it stood, the commenter's municipality ultimately would be penalized, rather than rewarded, for its early focus on reducing emissions from its power generation system. To address this situation, the commenter requested that the budget allocation be based on potential or projected heat input rate for entities such as the commenters. By granting this request, EPA would ensure that the commenter's and other similar entities have enough allowances to provide reliable power generation at an affordable price. As an alternative solution, the commenter requested that EPA provide in its model trading program rules for the use of a different time period to calculate baseline heat input for situations described above. The commenter cited precedence under the Clean Air Act for substitution of baseline data when a baseline period is not representative of normal source operation. See 40 CFR 52.21( 21)( ii) ( NSR rules). The commenter stated EPA has recognized that it should have discretion to allow the use of a different time period upon a determination that it is more representative of normal source operation. The commenter recommended that EPA should exercise similar discretion in this case.

Response:

State are required to achieve the mercury reduction requirements by reducing Hg emissions from coal fired power plants. States are welcome to use set asides ( size determined by the State) for new units and any special policy objectives  such as promoting energy efficiency or renewables. The States, rather than this regulation can decide the best way to incorporate renewable incentives.

5.7.2 Baseline Period for Allocations Comment:

One commenter ( OAR 2002 0056 3478) supported the use of the average of the highest three year heat inputs achieved during the five year period of 1998 to 2002 as the baseline for establishing plant mercury allocations.

Several commenters ( OAR 2002 0056 2867,  2922,  2948,  3437,  3565) noted the proposed calculation of the baseline heat input by " using the average of the three highest heat inputs of the period 1998 to 2002" and suggested using a more current period. Two of the 5 138 commenters ( OAR 2002 0056 2922,  2948) suggested using the average of the three highest heat inputs of the period 1999 to 2003. These commenters believed this approach would use a period that would be closer in time to the commencement of the trading program under EPA's proposal and still would avoid opportunities to affect the baseline through prospective actions. One of the commenters ( OAR 2002 0056 3565) strongly urged EPA to use the average of the three highest heat inputs of the period 1998 to 2002.

One commenter ( OAR 2002 0056 2867) recommended that EPA consider using the average heat input of the highest of three years from the period which begins six years prior to the implementation of the cap ( 2004 if the cap takes effect in 2010 as proposed or 2009 if the cap takes effect in 2015 under the commenter's recommended program) to account for growth in electricity demand, changes in the generation fleet, the inherent variability in heat input levels for individual units, and for weather and demand induced variability.

One commenter ( OAR 2002 0056 3437) noted that EPA did not mention updating the baseline heat input based on more recent years of operation. The commenter stated that the rule would use the same baseline throughout time. The commenter believed this would help in having to track annual operating data, but it was not clear to the commenter if this would increase or decrease a unit's allowances if the heat input data was update. The commenter noted EPA says this is preferable because it would eliminate a potential generation subsidy and an incentive for less efficient generation. The commenter stated that EPA should use an output based emission rate to address efficient generation and a system that would use updated heat input to more accurately reflect industry changes.

Response:

For existing units under the model trading rule, EPA is using the average of the highest three year heat inputs achieved during the five year period of 2000 to 2004 as the baseline for establishing plant mercury allocations. EPA proposed January 1, 2001, cut off on line date for considering units as existing units. The cut off on line date was selected so that any unit meeting the cut off date would have at least five years of operating data, i. e., data for 2000 through 2004. EPA is concerned with ensuring that particular units are not disadvantaged in their allocations by having insufficient operating data on which to base the allocations. EPA believes that a 5 year window, starting from commencement of operation, gives units adequate time to collect sufficient data to provide a fair assessment of their operations.

As discussed in the final rule preamble, under its example allocation methodology, EPA has finalized for the model rule a " modified output" approach. This example method involves heat input based allocations for existing coal units ( with different ratios based on coal type), with updating to take into account new generation on a modified output basis. It also utilizes a new source set aside for new units that have not yet established baseline data to be used for updating.

The EPA believes that allocating to existing units based on a baseline of historic heat input data ( rather than output data) is desirable, because accurate protocols currently exist for 5 139 monitoring this data and reporting it to EPA, and several years of certified data are available for most of the affected sources. Under the EPA example method, existing units as a group will not update their heat input. This will eliminate the potential for a generation subsidy ( and efficiency loss) as well as any potential incentive for less efficient existing units to generate more. This methodology will also be easier to implement because it will not require the updating of existing units' baseline data. Retired units will continue to receive allowances indefinitely, thereby creating an incentive to retire less efficient units instead of continuing to operate them in order to maintain the allowance allocations.

Comment:

One commenter ( OAR 2002 0056 2267) requested that EPA provide in its model trading program rules for the use of a different time period to calculate baseline heat input for situations where to allocate additional allowances to the entities in recognition of their foresight and progressive investment in hydroelectric power ( or other green power) such as Boiler # 9. The commenter stated there is precedence under the Clean Air Act for substitution of baseline data when a baseline period is not representative of normal source operation. See 40 CFR 2.21( 21)( ii) ( NSR rules). The commenter noted that EPA has recognized that it should have discretion to allow the use of a different time period upon a determination that it is more representative of normal source operation. The commenter urged that EPA should exercise similar discretion in this case.

Response:

For existing units under the model trading rule, EPA is using the average of the highest three year heat inputs achieved during the five year period of 2000 to 2004 as the baseline for establishing plant mercury allocations. EPA proposed January 1, 2001, cut off on line date for considering units as existing units. The cut off on line date was selected so that any unit meeting the cut off date would have at least five years of operating data, i. e., data for 2000 through 2004. EPA is concerned with ensuring that particular units are not disadvantaged in their allocations by having insufficient operating data on which to base the allocations. EPA believes that a 5 year window, starting from commencement of operation, gives units adequate time to collect sufficient data to provide a fair assessment of their operations.

States are required to achieve the mercury reduction requirements by reducing Hg emissions from coal fired power plants. States are welcome to use set asides ( size determined by the State) for new units and any special policy objectives   such as promoting energy efficiency or renewables. The States, rather than this regulation can decide the best way to incorporate renewable incentives.

Comment:

One commenter ( OAR 2002 0056 2918) understood that in the event that EGUs, burning a mixture of coal ranks, the MACT compliance limit will be adjusted based on pro rata heat input calculation of each of the coal ranks in the mix of coal burned. Consistent with such an 5 140 adjustment, the commenter recommended that EPA adopt a provision making each EGU responsible for obtaining periodic ASTM laboratory test data on coal burned by the EGU for each compliance period.

Similarly, if EPA adopts a cap and trade program, the commenter recommended that EGU owners be provided an opportunity to submit more recent coal rank data obtained by ASTM laboratory test methods for the coal burned during a time period that reflects more contemporary usage. The commenter stated that such coal rank data should be used by EPA in allocating Hg emission trading credits for the future year period( s) designated in the proposed cap and trade rule.

Whether EPA adopts Hg MACT emissions limits, or alternatively a Hg cap and trade program, the commenter stated that their recommendation will provide EGU owners the opportunity to adjust their Hg compliance requirements based on current coals burned. The commenter noted that coal fired EGUs do change coal suppliers and coal ranks over time because of changing market conditions and regulatory requirements. As such the commenter believed their proposal would add additional equity to EPA's Hg compliance requirements for EGUs.

Response:

As discussed in the final rule preamble, under its example allocation methodology, EPA has finalized for the model rule a " modified output" approach. This example method involves heat input based allocations for existing coal units ( with different ratios based on coal type), with updating to take into account new generation on a modified output basis. It also utilizes a new source set aside for new units that have not yet established baseline data to be used for updating.

For existing units under the model trading rule, EPA is using the average of the highest three year heat inputs achieved during the five year period of 2000 to 2004 as the baseline for establishing plant mercury allocations. EPA proposed January 1, 2001, cut off on line date for considering units as existing units. The cut off on line date was selected so that any unit meeting the cut off date would have at least five years of operating data, i. e., data for 2000 through 2004. EPA is concerned with ensuring that particular units are not disadvantaged in their allocations by having insufficient operating data on which to base the allocations. EPA believes that a 5 year window, starting from commencement of operation, gives units adequate time to collect sufficient data to provide a fair assessment of their operations.

The EPA believes that allocating to existing units based on a baseline of historic heat input data ( rather than output data) is desirable, because accurate protocols currently exist for monitoring this data and reporting it to EPA, and several years of certified data are available for most of the affected sources. Under the EPA example method, existing units as a group will not update their heat input. This will eliminate the potential for a generation subsidy ( and efficiency loss) as well as any potential incentive for less efficient existing units to generate more. This methodology will also be easier to implement because it will not require the updating of existing units' baseline data. 5 141 5.7.3 New Units Comment:

One commenter ( OAR 2002 0056 3437) did not support EPA's proposed alternative of using the lower of the NSPS for the different coal types or a rate based on the proposed 2018 cap rather than using a single emission rate for new units. The commenter stated that while this approach may address the differences between coal types and new and existing units, the commenter would still be concerned that using different information based on coal type could lead to fuel switching and the possibility of not achieving the desired reductions.

One commenter ( OAR 2002 0056 3543) understood that new sources would be required to hold allowances equivalent to the product of their NSPS and baseline heat input. The commenter stated however, EPA is unclear what will be proposed as the baseline for new sources.

One commenter ( OAR 2002 0056 3543) found the proposal unclear regarding how new sources would be treated under a cap and trade approach. The commenter noted new sources would be required to comply with the NSPS for mercury and be required to hold allowances. The commenter asked would new sources be given an allocation or is this up to the discretion of the states?

Response:

As discussed in the final rule preamble, under its example allocation methodology, EPA is finalizing the approach that new units will begin receiving allowances from the set aside for the control period immediately following the control period in which the new unit commences commercial operation, based on the unit's emissions for the preceding control period. Thus, a source will be required to hold allowances during its start up year, but will not receive an allocation for that year. States will allocate allowances from the set aside to all new units in any given year as a group. If there are more allowances requested than in the set aside, allowances will be distributed on a pro rata basis. Allowance allocations for a given new unit in following years will continue to be based on the prior year's emissions until the new unit establishes a baseline, is treated as an existing unit, and is allocated allowances through the State's updating process. This will enable new units to have a good sense of the amount of allowances they will likely receive  in proportion to their emissions for the previous year. This methodology will not provide allowances to a unit in its first year of operation; however it is a methodology that is straightforward, reasonable to implement, and predictable.

Although EPA is offering an example allocation method with accompanying regulatory language, EPA reiterates that it recognizes States' flexibility in choosing their Hg allocations method.

Comment: 5 142 Many commenters ( OAR 2002 0056 2067,  2422,  2818,  2911,  2915,  2922,  3198,  3443,  3444,  3514,  3519) believed that the cap and trade program should have a set aside for new sources. Several of these commenters ( OAR 2002 0056 2818,  2911,  2915,  3198) noted that a modest set aside would be consistent with the Acid Rain Program.

Several commenters ( OAR 2002 0056 2818,  3198) submitted that this will ensure that new units operating in compliance with the NSPS will have legitimate access to allowances. One commenter ( OAR 2002 0056 2915) stated that new unit development is critical to the continued use and development of Gulf Coast lignite for electric generation in Texas.

Commenter OAR 2002 0056 2911 suggested that once the size of the permanent allocation pool is determined, a small percentage of those allocations, 2 percent for example, can be set aside for new units each year. The commenter further suggested that any unused allocations would be returned to the pool for the other affected units. According to the commenter, similar concepts have been successfully incorporated into the trading program used for the NO x SIP Call.

Several commenters ( OAR 2002 0056 3443,  3519) submitted that the model rule proposal for a two percent new source set aside was reasonable. One commenter ( OAR 2002 0056 3443) believed this would be sufficient to prevent any inhibition to entry of new units in the market. The commenter asserted that redistribution of unused allowances from the set aside to existing units is a critical piece of this proposal. The commenter believed the model rule should require that this redistribution be completed in time for existing sources to use them in the same budget year.

One commenter ( OAR 2002 0056 3519) believed that new units should be defined as EGUs starting operation after the date of final rule adoption. One commenter ( OAR 2002 0056 2922) stated that if EPA chooses a " cap and trade" program, it must ensure that new facilities have reasonable access to mercury emission allowances.

Similarly, one commenter ( OAR 2002 0056 2067) stated that the proposed Cap and Trade alternative must give economic access to allocations to new power plants to allow for effective planning for construction of new units to meet growth and to replace retiring units. The commenter asserted that the Cap and Trade mechanism should not create obstacles to retiring older units or to adding new generation to ensure adequate security and reliability.

One commenter ( OAR 2002 0056 3444) stated the cap and trade program should provide new unit set asides for new units operating prior to 2010.

One commenter ( OAR 2002 0056 2725) stated that the West is one of the fastest growing regions in the country, and new coal plants are vital to affordable energy prices in the future and will be essential to continued growth in the economy. The commenter noted the DOE's Energy Information Administration projects a significant increase in construction of new coal based power plants; the DOE/ EIA Annual Energy Outlook 2004 with projections to 2025 forecasts the addition of 112 Gigawatts of new coal generating capacity. According to the 5 143 commenter, if these new plants were to be prevented from being constructed because of new mercury regulations, the only alternative for this needed capacity would be natural gas. The commenter stated that due to physical and regulatory constraints, the supply of natural gas is not able to affordably meet its demand.

Over the next several years, the commenter expected several new, clean coal units to come on line in the West, and submitted that EPA should not burden these new units with overly stringent emission control requirements. Thus, the commenter supported adopting the allocation of mercury allowances for new units under the trading approach consistent with Senator Inhofe's approach to Clear Skies.

Many commenters ( OAR 2002 0056 2042,  2375,  2422,  2519,  2862,  2907,  2815,  2922,  3440,  3478,  3556,  3565,  4191,  4891) stated there should be a modest mercury allowance set aside for new units. Many of the commenters ( OAR 2002 0056 2375,  2422,  2519,  2915,  3440,  3478,  3556,  3565,  4191,  4891) suggested the new unit set aside should be consistent with the 2 percent set aside for new facilities in Title IV Acid Rain Program. Several commenters ( OAR 2002 0056 2915,  3440,  3478,  4191) believed new unit development would be critical to the continued use and development of lignite for electric generation in Texas. One commenter ( OAR 2002 0056 3556) stated that any unused allocations would be returned to the pool for the other affected units. The commenter also stated that similar concepts have been successfully incorporated into the trading program used for the NO x SIP Call. Similarly, a second commenter ( OAR 2002 0056 2375) suggested the unused portion of the set aside should be returned to existing sources on a pro rata basis. One commenter ( OAR 2002 0056 2907) stated that as we enter a new era where demand is beginning to exceed supply, new generation becomes essential. The commenter added, new coal generation is cleaner and more efficient than existing plants. The commenter believed that EPA should use an approach similar to that used in the Clear Skies Act to allocate mercury allowances to new units under a mercury cap and trade program. One commenter ( OAR 2002 0056 3565) believed that new units should also be able to acquire mercury allowances from the allowance market.

One commenter ( OAR 2002 0056 2422) noted that under a cap and trade approach, EPA has proposed NSPS emission limits equivalent to the NSPS proposed under the 112( d) regulations. The commenter believed the limit was set at a level that could not be achieved by the best performing units, and should be adjusted upward. The commenter was concerned that a cap and trade program would add another significant burden to new units if they are not allocated emission allowances. New units would be left to pursue allowances on the open market, with no guarantee of access. The commenter stated that EPA should reconsider how it will ensure that new units operating in compliance with the NSPS will have legitimate access to allowances. The commenter suggested that this could be achieved, for example, by requiring a modest set aside of allowances from existing units, similar to the approach taken in the Title IV acid rain program.

One commenter ( OAR 2002 0056 4891) stated that as proposed, the mercury rule would discourage the development of new power plants given that it would require new sources to procure allowances from the same pool of allowances applicable to existing sources. The commenter submitted that jeopardizing the ability to develop new power plants would ultimately 5 144 put an untenable strain on the ability to meet the ever increasing demand for affordable electricity in Texas and throughout the U. S. The commenter believed that to avoid this clearly undesirable result and ensure the continued development of new plants, new power plants should either be exempted from the requirement to obtain allowances, or be provided an allowance set aside specifically for new units comparable to the 2 percent set aside for new facilities in the Title IV, Acid Rain Program.

One commenter ( OAR 2002 0056 4891) submitted that only existing facilities subject to the mercury rule should receive allowances. The commenter noted that as proposed, the mercury rule would discourage the development of new power plants given that it would require new sources to procure allowances. Jeopardizing the ability to develop new power plants would ultimately put an untenable strain on the ability to meet the ever increasing demand for affordable electricity in Texas and throughout the U. S. To avoid this clearly undesirable result and ensure the continued development of new plants, the commenter stated new power plants should be exempted from the requirement to obtain allowances.

One commenter ( OAR 2002 0056 2243) was concerned with how allowance programs are being developed. According to the commenter, when new projects were primarily gas fired, the availability of an adequate allowance pool for new sources was not as important as it is today. The commenter pointed out that as coal fired projects are conceived, the availability of access into the allowance market is critical. The commenter added that encouraging new project development is vital from both an economic and environmental point of view.

Response:

As discussed in the final rule preamble, the example allocation methodology includes a new source set aside equal to 5 percent of the State's emission budget for the years 2010 to 2014 and 3 percent of the State's emission budget for the subsequent years. This is a change from the SNPR were EPA proposed a level 2 percent set aside for all years.

One commenter pointed to EIA forecasts for coal to grow by 112 gigawatts ( GW) by 2025 and EPA economic modeling projects growth in coal by 2020. In order to estimate the need for allocations for new units, EPA considered projected growth in coal generation and the resulting Hg emissions portion of the Hg national cap. EPA believes the final new source set aside provides for that growth.

Because States have flexibility in choosing their Hg allocations method, individual States using a version of the example method may want to adjust this initial five year set aside amount to a number higher or lower than 5 percent to the extent that they expect to have more or less new generation going on line during the 2001 to 2013 period. They may also want to adjust the subsequent set aside amount to a number higher or lower than 2 percent to the extent that they expect more or less new generation going on line after 2004. States may also want to set this percentage a little higher than the expected need, because, in the event that the amount of the set aside exceeds the need for new unit allowances, the State may want to provide that any 5 145 unused set aside allowances will be redistributed to existing units in proportion to their existing allocations.

Comment:

One commenter ( OAR 2002 0056 2830) believed the heat rate conversion factor of 8,000 Btu/ kWh was too low for Fort Union lignite fired EGUs. The commenter stated that heat rates for units utilizing Fort Union lignite have improved over time. According to the commenter, the recent historical heat rate for existing Fort Union lignite fired boilers is just under 11,000 Btu/ gross kWhr. The commenter recommended that a heat rate conversion factor of 9,700 Btu/ gross MWhr be employed for new lignite fired units ( 69 FR 12409).

One commenter ( OAR 2002 0056 2841) stated that the rule should not discourage new coal units. The commenter noted that new units undergoing permitting and/ or under construction would not have the ability to establish a baseline heat input until going into commercial operation. The commenter also noted EPA has proposed an alternative to address the issue of no baseline by suggesting that the updated allocation for such units be adjusted by calculating the heat input for such units by multiplying the unit's output by a heat rate conversion factor of 8000 btu/ kWh. EPA suggested that the 8000 btu/ kWh rate represents a midpoint between expected heat rates for new pulverized coal plants and new integrated gasification combined cycle ( IGCC) coal plants. The stated purpose for such an approach is to create level benefits for new units based on their output and encouraging efficiency. In principle, the commenter agreed with the approach selected by EPA to address units that will not have an established baseline. However, the commenter believed the selected conversion rate of 8000 btu/ kWh rate cannot be supported and would unduly penalize new units.

The commenter stated the range of heat rates for IGCC units can be anywhere from 8400 btu/ kWh to 9500 btu/ kWh. Accordingly, the commenter did not believe the midpoint between IGCC and supercritical was appropriately established at 8000 btu/ kWh. Given the current state of IGCC technology and the range of heat rates, the commenter did not believe that EPA should try to establish any presumed incentive for IGCC. Instead, EPA should only utilize a rate that provides incentive to proven technology such as construction of a supercritical pulverized coal boiler that can be supported by Public Utility Commissions. The commenter recommended a conversion factor of 8900 btu/ kWh that would provide the incentive to build supercritical units, while not penalizing companies through the utilization of an unrealistic and unsupportable conversion factor. Similarly, the commenter believed the conversion factor should not have the unintended consequence of encouraging the further utilization of natural gas for the production of electricity.

Similarly, one commenter submitted that the model rule's use of an 8000 Btu/ kWh assumed heat rate for calculating allowance allocations appeared to be a mistake. The cmmenter noted that the model rule states that 8000 Btu/ kWh represents the " mid point" between the heat rate expected of new conventional coal and IGCC units. However, in the supplemental CAIR the same 8000 Btu/ kWh is used as the " mid point between gas fired combined cycle units and conventional coal units. The commenter agreed the 8000 Btu/ kWh mid point is reasonable for 5 146 CAIR. However, the commenter pointed out that existing IGCC units have heat rates in the mid 8000s and conventional coal units have heat rates in the mid to lower 9000s. Consequently, the commenter believed 9000 Btu/ kWh is the more appropriate mid point for the mercury model rule.

The commenter also had concerns about using the midpoint approach at all since it would clearly favor IGCC technology over conventional coal technology. The commenter encouraged EPA to consider a separate heat rate for IGCC and conventional coal units. The commenter pointed out that the DOE clean coal roadmap goals for 2010 indicate that 9000 Btu/ kWh for conventional coal and 8000 Btu/ kWh for IGCC would be reasonable heat rates.

The commenter ( OAR 2002 0056 2721) submitted that the new unit mercury allocation utilizing the modified heat output basis again places low rank fuels at a distinct disadvantage. The commenter noted that the modified heat output based procedure would take the three highest of the first five years of gross output and multiply it by a conversion factor of 8,000 btu/ kWH. The commenter stated that this would place a plant efficiency incentive on new units so that the low rank coals would be unfairly punished. The commenter noted that EPA is requesting comment on the appropriateness of 8,000 btu/ kWH. The commenter strongly encouraged EPA to establish a subcategory for heat rate conversion factor for low rank coals nearer 9,700 btu/ kWH.

One commenter ( OAR 2002 0056 2834) believed the proposed heat rate conversion factor of 8,000 Btu/ kWh is to low for Fort Union lignite fired EGUs. The commenter stated that heat rates for units utilizing Fort Union lignite have improved over time. According to the commenter the recent historical heat rate for existing Fort Union lignite fired boilers is just under 11,000 Btu/ gross kWh.

Response:

As discussed in the final rule preamble, under the example allocation methodology, allowances will be allocated to new units with an appropriate baseline on a " modified output" basis. The new unit's modified output will be calculated by multiplying its gross output by a heat rate conversion factor of 8,000 Btu per kilowatt hour ( Btu/ kWh). The 8,000 Btu/ kWh value for the conversion factor is an average of heat rates for new pulverized coal plants and new IGCC coal plants ( based upon assumptions in EPA's economic modeling analysis). See documentation for the Integrated Planning Model ( IPM) at http:// www. epa. gov/ airmarkets/ epa ipm). A single conversion rate will create consistent and level incentives for efficient generation, rather than favoring new units with higher heat rates.

EPA maintains that providing each new source an equal amount of allowances per MWh of output is an equitable approach. Because electricity output is the ultimate product being produced by electric generating unit, a single conversion factor based on output ensures that all sources will be treated equally. Higher conversion factors for less efficient technologies will effectively provide greater amounts of allowances ( and thus a greater subsidy) to such less efficient units for each MWh they generate. This will serve to provide greater relative incentives to build new less efficient technologies rather than efficient technology. It should also be noted 5 147 that, since all allocations are proportionally reduced after a new source is integrated into the market, higher conversion factors also lower allocations to existing sources.

Comment:

One commenter ( OAR 2002 0056 3437) submitted that if EPA decides to include a new source set aside, states should be in charge of managing it and should be able to use some of it to encourage energy efficiency. The commenter felt it would be more equitable to use a methodology that allows all new units to receive some allowances to reduce the amount that may need to be purchased. The commenter believed this is especially important if sources are allowed to request up to 5 years of allowances. The commenter suggested that one option would be to increase the discount factor ( 0.90) to 0.80 or 0.75 or more. The commenter noted it is difficult to estimate the actual number of new units and the amount of allowances needed, but this is somewhat resolved by redistributing unallocated allowances back to existing units.

Regarding the allocation methodology, one commenter ( OAR 2002 0056 3437) noted that EPA did not provide any basis for a discount factor of 0.90 to arrive at a final allocation.

One commenter ( OAR 2002 0056 3437) commented on EPA's proposed alternative where new units would simply apply at the end of the year for allowances based on actual emissions. The commenter submitted that this is not a good alternative because sources would be uncertain about the actual amount of emissions and available allowances. The commenter believed that this could lead to a flurry of activity to try and buy allowances in a short time or risk noncompliance.

Response:

The example allocation methodology for the final rule does include these discount factors. As discussed in the final rule preamble, under its example allocation methodology, EPA is finalizing the approach that new units will begin receiving allowances from the set aside for the control period immediately following the control period in which the new unit commences commercial operation, based on the unit's emissions for the preceding control period. Thus, a source will be required to hold allowances during its start up year, but will not receive an allocation for that year. States will allocate allowances from the set aside to all new units in any given year as a group. If there are more allowances requested than in the set aside, allowances will be distributed on a pro rata basis. Allowance allocations for a given new unit in following years will continue to be based on the prior year's emissions until the new unit establishes a baseline, is treated as an existing unit, and is allocated allowances through the State's updating process. This will enable new units to have a good sense of the amount of allowances they will likely receive   in proportion to their emissions for the previous year. This methodology will not provide allowances to a unit in its first year of operation; however, it is a methodology that is straightforward, reasonable to implement, and predictable.

Although EPA is offering an example allocation method with accompanying regulatory language, EPA reiterates that it recognizes States' flexibility in choosing their Hg allocations method. 5 148 Comment:

One commenter ( OAR 2002 0056 2181) stated that the proposal provides credit for the thermal output of new CHP facilities. The commenter believed this is a very important and beneficial provision that will help encourage the application of CHP. The commenter believed, however, the same credit should apply to existing CHP facilities. The commenter stated that the program should provide the maximum encouragement to CHP as a means of reducing energy consumption and emissions from the power and steam generation sectors. The commenter submitted that continued and increasing use of CHP can help reduce the cost of the program as well as producing significant coincident benefits for regulated and non regulated pollutant reductions.

Response:

As discussed in the final rule preamble, under the example allocation methodology, existing units as a group will not update their heat input. This will eliminate the potential for a generation subsidy ( and efficiency loss) as well as any potential incentive for less efficient existing units to generate more. This methodology will also be easier to implement because it will not require the updating of existing units' baseline data. Retired units will continue to receive allowances indefinitely, thereby creating an incentive to retire less efficient units instead of continuing to operate them in order to maintain the allowance allocations.

Comment:

One commenter ( OAR 2002 0056 2913) stated that their newest, cleanest and most efficient electric utility steam generating unit was currently under construction, which because the unit commenced construction prior to January 30, 2004, it was classified as an existing unit as provided for in rule § 63.9982( b). The commenter submitted however, if a cap and trade program were promulgated as proposed this unit's mercury allowances would be allocated according to new unit criteria ( i. e. a design output basis in lb/ GWh) and only after it operated for five years.

According to the commenter, its newest unit would be allocated mercury allowances based on the unit's heat input which, for the first five years of operation, would be converted to gross electrical output using a predetermined conversion factor of 8,000 Btu/ kWh. The commenter stated that 8,000 Btu/ kWh is not applicable under any cogenerating circumstances and is extremely aggressive under best case conditions and leaves no allowance for equipment degradation due to low load conditions, equipment degradation or non optimal process operations. The commenter further stated that any heat input used for co generation purposes would only be converted at one half of the actual rate and that mercury allowances would then be allocated based on these artificially low heat input conversion rates; these allowances would be reduced further by an additional 10 percent before being allocated for use. Beyond the penalties already imposed on this unit ( i. e. no allowance for mercury content in the limestone used for SO 2 control purposes as discussed above) the commenter claimed they will be further penalized by this allocation process and questions the appropriateness of applying what is in essence a new source limit/ allocation process to an existing unit. 5 149 While the commenter believed the set aside allocation process as currently proposed was flawed, they expressed a much larger concern. According to the commenter, under the allocation process proposed in § 60.4142( c)( 4)( iii) and ( iv), there was a distinct possibility that they would not be allocated enough mercury allowances to operate its newest unit regardless of the amount of the proposed set aside, due to the fact that a large new electric utility steam generating unit could potentially require and be granted the entire amount of allowances set aside. The commenter stated that they would then be faced with the possibility of not being able to achieve "  the maximum degree of reductions  " on its own even though it would use the very technology EPA relied upon in setting the EGU MACT standard in the first place. The commenter did not believe this is what Congress envisioned when it passed CAA section 112 into law. While the list of compliance measures, processes, methods, systems or techniques delineated in CAA section 112( d)( 2)( A)( E) is, admittedly, not all inclusive, the commenter argued they would essentially be prevented from using any of them to achieve compliance with the MACT standard under a cap and trade program not " funded" with sufficient set aside allowances.

As a remedy, the commenter offered that one way to treat all existing units equitably would be to allocate mercury allowances to all existing units whether or not they operated during the initial baseline period and whether or not they operated for five years or more. The commenter stated that one could look to § 60.4142( c)( 3) for guidance on what EPA believed was appropriate for initial mercury allowance allocations for units that have not operated for five years or more. To implement the stated policy consistent with the approach outlined in § 60.4142( c)( 3), the commenter offered suggested modifications to § 60.4142.

Response:

The example allocation methodology for the final rule addresses the commenter's concerns about new units. As discussed in responses above, the example allocation methodology includes: a new sources set aside, allowance allocations for a given new unit based on the prior year's emissions until the new unit establishes a baseline, and no inclusion of discount factors.

Comment:

The commenter ( OAR 2002 0056 4891) added that with the exemption option, new power plants should be exempted from the requirement to purchase allowances as long as they have NSPS Subpart Da technology operational when they initiate operations, and they adhere to monitoring and reporting requirements to demonstrate continuous compliance. By the same token, facilities that are not subject to the UMRR should not be able to receive credits and thereby receive windfall gains on the allowance trading markets.

Response:

In the final CAMR, new sources will be covered under the Hg cap of the trading program, and will be required to hold allowances equal to their emissions. EPA maintains that is essential to include new sources under the cap to ensure that environmental goal of reducing mercury emission is achieved. With new sources under the cap, the environmental goal 5 150 continues to be achieved despite future growth in the electric power sector, as older coal fired generation is retired and replaced new coal fired generation Comment:

Several commenters ( OAR 2002 0056 2834,  2898) submitted that Springerville Units 3 and 4 should receive allocations in the same manner as other " existing units." The commenters stated that the Springerville Generating Station was recently permitted for the addition of two new 400 MW net coal fired units. The permit for the addition of Springerville Units 3 and 4 was received on April 29, 2002, and construction of the phased project began on October 22, 2003, with Unit 3 scheduled for completion in 2006 and Unit 4 at a later date. Two other Units already exist at the site, Springerville Units 1 and 2.

The commenters stated that units such as Springerville 3 and 4 should receive allocations in the same manner as other " existing units" since construction commenced on or before January 30, 2004. The Springerville units 3 and 4 are " existing units" for the purpose of determining the applicability of the proposed rule. The commenters noted that under either section 111 or 112, an " existing unit" is one for which construction, modification, or reconstruction commenced on or before January 30, 2004 ( 69 FR 4662 and 69 FR 4690). The commenters stated that Units 3 and 4, however, are not listed as part of those existing units receiving mercury allowances under a Cap and Trade program. Under the proposed rule ( 69 FR 12446), units that " commence operation on or after January 1, 2000" receive allocations according to a different approach, regardless of whether they are " new" or " existing units." The commenters felt that, since construction of Springerville Units 3 and 4 commenced on or before January 30, 2004, these units should receive allocations in the same manner as other " existing units." Commenter 2898 added that due to the fact that there is no historical heat input for these units, the " baseline heat input" ( prior to multiplying by the adjustment factors) should be calculated using the maximum potential heat input for the units and a capacity factor of 90 percent. The commenter noted that units of this nature are invariably intended to provide base load power, and the allocation methodology must recognize this fact.

Response:

Under the example allocation methodology, a new unit is defined as a unit commencing operation after January 1, 2001. For purposes of allocating emissions, EPA believes that existing units need five years of heat input data to establishes it baseline heat input. This is consistent with the overall allocation approach, under which new unit establishes a baseline after 5 years of operation, is treated as an existing unit, and is allocated allowances through the State's updating process.

5.7.4 Auctions Comment: 5 151 Many commenters ( OAR 2002 0056 1834,  1969,  2117,  2161,  2180,  2267,  2375,  2721,  2830,  2835,  2850,  2867,  2891,  2898,  2911,  2922,  2948,  3443,  3445,  3543,  3546  3556,  3565) opposed the auctioning of mercury allowances. One commenter ( OAR 2002 0056 3565) believed states do not have that authority and allowances should be allocated free. A second commenter ( OAR 2002 0056 2891) stated that EPA had no regulatory " taxing" authority under section 112 or section 111 to mandate the auctioning of mercury allowances, and the auctioning of allowances would be poor public policy because it would increase the cost of an already expensive proposal. The commenter further stated that a mercury cap and trade program could be constructed in many ways to help ensure an equitable and cost effective program. The commenter noted that EPA requested comment on whether it could and should impose an auction program under either a section 112( n) or section 111( d) Federal Implementation Program cap and trade program, at 12408. The commenter stated that in short, it is neither legal nor appropriate for EPA to implement any auction program of mercury allowances.

Commenter OAR 2002 0056 2891 stated that first, EPA had no legal authority under the CAA to auction or require the auctioning of mercury allowances under either proposed cap and trade programs and conspicuously cited no legal authority in the proposal. According to the commenter, the only auctioning of allowances the EPA has authority to conduct is specifically delineated by an act of Congress in the 1990 CAA Amendments, section 416, under " acid rain" control. The commenter stated that even under section 416, the auction proceeds are redistributed to the original allowance holders. The commenter further stated that auction proceeds would be effectively a tax on those required to purchase mercury allowances. The commenter believed that EPA's contention, at 12408 col. 2, that it might have regulatory authority to collect taxes and deposit the proceeds in " general revenues" under the Miscellaneous Receipts Act was unfounded.

The commenter added that the policy goals EPA claimed an auction would achieve can be accomplished by less draconian and more legal means. The commenter stated that for example, a " new source set aside" provision alternatively suggested by EPA, at 12408 12409, could be constructed to accomplish the same objectives without unnecessarily driving up the costs of what will be an already expensive program.

One commenter ( OAR 2002 0056 2922) opposed auctions or any other method of forced sale of allowances.

Several commenters ( OAR 2002 0056 2161,  2948) opposed auctions, but stated that if EPA decided to permit auctions, auctions should not be for the initial allocations of allowances, but only for a very small percentage of allowances each year as in the Title IV program. One commenter ( OAR 2002 0056 2161) noted that the infrastructure for an allowance program is already in place as a result of the Acid Rain Amendments, and it should be relatively simple to add mercury allowances to the program already in existence.

Several commenters ( OAR 2002 0056 2180,  2267,  2835,  2898,  3445) supported an allocation system and opposed an auction. One commenter ( OAR 2002 0056 2898) 5 152 recommended that mercury allowances be allocated to sources by EPA. Several commenters ( OAR 2002 0056 2267,  2835,  3443,  3445) stated that mercury emissions would be controlled at substantial cost, and to pay for allowances in addition to the mercury controls would add substantial cost with no added environmental benefit. One of these commenters ( OAR 2002 0056 3445) did not believe that additional reductions would occur from sources seeking to reduce the cost of allowances; it was not anticipated that additional reductions will be possible, based on the available and developing control technologies.

Commenter OAR 2002 0056 2267 submitted that allocating allowances for free would provide assistance to the entities incurring most of the costs of complying with the necessary mercury reductions, lessening the financial impact of the program on these sources. One commenter ( OAR 2002 0056 2180) submitted that affected units will pay twice, once to reduce emissions and second to pay for allowances they need to operate. Commenter OAR 2002 0056 2835 suggested that if any allowances are withheld from affected EGUs for auction, proceeds from auction sales should be remitted to the original holders from which the allowances were withheld. Commenter OAR 2002 0056 3443 submitted that auctioning allowances would increase the price of electricity due to the increased stringency of the emission standard resulting from the requirement to purchase allowances and invest in control equipment. The commenter stated that well documented studies show clearly that affordable electricity is a key element in public health policy. The commenter felt that placing a tax on electricity could undermine the health benefits sought to be gained by this rulemaking.

Several commenters ( OAR 2002 0056 2991,  3556) believed that if states were allowed to sell allowances at auction ( or otherwise) rather than allocate them without charge, it would substantially change the cost analyses for the standard of performance that EPA has conducted. The commenters added that it would add to the variability of the implementation of the trading program, hindering the development of a robust program.

One commenter ( OAR 2002 0056 3543) believed auctions would not be necessary under an open market free trade system. The commenter submitted that the use of a safety valve mechanism, or capping allowance prices, may dictate decisions to install controls instead of the market price for an allowance. This would be counter to the idea that decisions to control emissions are driven by the cost effectiveness of controls compared to purchase of allowances. The commenter believed the safety valve mechanism also may hamper EPA's ability to assess penalties for noncompliance.

One commenter ( OAR 2002 0056 3546) stated that requiring controlled sources to both reduce emissions and pay for allowances to cover their remaining emissions would impose significant costs on emitting sources. These additional allowance costs would be unnecessarily burdensome and costly to fossil fuel fired generation. In contrast, the commenter believed allocating allowances to regulated sources would lessen the financial impact of this very costly control program.

Several commenters ( OAR 2002 0056 1969,  2830,  2850) disagreed with EPA's proposal to have an annual auction for mercury allocations under a cap and trade approach. 5 153 According to the commenters, considering the uncertainty of the availability of mercury controls and monitors, the risk to the existing coal fired electric generating units would be high. The commenters believed that, to alleviate some of the risk, the mercury caps should be fully and permanently allocated to the existing electric generating units as is done under the Title IV sulfur dioxide program. The commenters stated that new units would be better able to minimize risks since they would be able to design systems and select fuels to minimize mercury emissions, which is something that many existing units cannot do. The commenters asserted that if EPA decides to allocate allowances to new units, it should not be done at the expense of existing units. The commenters suggested that if EPA decides to implement an auction, EPA should manage that auction program at the national level rather than having it managed by the individual states.

One commenter ( OAR 2002 0056 2721) noted that allowance auctions would be the responsibility of the individual state. The permanent allowance system would not take into account new units, unless there was a new unit set aside. The commenter would be concerned with the quantity of the set aside as it is difficult to anticipate the rate of new units coming on line. An additional concern would be that the set aside would not be available for existing sources.

One commenter ( OAR 2002 0056 2861) opposed giving states the option of distributing allocations through an auction. The commenter submitted this is not a necessary element of an environmental control program. The commenter added that auctioning allowances would not produce any additional reduction in emissions. It would simply increase the cost of the regulatory program to companies and ultimately to consumers by requiring regulated entities to pay for every ton emitted. The commenter stated that auctioning of mercury allowances would simply not be an economically efficient policy. The commenter added, as UARG has argued in its comments, a state does not have the authority to auction allowances because to do so would fundamentally change the cost analysis that EPA used to establish the mercury performance standard.

One commenter ( OAR 2002 0056 3437) stated that, although EPA proposes it, the auction allowance work would fall to the states. While it may be beneficial to have a pool of revenue available, there could be resource issues with establishing and implementing an auction program. The commenter asserted that if EPA includes auctions, this must be voluntary and not a requirement.

Response:

For States participating in the EPA administered CAMR cap and trade program, States have the flexibility to determine their own methods for allocating Hg allowances to their sources. Specifically, such States will have flexibility concerning the cost of the allowance distribution, the frequency of allocations, the basis for distributing the allowances, and the use and size of allowance set asides.

As discussed in the final preamble, although there are some clear potential benefits to using auctions for allocating allowances, EPA believes the decision regarding utilizing auctions rightly belongs to the States and Tribes. EPA is not requiring, restricting, or barring State use 5 154 of auctions for allocating allowances. An example of an approach where CAMR allowances could be distributed to sources through a combination of an auction and a free allocation is provided in the preamble.

5.8 OTHER TRADING MECHANISMS 5.8.1 Banking Comment:

Several commenters ( OAR 2002 0056 1673,  1859,  2375,  2547,  2718,  2862,  2867,  2883,  2900,  2922,  2948,  3509,  3565) stated there should be no restrictions on banking of emission allowances. Several commenters ( OAR 2002 0056 2547,  2718) supported a provision for unrestricted banking as a way to encourage early emissions reductions, stimulate the trading market, encourage efficient pollution control, and provide flexibility to affected sources in meeting environmental objectives. One commenter ( OAR 2002 0056 2900) noted that, like the Acid Rain Program, the Mercury Budget Trading Program proposed unlimited banking without the flow control provisions of the NO x Budget Trading Program. The commenter supported unlimited banking of allowances allocated to sources under each phase of the Program and did not see any advantage to a flow control provision. Commenter OAR 2002 0056 2862 also believed there should not be any restrictions such as flow control. This commenter stated that because mercury is a chemical that bio accumulates in the environment, and because the behavior of mercury emissions are not exacerbated by seasonal weather conditions ( such as the proclivity for ozone formation development during hot, humid summer months), any reduction in mercury in advance of a compliance date would result in a net environmental gain.

Response:

EPA has finalized that banking will be allowed without restriction after the start of the Hg cap and trade program in 2010.

Commenter ( OAR 2002 0056 2375) submitted that a mercury cap and trade program should include provisions for early reduction credits ( ERC) and banking of mercury credits. The commenter supported unrestricted banking of all ERCs and Phase I and II excess credits without discount, except the banking of Phase I credits should be restricted if EPA determines in 2009 that IAQR reduction co benefits result in emissions less than 34 tpy and EPA sets the cap at 34 tpy. Sources would be permitted to use vintage Phase I credits during Phase I without discount and vintage Phase II credits during Phase II without discount.

Response:

EPA has finalized that banking will be allowed without restriction after the start of the Hg cap and trade program in 2010. Given that the 2010 cap is set at a level that represents Hg co benefit reductions under CAIR, EPA did not propose, and is not finalizing, an early reduction credit provision, because the cap level does not require the installation of Hg specific controls. 5 155 Under CAIR, Acid Rain Program sources will be able to bank SO 2 allowances from additional reductions before 2010 that may also result in ancillary Hg emission reductions.

One commenter ( OAR 2002 0056 3443) recommended in view of the environmental benefits fostered by a program that allows allowances to be banked in advance of the deadline for a cap, that early reduction credits should be allowed for calendar years 2008 and 2009. The commenter has long held that early reduction programs be made part of all cap and trade programs. The commenter believed that early reduction programs work to promote clean air sooner by encouraging the early installation of new technologies. The commenter installed state of the art scrubbers in advance of the statutory deadlines under the successful Title IV program. Likewise, the commenter installed the nation's first SCRs burning high sulfur coal in advance of the NO x SIP Call. For a mercury cap and trade program, the commenter asserted that the utility industry needs banking of early reduction credits because of the uncertainty in its ability to control mercury emissions over the long term. The commenter noted that as the preamble acknowledges, a banked allowance is one less ounce of mercury emitted in a given year. Thus, an early emissions banking program has the advantage of achieving reductions in advance of the 2010 compliance date for a Phase I cap.

The commenter recommended an early emission banking program would be based on the mass of reductions produced from the installation of an emissions control device on an individual unit basis, as was done in the NO x SIP Call. In addition to providing environmental improvements, the commenter believed this program also provides an opportunity to address important monitoring issues since utilities choosing to participate in the program would have to start monitoring for mercury in 2008 for units in this early reduction program. The commenter stated credit would be earned on an individual unit basis at levels below their Phase I allocation. The commenter estimated that on a yearly basis, they might earn three to six percent of their Phase I allocation level. The commenter noted this is a small amount, given that the current best mercury emission monitoring method ( the Ontario Hydro Method) has a 10 percent accuracy level.

Given the limited experience industry has had with mercury CEMs or equivalent methods, the commenter believed several monitoring issues would have to be resolved prior to the onset of monitoring. For example, substitution of missing data is just one of the many issues that the commenter felt need to be addressed. The commenter submitted an early banking program, starting in 2008, would allow EPA to address these issues prior to the imposition of the first cap in 2010.

The commenter submitted that excessive bank accumulations could be minimized by discounting the banked allowances in 2018 by a certain pre set percentage. The commenter believed the interim cap and the discounting of allowances would ensure that actual emissions in 2018 are close to the Phase II cap of 15 tons per year. The commenter stated that this approach provides the flexibility of building some allowances prior to program initiation in 2010 to hedge against the uncertainty in the estimate of achievable mercury reductions. This approach would also be environmentally preferable because it would encourage earlier reductions and then in 2018 permanently retire allowances. 5 156 Response:

Given that the 2010 cap is set at a level that represents Hg co benefit reductions under CAIR, EPA did not propose, and is not finalizing, an early reduction credit provision, because the 2010 cap level for CAMR does not require the installation of Hg specific controls. Under CAIR, Acid Rain Program sources will be able to bank SO 2 allowances from additional reductions before 2010 that may also result in ancillary Hg emission reductions. EPA has finalized that banking will be allowed without restriction after the start of the Hg cap and trade program in 2010. The ability of affected sources to bank Hg allowances starting in 2010 will promote earlier reductions than would otherwise be achieved in the program, and help to stimulate the Hg allowance market.

Comment:

One commenter OAR 2002 0056 3445 stated that they are already installing equipment to make significant reductions in NO x and SO 2 emissions. The commenter added that they and their customers have made a substantial investment in the NO x and SO 2 control technologies, one that the commenter believed will have a substantial level of mercury reduction co benefits. The commenter added that this equipment will be operational as much as five years before EPA's proposed initial compliance deadline, resulting in less overall mercury emissions to the environment.

The commenter believed that banking should be allowed, so the credits that the commenter earns by acting early may be used to offset later emissions or as a reserve in the event of equipment failure. A significant amount of the commenter's generation comes from nuclear power, which emits no mercury. The commenter pointed out that if any of those nuclear units experienced an unexpected outage, generation must be made up from the fossil plants, which could result in unanticipated mercury emissions. With limits as tight as the proposed 15 ton cap in 2018, the commenter believed that banked emissions credits should be available to offset the unexpected mercury emissions from such an event.

The commenter stated that banking would encourage companies to install and operate pollution control equipment early, at significant operating cost, so that the banked allowances could be used when additional equipment could not be installed in the limited time available. The commenter added that banking also encourages companies to operate pollution control equipment to achieve maximum emissions reductions, accumulating a pool of allowances that can be used as a reserve in case of the unforeseen loss of a non emitting or controlled unit, during periods of necessary but unexpected maintenance, and in the event that some controls do not perform as designed.

The commenter stated that utilities like them that have a significant number of non mercury emitting generation units ( e. g., nuclear and gas) must plan for fluctuations in their operations, based on long term maintenance and refueling cycles. The commenter added that these plans impact the plants' year to year operations and the commenter's overall emissions. The commenter further added that weather is also a factor in plant operations. According to the 5 157 commenter, an extremely hot summer or cold winter could result in a significant emissions increase relative to the original plan, which would be based on " normal weather assumptions" for that period. The commenter stated that banking would provide a cost effective mechanism for dealing with the expected year to year emissions fluctuations while ensuring long term compliance.

Response:

EPA has finalized that banking will be allowed without restriction after the start of the Hg cap and trade program in 2010.

Several commenters ( OAR 2002 0056 1596,  2071,  2064,  2094,  2359,  3398,  4139) stated that banking should not be allowed or should be restricted. One commenter ( OAR 2002 0056 2359) opposed EPA's proposal to allow units to bank early emission credits with no restrictions to be used in meeting reductions under CAA section 111. If banking and trading were allowed, the proposed 15 ton final cap in 2018 would increase to 22 tons or only a 54 percent reduction. The commenter believed that the banking of emission credits should be restricted and that at a minimum, credits should expire by a final compliance date. Commenter OAR 2002 0056 3398 rejected banking prior to the 2018 compliance date because it would extend the timeframe for meaningful reductions and may further contribute to hot spots. One commenter ( OAR 2002 0056 4139) did not support banking of allowances without restrictions. The commenter believed the availability of banked allowances should be decreased either through time generated reductions ( i. e., allowances expire after a definite time period) or by requiring the use of older banked allowances on an increasing ratio based on age ( i. e., 1 to 1.5 or 1 to 2). One commenter ( OAR 2002 0056 1596) stated that any banking of allowances must include an extra reduction for each transaction for environmental improvement. For example, when 100 units are retired, an additional 5 units should be retired.

Response:

Banking would achieve greater cumulative reductions early in the program than would be required by the final cap, and will not increase cumulative emissions over the entire length of the program. Banking has several additional advantages, including the potential to encourage earlier or greater reductions from sources, stimulate the market and encourage efficiency, and provide flexibility in achieving emissions reduction goals ( e. g., by allowing for periodic increased generation activity that may occur in response to interruptions of power supply from non Hg emitting sources).

5.8.2 Safety Valve Provision Comment:

Many State Attorney Generals ( OAR 2002 0056 2823) stated there is no legal or policy basis for establishing a " safety valve," which would set a maximum cost for mercury emission allowances. The commenters asserted EPA lacks both authority and a policy basis for adopting a 5 158 safety valve. The commenters believed the safety valve would provide incentive to deter emission reductions and should be withdrawn. The commenters noted that even if authority existed, EPA presented no legal or technical basis for the proposed price of $ 2,187.50. The commenters stated the provision is also unnecessary for a market based program and would undermine its purpose   to use market incentives to achieve timely reductions.

Response:

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

Comment: