NOX control, the EPA notes that combustion controls are the
only EGU NOX reduction strategy that the EPA generally
considers feasible for the 2017 ozone season in quantifying emission
budgets for the final CSAPR Update and that also requires new
construction. For this unique reason, in developing each state emission
budget, the EPA specifically considered the number of EGUs with
NOX reduction potential from installing state-of-the-art
combustion controls, 2015 reliance on these EGUs for electricity
generation in the state, and the magnitude of reductions relative to
the resulting emission budgets.
    These data indicate that nearly all of the EGU NOX
reduction potential for one state, Arkansas, comes from installing
state-of-the-art combustion controls. The EPA's analysis for the final
rule finds that two units at White Bluff and two units at Independence
power plants in Arkansas have significant EGU NOX reduction
potential from the installation of state-of-the-art combustion
controls. The NOX reduction potential from these units is
uniquely significant relative to Arkansas' resulting emission budget.
The agency's analysis finds approximately 3,000 tons of ozone season
NOX reduction potential from these 4 units in Arkansas. If
the EPA were to calculate a 2017 emission budget for Arkansas that
includes reductions attributable to combustion controls, these
reductions would be equivalent to 33 percent of Arkansas' resulting
emission budget. The NOX reduction potential from installing
combustion controls has an outsized effect on Arkansas' resulting
emission budget relative to other states. Arkansas is unique with
respect to emission reduction potential achievable from combustion
controls relative to its corresponding emission budget. In all other
states covered by this rule, reduction potential from combustion
controls relative to the CSAPR Update rule emission budgets is 11
percent or less. While the EPA does not anticipate that sources in any
other state would have difficulty installing upgraded combustion
controls for the 2017 ozone season, for the reasons described earlier,
the relatively low number of expected emissions reductions from those
controls means that failure of any of these sources to install such
controls would not lead the state to exceed the assurance levels and
incur CSAPR assurance penalties.
    Further, these units at White Bluff and Independence power plants
in Arkansas, combined, accounted for nearly 40 percent of the state's
2015 heat input. Compared to other CSAPR Update states, Arkansas is
also uniquely situated in this regard. In all other states covered by
this rule, the percentage of state-level heat input from units with
reduction potential from installation of combustion controls is 20
percent or less. The CSAPR allowance trading program allows Arkansas'
utilities the option to choose alternative compliance paths. However,
the EPA considers that if their compliance path included combustion
controls for these units, then it may be difficult to schedule outage
time to upgrade all four of the Arkansas units to state-of-the-art
combustion controls for the 2017 ozone season and supply adequate
electricity to meet demand in the state.
    If, due to the unique feasibility concerns discussed earlier, the
Arkansas units could not install upgraded controls for the 2017 ozone
season, Arkansas utilities could exceed the CSAPR assurance level in
2017.\150\ In such circumstances, Arkansas utilities would not only
need to purchase allowances for compliance, but they would also face
the CSAPR assurance provision penalty, meaning that for emissions
exceeding the assurance level, utilities would need to surrender three
allowances for each ton of emissions.
---------------------------------------------------------------------------

    \150\ More information about CSAPR Update Rule assurance levels
can be found in section VII of this document.
---------------------------------------------------------------------------

    In light of these unique circumstances, the EPA believes that it is
prudent and appropriate to finalize for Arkansas a 2017 ozone season
emission budget for Arkansas that does not account for EGU
NOX reduction potential from combustion controls and a 2018
ozone season emission budget for Arkansas that does account for EGU
NOX reduction potential from combustion controls. This
approach provides utilities an extra year to upgrade combustion
controls in the event that this is their chosen CSAPR Update compliance
path. This extra year

allows for upgrades to be made across four shoulder seasons (fall 2016,
spring 2017, fall 2017, and spring 2018).
    The emission budgets that the EPA is finalizing in FIPs for the
CSAPR Update rule are summarized in table VI.E-2.

            Table VI.E-2--Final 2017 EGU NOX Ozone Season Emission Budgets for the CSAPR Update Rule
                                             [Ozone season NOX tons]
----------------------------------------------------------------------------------------------------------------
                                                                                Adjusted      CSAPR update rule
                         State                             2015 emissions       historical      2017 * emission
                                                                                emissions           budgets
----------------------------------------------------------------------------------------------------------------
Alabama................................................             20,369             15,179             13,211
Arkansas...............................................             12,560             12,560       12,048/9,210
Illinois...............................................             15,976             14,850             14,601
Indiana................................................             36,353             31,382             23,303
Iowa...................................................             12,178             11,478             11,272
Kansas.................................................              8,136              8,031              8,027
Kentucky...............................................             27,731             26,318             21,115
Louisiana..............................................             19,257             19,101             18,639
Maryland...............................................              3,900              3,871              3,828
Michigan...............................................             21,530             19,811             17,023
Mississippi............................................              6,438              6,438              6,315
Missouri...............................................             18,855             18,443             15,780
New Jersey.............................................              2,114              2,114              2,062
New York...............................................              5,593              5,531              5,135
Ohio...................................................             27,382             27,382             19,522
Oklahoma...............................................             13,922             13,747             11,641
Pennsylvania...........................................             36,033             35,607             17,952
Tennessee..............................................              9,201              7,779              7,736
Texas..................................................             55,409             54,839             52,301
Virginia...............................................              9,651              9,367              9,223
West Virginia..........................................             26,937             26,874             17,815
Wisconsin..............................................              9,072              7,939              7,915
                                                        --------------------------------------------------------
    22 State Region....................................            398,596            378,641    316,464/313,626
----------------------------------------------------------------------------------------------------------------
* The EPA is finalizing CSAPR EGU NOX ozone season emission budgets for Arkansas of 12,048 tons for 2017 and
  9,210 tons for 2018 and subsequent control periods.

    The EPA's selection of emission budgets for this rule is specific
to, and appropriate for, defining near-term achievable upwind
obligations with respect to the 2008 ozone NAAQS in states where a FIP
is necessary. The EPA does not intend--nor does it believe it would be
justified in doing so in any event--that the cost-level-based
determinations in this rule impose a constraint for selection of cost
levels in addressing transported pollution with respect to future NAAQS
and/or any revisions to these FIPs for any other future transport rules
that the EPA may develop to address any potential remaining obligation
as to the current NAAQS, for which different cost levels may be
appropriate.
    In addition to 22 states identified previously, the EPA also
assessed the potential for EGU NOX reductions in Delaware
and the District of Columbia. This assessment finds that the District
of Columbia does not have any affected EGUs. As a result, despite the
District of Columbia's linkage to the Harford County, Maryland
receptor, the District does not have any EGU NOX reduction
potential. The EPA also has not taken action to approve or disapprove a
pending good neighbor SIP addressing the 2008 ozone NAAQS. Given that
the District of Columbia does not have any affected sources and the
District's SIP is still before the agency, the EPA is not finalizing a
FIP for the District in this action. Also, the EPA's assessment of EGU
NOX reduction potential shows zero reductions available in
Delaware in 2017 at any evaluated cost threshold because they are
already equivalently controlled. Given this information and the fact
that Delaware's SIP is also still pending before the agency, we are not
promulgating a FIP for Delaware in this rule. The EPA will consider the
information developed for this rule, as appropriate, in evaluating the
good neighbor SIPs for these areas,\151\ and if the EPA ultimately
disapproves those SIPs, the EPA will address any resulting FIP
obligation separately.
---------------------------------------------------------------------------

    \151\ As noted earlier, the EPA has not taken final action to
approve or disapprove Delaware's good neighbor SIP addressing the
2008 ozone NAAQS.
---------------------------------------------------------------------------

    The proposed CSAPR Update sought comment on whether or not to
include Wisconsin in the final CSAPR Update considering that the
modeling data for the proposal showed zero NOX reduction
potential for Wisconsin under the proposed EGU NOX control
stringency. Unlike our analysis at proposal, the EGU NOX
emission reduction potential analysis for the final rule shows that
EGUs in Wisconsin and all 22 CSAPR Update states have EGU emission
reductions available using the uniform control stringency represented
by $1,400 per ton. Further, ozone season emission budgets that the EPA
is finalizing in the CSAPR Update represent reductions from 2015
emission levels for Wisconsin and all 22 CSAPR Update states. The EPA
is therefore including each of the 22 CSAPR Update states in the final
CSAPR Update to ensure that each state achieves NOX emission
reductions to address significant contribution to nonattainment or
interference with maintenance of downwind pollution with respect to the
2008 ozone NAAQS.

VII. Implementation Using the Existing CSAPR NOX Ozone
Season Allowance Trading Program and Relationship to Other Rules

A. Introduction

    This section addresses step four of the CSAPR framework by
describing how the EPA will implement and enforce the EGU emission
budgets quantified in section VI, which represent the remaining EGU
emissions after reducing

those amounts of each state's emissions that significantly contribute
to downwind nonattainment or interfere with maintenance of the 2008
ozone NAAQS in downwind states. See Table VI.E-2 for final emission
budgets. The EPA is finalizing FIPs with respect to the 2008 ozone
NAAQS for each of the 22 states covered by this rule. The FIPs will
require affected EGUs to participate in the CSAPR NOX ozone
season trading program subject to the final emission budgets. The EPA
is updating the CSAPR NOX ozone season program requirements
in 40 CFR part 97 to reflect these CSAPR NOX ozone season
emission budgets and final CSAPR Update Rule trading program
requirements.
    The CSAPR NOX ozone season trading program is a market-
based approach that implements emission reductions needed to meet the
CAA's good neighbor requirements. The emission budgets establish state-
level aggregate emission caps that specify the quantity of emissions
authorized from affected EGUs. The EPA creates individual
authorizations (``allowances'') to emit a specific quantity (i.e., 1
ton) of ozone season NOX. The total number of allowances
equals the level of the emission budgets, which partially address
interstate emission transport under the good neighbor provision for the
2008 ozone NAAQS. To be in compliance, each participant must hold
allowances equal to its actual emissions for each control period. It
may buy or sell (trade) them with other market participants. Each
affected EGU can design its own compliance strategy--emission
reductions and allowance purchases or sales--to minimize its compliance
cost. And it can adjust its compliance strategy in response to changes
in technology or market conditions. The compliance flexibility provided
by the CSAPR NOX ozone season trading program does not
prescribe unit-specific and technology-specific NOX
mitigation. While the EPA establishes emission budgets that reflect
emission reductions that can be achieved by certain near-term and cost
effective EGU NOX mitigation strategies (e.g., turning on
idled SCRs), no particular EGU NOX reduction strategy is
required for any specific EGU to demonstrate compliance with the CSAPR
Update rule.
    In order to ensure that each upwind state addresses its significant
contribution to nonattainment or interference with maintenance and to
accommodate inherent year-to-year variability in state-level EGU
operations, the CSAPR NOX ozone season trading program
includes variability limits and assurance provisions. These provisions
are unchanged from those established in the original CSAPR with the
exception of each CSAPR Update state having a revised variability limit
and assurance level that corresponds with its revised emission budget.
The CSAPR assurance provisions require additional allowance surrender
penalties (a total of 3 allowances per ton of emissions) \152\ on
emissions that exceed a state's CSAPR NOX ozone season
assurance level, or 121 percent of the emission budget.
---------------------------------------------------------------------------

    \152\ Each excess ton above the assurance level must be met with
one allowance for normal compliance plus two additional allowances
to satisfy the penalty.
---------------------------------------------------------------------------

    When the EPA finalized the original CSAPR in 2011, the rule
established regional trading programs designed to cost-effectively
reduce transported emissions of SO2 and NOX from
power plants in eastern states that affect air quality in downwind
states. See 76 FR 48272 and 48273 (August 8, 2011). The EPA envisioned
that this approach to implementing necessary emission reductions could
be used to address transport obligations under other existing NAAQS and
future NAAQS revisions. See 76 FR 48211 and 48246 (August 8, 2011). The
EPA is finalizing implementation of the CSAPR Update emission budgets
using the CSAPR NOX ozone season allowance trading program,
with certain updates. Using the familiar CSAPR trading program to
implement these near-term EGU reductions for the 2008 ozone standard
provides many significant advantages, including certainty in emission
reductions achieved by dint of caps on emissions and air quality-
assured allowance trading, ease of transition to the new emission
budgets, the economic and administrative efficiency of trading
approaches, and the flexibility afforded to sources regarding
compliance.
    The first control period for the requirements finalized in these
FIPs is the 2017 ozone season (May 1, 2017-September 30, 2017).
Affected EGUs within each covered state must demonstrate compliance
with FIP requirements for the 2017 ozone season and each subsequent
ozone season unless and until the state submits a SIP that the EPA
approves as replacing the FIP, or the EPA promulgates another federal
rule replacing or revising the FIP.
    In this section of the preamble, the following topics are
addressed: New and revised FIPs; updates to CSAPR NOX ozone
season trading requirements, including trading program structure and
treatment of banked allowances; feasibility of compliance; key elements
of the CSAPR trading programs; replacing the FIP with a SIP; title V
permitting; and the relationship of this rule to other emission trading
and ozone transport programs (NOX SIP Call, CSAPR trading
programs, CPP).

B. New and Revised FIPs

    As explained in section III in this preamble, the EPA is finalizing
new or revised FIP requirements only for those states where the EPA has
the authority and obligation to promulgate a FIP addressing the state's
interstate transport obligation pursuant to CAA section
110(a)(2)(D)(i)(I) for the 2008 ozone NAAQS. That is, the EPA is
finalizing new or revised FIP requirements for certain states where the
EPA either found that the state failed to submit a complete good
neighbor SIP or disapproved a good neighbor SIP for that state.
Moreover, the EPA is only finalizing new or revised FIP requirements
for those states identified in sections V and VI of this preamble,
whose emissions significantly contribute to nonattainment or interfere
with maintenance of the 2008 ozone NAAQS in other eastern states. For
those states that contribute below the one percent threshold applied in
section V of this preamble, the EPA concludes that the state's
emissions do not significantly contribute to nonattainment or interfere
with maintenance of the 2008 ozone NAAQS. There is therefore no need to
impose further emission limits on sources within those states through
issuance of new or revised FIP requirements.
    Of the 22 states required to participate in the CSAPR
NOX ozone season trading program under this CSAPR Update, 21
states \153\ already comply with the original CSAPR NOX
ozone season requirements with respect to the 1997 ozone NAAQS. For
those 21 states, the EPA is revising their existing FIP requirements to
require compliance with updated budgets at the levels in Table VI.E-2.
One state, Kansas, has newly added CSAPR NOX ozone season
compliance requirements in this action. For Kansas, the agency is
establishing new FIP requirements to require compliance with a budget
at the level in Table VI.E-2.
---------------------------------------------------------------------------

    \153\ Alabama, Arkansas, Illinois, Indiana, Iowa, Kentucky,
Louisiana, Maryland, Michigan, Mississippi, Missouri, New Jersey,
New York, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas, Virginia,
West Virginia, and Wisconsin.
---------------------------------------------------------------------------

    One state, Georgia, has a continued compliance requirement under
the original CSAPR NOX ozone season program with respect to
the 1997 ozone NAAQS and is not found to significantly contribute to

nonattainment or interfere with maintenance of the 2008 ozone NAAQS in
other states. Therefore, Georgia's CSAPR NOX ozone season
requirements (including its emission budget) continue unchanged
pursuant to the state's previously-defined obligation that was
quantified to address the 1997 ozone NAAQS, and the EPA is not making
any changes to the existing FIP requirements for Georgia contained in
40 CFR part 52.
    Three states (Florida, North Carolina, and South Carolina) are
currently subject to the CSAPR NOX ozone season trading
program with respect to the 1997 ozone NAAQS under the original CSAPR.
However, as described in section IV of this preamble, the phase 2
NOX ozone season budgets \154\ for these three states were
remanded to the EPA for reconsideration by the D.C. Circuit in EME
Homer City II, 795 F.3d at 138. In this final rule, the EPA finds that
emissions from Florida, North Carolina, and South Carolina do not
significantly contribute to nonattainment or interfere with maintenance
of either the 1997 ozone NAAQS or the 2008 ozone NAAQS in other states.
Accordingly, starting with the 2017 ozone season, these three states
will no longer be subject to CSAPR NOX ozone season trading
program requirements and EGUs in these states will not be allocated
further allowances nor obligated to demonstrate compliance with CSAPR
NOX ozone season requirements. The EPA is revising 40 CFR
part 52 to remove CSAPR NOX ozone season program
requirements for these three states.
---------------------------------------------------------------------------

    \154\ CSAPR phase 1 NOX ozone season emission budgets
are effective for 2015 and 2016 while phase 2 NOX ozone
season emission budgets would be effective starting with the 2017
ozone season.
---------------------------------------------------------------------------

C. Updates to CSAPR NOX Ozone Season Trading Program
Requirements

    For the CSAPR Update rule, the EPA is finalizing certain updates to
the CSAPR NOX ozone season trading program to transition the
existing original CSAPR NOX ozone season trading program,
designed to address the 1997 ozone NAAQS, to address new requirements
as to interstate emission transport for the 2008 ozone NAAQS. These
changes will be effective for the 2017 ozone season control period. In
this context, the EPA determines the extent to which allowances issued
under emission budgets established to address interstate transport with
respect to the 1997 ozone NAAQS would or would not be eligible for
compliance under this rule for affected EGUs with emission budgets
established to address interstate transport for the 2008 ozone NAAQS.
In developing approaches to transition the CSAPR trading program, the
EPA weighed several factors, including achieving the environmental goal
of the CSAPR Update (i.e., achieving necessary emission reductions to
address interstate transport with respect to the 2008 ozone NAAQS) and
feasibility of implementing the CSAPR Update rule. The EPA proposed and
took comment on several approaches regarding this transition of the
original CSAPR NOX ozone season program to address
interstate emission transport for the more recent 2008 ozone NAAQS.
    The EPA considered whether CSAPR NOX ozone season
allowances issued in 2017 and thereafter to affected EGUs in original
CSAPR states without updated CSAPR NOX ozone season trading
program budgets (i.e., Georgia) can be used for compliance in the 22
CSAPR Update states and vice versa. As described later on, this final
rule prohibits the use of allowances for compliance between Georgia and
the CSAPR Update states because of the differences in air quality goals
(i.e., the 1997 ozone NAAQS versus the 2008 ozone NAAQS) and the
different NOX control stringency used to establish emission
budgets necessary to achieve those air quality goals. The EPA is
implementing this prohibition by establishing two distinct trading
groups with distinct allowances within the CSAPR NOX ozone
season allowance trading program. The EPA provides an option for
Georgia to voluntarily adopt via SIP a commensurate CSAPR Update
emission budget that would obviate this prohibition by including
Georgia in the trading group with the CSAPR Update states.
    The EPA also considered whether, and to what extent, banked \155\
2015 and 2016 CSAPR NOX ozone season allowances issued under
original CSAPR NOX ozone season emission budgets should be
eligible for compliance in CSAPR Update states in 2017 and beyond. As
described later on, this rule establishes a one-time allowance
conversion that transitions a limited number of banked 2015 and 2016
allowances (approximately 99,700 allowances) for compliance use in
CSAPR Update states. This allowance conversion is designed to limit the
potential use of banked allowances to no more than one year of the
CSAPR variability limits in order to ensure that implementation of the
trading program will result in NOX emission reductions
sufficient to address significant contribution to nonattainment or
interference with maintenance of downwind pollution with respect to the
2008 ozone NAAQS. However, the conversion also facilitates compliance
with the CSAPR Update by carrying over some allowances that can be used
for compliance.
---------------------------------------------------------------------------

    \155\ Allowances that were not used for compliance and were
saved for use in a later compliance period.
---------------------------------------------------------------------------

1. Relationship of Allowances and Compliance for CSAPR Update States
and States With Ongoing Original CSAPR Requirements
    The final rule establishes two trading groups within the CSAPR
NOX ozone season allowance trading program. Group 2 is newly
established and is comprised of the 22 CSAPR Update states. Group 1, at
this time, consists of Georgia. The CSAPR Update rule ozone season
Group 1 and Group 2 trading programs are codified under 40 CFR part 97,
subparts BBBBB for Group 1 and EEEEE for Group 2, to enact the EGU
NOX ozone season emission budgets for the 2008 ozone NAAQS.
Section 52.38(b) has been amended to update which sources are subject
to the requirements of the respective subparts of part 97 for control
periods after 2016.
    The EPA will issue distinct allowances for these trading groups,
CSAPR NOX ozone season Group 1 allowances and CSAPR
NOX ozone season Group 2 allowances, for the 2017 ozone
season control period and subsequent control periods. Covered entities
may transfer, trade (buy and sell), and bank (save) these allowances.
Pursuant to the CSAPR trading program regulations, compliance is
demonstrated by holding and surrendering one allowance for each ton of
ozone season NOX emitted during the control period (i.e.,
ozone season). The CSAPR Update finalizes provisions governing
compliance that prohibit the use of Group 1 allowances for compliance
in Group 2 states or the use of Group 2 allowances for compliance in
Group 1 states.\156\ Aside from revised emission budgets for CSAPR
NOX ozone season Group 2 states and the prohibition of using
Group 1 allowances for compliance in Group 2 states, and vice versa,
the CSAPR Update rule NOX ozone season trading programs'
implementation requirements (e.g., monitoring, reporting, assurance
provisions) are substantively identical to the original CSAPR
NOX ozone season trading program.
---------------------------------------------------------------------------

    \156\ There are limited exceptions for circumstances where a
source becomes subject to a requirement to hold additional Group 1
allowances after Group 1 allowances have been converted to Group 2
allowances, as discussed in section IX in this preamble.

---------------------------------------------------------------------------

    In the original CSAPR SO2 annual allowance trading
program, the EPA discussed its concern with permitting the use of
allowances for compliance between groups of states linked to air
pollution problems that are more easily resolved and groups of states
linked to air pollution problems that are more persistent. The EPA was
concerned that allowance trading between these groups of states could
undermine the capacity of the rule to achieve the emission reductions
required by the good neighbor provision of the CAA. Specifically,
trading between these groups could lead to greater emission reductions
in states linked to more easily resolved air pollution problems and
fewer emission reductions in states linked to more persistent air
pollution problems. This concern arose, in part, because the EPA
identified different levels of significant contribution to
nonattainment or interference with maintenance for these groups of
states. As a result, these groups' emission budgets were established
using different levels of control stringency. Allowing trading between
groups of states with emission budgets representing substantially
different uniform costs could lead to allowance transfers from EGUs in
states with less stringent emission budgets to EGUs in states with more
stringent emission budgets.\157\ The EPA was concerned that allowing
trading between such groups of states could increase the risk of
emissions within a state exceeding the CSAPR emission budget or
assurance level. For these reasons, the original CSAPR rulemaking
prohibited the use of CSAPR SO2 Group 1 allowances in
SO2 Group 2 states and vice versa.
---------------------------------------------------------------------------

    \157\ 76 FR at 48263-64.
---------------------------------------------------------------------------

    In similar fashion, in order to ensure that the CSAPR
NOX ozone season trading program implements emission
reductions needed to meet the CAA's good neighbor requirements for the
CSAPR Update states, the EPA is finalizing a prohibition on allowance
usage between Georgia and the CSAPR Update states. Specifically, for
the final CSAPR Update rule, the EPA determines that allowances issued
in 2017 and thereafter under the original CSAPR will not be eligible
for compliance in the 22 CSAPR Update states, and vice versa. The EPA
is finalizing this prohibition because states participating in the
original CSAPR NOX ozone season program (i.e., Georgia) are
doing so to address interstate emission transport for the 80 ppb 1997
ozone NAAQS, while CSAPR Update States are addressing interstate
emission transport for the 75 ppb 2008 ozone NAAQS. The air quality
assessment performed for this rule shows that ozone pollution problems
with respect to the 75 ppb standard are relatively more robust than
ozone problems with respect to the 80 ppb standard. Further, due in
part to these differences in ozone pollution risk represented by the
two standards, the EPA has identified different levels of significant
contribution to nonattainment or interference with maintenance for
these groups and the corresponding emission budgets and assurance
levels reflect different levels of EGU NOX control
stringency. The original CSAPR NOX ozone season emission
budgets and assurance levels reflect $500 per ton of NOX
emissions reduced while the CSAPR Update emission budgets and assurance
levels reflect $1,400 per ton of NOX emissions reduced. The
EPA finds this substantial difference in uniform cost could lead to
allowance transfers from EGUs in Georgia to EGUs in CSAPR Update
states. Specifically, the EPA notes that the ratio of marginal cost of
ozone season NOX control reflected in these emission budgets
is nearly three-to-one, which is similar to the three-to-one assurance
provision allowance surrender penalty that is incurred on emissions
that exceed any state's assurance level (121 percent of the emission
budget). The EPA finds that allowing trading between Georgia and the
CSAPR Update states could increase the risk that emissions in CSAPR
Update states exceed their emission budget or their assurance level.
    The EPA does not expect that the prohibition of using CSAPR Update
rule NOX ozone season Group 2 allowances for compliance in
Group 1 states will create significant concern regarding feasibility of
compliance for Group 1 states. Georgia's ozone season emissions have
been well below its original CSAPR NOX ozone season emission
budget for several years. The EPA anticipates that units within the
state will continue to meet compliance obligations even without the
ability to use CSAPR Update rule NOX ozone season Group 2
allowances for compliance. Further, the EPA is quantifying an optional
CSAPR Update rule EGU NOX ozone season emission budget for
Georgia, using the same methods and uniform cost as budgets for CSAPR
Update states. This emission budget reflects protection of downwind air
quality under the 2008 ozone NAAQS. If Georgia chooses to adopt this
emission budget via a revised SIP submittal, then the EPA believes that
such a SIP submission may be approvable and Georgia may thereby opt
into the CSAPR Update rule NOX ozone season Group 2 trading
program and use the CSAPR Update rule NOX ozone season Group
2 allowances for compliance.
    Comment: Commenters suggested that if states subject to the
original CSAPR for the 1997 ozone NAAQS are not found to significantly
contribute to nonattainment or interfere with maintenance for the 2008
ozone NAAQS, then allowances issued in those states should not be part
of the remedy, since there is no physical connection between
NOX allowances issued for those states and the downwind
ozone nonattainment or maintenance problem that another state's
reductions must address for a different NAAQS.
    Response: In light of the specific differences in ozone pollution
problems addressed, level of significant contribution to nonattainment
or interference with maintenance, and marginal cost of NOX
reduction used to establish emission budgets for the original CSAPR and
the CSAPR Update rule, the EPA agrees that it is reasonable to prohibit
the use of CSAPR Update rule NOX ozone season Group 1
allowances for compliance in Group 2 states and vice versa, as
described previously.
    Comment: Commenters suggested that there should not be a
prohibition on using allowances between these groups of states and that
the CSAPR assurance provisions are sufficient to ensure that emission
reductions are made in upwind states.
    Response: The assurance provisions provide limited flexibility
around the finalized emission budgets developed using uniform control
stringency to accommodate inherent variability in average power sector
operations. For example, assurance levels are intended to accommodate
specific unusual events, such as sudden and unexpected outages of a
unit, or severe weather. The assurance level is intended to function as
a not-to-exceed cap that includes both the state budget--established to
reduce significant contribution to and interference with maintenance of
the 2008 ozone NAAQS in downwind states--and the variability limit. The
flexibility provided by the assurance provisions is not designed to
address interstate trading in the case of two groups of states that are
addressing different ozone pollution problems, levels of significant
contribution to nonattainment or interference with maintenance, or
levels of EGU NOX reduction stringency in emission budgets.
Further, as described previously, the EPA finds that were it to

authorize use of allowances issued to EGUs in Georgia for compliance in
CSAPR Update states, the risk of emissions in a CSAPR Update state
exceeding its emission budget or assurance level would increase.
2. Use of Banked Vintage 2015 and 2016 CSAPR NOX Ozone
Season Trading Program Allowances for Compliance in CSAPR Update States
    In this subsection, the EPA describes its approach to transition a
limited number of allowances that were banked in 2015 and 2016 under
the original CSAPR EGU NOX ozone season emission budgets
into the allowances that can be used for compliance in CSAPR Update
states in 2017 and thereafter. As proposed, the EPA is finalizing a
limit on the number of banked allowances carried over based on the need
to assure that the CAA objective of the CSAPR Update is achieved. This
approach transitions some allowances for compliance to further ensure
feasibility of implementing the CSAPR Update rule.
    Specifically, the EPA is including in this final rule a method for
ensuring that emissions in the CSAPR Update region do not exceed a
specified level--this is, emissions up to the sum of the states'
seasonal emissions budgets and variability limits--as a result of the
use of banked allowances. The method is captured in a formula or ratio,
the numerator of which is the total number of banked allowances at the
end of the 2016 ozone season and the denominator of which is 1.5 times
the aggregated variability limits finalized in this rule. The ratio is
then applied to the banked vintage 2015 and 2016 allowances in each
account to yield the number of banked allowances available to each
account holder in 2017.\158\
---------------------------------------------------------------------------

    \158\ As discussed in section IX of the preamble, banked
allowances held in compliance accounts for sources in Georgia will
not be converted and will be excluded from the conversion ratio
calculation.
---------------------------------------------------------------------------

    When proposing this approach, the EPA described how sources in
states with new or updated budgets could use all of their banked
allowances, but at a turn-in ratio significantly higher than one under
which only one allowance would be used to cover each ton of emissions
(e.g., a four-for-one or a two-for-one turn-in ratio). The EPA proposed
to use turn-in ratios calculated using the proposed formula described
above--essentially the same formula that the EPA is including in this
final rule. At proposal, the EPA explained that the ratio of the banked
vintage 2015 and 2016 allowances to the aggregated ozone season
variability limits was designed to limit the magnitude of the emission
impact of sources' use of banked allowances to that of the emissions
level that would result from all states emitting up to the sum of their
budgets and their variability limits for one or two years. (See 80 FR
75747.) The formulaic ratio when applied to the actual bank and
emissions levels would yield a conversion factor for banked allowances
that would be used to implement the proposed emissions limitation.
    The final approach described in this section--a one-time conversion
of aggregated banked vintage 2015 and 2016 allowances to 2017 vintage
allowances equivalent to 1.5 years of the aggregated CSAPR Update
variability limits--is virtually identical to the approach we laid out
in the NPRM. In particular, it is identical to the proposal in terms of
the formula used to assess the number of banked allowances relative to
the CSAPR Update variability limits. Further, the value for the
principal input to this formula that the EPA is updating in this final
rule--the aggregated variability limits--is very similar to the value
for this input at proposal.\159\ The EPA has refined this approach to
converting the banked allowances based on comments we received that
urged us to simplify implementation. The final approach limits the
influence of banked allowances via a one-time conversion, which has the
same impact on the allowance bank as an ongoing turn-in ratio, but
provides simplified implementation of the CSAPR Update rule. Further,
because the EPA will perform the conversion at one time and each
allowance going forward will equate to one ton of emissions, the EPA
does not find it necessary to finalize rounding the conversion ratio to
the nearest whole number.
---------------------------------------------------------------------------

    \159\ At proposal, the aggregated variability limits totaled
approximately 60,000 tons and in the final rule the aggregated
variability limits total approximately 65,000 tons.
---------------------------------------------------------------------------

    The denominator in the conversion formula--1.5 times the states'
aggregated variability limits--represents the number of banked
allowances that will be available for use toward compliance with the
CSAPR Update. Under the CSAPR implementation framework, variability
limits are established to allow the units in a state to emit above the
state's emission budget in a single control period when necessary
because of year-to-year variability in power sector operations. The
variability limits operate in conjunction with, but are distinct from,
the state emission budgets. The purpose of the state emission budgets
is to ensure that each state achieves necessary emission reductions, as
required under CAA section 110(a)(2)(D)(i)(I). The purpose of the
variability limits, and the assurance provisions that require
additional allowances to be surrendered when emissions from covered
sources within a state exceed those limits, is to ensure that the
requirement for each state to reduce emissions necessary to address its
downwind air quality impacts is implemented in a manner consistent with
normal year-to-year variability in power sector operations while
keeping any emissions above the budget within acceptable limits.
    In the proposal, the EPA requested comment on a range of turn-in
ratios for banked allowances derived from the formula described
previously, including a four-for-one ratio based on the sum of covered
states' variability limits for one year and a two-for-one ratio based
on the sum of covered states' variability limits for two years.
Commenters expressed a wide range of views, from those advocating for
no use of banked allowances to those advocating for the use of all
banked allowances with no turn-in ratio, as well others advocating for
turn-in ratios between these extremes. However, commenters generally
did not address the specific topic of whether one, two, or a different
number of years of variability limits would represent an appropriate
quantity of banked allowances to allow to be used for compliance with
the CSAPR Update.
    The EPA has determined that it is appropriate to use as the formula
denominator the sum of covered states' variability limits for 1.5
years. As noted above, the purpose of the variability limits is to
accommodate year-to-year variability in power sector operations at the
state level. In theory, a bank based on the sum of all covered states'
variability limits would be sufficient to accommodate such variability
for all states simultaneously--in other words, the maximum amount of
permissible emissions consistent with the purpose and design of the
variability limits--for one year. Because it is unlikely that normal
year-to-year power sector variability would cause all states to need to
exceed their emissions budgets in the same year, the EPA considers the
sum of the states' variability limits for one year a reasonable maximum
for the number of allowances that would ever need to be used for
compliance to address potential variability in power sector operations.
However, the EPA's experience with implementing market-based trading
programs is that in

historical practice most sources typically do not use every available
allowance for compliance, but instead keep some in reserve in order to
ensure compliance (e.g., to avoid penalties in the event of unforeseen
emissions and/or problems with preliminary data calculations). The EPA
believes that using the states' variability limits for 1.5 years
instead of one year provides sources with sufficient allowances to
accommodate maximum year-to-year variability in power sector operations
while also addressing the manner in which allowance holdings are
actually managed and used. Thus, the EPA believes that providing
allowances equivalent to 1.5 years of covered states' variability
limits fulfills the primary purpose we described in our proposal--
limiting the use of banked allowances to no more than one year of
states' aggregated variability limits--while acknowledging the
historical practice in market-based trading programs of sources keeping
some allowances in reserve from year to year in order to provide
planning and operating flexibility over multi-year periods. The EPA
believes that this ratio provides an appropriate balance of these
considerations, while providing a bank any larger would be inconsistent
with the rule's purpose of achieving emission reductions required by
CAA section 110(a)(2)(D)(i)(I).
    The numerator in the conversion formula is the number of banked
allowances to be converted. At proposal, the EPA anticipated, based on
2014 emissions data, that there would be approximately 210,000 banked
allowances following the 2015 and 2016 ozone seasons. As commenters
correctly predicted, based on more recent data, the size of the
anticipated bank is now larger. Based on 2015 emissions data, the EPA
anticipates that there will be approximately 350,000 banked allowances
entering the CSAPR NOX ozone season trading program by the
start of the 2017 ozone season control period.\160\ As explained in
more detail below, this anticipated total of banked allowances reflects
the fact that the seasonal NOX emissions budgets established
in CSAPR are to a significant extent not acting to constrain actual
NOX emission levels during the ozone season. Affected units
overall are emitting less than their budgeted levels by a substantial
margin and therefore do not have to use all of their allowances to
comply with the requirements of CSAPR; as a result, the bank is growing
substantially, especially relative to the emissions reductions that
this rule is designed to achieve.
---------------------------------------------------------------------------

    \160\ This allowance bank size was quantified as the observed
allowance bank at the conclusion of 2015 plus an estimate of
allowances likely to be banked in 2016, assuming that 2016 emissions
would be unchanged from 2015 levels. These data rely on 40 CFR part
75 emission reporting and are available in the EPA's Air Markets
Program Data, available at http://ampd.epa.gov/ampd/.
---------------------------------------------------------------------------

    This amount of anticipated banked allowances is greater than the
sum of all the state emission budgets established in this CSAPR Update
and is roughly five times the total emission reduction potential that
informs the emission budgets imposed by this rule. This number of
anticipated banked allowances is also approximately five times larger
than the aggregated CSAPR Update variability limits. Without imposing a
limit on the transitioned vintage 2015 and 2016 banked allowances, the
number of banked allowances would increase the risk of emissions
exceeding the CSAPR Update emission budgets or assurance levels and
would be large enough to let all affected sources emit up to the CSAPR
Update assurance levels for five consecutive ozone seasons.
    In prior ozone season emissions trading programs, such as the Ozone
Transport Commission's NOX Budget Program and the
NOX Budget Trading Program implemented in conjunction with
the NOX SIP Call, allowance deduction provisions (in some
cases known as ``flow control'') were included in order to prevent
banked allowances from being used in a single ozone season in
quantities that would result in excess total emissions. Similarly under
the CSAPR Update rule, the conversion ratio together with the assurance
provisions will address the large size of the existing CSAPR bank with
respect to the 2017 ozone season.
    Limiting the influence of the banked allowances is critical to
achieving the goal of reducing ozone formation, because reduction in
ozone depends on reductions in precursor emissions contemporaneous with
the meteorological conditions conducive to the formation of ozone.
Hence the rule is designed with ozone season-specific budgets intended
to achieve emission reductions by the 2017 ozone season in order to
assist downwind states with meeting the July 2018 Moderate area
attainment date for the 2008 ozone NAAQS. See North Carolina, 531 F.3d
at 911-12 (instructing the EPA to coordinate upwind state emission
reductions with downwind attainment deadlines). Other Clean Air Act
programs designed to address public health and environmental problems
that result from cumulative emissions permit sources to comply by over-
controlling emissions in earlier years and using the resulting banked
reductions to offset emissions in later years. In contrast, states, and
when acting to meet its FIP obligations, the EPA, must ensure that the
goal of improved air quality will be achieved and can do so only if
emissions are reduced to specified levels during each ozone season.
    This approach to limiting the influence of banked allowances also
serves the goal of ensuring that emission reductions are achieved in
each state. A bank of allowances that is five times the CSAPR Update
variability limit would increase the risk of EGUs exceeding their
states' CSAPR assurance levels, and thereby impede the ability of the
assurance provisions to meaningfully limit emissions in each state.
These circumstances would undermine compliance with CAA section
110(a)(2)(D)(i)(I), which requires that ``[e]ach state must eliminate
its own significant contribution to downwind pollution.'' North
Carolina, 531 F.3d at 921. The assurance provisions, as finalized in
the original CSAPR rulemaking, were designed to address this
requirement by imposing a penalty in the event that EGUs exceed the
state assurance levels. 76 FR at 48294-98. If EGUs' incentive to
constrain emissions is compromised by the availability of a large bank
of allowances, the EPA could no longer ensure that appropriate state-
level emissions reductions are achieved.
    While the bank of allowances reflects actions taken by sources in
CSAPR to reduce emissions, it also reflects other factors unique to the
regulatory history of CSAPR. In particular, the CSAPR budgets were
established based on information available in 2010 and 2011. As
promulgated in 2011, CSAPR required the budgets to be implemented in
2012 (Phase 1) and 2014 (Phase 2). As a result of litigation, the
emissions budgets did not take effect until 2015. Between 2011 and
2015, the power sector responded to increases in natural gas supply,
declines in natural gas prices, and increasing penetration of wind and
other low- or zero-emitting renewable energy resources. Consequently,
by the time the CSAPR ozone season budgets were implemented in the 2015
ozone season, they were no longer binding on state emission levels,
even though they were anticipated to be binding when developed in 2011.
The original CSAPR emission budgets for the 2015 ozone season were
about 628,000 tons in aggregate, but actual emissions were about
451,000 tons, resulting in a substantial bank of allowances after the
2015 ozone season. In addition, based on emissions data for May and
June of 2016 (i.e., the first two months of the

2016 ozone season under the trading program), ozone season
NOX emissions have declined 15 percent compared to the
comparable period in 2015, which we anticipate will lead to a yet
larger bank of allowances. In this final rule, the 2017 emission
budgets plus the 21 percent variability limits total about 381,000 tons
in aggregate, compared to 2015 emissions from the relevant states of
about 399,000 tons. The bank of CSAPR allowances fostered in part by
the unique circumstances of CSAPR's implementation is thus of a size
that is so large relative to the budgets under this final CSAPR Update
rule that, if all of the banked allowances were used without
restriction, all states would exceed their emissions budgets for
several successive ozone seasons. In that case, use of the bank would
impede the achievement of the reductions needed to reduce ozone levels
and assist downwind states with attainment and maintenance of the NAAQS
by the 2017 ozone season. For these reasons, the implementation of the
conversion ratio derived from the formula that is established in the
final rule is necessary to limit the use of banked allowances and
assure that reductions will actually occur and contribute to improved
air quality in time to assist downwind states with meeting their
attainment dates.
    Some commenters objected to any limitation on the use of banked
allowances, in part noting the additional compliance flexibility that
banked allowances provide. But as explained above, without limitation,
the number of banked allowances could undermine the capacity of the
rule to achieve the emission reductions required by the good neighbor
provision of the CAA--timely emission reductions in upwind areas that
are necessary to avoid significant contribution to nonattainment or
interference with maintenance of the 2008 ozone NAAQS in downwind
areas. Specifically, the CSAPR Update establishes emission budgets that
represent the remaining EGU emissions after reducing those amounts of
each state's emissions that significantly contribute to downwind
nonattainment or interfere with maintenance of the 2008 ozone NAAQS in
downwind states, as required under CAA section 110(a)(2)(D)(i)(I). In
other words, the CSAPR Update establishes an emission budget for each
state that is its good neighbor obligation. If made available in its
entirety for compliance with the CSAPR Update, then the anticipated
350,000 banked allowances would inherently increase the risk of states
exceeding their emission budget by providing a total number of
allowances for compliance in 2017 that is more than double the 22 state
sum of emission budgets. The CSAPR allowance trading program already
provides some flexibility in the form of the CSAPR variability limits
and corresponding assurance levels to allow states to meet their good
neighbor obligation while respecting inherent variability in
electricity generation. However, the anticipated 350,000 banked
allowances, if fully available for compliance, would also increase the
risk of EGUs exceeding their states' CSAPR assurance level by providing
allowances for compliance greater than five times the CSAPR variability
limit. These excess allowances could be used for compliance
irrespective of the need to achieve the CAA good neighbor obligation
while complying with typical year-to-year variability on which the
assurance levels are based. The allowance bank would thereby further
undermine the capacity of the rule to achieve the emission reductions
required by the good neighbor provision of the CAA by increasing the
risk that emissions would exceed not only the emission budgets, but
also the assurance levels.
    The EPA believes that allowing for banking of excess emission
reductions is a positive element of a trading-based program such as
this one. Banking encourages early reductions, provides certainty, and
creates flexibility in order to achieve the public health goal more
cost-effectively and reliably. When use of banked allowances can
undermine the environmental goal rather than help to achieve it,
however, it is reasonable and appropriate to restructure the use of
banked allowances. For these reasons, when the EPA finalized the
original CSAPR provisions, the agency explicitly reserved its authority
to eliminate or revise allowances issued in a given compliance year.
The existing regulations for the current NOX ozone season
trading program explain that an allowance is ``a limited authorization
to emit one ton of NOX during the control period in one
year.'' 40 CFR 97.506(c)(6). The regulations continue by providing the
Administrator the ``authority to terminate or limit the use and
duration of such authorization to the extent the Administrator
determines is necessary or appropriate to implement any provision of
the Clean Air Act.'' Id. 97.506(c)(6)(ii). The regulations also clearly
state that such allowances do not constitute property rights. Id.
97.506(c)(7). The EPA also notes that banked allowances were accrued
against 2015 and 2016 implementation of seasonal emission budgets that
were established to address interstate emission transport for the 80
ppb 1997 ozone NAAQS. Banked compliance instruments with respect to the
1997 ozone NAAQS in 2015 or 2016 are not inherently interchangeable
with emission reductions needed to address interstate emission
transport for the 75 ppb 2008 ozone NAAQS starting in 2017.
    However, provided that it can do so without jeopardizing the good
neighbor objectives of the CSAPR Update rule, the EPA believes that
permitting some allowances banked under the original CSAPR to be used
to meet compliance with the CSAPR Update can facilitate compliance with
the requirements of the latter. As described in section VI, the EPA is
establishing emission budgets that it finds to be feasible for the 2017
ozone season. As a result, the EPA believes that it is feasible to
implement the final CSAPR Update rule emission budgets that the EPA is
promulgating in this action, even without availability of banked
allowances for compliance. However, in order to ensure implementation
feasibility, the EPA is finalizing an approach that transitions a
limited number of banked allowances into the CSAPR NOX ozone
season Group 2 program for compliance starting with the 2017 ozone
season. By providing for the use of some banked allowances for
compliance with the CSAPR Update rule, the EPA provides immediate but
limited compliance flexibility that will support the feasibility of
meeting emission budgets for the 2017 ozone season and variation in
power sector operations. The CSAPR Update assurance level reflects the
upper bound variation in power sector generation that the EPA would
expect in any given year. Thus, the carryover of converted banked
allowances equal to 1.5 years' worth of variability limits provides the
affected fleet with the ability to accommodate potential variation from
the mean in its load and emission patterns in the initial year of the
program and also maintain a small reserve of allowances, while
balancing the need to ensure that emissions are reduced, on average, to
the level of the budgets and within the assurance levels in subsequent
years. For a further discussion of additional implementation
feasibility provided by this approach, see section VII.C.
    Considering these factors--especially the EPA's obligation to
achieve the NOX emission reductions needed to address
transport with respect to the 2008 NAAQS--the EPA believes it is
reasonable--even required--to restrict

the number of banked allowances carried over.
    To enable the use of banked 2015 and 2016 vintage allowances for
compliance with the CSAPR Update, the EPA is finalizing a one-time
conversion that transitions a number of allowances equivalent to 1.5
years of the sum of states' CSAPR NOX ozone season Group 2
variability limits (the variability limits are 21 percent of the
regional total emission budgets), or approximately 99,700 allowances.
The one-time conversion of the 2015 and 2016 banked allowances will be
made using a calculated ratio, or equation, to be applied in early 2017
once compliance reconciliation (or ``true-up'') for the 2016 ozone
season program is completed. The EPA will use an equation to derive the
ratio by dividing the number of all 2015 and 2016 post-true-up banked
CSAPR NOX ozone season allowances being converted by 1.5
times the sum of the 2017 CSAPR Update variability limits quantified in
Table VII.C-2 in this preamble. As soon as practicable and not later
than March 1, 2018, which is the compliance deadline for the 2017
control period, and pending notification of all allowance holders, the
EPA will freeze allowance accounts and convert the original CSAPR
NOX ozone season 2015 and 2016 banked allowances to the 2017
vintage CSAPR Update rule NOX ozone season Group 2
allowances. These allowances may then be used in 2017 and thereafter on
a 1-to-1 (one allowance to one ton of ozone season emissions) basis for
compliance in Group 2 states.
    Dividing the bank by 1.5 times the collective variability limits
results in the ratio that the EPA will apply to convert each source's
banked 2015 and 2016 original CSAPR NOX ozone season
allowances to 2017 CSAPR Update rule NOX ozone season Group
2 allowances. The resulting post-conversion bank will be equivalent to
1.5 times the sum of states' CSAPR NOX ozone season Group 2
variability limits, or approximately 99,700 allowances. Based on
current data, the EPA notes that this conversion ratio would be
approximately 3.5 to 1, but the ratio could be lower or higher
depending on 2016 emissions. By instituting the one-time conversion of
banked 2015 and 2016 allowances, the EPA is limiting the use of such
allowances for purposes of assuring that emission reductions necessary
to address interstate transport with respect to the 2008 ozone standard
are achieved.
    As of the conversion date (see 40 CFR 97.526(c)(1)), the EPA will
convert all 2015 and 2016 allowances held in any account, other than a
Georgia source's compliance account, to Group 2 allowances. This
includes banked 2015 and 2016 allowances held in accounts in non-CSAPR
Update states (i.e., Florida, North Carolina, and South Carolina). The
ratio will be determined by dividing the number of allowances held in
all such accounts (i.e., every general account and every compliance
account except for a compliance account for a Georgia source) by 1.5
times the sum of the variability limits for all states other than
Georgia. Starting with the 2017 ozone season control period, only CSAPR
NOX ozone season Group 2 allowances can be used for
compliance with the CSAPR Update rule ozone season program. Any
remaining CSAPR NOX ozone season 2015 and 2016 allowances
that are not converted to Group 2 allowances may only be used for
compliance by affected sources in states that are subject to the
original CSAPR ozone season program to meet obligations for the 1997
ozone NAAQS (the only such state is Georgia).
    A source in the state of Georgia that chooses to have some or all
of its banked 2015 and 2016 allowances converted to Group 2 allowances
may move any of its 2015 and 2016 banked allowances out of a compliance
account and into a general account. These allowances in the general
account will then be subject to conversion to Group 2 allowances.
    The EPA proposed and took comment on a range of options for how to
treat the use of banked 2015 and 2016 CSAPR NOX ozone season
allowances by EGUs in the 22 CSAPR Update states. As described
previously, the EPA proposed that sources in states with new or updated
budgets could use all of their banked allowances, but at a ratio
significantly higher than one allowance to cover each ton (e.g., at a
four-for-one turn-in ratio). Additionally, the proposed CSAPR Update
solicited comment on less and more restrictive approaches to address
use of the CSAPR EGU NOX ozone allowance bank. Specifically,
the EPA sought comment on: (1) Allowing banked 2015 and 2016 CSAPR
NOX ozone allowances to be used for compliance with the
CSAPR Update for the 2008 ozone NAAQS starting in 2017 at a one-for-one
ratio, or (2) completely disallowing the use of banked 2015 and 2016
CSAPR NOX ozone allowances for compliance with the CSAPR
Update for the 2008 ozone NAAQS starting in 2017. The EPA also
solicited comment on whether and how the assurance provision penalty
might be increased, in conjunction with any of the above approaches, to
address the relationship of the allowance bank to emissions occurring
under this revised program from 2017 onward. At this time, the EPA is
not changing the assurance provision penalty or its application.
    Comment: Some commenters suggested that implementation by way of
ongoing turn-in ratios would be cumbersome and complicated because it
requires affected EGUs to hold allowances for compliance that are
equivalent to differing ratios of tons of emissions.
    Response: The EPA agrees with the commenters who observed that an
allowance trading program in which a CSAPR NOX ozone season
allowance issued in 2017 and thereafter would be worth one ton of
emissions while a CSAPR NOX ozone season allowance issued in
2015 or 2016 would be worth less than one ton of emissions is overly
complex. These differing emission equivalents of otherwise similar
compliance tools (i.e., allowances) would add a layer of complexity to
ongoing compliance demonstrations. Implementing a ratio by way of a
one-time conversion, instead, has the same impact on emission
reductions as an ongoing turn-in ratio in that the emissions equivalent
of the banked allowances will be reduced consistent with the ratio, but
the implementation of the ratio through a one-time conversion
simplifies implementation of the CSAPR Update rule, which supports
efficient and accurate compliance planning.
    Comment: Some commenters requested that the EPA not limit the use
of banked vintage 2015 and 2016 CSAPR NOX ozone season
allowances in the final CSAPR Update, suggesting that the EPA had not
demonstrated that use of these allowances would undermine the goals of
the CSAPR Update. These commenters suggested that the assurance levels
are adequately protective of the CSAPR Update emission reduction
requirements.
    Response: The EPA disagrees with these comments. As discussed
previously, the EPA anticipates a large number of banked allowances
entering the 2017 CSAPR ozone season control period. Allowing unlimited
use of this magnitude of vintage 2015 and 2016 CSAPR NOX
ozone season allowances in the 2017 control period and going forward
would put the emission reduction requirements of the CSAPR Update rule
in jeopardy and undermine the realization of the emission reductions
needed under the good neighbor provisions of the CAA to avoid
significant contribution to nonattainment and interference with

maintenance of the 2008 ozone NAAQS in downwind areas.
    Comment: Some commenters recommended that the EPA completely
disallow the use of banked 2015 and 2016 CSAPR NOX ozone
allowances for compliance with the CSAPR Update for the 2008 ozone
NAAQS starting in 2017.
    Response: A key feature of allowance trading programs is that they
provide sources an economically efficient strategy for integrating
current and future compliance. Banking of allowances for later use also
creates incentives to make early emission reductions, which often
result in improved air quality earlier than otherwise required. The EPA
has seen early reductions and banking in implementing other trading
programs over the past 20 years, such as the Acid Rain Program and the
NOX SIP Call. The EPA believes such an economic incentive,
and the associated environmental benefits, is conditioned on the
expectation that the resulting banked allowances will have some value
in the future of that program. The approach that the EPA is finalizing
provides a means for the existing 2015 and 2016 CSAPR NOX
ozone season allowances to retain some value, while appropriately
mitigating the potential adverse impact of the allowance bank on the
emission-reducing actions needed from affected EGUs in states with
obligations to address interstate transport for the 2008 ozone NAAQS.
    Comment: Commenters contend that discounting allowances by a turn-
in ratio essentially penalizes sources for early action.
    Response: Commenters did not provide quantitative analysis that the
turn-in ratio would reduce the overall economic value of the allowance
holdings nor even address the question of whether or how the diminution
of the number of allowances available would affect the value of each
individual allowance or that of the overall bank--especially in view of
the fact that the NOX emissions budgets are more
constraining. Because the allowance bank value is a product of both
allowance quantity and allowance price, the conclusion that any
reduction in quantity inherently reduces the bank value is flawed
because it ignores the likely increase in price. Similarly, it merits
noting the high likelihood that some portion of the banked allowance
price reflects larger dynamics in the power markets, such as lower
natural gas prices in recent years, as opposed to explicit early
actions.

D. Feasibility of Compliance

    In practice, the EGU emission budgets that the EPA is finalizing in
this action are achievable for each of the 22 states through operating
and optimizing existing SCR controls, operating existing SNCR controls,
installing state-of-the-art combustion controls, shifting generation to
lower NOX-emitting or non-emitting units, using allowances
that the EPA has allocated to EGUs (including banked allowances), or
obtaining allowances on the allowance market. The EPA believes that
this rule provides sufficient lead time to comply with the 2017 ozone
season requirements.\161\
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    \161\ As described in Section VI, the EPA is finalizing for
Arkansas a 2017 ozone season emission budget that does not account
for EGU NOX reduction potential from combustion controls
and a 2018 ozone season emission budget for Arkansas that does
account for EGU NOX reduction potential from combustion
controls. This approach provides utilities an extra year to upgrade
combustion controls in the event that this is their chosen CSAPR
Update compliance path. This extra year allows for upgrades to be
made across 4 shoulder seasons (fall 2016, spring 2017, fall 2017,
and spring 2018).
---------------------------------------------------------------------------

    To further examine the compliance feasibility of the state
NOX ozone season budgets, the EPA performed an analysis of
state-level achievable NOX ozone season emissions for 2017
that is independent of the IPM-based assessment used to establish the
emission budgets. This analysis relied on the most recent ozone season
data for 2015. For the covered states, these data were adjusted to
account for announced retirements, announced new SCR at existing units,
and announced coal-to-gas conversions at existing units.\162\ The EPA
then applied certain control assumptions directly to the reported unit-
level data. Specifically, this analysis applied EGU NOX
reductions for turning on idled SCR, optimizing all SCR to historically
demonstrated NOX emission rates, installing state-of-the-art
combustion controls, and turning on idled SNCR.
---------------------------------------------------------------------------

    \162\ These adjustments are performed in the same way as the
adjusted historic emissions described in section VI.
---------------------------------------------------------------------------

    The EPA evaluated the feasibility of turning on idled SCRs for the
2017 ozone season. Based on past practice, the EPA finds that idled
controls can be restored to operation in no more than a few months.
This timeframe is informed by many electric utilities' previous, long-
standing practice of utilizing SCRs to reduce EGU NOX
emissions during the ozone season while putting the systems into
protective lay-up during non-ozone season months. For example, this was
the long-standing practice of many EGUs that used SCR systems for
compliance with the NOX Budget Trading Program. It was quite
typical for SCRs to be turned off following the September 30 end of the
ozone season control period. These controls would then be put in
protective lay-up for several months of non-use before being returned
to operation by May 1 of the following ozone season. In the 22 state
CSAPR Update region, 2005 EGU NOX emission data suggest that
125 EGUs operated SCR systems in the summer ozone season while idling
these controls for the remaining seven non-ozone season months of the
year.\163\ Based on EGUs' past experience and the frequency of this
practice, the EPA finds that idled SCRs can be restored to operation in
no more than a few months. Further, because turning on idled SCRs
requires inherently more steps than fully operating existing operating
SCR or turning on idled SNCR, the EPA finds that these additional EGU
NOX reduction strategies are also feasible within a few
months. The lead-time for compliance with this rule is longer than this
timeframe. More details on these analyses can be found in the EGU
NOX Mitigation Strategies Final Rule TSD.
    The EPA also finds that, generally,\164\ state-of-the-art
combustion controls require a short installation time--typically, four
weeks to install along with a scheduled outage (with order placement,
fabrication, and delivery occurring beforehand). Feasibility of
installing combustion controls was examined by the EPA in the original
CSAPR where industry demonstrated the ability to install LNB controls
on a large unit (800 MW) in under six months. More details on these
analyses can be found in the EGU NOX Mitigation Strategies
Final Rule TSD.
---------------------------------------------------------------------------

    \164\ This is true with one exception. The EPA finds that for
Arkansas it is reasonable to delay EGU NOX reduction
potential for certain new combustion controls until 2018 and
therefore gives Arkansas a 2017 budget that does not reflect these
controls and a 2018 budget that does reflect these controls. This
issue is discussed further in Section VI.
---------------------------------------------------------------------------

    As described in section VI, to establish emission budgets, the EPA
made a data-informed assumption with respect to the reasonable
achievable SCR NOX rate (0.10 lbs/mmBtu) for units that are
not operating SCR optimally. In order to independently evaluate whether
emission budgets that rely on this assumption are achievable, the EPA
used actual SCR rates for existing units that reflect demonstrated
unit-level achievable SCR performance. Specifically, the EPA used the
lower of 2015 NOX rates (the most recent demonstrated
achievable SCR NOX rate) and each unit's third lowest
historical ozone season NOX rate. This approach

reflects SCR units operating in a manner consistent with demonstrated
SCR performance capability at each unit. This analysis does not account
for further EGU NOX reduction potential from shifting
generation to lower NOX-emitting or non-emitting units. As
discussed in section VI and further in the EGU NOX
Mitigation Strategies Final Rule TSD, the EPA believes shifting
generation to lower NOX-emitting or non-emitting units is
feasible to implement for the 2017 ozone season but the agency has not
developed an approach to assess generation shifting that is independent
of the IPM-based assessment discussed previously.
    The EPA's analysis showed that, with known fleet changes and
accounting for NOX reduction potential from SCR, SNCR, and
combustion controls, all CSAPR Update rule states would be at or below
their 2017 CSAPR Update rule assurance level while continuing to
otherwise operate consistent with 2015 behavior. The analysis showed
that, with known changes occurring prior to 2017, optimizing SCR and
SNCR, and installing combustion controls, the 22 states would lower
their emissions to approximately 306,000 tons--approximately 3 percent
below their aggregated CSAPR Update rule budgets, and each state would
be below its assurance level. Moreover, this analysis does not reflect
the NOX reduction potential from generation shifting that is
also available for compliance planning. The state-level summary of this
2017 analysis is provided in Table VII.D-1. For further discussion of
implementation feasibility, see the EGU NOX Mitigation
Strategies Final Rule TSD.\165\
---------------------------------------------------------------------------

    \165\ The EPA notes that a state can instead require non-EGU
NOX emission reductions through a SIP, if they choose to
do so.

  Table VII.D-1--Final 2017 EGU NOX Ozone Season Emission Budgets, Assurance Level, and Compliance Feasibility
                                                    Analysis
                                                     [Tons]
----------------------------------------------------------------------------------------------------------------
                                                                   Final 2017 *     Final 2017
                                                                      EGU NOX         EGU NOX       Compliance
                              State                                  emission        assurance      feasibility
                                                                      budgets          level         analysis
----------------------------------------------------------------------------------------------------------------
Alabama.........................................................          13,211          15,985          13,673
Arkansas........................................................          12,048          14,578           8,362
Illinois........................................................          14,601          17,667          13,892
Indiana.........................................................          23,303          28,197          25,325
Iowa............................................................          11,272          13,639          11,070
Kansas..........................................................           8,027           9,713           7,845
Kentucky........................................................          21,115          25,549          21,269
Louisiana.......................................................          18,639          22,553          18,250
Maryland........................................................           3,828           4,632           3,815
Michigan........................................................          17,023          20,598          17,960
Mississippi.....................................................           6,315           7,641           6,296
Missouri........................................................          15,780          19,094          16,326
New Jersey......................................................           2,062           2,495           2,048
New York........................................................           5,135           6,213           5,406
Ohio............................................................          19,522          23,622          16,481
Oklahoma........................................................          11,641          14,086          13,039
Pennsylvania....................................................          17,952          21,722          17,262
Tennessee.......................................................           7,736           9,361           6,569
Texas...........................................................          52,301          63,284          52,647
Virginia........................................................           9,223          11,160           8,670
West Virginia...................................................          17,815          21,556          12,236
Wisconsin.......................................................           7,915           9,577           7,813
                                                                 -----------------------------------------------
    22 State Region.............................................         316,464  ..............         306,252
----------------------------------------------------------------------------------------------------------------
* The EPA is finalizing CSAPR EGU NOX ozone season emission budgets for Arkansas of 12,048 tons for 2017 and
  9,210 tons for 2018 and subsequent control periods.

    The allowance trading program used to implement the emission
reductions in this rulemaking further promotes compliance feasibility.
With this approach, an individual source has the flexibility to forgo
any physical changes to its combustion or post-combustion process and
simply acquire allowances from another source for compliance.
Therefore, any unit-specific limitations in regard to permitting,
installing, and/or modifying controls or other elements of plant
operation do not jeopardize compliance, as the sources have alternative
compliance options.\166\ Allowance markets are well established,
liquid, and will carry a number of already available banked allowances.
Regarding market liquidity, the EPA observes that as of August 15, 2016
(part way through the second CSAPR NOX ozone season
compliance period) more than 1,200 private transfers have taken place
involving more than 260,000 CSAPR NOX ozone season
allowances.\167\ In particular, the combined flexibility of a bank and
a liquid market ensures that any unit with unique circumstances
regarding its control configuration can continue to operate in its
current fashion. Trading flexibility further enhances system
reliability because affected units may cover emissions from any
reliability-relevant operations with allowances available in the
marketplace.
---------------------------------------------------------------------------

    \166\ The EPA does not anticipate that restarting an existing
and permitted idled post-combustion NOX control device
would trigger any new permitting requirements.
    \167\ Allowance transaction data are available in EPA's Air
Markets Program Data, at http://ampd.epa.gov/ampd/.
---------------------------------------------------------------------------

    Stakeholders have a history and familiarity with trading programs.
Congress has enacted, and the EPA has promulgated, many rules that
allow EGUs and other sources to meet their emission limits by trading
allowances

with other sources. In a trading program, the EPA authorizes a source
to meet its emission limit by purchasing emission allowances generated
from other sources, typically ones that implement or enhance their
pollution control devices to reduce emissions to the point where they
are able to sell allowances. As a result, the availability of trading
reduces overall costs to the industry by using the marketplace to
incentivize particular sources that have the lowest control costs to
implement and operate pollution controls.
    The combination of control optimization feasibility, recent trends
in emission reductions, on-the-way emission reductions, allowance
trading, a pre-existing bank, and assurance levels support the
feasibility of the CSAPR Update rule 2017 emission budgets finalized in
this action.
    Further supporting the feasibility of this rule's compliance
obligation is the trend in recent emission reductions. While 2014 ozone
season NOX emissions for the 22 covered states were
approximately 466,000 tons, they dropped by 14 percent in 2015 to
400,000. Moreover, the 2016 ozone season emissions are anticipated to
be approximately 380,000 tons. This pace of reduction illustrates the
speed and adaptability in the fleet's response to market conditions. It
shows a trend in emission reductions that is consistent with the level
of reductions anticipated by the CSAPR Update rule budgets.
    Comment: The EPA received comment highlighting the significant drop
in the CSAPR Update rule budgets for 2017 relative to the CSAPR phase 1
and phase 2 budgets finalized in the original CSAPR rulemaking to
address the 1997 ozone standard. Some commenters asserted this
significant percent difference between the two illustrated a
feasibility concern.
    Response: The EPA views a comparison of the original CSAPR phase 1
and 2 budgets as a poor metric for assessing feasibility of sources'
compliance with the budgets being finalized in the CSAPR Update rule.
As noted previously, states are already well below their current CSAPR
budgets: Reported 2015 emissions for the 21 states subject to the
NOX ozone season trading program pursuant to both the
original CSAPR rulemaking and the CSAPR Update rule total 390,000 tons
in aggregate. For these 21 states, CSAPR phase 1 budgets aggregate to
535,000 tons and phase 2 budgets aggregate to 502,000 tons. Thus,
aggregate 2015 emissions from these states are already more than
100,000 tons below the original CSAPR budgets. Based upon the first two
quarters of emissions data, 2016 emissions are anticipated to be even
lower. These actual emissions make a more appropriate assessment of
what emission reductions are feasible for the 2017 ozone season.
Moreover, CSAPR Update rule states have limited flexibility to exceed
the emission budgets if needed for compliance feasibility by using
banked allowances.

E. FIP Requirements and Key Elements of the CSAPR Trading Programs

    The original CSAPR established a NOX ozone season
allowance trading program that allows affected sources within each
state to use allowances from other sources within the same trading
group for compliance, pursuant to certain monitoring requirements as
codified in 40 CFR part 75. In the CSAPR NOX ozone season
trading program, sources are required to hold one CSAPR ozone season
allowance for each ton of NOX emitted during the ozone
season. The EPA is utilizing that same regional trading approach, with
updated emission budgets, trading groups, and certain additional
revisions described later on, as the compliance remedy implemented
through the FIPs to address interstate transport for the 2008 ozone
NAAQS. The EPA is using the existing NOX ozone season
allowance trading system that was established under CSAPR in 40 CFR
part 97, subpart BBBBB for Group 1, and as promulgated in Subpart EEEEE
for Group 2, to implement the emission reductions identified and
quantified in the FIPs for this action.
1. Applicability
    In this rule, the EPA is finalizing the same applicability
provisions as the original CSAPR, without change. Under the general
CSAPR applicability provisions, a covered unit is any stationary
fossil-fuel-fired boiler or combustion turbine serving at any time on
or after January 1, 2005, a generator with nameplate capacity exceeding
25 MW, which is producing electricity for sale, with the exception of
certain cogeneration units and solid waste incineration units. See 76
FR 48273 (August 8, 2011), for a discussion on applicability in the
final CSAPR rule. The EPA is finalizing the same applicability
provisions as the original CSAPR for the CSAPR Update rule
NOX ozone season trading program Groups 1 and 2. See 40 CFR
97.504 and 40 CFR 97.804. The EPA is codifying these provisions as
described in section IX.
2. State Budgets
    The EPA is promulgating CSAPR NOX ozone season emission
budgets, as provided in table VII.E-1 in this preamble and in 40 CFR
97.810, for the 22 states in this final rule.\168\ This includes the
NOX ozone season emission budgets, new unit set-asides, and
Indian country new unit set-asides for 2017 and beyond.
---------------------------------------------------------------------------

    \168\ The 22 states are: Alabama, Arkansas, Illinois, Indiana,
Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Mississippi,
Missouri, New Jersey, New York, Ohio, Oklahoma, Pennsylvania,
Tennessee, Texas, Virginia, West Virginia, and Wisconsin.
---------------------------------------------------------------------------

    The EPA is establishing new or revised CSAPR NOX ozone
season emission budgets for the 22 eastern states subject to FIPs in
this final rule to address interstate transport for the 2008 ozone
NAAQS. For the 21 of these 22 states that are currently covered by the
original CSAPR ozone season program, the requirement to comply with the
budgets established to address the 2008 ozone NAAQS will replace the
current requirement to comply with the budgets established to address
the 1997 ozone NAAQS.\169\ For Kansas, which is newly brought into the
CSAPR NOX ozone season program, the EPA is finalizing a new
EGU NOX ozone season emission budget designed to address
interstate transport for the 2008 ozone standard.
---------------------------------------------------------------------------

    \169\ As discussed in section IV.C, Iowa, Maryland, Michigan,
New Jersey, New York, Ohio, Oklahoma, Pennsylvania, Texas, Virginia,
West Virginia, and Wisconsin will no longer be subject to an
obligation to reduce emissions to address the 1997 ozone NAAQS after
2016, so for these states the requirement to comply with the budgets
established under this rule will succeed the current requirement to
comply with the budgets established to address the 1997 ozone NAAQS.
Alabama, Arkansas, Illinois, Indiana, Kentucky, Louisiana,
Mississippi, Missouri, and Tennessee remain subject to an obligation
to reduce emissions to address the 1997 ozone NAAQS, but because the
budgets established in this rule are established with regard to the
more stringent 2008 ozone NAAQS, the EPA is coordinating compliance
requirements and allowing compliance with the budgets established
under this rule to serve the purposes of meeting these states'
interstate transport obligations with regard to both the 1997 ozone
NAAQS and the 2008 ozone NAAQS.
---------------------------------------------------------------------------

    The EPA is implementing the emission budgets finalized in this rule
by allocating allowances to sources in those states equal to the
budgets for compliance starting in 2017. The EPA is finalizing
allowance allocations for existing units for CSAPR NOX ozone
season Group 2 states through this rulemaking. Portions of the state
budgets will be set aside for new units, and the EPA will use the
processes set forth in the CSAPR regulations to annually allocate
allowances to the new units in each state from the new unit set-asides.
3. Allocations of Emission Allowances
    For states participating in the CSAPR NOX ozone season
Group 2 program, the

EPA will issue CSAPR NOX ozone season Group 2 allowances to
be used for compliance starting with the 2017 ozone season. This
section explains that, for most states, the EPA is allocating these
allowances up to each state's budget to existing units and new units in
that state by applying the same allocation methodology finalized in the
original CSAPR. This methodology considers both a unit's historical
heat input and its maximum historical emissions. See 76 FR 48284,
August 8, 2011. A different approach is taken for Alabama, Missouri,
and New York, as described later on. This section also describes
allocation to the new unit set-asides and Indian country new unit set-
asides in each state; allocation to units that are not operating; and
the recordation of allowance allocations in source compliance accounts.
    a. Allocations to existing units. The EPA will implement each
state's EGU NOX ozone season emission budget in the CSAPR
NOX ozone season Group 2 trading program by allocating the
number of emission allowances to covered units \170\ within that state
equal to the tonnage of that specific state's budget, as calculated in
section VI. See Table VI.E-2. The portion of a state budget allocated
to existing units in that state is the state budget minus the state's
new unit set-aside and minus the state's Indian country new unit set-
aside. The new unit set-asides are portions of each budget reserved for
new units that might locate in each state or in Indian country in the
future. For the existing source level allocations, see the TSD called,
``Unit Level Allocations and Underlying Data for the CSAPR for the 2008
Ozone NAAQS,'' in the docket for this rulemaking. The only allowance
allocations that are being updated in this final rule are allocations
of NOX ozone season allowances under the CSAPR
NOX ozone season Group 2 program. This final rule does not
change allowance allocations for the CSAPR NOX ozone season
Group 1 trading program or allocations of CSAPR SO2 or
NOX annual allowances.
---------------------------------------------------------------------------

    \170\ As described previously in applicability criteria.
---------------------------------------------------------------------------

    For the purpose of allocations, the original CSAPR regulations
defined an ``existing unit'' as one that commenced commercial operation
prior to January 1, 2010. For the 22 states subject to FIPs in this
rulemaking, the EPA is modifying the definition of an ``existing unit''
for purposes of the NOX ozone season Group 2 program to
include those units that commenced commercial operation prior to
January 1, 2015. This change will allow these units to be directly
allocated allowances from each state's budget as existing units and
will allow the new unit set-asides to be fully reserved for any future
new units locating in covered states or Indian country. The EPA did not
propose, and is not finalizing, any change in the definition of
``existing units'' for sources located in states subject to the
original CSAPR regulations (i.e., sources located in Georgia with
respect to allocation of the CSAPR NOX ozone season Group 1
allowances, and sources located in all covered states with respect to
allocations of CSAPR SO2 or NOX annual
allowances).
    The EPA proposed to apply the methodology finalized in the original
CSAPR for allocating emission allowances to existing units. This
methodology allocates allowances to each unit based on the unit's share
of the state's heat input, limited by the unit's maximum historical
emissions. As discussed in the original CSAPR final rule (See 76 FR
48288-9, August 8, 2011), the EPA finds this allowance allocation
approach to be fuel-neutral, control-neutral, transparent, based on
reliable data, and similar to allocation methodologies previously used
in the NOX SIP Call and Acid Rain Program. The EPA is
therefore finalizing the continued application of this methodology for
allocating allowances to existing sources in this final rule (except as
otherwise noted later on with respect to existing sources in Alabama,
Missouri, and New York).
    This final rule uses the average of the three highest years of heat
input data out of a consecutive five-year period to establish the heat
input baseline for each unit. These heat input data are used to
calculate each unit's proportion of state-level heat input (the unit's
three year average heat input divided by the state's average heat
input). As a first step, the EPA applies this proportion to the total
amount of existing unit allowances to be allocated to quantify unit-
level allocations. However, the EPA constrains the unit-level
allocations so as not to exceed the maximum historical baseline
emissions, calculated as the highest year of emissions out of a
consecutive eight-year period.\171\ The proposal evaluated 2010-2014
heat input data and 2007-2014 emissions data, which was the most recent
data available at that time. The final rule relies on 2011-2015 heat
input data and 2008-2015 emission data, which is currently the most
recent complete dataset.\172\
---------------------------------------------------------------------------

    \171\ The EPA's allocation methodology also considers whether
unit-level allocations should be limited because they would
otherwise exceed emission levels that are permissible under the
terms of consent decrees. However, in this instance the EPA's
analysis indicates that consideration of consent decree limits does
not alter the unit-level allocations.
    \172\ See the CSAPR Allowance Allocations Final Rule TSD for
further description of the allocation methodology.
---------------------------------------------------------------------------

    For the states of Alabama, Missouri, and New York, the EPA is not
applying the methodology described previously. Instead, for these
states only, the EPA is allocating allowances to existing units in the
state according to methodologies for allocating ozone season
NOX allowances under the current CSAPR NOX Ozone
Season Trading Program that have been adopted into state regulations
and submitted to the EPA for approval as SIP revisions, but with the
states' methodologies applied to the final budgets established in this
rule. This approach is consistent with the proposal, in which the EPA
indicated that where a state had adopted state regulations to govern
the allocation of allowances under the current CSAPR NOX
ozone season program and had included those regulations in an approved
SIP revision, if the state regulations by their terms would govern
allocations under a revised budget, or if it was clear how the state's
approved methodology could be used by the EPA to compute allocations
using the revised budget, the state's regulations or methodology would
be used to govern the allowance allocations under the final rule. These
three states have adopted state regulations regarding the allocation of
CSAPR allowances for ozone season NOX emissions and have
made SIP submittals seeking incorporation of the regulations into their
SIPs. Although the EPA has not acted on those SIP submittals (because
they concern the current NOX ozone season trading program to
which the sources in these three states will no longer be subject after
2016), the EPA has determined that it is clear how the allocation
methodologies reflected in the state-adopted regulations can be used to
compute allocations under the final budgets for this rule. The EPA took
comment in the proposal on this topic. As explained in the proposal,
these possible approaches could avert the need for a state to submit
another SIP revision to implement the same allocation provisions under
this rule that the state has already implemented or sought to implement
under CSAPR before adoption of this rule. Since the agency received no
adverse comments on using this modified allocation approach for states
with an EPA-approved SIP revision under the current rule, the EPA is
finalizing this approach

for these three states.\173\ Further discussion of how these three
states' methodologies were used to determine the allocations of
allowances to existing units in the states is included in the CSAPR
Allowance Allocations Final Rule TSD.
---------------------------------------------------------------------------

    \173\ In the case of Missouri, the allocations also reflect the
state's comments regarding the use of the state's methodology to
establish the allocations.
---------------------------------------------------------------------------

    As discussed later on, states have several options under CSAPR to
submit SIP revisions which, if approved, may result in the replacement
of the EPA's default allocations with state-determined allocations for
control periods in 2018 or later years. The provisions described
previously will not preclude any state from submitting an alternative
allocation methodology for later compliance years through a SIP
revision. See section VII.F for further details on the development of
approvable SIP submissions.
    b. Allocations to new units. Consistent with the revision to the
definition of ``existing unit'' described earlier, for purposes of the
final rule a ``new unit'' that is eligible to receive allocations from
the ``new unit set-aside'' for a state includes any covered unit that
commences commercial operation on or after January 1, 2015, as well as
a unit that becomes covered by meeting applicability criteria
subsequent to January 1, 2015; a unit that relocates to a different
state covered by a FIP promulgated by this final rule; and an
``existing'' covered unit that stops operating for two consecutive
years but resumes commercial operation at some point thereafter. To the
extent that states seek approval of SIPs with different allocation
provisions than those provided by CSAPR, these SIPs may also define new
units differently.
    The EPA is also finalizing allocations to a new unit set-aside
(NUSA) for each state equal to a minimum of 2 percent of the total
state budget, plus the projected amount of emissions from planned units
in that state. For instance, if planned units in a state are projected
to emit 3 percent of the state's NOX ozone season emission
budget, then the new unit set-aside for the state would be set at 5
percent, the sum of the minimum 2 percent set-aside plus an additional
3 percent for planned units. This is the same approach currently used
to implement the NUSA for all CSAPR trading programs. See 76 FR 48292.
Pursuant to the CSAPR regulations, new units may receive allocations
starting with the first year they are subject to the allowance-holding
requirements of the rule. If the allowances in the NUSA remain
unallocated to new units, the allowances from the set-asides are
redistributed to existing units before each compliance deadline. For
more detail on the CSAPR new unit set-aside provisions, see 40 CFR
97.811(b) and 97.812.

   Table VII.E-1--Final EGU NOX Ozone Season New Unit Set-Aside Amounts, Reflecting Final EGU Emission Budgets
                                                     [Tons]
----------------------------------------------------------------------------------------------------------------
                                                                                Indian country
                                               Final 2017 *  EGU  New unit  set-  New unit  set-   new unit  set-
                    State                        NOX  emission     aside  amount   aside  amount   aside  amount
                                                budgets  (tons)      (percent)      (tons) \1\        (tons)
----------------------------------------------------------------------------------------------------------------
Alabama......................................             13,211               2             255              13
Arkansas*....................................       12,048/9,210             2/2         240/185  ..............
Illinois.....................................             14,601               2             302  ..............
Indiana......................................             23,303               2             468  ..............
Iowa.........................................             11,272               3             324              11
Kansas.......................................              8,027               2             148               8
Kentucky.....................................             21,115               2             426  ..............
Louisiana....................................             18,639               2             352              19
Maryland.....................................              3,828               4             152  ..............
Michigan.....................................             17,023               4             665              17
Mississippi..................................              6,315               2             120               6
Missouri.....................................             15,780               2             324  ..............
New Jersey...................................              2,062               9             192  ..............
New York.....................................              5,135               5             252               5
Ohio.........................................             19,522               2             401  ..............
Oklahoma.....................................             11,641               2             221              12
Pennsylvania.................................             17,952               3             541  ..............
Tennessee....................................              7,736               2             156  ..............
Texas........................................             52,301               2             998              52
Virginia.....................................              9,223               6             562  ..............
West Virginia................................             17,815               2             356  ..............
Wisconsin....................................              7,915               2             151               8
                                              ------------------------------------------------------------------
    22 State Region..........................    316,464/313,626  ..............  ..............  ..............
----------------------------------------------------------------------------------------------------------------
\1\ New-unit set-aside amount (tons) does not include the Indian country new unit set-aside amount (tons).
* The EPA is finalizing CSAPR EGU NOX ozone season emission budgets for Arkansas of 12,048 tons for 2017 and
  9,210 tons for 2018 and subsequent control periods.

    c. Allocations to new units in Indian Country. Clean Air Act
programs on Indian reservations and other areas of Indian country over
which a tribe or the EPA has demonstrated that a tribe has jurisdiction
are implemented either by a tribe through an EPA-approved tribal
implementation plan (TIP) or the EPA through a FIP. Tribes may, but are
not required to, submit TIPs. Under the EPA's Tribal Authority Rule
(TAR), 40 CFR 49.1-49.11, the EPA is authorized

to promulgate FIPs for Indian country as necessary or appropriate to
protect air quality if a tribe does not submit and get EPA approval of
a TIP. See 40 CFR 49.11(a); see also 42 U.S.C. 7601(d)(4). To date, no
tribes have sought approval of a TIP implementing the good neighbor
provision at CAA section 110(a)(2)(D)(i)(I) with respect to the 2008
ozone NAAQS. The EPA has therefore determined that it is necessary and
appropriate for EPA to implement the FIPs in any affected Indian
reservations or other areas of Indian country over which a tribe has
jurisdiction. There are no existing units that would qualify as
``covered units'' under the final CSAPR Update in Indian country
located in the states covered by this rule.
    The EPA is finalizing its proposal to apply the CSAPR approach for
allocating allowances to any new units locating in Indian country.
Under the CSAPR approach, allowances to possible future new units
locating in Indian country are allocated by the EPA from an Indian
country new unit set-aside established for each state with Indian
country. See 40 CFR 97.811(b)(2) and 97.812(b). The EPA reserves 0.1
percent of the total state budget for new units in Indian country
within that state (5 percent of the minimum 2 percent new unit set-
aside, without considering any increase in a state's new unit set-aside
amount for planned units). Because states generally have no SIP
authority in these areas, the EPA will continue to allocate such
allowances to sources locating in such areas of Indian country within a
state over which a tribe or EPA has demonstrated that a tribe has
jurisdiction, even if the state submits a SIP to replace the applicable
FIP. 40 CFR 52.38(b)(9)(vi) and (vii) and 52.38(b)(10). Unallocated
allowances from a state's Indian country new unit set-aside are
returned to the state's new unit set-aside and allocated according to
the methodology described previously.
    d. Allocations to units that do not operate and the new unit set-
aside. The EPA is finalizing its proposal to apply the CSAPR approach
for allocating to units that do not operate and to the new unit set-
aside. The EPA is codifying the existing CSAPR provision under which a
covered unit that does not operate for a period of two consecutive
years will receive allowance allocations for a total of up to five
years of non-operation. 40 CFR 97.811(a)(2). This approach mitigates
concerns that loss of allowance allocations could be an economic
consideration that would cause a unit, which would otherwise retire, to
continue operations in order to retain ongoing allowance allocations.
Pursuant to this provision, starting in the fifth year after the first
year of non-operation, allowances allocated to such units will instead
be allocated to the new unit set-aside for the state in which the non-
operating unit is located. This approach allows the balance of
allowance allocations to shift over time from existing units to new
units, aligned with transition of the EGU fleet from older generating
resources to newer ones. Allowances in the new unit set-aside that are
not used by new units are reallocated to existing units in the state.
The EPA proposed to retain this timeline for allowance allocation for
non-operating units and it is finalizing that proposal.
4. Variability Limits, Assurance Levels, and Penalties
    In the original CSAPR, the EPA developed assurance provisions,
including variability limits and assurance levels (with associated
compliance penalties), to ensure that each state will meet its
pollution control obligations and to accommodate inherent year-to-year
variability in state-level EGU operations.
    The original CSAPR budgets, and the updated CSAPR emission budgets
finalized in this document, reflect EGU operations in an ``average
year.'' However, year-to-year variability in EGU operations occurs due
to the interconnected nature of the power sector and from changing
weather patterns, changes in electricity demand, or disruptions in
electricity supply from other units or from the transmission grid.
Recognizing this, the trading program provisions finalized in the
original CSAPR rulemaking include variability limits, which define the
amount by which an individual state's emissions may exceed the level of
its budget in a given year to account for this variability in EGU
operations. A state's budget plus its variability limit equals a
state's assurance level, which acts as a cap on each state's
NOX emissions during a control period (that is, during the
May-September ozone season in the case of this rule). The new
NOX ozone season trading program provisions established for
affected sources in the 22 states subject to this rule contain
equivalent assurance provisions.
    These variability limits ensure that the trading program can
accommodate the inherent variability in the power sector while also
ensuring that each state eliminates the amount of emissions within the
state, in a given year, that must be eliminated to meet the statutory
mandate of section 110(a)(2)(D)(i)(I). Moreover, the structure of the
program, which achieves required emission reductions through limits on
the total number of allowances allocated, assurance provisions, and
penalty mechanisms, ensures that the variability limits only allow the
amount of temporal and geographic shifting of emissions that is likely
to result from the inherent variability in power generation, and not
from decisions to avoid or delay the installation of necessary
controls.
    To establish the variability limits in the original CSAPR, the EPA
analyzed historical state-level heat input variability as a proxy for
emissions variability, assuming constant emission rates. See 76 FR
48265, August 8, 2011. The variability limits for ozone season
NOX in the original CSAPR were calculated as 21 percent of
each state's budget, and these variability limits for the
NOX ozone season trading program were then codified in 40
CFR 97.510 along with the state budgets. The EPA performed an updated
analysis to ensure the 21 percent variability limits used in the
original CSAPR rule were also valid for purposes of implementing the
new and revised budgets finalized in this rule. The EPA's updated
analysis demonstrates that variability considering recent data remains
consistent (i.e., within 1 percent) with the assessment conducted for
the original CSAPR rulemaking. This analysis may be found in the TSD
called, Power Sector Variability Final CSAPR Update TSD, in the docket
for this rulemaking. The EPA is therefore setting variability limits
for the 22 states covered by this rule calculated as 21 percent of each
state's new or revised budget and codifying these variability limits in
40 CFR 97.810.
    Table VII.E-2 shows the final EGU NOX ozone season Group
2 emission budgets, variability limits, and assurance levels for each
state.

 Table VII.E-2--Final EGU NOX Ozone Season Emission Budgets Reflecting EGU NOX Mitigation Available for 2017 at
                            $1,400 per Ton, Variability Limits, and Assurance Levels
                                                     [Tons]
----------------------------------------------------------------------------------------------------------------
                                                             EGU 2017 * NOX     EGU NOX ozone
                                                              ozone season     season group 2     EGU NOX ozone
                           State                            group 2 emission     variability     season group 2
                                                                 budgets           limits       assurance levels
----------------------------------------------------------------------------------------------------------------
Alabama...................................................            13,211             2,774            15,985
Arkansas..................................................      12,048/9,210       2,530/1,934     14,578/11,144
Illinois..................................................            14,601             3,066            17,667
Indiana...................................................            23,303             4,894            28,197
Iowa......................................................            11,272             2,367            13,639
Kansas....................................................             8,027             1,686             9,713
Kentucky..................................................            21,115             4,434            25,549
Louisiana.................................................            18,639             3,914            22,553
Maryland..................................................             3,828               804             4,632
Michigan..................................................            17,023             3,575            20,598
Mississippi...............................................             6,315             1,326             7,641
Missouri..................................................            15,780             3,314            19,094
New Jersey................................................             2,062               433             2,495
New York..................................................             5,135             1,078             6,213
Ohio......................................................            19,522             4,100            23,622
Oklahoma..................................................            11,641             2,445            14,086
Pennsylvania..............................................            17,952             3,770            21,722
Tennessee.................................................             7,736             1,625             9,361
Texas.....................................................            52,301            10,983            63,284
Virginia..................................................             9,223             1,937            11,160
West Virginia.............................................            17,815             3,741            21,556
Wisconsin.................................................             7,915             1,662             9,577
22 State Region...........................................   316,464/313,626  ................  ................
----------------------------------------------------------------------------------------------------------------
* The EPA is finalizing CSAPR EGU NOX ozone season emission budgets for Arkansas of 12,048 tons for 2017 and
  9,210 tons for 2018 and subsequent control periods.

    The assurance provisions include penalties that are triggered when
the state emissions as a whole exceed the state's assurance level. The
original CSAPR provided that, when the EGUs in a state exceed that
state's assurance level in a given year, some of those sources will be
assessed a 3-to-1 allowance surrender on the excess tons, as described
later on. Each excess ton above the assurance level must be met with
one allowance for normal compliance plus two additional allowances to
satisfy the penalty. The penalty is designed to deter state-level
emissions from exceeding assurance levels. This was described in the
original CSAPR as air quality-assured trading that accounts for
variability in the electricity sector but also ensures that the
necessary emission reductions occur within each covered state.\174\ If
the EGU emissions in a state do not exceed the state's assurance level,
no penalties are incurred by any source. Establishing assurance levels
with compliance penalties therefore responds to the court's holding in
North Carolina requiring the EPA to ensure that sources in each state
are required to eliminate emissions that significantly contribute to
nonattainment or interfere with maintenance of the NAAQS in another
state.\175\
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    \174\ See 76 FR 48266, August 8, 2011: ``Far from excusing any
state from addressing emissions within the state that significantly
contribute to nonattainment or interfere with maintenance in other
states, these variability limits ensure that the system can
accommodate the inherent variability in the power sector while
ensuring that each state eliminates the amount of emissions within
the state, in a given year, that must be eliminated to meet the
statutory mandate of section 110(a)(2)(D)(i)(I). Moreover, the
structure of the program, which achieves required emission
reductions through limits on the total number of allowances
allocated, assurance provisions, and penalty mechanisms, ensures
that the variability limits only allow the amount of temporal and
geographic shifting of emissions that is likely to result from the
inherent variability in power generation, and not from decisions to
avoid or delay the installation of necessary controls. Under the
remedy, an individual state can have emissions up to its budget plus
the variability limit. However, the requirement that all sources
hold allowances covering emissions, and the fact that those
allowances are allocated based on state-specific budgets without
variability, ensure that the total emissions from the states do not
exceed the sum of the state budgets. The remedy, therefore, ensures
both that total emissions do not exceed the total of the state
budgets and that the required emission reductions occur in each
state.''
    \175\ 531 F.3d at 908.
---------------------------------------------------------------------------

    To assess the penalty under the assurance provisions, the EPA
evaluates whether any state's total EGU emissions in a control period
exceeded the state's assurance level, and if so, the EPA then
determines which owners and operators of units in the state exceeded
the common designated representative's (DR) share of the state
assurance level and, therefore, will be subject to an allowance
surrender requirement. Since a DR often represents multiple sources,
the EPA evaluates which groups of units at the common DR level had
emissions exceeding the respective common DR's share of the state
assurance level. This provision is triggered only if two criteria are
met: (1) The group of sources and units with a common DR are located in
a state where the total state EGU emissions for a control period exceed
the state assurance level; and (2) that group with the common DR had
emissions exceeding the respective DR's share of the state assurance
level. The EPA is finalizing equivalent assurance provisions, modified
only as necessary to allow the provisions to work in the same way
despite the presence of factors that could otherwise alter their
operation, such as converted banked allowances, the possible election
by Georgia to bring its sources into the Group 2 program through a SIP
revision, and the possible election by other states to bring non-EGUs
and additional allowances into the program through SIP revisions. These
differences are discussed in section IX in this preamble. For more
information on the CSAPR assurance provisions generally, see 76 FR
48294 (August 8, 2011).

5. Compliance Deadlines
    As discussed in sections II.A., III.B., and IV.A., the rule
requires sources to comply with the new and revised NOX
emission budgets for the 2017 ozone season (May 1 through September 30)
in order to ensure that necessary NOX emissions reductions
are made as expeditiously as practicable to assist downwind states'
attainment and maintenance of the 2008 ozone NAAQS. The compliance
deadline is coordinated with the attainment deadline for that standard
and the rule includes provisions to ensure that all necessary
reductions occur at sources within each individual state. Thus, under
the new CSAPR NOX Ozone Season Group 2 Trading Program
established by this rule at subpart EEEEE of 40 CFR part 97, the first
control period is the 2017 ozone season (i.e., May 1, 2017 through
September 30, 2017).
    The deadline by which sources must hold Group 2 allowances in their
compliance accounts at least equal to their emissions during the
control period is March 1 of the year following the control period,
which is the same as the deadline for holding allowances under the
CSAPR annual trading programs. This is a change from the current CSAPR
NOX Ozone Season Trading Program provisions, which set a
deadline of December 1 of the year of the control period, and is
intended to simplify compliance and program administration and thereby
reduce costs for both regulated parties and the EPA. Under these
coordinated deadlines, the date by which Group 2 sources will be
required to hold Group 2 allowances for compliance for purposes of the
2017 control period is March 1, 2018.
6. Monitoring and Reporting and the Allowance Management System
    Monitoring and reporting in accordance with the provisions of 40
CFR part 75 are required for all units subject to the CSAPR
NOX ozone season trading programs and for all units covered
under this final rule for the 2008 ozone NAAQS requirements. The EPA
finalizes that the monitoring system certification deadline by which
monitors are installed and certified for compliance use generally will
be May 1, 2017, the beginning of the first control period in this rule,
with potentially later deadlines for units that commence commercial
operation less than 180 days before that date. Similarly, the EPA is
finalizing that the first period in which emission reporting is
required would be the quarter that includes May 1, 2017 (the second
quarter of the year that covers April, May, and June). These monitoring
and reporting deadlines are analogous to the current deadlines under
the original CSAPR.
    Under part 75, a unit has several options for monitoring and
reporting, including the use of a CEMS; an excepted monitoring
methodology based in part on fuel-flow metering for certain gas- or
oil-fired peaking units; low-mass emissions monitoring for certain non-
coal-fired, low emitting units; or an alternative monitoring system
approved by the Administrator through a petition process. In addition,
sources can submit petitions to the Administrator for alternatives to
specific CSAPR and part 75 monitoring, recordkeeping, and reporting
requirements. Each CEMS must undergo rigorous initial certification
testing and periodic quality assurance testing thereafter, including
the use of relative accuracy test audits (RATAs) and 24-hour
calibrations. In addition, when a monitoring system is not operating
properly, standard substitute data procedures are applied and result in
a conservative estimate of emissions for the period involved.
    Further, part 75 requires electronic submission of a quarterly
emissions report to the Administrator, in a format prescribed by the
Administrator. The report will contain all of the data required
concerning ozone season NOX emissions.
    Units currently subject to CSAPR NOX ozone season or
CSAPR NOX annual trading program requirements monitor and
report NOX emissions in accordance with part 75, so most
sources will not have to make any changes to monitoring and reporting
practices. In fact, only units in Kansas, which are currently subject
to the CSAPR NOX annual trading program but not the CSAPR
NOX ozone season trading program, will need to start newly
reporting ozone season NOX mass emissions. These emissions
are already measured under the annual program, so the change will be a
minor reporting modification and the sources will not be required to
install new monitoring systems. Units in the following states monitor
and report NOX emissions under the CSAPR NOX
ozone season trading program and will continue to do so without change
under the CSAPR ozone update for the 2008 NAAQS: Alabama, Arkansas,
Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan,
Mississippi, Missouri, New Jersey, New York, Ohio, Oklahoma,
Pennsylvania, Tennessee, Texas, Virginia, West Virginia, and Wisconsin.
7. Recordation of Allowances
    The EPA is establishing deadlines for recording allocations of
ozone season NOX allowances to sources affected under this
rule that generally parallel the recordation deadlines under the
existing CSAPR trading programs, but with later deadlines reflecting
the fact that this program is starting two years later than the
existing CSAPR trading programs. Specifically, allocations to existing
units for the first two control periods under the new program (2017 and
2018) will be recorded by January 9, 2017. This recordation deadline is
four months before the start of the first control period for the new
program (May 1, 2017) and 14 months before the date by which sources
are required to hold allowances sufficient to cover their emissions for
that first control period (March 1, 2018, as discussed previously),
giving sources ample time to engage in allowance trading activities
consistent with their preferred compliance strategies. Allowance
allocations for 2019 and 2020 will be recorded by July 1, 2018;
allocations for 2021 and 2022 will be recorded by July 1, 2019; and
allocations for 2023 and 2024 will be recorded by July 1, 2020.
Allowances for each succeeding control period will be recorded by July
1 of the fourth year before the year of the control period, matching