It further stabilizes allowance markets by providing a pool of allowances that can be used in periods when allowances are relatively scarce and by reducing price differences that would otherwise exist between different allowance vintages. Another advantage offered by systems that allow for banking of allowances is that by giving emitting sources with banked allowances a vested interest in the control program, such systems may more effectively align the interests of regulators and emissions sources. This "buy-in" should contribute to the long-term viability and political acceptability of the control program. [EPA-HQ-OAR-2009-0491-2573.1, p.13]
On the other hand, banked allowances make it possible for emissions in future years to exceed caps set in those years, eliminating the certainty otherwise provided by a cap-and-trade system that emissions levels will not exceed the cap. Environmental advocates, some state environmental agencies, and the EPA itself have expressed significant concerns with allowing banking for this reason. In response to these concerns, a regulator could end the existing emissions-trading program (rendering allowances useless) or limit use of banked allowances (reducing their value). [EPA-HQ-OAR-2009-0491-2573.1, p.13]
2. Banking and Transition
A tension exists between the expectations that underlie the decision to bank allowances and the environmental objectives of these programs. If allowances banked in one version of an emissions-trading system cannot be used in subsequent revisions, or if unanticipated program changes otherwise undermine their value, the basic expectations that support banking will be undermined. Allowances therefore only retain value to the extent that regulators credibly promise not to undermine them. If those that hold allowances no longer believe they will be useful in the future, they will not make continuing early reductions in emissions, and the efficiency benefits of banking will be unrealized even if banking remains a formal part of the program. [EPA-HQ-OAR-2009-0491-2573.1, pp.13-14]
It is even possible that these effects may carry over between different emissions-trading programs with the same repeat players. For example, EPA administers most emissions-trading programs for various pollutants in the United States, and the predominant emissions sources in most of these programs are similar -- large fossil fuel electricity generation plants and some industrial facilities. EPA actions that undermine the value of banked allowances in one program might lead a rational emitter to predict that the EPA will behave similarly with respect to other programs and markets and adjust its trading and banking behavior accordingly. Investors and market makers are similar repeat players. If the EPA discards banked allowances, these actors might be dissuaded from investing in not only the new market, but other existing or future EPA-administered emissions markets. Moreover, all of the EPA's regulatory decisions, including those regarding the value of banked allowances, are public. Participants in future emissions trading markets, even if they have no experience with current or past EPA-administered markets, will make judgments based on this information. If these first-time players observe that the EPA has undermined the expectations of past market participants, their rational response is identical to that for repeat players. In short, the agency's reputation among current or future market participants matters. [EPA-HQ-OAR-2009-0491-2573.1, p.14]
In short, the issue is efficiency -- what is problematic is the potential effect of regulatory decisions on market-participant behavior, along with the political impact of reduced participant buy-in. When participants believe that banked allowances will disappear or lose value in the future, they are less likely to make early reductions and bank credits and more likely to dump allowances already banked in a way that increases emissions. Sources will also be unlikely to make early reductions to smooth the transition from the existing program and provide a cushion of allowances in the first years of the new program. If this happens, a trading program will be less effective in achieving the expected abatement benefits at lowest cost. Spillover effects between repeat players in multiple markets or into future, unrelated markets may extend these adverse effects to other trading programs.[EPA-HQ-OAR-2009-0491-2573.1, p.14]
3. The EPA's Track Record
Since the 1990s, emissions-trading markets -- mainly in the form of cap-and-trade programs regulated by the EPA -- have become a leading federal policy mechanism in the United States for achieving reductions in pollution. For at least a few major air pollutants, most notably NOx and SO2 emissions from fossil fuel power plants, markets have supplemented traditional command-and-control regulation as a major regulatory tool. Cap-and-trade also has been advanced as a likely vehicle for regulating greenhouse gases from a broad range of sources. [EPA-HQ-OAR-2009-0491-2573.1, pp.14-15]
Emissions trading programs, however, do change over time. Caps on emissions generally have been tightened over time as new information about the adverse effects from pollutants has become known or costs of control have declined. The tightening of caps and expansion of programs' geographic scope has resulted in new programs with new sets of rules. Court decisions and broader policy changes also have spurred creation of new programs that supplant or modify existing ones. In all these transitions, treatment of banked allowances has been an issue.  [EPA-HQ-OAR-2009-0491-2573.1, p.15]
An important and underemphasized element of regulatory design during changes in emissions-trading systems is therefore the need to minimize disruption by maximizing confidence among participants that the rights and value embodied by banked allowances will be preserved as much as possible -- that environmental goals will be balanced with expectations about banked allowances. [EPA-HQ-OAR-2009-0491-2573.1, p.15]
A recent paper by the authors examines the several transitions between NOx emissions-trading markets created by EPA regulation: the start-up of the Ozone Transport Commission (OTC) NOx Budget Program, the 2003 transition from the OTC NOx Budget Program to the NOx SIP Call, the 2009 transition from the SIP Call to the seasonal NOx market in CAIR, and the creation in CAIR of a new annual NOx market. In addition, the paper discusses the recent transition in SO2 trading programs between the Title IV program created by Congress to the CAIR program created by the EPA. [EPA-HQ-OAR-2009-0491-2573.1, p.15]
In most of these transitions, the newer markets included stricter emissions caps than their predecessors. This created a fundamental tension between the rights and value associated with banked allowances and the environmental goal of reduced emissions. If banked allowances are used in the new, stricter program, emissions will be greater than desired in the short term until those banked allowances are drawn down. This delay before the new caps "bite" will be perceived as problematic and will create pressure to reduce or eliminate these "excess" allowances. However, a decision to prohibit the transfer of banked allowances to the new program has consequences for the stability and effectiveness of the market (and possibly other markets). [EPA-HQ-OAR-2009-0491-2573.1, p.15]
Striking the right balance is not easy, and the EPA has faced this issue through all the transitions between markets discussed in our recent paper. Though the basic issues have not changed, the EPA's response has not been consistent. When the EPA has restricted exchange of banked allowances, provided information on exchange only after allowances have been banked and expectations created, or when courts have blocked EPA plans for simple transitions, markets have responded with very high and unstable prices for allowances in the future markets and the collapse of allowance prices in the existing program. This past experience indicates that if EPA's handling of transitions in the NOx and SO2 markets leads to uncertainty for regulated entities about the credibility of allowance banking, these actions will adversely affect market behavior in the future, reducing the effectiveness and cost savings of market-based programs. [EPA-HQ-OAR-2009-0491-2573.1, p.16]
Our discussion of the transition between cap-and-trade programs for NOx and SO2 highlights this issue. The decision by the OTC states to "sunset" 1999 vintage NOx allowances, the D.C. Circuit decision to vacate the CAIR rule, and the EPA's recent proposed Transport Rule to replace CAIR have limited -- or in the case of the Transport rule would limit -- the use of banked allowances with the transition between programs, significantly altering their value and introducing a substantial element of uncertainty in the markets for emissions allowances. [EPA-HQ-OAR-2009-0491-2573.1, p.16]
D. Banked Allowances and the Transport Rule: Conclusions
We believe there are two key lessons to take away from our review of the historical experience with the several transitions in EPA-sponsored cap-and-trade programs. [EPA-HQ-OAR-2009-0491-2573.1, p.16]
One lesson of this history is that transitions to new trading programs can be difficult for markets, as reflected by the high reported prices for allowances in the months preceding the startup of new programs. These high prices were associated with uncertainty within the regulated industry over the availability of allowances. Observers have reported that the initiation of new environmental programs brings some degree of "fear" and "uncertainty" to the regulated community. The transition periods have been characterized by thin markets (i.e., there are relatively few transactions) and little or no mechanism for price discovery. Substantial price volatility in these new markets -- the OTC NOx market (1999), the transition to the NBP (2003), and the CAIR annual NOx market (2009) -- adversely affect trading activity and the overall efficiency of the program. [EPA-HQ-OAR-2009-0491-2573.1, p.16] [[See EPA-HQ-OAR-2009-0491-2573.1, pp.17-18 for a detailed discussion on this issue.]]

23 Governing statutes and EPA regulations make it clear that its emissions-trading programs do not convey formal property rights (see note 22 below and accompanying text). Nevertheless, emissions allowances convey certain rights in terms of complying with an emissions cap and, if banking is allowed, in terms of the use of allowances in future years. Even if these rights are not legally enforceable as full property rights would be, they are the source of the expectations that are at the root of a functional emissions trading market. See Section II.C below.
Response:
See preamble section IX and responses to other comments primarily in this section.
Organization: Large Public Power Council (LPPC)
Comment:
Large Public Power Council (LPPC)
IV. COMMENTS ON THE STATUS OF BANKED CAIR AND TITLE IV ALLOWANCES
LPPC believes that the proposed Transport Rule wrongly rejects policy options that would preserve the value of banked CAIR NOx allowances and banked Title IV allowances (which were the compliance currency for the SO2 budgets under CAIR). Substantial reserves of banked allowances exist because EGUs reduced their emissions far beyond Title IV and CAIR requirements, fairly expecting to be able to use these banked allowances for future compliance. Destroying the value of these allowances would discourage EGUs from undertaking similarly aggressive early emission reductions under the Transport Rule or other related programs. Moreover, EGUs will have every reason to "consume" banked allowances by increasing their emissions in through 2011 unless EPA creates some mechanism for preserving the value of banked allowances. 48 To avoid these problems, LPPC proposes to create a market for these banked allowances by allowing EGUs to trade in CAIR and Title IV allowances for a limited quantity of Transport Rule allowances set aside from the proposed state emission budgets. As discussed below, we believe this option both preserves the environmental integrity of the Transport Rule and is consistent with North Carolina. [EPA-HQ-OAR-2009-0491-2667.1, p.15]
Under our proposal, 10% of the allowances allocated under each state's budget would be set-aside for distribution to EGUs that are willing to retire banked CAIR and Title IV allowances. Banked allowances could be traded in for Transport Rule allowances from the set aside at an appropriate predetermined ratio (for example, two Title IV allowances for each Transport Rule SO2 allowance). For purposes of the trade-in, EGUs would be permitted to use their own reserves of banked allowances or purchase banked allowances from third parties. By creating a market for banked CAIR and Title IV allowances, this policy would reward the early emission reductions that took place under those programs and discourage excessive use of banked allowances during 2010 and 2011. [EPA-HQ-OAR-2009-0491-2667.1, pp.15-16]
This alternative would satisfactorily address the two major concerns EPA articulated with regard to proposals to allow the use of banked CAIR and Title IV allowances: (1) that doing so would be inconsistent with the D.C. Circuit's decision in North Carolina and (2) that the volume of banked allowances is such that their continued use would significantly impair the quantity of emission reductions expected under the Transport Rule. LPPC's proposed alternative avoids both concerns. Of course, the proposal would have no impact on the environmental integrity of the proposed Transport Rule, because banked allowances would merely be traded in for allowances set-aside from the state emissions budget. The size of the state emission budgets and variability limits would be unaffected. Furthermore, this alternative would comply with North Carolina because it does not implicate the concerns raised by the D.C. Circuit in that case. [EPA-HQ-OAR-2009-0491-2667.1, p.16]
In North Carolina, the D.C. Circuit reached three holdings that are relevant to the use of banked allowances. First, the D.C. Circuit held that EPA inappropriately used Title IV allowance allocations as the basis for state SO2 budgets under CAIR, arguing that this factor had nothing to do with ensuring that each state eliminated its significant contribution to downwind air quality problems. 49 Under the alternative recommended here, state SO2 budgets (and NOx budgets) would still be based entirely on EPA's method for quantifying significant contributions and interference with maintenance. Although EGUs that hold significant quantities of banked Title IV allowances would be able to claim Transport Rule allowances from the set-aside, this result would not offend the D.C. Circuit's instruction that state budgets conform to Section 110. 50 [EPA-HQ-OAR-2009-0491-2667.1, p.16]
Second, the D.C. Circuit held that EPA improperly used fuel adjustment factors to establish state NOx budgets, because this method allowed coal-dependent states to more easily address their significant contribution at the expense of states with cleaner fuel sources. 51 Section 110, reasoned the D.C. Circuit, requires each state to address its own significant contribution, and not bear a lesser or greater burden than other states based on its energy portfolio. Here again, the LPPC proposal preserves the North Carolina compliant state emission budgets proposed in the Transport Rule. Although sources holding banked allowances would benefit from the trade-in provision, there would be no improper cross-subsidization between states in violation of Section 110. [EPA-HQ-OAR-2009-0491-2667.1, p.16]
Lastly, the D.C. Circuit held that EPA unlawfully burdened the use of Title IV allowances by requiring those allowances to be submitted for compliance with CAIR at a discounted ratio. 52 LPPC's preferred alternative does not pose such a concern, because the trading of Title IV allowances for Transport Rule allowances would be completely voluntary and would not affect their value or legal status under the Acid Rain Program. [EPA-HQ-OAR-2009-0491-2667.1, pp.16-17]

48. 75 Fed. Reg. at 45,339. [EPA-HQ-OAR-2009-0491-2667.1, p.15]
49. 531 F.3d at 916-17. [EPA-HQ-OAR-2009-0491-2667.1, p.16]
50. LPPC does not believe that its proposal would make the Transport Rule legally vulnerable by causing allowance allocations to be "tainted" by the invalidated CAIR program, as EPA suggests. See 75 Fed. Reg. at 45,339. Allowing trade-ins of CAIR allowances does not affect the achievement of the Section 110 mandate that each state prohibit contributions to downwind air quality problems, and is a reasonable policy mechanism for ensuring future early emission reductions and preventing emissions increases in 2010 and 2011. [EPA-HQ-OAR-2009-0491-2667.1, p.16]
51. Id. at 918-21. [EPA-HQ-OAR-2009-0491-2667.1, p.16]
52. Id. at 921-22. [EPA-HQ-OAR-2009-0491-2667.1, p.17]
Response:
See preamble section IX.  EPA has concluded that, given the expected size of the residual allowance banks, the need to tie reductions to specific states as discussed in the preamble and responses to other comments, and the timing of allowance allocation, CAIR or Title IV allowances cannot be used in the Transport Rule. A 10% set-aside would not be available for distribution until after 2011 CAIR compliance (mid-2012), the turn-in ratios would be very high (diminishing the value of individual allowances), and many allowances are held in general accounts not associated with a particular state.  Multi-state companies would be at a considerable advantage if the 10% set-aside for CAIR allowance trade-in were implemented.  These companies could easily move allowances around to maximize the amount of Transport Rule allowances they receive.  Companies that operate in fewer areas, or only one area, would not have the same opportunities to use numerous unit accounts to maximize their ability to obtain the set-aside allowances.
Organization: Missouri Public Utilities Alliance (MPUA)
Comment:
Missouri Public Utilities Alliance (MPUA)
2. The final rule must make provisions to allow the use of emission allowances issued earlier which in good faith were managed and banked for long term stewardship of the environment.  To propose a system that ignores previous practices breaks faith with utility companies who have been following the law and the rules established by EPA.  Failure to honor these emission allowances could raise questions about the wisdom of future banking of the new credits. [EPA-HQ-OAR-2009-0491-2785.1, p.2]
Response:
See preamble section IX.
Organization: Owensboro Municipal Utilities (OMU)
Comment:
Owensboro Municipal Utilities (OMU)
The Clean Air Interstate Rule (CAIR) program currently allows power plants to reduce SO2 and NOx emissions more than required in a given year, enabling them to use these 'banked' emission allowances in a future compliance year. Banking allowances is very beneficial because it encourages power plants to make early emission reductions, thus reducing emissions to the environment sooner. [EPA-HQ-OAR-2009-0491-2811.1,p.2]
EPA's Proposed Transport Rule does not allow the use of previously banked CAIR allowances. OMU supports a final rule that permits the use of banked allowances to carry over into the final Transport Rule trading program. Elimination of banked SO2 and NOx allowances penalizes utilities like OMU that made early commitments to reduce emissions, while those who relied on purchased allowances will be rewarded. OMU encourages EPA to allow banked emission allowances to carryover into the Transport Rule trading program and never expire. [EPA-HQ-OAR-2009-0491-2811.1,p.2]
Response:
See preamble section IX.
Organization: Public Interest Law Center of Philadelphia
Comment:
Public Interest Law Center of Philadelphia
IV. Pre-2012 "Banked" CAIR Title IV Allowances of NOX and SO2 Should Not Be Rolled Over into New Programs Under the Proposed Transport Rule.
Under the CAIR program, the amount of annual NOX and SO2 emissions was significantly reduced. As a result, a large number of unused Title IV allowances were banked in both the NOX and SO2 programs. The EPA has evaluated several methods for converting allowances banked under the CAIR program to be converted to bankable allowances under the Transport Rule. The EPA's proposed approach is simply not to allow any pre-2012 banked credits to transfer into the Transport Rule NOX and SO2 programs. This approach will limit any legal or practical complications involved with the transfer of credits. We agree with the EPA's recommendation that these existing pre-2012 allowances be discarded. [EPA-HQ-OAR-2009-0491-2817.1, p.5]
The EPA should also directly address what is to be done with the additional allowances left under the CAIR program in the time before the new regulations takes effect. If the Transport Rule is passed in the spring of 2011, but does not go into effect 2012, many of the power plants holding additional banked allowances may feel an urgency to either use, or sell, the allowances before they expire. Such a "fire sale" could have an especially adverse effect during the 2001 ozone season (May to September), when ground levels of ozone peak. With no incentive to bank additional allowances, all communities are at an increased risk for increased pollution next summer. [EPA-HQ-OAR-2009-0491-2817.1, p.5]
Response:
EPA is finalizing the proposed approach of not allowing CAIR allowances to carry over into the Transport Rule programs or to allow the use of Title IV allowances in Transport Rule programs.  See further discussion in Preamble Section IX.  The trend in NOx and SO2 emissions in the first quarter of 2011 compared to 2010 emissions is lower.  Sources have only 6 months to make modifications to emission reduction strategies that would result in increased emissions.  States may take into account the amount of allowances held at the end of 2011 CAIR compliance when making Transport Rule state allocation decisions, so sources may not want to use up the excess as suggested.
Organization: Tennessee Valley Authority (TVA)
Comment:
Tennessee Valley Authority (TVA)
Even if EPA's assumptions were correct, the agency's approach penalizes early emission reductions under CAIR and thereby seriously undermines confidence in market incentives. Sources invested in controls to make early reductions under CAIR on the faith that those reductions could be banked for future use. The agency's approach under the transport rule penalizes those sources by not allowing these banked allowances to be used after 2011. EPA should eliminate the 2012 compliance deadline in the Proposed Transport Rule. [EPA-HQ-OAR-2009-0491-2782.1, pp. 4-5]
Response:
In the final Transport Rule, EPA does not allow the use of CAIR allowances.  State budgets for NOx under CAIR were determined using fuel factors which the court ruled, in the North Carolina decision, was not appropriate.  While CAIR allowances were not necessarily distributed using fuel factors, EPA was concerned that the fuel factors used in the state budgets would be indirectly carried forward into the Transport Rule against the decision of the Court.  The transition between CAIR and the Transport Rule is different than past program transitions.  Generally, EPA would want to maintain value for unused allowances.  EPA gave notice in March 2009 that there was the possibility that CAIR allowances might not have value in the future.  See http://epa.gov/airmarkets/business/cairallowancestatus.html .
Regarding the 2012 compliance deadline, please see preamble section VII.
Organization: Wisconsin Power and Light Company
Comment:
Wisconsin Power and Light Company
While understanding EPA's concern regarding issuance of a final CATR that can withstand legal challenge, WPL believes that EPA should issue a final rule that does not penalize early reducers of S02 and NOx under the Title IV Acid Rain Program and Clean Air Interstate Rule (CAIR). EPA must continue to provide incentives that promote early action as this has shown historically to achieve greater environmental benefits at reduced costs. It would be short-sighted for the EPA to discourage companies by implementing a policy that would reinforce just in time compliance. EPA must pursue whatever regulatory mechanism possible to preserve and carry-forward the value of Title IV S02 and CAIR NOx allowances as credits for the final CATR. More specifically, WPL supports that EPA allow for all previously banked allowances to be carried forward into the new CATR program at full value. [EPA-HQ-OAR-2009-0491-2844.1 p.4]
Response:
See preamble section IX.

V.F.4.a. SO2 Allowance Bank/Use of Title IV Allowances

Organization: Air Products and Chemicals, Inc.
Comment:
Air Products and Chemicals, Inc.
Our comments focus on the proposed rule's impact on 'banked' S02 allowances created under the Clean Air Act's Title IV Acid Rain Program ('Title IV allowances'). Since 1995, Air Products has undertaken aggressive S02 reduction efforts that enabled it to accumulate substantial quantities of Title IV allowances with a significant market value. Like other companies, Air Products saw the prospect of marketing these allowances in the future as a key incentive for achieving these aggressive emission reductions, and a critical way of offsetting their cost. Yet under the proposed Transport Rule, these banked allowances would have drastically diminished marketability - undermining the value of banked allowances as an incentive for 'early reductions' in emissions, and upsetting the reasonable expectations of Air Products and other companies. [EPA-HQ-OAR-2009-0491-2652.1, p. 1]
We believe that the final Transport Rule must include provisions that preserve the value of banked Title IV allowances. At the same time, we appreciate EPA's concern that any such provisions protect the environmental integrity of the Transport Rule and ensure that the final rule is consistent with the D.C. Circuit's opinion in North Carolina v. EPA. In response to EPA's call for comments on the transition to the Transport Rule and treatment of banked Title IV allowances, we outline a policy option that would achieve both objectives. [EPA-HQ-OAR-2009-0491-2652.1, p. 1]
I. Air Products' Banked Title IV Allowances .The issue of banked Title IV allowances is important to Air Products because we relied upon a stable policy framework for Title IV allowances in achieving significant S02 emission reductions. In 1990, Air Products became the General Partner and Operator of Pure Air's Advanced Flue Gas Desulfurization Plant co-located with NIPSCO's Bailly Generating Station (units 7 and 8) in Chesterton, Indiana. The Pure Air facility treats the combined flue gases from two boilers with a total nameplate capacity in excess of 500 MWe, achieving demonstrated removal of more than 95% of the sulfur dioxide emitted from those units. Our unique scrubbing process creates a reusable byproduct, gypsum, which is sold to a third party and manufactured into wallboard products. [EPA-HQ-OAR-2009-0491-2652.1, p. 2]
Since 1995, Air Products has consistently responded to S02 market prices by running the Pure Air scrubbers above the guaranteed removal rate when S02 market conditions were favorable. This practice contributed to faster and deeper reductions in S02 emissions than were initially contemplated under the S02 trading program. At the same time, these emission reductions allowed Air Products to retain valuable Title IV allowances that it expected to be able to sell or use for compliance - an expectation that EPA fostered when it made Title IV allowances the 'currency' of compliance with the S02 limitations in the Clean Air Interstate Rule ('CAIR,,). Under the proposed Transport Rule, however, Title IV allowances would serve no role in demonstrating compliance. As a result, our Title IV allowances are likely to have little or no value if the Transport Rule is promulgated in its present form. [EPA-HQ-OAR-2009-0491-2652.1, p. 2]
It would be both unfair and unwise for the Transport Rule to fail to provide any mechanism for preserving the value of banked Title IV allowances. In any cap-and-trade program, the ability to bank unused allowances encourages owners of emission sources to undertake early and aggressive emission reductions in the hopes of using or selling excess allowances at a later date - just as Air Products did at its Pure Air facility. This feature encourages near-term environmental improvements and optimizes the economic efficiency of the emissions trading program. Moreover, EPA explicitly structured the CAIR rule to retain Title IV allowance values, by requiring Title IV allowances to be submitted to demonstrate compliance with CAIR.5 Companies such as Air Products reasonably expected that their banked allowances would not subsequently be rendered valueless by EPA, especially because (as we point out below) this result was not compelled by the North Carolina decision. If EPA upsets these expectations through regulatory action, emission sources may choose not to rely upon banking under the new Transport Rule or other similar regimes - reducing the environmental effectiveness and economic efficiency of these programs. [EPA-HQ-OAR-2009-0491-2652.1, p. 2]
II. A Proposal for Preserving the Value of Title IV Allowances. For the reasons stated above, it is essential that EPA find a way to ensure that Title IV allowances retain value under the Transport Rule. We propose the following mechanism for doing so in a manner that is environmentally and legally sound. [EPA-HQ-OAR-2009-0491-2652.1, p. 2]
Overview of Proposal. EPA should amend the proposed Federal Implementation Plan (FIP) (and condition approved SIPs that integrate with the Transport Rule's interstate trading program) to allow Title IV allowances to be 'traded in' for a limited quantity of Transport Rule S02 allowances, while retaining all of the other basic features of the State Budgets / Limited Interstate Trading remedy. The essential features of this proposal are as follows: [EPA-HQ-OAR-2009-0491-2652.1, pp. 2-3]
:: In each of the first ten years of the Transport Rule S02 trading program, each state operating under the Transport Rule FIP (or an approved SIP that is integrated with the Transport Rule's interstate trading program) would place 4% of the allowances in its annual S02 budget into an 'Exchange Reserve.' [EPA-HQ-OAR-2009-0491-2652.1, p. 3]
:: Allowances in a state's Exchange Reserve would not be allocated directly to EGUs. Instead, the Exchange Reserve would be made available on an annual basis to entities that are willing to exchange banked Title IV allowances for Transport Rule S02 allowances. Transport Rule S02 allowances obtained from a state's Exchange Reserve would be available for compliance purposes in such state. The traded-in Title IV allowances would be retired. [EPA-HQ-OAR-2009-0491-2652.1, p. 3]
:: The benefits of this provision would be limited to entities that relied on the S02 trading regime under CAIR: a banked Title IV allowance could only be exchanged for a Transport Rule S02 allowance if it was acquired by the holder before the D.C. Circuit issued its opinion in North Carolina (July 11,2008).6 [EPA-HQ-OAR-2009-0491-2652.1, p. 3]
:: Because the number of banked Title IV allowances traded in will substantially exceed the quantity of Transport Rule S02 allowances in the various Exchange Reserves, allowances would not be exchanged at a one-to-one ratio. There are three viable mechanisms for rationing Transport Rule S02 allowances among entities trading in Title IV allowances: [EPA-HQ-OAR-2009-0491-2652.1, p. 3]
1. Reverse auction of Transport Rule S02 allowances. Under this method, each year entities would submit 'bids' that specify both the quantity of Title IV allowances to be traded in and the 'exchange rate' at which they would trade for Transport Rule S02 allowances. Bids would be accepted beginning with those offering the highest exchange rate (i.e., bids that most heavily discounted the Title IV allowances), until the Exchange Reserve is fully claimed.7 [EPA-HQ-OAR-2009-0491-2652.1, p. 3]
2. Pro rata allocation of Transport Rule S02 allowances. Under this method, EGUs would offer Title IV allowances for trade-in each year and would be given a quantity of Transport Rule S02 allowances that corresponds to their share of the total quantity of Title IV allowances traded in for that compliance year (for example, an EGU that contributed 20% of the total quantity of Title IV allowances offered for trade-in would receive 20% of the Transport Rule S02 allowances in the Exchange Reserve). [EPA-HQ-OAR-2009-0491-2652.1, p. 3]
3. Exchange at predetermined ratio. Under this method, EPA would determine an 'exchange rate' in advance. The exchange rate would be set at a level that ensures that the entire bank of pre-North Carolina Title IV allowances is extinguished between 2012 and 2021. [EPA-HQ-OAR-2009-0491-2652.1, pp. 3-4]
Of the three options above, the reverse auction appears preferable because it allows an entity trading in Title IV allowances to have some certainty as to the quantity of Transport Rule S02 allowances it will receive (assuming that the 'bid' is accepted) and avoids the difficult predictions involved in determining the appropriate 'exchange rate' for the Exchange Reserve. [EPA-HQ-OAR-2009-0491-2652.1, p. 4]
:: Depending on the quantity of banked pre-North Carolina allowances that remain and the level of participation in the exchange program, EPA may adjust the size of the Exchange Reserve over the l0-year period of the program to ensure that the exchange ratio of Title IV allowances to Transport Rule S02 allowances remains above 1:1 (or another appropriate minimum). [EPA-HQ-OAR-2009-0491-2652.1, p. 4]
:: EPA should also clarify that in crafting state implementation plans (SIPs) to comply with the Transport Rule, states are free to provide equivalent trade-in mechanisms8 for entities within their own state that hold banked Title IV allowances (even if the SIP does not provide for the state's participation in the interstate trading program established under the Transport Rule). [EPA-HQ-OAR-2009-0491-2652.1, p. 4]
Policy merits. From a policy perspective, our proposal offers several key advantages. First, this proposal would not impair the environmental integrity of the proposed Transport Rule. The proposal merely alters the manner in which Transport Rule S02 allowances would be allocated; it would not allow Title IV allowances to be used directly for compliance or otherwise enable sources covered by the Transport Rule to increase their emissions beyond the proposed state budgets. Second, the proposal would establish a market for Title IV allowances, preserving the credibility of the price signal established under both Title IV and the future Transport Rule program. In doing so, the proposal would give owners of EGUs the confidence in future allowance prices that is necessary to stimulate future long-term investments in early emission reduction. Moreover, the proposal would protect the reasonable expectations of companies who acquired Title IV allowances prior to July 2008 in reliance on explicit policies embedded in the CAlR rule. [EPA-HQ-OAR-2009-0491-2652.1, p. 4]
III. Consistency of the Proposal With North Carolina This proposal is fully consistent with the D.C. Circuit's opinion in North Carolina. In North Carolina, the D.C. Circuit identified two critical flaws with EPA's integration of Title IV allowances into CAlR. First, the D.C. Circuit held that it was improper for EPA to establish state S02 budgets using the Congressionally-mandated allocation of Title IV allowances as a basis. State budgets, reasoned the D.C. Circuit, must ensure that each state eliminates its 'significant contribution' to downwind nonattainment and 'interference with maintenance' of downwind attainment. The D.C. Circuit held that this criterion was unrelated to the allocations made under Title IV of the Clean Air Act, which were intended to address acid rain and were based on antiquated data. Under our proposal, however, state S02 budgets would continue to reflect the quantity of emissions that must be abated to eliminate significant contributions and interference with maintenance. Only the allocation of allowances to EGUs within states would be affected. Thus, unlike CAIR, this proposal would not interfere with the D.C. Circuit's instruction that state S02 budgets comply with the mandate of Section llO(a)(2)(D)(i). [EPA-HQ-OAR-2009-0491-2652.1, p. 4]
Second, the D.C. Circuit held in North Carolina that CAIR unlawfully limited the use of Title IV allowances by requiring those allowances to be submitted for compliance with CAIR at a discounted rate (and requiring states that elected not to join the regional trading program to provide for mandatory retirement of Title IV allowances in their state implementation plans).l0 According to the D.C. Circuit, EPA had no authority to require the termination of Title IV allowances. Because the exchange of Title IV allowances for Transport Rule allowances would be completely voluntary under our proposal, our proposal would not implicate this concern. [EPA-HQ-OAR-2009-0491-2652.1, p. 5]

Footnotes:
5 See 70 Fed. Reg. at 25,258 (noting that EPA decided to require the retirement of Title IV allowances in CAIR in order to avoid 'a significant increase in supply of title IV allowances, the collapse of the price of title IV allowances, the disruption of operation of the title IV allowance market and the title IV S02 cap and trade system, and the potential for increased emissions in all States prior to 2010 ... ')
6 Although the preamble to the Transport Rule indicates that Title IV allowance banks stood at 12 million allowances at the end of 2009, our estimate of the quantity of Title IV S02 allowances banked as of 2008 is between 6 and 6.5 million. This number may have declined in the last two years as pre-2008 allowances were submitted for compliance with CAlR or the Acid Rain Program, or traded to other parties. Thus, our proposal would significantly constrain the quantity of banked Title IV allowances that could be traded in for Transport Rule S02 allowances.
7 For example, a bid offering to trade 1,000 Title IV allowances at an exchange rate of 4:1 would rank higher than a bid offering to trade 2,000 Title IV allowances at an exchange rate of 2: 1. Assuming the quantity of Transport Rule S02 allowances in the Exchange Reserve were equal to 1,250, both bids would be accepted (i.e., the bid offering an exchange rate of 4: 1 would be satisfied first with 250 Transport Rule S02 allowances, and the bid offering an exchange rate of 2: 1 would be satisfied second with 1,000 Transport Rule S0 2 allowances). The auction could be designed either as a 'single price' auction or an 'as bid' auction.
8 To be equivalent, any such trade-in mechanism would be required to be consistent with the Transport Rule's state budget and variability requirements.
Response:
See preamble section IX and responses to other comments primarily in this section.
Organization: Buckeye Power, Inc.
Comment:
Buckeye Power, Inc.
Similarly, through its installation of JBR FGD pollution control equipment and purchases of emission allowances, Buckeye acquired Title IV SO2 allowances under the Clean Air Interstate Rule ('CAIR') and other existing and former laws and regulations to comply with existing emission control requirements through 2037. CATR must recognize and reward, rather than punish, Buckeye for its early action on acquiring emission control allowances to comply with existing law. Existing allowances should be accounted for and credited under CATR, not rendered immediately worthless upon the commencement of the new rule. EPA's proposal punishes those, such as Buckeye, who made good faith efforts and long term plans, including the incurrence of substantial costs, to comply with existing law. [EPA-HQ-OAR-2009-0491-2710.1, p.2]
In 2003, SCR equipment was placed in commercial operation on Cardinal Unit No. 2 and Cardinal Unit No. 3, at a total capital cost of approximately $185 million. In 2008, construction of FGD equipment, also known as a sulfur dioxide scrubber, was completed on Cardinal Unit No. 2 and placed into service. The capital cost of Cardinal Unit No. 2 scrubber was approximately $266 million. FGD equipment and associated environmental controls are also being installed on Cardinal Unit No. 3, with construction expected to be completed by December 31,2012, at a capital cost of approximately $489 million. [EPA-HQ-OAR-2009-0491-2710.1, p.4]
Buckeye generates excess NOx emission allowances because of its over-compliance with existing NOx emission limitations based upon its construction and installation of SCR equipment on Cardinal Units Nos. 2 and 3. Buckeye currently sells its excess NOx emission allowances to American Electric Power ('AEP'). [EPA-HQ-OAR-2009-0491-2710.1, p.4]
Buckeye has an unused bank of approximately 260,000 sulfur dioxide emission allowances available to meet its sulfur dioxide emission allowance requirements under CAIR through 2037. A portion of these allowances have been accumulated by Buckeye as a result of the installation of FGD equipment on its Cardinal Unit No. 2 and over-controls with respect to existing emission limitations. Approximately 161,000 of these allowances were purchased by Buckeye at a cost of approximately $25 million. [EPA-HQ-OAR-2009-0491-2710.1, p.4]
Since Buckeye owns two baseload coal-fired generating units at the Cardinal Station and four natural gas-fired peaking units at the Greenville Station, and Buckeye's affiliate, National, owns three natural gas-fired peaking units at the Robert P. Mone Plant, all of which are subject to unit specific allocations of SO2 and NOx emission allowances under EPA's CATR proposal, and because Buckeye has a substantial bank of unused SO2 emission allowances which are subject to loss under EPA's CATR proposal, Buckeye has an interest in this proceeding. [EPA-HQ-OAR-2009-0491-2710.1, p.4]
Response:
See preamble section IX, responses to other comments and the statement on EPA's website posted continuously since March 2009 http://epa.gov/airmarkets/business/cairallowancestatus.html .
Organization: City Utilities of Springfield
Comment:
City Utilities of Springfield
If necessary, EPA should find a way to transition to the new program by incorporating the use of Acid Rain allowances as a compliance option  -  perhaps at some premium ratio  -  during the first few years. [EPA-HQ-OAR-2009-0491-2721.1 p.6]
Response:
As discussed in preamble section IX, EPA does not believe that the North Carolina decision would allow the incorporation of Title IV allowances in any aspect of the final Transport Rule.  The North Carolina decision states that "SO2 petitioners argue EPA lacks the authority to terminate or limit Title IV allowances, either through a trading program under section 110(a)(2)(D), 42 U.S.C. Section 7410(a)(2)(D), or by requiring that SIPs have allowance retirement provisions.  We agree and grant the petition on this issue."
Organization: E.ON U.S.
Comment:
E.ON U.S.
A mechanism for awarding additional SO2 allowances as Early Reduction Credits should be established. [EPA-HQ-OAR-2009-0491-2797.1, p.9]
The number of Early Reduction Credits (ERC's) should be based on the number of banked SO2 allowances facilities developed under the CAIR SO2 Program (i.e., the number of Title IV allowances issued minus emissions, for each year CAIR is in effect). This would not be using Acid Rain SO2 allowances, which was determined to be unlawful by the Court. Rather, it would base the number of ERC's awarded on how much a company has emitted below its allowable emissions, as measured by the number of banked allowances. This represents reductions in contribution to air quality degradation in downwind states that facilities have already made, ahead of the requirement to do so by the Proposed Transport Rule [EPA-HQ-OAR-2009-0491-2797.1, pp.9-10]
Response:
As discussed in preamble section IX and in responses to similar comments, EPA cannot terminate or limit title IV allowances.  In order to implement the mechanism suggested by the commenter, EPA would need to require that Title IV allowances be turned in exchange for Transport Rule SO2 allowances.  EPA does not believe such a mechanism is consistent with the North Carolina decision.
Organization: Exelon
Comment:
Exelon
Finally, the court held that the CAIR trading program impermissibly related the states' SO2 reductions to Title IV allowances. By coordinating each state's SO2 reductions with Title IV allowances, EPA was found to have exceeded its authority under Section 110 by unlawfully tampering with the Title IV trading program. In the proposed rule, EPA would create new Transport Rule SO2 allowance currencies and set state SO2 budgets without regard to the Title IV program. EPA explicitly states that Title IV SO2 allowances could not be used to comply with Transport Rule. Exelon believes that these measures in the proposed Transport Rule remedy the deficiency identified by the court. EPA is continuing to consider using Title IV SO2 allowances banked as of December 31, 2011, as a tool for allocating new Transport Rule SO2 allowances. While this approach might be thought to reward early reductions in SO2 emissions, and to avoid a surge in 2011 SO2 emissions by retaining some value, Exelon believes that EPA should reject this approach. In light of the court's strong condemnation of any linkage between the statutory Title IV program and the regulatory CAIR program, the use of Title IV SO2 allowances even as a tool to allocate a new allowance currency poses an unnecessary litigation risk to the implementation of the Transport Rule. [EPA-HQ-OAR-2009-0491-2666.1, p.11]
Response:
As discussed in section IX of the preamble to the final rule and in responses to similar comments, EPA is finalizing an allocation methodology that does not rely on title IV allowance holdings.
Organization: Florida Electric Power Coordinating Group, Inc. (FCG)
Comment:
Florida Electric Power Coordinating Group, Inc. (FCG)
In North Carolina v. EPA. the court prohibited EPA from interfering with the Title IV program or allowance market through this rulemaking. Yet EPA readily admits that the proposed Transport Rule will decimate the value of Title IV allowances, and references an analysis that the Title IV allowance price will be 'nearly zero.' 75 Fed. Reg. 45340. This nearly complete diminution in value substantially interferes with Title IV, and is thus contrary to North Carolina v EPA. EPA fails to provide a reasoned justification for this result. [EPA-HQ-OAR-2009-0491-2658.1, p.5]
Because EPA's proposed action would destroy the value and usefulness of banked allowances, EPA's action would be tantamount to direct appropriation of the banked allowances. The Title IV allowance bank represents early emissions reductions by sources in the Acid Rain Program. Source owners and operators made and implemented early reductions with the reasonable expectation that banked Title IV allowances would continue to have value in the future. EPA's proposed action would clearly interfere with these distinct investment backed expectations, yet EPA fails to adequately provide a reasoned justification for this appropriation and deprivation of Title IV allowance holders' interests in their banked allowances. Simply arguing that allowances are not a 'property interest' does not alter the consequences of EPA's proposal. [EPA-HQ-OAR-2009-0491-2658.1,p.5-6]
Response:
See preamble section IX.
Organization: Florida Municipal Electric Association (FMEA)
Comment:
Florida Municipal Electric Association (FMEA)
EPA's failure to craft a proposal that allows the use of banked Acid Rain SO2 allowances and banked CAIR NOX allowances creates distrust in market-based control strategies: EPA could create a mechanism that would permit SO2 Acid Rain allowances to serve as an alternative "currency" for Transport Rule SO2 allowances. In addition, EPA could also adjust banked post- 2012 NOx allowances to remove the CAIR fuel factor adjustment for use in the Transport rule. It is noted that the Court did not completely rule out use of Acid Rain SO2 or NOx allowances for CAIR, just the way EPA did it. FMEA believes that EPA needs to consider the negative long range policy implications of abrogating programs and regulatory provisions that the utility industry has depended upon in making major financial and compliance decisions. [EPA-HQ-OAR-2009-0491-2731.1, p. 11]
Response:
See preamble section IX.
Organization: George Washington University Regulatory Study Center
Comment:
George Washington University Regulatory Study Center
Because of concern with the size of the SO2 and NOx banks, the EPA proposes not to allow the transfer of CAIR or Title IV SO2 allowances into the Transport Rule programs at all. For SO2 allowances, the agency cites specific reasons for its legal concerns. The EPA attempted in the CAIR rule to provide a continuing role for existing Title IV allowances in the new CAIR SO2 market by requiring the exchange of two or more Title IV allowances for each ton of SO2 emissions in the CAIR region. The North Carolina v. EPA court rejected this approach, holding that the EPA lacked authority under the CAA to modify the 1:1 relationship between Title IV allowances and tons of SO2 emissions specified in the CAA. Any attempt by the EPA to modify this relationship in the Transport Rule would presumably be deemed illegal as well. This is a somewhat perverse result because the tighter SO2 cap created by the Transport Rule in the states it covers would render Title IV allowances held by emitters largely valueless11 -- seemingly a more significant interference than modifying the statutorily-specified relationship or exchanging Title IV allowances for new Transport Rule allowances would be. Nevertheless, the result of North Carolina appears to be that the EPA has the authority to create a new SO2 trading program but no authority to allow the use of Title IV SO2 allowances in that new program with an exchange ratio that differs from 1:1. [EPA-HQ-OAR-2009-0491-2573.1, p.7]
Altering the exchange ratio of banked Title IV allowances directly is not, however, the only way those allowances could be accounted for in the Transport Rule. Neither the North Carolina decision nor the EPA's legal analysis in the Transport Rule appear to preclude the agency from basing allocation of new Transport Rule SO2 allowances on the volume of banked Title IV allowances held. Such an approach would be conceptually and perhaps practically similar to the Compliance Supplement Pool (CSP) system used in transitions between earlier programs for regulating NOx emissions.12 This would not modify the relationship between Title IV allowances and tons of emissions specified in the CAA since emitters would still hold and use their Title IV allowances, but would preserve the expectations embodied in banked Title IV allowances in a new form for use in complying with tighter Transport Rule emissions caps. [EPA-HQ-OAR-2009-0491-2573.1, pp.7-8]
A counterargument is that such a move would be a too-clever-by-half rebranding of the same meddling with Title IV allowances that the North Carolina court rejected. Nevertheless, it would be a much more modest interference with Title IV allowances than the Transport Rule as written would be. If compliance with the spirit as well as the letter of Title IV is required, such a CSP approach would be problematic, but so would the Transport Rule's treatment of SO2 allowances (or indeed almost any major regulation of SO2 emissions), as EPA projects that Title IV allowances will trade at market prices close to zero after the Transport Rule SO2 market begins. [EPA-HQ-OAR-2009-0491-2573.1, p.8]
We further recommend that EPA investigate the possibility of using a compliance supplement pool to allow crediting of banked Title IV SO2 allowances in allocation of Transport Rule allowances. Doing so would have similar benefits to transition of NOx CAIR allowances. [EPA-HQ-OAR-2009-0491-2573.1, p.32]

11 Title IV allowances might not be entirely without value since those allocated for emissions above the Transport Rule cap amount could be traded to emitters in states not covered by the transport rule.
12 Specifically, the OTC - NOx SIP Call and SIP Call-CAIR seasonal NOx transitions used compliance supplement pools.
Response:
See preamble section IX and responses to other comments primarily in this section.
Organization: Massachusetts Department of Environmental Protection
Attorney General of North Carolina
Maryland Department of Environment (MDE)
Adirondack Council
Comment:
Adirondack Council
With over 12 million SO2 allowances currently in the "bank," it is apparent that our calls for lower caps and ways to reduce the bank are needed immediately. By EPA creating a new scheme and not allowing Title IV SO2 allowances to be used as part of this program, you are rightly correcting a major flaw. [EPA-HQ-OAR-2009-0491-2848.1, p.3]
[These comments were also submitted as testimony at the Philadelphia, Pennsylvania public hearing on August 26, 2010.  See Docket Number EPA-HQ-OAR-0491-1938, p.65.]
Attorney General of North Carolina
a. Pre-existing allowances
EPA has proposed not to allow sources to use pre-existing Title IV allowances to meet the compliance requirements of the Transport FIP. For the reasons stated by EPA, 75 Fed. Reg. at 45,338/3, North Carolina concurs that the importation of banked Title IV allowances into the Transport FIP program would contravene the Clean Air Act as interpreted by the D.C. Circuit in North Carolina. [EPA-HQ-OAR-2009-0491-2685.1]
Maryland Department of Environment (MDE)
Maryland agrees with EPA and its interpretation of the Court's decision, that any approach to use the Title IV SO2 allowances is "...not related to, much less necessary for, implementation of the section 110(a)(2)(D)(i)(I) mandate to eliminate significant contribution and interference with maintenance" (75 FR 45338). We also agree with EPA that the existing NOx allowances banked under either the NOx SIP call or CAIR program should not be used as part of the proposed Transport Rule remedy. Similar to the Title IV SO2 allowances, NOx allowances banked under the NOx SIP Call were designed for a different purpose; i.e., to address transport issues associated with the 1-hour ozone NAAQS. And pre-2012 CAIR allowances are associated with a program that was found inadequate by the Court that is to be replaced by the program in the proposed Transport Rule; when CAIR is replaced any allowances banked under that program should therefore not convey. [EPA-HQ-OAR-2009-0491-2639.2, p.14; This comment can also be found at section V.F.4.b of this comment summary]
Massachusetts Department of Environmental Protection
With respect to the state budgets, EPA has proposed significant SO2 reductions in 2012 and 2014, which we strongly support. We applaud EPA's proposal to prohibit the use of Acid Rain Program SO2 allowances in the Transport Rule annual SO2 programs, which we believe will provide an incentive for power plants to install controls.
Response:
As explained in Section IX C of the preamble, EPA has created new Transport Rule SO2 allowances rather than allow the use of any title IV allowances in the Transport Rule program.
Organization: Morgan Stanly Capital Group
Gainesville Regional Utilities (GRU)
Comment:
Gainesville Regional Utilities (GRU)
EPA's Failure to Craft a Proposal that Allows the Use of Banked Acid Rain SO2 Allowances and Banked CAIR NOx Allowances Creates Distrust in Market-based Control Strategies
EPA could create a mechanism that would permit SO2 Acid Rain allowances to serve as an alternative 'currency' for the proposed CATR SO2 allowances. In addition, EPA could also adjust banked post-20l2 NOx allowances to remove the CAIR fuel factor adjustment for use in the proposed CATR. It is noted that the Court did not completely rule out the use of Acid Rain SO2 or NOx allowances for CAIR, just the way EPA did it. GRU believes that EPA needs to consider the negative long range policy implications of abrogating programs and regulatory provisions that the utility industry has depended upon in making major financial and compliance decisions. [EPA-HQ-OAR-2009-0491-2674.1, pp.7-8; this comment can also be found at V.F.4.b of this comment summary]
Morgan Stanly Capital Group
In addition, the Proposed Rule currently does not permit the transfer of banked SO2 allowances from prior emissions trading programs.16 This will adversely impact emissions trading markets where clear and consistent rules are needed to limit uncertainty and assure a smoothly functioning market. Indeed, the Proposed Rule has already resulted in a marked devaluation of emissions credits.17 Such devaluation will discourage market participants from making early emissions cuts and banking credits, and incentivize the use of allowances now being held so as to increase the level of short-term emissions. Thus, banked allowances would not be available to cushion the effects of lower budgets during the transition to operation under the program now described in the Proposed Rule. The new trading program could well be marginalized, and therefore less effective in achieving abatement benefits at a lower cost. [EPA-HQ-OAR-2009-0491-2819.1 p.5]
The Administrator should carry forward all existing allowances on a one-to-one basis under the Proposed Rule. This approach would be consistent with principles of equity and would help to maintain the underlying integrity of the Proposed Rule. Therefore, all unretired allowances issued under prior emissions programs should be fully convertible to the new program's allowances, and distributed on a one-for-one basis before further distribution from the allowance pool. [EPA-HQ-OAR-2009-0491-2819.1 p.9-10]
Response:
See preamble section IX and responses to similar comments.
Organization: RBS Sempra Commodities
Comment:
RBS Sempra Commodities
EPA collected revenue from the sale of SO2 allowances in the 2010 SO2 Allowance Auction while at the same time developing proposals to effectively eliminate their value through a rule change. Despite uncertainty about the EPA's response to court rulings related to CAIR, that program remained in effect as the prevailing rule at the time of the auction. Since EPA's actions directly impacted the value of allowances sold in the auction, EPA should develop an exchange mechanism for existing allowances or reimburse participating parties upon surrender of allowances purchased in the 2010 SO2 Allowance Auction. [EPA-HQ-OAR-2009-0491-2862.1 p.1]
The original Acid Rain Program was successful in large part because market participants were confidently able to make forward-looking decisions based on clear rules, forward allocations, and banking provisions. Abandoning CAIR and failing to bank existing allowances will diminish confidence in the environmental markets and thereby counteract efforts to develop a fair and efficient "replacement" market. [EPA-HQ-OAR-2009-0491-2862.1 p.1]
Response:
While EPA would like to offer the kind of continuity of allowance value described by the commenter, EPA believes that the North Carolina decision is very clear with regard to Title IV allowances.  As discussed in preamble section IX and in responses to other similar comments, EPA does not believe that it is consistent with the Court decision to implement any allocation, allowance exchange or reimbursement for Title IV allowances.  The auction mentioned by the commenter was conducted as required by the CAA for Acid Rain Program requirements.
Do I need to add something about the TR being more stringent and the Acid Rain market reacting to lower future emissions?
Organization: Southern California Edison Company
Comment:
Southern California Edison Company
Upon review of the proposed CATR, SCE is concerned and disappointed at the extent to which CATR would effectively supplant the Title IV allowance trading program with a new, wholly separate program, greatly devaluing the Title IV SO2 allowances. SCE understands that the value of Title IV allowances is generally projected to be at or close to zero if CATR is adopted. Adoption of CATR would thus mean a significant total impact on SCE's customer base through electric utility rates, and more broadly it would have the effect of penalizing companies (and their customers) that have been most proactive in reducing their SO2 emissions below their allocation levels. SCE also believes this would send an especially unfortunate signal to companies and markets at a time when other emissions cap and trade proposals are under consideration and Title IV has been held up as a model of a successful program. [EPA-HQ-OAR-2009-0491-2852.1 p.1]
In particular, it is unclear to SCE why the CATR program should not allow affected emitters to use Title IV allowances for CATR compliance (on top of all allowances they need to use for Title IV compliance), at least as an optional alternative to use of CATR-created allowances. CATR's establishment of state-specific SO2 budgets would still mean that the same emission reductions in each state are achieved, as far as SCE can determine, despite the availability of another allowance source for CATR compliance. Indeed it is unclear to SCE from the proposed rule and its preamble whether EPA even gave any consideration at all to such a construct. [EPA-HQ-OAR-2009-0491-2852.1 p.2]
This points up another concern of SCE's regarding the CATR proposal, and that is that as far as SCE can tell from the proposal and its supporting materials, EPA gave little or no weight in drafting CATR to the question of the rule's impact on Title IV allowance values, perhaps unduly skewing the rule development process towards an outcome costly to allowance holders. SCE understands that allowance holders do not have a "property rights" interest in their allowances, at least in some respects, but in its rulemakings EPA routinely and properly considers cost impacts that would not amount to impacts on property rights.  [EPA-HQ-OAR-2009-0491-2852.1 p.2]
Response:
See preamble Section IX.
Organization: Southern Company
Comment:
Southern Company
IX. EPA Must Consider Market Continuity as it Transitions from CAIR to the Proposed Transport Rule and Any Future Transport Rules
EPA has requested comment on how the transition from CAIR would occur. One of our main concerns with the proposed transition from CAIR, is the proposed elimination of banked allowances and the uncertainty that such elimination creates for compliance. There are no markets yet for Transport Rule allowances, and those markets will not exist until September 2011, just before the January 2012 compliance date. As discussed in more detail in Section X, the data used to develop unit allocations in the proposed rule are so flawed and will require such substantial revision that industry is essentially blind to potential compliance challenges. Given the limited trading and industry-wide allocation uncertainty, it is unclear whether allowances will be available if needed. And the Transport Rule's proposed tight compliance schedule exacerbates the uncertainty. [EPA-HQ-OAR-2009-0491-2864.1, p. 22]
Southern Company supports an approach that would recognize the value of banked NOx and SO2 allowances. EPA should recognize the potential loss to utilities-and the eventual cost to customers-by devaluing or eliminating a company's allowance inventory. At a minimum, EPA should include a mechanism the conversion of CAIR NOx into the Transport Rule program. This would be technically easy to accomplish since EPA proposes to use the same Allowance Management System that it used for CAIR. The conversion of banked CAIR allowances will ensure market continuity through 2011 and will avoid potential price shocks of resetting three new markets simultaneously in the second half of 2011. Subsequently, market continuity will ensure that reductions achieved under CAIR will continue through 2011 and avoid any incentive to 'use up' CAIR allowances and produce a short-term increase in NOx emissions (the same is also true for Acid Rain S02 allowances). The North Carolina decision found flaw with use of fuel adjustment factors in determining original CAIR NOx allowance allocations, however nothing in the decision prohibits the use of existing banked allowances in a new program. In the event that EPA determines the legal concerns are too great to carry the bank forward at full value, Southern Company could support an alternative approach allowing banked allowance conversion at a discounted value. EPA should design a process that effectively eliminates fuel adjustment factor effects by applying a surrender ratio based on the fuel mix of the surrendering entity. To avoid use of conversion proxies (financial institutions on behalf of utilities), allowances could be converted in rounds, with utilities surrendering in the first round followed by a non-utility surrender round. The second round would receive the highest conversion rate applied in the first round, thereby ensuring incentive for utilities to participate in the first round and not utilize conversion proxies. This discounted conversion approach is not preferable, but would achieve some of the objectives of market continuity outlined above. [EPA-HQ-OAR-2009-0491-2864.1, pp. 22-23]
EPA has stated that future transport rules 'may be needed to address transport under future revised ozone or fine particle health standards.,,2o Subsequent phases of the Transport Rule should ensure market continuity by maintaining a common currency, allowing use of existing allowances from one phase to the next. A market based program cannot be expected to work if the currency is continuously changing and price signals are disrupted on a regular basis. Further, EPA should wait to see the effect of the current rule before promulgating future transport rules.  [EPA-HQ-OAR-2009-0491-2864.1, p. 23]
[The above comments can also be found at Section V.F.4.b. of this comment summary.]
Response:
See responses to other comments and preamble section IX.
Organization: Tampa Electric Company
Comment:
Tampa Electric Company
In North Carolina v. Environmental Protection Agency, 531 Fed 3rd 896, 922 (DC Cir. 2008) the Court held that EPA lacked authority to terminate or limit Title IV allowances in this rulemaking. EPA cited this holding in rejecting an alternate allowance allocation scheme proposed by a member of the regulated community in this proceeding. However, it appears that the current proposal, if finalized, will result in the elimination of the value of banked Title IV allowances since compliance with the Transport Rule will adversely impact demand for banked Title IV allowances as emissions decrease. EPA has acknowledged this but provided no explanation or justification for the projected interference with the Title IV Allowance Program (75 FR at 45340 col 2). [EPA-HQ-OAR-2009-0491-2745.1 p.3]
Although the proposed Transport Rule does not directly impact the banked Title IV allowances, the result of this indirect impact on the value by reducing it is the same as if EPA had directly appropriated the allowances. A similar result is expected in the case of CAIR allowances for calendar years 2012 and beyond. These would become worthless as a result of finalization of the proposal in its current form. All of these allowances have value to Tampa Electric Company's customers and EPA has provided no rationale or justification for this interference or the failure to provide a mechanism for compensation for what amounts to a taking in violation of the United States Constitution [EPA-HQ-OAR-2009-0491-2745.1 p.3]
[These comments were submitted as testimony at the Philadelphia, Pennsylvania public hearing on August 26, 2010.  See Docket Number EPA-HQ-OAR-2009-0491-1938, p.73.]
The proposed Transport Rule may not have specifically touched the Acid Rain allowances, but has certainly affected their value and any banking strategies by utilities that have committed to early reductions. These useless allowances are an additional cost born by the rate payers, first for the emissions reduction controls installed and now the inability to recoup fuel cost savings.
Response:
See preamble section IX.
Organization: Tennessee Valley Authority (TVA)
Comment:
Tennessee Valley Authority (TVA)
B. Issue: EPA proposes that the Transport Rule provisions not allow the use of Title IV allowances either as the basis for allocating Transport Rule SO2 allowances or directly for compliance with the rule's allowance-building requirements, but invites comment on this matter. [p. 45338-39] [EPA-HQ-OAR-2009-0491-2782.1, p. 13]
TVA Comment: EPA requests comment on whether it could distribute Transport Rule allowances based on the number of Title IV  allowances a source has in its bank at the completion of compliance in the last year of the CAIR SO2 program, thereby incentivizing minimal use, by sources, of Title IV allowance banks and encouraging continued emission control. We believe that any such distribution of allowances would not be consistent with the Court's opinion in North Carolina v. EPA because it places a burden on the use of Title IV allowances. Under such an approach, EPA would be requiring the diversion of Title IV allowances for use in a trading program under Section 110(a)(2)(D). The D.C. Circuit held that "EPA lacks authority to terminate or limit Title IV allowances, either through a trading program under Section 110(a)(2)(D) . . , or by requiring that SIPs have allowance retirement provisions." North Carolina v. EPA, 531 F. 3d 896, 921 The Court found "nothing in . . .[the CAA] granting EPA the authority to remove Title IV allowances from circulation in the Title IV market." Id. EPA also seeks comment on whether it should allow the use of Title IV allowances for use in the trading program under the proposed Transport Rule. Any such voluntary use of the Title IV allowances was not prohibited by the Court in North Carolina v. EPA. It was not the use of Title IV allowances as "currency" in the CAIR market that the court found objectionable. Rather, the court objected to EPA "terminat[ing] the authorization the allowances provide within the Title IV market." Id. at 922-----. Moreover, the allowances in the Title IV bank result both from the emission reductions for Title IV and the early reductions for the CAIR SO2 program. As to the latter (i.e. the early reductions from the CAIR SO2 program), there should be no question as to their use to meet the requirements of the Transport Rule. Of course, the use of any Title IV allowances in meeting the requirements of the Transport Rule would remain subject to the assurance provisions that ensure each state eliminates all significant contributions to nonattainment and interference with maintenance in downwind states. [EPA-HQ-OAR-2009-0491-2782.1, pp. 13-14]
Elimination of the CAIR SO2 allowance banks would be unfair to utilities that installed controls at certain facilities early to bank allowances, and planned, as the CAIR rule allowed, to use these banked allowances to provide for an optimum transition to and time for installation of controls to meet future lower CAIR allocation levels. Eliminating these allowances will also reduce confidence in and hinder implementation of any future cap and trade programs, such as the trading program in the very Transport Rule proposed by EPA as well as those trading programs that have been included in draft legislation for greenhouse gases. Moreover, depressed allowance values prior to 2012 could result in increased emissions. [EPA-HQ-OAR-2009-0491-2782.1, p. 14]
Response:
See preamble section IX.

V.F.4.b. NOx Allowance Banks/Use of CAIR NOx Allowances

Organization: Adirondack Council
Comment:
Adirondack Council
The same holds true for nitrogen allowances. We recommend that old allowances not be used as part of the new program. If, however, you decide to allow existing nitrogen credits to be used, we suggest that you establish a discounted rate for banked NOX allowances, either at a 3:1 or 4:1 ratio. [EPA-HQ-OAR-2009-0491-2848.1, p.3]
[These comments were also submitted as testimony at the Philadelphia, Pennsylvania public hearing on August 26, 2010.  See Docket Number EPA-HQ-OAR-2009-0491-1938, p.65.]
EPA requests comment on the proposed approach, the previously-discussed alternative approaches, and any other possible approaches for handling banked pre-2012 CAIR allowances in the Transport Rule NOX programs. (p. 581) The Adirondack Council's preferred option for banked pre-2012 CAIR NOX allowances is to not let them into the Transport Rule program at all. However, if EPA does decided to allow the use of CAIR allowances, we suggest a deeply discounted ratio of either 3:1 or 4:1 in order to help maintain the benefits of the program that EPA has envisioned. [EPA-HQ-OAR-2009-0491-2848.1, p.5]
Response:
EPA is not allowing CAIR NOx allowances to be used in the Transport Rule.  See preamble section IX.
Organization: Allegheny Energy
Comment:
Allegheny Energy
Because the proposed rule does not eliminate the ARP, AE assumes it will continue to receive allowances under that allocation program and will continue to surrender ARP allowances on a one to one basis to cover the company's S02 emissions. AE further understands that the proposed rule does replace CAIR in its entirety and that EPA is seeking comment on how to handle the CAIR NOx allowances. AE supports carrying these allowances into the proposed rule and allowing full banking within the proposed rule. Given the extraordinarily short time frames to implement the proposed rule, EGUs will need allowances from the CAIR program to cover NOx emissions across their respective fleets. New NOx controls will be installed in the most economical manner, but every electric generator in the affected 31 states will be vying for the same control equipment and labor to install the control equipment. This will slow the process dramatically. A reasonable bridge will be the use of banked CAIR NOx allowances to cover emissions until such time as the reductions contemplated by the proposed rule can be implemented. [EPA-HQ-OAR-2009-0491-2605.1, p.3]
Response:
See preamble Section IX.  Also, EPA is confirming that the Acid Rain Program will continue, Title IV allowances will be allocated as provided under that program, and allowances will continue to be required for compliance.
Organization: Ameren Services Company
Comment:
Ameren Services Company
EPA should also consider allowing all or a portion of CAIR NOx allowances banked prior to 2012 to be used for compliance with the Transport Rule. This would allow more flexibility in meeting the strict limits during Phase I starting in 2012. This is necessary considering the rule as proposed basically allows only 6 months (assuming it is finalized in June 2011) to plan for compliance. [EPA-HQ-OAR-2009-0491-2722.1, p.9]
A portion of CAIR NOx allowances should be carried forward into the Transport Rule.
Many utilities have installed SCR and SNCR to meet the requirements of the CAIR and various state and local requirements. Many of these controls were installed to allow for trading of NOx allowances to support other uncontrolled sources as well as to bank allowances to supply a cushion in case of poor performance or failure of the control device to perform as designed. Additionally, Ameren as well as other utilities has used the NOx allowances banked by installation of SCR or SNCR in their planning processes to allow for an orderly, fiscally responsible plan for compliance. The Transport rule as currently proposed basically nullifies the previous compliance plans and strands a valuable asset. [EPA-HQ-OAR-2009-0491-2722.1, p.10]
Ameren supports carrying CAIR NOx allowances, both for the annual and ozone season programs into the Transport Rule. EPA should give consideration for carrying forward at least a portion of the NOx allowances banked prior to 2012 to aid in the mitigation of lost value from both a planning perspective as well as the loss of valuable assets. [EPA-HQ-OAR-2009-0491-2722.1, p.10]
Response:
See preamble Section IX.
Organization: American Municipal Power, Inc. (AMP)
Comment:
American Municipal Power, Inc. (AMP)
Allowance Provisions Should Be Flexible and Fair
AMP encourages EPA to design a final Transport Rule that allows full transfer of banked CAIR allowances into the new trading program. We respectfully disagree with EPA's concern that the CAIR allowance fuel adjustment factors will provide unjust allowance banking by certain units. These CAIR allowances have already been allocated and reliance on the use of the CAIR allowances is certainly reasonable and to be expected as part of long-range planning. Additionally, the Court did not address this issue in its consideration of the existing CAIR program; thus, the Court has not precluded the transfer of the allowances. The maintenance and use of the CAIR allowances is important to municipal generators and will provide increased flexibility in the initial years of the new program. [EPA-HQ-OAR-2009-0491-2678.1, p.3]
Response:
See preamble section IX and responses to other comments in this section.
Organization: American Public Power Association (APPA)
Comment:
American Public Power Association (APPA)
APPA also emphasizes, however, that it supports approaches that would permit the use of banked CAIR NOx allowances for compliance with the Proposed Transport Rule. In the final rule, EPA should provide that it will transfer all CAIR NOx annual and ozone season allowances held in each source`s compliance accounts for the final compliance period of CAIR into that source`s compliance accounts for the new program (to the extent the source is subject to the new program`s annual or ozone season NOx requirements, or both). This could readily be accomplished because, for purposes of compliance with the new program, EPA proposes to use the same Allowance Management System ("AMS") that it used for compliance with CAIR. 75 Fed. Reg. at 45312/1. There is no reason not to allow sources to use their CAIR allowances (including allowances that they bought or otherwise acquired from others) for compliance with the new program). [EPA-HQ-OAR-2009-0491-2812.1, pp.11-12]
EPA`s concern that some may view an approach that authorizes sources to use banked CAIR NOx allowances as unfairly permitting some sources a larger share of allowances due to CAIR`s use of fuel adjustment factors, which the North Carolina decision found EPA had not adequately justified, is no basis to bar use of these allowances already allocated. The court`s opinion in no way bars use of these already-allocated allowances, on a banked basis, in a new program. APPA believes that if EPA disallows use of banked CAIR NOx allowances at this juncture, it will be to the detriment of all sources that hold banked CAIR NOx allowances at the time that CAIR expires. It would be far better to allow all sources the benefit of their banked allowances than to render them worthless at the end of the CAIR program. 7 [EPA-HQ-OAR-2009-0491-2812.1, p.12]
Indeed, there are many compelling reasons to allow sources to use their banked CAIR NOx allowances for compliance with the proposed rule. First, as noted above, nothing in the court`s North Carolina opinion precludes -- and in fact, no party challenged -- use of banked CAIR NOx allowances. The only flaw identified by the court with respect to CAIR NOx allowances was the way that the U.S. EPA established NOx allowance budgets. Second, as EPA suggests, permitting use of banked CAIR NOx allowances would promote the continuation in 2010 and 2011 of the reductions that occurred under CAIR. 75 Fed. Reg. at 45339/1. Likewise, it would avoid creating an incentive for sources to "use up" CAIR NOx allowances, thereby potentially increasing their NOx emissions temporarily, because those allowances would -- in the absence of a provision allowing use of banked CAIR NOx allowances in the new program -- have no value after the allowance transfer deadline for the final CAIR annual and ozone season compliance periods. Third, allowing use of banked CAIR NOx allowances would provide a modest degree of increased flexibility for sources during the early years of the new program, an especially important consideration if EPA requires compliance with the Transport Rule according to the unreasonably accelerated schedule set forth in its proposal. [EPA-HQ-OAR-2009-0491-2812.1, p.12]

7. If EPA is concerned that the amount of banked CAIR NOx allowances is so great that it may reduce the amount of emission reductions that would otherwise be achieved under the proposed rule, 75 Fed. Reg. at 45339/1, there are better ways to avoid that outcome than to invalidate the allowances in whole or in part. For example, EPA could allow sources the full benefit of their banked CAIR NOx allowances, but "stagger" the right to use them over time. Under this sort of strategy, EPA could record the number of banked NOx allowances in each source`s account as of the expiration of CAIR and then divide them into parcels and assign each parcel a vintage year. Each year thereafter, for a relatively short period of years, a parcel of allowances would become valid and could be used for compliance with the Proposed Transport Rule in that year (or any subsequent year). This way, sources would get the full benefit of their banked CAIR NOx allowances without running the risk of allowing a large number of banked allowances to enter the system in any one year. [EPA-HQ-OAR-2009-0491-2812.1, p.12]
Response:
See preamble section IX and responses to other comments in this section.
Organization: Associated Electric Cooperative, Inc. (AECI)
Comment:
Associated Electric Cooperative, Inc. (AECI)
EPA has proposed to dissolve any remaining CAIR NOx allowances at the onset of the Transport Rule. This action will serve to provide a perverse incentive for utilities to throttle back emissions controls and consume as many CAIR NOx allowances as possible to save reagent cost of ammonia and urea since the CAIR allowances would be effectively turn into "confederate money" as of 2012. The result will be (at least) threefold: 1) a negative impact to air quality in 2011, 2) a penalty to utilities that over controlled and/or banked allowances from early reductions in prior years, and 3) asset uncertainty and price depression due to a fear that EPA may devalue future markets. EPA should allow for portability of banked CAIR NOx allowances into the Transport Rule  -  even if at a reduced rate.   [EPA-HQ-OAR-2009-0491-2845.1 p.8]
CAIR included a compliance supplement pool (CSP) at the onset of the rule. The Transport Rule does not. In the absence of a CSP, utilities should be able to borrow a limited number of allowances from future years at a ratio of less than one allowance per ton of emissions.  [EPA-HQ-OAR-2009-0491-2845.1 p.8]
Request: AECI requests that EPA allow CAIR NOx allowances to be grafted in to the Transport Rule. EPA could use methodology similar to the Progressive Flow Control mechanism of the NOx Budget Program to determine a conversion ratio for transferring allowances from CAIR to the Transport Rule. Allowing the CAIR allowances to survive, even at a reduced rate, would maintain some market integrity and avoid the environmental impact described above.  [EPA-HQ-OAR-2009-0491-2845.1 p.8]
Request: In addition to allowing for portability of CAIR NOx allowances into the transport rule, AECI requests that EPA amend the Transport Rule to allow for using future compliance year allowances at a reduced value.  [EPA-HQ-OAR-2009-0491-2845.1 p.8]
Under CAIR, certain states were required to comply with both an ozone season cap as well as an annual cap for NOx. Some states, such as Missouri, are no longer required to comply with the ozone season cap under the Transport Rule. Most utilities in these states achieved emission reductions greater than what was required under the NOx Budget Program and the CAIR and have banked ozone season NOx allowances. Dissolving these allowances would penalize these companies for making early/additional reductions under these preceding programs.   [EPA-HQ-OAR-2009-0491-2845.1 p.8]
Request: AECI requests that EPA amend the proposed rule to convert a portion of the CAIR ozone season allowances to permanent annual allowances in the Transport Rule. In addition to affording a small (earned) compliance supplement, it would achieve a certain level of market integrity going forward.  [EPA-HQ-OAR-2009-0491-2845.1 p.8]
Response:
See preamble section IX regarding the CAIR NOx allowances.  Transport Rule allowances are available for use for compliance in the vintage year that is the same or earlier than the compliance period.  Sources may not use future vintage allowances.  The comment is vague and does not specify how far into the future the allowances could be borrowed or at what discount rate.  Such a provision would undermine the design of the Transport Rule which relies on state budgets and assurance provisions to ensure that the required emission reductions are achieved in each state, each year.  A provision such as this would have the effect of providing unlimited budgets; therefore, EPA rejects the comment.
Organization: Attorney General of North Carolina
Comment:
Attorney General of North Carolina
EPA appears less certain regarding the fate of CAIR NOX allowances. North Carolina submits that the importation of CAIR NOX allowances would also violate the Clean Air Act.
EPA attempts to justify the importation, at some level, of CAIR NOX allowances on the grounds that, allowing pre-2012 CAIR NOX allowances and CAIR NOX ozone season allowances to be used in the proposed Transport Rule NOX programs, and thereby ensuring that the allowances would continue to have some market value in the future, would promote the continuation  -  in 2010 and 2011  -  of the reductions that occurred in 2009 under the CAIR NOX programs. Id. at 45,339/1. However, EPA readily concedes that "the amounts of the banks are so large that they might significantly reduce the amount of emissions reductions that would otherwise be achieved in the proposed Transport Rule NOX programs, particularly in the earlier years (e.g., 2012 and 2013)." Id. [EPA-HQ-OAR-2009-0491-2685.1]
EPA cannot justify any option that allows the importation of any NOX allowances. Under §110(a)(2)(D)(i)(I), States (or in this case EPA) must determine the extent of any "significant contribution" or "interference with maintenance." The timing of the elimination of these unlawful emissions is informed by the attainment requirements for the impacted states, North Carolina, 531 F.3d at 911-12, which are required to attain "as expeditiously as practicable" 22 but no later than certain dates, id. at 911. Accordingly, the upwind sources must eliminate their unlawful emissions "as expeditiously as practicable" and in a manner that is coordinated with the downwind nonattainment deadlines. [EPA-HQ-OAR-2009-0491-2685.1]
EPA has proposed to determine that emissions reductions by 2012 and 2014 are necessary in order to ensure that the reductions are both coordinated with the downwind nonattainment deadlines and achieved "as expeditiously as practicable," as required. Therefore, the budgets EPA has proposed in the Transport FIP define the breakpoint between lawful and unlawful emissions under North Carolina. Importing any allowances from outside those calculations, not to mention the concededly overwhelming bank of allowances remaining from the CAIR NOX program, would allow sources to delay elimination of their unlawful emissions past the point required by the only relevant considerations: downwind attainment deadlines and the associated "as expeditiously as practicable" mandate. Thus, the importation of any pre-existing allowances violates §110(a)(2)(D)(i)(I). See North Carolina, 531 F.3d at 913 (In responding to similar arguments regarding CAIR's compliance supplement pool, "EPA d[id] not argue that it can set a level of emissions that is an upwind state's `significant contribution' and then allow that state to exceed it."). [EPA-HQ-OAR-2009-0491-2685.1]
EPA's suggestion that importing pre-existing CAIR NOX allowances would "would promote the continuation  -  in 2010 and 2011  -  of the reductions that 23 occurred in 2009 under the CAIR NOX programs" also misses the point. Whatever downwind areas gain by preserving CAIR's reductions in the interim will be lost when the CAIR NOX allowances are redeemed in the following years. Under EPA's "first approach," 75 Fed. Reg. at 45,339/1-2, the preservation of the benefits of CAIR in 2010 and 2011 would be offset, on a one-to-one basis, in 2012, 2013 and beyond. And if the trade-in ratio were less than one-to-one, as in EPA's "second approach," id. at 45,339/2, so that more benefits are not foregone in the out years, EPA concedes that less benefit would be realized in the short term, making that option essentially a wash as well. The bottom line is that EPA would just be avoiding a concentrated air quality detriment now and replacing it with a drawn out and unlawful one over the next few years. [EPA-HQ-OAR-2009-0491-2685.1]
North Carolina supports the goal of preserving the environmental benefits of the unlawful CAIR during the transition to its successor. Indeed, North Carolina was the only petitioner in the consolidated CAIR litigation that sought remand without vacatur from the outset. See, e.g., North Carolina, 531 F.3d. at 929. Nevertheless, Congress has not authorized the avoidance of the statutory mandate in order to preserve current benefits. Therefore, North Carolina does not support the continued use of CAIR NOX allowances once the Transport FIP becomes effective. [EPA-HQ-OAR-2009-0491-2685.1]
Response:
EPA is not allowing CAIR NOx allowances to be used in the Transport Rule.  See preamble section IX.
Organization: Big Rivers Electric Corporation
Comment:
Big Rivers Electric Corporation
As proposed CAIR unused allowances would be eliminated as a means of compliance beginning in 2012.  For new units, a 3% set aside of CATR state allowance budgets to be shared pro rata in the event of over demand, and no allocation during initial year of start-up provides no assurance that necessary allowances would be available for new units utilizing the best emissions control technologies. [EPA-HQ-OAR-2009-0491-2661.1, p.3]
Response:
See preamble section VII regarding allocation to new units.
Organization: City of Ames, Iowa
Comment:
City of Ames, Iowa
18) We would advocate that allowances held by utilities under CAIR, be allowed to be transferred and used under the 'Air Transport Rule'. The logic is that either utilities and generators have either spent a lot of money acquiring them, or they have installed equipment (at great cost) or have operated their units in such a way to accumulate credits. They should not be forced to forfeit what they have already done in good faith to attempt to comply with CAIR. [EPA-HQ-OAR-2009-0491-2769, p.4]
Response:
See preamble section IX.
Organization: Clean Air Task Force
Clean Energy Group
Comment:
Clean Air Task Force
EPA requests comment on the use of banked allowances from other trading schemes for purposes of compliance with TR requirements. 144 Consistent with the Court's opinion in North Carolina v. EPA, the Agency must not allow the use in the TR of any SO2 or NOx allowances banked or otherwise carried over under the CAIR program or the Title IV acid rain program, and we support EPA's proposal to exclude these allowances for TR compliance. 145 [EPA-HQ-OAR-2009-0491-2738.1, p.26; This comment can also be found at section V.F.4 & V.G.2 of this comment summary]

Footnote:
144 75 Fed. Reg. at 45339.
145 75 Fed. Reg. at 45338-39.
Clean Energy Group
Although CAIR NOx allowances are not similarly explicitly proscribed in the court's decision, EPA should not in any way base the Transport Rule NOx allocations on CAIR allocations, either by allowing the use of previously-banked allowances for compliance or by allowing allowance holders to exchange them for Transport Rule allowances. Because CAIR allowance holdings are based on the fatally-flawed CAIR allocation, any use of these allowances in the new program would jeopardize the entire program. The Clean Energy Group supports EPA creating a new NOx allowance currency to ensure CAIR's flaws do not undermine the Transport Rule. [EPA-HQ-OAR-2009-0491-2702.1, p. 11]
Response:
EPA is not allowing the use or conversion of CAIR NOx allowances in the Transport Rule.  See preamble section IX.
Organization: Dominion
Comment:
Dominion
EPA Should Allow the Use of Banked NOx Allowances from CAlR in the Transport Rule
EPA should allow the transfer of unused NOx allowances banked from CAIR annual and ozone season programs on a one-to-one basis into the respective annual and ozone season NOx programs under the Transport Rule. This can be readily accomplished since EPA proposes to use the same Allowance Management System (AMS) that was used in the CAIR programs. To the extent EPA is concerned that the potential amount of banked CAIR NOx allowances would reduce the amount of emission reductions that would otherwise be achieved under the proposed Transport Rule, EPA could stagger their use for compliance during the initial years of the program by assigning specific CATR related annual vintages to the CAlR banked allowances or limit their use to a certain percentage. Although we do not believe it should be necessary to do so, we would prefer such an approach in lieu of invalidating the use of banked CAIR allowances altogether or reducing their value by way of imposing surrender ratios greater than 1-to-1. Prohibiting the ability to transfer banked allowances from CAIR renders their value useless, disadvantages sources that complied with CAIR by installing control technology instead of purchasing allowances. This could impact company decisions concerning early reductions if there is a perception that over-compliance with the initial phase of the Transport Rule may not be rewarded in a subsequent phase of NOx reductions, which EPA has indicated it intends to impose to address its expected revision (tightening) of the ozone standard. Allowing the use of banked CAIR NOx allowances in the new program would provide a modest degree of increased compliance flexibility for sources during the early years of the program and, combined with the unlimited banking of CATR allowances, may further encourage early reductions. [EPA-HQ-OAR-2009-0491-2715.1, pp.4-5]
Response:
See preamble section IX and responses to other comments, primarily in this section.
Organization: DTE Energy Services (DTEES)
DTE Energy
Comment:
DTE Energy
DTE supports the use of banked CAIR NOx allowances for compliance with the proposed Transport Rule. The proposed Transport Rule properly recognizes the important environmental and economic benefits of allowance banking, and that allowance banking as an element of EPA's CAIR program was not undermined by the court's remand. [EPA-HQ-OAR-2009-0491-2851.1,p.3]
DTE Energy Services (DTEES)
Use of banked CAIR allowances
DTEES understands that, as described in 75 FR 45339, in light of the North Carolina Court ruling, EPA is limited in how banked pre 2012 CAIR allowances can be used. DTEES fully supports the use of pre 2012 banked CAIR allowances for compliance with the Transport Rule. In particular EPA should not disallow the use of allowances that have been purchased for long term compliance planning purposes. [EPA-HQ-OAR-2009-0491-2699.1,p.2]
Response:
See preamble section IX and responses to other comments in this section.
Organization: Duke Energy
Comment:
Duke Energy
EPA Should Allow the Use of Banked Clean Air Interstate Rule ('CAIR") NOx Allowances for PTR Compliance
Duke Energy recommends that EPA permit the use of banked CAIR NOx allowances for compliance with the PTR. In the final rule, EPA should provide that it will transfer all CAIR NOx annual and ozone season allowances held in each source's compliance accounts after the final compliance period of CAIR into that source's compliance accounts for the new PTR programs (to the extent the source is subject to the new program's annual or ozone season NOx requirements, or both). There is no reason not to allow sources to use their CAIR allowances (including allowances that they bought or otherwise acquired from others) for compliance with the PTR NOx programs.  EPA's concern that some may view an approach that authorizes sources to use banked CAIR NOx allowances as unfairly permitting some sources a larger share of allowances due to CAIR's use of fuel adjustment factors, which the North Carolina decision found EPA had not adequately justified, is no basis to bar use of these allowances already allocated. The court's opinion in no way bars use of these already-allocated allowances, on a banked basis, in a new program. Moreover, if EPA disallows use of banked CAIR NOx allowances in the Transport Rule, it will be to the detriment of all sources that hold banked CAIR NOx allowances when CAIR expires. It would be far better to allow all sources the benefit of their banked allowances than to render them worthless at the end of the CAIR program.3 [EPA-HQ-OAR-2009-0491-2689.1, p.4]
There are many compelling reasons EPA should allow sources to use their banked CAIR NOx allowances for compliance with the PTR. First, nothing in the D.C. Circuit's North Carolina opinion precludes -- and in fact, no party challenged -- use of banked CAIR NOx allowances. The only flaw identified by the court with respect to CAIR NOx allowances was the way EPA established NOx allowance budgets. Second, as EPA suggests, permitting use of banked CAIR NOx allowances would promote the continuation in 2010 and 2011 of the reductions that occurred under CAIR. 75 Fed. Reg. at 45339/1. It would also avoid creating an incentive for sources to "use up" CAIR NOx allowances, thereby potentially increasing their NOx emissions temporarily, because those allowances would -- in the absence of a provision allowing use of banked CAIR NOx allowances in the new program -- have no value after the allowance transfer deadline for the final CAIR annual and ozone season compliance periods. Third, allowing banked CAIR NOx allowances to be used for compliance with the PTR would provide a modest degree of increased flexibility for sources during the early years of the new program, an especially important consideration if EPA retains the proposed accelerated compliance schedule and continues to overstate the ability of existing emission controls to reduce emissions. [EPA-HQ-OAR-2009-0491-2689.1, pp.4-5]

Footnote 3: If EPA is concerned that the amount of banked CAIR NOx allowances is so great that it may reduce the amount of emission reductions that would otherwise be achieved under the proposed rule, 75 Fed. Reg. at 45339/1, there are better ways to avoid that outcome than to invalidate the allowances in whole or in part. EPA should allow sources the full benefit of their banked CAIR NOx allowances. If EPA determines that a limitation on the use of those allowances is necessary, EPA should at least permit use of a substantial amount of the allowances over the first few years of the new program, [EPA-HQ-OAR-2009-0491-2689.1, p.4]
Response:
See preamble section IX.  Particularly, EPA is concerned that allowing the use of CAIR allowances in the Transport Rule will jeopardize states' ability to show that significant contribution to nonattainment and interference with maintenance is achieved.
Organization: E.ON U.S.
Comment:
E.ON U.S.
Banked CAIR NOx allowances should be usable.
Although the court decision found fault with use of Title IV SO2 allowances to implement CAIR, it did not prohibit use of the newly-created CAIR NOx allowances. Utilities have made investments in control technologies and reduced emissions to comply with CAIR, which presumably have resulted in improved air quality in downwind states. This is the same goal as the Proposed Transport Rule. Any banked CAIR NOx allowances are the result of reductions made after the 2005 baseline year used in the Proposed Transport Rule. Consequently, use of banked CAIR NOx allowances is appropriate. [EPA-HQ-OAR-2009-0491-2797.1, p.9]
Response:
See preamble section IX.
Organization: Empire District Electric Company (Empire District)
Comment:
Empire District Electric Company (Empire District)
EPA's preferred approach prohibits the usage of banked Title IV, NOx SIP Call and CAIR NOx allowances.  Empire District has reviewed the DC Circuit's remand and understands the difficulty of incorporating these allowances into the CATR.  However a number of utilities, including Empire District, have installed pollution control equipment to comply with CAIR and reduced emission below their allowance allocations.  The preferred approach proposed by EPA in effect penalizes such utilities by stranding their banked allowances.  Those allowances exist due to over compliance by the affected utilities and therefore represent the additional cost of that over compliance.  If the preferred interstate trading program is finalized as proposed such an approach by EPA would send a negative message regarding over compliance of any future regulation.  We urge EPA to establish a system, with possible flow controls, that would allow utilization of these stranded allowances.  Empire District assumes that a goal of EPA's is to encourage over compliance, not stifle it. [EPA-HQ-OAR-2009-0491-2659.1, p.6]
Response:
See preamble section IX and responses to other comments primarily in this section.
Organization: Environmental Markets Association (EMA)
Comment:
Environmental Markets Association (EMA)
EMA is glad to see that the EPA is considering three options for the convertibility of CAIR NOx allowances. Failing to convert banked CAIR NOx allowances largely eliminates the return on investment that was expected as CAIR was implemented. [EPA-HQ-OAR-2009-0491-2727.1, p.1] [These comments were also submitted as testimony at the Atlanta, Georgia public hearing on September 1, 2010.  See Docket Number EPA-HQ-OAR-0491-1939, pp.48-49.]
We fail to understand how "cap-and-trade" policy has been diminished in public debate. Cap & trade has for fifteen years proven essential to achieving these goals earlier and at lower cost than any other form of regulation. To fulfill our compliance obligations by undertaking these significant financial commitments, we feel it is essential to for EPA to restore confidence in achieving environmental objectives that affect the well-being of every American (and indeed, the global citizenry) using a trading market where investors can receive a fair shot at a return on investment. [EPA-HQ-OAR-2009-0491-2727.1, p.2]
Without the environmental certainty of a "cap", none of us can be assured that the desired improvements in human health and air quality will be achieved. Without the regulatory certainty needed to support "trade", risk premiums for emission reduction projects go up, along with the cost of allowances - something that does not benefit the environment or consumers. Cap & trade should be about attracting capital to the highest return projects. The higher the cost of capital, the higher the cost of the projects that get completed, and the greater the resistance to further reductions. [EPA-HQ-OAR-2009-0491-2727.1, p.2]
We know that EPA understands these principles, but we think it is essential for it to take the next step and provide for continuity of current programs by providing for conversion of CAIR NOx allowances. We also appreciate that the Agency is concerned over additional litigation because CAIR NOx allowances were allocated based on fuel factors, which the Court rejected in its decision. [EPA-HQ-OAR-2009-0491-2727.1, p.2] [These comments were also submitted as testimony at the Atlanta, Georgia public hearing on September 1, 2010.  See Docket Number EPA-HQ-OAR-0491-1939, p.49.]
EMA believes that EPA could provide for continuity in allowance markets by electing to apply surrender ratios to banked allowances, (Option 2 in the Proposed Rule.) We suggest that it might help reduce the risk of subsequent litigation if EPA set the surrender ratios in a way that would reverse impact of the original fuel factor allocation method (e.g., if a 100% coal-fired company converted its allowances at a higher ratio than a gas-fired company.) [EPA-HQ-OAR-2009-0491-2727.1, p.2]
There are a number of issues raised by the discounted CAIR NOx conversion option. If EPA decided to convert allowances based on the original allocation recipient, we would have two classes of allowances, and people would price them differently based on their eventual conversion rate. Under EMA's proposed methodology, we would not tie the reversal of the fuel factors to the original allowances as allocated to recipients, but by the fuel status of the holder of the allowances who offers them for conversion, i.e., no matter where they got them. [EPA-HQ-OAR-2009-0491-2727.1, p.2]
Then there is the issue of a company asking a financial intermediary (which has no fuel position) to convert NOx allowances on their behalf. To discourage use of non-emitting conversion proxies, EPA could require that conversion be completed in rounds, with the first round being restricted to owners of affected sources (with a definable fuel position.) Then in a successor round, EPA could stipulate that financials and other parties could convert the CAIR NOx allowances they hold at the highest conversion rate applied in the first round (so parties with a fuel position would have an incentive to participate in the first round and not utilize a third-party conversion proxy.) [EPA-HQ-OAR-2009-0491-2727.1, p.2]
EMA supports efforts, such as this, to promote market-based mechanisms for responding to environmental issues because emissions trading results in reducing emissions earlier and at a lower cost than any other form of regulation. We encourage EPA to maintain the continuity of existing trading programs by providing for the convertibility of current period allowances into the subsequent Trading Rule programs, and we will be encouraging Congress to provide EPA with sufficient flexibility in the future to avoid the problems that EPA has encountered in trying to maintain a viable emissions trading market. [EPA-HQ-OAR-2009-0491-2727.1, pp.2-3]
Response:
See preamble section IX and responses to other comments, primarily in this section.
Organization: Exelon
Comment:
Exelon
The Transport Rule also addresses the North Carolina court's holding that state NOX budgets based on fuel type rather than contribution to nonattainment or interference with maintenance are impermissible. CAIR established a fuel factor of 1.0 for coal-fired units, 0.6 for oil-fired units, and 0.4 for gas-fired units, resulting in higher allowances for coal-fired units which are responsible for the greatest amount of pollutant emissions. The proposed Transport Rule rectifies this issue, and correctly follows the court's analysis, by eliminating the use of fuel factors in determining state emissions budgets. These fuel factors then indirectly influenced the allocation of CAIR allowances (which were based on state budgets), and so are reflected in the CAIR allowances that remain banked today. If banked CAIR NOX allowances were permitted to be used under the Transport Rule, the rule's allowance scheme would be tainted by the same deficiencies that caused the court to reject the use of fuel factors in CAIR. Recognizing this, EPA has proposed that banked CAIR allowances would neither be acceptable for compliance with Transport Rule, nor used as a tool for allocating Transport Rule allowances. Exelon supports EPA's decision to exclude banked CAIR NOX allowances from any role in compliance with Transport Rule or allocation of allowances under the Transport Rule. [EPA-HQ-OAR-2009-0491-2666.1, pp.10-11]
Response:
The final Transport Rule does not allow the use of CAIR NOx allowances.
Organization: Florida Electric Power Coordinating Group, Inc. (FCG)
Comment:
Florida Electric Power Coordinating Group, Inc. (FCG)
These same issues arise in the context of CAIR allowances. Because CAIR allowances would not be transferrable into the new program, all CAIR allowances for calendar years 2012 and on would become worthless. Since EPA is responsible for the allowance system, EPA should look to the quantity of allowances held and price for both the Acid Rain and CAIR programs (in Florida and nationally) to clearly understand the value it is eliminating in its proposal.
Accordingly, EPA's proposed interference in the market for Title IV allowances is contrary to North Carolina v EPA, and would be equivalent to a taking and violation of substantive due process protections afforded by the U.S. Constitution. [EPA-HQ-OAR-2009-0491-2658.1, p.6]
Response:
See preamble section IX.
Organization: Gainesville Regional Utilities (GRU)
Comment:
Gainesville Regional Utilities (GRU)
EPA's Failure to Craft a Proposal that Allows the Use of Banked Acid Rain SO2 Allowances and Banked CAIR NOx Allowances Creates Distrust in Market-based Control Strategies
EPA could create a mechanism that would permit SO2 Acid Rain allowances to serve as an alternative 'currency' for the proposed CATR SO2 allowances. In addition, EPA could also adjust banked post-20l2 NOx allowances to remove the CAIR fuel factor adjustment for use in the proposed CATR. It is noted that the Court did not completely rule out the use of Acid Rain SO2 or NOx allowances for CAIR, just the way EPA did it. GRU believes that EPA needs to consider the negative long range policy implications of abrogating programs and regulatory provisions that the utility industry has depended upon in making major financial and compliance decisions. [EPA-HQ-OAR-2009-0491-2674.1, pp.7-8; this comment can also be found at V.F.4.a of this comment summary]
Response:
See preamble section IX.
Organization: George Washington University Regulatory Study Center
Comment:
George Washington University Regulatory Study Center
Somewhat surprisingly, the EPA also proposes prohibiting any exchange of CAIR NOx allowances for either the seasonal or annual markets. Although the agency also cites some legal concerns, this decision appears to be driven by policy preference, not by legal necessity.13 In the proposed rule, the EPA states that the size "of the banks are so large that they might significantly reduce the amount of emissions reductions that would otherwise be achieved in the proposed Transport Rule NOx programs, particularly in the earlier years.' In response to these concerns, the EPA sets out a predictable set of options for banked allowance exchange: one-to-one exchange, less than one-to-one exchange, and no exchange. The agency selects no exchange as its proposed option.16 [EPA-HQ-OAR-2009-0491-2573.1, p.8]
The agency's reasoning for discarding CAIR NOx allowances is unclear, however. Especially when compared to the transition of banked Title IV SO2 allowances, there are few if any legal barriers to a transition of banked CAIR NOx allowances into the new Transport Rule markets. The EPA claims that discarding banked CAIR NOx allowances would "avoid the legal and practical problems raised by the other approaches," but only one such potential legal issue is raised by the agency in the proposed rule. CAIR NOx allowances were allocated to emissions sources in part based on "fuel adjustment factors"  -  a move that was one of the elements of CAIR struck down by the court in North Carolina. The EPA suggests that "some parties" might claim that this legally-problematic allocation taints CAIR NOx allowances in such a way that transitioning them into the Transport Rule would itself be illegal. We disagree. [EPA-HQ-OAR-2009-0491-2573.1, p.9]
First, as the EPA immediately concedes, this claim is directly undermined by the fact that, under CAIR, states retained discretion to allocate allowances using methods other than fuel adjustment factors. Most states did in fact deviate from the allocation methods used in EPA's model rule; only Minnesota, Pennsylvania, Maryland, and Delaware chose to leave the federal implementation plan in effect, while 24 states chose different allocation methods in state implementation plans approved by the EPA. [EPA-HQ-OAR-2009-0491-2573.1, p.9]
Second, the claim that CAIR NOx allowances are in some way tainted is inconsistent with the North Carolina court's treatment of CAIR itself. While the court found fault with many aspects of CAIR, including the use of fuel adjustment factors in allocation, it ultimately decided to remand the rule and allow it to operate pending revision. CAIR NOx allowances were therefore used, traded, and banked in CAIR markets, with no indication (until a March 2009 letter from the EPA) that these banked allowances would not remain useful. If CAIR NOx allowances are so tainted that they are legally toxic to a new emissions market, they should have been equally toxic to the CAIR market. The North Carolina court rejected this outcome, at least temporarily, by remanding CAIR rather than vacating it. [EPA-HQ-OAR-2009-0491-2573.1, p.9]
Third, the impacts of the allocation decisions in CAIR have been diluted by trading of NOx allowances since their allocation. If a source received an allowance due to fuel adjustment factors but traded it to another emitter who then banked the allowance, it is this trading partner -- not the beneficiary of the improper fuel adjustment allocation -- that suffers as a result of the decision to discard that banked allowance (while many traded allowances were likely used rather than banked, there are many reasons why an emitter might buy allowances and then bank them). Discarding a traded allowance does not reach back and attempt to recover the gains made by beneficiaries of the CAIR allocation since it only affects the current allowance holder. Discarding banked NOx allowances therefore does not -- and cannot -- correct the improper advantage some sources may have received as a result of fuel adjustment factor allocation. Indeed it would only be possible to do so if the beneficiaries of fuel adjustment had uniformly banked these extra allowances. It is difficult and maybe impossible to tell how many of these sources' banked allowances were "excess" fuel-adjustment allowances, but it is certain that many such allowances were traded. Large-scale trading of allowances between sources in states that received more allowances as a result of fuel adjustment factors and sources in those that received fewer was an expected result of the allocation process, something that the North Carolina court recognized and indeed pointed to as the key flaw in that process. It would be truly perverse if the result of the court's finding was further penalization of those sources that CAIR, because of the flawed fuel adjustment allocation, forced to go into the market to buy allowances. [EPA-HQ-OAR-2009-0491-2573.1, pp.9-10]
Fourth, CAIR's allocation of allowances based on fuel-adjustment factors was not the only source of CAIR NOx allowances. Many CAIR allowances were allowances banked in earlier programs (the NOx SIP Call or even the NOx OTC Program) and transitioned into CAIR. These transitioned allowances then allowed new CAIR allowances to be banked rather than used immediately. Discarding banked allowances generally, therefore, penalizes sources that banked allowances in these earlier programs and retained them. Since neither of these programs suffered from the legal flaws of CAIR, such sources did not benefit from any improper allocation. [EPA-HQ-OAR-2009-0491-2573.1, p.10]
Finally, even if it could be established that the only holders of banked CAIR allowances were beneficiaries of fuel-adjustment factors allocation, the burden of discarding those allowances would fall primarily on downwind states, not on those sources. Sources holding a bank of allowances that will be valueless in the future have an incentive to simply emit pollution up to the size of their bank (or sell the allowances at cut-rate prices to other sources who could then do so themselves). If the large CAIR NOx banks are drawn down, this increased pollution would make it more difficult or in some cases impossible for downwind areas to comply in a timely way with the ozone and PM NAAQS. The Transport Rule could therefore in the short term have the opposite of its intended effect -- it could exacerbate, rather than remedy, problems of interference with maintenance or significant contribution to nonattainment. If banked allowances are transitioned into the Transport Rule market, they could of course be used in the future by holders to emit NOx, but they might be held indefinitely. Even if they are used, the emissions would be spread out over time, likely reducing or eliminating their impact on downwind nonattainment. Furthermore, if the EPA chose to transition banked CAIR NOx allowances into the Transport Rule at a reduced exchange ratio, as the agency has done in some past program transitions, the agency might be able to have its cake and eat it too. Long-term emissions would be lower than with a 1:1 exchange ratio, and emitters' incentive to emit now would be much less than under the agency's stated preference of no exchange. [EPA-HQ-OAR-2009-0491-2573.1, pp.10-11]
The EPA does not raise any legal concerns over the transfer of banked NOx allowances other than allocation of CAIR allowances based on fuel adjustment factors. In its brief discussion, it also does not address any of the above objections to that singular legal concern. In fact, the EPA's discussion of a variety of proposed options for transfer of banked CAIR NOx allowances -- only one of which is discarding those allowances -- indicates that the agency's concerns are primarily those of policy, rather than law. The agency's discussion of legal issues surrounding transfer of SO2 allowances -- for which it does believe that North Carolina precludes any transfer -- stands in contrast to its brief and relatively open-ended discussion of the rationale for barring transfer of NOx allowances at any exchange ratio. [EPA-HQ-OAR-2009-0491-2573.1, p.11]
There therefore appears to be no strong legal grounds for discarding CAIR NOx allowances, leaving only policy justifications. But EPA's preferred option is at odds with the agency's traditional position on banked allowances, as illustrated by the other transitions between EPA-administered emissions trading programs. Each successive NOx trading program has included more stringent caps on NOx emissions, but only in the Transport Rule has the EPA deemed allowance banks a sufficient threat to achievement of planned reductions to justify blocking any transfer of allowances. [EPA-HQ-OAR-2009-0491-2573.1, p.11]
First, we recommend that EPA allow the transfer of banked CAIR NOx allowances into the Transport Rule NOx programs at an exchange ratio that balances the agency's environmental concerns with regulated firms' interest in retaining the value of those allowances as secure assets. Doing this will have both environmental and economic benefits. It will encourage firms to retain their banked allowances -- rather than dumping them and emitting NOx -- and to make early emissions reductions to smooth the transition to Transport Rule programs. Transitioning banked allowances also has important positive consequences for the confidence of current and future market participants in EPA-administered emissions trading programs. [EPA-HQ-OAR-2009-0491-2573.1, pp.31-32]

 13 Specifically, the agency points out that the method for allocation of allowances in the Transport Rule would differ from the "fuel-adjustment factors" method used in CAIR and struck down by the D.C. Circuit Court. The EPA claims "some parties" may feel that allowing one-to-one exchange of banked CAIR NOx allowances would advantage those sources who received more allowances under the CAIR allocation method than under the Transport Rule method and who banked substantial numbers of CAIR NOx allowances (primarily coal plants). The agency does not claim that it lacks the legal authority to implement a one-to-one exchange of NOx allowances, however -- whereas it does make such a claim regarding SO2 allowances. See Transport Rule at 45339.
16 EPA staff provided some advance notice of this policy preference: Sam Napolitano, director of the EPA's Clean Air Markets Division, notified regulated entities via email and the EPA website in March of 2009 that "EPA's continued recording of CAIR NOx allowances does not guarantee or imply that any allowances will continue to be usable for compliance after a replacement rule is finalized or that they will continue to have value in the future." This information may have tempered expectations about the value of allowances banked in 2009 and 2010, but regulated entities had no such warning for CAIR allowances banked before then. EPA, Trading of CAIR Allowances, online at http://www.epa.gov/airmarkt/business/cairallowancestatus.html (accessed August 26, 2010).
Response:
See preamble section IX in the final Transport Rule, responses to other comments, and the March 2009 notice regarding future expectations for CAIR allowance that has been posted continuously since that time http://epa.gov/airmarkets/business/cairallowancestatus.html.
Regarding the fuel adjustment factors and the point that states changed CAIR allocation methodologies through SIP revisions, approximately two-thirds of the states had some version of the fuel adjustment factors included in the allocation methodology either through FIPs or SIP revisions.  The commenter is correct that few states remained subject to the FIP; however, many of the SIP revisions incorporated the model rule language by reference or codified verbatim or near-verbatim the language into state rules.
The following table summarizes the basic approaches states used to allocate the majority of their CAIR budgets under the CAIR NOX and CAIR NOX ozone season trading programs.  Additional detail on the precise methodologies can be found in the individual state rules.

Are allocations adjusted for fuel type (including fuel adjustment factors)?
FR Citation
DC
Yes, FIP
71 FR 25328
DE
Yes, FIP
71 FR 25328
MD
Yes, model rule methodology
74 FR 56117
GA
Yes, model rule methodology
72 FR 57202
KY
Yes, model rule methodology
72 FR 56623
MS
Yes, model rule methodology
72 FR 56268
TN
Yes, model rule methodology
72 FR 46388
IN
Yes, model rule methodology
72 FR 59480
OH
Yes, model rule methodology
73 FR 6034
FL
Yes, model rule methodology (plus bonus for certain biomass  -  150%)
72 FR 58016
WV
Yes, model rule methodology (no gas units, so they did not include the gas factor)
72 FR 71576
LA
Yes, model rule-like (including the fuel adjustment factors)
72 FR 55064
IA
Yes, model rule-like (including the fuel adjustment factors), but permanent
72 FR 43539
TX
Yes (coal 0.9; nat. gas 0.5; non-coal non-nat.gas 0.3)
72 FR 41453
SC
Yes (coal 1.0; non-coal 0.6)
74 FR 53167
MI
Yes, model rule-like (including the fuel adjustment factors)
72 FR 72256
IL
Yes, output
72 FR 58528
NY
No, heat input
73 FR 4109
VA
No, heat input
72 FR 73602
AL
No, heat input
72 FR 55659
AR
No, output
72 FR 54556
CT
No, output
73 FR 4105
MA
No, output
72 FR 67854
NJ
No, output
72 FR 55666
PA
No, output
74 FR 65446
WI
No, output
72 FR 58542
MO
No, table in rule
72 FR 71073
NC
No, table in rule
74 FR 62496

The CAIR model rule methodology included fuel adjustment factors for determining allocations (1.0 for coal, 0.60 for oil, and 0.40 for gas or other fuels).  This methodology was also used for allocating under CAIR FIPs.

Seventeen states adjusted allocations based on fuel type (13 of those were either FIP allocations or SIP-based allocations that used the model allocation methodology or a close variation).

Eleven states based allocations on other factors and did not adjust for fuel-type.
Regarding the portion of the CAIR NOx ozone season allowances that were carried over from the NOx Budget (NBP) program, 200,000 allowances were added at the start of that program through a Compliance Supplement Pool (CSP), and additional allowances were available in 2004, the first year of the program.  The NBP had a court-ordered 30 day delay to the start of the program in 2004.  The full 5 month ozone season budget had been allocated and the court made no adjustment to the initial allocation along with the delay.  Therefore, in the first year of the program, sources were responsible for covering 4 months of emissions with 5 months of allowances (a 20% bonus).  The amount of allowances carried into the CAIR NOx ozone season was nearly equivalent to the 200,000 CSP allowances, plus the extra 20% not needed in 2004.  Therefore, overall, there were few "extra" reductions made under the NBP.  Most of those allowances have since been used for compliance in CAIR.
As stated earlier, allowing the use of CAIR NOx allowances for compliance in the Transport Rule programs jeopardizes a state's ability to show that its significant contribution to nonattainment and interference with maintenance in another state has been eliminated.
Organization: Green Exchange, LLC
Comment:
Green Exchange, LLC
Green Exchange is glad to see that the EPA is considering three options for the convertibility of CAIR NOx allowances. If market participants are not afforded the opportunity to convert banked CAIR NOx allowances many well-intentioned environmental investments may not be able to provide the return on investment that was expected as CAIR was implemented. [EPA-HQ-OAR-2009-0491-1105.1, p.2]
We know that EPA understands these principles, but we think it is essential for it to take the next step and provide for continuity of current programs by electing to choose one of its three options for conversion of CAIR NOx allowances by imposing variability limits starting in 2012, applying surrender ratios to banked allowances, or including banked allowances in state cap. [EPA-HQ-OAR-2009-0491-1105.1, p.3]
Response:
See preamble section IX.
Organization: Hoosier Rural Electric Cooperative
Comment:
Hoosier Rural Electric Cooperative
Currently there are several affected utilities in Indiana that have a bank of NOx allowances obtained through early reduction programs. Hoosier requests that EPA allow the carrying over of those allowances to the CATR.  [EPA-HQ-OAR-2009-0491-2724.1 p.1]
Response:
See preamble section IX.
Organization: Indiana Energy Association
Comment:
Indiana Energy Association
f. A number of companies in the Indiana Utility Group have a significant bank of NO, allowances earned through early reduction programs in Indiana. The Indiana Utility Group requests that EPA allow carrying banked allowances into the CATR program. The Indiana Utility Group is significantly concerned that if allocations are tight during 2012, 2013 and 2014, the proposed EPA budget de facto prohibits the trading that the proposed CATR specifically allows . Such a de facto prohibition is both inconsistent with the trading policies of EPA and may result in an unconstitutional taking of allowances. [EPA-HQ-OAR-2009-0491-3711 p.3-4]
Response:
See preamble section IX.