[Federal Register: April 28, 2006 (Volume 71, Number 82)]
[Rules and Regulations]
[Page 25303-25326]
[DOCID:fr28ap06-14]

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Part III

Environmental Protection Agency

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40 CFR Parts 51 and 96

Rule To Reduce Interstate Transport of Fine Particulate Matter and
Ozone (Clean Air Interstate Rule): Reconsideration; Final Rule

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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Parts 51 and 96

[OAR 2003-0053; FRL-8047-9]
RIN 2060-AN57

Rule To Reduce Interstate Transport of Fine Particulate Matter
and Ozone (Clean Air Interstate Rule): Reconsideration

AGENCY: Environmental Protection Agency (EPA).

ACTION: Final notice of reconsideration.

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SUMMARY: On May 12, 2005, EPA published in the Federal Register the
final ``Rule to Reduce Interstate Transport of Fine Particulate Matter
and Ozone'' (Clean Air Interstate Rule or CAIR). The CAIR requires
certain upwind States to reduce emissions of nitrogen oxides
(NOX) and/or sulfur dioxide (SO2) that
significantly contribute to nonattainment of, or interfere with
maintenance by, downwind States with respect to the fine particle and/
or 8-hour ozone national ambient air quality standards (NAAQS).
Subsequently, EPA received 12 petitions for reconsideration of the
final rule. On December 2, 2005, EPA published a notice of its decision
to grant reconsideration of four issues raised in the petitions for
reconsideration, and granted an additional opportunity for public
comment. On December 29, 2005, EPA published a notice of its decision
to grant reconsideration of an additional issue raised by a petition
for reconsideration, and again granted an additional opportunity for
public comment. In this notice, EPA is announcing its final decisions
on the five specific issues addressed in the December 2005 notices.

DATES: Effective Dates: This reconsideration is effective June 27,
2006.

FOR FURTHER INFORMATION CONTACT: For general questions concerning
today's action, please contact Carla Oldham, U.S. EPA, Office of Air
Quality Planning and Standards, Air Quality Strategies and Standards
Division, Mail Code C504-03, Research Triangle Park, NC 27711, phone
number (919) 54l-3347, e-mail address<EMAIL_ADDRESS>For
questions concerning the analyses described in section III of this
notice, please contact Chitra Kumar, U.S. EPA, Office of Atmospheric
Programs, Clean Air Markets Division, Mail Code 6204J, 1200
Pennsylvania Avenue, NW., Washington, DC 20460, telephone (202) 343-
9128, e-mail address<EMAIL_ADDRESS>For legal questions, please
contact Sonja Rodman, U.S. EPA, Office of General Counsel, Mail Code
2344A, 1200 Pennsylvania Avenue, NW., Washington, DC 20460, telephone
202-564-4079, e-mail address<EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:

Does This Action Apply to Me?

    The CAIR does not directly regulate emissions sources. Instead, it
requires States to develop, adopt, and submit SIP revisions that would
achieve the necessary SO2 and NOX emissions
reductions, and leaves to the States the task of determining how to
obtain those reductions, including which entities to regulate.

How Can I Get Copies of This Document and Other Related Information?

    1. Docket. EPA has established a docket for action related to the
CAIR under Docket ID No. EPA-HQ-OAR-2003-0053. All documents in the
docket are listed in the http://www.regulations.gov index. Although

listed in the index, some information is not publicly available, e.g.,
CBI or other information whose disclosure is restricted by statute.
Certain other material, such as copyrighted material, will be publicly
available only in hard copy. Publicly available docket materials are
available either electronically in http://www.regulations.gov or in

hard copy at the EPA Docket Center (Air Docket), EPA/DC, EPA West, Room
B102, 1301 Constitution Ave., NW., Washington, DC. The Public Reading
Room is open from 8:30 a.m. to 4:30 p.m., Monday through Friday,
excluding legal holidays. The telephone number for the Public Reading
Room is<PHONE_NUMBER>.
    2. Electronic Access. You may access this Federal Register document
electronically through the EPA Internet under the ``Federal Register''
listings at http://www.epa.gov/fedrgstr/ In addition, the EPA has established a Web site for the CAIR at http://www.epa.gov/.

cleanairinterstaterule or more simply http://www.epa.gov/cair/.

Outline

I. Background
II. Today's Action
III. Discussion of Issues
    A. SO2 Allocation Methodology in the CAIR Model
Trading Rules
    B. Fuel Adjustment Factors Used to Set State NOX
Budgets
    C. PM2.5 Modeling for Minnesota
    D. Inclusion of Florida in the CAIR Region for Ozone
    E. Impact on CAIR Analyses of D.C. Circuit Decision in New York
v. EPA
IV. Statutory and Executive Order Reviews
    A. Executive Order 12866: Regulatory Planning and Review
    B. Paperwork Reduction Act
    C. Regulatory Flexibility Act
    D. Unfunded Mandates Reform Act
    E. Executive Order 13132: Federalism
    F. Executive Order 13175: Consultation and Coordination With
Indian Tribal Governments
    G. Executive Order 13045: Protection of Children From
Environmental Health and Safety Risks
    H. Executive Order 13211: Actions That Significantly Affect
Energy Supply, Distribution or Use
    I. National Technology Transfer Advancement Act
    J. Executive Order 12898: Federal Actions to Address
Environmental Justice in Minority Populations and Low Income
Populations
    K. Congressional Review Act
    L. Judicial Review

I. Background

    On May 12, 2005, the EPA (Agency or we) published the final ``Rule
to Reduce Interstate Transport of Fine Particulate Matter and Ozone''
(Clean Air Interstate Rule or CAIR) (70 FR 25162). In this action, EPA
found that 28 States and the District of Columbia contribute
significantly to nonattainment of, and interfere with maintenance by,
downwind States with respect to the NAAQS for fine particles
(PM2.5) and/or 8-hour ozone. The CAIR requires these upwind
States to revise their State implementation plans (SIPs) to include
control measures to reduce emissions of SO2 and/or
NOX. Sulfur dioxide is a precursor to PM2.5
formation and NOX is a precursor to PM2.5 and
ozone formation. By reducing upwind emissions of SO2 and
NOX, CAIR will assist downwind PM2.5 and 8-hour
ozone nonattainment areas in achieving the NAAQS.
    The CAIR implements the ``good neighbor'' provision of the Clean
Air Act (CAA), section 110(a)(2)(D), which establishes State
obligations to address interstate transport of pollution. The EPA
conducted extensive air modeling to determine the extent to which
emissions from certain upwind States were impacting downwind
nonattainment areas. All States found to contribute significantly to
downwind PM2.5 nonattainment and maintenance problems are
included in the CAIR region for PM2.5 and are required to
reduce annual emissions of SO2 and NOX. All
States found to contribute significantly to downwind 8-hour ozone
nonattainment and maintenance problems are included in the CAIR region
for ozone and are required to reduce NOX emissions during
the 5-month ozone season (May-

September). The CAIR establishes regional emission reduction
requirements for annual SO2 and NOX emissions and
seasonal NOX emissions. The reduction requirements are based
on performance of control technologies which are known to be highly
cost effective for reducing emissions of electric generating units
(EGUs). The first phase of NOX reductions starts in 2009
(covering 2009-2014) and the first phase of SO2 reductions
starts in 2010 (covering 2010-2014). The second phase of both
SO2 and NOX reductions starts in 2015 (covering
2015 and thereafter).
    Each State covered by CAIR may independently determine which
emission sources to control, and which control measures to adopt.
States that choose to base their programs on emissions reductions from
EGUs may allow their EGUs to participate in an EPA-administered cap and
trade program. The CAIR includes model rules for multi-State cap and
trade programs for annual SO2 and NOX emissions,
and seasonal NOX emissions. States may choose to adopt these
rules to meet the required emissions reductions in a flexible and
highly cost-effective manner. To learn more about the CAIR and its
impacts, the reader is encouraged to read the preamble to the CAIR (70
FR 25162; May 12, 2005).
    The CAIR was promulgated through a process that involved
significant public participation. The EPA published a notice of
proposed rulemaking on January 30, 2004 (69 FR 4566) and a supplemental
notice of supplemental proposed rulemaking on June 10, 2004 (69 FR
32684). The EPA also published a notice of data availability on August
6, 2004 (69 FR 47828). The Agency held public hearings on the January
2004 proposed rule on February 25 and 26, 2004, and an additional
hearing on the supplemental proposal on June 3, 2004. In addition, the
EPA received thousands of comments on the proposals. We responded to
all significant public comments in the preamble to the final rule and
in the final response to comments document available in the CAIR docket
(Docket No. OAR-2003-0053-2172).
    Following publication of the final rule, the Administrator received
twelve petitions requesting reconsideration of certain aspects of the
final CAIR. These petitions were filed pursuant to section 307(d)(7)(B)
of the CAA. Under this provision, the Administrator is to initiate
reconsideration proceedings if the petitioner shows that an objection
is of central relevance to the rule and either that it was
impracticable to raise the objection to the rule within the public
comment period, or that the grounds for the objection arose after the
end of the public comment period but before the time for seeking
judicial review had expired. The petitions for reconsideration of the
CAIR asked EPA to reconsider several specific aspects of the final
rule, and many of the petitions made similar requests.
    By letters dated August 1, 2005, EPA granted reconsideration of the
definition of ``electric generating unit'' or ``EGU'' as it relates to
solid waste incinerators (and particularly municipal waste
incinerators).\1\ The EPA explained that the issue would be addressed
in the proposed rule signed the same day. That proposed rule, entitled
``Rulemaking on Section 126 Petition from North Carolina to Reduce
Interstate Transport of Fine Particulate Matter and Ozone; Federal
Implementation Plans to Reduce Interstate Transport of Fine Particulate
Matter and Ozone; Revisions to the Clean Air Interstate Rule; Revisions
to the Acid Rain Program; Proposed Rule,'' was published on August 24,
2005 (70 FR 49708). In that proposal, EPA reconsidered the definition
of ``EGU'' in the final CAIR as it relates to solid waste incinerators
(70 FR at 49738). We proposed revisions to the definition of ``EGU''
and requested comment on that issue.
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    \1\ These letters are available in the CAIR Docket. (OAR-2003-
0053-2209 and 2210).
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    On December 2, 2005, EPA published a notice of its decision to
grant reconsideration of four additional issues presented in the
petitions for reconsideration, and solicited public comment on those
issues. On December 29, 2005, EPA published a notice of its decision to
grant reconsideration of one additional issue raised by petition for
reconsideration, and again solicited public comment on that issue. In
those two notices EPA did not propose any modifications to the final
CAIR, as we did not believe that any of the information that had been
submitted demonstrated that EPA's final decisions in the CAIR
rulemaking were erroneous or inappropriate.
    The EPA requested comment only on the issues specifically described
in Section III of each December 2005 notice. We did not reconsider or
re-open for further comment any other provisions in the CAIR.
    The EPA also received three limited requests to stay CAIR. The
implementation of the CAIR in limited geographic areas pending
resolution of this reconsideration process. One petitioner requested a
stay of implementation of the CAIR in the State of Florida, and one
petitioner requested a stay of implementation of the CAIR in the State
of Minnesota, and one petitioner requested a stay of CAIR for a limited
subset of affected sources. By letter dated August 1, 2005, EPA
declined to stay implementation of the CAIR in Florida.\2\
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    \2\ This letter is also available in the CAIR Docket (OAR-2003-
0053-2208).
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    Finally, in addition to petitions for reconsideration, fourteen
petitions for judicial review of the final rule were filed with the
U.S. Court of Appeals for the District of Columbia.\3\ The fourteen
cases have been consolidated into a single case, State of North
Carolina v. EPA (No. 05-1244) (D.C. Cir). Many of the parties who
petitioned EPA for reconsideration of the CAIR also petitioned for
judicial review of the rule.
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    \3\ State of North Carolina v. EPA (No. 05-1244); Minnesota
Power v. EPA (No. 05-1246); ARIPPA v. EPA (No. 05-1249); South
Carolina Public Service Authority et al. v. EPA (No. 05-1250);
Entergy Corp. v. EPA (No. 05-1251); Florida Ass'n of Electric
Utilities (No. 05-1252); FPL Group v. EPA (No. 05-1253); Northern
Indiana Public Service Co. v. EPA (No. 05-1254); South Carolina
Electric & Gas Co. v. EPA (No. 05-1256); Integrated Waste Services
Ass'n v. EPA (No. 05-1257); AES Corp v. EPA (No. 05-1259); City of
Amarillo, Texas et al. v. EPA (No. 05-1260); Appalachian Mountain
Club et al. v. EPA (No. 05-1246); Duke Energy v. EPA (No. 05-1246).
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II. Today's Action

    This notice addresses the five specific issues upon which we
granted reconsideration and solicited comment in the December 2, 2005
and December 29, 2005 notices. Today's action is one of three actions
EPA is taking today to resolve all remaining issues relating to the
petitions for reconsideration of CAIR.
    This notice takes action only with respect to the five issues
identified in the December 2005 notices. In those notices, we announced
our decision to grant reconsideration and solicited comments on the
specific issues to be reconsidered. We did not, however, propose any
changes to the CAIR or re-open for comment any other issues determined
in the CAIR. In this action, we take final action on the five issues
identified in the notices of reconsideration and respond to comments
received during the reconsideration process. The first issue addressed
in the December 2, 2005 notice relates to analyses done by EPA to
address petitioner's claims regarding alleged inequities arising from
the application of the SO2 allowance allocation approach to
be used by States choosing to participate in the EPA-administered
SO2 trading program. The second issue relates to EPA's use
of specific fuel adjustment factors to establish NOX budgets
for each State. The third issue relates to modeling

inputs used by EPA to determine whether emissions from Minnesota should
be included in the CAIR region for PM2.5. The fourth issue
relates to EPA's determination that the State of Florida should be
included in the CAIR region for ozone. The issue raised in the December
29, 2005 notice relates to the potential impact of a recent judicial
opinion, New York v. EPA, 413 F.3d 3 (D.C. Cir. 2005), certain analyses
done for the CAIR relating to the identification of highly cost-
effective controls and the timing of CAIR deadlines. New York v. EPA,
413 F.3d 3 (D.C. Cir. 2005) was decided on June 24, 2005--after the
final CAIR was published but before the time for judicial review of the
rule had run. Each issue is described in greater detail in Section III
of this notice.
    EPA also is taking two additional actions relating to the petitions
for reconsideration of CAIR. First, EPA is sending nine separate
letters to the petitioners with outstanding requests for
reconsideration. These letters address their requests that EPA
reconsider the following ten issues: (1) The 0.2[mu]g/m3
threshold used to determine if a state's emissions contribute
significantly to PM2.5 nonattainment and maintenance
problems in downwind states (multiple requests for reconsideration
arguing both that the threshold is too high and that it is two low);
(2) the inclusion of the full state of Florida in the CAIR region for
PM2.5 (two requests for reconsideration challenging EPA's
decision to determine significant contribution on a statewide basis);
(3) the inclusion of the full state of Texas in the CAIR region for
PM2.5 (two requests for reconsideration challenging EPA's
decision to determine significant contribution on a statewide basis);
(4) the NOX budget allocated to the State of Connecticut
(two requests for reconsideration); (5) the treatment of previously
allocated 2009 NOX Budget Trading Program allowances; (6)
the SO2 retirement ratio for Title IV allowances as applied
to units that receive, through 2009, ``bonus'' allocations under
section 405(a)(2) of the Clean Air Act; (7) the phase I NOX
compliance date of 2009; (8) EPA's interpretation of the ``interfere
with maintenance'' prong of section 110 of the Clean Air Act; (9) the
method used to identify downwind nonattainment areas; and (10) the
creation of a compliance supplement pool for the annual NOX
trading program. Finally, the petitions for reconsideration contain two
outstanding requests to stay CAIR: One asking for CAIR to be stayed in
the state of Minnesota and one asking that CAIR be stayed only for the
subset of sources that has either already received 2009 NOX
Budget Trading Program allowances or is currently receiving ``bonus''
allowances under section 405(a)(2) of Title IV of the Clean Air Act.
    EPA has carefully considered each of these requests for
reconsideration. We have concluded that reconsideration of these issues
is not warranted under section 307(d)(7)(B) of the Clean Air Act. EPA
is therefore denying all remaining requests for reconsideration. In
addition, EPA is denying the remaining requests to stay CAIR. These
decisions are fully explained in the letters to petitioners which are
available in the CAIR docket (EPA-HQ-OAR-2005-0053). In a separate
action signed today, EPA is taking final action on the request for
reconsideration discussed in the August 1, 2005 Federal Register
notice. This action is taken as part of our final action responding to
North Carolina's section 126 petition and promulgating Federal
implementation plans for all states in the CAIR regions. In that
action, we also take final action on the request reconsider EPA's
treatment in CAIR of solid waste incinerators (particularly municipal
waste combustors), and finalize the revisions to the definition of
``EGU'' proposed in response to that request. This action, titled
``Rulemaking on Section 126 Petition from North Carolina to Reduce
Interstate Transport of Fine Particulate Matter and Ozone; Federal
Implementation Plans to Reduce Interstate Transport of Fine Particulate
Matter and Ozone; Revisions to the Clean Air Interstate Rule; Revisions
to the Acid Rain Program,'' \4\ will be published shortly in the
Federal Register.
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    \4\ See http://www.regulations.gov, Docket ID No. EPA-HQ-OAR-

2003-0053.
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III. Discussion of Issues

A. SO2 Allowance Allocation (& State Budget) Approach in the CAIR Model
Trading Rules

    As noted above, EPA decided to grant reconsideration on six issues
related to the final CAIR. The first of these issues relates to the
SO2 allocation approach in the CAIR model rules. EPA
received one petition for reconsideration that asked EPA to reconsider
the SO2 allocation approach to be used by States
participating in the EPA-administered CAIR SO2 trading
program. This petitioner argued that the SO2 allowance
allocation approach is unreasonable and inequitable. The petitioner
argued that the approach is unreasonable because other approaches would
be more appropriate. According to the petitioner, the approach is
inequitable because it results in owners of units that have
historically lower emission rates being forced to buy allowances from
historically higher emitting units that install new emission controls.
The petitioner asked EPA to establish a different approach. As
described in the Notice of Reconsideration, EPA does not agree with
petitioner's conclusions about this issue. EPA continues to believe
that the approach selected is reasonable for the reasons explained in
the CAIR final rule and further discussed below. Furthermore, numerous
opportunities for public comment on this issue were provided, and a
full discussion of the allowance allocation options occurred during the
rule development process. Nonetheless, given the intense public
interest in this issue, EPA decided to grant the petition for
reconsideration insofar as it raised issues regarding alleged
inequities resulting from the application of EPA's SO2
allowance allocation approach.
    In the Notice of Reconsideration, EPA announced its decision to
reconsider this issue and solicited additional public input. EPA also
solicited comment on additional analyses it conducted in response to
the petition for reconsideration concerning the impact of the
SO2 allowance allocation approach adopted in the CAIR model
trading rule. This additional analysis compared the SO2
allocation approach in CAIR to various alternatives EPA also considered
during the rulemaking process. In response to comment on the Notice of
Reconsideration, EPA has further refined some of its analyses and
carefully considered the arguments of the petitioner. EPA continues to
believe that these analyses show that EPA's selected approach to
SO2 allowance allocations is appropriate, given the
objectives of CAIR and other relevant considerations. Moreover, EPA
believes that the Agency's approach produces a reasonable result in
terms of equity. Therefore, in this Notice of Final Action on
Reconsideration, EPA is not altering the approach taken in CAIR for
SO2 allowance allocation. EPA's response to public comments
on the analyses presented in the Notice of Reconsideration and further
discussion of the petitioner's concerns are provided below (and in the
Technical Support Document, ``CAIR SO2 Allocation Approach
Analysis'' and the Response to Comments).
Considerations Relevant To Choosing an Allocation Approach
    While EPA did not explicitly define a distinct set of principles
that should be

used in developing State budgets under a region-wide cap and trade
program, EPA has made it clear throughout this process that it has
relied upon several consistent, important factors in developing both
the SO2 and NOX budgets.
    The first is the impact of allowance allocations on the specific
environmental objectives and overall cost of the rule, as well as any
potential adverse effects. In general, while the chosen allocation or
State budget calculation approach can affect the distribution of
compliance costs under a cap-and-trade program, it will have little
effect on overall compliance costs or environmental outcome. This is
because the incentives provided by cap-and-trade encourage economically
efficient compliance over the entire region. However, this may not
always hold where there are interactions with existing environmental
policies. In the case of NOX, EPA did not find this
consideration to be restrictive because there was not an existing
annual NOX trading program and the SIP Call ozone season
trading program could be easily integrated into the CAIR ozone season
trading program. As a result, a number of budget methodologies were
compatible. For SO2, this consideration played a larger role
because depending upon how the program was integrated within the
existing Title IV structure, it could impact emissions before the
program went into effect as well as emissions in regions not affected
by the program.
    Another important consideration is that an allocation methodology
must be consistent with the existing regulatory and legislative
structure. Once again for NOX, this consideration could be
satisfied with a wide range of budget methodologies. However, for
SO2, reductions for EGUs using Title IV allowances is
necessary in order to ensure the preservation of a viable Title IV
program (70 FR 72272). Linking the two programs maintains the trust and
confidence that has developed in the functioning market for title IV
allowances. The EPA recognizes this familiarity and confidence
(especially in a market-based approach) as a key source of the
program's success.
    A third factor is equity. In the absence of other considerations,
EPA believes that it is in the public interest that the distribution of
allowances under a cap and trade program be as equitable as possible.
For NOX, since the other considerations could be satisfied
with a number of different methodologies, this factor was the primary
one. For SO2, where the other considerations were more
limiting, this factor was not as central to our decisions, especially
since the Title IV allocation structure was erected by Congress for the
long term.
Title IV and CAIR
    The CAIR model SO2 trading program relies on the use of
title IV SO2 allowances for compliance with the allowance-
holding requirements of CAIR. Title IV SO2 allowances have
already been allocated on a unit-by-unit basis in perpetuity, based on
formulas set forth in sections 405 and 406 of the Clean Air Act (CAA),
which EPA implemented through final regulations issued in 1998 (See 42
U.S.C. 7651d and 7651e; and 18 CFR 73.10(b)). The statutory formulas
for allocation of title IV SO2 allowances were based on unit
data for 1985-1987 and, for some units, data for years up to 1995. For
the title IV SO2 trading program, each allowance authorizes
one ton of SO2 emissions.
    For the CAIR SO2 trading program, SO2
reductions will be achieved by generally requiring CAIR sources to
retire more than one title IV allowance of 2010 and later vintages for
each ton of SO2 emissions in 2010 and thereafter.
Specifically, each title IV SO2 allowance issued for 2009 or
earlier will be used for compliance by CAIR sources at a ratio of one
allowance per ton of SO2 emissions and would authorize one
ton of SO2 emissions. Each title IV allowance of vintage
2010 through 2014 will be used for compliance under CAIR at a two-to-
one ratio and authorize 0.5 tons of SO2 emissions. Each
title IV allowance of vintage 2015 and later will be used at a 2.86-to-
1 ratio and authorize 0.35 tons of SO2 emissions. See
discussion in the preamble to the final CAIR in section VII (70 FR
25255-25273) and section IX (70 FR 25290-25291).
Response to Comments on EPA's Statutory Authority
    Several commenters expressed support of EPA's chosen allocation
approach, arguing that EPA was entirely within its legal authority to
use title IV allowances to implement the SO2 trading program
under CAIR. These commenters generally argued that EPA's use of title
IV allowances to implement CAIR reductions was necessary to maintain
the viability of the program and continued confidence in cap-and-trade
programs.
    A few commenters on the Notice of Reconsideration assert that EPA
has exceeded its statutory authority under title IV of the CAA by tying
CAIR SO2 allocations to title IV allowances. In addition, a
few commenters argue that EPA's final CAIR SO2 allocation
approach unlawfully limits States' discretion under section 110 of the
CAA to determine how to meet their ``good neighbor'' obligations and to
meet national ambient air quality standards. These same concerns were
also raised during the CAIR rulemaking process and EPA provided a
detailed justification for its use of title IV allowances under CAIR,
including direct responses to these comments in the CAIR preamble (70
FR 25290-25296). EPA maintains that its approach of using title IV
allowances in the CAIR SO2 trading program and imposing an
allowance-retirement requirement on States that do not adopt the CAIR
SO2 trading program is within its statutory authority and is
a reasonable exercise of that authority. Additionally, there is nothing
in section 110 of the CAA that would bar the use of title IV allowances
to accomplish attainment goals under 110(a)(2)(d).
    One commenter suggests that EPA's SO2 allocation
approach using title IV allowances is in violation of CAA section
110(a)(2)(d) because it distributes allowances among States in a way
that would effectively result in different emissions rates among
States, and different resulting control costs. The commenter argues for
an approach that results in an equal effective emissions rate across
States. The commenter then cites section 102(a) of the CAA, arguing
that the provision ``directs EPA to promote the development of air
pollution control laws at the state and local level that are as
`uniform' from jurisdiction to jurisdiction as practicable.'' The
commenter then proceeds to argue that EPA's use of title IV allowance
allocations for SO2 allowance allocations under CAIR
violates this notion of parity without reason and is therefore
unlawful.
    EPA disagrees with the commenter's interpretation of these two CAA
provisions. First, nothing in section 110(a)(2)(d) indicates how EPA
should allocate allowances under a cap-and-trade program. Second, while
the commenter suggests that an allocation approach that results in a
uniform effective emissions rate across all States would remedy the
inequities the commenter perceives in EPA's application of
110(a)(2)(d), the allocation approach that the commenter actually
recommends does not result in this outcome. Third, section 102(a) of
the CAA indicates that ``The Administrator shall * * * encourage the
enactment of improved and, so far as practicable in the light of
varying conditions and needs, uniform State and local laws relating to
the prevention and control of air pollution''. As is discussed

throughout this section of the CAIR Notice of Final Action on
Reconsideration, the existence of title IV creates a set of conditions
under which it is not ``practicable'' to create a new set of allowance
allocations for SO2 for the purposes of CAIR. Finally, the
use of the phrase ``The Administrator shall encourage'' in section
102(a) indicates that this provision is in no way a directive that
requires the Agency to obtain any specific result during its
rulemakings. Finally, the use of a cap-and-trade program assures that
the marginal cost paid for a ton of emission reduction should be close
to the observed allowance price, assuring a uniform marginal cost from
State to State.
SO2 Allocation Options Discussed in CAIR
    EPA considered and analyzed a variety of SO2 allowance
allocation methodologies during the CAIR rulemaking process. After
careful analysis, EPA decided to use the allocation approach chosen by
Congress in title IV of the Clean Air Act. EPA also considered the
following alternative approaches, which are explained in the final CAIR
``Corrected Response to Significant Public Comments on the Proposed
Clean Air Interstate Rule,'' Corrected April 2005 (Docket Number OAR-
2003-0053):

--Allocations based on historic tons of actual emissions from more
recent years;
--Allocations based on heat input (with alternatives based on heat
input from all fossil generation, and heat input from coal- and oil-
fired generation only); and
--Allocations based on electricity output (with alternatives based on
all generation and all fossil-fired generation).

    In addition to these alternatives, EPA has analyzed other heat
input-based allocation approaches in the reconsideration process,
explained below. Each allocation approach suggested by the petitioner
and other commenters during the CAIR rulemaking and reconsideration
process has advantages and disadvantages for different companies and
States. However, as explained in the final CAIR, EPA believes that the
approach used in the final CAIR is the most appropriate among the
alternatives for several reasons.
    First, EPA believes--based on strong policy and air quality
concerns--that it is necessary to use the existing title IV allowances
in order to preserve the viability and emissions reductions of the
highly successful title IV program. The disruption of the title IV
SO2 trading program would also potentially result in
increased emissions outside of the CAIR region starting in 2010
because, with title IV allowances having little or no value, the title
IV program would no longer constrain SO2 emissions in those
States. Further, if title IV allowances are not used for compliance in
the CAIR SO2 trading program, the likely result will be: a
significant surplus of title IV allowances; a collapse of the price of
title IV allowances; and a title IV SO2 trading program
that, contrary to Congressional intent, no longer provides incentives
to minimize emissions control costs and encourage pollution prevention
and innovation.
    If EPA adopts an approach that does not preserve the structure of
the title IV allowance market and the value of those allowances, the
confidence in the cap-and-trade policy instrument and allowance markets
in general, and in the CAIR cap-and-trade programs in particular, would
likely decline. Such an outcome could result in a reduced willingness
of the owners of sources in cap-and-trade programs to invest in control
technologies that would generate excess allowances for sale, or to
purchase allowances for compliance, for fear that the rules might
change. If owners were to ignore the incentives provided by cap-and-
trade in such a manner, efficiency and cost-savings provided by these
programs would be lost. The preservation of title IV allowances for use
in CAIR, then, is integral to the viability and effectiveness of both
title IV and the CAIR trading programs. See discussion in preamble to
the final CAIR in section IX (70 FR 25293-25295).
    Second, EPA relied on the permanent allocation methodology
established by Congress in title IV for purposes of reducing
SO2 emissions. Congress chose a policy of not revisiting and
revising these allocations and, apparently, believed that its
allocation methodology for title IV allowances would be appropriate for
future time periods.
    Third, title IV allowance allocations provide a logical and well
understood starting point from which additional electric generation
unit (EGU) SO2 emission reductions can be achieved for Acid
Rain units, which account for over 90 percent of the SO2
emissions from CAIR EGUs.
    Finally, in response to comments on the proposed CAIR, EPA
performed an analysis comparing the title IV methodology to other
methodologies. At the outset, EPA notes that the objective of CAIR is
not to ensure that each State receives the maximum amount of
SO2 allowances possible under any approach. The goal of CAIR
is to achieve the SO2 emissions reductions through the
region-wide budgets. As EPA has noted, selecting the most appropriate
SO2 allowance allocation approach for CAIR has required
addressing a number of different considerations. The policy and air
quality concerns specific to the CAIR SO2 trading program
and noted by EPA above necessitate that EPA implement the CAIR
SO2 program using the existing structure of title IV.
Nevertheless, EPA has analyzed the impact of using title IV allocations
on States relative to other possible allocation approaches, and found
that this approach produces a reasonable result (See CAIR Corrected
Response to Comments, section X.A.26, Docket : EPA-HQ-OAR-
2003-0053-2172, and ``CAIR SO2 Allocation Approach
Analysis'' Technical Support Document available in the docket).
    In summary, EPA's use of title IV allowances in the CAIR
SO2 trading program is supported by: (1) EPA's determination
that this approach is necessary to maintain the efficacy of the title
IV program and to prevent erosion of confidence in cap-and-trade
programs in general; and (2) EPA's analysis showing that the
allocations resulting from this approach are reasonable. Nevertheless,
as a part of this reconsideration, EPA performed additional analyses,
explained below, to evaluate the SO2 allocation approach in
the final CAIR in light of the petitioner's concerns.
Equitability of CAIR SO2 Allocation Approach
    While the petitioner stated that the CAIR final allocation approach
is ``inequitable'' because lower emitting units would buy allowances
from higher emitting units that install emission controls, it is
unclear why such a result would actually be inequitable. On the
contrary, the owner of each of the units involved would be choosing to
adopt the most economic compliance strategy in light of the unit's
emission control costs and the market value of allowances. The ability
of the owners to make such choices reflects the flexibility, inherent
cost-effectiveness, and promotion of least-cost compliance for all
program participants provided by a cap-and-trade program.
Response to Comments on the Equitability of CAIR SO2
Allocation Approach
    One commenter argued that EPA should use the same metrics and
methodologies used to evaluate NOX

allowance allocation approaches to evaluate SO2 allowance
allocation approaches. The commenter suggests that the metrics by which
EPA assessed NOX allocations included (1) whether the EPA
method avoids penalizing coal-fired generation units that already have
installed emissions controls and (2) whether, relative to the
alternative allocation approaches, the EPA method better minimizes for
each State the disparity between allowances provided and projected
emissions, and argued that EPA cites these rationales in justifying its
chosen NOX allocation approach. This commenter also suggests
that EPA's use of title IV allowances penalizes new units and
independent power producers (IPPs) and results in large wealth
transfers from low-emitting to high-emitting States.
    While EPA agrees that the Agency considered these factors (among
several others) in choosing its allocation approach under the CAIR
NOX trading programs, EPA does not fully agree with the
commenter's characterization of EPA's considerations. EPA believes that
the commenter has omitted some of the significant context and caveats
that were included in the discussion of NOX allocations and
the use of fuel adjustment factors in the reconsideration notice, as
well as a number of other factors that EPA must consider, particularly
in the context of SO2 allocations. First, EPA noted in the
June 10, 2004 Supplemental Notice of Proposed Rulemaking and in the
Notice of Reconsideration that, ``in contrast to allocations based on
historic emissions, the factors would also not penalize coal-fired
plants that have already installed pollution controls'' (69 FR 32869,
70 FR 72276, emphasis added). This language explains that
NOX allocations using historic heat input adjusted for fuel
type, while providing additional allowances to coal-fired units that
will likely install controls under CAIR, would not simultaneously
penalize coal-fired units that had already made investments in
emissions controls. An approach based on historic emissions, on the
other hand, would also provide additional allowances to units that
would likely have to install controls, but would simultaneously
penalize units that had already done so. While EPA makes this argument
in support of its chosen approach for NOX allocations, the
Agency does not raise this point to establish a criterion for
evaluating allowance allocation approaches. Rather, it simply notes
that its chosen approach for NOX allocations can provide an
advantage to one set of coal-fired units without disadvantaging another
set of coal-fired units.
    Second, while the commenter is correct in noting that EPA stated in
its discussion of NOX allocations in the Notice of
Reconsideration that it is in the public interest to attempt to
minimize the disparity between individual State budgets and projected
emissions for each State, EPA did not set this goal as one of only two
primary criteria for adoption of a given allocation strategy, as the
commenter suggests. Rather, EPA notes that ``In the absence of other
considerations, EPA believes that it is in the public interest to
reduce the disparity between the number of allowances in a State budget
and total projected State EGU emissions'' (70 FR 72276, emphasis
added). As EPA has noted, the Agency had to weigh many considerations
in choosing an SO2 allowance allocation approach. In
particular, unlike in the case of NOX, EPA had to consider
an existing, nationwide trading program implemented by statute in the
case of SO2.
    Third, as EPA discussed in the CAIR Response to Comments, while
commenters express concern about the availability of allowances for
non-Acid Rain units, it should be noted that not all sources covered
under the Acid Rain program received allowances. By the design of the
title IV program (as outlined by Congress), because of the permanent
allocation of allowances, new units beginning commercial operation
after 1995 or beginning construction after 1990 did not receive title
IV allowances. Thus, Congress recognized that, over time, new units
would be built and covered under the program, but felt it reasonable
that such units would obtain title IV allowances either through the
auction or from the market. Under the auction, 250,000 title IV
allowances are be auctioned annually (half for the current compliance
year and half for the compliance year seven years in advance), and
these allowances can be used for compliance with CAIR. The availability
of these allowances ensures that all sources, including new units and
non-title IV sources, will have access to a pool of allowances.
Finally, IPPs have the option of opting in to title IV until their
exemption expires in order to obtain title IV allowances. EPA addresses
other issues specific to IPPs in section VI.E of today's CAIR FIP
Notice of Final Rulemaking preamble.
    Fourth, while the commenter asserts that EPA's use of title IV
allowances in the CAIR SO2 trading program will result in
significant wealth transfers from low-emitting to high-emitting States,
EPA's analysis of SO2 coverage ratios (the ratio of
allowances to projected emissions, discussed to some degree in this
section and presented in the ``CAIR SO2 Allocation Approach
Analysis'' Technical Support Document, available in the docket), is not
suggestive of this trend. In fact, looking at the differences in
States' projected emissions and coverage ratios between the base case
and CAIR, it becomes evident that both lower- and higher-emitting
States are projected to make investments in emissions controls under
CAIR, reducing their demand for allowances, or freeing up allowances
for sale, in the process. States that might be categorized as high-
emitting are not always projected to be net sellers of allowances, and
States that might be categorized as low-emitting are not always
projected to be net purchasers of allowances.
    Another commenter argues that smaller units would be forced to
purchase SO2 allowances from the market in order to comply
with CAIR. This commenter argues that the SO2 allowance
market is not efficient and subjects some participants to endure an
undue amount of financial burden and/or risk. EPA believes that the
commenter's claims about the state of the SO2 allowance
market are unfounded. As is discussed in the Acid Rain Program Report
(EPA 43-R-05-012, October 2005), about 20,000 allowance transactions,
affecting about 15.3 million allowances were recorded in the EPA
Allowance Tracking System in 2004. In addition, title IV compliance
costs have been much lower than projected and allowance prices in the
SO2 allowance market have generally reflected this. Finally,
as discussed earlier in this section, sources have the option of
purchasing allowances directly from the annual auction.
    Further, in raising equity concerns, a couple of commenters argue
for conflicting measures of equity within their own comments. These
commenters argue that an equitable emissions allocation approach will
result in an equivalent effective emissions rate across States. These
commenters then point to EPA's chosen CAIR NOX emissions
allocation approach as an exemplary allocation approach because it
limits the disparity between individual State budgets and projected
emissions. However, the commenters fail to realize that EPA's
NOX allocations approach does not actually result in an
equivalent emissions rate across States. In other words, choosing a
CAIR SO2 allocation approach with the goal of minimizing the
disparities between State budgets and projected emissions would result
in the selection

of a different approach than would the goal of equating effective
emissions rates across States.
    Finally, some commenters argued that the use of title IV allowance
allocations penalizes sources who have already installed scrubbers
prior to the start of the Acid Rain Program. This is because, in
general, allowances under title IV were allocated to units that had not
installed controls at a higher rate relative to units that had
installed controls. The title IV approach, in that sense, is somewhat
similar to the approach taken for NOX under CAIR, in that it
provides additional allowances for units expected to install controls
under the rule. EPA believes that the commenters' arguments that the
continued use of title IV allowances penalizes sources that installed
controls prior to the Acid Rain Program are unfounded. First, these
controls were installed over 20 years ago and were completed within a
regulated electricity sector, such that in most cases the cost of
installing these controls should have been recovered through
electricity price rate increases. Second, these controls were installed
in response to requirements separate from both CAIR and the Acid Rain
Program. Third, Congress was clearly aware of the issues raised by
commenters when designing the SO2 trading program in 1990,
and consciously used a formula for future allocations for the length of
time it believed was reasonable. In general, the Acid Rain Program has
enjoyed 10 years of operation without substantial concern over this
issue and with industry at-large appreciating the program's merits in
providing a cost-effective, flexible, and balanced way to provide
environmental protection. Finally, analysis by one of these two
commenters, which estimates the windfall of allowances that a
hypothetical unscrubbed coal-fired unit would attain by installing a
scrubber and reducing emissions, neglects the fact that this unit would
have to bear the costs of installing controls. Thus, the ostensible
windfall would be significantly smaller than was suggested by the
commenter.
Analysis of SO2 Allocation Options Presented in the Notice
of Reconsideration
    In the Notice of Reconsideration, EPA compared three alternative
SO2 allowance allocation methodologies to the approach in
the final CAIR. In these analyses, EPA examined how allowances would be
distributed to individual companies instead of examining how they would
be distributed to States. According to the petitioner, the allowance
distribution will result in the petitioner's relatively low-emitting
units being forced to buy allowances from other companies' relatively
high-emitting units. The petitioner thus argues the allocation approach
used in CAIR is per se inequitable and unreasonable. To evaluate this
concern, EPA compared projected allocations not to individual units,
but to individual parent and operating companies who own these units
under various methodologies relative to projected SO2
emissions of all the units owned by those companies. Figures and tables
from the analysis presented in the Notice of Reconsideration can be
found in the docket, EPA-HQ-OAR-2003-0053, ``SO2 Allowance
Allocation Methodology Comparative Analysis Data Files'').
    The three alternative allowance allocation methodologies EPA
analyzed were suggested by various commenters during the rulemaking
process and this reconsideration process. These methodologies are:

--Allocating allowances based on more recent heat input data;
--Allocating allowances based on more recent heat input data adjusted
for fuel type (e.g., coal, oil and gas); and
--Allocating allowances based on more recent heat input data adjusted
both for fuel type and for coal type (e.g., bituminous, sub-bituminous
and lignite).

    In comparing the CAIR SO2 allocation approach and the
three alternative methodologies, EPA took into account certain factors
that are applicable to the CAIR final allocation approach but not to
the three alternative methodologies. For all four methodologies, EPA
analyzed the resulting total allowance allocations, and the total
projected emissions, for companies' sources located in the States
subject to CAIR. In addition, for all the methodologies, EPA analyzed
the relationship between allowances and emissions in two ways. First,
EPA calculated the ratio of allowances to total projected emissions
before CAIR controls (base case emissions). This provides a reasonable
estimate of the extent to which each company's future emissions will
exceed its allowances and, thus, indicates how much effort a company
must expend for compliance either by purchasing allowances or
installing controls. Second, EPA calculated the ratio of allowances to
total projected emissions after the installation of CAIR controls
(control case emissions). This provides a reasonable estimate of the
number of allowances a company would need to purchase or would be able
to sell after any controls are installed. Some companies with low-
emitting units may have excess allowances to sell even if no controls
are installed.
    In its analysis of the CAIR approach, EPA also considered both the
allowance allocations and the emissions for companies' units both
within the CAIR region and outside the CAIR region. EPA believes that
this is appropriate because, under the CAIR approach, if a company's
units outside the CAIR region have more title IV allowances than needed
to cover their emissions under the Acid Rain Program, the company might
be able to transfer, at little or no net cost, excess allowances to the
company's units in the CAIR region for use to cover emissions under the
CAIR trading program. Under the three alternative methodologies, all of
which would require creating new CAIR SO2 allowances
independent of the existing title IV allocations, CAIR sources could
not use title IV allowances held for sources outside (or inside) the
CAIR region for compliance with the CAIR SO2 allowance
holding requirement.
    Further, in the analysis of the CAIR approach, EPA considered the
allocation of title IV allowances to CAIR units that are not currently
in the Acid Rain Program but that could opt in to the Acid Rain Program
and receive title IV allowances (see 42 U.S.C. 7651i and 18 CFR part 74
and the discussion below concerning the ability of units to opt in).
This analysis assumed that companies owning non-Acid Rain units subject
to CAIR would elect to opt in to the Acid Rain Program because they
would receive title IV allowances to cover a portion of the units'
emissions under CAIR. EPA believes this assumption is reasonable
because any of these units has the option of becoming an Acid Rain
Program opt-in unit and thereby providing the company additional
allowances at little or no additional cost, and the value of title IV
allowances could be substantial. In contrast, the analysis of the three
alternative methodologies did not consider the impact of Acid Rain
Program opt-ins because these approaches do not use title IV allowances
for CAIR compliance.
    EPA's analysis indicated that while allocations vary from company
to company under the four methodologies, overall the distributions of
allowances that companies received relative to their projected
emissions for the CAIR control case are very similar. EPA came to
similar conclusions when looking at the base case.

Response to Comments on EPA's Analysis
    EPA received several comments on various aspects of the
SO2 allocation analyses presented in the Notice of
Reconsideration. A few commenters claimed that EPA should have focused
its analyses on State budgets rather than on projected allocations to
companies because, with an alternative allocation approach, States
would have the responsibility for allocating allowances to their
respective affected sources and could meet control requirements
differently than assumed in EPA's analyses. Further, these commenters
claimed a State-by-State analysis is more consistent with the analysis
of NOX allocation methodologies in the Notice of
Reconsideration and the final CAIR itself. Finally, one commenter noted
that company-specific analysis can obscure state-by-state variation and
may not be reliable given continual shifts in ownership structure.
    EPA agrees with the commenters that one method of evaluating the
reasonableness of SO2 allocation approaches is (in addition
to company-by-company analyses) to compare State budgets calculated
according to various methodologies. Despite one commenter's assertion
that company-level analysis is made unreliable by constantly changing
corporate structures, EPA believes that such an analysis remains
instructive. A State-level analysis provides additional perspective on
the impact of various allocation approaches, though it will, of course,
obscure some of the potential company-level variability among allowance
approaches.
    EPA presented such a State-by-State analysis in the final CAIR RTC
(final CAIR ``Corrected Response to Significant Public Comments on the
Proposed Clean Air Interstate Rule,'' Corrected April 2005 (Docket
Number OAR-2003-0053)). EPA recognizes that the analysis prepared for
the CAIR RTC did not consider two of the alternative allocation
approaches discussed above. For today's notice, EPA has analyzed State
budgets calculated under eight different approaches (title IV and seven
alternatives). These eight approaches are described in Table IIIA.1,
below.

  Table III.A.1.--Description of Allocation Approaches Included in EPA
                                Analysis
------------------------------------------------------------------------
           Approach name                   Description of approach
------------------------------------------------------------------------
EPA Title IV......................  Title IV allocations adjusted for
                                     the 2 to 1 allowance retirement
                                     ratio in 2010-2014 and the 2.86 to
                                     1 allowance retirement ratio in
                                     2015 and thereafter. EPA's chosen
                                     approach.
Average 1999-2002 (Pure) Heat       For each State, calculates the
 Input.                              average heat input over the years
                                     1999-2002. Apportions the region-
                                     wide SO2 cap to individual States
                                     based on each State's share of the
                                     total region-wide average for those
                                     years.
1999-2002 Heat Input w/Fuel         For each State, calculates the
 Factors.                            average adjusted heat input over
                                     the years 1999-2002. Adjusts heat
                                     input using factors of 1.0 for
                                     coal, 0.009 for natural gas, and
                                     0.3 for oil. Apportions the region-
                                     wide SO2 cap to individual States
                                     based on each State's share of the
                                     total region-wide average adjusted
                                     heat input for those years.
1999-2002 Heat Input w/Fuel         For each State, calculates the
 Factors & Coal Type.                average adjusted heat input over
                                     the years 1999-2002. Adjusts heat
                                     input using factors of 2.6 for
                                     bituminous coal, 1.0 for
                                     subbituminous and lignite coals,
                                     0.2 for natural gas, and 0.7 for
                                     oil. Apportions the region-wide SO2
                                     cap to individual States based on
                                     each State's share of the total
                                     region-wide average adjusted heat
                                     input for those years.
Average 1999-2002 Heat Input Coal   For each State, calculates the
 + Oil.                              average heat input from coal- and
                                     oil-fired units over the years 1999-
                                     2002. Apportions the region-wide
                                     SO2 cap to individual States based
                                     on each State's share of the total
                                     region-wide average heat input from
                                     these units for those years.
Average 1999-2002 SO2 Emissions...  For each State, calculates the
                                     average emissions over the years
                                     1999-2002. Apportions the region-
                                     wide SO2 cap to individual States
                                     based on each State's share of the
                                     total region-wide average emissions
                                     for those years.
Average 1999-2002 Generation        For each State, calculates the
 Output (all sources fossil and      average output over the years 1999-
 non-fossil).                        2002. Apportions the region-wide
                                     SO2 cap to individual States based
                                     on each State's share of the total
                                     region-wide average output for
                                     those years.
1999-2002 Generation Output         For each State, calculates the
 (Fossil-fuel-fired units only).     average output from fossil fuel-
                                     fired units over the years 1999-
                                     2002. Apportions the region-wide
                                     SO2 cap to individual States based
                                     on each State's share of the total
                                     region-wide average output from
                                     these units for those years.
------------------------------------------------------------------------

    As is shown in Table III.A.2, the first component of EPA's State-
level analysis compared the individual State shares of total region-
wide SO2 allocations under the various approaches. The
revised analysis is consistent with EPA's original findings. As can be
seen from Table III.A.2, 80 percent of States get neither the most nor
the least allowances relative to what they receive under the other
allocation approaches, under the title IV approach. (See ``Sulfur
Dioxide Allowance Allocation Methodology Comparative Analysis''
Technical Support Document (Docket ID: EPA-HQ-OAR-2003-0053)).
Furthermore, when compared specifically to the methods supported by
commenters (pure heat input, heat input with fuel factors, heat input
with fuel factors and coal type, coal and oil heat input and average
output all), distribution of State budgets using title IV allocations
results in an individual State receiving its smallest or greatest share
of total SO2 allocations relative to what the individual
State receives under the alternative approaches the same number of
times as the pure heat input methodology and fewer times than the other
methodologies supported by commenters (see the last three rows of Table
III.A.2). Such results support EPA's argument that its chosen
allocation approach is reasonable. While the coal and oil heat input
approach appears to perform best in this analysis, this approach
received more limited commenter support.
    In examining the results of this analysis for the States where
commenters that submitted adverse comments on the use of title IV own
generating units (FL, IN, MD, MN, NY, NC, PA, SC, TX), it becomes
apparent that each allocation approach makes some States better off and
others worse off. (See ``CAIR SO2 Allocation Approach
Analysis'' Technical Support Document available in the docket.) \5\

While using a heat input with fuel factors approach would provide an
advantage to many of the States that provided adverse comments on title
IV, shifting to this approach would disadvantage 10 of the 23 States
(DC is not counted) relative to the title IV approach.
---------------------------------------------------------------------------

    \5\ Also, it is worth noting that these many of the commenters
are all in cost-of-service States, where they should be able to pass
through costs. In other words, sources in these States are likely to
recover their cost of compliance, and the rate impact in these
States, spread over all generation, transmission, and distribution
is likely to be minimal. EPA's Regulatory Impact Analysis for CAIR
forecasts an increase of only about 2.0 percent and 2.7 percent in
average electricity prices in the CAIR region in 2010 and 2015,
respectively. Florida is projected to experience an increase in
retail electricity prices of 0.8 percent in 2010 and 1.4 percent in
2015. Also, the region containing North Carolina and South Carolina
is forecast to have retail electricity price increases lower than
the regional average increases under CAIR in 2010 and 2015.

                                       Table III.A.2.--States Share of Budget Under Various Allocation Approaches
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                1999-2002
                                                                 Average     1999-2002    Heat input    Average      Average      Average      Average
                      State                        EPA title    1999-2002    Heat input     w/fuel     1999-2002    1999-2002    1999-2002    1999-2002
                                                       IV      (pure) heat     w/fuel     factors &    heat input   emissions    output all     output
                                                                  input       factors     coal type    coal + oil                               fossil
--------------------------------------------------------------------------------------------------------------------------------------------------------
AL..............................................         4.4%         4.3%         4.9%         5.2%         4.7%         5.0%         4.7%         4.2%
DC..............................................         0.0%         0.0%         0.0%         0.0%         0.0%         0.0%         0.0%         0.0%
FL..............................................         7.0%         7.7%         5.6%         6.7%         7.3%         6.0%         7.2%         7.7%
GA..............................................         5.9%         4.1%         4.7%         5.3%         4.5%         5.2%         4.5%         4.2%
IA..............................................         1.8%         1.9%         2.4%         1.2%         2.3%         1.4%         1.5%         1.8%
IL..............................................         5.3%         4.7%         5.4%         4.4%         5.2%         4.7%         6.6%         4.4%
IN..............................................         7.0%         6.5%         7.9%         7.9%         7.5%         8.6%         4.6%         6.2%
KY..............................................         5.2%         4.9%         6.0%         7.3%         5.8%         5.8%         3.5%         4.5%
LA..............................................         1.7%         3.3%         1.6%         1.0%         1.5%         1.1%         3.4%         3.6%
MD..............................................         2.0%         1.8%         1.9%         2.3%         2.0%         2.7%         1.9%         1.7%
MI..............................................         4.9%         4.2%         4.4%         3.7%         4.3%         3.7%         4.1%         4.2%
MN..............................................         1.4%         1.9%         2.3%         1.1%         2.2%         1.0%         1.9%         1.7%
MO..............................................         3.8%         3.6%         4.3%         2.3%         4.1%         2.4%         2.9%         3.4%
MS..............................................         0.9%         1.4%         1.0%         1.0%         1.1%         1.2%         1.6%         1.6%
NC..............................................         3.8%         3.7%         4.5%         5.5%         4.3%         4.7%         4.5%         3.8%
NY..............................................         3.7%         4.0%         2.2%         2.7%         3.4%         2.7%         5.3%         3.9%
OH..............................................         9.2%         6.4%         7.9%         9.6%         7.5%        12.2%         5.4%         6.5%
PA..............................................         7.6%         6.0%         7.1%         8.4%         6.9%         9.5%         7.4%         6.1%
SC..............................................         1.6%         2.0%         2.3%         2.9%         2.2%         2.1%         3.4%         2.0%
TN..............................................         3.8%         3.0%         3.7%         4.4%         3.5%         4.0%         3.5%         3.0%
TX..............................................         8.9%        15.3%         9.4%         5.5%         9.0%         6.0%        13.9%        16.6%
VA..............................................         1.8%         2.3%         2.5%         3.1%         2.5%         2.3%         2.8%         2.3%
WI..............................................         2.4%         2.5%         2.9%         1.8%         2.8%         2.0%         2.2%         2.2%
WV..............................................         6.0%         4.4%         5.4%         6.7%         5.2%         5.8%         3.4%         4.5%
                                                 -------------------------------------------------------------------------------------------------------
    Total.......................................         100%         100%         100%         100%         100%         100%         100%         100%
Number of times method provides least allowances            3            4            1            7            0            2            4            4
Number of times method provides most allowances.            2            1            5            6            0            4            4            4
                                                 -------------------------------------------------------------------------------------------------------
    Total (most + least)........................            5            5            6           13            0            6            8            8
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: EPA, 2006.

    Note: For NOX, EPA calculated a separate region-wide
budget for New Jersey and Delaware using the same approach that was
used to calculate the larger CAIR region-wide budget. This region-
wide budget was then apportioned to individual State budgets using
the same approach used in CAIR. Because New Jersey and Delaware were
treated separately in the context of NOX allocations, EPA
has not included them in the SO2 analysis.

    Two commenters performed alternative analyses of State budgets,
modeled after the calculations done for the CAIR Reconsideration
related to NOX budgets (CAIR Statewide NOX Budget
Calculations, EPA Docket Number OAR-2003-0053, December 2005). The
commenters claim that their analysis proves that EPA's SO2
allowance allocation approach is inferior to a fuel-adjusted heat input
method, such as the allocation approach used in the CAIR NOX
model trading rule. They assert that EPA's analysis of NOX
allocation methodologies is also the appropriate way to compare the
reasonableness of the SO2 allocation alternatives.
    As EPA explained in the Technical Support Document for the Agency's
NOX budget analysis (``CAIR Statewide NOX Budget
Calculations,'' available in the docket), to quantitatively evaluate
whether the fuel factor approach is providing States with annual
NOX budgets that more closely reflected their projected
emissions, EPA calculated the arithmetic mean of the (absolute)
difference between the ratio of each State's allowance allocation under
each approach to its projected emissions under CAIR (coverage ratio),
and 1.0 (i.e., the value representing a State's projected emissions
matching the State's CAIR NOX budget). In other words, EPA
calculated how far off the State's coverage ratio was from 1.0, and
then determined the average value of this difference for each approach.
    One commenter performed a similar analysis of State budgets,
comparing each State's projected emissions to its projected allowances
under each allocation approach. The commenter analyzed the results in
relation to a coverage ratio of 1.0 (as EPA did in its

NOX analysis) and averaged the values for each approach.
Another commenter performed a similar analysis but presented the
results as the cumulative value (sum) of absolute differences between
the coverage ratios and 1.0.
    EPA disagrees with the commenter's assertion that the methodology
that the Agency used to evaluate State NOX allocations
should be the primary means by which to evaluate the reasonableness of
the SO2 allocation methodology. As explained in the CAIR
preamble, in the case of SO2, EPA needs to balance various
considerations, including the need to allocate SO2
allowances in a way that is less disruptive to the title IV program. In
light of these considerations, minimizing the disparity between a
State's allocation and projected emissions cannot be the primary
objective. For SO2, there is a pre-existing national trading
program (the Acid Rain SO2 trading program) that Congress
intended to continue as a viable program into the future and under
which allowances have been allocated in perpetuity. For NOX,
there is no pre-existing national trading program where efficiency and
effectiveness would be jeopardized by creating new CAIR NOX
allowances. There is, of course, a pre-existing regional NOX
ozone-season program covering a portion of the CAIR region (the
NOX Budget Trading Program, established by regulation,
rather than directly by Congress). Under the existing NOX
ozone-season program, no State has allocated allowances past 2009 (and
only a handful of States have allocated allowances past 2008).
Therefore, in contrast with EPA's determination concerning
SO2 allocations, evaluation of potential approaches to
NOX allocations did not involve concerns about Congressional
intent to preserve an existing trading program and about preserving the
value of allowances already allocated in perpetuity. For
NOX, EPA does not need to consider other important policy
concerns that are important for SO2.
    While the methodology used by EPA to evaluate NOX
allocation methodologies for CAIR can be applied to analysis of
SO2 allocations, EPA believes that the commenters performed
their State-by-State analyses incorrectly, overlooking a fundamental
difference between the CAIR NOX and SO2 trading
programs, which is the existence of a significant bank of pre-2010
allowances that will be eligible for use for compliance with CAIR.
Because of the existence of a SO2 allowance bank, EPA
believes that the commenter's comparison of allocation approaches using
a coverage ratio of 1.0, which would assume that in a given year total
SO2 emissions in the region are equal to the total region-
wide SO2 budget, is not appropriate for evaluating the
SO2 State budgets resulting from the various SO2
allocation methodologies. A State that had a coverage ratio of 1.0
would have enough allowances to cover its emissions, and, while this
ratio would be a meaningful target in the context of the CAIR
NOX trading program, it is not for SO2, because
2010 and 2015 emissions will be higher than the region-wide cap due to
the use of banked allowances. For SO2, the region-wide
ratios of allowances to projected emissions are 0.70 for 2010 and 0.60
for 2015. On average, one would expect States to have coverage ratios
similar to the region-wide average.
    While in both the NOX annual and NOX ozone
season trading programs some allowances beyond the State Budgets (i.e.,
compliance supplement pool allowances in the annual program and banked
allowances from the NOX Budget Trading Program in the ozone-
season program) will be available to sources, the amount of these extra
allowances will be too small to affect the State-by-State
NOX analysis. Consequently, EPA believes that a more
appropriate way to evaluate SO2 allocation methods is to use
the 0.70 (for 2010) and 0.60 (for 2015) coverage ratios, rather than a
ratio of 1.0. Further, because each allocation approach results in
allocations that are advantageous for different companies and States,
EPA believes that the reasonableness of a given allocation approach
should be judged by its overall impact on companies and States, not its
specific impact on any single company or State or on a few companies or
States.
    EPA has redone the commenters' analysis, using the methodology used
by EPA in its analysis of NOX allocations and corrected
coverage ratios described above. This analysis is presented in the
``CAIR SO2 Allocation Approach Analysis'' Technical Support
Document available in the docket. While the title IV SO2
allocation approach does not perform the best of the allocation
approaches considered using this metric, the differences observed among
the approaches are of a lower magnitude than those suggested by the
commenters. The commenters did not provide any benchmark in their
analysis for assessing whether or not a given allocation approach was
reasonable. Further, although the commenters discuss some of the
implications of the differences observed between an allocation approach
based on fuel factors and the allocation approach based on title IV,
they do not conclude their analyses with any meaningful arguments that
EPA's approach is not reasonable.
    As EPA noted earlier in this section, there are a number of ways by
which to assess the equitability of a given allowance allocation
approach. For a further understanding of the overall relative impacts
of the various allocation approaches, EPA believes that it is useful to
apply the statistical concepts of (1) bias and (2) consistency. EPA
determined that an appropriate statistic for examining the bias of a
given allocation approach is the average difference between a State's
coverage ratio and the coverage ratio for the entire region (e.g., 0.70
for 2010 or 0.60 for 2015). The degree of bias inherent in a given
allocation approach cannot be discerned from the absolute value
statistic, because it ignores the degree to which positive and negative
differences cancel each other out. A perfectly unbiased distribution
under a given allocation approach would be one that resulted in an
average difference of zero, meaning that on average a State-by-State
coverage ratio higher than the regional coverage ratio is balanced out
by a ratio below. Another useful statistic is the percent of instances
in which the allocation approach yields a State coverage ratio that is
high (or low) relative to the regional coverage ratio. Lack of bias
would be indicated if 50 percent of the State coverage ratios are
higher than the regional coverage ratio and 50 percent are lower.
    EPA evaluated the four allocation approaches considered during the
CAIR rulemaking (title IV, pure heat input, heat input with fuel-
factors, and heat input with fuel factors and coal type factors) along
these metrics. From EPA's calculations (Table III.A.3), all the
approaches are biased high for 2010 and all but one is biased high for
2015 (with CAIR controls). The average differences for EPA's approach,
0.06 in 2010 and 0.17 in 2015, are among the closest to zero compared
to the alternatives examined. The one approach (heat input with fuel
and coal adjustment factors) that exhibits less bias than the title IV
approach in 2010 exhibits bias of the same magnitude (but opposite
direction) as the title IV approach in 2015. In addition, the percent
of positive differences for EPA's approach for 2010 and 2015 are near
50 percent and do not greatly vary from the alternative methods
analyzed. This demonstrates that EPA's approach provides a reasonable
result.

                      Table III.A.3.--Evaluation of Bias and Consistency of Four Different SO2 Allocation Approaches, 2010 and 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         2010                                                2015
                                                 -------------------------------------------------------------------------------------------------------
                                                                                1999-2002                                           1999-2002
                                                                 Average     1999-2002    heat input                 Average     1999-2002    heat input
                                                   EPA title    1999-2002    heat input     w/fuel     EPA title    1999-2002    heat input     w/fuel
                                                       IV      (pure) heat     w/fuel     factors &        IV      (pure) heat     w/fuel     factors &
                                                                  input       factors     coal type                   input       factors     coal type
--------------------------------------------------------------------------------------------------------------------------------------------------------
Average Difference..............................         0.06         0.11         0.06         0.05         0.17         0.18         0.14        -0.17
Percent Positive................................          43%          39%          52%          48%          43%          43%          43%          52%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: EPA 2006.

Potential for Regional Emissions Increases
    As discussed above and in the CAIR preamble, another important
reason for use of the title IV allowances is to avoid SO2
emissions increases in 2010 and thereafter in non-CAIR States. If title
IV allowances were not used in the CAIR SO2 trading program,
the resulting reduction in the value of title IV allowances would
result in an increase in emissions in non-CAIR States. EPA estimates
that emissions ``leakage'' of title IV allowances from the CAIR region
into the non-CAIR region would be approximately 260,000 tons annually
in 2010 and thereafter (See 70 FR 25293).
    One commenter argues that EPA has not sufficiently evaluated and
compared the impact of the potential for increases in CAIR region
emissions under the approach of using title IV allowances that could
result from allocations to title IV opt-in units and title IV
allowances traded into the CAIR region from non-CAIR States to the
potential for emissions increases in non-CAIR States from ``leakage''
of title IV allowances from CAIR States to non-CAIR States under an
allocation approach that does not rely on title IV.
    EPA has, in fact, considered the issue of emissions ``leakage''
outside of the CAIR region throughout its analysis of CAIR and has also
analyzed the potential increases outside of the CAIR region if EPA were
to not use an allocation system based on title IV. EPA estimates, based
on its CAIR analysis, that title IV allowances from the non-CAIR region
equivalent to about 150,000 tons of SO2 emissions may be
traded into the CAIR region in 2010, which represent about 4 percent of
the projected CAIR region emissions in 2010. This compares to
approximately 260,000 title IV allowances, representing that many tons
of SO2 emissions, that sources in non-CAIR States would have
incentive to use to cover emissions at little to no cost, if we chose
an alternative system that is not based on title IV (an increase equal
to about 30 percent of the 0.9 million tons of emissions EPA projects
for non-CAIR region). This increase would occur because title IV
allowances would have no economic value.
    EPA has also considered the impact of opt-in unit allocations and
projects that in 2010 allowances equivalent to approximately 25,000
tons could be generated by units opting into the Acid Rain Program and
used for compliance in the CAIR SO2 trading program. This is
less than one percent of the projected CAIR region-wide emissions in
2010. (See the spreadsheet ``SO2 Allocation Analysis Data--
Owner and Parent Comparison'' available in the docket). Thus, EPA
believes that the effect of selecting the title IV allocation approach
for SO2 under CAIR will not significantly affect the overall
SO2 emission reduction objectives of the rule.
    It should also be noted that an alternative to including non-title
IV sources under CAIR and allowing them to use opt-in allowances from
title IV would be excluding these units altogether from CAIR. In
choosing to opt into title IV to provide allowances for use under CAIR,
these units would have to reduce emissions from the baseline at which
they were allocated in order to generate excess title IV allowances.
Thus, actual cumulative net emissions increases within the CAIR region
from title IV opt-in sources subject to CAIR are unlikely.
Alternatively, excluding these units from CAIR and keeping the same
SO2 allowance retirement ratios (and the same State budgets)
would achieve many, but not all, of the highly cost-effective
SO2 reductions and could result in emissions leakage within
the CAIR region at these sources, as generation (and thus emissions)
shift from the EGUs covered by the cap to EGUs not covered by the cap.
Opting Into the Acid Rain Program
    As discussed above, EPA's analyses of the distribution of
allowances under EPA's allocation approach included allowances
allocated to CAIR units that can opt into the title IV Acid Rain
Program. The statutory and regulatory provisions governing Acid Rain
Program opt-in units allow units that are subject to CAIR, but not to
the Acid Rain Program, to opt into the Acid Rain Program. Under section
410(a) of the Clean Air Act, the owner or operator of any unit that
emits SO2 and ``is not, nor will become, an affected unit''
under the general applicability provisions of CAA title IV (i.e.,
starting in 2000, CAA sections 403(e)(for new units) and 405 (for
existing units)) may apply to have the unit become an opt-in unit under
the Acid Rain Program. 42 U.S.C. 7651i(a). (The separate treatment of
``process sources'' under sections 410(a) and (e) is not applicable to
electric generating units covered by CAIR.) Section 410 was added to
the Clean Air Act by the Clean Air Act Amendments of 1990, which were
enacted on November 15, 1990.
    EPA interprets section 410(a) to allow any SO2-emitting
unit not currently covered by the general applicability provisions to
opt into the Acid Rain Program and receive SO2 allowances,
provided that certain requirements (e.g., emissions monitoring and
reporting requirements under part 75 of the Acid Rain regulations) are
met. The use of two separate terms, one to refer to a unit that ``is
not'' an affected unit, and the other to refer to a unit that ``will
not become'' an affected unit reflects the fact that there are two
separate applicability provisions, section 405 applying to units in
existence and generating electricity for sale when the CAA Amendments
were enacted and section 403(e), applying to units to be constructed at
some later date. In short, section 410(a) included language using both
a verb in the present tense (i.e., ``is not'') to refer to existing
units and a verb in the future tense (i.e., ``nor will become'') to
refer to begin generation or begin construction in the future. EPA does
not interpret the term ``nor will become'' to bar, from opting in,
currently operating units that are not covered by the generally
applicability

provisions but that may become subject to those provisions sometime in
the future. Consequently, a unit that currently has an exemption from
the general applicability provisions (e.g., an exempt cogeneration unit
under CAA section 402(17)(C) or 405(g)(6)(A)), may opt in under section
410(a)) even if the exemption may be lost sometime in the future. Such
a unit may become and remain an opt-in unit until the unit loses its
exemption.
    This interpretation of section 410(a) is reflected in the
implementing regulations. For example, Sec.  74.2 states that the opt-
in regulations apply to units that ``are not affected units under Sec.
72.6 [the general applicability provisions] * * * and that are
operating and are located in the 48 contiguous States of the District
of Columbia''. 40 CFR 74.2. The opt-in regulations do not exclude
operating units that are currently exempt from the general
applicability provisions but that may subsequently lose their
exemption. Moreover, Sec.  74.46(b)(iii) specifically addresses how to
treat opt-in allowance allocations for operating units that opt in but
subsequently become subject to the general applicability provisions.
The provision explains how to treat such allowance allocations for the
year in which the units lose their exemption and for subsequent years.
This supports EPA's interpretation that currently exempt units may
become opt-in units even though they may lose their exemption in the
future.
    EPA notes that the additional cost for CAIR units of opting into
the Acid Rain Program will be minimal. The major cost for any unit to
opt in is the cost of meeting emissions monitoring and reporting costs
under part 75. Whether or not they become Acid Rain Program opt-in
units, all units under CAIR already have to meet, and incur the costs
of, part 75 emissions monitoring and reporting requirements. EPA also
notes that currently under the Acid Rain Program only a small number of
units have opted into the program. Because EPA anticipates that the
existence of the CAIR program will result in more units opting in, EPA
will work with potential opt-in sources to consider opportunities to
improve the opt-in program.

B. Fuel Adjustment Factors Used to Set State NOX Budgets

    As described in the December 2, 2005 Notice of Reconsideration for
CAIR, EPA received several petitions for reconsideration asking EPA to
reconsider its decision to use fuel adjustment factors (FAF) to
establish NOX budgets for State in the CAIR region.
Petitioners contended that the Agency did not provide adequate notice
and that the use of the FAF approach adversely impacted States with
large gas- and oil-fired generation portfolios. Given the significant
public interest in this issue, EPA granted reconsideration and
solicited additional public comment on this issue.
    The Notice of Reconsideration explained that EPA believes that it
provided adequate notice both that the fuel adjustment factors might be
used and of the calculation procedures that it would use to determine
the specific factors. Nevertheless, in light of the significant public
interest in this issue, EPA granted reconsideration on the the use FAFs
(i.e., 1.0 for coal, 0.4 for gas, and 0.6 for fuel oil) in the
development of statewide NOX budgets. The Notice of
Reconsideration provided an additional opportunity for public comment
on the issue and presented additional analysis that EPA conducted to
further explain the impact of these factors on State annual
NOX budgets. That additional analysis demonstrated that the
factors selected are reasonable and decrease the disparity between most
States' projected electric generation unit (EGU) emissions and their
State NOX budgets. The Notice of Reconsideration did not
propose to change any aspect of how the CAIR apportions the regionwide
NOX budget among States.
    Today's action responds to public comment received on the Notice of
Reconsideration and presents some additional analysis that supports the
analysis presented in the Notice of Reconsideration.
Background on the Use of NOX FAFs in the Statewide
NOX Budgets
    The CAIR establishes regional emission budgets for annual and
seasonal NOX emissions. These regional budgets are then
further divided into State budgets, with a share of each total
regionwide budget apportioned to each State in the corresponding CAIR
region. The CAIR determines each State's pro-rata share of the
regionwide budget by using that State's share of the regionwide heat
input, as adjusted by the FAFs (i.e., 1.0 for coal, 0.4 for gas, and
0.6 for fuel oil). Petitioners asked EPA to reconsider this
methodology.
    As explained in the Notice of Reconsideration, States choosing to
participate in the trading program may allocate their statewide budgets
to sources in their respective State. In a cap-and-trade system,
however, the methodology used to allocate allowances in any given year
would not affect where control technologies are installed.\6\ Rather,
the determinant would be the cost of adding controls compared to the
cost of buying, or the profit from selling, allowances. Controls are
expected to be installed where it is relatively less expensive, without
regard to which units received the initial allocation of allowances.
Further, the total cost to industry of controlling emissions and the
total amount of reductions achieved would not be affected by the
allocation methodology in a given year (for a permanent system). The
allocation method, however, could have financial impacts on individual
units and companies. A unit that receives more allocations than it has
emissions would get a benefit at the expense of a unit that does not
receive enough allocations to cover its emissions. While States
choosing to participate in the cap-and-trade program can determine how
to allocate allowances among their units, companies in States whose
budgets exceed projected EGU emissions would likely receive a financial
benefit while companies in States whose budgets are lower than their
EGU emissions would likely incur additional costs. In the absence of
other considerations, EPA believes that it is in the public interest to
reduce the disparity between the number of allowances in a State budget
and total projected State EGU emissions. In the case of NOX
allowances, there are no considerations that offset the desirability of
reducing the disparity between a State's budget and projected
emissions. This contrasts with the case of SO2 allowances,
as described above, where there are counter-balancing considerations,
such as the importance of preserving the efficacy of the existing title
IV SO2 trading program.
---------------------------------------------------------------------------

    \6\ A permanent allocation approach, such as the CAIR allocation
methodology in the model trading rules, should not affect where
controls are installed. This is true regardless of the type of
approach used to permanently allocate allowances (e.g., heat input,
adjusted heat input, or output). The use of an updating allocation
system, on the other hand, could have some impact future generation.
---------------------------------------------------------------------------

1. Summary of Additional Analysis Presented in the Notice of
Reconsideration
    The Notice of Reconsideration presented two analyses that EPA
conducted to evaluate the potential impact of using the adjusted heat
input method versus the simple heat input method on State annual
NOX budgets: one regionwide analysis and a second State-by-
State analysis.
    The regionwide analysis of the potential impacts compared
regionwide budgets using both approaches (i.e., simple heat input and
fuel factor) to the

regionwide projected emissions of units fired with that fuel.\7\ That
analysis illustrated that: under either approach, the portion of the
State budgets derived from the heat input from the gas-fired units
generally exceeds both the historical and the future projected
emissions from these units; the fuel factor approach generally provides
additional allowances to States with large amounts of coal-fired units
that are making the majority of the investments in emission control
measures and technologies; and, using the fuel factor approach, the
disparity between the number of allowances provided to each type of
fossil fuel-fired electric generation and the projected emissions for
each fossil fuel type is less than under the simple heat input method.
---------------------------------------------------------------------------

    \7\ It should be noted that simple heat input or adjusted heat
input are used to set State budgets and do not imply that States
would allocate allowances to units in that manner. In the proposal,
EPA gives States flexibility in the distribution of allowances.
---------------------------------------------------------------------------

    The second analysis presented in the Notice of Reconsideration
examined the potential impacts of the two approaches for developing
Statewide budgets (i.e., simple heat input and fuel factor) on a State-
by-State basis. That analysis showed that States receiving fewer
allowances using a fuel factor approach, generally still receive
Statewide budgets that are greater than their projected emissions in
2009 and 2015. This results because a substantial portion of their
generation portfolio consists of gas-fired sources with generally low
NOX emission levels. More specifically, the analysis
illustrated that while States dominated by gas-fired generation (i.e.,
District of Columbia, Florida, Louisiana, Mississippi, New York, and
Texas) receive fewer allowances under a fuel factor approach, they are
provided with reasonable Statewide budgets that are comparable to their
projected emissions in 2009 and 2015. In addition, this analysis shows
that, relative to the simple heat input method, the fuel factor method
reduces the disparity between projected State emissions and State
budgets, e.g., allocating State budgets that are generally closer to
projected State emissions.
    EPA conducted the same analyses for the annual NOX
programs proposed for Delaware and New Jersey, which are being included
in the CAIR PM2.5 finding of significant contribution in a
separate rulemaking published today. This analysis showed results
similar to that found for the other CAIR PM2.5 States.
    Finally, to ensure that our estimates appropriately reflect the
distribution of emissions in the case of higher electricity demand and
increased gas and oil prices, the Notice of Reconsideration presented
EPA analysis based upon a sensitivity run using EIA's forecast of
higher electricity demand and gas and oil prices. This run produced
very similar emissions results to the original NOX analysis,
showing that EPA's original analysis is robust enough to support the
fuel adjusted heat input approach finalized in CAIR. (See the ``CAIR
Statewide NOX Budget Calculations Technical Support
Document, EPA 2005, for additional discussion of the analysis.)
2. Public Comments on Analysis Presented in the Notice of
Reconsideration
    Many commenters supported the EPA analysis presented in the Notice
of Reconsideration that demonstrated that:
     Under either approach, the portion of the State budgets
derived from the heat input from the gas-fired units generally exceeds
both the historical and the future projected emissions from these
units;
     The fuel factor approach generally provides additional
allowances to States with large amounts of coal-fired units that are
making majority of the investments in emission control measures and
technologies; and
     Using the fuel factor approach, the disparity between the
number of allowances provided and the emissions is less than under the
simple heat input method.
Adverse Comments on the Notice of Reconsideration
    a. Comments on EPA's Characterization of Operational Costs for Low-
Emitting Generation in Analysis
    Some commenters contended that EPA analysis of the projected
impacts on different types of power generation (i.e., coal-fired, gas-
and oil-fired units) was inaccurate because it did not reflect inherent
differences in the cost (e.g., fuel costs) to operate each type of
unit. Specifically, the commenters claim that gas-fired units ``have
incurred historical costs to burn a cleaner but higher-priced fuel.''
The commenter continues with ``while gas-fired plants have continually
paid the price for cleaner fuels, under CAIR these owners may be
penalized with additional costs of purchasing allowances.'' The
commenters believed that, as a result, EPA analysis of the potential
impacts of using the FAF approach--which was based on comparing CAIR
NOX allowances to the projected emissions--has not properly
considered the economic impacts to these units and their customers.
    EPA disagrees that higher fuel costs of oil- and gas-fired units
are not properly considered in the analysis of potential impacts of
using the FAF method in developing statewide NOX budgets. In
projecting which sources would install advanced controls under CAIR,
EPA modeling factored-in the operating characteristics of each source,
including fuel costs.\8\ This modeling showed that coal-fired units--
not gas- and oil-fired units--would make the significant investment in
advanced controls in order to achieve the CAIR mandated emission
reductions. The commenter did not demonstrate that EPA modeling, used
in the development of CAIR and the Notice of Reconsideration analysis,
mischaracterized the operating costs of these units. Further, the
commenter did not explain how a decision to build a gas-or oil-fired
unit prior to CAIR that has high operating costs, warrants an award of
valuable allowances to offset operating costs that they would have with
or without CAIR. Notably, although natural gas inherently burns with
lower NOX emissions, its choice in the CAIR region
historically is based much more on the economics to meet electric
demand requirements--electric generation from natural gas has been the
cheapest approach.
---------------------------------------------------------------------------

    \8\ IPM modeling uses ``model plants'' to represent the
characteristics of a group of actual facilities.
---------------------------------------------------------------------------

    In addition, it is not clear why the commenter believes that using
the FAF approach would result in gas-fired units having to purchase
NOX allowances. Analysis presented in the Notice of
Reconsideration showed that, in general, States with predominantly gas-
and oil-fired generation are provided with reasonable statewide budgets
that are comparable to their projected emissions in 2009 and 2015. If
the States were to directly pass through allowances to their gas-fired
units, these units would still have excess allowances. Furthermore in
most cases, these States still receive a larger budget than they need
to cover their projected emissions.
    In conclusion, EPA believes the projected emission levels used in
EPA's analysis of the potential impacts of using a FAF method to
apportion statewide NOX budgets appropriately considers the
operational costs of oil- and gas-fired units.
b. Comments on EPA Projections of Oil- and Gas-Fired Boilers Retirement
and Impacts on Analysis
    A few commenters believed that EPA inaccurately accounted for their
projected emissions because the IPM modeling did not consider

requirements, outside of environmental regulatory programs, to maintain
reserve electricity generation capacity. The commenter claims that, as
a result, there are oil-fired units that would continue to operate even
though IPM projects that they would retire because they are no longer
economical to run. The commenter believes that this potential
underestimation of projected NOX emissions is significant
enough to change the outcome of EPA's analysis which demonstrated that
predominantly gas-fired States would receive CAIR NOX
allowances sufficient to account for their future NOX
emissions.
    EPA disagrees with the commenters' contention that the potential
underestimation of emissions for oil-fired boilers would significantly
impact the EPA's analysis comparing apportioning statewide
NOX budgets using simple heat input and the FAF approach.
The EPA analysis showed that Florida, the State of concern to the
commenter, has coverage ratios (i.e., the ratio of the statewide
NOX budget and the projected NOX emissions) of
1.45 and 1.35 under CAIR in 2009 and 2015, respectively. In other
words, the statewide NOX budget provides 145 percent of the
allowances that Florida sources would need to account for their
projected emissions.
    EPA modeling projected that approximately 11 percent of the oil-
and gas-fired generation capacity (other than coal-fired generation and
combined-cycle turbines) would retire early in both 2009 and 2015,
respectively. These retirements comprise 4 and 5 percent of Florida's
total capacity in 2009 and 2015, respectively. Even if it was necessary
for all of these units to remain in operation to comply with
requirements for reserve capacity, it is not clear that this relatively
small portion of the total capacity would emit enough NOX to
significantly change the outcome of the EPA analysis. Should all or
some portion of these units remain in service, Florida's NOX
budget--which is 45 percent and 35 percent above their projected
emissions according to EPA analysis--would have a surplus of allowances
that it could provide to these units to offset emissions. Further,
these units could choose to reduce their emissions using a range of
advanced control options that, in some cases, achieve greater emission
reduction levels than found in coal-fired units.
3. Public Comment on the Notice of Reconsideration Discussion of Notice
    Several commenters supported EPA's position that adequate notice
was provided on the use of FAFs in the development of the statewide
NOX budgets. Many of these commenters also supported the
analysis EPA presented in the Notice of Reconsideration (discussed
below.)
    Other commenters maintained that the final CAIR did not provide
sufficient notice on the use of the FAF approach to developing
statewide budgets. The methodology used for developing the statewide
budgets, the FAFs, and the actual statewide budgets were discussed in
detail in the CAIR NFR (70 FR 25230) and supporting documentation.\9\
By granting reconsideration and, thereby, requesting public comment on
this issue in response to the Notice of Reconsideration, the Agency has
provided an additional opportunity for public involvement. As a result,
EPA believes that it provided ample notice and opportunity for comment
on the use of fuel adjustment factors, the calculation procedures used
to determine the specific factors, and the specific factors themselves.
---------------------------------------------------------------------------

    \9\ Both the ``Corrected Response to Significant Public Comments
on the Proposed Clean Air Interstate Rule'' (pp. 520-576) and the
``Technical Support Document for the Clean Air Interstate Rule
Notice of Final Rulemaking, Regional and State SO2 and
NOX Emissions Budgets'' include information on the use of
FAFs for developing the statewide NOX budgets.
---------------------------------------------------------------------------

4. Use of FAF Approach To Determining Statewide NOX Budgets
in the Final CAIR
    Today's action does not change the use of the FAF methodology to
determine the statewide NOX budgets for the CAIR. While EPA
believes that adequate notice was provided on the use of the FAF
approach and the specific FAFs, EPA granted the petitions on this issue
in consideration of general public interest in the matter. EPA believes
that today's action, in conjunction with the Notice of Reconsideration,
adequately responds to concerns raised by the petitioners.

C. PM2.5 Modeling for Minnesota

    One Petition for Reconsideration asked EPA to reconsider whether
emissions from Minnesota significantly contribute to downwind
nonattainment of the PM2.5 NAAQS. The petitioner (Minnesota
Power, or MP) asserted that EPA's modeling failed to account for
certain emissions reductions required by State programs (especially
those required under the Minnesota Emissions Reduction Program, or
MERP). In granting reconsideration, EPA explained that it was aware of
the emission reductions in question when it made the significant
contribution determinations in the final CAIR. EPA had accounted for
these reductions during the rulemaking by conducting a sensitivity
analysis (available in the CAIR docket), but had not conducted revised
air quality modeling (70 FR at 72279-72280). In response to the
reconsideration petition, EPA conducted revised air quality modeling
which used the inputs reflecting emission reductions required by the
MERP. This modeling showed (consistent with the sensitivity analysis)
that Minnesota contributes a maximum of 0.20 [mu]g/m\3\ to the downwind
PM2.5 nonattainment area of Chicago-Gary-Lake County, IL-IN.
This modeling thus supported EPA's conclusion that Minnesota's
contribution met the criteria in CAIR for determining ``significant
contribution.'' Id. This revised air quality modeling used the same
modeling platform used for all of the air quality modeling in CAIR. In
the Notice of Reconsideration, EPA solicited comment on the inputs used
to model Minnesota emissions, but declined to reconsider or reopen for
public comment issues relating to the air quality modeling platform
itself. Id. at 72280.
    Most of the comments received on this issue in response to the
Notice of Reconsideration supported EPA's conclusion. These include
comments from the Minnesota Pollution Control Agency (MPCA), the entity
with the most direct knowledge of emission reductions required by state
programs. EPA also received no adverse comments from Xcel Energy, the
entity that entered into the MERP with the MPCA and whose projected
emission levels were the centerpiece of the reconsideration petition.
In fact, no other power generation source in Minnesota besides
Minnesota Power offered adverse comments.\10\ EPA views these comments
as confirmation of the reasonableness of the modeling approach used by
EPA to assess significance of contribution of the State. EPA also views
these comments as confirmation that its revised modeling accurately
accounts for the MERP reductions.
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    \10\ Another power company in the Midwest region, Midwest
Generation, supported EPA emissions assessment for Minnesota.
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    Minnesota Power (MP) did not comment on the revised emissions
modeling done for power sector units in Minnesota and instead directed
its comments to the original emissions modeling done for the Final CAIR
that did not fully account for the MERP reductions. MP does not
directly challenge EPA's conclusion that the revised modeling
accurately accounts for the emission reductions required by

the MERP. MP claims, nonetheless, that the model inputs for the final
CAIR modeling (not the modeling done for the Notice of Reconsideration,
as just noted) contain errors. To the extent these alleged errors
relate to the MERP, EPA has corrected the errors as explained
above.\11\ The additional ``errors'' of which MP complains relate to
inputs regarding the projected 2010 emissions for certain units in
Minnesota. Although MP states that EPA has mischaracterized emissions
from some units, EPA believes that the emissions projections done to
provide inputs for the revised air quality modeling described in the
Notice of Reconsideration are appropriate.
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    \11\ The revised IPM modeling performed for the reconsideration
fully accounted for emission reductions attributable to the MERP.
These include emission reductions from the repowering of the two
units at the Riverside plant from coal to natural gas and the
retirement of a third coal unit at the plant. The inputs to the
revised modeling for the Notice of Reconsideration also accounted
for emission reductions from retrofit of the coal unit at the Allen
S. King plant with advanced pollution controls (scrubber for
SO2 removal and selective catalytic reduction technology
for NOX removal) and for emission reductions from re-
powering of two units at the High Bridge plant that will be re-
powered from coal to natural gas. It should be noted that MP has
submitted revised projected emission levels for certain Xcel units
covered by the MERP. These projections do not correspond precisely
with the projections EPA used in its revised modeling (but are very
similar). However, as explained below, EPA believes the projections
for these units used by EPA are more accurate than the projections
MP suggests should be used.
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    EPA believes its method of projecting power sector emissions for
units in Minnesota reflects a more accurate and robust method for
projecting emissions than the method used by MP. MP presents a method
for projecting 2010 emissions for certain select units using the
combination of a 2001 emission rate (based on Title IV data) and EPA's
projected 2010 heat input projection under the 2010 base case (no
CAIR). MP applies this method to several of its own units and several
owned by Xcel Energy.
    MP claims that if these lower emissions were used as inputs to the
PM2.5 modeling, that modeling would show that Minnesota's
contribution is below the PM2.5 significance threshold of
0.2 [mu]g/m3. However, the petitioner was selective in its
application of its methodology for projecting emissions. MP applies
their method only for units where that method results in emissions
projections that are lower than the original EPA emissions projections.
    Application of this approach to all units in Minnesota would result
in emissions levels for several units in 2010 that are above EPA's
projections. In such cases, however, MP relies upon the lower EPA
projections. It is also unclear why Minnesota Power used 2001 data to
develop 2010 emission levels, rather than 2004 data, for example. Data
from 2004 (as opposed to 2001 data), used in the manner MP has done,
would produce different emissions levels of SO2 and
NOX in 2010 for every unit in Minnesota. Selectively
developing projections in this manner is an insufficient approach for
developing power sector forecasts (see further discussion on IPM
below).
    MP also comments that ``EPA had erroneously assigned 2010 sulfur
dioxide emission rates on scrubbed Minnesota units at values as much as
double that of the performance levels posted in 2001.''MP Comment p. 4.
After reviewing the modeling results, EPA is unable to find any
instances in Minnesota where EPA projected SO2 emission
rates of scrubbed units from the revised power sector modeling that are
double that of the 2001 performance level. Id. Although the emission
rates are higher in EPA 2010 projections for the 3 Sherburne County
Plant units than 2001 levels, they are well within permitted levels at
those units and reflect projected changes in unit operations to
maximize efficiency (see further discussion on IPM below).
    MP also claims that ``NOX emission rates deviated
between 2001 and 2010 without supportive operating rationale.''  Id.
The difference in NOX rates that MP alludes to is again
based upon the modeling for the Final CAIR, not for the Notice of
Reconsideration. In addition, MP's characterization is inaccurate.
First and most important, EPA's 2010 projections of NOX
emission rates are generally lower than 2001 NOX emission
rate data for Minnesota units. EPA's projections show that for the 7
non-MERP units in Minnesota where MP provided revised NOX
emission estimates, 4 units have lower emission rates in 2010 under EPA
projections and only 3 units will have higher emission rates (compared
to 2001 data). Of the 3 units where the 2010 emission rate values are
higher for those units in EPA revised emissions modeling versus 2001
data, EPA finds that one unit is higher by 2 percent and two units are
higher by about 7 percent. Differences in emission rates of this
magnitude can occur for a variety of reasons and without significant
operational changes to a particular unit. Also, the petitioner has also
failed to demonstrate that EPA's projected NOX emission
rates are inaccurate.
    Another comment from MP stated that ``the EPA IPM modeling had
shifted heat input from large, lower emission units to higher emission
units.'' Id. A comparison of the historical data from 2001 with the
revised emissions modeling does not support this broad conclusion. Heat
input usage does not change significantly, and although there are some
shifts in heat input usage between 2010 EPA projections and the 2001
data, these shifts occur where the IPM projects it will be cost-
effective to make relatively small changes to where electricity is
produced. In addition, EPA does not accept the suggestion that because
a certain rate applied in 2001 it should be applied in 2010. This
argument is not adequate and ignores the many other factors that may
change in the future which could cause a change in the way a unit
produces electricity. These include (among others) fuel supply and
demand dynamics, the cost of technologies to reduce emissions, relative
performance changes in power generation technologies, and the price of
an allowance. EPA used a version of IPM completed in 2004 that
incorporated the best available data for EPA's power sector database
and the most recent cost and performance of technologies at that time,
focusing on what emissions and emission rates are likely to occur in
2010 with full consideration of all the key factors of power plant
operations that can influence future emission levels.
    The power sector is a complicated, interrelated, and interdependent
system of operation, and must be looked at holistically to ascertain
the sector's response to a certain set of conditions or constraints.
The petitioner's approach selectively chooses the methodology for
determining emissions at certain units and ignores the changes that may
occur at other units as a result. In addition, it is easy to question
the choices or assumptions that one makes for selective forecasts of
this nature, since methodologies can be developed to support foregone
conclusions, like lower emission levels in a future year. For this
reason, EPA uses the Integrated Planning Model to develop its power
sector emissions projections.
    IPM is a detailed, sophisticated, and comprehensive electric power
sector model that is used to derive all manner of projections for the
power sector and is used to develop the power sector emissions
projections that are used in air quality modeling. The model accurately
reflects the power sector and contains millions of variables to best
ascertain how specific facilities will produce electricity to meet
demand in the most cost-effective manner possible. The variables are
based upon the best available data, both current and anticipated, and
include permitted emission rates for units, unit efficiency,

cost data, and operational constraints. This model has been used to
support the development of Title IV of the Clean Air Act (the Acid Rain
Program), the NOX SIP Call, the Clean Air Interstate Rule,
the Clean Air Mercury Rule, and the Clean Air Visibility Rule. In
addition, it is used by the Federal Energy Regulatory Commission,
private sector, non-profits, research groups, States, and regional
planning organizations for power sector projections. The model has
undergone extensive peer-review and scrutiny, and EPA believes it is an
appropriate tool for use in developing power sector emission
projections and better accounts for the many dynamics that exist in the
power sector (http://www.epa.gov/airmarkets/epa-ipm/index.html).

    MP does not challenge the use of IPM for developing power sector
emission projections for certain units, but comments that at other
units, a revised methodology should be used. EPA believes that a
holistic approach is necessary and using a modeling tool that reflects
the integrated nature of the power sector as accurately as possible is
the most rational approach to forecasting emissions for all units
comprehensively.
    To its credit, MP also points out that emissions from the Taconite
Harbor Facility (a facility that was recently converted from an
industrial source to an electricity generating source) were not
included by EPA in either the power sector emissions data or in other
emissions inventory used for CAIR modeling. EPA will include the
facility in the next version of the IPM. If the facility had been
included in the inventory, emissions in Minnesota would have been
higher by almost 2,000 tons of SO2 and about 1,150 tons
NOX than what EPA projected (according to the commenter).
Since EPA did not include this facility, EPA believes that its own
projections of emissions in Minnesota underestimate likely future
emissions.
    MP also stated that it is ``noteworthy that there are other
reductions that Minnesota Power has not modeled that should warrant
consideration by EPA, including those resulting from emission controls
provided on Minnesota BART eligible units for the regional haze
program.'' MP Comment p. 6. The Regional Haze program requires Best
Available Retrofit Technology or BART to be installed and operational
on sources that the State finds subject to BART within five years after
EPA approves a State's regional haze SIP. These SIPs are due in
December 2007. EPA does not believe that States will require the
installation or operation of BART controls before 2010. Thus, it is
highly unlikely that 2010 emissions would be affected by the BART
requirements. In addition, MP does not quantify any reductions it
believes will occur due to the application of BART in Minnesota. Thus,
MP has not established that there will be additional reductions due to
BART that must be taken into account when projecting 2010 emissions for
units in MN. It is also important to note that EPA has determined that
CAIR achieves greater progress than BART, and may be used by States in
the CAIR region as an alternative to BART.
    In sum, EPA continues to believe its emission projections have
reasonably accounted for emission trends within Minnesota and fully
account for emission reductions attributable to the MERP. EPA believes
the inputs used for the modeling discussed in the Notice of
Reconsideration are reasonable and rational projections of 2010
emissions in Minnesota.\12\ For these reasons, EPA is not making any
additional changes to the inputs to the PM2.5 modeling for
Minnesota, beyond those changes described in the Notice of
Reconsideration.
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    \12\ Another power company in the Midwest region, Midwest
Generation, supported EPA emissions assessment for Minnesota.
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    For more detail on EPA's characterization of power sector units in
Minnesota and power sector emission inputs to the air quality modeling,
please see the Technical Support Document titled ``Emissions in
Minnesota: Additional Analysis as Part of the CAIR Reconsideration''
that is part of the record for this proceeding.
    Minnesota Power also raised a new issue in its comments on the
Notice of Reconsideration, which is that EPA should use a more recent
version of its modeling platform to conduct air quality modeling. MP
argues that if EPA had done so, Minnesota would be below the
PM2.5 significance threshold. EPA's modeling for the entire
final CAIR (as well as the revised Minnesota air quality analysis) used
the Community Multiscale Air Quality (CMAQ) model 4.3. Minnesota Power,
however, advocates use of the post-CAIR CMAQ 4.5. The commenter states
that the CMAQ 4.5 includes corrections to a mass stability problem in
the version (4.3) used by EPA.
    As noted earlier, EPA stated when granting reconsideration that it
was not reopening any issues dealing with the modeling platforms used
for the revised Minnesota modeling. We reiterate that position here.
EPA used CMAQ 4.3 for all of the air quality analyses conducted for the
final CAIR, and provided full notice and opportunity to comment on the
appropriateness of the model. See 69 FR 47828 (August 6, 2004)
(announcing plan to use CMAQ 4.3 for the final rule); see also 70 FR
25234-36 (summarizing the use of CMAQ 4.3). There was ample opportunity
to comment on any issues regarding the adequacy of the model during the
rulemaking. Nor is the existence of a new iteration of the model
``grounds for * * * objection ar[ising] after the period for public
comment'' (CAA section 307(d)(7)(B)). Predictive models are of course
open to the possibility of updating and so are often adjusted. Such
adjustments do not normally occasion new opportunities for comment,
particularly after the close of a rulemaking. Indeed, doing so would
create a perverse incentive to leave models unadjusted. The ultimate
issue is whether the model used in the rulemaking bears a ``rational
relationship to the characteristics of the data to which it is
applied''. Appalachian Power v. EPA, 249 F. 3d 1032, 1052 (D.C. Cir.
2001). There has already been full opportunity to comment on this
issue.
    Accordingly, after careful examination of Minnesota Power's
petition, as well as all comments submitted in response to EPA's
notice, EPA continues to find that Minnesota emissions contribute
significantly to downwind nonattainment of the PM2.5 NAAQS.
EPA is therefore not amending the rule to remove Minnesota from the
CAIR PM2.5 region.

D. Inclusion of Florida in the CAIR Region for Ozone

    Several petitioners sought reconsideration of EPA's determination
to include Florida within the CAIR ozone region. Although there were
substantial arguments that EPA had already provided adequate notice on
this issue (see 70 FR at 72280; several commenters also indicated that
this issue had already been noticed), EPA decided to grant the
petition.
    EPA included Florida within the CAIR ozone region because emissions
passed all of the contribution metrics EPA uses to evaluate
significance of contribution for ozone, and because highly cost
effective controls are available to control NOX emissions
from the state. Specifically, Florida contributes significantly to
nonattainment of the 8-hour ozone NAAQS in Fulton County, Georgia
(which includes Atlanta). See 70 FR at 25249 (Table VI-9).
    Many commenters agreed with EPA's analysis. The petitioners and
other commenters argued that Florida should

not be included within the CAIR ozone region at all, or that at most,
only the northern portion of the State should be included. Although the
reconsideration petitions originally challenged EPA's factual basis for
including Florida within the CAIR ozone region, the petitioners were
able to duplicate EPA's modeling results relating to magnitude of
contribution, frequency of contribution, and relative amount of
contribution (the three factors EPA evaluated in determining whether an
upwind State's contribution to a downwind State could be considered
significant), and therefore are not pursuing this claim. ``Assessment
of the Contribution of Florida Emissions to Ozone Nonattainment Under
EPA's Clean Air Interstate Rule'' (Morris, Tai, Tesche, and McNally)
(October, 2005) (``Ozone Report'') at pp. 4-6 to 4-7; see also
Supplemental Brief of Florida Power and Light in North Carolina v. EPA
(D.C. Cir. No. 05-1244) at p. 9; Supplemental Brief of Florida Electric
Utilities in the same case at pp. 5-6. Rather, the commenters are now
challenging how to interpret the relative amount of contribution
factor, which is one of the initial screening factors used by EPA to
assess if it is appropriate to further analyze the significance of a