step 1 of the budget setting process, EPA first adjusted the 2019
ozone-season data to reflect committed fleet changes under a baseline
scenario (i.e., announced and confirmed retirements, new builds, and
retrofits that have already occurred). For example, if a unit emitted
in 2019, but retired in 2020, its 2019 emissions would not be included
in the 2021 estimate. For units that had no known changes, the 2021
emissions assumption was the actual reported data from 2019 at this
first step of adjusting the baseline. EPA also included known new units
and scheduled retrofits in this manner. Using this method, EPA arrived
at a baseline emission, heat input, and emission rate estimate for each
unit for a future year (e.g., 2021), and then was able to aggregate
those unit-level estimates to state-level totals. These state-level
totals constituted the state's baseline from an engineering analytics
perspective. The ozone-season state-level emissions, heat input, and
emissions rates for covered sources under a baseline scenario were
determined for each future year examined (2021 through 2024). Because
2024 is the last ozone season for which EPA projects continued
contribution to any downwind receptors, 2024 is the last year for which
EPA is making an adjustment to emission budgets.
---------------------------------------------------------------------------

    \176\ EPA notes that historical state-level ozone season EGU
NOX emission rates are publicly available and quality
assured data. They are monitored using CEMS or other methodologies
allowed for use by qualifying units under 40 CFR part 75 and are
reported to EPA directly by power sector sources.
---------------------------------------------------------------------------

    For step 2 of the emissions budget setting process, EPA examined
how the baseline emissions and emission rates would change under
different control stringencies for EGUs. For instance, under the SCR
optimization scenario, if a unit was not operating its SCR at 0.08 lb/
mmBtu or lower in the baseline, EPA

lowered that unit's assumed emission rate to 0.08 lb/mmBtu and
calculated the impact on the unit's and state's emission rate and
emissions. Note, the heat input is held constant for the unit in the
process, reflecting the same level of unit operation compared to
historical 2019 data. An improved emission rate is then applied to this
heat input, reflecting control optimization. In this manner, the state-
level baseline totals from step 1 reflecting known baseline changes
were adjusted to reflect the additional application of the assumed
control technology at a given control stringency.
    Finally, at step 3 of the emissions budget setting process, EPA
used IPM to capture any generation shifting at a given control
stringency necessary for the majority of the respective emission
control technology to operate. EPA explains how it accounts for
generation shifting in more detail in in section VI.B and in the Ozone
Transport Policy Analysis Final Rule TSD. In this rule, as a proxy for
the near-term reductions required by 2021, EPA has constrained
generation shifting to occur only within-state.
    EPA requested comment on the approach described above, as well as
alternatives discussed in the budget-setting TSD. Specifically, EPA
requested comment on its consideration of using 2020 data in place of
2019 data as the most recent historical data set to inform final rule
budgets. Although the reduction potential associated with the selected
control stringency described in section VI would likely not change
substantially with that data set, the baseline values calculated in
step 1 of the emissions budget setting process may change significantly
and possibly result in lower or higher state-level emission budgets.
    Comment: EPA received comment highlighting the unique impact of the
Covid-19 pandemic on 2020 emissions and generation data due to changes
in market conditions that may not be representative in subsequent years
(e.g., changes in net generation, time-of-day impacts on demand, and
natural gas prices). Commenters cautioned against relying on 2020 data
for informing step 3 analysis in this rule.
    Response: EPA is finalizing, as proposed and consistent with these
comments, the continued use of 2019 EGU data as the latest, most
representative historical year for informing the Agency's step 3
analysis. EPA examined the unique Covid-related impacts on the power
sector and energy market data. It observed significant changes for some
variables where the change appeared to be specific to the 2020 dataset
and pandemic-related conditions, and therefore not representative of
future power sector operations or market conditions. These included
changes in natural gas prices, the demand profiles for electricity
(which influence what units generate at different parts of the day),
and overall electricity demand. This was further borne out by comparing
quarterly year-over-year data which revealed that changes in Q4 2020
data relative to Q4 2019 data were not as pronounced as changes in Q2
2020 data relative to Q2 2019 data, indicating the temporary status of
some of changes observed in the 2020 ozone season. For instance, Q2
2020 NOX emissions were down 20 percent year-over-year, but
Q4 2020 NOX emissions were down only 9 percent year-over-
year. EPA provides additional detail in the RTC document on its
consideration of 2019 and 2020 data as the most recent historical
representative year of the power sector. Had EPA utilized 2020 data as
the starting point for its future year baseline in Engineering
Analytics, it likely would have been incorporating some 2020-fleet
operational changes (and corresponding emission levels) unique to the
pandemic year instead of fleet changes expected to endure into post-
2020 years. As also explained in the RTC document, while EPA did
continue to use 2019 as the starting historical data set, it recognized
commenters' observations that New York and Virginia were differently
situated in that their emissions were higher in 2020 than 2019 (whereas
all other states were lower, at least partially attributable to Covid
impacts). Additionally, reflecting the 2020 fleet dynamics in the
future year baseline for New York helps capture some of the dynamics
related to the retirement of one unit at the Indian Point nuclear
facility as pointed out by the commenter. To account for these atypical
circumstances, EPA incorporated upward adjustments to its future year
baseline values for New York and Virginia that reflected the
incremental changes in heat input, generation, and emissions for 2020
relative to 2019.
    Comment: Some commenters suggested EPA use a multi-year historical
baseline for its step 3 analysis on the theory that this would provide
a more robust set of historical data and a more representative baseline
for the power sector.
    Response: EPA is finalizing use of the same single-year historical
baseline approach it used in the proposed rule. This approach is
similar to the CSAPR Update, where EPA also relied on a single-year
historical baseline to inform its step 3 approach. EPA's interest in a
historical data set to inform this part of the analysis is to capture
the current status of the power sector (i.e., incorporating the latest
new builds, retirements, and unit operation in response to current
regulations and market conditions). Incorporating prior years through a
multi-year historical baseline would dilute, rather than strengthen,
the methodology's ability to capture the most representative
perspective of the current power sector. It would in effect include
units that no longer exist, market conditions that have since evolved,
and a regulatory landscape that has likewise since changed. It would
diminish the effect of newer generation resources that have come online
which reflect the impacts of the latest changes in technology
performance and cost levels. EPA finds that, particularly at the state
and regional level, the most recent year data is a better
representation and basis for future year baselines rather than
incorporating older data. In other applications, where the purpose is
not forward looking, but rather distribution-based and unit-level
focused, lengthier historical baselines have more value. See additional
response to this comment in the State Emission Budgets section of the
RTC document.

C. Elements of New Trading Program

    To implement the updated emissions budgets developed according to
the process described in section VII.B, EPA is requiring EGUs in each
of the 12 covered states to participate in a new CSAPR NOX
Ozone Season Group 3 Trading Program. The provisions of the new ``Group
3'' trading program are largely identical to the provisions of the
``Group 2'' trading program in which affected EGUs in the 12 covered
states participated from 2017 through 2020. The principal differences
between the Group 2 and Group 3 trading programs are the differences in
state budgets and geography established in this rule to address the
covered states' remaining obligations under CAA section
110(a)(2)(D)(i)(I) with respect to the 2008 ozone NAAQS. One other
difference, which EPA is adopting in response to comments, concerns the
determination of which units are eligible to receive allocations of
allowances for use in the new Group 3 trading program as ``existing
units'' under EPA's default allocation methodology. Specifically,
certain units with scheduled future retirement dates will not receive
allocations as existing units for use in the Group 3 trading program
starting with the first control period for which the units' scheduled

retirements are reflected in adjustments to the state emission budgets.
This aspect of implementation of the Group 3 trading program is
discussed in section VII.C.3.b.
    The proposed rule included several provisions designed to address
the transition from the Group 2 trading program to the Group 3 trading
program. The provisions for allocation of supplemental allowances to
ensure that the enhanced control stringency established in this action
applies only after the rule's effective date are finalized as proposed.
The provisions concerning creation of an initial bank of Group 3
allowances in exchange for banked 2017-2020 Group 2 allowances at a
formula-based conversion ratio and the provisions concerning the recall
of certain previously recorded 2021-2024 Group 2 allowances are
finalized with certain modifications adopted after consideration of
comments. Also, in response to comments, the final rule includes
transitional provisions establishing a ``safety valve'' mechanism under
which sources may obtain additional Group 3 allowances in exchange for
additional 2017-2020 Group 2 allowances at a higher conversion ratio.
All of these transitional provisions are discussed in section VII.C.4.
    The only other differences between the new Group 3 trading program
regulations and the Group 2 trading program regulations that applied
for emissions through the 2020 control periods are a small number of
corrections and administrative simplifications that have no effect on
program stringency; EPA is eliminating these differences by making the
same corrections and simplifications to the regulations for the Group 2
trading program and the other existing CSAPR trading programs starting
with the 2021 control periods.\177\ In this section, the Agency
discusses major elements of the new Group 3 trading program, with
emphasis on the elements that differ from the previous provisions of
the Group 2 trading program as well as the provisions specifically
designed to address the transition from the Group 2 trading program to
the Group 3 trading program.
---------------------------------------------------------------------------

    \177\ The corrections and simplifications generally apply to
each of the five existing CSAPR trading programs at subparts AAAAA
through EEEEE of 40 CFR part 97, and a subset also apply to the
Texas SO2 Trading Program at subpart FFFFF of 40 CFR part
97. The specific corrections and simplifications are described as
applied to the new Group 3 trading program in sections VII.C.1.
through VII.C.7. The same changes as applied to the existing
programs are discussed in section VII.C.8.
---------------------------------------------------------------------------

1. Applicability
    In this rule, EPA is using the same EGU applicability provisions in
the new Group 3 trading program as in the existing Group 2 trading
program and the other CSAPR trading programs, without change. Under the
general CSAPR applicability provisions, a covered unit is any
stationary fossil-fuel-fired boiler or combustion turbine serving at
any time on or after January 1, 2005, a generator with nameplate
capacity exceeding 25 MW, which is producing electricity for sale, with
the exception of certain cogeneration units and solid waste
incineration units.
2. State Budgets, Variability Limits, Assurance Levels, and Penalties
    EPA is establishing revised state budgets for EGU emissions of
ozone season NOX for the 12 ``Group 3'' states subject to
new or amended FIPs in this final rule in order to fully address these
states' significant contribution with respect to the 2008 ozone NAAQS.
The budgets have been established according to the process described in
section VII.B. As discussed in that section, for each of the covered
states, separate budgets are established for the three individual years
2021, 2022, and 2023, and then for 2024 and beyond.\178\ Portions of
the updated NOX ozone season emission budgets are reserved
as updated new unit set-asides and Indian country new unit set-asides
for the same control periods, as further described in section
VII.C.3.a. The amounts of the state emissions budgets for 2021, 2022,
2023, and 2024 and beyond are shown in tables VII.C.2-1, VII.C.2-2,
VII.C.2-3, and VII.C.2-4.
---------------------------------------------------------------------------

    \178\ See section VII.C.4.a. for a discussion of transitional
provisions included in this final rule to ensure that the increased
stringency of the new emission budgets being established for the
2021 control period will apply only after the rule's effective date,
even though the new Group 3 trading program will be implemented as
of the start of the 2021 ozone season on May 1, 2021.
---------------------------------------------------------------------------

    Similar to the previous requirements to hold Group 2 allowances
sufficient to cover their NOX emissions in each control
period from 2017 through 2020, sources in states covered by the new
Group 3 trading program will be required to hold new Group 3 allowances
sufficient to cover their NOX emissions in each control
period in 2021 and thereafter. For Group 3 states that were found in
the CSAPR Update to still have good neighbor obligations with respect
to the 1997 ozone NAAQS, EPA is determining that participation of the
state's EGUs in the more stringent Group 3 trading program will satisfy
those obligations.\179\
---------------------------------------------------------------------------

    \179\ Out of the 12 states included in the Group 3 trading
program, Illinois, Indiana, Kentucky, and Louisiana were found in
the CSAPR Update to still have good neighbor obligations with
respect to the 1997 ozone NAAQS. See 81 FR 74509 n.21 (November 21,
2016).
---------------------------------------------------------------------------

    In the CSAPR and the CSAPR Update, EPA developed assurance
provisions, including variability limits and assurance levels (with
associated compliance penalties), to ensure that each state will meet
its pollution control and emission reduction obligations and to
accommodate inherent year-to-year variability in state-level EGU
operations. Establishing assurance levels with compliance penalties
responds to the D.C. Circuit's holding in North Carolina requiring EPA
to ensure within the context of an interstate trading program that
sources in each state are required to eliminate emissions that
significantly contribute to nonattainment or interfere with maintenance
of the NAAQS in another state.\180\
---------------------------------------------------------------------------

    \180\ 531 F.3d at 908.
---------------------------------------------------------------------------

    Like the emission budgets promulgated in the CSAPR and the CSAPR
Update, the revised emission budgets promulgated in this rule reflect
EGU operations in an ``average year.'' However, year-to-year
variability in EGU operations occurs due to the interconnected nature
of the power sector, changing weather patterns, changes in electricity
demand, or disruptions in electricity supply from other units or from
the transmission grid. Recognizing this, the trading program provisions
finalized in the CSAPR and CSAPR Update rulemakings include variability
limits, which define the amount by which an individual state's
emissions may exceed the level of its budget in a given year to account
for variability in EGU operations. A state's budget plus its
variability limit equals the state's assurance level, which acts as a
cap on the state's NOX emissions during a given control
period (in this rulemaking, the relevant control period is the May-
September ozone season). The new CSAPR NOX Ozone Season
Group 3 Trading Program provisions established for affected sources in
the 12 states subject to the new trading program under this final rule
contain equivalent assurance provisions to the prior CSAPR and CSAPR
Update trading programs.
    The variability limits ensure that the trading program can
accommodate the inherent variability in the power sector while ensuring
that each state eliminates the amount of emissions within the state, in
a given control period, that must be eliminated to meet

the statutory mandate of CAA section 110(a)(2)(D)(i)(I). Moreover, the
structure of the trading program, which achieves required emission
reductions through limits on the total numbers of allowances allocated,
assurance provisions, and penalty mechanisms, ensures that the
variability limits only allow the amount of temporal and geographic
shifting of emissions that is likely to result from the inherent
variability in power generation, and not from decisions to avoid or
delay the optimization or installation of necessary controls.
    To establish the variability limits in the CSAPR, EPA analyzed
historical state-level heat input variability as a proxy for emissions
variability, assuming constant emission rates. See 76 FR 48265. The
variability limits for ozone season NOX in both the CSAPR
and the CSAPR Update were calculated as 21 percent of each state's
budget, and these variability limits for the NOX ozone
season trading programs were then codified in 40 CFR 97.510 and 40 CFR
97.810, along with the respective state budgets. For this final rule,
EPA is retaining variability limits for the 12 Group 3 states covered
by this rule calculated as 21 percent of each state's revised
budget.\181\
---------------------------------------------------------------------------

    \181\ See section VII.C.4.a. for a discussion of transitional
provisions included in the final rule to ensure that the increased
stringency of the new budgets will apply only after the rule's
effective date, even though the new Group 3 trading program will be
implemented as of the start of the 2021 ozone season on May 1, 2021.
The supplemental allowances and assurance level adjustments that are
being provided for the 2021 control period in accordance with those
transitional provisions are not reflected in the amounts shown in
Table VII.C.2-1.

Table VII.C.2-1--CSAPR NOX Ozone Season Group 3 State Budgets, Variability Limits, and Assurance Levels for 2021
                                                       182
----------------------------------------------------------------------------------------------------------------
                                                                     Emissions      Variability      Assurance
                              State                                budget (tons)   limit (tons)    level (tons)
----------------------------------------------------------------------------------------------------------------
Illinois........................................................           9,102           1,911          11,013
Indiana.........................................................          13,051           2,741          15,792
Kentucky........................................................          15,300           3,213          18,513
Louisiana.......................................................          14,818           3,112          17,930
Maryland........................................................           1,499             315           1,814
Michigan........................................................          12,727           2,673          15,400
New Jersey......................................................           1,253             263           1,516
New York........................................................           3,416             717           4,133
Ohio............................................................           9,690           2,035          11,725
Pennsylvania....................................................           8,379           1,760          10,139
Virginia........................................................           4,516             948           5,464
West Virginia...................................................          13,334           2,800          16,134
----------------------------------------------------------------------------------------------------------------

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

    \182\ The state-level emission budget calculations pertaining to
Tables VII.C.2-1 through VII.C.2-4 are described in section VII.B,
and in greater detail in the Ozone Transport Policy Analysis Final
Rule TSD. Budget calculations and underlying data are also available
in Appendix A of that TSD.

Table VII.C.2-2--CSAPR NOX Ozone Season Group 3 State Budgets, Variability Limits, and Assurance Levels for 2022
----------------------------------------------------------------------------------------------------------------
                                                                     Emissions      Variability      Assurance
                              State                                budget (tons)   limit (tons)    level (tons)
----------------------------------------------------------------------------------------------------------------
Illinois........................................................           9,102           1,911          11,013
Indiana.........................................................          12,582           2,642          15,224
Kentucky........................................................          14,051           2,951          17,002
Louisiana.......................................................          14,818           3,112          17,930
Maryland........................................................           1,266             266           1,532
Michigan........................................................          12,290           2,581          14,871
New Jersey......................................................           1,253             263           1,516
New York........................................................           3,416             717           4,133
Ohio............................................................           9,773           2,052          11,825
Pennsylvania....................................................           8,373           1,758          10,131
Virginia........................................................           3,897             818           4,715
West Virginia...................................................          12,884           2,706          15,590
----------------------------------------------------------------------------------------------------------------

Table VII.C.2-3--CSAPR NOX Ozone Season Group 3 State Budgets, Variability Limits, and Assurance Levels for 2023
----------------------------------------------------------------------------------------------------------------
                                                                     Emissions      Variability      Assurance
                              State                                budget (tons)   limit (tons)    level (tons)
----------------------------------------------------------------------------------------------------------------
Illinois........................................................           8,179           1,718           9,897
Indiana.........................................................          12,553           2,636          15,189
Kentucky........................................................          14,051           2,951          17,002
Louisiana.......................................................          14,818           3,112          17,930

Maryland........................................................           1,266             266           1,532
Michigan........................................................           9,975           2,095          12,070
New Jersey......................................................           1,253             263           1,516
New York........................................................           3,421             718           4,139
Ohio............................................................           9,773           2,052          11,825
Pennsylvania....................................................           8,373           1,758          10,131
Virginia........................................................           3,980             836           4,816
West Virginia...................................................          12,884           2,706          15,590
----------------------------------------------------------------------------------------------------------------

Table VII.C.2-4--CSAPR NOX Ozone Season Group 3 State Budgets, Variability Limits, and Assurance Levels for 2024
                                                   and Beyond
----------------------------------------------------------------------------------------------------------------
                                                                     Emissions      Variability      Assurance
                              State                                budget (tons)   limit (tons)    level (tons)
----------------------------------------------------------------------------------------------------------------
Illinois........................................................           8,059           1,692           9,751
Indiana.........................................................           9,564           2,008          11,572
Kentucky........................................................          14,051           2,951          17,002
Louisiana.......................................................          14,818           3,112          17,930
Maryland........................................................           1,348             283           1,631
Michigan........................................................           9,786           2,055          11,841
New Jersey......................................................           1,253             263           1,516
New York........................................................           3,403             715           4,118
Ohio............................................................           9,773           2,052          11,825
Pennsylvania....................................................           8,373           1,758          10,131
Virginia........................................................           3,663             769           4,432
West Virginia...................................................          12,884           2,706          15,590
----------------------------------------------------------------------------------------------------------------

    The assurance provisions include penalties that are triggered in
the event that the covered sources' emissions in a given state, as a
whole, exceed the state's assurance level. The CSAPR and the CSAPR
Update provided that, when the emissions from EGUs in a state exceed
that state's assurance level in a given year, particular sources within
that state will be assessed a 3-to-1 allowance surrender on emissions
exceeding the assurance level. Specifically, each excess ton above a
given state's assurance level must be met with one allowance, per
standard compliance, and two additional allowances to satisfy the
penalty. The penalty was designed to deter state-level emissions from
exceeding assurance levels. In both the CSAPR and the CSAPR Update, the
assurance provisions were designed to account for variability in the
electricity sector while ensuring that the necessary emission
reductions occur within each covered state, consistent with the court's
holding in North Carolina, 531 F.3d at 908. If EGU emissions in a given
state do not exceed that state's assurance level, no penalties are
incurred by any source.
    To assess the penalty under the assurance provisions, EPA is
following the same methodology finalized in the CSAPR Update. See 81 FR
74567. In that methodology, EPA evaluates whether any state's total EGU
emissions in a control period exceeded the state's assurance level, and
if so, EPA then determines which groups of units in the state
represented by a ``common designated representative'' emitted in excess
of the common designated representative's share of the state assurance
level and, therefore, will be subject to the allowance surrender
requirement described above. Thus, penalties under the assurance
provisions are triggered for the group of sources represented by a
common designated representative when two conditions are met: (1) The
group of sources and units with a common designated representative are
located in a state where the total state EGU emissions for a control
period exceed the state assurance level; and (2) that group with the
common designated representative had emissions exceeding the respective
common designated representative's share of the state assurance level.
EPA is establishing assurance provisions for the CSAPR NOX
Ozone Season Group 3 Trading Program that are equivalent to the
assurance provisions in the CSAPR NOX Ozone Season Group 2
Trading Program.
    In this final rule, EPA is simplifying the procedures for
administering the assurance provisions, as compared to the analogous
provisions included in the existing CSAPR trading programs for control
periods before 2021.\183\ The simplifications are made possible by the
revisions to the process for allocating allowances from the new unit
set-asides that are discussed in section VII.C.3.c. The same
simplifications are also being implemented in the existing CSAPR
trading programs, as discussed in section VII.C.8. These
simplifications concern the procedures for determining the portion of
the state's assurance level to be assigned to each common designated
representative. Specifically, certain provisions of these procedures as
previously implemented in the existing CSAPR trading programs were
designed to address circumstances where a new unit operates but has no
allowance allocation determined for it. Administration of these
provisions

required EPA to issue a notice to collect information needed solely for
this purpose that is not otherwise required to be reported to EPA.
Because the revised new unit set-aside (``NUSA'') allocation procedures
eliminate the possibility that a new unit would not have an allowance
allocation determined for it, EPA is eliminating the provisions for
issuance of the related extra notice. EPA also is extending the date as
of which a common designated representative is determined under both
the new Group 3 trading program and the existing CSAPR trading programs
from April 1 of the year following the control period to July 1 so as
to preserve the relationship of those dates to the allowance transfer
deadline, which is being extended from March 1 of the year following
the control period to June 1.\184\ Further discussion of these changes
from the current provisions in the existing trading programs is
provided in section VII.C.8.
---------------------------------------------------------------------------

    \183\ EPA proposed and requested comment on implementing the
simplified assurance provisions as of the 2023 and 2021 control
periods, respectively. No comments were received, and EPA is
clarifying the regulations by implementing the simplified provisions
as of the 2021 control period. For further discussion, see section
VII.C.8.b.
    \184\ As discussed in section VII.C.8., in order to minimize
unnecessary differences between the CSAPR trading programs and the
similarly structured Texas SO2 Trading Program, EPA is
also revising the date for determination of a common designated
representative under the Texas SO2 Trading Program.
---------------------------------------------------------------------------

    Comment: EPA received several comments concerning the achievability
of state emissions budgets in 2021 that highlighted the quick
implementation timeframe and suggesting that such a timeframe would not
allow enough times for a liquid allowance market to form and thus
inhibit sources' ability to obtain the allowances that they need for
compliance.
    Response: As an initial matter, EPA observes that in 25 years of
promulgating and administering trading programs for NOX and
SO2 as mechanisms to address acid precipitation or
interstate transport of air pollution, the Agency has never encountered
a single instance where a source was unable to comply with the
requirements of any of these trading programs because of an inability
to find allowances available for purchase. Almost all of the sources
that will participate in the trading program established under this
final rule have previously participated in some of these other trading
programs and therefore are, or should be, fully aware that under every
such trading program, a functioning allowance market has developed.
Nevertheless, some commenters assert that in the trading program
established under this specific final rule--where the emission
reductions required for the first control period are set at levels
designed to be achievable without installation of any new controls by
any source--for the first time ever, either no industry participants
will be willing to take actions that would create surplus allowances or
all industry participants will refuse to sell such surplus allowances
at any price. The comments fly in the face of 25 years of evidence and
common experience, not to mention principles of economics and market
participants' self-interest. EPA views the comments as unsupported and
speculative to the point of irrationality.
    EPA first addresses the viability of 2021 implementation for the
emission reductions required under this rule in detail in section VI. B
above. With regard to the specific market liquidity concerns expressed
here, EPA notes that those same concerns have been voiced in the lead-
up to past CSAPR trading programs and have never materialized. Instead,
a functioning allowance market has always formed and resulted in 100
percent compliance with the allowance holding requirements for the
first control period (and subsequent control periods). As described in
this section, under the new trading program sources are not required to
hold (and subsequently surrender) any allowances for compliance
purposes until June 1, 2022--well after the end of the 2021 ozone
season. In the current CSAPR Update ozone season programs, EPA observes
that most trades occur near or after end of the ozone season.
Therefore, the approximately two months between final rule promulgation
and the start of the compliance period is in no way a limit on the time
sources have to buy and sell allowances for that compliance period.
Rather, sources will have eight months after the end of the control
period in which to engage in any necessary or desired allowance market
transactions. The total quantity of allowances usable for the 2021
control periods from state emission budgets and from the initial Group
3 bank (discussed in section VII.C.4.b) will be known before the start
of the 2021 control period, and EPA expects that almost all such
allowances will be recorded in sources' compliance accounts well before
the end of the 2021 control period, ensuring that there will be no
logistical impediments to such transactions. Moreover, in many cases,
units that may have the need to procure allowances will also have
associated units under common ownership elsewhere in the fleet that
hold a surplus of allowances In this case, it is only a matter of
intra-owner allowance movement needed to align allowancing holdings
with allowance surrender obligations, and the need for accessing a
broader allowance market is mooted.
    Further, the level of the budgets, in addition to the initial Group
3 bank, should obviate any market liquidity concerns as the number of
allowances on the market for the first year will accommodate a variety
of compliance pathways and unit operational decisions. Moreover, the
experience of the CSAPR programs reveals that the allowance price is
highest in the first compliance period, creating an incentive for all
sources to implement achievable emission reductions and for sources
with surplus of allowances to sell them while allowance prices are
highest, generating the conditions for a robust market to form--further
promoting market liquidity. While EPA strongly disagrees, based on
previous program implementation and forward-looking analysis, that
there is any risk of market illiquidity, the Agency is creating an
additional ``safety valve'' in this final rule due to the near-term
implementation timetable. Consistent with commenters' suggestions, EPA
will allow the one-time conversion of Group 2 allowances at an 18:1
ratio to provide additional assurance to sources that allowances will
be available, but ensuring that the cost of this compliance option is
such that entities will utilize it only in the very unlikely event that
access to such additional allowances proves to be necessary. The safety
valve is described further in section VII.C.4.c.
    Comment: EPA received several comments concerning the proposed
variability limits and associated assurance levels for the states in
the Group 3 trading program. Some commenters suggested that EPA should
eliminate or tighten variability limits for the Group 3 trading
program. One commenter justified these changes by observing that the
Group 2 trading program established under the CSAPR Update had excess
availability of allowances and low allowance prices.
    One commenter suggested that EPA eliminate variability limits for
the Group 3 trading program on the basis that the variability limits
and associated assurance levels as proposed do not result in the
elimination of downwind non-attainment by the end of 2021. This
commenter stated that EPA failed to provide a full explanation in the
proposed action as to why the 21 percent variability limit used in the
trading programs for ozone season NOX established in the
CSAPR and the CSAPR Update was still applicable in the new Group 3
trading program. The commenter stated there is no justification for EPA
to increase the budget amounts due to variability in

EGU fleet operation if EPA is correct in its assessment that the
proposed NOX mass emission budget levels are representative
of near-term achievable NOX emission control obligations
based on historical EGU fleet operation. The commenter stated that
increasing budgets by 21 percent to arrive at an assurance level
permits an upwind state's EGU fleet to emit NOX mass
emissions more than the levels necessary to meet the given state's
obligation to downwind areas. The commenter further states a belief
that EPA is misapplying the concept of EGU fleet operational
variability to permit a state's EGU fleet to emit NOX mass
emissions at levels that may negatively impact the health and welfare
of downwind populations.
    Response: EPA disagrees with the commenters and is retaining the
variability limits and associated assurance levels as reflected in both
the CSAPR and the CSAPR Update. EPA believes a variability limit of 21
percent continues to be appropriate for states in the Group 3 trading
program. The assertion that state budgets are increased by 21 percent
in response to the variability limit is incorrect. Rather, as described
in the CSAPR, the CSAPR Update, and reiterated in this final action,
the variability limits reflect expected year-to-year or season-to-
season variability in demand for electricity, and therefore,
variability in the use of fuel and in emissions. While a given state
may emit up to the assurance level (i.e., that state's budget plus the
21 percent variability limit) during years with adverse meteorology and
atypical levels of electricity demand, allowances banked from prior
control periods may then be used for compliance obligations. However,
the total number of allowances issued for each control period in the
Group 3 trading program is equal to the sum of the Group 3 states'
emission budgets, not the sum of the Group 3 states' assurance levels.
Although EPA is also creating an initial bank of allowances in an
amount equal to the sum of the states' variability limits for the 2022
control period (see section VII.C.4.b), creation of the bank is a one-
time event and does not represent a 21 percent increase in the state
emission budgets established for each control period.
    With regard to the comment that EPA has not sufficiently justified
reusing in the Group 3 trading program the same 21 percent variability
limits used in the trading programs for ozone season NOX
established in the CSAPR and the CSAPR Update, EPA disagrees that
updating these limits is necessary. The original variability analysis
performed in the CSAPR rulemaking considered data for 26 states
(including all 12 Group 3 states) and reflected over a decade of
operational variability (from 2000 through 2010), producing relatively
robust standard deviation estimates. EPA would not necessarily view
changes of a few percent above or below the previously identified
variability level of 21 percent from an updated analysis as significant
enough to require establishment of different variability limits in the
Group 3 trading program. Nevertheless, in response to the comment, EPA
has performed an updated variability analysis for the 12 Group 3 states
reflecting data for all control periods from 2000 to 2019. The updated
analysis again results in a variability estimate of 21 percent. EPA
also considered shorter time periods for the updated analysis and found
that the resulting variability estimates are not especially sensitive
to the particular time period analyzed. Accordingly, EPA concludes that
it is reasonable to finalize the variability limits for the Group 3
trading program at the level of 21 percent as proposed.\185\
---------------------------------------------------------------------------

    \185\ For details on the original variability analysis for 26
states over the 2000-2010 period, including a description of the
methodology, see the Power Sector Variability Final Rule TSD from
the CSAPR (EPA-HQ-OAR-2009-0491-4454). For the updated variability
analysis for the 12 Group 3 states for the 2000-2019 period, see the
Excel file ``Historical Variability in Heat Input 2000 to
2019.xls.'' Both documents are available in the docket for this
final rule.
---------------------------------------------------------------------------

3. Unit-Level Allocations of Emissions Allowances
    For states participating in the CSAPR Group 3 trading program, EPA
is issuing CSAPR NOX Ozone Season Group 3 allowances to be
used for compliance beginning with the 2021 ozone season. This section
explains the default process by which EPA is allocating total amounts
of these allowances equal to each state's budget amount existing units
and new units in the state. Section VII.C.3.a describes the
determination of the portions of each state's budget that will be set
aside for potential allocation to new units in the state and in any
Indian country within the state's borders. Section VII.C.3.b discusses
the methodology used to allocate shares of each state's budget not
reserved in a set-aside to the existing units in the state, including
in some cases to units that have ceased operations. Sections VII.C.3.c
and VII.C.3.d discuss the process for allocating the allowances in the
new unit set-asides and Indian country new unit set-asides,
respectively, to individual units.
    As under both the CSAPR and the CSAPR Update, states have several
options under this final rulemaking to submit SIP revisions which, if
approved, may result in the replacement of EPA's default allocations
with state-determined allocations for the 2022 control period and
beyond. The provisions described in this section do not prevent any
state from employing an alternative allocation methodology for control
periods after 2021 through a SIP submission. See section VII.D. for
details on the development of approvable SIP submissions.
a. Set-Asides of Portions of State Budgets for New Units
    As part of the default allocation process that will apply where a
state does not employ an alternative allocation process pursuant to an
approved SIP revision, EPA is promulgating allocations to a new unit
set-aside for each state equal to a minimum of 2 percent of the total
state budget, plus the projected amount of emissions from planned units
in that state. For example, if planned units in a state are projected
to emit 3 percent of the state's NOX ozone season emission
budget, then the new unit set-aside for the state would be set at 5
percent, which is the sum of the minimum 2 percent set-aside plus an
additional 3 percent for planned units. As further discussed in section
VII.C.3.d., for the three Group 3 states with Indian country within
their borders (Louisiana, Michigan, and New York), EPA is reserving 5
percent of the minimum 2 percent new unit set-aside, or 0.1 percent of
the total state budget, for any new units in Indian country within the
borders of state,\186\ with no additional amount to address planned
units in Indian country.\187\ This is the same approach previously used
to establish the amounts of new unit set-asides and Indian country new
unit set-asides for all the CSAPR and CSAPR Update trading programs.
See, e.g., 76 FR 48292 (August 8, 2011). Note that New York has set its
NUSA percentage within its approved SIP for the existing Group 2
trading program to 5 percent of the state emission budget without
consideration of planned units; therefore, this NUSA percentage is used

for New York. As described in greater detail in sections VII.C.3.c and
VII.C.3.d, new units are eligible to receive allocations from a new
unit set-aside or Indian country new unit set-aside starting with the
first year they are subject to the allowance-holding requirements of
this rule. If the allowances in the NUSA for a state or the Indian
country NUSA for Indian country within the borders of a state are not
allocated to new units, the allowances are redistributed to existing
units in the state before each compliance deadline.
---------------------------------------------------------------------------

    \186\ In the CSAPR rulemaking, based on analysis of a set of
states that includes all the proposed Group 3 states in this action,
EPA determined that among the states analyzed, in the state for
which Indian country represented the largest share of the total area
within the state's borders, that share was 5 percent. See 76 FR
48293 (December 27, 2011). EPA adopted the same 5 percent figure in
the CSAPR Update. See 81 FR 74565-66 (May 27, 2016).
    \187\ According to the information available to EPA, there are
currently no planned units in Indian country within the borders of
any Group 3 state.
---------------------------------------------------------------------------

    The process described above for determining the portions of each
state budget that will be set aside for potential allocation to new
units is unchanged from the process described in the proposed rule. EPA
received no comments concerning the portions of the emission budgets
established under the new Group 3 trading program that would be set
aside for this purpose. One commenter suggested that the amounts of the
new unit set-asides should be increased by adding allowances from the
existing Group 2 trading program that would have been allocated to
retired units under that program. EPA is not implementing this
suggestion and responds more fully to the comment in section VII.C.4.b.
    Because the budgets under the Group 3 trading program vary across
control periods, the amounts of the default new unit set-asides and
Indian country new unit set-asides also vary. The amounts for each
state for 2021 through 2023 and for 2024 and beyond are set forth in
tables VII.C.3-1 through VII.C.3-4.\188\
---------------------------------------------------------------------------

    \188\ See section VII.C.4.a. for a discussion of transitional
provisions included in the final rule to ensure that the increased
stringency of the new budgets will apply only after the rule's
effective date, even though the new Group 3 trading program will be
implemented as of the start of the 2021 ozone season on May 1, 2021.
The supplemental allowances that are being provided for the 2021
control period in accordance with those transitional provisions are
not reflected in the emission budget amounts shown in Table VII.C.3-
1.

           Table VII.C.3-1--CSAPR NOX Ozone Season Group 3 New Unit Set-Aside (NUSA) Amounts for 2021
----------------------------------------------------------------------------------------------------------------
                                                                                New unit  set-
                                                  New unit  set-  Total new unit   aside amount   Indian country
              State                  Emission      aside amount      set-aside     for new units   new unit set-
                                  budgets (tons)     (percent)    amount for new   not in Indian   aside amount
                                                                   units (tons)   country (tons)      (tons)
----------------------------------------------------------------------------------------------------------------
Illinois........................           9,102               3             265             265  ..............
Indiana.........................          13,051               2             262             262  ..............
Kentucky........................          15,300               2             309             309  ..............
Louisiana.......................          14,818               3             445             430              15
Maryland........................           1,499               9             135             135  ..............
Michigan........................          12,727               4             513             500              13
New Jersey......................           1,253               2              27              27  ..............
New York........................           3,416               5             171             168               3
Ohio............................           9,690               3             291             291  ..............
Pennsylvania....................           8,379               4             335             335  ..............
Virginia........................           4,516               4             185             185  ..............
West Virginia...................          13,334               2             266             266  ..............
----------------------------------------------------------------------------------------------------------------

           Table VII.C.3-2--CSAPR NOX Ozone Season Group 3 New Unit Set-Aside (NUSA) Amounts for 2022
----------------------------------------------------------------------------------------------------------------
                                                                                New unit  set-
                                                  New unit  set-  Total new unit   aside  amount  Indian country
              State                  Emission      aside  amount     set-aside    for  new units  new unit  set-
                                  budgets (tons)     (percent)    amount for new   not in Indian   aside amount
                                                                   units (tons)   country (tons)      (tons)
----------------------------------------------------------------------------------------------------------------
Illinois........................           9,102               3             265             265  ..............
Indiana.........................          12,582               2             254             254  ..............
Kentucky........................          14,051               2             283             283  ..............
Louisiana.......................          14,818               3             445             430              15
Maryland........................           1,266               9             115             115  ..............
Michigan........................          12,290               4             494             482              12
New Jersey......................           1,253               2              27              27  ..............
New York........................           3,416               5             171             168               3
Ohio............................           9,773               3             290             290  ..............
Pennsylvania....................           8,373               4             339             339  ..............
Virginia........................           3,897               4             161             161  ..............
West Virginia...................          12,884               2             261             261  ..............
----------------------------------------------------------------------------------------------------------------

           Table VII.C.3-3--CSAPR NOX Ozone Season Group 3 New Unit Set-Aside (NUSA) Amounts for 2023
----------------------------------------------------------------------------------------------------------------
                                                                                New unit  set-
                                                  New unit  set-  Total new unit   aside  amount  Indian country
              State                  Emission      aside  amount     set-aside     for new units   new unit set-
                                  budgets (tons)     (percent)    amount for new   not in Indian   aside amount
                                                                   units (tons)   country (tons)      (tons)
----------------------------------------------------------------------------------------------------------------
Illinois........................           8,179               3             248             248  ..............
Indiana.........................          12,553               2             249             249  ..............
Kentucky........................          14,051               2             283             283  ..............
Louisiana.......................          14,818               3             445             430              15
Maryland........................           1,266               9             115             115  ..............
Michigan........................           9,975               4             398             388              10
New Jersey......................           1,253               2              27              27  ..............
New York........................           3,421               5             171             168               3
Ohio............................           9,773               3             290             290  ..............
Pennsylvania....................           8,373               4             339             339  ..............
Virginia........................           3,980               4             166             166  ..............
West Virginia...................          12,884               2             261             261  ..............
----------------------------------------------------------------------------------------------------------------

      Table VII.C.3-4--CSAPR NOX Ozone Season Group 3 New Unit Set-Aside (NUSA) Amounts for 2024 and Beyond
----------------------------------------------------------------------------------------------------------------
                                                                                New unit  set-
                                                  New unit  set-  Total new unit   aside amount   Indian country
              State                  Emission      aside amount      set-aside     for new units  new unit  set-
                                  budgets (tons)     (percent)    amount for new   not in Indian   aside amount
                                                                   units (tons)   country (tons)      (tons)
----------------------------------------------------------------------------------------------------------------
Illinois........................           8,059               3             244             244  ..............
Indiana.........................           9,564               2             190             190  ..............
Kentucky........................          14,051               2             283             283  ..............
Louisiana.......................          14,818               3             445             430              15
Maryland........................           1,348               9             122             122  ..............
Michigan........................           9,786               4             392             382              10
New Jersey......................           1,253               2              27              27  ..............
New York........................           3,403               5             170             167               3
Ohio............................           9,773               3             290             290  ..............
Pennsylvania....................           8,373               4             339             339  ..............
Virginia........................           3,663               4             150             150  ..............
West Virginia...................          12,884               2             261             261  ..............
----------------------------------------------------------------------------------------------------------------

b. Allocations to Existing Units, Including Units That Cease Operation
    The portion of a state budget remaining after the portions reserved
for new units have been set aside is allocated among the existing units
in the state. EPA in this action is generally allocating allowances to
existing units in the Group 3 states following the same methodology for
allowance allocation that was used in the CSAPR Update, which relies on
historical heat input data and historical emissions data for each
eligible existing unit in the state. See 81 FR 74564-65. For the new
Group 3 trading program, EPA is applying this methodology using
historical data through 2019. In response to comments, EPA is also
making one change to the approach used to determine which existing
units are eligible to receive allocations for a given control period,
specifically by excluding certain units with scheduled future
retirements from receiving allocations for control periods after the
years in which the scheduled retirements are reflected in adjustments
to the respective states' emission budgets. For the amounts of the
allocations to existing units, see the TSD ``Unit Level Allocations and
Underlying Data for the Revised CSAPR Update for the 2008 Ozone
NAAQS,'' in the docket for this final rule. Note that this final rule
addresses allocations of only the newly created CSAPR NOX
Ozone Season Group 3 allowances issued under and used for compliance in
the Group 3 trading program. EPA is not changing allocations of
allowances used in the CSAPR NOX Ozone Season Group 1 or
Group 2, NOX Annual, or SO2 Group 1 or Group 2
trading programs and is not reopening the previously established
default allocations under these programs.
    For the purpose of allocations, the CSAPR considered an ``existing
unit'' to be a unit that commenced commercial operation prior to
January 1, 2010, and the CSAPR Update considered an ``existing unit''
to be a unit that commenced commercial operation prior to January 1,
2015. For the 12 states subject to new or amended FIPs in this
rulemaking, EPA is considering an ``existing unit'' for purposes of the
Group 3 trading program to be a unit that commenced commercial
operation prior to January 1, 2019 (although only existing units that
did not cease operation before January 1, 2021 will be eligible to
receive allocations of Group 3 allowances as existing units). This
change will allow units commencing commercial operation between 2015
and 2019 to be directly allocated allowances from each state's budget
as existing units and will allow the full amounts of the new unit set-
asides and Indian country new unit set-asides to be available for any
future new units

locating in covered states or Indian country. Using data available at
the time of the proposed rule's development, EPA identified which units
in the proposed Group 3 states that currently submit quarterly
emissions reports to EPA appear to be eligible or ineligible to receive
allowance allocations as existing units; \189\ for this final rule, EPA
has updated the lists of units with the most recent data. EPA is not
reconsidering which units are ``existing units'' for purposes of any
other CSAPR trading program. Sources in most of the Group 3 states also
participate in the CSAPR NOX Annual and SO2 Group
1 trading programs, for which an ``existing unit'' is a unit that
commenced commercial operation before January 1, 2010. Thus, a unit
that is located in one of these states and that commenced commercial
operation between January 1, 2010, and January 1, 2019, would be
considered an ``existing unit'' for purposes of default allowance
allocations under the Group 3 trading program but would continue to be
considered a ``new unit'' for purposes of default allowance allocations
under the CSAPR NOX Annual and SO2 Group 1
trading programs.
---------------------------------------------------------------------------

    \189\ See ``CSAPR NOX OS Group 3--Unit Level
Allocations and Underlying Data.xls'', available in the docket.
---------------------------------------------------------------------------

    As noted earlier in this section, in response to comments EPA is
finalizing a change from the allocation methodology used in the
existing CSAPR trading programs with respect to which existing units
are eligible to receive allocations from the budget for a given control
period following retirement. Specifically, in cases where, before
finalization of this rule, a unit was scheduled to retire with
sufficient certainty for the retirement to be taken into account in
EPA's process in this rule for setting the emission budgets for the
state where the unit is located, EPA is not providing allocations of
allowances to the unit as an existing unit from the budget for any
control period starting with the first control period for which the
state's emission budget has been adjusted to reflect the unit's
scheduled retirement. This approach to determining eligibility to
receive allocations as an existing unit does not apply to other units
that may cease operations but whose upcoming retirements were not
scheduled as of finalization of this action with sufficient certainty
to be reflected in the process for setting the emission budgets. These
other units would continue to receive allowance allocations as existing
units for five control periods of non-operation, consistent with the
allocation methodology used in the existing CSAPR trading programs. EPA
provides additional discussion of these aspects of the allocation
methodology in the responses to comments at the end of this section.
The criteria that EPA has applied to determine whether a unit's
scheduled retirement is sufficiently certain to serve as a basis for
adjusting emission budgets and unit-level allocations are discussed in
section VII.B and in the Ozone Transport Policy Analysis Final Rule
TSD.
    EPA is applying the default methodology finalized in the CSAPR
Update for allocating emission allowances to existing units, updated to
use more recent historical data. This methodology allocates allowances
to each unit based on the unit's share of the state's heat input,
limited by the unit's maximum historical emissions. As discussed in the
CSAPR Update, see 81 FR 74563-65, EPA finds this allowance allocation
approach to be fuel-neutral, control-neutral, transparent, based on
reliable data, and similar to allocation methodologies previously used
in the CSAPR, the NOX SIP Call, and the Acid Rain
Program.\190\ EPA is therefore continuing the application of this
default methodology for allocating allowances to existing sources in
this final rule.
---------------------------------------------------------------------------

    \190\ See 40 CFR parts 72-78.
---------------------------------------------------------------------------

    This final rule uses the average of the three highest years of heat
input data out of the most recent five-year period that is considered
representative to establish the heat input baseline for each unit.\191\
These heat input data are used to calculate each unit's proportion of
state-level heat input (the average of the unit's three highest non-
zero years of heat input divided by the total of such averages for all
eligible units within the given state). In general, EPA applies this
proportion to the total amount of existing unit allowances to be
allocated to quantify unit-level allocations. However, EPA also
constrains each unit's allocation so as not to exceed the unit's
maximum historical baseline emissions, calculated as the highest year
of emissions out of the most recent eight-year period that is
considered representative.\192\ In other words, if the allocation that
a unit would receive from the emission budget for its state based
solely on consideration of the unit's share of the state-level heat
input exceeds that unit's maximum historical baseline emissions, the
unit's allocation is capped at its maximum historical baseline
emissions and the excess allowances are instead allocated to other
units in the state whose allocations do not exceed their respective
maximum historical baseline emissions, again in proportion to those
other units' shares of the state-level heat input. Like the proposed
rule, this final rulemaking uses 2015-2019 heat input data and 2012-
2019 emissions data for purposes of computing unit-level allocations.
Although EPA proposed to update the data used in this action to include
2016-2020 heat input data and 2013-2020 emission data, most comments
received on this topic opposed the use of 2020 data as potentially
unrepresentative because of changes in economic conditions related to
the COVID-19 pandemic. EPA is persuaded that in the unusual
circumstance of the pandemic, 2020 data have the potential to be less
representative for at least some units than data from earlier control
periods, and accordingly EPA is not updating the periods of the data
used in the allocation calculations for the final rule to include 2020
data.
---------------------------------------------------------------------------

    \191\ As described in the Unit Level Allowance Allocations TSD
and done in prior CSAPR actions, the allocation method uses a five-
year baseline in order to improve representation of a unit's normal
operating conditions. Using the three highest, non-zero ozone season
heat input values within the five-year baseline reduces the
likelihood that any particular single year's operations (which might
not be representative due to outages or other unusual events)
determine a unit's allocation.
    \192\ EPA's allocation methodology also considers whether unit-
level allocations should be limited because they would otherwise
exceed emission levels that are permissible under the terms of
consent decrees. However, in this instance EPA's analysis indicates
that consideration of consent decree limits does not alter the unit-
level allocations.
---------------------------------------------------------------------------

    Under the CSAPR Update, if, at the time the rule was finalized, a
state had already submitted a SIP revision addressing the allocation of
CSAPR NOX ozone season allowances among the units in the
state, and if the SIP submission's allocation provisions could be
applied to an updated budget, EPA applied the state's preferred
allocation methodology to determine the allocation of allowances among
that state's units under the final CSAPR Update. Two of the Group 3
states (Indiana and New York) have such methodologies for allocating
CSAPR NOX Ozone Season Group 2 allowances among their units.
As under the CSAPR Update, in this final rule EPA is carrying out the
intent of these SIPs by establishing initial allowance allocations to
existing units under the FIPs for these two states using the allocation
methodologies already adopted by the states. EPA received no comments
opposing this approach to establishing the default allocation
methodologies for these states. EPA

notes that, consistent with the approach taken for other states, when
applying these states' allocation methodologies, the set of units
deemed eligible to receive allocations for each control period as
existing units is updated to eliminate any units whose scheduled
retirements were considered sufficiently certain to be reflected in the
budget-setting process with respect to that control period.
    Comment: EPA received a comment suggesting modifications to the
proposed methodology for calculating allowance allocations in the event
that a unit has fewer than three years of operating history for use in
calculating allocations. The commenter suggests that EPA either revise
the allocation methodology for existing units so as to recompute
existing unit-level allocations for each ozone season through 2024 to
take account of additional years of heat input data for units in this
situation or else allow units in this situation to receive allocations
from new unit set-asides to the extent that their allocations as
existing units are less than their actual emissions.
    Response: EPA disagrees that the revisions to the allocation
approach suggested by the commenter are needed in order to effectuate a
reasonable allocation of allowances among all of the units in a given
state. The suggested revisions would require promulgating new
allocation methodologies for either all existing units or all new units
that would differ from the allocation methodologies used in all of the
existing CSAPR trading programs and that would change the allocation to
the commenter's unit by at most one allowance for the 2021 control
period. EPA notes that any state may submit SIP revisions to replace
EPA's default allocations with state-determined allocations if the
state would prefer that allowances be allocated differently among the
state's units.
    Comment: Commenters expressed diverse views on questions concerning
allocations of allowances to units with unscheduled future retirements,
ranging from recommendations that EPA end such allocations immediately
upon a unit's retirement to recommendations that EPA continue
allocations to retired units indefinitely.
    Response: With respect to units with unscheduled future
retirements, EPA proposed to provide allocations of allowances
according to the methodology used in the existing CSAPR trading
programs. Under this methodology, when a unit ceases operation for two
consecutive control periods, it continues to receive allocations for
five control periods starting with the first control period of non-
operation. After the fifth control period, allowances that would
otherwise have been allocated to the unit for future control periods
are instead directed to the state's new unit set-aside for each control
period, and if the unit happens to resume operation in a future control
period, it is eligible to receive allocations only as a ``new'' unit
from the new unit set-aside for that control period. The rationale for
continuing to make allocations to sources that have ceased operations
for five control periods, rather than ending allocations immediately or
extending the allocations indefinitely, is to balance two concerns. The
first concern, which tends to suggest reallocating allowances more
quickly, is to ensure that allowances are available for new units as
the generating fleet evolves. The second concern, which tends to
suggest reallocating allowances less quickly, is to ensure that the
program's allowance allocation provisions do not distort a unit owner's
incentives to pursue what would otherwise be the most economic
compliance strategy. Such distortion could occur if a predicted
immediate loss of allowance allocations upon closure would give the
owner of an otherwise uneconomic unit an incentive to keep the unit in
operation just to receive allowance allocations.
    None of the comments recommending a change to the approach for
allocating allowances to units with unscheduled future retirements
advocate allocating the allowances to other units instead. Rather, all
of these comments appear to either explicitly or implicitly incorporate
an assumption that the recommended change in allocations to the units
with unscheduled future retirements would be accompanied by a
corresponding change in the total number of allowances made available
collectively to all units in the state under the Group 3 trading
program. In other words, the comments recommending earlier
discontinuation of allocations to retired units are actually advocating
for reduced emission budgets implemented through the mechanism of
reduced allocations to retired units, while the comments recommending
more extended allocations to retired units are actually advocating for
increased emission budgets implemented through the mechanism of
increased allocations to retired units. EPA was unable to identify any
comments advocating for changes in the methodology establishing the
allocations to units with unscheduled retirements that were not
effectively comments advocating for changes in the amounts of the
emission budgets, which EPA considers a different issue. Comments on
the amounts of the emission budgets are addressed elsewhere.
    Comment: EPA received several comments regarding the question of
when to treat a unit with an unscheduled future retirement as retired
for purposes of triggering the count of the five control periods for
which the unit would continue to receive allocations. One comment
suggested that EPA begin counting the five control periods following
the unit's announced retirement date rather than when the unit has
ceased operating for two consecutive control periods. Other comments
suggested that EPA evaluate non-operation on the basis of full calendar
years rather than on the basis of control periods (i.e., the ozone
season portions of calendar years).
    Response: EPA disagrees with these comments. With respect to the
suggestion to wait for a retirement announcement even if a unit has
ceased operation for two control periods, EPA sees no reason to also
wait for a retirement announcement before taking observed information
about a unit's actual non-operation into account for purposes of
determining allowance allocations. With respect to the suggestion that
EPA evaluate non-operation over full calendar years instead of control
periods, EPA has followed the approach of considering a unit's non-
operation during the relevant control period for each trading program--
in other words, the calendar year for annual programs and the ozone
season for seasonal NOX programs--in all of the existing
CSAPR trading programs since 2015 without encountering any problems.
Commenters have not identified any new issues with the existing
procedures that would justify establishing different procedures for the
new Group 3 trading program. The example cited by commenters where a
unit might operate during the non-ozone season portion but not the
ozone season portion of two consecutive calendar years is neither a new
issue nor a significant problem. If such a unit loses its allocation as
an existing unit but then operates in a subsequent ozone season, under
the Group 3 trading program (as under the other seasonal NOX
trading programs) the unit becomes eligible to receive allocations from
the new unit set-aside.
    Comment: EPA received several comments concerning units that have
already retired. Some commenters recommended that these units should
receive allocations under the Group 3 trading program at least until
the units

had received allocations for a total of five years of operation under
the current Group 2 trading program and the new Group 3 trading
program, generally citing the rationale described above for why EPA
continues to provide allocations for a limited amount of time in the
case of units with unscheduled future retirements.
    Response: EPA disagrees with these comments. With respect to units
that permanently retired before January 1, 2021, EPA will not provide
allocations of Group 3 allowances. As noted above, the reason that the
existing CSAPR trading programs have provided allowances to units for a
period of time following their retirement is to avoid a distortion that
immediate discontinuation of allocations otherwise could cause to the
owner's incentives in making decisions about the unit's future. Where a
unit's owners have already retired a unit, this reason for continuing
allowance allocations for some period after retirement no longer
applies. Thus, including a provision in the new Group 3 trading program
that would allocate allowances to past retirements would simply
redistribute allowances from operating units to retired units for no
useful purpose. EPA again notes that any state may submit SIP revisions
to replace EPA's default allocations with state-determined allocations
if the state would prefer that allowances be allocated differently
among the state's units.
    Comment: Another commenter on units that have already retired
recommended not only that the units continue to receive allocations for
a combined five-year period under the Group 2 and Group 3 trading
programs but also that after the end of the five-year period EPA should
add an equivalent quantity of allowances to the states' new unit set-
asides to ensure that sufficient allowances are available for new
units.
    Response: EPA disagrees with this additional recommendation. As
discussed above with respect to the comments received on the
methodology for allocating allowances to units with unscheduled future
retirements, the recommendation to add allowances to the new unit set-
asides is effectively a comment on the amounts of the emission budgets
rather than on the allocation methodology, and comments on the amounts
of the emission budgets are addressed elsewhere. EPA notes that the
process for setting the emission budgets already includes a procedure
to ensure that the emission budgets account for estimated emissions
from planned new units.
    Comment: With respect to units with scheduled future retirements,
in the proposed rule EPA proposed to treat the units identically to
units with unscheduled future retirements, allocating allowances to
these units for five years starting with their first year of non-
operation. Commenters observed that EPA was proposing to account for
units with scheduled future retirements by reducing emission budgets in
the control periods immediately following the retirements and suggested
that it would be inconsistent for EPA to treat these units differently
for purposes of the budget-setting process and the unit-level
allocation process. The commenters implied that allowance markets might
not be sufficiently liquid to facilitate the transfer of allowances
from retired units to units that continue to operate, and suggested
that the reductions in allocations to the operating units caused by the
reductions in the overall emission budgets would constitute an increase
in program stringency for the operating units.
    Response: EPA disagrees with commenters' implicit assumption that
allowance markets will be illiquid and with the suggestion that changes
in how allowances are allocated among operating and retired units, as
opposed to changes in state emission budgets, represent changes in
overall program stringency. However, EPA agrees that it is reasonable
to treat the units with scheduled future retirements more consistently
across the budget-setting and unit-level allocation processes.
Accordingly, in the final action, EPA is accounting for units with
scheduled future retirements not only by reducing emission budgets in
the control periods immediately following the retirements but also by
ending allocations to those retired units in the control periods
immediately following the retirements. Just as units that have already
retired before 2021 are not included in the set of existing units to
which allowances are allocated for 2021 under EPA's default
methodology, in the final rule units with scheduled retirements before
2022, 2023, and 2024 are not included in the sets of existing units to
which allowances are allocated for 2022, 2023, and 2024, respectively.
As with EPA's rationale for not allocating allowances to units that
have already retired, allocating allowances to a unit for control
periods after the control period in which the unit is already scheduled
to retire serves no useful purpose, because in such circumstances there
is no potential distortion of economic incentives that needs to be
considered. The effect of this change in the final rule is to ensure
that allocations to a state's units that continue to operate do not
change from control period to control period based solely on the
retirements of other units in the state, where those retirements are
known and already factored into the budgets. EPA notes that in the
unlikely event that one of these retiring units operates in a control
period after the control period in which it was scheduled to retire, it
would be eligible to receive an allocation of allowances as a ``new''
unit from the state's new unit set-aside for the control period.
    Finally, EPA notes that because this change addresses scheduled
future retirements occurring in 2021, 2022, and 2023 that are first
reflected in the state emission budgets for the 2022, 2023, and 2024
control periods, respectively, the change first affects unit-level
allocations as of the 2022 control period. Under this final rule, every
Group 3 state has the ability to establish state-determined unit-level
allocations to replace EPA's default unit-level allocations through SIP
revisions for any control period after 2021. Thus, any state that that
would prefer to allocate allowances for control periods after 2021 to
units with scheduled future retirements has the ability to do so
through SIP revisions.
c. Allocations to New Units
    Consistent with the updates to which units are considered to be
``existing units'' described in section VII.C.3.b, for purposes of this
final rule a ``new unit'' that is eligible to receive allocations from
the new unit set-aside (NUSA) for a state includes any covered unit
that commences commercial operation on or after January 1, 2019, as
well as a unit that becomes covered by meeting applicability criteria
subsequent to January 1, 2019; a unit that relocates to a different
state covered by a FIP promulgated by this rule; and an ``existing''
covered unit that loses its allocation as an existing unit due to a
scheduled retirement or by otherwise ceasing operation but that resumes
operation at some point thereafter. The amounts of allowances initially
placed in each new unit set-aside for potential allocation to new units
are determined as described in section VII.C.3.a. In addition, any
allowances that would otherwise have been allocated to a unit with an
unscheduled future retirement that is no longer eligible to receive
allocations as an existing unit are redirected to the new unit set-
aside for the state in which the unit is located. Units qualifying to
receive allocations from a new unit set-aside may receive such
allocations starting with the first

year they are subject to the allowance-holding requirements of the
rule. If the allowances in the NUSA for a given state are not allocated
to new units, the allowances are redistributed to the existing units in
the state before each compliance deadline.
    In the final rule, under the new Group 3 trading program EPA will
allocate allowances from each new unit set-aside using a one-round
approach that will be carried out after the end of the control period
at issue. Under the one-round approach, any eligible units in the state
that operated during the control period will be allocated allowances in
proportion to their respective emissions during the control period, up
to the amounts of those emissions if the NUSA contains sufficient
allowances, and not exceeding those emissions. Any allowances remaining
in a new unit set-aside after the allocations to new units will be
reallocated to the existing units in the state. EPA will issue a notice
of data availability concerning the proposed allocations by March 1
following the control period, provide an opportunity for submission of
objections, and issue a final notice of data availability and record
the allocations by May 1 following the control period, one month before
the June 1 compliance deadline. EPA believes this one-round approach
for allocating allowances from each state's NUSA to eligible units is
both simpler and more equitable that the two-round approach that EPA
historically used in all the previous CSAPR trading programs. The
existing CSAPR trading programs are being amended to also adopt the
one-round approach starting with the 2021 control periods. The
differences between the two-round and one-round procedures and reasons
for adopting the revisions are discussed in section VII.C.8.b.\193\
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    \193\ EPA proposed and requested comment on implementing the
simplified NUSA allocation procedure as of the 2023 and 2021 control
periods, respectively. No comments were received, and EPA is
clarifying the regulations by implementing the simplified procedure
as of the 2021 control period. For further discussion, see section
VII.C.8.b.
---------------------------------------------------------------------------

    Comment: EPA received comments concerning allocation of the
portions of new unit set-asides composed of allowances redirected to
the new unit set-asides from existing units that have retired and lost
their allocations. Some commenters suggested that while EPA should make
these allowances available to new units, EPA should not reallocate
these allowances to existing units after the completion of allocations
to eligible new units, or should reallocate allowances only where the
existing units demonstrated emission rates at or below the levels EPA
used in setting the state budgets. Other commenters supported the
proposed approach of reallocating the allowances to existing units, as
provided under the existing CSAPR trading programs.
    Response: After consideration of the comments, EPA is finalizing
the provisions that allow all allowances in the new unit set-asides,
including allowances redirected from retired units, to be reallocated
to existing units. As with many of the comments received concerning
allocations to existing units, these comments are effectively
advocating for reductions in the overall emission budgets through the
mechanism of reduced allocations to certain units. In the final rule,
this issue applies only the allowances no longer allocated to units
with unscheduled future retirements, because the allowances formerly
allocated to units with scheduled future retirements will be removed
from the budgets for control periods after the scheduled retirements
instead of being added to the new unit set-asides for the future
control periods. EPA has not included a mechanism in this rule to
adjust the emission budgets over time to account for either units with
unscheduled future retirements or the construction of unplanned new
units and is not prepared at this time to reduce the budgets for units
with unscheduled future retirements without consideration of whether
and how to increase the budgets for the construction of unplanned new
units. Although EPA has determined that it is reasonable in this rule
to reduce the emission budgets over time to account for units with
scheduled future retirements, this is in part because EPA's budget-
setting process also accounts for the construction of planned new units
over time.
d. Allocations to New Units in Indian Country
    Clean Air Act programs in Indian reservations and other areas of
Indian country over which a tribe or EPA has demonstrated that a tribe
has jurisdiction generally may be implemented either by a tribe through
an EPA-approved tribal implementation plan (TIP) or by EPA through a
FIP. Tribes may, but are not required to, submit TIPs. Under EPA's
Tribal Authority Rule (TAR), 40 CFR 49.1-49.11, EPA is authorized to
promulgate FIPs for sources in Indian country as necessary or
appropriate to protect air quality if a tribe does not submit and
receive EPA approval of a TIP. See 40 CFR 49.11(a); see also 42 U.S.C.
7601(d)(4). To date, no tribes have sought approval of a TIP
implementing the good neighbor provision at CAA section
110(a)(2)(D)(i)(I) with respect to the 2008 ozone NAAQS. EPA has
therefore determined that it is necessary and appropriate for EPA to
implement the FIPs in any affected Indian reservations or other areas
of Indian country over which a tribe has jurisdiction. However, there
are no existing units that would qualify as ``covered units'' in Indian
country located in the Group 3 states under this final rule.
    EPA is generally applying the CSAPR Update approach for allocating
allowances to any new units located in Indian country, with parallel
modifications to those described above with respect to unit-level
allocations from the new unit set-asides for units not in Indian
country. Under this approach, allowances to possible future new units
located in Indian Country will be allocated by EPA from an Indian
country new unit set-aside established for the Indian country (if any)
within each state's borders. The amounts of allowances initially placed
in each Indian country new unit set-aside for potential allocation to
new units are determined as described in section VII.C.3.a. Because
states generally have no SIP authority in these areas, EPA will
continue to administer the allocation of allowances to any sources that
locate in such areas of Indian country within a state's borders over
which a tribe or EPA has demonstrated that a tribe has jurisdiction,
even if the state submits a SIP to replace the applicable FIP for the
sources in the state.
    EPA will allocate allowances from each Indian country new unit set-
aside using a one-round approach that will be carried out after the end
of the control period at issue. Under the one-round approach, any
eligible units in the area of Indian country that operated during the
control period will be allocated allowances in proportion to their
respective emissions during the control period, up to the amounts of
those emissions if the Indian country NUSA contains sufficient
allowances, and not exceeding those emissions. Unallocated allowances
from the Indian country new unit set-aside for Indian country within a
particular state's borders will be returned to the state's new unit
set-aside and allocated according to the methodology for that new unit
set-aside. EPA believes this one-round approach for allocating
allowances from each Indian country NUSA to eligible units is both
simpler and more equitable than the two-round approach that EPA
historically used in all the previous CSAPR trading programs. The
existing CSAPR trading programs are being

amended to also adopt the one-round approach starting with the 2021
control periods. The differences between the two-round and one-round
procedures and reasons for adopting the revisions are discussed in
section VII.C.8.b.\194\
---------------------------------------------------------------------------

    \194\ EPA proposed and requested comment on implementing the
simplified NUSA allocation procedure as of the 2023 and 2021 control
periods, respectively. No comments were received, and EPA is
clarifying the regulations by implementing the simplified procedure
as of the 2021 control period. For further discussion, see section
VII.C.8.b.
---------------------------------------------------------------------------

    Comment: Some commenters suggested alternatives to the provisions
concerning the Indian country new unit set-asides. These commenters
suggested that EPA should consolidate all allowances held back from all
state budgets for potential new sources in Indian country into a single
newly-created new unit set-aside for all Indian country within the
borders of all states covered by the new Group 3 trading program in
order to provide a clearer separation between state and tribal
jurisdictions. The commenters further suggested that if any allowances
in the consolidated Indian country set-aside are not allocated to new
units, the allowances either should be retired or should be sold, with
the sale proceeds dedicated to tribes through grant programs.
    Response: EPA disagrees with these comments. There are no existing
EGUs in Indian country within the borders of any state covered by the
Group 3 trading program. All of the allowances being held back for
potential allocation to new units in Indian country are being held back
from state emission budgets. These budgets were determined based on the
projected emissions of the existing units in the states after
accounting for emission reductions achievable through implementation of
the selected control strategy (with adjustments for known changes to
the fleet of units such as scheduled future retirements of existing
units and construction of planned new units). Because the allowances
added to the Indian country new unit set-asides are being held back
from the overall state budget amounts that would otherwise be allocated
among each state's existing units, EPA believes the most reasonable
disposition for these allowances if they are not allocated to potential
new units in Indian country is to return them to the states from whose
emission budgets the allowances were held back, after which the
allowances can be redistributed in accordance with the procedures used
to allocate the remainder of those states' budgets.
    With respect to maintaining separation between state and tribal
jurisdictions, EPA believes that the regulations for the new Group 3
trading program already maintain a clear separation between the new
unit set-asides for each state and the Indian country new unit set-
asides for Indian country within the borders of certain states, with
the consequence that no greater clarity of separation would be achieved
by consolidating the various Indian country new unit set-asides
established under the new trading program into a single new unit set-
aside for all Indian country within the borders of all states covered
by the Group 3 trading program. Further, EPA believes such an approach
would be likely to cause confusion because it would differ from the
established approach already being implemented in all the existing
CSAPR trading programs, where a separate Indian country new unit set-
aside is established for any Indian country within the borders of any
individual state covered by the trading program.
4. Transitioning From Existing CSAPR NOX Ozone Season Group
2 Trading Program
    This section discusses four sets of provisions that EPA is
implementing in order to address the transition of sources from the
Group 2 trading program to the Group 3 trading program. First, to
address the fact that the effective date for the final action in this
rulemaking will fall after the start of the ozone season on May 1,
2021, and to ensure that under these circumstances the Group 3 trading
program can be implemented for the full May-September ozone season in
2021 without imposing retroactive emission reduction requirements, EPA
will allocate additional allowances, and make corresponding adjustments
to states' 2021 assurance levels, so as to offset the otherwise
applicable emission reduction requirements under this rulemaking for
the portion of the 2021 ozone season occurring before the final rule's
effective date. Second, in order to facilitate the continued use of
market-based trading programs as the compliance mechanism for sources
covered by this action while ensuring an appropriate level of
stringency in the Group 3 trading program, EPA is implementing a
process by which an initial bank of CSAPR NOX Ozone Season
Group 3 allowances will be created through the conversion of certain
banked CSAPR NOX Ozone Season Group 2 allowances allocated
for the control periods in 2017 through 2020. Third, to provide
additional compliance flexibility in extreme circumstances, EPA is
creating a safety valve mechanism that would allow Group 3 sources to
exchange additional 2017-2020 Group 2 allowances for Group 3 allowances
at a higher conversion ratio. Finally, to maintain the previously
established levels of stringency of the Group 2 trading program for the
states and sources that remain subject to that program, CSAPR
NOX Ozone Season Group 2 allowances equivalent in amount and
usability to the vintage year 2021-2024 CSAPR NOX Ozone
Season Group 2 allowances previously recorded in the compliance
accounts for sources in the new Group 3 region are being recalled.
a. Supplemental Allowance Allocations To Avoid Retroactive Emission
Reduction Requirements
    Although EPA anticipates that this final rule will be published in
the Federal Register by early April 2021, before the start of the 2021
ozone season on May 1, 2021, the effective date of the rule will fall
after May 1, 2021 because of the requirements of the Congressional
Review Act (CRA), 5 U.S.C. 801-808. Under CRA section 801(a)(3), a
``major rule,'' as defined under the CRA, generally may not take effect
sooner than 60 days after the date of publication in the Federal
Register (or, if later, 60 days after the date on which Congress
receives a report on the final rule from EPA). Under CRA section
804(2), a ``major rule'' includes any rule that the Office of
Management and Budget (OMB) finds is ``economically significant'' under
Executive Order 12866, that is, a rule likely to result in an annual
effect on the economy of $100 million or more. Because this rule is
projected to result in annualized benefits greater than $100 million
per year, as discussed in section VIII of the preamble, OMB has found
that the rule is ``economically significant.'' It is thus a ``major
rule'' for CRA purposes, with the result that the rule's effective date
will occur after the start of the 2021 ozone season.
    EPA finds that, notwithstanding that the final rule's effective
date will be after May 1, 2021, it will nevertheless serve the public
interest and greatly aid in administrative efficiency for most elements
of the Group 3 trading program--specifically, all elements of the
trading program other than the elements designed to establish more
stringent emissions limitations for the sources in Group 3 states--to
start on May 1, 2021. This will facilitate implementation of the Group
3 trading program in an orderly manner for the entire 2021 ozone season
and reduce compliance burdens and potential confusion. Each of the
CSAPR trading programs for ozone season NOX is

designed to be implemented over an entire ozone season. Implementing
the transition from the Group 2 trading program to the Group 3 trading
program in a manner that required the covered sources to participate in
the Group 2 trading program for part of the 2021 ozone season and the
Group 3 trading program for the remainder of that ozone season would be
complex and burdensome for sources. Attempting to address the issue by
splitting the Group 2 and Group 3 requirements into separate years is
not a viable approach, because EPA has no legal basis for releasing the
Group 3 sources from the emission reduction requirements found to be
necessary in the CSAPR Update for a portion of the 2021 ozone season,
and EPA similarly has no legal basis for deferring implementation of
the 2021 emission reduction requirements found to be necessary under
this rule until 2022. Moreover, the requirements of the Group 2 trading
program and the Group 3 trading program are substantively identical as
to almost all provisions, such that with respect to those provisions, a
source will not need to alter its operations in any manner or face
different compliance obligations as a consequence of a transition from
the Group 2 trading program to the Group 3 trading program. Thus, EPA
believes that no substantive concerns regarding retroactivity arise
from implementing the Group 3 trading program starting on May 1, 2021,
so long as those aspects of the Group 3 trading program that do
meaningfully differ from the analogous aspects of the Group 2 trading
program--that is, the relative stringencies of the two trading
programs, as reflected in the emissions budgets and associated
assurance levels--are applied only as of the effective date of the
final rule.
    Thus, with respect to two aspects of the final rule, EPA is making
the following adjustments in 2021 ozone season obligations in order to
ensure that no new requirements are imposed on any regulated parties
prior to the effective date of the final rule.
    To cause the more stringent budgets of the Group 3 trading program
to apply only after the effective date of the final rule, EPA will make
supplemental allocations of Group 3 allowances to Group 3 sources for
the portion of the 2021 ozone season occurring before the effective
date of the final rule. The total amounts of the supplemental
allowances available for allocation to the sources in each state will
be calculated by multiplying the difference between the state's Group 2
and Group 3 budgets by the fraction of the 2021 ozone season, measured
in days, occurring before the final rule's effective date. The state's
total amount of supplemental allowances will then be allocated among
the state's existing units as if the supplemental allowances had been
included in the state's 2021 emissions budget for the Group 3 trading
program. The allocations of supplemental allowances will be recorded at
the same time as the allocations from the budget.
    To cause the more stringent assurance levels of the Group 3 trading
program to apply only after the effective date of the final rule, EPA
will include an increment in each state's assurance level for 2021 in
addition to the state's emissions budget and variability limit for
2021. The amount of the increment will be computed as 1.21 times the
total amount of supplemental allowances determined for the state as
described above, where 1.21 is the ratio of the Group 2 state assurance
levels to the Group 2 state budgets and is also the ratio of the Group
3 state assurance levels to the Group 3 state budgets. In the event of
an exceedance of a state's assurance level, the allocations of
supplemental allowances and the increment to the state's variability
limit will also be taken into account for purposes of the calculations
used to apportion responsibility for any exceedance of a state's
assurance level among the owners and operators of the state's sources.
    In all respects other than the allocation of supplemental Group 3
allowances and the addition of an increment to the states' assurance
levels, EPA is implementing the Group 3 trading program for the 2021
control period exactly as the program would be implemented for any
other control period. Thus, allocations of Group 3 allowances from each
state's emissions budget to existing and new units are being made for
the entire 2021 ozone season (i.e., May 1, 2021, through September 30,
2021), emissions will be monitored and reported for the entire 2021
ozone season, and as of the allowance transfer deadline for the 2021
control period (i.e., June 1, 2022) each source will be required to
hold in its compliance account vintage-year 2021 Group 3 allowances not
less than the source's emissions of NOX during the entire
2021 ozone season. Because of the supplemental allowances allocated for
the portion of the 2021 ozone season before the rule's effective date,
EPA finds that implementing the program in this manner will
substantively apply the final rule's emission reduction requirements
only from the rule's effective date. Similarly, because of the
increment to the states' assurance levels for 2021, EPA finds that
implementing the trading program in this manner will substantively
apply the final rule's more stringent assurance levels only from the
rule's effective date. Moreover, any efforts undertaken by a source to
reduce its emissions during the portion of the 2021 ozone season before
the effective date of the rule will aid the source's compliance by
reducing the amount of Group 3 allowances that the source will need to
hold in its compliance account as of the allowance transfer deadline,
increasing the range of options available to the source for meeting its
compliance obligations under the Group 3 trading program.
    EPA requested comment on this approach for implementing the Group 3
trading program in a manner that would apply the substantive increases
in stringency established under the final rule on and after, but not
before, the final rule's effective date. No commenters opposed this
approach.
b. Creation of Initial Group 3 Allowance Bank
    For this rulemaking, EPA is creating a limited initial bank of
allowances that can be used for compliance in the CSAPR NOX
Ozone Season Group 3 Trading Program by converting certain allowances
banked in 2017-2020 under the CSAPR NOX Ozone Season Group 2
Trading Program at a conversion ratio determined by a formula. Any such
conversion of banked allowances from the Group 2 trading program for
use in the Group 3 trading program must ensure that implementation of
the Group 3 trading program will result in NOX emission
reductions sufficient to address significant contribution in the 12
linked Group 3 states, while also providing industry certainty (and
obtaining an environmental benefit) through continued recognition of
the value of saving allowances through early reductions in emissions.
EPA's approach to balancing these concerns in the CSAPR Update through
the conversion of banked allowances from the CSAPR trading program for
ozone season NOX emissions was upheld in Wisconsin v. EPA,
see 938 F.3d at 321.
    Similar to the approach taken in the CSAPR update, EPA is creating
the initial bank of allowances for the Group 3 trading program through
a one-time conversion of banked Group 2 allowances. The allowances in
the initial Group 3 bank will be allocated for the 2021 control period
and will therefore be useable in that control period or any subsequent
control period. Because the purpose of an initial bank is to assist in
compliance flexibility without relaxing the program

stringency identified as appropriate to address states' obligations
under the good neighbor provision, EPA's objective is to set the target
amount for the initial bank at a level high enough to accommodate year-
to-year variability in operations and emissions, as reflected in
states' variability limits, but not high enough to allow sources
collectively to plan to emit in excess of the collective state budgets.
For this rulemaking, as proposed, EPA is determining that an initial
bank amount approximately equal to the sum of the states' variability
limits is a reasonable level to accomplish this objective, given the
expectation that sources would generally seek to carry a bank of
roughly that amount forward from year to year in order to retain a
comparable degree of compliance flexibility in subsequent control
periods.\195\ Further, because emission reductions from some of the
emission controls that EPA has identified as appropriate to use in
setting budgets are first reflected in the 2022 state budgets rather
than the 2021 state budgets, EPA is basing the initial bank target
amount on the sum of the states' 2022 variability limits rather than
the 2021 variability limits. This approach results in an initial bank
target amount of 21,777 allowances, computed on the basis of a full
ozone season.
---------------------------------------------------------------------------

    \195\ When establishing a similar initial bank under the CSAPR
Update, EPA set the target bank amount at 1.5 times the sum of the
states' variability limits. See 81 FR at 74557-60. Experience under
that trading program indicates that a smaller initial bank would
have provided sufficient flexibility, as the bank grew in each
control period of the trading program and the prices of allowances
remained well below the estimated control costs EPA used to
establish the budgets under that rule. Additionally, allowance
prices under that trading program were $500-$600 per allowance when
initially recorded (roughly one-third of the $1,600/ton cost
threshold used in developing the Group 2 budgets), indicating that
the initial bank created by the conversion may have been too large
to ensure incentives for continuing implementation of the control
strategies contemplated under that rulemaking.
---------------------------------------------------------------------------

    As discussed in section VII.C.4.a, the effective date of this rule
will occur after the start of the 2021 ozone season, and adjustments
are being made to ensure that the increased stringency of this rule's
state budgets and state assurance levels (i.e., the sums of the budgets
and variability limits) takes effect only after the rule's effective
date. Consistent with these other adjustments, and as proposed, the
initial bank target amount will be similarly prorated. For example, if
the effective date of the final rule is June 1, 2021, which would be
after the first 31 days of the 153-day ozone season have passed, the
full-season initial bank target amount of 21,777 allowances would be
prorated to an initial bank target amount of 17,365 allowances.\196\
EPA notes that prorating the bank amount in this manner will not reduce
sources' compliance flexibility for the 2021 ozone season, because the
amounts of Group 3 allowances that sources will receive for the portion
of the 2021 ozone season before the rule's effective date will be based
on the existing Group 2 trading program budgets. The Group 2 budgets
exceed the sources' collective 2019 emissions by over 38,000 tons (and
exceed the sources' 2020 emissions by almost 60,000 tons), indicating
potentially surplus allowances well above the full-season initial bank
target amount of 21,777 allowances. Thus, although the prorating
procedure will reduce the amount of Group 3 allowances that sources
will receive in the form of an initial bank, the reduction in the
quantity of these allowances will be more than offset by the
supplemental Group 3 allowances that will be allocated in excess of
sources' recent historical emission levels for the portion of the ozone
season before this final rule's effective date.
---------------------------------------------------------------------------

    \196\ The portion of the ozone season from June 1 through
September 30 has 122 days (153-31 = 122), which is 79.74 percent of
all the days in the ozone season (122 / 153 = 0.7974). Multiplying
the full-season initial bank target amount of 21,777 allowances by
79.74 percent yields a prorated target amount for the initial bank
of 17,365 allowances.
---------------------------------------------------------------------------

    Taking the same approach as was followed in the CSAPR Update, EPA
will allocate the new Group 3 allowances constituting the initial bank
through a conversion process in which Group 2 allowances allocated for
the 2017 through 2020 control periods and banked under the existing
Group 2 trading program will be exchanged for Group 3 allowances
allocated for the 2021 control period at a uniform conversion ratio
determined by a formula. The conversions will be carried out at the
level of individual sources and general accounts, in each case using
the same uniform conversion ratio. By creating the new Group 3
allowances through the conversion of previously banked Group 2
allowances, the bank creation mechanism rewards holders of banked Group
2 allowances for conducting emission reduction activities that
contributed to the creation of those banked allowances as well as for
financially supporting emission reductions activities at other sources
through allowance purchases. Creating the new Group 3 allowances
through conversion of previously banked Group 2 allowances also helps
preserve the stringency of the Group 2 trading program for the states
that remain covered by that trading program at levels consistent with
the stringency found to be appropriate to address those states' good
neighbor obligations with respect to the 2008 ozone NAAQS in the CSAPR
Update.
    Under EPA's proposed approach for creation of the bank, the
conversion formula would have used the total quantity of 2017-2020
Group 2 allowances being converted as the numerator and the total
quantity of 2021 Group 3 allowances being created as the denominator.
EPA also proposed to give holders of 2017-2020 Group 2 allowances
complete flexibility to choose how many of those allowances they wanted
to include in the conversion process, making the formula numerator
entirely dependent on those choices. An unavoidable consequence of this
proposed flexibility was that EPA would have been unable to predict the
conversion ratio until holders finalized their choices shortly before
the conversion date. In the proposed rule, the formula denominator was
also uncertain to a lesser degree because of the then-unknown magnitude
of the prorating adjustment affecting the quantity of 2021 Group 3
allowances being created, although this uncertainty will be resolved as
of publication of the final rule in the Federal Register. Commenters
requested that EPA provide greater certainty concerning the conversion
process, as discussed later in this section; further, commenters
submitted no comments asking EPA to finalize the proposed flexibility
for Group 2 allowance holders.
    After consideration of comments, EPA is not finalizing the proposed
flexibility for Group 2 allowance holders to decide how many Group 2
allowances to include in the conversion process and is instead
finalizing a formula for the conversion ratio based on an alternative
offered for comment that provides greater certainty. Under the
alternative being finalized, the formula numerator is the portion of
the total existing bank of 2017-2020 Group 2 allowances attributable to
the Group 3 states, which is more specifically defined as: (1) The sum
of the budgets of the Group 3 states under the Group 2 trading program
for the 2017-2020 control periods, plus (2) the portion of the initial
Group 2 bank target amount attributable to the Group 3 states, minus
(3) the emissions of sources in the Group 3 states for the 2017-2020
control periods.\197\ The formula denominator in the final rule
continues to be based on the initial

Group 3 bank target amount, but reflects the full-season target amount
instead of the target amount after the prorating adjustment. The final
rule also provides for the value computed from the formula to be
rounded down to the nearest whole number. Using data as of January
2021, the formula numerator will be 186,014 allowances \198\ and the
formula denominator will be 21,777 allowances, yielding a rounded
conversion ratio of 8:1. In other words, the result of applying the
formula in the final rule is that eight 2017-2020 Group 2 allowances
will be exchanged for each 2021 Group 3 allowance created in the
initial bank.\199\ Continuing the previous example, if the rule's
effective date is June 1, 2021 and the initial Group 3 bank target
amount after prorating is therefore 17,365 allowances, then 138,920
Group 2 allowances \200\ would be removed from the accounts where those
allowances are held and 17,365 Group 3 allowances would be recorded in
the same accounts.
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    \197\ As stated in the proposed rule, the rationale for defining
the formula numerator in this particular way is to preserve the
intended stringency of the Group 2 trading program for the states
and sources that will continue to participate in that program. See
85 FR at 69018.
    \198\ Under the Group 2 trading program, the sum of the 2017-
2020 state budgets for the 12 Group 3 states is 680,872 tons (the
sum of the budgets for the Group 3 states for 2017 is 170,218, and
170,218 x 4 = 680,872). The portion of the initial Group 2 bank
target amount attributable to the Group 3 states is 53,619 tons (the
sum of the variability limits for the Group 3 states for 2017 is
35,746, and 35,746 x 1.5 = 53,619). The sum of the Group 3 states'
reported ozone season NOX emissions for 2017 through 2020
is approximately 548,477 tons. Based on these data, the formula
numerator would be 680,782 + 53,619-548,477 = 186,014 allowances.
    \199\ 186,014 / 21,777 = 8.54, which rounds down to 8.
    \200\ 17,365 x 8 = 138,920. EPA notes that under this example,
the deducted Group 2 allowances would constitute roughly half of all
banked 2017-2020 Group 2 allowances projected to remain in all
accounts (including the compliance accounts for sources that will
continue to be covered under the Group 2 trading program in control
periods after 2020) after deductions for compliance with the Group 2
trading program for the 2020 control period.
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    In addition to requesting greater certainty about the conversion
process, commenters also indicated an interest in receiving the
allowances in the initial Group 3 bank more quickly than would have
occurred under the proposed rule. In response to these comments, EPA
has advanced the conversion process schedule such that the conversions
will be completed more than two months earlier than proposed and
shortly after recordation of Group 3 allowance allocations from the
state budgets for the 2021 control period for most sources.
Approximately 45 days after the rule's effective date, EPA will
temporarily suspend acceptance of transfers of Group 2 allowances.
Before resuming acceptance of such transfers, EPA will allocate Group 3
allowances up to the initial Group 3 bank target amount to Group 3
sources at the 8:1 conversion ratio in proportion to the amounts of
2017-2020 Group 2 allowances held in each such source's compliance
account immediately before the conversion.\201\ If the Group 3 sources'
compliance accounts do not collectively hold enough Group 2 allowances
to exchange for the full target amount of the initial Group 3 bank at
the 8:1 conversion ratio, EPA will allocate Group 3 allowances up to
the remainder of the initial Group 3 bank target amount to general
accounts at the same 8:1 conversion ratio in proportion to each such
general account's holdings of 2017-2020 Group 2 allowances immediately
before the conversion.\202\ For each Group 3 allowance allocated ard
recorded in a given account, EPA will deduct from the same account
eight 2017-2020 Group 2 allowances on a first-in, first-out basis.
After recording the Group 3 allowance allocations and the 2017-2020
Group 2 allowance deductions, EPA will resume acceptance of transfers
of Group 2 allowances.
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    \201\ Group 2 allowances held in Group 2 sources' compliance
accounts will not be affected by the conversion process.
    \202\ If the Group 3 sources' compliance accounts and the
general accounts combined do not collectively hold enough Group 2
allowances to exchange for the full target amount of the initial
Group 3 bank at the 8:1 conversion ratio, the total quantity of
Group 3 allowances created would be less than the initial Group 3
bank target amount. However, the outcome would be reasonable because
it would occur only if owners of Group 3 sources in fact were not
sufficiently interested in receiving banked Group 3 allowances to
hold the required quantity of 2017-2020 Group 2 allowances in the
appropriate accounts.
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    Comment: Some commenters stated that EPA should not create an
initial bank of Group 3 allowances because of a consequent reduction in
stringency of the rule.
    Response: EPA disagrees with the comment that it should not create
an initial bank of Group 3 allowances under the new trading program.
EPA believes creating an initial bank of Group 3 allowances will
provide Group 3 sources flexibility to comply with the stringency of
the new trading program in light of year-to-year variability in unit
operations and emissions. Creating the initial bank of Group 3
allowances through the conversion of banked 2017-2020 Group 2
allowances also provides sources within the Group 3 states with an
opportunity to benefit under the Group 3 trading program from their
efforts to bank allowances under the Group 2 trading program. Failure
to establish an initial bank could reduce the incentive to achieve
early reductions and bank allowances in the future by signaling to
market participants that banked allowances accrued under existing
trading programs will hold no value in any future new or modified
trading program. EPA's approach of establishing an initial Group 3 bank
in an amount equal to the sum of the new trading program's aggregate
variability limits is similar to the methodology followed in the CSAPR
Update that was upheld against challenge in the Wisconsin decision.
    Comment: Some commenters stated that EPA should create a larger
bank, possibly by allowing some or all banked Group 2 allowances to be
used for compliance in the Group 3 trading program on a 1-for-1 basis
instead of being converted to Group 3 allowances at a conversion ratio
greater than 1:1.
    Response: EPA disagrees with these comments. Creating an overly
large initial bank of Group 3 allowances, regardless of the conversion
ratio used, would dilute the intended control stringency and emission
budgets established in this rule to address Group 3 states' obligations
under the good neighbor provision with respect to the 2008 ozone NAAQS.
Certainly, given the large existing bank of 2017-2020 Group 2
allowances, allowing these Group 2 allowances to be used for compliance
in the Group 3 trading program at a 1:1 ratio would unacceptably dilute
the control stringency and emission budgets established by EPA in this
rulemaking. As explained earlier in this section, EPA believes that
creating an initial bank of Group 3 allowances in an amount not
exceeding the sum of the Group 3 state's variability limits, and doing
so through conversion of Group 2 allowances at an 8:1 ratio, is
consistent with both achieving the requisite level of stringency and
encouraging continued use of banking.
    Comment: A commenter suggested that EPA should base the initial
Group 3 bank target amount not on the sum of Group 3 states'
variability limits for 2022, but instead on the sum of Group 3 states'
variability limits for 2021.
    Response: EPA disagrees with this comment. The initial Group 3
allowance bank is intended to accommodate year-to-year variability in
operations and emissions, and EPA expects that on average, sources
collectively will aim to carry forward the bank from year to year so
that in each subsequent control period, sources will continue to have
the flexibility needed to accommodate year-to-year variability in
operations and emissions. Unlike the 2022 state emission budgets, the
2021 state emission budgets do not reflect emission reductions
achievable from application of the full control stringency

that EPA is finding necessary to resolve the Group 3 states'
obligations under the good neighbor provision with regard to the 2008
ozone NAAQS. Because the Group 3 bank is intended to be an element of
the Group 3 trading program on an ongoing basis, not just in 2021, as a
matter of program design EPA considers it appropriate for the amount of
the initial Group 3 bank to represent the full control stringency found
to be necessary under this rule. For this reason, it is appropriate to