Sources subject to trading programs under the FIP and sources in
States choosing to participate in the EPA-administered CAIR SIP trading
programs will be able to trade allowances with one another under common
emissions caps across participating States. Integration of the trading
programs reduces the possibility of inconsistent or conflicting
deadlines or requirements, increases the potential cost savings for
sources, and streamlines program administration. Unnecessary
inconsistency in trading programs could hamper sources' ability to plan
and achieve the needed reductions as cost effectively as possible. In
addition, if a State submits and EPA approves a SIP revision including
the CAIR SIP model trading programs after EPA establishes trading
programs under today's FIP, disruptions to sources that shift from
regulation under a FIP to regulation under a SIP will be minimized due
to the consistency between the respective CAIR SIP and FIP programs.
    The EPA establishes (in part 97) the geographic boundaries of the
common trading programs as those States that submit SIP revisions in
response to the CAIR implementing the EPA-administered trading programs
or that are subject to FIPs. The EPA will administer these common
trading programs in collaboration with affected States.
    For the final CAIR FIP NOX and SO2 cap-and-
trade programs, EPA adopted the CAIR model trading programs with slight
revisions to allow for Federal implementation. The FIP trading programs
are thus virtually identical to the CAIR SIP model trading programs.
The CAIR FIP cap-and-trade programs include all of the mandatory
elements that States are required to include in their SIPs in order to
participate in the EPA-administered cap-and-trade programs for CAIR.
    The Agency is finalizing, with certain changes described in section
VI.C, the proposal to provide States that are subject to today's CAIR
FIP requirements with the option to submit abbreviated SIP revisions
covering specific elements of the FIP trading programs without
submitting full SIP revisions to meet the requirements of CAIR. See
section VI.C in this preamble for further discussion of abbreviated SIP
revisions.

B. Relationship of Emissions Trading Programs to Section 126 Relief

    In section II of today's preamble, EPA responds to commenters who
argued that, because a CAIR SIP could or the CAIR FIP would reflect a
trading component, such an implementation plan would not satisfy
section 126 as a matter of law. As explained in section II, these
arguments assume that the Agency must grant the petition, which is not
EPA's view so long as the underlying SIP deficiencies are rectified.
    Although EPA is denying the section 126 petition as discussed
elsewhere in today's preamble, based on modeling projections the Agency
believes that sources in States upwind of North Carolina will reduce
emissions under the CAIR trading regime.
    As discussed in the FIP NPR (70 FR 49737), EPA believes that upwind
sources in States that were found to contribute significantly to North
Carolina nonattainment will in fact reduce emissions of
PM2.5 precursors under the CAIR trading regime. The Agency
explained that its Integrated Planning Model (IPM) \16\ analysis
conducted for the CAIR NFR--which assumes emissions trading--projects
decreases in annual SO2 and NOX emissions under
CAIR compared to the Base Case (i.e., compared to projections without
CAIR) in both 2010 and 2015 for each of the States found in the CAIR
NFR analysis to contribute significantly to nonattainment of the
PM2.5 NAAQS in North Carolina.
---------------------------------------------------------------------------

    \16\ The IPM is a multiregional, dynamic, deterministic linear
programming model of the U.S. electric power sector. The Agency uses
IPM to examine costs and, more broadly, analyze the projected impact
of environmental policies on the electric power sector in the 48
contiguous States and the District of Columbia.
---------------------------------------------------------------------------

    The EPA further explained that the Agency's CAIR modeling--which,
again, assumes interstate emissions trading--projects that under CAIR
by 2010, with the projected emission reductions, there will be no
remaining PM2.5 nonattainment counties in North Carolina.
Thus, the emission reductions under CAIR are projected to be sufficient
to eliminate PM2.5 nonattainment in North Carolina and,
necessarily, no States will contribute to nonattainment.\17\ This
discussion of the Agency's analysis of CAIR is informational and is not
intended to reopen or reconsider any issue related to that analysis.
---------------------------------------------------------------------------

    \17\ IPM emissions modeling conducted for the final CAIR is in
the CAIR docket EPA-HQ-OAR-2003-0053; air quality modeling results
are in the Air Quality Modeling Technical Support Document for the
Final Clean Air Interstate Rule, March 2005, Appendix F; see also
Table VI-10 to the preamble of the CAIR final rule at 70 FR 25251.
---------------------------------------------------------------------------

    As discussed in section II in today's preamble, some commenters
argued that relief under section 126 must occur within 3 years and
therefore that the CAIR emission reductions do not satisfy section 126
because although those reductions commence within 3 years they are
phased in over a longer time. We respond to legal arguments in section
II, above.
    In any case, the EPA believes that many emission sources in States
upwind of North Carolina will install NOX and/or
SO2 emission control technology before 2009. As explained
above, EPA modeling projects that North Carolina will come into
attainment of the PM2.5 standards by 2010 under CAIR,
including trading programs. Much of the emission reductions that will
bring North Carolina counties into attainment with the PM2.5
standards will result from use of selective catalytic reduction (SCR)
for NOX control and flue gas desulphurization (FGD) for
SO2 control on units in upwind States. For the following
reasons, EPA believes that many of these controls will be installed
before 2009.
    Early emission reductions occur for several reasons. Today's CAIR
FIP trading rules and the CAIR SIP model trading rules include
incentives for early emission reductions. For example, sources may bank
title IV SO2 allowances into the CAIR FIP or CAIR SIP
SO2 trading programs (see section VI.I, below, for further
discussion of incentives for early reductions). Another reason why
sources may reduce emissions early is the need to stagger control
installations at plants where multiple units will be retrofitted to
avoid operational disruptions.
    As discussed elsewhere in today's preamble, the 10 States that EPA
determined in CAIR contribute to North Carolina's nonattainment of the
PM2.5 standards are Alabama, Georgia, Indiana, Kentucky,
Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, and West
Virginia. Table VI-1, below, summarizes for these 10 States the total
coal-fired electric generating capacity expected to be on-line by the
end of 2006 as well as the portion of that capacity expected to be
controlled with SCR or FGD.\18\ In addition, the table

summarizes for the 10 States the generating capacity that EPA expects
to be controlled with SCR or FGD through the end of 2008 based on
research that the Agency conducted for today's action.\19\ The table
also summarizes for the 10 States the generating capacity that EPA
projects will be controlled with SCR or FGD by the end of 2010 based on
IPM modeling projections.\20\ As Table VI-1 indicates, many of the
emission controls that EPA's modeling projects will be installed by the
end of 2010 are actually likely to be installed before 2009.
---------------------------------------------------------------------------

    \18\ Generating capacity through the end of 2006 (with capacity
greater than 25 MWe) based on EPA's v.2.1.9 NEEDS database (2004).
Capacity expected to be controlled with SCR or FGD by the end of
2006 based on research EPA conducted on planned control retrofits on
coal-fired units.
    \19\ This includes expected capacity (greater than 25 MWe) with
control retrofits through the end of 2008 based on EPA research of
planned control retrofits on coal-fired units. Research included
searching the Internet for company announcements regarding contracts
for control retrofits. For 2007 and 2008 retrofits EPA focused its
research on units with capacity greater than 100 MWe; if smaller
units were included, we might have identified additional planned
retrofits.
    \20\ These 2010 projections are from IPM modeling conducted for
the final CAIR and include units with capacity greater than 25 MWe
(IPM version 2.1.9, 2004).

   Table VI-1.--SCR and FGD Summary for 10 States Contributing to North Carolina's Nonattainment of the PM2.5
                                                    Standards
----------------------------------------------------------------------------------------------------------------
                                        Expected capacity with   Expected capacity with  Projected capacity with
 Total generating capacity by end of     emission controls by     emission controls by     emission controls by
                 2006                        end of 2006              end of 2008         end of 2010 under CAIR
----------------------------------------------------------------------------------------------------------------
132 GW (466 units)...................  SCR: 67 GW (126 units).  SCR: 70 GW (130 units).  SCR: 82 GW (184 units)
                                       FGD: 48 GW (111 units).  FGD: 64 GW (137 units).  FGD: 73 GW (167 units)
----------------------------------------------------------------------------------------------------------------

    EPA believes that even more controls may be installed before 2009
than were identified in the Agency's research. It is reasonable to
suppose that, once CAIR SIP revisions are submitted and approved,
additional plans for control retrofits will be adopted due to SIP
revisions.
    Some commenters supported the use of trading programs in connection
with a section 126 remedy and some did not. A commenter, using South
Carolina as an example, questioned why emissions can be above State
budget amounts through allowance trading. This commenter points out
that EPA's IPM modeling for CAIR projects emissions in South Carolina
above the State's 2015 SO2 emissions budget 5 years after
2015 and asserts that emissions over the State budget ``will still
contribute to attainment problems in North Carolina.'' However, as
explained above, based on modeling for CAIR--which assumes interstate
emissions trading--by 2010 there will be no remaining PM2.5
nonattainment counties in North Carolina. In other words, the EGU
emission reductions projected by IPM to occur under the CAIR trading
regimes are the amounts that are projected to be sufficient to bring
North Carolina into attainment in 2010, regardless of whether for some
States emissions are projected to be above the State EGU emissions
budgets.

C. Abbreviated SIP Revisions Covering Elements of the CAIR FIP Cap-and-
Trade Programs

    In the FIP NPR (70 FR 49720, 49727-49739), the Agency proposed to
provide States that are covered by CAIR with the option to submit
abbreviated SIP revisions covering specific elements of the CAIR FIP
trading programs without submitting full SIP revisions to meet the
requirements of CAIR. By proposing to accept such abbreviated SIP
revisions, the Agency intended to increase the options available for
States to comply with CAIR. A State could choose to retain control of
these specific elements of the trading programs without submitting a
full SIP revision.
    As proposed, a State would submit an abbreviated SIP revision that
would modify the application of certain elements of the FIP in order to
better meet the needs of the State. The EPA proposed that a State could
choose to modify the application of the FIP through abbreviated SIP
revisions that would do any or all of the following:
     Make applicable, to the State, provisions in the FIP for
otherwise unaffected units to opt into the FIP trading programs,
     Allow the State, rather than EPA, to allocate
NOX annual and/or NOX ozone season allowances,
     Allow the State, rather than EPA, to allocate allowances
from the NOX annual Compliance Supplement Pool (CSP), and
     Include NOX SIP Call trading sources that are
not EGUs under CAIR in the CAIR FIP NOX ozone season cap-
and-trade program.
    As there are no sanctions or penalties for leaving the CAIR FIP
trading programs in place, EPA anticipates that some States may prefer
to avoid spending the time and money necessary to submit a full SIP
revision and may just modify the application of certain parts of the
FIP.
    The final CAIR (70 FR 25162) requires States to submit SIP
revisions complying with the CAIR requirements to the Agency by
September 11, 2006 and to submit the initial set of NOX
allocations by October 31, 2006.
    In the CAIR FIP NPR, the Agency proposed that States choosing to
submit abbreviated SIP revisions addressing the specific elements
identified in the proposal would be required to submit such revisions
to EPA by March 31, 2007, and--if choosing to address NOX
allocations in an abbreviated SIP revision--would be required to submit
the initial set of NOX allocations by September 30, 2007 (70
FR 49731).\21\ The EPA proposed allowing States to submit abbreviated
SIP revisions later than full revisions because the Agency anticipates
that it will be able to complete the approval process more quickly for
abbreviated revisions due to their narrower scope.
---------------------------------------------------------------------------

    \21\ The proposed regulatory text at Sec.  51.123 (70 FR 49746)
would require States using the abbreviated SIP revision approach for
NOX allocations to notify EPA of such allocations by
September 30, 2007 for 2009, 2010 and 2011. Through an inadvertent
error, the preamble listed a different date--the preamble indicated
that the proposed deadline for such allocations would be October 31,
2007 (70 FR 49731). The Agency intended the proposed date to be
September 30, 2007 as indicated in the regulatory text.
---------------------------------------------------------------------------

    The Agency proposed to include appendices in part 97 that will be
amended in the future to list any States for which the Administrator
approves abbreviated SIP revisions covering opt-ins, allocation of
NOX allowances, distribution of CSP allowances, or inclusion
of non-CAIR NOX SIP Call trading sources in the CAIR FIP
NOX ozone season trading program.
    The Agency received a number of comments on its proposal to allow
submission of abbreviated SIP revisions for CAIR. Several commenters
supported the abbreviated SIP revision approach. A commenter states
that the approach provides States added flexibility, helps facilitate
eventual transitions from a FIP-implemented to a State-implemented
CAIR, and provides

sources with better certainty regarding key operational elements (such
as NOX allocations) over the initial years of the program.
Commenters generally supported the choice of specific elements that EPA
proposed to allow States to control using abbreviated SIP revisions.
    Several commenters argued against the Agency's proposed submission
deadline for abbreviated SIP revisions. Commenters who argued against
the proposed submission deadline generally did so in relation to the
timing for NOX allocations. The EPA discusses the schedule
for determining and recording NOX allocations in detail in
the NOX allocations section in today's preamble (section
VI.F, below) and responds in that section to commenters' concerns
regarding submission deadlines for abbreviated SIP revisions in
relation to NOX allocation timing.
    One commenter that did not support the proposal for abbreviated SIP
revisions suggested that allowing such revisions to be submitted later
than the deadline for a full SIP revision sets a poor procedural
precedent. The Agency disagrees. The proposal to allow abbreviated SIP
revisions for CAIR is based on the unique circumstances in this case
and does not set precedent for other different circumstances.
    The EPA is finalizing, with certain changes described below, the
approach that a State can choose to modify the application of the CAIR
FIP through abbreviated SIP revisions that do any or all of the
following:
     Make applicable, to the State, provisions in the FIP for
otherwise unaffected units to opt into the FIP trading programs,
     Allow the State, rather than EPA, to allocate annual and/
or ozone season NOX allowances,
     Allow the State, rather than EPA, to allocate allowances
from the annual NOX Compliance Supplement Pool (CSP), and
     Include NOX SIP Call trading sources that are
not EGUs under CAIR in the CAIR FIP NOX ozone season cap-
and-trade program.
    Thus a State could choose, through its abbreviated SIP revision, to
bring its NOX SIP Call trading sources that are not EGUs
under CAIR from the NOX SIP Call trading program into the
CAIR NOX ozone season trading program.
    With regard to the provision allowing an abbreviated SIP revision
to provide for State allocation of annual and/or ozone season
NOX allowances, EPA is revising that provision to give
States the same flexibility concerning such allocations as States have
in a full SIP revision. In a full SIP revision, States have the option
of allocating allowances to CAIR units or to other entities (such as
renewable energy facilities) or of auctioning allowances. The States
must submit the CAIR unit allocations to the Administrator by specified
deadlines so that the allowances can be recorded in the allowance
tracking system, but the requirements for a full SIP revision do not
address what happens if the State fails to meet these deadlines. In
contrast, under the proposed provision for an abbreviated SIP revision
allowing for State allowance allocations, a State's allocation
provisions must provide that, if a State does not inform the
Administrator of the allocations to CAIR units by the specified
deadlines, the Administrator will assume that the units get the same
allocations for the year as in the prior year and will record such unit
allocations. (EPA notes that the deadline for submitting the initial
set of allocations is changed, as described below, from the proposed
deadline of September 30, 2007 to April 30, 2007.)
    The difficulty with the proposed approach is that it assumes that
the State is distributing (not auctioning) allowances and is providing
them to CAIR units (not to other entities). In order to clarify that
States have the same flexibility in allocating in abbreviated SIP
revisions and full SIP revisions, EPA is removing the abbreviated SIP
revision language concerning the Administrator's actions in the event a
State fails to inform in a timely manner the Administrator of the
allocations. However, it should be noted that the provisions for both
abbreviated SIP revisions and full SIP revisions set deadlines for
State submission of allocations to the Administrator for recordation
and that, in reviewing such SIP revisions, EPA intends to ensure that
the SIP revisions are consistent with those deadlines.
    With regard to the provision allowing an abbreviated SIP revision
to provide for State allocation of the CSP, EPA is revising that
provision to give States the same flexibility with regard to CSP
allocations as States have in a full SIP revision. Under Sec.
51.123(e)(4)(iii), States may use in a full SIP revision one or both of
the mechanisms described for CSP allocation, one based on early
reductions and one based on need. Under the proposed provision for an
abbreviated SIP revision concerning State CSP allocations, a State must
use the allocation methods detailed in either Sec.  96.143 or Sec.
97.143. In order that an abbreviated SIP revision provides States the
same flexibility as a full SIP revision, EPA is revising the
abbreviated SIP revision language to give States the options of using
the Sec.  96.143 or Sec.  97.143 provisions or the provisions under
Sec.  51.123(e)(4).
    The EPA will include appendices in part 97 that will be amended in
the future to list any States for which the Administrator approves
abbreviated SIP revisions covering any of the 4 specific elements
listed above. The EPA anticipates coordinating such amendments of the
appendices with the Administrator's final decision to approve such SIP
revisions.

D. Overall Structure of the CAIR FIP Cap-and-Trade Programs

    In the CAIR NFR, the Agency provided SIP model rules for the CAIR
NOX annual, CAIR NOX ozone season, and CAIR
SO2 annual trading programs that States can use to meet the
emission reduction requirements in the CAIR (in part 96). For the final
CAIR FIP cap-and-trade programs, EPA decided to adopt the CAIR SIP
model rules with minor changes to allow for Federal implementation.
    The emission reductions mandated by today's final rule will be
achieved from EGUs (see sections VI.E and VII, below, for discussion of
applicability provisions).
    The CAIR FIP cap-and-trade programs rely on the detailed unit-level
emissions monitoring and reporting procedures of part 75 and consistent
allowance management practices. All affected sources are required to
monitor and report their emissions using part 75. Source information
management, emissions data reporting, and allowance trading will be
accomplished using on-line systems similar to those currently used for
the Acid Rain SOX and NOX SIP Call trading
programs.
    The penalty provisions for excess emissions under today's FIP
trading programs were also adopted from the CAIR model trading rules.
As discussed in section VII in today's preamble, the Agency revised the
excess emission penalties in the CAIR SO2 trading program to
clarify the penalties for units that have excess emissions under both
the Acid Rain Program and the CAIR SO2 trading program. The
penalty provisions adopted for the final FIP thus are the excess
emissions penalty provisions in the CAIR with the revised CAIR
SO2 trading program penalties.
1. SO2 Annual Program
    The final CAIR FIP SO2 cap-and-trade program requires
affected sources to hold SO2 allowances sufficient to cover
their emissions for each control period. For the FIP SO2
program, EPA decided to adopt the CAIR model SO2 trading
rule (with minor changes to allow for Federal implementation) which is
based

on the existing Acid Rain Program and relies on title IV SO2
allowances.
    As in the CAIR SIP SO2 model trading program, the
SO2 reductions for the CAIR FIP SO2 trading
program will be achieved by requiring sources to retire, in most cases,
more than one title IV allowance for each ton of SO2
emissions.\22\ Sources can use pre-2010 title IV SO2
allowances for compliance with the CAIR FIP SO2 cap-and-
trade program at a 1-to-1 ratio (i.e., SO2 allowances of
vintage 2009 and earlier will offset one ton of SO2
emissions). Allowances of vintages 2010 through 2014 will offset 0.5
tons of emissions (i.e., such allowances will need to be retired at a
ratio of 2-to-1 for CAIR compliance, in other words 2 allowances for
every ton of emissions). Allowances of vintages 2015 and beyond will
offset 0.35 tons of emissions (i.e., such allowances will need to be
retired at a ratio of 2.86-to-1, in other words 2.86 allowances for
every ton of emissions). The emission value of an SO2
allowance is independent of the year in which it is used, but rather is
be based on its vintage (i.e., the year for which the allowance is
issued). These SO2 allowance retirement ratios are the
retirement ratios in the CAIR NFR, which EPA adopted in the CAIR FIP
SO2 trading program (see discussion in section VII in the
CAIR NFR preamble at 70 FR 25255-25273, as well as in section IX at 70
FR 25290-25291).
---------------------------------------------------------------------------

    \22\ Allowances of pre-2010 vintage will be retired at a ratio
of one allowance per ton of emissions. For allowances of later
vintages, more than one allowance will be retired per ton of
emissions.
---------------------------------------------------------------------------

    The Agency uses the single term, ``CAIR SO2 allowance,
'' to refer to an SO2 allowance under a CAIR SIP using the
model trading rule or CAIR FIP.\23\ A CAIR SO2 allowance can
be used for compliance with the SO2 allowance-holding
requirement in a CAIR SIP or CAIR FIP SO2 trading program.
Sources in States governed by either of these SO2 trading
programs can trade CAIR SO2 allowances with each other.
---------------------------------------------------------------------------

    \23\ A CAIR SO2 allowance is generally a tilte IV
SO2 allowance; the only exception is where a State adopts
the provisions allowing units not otherwise covered by the CAIR
SO2 trading program to opt in and allocates allowances
(which are not title IV allowances) to such units. For purposes of
compliance with the EPA-administered CAIR SIP SO2 trading
program or with the CAIR FIP SO2 trading program in
today's rule, the value of SO2 allowances are discounted
based on the allowance vintage year, as explained above.
---------------------------------------------------------------------------

2. NOX Annual Program
    The final CAIR FIP NOX annual cap-and-trade program
requires affected sources to hold NOX annual allowances
sufficient to cover their emissions for each control period. For the
FIP NOX trading program, EPA adopted the CAIR SIP model
NOX trading program with minor revisions to allow for
Federal implementation. The FIP NOX program relies on CAIR
NOX annual allowances that will be allocated to affected
units by the EPA (see section VI.F in today's preamble for discussion
of the methodology and schedule for allocating NOX
allowances) or allocated by States using abbreviated SIP revisions. A
NOX annual allowance authorizes the emission of one ton of
NOX.
    The Agency is finalizing the proposed Compliance Supplement Pool
(CSP) of allowances that will be allocated to sources and can be used
for compliance with the CAIR FIP NOX annual cap-and-trade
program. See sections V and VI.I in today's preamble for further
discussion of the CSP.
    NOX ozone season allowances issued under the
NOX SIP Call or under the CAIR FIP NOX ozone
season trading program can't be used for compliance with the CAIR FIP
NOX annual reduction requirement. (Pre-2009 NOX
ozone season allowances issued under the NOX SIP Call can be
banked into the CAIR FIP NOX ozone season program; see
discussion of FIP NOX ozone season program, below.)
    The Agency uses the single term, ``CAIR NOX allowance,''
to refer to a NOX allowance issued under a CAIR SIP using
the model trading rule or CAIR FIP. A CAIR NOX allowance can
be used for compliance in a CAIR SIP or CAIR FIP NOX annual
trading program. Sources in States governed by either of these
NOX annual trading programs can trade CAIR NOX
allowances with each other.
3. NOX Ozone Season Program
    The final CAIR FIP NOX ozone season cap-and-trade
program requires affected sources to hold CAIR NOX ozone
season allowances sufficient to cover their emissions for each control
period. For the ozone season program, the control period extends from
May 1 through September 30 for each year of the program. For this
trading program also, EPA adopted the trading program from the CAIR SIP
model NOX ozone season trading rule with minor modifications
to allow for Federal implementation. Under the FIP program, a
NOX ozone season allowance authorizes the emission of one
ton of NOX during the ozone season.
    The FIP program relies on CAIR NOX ozone season
allowances that will be allocated to affected sources by the EPA (see
section VI.F in today's preamble for discussion of the methodology and
schedule for allocating NOX allowances) or allocated by
States using abbreviated SIP revisions. In addition, pre-2009
NOX SIP Call allowances can be banked into the CAIR FIP
NOX ozone season program and used by affected sources for
compliance with that program. NOX allowances issued under
the CAIR FIP NOX annual program can't be used for compliance
with the CAIR FIP NOX ozone season reduction requirement.
    As discussed in the CAIR NFR and the CAIR FIP NPR, certain emission
sources that do not meet the applicability requirements of CAIR are
included in the existing EPA-administered NOX Budget Trading
Program under the NOX SIP Call. (The types of NOX
Budget Trading Program units that are not EGUs under CAIR include
industrial boilers and turbines, cement kilns, and small EGUs.) As
explained in the CAIR NFR and CAIR FIP NPR, EPA will no longer
administer the NOX SIP Call ozone season cap-and-trade
program for ozone seasons after 2008; however, NOX SIP Call
requirements will remain in place. The CAIR NFR provides that States
that choose to participate in the CAIR EPA-administered NOX
ozone season cap-and-trade program may choose whether or not to bring
their non-CAIR NOX SIP Call trading sources into the CAIR
ozone season trading program, through their SIP revisions. Bringing the
non-CAIR NOX SIP Call trading sources into the CAIR ozone
season program is one way to continue to meet NOX SIP Call
requirements. See section VII in the CAIR NFR (70 FR 25255-25273) and
section IX.A. (70 FR 25289-25290).
    As discussed above, the Agency is finalizing its proposal that
States may choose to submit an abbreviated SIP revision to bring their
non-CAIR NOX SIP Call trading sources into the CAIR FIP
NOX ozone season cap-and-trade program. The abbreviated SIP
revision may increase a State's NOX ozone season trading
budget under the CAIR FIP NOX ozone season cap-and-trade
program by an amount equal to the portion of the State's NOX
SIP Call State trading budget that is attributed to such units.
    The Agency uses the single term, ``CAIR NOX Ozone Season
allowance,'' to refer to a NOX ozone season allowance issued
under a CAIR SIP using the model trading rule or CAIR FIP. A CAIR
NOX ozone season allowance could be used for compliance in a
CAIR SIP or CAIR FIP NOX ozone season trading program.
Sources in States governed by either of these NOX ozone
season trading programs can trade CAIR NOX Ozone Season
allowances with each other.

E. Sources Subject to the CAIR FIP Cap-and-Trade Programs

    Under the proposed CAIR FIP cap-and-trade programs, only EGUs were
subject to the proposed rules. The proposed applicability provisions
are, by design, identical to the provisions for applicability the CAIR
SIP model trading programs and incorporated the FIP NPR revisions to
the applicability provisions of the final CAIR SIP model trading rules.
The revisions to CAIR SIP model rule applicability include exemptions
for (1) municipal solid waste incinerators and (2) existing units that
have not served a generator since before November 15, 1990.
Incorporating these exemptions into the applicability provisions in
both the CAIR SIP and CAIR FIP trading programs provides clarity and
aligns the provisions more closely with the provisions in the title IV
Acid Rain Program. A detailed discussion of the rationales for
including these exemptions may be found in section VII of the CAIR FIP
NPR. (See section VIII.C. in the CAIR NFR preamble for applicability
discussion at 70 FR 25276-25278 and section VII in today's preamble for
additional discussion of changes to the CAIR EGU definition).
    Public comment on the proposed applicability provisions of the CAIR
FIP trading programs primarily expressed interest in additional
exemptions for waste coal-fired units, biomass-fired units, and low
emissions units. These are discussed in detail below.
    Applicability in the Final CAIR FIP. Today's action finalizes that,
in any jurisdiction for which a final CAIR FIP is promulgated, units
will be subject to the CAIR FIP trading programs (i.e., to the CAIR FIP
SO2, NOX annual, or NOX ozone season
programs, as appropriate) if they are stationary, fossil-fuel-fired
boiler or stationary, fossil-fuel-fired combustion turbine serving at
any time, since the later of November 15, 1990 or the start-up of the
unit's combustion chamber, a generator with nameplate capacity of more
than 25 MWe producing electricity for sale. Certain cogeneration units
or solid waste incinerators are exempt from the CAIR FIP and are
described below.
    Cogeneration Unit Exemption. As in the CAIR NFR, certain
cogeneration units are exempt from the CAIR FIP trading programs.
Cogeneration units include units having equipment used to produce
electricity and useful thermal energy for industrial, commercial,
heating, or cooling purposes through sequential use of energy and
meeting certain operating and efficiency standards. The program has
different applicability provisions for non-cogeneration units and
cogeneration units. Any cogeneration unit, serving (since the later of
November 15, 1990 or the start-up of the unit), a generator with a
nameplate capacity of greater than 25 MW and supplying more than \1/3\
potential electric output capacity and more than 219,000 MW-hrs
annually to any utility power distribution system for sale, will be
subject to the requirements of the CAIR FIP trading rules. Otherwise,
the unit will qualify for an exemption under the FIP rules. This
cogeneration unit exemption is identical to the exemption in the CAIR
NFR, as revised by today's action. Section VIII.C.3. of the CAIR NFR
preamble describes the cogeneration unit exemption and discusses the
specific elements of how units would qualify and remain qualified for
the exemption (70 FR 25276-25278).
    Solid Waste Incinerator Exemption. Today's action includes an
exemption for certain solid waste incinerators in both the CAIR and
CAIR FIP cap-and-trade programs. Specifically, a solid waste
incineration unit commencing operation before January 1, 1985, for
which the average annual fuel consumption of non-fossil fuels during
1985-1987 exceeded 80 percent and during any 3 consecutive calendar
years after 1990 the average annual fuel consumption of non-fossil
fuels exceeds 80 percent, is not subject to either the CAIR or CAIR FIP
cap-and-trade programs. (Section VII of the preamble for today's rule
provides additional discussion.)
    Individual Unit Opt-ins. Today's action includes provisions for
individual units to opt-in to the CAIR FIP trading programs. These
units, when they opt-in, become ``affected'' by the CAIR FIP trading
program and, as a result, must comply with allowance holding
requirements, monitor and report emissions, and receive CAIR
allowances.
    The opt-in provisions of the CAIR FIP trading programs would become
applicable to sources in a given State only if the State chooses to
submit an abbreviated SIP revision that would provide for the inclusion
of opt-ins in the CAIR FIP trading programs. The EPA considered
requiring all States to have opt-in provisions in the proposed CAIR FIP
trading programs. By not requiring opt-in provisions in all States
covered by the proposed FIP trading programs, the Agency seeks to
preserve the States' flexibility to decide whether to allow opt-in
units. In addition, the EPA believes that including opt-in provisions
only in States that have elected to include them in an abbreviated SIP
revision avoids the possibility of ``stranding'' some opt-in units.
More specifically, this requirement avoids a situation where a unit
might make investments based upon assumption that it will opt-in to a
CAIR FIP trading program only to be stranded if the CAIR FIP program
was later supplanted by EPA approving a CAIR SIP submitted by the State
that did not include opt-in provisions.
    If States choose to submit abbreviated SIP revisions to provide for
the inclusion of opt-ins in the CAIR FIP trading programs, the SIP
revisions must include the opt-in provisions that are provided in the
CAIR final rule. See section VIII.G. of the CAIR NFR preamble for
discussion of opt-in provisions (70 FR 25286-25288).
    Waste Coal-Fired Units Under CAIR FIP. The EPA received comments
requesting an exemption for waste coal-fired units from both the CAIR
and CAIR FIP SO2 annual programs. Some commenters claimed
that their costs to comply with the programs are excessively high. The
economics of a waste coal-fired unit are different depending upon
whether the unit has a fixed price power purchase agreement in place or
whether it is selling electricity on the wholesale market.
    Units that had power purchase agreements with fixed prices in place
on November 15, 1990, are exempt from title IV and do not receive title
IV allowances. The commenters state that, while their agreements are in
effect, these units are not able to pass through cost increases, such
as the cost of compliance with CAIR, except where specific escalations
are provided (e.g., compensation for increases in fuel costs or
inflation).
    While under the agreements and exempt from title IV, the units can
opt into the title IV program and receive allowances as opt-in units.
Commenters claim that the title IV opt-in provisions could allocate
allowances to them at levels below their projected emissions because
the years on which title IV bases the allocations are early in the
units operation and might under-represent the unit's typical heat
input. The commenters add that it is not cost effective for the units
to reduce SO2 emissions by installing advanced emission
controls because the units already achieve significant reductions and
have fixed price contracts that do not allow them to pass through
control costs.
    The second scenario is the period beginning when the units' power
purchase agreements expire and the units lose their title IV exemption.
As title IV affected units, they lose their

title IV opt-in status and can no longer receive title IV allowances
under the title IV opt-in provisions. These units are no longer locked
into their power purchase contracts and are free to participate in the
wholesale electricity markets. The commenters contend that reducing
emissions--even when they are free to pass through the cost of
compliance--is not cost-effective, because most waste coal-fired
facilities already operate at lower SO2 emission rates than
many other sources. This, however, belies the real issue, since under a
trading program, sources have multiple compliance options including
installing emission controls, switching fuels or purchasing allowances.
If a source's control costs are above the marginal cost of control in
the region, the unit is likely to comply by purchasing allowances,
thereby reducing their cost of control to the market price.
    In general, information regarding the cost of generation,
electricity markets, and cost of controlling emissions may be found
through publicly available sources. This information is used, and in
some cases developed, by EPA in its regulatory efforts (e.g., IPM
modeling results, technical support documents (TSD) examining the cost
and feasibility of control options). However, information regarding
specific terms of the contracts, such as found in the power purchase
agreements of the waste coal-fired units, is generally proprietary and
is claimed to vary widely from contract to contract. Although complete
information on contracts (e.g., the fixed price for electricity, price
escalators) could have been provided in order to perform a thorough
analysis, commenters provided EPA with some limited information (much
of it after the public comment period closed) that did not support the
commenters' case for the broad closure of waste coal-fired units as a
category of sources. In addition, commenters presented some limited
analysis of the ratio of their estimated cost of compliance with CAIR
to their projected revenue. Again, EPA's evaluation of this limited
analysis showed that it did not support the commenters claims that they
would not be economically viable. (The results of EPA's evaluation of
the commenters' analysis are discussed later in this section.) Because
the unit-specific information provided by the commenters was limited,
EPA conducted an analysis using generally available information to
evaluate the potential impact of the cost of complying with CAIR for a
typical CFB combusting waste coal. This analysis shows that the typical
waste coal-fired unit would remain economically viable under CAIR. (The
results of this analysis are discussed later in this section.)
    EPA understands that waste coal-fired facilities have not received
a title IV SO2 allowance allocation because they have been
exempt from title IV under the IPP exemption. Title IV's IPP exemption
applies to units that had power purchase agreements with fixed prices
in place on November 15, 1990, and includes units other than waste
coal-fired facilities. Congress limited this exemption to only those
units with power purchase commitments in effect, thereby acknowledging
that once the unit was freed from its power purchase commitment, it was
free to pass through compliance costs to its customers. The unit may
lose this exemption even before the full-term of the contract if the
power purchase commitment changes after November 15, 1990, in a way
that allows the cost of compliance with the Acid Rain Program to be
shifted to the purchaser. For example, expiration or termination of the
power purchase commitment or modification so that the price is
increased (e.g., changed to a market price) results in loss of the
exemption. The purpose of the exemption is to protect IPP facilities
subject to contract prices that were set before passage of the CAA
Amendments of 1990 (including the Acid Rain Program in title IV) and
that did not allow pass through of the costs of Acid Rain Program
compliance. Congress has limited the exemption to apply to the Acid
Rain Program and did not mandate the Agency with maintaining the
exemption in future programs. EPA believes that this exemption was
aimed at easing the transition of such facilities into the Acid Rain
Program and that there is no basis for maintaining this exemption for
every subsequent cap-and-trade program.
    Waste coal-fired units are designed and operated for the purpose of
generating electricity for sale. As a result, they are reasonably
treated as part of the power generation sector, which comprises the
category of sources the CAIR and CAIR FIP trading programs aimed at
regulating. For this reason, EPA modeling for CAIR included waste coal-
fired EGUs as part of the power sector, which was shown to collectively
be able to make highly cost-effective SO2 and NOX
emission reductions. The marginal cost of control and the average cost
of control, shown to be highly cost-effective, reflect a range of power
sector control costs that include costs from sources such as waste
coal-fired units. Notably, the model considers where control will be
least expensive and that some units will purchase allowances in the
determination of which units are projected to dispatch. EPA modeling
shows that waste coal-fired units continue to be dispatched even when
the cost of complying with CAIR is part of the unit's production costs.
Commenters did not provide any basis for changing EPA's treatment of
waste coal-fired units in the modeling or for challenging EPA's
modeling results.
    EPA agrees that these units do not have large SO2
emissions. These units may emit based on a reduction in SO2
from sulfur content in the fuel of approximately 90 percent, or in some
cases greater, reductions in SO2 from sulfur content of the
fuel.\24\ However, many continue to emit at rates above those recently
achieved by coal-fired units with advanced SO2 controls
(i.e., scrubbers). Nevertheless, because these units tend to be
relatively small and have lower total emissions, they would be required
to purchase significantly fewer allowances than other, potentially
higher emitting, sources that also may not have received SO2
allowances under title IV.
---------------------------------------------------------------------------

    \24\ Reduction in SO2 from CFB units are EPA
estimates based upon the design of the facilities.
---------------------------------------------------------------------------

    However, EPA does not believe that the CAIR SO2 annual
requirements would impose an undue or inequitable ``economic burden''
on waste coal-fired units that would ``threaten the viability'' of all,
or even many, of these units. EPA considered the potential impacts for
both the periods of the concern identified by the commenter: (1) When
the power purchase agreement is in place and the unit is exempt from
title IV; and (2) after the power purchase agreement has expired and
the unit is title IV affected.
    For the period in which the waste coal-fired unit has a power
purchase contract in place, EPA examined the analysis presented by the
commenters in support of their argument that CAIR compliance costs
would threaten their economic viability. EPA believes the commenters'
analysis substantially overestimated the potential compliance costs of
CAIR and the CAIR FIP (by inaccurately accounting for the future
projected cost of emitting one ton of SO2, underestimating
access to title IV SO2 allowances through the title IV opt-
in provisions, and inaccuracies in other analytical assumptions) and,
when more realistic assumptions are correctly applied, these units are
much better off. (Section VI.A of the CAIR FIP Response to Comment
Document presents the results of this analysis.)

    As mentioned above, while waste coal-fired units have a valid power
purchase agreement (and, subsequently, an exemption from title IV),
they may choose to opt-in to the title IV program and receive
SO2 allowances. The title IV opt-in provisions provide units
with SO2 allowances based upon their heat input (i.e., the
average of their annual heat input for the years 1985 through 1987 or
their first 3 whole years of operation) and their emission rate (i.e.,
the lesser of their actual emission rate during the first baseline year
or, their lowest permitted emission limit in year they apply that will
be effective that year or any time after). As a result, these units
could receive SO2 allowances sufficient to authorize all of
their future, annual emissions under the title IV program. Other units,
that may operate more than they did during the baseline years, may
receive SO2 allowances from the title IV opt-in provisions
at levels lower than their future emissions. Assuming the waste coal-
fired units made no additional reduction in SO2 emissions,
this same opt-in allocation level would authorize half of their
emissions, and require them to purchase SO2 allowances equal
to half of their emissions, under the first phase of CAIR or the CAIR
FIP.\25\ Considering that waste coal-fired CFB units generally achieve
greater than 90 percent SO2 emission reductions, the unit
would purchase SO2 allowances equal 5 percent of this total,
uncontrolled emissions. The retirement ratio for the second phase of
CAIR or the CAIR FIP would result in the sources purchasing
SO2 allowances equivalent to 7 percent of this uncontrolled
emissions level (i.e., two thirds of the remaining 10 percent of the
uncontrolled emissions). From the evidence that EPA has been provided,
the commenters have not demonstrated that purchasing allowances equal
to approximately 5 percent or 7 percent of uncontrolled emissions in
the phases 1 and 2 of the CAIR FIP (and CAIR), respectively, would
result in the units not being economically viable.
---------------------------------------------------------------------------

    \25\ Assumes sources receive title IV opt-in allowances equal to
their current emissions. The 2-to-1 retirement ratio of CAIR's first
phase requires CAIR sources to hold twice as many allowances.
---------------------------------------------------------------------------

    The commenters concerns about the economic viability of waste coal-
fired units continue for periods of time when the power purchase
agreements have expired (i.e., the units have lost the exemption from
title IV) and the units are free to participate in the electricity
markets. EPA addressed this concern by conducting additional analysis
using generally available information to evaluate the potential impact
of the cost of complying with CAIR for a typical CFB combusting waste
coal. More specifically, EPA examined how the potential cost to operate
a typical waste coal-fired CFB unit (in $/MWh) compares to the
potential price it would receive on the electricity market. This
analysis estimated the potential cost of producing electricity for a
waste coal-fired CFB (including the cost of complying with CAIR) to be
significantly less than the EPA projected wholesale price and the
forecasted price of electricity. In general, waste coal-fired
facilities will continue to be profitable, even when factoring in the
cost of complying with CAIR.
    EPA also notes that, upon the expiration of the power purchase
agreements, waste coal-fired units will participate in the electricity
markets and be required to comply with all applicable emission control
programs, including the title IV Acid Rain Program, just as other coal-
fired facilities. Some of these coal-fired units have installed
emission control equipment, emit SO2 at lower rates than the
waste coal-fired units, and are complying with title IV while they
compete in the electricity markets. Additionally, new units continue to
come online and are economically viable even though they must acquire
title IV SO2 allowances on the market.
    In addition, commenters mentioned that waste coal-fired facilities
provide benefits outside of air emissions, such as assisting in the
mitigation of waste coal impacts on the land. EPA notes that, in case
of waste coal-fired units, there are a variety of avenues of potential
relief for States that wish to assist these units as they transition to
competitive markets. Options for States to encourage certain types of
generation include, but are not limited to: Revenue from renewable
portfolio standards (where waste coal-fired units can qualify); and
providing valuable CAIR NOX annual and ozone season
allowances, as well as mercury allowances under the Clean Air Mercury
Rule (which are options in Pennsylvania, where most of the commenters
waste coal-fired units are located). EPA also notes that, in the case
of waste coal-fired units that have contended that they provide multi-
media benefits, that they will have the flexibility to develop
integrated, multi-pollutant compliance strategies under CAIR.
    In summary, EPA does not agree with commenters that believe that
complying with the CAIR FIP or CAIR SO2 annual program would
result in this category of units not being economically viable. These
units are designed to generate electricity for sale on the grid and are
part of the power generation sector. The CAIR FIP and CAIR trading
programs are designed to achieve emission reductions from EGUs while
providing the flexibility for the markets to find the least-cost
reductions. Once their contracts expire, waste coal-fired units, just
as other coal-fired generation sources which may or may not receive
title IV SO2 allowances, will be expected to hold
SO2 allowances and compete in the electricity markets. In
addition, the commenter has not provided analysis that demonstrates
that waste coal-fired units, as a category, would not be economically
viable as a result of CAIR. For these reasons, EPA has not included an
exemption for waste coal-fired units or IPPs in the CAIR FIP or CAIR
trading programs.
    Biomass-Fired Units under CAIR FIP. EPA received comment that
biomass-fired units should be exempt from the CAIR and CAIR FIP trading
programs. These commenters claimed that their operations are similar to
those of solid waste incineration units, which EPA proposed to exempt
in the CAIR FIP NPR. Commenters added that they could meet fossil fuel
use criteria used in the solid waste incineration unit exemption (i.e.,
the average annual fuel consumption of non-fossil fuels not exceeding
80 percent for the years 1985-1987 (or for a unit commencing operation
after January 1, 1985, the first 3 years of operation) and during any 3
consecutive calendar years after 1990). In addition, commenters noted
that this would be consistent with the title IV exemptions for biomass-
fired units as ``qualifying facilities.''
    EPA disagrees with commenters that request that biomass-fired EGUs
be exempted from the CAIR and CAIR FIP trading programs because they
are similar to solid waste incinerators. While biomass-fired EGUs may
be able to meet the criteria for limited combustion of fossil fuel used
in the solid waste incineration unit exemption in the CAIR and CAIR FIP
trading programs, they differ from solid waste incineration units in
that biomass-fired units are designed and operated for the purpose of
generating electricity for sale. As a result, they are reasonably
treated as part of the power generation sector, which comprises the
category of sources the CAIR and CAIR FIP trading programs aimed at
regulating. For this reason, EPA modeling for CAIR included biomass-
fired EGUs as part of the power sector, which was shown to be able to
make highly cost-effective SO2 and NOX emission
reductions. The marginal cost of control and the average

cost of control, shown to be highly cost-effective, reflect a range of
power sector control costs that include costs from sources such as
biomass-fired units. Commenters did not provide any basis for changing
EPA's treatment of biomass-fired units in the modeling or for
challenging EPA's modeling results.
    Biomass-fired units included in the CAIR and CAIR FIP trading
programs are distinguishable from solid waste incineration units exempt
from the CAIR and CAIR FIP trading programs. First, while the purpose
of biomass-fired units are to generate electricity (and, in some cases,
useful thermal energy), solid waste incineration units are designed and
operated for the purpose of disposing of solid waste, with electricity
generation incidental to this purpose. In fact, the term ``solid waste
incineration unit'' excludes sources whose primary purpose is something
other than waste disposal, such as ``material recovery facilities * * *
which combust for the primary purpose of recovering materials'' and
``qualifying small power production facilities * * * or qualifying
cogeneration facilities * * * which burn homogeneous waste for the
production of electric energy * * * for the production of electric
energy and steam or forms of useful energy (such as heat) * * *'' (18
U.S.C. 7429(g)(1)) Thus, it was reasonable for EPA to treat biomass-
fired units, but not solid waste incineration units, as part of the
power sector. Second, as explained in the CAIR FIP NPR, emission
reductions from solid waste incineration units, treated as a separate
source category, were not considered in EPA's determination of highly
cost-effective reductions from the power sector. Biomass-fired units
were treated as part of the power sector, which was shown in EPA's
modeling to be able to make highly cost-effective reductions.
    EPA does not believe that the title IV exemption for qualifying
biomass-fired units means that these units should be exempt from all
cap-and-trade programs developed after the Acid Rain Program. Under the
Acid Rain Program, an IPP facility (such as a biomass-fired unit) that
has, as of November 15, 1990, a qualifying power purchase commitment
(including a sales price) to sell at least 15 percent of planned net
output capacity and has installed net output capacity not exceeding 130
percent of planned net output capacity is exempt from the program.
However, if the power purchase commitment changes after November 15,
1990 in a way that allows the cost of compliance with the Acid Rain
Program to be shifted to the purchaser, then the IPP facility loses the
exemption. For example, expiration or termination of the power purchase
commitment or modification so that the price is increased (e.g.,
changed to a market price) results in loss of the exemption. The
purpose of the exemption is to protect IPP facilities subject to
contract prices that were set before passage of the CAA Amendments of
1990 (including the Acid Rain Program in title IV) and that did not
allow pass through of the costs of Acid Rain Program compliance.
However, EPA maintains that this exemption was aimed at easing the
transition of such facilities into the Acid Rain Program and that there
is no basis for maintaining this exemption for every subsequent cap-
and-trade program.
    Under the CAIR trading programs, a biomass-fired unit can be
allocated NOX allowances, just as any other CAIR unit.
Further, although biomass-fired units are not generally allocated title
IV allowances, which are used in the CAIR SO2 annual trading
program, those units can opt into the Acid Rain Program and receive
title IV allowances as long as they retain their IPP exemption. If they
lose the exemption because they are no longer bound by their power
purchase commitment, then they can pass through compliance costs to the
same extent any CAIR unit can do so.
    For the reasons discussed above, the EPA is not including an
exemption from the CAIR and CAIR FIP trading programs for biomass-fired
units in today's final rule.
    Low Emissions Units Under CAIR FIP. EPA received comment requesting
that units with low emissions, such as units that emit less than 25-
tons annually, be exempt from the CAIR and CAIR FIP trading programs.
This includes simple cycle turbines that are operated infrequently,
primarily during peak demand or when there are operational difficulties
with baseload units. Commenters claim that the cost of monitoring and
reporting their emissions is excessively burdensome and that special
provisions in part 75 monitoring for low mass emitting (LME) units does
not provide adequate relief.
    Today's final CAIR FIP trading rules do not include an exemption
for low emitting units. While low emitting, these units are designed
and operated for the purposes of generating electricity for sale. As a
result, they are reasonably treated as part of the power generation
sector, which comprises the category of sources the CAIR and CAIR FIP
trading programs aimed at regulating. For this reason, low-emitting
units were included as part of the power sector, which was shown
through EPA modeling for CAIR to be able to make highly cost-effective
emission reductions. The marginal cost of control and the average cost
of control, shown to be highly cost effective, reflect a range of power
sector control costs that include costs from low-emitting units
(including simple-cycle turbines).
    Commenters advocating an exemption of these units did not provide
any basis for changing EPA's treatment of these units in the modeling
or for challenging EPA's modeling results.
    The NOX SIP Call did include an exemption for units that
could demonstrate that their permits imposed an operating hour
limitation under which their potential emissions during the ozone
season did not exceed 25 tons (the ``25-ton exemption''). Units wishing
to obtain the 25-ton exemption were required to use conservative
emission estimates of their potential emissions and State budgets were
adjusted to remove the equivalent of their potential emissions from
that State's trading program budget. In general, this exemption was
undersubscribed and complex. EPA also notes that it received little
comment on including a 25-ton exemption, with only a single facility
claiming that this exemption is necessary. EPA does not see compelling
justification to include this exemption in the CAIR and CAIR FIP
trading programs.
    EPA does not agree with commenters that contend that the LME
provisions do not adequately relieve the cost of monitoring and
reporting for low emitting units. The part 75 LME provisions provide
qualifying sources with multiple options to allow facilities to choose
the approach that best fits their circumstances. First, units may
choose to use EPA-provided, conservative emission factors in lieu of
installing and operating Continuous Emissions Monitoring Systems
(CEMS). The LME provisions provide a second option that allows
facilities to determine unit-specific emission factors for use in
estimating their annual emissions. Additionally, EPA provides the
software necessary to generate the quarterly emissions reports for
these sources to further lessen the burden on these sources. These
streamlined monitoring and reporting procedures relieve much of the
administrative burden, and therefore, the compliance costs, for LME
qualifying units. This allows EPA to accurately and cost-effectively
account for the emissions, even at low emission levels, and allow these
units to participate in the CAIR trading programs.

F. Allocation of NOX Emission Allowances to Sources

    The EPA presented in the NPR (70 FR 49730-49734) its proposed
schedules and methods for allocating NOX allowances to
sources, including allowances for the CAIR FIP NOX annual
trading program and the CAIR FIP NOX ozone season trading
program. The Agency proposed to use NOX allocation methods
that are consistent with the NOX allocation methods in the
CAIR SIP model trading rules.
    As discussed above, the Agency proposed that a State could choose
to modify the application of the FIP through abbreviated SIP revisions
that would allow the State, rather than EPA, to allocate NOX
annual and/or ozone season allowances for the CAIR FIP trading
programs.
    The EPA proposed formulas for EPA-determined allocations of
NOX allowances to units (both existing units with sufficient
baseline data and new units) under the CAIR FIP trading programs.
Further, the Agency proposed schedules for applying the allocation
formulas and for determining such NOX allocations for the
CAIR FIP trading programs. The EPA also proposed schedules for States
to apply State-determined allocation formulas under abbreviated SIP
revisions. In addition, EPA proposed a schedule for the Administrator
to record NOX allocations (whether EPA-or State-determined)
in source accounts.
    The EPA received a number of comments on each of these elements of
its proposed schedules and methods for NOX allocations. The
Agency discusses the comments and presents the final schedules and
methods for NOX allocations below.
    See section VI.I in today's preamble for a discussion of the
Agency's method for distributing FIP NOX annual allowances
from the NOX annual CSP.
1. Schedule for Determining and Recording NOX Allocations
    The Agency's preference is for States to make decisions about
NOX allocations for their sources. Although EPA will
determine NOX allocations for the CAIR FIP trading programs,
we intend to only record EPA-determined allocations in allowance
accounts for sources located in a State without a timely, approved CAIR
SIP revision (or timely, approved abbreviated CAIR SIP revision
providing for State-determined allocations).
    While EPA's proposal included schedules for determining and
recording NOX allocations for both existing units with
sufficient baseline data and new units, this section of the preamble--
and the public comments--focus on the allocations for existing
units.\26\
---------------------------------------------------------------------------

    \26\ The Agency is finalizing the proposed schedules for
determiing and recording FIP NOX allocations for new
units; see Sec. Sec.  97.141, 97.341, 97.153 and 97.353.
---------------------------------------------------------------------------

    As discussed further below, EPA intends to determine NOX
allocations for the CAIR FIP trading programs by October 31, 2006
(covering 2009-2014). For any State choosing to determine CAIR FIP
NOX allocations using an abbreviated SIP revision, the
deadline for States to notify EPA of their first set of NOX
allocations (covering at least 2009-2011) is April 30, 2007. The Agency
will record EPA-determined allocations for the CAIR FIP trading
programs by September 30, 2007 (covering 2009), September 30, 2008
(covering 2010) and September 30, 2009 (covering 2011-2013). If State-
determined NOX allocations are approved earlier than these
recordation deadlines (under a full SIP revision or an abbreviated SIP
revision), the Agency intends to record the State-determined
allocations in source accounts rather than EPA-determined allocations,
as soon as possible. Table VI-2, below, summarizes the final deadlines
for recording CAIR FIP NOX allocations (EPA-determined
allocations or State-determined allocations using an abbreviated SIP
revision). Table VI-3 summarizes the final deadlines for recording CAIR
SIP NOX allocations for States choosing to use the CAIR
model trading rules (full SIP revisions).
    As discussed in the NPR, the Agency developed proposed schedules
for recording CAIR FIP NOX allocations for existing units in
source accounts with the objective of balancing the following two
goals: (1) Providing both adequate certainty to sources regarding their
CAIR NOX allocations and adequate time for sources to make
compliance decisions, and (2) providing States choosing to allocate
CAIR NOX allowances with time to submit, and EPA to approve,
abbreviated or full SIP revisions that provide for State-determination
of allowance allocations.
    The final CAIR (70 FR 25162) requires States to submit SIP
revisions complying with the CAIR requirements to the Agency by
September 11, 2006 and to submit the initial set of NOX
allocations by October 31, 2006.
    In the CAIR FIP NPR, the Agency proposed that States choosing to
submit abbreviated SIP revisions would be required to submit such
revisions to EPA by March 31, 2007, and--if choosing to address
NOX allocations in an abbreviated SIP revision--would be
required to submit the initial set of NOX allocations by
September 30, 2007. The EPA proposed allowing States to submit
abbreviated SIP revisions later than full revisions because the Agency
anticipates being able to complete the approval process more quickly
for abbreviated revisions due to their narrower scope.
    The Agency stated in the FIP NPR its intention to determine final
NOX allocations for 2009 through 2014 for the FIP trading
programs prior to December 1, 2007 (70 FR 49732). The EPA has further
considered its plans for determining these final NOX
allocations and now intends to determine them by October 31, 2006. The
Agency intends to publish a Notice of Data Availability (NODA) during
spring 2006 with NOX allocations for 2009 through 2014. The
public will have an opportunity to make objections to any of the data
used in these allocations. EPA will publish a NODA with the final
NOX allocations for 2009 through 2014 (adjusted if necessary
in light of any objections) by October 31, 2006. In this manner, the
Agency intends to provide earlier notice to sources of the EPA-
determined NOX allocations.
    The EPA proposed to determine NOX allocations by July
31, 2011 and July 31 of each year thereafter for the control period in
the fourth year after the year of the deadline for the determination
and then to provide opportunity for submission of objections to the
determination. The EPA would make any necessary adjustments to the
allocations in light of any objections, before the deadline for EPA to
record the allocations. The EPA is now finalizing this schedule. For
example, the Agency will determine allocations by July 31, 2011 for the
2015 control period and then provide opportunity for submission of
objections. The Agency intends to make any necessary adjustments to
these allocations, in light of any objections, as soon as possible
after the receipt of objections and before the recordation deadline
\27\ of December 1, 2011. As discussed further below, the Agency
intends to record EPA-determined NOX allocations in source
accounts only in the absence of a timely, approved full CAIR SIP
revision or a timely, approved abbreviated CAIR SIP revision providing
for State-determined allocations.
---------------------------------------------------------------------------

    \27\ Recordation deadline means the date by which the
Administrator will record allocations in source accounts in the
allowance tracking systems.
---------------------------------------------------------------------------

    The EPA presented in the FIP NPR its proposed deadlines for
recording NOX allocations in source accounts for the CAIR
FIP trading programs (see Table

VI-1 in the NPR at 70 FR 49732.) The proposed recordation deadlines for
FIP NOX allocations were as follows: By December 1, 2007 for
the 2009 control period; by December 1, 2008 for the 2010 control
period; by December 1, 2009 for the 2011, 2012 and 2013 control
periods; by December 1, 2010 and December 1 of each year thereafter for
the control period in the fourth year after the recordation deadline.
These proposed recordation deadlines were the latest dates by which EPA
proposed to record NOX allocations for the CAIR FIP trading
programs. The EPA proposed to record EPA-determined NOX
allocations only in the absence of a timely, approved full CAIR SIP
revision or a timely, approved abbreviated CAIR SIP revision providing
for State-determined NOX allocations. The Agency intended to
record any NOX allocations determined by a State using an
abbreviated SIP revision as soon as feasible after approval of the
abbreviated SIP revision; EPA did not intend to wait until the proposed
deadlines to record such State-determined allocations. Likewise, the
Agency intended to record any NOX allocations determined by
a State using a full SIP revision as soon as feasible after approval of
the full revision (and according to the recordation deadlines in the
CAIR SIP rules at Sec. Sec.  96.153 and 96.353).\28\
---------------------------------------------------------------------------

    \28\ The FIP NPR preamble contained an inaccurate statement
regarding proposed NOX allocation recordation deadlines.
The preamble (70 FR 49731) indicated that the recordation deadlines
would be the same whether the allocations were in a full SIP
revision or in an abbreviated revision; however the proposed
recordation deadlines relevant to abbreviated revisions are
different from deadlines for full SIP revisions.
---------------------------------------------------------------------------

    In the FIP NPR (70 FR 49739), the Agency proposed to remove the
deadline to record NOX allocations for the first set of
years submitted in a SIP revision (i.e., in a full SIP revision) that
used the model allocation method in part 96, but to retain the
deadlines to record the subsequent allocations. The CAIR NOX
model trading rules, as finalized at 70 FR 25162, required the
Administrator to record the initial set of NOX allocations
submitted by the States by December 1, 2006 (Sec. Sec.  96.153 and
96.353). However, since the SIP revisions that include such allocations
are not due until September 11, 2006, it is highly unlikely that all
the SIP revisions will be approved by EPA in time for the allocations
to be recorded by December 1, 2006. CAIR NOX allowance
allocations should not be recorded, and thereby be tradable in the
allowance market, before the SIP revision on which the allocations are
based is final; it would be highly disruptive to the allowance market
if allocations that are recorded and could be traded could subsequently
be rendered invalid due to disapproval of the SIP revision on which the
allocations are based.
    The Agency's proposal to remove the deadline to record the first
set of NOX allocations submitted in a full SIP revision did
not include an alternative recordation deadline. Some commenters
suggested that EPA should set an alternative deadline, and one
commenter suggested that the deadline should be within 30 to 60 days
following EPA approval of a State's SIP revision. The Agency is
finalizing a recordation deadline of September 30, 2007 for the first
set of NOX allocations submitted with a full SIP revision.
This recordation deadline is based on the Agency's belief that full SIP
revisions can be approved in about a year from submission, that is by
about September 2007.
    Some industry commenters who supported the abbreviated SIP revision
approach did not support the proposed schedule for abbreviated
revisions, in particular with regard to the schedule for NOX
allocations. Some suggested that abbreviated SIP revisions should be
due on the same schedule as full SIP revisions (i.e., that the deadline
for abbreviated SIP revisions should be September 11, 2006, instead of
March 31, 2007 as proposed) or, as suggested by one commenter, on an
even earlier schedule than full SIP revisions. Similarly, some
suggested that the deadline for the first set of NOX
allocations submitted with an abbreviated SIP revision should be the
same as the NOX allocations deadline for a full SIP revision
(i.e., that the deadline for allocations in an abbreviated revision
should be October 31, 2006, instead of the proposed deadline).\29\ Some
commenters suggested that sources should be provided earlier knowledge
of their allocations in order to plan for compliance.
---------------------------------------------------------------------------

    \29\ The deadline that EPA proposed for submitting
NOX allocations with an abbreviated SIP revision is
September 30, 2007 for 2009, 2010 and 2011, as specified in the
proposed regulatory text at Sec.  51.123 (70 FR 49746). Through an
inadvertent error the preamble to the NPR listed a different date;
the preamble indicated that the proposed deadline for such
allocations would be October 31, 2007 (70 FR 49731).
---------------------------------------------------------------------------

    A State commenter asserts that submitting an abbreviated SIP
revision under the proposed schedule will be problematic for some
States that may not be able to complete a State rulemaking prior to the
deadline for such submission.
    The EPA is finalizing the proposed March 31, 2007 deadline for
submission of abbreviated SIP revisions to the Agency. Because of the
narrower scope of abbreviated SIP revisions, EPA anticipates that it
will be able to complete the approval process more quickly for such
revisions than for full SIP revisions. The EPA believes that it can
approve abbreviated SIP revisions in about 6 months from submission.
With abbreviated SIP revisions due to the Agency about 6 months later
than the deadline for full SIP revisions, EPA anticipates that approval
for both types of submissions would be feasible by about the same time,
that is by about September 2007.
    The Agency is finalizing a deadline of April 30, 2007--instead of
September 30, 2007 as proposed--for States to submit to EPA their first
set of NOX allocations associated with an abbreviated SIP
revision (covering at least 2009, 2010 and 2011). The Agency revised
this deadline in order to provide sources with an earlier opportunity
to have notice of the State-determined NOX allocations.
    A few industry commenters argued that the deadlines for recording
NOX allocations in source accounts for the CAIR FIP trading
programs should be earlier than proposed, to provide earlier knowledge
to sources of their allocations. One recommended that NOX
allocations for the CAIR FIP trading programs--whether determined by
EPA or determined by a State using an abbreviated SIP revision--be
recorded in source accounts by December 1, 2006 for 2009 through 2011.
    Another industry commenter suggested that, if a State fails to meet
the October 31, 2006 deadline for allowance allocations in a full SIP
revision, EPA should immediately record the FIP allowance allocations.
The same commenter also suggested that NOX allocations
should be recorded in source accounts a minimum of 3 years prior to the
date they can be used for compliance and asserted that, if a source did
not know until a year before the compliance deadline what its
allocation will be, the source ``would be completely unable to plan for
compliance.''
    A State commenter suggests that the requirements for notification
of allocations under CAIR SIP trading programs and the CAIR FIP trading
programs should be the same. According to the commenter, if EPA
finalizes a lead time for recording NOX allocations under
the CAIR FIP trading programs of less than 3 years for the first 4
control periods, ``the same flexibility

should be extended to approved CAIR SIP trading programs.''
    In determining the final NOX allocation recordation
deadlines, abbreviated SIP submission deadlines, and schedules for
determining NOX allocations, the Agency is balancing the
goals of (1) providing information in advance to source owners and
operators regarding their future CAIR NOX allocations in
order to facilitate their decision-making concerning compliance with
the requirements to hold allowances and (2) providing States choosing
to allocate CAIR NOX allowances sufficient time to prepare
and submit SIP revisions (full or abbreviated revisions) setting forth
the State allocation methodology and prepare and submit unit
allocations for specific years and providing EPA sufficient time to
review and approve these SIP revisions and record these unit
allocations. The EPA made adjustments to the proposed NOX
allocation schedules in response to public comments received on the
proposal. The Agency believes that the final schedules achieve a
reasonable balance between these goals within the constraints of the
available time.
    The Agency is finalizing a deadline of September 30, 2007 (instead
of December 1, 2007 as proposed) for recording NOX
allocations for 2009 for the CAIR FIP trading programs, whether EPA-
determined or State-determined using an abbreviated SIP revision. This
is the same deadline that EPA is finalizing for recording the first set
of State-determined NOX allocations in a full SIP revision,
as discussed above. This is the earliest feasible recordation date
based on EPA's assumption that it will take about a year to approve a
full revision and about 6 months to approve an abbreviated revision.
The EPA would like to stress that, if State-determined NOX
allocations are approved earlier than this deadline (under a full SIP
revision or an abbreviated SIP revision) the Agency intends to record
the State-determined allocations in source accounts as soon as
possible. The Agency does not intend to wait until the recordation
deadline to record State-determined allocations and will record EPA-
determined allocations for 2009 by this deadline in the absence of an
approved full SIP revision or an approved abbreviated SIP revision
providing for State-determined allocations.
    Similarly, the Agency is finalizing a recordation deadline of
September 30, 2008 (instead of December 1, 2008) for recording CAIR FIP
NOX allocations for 2010; and September 30, 2009 (instead of
December 1, 2009) for recording CAIR FIP NOX allocations for
2011, 2012 and 2013. The Agency does not intend to wait until these
deadlines to record State-determined allocations and will record EPA-
determined allocations for 2010, 2011, 2012 and 2013 according to these
deadlines in the absence of an approved full SIP revision or an
approved abbreviated SIP revision providing for State-determined
allocations. The Agency will record EPA-determined allocations in
source accounts one year at a time for 2009 and 2010 in order to
provide flexibility to States to determine allocations for their
sources.
    Beginning with allocations for the 2014 compliance year, EPA is
finalizing the proposed recordation deadlines for CAIR FIP
NOX allowances. That is, beginning with the 2014 control
period and for each control period thereafter, EPA intends to record
NOX allocations for the CAIR FIP trading programs in source
accounts by December 1 of each year for the control period 4 years
after the year in which the allocations are recorded. This approach
will provide sources with their allocations about 3 years in advance.
For example, EPA will record FIP allocations for the 2014 control
period by December 1, 2010. The Agency will record EPA-determined
allocations only in the absence of an approved full SIP revision or an
approved abbreviated SIP revision providing for State-determined
allocations.
    Table VI-2, below, summarizes the final NOX allocation
recordation deadlines for the CAIR FIP trading programs. Deadlines for
future control periods not shown in the table follow the same pattern
shown for 2014 through 2016. Note that these are the latest dates by
which EPA will record CAIR FIP NOX allocations. The EPA
intends to record State-determined CAIR FIP NOX allocations
as soon as possible after approval of abbreviated SIP revisions.

    Table VI--2.--Recordation Deadlines for CAIR FIP NOX Allocations
------------------------------------------------------------------------
                                            Deadline by which FIP NOX
                                          allocations are recorded (EPA-
          CAIR control period            determined allocations or state-
                                           determined allocations using
                                            abbreviated SIP revision)
------------------------------------------------------------------------
2009...................................  September 30, 2007.
2010...................................  September 30, 2008.
2011...................................  September 30, 2009.
2012...................................  September 30, 2009.
2013...................................  September 30, 2009.
2014...................................  December 1, 2010.
2015...................................  December 1, 2011.
2016...................................  December 1, 2012.
------------------------------------------------------------------------

    As discussed in the FIP NPR (70 FR 49731), EPA acknowledges that it
is preferable for source owners and operators to have at least 3 years
lead time with regard to allowance allocations when feasible. A shorter
lead time would reduce the period for buying or selling allowances and
could prevent sources from participating in allowance futures markets,
a mechanism for hedging risk and lowering costs (CAIR NFR, 70 FR
25279). Although lead time may impact the selection of trading
strategies, as discussed further below, EPA believes that the selection
of compliance methods (e.g., installation of emission control
technology, fuel switching, or allowance purchases) should not be
impacted by the amount of allowances a source is allocated for a given
year.
    The final schedule for recording NOX allocations for the
CAIR FIP trading programs in today's rulemaking provides that
allocations will be recorded with at least 3 years lead time in all but
the initial 4 compliance years. For those initial years, the Agency
will work with the States to be able to record State-determined
NOX allocations as soon as feasible and will record EPA-
determined allocations by the recordation deadlines in the absence of
timely, approved full SIP revisions or timely, approved abbreviated SIP
revisions providing for State-determined allocations.
    Table VI-3, below, summarizes the final recordation deadlines for
NOX allocations for the CAIR SIP model trading rules (i.e.,
NOX allocations contained in full SIP revisions). Deadlines
for future control periods not shown in the table follow the same
pattern shown for 2015 and 2016. The EPA intends to record State-
determined allocations as soon as possible after approval of full SIP
revisions.

     Table VI--3.--Recordation Deadlines for CAIR SIP Model Rule NOX
                               Allocations
------------------------------------------------------------------------
                                            Deadline by which SIP NOX
                                          allocations are recorded (for
          CAIR control period            States choosing to use the CAIR
                                                 SIP model rules)
------------------------------------------------------------------------
2009...................................  September 30, 2007.
2010...................................  September 30, 2007.
2011...................................  September 30, 2007.
2012...................................  September 30, 2007.
2013...................................  September 30, 2007.
2014...................................  September 30, 2007.
2015...................................  December 1, 2009.
2016...................................  December 1, 2010.
------------------------------------------------------------------------

    It is likely that source owners and operators will know or at least
have a reasonable understanding of the likely

amounts of their NOX allocations substantially earlier than
the deadlines for recording allocations in source accounts. States
submitting full CAIR SIP revisions must notify EPA of their initial set
of unit-by-unit NOX allocations (covering at least 2009,
2010 and 2011) by October 31, 2006. As indicated in the CAIR, the
States have broad discretion in making unit-by-unit allocations, and
EPA's review will center on whether the total allocations in a given
year exceed the State's trading budget. See Sec. Sec.
51.123(o)(2)(ii)(A) and (aa)(2)(iii)(A). The Agency intends to
determine unit-by-unit NOX allocations for the initial
compliance years of the CAIR FIP trading programs by the same date,
October 31, 2006 (covering 2009 through 2014). States submitting
abbreviated SIP revisions must notify EPA of their unit-by-unit
NOX allocations for the CAIR FIP trading programs by April
30, 2007 (covering at least 2009, 2010 and 2011). As is the case for
States submitting full SIP revisions, EPA's review of unit-by-unit
allocations will center on ensuring that the State budget would not be
exceeded.
    Moreover, through each State's public rulemaking, adjudicative,
and/or legislative processes for determining allocations, source owners
and operators will likely be aware of their State's plans regarding
NOX allocations even in advance of the deadlines by which
the States must submit their unit-by-unit allocations to EPA. For
example, the public is likely to know whether the State is planning to
allocate using the example NOX allocation method provided in
the CAIR SIP model rules, or what alternative allocation method the
State is planning to use. This knowledge would give owners and
operators a sense for what their allocations will be.
    An industry commenter asserted that, if a source did not know until
a year before the compliance deadline what its allocation will be the
source ``would be completely unable to plan for compliance,'' stating
as a reason ``it takes longer than a year to install the controls that
might be necessary to meet an unexpectedly low allocation.'' Another
commenter asserted that ``Sources use the period of time between
finalization of source-by-source allocations and the control period to
plan and implement any strategy necessary to achieve compliance.'' The
Agency disagrees with these arguments. The EPA believes--and general
economic theory suggests--that for owners and operators of sources
covered by CAIR trading programs, the determination regarding what will
be the lowest cost compliance methods (e.g., installation of emission
control technology, fuel switching, or allowance purchases) should not
be impacted by the amount of allowances a source is allocated for a
given year.
    The Agency believes the decision to install NOX control
technology will be made based on evaluating the cost to that source of
installing controls compared to the price of NOX allowances
in the allowance market. For a particular source, if the cost to
control a ton of NOX emissions is lower than the
NOX allowance price, then the source will likely choose to
control emissions. This is the case regardless of the amount of
allowances allocated to the source since using an allocated allowance
to cover emissions has an opportunity cost (i.e., the value of that
allowance if it were sold in the allowance market) just as using a
purchased allowance to cover emissions has a cost (i.e., the price of
purchasing that allowance in the allowance market).
    Such a source may choose to over-control and make greater
reductions than those required on average by the NOX trading
program cap either to free up allocated allowances that can then be
sold for more than it cost to free up the allowances or in order to
avoid purchasing allowances in the allowance market. In contrast, for a
particular source, if the cost to control a ton of NOX
emissions is higher than the NOX allowance price, the source
will likely choose to use allocated allowances or buy allowances to
cover its NOX emissions since that will cost less than
installing control technology.
    The Agency strongly urges States to submit CAIR SIP revisions (full
or abbreviated revisions) to EPA in a timely manner. The EPA will
endeavor to work with States to ensure that the Agency can timely
approve SIP revisions and record State NOX allocations in
source accounts.\30\ However, once EPA-determined NOX
allocations are recorded for a particular control period (which would
only occur in the absence of a timely, approved full CAIR SIP revision,
or a timely, approved abbreviated CAIR SIP revision providing for
State-determined allocations), EPA intends not to record overlapping
State-determined allocations for that same control period. Rather, EPA
will work with the States to approve SIP revisions with State
allocations for control periods after the last control period for which
EPA-determined allocations have been recorded in source accounts. It
would be highly disruptive to the allowance market if EPA-determined
allocations that had been recorded and could be traded in the market
could subsequently be rendered invalid due to approval of overlapping
State allocations for the same control period.\31\
---------------------------------------------------------------------------

    \30\ EPA believes that, if a State submits its CAIR SIP revision
later than the submission deadline (September 11, 2006 or March 31,
2007 for a full or abbreviated SIP revision, respectively), it is
unlikely that there will be adequate time for the Agency to review
and approve the SIP revision and record State-determined
NOX allocations by the recordation deadline under the FIP
for the 2009 compliance year. For a CAIR SIP revision submitted
after its deadline, EPA intends to withdraw FIP requirements in a
State as soon as practical after receiving approvable SIP revisions
and will work with any State to ensure a timely withdrawal of the
FIP and recording of State NOX allocations in source
accounts. The deadlines for recording CAIR FIP NOX
allocations and CAIR SIP NOX allocations are presented
above in Tables VI-2 and VI-3, respectively.
    \31\ The discussion in this section focuses on the time frame in
which EPA plans to record EPA-determined allocations in order to
coordinate with the approval of SIP revisions and the recordation of
State allocations, assuming States choose to participate in the EPA-
administered CAIR NOX trading programs. The Agency will
also carefully consider the timing of a transition from federal to
State-implemented programs for any States choosing to use a method
other than the EPA-administered CAIR SIP trading programs to meet
their CAIR obligations.
---------------------------------------------------------------------------

    For States choosing to submit full SIP revisions for CAIR, the
Agency suggests they consider designating any of the 4 specific
elements that can be included in abbreviated SIP revisions (e.g.,
NOX allocations) as being submitted for purposes of both a
full SIP revision and an abbreviated SIP revision. Because the Agency
anticipates that it will be able to approve abbreviated SIP revisions
more quickly than full SIP revisions, a State's designation of its
NOX allocations as an abbreviated SIP revision (as well as
part of a full SIP revision) may result in EPA being able to approve
the allocations portion more quickly and being able to record the
State-determined unit-by-unit allocations sooner.
    The Agency intends to work with any State choosing to allocate
NOX allocations (whether through a full SIP revision or an
abbreviated SIP revision) and to ensure that the State's allocations,
rather than EPA-determined allocations, will be recorded as soon as
possible.
    The Clean Air Act is designed to give States the first obligation
(and opportunity) to prevent significant contribution to a downwind
State's nonattainment problems. The EPA only acts in the case where a
State does not meet this obligation. The Agency is promulgating CAIR
FIPs as soon as possible to assure downwind States that emission
reductions will occur in time to help them meet their nonattainment
deadlines. Even though EPA is

promulgating FIPs, the Agency recognizes that the Clean Air Act assigns
first responsibility to the States, and it is EPA's preference to
defer, wherever possible, to States the decisions about control
mechanisms to prevent significant contribution, including States'
decisions about allocation of NOX allowances.
2. Method for Allocating NOX Allowances
    Proposed NOX Allocation Methodology. In the NPR, EPA proposed a
NOX allocation approach for both annual and ozone season
allowances that is consistent with the example methodology presented in
the CAIR SIP model trading rules. The proposed methodology was the same
for annual NOX allowances and for ozone season
NOX allowances, except that the ozone season method uses
ozone season heat input not annual heat input.
    For existing units, the proposed NOX allocation
methodology used input-based allocations, adjusting the heat input by
factors based on fuel type (described later in this section). As in the
example allocation methodology in the CAIR SIP model trading rules, for
existing units the Agency proposed to use heat input based on the
average of the 3 highest amounts of a unit's adjusted heat input for 5
years (2000 through 2004). The EPA took comment on using heat input
based on 3 or 4 years of data rather than 5 years.
    For new units that have established baselines, EPA proposed that
allocations would be based on generation using a modified output
approach to convert output to heat input (described below), and
allocations to existing units would be updated to take into account new
generation, because new units would receive allocations from the pool
of allowances shared with existing sources. New units that have not yet
established baseline data would receive allowances from a new unit set-
aside.
    The Agency proposed that EPA would allocate allowances to existing
units from the State's EGU NOX budget for the first 6
control periods (2009 through 2014) for existing sources on the basis
of historic baseline heat input. Consistent with CAIR, EPA proposed
January 1, 2001 as the proposed cut-off on-line date for considering
units as existing units. Allowances for 2015 and later would be
allocated from the State's EGU NOX budget annually, 3 years
in advance. These allocations would take into account output data from
new units with established baselines (modified by heat input conversion
factors to yield heat input numbers, as described below). As new units
enter into service and establish a baseline, they would be allocated
allowances in proportion to their share of the total calculated region-
wide heat input. Allowances allocated to existing units would slowly
decline as their share of total calculated heat input decreases with
the entry of new units. (Note that once a baseline heat input was
established for existing units, this baseline heat input would not
change).
    EPA proposed to allocate allowances from a new unit set aside to
new units that have entered service but have not yet established a 5-
year baseline. The allowances from the set-aside would be distributed
based on a unit's reported emissions from the previous control period,
which would provide allowances for use in meeting the allowance-holding
requirement during the interim period before the unit would be
allocated allowances on the same basis as existing units.
    Consistent with the CAIR SIP example allocation methodology, the
new unit set-aside would be equal to 5 percent of a State's emission
budget for the years 2009-2013 and 3 percent of a State's emission
budget for subsequent years. New units would begin receiving allowances
from the set-aside for the control period immediately following the
control period in which the new unit commences commercial operation,
based on the unit's emissions from the preceding control period. EPA
would allocate allowances from the set-aside to all new units in any
given year as a group. If there were more allowances requested than
exist in the set-aside, allowances would be distributed on a pro-rata
basis.
    EPA received a number of comments on various aspects of the
proposed NOX allocation methodology. First, while most
commenters were supportive of allocating allowances to existing units
using historic heat input, some commenters advocated the use of output
data for determining allocations, suggesting that such an approach
would reward cleaner, more efficient generation, particularly with
updating.
    Second, most commenters supported the use of a 5-year baseline for
allocating allowances based on heat input, noting that a longer period
of data collection is more likely to capture a unit's normal operating
conditions. One commenter suggested that a shorter baseline period
would allow new sources to enter the existing source pool in a more
timely manner and thus provide existing sources with more certainty.
    One commenter requested clarification on the treatment of
replacement units under the allocation provisions, regarding whether
they would be treated as new units, and have to reestablish a baseline,
or maintain their allowance allocation similarly to retired units.
    Several industry commenters made suggestions regarding the use of
new unit set-asides in the FIP NOX allocation methodology.
Some stated that EPA should provide that unused allowances from the
set-aside would be returned to existing units. The Agency proposed to
do so, and is finalizing that any unallocated allowances that remain in
the new unit set-asides will be allocated on a prorated basis to the
units that received allocations. See Sec. Sec.  97.142(d) and
97.342(d). One commenter argued against using a new unit set-aside.
Another commenter supported the use of a set-aside but argued that new
units should be provided access to allocations during their initial
year of operation.
    In today's rule, EPA is finalizing most of the NOX
allowance allocation provisions as proposed. First, EPA is finalizing
the use of an input-based approach for allocating allowances. This
approach uses a baseline heat input comprised of operating data from
the years 2000-2004, and uses the average of the 3 highest heat input
years from this time period for allowance allocation calculations for
existing units. This baseline heat input will not be updated over time.
    EPA believes, as it stated in the final CAIR, that allocating to
existing units based on a baseline of historic heat input data, rather
than output data, is desirable because accurate protocols currently
exist for monitoring this data and reporting it to EPA, and several
years of certified data are available for most of existing units. EPA
has chosen not to utilize an updating system for allocating allowances,
in order to avoid the subsidization of increased fuel use (or increased
electricity generation) and the associated market distortions. If
allocations were based on updated heat input (or updated output) data
then increased fuel use (or increased electricity generation) would
result in increased future allocations and thus would in effect be
subsidized.
    For new units, EPA is finalizing the use of the proposed modified
output approach for calculating baseline heat input, described in
detail below, as well as the allocation to new units without a baseline
from a new unit set aside of 5 percent of a State's emission budget for
the years 2009-2013 and 3 percent of a State's emission budget for
subsequent years.
    The Agency believes that it is reasonable to provide a set-aside
for allocations to new units and further

believes that it is reasonable not to provide access to allocations for
a new unit during its initial year of operation. The Agency's final
methodology provides allocations to new units based on the prior year's
emissions until the new unit establishes a baseline and is allocated as
an existing unit. The methodology does not provide allowances to a unit
in its first year of operation; however, it is straightforward,
reasonable to implement, and predictable (see preamble to final CAIR,
70 FR 25281).
    As in the CAIR SIP example methodology, after 5 years of operation,
a new unit will have an adequate operating baseline of output data to
be incorporated into the calculations for NOX allocations
for existing units. (However, as discussed below in section VII of this
preamble, allowances are allocated to existing units several years in
advance, and a new unit with a baseline may need to continue to get
allowances from the new unit set-aside for a few years after the unit's
baseline is established.) The average of the highest 3 years from these
5 years will be multiplied by a heat-input conversion factor of 7,900
Btu/KWh to calculate the heat input value used to determine the new
unit's allocation from the pool of allowances for existing units. New
units will update the heat input numbers only once--for the initial 5-
year baseline period after they start operating. As in the CAIR SIP
example methodology, existing units as a group will not update their
heat input. This eliminates the potential for a generation subsidy
because current or future operating behavior will not impact the units'
allocations. Retired units will continue to receive allowances
indefinitely, thereby avoiding creation of a disincentive to retire
less efficient units.
    As discussed in section VII in today's preamble, EPA is adopting
technical changes to the SIP rules that make it clear that a separate
request for new-unit-set-aside allowances must be submitted for each
control period for which they are sought and must be submitted by May 1
(rather than July 1) of that control period; the final FIP rules are
consistent with these technical changes.
    Regarding replacement units, EPA's allocation approach allows such
units to retain their NOX allowance allocation, so as not to
provide a disincentive to replace (e.g., repower) older, less-efficient
units. As discussed in section VII in today's preamble, a definition of
``replacement'' has been added and the definition of ``commence
commercial operation'' has been clarified in the CAIR SIP model trading
rules in order to clarify the treatment of replacement units. The final
CAIR FIP rules are consistent with these changes in the SIP rules.
    Adjustments to Heat Input Data by Fuel Factors. In the NPR, EPA
proposed an allocation methodology based on the example allocation
methodology in the CAIR SIP model rules, which included adjustments to
heat input by fuel type, using fuel adjustment factors that are based
on average historic NOX emissions rates by 3 fuel types
(coal, natural gas, and oil) for the years 1999--2002. These adjustment
factors are 1.0 for coal-fired units, 0.6 for oil-fired units, and 0.4
for units fired with all other fuels (e.g., natural gas). The factors
reflect the inherently different emissions rates of different fossil
fuel-fired units.
    A number of commenters supported the use of the proposed fuel
factors to adjust heat input, arguing that adjusting heat input for
fuel type results in a more equitable allocation scheme that would
provide allowances that are in closer proportion to historic emissions.
Commenters supporting the use of fuel factors also noted that EPA
should retain these fuel factors in order to maintain consistency with
the model cap-and-trade rule, which would ease any necessary
transitions from a CAIR FIP to a CAIR SIP if most States are expected
to eventually adopt the model rule. One commenter opposing the use of
fuel factors for individual unit allocations argued that adjusting
baseline heat input for fuel use is inequitable and penalizes clean
generation and is irreconcilable with EPA's ``highly cost-effective''
determination and EPA's air quality modeling. This same commenter also
questioned EPA's legal authority to use fuel adjustment factors in the
allocation of allowances.
    EPA is finalizing the use of the proposed adjustment factors (1.0
for coal-fired units, 0.6 for oil-fired units, and 0.4 for units fired
with all other fuels (e.g., natural gas)), to adjust baseline heat
input. EPA believes that these adjustment factors appropriately
consider the inherently higher emissions rate of coal-fired units and
the relatively greater burden on these units to control emissions.
    EPA's determination that CAIR control levels are highly cost
effective was assessed at the regional, rather than the State, level
because of the ability of sources to meet control requirements through
a regional cap-and-trade program for EGUs. While the chosen allocation
methodology can affect the distribution of compliance costs under the
cap-and-trade program, it will have little effect on overall compliance
costs or environmental outcome. This is because the incentives provided
by cap-and-trade encourage economically efficient compliance over the
entire region, as discussed above. The economically efficient outcome
will not depend on the relative levels of individual unit allowance
allocations.
    For this same reason, air quality modeling is not relevant to the
determination of allowance allocations, and a given allowance
allocation approach, particularly one based on historic data, would
have no affect on air quality modeling.
    Finally, EPA disagrees with the commenter who questioned its legal
authority to use this allocation scheme. The approach selected by EPA
is reasonable, is supported by the information available to EPA and is
well within the scope of EPA's authority to act. For further discussion
of this issue, see the CAIR notice of final action on reconsideration
signed the same day as the final FIP notice. While the reconsideration
notice addresses the use of fuel factors in the context of determining
the State NOX budgets, the same rationale applies to the use
of fuel factors for individual unit allocations.
    Cogeneration Units. In the NPR, EPA proposed that for a new
cogeneration unit that is a boiler, annual heat input values used to
calculate the unit's baseline heat input for purposes of allowance
allocations would be determined by converting the available thermal
output (Btu) of useable steam from the boiler to an equivalent heat
input by dividing the total thermal output (Btu) by a standard boiler/
heat exchanger efficiency rate of 80 percent. In today's rule, EPA is
finalizing this approach.
    For new cogeneration combustion turbines, EPA proposed in the NPR
to calculate annual heat input for such a unit by: Converting the
available thermal output of useable steam from a heat recovery steam
generator (HRSG) to an equivalent heat input by dividing the total
thermal output (Btu) by a standard boiler/heat exchanger efficiency
rate of 80 percent; and then adding the equivalent heat input for the
electrical generation from the combustion turbine, which is calculated
by multiplying the turbine's generation (in KWh) by the conversion
factor of 3,413 Btu/kWh. EPA is finalizing this approach as proposed.
    One commenter suggested that EPA's approaches for allocating to new
cogeneration boilers and combustion turbines be modified. This
commenter argued that EPA's proposed

methodology improperly rewards new cogeneration units by not matching
the rate of allocation with the degree of benefits realized by a
specific cogeneration unit. The commenter further asserts that EPA's
methodology would give a unit that only slightly improves its
efficiency the same allowance allocation benefit as a unit that
achieves a large increase in efficiency.
    The commenter proposes an alternative allocation approach for
cogeneration units, the primary goal of which is rewarding electricity
as a higher value product than steam.
    As EPA noted in the final CAIR preamble, steam and heat output,
like electrical output, are useable forms of energy that can be
utilized to power other processes. Because it would be nearly
impossible to adequately define the efficiency in converting steam
energy into the final product for each of the various processes and
uses for these outputs, EPA selected an approach that focuses on the
effectiveness of a cogeneration unit in capturing energy from fuel
input and converting it into the useable forms of steam and
electricity. EPA's approach does not attempt to regulate the efficiency
of the processes that are powered by the steam output from cogeneration
units.
    Further, EPA disagrees with the commenters suggestion that the
Agency's approach would not provide an incentive for cogeneration units
to operate efficiently. The use of modified output, rather than actual
heat input, as the basis of determining allowance allocations will
promote the development of cleaner and more efficient generation of
both electricity and process steam. EPA's approach rewards cogeneration
combustion turbines that have HRSGs capable of recapturing greater than
80 percent of the available heat from the combustion turbine exhaust
and any auxiliary burners. Furthermore, EPA's use of a 3,413 btu/KWh
factor to convert electrical output from the combustion turbine to an
equivalent heat input assumes that 100 percent of the combustion
turbine's heat input that is not converted to electricity is sent to
the HRSG as heat. This approach neglects energy losses in the
combustion turbine and generator. EPA believes that any efficiency
gains made by reducing these losses will be rewarded by the Agency's
approach, by resulting in greater electricity and/or steam output for a
given amount of heat input.
    Comments on providing sources owned by small entities with a
greater share of allowances: In the NPR, EPA took comment on allocating
NOX allowances in such a way as to provide sources owned by
small entities with a greater share of allowances. As discussed at
proposal, this option was based on the recommendation of one of the
Small Business Advocacy Review Panel members. This option would
necessitate reducing the number of NOX allowances available
to other affected sources in order to ensure that the overall reduction
requirements of CAIR are achieved, but could potentially provide
economic relief to small entities that demonstrate economic hardship as
a result of the rulemaking.
    A number of commenters expressed opposition to such an allocation
approach arguing that it is inappropriate for EPA to subsidize small
entity sources through additional allocations that result in reduced
allowance allocations and increased compliance costs for larger
sources. Additionally, some of these commenters noted that such an
approach could open the NOX allowance allocation system to
gaming, such as through a company establishing subsidiaries in order to
obtain additional allowances made available for small entities.
Finally, one of these commenters suggested that such an approach would
deviate from the CAIR model rules, and could restrict a State's freedom
if the State plans to transition from CAIR FIP allocations to CAIR SIP
allocations. One commenter expressed support for the approach described
in the NPR, but noted the need for additional clarification on the
definition of hardship and how such an approach would fit in with the
compliance supplement pool. No potentially affected small entities, as
defined in the NPR, submitted comments in support of this approach.
    EPA is not finalizing a NOX allocation approach that
gives a greater share of allowances to small entities that demonstrate
hardship. EPA believes that the flexibilities inherent in the CAIR FIP
trading program, as well as the existence of the Compliance Supplement
Pool in the first year of the program, will reasonably address concerns
about the economic impact of the rule on all sources. Additionally, the
lack of commenter support for such an approach suggests that such an
approach may not be warranted.
    Comments on use of an auction to distribute NOX allowances. In the
NPR, the Agency asked for comment on using a combination of direct
allocation and auctions for distributing NOX allowances in
the proposed CAIR FIP trading programs. The proposed approach was
analogous to the approach in the Administration's proposed Clear Skies
legislation: For the first CAIR NOX control period (2009)
the Agency would allocate 100 percent of the allowances using the fuel-
factor adjusted heat input approach described above. For the second
control period (2010) the Agency would allocate 99 percent of
allowances to units and auction the remaining 1 percent. The percentage
of allowances distributed via auction would increase over time, with
the Agency distributing via auction an additional 1 percent of
allowances every year for 20 years and then an additional 2.5 percent
of allowances every year thereafter, until eventually 100 percent of
allowances would be distributed via auction. The Agency also requested
comment on appropriate auction procedures for the proposed CAIR FIP
trading programs.
    The majority of commenters opposed the use of an auction for
allocating allowances. One commenter expressed support for an auction
and the specific approach that EPA outlined at proposal. This commenter
suggested that EPA modeled the auction procedure after that used in the
Acid Rain Program. EPA does not necessarily agree with the specifics of
the arguments submitted by commenters opposing the use of an auction.
However, in light of the comments, EPA is concerned that adoption of
the auction approach would be premature because the Agency lacks
sufficient information about the potential impact of such auctions on
sources and about the appropriate procedures for implementing such
auctions. Consequently, the allocation provisions for today's final
rule do not include auctions. Today's final allocation methodology,
described earlier in this section, provides for the direct distribution
of allowances to affected units.

G. Allocation of SO2 Allowances to Sources

    The Agency proposed a CAIR FIP SO2 cap-and-trade program
substantively identical to the CAIR SIP model SO2 trading
rule, which relies on title IV allowances. Title IV allowances have
already been allocated in perpetuity to individual units by title IV of
the CAA (70 FR 25278). Thus, the FIP proposal did not include an
allocation methodology for SO2 allowances, except with
regard to opt-in units.
    The Agency received several comments on the use of the title IV
allowances in the CAIR FIP SO2 program. EPA also received
several petitions for reconsideration of the CAIR, and granted
reconsideration concerning claims that inequities result from using
title IV allowance allocations in the CAIR program. EPA received,
considered, and responded to numerous

comments on this issue as part of the reconsideration process. As
explained in the CAIR Notice of Final Action on Reconsideration signed
the same day as this action, EPA has decided not to alter the approach
taken in the final CAIR.
    In today's action, EPA is adopting the CAIR model SO2
trading rules as the CAIR FIP SO2 trading rules, with minor
revisions to allow for Federal implementation. Thus, EPA is adopting
the approach taken in the final CAIR for SO2 allowance
allocation and State SO2 budgets, which was not changed
during the reconsideration process. This approach is explained below,
with a brief explanation of EPA's response to the major comments
received on this process. A more complete discussion of this issue and
the comments received appears in the preamble to the CAIR Notice of
Final Action on Reconsideration.
    Several issues on SO2 allowance allocations and State
budgets were raised both in comments on the proposed CAIR FIP and in
the context of the CAIR reconsideration process. EPA has responded to
such FIP comments in the CAIR Notice of Final Action on
Reconsideration, a separate action signed the same day as this notice.
These comments include the following claims:
     Inequities result from EPA's allocation approach, i.e.,
using title IV allowance allocations in the CAIR FIP trading program. A
few commenters suggested that EPA instead create new CAIR
SO2 allowances and allocate these allowances using a
methodology similar to that adopted in the CAIR SIP model trading rule
for NOX.
     EPA's approach to SO2 allowance allocation and
State budgets creates inequities between States.
     New units and independent power production (IPP)
facilities, which did not receive allocations under the Acid Rain
Program, are unfairly disadvantaged by the CAIR SO2 budget
and allocation methodology.
    A variety of approaches to SO2 allowance allocation were
raised and analyzed during the CAIR rulemaking process, including the
approach EPA adopted in the final CAIR SIP model rule and in today's
final FIP trading rule. Alternative approaches analyzed for the final
CAIR included the creation of new CAIR SO2 allowances and
allocating on the basis of historic tonnage emissions, heat input (with
alternatives based on heat input from all fossil generation or heat
input from coal- and oil-fired generation only), and output (with
alternatives based on all generation and all fossil-fired generation).
(See CAIR Corrected Response to Comments, section X.A.26, Docket
: EPA-HQ-OAR-2003-0053-2172).
    Furthermore, as a part of the CAIR reconsideration, EPA reanalyzed
State differences in allocation approaches using the same methodology
as for the final CAIR, comparing the title IV approach and seven
alternative approaches (those discussed above, and those raised by the
commenters on the reconsideration, discussed below). EPA also performed
additional analyses to evaluate the use of title IV allowance
allocations in the final CAIR to see how companies and States fared in
terms of the amount of allowances allocated relative to their projected
SO2 emissions. In these analyses, EPA compared 3 alternative
SO2 allowance allocation methodologies that were either
referred to by the petitioner in the petition for reconsideration or by
commenters on the proposed response to the petition, to the use of
title IV SO2 allowance allocations. EPA considered the
following approaches, all using 1999-2002 data: (1) Pure heat input;
(2) heat input adjusted for fuel type (e.g., coal, oil and gas); and
(3) heat input adjusted for fuel type and coal type (e.g., bituminous,
sub-bituminous, and lignite).
    Each allocation methodology suggested by the petitioner and
commenters during the CAIR rulemaking results in both advantages and
disadvantages for different companies and States. However, as EPA
explained in the CAIR Response to Comments and again in the CAIR Notice
of Final Action on Reconsideration, the analyses performed by EPA
demonstrate that EPA's use of title IV allowance allocations is
reasonable (see CAIR Notice of Final Action on Reconsideration, signed
in a separate action the same day as this notice).
    Comments about new units and IPPs, which did not receive
allocations under the acid rain program, being disadvantaged by the
CAIR SO2 budget and allocation methodology are also
addressed in the CAIR Notice of Final Action on Reconsideration, as
well as in the applicability section (VI.E) of this final FIP action.
EPA considered the allocation of title IV allowances to CAIR region
units that are not currently in the Acid Rain Program but that could
opt into the Acid Rain Program and receive title IV allowances (see 42
U.S.C. 7651i and 18 CFR part 74). EPA assumes that companies owning
non-Acid Rain units subject to CAIR will opt into the Acid Rain Program
to receive title IV allowances to cover a portion of the units'
emissions under CAIR. EPA believes this assumption is reasonable
because, as explained in the CAIR Notice of Final Action on
Reconsideration, each of these units has the option of becoming an Acid
Rain Program opt-in unit at little cost.
    The fact that non-Acid Rain units may opt into the Acid Rain
Program and receive allocations addresses the concern that the CAIR
applicability provisions sweep in units that are not covered under the
Acid Rain Program and thus do not receive Acid Rain Program
allocations. EPA maintains that the statutory and regulatory provisions
governing Acid Rain Program opt-in units allow units that are subject
to CAIR, but not to the Acid Rain Program, to opt into the Acid Rain
Program. See CAIR Notice of Final Action on Reconsideration--signed the
same day as the final FIP rule--for additional discussion of authority
under section 410(a) of the Clean Air Act.
    Further, it should be noted, that not all units required to
participate in the Acid Rain Program receive allocations under the Acid
Rain Program. While, as noted above, the Acid Rain Program provides
allowances for non-Acid Rain units opting into the program as long as
they remain non-Acid Rain units, the Acid Rain Program provides no
allocations for virtually all new Acid Rain units (i.e., Acid Rain
units commencing commercial operation on or after November 15, 1990)
and for all existing units that were not Acid Rain units when the
allowance allocations were completed in 1998 but that become Acid Rain
units thereafter. By using title IV allowance allocations in the CAIR
SIP SO2 model trading program (adopted today as the CAIR FIP
SO2 trading program), EPA is taking the same approach to
allocations for these units.
    Finally, it is worth noting that not all title IV allowances for
future years have been allocated. 250,000 allowances will continue to
be auctioned for the years 2012 and thereafter, and these allowances
could be used to comply with the requirements of CAIR. The availability
of these allowances ensures that all sources, including new units and
non-title IV sources, will have access to a pool of allowances.
    In summary, EPA's use of title IV allowances in the CAIR (and CAIR
FIP) SO2 trading program is supported by: (1) EPA's
determination that this approach is necessary to maintain the efficacy
of the title IV program and prevent erosion of confidence in cap-and-
trade programs in general; and (2) the results of EPA's analysis which
indicate that the allocations resulting from this approach are
reasonable.

    A few comments related to SO2 budgets and allocations
submitted in response to the proposed CAIR FIP were unique to this
action and, therefore, are addressed below.
    One FIP commenter states that the CAIR final allocation methodology
is ``inequitable'' because lower emitting units would buy allowances
from higher emitting units that install emission controls. However, it
is unclear why such a result would actually be inequitable. On the
contrary, the owner of each of the units involved would be choosing to
adopt the most economic compliance strategy in light of the unit's
emission control costs and the market value of allowances. The ability
of the owners to make such choices reflects the flexibility provided by
a cap-and-trade program.
    Moreover, EPA believes that for purposes of evaluating various
allocation methodologies, computing allocations on a company-by-company
basis is more appropriate than comparing allocations on a unit-by-unit
basis. This is because, while one unit could be allocated fewer
allowances under one methodology, another unit owned by the same
company could be allocated more allowances, which may offset the
smaller allocation of the first unit.
    This same commenter performed its own analysis of differences in
SO2 State budgets for select States, comparing EPA's
finalized method to ``a heat input method (similar to the
NOX allowance allocation method).'' The commenter described
the 6 of its selected States as ``[l]ow-emitting states that already
have made substantial investments in SO2 emissions controls
(e.g., South Carolina, Minnesota, Iowa, Wisconsin, Virginia, and North
Carolina).'' Another 5 States the commenter analyzed were described as
``high-emitting states (e.g., Ohio, Georgia, West Virginia,
Pennsylvania and New York).'' See Docket ID: EPA-HQ-OAR-2004-0076-0204.
The commenter's characterization of States as ``low-'' or ``high-
emitting'' and as having made ``substantial'' SO2 control
investments is entirely unsupported. The commenter provided no criteria
or factual basis for making such characterization, and the analysis
submitted by the commenter appears to disregard the cost of installing
controls in order to generate any excess allowances in States that are
characterized as ``high-emitting.'' Further, only 3 utilities from the
State's listed as ``low-emitting'' by the commenter, submitted adverse
comments on EPA's use of title IV.
    Nevertheless, as mentioned above, EPA performed a comprehensive
State-by-State SO2 budget analysis of all CAIR States and a
variety of alternative methodologies to evaluate the claim of inequity
as a part of the CAIR Notice of Final Action on Reconsideration. In