[Federal Register Volume 60, Number 149 (Thursday, August 3, 1995)]
[Proposed Rules]
[Pages 39668-39694]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18869]



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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Ch. I

[FRL-5267-9]


Open Market Trading Rule for Ozone Smog Precursors

AGENCY: Environmental Protection Agency (EPA).

ACTION: Proposed policy statement and model rule; Notice of public 
hearing.

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SUMMARY: This notice conveys EPA's strong support for an innovative 
approach in emissions trading that would bring better, faster, and less 
expensive progress towards our nation's air quality goals. This 
innovative approach, known as open market trading, would allow all 
types of sources to trade emissions of pollutants that cause ground-
level ozone and significantly reduce the overall cost of meeting the 
public health and environmental goals of the national ambient air 
quality standards (NAAQS) for ozone. An important feature of this 
approach is that individual trades would not have to be processed as 
separate State implementation plan (SIP) revisions. Rather, open market 
trades would provide sources with an alternative means of compliance, 
and they would be reviewed by State and Federal authorities 
predominantly during compliance determinations. The EPA believes this 
open market approach can provide important emissions reduction 
benefits. It can be put into operation immediately in places where 
area-wide emissions budgets and source allocations needed to meet the 
ozone standard have yet to be determined. The unique character of this 
approach encourages and permits market participation and innovation by 
smaller stationary sources and mobile sources. It also encourages 
sources to make reductions early; these reductions can provide 
immediate public health benefits. By providing a lower cost compliance 
alternative, the open market approach can make it easier for States to 
adopt additional control measures where needed to achieve attainment.
    The EPA has developed today's proposed open market trading rule 
(OMTR) as a new approach that would supplement, and would not modify or 


[[Page 39669]]
limit the adoption by States of other emissions trading approaches 
available under the Clean Air Act (Act) and existing EPA rules and 
policies. Today's proposal is in the form of a model rule; any State 
which adopts the final version of this rule could expect its rule to be 
immediately approved by EPA. This feature would enable States to begin 
operation of an open market trading program without delay. The EPA 
continues to encourage States to take advantage of all market-based 
programs available to them, including emissions budget (cap and trade) 
programs and emissions offsets, as well as emissions averaging 
programs.

DATES: Comments. Comments must be received on or before October 2, 
1995. Public Hearing. A public hearing will be held August 31, 1995, 
beginning at 9 a.m. Persons wishing to present testimony must contact 
Ms. Shelby Journigan at (919) 541-5543 by August 24, 1995. Persons 
wishing to attend the hearing should contact Ms. Journigan to obtain 
the location of the hearing.

ADDRESSES: Comments should be submitted (in duplicate, if possible) to 
Air and Radiation Docket and Information Center (6102), ATTN: Docket 
No. A-95-21, Room M1500, U.S. EPA, 401 M Street, SW., Washington, DC 
20460; Phone 202-260-7548 or 202-260-7549. Fax 202-260-4400. Docket No. 
A-95-21, containing information supporting the development of today's 
proposal, is available for public inspection and copying between 8 a.m. 
and 5:30 p.m., Monday through Friday, at the address listed below. A 
reasonable fee for copying may be charged.

FOR FURTHER INFORMATION CONTACT: Nancy A. Mayer, U.S. EPA, MD-15, 
Research Triangle Park, North Carolina 27711, telephone 919-541-5390, 
fax 919-541-0839; or Scott L. Mathias, U.S. EPA, MD-15, Research 
Triangle Park, North Carolina 27711, telephone 919-541-5310, fax 919-
541-0839.

SUPPLEMENTARY INFORMATION: The contents of today's preamble are listed 
in the following outline:

I. Introduction and Overview
    A. Emerging Market-Based Approaches for Ozone Control
    1. Emissions Budgets (``Cap and Trade'')
    2. Open Market Trading
    B. Open Market and Emissions Budgets Can Work in Concert
    C. Rationale and Principles for Today's Proposal
II. Summary of Proposed Rule
    A. Purpose
    B. Applicability
    C. State Program Election and Submittal
    D. Rule and Program Summary
    1. Generating DER's
    2. Using DER's for Compliance
    3. Time and Place Use Limitations
    4. Reporting, Recordkeeping, and Public Availability
    5. Market Participants
    6. Protocol Development and Approval
    7. Enforcement
    8. Program Audit
III. Discussion of Issues
    A. Regulatory and Contractual Liability in the Open Market
    1. Option 1: User Liability
    2. Option 2: Retaining Pre-Approval Requirement
    3. Option 3: Splitting Regulatory Liability Between User and 
Generator
    4. Option 4: Reliance on Third Party Guarantors
    5. Proposed Approach
     a. Generator Certification
     b. Guidance for Emissions Quantification Protocols
     c. Third-Party Relationships
     d. ``Good Faith'' Purchasers
    B. DER Generation
    1. DER Formation and Baseline
    2. Start Date for DER Generation
    3. Converting ERC Activity into DER Activity
    4. Prohibited Generation Activities
     a. Shutdowns & Production Curtailments
     b. Overcompliance with an Alternative Emissions Limit
    C. DER Use and Transfer
    1. Potential Uses
     a. Use by Regulated Sources
     b. Advantages to States
    2. Special New Source Review Requirements
    3. Special DER Use Restrictions
     a. Geographic Restrictions
     b. Interpollutant Trading
     c. Seasonal Restrictions
    4. Prohibited DER Uses
     a. Compliance with Certain Mobile Source Requirements
     b. Compliance with Certain Technology Standards
     c. Compliance with Toxics Standards
     d. Avoiding New Source Review
     e. Use to Avoid Penalties
     f. Use to Increase Over 1990 Emissions Levels
    5. Use for Conformity Offsets
    6. Use in Place of Variances
    7. Holding DER's Before Use
    8. Contribution to the Environment
    9. Potential Market Participants
    D. Characteristics of DER's
    1. DER Life
    2. Limited Authorization to Emit and DER Limitation or 
Termination
    E. Notices, Reporting and Recordkeeping
    1. Notice and Certification of DER Generation
    2. Notice of Intent to Use DER's
    3. Notice and Certification of DER Use
    4. Notice of Intent to Generate Rejected
    5. Public Availability of Information
    F. Federally Enforceable Operating Permits
    G. DER Registries
    H. Protocol Development and Approval
    I. Meeting Related Federal Requirements
    1. Attainment and Maintenance Plans
    2. Rate of Progress (ROP) Requirements
    3. RACT
    J. Enforcement Issues
    1. Calculation of Violations
    2. State Compliance Determinations
    K. Program Audits and Reconciliation Measures
    L. Interstate Trading
    M. Effect of VOC Trading on Emissions of Air Toxics
    N. Impact of OMTR on Other Programs and Policies
    1. Emissions Trading Policy Statement
    2. Economic Incentive Program Rule and Guidance
    3. Memorandum to Region IX Regarding Surplus Determination
    4. Emissions Budget Programs
IV. Administrative Requirements
    A. Public Hearing
    B. Docket
    C. Executive Order 12866
    D. Unfunded Mandates Act
    E. Paperwork Reduction Act
    F. Regulatory Flexibility Act
    G. Clear Air Act Section 117

I. Introduction and Overview

    On March 16, 1995, President Clinton and Vice President Gore 
announced 25 major initiatives for regulatory reinvention at EPA. The 
number one initiative was an ``open market'' air emissions trading rule 
to achieve the public health standard for ozone faster and at lower 
cost. The Presidential announcement said:

    EPA will issue an emissions trading rule for smog-creating 
pollutants that will allow States to obtain automatic approval for 
open market trading of emissions credits with accountability for 
quantified results. Expanding use of market trading on a local and 
regional level will give companies broad flexibility to find lowest 
cost approaches to emissions reductions. The rule will encourage 
experimentation with new trading options, while enabling States to 
pursue more quickly allowance-based cap systems, which are already 
under development in some areas. (Reinventing Environmental 
Regulations; Clinton/Gore, March 16, 1995)

Today's proposal of a model rule for open market trading fulfills this 
commitment. It would provide an expedited path by which States, with 
EPA's cooperation, could quickly implement this new approach.
    Together with ongoing initiatives to promote emissions budget (cap 
and trade) programs, the open market rule signifies a major push to 
introduce market-based approaches to cleaning up the air: Reducing 
costs, increasing innovation, enhancing flexibility, and accelerating 
attainment of health standards.
    Ground level ozone, the primary constituent of smog, continues to 
be one of the most pervasive pollution problems in the United States. 
Exposure to ozone may cause serious respiratory health problems, such 
as chest pain, coughing, nausea, and congestion. 

[[Page 39670]]
Elevated ozone levels have been associated with observed increases of 
hospital admissions for respiratory diseases such as asthma and 
decreased lung function of children attending summer camp. It is 
estimated that ozone damage to crops, forests, natural systems and 
synthetic materials is significant and exceeds $2 billion per year lost 
to crops alone. Ozone is not directly emitted into the air, but instead 
is formed in the atmosphere from reactions of ``precursor'' pollutants 
in the presence of sunlight and warm conditions. The major ozone 
precursor emissions are oxides of nitrogen (NOX) and volatile 
organic compounds (VOC).
    In the last 25 years great progress has been made toward achieving 
healthy air quality under the Act. However, over 100 million people 
still live in areas that do not meet the ozone health standard. 
Continued reductions in ozone precursor emissions are important to 
protect public health, and represent a tremendous challenge for our 
nation's citizens and industries.
    The 1990 Amendments to the Act established new deadlines for 
meeting the health standard for ozone and substantially increased EPA, 
State and industry attainment efforts. All areas that have not yet 
attained and maintained the ozone standard are categorized as marginal, 
moderate, serious, severe, or extreme areas. Each category has a 
compliance deadline, ranging from 3 years (for marginal areas) to 20 
years (for extreme areas; e.g., Los Angeles). All such areas have 
requirements for reasonably available control technology (RACT) for 
major stationary sources of VOC and NOX and with the exception of 
marginal areas have defined rates of progress (ROP) for reducing ozone 
precursor emissions.
    The smog reduction programs in the U.S. are typically based on 
traditional forms of environmental regulation: source-specific 
emissions standards (e.g., RACT) set on a uniform basis for categories 
of similar sources. Even though set as performance standards, these 
regulations have a tendency to treat all sources within a category the 
same and to be oriented toward the lowest common denominator, that is, 
toward sources within the class that have the greatest difficulty and/
or greatest cost of control. Such standards simultaneously miss 
substantial opportunities for cheap emissions controls by ``better'' 
sources, and impose a disproportionately high cost (per ton of 
pollutant reduced) on a smaller group of sources. Government frequently 
lacks information on untapped but cost-effective control options, and 
sources have no incentive to be forthcoming. Government also tends to 
overlook smaller or unconventional sources.
    Recognizing some of these problems in traditional regulations, EPA 
has developed policies permitting an increasing variety of ``emissions 
trading'' approaches since the late 1970's. The EPA ``bubble,'' 
``netting,'' and ``offset'' programs allow certain kinds of trading of 
emissions reduction obligations within the pre-existing regulatory 
structure. These programs use the existing command and control 
regulations as a baseline for trading.
    The results of these existing programs have been mixed. Overall, 
the volume of existing source trading has been small, perhaps due to 
high transaction costs associated with the bubble policies. New sources 
have found it possible through netting to avoid both time- and 
resource-consuming Government review processes. Bubbles, netting and 
offsets have reduced sources' overall compliance costs. However, there 
have been significant problems of quality control, reducing the 
environmental effectiveness of the programs.

A. Emerging Market-Based Approaches for Ozone Control

    The 1990 Act Amendments recognized the merit of market-based 
solutions to pollution control. The Amendments introduced a market-
based allowance trading system for sulfur dioxide to control acid rain. 
The Amendments also included a requirement, in certain cases, for 
economic incentive programs (EIP's) to be used as part of States' plans 
to meet the ozone and carbon monoxide standards in designated 
nonattainment areas. In 1994, EPA issued the EIP rule, which provided 
rules and guidance for establishing EIP's. Two market-based approaches 
have emerged that show particular promise for EIP's or other ozone 
related trading systems: emissions budget programs and, more recently, 
the open market approach.
1. Emissions Budgets: (``Cap and Trade'')
    Emissions budget programs have been highly successful where they 
have been implemented to date and offer the potential for high 
integrity achievement of environmental goals and considerable cost 
savings. Emissions budgets programs are predictable, flexible, offer 
low transaction costs, and in practice have yielded both unexpectedly 
high rates of innovation and unexpectedly lower costs. The cost of the 
acid rain program is proving to be considerably lower than expected--in 
large part because of the flexibility and innovation allowed under an 
emissions budget program. Estimated national annualized cost of the 
program at the time of enactment (1990) was $4 billion; the current 
(December 1994) estimate from the General Accounting Office is $2 
billion (Market-Based Pollution Control Programs, ICF Kaiser, Inc. May 
11, 1995). Recent scrubber costs are about half of their historic level 
and their removal efficiency has increased. Prices for low sulfur coal 
are also lower than expected because of increased production, increased 
use of low expense coal cleaning, bundling of allowances with fuel 
sales, and competition in transportation. The Regional Clean Air 
Incentives Market (RECLAIM) program is expected to cut Southern 
California NOX emissions by 80 percent over 10 years while saving 
about $58 million annually compared to traditional regulations (ICF 
Kaiser, 1995). Well-designed emissions budget proposals offer the 
highest degree of certainty for the environment and sources alike, and 
EPA wants to do everything possible to support and encourage them. The 
EPA is currently providing strong support for ongoing State development 
of emissions budget approaches for large-scale regional control of 
NOX in the Northeast Ozone Transport Region (OTR), and for VOC 
emissions in Chicago and Los Angeles.
    Notwithstanding their substantial benefits, emissions budget 
programs are unlikely to capture all of the market-based opportunities 
to achieve environmental results with reduced cost and greater 
flexibility. Emissions budget programs have required considerable 
start-up time and effort. They require agreement on (1) The universe of 
covered sources, (2) baseline emissions levels, (3) the emissions cap 
and its rate of decline, (4) the allocation of emissions allowances, 
and (5) standardized monitoring and measurement techniques for 
determining each source's emissions. Experience with RECLAIM and the 
acid rain program shows that obtaining agreement on these points can 
take several years. As a result, emissions budget programs have been 
applied to date mostly to well-measured pollutants from relatively 
uniform industrial sectors, e.g., oxides of sulfur (SOX) and 
NOX from utilities. Start-up time should decline, however, as 
experience is gained. The RECLAIM program and the Chicago program are 
making great strides in extending emissions budget programs to some 
categories of VOC sources.
    The EPA is committed to continue providing financial and staff 
support to emissions budget development projects, 

[[Page 39671]]
and the Agency will process emissions budget SIP revisions on an 
expedited basis. Nonetheless, opportunities remain for market-based 
solutions that emissions budgets are not likely to capture in the near 
term. The EPA is pursuing the open market approach, in addition to 
emissions budget approaches, to reach more of these opportunities for 
cost reduction and flexibility while meeting public health protection 
standards.
2. Open Market Trading
    As stated, the open market approach has the potential to reach 
market-based opportunities that emissions budgets are not capturing, 
and to serve in some cases as a transitional stage until full emissions 
budget programs can be developed. Open market trading programs can 
begin operating without waiting for agreement on a cap, on allocations, 
or on pre-established emissions measurement methodologies.1

    \1\ The name ``open market'' was coined to reflect the absence 
of an emissions budget or cap (so-called ``closed market'' systems).
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    They can be implemented before there is agreement on an area-wide 
or regional budget or other package of emissions reduction measures 
fully adequate to demonstrate attainment of the ozone smog health 
standard. They also have the potential to reach more diverse and 
numerous types of sources (including mobile sources) than have been 
covered to date by emissions budget programs.
    The OMTR described today builds on the pioneering work done in a 
major demonstration project overseen by the Northeast States for 
Coordinated Air Use Management (NESCAUM) and the Mid Atlantic Regional 
Air Management Association (MARAMA) (Emissions Reduction Credit 
Demonstration Project, Phase II, Volume I Final Report, April 1995). 
This project was partially funded by EPA's market-based initiative 
grant program and has involved many State air pollution officials, EPA 
staff, environmentalists, and representatives of major corporations in 
the Northeast.
    The open market system differs both in concept and execution from 
the traditional emissions reduction credit (ERC) programs, ``bubbles,'' 
``netting,'' and ``offsets. These programs involve trading of 
contemporaneous emissions rates that extend indefinitely into the 
future. The open market, on the other hand involves trading of discrete 
quantities (tons) of emission reductions already made. The discrete 
reductions are measured from an emissions baseline that is generally 
defined as the lower of actual or legally allowable emissions at the 
source. Retrospective quantification of discrete reductions offers the 
potential for achieving greater certainty and verifiability for all 
parties regarding reductions already accomplished.
    Administration of ERC programs under the 1986 Emissions Trading 
Policy Statement has required a heavy investment of State, Federal, and 
public resources in ``up-front'' review and clearance of specific 
trades. In the effort to avoid quality control problems (``paper 
trades'') that existed at points in the past, States typically devote 
substantial resources and take considerable time to review individual 
trades. High governmental costs and delays for the private sector have 
kept the volume of emissions trades quite low.
    The open market system would shift review and approval of 
individual trades from the front end as a SIP revision or a permit 
change, to the time of use as a compliance determination and 
enforcement matter. Instead of complying with an emissions limitation 
through control equipment or process changes on site, a source 
operating under the open market rule may comply by buying and using an 
appropriate number of tons of discrete emissions reductions (DER's). 
This system places responsibility for the quality of those DER's on the 
source that uses them for compliance. These features would reduce 
front-end costs and delays while harnessing private sector resources to 
assist government in assuring quality control. Responsibility for 
compliance would motivate arms-length users to inspect carefully and 
choose wisely among the DER's offered on the market, and to protect 
themselves through contract indemnification provisions with sellers of 
reductions, or with third party auditors, and through purchases of 
extra reductions as ``insurance.'' Trades can take place before 
governmental review and approval, increasing flexibility and lowering 
costs.
    The likely benefits of this system would be several. The fact that 
reductions are accomplished before they are traded and used, encourages 
earlier achievement of reductions. The private sector would be rewarded 
for revealing, rather than concealing, cost-effective pollution control 
opportunities. Lower cost curves would make it easier for States to 
deny variances and promulgate additional needed rules. The open market 
system would also expand the participating pool of sources beyond those 
currently subject to direct regulation.
    The practical implementation of an open market trading system gives 
rise to many significant questions. These questions are identified here 
and addressed in Section III of the preamble to today's notice. How 
would open market trading be made consistent with air quality goals and 
legal requirements? What would be EPA's role in assuring market 
integrity? To promote certainty in the market as well as quality and 
enforceability of reductions, what level of EPA support for emissions 
reduction quantification protocols would be necessary? What would be 
the appropriate degree of compliance oversight?

B. Open Market and Emissions Budgets Can Work in Concert

    The EPA believes open market and emissions budget systems can 
complement each other and even work together. Open market systems can 
be put into place more quickly because they do not require consensus-
building on a budget, allocation disbursement and related 
infrastructure. Open market systems can involve different source 
sectors and smaller, more diverse sources that are not easily captured 
by budgets. Open market systems can operate in concert with budgets and 
positively affect areas outside the emissions budget domain.
    Emissions budget systems would still offer substantial advantages 
over open market systems. Under emissions budgets, sources have greater 
certainty about future allowance allocations and thus greater 
flexibility and ability to plan operations and trading in the future. 
Reductions from shutdowns and curtailments, while not compatible with 
the open market system, can be accommodated under an emissions budget 
program. Thus, there will be continuing incentives to move from an open 
market to a budget system, which would allow increased flexibility and 
cost savings consistent with achieving health and environmental goals.

C. Rationale and Principles for Today's Proposal

    The model State rule proposed in today's notice has several 
features that would clear the way for widespread application of open 
market trading programs. Today's proposal is designed to eliminate the 
bottleneck of the single-source SIP revisions for emissions trading. 
The adoption of the OMTR into the SIP would allow sources to legally 
substitute DER's for on-site compliance through pollution control 
equipment. Today's proposal is a model rule for incorporation into the 
SIP. Once this rule is made final, EPA proposes to automatically 
approve SIP revisions that adopt this rule. 

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    The model rule would not displace any other trading rule or option 
currently approved or under development. It would open a new method of 
trading and a new route for adopting that method. The model rule 
describes a set of provisions that EPA has concluded are approvable in 
all circumstances and in any area of the country. Variations that are 
more expansive (e.g., trading over greater distances than provided in 
the model rule) may be approvable in specific areas or under the 
specific circumstances of a particular State. The EPA would evaluate 
SIP revisions containing variations of this model rule on a case-
specific basis. The EPA is committed to working closely with any State 
interested in pursuing any such variation. The EPA is available to 
consult with States on the approvability of potential variations and to 
provide expeditious review and decisions on any such submissions.
    In producing this proposed model rule, EPA has observed the 
following over-arching principles:
1. Do Not Interfere With Ongoing State Market-Based Programs
    As mentioned above, one function of the OMTR is to encourage, 
enable, and support emerging State trading programs, whether they are 
classified as open market, emissions budget, or another trading 
approach. The proposed model rule is neither mandatory nor 
prescriptive. States would be free to tailor their own programs, which 
may or may not include an open market trading component, and EPA 
encourages States to harness compliance tools appropriate to their 
particular circumstances.
2. Reduce Compliance Costs Without Compromising Environmental Integrity
    A key test for any market-based strategy, including the OMTR, is to 
lower the overall cost to the economy of clean air compliance, in a 
manner that has equivalent or better environmental integrity.
3. Provide for a Long-Term Benefit to the Environment
    The open market rule should benefit the environment in a number of 
ways. Facilities may reduce emissions beyond their current levels in 
order to sell the reductions, and facilities purchasing the reductions 
would in turn have more flexibility to meeting their compliance 
obligations, often obviating the need for source-specific emissions 
limit modifications and exemptions. The open market program should 
encourage early reductions through banking. It also should create an 
incentive to try incremental and innovative emissions reduction 
strategies, as well as reward accurate emissions measurement 
procedures. To ensure an environmental benefit, the proposed rule 
requires 10 percent of every credit used to be retired for 
environmental benefit.
4. Maximize Flexibility and Minimize Transaction and Regulatory Costs
    Reflecting one of the President's concerns with the role and 
effectiveness of the Government in his reinvention initiative, a major 
goal in this rule development is to improve upon the burdensome 
oversight, and reporting and recordkeeping requirements that currently 
exist in many pollution control programs. In this spirit, the rule 
proposes requirements that are less burdensome yet consistent with the 
level of quality necessary to maintain environmental integrity within 
the open market system.
5. Actively Involve the Public, Industry and States in the Process
    The EPA has worked with States, industry, and the public in 
developing this model rule. This cooperative process will continue as 
the proposed rule emerges toward its final version.

II. Summary of Proposed Rule

A. Purpose

    The purpose of the model open market trading rule is to allow 
sources to generate and use DER's for compliance with Title I and 
various Title II VOC and NOX rules while complying with all other 
applicable requirements of the Act. The model rule would provide VOC 
and NOX sources with a financial incentive to reduce emissions 
below levels required by applicable Federal and State requirements and 
below their actual emissions in the recent past. Sources would be 
permitted to make more economical decisions regarding how to comply 
with pollution control requirements applicable to them. These sources 
would be able to supplement or replace traditional compliance 
strategies with a strategy of purchasing and using DER's.

B. Applicability

    Today's notice applies to any State that adopts and submits an 
identical rule to EPA as a SIP revision. The preamble to the proposed 
model rule serves as a policy statement on open market emissions 
trading, and explains how EPA would view specific deviations from the 
proposed model rule.

C. State Program Election and Submittal

    The EPA would automatically and immediately approve any State 
submittal that revises that State's SIP to incorporate the identical 
language of the model rule. That does not imply, however, that a State 
could not develop variations on the model rule tailored to its 
particular needs. The EPA would review any such rule and judge its 
approvability in accordance with the adequacy and reasonableness of the 
justifications for any variations from the model rule. Variations could 
not be automatically approved, but EPA is committed to reviewing them 
expeditiously.

D. Rule and Program Summary

    This section briefly describes, in nontechnical terms, how the open 
market trading system would work under the model rule proposed in 
today's notice. It serves as a brief summary of the steps a source 
would take to generate and/or use a DER, including any limitations. It 
also describes what, when and how the source would need to tell the 
State about their DER activity. A brief description of EPA's 
enforcement strategy is also included.
1. Generating DER's
    Any NOX or VOC source could generate DER's under the OMTR. In 
contrast with traditional trading programs, where a source must accept 
a permanent tightening of applicable emissions reduction requirements 
in order to generate a continuing stream of emissions reduction 
credits, in the open market program a generating source would not 
change its legal emissions limitations. The source could generate DER's 
by any action that reduces its emissions per unit of production or 
operation (e.g., install pollution controls, make process changes, 
switch fuels). Qualifying actions may even be temporary (e.g., a 
temporary fuel switch); after the discrete period in question, the 
source would have no obligation to continue emitting below its legal 
limitations.
    To be valid, DER's must meet the requirements of the model rule and 
of guidance regarding emissions quantification that will be issued by 
EPA. The DER's must be real, surplus, and verifiably quantified. The 
DER's must represent real reductions in ozone-forming emissions. In 
addition, they must be surplus, that is, reductions that were not 
otherwise required by existing regulatory requirements or accounted for 
in attainment or maintenance plans. DER's are emission reductions 
generated 

[[Page 39673]]
over a discrete period of time, measured in units of mass (usually 
tons). The generating source would be responsible for verifiably 
documenting the amount of DER's it had produced, and DER's would have 
to be measured through a valid quantification protocol.
    To generate DER's, a source would first determine its baseline, 
which reflects what the source would have emitted during the generation 
period absent its DER generation strategy. In general, this would be 
determined by referring to either the emissions level that would be 
allowed by current law, or the facility's emissions that would have 
occurred based on recent actual emissions rates. After the baseline was 
ascertained, measurements would be taken and calculations would be made 
to determine the amount of DER's that resulted from the specific action 
taken to reduce emissions. This process must follow a valid 
quantification protocol developed in one of several ways as indicated 
below. The protocol would take into account an individual source's 
characteristics (e.g., rates of VOC and NOX production, continuous 
or batch processes, etc.) and monitoring capabilities. A source could 
chose to follow a protocol that had been found to be previously 
acceptable, or it could forge a new protocol following criteria that 
EPA will issue in protocol guidance.
    The generator would quantify its reduction by factoring relevant 
source-specific information into the quantification protocol to 
determine the amount of DER's generated. The generator must document 
DER's in a format that would allow enforcement authorities to verify 
them, to determine the user's compliance and, where necessary, to 
enforce in cases of invalid DER's. Once generated, DER's could be used 
at any later time for compliance with an eligible VOC or NOX 
emissions reduction requirement. Like other emissions allowances 
recognized under the Act, they would not be the holder's property, but 
instead would be a limited authorization to emit the designated amount 
of emissions.
    After a DER had been generated, the source generating the DER's 
would submit a Notice and Certification of Generation to the State 
where the generation had taken place. This notice must contain a 
certification, made under penalty of law, as to the accuracy of certain 
information, including:
    (a) The name and location of the source that reduced emissions;
    (b) The discrete time period over which the emissions reductions 
occurred;
    (c) The amount of emissions reductions that occurred during the 
ozone season and the amount of reductions that occurred during other 
parts of the year;
    (d) The unique identification number for each ton of DER's created;
    (e) The emissions quantification protocols that were used to 
calculate and document the emissions reductions;
    (f) Information on existing requirements, if any, to which the 
generator source is subject; and
    (g) A signature of an authorized individual who is certifying under 
penalty of law that the above information is accurate and complete.
    Certain actions described in the rule would not create DER's, such 
as:
    (a) Facility shutdowns;
    (b) Temporary or permanent production curtailments;
    (c) Emissions reductions resulting from modifying or discontinuing 
any activity that is otherwise illegal;
    (d) Emissions reductions that occur as the result of any applicable 
Federal or State requirement including compliance with MACT, BACT, 
LAER, and NSPS requirements, or emission reductions relied on by the 
State for meeting the ozone NAAQS; and
    (e) Actions that occurred prior to the start of the relevant 1995 
ozone season.
2. Using DER's for Compliance
    Once DER's were generated, they could be transferred to any party 
for use to comply with eligible requirements. Anyone could hold, 
purchase and sell DER's. Intermediaries could act as DER brokers to 
further facilitate the market process. Any source could use DER's to 
cover eligible compliance obligations. Common uses for DER's might be: 
(a) To comply with specified NOx and VOC emissions limits; (b) to 
cover emissions increases that currently are commonly legitimized by 
variances; or (c) as offsets under an EPA-approved major new source 
review regulation.
    A source that desired to use DER's for compliance purposes over a 
specified period must determine the amount of DER's it would need. 
Thus, the source must estimate its DER requirement through a valid 
emission quantification protocol, similar to the process described for 
DER generation, except that the user source must project its underlying 
activity rate for the use period. The source must retire 10 percent of 
the DER's it uses; thus it must purchase a fraction more than it needed 
for compliance purposes in order to help ensure that the flexibility 
and economic benefits of the open market trading program would also 
produce a public health protection gain in each future year.
    In order for a user source to use DER's for compliance purposes, 
that source must own such DER's before the applicable date for 
compliance. The user must notify its State at least 30 days prior to 
its first actual use of DER's of its intentions to use such DER's. This 
notice would not obligate the notifying source to use the specified 
DER's. The notice would give the State the opportunity, if it wished, 
to begin inspecting the validity of the DER's before they are used.
    The source must ``true-up'' its original DER need estimate by using 
the appropriate protocol to determine its DER compliance requirement 
during or after the period in which DER's would be applied. When a 
source had actually used specific DER's, it must file a Notice and 
Certification of Use along with its regular compliance reports to the 
State no less often than once every year. This notice would become part 
of the documentation that the State would rely upon to verify that the 
user had met its compliance obligations.
    The model OMTR would prohibit certain DER uses. Such prohibitions 
include: (a) To avoid penalties or enforcement actions by obtaining 
DER's after the fact of noncompliance; (b) for netting or other means 
to avoid NSR/PSD requirements; (c) to meet Act section 111 and 129 
NSPS, LAER, BACT or MACT requirements; and (d) to meet requirements for 
motor vehicle emissions standards, reformulated gasoline, Reid vapor 
pressure standards, clean fueled fleets, employer trip reduction 
programs, or vehicle inspection and maintenance programs.
3. Time and Place Use Limitations
    By definition, DER's must be used at a time after their generation. 
This is known as intertemporal trading. Intertemporal trading could 
occur, within the same ozone season, from one ozone season to a later 
one, or from the ozone season to a non-ozone season. However, DER's 
generated during a time outside of the ozone season could not be used 
to comply with any emission reduction obligations during the ozone 
season.
    User sources must also comply with certain geographic restrictions 
to ensure that the new geographic distribution of emissions created by 
trading would not interfere with a State's obligation to maintain air 
quality or reach attainment of the ozone smog standard in a timely 
manner. Due to differences in the role of natural emissions and in how 
VOC and NOx react to form ozone, the 

[[Page 39674]]
proposed model rule places different geographic limitations on VOC and 
NOx.
    Under the model rule as proposed herein, VOC reductions generated 
outside any ozone nonattainment area may not be used for compliance 
inside any nonattainment area. NOx emissions generated outside a SIP's 
modeling domain (as defined by urban airshed modeling) may not be used 
for compliance inside the modeling domain. These limitations could be 
relaxed in some but not all State-specific OMTR applications due to an 
area's unique meteorology. If a State submitted appropriate 
justification, EPA would consider and expeditiously review any area-
specific variations on the model rule's geographic limitations.
    Consistent with these geographical limitations, interstate trading 
and use of DER's would be allowed and encouraged, so long as the 
relevant States had entered into agreements that allowed such 
transactions. Participating States must provide for an interstate DER 
tracking system so the States could protect against DER's being used 
more than once.
4. Reporting, Recordkeeping, and Public Availability
    Sources must keep adequate and accurate records so as to ensure 
that the DER's are real, quantified, surplus and verifiable. In 
addition to the records they must create themselves, users would be 
expected to have pertinent records of DER generation from the generator 
to prove they held valid DER's. The user source then must hold such 
records for a minimum of 5 years after the DER's are used.
    The notices that are submitted to the State must be made available 
to the public by the State under the appropriate State law regarding 
public access to such documentation. This requirement applies equally 
to both title V and non-title V sources. This will allow the public to 
monitor specific transactions and contribute to public confidence in 
the open market system.
5. Market Participants
    Both sources that have and do not have title V operating permits 
could, and are encouraged to, participate in the open market trading 
program, especially as DER generators. One of the benefits of the open 
market program is that small stationary sources and mobile sources that 
are not subject to title V requirements could contribute to reducing 
overall pollution levels in an area. The Notice of Intent to Use and 
the Notice and Certification of Use must be filed with any applicable 
operating permit.
6. Protocol Development and Approval
    One key to integrity in the operation of an open market system is 
accurate quantification of the amount of surplus DER's created, and 
accurate quantification of the amount of DER's needed to meet 
compliance obligations. For the program to be adequately enforceable by 
State and Federal authorities, these measurements or calculations 
require emissions quantification protocols that could be recognized by 
the State and the EPA for use in the open market program. All DER 
generation and use activities must be documented through the use of DER 
quantification protocols that either have been approved by EPA, or that 
correspond to EPA guidance on acceptable protocols. Typically, a 
protocol would specify the measurement methods, monitoring methods, 
calculation procedures, and documentation requirements for estimating 
or measuring emissions for both the source's discrete reduction 
strategy and its baseline. All protocols must include methods that are 
credible and replicable.
    EPA-approved protocols could come into existence in two ways. 
First, EPA intends to issue EPA-approved protocols for a number of 
reduction strategies. Second, EPA would work together with States and 
industries to jointly review and approve quantification protocols for a 
variety of source types. As a separate action, EPA also plans to issue 
guidance on the development of an acceptable protocol. This guidance 
would lay out specific criteria that must be met by a protocol 
developed by a generator or user which had not already been approved by 
EPA. The EPA intends to issue this guidance by the time the model rule 
is finalized.
7. Enforcement
    The user source would be responsible for complying with all 
applicable requirements, and therefore would bear the burden of 
demonstrating that the DER's it relied on were real, surplus, in 
sufficient quantity to meet its compliance obligation, came from an 
appropriate place and season, and met all other applicable requirements 
of the rule. The user would be subject to enforcement proceedings for 
insufficient or invalid DER holdings. The DER user, not the State, 
would bear the burden of proof that the amount of DER's purchased were 
sufficient to cover its compliance obligation including the 
environmental discount, and that the DER use met all applicable 
requirements of this rule.
    From a compliance and enforcement standpoint, a lack of adequate 
and credible recordkeeping would be equivalent to a lack of creditable 
DER's. As stipulated in the Act, each violation (emissions limit or 
recordkeeping) would be subject to maximum penalty of $25,000 per day. 
Criminal sanctions could also apply as allowed under law. In assessing 
penalties, EPA enforcement policy does take into account the nature and 
degree of violation when determining what is an appropriate enforcement 
action.
8. Program Audit
    At least once every 3 years, the State would be required to audit 
their open market trading program to evaluate the program's 
performance. The audit would include, but would not be limited to, an 
examination of the program's effects on requirements for rate of 
progress (ROP) and timely attainment (credits used compared to credits 
generated in a given year or ozone season), and the effects of 
reconciliation measures that might have been taken as a result of 
previous audit findings.
    If the audit indicated a problem with implementing this rule, then 
the State must consider initiating measures to reconcile the problem. 
Possible reconciliation measures would include, but would not be 
limited to: (a) Enhancing monitoring requirements; (b) increasing the 
environmental benefit component of DER use, or limiting the use of 
DER's to compensate for the difference between actual emissions and the 
reductions needed to reach attainment; (c) implementing additional 
technology-specific emissions reductions; (d) increasing penalties, or 
(e) restricting trading.
    The EPA would also perform a national audit based on the 
compilation of State audit reports and if necessary, would revise the 
open market program in accord with the audit's findings.

III. Discussion of Issues

    This section provides more detail on the provisions of the OMTR and 
issues surrounding the development of an open market trading system and 
requests public comment on several issues. This section also discusses 
elements of the proposed model rule that States could modify to meet 
their unique needs. The EPA recognizes that States may develop 
variations on this rule that are better suited to specific local air 
pollution problems, and EPA will be flexible with respect to approving 
a variation to the model rule if the State provides an adequate and 
reasonable justification. 

[[Page 39675]]


A. Regulatory and Contractual Liability in the Open Market

    Currently, most emissions trades between existing sources are made 
through single-source SIP revisions that must be approved by both 
States and EPA. Pre-approval scrutiny of each trade is generally 
effective in ensuring that trading does not interfere with air quality 
requirements: For example, that the emission reductions and increases 
involved are calculated from appropriate baselines and are 
appropriately quantified. However, individual SIP revisions take 
considerable time and involve substantial costs for both the private 
sector and State and Federal governments. At least in part because of 
these transaction costs, the number of emissions trades between 
existing sources has been relatively low, and significant potential 
opportunities to meet air quality objectives at lower cost have not 
been realized.
    The EPA's fundamental objectives in this proposal are to free up 
the market for a higher volume of cost-effective emissions trading 
while at the same time maintaining the relatively high level of quality 
assurance that the current system provides. To meet these objectives, 
EPA has used the following ``design criteria'' in designing the 
proposed open market trading rule. The proposed rule should:
    (1) Support timely attainment and maintenance of the Clean Air 
Act's public health protection standards;
    (2) Reduce private sector compliance costs, making it possible to 
better protect the environment at lower cost;
    (3) Reduce governmental costs in administering an expanded 
emissions trading system;
    (4) Make maximum use of private sector mechanisms for quality 
assurance (liability arrangements, contractual guarantees, insurance, 
third party services, etc.);
    (5) Give potential market participants the ability to predict with 
reasonable certainty which emission reduction actions will be found 
valid and creditable by governmental authorities; and
    (6) Provide the private sector with strong incentives to comply 
with all requirements while at the same time giving responsible (``good 
faith'') market participants reasonable expectations on potential 
exposure to civil or criminal penalties.
    The proposed rule, as already noted, is derived from the ``open 
market'' concept developed by the EPA-supported NESCAUM-MARAMA 
demonstration project and elaborated in a recent article.2 This 
approach avoids the need for single-source SIP revisions by treating 
emissions trading as a compliance option, that is, as another means of 
compliance with applicable pollution control requirements contained in 
the State Implementation Plan (SIP).

    \2\ Emissions Reduction Credit Demonstration Project, Phase II, 
Volume I Final Report, April 1995. Developing a Market in Emission 
Credits Incremental: An ``Open Market'' Paradigm for Market-Based 
Pollution Control; Richard Ayres, Bureau of National Affairs 
Environment Reporter, Current Affairs December 2, 1994.
---------------------------------------------------------------------------

    At present, most SIP's establish emission limitations directly 
applicable to specific equipment and operations at facilities. Owners 
and operators of such facilities must comply with these emission 
limitations by installing emissions control equipment, making process 
changes, or changing fuels or other inputs. Failure to comply is a 
violation of State law and section 113 of the Clean Air Act and exposes 
the source to enforcement proceedings by the State and EPA. Citizens 
may also bring actions to enforce these obligations under section 304 
of the Act.
    Under the open market concept, sources would have the option of 
complying by purchasing appropriate amounts (tons) of discrete emission 
reductions (DER's) generated by others. The governmental role in 
reviewing emissions trades would be transformed from prior approval 
during SIP revisions to ``post-hoc'' scrutiny during compliance 
determinations. Eliminating pre-approval of reductions and shifting to 
review at the compliance stage would greatly free up the market and 
increase trading volume, thereby reducing compliance costs and 
benefitting the environment.
    A key issue identified, however, in the NESCAUM-MARAMA 
demonstration project and in the above-cited article is how to maintain 
confidence that DER quality will remain high--that reductions will be 
taken only from appropriate baselines and rigorously quantified--as 
government involvement moves from prior approval to compliance 
auditing.
    Maintaining confidence in the quality of DER's is critical from all 
perspectives. Regulatory authorities and the public need to know that 
pollution will actually be reduced as projected, and the private sector 
needs to know that the market will reward high quality reductions and 
reject defective ones. Yet detailed compliance audits are inherently 
conducted on only a fraction of sources each year, as limited 
governmental enforcement resources must be targeted at a range of high 
priority environmental problems.
    In the stakeholder and interagency review processes conducted prior 
to this proposal, a number of options were put forward for maintaining 
DER quality assurance in an expanded emissions trading market. The 
proposal made today is a hybrid of these options that EPA has developed 
using the ``design criteria'' described above. The EPA believes this 
hybrid best serves the twin objectives of freeing up the market for a 
higher volume of emissions trading while maintaining sound quality 
assurance incentives.
1. Option 1: User Liability
    The first option considered was put forth by the original 
developers of the open market concept. Building directly on the current 
regulatory structure, they contemplated that liability for deficiencies 
in DER's under the Clean Air Act and State air pollution laws would 
remain with the party who purchased and used the DER's as a compliance 
option, since that party had the original compliance obligation. The 
key concepts underlying this option are that (1) DER's are compliance 
products similar to pollution control equipment, and (2) as such the 
user source is responsible for compliance when using DER's just as it 
is when complying by use of control equipment.
    Like sources using purchased control equipment or services, sources 
using DER's to meet their emission limits would be able to control 
their compliance risks by choosing carefully among vendors and by 
negotiating for appropriate guarantees, insurance, or indemnification 
provisions. Pollution control equipment and services purchased from 
vendors generally come with guarantees specified in contracts or 
implied under commercial law, or with specific insurance policies or 
indemnification agreements as negotiated by the parties. Pollution 
sources using purchased control equipment or services, however, remain 
responsible for their own compliance obligations with State and Federal 
pollution laws, and remain liable to enforcement authorities in cases 
of non-compliance, even if the non-compliance was caused by a 
shortcoming in the products or services purchased from a vendor. In 
that case, sources have recourse to contractual guarantees, insurance, 
or indemnification provisions. Through these provisions sources can 
return to compliance (e.g., obtain satisfactory equipment) and be 
compensated appropriately for damages.
    Liability for compliance with State and Federal pollution laws and 
the 

[[Page 39676]]
prospect of enforcement for non-compliance encourage each source to pay 
attention to the quality of goods and services offered by prospective 
vendors of emission control equipment, fuels, and services. In the 
competition for sources' business, market forces favor vendors with 
great expertise, good track records for reliability, or the best 
guarantees. Less capable vendors, who expose their clients to greater 
risks of non-compliance, generally command lower prices--if they can 
get any business at all. Market forces would be expected to operate in 
the same way for DER's. In order to minimize risk, buyers would look 
for quality and favor DER's that present low risks of placing users in 
non-compliance. Users would remain responsible to enforcement 
authorities in cases of non-compliance, but would be able to use 
contractual provisions (guarantees, insurance, etc.) to shift the 
financial consequences to generators or intermediaries that sold them 
defective goods. The care users would take to reduce their compliance 
risks would help assure the quality of DER's for the benefit of both 
governmental authorities and the public.
    Many participants in pre-proposal stakeholder discussions expressed 
support for this option of placing liability for DER validity on the 
buyer. Some participants, however, expressed concern that this option 
would not provide appropriate incentives for attention to DER quality 
if the seller and buyer are not in an independent, arms-length business 
relationship, such as when DER transactions are internal to a company 
or between companies that have close ties.
    Still other participants expressed concern that buyer liability 
could create excessive uncertainties and risks for buyers. They 
predicted that buyer liability would reduce market activity and 
suggested other options.
2. Option 2: Retaining Pre-Approval Requirement
    Several commentors recommended that EPA continue to allow trading 
only in reductions that have been pre-approved by governmental 
authorities. They contended that an active market could develop only if 
buyers have certainty that reductions offered on the market will be 
accepted by governmental authorities, and that this degree of certainty 
could be provided only by governmental pre-approval.
    These commenters acknowledged, however, that the requirement for a 
source-specific SIP revision was an expensive and lengthy process for 
both industry and government and would remain a bottleneck preventing 
expansion of the market, especially given current governmental 
budgetary constraints. In response, these commenters suggested process 
changes such as limiting the time allowed for State review or 
dispensing with EPA review.
    Other commenters, however, expressed concern that these process 
changes would present too high a risk of approving poor quality DER's. 
Governmental approval would be given despite reduced scrutiny of DER 
quality. Neither buyers nor any other party would have incentives to 
scrutinize the quality of DER's offered on the market once they were 
governmentally approved. These commenters expressed concern that this 
would lead to an influx of unsupported DER's, to the disadvantage of 
generators that were trying to follow the rules, and an increase in 
actual pollution levels.
3. Option 3: Splitting Regulatory Liability Between User and Generator
    Other commenters suggested splitting liability for compliance under 
State laws and the Clean Air Act among the generators and users of 
DER's. Under this option, DER generators would bear full liability for 
the validity of the DER's they sold, and users' liability would be 
limited to deficiencies in how DER's were used (i.e., inaccurate 
calculation of a user's compliance ``debit''). In other words, users 
could purchase and use DER's without any legal risk for deficiencies in 
the generation of those DER's. In a variation of this option, the user 
would have the limited obligation to make up shortfalls if compliance 
authorities discovered deficiencies in the DER's it relied on. 
Commenters stated that one of the advantages of this approach would be 
that each party would be held responsible for actions under its own 
control. The transaction costs associated with constructing legal 
arrangements to give the DER buyer information and certainty about DER 
generation activities (inspecting potential DER purchases and 
negotiating for guarantees or insurance) would be avoided, thereby 
expanding the volume of trading and the cost savings.
    Proponents of this option acknowledged that buyers would have fewer 
incentives to inspect DER's offered to them, compared to the buyer 
liability option. They contended, however, that it would be possible to 
increase the frequency of governmental audits, and the size of 
penalties, enough to maintain DER quality assurance. Other commenters 
expressed concern that an increase in governmental auditing sufficient 
to preserve DER quality would be difficult in light of budgetary 
constraints, and that it would be difficult to convey appropriate 
market signals about potential penalties through case-by-case 
enforcement actions. Legal issues were also raised over whether State 
authorities could obtain jurisdiction over out-of-state generators, and 
on whether statutes of limitations with respect to generation 
violations would begin to run before the DER's are used.
4. Option 4: Reliance on Third Party Guarantors
    Another suggested option is to allow independent third parties to 
guarantee the validity of DER generation and assume the compliance 
liability for invalid DER's. In this option, independent third parties 
would become subject to penalties under State laws and the Clean Air 
Act if DER's were deficient. This liability would give such third 
parties incentives similar to those of the buyer under Option 1 to 
inspect DER's carefully and choose those that are best supported. The 
user would remain liable for deficiencies in how DER's were used, as in 
the split liability option above.
    Proponents indicated that this approach could be of special value 
when dealing with small sources that have the potential to generate 
cost-effective emission reductions, but that lack the knowledge or 
capacity to seize the opportunities on their own. Likewise, the 
availability of such third parties might be valuable to small sources 
that were potential users of DER's, but that lacked the necessary 
expertise to purchase high quality DER's on their own or the 
willingness to assume liability for defective DER's. Other commenters 
raised questions about the legal means by which such third parties 
would be made subject to regulatory liability, how to define an 
independent third party, and how to handle the potential bankruptcy of 
such a party.
5. Proposed Approach
    The proposed open market trading rule adopts a hybrid of these 
options, as well as other measures to address concerns about incentives 
and uncertainties. The proposal is based largely on Options 1 and 4, 
while also requesting comment on the issues raised in Option 3. The EPA 
believes that the principle of buyer liability will work the best to 
assure DER quality. The EPA also believes that in addition to their 
major role through contractual mechanisms, third parties should be 
allowed to assume regulatory liability in certain circumstances. The 
proposal also reflects other significant features 

[[Page 39677]]
intended to promote market activity by reducing the uncertainties 
associated with buyer liability.
    Accordingly, under the proposed open market trading rule, sources 
may use DER's in lieu of direct pollution control measures to 
demonstrate compliance with their emission reduction obligations under 
State and Federal law. Today's rule proposes that the user source would 
be responsible to enforcement authorities for compliance. The EPA has 
taken four steps in this proposal to reduce the uncertainties and 
transaction costs associated with this liability structure. Included in 
these steps are provisions for third parties, in certain circumstances, 
to assume the legal responsibilities of a generator. In addition, EPA 
is considering and asking for comment on whether there are appropriate 
circumstances in which a third party could take on a portion of the 
legal liability of certain users, or liability could be divided between 
user and generator.
    a. Generator Certification. First, the proposal would require 
generator sources to certify, under penalty of law, to the accuracy of 
the underlying factual information (e.g., the accuracy of monitoring 
and other data used to calculate the reductions), which supports DER's 
offered for sale. If subsequent investigation should demonstrate that 
such information was inaccurate, the generator would be subject to 
civil and, if appropriate, criminal enforcement. It should be noted 
that certification is a requirement to which pollution control 
equipment vendors are not subject, but EPA believes it is an 
appropriate requirement for DER generators in order to provide a 
significant added measure of DER quality assurance to prospective 
users, State and Federal authorities, and the public.
    b. Guidance for Emissions Quantification Protocols. Second, EPA 
proposes to issue guidance containing criteria for emissions 
quantification protocols. Quantification of the emissions reductions 
that sources have generated and the amounts that are needed by users 
would have to meet the criteria in this guidance. In addition, working 
with the States, industry, and the environmental community, EPA 
proposes to create a mechanism for approving specific quantification 
protocols for priority types of generation and use activities. A number 
of such protocols would be drafted by industries, and others by EPA or 
States. They would be reviewed by a multi-stakeholder process prior to 
an EPA approval decision. The EPA believes these protocol guidance and 
specific protocols would give generators and users, as well as 
compliance authorities, a predictable ``road map'' for distinguishing 
DER's that have a high likelihood of being considered valid, from ones 
that are suspect or clearly inadequate.
    c. Third-Party Relationships. Third, EPA proposes to encourage the 
emergence of a variety of third-party relationships that could help the 
market function. Within the context of Option 1, third parties could, 
through contractual arrangements, assume many important functions that 
would assist generators and users. Further, as suggested in Option 4 
above, EPA proposes to allow third parties to assume the regulatory 
liability of generators in certain circumstances. Finally, EPA is 
considering and requesting comment on the possibility of allowing third 
parties to take on a portion of the regulatory liability of certain 
users.
    (i) Third party contractual roles. Under the proposal, generators 
and users could enter contractual arrangements with third parties to 
perform a variety of important functions. For example, generators and 
users could hire technical and legal experts to improve their ability 
to create and purchase high quality DER's. Technical experts could help 
generators develop quantification protocols that conform to EPA 
guidance, and develop the data that plugs into such protocols. Lawyers 
could provide expert opinions on the applicable State and Federal 
requirements that determine a source's baseline. Similar technical and 
legal services could be performed for the user, both to determine the 
user's need for DER's and to pick the highest quality.
    Third parties could also serve as brokers matching sellers and 
buyers. Some third parties may acquire their own portfolios of DER's 
and offer guarantees, insurance, or indemnification services to buyers.
    Independent third parties could serve as a trusted source of expert 
opinions establishing the quality of DER's. Such opinions would not 
relieve the user of its regulatory liability under State law and the 
Clean Air Act, but they could serve to reduce uncertainty, distinguish 
high quality products, and build market confidence. The EPA 
specifically requests comment on whether an opinion by an independent 
third party should be required when the generator and the user are not 
in an ``arms-length'' relationship.
    (ii) Third parties as generators. The EPA also proposes that, under 
defined circumstances, third parties could directly assume the 
regulatory liability of generators. Third parties could play an 
instrumental role when dealing with small batches of cost-effective 
emission reductions from smaller sources. The EPA recognizes that the 
requirement for generator certification could discourage participation 
by small sources with the potential to make highly cost-effective 
reductions. Buyers may also be reluctant to take on the task of 
inspecting numerous small DER offerings from such sources. Third 
parties may be more familiar with the emission reduction methods and 
the DER calculation protocols than the owners and operators of such 
generator sources. Third parties could offer the service of taking 
operational responsibility for performing and documenting emission 
reducing actions for such sources, thereby capturing inexpensive 
emission reductions opportunities that smaller sources would otherwise 
be unaware of, or that they would be unwilling to seize on their own 
given the requirement for generator certification. The third party 
could then take ownership or control of the reductions achieved, 
aggregate many small batches of DER's, and offer them for sale to 
users.
    To promote such actions, EPA is proposing that third party 
aggregators of DER's from small sources could take on the 
responsibilities of generators under the rule in certain circumstances. 
Specifically, this could occur where the third party enters an 
agreement with the owner of the small source to take actual operational 
responsibility for performing and documenting the action that generates 
DER's. Under the rule, the third party would be considered an 
``operator'' of the sources in question, for the purposes of the Clean 
Air Act. The third party, not the numerous smaller sources, would file 
the Notice and Certification of Generation and assume the legal risk 
associated with the generator's certification as to the accuracy of the 
information underlying its DER; the sources whose emissions the 
aggregator reduced would have no liability. The user would look to the 
third party operator, not the actual owners of those sources, for the 
necessary documentation and certification as to the validity of the 
DER's, and for appropriate guarantee or insurance provisions.
    In order to qualify for this role, the third party also would need 
to demonstrate financial responsibility, in order to insure that it has 
an adequate stake in generating bona fide DER's, and that the neither 
subsequent users nor the environment bear an undue risk in case of 
fraud or bankruptcy. EPA solicits comment on what specific criteria for 
a 

[[Page 39678]]
showing of financial responsibility should be set forth in the final 
rule, and whether any additional qualifications or requirements on such 
third parties would be appropriate.
    (iii) Third parties as users. EPA is considering and requests 
comment on whether third parties could play a similar role on the user 
side. The EPA recognizes that, as on the generation side, some sources 
with the potential to reduce control costs by using DER's may 
nonetheless be unwilling to take on the regulatory liability associated 
with responsibility for the validity of the DER's. It has been 
suggested that the rule could allow a qualified third party, by 
agreement with the user source, to assume the user's liability under 
State law and the Clean Air Act for the validity of the DER's used. 
Under this suggested approach, the user would retain legal 
responsibility for the calculation of the amount of DER's needed for 
compliance, as well as all other aspects of how the user source is 
operated. The third party, however, would assume legal responsibility 
for the validity of the DER's acquired and used.
    The EPA is considering and requests comment on this approach should 
be adopted, and if so, with what appropriate conditions. Specifically, 
EPA is considering and solicits comment on what conditions would be 
necessary to maintain DER quality assurance incentives and capabilities 
for compliance determinations and enforcement actions equal to those 
associated with user liability alone. For example, to ensure that the 
third party has the same motivation as would the otherwise liable user 
to review DER offerings with care and choose on the basis of quality, 
the third party would have to be functionally independent of the 
generator from which it acquired the DER's. The third party would also 
have to consent expressly to take on the legal responsibility of the 
user source for deficiencies in the DER's, and to being considered an 
``operator'' of user source for that purpose. The user and third party 
would have to file a single, unified Notice of Intended Use. They would 
have to do likewise for the Notice and Certification of Use, which 
would have to include certifications under penalty of law by 
responsible corporate officers of both the user and the third party as 
well as to the accuracy of the facts underlying their respective 
portions of the documentation. The third party would have to 
acknowledge the jurisdiction of the user source's State, and that any 
statutes of limitations on DER validity run from the time DER's are 
used, regardless when they were generated. The third party would have 
to commit to be present and make records available, on the same basis 
as the user, present with the user itself, for any inspections or 
related interaction with compliance authorities. As on the generation 
side, a demonstration of the third party's financial responsibility 
would assure that it has a sufficient stake to motivate diligence in 
determining the validity of DER's, and would protect the environment 
from undue risks of fraud or bankruptcy. As above, EPA solicits comment 
on what specific criteria should govern a showing of financial 
responsibility. The EPA is also considering and requests comment on how 
this approach would affect compliance determinations and enforcement 
proceedings in terms of complexity, resource demands, and 
effectiveness.
    d. ``Good Faith'' Purchasers. Fourth, EPA proposes to develop a 
penalty or enforcement response policy in conjunction with the final 
open market trading rule that would lay out in greater detail how EPA 
intends to respond when DER's are determined to be deficient, despite 
users' ``good faith'' efforts, and the criteria upon which good faith 
would be judged. Enforcement of the Clean Air Act has a number of 
objectives, including remediation of environmental harm and deterrence 
of further non-compliance. The penalty or enforcement response policy 
will address the case where a source has fully acted in good faith in 
the purchase of DER's, including exercising due diligence in the 
inspection and selection of those DER's, and yet the DER's are 
subsequently determined to be deficient by compliance authorities. The 
policy will make clear that EPA's focus would be on remedying the harm 
to the environment from deficiencies in the DER's (i.e., the harm from 
excess emissions). This could be accomplished by requiring the user 
only to purchase and retire a sufficient number of DER's (perhaps with 
a multiplier) to recoup the deficiencies in the DER's originally used. 
The EPA requests comments on the steps a purchaser might take to be 
considered a good faith purchaser and on the appropriate multiplier, if 
any, should be applied in cases where replacement DER's are to be 
acquired.
    The EPA believes these four features of the proposal would provide 
generators, users, and government authorities with sufficient guidance 
and certainty so that an active market in high quality DER's would 
develop.
    After careful consideration, EPA rejected Option 2 (pre-approval 
requirement). The EPA agrees with concerns expressed by some commenters 
that retaining prior approval would maintain the bottleneck in the 
current system, and that proposals to limit State governmental review 
time or dispense with Federal review would run too high a risk of 
giving governmental sanction to poor quality DER's.
    It should be noted that nothing in the proposed model rule is 
intended to prevent a State or other authorities from examining the 
quality of a particular DER prior to the compliance determination 
phase. Indeed, the Notice and Certification of Generation and the 
Notice of Intent to Use would give a State the opportunity to review a 
particular DER at an earlier stage, if it so chooses. The EPA expects 
also that many sources may seek informal consultations with States or 
EPA on the appropriateness of an emissions quantification protocol, the 
correct application of a monitoring method, the applicable baseline 
requirements, or other issues. The availability of such informal 
consultations could play an important role in providing certainty and 
predictability to the market. The EPA intends to continue working with 
stakeholders to explore mechanisms for informal early review of 
particular DER's.
    With respect to Option 3, eliminating the user's responsibility for 
the quality of the DER's it purchased would reduce transaction costs 
and thereby expand the scope of trading leading to economic and 
environmental benefits. It would also increase the importance of 
governmental scrutiny during compliance determinations as a check on 
DER validity and a means of ensuring achievement of the environmental 
benefits. Only a fraction of sources are subject to detailed compliance 
inspections each year. If users are responsible for making up 
deficiencies, they will have some incentive to inspect the DER's 
offered to them to assure that they are real, surplus, and 
appropriately quantified. Nevertheless, it is possible that more 
unsupported or invalid DER's would be sold. This would increase 
pollution, damage public health, and undermine confidence in the 
market. The EPA is also concerned that both of these approaches could 
put the most scrupulous DER generators at a competitive disadvantage as 
compared with others that may exercise less care in their DER 
generation activities, unless compliance determinations are an 
effective check on the supply of defective reductions. The EPA requests 
comment on these issues. The EPA also requests comment on how, under a 
split 

[[Page 39679]]
liability approach, States would address jurisdictional issues over 
out-of-State generators, or issues of responsibility for DER's 
generated in the past by sources no longer in business.
    The EPA requests comments on all aspects of its proposed approach 
to liability.

B. DER Generation

1. DER Formation and Baseline
    Under the proposed OMTR, participating sources may create 
reductions by reducing their emissions for a specific period of time 
below levels allowed by the approved SIP, State adopted rules (if more 
stringent and not yet in the approved SIP), applicable Federal 
requirements (e.g., NSPS), or historical actual emissions, whichever is 
more stringent. The source would not be required to remain at that new 
lower level permanently, but instead could reduce for a discrete time 
period. During that period, reductions may be calculated by determining 
the difference between what the source's emissions would have been 
under the baseline emissions rate (actual or allowable emissions 
without the DER generation strategy) and the actual emissions for the 
discrete period of operation at the new lower emissions level, times a 
measure of the source's operational level. The source would calculate 
its DER's in one ton units.
    The generation baseline establishes a benchmark for what is surplus 
to all the source's applicable Federal and State requirements, 
including those contained in the area's SIP. Therefore, for sources 
located in areas where the attainment or maintenance plan is based on a 
source's actual emissions, the generation baseline would be the lower 
of the source's expected actual or allowable emissions. In areas that 
have fully approved attainment or maintenance plans which are based on 
sources' allowable emissions, the State has the option to let sources 
use their allowable emissions as the generation baseline. For sources 
not subject to any applicable VOC or NOX requirements, and located 
in areas that are not required to have attainment or maintenance plans, 
the baseline would also be based on the source's actual pre-generation 
strategy emissions.
    In some cases, the sources ``actual'' baseline emissions could be 
measured directly, for example, as the pre-control device emissions. In 
other cases, the baseline could be determined by reference to emissions 
rates for the two years immediately prior to the generation period in 
question, unless some other time period was deemed to be more 
representative of the operation of the source. In such cases, the 
expected actual emissions would be the product of the historical 
baseline emissions rate per unit production and the actual production 
during the generation period. The expected allowable emissions would be 
the product of the allowable emissions rate per unit production and the 
actual production during the generation period.
    Some comments have expressed concern about the establishment of the 
emissions baseline for sources generating DER's in areas which have 
failed on a prolonged basis to submit and gain EPA approval of: (a) 
Measures needed to meet rate of progress (ROP) requirements, (b) 
attainment demonstrations, or (c) maintenance plans. These commenters 
have argued that if a State has not yet adopted the additional 
emissions control measures that would be necessary to rectify such a 
SIP deficiency, DER generating sources would be operating from an 
inappropriately high baseline. The commenters have suggested that steps 
would need to be taken to address such situations, for example, (a) 
barring further DER accrual by generators until the ROP, attainment 
demonstration, or maintenance plan deficiency is remedied, or (b) 
discounting DER generation by an amount proportional to the area's 
overall reduction deficiency.
    Other commenters have argued that while a DER generator's baseline 
would be inappropriately high in such cases, all sources' baselines 
would be inappropriately high, whether the sources are participating in 
the open market program or not. These commenters believe that including 
in the OMTR a requirement to address such SIP problems by selectively 
targeting DER generators and users is unwarranted, since all sources 
reap an economic benefit from not having a lower baseline and tighter 
control requirements. They also believe that singling out open market 
participants would act to discourage participation in the open market 
system by creating undue regulatory uncertainty about the ability to 
create and use DER's, thereby sacrificing the efficiency gains provided 
by this regulatory approach. They have argued that States should 
rectify such attainment problems without singling out open market 
participants.
    The EPA believes that both arguments raise valid concerns, and 
requests comments on whether the OMTR should require action to address 
DER generation in cases where States have such attainment problems, 
and, if so, what those actions should be.
2. Start Date for DER Generation
    DER's that may be used for compliance under this model rule must 
have been generated after the start of the 1995 ozone season (May 1, 
1995 in most cases) and must meet all other requirements of the model 
rule. One of the objectives of this model rule development process has 
been to make trading possible during the 1995 ozone season. Earlier 
dates were considered but rejected because of the potential to 
overwhelm the market with pre-existing reductions that by definition 
were not motivated by the prospect of creating a tradable product of 
value. Another objective of the rule is to create an incentive for 
sources to make additional reductions beyond those they would otherwise 
have made. It would not be consistent with this objective to give 
retroactive credit for actions taken before this rule was developed and 
which were made for other reasons. The EPA is also concerned that 
crediting earlier reductions could lead to an imbalance in the first 
years after a State program is in place. Thus, if a large-scale use of 
pre-1995 reduction stockpiles occurred in that period, before large-
scale generation of new DER's had developed, it could lead to elevated 
ozone levels during the use years, creating human health consequences 
and jeopardizing an area's compliance with underlying Act requirements.
    The EPA acknowledges that some stationary sources in the Northeast 
have participated in the NESCAUM-MARAMA Demonstration Project, and have 
made discrete reductions before the 1995 ozone season which they intend 
to sell as DER's. While EPA has acknowledged and encouraged these 
potential trades, they cannot fall within this model rule. These 
facilities may need to proceed through source-specific SIP revisions. 
The EPA will continue to work with the NESCAUM-MARAMA participants to 
process revisions expeditiously.
3. Converting ERC Activity Into DER Activity
    The EPA recognizes that there are beneficial emissions reductions 
that will occur in the future under the current ERC program. Emissions 
reduction activity intended for ERC use would be creditable as DER's, 
provided that the activity met all applicable requirements of the OMTR. 
However, the same emissions reduction activity may not be used in both 
programs; the source would have to choose one program to the exclusion 
of credit in the other. Reductions made before the 1995 ozone 

[[Page 39680]]
season by an activity approved as an ERC could not, however, be used as 
DER's.
4. Prohibited Generation Activities
    a. Shutdowns & Production Curtailments. Under the proposed model 
rule, DER's would be generated by actions that reduce the rate of 
emissions of a source per unit of production. Typically, these actions 
would consist of installing control equipment, making process changes, 
or changing fuels or other inputs so as to reduce emissions per unit of 
production. The proposed model rule would not allow shutdowns or 
production curtailments to generate DER's.
    Many participants in stakeholder meetings have argued that 
shutdowns and curtailments would not be undertaken, or hastened, to 
generate DER's (i.e., they would have happened anyway). The EPA has no 
evidence at this time that shutdowns and curtailments would occur 
earlier on account of the economic benefit derived from generating 
DER's. Shutdowns and curtailments generally occur due to economic 
conditions, and they do not result in an improved efficiency of 
emissions per product. In addition, EPA is concerned that for major 
sources under emissions rate limits, economic-related curtailments 
could be used to generate DER's with no requirement to offset higher 
emissions through use of DER's during full production boom periods. 
Therefore, EPA believes that in general, allowing DER's to be generated 
from shutdowns and curtailments could lead to increased emissions from 
sources using DER's without real, additional reductions having been 
made by DER generators.
    As noted previously, a major purpose of this proposed rule would be 
to promote innovative approaches to controlling and preventing air 
pollution, involving the full range of major, minor, area, and mobile 
source sectors. The EPA believes banking of DER's created from 
shutdowns could provide a massive supply of inexpensive DER's that 
would inhibit investment by others in measures that actually reduce 
emissions per unit of production from sources that continue in 
operation. The EPA believes this glut of DER's from actions that would 
have otherwise occurred and that produced no additional reductions 
could also lead to emissions spikes and therefore jeopardize compliance 
with underlying Act requirements for attainment of the ozone standard.
    In addition to concerns about the effect of shutdowns on 
attainment, EPA is also concerned with load-shifting that could occur 
when sources shut down. If small sources (e.g. gas stations or print 
shops) reduce emissions by shutting down, their economic activity will 
likely be picked up by new or existing sources in the same areas. Since 
emissions created by increased operating rates by other existing 
sources are not limited, and since new small sources are not subject to 
an offset or cap requirement, the net effect of allowing shutdowns to 
generate DER's would be to increase overall emissions.
    The EPA does recognize some situations in which DER's generated 
from activities that appear to be shutdowns and curtailments might be 
consistent with an open market system. For example, for mobile sources, 
reductions in use levels should be allowed to generate DER's if such 
reductions occur in the context of a formal plan to shorten or obviate 
trips and are generated with an appropriate emission quantification 
protocol. Such use level reductions would not be considered 
curtailments. An example of a program that could reduce motor vehicle 
use levels is an employee commute option that generates emissions 
reductions beyond what might be required for an area under section 
182(d)(1)(B) of the Act.
    Another example would be the early automobile retirement program 
known as scrappage. The EPA does not consider mobile source scrappage 
to be a shutdown, and scrappage programs would be allowed to generate 
DER's under the proposed rule. This would be acceptable because 
scrappage programs conforming to EPA guidance actually would achieve 
earlier retirement of old, high-emission vehicles than would otherwise 
occur.
    In the process of developing this rule, a number of industry and 
State groups offered other examples where shutdowns and curtailments 
might be consistent with an open market system. One example is the 
concept of allowing DER's to be generated from shutdowns and 
curtailments when such reductions can be captured within a ``closed 
loop'' of existing and new sources. Facilities that replace small 
boilers with a central energy source and thus create fewer emissions 
might create a net environmental benefit through small boiler 
shutdowns. This differs from the more common shutdown case, where a 
facility closes and the production load could shift to another 
unrelated source. In general, establishing conditions by which closed 
loop or other potentially beneficial shutdowns could be considered in 
the open market program would add complexity to the proposed rule and 
still might be problematic with respect to the intent of the rule as 
outlined above. The EPA requests comments on language that would allow 
for acceptable, environmentally benign or beneficial exceptions to the 
common shutdown circumstances.
    The EPA is also interested in public comment on whether a State 
that has an approved attainment demonstration or maintenance plan that 
does not rely on emission reductions from shutdowns and curtailments 
may permit such shutdowns and curtailments to generate DER's. In such 
cases, EPA believes that the use of DER's generated from shutdowns and 
curtailments would not jeopardize attainment, since the SIP would 
already contain enough emission reductions from other sources to 
satisfy the attainment demonstration requirement of the Act. Thus, it 
might be appropriate to allow States to credit emission reductions from 
shutdowns and curtailments.
    On the other hand, except where shutdowns are used for new source 
offsets, air quality improves as sources shut down. Shutdowns are 
already available as offsets for new sources. In the major new source 
offset program, Congress decided that encouraging continued economic 
development in nonattainment areas by allowing emission reductions from 
shutdowns to offset new source emissions was worth the sacrifice of the 
natural improvement in air quality that results from sources that shut 
down. If existing sources are allowed to relax otherwise applicable 
emission limits by using DER's generated from shutdowns and 
curtailments, States would be giving up this built-in air quality 
improvement. The EPA believes that allowing DER's to be generated from 
shutdowns could be inconsistent with Congress' intent to encourage 
economic development, since the value of DER's generated from shutdowns 
would be expected, on the margin, to encourage sources to shutdown. The 
EPA is interested in comment from the public on this matter.
    In the event that shutdowns and curtailments were allowed to 
generate DER's in areas with approved attainment demonstrations or 
maintenance plans that do not rely on such reductions, EPA requests 
comment on the period of time into the future that a shutdown source 
would be allowed to continue generating credit. The EPA also requests 
comment on the effect that allowing DER's to be generated from 
shutdowns and curtailments would have on incentives for owners and 
operators of existing, ongoing sources to invest in innovative 
pollution control or prevention measures. The EPA also 

[[Page 39681]]
requests comment on how to treat discrete increases in emissions that 
result from full production boom periods if discrete decreases due to 
production curtailments are creditable.
    While EPA is proposing that the use of credits from shutdowns be 
restricted under the proposed open market system, this does not imply 
that such reductions cannot be used in other programs. Emission 
reductions from shutdowns remain creditable in the offset program for 
major new sources discussed previously, and can be used in emissions 
budget systems. In emissions budget systems, the integrity of the 
agreed emissions budget cannot be violated by emissions credits from 
shutdowns and curtailments, since the closed system ensures that the 
stated emissions target will be attained and maintained.
    The Department of Defense (DoD) was especially concerned about the 
impact of the rule on military base closures and the civilian 
redevelopment of closure properties, as well as the ability of DoD to 
use shutdown reductions to support other military installations of 
other federal activities. In particular, DoD highlighted the fact that 
most redevelopment of closed bases occurs over a long period of time in 
a phased process. Credits for shutdown reductions are not only needed 
at the time of the shutdown, but need to have an extended life to be 
available to support actions 5, 10, or 15 years in the future.
    The EPA believes that its current new source review (NSR) rules and 
soon-to-be proposed changes to those rules will support base closure 
redevelopment needs. For areas with approved attainment demonstrations, 
current NSR regulations allow the use of emission reductions that are 
contained in the emissions inventory at time of use--including 
emissions from shutdowns and source curtailment--to be used to comply 
with the NSR offset requirement.
    In areas without approved attainment demonstrations, current EPA 
regulations restrict the use of shutdown/source curtailments to be used 
as NSR offsets where the reductions occur prior to submittal of the 
permit application by the new source (with the exception of replacement 
facilities). However, EPA is already planning a regulatory change as 
part of the NSR update package that proposes to relax this restriction 
in the Federal NSR requirements. This package is scheduled to be 
proposed this fall. This would mean that under EPA's proposal, emission 
reductions from shutdowns held by DoD or the local redevelopment 
authority (LRA) would be available until needed for NSR offset 
purposes.
    The DoD was also concerned about the availability of shutdown 
reductions to satisfy general conformity requirements. Since the 
preamble of the general conformity rule references the NSR rules to 
define offsets, any emission reductions that are consistent with EPA 
guidance regarding NSR offsets are also available for conformity 
offsets. This means that any mobile or stationary source emissions 
increase needing conformity offsets may obtain them from both mobile or 
stationary source reductions, including reductions resulting from 
shutdown or curtailments if such sources are contained in the emissions 
inventory at time of use. The EPA also confirms conformity offsets from 
shutdown (closure reductions) could be retained by DoD or the LRA 
indefinitely, freely transferred, and used for conformity purposes when 
needed. The EPA requests comments on these determinations.
    b. Overcompliance With An Alternative Emission Limit. In many 
States, sources are given flexibility from RACT requirements when the 
State grants them an alternative emission limit (AEL) that is less 
stringent than the RACT standard. The OMTR would not allow sources to 
generate DER's by reducing emissions below levels required by an AEL 
but still above levels required by the otherwise applicable RACT 
standard. Sources subject to AEL's could, however, generate DER's by 
reducing emissions below the levels associated with the otherwise 
applicable RACT standard.
    C. DER Use and Transfer. 1. Potential Uses. One key to a strong DER 
market and to minimizing compliance costs is enhancing the demand for 
DER's created by allowing as many and varied uses as possible. One use 
of DER's would be as a substitute for compliance with an applicable 
RACT standard. However, EPA expects that there would be many other uses 
as well. The philosophy of the model OMTR is that any use not 
prohibited in the rule is a valid use. The EPA encourages States that 
adopt this OMTR to adopt this approach.
    a. Use by Regulated Sources. The EPA believes appropriate use of 
DER's by sources would include, but not be limited to:
    (1) Use for delayed RACT compliance;
    (2) Use as compliance insurance margins to cover uncertainties in 
the value of DER's or variations in process emissions or control device 
efficiency;
    (3) Use as a substitute for reductions to be achieved through 
certain non-statutory mobile source requirements not otherwise 
prohibited in the rule;
    (4) Use as offsets for new stationary sources used either by a new 
source or by States as an incentive for economic development;
    (5) Use as part of a noncompliance settlement to compensate the 
environment for past violations.
    b. Advantages to States. States could also benefit from the 
adoption of an open market program because the existence of DER's could 
give the State more flexibility in attainment planning. For instance, a 
State could eliminate the granting of alternative emission limits or 
variances, or regulate emissions from occasional small-scale research 
and development activities. Sources could comply with applicable 
requirements through the use of DER's. These measures could increase 
rule effectiveness.
    2. Special New Source Review Requirements. Any proposed major 
stationary source or major modification applying for a permit to 
construct in an ozone nonattainment area may employ DER's to satisfy 
the requirements for offsets. Offsets are governed by EPA and State 
regulations for new source review (NSR).3 Nothing in today's 
notice would alter EPA NSR requirements or exempts owners or operators 
from compliance with applicable preconstruction permit requirements 
under section 173 of the Act or regulations contained at 40 CFR 
51.165(a).

    \3\ 3 States have rules concerning the preconstruction review of 
major stationary sources and major modifications applying for 
permits to construct in nonattainment areas. These rules must be 
consistent with the minimum requirements set forth under Federal 
regulations at 40 CFR 51.165(a).
---------------------------------------------------------------------------

    Today's model rule establishes specific criteria which the State 
must ensure would be met if DER's were used for offsetting new source 
emissions. In general, emissions reductions used as offsets must be 
real, surplus, enforceable, permanent, and quantifiable. In addition, 
section 173 of the Act sets forth specific requirements for emissions 
offsets which must be satisfied by a proposed major stationary source 
or major modification.
    Section 173 of the Act requires that the emissions reductions be 
Federally enforceable before the construction permit may be issued 
(section 173(a)(1)), and achieved by the time the source or 
modification commences operation (section 173(c)(1)). In using DER's 
for offsets, it would be necessary for the new major source or modified 
source to secure a series of DER's over the life of the source. The EPA 
believes that it is reasonable to require that sufficient DER's be 
obtained to offset the source's emissions on at least an annual basis. 
The first year's DER's should be 

[[Page 39682]]
submitted to the permitting authority prior to the public notice 
announcing the proposed construction permit. The determination of the 
amount of offset needed must take into account the prescribed offset 
ratio for the nonattainment area of concern. The permit must contain an 
enforceable condition requiring the source, each year, to have 
demonstrated to the permitting authority that, at that time, it held 
sufficient DER's to meet offset needs for at least the next year of 
operation. Failure to obtain any required offsets in a timely manner 
would be a violation of the source's permit.
    Section 173(c)(2) of the Act prohibits emissions reductions 
otherwise required by the Act from being used as offsets. For example, 
reductions required to meet RACT, MACT, acid rain reductions, and the 
phase-out of chlorofluorocarbons pursuant to statutory requirements are 
not creditable as emissions offsets.
    3. Special DER Use Restrictions. The proposed model OMTR would 
limit the use of DER's with respect to certain generation and use 
characteristics of the DER. Relevant characteristics include pollutant 
type, the modeling domain or nonattainment status of the area where the 
DER was generated, and the time of generation. The proposed OMTR would 
provide for these limiting provisions, in part, to assure that in 
nearly all cases the uses would be helpful toward reducing peak ozone 
concentrations. That is, the connection between generation and use must 
be correct, considering the distance between the generator and user 
sources and the patterns of pollutant transport in the relevant area 
(direction). States would be encouraged to assess their own unique 
situations, and devise an OMTR that contains special DER use 
limitations that are consistent with relevant modeling analyses that 
are in the SIP.
    a. Geographic Restrictions. Ozone smog formation is a difficult 
problem that has resulted in various approaches aimed at resolving it. 
Prior to the 1990 amendments to the Act, ozone attainment plans largely 
focused on emission reductions in nonattainment areas. More recently, 
attention has been focused on the issue of long-range transport and its 
contribution to ozone formation and to violation of the ozone standard. 
Ozone precursor pollutants mix and react together as they travel long 
distances over several days, thus creating a serious problem. For 
example, high ozone concentrations in the northeast occur on scales of 
over 1,000 km and can persist for many days. Our current understanding 
of ozone formation suggests that the relative importance of VOC and NOx 
control varies with the location and scale of the ozone problem. In 
general, VOC control is most likely to be effective in urbanized 
nonattainment areas, and less effective in the surrounding countryside 
where local natural VOC emissions can overwhelm those from human 
activities. On the other hand, NOx control tends to be most beneficial 
over larger distances. Therefore, the model OMTR would restrict VOC DER 
use to the same area in which the DER was generated, and would permit 
NOx DER trades to occur within the larger modeling domain.
    While considering the general relationships among VOC, NOx and 
ozone formation, it is also important to consider unique local effects 
that might be characterized in a specific SIP modeling analysis. DER 
uses should be consistent with relevant modeling analyses that are in 
the SIP to preserve the integrity of the SIP. In these modeling 
analyses, distance and direction effects are considered by analysis of 
various episodes, meteorological regimes, and boundary conditions. 
SIP's may define locations where emission reductions are most helpful, 
marginal, or even counterproductive.
    Some SIP's may have a regional NOx strategy component. A regional 
strategy means that emission reductions are planned to occur across a 
large area that may include sources located both within the local urban 
airshed modeling domain and outside the modeling domain. A modeling 
domain is the geographic area covered by an air quality model used to 
support an attainment or maintenance demonstration. The domain can be 
thought of as a rectangular box which is superimposed over the area 
being modeled. For the current (1994) revisions to State implementation 
plans (SIP's) for ozone, 23 modeling domains have been defined for 
different locations in the United States. Typical domain size ranges 
from 100 km x 100 km to 350 km x 350 km. Specifications for each of the 
23 modeling domains are available through the U.S. EPA's Technology 
Transfer Network (TTN). In addition, maps should be available from the 
State agency having lead responsibility for the modeling analysis. Lead 
State agencies are also identified in the TTN.
    In the regional strategy knowing the precise location of each 
emissions reduction is not as critical as understanding the general 
distances and directions emission reductions travel from the 
nonattainment area. In such cases, the modeling analysis shows ozone 
reductions in the nonattainment area through both local emission 
reductions within the modeling domain and by reduced regional, boundary 
concentrations coming in to the area due to emission reductions outside 
the modeling domain.
    The above considerations are reflected in SIP attainment 
demonstration or other modeling analyses conducted in support of the 
SIP. Thus, in some cases a SIP's control strategy may simply call for 
local reductions in a nonattainment area and, in other cases, the SIP 
may be supported by modeling analyses which indicate that both local 
and regional emission reductions are needed.
    In general, EPA would view NOX DER's used within the same 
urban airshed modeling domain as they were generated as acceptable as 
long as they: (1) Are consistent with the regional concept in the SIP 
strategy, and (2) address distance and direction concerns. The EPA 
acknowledges that in special cases, NOX trades within a modeling 
domain could result in higher NOX emissions in an urbanized area, 
and may increase already high ozone levels in that area; in this case, 
the use of NOX DER's in that area might not be consistent with 
attainment demonstration and in such cases should be disallowed.
    In addition, EPA believes that DER uses would be generally 
beneficial where NOX or VOC DER's generated inside a nonattainment 
or maintenance area were used by sources not located in a nonattainment 
area, maintenance area or modeling domain. Trades which crossed or were 
entirely outside of modeling domain boundaries could be ineffective 
where the distances are great or the direction of pollutant transport 
showed little benefit in reducing peak ozone concentrations from such a 
trade.
    Because of the complexity that would be required of EPA to list in 
the model rule all possible combinations of distance and direction for 
NOX and VOC trades in all areas wanting to adopt open market 
trading programs, the model rule proposes to allow NOX DER use 
only if the NOX DER was generated within the same modeling domain, 
and VOC DER use only if the VOC DER was generated in the same area. 
States would be encouraged to assess their own unique situations, and 
propose an OMTR that allowed NOT2X trades from outside the 
modeling domain at an appropriate discount, or allowed VOC trades with 
adjacent nonattainment areas, after taking into account and justifying 
the distance and direction considerations.
    In addition, States could choose to adopt rules which allowed 
NOX trades 

[[Page 39683]]
without discount where certain distance and direction criteria were 
met. For example, EPA would approve a State OMTR that allowed trades 
without discounting for distance and direction where the rule included 
the following criteria. Regarding distance, the generator and user 
sources should be within either 200 km or 2 days transport of each 
other. The transport criterion should be determined by examining the 
average wind speed which occurs on days with ozone exceedances near the 
user source. In all cases, the direction of the prevailing wind near 
the generator source and the user source should be within a 
 22.5 degree sector of a straight line between the two 
sources. Average wind speed and prevailing wind direction should be 
based on data from National Weather Service stations near both the 
generator and user sources. The prevailing direction and average speed 
should be calculated over the period 7 a.m. to 7 p.m. This period 
captures the time of day when emissions are typically highest, as well 
as to include the portion of the day when surface wind measurements are 
most representative of overall transport within the mixed layer. In 
calculating the prevailing wind direction, one could include those days 
with exceedances near the user source during the years used for 
classification of the nonattainment area. As an alternative, one could 
base the direction calculation upon all days in the ``ozone season'' 
for any year used for classification purposes in the area of the user 
source. For distances or directions which extended beyond these 
criteria, EPA believes that discounting may be necessary.
    In general, EPA encourages States to propose their own geographic 
requirements based on the characteristics of their areas. The model 
OMTR would contain generic restrictions that States could modify to 
more appropriately meet their air quality objectives. The EPA is 
committed to working with States in creating the most beneficial 
geographic restrictions for their specific areas.
    b. Interpollutant Trading. Interpollutant trades are defined as 
trades that occur between the two classes of ozone precursor 
pollutants, VOC and NOX. The available scientific and modeling 
information suggests both positive aspects and risks with an 
interpollutant trading program. Certain trades have the potential to be 
complementary, leading to greater reductions in ozone than would 
otherwise occur (e.g., a facility sells NOX DER's to a buyer who 
operates a VOC source in a rural area within the Northeast Ozone 
Transport Region). Others, however, may be counterproductive. For 
example, if a modeling analysis in the SIP identified a specific 
geographical area as an area where VOC reductions were needed and 
NOX reductions were not helpful over a local or regional scale, 
then a reduction in NOX emissions in that area should not be 
exchanged for required reductions in any other area. Since EPA cannot 
account for all possible site-specific cases where interpollutant 
trading is beneficial, the proposed model OMTR would not include 
interpollutant trading.
    States are nevertheless encouraged to submit as variations on the 
model OMTR, rules of their own that would permit interpollutant trading 
if adequate prior analyses had been performed which indicated that the 
nature of trades meeting specific criteria was consistent with expected 
lower ozone concentrations. These prior analyses might be performed by 
the State(s) or by others in support of one or more SIP's. Although a 
user could perform modeling analyses to support each proposed use of 
specific DER's, this would not be required. In general, interpollutant 
trading rules should encourage excess VOC emission reductions in 
geographic locations where ozone is limited by available VOC or 
encourage excess NOX emission reductions in locations where ozone 
is limited by available NOX. In the event a user and generator 
were in different States, review responsibility should be consistent 
with the policy on interstate trades. Where such interpollutant trades 
were permitted by States, the applicable rule should address distance 
and direction considerations as they applied to allowable 
interpollutant trades. The EPA would expeditiously review any such 
variations.
    c. Seasonal Restrictions. Whereas DER's generated in the ozone 
season might be traded to meet emissions requirements either during or 
outside the ozone season, DER's generated in the non-ozone season could 
be used only to meet non-ozone season emissions requirements. Using 
DER's during the ozone season that were generated outside the ozone 
season should not be allowed since such uses clearly would run counter 
to programs designed to attain or maintain the ozone standard and to 
meet ROP requirements. Ozone season reductions are the only ones 
effective in reducing peak ozone concentrations and are needed then. 
Thus, the rule would not allow DER's generated during a time outside of 
the ozone season to be used to comply with any air quality obligations 
during the ozone season.
    The time of year in which areas experience ozone concentrations 
above the standard varies with location. In general, areas with greater 
intensity of sunlight will experience longer ozone seasons. Thus, 
southern areas tend to have longer ozone seasons than northern areas of 
the country. The EPA has defined the ozone season for each State at 40 
CFR part 58, Appendix D. The purpose of this definition is to set the 
time of year during which States must monitor ozone concentrations. 
Ozone violations are not expected to occur outside the defined ozone 
season.
4. Prohibited DER Uses
    The proposed model OMTR prohibits several uses of DER's for a 
variety of statutory and policy reasons. The following sections explain 
the rationale for each specific prohibition, and where appropriate, 
seek comment on specific issues relating to the prohibition. In 
general, EPA requests comment on any DER use that would be expressly 
prohibited by the proposed model OMTR. Comments that explain in detail 
how EPA could allow the prohibited uses given the language in the Act 
and the rationale for current EPA policies would be particularly 
helpful.
    a. Compliance With Certain Mobile Source Requirements. The EPA 
believes that compliance with national mobile source programs (i.e., 
national exhaust and evaporative emission standards for cars, trucks, 
and nonroad equipment under sections 202 and 213 of the Act, plus any 
national fuel standards under section 211 of the Act) cannot be avoided 
through the use of DER's generated by other control measures. Some of 
these national mobile source control programs have internal averaging, 
banking and trading provisions, and EPA is currently examining whether 
more flexibility can be built into them. However, the statutory 
provisions by their terms appear to preclude compliance through DER's 
generated from other sources. In addition, using DER's generated 
outside of these programs (e.g., between different mobile source 
programs) would be inappropriate in instances where reductions 
associated with these programs occur nationally, and stationary and 
area source DER's generated in a specific region would be used to 
increase emissions nationally. The EPA is currently considering whether 
DER's generated regionally can be credited toward meeting same-source 
national requirements within a specific program (e.g., a scrapped 
outboard engine could create a DER in the national marine engine 
average standard structure).

[[Page 39684]]

    The EPA also believes the Act would not allow the use of DER's 
generated from other programs to meet the requirements of certain 
regional or local mobile source control programs. Many local or 
regional mobile source control programs, such as vehicle inspection and 
maintenance under sections 182(b)(4) or (c)(3) of the Act, employer 
trip reduction programs under section 182(d)(2)(B) of the Act, or clean 
fuel fleet requirements under section 246 of the Act, have provisions 
that appear to preclude compliance through DER's generated from other 
sources. However, unless prohibited by other provisions of the Act, 
DER's could be used to meet any regional or local mobile source 
requirements that are in addition to those specifically mandated by the 
Act. The EPA requests comment on whether the Act would allow the use of 
DER's to meet Federal mobile source requirements and whether EPA should 
adopt such an approach.
    The EPA believes that emission reductions generated in the context 
of an existing averaging, banking, and trading (ABT) program specific 
to a particular mobile source program should not be used to generate 
DER's. The same rule applies to fuel producers. The reason for this 
restriction would be to avoid double use of DER's, especially since the 
State may not be aware of the use of the ABT DER in the context of the 
relevant program.
    The EPA is concerned about quantifying DER's generated for upstream 
and downstream emissions reductions strategies. An example of an 
upstream activity is fuel distribution emissions--providers of natural 
gas may seek to generate a DER to reflect reductions in gasoline 
distribution emissions that result from sales of natural gas for 
alternative fuel vehicles. In this case, the use of an additional clean 
fuel vehicle does not necessarily take a known quantity of gasoline out 
of the conventional fuel distribution system. However, these kinds of 
emission reductions may be allowed to generate DER's if an adequate 
quantification method can be devised and approved by EPA. The EPA 
solicits comments on whether and under what conditions these emission 
reduction strategies should be allowed to generate DER's.
    b. Compliance With Certain Technology Standards. Today's proposal 
is consistent with the EIP rule (59 FR 16696 (1994)) in that DER's 
could not be used to meet Act sections 111 and 129, new source 
performance standards (NSPS), best available control technology (BACT) 
standards, or lowest achievable emissions reduction (LAER) standards.
    The EPA believes it is important to begin investigating whether 
compliance flexibility and costs savings can be offered to new sources. 
In this regard, the Agency has proposed in the model rule that DER's be 
used for offsets that satisfy new source review requirements. However, 
EPA questions whether additional flexibility and cost savings can be 
achieved by allowing sources subject to NSPS, BACT or LAER to utilize 
the open market program to meet these control technology requirements. 
In certain cases, the compliance requirements for NSPS, BACT or LAER 
may inhibit new low-pollution facilities from replacing older, high-
pollution facilities as quickly as would have occurred otherwise. If 
DER's were used to lower the economic hurdle in these cases, both the 
environment and the economy would be better off in the long run.
    The EPA requests comment on how to allow the use of DER's under the 
open market program to meet NSPS, BACT and LAER requirements.
    c. Compliance With Toxics Standards. Today's proposal would not 
relieve sources participating in the open market trading of the 
obligation to meet all requirements under section 112 of the Act. 
Standards promulgated under section 112 require sources to meet maximum 
achievable control technology (MACT) standards for air toxics. Often, 
section 112 standards apply to the same emissions point at a facility 
as RACT requirements. For example, a RACT requirement and a MACT 
requirement could both require control of an emissions point to a level 
achieved by a flare. In such a case, the source could not use a DER to 
meet the RACT control requirement because the MACT standard imposes an 
independent obligation to achieve the specified level of control. This 
ensures that trading would not result in higher levels of hazardous air 
pollutant emissions from a source than are permitted by Federal air 
toxics control requirements.
    d. Avoiding New Source Review. While allowing the use of DER's to 
satisfy the requirement for offsets, EPA believes that it would be 
unlawful to allow DER's to be used to avoid new source review 
requirements altogether. Therefore, the model rule would specifically 
prohibit the use of DER's to ``net out'' of review.
    In addition, sources that had previously agreed to operational 
limitations in order to avoid the new source review requirements, could 
not use DER's to subsequently increase their emissions to major source 
levels, and thus circumvent the provisions requiring retroactive review 
as a major source or major modification.
    e. Use To Avoid Penalties. The proposed model OMTR would require 
sources to purchase DER's before using them. A user could not defer 
purchase until after failing to comply. The EPA believes allowing such 
a retroactive acquisition of DER's would encourage sources to avoid 
their compliance obligations until such time as they were determined to 
be out of compliance. However, as described elsewhere in today's 
preamble, EPA does not wish to preclude the purchase of DER's as part 
of a settlement agreement for a violation or as a potential component 
of EPA's penalty policy.
    f. Use To Increase Over 1990 Emissions Levels. The EPA recognizes 
the possibility that a source may want to use DER's to allow that 
source to relax current costly compliance obligations. Such use of 
DER's may, in some cases, allow a facility to emit levels of pollution 
greater than levels accounted for in the 1990 emissions inventory. The 
EPA requests comment on whether in order to prevent excessive 
degradation of air quality near a particular source the OMTR should 
prohibit sources from using DER's to revert to pre-1990 levels. The EPA 
acknowledges that it may be difficult to effectively enforce such a 
provision since the State may not know with certainty the lower of 
actual or allowable emissions from a particular source prior to 1990.
5. Use for Conformity Offsets
    The EPA's General Conformity rule allows the conformity 
requirements to be met by a Federal agency obtaining emissions offsets 
(40 CFR 51.858, 93.158). The rule requires the offsets to come from 
within the same nonattainment or maintenance area.
    The definition of emissions offsets in the conformity rule is 
intended to assure that offsets within the air programs are calculated 
and credited consistently and that the term is used the same in the 
conformity rules as in the EPA NSR program. All offsets must therefore 
be quantifiable, consistent with the applicable SIP attainment and ROP 
demonstrations, surplus to reductions required by--and credited to--
other applicable SIP provisions, enforceable at both the State and 
Federal levels, and permanent within the time-frame specified by the 
program. DER's used in accordance with the OMTR could meet these 
requirements. Thus, the current conformity rule allows DER's to be used 
as conformity offsets where they occur 

[[Page 39685]]
in the same nonattainment or maintenance area.
    Since the purpose of conformity is to assure that Federal actions 
are consistent with SIP's, SIP's which explicitly allow the use of 
DER's should logically allow the use of DER's as part of their 
conformity SIP. That is, DER's which meet the SIP requirements should 
also be considered to be DER's which conform to the SIP. Thus, if a 
State adopts an OMTR into their SIP, such DER's should be available for 
conformity offsets.
6. Use in Place of Variances
    Many States currently provide for source-specific variances in the 
form of compliance extensions and alternative emissions limits for 
circumstances where it would be economically or technically infeasible 
to install controls. States are encouraged to consider discontinuing 
variances in areas where open market trading exists. Several States 
have already included such provisions in their proposed EIP's. Instead 
of granting variances, the State could achieve universal application of 
a RACT standard and allow sources that might otherwise be granted 
variances to comply through use of DER's. Discontinuing variances has 
the potential to improve ``rule effectiveness'' by allowing more timely 
rule compliance. This benefit could be reflected in attainment 
demonstrations or maintenance plans, if approved by EPA.
7. Holding DER's Before Use
    The model OMTR would require that DER's intended to be used by 
sources for compliance purposes must be held before the intended use 
period. This means that a particular DER generation activity must be 
completed prior to the start of the use period. To meet this 
requirement, a stream of DER's generated from an ongoing generation 
activity could be broken and parcelled prior to the start of the use 
period. This approach ensures the benefits of retrospective 
quantification described elsewhere in today's preamble. Under the OMTR, 
near-simultaneous trades similar to ERC trades could occur. For 
example, two facilities could arrange beforehand a series of 
transactions where one facility made reductions that were creditable to 
another facility. The EPA believes this type of transaction could 
facilitate same-season trading.
    However, this near-simultaneous transaction must comport with the 
30-day advance Notice of Intent to Use requirement. One way to enable 
this transaction would be to prearrange such transactions 30 days in 
advance and maintain a 30 day lag-time between the continuous 
generation and use of the DER's. Another method might be to make an 
exception for this special transaction, such that steps are taken to 
assure the benefits of retrospective quantification while allowing 
near-simultaneous trading. The EPA requests comment on how near-
simultaneous trading could occur or be improved in light of the 30-day 
advance notice requirement.
    The EPA recognizes that the near-simultaneous use and generation 
might increase transactions costs since the Notice and Certification of 
Generation and the Notice of Intent to Use, as well as the underlying 
generation and use documentation, would have to accompany each 
transaction. While these notices could be made routine and could be 
kept in electronic form, EPA requests comment on procedures that could 
be used in the open market trading program without compromising the 
program's enforceability, that maintain the benefits of retrospective 
quantification, but result in reasonable transactions costs for the 
sources that wish to engage in near-simultaneous trading.
8. Contribution to the Environment
    The final economic incentive program (EIP) rules (59 FR 16690 
(1994)) and guidance establish as a goal for all EIP's that they be 
designed to benefit both the environment and the regulated entities. 
The rule and guidance requires States to design programs that would 
meaningfully meet this goal, while providing flexibility to the States 
in determining how best to accomplish such benefit-sharing in the 
context of each specific program. Requiring that at least ten percent 
of the DER's traded be retired would meet this benefit sharing goal.
    The EPA believes this ten percent requirement is justified because 
the OMTR has the ability to greatly reduce costs to regulated industry 
and it is fair that some of those savings should be used to achieve 
further emissions reductions. Such a discount is clearly appropriate in 
the case where intertemporal trading is permitted. Intertemporal trades 
can increase the risk of emissions spiking, which in extreme 
circumstances could, in some years, negate the benefits of the early 
reductions provided by banking. The discount decreases the risk of 
spiking, and provides additional confidence that a retrospective 
approach to auditing the effects of the program will be sufficient.
    Therefore, EPA would approve the component of a State OMTR that 
required a user to retire any specific percentage of at least ten 
percent of the DER's it purchases for compliance use.
9. Potential Market Participants
    An active market with a large number of participants helps to 
promote economic efficiency in air pollution control. Subject to the 
limits specified by the rule, any source that emits NOX or VOC in 
an area that adopts an OMTR could participate in the open market system 
as a DER generator, and any source subject to a VOC or NOX 
emissions reduction requirement could participate as a DER user. The 
open market system would provide an incentive for VOC and NOX 
sources that have traditionally not been regulated to make pollution 
reductions. Large sources, small sources, area sources, mobile sources 
and non-title V sources could all participate.
    The EPA anticipates that DER's will be handled much like any other 
tradeable emissions reduction. They could be bought and sold by 
service-providing intermediaries, brokers, or even speculators. DER's 
could also be purchased and permanently or temporarily retired solely 
for environmental benefit by environmentally minded individuals or 
charitable organizations.

D. Characteristics of DER's

1. DER Life
    The maximum length of time between DER generation and use is the 
DER life. The proposed OMTR places no limit on DER life. The EPA 
considered a variety of approaches to limiting DER life, and concluded 
that longer lives promote market stability and diminish the risk of 
emissions ``spiking.'' Market confidence increases as the life 
increases, because DER holders are assured that barring unusual 
circumstances, their DER's will not ``die'' before they are needed for 
use. Spiking risks appear to diminish in proportion to longer DER lives 
because the timing of DER use presumably becomes more random and less 
tied with anticipated DER expiration. DER's with unlimited lives would 
also require less recordkeeping and tracking burdens.
    In recognizing the value of long DER lives, EPA found no obvious 
basis for any particular number of years that DER's should last. Any 
limit to DER life--however long--might encourage DER's being stockpiled 
for future use, which creates the risk of spiking. Moreover, no 
procedural or environmental problems have been found to date with the 
unlimited lives granted for allowances in the acid rain trading 
program. The EPA is therefore 

[[Page 39686]]
inclined to adopt the same convention for DER's in the open market 
program. The EPA requests comments on whether and for what reasons a 
long finite life might be more appropriate than an unlimited DER life.
2. Limited Authorization to Emit and DER Limitation or Termination
    Just as under the Title IV SO2 emissions trading program, the OMTR 
would not confer property rights to the DER holder. Section 403(f) of 
the Act states:

    An allowance allocated * * * is a limited authorization to emit 
sulfur dioxide * * * Such allowance does not constitute a property 
right. Nothing in this subchapter or in any other provision of law 
shall be construed to limit the authority of the United States to 
terminate or limit such authorization. (42 U.S.C. 7651b)

Congress included this requirement to ensure that allowance holders 
understood that they were barred from claiming a governmental taking 
under the 5th Amendment of the U.S. Constitution. Like the acid rain 
SO2 allowances, DER's would not be property, but would be limited 
authorizations to emit the regulated pollutant. Property status is 
unnecessary to secure a stable commercial setting for DER trading and 
could produce undesired and perverse results, such as requiring a 
government agency to compensate the owner of a pollution source when 
its emissions are limited. A tradeable reduction derives its value 
wholly from the regulation under which it was created. DER holders 
could exercise a specific license to use DER's in the manner set out 
under the model OMTR.
    Program audit and reconciliation provisions in the model rule would 
authorize the participating air pollution control agency to limit or 
terminate DER use in extreme circumstances. States should consider this 
an option only when other options have failed to provide for meeting 
the State's underlying Act obligations. Although EPA would not expect 
this to occur, and would expect that the program will achieve real and 
cost-effective emissions reductions without having to resort to DER 
limitation, this contingency measure must be available to provide 
confidence that States will make continued progress toward their air 
pollution control goals.
E. Notices, Reporting and Recordkeeping

    As with all environmental compliance programs, appropriate 
reporting and recordkeeping would be necessary to allow for the proper 
enforcement of all applicable requirements and the tracking of the 
overall compliance program. In addition, there is a need for the public 
to obtain access to sufficient information to monitor the performance 
of industry and government in meeting their obligations. In an 
emissions trading program of this type, these reports are essential for 
ensuring the integrity of the system and the confidence of the public 
that air quality goals are being met.
    Each record that must be kept, or report that must be filed, puts a 
resource burden on the entity required to produce it. Therefore, it is 
important to reduce the amount of recordkeeping and reporting to the 
minimum necessary to ensure a high-integrity market. Three notices 
would be considered necessary: (1) A notice of generation of DER's, (2) 
a notice of intent to use DER's for compliance purposes, and (3) a 
notice of use of DER's for compliance.
1. Notice and Certification of DER Generation
    A DER generator would be required to file a Notice and 
Certification of DER Generation with the State containing information 
on the creation of DER's. This notice must be submitted within 90 days 
after a generation action is complete, or 1 year after commencement of 
the generation action, whichever is sooner. A responsible corporate 
officer must certify under penalty of law that the information in this 
notice is true, accurate and complete, based upon information and 
belief formed after reasonably inquiry.
    This notice would provide potential buyers, the States (in their 
role as prospective compliance authorities), and the public the 
opportunity to review the records concerning the methods (protocols) 
used to generate reductions, the specific data (emissions rates, 
production volumes, etc.), and the relevant baseline (lower of actual 
or allowable) to verify that the DER's are real, surplus, and 
accurately quantified. Second, this notice, coupled with the user's 
responsibility to report a DER use, would serve as the necessary 
``tracking'' record to assure that a specific DER was used only once, 
since the tracking system should uncover the case of multiple use of a 
ton with the same serial number. Third, the notice would provide 
pertinent information for audits of the overall emissions trading 
program by the State.
    To provide systematic certainty and integrity to the program, the 
State would assign a unique serial number to each ton of reduction. 
This would allow a subsequent Notice and Certification of DER Use to be 
matched to the exact tons which were generated and ensure that such 
tons came from a relevant geographic location and were used only once. 
Each State could establish its own numbering system, or could 
collaborate with other States to design a regional or national system.
2. Notice of Intent to Use DER's
    The Notice of Intent to Use DER's for compliance purposes would be 
required in order to alert the State and public that a source intended 
to use DER's. The State and the public would have the opportunity 
thereby to examine a DER compliance strategy prior to use and prior to 
the possibility of any environmental harm. The notice must be filed at 
least 30 days prior to the source's first use of DER's and renewed at 
least annually in cases of continued or repeated use. This notice would 
serve to ensure that a prospective user held sufficient DER's prior to 
use. It also would allow the State to consider the level of inspection 
oversight to employ with the user. This notice only signals intent to 
use DER's; a notifying source would not actually have to use them.
    As part of their Notice of Intent to Use, States may want to 
require sources to submit the price paid for each DER. The EPA believes 
that knowledge of DER price could serve to assist States in determining 
which DER's were high quality and which were low quality. Therefore, 
price could serve as a signal to target a State's enforcement 
resources. For example, a generator would be likely to charge premium 
prices for DER's they created that were supported with high quality 
documentation, whereas a generator of a less supportable DER might tend 
to lower its DER price in order to compete. The lower-priced DER in 
this context would denote a lower quality, or higher risk product. Of 
course, in other instances low price may indicate no more than that the 
generator has found a low-cost control opportunity. Nonetheless, price 
might serve as a signal to a State to examine specific DER's more 
carefully during compliance reviews. The EPA requests comment as to 
whether price should be a required submission in the model rule.
3. Notice and Certification of DER Use
    The Notice and Certification of DER Use would be required in order 
to provide the State with information on the actual amount of DER's 
used by a particular source for compliance purposes. It would include 
information on the methods by which both the amount generated and the 
amount needed for compliance purposes were calculated. A duly 
authorized corporate 

[[Page 39687]]
officer must certify under penalty of law that the information in this 
notice was true, accurate and complete, based upon information and 
belief formed after reasonable inquiry. Based on receipt of this 
notice, the State could conduct compliance determinations and 
inspections to ensure that the source had met all of its obligations 
through the use of DER's. This notice is essential for the purposes of 
compliance assurance and enforcement.
    No action would be required by the State when it received a notice, 
other than to make it publicly available as discussed below. The Notice 
and Certification of Generation and the Notice and Certification of 
Use, however, would be the State and Federal authorities' main 
compliance and enforcement tools for generators and users of DER's.
    To lessen the paperwork burden on sources, the information in each 
of the proposed notices has been reduced to the minimum necessary. 
However, the source would be required to keep full records of all of 
the documentation associated with the generation and/or use of DER's at 
their facility.
4. Notice of Intent to Generate Rejected
    The EPA has considered creating a Notice of Intent to Generate 
which would be filed before any generation activity, but prefers not to 
require it in the model OMTR. Proponents advocated the notice so as to 
provide the State with advance notice of the time period over which 
DER's would be generated and the method that would be used to generate 
them (``Emission Reduction Credit Demonstration Project,'' Phase II, 
Volume I; Final Report, April 1995). Proponents cited reasonable 
justifications for such a notice. The notice could provide some 
preemptive assurances against invalid DER generation, and hopefully 
could result in a higher level of scrutiny which would lead to a system 
with enhanced environmental integrity. However, EPA believes this 
benefit is outweighed by the resource burden required to be placed on 
each participating source and State, since the notification is, by 
definition, a non-binding assertion of intent that some facilities may 
and will ultimately decide not to follow. Although the model OMTR would 
not require a Notice of Intent to Generate, a State may decide that in 
its particular case that the benefits of the notice outweigh the 
burdens. Therefore, EPA would approve specific OMTR's that require this 
notice.
5. Public Availability of Information
    Adopting the model rule into the SIP would replace the need for 
single-source SIP revisions. Such SIP revisions, however, serve the 
purpose of providing the public with notification of each proposed 
trade. Without some other vehicle for public notice, the public would 
not be aware of DER trades. The EPA believes public confidence is 
essential to the success of the open market program. Members of the 
public have a legally recognized role in compliance assurance and 
enforcement through the citizens suit provisions under section 304 of 
the Act. The public must have fair access to the information related to 
DER generation and use activity.
    The proposed model rule would require the State to make all of the 
notices received available to the public. For sources with a title V 
permit, the information must be filed with or attached to the permit 
and made available where the permit is available. For non-title V 
sources, the State would make the notices available in a similar manner 
to the title V sources. Facility documentation that is not included in, 
but supports the information in, the notices must be made available 
through the State's ``freedom of information'' or other laws, if 
applicable, relating to the public's access to a source's compliance 
documentation.
    The EPA is concerned that not all States will have laws that allow 
the documentation underlying the notices to be reasonably accessed by 
the public if it is not submitted to the State along with the required 
notices. The Agency considered a range of requirements that would 
facilitate the public availability of such documentation. At one end of 
the range, the Agency considered a rule requirement for sources to make 
the documentation available to the public upon request. At the other 
end of the range, the Agency considered a rule requirement that all 
source documentation be submitted to the State along with the required 
notices so that the State could make the information available. A 
middle ground option would require sources to submit the underlying 
documentation to the State, but waive the requirement if the source 
agreed to make the documentation available to the public upon request. 
The Agency requests comment on the appropriate way to ensure that the 
public has reasonable access to a source's compliance documentation 
without unreasonably burdening either the source or the State.
F. Federally Enforceable Operating Permits

    The purpose of the title V program, codified in 40 CFR Part 70, is 
to ensure effective implementation of all applicable requirements of 
the Act for those sources subject to a Federally enforceable operating 
permit. The title V program rules impose various important 
administrative and procedural provisions (e.g., permit fees, 
opportunity for public participation). The title V program does impose 
a limited number of requirements relevant to source operation that 
supplement the applicable requirements of the Act in order to enhance 
their implementation. For example, a source's title V permit must 
specify methods for monitoring and certifying compliance, and must 
address these if the applicable requirement fails to otherwise provide 
them. The provisions of the Part 70 rule that provide for individual 
source emissions trading under permit-specific caps and for trading 
under a SIP are currently the subject of rulemaking.
    If adopted into a State's SIP, the provisions of the OMTR become 
part of the underlying requirements reflected in a source's operating 
permit. Therefore, changes in a source's operating permit language are 
not necessary for the source to participate in the open market program. 
However, for the benefit of both the source and the public, language 
that specifically addresses the ability of the source to comply with 
applicable requirements through emissions trading could appear in the 
permit. The EPA intends to issue permit writing guidance that would 
include language on open market trading that could be incorporated into 
individual permits.

G. DER Registries

    Open marketplace participants would require access to information 
that enabled them to make accurate and informed decisions about the 
supply, demand, quality and expense of DER's. This information could be 
efficiently transferred among participants through one or more 
registries that sent and received relevant DER information. Registries 
should provide convenient and inexpensive public access, should not 
interfere with the ability of ``small'' market players to participate, 
and should help assure that specific DER's are not used more than once.
    Comprehensive, high-quality information should be readily available 
at reasonable cost to all participants and the public. Such information 
might include: DER source listings, generator source type, location, 
contact name of DER holder or holder's agent, DER 

[[Page 39688]]
generation period, DER price, specific use restrictions if applicable, 
generator and user nonattainment area classification, and DER user's 
needs and requirements.
    The EPA also believes that small market players, i.e., generator or 
user sources that generate or use relatively small market quantities, 
should not be disadvantaged by registry access requirements or the 
listing fee structure. The EPA does not wish in any way to discourage 
small sources from taking advantage of the benefits of open market 
trading.
    The EPA has addressed the issue of double-counting of DER uses 
through the proposed rule's notice requirements. States must ensure 
that unique identification is assigned to each ton of DER's generated 
and reported in the Notice and Certification of Generation that each 
generator source would be required to submit. States could then check 
that a specific DER was used only once by cross-referencing DER use 
notices with the DER generation notice. This check would be more 
complicated in a case where use occurred in a State other than the 
generator source's State. Therefore, the proposed OMTR would require 
that States that allow such uses must have a memorandum of 
understanding (MOU) or similar agreement approved by the EPA, which 
facilitates checking for double-use of DER's.
    While EPA recognizes that this function might best be performed 
through a national registry, a question remains as to whether EPA, 
State governments, or the private sector should provide these services. 
The EPA is inclined to encourage registry development in the private 
sector. For resource and efficiency reasons, EPA believes the private 
sector is a more appropriate choice than EPA. Thus EPA requests comment 
on (1) whether the private sector should provide such services; (2) 
whether registries should be subject to regulation to assure access and 
coverage of relevant information; (3) whether EPA or the State should 
operate registries; and (4) whether a national registry, as opposed to 
multiple regional or local registries, is necessary for the open market 
program to function properly.

H. Protocol Development and Approval

    A key to integrity in the operation of the open market trading 
system is accurate quantification of the amount of surplus DER's 
created and of the amount needed to meet compliance obligations. 
Emissions quantification is generally divided into two conceptual 
components. First, emissions quantification protocols specify the type 
of data needed on emissions rates and operating rates (e.g., monitoring 
methods, emissions factors, production rate or other activity measures) 
and address other critical methodological issues (e.g., data quality 
and statistical considerations). Second, specific data must be 
developed pursuant to such protocols and used to calculate specific 
results. Quantification protocols can be defined to varying degrees of 
specificity in advance of particular emissions reduction actions. The 
actual data used in particular cases, naturally, can be developed and 
evaluated only case-by-case.
    A number of cross-cutting factors must be considered regarding the 
development of emissions quantification protocols. On the one hand, 
both emission sources and compliance authorities have strong interests 
in certainty. Federal and State authorities want to be sure that 
methods are technically sound and that sources can be held to follow 
them. Sources want methods they can use with assurance of predictable 
outcomes at the time of compliance determinations. Based on these 
concerns, some State and industry stakeholders have urged that 
protocols be reviewed and approved by EPA before DER's are introduced 
into the market. This would give both sources and compliance 
authorities a common yardstick with which to gauge the validity of 
DER's and the greatest certainty of outcomes, without requiring 
redundant resource investment by multiple States.
    On the other hand, a protocol pre-approval requirement would 
greatly strain governmental resources and significantly dampen 
development of the open market system. Given the variety of source 
types eligible to participate and the variety of emissions reduction 
strategies available to them, dozens (possibly hundreds) of specific 
quantification protocols would be needed. Resource constraints on EPA 
and States could severely limit the number of such protocols that could 
be developed and approved in the near future, even with the benefit of 
partnerships with industry and others. Many DER generation and use 
actions could be delayed or precluded by the unavailability of pre-
approved protocols and the lack of a route for proceeding without such 
protocols.
    In response to these cross-cutting considerations, EPA has tried to 
develop a middle ground that provides a sufficient measure of certainty 
and predictability with due regard for governmental resource 
constraints and the need for flexibility to adapt to new situations. 
The EPA intends to issue guidance containing criteria for acceptable 
emissions quantification protocols. The criteria would set forth 
meaningful standards for the kinds and quality of data required to 
support the calculation of amounts of emissions reduced by generators 
or needed by users. DER Generators and users would be able to employ 
these criteria to develop specific quantification protocols for their 
applications. Compliance and enforcement authorities would be able to 
use these criteria to determine whether submitted protocols, and 
associated data, are sufficient to establish compliance. The guidance 
would be issued with the final model OMTR and revised and expanded as 
necessary from time to time. Generators and users would be able to rely 
on, and would be held to, the guidance in effect at the time they 
generated DER's or at the time they determined their need for DER's to 
meet compliance obligations, respectively.
    In addition, EPA intends to create a mechanism for working with 
States, industry, and the environmental community to develop and 
approve specific quantification protocols for priority types of 
generation and use activities. It is envisioned that some such 
protocols would be drafted by industries, and others by EPA or States. 
They would be reviewed by a multi-stakeholder process prior to an EPA 
approval decision. The EPA believes that in many cases emissions 
quantification protocol development may not be a large additional 
burden. This could be especially true for protocols that determine the 
amount of DER's needed to be in compliance, since user sources subject 
to emissions limits may be already familiar with the task of evaluating 
their emissions levels.
    The EPA specifically requests comments on two variations on this 
basic approach. In both cases, sources would develop their own 
protocols subject to EPA's protocol guidance criteria where no pre-
approved protocol existed. Where EPA-approved protocols existed, 
however, two options could be followed. In one case, a source would be 
required to use the pre-approved protocol unless it obtained EPA's 
approval of an alternative protocol. In the other case, a source would 
be allowed to use an alternative of its own design in lieu of the pre-
approved protocol, so long as the alternative conformed to the criteria 
in EPA's protocol guidance.
    The model rule would allow State OMTR's to incorporate EPA's 
protocol guidance and specific pre-approved protocols by reference. In 
this way, a 

[[Page 39689]]
source which generated or used DER's would be on notice that it was 
legally bound by the protocol guidance or specific protocols (as 
applicable) that were in effect at the time of their generation or use 
action. Incorporation by reference would provide fair notice and 
binding effect while avoiding the need for continual SIP revisions as 
new specific protocols were adopted and as EPA's protocol guidance was 
revised. In the interest of assuring enforceability, EPA is also 
considering whether each EPA-approved protocol and/or the EPA protocol 
guidance should be incorporated directly into State SIP's and requests 
comment on the sufficiency of the incorporation by reference approach.
    The EPA acknowledges, however, that there are risks for both 
sources and authorities associated with allowing operation under 
protocol guidance as proposed. Generators would be allowed to introduce 
DER's into the market based on specific protocols that they devised 
pursuant to the guidance, without advance approval. Compliance agencies 
would have to determine the protocol's consistency with the guidance at 
the time of the compliance determination, after sources had made use of 
the reductions. Despite the fact that the proposed rule assigns users 
the burden of proof of DER validity, it may be more difficult at this 
stage for compliance authorities to reject DER's based on unsound 
methodologies. Further, at least a portion of the resource burden 
associated with evaluating protocols in advance would be shifted to 
State and Federal compliance authorities later in the process. The EPA 
requests comment on these issues.
    The EPA believes this combination of protocol guidance and specific 
protocols would give generators and users, as well as compliance 
authorities, a predictable ``road map'' for distinguishing DER's that 
have a high likelihood of being considered valid from ones that are 
doubtful or clearly inadequate. The EPA requests comment on all aspects 
of this approach.

I. Meeting Related Federal Requirements

    The Act requires SIP's to include provisions to meet specific rate 
of progress (ROP) requirements applicable to certain ozone 
nonattainment areas under section 182. The Act also requires SIP's to 
provide for the attainment and maintenance of the NAAQS. SIP's must 
include specific emissions limits within a nonattainment area to meet 
ROP and, in moderate or above nonattainment areas, as well as certain 
marginal areas, the SIP must require RACT. SIP's may also include 
modeling analyses which result in emissions limits over an area larger 
than the nonattainment area--the modeling domain--as needed to attain 
the NAAQS. Emissions trades between sources far apart could cross 
multiple nonattainment areas and modeling domains and, thus, impact 
ROP, RACT and attainment requirements contained in more than one SIP.
    As noted above, the proposed rule would limit certain DER uses with 
respect to pollutant, modeling domain, and nonattainment area. These 
provisions recognize the regional nature of the ozone nonattainment 
problem and the specific limitations are intended to help assure 
consistency with any attainment or maintenance plan and ROP 
requirements.
    In addition, the model rule would require an audit of the trading 
program to evaluate, among other items, the effect of the program on 
the attainment demonstration and ROP requirements. The provisions would 
require a retrospective look at the effects of the trading program at 
least once every three years. Where an inconsistency with the 
attainment or maintenance plan or ROP is determined by the State, the 
State must institute measures to correct the problem.
1. Attainment and Maintenance Plans
    The EPA recognizes that the intertemporal use of DER's may, under 
certain circumstances, place pressure on an area's attainment 
requirements. If numerous DER's generated prior to the attainment date 
were used near the attainment date, the additional emissions from 
sources that avoided otherwise required reductions could lead to 
violations of the NAAQS and delay attainment.
    In addition, emissions trades between sources far apart could cross 
multiple nonattainment areas, States, and modeling domains and, thus, 
impact ROP and attainment or maintenance plan requirements contained in 
the SIP's.
    The validity of attainment and maintenance plan modeling analyses 
could be eroded by trading if the location and amount of emissions 
significantly changed from the initial plan assumptions. Such shifts 
would add uncertainty to predictions of the ozone levels expected on 
peak ozone days. In a worst-case scenario, reductions created during 
non-episodic conditions could be used during episodic conditions, 
exacerbating peak ozone levels.
    The EPA must evaluate these potential planning concerns in light of 
section 110(l) of the Act, which provides that EPA--

shall not approve a revision of a plan if the revision would interfere 
with any applicable requirement concerning attainment and reasonable 
further progress * * * or any other applicable requirement of this Act.

Whether DER use would interfere with an attainment demonstration 
depends on numerous factors involving the amount, timing, and location 
of trades. Limitations in the model rule (e.g., spatial limitations) 
could reduce the risk of such interference. Based on available 
information, EPA does not have evidence at this time that would lead it 
to believe that an overly large number of DER's will be used during the 
year of an attainment deadline, or at any other time that could 
precipitate exceedances of the standard. Rather, it seems reasonable to 
assume that DER's will be generated fairly steadily as opportunities 
for better controls arise, in response to continuing demand by DER 
users. Moreover, certain sources may require use of DER's over a long 
period of time; under these circumstances, it is doubtful that the 
intertemporal or spatial aspects of the OMTR would interfere with 
attainment. The EPA acknowledges, however, that generation of DER's 
could be bunched at particular points in time, such as new control 
deadlines, by sources that are able to implement controls prior to the 
required date. Also, use of DER's could be bunched just after such 
deadlines. If this phenomenon occurs on a large enough scale and at a 
particular time, attainment could be jeopardized. On balance, EPA has 
concluded in this proposal that current information does not establish 
a sufficient risk of this scenario to constitute interference with 
attainment. Although the open market trading program adds an element of 
uncertainty to the attainment planning, attainment demonstrations have 
many other unavoidable uncertainties which may include growth 
projections, biogenic emissions, mobile source emissions, rule 
effectiveness, model boundary conditions, and model precision. The EPA 
invites comments on its analysis and conclusions on this point.
    It is possible to imagine trades that could adversely affect a 
SIP's attainment or maintenance strategy by creating ``spikes'' over 
permissible aggregate emissions levels. The mere possibility of such 
events does not mean that the program would necessarily interfere with 
attainment planning. It does, however, offer support for the need of 
periodic trading program audits to monitor trading. 

[[Page 39690]]

2. Rate of Progress (ROP) Requirements
    ROP requirements must be met in nonattainment areas. Section 
182(b)(1)(A) of the Act, applicable to ozone nonattainment areas 
classified as Moderate or higher, provides that the SIP--

shall provide for such specific annual reductions in emissions of 
volatile organic compounds and oxides of nitrogen as necessary to 
attain the national primary ambient air quality standard for ozone 
by the attainment date applicable under this Act.

Section 171(l), applicable to all nonattainment areas, contains a 
similar requirement. Section 182(b)(1)(A) further requires a 15 percent 
reduction in VOC by the end of 1996. Section 182(c)(2)(B), applicable 
to areas classified Serious and higher, generally requires a 9 percent 
reduction in VOC or NOX for each 3 year period thereafter, until 
attainment.
    An area's success in meeting ROP requirements depends on many 
factors, including growth rate, rule adoption schedule, and control 
effectiveness. In many cases, trading would clearly not impact ROP: for 
example, in areas not covered by ROP programs; in areas trading 
NOX emissions and affected by VOC-only ROP programs; for same 
pollutant trades within a single nonattainment area; and for trades 
involving emissions reduction from sources in one nonattainment area 
over one ozone season. In addition, where the SIP's nonattainment area 
reductions were greater than ROP requirements, VOC trading within that 
margin would not affect ROP and, thus, would be acceptable. In general, 
EPA believes that an audit program should be part of a State's ROP 
planning, because, like attainment planning, it may be affected by 
trades under an OMTR. The intertemporal aspect of trades, as well as 
trades across nonattainment areas, raise the possibility that under 
certain circumstances, trading could jeopardize ROP.
    The EPA has made use of a computer model which allows a rough 
approximation of the impact of intertemporal trades on attainment and 
ROP plans, under various simplified assumptions about overall market 
activity and some alternative policy choices. As discussed above with 
respect to attainment planning, hypothetical circumstances may arise in 
which large quantities of DER's are generated in year 1 and used in 
year 2, or generated in one area and used in a neighboring area, to a 
degree that interferes with reduction targets in year 2 or in the 
neighboring area.
    However, for much the same reasons discussed above with respect to 
attainment planning, EPA believes it reasonable to assume that 
intertemporal trading will not be of the magnitude necessary to 
interfere with the 1996 and subsequent ROP targets. For the same 
reasons, EPA believes it reasonable to assume that OMTR trading will 
not cause annual emissions spikes that may interfere with the section 
182(b)(1)(A) requirement concerning annual reductions as necessary to 
attain. In any event, EPA believes that even if annual ``spikes'' were 
likely to occur as a result of an OMTR program, this requirement should 
be interpreted in light of the purpose of the OMTR, which is to 
encourage early reductions in exchange for an opportunity to trade the 
DER's so generated. If year 2 emissions are higher than in year 1 
because DER generation causes emission reductions to occur a year 
early, EPA would not conclude that DER use interfered with the section 
182(b)(1)(A) requirement. The EPA invites comment on its analysis and 
conclusions concerning ROP.
3. RACT
    Act section 182(b)(2) requires a SIP revision implementing RACT for 
VOC sources for ozone nonattainment areas classified as ``moderate'' 
and higher. Section 182(f)(1) imposes the same requirement on NOX 
sources. The Act does not define RACT; instead, EPA defines RACT as the 
lowest emissions limitation that a particular source is capable of 
meeting by the application of control technology that is reasonably 
available considering technological and economic feasibility (44 FR 
53762 (1979)). VOC RACT has traditionally been met on a 24-hour basis 
unless the State has shown that a longer averaging time is needed 
because of recordkeeping difficulties or control infeasibility. Many 
RACT rules adopted by States include emissions rate limits based on 
daily or 30 day averaging times.
    For many years, EPA has interpreted RACT as a performance standard, 
which normally manifests itself as an emissions limitation based on a 
particular control technology, as opposed to a requirement for the 
technology itself. The EPA has applied RACT on an aggregate basis in 
the EIP rule, so that some sources may meet RACT limits through 
averaging (59 FR 16706 (1994)). However, under the model OMTR, DER's 
that were generated before a RACT compliance deadline could be used 
after the deadline. This raises the possibility that stationary sources 
subject to RACT requirements, in the aggregate, would not meet their 
otherwise applicable SIP RACT limits in the period after the RACT 
compliance deadline.
    The EPA believes that it has the discretion to define ``reasonable 
available control technology'' to allow intertemporal averaging that 
may occur around a RACT compliance deadline under the OMTR. In the EIP 
rule, EPA considered air quality factors in determining whether 
stationary sources subject to RACT could emit at levels higher than 
levels otherwise deemed RACT if the excess emissions were more than 
offset by reductions among non-RACT sources. The EPA concluded that 
this system was consistent with the definition of RACT because the 
higher emissions levels of the RACT sources would be considered to be 
reasonable in light of the exceptional environmental benefits of the 
additional offsetting reductions.
    A comparable analysis applies in the case of the OMTR. The OMTR 
would encourage early reductions by both RACT and non-RACT sources in 
year 1. In year 2, DER use might cause higher-than-current RACT levels 
of emissions. However, because DER generation would have provided early 
environmental benefits in year 1, and because 10 percent of the DER's 
used in year 2 would be retired for environmental benefit, EPA could 
conclude that the emissions levels in year 2 continue to reflect RACT.
J. Enforcement Issues

1. Calculation of Violations
    The proposed rule provides for the calculation of violation days as 
consecutive days with a DER shortfall after first taking into account 
all valid DER's. This standard is applicable when emissions or 
emissions rates are measured on a daily basis. For example, if a source 
exceeds its emissions rate for 10 days and can demonstrate that it held 
sufficient DER's to cover its emissions overages for only the first 5 
days, the source would be subject to penalties for the last 5 days. In 
circumstances when sources use a longer period of time for measuring 
emissions (e.g., a 30 day average period), violation days would be 
calculated based on the number of days of the measurement period for 
which there is any DER shortfall. For example, if a source measured 
emissions over a 30 day period and it was determined to have had a 
shortfall of DER's beginning any day during the measurement period, the 
enforcement action and penalty calculation would be for 30 days of 
violations. The EPA believes that this would encourage market 
participants to develop better, more accurate emissions measurement 
methods that will enable 

[[Page 39691]]
sources to measure emissions on a daily basis.
2. State Compliance Determinations
    Sources subject to the title I permit requirements would be 
required to submit compliance certifications annually. States monitor 
compliance of other stationary sources on a periodic basis. This rule 
would not impose a particular time period or frequency for States to 
review the validity of DER uses. However, it is EPA's expectation that 
States would develop inspection plans which address both generator and 
user sources in a manner consistent with EPA's Compliance Monitoring 
Strategy and other applicable guidance. In addition, because the 
integrity of the open market trading program relies so heavily on 
retrospective review, it is likely that EPA would identify the OMTR as 
a national priority in the early years of implementation. As a result, 
States would be expected to address a wide range of OMTR participants 
in their inspection planning. In this regard, DER use would be treated 
exactly the same as other air pollution control programs. The EPA 
solicits comment on whether a particular time limit within which to 
review particular DER uses should be imposed, in light of the fact that 
OMTR is a new program that carries risks concerning, for example, the 
quantification of DER's.

K. Program Audits and Reconciliation Measures

    The OMTR would require States to conduct periodic audits of the 
open market trading program and implement reconciliation measures if 
appropriate. The State must evaluate and report on the following 
program elements:
    (1) The amount and timing of emissions reductions (e.g. DER's used 
compared to DER's generated in a given year or ozone season);
    (2) Compliance by generators and users;
    (3) The effect of the program on temporal and spatial assumptions 
in the attainment demonstration and ROP plans;
    (4) The effect of trading on emissions of hazardous air pollutants; 
and
    (5) The effects of remedial measures, if applicable, implemented as 
a result of previous audit findings.
    Unlike the EIP requirement (59 FR 16700 (1994)), under the OMTR 
program, reconciliation measures would not have to be automatically 
executing, and therefore, an appropriate ``trigger'' for the automatic 
execution of reconciliation measures would not be necessary. However, 
in the event the program audit revealed problems attributable to the 
trading program that were likely to persist, EPA encourages States to 
adopt remedial measures.
    The following list of contingencies should be considered depending 
upon the nature of the problem that is uncovered by the audit:
    (1) Restrict trading (limit trading so that the difference between 
DER generation and use is reconciled in a one-year period); increasing 
the environmental benefit component of DER's or limiting DER's or 
portions of DER's to compensate for the difference between the 
projected and actual emissions inventory;
    (2) Enhanced monitoring (increase monitoring or quantification 
requirements for facilities in the OMTR program to better determine 
impacts on progress and attainment from the participating sources);
    (3) Implement specific additional emissions reduction measures; and
    (4) Increase enforcement and/or penalties (for use in the case 
where the discrepancy between actual and projected data is related to 
non-compliance with the OMTR program).
    Audits must occur at least every 3 years, coinciding with a ROP 
milestone determination, or, if none applies, simply every three years 
after State adoption of the OMTR.
    In conjunction with the triennial audits proposed above, EPA would 
work cooperatively with States that adopt open market programs to 
assess on a three-year basis the nationwide performance of open market 
trading programs. Using the results of State audits, an analysis would 
be prepared to assess the open market program's effectiveness. In the 
event that the triennial assessments showed that programs based on the 
OMTR jeopardized particular areas' ability to attain the NAAQS, to 
demonstrate required progress, or to meet other Act requirements, then 
EPA could issue specific SIP calls or, in the extreme case, adjust the 
OMTR program to compensate for such shortcomings.
    The EPA solicits comment on all aspects of the audit requirements, 
in particular: (1) The frequency of the audits (more or less frequent 
than every three years); (2) the components of the audit program that 
should be required; (3) whether a mechanism for triggering 
reconciliation measures should be required; and (4) which, if any, 
reconciliation measures should be required.

L. Interstate Trading

    The proposed OMTR limits interstate trades to areas which have 
Memoranda of Understanding (MOU's) to assure the success of the trading 
program in each State. This provision recognizes the regional and 
interstate nature of the ozone nonattainment problem and the specific 
limitation is intended to help assure consistent compliance programs 
and facilitate information exchange between the States.
    After States adopt the model rule, sources might wish to effect 
trades across State lines. Such VOC trades could occur within 
interstate nonattainment areas; for NOX, modeling domains are 
frequently interstate. A mechanism would be needed to assure that an 
emissions reduction in one State was recognized in another State and 
that trades were made consistent with the requirements of the 
respective State's rules. Further, a trading program needs enforcement 
provisions that assure proper monitoring and enforcement in all 
participating States. Therefore, EPA believes that States must sign a 
MOU or equivalent document. The MOU must include the following 
provisions:
    (a) The State where the generator is located must agree to provide 
the State where the user is located in a timely manner with all 
relevant information it possesses concerning the DER's and the 
generator, including, but not limited to, information on the 
generator's SIP limits and permit, as well as a copy of the notice of 
generation proffered by the DER user;
    (b) The user State must agree to provide the generator State in a 
timely manner with all relevant information, including the notice of 
intent to use and the notice of use;
    (c) The State where the generator is located must agree to notify 
the State where the user is located as to whether the DER has been used 
previously;
    (d) The State where the user is located must agree to enforce its 
individual State emissions requirements as modified by any valid 
trades.
    The EPA solicits comment on all aspects of the interstate trading 
issue, including whether States should be permitted to include 
interstate trading only after EPA approval of its MOU's with other 
States.

M. Effect of VOC Trading on Emissions of Air Toxics

    Many volatile organic compounds (VOC's) are listed as hazardous air 
pollutants (HAP's) under section 112 of the Act. Emissions of these 
toxic pollutants are often reduced incidentally by compliance with VOC 
limitation. Citizens groups have been concerned that by relaxing site-
specific VOC limitations, VOC trading programs might lessen public 
health protection from air toxics at some facilities. The 

[[Page 39692]]
EPA is considering whether open market trading programs should contain 
safeguards (beyond the continued requirement to meet section 112 
standards) to reduce the chance that a facility using off-site DER's in 
lieu of meeting otherwise applicable VOC limits, would have higher HAP 
emissions than if it directly met the VOC limits with on-site controls.
    Overall, EPA believes that open market trading programs would 
encourage quicker reductions of VOC emissions, including HAP's that are 
VOC's, by reducing the cost of Act control requirements and providing 
incentives for early reductions. This could reduce aggregate risks from 
toxic air emissions.
    At the facility-specific level, however, results may not be 
geographically uniform. For example, if a facility emits VOC's that are 
toxic air pollutants, and buys DER's to satisfy a RACT requirement, the 
facility's emissions of air toxics would be higher than if the facility 
had installed controls. Conversely, if the facility chooses to make 
extra emissions reductions and sell them as DER's, toxic emissions from 
the facility should be lower than without trading.
    The EPA has considered several options for dealing with potential 
changes in toxics emissions as a result of open market trading. The 
first option would require all sources participating in the open market 
system to disclose to the public when DER generation or use would cause 
HAP increases (or forgone decreases), and that States should 
retroactively study the effect of open market VOC trading on aggregate 
and facility-specific hazardous air pollutant emissions.
    A second option would be for EPA to prohibit a source from using a 
DER for RACT compliance if the effect would be to increase hazardous 
air pollutant emissions.
    A third option would require States to include in their programs 
some mechanism to prevent trades that could pose significant toxics 
concerns, with the mechanism to be determined by the State. Such 
mechanisms could include screening assessments to provide an indication 
of whether health or environmental risks from a facility might increase 
significantly, or a fuller risk assessment. As a variation of this 
option, a requirement for sources to notify the public of HAP increases 
due to trades could be among the options available to a State.
    The fourth option would be for EPA to leave to State discretion the 
issue of whether State programs should include restrictions, 
disclosure, or other safeguards to ensure that toxic emissions changes 
are acceptable. The EPA could issue guidance on ways to determine 
whether a VOC trade should be considered unacceptable due to toxics 
impacts.
    The EPA has decided to propose a disclosure requirement which might 
serve many purposes. Citizens who live near a facility could use the 
information to determine whether the trade posed a health concern. In 
many instances, this information may be reassuring, where perceived HAP 
emissions were larger than actual amounts. The State could also use 
disclosed information to help ascertain whether to use State regulatory 
authorities to curb any HAP increases (or to ensure attainment of 
expected decreases).
    Many facilities already are subject to annual toxic release 
inventory reporting required by the Emergency Planning and Community 
Right-to-Know Act of 1986 and Pollution Prevention Act of 1990. These 
reports include estimates of annual emissions of all but eight of the 
189 hazardous air pollutants listed under section 112 of the Act. Using 
the same methodologies it uses for toxic release inventory (TRI) 
reporting, the facility could estimate HAP emissions with and without 
DER generation or use. DER generators would include this information in 
their generation certification notices submitted to the State. DER 
users would include the information in their notice of intent to use 
DER's and in their post-use compliance certifications. As described in 
other sections of this preamble, the rule would require States to make 
these notices available to the public.
    Some commentors have expressed concern that a toxic pollutant 
disclosure requirement would stigmatize the use of DER's with the 
detrimental effect of ``chilling'' the use of DER's and discourage 
market participation. These commentors have further argued that plant-
specific fluctuations in HAP emissions resulting from the generation 
and use of DER's are not likely to be significant, and that they will 
in most cases be below the level of Federal and State regulatory 
concern. Toxic emissions that do not fall below this level are already 
(or will be soon) regulated under Section 112 of the Act. The EPA 
solicits comments as to whether it should balance this concern against 
the potential lack of knowledge about toxic pollutant emissions 
changes.
    The EPA seeks comment on all aspects of this possible disclosure 
requirement. The Agency seeks comment on the suitability of TRI 
emissions estimation methodologies for the purposes of this rule. In 
addition, EPA seeks comment on alternative ways to estimate the 
difference in emissions of each HAP that would result from DER use or 
generation, especially for facilities not subject to TRI.
    The EPA is also soliciting comments on the approach that States 
should take in studying the effects of open market VOC trading on the 
aggregate level of risk from air toxics, and on such risks from 
individual facilities. Depending on the results, the study could either 
allay concerns of significant increases in risk, or suggest a need for 
changes in open market trading or air toxics programs. One component of 
this study might be to evaluate the information that would be available 
as a result of the proposed disclosure requirement.

N. Impact of OMTR on Related Programs and Policies

1. Emission Trading Policy Statement
    The final Emission Trading Policy Statement (ETPS), published in 
the Federal Register on December 4, 1986 provides a general framework 
for EPA-approvable emission trading. This policy requires that all 
reductions used in trades be enforceable, permanent, surplus and 
quantifiable. This policy provides guidance for States to develop model 
trading rules that would allow specific two-source trades without 
source-specific SIP revisions, as well as approval criteria for trades 
submitted as source-specific SIP revisions. The OMTR does not change 
the requirements of the ETPS, or the types of emissions trading that 
can occur under the ETPS.
2. Economic Incentive Program Rule and Guidance
    The EPA's most recent policy on emissions trading is embodied in 
the Economic Incentive Program (EIP) rules that were promulgated on 
April 7, 1994. The 1990 Amendments of the Act required EPA to 
promulgate EIP rules for certain areas that must implement an EIP as 
part of their ozone and carbon monoxide attainment strategy. These 
rules also serve as guidance for all other areas that choose to develop 
and implement EIP's. The types of trading programs envisioned in the 
EIP are emissions limiting strategies (such as RECLAIM), market-
response strategies, and directionally-sound strategies. The model rule 
proposed here would establish the ground rules for one type of market-
response strategy, namely open market emissions trading of ozone 
precursor emissions. The model rule proposed today in no way limits the 
use of other strategies. 

[[Page 39693]]

    The open market program would differ from the requirements for EIP 
programs in many respects, including, among others:
    (1) The intertemporal, spatial, and inter-pollutant trading 
requirements and restrictions;
    (2) Requirements for trading between RACT and non-RACT sources;
    (3) Notifications by generators and users;
    (4) Lack of pre-approval for trades; and
    (5) Requirements for program audits and reconciliation measures.
    In light of these differences, EPA is considering amendments to the 
final EIP rules and guidance, so that the model OMTR would meet all the 
criteria for an EIP mandated under section 182(g). These amendments 
could affect the final EIP decisions in such areas as the definition of 
surplus, the averaging time for RACT, and the requirement that 
protocols be approved by EPA before they are used.
3. Memorandum to Region IX Regarding Surplus Determination
    On August 26, 1994 EPA issued a guidance document on the use of 
pre-1990 ERC's and adjusting for RACT at time of use. In this memo EPA 
stated that for banked ERC's it was not sufficient to determine surplus 
at time of generation, but ERC's must be discounted at time of use to 
account for any new RACT requirements that may have occurred since the 
ERC was banked.
    ERC's are reductions in the rate of emissions (e.g., pound per day 
or tons per year). When a source creates an ERC it takes an action 
which reduces the rate of emissions on a continuous basis. The ERC's 
are used to offset increases (or lack of decreases) in the rate of 
emissions on a contemporaneous basis. Thus the reduction created by the 
ERC must be surplus at the time of use. DER's, on the other hand, would 
be created and documented before they were used. Thus, barring any 
restrictions at the time of use, DER's would be surplus only at the 
time of creation.
    The Memorandum also ties surplus to the 1990 and other subsequent 
emissions inventories as well as attainment demonstrations and ROP 
plans. The EPA believes that this policy is still valid for ERC 
programs but would only be partially applicable to DER programs. 
Several aspects of the proposed open market program illustrate this 
point. First, one purpose of the proposed open market rule would be to 
encourage early reductions, and this incentive would be reduced or lost 
if there were not a reasonable expectation that the reductions could be 
used at a later date because they were no longer surplus. Second, the 
proposed rule would not allow pre-1995 reductions to qualify for 
credit, which would reduce the likelihood that a large amount of banked 
reductions could be used in the future. Finally, the proposed rule 
would retain the link to emissions inventories, attainment 
demonstrations and ROP plans for determining surplus at the time of 
generation, but would rely on retrospective program audits to ensure 
that DER use would not chronically interfere with progress toward 
attainment or attainment.
4. Emissions Budget Programs
    Since the 1990 amendments to the Act there has been considerable 
activity in developing emissions budget programs for attaining the 
ozone standard. These programs determine the quantity of emissions an 
area can emit and still demonstrate attainment. This emissions budget 
is then allocated among the sources in the nonattainment area in the 
form of emissions allowances. Sources are then allowed to trade their 
allowances. The EPA has proposed conditional approval of the NOX/
SOX Regional Clean Air Incentives Market (RECLAIM) program in the 
Los Angeles area, which is the most fully developed ozone program of 
this kind. Various cap and trade programs are also being developed in 
Illinois for VOC, and in the Ozone Transport Region for NOX. The 
model rule would not inhibit the development and implementation of 
these programs. The EPA continues to strongly encourage States to 
develop cap and trade programs as part of their attainment strategies.
    The EPA envisions that open market trading programs could be 
complementary to emissions budget programs. It is typically difficult 
to include all of an area's VOC and NOX sources in an emissions 
budget due to administrative costs or difficulty in quantifying the 
sources' emissions. For these reasons, smaller stationary sources and 
mobile sources are omitted. An open market program could offer sources 
not covered by the emissions budget a cost-reducing compliance option, 
as well as provide a continuous incentive to those sources to quantify 
their surplus emissions reductions.

IV. Administrative Requirements

A. Public Hearing

    A public hearing will be held to discuss the proposed standards in 
accordance with Section 307(d)(5) of the Act. Persons wishing to make 
an oral presentation on the proposed model OMTR should contact the 
Agency in accordance with the instructions given in the DATES  Public 
Hearing section of this preamble. Oral presentations will be limited to 
15 minutes each. Any member of the public may file a written statement 
before, during, or within 30 days after the hearing. Written statements 
should be addressed to the Air Docket section address given in the 
ADDRESSES section of this preamble, and should refer to Docket No. A-
95-21.

B. Docket

    The docket is an organized and complete file of all the information 
submitted to or otherwise considered by the Agency in the development 
of this proposed rulemaking. The principal purposes of the docket are: 
(1) To allow interested parties to readily identify and locate 
documents so that they can intelligently and effectively participate in 
the rulemaking process; and (2) to serve as the record in case of 
judicial review (except for interagency review materials) (Section 
307(d)(7)(A) of the Act).

C. Executive Order 12866

    Under Executive Order 12866 (58 FR 51735 (1993)), the Agency must 
determine whether a regulatory action is ``significant'' and therefore 
subject to OMB review and other requirements of the Executive Order. 
The Order defines a ``significant regulatory action'' as one that is 
likely to result in a rule that may:
    (1) Have an annual effect on the economy of $100 million or more or 
adversely affect in a material way the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or 
communities;
    (2) Create serious inconsistency or otherwise interfere with an 
action taken or planned by another Agency;
    (3) Materially alter the budgetary impact of entitlements, grants, 
user fees, or loan obligations of recipients thereof; or
    (4) Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
the Executive Order.''
    It has been determined that today's proposed model rule is a 
significant action because it raises novel policy issues arising out of 
the President's priorities. This action was submitted to OMB for review 
in accordance with the Executive Order, and changes made in response to 
OMB suggestions or recommendations will be documented in the public 
record.

[[Page 39694]]


D. Unfunded Mandates Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (``Unfunded 
Mandates Act'') requires that the Agency prapare a budgetary impact 
statement before promulgating a rule that includes a Federal mandate 
that may result in expenditure by State, local, and tribal governments, 
in aggregate, or by the private sector, of $100 million or more in any 
one year. A ``Federal intergovernmental mandate'' excludes ``a duty 
arising from participation in a voluntary Federal program,'' unless the 
regulation ``relates to a then-existing Federal program under which 
$500,000,000 or more is provided annually to State, local, and tribal 
governments under entitlement authority,'' if the provision would 
``increase the stringency of conditions of assistance'' or ``place caps 
upon, or otherwise decrease the Federal Governement's responsibility to 
provide funding. A ``Federal private sector mandate'' includes a 
regulation that ``would impose an enforceable duty upon the private 
sector, except (i) a condition of Federal assistance; or (ii) a duty 
arising from participation in a voluntary Federal program.''
    The proposed model OMTR would be a volutary program that State and 
local governments could adopt. If adopted, the rule would govern the 
voluntary participation of private sector entities in an emissions 
trading program. Because the program would be voluntary for State and 
local governments and private entities, the Agency has not prepared a 
budgetary impact statement.

E. Paperwork Reduction Act

    Today's proposal contains voluntary information collection 
requirements that are subject to review by the Office of Management and 
Budget (OMB) under the Paperwork Reduction Act of 1980, 44 U.S.C. 3501, 
et seq.
    This collection of information has an estimated reporting burden 
averaging of 73.5 hours per trade and an estimated annual recordkeeping 
burden averaging 60 hours per respondent. These estimates include time 
for reviewing instructions, searching existing data sources, gathering 
and maintaining the data needed, and completing and reviewing the 
collection of information.
    Send comments regarding the burden estimate or any other aspect of 
this collection of information, including suggestions for reducing the 
burden to Director, Regulatory Information Division, EPA, 401 M St., SW 
(Mail Code 2138), Washington, DC 20460, and to the Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
Washington, DC 20503, marked ``Attention: Desk Officer for EPA.''

F. Regulatory Flexibility Act

    The Regulatory Flexibility Act of 1980 and applicable EPA 
guidelines revised in 1992 require Federal agencies to identify 
potentially adverse impacts of Federal rules upon small entities. Small 
entities include small businesses, organizations, and governmental 
jurisdictions. In instances where significant impacts are possible on a 
substantial number of these entities, agencies are required to perform 
a Regulatory Flexibility Analysis.
    Today's proposal does not of itself impose an requirements on small 
entities, nor require or exclude small entities participation in open 
market trading in the future. As a result, the EPA has determined that 
the proposed rule will not have a significant impact on a substantial 
number of small entities.
    Therefore, as required under section 605 of the Regulatory 
Flexibility Act, 5 U.S.C. 601 et seq., I certify that this rule does 
not have a significant impact on a substantial number of small 
entities.

G. Clean Air Act Section 117

    In accordance with section 117 of the Act, publication of this 
proposal was preceded by consultation with appropriate advisory 
committees, independent experts, and Federal departments and agencies. 
The Administrator welcomes comment on all aspects of the proposed model 
rule, including health, economic, technological, and other aspects.

    Dated: July 26, 1995.
Carol M. Browner,
Administrator.
[FR Doc. 95-18869 Filed 8-2-95; 8:45 am]
BILLING CODE 6560-50-P