[Federal Register Volume 65, Number 249 (Wednesday, December 27, 2000)]
[Proposed Rules]
[Pages 81799-81810]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-32945]


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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 52

[IL165-1; FRL-6923-3]


Approval and Promulgation of Implementation Plans; Illinois 
Trading Program

AGENCY: Environmental Protection Agency (USEPA).

ACTION: Proposed rule.

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[[Page 81800]]

SUMMARY: On December 16, 1997, Illinois submitted rules establishing a 
``cap and trade'' program for volatile organic compound (VOC) emissions 
in the Chicago area. Illinois issues each major source an allotment of 
allowances, which it calls allotment trading units or ATUs. For most 
sources, this allotment corresponds to 12 percent below baseline 
emissions. Each source must emit no more than the level at which it 
holds allotment trading units. Trading of allotment trading units is 
allowed, so that sources that reduce emissions more than 12 percent may 
sell allotment trading units, and sources that reduce emissions less 
than 12 percent must buy allotment trading units. In effect, trading 
increases the allowable emissions of the allowance buying source, 
equally decreases the allowable emissions of the allowance selling 
source, and yields no change in total allowable emissions. The net 
effect is to set a cap reflecting approximately a 12 percent reduction 
in VOC emissions in the Chicago area.
    USEPA proposes to grant final approval of these rules if Illinois 
resolves certain issues. Specifically, USEPA proposes that Illinois 
must: Clarify the timeline and penalties for violating sources, satisfy 
USEPA's trading program policy on environmental justice, provide for 
full-year offsets for new sources, commit to discount credits where 
emission reductions are potentially accompanied by emission increases 
elsewhere, and commit to remedy any problems identified in its periodic 
program review.

DATES: Written comments on this proposed rule must arrive on or before 
January 26, 2001.

ADDRESSES: Send comments to:
    J. Elmer Bortzer, Acting Chief, Air Programs Branch (AR-18J), 
United States Environmental Protection Agency, 77 West Jackson 
Boulevard, Chicago, Illinois 60604.
    Copies of the State's submittal are available for inspection at the 
following address: (We recommend that you telephone John Summerhays at 
(312) 886-6067, before visiting the Region 5 Office.)
    U.S. Environmental Protection Agency, Region 5, Air and Radiation 
Division (AR-18J), 77 West Jackson Boulevard, Chicago, Illinois 60604.

FOR FURTHER INFORMATION CONTACT: John Summerhays, Regulation 
Development Section, Air Programs Branch (AR-18J), U.S. Environmental 
Protection Agency, Region 5, Chicago, Illinois 60604, 
[email protected], (312) 886-6067.

SUPPLEMENTARY INFORMATION: In this proposed rulemaking, the terms 
``we,'' ``us,'' and ``our'' mean USEPA. This document is organized 
according to the following table of contents:

I. Introduction

II. The Features of the Illinois Trading Program

    What is the purpose of the program?
    How does the program work?
    What sources are in the program?
    What must sources in this program do?
    How does Illinois set baseline emission and allotment levels?
    What elements of this program are implemented through Title V 
permits?
    What penalties apply to noncomplying sources?
    Does this new program relax any old requirements?

III. The Criteria USEPA Is Using to Review Illinois' Program

    What types of review criteria is USEPA using?
    What guidance applies to this type of emission trading program?
    What criteria address satisfaction of other Clean Air Act 
requirements?
    How does USEPA judge the program's emissions reductions?

IV. USEPA Review of the Features of Illinois' Program

    Does the program:
    1. Assure that credits are surplus, quantifiable, enforceable, 
and permanent?
    2. Assure that appropriate methods will be used to measure 
emissions?
    3. Authorize adequate penalties for sources that violate these 
rules?
    4. Adequately address environmental justice issues?
    5. Assure satisfaction of new source requirements?
    6. Provide for Illinois to identify and resolve program problems 
that arise?

V. USEPA Review of Expected Emission Reduction

    How much emission reduction will be achieved?
    Can false credits arise from ``demand shifting''?
    Can ``spiking'' be a problem?

VI. Proposed Action

    What action is USEPA proposing to take on the Illinois trading 
program?
    What further commitments and program revisions is USEPA 
proposing to require from Illinois?

VII. Administrative Requirements

Executive Order 12866
Executive Order 13045
Executive Order 13084
Executive Order 13132
Regulatory Flexibility
Unfunded Mandates
Submission to Congress and the Comptroller General
National Technology Transfer and Advancement Act

I. Introduction

    On December 16, 1997, Illinois submitted rules for a ``cap and 
trade'' program for emissions of volatile organic compounds (VOC \1\) 
in the Chicago area. In this program, sources receive allotments 
generally equivalent to 12 percent less than their baseline emissions, 
issued as the appropriate number of allotment trading units or ATUs. 
Sources must have emissions no higher than the number of ATUs they 
hold, so a source's ATU holdings are a ``cap'' on its emissions. 
Sources may buy or sell ATUs and thereby increase or decrease their own 
cap. This ``trade'' of ATUs gives sources more flexibility in meeting 
program requirements. Trading is expected to shift emission reductions 
toward sources that can reduce emissions more cheaply. Trading does not 
affect the net total emissions allowed under the program, which is 
approximately 12 percent below net total baseline levels.
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    \1\ Illinois uses the term ``Volatile Organic Material'' (VOM) 
rather than VOC. The State's definition of VOM is equivalent to 
USEPA's definition of VOC. The two terms are interchangeable when 
discussing volatile organic emissions. For consistency with the Act 
and USEPA policy, this rulemaking uses the term VOC.
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    USEPA proposes to approve these rules, provided that Illinois 
addresses certain issues. Specifically, USEPA proposes to approve the 
rules only if Illinois: (1) Clarifies the applicability of penalties as 
given in Clean Air Act section 113 for violating sources, (2) satisfies 
USEPA's trading program policy on environmental justice, (3) provides 
for full-year offsets for new sources, (4) commits to discount credits 
where emission reductions are accompanied by emission increases 
elsewhere, and (5) commits to remedy any problems identified in its 
periodic program review.

II. The Features of the Illinois Trading Program

What Is the Purpose of the Program?

    The Illinois trading program is designed to reduce VOC emissions 
and thereby help attain the ozone standard in the Chicago area. The 
Chicago area is a Severe ozone nonattainment area.

How Does the Illinois Trading Program Work?

    The Illinois trading program is a cap and trade program. Each 
participating source is subject to a cap on its total emissions, but 
sources may redistribute the allowed emissions by trading allotment 
trading units. The Illinois Environmental Protection Agency (IEPA) 
establishes a cap for each

[[Page 81801]]

participating source as a function of ozone season emissions during a 
baseline period (generally 1994 to 1996). In most cases, this cap is 
set at 12 percent below baseline emissions.
    Each year, the State issues allotment trading units or ATUs to each 
source, reflecting the source's cap level of emissions. Sources are 
required to hold a number of ATUs that is at least equivalent to their 
actual ozone season emissions that year. If a source emits more or less 
emissions than corresponds to its State issuance of ATUs, it must 
purchase or may sell ATUs, respectively, until the source at a minimum 
holds the number of ATUs that correspond to the source's emissions for 
that ozone season.
    It is immaterial whether changes in emissions are due to emission 
controls or production level changes. For example, a source that emits 
15 percent less per widget but produces 10 percent more widgets is 
still required to purchase ATUs.
    If no trading were to occur, then each source would have to limit 
its emissions to its allotment level, which again in most cases is 12 
percent below baseline emission levels. Trading of ATUs allows 
redistribution of emissions from the seller to the buyer of ATUs. For 
example, if a source was issued ATUs for 50 tons of emissions but 
emitted 75 tons, the source would have to buy 25 tons worth of ATUs, 
generally from another source that reduced its emissions to 25 tons 
below its allotment level. Presumably, sources that can reduce 
emissions more cheaply will be selling ATUs to sources for whom 
controls are more expensive. However, this trading does not increase 
the total emissions that are allowed from the universe of sources in 
the program. Consequently, total emissions from the sources in the 
program are subject to a net cap equal to approximately 12 percent 
below the total baseline emissions.
    The rules for the Illinois trading program provide various tools 
for implementing the program. The rules provide for an electronic data 
base for tracking ATUs. This data base will include information on the 
trades of ATUs, the current holdings of each source, and additional 
information such as recent ATU prices. Thus, after a source reports its 
ozone season emissions each year, it is then easy to identify whether a 
source has adequate ATUs to accommodate its emissions for that year's 
ozone season.

What Sources Are in the Program?

    Participation in the trading program is mandatory for essentially 
all major sources of VOC in the Chicago area. In this area, ``major 
source'' of VOC is defined as a source with the potential to emit 25 
tons of VOC per year. The only significant exclusion of major sources 
from the trading program is for sources that emit disproportionately 
little during the summer, specifically for sources that emit less than 
10 tons during the ozone season. Participation is mandatory for sources 
throughout the Chicago ozone nonattainment area, including Cook, 
DuPage, Kane, Lake, McHenry, and Will Counties, as well as townships 
within Grundy County (Aux Sable and Goose Lake Townships) and Kendall 
County (Oswego Township).
    Additional sources have the option for voluntary participation. 
Illinois' rules include separate ``opt-in'' provisions for small 
industrial sources and for mobile and area sources. Any person who 
arranges emission reductions from such sources may petition IEPA to 
receive allotments corresponding to the quantity of the emissions 
reduction. The direct or indirect sale of these ATUs to a major source 
will then shift the burden of emission reductions from major to minor 
sources but will not alter the total emission reductions that must 
occur.

What Must Sources in This Program Do?

    Sources in the Illinois trading program have several obligations. 
First, the source must evaluate its baseline emissions and submit this 
information as part of an application for an allotment of ATUs. The 
application also must identify the emission quantification techniques 
used to determine baseline and future year emissions and must justify 
any requests for exemption from the 12 percent reduction that is 
normally reflected in allotment levels. IEPA uses this information to 
determine the allotment it will issue to the source and to establish 
the methods that the source shall use to determine future emissions 
levels.
    Illinois began issuing ATUs in early 2000. (The rules provide for 
first issuance in 1999, but Illinois has deferred this one year.) Each 
source is required to apply the identified methods for determining 
emissions during the ozone season, defined for the trading program as 
May through September. Now, the most important source obligation has 
begun, namely to assure that emissions are no higher than the quantity 
of ATUs held.

How Does Illinois Set Baseline Emission and Allotment Levels?

    Baseline emissions generally reflect VOC emissions during the ozone 
seasons in 1994, 1995, and 1996. Illinois adjusts these emissions 
values downward if the emissions exceeded 1996 allowable emissions 
levels, whether due to noncompliance or because 1996 limitations were 
not yet in effect. Illinois adjusts these emission values upward if the 
source reduced emissions after 1990 below the level required as of 
1996. In most cases, baseline emissions reflect the average of the 
higher two of these three ozone season emissions values. However, the 
option exists for sources to demonstrate that their production levels 
were unrepresentative for one or more of these years and to substitute 
a value(s) from a more representative year chosen from 1990 to 1993 or 
from 1997.
    Once Illinois establishes baseline emissions, it can determine the 
quantity of ATUs to be issued to the source. In most cases, allotments 
are set at 88 percent of baseline emissions, targeting a 12 percent 
emission reduction.
    An exception applies if the source can demonstrate that an 
emissions unit is well controlled and should not be targeted for 
further reductions. This exception is possible if the source is meeting 
a recently established Lowest Achievable Emission Rate limitation, is 
meeting a Maximum Achievable Control Technology limitation, or has Best 
Available Technology. In such cases, allotments for such a unit are set 
at the well controlled level.

What Elements of This Program Are Implemented Through Title V Permits?

    The State uses source operating permits to implement several 
features of the trading program. As mandated by Title V of the Clean 
Air Act, Illinois requires operating permits for all major sources, 
which it calls Clean Air Act Permit Program (CAAPP) permits. These 
permits must identify all requirements applicable to a source and can 
be issued only after input from USEPA and the public has been 
solicited. Illinois' trading rules require participation only from 
sources that must obtain a CAAPP permit. This permit is used to 
formally establish the source's baseline emissions, identify any 
maximally controlled emission units that are exempt from the 12 percent 
reduction requirement, set the quantity of ATUs to be issued to the 
source, and specify the methods to be used to measure emissions. To 
incorporate these items into the CAAPP permit, the State must follow 
procedural requirements that provide ample opportunity for USEPA and 
the public to have input into any relevant issues.

[[Page 81802]]

What Penalties Apply to Noncomplying Sources?

    Sources violating the requirements of the Illinois trading rules 
are liable for the full penalties authorized in Section 113 of the 
Clean Air Act. One type of noncompliance is violating requirements for 
measuring and reporting emissions. A second type of noncompliance is 
failing to hold ATUs equivalent to the year's ozone season emissions.
    Sources must generally secure adequate ATUs by December 31 of each 
year, that is, within 3 months of the end of each ozone season. A 
source that holds insufficient ATUs at the end of the year then has a 
``second chance'' to secure ATUs equaling 120 percent (or in some cases 
150 percent) of the shortfall. This ``second chance'' appears to last 
for 3 additional months, though USEPA is requesting clarification from 
IEPA on this point. A source that holds insufficient ATUs after this 
``second chance'' is a violating source. This source could be subject 
to various enforcement actions and would be liable for penalties 
currently authorized at up to $27,500 per day for each of the 153 days 
of the ozone season.

Does This New Program Relax Any Old Requirements?

    In general, no. Most importantly, no emission limitations are 
relaxed by this program. The limitations requiring reasonably available 
control technology (RACT), for example, remain fully and independently 
enforceable. That is, a source that exceeded its RACT limits would be 
liable for enforcement action regardless of the number of ATUs it held.
    The one pre-existing requirement that the Illinois trading rules 
modify is the requirement for offsets for major new sources and major 
modifications of existing sources. In these cases, the source obtains 
offsets by obtaining the appropriate number of ATUs rather than by 
traditional means as part of a construction permit. Since the Chicago 
area is a severe ozone nonattainment area, sources must obtain 1.3 tons 
worth of ATUs for each ton of new source emissions. The State issues no 
ATUs for new sources or for modifications. The ATUs that the source 
must purchase to accommodate these new emissions are available if and 
only if some other source has made a corresponding reduction in its 
emissions. Therefore, the trading program provides offsets that in 
principle are equivalent to offsets provided by traditional means. 
However, the use of the trading rules to provide offsets has several 
ramifications for the quantity of offsets required and obtained. These 
ramifications are discussed below in the review of Illinois' program.

III. The Criteria for Reviewing Illinois' Program

What Types of Review Criteria Is USEPA Using?

    USEPA must use several types of criteria for evaluating Illinois' 
trading program. First, USEPA has established numerous criteria as part 
of published and promulgated guidance on economic incentive programs, 
including guidance on emission trading programs. Second, USEPA must 
apply guidance on any other Clean Air Act program that is affected by 
Illinois' program. Third, insofar as the purpose of Illinois' program 
is to achieve specified emission reductions, USEPA must evaluate the 
State's estimate of anticipated reductions.
    The guidance most relevant to Illinois' trading program is the 
guidance on economic incentive programs published on April 7, 1994, 
promulgated as subpart U of part 51 of title 40 of the Code of Federal 
Regulations (40 CFR 51), including sections 51.490 to 51.494. Although 
a portion of that guidance speaks to economic incentive programs that 
are required in certain circumstances under the Clean Air Act, that 
portion of the guidance is not relevant here. Instead, the relevant 
portion of that guidance addresses voluntary programs, with the general 
purpose of assuring that the net effect of any emissions trading (or 
actions under any other economic incentive program) does not cause 
violations of any of various requirements of the Clean Air Act.
    More recently, on September 15, 1999, at 64 FR 50086, USEPA 
published notice of availability of proposed revised guidance on 
economic incentive programs. This guidance proposes more detailed 
recommendations for many of the issues addressed in the 1994 guidance 
and also provides guidance on several types of programs not addressed 
in the 1994 guidance.
    One issue not addressed in the proposed guidance is whether this 
guidance applies to programs developed before the proposed guidance 
became available. When USEPA publishes new guidance, USEPA often allows 
an exemption from that guidance for submittals that the State adopted 
and submitted prior to the proposal of that guidance. This exemption is 
known as ``grandfathering.'' This practice allows us to approve 
programs that the State adopted in good faith according to guidance 
available at the time. Since Illinois submitted its program on December 
16, 1997, today's rule grandfathers this program from most of the 1999 
proposed guidance and instead reviews most aspects of this program 
against the criteria published in 1994.
    Today's rule nevertheless uses one element of the newer proposed 
guidance in our review of Illinois' program, namely the element that 
addresses environmental justice and related ``toxic hotspot'' issues. 
Environmental justice refers to efforts to assure that areas with high 
populations of minorities or low-income persons are not unfairly 
exposed to environmental hazards such as toxic air pollutants. The 
proposed new guidance identifies specific issues to be addressed to 
assure that trading programs do not have an inequitable impact on 
environmental justice areas or other communities of concern. We are 
applying this portion of the proposed guidance due to the importance of 
this issue and because relevant guidance was not previously available.
    For other issues, USEPA intends to examine Illinois' program in 
light of the new guidance once the new guidance is finalized. USEPA has 
discussed these plans with Illinois. Illinois and USEPA share an 
understanding that we will review the program accordingly and Illinois 
will reconcile the program to the new guidance within three years after 
guidance issuance.
    A second set of criteria is that the program not result in 
contravention of any Clean Air Act requirement. As will be discussed 
below, the Illinois trading program has little effect on other 
programs, and so only limited guidance on other programs must be 
considered.
    A third set of review criteria is for the quantity of emission 
reductions that the program is likely to achieve. These criteria 
reflect standard judgments of emission inventory estimates. This review 
is expected to be relevant in a future review of whether Illinois has 
provided sufficient emission reductions to attain the ozone standard.

What Published Guidance Applies to This Type of Trading Program?

    Guidance published on April 7, 1994, promulgated at 40 CFR 51 
subpart U, gives guidance on numerous features of trading programs. 
This guidance helps assess whether State programs:
    --Assure that credits are quantifiable, surplus, enforceable, and 
permanent. Quantifiable means that the quantity of emission reductions 
can be estimated. Surplus for this type of program means that 
reductions creditable to this program are not already required under

[[Page 81803]]

other programs. Enforceable means that the State and USEPA can take 
action to require compliance with the program requirements and deter 
noncompliance. Permanent here means that reductions are required as 
long as the trading rules are part of the State Implementation Plan 
(SIP).
    --Assure that appropriate methods will be used to determine 
emission quantities. The 1994 guidance requires that the submittal 
``specify the approach or the combination or range of approaches'' that 
will be used for each source category to quantify emissions, and 
provides guidance for judging whether these approaches are acceptable.
    --Authorize adequate penalties for sources that violate these 
rules. State programs must authorize enforcement actions and penalties 
as permissible under section 113 of the Clean Air Act (currently, 
penalties up to $27,500 per day per violation) or equivalent penalties 
based on the size of the violation measured in tons.
    USEPA is also evaluating Illinois' program against criteria in the 
1999 proposed guidance for addressing environmental justice issues. 
USEPA shares the commonly expressed concern about the possibility of 
trading programs creating localized increases in hazardous air 
pollutants, both in minority and low-income areas (``environmental 
justice areas'') and elsewhere. This is a concern with programs that 
address VOC or particulate matter emissions, insofar as these emissions 
may have hazardous constituents. Therefore, USEPA's 1999 proposed 
guidance identifies four elements of well designed trading programs, 
including (1) prevention or mitigation of unacceptable impacts, (2) 
provision of sufficient information for public review, (3) suitable 
opportunities for public input, and 4) periodic program review to 
identify and remedy problems.

Does the Program Affect Satisfaction of Other Clean Air Act 
Requirements?

    An important general criterion in reviewing any trading program is 
whether the program affects other State regulatory provisions such that 
the State no longer satisfies Clean Air Act requirements. The specific 
criteria to be used in program review are a function of the particular 
provisions that the program affects. For example, many trading programs 
allow relaxations from RACT (counterbalanced by other reductions) or 
allow alternative reductions to achieve RACT. Such programs must be 
reviewed based on criteria that address whether the alternative set of 
limits continue to satisfy RACT requirements.
    As noted in the prior section describing the Illinois trading 
program, Illinois' program has no effect on emission limitations that 
satisfy RACT or other assorted Clean Air Act requirements. As a result, 
no detailed review of the Illinois program is needed to conclude that 
these requirements remain satisfied.
    The only existing provision in Illinois rules that the trading 
program affects is the requirement for offsets of emissions from major 
new sources and major modifications. Sources conventionally obtain 
offsets as part of a construction permit. Therefore, sources 
conventionally obtain offsets in advance of construction, based on 
shutdown or reductions at a specified other source. Under the Illinois 
trading program, sources obtain offsets in the form of ATUs, which 
represent emission reductions at the source or sources that no longer 
hold(s) these ATUs. In effect, the source obtains offsets on an ongoing 
basis, perhaps from different sources at different times.
    The offset requirement is established in Section 173 of the Clean 
Air Act. Section 173(c) requires that ``the total tonnage of increased 
emissions of the air pollutant from the new or modified source shall be 
offset by an equal or greater reduction, as applicable, in the actual 
emissions * * * from the same or other sources in the area.'' Section 
173(a) requires that these offsets be sufficient to assure ``that total 
allowable emissions from existing sources (plus any new source 
emissions) will be sufficiently less than (existing emissions) so as to 
represent * * * reasonable further progress.'' Section 182(d) generally 
requires 1.3 tons of offsets per ton of new emissions. These 
requirements set the principal criteria for reviewing this aspect of 
the Illinois program. The program review below discusses these criteria 
in more detail.

How Does USEPA Judge the Program's Emissions Reductions?

    Illinois' trading program submittal includes an estimate of the 
emission reductions that it expects the program to achieve. USEPA must 
review baseline emissions estimates from Illinois and differences 
between baseline emissions as defined by the program and average actual 
emissions. USEPA must also evaluate the impact of assorted program 
features such as exemptions from the 12 percent reduction, potential 
use of a special ATU fund, the distribution of ATUs upon source 
shutdown, and the possibility of ATU creation from reductions by small 
sources. This review will also address the possibility of false credits 
from ``demand shifting'' (e.g. shutdown of a gasoline station leading 
to increased gasoline sales elsewhere) and the possibility of 
``spiking'' (i.e. hoarding of ATUs now followed by high emissions in a 
future year).

IV. USEPA Review of the Features of Illinois' Program

Does the Program Assure that Emission Reductions are Quantifiable, 
Surplus, Enforceable, and Permanent?

    USEPA's guidance on trading programs includes four key principles, 
that emission reductions in these programs be quantifiable, surplus, 
enforceable, and permanent. This section will review whether the 
emission reductions in Illinois' program are surplus and permanent. 
Subsequent sections will review whether the emission reductions are 
quantifiable and enforceable.
    ``Surplus'' here means that the emission reductions are beyond the 
requirements which are already part of the SIP. Illinois' trading rules 
use the existing SIP as the baseline from which further reductions are 
calculated. This approach is used both in setting baseline emissions 
levels for major sources, from which a 12-percent reduction is 
calculated, and in assessing the number of ATUs to be issued for 
emission reductions by minor sources and mobile sources. Thus, the 
reductions from the Illinois trading program qualify as surplus.
    A question about whether the trading program reductions are surplus 
may arise in the future. If Illinois adopts further regulations, USEPA 
must evaluate whether the reductions pursued by those regulations would 
also help meet trading rule requirements. If so, then USEPA would view 
the trading rule as continuing to achieve the reductions accorded to it 
in this rulemaking but would view the further regulations as achieving 
no further reductions. For example, if Illinois adopts a car scrappage 
program that allows generation of ATUs based on the emission 
reductions, then USEPA would view this program as redistributing the 
emission reductions of the trading program without producing further 
reductions.
    ``Permanent'' is defined in USEPA's economic incentive program 
guidance as assuring that the emission reductions will endure as long 
as the rule applies and as long as the SIP relies on these reductions. 
This principle is satisfied because the Illinois trading rules and

[[Page 81804]]

the emission reductions they require have no termination.

Does the Program Assure that Appropriate Methods Will Be Used to 
Measure Emissions?

    Trading programs must provide appropriate methods for determining 
the quantity of emissions, in order that trades and compliance 
evaluations accurately reflect actual emissions. Guidance at 40 CFR 
51.493(d) states that programs are to specify the approach or menu of 
approaches that may be used for each source category in the program.
    The Illinois program identifies methods to be used for each type of 
emission unit. Section 205.330 identifies a range of methods which, 
``in conjunction with relevant source-specific throughput and operating 
data, are acceptable methods * * * to determine seasonal emissions''. 
For example, the first method is ``material balance calculation, based 
on the VOM content of raw materials and recovered materials, as is 
typically used for degreasers, coating lines, and printing lines 
equipped with a carbon adsorption system (recovery-type control device) 
or without any control device''.
    USEPA's 1994 guidance does not address how particular emission 
quantification methods for particular sources are to be chosen from a 
range of methods or whether USEPA is to be given the opportunity to 
review the selection. Nevertheless, the Illinois program provides USEPA 
and the public an additional opportunity to review the specification of 
the method to be used for each unit of each source. The Illinois rules 
dictate that the methods to be used for each source are to be specified 
in the source's Title V permit. Consequently, USEPA and the public have 
the opportunities for methods review that are inherent in the Title V 
process, including a 30-day public review of a draft permit and a 45-
day period in which USEPA may veto the permit if it finds the permit 
objectionable. Thus, the Illinois program satisfies the guidance of 40 
CFR 51.493(d) for programs to specify the approach or range of 
approaches to be used, and provides additional opportunity for USEPA 
and the public to assure that each source's methods are appropriate.
    Although USEPA is not currently reviewing Illinois' program against 
recent proposed guidance, it is worth noting that the program in fact 
satisfies this proposal. An option in the proposed guidance is for 
methods to be specified according to a procedure that offers a 30-day 
opportunity for public comment and a 45-day opportunity for USEPA to 
take steps leading to rejection of the method proposed by the State. 
Illinois identifies presumptive methods in its rules but uses Title V 
permits to require specific methods for specific sources. Therefore, 
Illinois' program satisfies the recent proposed guidance with respect 
to establishment of emission quantification methods as well as the 1994 
guidance on the subject.

Does the Program Authorize Adequate Penalties for Sources that Violate 
These Rules?

    USEPA guidance requires that sources that violate trading program 
requirements be potentially liable for the penalties authorized in 
Section 113 of the Clean Air Act or their equivalent. USEPA's guidance 
further specifies that a violation for an ozone season must be tallied 
as a violation for each day of the season. The Illinois rules authorize 
penalties of this magnitude for violators of Illinois trading program 
requirements.
    Applicability of these penalties is straightforward for violations 
of measuring, recordkeeping, and reporting requirements. Applicability 
for violation of the ATU holding requirement is more complicated, 
reflecting the schedule by which this requirement takes effect.
    Sources are ordinarily expected to hold ATUs at least equivalent to 
an ozone season's emissions by December 31 of that year. A source that 
holds insufficient ATUs then to accommodate its ozone season emissions 
has a ``second chance'' to accommodate its emissions. In this ``second 
chance,'' the source must obtain ATUs equal to the shortfall in its 
end-of-year ATU holdings plus a surcharge. The surcharge is generally 
20 percent of the shortfall, but the surcharge is 50 percent of the 
shortfall if the source also had a shortfall the previous year. A 
source must either purchase the necessary ATUs or request to be issued 
that many fewer ATUs for the next year. A source that fails to 
compensate for its December 31 shortfall is violating the program 
requirements and is subject to penalties as authorized in Section 113.
    Illinois' rules do not identify an explicit deadline by which 
sources must obtain compensating ATUs. However, practical 
considerations imply a de facto deadline. Since the next ozone season 
begins May 1, the State must issue ATUs by about April 1. This date 
would thus be a deadline for sources to request a reduction in the 
number of ATUs issued to them. More generally, if by April 1 a source 
has neither requested a reduction in their year's ATU issuance nor 
purchased the necessary ATUs, the source would clearly be violating the 
rules and the State could commence enforcement action.
    While USEPA views the rules as implying a deadline for compliance, 
we believe that the State must clarify whether this interpretation is 
appropriate. Given the importance of having a clear deadline for 
compliance, USEPA intends to approve these rules only if the State 
submits clarifications that demonstrate that sources have a deadline 
for obtaining the necessary ATUs or be in violation and liable for 
appropriate enforcement action.

Does the Program Adequately Address Environmental Justice Issues?

    ''Environmental justice'' concerns the possibility that low income 
and minority populated areas are subject to worse environmental 
conditions and less regulatory mitigation efforts. The question here is 
what effect the Illinois program might have on air quality in low 
income and minority populated areas. A related question is whether the 
Illinois program might lead to worsened air quality in any location. 
These are not issues for ozone, insofar as ozone air quality is a 
regional problem that is insensitive to emission distributions. 
Instead, these issues arise because a subset of the VOC being regulated 
are hazardous air pollutants (HAPs). As a result, the issues arise from 
the possibility that a local increase of VOC emissions might occur that 
might translate to a local increase in HAP concentrations, 
notwithstanding the general VOC emission reductions that the trading 
program pursues.
    The 1999 proposed guidance on economic incentive programs proposes 
four key elements to be included in trading programs to assure 
environmental justice and to avoid problematic increases in localized 
concentrations of HAPs. These elements are: (1) Provisions that prevent 
or mitigate potential adverse changes in emissions or emission 
distribution of HAPs, (2) provisions for sufficient information to be 
made available for meaningful review and participation, (3) public 
participation in program design, implementation, and evaluation, and 
(4) periodic program evaluations.
    The proposed guidance notes the typical differences between open 
market trading programs and cap and trade programs, and recognizes that 
cap and trade programs often inherently make trades increasing HAPs 
unlikely. The guidance states:

    Cap-and-trade programs * * * typically impose an emissions cap 
that requires a reduction in overall emissions, and typically 
require compliance with existing emission rate limitations. Despite 
the possibility of

[[Page 81805]]

emission increases at sources that increase production and do not 
add emission controls, these program features help assure that a 
participating source would be unlikely to increase its HAP emissions 
to unacceptable levels. As a result, cap-and-trade programs in 
general are less likely to need additional measures to prevent 
trades that would increase HAP emissions. In most cap-and-trade 
programs, a retrospective program evaluation is more important for 
ensuring that the program did not, in fact, create unacceptable 
localized emission increases.

    The Illinois program is in fact a cap and trade program that 
requires a reduction in overall emissions and requires full compliance 
with HAPs emissions limits (notably, maximum achievable control 
technology (MACT) limits) and RACT limits, irrespective of the number 
of ATUs held. Emissions increases can occur at sources that increase 
production, but the program allows no emission increases that are not 
allowed in the absence of the program, and the program does not allow 
any source to forgo emission reductions that would otherwise be 
required. Furthermore, Illinois' program reduces the likelihood of 
emission increases, because a source that increases emissions here 
faces a cost not imposed elsewhere of purchasing ATUs for the emission 
increase in addition to the ATUs needed to avoid the normal 12-percent 
emission reduction. Consequently, the Illinois program is expected to 
reduce the likelihood of localized increases in HAPs emissions.
    The second and third elements of USEPA's proposed policy on HAPs 
and trading concerns whether sufficient information is available and 
whether the public has suitable opportunities to provide informed input 
into the development and implementation of the program. The rules 
establishing the procedures and criteria of the program were adopted on 
the basis of a lengthy stakeholder consultation process as well as the 
normal process for public input for rulemaking. The Title V permit 
process employed in Illinois' program provides for public input in the 
establishment of the source-specific elements of the program. Finally, 
the ATU tracking data base and the annual report provide the public 
sufficient information and opportunity to offer input on ongoing 
implementation issues.
    The fourth element to be addressed is to provide for periodic 
program evaluation and opportunity to remedy any problems that are 
identified following startup of the program. The rules for Illinois' 
program require an annual program review and report by Illinois. 
Illinois has convened a workgroup to determine what type of information 
to provide in this annual report. The workgroup includes business and 
environmental group representatives, and USEPA attends its meetings. 
The workgroup has focused on defining the information that companies 
must report to support an assessment of the effects of the program on 
HAPs emissions. The workgroup has achieved general consensus on a draft 
rule to require companies to report emissions of individual HAP species 
that are emitted in significant quantities in the Chicago area.
    The State has not discussed how its annual report will be 
distributed or what it will do with the results of the report. In 
particular, the State has made no commitment to remedy any program 
deficiencies that are identified. USEPA needs this information before 
it can reach final judgment on whether Illinois' program satisfies this 
portion of USEPA's guidance.
    As discussed in USEPA's proposed policy, USEPA must evaluate 
programs as a whole by considering the four above program elements 
jointly. In formulating this proposed policy, USEPA envisioned that cap 
and trade programs in many cases would inherently be unlikely to yield 
localized HAP increases, and that in such cases the mid-course program 
review would play an enhanced role as a backstop for assuring that the 
expected protection against localized HAP increases is realized. 
Therefore, USEPA proposes that if Illinois commits to a wide 
distribution of its annual review and commits to remedy any problems 
identified in its annual program review, then the Illinois program 
would be found to provide adequate assurances against localized HAP 
increases.
    Public commenters on the State rulemaking for these rules noted 
these issues concerning localized increases in HAP concentrations and 
focused on an analogous issue, namely that trading might lead to 
overall increases in emissions of hazardous air pollutants. In essence, 
these commenters were concerned that trading might yield emission 
increases for the subset of the VOC components that are hazardous, 
notwithstanding the mandated reduction of VOC as a whole.
    Increases in area-wide emissions of hazardous air pollutants are 
just as unlikely as increases of VOC or hazardous air pollutant 
emissions in localized areas, again because most sources' emissions 
will be decreasing and because an increase in HAPs at any particular 
source would presumptively involve an improbable shift in the 
proportion of emissions that are hazardous. Nevertheless, in response 
to these concerns, the trading rules provide for IEPA to evaluate the 
impacts of trades on HAP emissions and report its findings in a 
periodic program review. This program review is also required to 
identify any geographic redistributions of emissions occurring under 
the program, such as redistributions that would cause environmental 
justice concerns. Given this safeguard, if indeed Illinois commits to 
remedy any problems identified in its review, and given the minimal 
likelihood that such problems would arise, the Illinois trading program 
should have a favorable impact on HAP concentrations area-wide as well 
as in localized areas.

Does the Program Assure Satisfaction of New Source Requirements?

    As noted previously, Illinois' trading rules explicitly provide in 
general that other State and Federal rules, which implement various 
Clean Air Act requirements such as RACT, MACT, and lowest achievable 
emission rate, must be satisfied and are unaffected by the trading 
rules. The only requirement under other rules that is significantly 
affected by the rules for the Illinois trading program is the 
requirement for offsets for new sources. Therefore, the review for 
consistency with the Clean Air Act needs only to address whether the 
alternative approach to offsets under these rules satisfies applicable 
requirements.
    As discussed in the program description above, the trading rules 
provide that new sources and sources undergoing major modifications 
must purchase ATUs (representing emission reductions elsewhere) 
equivalent to at least 1.3 times the new emissions. This approach 
provides offsets that are generally equivalent to the traditional 
approach. However, a detailed comparison reveals important differences 
in the two approaches.
    Offsets under the trading rule differ from conventional offsets in 
three key respects: (1) Trading rule offsets need only offset actual 
emissions, whereas conventional offsets must offset potential 
emissions; (2) trading rule offsets may be arranged essentially 
contemporaneously, whereas conventional offsets are arranged prior to 
issuance of the new source's permit to construct; and (3) trading rule 
offsets focus on ozone season emissions, whereas conventional offsets 
address the full year's emissions.
    The first issue is whether offsetting of actual rather than 
potential emissions satisfies the basic requirement in Section 173, as 
quoted above, to assure that the sum of the emissions allowed

[[Page 81806]]

from existing sources plus the new source is suitably reduced. 
Ordinarily, this assurance is provided by requiring reductions in 
existing source emissions that more than compensate for the full 
allowable quantity of new emissions from the new source. The trading 
program uses a different approach. The trading program directly 
regulates the sum of actual emissions from all major existing and new 
sources. The number of ATUs issued is effectively a cap on overall 
actual emissions from major sources in the Chicago area. No additional 
ATUs are issued to new or modified sources. Consequently, when a new 
source obtains the required 1.3 tons worth of ATUs per ton of new 
emissions, then the source or sources selling the ATUs have necessarily 
achieved 1.3 tons of emission reductions to offset each ton of the new 
source's emissions. That is, the Illinois program requires a net 
reduction of 0.3 tons per ton of new emissions in the total allowable 
emissions from existing plus new sources in the Chicago area. Thus, 
despite the focus on actual rather than potential emissions, the 
Illinois trading program nevertheless satisfies the relevant net 
reduction requirement.
    Another perspective on this issue is to view the use of actual 
versus potential emissions as a reflection of how the offsets are 
administered. For conventional offsets, there is one opportunity to 
establish offsetting emission reductions, during issuance of the 
construction permit before the source is constructed. In those 
circumstances, the permit must provide sufficient offsets to offset as 
much new emissions as the new source will ever emit, i.e., the new 
source's potential emissions. In contrast, the trading rule provides 
opportunities recurring on an annual basis to reassess the quantity of 
emissions to be offset. The trading rule relies on this annual 
reassessment to assure that the new source obtains enough offsets each 
year to offset its emissions adequately.
    A second difference between offsets under the trading program and 
conventional offsets is the timing by which the offsets are arranged. 
Section 173 requires that ``sufficient offsetting emission reductions 
have been obtained'' ``by the time the source is to commence 
construction.'' (The clauses in Section 173 are reversed here.) 
Ordinarily, the construction permit identifies the offsets. In 
Illinois' trading program, the construction permit restates the 
requirement to hold ATUs sufficient to offset (at a 1.3 to 1 ratio) the 
emissions attributable to the major new source or major modification. 
USEPA views this as satisfying the requirement to provide assurances 
prior to construction that the new emissions will be suitably offset. 
Illinois further requires new sources to identify how they plan to 
obtain offsets for the first three years of operation, which increases 
the likelihood in practice that new sources will make permanent 
arrangements for offsets similar to the unavoidably permanent 
arrangements for conventional offsets.
    The third difference from conventional offsets is the seasonality 
of offsets under the Illinois trading program. Offsets under the 
trading rule are achieved by obtaining ATUs. These ATUs represent ozone 
season emissions, and must be obtained in proportion to ozone season 
emissions of the new source or major modification. This differs from 
the conventional focus on increases and decreases of annual emissions. 
In most cases the two approaches will have about the same effect, 
because the off-season new emissions will typically have about the same 
ratio to on-season new emissions as the off-season to on-season ratio 
of offsetting emission reductions. For example, if the new source emits 
10 tons per month and the offsetting source reduces emissions by 13 
tons per month, then there is no practical difference between tallying 
50 new tons against 65 tons of reductions for a 5-month ozone season 
versus tallying 120 new tons versus 156 tons of reductions for the full 
year. However, seasonal distributions of emissions can vary, so USEPA 
must assess whether an approach that focuses on ozone season emissions 
satisfies applicable requirements.
    Section 173, as quoted above, requires offsets to reduce ``total 
emissions'' sufficiently to achieve reasonable further progress toward 
attaining the relevant standard. One possible interpretation of this 
requirement is that one evaluates the total of all emissions that are 
germane to assessing whether reasonable further progress is occurring, 
in which case one would take the Illinois approach of focusing on ozone 
season emissions. However, USEPA views the term ``total'' in Section 
173 to include all emissions from all times of the year, so that one 
must assess whether emission reductions (occurring in any part of the 
year) sufficiently offset the full year's new emissions, irrespective 
of the seasonal definition of reasonable further progress used in other 
contexts.
    In short, the Illinois trading program provides offsets on the 
basis of ozone season emissions, but USEPA interprets Section 173 to 
require offsets on a full year basis. USEPA views this feature of the 
Illinois trading program as a significant deficiency that Illinois must 
correct before USEPA can fully approve the program.
    The Illinois trading program clearly provides for satisfaction of 
other new source review requirements. New emissions must be offset 
permanently. Because the Illinois trading program and its ATU holding 
requirement are permanent, USEPA views the trading program as mandating 
permanent offsetting of new emissions. Sources must obtain offsets from 
the same nonattainment area or from other areas meeting certain 
criteria. The Illinois trading program operates only within the Chicago 
nonattainment area, so offsets for new Chicago area sources would 
derive entirely from other sources in the Chicago area. Other new 
source requirements, including lowest achievable emission rates, 
compliance by other sources having the same owner, and criteria for 
determining the applicability of these requirements, are all unaffected 
by the Illinois trading program. Therefore, USEPA proposes to find that 
Illinois will continue to satisfy previously satisfied Clean Air Act 
requirements if offsets are provided on a full year basis.

Will Illinois Identify and Resolve Program Problems That Arise?

    Because trading programs have a variety of designs and because we 
have little experience with these programs, USEPA guidance calls for 
trading programs to undertake periodic program evaluations and to 
remedy any problems that are identified.
    Illinois' trading rules require an annual program review. This 
program review is available to the public. However, IEPA has not 
described how it will distribute this review and has not committed to 
pursue remedies if problems are identified. The pursuit of remedies is 
implicit in the requirement for annual program review. Nevertheless, in 
accordance with USEPA guidance, Illinois must provide an explicit 
commitment that it will provide the public suitable opportunity to 
comment on program implementation and that it will pursue remedies for 
any problems that the annual program review identifies.

V. USEPA Review of Expected Emission Reduction

How Much Emission Reduction Will Be Achieved?

    The Illinois trading rules are clearly designed to achieve an 
overall reduction approaching 12 percent of the emissions of the major 
sources in the Chicago area.

[[Page 81807]]

Most sources are issued ATUs equal to 12 percent less than their 
baseline emissions. Trades of these ATUs would shift which source 
achieves the emission reduction without changing the net total emission 
reduction achieved.
    Features that affect the quantity of reduction to be achieved are: 
(1) Exemptions from the 12 percent reduction for specified classes of 
well controlled sources, (2) exemptions from the program for sources 
that submit to a limitation of 15 tons of emissions per ozone season 
and for sources that reduce emissions by 18 percent, (3) differences 
between baseline emissions and average emissions, (4) availability of a 
reserve account of ATUs equal to one percent of total baseline 
emissions, and (5) surcharges of ATUs that sources that emit in excess 
of their ATU holdings must purchase or not be issued. Many of the 
quantitative influences on the emission reductions to be achieved by 
this program are difficult to assess. The numbered paragraphs below 
address the impact of each of these features.
    1. USEPA asked Illinois for clarification of the number of ATUs 
that would be issued to sources that are exempted from the 12 percent 
reduction in ATUs issued based on being well controlled. By letter of 
June 18, 1998, Illinois clarified that emission units that are found to 
be controlled with best available technology by May 1, 1999, for 
example, are to be issued ATUs reflecting emissions achieved by the 
best available technology, without adjustments that would otherwise 
apply. This means that the number of ATUs issued could be more or less 
than 12 percent below baseline emissions, depending on whether the 
extra controls achieve less or more than 12 percent emission 
reductions. As a result, the net effect of this exemption will likely 
be small.
    2. Only a slight loss of emission reduction will likely result from 
sources opting out of the program via a 15 ton per season limit, and 
only a slight gain of emission reduction will likely result from 
sources opting out via an 18 percent reduction. USEPA has no precise 
estimate of these effects but expects the net effect to be small.
    3. USEPA also has no precise estimates of differences between 
baseline emissions and average emissions. To investigate this issue, we 
obtained values of an index of midwest industrial production data 
prepared monthly by the Chicago Federal Reserve Board. We used this 
index because Chicago area industrial emissions should fluctuate in the 
same manner as midwest industrial production. We focused on values for 
the five months in Illinois' program. ``Average'' production reflected 
1994 to 1996 values for these five months, and ``baseline'' production 
reflected the average for the higher two of these 3 years (1995 and 
1996).
    The index value for ``baseline'' production was 0.7 percent higher 
than the index value for ``average'' production. Consequently, USEPA 
estimates that baseline emissions under Illinois' program are 0.7 
percent above average emissions, and so USEPA is subtracting 0.7 
percent in its estimate of emission reductions required by Illinois' 
program.
    USEPA recognizes that the Chicago Federal Reserve Board index, as a 
composite statistic, does not directly address the difference between 
average versus higher two of three that would be found by examining 
data on a source-by-source basis. Nevertheless, USEPA believes that the 
production index shows qualitatively that the difference is relatively 
small. Since source-specific data are unavailable, USEPA proposes to 
use the production index to adjust the estimate of the reductions that 
Illinois' program will achieve.
    4. Illinois issues ATUs equal to 1 percent of baseline emissions to 
an ``Alternative Compliance Market Account.'' These ATUs are expensive, 
generally priced at the lesser of $10,000 per ton or 1.5 times the 
normal market price of ATUs. The emission reduction required by the 
Illinois trading program will be reduced to the extent that sources 
purchase ATUs from this account rather than from other sources. Thus, 
this feature will subtract between 0 and 1 percent of the reduction 
that the Illinois trading program requires.
    5. When a source has a shortfall in its December 31 ATU holdings 
relative to its emissions that ozone season, it must provide ATUs equal 
to 120 percent of its shortfall. This provides a net 20 percent benefit 
to the environment. However, few sources are expected to have 
shortfalls, so this effect is likely to be small.
    Illinois forecasted the emission reduction from its trading program 
by examining data in its emissions data base for major sources. This 
examination identified which sources would likely be subject to the 
program, preliminarily assessed which emission units at these sources 
would likely be exempted from the 12-percent reduction requirement 
(particularly because of implementation of MACT), and evaluated the 
total emissions which would be subject to a 12-percent reduction. 
Illinois thereby estimated that its trading program would reduce VOC 
emissions in the Chicago area by 12.6 tons per year.
    Illinois has developed a reasonable inventory of sources to be 
subject to the trading program. However, Illinois overlooked two 
factors which could significantly affect emission reductions to be 
expected from the program. First, the issuance of ATUs equal to 1 
percent of baseline emissions to the Alternative Compliance Market 
Account means that the program may reduce emissions only to 11 percent 
instead of 12 percent below baseline emissions. Second, as discussed 
above, baseline emissions are estimated to be about 0.7 percent higher 
than average emissions. Thus, 11 percent below baseline emissions would 
be about 10.4 percent below average emissions.
    Consequently, USEPA estimates that Illinois' trading program will 
reduce emissions by 10.4 percent of the 105 tons per day emitted by 
sources in the program, or 10.9 tons per day. The actual reduction may 
be higher, to the extent that the Alternative Compliance Market Account 
goes unused and to the extent that surcharges are imposed on sources 
holding insufficient ATUs on December 31. The reduction will likely be 
higher in the first few years, while sources build up a reserve of 
ATUs, though this effect is likely to be minimal after a few years. The 
actual reduction may be lower, to the extent that the above analysis 
understates the difference between baseline and average emissions and 
to the extent that sources under 15 tons per ozone season obtain 
exemptions from the program. The reduction could be either slightly 
higher or slightly lower, depending on differences between well 
controlled emission levels and 12 percent below baseline levels. 
Nevertheless, despite the uncertainties in any estimate of program 
benefits, USEPA believes that Illinois' trading program will reduce VOC 
emissions in the Chicago area by about 10.9 tons per day.
    The generation of ATUs is complicated in some cases by the 
difficulty of estimating the quantity of emission reductions. This is 
especially the case for programs to reduce highway vehicle emissions, 
for which the reductions are generally a function of a complicated 
array of variables. For example, the effect of programs for getting old 
cars off the road is influenced by the age mix of the cars being 
scrapped and the age mix of the cars being driven instead as well as 
collateral effects on miles driven, and is variable with time as the 
foregone mileage of the scrapped cars declines. USEPA anticipates being 
fully consulted on the quantification of emission

[[Page 81808]]

reductions from programs that reduce highway vehicle emissions as a 
means of generating ATUs. In any case, the uncertainty in these 
emission estimates is no more likely to yield either greater or lesser 
reductions, and the net effect is expected to be small.

Can False Credits Arise From ``Demand Shifting''?

    ``Demand shifting'' involves redistribution of production from one 
source to another. Demand shifting is a problem if credits are 
generated by the reduction in production at the first source and no 
credits are consumed by the production increase at the second source, 
since credits for emission reductions would be created where no net 
emission reduction has occurred. Illinois' program authorizes 
generation of ATUs via emission reductions at small industrial sources 
and at other sources including mobile sources and commercial 
operations.
    For small industrial sources, the Illinois trading rules explicitly 
prohibit issuance of ATUs for small source production declines when 
that source's production might shift to another small source in the 
Chicago area. (Production shifts to large sources raise no problems, 
because large sources are required to hold ATUs to accommodate any 
increased production.) Therefore, the Illinois rules prevent the 
``demand shifting'' problem for small industrial sources.
    For commercial and mobile sources, Illinois' rules do not 
explicitly address the demand shifting issue. The IEPA is responsible 
for judging the quantity of emission reductions that a proposed control 
program will achieve (or has achieved). However, the rule does not 
require adjusting the emission reduction quantity to account for 
shifting of the relevant activity to other similar sources, nor has 
IEPA committed to make such an adjustment.
    USEPA believes that Illinois' trading program should be approved 
only if Illinois commits to adjust any amounts of ATUs issued for 
commercial or mobile source emission reductions to reflect potential 
``demand shifting'' or otherwise satisfactorily addresses this issue. 
The need for such a commitment or other resolution of this issue 
reflects the significant impact that could result from failure to 
account for the full consequences of proposed control programs for 
these types of sources.

Can ``Spiking'' be a Problem?

    ``Spiking'' refers to the possibility that several years of low 
emissions would be followed by a year of exceptionally high emissions. 
This is possible in programs like Illinois' that allow ``banking'' of 
credits, wherein credits not used in the low emission years can be 
reserved for use in a later year to allow high emissions. Illinois' 
ATUs have a two year life, so a source that for several years emits 
below its allotment level would increasingly be using year-old ATUs and 
reserving same-year ATUs, until ultimately in theory the source could 
hold two years of allotments that it could use in one year. Note that 
this scenario necessarily involves below average emissions in the year 
or years preceding the exceptionally high emission year.
    Spiking is most problematic when high emissions are more likely to 
occur during critical air pollution episodes than low emissions. This 
was possible with USEPA's ``NOX SIP Call'', for example, 
where USEPA was concerned that above average electrical generation and 
nitrogen oxides (NOX) emissions might be more likely to 
occur during high temperature ozone episodes than during supposedly 
compensating periods of below average activity and emissions. This is 
not the case for the Illinois program, which addresses principally 
manufacturing operations that are not influenced by meteorology or 
other factors affecting air quality. As a result, in Illinois, just as 
a hypothetical year with much higher than average emissions is preceded 
by a year or years with correspondingly lower than average emissions, 
the relative worsening of air quality for the high emissions year 
compared to average conditions is likely to be the same as the relative 
improvement of air quality for the preceding low emissions years.
    USEPA has proposed guidance for States to ``include safeguards * * 
* to prevent emission spiking commensurate with the probability that 
spiking will occur.'' USEPA investigated the probability of spiking 
occurring in the Illinois program.
    Because the Illinois program requires continued achievement of 
RACT, sources have little latitude to cause spiking by varying control 
efficiencies. Instead, spiking is only plausible if ``spiking'' in 
production levels occurs.
    USEPA investigated the likelihood of significant variations in 
production by analyzing the Chicago Federal Reserve Board's Midwest 
production index referenced above. The Chicago area has a diverse 
manufacturing base, so the variability of Midwest production is 
indicative of the variability of the production of major VOC sources in 
the Chicago area. The index is available for 1973 to 1998. Again USEPA 
examined the average index value for the five ozone season months. Of 
the 25 comparisons of consecutive year index averages, the index never 
changed by as much as 20 percent, dropped between 12 and about 18 
percent in 3 years, increased by about 16 percent in 1 year, and stayed 
within about 10 percent for the remaining 21 years.
    USEPA concludes that spiking is unlikely to occur in the Illinois 
program. Nevertheless, USEPA expects Illinois to report in its annual 
program review whether a significant stockpile of ATUs is being banked 
and if so to take corrective action as appropriate.

VI. Today's Action

What Action Is USEPA Proposing To Take?

    USEPA proposes to approve the Illinois trading program if Illinois 
provides five commitments or program revisions identified in this 
notice. Today's notice solicits comments on these proposed 
prerequisites for program approval as well as on other issues raised by 
Illinois' submittal and USEPA's review. USEPA believes that submittal 
of these materials will not raise any new issues not addressed in 
today's notice. Therefore, USEPA anticipates that submittal of these 
materials will not necessitate further proposed rulemaking.

What Further Commitments and Program Revisions is USEPA Proposing To 
Require From Illinois?

    USEPA proposes to approve Illinois' trading program only if 
Illinois submits five items:
    1. Illinois must describe the timeline for sources to obtain the 
necessary number of ATUs. This description must identify a deadline 
after which Section 113 enforcement actions may be pursued.
    2. Illinois must satisfy USEPA's policy on environmental justice as 
described in the proposed trading program guidance announced on 
September 15, 1999, at 64 FR 50086. This requires Illinois to commit to 
review effects of the trading program on the distribution of hazardous 
air pollutant emissions in its annual program review, distribute that 
review for public comment, and commit to address any identified 
problems.
    3. Illinois must modify its new source requirements to provide 
offsets (at a 1.3 to 1 ratio, optionally from off-season emission 
reductions) for potential off-season VOC emissions of any major new 
source or major modification, to supplement the offsets that the 
trading program provides for on-season emissions.

[[Page 81809]]

    4. Illinois must commit to discount or prohibit issuance of ATUs 
for commercial or mobile source emission reductions when the reduction 
is attributable to an activity level decrease that may accompany an 
increase in the level of that activity elsewhere in the Chicago area 
(``demand shifting'').
    5. Illinois must commit to address any problems that are identified 
in its annual program review.

VII. Administrative Requirements

Executive Order 12866

    The Office of Management and Budget (OMB) has exempted this 
regulatory action from Executive Order 12866, entitled ``Regulatory 
Planning and Review.''

Executive Order 13045

    Protection of Children from Environmental Health Risks and Safety 
Risks (62 FR 19885, April 23, 1997), applies to any rule that: (1) Is 
determined to be ``economically significant'' as defined under 
Executive Order 12866, and (2) concerns an environmental health or 
safety risk that USEPA has reason to believe may have a 
disproportionate effect on children. If the regulatory action meets 
both criteria, the Agency must evaluate the environmental health or 
safety effects of the planned rule on children, and explain why the 
planned regulation is preferable to other potentially effective and 
reasonably feasible alternatives considered by the Agency. This rule is 
not subject to Executive Order 13045 because it does not involve 
decisions intended to mitigate environmental health or safety risks.

Executive Order 13084

    Under Executive Order 13084, USEPA may not issue a regulation that 
is not required by statute, that significantly affects or uniquely 
affects the communities of Indian tribal governments, and that imposes 
substantial direct compliance costs on those communities, unless the 
Federal government provides the funds necessary to pay the direct 
compliance costs incurred by the tribal governments, or USEPA consults 
with those governments. If USEPA complies by consulting, Executive 
Order 13084 requires USEPA to provide to the Office of Management and 
Budget, in a separately identified section of the preamble to the rule, 
a description of the extent of USEPA's prior consultation with 
representatives of affected tribal governments, a summary of the nature 
of their concerns, and a statement supporting the need to issue the 
regulation. In addition, Executive Order 13084 requires USEPA to 
develop an effective process permitting elected officials and other 
representatives of Indian tribal governments ``to provide meaningful 
and timely input in the development of regulatory policies on matters 
that significantly or uniquely affect their communities.''
    Today's rule does not significantly or uniquely affect the 
communities of Indian tribal governments. This action does not involve 
or impose any requirements that affect Indian Tribes. Accordingly, the 
requirements of section 3(b) of Executive Order 13084 do not apply to 
this rule.

Executive Order 13132

    Federalism (64 FR 43255, August 10, 1999) revokes and replaces 
Executive Orders 12612 (Federalism) and 12875 (Enhancing the 
Intergovernmental Partnership). Executive Order 13132 requires USEPA to 
develop an accountable process to ensure ``meaningful and timely input 
by State and local officials in the development of regulatory policies 
that have federalism implications.'' ``Policies that have federalism 
implications'' is defined in the Executive Order to include regulations 
that have ``substantial direct effects on the States, on the 
relationship between the national government and the States, or on the 
distribution of power and responsibilities among the various levels of 
government.'' Under Executive Order 13132, USEPA may not issue a 
regulation that has federalism implications, that imposes substantial 
direct compliance costs, and that is not required by statute, unless 
the Federal government provides the funds necessary to pay the direct 
compliance costs incurred by State and local governments, or USEPA 
consults with State and local officials early in the process of 
developing the proposed regulation. USEPA also may not issue a 
regulation that has federalism implications and that preempts State law 
unless the Agency consults with State and local officials early in the 
process of developing the proposed regulation.
    This rule will not have substantial direct effects on the States, 
on the relationship between the national government and the States, or 
on the distribution of power and responsibilities among the various 
levels of government, as specified in Executive Order 13132, because it 
merely proposes to approve a state rule implementing a federal 
standard, and does not alter the relationship or the distribution of 
power and responsibilities established in the Clean Air Act. Thus, the 
requirements of section 6 of the Executive Order do not apply to this 
rule.

Regulatory Flexibility

    The Regulatory Flexibility Act (RFA) generally requires an agency 
to conduct a regulatory flexibility analysis of any rule subject to 
notice and comment rulemaking requirements unless the agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities. Small entities include small 
businesses, small not-for-profit enterprises, and small governmental 
jurisdictions.
    This rule will not have a significant impact on a substantial 
number of small entities because SIP approvals under section 110 and 
subchapter I, part D of the Clean Air Act do not create any new 
requirements but simply approve requirements that the State is already 
imposing. Therefore, because the Federal SIP approval does not create 
any new requirements, I certify that this action will not have a 
significant economic impact on a substantial number of small entities. 
Moreover, due to the nature of the Federal-State relationship under the 
Clean Air Act, preparation of flexibility analysis would constitute 
Federal inquiry into the economic reasonableness of state action. The 
Clean Air Act forbids USEPA to base its actions concerning SIPs on such 
grounds. Union Electric Co. v. U.S. EPA, 427 U.S. 246, 255-66 (1976); 
42 U.S.C. 7410(a)(2).

Unfunded Mandates

    Under section 202 of the Unfunded Mandates Reform Act of 1995 
(``Unfunded Mandates Act''), signed into law on March 22, 1995, USEPA 
must prepare a budgetary impact statement to accompany any proposed or 
final rule that includes a Federal mandate that may result in estimated 
costs to State, local, or tribal governments in the aggregate; or to 
the private sector, of $100 million or more. Under section 205, USEPA 
must select the most cost-effective and least burdensome alternative 
that achieves the objectives of the rule and is consistent with 
statutory requirements. Section 203 requires USEPA to establish a plan 
for informing and advising any small governments that may be 
significantly or uniquely impacted by the rule.
    USEPA has determined that the approval action proposed does not 
include a Federal mandate that may result in estimated costs of $100 
million or more to either State, local, or tribal governments in the 
aggregate, or to the private sector. This Federal action

[[Page 81810]]

proposes to approve pre-existing requirements under State or local law, 
and imposes no new requirements. Accordingly, no additional costs to 
State, local, or tribal governments, or to the private sector, result 
from this action.

National Technology Transfer and Advancement Act

    Section 12 of the National Technology Transfer and Advancement Act 
(NTTAA) of 1995 requires Federal agencies to evaluate existing 
technical standards when developing a new regulation. To comply with 
NTTAA, USEPA must consider and use ``voluntary consensus standards'' 
(VCS) if available and applicable when developing programs and policies 
unless doing so would be inconsistent with applicable law or otherwise 
impractical.
    The USEPA believes that VCS are inapplicable to this action. 
Today's action does not require the public to perform activities 
conducive to the use of VCS.

List of Subjects in 40 CFR Part 52

    Environmental protection, Air pollution control, Reporting 
recordkeeping requirements, Volatile organic compounds.

    Dated: December 15, 2000.
Francis X. Lyons,
Regional Administrator, Region 5.
[FR Doc. 00-32945 Filed 12-26-00; 8:45 am]
BILLING CODE 6560-50-U