[Federal Register Volume 66, Number 26 (Wednesday, February 7, 2001)]
[Proposed Rules]
[Pages 9278-9285]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-3160]


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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 52

[NH035-1-7161b; A-1-FRL-6942-4]


Approval and Promulgation of Air Quality Implementation Plan; New 
Hampshire; Discrete Emissions Reductions Trading Program

AGENCY: Environmental Protection Agency (EPA).

ACTION: Proposed rule.

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SUMMARY: The Environmental Protection Agency is proposing to 
conditionally approve a State Implementation Plan (SIP) revision 
submitted by the State of New Hampshire. This revision establishes 
regulations for an emissions trading program Env-A 3100, Discrete 
Emissions Reductions Trading Program, which provides a more cost-
effective mechanism for sources to meet regulatory requirements for 
reducing oxides of nitrogen and volatile organic compound emissions. 
This action is being taken under the Clean Air Act (CAA). Public 
comments on this document are requested and will be considered before 
taking final action on this SIP revision.

DATES: Comments must be received on or before March 9, 2001.

ADDRESSES: Comments may be mailed to Susan Studlien, Deputy Director, 
Office of Ecosystem Protection (mail code CAA), U.S. Environmental 
Protection Agency, Region I, JFK Federal Bldg., Boston, MA 02203. 
Copies of the State submittal and EPA's technical support document are 
available for public inspection during normal business hours, by 
appointment at the Office of Ecosystem Protection, U.S. Environmental 
Protection Agency, Region I, One Congress Street, 11th floor, Boston, 
MA and at the Air Resources Division, Department of Environmental 
Services, 6 Hazen Drive, PO Box 85, Concord, New Hampshire 03302-0095.

FOR FURTHER INFORMATION CONTACT: Donald Dahl at (617) 918-1657, or by 
electronic mail at [email protected].

SUPPLEMENTARY INFORMATION:

Overview

    The Environmental Protection Agency (EPA) is proposing to 
conditionally approve a State Implementation Plan (SIP) revision 
submitted by the State of New Hampshire. This revision establishes 
regulations for an emissions trading program Env-A 3100, Discrete 
Emissions Reductions Trading Program.

[[Page 9279]]

    The following table of contents describes the format for this 
SUPPLEMENTARY INFORMATION section:

EPA's Proposed Action

    What Action Is EPA Proposing Today?
    Why Is EPA Proposing This Action?
    What Is Emissions Trading?
    What Is Discrete Emissions Reduction Trading?
    What Are EPA's Proposed Conditions For Approval?
    1. Using Approved Emission Quantification Protocols
    2. Delayed Trading
    3. Claiming Ownership of Discrete Credits
    4. Notifying Metropolitan Planning Organizations
    5. Notifying the Federal Land Manager
    6. Accounting for Discrete Credits in Emission Inventory
    7. Rule May Allow Use of Credits to Avoid Permitting 
Requirements
    8. Rule Allows for Trading NOX Emission Reductions to 
Meet VOC Reduction Requirements
    What Other Clarifications Should New Hampshire Make in Their 
Program?
    How Can New Hampshire Get Full Approval for Their Program?
    What Guidance Did EPA Use to Evaluate New Hampshire's Program?
    What Is EPA's Evaluation of New Hampshire's Program?

New Hampshire's Open Market Emissions Trading Program

    How Do Sources Generate Credits?
    How Do Sources Use Credits?
    What Are the Other Requirements of New Hampshire's Program?
    How Does New Hampshire's Program Protect the Environment?
    How Is New Hampshire's Program Enforced?
    How Does New Hampshire's Program Interact With Title V Permits?
    How Does New Hampshire's Program Provide for Emissions 
Quantification Protocols?
    When Was New Hampshire's Program Proposed and Adopted?
    When Was New Hampshire's Program Submitted to EPA and What Did it 
Include?

Other Significant Items Related to New Hampshire's Program

    How Does New Hampshire's Program Avoid Adverse Local Impacts of 
Hazardous Air Pollutant Emissions?
    How Does EPA's Proposed Action Affect Earlier Credits?
    How Will New Hampshire Audit the Program?
    What is the Basis for Today's Proposal?
    How Will New Hampshire Address Future EPA Trading Guidance?
    What is the Status of the 1994 Economic Incentive Program?

Conclusion

Administrative Requirements

EPA's Proposed Action

What Action Is EPA Proposing Today?

    EPA is proposing a conditional approval of New Hampshire's Env-A 
3100. On January 9, 1997, the New Hampshire Air Resources Division 
(ARD) submitted Env-A 3100 to EPA for approval into the New Hampshire 
SIP. Additional documentation was submitted to EPA by DES on February 
24, 1998. This revision establishes regulations for an emissions 
trading program Env-A 3100, Discrete Emissions Reductions Trading 
Program (DER).

Why Is EPA Proposing This Action?

    EPA is proposing this action to:
     Give the public the opportunity to submit written comments 
on EPA's proposed action, as discussed in the DATES and ADDRESSES 
sections,
     Fulfill New Hampshire's and EPA's requirements under the 
Clean Air Act (the Act),
     Make New Hampshire's DER Program federally-enforceable.

What Is Emissions Trading?

    Air emission trading is a program where one source, for example a 
power plant, reduces its emissions below the level it is required to 
meet. This source then sells or trades these reductions as credits to 
another source which continues to release emissions above its required 
levels. In return for this flexibility, the second source must purchase 
additional credits beyond those needed to comply, therefore reducing 
overall emissions. Emissions trading uses market forces to reduce the 
overall cost of compliance for sources, while maintaining emission 
reductions and environmental benefits.

What Is Discrete Emissions Reduction Trading?

    New Hampshire's Discrete Emissions Reduction Trading Program (DER 
Program) is similar to an Open Market Emission Trading Program as 
described in EPA's model Open Market Trading Rule (OMTR) which was 
proposed on August 25, 1995 (60 FR 44290). In a Discrete Emissions 
Reduction trading program, a source generates short-term emission 
reduction credits, called discrete emission reductions (DERs) by 
reducing its emissions. The source can then use these discrete credits 
at a later time, or trade them to another source to use at a later 
time. The trading program relies on many sources continuing to generate 
new discrete credits to balance with other sources using previously 
generated discrete credits.
    For example, a power plant adds on additional controls that reduce 
oxides of nitrogen ( NOX) emissions beyond Clean Air Act 
requirements. This emission reduction could generate discrete credits. 
The power plant trades these discrete credits to an industrial 
manufacturer that operates boilers to generate process steam. In the 
future, the manufacturer can use the discrete credits to meet its 
NOX control requirements. While the manufacturer is using 
the discrete credits, the power plant and other sources are also 
reducing emissions and generating discrete credits. But the 
manufacturer must also purchase an additional amount, 10 percent, of 
discrete credits above the number of credits they would otherwise need 
to comply. The manufacturer, or any other source, will never use this 
additional amount for compliance. This is known as a retirement of 
credit to benefit the environment. The total effect is to reduce 
emissions.

What Are EPA's Proposed Conditions for Approval?

    EPA is proposing the following conditions that would need to be met 
before EPA can approve New Hampshire's DER Trading Program. These areas 
of New Hampshire's DER Program do not fully satisfy EPA's guidance. A 
Technical Support Document (TSD), prepared in support of this proposed 
action, contains a full description of EPA's conditions for approval. A 
copy of the TSD is available upon request from the EPA Regional Office 
listed in the ADDRESSES section.

1. Using Approved Emission Quantification Protocols

    With regard to New Hampshire, the credit quantification protocol 
provisions of Env-A 3100 mirror EPA's August 1995 proposed model rule 
language concerning protocols. However, since the proposal there have 
been some changes made to EPA's guidance regarding emission 
quantification protocols in trading programs. See EPA's proposal to 
grant conditional approval of New Jersey's open market trading program, 
66 FR 1796. One of the recent changes addresses the procedures for 
adopting alternative protocols in existing guidance. The notice for New 
Jersey's program states that EPA approval is required prior to allowing 
a source to deviate from an established EPA emission quantification 
protocol. ENV-A 3107.02(b) states that EPA approval is not needed in 
advance when a source wants to deviate from

[[Page 9280]]

established protocols in calculating emission credits. In order to 
receive full approval, New Hampshire must require that deviations to 
existing protocols first be approved by EPA prior to their use.

2. Delayed Trading

    EPA guidance requires emission trading programs to require sources 
to purchase credits prior to the source having to use those credits to 
comply with their emission limits. ENV-A 3104.11 allows a source, when 
credits are unavailable, to delay the purchase of credits after the 
period the source needed them to comply with emission limits resulting 
from New Hampshire's Reasonable Available Control Technology 
requirements. If a source is dependent on using emission credits to 
comply with RACT requirements, it is the source's responsibility to 
ensure that credits will be available when it makes it's choice not to 
add emission controls to comply with the RACT requirements. Therefore, 
for full approval New Hampshire must require source's to have 
sufficient emission credits prior to the intended use period.

3. Claiming Ownership of Discrete Credits

    Env-A 3100 states that a source is eligible to generate discrete 
credits. However, New Hampshire's DER Program is unclear in a situation 
when different parties try to claim the same emission reduction from a 
source as a credit. This issue is significant because the rights to 
credits generated by a particular credit generation strategy will be 
unclear in some cases. For instance, a manufacturer of a device or fuel 
additive that reduces automobile emissions might attempt to register 
credits based on the sale of the device or fuel additive within New 
Hampshire. However, an owner of a vehicle fleet might also attempt to 
register credits based on his or her installation of those same devices 
or use of fuel within the fleet. Registration of both sets of credits 
would double count the emission reductions, leading to the generation 
of excess credits.
    For full approval, New Hampshire must address the issue of 
ownership claims in its regulation and make provisions for reporting 
ownership claims in the Notice and Certification of Generation.

4. Notifying Metropolitan Planning Organizations

    To avoid double-counting the emission reductions generated by 
mobile sources in trading programs, the state must ensure coordination 
between the emission trading program and the conformity analyses in the 
area in which the trading program takes place. Metropolitan Planning 
Organizations should not use any reductions they receive notice about, 
for transportation conformity. Similarly, the trading program should 
not allow use of reductions that the Metropolitan Planning 
Organizations rely on in a transportation conformity determination. New 
Hampshire should require a generator of mobile-source emission 
reductions to notify the Metropolitan Planning Organizations in the 
area, and the State Department of Transportation of the generator's 
intention to generate emission reductions. The generator must provide 
enough information to the Metropolitan Planning Organizations about the 
likely emission reductions from the activity to allow the Metropolitan 
Planning Organizations to adjust its regional conformity analyses 
appropriately. Once notified, the Metropolitan Planning Organizations 
may not use these emission reductions to satisfy the requirement for 
transportation conformity.

5. Notifying the Federal Land Manager

    EPA has a policy of providing special protection for Class I areas 
(pristine environments such as international parks, large national 
parks and wilderness areas), as required under sections 160 through 169 
of the Act. New Hampshire has two Class I areas--the Great Gulf 
Wilderness Area and Presidential Range-Dry River Wilderness Area. This 
policy includes keeping Federal Land Managers informed of activities 
that could affect air quality in Class I areas. In accordance with this 
policy, New Hampshire must revise Env-A 3100, or submit procedures as 
part of the SIP, which requires New Hampshire to send a notification to 
the relevant Federal Land Manager at least 30 days prior to any 
discrete credit use activity occurs approximately within 100 kilometers 
of a Class I area.

6. Accounting for Discrete Credits in Emission Inventory

    The Act requires states to have an emissions inventory that 
specifically accounts for actual emissions of all major stationary 
sources and minor/area source categories. EPA's General Preamble 
guidance to the Act also requires the inventory to consider credits 
available for use as if they are in the air for all attainment 
demonstrations. Therefore all attainment modeling demonstrations must 
include all unused credits, that sources can eventually use, as actual 
emissions. While this can inflate an area's actual emissions inventory 
above the level of what will probably occur, it does not inflate 
emissions above what could potentially occur. For emission trading 
purposes, EPA has and continues to require that attainment, reasonable 
further progress and rate-of-progress demonstrations use a worst-case 
emissions scenario. This is to discourage the accumulation of large 
banks of credits that could potentially ruin any attainment plan or 
demonstration if the credits were all used at the same time. For full 
approval of Env-A 3100, New Hampshire must submit to EPA additional 
information on how the emission inventories account for unused credits 
under New Hampshire's DER Program.

7. Rule May Allow Use of Credits To Avoid Permitting Requirements

    Env-A 3104.10 contains a list of situations where DERs cannot be 
used. Env-A.3104.10(b) correctly states that DERs cannot be used to 
avoid the applicability of NSR requirements. This is consistent with 
EPA's policy that emission credits cannot be used to avoid the 
applicability of a Clean Air Act Requirement. Credits can only be used 
to comply with requirements. However, New Hampshire's rule does not 
prohibit the use of DERs to avoid a source's applicability to New 
Hampshire's title V operating permit program (state regulation Env-A 
609). For full approval, New Hampshire must add to Env-A 3104.10 a 
prohibition on using DERs to avoid the title V operating permit 
program.

8. Rule Allows for Trading NOX Emission Reductions To Meet 
VOC Reduction Requirements

    Env-A 3104.10(f) allows for NOX reductions to be used to 
meet VOC reduction requirements using a NOX to VOC ratio of 
1:1. EPA recognizes that inter-precursor trading can be done under very 
limited circumstances. First, the pollutants being traded must impact 
the environment in the same way. In New Hampshire's rule, inter-
precursor trading is limited to trading NOX emission 
decreases for VOC emission increases. Science and the Clean Air Act 
(CAA) recognize that both NOX and VOC emissions combine in 
the atmosphere to create ozone and that in some areas reducing one of 
these pollutants is more important. In fact, CAA Sec. 182(c)2(C) 
provides for states with ozone problems to substitute NOX 
reductions for VOC reductions in their Attainment and Reasonable 
Further Progress Plans. Second, EPA believes that any proposed inter-
precursor

[[Page 9281]]

emission trade should be analyzed for the extent of impact from each 
pollutant involved in the trade. For example, it would not make sense 
to allow a trade of a decrease of 1 ton of pollutant A for an increase 
of one ton of pollutant B if pollutant B has a greater environmental 
impact than pollutant A. New Hampshire's rule allows for a one ton 
decrease in NOX to be traded for a one ton increase of VOC. 
Both VOC and NOX impact the concentration of ozone.
    Based on this policy, in 1997, EPA told New Hampshire that in order 
for EPA to accept New Hampshire's trading program, an analysis would 
have to be performed to demonstrate that NOX emissions 
impact ozone formation more than or the same as VOC emissions. On 
February 24, 1998, New Hampshire submitted to EPA an analysis of 
trading NOX for VOC emissions. The analysis is based on a 
series of urban airshed modeling runs which demonstrate that 
NOX emissions have a greater effect than VOC reductions on 
reducing ground level ozone in New Hampshire. Based on this supporting 
documentation, EPA finds that a 1:1 ratio of NOX for VOC is 
supportable in New Hampshire. This means that a one ton decrease in 
NOX emissions can be used for a one ton increase of VOC 
emissions.
    Env-A 3104.10(f), however, also allows the state to increase the 
ratio of NOX to VOC from 1:1 to something greater, based on 
another analysis. The state rule requires any additional analysis to 
follow some general criteria. The problem with this provision is that 
inter-precursor emission trades using a ratio different from 1:1 could 
occur without the opportunity for EPA or public review. It is critical 
that the public and EPA are given the opportunity to review any 
analysis used to support inter-precursor emission trading.
    Therefore, for full approval, New Hampshire must revise Env-A 
3104.10(f) to remove the ability for the state to allow for inter-
precursor trading at a ratio greater than a 1:1 ratio of NOX 
for VOC emissions. In the future, if New Hampshire demonstrates that a 
different ratio is more appropriate, New Hampshire should revise Env-A 
3100 to reflect the new analysis and submit the rule change to EPA for 
approval as a revision to the New Hampshire SIP.

What Other Clarifications Should New Hampshire Make in Their 
Program?

    In addition to the issues which EPA is conditionally approving Env-
A 3100, there is one area of the rule that New Hampshire should 
clarify. New Hampshire should clarify in Env-A 3110 that it is a 
violation for each and every day within an averaging period if a source 
does not meet the requirements of the trading rule (e.g., have 
sufficient discrete emission reductions, keep records, etc) for that 
averaging period. That is, a source will have 30 days of violations if 
a monthly averaging limit is not met and 365 days of violations if an 
annual limit is not met. While EPA understands that this is what New 
Hampshire meant in Env-A 3110, this provision is not an approval issue, 
and clarification would make the DER program more understandable.

How Can New Hampshire Get Full Approval for Their Program?

    EPA is proposing conditional approval of New Hampshire's DER 
Program, provided New Hampshire commits to correct the deficiencies 
discussed in the ``What are EPA's Proposed Conditions for Approval?'' 
section, in writing, on or before March 9, 2001. New Hampshire must 
then correct the deficiencies and submit them to EPA within one year of 
EPA's final action on the DER Trading Program SIP revision.
    If New Hampshire submits a commitment to comply with EPA's 
conditions, EPA will publish a final conditional approval of New 
Hampshire's DER Program. EPA will consider all information submitted 
prior to any final rulemaking action as a supplement or amendment to 
the January 9, 1997 and February 24, 1998 submittals. If New Hampshire 
does not make the required commitment to EPA, EPA is proposing to 
disapprove the DER Program.

What Guidance Did EPA Use To Evaluate New Hampshire's Program?

    EPA's basis for evaluating New Hampshire's DER Program is whether 
it meets the SIP requirements described in section 110 of the Act. In 
1994, EPA issued Economic Incentive Program (EIP) rules and guidance 
(40 CFR part 51, subpart U), which outlined requirements for 
establishing EIPs that States are required to adopt in some cases to 
meet the ozone and carbon monoxide standards in designated 
nonattainment areas. There is no requirement for New Hampshire to 
submit an EIP, so its DER Program need not necessarily follow the EIP 
rule. However, since subpart U also contains guidance on the 
development of voluntary EIPs, New Hampshire did follow certain aspects 
of the EIP guidance in the development and submittal of its DER 
Program. Lastly, on September 15, 1999 EPA proposed changes to the 1994 
EIP.
    EPA also published on August 3, 1995, a proposed policy on open 
market trading programs and on August 25, 1995, a model open market 
trading rule. EPA's proposed policy describes the elements of an open 
market trading program that EPA considers to be desirable and necessary 
for a program to be approvable as a SIP revision. The proposed policy 
also allowed States to adopt rules that varied from the proposed model 
rule. In a March 10, 1998-letter from Richard D. Wilson, Acting 
Assistant Administrator for Air and Radiation to Congressman Thomas J. 
Bliley, EPA clarified its policy on open market trading. The letter 
said that EPA will work with states to develop open market programs 
tailored to their individual circumstances and use the August 1995 
proposal as guidance.
    Also available for reference is EPA's September 18, 1997 Proposed 
Action on the State of Michigan's Trading Rules and EPA's January 9, 
2001 Proposed Action on the State of New Jersey's Trading Rules.
    For further discussion of how these documents provide the basis of 
today's proposed action, see the section ``What is the Basis for 
Today's Proposal?'

What Is EPA's Evaluation of New Hampshire's Program?

    EPA has determined New Hampshire's new Env-A 3100 regulation for 
New Hampshire's DER Program is consistent with EPA's guidance, except 
for the deficiencies discussed in the ``What are EPA's Proposed 
Conditions for Approval?'' section. New Hampshire's DER Program is 
based upon and is consistent with EPA's proposed Open Market Policy and 
Model Rule of 1995, EPA's proposal of 1997 on Michigan's Program, EPA's 
proposal of 2001 on New Jersey's Program, and EPA's proposal of 1999 to 
revise the EIP.
    New Hampshire's Env-A 3100 contains provisions for definitions, 
generation, transfer, verification and use of discrete credits, the 
registry, geographic restrictions, recordkeeping, public availability, 
demonstrating compliance and penalties.
    Given the documentation in the SIP submittal and the provisions of 
New Hampshire's DER Program, EPA believes New Hampshire has 
demonstrated the State's other regulations will achieve at least the 
same quantity of NOX and volatile organic compound (VOC) 
emission reductions, with or without the DER Program. Furthermore, 
given the extra reductions inherent in New Hampshire's reasonably 
available control technology (RACT) program, the

[[Page 9282]]

State will continue to meet the reasonable further progress and SIP 
attainment requirements. Based upon these analyses and documentation, 
and a requirement to conduct a periodic program audit, EPA believes 
that New Hampshire's DER Program will not interfere with any applicable 
requirement concerning attainment and reasonable further progress, or 
any other applicable requirement of the Act.
    EPA has also determined, with the exceptions discussed in the 
``What are EPA's Proposed Conditions for Approval?'' section, the 
emission quantification protocol criteria, monetary penalty structure, 
geographic scope of trading, early reduction credit, and program audit 
provisions of New Hampshire's DER Program are consistent with EPA's 
guidance.
    A TSD, prepared in support of this proposed action, contains the 
full description of New Hampshire's submittal and EPA's evaluation. A 
copy of the TSD is available upon request from the EPA Regional Office 
listed in the ADDRESSES section.

New Hampshire's Open Market Emissions Trading Program

How Do Sources Generate Credits?

    Sources participating in the DER Program generate discrete credits 
by reducing emissions below a baseline over a discrete time period. The 
generation baseline is established by existing requirements, and is 
determined by the lower of allowable emissions or actual past 
emissions. Sources which generate discrete credits must submit a 
``Notice'' to the state, which includes information about the source 
generating the reductions, the methods of generating the reductions, 
the amount of reductions, and the methods used to measure the 
reductions. An official representative of the source must certify the 
following:
     Information in the Notice is true, accurate and complete,
     Emission reductions generated are real and surplus,
     The emission quantification protocol used to calculate the 
emissions reductions, and
     A prohibited generation strategy is not the basis for the 
emission reduction.

How Do Sources Use Credits?

    New Hampshire's DER Program requires discrete credits to be 
assigned a unique serial number by the state before they are used. The 
source using the credits must hold the credits prior to the compliance 
period for which the credits are going to be used. The user must submit 
a notice of intent to use the credits at least 30 days prior to the use 
period. Sources that wish to trade or use discrete credits must provide 
notices to the state with information about the source's intent to use 
discrete credits, as well as the source's use of the discrete credits. 
The notices must also include:
     Number of discrete credits to be used,
     The requirements the source will comply with through the 
use of discrete credits,
     Copy of the generation Notice for the discrete credits 
used,
     Statements that the discrete credits were not previously 
used or retired, and
     Certifications similar to the other Notices.
    A generating source can use discrete credits at a later time, or 
trade them to another source to use at a later time. The source using 
discrete credits must purchase an additional 10 percent of discrete 
credits above the number of credits they would otherwise need to 
comply. This additional amount is not used for compliance, but retired 
to benefit the environment.

What Are the Other Requirements of New Hampshire's Program?

    New Hampshire's DER Program also contains requirements on the 
geographic scope of trading, recordkeeping, public availability of 
information, and quantification protocols.
    Sources can trade VOC or NOX discrete credits. Discrete 
credits must be designated as either ozone season (May 1 through 
September 30) or non-ozone season credits. Discrete credits generated 
outside of the ozone season cannot be used during the ozone season.

How Does New Hampshire's Program Protect the Environment?

    New Hampshire submitted these rules as a SIP revision to allow 
sources which emit ozone precursors--NOX and VOCs--
flexibility in complying with requirements already in the SIP. The 
program provides emissions sources with a financial incentive to reduce 
emissions below levels required by applicable Federal and State 
requirements and below the source's actual emissions of the recent 
past. Sources that make these extra reductions going beyond 
requirements generate discrete credits that they can use later or sell 
to other sources. Discrete credits may be used by sources to comply 
with emissions limits. The program is not a means of limiting 
emissions; instead, trading is meant to provide an opportunity to 
comply with existing emission limits in a more cost effective manner.
    However, the DER Program protects the environment in several ways:
     New Hampshire has demonstrated that in each ozone season 
the number of discrete credits generated will be equal to or greater 
than the number used,
     The calculation of the number of discrete credits needed 
for use is conservative since the source must retire an additional 10 
percent of credits, and
     The DER Program specifically requires credits to be 
surplus to reductions already relied on in the SIP.

How Is New Hampshire's Program Enforced?

    New Hampshire's DER Program divides compliance responsibilities 
between the generator and user of discrete credit. In general, the 
generator and user are responsible for actions within his or her 
control, and a generator or user is in violation of Env-A 3100 if they 
do not fulfill their respective responsibilities.
    The generator is responsible for ensuring that it has created 
discrete credits according to the DER Program and that the discrete 
credits are real, surplus, and properly quantified.
    The user is responsible for ensuring that its use of discrete 
credits complies with the provisions of the DER Program, including the 
prohibitions on use (Env-A 3104.10). A user is also responsible for 
ensuring a discrete credit is not used unless the credit is verified, 
the credit was not previously used or retired, and the discrete credit 
is valid. In any enforcement action, the generator and user bear the 
burden of proof on each of their respective responsibilities

How Does New Hampshire's Program Interact With Title V Permits?

    The purpose of the Title V permitting program, codified in 40 CFR 
Part 70, is to ensure that a single document identifies all applicable 
requirements under the Act for sources that are ``major sources'' or 
are otherwise required to obtain a federally enforceable operating 
permit. Part 70 contains provisions designed to streamline the process 
of modifying operating permits for facilities that wish to participate 
in an emissions trading program like the New Hampshire's DER program. 
See, e.g., 40 C.F.R. Secs. 70.6(a)(8), 70.7(e)(2)(B).

How Does New Hampshire's Program Provide for Emissions Quantification 
Protocols?

    A key element in the design and implementation of trading programs, 
including open market trading programs, is methods for quantifying

[[Page 9283]]

amounts of emissions. Precisely determining these amounts would be 
important to determine the amount of emissions by which a source may be 
exceeding its SIP or permit limits, and therefore the amount of 
emissions reductions the source would need to acquire in an emissions 
trade in order to meet those limits; as well as the amount of emissions 
a source may generate to sell. These methods are often referred to as 
emissions quantification protocols, or, simply, protocols.
    In its notice regarding the New Jersey Trading Program, EPA 
identified as an issue the question of whether protocols maybe included 
in a Title V permit in lieu of the SIP itself. For a more complete 
discussion of this, see the New Jersey Notice, 66 FR 1796. However, EPA 
proposes to approve New Hampshire's DER Program on the basis that at 
the time New Hampshire adopted and submitted it to EPA, New Hampshire 
relied on the guidance provided at that time. As a result, EPA proposes 
to approve the provisions of the DER Program that the SIP must include 
criteria for protocol development but not the protocols themselves.

When Was New Hampshire's Program Adopted?

    New Hampshire adopted the DER program on January 13, 1997.

When Was New Hampshire's Program Submitted to EPA and What Did it 
Include?

    EPA received New Hampshire's submittal of its DER Program SIP 
revision to EPA on January 28, 1997. The rule was deemed 
administratively and technically complete by operation of law on July 
28, 1997. Additional information was submitted by New Hampshire on 
February 24, 1998.
    New Hampshire's DER Program SIP revision included the following 
elements:
     Env-A 3100 and
     Modeling analysis to support inter-precursor emission 
trading, specifically, NOX emission decreases to meet VOC 
emission reduction requirements.

Other Significant Items Related to New Hampshire's Program

How Does New Hampshire's Program Avoid Adverse Local Impacts of 
Hazardous Air Pollutant Emissions?

    In VOC trading programs, it is important to recognize that many 
VOCs are also classified as hazardous air pollutants (HAPs). EPA is 
committed to protecting the health and environment of local communities 
from any negative impacts related to VOC trading. EPA is also committed 
to providing flexibility for local decision making that can allow for 
different circumstances in different localities.
    While sources involved in VOC trading are required to meet all 
applicable current and future air toxics requirements, such as maximum 
achievable control technology (MACT), EPA believes VOC trading programs 
should build in additional safeguards for HAPs. In the September 15, 
1999, proposed revisions to the EIP guidance, EPA outlined a draft 
framework for addressing HAP-related issues in VOC trading programs. 
The draft framework says VOC trading programs must contain the 
following general safeguards:
     A program review of the trading program to evaluate the 
impacts of VOC trades involving HAPs on the health and environment of 
local communities,
     Prevention and/or mitigation measures to address any 
negative impacts,
     Public participation in program design, implementation and 
evaluation, and
     Availability of sufficient information for meaningful 
review and participation.
    EPA believes New Hampshire's DER Program is consistent with the 
proposed framework for addressing HAP-related issues in VOC trading 
programs as outlined below, even though New Hampshire adopted its DER 
Program prior to the proposed revisions to the EIP.

Periodic Program Evaluation Provisions

    Env-A 3109 requires New Hampshire to audit the DER Program and 
assess the effects of toxic emission resulting from the DER Program. 
This audit is made available to the public within one year after the 
audit begins. Evaluation can also occur on a source-by-source basis 
through the public accessibility of the Notice and Certification of 
emission credit generation and use.

Prevention and Mitigation Provisions

    New Hampshire's DER program is more restrictive than EPA's proposed 
open market trading model rule with respect to HAPs. The proposed model 
rule requires a user source to disclose the amount of HAPs emitted as a 
result of the use of discrete credits and certify compliance with the 
state's ambient air levels (AAL). AAL's are defined in New Hampshire's 
Regulated Toxic Air Pollutants, Env-A 1400. This state regulation 
requires existing, new, or modified sources to demonstrate that 
permitted emissions from the source do not violate the ambient air 
limits established by Env-A 1400. The DER Program requires each source 
to certify that any emission trade will not effect the source's 
compliance with the AALs. The public is further protected because New 
Hampshire uses risk analysis as the basis for developing AALs.

Public Participation Provisions

    In developing the DER program, New Hampshire created a work group 
called Emission Reduction Trading Advisory Committee, which met on a 
monthly basis during program development. New Hampshire also held a 
public hearing on October 10, 1996 to discuss the rule before 
finalizing the rule in 1997.

Information Availability Provisions

    New Hampshire's program requires each generator and user of 
emission credits to analyze the impact on air toxic emissions resulting 
from VOC emission trading. In cases where a source is required to have 
an operating permit, New Hampshire requires the emission trade 
information to be attached to the permit.
    As of this writing, EPA believes New Hampshire's DER Program is 
consistent with EPA's current thinking on addressing HAP-related issues 
in VOC trading programs. As EPA develops additional guidance, EPA will 
provide this guidance to New Hampshire as the State continues to 
discuss these and other issues in the program audit and, where 
appropriate, require New Hampshire to revise the DER Program.

How Does EPA's Proposed Action Affect Earlier Credits?

    Upon a final approval of New Hampshire's DER SIP revision, Env-A 
3100 will be federally-enforceable. Since Env-A 3100 is a SIP 
flexibility mechanism, compliance with its terms is essential in order 
to avoid complying with other applicable requirements of the SIP. Also, 
the generator may have other responsibilities related to proper 
quantification of the discrete credits. EPA suggests that the 
generators and any users of the discrete credits review these specific 
discrete credit generation strategies before Env-A 3100 becomes subject 
to EPA enforcement.

How Will New Hampshire Audit the Program?

    Env-A 3109 requires New Hampshire to conduct a program audit every 
three years, beginning no later than 1999. New Hampshire has submitted 
a program audit that summarizes emission trades through 1998.

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What is the Basis for Today's Proposal?

    As discussed in the section ``What Guidance Did EPA Use to Evaluate 
New Hampshire's Program?'' the 1994 EIP includes requirements for 
mandatory EIPs and guidance for voluntary EIPs. 40 CFR part 51, subpart 
U; 59 FR 16690. EPA proposed revised guidance to accommodate open 
market trading programs, by notices dated August 3, 1995, 60 FR 39668, 
and August 25, 1995, 60 FR 44290. EPA received comments on both of 
these proposals. EPA proposed action on a Michigan emission trading 
program by notice dated September 18, 1997, 62 FR 48972. EPA proposed 
action on a New Jersey emission trading program by notice dated January 
9, 2001, 66 FR 1796. EPA also proposed revisions to the EIP on 
September 15, 1999, 64 FR 50086.
    In addition, in a letter to Congressman Thomas J. Bliley, dated 
March 10, 1998, Richard D. Wilson, EPA's Acting Assistant Administrator 
for Air and Radiation, stated that EPA would ``work with the States to 
develop open market programs tailored to their individual 
circumstances. In this process EPA and the States are using the August 
1995 [open market trading] proposal as guidance and taking into account 
both State circumstances and the many useful comments we received in 
response to the proposal.''
    New Hampshire adopted its SIP on January 13, 1997 and submitted it 
to EPA on January 21, 1997. In response to requests by EPA, New 
Hampshire supplemented the submittal with modeling analysis to support 
inter-precursor trading on February 24, 1998.
    By notice dated September 15, 1999, EPA proposed revised guidance 
for economic incentive programs. 64 FR 50086. That proposal would 
revise in certain respects the Agency guidance provided in the 1994 
EIP, the 1995 open market trading program proposals and the guidance 
provided in the 1997 EPA proposal to approve the Michigan program and 
the 2001 EPA proposal to approve the New Jersey program. The public 
comment period on the September 15, 1999 proposal ended December 10, 
1999. EPA is currently considering the public's comments in developing 
a final revision to the EIP guidance.
    In developing its DER SIP revision, New Hampshire relied on EPA's 
statements that New Hampshire could base its SIP revision on the 1995 
open market trading proposal. New Hampshire's submittal of the SIP 
revision also accorded with EPA's representations to Congressman Bliley 
that States could use the 1995 guidance to assist them in developing 
their open market trading programs. EPA mostly evaluated the SIP 
revision against the guidance available at the time of the program's 
development and submittal. In light of this reliance, EPA is today 
proposing to approve the New Hampshire's SIP revision, except for the 
deficiencies discussed in the ``What are EPA's Proposed Conditions for 
Approval?'' section. In doing so, EPA is proposing to apply, on an 
interim basis, both the 1995 open market trading program proposals, the 
1999 proposed revisions to the EIP, and the guidance contained in the 
1997 EPA proposal to approve the Michigan program and the 2001 EPA 
proposal to approve the New Jersey program, recognizing that some 
aspects of these proposals may be further revised by the policies of 
the 1999 EIP proposal, if and when it is finalized.

How Will New Hampshire Address Future EPA Trading Guidance?

    EPA believes the basis for today's proposed action is a reasonable 
approach in the interest of supporting trading programs. However, due 
to EPA's lack of experience with open market trading programs and the 
many issues that such programs raise, EPA will use any future final 
revised EIP guidance as a basis for re-evaluating New Hampshire's DER 
Program, in coordination with the State, to ensure that its operation 
is consistent with the Clean Air Act and federal regulation. EPA will 
notify the State of any deficiencies in the DER Program, within 18 
months after EPA issues a final revised EIP guidance. As with any SIP, 
EPA may require New Hampshire to revise the DER Program where necessary 
and re-submit the DER Program according to the requirements and 
deadlines under section 110(k)(5) of the Act. According to section 
110(k)(5), New Hampshire may have up to 18 months to revise and re-
submit the DER Program after EPA notifies the State of any 
deficiencies.

What is the Status of the 1994 Economic Incentive Program?

    The 1994 EIP established, through notice-and-comment action, rules 
for mandatory EIPs and guidance for voluntary EIPs. Any final action 
that EPA may take to approve the New Hampshire DER Program, to the 
extent that action differs from the guidance portion of the 1994 EIP, 
would revise that portion of the 1994 EIP action only for purposes of 
today's action on the New Hampshire SIP submittal. EPA's proposed 1999 
EIP guidance, once completed through notice-and-comment action, may 
further revise the guidance portion of the 1994 EIP action.

Conclusion

    EPA is proposing to approve conditionally the New Hampshire SIP 
revision for Env-A 3100. This SIP revision implements New Hampshire's 
DER Program. EPA is proposing conditional approval of New Hampshire's 
DER Program, provided New Hampshire commits to correct the deficiencies 
discussed in the ``What are EPA's Proposed Conditions for Approval?'' 
section, in writing, on or before March 9, 2001. New Hampshire must 
then correct the deficiencies and submit them to EPA within one year of 
EPA's final action on the DER SIP revision.
    If New Hampshire submits a commitment to this effect, EPA will 
publish a final conditional approval of New Hampshire's DER Program. 
EPA will consider all information submitted prior to any final 
rulemaking action as a supplement or amendment to the January 21, 1997 
submittal. If New Hampshire does not make the required commitment to 
EPA, EPA is proposing in the alternative to disapprove the DER Program.
    EPA is requesting public comment on the issues discussed in today's 
action. EPA will consider all public comments before taking final 
action. Interested parties may participate in the Federal rulemaking 
procedure by submitting written comments to the EPA Regional office 
listed in the ADDRESSES section.

Administrative Requirements

    Under Executive Order 12866 (58 FR 51735, October 4, 1993), this 
action is not a ``significant regulatory action'' and therefore is not 
subject to review by the Office of Management and Budget. This action 
merely approves state law as meeting Federal requirements and imposes 
no additional requirements beyond those imposed by state law. 
Accordingly, the Administrator certifies that this rule will not have a 
significant economic impact on a substantial number of small entities 
under the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). Because 
this rule approves pre-existing requirements under state law and does 
not impose any additional enforceable duty beyond that required by 
state law, it does not contain any unfunded mandate or significantly or 
uniquely affect small governments, as described in the Unfunded 
Mandates Reform Act of 1995 (Public Law 104-4). For the same reason, 
this rule also does not significantly or uniquely affect the 
communities of tribal governments, as specified by Executive Order 
13084 (63

[[Page 9285]]

FR 27655, May 10, 1998). 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 (64 FR 43255, August 10, 1999), because it 
merely approves 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. This rule also is 
not subject to Executive Order 13045 (62 FR 19885, April 23, 1997), 
because it is not economically significant.
    In reviewing SIP submissions, EPA's role is to approve state 
choices, provided that they meet the criteria of the Clean Air Act. In 
this context, in the absence of a prior existing requirement for the 
State to use voluntary consensus standards (VCS), EPA has no authority 
to disapprove a SIP submission for failure to use VCS. It would thus be 
inconsistent with applicable law for EPA, when it reviews a SIP 
submission, to use VCS in place of a SIP submission that otherwise 
satisfies the provisions of the Clean Air Act. Thus, the requirements 
of section 12(d) of the National Technology Transfer and Advancement 
Act of 1995 (15 U.S.C. 272 note) do not apply. As required by section 3 
of Executive Order 12988 (61 FR 4729, February 7, 1996), in issuing 
this rule, EPA has taken the necessary steps to eliminate drafting 
errors and ambiguity, minimize potential litigation, and provide a 
clear legal standard for affected conduct. EPA has complied with 
Executive Order 12630 (53 FR 8859, March 15, 1988) by examining the 
takings implications of the rule in accordance with the ``Attorney 
General's Supplemental Guidelines for the Evaluation of Risk and 
Avoidance of Unanticipated Takings'' issued under the executive order. 
This rule does not impose an information collection burden under the 
provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et 
seq.).

List of Subjects in 40 CFR Part 52

    Environmental protection, Air pollution control, Hydrocarbons, 
Intergovernmental relations, Nitrogen dioxide, Ozone, Reporting and 
recordkeeping requirements, Volatile organic compounds.

    Authority: 42 U.S.C. 7401 et seq.

    Dated: January 19, 2001.
Mindy S. Lubber,
Regional Administrator, EPA-New England.
[FR Doc. 01-3160 Filed 2-6-01; 8:45 am]
BILLING CODE 6560-50-P