[Federal Register Volume 66, Number 141 (Monday, July 23, 2001)]
[Proposed Rules]
[Pages 38231-38247]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-18318]


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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 52

[TX-133-1-7499; FRL-7016-9]


Approval and Promulgation of Implementation Plans; Texas; 
Emissions Banking and Trading Revisions for the Mass Emissions Cap and 
Trade Program for the Houston/Galveston Ozone Nonattainment Area

AGENCY: Environmental Protection Agency (EPA).

ACTION: Proposed rule.

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SUMMARY: Through parallel processing, the EPA is proposing to approve a 
revision to the Texas State Implementation Plan (SIP). We are proposing 
approval of the NOX Mass Cap and Trade program for the 
Houston/Galveston (HGA), one-hour ozone nonattainment area. If the 
State makes significant changes between the versions being parallel 
reviewed and the final adopted versions, other than those changes 
resulting from issues discussed in this proposed rulemaking, EPA will 
issue an additional proposed rulemaking prior to taking final action. 
If there are no significant changes (other than changes resulting from 
issues discussed in this proposed rulemaking) to the parallel-processed 
versions and Texas submits the final versions by October 1, 2001, the 
EPA will proceed with final rulemaking. The MECT program will 
contribute to attainment of the 1-hour ozone National Ambient Air 
Quality Standard (NAAQS) in the HGA ozone nonattainment area.

DATES: Written comments must be received on or before August 22, 2001.

ADDRESSES: Written comments should be addressed to Mr. Thomas H. Diggs,

[[Page 38232]]

Chief, Air Planning Section (6PD-L), at the EPA Region 6 Office listed 
below. Copies of documents relevant to this action including the 
Technical Support Document (TSD) are available for public inspection 
during normal business hours at the following locations. Anyone wanting 
to examine these documents should make an appointment with the 
appropriate office at least two working days in advance.
    Environmental Protection Agency, Region 6, Air Planning Section 
(6PD-L), 1445 Ross Avenue, Dallas, Texas 75202-2733. Texas Natural 
Resource Conservation Commission, Office of Air Quality, 12124 Park 35 
Circle, Austin, Texas 78753.

FOR FURTHER INFORMATION CONTACT: Merrit Nicewander, Air Planning 
Section (6PD-L), EPA Region 6, 1445 Ross Avenue, Dallas, Texas 75202-
2733, telephone (214)665-7519.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Mass Emissions Cap and Trade Program
    A. Proposed Action
    B. MECT EIP Contents
    C. EPA's Analysis
    D. Conclusion
II. Background
    A. Date of State's SIP Submission
    B. General Requirements for an EIP
III. Administrative Requirements

    Throughout this document ``we,'' ``us,'' and ``our'' means EPA.

I. Mass Emissions Cap and Trade Program

A. Proposed Action

What Action Are We Taking?
    The EPA is proposing to approve the NOX Mass Cap and 
Trade program for the Houston/Galveston one-hour ozone nonattainment 
area. The HGA ozone nonattainment area is required to attain the one-
hour ozone standard of 0.12 parts per million (ppm) by November 15, 
2007.
    The rule adopted and submitted as this SIP revision by letter of 
the Governor dated December 22, 2000 is one element of the control 
strategy for the HGA nonattainment area to comply with the requirements 
of the Clean Air Act (CAA) and achieve attainment for ozone. The HGA 
ozone nonattainment area will need to reduce nitrogen oxides 
(NOX) to reach attainment with the one-hour standard. The 
MECT emissions banking rule was evaluated as an integral component of 
the HGA control strategy to reduce NOX emissions.

B. MECT EIP Contents

What Is the TNRCC MECT Program That Has Been Submitted for Approval as 
Part of the Texas SIP?
    The proposed SIP revision submitted by the TNRCC is the Mass 
Emission Cap & Trade Program (30 Texas Administrative Code (TAC) 
Chapter 101, Subchapter H, Division 3). The MECT regulation is found at 
sections 101.350 through 101.363. The MECT program is mandatory for 
stationary facilities that emit NOX in the HGA ozone 
nonattainment area (at sites that have a collective design capacity of 
10 tons per year or more) and which are subject to the TNRCC 
NOX rules as found at 30 TAC Chapter 117. NOX is 
a precursor gas that reacts with volatile organic compounds (VOCs) in 
the presence of sunlight to form ground-level ozone. The program sets a 
cap on NOX emissions beginning on January 1, 2002 with a 
final reduction to the cap occurring in 2007.
    Facilities are required to meet NOX allowances on an 
annual basis. Facilities may purchase, bank or sell their allowances. 
The program has a provision to allow a facility to use discrete 
emission reduction credits (DERCs) and mobile discrete emission 
reduction credits (MDERCs) in lieu of allowances if they are generated 
in the HGA area. Although EPA is today proposing to approve the MECT 
rules, EPA notes that the MECT rules were submitted along with rules 
authorizing the generation and use of DERCs and MDERCs. These rules are 
found in 30 TAC Chapter 101, Subchapter H, Division 4. The MECT rules 
authorize use of DERCs and MDERCs generated pursuant to the rules in 
Division 4 to meet the cap. EPA is not today proposing action on the 
rules in Division 4, but intends to act on them in a separate 
rulemaking at a later date. This schedule of action on the submitted 
Emissions Banking and Trading rules has been discussed with and is 
acceptable to the State.
    The MECT EIP is mandatory for facilities in that if they meet the 
above conditions they must participate in the cap. However, the MECT 
program is a discretionary EIP since it is not a requirement of the 
Clean Air Act that it be adopted by the State.
    TNRCC proposed revisions to the MECT rule on May 30, 2001. The EPA 
is proposing through parallel processing to approve the State's 
proposed revisions to the MECT rule submitted by the Governor on June 
15, 2001. The proposed rule revision contains the inclusion of emission 
quantification protocols, the inclusion of an annual compliance summary 
report to EPA and the public, and a revised schedule of emission 
reduction factors. The proposed changes strengthen certain elements of 
the MECT SIP submittal.
What Is Parallel Processing?
    Parallel processing means that EPA proposes action on a state rule 
before it becomes final under state law. Under parallel processing, EPA 
takes final action on its proposal if the final, adopted state 
submission is substantially unchanged from the submission on which the 
proposed rulemaking was based, or if significant changes in the final 
submission are anticipated and adequately described in EPA's proposed 
rulemaking or result from needed corrections determined by the State to 
be necessary through review of issues described in EPA's proposed 
rulemaking.
    We cannot finalize action on the MECT EIP program unless and until 
the Governor submits the finally adopted regulation. The State has 
begun its rulemaking process and submission of the final rule is 
anticipated in September 2001. Significant changes between the versions 
being parallel reviewed and the final adopted versions, other than 
those changes resulting from issues discussed in this proposed 
rulemaking, will result in a new EPA proposed rulemaking. If there are 
no significant changes to the parallel-processed versions and they are 
submitted by October 1, 2001, the EPA will proceed with final 
rulemaking.
Has the MECT Rule Been Revised by TNRCC Since It Was Submitted To EPA 
as a SIP Revision?
    Yes, the MECT rule was revised by TNRCC after it had been submitted 
to EPA as part of the Texas SIP on December 22, 2000. Rule Log # 2001-
015-101-AI which clarified the applicability requirements of the rule 
at Sec. 101.351 was adopted on May 23, 2001. This rule revision was 
effective on June 13, 2001. A SIP revision incorporating this 
clarification was submitted by the Governor on July 2, 2001. The TNRCC 
clarified section 101.351 to specify that the requirement to operate 
under the cap and trade program applied to all NOX emitting 
facilities in the HGA area with emission standards under Chapter 117, 
Control of Air Pollution from Nitrogen Compounds, and which are located 
at a site where their collective design capacity to emit NOX 
is ten tons or more per year. We are also proposing to approve this 
minor revision in this action.

[[Page 38233]]

What Areas of Texas Will Be Affected by the MECT Program?
    The HGA ozone nonattainment area contains Brazoria, Chambers, Fort 
Bend, Galveston, Harris, Liberty, Montgomery, and Waller counties in 
Texas.
What Is an Economic Incentive Program?
    An economic incentive program is a regulatory program that achieves 
an air quality objective by providing market-based incentives or 
information to emission sources. A uniform emission reduction 
requirement, based for instance on installation of a required emission 
control technology, does not take account of variations in processes, 
operations, and control costs across sources even of the same type, 
such as electric utilities, or petroleum refiners. By providing 
flexibility in how sources meet an emission reduction target, an EIP 
empowers sources to find the means that are most suitable and most 
cost-effective for their particular circumstances.
What Is a CAP?
    A cap is the total emission limitation for all participating 
sources in the EIP. The NOX cap will be established at 
levels demonstrated as necessary and feasible to allow HGA to attain 
the NAAQS for ozone. The cap will consist of the summation of 
individual allowances allocated to each facility in the MECT EIP. The 
cap will be enforced by the allocation, trading, and banking of 
allowances. Each facility will be required to hold allowances in its 
compliance account on March 1 of each year equal to or greater than the 
total emissions of NOX emitted during the previous control 
period.
What Sources Are Subject to the MECT Program?
    The MECT program is mandatory for stationary facilities that emit 
NOX in the HGA ozone nonattainment area and which are 
subject to the emission specifications under sections 117.106, 117.206 
and 117.475 and which are located at a site where they collectively 
have a design capacity to emit of 10 tons per year or more of 
NOX. If an individual stack is not subject to or is exempt 
from the requirements of 30 TAC Chapter 117, that stack is not subject 
to the MECT program regardless of its design NOX capacity. 
Other stacks at the same facility may be subject to the MECT program if 
they are subject to Chapter 117.
    It should be noted that section 117.203(a)(1)historically provided 
exemptions for any new units that were placed in service after November 
15, 1992, since these sources would have been subject to Best Available 
Control Technology (BACT) and /or Lowest Achievable Emission Reduction 
(LAER) new source review (NSR) requirements. These NSR requirements are 
typically more restrictive than the section 117 requirements. However, 
new section 117.203(b) revokes the exemption and the sources are 
subject to the MECT program. EPA approved 117.203(b) on September 1, 
2000.
What Is the Definition of the Term, Facility?
    The MECT regulation states that it applies to stationary 
facilities. The term, facility, however, is not defined in the rule. 
Facility is defined in at least two different places in the permitting 
regulations. TNRCC defines facility at 30 TAC 116.10(4) as ``a discrete 
or identifiable structure, device, item, equipment, or enclosure that 
constitutes or contains a stationary source, including appurtenances 
other than emission control equipment. A mine, quarry, well test, or 
road is not a facility.'' TNRCC further defines ``building, structure, 
facility, or installation'' at 30 TAC 116.12(4) as ``All of the 
pollutant-emitting activities which belong to the same industrial 
grouping, are located in one or more contiguous or adjacent properties, 
and are under the control of the same person (or persons under common 
control) except the activities of any vessel. Pollutant-emitting 
activities shall be considered as part of the same industrial grouping 
if they belong to the same ``major group'' (i.e., which have the same 
two-digit code) as described in the Standard Industrial Classification 
Manual, 1972, as amended by the 1977 supplement.'' The technical review 
and proposed approval of the MECT rule is based upon the definition of 
the term, facility, as defined in 30 TAC 116.10(4). Facility within the 
context of the MECT rule is interpreted by the State and EPA to mean 
equipment that is vented to a stack.
What Is an Allowance?
    Allowance means the authorization to emit one ton of NOX 
per year. One compliance account shall be used for multiple sources 
located at the same site and under common ownership or control. The 
commission will maintain a registry of the allowances in each 
compliance account.
What Is a Control Period?
    A control period or a compliance period is the 12-month period 
beginning January 1 and ending December 31 of each year. The initial 
control period will begin January 1, 2002.
When Will the cap Be Implemented?
    The cap will be implemented on January 1, 2002 at historical 
emission levels, with three mandatory reductions increasing over time 
until achieving the final cap by January 1, 2007. These sections also 
require all new or modified sources in HGA to obtain unused allowances 
from other sources already participating under the cap to offset any 
increased NOX emissions.
How Will the cap Be Determined?
    The MECT rules at section 101.353 describe how allowances will be 
allocated to individual facilities. Initially, for any facility 
operating prior to January 1, 1997, allowances will be based on the 
average of its actual level of activity from 1997, 1998, and 1999 
multiplied by the facility's actual emission factors from 1997, 1998, 
and 1999 (not to exceed any applicable federal or state regulation, 
rule, or permit limit).
How Will the cap Be Adjusted to the Level Relied Upon in the Attainment 
Demonstration?
    All facilities in the MECT EIP program will have periodic 
reductions in allowances until 100% of the reductions is achieved in 
2007. There are two categories of sources for which the reduction 
schedule has been developed. The first category is boilers, auxiliary 
steam boilers, and stationary gas turbines within an electric power 
generating system. The second category is all other sources. Beginning 
April 1, 2007 and for all subsequent control periods, allowances will 
be reduced by 100% of the required reductions.
    TNRCC proposed revisions to the MECT rule on May 30, 2001 which is 
being parallel processed by this document. The proposed rule revision 
contains a potential revised schedule of emission reduction factors 
depending upon the results of a TNRCC study that is to be completed by 
2002 and requires EPA approval. The EPA is proposing approval of the 
revisions to the MECT rule submitted to us on June 15, 2001 which we 
are parallel processing but not that portion of the proposed rule 
containing a potential modification to the reduction schedule. 
Specifically, we are not taking action on section 101.353(a)(3)(B) and 
(D) in this document.
Are There Allowances for New Sources in the cap?
    No, any new or modified facility will not be allocated any 
allowances if that

[[Page 38234]]

facility has submitted a NSR permit application which has determined to 
be administratively complete on or after January 2, 2001.
How Will New Sources Participate in the MECT cap?
    The new or modified facilities will be required to obtain 
allowances from other facilities already participating in the cap and 
trade program or by obtaining DERCs or MDERCs.
Can Allowances Be Used in Other Programs?
    Allowances are valid only for MECT program purposes. An allowance 
does not constitute a security or a property right. Allowances cannot 
be used to exceed any NSR permit limitation or any other applicable 
rule or law. Allowances can be used for the 1:1 portion of NSR 
offsetting under section 101.352(e). Allowances can not be used for 
netting under the NSR program.
What Happens to a Facility That Has Less NOX Emissions Than 
Allowances for a Compliance Period?
    Allowances may generally be banked for future use or traded during 
the control period for which they are allocated or the following 
control period.
What Happens to a Facility That Has More NOX Emissions Than 
Allowances for a Compliance Period?
    If a facility emits more NOX than was held in the 
compliance account on March 1 following the control period, allowances 
for the next control period will be reduced by the amount equal to the 
emissions exceeding the compliance account plus an additional 10%. This 
does not preclude additional enforcement action by the TNRCC and/or 
EPA.
Can Unused Allowances Be Banked for Future Use?
    Yes, allowances may generally be banked for future use or traded 
during the control period for which they are allocated or the following 
control period. Any allowance not used for compliance may be banked or 
traded for use in the following control period. Allowances that are not 
expired or used can be traded at any time after they have been 
allocated.
How Are Trades of Allowances Conducted?
    Only authorized account representatives may trade allowances. Trade 
requests are to be made through the submittal of a completed ECT-2 
Form, Application for Transfer of Allowances. The completed form, 
including the price paid per allowance, will be submitted to TNRCC 30 
days prior to the allowances being deposited into the account. Trades 
will be completed through the TNRCC executive director and will be 
considered complete when the executive director issues a letter 
finalizing the trade.
Will the Program Be Audited?
    Yes, an audit of the cap and trade program will be conducted by 
TNRCC every three years. The audit will evaluate the impact of the 
program on the state's attainment demonstration, the availability and 
cost of allowances, compliance by the participants, and other elements. 
The TNRCC Executive Director will recommend measures to remedy any 
problems identified in the audit. The trading of allowances, discrete 
emission reduction credits, and/or mobile discrete emission reduction 
credits may be discontinued as a remedy for problems identified in the 
program audit. The audit data and results will be completed and 
submitted to the EPA and made available for public inspection within 
six months after the audit begins.
How Will Emissions Be Monitored by the Facilities in Order To Determine 
Compliance With the cap?
    The proposed revision to the MECT EIP rule which is being parallel 
processed contains a revision to section 101.354 Allowance Deductions. 
The revision requires allowance deductions to be based upon the 
emission quantification protocols established in 30 TAC Chapter 117. 
The EPA is proposing to approve the Chapter 117 monitoring methodology 
in this action as the emission quantification protocols for the MECT 
program.
How Will a Facility Report Compliance With the Cap?
    Facilities are required by March 31 of each year to submit a 
completed ECT-1 Form to TNRCC with the amount of actual NOX 
emissions for the preceding control period. Also included are the 
methods used in determining the emissions and a summary of all final 
trades.

C. EPA's Analysis

How Did EPA Review and Evaluate the TNRCC MECT EIP SIP Submittal?
    The document, Improving Air Quality with Economic Incentive 
Programs, (EPA-452/R-01-001) January 2001 is the EPA guideline for 
reviewing and approving discretionary EIP submittals for SIP credit. It 
will be referred to as the EPA EIP Guidance throughout this notice. The 
guidance pertains to discretionary EIPs that will be measures in State 
implementation plans. The guidance applies to the establishment of a 
discretionary EIP for attaining the NAAQS for criteria pollutants. The 
EPA technical review of the MECT SIP submittal against the expectations 
of the EPA EIP Guidance is contained in the Technical Support Document 
for the TNRCC Mass Emissions Cap and Trade Program for the HGA 
Nonattainment Area dated April 2001. The technical support document is 
available as specified in the section of this document identified as 
ADDRESSES.
What Does the EPA Mean by Guidance?
    The EPA stated that the EIP guidance applies to discretionary EIPs, 
but does not represent the EPA's final action regarding discretionary 
EIPs. Final action occurs when the EPA has approved or disapproved the 
discretionary EIP submitted as a SIP revision. Congress did not address 
specific requirements for EIPs in the CAA. Consistent with our mandate, 
the EPA has interpreted what an EIP should contain in order to meet the 
requirements of the CAA. The document is a guidance document that sets 
forth EPA's non-binding policy for EIPs. The document does not 
represent final EPA action on the requirements for EIPs. Rather, the 
document identifies several different types of economic incentive 
programs, and proposes elements for each type that, if met, EPA 
currently believes would assure that the program would meet the 
applicable CAA provisions.
    The guidance phrases these elements in the imperative--that is, 
using the terms ``must'' or ``shall.'' This is done only to signify 
that EPA would propose to approve a SIP submittal of a program 
containing the indicated elements on grounds that under section 110(l) 
of the CAA, the SIP revision does not interfere with any applicable 
requirement concerning attainment, reasonable further progress, or any 
other applicable requirement.
Was the EPA EIP Guidance a Final Agency Action?
    Because it is a guidance document, the EPA EIP Guidance does not 
represent the EPA's final action for any discretionary EIP. Final 
action occurs when the EPA has approved or disapproved the 
discretionary EIP submitted as a SIP revision.
    Once an EIP SIP revision is submitted, EPA will take action through 
notice-and-comment rule making to determine if the statutory 
requirements have been

[[Page 38235]]

met. Only action taken after the conclusion of that rulemaking would 
constitute final Agency action. The EPA would take steps to expedite 
its proposed approval in the case of SIP revisions containing programs 
that contain the elements of the EPA EIP guidance.
    If a program that does not contain the elements of the EPA EIP 
guidance for that type of program is submitted, EPA would still seek to 
determine whether the applicable CAA requirements were met, and, if so, 
EPA would approve the submission. The EPA would make the determination 
through notice-and-comment rulemaking.
What Criteria Did EPA Use To Analyze the MECT SIP Submittal?
    There are three fundamental principles that apply to all EIPs; 
integrity, equity and environmental benefit. The MECT was evaluated 
against the Clean Air Act requirements for all three of these 
principles. The EPA EIP guidance contained elements for trading EIPs as 
well as provisions specific to mass cap and trade EIPs. Each of these 
principles, elements and provisions are addressed in this notice.
Fundamental EIP Principle One--Integrity
    There are four elements that make up the EIP principle of 
integrity. The fundamental principle of integrity consists of the 
qualities of surplus, enforceable, quantifiable and permanent.
Integrity Element One--Surplus
    The element of surplus as it applies to MECT EIPs provides that 
programmatic emission reductions are surplus as long as they are not 
otherwise relied on in any of the following air quality-related 
programs such as the SIP, SIP-related requirements such as 
transportation conformity, other adopted TNRCC air quality programs not 
in the SIP, and federal rules that focus on reducing precursors of 
criteria pollutants such as new source performance standards (NSPS), 
rules for reducing VOCs promulgated under section 183 of the CAA, and 
statutorily mandated mobile source requirements.
    In multi-source emission cap-and-trade EIPs, the programmatic 
fundamental element of surplus, as used with reference to the EIP as a 
whole, has a special meaning. A program that conforms to the EIP 
Guidance will show that the cap on all emissions is below the threshold 
that would have been set before the program was implemented for the 
affected sources. It should be noted that the fundamental element of 
surplus does not apply to sources participating in multi-source 
emission cap-and-trade EIPs, only to the programmatic emission 
reductions.
    EPA concluded that the TNRCC MECT SIP submittal at section 
101.353(a)(3) demonstrated declining reductions of NOX 
emissions over time in order to reach attainment. The cap is at least 
80% lower than the emission level that existed prior to the 
implementation of the MECT EIP. In addition the MECT EIP will ensure 
lower NOX emissions than implementation of 30 TAC Chapter 
117 emission standards for the HGA attainment demonstration will 
ensure, since the MECT program limits mass emissions based on 
historical activity levels, and reduces the mass cap over time based on 
emission rate specifications in section 117. The Chapter 117 Emission 
Specifications for Attainment Demonstrations (ESAD) limitations are 
rate based and do not limit mass emissions. Thus, the programmatic 
surplus provision for the MECT EIP that the cap on all emissions be 
below the threshold that would have otherwise been set for the affected 
sources has been met. EPA concluded that the TNRCC MECT EIP SIP 
submittal meets the Clean Air Act requirements and EPA EIP guidance 
expectations for the integrity element of surplus.
Integrity Element Two--Enforceable
    Emission reduction use, generation, and other actions are 
enforceable on a programmatic basis, if they are independently 
verifiable, define program violations and identify those liable for 
violations. The EPA EIP expectation for enforceable also is that the 
state and the EPA maintain the ability to apply penalties and secure 
appropriate corrective actions where applicable. Citizens should also 
have access to all the emissions-related information obtained from the 
source so that citizens can file suits against sources for violations. 
Required actions are enforceable on a programmatic basis if they are 
practicably enforceable in accordance with other EPA guidance on 
practicable enforceability.
    In multi-source emission cap-and-trade EIPs, the source-specific 
fundamental elements of enforceable, and quantifiable, as used with 
reference to the actions of the individual sources participating in the 
EIP, have special meanings. Source-specific actions are enforceable if 
each source owner/operator is responsible for owning enough allowances 
to cover its emissions for the given time period and for providing 
clear title to the allowances it transfers.
    On a source specific basis as spelled out in Sec. 4.1(b), actions, 
emission reductions or emission limits as required by the MECT EIP are 
enforceable if the source is liable for any violations, the liable 
party is identifiable and the state, the public, and the EPA can 
independently verify a source's compliance. The expectation for 
enforcement elements common to all trading EIPs is that certain 
enforcement elements will be incorporated into all trading EIP rules 
submitted as a SIP revision. These include provisions for assessing 
liability, provisions to assess penalties against participating 
sources, and provisions for sources with title V permits.
1. Enforceable Element--Liability Assessment
    The expectation for provisions for assessing liability common to 
all trading EIPs is discussed at section 6.1(a) of the EPA EIP guidance 
document. A program that conforms to the EIP Guidance will include 
provisions for assessing liability. Unlike traditional CAA regulatory 
mechanisms, emission trading involves more than one party. These 
parties can include those who own or operate the sources participating 
in the trade and sometimes another party who facilitated the trade 
(such as a broker).
    To ensure there is integrity in the trading system, parties are 
also normally responsible for ensuring the validity of the trades or 
their use of emission reductions. At a minimum, each party is 
responsible for the truth, accuracy, and recording of all the 
information it provides to make the trade happen. The TNRCC MECT EIP 
rule should contain provisions to make users responsible for ensuring 
the validity of their use of emission reductions.
    Traded emissions reductions are valid if they are true and 
accurate, generally meet all requirements of the MECT EIP rule, are 
properly measured in keeping with quantification protocols, satisfy 
monitoring, recordkeeping and reporting (MRR) provisions, and adhere to 
all other provisions for trading, such as no double counting. Sources 
using traded emission reductions are the main parties which will be 
held liable for any violations of applicable emission limitations. 
However, to discourage any possible collusion between sources, 
generators, and third parties, EPA may also hold other parties liable 
as explained in the EIP Guidance.
    The revision to the MECT rule which is being parallel processed by 
this notice submitted the emission quantification protocols in 30 TAC 
Chapter 117. EPA is reviewing the submitted protocols in

[[Page 38236]]

accordance with the principles discussed herein, and CAA requirements. 
The revised section 101.354 speaks to the Executive Director approving 
other methods instead of the protocols in Chapter 117. Any use of a 
method other than the Chapter 117 protocols must be submitted to, and 
approved by, EPA.
    The EIP states that in any enforcement action, the parties bear the 
burden of proof on each of their respective responsibilities. The MECT 
EIP submittal did not specifically address the assessment of liability 
for generators, third parties and users. EPA concluded that the MECT 
EIP rule itself did not contain the EPA EIP guidance specific 
expectation for liability assessment.
    However, the TNRCC enforcement statute & rule are not typically in 
individual rules but have their own codification elsewhere. The Texas 
Water Code Chapter 7 contains the statutory provisions for enforcement 
of the MECT EIP regulation. The TNRCC enforcement rule is found at 30 
TAC section 70.5. It provides remedies found in the state statutes 
(Texas Water Code and the Texas Health and Safety Code). It includes 
referrals to the EPA for civil, judicial or administrative action. 
Nothing in chapter 70 shall preclude the TNRCC executive director from 
seeking any remedy in law or equity not specifically mentioned in the 
rules. The Office of the Attorney General of the State of Texas cited 
State laws and regulations that regulate, at a minimum, the same 
sources as the Clean Air Act and do so with standards that are no less 
stringent than those specified by the CAA. The cited laws and 
regulations are: Texas Health and Safety Code Ann. sections 382.016 
(Monitoring Requirements, Examination of Records), 382.021 (Sampling 
Methods and Procedures), 382.0514 (Sampling, Monitoring and 
Certification); 30 TAC sections 122.132 (Application and Required 
Information for Initial Permit Issuance, Reopening, Renewal, or General 
Operating Permits), 122.134 (Complete Application), 122.136 
(Application Deficiencies), 122.142 (Permit Content Requirements), 
122.143 (General Terms and Conditions), 122.144 (Recordkeeping Terms 
and Conditions), 122.145 (Reporting Terms and Conditions), 122.146 
(Compliance Certification Terms and Conditions), 122.165 (Certification 
by Responsible Official; 30 TAC sections 101.8 (Sampling), 101.9 
(Sampling Ports).
    The MECT rules do not establish the number of days of violation 
when the cap is exceeded. Although not specifically included in the 
MECT EIP submittal, if the State can demonstrate to EPA's satisfaction 
that it has adequate authority regarding this issue, the enforcement 
expectations of the EPA EIP are met.
    Other TNRCC programs requiring enforcement provisions consistent 
with the Clean Air Act have not been found deficient by EPA. The 40 CFR 
part 70, Title V operating permits program and the 40 CFR part 63, 
National Emission Standards for Hazardous Air Pollutants (NESHAPs) are 
two such programs. The Office of the Attorney General of the State of 
Texas has provided written opinions for these programs. The opinions 
state that TNRCC has the necessary legal authority to implement and 
enforce the programs. TNRCC has the authority to have reasonable 
requirements for measuring and monitoring air emissions and to require 
owners and operators of sources to make and maintain records of the 
emissions. The Attorney General has determined that TNRCC is allowed to 
prescribe sampling methods and procedures to be used to determine 
violations of and compliance with the TNRCC rules and orders. EPA 
concluded that the TNRCC MECT EIP SIP submittal will meet the Clean Air 
Act requirements and EPA EIP guidance expectations for liability 
assessment in the integrity element of enforceable if the State 
demonstrates to EPA's satisfaction adequate authority regarding the 
number of days of violation, and the rules are amended to provide that 
any use of monitoring protocols other than those specified in Chapter 
117 will be approved by EPA.
2. Enforceable Element--Penalties and Corrective Action
    The expectation for provisions for penalties and corrective actions 
common to all trading EIPs is that the monetary and non-monetary 
penalty provisions in the MECT emission trading EIP will include 
mechanisms that enable TNRCC to assess monetary penalties and impose 
corrective actions against the sources participating in the EIP. These 
mechanisms include making up any emission shortfall, paying a monetary 
penalty based on statutory penalties for source noncompliance, and 
surrender an additional punitive amount of emission reductions. They 
also include implementing corrective actions to ensure the violation 
will not occur in the future and to compensate for the environmental 
damage caused by an emissions violation. These corrective actions may 
consist of such items as better monitors, more effective emissions 
controls, more frequent monitoring and reporting and better monitoring 
procedures. The EIP Guidance expectation for penalty policy is 
described in section 5.1(c) and section 6.1(b).
    The EIP Guidance expectation for penalty provisions includes 
provisions for imposing penalties when a source is in violation of MECT 
allowances, and record keeping. A program that conforms with the EIP 
Guidance will define a violation, establish the procedure for 
determining the magnitude of a violation, set potential penalties, and 
maintain the ability to impose a maximum monetary penalty of at least 
$10,000 per day per violation. Title V of the CAA currently requires 
States to have a maximum penalty authority of at least $10,000 per day 
per violation. The Federal CAA maximum is $27,500 per day per 
violation.
    The MECT EIP SIP submittal at section 101.353(c) requires that if 
actual emissions of NOX during a control period exceed the 
amount of allowances held in a compliance account on February 1 
following the control period, allowances for the next control period 
will be reduced by an amount equal to the emissions exceeding the 
allowances in the compliance account plus an additional 10%. This does 
not preclude additional enforcement action by the TNRCC executive 
director.
    The MECT EIP submittal was silent with respect to the authority for 
monetary penalty provisions up to the CAA statutory maximum on a per 
day and per unit basis. The Office of the Attorney General of the State 
of Texas has provided written opinions for the Title V operating 
permits program and the NESHAP program. The opinions of the Texas 
Attorney General indicate that TNRCC has the necessary legal authority 
to implement and enforce the programs in accordance with the 
requirements of the Clean Air Act. EPA concluded that the TNRCC MECT 
EIP SIP submittal meets the Clean Air Act requirements and EPA EIP 
guidance expectations for penalties and corrective action in the 
integrity element of enforceable.
3. Enforceable Element--Monitoring, Recordkeeping and Reporting
    The expectation for monitoring, recordkeeping and reporting 
procedures is to ensure source compliance and State and Federal 
enforceability. Monitoring ensures the operator of the source that 
compliance is being achieved at all times. It also ensures an inspector 
that compliance has been achieved at times when the inspector is not on 
site to observe behavior. Retention of monitoring records ensures that 
the records are available for review by inspectors or source 
supervisors who are determining compliance.

[[Page 38237]]

    Periodic and annual reports are also essential to summarize the 
compliance picture for State planning purposes, for review by the EPA 
and the public, as well as by source managers who wish to oversee the 
progress of their participation in the EIP. The EIP guidance provides 
the following as examples of MRR procedures: Continuous or periodic 
monitoring of emissions, production, activity levels, or emission 
control equipment operation; measurement devices to verify emission 
rates and operating conditions; measurement of mass emissions or 
emission rates using the EPA-approved reference test methods; operating 
and maintenance procedures or other work practices and record keeping 
of material usage, inventories, or throughput.
    The MECT EIP SIP submittal at section 101.358 requires sources 
conducting compliance monitoring to use emission quantification 
methods. A condition for all sources in the MECT program is that they 
be subject to 30 TAC Chapter 117. For each source category in Chapter 
117, there is a corresponding section covering the requirements for the 
initial demonstration of compliance, the continuous demonstration of 
compliance, as well as the requirements for notification, recordkeeping 
and reporting requirements. The following table cross references these 
requirements by source category.
    TNRCC has submitted a revision to the MECT rule which is being 
parallel processed with this notice that is the submission of emission 
quantification protocols. The protocols in 30 TAC Chapter 117 specify 
initial and continuous monitoring methodologies. These requirements in 
Chapter 117 have met the public notice provisions for protocols. EPA 
concluded that the TNRCC MECT EIP SIP submittal will meet the Clean Air 
Act requirements and EPA EIP guidance expectations for emission 
quantification protocols, monitoring, recordkeeping and reporting in 
the integrity element of enforceable, if, as was discussed above, any 
use of protocols other than those specified in Chapter 117 will be 
approved by EPA.

----------------------------------------------------------------------------------------------------------------
 Cross Reference of MECT Source Category by Compliance, Notification, Recordkeeping, and Reporting Requirements
-----------------------------------------------------------------------------------------------------------------
                                                                       Continuous             Notification,
 30 TAC Chapter 117 Source Categories   Initial Demonstration       Demonstration of        Recordkeeping and
                                            of Compliance              Compliance         Reporting Requirements
----------------------------------------------------------------------------------------------------------------
Utility Boilers, Auxiliary Steam       Sec.  117.111..........  Sec.  117.113..........  Sec.  117.119
 Boilers & Stationary Gas Turbines.
Industrial, Commercial and             Sec.  117.209..........  Sec.  117.213..........  Sec.  117.219
 Institutional Boilers, Process
 Heaters, Stationary Gas Turbines,
 I.C. Engines, FCCs, BIFs, Duct
 Burners, Recovery Furnaces, Lime
 Kilns, Lightweight Aggregate Kilns,
 Heat Transfer Furnaces, Magnesium
 Chloride Fluidized Bed Dryers &
 Incinerators.
Acid Manufacturing--Adipic Acid        Sec.  117.311..........  Sec.  117.113..........  Sec.  117.319
 Manufacturing.
Acid Manufacturing--Nitric Acid        Sec.  117.411..........  Sec.  117.413..........  Sec.  117.419
 Manufacturing.
Small Combustion Sources--Water        Emission Specifications  Certification            117.469
 Heaters, Small Boilers and Process     Sec.  117.465.           Requirements Sec.
 Heaters.                                                        117.467.
Small Combustion Sources--Boilers,     Emission Specifications  Operating Requirements   Sec.  117.479
 Process Heaters, and stationary        Sec.  117.475.           Sec.  117.478.
 Engines at Minor Sources.
----------------------------------------------------------------------------------------------------------------

4. Enforceable Element--Evaluation
    The EIP evaluation procedure is the process of retrospectively 
assessing the performance of the EIP. The primary purpose of program 
evaluation is to determine the overall effects of the MECT EIP on 
emissions and measure other aspects of program performance, such as 
increased flexibility or reduced costs.
    The EIP performance procedures may include tracking and evaluating 
program performance measures that were raised by the stakeholders 
during the rule development process. The EIP Guidance includes program 
evaluation procedures. A program that conforms to the EIP Guidance will 
include procedures that make the public aware that the program is being 
evaluated, and give the public ample opportunity to help evaluate the 
program. The EIP Guidance specifies that a program evaluation will be 
conducted at least every 3 years. The schedule coincides with other 
periodic reporting provisions such as those applicable to emission 
inventory revisions required by the CAA. The EIP Guidance expectation 
is that the state will submit the results of the EIP program evaluation 
to EPA.
    The evaluation program should include inspections to allow 
assessment of the implementation of the program and to confirm 
assumptions. Annual evaluation of the program is appropriate for at 
least 2 years, until the projected emissions have been adequately 
confirmed.
    The MECT EIP SIP submittal at Sec. 101.363 requires program audits 
every three years. The audit will evaluate the impact of the program on 
the state's attainment demonstration, the availability and cost of 
allowances, compliance by the participants, and any other elements the 
TNRCC executive director may choose to include. EPA concluded that the 
TNRCC MECT EIP SIP submittal meets the Clean Air Act requirements and 
EPA EIP guidance expectations for evaluation in the integrity element 
of enforceable.
5. Enforceable Element--Reconciliation
    The expectation for EIP evaluation procedures is a commitment to 
develop and implement reconciliation procedures if the EIP evaluation 
determines that source emissions exceed the allowances for a control 
period. The primary purpose of conducting a program reconciliation is 
to correct any differences between allowances versus actual emissions. 
This allows for the opportunity to make mid-course corrections to the 
program.
    A program that conforms to the EIP Guidance will include an 
enforceable commitment that if the program evaluation shows a problem 
with the EIP such as emissions exceeding allowances, the problem will 
be corrected as expeditiously as possible. The commitment to correct 
the problem should be based on what may be achieved using reasonable, 
sustained efforts within the context of the TNRCC's rule making 
process. Corrections should include any revisions to the program to 
ensure that subsequent problems do not occur. The EIP Guidance 
specifies that any problem will be corrected as soon as practicable,

[[Page 38238]]

but no later than the next triennial program evaluation.
    The MECT EIP SIP submittal at section 101.363 requires program 
audits every three years. The audit will evaluate the impact of the 
program on the state's attainment demonstration, the availability and 
cost of allowances, compliance by the participants, and any other 
elements the TNRCC executive director may choose to include. The 
revised attainment demonstration submittal which is being parallel 
processed includes a TNRCC study to be completed in 2002 which will 
evaluate and potentially adjust Chapter 117 emission limitations. In 
addition, the 2004 mid-course correction by TNRCC will evaluate control 
measures and enforceable commitments necessary to reach attainment in 
2007. There will be an opportunity at both of these occasions to adjust 
allowances to reach attainment if the audit results indicate that all 
issued allocations are higher than assumed in the attainment 
demonstration. The proposed revisions to the MECT rule have a different 
percent reduction if section 117.106(c)(5) and section 117.206(c)(18) 
apply. EPA concluded that the TNRCC MECT EIP SIP submittal meets the 
Clean Air Act requirements and EPA EIP guidance expectations for 
reconciliation procedures in the integrity element of enforceable.
6. Enforceable Element--Public Disclosure
    The public disclosure provisions of an EIP were developed pursuant 
to the CAA (section 114(c)) and implementing regulations (40 CFR 2.301) 
which specify procedures and criteria for determining what information 
is available to the public and what information may be withheld from 
the public as confidential business information. These procedures and 
criteria apply to information in EIPs, just as they apply to 
information in other CAA programs.
    Congress has recognized that regulatory failures can and do occur. 
To provide another avenue of protection, Congress ensured that the 
public has the right to access information and file suit in a Federal 
court. Because citizens have the right to bring legal actions under the 
CAA, a program that conforms to the EIP Guidance will ensure that the 
public has access to emission information. The public needs to be able 
to see the data in order to adequately judge the effectiveness of the 
EIP and exercise the right to file suit.
    A program that conforms to the EIP Guidance will ensure that--
     Information will be disclosed in a manner that is 
transparent, allowing the public to easily and accurately calculate the 
emissions of each participating source,
     Facilities participating in the EIP will disclose 
violations to the state in an annual certification of compliance or 
non-compliance,
     Sources that violate permits will notify the affected 
community of the violation and of potential health and environmental 
impacts,
     The state will compile these disclosures into an annual 
comprehensive report on emissions and violations,
     The state will submit the report to EPA and make it 
available to the public, and
     The state will obtain from the participating sources and 
disclose to the public all information necessary to calculate every 
source's or source category's emissions.
    The MECT EIP SIP submittal stipulates at section 101.352(i) that 
TNRCC will maintain a registry of allowances in each compliance 
account. Section 101.359 requires facilities with a compliance account 
to submit an ECT-1 form annually for each control period to TNRCC with 
account emissions and transfers. TNRCC rules at 30 TAC section 1.5 
require public disclosure of information held by the agency, presumably 
including the annual report. There are, however, exemptions for 
information relating to trade secrets and ``economics of operation.'' 
If these provisions are interpreted to cover activity levels, it could 
impede the public from obtaining information necessary to determine 
emissions from some units. Activity levels are necessary to determine 
mass emissions from sources without monitoring devices such as 
continuous emission monitoring systems (CEMS). This issue regarding 
confidentiality of records has been transmitted to TNRCC as a comment 
on the proposed MECT rule revisions which are being parallel processed.
    The proposed revision to the MECT rule that is being parallel 
processed contains a new section 101.363, Program Audits and Reports. 
The rule at section 101.363(b) requires TNRCC to annually develop and 
make available to EPA and the public a report that includes the number 
of allowances allocated to each compliance account, the number of 
actual NOX allowances subtracted from each compliance 
account based on the actual NOX emissions from the site and 
a summary of all trades completed. If the State demonstrates to EPA's 
satisfaction that the confidentiality provisions will not prevent 
public disclosure of activity level data necessary to determine 
emissions under the cap program, the TNRCC MECT EIP SIP submittal will 
meet the Clean Air Act requirements and EPA EIP guidance expectations 
for public disclosure procedures in the integrity element of 
enforceable.
7. Enforceable Element--Sources With Title V Permits
    The EPA EIP expectation for sources with Title V permits is that 
the facility's operating permit will be modified to include the 
detailed compliance provisions necessary to assure compliance with the 
EIP. Thus, the permit becomes a valuable tool to ensure the source 
meets the requirements of the CAA. Also, Title V program requirements, 
such as permit modification requirements, may not be subsumed, 
overridden, or otherwise affected by requirements of a discretionary 
EIP approved into a SIP.
    Once the Title V permit includes terms and conditions necessary to 
implement the EIP, the source may typically make individual trades 
under the EIP without the need for future formal permit revisions. This 
is true because most trading activity under such a permit would already 
be addressed and allowed by the specific terms and conditions of the 
permit and such trading would not normally conflict with the permit. 
This is the principle expressed by 40 CFR 70.6(a)(8), which states that 
permit revisions are not required for trading program changes that are 
``provided for'' in the permit.
    Concerning permit content, the MECT EIP program would--in order to 
conform to the EIP Guidance--provide that sources subject to title V 
place a copy of any notices specified by the EIP in the operating 
permit file, and make these notices available to the public. These 
notices should be designed to provide meaningful information in the 
permitting context, and should help the public to determine the lawful 
emissions credits generated by or available to the source at any given 
time.
    This expectation centers upon the requirement that a facility's 
Title V operating permit list all of the CAA requirements that apply to 
that facility, including monitoring and other provisions necessary to 
assure compliance with the MECT EIP. By identifying MECT EIP 
requirements as alternate operating scenarios, for instance, the 
modifications of the permit can be held to a minimum.

[[Page 38239]]

    Requirements of the MECT EIP to be included in the Title V permit 
include the compliance, monitoring, record keeping, reporting and 
public notice provisions. The TNRCC MECT EIP SIP submittal did not 
include a showing that the TNRCC title V operating permit regulations 
do not interfere with the incorporation of MECT EIP provisions into 
title V permits as specified by section 16.8 of the EIP guidance. Since 
the Title V program is outside the SIP process, the expectations of 
this section, if not met by the facility, do not serve as grounds for 
not approving the MECT EIP SIP submittal and/or the attainment 
demonstration SIP.
8. Enforceable Element--Tracking Mechanisms
    The expectations for setting up tracking mechanisms in a multi-
source emission cap-and-trade EIP are to facilitate a full and open 
trading of allowances. The EIP Guidance expectation is that the MECT 
EIP will have an efficient, effective method to track and record 
allowance transfers. The TNRCC MECT SIP submittal at section 101.353 
established the allocation of allowances procedure in the MECT EIP. The 
allowance and authorized account representative will initially be 
identified by TNRCC by January 1, 2002. A secure data management 
system, enforceable procedure for data reporting, and time frame 
establishment are required by section 101.359. EPA concluded that the 
TNRCC MECT EIP SIP submittal meets the Clean Air Act requirements and 
EPA EIP guidance expectations for tracking mechanisms in the integrity 
element of enforceable.
Integrity Element Three--Quantifiable
    The EPA EIP guidance at section 4.1(a) defines the EIP expectations 
for the integrity element of quantifiable for all EIPs on a 
programmatic basis. The EIP states that the creation and use of 
emission reductions are quantifiable if the source can reliably 
calculate the amount of emissions and/or emission reductions occurring 
during implementation of the program, and replicate the calculations. 
It further states that when quantifying results, sources will use same 
methodology used to measure baseline emissions, unless there are good 
technical reasons why this is not appropriate. The only source specific 
expectation for quantifiable in MECT EIPs found at section 4.1(b) is 
that sources will quantify total emissions per unit of time.
    The EIP quantification procedures should ensure that these 
fundamental elements are applied throughout the life of the EIP. For 
the MECT EIP, the source of the data used in quantification of 
allowances includes using data already reported or available. The 
expectation is that quantification will be performed continuously 
throughout the compliance period to demonstrate compliance with the 
allowances. A program conforming to the EIP Guidance will also include 
quantification protocols--the technical plans and procedures used to 
quantify emissions during the control period.
1. Quantifiable Element--Predicting Results
    The expectation for predicting EIP results is that the program 
include projections of the emission reductions associated with program 
implementation. These projected results would be based on technical 
assumptions related to and consistent with the assumptions used to 
develop the area's attainment demonstration, and provide sufficient 
supporting information showing what the impact would be on the 
applicable inventory. The MECT EIP may not interfere or be inconsistent 
with SIP or SIP-related requirements including the attainment plan or 
maintenance plan, reasonable further progress, and rate of progress. 
Reliable and replicable forecasts of HGA's pre- and post-EIP emission 
levels are part of EPA's evaluation of the SIP submittal.
    The TNRCC SIP narrative for the attainment demonstration contains 
the emission reduction projections associated with MECT EIP 
implementation. The EIP SIP submittal at section 101.353(a)(3) 
demonstrates that the MECT has increasing reductions of NOX 
emissions over time in order to reach attainment. The MECT implements 
an approximate reduction in NOX emissions of over 80%. The 
reductions are achieved by implementation of the emission factors 
required for applicable stationary sources as found at 30 TAC sections 
117.106, 117.206 and 117.475. These reduction levels were developed to 
support, and are consistent with, the attainment demonstration. EPA 
concluded that the TNRCC MECT EIP SIP submittal meets the Clean Air Act 
requirements and EPA EIP guidance expectations for predicting results 
in the integrity element of quantifiable.
2. Quantifiable Element--Uncertainty
    The expectation for addressing uncertainty is to provide greater 
rule effectiveness, elimination of alternative emission limits, and 
other environmental benefits. However, implementing any type of EIP may 
result in higher or lower emissions than projected, due to geographic 
or timing uncertainties in emission distributions. A program that 
conforms to the EIP Guidance will provide a range of estimates of the 
emission reductions attributable to the EIP, judge the likelihood that 
the EIP will interfere with state air quality planning requirements and 
demonstrations, demonstrate that emission projections in the air 
quality management plan have been adjusted and determine whether that 
level of uncertainty is acceptable and document the decision.
    The regulation for the MECT EIP was submitted with other control 
measure implementing regulations to be approved as part of the SIP. 
These implementing SIP approved rules have been determined to be 
necessary for the implementation of the attainment demonstration SIP. 
The SIP narrative for the attainment demonstration contains the degree 
of uncertainty associated with reaching attainment. Enforceable 
commitments and other measures have been incorporated in the attainment 
demonstration SIP. Thus the MECT EIP is an integral part of the air 
quality planning procedure and the measures necessary to reach 
attainment of the NAAQS. The MECT rules therefore will not interfere 
with attainment of the NAAQS, they are part of the strategy to attain 
those standards. Although not submitted with the MECT EIP SIP 
submittal, the EPA EIP guidance expectations for addressing uncertainty 
have been incorporated into other attainment demonstration SIP 
submittals.
    Uncertainty is addressed in the EIP guidance at section 6.4(c). 
With respect to uncertainty in emissions measurement, the Chapter 117 
monitoring provisions are adequate to reduce uncertainty to a 
reasonable level. In particular, the larger sources are required to 
have monitoring with the least uncertainty--CEMS and parametric 
emission monitoring systems (PEMS). This section of the EIP focuses on 
the different levels of uncertainty associated with using reductions 
from one type of source at another type of source, which is very 
relevant to using MDERCS and DERCS in the MECT. The MECT rules 
authorize the use of DERCS and MDERCS generated pursuant to 30 TAC 
Chapter 101, Subchapter H, Division 4 to comply with the annual cap. 
The DERC and MDERC rules are being reviewed for conformance with the 
EIP Guidance section 6.4(c) as part of EPA's evaluation of Subchapter 
H, Division 4. EPA will shortly propose action on the rules in 
Subchapter H,

[[Page 38240]]

Division 4. MDERCS and DERCS may not be utilized for compliance with 
MECT program annual caps until the DERC and MDERC rules are approved by 
EPA. EPA concluded that the TNRCC MECT EIP SIP submittal meets the 
Clean Air Act requirements and EPA EIP guidance expectations for 
uncertainty in the integrity element of quantifiable.
3. Quantifiable Element--Approving Quantification Protocols
    EIPs rely on emission quantification protocols to determine source 
compliance and overall program performance. An EIP quantification 
protocol is the technical procedure a source uses to calculate the 
amount of emissions associated with that source's activities under an 
EIP.
    TNRCC has submitted a revision to the MECT rule which is being 
parallel processed with this notice that is the submission of emission 
quantification protocols. The protocols which are contained in 30 TAC 
Chapter 117 specify initial and continuous monitoring methodologies. 
These requirements in Chapter 117 have met the public notice provisions 
for protocols. The Chapter 117 rules do not, however, contain missing 
data provisions establishing how to determine emissions when required 
NOX monitoring equipment is not functioning properly. EIP 
section 5.2(c) states that protocols should contain such provisions.
    EPA concluded that the TNRCC MECT EIP SIP submittal will meet the 
CAA requirements and EPA EIP guidance expectations for approving 
emission quantification protocols, if the rules are revised to specify 
missing data provisions as described in EIP guidance section 5.2(c).
4. Quantifiable Element--Selecting Emission Measurement Protocols
    The expectation for the hierarchy for selecting emission 
measurement protocols is based upon site-specific information almost 
always being more reliable as an indicator of emissions than emission 
factors. Sources should use site-specific data whenever available or 
feasible. The EPA EIP guidance document recommends the following 
emission quantification approaches in the priority order described in 
the hierarchy below:
    a. CEMS data on the unit generating the emissions during the 
generation.
    b. CEMS data on the unit generating the emissions at a time other 
than the generation, but at representative conditions.
    c. Multiple emission tests at the affected unit(s) at 
representative conditions.
    d. Emission test at the affected unit(s) at representative 
conditions.
    e. Emission test at maximum load or stack tests at identical unit.
    f. Emission factors (where allowed) or material balance.
    The proposed approval of this notice is based upon the review that 
the hierarchy for selecting emission measurement protocols has been 
consistent with the EPA EIP guideline document. EPA concluded that the 
TNRCC MECT EIP SIP submittal meets the Clean Air Act requirements and 
EPA EIP guidance expectations for selecting emission measurement 
protocols in the integrity element of quantifiable.
Integrity Element Four--Permanent
    The EPA EIP guidance defines the expectations for the integrity 
element of permanent for all EIPs on a programmatic basis. The EIP 
states that emission reductions are permanent if a source commits to 
actions or achieves reductions for a future period of time as defined 
in the EIP.
    For compliance flexibility EIPs, the results of an EIP are 
permanent if you are able to ensure that no emission increases 
(compared to emissions if there was no EIP) occur over the time defined 
in the SIP. For programmatic reduction EIPs, the results of an EIP are 
permanent if the EIP is able to ensure that the programmatic reductions 
occur over the duration of the EIP rule, and for as long as they are 
relied on in the SIP or SIP-related requirements. The only source 
specific provision for permanent in MECT EIPs found at section 4.1(b) 
is that the integrity element of permanent does not apply to emission 
reductions made by sources
    The TNRCC MECT EIP SIP submittal at section 101.352(b) requires for 
every control period, each site to hold allowances equal to or greater 
than the total NOX emissions. EPA concluded that the TNRCC 
MECT EIP SIP submittal meets the Clean Air Act requirements and EPA EIP 
guidance expectations for the integrity element of permanent.
Fundamental EIP Principle Two--Equity
    Equity issues can be caused by an uneven distribution of emissions, 
or other non-emission effects. Some communities are considered 
communities of concern, because they have historically experienced 
higher emission levels than other communities in the same locale. These 
higher emissions often result in less healthy air quality. Equity 
issues may need resolution if the EIP continues or exacerbates existing 
pollutant concentrations in existing communities of concern, or causes 
new communities to experience higher emission levels than other 
communities in the same locale. There are two elements that comprise 
the fundamental principle of equity in EIPs. They are general equity 
and environmental justice.
Equity Element One--General Equity
    General equity means that an EIP ensures that all segments of the 
population are protected from public health problems, and no segment of 
the population receives a disproportionate share of a program's 
disbenefits. The MECT EIP SIP submittal consists of an overall 
reduction of NOX emissions of 80%. Although allowances can 
be traded annually to meet compliance requirements, the overall trend 
at all sources will be a reduction of NOX levels. In 
addition, the TNRCC submittal at section 101.353(c) requires for a 
source, exceeding the allowances in the compliance account, allowances 
for the next control period to be reduced by a like amount plus an 
additional 10%. EPA concluded that the TNRCC MECT EIP SIP submittal 
meets the Clean Air Act requirements and EPA EIP guidance expectations 
for general equity in the fundamental principle of equity.
Equity Element Two--Environmental Justice
    The environmental justice element applies if the MECT EIP covers 
VOCs, and could disproportionately impact communities populated by 
racial minorities, people with low incomes, and/or Tribes. The 
localized hazardous air pollutant (HAP) provisions of an EIP could 
occur if the EIP allowed VOC HAPs to be shifted from one facility to 
another. Although the TNRCC MECT EIP SIP submittal is a mass cap and 
trade program for NOX stationary sources only, section 
101.356(f) provides for sites to use VOC DERCs and MDERCs in place of 
allowances for compliance provided a demonstration has been made and 
approved by TNRCC and EPA. The use of VOC reductions in place of 
NOX allowances will only drive the VOC emissions lower. The 
MECT EIP rule does not allow VOC HAPs to be shifted from one facility 
to another. There is no likelihood under the MECT EIP for 
disproportionate impact on communities of concern. EPA concluded that 
the TNRCC MECT EIP SIP submittal meets the Clean Air Act requirements 
and EPA EIP guidance expectations for environmental justice in the 
fundamental principle of equity.

[[Page 38241]]

Fundamental Principle Three--Environmental Benefit
    EPA EIP expectations for the fundamental principle of environmental 
benefit are that a MECT EIP ensures a declining budget or emission caps 
that set an absolute limit on mass emissions which would otherwise have 
increased or would have increased at a greater rate. The TNRCC MECT EIP 
SIP submittal at section 101.353(a)(3) provides for increasing 
reductions of NOX emissions over time in order to reach 
attainment. In addition the MECT EIP will ensure lower NOX 
emissions than the implementation of 30 TAC Chapter 117 emission 
standards for the HGA attainment demonstration will ensure, since the 
MECT program limits mass emissions based on historical activity levels, 
and reduces the mass cap over time based on the emission rate 
specifications in section 117. The Chapter 117 ESAD limitations are 
rate based and do not limit mass emissions. Thus, the environmental 
benefit expectation for the MECT EIP cap on all emissions to be below 
the level that would have otherwise been set for the affected sources 
has been met. EPA concluded that the TNRCC MECT EIP SIP submittal meets 
the Clean Air Act requirements and EPA EIP guidance expectations for 
the fundamental principle of environmental benefit.
Other Elements of All Trading EIPs
    The other provisions of a trading EIP are discussed at Sec. 6.5 of 
the EPA EIP guidance document. These include provisions for geographic 
trading across boundaries, provisions for notifying the relevant 
Federal Land Manager (FLM) in a Class I area, accounting for emission 
reductions that occur prior to the approval of the EIP, and restricting 
use of Alternative Emission Limits (AELs).
1. Other Trading EIP Elements--New Source Review and Trading
    The expectation is for trading EIPs to contain provisions that 
include new source review and trading since the NSR program may affect 
implementation of a trading EIP and, in turn, the EIP may affect 
implementation of some portions of the NSR program. To meet this 
expectation, sources allowed to comply with offset or netting 
requirements with EIP emission reductions may only use those emission 
reductions which independently meet relevant NSR requirements in the 
CAA, EPA NSR regulations and guidance, and provisions of the EPA EIP 
guidance document. The EIP expectation is that TNRCC will ensure that 
major sources and major modifications are not exempted from any NSR or 
Prevention of Significant Deterioration of Air Quality (PSD) 
requirement because of the implementation of the MECT EIP. Another 
expectation is that a major source or major modification may not avoid 
NSR review by using an EIP except for the use of emission reductions 
that meet the NSR/PSD requirements for netting when the EIP emission 
reductions occur contemporaneously with their use and occur at the same 
source as the emission increase.
    The TNRCC MECT SIP submittal at section 101.352(d) states that 
allowances cannot be used for netting requirements under 30 TAC Chapter 
116, Subchapter B, Divisions 5 and 6 which relate to Nonattainment 
Review and Prevention of Significant Deterioration Review. However, 
section 101.352(e) does permit allowances to occur simultaneously to 
satisfy the correlating one to one portion of the offset requirements 
for new or modified facilities subject to federal nonattainment NSR 
requirements as provided at 30 TAC Chapter 116, Subchapter B, Division 
7 relating to Emission Reductions Offsets. It is understood that the 
use of allowances for the offset requirements will be accomplished by a 
permanent transfer of the allowances to the source undergoing 
permitting. The proposed MECT revision which is being parallel 
processed by EPA in this notice contains the new section 101.356(c) 
which provides for the permanent selling of the annual allowances. The 
permanent transfer of the allowances would meet the requirements of 
section 116.115(b)(2)(C)(iii) for the life of the source. EPA concluded 
that if the State clarifies that the new source will have to obtain 
offsets for the life of the source the TNRCC MECT EIP SIP submittal 
will meet the Clean Air Act requirements and EPA EIP guidance 
expectations for new source review and trading for the category of 
other trading EIP elements.
2. Other Trading EIP Elements--Limitations on Emission Reduction Use
    The expectations are for trading EIPs to provide limitations on 
emission reduction use to be consistent with provisions of the CAA and 
other existing EPA policies. A program that conforms to this 
expectation will not allow the use of NOX emission 
reductions generated outside the modeling domain, emission reductions 
to meet NSPS, BACT, LAER, NSR offset requirements, title IV Acid Rain 
requirements, and any air toxic requirement under section 112 of the 
CAA. Nor would emission reductions be used to meet various statutorily-
mandated mobile source requirements, including exhaust and evaporative 
emission standards for both highway and non-road vehicles and engines; 
Federal Reid Vapor Pressure (RVP), reformulated gasoline (RFG), anti-
dumping and detergent additive requirements, emission reductions to 
meet the municipal waste combustion rules and federally-mandated 
inspection/maintenance (I/M) program requirements.
    The TNRCC MECT SIP submittal at section 101.351 limits the MECT EIP 
to only stationary sources within the eight county Houston Galveston 
ozone nonattainment area. The MECT EIP rule at section 101.356 does not 
allow the use of NOX emission reduction credits (ERCs) from 
30 TAC Chapter 101, Subchapter H, Division 1 ERC EIP program for MECT 
banking and trading. Likewise, section 101.352(c) allows unused 
allowances to be used as ERCs but the use of ERCs as allowances is not 
permitted. DERCs or MDERCs allowed for use as allowances would by 
definition be surplus to the statutory mobile source, NSPS, BACT, LAER, 
NSR, sulfur in fuel Tier II, and municipal waste combuster (MWC) 
requirements. EPA concluded that the TNRCC MECT EIP SIP submittal meets 
the Clean Air Act requirements and EPA EIP guidance expectations for 
limitations on emission reduction use for the category of other trading 
EIP elements.
3. Other Trading EIP Elements--Banking Emission Reductions
    The expectations for trading EIPs for banking emission reductions 
center on emission spiking. The expectation is that, if the banking of 
emission reductions is allowed in the EIP, an evaluation would be 
performed to examine how likely it is that emission spiking will occur, 
and that safeguards would be included in the EIP to prevent emission 
spiking commensurate with the probability that spiking will occur.
    The TNRCC MECT SIP submittal at section 101.356(a) allows a source 
participating in the EIP to bank the allowances not used in one control 
period to be used in the following control period. The MECT EIP also 
requires that the oldest allowances must be used first. This also tends 
to prevent carryover for more than one year and thus prevent emission 
spiking. The MECT rules so restrict ``banking'' that any potential for 
emissions ``spiking'' would be minimal. Banking is limited to just one 
year, and the chance of carryover to subsequent years is

[[Page 38242]]

minimized by section 101.354(b) (requiring Executive Director to debit 
most recently allocated allowances before banked allowances--thus 
increasing likelihood that banked allowances will expire). Use of the 
banking provision will be random, and with the significantly declining 
cap, chances of spiking should be minimal. EPA concluded that the TNRCC 
MECT EIP SIP submittal meets the Clean Air Act requirements and EPA EIP 
guidance expectations for banking emission reductions for the category 
of other trading EIP elements.
4. Other Trading EIP Elements--General Conformity
    The expectations for trading EIPs for general conformity are to 
ensure that a federal entity can not use emission reductions generated 
by an EIP to meet the offset or mitigation options of the general 
conformity requirements. The general conformity requirements will be 
contained in the revised general conformity rules that EPA will propose 
shortly. The EIP guidance will be revised as appropriate following 
promulgation of the general conformity rules. The EIP guidance does not 
specify that the MECT rules contain any provision on general 
conformity, so the MECT meets this EIP expectation on general 
conformity.
5. Other Trading EIP Elements--Specific Pollutant Effects
    The expectation for provisions to address specific pollutant 
effects may need to be included in the EIP SIP submittal. If 
NOX is in the MECT EIP, provisions for localized increases 
in emissions of criteria pollutants in section 16.11 of the EPA EIP 
guidance may apply. If VOCs are in the MECT EIP, provisions for 
localized increases in HAPs in section 16.2 may apply. If inter-
precursor trading is included in the MECT EIP, provisions for ozone 
inter-precursor trading in section 16.9 may apply.
    With respect to localized increases on NOX, the 
expectation applies to trading EIPs which can potentially exceed the 
annual significant emissions increase threshold of 40 tons per year 
(tpy). This increase applies only to emission increases above what the 
source was emitting before the implementation of the EIP. Since the 
MECT EIP will result in a substantial overall emissions decrease it is 
highly unlikely that this provision will be triggered.
    With respect to VOCs, if the MECT EIP could cause localized 
increases in HAPs, the provisions of section 16.2 of the EPA EIP 
guidance would be applicable. Since the only potential VOC 
participation in the EIP is the use of DERCs and MDERCs, there could be 
no increase in VOCs above the baseline. For this reason the Hazardous 
Air Pollutant (HAP) framework is not applicable to the MECT EIP. For 
the same reasons the expectations of section 16.9 of the EIP guidance 
for provisions for ozone inter-precursor trading are not applicable to 
the MECT EIP submittal. EPA concluded that the TNRCC MECT EIP SIP 
submittal meets the Clean Air Act requirements and EPA EIP guidance 
expectations for specific pollutant effects for the category of other 
trading EIP elements.
6. Other Trading EIP Elements--Transportation Conformity
    The expectations for trading EIPs to ensure consistency with 
transportation conformity are that the MECT EIP rule contain 
requirements that mobile sources generating mobile discrete emission 
reductions credits certify the reductions are not used to meet 
transportation conformity requirements. To meet the expectation, the 
EIP rule would require notification to TNRCC, the HGA Metropolitan 
Planning Organization (MPO), and the Texas Department of Transportation 
of the generator's intention to generate MDERCs. Once notified, the MPO 
may not use these MDERCs to satisfy the requirement for transportation 
conformity. The expectation is that the generator will provide enough 
information to the MPO about the likely emission reductions from the 
activity to allow the MPO to adjust its regional conformity analyses 
appropriately. TNRCC must also include provisions for assessing 
penalties against sources that use EIP MDERCs that are not surplus to 
transportation conformity requirements.
    The MECT rules do not require notification to the MPO as stated in 
the EIP guidance. It is understood that any MDERC to be traded must be 
surplus to any state or federal law, regulation or agreed order. This 
would mean that the MDERC has to be surplus to the conformity analysis 
relied upon in the SIP attainment demonstration which is required by a 
federal rule. The TNRCC MECT SIP submittal at section 
101.356(f)requires any MDERCs traded must be surplus in accordance with 
the emission quantification protocols established in 30 TAC Chapter 
101, Subchapter H, Division 4. If the State commits to EPA's 
satisfaction to provide for notification of MDERC generation to the 
MPO, EPA will conclude that the TNRCC MECT EIP SIP submittal meets the 
Clean Air Act requirements and EPA EIP guidance expectations for 
transportation conformity for the category of other trading EIP 
elements.
7. Other Trading EIP Elements--Inter-Credit Trading
    The expectations for trading EIPs to contain provisions for inter-
credit trading center on the acquisition and use of an emission 
reduction generated under one EIP to meet the requirements of another 
EIP. The expectation is that if the EIP includes inter-credit trading, 
the provisions of section 16.12 will be met. The TNRCC MECT SIP 
submittal at section 101.356(f) requires any DERCs or MDERCs traded 
must be generated in accordance with the emission quantification 
protocols established in 30 TAC Chapter 101, Subchapter H, Division 4. 
The DERC and MDERC rules are being reviewed for conformance with the 
EIP section 16.12 as part of EPA's evaluation of 30 TAC Chapter 101, 
Subchapter H, Division 4. EPA will shortly propose action on the rules 
in Subchapter H, Division 4. MDERCs and DERCs may not be utilized for 
compliance with MECT program annual caps until the DERC and MDERC rules 
are approved by EPA.
    EPA concluded that the TNRCC MECT EIP SIP submittal meets the Clean 
Air Act requirements and EPA EIP guidance expectations for inter-credit 
trading for the category of other trading EIP elements.
8. Other Trading EIP Elements--EIPs That Include Reasonably Available 
Control Technology (RACT) Sources
    The expectations for trading EIPs that include RACT sources are 
that if the EIP covers RACT sources, the provisions of the EIP guidance 
document section 16.13 be met. Sources with an alternative RACT limit 
usually are allowed to emit at a higher rate than sources covered under 
the presumptive RACT limit. Sources subject to presumptive and 
alternative RACT limits may generate reductions for use in a trading 
EIP. However, in a program that conforms to the EIP Guidance, the 
amount of the reduction would be based on application of the 
presumptive RACT limit rather than the alternative RACT limit. 
Sometimes alternative RACT determinations are considered a type of 
Alternative Emission Limitation. Once the MECT EIP is adopted TNRCC may 
not issue any new AELs.
    The RACT and ESAD for the HGA area in Chapter 117 are as stringent 
if not more stringent than the presumptive limits contained in the 
Control Technology Guideline (CTG) documents. Therefore these 
presumptive national limits will be above the rates used to establish 
MECT

[[Page 38243]]

allowances. EPA concluded that the TNRCC MECT EIP SIP submittal meets 
the Clean Air Act requirements and EPA EIP guidance expectations for 
EIPs that include RACT sources for the category of other trading EIP 
elements.
9. Other Trading EIP Elements--Geographic Trading Across Jurisdictional 
Boundaries
    The expectations for trading EIPs for geographic trading across 
jurisdictional boundaries does not provide additional geographic 
restrictions to trading if the MECT EIP only covers areas that are not 
needing and lacking an attainment demonstration. In this case the 
geographic restrictions contained in the approved SIP will apply to the 
MECT EIP. The TNRCC MECT SIP submittal at section 101.351 limits the 
MECT EIP only to stationary sources within the eight county Houston 
Galveston ozone nonattainment area. EPA concluded that the TNRCC MECT 
EIP SIP submittal meets the Clean Air Act requirements and EPA EIP 
guidance expectations for geographical trading across jurisdictional 
boundaries for the category of other trading EIP elements.
10. Other Trading EIP Elements--Federal Land Manager (FLM) Notification
    The expectations for trading EIPs for Federal Land Manager 
notification in PSD Class I areas is found at section 16.6 for trading 
EIPs located in or within 100 km of a PSD Class I area. The nearest PSD 
Class I area to the HGA area is Breton Island National Wildlife 
preserve off the coast of Louisiana. It is more than 300 kilometers 
from the HGA area. EPA concluded that the TNRCC MECT EIP SIP submittal 
meets the Clean Air Act requirements and EPA EIP guidance expectations 
for FLM notification for the category of other trading EIP elements.
11. Other Trading EIP Elements--Tracking Systems and Market 
Clearinghouses
    The expectations for trading EIPs for tracking systems and market 
clearinghouses is that both TNRCC and the sources participating in 
trading EIPs will obtain accurate information about market activities 
related to trading emission reductions. Specifically, the State will 
obtain information that would allow the tracking of generation/use of 
emission reductions, ensure compliance, target enforcement resources 
and conduct periodic EIP performance audits. A tracking system is 
needed to meet these provisions. The information would be made readily 
available to the public.
    The TNRCC MECT SIP submittal at section 101.356(e) requires all 
trades to be completed by the TNRCC executive director following the 
submittal of a completed TNRCC ECT-2 form, Application for Transfer of 
Allowances. The completed ECT-2 shall include the price paid per 
allowance. The ECT-2 shall be submitted to TNRCC at least 30 days prior 
to the allowances being deposited into the transferee's broker or 
compliance account. The TNRCC executive director will issue a letter to 
the purchaser and seller reflecting the trade. The trade will be 
considered finalized upon issuance of the letter. The MECT SIP 
submittal at section 101.363 requires each source to report trades 
annually in the compliance report using TNRCC form ECT-1. Performance 
audits of allowance trading is required by section 101.363. EPA 
concluded that the TNRCC MECT EIP SIP submittal meets the Clean Air Act 
requirements and EPA EIP guidance expectations for tracking systems and 
market clearinghouses for the category of other trading EIP elements.
12. Other Trading EIP Elements--Multi-Claimants
    The expectations for trading EIPs concerning multi-claimants 
focuses on certain situations where ownership of an EIP emission 
reduction strategy could be claimed by more than one party. When these 
situations occur, it is important that the MECT EIP ensure that 
ownership is successfully claimed by only one party to avoid double 
counting of reductions. From the MECT EIP SIP submittal, all sources in 
the cap must participate by receiving allocations of allowances as per 
section 101.353. The banking and trading of allowances are specified by 
section 101.356. The allocation, banking and trading of allowances is 
controlled by TNRCC at each phase by the submission and approval of 
forms such that there should be no practical question of ownership of 
allowances. EPA concluded that the TNRCC MECT EIP SIP submittal meets 
the Clean Air Act requirements and EPA EIP guidance expectations for 
multi-claimants for the category of other trading EIP elements.
13. Other Trading EIP Elements--Emission Reductions Prior to EIP 
Approval
    The expectations for trading EIPs address the condition that there 
may be sources that reduce emissions before the development of an EIP. 
Some generators may want these old emission reductions to participate 
in the trading EIP. Any emission reductions that result from emission 
reduction strategies that were started before November 30, 1990 may not 
be allowed to participate in a trading EIP. In the MECT EIP SIP 
submittal at section 101.353, all sources in the cap must participate 
by receiving allocations of allowances. The allocations are based upon 
the level of activity and emission rates of all sources for the annual 
periods of 1997, 1998 and 1999. There is no provision for ERCs to occur 
prior to the approval of the EIP or outside the process of initial 
allocation of allowances. EPA concluded that the TNRCC MECT EIP SIP 
submittal meets the Clean Air Act requirements and EPA EIP guidance 
expectations for emission reductions prior to EIP approval for the 
category of other trading EIP elements.
14. Other Trading EIP Elements--Compliance Margins
    The expectation for trading EIPs for provisions for compliance 
margins is that the MECT trading EIP will include provisions to account 
for compliance margins when sources participating in an EIP are 
initially complying with an emission limit. The provision for 
compliance margins is for sources participating in an EIP to comply 
with an emission limit. Since the MECT EIP is based upon allowances 
consisting of mass emissions determined from historical actual 
emissions, the provision does not apply. The eighty percent reduction 
of emissions from historical levels will leave little if any room for 
compliance margins. EPA concluded that the TNRCC MECT EIP SIP submittal 
meets the Clean Air Act requirements and EPA EIP guidance expectations 
for compliance margins for the category of other trading EIP elements.
15. Other Trading EIP Elements--Alternative Emission Limits
    The trading EIPs expectation is for provisions restricting the use 
of alternative emission limits. Under traditional air quality 
management approaches, sources are required by regulation to meet 
emission limitations. In some cases, sources may find it difficult to 
meet these requirements by the required deadline. In such events, 
States have granted sources some form of relief (e.g., waivers, 
exemptions, compliance deadline extensions, and temporary relaxations 
to the regulatory requirements). These forms of relief are known as 
alternative emission limits, or AELs. While AELs may be necessary in 
limited cases, widespread use of AELs ultimately means that expected 
emission reductions will be delayed. A benefit of trading EIPs is that 
they provide sources an alternative means for obtaining required 
emission reductions

[[Page 38244]]

on time. This means that in many cases, sources will not need AELs as a 
means of regulatory relief.
    The TNRCC MECT EIP SIP submittal at section 101.353 specifies that 
all allowances are based upon the level of activity and emission rates 
of all sources in the cap for the annual periods of 1997, 1998 and 
1999. Once the MECT EIP is operational, if a source cannot meet the 
allowance limitation additional allowances must be purchased. The EIP 
Guidance expectation is that the MECT program will prohibit the 
issuance of AELs which would raise the annual cap unless the source 
demonstrates that it can not purchase allowances. The MECT program 
contains no explicit prohibition against issuance of AELs. EPA 
concluded that the TNRCC MECT EIP SIP submittal will meet the Clean Air 
Act requirements and EPA EIP guidance expectations for alternative 
emission limits for the category of other trading EIP elements, if the 
state demonstrates how existing provisions will prevent issuance of an 
AEL that increases an annual allocation, or the state commits not to 
issue such an AEL, unless the source demonstrates that it cannot 
acquire allowances.
Provisions for a Multi-Source Emission Cap-and-Trade EIP
    The expectations for additional provisions needed for a multi-
source emission cap-and-trade EIP are found in the EPA EIP guidance 
document. A multi-source emission cap-and-trade EIP is an emission 
trading EIP that limits the total emissions from a group of sources to 
a level needed for an area to attain a NAAQS, and allows sources 
flexibility in complying with their emission limits.
    The following list presents several conditions that an EIP that 
conforms to the Guidance would meet to ensure the integrity of the 
emission cap. It also includes references to the TNRCC MECT SIP 
submittal which ensure the integrity of the emission cap.
     Sources have the ability to measure and report all capped 
emissions. TNRCC has revised the MECT rule by submitting emission 
quantification protocols that meet the EPA EIP guidance.
     Each affected source must designate an authorized account 
representative as per section 101.356(d) who is responsible for the 
source's emissions, trading and allowances.
     The SIP submittal demonstrated that sources cannot shift a 
significant amount of production, and therefore emissions, to non-
affected sources outside the EIP since all regulated stationary sources 
of NOX in the HGA area must participate in the MECT.
     Penalties for non-compliance are known in advance, are 
automatic when a unit's emissions in the control period exceed its 
allowances, and are equivalent to traditional CAA penalties as per 
TNRCC's enforcement statutes, regulations and policies.
     All the emissions, allowance, and transaction information 
are to be publicly available on the TNRCC world wide web site.
     The MECT EIP covers sources with RACT requirements. Rather 
than allow RACT sources to comply using the EIP, the MECT EIP has 
incorporated the RACT and limitations to reach attainment into the 
allowances of the EIP.
     The MECT EIP rule can not increase localized emissions of 
HAPs since the only use of VOCs allowed to be traded are reductions 
below the baseline for the attainment demonstration.
    EPA concluded that the TNRCC MECT EIP SIP submittal meets the Clean 
Air Act requirements and EPA EIP guidance expectations for additional 
provisions needed for a multi-source emission cap and trade EIP.
1. Other Multi-Source Cap & Trade Provisions--Setting the Budget
    The expectations for setting the budget for a multi-source emission 
cap-and-trade EIP are that the program baseline for the cap-and-trade 
program will be no greater than the sum of the historical average 
emissions of the participating sources.
    The MECT program baseline is based almost entirely on the sum of 
historical emissions from sources in the program. For some newer 
sources, allocations are based on allowable emissions for two years, 
but this is only until an actual emissions baseline is established as 
required by 30 TAC 101.353(a)(2)(B) and (4)(B).
    EPA concluded that the TNRCC MECT EIP SIP submittal meets the Clean 
Air Act requirements and EPA EIP guidance expectations for setting the 
budget needed for a multi-source emission cap and trade EIP.
2. Other Multi-Source Cap & Trade Provisions--Defining the Affected 
Sources
    The expectations for defining the affected sources for a multi-
source emission cap-and-trade EIP are found at section 7.4(c) of the 
EPA EIP guidance document. A multi-source emission cap-and-trade EIP 
contains a certain set of sources. The aggregate emissions from these 
sources are capped. The emission cap aspect of a multi-source emission 
cap-and-trade EIP will be compromised, however, if TNRCC defines the 
population of sources in a way that allows production from sources 
covered under the EIP to shift to those that are not covered. The TNRCC 
MECT SIP submittal at section 101.351 establishes the MECT EIP cap for 
stationary sources with emissions greater than 10 tpy. Significant 
emission shifts are unlikely since any sources with emissions less than 
10 tpy whose sources increase above 10 tpy are required to obtain 
allowances from other sources and become part of the cap. Section 
101.353(b) requires new or modified sources not in the cap to obtain 
allowances for each control period from sources participating in the 
MECT EIP. EPA concluded that the TNRCC MECT EIP SIP submittal meets the 
Clean Air Act requirements and EPA EIP guidance expectations for 
defining the affected sources for a multi-source emission cap and trade 
EIP.
3. Other Multi-Source Cap & Trade Provisions--Opt-in Sources
    The expectations for provisions for opt-in sources in a multi-
source emission cap-and-trade EIP are found at section 7.4(d) of the 
EPA EIP guidance document. Additional sources may want to ``opt-in'' to 
the multi-source cap-and-trade EIP. These additional sources could be 
smaller, located in a different geographic area, or represent another 
sector than the originally defined affected sources. All trading units 
are within the HGA area. There is no provision for opt-ins. Section 
101.353(b) requires new or modified sources not in the cap to obtain 
allowances for each control period from sources participating in the 
MECT EIP. The TNRCC MECT SIP submittal at section 101.353(b) requires 
new or modified sources not in the cap to obtain allowances for each 
control period from sources participating in the MECT EIP. EPA 
concluded that the TNRCC MECT EIP SIP submittal meets the Clean Air Act 
requirements and EPA EIP guidance expectations for opt-in sources for a 
multi-source emission cap and trade EIP.
4. Other Multi-Source Cap & Trade Provisions--Distributing Allowances
    The expectations for provisions for distributing allowances in a 
multi-source emission cap-and-trade EIP are found at section 7.4(e) of 
the EPA EIP guidance document. The expectation is that after the 
emission budget is set, the population of covered sources would receive 
a share of the emission budget. Factors that may be used to assign a 
share of the budget include historical,

[[Page 38245]]

current or projected emission levels and existing control technology 
requirements. The TNRCC MECT SIP submittal at section 101.351 applies 
to all stationary NOX facilities subject to TNRCC Rule 117 
emission specifications at sites with emissions design capacity above 
10 tpy in the HGA ozone nonattainment area. The emission budget in the 
MECT EIP was established based on historical emission levels. From 
section 101.351(a), the initial allowances in the MECT EIP will be 
based on the actual historical emissions for each source from 1997, 
1998 and 1999. Section 101.351(a)(3) requires three steps from January 
1, 2002 through April 1, 2007 where the allowances are reduced to reach 
the final goal of approximately 80% overall reduction from the 
historical levels. The program will be audited every three years to 
evaluate its impact on the attainment demonstration. The TNRCC 
Executive Director will recommend any measures necessary to remedy 
problems.
    The revised attainment demonstration submittal which is being 
parallel processed includes a TNRCC study to be completed in 2002 which 
will evaluate and potentially adjust Chapter 117 emission limitations. 
In addition the 2004 mid-course correction by TNRCC will evaluate 
control measures and enforceable commitments necessary to reach 
attainment in 2007. There will be an opportunity at both of these 
occasions to readjust allowances to reach attainment if the audit 
results indicate that all issued allocations are higher than assumed in 
the attainment demonstration.
    Section 101.353(g) of the MECT Rules states that in ``extenuating 
circumstances'' the TNRCC executive director may deviate from the 
requirements for determining the amount of allowances to be issued to a 
facility. TNRCC explained the purpose of this provision as being to 
``prevent significantly low allocations'' in ``extraordinary 
circumstances, for example a catastrophe which required a facility to 
shut down during the historic period upon which allocations would 
normally be based.'' TNRCC Chapter 101 Rule Log No. 1998-089-101-AI, at 
74. Existing sources that wish to utilize section 101.353(g) were 
required by paragraph (1) of the rule to file applications by June 30, 
2001. We are informed that approximately 15 sources filed applications 
by the deadline, and that their NOX emissions represent 
approximately one half of one percent of total emissions regulated by 
the MECT program.
    Section 101.353(g) allows executive director discretion. It is 
expected, however, that prior to the time that EPA takes final action 
on the MECT rules, the state will have made decisions on all 
applications that were submitted by June 30, 2001. In order for EPA to 
approve the MECT rules, the state must demonstrate prior to final EPA 
action that any allocations issued pursuant to section 101.353(g)(1) 
are not inconsistent with the attainment demonstration, and comply with 
the CAA.
    Paragraph (2) of section 101.353(g) allows a finite group of 
relatively new sources to submit applications after June 30, 2001. In 
order for EPA to approve the MECT rules, the state must either (1) 
demonstrate that the allocations that could be issued pursuant to 
section 101.353(g)(2) would not be inconsistent with the attainment 
demonstration and would comply with the CAA, or (2) modify the rule to 
eliminate executive director discretion or require EPA approval of any 
allocation issued pursuant to paragraph (g)(2).
    EPA concluded that the TNRCC MECT EIP SIP submittal will meet the 
Clean Air Act requirements and EPA EIP guidance expectations for 
distributing allowances for a multi-source emission cap and trade EIP, 
if the above-described demonstrations or modifications are made.
5. Other Multi-Source Cap & Trade Provisions--Emissions Banking
    The TNRCC MECT SIP submittal at section 101.356(a) allows a source 
participating in the EIP to bank the allowances not used in one control 
period to be used in the following control period. The EIP Guidance 
expectation at section 16.15 is that a banking EIP would safeguard 
against emissions spiking. The MECT rules so restrict ``banking'' that 
any potential for emissions ``spiking'' would be minimal. Banking is 
limited to just one year, and the chance of carryover to subsequent 
years is minimized by section 101.354(b)(requiring Executive Director 
to debit most recently allocated allowances before banked allowances--
thus increasing likelihood that banked allowances will expire). Use of 
the banking provision will be random, and with the significantly 
declining cap, chances of spiking should be minimal. EPA concluded that 
the TNRCC MECT EIP SIP submittal meets the Clean Air Act requirements 
and EPA EIP guidance expectations for emissions banking for a multi-
source emission cap and trade EIP.
6. Other Cap & Trade Provisions--Allowing Shutdowns to Generate 
Reductions
    Shutdowns may be allowed to generate emission reductions within the 
context of a multi-source cap-and-trade program if the emissions 
reductions resulting from the shutdown are still in the applicable 
emissions inventory and the EIP has provisions to address shifting 
demand. The MECT EIP at section 101.353(h) states that if allowances 
are being allocated based on allowable emissions and the facility does 
not achieve two complete consecutive calendar years of actual level of 
activity data, then allowances will not continue to be allocated if the 
facility ceases operation or is not built. EPA concluded that the TNRCC 
MECT EIP SIP submittal meets the Clean Air Act requirements and EPA EIP 
guidance expectations for allowing shutdowns to generate reductions for 
a multi-source emission cap and trade EIP.
7. Other Cap & Trade Provisions--Shifting Demand
    Shifting of activity levels is a potentially serious problem for 
all multi-source cap-and-trade EIPs. A source in a cap could decide to 
shift production to a source outside the cap within the same non-
attainment area. Shifting demand from sources within the cap to sources 
outside the cap is unlikely to occur due to the fact that the regulated 
industries (refineries, petrochemical, chemical, etc.) are made up of 
relatively large sources. In other words, all significant sources that 
could do the work performed by capped sources are also within the cap. 
The under 10 ton sources just are not capable of assuming any 
significant portion of the activity. If emissions at a non-capped 
source increase to over ten tons per year, it will become regulated 
under the cap. It was concluded that significant shifting of demand is 
unlikely to occur, due to the nature of the EIP. EPA concluded that the 
TNRCC MECT EIP SIP submittal meets the Clean Air Act requirements and 
EPA EIP guidance expectations for shifting demand for a multi-source 
emission cap and trade EIP.
8. Other Cap & Trade Provisions--True-up Period
    Within the context of a multi-source emission cap-and-trade EIP a 
source may be allowed to obtain emission allocations after the end of 
the compliance period. The time between the end of the compliance 
period and when the source would demonstrate compliance is called the 
true-up period.

[[Page 38246]]

The length of a true-up period should be based on the length of the 
compliance period. In general, for a compliance periods of several 
months up to a year the true-up period should not be more than 60 days. 
For shorter compliance periods the true-up period should be shorter 
than 60 days. The MECT EIP at section 101.352(b) and at section 
101.354(d) requires each site no later than March 1 of each year to 
hold a quantity of allowances in its compliance account that equals or 
exceeds the total emissions of NOX emitted during the 
control period just ended. This requirement will begin March 1, 2003. 
This ``true up'' period is 60 days. EPA concluded that the TNRCC MECT 
EIP SIP submittal meets the Clean Air Act requirements and EPA EIP 
guidance expectations for a true-up period for a multi-source emission 
cap and trade EIP.

D. Conclusion

    EPA reviewed the TNRCC MECT SIP submittal with respect to the 
expectations of the EPA EIP Guidance document and the requirements of 
the Clean Air Act. Overall EPA has concluded, after review and 
analysis, that the TNRCC MECT EIP regulation can provide a positive 
contribution toward the attainment of the one-hour ozone standard in 
the HGA area. EPA proposes to conclude that the program will satisfy 
all requirements of the Clean Air Act, if certain modifications and/or 
demonstrations described above are made.

II. Background

A. Date of State's SIP Submission

What Was the Date of the State's SIP Submission?
    EPA received the proposed MECT SIP revision submitted by the TNRCC 
on December 22, 2000. The MECT SIP revision consisted of new sections 
to 30 TAC Chapter 101, Subchapter H, Division 3 which had been 
promulgated by TNRCC in December 2000. The MECT regulation is found at 
new sections 101.350 through 101.363. The Governor submitted revisions 
to the MECT submittal by letter dated June 15, 2001 and requested 
parallel processing of the revisions.
Was the TNRCC MECT Rule Subject to Public Notice?
    The TNRCC held public hearings on the proposed MECT rules at the 
following locations: September 18, 2000, in Conroe and Lake Jackson; 
September 19, 2000 in Houston (2 hearings); September 20, 2000, in Katy 
and Pasadena; September 21, 2000, in Beaumont, Amarillo, and Texas 
City; September 22, 2000, in Dayton, El Paso, and Arlington; and 
September 25, 2000, in Austin and Corpus Christi. The comment period 
closed at 5 p.m. on September 25, 2000. Fifteen individuals opposed the 
cap and trade concept. Eight individuals expressed general support for 
the cap and trade concept. The public input was incorporated into the 
final TNRCC regulation.
What Are the Sections of the MECT Rule?
    New section 101.350 contains definitions of terms used in the rule. 
Other sections are: section 101.351 Applicability, section 101.352 
General Provisions, section 101.353 Allowances, section 101.354, 
Allowance Deductions, section 101.356 Allowance Banking and Trading, 
section 101.358 Emission Monitoring and Compliance Demonstration, 
section 101.359 Reporting and section 101.360 Level of Activity 
Certification. The revised MECT rule contains section 101.363, Program 
Audits and Reports.

B. General Criteria for an EIP

What Are the General Criteria for an EIP?
    The document, Improving Air Quality with Economic Incentive 
Programs, (EPA-452/R-01-001) January 2001 is the EPA guideline for 
discretionary EIP submittals for SIP credit. As previously stated, the 
guidance document does not represent the EPA's final action for any 
discretionary EIP. Final action occurs when the EPA has approved or 
disapproved the discretionary EIP submitted as a SIP revision.
What Is the Applicability of Previous EPA EIP Regulations and Guidance?
    The EPA EIP Guidance will take precedence over the discretionary 
EIP guidance provided in prior documents such as the 1994 EIP 
(published at 59 FR 16690) and the guidance in the emission trading 
policy statement (ETPS) (published on December 4, 1986 at 51 FR 43813). 
In addition, the guidance represents the EPA's final action on the 
Open-Market Trading Rule (OMTR) (proposed in August 3, 1995 at 60 FR 
39668, and on August 25, 1995 at 60 FR 44290). While the proposed OMTR 
rule was never made final, the EPA EIP Guidance addresses the public 
comments received for that proposal, and provides guidance on other 
types of EIPs as well. These previously published documents provide 
supplementary information and useful background for designing an EIP. 
The requirements for mandatory EIPs remain in the Code of Federal 
Regulations (CFR), title 40, part 51, subpart U (59 FR 16690).
How Does the EPA EIP Guidance Affect the EPA's 1994 EIP Rule?
    The EPA's 1994 EIP rule established requirements for mandatory 
EIPs, and guidance for discretionary EIPs. The rule still remains in 
effect for mandatory EIPs. The new EPA EIP document updates the 
guidance the EPA's 1994 EIP rule provides for developing discretionary 
EIPs. The EPA removed Sec. 51.490(b) of the EPA's 1994 EIP rule when 
the final version of the EIP guidance was published.
Why Was the EPA EIP Guidance Developed?
    The EPA intended for the EPA EIP to be the primary guidance for use 
in EIP development. The EPA intended for the EIP guidance to achieve 
the following:
     Update the existing guidance using a new plain language 
format.
     Tie together, for reference purposes, all of the existing 
related guidance in one document.
     Provide additional information on issues not discussed in 
previously existing guidance.
    The EPA EIP guidance document provides strategic advice on choosing 
a program and determining which sources to include in the program. It 
provides information on using emission reductions attributable to a 
discretionary EIP to meet the air quality-related programs such as SIP 
or SIP-related requirements. It also discusses the important tasks in 
program implementation such as tracking and evaluation.
What Are the Goals of the EPA EIP Guidance?
    The goals of the EPA EIP guidance are as follows:
     Define economic incentive programs.
     Select the best type of EIP for a given situation.
     Provide help in understanding the process for getting an 
EIP rule approved as part of the SIP.
     Provide the information needed to implement an approved 
EIP.
     Provide information regarding evaluation and updating an 
approved EIP.
     Describe other guidance that might applicable.
Is the EPA EIP Guidance Information on the Program-Level or the Source-
Level?
    Both, the guidance provides information at two levels, a program-
level and a source-level. Program-level

[[Page 38247]]

guidance applies to the EIP as a whole. States are primarily 
responsible for implementing these provisions. Source-level guidance 
applies to specific sources participating in the EIP. While the State 
is responsible for establishing the appropriate requirements for 
sources in the rule, the sources themselves are responsible for 
implementing these other provisions. Program-level and source-level 
guidance will apply to the majority of EIPs, but there are some 
exceptions where source-level guidance is not applicable. The EPA 
intended the guidance to be a ``living document,'' and plans to update 
the guidance periodically as the EPA establishes new policies and 
standards.
How Will EPA Act on an EIP SIP Submittal?
    Once an EIP SIP revision is submitted, EPA will take action through 
notice-and-comment rule making to determine if the statutory 
requirements have been met. Only action taken after the conclusion of 
that rulemaking would constitute final Agency action. The EPA would 
take steps to expedite its proposed approval in the case of SIP 
revisions containing programs that contain the elements of the EPA EIP 
guidance.
    If a program that does not contain the elements of the EPA EIP 
guidance for that type of program is submitted, EPA would still seek to 
determine whether the applicable CAA requirements were met, and, if so, 
EPA would approve the submission. The EPA would make the determination 
through notice-and-comment rule making.

III. Administrative Requirements

    Under Executive Order 12866 (58 FR 51735, October 4, 1993), this 
proposed action is not a ``significant regulatory action'' and 
therefore is not subject to review by the Office of Management and 
Budget. For this reason, this action is also not subject to Executive 
Order 13211, ``Actions Concerning Regulations That Significantly Affect 
Energy Supply, Distribution, or Use'' (66 FR 28355, May 22, 2001). This 
proposed action merely proposes to approve state law as meeting federal 
requirements and imposes no additional requirements beyond those 
imposed by state law. Accordingly, the Administrator certifies that 
this proposed 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 proposes to approve 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). This proposed rule also does not have a 
substantial direct effect on one or more Indian tribes, on the 
relationship between the Federal Government and Indian tribes, or on 
the distribution of power and responsibilities between the Federal 
Government and Indian tribes, as specified by Executive Order 13175 (65 
FR 67249, November 9, 2000), nor will it 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 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. This 
proposed 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 proposed 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 proposed 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, Intergovernmental 
relations, Nitrogen dioxide, Nonattainment, Ozone, Reporting and 
recordkeeping requirements, Volatile organic compounds.

    Dated: July 16, 2001.
Gregg A. Cooke,
Regional Administrator, Region 6.
[FR Doc. 01-18318 Filed 7-20-01; 8:45 am]
BILLING CODE 6560-15-P