Approval and Promulgation of Air Quality Implementation Plans; Texas; Discrete Emission Credit Banking and Trading Program, 58154-58167 [05-19998]

Agencies

• ENVIRONMENTAL PROTECTION AGENCY

[Federal Register Volume 70, Number 192 (Wednesday, October 5, 2005)]
[Proposed Rules]
[Pages 58154-58167]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-19998]


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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 52

[R06-OAR-2005-TX-0029; FRL-7980-7]


Approval and Promulgation of Air Quality Implementation Plans; 
Texas; Discrete Emission Credit Banking and Trading Program

AGENCY: Environmental Protection Agency (EPA).

ACTION: Proposed rule.

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SUMMARY: EPA is proposing to conditionally approve revisions to the 
Texas State Implementation Plan (SIP) concerning the Discrete Emission 
Credit Banking and Trading Program. Additionally, we are proposing 
approval of a subsection of Chapter 115 of the Texas Administrative 
Code (TAC), Control of Air Pollution from Volatile Organic Compounds, 
which cross-references the Discrete Emission Credit Banking and Trading 
Program. We are also proposing approval of a subsection of 30 TAC 
Chapter 116, Control of Air Pollution by Permits for New Construction 
or Modification, which provides a definition referred to in the 
Discrete Emission Credit Banking and Trading Program.

DATES: Comments must be received on or before November 4, 2005.

ADDRESSES: Submit your comments, identified by Regional Materials in 
EDocket (RME) ID No. R06-OAR-2005-TX-0029, by one of the following 
methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the on-line instructions for submitting comments.
     Agency Website: https://docket.epa.gov/rmepub/ RME, EPA's 
electronic public docket and comment system, is EPA's preferred method 
for receiving comments. Once in the system, select ``quick search,'' 
then key in the appropriate RME Docket identification number. Follow 
the on-line instructions for submitting comments.
     U.S. EPA Region 6 ``Contact Us'' web site: https://epa.gov/
region6/r6coment.htm. Please click on ``6PD'' (Multimedia) and select 
``Air'' before submitting comments.
     E-mail: Mr. David Neleigh at neleigh.david@epa.gov. Please 
also cc the person listed in the FOR FURTHER INFORMATION CONTACT 
section below.
     Fax: Mr. David Neleigh, Chief, Air Permitting Section 
(6PD-R), at fax number 214-665-6762.
     Mail: Mr. David Neleigh, Chief, Air Permitting Section 
(6PD-R), Environmental Protection Agency, 1445 Ross Avenue, Suite 1200, 
Dallas, Texas 75202-2733.
     Hand or Courier Delivery: Mr. David Neleigh, Chief, Air 
Permitting Section (6PD-R), Environmental Protection Agency, 1445 Ross 
Avenue, Suite 1200, Dallas, Texas 75202-2733. Such deliveries are 
accepted only between the hours of 8 am and 4 pm weekdays except for 
legal holidays. Special arrangements should be made for deliveries of 
boxed information.
    Instructions: Direct your comments to RME ID No. R06-OAR-2005-TX-
0029. EPA's policy is that all comments received will be included in 
the public file without change, and may be made available online at 
https://docket.epa.gov/rmepub/, including any personal information 
provided, unless the comment includes information claimed to be 
Confidential Business Information (CBI) or other information the 
disclosure of which is restricted by statute. Do not submit information 
through RME, regulations.gov, or e-mail if you believe that it is CBI 
or otherwise protected from disclosure. The RME website and the Federal 
regulations.gov are ``anonymous access'' systems, which means EPA will 
not know your identity or contact information unless you provide it in 
the body of your comment. If you send an e-mail comment directly to EPA 
without going through RME or regulations.gov, your e-mail address will 
be automatically captured and included as part of the comment that is 
placed in the public file and made available on the Internet. If you 
submit an electronic comment, EPA recommends that you include your name 
and other contact information in the body of your comment and with any 
disk or CD-ROM you submit. If EPA cannot read your comment due to 
technical difficulties and cannot contact you for clarification, EPA 
may not be able to consider your comment. Electronic files should avoid 
the use of special characters, any form of encryption, and be free of 
any defects or viruses. Guidance on preparing comments is given in the 
SUPPLEMENTARY INFORMATION section of this document under the General 
Information heading.
    Docket: All documents in the electronic docket are listed in the 
RME index at https://docket.epa.gov/rmepub/. Although listed in the 
index, some information is not publicly available, i.e., CBI or other 
information whose disclosure is restricted by statute. Certain other 
material, such as copyrighted material, is not placed on the Internet 
and will be publicly available only in hard copy form. Publicly 
available docket materials are available either electronically in RME 
or in the official file which is available at the Air Permitting 
Section (6PD-R), Environmental Protection Agency, 1445 Ross Avenue, 
Suite 700, Dallas, Texas 75202-2733. The file will be made available by 
appointment for public inspection in the Region 6 FOIA Review Room 
between the hours of 8:30 am and 4:30 pm weekdays except for legal 
holidays. Contact the person listed in the FOR FURTHER INFORMATION 
CONTACT paragraph below to make an appointment. If possible, please 
make the appointment at least two working days in advance of your 
visit. There will be a 15 cent per page fee for making photocopies of 
documents. On the day of the visit, please check in at the EPA Region 6 
reception area at 1445 Ross Avenue, Suite 700, Dallas, Texas.
    The State submittal is also available for public inspection at the 
State Air Agency listed below during official business hours by 
appointment: Texas Commission on Environmental Quality, Office of Air 
Quality, 12124 Park 35 Circle, Austin, Texas 78753.

FOR FURTHER INFORMATION CONTACT: Ms. Adina Wiley, Air Permitting 
Section (6PD-R), Environmental Protection Agency, Region 6, 1445 Ross 
Avenue,

[[Page 58155]]

Suite 700, Dallas, Texas 75202-2733, telephone (214) 665-2115; fax 
number 214-665-6762; e-mail address wiley.adina@epa.gov.

SUPPLEMENTARY INFORMATION: Throughout this document wherever ``we,'' 
``us,'' or ``our'' is used, we mean the EPA.

Outline

I. Discrete Emission Credit Banking and Trading Program
    A. Proposed Action
    1. What is EPA proposing to approve?
    2. What is a conditional approval?
    3. What future actions are necessary for the DERC program to 
fully meet EPA's expectations?
    B. Summary of the Discrete Emission Credit Banking and Trading 
program
    1. How does the DERC program work?
    2. What is the history of the DERC program?
    C. EPA's Analysis
    1. How did EPA review and evaluate the DERC program?
    2. What criteria did EPA use to analyze the DERC program?
    3. What is EPA's analysis of the fundamental principle of 
integrity?
    4. Will the DERC program violate the integrity of the MECT 
program?
    5. What is EPA's analysis of the fundamental principle of 
equity?
    6. What is EPA's analysis of the fundamental principle of 
environmental benefit?
    7. What is EPA's analysis of the use of discrete emission 
credits for nonattainment new source review offsets?
    8. What is EPA's analysis of the commitments TCEQ has made?
    9. What is EPA's analysis of the cross-reference rule language 
in Chapters 115 and 116?
    10. What is EPA's analysis of the DERC program with respect to 
section 110(l) of the Clean Air Act?
    D. Conclusion
II. General Information
III. Statutory and Executive Order Reviews

I. Discrete Emission Credit Banking and Trading Program

A. Proposed Action

1. What is EPA proposing to approve?
    The EPA is proposing conditional approval of the Discrete Emission 
Credit Banking and Trading Program, referred to as the Discrete 
Emission Reduction Credit (DERC) program, enacted at Texas 
Administrative Code (TAC) Title 30, Chapter 101 General Air Quality 
Rules, Subchapter H, Division 4, sections 101.370-101.374, 101.376, 
101.378, and 101.379. Also at this time, EPA is proposing approval of 
30 TAC Chapter 115, Control of Air Pollution from Volatile Organic 
Compounds, Subchapter J, Division 4, section 115.950 (``Use of 
Emissions Credits for Compliance''), which cross-references the DERC 
program. EPA is also proposing approval of the definition of 
``facility'' published at 30 TAC Chapter 116, Control of Air Pollution 
by Permits for New Construction or Modification, Subchapter A, section 
116.10(4). These revisions were provided in SIP revisions dated July 
22, 1998; December 20, 2000; July 15, 2002; January 31, 2003; and 
December 6, 2004.
2. What is a conditional approval?
    Under section 110(k)(4) of the Clean Air Act EPA may conditionally 
approve a plan based on a commitment from the State to adopt specific 
enforceable measures within one year from the date of approval. If EPA 
determines that the revised rule is approvable, EPA will propose 
approval of the rule. If the State fails to meet its commitment within 
the one year period, the approval is treated as a disapproval. There 
are at least two ways that the conditional approval may be converted to 
a disapproval.
     If the State fails to adopt and submit the specified 
measures by the end of one year (from the final conditional approval), 
or fails to submit anything at all, EPA will have to issue a finding of 
disapproval but will not have to propose the disapproval. That is 
because in the original proposed and final conditional approval, EPA 
will have provided notice and an opportunity for comment on the fact 
that EPA would directly make the finding of disapproval (by letter) if 
the State failed to submit anything. Therefore, at the end of one year 
from the conditional approval, the Regional Administrator (RA) will 
send a letter to the State finding that it had failed to meet its 
commitment and that the SIP submittal is disapproved. The 18-month 
clock for sanctions and the two year clock for a Federal Implementation 
Plan (FIP) start as of the date of the letter. Subsequently, a notice 
to that effect will be published in the Federal Register, and 
appropriate language will be inserted in the Code of Federal 
Regulations (CFR). Similarly, if EPA receives a submittal addressing 
the commitment but determines that the submittal is incomplete, the RA 
will send a letter to the State making such a finding. As with the 
failure to submit, the sanctions and FIP clocks will begin as of the 
date of the finding letter.
     Where the State does make a complete submittal by the end 
of the one year period, EPA will have to evaluate that submittal to 
determine if it may be approved and take final action on the submittal 
within 12 months after the date EPA determines the submittal is 
complete. If the submittal does not adequately address the deficiencies 
that were the subject of the conditional approval, and is therefore not 
approvable, EPA will have to go through notice-and-comment rulemaking 
to disapprove the submittal. The 18-month clock for sanctions and the 
two year clock for a FIP start as of the date of final disapproval.
    In either instance, whether EPA finally approves or disapproves the 
rule, the conditional approval remains in effect until EPA takes its 
final action. Note that EPA will conditionally approve a certain rule 
only once. Subsequent submittals of the same rule that attempt to 
correct the same specifically identified problems will not be eligible 
for conditional approval.
3. What future actions are necessary for the DERC rule to fully meet 
EPA's expectations?
    TCEQ has submitted a commitment letter to Region 6 outlining the 
steps that will be taken to achieve full approval. This letter, dated 
September 8, 2005, can be found in the RME docket. The commitments are:
    1. Revising the language in section 101.373:
    a. To prohibit the future generation of discrete emission reduction 
credits from permanent shutdowns;
    b. To allow discrete emission reduction credits generated from 
permanent shutdowns before September 30, 2002, to remain available for 
use for no more than five years from the date of the commitment letter; 
and
    2. TCEQ will perform a credit audit to remove from the emissions 
bank all discrete emission reduction credits generated from permanent 
shutdowns after September 30, 2002.
    3. Revising the language in sections 101.302(f), 101.372(f)(7), and 
101.372(f)(8) to clarify that EPA approval is required for individual 
transactions involving emission reductions generated in another state 
or nation, as well as those transactions from one nonattainment area to 
another or from attainment counties into nonattainment areas.
    4. TCEQ will revise Form DEC-1, Notice of Generation and Generator 
Certification of Discrete Emission Credits; Form MDEC-1, Notice of 
Generation and Generator Certification of Mobile Discrete Emission 
Credits; and Form DEC-2, Notice of Intent to Use Discrete Emission 
Credits, to include a waiver to the Federal statute of limitations 
defense for generators and users of discrete emission credits.
    5. TCEQ will maintain its current policy of preserving all records 
relating to discrete emission credit generation

[[Page 58156]]

and use for a minimum of five years after the use strategy has ended.
    Additionally, TCEQ has agreed to comply with these commitments 
during the conditional approval period. Specifically, TCEQ will not 
approve any trades involving the types of reductions described in item 
(3) above, will not approve any use of discrete shutdown credits that 
were generated after September 30, 2002, and will require the waiver 
described in item (4) above for generators and users of discrete 
emission credits.
    TCEQ will submit these revisions to EPA on or before December 01, 
2006. The conditional approval will automatically become a disapproval 
if the revisions are not completed and submitted to EPA by this date.

B. Summary of the Discrete Emission Credit Banking and Trading Program

1. How does the DERC program work?
    The DERC rules establish a type of Economic Incentive Program 
(EIP), in particular an open market emission trading program as 
described in EPA's EIP Guidance document, ``Improving Air Quality with 
Economic Incentive Programs'' (EPA-452/R-01-001, January 2001). In an 
open market trading (OMT) program, a source generates short-term 
emission credits (called discrete emission credits, or DECs, in the 
Texas program) by reducing its emissions. Discrete emission credit is a 
generic term that encompasses reductions from stationary sources 
(discrete emission reduction credits or DERCs), and reductions from 
mobile sources (mobile discrete emission reduction credits or MDERCs). 
The source can then use these DECs at a later time, or trade them to 
another source to use at a later time. The trading program assumes that 
many sources will participate and continuously generate new DERCs or 
MDERCs to balance with other sources using previously generated 
discrete credits. DECs are quantified, banked and traded in terms of 
mass (tons) and may be generated and used statewide. Reductions of all 
criteria pollutants, with the exception of lead, may be certified as 
DECs.
    This program provides flexibility for sources in complying with 
certain State and Federal requirements. Traditionally DECs have been 
used for alternate RACT compliance for volatile organic compounds 
(VOCs) and nitrogen oxides (NOX). The DERC rule also allows 
DECs to be used to exceed allowable emission levels, as new source 
review (NSR) offsets, and in lieu of allowances in the Houston/
Galveston/Brazoria NOX MECT program.
    In this action, when we refer to this program as ``the DERC rule'' 
or ``the DERC program'' we are speaking of the entire Discrete Emission 
Credit Banking and Trading program, which encompasses both DERCs and 
MDERCs.
2. What is the history of the DERC program?
    The DERC program was first adopted by the State at 30 TAC Section 
101.29 on December 23, 1997. Effective January 18, 2001, Section 101.29 
was repealed and Chapter 101, Subchapter H, Divisions 1, 3, and 4 were 
created. This action created separate divisions for the ERC, Mass 
Emissions Cap and Trade (MECT) in the Houston/Galveston/Brazoria (HGB) 
area, and DERC programs. Amendments to the MECT were adopted on October 
18, 2001; these amendments also included changes made primarily for 
clarification to Sections 101.370, 101.372, and 101.373 in the DERC 
program. The DERC program was amended again effective April 14, 2002, 
to include the provisions in Texas Senate Bill 1561 for air emissions 
trading across international boundaries. The submittal, which was 
effective on January 17, 2003, completely reorganized the DERC and ERC 
program rules into more standardized formats parallel to each other, 
with a rule structure which followed a process of recognizing, 
quantifying, and certifying reductions as credits while explaining the 
guidelines for trading and using creditable reductions. The most recent 
submittal of December 06, 2004, amended Sections 101.370, 101.373, 
101.373, and 101.376. The DERC program adoption and each of the 
subsequent revisions were submitted to EPA for approval into the SIP; 
however, this proposed conditional approval is the first time we have 
acted on this program.

C. EPA's Analysis

1. How did EPA review and evaluate the DERC program?
    Generally, SIP rules must be enforceable and must not relax 
existing requirements. See Clean Air Act sections 110(a), 110(l), and 
193.
    A guidance document that we used to define evaluation criteria is 
``Improving Air Quality with Economic Incentive Programs'' (EPA-452/R-
01-001, January 2001) (EIP Guidance). This guidance applies to 
discretionary economic incentive programs (EIPs) adopted to attain 
national ambient air quality standards (NAAQS) for criteria pollutants, 
but the EIP Guidance is not EPA's final action on discretionary EIPs. 
Final action as to any such EIP occurs when EPA acts on it after its 
submission as a SIP revision. Because the EIP Guidance is non-binding 
and does not represent final agency action, EPA is using the guidance 
as an initial screen to determine whether potential approvability 
issues arise. A more detailed review of the DERC program as compared to 
the EIP Guidance is in the Technical Support Document (TSD) for the 
TCEQ Discrete Emission Credit Banking and Trading Program. The TSD is 
available as specified in the section of this document identified as 
ADDRESSES.
2. What criteria did EPA use to analyze the DERC program?
    Fundamental principles that apply to all EIPs are integrity 
(meaning that credits are based on emission reductions that are 
surplus, enforceable, quantifiable, and permanent), equity, and 
environmental benefit. These fundamental principles can apply to an EIP 
in its entirety (the programmatic level) or to individual sources (the 
source-specific level). EPA evaluated the DERC program against these 
three fundamental principles, specific concerns applicable to open 
market trading programs, and applicable Clean Air Act requirements. Our 
complete analysis of the DERC program is contained in the TSD for this 
action.
3. What is EPA's analysis of the fundamental 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 does not apply to the DERC program in its 
entirety because OMT programs are not designed to achieve program-wide 
emission reductions. However, the element of surplus does apply at the 
source-specific level. Emission reductions are surplus if the 
reductions are not presently relied upon in any other air quality-
related programs such as the SIP, SIP-related requirements such as 
transportation conformity, other adopted TCEQ measures not in the SIP, 
Federal rules that focus on reducing precursors of criteria pollutants 
such as new source performance standards, or a consent decree. Emission 
reductions measured by sources on a retrospective basis are surplus if 
the source's actual emissions are below its baseline allowable or 
historical actual emissions--whichever is lower--and the retrospective 
inventories reflect actual emission information as appropriate.

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    Sections 101.372(c)(1)(A) and (c)(2)(A) of the DERC rules require 
that a reduction be real, quantifiable, and surplus at the time the 
DERC or MDERC is generated. Surplus is defined in section 101.370(33) 
as an emission reduction that is not otherwise required of a facility 
or mobile source by state or Federal law, regulation, agreed order, and 
not otherwise relied on in the SIP. Thus, the DERC rule requires that 
at the time of generation, reductions satisfy the source-specific 
integrity element of surplus. Requirements for emission reduction 
baselines are specified in sections 101.373(b) and 101.374(b).

Integrity Element Two--Enforceable

    Emission reductions use, generation, and other required actions in 
the EIP are enforceable on a programmatic basis if they are 
independently verifiable, define program violations, and identify those 
liable for violations. For enforceability, both the State and EPA 
should have 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 must be practicably enforceable in accordance with other EPA 
guidance on practicable enforceability. At the source-specific level, 
the source must be liable for violations, the liable party must be 
identifiable, and the State, the public, and EPA must be able to 
independently verify a source's compliance. Additionally, in OMT 
programs owners/operators of sources generating OMT credits must ensure 
the truth and accuracy of statements regarding actions taken to 
generate discrete credits and are liable for meeting their emission 
limits. Owners/operators of sources using OMT credits must ensure the 
validity of discrete credit generation and use and are liable for 
meeting their emission limits. The EIP Guidance outlines enforcement 
elements common to all trading EIPs in Chapter 6.0. In addition to 
addressing the programmatic and source-specific enforcement provisions 
discussed above, trading EIPs must incorporate provisions for assessing 
liability, provisions to assess penalties against participating 
sources, and provisions for sources with title V permits.
    The monitoring and testing protocols established in 30 TAC Chapters 
115 and 117 are adequate for independent verifications of emission 
reductions certified as DERCs or MDERCs and for demonstrating 
practicable enforceability. The DERC rule identifies those liable at 
section 101.372(l), and information to be made available to the public/
citizens is addressed at section 101.372(i). The DERC rule does provide 
in section 101.372(l)(2) that a user is in violation of the rule if the 
user does not possess enough DECs to cover the compliance need for the 
use period. If the user possesses an insufficient quantity of DECs to 
cover its compliance need, the user will be out of compliance for the 
entire use period. Each day the user is out of compliance may be 
considered a violation.
    The application of penalties or obtaining corrective action and 
citizen filing of lawsuits are not addressed in the DERC rules. Texas 
enforcement provisions are not typically in the State's individual 
rules but are separately codified. Texas Water Code Chapter 7 contains 
the State's statutory provisions for enforcement of the DERC program. 
In particular, TWC section 7.051 provides for the assessment of 
administrative penalties by the TCEQ, and section 7.032 provides for 
injunctive relief by the TCEQ. The TCEQ enforcement rule at 30 TAC 
section 70.5 incorporates remedies found in the State statutes (Texas 
Water Code and the Texas Health and Safety Code), and permits referrals 
to EPA for civil, judicial or administrative action. It is our 
conclusion that TCEQ has adequate legal authority to enforce its DERC 
program. Once we approve the DERC program into the SIP, EPA will be 
able to enforce it under section 113 of the Clean Air Act.
    For the above reasons, and as further explained in the TSD, EPA has 
concluded that the DERC program is consistent with Clean Air Act 
requirements and EIP Guidance expectations for the integrity element of 
enforceability.

Integrity Element Three--Quantifiable

    On a programmatic basis, emissions and emission reductions 
attributable to an EIP are quantifiable if the source can reliably and 
replicably measure or determine them. The generation or use of emission 
reductions by a source or group of sources is quantifiable on a source-
specific basis if each source can reliably calculate the amount of 
emissions and/or emission reductions occurring during the 
implementation of the program, and replicate the calculations. The EIP 
Guidance further states that when quantifying results, sources must use 
the same methodology used to measure baseline emissions, unless there 
are good technical reasons that this approach is not appropriate. In 
OMT EIPs, sources must quantify their activity level and their 
historical, actual, and allowable emission rates per activity levels; 
OMT credit generators must quantify their emissions before and during 
implementation of the reduction strategy; and OMT credit users must 
quantify the amount of credits they will need to cover their total 
emissions when using discrete credits. Common elements for quantifying 
results of an EIP are included in Chapter 5.0 of the EIP Guidance. All 
EIPs should incorporate provisions for predicting results, addressing 
uncertainty, approving quantification protocols, and emission 
quantification methods.
    For a reduction to be certified as a DEC, the reduction must be 
real, quantifiable, and surplus at the time the DEC is generated. 
Quantifiable is defined as an emission reduction that can be measured 
or estimated with confidence using replicable methodology under section 
101.370(25). The emission quantification provisions established in 30 
TAC Chapters 115 and 117 are sufficient to reliably and replicably 
measure the emission reduction. The DERC program definition of 
quantifiable and the quantification provisions above are sufficient to 
satisfy the quantifiability requirements at the programmatic and 
source-specific levels. Additionally, generators/users wanting to use 
quantification protocols alternate to 30 TAC Chapter 115 and Chapter 
117 must follow the quantification requirements at section 
101.372(d)(1)(C). EPA approval of such alternate protocols is required. 
The formulas used to calculate DERC generation, DECs needed, and DECs 
used incorporate the use of the baseline, actual, and allowable 
activity levels as applicable. The calculation for DERC generation 
includes the difference between the baseline emission rate and the 
emission reduction strategy emission rate. This ensures that the DERC 
generator quantifies their emissions before and during implementation 
for the reduction strategy. Section 101.376(d)(1)(D) requires that the 
application to use DECs include the amount of DECs needed. For the 
above reasons, and as further explained in the TSD, EPA has concluded 
that the DERC program is consistent with Clean Air Act requirements and 
EIP Guidance expectations for the integrity element of quantifiability.

Integrity Element Four--Permanent

    To satisfy the EIP Guidance expectations for permanence, a 
compliance flexibility EIP must ensure that no emission increases 
(compared to emissions if there was no EIP) occur

[[Page 58158]]

over the time defined in the SIP. On a source-specific basis, the 
permanence expectations are met if the sources participating in the EIP 
commit to actions or achieve reductions for a future period of time as 
defined in the EIP.
    The DERC certification procedures under section 101.373(d) ensure 
that the credits generated are permanent, thus ensuring that there were 
no increases in emissions during the DERC generation period. Similar 
provisions are provided for MDERC certification in section 101.374(e).
4. Will the DERC program violate the integrity of the MECT program?
    In our initial MECT approval (66 FR 57252, Nov. 14, 2001), EPA 
deferred action on the use of DERCs and MDERCs for compliance with the 
MECT until our action on the DERC rule. In addition to the original 
MECT submission, TCEQ has submitted revisions to section 101.356 twice 
since EPA's approval of the MECT program. In this document, we are 
reviewing the use of DERCs and MDERCs in TCEQ's MECT program for the 
Houston/Galveston/Brazoria (HGB) ozone nonattainment area. We will 
review and act on the revisions to the MECT program in a separate 
action (RME Docket R06-OAR-2005-TX-0023). The use of DERCs and MDERCs 
in the MECT program will not be Federally approved until the approval 
of both the DERC rule and the revisions to the MECT program.
    The DERC and MECT programs are OMT and multi-source cap-and-trade 
programs, respectively, as described in the EIP Guidance. Section 4.1 
of the EIP Guidance explains that certain types of EIPs may not be 
combined because their characteristics and requirements are 
incompatible and cites OMT and multi-source cap-and-trading as an 
example of such incompatible programs. Therefore, the fact that the 
MECT program provides for the use of DERCs and MDERCs in lieu of 
allowances at section 101.356(h), with corresponding provisions in the 
DERC rule at section 101.376(b), is contrary to the general statement 
in the EIP Guidance about the incompatibility of OMT and multi-source 
cap-and-trade programs.
    The EIP Guidance discourages the use of OMT credits in a multi-
source cap-and-trade program based on concerns that the use of OMT 
credits in the cap program could potentially undermine the integrity of 
the cap, thus preventing the goals that the cap was established to 
achieve. EPA is concerned that including OMT credits in a cap-and-trade 
system could lead to:
     The possibility that more OMT credits will be used in a 
given year than are generated;
     The possibility that sources will shift production from 
one source to another, generating credits at the reduced source while 
no real net benefit in air quality is achieved; and
     The possibility that reductions at unregulated sources 
will not be real reductions and that they will be used to offset 
increases at regulated sources.
    When a program includes elements that are not consistent with the 
approaches outlined in our guidance, EPA may still approve the rule if 
it is consistent with CAA requirements and the rationales underlying 
the provisions in EPA guidance. In this case, we must determine whether 
the use of OMT credits (DERCs or MDERCs) in lieu of allowances will, 
because of the above concerns, undermine the goal of the MECT program, 
which is attainment of the one-hour ozone standard in the HGB area. EPA 
should also consider whether there are adequate safeguards to ensure 
that the additional flexibility provided by the interplay between the 
DERC and MECT programs will not undermine the HGB reasonable further 
progress plan and attainment demonstration.
    Regarding the HGB reasonable further progress plan, we approved the 
plan on February 14, 2005 (70 FR 07407). The HGB area met its rate of 
progress (ROP) target by a wide margin (over 100 tons per day) so the 
institution of DERCs in the MECT would not be expected to interfere 
with ROP.
    As for the attainment demonstration, the reduction in industrial 
NOX emissions relied on in it is achieved by the MECT 
program, which provides a cap on NOX emissions. Beginning in 
2002, the amount of allowances (the authorization to emit one ton of 
NOX during a control period, which is the calendar year) 
under the cap decreases to the final cap level in 2007. The final 2007 
cap level was set, based on photochemical modeling and other evidence, 
at a level determined necessary for the area to meet the one-hour ozone 
standard. Even after the change from 90 percent to 80 percent 
NOX control strategy, the final MECT level is among the most 
stringent levels of NOX controls on industrial emissions in 
the United States.
    Because of the stringency of the MECT NOX controls, 
Texas linked the DERC and MECT programs, in an effort to provide 
additional flexibility to sites subject to the program while 
encouraging the development and use of cleaner technologies to reduce 
NOX emissions from sources not covered by the cap-and-trade 
program. Only DERCs and MDERCs generated in the HGB area are available 
for use in lieu of allowances.
    At the time the MECT rules were developed, the number of DERCs 
available for use in the HGB area totaled over 37,000 tons (all 
generated by stationary sources; no MDERCs had been generated). 
Additionally, sources had the ability to make early reductions and 
continue banking DERCs until the January 1, 2002, implementation date 
of the MECT. After implementation of the MECT, sources subject to the 
cap no longer had the ability to generate DERCs because those 
reductions would take the form of unused allowances. The potential for 
capped sites to hold these banked DERCs for use in 2005 and beyond was 
significant enough to negatively impact the HGB ROP and attainment 
demonstration. To guard against more DERCs being used in a given year 
than are being generated, which might affect the goal of attainment, 
Texas included the following provisions in the MECT rule limiting the 
use of NOX DERCs in lieu of allowances.
    First, beginning in 2005, use of DERCs within the MECT is limited 
to 10,000 DERCs collectively for all sites within the HGB area. This 
provision eliminates the potential for sites subject to the MECT to use 
a large quantity of DERCs in a single year and negatively impact the 
HGB ROP plan and attainment demonstration. All requests to use DERCs 
(or MDERCs) in the MECT must be made by October 1 of the control period 
for which the DERCs (or MDERCs) would be used. In terms of the 10,000 
DERC limit, TCEQ will approve requests to use DERCs in the amount of 
250 tons or less for a given control period. After October 1, when all 
requests to use DERCs have been received, TCEQ determines how to 
respond to any requests to use DERCs in an amount exceeding 250 tons. 
TCEQ may reduce any such request so that the total amount of all DERCs 
used collectively does not exceed 10,000. If all the requests to use 
DERCs in a given control period are less than the 10,000 limit, TCEQ 
will then address requests for more than 250 tons. For these requests, 
TCEQ determines the number of remaining DERCs under the 10,000 limit 
that were not approved in the requests of 250 tons or less. These extra 
DERCs may be apportioned based on the percentage of DERCs in excess of 
250 requested for use by those sites relative to the total amount of 
extra DERCs available.
    Second, depending on when the DERCs were generated, the MECT rule 
requires the use of DERCs at specified

[[Page 58159]]

ratios. Beginning in 2005, DERCs generated before January 1, 2005, are 
required to be used at a ratio of four DERCs to one allowance. The 
ratio of DERCs to allowances increases to a 10 to 1 ratio for DERCs 
generated before 2005 and used in the 2007, or subsequent, control 
periods. For example, if DERC usage equaling the full 10,000 limit is 
approved for use in the 2007 control period, the overall cap would be 
increased by 1,000 allowances. Any DERCs generated after January 1, 
2005, are available for use within the MECT at a one to one ratio, but 
are still included in the 10,000 DERC collective limit. We believe 
these ratios guard against the possibility that the availability of 
historic reductions would permit the use of more DERCs in a year than 
are generated, which could interfere with attainment or reasonable 
further progress.
    As a further safeguard against the possibility of undermining the 
attainment demonstration by allowing the use of more DERCs in any given 
year than are generated, Texas added an additional 2.7 tons per day 
into the attainment model beyond the emissions that would be allowed 
based on source allocations. This additional 2.7 tons per day 
represents the maximum amount of pre-2005 DERCs available for use in 
the attainment year 2007. To arrive at this number, TCEQ divided the 
10,000 DERC limit by 10 (the 2007 reduction ratio) and then by 365 
(days per year) to yield a total of 2.7 tons per day that could be 
reintroduced into the cap. DERCs generated after 2005 by sources 
outside of the cap could not be quantified as those reductions would be 
generated through voluntary measures. TCEQ therefore assumed that all 
DERCs that would be used in the 2007 control period were pre-2005 
DERCs. Including these added emissions in the attainment modeling is 
analogous to cap-and-trade programs that set aside a percentage of the 
modeled emissions for new source growth or other purposes.
    The MECT program also provides that MDERCs can be used in lieu of 
allowances at a ratio of one MDERC to one allowance. MDERCs are not 
included in the 10,000 DERCs limit in any given year. TCEQ incorporated 
MDERCs into the MECT to provide incentives for mobile reductions. 
Although there is no set limit for MDERC usage under the MECT, from our 
experience with open market trading programs, we can reasonably predict 
that a relatively small quantity of MDERCs will be generated. 
Consistent with our prediction, we note that only 60 tons of 
NOX MDERCs have been banked as of August 1, 2005.
    TCEQ has also committed to making certain revisions to the DERC 
program to ensure that DECs used are real and surplus, consistent with 
the assumptions in the attainment demonstration. These revisions will 
include:
     Prohibiting the generation of DERCs from permanent 
shutdowns;
     Ensuring that reductions can only come from process 
changes or the installation of control equipment that result in less 
emissions per unit of production, thus preventing reductions from 
production shifting as a method of DEC generation;
     Clarifying provisions that allow for public comment and 
EPA approval of quantification protocols to ensure that the reductions 
used for DEC generation are quantifiable.
    Additionally, section 101.363 requires TCEQ to audit the MECT 
program every three years. If the use of DERCs or MDERCs is shown to 
negatively impact attainment, TCEQ will remove this flexibility from 
the program.
    With the restrictions outlined above, we believe that using DERCs 
and MDERCs in lieu of allowances provides additional flexibility in 
compliance with the MECT program without undermining the goal of 
attaining the one-hour ozone standard in the HGB area. EPA also 
believes that the restrictions placed on the use of DECs in the MECT 
will prevent such use from damaging the integrity of the MECT program 
and the HGB attainment demonstration. Because the basis for the use of 
DECs in the MECT is, in part, the modeling and attainment demonstration 
for the HGB area, EPA cannot grant a final approval of this provision 
of the MECT program until EPA issues a final approval of the attainment 
modeling provided as a mid-course review SIP revision. The attainment 
demonstration and MECT revisions are being concurrently proposed for 
approval (RME Dockets R06-OAR-2005-TX-0018 and R06-OAR-2005-TX-0023).
5. What is EPA's analysis of the fundamental principle of equity?
    The equity principle is composed of two elements--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. OMT EIPs should specifically protect communities from 
disproportionate impacts from emission shifts and foregone emission 
reductions.
    Consideration of health impacts from DEC use are included 
throughout the DERC rule. A facility wishing to use reductions of one 
pollutant to meet the reduction requirement of another pollutant must 
use urban airshed modeling to obtain TCEQ and EPA approval. If the 
facility generating the reductions is located outside the United 
States, the substitution must result in a greater health benefit and be 
of equal or greater benefit to the overall air quality of the area. 
Once the TCEQ meets the commitments outlined earlier, EPA review and 
approval will be required any time a reduction generated outside the 
United States is requested for use. EPA intends to address any such 
requests through a SIP revision, which will provide an opportunity for 
public participation. The public information requirements in section 
101.372(h) and the information that must be submitted to the TCEQ for 
inclusion in the credit registry on the use and banking of DECs in 
sections 101.376 and 101.379 demonstrates the importance of public 
participation in the DERC program.

Equity Element Two--Environmental Justice

    The environmental justice element applies if the EIP covers VOCs 
and could disproportionately impact communities populated by racial 
minorities, people with low incomes, and/or Tribes. EIPs that include 
hazardous air pollutants (HAPs) must also satisfy the expectations of 
Appendix 16.2 of the EPA EIP Guidance, which addresses prevention and/
or mitigation of impacts from potential or actual trades involving 
HAPs, sufficient information made available for meaningful review and 
participation, public participation, and periodic program evaluations. 
OMT EIPs should also protect communities of concern from 
disproportionately high and adverse impacts from emission shifts and 
foregone emission reductions.
    Because the DERC program allows for the generation and use of DECs 
from VOCs and/or HAPs, the rule must be evaluated against environmental 
justice expectations. The DERC rule satisfies all elements of the HAP 
Framework. For compliance with the prevention and/or mitigation of 
potential impacts, the TCEQ has placed limits on NOX and VOC 
DEC usage in ozone nonattainment areas and similar DEC usage limits in 
attainment or unclassified areas to exceed permit allowables. 
Additionally, the trading of DECs may be discontinued if the program 
audit identifies problems in a localized area of

[[Page 58160]]

concern. The TCEQ addresses the expectations for sufficient information 
made available for meaningful review and participation by requiring 
under section 101.372(i) that all information submitted with notices, 
reports, and trades regarding the nature, quantity of emissions, and 
sales price for DECs is public information. This information is 
available upon request or on the TCEQ website. Public participation is 
an integral feature of the DERC rule in the design, implementation, and 
evaluation of the program. During the development of the SIP revisions 
under consideration in this action, the TCEQ held four public meetings 
in Austin, Channelview, and Houston, TX. The TCEQ also has an extensive 
stakeholder list of approximately 150 contacts who receive copies of 
all TCEQ rulemaking actions for comment and participation in 
development. The public also has the opportunity to comment on 
quantification protocols used under section 101.372(d) and has the 
ability to review the program evaluations under section 101.379.
    As an added measure that demonstrates general equity and 
environmental justice, TCEQ has developed the Toxicological Risk 
Assessment (TARA) Effects Evaluation Procedure. Under this process, 
which is authorized under section 382.0518(b)(2) of the Texas Health 
and Safety Code, TCEQ may not grant a permit to a facility and a 
facility may not begin operating unless it is demonstrated that 
emissions will not have an adverse impact on public health and welfare. 
This demonstration is accomplished by (1) establishing off-property 
ground-level-air concentrations of constituents resulting from the 
proposed emissions, and (2) evaluating these concentrations for the 
potential to cause adverse health or welfare effects. The TARA Effects 
Evaluation is used to evaluate the use of DECs in an air permit. The 
TCEQ guidance document ``How to Determine the Scope of Modeling and 
Effects Review for Air Permits'' (RG-324, Oct. 2001) has a detailed 
discussion of the TARA Effects Evaluation procedures.
6. What is EPA's analysis of the fundamental principle of environmental 
benefit?
    All EIPs must be environmentally beneficial and can demonstrate 
this principle through more rapid emission reductions or faster 
attainment than would have occurred without the EIP. The DERC EIP meets 
the expectations for the environmental benefit principle. The ability 
to generate DECs provides an incentive for early compliance and more 
rapid emission reductions. Additionally, users of DECs must retire an 
additional 10 percent of DECs as an environmental benefit under section 
101.376(d)(2)(D).
7. What is EPA's analysis of the use of discrete emission credits for 
nonattainment new source review offsets?
    Appendix 16.14 of the EIP Guidance outlines EPA's expectations for 
the use of emission credits in the NSR program. In addition to meeting 
the requirements of the NSR program, a source wishing to use OMT 
credits to meet NSR offset requirements must:
     Meet all other OMT requirements.
     Meet the geographic limitation and other criteria 
contained in section 173 of the CAA.
     Obtain sufficient OMT credits for at least one year of 
operation before receiving its permit.
     Commit in its NSR permit to obtain sufficient additional 
OMT credits to cover each subsequent year of operation by December 31 
of the previous year. This means that the OMT credits used for NSR 
offsets must be obtained in advance of the year for which they will be 
used.
     Ensure that emissions reductions used as OMT credits are 
not otherwise required by the CAA.
    The DERC program meets the requirements of an OMT program, as shown 
in the TSD for this action. Table IV-3 of the TSD specifically 
addresses how sources demonstrate that DECs are surplus and not 
otherwise required by the CAA. Section 101.376 of the DERC program 
provides that DECs can be used as NSR offsets if the following 
requirements are met:
     The user must obtain the executive director's advance 
approval covering use of specific DECs for at least one year of 
operation of the new or modified facility;
     The amount of DECs needed for NSR offsets equals the 
quantity of tons needed to achieve the maximum allowable emission level 
set in the user's NSR permit. The user must also purchase and retire 
enough DECs to meet the offset ratio requirement in the user's ozone 
nonattainment area. The user must purchase and retire either the 
environmental contribution of 10 percent or the offset ratio, whichever 
is higher; and
     The NSR permit must meet the following requirements:
     The permit must contain an enforceable requirement that 
the facility obtain at least one additional year of offsets before 
continuing operation in each subsequent year;
     Before issuance of the permit the user must identify the 
DECs; and
     Before start of operation the user must submit a completed 
DEC-2 Form, Notice of Intent to Use Discrete Emission Credits, along 
with the original certificate.
    The structure of the DERC program also addresses the requirements 
in section 173 of the CAA concerning NSR offsets. In particular, 
section 173(a)(1)(A) requires that ``by the time the source is to 
commence operation'' the total allowable emissions in the area must be 
less than total emissions as of the time of the application to 
construct, so as to represent reasonable further process under section 
171. Further, section 173(c) requires that by the time the source 
commences operation its new emissions must be offset by ``actual'' 
reductions in the area. Thus, as to offsets, section 173 requires that 
emission reductions occur in sufficient quantity to ensure that new or 
modified sources do not add to the total emissions in the airshed.
    Because OMT programs such as the DERC program provide for banking 
and trading of reductions that occur over a discrete span of time, it 
is possible that when they are used as NSR offsets such reductions may 
have occurred several years before the commencement of the new 
emissions that they are being used to offset. It is important that such 
time lags between generation of the DECs and their use as offsets not 
interfere with the purposes of the NSR program. These purposes include 
ensuring that new sources in nonattainment areas do not significantly 
add to the overall level of emissions in the area.
    The ultimate test as to whether offsetting emissions reductions are 
sufficient under section 173(a)(1)(A) is whether they represent 
``reasonable further progress as defined in section 171.'' The 
definition of ``reasonable further progress'' in section 171(1) plainly 
refers to the air quality goal of attainment of the NAAQS. Accordingly, 
real reductions should be the focus. We consider banked DERCs and 
MDERCs to be real reductions. Therefore, we only need to determine 
whether the potential time lag between generation and use of DERCs and 
MDERCs as offsets may interfere with attainment or otherwise impede the 
achievement of the goals of the NSR program.
    We do not expect that many sources will choose to use DECs for NSR 
offsets. Emission credits representing ongoing, perpetual reductions--
such as the credits generated under the 30 TAC Chapter 101, Subchapter 
H, Division 1 Emission Credit Banking and Trading program--are the 
traditional choice for

[[Page 58161]]

NSR offsets. By contrast, EPA believes that few DECs will be used as 
offsets, because few facilities will want to face potentially having to 
shut down if no credits are available in later years. We note that 
since the DERC program began operation in 1997 no source has applied to 
use DECs as NSR offsets. Nonetheless, we are evaluating the potential 
impact of usage of this feature of the DERC program. We conclude that 
the program is consistent with section 173 and NSR goals, for the 
following reasons.
A. Substantial Likelihood of Continuing Reductions in Each 
Nonattainment Area
    First, and most important, we expect that, under the DERC program, 
new discrete emission reductions, and other reductions that are 
equivalent to discrete reductions, will be generated on an ongoing 
basis. The generation of new reductions is important to counterbalance 
the potential effect of the use as offsets of reductions that took 
place entirely in the past. If new reductions are generated regularly, 
then the system as a whole will satisfy the section 173 offset 
requirements even if some of the DERCs and MDERCs in the system are 
from previous years.
    In each of the nonattainment areas in Texas where DERCs and MDERCs 
might be used as offsets, there is a reasonable basis to conclude that 
DERCs and MDERCs will be generated on a recurring basis at least until 
the area reaches attainment. Because of the expected low utilization of 
DERCs and MDERCs as offsets, it is not necessary to show that DERCs and 
MDERCs will be generated in quantities equal to existing banked 
quantities--a much smaller amount of recurring generation will be 
sufficient. We will address each of the nonattainment areas in Texas 
separately.

Houston/Galveston/Brazoria (HGB) 8-Hour Ozone Nonattainment Area

    The HGB area is a moderate nonattainment area for ozone under the 
8-hour standard. Its attainment deadline is 2010. In the HGB area, the 
existence of a robust trading market, with credits that are for 
relevant purposes fungible across several programs, leads EPA to 
conclude that additional reductions may reasonably be expected in the 
future. The NOX Mass Emissions Cap and Trade (MECT) program 
and the large and diverse universe of sources will ensure that a robust 
trading market will exist until the area reaches attainment. Analysis 
of the HGB 2002 emissions inventory shows that for VOC emissions, 
approximately 41 percent of the inventory (239 tpd) is attributable to 
area sources, 23 percent (136 tpd) is attributable to point sources, 20 
percent (115 tpd) is attributable to onroad mobile sources, and 16 
percent of the inventory (93 tpd) is attributable to nonroad mobile 
sources. For NOX emissions, approximately 35 percent of the 
inventory (398 tpd) is attributable to nonroad mobile sources, 30 
percent (338 tpd) is attributable to point sources, 28 percent of the 
inventory (323 tpd) is attributable to onroad sources, and 8 percent 
(87 tpd) is attributable to area sources. (Please note that the 
emissions inventory data above is presented only for illustrative 
purposes. EPA is not proposing action on the 2002 emissions inventory 
in this document.) Typical point sources in the HGB area include 
refineries, chemical facilities, and electric generating facilities.
    The MECT program applies to all sites in the HGB area with an 
uncontrolled design capacity to emit 10 or more tons of NOX 
per year. The MECT is a declining cap: the first phase of 
NOX reductions required under the cap was in 2002, and has 
been followed by step-downs that will continue through 2007. All sites 
subject to the MECT had the option of complying early and generating 
DERCs up to the 2002 start date. Since 2002, any reductions these sites 
make have been considered unused allowances under the MECT program, 
instead of being banked as DERCs. Sites participating in the MECT also 
have the option to use banked DERCs in lieu of MECT allowances. 
Additionally, sources not subject to the MECT (e.g., mobile sources and 
area sources) can still generate DERCs in accordance with the 
generation strategies in the DERC rule. Therefore, we conclude, as to 
NOX, that the emissions increases at sources that have used 
DERCs generated in the past for offsets will be offset by reductions in 
the future that will occur as unused allowances.
    With regard to VOCs, TCEQ has also adopted two rules for 
controlling emissions of highly reactive volatile organic compounds 
(HRVOCs) in the HGB area. The short-term limit on HRVOC emissions 
established in 30 TAC Chapter 115 will be effective in 2006, and the 
HRVOC annual emissions cap and trade program will be effective in 2007. 
Sources subject to these rules can comply early and generate DERCs from 
early reductions up until the implementation dates. Therefore, we 
believe that sources will have incentives to generate VOC DERCs in the 
future, which will tend to offset the use of past DERCs for NSR 
purposes.

Dallas/Fort Worth (DFW) 8-Hour Ozone Nonattainment Area

    Past patterns of DERC generation, combined with rules coming into 
effect in the future, suggest that it is likely that new reductions 
will continue to occur, although not in every year. From 2000 through 
2005, some amount of DERCs were generated in every year except 2005 
(which of course is not over yet). A relatively small amount was 
generated in 2004, but nonetheless the fact that substantial amounts of 
reductions were generated in each of the years 2000 through 2003 is a 
positive sign as to the ability of stationary sources in the DFW area 
to generate reductions. There are approximately 9,000 tons of 
NOX and 10 tons of VOC DERCs banked in DFW; no MDERCs have 
been generated in DFW. Analysis of the DFW 2002 emissions inventory 
shows that for VOC emissions, approximately 53 percent of the inventory 
(216 tpd) is attributable to area sources, 26 percent (104 tpd) is 
attributable to onroad mobile sources, 13 percent (55 tpd) is 
attributable to nonroad mobile sources, and 8 percent of the inventory 
(30 tpd) is attributable to point sources. For NOX 
emissions, approximately 45 percent of the inventory (207 tpd) is 
attributable to onroad mobile sources, 27 percent (121 tpd) is 
attributable to nonroad mobile sources, 19 percent of the inventory (83 
tpd) is attributable to point sources, and 9 percent (40 tpd) is 
attributable to area sources. (Please note that the emissions inventory 
data above is presented only for illustrative purposes. EPA is not 
proposing action on the 2002 emissions inventory in this document.) 
Typical point sources in the DFW area are electric generating 
facilities and cement kilns. Electric generating facilities have 
generated approximately 85 percent of the NOX DERCs in DFW 
to date.
    To the extent there is a concern that these previous reductions 
were driven by early compliance with rules that are now in effect, and 
therefore that there is no incentive for future reductions, other rules 
coming into effect in the future should mitigate that concern. The DFW 
5 percent increment of progress plan submitted to fulfill obligations 
under the 1-hour ozone standard extends the nonattainment area to the 
new counties of Ellis, Parker, Rockwall, Johnson, and Kaufman. Sources 
in the newly designated nonattainment counties now have a RACT 
compliance date of 2007. These sources could comply early with RACT 
requirements and generate DERCs up to the 2007 compliance date. The 8-
hour ozone attainment deadline for DFW is 2010. The 8-hour ozone

[[Page 58162]]

attainment demonstration SIP has not yet been submitted, but it will 
presumably have control measures taking effect between now and 2010, 
which will drive reductions, and therefore potential early reductions, 
during that time.
    In addition to the above reasons, to the extent discrete credits 
become widely used in the DFW area (as NSR offsets or otherwise), the 
ordinary function of the trading market could drive the creation of new 
DERCs and MDERCs. That is, demand for discrete reductions will provide 
a financial incentive for sources to generate such reductions.

Beaumont/Port Arthur (BPA) 8-Hour Ozone Nonattainment Area

    Past patterns of DERC generation in the BPA area, combined with 
rules coming into effect in the future, suggest that it is likely that 
new reductions will continue to occur, although not in every year. From 
1999 through 2005, some amount of DERCs were generated in every year 
except 2000 and 2005 (which of course is not over yet). The fact that 
substantial amounts of reductions were generated in most of these years 
is a positive sign as to the ability of stationary sources in the BPA 
area to generate reductions usable as DERCs. There are approximately 
1,500 tons of NOX DERCs banked in BPA; no MDERCs have been 
generated in BPA. Analysis of the BPA 2002 emissions inventory shows 
that for VOC emissions, approximately 44 percent of the inventory (57 
tpd) is attributable to area sources, 34 percent (44 tpd) is 
attributable to point sources, 12 percent (16 tpd) is attributable to 
nonroad mobile sources, and 10 percent of the inventory (13 tpd) is 
attributable to onroad sources. For NOX emissions, 
approximately 41 percent of the inventory (120 tpd) is attributable to 
nonroad mobile sources, 38 percent (109 tpd) is attributable to point 
sources, 16 percent of the inventory (46 tpd) is attributable to onroad 
mobile sources, and 5 percent (16 tpd) is attributable to area sources. 
(Please note that the emissions inventory data above is presented only 
for illustrative purposes. EPA is not proposing action on the 2002 
emissions inventory in this document.) Typical point sources in the BPA 
area are refineries, chemical facilities, and electric generating 
facilities. Chemical manufacturers and refineries have generated all 
the DERCs in BPA to date.
    To the extent there is a concern that these previous reductions 
were driven by early compliance with rules that are now in effect, and 
therefore that there is no incentive for future reductions, other rules 
coming into effect in the future should mitigate that concern. In 
particular, TCEQ has proposed to lower the RACT exemption for 
shipbuilding/repair and batch processes from 100 to 50 tons, which will 
cause some sources to be newly subject to RACT. These sources could 
comply early with RACT requirements and generate DERCs up to the 2006 
compliance date.
    Beaumont expects to reach attainment by the end of 2006, therefore, 
the time frame for using DERCs/MDERCs as NSR offsets in this area (and 
hence the scope of our concern about this usage) may prove to be fairly 
limited. If discrete credits do become widely used in the BPA area (as 
NSR offsets or otherwise), the ordinary function of the trading market 
could drive the creation of new DERCs and MDERCs. That is, demand for 
discrete reductions will provide a financial incentive for sources to 
generate such reductions.

El Paso CO and PM10 Nonattainment Area

    El Paso is currently classified as a moderate nonattainment area 
for carbon monoxide (CO) and particulate matter with a diameter of less 
than 10 micrometers and smaller (PM10). El Paso has 
monitored attainment of the CO standard for approximately the past five 
years and is expected to submit a request for redesignation by the end 
of 2005. EPA approved El Paso's 179(b) plan for PM10 on 
January 18, 1994 (59 FR 2532), which demonstrated that the area would 
achieve the PM10 standard except for emissions contribution 
from geologic dust from Mexico. TCEQ also intends to pursue 
redesignation under the PM10 standard in the future. Since 
the DERC program began in 1997, no CO or PM10 DECs have been 
generated.
    With the future redesignation requests the timeframe for using 
DERCs/MDERCs as NSR offsets in the El Paso area (and hence the scope of 
our concern about this usage) may prove to be fairly limited. If 
discrete credits do become widely used in the El Paso area (as NSR 
offsets or otherwise), the ordinary function of the trading market 
could drive the creation of new DERCs and MDERCs. That is, demand for 
discrete reductions will provide a financial incentive for sources to 
generate such reductions. Also, because there are no DERCs or MDERCs 
generated in El Paso, the concern that older banked reductions could 
reenter the market is not applicable.
B. Geographic Restrictions
    The geographic restrictions outlined in section 101.372(f) provide 
further safeguards against inappropriate use of DECs as offsets, by 
ensuring that reductions used for offsets come from the same source or 
from other sources in the same nonattainment area. On completion of the 
conditions outlined earlier in this document, TCEQ Executive Director 
and EPA approval will be required for sources wishing to use reductions 
generated in another state or nation, from another nonattainment area, 
or from attainment counties into nonattainment areas. The DERC program 
relies on many sources continuing to generate new DERCs and MDERCs to 
balance with other sources using previously generated discrete credits. 
Proper functionality of the DERC program will ensure that reductions 
used as offsets will not negatively impact an area's attainment 
strategy.
C. DECs Are Equivalent to Real Reductions in Allowables
    EPA believes that although generating a DEC does not change the 
allowable emissions in a facility's permit, it is nonetheless 
appropriate to treat the temporary reduction in facility emissions that 
a DEC represents as a limited reduction in the allowable emissions of 
the generating facility. The rationale for this conclusion is that a 
DEC is banked after it is generated, but the facility must be able to 
quantify its reductions and demonstrate that emissions before and after 
a reduction strategy produced a certain amount of reductions. Thus, by 
nature of