02-8685. Approval and Promulgation of Implementation Plans: South Carolina: Nitrogen Oxides Budget and Allowance Trading Program

AGENCY:

Environmental Protection Agency (EPA).

ACTION:

Proposed rule.

SUMMARY:

EPA is proposing to approve a State Implementation Plan (SIP) revision submitted by the State of South Carolina on October 30, 2000, and revised on July 30, 2001. This revision responds to the EPA's regulation entitled, “Finding of Significant Contribution and Rulemaking for Certain States in the Ozone Transport Assessment Group Region for Purposes of Reducing Regional Transport of Ozone,” otherwise known as the “NO_X SIP Call.” This revision establishes and requires a nitrogen oxides (NO_X) allowance trading program for large electric generating and industrial units, and reductions for cement kilns, beginning in 2004. The revision includes a budget demonstration and initial source allocations that clearly demonstrate that South Carolina will achieve the required NO_X emission reductions in accordance with the timelines set forth in EPA's NO_X SIP Call. The intended effect of this SIP revision is to reduce emissions of NO_X in order to help attain the national ambient air quality standard for ozone. EPA is proposing to approve South Carolina's NO_X Reduction and Trading Program because it meets the requirements of the Phase I NO_X SIP Call that will significantly reduce ozone transport in the eastern United States. South Carolina has requested that EPA parallel process this revision because the revision is not yet state-effective.

DATES:

Written comments must be received on or before May 10, 2002.

ADDRESSES:

All comments should be addressed to: Sean Lakeman; Regulatory Development Section; Air Planning Branch; Air, Pesticides and Toxics Management Division; U.S. Environmental Protection Agency Region 4; 61 Forsyth Street, SW, Atlanta, Georgia 30303-8960.

Copies of documents relative to this action are available at the following addresses for inspection during normal business hours:

Environmental Protection Agency, Region 4, Air Planning Branch, 61 Forsyth Street, SW, Atlanta, Georgia 30303-8960.

South Carolina Department of Health and Environmental Control, Bureau of Air Quality Control, 2600 Bull Street, Columbia, South Carolina 29201.

The interested persons wanting to examine these documents should make an appointment at least 24 hours before the visiting day and reference file SC-037.

FOR FURTHER INFORMATION CONTACT:

Sean Lakeman, Regulatory Development Section, Air Planning Branch, Air, Pesticides and Toxics Management Division, Region 4, U.S. Environmental Protection Agency, 61 Forsyth Street, SW, Atlanta, Georgia 30303-8960. The telephone number is [phone]. Mr. Lakeman can also be reached via electronic mail at [e-mail].

SUPPLEMENTARY INFORMATION:

On October 30, 2000, the South Carolina Department of Health and Environmental Control (DHEC) submitted a draft NO_X emission control rule to the EPA for pre-adoption review. Also, DHEC requested that EPA parallel process the submittal concurrent with the development of the final State rule and included a schedule for development and adoption of the rule by the State. On July 30, 2001, DHEC submitted adopted revisions to its SIP to meet the requirements of the Phase I NO_X SIP Call. After the rules are adopted by the South Carolina Board of Health and Environmental Control, the revisions must be reviewed and approved by the South Carolina General Assembly. After approval by the General Assembly, the rules will become state-effective upon publication in the South Carolina State Register. EPA will take final action on South Carolina's revisions when the State submits state-effective rule revisions, including their emission budgets and initial allocations.

The revisions submitted comply with the requirements of the Phase I NO_X SIP Call. Included in South Carolina's submittal are new rules Regulation 61-62.96 NO_X Budget Trading Program and Regulation 61-62.99 Nitrogen Oxides Budget Program Requirements For Stationary Sources Not In the Trading Program. The information in this proposal is organized as follows:

I. EPA's Action

A. What action Is EPA proposing today?

B. Why Is EPA Proposing This Action?

C. What Are the NO_X SIP Call General Requirements?

D. What is SPA's NO_X budget and allowance trading program?

E. What guidance did EPA use to evaluate South Sarolina's submittal?

What is the result of EPA's evaluation of South Carolina's program?

II. South Carolina's Control of NO_X Emissions

A. When did South Carolina submit the SIP revision to EPA in response to the NO_X SIP Call?

B. What is the South Carolina NO_X Budget Trading Program?

C. What is the Compliance Supplement Pool?

D. What is the New Source Set-Aside program?

III. Proposed Action

IV. Administrative Requirements

I. EPA's Action

A. What Action is EPA Proposing Today?

EPA is proposing to approve revisions to South Carolina's SIP concerning the adoption of its NO_X Reduction and Trading Program, submitted for parallel processing on October 30, 2000, and revised on July 30, 2001.

B. Why is EPA Proposing This Action?

EPA is proposing this action because South Carolina's NO_X Reduction and Trading Program and cement kiln regulations meet the requirements of the Phase I NO_X SIP Call. Therefore, EPA is proposing full approval of South Carolina's NO_X Reduction and Trading Program.

C. What Are the NO_X SIP Call General Requirements?

The NO_X SIP Call requires 22 States and the District of Columbia to meet statewide NO_X emission budgets during the five month period from May 1 to September 30, called the ozone season (or control period), in order to reduce the amount of ground level ozone that is transported across the eastern United States. The D.C. Circuit decision on March 3, 2000, concerning the NO_X SIP Call (Michigan v. EPA, 213 F.3d 663 (D.C. Cir. 2000)) reduced the number of States from 22 to 19.

EPA identified NO_X emission reductions by source category that could be achieved by using cost-effective controls. The source categories included were electric generating units (EGUs) and non-electric generating units (non-EGUs), internal combustion engines, and cement kilns. EPA determined state-wide NO_X emission budgets based on the implementation of these cost effective controls for each affected jurisdiction to be met by the year 2007. Internal combustion engines are not addressed by South Carolina in this response to Phase I, but will be in Phase II. In the NO_X SIP Call notice, EPA suggested that imposing statewide NO_X emissions caps on large fossil-fuel fired industrial boilers and EGUs would provide a highly cost effective means for states to meet their NO_X budgets. In fact, the state-specific budgets were set assuming an emission rate of 0.15 pounds NO_X per million British thermal units (lb. NO_X/mmBtu) at EGUs, multiplied by the projected heat input (mmBtu/hr). The NO_X SIP Call state budgets also assumed on average a 30 percent NO_X reduction from cement kilns, and a 60 percent reduction from industrial boilers. The non-EGU control assumptions were applied at units where the heat input capacities were greater than 250 mmBtu per hour, or in cases where heat input data were not available or appropriate, at units with actual emissions greater than one ton per day. However, the NO_X SIP Call allowed states the flexibility to decide which source categories to regulate in order to meet the statewide budgets.

To assist the states in their efforts to meet the SIP Call, the NO_X SIP Call final notice included a model NO_X allowance trading regulation, called “NO_X Budget Trading Program for State Implementation Plans,” (40 CFR part 96), that could be used by states to develop their regulations. The NO_X SIP Call notice explained that if states developed an allowance trading regulation consistent with the EPA model rule, they could participate in a regional allowance trading program that would be administered by the EPA. See 63 FR 57458-57459.

There were several periods during which EPA received comments on various aspects of the NO_X SIP Call emissions inventories. On March 2, 2000 (65 FR 11222), EPA published additional technical amendments to the NO_X SIP. On March 3, 2000, the D.C. Circuit issued a decision on the NO_X SIP Call that largely upheld EPA's position. (Michigan v. EPA, 213 F.3d 663 (D.C. Cir. 2000)). The DC Circuit Court denied petitioners' requests for rehearing or rehearing en banc on July 22, 2000. However, the Circuit Court remanded four specific elements to EPA for further action: the definition of electric generating unit, the level of control for stationary internal combustion engines, the geographic extent of the NO_X SIP Call for Georgia and Missouri, and the inclusion of Wisconsin. On March 5, 2001, the U.S. Supreme Court declined to hear an appeal by various utilities, industry groups, and a number of upwind states from the D.C. Circuit's ruling on EPA's NO_X SIP Call rule.

EPA published a proposal that addresses the remanded portion of the NO_X SIP Call on February 22, 2002 (67 FR 8396). Any additional emissions reductions required as a result of a final rulemaking on that proposal will be reflected in the second phase portion (Phase II) of the State's emission budget. On April 11, 2000, in response to the Court's decision, EPA notified South Carolina of the maximum amount of NO_X emissions allowed for the State during the ozone season. This budget adjusted South Carolina's NO_X emission budget to reflect the Court's decision regarding internal combustion engines and cogeneration facilities. Although the Court did not order EPA to modify South Carolina's budget, the EPA believes these adjustments are consistent with the Court's decision.

D. What is EPA's NO_X Budget and Allowance Trading Program?

EPA's model NO_X budget and allowance trading rule, 40 CFR part 96, sets forth an NO_X emissions trading program for large EGUs and non-EGUs. A state can voluntarily choose to adopt EPA's model rule in order to allow sources within its borders to participate in regional allowance trading. The October 27, 1998, Federal Register notice contains a full description of the EPA's model NO_X budget trading program. See 63 FR 57514—57538 and 40 CFR part 96.

Emissions trading, in general, uses market forces to reduce the overall cost of compliance for pollution sources, such as power plants, while maintaining emission reductions and environmental benefits. One type of market-based program is an emissions budget and allowance trading program, commonly referred to as a “cap and trade” program.

In a cap and trade program, the state (or EPA) sets a regulatory limit in mass emissions (emissions budget) from a specific group of sources. The budget limits the total number of allowances for each source covered by the program during a particular control period. When the budget is set at a level lower than the current emissions, the effect is to reduce the total amount of emissions during the control period. After setting the budget, the state (or EPA) then assigns, or allocates, allowances to the participating entities up to the level of the budget. Each allowance authorizes the emission of a quantity of pollutant, e.g., one ton of airborne NO_X.

At the end of the control period, each source must demonstrate that its actual emissions during the control period were less than or equal to the number of available allowances it holds. Sources that reduce their emissions below their allocated allowance level may sell their extra allowances. Sources that emit more than the amount of their allocated allowance level may buy allowances from the sources with extra reductions. In this way, the budget is met in the most cost-effective manner.

E. What Guidance Did EPA Use To Evaluate South Carolina's Submittal?

The final NO_X SIP Call rule included a model NO_X budget trading program regulation. See 40 CFR part 96. EPA used the model rule in 40 CFR part 96, and 40 CFR 51.121-51.122 to evaluate South Carolina's NO_X reduction and trading program and 40 CFR Part 98 subpart B (proposed model rule for cement kilns) to evaluate South Carolina's cement kiln rule SIP submittal.

F. What Is the Result of EPA's Evaluation of South Carolina's Program?

EPA has evaluated South Carolina's July 30, 2001, SIP submittal and finds it approvable. The South Carolina NO_X reduction and trading program and cement kiln rule are consistent with EPA's guidance and meet the requirements of the Phase I NO_X SIP Call. EPA finds the NO_X control measures in South Carolina's NO_X reduction and trading program approvable. Also, EPA finds that the submittal contained the information necessary to demonstrate that South Carolina has the legal authority to implement and enforce the control measures, and to demonstrate their appropriate distribution of the compliance supplement pool. Furthermore, EPA proposes to find that the submittal demonstrates that the compliance dates and schedules, and the monitoring, recordkeeping and emission reporting requirements, will be met.

II. South Carolina's Control of NO_X Emissions

A. When Did South Carolina Submit the SIP Revision to EPA in Response to the NO _X SIP Call?

On October 30, 2000, the South Carolina DHEC submitted a draft NO_X emission control rule to the EPA for pre-adoption review, requesting parallel processing concurrent with the development of the rule at the State level and included a schedule for development and adoption of the rule by the State. On July 30, 2001, DHEC submitted adopted revisions to its SIP to meet the requirements of the Phase I NO_X SIP Call. Since the rules have not completed South Carolina's internal requirements to become state-effective, EPA is using the parallel process to propose approval of these rules.

B. What Is South Carolina's NO _X Budget Trading Program?

South Carolina proposes, as in the model rule, to allow the large EGUs, boilers, and turbines to participate in the multi-state cap and trade program. Cement kilns are not included in the trading program, but will be required to install low NO_X burners, mid-kiln system firings or technology that achieves the same emission decreases, which achieve overall 30 percent reduction from sources in this category. South Carolina's SIP revision to meet the requirements of the NO_X SIP Call consists of a new rule for the “NO_X Budget Trading Program” (regulation 61-62.96) and a new rule for “Nitrogen Oxides (NO_X) Budget Program Requirements for Stationary Sources Not in the Trading Program” (regulation 61-62.99). The requirements under 61-62.96 affect EGUs and non-EGUs. Regulation 61-62.96 “NO_X Budget Trading Program” added nine new subparts: Subpart A—NO_X Budget Trading Program General Provisions; Subpart B—Authorized Account Representative for NO_X Budget Sources; Subpart C—Permits; Subpart D—Compliance Certification; Subpart E—NO_X Allowance Allocations; Subpart F—NO_X Allowance Tracking System; Subpart G—NO_X Allowance Transfers; Subpart H—Monitoring and Reporting; Subpart I—Individual Unit Opt-ins.

South Carolina's NO_X Budget Trading Program establishes and requires a NO_X allowance trading program for large EGUs and non-EGUs. The regulations under 61-62.96 establish an NO_X cap and allowance trading program for the ozone control seasons beginning May 31, 2004, and commencing May 1 in years thereafter.

The State of South Carolina voluntarily chose to follow the EPA's model NO_X budget and allowance trading rule, 40 CFR part 96. Since South Carolina's NO_X Budget Trading Program is based upon EPA's model rule, it is approvable and South Carolina sources are allowed to participate in the interstate NO_X allowance trading program that EPA will administer for the participating states.

The State of South Carolina has adopted regulations that are substantively identical to 40 CFR part 96. Therefore, pursuant to 40 CFR 51.121(p)(1), South Carolina's SIP revision is approved as satisfying the State's NO_X emission reduction obligations. Under 61-62.96, South Carolina allocates NO_X allowances to the EGU and non-EGU units that are affected by these requirements. The NO_X trading program, except for one source discussed below, applies to fossil fuel fired EGUs with a nameplate capacity greater than 25 MW that sell electricity to the grid as well as any non-EGUs that have a maximum design heat input greater than 250 mmBtu per hour. Each NO_X allowance permits a source to emit one ton of NO_X during the seasonal control period. NO_X allowances may be bought or sold. Unused NO_X allowances may also be banked for future use, with certain limitations.

In Section 96.4(a) of their rule, South Carolina deviated from the EGU and non-EGU budget under the NO_X SIP Call by categorizing as a non-EGU an existing co-generating unit at a paper mill which produces less than an annual average of one third of its potential electrical output capacity for sale. South Carolina moved the allowances for this unit from the EGU budget into the non-EGU budget. The net effect was to keep the total South Carolina EGU and non-EGU budget the same as under the NO_X SIP Call. Since the effect of this action did not change the State's total NO_X budget, and will achieve the same amount of NO_X reductions, it is considered approvable.

In Section 96.4(b) of their rule, the State allows a unit that restricts its fuel use to only natural gas or fuel oil and its NO_X emissions to 25 tons or less during a control period (through a federally enforceable permit) to be exempted from the requirements of the trading program. The State has clearly required that the unit meet both the fuel use and the NO_X emissions limitation throughout section 96.4(b). However, in Section 96.4(b)(iv) the rule indicates that a unit shall lose its exemption if the unit fails to comply with the restrictions on fuel use and NO_X emissions. This section would be clearer if it specified that a unit will lose its exemption if the unit fails to comply with the restrictions on fuel use or NO_X emissions. However, the State patterned their rule after the verbiage in 40 CFR part 97, in which the word “and” is used erroneously. This verbiage has been corrected to “or” in proposed revisions to 40 CFR part 97. EPA believes that South Carolina intends for this rule to reflect the correct definition and that a unit will lose its exemption if the unit fails to meet either the fuel use or the emissions limitation. The State's intention is further evidenced by the appropriate inclusion of both requirements (fuel use and emissions limitations) throughout section 96.4(b), therefore the EPA believes this section is approvable.

Source owners will monitor their NO_X emissions by using systems that meet the requirements of 40 CFR part 75, subpart H, and report resulting data to EPA electronically. Each budget source complies with the program by demonstrating at the end of each control period that actual emissions do not exceed the amount of allowances held for that period. However, regardless of the number of allowances a source holds, it cannot emit at levels that would violate other Federal or State limits, for example, reasonably available control technology (RACT), new source performance standards, or Title IV (the Federal Acid Rain program). South Carolina's regulations require the following in Section 96.6 Standard requirements: “ (g) Effect on Other Authorities. No provision of the NO_X Budget Trading Program, a NO_X Budget permit application, a NO_X Budget permit, or an exemption under Section 96.5 shall be construed as exempting or excluding the owners and operators and, to the extent applicable, the NO_X authorized account representative of a NO_X Budget source or NO_X Budget unit from compliance with any other provision of the applicable, approved State implementation plan, a federally enforceable permit, or the Clean Air Act (CAA).”

South Carolina's Nitrogen Oxides (NO_X) Budget Program Requirements for Stationary Sources Not In The Trading Program (Regulation 61-62.99) establishes requirements for cement manufacturing facilities. While these sources are subject to NO_X reduction requirements, they do not participate in the NO_X trading program. Cement kilns will be required to install low NO_X burners, mid-kiln system firings, or technology that achieves equivalent emission reductions. For mobile and area source categories, South Carolina's submittal does not rely on any additional reductions beyond the anticipated federal measures.

South Carolina's submittal demonstrates that the Phase I NO_X emission budgets established by EPA will be met. The final NO_X budget for EGUs and non-EGUs in South Carolina has been revised from the March 2, 2001, notice (65 FR 11222) that revised the NO_X statewide emissions budgets for the affected states and the District of Columbia. South Carolina's submittal provides documentation demonstrating that EPA's 2007 budget emissions incorrectly omitted numerous small generators (less than 25 MW) and a generator with a nameplate capacity of 27 MW that were identified in the North American Electric Reliability Council Database and did not appear in EPA's original overall EGU budget for South Carolina. EPA reviewed South Carolina's corrections and concurs with South Carolina's revised list of EGUs, large non-EGUs and small non-EGUs, as well as South Carolina's resultant 2007 NO_X budget emissions for the EGU and non-EGU source categories. EPA therefore is proposing to approve South Carolina's draft NO_X emission budgets to meet Phase I of the NO_X SIP Call as shown below:

Source category	EPA 2007 NOX budget emissions (tons/season)	South Carolina 2007 NOX budget emissions (tons/season)
EGUs	16,772	17,837
Non-EGUs	27,787	32,141
Area Sources	9,415	9,415
Non-road Sources	14,637	14,637
Highway Sources	54,494	54,494
Total	123,105	128,524

C. What Is the Compliance Supplement Pool?

To provide additional flexibility for complying with emission control requirements associated with the NO_X SIP Call, the final NO_X SIP Call rule provided each affected state with a “compliance supplement pool.” The compliance supplement pool is a quantity of NO_X allowances that may be used to cover excess emissions from sources that are unable to meet control requirements during the 2004 and 2005 ozone season. Allowances from the compliance supplement pool will not be valid for compliance past the 2005 ozone season. The NO_X SIP Call included these voluntary provisions in order to address commenters' concerns about the possible adverse effect that the control requirements might have on the reliability of the electricity supply or on other industries required to install controls as the result of a state's response to the NO_X SIP Call.

A state may issue some or all of the compliance supplement pool via two mechanisms. First, a state may issue some or all of the pool to sources with credits from implementing NO_X reductions in an ozone season beyond any applicable requirements of the CAA after September 30, 1999, and before May 31, 2004, (i.e., early reductions). This will allow sources that cannot install controls prior to May 31, 2004, to purchase other sources' early reduction credits in order to comply. Note that while South Carolina offers the opportunity for sources to earn early reduction credits in the 2000 ozone season (early reduction credits may only be issued for reductions made above and beyond any requirements under the CAA), this presumes monitoring according to part 75, subpart H, to establish a baseline in the ozone season prior to the year for which early reduction credits are requested. Second, a state may issue some or all of the pool to sources that demonstrate a need for an extension of the May 31, 2004, compliance deadline due to undue risk to the supply of electricity or other industrial sectors, and where early reductions are not available. See 40 CFR 51.121(e)(3). In South Carolina's rule, each NO_X Budget unit for which the owner or operator requests early reduction credits shall reduce its NO_X emission rate, for each control period for which early reduction credits are requested, to 0.25 lb/mmBtu or less for a “one to one” credit. For reductions down to but not including 0.25 lb/mmBtu sources can receive early reduction credits at a rate of one-half credit for each ton of NO_X reduction. South Carolina's regulation reads, “After the early reduction credits are calculated, the credits shall be discounted for units that do not reduce down to 0.25 lb/mmBtu so that for each ton of NO_X reduction achieved down to but not including 0.25 lb/mmBtu, the unit shall receive one half credit. For units that reduce their NO_X emissions beyond and including 0.25 lb/mmBtu, the credits will not be discounted and the unit shall receive one credit for each ton of NO_X reduction.” Since the net effect of South Carolina's rule as it relates to early reduction credit will keep the budget at the proper value, this deviation is considered approvable.

D. What Is the New Source Set-Aside Program?

South Carolina's SIP provides for new unit set-asides for EGUs and for non-EGUs. DHEC will establish one allocation set-aside pool for each control period. The allocation set-aside pool will consist of NO_X allowances equal to four percent in 2004, 2005, and 2006, and three percent thereafter, of the tons of NO_X allowances in the State trading budget, rounded to the nearest whole NO_X allowance as appropriate. This approach to allocations for new units is acceptable because it falls within the flexibility of the NO_X SIP Call requirements for a state's allocation to new sources.

III. Proposed Action

EPA is proposing to approve the South Carolina's SIP revision consisting of its draft NO_X Budget Trading Program and cement kiln rule, which was submitted on October 30, 2000, and revised on July 30, 2001. EPA finds that South Carolina's submittal will be fully approvable when it becomes state-effective because it meets the requirements of the Phase I NO_X SIP Call.

IV. 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 tribal implications because it will 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). This action also does not have Federalism implications because it does not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 13132 (64 FR 43255, August 10, 1999). This action 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 “Protection of Children from Environmental Health Risks and Safety Risks” (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. This proposed approval of the South Carolina NO_X Budget Trading Program 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
• Nitrogen dioxide
• Ozone
• Reporting and recordkeeping requirements

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

Dated: April 1, 2002.

A. Stanley Meiburg,

Acting Regional Administrator, Region 4.