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The South Coast Air Quality Management District (SCAQMD)

Letter from Felicia Marcus to Barry Wallerstein

South Coast Air Quality Management District
21865 E. Copley Drive, Diamond Bar CA 91765-4182
(909) 396-2000 - http://www.aqmd.gov January 22, 1998

Mr. J. Charles Fox, Associate Administrator

U.S. EPA - Mail Code 1801
Office of Reinvention
401 M Street, S.W.
Washington, D.C. 20460

Dear Mr. Fox:

Enclosed please find the South Coast Air Quality Management District's proposal for Project XL. We are asking that Rule 2501 - Air Quality Investment Program (AQIP) and Rule 2503 - Enforceable Procedures be approved as a pilot project that meets the project criteria specified in the Federal Register.

Please note that Rule 2501 was adopted in May 1997 and Rule 2503 was adopted in December 1997 with the implementation date of January 1, 1998. The SCAQMD has already received proposals to reduce VOC, NOx, CO, SOx, and PM10) from stationary and mobile sources for the AQIP. The SCAQMD has also received applications from Regulation IV and XI sources requesting the use of AQIP emission reductions. Any delay would negatively impact rule implementation at a time of heightened interest and momentum.

EPA has for some time encouraged the development of innovative compliance strategies to achieve enhanced environmental results while maintaining economic health. In fact, the President's directive in issuing the new PM2.5 and Ozone standards specifically calls for the development of an air quality trust fund as one way to implement the new standards. Rules 2501 and 2503 represent our proposal to answer that challenge.

The SCAQMD is recognized as a leader in developing market-incentive programs. Our Rule 1501.1 - Alternatives to Worktrip Reduction Plans was approved by Project XL in 1995. We view alternative methods of achieving stricter air quality standards as the next step in regulatory innovation.

We appreciate your positive consideration of this proposal, and look forward to future cooperative efforts. If you have any questions regarding our submittal, please contact Elaine Chang, Director of Planning and Policy at (909) 396-3186.


Barry R. Wallerstein, D. Env.
Acting Executive Officer

The South Coast Air Quality Management District (SCAQMD) has jurisdiction over the South Coast Air Basin (Basin) consisting of Orange county and the non-desert portions of Los Angeles, Riverside, and San Bernadino counties. There are over 25,000 regulated emission sources within the area. Air quality in the Basin continues to improve, but still experiences the worst air quality in the nation due to the region's rapid population growth, as well as the physical and meteorological setting of the Basin. Most federal standard exceedances are for ozone, followed by carbon monoxide and PM10. Traditional-style command and control regulatory programs to achieve clean air have become increasingly costly and difficult to administer.

In April 1995, the SCAQMD initiated the Intercredit Trading Study to assess its existing market-based regulatory programs for potential enhancements. In March 1996, SCAQMD staff presented recommendations to the agency's Governing Board based on that assessment of the SCAQMD's trading programs and the ensuing public comments. The recommendations were to develop a universal trading market for broader trading of mobile and stationary source emission credits, and to expand the Air Quality Investment Program (AQIP); the latter concept is based on creating a pool of pre-verified emission reductions. In order to achieve health-based air quality standards through an innovative approach while also maintaining economic health in the Basin, the SCAQMD Governing Board directed staff to initiate rule development for the Intercredit Trading Program.

The Intercredit Trading Program is designed to include two components: an open market trading program and an air quality investment program. Rule 2501 - Air Quality Investment Program and Rule 2503 - Enforceable Procedures represent the implementation of the latter component. The SCAQMD Governing Board adopted Rule 2501 in May 1997. Rule 2501 is designed to complement the existing command and control regulatory programs by providing, an alternative compliance option to those sources subject to SCAQMD source-specific rules and regulations (i.e., Regulations IV and XI). Rule 2501 also implements Control Measure #97FLX-02: Air Quality Investment Program, in the 1997 Air Quality Management Plan (AQMP). Under Rule 2501, Regulations IV and XI sources that meet the eligibility requirements of the rule, along with Rule 2202 - On-road Motor Vehicle Mitigation Options sources, may voluntary elect to participate in the AQIP by submitting a specified fee. This fee will be used to fund mobile and stationary source projects that will produce equivalent VOC, NOx, SOx, CO, and/or PM10 emission reductions that would otherwise be required of the AQIP participants.

Pursuant to Rule 2501, the participation of Regulation IV and XI sources in the AQIP is allowed upon passage of a rule specifying enforceable procedures for using AQIP emission reductions. In December 1997, the SCAQMD Governing Board adopted Rule 2503 - Enforceable Procedures to work hand in hand with Rule 2501. Specifically, Rule 2503 outlines monitoring, recordkeeping and reporting (MRR) requirements for Regulation IV and XI sources based on the guidelines set forth in Rule 2501. Rule 2503 also specifies the quantification methodologies for determining the amount of emission reductions required.
Environmental Results

The AQIP is designed to achieve greater environmental benefit than the current command and control regulations. For example, in the past, for those sources facing compliance difficulties of either a financial or technical nature, resolution would be sought either through rule exemption or variances. Under Rule 2501, sources can participate in the program and thereby achieve equivalent emission reductions that would otherwise be lost. Furthermore, the Rule 2501 investment fee has a built-in premium charge (e.g., 10% for small businesses and 20% for others). The premium collected will be used to fund additional emission reductions that can be retired to benefit the environment. In certain cases, the premium will fund projects to advance clean technologies, or develop emission quantification/monitoring protocols. All these will have long-term environmental benefits in promoting attainment of clean air standards.

To ensure that quantifiable environmental benefits can be achieved, Rule 2501 establishes an Environmental Benefit Account to retire at least 10% additional emission reductions requested by the investors. Other provisions in Rule 2501 (such as Retirement of unused credits after credit expiration dates, and restrictions on the transferability of overpurchased credits) will all contribute to the additional emission reductions anticipated from the AQIP.

In summary, Rule 2501 is designed to achieve both quantitative and qualitative emission reductions or air quality benefits with a minimum of 10% additional reductions ensured.

Cost Savings and Paperwork Reduction

Implementation of Rule 2501 will result in significant cost savings and paperwork reduction for regulated sources. Since Rule 2501 is a voluntary program, sources subject to command and control regulatory programs will only participate in the AQIP if it's the more cost-effective compliance option.

In addition, Rule 2501 allows businesses to temporarily delay compliance which avoids expensive and/or necessary paperwork in filing variance applications.

Stakeholder Support

SCAQMD staff has solicited and incorporated extensive input from a large focus group in developing AQIP design and objectives. The focus group consists of representatives from public agencies, the regulated community, and environmental groups. SCAQMD staff has worked intensively with the focus group to resolve outstanding issues to the degree feasible. A summary of comments and issues related to both Rule 2501 and Rule 2503 is provided in Attachments C and D.

The AQIP has received broad-based stakeholder support from the following organizations: California Council for Environmental and Economic Balance (CCEEB) which is a statewide private, nonprofit, nonpartisan organization of California business, labor, and public policy, City of Los Angeles (CLA), Construction Industry Air Quality Coalition (CIAQC), County Sanitation Districts of Los Angeles County (LACSD), and the Regulatory Flexibility Group (RFG) representing The Walt Disney Company, Southern California Edison Company, Southern California Gas Company, Hughes Electronics Corporation, Los Angeles Times, Boeing, Northrop Grumman Corporation, Shell Oil Company, Texaco, Inc., Chevron, Tosco, TABC, Inc., TRW, Inc., and Santa Fe Pacific Pipeline Partners.

Innovative/Multi-Media Pollution Prevention

The AQIP represents an innovative approach to address environmental compliance issues, including both technologies and management practices. It provides compliance flexibility, potential cost savings to the regulated community, and directly funds clean technologies to achieve emission reductions at lower costs. In addition, Rule 2501 is designed in such a way that emission reductions are achieved prior to use to ensure that emission reduction goals are achieved. Furthermore, projects selected for funding will take into consideration the ability to achieve concurrent or multiple pollutant emission reductions, consistency with other local, state, and federal programs, and mitigation of' potential adverse environmental impacts. These criteria are used to optimize the development of environmentally beneficial technologies.


Rule 2501 can be characterized as an, SCAQMD-operated open market trading program. It is intended to "jump start" the Intercredit Trading Market which SCAQMD is currently developing. Through the implementation of Rule 2501, credit generation and certification, credit trading, and credit use can be demonstrated to illustrate real world demand and supply, market interaction, and regulatory process. As a result, experience and market confidence can be gained to facilitate the operation of the pending Intercredit Trading Market.

In addition, the projects funded through Rule 2501 can be used to demonstrate feasibility of technology, cost effectiveness, compliance and enforcement. These are critical components of any environmental rulemaking process, and can be field-demonstrated and properly documented under Rule 2501. One of the primary objectives of Rule 2501 is to incentivize the advancement of clean technologies to the extent that those advances can then become the next generation of regulatory controls.


Since the AQIP is a voluntary compliance option, sources subject to command and control regulatory programs will only participate in the AQIP if it is feasible.

In addition, the implementation of the AQIP will produce real, quantifiable, surplus, permanent, and enforceable emission reductions that are quantifiable according to an SCAQMD-approved Quantification Protocol, and/or produce an air quality benefit through the advancement and commercialization of clean technologies. These protocols demonstrate the feasibility of control technologies.

Monitoring, Reporting, and Evaluation

Rule 2501 outlines a set of criteria for the monitoring, reporting, and recordkeeping (MRR) requirements on the development of emissions quantification protocols and enforceable procedures for AQIP investors. Furthermore, these protocols or enforceable procedures will be formally adopted by the SCAQMD Governing Board as District rules. As a result, the standard rulemaking proceedings will involve all stakeholders and issues, and intents will be properly documented and clarified with information readily accessible to the general public. Rule 2503 is an example of such a rule needed in order to implement Rule 2501. In addition, the information needed from both the AQIP investors and providers is clearly specified in Rule 2501 to ensure compliance verification.

Furthermore, as part of Rule 2501 adoption resolution, the SCAQMD Governing Board directed staff to initiate an extensive outreach effort to inform and involve the public regarding the AQIP program. Semiannual and annual reports are also required by Rule 2501 to document AQIP activity, such as the amount of money collected, total reductions achieved, types of project funded, investment fees, and cumulative environmental impacts from credit use.

Shifting of Risk Burden

The implementation of Rule 2501 and Rule 2503 will not subject any segment of the population to unjust or disproportionate environmental or socioeconomic impacts. On a regional basis, implementation of Rule 2501 will produce greater emission reductions than otherwise required under command and control regulations (i.e., through the 10% built-in environmental benefit). In addition, to prevent localized air quality impacts, specific requirements are provided in Rule 2501 to protect the attainment of the NO2 ambient air quality standard. With respect to localized air toxics impacts, Rule 2501 does not allow the use of AQIP reductions in lieu of NESHAP requirements. In addition, consistent with existing SCAQMD air toxics rules and policies, Rule 2501 does not allow a source to participate in AQEP if there are emission increases or reductions foregone, resulting in air toxics impacts greater than the specified significance thresholds. These provisions prevent regulatory compliance flexibility achieved at the cost of uneven public health protection.

As part of Rule 2501 development, SCAQMD staff has prepared an Environmental and Socioeconomic Assessment in accordance with the California Environmental Quality Act (Public Resources Code Section 21000 et seg) and state law requirements for Socioeconomic Analysis (Health and Safety Code Section 40440.8). Pursuant to California Environmental Quality Act (CEQA) Guidelines Section 15321 - Enforcement Actions by Regulatory Agencies, the SCAQMD has determined that Rule 2503 is exempt from CEQA. Notice of Exemption has been prepared pursuant to CEQA Guidelines Section 15062 and filed with the county clerks of the four counties. Rule 2503 is not expected to generate additional costs for Regulation IV and XI sources using AQIP because its requirements are intentionally designed to be consistent with existing regulations.

Attachments: Rule 2501 - Air Quality Investment Program
Rule 2503 -Enforceable Procedures
Board Letter for Rule 2501
Board Letter for Rule 2503

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