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The South Coast Air Quality Management District (SCAQMD)

Board Meeting

BOARD MEETING: May 9, 1997


PROPOSAL: Adopt Proposed Rule 2501 - Air Quality Investment Program

SYNOPSIS: Proposed Rule 2501 will provide an alternative compliance option to sources subject to source-specific AQMD rules and regulations by creating an AQIP reserve of real, quantifiable, permanent, enforceable, and surplus emission reductions. Source operators can voluntarily participate by submitting a specified fee to use the emission reductions from the reserve as an alternative to compliance with a specific emission limitation under Regulations IV, XI or Rule 2202. This fee will be used to fund stationary and mobile source projects that will produce surplus emission reductions for the reserve thereby ensuring that this program will produce emission reductions equivalent to or greater than those required by the source-specific rules.

COMMITTEE: Mobile Source, April 25, 1997, Reviewed.


1. Certify the Final Environmental Assessment for Proposed Rule 2501 - Air Quality Investment Program, as proposed, in accordance with the attached Resolution, and
2. Adopt Proposed Rule 2501 - Air Quality Investment Program.


In March 1996, AQMD staff presented to the Board a set of policy recommendations to develop an Intercredit Trading Program. As part of the overall recommendations to develop an universal trading market to allow broader trading of mobile and stationary source emission credits, AQMD staff also recommended that an expanded AQIP be developed. An expanded AQIP would compliment a universal trading market and would be consistent with the objective of the Intercredit Trading Study to increase compliance flexibility and promote the commercialization of advanced pollution control technologies. Based on these policy recommendations, the Board directed staff to initiate rule development for an Intercredit Trading Program.

The AQMD currently is developing a series of market incentive rules under Proposed Regulation XXV - Intercredit Trading Program to implement the recommendations from the Intercredit Trading Study. This proposed regulation will initially include four rules: Rule 2500 - Intercredit Trading; Rule 2501 - AQIP; Rule 2505 - Credit Generation for Permitted Stationary Sources; and Rule 2506 - Credit Generation for Area Sources. Proposed Rule 2500 is an umbrella rule that creates the universal trading market, specifies the provisions for trading of credits< credit use, program audits, and backstop measures. Proposed Rule 2505 and Proposed Rule 2506 identify credit-generating provisions for permitted stationary sources and unpermitted area sources, respectively.


The Proposed Rule 2501 will absorb and expand the existing AQIP under Rule 2202. Under Proposed rule 2501 there are two AQIP participants: (1) Clean Air Investors, and (2) Emission Reduction Providers.

AQIP Clean Air Investors (Investors) are those regulated sources that meet the applicability requirements of this proposed rule and voluntarily elect to pay a specified Investment Fee to fund AQMD-approved emission reduction projects as an alternative to compliance with a specific emissions limitation requirement. The investment fee would be used to fund mobile and stationary projects that will achieve emission reductions equivalent to, or greater than, those which would have otherwise been required by the source under the applicable AQMD rule or regulations. In addition, after control strategies that achieve equivalent emission reductions are selected, many remaining investment fees acquired through the AQIP will be used to fund projects that will (1) promote the advancement and commercialization of technologies consistent with the AQMD's AQMP objectives to achieve air quality goals, and/or (2) generate additional emission reductions/air quality improvement to benefit the environment.

Prior to participating in the AQIP, an Investor who meets the applicability requirements of Proposed Rule 2501 must submit an AQIP Plan Registration and the appropriate Investment Fee. Upon approval of the AQIP Plan Registration, the Investor can use the AQIP emission reductions.

AQIP Emission Reduction Providers (Providers) are interested parties that implement AQMD-approved air quality projects thereby providing the emission reductions that are needed by the Investors. Providers would implement control strategy proposals to generate emission reductions equivalent to, or greater than, those needed by the Investors. To ensure emission reductions used by Investors are real, quantifiable, surplus, permanent, and enforceable, these emission reduction projects must be quantified using an AQMD-approved emissions quantification protocol.

Under Proposed Rule 2501, the AQMD will establish an Emission Reduction Reserve of real, quantifiable, permanent (for the duration of the emission reduction activity) enforceable, and surplus emission reduction. Only those emission reductions that have been verified by the Executive Officer to have occurred and that have been quantified pursuant to an AQMD approved Emissions Quantification Protocol will be designated for use in the AQIP Reserve. Investors can then use these pre-approved emission reductions as an alternative to compliance with specifc emission limitations. The creation of the Reserve ensures that generation and verification of emission reductions will occur prior to their use.

In addition, this proposed rule includes provisions to establish a consultation committee to provide guidance regarding implementation of the AQIP, program audits and status reports, and corrective measures to correct potential problems identified through either the status report or program audits.

Policy Issues

Over the past month, the AQMD staff has worked with environmental groups, business representatives, agencies (EPA and ARE), and other interested parties to resolve issues related to Proposed Rule 2501 to the degree feasible. Based on discussions with these parties and revisions to Proposed Rule 21501, the AQMD staff believes that it has addressed several issues originally identified in the Board Letter to the March 14, 1997 Set Hearing package for Proposed Rule 2501 and the April 11, 1997 Hearing package for Proposed Rule 2501. Table 1 provides a summary of these issues and the manner in which they were addressed.

Although a number of issues under Proposed Rule 2501 have been resolve, there remain outstanding issues regarding program approvability and design that interested parties and/or staff disagree on and are unlikely to ever agree. Table 2 summarizes the five outstanding issues associated with Proposed Rule 2501 and characterizes the general position and comments from the environmental groups, business representatives, and agencies (EPA and AEB). The five key outstanding issues are as follows: (1) EPA approval of emissions quantification protocols; (2) toxic thresholds; (3) level of premium; (4) program applicability; and (5) buy back option for unused or excess emission reductions.

A more detailed discussion of these issues and other comments received is contained in the Staff Report. AQMD staff will continue to work with interested parties on identified issues.

AQMP and Legal Mandates

Proposed Rule 501 will implement 1997 AQMP Control Measure #97FLX-02: AQIP. CM #97FLX-02 would allow sources subject to AQMD rules and regulations to voluntarily invest in AQIP emission reductions as an alternative to compliance with specific emission limitations. Although no direct emission reductions were targeted by this measure in the 1997 AQMP, implementation of this proposed rule is expected to produce a net air quality benefit and provide for the commercialization of advanced pollution control technologies that will be needed to achieve the Basis's air quality attainment goals.

CEQA and Socioeconomic Analysis

Pursuant to the California Environmental Quality Act (CEQA) and the AQMD's Certified Regulatory Program (Rule 110), the AQMD has prepared a Subsequent Environmental Assessment (EAA) for Proposed Rule 2501. The Draft Subsequent EA was made available to the public for a 45-day review period ending January 8, 1997. Response to comments received on the draft document are included in the Final Subsequent EA. The changes to the proposed rule made since the release of the Draft Subsequent EA are described and evaluated in the Final Subsequent EA. The modifications do not result in a new significant environmental impact or a substantial increase in the severity of a previously identified impact and, therefore, do not require

Table 1: Summary of Recently Addressed Issues

How Resolved
Regulatory Liability Creation of the AQIP Reserve ensures reductions are generated and verified prior to use of those reductions.
Civil Penalties Civil Penalties for Providers: Creation of AQIP Reserve resolved the regulatory liability issue thereby placing less emphasis on civil penalties for Providers.
Civil Penalties for Investors: Same civil penalties as existing regulatory program in addition to requirements to make up any emission reduction shortfalls.
Program Restrictions for Regulation XIII and Federal Regulation Provided clarification in the rule language that restricts use of the AQIP:
- to net or avoid NSR requirements or to comply with NSR requirements; and
- to comply with a federal regulation unless that regulation or other federal policies specifically allows for emissions trading of the type set forth under Proposed Rule 2501.
Enforceability - MRR Requirements for Providers and Investors Provided clarification regarding MRR requirements for Investors and Providers.
Propose to develop Enforceable Procedures Rule for Investors.
Surplus Definition Revised definition of surplus to indicate:
- surplus emission reductions will be determined by the most stringent of the federally and locally approved plan;
- the stringency between the federally and locally approved plan is defined by the control efficiency of the source category; and
- the SIP represents the combination of rules and control measures.
10 Percent Environmental Benefit A set aside account will be established to ensure that 10 percent of the AQIP emission reductions used will be retired.
Source of Emission Reductions for Pre-Funding the AQIP Reserve The AQMD staff to report back to the Board by January 1, 1998 regarding the type, origin, and amount of emission reductions that will be used for pre-funding the AQIP Emission Reduction Reserve. (See Resolution)
Development of Enforceable Procedures Rule for AQIP Users Committed to expedited schedule to develop the enforceable procedures rule. (See Resolution)
Permit Modification for Title V Facilities Proposed Rule 2501 incorporates language indicating that the Plan Registration will constitute an application for a permit revision unless operation under the Plan is covered by an alternative operating scenario.
The AQMD staff is committed to working with EPA regarding permitting requirements Title V facilities that elect to participate in Proposed Rule 2501. (See Resolution)

a recirculation of the document pursuant to CEQA Guidelines Section 25088.5. Many of the modifications result in increased program enforceability and address other issues raised in the Draft Subsequent EA and by the environmental community. In fact, the revised propose rule would mitigate the potential significant air quality impacts described in the Draft Subsequent EA to insignificance. The Final Subsequent EA is included as part of this package presented to the Governing Board for the public hearing on the proposed amendments.

AQMD staff conducted a socioeconomic impact assessment for Proposed Rule 2501. In summary, Proposed Rule 2501 is likely to lower compliance costs since facilities can elect to purchase emission reductions through the AQIP when it is more cost-effective than direct compliance with applicable source-specific rules or regulations. In addition, the program provides an incentive for the development of innovative control technologies and provides an initial foundation for a broader private market under the Proposed Universal Trading Market.

Implementation Plan

AQMD staff will conduct an expanded outreach program to solicit proposals for the AQIP, building on other existing outreach efforts. In addition, the AQMD staff will conduct a public outreach program to educate and inform small businesses about this proposed program.

Resource Impacts

The proposed rule will require development of emissions quantification protocols for generating and using AQIP emission reductions, and approval of AQIP Plan Registrations. In addition, Proposed Rule 2501 will require additional AQMD staff workloads to review, certify, and select control strategy proposals. Sufficient resources have been budgeted in the AQMD Three-Year Budget Forecast.

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