This is a preliminary document prepared by a subgroup of members of the Base Programs Analyses and Policies Work Group as part of the Federal Advisory Committee Act (FACA) Subcommittee process. It is not an EPA document. It is subject to work group discussion. Interested persons should forward their comments to a member of the Base Programs Analyses and Policies Work Group or to the contact persons shown below.

Rewards and Sanctions

Date: February 13, 1997

Contacts: Stephen Gerritson, LADCO, (847) 296-2181 and Vince Brisini, Pennsylvania Electric Company, (814) 533-8111

Note: This draft merges three issue papers, Economic Incentives and Disincentives as an Adjunct to Sanctions (11/15/96), Sanctions (1/22/97), and Safe Harbors/Early Incentives (1/23/97). The comments of work group members on the precursor issue papers have been incorporated into this draft of the composite issue paper.

Status: Draft #2

Introduction

This paper discusses rewards for accelerated air quality planning and implementation, and sanctions for delays and missed deadlines. Both encourage early emission reductions and accelerated planning and implementation under the new/revised ozone and particulate matter national ambient air quality standards and regional haze rule. More specifically, the incentives discussed in this paper encourage states/tribes to submit and implement their state/tribal implementation plans (SIP/TIP) early, and encourage sources to voluntarily reduce emissions in Areas of Influence and areas at risk early. An additional goal is to promote early actions to support integration of the ozone, PM-fine, and regional haze time lines. The options presented in this paper supplement the existing set of rewards and sanctions provided by the Clean Air Act.

Background

Rewards

Rewards for reducing emissions may take many forms, and not all are financial, although potential cost-savings are obviously important. Some existing state programs reward sources with high-profile awards from the governor. States also are using reductions in corporate income taxes and low- or no-interest loans to reward sources. EPA's 33/50, Green Lights, and Energy Star programs publicize participants and their accomplishments in local and national media. However obvious, it is important to observe that if emissions reductions are deep enough, one reward for the area is avoiding designation as a nonattainment area or redesignation, and another is more healthful air for the area's residents.

Incentives generally involve tradeoffs. States or tribes, for instance, may reduce their future administrative burden by initiating their planning process and implementing programs early. Sources that commit to additional early emission reductions may be exempted from future reduction requirements.

A "safe harbor" is one type of incentive in which sources choosing to institute more stringent controls early are "sheltered" from additional control requirements for a specified length of time. Safe harbors could be used by states to reward sources.

The early reduction program under the federal hazardous air pollutant provisions is an example of a safe harbor. The program is designed to encourage early reductions from hazardous air pollutant (HAP) emission sources. Existing sources may be granted a 6-year extension of the typical 3-year compliance deadline for Maximum Achievable Control Technology (MACT) standards if they can demonstrate a reduction of 90 percent (95 percent for particulate HAPs) or more of HAP emissions prior to the proposal of the technology-based standard. Sources achieving the reduction after the standard's proposal but before January 1, 1994, may also qualify for the compliance extension if it makes an enforceable commitment to achieve the reduction before proposal of the standard. The early reductions must be based on actual and verifiable emissions in a base year no earlier than 1987, and sources must undergo review for a health-based emission limit at the same time as the other sources in the source category.

The early reduction program has the potential for substantially reducing emissions well before the compliance date for MACT standards. Sources which participate in the program obtain more time to develop strategies for compliance with MACT standards and the flexibility to choose the means by which they reduce their HAP emissions. The early reduction option gives sources more time to design cost-effective emission reduction approaches for their facilities and reduce the cost of compliance over the long-term. Public and environmental exposures to pollutants are reduced earlier than if sources delay control of emissions until they are subject to MACT standards. This early reduction results not only in lower annual emissions but also in lower overall emissions from the source over the long-term.

Sanctions

Traditionally, a "sanctions clock" starts for a state when the EPA does one or more of the following: 1) finds that a state has failed to submit or has submitted an incomplete state implementation plan (SIP) or one or more elements of the plan; 2) disapproves a submitted SIP (in whole or in part); and 3) finds that any requirement of an approved SIP is not being implemented. If the state does not correct the deficiency within 18 months, the EPA imposes a prohibition of federal highway fund approval or increases the offset ratio for new or modified sources in nonattainment areas to at least 2:1. The sanction would be applied until the EPA determines that the state has come into compliance. Furthermore, if the EPA finds a "lack of good faith," both of the sanctions would be applied until the state comes into compliance. In addition to offset and highway sanctions, the EPA may withhold section 105 funds to state air quality agencies. Although EPA has not imposed sanctions for other SIP failures, the Agency does have this authority.

The EPA may promulgate a federal implementation plan (FIP) within two years after finding that a state has failed to submit a SIP or determining that a state has submitted an inadequate SIP.

General Principles

The principles used to develop the proposed rewards and sanctions are as follows:

1) no proposal should make any situation any worse (i.e. no area-wide backsliding);

2) positive incentives should encourage early compliance (states should not be rewarded for merely meeting the deadlines); and

3) negative incentives should be applicable immediately and should "fit the crime."

Related Issue Papers

The Economic Incentives Subgroup of the National and Regional Strategies Work Group is preparing a thought piece on early reductions within the context of a market-trading program. The "Early Reductions" document deals particularly with issues related to emissions banking. The Reasonable Further Progress issue paper being developed discusses early actions that contribute to satisfying reasonable further progress requirements.

Issue 1. How can planning bodies (States, tribes, RAMP, AOI-level, etc.) be encouraged to plan and implement plans early?

Several incentives or "rewards" are seen as possibilities in encouraging states toward early compliance with planning requirements. A reduced offset ratio could be granted to those areas which require offsets, making it easier to attract new industry. As an alternative, additional offset credits could be granted, although a pool of offset credits would have to be established. Increased flexibility could be granted to states, either through a variation on the Flexible Attainment Region (FAR) concept, whereby states are granted extra time to deal with future violations in a flexible manner, or through "trading" certain mandatory measures (such as NOX RACT, NSR, or transportation conformity) for other equivalent measures. A set-aside of federal highway money could be structured to accelerate planning.

Reduced offset ratios. A state which complied with its requirements earlier than the deadline (just how early would qualify is an unanswered question) could be rewarded by a reduction in its offset ratio for new sources. Currently, new sources locating within a nonattainment area must find offsets for their projected emissions at a ratio greater than one, depending upon the severity of the area's classification. That is, for every ton the new source would emit, reductions in "old" sources of 1.2 to 1.5 tons must be found. Reducing this ratio would make attracting new industry easier, and would help prevent the flight of new sources to attainment areas, where their emissions may be less controlled.

Additional offset credits. States requiring offsets for new sources often maintain a bank or pool of credits, obtained from shutdowns, penalties, etc. States which meet the early compliance requirements could be awarded additional offset credits for this pool. These credits could be generated through set-asides from open market trading programs, through penalties on others, or by some other means.

Flexible response. Currently, a state which has been redesignated to attainment and then experiences violations of the standard must implement a contingency plan which includes automatic measures. Flexible attainment regions (of which there are now three) have additional time to "cure" the violation in a more flexible manner, through a combination of voluntary and required measures. States which meet early compliance requirements could be granted a similar flexibility in meeting their emissions reductions requirements. This could include a variation on the FAR concept, or relief from specific measures, such as NOx RACT, provided that equivalent reductions are made.

Set-aside of federal highway money. Set-asides are used in federal highway legislation to help states achieve various objectives. A set-aside for projects improving air quality could be structured to both encourage states toward early compliance with planning requirements and reduce states' shares of the cost of transportation projects that reduce emissions.

Issue 2. How can planning bodies (States, tribes, RAMP, AOI-level, etc.) be discouraged from missing deadlines?

As noted above, negative incentives are intended to be applied immediately upon a missed deadline, and should be seen as appropriate punishment for the "crime," but not so onerous as to cause a political response. Examples of negative incentives could include: accelerated future deadlines, additional requirements such as lower RACT thresholds, denial of variances or AELs, discounted credits, or reduction requirements imposed on the agencies of the state.

Accelerated future deadlines. For a missed deadline, a state could be told that the next deadline has been moved up six months, to ensure that it would not be missed.

Lower RACT thresholds. Depending upon the severity of the nonattainment area, sources above a certain minimum (25 to 100 tons per year) are required to install RACT. A state which failed to meet a deadline for filing could have this minimum reduced. This would have the added advantage of creating a lobbying group among industry for meeting the deadline.

Denial of variances or AELs. Variances and alternative emission limits are a form of flexibility which USEPA and the states can grant under certain circumstances. Failure to meet deadlines could result in the loss of this flexibility.

Discounted credits. Under a trading program, emission reduction credits would be banked at full value unless there is an environmental set-aside. States failing to meet their deadlines could have these banked credits discounted by some percentage.

Additional requirements for state agencies. Since it would be the state, rather than emission sources, which missed the deadline, perhaps it should be the state agencies which must generate the extra reductions. This could be done through the imposition of mandatory car pooling or some other VMT reduction program, acceleration of the AFV program, etc.

Issue 3. How can sources be encouraged to reduce emissions early?

Safe harbors. Increased flexibility could be granted to sources, either individually or collectively, in the form of safe harbors. The advantages of safe harbors include early emission reductions and, for regulators, more certainty and less hassle. The disadvantages include limitation on regulators' control options in the future. Regulators may qualify safe harbor programs with either a limit on the number of years during which it is available or explicit provision for imposition of controls on the sheltered sources. EPA can't give certainty to safe harbors, reducing the certainty for sources.

The Work Group is considering three safe harbors for highway vehicles.

1) Flexibility in new vehicle certification: allow vehicle manufacturers to average emission limits over several models, i.e., lower emissions on models that can meet limits with less cost are averaged with higher emissions on models that are more costly to control.

2) Exempt post '96 models with on-board diagnostics (OBD) from inspection and maintenance programs.

3) Clean fuel fleet rebuild every 100,000 miles. [Need to specify Work Group's proposal with additional detail: what is the tradeoff?]

Outstanding Issues

Positive Incentives for Early Planning and Emissions Reductions

What are the minimum requirements to qualify for positive incentives?

What if all existing sources qualify for these positive incentives but additional controls are needed to attain the NAAQS?

Should emission reductions resulting from national programs, for example, mobile source emission reductions, count toward RFP only if states meet deadlines?