TITLE 30.ENVIRONMENTAL QUALITY

Part 1. TEXAS COMMISSION ON ENVIRONMENTAL QUALITY

Chapter 101. GENERAL AIR QUALITY RULES

Subchapter H. EMISSIONS BANKING AND TRADING

The Texas Commission on Environmental Quality (commission) proposes amendments to §§101.300, 101.302 - 101.304, 101.311, 101.356, 101.359, 101.370, 101.373, 101.374, and 101.376.

The amendments will be submitted to the United States Environmental Protection Agency (EPA) as revisions to the state implementation plan (SIP).

BACKGROUND AND SUMMARY OF THE FACTUAL BASIS FOR THE PROPOSED RULES

In December 2000, the commission adopted rules setting a limit of 10,000 on the total use of discrete emission reduction credits (DERC) in the Houston/Galveston ozone nonattainment area beginning on January 1, 2005. At the time of that adoption, the commission instructed the executive director to develop guidance for the distribution of DERCs among applicants requesting their use. The commission is proposing amendments to specify the method for which DERC use may be approved. The commission also identified several areas of the mass emission cap and trade program where modifications are needed to either expand flexibility or protect the emission cap established by the SIP.

Industrial facilities that generate emission reduction credits (ERC) must first establish a baseline of emissions from which reductions may be subtracted and credit awarded. In order to give affected industries flexibility and allow them to select years that best represent their level of production activity, the commission proposes to amend the rules to allow industries to select two consecutive calendar years from the ten consecutive years preceding the reduction or from a period including or following the most recent emission inventory used in the SIP. The baseline emissions may not exceed the quantity of emissions reported in the most recent year of emissions inventory used in the SIP.

The commission proposes to amend the DERC calculation equation to ensure that no credit is awarded for curtailment of activity and to simplify the equation. The commission also proposes amendments that ensure that incidental increases in criteria pollutants or ozone precursors for which an area is nonattainment resulting from discrete mobile source reductions are offset. The amendments would also ensure that secondary emission increases from mobile source reductions do not exceed state or federal standards.

The commission is proposing to amend the relevant sections of Chapter 101 to allow reductions in any criteria pollutants for which an area has been designated as not meeting national ambient air quality standards (NAAQS) to qualify as an ERC. Currently, only nitrogen oxides and volatile organic compounds can be banked as ERCs. These new provisions are intended to provide opportunity to generate emission credits in the El Paso area that is nonattainment for ozone, carbon monoxide, and particulate matter with an aerodynamic diameter less than ten microns (PM 10 ).

SECTION BY SECTION DISCUSSION

General Administrative Amendments

The commission proposes to change the word "shall" to "must" and the word "which" to "that" in numerous locations in the rule language to conform to the drafting standards in the Texas Legislative Council Drafting Manual, October 2002.

The commission proposes to spell out acronyms the first time they are used in a section and to delete acronyms that are only used once in a section.

SUBCHAPTER H, EMISSIONS BANKING AND TRADING

Division 1, Emission Credit Banking and Trading

Section 101.300, Definitions

The commission proposes to delete the definitions of "Baseline" and "Mobile emissions baseline" because these definitions are redundant with the existing definitions of "Baseline emissions" and "Mobile source baseline emissions." The commission proposes to delete certain specifications in the definitions of "Baseline activity" and "Baseline emissions." These specifications concern years from which a baseline may be determined. The commission proposes to remove the specific requirements for mobile emission reduction credits (MERC) and describe in general terms what reductions would qualify as a MERC. The specific requirements by which MERCs may be generated would be added in §101.303 and §101.373 as definitions of variables in equations used to calculate ERCs. The commission proposes to add a specification to the definition of "Emission reduction strategy" stating that such a strategy must be beyond reductions required by state or federal law. The commission proposes to add a specification to the definition of "Mobile source baseline emissions" stating that the baseline is calculated prior to the application of a reduction strategy and accounts for all required reductions under state and federal law. The commission proposes to add a new definition for "Mobile source baseline emission rate" stating that it is a mobile source's rate of emissions per unit of mobile source baseline activity during the mobile source baseline emissions period. The commission also proposes minor changes to improve readability and would renumber the definitions.

Section 101.302, General Provisions

The commission proposes to amend this section to add all pollutants for which an area may be declared nonattainment for an NAAQS to the list of pollutants, the reduction of which, can qualify as an ERC. The commission is proposing this action because portions of El Paso are nonattainment for PM 10 and carbon monoxide, and the amendment will allow reductions in these two pollutants to be certified and banked as an emission credit. The commission proposes minor changes for readability and corrections to citations of federal and state law.

Section 101.303, Emission Reduction Credit Generation and Certification

The commission proposes to add specifications to the requirements of the term "baseline emissions," as this term is used as a factor in equations to determine ERC generation. In order to give affected industries flexibility and allow them to select years that best represent their level of production activity, the commission proposes a new subsection (b) that would allow industries to select any two consecutive calendar years from either a period including or following the most recent year of emission inventory used in the SIP or, if that period is less than ten years, the ten consecutive years immediately preceding the emission reduction. The baseline emissions may not exceed the quantity of emissions reported in the most recent year of emissions inventory used in the SIP. For reductions being certified in accordance with 30 TAC §116.170(b), Applicability of Emission Reductions as Offsets, the baseline emissions may not exceed the quantity of emissions reported in the emissions inventory used in the SIP in place at the time the reduction strategy was implemented. The commission is proposing to structure the rule so that a general concept of baseline emissions is found in definitions, but specifications to the definition will be found in the sections containing the equations where the terms are used. The commission also proposes to make minor changes for readability and would renumber paragraphs in the section.

Section 101.304, Mobile Emission Reduction Credit Generation and Certification

The commission proposes to modify this section to parallel the structure of §101.303 to first state the methods by which MERCs may be generated and to then describe prohibited generation strategies. The commission proposes to add the requirements that strategies for MERC generation cannot cause secondary emissions increases for certain criteria pollutants or their precursors without being offset at a 1:1 ratio, and that the strategy cannot cause an exceedance of federal or state rules. The commission proposes a new subsection (b) that identifies the requirements for the establishment of mobile source baseline emissions. The content of this new subsection is transferred from the proposed deletion of the definition of "Mobile emissions baseline" as well as existing language in this section. The commission proposes to add a requirement to record the date of reduction to the requirements for the generation of MERCs in order to verify that the reduction was not a requirement of state or federal law. The commission also proposes minor changes for readability and grammatical errors and would renumber paragraphs in the section.

Section 101.311, Program Audits and Reports

The commission proposes to expand the applicability of this section by removing references limiting the rules to ozone precursors and ozone nonattainment areas.

Division 3, Mass Emissions Cap and Trade Program

Section 101.356, Allowance Banking and Trading

The commission proposes to reorganize this section for ease of use. The commission proposes to eliminate the requirement from this section for reporting the price paid per ton of allowance if the transfer involves two sites under common ownership and control. This requirement was intended to provide the general public and regulated community with a market value for allowances traded; however, intra-company transfers typically do not involve a monetary exchange and can skew the market values listed by the commission.

The commission proposes to add a new §101.356(d)(3) to specify that all ECT-2 Forms, Application for Transfer of Allowances, involving the transfer of allowances needed for compliance with the control period to be submitted no later than January 30 of the following control period.

The commission proposes to amend §101.356(h)(9) and to add a new paragraph (10)to address the issue of DERC allocation in the Houston/Galveston ozone nonattainment area. Any application to use 250 DERCs or less would be approved. For any application requesting the use of more than 250 DERCs, 250 DERCs will be approved for use, and DERCs in excess of 250 can be reduced such that the area-wide use of DERCs does not exceed 10,000. If after approval of all requests to use 250 DERCs or less, the total requests for DERC use is less than 10,000, the remaining DERCs will be apportioned among those sites requesting to use more than 250 DERCs. This apportionment will be based on a percentage derived by dividing the amount of DERCs requested by a site in excess of 250 by the total number of DERCs requested in excess of 250 from all sites. This percentage would then be used to calculate the number of DERCs in excess of 250 that will be approved for those sites. At no time can more than 10,000 DERCs be approved for use during a control period. For example, assume the total number of DERCs approved for use in lieu of allowances equals 9,000 DERCs after approving all requests to use 250 DERCs. The remaining number of DERCs up to the 10,000 DERC limit is 1,000 DERCs. Company A has requested to use a total of 750 DERCs or 500 above the 250 DERC approval maximum, Company B has requested to use 1,000 DERCs or 750 above the 250 DERC maximum, and Company C has requested to use 500 DERCs or 250 above the 250 maximum. The total of all three requests above the 250 maximum is 1,500 DERCs. To calculate the apportionment percentage for Company A, 500 is divided by 1,500 to yield 33.3%. The same calculation yields 50% for Company B and 16.7% for Company C. These percentages are then applied to the 1,000 DERCs available. Company A would therefore be approved for 333 DERCs above the 250 DERC maximum or a total of 583 DERCs. Company B would be approved for 500 DERCs above 250 (total of 750 DERCs) and Company C would be approved for 167 DERCs (total of 417 DERCs). In this manner, the 1,000 remaining DERCs up to the 10,000 DERC limit are equally apportioned among the requestors.

Requests for DERC use must be received by October 1 of the control period for which the DERCs or mobile emission reduction credits (MDERC) are to be used. Additionally, the DEC-2 Form, Notice of Intent to Use Discrete Emission Credits, must be accompanied by an original DERC or MDERC certificate. The DEC-3 Form, Notice of Use of Discrete Emission Credits, must be submitted along with the site's annual compliance report. The commission proposes minor changes for readability and would renumber the paragraphs in the section.

Section 101.359, Reporting

The commission proposes to amend this section to require detailed documentation in support of the reported activity levels and to require that emission factors be included with the submittal of an ECT-1 Form, Annual Compliance Report. This proposed revision would require that the submittal of an ECT-1 Form include the same level of supporting documentation that was submitted with the ECT-3 Form, Level of Activity Certification. Sites may reference previously submitted documentation supporting an emission factor if the emission factor is still used in the calculation of actual emissions for the control period. The commission also proposes to amend this section to give the executive director authority to suspend trades involving the transfer of allowances for future control periods from any site that has not submitted an annual compliance report. For example, if after March 31, 2003 Site A has not submitted an annual compliance report for the 2003 control period but has submitted an application for transfer of 2003 allowances to another site, the trade would be withheld pending the submittal of Site A's ECT-1 form and verification of compliance for 2003.

Division 4, Discrete Emission Credit Banking and Trading

Section 101.370, Definitions

The commission proposes to delete the definitions of "Baseline," "Level of activity," and "Mobile emissions baseline" because these definitions are redundant with the existing definitions of "Baseline emissions," "Baseline activity," and "Mobile source baseline emissions." The commission proposes to delete certain specifications in the definitions of "Baseline activity" and "Baseline emissions." These specifications concern years from which a baseline may be determined. The specifications will be added in §101.303 and §101.373 as definitions of variables in equations used to calculate ERCs. The commission proposes to amend the definitions of "Discrete emission reduction credit" and "Mobile discrete emission reduction credit" to replace the word "creditable" with "certified" to indicate that the credit has been reviewed and approved. The commission would also specify that ERCs are to be expressed in tons to be consistent with other unit expressions of this subchapter. The commission proposes to amend the definition of "Permanent" to include a requirement that a permanent shutdown of a facility be enforceable meaning that the authorization for the facility has been removed. The commission also proposes minor changes for readability and would renumber the section.

Section 101.373, Discrete Emission Reduction Credit Generation and Certification

The commission proposes to add specifications to the requirements of baseline emissions as these terms are used as factors in equations to determine DERC generation. In order to give affected industries flexibility and allow them to select years that best represent their level of production activity, the commission proposes to amend the rules to allow industries to select any two consecutive calendar years from either a period including or following the most recent year of emission inventory used in the SIP or, if that period is less than ten years, the ten consecutive years immediately preceding the emission reduction. If a facility has been in existence for less than two years, a shorter time period not less than 12 months may be considered. The baseline may not exceed the quantity of emissions reported in the most recent year of emissions inventory used in the SIP. For reductions being certified in accordance with §116.170(b), the baseline may not exceed the quantity of emissions reported in the emissions inventory used in the state implementation plan in place at the time the reduction strategy was implemented. For facilities in an area in which a SIP demonstration is not required for a criteria pollutant, the two consecutive calendar years shall include or follow the 1990 emission inventory. For reduction strategies that exceed 12 months, the baseline and SIP emission inventory are established after the first year of generation and are fixed for the life of the strategy. A new baseline is established for each unique emission reduction strategy. The commission proposes to amend the DERC calculation equation to ensure that no credit is awarded for curtailment of activity and to simplify the equation. The proposed equation would only give DERC credit for the difference between the baseline emission rate and the strategic emission rate. The commission proposes to add a new §101.373(c)(2) that would require that the sum of the reduction generated and the total strategy emissions shall not exceed the quantity of emissions reported or represented in the emissions inventory used for the SIP or the two-year baseline emission average, whichever is less. The commission proposes minor changes for readability and to renumber the components of the section.

Section 101.374, Mobile Discrete Emission Reduction Credit Generation and Certification

The commission proposes to modify this section to parallel the structure of §101.373 to first state the methods by which MERCs may be generated and to then describe prohibited generation strategies. The commission proposes to add to the prohibited strategies any strategy that results in secondary emission increases that exceed limits in state or federal rules. The commission proposes a new subsection (b) that identifies the requirements to establish mobile source baseline emissions. The content of this new subsection consists of proposed deletions of the definition of "Mobile emissions baseline" as well as existing language in this section. MDERCs could not be funded under a state or federal program unless specifically allowed by the program. MDERCs could not be generated through the transfer of emissions from one mobile source to another within the same nonattainment area or from a strategy causing an increase in secondary emissions exceeding state or federal standards. The commission proposes a new subsection (d) that would require mobile emission reduction strategies that reduce one criteria pollutant or precursor for which an area is nonattainment and that cause an increase in another criteria pollutant or precursor for which the area is nonattainment to offset any increase at a 1:1 ratio. The commission also proposes to delete the requirement that the owner of the initial emission credit certificate shall be the owner of the facility or mobile source creating the emission reduction because this requirement is already in the existing §101.372(m). The commission proposes to amend subsection (a) to state that MDERCs cannot be credited for transfer of emissions from one source to another under common ownership because this would not constitute a net reduction by the owner. The commission proposes to delete the requirement for a calculation protocol for MDERC certification as this requirement is currently in §101.372, General Provisions. The commission proposes minor changes for readability and to renumber components of the section.

Section 101.376, Discrete Emission Credit Use

The commission proposes to amend §101.376(d)(2)(C) to state that the equation in the subparagraph is used to calculate the number of credits needed to exceed an allowable emission limit rather than comply with allowable emission limits of a permit. The commission proposes to eliminate the requirement to disclose the price paid per ton for DERC transfers between two sites under common ownership and control and to add United States Code (USC) references to citations of sections of the Federal Clean Air Act. The commission proposes to specify certain variables in equation §101.376(d)(2)(A)(ii) instead of referencing other variables in the section. The commission proposes minor changes for readability and to renumber components of the section.

FISCAL NOTE: COSTS TO STATE AND LOCAL GOVERNMENT

Nina Chamness, Analyst, Strategic Planning and Grants Management, determined that for the first five-year period the proposed amendments are in effect, there will not be fiscal implications for the agency or other units of state and local government as a result of administration or enforcement of the proposed amendments.

The proposed amendments revise sections of the emissions credit banking and trading program and pertain to the ERC program, the mass emission cap and trade program, and the DERC program. The major impacts of the proposed amendments include: 1) the development of a method, as mandated by current rule, to distribute DERCs in the Houston/Galveston mass emission cap and trade program area; 2) the modification of DERC regulations to require that mobile source programs reducing qualifying pollutants not allow those reductions to count as credits if they generate other pollutants; 3) increases in other emissions exceeding existing state or federal standards would be disallowed under the proposed rule change; and 4) the expansion of the list of pollutants, the reduction of which could generate an ERC in nonattainment areas for the pollutant.

Minor amendments are also proposed to eliminate redundancies found in rule language or to give industry participants in the DERC and ERC programs greater flexibility in establishing baseline production levels. Those baseline levels determine whether DERCs or ERCs are generated or sold.

The proposed amendments, if adopted, will be submitted to the EPA as revisions to the Texas SIP.

An ERC is a certified emission reduction, expressed in tons per year, that is created by eliminating future emissions and quantified during or before the period in which emission reductions are made from a facility. A DERC is a creditable emission reduction that is created during a generation period, quantified after the period in which emissions reductions are made, and expressed in tenths of a ton.

ERC and DERC generation and banking is voluntary under the current rules. Participation in the mass emission cap and trade program is mandatory; therefore, more industry partners actively trade excess emission allowances under this program rather than concentrating on generating and trading ERCs and DERCs. However, under current rules, the commission needs to develop guidance for DERC distribution among the applicants requesting their use in the Houston/Galveston ozone nonattainment area.

Fewer than 20 industry participants in the Houston/Galveston ozone nonattainment area have volunteered to participate in these two programs, and three companies in the program hold 98% of the DERCs. Most participants are in the petrochemical, chemical, and electric utility industries. The proposed amendments provide the necessary guidance for the DERC distribution in this specific nonattainment area, which must be limited to 10,000 tons per year beginning January 1, 2005. Unused DERCs in the Houston/Galveston ozone nonattainment area would be reserved for use in future years at the same value as when they were banked.

In the mobile source program, participants may not generate DERCs or MDERCs by reducing one qualifying pollutant while increasing another criteria pollutant under certain circumstances, and may not increase other emissions to exceed existing state or federal standards. This offset requirement only applies to voluntary mobile source reductions and is not a compelled reduction.

To encourage the reduction of a wider range of pollutants, the commission proposes to expand the list of contaminants, the reduction of which, would qualify to generate ERCs. El Paso, for example, is a nonattainment area for carbon monoxide emissions and particulate matter. Under the current rules, the reduction of these contaminants would not generate ERCs; however, under the proposed amendments, voluntary reduction of these contaminants would generate ERCs.

No fiscal implications are expected for units of state or local government due to the implementation of the proposed amendments because there are no state and local governments that participate in the DERC and ERC programs, and no additional resources are required by the commission.

PUBLIC BENEFITS AND COSTS

Ms. Chamness also determined that for each year of the first five years the proposed amendments are in effect, the public benefit anticipated from the proposed amendments will be the potential for yearly emission reductions required under the Houston/Galveston ozone nonattainment area SIP.

No significant financial implications are anticipated for businesses or individuals as a result of the proposed amendments.

The DERC and ERC programs are voluntary. Industry is much more attracted to the trading of allowances allowed under the compulsory mass emission cap and trade program. The proposed amendments limit the number of DERCs that are eligible for use in 2005, but because very few companies participate in the program and 98% of the credits are held by three participants, the limitations on the trade of DERCs is not expected to have a significant fiscal impact in the nonattainment areas.

SMALL BUSINESS AND MICRO-BUSINESS ASSESSMENT

No adverse fiscal implications are anticipated as a result of implementation of the proposed amendments for small or micro-businesses. Small and micro-businesses must already comply with allowances set by the mass emission cap and trade program, and participation in the ERC and DERC programs is voluntary. None of the companies participating in these volunteer programs qualifies as a small business, and the commission does not anticipate an increase in participation by small and micro-businesses, because these programs tend not to be cost effective for small or micro-businesses.

LOCAL EMPLOYMENT IMPACT STATEMENT

The commission reviewed this proposed rulemaking action and determined that a local employment impact statement is not required because the proposed amendments do not adversely affect a local economy in a material way for the first five years that the proposed amendments are in effect.

DRAFT REGULATORY IMPACT ANALYSIS DETERMINATION

The commission reviewed the proposed rulemaking action in light of the regulatory analysis requirements of Texas Government Code, §2001.0225, and determined that the action is not subject to §2001.0225 because it does not meet the definition of a "major environmental rule" as defined in that statute. A "major environmental rule" is a rule the specific intent of which is to protect the environment or reduce risks to human health from environmental exposure, and that may adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, or the public health and safety of the state or a sector of the state. The proposed amendments to Chapter 101 are not specifically intended to protect the environment or reduce risks to human health from environmental exposure to air pollutants; although, the underlying emissions banking and trading program is intended to achieve these goals. The primary purpose of this rulemaking action is to develop guidance for the distribution of DERCs among applicants requesting their use under Subchapter H, Division 3, and to amend several areas of the banking and trading program where modifications are needed to either expand flexibility or protect the emission cap established by the SIP. None of these amendments place additional financial burdens on the regulated community. Therefore, the proposed rulemaking action does not affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, or the public health and safety of the state or a sector of the state.

As defined in the Texas Government Code, §2001.0225 only applies to a major environmental rule, the result of which is to: exceed a standard set by federal law, unless the rule is specifically required by state law; exceed an express requirement of state law, unless the rule is specifically required by federal law; exceed a requirement of a delegation agreement or contract between the state and an agency or representative of the federal government to implement a state and federal program; or adopt a rule solely under the general powers of the agency instead of under a specific state law. This rulemaking action does not meet any of these four applicability requirements of a "major environmental rule." Specifically, the banking and cap and trade systems amendments in this proposal were developed to provide flexibility in meeting the ozone NAAQS set by the EPA under 42 USC, §7409, and therefore meet a federal requirement. This rulemaking action does not exceed an express requirement of state law or a requirement of a delegation agreement, and was not developed solely under the general powers of the agency, but was specifically developed to meet the NAAQSs established under federal law and authorized under Texas Health and Safety Code, §§382.011, 382.012, and 382.017, as well as under 42 USC, §7410(a)(2)(A).

The commission invites public comment on the draft regulatory impact assessment.

TAKINGS IMPACT ASSESSMENT

The commission completed a takings impact assessment for this proposed rulemaking action. The amendments are proposed to programs that would provide flexibility in meeting the ozone NAAQS set by the EPA under 42 USC, §7409. Promulgation and enforcement of the proposed amendments will not burden private real property. The proposed amendments do not affect private property in a manner that restricts or limits an owner's right to the property that would otherwise exist in the absence of a governmental action. Additionally, the credits and allowances created under these rules are not property rights. Consequently, this rulemaking action does not meet the definition of a takings under Texas Government Code, §2007.002(5). Although the proposed amendments do not directly prevent a nuisance or prevent an immediate threat to life or property, they do prevent a real and substantial threat to public health and safety, and partially fulfill a federal mandate under 42 USC, §7410. Specifically, the emission limitations and control requirements within these rules were developed in order to meet the ozone NAAQS set by the EPA under 42 USC, §7409. States are primarily responsible for ensuring attainment and maintenance of the NAAQS once the EPA has established them. Under 42 USC, §7410 and related provisions, states must submit, for approval by the EPA, SIPs that provide for the attainment and maintenance of NAAQS through control programs directed to sources of the pollutants involved. Therefore, the purpose of this rulemaking action is to revise programs which provide flexibility in meeting the ozone NAAQS set by the EPA under 42 USC, §7409. Consequently, the exemption which applies to these proposed amendments is that of an action reasonably taken to fulfill an obligation mandated by federal law. Therefore, these proposed revisions will not constitute a takings under Texas Government Code, Chapter 2007.

CONSISTENCY WITH THE COASTAL MANAGEMENT PROGRAM

The commission determined that this rulemaking action relates to an action or actions subject to the Texas Coastal Management Program (CMP) in accordance with the Coastal Coordination Act of 1991, as amended (Texas Natural Resources Code, §§33.201 et seq .), and the commission rules in 30 TAC Chapter 281, Subchapter B, concerning Consistency with the CMP. As required by §281.45(a)(3) and 31 TAC §505.11(b)(2), relating to Actions and Rules Subject to the Coastal Management Program, commission rules governing air pollutant emissions must be consistent with the applicable goals and policies of the CMP. The commission reviewed this action for consistency with the CMP goals and policies in accordance with the rules of the Coastal Coordination Council, and determined that the action is consistent with the applicable CMP goals and policies. The CMP goal applicable to this rulemaking action is the goal to protect, preserve, and enhance the diversity, quality, quantity, functions, and values of coastal natural resource areas (31 TAC §501.12(l)). No new sources of air contaminants will be authorized and the proposed amendments will maintain the same level of or reduce the level of emissions control as the existing rules. The CMP policy applicable to this rulemaking action is the policy that commission rules comply with federal regulations in 40 Code of Federal Regulations, to protect and enhance air quality in the coastal areas (31 TAC §501.14(q)). This rulemaking action complies with 40 Code of Federal Regulations Part 51, Requirements for Preparation, Adoption, and Submittal of Implementation Plans. Therefore, in accordance with 31 TAC §505.22(e), the commission affirms that this rulemaking action is consistent with CMP goals and policies.

The commission solicits comments on the consistency of the proposed rulemaking action with the CMP during the public comment period.

EFFECT ON SITES SUBJECT TO THE FEDERAL OPERATING PERMITS PROGRAM

These amendments will not require any changes to outstanding federal operating permits.

ANNOUNCEMENT OF HEARING

A public hearing for this proposed rulemaking has been scheduled for July 20, 2004, at 2:00 p.m., at the Texas Commission on Environmental Quality, 12100 North I-35, Building F, Room 2210, Austin. The hearing will be structured for the receipt of oral or written comments by interested persons. Registration will begin 30 minutes prior to the hearing. Individuals may present oral statements when called upon in order of registration. A five- minute time limit may be established at the hearing to assure that enough time is allowed for every interested person to speak. There will be no open discussion during the hearing; however, commission staff members will be available to discuss the proposal 30 minutes before the hearing and will answer questions before and after the hearing.

Persons planning to attend the hearing who have special communication or other accommodation needs, should contact the Office of Environmental Policy, Analysis, and Assessment at (512) 239-4900. Requests should be made as far in advance as possible.

SUBMITTAL OF COMMENTS

Comments may be submitted to Patricia Durón, Office of Environmental Policy, Analysis, and Assessment, MC 205, P.O. Box 13087, Austin, Texas 78711-3087; or by fax at (512) 239-4808. All comments should reference Rule Project Number 2003-064-101-AI. Comments must be received by 5:00 p.m. on July 26, 2004. For further information, please contact Cory Chism, Air Permits Division, at (512) 239-0539 or Alan Henderson, Policy and Regulations Division, at (512) 239-1510.

1. EMISSION CREDIT BANKING AND TRADING

30 TAC §§101.300, 101.302 - 101.304, 101.311

STATUTORY AUTHORITY

The amended sections are proposed under Texas Water Code, §5.103, concerning Rules, and §5.105, concerning General Policy, that authorize the commission to adopt rules necessary to carry out its powers and duties under the Texas Water Code; and under Texas Health and Safety Code, §382.017, concerning Rules, that authorizes the commission to adopt rules consistent with the policy and purposes of the Texas Clean Air Act. The amended sections are also proposed under Texas Health and Safety Code, §382.002, concerning Policy and Purpose, that establishes the commission purpose to safeguard the state air resources, consistent with the protection of public health, general welfare, and physical property; §382.011, concerning General Powers and Duties, that authorizes the commission to control the quality of the state air; and §382.012, concerning State Air Control Plan, that authorizes the commission to prepare and develop a general, comprehensive plan for the control of the state air. The amended sections are also proposed under Texas Health and Safety Code, §382.014, concerning Emission Inventory, that authorizes the commission to require a person whose activities cause air contaminant emissions to submit information to enable the commission to develop and emissions inventory; §382.016, concerning Monitoring Requirements, that authorizes the commission to prescribe reasonable requirements for the measuring and monitoring of air contaminant emissions; and §382.051 and §382.0518, concerning Permitting Authority of Commission and Preconstruction Permit, that authorize the commission to issue preconstruction and operating air permits.

The proposed amended sections implement Texas Health and Safety Code, §§382.002, 382.011, 382.012, and 382.017; and House Bill 2912, §5.01 and §18.14, 77th Legislature, 2001.

§101.300.Definitions.

The following words and terms, when used in this division, [ shall ] have the following meanings, unless the context clearly indicates otherwise.

(1) (No change.)

(2) Actual emissions-- The [ Actual emissions as of a particular date shall equal the ] total emissions during a [ the ] selected time period, using the facility's [ facility ] or mobile source's actual daily operating hours, production rates, or types of materials processed, stored, or combusted during that [ the ] selected time period.

(3) (No change.)

[ (4) Baseline--Emissions that occur prior to an emission reduction strategy, considering all limitations required by applicable local, state, and federal rules and regulations. The baseline may not exceed the quantity of emissions reported in the most recent year of emissions inventory used in the state implementation plan. ]

(4) [ (5) ] Baseline activity--The facility's level of activity based on the facility's actual daily operating hours, production rates, or types of materials processed, stored, or combusted averaged over [ any ] two consecutive calendar years [ including and following the most recent year of emissions inventory used in the state implementation plan or subsequent year(s) which precede the emission reduction strategy or credit use period. For facilities in existence less than 24 months or not having two complete calendar years of activity data, a shorter time period of not less than 12 months may be considered by the executive director ].

(5) [ (6) ] Baseline emission rate--The facility's rate of emissions per unit of activity during the baseline activity period.

(6) [ (7) ] Baseline emissions--The facility's [ total ] actual emissions, in tons per year, occurring prior to an emission reduction strategy calculated as [ based on ] the product of baseline activity and baseline emission rate that is surplus to all limitations required by applicable local, state, and federal rules and regulations [ averaged over any two consecutive calendar years including and following the most recent year of emissions inventory used in the state implementation plan or subsequent year(s) which precede the emission reduction strategy or credit use period ].

(7) [ (8) ] Certified--Any emission reduction that is determined to be creditable upon review and approval by the executive director.

(8) [ (9) ] Curtailment--A reduction in activity level at any facility or mobile source.

(9) [ (10) ] Emission credit [ Credit ]--An emission reduction credit or mobile emission reduction credit.

(10) [ (11) ] Emission reduction [ Reduction ]--An actual reduction in emissions from a facility or mobile source.

(11) [ (12) ] Emission reduction credit--A certified emission reduction, expressed in tons per year, that is created by eliminating future emissions and quantified during or before the period in which emission reductions are made from a facility.

(12) [ (13) ] Emission reduction strategy--The method implemented to reduce the facility's or mobile source's emissions beyond that required by state or federal law, regulation, or agreed order .

(13) [ (14) ] Facility--As defined in §116.10 of this title (relating to General Definitions).

(14) [ (15) ] Generator--The owner or operator of a facility or mobile source that creates an emission reduction.

[ (16) Mobile emissions baseline--Mobile emissions that occur prior to a mobile emission reduction strategy, considering all limitations required by applicable local, state, and federal rules and regulations. A valid mobile emission baseline can be calculated by either using measured emissions of an appropriately sized sample of the participating mobile sources using an approved EPA test procedure or by using estimated emissions of the participating mobile sources using the most recent edition of the EPA on-road or non-road mobile emissions factor models, or other model as applicable. To ensure that mobile emission reduction credits are surplus, mobile source baseline emissions estimates for each year of the proposed mobile source control program must be the same as, or lower than, those used, or proposed to be used, in the state implementation plan in which the control program is proposed. ]

(15) [ (17) ] Mobile emission reduction credit [ (MERC) ]-- A certified emission reduction from a mobile source, expressed in tons per year, that is created by eliminating future emissions and quantified during and before the period in which reductions are made from that mobile source. [ A credit representing the amount of emission reductions from a mobile source strategy. These emission reductions are voluntary and must be in addition to compliance with local, state, and federal rules and regulations. MERCs are any enforceable, permanent, and quantifiable emission reduction (exhaust and/or evaporative) generated by a mobile source, which has been banked in accordance with the rules of the commission. MERCs can be banked, purchased, traded, and sold to meet clean air mandates for specified air programs, and MERCs may be applied to the emission reduction obligations of another air quality source or to air quality attainment goals. MERCs are expressed in tons per year. ]

(16) [ (18) ] Mobile source--On-road (highway) vehicles (e.g., automobiles, trucks , and motorcycles) and non-road vehicles (e.g., trains, airplanes, agricultural equipment, industrial equipment, construction vehicles, off-road motorcycles, and marine vessels).

(17) [ (19) ] Mobile source baseline activity--The level of activity of a mobile source based on an estimate for each year for which the credits are to be generated. After the initial year, the annual estimates should reflect:

(A) the change in the mobile source emissions to reflect any deterioration in the emission control performance of the participating source;

(B) the change in the number of mobile sources resulting from normal retirement or attrition, and the replacement of retired mobile sources with newer and/or cleaner mobile sources;

(C) the change in usage levels, hours of operation , or vehicle miles traveled in the participating population; and

(D) the change in the expected useful life of the participating population.

(18) [ (20) ] Mobile source baseline emissions [ emission ]--The mobile source's [ total ] actual emissions, in tons per year, occurring prior to a mobile emission reduction strategy calculated as [ based on ] the product of mobile source activity and the mobile source emissions rate that is surplus to all limitations required by applicable local, state, and federal rules and regulations .

(19) Mobile source baseline emission rate--The mobile source's rate of emissions per unit of mobile source baseline activity during the mobile source baseline emissions period.

(20) [ (21) ] Most stringent allowable emissions rate--The emission rate of a facility or mobile source, considering all limitations required by applicable local, state, and federal rules and [ , or ] regulations.

(21) [ (22) ] Permanent--An emission reduction that is long-lasting and unchanging for the remaining life of the facility or mobile source. Such a time period must be enforceable.

(22) [ (23) ] Protocol--A replicable and workable method of estimating emission rates or activity levels used to calculate the amount of emission reduction generated or credits required for facilities or mobile sources.

(23) [ (24) ] Quantifiable--An emission reduction that can be measured or estimated with confidence using replicable methodology.

(24) [ (25) ] Real reduction--A reduction in which actual emissions are reduced [ as opposed to a reduction in allowable emissions ].

(25) [ (26) ] Shutdown--The permanent cessation of an activity producing emissions at a facility or mobile source.

(26) [ (27) ] Site--As defined in §122.10 of this title (relating to General Definitions).

(27) [ (28) ] Source--As defined in §101.1 of this title (relating to Definitions).

(28) [ (29) ] State implementation plan-- A [ a ] plan that [ which ] provides for attainment and maintenance of a primary or secondary national ambient air quality standard as adopted in 40 Code of Federal Regulations Part 52, Subpart SS.

(29) [ (30) ] Strategic emissions--A facility's or mobile source's new allowable emission limit, in tons per year, following implementation of an emission reduction strategy.

(30) [ (31) ] Surplus--An emission reduction that is not otherwise required of a facility or mobile source by any local, state , or federal law, regulation, or agreed order and has not been otherwise relied upon in the state implementation plan.

(31) [ (32) ] User--The owner or operator of a facility or mobile source that acquires and uses emission credits to meet a regulatory requirement, demonstrate compliance, or offset an emission increase.

§101.302.General Provisions.

(a) Applicable pollutants. Reductions of criteria pollutants or precursors of criteria pollutants for which an area is designated nonattainment, [ volatile organic compounds (VOC) and nitrogen oxides (NOx ) ] may qualify as emission credits. [ Reductions of other pollutants do not qualify as emission credits under this division, except as provided in paragraph (2) of this subsection. ] Reductions of one pollutant may not be used to meet the requirements for another pollutant, unless:

(1) urban airshed modeling demonstrates that one ozone precursor may be substituted for another, subject to executive director and United States Environmental Protection Agency (EPA) [ EPA ] approval; or

(2) (No change.)

(b) (No change.)

(c) Emission credit requirements.

(1) Emission reduction credits [ (ERCs) ] are certified reductions that [ which ] meet the following requirements:

(A) - (B) (No change.)

(C) in order to become certified, the reduction must have occurred after the most recent year of emissions inventory used in the state implementation plan (SIP) [ for VOC and NO x ]; and

(D) (No change.)

(2) Mobile emission reduction credits [ (MERCs) ] are certified reductions that [ which ] meet the following requirements:

(A) - (B) (No change.)

(C) in order to become certified, the reduction must have occurred after the most recent year of emissions inventory used in the SIP [ for VOC and NO x ];

(D) - (E) (No change.)

(3) Emission reductions from a facility or mobile source that [ which ] are certified as emission credits under this division cannot be recertified in whole or in part as credits under another division within this subchapter.

(d) Protocol.

(1) All generators or users of emission credits shall [ must ] use a protocol that [ which ] has been submitted by the executive director to the EPA for approval, if existing for the applicable facility or mobile source, to measure and calculate baseline emissions. If the generator or user wishes to deviate from a protocol submitted by the executive director, EPA approval is required before the protocol can be used. Protocols must [ shall ] be used as follows.

(A) Facilities subject to the emission specifications under §§117.106, 117.206, or 117.475 of this title (relating to Emission Specifications for Attainment Demonstrations; and Emission Specifications) shall quantify reductions in nitrogen oxide emissions [ NO x ] using the testing and monitoring methodologies identified to show compliance with the emission specification.

(B) Facilities subject to the requirements under §§115.112, 115.121, 115.122, 115.162, 115.211, 115.212, 115.352, 115.421, 115.541, or 115.542 of this title (relating to Control Requirements; and Emission Specifications) shall quantify volatile organic compound [ VOC ] reductions using the testing and monitoring methodologies identified to show compliance with the emission specifications or requirements.

(C) If the executive director has not submitted a protocol for the applicable facility or mobile source to the EPA for approval, the following requirements apply:

(i) (No change.)

(ii) the generator shall [ must ] collect relevant data sufficient to characterize the facility's or mobile source's emissions of the affected pollutant and the facility's or mobile source's activity level for all representative phases of operation in order to characterize the facility's or mobile source's baseline emissions;

(iii) (No change.)

(iv) the chosen quantification protocol must [ shall ] be made available for public comment for a period of 30 days and must [ shall ] be viewable on the commission's Web [ web ] site;

(v) - (vi) (No change.)

(2) - (3) (No change.)

(e) (No change.)

(f) Geographic scope. Except as provided in paragraph (3) of this subsection, only emission reductions generated in [ ozone ] nonattainment areas can be certified. An emission credit must be used in the nonattainment area in which it is generated unless the user has obtained prior written approval of the executive director and the EPA; and:

(1) (No change.)

(2) the emission credit was generated in a [ an ozone ] nonattainment area that [ which ] has an equal or higher nonattainment classification than the [ ozone ] nonattainment area of use, and a demonstration has been made and approved by the executive director and the EPA to show that the emissions from the [ ozone ] nonattainment area where the emission credit is generated contribute to a violation of the national ambient air quality standard in the [ ozone ] nonattainment area of use; or

(3) a facility is using emission reductions generated outside the United States that [ which ] have been determined by the executive director to be real, permanent, enforceable, quantifiable, and surplus to any applicable international, federal, state, or local law and the result would provide a greater health benefit to the area as determined by the executive director; and the facility:

(A) - (C) (No change.)

(g) Recordkeeping. The generator shall [ must ] maintain a copy of all notices and backup information submitted to the registry for a minimum of five years. The user shall [ must ] maintain a copy of all notices and backup information submitted to the credit registry from the beginning of the use period and for at least five years after. The user shall [ must ] also make such records available upon request to representatives of the executive director, EPA, and any local enforcement agency. The records must [ shall ] include, but not necessarily be limited to:

(1) - (3) (No change.)

(h) (No change.)

(i) Authorization to emit. An emission credit created under this division is a limited authorization to emit the pollutants identified in subsection (a) of this section [ VOC and/or NO x ], unless otherwise defined, in accordance with the provisions of this section, 42 United States Code, §§7401 et seq [ the FCAA ], and Texas Health and Safety Code, Chapter 382 [ the TCAA ], as well as regulations promulgated thereunder. An emission credit does not constitute a property right. Nothing in this division may be construed to limit the authority of the commission or the EPA to terminate or limit such authorization.

(j) (No change.)

(k) Compliance burden. Users may not transfer their compliance burden and legal responsibilities to a third-party [ third party ] participant. Third-party [ Third party ] participants may only act in an advisory capacity to the user.

(l) Credit ownership [ Ownership ]. The owner of the initial emission credit certificate shall be the owner or operator of the facility or mobile source creating the emission reduction. The executive director may approve a deviation from this subsection considering factors such as, but not limited to:

(1) (No change.)

(2) whether the owner or operator of the facility or mobile source lacks the potential to generate 1/10 [ one-tenth of a ] ton of credit.

§101.303.Emission Reduction Credit Generation and Certification.

(a) Methods of generation.

(1) Emission reduction credits (ERC) [ (ERCs) ] may be generated using one of the following methods or any other method that is approved by the executive director:

(A) the permanent shutdown of a facility that [ which ] causes a loss of capability to produce emissions;

(B) the installation and operation of pollution control equipment that [ which ] reduces emissions below the level required of the facility;

(C) a change in a manufacturing process that [ which ] reduces emissions below the level required of the facility;

(D) the permanent curtailment in production, that [ which ] reduces the facility's capability to produce emissions; or

(E) (No change.)

(2) ERCs may not be generated from the following strategies:

(A) - (B) (No change.)

(C) reductions in emissions from the shutdown of a facility that [ which ] was not reported or represented in the most recent emissions inventory used in the state implementation plan (SIP).

(b) ERC baseline emissions.

(1) The baseline emissions may not exceed the quantity of emissions reported in the most recent year of emissions inventory used in the SIP. For reductions being certified in accordance with §116.170(b) of this title (Applicability of Emission Reductions as Offsets), the baseline emissions may not exceed the quantity of emissions reported in the emissions inventory used in the SIP in place at the time the reduction strategy was implemented.

(2) The baseline emissions must consist of the facility's actual emissions averaged over any two consecutive calendar years selected from either a period including or following the most recent year of emission inventory used in the SIP or, if that period is less than ten years, the ten consecutive years immediately preceding the emission reduction.

(3) For facilities in existence less than 24 months or not having two complete calendar years of activity data, a shorter time period of not less than 12 months may be considered by the executive director.

(c) [ (b) ] ERC calculation. The quantity of ERCs is determined by subtracting the facility's strategic emissions from the facility's baseline emissions, as calculated in the following equation. The facility's strategic emissions equal the enforceable emission limit for the applicable facilities after the emission reduction strategy has been implemented.

Figure: 30 TAC §101.303(c)

[ Figure: 30 TAC §101.303(b) ]

(d) [ (c) ] ERC certification.

(1) Facilities with potential ERCs must submit , to the executive director, an EC- 1 Form, Application for Certification of Emission Credits, within 180 days of the implementation of the emission reduction strategy [ to the executive director ]. Applications will be reviewed to determine the credibility of the reductions. Reductions determined to be creditable will be certified by the executive director and an ERC certificate will be issued to the owner.

(2) ERCs shall be quantified in accordance with §101.302(d) of this title (relating to General Provisions). The executive director shall have the authority to inspect and request information to assure that the emissions reductions have actually been achieved.

(3) An application for ERCs [ emission reduction credits ] must include, but is not limited to, a completed EC-1 Form signed by an authorized representative of the applicant along with the following information for each pollutant reduced at each applicable facility:

(A) a complete description of the emission reduction strategy;

(B) the amount of emission credits generated;

(C) for volatile organic compound reductions, a list of the specific compounds reduced;

(D) documentation supporting the baseline [ emission ] activity, baseline emission rate, baseline [ total ] emissions, and strategic emissions;

(E) emissions inventory data from the most recent year of emissions inventory used in the SIP [ state implementation plan ] and emissions inventory data for the two consecutive years used to determine baseline activity for each applicable pollutant and facility;

(F) the most stringent emission rate and the most stringent emission level for the applicable facility, considering all the local, state, and federal applicable regulatory and statutory requirements;

(G) a complete description of the protocol used to calculate the emission reduction generated; and

(H) the actual calculations performed by the generator to determine the amount of emission credits generated.

(4) ERCs will be made enforceable by one of the following methods:

(A) amending or altering a new source review [ (NSR) ] permit to reflect the emission reduction and set a new maximum allowable emission limit;

(B) voiding a new source review [ an NSR ] permit when a facility has been shut down;

(C) for any facility [ which is ] authorized by standard permit, standard exemption, or permit by rule, certifying emissions on a PI-8 Form, Special Certification Form for Exemptions and Standard Permits, or other form considered [ deemed ] equivalent by the executive director, the emission reduction and the new maximum allowable emission limit;

(D) for any facility that [ which ] is not required to have authorization by permit, standard permit, standard exemption, or permit by rule, certifying emissions on an OPC-RE1 Form, Certified Registration of Emissions Form for Potential to Emit, or other form considered [ deemed ] equivalent by the executive director, the emission reduction and the new maximum allowable emission limit; or

(E) for any facility that [ which ] is not required to have authorization by permit, standard permit, standard exemption, or permit by rule, obtaining an agreed order that [ which ] sets a new maximum allowable emission limit.

§101.304.Mobile Emission Reduction Credit Generation and Certification.

(a) Methods of generation.

(1) Mobile emission reduction credits (MERC) [ (MERCs) ] may be generated by any mobile source emission reduction strategy that creates actual mobile source emission reductions under these rules and subject to the approval of the commission.

(2) MERCs may not [ cannot ] be generated from the following strategies: [ specific reductions funded through state or federal programs, unless specifically allowed under that program. ]

(A) that portion of reductions funded through a state or federal program, unless specifically allowed under that program;

(B) through the transfer of emissions from one mobile source to another mobile source within the same nonattainment area and under common ownership or control; or

(C) reduction strategies resulting in secondary emissions increases that exceed limits established under state or federal rules or regulations.

[ (3) MERCs cannot be generated from a mobile source if the emissions have been transferred from that mobile source to another mobile source. ]

(b) MERC baseline emissions.

(1) Mobile source baseline emissions shall be calculated with either measured emissions of an appropriately sized sample of the participating mobile sources using a United States Environmental Protection Agency (EPA)-approved test procedure, or by estimating emissions of the participating mobile sources using the most recent edition of the EPA on-road or non-road mobile emissions factor models or other model as applicable.

(2) Mobile source baseline emissions for each year of the proposed mobile source reduction strategy must be the same as, or lower than, those used or proposed to be used in the state implementation plan (SIP) in which the reduction strategy is proposed.

(3) Baseline emissions for quantifying MERCs should include, but not be limited to, the following information and data as appropriate:

(A) the emission standard to which the mobile source is subject or the emission performance standard to which the mobile source is certified;

(B) the estimated or measured in-use emissions levels per unit of use from all significant mobile source emissions sources;

(C) the number of mobile sources in the participating group;

(D) the type or types of mobile sources by model year;

(E) the actual or projected activity level, hours of operation, or miles traveled, by type and model year; and

(F) the projected remaining useful life of the participating group of mobile sources.

(c) [ (b) ] MERC calculation. The quantity of MERCs must be calculated from the annual difference between the mobile source baseline emissions [ baseline ] and the projected emissions level after the MERC strategy has been put in place. The projected emissions must be based on the best estimate of the actual in-use emissions of the modified or substitute on-road or non-road vehicles or transportation system. Any estimate of a projected annual mobile source emissions level based on an assumption of reduced consumer service or transportation service would not be allowed without the support of a convincing analytical justification of the assumption. [ Emission baselines for quantifying MERCs should include the following information and data as appropriate, but not be limited to: ]

[ (1) the emission standard to which the mobile source is subject or emission performance to which the mobile source is certified; ]

[ (2) the estimated or measured in-use emissions levels per unit of use from all significant mobile source emissions sources; ]

[ (3) the number of mobile sources in the participating group; ]

[ (4) the type or types of mobile sources by model year; ]

[ (5) the actual or projected activity level, hours of operation or miles traveled by type, and model year; and ]

[ (6) the projected remaining useful life of the participating group of mobile sources. ]

(d) Emission offsets. Mobile source reduction strategies that reduce emissions in one criteria pollutant or precursor for which an area is designated nonattainment, yet result in an emissions increase of another criteria pollutant or precursor for which that same area is nonattainment and from the same mobile source, must be required to offset the resulting increase at a 1:1 ratio with ERCs or MERCs.

(e) [ (c) ] MERC certification.

(1) Mobile sources with potential MERCs shall [ must ] submit to the executive director an MEC-1 Form, Application for Mobile Emission Credits, within 180 days of implementation of the strategy. Upon approval of the application, the executive director shall issue a MERC certificate(s) to the person, company, business, organization, or public entity generating the mobile emission reduction. A MERC certificate will indicate the total amount of certified emission credits, the quantity available on an annual basis, and the date upon which the last annualized emission reduction expires.

(2) MERCs will be determined and certified in accordance with §101.302(d) of this title (relating to General Provisions) using:

(A) EPA methodologies, when available;

(B) actual monitoring results, when available;

(C) calculations [ otherwise calculated ] using the most current EPA mobile emissions factor model or other model as applicable; or

(D) calculations [ otherwise calculated ] using creditable emission reduction measurement or estimation methodologies that [ which ] satisfactorily address the analytical uncertainties of mobile source emissions reduction strategies.

(3) An application for MERCs must include, but is not limited to, a completed MEC-1 Form signed by an authorized representative of the applicant along with the following information for each pollutant reduced by [ at ] each applicable mobile source:

(A) the date of the reduction;

(B) [ (A) ] a complete description of the generation strategy;

(C) [ (B) ] the amount of emission credits generated;

(D) [ (C) ] documentation supporting the mobile source baseline [ emission ] activity, mobile source baseline emission rate, mobile source baseline [ total ] emissions, and the mobile source strategy emissions;

(E) [ (D) ] a complete description of the protocol used to calculate the emission reduction generated;

(F) [ (E) ] the actual calculations performed by the generator to determine the amount of emission credits generated; and

(G) [ (F) ] a demonstration that the reductions are surplus to all local, state, and federal rules and to emission modeled in the SIP.

(4) MERCs will be made enforceable by obtaining an agreed order that [ which ] sets a new maximum allowable mobile source emission limit [ limits ].

§101.311.Program Audits and Reports.

(a) No later than three years after the effective date of this division, and every three years thereafter, the executive director will audit this program.

(1) - (2) (No change.)

(3) The audit data and results will be completed and submitted to the United States Environmental Protection Agency (EPA) [ EPA ] and made available for public inspection within six months of the date the audit begins.

(b) No later than February 1 of each calendar year, the executive director shall develop and make available to the general public and EPA a report that includes:

(1) the amount of [ volatile organic compound (VOC) and nitrogen oxides (NO x ) ] emission credits generated under this division within each [ ozone ] nonattainment area;

(2) the amount of [ VOC and NO x ] emission credits used under this division within each [ ozone ] nonattainment area; and

(3) (No change.)

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on June 10, 2004.

TRD-200403840

Stephanie Bergeron

Director, Environmental Law Division

Texas Commission on Environmental Quality

Earliest possible date of adoption: July 25, 2004

For further information, please call: (512) 239-6087


3. MASS EMISSIONS CAP AND TRADE PROGRAM

30 TAC §101.356, §101.359

STATUTORY AUTHORITY

The amended sections are proposed under Texas Water Code, §5.103, concerning Rules, and §5.105, concerning General Policy, that authorize the commission to adopt rules necessary to carry out its powers and duties under the Texas Water Code; and under Texas Health and Safety Code, §382.017, concerning Rules, that authorizes the commission to adopt rules consistent with the policy and purposes of the Texas Clean Air Act. The amended sections are also proposed under Texas Health and Safety Code, §382.002, concerning Policy and Purpose, that establishes the commission purpose to safeguard the state air resources, consistent with the protection of public health, general welfare, and physical property; §382.011, concerning General Powers and Duties, that authorizes the commission to control the quality of the state air; and §382.012, concerning State Air Control Plan, that authorizes the commission to prepare and develop a general, comprehensive plan for the control of the state air. The amended sections are also proposed under Texas Health and Safety Code, §382.014, concerning Emission Inventory, that authorizes the commission to require a person whose activities cause air contaminant emissions to submit information to enable the commission to develop and emissions inventory; §382.016, concerning Monitoring Requirements, that authorizes the commission to prescribe reasonable requirements for the measuring and monitoring of air contaminant emissions; and §382.051 and §382.0518, concerning Permitting Authority of Commission and Preconstruction Permit, that authorize the commission to issue preconstruction and operating air permits.

The proposed amended sections implement Texas Health and Safety Code, §§382.002, 382.011, 382.012, and 382.017; and House Bill 2912, §5.01 and §18.14, 77th Legislature, 2001.

§101.356.Allowance Banking and Trading.

(a) Allowances not used for compliance at the end of a control period may be banked for use in the following control period in compliance with §101.354 of this title (relating to Allowance Deductions) or traded except as provided in subsection (g) [ (c) ] of this section.

(b) Allowances that [ which ] have not expired or been used may be traded at any time during a control period after they have been allocated except as provided in subsection (g) [ (d) ] of this section.

(c) Only authorized account representatives must trade allowances.

(d) Trades involving individual allowance may be made in accordance with the following.

(1) Submit a completed ECT-2 Form, Application for Transfer of Allowances.

(2) The completed ECT-2 Form must include the price paid per allowance, except for transfers between sites under common ownership or control, and shall be submitted to the executive director at least 30 days prior to the allowances being deposited into the transferee's broker or compliance account.

(3) ECT-2 Forms involving the transfer of allowances needed for compliance with a control period shall be submitted on or before January 30 of the following control period.

(4) All information regarding the quantity and sales price of allowances not exempt from reporting under paragraph (2) of this subsection must be immediately made available to the public.

(5) The executive director will issue a letter to the purchaser and seller reflecting this trade. The trade is final upon issuance of this letter.

(e) [ (c) ] The owner or operator of a site receiving allowances on an annual basis may permanently transfer ownership of the allowances allocated to individual facilities at that site to any person in accordance with the following requirements . [ : ]

(1) A [ a ] request for transfer of ownership shall be reviewed for approval by the executive director following the submission of a completed ECT-4 Form, Application for Permanent Transfer of Allowance Ownership . [ ; ]

(2) The [ the ] ECT-4 Form must [ shall ] include the price paid per allowance , except for transfers between sites under common ownership or control, and shall be submitted to executive director at least 30 days prior to the allowances being deposited into the transferee's broker or compliance account . [ ; ]

(3) All [ all ] information regarding the quantity and sales price of allowances not exempt from reporting under paragraph (2) of this subsection must [ shall ] be immediately made available to the public . [ ; and ]

(4) The [ the ] executive director will issue a letter to the purchaser and seller reflecting this transaction. The transfer is final [ transaction will be considered finalized ] upon issuance of this letter.

[ (d) The banking for future use or trading of allowances not used for compliance during a control period shall be restricted in accordance with the following: ]

[ (1) allowances which were allocated in accordance with the variable in (2)(B) listed in the figure contained in §101.353(a) of this title (relating to Allocation of Allowances) may not be banked for future use or traded; and ]

[ (2) allowances which were allocated prior to January 1, 2005 in accordance with the with the variables in (3)(D) listed in the figure contained in §101.353(a) of this title may not be banked for future use or traded. ]

[ (e) Only authorized account representatives may trade allowances. ]

[ (f) Trades will be reviewed for approval by the executive director in accordance with the following: ]

[ (1) submittal of a completed ECT-2 Form, Application for Transfer of Allowances; ]

[ (2) the completed ECT-2 Form shall include the price paid per allowance and shall be submitted to executive director at least 30 days prior to the allowances being deposited into the transferee's broker or compliance account; ]

[ (3) all information regarding the quantity and sales price of allowances shall be immediately made available to the public; and ]

[ (4) the executive director will issue a letter to the purchaser and seller reflecting this trade. The trade will be considered finalized upon issuance of this letter. ]

(f) [ (g) ] Trades involving the transfer of individual future year allowances to be allocated to individual facilities at a site must [ may ] be made in accordance with the following . [ : ]

(1) The [ the ] application for trade shall be reviewed for approval by the executive director following the submission of a completed ECT-5 Form, Application for Transfer of Individual Future Year Allowances . [ ; ]

(2) The [ the ] completed ECT-5 Form must [ shall ] include the price paid per allowance , except for transfers between sites under common ownership or control. [ ; ]

(3) Transferred [ transferred ] allowances will be deposited in the transferee's broker or compliance account on April 1 of the year in which the allowances are allocated and will be subject to the existence of the allowances in the transferor's account on that date . [ ; ]

(4) All [ all ] information regarding the quantity and sales price of allowances not exempt from reporting under paragraph (2) of this subsection must [ shall ] be immediately made available to the public . [ ; and ]

(5) The [ the ] executive director will issue a letter to the purchaser and seller reflecting this trade. The transfer is final [ trade will be considered finalized ] upon issuance of this letter.

(g) The banking for future use or trading of allowances not used for compliance during a control period shall be restricted in accordance with the following.

(1) Allowances that were allocated in accordance with the variables in (2)(B) listed in the figure contained in §101.353(a) of this title (relating to Allocation of Allowances) may not be banked for future use or traded.

(2) Allowances that were allocated prior to January 1, 2005 in accordance with the variables in (3)(D) listed in the figure contained in §101.353(a) of this title may not be banked for future use or traded.

(h) Sites may use nitrogen oxides (NO x ) discrete emission reduction credits (DERC) or mobile discrete emission reduction credits (MDERC) that [ which ] have been generated and acquired in accordance with Division 4 of this subchapter (relating to Discrete Emission Credit Banding and Trading) in place of allowances for compliance with this division in accordance with paragraphs (1) - (9) of this subsection. Sites may use volatile organic compound (VOC) DERCs or MDERCs that [ which ] have been generated and acquired in accordance with Division 4 of this subchapter, in place of allowances for compliance with this division in accordance with paragraphs (1) - (9) of this subsection provided that demonstration has been made and approved by the executive director and the United States Environmental Protection Agency [ EPA ] to show that the use of VOC DERCs or MDERCs is equivalent, on a one to one basis or other ratio, to the use of NO x allowances in reducing ozone.

(1) - (6) (No change.)

(7) Beginning January 1, 2005, no more than 10,000 DERCs may be used in any combination totaled over all sites in the Houston/Galveston [ (HGA) ] ozone nonattainment area during a single calendar year in accordance with paragraph (10) of this subsection . This restriction does not apply to MDERCs.

(8) (No change.)

(9) DERCs or MDERCs submitted with a DEC-2 Form, Notice of Intent to Use Discrete Emission Credits, for the purpose of compliance with this section, shall [ must ] be submitted to the executive director on or before October 1 of the control period for which the DERCs or MDERCs will be used and must be accompanied by an original DERC or MDERC certificate. In addition, a DEC-3 Form, Notice of Use of Discrete Emission Credits, must be submitted on March 31 along with the site's ECT-1 Form, Annual Compliance Report [ at least 30 days prior to intended use ].

(10) Beginning January 1, 2005, DERCs shall be approved for use with this division according to the following.

(A) Approval will be given for sites requesting use of 250 or less DERCs per control period.

(B) If a site requests the use of more than 250 DERCs in a control period, the amount in excess of 250 may be reduced so that the total amount of all DERCs used by all sites does not exceed 10,000. For all requests in excess of 250, the excess DERCs up to the 10,000 DERC limit 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 DERCs available up to the 10,000 DERC limit.

(i) Emission reduction credits (ERC) [ (ERCs) ] may be converted into a yearly allocation of allowances at the rate of one ERC to one allowance per year only if they were generated prior to December 1, 2000 and provided that:

(1) (No change.)

(2) the ERC was generated in the Houston/Galveston [ HGA ] area;

(3) - (5) (No change.)

§101.359.Reporting.

(a) Beginning March 31, 2003, for each control period, facilities under each compliance account shall submit a completed ECT-1 Form, Annual Compliance Report, to the executive director by March 31 of each year detailing the following:

(1) the amount of actual nitrogen oxides (NO x ) emissions during the preceding control period;

(2) the method of determining NO x emissions, including, but not limited to, any monitoring protocol and results, calculation methodology, level of activity, and emission factor; [ and ]

(3) a summary of all final trades for the preceding control period ; and [ . ]

(4) detailed documentation supporting the reported activity level and emission factor for each facility equivalent in kind and detail to that submitted with an ECT-3 Form, Level of Activity Certification. It is acceptable to reference documentation supporting an emission factor if previously submitted with an ECT-1 Form or an ECT-3 Form.

(b) For sites failing to submit an ECT-1 Form by the required deadline in subsection (a) of this section, the executive director may withhold approval of any proposed trades from that site involving allowances allocated for the control period for which the ECT-1 Form is due or to be allocated in subsequent control periods.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on June 10, 2004.

TRD-200403838

Stephanie Bergeron

Director, Environmental Law Division

Texas Commission on Environmental Quality

Earliest possible date of adoption: July 25, 2004

For further information, please call: (512) 239-6087


4. DISCRETE EMISSION CREDIT BANKING AND TRADING

30 TAC §§101.370, 101.373, 101.374, 101.376

STATUTORY AUTHORITY

The amended sections are proposed under Texas Water Code, §5.103, concerning Rules, and §5.105, concerning General Policy, that authorize the commission to adopt rules necessary to carry out its powers and duties under the Texas Water Code; and under Texas Health and Safety Code, §382.017, concerning Rules, that authorizes the commission to adopt rules consistent with the policy and purposes of the Texas Clean Air Act. The amended sections are also proposed under Texas Health and Safety Code, §382.002, concerning Policy and Purpose, that establishes the commission purpose to safeguard the state air resources, consistent with the protection of public health, general welfare, and physical property; §382.011, concerning General Powers and Duties, that authorizes the commission to control the quality of the state air; and §382.012, concerning State Air Control Plan, that authorizes the commission to prepare and develop a general, comprehensive plan for the control of the state air. The amended sections are also proposed under Texas Health and Safety Code, §382.014, concerning Emission Inventory, that authorizes the commission to require a person whose activities cause air contaminant emissions to submit information to enable the commission to develop and emissions inventory; §382.016, concerning Monitoring Requirements, that authorizes the commission to prescribe reasonable requirements for the measuring and monitoring of air contaminant emissions; and §382.051 and §382.0518, concerning Permitting Authority of Commission and Preconstruction Permit, that authorize the commission to issue preconstruction and operating air permits.

The proposed amended sections implement Texas Health and Safety Code, §§382.002, 382.011, 382.012, and 382.017; and House Bill 2912, §5.01 and §18.14, 77th Legislature, 2001.

§101.370.Definitions.

The following words and terms, when used in this division, [ shall ] have the following meanings, unless the context clearly indicates otherwise.

(1) Activity--The amount of activity [ operation ] at a facility or mobile source measured in terms of production, use, raw materials input, vehicle miles traveled, or other similar units that have a direct correlation with the economic output and emission rate of the facility or mobile source.

(2) Actual emissions-- The [ Shall equal the ] total emissions during a [ the ] selected time period, using the facility's or mobile source's actual daily operating hours, production rates, or [ and ] types of materials processed, stored, or combusted during that [ the ] selected time period.

(3) (No change.)

[ (4) Baseline--Emissions that occur prior to an emission reduction strategy, considering all limitations required by applicable state and federal regulations. The baseline may not exceed the most recent level of emissions reported in the emissions inventory used in a state implementation plan (SIP). For facilities in an area in which a SIP demonstration is not required for a criteria pollutant, the two consecutive calendar years shall include or follow the 1990 emission inventory. For reduction strategies that exceed 12 months, the baseline is established after the first year of generation and is fixed for the life of the strategy. A new baseline is established for each unique emission reduction strategy. ]

(4) [ (5) ] Baseline activity--The facility's actual level of activity based on the facility's actual daily operating hours, production rates, or types of materials processed, stored, or combusted averaged over [ any ] two consecutive calendar years [ including and following the most recent year of emissions inventory used in the SIP or subsequent year(s) which precede the emission reduction strategy or credit use period. For facilities in an area in which a SIP demonstration is not required for a criteria pollutant, the two consecutive calendar years shall include or follow the 1990 emission inventory. For facilities in existence less than two years or not having two complete calendar years of activity data, a shorter time period of not less than 12 months may be considered by the executive director ].

(5) [ (6) ] Baseline emission rate--The facility's rate of emissions per unit of activity during the baseline activity period.

(6) [ (7) ] Baseline emissions--The facility's [ total ] actual emissions , in tons per year, occurring prior to an emission reduction strategy and calculated as [ based on ] the product of baseline activity and baseline emission rate that is surplus to all limitations required by applicable local, state, and federal rules and regulations [ averaged over any two consecutive calendar years including and following the most recent year of emissions inventory used in the state implementation plan or subsequent year(s) which precede the emission reduction strategy or credit use period ].

(7) [ (8) ] Certified--Any emission reduction that is determined to be creditable upon review and approval by the executive director.

(8) [ (9) ] Curtailment--A [ temporary or partial ] reduction in activity level at any facility or mobile source.

(9) [ (10) ] Discrete emission credit--[ An emission reduction generated over a discrete period of time, and measured in tenths of a ton. ] A [ creditable emission credit such as a ] discrete emission reduction credit or mobile discrete emission reduction credit.

(10) [ (11) ] Discrete emission reduction credit--A certified [ creditable ] emission reduction that [ which ] is created during a generation period, quantified after the period in which emissions reductions are made, and expressed in tons [ tenths of a ton ].

(11) [ (12) ] Emission reduction--An actual reduction in emissions from a facility or mobile source.

(12) [ (13) ] Emission reduction strategy--The method implemented to reduce the facility's or mobile source's emissions beyond that required by state or federal law, regulation, or agreed order.

(13) [ (14) ] Facility--As defined in §116.10 of this title (relating to General Definitions).

(14) [ (15) ] Generation period--The discrete period of time, not exceeding 12 months, over which a discrete emission reduction credit is created.

(15) [ (16) ] Generator--The owner or operator of a facility or mobile source that creates an emission reduction.

[ (17) Level of activity--The amount of activity at a facility measured in terms of production, fuel use, raw materials input, or other similar units. ]

(16) [ (18) ] Mobile discrete emission reduction credit [ (MDERC ] or discrete mobile credit[ ) ]--[ A credit that is surplus, generated by a mobile source strategy. It is a creditable ] A certified emission reduction from a mobile source that is created during a generation period, quantified after the period in which emissions reductions are made, and expressed in tons.

[ (19) Mobile emissions baseline--Mobile emissions that occur prior to a mobile emission reduction strategy, considering all limitations required by applicable state and federal regulations. A valid mobile emission baseline can be calculated by either using measured emissions of an appropriately sized sample of the participating mobile sources using an approved EPA test procedure or by using estimated emissions of the participating mobile sources using the most recent edition of EPA's on-road or non-road mobile emissions factor models, or other model as applicable. To ensure that mobile credits are surplus, mobile source baseline emissions estimates for each year of the proposed mobile source control program must be the same as, or lower than, those used, or proposed to be used, in the state implementation plan in which the control program is proposed. ]

(17) [ (20) ] Mobile source--On-road (highway) vehicles (e.g., automobiles, trucks, and motorcycles) and non-road vehicles (e.g., trains, airplanes, agricultural equipment, industrial equipment, construction vehicles, off-road motorcycles, and marine vessels).

(18) [ (21) ] Mobile source baseline activity--The [ mobile source's ] level of activity of a mobile source during the applicable mobile source baseline emissions period [ year ].

(19) [ (22) ] Mobile source baseline emissions--The mobile source's actual [ total ] emissions , in tons per year, occurring prior to a mobile emission reduction strategy calculated as [ based on ] the product of mobile source baseline activity and mobile source baseline emission rate that is surplus to all limitations required by applicable local, state, and federal rules and regulations .

(20) [ (23) ] Mobile source baseline emissions rate--The mobile source's rate of emissions per unit of mobile source baseline activity during the mobile source baseline emissions [ activity ] period.

(21) [ (24) ] Most stringent allowable emissions rate--The emissions rate of a facility or mobile source, considering all limitations required by applicable local, state, and federal rules and regulations.

(22) [ (25) ] Ozone season--The portion of the year when ozone monitoring is federally required to occur in a specific geographic area, as defined in 40 Code of Federal Regulations Part 58, Appendix D , §2.5 .

(23) [ (26) ] Permanent--An emission reduction that is long-lasting and unchanging for the remaining life of the facility or mobile source. Such a time period must be enforceable.

(24) [ (27) ] Protocol--A replicable and workable method of estimating emission rates or activity levels used to calculate the amount of emission reduction generated or credits required for facilities or mobile sources.

(25) [ (28) ] Quantifiable--An emission reduction that can be measured or estimated with confidence using replicable methodology [ techniques ].

(26) [ (29) ] Real reduction--A reduction in which actual emissions are reduced.

(27) [ (30) ] Shutdown--The permanent cessation of an activity producing emissions at a facility or mobile source .

(28) [ (31) ] Site--As defined in §122.10 of this title (relating to General Definitions).

(29) [ (32) ] Source--As defined in §101.1 of this title (relating to Definitions).

(30) [ (33) ] State implementation plan--A plan that [ which ] provides for attainment and maintenance of a primary or secondary national ambient air quality standard as adopted in 40 Code of Federal Regulations Part 52, Subpart SS .

(31) [ (34) ] Strategy activity--The facility's or mobile source's level of activity during the discrete emission reduction credit generation period.

(32) [ (35) ] Strategy emission rate--The facility's or mobile source's emission rate during the discrete emission reduction credit generation period.

(33) [ (36) ] Surplus--An emission reduction that is not otherwise required of a facility or mobile source by a state or federal law, regulation, or agreed order and has not been otherwise relied upon in the state implementation plan .

(34) [ (37) ] Use period--The period of time over which the user applies discrete emission credits to an applicable emission reduction requirement.

(35) [ (38) ] User--The owner or operator of a facility or mobile source that acquires and uses discrete emission reduction credits to meet a regulatory requirement, demonstrate compliance, or offset an emission increase.

(36) [ (39) ] Use strategy--The compliance requirement for which discrete emission credits are being used.

§101.373.Discrete Emission Reduction Credit Generation and Certification.

(a) Methods of generation.

(1) Discrete emission reduction credits (DERC) may be generated using one of the following methods or any other method that is approved by the executive director:

(A) the permanent shutdown of a facility that [ which ] causes a loss of capability to produce emissions;

(B) the installation and operation of pollution control equipment that [ which ] reduces emissions below the level required of the facility; or

(C) a change in the manufacturing process that [ which ] reduces emissions [ emission ] below the level required of the facility . [ ; ]

(2) DERCs may not be generated by the following strategies:

(A) - (B) (No change.)

(C) emission reductions required to comply with any provision under 42 United States Code (USC), Subchapter I [ Title I of the FCAA ] regarding tropospheric ozone, or 42 USC, Subchapter IV-A [ Title IV of the FCAA ] regarding acid deposition control;

(D) emission reductions of hazardous air pollutants, as defined in 42 USC, §7412 [ the FCAA, §112 ], from application of a standard promulgated under 42 USC, §7412 [ FCAA, §112 ];

(E) emission reductions that [ which have ] occurred as a result of transferring the emissions to another facility at the same site;

(F) (No change.)

(G) emission reductions occurring at a facility that [ which ] received an alternative emission limitation to meet a state reasonably available control technology requirement, except to the extent that the emissions are reduced below the level that would have been required had the alternative emission limitation not been issued;

(H) emission reductions at a site facility with a flexible permit, unless the reductions are made permanent and enforceable or the generator can demonstrate that the emission reductions were not used to satisfy the conditions for the facilities under the flexible permit ; [ . ]

(I) that portion of [ specific ] emission reductions funded through a state or federal program [ programs ], unless specifically allowed under that program;

(J) - (K) (No change.)

(b) DERC baseline.

(1) The baseline emissions may not exceed the quantity of emissions reported in the most recent year of emissions inventory used in the SIP. For reductions being certified in accordance with §116.170(b) of this title (relating to Applicability of Emission Reductions as Offsets), the baseline emissions may not exceed the quantity of emissions reported in the emissions inventory used in the SIP in place at the time the reduction strategy was implemented.

(2) The baseline emissions must consist of the facility's actual emissions averaged over any two consecutive calendar years selected from either a period including or following the most recent year of emission inventory used in the SIP or, if that period is less than ten years, the ten consecutive years immediately preceding the emission reduction.

(3) For facilities in an area in which a SIP demonstration is not required for a criteria pollutant, the two consecutive calendar years must include or follow the 1990 emission inventory.

(4) For reduction strategies that exceed 12 months, the baseline and SIP emissions inventory are established after the first year of generation and are fixed for the life of the strategy. A new baseline is established for each unique emission reduction strategy.

(5) For facilities in existence less than 24 months or not having two complete calendar years of activity data, a shorter time period of not less than 12 months may be considered by the executive director.

(c) [ (b) ] DERC calculation.

(1) DERCs, except for shutdowns, are calculated according to the following equation. [ equations: ]

Figure: §101.373(c)(1)

[Figure: §101.373(b)(1)]

(2) The sum of the reduction generated and the total strategy emissions must not be greater than the quantity of emissions reported or represented in the emissions inventory used for SIP determination or the two-year average baseline emissions, whichever is less.

(3) [ (2) ] For shutdown emission reduction strategies, the quantity of emission reduction generated is equivalent to the baseline emissions.

(4) [ (3) ] The generation period for a shutdown is five years. Shutdown DERCs must be generated and noticed to the registry on an annual basis.

(d) [ (c) ] DERC certification.

(1) A DEC-1 Form, Notice of Generation and Generator Certification of Discrete Emission Credits, shall [ must ] be submitted to the executive director no later than 90 days after the end of the generation period, or no later than 90 days after the completion of the first 12 months of generation. Submission of the DEC-1 Form should continue every 12 months thereafter for each subsequent year of generation.

(2) DERCs must [ shall ] be quantified in accordance with §101.372(d) of this title (relating to General Provisions). The executive director shall have the authority to inspect and request information to assure that the emission reductions have actually been achieved.

(3) An application for DERCs must include, but is not limited to, a completed DEC-1 Form signed by an authorized representative of the applicant along with the following information for each pollutant reduced at each applicable facility:

(A) the generation period;

(B) a complete description of the generation activity;

(C) for shutdown emission reduction strategies, an explanation as to whether production shifted from the shutdown facility to another facility at the same site;

(D) the amount of discrete emission credits generated;

(E) for volatile organic compound reductions, a list of the specific compounds reduced;

(F) documentation supporting the baseline [ emission ] activity, baseline emission rate, [ emission reduction ] strategy emission rate, and [ emission reduction ] strategy activity;

(G) emissions inventory data from the most recent year of emissions inventory used in the SIP and emissions inventory data for the two consecutive years used to determine the baseline activity for each applicable pollutant and emission point;

(H) the most stringent emission rate for the applicable facility, considering all the local, state, and federal applicable regulatory and statutory requirements;

(I) a complete description of the protocol used to calculate the emission reduction generated; and

(J) the actual calculations performed by the generator to determine the amount of discrete emission credits generated.

§101.374.Mobile Discrete Emission Reduction Credit Generation and Certification.

(a) Method of generation.

(1) Mobile discrete emission reduction credits (MDERC) may be generated by any mobile source emission reduction strategy that creates actual mobile source emission reductions under this division (relating to Discrete Emission Credit Banking and Trading) [ this rule ], and is subject to the approval of the commission.

(2) MDERCs may not be generated from the following strategies:

(A) that portion of reductions funded through a state or federal program, unless specifically allowed under that program;

(B) through the transfer of emissions from one mobile source to another mobile source within the same nonattainment area and under common ownership or control; or

(C) reduction strategies resulting in secondary emissions increases that exceed limits established under state or federal rules or regulations.

[ (2) MDERCs cannot be generated from specific reductions funded through state or federal programs, unless specifically allowed under that program. ]

[ (3) MDERCs cannot be generated from a mobile source if the emissions have been transferred from that mobile source to another mobile source. ]

(b) MDERC baseline emissions.

(1) Mobile source baseline emissions must be calculated with either measured emissions of an appropriately sized sample for the participating mobile sources using a United States Environmental Protection Agency (EPA)-approved test procedure, or estimated emissions of the participating mobile sources using the most recent edition of the EPA on- road or non-road mobile emissions factor model or other model as applicable.

(2) Mobile source baseline emissions for each year of the proposed mobile source reduction strategy must be the same as, or lower than, those used or proposed to be used in the state implementation plan (SIP) in which the reduction strategy is proposed.

(3) Baseline emissions for quantifying MDERCs should include, but not be limited to, the following information and data as appropriate:

(A) the emission standard to which the mobile source is subject or the emission performance standard to which the mobile source is certified;

(B) the estimated or measured in-use emissions levels per unit of use from all significant mobile source emissions sources;

(C) the number of mobile sources in the participating group;

(D) the type or types of mobile sources by model year; and

(E) the actual activity level, hours of operation, or miles traveled by type and model year.

(c) [ (b) ] MDERC calculation. The quantity of MDERCs must [ An MDERC may ] be calculated from the annual difference between the mobile source baseline emissions [ baseline ] and the strategy [ actual ] emissions [ level after the MDERC strategy has been put in place ]. The MDERC must be based on actual in-use emissions of the modified or substitute mobile source. [ Emission baselines for quantifying MDERCs should include the following information and data as appropriate, but not be limited to: ]

[ (1) the emission standard to which the mobile source is subject or emission performance to which the mobile source is certified; ]

[ (2) the measured in-use emissions levels per unit of use from all significant mobile source emissions sources; ]

[ (3) the number of mobile sources in the participating group; ]

[ (4) the type or types of mobile sources by model year; and ]

[ (5) the actual activity level, hours of operation or miles traveled by type, and model year. ]

(d) Emission offsets. Mobile source reduction strategies that reduce emissions in one criteria pollutant or precursor for which an area is designated as nonattainment or near nonattainment, yet result in an emissions increase from the same mobile source in another criteria pollutant or precursor for which that same area is nonattainment or near nonattainment, must be required to offset the resulting increase at a 1:1 ratio with DERCs or MERCs.

(e) [ (c) ] MDERC certification.

(1) An MDEC-1 Form, Notice of Generation and Generator Certification of Mobile Discrete Emission Credits, shall [ must ] be submitted to the executive director no later than 90 days after the discrete emission reduction strategy activity has been completed, or no later than 90 days after the completion of the first 12 months of generation. Submission of the MDEC-1 Form shall [ should ] continue every 12 months thereafter for each subsequent year of generation.

(2) MDERCs will be determined and certified in accordance with §101.372(d) of this title (relating to General Provisions) using:

(A) EPA methodologies, when available;

(B) actual monitoring results, when available;

(C) calculations using the most current EPA mobile emissions factor model or other model as applicable; or

(D) calculations using creditable emission reduction measurement or estimation methodologies that [ which ] satisfactorily address the analytical uncertainties of mobile source emissions reduction strategies. The generator shall [ must ] collect relevant data sufficient to characterize the process emissions of the affected pollutant and the process activity level for all representative phases of source operation during the period under which the MDERCs are created or used.

(3) An application for MDERCs must include, but is not limited to, a completed MDEC-1 Form signed by an authorized representative of the applicant along with the following information for each pollutant reduced for each mobile source:

(A) the date of the reduction;

(B) a complete description of the generation activity;

(C) the amount of discrete mobile source emission credits generated;

(D) documentation supporting the mobile source baseline [ emission ] activity, mobile source baseline emission rate, mobile source baseline [ total ] emissions, and the mobile source strategy emissions ;

(E) a complete description of the protocol used to calculate the discrete mobile source emission reduction generated;

(F) the actual calculations performed by the generator to determine the amount of discrete mobile source emission credits generated; and

[ (G) the calculation protocol as approved by the executive director and submitted to EPA; and ]

(G) [ (H) ] a demonstration that the reductions are surplus to all local, state, and federal rules and to emissions modeled in the SIP.

[ (4) The owner of the initial emission credit certificate shall be the owner of the facility or mobile source creating the emission reduction. The executive director may approve a deviation from this paragraph considering factors such as, but not limited to: ]

[ (A) an entity other than the owner of the facility or mobile source incurred the cost of the emission reduction strategy; or ]

[ (B) the owner of the facility or mobile source lacked the potential to generate one-tenth of a ton of credit. ]

§101.376.Discrete Emission Credit Use.

(a) Requirements to use discrete emission credits. Discrete emission credits may be used if the following requirements are met.

(1) The user shall [ must ] have ownership of a sufficient amount of discrete emission credits before the use period for which the specific discrete emission credits are to be used.

(2) The user shall [ must ] hold sufficient discrete emission credits to cover the user's compliance obligation at all times.

(3) The user shall acquire additional discrete emission credits during the use period if it is determined the user does not possess enough discrete emission credits to cover the entire use period. The user shall [ must ] acquire additional credits as allowed under this section prior to the shortfall, or be in violation of this section.

(4) (No change.)

(b) Use of discrete emission credits. With the exception of uses prohibited in subsection (c) of this section or precluded by commission order or condition within an authorization under the same commission account number, discrete emission credits may be used to meet or demonstrate compliance with any facility or mobile regulatory requirement including the following:

(1) to exceed any allowable emission level, if the following conditions are met:

(A) in ozone nonattainment areas, permitted facilities may use discrete emission credits to exceed permit allowables by no more than ten tons for nitrogen oxides [ (NO x ) ] or five tons for volatile organic compounds [ (VOC) ] in a 12-month period as approved by the executive director. This use is limited to one exceedance, up to 12 months within any 24-month period, per use strategy. The user shall [ must ] demonstrate that there will be no adverse impacts from the use of discrete emission credits at the levels requested; or

(B) at permitted facilities in counties or portions of counties designated as attainment or unclassified, discrete emission credits may be used to exceed permit allowables by values not to exceed the prevention of significant deterioration significance levels as provided in 40 Code of Federal Regulations (CFR) §52.21(b)(23), as approved by the executive director prior to use. This use is limited to one exceedance, up to 12 months within any 24-month period, per use strategy. The user shall [ must ] demonstrate that there will be no adverse impacts from the use of discrete emission credits at the levels requested;

(2) as new source review (NSR) permit offsets , if the following requirements are met:

(A) the user shall [ must ] obtain the executive director's approval prior to the use of specific discrete emission credits to cover, at a minimum, one year of operation of the new or modified facility in the NSR permit;

(B) the amount of discrete emission credits 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 shall [ must ] also purchase and retire enough discrete emission credits to meet the offset ratio requirement in the user's ozone nonattainment area. The user shall [ must ] purchase and retire either the environmental contribution of 10% or the offset ratio, whichever is higher; and

(C) the NSR permit must meet the following requirements:

(i) (No change.)

(ii) prior to issuance of the permit the user shall [ must ] identify the discrete emission credits; and

(iii) prior to start of operation the user shall [ must ] submit a completed DEC-2 Form, Notice of Intent to Use Discrete Emission Credits, along with the original certificate;

(3) - (4) (No change.)

(c) Discrete emission credit use prohibitions. A discrete emission credit may not be used under this division:

(1) - (2) (No change.)

(3) to meet (as codified in 42 United States Code (USC) Federal Clean Air Act (FCAA)) [ FCAA ] requirements for:

(A) new source performance standards under FCAA, §111 (42 USC, §7411) ;

(B) lowest achievable emission rate standards under FCAA, §173(a)(2) (42 USC, §7503(a)(2)) ;

(C) best available control technology standards under FCAA, §165(a)(4) (42 USC, §7475(a)(4)) or Texas Health and Safety Code, §382.0518(b)(1);

(D) hazardous air pollutants standards under FCAA, §112 (42 USC, §7412) , including the requirements for maximum achievable control technology;

(E) standards for solid waste combustion under FCAA, §129 (42 USC, §7429) ;

(F) requirements for a vehicle inspection and maintenance program under FCAA, §182(b)(4) or (c)(3) (42 USC, §7511a(b)(4) or (c)(3)) ;

(G) ozone control standards set under FCAA, §183(e) and (f) (42 USC, §7511b(e) and (f)) ;

(H) clean-fueled vehicle requirements under FCAA, §246 (42 USC, §7586) ;

(I) motor vehicle emissions standards under FCAA, §202 (42 USC, §7521) ;

(J) standards for non-road vehicles under FCAA, §213 (42 USC, §7547) ;

(K) requirements for reformulated gasoline under FCAA, §211(k) (42 USC, §7545) ; or

(L) requirements for Reid vapor pressure standards under FCAA, §211(h) and (i) (42 USC, §7545(h) and (i)) ;

(4) - (6) (No change.)

(d) Notice of intent to use.

(1) A completed DEC-2 Form, signed by an authorized representative of the applicant shall [ must ] be submitted to the executive director in accordance with the following requirements.

(A) - (B) (No change.)

(C) A copy of the application shall [ must ] also be sent to the federal land manager 30 days prior to use if the user is located within 100 kilometers of a Class I area, as listed in 40 CFR Part 81 (2001).

(D) The application must include, but is not limited to, the following information for each use:

(i) - (v) (No change.)

(vi) a complete description of the protocol, as submitted by the executive director to the United States Environmental Protection Agency [ EPA ] for approval, used to calculate the amount of discrete emission credits needed;

(vii) (No change.)

(viii) the date that [ on which ] the discrete emission credits were acquired or will be acquired;

(ix) (No change.)

(x) the price of the discrete emission credits acquired or the expected price of the discrete emission credits to be acquired , except for transfers between sites under common ownership or control ;

(xi) (No change.)

(xii) a certification of use, that [ which ] must contain certification under penalty of law by a responsible official of the user of truth, accuracy, and completeness. This certification must state that based on information and belief formed after reasonable inquiry, the statements and information in the document are true, accurate, and complete.

(2) DERC use calculation.

(A) To calculate the amount of discrete emission credits necessary to comply with §§117.108, 117.138, 117.210, or 117.223 of this title (relating to System Cap; and Source Cap), a user may use the equations listed in those sections, or the following equations.

(i) (No change.)

(ii) For maximum daily cap:

Figure: 30 TAC §101.376(d)(2)(A)(ii)

[Figure: 30 TAC §101.376(d)(2)(A)(ii)]

(B) (No change.)

(C) The amount of discrete emission credits needed to exceed an allowable emissions level [ comply with permit allowables ] is calculated as follows.

Figure: 30 TAC §101.376(d)(2)(C) (No change.)

(D) The user shall [ must ] retire 10% more discrete emission credits than are needed, as calculated in this paragraph, to ensure that the facility or mobile source environmental contribution retirement obligation will be met.

(E) (No change.)

(3) A user may submit a notice late in the case of an emergency, but the notice must be submitted before the discrete emission credits can be used. The user shall [ must ] include a complete description of the emergency situation in the notice of intent to use. All other notices submitted less than 45 days prior to use, or 90 days prior to use for a mobile source, will be considered late and in violation . [ ; ]

(4) - (5) (No change.)

(e) Notice of use.

(1) - (2) (No change.)

(3) A DEC-3 Form, Notice of Use of Discrete Emission Credits, shall [ must ] be submitted to the commission in accordance with the following requirements.

(A) - (B) (No change.)

(C) The notice is to be used as the mechanism to update or amend the notice of intent to use and must include any information different from that reported in the notice of intent to use, including, but not limited to, the following items:

(i) purchase price of the discrete emission credits obtained prior to the current use period , except for transfers between sites under common ownership or control ;

(ii) (No change.)

(iii) the actual emissions during the use period for volatile organic compounds [ VOC ] and nitrogen oxides [ NO x ];

(iv) - (vi) (No change.)

(4) - (5) (No change.)

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on June 10, 2004.

TRD-200403841

Stephanie Bergeron

Director, Environmental Law Division

Texas Commission on Environmental Quality

Earliest possible date of adoption: July 25, 2004

For further information, please call: (512) 239-6087