State of California

AIR RESOURCES BOARD



Notice of Public Availability of Modified Text

PUBLIC HEARING TO CONSIDER A REGULATION TO ESTABLISH A STATEWIDEMETHODOLOGY TO CALCULATE THE VALUE OF EMISSION REDUCTIONCREDITS THAT ARE USED INTERCHANGEABLY

Public Hearing Date: May 22, 1997

Public Availability Date: June 13, 1997

Deadline for Public Comment: June 30, 1997





At a public hearing held May 22, 1997, the Air Resources Board (the "Board") considered theadoption of sections 91500 through 91508 of Subchapter 5.5, Chapter 1, Division 3, Title 17,California Code of Regulations ("CCR") in response to recently-enacted legislation (AB1777; Healthand Safety Code section 39607.5). The purpose of the regulation is to establish principles and criteriafor air pollution control and air quality management districts (Districts) to use when developingprograms to allow the use of interchangeable credits as a compliance alternative for meeting specifiedair pollution control requirements in District rules and regulations. The proposed regulatory action isdescribed in detail in the Initial Statement of Reasons for Rulemaking, released April 4, 1997.

At the public hearing, the Board approved sections 91500 through 91508 of Title 17, CCR, withmodifications to the originally proposed regulatory language as follows:

Attached is a copy of Board Resolution 97-19, approving the above described regulatory action. Attachment A to the resolution contains the approved regulatory language, with additions to theoriginally proposed text shown by underline, and deletions shown by strike-out.

In accordance with section 11346.8 of the Government Code, the Board directed the ExecutiveOfficer to adopt sections 91500 through 91508, as approved, after making the modified regulatorylanguage available to the public for comment for a period of at least 15 days, provided that theExecutive Officer shall consider such written comments as may be submitted during this period, shallmake such modifications as may be appropriate in light of the comments received, and shall present theregulation to the Board for further consideration if he determines that this is warranted.

Written comments must be submitted to the Clerk of the Board, Air Resources Board, P.O. Box 2815,Sacramento, California 95812, no later than June 30, 1997, for consideration by the Executive Officer. Questions regarding this mail-out may be directed to Ms. Lucille van Ommering, Staff Air PollutionSpecialist, Office of Air Quality and Transportation Planning, at (916) 323-0296. Only commentsrelating to the modifications described in this notice (i.e., the underline and strike-out text in AttachmentA to the Resolution) will be considered by the Executive Officer.

Sincerely,



Michael P. Kenny

Executive Officer

Attachment


State of California

AIR RESOURCES BOARD

Resolution 97-19

May 22, 1997

Agenda Item No: 97-4-2

WHEREAS, sections 39600 and 39601 of the Health and Safety Code authorize the Air ResourcesBoard (the "Board") to adopt standards, rules, and regulations, and to do such acts as may benecessary for the proper execution of the powers and duties granted to and imposed upon the Boardby law;

WHEREAS, section 39607.5(a) of the Health and Safety Code requires the Board to develop andadopt a methodology for use by Air Pollution Control/Air Quality Management Districts (Districts) tocalculate the value of credits issued for emission reductions from stationary, mobile, indirect, and areasources, including those issued under market-based incentive programs when those credits are usedinterchangeably;

WHEREAS, section 39607.5(b) of the Health and Safety Code requires the Board to ensure that themethodology results in the maintenance and improvement of air quality by requiring emission credits tobe permanent, enforceable, quantifiable, and surplus to the reductions required to attain and maintainfederal and state air quality standards, and is otherwise in compliance with Division 26 of the Healthand Safety Code;

WHEREAS, section 39607.5(b) of the Health and Safety Code requires the Board to consider theviability of the trading process, opportunities for source flexibility and banking of credits, and the lengthof time that the credits are to be valid;

WHEREAS, sections 40920.6(c) and (d) of the Health and Safety Code require Districts to allow theretirement of emission reduction credits in lieu of compliance with best available retrofit controltechnology (BARCT) and other feasible emission control measures if specified criteria are met;

WHEREAS, the staff has developed a "Proposed Regulation To Establish A Statewide MethodologyTo Calculate The Value Of Emission Reduction Credits That Are Used Interchangeably" that wouldestablish principles and criteria with which Districts must comply when developing programs to allowthe interchangable use of emission reduction credits;

WHEREAS, the California Environmental Quality Act and Board regulations require that no projecthaving significant adverse environmental impacts be adopted as proposed if feasible alternatives ormitigation measures are available to eliminate or substantially reduce such impacts;

WHEREAS, the staff has held public workshops and consultative meetings with the Districts, theCalifornia Air Pollution Control Officers Association, interested business and industry representatives,and environmental organizations in developing the proposed methodology;

WHEREAS, the staff has prepared an "Initial Statement of Reasons for Rulemaking" (staff report) thatdescribes the bases and rationale for the elements of the proposed regulation and has made that staffreport available for public comment at least 45 days in advance of the Board Hearing;

WHEREAS, a public hearing and other administrative proceedings were held in accordance with theprovisions of Chapter 3.5 (commencing with Section 11340), Part 1, Division 3, Title 2, of theGovernment Code;

WHEREAS, based upon the information presented by the staff and the public comments received, theBoard finds that:

1. The generation and use of emission reduction credits can provide a cost-effective alternative forcomplying with certain District emission reduction requirements.

2. This regulation is necessary to ensure that the generation and use of emission reduction credits do notinterfere with attaining and maintaining federal and state air quality standards and to provide flexibilityand consistency to regulated entities by retaining the value of credits that are certified and banked forfuture use to meet applicable District requirements.

3. The regulation meets the requirements of section 39607.5 of the Health and Safety Code;specifically the regulation:

(a) ensures that the calculation methodology shall result in the maintenance and improvement of airquality consistent with Division 26 of the Health and Safety Code, including but not limited to therequirements of the California Clean Air Act set forth in sections 40910-40927; market-basedincentive program criteria set forth in section 39616; programs governing Toxic Air Contaminants andAir Toxics "Hot Spots", as set forth in Chapter 3.5 and Part 6 of Division 26 of the Health and SafetyCode, respectively; and District banking and offset systems, as set forth in sections 40709-40714.5;

(b) allows for credit use in market-based incentive programs adopted pursuant to section 39616 of theHealth and Safety Code, and allows the use of all those credits, including those from a market-basedincentive program, to meet other stationary or mobile source requirements that do not expresslyprohibit that use;

(c) ensures that the methodology does not provide for double-counting of emission reductions, norprovide for an additional discount of credits solely as a result of emissions trading if a district hasalready discounted the credit as part of its process of identifying and granting those credits to sources;and

(d) ensures that any credits shall be permanent, enforceable, quantifiable, and surplus.

4. Interchangeable credits used consistently with this regulation will, in the aggregate, not result ingreater annual pollutant emissions than would have occurred without trading.

5. District adoption and implementation of calculation protocols consistent with the principles andcriteria contained in this regulation will ensure that emission credits are real, surplus, permanent,quantifiable, and enforceable.

6. Emission reduction credits or market-based trading instruments that are generated under programsauthorized by sections 39616 and 40440.1 can be used interchangeably if a study conducted by theDistrict and concurred with by the Board determines that the interchangeable use of such credits meetsall applicable requirements.

WHEREAS, the Board further finds that:

1. The proposed regulation is not anticipated to result in a significant adverse environmental impact dueto emissions increases because any credits used to comply with specific District emission reductionrequirements must yield reductions equivalent to or greater than the measure(s) they replaced.

2. The regulation does not allow the use of interchangeable credits to meet technology- or risk-basedrequirements such as BACT or air toxics control measures (ATCMs).

3. Generation and use of interchangeable credits in trades where toxic air contaminants are associatedwith criteria pollutants such as VOCs and PM may result in increases in emissions of toxic aircontaminants and associated health risk.

4. The magnitude of potential increases in health risk from toxic air contaminants will be limited and shallnot exceed District-established significance thresholds for facilitywide cancer risk or a facilitywidehazard index of one for non-cancer health effects.

5. The public disclosure requirements in the regulation and in CEQA ensure that information aboutlocalized air toxics impacts is available for consideration by the public and by District Governing Boardsthat establish thresholds for significant health risk at the local level.

6. There are no feasible mitigation measures or alternatives short of prohibiting trading of criteriapollutants which have a toxic air contaminant component that would substantially reduce the potentialadverse impacts of the proposed regulatory action while at the same time providing businesses theopportunity to use emission reduction credits as a compliance option in lieu of meeting certain districtrequirements.

7. Specific economic considerations, i.e. the need to provide the regulated community with thecompliance flexibility required by statute, outweigh the minor unavoidable environmental risksassociated with potential increases in toxic air contaminants at specific facilities engaging in trading.

NOW, THEREFORE, BE IT RESOLVED that the Board hereby approves a new Subchapter 5.5, sections 91500 through 91508, Title 17, California Code of Regulations, as amended by the Board and set forth in Attachment A hereto.

BE IT FURTHER RESOLVED, that the Board directs the Executive Officer to adopt the provisionsset forth in Attachment A after making them available to the public for a period of

15 days, provided that the Executive Officer shall consider such written comments as may be submittedduring this period, shall make modifications as may be appropriate in light of the comments received,and shall present the regulation to the Board for further consideration if he determines this is warranted.

BE IT FURTHER RESOLVED, that the Board directs the Executive Officer to send the adoptedregulation to the Districts and provide assistance to any District that elects to develop an emission credittrading program in compliance with the adopted regulation.

BE IT FURTHER RESOLVED, that this regulation shall apply to any District that adopts, implements,or amends a rule or regulation that provides for the generation and use of interchangeable emissionreduction credits to ensure that District emission credit trading programs comply with the principles andcriteria established in this regulation.

BE IT FURTHER RESOLVED, that the Board directs staff to submit the adopted regulation to theOffice of Administrative Law with a request that this regulation become effective upon filing with theSecretary of State in order to facilitate District development and adoption of interchangeable credittrading programs which they are authorized or required to adopt by law.

I hereby certify that the above is a true and correct copy of Resolution 97-19, as adopted by the AirResources Board.

Pat Hutchens, Clerk of the Board


Proposed Regulation to Establish a Statewide Methodology To Calculate the Value ofEmission Reduction Credits That Are Used Interchangeably

California Air Resources Board

The proposed regulation would be incorporated as new section 91500 through 91508 of Subchapter5.5, Chapter 1, Division 3, Title 17, California Code of Regulations, to read as follows:

Subchapter 5.5 INTERCHANGEABLE AIR POLLUTION EMISSION REDUCTIONCREDITS

Article 1. Scope and Policy; Definitions

91500. Purpose.

This regulation establishes a statewide methodology for use by air pollution control and air qualitymanagement districts (Districts) when calculating the value of emission reduction credits from stationary,mobile, or area sources. As such, this regulation (1) provides a uniform exchange mechanism forstationary, mobile, and area source credits; and (2) provides for the use of credits as a compliancealternative for meeting specified District control requirements. The regulation is intended to ensure thatinterchangeable credits represent verified emission reductions that are real, permanent, quantifiable,enforceable, and surplus to those emission reductions which are needed to comply with existingrequirements and with District air quality plans.

Authority cited: Sections 39600, 39601, and 39607.5(a), Health and Safety Code. Reference:Sections 39605, 39607.5(b), 40709-40714.5, and 40920.6(c), Health and Safety Code.

91501. Definitions.

The following definitions shall apply in In complying with this regulation., Districts shall apply definitionsincluded in District rules adopted pursuant to section 40709 et seq. of the Health and Safety Code,except as defined below.

(a) "Air quality plan" includes, but is not limited to, attainment, rate-of-progress, and maintenance plansadopted by Districts pursuant to State requirements specified in Chapter 10 (commencing with section40910) of Part 3 of the Health & Safety Code (the California Clean Air Act), and federal requirementsspecified in the Clean Air Act governing the State Implementation Plan (SIP).

(b) "Certified" means an interchangeable credit has been evaluated by the air pollution control officer ofthe affected District pursuant to the requirements of this regulation and found to comply with allapplicable District, state, and federal requirements.

(c) "Credit generation period" means the period of time, specified by year, in which interchangeablecredits are generated.

(d) "Emission reduction duration" means the length of time during which the action generating theemission reduction credit results in verifiable and surplus emission reductions.

(e) "Hazard Index" means the ratio of the concentration of a toxic pollutant with non-cancer healtheffects and the reference exposure level for that pollutant.

(f) "Interchangeable credit" means an emission reduction credit generated from a stationary, mobile, orarea source that can be used, traded, or banked among programs and/or source categories as specifiedin this regulation and in accordance with state and federal law.

(g) "Reference Exposure Level" means a concentration level at or below which no adverse healtheffects are anticipated.

(h) "Registered" means that an interchangeable credit has been deposited, withdrawn, or transferredthrough the act of recording a transaction in a District's banking register.

(i) "Surplus" means that the reduction is not required or assumed throughout the time of the emissionreduction duration by any local, state or federal permit, rule, regulation, law, ordinance or the mostrecent locally approved air quality plan, or control measure implementation date. If the controlefficiency or emission standard in the most recent locally approved air quality plan is less stringent thanthe control efficiency or emission standard in the applicable SIP for a specific source category, then thefederally approved SIP will be used for purposes of determining surplus reductions.

(j) "Total Hazard Index" means the sum of hazard indices for pollutants with non-cancer health effectsthat have same or similar adverse health effects.

Authority cited: Sections 39600, 39601, and 39607.5(a), Health and Safety Code. Reference:Sections 39605, 39607.5(b), 40709-40714.5, and 40920.6(c), Health and Safety Code.

Article 2. Credit Exchange Function

91502. Certified Credits

District certified credits that are generated pursuant to relevant district, state, and federal requirementsand calculation protocols can be used interchangeably among programs and/or source categories tomeet applicable district requirements to the extent provided by district rules.

Authority cited: Sections 39600, 39601, and 39607.5(a), Health and Safety Code. Reference:Sections 39605, 39607.5(b), 40709-40714.5, and 40920.6(c), Health and Safety Code.

91503. Credit Denomination

The value of a Credits that is are used interchangeably shall be expressed in certified and registeredaspounds of pollutant in one year increments. the year generated.

Authority cited: Sections 39600, 39601, and 39607.5(a), Health and Safety Code. Reference:Sections 39605, 39607.5(b), 40709-40714.5, and 40920.6(c), Health and Safety Code.

91504. Banking

(a) Interchangeable credits shall comply with the requirements set forth in Health and Safety Codesections 40709 through 40714.5, and applicable federal requirements governing the creation, banking,and use of credits. Emission reductions proposed to offset simultaneous emissions increases within thesame stationary source need not be banked prior to use as offsets, pursuant to section 40709(c).

(b) The District shall specify the earliest year in which an interchangeable credit can be used.

(c) An interchangeable credit cannot be used prior to its certification and registration, or in anyinstances in which the District determines such use would not comply with section 91506(d).

(d) Credits can be used interchangeably within the time period specified by the District or ARB,consistent with the air quality plan, applicable state and federal requirements and section 91507(b)(6).

(e) While banked, a certified and registered credit will retain its full value. At the time of use, creditswill be subject to prevailing federal, state, and district requirements.

Authority cited: Sections 39600, 39601, and 39607.5(a), Health and Safety Code. Reference:Sections 39605, 39607.5(b), 40709-40714.5, and 40920.6(c), Health and Safety Code.

Article 3. Criteria and Methodology for Generation and Use of Interchangeable Credits.

91505. Applicability.

(a) The provisions set forth in this subchapter shall apply to any District which adopts, implements, oramends a rule or regulation which provides for the generation and use of interchangeable credits fromstationary, mobile, or area sources.

(b) Districts with existing interchangeable credit and trading rules and regulations shall makeamendments as necessary to comply with this regulation within nine months of its effective date, unlessthe District can demonstrate to the satisfaction of the Executive Officer that more time, not to exceedone year total, is necessary.

(c) Districts with market incentive programs authorized by Health and Safety Code sections 39616 and40440.1 that propose to expand such programs to allow the use of interchangeable credits shall ensurecompliance with the criteria set forth in section 39616(c), and this regulation.

(d) Districts may maintain a separate account of emission reduction credits for new source review offsetpurposes consistent with sections 40709 et seq. and 40918 through 40920.5 of the Health and SafetyCode without complying with the provisions of this regulation.

(e) Credits that are used interchangeably must meet all applicable federal, state, and districtrequirements, including but not limited to the provisions of this subchapter, the adopted air quality plan,and those pertaining to the generation and use of emission reduction credits.

Authority cited: Sections 39600, 39601, and 39607.5(a), Health and Safety Code. Reference:Sections 39605, 39607.5(b), 40709-40714.5, and 40920.6(c), Health and Safety Code.

91506. Generation and Use.

(a) Districts shall adopt rules which, at a minimum, comply with the provisions of this subchapter andwith sections 40920.6(c) & (d) and 40709-40714.5 of the Health and Safety Code prior to allowingthe use of interchangeable credits to meet District requirements other than the offset provisions of theirnew source review programs.

(b) Interchangeable credits must be certified by the District in which the generation occurs andregistered in that District's emission reduction credit bank prior to use. Districts within the samenonattainment area may establish a multi-district banking program.

(c) Districts, in consultation with the Air Resources Board, shall adopt enforceable technical protocolsthat define how emission reductions will be calculated for purposes of certifying them as interchangeablecredits.

(d) Use of interchangeable credits must, in the aggregate, result in no greater annual pollutant-specificemissions than would have occurred in lieu of trading, consistent with the District's portion of the airquality plan. The assessment of equivalency shall take into account the exceedance season for eachaffected nonattainment pollutant.

(e) Districts shall ensure compliance with federal, state and District requirements governing creditgeneration and use through permit conditions or other enforceable instruments.

(f) Districts shall not allow the use of emission reduction credits to comply with the "best availablecontrol technology" requirements of sections 40405 and 40918-40920.5 of the Health and SafetyCode, or with any technology-based requirements of sections 111, 169, 171 and 173 of the federalClean Air Act.

(g) Districts may authorize the use of interchangeable credits consistent with any federal, state, or localrequirements applicable to toxic air contaminants, only if allowed by regulations established pursuant tosection 39665 et seq. of the Health and Safety Code, and section 112 of the federal Clean Air Act.

(h) Surplus emission reductions that meet the requirements of Health and Safety Code section 40714.5can be used to create interchangeable credits. If not already accounted for in District air quality plans,baseline emissions from qualifying sources must be included and accounted for in the next update to theplan.

(i) Emission reduction credits from permitted stationary sources that were certified and banked solelyfor use in a District's new source review program must be included and accounted for in the air qualityplan prior to use in an interchangeable credit trading program.

(j) Emission reduction credits or market-based trading instruments generated under programsauthorized by Health and Safety Code sections 39616 and 40440.1 may be used interchangeablyoutside the market incentive program only upon a determination by the District, based upon a studyconducted by the District that, in the aggregate, such credits represent real reductions, and providedthat:

(1) the District submits its request and the above study to the ARB at least 120 days prior to theintended interchangeable use of those credits outside of the original market incentive program.

(2) ARB concurs in writing that the District's submittal regarding the interchangeable use of such creditscomplies with all applicable requirements including the criteria in Health and Safety Code section39616(c); as it pertains to this program. ARB shall provide a written response containing its findingwithin 90 days of receipt of the District's submittal.

(k) District rules shall provide for assessment and consideration of potential localized impacts that useof interchangeable credits may have on the public's exposure to air pollution. In no case shall emissionsof toxic air contaminants established pursuant to section 39665 et seq. of the Health and Safety Codeand section 112 of the federal Clean Air Act be allowed to increase as a result of credit use.

(l) In no case shall the generation and use of credits result in a total facility-wide health risk from toxicair contaminants identified pursuant to Health and Safety code section 39657 that exceeds a districtestablished significance threshold applicable to emissions trading. Health risk shall be assessed usingcancer potency values and reference exposure levels established by the Office of Environmental HealthHazard Assessment. District programs shall provide for public disclosure of any increase in emissionsof toxic air contaminants which results in a total facility-wide cancer health risk above ten in one millionor a total facility hazard index greater than 1.

Authority cited: Sections 39600, 39601, and 39607.5(a), Health and Safety Code. Reference:Sections 39605, 39607.5(b), 40709-40714.5, and 40920.6(c), Health and Safety Code.

91507. Calculation Methodology.

(a) Interchangeable credits shall be calculated based on a District's adopted calculation protocol. Thecalculation protocol shall include the elements specified in subparagraph (b) and shall be consistent withthe following criteria:

(1) Emission reductions used to generate interchangeable credits shall be real, permanent for the term ofcredit generation, enforceable, surplus, and quantifiable.

(2) Emission reductions shall be calculated using the most stringent of historic actual emissions,applicable requirements, the District's air quality plan, or the federally approved SIP, or, whereapplicable, other more stringent levels as established in an implementing rule or regulation.

(b) Districts shall provide for enforceable credit calculation protocols and procedures that contain thefollowing elements:

(1) Calculation methods to determine the amount of reductions being generated as credits, includingformulae accounting for emissions rate, operating period, activity level, and technical uncertainty.

(2) Procedures for calculating, certifying, and registering credits in one year increments when credits aregenerated from multi-year emission reductions.

(3) Procedures for certifying that emission reductions are surplus and available for use asinterchangeable credits.

(4) Procedures to incorporate emission inventory updates and changes in source category baselines, airquality plans, and applicable regulatory requirements into the credit calculation protocols.

(5) Methodologies used to determine the time period in which a banked credit is available for use,consistent with the air quality plan.

(6) Provisions for the use of ARB calculation methodologies, emission factors, certification standards,emission baseline data, and timeframes for credit use for mobile sources and for products under ARBregulatory authority.

(7) Provisions for monitoring, recordkeeping, and reporting requirements to verify and enforce creditgeneration at the specified value over the full generation period.

Authority cited: Sections 39600, 39601, and 39607.5(a), Health and Sa