Approval and Promulgation of Implementation Plans; New Jersey; Nitrogen Oxides Budget and Allowance Trading Program

Overview

The Environmental Protection Agency (EPA) proposes to conditionally approve the New Jersey State Department of Environmental Protection's (New Jersey's) Nitrogen Oxides Budget and Allowance (NOX Budget) Trading Program. The following table of contents describes the format for this SUPPLEMENTARY INFORMATION section: EPA's Action What Action is EPA Proposing Today? Why is EPA Proposing this Action? What is a Budget and Allowance Trading Program? What is EPA's Proposed Condition for Approval? How can New Jersey Get Full Approval for Their Program? What Guidance did EPA Use to Evaluate New Jersey's Program? What is EPA's Evaluation of New Jersey's Program? New Jersey's NOX Budget Trading Program What is the Ozone Transport Commission's Memorandum of Understanding (OTC MOU)? Which States Signed the OTC MOU? What Does the OTC MOU Require? How Did States Meet the OTC MOU? How Did New Jersey Meet the OTC MOU? How Does New Jersey's Program Protect the Environment? How Will New Jersey and EPA Enforce the Program? When Did New Jersey Propose and Adopt the Program? When Did New Jersey Submit the Program to EPA and What Did it Include? What Other Significant Items Relate to New Jersey's Program? Conclusion Administrative Requirements

EPA's Action

What Action Is EPA Proposing Today?

EPA proposes to conditionally approve a revision to New Jersey's ozone State Implementation Plan (SIP) which New Jersey submitted to EPA on April 26, 1999. This SIP revision relates to New Jersey's new Subchapter 31 ``NOX Budget Program'' regulation for New Jersey's NOX Budget Trading Program.

Why Is EPA Proposing this Action?

EPA is proposing this action to: • Give you the opportunity to submit written comments on EPA's proposed action, as discussed in the DATES and ADDRESSES sections. • Fulfill New Jersey's and EPA's requirements under the Clean Air Act (the Act). • Make New Jersey's NOX Budget Trading Program federally-enforceable and available for credit toward the attainment SIP.

What Is a Budget and Allowance Trading Program?

Air emissions trading uses market forces to reduce the overall cost of compliance for sources, such as a power plant, while maintaining emission reductions and environmental benefits. One type of market- based program is an emissions budget and allowance trading program, also commonly referred to as a cap and trade program. In a budget and allowance trading program, the state or EPA set a regulatory limit, or budget, on mass emissions from a specific group of sources. The state or EPA assigns or allocates allowances to the sources, authorizing emissions up to the level of the budget. Sources may sell or trade allowances with other sources, cost-effectively complying with the budget. The budget limits the total number of allocated allowances. The total effect is to reduce emissions. An example of a budget and allowance trading program is EPA's Acid Rain Program for reducing sulfur dioxide emissions.

What Is EPA's Proposed Condition for Approval?

EPA proposes to condition its approval of New Jersey's NOX Budget Trading Program on New Jersey including a definition of a violation and of the days of a violation which more fully comports with the other state rules and EPA's guidance. Originally, New Jersey proposed amendments to Subchapter 3 for the NOX Budget Trading Program which included defining a violation and for determining the number of days of a violation in order to determine civil and criminal penalties. These provisions stated: • Each ton of excess emissions is a separate violation • For purposes of determining the number of days of a violation, each day in the control period (153 days), where there are any excess emissions, constitutes a day in violation, unless the source can demonstrate a lesser number of days, to the State's satisfaction. However, in response to comments on the proposal, New Jersey reserved these provisions when it adopted Subchapter 31 on June 17, 1998. In the adoption documents, New Jersey said it would propose another amendment to clarify these provisions for defining violations. The absence of these provisions in New Jersey's adopted NOX Budget rule creates uncertainty about how the State will define a violation and determine the number of days of a violation should a source not hold enough allowances as of the allowance transfer deadline. The other states in the Ozone Transport Commission (OTC) included similar provisions in their adopted rules. Since the NOX Budget Program is a regional program, each state rule must be substantively consistent with the other state rules, in order to ensure an allowance in one state has the same value as an allowance in another state. This area of New Jersey's NOX Budget Program does not fully satisfy EPA's guidance for providing enforcement mechanisms. New Jersey must revise Subchapter 3 and/or 31 to incorporate the provisions for defining a violation and determining the number of days of a violation should a source not hold enough allowances as of the allowance transfer deadline. Correcting this deficiency will clarify any confusion in how the State defines a violation and

will help to ensure consistency within the regional NOX Budget Trading Program.

How Can New Jersey Get Full Approval for Their Program?

EPA proposes a conditional approval of New Jersey's NOX Budget Trading Program due to the deficiency discussed in the ``What is EPA's Proposed Condition for Approval?'' section. EPA informed New Jersey of the deficiency in a July 8, 1999 letter. In a July 29, 1999 letter, New Jersey committed to correcting the deficiency within one year of EPA's final action. To achieve full approval, New Jersey must correct the deficiency and submit it to EPA within one year of EPA's final action on New Jersey's NOX Budget Trading Program SIP revision. However, if New Jersey corrects the deficiency between the time of today's proposed action and a final rulemaking action, and the correction is consistent with EPA's findings as discussed earlier, EPA proposes full approval of New Jersey's NOX Budget Trading Program. EPA will consider all information submitted prior to any final rulemaking action as a supplement or amendment to the April 26, 1999 submittal.

What Guidance Did EPA Use To Evaluate New Jersey's Program?

In 1994, EPA issued Economic Incentive Program (EIP) rules and guidance (40 CFR part 51, subpart U), that outlines requirements for establishing EIPs in cases where the Act requires States adopt EIPs to meet the ozone and carbon monoxide standards in designated nonattainment areas. There is no requirement for New Jersey to submit an EIP. However, since subpart U also contains guidance on the development of voluntary EIPs, New Jersey followed the EIP guidance in the development and submittal of its NOX Budget Trading Program. EPA evaluated New Jersey's NOX Budget Trading Program to determine whether the Program meets the SIP requirements described in section 110 of the Act. EPA also evaluated the Program using the EIP of 1994 as guidance for voluntary EIPs, in coordination with other guidance documents.

What Is EPA's Evaluation of New Jersey's Program?

EPA determined New Jersey's new Subchapter 31 regulation for New Jersey's NOX Budget Trading Program is consistent with EPA's guidance, except for the deficiency discussed in the ``What is EPA's Proposed Condition for Approval?'' section. Specifically, New Jersey's NOX Budget Trading Program is consistent with EPA's EIP guidance of 1994. New Jersey's Subchapter 31 contains provisions for definitions, program applicability, opt-ins, interface with the emission offset program and the open market emissions trading program, annual allowance allocation, claims for incentive allowances, permitting, allowance transfer, allowance banking, early reduction credits, the NOX Allowance Tracking System, monitoring, recordkeeping, reporting, end-of-season reconciliation, compliance certification, excess emissions deduction, the program audit, and guidance documents incorporated by reference and penalties. Given the documentation in the SIP submittal and the provisions of New Jersey's NOX Budget Trading Program, and New Jersey's commitment for a periodic program audit, EPA determined that New Jersey will continue to meet the reasonable further progress and SIP attainment requirements. A Technical Support Document (TSD), prepared in support of this proposed action, contains the full description of New Jersey's submittal and EPA's evaluation. A copy of the TSD is available upon request from the EPA Regional Office listed in the ADDRESSES section.

New Jersey's NOX Budget Trading Program

What Is the Ozone Transport Commission's Memorandum of Understanding?

The Ozone Transport Commission (OTC) adopted a Memorandum of Understanding (MOU) on September 27, 1994, which committed the signatory states to the development and proposal of a region-wide reduction in NOX emissions, with one phase of reductions by 1999 and another phase of reductions by 2003. Since the Act required reasonably available control technology (RACT) to reduce NOX emissions by May of 1995, the OTC MOU refers to the reduction in NOX emissions by 1999 as Phase II and the reduction in NOX emissions by 2003 as Phase III.

Which States Signed the OTC MOU?

The OTC states include Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island, New York, New Jersey, Pennsylvania, Maryland, Delaware, the northern counties of Virginia and the District of Columbia. All of the OTC jurisdictions, with the exception of the Commonwealth of Virginia, signed the September 27, 1994 MOU.

What Does the OTC MOU Require?

The OTC MOU requires a reduction in ozone season (May 1 to September 30) NOX emissions from utility and large industrial combustion facilities within the Ozone Transport Region. This reduction furthers the effort to achieve the health-based national ambient air quality standard for ozone. In the MOU, the OTC states agreed to propose regulations for the control of NOX emissions according to the following guidelines: • The level of required NOX reductions is from a 1990 baseline emissions level. • The reduction would vary by location, or zone, and use a two-phase region-wide trading program. • The reduction required by May 1, 1999 is the less stringent of the following: a. The affected facilities in the inner zone will reduce their NOX emission rate by 65% from the 1990 baseline, or emit NOX at a rate no greater than 0.20 pounds per million Btu. b. The affected facilities in the outer zone will reduce their NOX emission rate by 55% from the 1990 baseline, or emit NOX at a rate no greater than 0.20 pounds per million Btu. • The reduction required by May 1, 2003 is the less stringent of the following: c. The affected facilities in the inner and outer zones will reduce their NOX emission rate by 75% from the 1990 baseline, or emit NOX at a rate no greater than 0.15 pounds per million Btu. d. The affected facilities in the northern zone will reduce their NOX emission rate by 55% from the 1990 baseline, or emit NOX at a rate no greater than 0.20 pounds per million Btu. The inner zone consists of all contiguous moderate and above nonattainment areas in the OTC, except those located in Maine. The outer zone consists of the remainder of the OTC, except the northern zone. The northern zone consists of Maine, Vermont and New Hampshire (except for its moderate and above nonattainment areas) and the northeastern attainment portion of New York. New Jersey must meet the requirements for the inner zone.

How Did States Meet the OTC MOU?

First, after consideration of the reductions required in the OTC MOU, the OTC States developed a 1990 baseline emission level and the emission budgets for 1999 and 2003. The NOX Budget Trading Program caps

NOX emissions in the Ozone Transport Region at 219,000 tons in 1999 and 143,000 tons in 2003, less than half of the 1990 baseline emission level of 490,000 tons. Then, the OTC charged a Task Force of representatives from the OTC States, organized through the Northeast States for Coordinated Air Use Management (NESCAUM) and the Mid-Atlantic Regional Air Management Association (MARAMA), with the task of developing a model rule to implement the program defined by the OTC MOU. During 1995 and 1996, the NESCAUM/MARAMA NOX Budget Task Force worked with EPA, as well as representatives from industry, utilities, and environmental groups, and developed a model rule as a template for OTC states to adopt their own rules to implement the OTC MOU. EPA's EIP rules formed the general regulatory framework for the model rule. The OTC issued the model rule on May 1, 1996. The model rule was intended to be used by the OTC states to implement the Phase II reductions called for in the MOU. The model rule does not specifically include the implementation of Phase III.

How Did New Jersey Meet the OTC MOU?

In accordance and consistent with the NESCAUM/MARAMA NOX Budget model rule issued in May 1996, New Jersey developed their regulation, new Subchapter 31 ``NOX Budget Program.'' Subchapter 31 includes reduction requirements to implement Phase II and Phase III of the OTC's MOU. The regulation includes provisions for a regional NOX Budget Trading Program, and establishes procedures for defining NOX emission allowances for each NOX control period beginning May 1, 1999 through the NOX control period ending September 30, 2002 (Phase II), and for each NOX control period beginning May 1, 2003 and thereafter (Phase III). New Jersey's SIP submittal identifies the budget sources and their initial NOX allowance allocations.

How Does New Jersey's Program Protect the Environment?

Specific to New Jersey, the NOX Budget Program will result in NOX emissions reductions during the ozone season of close to 80% between 1990 and 2003 from applicable sources. In 1990, NOX emissions from NOX Budget sources totaled more than 46,500 tons during the ozone season. In 1995, following New Jersey's NOX RACT rules, emissions of NOX were reduced to about 21,200 tons during the ozone season. The adopted NOX Budget Program rules will further reduce NOX emissions to 17,300 and 8,200 tons during the ozone season in 1999 and 2003, respectively. In addition to contributing to attainment of the ozone standard, decreases of NOX emissions will also likely help improve the environment in several important ways. On a national scale, decreases in NOX emissions will also decrease acid deposition, nitrates in drinking water, excessive nitrogen loadings to aquatic and terrestrial ecosystems, and ambient concentrations of nitrogen dioxide, particulate matter and toxics. On a global scale, decreases in NOX emissions will, to some degree, reduce greenhouse gases and stratospheric ozone depletion.

How Will New Jersey and EPA Enforce the Program?

Under New Jersey's NOX Budget Trading Program, New Jersey allocates allowances to budget sources. Each allowance permits a source to emit one ton of NOX during the seasonal control period. For each ton of NOX discharged in a given control period, EPA will remove one allowance from the source's allowance account. The source, or any other source will never use this allowance again for compliance. This is known as a retirement of the allowance. Allowances may be bought, sold, or banked. Unused allowances may be banked for future use, with limitation. Each budget source must comply with the program by demonstrating at the end of each control period that actual emissions do not exceed the amount of allowances held for that period. However, regardless of the number of allowances a source holds, it cannot emit at levels that would violate other federal or state limits, for example, RACT, new source performance standards, or Title IV. The State and EPA will determine compliance by ensuring that allowances held by a source at the end of each control period meet or exceed the emissions for that source for the given control period. Source owners shall monitor emissions by certified monitoring systems and must report resulting data to EPA. Violations are also possible for not adhering to monitoring, reporting and record keeping requirements. However, as discussed in the ``What is EPA's Proposed Condition for Approval?'' section, the missing provisions in New Jersey's Program limit the ability of New Jersey and EPA to enforce the Program. Lastly, the federally-enforceable operating permits for budget sources contain the applicable requirements of the NOX Budget Program.

When Did New Jersey Propose and Adopt the Program?

New Jersey proposed their NOX Budget Trading Program on September 15, 1997 and held a public hearing on October 17, 1997. New Jersey requested public comments by November 24, 1997. New Jersey adopted the NOX Budget Trading Program on June 17, 1998 with an operative date of August 16, 1998.

When Did New Jersey Submit the Program to EPA and What Did it Include?

New Jersey submitted its NOX Budget Trading Program SIP revision to EPA on April 26, 1999. EPA determined the submittal administratively and technically complete on June 18, 1999. New Jersey's NOX Budget Trading Program SIP revision included the following elements: • New Subchapter 31 • Amended Subchapter 3 • Copies of monitoring guidance and energy efficiency protocol to incorporate by reference • Allowance allocation file for 1999 and explanation of allocation methodology, as supporting information.

What Other Significant Items Relate to New Jersey's Program?

• New Jersey's NOX Budget Trading Program SIP revision also fulfills the State's commitments to adopt the NOX Budget Program with respect to the Alternative Ozone Attainment Demonstration submittals sent to EPA on December 31, 1996 and August 31, 1998. • New Jersey's Subchapter 31 contains NOX emissions budget and allocation schemes for 1999 through the ozone season of 2002 (Phase II), and for the ozone season of 2003 and beyond (Phase III) of the OTC NOX Budget Program. Therefore, Subchapter 31 satisfies New Jersey's obligations under the OTC MOU to make specific additional NOX reductions by May 1, 2003 and continue to make reductions thereafter. Additionally, New Jersey's attainment demonstrations will rely on the NOX reductions associated with the OTC program in 2003 and beyond to achieve attainment with the one hour ozone standard. In its current form, except for the deficiency discussed in the ``What is EPA's Proposed Condition for Approval?'' section, Subchapter 31 is approvable for 1999, 2000, 2001, 2002 and 2003 and thereafter. In September 1998, EPA issued the final Regional Transport of Ozone Rule (``NOX SIP Call'') requiring 22 eastern

States and the District of Columbia to submit SIP's to address the regional transport of ground-level ozone through reductions in NOX. New Jersey did not submit the April 26, 1999 SIP revision for Subchapter 31 to satisfy the requirements of the NOX SIP Call. Therefore, in order to meet EPA's NOX SIP Call, New Jersey will need to submit an additional SIP revision that establishes the NOX caps for the State during 2003 and beyond, but New Jersey's Phase III limits may be equivalent to the SIP Call limits.

Conclusion

EPA proposes a conditional approval of New Jersey's NOX Budget Trading Program due to the deficiency discussed in the ``What is EPA's Proposed Condition for Approval?'' section. In a July 29, 1999 letter, New Jersey committed to correcting the deficiency within one year of EPA's final action. To achieve full approval, New Jersey must correct the deficiency and submit it to EPA within one year of EPA's final action on New Jersey's NOX Budget Trading Program SIP revision. However, if New Jersey corrects the deficiency between the time of today's proposed action and a final rulemaking action, and the correction is consistent with EPA's findings as discussed earlier, EPA proposes full approval of New Jersey's NOX Budget Trading Program. EPA requests public comment on the issues discussed in today's action. EPA will consider all public comments before taking final action. Interested parties may participate in the Federal rulemaking procedure by submitting written comments to the EPA Regional office listed in the ADDRESSES section.

Administrative Requirements

Executive Order 12866

The Office of Management and Budget (OMB) has exempted this regulatory action from review under Executive Order (E.O.) 12866, entitled ``Regulatory Planning and Review.''

Executive Order on Federalism

Under E.O. 12875, EPA may not issue a regulation that is not required by statute and that creates a mandate upon a state, local, or tribal government, unless the Federal government provides the funds necessary to pay the direct compliance costs incurred by those governments. If the mandate is unfunded, EPA must provide to the Office of Management and Budget a description of the extent of EPA's prior consultation with representatives of affected state, local, and tribal governments, the nature of their concerns, copies of written communications from the governments, and a statement supporting the need to issue the regulation. In addition, E.O. 12875 requires EPA to develop an effective process permitting elected officials and other representatives of state, local, and tribal governments ``to provide meaningful and timely input in the development of regulatory proposals containing significant unfunded mandates.'' Today's rule does not create a mandate on state, local or tribal governments. The rule does not impose any enforceable duties on these entities. Accordingly, the requirements of section 1(a) of E.O. 12875 do not apply to this rule. On August 4, 1999, President Clinton issued a new executive order on federalism, Executive Order 13132, [64 FR 43255 (August 10, 1999),] which will take effect on November 2, 1999. In the interim, the current Executive Order 12612, [52 FR 41685 (October 30, 1987),] on federalism still applies. This rule will not have a substantial direct effect on States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 12612. The rule affects only one State, and does not alter the relationship or the distribution of power and responsibilities established in the Clean Air Act.

Executive Order 13045

Protection of Children from Environmental Health Risks and Safety Risks (62 FR 19885, April 23, 1997), applies to any rule that: (1) Is determined to be ``economically significant'' as defined under E.O. 12866, and (2) concerns an environmental health or safety risk that EPA has reason to believe may have a disproportionate effect on children. If the regulatory action meets both criteria, the Agency must evaluate the environmental health or safety effects of the planned rule on children, and explain why the planned regulation is preferable to other potentially effective and reasonably feasible alternatives considered by the Agency. This rule is not subject to E.O. 13045 because it is not an economically significant regulatory action as defined by E.O. 12866, and it does not address environmental health or safety risk that would have a disproportionate effect on children.

Executive Order 13084

Under E.O. 13084, EPA may not issue a regulation that is not required by statute, that significantly or uniquely affects the communities of Indian tribal governments, and that imposes substantial direct compliance costs on those communities, unless the Federal government provides the funds necessary to pay the direct compliance costs incurred by the tribal governments. If the mandate is unfunded, EPA must provide to the Office of Management and Budget, in a separately identified section of the preamble to the rule, a description of the extent of EPA's prior consultation with representatives of affected tribal governments, a summary of the nature of their concerns, and a statement supporting the need to issue the regulation. In addition, E.O. 13084 requires EPA to develop an effective process permitting elected officials and other representatives of Indian tribal governments ``to provide meaningful and timely input in the development of regulatory policies on matters that significantly or uniquely affect their communities.'' Today's rule does not significantly or uniquely affect the communities of Indian tribal governments. Accordingly, the requirements of section 3(b) of E.O. 13084 do not apply to this rule.

Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) generally requires an agency to conduct a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. Small entities include small businesses, small not-for-profit enterprises, and small governmental jurisdictions. This proposed rule will not have a significant impact on a substantial number of small entities because conditional approvals of SIP submittals under section 110 and subchapter I, part D of the Clean Air Act does not create any new requirements but simply approve requirements that the state is already imposing. Therefore, because the Federal SIP approval does not impose any new requirements, I certify that this action will not have a significant economic impact on a substantial number of small entities. Moreover, due to the nature of the Federal-State relationship under the Clean Air Act, preparation of flexibility analysis would constitute Federal inquiry into the economic reasonableness of state action. The Clean Air Act forbids EPA to base its actions concerning SIPs on such grounds. Union Electric Co., v. U.S. EPA, 427 U.S. 246, 255-66 (1976); 42 U.S.C. 7410(a)(2).

If the conditional approval is converted to a disapproval under section 110(k), based on the state's failure to meet the commitment, it will not affect any existing state requirements applicable to small entities. Federal disapproval of the state submittal does not affect its state-enforceability. Moreover, EPA's disapproval of the submittal does not impose a new Federal requirement. Therefore, I certify that this disapproval action will not have a significant economic impact on a substantial number of small entities because it does not remove existing requirements nor does it substitute a new federal requirement.

Unfunded Mandates

Under section 202 of the Unfunded Mandates Reform Act of 1995 (``Unfunded Mandates Act''), signed into law on March 22, 1995, EPA must prepare a budgetary impact statement to accompany any proposed or final rule that includes a federal mandate that may result in estimated annual costs to State, local, or tribal governments in the aggregate; or to private sector, of $100 million or more. Under section 205, EPA must select the most cost-effective and least burdensome alternative that achieves the objectives of the rule and is consistent with statutory requirements. Section 203 requires EPA to establish a plan for informing and advising any small governments that may be significantly or uniquely impacted by the rule. EPA has determined that the proposed conditional approval action does not include a federal mandate that may result in estimated annual costs of $100 million or more to either State, local, or tribal governments in the aggregate, or to the private sector. This federal action approves pre-existing requirements under State or local law, and imposes no new requirements. Accordingly, no additional costs to State, local, or tribal governments, or to the private sector, result from this action.

List of Subjects in 40 CFR Part 52

Environmental protection, Air pollution control, Hydrocarbons, Intergovernmental relations, Nitrogen dioxide, Ozone, Reporting and recordkeeping requirements, Volatile organic compounds.

Authority: 42 U.S.C. 7401 et seq.

Dated: September 30, 1999. William J. Muszynski, Acting Regional Administrator, Region 2. [FR Doc. 99-26855 Filed 10-13-99; 8:45 am] BILLING CODE 6560-50-P