CAIR Assessment of Public Comments
6 NYCRR Part 243, CAIR NOx Ozone Season Trading Program, 6 NYCRR Part 244, CAIR NOx Annual Trading Program, 6 NYCRR Part 245, CAIR SO2 Trading Program
Introduction
The Department is proposing three regulations to comply with EPA's Clean Air Interstate Rule (CAIR) that will establish cap-and-trade programs designed to mitigate interstate transport of nitrogen oxides (NOx) and sulfur dioxide (SO2) to help reduce ozone and fine particulate formation in CAIR states located in the eastern U.S. These rules consist of Part 243, CAIR NOx Ozone Season Trading Program; Part 244, CAIR NOx Annual Trading Program; and Part 245, CAIR SO2 Trading Program. As part of this rulemaking, Part 200 will be amended to update cross references in section 200.9, Referenced Material.
The Department proposed Parts 243, 244, and 245 on March 27, 2007. Hearings were held in Avon on May 15, 2007, in Long Island City on May 16, 2007, and in Albany on May 17, 2007. The comment period closed at 5:00 P.M. on May 24, 2007. The Department received written comments on New York's Clean Air Interstate Rule Program from 15 interested parties. These comments are summarized and responded to in this document.
Comments
243-1.2, 244-1.2 Definitions
1. Comment - "allocate or allocation", New York's rule has replaced the words "a permitting authority or the Administrator" in EPA's model trading rule by "the Department" and the words "other entity" by the words "the energy efficiency and renewable technology account". The terms "allocate" or "allocation" must apply to all allowances issued by States participating in the EPA-administered CAIR NOx ozone season trading program so that all such allowances are fungible and can be traded and used to meet the allowance-holding requirement for all sources in all States in the respective programs. The current definition of "allocate or allocation" has the effect of limiting allocated allowances to only those issued by New York's Department of Environmental Conservation. New York needs to replace the words "the Department" and "the energy efficiency and renewable technology account" by the more generic terms used in EPA's NOx ozone season model trading rule, i.e., "a permitting authority or the Administrator" and "other entity". (1)
Response - The department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
2. Comment - "alternate CAIR designated representative" and "CAIR designated representative", New York has deleted the last sentence in EPA's model trading rule that requires that, if the source is subject to the Hg Budget Trading Program, the CAIR designated representative (or alternate) be the same person as the Hg designated representative. EPA understands that New York sources will not be participating in the Hg Budget Trading Program. However, under the requirements of the Clean Air Mercury Rule (CAMR), all units subject to CAMR must monitor and report mercury emissions according to 40 CFR Part 75. This necessitates having a Hg designated representative. Therefore, New York should require that, if the source includes a unit subject to the requirements of New York's rule implementing CAMR, the CAIR designated representative (or alternate) be the same person as the Hg designated representative. (1)
Response - The department has revised the express terms to add the language "the Mercury Reduction Program for Coal-Fired Electric Utility Steam Generating Units" to the definitions of "alternate CAIR designated representative" and "CAIR designated representative."
New York has not adopted a Mercury Budget Trading Program. The State will not have any "Hg Budget units" or "Hg Budget source(s)" and will not be allocating mercury allowances to subject facilities with Mercury Reduction Program units. The responsibilities of the Hg designated representative insofar as they relate to the implementation Hg Budget Trading program are not relevant to New York's mercury control program.
Insofar as the responsibilities of the Hg designated representative relate to Part 75 requirements or routine monitoring and compliance reporting, they can be addressed through the Title V operating permit. New York's approved Title V operating permit program is set forth at 6 NYCRR Part 201. Title V operating permits must include all applicable requirements, including "all applicable Federal reporting requirements" (6 NYCRR 201-6.5(c)). A responsible official must certify to the permitting agency that the facility is operating in compliance with all applicable requirements. 6 NYCRR 201-6.5(e). "Responsible Official" is defined in 6 NYCRR 201-2.1(b)(28) as "a president, vice-president, secretary, treasurer, general partner, proprietor, principal executive officer, ranking elected official, or any other person who performs policy or decision making functions and is authorized to legally bind a corporation, partnership, sole proprietorship, or government entity which operates a facility that is subject to the provisions of this Part. Whenever the term responsible official is used in this Part, or in any other regulations implementing Title V of the Act, it shall be deemed to refer to the 'designated representative' with regard to all matters under Title IV of the Act."
6 NYCRR 201-2.1(b) 'Designated representative'. A responsible natural person or official authorized by the owner and operator of an "affected source" and of all affected units at such source as evidenced by a certificate of representation submitted in accordance with subpart B of 40 CFR part 72, to represent and legally bind each owner and operator, as a matter of Federal law, in matters pertaining to the Acid Rain Program. Whenever the term 'responsible official' is used in this Part or in any other regulations implementing title V of the act, it shall be deemed to refer to the "designated representative" with regard to all matters under title IV of the act.
The requirements in Subpart HHHH of 40 CFR Part 96 for subject sources to maintain records, certify monitoring units, and submit periodic compliance reports are incorporated into New York's mercury reduction program and, as applicable requirements, will be included in Title V operating permits. These requirements are not unlike compliance requirements included in other Department regulations and implemented through Title V permits. The term "responsible official" already takes into account the role of the "designated representative" under Title IV of Act. The Department does not believe it is necessary to designate a "Hg designated representative" in addition to the "responsible official" or "designated representative" for purposes of implementing New York's mercury reduction program. The proposed rules include text within the definitions of "CAIR designated representative" and "alternate CAIR designated representative" that requires the same person be responsible for meeting the requirements of all programs applicable to the source for which the person is responsible.
3. Comment - "coal-fired", New York needs to add at the end of the definition the words ", during any year". Even if a unit is not currently combusting some coal, the unit is coal-fired if it has ever combusted coal in any year. (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
4. Comment - New York needs to supplement the "commence commercial operation" definition with the following language: "(iii) Notwithstanding paragraphs (i) and (ii) of this definition, for a unit not serving a generator producing electricity for sale, the unit's date of commencement of operation shall also be the unit's date of commencement of commercial operation." This language addresses the fact that: monitoring system certification deadlines are based on commencement of commercial operation; and non-EGUs may not generate electricity and so never "commence commercial operation," as currently defined in the CAIR NOx ozone season trading rule. (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
5. Comment - New York needs to revise the "commence operation" definition in the CAIR NOx ozone season trading rule by redesignating the current paragraphs (i), (ii), and (iii) as paragraphs (i)(a), (i)(b), and (i)(c), and adding the following language: "(ii) Notwithstanding paragraph (i) of this definition, and solely for purposes of 40 CFR Part 96, subpart HHHH, for a unit that is not a CAIR NOx Ozone Season unit under sections 243-1.4(a)(1)(iii), (a)(2), or (a)(3) on the later of November 15, 1990 or the date the unit commences operation as defined in paragraph (i) of this definition and that subsequently becomes such a CAIR NOx Ozone Season unit, the unit's date for commencement of operation shall be the date on which the unit becomes a CAIR NOx Ozone Season unit under sections 243-1.4(a)(1)(iii), (a)(2), or (a)(3). (a) For a unit with a date of commencement of operation as defined in paragraph (ii) of this definition and that subsequently undergoes a physical change (other than replacement of the unit by a unit at the same source), such date shall remain the date of commencement of operation of the unit, which shall continue to be treated as the same unit. (b) For a unit with a date for commencement of operation as defined in paragraph (ii) of this definition and that is subsequently replaced by a unit at the same source (e.g., repowered), such date shall remain the replaced unit's date of commencement of operation, and the replacement unit shall be treated as a separate unit with a separate date for commencement of operation as defined in paragraph (i) or (ii) of this definition as appropriate." This language addresses situations where a non-EGU does not become subject to CAIR until a date after the unit commences operation; the current definition of "commence commercial operation" includes analogous language. (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
6. Comment - "fossil-fuel-fired" differs between the NOx SIP Call trading program and the CAIR trading program. New York should add to the CAIR NOx ozone season trading rule, the NOx SIP Call definition but should specify that this definition applies only for purposes of determining applicability for units that are not CAIR NOx Ozone Season units under the applicability criteria in 40 CFR 96.304. (1)
Response - The Department has modified 243-1.4(a)(1)(i) according to EPA's comment (see below 10. Comment and Response). The Department has added the NOx SIP Call definition under this subparagraph for purposes of determining applicability for units that are not CAIR NOx Ozone Season units under the applicability criteria in 40 CFR 96.304.
7. Comment - Revise the definition of "heat input" to be consistent with the definition in EPA's model trading rule and in New York's CAIR NOx annual and SO2 trading rules. (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
8. Comment - "permitting authority", New York needs the definition to include the Department, as well as permitting authorities in other States. As discussed above, the term "permitting authority" must refer to the permitting authorities in all States participating in the EPA-administered trading program so that CAIR NOx ozone season allowances issued by all such permitting authorities (including the Department) are fungible and can be traded and used to meet the allowance-holding requirement. Where New York needs to refer only to the Department, the New York rule properly uses the term "Department", rather than the generic term "permitting authority". (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
9. Comment - New York removed the definition of "potential electrical output capacity" in EPA's model trading rule. New York's rule needs to include this definition; the term is used in 243-1.4(b)(1)(i)('b') and 40 CFR 96.304(b)(1)(i)(B). (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
243-1.4 Applicability
10. Comment - In order to correctly include all units that meet the applicability criteria in 40 CFR 96.304 of EPA's model trading rule plus all EGUs from the NOx SIP Call that are not covered by EPA's model trading rule, the applicability provisions need to be revised as follows:
In 243-1.4(a)(1)(i) and (ii), the words "15 MWe" need to be revised to read "25 MWe", consistent with the applicability criteria in EPA model trading rule. A new paragraph (a)(1)(iii) needs to be added, reading as follows: "Any unit that is not a CAIR NOx Ozone Season unit under subparagraphs (i) or (ii) of this paragraph and that, any time on or after January 1, 1995, serves a generator with a nameplate capacity equal to or greater than 15 MWe and sells any amount of electricity." (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
11. Comment - In 243-1.4(b)(1)(i) and (ii), the words "under paragraph (a)(1)" need to be revised to read "under paragraphs (a)(1)(i) and (a)(1)(ii)". (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
243-1.5, 244-1.5 Shutdown of a CAIR NOx unit
12. Comment - New York's current 243-1.5 is inconsistent with EPA's model trading rule (40 CFR 96.305), as well as with the comparable provision (245-1.5) in New York's CAIR SO2 rule. New York needs to revise 243-1.5 so it parallels 245-1.5. There are several problems with the current 243-1.5. First, the section must be explicitly made inapplicable to opt-in units, which under 243-9.7 are supposed to meet certain requirements before they can withdraw from, and no longer be subject to the requirements of, the CAIR trading program. Second, the approach in EPA's model rule is to avoid requiring a permanently shutdown unit from submitting emissions reports of zero pending submission by the designated representative of a notice of permanent retirement (or surrender or modification of the unit's permit). Emissions reporting can be stopped when the unit permanently retires, but notice must also be provided to the Department. Third, while 243-1.5 relieves shutdown units of any obligations under the CAIR trading program, the EPA's model trading rule continues to impose certain requirements, i.e., the unit cannot have any further emissions, records must be kept showing that the unit is permanently retired, the unit continues to be subject to requirements related to the period before the unit retirement, and the unit loses its exemption from monitoring, allowance-holding, and other requirements under the CAIR trading program if the unit resumes operation or submits a CAIR permit application. Fourth, EPA's model rule specifies that, for a unit that loses its exemption, the date of resumed operation is treated as the commence commercial operation date for purposes of applying monitor certification requirements. EPA notes that New York may exclude retired units from receiving allowance allocations. (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
243-1.6, 244-1.6 Standard Requirements
13. Comment - In 243-1.6(c)(5) and (g), New York needs to add, after the reference to the CAIR permit, a reference to the exemption under 243-1.5. See discussion above of 243-1.5. (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
243-2.3 Changing CAIR designated representative
14. Comment - In 243-2.3(a), the word "Authorization" needs to be revised to read "Administrator". (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
243-2.6 Delegation by CAIR designated representative and alternate CAIR designated representative.
15. Comment - In 243-2.6(d), the words "shall designated representative or alternate" need to be revised to read "shall be effective, with regard to the CAIR designated representative or alternate". (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
243-3.1, 244-3.1 General CAIR NOx Ozone Season Trading Program permit requirements.
16. Comment - In 243-3.1(b), New York needs to revise the word "distinguishable" to read "separable". This change is consistent with EPA's model trading rule, as well as the comparable provision in New York's CAIR SO2 trading rule (245-3.1(b)). (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
243-3.4, 244-3.4, 245-3.4 CAIR permit contents
17. Comment - New York needs to remove the words "In addition to the requirements of Part 201 of this title". EPA's model trading rule provides that the CAIR permit is a separable portion of a permit issued under 6 NYCRR Parts 201 and specifies the content of that portion of the permit issued under New York's permitting rules. In order to be consistent with EPA's model rule, 243-3.4 needs to limit the content of CAIR-permit portion of the New York permit to the requirements of 40 CFR 96.323(a). In addition, while New York's rule provides elsewhere (in 243-1.6(c)(7)) for automatic incorporation of allowance transfers, the State's rule does not include the provision in 40 CFR 96.323(b) that the definitions of terms (in 243-1.2) are automatically incorporated in the CAIR permit. (1)
Response - The Department agrees with this comment and has modified the wording of section 3.4 to clarify that the CAIR permit contents are a separable component of the Part 201 (Title V) Permit.
243-5.2, 244-5.2 Timing requirements for CAIR NOx allowance allocations
18. Comment - In 243-5.2(a), the deadline for submission of allocations to the Administrator needs to be no later than the deadline (September 30, 2007) for recordation of CAIR NOx allowances by the Administrator. Further, New York needs to add the words ", in a format prescribed by the Administrator," after the words "will submit to the Administrator". (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
19. Comment - 243-5.2(b) provides that the Department will allocate by October 31, 2008 and each October 31 thereafter for the control period that is four years after the applicable deadline for "submission". New York needs to add the words "in a format prescribed by the Administrator," after the words "the Department will submit to the Administrator". EPA recommends deleting the last two sentences of the paragraph beginning with, "If the Department fails to allocate
Response - The Department agrees with this comment and will revise 243-5.2(b) to include the suggested text and to clarify the Department's procedure for allocating allowances if the Department fails to allocate allowances under the regular convention.
243-5.3, 244-5.3 CAIR NOx allowance allocations
20. Comment - In 243-5.3(a)(1), the reference to section 243-1.4(a)(1)(i) needs to be revised to refer to section 243-1.4(a)(1)(i) and (ii). (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
21. Comment - In 243-5.3(a)(2), the reference to section 243-1.4(a)(1)(ii) needs to be revised to refer to the new section 243-1.4(a)(1)(iii). EPA also notes that some units subject to the New York's NOx SIP Call trading rule and so covered by section 243-1.4(a)(1)(iii) may have nameplate capacity of 25 MWe or greater (e.g., cogeneration units exempt under EPA's model trading rule but covered by the NOx SIP Call trading rule). Consequently, it seems that in 243-5.3(a)(2) New York should remove the words "with a nameplate capacity equal to or greater than 15 MWe and equal to or less than 25 MWe" and should revise the last sentence to read "This figure represents the sector budget for additional electricity generating units subject to the NOx SIP Call." (1)
Response - The Department has separated out the portion of the NOx Budget Trading Program which makes up the baseline tons for EGUs equal to or greater than 15 MWe and equal to or less than 25 MWe. This budget was added to the CAIR NOx Ozone Season Trading Program budget for allocation to those units. This portion of the CAIR NOx Ozone Season Trading Program budget is separate from the larger EGU (greater than 25 MWe) budget established by EPA. The Department believes that the comment suggested above to revise the last sentence in 243-5.3(a)(2) is unnecessary and does not provide any clarification. Instead, the suggested revision may confuse which portion of the CAIR budget is intended for the smaller EGUs carried over from the NOx SIP Call with the portion of the budget reserved for large EGUs (greater than 25 MWe).
22. Comment - In 243-5.3(b), (c), (d), and (e), it seems that New York should change the references to "the date by which the Department must make the CAIR NOx ozone season allocations pursuant to subdivision 243-5.2(b)" to refer to "subdivision 243-5.2". A baseline heat input needs to be calculated for allocations under subdivision 243-5.2(a) as well as under subdivision 243-5.2(b). (1)
Response - The Department has modified the language in section 5.3 to reflect the suggested change to the reference. The Department understands that EPA's model rule includes language stating how a baseline heat input is calculated. However, the Department also understands that the allocation section may be modified by states to incorporate a different methodology for allocating allowances. The Department has modified the allocation section to be consistent with New York's current NOx Budget Trading Program. The Department does not feel that incorporating the suggested change to the heat input calculation is necessary in this case and does not have an impact on New York's allocation of CAIR allowances.
23. Comment - In 243-5.3(b)(5), (c)(5), (d)(5) and (e)(5) New York should replace the word "transfer" with the word "allocate" in the first sentence. (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
24. Comment - In 243-5.3(c), New York needs to revise the title of this paragraph consistent with the comment above on 243-5.3(a)(2). (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
25. Comment - 243-5.3(f)(2) needs to be revised to state that the Department will establish one "new unit set-aside", not a "general account", for each control period. There needs to be a consistent method for EPA to keep track of new unit set-asides and allowance allocations for all States. In operating the allowance tracking system, EPA segregates pools of allowances reflecting the amounts that each State sets for the new unit set-asides. Under EPA's model trading rule, States calculate the new-unit allocations and submit the resulting figures to EPA by July 31, and EPA records the allocations from the appropriate new-unit set-aside pool in the appropriate compliance accounts by September 1. In paragraphs in 244-5.3(e) and (f), references should be made to "the new unit set-aside account", not "new CAIR NOx Ozone Season unit set-aside allocation general account", and references to the "general account" should be corrected. (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
26. Comment - Throughout 243-5.3(f), the words "new CAIR NOx Ozone Season unit set-aside" need to be revised to read "CAIR NOx Ozone Season new unit set-aside". (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
27. Comment - EPA notes that, under 243-5.3(f)(4), it appears that every new unit must be allocated allowances from the new unit set-aside for five years, even though a baseline of only three years is required to calculate allowances for existing units. EPA notes this to ensure that this is what New York intends. (1)
Response - The Department is required to allocate CAIR NOx allowances four years in advance of the control period, therefore in order to provide new units with enough allowances to operate during the period before they are able to draw from the existing unit pool, the Department is allowing new units to receive allowances from the new unit set-aside for up to six years.
28. Comment - New York must revise 243-5.3(f)(8). Under 40 CFR 51.123(aa)(2)(iii)(D), New York must submit, to the Administrator for recordation, the new unit set-aside allocations for a given year by July 31 of that year. The Administrator must record the allocations by September 1. The provision in New York's rule (243-5.3(f)(8)) must be revised to state that the Department must submit to the Administrator the amounts of the reserved CAIR NOx allowances from a new unit set-aside by July 31 of the year to which the new unit set-aside applies. Further, 243-5.3(f)(8) must state that the allocations be submitted to the Administrator, in a format prescribed by the Administrator, by the applicable deadline. (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
29. Comment - New York must revise 224-5.3(c)(8). Under 40 CFR 51.123(o)(2)(ii)(C ), New York must submit, to the Administrator for recordation, the new unit set-aside allocations for a given year by October 31 of that year. The Administrator must record the allocations by December 1. The provision in New York's rule (224-5.3(c)(8)) must be revised to state that the Department must submit to the Administrator the amounts of the reserved CAIR NOx allowances from a new unit set-aside by October 31 of the year to which the new unit set-aside applies. Further, 244-5.3(c)(8) must state that the allocations be submitted to the Administrator, in a format prescribed by the Administrator, by the applicable deadline.
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
30. Comment - In 243-5.3(f)(9), there appears to be a typographical or wording error in the third sentence in the phrase "that includes an existing CAIR NOx unit are in excess". (1)
Response - The Department agrees with this comment and will revise the express terms.
30. Comment - In 243-5.3(g)(3), there appears to be a typographical or wording error in the second paragraph in the phrase "that includes an existing CAIR NOx unit are in excess". (1)
Response - The Department agrees with this comment and will revise the express terms.
243-6.2, 244-6.2 Establishment of accounts
31. Comment - In 243-6.2(b)(4), the word "alternative" should read "alternate". Throughout New York's rule, the correct term is "alternate" (not "alternative") CAIR authorized account representative. (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
32. Comment - In 243-6.2(b)(4)(ii), New York needs to revise the words "the Department" to read "the Administrator". This change will make the provision consistent with EPA's model trading rule and New York's CAIR SO2 trading rule. (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
243-6.4, 244-6.4 Recordation of CAIR NOx allowance allocations.
33. Comment - In 243-6.4(a), New York needs to add the deadline of September 30, 2007 for the Administrator to record allocations and needs to revise the words "in accordance with subdivision 243-5.2" to read "in accordance with subdivision 243-5.2(a), for the control periods in 2009, 2010, and 2011." (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
34. Comment - A new paragraph needs to be added that reads as follows: "By December 1, 2008, and December 1 of each year thereafter, the Administrator will record in the CAIR NOx source's compliance account the CAIR NOx allowances allocated for the CAIR NOx units at the source, as submitted by the Department in accordance with subdivision 243-5.2(b), for the control period in the fourth year after the applicable deadline for recordation under this paragraph." (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
35. Comment - Another new paragraph needs to be added that reads as follows: "By September 1, 2009 and September 1 of each year thereafter, the Administrator will record in the CAIR NOx source's compliance account the CAIR NOx allowances allocated for the CAIR NOx units at the source, as submitted by the Department in accordance with subdivision 243-5.3(f)(8) for the control period in the year of the applicable deadline for recordation under this paragraph." (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
243-6.5, 244-6.5, 245-6.5 Compliance with CAIR emissions limitation.
36. Comment - 243-6.5. The title should be revised to add "Ozone Season" between "NOx" and "emissions". (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
37. Comment - In 243-6.5(d)(2)(i), New York needs to remove the words "unless the owners and operators of the unit demonstrate that a lesser number of days should be considered". This language is inconsistent with 243-1.6(d)(2), which reflects the language in EPA's model trading rule at 40 CFR 96.306(d)(2). The provision in 243-1.6(d)(2) and in 40 CFR 96.306(d)(2) correctly states what constitutes a violation under the Clean Air Act, and this cannot be changed by a State Implementation Rule. While the provision in 243-6.5(d)(2)(i) needs to be revised, New York will still retain enforcement discretion in applying the discretionary civil penalty provisions under the Clean Air Act to specific cases. (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
38. Comment - In 243-6.5(f)(1) and (2), New York needs to remove the words "the Department or". These provisions relate to the allowance tracking system, which is established and operated by the Administrator. These changes will make the provisions consistent with EPA's model trading rule and New York's CAIR SO2 trading rule. Section (f) relates to 'Administrator's action on submissions' to the Allowance Tracking System. EPA would be receptive to New York adding a provision to the rule which allows the "Department" to perform audits and correct allocations due to errors prior to the EPA Administrator recording the allocations in the source's compliance account. New York should consider adding the provision to section 243-5.3 CAIR NOx Ozone Season allowance allocations. (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
243-8.2, 244-8.2 Initial certification and recertification procedures.
39. Comment - In 243-8.2(d)(3)(v)('a')('5'), the word "accepted" needs to be revised to read "excepted". (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
40. Comment - In 243-8.2(f), the words "the Administrator" need to be revised to read "the Administrator and, if applicable, the Department". (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
243-8.5, 244-8.5, 245-8.5 Recordkeeping and reporting.
41. Comment - In 243-8.5(d)(4), New York has deleted the words "Hg Budget Trading Program" that are in EPA's model trading rule. EPA understands that New York sources will not be participating in the Hg Budget Trading Program. However, under the requirements of the Clean Air Mercury Rule (CAMR), each unit subject to CAMR must monitor and report mercury emissions according to 40 CFR Part 75, and the unit's quarterly reports of emissions data must include mercury emissions data, as well as SO2 and NOX data if the unit is also subject to the EPA-administered CAIR SO2 and NOX trading programs. Therefore, New York should require that, if the unit is subject to the requirements of CAMR (or New York's rule implementing CAMR), the quarterly report must include applicable data and information required by 40 CFR Part 75, Subparts F through I. (1)
Response - The Department agrees with this comment and will include language to include New York's Hg reduction program.
243-9.4, 244-9.4, 245-9.4 Applying for CAIR opt-in permit.
42. Comment - In 243-9.4, New York has deleted the provision in 40 CFR 96.183(b), which provides that, unless the Department issues a notification of acceptance of withdrawal of an opt-in unit from the CAIR trading program or the unit becomes subject to the program under the general applicability provisions in 243-1.4, the opt-in unit remains subject to the requirements for opt-in units even if the designated representative fails to submit an application necessary to renew the CAIR opt-in permit. Since it seems that opt-in permits issued by the Department, like other title V permits, would have a limited term and so would need to be renewed, this deletion is inconsistent with EPA's model rule and could allow a unit to terminate its status as an opt-in unit without meeting the conditions for withdrawal. (1)
Response - The Department respectfully disagrees with this comment. Under 243-9.7 requires the designated CAIR representative to request withdrawal of a permit and specifies the conditions of withdrawal. The CAIR opt-in permit is incorporated into the facility's Title V or State Facility Permit. A State Facility Permit does not expire. Therefore, there is not a need for units with State Facility Permits to reapply. Title V Permits expire every five years and a facility having a Title V Permit is required to renew that permit in order to continue operating. Based on the facility's obligation to renew under Title V, 6 NYCRR Part 201, the air permitting regulation, would not allow a unit to terminate its status as a CAIR opt-in unit without meeting the conditions for withdrawal.
243-9.5, 244-9.5, 245-9.5 Opt-in process.
43. Comment - Since, as discussed above, it seems that opt-in permits issued by the Department would have a limited term and so would need to be renewed through submission of another application, the words "the application" in 243-9.5 and 243-9.5(a) need to be revised to read "the initial application". (1)
Response - The Department respectfully disagrees with this comment. The Department uses slightly different terminology that requires an application to opt-in to the CAIR program and refers to subsequent renewal applications and renewals. The Department does not use the term "initial application" in the Title V permitting context, therefore to maintain consistency with Part 201, the Department's air permitting regulation, the Department will continue to use the term "application" to mean "initial application" and "renewal" to mean any subsequent applications. Opt-in units may include facilities that are not required to obtain Title V permits, and those units would receive State Facility Permits under 6 NYCRR Subpart 201-5 that do not expire.
44. Comment - In 243-9.5(e), the words "issue a CAIR opt-in permit to the Administrator" need to be revised to read "will issue a CAIR opt-in permit. The Department will provide a copy of the CAIR opt-in permit to the Administrator". (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
EPA Comments on Part 244 - New York's CAIR NOx Annual Trading Program
244-1.2 Definitions
45. Comment - "nameplate capacity", New York needs to add, before the words "as specified by the manufacturer", the words "as of such installation" and to add, before the words "as specified by the person", the words "as of such completion". This is necessary to make the definition of this term consistent with the EPA's model rule and with the definition used in New York's CAIR SO2 trading rule. (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
244-8.3 Out of control periods.
46. Comment - In 244-8.3(b), New York needs to revise the second sentence to add the words "the Department or" before the words "the Administrator". (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
244-9.8 Change in regulatory status.
47. Comment - In 244-9.8(a), New York needs to revise the words "the Department" to read "the Department and the Administrator". This change will make the provision consistent with EPA's model trading rule and New York's CAIR SO2 trading rule. (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
244-9.9 CAIR NOx allowance allocations to CAIR NOx opt-in units.
48. Comment - In 244-9.9(a)(1) and (2), New York add, after the words "will allocate CAIR NOx allowances to the CAIR NOx opt-in unit" the words "and submit to the Administrator the allocation". These changes will make the provisions consistent with EPA's model trading rule and New York's CAIR SO2 trading rule. (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
245-1.2 Definitions
49. Comment - In the definition of "CAIR NOx Ozone Season Trading Program", the words "in accordance" should be revised to read "in accordance with". (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
50. Comment - In the definition of "CAIR SO2 Trading Program", the words "in accordance" should be revised to read "in accordance with". (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
245-8.2 Initial certification and recertification procedures.
51. Comment - In 245-8.2(d)(3)(v)('c'), New York needs to revise the words "as indicated in the Administrator's notice" to read "as indicated in the Department's or the Administrator's notice". Under 245-82(d)(3)(v) and 40 CFR 96.271(d)(3)(v), the notice may be issued by the Department or the Administrator. (1)
Response - The Department agrees with this comment and will revise the express terms accordingly to incorporate the suggested revision.
52. Comment - Provisions of The Proposed CAIR NOx Trading Program Rules Are Unconstitutional and 'Ultra Vires'. The proposed Parts 243 and 244 would allocate 10 percent of NOx annual and ozone season emission allowances to the Energy Efficiency and Renewable Energy Technology Account (EERET Account). According to the Regulatory Impact Statement (RIS) for the proposed CAIR NOx Trading Program, the EERET Account will be administered by the New York State Energy Research and Development Authority (NYSERDA) and the allowances in the account "will be sold" in support of the "emissions goals of the CAIR NOx Trading Program by rewarding investments in energy efficiency and renewable energy technologies, and/or innovative abatement technologies." The RIS further states that "each emissions allowance represents a commodity of value that must be consumed in order to operate a power plant."1 (2, 5)
Sale of emissions allowances for revenue raising purposes constitutes a tax. Under the proposed CAIR rule, the Department of Environmental Conservation (NYSDEC) and its agent, NYSERDA, will sell or otherwise distribute the allowances to raise revenue in support of public benefit projects. The level of revenue generated by the sale of the allowances will be a function of market economics - and will have no relationship to the actual costs of administering the licensing/regulatory program. Because the revenue collected through this licensing/regulatory scheme will exceed the expenses associated with administering the CAIR NOx Trading Program, NYSDEC is proposing to establish a tax. Under the state constitution, however, only the legislature may create a tax. An administrative agency, such as NYSDEC, cannot establish a tax without unambiguous legislative authority. Because the legislature has not authorized the revenue raising/taxing measures included in the proposed CAIR NOx Trading Program, NYSDEC's proposed rules are unconstitutional and 'ultra vires'.2 In addition to the proposed EERET Account set-aside constituting an illegal tax (as set forth above) irrespective of the size of the set-asides, the proposed increase in the quantity of allowances for use in support of energy efficiency and renewable energy represents an unnecessary and significant impact on the State's fossil generation sources and ultimately upon the ratepayers and the business climate in New York. (2, 5, 9)
If NYSDEC and/or NYSERDA take the position that they have legislative authority to raise revenue in the manner described in proposed 6 NYCRR Parts 243 and 244, AES respectfully requests that NYSDEC and/or NYSERDA specify where such authority is derived. Environmental Conservation Law (ECL) Articles 1, 3 and 19, which are cited in the proposed rulemaking package, do not provide such authority. The RIS states that sale of allowances through an auction is a "way in which the Department may allocate allowances." To the extent NYSDEC maintains that it possesses legislative authority to raise revenue through the sale of emissions allowances, the Alliance respectfully requests that NYSDEC specify the statutory basis for such authority. If NYSDEC and/or NYSERDA believe that the allocation of allowances to the EERET Account for the purposes enumerated in the proposed rulemaking materials 'does not' constitute a tax, the legal basis for that position should be articulated. (2, 5)
Under its enabling legislation, NYSERDA is not empowered to either receive and sell emissions allowances or fund projects on behalf of NYSDEC. NYSERDA's proposed function in the CAIR emission allocation proposal is fundamentally governmental in nature and would entail NYSERDA acting within the framework of NYSDEC's regulatory process to sell or distribute emissions allowances needed for regulated entities to operate - with the resultant revenues being used to support public benefit projects. In its rulemaking materials, NYSDEC expressly refers to NYSERDA as its "agent." NYSERDA is not empowered under its enabling legislation to receive, sell or distribute NOx emissions allowances from the EERET Account. NYSERDA is also subject to the same legal constraints applicable to the imposition of taxes or fees as is NYSDEC. As a result, NYSERDA would be acting 'ultra vires' and in derogation of the State Constitution in this role. (2)
Response - The Department inadvertently included the word "agent" in the Express Terms Summary. The Department does not refer to NYSERDA as its agent anywhere in the proposed rules. The Express Terms Summary will be revised to remove "agent."
The allocation of the CAIR NOx ozone season allowances and CAIR NOx allowances (hereinafter simply "allowances") to the Energy Efficiency and Renewable Energy (EERET) Accounts under proposed Parts 243 and 244 is an exercise of the Department's regulatory or police power under the Environmental Conservation and the State Energy Law.3 This power is consistent with the policy of the State as expressed in section 4 of Article XIV of the New York State Constitution. The EERET Account allocation is not tantamount to the imposition of a tax.
In two respects, the EERET Account allocation also represents an incremental change in the evolving field of air pollution control regulation. First, it attempts to retain, for purposes of protection of the environment and public welfare, the value of a public resource for which the Department is responsible. Second, it represents an increasing recognition that regulatory efforts to control air pollution can no longer be restricted to a focus on single pollutants and end-of-stack measures but must be designed to allow the implementation of measures that are part of an integrated multipollutant approach. One of the key elements of such an approach is to greatly enhance the use of energy efficiency (EE) and renewable energy (RE) technologies.
The air is a public resource. As such, the air belongs to no one. Pursuant to ECL Sections 1-0101, 3-0301, 19-0103, and 19-0105, the Department is responsible for preserving this public resource by regulating sources that send pollution into the air. ECL Section 1-0101 provides that it is the responsibility of the State government to act as trustee of the environment, including the air resource, for present and future generations.
Allowances are the basic currency used in an emissions cap-and-trade system. It is essential that one understand the true nature of allowances in order to properly evaluate the propriety of the Department's inclusion of the EERET Account allocation in the proposed rules.
The definition of an allowance - and even the very name "allowance" - conveys the message that an allowance is a type of license to use a public resource. Under proposed Parts 243 and 244, an allowance is defined, in pertinent part, as "a limited authorization issued by a permitting authority or the Administrator under provisions of a State implementation plan
The total number of allowances in a cap-and-trade program that have a current or past year vintage constitutes an emissions cap for all sources subject to the program. By setting a cap or limit on the number of tons that all sources in the program may legally emit, the program imposes a scarcity of use of the air resource by the covered sources. The substantial ongoing volume of NOx emissions by sources to be covered by proposed Parts 243 and 244 represents a demand to use the air resource as a means of NOx pollution disposal. The allowances form a commoditized supply of the public resource that is available for this disposal use. This type of scarce commodity has a substantial market value. The value is drawn or produced from the public resource and it is ultimately to the public that that value belongs.
The Department's decision on how to allocate allowances inescapably involves the transfer of some value or wealth. In the absence of a statutory directive to transfer this wealth to pollution sources for free, the Department believes the value should be retained for the benefit of the environment and the public welfare in a manner that is within the authority granted to the Department. By allocating allowances to NYSERDA, the Department has created a mechanism by which the value of the allowances may be used to promote EE/RE technologies to reduce air pollution. NYSERDA is the entity created by the State Legislature that is most qualified and equipped to achieve this environmental protection goal in this way.
As a general matter, when allowances are allocated for free, consumer prices are not lower than they would have been had the allowances been sold. The cost of allowances - especially with regard to electricity generators that operate in a deregulated electricity supply market such as exists in New York State - is eventually passed along to consumers. The Congressional Budget Office succinctly described this phenomenon as follows:
A common misconception is that freely distributing emission allowances to producers would prevent consumer prices from rising as a result of the cap. Although producers would not bear out-of-pocket costs for allowances they were given, using those allowances would create an "opportunity cost" for them because it would mean forgoing the income that they could earn by selling the allowances. Producers would pass that opportunity cost on to their customers in the same way that they would pass along actual expenses. That result was borne out in the cap-and-trade programs for sulfur dioxide in the United States and for CO2 in Europe, where consumer prices rose even though producers were given
allowances for free.
Thus, giving away allowances could yield windfall profits for the producers that received them by effectively transferring income from consumers to firms' owners and shareholders.
'Trade-offs in Allocating Allowances for CO2 Emissions', p. 3, Congressional Budget Office (April 25, 2007) <http://www.cbo.gov/ftpdoc.cfm?index=8027&type=1>. See also, 'Evaluation of CO2 Emission Allocations as Part of the Regional Greenhouse Gas Initiative - Final Report', pp. 9 and 14, Center for Energy, Economic & Environmental Policy, Edward J. Bloustein School of Planning and Public Policy (June 30, 2005) <http://www.policy.rutgers.edu/ceeep/events.html>.
The majority of air pollution is the result of creating energy. Most energy usage is derived from the burning of fossil fuels. In the United States, fossil fuel combustion is responsible for about 93 percent of NOx emissions, 91 percent of sulfur dioxide (SO2) emissions, 70 percent of greenhouse gas emissions, and a significant fraction of fine particulate matter emissions.6
The Department is among a growing number of environmental regulatory agencies that have found that the most effective new measures to prevent or control air pollution entail efforts to reduce the quantities of fossil fuels that need to be combusted to create the amount of energy that our society needs. Much greater development and use of EE/RE technologies would help achieve very significant and simultaneous reductions in emissions of a number of different air pollutants.
The United States General Accountability Office (GAO) recently wrote about the need for immediate and sustained government action to encourage advanced energy technologies that will alleviate or avert environmental perils. The GAO also explained how States are now addressing this need through initiatives to produce and use energy more cleanly and efficiently.
The nation is once again assessing how best to stimulate the deployment of advanced energy technologies in response to recent high energy prices - caused by the growing world demand for energy, wars in the Middle East, and last year's hurricanes - and concerns about the adverse environmental effects, particularly greenhouse gas emissions, of using conventional fossil energy. Reducing the nation's dependence on oil and carbon dioxide emissions in the next 25 years is not unlike the 1960s challenge to put a man on the moon. Without sustained high energy prices or concerted, high-profile federal government leadership, U.S. consumers are unlikely to change their energy-use patterns, and the United States will continue to rely upon its current energy portfolio. Specifically, government leadership is needed to overcome technological and market barriers to deploying advanced energy technologies that would reduce the nation's vulnerability to oil supply disruptions and the adverse environmental effects of burning fossil fuels.
The nation's current energy portfolio has raised concerns about the adverse environmental effects of energy generation - particularly greenhouse gas emissions from coal-fired and oil-fired power plants and the long-term storage of spent nuclear fuel.
. . . .
Several states have taken the lead in encouraging the deployment of advanced energy technologies, particularly in renewable energy. For example, in the past 7 years, Texas tripled its renewable energy use as a result of its renewable portfolio standard. Similarly, Minnesota's ethanol program has displaced 10 percent of gasoline consumption with ethanol. Many other states have initiatives to stimulate renewable energy generation as well. States' initiatives that diversify our energy portfolio and reduce harmful emissions are positive steps.
'Key Challenges Remain for Developing and Deploying Advanced Energy Technologies to Meet Future Needs', pp. 53-54, U.S. General Accountability Office, GAO-07-106 (December 2006) <www.gao.gov/new.items/d07106.pdf>.
RE technologies include, among other things, those that create electrical power from solar, hydro, geothermal, or wind energy. These technologies may allow the displacement of electrical power that otherwise would depend on the combustion of fossil fuels. To the extent that these cleaner sources of energy displace sources that combust fossil fuels, they allow a further tightening of air pollution control standards than would otherwise be feasible. With greater utilization of RE technologies, the Department could lower emissions caps in current electricity sector cap-and-trade programs.
A major reason that EE measures cost-effectively achieve emissions reductions across a range of pollutant categories is that the emission reductions are implemented through a single technology at the end-use. When emissions reductions are sought at the smokestack, a number of different technologies may need to be employed, some of which may have limiting or counterproductive effects on emissions reductions for other pollutants. For example, flue-gas scrubbing equipment typically consumes energy so the installation of the equipment will increase power generation at the electricity generator and thereby increase CO2 emissions while SO2 emissions are reduced. In the situation where a fuel input is changed in response to a new regulatory limit, a similar circumstance may occur. For example, if a source switches from high to low sulfur coal to comply with an SO2 limit the substituted coal may increase mercury emissions. If EE measures are implemented at the end-user of electrical power, the demand for electrical power is reduced with a concomitant lessening of the burning of fossil fuels. This leads to the elimination of all air pollution that would have been attributable to the foregone fossil fuel combustion.
Staff of the Northeast States for Coordinated Air Use Management, of which New York State is a member, recently articulated the need for a multipollutant perspective in air pollution regulation and explained how auctioning emissions allowances (with the goal of encouraging energy efficiency) could fit within this new approach.7
Increasingly, however, states are facing a more complex set of challenges. These include new findings in science supporting more stringent health-based standards; newly defined pollution problems, including pollutant interactions and localized impacts; industrial sectors that are highly regulated; an increasingly aware and concerned public; and dwindling resources.
Traditionally, governments have responded to air quality problems on a pollutant-by-pollutant basis. However, recent challenges in addressing ground-level ozone (O3) nonattainment and global climate change have been catalysts for the Northeast states to recognize the limits of the existing air quality management framework and the importance of moving to a more holistic, multipollutant approach. These issues cut across sectors as well as agency jurisdictions.
Integrated multipollutant planning has the potential to be a more efficient and economical way to address today's environmental and public health issues.
. . . .
Multipollutant planning can also help identify unintended consequences of various control approaches and select the best mix of policies and controls, given the mandate to protect public health and the environment. Moving to this approach requires changing the way agencies currently problem-solve and interact with one another, and takes considerable time, effort, and support.
In the Northeast, states have taken vital steps toward integrated multipollutant planning by establishing crossjurisdictional connections, considering creative alternatives to traditional problem-solving and regulation, and creating measurement and analysis tools.
. . . .
A critical step in state multipollutant planning is to establish cross-jurisdictional connections. With the advent of the Ozone Transport Commission's NOx Budget Program and EPA's NOx SIP Call, the Northeast states became proactive in incorporating energy efficiency incentives into their air quality programs. They established more formal connections between agencies, hosting cross-training workshops with air and energy staff, testing innovations through pilot programs, developing metrics and tools linking air and energy goals, and quantifying energy efficiency for state implementation plans (SIPs). These efforts have provided valuable insights and experience toward successful multiple pollutant integration.
The connections forged between high-level air quality and energy officials in developing output-based standards and energy set-asides for the SIP Call required collaboration among policy-makers with sometimes disparate or competing interests and priorities that has continued with the Regional Greenhouse Gas Initiative (RGGI). A critical element for the success of future efforts will be aligning the interests of environmental, energy, and other state agencies to the greatest extent possible. With RGGI, for example, air quality and energy policy-makers are working toward an agreed-upon objective of reducing CO2 emissions in a cost-effective manner that will not compromise energy system reliability.
States must continue to consider creative alternatives to traditional problem-solving and regulatory approaches in multipollutant planning. For example, the push in the 1990s toward market-based solutions to air quality problems, including the acid rain and NOx cap-and-trade programs, was successful in reducing regional criteria pollutant emissions in the Northeast.
. . . .
Given that easily available emissions reductions from the typically regulated sources are decreasing and their costs per ton are increasing, states now seek solutions beyond traditional constructs. For example, the Northeast states are considering the innovative use of demand-side initiatives, including energy efficiency, to address growing NOx emissions that coincide with days of high electricity demand. Electric power plants and generators that are used to meet this demand are among the highest emitting power plants in the region during the periods that the region experiences unhealthy air quality. A peak-day power generator strategy, coupled with a strong consumer education/energy conservation component, could yield significant and cost-effective emissions reductions.
. . . .
States must continue to look beyond basic CAA requirements to ensure tools are developed that support state-based multipollutant programs.
. . . .
Decades of stove-piped federal and state statutes have created institutional and structural obstacles to more integrated approaches. The statutes require agencies to develop plans solely aligned along specified air quality objectives. Tracking SIP progress typically relies on prescribed metrics that may not reflect cross-media or cross-program impacts. Funding is often focused on or earmarked to media- and issue-specific progress, so that multipollutant environmental objectives cannot be easily met.
. . . .
Agencies are constrained by single-pollutant funding streams. One way to change this would be to use revenues from auctioning GHG and other pollution credits (i.e., encouraging a shift from allocating NOx and SO2 credits to generators) for research and development and subsidizing energy efficiency programs. For example, the solar technology market, which provides effective multipollutant benefits, needs to be transformed to be competitive.
Leah Weiss, Michelle Manion, Gary Kleiman, and Christopher James, 'Building Momentum for Integrated Multipollutant Planning - Northeast States Perspective', EM, pp. 25- 28, Air and Waste Management Association (May 2007) <http://www.nescaum.org/documents/building-momentum-for-integrated-multipollutant-planning-northeast-states-perspective/building-momentum-for-integrated-multipollutant-planning-northeast-states-perspective/>.
The current actions of the Department and other air pollution control agencies in the Northeast are part of an ongoing evolution in mechanisms to address air pollution. The latest multi-pollutant and EE/RE efforts stem from a January 2004 report published by the National Research Council (NRC) that assessed air quality management practices.8 The NRC report, 'Air Quality Management in the United States', National Academies Press (January 2004) <http://www.nap.edu/books/0309089328/html>, recommended, among other things, that air quality management practices should strive to take an integrated multi-pollutant approach to controlling emissions of pollutants posing the most significant risks. 'Id'. at 16.
In March 2005, EPA's Clean Air Act Advisory Committee9 formed the Air Quality Management (AQM) Subcommittee and charged the AQM Subcommittee to develop recommendations that would improve the air quality management system and address the air quality challenges expected to confront officials over the next 10 to 20 years. The AQM Subcommittee, on which staff of the Department sat, used the NRC report as a foundation for its efforts. The AQM Subcommittee issued its draft recommendations in May 2007. See 'Recommendations to the Clean Air Act Advisory Committee, Air Quality Management Subcommittee, Phase II Recommendations, June 2007' (July 17, 2007 Final Report Draft). Within the context of its overarching recommendation that EPA and the States should adopt an integrated multi-pollutant approach to managing air quality, the AQM Subcommittee wrote the following specific recommendations:
Recommendation 7: Encourage pollution prevention, energy efficiency and renewable energy - 'Analyze existing laws to determine the extent to which they can be used to encourage pollution prevention, energy efficiency, and renewable energy as they may be effective in reducing emissions'.
. . . .
A clean air strategy that takes full advantage of opportunities to use pollution prevention, energy efficiency and renewable energy measures may offer three advantages. First, such an approach could, with a single investment, reduce multiple emissions and reduce and/or eliminate pollutants and emissions to other media, as well as emissions that are currently unregulated but which may be in the future. Second, viewed from a systems perspective (as the Energy Policy Act dictates) pollution prevention, energy efficiency and renewable energy measures may be more cost effective than command and control strategies. Third, such measures may help the U.S. accomplish important public policy goals outside the environmental and clean air arena, such as energy security, national security and homeland security. Many states have established pollution prevention programs that have garnered tremendous successes.
'Id'. at 37 and 38.
Recommendation 9: Overcome potential barriers to clean energy/air quality integration - 'EPA should work with state, tribal, and local air agencies, energy organizations, and regional air quality planning organizations to overcome potential barriers to clean energy/air quality integration'.
. . . .
There is limited precedent for adoption of energy efficiency and renewable energy measures within SIPs and TIPs. States must submit ozone and PM2.5 SIPs over the next two years, leaving little time to accommodate the lengthy process required for incorporating energy efficiency and renewable energy measures into the plans. Notwithstanding, EPA should lead the way now to overcome real and perceived obstacles to including energy efficiency and renewable energy measure adoption and inclusion in SIPs and TIPs.
'Id'. at 41 and 42.
At the same time that the Department was working on the AQM Subcommittee, New York State, acting primarily through NYSERDA, continued its involvement in EPA's voluntary Clean Energy-Environment State Partnership Program. EPA describes this program as follows:
"Under the Partnership Program, states work across their relevant agencies to develop and implement a comprehensive strategy for using existing and new energy policies and programs to promote energy efficiency, clean distributed generation, renewable energy, and other clean energy sources that can provide air quality and other benefits. They are establishing and working toward achieving one or more specific and robust clean energy-air quality goals, including state goals for cost-effective clean energy." 10
This federal-State initiative is one of many public and non-profit initiatives that are helping to develop, sustain, and expand the connections that are necessary to address air pollution, energy use, national security, and economic development in a comprehensive, integrated, and cost-effective manner.11
The establishment of the EERET Account allocation and NYSERDA's possible use of the value resulting from allowance sales amounts to an adjustment in the way New York State government is addressing the problem of air pollution. By beginning the shift of allocating allowance values from polluting industries to EE/RE measures, the Department is acting within its statutory authority to protect and preserve the air resource for present and future generations. Although, the Department has chosen to allocate only 10 percent of both the CAIR NOx Ozone Season Trading Program Budget and the CAIR NOx Annual Trading Program Budget to the EERET account at the present time, it has indicated that it is considering expanding the scope of this allocation in the future.12 Regulated sources will benefit by having this advance notice of a possibly much larger sale of allowances in the future.
The allocation to the EERET Account bears a number of similarities to existing EE/RE set-asides established by States pursuant to the NOx SIP call. EPA actively supported States that wished to create EE/RE set-asides and promoted them as an innovative way to promote EE/RE development within the cap-and-trade regulatory context. EPA published three guidance documents to assist States in establishing EE/RE set-asides. See http://www.epa.gov/cleanenergy/stateandlocal/guidance.htm.
Among the six States that created EE/RE set-asides allocations, the allocations have ranged in size from one to five percent of the particular State NOx budgets.13 Each set-aside allocation constituted the transfer of allowance value to the sponsors or developers of eligible EE/RE projects. Allowances received by EE/RE project sponsors under these set-asides are ultimately sold to sources needing the allowances for compliance purposes. For the purchasing source, the allowance transaction is essentially the same as purchasing an allowance that is sold by NYSERDA. Under the EE/RE set-asides and the proposed EERET Account allocation, a portion of the State's total allocation of NOx allowances is not given to emitting sources for free. Instead, that share of allowances is initially allocated to third parties with the regulated sources ultimately purchasing those allowances in the marketplace.
The Department previously established EE/RE set-asides in the Pre-2003 Nitrogen Oxides Emission Budget and Allowance Program (Subpart 227-3), the NOx Budget Trading Program (Part 204), the Acid Deposition Reduction Program NOx Budget Trading Program (Part 237), and the Acid Deposition Reduction Program SO2 Budget Trading Program (Part 238). The Department's experience with these programs has been that they have been under-subscribed and have had no significant encouraging effect on the development of EE/RE projects. This experience appears to have been shared by other States.14
As a general matter, it appears that the under-subscription of the EE/RE set-asides is due to the fact that allowance prices have not been sufficiently high to provide an adequate incentive to undertake EE/RE projects. EE/RE projects individually account for very minor amounts of NOx or SO2 reductions so that numerous projects need to be aggregated for even one allowance to be awarded. This need for aggregation, often spread over multiple project owners, along with the requirement for project sponsors to engage in complicated single pollutant emissions reduction accounting procedures, imposes very significant transaction costs on top of the other substantial development costs for these projects. Furthermore, the extent that project sponsors can realistically rely on future allowance sales in order to secure initial project financing is not great. Before an EE/RE project sponsor may be awarded allowances from an EE/RE set-aside, the project must be complete and have been in operation long enough to generate operating data that would be used to demonstrate the emissions reductions (through assumed electrical power demand displacement) for which the allowances may be awarded. The long time delays and lack of certainty concerning such awards make the EE/RE set-asides have relatively little appeal for potential project sponsors.
The EERET Account allocation is a successor mechanism to the EE/RE set-aside allocations. Having gained the experience with the EE/RE set-asides, the Department thinks the EERET Account allocation will avoid the problems found with the administration of the EE/RE set-asides.
The EERET Account is defined in proposed Parts 243 and 244 as follows:
'Energy efficiency and renewable energy technology account'. A general account that may be opened by the New York State Energy Research and Development Authority (NYSERDA) from which allowances will be sold or distributed in order to provide funds to be used to support programs that encourage and foster energy efficiency measures and renewable energy technologies and cover the reasonable costs associated with the administration and evaluation of these programs by NYSERDA.
Proposed Sections 243-1.2(b)(40) and 244-1.2(b)(36).
Should NYSERDA establish the EERET account, the Department anticipates that NYSERDA, acting pursuant to its own enabling statutes, would sell or distribute emissions allowances to support programs as described in the EERET Account definition. The programs to be funded by the sale of allowances are related to the reduction of air pollution and are in furtherance of the statutory purposes and mandates of the Department and NYSERDA.
Pursuant to Energy Law Section 3-103 the Department is obligated to conduct its affairs so as to conform to the State's energy policy that is set forth in Energy Law Section 3-101. Energy Law Section 3-101 provides that it is the energy policy of the State to obtain and maintain an adequate and continuous supply of safe, dependable and economical energy for the people of the State and to accelerate development and use within the State of renewable energy sources, in order to, among other things, protect its environmental values and husband its resources for future generations.
ECL Section 3-0301 empowers the Department to coordinate and develop programs to carry out the environmental policy of New York State set forth in ECL Section 1-0101 which includes the prevention of air pollution and promoting technology that minimizes adverse impacts to the environment. Section 3-0301 also specifically empowers the Department to provide for the prevention and abatement of air pollution; encourage and undertake scientific investigation and research on pollution prevention and abatement; and assess new and changing technology to identify long-range implications for the environment and encourage alternatives that minimize adverse impact.
In carrying out its powers and duties, ECL Section 3-0301 also provides that the Department is to consult and cooperate with officials of other State agencies having duties and responsibilities concerning the environment as well as officials and representatives of any public benefit corporation.
The inclusion of the EERET Account allocation in the proposed rules is not a mandate for NYSERDA action. The allocation is contingent upon NYSERDA's affirmative act of establishing the EERET Account. Should NYSERDA establish the EERET Account, it would do so pursuant to its own statutory authority.
NYSERDA's statutory authority springs from Title 9 of the Public Authorities Law (PAL). In enacting Title 9, the legislature declared, in relevant part, that the purpose of NYSERDA is, among other things, to promote the development and utilization of "safe, dependable, renewable and economic energy sources and the conservation of energy and energy resources." PAL Section 1850-a. The statute directs NYSERDA to develop and implement [these] new energy technologies and energy conservation technologies in a manner consistent with economic, social and environmental objectives. PAL Sections 1851(10) and (11); and 1854. In exercising its statutory powers, NYSERDA is directed to cooperate and act in conjunction with various entities, including State agencies, in exercising its powers, and is authorized to provide services to State agencies in furtherance of its corporate purposes. PAL Section 1854(2). Pursuant to PAL Section 1855, NYSERDA is specifically empowered to accept from any State agency the grant of any aid in any form and to comply, subject to the relevant provisions of NYSERDA's enabling legislation, with the terms and conditions of the grant of the aid. PAL Section 1855 also provides that NYSERDA may receive, acquire, sell, and dispose of any personal property,15 and may "enter into any contracts and to execute all instruments necessary or convenient for the exercise of its corporate powers and the fulfillment of its corporate purposes." PAL Section 1855(5) and (10). Finally, the statute provides NYSERDA with the authority "to do all things necessary or convenient to carry out its corporate purposes and exercise the powers given and granted by this title." PAL Section 1855(17).
Given the numerous references and express emphasis in NYSERDA's enabling statutes on the development of energy conservation and renewable energy resources, as central to NYSERDA's purpose, NYSERDA's establishment of the EERET Account and use of allowance sale revenues for the purposes stated in the EERET Account definition would clearly fall within the authority granted to NYSERDA by Title 9 of the PAL.
Any funds generated by NYSERDA by the sale of allowances would be kept and used by NYSERDA. None of the funds would come to the Department or support Department operations. However, the value of the allowances would be used for measures aimed at air pollution control. These measures would include the development and deployment of technologies that could address a number of different air pollutants that are emitted by various types of sources in New York State. These types of sources may be found in any stationary or mobile source emissions sector and may combust any type of fuel.
In summary, the establishment of the EERET Account allocation retains the value derived from the air resource and directs that value to uses that are directly related to preserving and protecting that public resource, is similar in all pertinent respects to the EPA supported practice of establishing EE/RE set-asides, and adheres to the federal Clean Air Act and State law.
53. Comment - While not currently proposed for adoption in the draft rules, the Regulatory Impact Statement indicates that allowance auctions were considered, but that limited time prevented their use in the upcoming programs. It goes on to note that, "Based on the Department's experience with the EERET Account, the Department will consider expanding this type of approach in CAIR at some point in the future." Part of the justification behind possible future consideration of auctioning allowances for the proposed EERET Account is the erroneous proposition that auctioning allowances "will not cause the retail price of electricity to increase because generators incorporate the same dollar value of the allowances in their bids to supply electricity whether the allowances are obtained at no cost or purchased on the open market." This statement, coupled with NYSDEC's incorrect belief that generators recoup the cost to purchase allowances in the price they receive for their electricity represents an incomplete and flawed understanding of how the deregulated wholesale electricity market operates.
While merchant generators include a value for emissions allowances in their ISO bid price, it does not follow that if they must purchase them rather than receive allocations, they will fully recover the cost of allowances in the price of electricity. In fact, depending upon a respective generator's fuel and the type of generator setting the clearing price in the energy markets, a given generator will at best "break-even" on the cost of auctioned allowances (excluding cash, credit, and administrative costs), and can incur significant losses on allowance costs in many periods. Such losses on allowance costs could represent a material shift in the financial performance of existing facilities and detract from future investment in the New York power market.
Therefore, we urge the state to thoroughly evaluate all the implications of potentially shifting to an allowance auction approach before considering such a significant change in program design. AES submits that requiring affected sources to purchase the allowances needed to operate would constitute an illegal tax for the reasons set forth above with respect to the proposed EERET Account. AES further submits that prior to a future initiative by NYSDEC seeking to initiate an auction, NYSDEC is required to formally notice any such proposal in accordance with the statutory requirements applicable to NYSDEC rulemaking, including, without limitation, the process requirements provided in the State Administrative Procedures Act. (2)
Response - The commenter claims that the decision to invest in pollution controls would be different for a source where the allowances are given to the facility for free compared to when the source must buy allowances.
The Department recognizes that a source may benefit financially if it is given allowances for free. However, the Department believes that generally the allowance distribution mechanism does not influence the source owner's decision on whether to control emissions.
The following simple example illustrates that the decision whether to install pollution control technology at the source is the same regardless of the allocation methodology.
For this example, the following assumptions are used:
• Facility ABC emits 1,000 tons per year of NOx - uncontrolled
• Facility ABC can control 500 tons of emissions at an annualized cost of $1,000 per ton
• Cost to control 500 tons of emissions = 500 tons x $1,000 / ton = $500,000
• Two allowance scenarios are evaluated:
• "Full" allocation where the facility gets 1,000 allowances
• Zero allocation
• Also, two cost scenarios are evaluated
• Cost lower than source's cost of control ($999)
• Cost higher than source's cost of control ($1,001)
Basic allowance costs associated with the decision are as follows:
| For full allocation - the facility gets 1000 free allowances. | For zero allocation - the facility must purchase all allocations needed for compliance. |
| If the facility does not control - it must offset 1000 tons of emissions so all allowances are used. | If the facility does not control - it must offset 1000 tons of emissions - so it must purchase 1000 allowances. |
| If the facility does control - it must offset 500 tons of emissions so the facility would be able to sell 500 allowances | If the facility does control - it must offset 500 tons of emissions so the facility must purchase 500 allowances. |
In both scenarios, the final decision on whether to control technologies would be based upon the value of the allowances. If an allowance is worth $999 (or less), the value to the source of the 500 tons of emissions (that could be controlled) is calculated as follows (independent of the allocation methodology)
| Low Price Scenario Value of the 500 allowances that may be sold if controls are implemented = 500 x $999 per allowance = $499,500 |
Low Price Scenario Value of the 500 allowances that are not purchased if controls are implemented = 500 x $999 per allowance = $499,500 |
| High Price Scenario Value of the 500 allowances that may be sold if controls are implemented = 500 x $1,001 per allowance = $500,500 |
High Price Scenario Value of the 500 allowances that are not purchased if controls are implemented = 500 x $1,001 per allowance = $500,500 |
For the chart below, it is assumed that under the free allocation scenario, the source will use 500 of its allowances to account for emissions in either cost scenario and it is also assumed that the zero allocated source will need to purchase 500 allowances to account for emissions in either cost scenario. For the purposes of this response, the first 500 tons of emissions are considered a fixed cost and are the same for each scenario. The 500 tons of emissions that may be controlled are considered a variable cost and are evaluated in the chart below.
| Scenario | Allowance Price | Unpurchased Allowances | Avoided Cost | Sold Allowances | Sales Revenue | Control Cost | Likely Decision |
|---|---|---|---|---|---|---|---|
| 100% allocation | $ 999 (or less) |
0 | 0 | 500 | 499,500 | 500,000 | No control |
| $1001 (or more) |
0 | 0 | 500 | 500,500 | 500,000 | Control | |
| Zero allocation | $ 999 (or less) |
500 | 499,500 | 0 | 0 | 500,000 | No Control |
|
$1001 |
500 |
500,500 |
0 |
0 |
500,000 |
Control |
When deciding whether to invest in a control strategy, an avoided cost is as valuable as revenue, so in both allocation scenarios, the cost effective decision is the same.
An evaluation of any percentage allocation between zero and 100 would yield a similar result.
54. Comment - In light of the proposed allocation to the EERET Account, the proposed CAIR NOx Trading Program appears to be more stringent than the underlying and corresponding federal Environmental Protection Agency (EPA) requirements. In effect, the proposal would create two potential avenues for affected entities to comply: 1) either decrease emissions to below the levels otherwise required by the applicable federal Clean Air Act CAIR program requirements; and/or 2) bear the added expense of purchasing allowances either through the cap and trade program or from the EERET set aside. Both options are more stringent than required under EPA's CAIR program. In reviewing the proposed rulemaking, the Alliance did not find the statutorily-required analysis where NYSDEC proposes to impose requirements more stringent than those included in the federal Clean Air Act. By proposing to assign 10 percent of allowances to the EERET Account, NYSDEC would implement emissions requirements that are more stringent than the requirements of the Clean Air Act. Accordingly, NYSDEC's proposed CAIR NOx Trading Program is subject to the legislative mandate in ECL Section 19-0303(4) including, without limitation, specified requirements for the content of the RIS and approval by the State Environmental Board. Based on our review, it appears that the proposed CAIR rulemaking materials neither conform to the statutory requirements of ECL Section 19-0303(4) nor acknowledge that the proposal contains requirements more stringent than those underlying the federal Clean Air Act. (2, 5)
Response - The Department respectfully disagrees. The Department is making available all of the CAIR NOx allowances that EPA budgeted for New York State (40 CFR Part 51.123(e)(2) and (q)(2)). Creating an EERET account does not make New York's portion of CAIR any more stringent than EPA's requirements. In fact, Parts 243 and 244 do not limit NOx emissions from any CAIR NOx source or CAIR NOx Ozone Season source in New York State based on the number of allowances that the Department allocates to the units that are included in that source. A source may acquire a sufficient number of allowances to account for its emissions from any entity that has allowances that have been allocated as part of the regional CAIR trading program. The entire amount of CAIR NOx allowances will be made available for distribution. The Department's allocation methodologies in the proposed regulations merely determine how the allowances are distributed. The methodologies do not lower any emission limit or reduce the size of the budget. Furthermore, EPA discussed the use of allowance auctions as a method for allocating NOx allowances in the preamble to the final CAIR rule (70 FR 25279) and while EPA takes no stance on whether states should utilize this approach, the Agency clearly recognizes auction as a valid mechanism for allocation. Therefore, the EERET Account which will offer for sale the allowances allocated to it is clearly not more stringent than the federal requirements.
55. Comment - The RIS acknowledges that EPA would implement the CAIR NOx Trading Program through a Federal Implementation Plan (FIP) in the event that NYSDEC does not adopt State Implementation Plan provisions ('i.e.', NYSDEC's proposed CAIR rule) that conform to the underlying federal requirements for CAIR. As a control strategy for FIPs, EPA adopted its CAIR model cap-and-trade rules. For NOx, EPA's model cap-and-trade rules do not provide for a set aside of allowances to an EERET Account or similar account. EPA's model cap-and-trade rules provide for allocating 95 percent of allowances to affected units in the 2009 through 2014 control periods, and 98 percent for the 2015 control period and thereafter. 40 CFR 96.142. (2, 9)
Response - EPA acknowledges that each State may reserve a portion of its allowance budget for an auction. Proceeds from the auction would be fully retained by the State to be used as they see fit. EPA notes that the example allocation method presented in the model trading rule does not include auctions. While EPA has provided a description of some of the different allocation options open to States and outlined some of their key features, EPA has stated that the State's policy choice on allocations does not impact the environmental goals of the CAIR program. EPA leaves it up to the States to choose policies that best match their particular needs and circumstances. 'Corrected Response To Significant Public Comments On The Proposed Clean Air Interstate Rule'; Docket Number OAR-2003-0053 (April 2005)
<www.epa.gov/interstateairquality/pdfs/cair-rtc.pdf>.
56. Comment - The proposed increase in the quantity of allowances for use in support of energy efficiency and renewable energy represents an unnecessary and significant impact on the State's fossil generation sources and ultimately upon the rate payers and the business climate in New York. As an artifact of the method used by EPA to determine each state's EGU NOx allowance budget, New York (and, as a consequence, its affected EGU sources) is being required to make disproportionate emission reductions under the CAIR program. The following information on the ozone season trading programs (proposed Part 243 as compared to existing Part 204) illustrates this point:
| Reduction under Phase 1 CAIR in the NY EGU Budget from the current SIP Call Budget | |
|---|---|
| New York | 32% |
| Pennsylvania | 19% |
| Maryland | 13% |
Increasing the size of the set-asides further compounds this impact. The fact that the State's CAIR NOx budget is already so small, suggests that any expansion of set-asides is unwarranted and will have deleterious impacts to the State. We encourage NYSDEC to reconsider its proposal to expand the set-asides in comparison to existing programs. (2, 5)
Response - The allocations to the EERET Accounts constitute a small portion (less than 0.4 percent) of the regional NOx emissions budgets under the CAIR NOx Ozone Season Trading Program and the CAIR NOx Trading Program. These allocations will not reduce the regional or New York trading program budgets. The Department does not believe that expanding the EERET Account allocations will have any significant or detrimental impact on the trading programs or on the emissions of individual sources. The Department refers the commenter to the Response to Comment 54 above, which explains that the size of the EERET Account allocations or the methodology by which New York distributes NOx allowances does not affect New York State's portion of the overall regional CAIR emissions budget.
57. Comment - To the extent that NYSDEC nonetheless maintains an allowance set-aside in support of energy efficiency in the CAIR NOx rules, it should be in the form as it exists in the current Parts 204, 237 and 238 which allow efficient fossil fuel-fired electric generating units to obtain allowances if they produce power more efficiently than the State-wide average. As noted in the Regulatory Impact Statement, NYSDEC considered and rejected replicating the current energy efficiency and renewable energy set-aside provisions in the proposed CAIR rules. The ability for highly efficient fossil fuel fired electricity generating units to potentially be able to earn energy efficiency set-aside allowances provides an incentive for power plant efficiency, which has significant air quality benefits. Since there are beneficial environmental consequences to including the provision, if NYSDEC determines to maintain allowance set-asides in support of energy efficiency, it, should be in the form that exists in the existing budget programs. (2)
Response - For the reasons stated in the response to Comment 52, the previously established EE/RE set-asides have been undersubscribed and have had no significant encouraging effect on the development of EE/RE projects.
58. Comment - The draft Part 243 rule is silent on the use of banked Part 204 (NOx Budget Rule) allowances in the new Part 243 program which replaces it. EPA's final CAIR rule and its CAIR FIP provide for the carryover and use of banked NOx Budget Rule allowances into the CAIR program. NYSDEC should provide clarification in the rule that this is allowed. (2, 5, 8)
Response - The definition of "CAIR NOx Ozone Season Allowance" includes allowances that were allocated under the NOx Budget Trading Program in accordance 40 CFR Part 51.121(p). This includes all banked allowances that were allocated under 6 NYCRR Part 204.
59. Comment - There are several discrepancies between the draft Part 243 and 244 Rules, and the Express Terms Summary concerning the timing of NOx allocations. The proposed rules indicate that on the effective date of rule, ozone season and annual allowance allocations will be made for the 2009, 2010 and 2011 control periods. The Express Terms Summary states that allocations will only be made for the 2009 and 2010 control periods. The Express Terms Summary should be revised to reflect the initial three-year allocation as specified in the rules themselves. The proposed rules indicate that subsequent allocations will be made by October 31 of each subsequent year for the next control period. The Express Terms Summary indicates that after the initial allocations, subsequent allocations under Part 243 will be made annually by April 1 of each subsequent year, and under Part 244 will be made by January 1. The Rules and Express Terms Summary should be consistent, and provide for allocations at the earliest possible date. (2, 5)
Response - The Department appreciates this comment and will revise the Express Terms Summary to be consistent with rules (express terms).
60. Comment - All three programs require that certificates of representation be provided to NYSDEC. The date by which these documents need to be submitted should be specified in the rules. (2, 5)
Response - The certificate of representation is must be received by EPA on or before the date of the submission of the CAIR permit application to the Department. The CAIR permit application is due before January 1, 2008 and must be submitted by the designated representative or the alternate designated representative.
61. Comment - EPA set an emissions cap for CAIR based on a target level of 0.15 lb NOx/mmBtu. However, the approach that EPA used to estimate the energy use (heat input in mmBtu) under-estimated New York energy use and thus allocated fewer NOx allowances to the State. For example, the electric generating units greater than 25 MWs were allocated 20,632 NOx allowances and the Ozone Season average heat input for 2002-2006 was 354,220,000 mmBtu so the effective NOx emission rate is 0.116 lb NOx/mmBtu, 23 percent less than the EPA target.
EPA looked at four years of state-wide heat input and an analysis of the years used relative to a longer climatological record suggest that for the annual heat input the New York energy use was lower than we would expect. DEC's alternative approach that considers individual unit or station energy use, picks the highest year for each, and sums reduces the effect of unit outages and state-wide climatic effects is more robust and that approach would have resulted in a larger CAIR cap. Another under-estimation problem was caused by the EPA IPM modeling. In particular, the CAIR baseline analysis for New York is significantly different than subsequent IPM modeling performed during the RGGI process. Without special consideration, IPM predicts that oil and dual-fired generation units nearly fall out of the generation profile. Modifications in the RGGI analyses made the projections resemble historical observations and the resulting emissions were significantly higher. IPM also had a problem with new builds because without special consideration it predicts the construction of much more new generation in the NYC metropolitan area than could be reasonably expected. As a result, the EPA analysis predicted that NY emissions were lower and additional reductions would be easier to implement than we can reasonably expect.
The problems described above are exacerbated by DEC's decision to establish an unprecedented set-aside percentage that includes a five percent new source set-aside and a 10 percent set-aside EERET. This represents a basic doubling of the total set-aside for any previous NY cap and trade program. It will result in an effective NOx emission rate of 0.099 lb NOx/mmBtu, 34 percent less than the EPA target (the electric generating units greater than 25 MWs will be directly allocated 17,537 NOx allowances and the Ozone Season average heat input for 2002-2006 was 354,220,000 mmBtu). As a result affected NY sources will be at an even larger competitive disadvantage compared to sources in other CAIR states. (4, 5)
Response - The Department respectfully disagrees. First, EPA has set an emission cap for the overall regional program at a level of 0.15 lbs/MMBtu. The budget for New York State is a part of the overall regional program and sources in New York are not capped by New York's trading program budgets. Second, the emission rate is not reduced by the method in which the Department allocates allowances. The same number of allowances is available to the affected units regardless of how the allowances are distributed. The Department is not lowering the number of allowances available in the regional trading program. Therefore, the effective NOx rate remains the same.
62. Comment - Allocating allowances to larger set-asides, and the future consideration of auctions as an allocation method for CAIR, diminishes rather than enhances incentives for the installation of emissions controls. For the CAIR pollutants back-end controls are available and the sale of excess allowances generated by installation of those emissions controls provides financial incentives for this equipment. Larger set-asides and auctions reduce the number of excess allowances that can be generated by the emissions control systems and thus reduce those incentives. Sources affected by these regulations derive no net asset benefit because it is very likely that they will be obliged to surrender more allowances than they have been allocated. Any financial benefit derives entirely from their ability to reduce NOx and SO2 emissions below their allocated levels. A strong secondary market is necessary in order to provide clear incentives for over-compliance. If larger set-aside auctions reduce or eliminate the incentives for over-compliance, this will place the emphasis for pollutant reduction on the expenditure of auction revenues, not abatements produced by market forces. As noted earlier DEC has yet to show how much of a pollution reduction can be expected by the EERET program. Moreover, it is disappointing that DEC has not estimated the expected emission reductions expected from funding energy efficiency and renewable energy programs. Without that information DEC cannot determine the benefit of those reductions relative to the reduction in allowance sales that could subsidize pollutant control equipment. (4, 5)
Response - Subsidizing the cost of pollution control equipment is not a goal of New York's CAIR program. The Department believes that the savings associated are the same regardless of whether the owner of an affected unit sells an allowance that was given to them for free or if they avoid the emissions through efficiency and do not have to purchase allowances in order to comply with the program. Affected sources (as a whole) that are in the CAIR NOx programs will continue to emit NOx to the levels of the caps regardless of how or where reductions are achieved. It will be less expensive for certain units to purchase allowances to comply with the CAIR regulations than to reduce emissions by installing control equipment. Not all affected units will reduce emissions. Some units may actually choose to increase emissions and purchase allowances to comply with the rule. Similarly, reducing electric demand will not directly reduce NOx emissions in a capped program. Reduced electric demand may lower allowance prices making the overall cost of compliance less. The use of revenues from the sale of allowances allocated to the EERET Account for the implementation of EE/RE projects involving sources of NOx not covered by the CAIR trading programs would be expected to reduce NOx emissions as well as emissions of other pollutants. Given the wide range of potential projects that could be funded by the EERET Account allocation (e.g., commercial and residential fuel burning, mobile sources, and appliances), it would be difficult to make estimates of the emissions reduction benefits.
63. Comment - The Part 243 Regulatory Impact Statement includes a discussion of two ways in which the Department could allocate allowances. The basis of the difference in the discussion is the financial value of the allowances. Cap and trade programs have been very successful as pollution control programs and Parts 243-245 are pollution control programs. This discussion of the value of allowances as a part of state revenue is inappropriate. More importantly, the entire discussion of the economic efficiencies of allowance distributions represents a radical departure from the structure of the successful cap and trade model for pollution control. DEC has yet to address significant issues raised by the prospect of large set-asides for auctions.
The following issues have to be addressed before any decision is made to experiment with the proven cap and trade model by adding larger set-asides:
• Sources affected by these regulations derive no net asset benefit because it is very likely that they will be obliged to surrender more allowances than they have been allocated. Any financial benefit derives entirely from their ability to reduce NOx and SO2 emissions below their allocated levels.
• The SO2 auctions in the Acid Rain Program have disrupted the secondary market for SO2 allowances. The experience of the Federal SO2 market shows dramatic falls in volume and a price that is easy to manipulate during the period of anomaly around the auction. It has not been shown how larger set-aside auctions will affect the secondary market that is needed for an ongoing price signal. The strong price signal in the acid rain and NOx budget programs has been one of the reasons for the success of the those programs because it efficiently prices the SO2 and NOx environmental constraints.
• A strong secondary market is necessary in order to provide clear incentives for over-compliance. If larger set-aside auctions reduce or eliminate the incentives for over-compliance, this will place the emphasis for pollutant reduction on the expenditure of auction revenues, not abatements produced by market forces. (4)
Response - The Department recognizes that purchasing allowances represents a cost of doing business that some facilities may not have had to bear previously. This cost is associated with the use of the air, which is a public resource, for disposal of the sources' NOx pollution.
The Department is not proposing an auction of allowances at this time. The Department does not believe that the possible sale of NOx allowances that are allocated to the EERET Account is similar to the auction of SO2 allowances under the Federal Acid Rain Program.
The Department believes that financial benefit can also be realized by reducing emissions which would reduce or eliminate the number of allowances that need to be purchased for compliance with the CAIR regulations. Over-compliance may be in the best interest for some of the affected units, it is not a requirement of the program. Under the proposed regulations, a source that is able to over-comply by reducing emissions below its allocation level has the ability to sell or bank allowances, thus providing additional flexibility for the operation of the facility. To the extent a source must purchase allowances to cover its compliance obligation, there remains a financial incentive to reduce its cost by reducing its emissions.
64. Comment - The Alliance supports and appreciates NYSDEC's proposal to implement the federal CAIR program using a cap-and-trade regime. The Alliance is concerned that certain aspects of NYSDEC's proposed CAIR NOx Trading Program16 represent a policy shift towards the sale or auctioning of allowances to fund or subsidize State energy initiatives. As a practical matter, set asides for such purposes derogate the efficiency of cap-and-trade initiatives by increasing the cost of compliance and decreasing the effective emissions limits. The use of set-asides for the purposes outlined in the proposed rulemaking demonstrates a policy expansion beyond the specific air quality objectives of the CAIR cap-and-trade program and raises legal considerations regarding NYSDEC's authority.
Insofar as allowances are auctioned, affected facilities receive an avoided cost benefit through the installation of controls. However, by diminishing the prospects for creating surplus allowance revenue through emissions control projects, auctioning limits the potential economic benefits of such projects. Accordingly, NYSDEC's discussion in the RIS regarding its consideration of future auctioning as an allocation mechanism for CAIR creates regulatory risk that allowance revenues resulting from emissions control expenditures will not materialize and, therefore, will tend to diminish investment in emissions controls. Unlike previously successful cap-and-trade programs for NOx and SO2, NYSDEC's consideration of a switch to auctioning will discourage investments that would otherwise result in over-controlling emissions of regulated pollutants.
The prospects for future allowance auctioning in New York will also tend to channel emissions control project investment to other CAIR states where companies can derive the financial benefit of over control. Because CAIR is a regional program, companies subject to CAIR requirements in New York and other CAIR states will receive better returns on emissions control investments in states that provide a means to monetize emissions reductions in the form of surplus allowance value. Potential future auctioning in New York will create a tendency towards compliance through emissions control projects (i.e., emissions reductions) in other states, and compliance through allowance surrenders in New York. This could have the unintended consequence of depriving New York of in-state reductions, and enhancing pollution control investment in other CAIR states. NYSDEC should carefully consider policies that will result in transferal of economic activity outside of New York at the expense of environmental benefit in New York. (5)
The distinct impacts of the proposed CAIR rules in New York in comparison to other CAIR states diminishes the validity of the EPA cost estimates as applied to New York State. The RIS cost analysis relies on EPA modeling conducted across the CAIR region that does not adequately account for New York-specific circumstances and factors. Reliability requirements in the New York market often alter power plant dispatch patterns which, based on experience with the wholesale market, results in increased mass emissions. Predictions in EPA's model of large decreases in generation in New York do not realistically reflect reliability needs and do not accurately characterize operations of the New York electricity grid. Likewise, the modeling assumptions and prediction for new builds (i.e., new capacity additions) do not reflect the higher costs and heightened citing barriers in New York State. By significantly underestimating the cost and barriers to new builds, the modeling appears to assume an unrealistic amount of new capacity. Consequently, EPA's CAIR modeling underestimates future emissions and the cost of complying with the CAIR program requirements. The proposed allocation of allowances to the EERET Account in New York further increases costs to affected sources in New York which effects are not considered in EPA's modeling. Because it relies on EPA region-wide modeling that does not accurately reflect New York State-specific considerations, the RIS does not properly detail the costs to affected facilities in New York State. (5)
Response - The Department agrees that EPA's IPM modeling is likely to be a poor projection if we only look at New York State, but since the cost estimates provided by EPA are based upon the entire CAIR region, the overall cost estimates are considered reasonable. EPA's estimate for allowance cost is based upon the concept that an allowance will cost approximately the same as the most expensive ton of emission reduction that is implemented. So, even though there may be anomalies in the New York portion of the CAIR program, this is unlikely to significantly alter the cost (up or down) of a CAIR allowance because New York has a very small portion (less than four percent) of the regional CAIR budget. The EERET Account comprises less than 0.4 percent of the regional CAIR budget. See also response to Comment 53.
65. Comment - The Alliance appreciates NYSDEC's statements in the RIS that 6 NYCRR Parts 237 and 238 will be repealed once the CAIR rules become "operative" and suggests that language should be added to the CAIR rules to that effect. (5)
Response - The Department will undertake rulemakings to repeal Parts 204, 237, and 238 at an appropriate future date. Since the Department can not determine at this time what the appropriate date is, the Department is not presently proposing to repeal these rules.
66. Comment - Section 243-1.4, Applicability: The Part 204 NOx Ozone Season Trading Program provides an exemption for units that have accepted permit conditions to limit the unit's potential NOx mass emissions during the control period to 25 tons or less (Section 204-1.4(b)). Proposed Part 243 removes this exemption and establishes a nameplate capacity of 15 MWe for applicable units. EPA's CAIR SIP NOx model trading program also eliminates this exemption, but sets the applicable nameplate capacity at 25 MWe. Alliance members request that the exemption for facilities accepting enforceable limits on potential to emit be reinstated for applicable units between 15 and 25 MWe. Preferably, we request that the applicable nameplate capacity for Part 243 be changed to 25 MWe to be consistent with the EPA model rule. (5)
Response - The Department agrees with this comment and will include the exemption for facilities accepting enforceable limits on potential to emit in Part 243. The Department has elected to make all of the non-EGU and Portland cement kiln sources that were subject to Part 204 also subject to the CAIR NOx Ozone Season Trading Program as provided for under 40 CFR Part 51.123(aa). This exemption allows sources that have been exempt under Part 204 to continue that exemption under Part 243.
67. Comment - Section 243-5.3(f)(9) CAIR NOx Ozone Season Allowance Allocation: The Alliance submits that there is no need to wait to return and allocate unused allowances from the new unit set-aside until March 31 following the control period if all applications must be received from new sources by May 1. A reasonable turnaround date for the allowances is July 1 of the same control period. (5)
Response - The reason for the lag is to allow for EPA reconciliation of accounts. During the reconciliation process, EPA freezes the accounts which does not allow for any activity of allowances that may be used for compliance.
68. Comment - Section 244-5.3(c)(9) CAIR NOx Allowance Allocations: New sources must request allowances no later than January 1 of the control period. Flowback allowances are proposed to be placed into compliance accounts by July 1 following the control period. It seems reasonable that because NYSDEC will know how many allowances will be needed soon after January 1, set-aside allowances could be allocated to sources that need them by March 1 of the same control period, and the unused remainder of the set-aside allowances returned to the affected sources at the same time. (5)
Response - The reason for the lag is to allow for EPA reconciliation of accounts. During the reconciliation process, EPA freezes the accounts which does not allow for any activity of allowances that may be used for compliance.
69. Comment - Section 243-5.3(g) CAIR NOx Ozone Season Allowance Allocations: Alliance members suggest that instead of establishing an Energy Efficiency and Renewable Energy Technology set-aside account, the procedures established under existing allowance allocation rules in Part 204-5.3(f), Part 237-5.3(c) and Part 238-5.3(d) should be continued. This comment also applies to Section 244-5.3(d). (5, 8)
Response - For the reasons stated in the response to Comment 52, the previously established EE/RE set-asides have been undersubscribed and have had no significant encouraging effect on the development of EE/RE projects.
70. Comment - Section 245-6.4 Recordation of CAIR SO2 Allowances: As written, the text suggests that CAIR allowances will be allocated as if separate from the existing allowances under CAA Title IV. The text should be modified to clarify that the Title IV allowances which are already in the source compliance accounts, are indeed CAIR allowances once the CAIR program begins. In addition, EPA will determine compliance on a facility, not unit, level and the corresponding change should be made for the proposed Part 245. EPA has transferred all the allowances held in the unit level accounts to a corresponding facility level account and the old unit level accounts were closed. (5)
Response - The Department has taken this text directly from EPA's model rule. 71 FR 25372 - 73 (May 12, 2005) and 71 FR 25389 (April 28, 2006). EPA requires states to be consistent with this portion of the CAIR model rule language (40 CFR 96.253). The Department refers to the definition of "CAIR SO2 Allowance" which states that a CAIR SO2 allowance is a limited authorization issued by the Administrator under the Acid Rain Program.
71. Comment - A major difference between the DEC's proposed CAIR and the rules of the federal government and New York's existing Acid Deposition Reduction Program (Parts 237 and 238) and NOx Budget Trading Program (Part 204) involves the allocation of allowances for NOx. New York's CAIR proposes to have the New York State Energy and Research Development Authority sell 10 percent of the allowances and use the revenues to provide financial incentives for investments in energy efficiency and renewable energy technologies and possibly for innovative abatement technologies and clean energy technologies. IPPNY members support the direct allocation of allowances for the use of generators under the program. We also support the rule's provision that allocates allowances directly back to generators, in the event that any allocation of allowances by sale cannot be performed.
IPPNY's members can all agree that any sale approach must be fully analyzed well prior to implementation for potential impacts to consumers, the economy, the industry and future investment, and electric system reliability. New York's businesses already struggle under the strain of the nation's second highest electric rates to compete with sister companies and competitors nationally and internationally. Economic development, particularly in upstate New York, has suffered as a direct result. It is important that the final version of this rule balances economic development, energy and environmental interests. (8)
Response - As a general matter, when allowances are allocated for free, consumer prices are not lower than they would have been had the allowances been sold. The cost of allowances - especially with regard to electricity generators that operate in a deregulated electricity supply market such as exists in New York State - is eventually passed along to consumers. The Congressional Budget Office succinctly articulated this phenomenon as follows:
A common misconception is that freely distributing emission allowances to producers would prevent consumer prices from rising as a result of the cap. Although producers would not bear out-of-pocket costs for allowances they were given, using those allowances would create an "opportunity cost" for them because it would mean forgoing the income that they could earn by selling the allowances. Producers would pass that opportunity cost on to their customers in the same way that they would pass along actual expenses. That result was borne out in the cap-and-trade programs for sulfur dioxide in the United States and for CO2 in Europe, where consumer prices rose even though producers were given allowances for free. Thus, giving away allowances could yield windfall profits for the producers that received them by effectively transferring income from consumers to firms' owners and shareholders.
'Trade-offs in Allocating Allowances for CO2 Emissions', p. 3, Congressional Budget Office (April 25, 2007) <http://www.cbo.gov/ftpdoc.cfm?index=8027&type=1>. See also, 'Evaluation of CO2 Emission Allocations as Part of the Regional Greenhouse Gas Initiative - Final Report', pp. 9 and 14, Center for Energy, Economic & Environmental Policy, Edward J. Bloustein School of Planning and Public Policy (June 30, 2005) <http://www.policy.rutgers.edu/ceeep/events.html>
72. Comment - Overall, IPPNY is concerned about the disadvantages for many New York companies that are created by the Department's proposal to allocate allowances by selling them, as this approach is not part of the federal program. Indeed, this allocation method is largely untested and has never been implemented in New York. Given that all past successful emission cap and trade programs have not relied on this approach to allocate allowances, it is possible that EPA may not approve a program for New York that contains this method. We strongly suggest that New York's program be consistent with the federal program to avoid unnecessary exposure to increased energy costs that could result from a program disparity. (8)
Response - EPA has acknowledged that each State may reserve a portion of its allowance budget for an auction. Proceeds from the auction would be fully retained by the State to be used as they see fit. For example, a State could develop a program that uses the revenue to provide incentives for additional local reductions within non-attainment areas. EPA has seen benefits in requiring States to reserve a portion of their budgets for auction. EPA notes that the example allocation method presented in the model trading rule does not include auctions. While EPA has provided a description of some of the different allocations options open to States and outlined some of their key features, EPA believes that the State's policy choice on allocations does not impact the environmental goals of the CAIR program. EPA leaves it up to the States to choose policies that best match their particular needs and