[Federal Register Volume 66, Number 199 (Monday, October 15, 2001)]
[Rules and Regulations]
[Pages 52343-52359]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-25728]


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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 52

[IL 165-2; FRL-7056-6]


Approval and Promulgation of Implementation Plans; Illinois 
Trading Program

AGENCY: Environmental Protection Agency (USEPA).

ACTION: Final rule.

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SUMMARY: USEPA is approving the Illinois trading program, submitted on 
December 16, 1997. This program is a cap and trade program, designed to 
reduce emissions of volatile organic compounds (VOC) in the Chicago 
ozone nonattainment area below the levels required by reasonably 
available control technology (RACT) and other regulations. Illinois 
requires participation by major industrial VOC sources. Each 
participating source must hold allowances equivalent to its emissions, 
and Illinois issues allowances to each source equivalent to 12 percent 
less than baseline actual emissions. Sources may buy and sell 
allowances, thereby redistributing allowable emissions, but the sum of 
emissions from the sources involved must in any case reflect a 12 
percent reduction from total baseline levels. USEPA reviewed Illinois' 
estimates of program benefits and concluded that the program would 
reduce VOC emissions by 10.9 tons per day.
    On December 27, 2000, at 65 FR 81799, USEPA proposed to approve 
this program provided Illinois satisfactorily resolved five issues. 
Illinois' response to the proposed rulemaking resolved four of these 
issues, by clarifying the timetable for suitable enforcement authority, 
satisfying USEPA's environmental justice policy, prohibiting credit 
issuance to minor sources in the absence of an area-wide net emissions 
decrease (``demand shifting''), and committing to remedy any problems 
identified in its annual program review. Illinois addressed the fifth 
issue by a letter to USEPA dated August 23, 2001. In this letter, 
Illinois requested that USEPA defer rulemaking on section 205.150(e), 
which exempts new sources that satisfy the trading program's seasonal 
offset requirements from the requirement for full year offsets. Because 
USEPA is deferring rulemaking on this section, the State Implementation 
Plan (SIP) continues to require full year offsets, satisfying the fifth 
prerequisite for program approval.
    USEPA received multiple comments on its proposed rulemaking, 
regarding

[[Page 52344]]

environmental justice, ``open market trading program'' features of the 
Illinois program, and numerous other topics. USEPA believes that the 
Illinois program is designed to make environmental justice problems 
unlikely, and believes that Illinois has suitable processes for 
identifying and remedying such problems should they occur. USEPA 
further believes that Illinois is providing suitable information to the 
public and is providing suitable opportunities for public input, and 
believes that Illinois has satisfied USEPA's environmental justice 
policy in other respects as well. USEPA is satisfied that the Illinois 
program is fundamentally a cap and trade program and cannot in any 
significant way be considered an open market trading program. After 
reviewing the various comments, and aside from one section of Illinois' 
rules (pertaining to offsets for new sources and major modifications) 
for which USEPA is deferring rulemaking, USEPA has concluded that the 
Illinois program satisfies relevant guidance and Clean Air Act 
requirements.

EFFECTIVE DATE: This action will be effective on November 14, 2001.

ADDRESSES: Copies of Illinois' submittals and other information are 
available for inspection during normal business hours at the following 
address: (We recommend that you telephone John Summerhays at (312) 886-
6067, before visiting the Region 5 Office.)
    United States Environmental Protection Agency, Region 5, Air 
Programs Branch (AR-18J), Regulation Development Section, 77 West 
Jackson Boulevard, Chicago, Illinois 60604.

FOR FURTHER INFORMATION CONTACT: John Summerhays, Environmental 
Scientist, United States Environmental Protection Agency, Region 5, Air 
Programs Branch (AR-18J), Regulation Development Section, 77 West 
Jackson Boulevard, Chicago, Illinois 60604, (312) 886-6067, 
([email protected]).

SUPPLEMENTARY INFORMATION: This supplementary information section is 
organized as follows:

I. What did USEPA propose?
II. What comments did USEPA receive?
III. How did Illinois EPA respond to prerequisites for approval?
IV. What are USEPA's responses to comments?
    1. Environmental justice comments
    2. Comments on ``open market trading features''
    3. Additional comments by NRDC et al.
    4. Additional comments by ED dated March 26, 2001
    5. Additional comments by ED dated January 26, 2001
    6. Additional comments by Alex Johnson
    7. Additional comments by Richard Kosobud
    8. Additional comment by IEPA
V. What action is USEPA taking?
VI. Administrative Requirements

I. What Did USEPA Propose?

    USEPA proposed to approve the Illinois trading program provided 
that Illinois took five specified actions. In particular, USEPA 
proposed that Illinois must: (1) Clarify the timeline and penalties for 
violating sources, (2) satisfy USEPA's trading program policy on 
environmental justice, (3) provide for full-year offsets for new 
sources and major modifications, (4) commit to discount credits where 
emission reductions are potentially accompanied by emission increases 
elsewhere, and (5) commit to remedy any problems identified in its 
periodic program review.
    USEPA published its notice of proposed rulemaking on December 27, 
2000, at 65 FR 81799. This notice included an extensive description of 
the Illinois trading program, followed by a discussion of the criteria 
USEPA used to review the program, a review of the features of the 
Illinois program, and a review of the emission reductions attributable 
to the program.
    In brief, the Illinois trading program is a cap and trade program 
designed to reduce emissions of volatile organic compounds (VOC) in the 
Chicago ozone nonattainment area. Major VOC sources, i.e. industrial 
facilities emitting at least 25 tons per year, including at least 10 
tons between May and September, are required to participate. Each such 
source must determine its baseline actual emissions. The state issues 
allowances generally equivalent to 12 percent less than the baseline 
emissions.
    The principal compliance obligation upon sources is to hold 
allowances at least equal to emissions each year. Sources have several 
options for complying with this requirement. The first option is simply 
to reduce emissions to 12 percent below baseline emissions. Under this 
option, the source has no need to buy or sell allowances. A second 
option is to reduce emissions more than 12 percent below baseline 
emissions. Under this option, the source would receive more allowances 
from the state than it would need to accommodate its emissions, and the 
source could choose to sell the excess allowances. A third option is to 
reduce emissions less than 12 percent below baseline emissions or even 
increase emissions. This option would require purchase of allowances, 
presumably from a source that under the second option reduced its 
emissions enough below its target 12 percent reduction level to 
accommodate the excess emissions of the purchasing source, i.e., the 
amount by which the purchasing sources exceeds its target, 12 percent 
reduced, emission level.
    The third option creates concern about environmental justice. This 
concern arises because some of the VOC emissions include hazardous air 
pollutants (HAPs). Particularly at issue is the potential for increased 
emissions of HAPs in low income and minority communities and other 
communities of concern. In one form of this issue, the fact that 
companies not only may fail to achieve 12 percent emission reductions 
but may in fact increase emissions means that the program allows 
increases of emissions of VOC and potentially of HAPs. Another form of 
this issue reflects concern that even when a source reduces emissions 
by an amount short of 12 percent, the source may be viewed as reducing 
its HAPs emissions by less than it should. This concern is discussed in 
the notice of proposed rulemaking. Because several commenters commented 
on this issue, a later section of this document discusses this issue at 
length.

II. What Comments Did USEPA Receive?

    USEPA received nine comment letters. Because the initial comment 
period closed before being reopened, some groups sent comments on both 
January 26, 2001, and March 26, 2001. USEPA received the following 
comment letters from the following groups:

Citizens for a Better Environment (CBE)/American Lung Association of 
Metropolitan Chicago (ALAMC)--comments sent March 26, 2001
Environmental Defense (ED)--comments sent January 26, 2001, and 
comments sent March 26, 2001
Illinois Environmental Protection Agency (IEPA)--comments sent March 
26, 2001
Alex Johnson--comments sent March 27, 2001
Richard Kosobud (professor at University of Illinois at Chicago)--
comments sent March 22, 2001
Natural Resources Defense Council (NRDC)/CBE/ALAMC/Public Employees for 
Environmental Responsibility (PEER)--comments sent January 26, 2001
NRDC/ALAMC--comments sent March 26, 2001
PEER--Comments on several open market trading programs sent March 9, 
2001

    The letter from IEPA focuses on the issues identified in the notice 
of

[[Page 52345]]

proposed rulemaking for the state to address. These issues are 
addressed in a separate section immediately following. The section 
after that will address one additional comment by IEPA and comments 
from the other commenters.
    Several commenters identified concerns regarding the potential that 
trading of volatile organic compound emissions has to increase 
emissions of HAPs in areas already overburdened with emissions of HAPs, 
one form of an issue known as the environmental justice issue. In 
addition, several comment letters presented the view that the Illinois 
program has features of open market-type trading programs, and 
commented that these features create a variety of problems. For 
clarity, the section of this notice addressing comments has a 
subsection for each of these two topics addressing all comments on each 
topic. Since the remainder of the comments cannot be so readily 
categorized, the remaining comments will be addressed in subsections 
organized by commenter.
    The comments submitted by NRDC and ALAMC on March 26, 2001, 
generally include the comments submitted by NRDC, CBE, ALAMC, and PEER 
on January 26, 2001. For convenience, these comment letters will be 
addressed jointly, and this notice will refer to these commenters as 
NRDC et al.

III. How Did Illinois EPA Respond to Prerequisites for Approval?

    As noted previously, USEPA proposed to approve the Illinois trading 
program provided Illinois resolved five issues. Illinois' comment 
letter addresses each of these issues in turn. The following discussion 
identifies Illinois' actions and USEPA's review for each of these five 
items in the same order.
    The first prerequisite for approval was that Illinois clarify the 
timeline and penalties for violating sources. Illinois provided this 
clarification. Illinois noted the need to complete the process of 
accounting for one ozone season's emissions before the next ozone 
season begins, and the state's comments include a detailed schedule by 
which such accounting is achieved.
    In Illinois' program, if a source fails to hold sufficient 
allowances by December 31 to accommodate their emissions that ozone 
season, it must provide ``excursion compensation.'' Illinois identifies 
and notifies these sources within about a week of December 31. Pursuant 
to section 205.720, sources must compensate for the excess emissions 
plus a 20 percent (or, for repeat offenders, 50 percent) surcharge. 
Sources may ask within 15 days that this 120 percent (or 150 percent) 
compensation be taken in the form of a reduction of the next year's 
issuance of allowances. Alternatively, 20 days after notifying the 
source of its excess emissions, Illinois sends the source a bill for 
the purchase of the necessary allowances from the State's special 
compliance fund. If the company has not paid this bill within 45 days, 
the source is in violation.
    For example, if a source receives notification of an emissions 
excursion on January 7, it would have until January 22 to request the 
requisite deduction from the upcoming issuance of allowances. In 
absence of such a request, Illinois would send the source a bill on 
January 27 for the then mandatory purchase of allowances. Assuming 2 
days for delivery of this bill, the source would have until March 15 to 
pay the bill. After that date, if the source has not paid its bill, the 
source would be in violation and traditional enforcement action could 
begin. Violating sources are liable for full enforcement authorized 
under Clean Air Act section 113, including penalties up to $27,500 per 
day.
    This schedule is consistent with the schedule inferred by USEPA in 
its proposed rulemaking. USEPA finds this a suitable timetable for 
enforcement action with penalties sufficient to deter noncompliance.
    The second prerequisite for approval was that Illinois satisfy 
USEPA's policy on environmental justice. In particular, USEPA noted a 
need for Illinois to ``commit to review effects of the trading program 
on the distribution of hazardous air pollutant emissions in its annual 
program review, distribute that review for public comment, and commit 
to address any identified problems. Illinois noted that its rule in 
fact requires the state to conduct the review sought by USEPA 
(including reviewing program effects on ``trends and spatial 
distributions of hazardous air pollutants'' (cf. section 205.760(a)(9)) 
and to make the report available to all interested parties. Illinois 
committed to widespread distribution of the report, sending copies to 
everyone that expressed interest in the program and making the report 
available on its internet site.
    Illinois described its ongoing efforts for continuing public review 
during the implementation of the program. Illinois noted in particular 
the proposal of a rule to require HAPs emissions reporting so that the 
impact of the program on HAPs emissions can be analyzed more precisely. 
Finally, Illinois committed in its letter to address any problems 
identified in its annual program review. These statements satisfy the 
second prerequisite for approval, and lead USEPA to conclude that 
Illinois has satisfied USEPA's environmental justice policy for trading 
programs. Subsequent sections of this notice provide further discussion 
of environmental justice issues.
    The third prerequisite for approval was that Illinois modify its 
new source requirements to assure that emission reductions (from any 
time during the year) be obtained to offset the full year emissions 
from new sources and major modifications in the Chicago area. Illinois' 
comment letter, dated March 26, 2001, objects to this proposed USEPA 
view and argues that providing offsets on an ozone season basis is 
fully consistent with the Clean Air Act and should be approved by 
USEPA.
    Subsequently, on August 23, 2001, Illinois amended its rulemaking 
request, requesting that USEPA conduct rulemaking on section 205.150(e) 
separately from rulemaking on the remainder of Part 205. Section 
205.150(e) states that major new sources and sources with major 
modifications that obtain the necessary allotment trading units (ATUs, 
providing offsets on a ozone season basis) are considered to satisfy 
applicable offset requirements (otherwise requiring offsets on a full 
year basis).
    USEPA is in fact deferring action on section 205.150(e). By this 
deferral, USEPA is excluding the exemption from and retaining the 
requirement for full year offsets. Thus, pending further rulemaking on 
section 205.150(e), the prerequisite for program approval is satisfied 
because the approved SIP continues to require offsets on a full year 
basis.
    USEPA is continuing to review whether Illinois may provide offsets 
on an ozone season basis. USEPA has solicited comments on a proposed 
view that Illinois must require full year offsets and is not soliciting 
comments on this issue at this time. Depending on the results of its 
review, USEPA intends either to publish final disapproval or proposed 
approval of section 205.150(e).
    The fourth prerequisite for approval was that Illinois avoid 
issuing credits for ``demand shifting,'' i.e., that Illinois assure 
that no credits would be issued to the extent an emission reduction at 
one source simply reflects a shift in production to another source that 
is not accountable for its emission increase. The notice of proposed 
rulemaking noted that Illinois' rules explicitly prohibit credit 
issuance to small industrial sources whose emissions may

[[Page 52346]]

be shifting to another small source in the area. However, the notice 
requested that Illinois commit to avoid credit issuance in cases of 
demand shifting involving commercial and mobile sources.
    Illinois responded that its rules in fact already prohibit credit 
issuance to the extent mobile and area sources experience demand 
shifting. The rules provide for credit issuance only to the extent that 
emissions are reduced in the overall business sector. Thus, Illinois 
will issue no credits in cases where demand shifting results in no net 
emission reduction. This satisfies USEPA's concern.
    The fifth prerequisite for approval was that Illinois commit to 
remedy any problems identified in its periodic program review. Illinois 
noted that the periodic program review was intended to help fulfill the 
purpose of identifying and thus facilitating resolution of problems. 
Illinois then stated that ``Illinois EPA is committed to addressing any 
problems'' identified in the annual program review or identified 
elsewhere. USEPA is satisfied with this commitment.

IV. What Are USEPA's Responses to Comments?

1. Environmental Justice Comments

    Comment: Several commenters expressed concern that Illinois' 
program has the potential to foster redistributions of emissions 
causing areas already having excessive air pollution to become exposed 
to even more emissions. These commenters recognize that Illinois' 
program targets emissions of volatile organic compound (VOC) emissions; 
their concern focuses on the components of VOC such as benzene that are 
hazardous. All commenters addressed this concern.
    NRDC et al., quote from Executive Order 12898 (requiring agencies 
to assure environmental justice) and quote the description of the issue 
that USEPA provided in its notice of proposed rulemaking (65 FR 81804, 
December 27, 2000). NRDC et al., further quote USEPA's proposed view 
that features such as Illinois' emissions cap ``help assure that a 
participating source would be unlikely to increase its HAP emissions to 
unacceptable levels.'' NRDC et al., find this a ``reprehensible failure 
by USEPA to recognize the disproportionate potential risk that adjacent 
communities are being forced to accept from increased HAP emissions 
made possible under the Illinois Trading Program.''
    NRDC et al., dispute USEPA's view that the public has had 
``suitable opportunities to provide informed input into the development 
and implementation of the program.'' NRDC et al., cite several examples 
of gaps in public information. According to these commenters, Illinois 
has provided no information as to how emissions information for HAPs 
will be tracked, and no agreement has been reached on how the Annual 
Report will address HAPs emissions information.
    NRDC et al., state that Illinois had sufficient information to 
consider the control costs of the finite number of program participants 
and thereby to assess ``the shifts in emissions reductions likely to 
occur.'' NRDC et al., have no doubt that some of these sources are in 
``communities disproportionately comprised of low income and/or 
minority populations * * * already overburdened with pollutants.'' NRDC 
et al., state that ALAMC raised these concerns during Illinois' 
development of its rule. In NRDC et al.'s, view, IEPA had the data ``to 
anticipate and protect against the shifting of the burden of HAPs into 
[communities of concern], IEPA had the responsibility to provide such 
an analysis, and USEPA has the responsibility to require such an 
analysis.
    CBE/ALAMC comment that ``we agree with USEPA'' that one may be 
concerned about ``the potential [this] program has to worsen air 
quality in any location.'' CBE/ALAMC then argue that low income and 
minority communities will be most likely to be subject to such 
disparate impacts, because these communities ``tend to live in the 
vicinity of older stationery sources [that are] most likely to * * * 
`buy' their way out of [emission reduction requirements].''
    IEPA supports USEPA's policy and the proposed views on the Illinois 
program. IEPA observes that its trading program imposes requirements 
for reductions of emissions below the levels permissible under other 
regulations, and allows no emissions that are prohibited by other 
regulations. IEPA agrees with USEPA that the Illinois program for this 
and other reasons is unlikely to yield localized increases in HAPs 
emissions.
    IEPA describes the workgroup of interested parties that has led to 
proposed rule revisions to require enhanced reporting of hazardous air 
pollutant emissions by program participants, demonstrating the 
continuing involvement of the public in review of the program during 
its implementation. IEPA observes that the program provides an annual 
program review, which IEPA commits to provide ``to all members of the 
public that have expressed interest'' and to make the report available 
via its Internet site. IEPA further commits to address any problems 
identified during this review.
    ED observes that emissions trading can help address environmental 
justice concerns. ED states that cap and trade programs hold sources 
directly accountable for their overall emission levels and are likely 
to outperform command and control regulations in achieving sustained 
reductions in emissions. ED observes that ``the cost-savings and 
flexibility produced through emissions trading [allows] policy-makers 
[to] set more ambitious emissions reduction requirements''. ED cites 
particular benefits to programs that pursue substantial reductions, for 
example to achieve air quality standards. ED states that emissions 
trading markets can stimulate emissions overcontrol and encourage 
environmental innovation, benefitting all affected populations 
including communities of concern.
    ED comments that ``the fundamental economic benefit of emissions 
trading allowing environmental objectives and mandates to be met more 
cost-effectively'' are particularly important to communities of concern 
because ``they are, arguably, most in need both of protection from 
environmental threats and of access to economic opportunity, the 
development of which can be blunted by unnecessarily costly emissions 
control programs.'' ED states further that command and control-based 
limitations are inevitably subject to political considerations, which 
can be affected by the socio-economic status or racial or ethnic 
identity of the affected populations, whereas emissions trading 
programs all but eliminate the role of political discretion.
    Finally, ED comments on the benefits of ``transparency,'' i.e., 
that the trading program enhances public knowledge of existing problem 
areas and whether emissions trading is having beneficial or detrimental 
effects in particular areas. ED states ``[i]t is difficult to know a 
priori'' how emission trades themselves will affect communities of 
concern, and so ED believes it is incumbent on Illinois to obtain data 
on program results and to identify ``sound analytical methods to be 
used in assessing the performance of the program as it affects 
communities of concern.'' ED believes that ``assessing individual 
trades is likely to be misleading * * *, while assessing overall 
program impacts will be key to understanding its effects on communities 
of concern.'' ED concludes that this process will also help Illinois 
identify remedies if the program is found to cause disparate impacts.

[[Page 52347]]

    Kosobud notes that fundamentally, as a result of the trading 
program, ``[e]veryone in the region benefits from cleaner air''. 
Kosobud addresses concerns ``that trading could cluster emissions in 
certain neighborhoods. [His] appraisal of the early results indicates 
no such clusters have occurred.'' While noting that further information 
on HAPs emissions will provide a better basis for assessing this 
question in the future, Kosobud observes that potential impacts are 
limited because sources remain ``subject to traditional regulation 
including the more rigorous rules for HAPs'', and sources ``have 
discretion only for'' the 12 percent reduction requirement of the 
trading program.
    PEER comments on the environmental justice impacts of open market 
trading. These comments are addressed in the next section, concerning 
comments relating to open market trading.
    Response: Comments regarding environmental justice generally 
involve an implicit comparison. The first step in responding to these 
comments is to define the comparison. Most commenters appear to be 
comparing conditions after the program begins to conditions before the 
program begins. For example, NRDC et al., express concern about the 
potential for ``increased HAP emissions made possible by the Illinois 
trading program.''
    Comparing emissions before and after program start-up includes 
changes over time that are not effects of the program. For example, a 
source may increase production over time without installing pollution 
controls. This would yield an emission increase that would be included 
in a comparison of before versus after program start-up that should not 
be attributed to the program.
    A more appropriate comparison is to compare prospective emissions 
after program startup to prospective emissions at the same time 
assuming no program. This comparison actually assesses the impact of 
the program, assessing whether the trading program can yield emission 
increases that would not otherwise be allowed.
    Current programs allow emissions to increase. The Illinois trading 
program does not allow any emissions increases that are not allowable 
under other applicable regulations. With the trading program just as 
without it, emissions per unit production may not increase above levels 
reflecting reasonably available control technology (RACT). The trading 
program also provides no incentive to increase emissions; no source 
would increase emissions simply because Illinois has adopted a trading 
program. In fact, the trading program provides strong incentives 
against emission increases, both because the program requires that most 
sources reduce emissions and because the trading program imposes a cost 
for purchasing credits that discourages emission increases. Therefore, 
USEPA concludes that a comparison based on projected emissions would 
show no sources having greater emissions and numerous sources showing 
lesser emissions with versus without the trading program.
    A second appropriate comparison is to compare the scenario 
involving the trading program against a scenario involving the same 
emission reductions achieved by alternative means. This begs the 
question of how the alternative reductions are obtained.
    One form of this comparison is to define the alternative to reflect 
Illinois adoption of RACT regulations to achieve equivalent reductions. 
The usual presumption is that RACT regulations would yield a different 
distribution of reductions, with emissions being higher at some sources 
and lower at others. However, quantifying these differences is 
difficult at best. First, Illinois in its rule adoption process 
concluded that it could not identify RACT regulations that could 
achieve reductions equivalent to its trading program. More generally, 
no commenter identified a set of RACT regulations that could achieve 
equivalent reductions, and it is in fact questionable whether such a 
set of regulations can be identified. It is impossible to quantify how 
the reductions from an undefined RACT program would compare to the 
reductions from the Illinois trading program.
    Second, even if one could define a RACT alternative, and assuming 
that one could then quantify the distribution of reductions from the 
alternative (as well as the increases due to production increases), the 
comparison would still require quantifying the distribution of 
reductions from the trading program. Such quantifying is difficult.
    NRDC et al., argue that Illinois' economic impact analysis gave it 
solid data to project which sources were likely to purchase credits 
(i.e., emit more than baseline emissions minus 12 percent) and which 
sources were likely to sell credits (i.e., emit less than baseline 
emissions minus 12 percent). In USEPA's experience, such analyses do 
not yield data that are sufficiently reliable to conduct the type of 
assessment NRDC et al., seek. While economic impact analyses can give a 
useful estimate of the overall impact of a set of regulations, these 
analyses do not reflect the source-specific factors that would need to 
be considered to judge which particular locations might be most likely 
to experience net credit purchases. Consequently, USEPA does not 
require Illinois to conduct the type of analysis sought by NRDC et al.
    Elsewhere in their comments, NRDC et al. argue that large swings in 
emissions could occur because ``the operations of market mechanisms are 
anything if not unpredictable.'' This latter comment contradicts their 
assertion that Illinois could have readily predicted source-specific 
shifts in emissions. In fact, assessing stability of aggregate 
emissions (for example by the examination of production data described 
in the notice of proposed rulemaking) is more feasible than predicting 
the future actions of individual sources.
    One possibility is that the trading program would produce emission 
reductions identical to those that would be imposed via RACT 
rulemaking. RACT rulemakings tend to be dominated by issues of cost and 
feasibility. Illinois' trading program is designed to allow sources 
themselves to determine which combination of controls are feasible and 
can be achieved at least cost. Thus, in theory, the Illinois trading 
program could provide the same set of reductions that RACT rulemaking 
would seek to provide. In practice, the trading program provides 
incentive for process changes that may be very cost-effective but 
generally cannot be imposed by regulation. Thus, speculation on the 
difference between emission reductions with a trading program versus 
with a RACT regulation must include speculation on the extent to which 
sources in a trading program would reduce emissions via process changes 
versus installation of control equipment.
    Another form of this comparison is to define the alternative 
scenario as one in which all sources subject to the trading program 
regulations instead must reduce emissions by no more or less than 12 
percent. This alternative scenario is as if Illinois' regulation could 
be subdivided into an emission reduction component and a trading 
component, and removing the trading component. As compared to this 
alternative, the Illinois trading program will of course have higher 
emissions in some locations and lower emissions in other locations. 
However, USEPA believes that communities of concern (which are presumed 
to have disparate pollution burdens) are as likely to experience lower 
emission than higher emissions. In any case, it is doubtful that 
Illinois could have adopted a

[[Page 52348]]

regulation that required all sources to reduce emissions by 12 percent 
without option for trading. Therefore, an alternative constructed in 
this fashion is probably not a realistic alternative.
    CBE/ALAMC and ED provide rationales by which the Illinois trading 
program would be likely to yield emission reductions that favor or 
disfavor communities of concern. CBE/ALAMC argues that communities of 
concern, in particular low income and minority communities, tend to 
have older sources that are prone to be difficult to control and that 
are therefore prone to have less emission reduction than other areas. 
ED observes that such communities will tend to fare better with a 
trading program than with traditional RACT-type regulations, because 
``vulnerable populations' relative lack of political leverage'' will 
tend to be a more important factor in developing RACT-type regulations 
than in a trading program.
    These comments by CBE/ALAMC and ED implicitly reflect comparison to 
alternative control scenarios that may not be realistic alternatives. 
Nevertheless, the annual program review will address the actual effects 
of Illinois' program.
    USEPA agrees with Kosobud that preliminary evidence indicates that 
the program is providing relatively uniform reductions across the 
Chicago area. USEPA intends to continue to monitor the distribution of 
emission reductions that result from the Illinois trading program. If 
the program results in a problematic distribution of emission 
reductions, USEPA will request that Illinois remedy the situation.
    Comment: CBE/ALAMC comment on USEPA's description of workgroup 
efforts to define the HAPs emissions information that sources must 
report and to define the information for Illinois to provide in its 
annual report. CBE/ALAMC disagree with USEPA's claim that the workgroup 
achieved consensus on emission reporting requirements. CBE/ALAMC 
observe that rule revisions to adopt these emission reporting 
requirements are being subject to unusual hearing requirements and have 
not been adopted even as the second year of the trading program begins. 
CBE/ALAMC note that the workgroup has had ``little, if any, 
discussion'' of how to analyze and report the information on HAPs 
emissions to be collected. CBE/ALAMC identify several questions that 
remain to be addressed, including whether the annual report will give 
community-specific information on trades and HAPs impacts, what 
opportunity the public will have to comment on the annual reports, and 
whether Illinois will address the public's comments and make any 
warranted program changes.
    CBE/ALAMC express concern in particular that the workgroup has not 
defined what constitutes an environmental injustice. CBE/ALAMC describe 
and dispute an industry view that environmental injustice cannot be 
identified without a complete risk assessment. CBE/ALAMC argue instead 
that ``any community that is subject to an increase in HAPs 
[emissions]--or even a community whose HAP emissions are not reduced to 
the level commensurate with those that are being achieved in other 
communities--is suffering a disparate impact.''
    CBE/ALAMC then note that even more difficult than defining 
environmental justice is addressing problems after they occur. CBE/
ALAMC state that ``IEPA should have been required to address these 
issues before the program was implemented.'' CBE/ALAMC state that ALAMC 
urged during Illinois' rule development process that steps be taken to 
``prevent the problem from happening in the first place.'' CBE/ALAMC 
now doubt ``that IEPA will be able to identify and mitigate any EJ or 
disparate impacts . . . in a timely manner, if at all. Not only do 
these potential problems need to be well defined, but a detailed course 
of action to correct them needs to be in place before USEPA should even 
consider approving this program.''
    Johnson comments that Illinois ``fails to address several critical, 
common sense provisions'' of USEPA's guidance on environmental justice. 
Johnson states that ``Illinois has yet to propose and commit to an 
adequate program to evaluate [the program's] potential to increase 
exposures of selected populations to hazardous air pollutants.'' 
Johnson disputes USEPA's statement that the workgroup on the annual 
program review ``has achieved general consensus * * * to require 
companies to report emissions of individual HAPs''. Johnson believes 
that ``[n]o consensus * * * has been achieved. Rather, Illinois has 
only proposed a rule based upon divergent concerns.'' Finally, Johnson 
comments with respect to ``the most important element'' of USEPA's 
recent guidance, namely that the state must ``provide for an 
opportunity to remedy any problems that are identified following 
[program] startup''. Johnson expresses the view that a ``sounder * * * 
policy'' would go beyond providing an opportunity for mitigation and 
instead require actual mitigation, but Johnson objects that Illinois 
does not even provide the opportunity for mitigation.
    Response: The primary purpose of this rulemaking is to evaluate the 
rules that Illinois submitted and the emission reductions that these 
rules are intended to achieve. Nevertheless, USEPA requires that states 
submitting trading programs that include VOC (and thus potentially 
involve trading of HAPs) must provide an ongoing public input and 
review process to evaluate whether the programs yield an equitable 
distribution of impacts on HAP emissions.
    USEPA continues to believe that Illinois is taking appropriate 
steps to assure an informed, public debate of the impacts of its 
trading program on emissions of hazardous air pollutants. USEPA did not 
claim that all parties agree on all details of a rule on emissions 
reporting; USEPA instead more accurately observed that a workgroup 
convened by the state had ``achieved general consensus on a draft 
rule,'' in particular a general consensus ``to require companies to 
report emissions of individual HAP species.'' Subsequent to USEPA's 
notice of proposed rulemaking, Illinois has now published and 
distributed its first annual report on the program. Contrary to CBE/
ALAMC's concerns about lack of discussion of methods for analyzing 
whether disparate impacts had occurred, Illinois extensively solicited 
input from the business and environmental members of its workgroup on 
such methods and other aspects of this report.
    USEPA acknowledges that business representatives and environmental 
groups can have differing definitions of environmental justice and 
disparate impacts. Given the variety of possible scenarios, it is 
reasonable for Illinois to focus on analyzing actual data and to avoid 
extensive preliminary debate on methods for analyzing an array of 
hypothetical scenarios, most of which would not actually occur.
    As sought by Johnson, Illinois has committed to an ongoing process 
for reviewing the program's impact on hazardous air pollutant emissions 
and to remedy any problems that are identified. USEPA does not share 
Johnson's view that USEPA should require the state to adopt specific 
provisions mandating mitigation of any environmental justice problems 
that arise. USEPA further disagrees with Johnson's statement that 
Illinois provides no opportunity for such mitigation.
    USEPA reviewed Illinois' program according to guidance on three 
elements of programs well designed to address environmental justice 
concerns. The key first element is a program design that

[[Page 52349]]

makes environmental justice problems unlikely. Illinois does so by 
requiring program participants to continue to comply with all RACT and 
hazardous air pollutant regulations and establishing an overall 
emission reduction requirement, which discourages the otherwise likely 
local emission increases. The second element is an ongoing public 
information and review process. This process should identify whether 
problems are arising that can be addressed with simple permit 
revisions, whether problems are arising that would require rule 
revisions, or whether as expected no significant problems are arising. 
It is important here to note that the range of potential issues is 
wide, and so it is unrealistic to expect the state to adopt a rule that 
provides for program revisions to address any possible desired remedy. 
The third element is the state's commitment to remedy any problems that 
are identified. By incorporating these elements into its program, USEPA 
believes that Illinois has taken appropriate steps to address concerns 
about environmental justice.

2. Comments on ``Open Market Trading Features''

    Comment: ED comments extensively on the ``elements of an 'open 
market' system'' incorporated in Illinois'' program. Because Illinois 
allows generation of trading credits from small industrial, mobile, and 
area sources, ED views Illinois' program as a hybrid and not a true cap 
and trade program. ED believes that this incorporation of open market 
features into Illinois' program should prompt USEPA to reconsider 
whether Illinois' program will achieve the intended emission 
reductions.
    ED compares Illinois' program unfavorably with the acid rain 
program. ED describes the acid rain program as allowing sources not 
otherwise subject to the program to voluntarily opt into the program, 
to receive allowances reflecting a cap on current actual emissions and 
to be allowed to sell allowances to the extent the sources reduce 
emissions below their cap. ED describes Subpart E of Illinois' trading 
rules as providing short-term, ``discrete'' credits. ED concludes that 
existence of these open market style credits ``fundamentally weakens 
the integrity of the emissions cap [and] undermines the economic 
incentives [for] investments in emissions reductions.''
    NRDC et al., comment without elaboration that the Illinois program 
``incorporates many features of the open market trading rule proposed 
in 1995 * * *.'' NRDC et al., also claim that Illinois' program 
``allows sources to meet (and circumvent) otherwise applicable 
requirements with [unreliable] pollution credits'' and thus ``will 
relax existing SIP measures.'' Elsewhere in their comments, NRDC et 
al., `cite the ``use of credits from outside the 'capped' sources, from 
mobile, area and small industrial sources,'' allowing ``inter-sector 
trading of discrete (i.e., mass-based) credits, in many cases 
quantified retrospectively.'' NRDC et al., view these features as 
evidence that ``the Illinois trading program incorporates open market 
trading mechanisms into its purported limited cap and trade system.''
    PEER, in its comments of March 8, 2001, objects at length to open 
market trading programs in general and to New Jersey's and Michigan's 
open market trading programs in particular. PEER does not discuss the 
Illinois program in its comments. Nevertheless, the subject line of 
this comment letter identifies the Illinois program as one of four 
programs, ``each of which is based entirely or in substantial part on 
`open market trading.' ''
    Response: ED implicitly acknowledges that the core features of 
Illinois' program subject major VOC sources in the Chicago area to a 
cap and trade program. In addition, ED apparently supports voluntary 
participation of minor sources in Illinois' program. ED's objections 
focus more narrowly on the potentially short duration of such sources' 
participation and the mechanism for accounting for emission reductions 
from such sources, which ED views as open market features of the 
Illinois program.
    In general, cap and trade programs differ from open market trading 
programs in several respects: (1) Cap and trade programs require 
emission reductions beyond those required by RACT regulations and other 
regulations, whereas open market trading programs characteristically 
allow emissions above levels such regulations allow (provided another 
source achieves more than compensating reductions). (2) Cap and trade 
programs seek to cap the emissions of a category of sources at some 
level lower than emissions would otherwise be, typically at a level 
well below prior actual emissions. In contrast, open market programs 
require net emission reductions as part of each trade but do not 
foreordain any overall quantity of reductions to be achieved. (3) Cap 
and trade programs have mandatory participation from a specified 
category of sources, whereas participation in open market programs is 
voluntary. (4) Cap and trade programs typically account for all 
emissions from the participating sources, whereas open market programs 
typically account only for net emission increases and decreases of 
participating sources. Typically, cap and trade programs issue a finite 
number of allowances and limit emissions of each source according to 
the source's holdings of allowances, whereas open market programs only 
track whether the emissions decreases of one source suitably compensate 
for the emissions increases of a matched source.
    The Illinois program clearly has these fundamental features of cap 
and trade programs and lacks the contrasting features of open market 
trading programs. (1) The Illinois program requires compliance with 
RACT regulations and all other regulations. (2) The Illinois program 
sets a cap on emissions which for most sources is 12 percent below 
baseline actual emissions. Aside from ED's general concerns about 
program effectiveness, no commenter objected to USEPA's proposed 
conclusion that the program would reduce Chicago area VOC emissions by 
10.9 tons per day. (3) The Illinois program requires participation by 
major VOC sources in the Chicago ozone nonattainment area. 
Participation by these sources is not voluntary. (4) The Illinois 
program accounts for all emissions of the mandated program 
participants, requiring that these sources limit their emissions to 
correspond to the number of allowances the source holds out of the 
finite overall set of allowances.
    ED does not dispute that the core features of the Illinois program 
are those of a cap and trade program; ED instead argues more narrowly 
that the program is a hybrid in which the cap and trade characteristics 
are supplemented by open market trading program features. However, 
USEPA does not agree either that the Illinois program is in any 
significant respect an open market trading program or that any features 
of the Illinois program warrant its disapproval.
    ED does not object to Illinois' provisions for voluntary 
participation of small sources on an opt-in basis, which USEPA views as 
the most significant element of the Illinois program that is 
characteristic of open market trading programs. Instead, ED favors the 
opt-in provisions of the acid rain program, a program which ED views as 
a properly designed cap and trade program.
    ED focuses on the duration and accounting of emission reductions by 
opt-in sources in the acid rain program versus the Illinois program. ED 
overstates the significance of these distinctions. The acid rain 
program is set up to include predominantly long

[[Page 52350]]

term opt-ins and yet the program does not prohibit relatively short 
term participation. In theory, the Illinois program is more 
accommodative of short term participation. In practice, the opt-ins to 
date have all been permanent. In any case, although the Illinois 
program has the potential to have a greater fraction of short term 
participants, it is not clear that even the realization of that 
potential would significantly change the reliability level of the 
reductions or otherwise cause the problems ED anticipates.
    As for the accounting process, USEPA views the two processes as 
fundamentally equivalent. Whether a source receives allowances equal to 
baseline emissions and must retire allowances equal to actual 
emissions, or alternatively the source receives allowances according to 
the difference between baseline and actual emissions, both programs 
result in the source having salable allowances equivalent to the 
source's emission reductions.
    USEPA does have related concerns arising from the issuance of 
allowance pursuant to emission reductions from small sources, 
particularly from mobile sources. The emission reductions from mobile 
sources can be difficult to quantify, insofar as one cannot measure the 
emissions directly and one must consider the time varying deterioration 
and usage of the vehicles involved with and without the emission 
reduction activity.
    This issue is not a function of whether crediting for the 
reductions is done in a characteristically open market trading manner 
or in a characteristically cap and trade manner, e.g., whether the 
state issues allowances according to the emission reduction or whether 
the state issues allowances equal to a cap and allows sale of 
allowances according to the eliminated emissions. The issue instead 
pertains to the reliability with which the emission reduction can be 
determined. Poorly quantified emission reductions result in a program 
that does not as reliably obtain the intended emission reductions.
    To date, Illinois has received no requests for issuance of 
allowances pursuant to emission reductions by mobile or area sources. 
USEPA expects this program feature never to involve significant 
quantities of emissions.
    Should such requests arise, USEPA has requested that Illinois 
consult extensively with USEPA on the methods for evaluating emissions 
and emission reductions, particularly for requests involving mobile 
sources. With such consultation, USEPA believes that issuance of 
allowances for emission reductions from these source types are an 
acceptable program feature that will not significantly affect the 
integrity of Illinois' program.
    Other commenters provide less justification for suggesting that 
their concerns about open market trading programs apply to the Illinois 
program. Contrary to comments by NRDC et al., the Illinois program 
retains RACT and other such limitations as independently enforceable 
requirements irrespective of how many allowances a source holds. USEPA 
continues to believe that the Illinois program is fundamentally a cap 
and trade program that is unlikely to cause the problems identified by 
these commenters.

3. Additional Comments by NRDC et al.,

    Comment: NRDC et al., make a variety of comments in its 
introductory remarks. NRDC et al., comment that ``EPA has had some 
degree of success with the acid rain trading program'', but finds the 
Illinois program to fall short of the acid rain program in several 
respects.
    Response: USEPA agrees that sulfur dioxide from large boilers is 
easier to measure and quantify than VOC from various kinds of VOC 
sources. This causes VOC programs generally to have greater uncertainty 
that sulfur dioxide programs. However, the Clean Air Act does not 
direct USEPA to evaluate whether Illinois' trading program is better or 
worse than the acid rain program. USEPA must instead evaluate whether 
the Illinois program provides an approvable addition to the Illinois 
SIP. Further comments and responses below will address the specific 
features of the Illinois program noted by NRDC et al., treating them as 
features that NRDC et al., find problematic.
    Comment: The Illinois program ``will relax existing SIP measures'' 
and ``allows sources to meet (and circumvent) otherwise applicable 
requirements with pollution credits having the integrity of counterfeit 
currency.''
    Response: The Illinois program does not relax any existing SIP 
measures.
    Comment: ``Polluters [are] allowed to develop their own 
quantification methods without the bother of EPA or public oversight.''
    Response: Illinois set the general methods via rulemaking and sets 
source-specific details of these methods via permit, processes that 
provide opportunity for public input. USEPA's proposed rulemaking 
provided a further opportunity for public input on the general methods, 
though the commenters provided no such input.
    Comment: NRDC et al., state that ``We are aware from internal EPA 
documents * * * that there has been a raging debate within the Agency'' 
concerning trading program policy, debates which ``apparently began in 
large part out of vociferous opposition to EPA's deplorable 1995 Open 
Market Trading (OMT) proposal.''
    Response: While NRDC et al., do not specify the internal USEPA 
documents it examined, the comments do imply that USEPA's proposed 
rulemaking is the outcome of a thorough internal debate on relevant 
issues. These comments further imply that many of the issues raised by 
NRDC et al. are issues that USEPA has already addressed in preparing 
its proposed rulemaking. In these cases, and in the absence of new 
input warranting a different conclusion, NRDC et al. should expect 
USEPA's final rulemaking to reach the same conclusion as USEPA 
proposed.
    Comment: NRDC et al., comment that USEPA appears to be proposing 
conditional approval, and yet the proposed action lacks key 
prerequisites for conditional approvals. NRDC concludes that the Clean 
Air Act provides no basis for the proposed action.
    Response: USEPA did not propose conditional approval. USEPA 
identified some concerns with the State's submittal but anticipated 
that Illinois would address these concerns. USEPA proposed that if in 
fact Illinois satisfactorily addressed these concerns, then USEPA would 
publish full approval pursuant to section 110(k)(3).
    Comment: NRDC et al., object to a failure to require that emission 
reductions be surplus. NRDC et al., observe that the program fails to 
define surplus. These commenters reference the definition of surplus 
given in USEPA's regulations on trading programs (40 CFR 51.491 and 
51.493), and specifically note the failure to avoid crediting 
reductions already ``assumed in the relevant emission inventory or [in 
the Chicago area's] most recent federally approved rate-of-progress or 
attainment plan.'' The commenters further observe that surplus 
reductions in fact cannot be identified because ``there has yet to be a 
submission, let alone a federal approval, of an [attainment] plan 
including detailed and specific measures.'' The commenter continues by 
suggesting that USEPA should not approve Illinois' trading program 
until a detailed attainment plan is in place to specify which emission 
reductions should be considered surplus and thus creditable for a 
trading program.
    NRDC et al., further comment on the baselines from which Illinois 
determines each source's target

[[Page 52351]]

emissions level (generally 12 percent below baseline level). NRDC et 
al., object that USEPA's proposal does not describe ``whether or how 
the baselines are consistent with the inventories included in the 
approved SIP, rate of progress, or attainment demonstration.''
    Response: USEPA's trading program regulations at 40 CFR 51.491 
define surplus as ``at a minimum, emission reductions in excess of an 
established program baseline which are not required by SIP requirements 
or State regulations, relied upon in any applicable attainment plan or 
demonstration, or credited in any reasonable further progress or 
milestone demonstration, so as to prevent the double counting of 
emission reductions.'' The Illinois program pursues emission reductions 
relative to a baseline that reflects actual emissions (adjusted if 
necessary to discount noncompliance) pursuant to ``applicable 
requirements effective in 1996'' (Cf. Section 205.320). The regulations 
Illinois submitted do not use the term ``surplus,'' nor do USEPA's 
regulations require use of the term. Instead, Illinois has indirectly 
addressed the issue by defining the applicability and the emission 
reduction obligations of affected sources, and has designed its program 
to achieve reductions beyond those required by or anticipated from 
other programs. The notice of proposed rulemaking includes a 
quantitative evaluation of the emission reductions expected from 
Illinois' trading program beyond the reductions achieved by other 
means. That evaluation reflects USEPA's belief that the Illinois 
trading program in fact achieves reductions that are surplus to the 
reductions from other elements of the SIP.
    USEPA policy is that trading programs may be approved even before a 
needed attainment demonstration has been approved, so long as the state 
commits to assure that source emission estimates for the trading 
program and for the ultimate attainment demonstration are consistent. 
In this case, Illinois has submitted an attainment demonstration for 
the Chicago area, which USEPA proposed to approve on July 11, 2001, at 
66 FR 36369. The reductions from the trading program are surplus to the 
other elements of this attainment demonstration. The baselines of the 
trading program are fundamentally consistent with the attainment 
demonstration inventory because they are based on the same set of 
emissions data. The baselines are not identical to the attainment 
demonstration inventory, particularly due to the adjustments noted by 
the commenters, but USEPA accounted for the differences in its review 
of program benefits described at length in the notice of proposed 
rulemaking.
    Comment: NRDC et al., comment extensively on the RECLAIM program in 
the Los Angeles area. The commenter states that the NOX 
RECLAIM program ``has failed spectacularly in recent months.'' The 
commenter cites a lawsuit filed against a company participating in a 
Los Angeles area trading program ``because of its redistribution of 
pollution burdens to low income and minority communities'' near the 
sources ``using credits rather than making the reductions required of 
them under the Clean Air Act.'' The commenter observes that the public 
has raised the same concerns about the Illinois program, and that 
``alternatives with a lesser impact are available.''
    Response: The commenters have not explained how their views of the 
RECLAIM program are germane to USEPA's review of the Illinois trading 
program. USEPA cannot disapprove a program that meets Clean Air Act 
requirements simply because commenters identify ``lesser impact'' 
alternatives.
    Comment: NRDC et al., state that the Illinois program has no 
credible enforcement mechanisms. The commenters concede that the 
program ``is ultimately enforceable under enforcement provisions of the 
Clean Air Act.'' However, the comment expresses concern that the 
timetable for such enforceability extends too long and in fact is 
indeterminate. While noting that USEPA's proposed rulemaking requests 
that Illinois clarify the timetable, the commenters find it 
``unacceptable'' that the proposed rulemaking ``fails to specify how to 
rectify [this] problem.''
    Response: As discussed in more detail in section III above, 
Illinois has clarified the timetable for enforcement of the 
requirements of the trading program. In brief, sources that fail to 
hold the necessary number of allowances as of December 31 and then fail 
to cover the shortfall plus a surcharge under a timetable that ends 
about mid-March are subject to enforcement action pursuant to Section 
113 of the Clean Air Act. USEPA solicited comments on a similar 
prospective resolution of this issue.
    Comment: NRDC et al., comment that ``[t]he Illinois trading program 
allows sources to borrow not only from the past, but also from the 
future,'' and views this as an ``unlawful variance.'' By footnote, the 
commenters specify that this concern applies particularly to the 
program feature known as the Alternative Compliance Market Account.
    Response: In Illinois' program, most emission reductions will occur 
every year. Because allowances under the program have a two-year life, 
in some cases excess reductions in earlier years will allow lesser 
reductions in later years, consistent with the early reductions policy 
that USEPA has adopted in several of its rules.
    Even with the Alternative Compliance Market Account, ``regular 
access'' to credits from this special account is for credits associated 
with the year of purchase (also usable thereafter). Allowance of 
emissions in one year based on credits from a later year occurs only 
with ``special access'' to the Alternative Compliance Market Account. 
Several restrictions assure that ``special access'' will occur rarely 
if ever. ``Special access'' is prohibited if the source can obtain 
credits from the marketplace or from ``regular access'' to the 
Alternative Compliance Market Account. Credits via special access cost 
twice as much as credits purchased on the market. (``Regular Access'' 
credits cost 50 percent above market prices.) The number of credits 
accessible through special access is limited to one percent of the 
number of credits issued to sources. This feature of the Illinois 
program is designed as an emergency fund of high-priced credits in case 
normally priced credits do not materialize.
    USEPA generally requires that reductions occur before credit use to 
avoid concerns about otherwise unallowable emissions occurring and then 
having expected compensating emission reductions fail to occur. This is 
unlikely to occur in Illinois, because the prerequisites for special 
access are unlikely to be met. Even if the prerequisites for special 
access are met, and under a worst case in which compensating reductions 
do not occur, the risk is capped at one percent of overall emissions. A 
further fallback is Illinois' annual program report and Illinois' 
commitment to address problems identified in the annual report. While 
the issue identified by the commenter raises the possibility of 
achieving one percent less emission reduction, USEPA finds that this 
issue does not raise concerns about the fundamental integrity of the 
program, and USEPA finds further that the best estimate of the 
reductions to be achieved by the program do not reflect any adjustment 
pursuant to this program feature.
    Comment: NRDC et al., express concern that provisions for measuring 
emissions do not satisfy 1994 trading program guidance. The commenters 
state that the notice of proposed

[[Page 52352]]

rulemaking ``misstates the standards of the 1994 Economic Incentive 
Program guidance, asserting that they simply require `approaches or a 
range of approaches' to quantification.'' The commenters state that 
this guidance instead requires programs to include replicable emission 
quantification methods, specified in detail in the state's submittal.
    Separately, the commenters' introductory comments object that the 
methods to be used ``are incapable * * * of directly measuring * * * 
emissions,'' and allow use of ``emission factors that are * * * as 
likely to be wrong as they are right and that will result in half of 
sources using them being in noncompliance.''
    Response: A full reading of the 1994 guidance requires considering 
both the parts of 40 CFR 51.493(d) quoted by the commenter and the 
parts quoted in the notice of proposed rulemaking. The heading of 40 
CFR 51.493(d) is ``Replicable emission quantification methods''. Parts 
of the introductory text under this heading are quoted by the 
commenters. The introductory text additionally states that the methods 
``shall yield results [with] a level of certainty comparable to that 
for source-specific standards and traditional methods of control 
strategy development.'' This text is followed by subparagraph (1), 
entitled ``specification of quantification methods.'' Subparagraph 1 is 
quoted in part in the notice of proposed rulemaking, including the 
language quoted above under which the ``specified quantification 
methods'' may include a combination or a range of methods.
    ``Traditional'' control programs give varying levels of details of 
emission quantification methods. Source-specific limitations generally 
specify a single test method from 40 CFR part 60, appendix A, leaving 
only relatively modest details unspecified (e.g., types of process 
materials used during the test). Category-specific rules generally 
specify a range of methods; for example rules limiting stack emissions 
of particulate matter would generally specify that any of the methods 
from 5 or 5A to 5H may be used as appropriate. Even a wider range is 
specified in rules on new source review, which generally give no 
particulars on the test method to apply and instead specify that the 
state is to identify limits (implicitly having an associated test 
method) in a permit subject to 30-day public review.
    The approach in the Illinois trading program is well within this 
range of approaches. This trading program is limited to one pollutant 
(VOC) but covers a wide range of VOC sources. Illinois' rules specify 
methods for each type of source in this range, with more complete 
details specified in each source's Title V permit. This approach is 
appropriate for the range of sources in the program and is consistent 
with the approaches taken with other comparable control programs. The 
rules submitted by Illinois assure that each source will have a fully 
replicable emission quantification method subject to appropriate public 
review. Consequently, USEPA concludes that Illinois' program satisfies 
the 1994 guidance on emission quantification methods.
    Direct measurements of emissions usually provide more reliable data 
than indirect methods. However, the level of VOC control achieved by 
Illinois' program would not have been possible if sources needing to 
use indirect methods had been excluded. All methods give results that 
can be either too high or too low. In fact, in a trading context, it is 
preferable to have approximately equal likelihood of obtaining results 
that are too high versus too low. USEPA is satisfied that the indirect 
methods that must be used to address sources in Illinois' program are 
sufficiently reliable to have an acceptable level of confidence that 
Illinois' program will achieve the anticipated emission reductions.
    Comment: NRDC et al., state that ``the Illinois trading program is 
devoid of any programmatic enforceability'' and therefore should not be 
creditable for addressing rate of progress requirements.
    Response: USEPA is satisfied that the requirements of the Illinois 
trading program are clear and enforceable. Although the program started 
too late to be creditable for purposes of the 1997 to 1999 rate of 
progress plan, the program is creditable for attainment planning 
purposes.
    Comment: NRDC et al., comment that the Illinois trading program 
interferes with reasonable further progress and attainment obligations. 
NRDC et al., suggest that Illinois may adopt a trading program to add 
flexibility to a required control program but may not use the program 
as a ``substitute * * * for the required control stategy'' needed to 
satisfy reasonable further progress and attainment requirements. NRDC 
et al., object that USEPA ``attempts to trivialize this issue as one of 
`spiking.' '' NRDC et al., further state that the Illinois program 
lacks but needs ``safeguards against accumulation and rapid dumping of 
credits'' (i.e., spiking). Since ``the operations of market mechanisms 
are anything if not unpredictable,'' NRDC et al., reach ``the 
conclusion that `spiking' needs to be addressed affirmatively and 
proactively.''
    Response: The Illinois trading program must be understood as 
fundamentally being an emission control strategy. The commenters cite 
nothing in the Clean Air Act or USEPA guidance to suggest that this 
type of control strategy cannot be used to help achieve the 
requirements for either reasonable further progress or attainment. The 
notice of proposed rulemaking evaluates the emission reductions 
expected from this program, and no commenter commented on this 
evaluation. USEPA continues to believe that the Illinois trading 
program is a control strategy that enforceably achieves a reduction 
estimated at 10.9 tons per day, representing an appropriate element of 
any reasonable further progress or attainment plan for which these 
reductions are timely.
    In practice, Illinois chose to delay implementing the trading 
program by one year, so that the reductions were no longer timely for 
the reasonable further progress plan for reductions by 1999. Illinois 
submitted substitute measures for this plan, and USEPA approved the 
revised plan on December 18, 2000 (see 65 FR 78961). The reductions 
from the trading program are still timely for attaining the standards.
    With respect to ``spiking,'' the notice of proposed rulemaking 
presents economic data indicating that significant swings in emissions 
are unlikely. The commenters implicitly prefer that the trading program 
not accommodate significant swings in emissions should the causes of 
such swings arise. Such swings in emissions are unregulated in absence 
of a trading program and in fact are inhibited in the presence of 
Illinois' trading program. The extent of spiking possible under 
Illinois' program is limited by the two year lifetime of allowances. In 
addition, the scenario with higher than average later year emissions by 
definition has equivalently lower than average emissions in earlier 
years. USEPA continues to believe that it has adequate assurances that 
no spiking problem will arise in the Chicago area.
    Comment: NRDC et al., find that ``section 173(c)(2) disallows the 
use of `reductions otherwise required by this Act' for offsets.''
    Response: If all sources emit the full amount allowed under the 
Illinois trading program, no excess allowances would be available to 
accommodate a new source. That is, if sources achieve no reductions 
beyond those required by the program (which as part of the attainment 
demonstration are

[[Page 52353]]

considered required by the Act), no offsets would be available. Only if 
and to the extent that sources achieve reductions that are not 
otherwise required will allowances representing offsets be available.
    Comment: NRDC et al., object to the possibility in the Illinois 
trading program that credits generated from mobile source emission 
reductions may be used to offset emissions from major new stationary 
sources. NRDC et al., state that the ``Clean Air Act, 40 CFR 61.165 and 
part 51, appendix S make clear that offsets may be obtained only from 
`stationary sources' and not `mobile sources.' '' The commenters 
observe that this law and these regulations ``make no mention of 
`mobile sources' '' as a possible origin of offsets. The commenters 
quote Clean Air Act section 173(c)(1) and infer that the ``sources'' 
from which offsets must be obtained must be stationary sources. The 
commenters justify this inference by noting that some uses of the term 
``source'' by necessity mean ``stationary source,'' and by observing 
that the terms ``source'' and ``stationary source'' are used 
interchangeably in Part D of Title I of the Act.
    Response: USEPA disagrees with the commenters' assertion that 
offsets under section 173 of the CAA are limited to those from 
stationary sources. The language of section 173 and the statutory 
framework and context are best read as allowing offsetting emissions 
reductions to be provided by sources other than stationary sources. As 
specified in section 173(a)(1)(A), the ultimate test as to whether 
offsetting emissions reductions are sufficient is by reference to 
whether they represent ``reasonable further progress as defined in 
section 171.'' The definition of ``reasonable further progress'' in 
section 171(1) plainly refers to the air quality goal of attainment of 
the NAAQS, and since all sources of air pollution, including mobile, 
stationary, and ``area'' sources, contribute to nonattainment, the 
definition of reasonable further progress naturally does not exclude 
any category of emissions. Accordingly, USEPA has not limited offsets 
under section 173(a)(1)(A) to those derived from other stationary 
sources, but has instead allowed other source categories, such as 
mobile sources, to provide offsets. The statutory language cited by the 
commenters, referencing ``other sources'' providing offsets, plainly 
means sources other than the new or modified major stationary source. 
This language should not be interpreted as requiring offsets to come 
from that subset of other sources that are stationary.
    Comment: NRDC et al., comment that the Illinois trading program 
violates Clean Air Act section 173 by allowing emission reductions that 
commence after new source construction to be used as offsets for the 
new source's emissions. The commenters quote section 173(c)(1) as 
requiring that emission reductions obtained for offsets ``shall be, by 
the time a new or modified source commences operation, in effect and 
enforceable''. Similarly, the commenters quote section 173(a)(1)(A) 
that, ``by the time the source is to commence operation, sufficient 
offsetting emissions reductions have been obtained''. The commenters 
further quote the Draft NSR Workshop Manual (October 1993) that 
``Offsets should be specifically stated and appear in the permit, 
regulation or other document which establishes a Federal enforceability 
requirement for the emissions reduction.''
    NRDC et al., object to the rationale given in USEPA's notice of 
proposed rulemaking for finding Illinois' offsets adequately permanent. 
The commenters find this rationale inconsistent with section 173 and 
related USEPA guidance. First, the commenters view USEPA's rationale as 
tantamount to accepting a promise to obtain offsets in lieu of 
requiring advance specification of actual offsets. The commenters state 
that this `` `restatement' approach is little different from a 
construction permit merely `restating' the requirement to meet BACT or 
LAER upon operation''. The commenters are further concerned that the 
public get adequate opportunity to review the origins of the offset and 
to comment on whether the offsets are lawful, quantifiable, surplus, 
enforceable, and permanent. The commenters further comment that section 
173 requires advance securing of offsets, ``in order to prevent any 
later complaints from the source'' if offsets subsequently cannot be 
found.
    Second, the commenters consider Illinois' approach unreliable. The 
commenters dissect statements in USEPA's notice of proposed rulemaking 
to demonstrate that offsets here would lack the necessary permanence. 
The commenters observe that USEPA's rationale ``brims with the inherent 
uncertainty, indeterminacy, and unenforceability'' of Illinois' 
approach. The commenters believe that ``permits with temporary plans 
that increase the likelihood in practice that sources will offset their 
pollution increases prior to operation'' fall short of the guarantee of 
permanent offsets established that the Clean Air Act mandates.
    Response: The commenters have properly quoted section 173 but have 
urged an overly restrictive interpretation of allowable approaches for 
obtaining offsets. Section 173 does not use the term ``permanent,'' and 
USEPA does not believe that section 173 requires permanent reliance on 
a single action or set of actions to offset the new source's emissions 
in all future years.
    USEPA must evaluate what it means to obtain an emission reduction 
for offset purposes. The commenters believe that obtaining an emission 
reduction means securing an action (and establishing a mechanism for 
assuring the permanence of the action) that will yield emission 
reductions that will offset the new source or major modification 
emissions starting by the time the new or modified source commences 
operation and continuing in all future years. The Illinois program aims 
to address the offset requirement in a slightly different manner, 
requiring that the needed emission reductions occur each year but 
allowing different years' reductions to reflect different actions.
    Some hypothetical cases help illustrate the key issues here. In the 
first hypothetical case, new source A obtains its first three years of 
offsets from source B, its second three years of offsets from source C, 
and thereafter switches between source B and source C as the origins of 
its offsets. In this case, the commenters' interpretation of section 
173 is violated because there is no single origins of emission 
reductions that permanently offsets new source A's emissions, and 
because the emission reductions from source C would perhaps not be in 
effect when new source A commences operation. However, USEPA believes 
that this case satisfies section 173. Source A has secured sufficient 
emission reductions by the time it commences operation. These 
``sufficient emission reductions'' occur in each subsequent year as 
well, such that the combination of new emissions and emission offsets 
represents reasonable further progress. USEPA interprets section 
173(c)(1) to require sufficient emission reductions to commence by the 
time the new source commences operation, not to require each action 
yielding emission reductions ever to be used for offset purposes to 
occur by commencement of source operation.
    In a second hypothetical case, new source A receives a permit 
specifying ofsets for the first 3 years, based on source B suspending 
operations for 3 years, and requiring that source A obtain equal 
offsets from unspecified other sources thereafter. Assuming that

[[Page 52354]]

the requirement for the subsequent offsets is adequately enforceable, 
USEPA again would find section 173 satisfied. The permit assures 
emission reductions offsetting new source A's emissions starting by the 
time source A commences operation and assures that sufficient 
offsetting emission reductions will be in effect at all subsequent 
times as well. USEPA concludes that this scenario would satisfy the 
section 173 requirements for offsets to be in effect by the time the 
new source commences construction and to continue to assure reasonable 
further progress.
    Illinois' trading program addresses offsets in a manner similar to 
this second case. A new source must purchase credits reflecting 
emission reductions starting upon commencement of operations and at all 
times thereafter. A new source must identify its plans for offsets for 
the first three years but need not specify the origins of these offsets 
for all future years. The Illinois trading program nevertheless 
establishes an enforceable requirement for new sources to secure 
offsets at all necessary times.
    The approach stated in the proposed rulemaking is consistent with 
the statements quoted from the document entitled ``Draft NSR Workshop 
Manual''. In fact, the first hypothetical case above seems consistent 
with even the commenters' presumed interpretation of the quoted 
statement, insofar as the permit would specifically state the offsets 
coming from Source B and the offsets coming from Source C in 
alternating three year periods. However, USEPA applies a more flexible 
interpretation of its guidance, wherein the specific statement of 
offsets can have varying characteristics depending on the nature of the 
offsets being provided. USEPA expects permits for major new VOC sources 
in the Chicago area to specifically state that offsets will be obtained 
via the purchase of surplus credits, and USEPA affirms that the trading 
regulations that provide for Federal enforceability of the offsets 
specifically state that surplus credits shall serve as offsets. The 
flexibility of this USEPA guidance is highlighted by the use of the 
terms ``should'' and ``must,'' i.e., that the document providing 
enforceability of the offsets should specifically state the offsets, 
whereas offsets must be established in a permit or a SIP revision.
    More recent guidance makes even more clear that reductions from 
trading programs, which are enforceable but which may not have 
forecastable origins, provide suitable offsets. Specifically, guidance 
on trading programs, dated January 2001, clarifies at several points 
that emission reductions obtained pursuant to trading programs may be 
used for offset purposes, notwithstanding that the sources providing 
future offsetting reductions may not be known at the time of new source 
construction. In section 16.14 of this guidance, entitled ``Provisions 
for new source review and trading'', on page 255, the guidance states 
that ``You may allow sources to use emission reductions generated by 
your [trading program] to comply with PSD/NSR requirements [if, among 
other things,] sources that are required to obtain offsets or netting 
credits have an obligation to obtain such credits, when they are not 
continuous credits, for the life of the source needing the credit.'' 
Similar guidance is provided in Chapter 7, including guidance for open 
market trading programs that ``If a source wishes to use [credits] to 
meet its NSR offset requirements it must * * * obtain sufficient 
[credits] for at least 1 year of operation before receiving its permit 
[and] commit in its NSR permit to obtain sufficient [credits]'' 
annually thereafter.
    The commenters are concerned about the ``uncertainty, 
indeterminacy, and unenforceability'' of Illinois' approach. This 
comment reflects the commenters' concern about the possibility of 
sources changing the origins of offsets. However, under section 173, 
the critical issue is whether USEPA can be certain that emissions will 
be offset at all times. The Illinois trading program provides for 
offsets at all times, and provides a clear mechanism for enforcing this 
requirement.
    The commenters also express concern at the lack of opportunity for 
public review and comment on the offsets that a new source would use. 
Most USEPA policy on this issue reflects cases where a construction 
permit is used to establish offsets. This case is different, insofar as 
the public will have already had the opportunity to review the 
mechanism for obtaining offsets (during the development and then this 
USEPA review of the trading program), the public will have an 
additional opportunity to comment on the mechanism when a draft 
construction permit is issued, but then no convenient forum exists for 
soliciting public input when a source purchases offsets from different 
origins. Under these circumstances, USEPA believes that the public has 
adequate opportunity to comment on the most significant issues 
pertaining to satisfaction of the offset requirements.
    The commenters find Illinois' approach to offsets to be analogous 
to issuing a construction permit that simply restates a requirement to 
meet the lowest achievable emission rate (LAER) upon operation. USEPA 
disagrees with this analogy. First, new source permits in Illinois will 
specify the precise obligation of the source for offset purposes under 
the trading program, namely to obtain credits sufficient to offset the 
new source emissions. Second, the key reason a permit simply restating 
the LAER requirement is not enforceable, that such a permit does not 
give the source fair notice as to its precise obligations for emissions 
control, does not apply to a source mandated to obtain a determinate 
number of credits for offset purposes.
    Comment: NRDC et al., concur with the interpretation described in 
the notice of proposed rulemaking that ``section 173 requires offsets 
on a full year basis, rather than the ozone season basis allowed by 
Illinois.''
    Response: USEPA is deferring rulemaking on this issue, pending 
further review including consideration of this comment and the contrary 
comment by Illinois EPA. As discussed previously, by not rulemaking on 
the exemption in section 205.150(e) of Illinois' rules, the standard 
offset requirements in Part 203 of Illinois' rules remain in effect as 
part of the Illinois SIP.

4. Additional Comments by ED Dated March 26, 2001

    ED submitted comments both on January 26, 2001, and March 26, 2001. 
The comments of March 26, 2001, include most but not all of the 
comments of January 26, 2001. ED's comments express numerous concerns 
about ``open market'' features of Illinois'' program. These comments 
are addressed above, as are comments by ED concerning environmental 
justice. The following discussion presents other ED comments of March 
26, 2001 and USEPA's responses. The remaining comments submitted 
January 26, 2001, are addressed in the section that follows.
    Comment: ED comments generally that Illinois has begun to develop a 
program with the potential to deliver significant environmental and 
health benefits, but that USEPA should withhold approving the program 
until a number of outstanding issues are remedied.
    Response: USEPA responds generally that it believes that the 
program Illinois submitted is approvable, and USEPA does not believe 
that ED's concerns warrant withholding approval. Further details of 
ED's concerns and USEPA's responses follow.

[[Page 52355]]

    Comment: ED makes several comments expressing concern that the 
Illinois program gives credits for small source emission reductions 
beyond how much net area-wide emissions are actually reduced. ED 
suggests that provisions for credit for small source emission 
reductions should either be eliminated or reformed into an opt-in 
approach. ED objects to section 205.500(a)(1) and (a)(3) calculating 
emission reductions based on allowable emissions rather than on actual 
emissions. ED recommends that a source emitting above allowable levels 
not be allowed to generate credits, and objects that a source emitting 
below its allowable levels may increase production and increase 
emissions and nevertheless obtain credits for artificial reductions.
    Response: These provisions do not in fact give credits beyond the 
net area-wide emission reductions. Section 205.500(a)(1) allows credits 
only to the extent installation of control equipment or use of cleaner 
process inputs yields reductions below allowable levels. Section 
205.500(a)(3) allows credit for production curtailments, provided no 
demand shifting occurs, and according to the decrease in production 
levels times the allowable emission rate per unit production. Thus, no 
ATUs are issued for emission controls bringing a source into 
compliance. Also, the baseline for calculating reductions from 
production curtailments is not simply maximum allowable emissions but 
rather is the allowable emission rate at the actual production level. 
This approach is analogous to the determination of baselines for major 
sources (Cf. section 205.320(d)), which provides adjustment to the same 
type of level for sources that installed overcomplying emission 
controls since 1990. By using a baseline that reflects mandated control 
levels, subject to the provision that actual emission reductions have 
resulted from emission controls since 1990, Illinois is operating from 
the same baseline as is used in attainment and reasonable further 
progress demonstrations and is rewarding sources that overcomply. In no 
case does a source with artificial reductions but actual emission 
increases obtain credits. USEPA views this approach as acceptable.
    Comment: With sections 205.500(a)(2), (a)(3), and (a)(4), ED 
expresses concern that credits may be granted for production 
curtailments notwithstanding a possibility that the production is 
shifting to another source that is not accountable for its increased 
emissions. ED further believes that credits for shutdowns and 
curtailments should not be granted, since they are not surplus to 
``business as usual,'' the credits create ``a perverse incentive to 
slow business production'', and USEPA's recent trading program guidance 
states that `` `shutdowns and activity curtailments cannot generate 
[discrete emissions reductions]' '' in open market trading programs.
    Response: The section of this notice addressing the proposed 
prerequisites for program approval discusses at length the provisions 
that assure that ``demand shifting'' will not lead to undue issuance of 
allowances. In short, Illinois' rules dictate that no ATUs shall be 
issued when demand shifting may be occurring. USEPA expects most cases 
to be clear as to whether other sources in the area make a product 
similar to the product made by the source curtailing production. As 
reviewed against 1994 guidance, USEPA is satisfied with Illinois' 
prohibition against demand shifting for stationary sources.
    USEPA has committed to reevaluate Illinois' program against the 
2001 trading program guidance. USEPA will reconsider the 
appropriateness of the creditability of small source shutdowns and 
curtailments during that reevaluation.
    Comment: For section 205.500(c), ED believes that Illinois should 
apply a lower threshold for subjecting credit generation to public 
notice.
    Response: USEPA believes that Illinois has flexibility in choosing 
a threshold for subjecting credit generation to public notice and 
believes that the threshold chosen by Illinois is acceptable.
    Comment: For section 205.500(d)(3), ED urges clarification that the 
source has the burden of proof that claimed emission reductions in fact 
represent a net reduction in Chicago area emissions.
    Response: USEPA believes that the information requirements imposed 
on the applicant establish an adequate inference that the source has 
the requested burden of proof for showing that the requirements for a 
net reduction are met.
    Comment: ED comments on several specific Illinois rules that affect 
the coverage and impact of the trading program. ED questions whether 
sources that grow to 10 tons per ozone season become permanently 
subject to an ATU holding requirement and receive a permanent ATU 
allocation. ED objects that sources below 15 tons per ozone season may 
increase emissions up to that level without securing compensating 
emission reductions. ED urges that emissions from startup and 
malfunction be incorporated into the program.
    Response: A source that grows above 10 tons per ozone is 
permanently subject to the requirement to hold adequate ATUs and 
receives a permanent ATU allocation based on emissions prior to the 
source growth. This is equivalent to enlarging the program to include 
the source, and provides an offset for minor source growth that is 
usually not obtained. Allowing emissions increases below 15 tons per 
ozone season is effectively the standard practice of not regulating 
emissions from small sources. Under section 205.225, sources with 
authorization for higher emissions during startup and malfunction 
exclude such emissions in determining the ATU holding requirement. 
Under section 205.320(e)(4), all sources exclude excess emissions from 
startup and malfunction from baseline emissions. Thus, such emissions 
from ``authorized sources'' are excluded from the program, and such 
emissions from sources without the authorization create an obligation 
to obtain ATUs. While USEPA encouraged Illinois to expand the coverage 
of its program to include these emissions for all sources, Illinois is 
under no obligation to do so, and the approach Illinois adopted of 
requiring ATU accommodation for these emissions for most sources is 
fully acceptable.
    Comment: ED asks whether the delayed determination of baselines for 
recently constructed sources will significantly affect the impact of 
the program.
    Response: Illinois has adopted a reasonable approach for 
determining baselines for recently constructed sources, for which it is 
appropriate to obtain additional information before determining a 
permanent allocation. There are few such sources, so the impact of this 
program feature is minimal.
    Comment: ED asks whether sources entering the program due to a 
major modification will be issued ATUs for the pre-modification 
emissions, thereby increasing the cap.
    Response: Sources entering the program are in fact issued ATUs 
according to pre-modification emissions, and have an obligation to 
match each 0.1 ton of nonmodification-related emissions with 1 ATU and 
each 0.1 ton of modification-related emissions with 1.3 ATUs. This 
enlarges the cap but also enlarges the emissions to be covered by the 
cap. The net effect of this incorporation of another source into the 
program is approximately the 0.3 tons of reduction per ton of 
modification-related emissions. As noted in a response to a comment by 
NRDC et al., a source that has

[[Page 52356]]

undergone a major modification must purchase ATUs from another source 
or sources that has made ATUs available by emitting less than they 
would otherwise have been allowed to emit.
    Comment: ED observes that the provisions of Rules 205.205 allow 
some sources that would otherwise be subject to the trading program to 
be exempt. Similarly, section 205.405 exempts some sources, such as 
those subject to maximum achievable control technology (MACT) 
requirements from the requirement for a 12 percent reduction. ED is 
concerned that these exemptions may cause the program to fail to 
achieve the 12 percent reduction being sought by the program.
    Response: USEPA recognizes that these program elements can affect 
the emission reductions achieved by the program. In fact, as described 
in the notice of proposed rulemaking, USEPA's review of the state's 
assessment of program benefits addressed the effect of these program 
elements. While the exemption for sources emitting less than 15 tons 
per ozone season forgoes a modest 12 percent reduction from these 
sources, the exemption for sources that reduce emissions by 18 percent 
(with credits equal to six percent going to a credit reserve fund) will 
likely yield a net reduction greater than 12 percent. The exemption of 
some sources from a 12 percent reduction requirement will slightly 
reduce the benefits of the program. USEPA will continue to incorporate 
these factors in its final assessment of expected emission reductions 
from the program.
    Comment: ED asks whether sources ``need to comply with the most 
recent NESHAP and MACT levels.''
    Response: Yes. Although new such regulations do not affect 
baselines or other aspects of the trading program, new such 
regulations, like existing such regulations (and like RACT regulations) 
are independently enforceable compliance responsibilities of affected 
sources.
    Comment: ED objects to several features of the Alternative 
Compliance Market Account. ED objects that ATUs stored in this account 
do not expire. ED objects that under some circumstances a limited 
number ATUs may be borrowed from the following year's account, 
potentially having a cumulative effect of shifting ATUs between years 
indefinitely. ED asks whether the transfer of expired ATUs into the 
account which occurs under special circumstances offers sources the 
option to seek cleaner air by requesting that the expired ATUs in fact 
be retired. ED asks whether section 205.710(g) means that the borrowing 
of ATUs is limited to 1 percent of the total cap.
    Response: In reviewing the state's assessment of program benefits, 
USEPA assessed benefits as if all ATUs in the Alternative Compliance 
Market Account are used each year. The more this account has long-lived 
ATUs, the more the area has benefited from earlier emissions levels 
below expected levels. Borrowing from the following year will occur 
rarely, if ever, because the price of such ATUs is twice that of normal 
ATUs. Furthermore, USEPA interprets section 205.710(e)(1) to provide 
that such borrowing yields a correspondingly reduced issuance of ATUs 
in the following year. Although the rules provide no mechanism for 
sources to request that their expired ATUs be retired, a case in which 
the account must be populated with expired ATUs would be an extreme 
circumstance in which there would likely be few expired ATUs. ED is 
correct in its understanding that the rule language related to cases 
``without a positive balance'' in the account means that Illinois is 
limited to borrowing 1 percent from the following year's allotment of 
ATUs.
    Comment: ED objects to allowing the indefinite borrowing from the 
future that is inherent in a source with an emissions excursion (i.e., 
emissions exceeding ATU holdings) providing compensation from its 
following year ATU issuance.
    Response: USEPA expects minimal quantities of emissions to be 
``borrowed from the future.'' In fact, USEPA supports requiring sources 
to provide emission reductions that compensate for prior excess 
emissions. The source with excess emissions also incurs a penalty of 20 
percent of the excess emissions, so that borrowing in such a case is 
accompanied by a net emission reduction. This surcharge, which 
increases to 50 percent if excess emissions recur for a second year, 
also helps assure that emissions excursions cannot recur indefinitely. 
USEPA believes these provisions are acceptable.
    Comment: ED comments generally that the Illinois trading program 
provides inadequate public information for tracking credit allocations 
and trades. ED also requests a public registry that records annual as 
well as seasonal emissions and differentiates those VOC that are 
hazardous air pollutants.
    Response: USEPA agrees that full public access to information on 
allocations and trades improves the effectiveness of emission trading 
market systems. USEPA believes that the public database mandated in 
Rule 205.600 fulfills this purpose. This database is on the Internet at 
``http://www.epa.state.il.us/air/erms/''. The other more detailed 
information is not amenable to ongoing tracking on a registry, but much 
of this information will be provided to the public in Illinois' annual 
program report, and the public has access to detailed information by 
requesting it from IEPA.
    Comment: Sources that obtain an exemption from the program should 
nevertheless be required to report seasonal emissions.
    Response: Sources that obtain an exemption by reducing emissions by 
at least 18 percent must report seasonal emissions, as the commenter 
recommends. Sources that obtain an exemption by becoming limited to 15 
tons per ozone season are exempt from seasonal emissions reporting but 
must demonstrate compliance with permit restrictions that limit 
seasonal emissions. USEPA believes that these requirements adequately 
address the commenter's concerns.
    Comment: Since sources can use different years for assessing 
baseline emissions, it is possible that a 12 percent reduction from 
baseline levels will yield a lesser reduction relative to the total 
inventory for a single, typical year.
    Response: USEPA agrees and has described this issue in its notice 
of proposed rulemaking. USEPA examined Midwest manufacturing data in an 
effort to assess the degree to which the sum of source baseline levels 
can be expected to differ from total emissions for a single, typical 
year. Since Midwest manufacturing production is fairly stable, USEPA's 
estimate of emission reductions from Illinois' program reflects a 
deduction of only 0.7 of the 12 percent targeted reduction pursuant to 
this factor.
    Comment: ED questions provisions in section 205.320(c) that seem to 
allow a new source to establish an artificially low baseline.
    Response: In fact, an artificially low baseline would increase the 
source's need to purchase credits. These provisions are similar to 
provisions for existing sources. Even if a source increases its 
baseline through this provision, this will likely at worst cause only a 
slight shrinking of the reductions from new sources. Since Illinois 
took no credit for offsets from new sources, no adjustment to the 
program benefits estimate is needed.
    Comment: For sources with emissions above compliance levels, ED 
recommends including noncompliance emissions in the trading program, 
both as a basis for issuing credits (for so long as the established 
compliance schedule

[[Page 52357]]

allows) and as emissions for which credits must be obtained. ED 
believes this would use the market to encourage faster efforts at 
compliance.
    Response: USEPA supports ED's recommendation. However, USEPA is 
currently evaluating whether Illinois' program is approvable, not 
whether enhancements are possible. USEPA concludes that this suggestion 
is not needed for Illinois' program to be approvable. In any case, 
USEPA views noncompliance as a transient condition which in most cases 
is quickly remedied by normal enforcement tools.
    Comment: ED objects to USEPA judging Illinois' program against 1994 
guidance. ED argues that USEPA should apply the guidance ``finalized 
and published in January 2001'', which reflects the ``considerable 
increase in our knowledge with respect to how air emissions trading 
programs should be designed''.
    Response: USEPA periodically updates various kinds of guidance to 
reflect increases in knowledge. USEPA then faces the question of 
whether State submittals developed on the basis of the older guidance 
should be judged against the older or the newer guidance. In cases that 
do not involve changes in law, USEPA commonly concludes that equity and 
fairness dictate that USEPA offer to review state submittals based on 
the guidance that applied when the state submittal was being developed. 
For these reasons, USEPA is principally judging the Illinois program 
against the 1994 guidance. This approach is stated in the January 2001 
guidance.
    USEPA has nevertheless taken steps to address ED's concern. First, 
as acknowledged by the commenter, USEPA is applying the more recent 
guidance with respect to the ``environmental justice'' issue. This 
element of guidance is the most significant change between the old and 
the new guidance documents. Second, as noted in the notice of proposed 
rulemaking, USEPA intends to re-evaluate the program according to the 
new guidance and, if warranted, request that Illinois make appropriate 
changes. With these safeguards, USEPA finds it appropriate to conduct 
this rulemaking principally on the basis of the 1994 guidance.
    Comment: ED objects to USEPA finding in its proposed rulemaking 
that the Illinois program has deficiencies but proposing to approve the 
program if the deficiencies are remedied. ED particularly objects to 
USEPA approving Illinois' program without offering the public an 
opportunity to review the modifications that Illinois adopts to address 
the deficiencies.
    Response: Under section 553 the Administrative Procedures Act, 
USEPA must publish a notice that (for rulemakings such as this) 
includes ``description of the subjects and issues involved.'' USEPA 
must then ``give interested persons an opportunity to participate in 
the rule making through submission of written data, views, or 
arguments.'' Finally, USEPA must consider such comments prior to taking 
final action.
    USEPA's obligation, then, is to assure that the public has the 
opportunity to comment on significant issues inherent in the 
rulemaking. USEPA recognized this obligation in its notice of proposed 
rulemaking. That notice states that ``USEPA believes that submittal of 
[materials addressing the prerequisites for approval] will not raise 
any new issues not addressed in today's notice. Therefore, USEPA 
anticipates that submittal of these materials will not necessitate 
further proposed rulemaking.'' Implicit in those statements is an 
acknowledgement that USEPA would publish an additional notice of 
proposed rulemaking if it found that elements of Illinois' supplemental 
materials or USEPA's intended final rulemaking posed significant issues 
not identified in the notice of proposed rulemaking.
    In this case, USEPA has found that the supplemental material 
provided by Illinois (and USEPA's final rulemaking) raise no 
significant new issues. For example, the first item requested by USEPA 
dictated that Illinois describe the timeline for sources to obtain 
ATUs, after which enforcement could commence. USEPA identified its 
understanding of the timeline of the program, and Illinois submitted 
material clarifying that USEPA's understanding was basically correct. 
Thus, Illinois' material (and USEPA's rulemaking) pose no significant 
issues not already raised by the notice of proposed rulemaking. More 
generally, USEPA has concluded that the material Illinois has submitted 
on all five prerequisites for approval raise no issues that were not 
adequately addressed in the notice of proposed rulemaking.

5. Additional Comments by ED Dated January 26, 2001

    ED made two additional comments in its January 26, 2001, comments 
that were not included in its later comments.
    Comment: Various types of emissions are exempted from Illinois' 
program. ``Although this may be well-documented and justified, it still 
suggests that the cap is being violated.''
    Response: Illinois has considerable latitude choosing what types of 
emissions are to be covered by its program. By exempting certain 
emissions, Illinois has defined a program in which the cap applies to a 
slightly more narrow range of emissions. Illinois does not allow 
violations of this more narrowly defined cap. USEPA considered the 
effects of these exemptions in assessing emission reductions from the 
program.
    Comment: ``The stated purpose in [section 205.710(a)] should be 
expanded to include covering for emergency situations and otherwise 
holding the environment harmless for excursions, etc.'' ED asks the 
rationale for credits in the Alternative Compliance Market Account 
having indefinite shelf life whereas normal ATUs have only a two year 
life.
    Response: USEPA believes the purpose need not be stated in the 
rule. The Alternative Compliance Market Account is an emergency, backup 
source of high priced credits, which justifies treating these ATUs 
differently from normal ATUs.

6. Additional Comments by Alex Johnson

    Comment: In addition to Alex Johnson's comments on environmental 
justice issues, he comments that Illinois should have adopted different 
control measures. Johnson notes that Illinois' own estimates show that 
``an adequate AIM rule or cold cleaning degreaser rule would deliver 
far more reductions in both HAPs and ozone precursors'' than the 
trading rule. Johnson interprets section 182(e) of the Clean Air Act as 
expressing Congressional intent that economic incentive programs be 
used only as a last resort.
    Response: The Clean Air Act provides no basis for USEPA to require 
that Illinois choose the commenter's preferred measures. In areas that 
fail to achieve milestones of progress toward attainment, section 
182(g) identifies economic incentive programs as one of three options 
required for Serious or Severe ozone nonattainment areas (cf. section 
182(g)(3)) and as the only option for extreme areas (cf. Section 
182(g)(5). The fact that such programs are required in such 
circumstances does not signify that States cannot adopt such programs 
in other circumstances.

7. Additional Comments by Richard Kosobud

    Comment: In addition to commenting on the environmental justice 
issue, Richard Kosobud generally supports the Illinois trading program. 
He comments that this program provides incentives under which needed 
emission reductions are achieved by the sources

[[Page 52358]]

that can achieve these reductions at lowest cost. He observes that the 
first year of operation of the program ``already indicates [that 
trading] saves compliance costs,'' thereby freeing ``resources for 
other private and public uses,'' and at the same time achieves 
significant benefits in reducing ozone precursor emissions. Kosobud 
concludes that USEPA should support this program.
    Response: USEPA's experience with the acid rain program, and 
Illinois' experience to date with its program, indicates that such 
programs indeed provide strong incentives for companies to reduce 
emissions, often in ways that USEPA and the State could not otherwise 
require. For example, some companies in the Chicago area have reduced 
emissions by changing the nature of their process so as to use less 
solvent. These reductions can be achieved at far less cost than the 
industry-wide types of limitations that can be mandated by state 
regulation. Therefore, USEPA supports Illinois' program.

8. Additional Comment by IEPA

    Comment: Illinois objects to statements that USEPA will require the 
trading program to be revised to conform to the economic incentive 
program guidance finalized on January 19, 2001. Illinois argues that 
states cannot provide the regulatory certainty that regulated sources 
must have if USEPA judges programs according to guidance that becomes 
available only after the state adopts its rule. Illinois observes that 
the Clean Air Act does not authorize USEPA to ``require revisions to 
state rules in the absence of identifying a specific deficiency with 
the rule.'' Finally, Illinois urges USEPA to defer judgment on the 
program until the program runs longer, both for USEPA guidance to 
reflect live experience with state trading programs and to be able to 
judge the successful and the problematic features of the program.
    Response: USEPA recognizes Illinois' concerns about review of its 
program. Given USEPA's limited experience with trading programs, the 
operation of Illinois' program and other programs will provide valuable 
insights that USEPA will use in its further evaluation of the Illinois 
program. In fact, Illinois' decision to include an annual program 
review in its rules undoubtedly reflects Illinois' recognition as well 
that reassessing the features of the program is warranted as we gain 
more experience with the Illinois program and other programs.
    The guidance issued in January 2001 reflects USEPA's current 
recommendations regarding the various elements of economic incentive 
programs. If further experience with Illinois' and others' programs 
leads USEPA to different views, the basis for assessing Illinois' 
program will change accordingly. For features that differ from current 
guidance, USEPA will also consider whether the feature differs from 
guidance available at the time the State adopted its rules. As always, 
judgments of full programs reflect an overall assessment of the 
programs, wherein deviations from individual elements of USEPA guidance 
may be acceptable depending on the significance and the consequences of 
these deviations.
    USEPA intends to coordinate its review of Illinois' program with 
Illinois' annual review process. If USEPA believes that Illinois' 
program has inadequacies needing correcting, USEPA would consult with 
Illinois and the public on the applicable issues before requesting 
program revisions.

V. What Action Is USEPA Taking?

    USEPA is taking final action to approve the Illinois trading 
program, except that USEPA is deferring action on section 205.150(e), a 
section which exempts new sources and sources with major modifications 
from a requirement for full year offsets. USEPA finds that Illinois has 
satisfied the five prerequisites for approval of its program. USEPA's 
review of comments lead to a conclusion that Illinois has taken and is 
taking adequate steps to address hazardous air pollutant impacts of its 
program, that the program is fundamentally a cap and trade program to 
which concerns pertaining to open market programs are largely 
irrelevant, and that various other features of the program are 
appropriate elements of a fully approvable program. USEPA concludes 
that these regulations provide enforceable emission reductions that 
USEPA estimates at 10.9 tons per day in the Chicago ozone nonattainment 
area.

VI. Administrative Requirements

    Under Executive Order 12866 (58 FR 51735, October 4, 1993), this 
action is not a ``significant regulatory action'' and therefore is not 
subject to review by the Office of Management and Budget. For this 
reason, this action is also not subject to Executive Order 13211, 
``Actions Concerning Regulations That Significantly Affect Energy 
Supply, Distribution, or Use'' (66 FR 28355, May 22, 2001). This action 
merely approves state law as meeting federal requirements and imposes 
no additional requirements beyond those imposed by state law. 
Accordingly, the Administrator certifies that this rule will not have a 
significant economic impact on a substantial number of small entities 
under the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). Because 
this rule approves pre-existing requirements under state law and does 
not impose any additional enforceable duty beyond that required by 
state law, it does not contain any unfunded mandate or significantly or 
uniquely affect small governments, as described in the Unfunded 
Mandates Reform Act of 1995 (Public Law 104-4). This rule also does not 
have a substantial direct effect on one or more Indian tribes, on the 
relationship between the Federal Government and Indian tribes, or on 
the distribution of power and responsibilities between the Federal 
Government and Indian tribes, as specified by Executive Order 13175 (65 
FR 67249, November 9, 2000), nor will it have substantial direct 
effects on the States, on the relationship between the national 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government, as specified 
in Executive Order 13132 (64 FR 43255, August 10, 1999), because it 
merely approves a state rule implementing a federal standard, and does 
not alter the relationship or the distribution of power and 
responsibilities established in the Clean Air Act. This rule also is 
not subject to Executive Order 13045 (62 FR 19885, April 23, 1997), 
because it is not economically significant.
    In reviewing SIP submissions, USEPA's role is to approve state 
choices, provided that they meet the criteria of the Clean Air Act. In 
this context, in the absence of a prior existing requirement for the 
State to use voluntary consensus standards (VCS), USEPA has no 
authority to disapprove a SIP submission for failure to use VCS. It 
would thus be inconsistent with applicable law for USEPA, when it 
reviews a SIP submission, to use VCS in place of a SIP submission that 
otherwise satisfies the provisions of the Clean Air Act. Thus, the 
requirements of section 12(d) of the National Technology Transfer and 
Advancement Act of 1995 (15 U.S.C. 272 note) do not apply. As required 
by section 3 of Executive Order 12988 (61 FR 4729, February 7, 1996), 
in issuing this rule, USEPA has taken the necessary steps to eliminate 
drafting errors and ambiguity, minimize potential litigation, and 
provide a clear legal standard for affected conduct. USEPA has complied 
with Executive Order 12630 (53 FR 8859, March 15,

[[Page 52359]]

1988) by examining the takings implications of the rule in accordance 
with the ``Attorney General's Supplemental Guidelines for the 
Evaluation of Risk and Avoidance of Unanticipated Takings'' issued 
under the executive order. This rule does not impose an information 
collection burden under the provisions of the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3501 et seq.).
    The Congressional Review Act, 5 U.S.C. 801 et seq., as added by the 
Small Business Regulatory Enforcement Fairness Act of 1996, generally 
provides that before a rule may take effect, the agency promulgating 
the rule must submit a rule report, which includes a copy of the rule, 
to each House of the Congress and to the Comptroller General of the 
United States. USEPA will submit a report containing this rule and 
other required information to the U.S. Senate, the U.S. House of 
Representatives, and the Comptroller General of the United States prior 
to publication of the rule in the Federal Register. A major rule cannot 
take effect until 60 days after it is published in the Federal 
Register. This action is not a ``major rule'' as defined by 5 U.S.C. 
804(2). This rule will be effective November 14, 2001.
    Under section 307(b)(1) of the Clean Air Act, petitions for 
judicial review of this action must be filed in the United States Court 
of Appeals for the appropriate circuit by December 14, 2001. Filing a 
petition for reconsideration by the Administrator of this final rule 
does not affect the finality of this rule for the purposes of judicial 
review nor does it extend the time within which a petition for judicial 
review may be filed, and shall not postpone the effectiveness of such 
rule or action. This action may not be challenged later in proceedings 
to enforce its requirements. (See section 307(b)(2).)

List of Subjects in 40 CFR Part 52

    Environmental protection, Air pollution control, Incorporation by 
reference, Intergovernmental relations, Reporting and recordkeeping, 
Volatile organic compounds.

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

    Dated: September 6, 2001.
David A. Ullrich,
Deputy Regional Administrator, Region 5.

    For the reasons stated in the preamble, part 52, chapter I, title 
40 of the Code of Federal Regulations are amended as follows:

PART 52--[AMENDED]

    1. The authority citation for part 52 continues to read as follows:

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

Subpart O--Illinois

    2. Section 52.720 is amended by adding paragraph (c)(158), to read 
as follows:


Sec. 52.720  Identification of plan.

* * * * *
    (c) * * *
    (158) On December 16, 1997, Bharat Mathur, Chief, Bureau of Air, 
Illinois Environmental Protection Agency, submitted rules for a cap and 
trade program regulating volatile organic compound emissions in the 
Chicago area. By letter dated August 23, 2001, the state requested that 
USEPA defer rulemaking on section 205.150(e), which exempts new and 
modified sources obtaining offsets under the trading program from the 
requirements for traditional, full year offsets.
    (i) Incorporation by reference.
    Illinois Administrative Code, Title 35, Subtitle B, Chapter I, 
subchapter b, Part 205, entitled Emissions Reduction Market System, 
adopted November 20, 1997, effective November 25, 1997, except section 
205.150(e).

[FR Doc. 01-25728 Filed 10-12-01; 8:45 am]
BILLING CODE 6560-50-P