ENV-15-07-00009-A New York State Clean Air Interstate Rule
10/10/07 N.Y. St. Reg. ENV-15-07-00009-A
NEW YORK STATE REGISTER
VOLUME XXIX, ISSUE 41
October 10, 2007
RULE MAKING ACTIVITIES
DEPARTMENT OF ENVIRONMENTAL CONSERVATION
NOTICE OF ADOPTION
I.D No. ENV-15-07-00009-A
Filing No. 1017
Filing Date. Sept. 19, 2007
Effective Date. s , 30 d
New York State Clean Air Interstate Rule
PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following action:
Action taken:
Amendment of Part 200 and addition of Parts 243, 244 and 245 to Title 6 NYCRR.
Statutory authority:
Environmental Conservation Laws, sections 1-0101, 3-0301, 19-0103, 19-0105, 19-0301, 19-0303, 19-0305, 19-0311; and Energy Law, sections 3-010 and 3-103
Subject:
New York State Clean Air Interstate Rule (CAIR).
Purpose:
To establish cap-and-trade programs designed to mitigate interstate transport of NO and SO to help reduce ozone and fine particulate formation in CAIR states located in the eastern U.S.
Substance of final rule:
Part 243 establishes the Clean Air Interstate Rule (CAIR) NO Ozone Season Trading Program, Part 244 establishes the CAIR NO Annual Trading Program and Part 245 establishes the CAIR SO Annual Trading Program. These programs are designed to reduce ozone and particulate matter with an aerodynamic diameter less than or equal to a nominal 2.5 micrometers (PM) in New York State and downwind states by limiting emissions of NO and SO year-round from fossil fuel-fired electricity generating units (EGUs) and limiting NO during the ozone season (May 1 through September 30) from fossil fuel-fired electricity generating units, Portland cement kilns, and fossil fuel-fired non-electricity generating units.
Parts 243, 244, and 245 establish emission budgets for NO and SO, respectively. Parts 243, 244, and 245 establish trading programs by creating and allocating allowances that are limited authorizations to emit up to one ton of NO or SO in the respective control periods or any control period thereafter. Affected units are required to hold allowances for compliance deduction, at the respective allowance transfer deadlines, the tonnage equivalent to the emissions at the unit for the control period immediately preceding such deadline.
Part 243 applies to units that serve an electrical generator with a nameplate capacity equal to or greater than 15 megawatts of electrical output and sells any amount of electricity, Portland cement kilns which have a maximum design heat input equal to or greater than 250 mmBtu/hr., and fossil fuel-fired non-electricity generating units, which have a maximum design heat input equal to or greater than 250 mmBtu/hr. For Part 243, the first control period commences on May 1, 2009 and concludes on September 30, 2009. Subsequent control periods begin on May 1 and conclude on September 30 of that calendar year.
Parts 244 and 245 apply to units that serve an electrical generator with a nameplate capacity equal to or greater than 25 megawatts of electrical output and sells any amount of electricity. The control period for Part 244 runs from January 1 to December 31 starting in 2009. The control period for Part 245 runs from January 1 to December 31 starting in 2010.
Parts 243 and 244 require each CAIR NO unit to have a CAIR authorized account representative (AAR) who shall be responsible for, among other things, complying with the CAIR NO permit requirements, the monitoring requirements, the allowance provisions, and the recordkeeping and reporting requirements. Similarly for Part 245, each CAIR SO unit needs to have a CAIR AAR designated to perform these duties. The owner and/or operator of the unit may also designate an alternate CAIR designated representative to perform the above duties.
For Parts 243, 244, and 245, the CAIR AAR shall submit a complete CAIR permit application to the New York State Department of Environmental Conservation (Department) by 12 months before the date on which the applicable CAIR NO or CAIR SO unit commences operation.
The Statewide CAIR NO Ozone Season Trading Program (Part 243) Budget is 31,091 tons for the control periods 2009 through 2014 and 27,652 tons for 2015 and beyond. The Statewide CAIR NO Trading Program (Part 244) Budget is 45,617 tons for the control periods 2009 through 2014 and 38,014 tons for 2015 and beyond.
By September 30, 2007, the Department will submit to the Administrator, in a format prescribed by the Administrator the CAIR NO allowance allocations (Part 243 and 244), for the 2009, 2010, and 2011 control periods. By October 31 of each year thereafter, the Department will allocate CAIR NO allowances for the control period that commences in the year four years after the deadline for submission.
The Department will determine the number of CAIR NO allowances to be allocated to each CAIR NO unit by: (1) multiplying the greatest heat input (EGUs and non-EGUs) experienced by the unit or clinker production (Portland cement kilns) for any single control period among the three most recent control periods, for which data is available by the applicable pound per input unit rate (first round calculation); (2) determining the allocation factor by dividing 85 percent of the Statewide CAIR NO budget by the sum of all the above first round calculations (second round calculation); (3) multiplying the allocation factor by each unit's first round calculation result (third round calculation); and, (4) allocating the lesser of the unit's control period potential to emit or the third round calculation plus the unit's proportional share of any additional allowances remaining in the 85 percent portion of the Statewide CAIR NO budget.
The Statewide CAIR SO trading program budget is 135,139 tons for the 2010 through 2014 control periods and 94,597 tons for 2015 and beyond. SO allowances have already been allocated and received by sources under title IV of CAA Section 403. Pre-2010 title IV SO allowances can be used for compliance with CAIR. SO reductions are achieved by requiring sources to retire more than one allowance for each ton of SO emitted. The emission value of an SO allowance is independent of the year in which it is used, but is based upon its vintage. Each sulfur dioxide allowance of vintage 2009 and earlier offsets one ton of SO emissions. Vintages 2010 through 2014 offset 0.5 tons of emissions, this equates to a 50 percent emission reduction. Vintages 2015 and beyond offset 0.35 tons of emissions, this equates to a 65 percent emission reduction.
For Parts 243 and 244, new units will be allocated from set-aside accounts which consist of five percent of the Statewide CAIR NO budgets. The CAIR AAR of the new unit may submit a written request to the Department to reserve for the new unit allowances in an amount no greater than the unit's control period potential to emit (CPPTE). For Part 243, the request must be made prior to May 1 of the control period for which the request is being made or prior to the date the unit commences operation, whichever is later. For Part 244, the request must be made prior to January 1 of the control period for which the request is being made or prior to the date the unit commences operation, whichever is later. For both Parts 243 and 244, the unit must have all of its required permits for the Department to consider these requests.
If more than one project requests allowances from the new unit set-aside and the number requested exceeds the number in the set-aside account, the Department will reserve allowances in the order in which approvable requests were submitted. Requests will be considered to be simultaneous if received in the same calendar quarter. Should approvable requests in excess of the set-aside be submitted in the same quarter, the Department will reserve allowances to each project in an amount proportional to the allowances requested. Unused set-aside allowances will flow back to the CAIR NO units in proportion to their original allocation.
The CAIR NO Trading Program Budgets are designed to allocate 10 percent of the emissions allowances to the Energy Efficiency and Renewable Energy Technology Account (the EERET Account). The EERET Account will be administered by the New York State Energy Research and Development Authority (NYSERDA) and the allowances in the account will be sold or distributed in order to help achieve the emissions reduction goals of the CAIR NO Trading Programs by promoting or rewarding investments in energy efficiency and renewable technologies.
The EERET Account ensures that the value of the allowances is used to further the aims of the emissions reduction program through cost-effective energy efficiency and clean energy technologies, while simultaneously helping to reduce the cost of the CAIR NO Trading Programs to consumers.1
The EERET Account will be administered by NYSERDA. NYSERDA would be required to promptly sell or distribute the allowances as part of a fair, open and transparent process. The proceeds of the allowance sales will be used to fund energy efficiency projects, renewable energy, or clean energy technology. NYSERDA currently administers similar energy efficiency and clean energy technology programs, and the addition of the EERET Account should be easily accomplished. If for any reason the EERET allowances are not sold or distributed by NYSERDA, the allowances would flow back to the Department and be redistributed to the affected units (similar to the flowback method for the new unit set-aside allocations).
The EERET represents a change from the current practice under Parts 204, 237 and 238 of awarding allowances for avoided emissions attributable to the implementation of energy efficiency/renewable energy (EE/RE) projects. The Department's experience is that few sponsors of EE/RE projects have sought the award of EE/RE allowances. This is due to the difficulty in demonstrating enough avoided emissions, even when aggregating projects, to qualify for a single EE/RE allowance. It requires a savings of approximately 1,333 MWh of electricity (at the current 1.5 lbs/MWh reward rate) to yield one NO allowance. The value of one NO allowance is approximately $2,000. The EE/RE allowances have not served as an incentive to undertake EE/RE projects to the extent originally anticipated by the Department. As the nominal NO rate decreases with this regulation, the reward rate would likely also be decreased. This will make applying for these allowances even less desirable.
In addition, providers of renewable and other clean energy technologies have been somewhat reluctant to apply for NO allowances under the structure of Parts 204, 237 and 238. This is largely because the crediting of NO allowances for low or zero emissions technologies would effectively assign the avoided NO allowances to this generation and, if these allowances are sold and used for compliance, this could reduce or eliminate the ability to sell the “green attributes” of this power. In order to more effectively provide economic incentives for energy efficiency and clean energy technologies, the Department believes that using the receipts of the allowance sales to provide financial incentives could result in an expansion in these types of projects.
The Department will establish one NO and one SO compliance account for each CAIR NO and CAIR SO source. Allocations will be made into compliance accounts and deductions of allowances for compliance purposes will be made from compliance accounts. Allowances may be held without discount until deducted for compliance. The CAIR AAR may specify the allowances by serial number to be deducted for compliance purposes in the compliance certification report or utilize the first in, first out protocols in the regulation. In order to meet the unit's budget emissions limitation for the control period immediately preceding, CAIR NO Ozone Season allowances must be submitted for recordation in a source's compliance account by midnight of November 30, CAIR NO Annual allowances must be submitted for recordation in a source's compliance account by midnight of March 1, and CAIR SO allowances must be submitted for recordation by midnight of March 1. After making the deductions for compliance, if a unit has excess emissions, the Department will deduct from the source's compliance account, allocated for a subsequent control period, allowances equal to three times the unit's excess emissions.
Parts 243, 244, and 245 rely on the provisions of Part 75 for emissions monitoring and reporting. Units that are in compliance with Title IV of the Clean Air Act and 6 NYCRR Parts 204, 237, and 238 provisions for emissions monitoring and reporting should be in compliance with Parts 243, 244, and 245.
Units that are not CAIR NO or SO units may qualify to opt-in the programs. A unit may become a CAIR NO opt-in unit or CAIR SO opt-in unit if it conforms to all of the permitting, monitoring, recordkeeping and reporting requirements of a CAIR NO or SO unit. Opt-in units receive CAIR NO Ozone Season allowance allocations by May 31 for each control period based on the lesser of its baseline heat input or heat input for the previous control period multiplied by the lesser of its baseline NO emission rate or the most stringent applicable NO emission limitation. Opt-in units receive CAIR NO Annual or CAIR SO allowance allocations by January 1. Opt-in units may withdraw from the program.
Part 200 cites the portions of federal statute and regulations that are incorporated by reference into Parts 243, 244, and 245.
1 Analyses conducted by NYSERDA for the Department demonstrate that investments in energy efficiency have the effect of reducing electricity demand and the overall cost of the Program. http://www.rggi.org/documents.htm.
Pursuant to Article 8 of the State Environmental Quality Review Act, a Short Environmental Assessment Form, a Negative Declaration and a Coastal Assessment Form have been prepared and are on file. This rule was approved by the Environmental Board.
Text of rule and any required statements and analyses may be obtained from:
Michael Miliani, Department of Environmental Conservation, Division of Air Resources, 625 Broadway, Albany, NY 12233-3251, (518) 402-8396, e-mail: CAIR@gw.dec.state.ny.us
Summary of Revised Regulatory Impact Statement
On April 25, 2005, the United States Environmental Protection Agency (EPA) issued a final administrative action in which it made findings that numerous states, including New York State, had failed to submit State Implementation Plan (SIP) provisions that EPA determined are required under federal Clean Air Act (CAA) Section 110(a)(2)(D) to address interstate pollutant transport with respect to the national ambient air quality standards (NAAQS) for ozone, and particulate matter with an aerodynamic diameter less than or equal to a nominal 2.5 micrometers (PM). ‘Finding of Failure To Submit Section 110 State Implementation Plans for Interstate Transport for the National Ambient Air Quality Standards for 8-Hour Ozone and PM, 70 FR 21147-151 (April 25, 2005) (the Finding). CAA Section 110(a)(1) requires states to submit new SIP provisions to account for a new or revised NAAQS within three years after the promulgation of such standard, or any shorter period that EPA might mandate. The Finding started a two-year clock for the promulgation of a Federal Implementation Plan (FIP) under CAA Section 110(c)(1). For any state, including New York State, that fails to receive EPA approval for submitted SIP provisions within the two-year period, EPA will impose a FIP to implement adequate pollutant transport measures.
In a final administrative action announced on May 12, 2005, EPA identified 23 states and the District of Columbia as containing sources of ozone season1 emissions of nitrogen oxides (NO) that contribute to attainment or maintenance problems in downwind states with respect to the ozone NAAQS. In addition, EPA identified 25 States and the District of Columbia as containing sources of annual NO and sulfur dioxide (SO) emissions that cause attainment or maintenance difficulties in downwind states with respect to the PM NAAQS. ‘Rule To Reduce Interstate Transport of Fine Particulate Matter and Ozone (Clean Air Interstate Rule); Revisions to Acid Rain Program; Revisions to the NO SIP Call; Final Rule’, 70 FR 25162-405 (May 12, 2005) (CAIR). New York State was listed as a state that must address emissions of NO and SO because it contributes to nonattainment of both the ozone and PM NAAQS in downwind states. CAIR specified exact tonnages of NO and SO that New York State must reduce in order to satisfy its obligations under CAA Section 110(a)(2)(D). CAIR established budgets for electricity generating units (EGUs) in New York State and other CAIR states for emissions of NO and SO.
EPA determined the level of emissions reductions in CAIR based on an assumed imposition of highly cost-effective emissions controls on EGUs in the states subject to CAIR. For a State such as New York that contributes to downwind nonattainment of both the ozone and PM NAAQS, CAIR provides three model rules that the State may adopt so that it can participate in interstate emissions cap-and-trade programs. As a general matter, these cap-and-trade programs were designed by EPA to apply to EGUs. The model rules, codified at 40 CFR Part 96, place State-wide caps on the annual and ozone season emissions of NO and annual emissions of SO from EGUs collectively. The ozone season NO program, found at 40 CFR 96 Sections 301–388, addresses EGU emissions reductions needed for attainment of the ozone NAAQS. The annual NO program and the annual SO program, found at 40 CFR 96 Sections 101–188 and 40 CFR 96 Sections 201–288, respectively, address EGU emissions reductions needed for attainment of the PM NAAQS. While a subject state retains the discretion to reduce emissions by the requisite amounts in any manner that it sees fit, adoption of the model rules would produce SIP revisions that EPA will find readily approvable to address the SIP deficiencies identified in the Finding.
The proposed rules constitute New York State's adoption of the three emissions cap-and-trade rules of CAIR. Part 243 establishes the CAIR NO Ozone Season Trading Program; Part 244 establishes the CAIR NO Annual Trading Program; and Part 245 establishes the CAIR SO Trading Program. Certain revisions to Part 200 are necessary in order to facilitate the administration of these programs. These include the addition of references to Table 1 of Section 200.9 Referenced Material.
The New York State Legislature has accorded the New York State Department of Environmental Conservation (Department) with the primary authority to formulate and implement the SIP. The provisions of State law, taken together, clearly empower the Department to promulgate and implement the proposed rules as SIP provisions. The statutory authority to promulgate Parts 243, 244, and 244 in the State derives primarily from the Department's obligation to prevent and control air pollution, as set out in the Environmental Conservation Law (ECL) at Sections 1-0101, 3-0301, 19-0103, 19-0105, 19-0301, 19-0303, 19-0305, and 19-0311. The promulgation of the CAIR rules is also consistent with the Department's obligations under Energy Law 3-101 and Energy Law 3-103. The legislative objectives underlying the above statutory authority are essentially directed toward promoting the safety, health and welfare of the public, protecting the State's natural environment, and also helping to assure a safe, dependable and economical supply of energy to the people of the State. The general powers of the New York State Energy Research and Development Authority (NYSERDA) that are relevant to the Program's ability to sell allowances are set forth in the Public Authorities Law Sections 1851, 1854 and 1855.
New York State contains nonattainment areas for primary and secondary ozone and PM NAAQS.2 As such, the air quality in these areas is not, allowing for an adequate margin of safety, sufficient to protect public health, and is not sufficient to protect the public welfare from any known or anticipated adverse effects associated with the presence of the relevant air pollutants.3
CAIR and its supporting record, including the rule making records generated during the 1997 promulgations of the ozone and PM NAAQS, contain ample descriptions of the health and environmental rationales for controlling emissions of NO and SO from EGUs. (70 FR 25170, 25306–08).
By action dated July 18, 1997, EPA revised the NAAQS for particulate matter to add new standards for fine particles (PM) (62 FR 38652). EPA established health- and welfare-based (primary and secondary) annual and 24-hour standards for PM. Individuals particularly sensitive to fine particle exposure include older adults, people with heart and lung disease, and children. The secondary standards are designed to protect against major environmental effects caused by PM such as visibility impairment—including Class I areas which contain national parks and wilderness areas across the country—soiling, and materials damage.
By action dated July 18, 1997, EPA promulgated identical revised primary and secondary ozone standards that specified an eight-hour ozone standard of 0.08 parts per million (ppm) (62 FR 38652). In general, the revised eight-hour standards are more protective of public health and the environment and more stringent than the pre-existing one-hour ozone standards that they replaced. EPA published the eight-hour ozone nonattainment designations that became effective on June 15, 2004. On December 22, 2006, the U.S. Circuit Court of Appeals for the District of Columbia vacated EPA's eight-hour ozone NAAQS Implementation Rule. The schedule for demonstrating attainment with the eight-hour Ozone NAAQS will change, although the standard remains in effect and the State will have to demonstrate compliance with it. Implementation of the CAIR programs remain an essential component of New York State's SIP to achieve attainment of the eight-hour ozone NAAQS.
EPA undertook extensive computer modeling which shows that CAIR will assist New York State's efforts towards reaching attainment of the eight-hour ozone and PM NAAQS.4 Measured from 2003 levels in New York State, EPA estimates that CAIR will result in SO2 emission reductions of about 213,000 tons or 84 percent and NO emission reductions of about 32,000 tons or 48 percent. At the end of 2004, EPA had designated 30 New York counties as being components of ozone nonattainment areas. EPA's CAIR modeling shows that CAIR, in conjunction with existing CAA programs as well as New York State's clean air programs, are predicted to bring 19 of these counties into attainment by 2010. EPA's modeling also shows that even after the full implementation of CAIR in 2015, nine counties would remain in nonattainment of the ozone NAAQS. However, EPA expects that CAIR will further reduce ground-level ozone levels in these nine counties. The Department is currently working to establish or revise additional SIP programs to bring all areas into attainment.
EPA allows states to add the portion of the NO SIP Call trading budget attributed to non-EGUs and small EGUs to the State's CAIR NO Ozone Season Trading Budget. New York State has chosen to include all of the affected sources currently covered by Part 204, NO Budget Trading Program in the CAIR NO Ozone Season Trading Program (Part 243). The NO budgets for small EGUs, non-EGUs, and Portland cement kilns will be added to New York's ozone season EGU budget established under CAIR to form the sector budgets under Part 243, CAIR NO Ozone Season Trading Program. Small EGUs include fossil fuel-fired units serving a generator with a nameplate capacity of 15 MWe to 25 MWe. Non-EGUs include fossil fuel-fired large non-EGUs with a heat input rating of 250 MMBtu/hr or greater. Portland cement kilns consist of fossil fuel-fired cement kilns with heat input rating of 250 MMBtu/hr or greater.
The NO ozone season Portland Cement Kiln Unit Sector Budget has been revised as part of the CAIR rulemakings. The current Part 204 Portland Cement Kiln Unit Sector Budget is 8,085 tons per ozone season. The budget for these units has been revised to 6,271 tons per ozone season, representing a reduction of 1,814 tons of NO per ozone season starting in 2009.
The CAIR NO Trading Program budgets are designed to allocate 10 percent of the emissions allowances to the Energy Efficiency and Renewable Energy Technology Account (the EERET Account). The EERET Account will be administered by the New York State Energy Research and Development Authority (NYSERDA) and the allowances in the account will be sold in order to help achieve the emissions reduction goals of the CAIR NO Trading Programs by promoting or rewarding investments in energy efficiency and renewable technologies, and/or innovative abatement technologies.
ICF International has conducted electricity system modeling analysis to estimate the incremental cost of implementing CAIR and the Clean Air Mercury Rule (CAMR) in New York. The analysis compared a reference or business-as-usual case (absent either CAIR or CAMR) to each of three policy cases: New York's proposed approach for implementing both CAIR and CAMR, CAIR only, and CAMR only. CAIR and CAMR policies (implemented together) could increase wholesale electricity prices by an average of 1.7 percent or $1.14 MWh over the 2010 to 2020 timeframe. For a typical residential customer (using 750 Kwh per month5), this translates into a monthly retail bill increase of $0.86.
Considering only this rulemaking and none of the other requirements that are resulting in reductions in NO and SO emissions at these facilities (NSR/PSD settlements, mercury control and BART and other potential haze requirements), the annual NO program will cost the EGUs $17.2 million a year from 2009 to 2014 and $30.2 million in 2015 and beyond. This is estimated by using the average cost of NO control that EPA identified in the CAIR regulatory support documents multiplied by the total emission reductions required under CAIR (sum of allowances under Parts 204 and 237 minus the CAIR annual NO allowances). Using the same formula to estimate the cost of control, the ozone season NO program will cost the EGUs $9.2 million starting in 2009 and $24.6 million starting in 2015. It should be noted that no additional costs are expected for the non-EGU owners since there is no change to the number of allowances to be distributed to them under Part 243. In addition, the Portland cement kiln owners will not experience an increase in cost as a result of Part 243 because, as noted above, the reduction in allowances distributed to this sector under Part 243 is reflective of actual emissions of these units plus a margin for growth. The costs to EGUs associated with SO control under Part 245 is expected to be $0 in 2009 and $25.7 million in 2015 (sum of allowances Part 238 minus the CAIR SO budget multiplied by the average cost of control estimated by EPA).
There will be costs associated with Local Governments. The Jamestown Board of Public Utilities (JBPU), a municipally owned public utility, owns and operates the S. A. Carlson Generating Station (SACGS). The emissions monitoring at SACGS currently meets the monitoring provisions of CAIR. Therefore, no additional monitoring, record keeping or reporting costs will be incurred as a result of this program.
The JBPU will need to either limit emissions at the SACGS to no more than its allowance allocations under Parts 243, 244, and 245 or purchase allowances equal to the number of tons emitted in excess of the number of allowances initially allocated to it. Given the highly variable nature of control equipment cost, the Department limited the analysis of control costs to the purchase of allowances to comply with the program. The Department estimated allocations for SACGS and subtracted those allocations from 2006 facility emissions. The estimated cost for purchasing allowances was determined to be approximately $1.4 million annually for the period from 2010 through 2014 and $2.4 million in 2015 and beyond.
There will be costs associated with the administration of CAIR. The Department will need to review monitoring plans submitted to comply with the requirements of Parts 243, 244, and 245. However, since these plans have been used to comply with current Parts 204, 237, and 238 these costs will not amount to an increase above what is already contemplated. The administrative aspects of the regulation and central office support for permitting and compliance activities will need to increase beyond what is currently required to implement existing regulations, but not significantly. The Department estimates that three to four additional person years will be required to implement these programs at a cost of $110,000 per person year or $440,000 annually.
The owners and operators of each source subject to CAIR and each unit at the source shall keep each of the following documents for a period of five years from the date the document is created:the account certificate of representation form; all emissions monitoring information; copies of all reports and other submissions and all records made or required under CAIR; and copies of all documents used to complete a permit application and any other submission under CAIR or to demonstrate compliance with CAIR.
The Department considered various alternatives when developing CAIR. These include: No action, where EPA would implement a FIP to establish the federal cap-and-trade programs under 40 CFR Part 97; command-and-control; and auction versus free allocation. Free allocation can be based on heat input or energy output.
There are two ways in which the Department may allocate allowances: Sell them through an auction or give them away as has been done in the past. The Department has opted to continue to allocate the majority of allowances to affected sources based on historical operation. A precedent from other proven allowance trading programs has been established for this type of allowance allocation.6 The Department chose this option in order to meet the Federal deadlines of CAIR and to avoid FIP implications. CAIR is on a strict timeline that does not afford the Department the time to create the necessary structure and work out the details to include and implement a full auction as part of the allocation process. Based on the Department's experience with the EERET account under this program, the Department will consider expanding this type of approach in CAIR at some point in the future.
SO allowances have already been allocated and received by sources under title IV of CAA Section 403. Pre-2010 Title IV SO allowances can be used for compliance with CAIR. SO reductions are achieved by requiring sources to retire more than one allowance for each ton of SO emitted. The emission value of an SO allowance is independent of the year in which it is used, but is based upon its vintage. Each sulfur dioxide allowance of vintage 2009 and earlier offsets one ton of SO emissions. Vintages 2010 through 2014 offset 0.5 tons of emissions, this equates to a 50 percent emission reduction. Vintages 2015 and beyond offset 0.35 tons of emissions, this equates to a 65 percent emission reduction. The Department is proposing to adopt the Federal model rule for SO at this time. However, the Department may, in the future, adopt an alternative approach. In the interim, Part 238 will remain in place.
The Department considered utilizing an electricity output based allocation methodology. Advocates for use of an output based methodology agree that this type of approach rewards the most efficient generation. The Department agrees with that assertion, but has not chosen to allocate on an output basis because of the lack of available generation data, as well as deficiencies in the standardization of generation data. It is not likely that the required data will become available in time to finalize New York State's CAIR regulations. Because of the additional burden the output based methodology would place on the Department and on the affected sources, the Department has chosen not to allocate allowances in this manner at this time. The Department includes a Control Period Potential To Emit (CPPTE) component in it's allowance allocation methodology which limits the amount of allowances an affected facility can receive based on the maximum capacity of a unit to emit under its physical and operational design during a control period. If the CPPTE is used in an output based allocation system, there is likely little difference in the actual allowances distributed to facilities.
The Department chose a fuel neutral approach in the allocation methodology for NO allowances. The Department substantially adopted the methodology used in allocating NO allowances under Parts 204 and 237. As with Parts 204 and 237, the Department believes that a fuel neutral allocation methodology is appropriate because of the relatively small differences in uncontrolled NO emission rates (as compared to SO) resulting from use of different types of fossil fuel.
The Department considered and rejected an energy efficiency and renewable energy generator set-aside under the program. Instead, the Department is proposing to create the EERET Account. The inclusion of the EERET Account will not cause the retail price of electricity to increase because generators incorporate the same dollar value of the allowances in their bids to supply electricity whether the allowances are obtained at no cost or purchased on the open market.
1 Ozone season, for the purpose of this rulemaking, is defined as the time period from May 1 through September 30.
5 Typical customer usage numbers from the Energy Information Administration (EIA). Electricity rates from December 2005 Patterns & Trends report.
6 MIT Joint Program on the Science and Policy of Global Change. “Emissions Trading to Reduce Greenhouse Gas Emissions in the United States: The McCain-Lieberman Proposal.” Sergy Paltsev, John M. Reilly, Henry D. Jacboy, A. Denny Ellerman and Kok Hou Tay. Report No. 97, June 2003.
Regulatory Flexibility Analysis
No changes were made to the previously published Regulatory Flexibility Analysis.
Rural Area Flexibility Analysis
No changes were made to the previously published Rural Area Flexibility Analysis.
Job Impact Statement
No changes were made to the previously published Job Impact Statement.
Summary of Assessment of Public Comment
INTRODUCTION
The Department is proposing three regulations to comply with EPA's Clean Air Interstate Rule (CAIR) that will establish cap-and-trade programs designed to mitigate interstate transport of nitrogen oxides (NO) and sulfur dioxide (SO) to help reduce ozone and fine particulate formation in CAIR states located in the eastern U.S. These rules consist of Part 243, CAIR NO Ozone Season Trading Program; Part 244, CAIR NO Annual Trading Program; and Part 245, CAIR SO Trading Program. As part of this rulemaking, Part 200 will be amended to update cross references in section 200.9, Referenced Material.
The Department proposed Parts 243, 244, and 245 on March 27, 2007. Hearings were held in Avon on May 15, 2007, in Long Island City on May 16, 2007, and in Albany on May 17, 2007. The comment period closed at 5:00 P.M. on May 24, 2007. The Department received written comments on the proposed rules from 15 interested parties. These comments are summarized and responded to in this document.
Comments were received on a number of sections in the regulations, some in support and some in opposition. While a few commenters offered support for the proposal, the majority of commenters offered recommended additions, changes and deletions to the regulations.
The Environmental Protection Agency (EPA) provided many comments which addressed inconsistencies and deviations from EPA's model CAIR rule language, and suggested clarification of the Department's intent in certain areas of the regulations. The Department has incorporated most of EPA's suggested revisions into the CAIR rules.
A number of comments address the Department's allocation to the energy efficiency and renewable energy technology account (EERET Account). Some commenters requested that if the Department and/or New York State Energy Research and Development Authority (NYSERDA) take the position that they have legislative authority to raise revenue in the manner described in proposed 6 NYCRR Parts 243 and 244, that the Department and/or NYSERDA specify where such authority is derived within the Environmental Conservation Law (ECL). The commenters also suggest that the sale of emissions allowances for revenue raising purposes constitutes a tax and that under the state constitution, however, only the legislature may create a tax. The comments also state that an administrative agency, such as the Department, cannot establish a tax without unambiguous legislative authority. Because the legislature has not authorized the revenue raising/taxing measures included in the proposed CAIR NO Trading Program, the commenters believe that NYSDEC's proposed rules are unconstitutional and ‘ultra vires’.
The Department's response to those comments is that the allocation of the CAIR NO ozone season allowances and CAIR NO allowances (hereinafter simply “allowances”) to the EERET Accounts under proposed Parts 243 and 244 is an exercise of the Department's regulatory or police power under the Environmental Conservation and the State Energy Law. This power is consistent with the policy of the State as expressed in section 4 of Article XIV of the New York State Constitution. Pursuant to Energy Law Section 3-103 the Department is obligated to conduct its affairs so as to conform to the State's energy policy that is set forth in Energy Law Section 3-101. Energy Law Section 3-101 provides that it is the energy policy of the State to obtain and maintain an adequate and continuous supply of safe, dependable and economical energy for the people of the State and to accelerate development and use within the State of renewable energy sources, in order to, among other things, protect its environmental values and husband its resources for future generations. Also, ECL Section 3-0301 empowers the Department to coordinate and develop programs to carry out the environmental policy of New York State set forth in ECL Section 1-0101 which includes the prevention of air pollution and promoting technology that minimizes adverse impacts to the environment. Section 3-0301 also specifically empowers the Department to provide for the prevention and abatement of air pollution; encourage and undertake scientific investigation and research on pollution prevention and abatement; and assess new and changing technology to identify long-range implications for the environment and encourage alternatives that minimize adverse impact. In carrying out its powers and duties, ECL Section 3-0301 also provides that the Department is to consult and cooperate with officials of other State agencies having duties and responsibilities concerning the environment as well as officials and representatives of any public benefit corporation.
The Department's response also states that the EERET Account allocation is not tantamount to the imposition of a tax. The air is a public resource. As such, the air belongs to no one. Pursuant to ECL Sections 1-0101, 3-0301, 19-0103, and 19-0105, the Department is responsible for preserving this public resource by regulating sources that send pollution into the air. ECL Section 1-0101 provides that it is the responsibility of the State government to act as trustee of the environment, including the air resource, for present and future generations.
The Department's decision on how to allocate allowances inescapably involves the transfer of some value or wealth. In the absence of a statutory directive to transfer this wealth to pollution sources for free, the Department believes the value should be retained for the benefit of the environment and the public welfare in a manner that is within the authority granted to the Department. By allocating allowances to NYSERDA, the Department has created a mechanism by which the value of the allowances may be used to promote Energy Efficiency and Renewable Energy (EE/RE) technologies to reduce air pollution. NYSERDA is the entity created by the State Legislature that is most qualified and equipped to achieve this environmental protection goal in this way.
The establishment of the EERET Account allocation and NYSERDA's possible use of the value resulting from allowance sales amounts to an adjustment in the way New York State government is addressing the problem of air pollution. By beginning the shift of allocating allowance values from polluting industries to EE/RE measures, the Department is acting within its statutory authority to protect and preserve the air resource for present and future generations. For two reasons, the Department has chosen to allocate only 10 percent of both the CAIR NO Ozone Season Trading Program Budget and the CAIR NO Annual Trading Program Budget to the EERET account at the present time. First, the proposed rules represent the first time the Department will allocate allowances in this manner and the Department wished to learn from the experience before providing for any larger EERET Account allocation.1 Second, by signaling the Department's direction with respect to NO allowance allocations with this relatively small EERET Account allocation, the Department anticipates that regulated sources will be given sufficient time to adjust to the new position this type of allocation will mean for them financially. Regulated sources will benefit by having this advance notice of a possibly much larger sale of allowances in the future.
NYSERDA's statutory authority springs from Title 9 of the Public Authorities Law (PAL). In enacting Title 9, the legislature declared, in relevant part, that the purpose of NYSERDA is, among other things, to promote the development and utilization of “safe, dependable, renewable and economic energy sources and the conservation of energy and energy resources.” PAL Section 1850-a. The statute directs NYSERDA to develop and implement [these] new energy technologies and energy conservation technologies in a manner consistent with economic, social and environmental objectives. PAL Sections 1851(10) and (11); 1854. In exercising its statutory powers, NYSERDA is directed to cooperate and act in conjunction with various entities, including State agencies, in exercising its powers, and is authorized to provide services to State agencies in furtherance of its corporate purposes. PAL Section 1854(2). Pursuant to PAL Section 1855, NYSERDA is specifically empowered to accept from any State agency the grant of any aid in any form and to comply, subject to the relevant provisions of NYSERDA's enabling legislation, with the terms and conditions of the grant of the aid. PAL Section 1855 also provides that NYSERDA may receive, acquire, sell, and dispose of any personal property,2 and may “enter into any contracts and to execute all instruments necessary or convenient for the exercise of its corporate powers and the fulfillment of its corporate purposes.” PAL Sections 1855(5) and (10). Finally, the statute provides NYSERDA with the authority “to do all things necessary or convenient to carry out its corporate purposes and exercise the powers given and granted by this title.” PAL Section 1855(17).
Given the numerous references and express emphasis in NYSERDA's enabling statutes on the development of energy conservation and renewable energy resources, as central to NYSERDA's purpose, NYSERDA's establishment of the EERET Account and use of allowance sale revenues for the purposes stated in the EERET Account definition would clearly fall within the authority granted to NYSERDA by Title 9 of the PAL.
Any funds generated by NYSERDA by the sale of allowances would be kept and used by NYSERDA. None of the funds would come to the Department or support Department operations. However, the value of the allowances would be used for measures aimed at air pollution control. These measures would include the development and deployment of technologies that could address a number of different air pollutants that are emitted by various types of sources in New York State. These types of sources may be found in any stationary or mobile source emissions sector and may combust any type of fuel.
In light of the proposed allocation to the EERET Account, some commenters assert that the proposed CAIR NO Trading Program is more stringent than the underlying and corresponding federal EPA requirements. The Department disagrees with this perspective. The Department is making available all of the CAIR NO allowances that EPA budgeted for New York State (40 CFR Part 51.123(e)(2) and (q)(2)). Creating an EERET Account does not make New York's portion of CAIR any more stringent than EPA's requirements. In fact, Parts 243 and 244 do not limit NO emissions from any CAIR NO source or CAIR NO Ozone Season source in New York State based on the number of allowances that the Department allocates to the units that are included in that source. The Department's allocation methodologies in the proposed regulations merely determine how the allowances are distributed. The allocation methodologies do not lower any emission limit or reduce the size of the budget. Therefore, the EERET Account which will offer for sale the allowances allocated to it is not more stringent than the federal requirements.
The Department also notes that EPA acknowledges that each State may reserve a portion of its allowance budget for an auction. Proceeds from the auction would be fully retained by the State to be used as they see fit. While EPA has provided a description of some of the different allocation options open to States and outlined some of their key features, EPA has stated that the State's policy choice on allocations does not impact the environmental goals of the CAIR program. EPA allows the States to choose policies that best match their particular needs and circumstances. ‘Corrected Response To Significant Public Comments On The Proposed Clean Air Interstate Rule’; Docket Number OAR-2003-0053 (April 2005) <www.epa.gov/interstateairquality/pdfs/cair-rte.pdf>.
Some commenters indicate that the proposed increase in the quantity of allowances for use in support of energy efficiency and renewable energy represents an unnecessary and significant impact on the State's fossil generation sources and ultimately upon the rate payers and the business climate in New York. The commenters also state that since the State's CAIR NO budget is already so small, any expansion of set-asides is unwarranted and will have deleterious impacts to the State. The Department responds that allocations to the EERET Accounts constitute a small portion (less than 0.4 percent) of the regional NO emissions budgets under the CAIR NO Ozone Season Trading Program and the CAIR NO Trading Program. These allocations will not reduce the regional or New York trading program budgets. The Department does not believe that expanding the EERET Account allocations will have any significant or detrimental impact on the trading programs or on the emissions of individual sources.
Some commenters state that the allocation of allowances to larger set-asides, and the future consideration of auctions as an allocation method for CAIR, diminishes rather than enhances incentives for the installation of emissions controls. They state that for the CAIR pollutants, back-end controls are available and the sale of excess allowances generated by installation of those emissions controls provides financial incentives for this equipment. The commenters argue that larger set-asides and auctions reduce the number of excess allowances that can be generated by the emissions control systems and thus reduce those incentives. Also, sources affected by these regulations derive no net asset benefit because it is very likely that they will be obliged to surrender more allowances than they have been allocated. If larger set-aside auctions reduce or eliminate the incentives for over-compliance, this will place the emphasis for pollutant reduction on the expenditure of auction revenues, not abatements produced by market forces. The commenters also state that the Department has yet to show how much of a pollution reduction can be expected by the EERET program. The Department responds that the savings associated with reduced emissions are the same regardless of whether the owner of an affected unit gets to sell an allowance that was given to them for free or if that owner saves the same amount because she does not have to purchase allowances in order to comply with the program — the incentive to control emissions is the same because the cost of an allowance is saved either way. Affected sources (as a whole) that are in the CAIR NO programs will continue to emit NO to the levels of the caps regardless of how or where reductions are achieved. It will be less expensive for certain units to purchase allowances to comply with the CAIR regulations than to reduce emissions by installing control equipment.
A commenter pointed out that the exemption for units that have accepted permit conditions to limit the unit's potential NO mass emissions during the control period to 25 tons or less under current Part 204 (Section 204-1.4(b)) was not included in the proposed Part 243. The Department agrees with this comment and will include the exemption for facilities accepting enforceable limits on potential to emit in Part 243. The Department always intended to include all of the non-EGU and Portland cement kiln sources that were subject to Part 204 in the CAIR NO Ozone Season Trading Program as provided for under 40 CFR Part 51.123(aa). This exemption allows sources that have been exempt under Part 204 to continue that exemption under Part 243.
Some commenters suggest that instead of establishing an EERET Account, the procedures established under existing allowance allocation rules in Part 204-5.3(f), Part 237-5.3(c) and Part 238-5.3(d) should be continued. The Department's experience with the previously established EE/RE set-asides programs has been that they have been under-subscribed and have had no significant encouraging effect on the development of EE/RE projects. This experience appears to have been shared by other States. As a general matter, it appears that the under-subscription of the EE/RE set-asides is due to the fact that allowance prices have not been sufficiently high to provide an adequate incentive to undertake EE/RE projects. EE/RE projects individually account for very minor amounts of NO or SO reductions so that numerous projects need to be aggregated for even one allowance to be awarded. This need for aggregation, often spread over multiple project owners, along with the requirement for project sponsors to engage in complicated single pollutant emissions reduction accounting procedures, imposes very significant transaction costs on top of the other substantial development costs for these projects. Furthermore, the extent that project sponsors can realistically rely on future allowance sales in order to secure initial project financing is not great. Before an EE/RE project sponsor may be awarded allowances from an EE/RE set-aside, the project must be complete and have been in operation long enough to generate operating data that would be used to demonstrate the emissions reductions (through assumed electrical power demand displacement) for which the allowances may be awarded. The long time delays and lack of certainty concerning such awards make the EE/RE set-asides have relatively little appeal for potential project sponsors.
Commenters who support allocating allowances to the EERET Account, argue that selling or distributing a mere 10 percent of allowances to support energy efficiency and renewable energy is insufficient to protect the environment and public health at the least cost to consumers. These commenters believe programs to curb air pollutant emissions should encourage investment in clean energy technologies, which they say are the long-term solution to air pollution and climate change. These commenters support providing allowances to clean energy projects or using funds from the auction of such allowances for investments in clean energy generation and energy efficiency and urge New York State to consider the impact on clean energy options when finalizing the rules for NO and SO allocations. In particular, the commenters state, New York State must ensure clean, non-emitting energy resources can appropriately make avoided emissions claims, and New York State must ensure any funds raised via auctions are used for truly sustainable practices. Generation from renewable resources displaces power from other sources and therefore can help lower the cost of allowances sold in market transactions including auctions. The commenters believe clean generation should continue to have the opportunity to correctly make claims based on avoided emissions. The Department appreciates the comment supporting the concept of the EERET Account allocation. The Department will consider expanding the sale of allowances under the CAIR programs as a possible rule revision in the future. The Department is proposing to allocate 10 percent of the trading program budgets to the EERET Accounts from which NYSERDA may sell or distribute the allowances to encourage the development of energy efficiency and renewable energy projects. The EERET Account allocation is a successor mechanism to the EE/RE set-aside allocations. Having gained the experience with the EE/RE set-asides, the Department thinks the EERET Account allocation will avoid the problems found with the administration of the EE/RE set-asides.
1 On December 5, 2005, the Department released for comment a draft 6 NYCRR Part 242, CO Budget Trading Program, which is currently undergoing pre-proposal development. The allocation of CO allowances to a similar account under the future Part 242 will occur later and will be done through an auction format that is currently being studied and developed on a separate administrative track.
The CO Budget Trading Program will differ from the CAIR NO cap-and-trade programs in the following significant ways: most allowances in the CO Budget Trading Program will likely be auctioned; the compliance period is at least three times longer than in the CAIR programs so the initial allowance allocation under the CO Budget Trading Program may take place later but still be more than three years in advance of the first allowance transfer deadline; the CO Budget Trading Program is not subject to SIP deadlines for approval so auction development may take longer; and there is no history of allocation of CO allowances (much less any free allocation) that might have been relied on by sources in making past business decisions.
2 Allowances have some of the attributes of property, including transferability and the capacity to be the subject of sale and purchase agreements. Thus, an allowance would fall within the meaning of “personal property” under PAL § 1855 although the allowance lacks any attendant property “right” that would give an allowance holder an entitlement to compensation should the allowance be devalued or terminated by the government.
