United States Environmental Protection Agency

UNITED STATES ENVIRONMENTAL PROTECTION AGENCY REGION IX AIR DIVISION

Technical Support Document

EPA’s Rulemaking for the California State Implementation Plan as submitted by the California Air Resources Board

Regarding

San Joaquin Valley Unified Air Pollution Control District

Rule 9510, “Indirect Source Review (ISR)”

Prepared by: Lily Wong

May 10, 2010

1 TABLE OF CONTENTS

1. Rule Identification

2. Background a. San Joaquin Valley Nonattainment Status

b. Indirect Source Review Programs

3. Rule Summary a. Purpose and Applicability

b. Baseline Emission Projections and Mitigation Requirements

c. Administrative Process and Implementation Mechanisms

d. Analysis and Quantification Using APCO-Approved Model

e. Two Distinct Portions of the Program

4. EPA Review Criteria

5. EPA Evaluation a. Roadmap to EPA Evaluation

b. ISR Portion of the Rule b.i. Rule Relaxation b.ii. Stringency b.iii. Adequate Personnel, Funding, and Authority b.iii.A. Ongoing Legal Challenge to Rule 9510 b.iv. Enforceable b.v. EIP Guidance b.v.A. Fundamental Principles b.v.A.a) Environmental Benefit b.v.A.b) Equity b.v.A.c) Surplus b.v.A.d) Quantifiable b.v.A.e) Permanent b.v.B. Enforceable Commitment b.v.B.a) Program Evaluation, Procedures, and Reporting b.v.B.b) Remedy Emission Reduction Shortfall

c. Off-site Emission Reduction Portion of the Rule

d. Voluntary Measures Policies

2 d.i. Enforceable Commitment d.ii. Percent Limitation on SIP Credit d.iii. Limitations on Use d.iv. Timing of Emission Reductions d.v. Consistent Methodologies for Estimating Emission Reductions

e. Consideration of Separate Incentive Program SIP Submittal

f. Summary of Evaluation

6. EPA Action

7. Additional Recommendations

8. Attachments (6)

3 1. RULE IDENTIFICATION

Agency: San Joaquin Valley Unified Air Pollution Control District (SJVUAPCD)

Subject of this TSD: Rule 9510, “Indirect Source Review (ISR)” Adopted: December 15, 2005 Submitted: December 29, 2006

Previous Rule Submittals: None

Current SIP-Approved Rule: None

2. BACKGROUND: a. San Joaquin Valley Nonattainment Status Eight counties comprise the San Joaquin Valley (SJV) nonattainment area. From north to south, these counties are San Joaquin, Stanislaus, Merced, Madera, Fresno, Kings, Tulare, and the valley portion of Kern (40 CFR 81.305).

The SJV is designated nonattainment for the 1-hour ozone standard1, the 1997 8-hour ozone standard, both the 1997 24-hour and annual PM2.5 standards, and the 2006 24-hour PM2.5 standard.

For the 1-hour ozone standard, the area is classified as extreme with an attainment date of November 15, 2010. For the 8-hour ozone standard, the area is classified as extreme with an attainment date of June 15, 2024.

2 For the 1997 PM2.5 standards, the area has an attainment date of April 5, 2010 which may be extended up to five years until April 5, 2015. For the 2006 PM2.5 standards, the area has an attainment date of December 14, 2014 which may be extended to December 14, 2019.

EPA recently redesignated the SJV to attainment for the PM10 standards (73 FR 66759 (November 12, 2008).

California submitted an extreme area attainment demonstration plan for 1-hour ozone standard in November 2004 (2004 1-Hour Ozone Plan) and for the 8-hour ozone standard in November 2007. The area’s plan for attaining the 1997 PM2.5 standards was submitted in June 2008. The 2004 1-Hour Ozone Plan as submitted relied on reductions from Rule 9510 in its attainment demonstration. However, the plan as approved by EPA does not rely on these reductions because EPA had not yet approved Rule 9510 into the California SIP and thus it could not credit its reductions. See 74 FR 10420, 10436 (March 8, 2010). The 8-hour ozone and PM2.5 plans for the 1997 standards incorporate reductions from the rule in their baseline inventories.

1 The 1-hr ozone standard was revoked in June 2005; therefore transportation and general conformity do not apply to the area for the 1-hr ozone plan. 2 PM nonattainment areas are not classified. b. Indirect Source Review Programs Development projects include the building of residential housing, and commercial, industrial, office, educational, government, and recreational space. Development projects indirectly result in new emissions from mobile, stationary, and area sources, including those from new or longer vehicle trips, fuel combustion from stationary and area sources, use of consumer products, landscaping maintenance, and construction activities. These growth emissions would be reflected in the non-attainment area’s projected baseline emissions inventory. Generally, indirect source review (ISR) programs would reduce growth emissions through incorporating mitigating features into the planning and design of the development project (e.g., mixed use/high density, bicycle and pedestrian paths, proximity to mass transit, shuttle services, energy efficient buildings and appliances, etc.) which primarily target a reduction in total vehicle trips and vehicle miles traveled (VMT), as well as implementing measures to reduce construction emissions.

3. RULE SUMMARY This section describes specific rule provisions and how the program functions. It does not include EPA’s analysis which is found in a subsequent section. The subsections below are: a) Purpose and Applicability, b) Baseline Emission Projections and Mitigation Requirements, c) Administrative Process and Implementation Mechanisms, d) Analysis and Quantification Using APCO-Approved Model, and e) Two Distinct Portions of the Program. a. Purpose and Applicability The purpose of Rule 9510 is to achieve emission reductions from new development projects meeting a defined size threshold (e.g., 50 residential units, 2,000 square feet of commercial space, 25,000 square feet of light industrial space, etc.) [Sections 1.0 and 2.0]. The rule also applies to transportation and transit projects where construction exhaust emissions are equal to or greater than 2 tons of NOx or 2 tons of PM10. The rule does not apply to the development of facilities whose primary function is subject to SJVUAPCD’s permitting requirements (e.g., stationary sources) [Section 4.4.3]. b. Baseline Emission Projections and Mitigation Requirements

Based on the developer’s project application, baseline emissions (i.e., NOx and PM10 emissions from the proposed development project without considering any mitigation measures) are estimated using a computer model. The rule requires that baseline emissions be reduced/mitigated pursuant to Sections 6.1, 6.2 and 6.3. Expected total project emissions mitigation is calculated based on a proportion attributable to construction equipment emissions [section 6.1: reduce NOx emissions by 20% and PM10 emissions by 45%], and a proportion attributable to operational emissions [section 6.2 - reduce NOx emissions by 33% and PM10 emissions by 20%]. Section 6.3 says the combined emission mitigation requirements in Sections 6.1 and 6.2 may be met by any combination of on-site emission reduction measures or off-site fees paid to SJVUAPCD. The SJVUAPCD Air Pollution

Control Officer (APCO) would utilize the fees to fund off-site projects to reduce NOx and

PM10 emissions [Section 10.0]. c. Administrative Process and Implementation Mechanisms The rule requires an applicant to submit an Air Impact Assessment (AIA) application to SJVUAPCD no later than when it applies for a final discretionary approval on a proposed development project from the public agency [Section 5.0]. The AIA application includes:  a detailed project description  an On-site Emission Reduction Checklist which identifies on-site measures to be incorporated into the design of the development project and to minimize construction emissions  a Monitoring and Reporting Schedule (MRS) which outlines how selected on-site emission reduction measures will be implemented and enforced if the measure is not being enforced by another public agency  an optional Off-Site Fee Deferral Schedule for payment of fees in accordance with a schedule

The AIA is conducted using an APCO-approved model (e.g., URBEMIS; see www.urbemis.com) to calculate emissions, emission reductions from on-site measures, and any Off-Site Fees if applicable [Section 5.6]. The inputs to URBEMIS include type of land use, number of units, and mitigation measures selected, and the outputs are total area source emissions, total vehicle emissions, total overall emissions and total reduced emissions in terms of lbs/summer day, lbs/winter day, or tons/year. URBEMIS emission factors are based on the EPA approved model for California, EMFAC2007. The AIA could be conducted by the applicant or by the SJVUAPCD. The AIA is approved or disapproved by the APCO. If approved, the APCO enters into a contract with the applicant to implement any applicable MRS. Upon completion, the APCO would issue an MRS Compliance letter, although active operational on-site measures must be implemented for 10 years after build out of the project.

Implementation of on-site emission reduction measures relies in part on local land use authorities’ existing mechanisms. For instance, a city or county may require building permits for development projects, and the implementation of the on-site emission reduction measures could be subject to enforcement by that city or county agency. If the city or county agency does not have enforcement authority over the on-site measures, the developer and SJVUAPCD would sign a MRS contract on the implementation of the on-site measures.

SJVUAPCD is responsible for administering the program which utilizes Off-Site Fees to fund off-site projects to reduce NOx and PM10 emissions. The rule requires SJVUAPCD to track the funds in dedicated accounts, establish criteria for off-site projects, review emission reduction calculations, enter into contracts with off-site project applicants on the implementation and reporting of the emission reductions from off-site projects, conduct inspections of off-site projects, and prepare annual reports on expenditure of monies, including the amount of monies collected and spent, details on projects funded, and emission reductions realized [Section 10.0].

The Staff Report at Appendix E (see Attachment 2) identifies the following existing grant programs administered by SJVUAPCD which could be used to obtain the off-site emission reductions: Heavy-Duty Engine Incentive Program, REMOVE II Program, Lawnmower Buyback Program, Light and Medium Duty Vehicle Program, and Voluntary Accelerated Vehicle Retirement. The Staff Report also identified new programs which appeared to be in the conceptual stages: Stationary Source Incentive Program, PM10 Public Agency Road and Unpaved Surface Program, and Agricultural Project Incentive Program. d. Analysis and Quantification of Specific Projects Using APCO-Approved Model In order to assess the air impacts of the development project, the rule at Section 5.6.2 requires the use of an APCO-approved model which estimates construction, area source, and/or operational emissions of NOx and PM10 from potential land uses, using the most recent approved version of relevant ARB emissions models and emissions factors. The Staff Report at section IV.E, pp. 19-22 (see Attachment 2) states that in most cases, the model will be URBEMIS since it includes several features which make it the recommended tool. For example, URBEMIS contains: California specific emission factors with motor vehicle emission factors based on the latest version of EMFAC, emissions calculations for PM10, motor vehicle activity based on trip rates from the Institute of Transportation Engineers (which are nationally accepted and widely used), emissions calculations for area sources, and flexibility to modify defaults if project-specific information is known. The inputs to URBEMIS are, at a minimum: type of land use, number of units, and mitigation measures selected. The URBEMIS outputs are: total area source emissions, total vehicle emissions, total overall emissions and total reduced emissions in terms of lbs/summer day, lbs/winter day, or tons/year. e. Two Distinct Portions of the Program The implementation of Rule 9510 could be viewed as having two distinct portions. Because this TSD includes discussions which may focus on only one portion of the program, this TSD will use the following terms: 1) “ISR portion” of the program refers to the portion of the program that includes: the application and approval process, estimating emissions from proposed development projects, determining the required level of emission mitigation, determining the reductions from on-site emission reduction measures,3 determining the amount of fees, if any, to be paid, and the schedule and payment of fees. 2) “Off-site emission reduction portion” of the program pertains to SJVUAPCD’s program to use the fees to fund off-site emission reduction measures.4

4. EPA REVIEW CRITERIA: EPA generally focuses on 3 criteria in evaluating state and local rules for approval into the SIP. For this rulemaking, we are including three additional considerations.

1. Rule Relaxation - Where previous versions of rules or plans are SIP approved, EPA must evaluate whether new submittals comply with sections 110(l) and 193 of the Clean Air Act (CAA) regarding SIP relaxations.

2. Stringency - Section 182(b)(2) of the CAA requires certain SIP rules to apply Reasonably Available Control Technology (RACT). Other sections of the Act require other control levels.

3. Enforceability - Section 110(a) of the CAA requires enforceable SIP requirements. Several EPA guidance documents are used to evaluate rule enforceability, including the “Bluebook” (Issues Relating to VOC Regulation Cutpoints, Deficiencies, and 3 On-site emission reduction measure is defined as “any feature, activity, device, or control technology of a project, which is incorporated into the design of that project or through other means, which will avoid, minimize, reduce or eliminate the project’s emissions” (Section 3.16.1). 4 Off-site emission reduction measure is defined as “any feature, activity, or emission reduction project used, undertaken, or funded to compensate for a project’s emission that is not part of the development project” (Section 3.16.2). Clarification to Appendix D, November 24, 1978, 52 FR 45044), EPA Region IX’s Guidance Document for Correcting Common VOC and Other Rule Deficiencies (August 21, 2001, the “Little Bluebook”), and State Implementation Plans; Nitrogen Oxides Supplement to the General Preamble; Clean Air Act Amendments of 1990 Implementation of Title I; Proposed Rule, (the NOx Supplement), 57 FR 55620, November 25, 1992. Section 110(a) of the CAA also requires assurances that the State has adequate personnel, funding, and authority to carry out SIP provisions.

4. Economic Incentive Programs - EPA published the guidance, “Improving Air Quality with Economic Incentive Programs” on January 2001 (EPA-452/R-01-001) and available at http://www.epa.gov/ttn/oarpg/t1/memoranda/eipfin.pdf. This document will be referred to in this TSD as the “EIP Guidance.” The EIP Guidance applies to discretionary economic incentive programs (EIPs) and represents the agency’s interpretation of what EIPs should contain in order to meet the requirements of the CAA. EIPs use market-based strategies to encourage the reduction of emissions in the most efficient manner. Three fundamental principles apply to EIPs: environmental benefit, equity, and integrity (i.e., reductions are surplus, quantifiable, enforceable, and permanent). Because the EIP Guidance is non-binding and does not represent final agency action, EPA is using the guidance as an initial screen to determine whether potential approvability issues arise.

5 & 6. Voluntary Measures – EPA recognized that many areas have implemented most of the traditional control measures and are continuing to experience challenges in meeting air quality standards. Many states and local agencies are trying new emission reduction strategies to meet the SIP requirements for attainment, reasonable further progress, rate of progress, or maintenance. In recognition and in support of these efforts, EPA developed two policies to provide states and local agencies with flexibility to test and use these innovative measures.  EPA’s “Guidance on Incorporating Voluntary Mobile Source Emission Reduction Programs in State Implementation Plans (VMEP),” October 24, 1997, applies to programs achieving emission reductions from mobile source strategies which may not meet EPA’s traditional criteria on federal enforceability. This document is available at http://www.epa.gov/otaq/stateresources/policy/general/vmep-gud.pdf. In this TSD, we will refer to this guidance as “VMEP.”  EPA’s guidance “Incorporating Emerging and Voluntary Measures into a State Implementation Plan (SIP)," September 2004, applies to stationary and area source emission reduction measures which do not meet EPA’s traditional criteria on quantification and enforceability. This document is available at http://www.epa.gov/ttn/oarpg/t1/memoranda/evm_ievm_g.pdf. In this TSD, we will refer to this guidance as the “Emerging & Voluntary Measures Policy.”

Under these policies, EPA could approve such measures into the SIP, subject to the terms and conditions of the guidance documents. Because both guidance documents are non-binding and do not represent final agency action, EPA is using the guidance documents as an initial screen to determine whether potential approvability issues arise. 5. EPA EVALUATION a. Roadmap to EPA Evaluation

SIP control measures must meet the criteria in the CAA regarding rule relaxation, stringency, enforceability, and adequate personnel, funding and authority. Because Rule 9510 allows a developer who does not fully meet his/her emission reduction requirement from on-site measures to pay a fee, and the program relies on SJVUAPCD to obtain other emission reductions from the use of these fees, Rule 9510 is an economic incentive program. As a result, we have evaluated the rule against the EIP Guidance.

Because of the two distinct portions of the rule, we will first discuss our evaluation of the ISR portion of the rule against the criteria followed by the evaluation of the off-site emission reduction portion of the rule. For criteria where our evaluation and conclusion of the off-site emission reduction portion of the rule are the same as the ISR portion of the rule, we will not duplicate the discussions and simply refer to the previous discussions.

The initial evaluation against the criteria in CAA and the EIP Guidance will show that Rule 9510 does not meet the traditional enforceability criteria. In such cases, the rule may be evaluated against two other policies on voluntary measures (EPA’s VMEP and the Emerging & Voluntary Measures Policy). In order to clarify the stepwise evaluation process, we have included the following diagram. This diagram also illustrates that some criteria are found in multiple documents. Consequently, where the TSD discusses the evaluation of a given criterion, we will not repeat that discussion under the heading of a subsequent guidance. b. ISR Portion of the Rule i. RULE RELAXATION There is no previous version of this rule in the SIP so this rule strengthens the SIP and complies with 110(l) requirement regarding relaxation. ii. STRINGENCY Section 182 of the CAA requires areas that are designated at moderate or above for ozone to implement RACT on sources covered by a Control Techniques Guidelines (CTG) document and on any major non-CTG source. As an extreme ozone nonattainment area, the SJV is subject to the RACT requirement. There are no CTGs for the source categories covered by Rule 9510 and the majority of the emissions from this source category are mobile source emissions and not subject to the RACT requirement. Therefore, Section 182 of the CAA does not apply to Rule 9510, so stringency is not being evaluated for SIP approval. iii. ADEQUATE PERSONNEL, FUNDING, AND AUTHORITY Section 110(a)(2)(E) of the CAA requires the State and responsible local agencies (e.g., SJVUAPCD) to provide necessary assurances that the State and air district have adequate personnel, funding, and authority to carry out its overall State Implementation Plan. EPA most recently addressed this issue in our approval of the 2004 1-Hour Ozone Plan for SJV and concluded that California and SJVUAPCD have demonstrated that they have adequate personnel, funding, and authority. (See proposed approval at 74 FR 333933 (July 14, 2009) and final approval at 75 FR 10420 (March 8, 2010)). However, Rule 9510 raises unique issues regarding SJVUAPCD’s authority to promulgate and enforce a rule regarding emissions from mobile sources.

A) Ongoing Legal Challenge to Rule 9510 We are aware of the ongoing legal challenge by the National Association of Home Builders (NAHB) to the District’s legal authority to implement Rule 9510. See National Association of Home Builders v. San Joaquin Valley Unified Air Pollution Control District, No. 08- 17309 (9th Circuit). In that case, NAHB asserts that the SJVUAPCD, through Rule 9510, is attempting to establish and enforce an emissions standard for new nonroad engines without first having received a waiver as required by CAA section 209, 42 U.S.C. § 7543. Based on the information before us for this proposal, we believe that the SJVUAPCD has the authority to adopt and implement Rule 9510 without such a waiver.

Rule 9510 is designed to reduce emissions from development projects, which could include emissions from vehicles (from increases in vehicle miles traveled by residents and industrial or commercial service providers), entrained and re-entrained road dust, construction equipment, and landscape equipment. While Sections 6.1 and 6.2 of the rule establish emission reduction requirements, Section 6.3 states, “The requirements listed in Sections 6.1 and 6.2 above can be met through any combination of on-site emission reduction measures or off-site fees.” A developer has numerous options to meet the emission reduction obligation, including options that do not involve any changes to nonroad equipment. For instance, all reductions can come from on-site emission reduction measures where the developer chooses design features such as increasing the density of a residential project, selecting a development location that is in close proximity to retail and commercial services and transit stops, adding bicycle lanes and bicycle storage, adding pedestrian walkways, providing shuttle and carpooling assistance and transit pass subsidy, reduced parking at the project, including street block patterns forming interconnected grids, using lower emitting water heaters, and other energy efficiency measures. Alternatively, a developer could simply pay fees to meet the entire emission reduction obligation, or any portion of the obligation.

This “mix and match” flexibility means a developer can select which of the mitigation options are most cost effective and compatible with the proposed project. In addition, the SJVUAPCD’s process for reviewing applications from project developers demonstrates that Rule 9510 does not function as a prohibitory rule controlling emissions from nonroad engines. The SJVUAPCD has created a flow chart which is available on its website (Attachment 4). This flow chart shows the steps taken by the SJVUAPCD to confirm emissions calculations, review monitoring and reporting schedules, and either assess off-site mitigation fees or confirm that no fees are due.

CAA section 209 draws a distinction between state standards affecting the emissions of nonroad engines and other state requirements relating to use of nonroad engines that are no longer new. See, e.g. 40 CFR part 89, subpart appendix A to subpart A. Rule 9510’s assessment of emission reductions and/or off-site mitigation fees is based upon the total unmitigated emissions from a development project. It does not require any changes in design or emission rates from nonroad engines. Indeed, projects can comply without any reduction in expected emissions from nonroad engines. Therefore, Rule 9510 is not within the scope of preemption under section 209.

However, in-use controls on nonroad engines could operate in such a way that they amount to a standard controlling emissions of nonroad engines and may be subject to the preemption provision applicable to nonroad engines or vehicles. If the in-use control either 1) acted to compel the manufacturer or user of a nonroad engine to change the emission control design or equipment of the nonroad engine, or 2) created incentives so onerous as to be in effect a mandate to manufacture or use one engine over another, the in-use control could fall within the scope of preemption under section 209.

As described earlier, Rule 9510 allows project developers to choose construction equipment, operational equipment, and project design features which mitigate emissions of NOx and PM- 10. Alternatively, the off-site mitigation fee schedules established by Rule 9510 are set forth in section 7.2. The upper bounds of these fees are $9,350 per ton for NOx and $9,011 per ton for PM-10. The magnitude of these fees neither compels changes to the emission control design or equipment of any nonroad engine, nor mandate the manufacture or use of one vehicle over another. In its Staff Report regarding Rule 9510, the SJVUAPCD projected that approximately only 13% of the NOx emissions reductions achieved through implementation of Rule 9510 would occur at the development project. The remaining 87% of the NOx emission reductions would be accomplished through off-site mitigation fees. SJVUAPCD also projected that approximately 31% of PM10 emission reductions would occur from on-site measures at the development project and 69% of PM10 emission reductions would be accomplished through off-site mitigation fees. (See Attachment 2, pages B-26 to B-29). The non-coercive nature of the off-site mitigation fees is confirmed by the SJVUAPCD’s experience with implementing Rule 9510. From March 1, 2006, to February 29, 2008, the SJVUAPCD received a total of $18,310,429 in off-site mitigation fees from project developers. (See Attachment 5) The project developers that paid these off-site mitigation fees obviously believed it was to their economic advantage to pay the fees and that Rule 9510 did not effectively compel then to purchase new nonroad engines or vehicles. EPA accepts comment on this analysis, which should be provided in response to EPA’s proposed rulemaking published in the Federal Register. iv. ENFORCEABLE Typically, a rule is enforceable5 if the rule is clearly written, the provisions and criteria are objective, and the rule includes appropriate recordkeeping, monitoring, and other provisions to enable enforcement of the substantive requirements. The source is normally liable for the emission reductions. If the source fails to comply with the rule, the source would be in violation, would be subject to penalties, and could be compelled by SJVUAPCD, EPA, or citizens to implement corrective measures to achieve the emission reductions.

In Rule 9510, the “source” or entity subject to the rule is the developer. The rule requires the developer to comply with the emission mitigation requirements by implementing on-site measures or paying a fee. SJVUAPCD would then use the fees to achieve emission reductions from off-site measures.

While the provisions requiring payment of fees are enforceable (in that a failure by an applicant to pay required fees constitutes a violation of the rule), Rule 9510 does not meet the CAA enforceability criteria because it does not ensure that the emission reductions will be achieved. Under Rule 9510, the developer is not always liable for the emission reductions.  If a developer’s on-site measures are not subject to enforcement by a public agency6 (e.g., a city or county who issues building permits for development projects), the mechanism to ensure that on-site measures are implemented is an MRS contract between the developer and SJVUAPCD. Contracts raise federal enforceability concerns.  If a developer’s on-site measures are subject to enforcement by a public agency Rule 9510 implicitly relies on the public agency to ensure that on-site measures are implemented. However, Section 8.2 of the rule specifically says, “No section or provision within this rule requires action on the part of the public agency.” Consequently, the rule relies on a mechanism outside the jurisdiction of SJVUAPCD for enforcement of the provision. There are two potential problems. First, the on-site measures identified and agreed to in the AIA application process may not be included in the public agency’s permit or other instrument. Second, even if the on-site measures are being required by the public agency, failure by the developer to implement those measures is not a violation of Rule 9510. Therefore, these on-site measures raise federal enforceability concerns. v. EIP GUIDANCE

A) Fundamental Principles The fundamental principles in EPA’s EIP Guidance are: environmental benefit, equity, and integrity (i.e., emission reductions are surplus, quantifiable, enforceable, and permanent).

1) Environmental Benefit

5 The TSD describes federal enforceability, which is the relevant criteria for SIP approval. If a provision is enforceable by another authority but not by EPA, we conclude that the provision is not enforceable, 6 The rule does not identify which public agencies have enforcement authority over on-site measures, and the rule does not specify the process to make this determination. Rule 9510 adequately addresses the environmental benefit principle because it regulates a sector that was not previously regulated, resulting in emission reductions for air quality benefit.

2) Equity The equity principle says that all segments of the population are protected from public health problems and no segment of the population receives a disproportionate share of a program’s disbenefits. Status quo would be development not subject to an ISR program, and one would see increases in emissions from population growth and increased VMTs. With Rule 9510, mitigation of emissions is required, resulting in emission reductions that would not otherwise occur as well as potential benefits to the surrounding population, e.g., potentially better access to public transit, bike paths, pedestrian friendlier environment, and lower energy costs from energy efficient measures in the development projects. This program does not result in disbenefits to communities as it would only result in decreases in emissions. Consequently, Rule 9510 adequately addresses the equity principle.

3) Surplus The EIP Guidance also states that in order to ensure that there is no double counting of emission reductions, the emission reductions must be surplus – i.e., the reductions are not already relied upon in the SIP. Reductions from this rule are surplus in that this is a new rule establishing new requirements on a sector that has not been regulated.

4) Quantifiable While Rule 9510 relies on an APCO-approved model to estimate a developer’s baseline emissions and emission mitigation obligations, the baseline emissions and projected emission reductions on a programmatic basis must be quantifiable. For the ISR portion of the program, we believe that the quantifiable criterion is met in the context of this source category – development projects. The APCO-approved model is based on the EPA-approved model EMFAC. Modeling land use and the related transportation impacts is an inherently uncertain process, since relationships between land use and travel are complex. Land use activities may interact with each other, either acting synergistically and improving emissions reductions or in some cases limiting the beneficial effects where isolation of the development reduces shifts away from single occupancy vehicles. Operational reductions from on-site measures would primarily be from reductions in vehicle miles traveled (VMT). As such, this measure is similar to estimations from transportation control measures (TCMs) which also include basic inherent uncertainties in estimating baseline emissions and emission reductions from TCMs. The APCO-approved model was updated to include the latest information on land use, what design features consistently reduced vehicle activity (and consequently emissions) in the real world and by how much to minimize uncertainties. With the level of emission reductions expected from on-site mitigation, the inherent uncertainties in these emissions are acceptable.

Appendix B of the Staff Report (see Attachment 2) includes the methodology and assumptions for estimating the overall emissions reductions from Rule 9510. Attachments 2 and 3 of Appendix B (see Attachment 2 of this TSD) indicate that the vast majority of the growth in NOx operational emissions would be from motor vehicle emissions, and the majority of the growth in PM10 operational emissions would be from re-entrained paved road dust. NOx and PM10 emissions would also increase from the use of construction equipment. Total annual growth in emissions was calculated from the estimated total growth in motor vehicle emissions from 2006 - 2014 using EMFAC2002.7 Taking into account expected growth, an assumption of 85% rule penetration, and a staff estimate of the percentage of developers choosing on-site measures vs. off-site measures, SJVUAPCD staff estimated that

2010 NOx reductions would be 0.7 tons per day (tpd) from on-site measures, and 4.7 tpd from off-site measures for a total NOx reductions of 5.4 tpd. Taking into account the uncertainties associated with this program, SJVUAPCD claimed 4.0 tpd NOx reductions from this measure in the 1-Hr Ozone Plan (or approximately 74% of the estimated emission reductions from the program) in 2010. See SJV 1-Hr Ozone Plan, Table 4-1. Based on the above, it appears to

EPA that the 4.0 tpd claimed NOx reductions would translate to 0.52 tpd NOx from on-site measures and 3.48 tpd NOx from off-site measures.

SJVUAPCD also projected the total estimated PM10 reductions (from re-entrained paved road dust, construction equipment NOx emissions that was converted at a ratio of 1.5 to 1 to PM10 emissions based on modeling, and PM10 exhaust from construction equipment) would be 5.8 tpd, of which 1.8 tpd were projected to be from on-site measures and 4.0 tpd would be from off-site measures (see Staff Report at Attachment 2, pp. B-27 to B-29).

5) Permanent The reductions are permanent as described below. Some on-site emission reduction measures that are factored into the design of the project (e.g., creation of pedestrian and bicycle paths, increased housing density, reduced parking, energy efficiency measures, etc.) would be permanent because the measure is imbedded in the project design. When the development is constructed with mitigating design features, the development project would result in a permanent and continuous stream of emission reductions. While there could be on-site measures which are not design features, the rule requires the developer to implement the selected on-site emission reduction measures. If the enforceability issue were addressed, these would be permanent reductions.

B) Enforceable Commitment The EIP Guidance says the EIP submittal should include an enforceable commitment from the state or local air agency to: 1. monitor, evaluate, and report on the resulting emission effects of the measure 2. remedy any SIP credit emission reduction shortfalls if the program does not achieve the projected emission reductions.

Rule 9510 falls short on these two considerations as described below.

1) Program Evaluation, Procedures, and Reporting SJVUAPCD may make the enforceable commitment in their submittal, or Rule 9510 could include provisions: a) requiring SJVUAPCD to monitor, evaluate, track and report on implementation of the entire program, and b) describing the procedures for comparing projected emission reductions with actual emission reductions achieved, and require reporting of this comparison.

SJVUAPCD did not include an enforceable commitment in the submittal of Rule 9510 and Rule 9510 does not include all provisions noted above. While Section 10 of the rule includes some provisions on monitoring, evaluating, tracking, and reporting, this section only pertains

7 At the time the District adopted Rule 9150, EMFAC2002 was the EPA-approved model for calculating on- road motor vehicle emissions in California. See 68 FR 1570 (April 1, 2003). to the off-site emission reduction portion of the program. The rule also needs to address program evaluation and reporting on the ISR portion of the program, and include the procedures and reporting of the comparison of projected and actual emission reductions from the entire program (i.e., ISR portion and off-site emission reduction portion).

2) Remedy Emission Reduction Shortfall SJVUAPCD did not provide an enforceable commitment to remedy any emission reduction shortfall from the Rule. The staff report stated that SJVUAPCD’s general contingency measures in the 2004 1-hour ozone plan would be sufficient to address any emission reduction shortfall.8 The reliance on the plan’s contingency measures is not appropriate. The 2004 plan’s contingency measures were submitted to meet the requirement in CAA sections 172(c)(9) and 182(c)(9) for such measures. As a result, their reductions are already relied on in the SIP and, therefore, are not surplus. We discuss above that one of the fundamental principles in EPA’s EIP guidance is that emission reductions from such programs must be surplus. It follows that any additional reductions used to backstop those reductions must also be surplus. c. Off-site Emission Reduction Portion See the discussions above for evaluation of the following criteria: rule relaxation, stringency, adequate personnel, funding, and authority, environmental benefit, equity, and enforceable commitment. Section 10 of the rule, “APCO Administration of the Off-Site Fee Funds,” describes in general terms SJVUAPCD’s program to obtain emission reductions from off-site measures. As stated earlier, the submittal included only cursory details on the off-site emission reduction portion of the program. Consequently, the off-site emission reduction portion of the program does not meet the enforceability criteria. Also, the rule relies on a contractual agreement between SJVUAPCD and the off-site project applicant to ensure implementation of the off-site project. Contracts raise federally enforceability concerns unless the rule is written to make a violation of the contract a violation of the rule. Because there is little detail in this rule submittal on the off-site emission reduction portion of the program, it was not possible to evaluate whether this portion of the program met the approvability criteria that the emission reductions are surplus, quantifiable, and permanent.

In order to ensure that this part of the program results in emission reductions that meet EPA’s criteria on surplus, quantifiable, enforceable, and permanent, it is necessary that this component of the program be fully described and included in a SIP submittal. While the Staff Report in Appendix E (see Attachment 2 of this TSD) identified several possible programs that SJVUAPCD could rely on to fund off-site projects, the submittal of Rule 9510 does not include the necessary program details on how creditable emission reductions will be achieved. At a minimum, the submittal should describe and provide supporting documentation on: the protocols and quantification methodology and procedures to calculate emission reductions; criteria, policies, and procedures to ensure that the reductions are surplus (including identifying potential source categories for the reductions); publicly accessible and transparent tracking and evaluation of the program on a real-time basis; evaluation of program implementation and a summary of how any concerns (e.g.

8 Staff Report Appendix A, pp. A-42 & A-43, (see Attachment 2 of the TSD) states, “In the event that the rule did not achieve a milestone and altering the project mix was not successful, contingency measures are in place in the SIP to make up the shortfall while revisions to the rule are made or new rule(s) are adopted to correct the situation.” quantification or surplus issues) were resolved; annual reporting of amount of emission reductions achieved versus predicted; the audit and enforcement program; and how the public input is provided for in the development and implementation of the program.

In evaluating Rule 9510 against criteria in the EIP Guidance as well as the CAA, EPA has concluded that Rule 9510 does not meet the traditional enforceability criteria. As such, we turn to EPA’s voluntary measures guidances. d. Voluntary Measures Guidances i. ENFORCEABLE COMMITMENT EPA’s guidance on voluntary measures relies on two fundamental components – enforceable commitment to: 1) evaluate and report on the emission effects of the program, and 2) remedy any SIP credit emission reduction shortfall. As previously discussed under the EIP Guidance section, Rule 9510 does not adequately address the enforceable commitment condition of the policies. However, because the enforceable commitment deficiency could readily be addressed by SJVUAPCD, we have also evaluated Rule 9510 against other provisions in VMEP and the Emerging & Voluntary Measures Policy. ii. PERCENT LIMITATION ON SIP CREDIT In light of the uncertainties and untested nature of the projects considered for approval under VMEP and the Emerging & Voluntary Measures Policy, EPA has set a qualified SIP credit limit of 3 % and 6% respectively of projected future emission reductions required for attainment. For instance, if 100 tpd of NOx reductions were needed to attain in the year 2013, a state could claim up to 3 tpd of NOx reductions under VMEP and claim up to 6 tpd of NOx reductions under the Emerging & Voluntary Measures Policy.

Although the 2004 1-Hour Ozone Plan approved by EPA did not rely on these reductions (because EPA had not yet approved Rule 9510 into the California SIP and thus could not credit its reductions), we are nonetheless evaluating Rule 9510 for consistency with this criterion in the event that the SIP may rely on these emission reductions in the future.

Under the 1-hour ozone plan, SJVUAPCD needed 214.1 tons per day (tpd) of NOx reductions to attain in 2010, and the 3% and 6% limit are equal to 6.42 tpd and 12.85 tpd respectively.

The 1-hour ozone plan assumes emission reductions from the Rule 9510 of 4.0 tpd NOx, which is well below the 3% and 6% limit of reductions needed for attainment. (See Attachment 6) iii. LIMITATIONS ON USE The voluntary policies reiterate that reductions from voluntary control measures are subject to existing applicable SIP policy. Consequently, the reductions cannot be used by a source to meet RACT, BACT, BART, LAER, NSPS, NESHAPS, or NSR offsets. Rule 9510 is consistent with such limitations and does not provide for such use. iv. TIMING OF EMISSION REDUCTIONS The timing of when the emission reductions from a voluntary measure occur must be considered under EPA’s policies. For example, the claimed reductions should occur no later than the attainment date; therefore, by necessity, the evaluation period, reporting, and remedy of emission reduction shortfall for the rule should occur before the attainment date. Even though EPA did not approve the 2004 1-Hour Ozone Plan with any reliance of emission reductions from Rule 9510, SJVUAPCD adopted this rule to meet a commitment in the 2004

1-Hour Ozone Plan to achieve 4.0 tpd reduction in NOx emissions in the area’s attainment year of 2010. SJVUAPCD is conducting an annual evaluation and reporting. While SJVUAPCD needs to address the issues previously described on program evaluation and reporting, the timing considerations appear consistent with the policies. v. CONSISTENT METHODOLOGIES FOR ESTIMATING EMISSION REDUCTIONS While it is unclear what methodology SJVUAPCD will be relying on to determine emission reductions achieved from this rule, SJVUAPCD should use a methodology that is consistent with the methodology SJVUAPCD used in its projection of emission reductions for SIP credit described in the Final Staff Report, Appendix B “Emission Reductions Analysis for Proposed Rule 9510 (Indirect Source Review) and Rule 3180 (Administrative Fees for Indirect Source Review), December 15, 2005.” e. Consideration of Separate Incentive Program SIP Submittal

Subsequent to the submittal of Rule 9510, SJVUAPCD took several actions which appear to relate to the deficiencies noted above, particularly with respect to the Off-site emission reduction portion of the program. We have summarized SJVUAPCD’s actions below and have considered whether these actions are sufficient to address those deficiencies.

On April 30, 2007, SJVUAPCD adopted its 2007 Ozone Plan to address the 8-hour ozone standard. The 8-hour ozone plan was submitted to EPA on November 16, 2007. This submittal included SJVUAPCD’s Board Resolution No. 07-04-11b entitled, “In the Matter of: Adopting Commitments to Enhance SIP Creditability of Incentive-Based Emission Reductions.” In the Board Resolution, SJVUAPCD enforceably committed to: ensure that emission reductions from the program would be surplus, quantifiable, enforceable, and permanent; implement incentive programs through enforceable contracts between SJVUAPCD and the grantee; use established protocols or ones that were developed through a transparent public process; conduct inspections and monitor incentive projects; prepare and provide annual reports to EPA which includes a description of the amount of funds spent, amount of reductions achieved, and other findings; if there is a shortfall in emission reductions, revise any air quality plan within 12 months of the annual report; make publicly available the tracking of emission reductions from incentive-based programs on a real-time basis; and provide adequate resources to ensure grantees fulfill their contractual requirements.

Does SJVUAPCD’s Board Resolution adequately address the deficiencies with Rule 9510? Because SJVUAPCD’s Board Resolution No. 07-04-11b included an enforceable commitment to make up emission reduction shortfalls from incentive programs, one could potentially argue that the Board Resolution addresses any emission reduction shortfall from Rule 9510. While it is likely that Board Resolution No. 07-04-11b addresses the off-site emission reduction portion of Rule 9510, Rule 9510 includes emission reductions from the ISR portion of the program which is not covered by Board Resolution No. 07-04-11b since Rule 9510 is a regulatory program. Since the Board Resolution does not specifically address the ISR portion of Rule 9510, an enforceable commitment to make up any emission reduction shortfall is still needed, if only for the ISR portion of Rule 9510. Chapter 7 of the 8-hour ozone plan (“Action Plan for Reducing Emissions With Incentive Funds”) describes more fully SJVUAPCD’s incentive program and Chapter 7.5 describes SJVUAPCD’s proposal to enhance the SIP creditability of incentive based emission reductions. SJVUAPCD describes Chapter 7 as “an action plan in progress” and acknowledges that it establishes a framework for enforcement and accountability and that the development of the policies and procedures for the incentive program would be forthcoming as a subsequent effort.

While SJVUAPCD has taken many steps to address the SIP creditability of their incentive programs, additional steps will still be necessary as outlined in the Board Resolution. Furthermore, it appears that SJVUAPCD has not yet fulfilled commitments that were due (e.g., the annual reporting to EPA by March 31). f. Summary of Evaluation

Evaluation & Findings How to Address Deficiency

1. Rule 9510 does not meet the  Revise rule to address traditional traditional enforceability criteria under enforceability criteria, or CAA and the EIP Guidance  Be consistent with VMEP and Emerging & Voluntary Measures Policy as noted below by the adoption of a Board Resolution. 2. Rule 9510 is not fully consistent with Adopt a Board Resolution which includes: the VMEP & Emerging & Voluntary  Enforceable commitment to monitor, Measures Policy conditions evaluate, and report in a timely manner on the entire ISR program.  A description of SJVUAPCD’s process, procedures, and timing for evaluating program implementation and results, including procedures for how projected emission reductions will be compared with actual emission reductions achieved. The timing of the evaluation and reporting must be appropriate to ensure that any shortfall could be remedied before any rate of progress/reasonable further progress milestone date or the attainment date.  Enforceable commitment to make up any emission reduction shortfall in a timely manner from the entire ISR program. 3. Rule 9510 and SIP submittal lack  Implement commitments in Board sufficient detail on the policies and Resolution 07-04-11b on incentive-based procedures to implement the District’s emission reductions (see “Consideration of program to achieve emission Separate Incentive Program SIP Submittal” reductions from off-site emission on pages 18-19 of this TSD). reduction measures, raising enforceability concerns.

If implementation of the steps to address deficiency #3 above is delayed, it may be appropriate to assign SIP credit for on-site measures if steps to address deficiency #2 above are adequately addressed.

6. EPA ACTION:

Although Rule 9510 does not fully comply with EPA’s approvability criteria and policies, Rule 9510 is a novel approach for advancing air quality goals. We commend the SJVUAPCD for this ground-breaking approach to achieving emission reductions. Innovations of this type are particularly critical to making progress given SJVUAPCD’s extremely challenging air quality problems. In addition, Rule 9510 is directionally sound and if approved, would generally strengthen the SIP. Consequently, EPA staff is recommending approving the rule into the SIP, but is also recommending that the reductions from the Rule should not be credited in any attainment and rate of progress/reasonable further progress demonstrations or used to meet contingency measure requirements until the District corrects the identified problems, which we believe the District should easily be able to do.9 Approval is recommended because ISR programs represent an important effort by state and local air districts to address emissions which heretofore have not been easily regulated. ISR programs are innovative and important because of the targeted sector (e.g., emissions from vehicle travel), the way the programs achieve emission reductions (e.g., generally through selection of location and infrastructure design vs. emission control technologies), and the potentially significant co-benefits of reduced energy use which is an important strategy for reducing green house gases. It is noteworthy that EPA is prohibited by the CAA from requiring states and local air agencies to include ISR programs in SIPs or subjecting areas to ISR under a Federal Implementation Plan. EPA staff believes approval without SIP credit is warranted because SJVUAPCD has voluntarily chosen to develop this innovative program which highlights the importance of land use planning as an integral part of an attainment strategy.

7. ADDITIONAL RECOMMENDATIONS:

We recommend SJVUAPCD provide additional information regarding consistency with the Plan.  SJVUAPCD should provide a description of the reductions that are being claimed by the metropolitan planning organizations in the San Joaquin Valley for land use changes and transportation control measures and demonstrate that these reductions will not overlap with reductions being claimed for Rule 9510 in current and future analyses. SJVUAPCD should also explain how the rule’s assumptions on stationary and area source emissions and emission reductions from development projects are consistent with those assumed for growth in the nonattainment area plans.  SJVUAPCD should describe the methodology for tracking emission reductions and show how it is consistent with the methodology SJVUAPCD used in its projection of emission reductions for SIP credit described in the Final Staff Report, Appendix B (see Attachment 2).  Rule section 10.2.6 allows SJVUAPCD, for the off-site emission reductions, to

substitute NOx reductions for PM10 at a 1.5 to 1 ratio. SJVUAPCD should describe

how this provision is consistent with the ozone nonattainment area plan and the PM10 maintenance plan and provide the technical justification for this substitution and the rationale for the specific ratio.

9 EPA recently approved the attainment and rate-of-progress demonstrations in the SJV 1-hour ozone plan. These approvals do not rely on reductions from Rule 9510. See 75 FR 10420 (Mar. 8, 2010). 8. ATTACHMENTS:

1. SJVUAPCD Rule 9510, “Indirect Source Review (ISR).”

2. “SJVUAPCD Final Draft Staff Report” for Rule 9510 (including Appendices A through G) dated December 15, 2005 and submitted to EPA on December 29, 2006. We will refer to this document as the “Staff Report.” These documents are also available on SJVUAPCD’s web site at http://www.valleyair.org/ISR/ISRSupportDocuments.htm.

3. SJVUAPCD’s Board Resolution No. 07-04-11b, “In the Matter of: Adopting Commitments to Enhance SIP Creditability of Incentive-Based Emission Reductions.”

4. SJVUAPCD’s March 1, 2006 document entitled, “Application Review Process Flow Chart.” This document is also available at: http://www.valleyair.org/isr/Documents/ISRProcessFlowChart.pdf

5. SJVUAPCD Annual Reports to the Governing Board. Page 5 of “2008 Annual Report on the District’s Indirect Source Review Rule,” and page 3 of “2007 Annual Report on the District’s Indirect Source Review Rule.” These documents are also available at: http://www.valleyair.org/ISR/ISRResources.htm#ISRReports

6. Excerpts: Table 4-1 in the 2004 1-hour Ozone Plan and Table 2 in EPA’s proposed approval of the plan at 74 FR 33933 (July 14, 2009)