Insofar as they may impose requirements or limitations on the use of emission reduction credits, the provisions of Title 40, Chapter I, Part 51, subparts T and W and part 93 subparts A and B of the Code of Federal Regulations (CFR)(EPA 1994), in effect, but not including later amendments, were adopted by the Colorado Air Quality Control Commission on the date shown and were made part of the Colorado Air Quality Control Commission Regulations and are hereby incorporated by reference. Copies of the material incorporated by reference are available for public inspection during regular business hours at the office of the Commission, located at 4300 Cherry Creek Drive South, Denver. Parties wishing to inspect these materials should contact the Technical Secretary of the Commission, or the documents may be examined at any state depository library. I. PURPOSE This section establishes procedures for the generation, certification and registration of emissions reduction credits (ERCs) and for their use in emission credit transactions. These procedures are intended to:

A. Promote economic development and lower the cost of meeting pollution control requirements while assuring ambient air quality progress and continued air quality maintenance; B. Encourage development of innovative and cost-effective pollution control methods and technologies; and C. Guarantee that emission reduction transactions provide an environmental benefit. Pursuant to section 24-4-103(5), C.R.S. (1988), the Commission designates the effective date for this Regulation No. 5 as the date on which the United States Environmental Protection Agency promulgates a final rule adopting this regulation as a permanent part of the state implementation plan.

II. SCOPE This section applies to any criteria pollutant regulated under the Colorado Air Pollution Prevention and Control Act or the regulations promulgated thereunder in all attainment, maintenance and non-attainment areas of the state. This section does not apply to internal netting of emissions for NSR purposes. III. DEFINITIONS A. “Actual emissions rate” as of a particular date shall equal the average rate, in pounds per hour, at which the unit emitted the pollutant during a twelve-month period which precedes the particular date and is representative of normal unit operation. Any 12 consecutive months from the past ten years may be used if it is after November 15, 1990 and it is demonstrated to the Division's satisfaction that the period proposed by the source is more representative of normal unit operations.

B. “Air Shed” means any attainment, non-attainment, maintenance area or PM-10 PSD area. C. “Attainment area” means any area of the country designated or redesignated by EPA at 40 CFR part 81 in accordance with section 107(d) of the Clean Air Act as having attained the relevant National Ambient Air Quality Standard (NAAQS) for a given criteria pollutant. D. “Criteria pollutant” means an air pollutant or precursor thereof for which a NAAQS has been promulgated, excluding elemental lead (for purposes of this regulation). E. “Curtailment” means a permanent or time limited reduction in hours of operation or process rate. F. “Emission credit transaction” means the transfer or use of certified emission reduction credits. G. “Emission Reduction” means an emission reduction generated in accordance with Section IV of this rule.

H. “Mobile Emission Reduction System” means fuel switching or add-on emissions control systems. I. “EPA” means the Environmental Protection Agency.

J. “Generator” means the owner of a source or the permittee of a source. K. “Maintenance Area” means any area of the country designated at 40 CFR part 81 in accordance with section 107(d) of the Clean Air Act as a maintenance area. L. “Mobile source” means any vehicle or engine used on the highway, the fuels and fuel delivery systems used by those vehicles or engines, and the operation strategies associated with those vehicles or engines. For the purpose of this definition, non-road vehicles and engines including those used in marine vessels, locomotives, and airplanes, as well as those described in the definition of non- road contained in the Clean Air Act are not included.

M. “Non-attainment area” means any area designated at 40 CFR part 81 in accordance with section 107(d) of the Clean Air Act as non-attainment.

N. “Operational strategies,” for mobile sources, means strategies that are undertaken to reduce emissions through operational controls and include, but are not limited to, trip reduction plans and revised routing strategies.

O. “Owner” means a person or entity who claims lawful possession of a source or credit by virtue of legal title or equitable interest therein which entitles it to such possession. P. “Ozone Season” means the portion of the year in which there is a potential for an ozone violation to occur in a specific geographic area as defined in 40 CFR part 58 appendix D or as determined by the State and approved by EPA.

Q. “Quantifiable” means the ability to determine the actual emissions or emission reductions on a source- specific basis with a known predictable accuracy and precise information considering the relevant discrete time period.

R. “Reduced emissions rate” shall be the emissions rate of a source after application of control equipment, curtailment or other means to reduce the rate of emissions. S. “Source” means any mobile, area or stationary source. T. “Surplus” means an emission reduction below an established source's actual emissions level accounted for in the SIP inventory which is not required to be reduced by the SIP, any applicable attainment demonstration, reasonable further progress plan, maintenance or contingency plan or mandated by any applicable requirement.

U. “ERC Trading Network” means an electronic bulletin board operated by the Division that is accessible by the public and which lists available ERCs and related information necessary to support the emissions trading system.

IV. GENERATION OF CREDITS A. Emissions Reductions 1. Emissions Reductions shall be determined as follows and use the following terms: a. For temporary emissions reductions:

Emissions Reductions = (Actual ER - Reduced ER) x T where Emission Rate (“ER”), is specified in terms of mass emissions per time unit (e.g., pounds SO2 per hour);

Relevant Time Period (T), is the time over which the reduction occurs. b. For permanent emissions reductions:

Emissions Reductions = Actual ER - Reduced ER c. The source shall quantify each reduction of a pollutant's emissions in the same unit of measurement used in the standard or regulation applicable to the pollutant. d. Emission reductions beyond compliance levels are creditable if the generator by transference of business does not replace the emissions in the air shed. 2. ERCs are certified emission reductions for a specified period of time that are actual, quantifiable, surplus and enforceable.

3. Sources intending to generate ERCs shall first submit written notification on Division forms to the Division of their intent to generate credits. The source shall maintain a copy of the notification on site and shall make the notification available to Division representatives upon request.

4. At the time of certification, emission reduction generators shall permanently retire ten percent of all emission reductions for which certification is sought as an environmental benefit. 5. Notwithstanding paragraph A.4 above, a retirement of five percent may be approved by the Division for a generator's emissions reduction in order to achieve other environmental objectives such as those contained in the Pollution Prevention Program and other similar voluntary “beyond-compliance” programs that are comprehensive and facility-wide in nature.

B. Mobile Source ERCs 1. Mobile source emission reduction credits (“MERCs”) are temporary credits which may be generated through the following methods:

a. By achieving reductions in emissions from vehicles which continue in use through the use of emissions reduction systems, or operational strategies. b. By scrapping higher-emitting vehicles from service, which are substituted by vehicles having lower emissions.

2. MERC annual emission rates shall be calculated as the difference between the baseline and the projected emissions level following the reduction. The MERC shall be calculated as the product of the annual emission rate and the remaining useful life of the vehicle which constitutes the baseline.

a. The baseline shall be calculated as the product of the emissions rate of the type of vehicle (expressed in grams per mile of the pollutant(s) involved in the credit transaction) and the annual vehicle miles traveled. Absent evidence to the contrary, each vehicle is assumed to travel 12,000 miles per year. The baseline shall be calculated independently for each year for which a MERC is claimed and shall consider deterioration of the source, changes in usage levels, expected useful life changes and alterations in statistical distribution of the model year. b. The projected emissions level shall consist of the best estimate of the actual in-use emissions of the vehicles following emissions control upgrades or of the replacement vehicles, also calculated as the product of the emissions rate of the vehicle (expressed in grams per mile of the pollutant(s) involved in the credit transaction) and the annual vehicle miles traveled. Absent evidence to the contrary, each vehicle is assumed to travel 12,000 miles per year. c. The remaining useful life of a vehicle shall be more than three years from the date of the credit transaction.

d. The emissions rate for a particular vehicle may be calculated by: (1) Measurement of emissions from an adequate sample of the participating mobile sources, (2) Estimates of participating source emissions using the EPA Mobile Emissions Factor Model or any other EPA-approved quantification methodology, or (3) Rather than repairing a gross emitting vehicle the vehicle may be scrapped for credit at the passing emissions rate specified for that specific vehicle. e. Credits for mobile sources shall not be issued for reductions of less than 10 tons of emissions.

C. Permit Revision for Permanent Reduction Credits 1. If the Division determines that certification will be or has been granted, it shall modify the applicant's permit to provide that the allowable emissions are equal to the permanently reduced rate of emissions utilized in the calculation of the emissions reduction. 2. The owner or operator of a source not required to obtain a permit by provisions of law other than this section shall be required to apply for and accept a permit as a condition of generating a certified ERC.

3. Such permits or permit revisions shall state only those additional conditions necessary to ensure the enforcement of the emissions limitations applicable to the source as a result of using ERCs.

V. CERTIFICATION OF EMISSIONS REDUCTIONS The certification process serves to ensure the validity and accuracy of emissions reductions. Emissions reductions generated may be certified by either the Division or by a third party, who must be independent from both the generator and buyer of ERCs. The Division shall not grant an enforcement shield for third party certified credits.

A. Division Certification The Division may certify emissions reductions as ERCs if adequate documentation reflects that the requirements of this regulation have been met. Once certified, the Division shall issue a serial number, include the ERCs on a Division Registry and, if requested by the owner, the Division shall place the ERCs on the electronic trading network bulletin board. The Division shall issue the appropriate ERC Certificates and forward them to the owner's designated representative. 1. Certification documentation for permanent and temporary credits After the source has achieved emissions reductions and prior to sale or use of the credits, certification documentation submitted by the generator shall include as appropriate, but not be limited to, the following:

a. Actual Emissions Rate Documentation (1) Stack test results, (2) Mass balance calculations, (3) Monitoring data, or (4) CEM data b. Description of the Reduction Strategy c. Control Technology Information (1) The technology used, (2) Supply vendor, (3) Efficiency of the control technology, (4) Production/time information, (5) Certified operation records, and (6) Designated representative verification document d. Process Changes/Material Substitutions Information (1) Materials or process alteration information, (2) Mass balance sheets, (3) Production/time information, (4) Certified operation records, and (5) Designated representative verification document B. Third Party Certification 1. Prior to sale or use, the generator may use an independent Third Party for emission reduction certification.

2. Documentation subject to Third Party review and certification shall include the same information as specified above in A.1.

3. Upon its certification, the Third Party and generator shall submit a Statement of Third Party Certification to the State, on a Division-specified form, for serial number assignment, registration and, if requested, placement on the electronic trading network bulletin board. The statement of Third Party Certification shall be retained on site and made available to any Division representative on request.

4. The state need not issue an ERC Certificate in instances of Third Party certification. C. Protocol Use - To quantify the amount of ERCs generated, sources shall use quantification protocols in accordance with the requirements below.

1. If an EPA-approved protocol exists for a given application, it may be used. 2. If a credit generator wants to deviate to some extent from an approved protocol, or develop a new protocol, the generator must do so in accordance with guidance set forth by EPA. The Division's approval need not be obtained in advance; however, the Division reserves the right to reject the protocol and any resulting credits whether or not the protocol was followed upon certification or ERC use.

a. Protocol Elements. Protocols must contain methods that are credible, workable, enforceable, and replicable and must include all of the following elements: (1) A description of the calculation methods used fo determining the reductions achieved by the emissions controls as implemented;

(2) A description of the record-keeping program that provides for verification of production, materials used, and use of control equipment; (3) The EPA test methods, where available; and (4) A requirement for complete, verifiable records on production, materials used and use of control equipment.

3. Emission Quantification Methods. A protocol may contain the following: a. Emission quantification methods contained in an applicable Federally-approved operating permit; or b. Emission quantification methods approved in the applicable SIP. VI. USES OF EMISSION REDUCTION CREDITS A. Any person may, at any time, transfer, buy, sell, trade, or otherwise convey to another person or retire ERCs in any manner consistent with these rules.

B. Sources may use ERCs for a pollutant to satisfy applicable emissions regulations for that pollutant subject to the limitations in VI.G. ERC transactions shall involve emissions of the same criteria pollutants, or different pollutants having the same impact on air quality as determined by the Division and approved by EPA on a case-by-case basis, which may include modeling requirements.

Any dispute concerning the modeling effort shall be decided by the Air Quality Control Commission pursuant to a petition for a Declaratory Order in accordance with Regulation No. 3, Part A, Section IX.

C. A source may use ERCs to meet Reasonably Available Control Technology (RACT) requirements (Regulation No. 7) in any manner consistent with these rules and to meet Best Available Control Technology (BACT) requirements consistent with EPA policy guidelines if the cost differential is favorable to the affected source.

D. If the use of Temporary ERCs is intended to satisfy an applicable requirement for greater than one year in duration the user source shall obtain a permit change incorporating the use of Temporary ERCs into the user's permit.

E. Geographic Scope. The source shall comply with the following spatial requirements for use of ERCS across different areas of the state, to ensure consistency with the attainment demonstration: 1. Sources may only trade ERCs generated within a non-attainment, attainment or maintenance area within the same non-attainment, attainment or maintenance area. 2. Sources shall not use ERCs generated in attainment areas inside a non-attainment or maintenance area.

3. Sources may use ERCs generated inside a non-attainment or maintenance area in an attainment area.

4. Sources shall not trade ERCs outside of the PM-10 PSD area within which the ERC was generated, as reflected in appendix A.

F. ERC Shelf Life 1. Permanent ERCs shall expire where no application has been filed for use within ten years from the time of generation.

2. MERCs are Temporary ERCs.

G. Use Limitations. ERCs may not be used:

1. Before acquisition by the user of the ERCs;

2. For internal netting or other means to avoid the applicability of New Source Review (NSR) requirements;

3. To meet Clean Air Act requirements for new source performance standards (NSPS) under section 111; lowest achievable emission rate (LAER) standards under section 173(a)(2); hazardous air pollutant (HAP) standards under section 112; standards for solid waste combustion under section 129; requirements for a vehicle inspection and maintenance program under sections 182(b)(4) or (c)(3); clean fueled fleet requirements under section 246; motor vehicle emissions standards under section 202; standards for non-road vehicles under section 213; requirements for reformulated gasoline under section 211(k); or requirements for Reid vapor pressure standards under sections 211(h) and (I); 4. To meet state motor vehicle emission standards;

5. During a season of higher concern than the season in which they are generated (this limitation applies only to temporary ERCs);

6. To meet requirements contained in Title IV of the Act. 7. In any way that may cause or contribute to a violation of the NAAQS or to an increment exceedance in an attainment area, or which will violate any other requirement of the state implementation plan, which shall be determined by the source through modeling. The source may request that the Division waive the modeling requirement if the source can demonstrate that the impact of the trade is negligible. The source shall do the modeling to the Division's specifications.

8. ERCs may only be used to satisfy the applicable requirements for criteria pollutants. For criteria pollutants that contain a state or federal HAP listed in Regulation No. 3, Appendix D, the HAPs reduced to generate the ERC must be of equal or greater toxicity than the HAPs contained in the emissions for which the ERC will be used in lieu of satisfying an applicable requirement. The evaluation of toxicity shall be done by the source intending to use the ERCs and must be approved by the Division before the ERC may be used. H. Permit Revision 1. Permanent ERC use must be incorporated or appended into the terms of a permit applicable to the user's emissions sources.

2. Temporary ERC users shall submit an APEN prior to use including the information required in Section VI.J.2 of this rule.

3. For sources subject to the requirement to obtain a permit under the operating permit program, the permit, when issued or revised, shall authorize the use of ERCs for compliance purposes.

4. If an ERC transaction would require the modification of permits held by more than one person, the application may be jointly submitted by all potentially affected permittees. 5. Synthetic minor sources using ERCs even in a temporary form may forfeit their synthetic minor status if ERC usage causes emissions to exceed major source triggers or thresholds as specified in Regulation No. 3 and Regulation No. 8.

6. The owner or operator of a source not required to obtain a permit by provisions of law other than this section shall be required to apply for and accept a permit as a condition of using an ERC.

7. Such permits or permit revisions shall state only those additional conditions necessary to ensure the enforcement of the emissions limitations applicable to the source as a result of using ERCs.

I. Notice and Certification of Use for Temporary Credits 1. Required Certification Information. The Notice and Certification of Use shall include an APEN and the following information submitted on Division form(s): a. The name and location of the owner or operator of the user source; b. The amount of ERCs used and the associated serial numbers assigned by the Division;

c. The use period;

d. The applicable State and Federal requirements that the ERCs were used to comply with;

e. The emissions quantification protocols that were used to calculate the amount of ERCs required to demonstrate compliance and documentation for the compliance calculation under section V.C. of this section; and f. A statement that a reasonable effort was made to verify that the ERCs were not previously used and were not generated as a result of actions prohibited under this regulation or other provisions of law.

2. Any Notice and Certification of Use submitted pursuant to this regulation shall contain certification by a responsible official under penalty of law of the truth, accuracy and completeness of the information submitted. This certification shall state that based on information and belief formed after reasonable inquiry, the statements and information in the document and in referenced documents attached are true, accurate and complete. J. Notice and Declaration of Incomplete Use.

1. General Rule. The owner or operator of a user source shall submit to the Division a Notice and Declaration of Incomplete Use that contains the information described in paragraph V.A.1. of this subsection within 90 days after the end of the use period or one year after the beginning of the use period, whichever is sooner. The owner or operator of a user source shall provide the required information for each increment of ERCs used over a time period not to exceed one year. The Notice and Declaration of Incomplete Use shall be made publicly available pursuant to section VIII. B. 2. Required Declaration Information. The Notice and Declaration of Incomplete Use shall include the following information submitted on Division form(s): a. The name and location of the owner or operator of the user source; b. The amount of ERCs used and the associated serial numbers assigned by the Division;

c. The use period;

d. The applicable State and Federal requirements that the ERCs were used to comply with;

e. The user's emissions quantification protocols that were used to calculate the amount of ERCs required to demonstrate compliance and documentation for the compliance calculation under section V.C of this section; f. A statement that a reasonable effort was made to verify that the ERCs were not previously used and were not generated as a result of actions prohibited under this regulation or other provisions of law; and g. A copy of the relevant ERC Certification of Generation. 3. Any Notice and Declaration of Incomplete Use submitted pursuant to this regulation shall contain certification by a responsible official under penalty of law of the truth, accuracy and completeness of the information submitted. This certification shall-state that based on information and belief formed after reasonable inquiry, the statements and information in the document and in referenced documents attached are true, accurate and complete. K. Demonstrations of Attainment 1. Only a permanent ERC may be used by the state to show attainment, or reasonable further progress toward attainment, of the NAAQS. A permanent ERC may be used to show attainment or reasonable further progress beginning ten years from the date of generation, if within that period such permanent ERC has not been used and no application for its use has been made.

2. Where no application has been filed for the approval of the use of a certified permanent ERC within ten years after generation, the state shall subsequently take, without compensation, the reduction in making demonstrations of attainment, or reasonable further progress towards attainment, of the NAAQS or adding to the available increment. 3. Unused temporary ERCs shall be included in the inventory for purposes of reasonable further progress toward attainment of the NAAQS unless retired by the owner. VII. RECORD KEEPING AND PUBLIC AVAILABILITY A. Record keeping.

1. The generator source shall adequately document the protocol and specific data by which a temporary ERC is quantified. Generator sources shall transfer copies of all such documentation to any transferee at the time that ownership of an ERC is transferred. 2. The user source shall document the protocol and specific data by which the amount of temporary ERCs needed for compliance was determined.

3. The user source shall maintain all relevant documentation for a minimum of five years after a temporary ERC is used for compliance. Records shall be kept with at least the same frequency as required for the underlying requirement.

4. Record keeping requirements for permanent ERCs shall be contained within the source's permit.

B. Public Availability.

All information submitted to the State for compliance with this rule shall be available to the public under C.R.S. §24-72-201 et seq.

1. The State will make all notices of generation and use submitted by sources pursuant to this rule available for public review. For sources with operating (Regulation No. 3, Part C) or construction permits (Regulation No. 3, Part B), the State will attach copies of these notices to the copy of the operating or construction permit retained in the State offices. For sources that do not have permits, the State will make these notices available in a similar manner.

2. All documentation submitted to the State that supports such notices as part of this rule shall be made available to the public unless a valid business confidentiality claim has been demonstrated pursuant to C.R.S. §24-72-201 et seq.

3. Any notice of ERC use shall be posted on the ERC Trading Network. 4. The Division shall notify the local government in the vicinity of the credit-using source regarding the trade when the trade triggers Regulation No. 3 public notice requirements. VIII. ERC USE FOR NSR AND CONFORMITY PURPOSES A. General Rule. ERCs may be used to meet:

1. NSR offset requirements pursuant to section 173 of the Act, 40 CFR 51.165(a) and subsection VII.B of this section.

2. Any offset requirements pursuant to 40 CFR part 51, subparts T and W and part 93 subparts A and B, which are hereby incorporated by reference as reflected in the first paragraph of this regulation No. 5 insofar as they may impose requirements or limitations on the use of ERCs.

B. If a temporary ERC is used to satisfy NSR offset requirements, the NSR permit shall contain an enforceable commitment that before receiving any operating permit or permit renewal, the operating permit shall contain an enforceable condition that the source shall obtain offsets for each subsequent year before continuing to operate in each subsequent year (The year is based on the ERC use start date).

IX. PROGRAM AUDITS A. Beginning no later than 5 years after State adoption of this rule and at least every 5 years thereafter, the Division shall audit this program to evaluate, at a minimum, the following program elements: 1. Amount and timing of emission reductions (e.g., ERCs used compared to ERCs generated in a given year or ozone season);

2. Compliance by generators and users;

3. The effect of the program on temporal and spatial assumptions in the attainment demonstration and rate of progress plans;

4. The effects of remedial measures, if applicable, implemented as a result of previous audit findings;

5. The effects on hazardous air pollutant emissions from operation of this rule; and 6. The environmental benefits generated from the program. B. As determined by the Commission, the Division shall institute remedial measures to the extent necessary and report such measures to the public.

C. The audit data and results shall be completed, submitted to EPA, and available for public inspection within one year after the audit begins.

X. CONSEQUENCES OF USE OF INVALID CREDITS A. In the event that Division-certified credits used to meet an underlying applicable requirement are based on alleged reductions which did not in fact occur, the Division will not subject a credit user to enforcement action for failure to comply with that requirement for a period of eighteen months. The credit user must achieve compliance with the requirement as soon as reasonably possible, but in no event later than eighteen months following a determination that the reductions did not occur.

B. If claimed reductions which form the basis for third party certified credits prove false, the generator or user of such credits shall secure compensating reductions in emissions within the air shed, either through the use of other valid credits or through an enforceable limitation on future emissions. The reductions shall be achieved as soon as reasonably possible, but in no event later than eighteen months following a determination that the claimed reductions did not in fact occur. XI. STATEMENT OF BASIS, SPECIFIC STATUTORY AUTHORITY AND PURPOSE A. October 24, 1996 - Adoption of Regulation No. 5 and revisions to Regulation No. 3, Part A This Statement of Basis, Specific Statutory Authority and Purpose complies with the requirements of the Colorado Administrative Procedures Act, section 24-4-103, C.R.S. and the Colorado Air Pollution Prevention and Control Act, sections 25-7-110, 25-7-110.5 and 25-7-110.8, C.R.S. Basis The Division has worked with the emissions trading and banking subcommittee to develop Regulation No. 5 and revisions to Regulation No. 3 for the purpose of implementing an EPA- approvable emissions trading program.

The subcommittee has developed a trading rule combining elements from the existing EPA guidance and the prior Commission rule. The subcommittee spent a great deal of time discussing the issues around the possible uses for credits, how credits could be certified, and how they should be traded and tracked.

Emission reduction credits are intended to be granted only for reductions beyond compliance levels which are actual, quantifiable, surplus and enforceable. This rule is not intended to impose additional control limitations on sources. The rule does impose requirements to ensure that these basic criteria are met in order to guarantee that the source flexibility afforded by this program does not occur at the expense of air quality.

This rule is a revision to the SIP done only under the Commission's general authority. Thus, the trading and banking rule will not be state enforceable until after legislative review. Section 25-7- 133(2), C.R.S. Additionally, because EPA must approve this change into the SIP, the Commission finds it appropriate to delay the effective date of these revisions until EPA approval as a SIP revision. This will provide the sources that might wish to participate the assurance that the rule is approved and that the credits are useable prior to the implementation of the program. The existing trading provisions in Regulation No. 3 will remain in effect until the new trading rules are approved by EPA. These constraints on the effective date of these revisions are reflected in the rule text approved by the Commission. In addition, in order to avoid confusion about what portions of the regulations are effective until EPA approval of the SIP change, the parts of Regulation No. 3 which will be repealed are printed in italics. State implementation plans are to include, among other things, enforceable emissions limitations and other control measures, means or techniques to meet the requirements of the Clean Air Act. These are to include economic incentives such as fees, marketable permits, and auctions of emissions rights. 42 U.S.C. 7410(a)(2)(A). These regulation revisions are being submitted as a SIP revision pursuant to the foregoing Clean Air Act requirements. The following issues were identified by the subcommittee and noticed by the Commission for further consideration. The Commission discussed and resolved these issues in the course of this rulemaking proceeding and makes the following findings regarding these issues. 1. Issue: Once used, does a permanent emission reduction credit (ERC) ever expire? Some believe that an ERC once used, even if from a permanent reduction, should expire after some period (e.g., 20 years).

Conclusion: The Commission, based on the experience in the previous trading rules, decided that the permanent credits shall not expire after they are put into use. 2. Issue: Should a decrease in electrical demand be usable to generate emission reduction credits? Conclusion: Because of the existence and operation of the national electrical grid system, the Commission believes that it would be far too difficult to verify that there had been a decrease in demand (a decrease in actual emissions) and not a variation in the grid structure, and therefore at this time finds it is inappropriate to allow a decrease in demand to generate ERCs.

3. Issue: As the proposed rule is written, inter-pollutant trading is allowed on a case-by-case basis subject to Division approval. The subcommittee and the Division recognized that a universal or standard protocol for approving such trades would be desirable, but that no officially-approved protocols for any inter-pollutant trades exist. Conclusion: The Commission agrees that there is currently insufficient scientific information available to support inter-pollutant trades in most cases. In order to ensure that the Division staff is not placed in the position of having to develop information and protocol to support an inter-pollutant trade proposal, the Commission finds that the burden of proving the acceptability of an inter-pollutant trade shall be placed on the source.

Because of concerns expressed by the EPA that the protocol for inter-pollutant trades has not yet been developed, the language of VI.B. was amended to allow proponents of such trades the opportunity to make their case to the Division and EPA for approval. This amendment attempts to address the EPA concern.

4. Issue: The proposed rule states that temporary credits must be credited and traded within the same “season” for seasonal pollutants. Should temporary credits be allowed to be traded from a season of lower concern to a season of higher concern? Conclusion: The Commission finds that the use of temporary credits should be restricted to the same season in which they were generated, or a season of lower concern. This will help mitigate any significant increases in seasons that may cause a violation of the NAAQS.

5. Issue: At this time no internal provisions exist for program development and implementation. How should the cost of the program implementation and development be addressed? Conclusion: The Commission acknowledges that the Division will monitor the activity in the trading program and, if needed, legislative fee authority will be sought. Fees for permit changes required by this rule will be charged pursuant to Regulation No. 3. Nevertheless, the Commission acknowledges that resources are not currently available and funding may be needed for this program.

6. Issue: Should the rule contain procedures or criteria specific to trading Hazardous Air Pollutants (HAPs)? The subcommittee and the Division agreed not to address this issue of HAPs in the proposed rule.

Conclusion: The Commission is concerned that use of ERCs for criteria pollutants that contain or consist of HAPs could unduly increase the risks to communities and the environment in the vicinity of the credit-using source. Assessing relative risk is difficult, time-consuming and highly fact-specific to a particular source and trade. In order to address this concern, the Commission adopted Section VI.G.8 that requires that the HAPs reduced to generate the ERC must be of equal or greater toxicity than the HAPs contained in the emissions for which the ERC will be used in lieu of satisfying an applicable requirement. Section VI.G.8 does not operate as an emissions control regulation on any HAPs, but is simply a limitation on participation in the trading program. 7. Issue: How is the base emission rate set? In order to show the level of actual emissions at a source before reductions for which credits are claimed, a period representative of normal operating conditions must be used.

Conclusion: The Commission adopts provisions that require using the last twelve months' actual emission rate unless the last twelve months are not representative. The source may propose to the Division to use any consecutive twelve months in the last ten years as more representative of normal unit operations. This allows most sources to use a period which the Commission believes is likely to be representative of normal operating conditions. Where the source can show that the period is not representative, the rule allows source flexibility in determining their pre-reduction actual emissions. 8. Issue: Should the Commission give authority to the Division to allow discounts from the ten percent contribution of emission reductions for air quality benefits for generators that participate in a voluntary pollution prevention program or other voluntary “beyond- compliance” programs? Should a generator be allowed to contribute only five percent of its their emissions reductions for air quality benefits as an incentive for participation in pollution prevention programs? Conclusion: The Commission agreed to provide such flexibility to the Division for generators that have voluntarily adopted comprehensive and facility-wide environmental programs such as a Pollution Prevention Program or other similar voluntary “beyond- compliance” programs.

9. Issue: Should ERCs be used to satisfy Best Available Control Technology (BACT) or Lowest Achievable Emission Rate (LAER) requirements where a source triggers PSD or nonattainment New Source Review and must install BACT or LAER control technologies? Recent reports in the national press have indicated that EPA is giving serious consideration to allowing ERC use for BACT as it attempts to move away from command- and-control approaches to more contemporary market approaches. Conclusion: The Commission believes that ERCs may appropriately be used in lieu of the emissions reductions which would otherwise be achieved by application of the BACT technology requirements in situations where such technology requirements are not cost- effective or exacerbate other pollutant emissions, and the use of an ERC would achieve the same purposes more efficiently. In such instances, it will be incumbent on the source to demonstrate that such a situation exists. In any case, however, the other PSD provisions and required analyses would apply to the source. PSD requirements are performed on future allowable emission rates. Because of concerns about the use of ERCs for BACT requirements, although the Commission has allowed ERCs to be used to meet BACT requirements in limited instances, it believes that this provision should only be applied prospectively for new BACT requirements and not to allow a source to remove BACT where it has already been installed. The Commission concludes that use of ERCs in lieu of emissions reductions from LAER is not appropriate because of the potential impacts on nonattainment areas.

10. Issue: How will the local effect of “hot spot” pollutant trades be analyzed to prevent a local criteria pollutant exceedance due to emission credit transactions? Should the rule require modeling of criteria pollutants to assure there are no exceedances of the National Ambient Air Quality Standards? Conclusion: The Commission adopts the language in section VI.G.7 of Regulation No. 5 requiring modeling for all trades in order to ensure that trades do not cause or contribute to a NAAQS exceedance, an increment exceedance, or any violation of a required SIP provision. As that section reflects, the source may request that the Division waive the modeling requirement if the source can document to the Division's satisfaction that the trade has a negligible impact.

11. Issue: How and who modifies the conformity budget for intersector trading? With mobile to stationary source trades, does the emission budget increase after the life of the credit has expired, and how is this accomplished? Conclusion: The Commission has provided for ERCs to be available to satisfy conformity requirements in accordance with the federal rules. The Transportation Conformity requirements (40 CFR Parts 51 and 93) presently allow for trades among emissions budgets where either a SIP revision or a SIP establishes mechanisms for such trades. 40 CFR §93.124(c). The Colorado emissions trading rule is intended to be a SIP revision establishing such a “mechanism” to allow for such trades. The Commission recognizes that, if mobile source emissions rise above the mobile source emissions budget in the state implementation plan, a plan revision may be necessary as otherwise required by state and federal law. 12. Issue: What becomes of the “buffer” between a credit-generating source's potential to emit and its actual emissions before the reduction for which the credit is claimed? Does the generator get to keep a portion, all, or none of it? Conclusion: The Commission finds that methods exist to allow a source to retain the operating flexibility from a pre-reduction “buffer.” When a source wants such flexibility, it may claim credits for less than the entire reduction in emissions accomplished; the difference constitutes a new “buffer.” A source may use temporary credits to meet short- term operating needs.

These methods retain flexibility for the source without relying on “paper reductions.” The Commission concludes that it is imperative that reductions for which credits are granted must be actual reductions. Allowing a source to retain a buffer from within the credits granted, as proposed by the Colorado Association of Commerce and Industry, would result in credits for “reductions” which did not actually occur. This result is unacceptable, particularly because sources determine their own permitted emissions levels when they file their Air Pollution Emission Notices.

For example, a source with a ninety-five ton per year permitted level that actually emits fifty tons reduces its emissions to forty tons. The source should take a new permit with a level between forty and fifty tons (e.g., forty-five tons) so that the source has a five ton buffer. The source may then fluctuate its emissions between forty and forty-five tons without violating the permit, and generate temporary credits for any emissions reductions below forty-five tons.

In order to ensure that reductions are actual, an ERC-generating source will not be able to increase its permitted emissions in the absence of a process or control modification. The source cannot, for example, simply file an APEN with higher emissions estimates and thereby increase its permitted emissions. The effect would be to allow emissions for which credits were already granted, resulting in “paper reductions.” This consequence is unacceptable.

13. Issue: Should a closer relationship be established between emission trades and the various pollutant-specific SIP elements? With regard to the spatial distribution of emissions, the rule as proposed did not acknowledge any sub-regional emission budgets, dispersion modeling requirements, or other spatial considerations contained in attainment and maintenance demonstrations for specific SIP elements.

Conclusion: The original proposed regulation did not have a modeling requirement for ERC use. The Division subsequently proposed that modeling be required prior to an ERC use unless the source requests that such modeling be waived and the source can show that the ERC use would have a “negligible” impact. The Colorado Association of Commerce and Industry expressed a concern that the Division would require costly or unnecessary modeling in most cases. This concern stems from the lack of definition of what is “negligible” in the judgment of the Division. The Commission believes that modeling should only be required where the location or circumstances of the ERC use would reasonably be expected to cause or contribute to a NAAQS violation, an increment exceedance, or violation of a SIP provision such.as near a “hot spot” in a nonattainment area or where ambient conditions are within 5% of any applicable standard. The Commission, based on the explanation offered by the Division, believes that the modeling required by the rule as adopted will adequately address this issue. 14. Issue: Should the emission trading rule clarify whether trades can take place among different air sheds/Air Quality Control Regions.

Conclusion: The Commission adopts two levels of limitations on the geographic scope of trading. First, trades are limited to sources within the same nonattainment area or from a source in a nonattainment area to one in an attainment area. Second, all trades must be between sources within the same PM-10 PSD areas. These limitations are intended to avoid excessive impacts on local communities and Class I areas from long-distance trades.

In addition to the issues discussed above, the Commission also considered concerns about granting ERCs for emission reductions which occurred in the past. This rule allows a source to use credits generated under the old rule and to seek credit certification for reductions which occurred prior to adoption of this rule. However, the Commission wants to emphasize that past emission reductions which have been used to demonstrate attainment or reasonable further progress for SIP purposes are not eligible to qualify as ERCs.

The Commission recognizes that use of ERCs in lieu of compliance with an emission limitation may raise public concerns in the vicinity of the credit-using source. For this reason, the rule anticipates that notice to the Division will be required prior to use of ERCs. Permanent ERC use must be accomplished through a permit change. Temporary ERC use may occur only after an APEN is filed with the Division. Each of these documents is available to the public. Notices of ERC use will be published on the ERC Trading Network by the Division. The provisions of Regulation No. 3 requiring and allowing public notice and comment of proposed permits and modifications will also apply to permit actions to approve use of ERCs. The Commission believes that use of the Division's discretion to seek public comment needs to be supplemented in order to provide sufficient information to the public regarding proposed uses of ERCs. Accordingly, the Commission has included a requirement that the Division notify local governments in the affected area when the trade will result in the use of ERCs which would exceed the threshold for, or otherwise trigger, public notice and comment pursuant to section IV.C.1 of Part B, Regulation No. 3. The Commission anticipates that local governments will be able to use this notice to schedule informational meetings for citizens, which Commission members and appropriate Division staff will be able to attend. The Commission also emphasizes that the Division should exercise appropriate discretion to provide public notice and comment for trades that involve HAPs, which would be implemented by notifying the local government pursuant to the process described above. The Commission elected to preclude trading of elemental lead because of that pollutant's particular characteristics and modified the definition of criteria pollutant for the purposes of this regulation.

The Commission included Section IV.A.1.d. in this regulation to ensure that ERCs are granted only for real overall reductions in emissions. This provision ensures that reductions will be creditable only if the emissions are not replaced in the airshed by another generator in a business of like kind. In order to assure that this program does not grant credit for “paper” reductions, the rule prohibits generating ERCs where this business shift will replace emissions within the same airshed. This determination will be made on a case-by-case, fact-specific basis.

Specific Statutory Authority These regulation revisions are adopted under the general authority of the Commission found in section 25-7-105(1), C.R.S. and are consistent with 42 U.S.C. 7410(a)(2)(A). Purpose This rule was proposed in order to provide the maximum flexibility for sources in meeting the state and federal requirements outlined under the possible uses for credits. The Commission makes the following findings in regards to the adoption of this regulation: 1. The Commission has considered, and has based its decision, on the reasonably available, validated, reviewed and sound scientific methodologies and information made available by interested parties.

2. Where these revisions are not administrative in nature, the record supports the conclusion that the provisions adopted will result in a demonstrable reduction in air pollution. This reduction is accomplished through the retirement of 10% of the achieved reduction in emissions. 3. The revisions selected maximize the air quality benefits of the emissions standards that apply. The revisions selected are the most cost-effective based on the documents submitted by the parties under section 25-7-110.5, and provide the regulated community with flexibility in meeting emissions limitations. Although the requirement for increased emissions modeling may impose additional costs, the Commission believes this requirement is necessary to ensure that no violations of air standards will occur as a result of using ERCs. Appendix A PM-10 PSD Areas Statement of Basis, Specific Statutory Authority, and Purpose Revision to Regulation No. 5, Part B - Permit Fee Credit Regulation December 18,2003 This Statement of Basis, Specific Statutory Authority and Purpose complies with the requirements of the Colorado Administrative Procedures Act, § 24-4-103, C.R.S., and the Colorado Air Pollution Prevention and Control Act, §§ 25-7-110 and 25-7-110.5, C R S (“the Act”). Specific Statutory Authority Section 25-7-109(1)(a), C.R.S., provides the Commission the authority to adopt, promulgate, modify and/or repeal emission control regulations that require the use of air pollution controls. Basis and Purpose Regulation No. 5, Part B deals with the establishment and implementation of a voluntary program for the generation, certification and use of permit fee credits as a benefit to the environment. The original basis for the promulgation of Part B indicates that the permit fee credits were conditioned upon annual appropriations from the Colorado Legislature. Pursuant to the enactment of Colorado House Bills 02-1203 and 03-1015 (“HB02-1203” and “HB03-1015”), both the necessary funding mechanism and the authority for the permit fee credits program have been withdrawn. This amendment conforms Regulation No. 5 to the repeal of § 25-7-114.8, C.R.S. (HB03-1015), and the withdrawal of legislative funding for the permit fee credit program (HB02-1203).

COLORADO AIR QUALITY CONTROL COMMISSIONADOPTED: December 18,2003