[[pp. 5051-5100]] Control of Air Pollution from New Motor Vehicles: Heavy-Duty
[Federal Register: January 18, 2001 (Volume 66, Number 12)]
[Rules and Regulations]
[Page 5051-5100]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18ja01-17]
[[pp. 5051-5100]] Control of Air Pollution from New Motor Vehicles: Heavy-Duty
Engine and Vehicle Standards and Highway Diesel Fuel Sulfur Control
Requirements
[[Continued from page 5050]]
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[GRAPHIC] [TIFF OMITTED] TR18JA01.003
BILLING CODE 6560-50-C
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This large body of evidence that NOX adsorbers are
highly effective, that they can be applied to diesel engines (as
further described in the RIA), and that there is a clear and strong
prospect for their further development, causes us to conclude that
NOX adsorbers will provide at least one feasible path to the
NOX standards we have set today. Further, we can conclude
from this development experience that the 0.20 g/bhp-hr NOX
standard represents the lowest standard achievable by the year 2007,
having given appropriate consideration to cost, energy, and safety as
described elsewhere in sections III and V of this document and in the
RIA.
Remaining Engineering Development
The considerable success in demonstrating NOX adsorber
technology in laboratory settings, as outlined above, clearly shows
that the technology is currently capable of achieving the
NOX standard level. There are several engineering challenges
that will be addressed in going from this level of demonstration to
implementation of durable and effective emission control systems on
production vehicles. One of these technical challenges involves changes
to the way diesel engines will need to operate in order to take full
advantage of the NOX adsorber, representing a shift from
current day engine operation. Working within the engine design and
operating principles expected for 2004 model year engines, optimization
of the total system (matching exhaust temperatures to the operating
window of NOX adsorbers and controlling exhaust air to fuel
ratios), will be essential to getting the best performance from the
NOX adsorber. We have estimated in the RIA that diesel
engine manufacturers collectively will need to invest $385 million in
order to implement this change. In addition to the generic need to
optimize operation to match the NOX adsorber performance,
industry will further need to address NOX adsorber
desulfation and its associated issues because some sulfur will still
remain in the fuel and the engine's lubricating oil.
Clear engineering paths to address these problems can be described
today, several years in advance of when they will need to be applied.
The primary thing that must occur is to eliminate most of the sulfur
from diesel fuel. The fuel sulfur standard set today in this rulemaking
overcomes this obstacle. The second set of system engineering steps
needed to accomplish both NOX regeneration and desulfation
are already being laid out in test programs conducted by DOE in the
DECSE Phase II program and in our own test program at the National
Vehicle and Fuel Emissions Laboratory. The DECSE Phase II program
clearly demonstrates that, through changes in ``in-cylinder''
operation, diesel exhaust conditions can be generated that are
optimized for NOX storage (fuel lean operation),
NOX regeneration (fuel rich operation), or desulfation (hot,
fuel rich operation). This in-cylinder approach, discussed more fully
in the RIA, represents a likely technical solution for light heavy-duty
vehicles which are expected to already have the necessary EGR and
common rail fuel system technologies need for this approach by the 2004
model year. Testing at NVFEL shows yet another engineering path to
optimizing the NOX control system external to the combustion
system. This approach segregates the exhaust into separate streams
external to the engine and manipulates exhaust conditions by changing
exhaust mass flow (through valves) and by adding supplemental fuel with
an electronic fuel injector. This approach means that exhaust
temperatures and air to fuel ratios can be controlled external to the
engine allowing great flexibility to control and optimize
NOX regeneration and sulfur regeneration events. This
approach may prove to be a good solution for heavy heavy-duty vehicles
because of the freedom it allows for optimization of both the engine
operation and the aftertreatment operation with fewer tradeoffs with
regards to fuel consumption and engine durability. A complete
description of this approach and its merits is given in the RIA.
Each of the engineering paths described here shows a means for
compliance with the NOX standard given further optimization
and development and, given past experiences with the introduction of
new technologies, other approaches are likely to be devised as well.
Given industry's demonstrated ability to develop solutions to similar
issues with gasoline three-way catalysts and gasoline-based
NOX adsorber technologies, we are confident that the
NOX emission control system can be designed for the long
life required for heavy-duty diesel operation. We are not alone in this
evaluation of NOX adsorber development, as evidenced by the
strong endorsement of the technology by many in the
industry.126 For example, one letter we have received
stated, ``We believe all NOX Adsorber development issues
have been identified and the technology is proceeding according to
schedule. We have identified development paths leading toward
production optimization and do not see insurmountable technical
barriers. We are confident in our ability and experience in applying
the science of surface chemistry and catalysis to achieve our
objective.'' 127
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\126\ Letter from Steven Suttle, Corning, Inc., to Margo Oge,
EPA, dated October 23, 2000, Item IV-G-59; letter from Martin
Lassen, Johnson Matthey, to Margo Oge, EPA, dated October 19, 2000,
Item IV-G-55; letter from John Mooney, Engelhard Corporation, to
Margo Oge, EPA, dated October 3, 2000, Item IV-G-38; MECA press
release dated October 3, 2000, Item IV-G-53; and Department of
Energy, dated September 6, 2000, Item IV-G-28; all contained in
Docket A-99-06.
\127\ Letter from John J. Mooney, Director, Technical
Development and Business Groups, Engelhard Corporation, to Margo
Oge, Director, OTAQ, EPA, dated October 3, 2000, Item IV-G-38,
Docket A-99-06.
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NTE NOX Limits
The broad NOX reduction capability of the NOX
adsorbers will also enable the NTE NOX requirements to be
met. As discussed previously, we have established an NTE NOX
standard of 1.5 x FTP standard, or 0.30 g/bhp-hr NOX,
which is 0.10 g/bhp-hr above the FTP standard. The NMHC+NOX
NTE standard for 2004 technology HDDEs is 1.25 x 2.5 g/bhp-hr NMHC +
NOX, or 3.125 g/bhp-hr, which is 0.625 g/bhp-hr above the
2004 FTP standard. As discussed in the RIA for this final rule, we
would expect that the majority of the NTE standard for a 2004
technology engine would be comprised of NOX emissions,
perhaps as much as 3.0 g/bhp-hr (with the remainder, 0.125 g/bhp-hr,
being HC). Based on available data, including data from our NVFEL test
facility, we believe a NOX adsorber system will be capable
of a 90 percent or greater emission reduction across the entire NTE
control zone, for the test conditions covered by the NTE test
procedure, by model year 2007. A 90 percent reduction from the ``base''
NOX NTE level of 3.0 g/bhp-hr would result in a tailpipe
emission rate of 0.30 g/bhp-hr, which is 1.5 times the 2007 FTP
NOX standard. As discussed in the RIA, we have demonstrated
NOX reductions on the order of 90 percent or greater across
the NTE control zone in our test program at NVFEL. A complete
description of the NOX adsorber testing completed at NVFEL
is provided in the final RIA and in the docket associated with this
rule. This testing was performed at standard laboratory conditions;
however, we do not expect the expanded ambient conditions required for
NTE compliance to have a significant impact on the performance of the
exhaust emission control systems. Additional discussion of this issue
is contained in the RTC and the RIA for this rule.
[[Page 5053]]
Sulfur Trap
The preceding discussion of NOX adsorbers assumes that
SOX (SO2 and SO3) emissions will be
``trapped'' on the surface of the catalyst, effectively poisoning the
device and requiring a ``desulfation'' (sulfur removal event) to
recover catalyst efficiency. We believe that, at the 15 ppm cap fuel
sulfur level, this strategy will allow effective NOX control
with moderately frequent desulfation and with a modest fuel consumption
of one percent. We believe this fuel consumption impact will be more
than offset by reduced reliance on current, more fuel inefficient
NOX control strategies (see discussion in Section III.G for
estimates of overall fuel economy impacts). In the NPRM for this
rulemaking, we sought comment on the potential of a separate
SOX trap catalyst to control sulfur poisoning of the
NOX adsorber catalyst. As detailed further in the final RIA
and RTC documents, we believe that even if a separate SOX
trap system were used, fuel sulfur levels would have to be 15 ppm or
lower in order for the NOX adsorber technology to function
properly over the life of a heavy-duty vehicle.
Urea SCR Technology
SCR Technology has been put forward by some as another means of
meeting stringent NOX standards. For reasons discussed below
we do not believe that it provides an adequate basis for establishing
the feasibility of today's emission standards. Selective Catalytic
Reduction (SCR), like the NOX adsorber technology, was first
developed for stationary applications and is currently being refined
for the transient operation found in mobile applications. With the SCR
system, a urea solution is injected upstream of the catalyst which
breaks down the urea into ammonia and carbon dioxide. The ammonia is
used as a NOX reductant across the SCR catalyst producing
N2 and water. Catalysts containing precious metals
(platinum) can be used at the inlet and outlet of SCR systems designed
for mobile applications to improve low temperature NOX
reduction performance and to oxidize any ammonia that may pass through
the SCR, respectively. SCR systems using these oxidation catalysts and
being developed for mobile applications are more often called ``compact
SCR'' systems. Generally, reference to SCR throughout this preamble
should be taken to mean compact SCR. The use of these platinum
catalysts enables SCR systems to achieve NOX reductions at
lower temperatures (as required for diesel engine applications), but
introduces sensitivity to sulfur in much the same way as for diesel
particulate filter technologies. Sulfur in diesel fuel inhibits low
temperature performance and results in high sulfate-make, leading
directly to higher particulate emissions. For a further discussion of
SCR system sensitivity to sulfur in diesel fuel, and of its need for
low sulfur diesel fuel, refer to Section III.F.
Urea SCR catalysts, like NOX adsorbers, need low sulfur
diesel fuel to achieve high NOX conversion efficiencies and
to control sulfate PM emissions. If low sulfur fuel is required, SCR
NOX control may be possible in some applications by 2007.
However we believe there are significant barriers to its general use
for meeting the 2007 standards. SCR systems require vehicles to carry a
supply of urea. The infrastructure for delivering urea at the diesel
fuel pump would need to be in place for these devices to be feasible in
the marketplace; and before development of the infrastructure could
begin, the industry would have to decide upon a standardized method of
delivery for the urea supply.
In addition to this, there would need to be adequate safeguards in
place to ensure the urea is used throughout the life of the vehicle
since, given the added cost of urea and the fact that urea depletion
would not normally affect driveability, there would be an incentive not
to refill the urea tank. This could lead to considerable uncertainties
regarding the effectiveness of SCR, even if EPA were to promulgate the
regulations that likely would be needed to require the regular
replenishment of urea. Some commenters have suggested that this is the
key issue with regard to urea SCR systems. One commenter further
concludes that this issue could be addressed by designing engines with
on-board diagnostic systems utilizing a NOX sensor that
would observe a loss of NOX control. When observed, the
engine would be designed to reduce power gradually until a 50 percent
loss of power was realized. This power loss would serve to encourage
the user to replenish the urea tank.128 While such an
approach may be possible, it raises concerns for public safety as poor
engine performance could lead to inadequate power for safe merging onto
highways and other related driving situations. We remain hesitant to
base a national program on such technology when important issues such
as driver training on the need to refill the urea tank and the
consequences of failure to do so cannot be appropriately controlled.
This approach would seem to suggest a need for EPA-mandated spot checks
of individual vehicles to ensure compliance with the NOX
standard. How such a program would work and the burden that it might
place on small business entities was not addressed in the comments. In
testimony given at the public hearing held for this rulemaking in Los
Angeles, the California Trucking Association raised concerns about the
appropriateness of putting this regulatory burden on truckers when a
simpler technology such as a diesel NOX adsorber was
available instead.129 Without measures similar to these, we
would expect that a substantial number of users would not remember to
fill their urea tanks. Since failure to provide urea for a vehicle
would lead to a total loss of NOX control for that vehicle,
we would need to model the loss of NOX control to be
expected from an SCR based program. Such a loss in NOX
control most likely would be appreciable and, in effect, the
NOX standard would not be met on a fleetwide basis.
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\128\ API Comments on the 2007 Heavy Duty Engine/Diesel Sulfur
Proposed Rule, August 14, 2000, Air Docket A-99-06, IV-D-343.
\129\ Testimony of Stephanie Williams--Director of Environmental
Affairs, California Trucking Association to EPA public hearing June
27, 2000, Air Docket A-99-06, IV-F-190.
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We believe that these significant obstacles would prevent the
widespread or general availability of SCR for use as a NOX
control strategy to meet the 0.20 g/bhp-hr NOX standard.
These problems may, however, be resolved in some niche applications;
for example, certain well-managed centrally-fueled fleets. Because of
the many obstacles to ensure in-use NOX control with the
SCR, we do not believe that feasibility of the 0.20 g/bhp-hr
NOX standard can be based upon SCR technology. For further
discussion of urea SCR's need for low sulfur diesel fuel, refer to
section III.F of this preamble.
Summary
Based on the discussion above, we believe that NOX
exhaust emission control technology, in combination with low sulfur
diesel fuel of 15 ppm or lower, is capable of meeting the very
stringent NOX standards finalized today. The certainty
provided by this rulemaking that low sulfur diesel fuel will be
available in the future, and the emission standards finalized today
that necessitate advanced NOX controls, should lead to rapid
development of these technologies. The NOX adsorber
technology has shown remarkable advancement in the last five years,
both in stationary source applications and
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lean-burn gasoline applications, and now for heavy-duty diesel engines.
Given this rapid progress, the availability of low sulfur diesel fuel,
the identification of engineering paths to resolving the technological
issues, and the lead time provided by today's rulemaking, we believe
that applying NOX adsorbers to heavy-duty diesel engines
will provide the emission reductions needed to comply with the 2007 HD
NOX standards. This can be done in a cost effective way,
with little or no fuel economy impact, and no special concerns of
safety.
c. Meeting the NMHC Standard
Historically control of non-methane hydrocarbon (NMHC) emissions on
diesel engines has been relatively simple, when compared to gasoline
engines, due to the net fuel lean (abundant oxygen) operation typical
of diesel engines. In fact, due to this operating characteristic,
diesel engine NMHC levels have often been significantly below the
mandated levels. The introduction of catalytic NOX control
and the subsequent need to operate under alternately net lean and net
rich conditions is likely to make NMHC control more difficult.
Meeting the NMHC standards under the lean operating conditions
typical of the biggest portion of NOX adsorber operation
should not present any special challenges to diesel manufacturers.
Since the devices discussed above--catalyzed particulate filters and
NOX adsorbers, contain platinum and other precious metals to
oxidize NO to NO2, they are also very efficient oxidizers of
hydrocarbons. NMHC emission reductions of greater than 95 percent have
been shown in these devices over the transient FTP and SET
modes.130 Given that typical engine-out NMHC is expected to
be in the 0.20 g/bhp-hr range for engines meeting the 2004 standards,
this level of NMHC reduction will mean that under lean conditions
emission levels will be well below the standard.
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\130\ ``The Impact of Sulfur in Diesel Fuel on Catalyst Emission
Control Technology,'' report by the Manufacturers of Emission
Controls Association, March 15, 1999, pp. 9 & 11.
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However, the NOX regeneration strategies for the
NOX adsorber technology may prove difficult to control
precisely, leading to a possible increase in HC emissions under the
rich operating conditions required for NOX regeneration.
Even with precise control of the regeneration cycle, HC slip may prove
to be a difficult problem due to the need to regenerate the
NOX adsorber under net rich conditions (excess fuel) rather
than the stoichiometric (fuel and air precisely balanced) operating
conditions typical of a gasoline three-way catalyst. It seems likely
therefore, that in order to meet the HC standards we have set, an
additional clean up catalyst may be necessary. A diesel oxidation
catalyst, like those applied historically for HC and partial PM
control, can reduce HC reductions (including toxic HCs) by more than 80
percent.131 This amount of additional control along with
optimized NOX regeneration strategies will ensure very low
HC emissions. With such a downstream clean-up device to control HC slip
during the periodic NOX regeneration event, the HC standard
we have set here can be met. For a complete description of how the
clean up catalyst functions in conjunction with the NOX
adsorber technology, please refer to the complete system description
given below in section III.E.1.e and to the final RIA.
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\131\ Demonstration of Advanced Emission Control Technologies
Enabling Diesel-Powered Heavy-Duty Engines to Achieve Low Emission
Levels, Manufacturers of Emissions Controls Association, June 1999.
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Given industry's extensive experience with diesel oxidation
catalysts, the long lead time provided by this rulemaking and the
availability of less than 15 ppm sulfur diesel fuel, we conclude,
having given consideration to cost, energy impacts and safety, that the
NMHC standard is feasible.
d. Meeting the Crankcase Emissions Requirements
The most common way to eliminate crankcase emissions has been to
vent the blow-by gases into the engine air intake system, so that the
gases can be recombusted. Until today's rulemaking, we have required
that crankcase emissions be controlled only on naturally aspirated
diesel engines. We have made an exception for turbocharged heavy-duty
diesel engines because of concerns in the past about fouling that could
occur by routing the diesel particulates (including engine oil) into
the turbocharger and aftercooler. However, this is an environmentally
significant exception since most heavy-duty diesel trucks use
turbocharged engines, and a single engine can emit over 100 pounds of
NOX, NMHC, and PM from the crankcase over its lifetime.
Given the available means to control crankcase emissions, we have
eliminated this exception. We anticipate that the heavy-duty diesel
engine manufacturers will be able to control crankcase emissions
through the use of closed crankcase filtration systems or by routing
unfiltered blow-by gases directly into the exhaust system upstream of
the emission control equipment. However, the provision has been written
such that if adequate control can be had without ``closing'' the
crankcase then the crankcase can remain ``open.'' Compliance would be
ensured by adding the emission from the crankcase ventilation system to
the emissions from the engine control system downstream of any emission
control equipment.
We expect that in order to meet the stringent tailpipe emission
standards set here, that manufacturers will have to utilize closed
crankcase approaches as described here. Closed crankcase filtration
systems work by separating oil and particulate matter from the blow-by
gases through single or dual stage filtration approaches, routing the
blow-by gases into the engine's intake manifold and returning the
filtered oil to the oil sump. These systems are required for new heavy-
duty diesel vehicles in Europe starting in 2000. Oil separation
efficiencies in excess of 90 percent have been demonstrated with
production ready prototypes of two stage filtration
systems.132 By eliminating 90 percent of the oil that would
normally be vented to the atmosphere, the system works to reduce oil
consumption and to eliminate concerns over fouling of the intake system
when the gases are routed through the turbocharger. Mercedes-Benz
currently utilizes this type of system on virtually all of its heavy-
duty diesel engines sold in Europe. An alternative approach would be to
route the blow-by gases into the exhaust system upstream of the
catalyzed diesel particulate filter which would be expected to
effectively trap and oxidize the engine oil and diesel PM. This
approach may require the use of low sulfur engine oil to ensure that
oil carried in the blow-by gases does not compromise the performance of
the sulfur-sensitive emission control equipment.
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\132\ Letter from Marty Barris, Donaldson Corporation, to Byron
Bunker US EPA, March 2000. Air Docket A-99-06.
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e. The Complete System
We expect that the technologies described above would be integrated
into a complete emission control system as described in the final RIA.
The engine-out emissions will be balanced with the exhaust emission
control package in such a way that the result is the most beneficial
from a cost, fuel economy and emissions standpoint. The engine-out
exhaust characteristics will also have a role in assisting the exhaust
emission control devices used. The NOX
[[Page 5055]]
adsorber, for instance, will require periods of oxygen-depleted exhaust
flow in order to accomplish NOX regeneration and to allow
for sulfur control using desulfation events. This may be most
efficiently done by reducing the air-fuel ratio that the engine is
operating under during the regeneration to reduce the oxygen content of
the exhaust, or alternatively by partitioning the exhaust flow such
that only a small portion of the exhaust flow is used for
NOX regeneration, thereby reducing the amount of oxygen
needing to be depleted through fuel addition. Further, it is envisioned
that the PM device will be integrated into the exhaust system upstream
of the NOX reduction device. This placement would allow the
PM trap to take advantage of the engine-out NOX as an
oxidant for the particulate, while removing the particulate so that the
NOX exhaust emission control device will not have to deal
with large PM deposits which may cause a deterioration in performance.
Further it allows the NOX adsorber to make use of the
upstream PM filter as a pre-catalyst to oxidize some NO to
NO2 and to partially oxidize the reductant (diesel fuel or
exhaust hydrocarbons) to a more desirable reductant form such as CO
before entering the NOX adsorber. Of course, there is also
the possibility of integrating the PM and NOX exhaust
emission control devices into a single unit to replace a muffler and
save space (Toyota's DNPR system being an example of this
approach).133 The final component in any of these system
configurations is likely to be some form of clean up catalyst which can
provide control of HC slip during NOX regeneration as well
as H2S slip during SOx regeneration. Particulate free
exhaust may also allow for new options in EGR system design to optimize
its efficiency.
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\133\ Revolutionary Diesel Aftertreatment System Simultaneously
Reduces Diesel Particulate Matter and Nitrogen Oxides, Toyota Motor
Corporation press release, July 25, 2000, Air Docket A-99-06.
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We expect that the emission reduction efficiency of the exhaust
emission control system will vary across the NTE zone as a function of
exhaust temperature and space velocity.134 Consequently, to
maintain the NTE emission cap, the engine-out emissions would have to
be calibrated with exhaust emission control system performance
characteristics in mind. This would be accomplished by lowering engine-
out emissions where the exhaust emission control system was less
efficient, for example by retarding fuel injection timing or increasing
the EGR rate. Conversely, where the exhaust emission control system is
very efficient at reducing emissions, the engine-out emissions could be
tuned for higher emissions and better fuel economy. These trade-offs
between engine-out emissions and exhaust emission control system
performance characteristics are similar to those of gasoline engines
with three-way catalysts in today's light-duty vehicles and can be
overcome through similar system based engineering solutions. Managing
and optimizing these trade-offs will be crucial to effective
implementation of exhaust emission control devices on diesel
applications.
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\134\ The term, ``space velocity,'' is a measure of the volume
of exhaust gas that flows through a device.
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2. Feasibility of Stringent Standards for Heavy-Duty Gasoline
Gasoline emission control technology has evolved rapidly in recent
years. Emission standards applicable to 1990 model year vehicles
required roughly 90 percent reductions in exhaust NMHC and CO emissions
and a 75 percent reduction in NOX emissions compared to
uncontrolled emissions. Today, some vehicles' emissions are well below
those necessary to meet the current federal heavy-duty gasoline
standards, the 2004 heavy-duty gasoline standards, and the California
Low-Emission Vehicle standards for medium-duty vehicles. The continuing
emissions reductions have been brought about by ongoing improvements in
engine air-fuel management hardware and software plus improvements in
exhaust system and catalyst designs.
We believe that the types of changes being seen on current vehicles
have not yet reached their technological limits and continuing
improvement will allow them to meet today's standards. The RIA
describes a range of specific emission control techniques that we
believe could be used. There is no need to invent new technologies,
although there will be a need to apply existing technology more
effectively and more broadly. The focus of the effort will be in the
application and optimization of these existing technologies.
In our light-duty Tier 2 rule, we have required that gasoline
sulfur levels be reduced to a 30 ppm average, with an 80 ppm maximum.
This sulfur level reduction is the primary enabler for the Tier 2
standards. Similarly, we believe that the gasoline sulfur reduction,
along with refinements in existing gasoline emission control
technology, will be sufficient to allow heavy-duty gasoline vehicles
and engines to meet the emission standards sought by today's rule.
However, we recognize that the emission standards are stringent,
and considerable effort will have to be undertaken. For example, we
expect that every engine will have to be recalibrated to improve upon
its cold start emission performance. Manufacturers will have to migrate
their light-duty calibration approaches to their heavy-duty offerings
to provide cold start performance in line with what they will have to
achieve to meet the Tier 2 standards.
We also project that today's new heavy-duty gasoline standards
would require the application of advanced engine and catalyst systems
similar to those projected for their light-duty counterparts.
Historically, manufacturers have introduced technology on light-duty
gasoline applications and then applied those technologies to their
heavy-duty gasoline applications. Today's standards will allow
manufacturers to take this same approach. In other words, we expect
that manufacturers will meet today's new standards through the
application of technology developed to meet light-duty Tier 2 standards
for 2004.
Improved calibration and systems management will be critical in
optimizing the performance of the engine with the advanced catalyst
system. Precise air/fuel control must be tailored for emissions
performance and must be optimized for all types of driving. Calibration
refinements may also be needed for EGR system optimization and to
reduce cold start emissions through methods such as spark timing
retard. We also project that electronic control modules with expanded
capabilities will be needed on some vehicles and engines.
We also expect increased use of other technologies in conjunction
with those described above. We expect some increased use of air
injection to improve upon cold start emissions. We may also see air-gap
manifolds, exhaust pipes, and catalytic converter shells as a means of
improving upon catalyst light-off times thereby reducing cold start
emissions. Other, non-catalyst related improvements to gasoline
emission control technology include higher speed computer processors
which enable more sophisticated engine control algorithms and improved
fuel injectors providing better fuel atomization thereby improving fuel
combustion.
Catalyst system durability is, and will always be, a serious
concern. Historically, catalysts have deteriorated when exposed to very
high temperatures. This has long been a concern especially for heavy-
duty work
[[Page 5056]]
vehicles. However, catalyst manufacturers continue to make strides in
the area of thermal stability and we expect that improvements in
thermal stability will continue for the next generation of catalysts.
We believe that, by optimizing all of these technologies,
manufacturers will be able to achieve today's standards. Advanced
catalyst systems have already shown potential to reduce emissions to
close to these levels. Some current California vehicles are certified
to levels below 0.20 g/mi NOX. California tested an advanced
catalyst system on a vehicle loaded to a test weight comparable to a
heavy-duty vehicle test weight and achieved NOX and NMOG
levels of 0.1 g/mi and 0.16 g/mi, respectively. The California vehicle
with the advanced catalyst had not been optimized as a system to take
full advantage of the catalyst's capabilities.
The compliance flexibility provisions can also be an important tool
for manufacturers in implementing a new standard. The program allows
manufacturers to transition to the more stringent standards by
introducing emissions controls over a longer period of time, as opposed
to a single model year. Manufacturers plan their product introductions
well in advance. With the compliance flexibilities, manufacturers can
better manage their product lines so that the new standards don't
interrupt their product introduction plans. Also, the program allows
manufacturers to focus on higher sales volume vehicles first and use
credits for low sales volume vehicles.
3. Feasibility of the New Evaporative Emission Standards
The new evaporative emission standards appear to be feasible now.
Many designs have been certified that already meet these standards. A
review of 1998 model year certification data indicates that five of
eight evaporative system families in the 8,500 to 14,000 pound range
comply with the new 1.4 g/test standard, while all evaporative system
families in the over 14,000 pound range comply with the new 1.9 g/test
standard.
The new evaporative emission standards should not require the
development of new materials but may, in some cases, require new
application of existing materials. Low permeability materials and low
loss connections and seals are already used to varying degrees on
current vehicles, but that practice may become more widespread. Today's
new standards would likely ensure their consistent use and discourage
manufacturers from switching to cheaper materials or designs to take
advantage of the large safety margins they have had under current
standards.
There are two approaches to reducing evaporative emissions for a
given fuel. One is to minimize the potential for permeation and leakage
by reducing the number of hoses, fittings and connections. The second
is to use less permeable hoses and lower loss fittings and connections.
Manufacturers are already employing both approaches.
Most manufacturers are moving to ``returnless'' fuel injection
systems. Through more precise fuel pumping and metering, these systems
eliminate the return line in the fuel injection system. The return line
carries unneeded fuel from the fuel injectors back to the fuel tank.
Because the fuel injectors are in such close contact with the hot
engine, the fuel returned from the injectors to the fuel tank has been
heated. This returned fuel is a significant source of fuel tank heat
and vapor generation. The elimination of the return line also reduces
the total length of hose on the vehicle though which vapors can
permeate, and it reduces the number of fittings and connections through
which fuel can leak.
Low permeability hoses and seals, and low loss fittings are
available and are already used on many vehicles. Fluoropolymer
materials can be added as liners to hose and component materials to
yield large reductions in permeability over such conventional materials
as monowall nylon. In addition, fluoropolymer materials can greatly
reduce the adverse impact of alcohols in gasoline on permeability of
evaporative components, hoses and seals.
F. Need for Low Sulfur Diesel Fuel
The following discussion will build upon the brief sulfur
sensitivity points made earlier in this section by providing a more in-
depth discussion of sulfur's effect on the diesel exhaust emission
control technologies. In order to evaluate the effect of sulfur on
diesel exhaust control technologies, we used three key factors to
categorize the impact of sulfur in fuel on emission control function.
These factors were efficiency, reliability, and fuel economy. Taken
together these three factors lead us to believe that diesel fuel sulfur
levels of 15 ppm will be required in order to make feasible the heavy-
duty vehicle emission standards. Brief summaries of these factors are
provided below. A more in-depth review is given in the following
subsections and in the final RIA.
The efficiency of emission control technologies to reduce harmful
pollutants is directly affected by sulfur in diesel fuel. Initial and
long term conversion efficiencies for NOX, NMHC, CO and
diesel PM emissions are significantly reduced by catalyst poisoning and
catalyst inhibition due to sulfur. NOX conversion
efficiencies with the NOX adsorber technology in particular
are dramatically reduced in a very short time due to sulfur poisoning
of the NOX storage bed. In addition, total PM control
efficiency is negatively impacted by the formation of sulfate PM. As
explained in detail in the following sections, all of the advanced
NOX and PM technologies described here have the potential to
make significant amounts of sulfate PM under operating conditions
typical of heavy-duty vehicles. We believe that the formation of
sulfate PM will be in excess of the total PM standard, unless diesel
fuel sulfur levels are at or below 15 ppm. Based on the strong negative
impact of sulfur on emission control efficiencies for all of the
technologies evaluated, we believe that 15 ppm represents an upper
threshold of acceptable diesel fuel sulfur levels.
Reliability refers to the expectation that emission control
technologies must continue to function as required under all operating
conditions for the life of the vehicle. As discussed in the following
sections, sulfur in diesel fuel can prevent proper operation of both
NOX and PM control technologies. This can lead to permanent
loss in emission control effectiveness and even catastrophic failure of
the systems. Sulfur in diesel fuel impacts reliability by decreasing
catalyst efficiency (poisoning of the catalyst), increasing diesel
particulate filter loading, and negatively impacting system
regeneration functions. Among the most serious reliability concerns
with sulfur levels greater than 15 ppm are those associated with
failure to properly regenerate. In the case of the NOX
adsorber, failure to regenerate will lead to rapid loss of
NOX emission control as a result of sulfur poisoning of the
NOX adsorber bed. In the case of the diesel particulate
filter, sulfur in the fuel reduces the reliability of the regeneration
function. If regeneration does not occur, catastrophic failure of the
filter could occur. It is only by the availability of low sulfur diesel
fuels that these technologies become feasible. The analysis given in
the following section makes clear that diesel fuel sulfur levels will
need to be under 15 ppm in order to ensure robust operation of the
technologies under the variety of operating conditions anticipated to
be experienced in the field.
Fuel economy impacts due to sulfur in diesel fuel affect both
NOX and PM
[[Page 5057]]
control technologies. The NOX adsorber sulfur regeneration
cycle (desulfation cycle) can consume significant amounts of fuel
unless fuel sulfur levels are very low. The larger the amount of sulfur
in diesel fuel, the greater the adverse effect on fuel economy. As
sulfur levels increase above 15 ppm, the adverse effect on fuel economy
becomes more significant, increasing above one percent and doubling
with each doubling of fuel sulfur level. Likewise, PM trap regeneration
is inhibited by sulfur in diesel fuel. This leads to increased PM
loading in the diesel particulate filter and increased work to pump
exhaust across this restriction. With low sulfur diesel fuel, diesel
particulate filter regeneration can be optimized to give a lower (on
average) exhaust backpressure and thus better fuel economy. Thus, for
both NOX and PM technologies the lower the fuel sulfur level
the lower the operating costs of the vehicle.
1. Catalyzed Diesel Particulate Filters and the Need for Low Sulfur
Fuel
Diesel particulate filters (PM traps) function to control diesel PM
through mechanical filtration of PM from the diesel exhaust stream and
then oxidation of the stored PM (trap regeneration). Through oxidation
in the catalyzed diesel particulate filter the stored carbonaceous PM
is converted to CO2 and released into the atmosphere.
Failure to oxidize the stored PM leads to accumulation in the trap,
eventually causing the trap to become so full that it severely
restricts exhaust flow through the device, leading to trap or vehicle
failure.
As discussed earlier in this section, uncatalyzed diesel
particulate filters require exhaust temperatures in excess of 650 deg.
C in order for the collected PM to be oxidized by the oxygen available
in diesel exhaust. That temperature threshold for oxidation of PM by
exhaust oxygen can be decreased to 450 deg. C through the use of base
metal catalytic technologies. For a broad range of operating conditions
typical of in use operation, diesel exhaust is significantly cooler
than 400 deg. C. If oxidation of the trapped PM could be assured to
occur at exhaust temperatures lower than 300 deg. C, then diesel
particulate filters would be expected to be robust for most
applications and operating regimes. Oxidation of PM (regeneration of
the trap) at such low exhaust temperatures can occur by using oxidants
which are more readily reduced than oxygen. One such oxidant is
NO2.
NO2 can be produced in diesel exhaust through the
oxidation of the nitrogen monoxide (NO), created in the engine
combustion process, across a catalyst. The resulting NO2-
rich exhaust is highly oxidizing in nature and can oxidize trapped
diesel PM at temperatures as cool as 250 deg.C.135 Some
platinum group metals are known to be good catalysts to promote the
oxidation of NO to NO2. Therefore in order to ensure passive
regeneration of the diesel particulate filters, significant amounts of
platinum group metals (primarily platinum) are being used in the wash-
coat formulations of advanced diesel particulate filters. The use of
platinum to promote the oxidation of NO to NO2 introduces
several system vulnerabilities affecting both the durability and the
effectiveness of the catalyzed diesel particulate filter when sulfur is
present in diesel exhaust. The two primary mechanisms by which sulfur
in diesel fuel limits the robustness and effectiveness of diesel
particulate filters are inhibition of trap regeneration, through
inhibition of the oxidation of NO to NO2, and a dramatic
loss in total PM control effectiveness due to the formation of sulfate
PM. Unfortunately, these two mechanisms trade-off against one another
in the design of diesel particulate filters. Changes to improve the
reliability of regeneration by increasing catalyst loadings lead to
increased sulfate emissions and, thus, loss of PM control
effectiveness. Conversely, changes to improve PM control by reducing
the use of platinum group metals and, therefore, limiting ``sulfate
make'' leads to less reliable regeneration. We believe the only means
of achieving good PM emission control and reliable operation is to
reduce sulfur in diesel fuel, as shown in the following subsections.
---------------------------------------------------------------------------
\135\ Hawker, P. et al., Experience with a New Particualte Trap
Technology in Europe, SAE 970182.
---------------------------------------------------------------------------
a. Inhibition of Trap Regeneration Due to Sulfur
The passively regenerating diesel particulate filter technologies
rely on the generation of a very strong oxidant, NO2, to
ensure that the carbon captured by the PM trap's filtering media is
oxidized under the exhaust temperature range of normal operating
conditions. This prevents plugging and failure of the PM trap.
NO2 is produced through the oxidation of NO in the exhaust
across a platinum catalyst. This oxidation is inhibited by sulfur
poisoning of the catalyst surface.136 This inhibition limits
the total amount of NO2 available for oxidation of the
trapped diesel PM, thereby raising the minimum exhaust temperature
required to ensure trap regeneration. Without sufficient
NO2, the amount of PM trapped in the diesel particulate
filter will continue to increase and can lead to excessive exhaust back
pressure, low engine power, and even catastrophic failure of the diesel
particulate filter itself.
---------------------------------------------------------------------------
\136\ Hawker, P. et al, Experience with a New Particulate Trap
Technology in Europe, SAE 970182.
---------------------------------------------------------------------------
The failure mechanisms experienced by diesel particulate filters
due to low NO2 availability vary significantly in severity
and long term consequences. In the most fundamental sense, the failure
is defined as an inability to oxidize the stored particulate at a rate
fast enough to prevent net particulate accumulation over time. The
excessive accumulation of PM over time blocks the passages through the
filtering media, making it more restrictive to exhaust flow. In order
to continue to force the exhaust through the now more restrictive
filter, the exhaust pressure upstream of the filter must increase. This
increase in exhaust pressure is commonly referred to as increasing
``exhaust backpressure'' on the engine.
The increase in exhaust backpressure represents increased work
being done by the engine to force the exhaust gas through the
increasingly restrictive particulate filter. Unless the filter is
frequently cleansed of the trapped PM, this increased work can lead to
reductions in engine performance and increases in fuel consumption.
This loss in performance may be noted by the vehicle operator in terms
of poor acceleration and generally poor driveability of the vehicle. In
some cases, engine performance can be so restricted that the engine
stalls, stranding the vehicle. This progressive deterioration of engine
performance as more and more PM is accumulated in the filter media is
often referred to as ``trap plugging.'' Trap plugging also has the
potential to cause engine damage. If the exhaust backpressure gets high
enough to open the exhaust valves prematurely, the exhaust valves can
then strike the piston causing catastrophic engine failure. Whether
trap plugging occurs, and the speed at which it occurs, will be a
function of many variables in addition to the fuel sulfur level; these
variables include the vehicle application, its duty cycle, and ambient
conditions. However, if the fuel sulfur level is sufficiently high to
prevent trap regeneration in any real world conditions experienced,
trap plugging can occur. This is not to imply that any time a vehicle
is refueled once with high sulfur fuel trap plugging will occur.
Rather, it is important to know that the use of fuel with sulfur levels
higher than 15 ppm significantly
[[Page 5058]]
increases the chances of particulate filter failure.
Catastrophic failure of the filter can occur when excessive amounts
of PM are trapped in the filter due to a lack of NO2 for
oxidation. This failure occurs when excessive amounts of trapped PM
begin to oxidize at high temperatures (combustion-like temperatures of
over 1000 deg. C) leading to a ``run-away'' combustion of the PM. This
can cause temperatures in the filter media to increase in excess of
that which can be tolerated by the particulate filter itself. For the
cordierite material commonly used as the trapping media for diesel
particulate filters, the high thermal stresses caused by the high
temperatures can cause the material to crack or melt. This can allow
significant amounts of the diesel particulate to pass through the
filter without being captured during the remainder of the vehicle's
life. That is, the trap is destroyed and PM emission control is lost.
Further the high temperatures generated during this event can destroy
the downstream catalyst components, such as the NOX
adsorber, rendering them ineffective as well.
Full field test evaluations and retrofit applications of these
catalytic trap technologies are occurring in parts of Europe where low
sulfur diesel fuel is already available.137 The experience
gained in these field tests helps to clarify the need for low sulfur
diesel fuel. In Sweden and some European city centers where below 10
ppm diesel fuel sulfur is readily available, more than 3,000 catalyzed
diesel particulate filters have been introduced into retrofit
applications without a single failure. Given the large number of
vehicles participating in these test programs, the diversity of the
vehicle applications which included intercity trains, airport buses,
mail trucks, city buses and garbage trucks, and the extended time
periods of operation (some vehicles have been operating with traps for
more than 5 years and in excess of 300,000 miles138), there
is a strong indication of the robustness of this technology on 10 ppm
low sulfur diesel fuel. The field experience in areas where sulfur is
capped at 50 ppm has been less definitive. In regions without extended
periods of cold ambient conditions, such as the United Kingdom, field
tests on 50 ppm cap low sulfur fuel have also been positive, matching
the durability at 10 ppm, although sulfate PM emissions are much
higher. However, field tests on 50 ppm fuel in Finland, where colder
winter conditions are sometimes encountered (similar to many parts of
the United States), showed a significant number of failures (~10
percent) due to trap plugging. This 10 percent failure rate has been
attributed to insufficient trap regeneration due to fuel sulfur in
combination with low ambient temperatures.139 Other possible
reasons for the high failure rate in Finland when contrasted with the
Swedish experience appear to be unlikely. The Finnish and Swedish
fleets were substantially similar, with both fleets consisting of
transit buses powered by Volvo and Scania engines in the 10 to 11 liter
range. Further, the buses were operated in city areas and none of the
vehicles were operated in northern extremes such as north of the Arctic
Circle.140 Given that the fleets in Sweden and Finland were
substantially similar, and given that ambient conditions in Sweden are
expected to be similar to those in Finland, we believe that the
increased failure rates noted here are due to the higher fuel sulfur
level in a 50 ppm cap fuel versus a 10 ppm cap fuel.141
Testing on an even higher fuel sulfur level of 200 ppm was conducted in
Denmark on a fleet of 9 vehicles. In less than six months all of the
vehicles in the Danish fleet had failed due to trap
plugging.142 The failure of some fraction of the traps to
regenerate when operated on fuel with sulfur caps of 50 ppm and 200 ppm
is believed to be primarily due to inhibition of the NO to
NO2 conversion as described here. Similarly the increasing
frequency of failure with higher fuel sulfur levels is believed to be
due to the further suppression of NO2 formation when higher
sulfur level diesel fuel is used.
---------------------------------------------------------------------------
\137\ Through tax incentives 50 ppm cap sulfur fuel is widely
available in the United Kingdom and 10 ppm sulfur is available in
Sweden and in certain European city centers.
\138\ Allansson, et al. SAE 2000-01-0480
\139\ Letter from Dr. Barry Cooper, Johnson Matthey, to don
Kopinski, US EPA, Air Docket A-99-06.
\140\ Telephone conversation between Dr. Barry Cooper, Johnson
Matthey, and Todd Sherwood, EPA, Air Docket A-99-06.
\141\ The average temperature in Helsinki, Finland, for the
month of January is 21 deg. F. The average temperature in Stockholm,
Sweden, for the month of Juanuary is 21 deg. F. The average
temperature at the University of Michigan in Ann Arbor, Michigan,
for the month of January is 24 deg. F. The temperatures reported
here are from www.worldclimate.com based upon the Global Historical
Climatology Network (GHCN) produced jointly by the National Climatic
Data Center and Carbon Dioxide Information Analysis Center at Oak
Ridge National Laboratory (ORNL).
\12\ Letter from Dr. Barry Cooper to Don Kopinski US EPA, Air
Docket A-99-06.
---------------------------------------------------------------------------
As shown above, sulfur in diesel fuel inhibits NO oxidation leading
to increased exhaust backpressure, reduced fuel economy, compromised
reliability, and potentially engine damage. Therefore, we believe that,
in order to ensure reliable and economical operation over a wide range
of expected operating conditions, diesel fuel sulfur levels should be
at or below 15 ppm. With these low sulfur levels we believe, as
demonstrated by experience in Europe, that catalyzed diesel particulate
filters will prove to be both durable and effective at controlling
diesel particulate emissions. We did receive comments from the refining
industry suggesting that PM filters could work on fuel sulfur levels as
high as 50 ppm. The commenters pointed to some specific test programs
where fuel with an approximate average sulfur level of 30 ppm was used
as evidence of the robustness of the technology on higher sulfur fuels.
While we do not deny that it is possible to operate some vehicles in
limited applications over defined driving cycles on fuel as high as 30
ppm, we do not believe that this limited data should be the basis for a
national program. The reality that some vehicles do fail on 50 ppm cap
fuel, as demonstrated by the Finish fleet results mentioned above,
shows that durability is not assured with the use of higher sulfur
diesel fuel. We believe that the evidence, as a whole, shows that
oxidation of NO to NO2 will be poisoned due to these higher
fuel sulfur levels with a resulting significant possibility of PM trap
failures that is too great a concern for us to feel confident about a
fuel sulfur level higher than 15 ppm.
b. Loss of PM Control Effectiveness
In addition to inhibiting the oxidation of NO to NO2,
the sulfur dioxide (SO2) in the exhaust stream is itself
oxidized to sulfur trioxide (SO3) at very high conversion
efficiencies by the precious metals in the catalyzed particulate
filters. The SO3 serves as a precursor to the formation of
hydrated sulfuric acid (H2SO4+H2O), or
sulfate PM, as the exhaust leaves the vehicle tailpipe. Virtually all
of the SO3 is converted to sulfate under dilute exhaust
conditions in the atmosphere as well in the dilution tunnel used in
heavy-duty engine testing. Since virtually all sulfur present in diesel
fuel is converted to SO2, the precursor to SO3,
as part of the combustion process, the total sulfate PM is directly
proportional to the amount of sulfur present in diesel fuel. Therefore,
even though diesel particulate filters are very effective at trapping
the carbon and the SOF portions of the total PM, the overall PM
reduction efficiency of catalyzed diesel particulate filters drops off
rapidly with increasing sulfur levels due to the formation of sulfate
PM downstream of the trap.
[[Page 5059]]
SO2 oxidation is promoted across a catalyst in a manner
very similar to the oxidation of NO, except it is converted at higher
rates, with peak conversion rates in excess of 50 percent. The
SO2 oxidation rate for a platinum based oxidation catalyst
typical of the type which might be used in conjunction with, or as a
washcoat on, a catalyzed diesel particulate filter can vary
significantly with exhaust temperature. At the low temperatures typical
of some urban driving and the heavy-duty federal test procedure (HD-
FTP), the oxidation rate is relatively low, perhaps no higher than ten
percent. However at the higher temperatures that might be more typical
of highway driving conditions and the Supplemental Emission Test (also
called the EURO III or 13 mode test), the oxidation rate may increase
to 50 percent or more. These high levels of sulfate make across the
catalyst are in contrast to the very low SO2 oxidation rate
typical of diesel exhaust (typically less than 2 percent). This
variation in expected diesel exhaust temperatures means that there will
be a corresponding range of sulfate production expected across a
catalyzed diesel particulate filter.
The US Department of Energy in cooperation with industry conducted
a study entitled DECSE to provide insight into the relationship between
advanced emission control technologies and diesel fuel sulfur levels.
Interim report number four of this program gives the total particulate
matter emissions from a heavy-duty diesel engine operated with a diesel
particulate filter on several different fuel sulfur levels. A straight
line fit through this data is presented in Table III.F-1 below showing
the expected total direct PM emissions from a heavy-duty diesel engine
on the supplemental emission test cycle.143 The data can be
used to estimate the PM emissions from heavy-duty diesel engines
operated on fuels with average fuel sulfur levels in this range.
---------------------------------------------------------------------------
\143\ Note that direct emisisons are those pollutants emitted
directly from the engine or from the tailpipe depending on the
context in which the term is used, and indirect emissions are those
pollutants formed in the atmosphere through chemical reactions
between direct emissions and other atmospheric constituents.
Table III.F-1.--Estimated PM Emissions From a Heavy-Duty Diesel Engine
at the Indicated Fuel Sulfur Levels
------------------------------------------------------------------------
Supplemental emission test
----------------------------------------- performance
-------------------------------
PM increase
Fuel sulfur [ppmm] Tailpipe PM b relative to 3
[g/bhp-hr] to 3 ppm
sulfur
------------------------------------------------------------------------
3....................................... 0.003 ..............
7 a..................................... 0.006 100%
15a..................................... 0.009 200%
30...................................... 0.017 470%
150..................................... 0.071 2300%
------------------------------------------------------------------------
a The PM emissions at these sulfur levels are based on a straight-line
fit to the DECSE data; PM emissions at other sulfur levels are actual
DECSE data. (Diesel Emission Control Sulfur Effects (DECSE) Program--
Phase II Interim Data Report No. 4, Diesel Particulate Filters-Final
Report, January 2000. Table C1.) Although DECSE tested diesel
particulate filters at these fuel sulfur levels, they do not conclude
that the technology is feasible at all levels, but they do note that
testing at 150 ppm is a moot point as the emission levels exceed the
engine's baseline emission level.
b b Total exhaust PM (soot, SOF, sulfate).
Table III.F-1 makes it clear that there are significant PM emission
reductions possible with the application of catalyzed diesel
particulate filters and low sulfur diesel fuel. At the observed sulfate
PM conversion rates, the DECSE program results show that the 0.01 g/
bhp-hr total PM standard is feasible for diesel particulate filter
equipped engines operated on fuel with a sulfur level at or below 15
ppm. The results also show that diesel particulate filter control
effectiveness is rapidly degraded at higher diesel fuel sulfur levels
due to the high sulfate PM make observed with this technology. It is
clear that PM reduction efficiencies are limited by sulfur in diesel
fuel and that, in order to realize the PM emissions benefits sought in
this rule, diesel fuel sulfur levels must be at or below 15 ppm. The
data further indicates that were the fuel sulfur level set at a 30 ppm
average, as some commenters suggested, the PM emissions from the
controlled vehicles would be nearly three times the emissions from a
vehicle operating on fuel with a 7 ppm average.
c. Increased Maintenance Cost for Diesel Particulate Filters Due to
Sulfur
In addition to the direct performance and durability concerns
caused by sulfur in diesel fuel, it is also known that sulfur can lead
to increased maintenance costs, shortened maintenance intervals, and
poorer fuel economy for particulate filters. Diesel particulate filters
are highly effective at capturing the inorganic ash produced from
metallic additives in engine oil. This ash is accumulated in the filter
and is not removed through oxidation, unlike the trapped carbonaceous
PM. Periodically the ash must be removed by mechanical cleaning of the
filter with compressed air or water. This maintenance step is
anticipated to occur on intervals of well over one hundred thousand
miles. However, sulfur in diesel fuel increases this ash accumulation
rate through the formation of metallic sulfates in the filter, which
increases both the size and mass of the trapped ash. By increasing the
ash accumulation rate, the sulfur shortens the time interval between
the required maintenance of the filter and negatively impacts fuel
economy.
2. Diesel NOX Catalysts and the Need for Low Sulfur Fuel
All of the NOX exhaust emission control technologies
discussed previously in Section III are expected to utilize platinum to
oxidize NO to NO2 to improve the NOX reduction
efficiency of the catalysts at low temperatures or as in the case of
the NOX adsorber, as an essential part of the process of
NOX storage. This reliance on NO2 as an integral
part of the reduction process means that the NOX exhaust
emission control technologies, like the PM exhaust emission control
technologies, will have problems with sulfur in diesel fuel. In
addition, NOX adsorbers have the added problem that the
adsorption function itself is poisoned by the presence of sulfur. The
resulting need to remove the stored sulfur (desulfate) leads to a need
for extended high temperature operation which can deteriorate the
NOX adsorber. These limitations due to sulfur in the fuel
affect the overall performance and feasibility of the technologies.
a. Sulfur Poisoning (Sulfate Storage) on NOX Adsorbers
The NOX adsorber technology relies on the ability of the
catalyst to store NOX as a nitrate (MNO3) on the
surface of the catalyst, or adsorber (storage) bed, during lean
operation. Because of the similarities in chemical properties of
SOX and NOX, the SO2 present in the
exhaust is also stored by the catalyst surface as a sulfate
(MSO4). The sulfate compound that is formed is significantly
more stable than the nitrate compound and is not released and reduced
during the NOX release and reduction step (NOX
regeneration step). Since the NOX adsorber is essentially
100 percent effective at capturing SO2 in the adsorber bed,
the sulfur build up on the adsorber bed occurs rapidly. As a result,
sulfate compounds quickly occupy all of the NOX storage
sites on the catalyst
[[Page 5060]]
thereby rendering the catalyst ineffective for NOX storage
and subsequent NOX reduction (poisoning the catalyst).
The stored sulfur compounds can be removed by exposing the catalyst
to hot (over 650 deg.C) and rich (air-fuel ratio below the
stoichiometric ratio of 14.5 to 1) conditions for a brief
period.144 Under these conditions, the stored sulfate is
released and reduced in the catalyst.145 While research to
date on this procedure has been very favorable with regards to sulfur
removal from the catalyst, it has revealed a related vulnerability of
the NOX adsorber catalyst. Under the high temperatures used
for desulfation, the metals that make up the storage bed can change in
physical structure. This leads to lower precious metal dispersion, or
``metal sintering,'' (a less even distribution of the catalyst sites)
reducing the effectiveness of the catalyst.146 This
degradation of catalyst efficiency due to high temperatures is often
referred to as thermal degradation. Thermal degradation is known to be
a cumulative effect. That is, with each excursion to high temperature
operation, some additional degradation of the catalyst occurs.
---------------------------------------------------------------------------
\144\ Dou, Danan and Bailey, Owen, ``Investigation of
NOX Adsorber Catalyst Deactivation,'' SAE 982594.
\145\ Guyon M. et al, ``Impact of Sulfur on NOX Trap
Catalyst Activity--Study of the Regeneration Conditions'', SAE
982607.
\146\ though it was favroable to decompose sulfate at 800 deg.C,
performance of the NSR (NOX Storage Reduction catalyst,
i.e. NOX Adsorber) catalyst decreased due to sintering of
precious metal.--Asanuma, T. et al, ``Influence of Sulfur
Concentration in Gasoline on NOX Storage--Reduction
Catalyst'', SAE 1999-01-3501.
---------------------------------------------------------------------------
One of the best ways to limit thermal degradation is by limiting
the accumulated number of desulfation events over the life of the
vehicle. Since the period of time between desulfation events is
expected to be determined by the amount of sulfur accumulated on the
catalyst (the higher the sulfur accumulation rate, the shorter the
period between desulfation events) the desulfation frequency is
expected to be proportional to the fuel sulfur level. In other words
for each doubling in the average fuel sulfur level, the frequency and
accumulated number of desulfation events are expected to double. We
believe, therefore, that the diesel fuel sulfur level must be set as
low as possible in order to limit the frequency and duration of
desulfation events. Without control of fuel sulfur levels below 15 ppm,
we can no longer conclude with any confidence that sulfur poisoning can
be controlled without unrecoverable thermal degradation. Some
commenters have suggested that the NOX adsorber technology
could meet the NOX standard using diesel fuel with a 30 ppm
average sulfur level. This would imply that the NOX adsorber
could tolerate as much as a four fold increase in desulfation frequency
(when compared to an expected seven to 10 ppm average) without any
increase in thermal degradation. This conclusion is inconsistent with
our understanding of the technology that, with each desulfation event,
some thermal degradation occurs. Therefore, we believe that diesel fuel
sulfur levels must be at or below 15 ppm in order to limit the number
and frequency of desulfation events. Limiting the number and frequency
of desulfation events will limit thermal degradation and, thus, enable
the NOX adsorber technology to meet the NOX
standard.
Sulfur in diesel fuel for NOX adsorber equipped engines
will also have an adverse effect on fuel economy. The desulfation event
requires controlled operation under hot and net fuel rich exhaust
conditions. These conditions, which are not part of a normal diesel
engine operating cycle, can be created through the addition of excess
fuel to the exhaust. This addition of excess fuel causes an increase in
fuel consumption. We have developed a spreadsheet model that estimates
the frequency of desulfation cycles from published data and then
estimates the fuel economy impact from this event.147 Table
III-F.2 shows the estimated fuel economy impact for desulfation of a
NOX adsorber at different fuel sulfur levels assuming a
desired 90 percent NOX conversion efficiency. The estimates
in the table are based on assumed average fuel sulfur levels associated
with different sulfur level caps. Note that, although we can estimate
the fuel consumption penalty of operation on diesel fuel sulfur levels
higher than 15 ppm, this analysis does not consider the higher degree
of thermal degradation due to the more frequent desulfation events
which are required for operation on these higher sulfur levels.
---------------------------------------------------------------------------
\147\ Memo from Byron Bunker, to docket A-99-06, ``Estimating
Fuel Economy Impacts of NOX Adsorber De-Sulfurization.''
Table III.F-2.--Estimated Fuel Economy Impact From Desulfation of a 90%
Efficient NOX Adsorber
------------------------------------------------------------------------
Fuel
Average economy
Fuel sulfur cap (ppm) fuel sulfur penalty
(ppm) (in
percent)
------------------------------------------------------------------------
500........................................... 350 27
50............................................ 30 2
25............................................ 15 1
15............................................ 7 1
5............................................. 2 1
------------------------------------------------------------------------
The table highlights that the fuel economy penalty associated with
sulfur in diesel fuel is noticeable even at average sulfur levels as
low as 15 ppm and increases rapidly with higher sulfur levels. It also
shows that the use of a NOX adsorber with a 15 ppm sulfur
cap fuel would be expected to result in a fuel economy impact due to
the need for desulfation of the catalyst of less than one percent,
absent other changes in engine design. However, as discussed in Section
G below, we anticipate that other engine modifications could be made to
offset this fuel economy impact. For example, a NOX control
device in the exhaust system could allow use of fuel saving engine
strategies, such as advanced fuel injection timing, that could be used
to offset the increased fuel consumption associated with the
NOX adsorber. The result is that low sulfur fuel enables the
NOX adsorber which, in turn, enables fuel saving engine
modifications. The total emission control system fuel economy impact,
which we estimate to be zero under a 15 ppm cap program, is discussed
below in Section III.G.
Future improvements in the NOX adsorber technology are
expected and needed if the technology is to provide the environmental
benefits we have projected today. Some of these improvements are likely
to include improvements in the means and ease of removing stored sulfur
from the catalyst bed. However because the stored sulfate species are
inherently more stable than the stored nitrate compounds (from stored
NOX emissions), we expect that a separate release and
reduction cycle (desulfation cycle) will always be needed in order to
remove the stored sulfur. Therefore, we believe that fuel with a sulfur
level at or below 15 ppm sulfur will be necessary in order to control
thermal degradation of the NOX adsorber catalyst and to
limit the fuel economy impact of sulfur in diesel fuel.
b. Sulfate Particulate Production and Sulfur Impacts on Effectiveness
of NOX Control Technologies
The NOX adsorber technology relies on a platinum based
oxidation function
[[Page 5061]]
in order to ensure high NOX control efficiencies. As
discussed more fully in section III.F.1, platinum based oxidation
catalysts form sulfate PM from sulfur in the exhaust gases
significantly increasing PM emissions when sulfur is present in the
exhaust stream. The NOX adsorber technology relies on the
oxidation function to convert NO to NO2 over the catalyst
bed. For the NOX adsorber this is a fundamental step prior
to the storage of NO2 in the catalyst bed as a nitrate.
Without this oxidation function the catalyst will only trap that small
portion of NOX emissions from a diesel engine which is
NO2. This would reduce the NOX adsorber
effectiveness for NOX reduction from in excess of 90 percent
to something well below 20 percent. The NOX adsorber relies
on platinum to provide this oxidation function due to the need for high
NO oxidation rates under the relatively cool exhaust temperatures
typical of diesel engines. Because of this fundamental need for a
catalytic oxidation function, the NOX adsorber inherently
forms sulfate PM when sulfur is present in diesel fuel, since sulfur in
fuel invariably leads to sulfur in the exhaust stream.
The Compact-SCR technology, like the NOX adsorber
technology, uses an oxidation catalyst to promote the oxidation of NO
to NO2 at the low temperatures typical of much of diesel
engine operation. As discussed above, there are substantial questions
regarding the ability of SCR systems to be implemented successfully to
meet the requirements finalized today. By converting a portion of the
NOX emissions to NO2 upstream of the ammonia SCR
reduction catalyst, the overall NOX reductions are improved
significantly at low temperatures. Without this oxidation function, low
temperature SCR NOX effectiveness is dramatically reduced
making compliance with the NOX standard impossible. As
discussed previously in Section III, platinum group metals are known to
be good catalysts to promote NO oxidation, even at low
temperatures.148 Therefore, future Compact-SCR systems would
need to rely on a platinum oxidation catalyst in order to provide the
required NOX emission control. This use of an oxidation
catalyst in order to enable good NOX control means that
Compact SCR systems will produce significant amounts of sulfate PM when
operated on anything but the lowest fuel sulfur levels due to the
oxidation of SO2 to sulfate PM promoted by the oxidation
catalyst.
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\148\ Platinum group metals include platinum, palladium,
rhodium, and other precious metals.
---------------------------------------------------------------------------
Without the oxidation catalyst promoted conversion of NO to
NO2, neither of these NOX control technologies
can meet the NOX standard set here. Therefore each of these
technologies will require low sulfur diesel fuel to control the sulfate
PM emissions inherent in the use of oxidation catalysts. The
NOX adsorber technology may be able to limit its impact on
sulfate PM emissions by releasing stored sulfur as SO2 under
rich operating conditions. The Compact-SCR technology, on the other
hand, has no means to limit sulfate emissions other than through lower
catalytic function or lowering sulfur in diesel fuel. The degree to
which the NOX emission control technologies increase the
production of sulfate PM through oxidation of SO2 to
SO3 varies somewhat from technology to technology, but it is
expected to be similar in magnitude and environmental impact to that
for the PM control technologies discussed previously in section
III.F.1, since both the NOX and the PM control catalysts
rely on precious metals to achieve the required NO to NO2
oxidation reaction.
Thus, we believe that diesel fuel sulfur levels will need to be at
or below 15 ppm in order to apply any of these NOX control
technologies. Without this low sulfur fuel, the NOX control
technologies are expected to create PM emissions well in excess of the
PM standard regardless of the engine-out PM levels. Again, as noted
with the PM control technologies, test results to date on catalysts
with high oxidation potential indicate that were the fuel sulfur level
set with a 30 ppm average, as some commenters suggested, the PM
emissions from the controlled vehicles would increase nearly three fold
over the level expected from fuel with a 7 ppm average, the average
fuel sulfur level we would expect from a 15 ppm cap fuel (see Table
III.F.1).
3. What About Sulfur in Engine Lubricating Oils?
Current engine lubricating oils have sulfur contents which can
range from 2,500 ppm to as high as 8,000 ppm by weight. Since engine
oil is consumed by heavy-duty diesel engines in normal operation, it is
important that we account for the contribution of oil derived sulfur in
our analysis of the need for low sulfur diesel fuel. One way to give a
straightforward comparison of this effect is to express the sulfur
consumed by the engine as an equivalent fuel sulfur level. This
approach requires that we assume specific fuel and oil consumption
rates for the engine. Using this approach, estimates ranging from two
to seven ppm diesel fuel sulfur equivalence have been made for the
sulfur contribution from engine oil.149 150 If values at the
upper end of this range accurately reflect the contribution of sulfur
from engine oil to the exhaust this would be a concern as it would
represent 50 percent of the total sulfur in the exhaust under a 15 ppm
diesel fuel sulfur cap (with an average sulfur level assumed to be
approximately seven ppm). However, we believe that this simplified
analysis, while valuable in demonstrating the need to investigate this
issue further, overstates the likely sulfur contribution from engine
oil by a significant amount due to its inclusion of engine oil lost
through the open crankcase system in the estimate of oil consumption to
the exhaust.
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\149\ Whitacre, Shawn. ``Catalyst Compatible'' Diesel Engine
Oils, DECSE Phase II, Presentation at DOE/NREL Workshop ``Exploring
Low Emission Diesel Engine Oils.'' January 31, 2000.
\150\ This estimate assumes that a heavy-duty diesel engine
consumes 1 quart of engine oil in 2,000 miles of operation, consumes
fuel at a rate of 1 gallon per 6 miles of operation and that engine
oil sulfur levels range from 2,000 to 8,000 ppm.
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Current heavy-duty diesel engines operate with open crankcase
ventilation systems which ``consume'' oil by carrying oil from the
engine crankcase into the environment. This consumed oil is correctly
included in the total oil consumption estimates, but should not be
included in estimates of oil entering the exhaust system for this
analysis, since as currently applied this oil is not introduced into
the exhaust. At present we estimate that the majority of lube oil
consumed by an engine meeting the 0.1 g/bhp-hr PM standard is lost
through crankcase ventilation, rather than through the exhaust. Based
on assumed engine oil to PM conversion rates and historic soluble
organic fraction breakdowns we have estimated the contribution of
sulfur from engine oil to be less than two ppm fuel equivalency. With
our action to close the crankcase, coupled with the use of closed
crankcase ventilation systems that separate in excess of 90 percent of
the oil from the blow-by gases, we believe that this very low
contribution of lube oil to sulfur in the exhaust can be maintained.
For a further discussion of our estimates of the sulfur contribution
from engine oil refer to the final RIA in the docket.
G. Fuel Economy Impact of High Efficiency Control Technologies
The high efficiency emission control technologies expected to be
applied in order to meet the NOX and PM standards involve
wholly new system components integrated into engine designs and
calibrations, and as such
[[Page 5062]]
may be expected to change the fuel consumption characteristics of the
overall engine design. After reviewing the likely technology options
available to the engine manufacturers, we believe that the integration
of the engine and exhaust emission control systems into a single
synergistic emission control system will lead to heavy-duty vehicles
which can meet demanding emission control targets without increasing
fuel consumption beyond today's levels.
1. Diesel Particulate Filters and Fuel Economy
Diesel particulate filters are anticipated to provide a step-wise
decrease in diesel particulate (PM) emissions by trapping and oxidizing
the diesel PM. The trapping of the very fine diesel PM is accomplished
by forcing the exhaust through a porous filtering media with extremely
small openings and long path lengths.151 This approach
results in filtering efficiencies for diesel PM greater than 90 percent
but requires additional pumping work to force the exhaust through these
small openings. The additional pumping work is anticipated to increase
fuel consumption by approximately one percent.152 However,
we believe this fuel economy impact can be regained through
optimization of the engine--PM trap--NOX adsorber system, as
discussed below.
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\151\ Typically, the filtering media is a porous ceramic
monolith or a metallic fiber mesh.
\152\ Engine, Fuel, and Emissions Engineering, Incorporated,
``Economic Analysis of Diesel Aftertreatment System Changes Made
Possible by Reduction of Diesel Fuel Sulfur Content,'' December 14,
1999, Air Docket A-99-06.
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2. NOX Control Technologies and Fuel Economy
NOX adsorbers are expected to be the primary
NOX control technology introduced in order to provide the
reduction in NOX emissions envisioned in this rulemaking.
NOX adsorbers work by storing NOX emissions under
fuel lean operating conditions (normal diesel engine operating
conditions) and then by releasing and reducing the stored
NOX emissions over a brief period of fuel rich engine
operation. This brief periodic NOX release and reduction
step is directly analogous to the catalytic reduction of NOX
over a gasoline three-way catalyst. In order for this catalyst function
to occur the engine exhaust constituents and conditions must be similar
to normal gasoline exhaust constituents. That is, the exhaust must be
fuel rich (devoid of excess oxygen) and hot (over 250 deg.C). Although
it is anticipated that diesel engines can be made to operate in this
way, it is assumed that fuel economy while operating under these
conditions will be worse than normal. We have estimated that the fuel
economy impact of the NOX release and reduction cycle would,
all other things being equal, increase fuel consumption by
approximately one percent. Again, we believe this fuel economy impact
can be regained through optimization of the engine--PM trap--
NOX adsorber system, as discussed below.
In addition to the NOX release and regeneration event,
another step in NOX adsorber operation may affect fuel
economy. As discussed earlier, NOX adsorbers are poisoned by
sulfur in the fuel even at the low sulfur levels mandated here. As
discussed in the RIA, we anticipate that the sulfur poisoning of the
NOX adsorber can be reversed through a periodic
``desulfation'' event. The desulfation of the NOX adsorber
is accomplished in a similar manner to the NOX release and
regeneration cycle described above. However it is anticipated that the
desulfation event will require extended operation of the diesel engine
at rich conditions.153 This rich operation will, like the
NOX regeneration event, require an increase in the fuel
consumption rate and will cause an associated decrease in fuel economy.
With a 15 ppm fuel sulfur cap, we are projecting that fuel consumption
for desulfation would increase by one percent or less, which we believe
can be regained through optimization of the engine-PM trap-
NOX adsorber system as discussed below.
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\153\ Dou, D. and Bailey, O., ``Investigation of NOX
Adsorber Catalyst Deactivation'' SAE982594.
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While NOX adsorbers require non-power producing
consumption of diesel fuel in order to function properly and,
therefore, have an impact on fuel economy, they are not unique among
NOX control technologies in this way. In fact NOX
adsorbers are likely to have a very favorable NOX to fuel
economy trade-off when compared to other NOX control
technologies like cooled EGR and injection timing retard that have
historically been used to control NOX emissions. Today, most
diesel engines rely on injection timing control (retarding injection
timing) in order to meet the 4.0 g/bhp-hr NOX emission
standard. For 2004 model year compliance, we expect that engine
manufacturers will use a combination of cooled EGR and injection timing
control to meet the 2.0 g/bhp-hr NOX standard. Because of
the more favorable fuel economy trade-off for NOX control
with EGR when compared to timing control, we have forecast that less
reliance on timing control will be needed in 2004. Therefore, fuel
economy will not be changed even at this lower NOX level.
NOX adsorbers have a significantly more favorable
NOX to fuel economy trade-off when compared to cooled EGR or
timing retard alone, or even when compared to cooled EGR and timing
retard together.154 Current NOX adsorber data
show greater than 90 percent reduction in NOX emissions over
the SET, while only increasing fuel consumption by a very reasonable
two percent. Further the data show that, for significant portions of
the engine's typical operating range, NOX control in excess
of 98 percent is possible even with engine-out emissions as high as 5
g/bhp-hr.155 Therefore, we expect manufacturers to take full
advantage of the NOX control capabilities of the
NOX adsorber and project that they will decrease reliance on
technologies with a less favorable emissions to fuel economy trade-off,
especially injection timing retard, when operating at conditions where
the NOX adsorber performance is significantly greater than
90 percent. We would therefore predict that the fuel economy impact
currently associated with NOX control from timing retard
would be decreased by at least three percent. In other words, through
the application of advanced NOX emission control
technologies, which are enabled by the use of low sulfur diesel fuel,
we expect the NOX trade-off with fuel economy to continue to
improve significantly when compared to today's technologies. This will
result in both much lower NOX emissions, and potentially
overall improvements in fuel economy. Improvements could easily offset
the fuel consumption of the NOX adsorber itself and, in
addition, the one percent fuel economy loss projected to result from
the application of PM filters. Consequently, we are projecting no fuel
economy penalty to result from this rule.
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\154\ Zelenka, P. et al, Cooled EGR--A Key Technology for Future
Efficient HD Diesels, SAE 980190, Society of Automotive Engineers
1998. Figure 2 from this paper gives a graphical representation of
how new technologies (including exhaust emission control
technologies) can shift the trade-off between NOX
emissions and fuel economy.
\155\ ``2007 Diesel Emission Test Program, Initial Test
Report,'' December 11, 2000, Air Docket A-99-06, Item IV-A-29.
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3. Emission Control Systems for 2007 and Net Fuel Economy Impacts
We anticipate that, in order to meet the stringent NOX
and PM emission standards set today, the engine manufacturers will
integrate engine-based emission control technologies and
[[Page 5063]]
post-combustion emission control technologies into a single systems-
based approach that will fundamentally shift historic trade-offs
between emissions control and fuel economy. As outlined in the
preceding two sections, individual components in this system will
introduce new constraints and opportunities for improvements in fuel
efficient control of emissions. Having considered the many
opportunities to fundamentally improve these relationships, we believe
that it is unlikely that fuel economy will be lower than today's levels
and, in fact, may improve through the application of these new
technologies and this new systems approach. Therefore, for our analysis
of economic impacts in Section V, no penalty or benefit for changes to
fuel economy are considered.
H. Review of the Status of Heavy-Duty Diesel NOX Emission
Control Technology
In the NPRM, we provided a detailed technical evaluation of test
data and other information that concluded that the proposed program
would be technologically feasible for all heavy-duty engines. During
the public comment period, we received many comments as well as
additional information about the likely status and capability of
emission control technology development in the 2007 time frame. To this
information we have added our own updated evaluation of test data as
well as technical information developed by ourselves and others.
Based on this information, and as discussed in Sections III.E and
III.F above, we now have an even higher degree of confidence that
manufacturers will be able to meet the new heavy-duty standards.
Manufacturers of heavy-duty gasoline engines will apply essentially the
same technology that is being developed for light-duty trucks under the
Tier 2 program and should not have major problems doing so, especially
given the significant available lead time. Regarding diesels, although
the technological challenges are somewhat greater than for gasoline
engines, we believe that manufacturers will achieve the engine
standards adopted today for 2007 and later years, in conjunction with
the low sulfur diesel fuel we are also requiring.
As we discussed earlier, there are two primary technologies that
diesel engine manufacturers expect to use to meet the standards adopted
in today's rule, and they are at different stages of commercial
development. Catalyzed diesel PM trap technologies are in widespread
fleet testing today, we have shown that there are no serious
impediments to the widespread application of this technology to heavy-
duty diesel engines that can meet our new standards by 2007, if not
earlier. Diesel NOX adsorber technology, the emission
control technology we believe will be used for heavy-duty diesel
engines to meet the very low NOX emission standards adopted
today, is less developed relative to PM control technology. Still, as
we discussed earlier, we have identified a clear technological pathway
to compliance with the NOX standards using NOX
adsorber technology. While we do not anticipate major obstacles in
commercializing these systems by 2007, it is important that the various
parties in the industry continue to make good progress in their
development of NOX adsorber technology for heavy-duty diesel
engines.
As a mechanism for monitoring and evaluating this technological
progress, we believe it will be important to publicly reassess the
status of heavy-duty diesel NOX adsorber systems on an
ongoing basis. To accomplish this, we will conduct regular biennial
reviews of the status of heavy-duty NOX adsorber technology.
For each review, we will collect and analyze information from engine
manufacturers, NOX adsorber manufacturers, our own testing,
and other sources. At the end of each review cycle, we will release
(and post on the Web) a report discussing the status of the technology
and any implications for the heavy-duty engine emission control
program. We will release the first report by December 31, 2002 and
subsequent reports at the end of each second year through December 31,
2008. This biennial process is similar to that used by the State of
California to monitor and evaluate their emission control programs.
IV. Our Program for Controlling Highway Diesel Sulfur
With today's action, we are requiring substantial reductions in
highway diesel fuel sulfur levels nationwide, because sulfur
significantly inhibits the ability of the diesel emission control
devices to function which are necessary to meet the emission standards
finalized today. With the highway diesel fuel sulfur standard we are
finalizing today, we have concluded that there will be technology
available to achieve the reductions required by the stringent emission
standards we are implementing for model year 2007 and later heavy-duty
engines.
In developing the provisions of the fuel program being adopted
today, we identified several goals that we want the program to achieve.
First, we must ensure that there will be an adequate supply of highway
diesel fuel for all vehicles. Second, we must ensure that low sulfur
diesel fuel will be readily available nationwide for the 2007 and later
model year heavy-duty vehicles that need it. Finally, we want to ensure
a smooth transition to low sulfur fuel.
In the NPRM, we proposed that refiners be required to start
producing all of their highway diesel fuel at the 15 ppm sulfur level
beginning in 2006. We also requested comment on a range of options for
transitioning to the low sulfur diesel fuel over time. With regard to
the programmatic goals noted above, the proposed approach, which would
have required all highway diesel fuel to meet the 15 ppm sulfur
standard in 2006, guaranteed availability of the low sulfur diesel fuel
throughout the nation. However, many commenters stated concerns that
the proposed program would not ensure adequate overall supplies of
highway diesel fuel, especially if some refiners chose not to continue
producing highway diesel fuel to avoid the changes needed to meet the
low sulfur levels.
The final diesel fuel program we are adopting today includes
flexibilities for the refining industry as a whole, as well as
additional flexibilities for refiners experiencing hardship
circumstances. First, the program gives refiners a temporary compliance
option for low sulfur diesel fuel beginning in mid-2006. The final
program also includes additional flexibilities for refineries located
in certain western states (the Geographic Phase-In Area (GPA)
156), provisions for qualifying small refiners, and a
general hardship provision for which any refiner may apply under
certain conditions. These flexibilities ensure that the vast majority
of refiners nationwide can fully comply at the earliest possible date
while avoiding an excessive burden on a subset of refiners. The
following section details each of the requirements of the highway
diesel fuel program for refiners and importers, summarizes the analyses
we have performed on the impacts of the temporary compliance option
being adopted today, and describes additional information we have
received that supports the changes made to the proposed program.
Section VII provides additional information about the
[[Page 5064]]
compliance and enforcement provisions that will accompany these
requirements.
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\156\ As defined in the Tier 2 final rulemaking (see 65 FR 6698,
February 10, 2000), the GPA encompasses the states of Alaska,
Colorado, Idaho, Montana, New Mexico, North Dakota, Utah and
Wyoming. Note that minor changes to this area are currently under
consideration. Any such changes subsequent to today's rule are
intended to be carried over into today's rule as well.
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We believe the highway diesel fuel program we are adopting today
meets all of the programmatic goals noted above. We believe that the
final program will ensure that the overall supply of highway diesel
fuel will be sufficient for all vehicles. To the extent there may have
been supply concerns with a complete fuel turnover to low sulfur diesel
in 2006 as some commenters have suggested, the flexibilities for
refiners contained in the final program will serve as a ``safety
valve'' by allowing up to 25 percent of the highway diesel fuel to
remain at the current 500 ppm sulfur standard and providing additional
time, if needed, for some refiners to fully convert over to low sulfur
fuel. The combination of flexibilities provided to refiners in today's
final rule should eliminate any concerns about the potential for supply
shortfalls of highway diesel fuel. The final diesel fuel program is
carefully structured so that we are confident there will be widespread
availability of low sulfur fuel across the nation for 2007 and later
model heavy-duty vehicles. In this way, the important health benefits
of this program to people throughout the country can be achieved
expeditiously, at a reasonable cost, while minimizing the burden on the
affected industries.
This section also summarizes our technical feasibility analysis of
the low sulfur highway diesel fuel program, and the impact of the
program on other fuel properties and specialty fuels. Finally, the
following section describes how state programs will be affected by
today's action including a provision that allows the State of Alaska
the option of developing an alternative transition plan for
implementing low sulfur fuel.
A. Highway Diesel Sulfur Standards for Refiners and Importers
The requirements of the highway diesel fuel sulfur control program
will become effective in time to be available with the introduction of
the first heavy-duty engines meeting the model year 2007 and later
engine standards we are adopting today. The following paragraphs
describe the requirements, standards, and deadlines that apply to
refiners and importers of highway diesel fuel and the options available
to all refiners.
1. Standards and Deadlines That Refiners and Importers Must Meet
As described earlier in Section III.H. above, the new standards
being adopted today for heavy-duty engines will begin with the 2007
model year. With today's action, we are adopting specific dates when
fuel intended to be marketed as low sulfur diesel fuel must be produced
at the refinery, distributed at the terminal level, and marketed at the
retail level. Refiners and importers are required to produce highway
diesel fuel meeting the 15 ppm sulfur standard beginning June 1,
2006.157 At the terminal level, highway diesel fuel sold as
low sulfur fuel is required to meet the 15 ppm sulfur standard
beginning July 15, 2006. For retail stations and wholesale purchaser-
consumers, highway diesel fuel sold as low sulfur fuel must meet the 15
ppm sulfur standard by September 1, 2006.
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\157\ Highway diesel fuel (referred to as motor vehicle diesel
fuel in the regulatory language to be consistent with language in
existing laws and regulations) includes any diesel fuel or any
distillate product that is used, intended for use, or made available
for use as a fuel in highway diesel vehicles or engines that are
subject to the standards finalized today. However, kerosene or other
distillates such as JP-8 are only considered to be highway diesel
fuel and thus subject to our program at the point in the production
or distribution system that they are either designated as such, or
otherwise used, intended for use, or made available for use in
highway diesel vehicles. Thus, if refiners do not designate these
other distillates as highway diesel fuel, they are not subject to
the 15 ppm sulfur standard.
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In the NPRM, we proposed a set of compliance dates slightly earlier
than the dates contained in today's final rule. Under the proposal,
refiners, terminals and retailers would have had to begin producing low
sulfur diesel fuel by April 1, 2006, May 1, 2006 and June 1, 2006,
respectively. Several commenters pointed out that the April
introduction date for refiners occurred at the same time refiners would
be changing over from winter to summer gasoline to comply with Reid
Vapor Pressure (RVP) requirements. They recommended that the
introduction of low sulfur diesel fuel be delayed for a couple of
months to provide refiners and the distribution system the opportunity
to focus on the two conversions separately and ensure that each occurs
as designed. Commenters also suggested that we extend the time period
between the refinery and downstream deadlines to better allow for the
time it may take the distribution system to make a complete transition
to the 15 ppm sulfur level.
In response to these concerns, today's action provides a few
additional months for introduction of the low sulfur diesel fuel
compared to the NPRM and provides an additional month between the
refinery and retail compliance dates, to provide a smoother transition
through the distribution system. We believe the additional time
provides appropriate relief for the refiners, while still assuring that
low sulfur diesel fuel will be available at the retail level no later
than September 1, 2006. This schedule will allow manufacturers to
introduce 2007 and later model year diesel engines and vehicles as
early as September 1, 2006. While a slight delay from the dates of the
proposal, the Agency does not believe this delay will place any undue
burden on the engine manufacturers. Historically, new heavy-duty
vehicle models were introduced on or around January 1 (of the same
calendar year as the model year). Only recently, manufacturers have
begun introducing some model lines earlier, particularly light heavy-
duty vehicles.
In the NPRM, we proposed that all highway diesel fuel be required
to comply with the 15 ppm sulfur standard starting in 2006. Today's
program includes a combination of flexibilities available to refiners
to ensure a smooth transition to low sulfur highway diesel fuel.
Refiners can take advantage of a temporary compliance option, including
an averaging, banking and trading component, beginning in June 2006 and
lasting through 2009, with credit given for early compliance before
June 2006. Under this option, up to 20 percent of highway diesel fuel
may continue to be produced at the existing 500 ppm sulfur maximum
standard, though it must be segregated from 15 ppm fuel in the
distribution system, and may only be used in pre-2007 model year heavy-
duty vehicles. We are providing additional hardship provisions for
small refiners to minimize their economic burden in complying with the
15 ppm sulfur standard and giving additional flexibility to refiners
subject to the Geographic Phase-in Area (GPA) provisions of the Tier 2
gasoline sulfur program, which will allow them the option of staggering
their gasoline and diesel investments. Finally, we are adopting a
general hardship provision for which any refiner may apply on a case-
by-case basis under certain conditions. These hardship provisions,
coupled with the temporary compliance option, will provide a ``safety
valve'' allowing up to 25 percent of highway diesel fuel produced to
remain at 500 ppm for these transitional years to effectively address
the concerns over highway diesel fuel supply.
It should be noted that the requirements of the fuel program
described below apply to refiners and importers only.158 We
are not adopting any retailer availability requirements
[[Page 5065]]
with these provisions. In other words, we are not requiring that diesel
retailers sell the 15 ppm fuel. Rather, retailers may sell 15 ppm
sulfur diesel fuel, 500 ppm sulfur diesel fuel, or both. We believe the
program being adopted today for refiners and importers will ensure that
adequate supplies of low sulfur diesel fuel are available throughout
the nation. The voluntary compliance and hardship provisions have been
designed with a required level of production that we believe will
ensure that 15 ppm fuel is distributed widely through pipelines and at
terminals throughout the country without the need for a retailer
availability requirement. Our analysis supporting the design of these
provisions can be found in Chapter IV of the RIA for today's action.
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\158\ As described above, distributors and retailers marketing
low sulfur diesel fuel have deadlines for compliance with the sulfur
standards, as well as other requirements such as pump labeling.
Section VII of today's action provides further details on the
downstream requirements for distributors and retailers.
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2. Temporary Compliance Option for Refiners and Importers
We believe there are several advantages to allowing some
flexibility in the early years of the program such that not all of the
highway diesel fuel pool must be converted to low sulfur diesel fuel at
one time. First, some commenters expressed concerns over adequate
supplies of highway diesel fuel if the entire pool converted to low
sulfur diesel fuel in 2006, because they believe some refiners might
produce less total highway diesel fuel volume or choose to leave the
highway diesel fuel market altogether. Allowing the temporary
compliance option lowers this concern because a portion of the highway
diesel pool can remain at the current 500 ppm sulfur standard, if
necessary, providing additional time for the market to adjust. This
portion of the highway diesel pool that refiners choose to delay will
likely be the portion that is more costly for them to desulfurize and,
thus, most likely to raise concerns with respect to shortfalls. Second,
a temporary compliance option can benefit refiners by reducing the fuel
production costs in the early years of the program, because refiners
are able to spread out their capital investments. The option also
benefits refiners by spreading out the industry-wide demand for
engineering and construction resources over several years, and also by
allowing more time between the gasoline sulfur and diesel sulfur
compliance dates. Third, refiners that are able to delay investment
could attain lower costs for such equipment as technology improvements
are realized during that time and as refiners see how well the
desulfurization technologies achieve the 15 ppm sulfur standard.
The primary emissions benefits of low sulfur highway diesel fuel
are the emissions reductions that will occur over time as new vehicles
designed to meet the emission standards adopted today are introduced
into the vehicle fleet. Consequently, in the NPRM we requested comment
on several options that would allow refiners and importers to phase in
the production of low sulfur highway diesel fuel. With today's action,
we are adopting a temporary compliance option for refiners and
importers that will allow them to produce less than 100 percent of
their highway diesel fuel at the 15 ppm sulfur level. Refiners and
importers may choose to participate in the compliance option on a
refinery-by-refinery basis. A refiner must demonstrate compliance with
the compliance option on an annual basis. Refiners with special
financial hardships have additional flexibility provisions, which are
described further in Section IV.C.
We believe today's temporary compliance option in combination with
the hardship provisions discussed in Section IV.C. has the potential to
provide flexibility to more than half of all U.S. refineries by
allowing up to 25 percent159 of the highway diesel fuel
volume in the country to continue to be produced at the current sulfur
level of 500 ppm. We estimate that refiners will be able to save as
much as $1.7 billion over the duration of the optional compliance
program compared to the proposed requirement that all highway diesel
fuel comply with 15 ppm sulfur in 2006. Much, but not all, of this
potential savings will be offset by increased costs in the distribution
system. We project that in total a small overall savings should result
from refiners taking advantage of the temporary compliance option.
---------------------------------------------------------------------------
\159\ Up to 5 percent of which is small refiner production.
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Under the temporary compliance option finalized today, a refinery
may produce up to 20 percent of its total highway diesel fuel at the
existing highway diesel fuel sulfur standard of 500 ppm, determined on
an annual basis. The remaining 80 percent of the highway diesel fuel
produced at that refinery during the year must meet a sulfur standard
of 15 ppm.160 As part of this temporary compliance option, a
PADD-based averaging, banking, and trading (ABT) program will be
available. Figure IV-1 presents the five PADDs into which the United
States is divided.161 For example, a refinery could produce
more than 80 percent of its highway diesel fuel as low sulfur diesel
fuel and generate credits based on the volume of highway diesel fuel
produced at 15 ppm that exceeded the 80 percent requirement. Within
that same PADD (within the limits noted below for California, Alaska,
Hawaii, and any state with an EPA-approved waiver from the federal
program), these credits may be averaged with another refinery owned by
that refiner, banked for use in future years, or sold to another
refinery.
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\160\ We are aware that today there are refiners that produce
one grade of diesel fuel for both highway and off-highway purposes,
where dye is added by parties downstream if it is to be sold as off-
highway diesel fuel. To the extent possible, we do not want to
interfere with this practice. Consequently, for purposes of
determining compliance with these optional requirements, a refiner
producing all 15 ppm fuel may include the entire volume it produces
in the calculation. Furthermore, a refiner producing all 500 ppm
fuel must count any diesel fuel produced with a sulfur content of
500 ppm or less unless it has been dyed by the refiner to be used as
nonroad diesel fuel. A refiner would only include kerosene in its
volume calculation if the kerosene is less than 500 ppm sulfur
content and the kerosene is blended at the refinery into non-dyed
fuel with a sulfur content of less than 500 ppm.
\161\ The Department of Energy divides the United States into
five Petroleum Administrative Districts for Defense, or PADDs. The
states encompassed by each of the five PADDs are defined in the Code
of Federal Regulations at Title 40, Sec. 80.41.
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BILLING CODE 6560-50-P
[[Page 5066]]
[GRAPHIC] [TIFF OMITTED] TR18JA01.004
BILLING CODE 6560-50-C
Also, a refinery may produce less than 80 percent of its highway
diesel fuel at the 15 ppm sulfur level, as long as it obtains enough
credits from another refinery within the PADD to offset the volume of
500 ppm sulfur fuel produced that exceeded the 20 percent of highway
diesel fuel allowed to be produced at the 500 ppm sulfur level. As
noted above, any credit trading will be limited to those refineries
within the same PADD (within the limits noted below for California,
Alaska, Hawaii, and any state with an EPA-approved waiver from the
federal program). This restriction is necessary to limit the
possibility that any area of the country is dominated by refineries
complying via purchases of credits and, thus, producing a small volume
of low sulfur diesel fuel, which could lead to concerns that the low
sulfur diesel fuel would not be sufficiently available throughout the
country.
Based on an extensive analysis which incorporates the hardship
provisions and GPA refiner provisions discussed in Section IV.B. and
C., we have chosen a level of 80 percent to have confidence that there
will be widespread availability of 15 ppm fuel throughout the United
States. Given the requirements of today's program, we believe that all
pipelines are likely to carry the 15 ppm fuel. Pipelines that may be
able to carry only one grade of highway diesel fuel are likely to carry
15 ppm as the majority diesel fuel in the market.162 Those
that are able to carry more than one grade of highway diesel fuel will
facilitate the distribution of the remaining 500 ppm fuel. In addition,
to ensure widespread availability of low sulfur diesel fuel throughout
the nation, we have found it necessary to set the 15 ppm production
threshold high enough so that there is a sufficient geographic
scattering of refineries producing low sulfur diesel fuel around the
country. At a lower threshold, there could be isolated regions of the
country where 15 ppm fuel would not be available in sufficient
quantities.
---------------------------------------------------------------------------
\162\ Today, many pipelines carry only one grade of distillate
(e.g., only 500 ppm sulfur high diesel fuel) rather than both 500
ppm sulfur highway fuel and off-highway fuel which has even higher
levels of sulfur (e.g., on the order of 3,000 ppm).
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We have analyzed the refinery/pipeline distribution system in the
United States in the context of the small refiner hardship and other
provisions of the rule and believe a 80 percent temporary compliance
option level for 15 ppm is necessary to achieve widespread availability
and avoid shortages in specific areas. At levels below an 80 percent
level, we would have concerns over whether 15 ppm sulfur diesel fuel
would be the primary highway diesel fuel distributed through pipelines
and whether the low sulfur diesel fuel would be available to all areas
of the country in sufficient quantities. The reader is directed to
Chapter IV of the RIA for today's action for our complete analysis
supporting the development of the temporary compliance option.
While we have set the minimum requirement under the compliance
option at 80 percent, we believe most refineries will focus on
production of one grade or the other. We expect that certain refineries
will find it more economically advantageous to install the necessary
equipment to produce all of their highway diesel fuel at the 15 ppm
sulfur level and generate credits. Conversely, other refineries may
find it advantageous to continue producing all of their highway diesel
fuel at the 500 ppm sulfur fuel through the period of the compliance
option, by obtaining credits to demonstrate compliance. This will
provide additional time for those refiners that have not converted to
low sulfur fuel. This will allow refiners to spread out their capital
investments and provide more time to arrange for engineering and
construction resources. In addition, the refiners that are able to
delay investment could attain lower costs for such equipment as
technology improvements are realized during that time and as refiners
see how well the range of desulfurization technologies works to achieve
the 15 ppm sulfur standard.
Foreign refiners may choose to participate in the temporary
compliance option. For purposes of determining compliance with the low
sulfur diesel requirements, foreign refiners must demonstrate
compliance based on the amount of highway diesel fuel they import into
the United States. Therefore, a given foreign refiner must demonstrate
that at least 80 percent of the highway diesel fuel it imported into
each PADD
[[Page 5067]]
meets a 15 ppm sulfur level, or show that it has enough credits from
other refiners in the PADD into which it imported the fuel to cover the
volume of fuel below the 80 percent requirement. Foreign refineries may
also generate credits if they exceed the 80 percent requirement in a
given PADD, and may sell those credits within the same PADD. A foreign
refiner may also choose to not participate in the temporary compliance
option and, as described below, let the fuel importer be the party
which demonstrates compliance.
Importers of highway diesel fuel (i.e., companies that import fuel
but are not solely refiners) may also participate in the temporary
compliance option. Importers must demonstrate that at least 80 percent
of the highway diesel fuel imported into each PADD (within the limits
noted below for California, Alaska, Hawaii, and any state with an EPA-
approved waiver from the federal program) meets a 15 ppm sulfur level,
or show that they have enough credits from other refiners in the PADD
into which the fuel is imported to cover the volume of fuel below the
80 percent requirement. Importers may also generate credits if they
exceed the 80 percent requirement in a given PADD. Importers that
import highway diesel fuel from foreign refiners that are participating
in the temporary compliance option must exclude the volume of fuel
purchased from those refiners in their compliance calculations or
credit generation calculations.
Because we expect most refineries to choose to produce fuel either
all at the 15 ppm sulfur level or all at the 500 ppm sulfur level,
credits will be generated by some refiners and desired by others. Thus,
the ABT program will play an important part in achieving overall
compliance. The details of the ABT program are described below.
a. Generating Credits
Beginning on June 1, 2006 and continuing through December 31, 2009,
refineries and importers may generate credits based on the volume of
low sulfur diesel fuel produced above the required percentage (i.e., 80
percent). One credit will be generated for every gallon of highway
diesel fuel produced at 15 ppm sulfur that exceeds the 80 percent
requirement. Credits will be calculated on a calendar-year basis. For
example, if a refinery produces 10 million gallons of highway diesel
fuel in 2007, it must produce 80 percent of its highway diesel volume
(8 million gallons) as low sulfur during 2007. If the refinery actually
produces 100 percent of its highway diesel fuel as low sulfur during
2007, it can generate credits based on the volume of the ``extra'' 20
percent of low sulfur fuel it produced above the required minimal
percentage--that is, two million gallons of credits. Because the
requirements for low sulfur fuel begin in the middle of 2006, a
refinery will generate credits in 2006 based on the volume of low
sulfur fuel produced beginning June 1, 2006 that exceeds 80 percent of
the highway diesel fuel produced at its facility between June 1, 2006
and December 31, 2006. Once credits are generated by a refinery, they
may be used by the refinery for averaging purposes with other
refineries owned by the same refiner, traded to another refinery, or
banked for use in future calendar year averaging or trading. Credits
may only be used in the PADD in which they are generated, with the
further limitations on credit generation and use in PADD V noted below
for California, Alaska, and Hawaii.
Refineries may no longer generate credits after December 31, 2009.
Beginning January 1, 2010, every refinery must either comply with the
low sulfur diesel fuel requirements by (1) producing 100 percent of its
highway diesel fuel at the 15 ppm sulfur level or (2) by using credits
through May 31, 2010 to demonstrate compliance with the 100 percent
requirement, provided that banked credits are available to the refinery
(described in more detail below). Starting June 1, 2010, all refineries
must produce 100 percent of their highway diesel fuel as low sulfur
fuel (without the use of credits).
Finally, early credits, or credits from low sulfur fuel produced at
a refinery prior to June 1, 2006, may be generated, but only under
limited circumstances. Unlike in the Tier 2 program, where significant
emission benefits accrued with the early introduction of low sulfur
gasoline, very little emission benefit (only a small reduction in
sulfate PM emissions from the in-use fleet) will result from the early
introduction of 15 ppm diesel fuel. Consequently, the main purpose in
allowing early credits under the diesel program is to smooth program
implementation beginning June 1, 2006, by allowing a pool of credits to
be available upon program startup. By allowing the generation of early
credits, both purchasers and sellers of credits can have confidence in
the legitimacy of the credits traded, which, in turn, allows for the
purchaser to have increased confidence in their ability to rely on the
ABT program for compliance. Consequently, beginning June 1, 2005 we
will allow refineries to generate credits for any volume of highway
diesel fuel produced which meets the 15 ppm cap. Any refiner that
chooses to do so may bank these credits for later use during the
compliance option years, or may trade them to other refineries within
the same PADD for use during the compliance option years. The one
restriction placed on the generation of these credits is that refiners
will have to demonstrate that the 15 ppm fuel produced early is
segregated in the distribution system and not commingled with current
500 ppm sulfur fuel. Only that volume that the refiner verifies was
actually sold as 15 ppm fuel at retail or into centrally-fueled fleets
will be eligible for early credits.
Providing refiners with an incentive to produce diesel fuel
complying with the 15 ppm cap earlier than required will not only
instill confidence in the ABT program under the temporary compliance
option, but will also provide both refiners and the distribution system
the opportunity to gain valuable experience prior to the start of the
program with producing and distributing fuel meeting the 15 ppm cap. We
believe that allowing early credit generation for one year prior to the
start of the program will provide the opportunity for the generation of
sufficient early credits to provide refiners with the program
implementation flexibility they will need. If we allowed early credits
to be generated in this manner for a longer time period, we are
concerned that the significant amounts of early credits that could be
generated could compromise availability of 15 ppm fuel at the startup
of the program. Use of these credits after June 1, 2006 could affect
the availability of low sulfur highway diesel fuel across the country
when the 2007 model year heavy-duty engines are introduced in the
market, because the amount of 500 ppm fuel could significantly exceed
the 20 percent threshold allowed under our temporary compliance option.
The only situation in which we will allow for the generation of
credits prior to June 1, 2005 is if a refiner demonstrates that the
fuel will be used in vehicles certified to meet the 2007 particulate
matter standard being adopted today for heavy-duty engines (0.01 g/bhp-
hr) or in vehicles with retrofit technologies that achieve emission
levels equivalent to the 2007 NOX or PM standard verified as
part of a retrofit program administered by EPA or a state. (Refer to
section I.C.7 for more discussion on retrofit programs.) Under this
situation, we will have confidence that emission benefits are in fact
accruing early, along with the fuel sulfur credits. The early credit
provision of this fuel program will complement the provisions that
encourage the
[[Page 5068]]
introduction of cleaner vehicles earlier than the 2007 model year, as
discussed in Section III.D.
b. Using Credits
If a refinery does not meet the 80 percent minimum requirement for
low sulfur highway diesel fuel with actual production at that refinery,
the refinery will be able to use credits to demonstrate compliance with
the 80 percent requirement. The use of credits is limited to credits
generated by refineries within the same PADD (within the limits noted
below for California, Alaska, Hawaii, and any state with an EPA-
approved waiver from the federal program). Under the temporary
compliance option, for every gallon of 500 ppm sulfur fuel produced by
a refinery that exceeds the maximum allowed limit of 20 percent, the
refinery must obtain one credit from another refinery within the same
PADD or use banked credits (that were generated within the same PADD).
Although credits will not officially exist until the end of the
calendar year (based on the generating refinery's actual low sulfur
fuel production for that calendar year), refineries may contract with
each other for credit sales prior to the end of the year, based on
anticipated production. The actual trading of credits will not take
place until the end of the year. All credit transfer transactions will
have to be concluded by the last day of February after the close of the
annual compliance period and each refinery must submit documentation
(as described in Section VII.E.) demonstrating compliance with the
appropriate volume of low sulfur highway diesel fuel. For example, a
refinery that wishes to purchase credits from another refinery to
comply with the 2007 required percentage of low sulfur fuel can do so
based on the generating refinery's projections of low sulfur fuel
production. By the end of February 2008, both the credit-purchasing
refinery and the credit-selling refinery must reconcile the validity of
the credits, and demonstrate compliance with the 80 percent
requirement. As noted earlier, at the beginning of the program, the
initial compliance period will begin on June 1, 2006 and end on
December 31, 2006. For this initial period, refineries must submit
documentation, by February 28, 2007, demonstrating compliance with the
appropriate levels of low sulfur highway diesel fuel for the period
between June 1, 2006 and December 31, 2006.
Because there could be situations where a refinery planning to use
credits to comply with the minimum percentage of fuel required comes up
short at the end of the year, we are adopting provisions that allow a
limited amount of carryover, or ``credit deficits.'' A refinery that
does not meet the required percentage of low sulfur fuel production in
a given year will be allowed to carry forward a credit deficit for one
year, as long as the deficit does not exceed five percent of its annual
highway diesel fuel production. However, the refinery will have to make
up the credit deficit and come into compliance with the required low
sulfur production percentage in the next calendar year, or the refinery
will be in violation of the program requirements. This provision is
intended to give some relief to refineries faced with an unexpected
shutdown or that otherwise are unable to obtain sufficient credits to
meet the required percentage of low sulfur fuel production.
With regard to credit trading, any person can act as a broker in
facilitating credit transactions, whether or not such person is a
refiner and/or importer, so long as the title to the credits are
transferred directly from the refinery generating the credits to the
refinery purchasing the credits. Whether credits are transferred
directly from the generating refinery to the purchasing refinery, or
through a broker, the refinery purchasing the credits should have
sufficient information to fully assess the likelihood that credits are
valid. Any credits that are traded to another refinery may, in turn, be
traded to another refinery; however, the credits cannot be traded more
than twice. We believe this provision is necessary because repeated
transfers of credits would significantly reduce our ability to verify
the validity of credits.
c. How Long Will Credits Last?
The goal of the ABT provisions is to provide additional flexibility
to refiners in the early years of the low sulfur diesel fuel program.
After the first few years of the program, there will be a significantly
greater proportion of after-treatment-equipped vehicles in the fleet.
It will be important to ensure a full transition to the new low sulfur
fuel to prevent misfueling of those vehicles and preserve the
environmental benefits of the program. Therefore, the ability of
refineries to generate credits will end on December 31, 2009.
Refineries will be allowed to use any available banked credits,
including early credits, for fuel produced through May 31, 2010. Any
remaining credits not used for the compliance period until May 31, 2010
will expire. Beginning June 1, 2010, all refineries must produce 100
percent of their highway diesel fuel at the 15 ppm sulfur level without
the use of credits, and the ABT program will end.
d. Additional Limitations on Credit Trading for Some States
At this time we are adopting a low sulfur highway diesel fuel
program that will apply throughout the United States, with trading of
credits limited to those refineries located within the same PADD.
Although we are adopting a diesel fuel program that currently will
apply nationwide, it is possible that the State of California, or some
other state, may adopt in the future a different highway diesel fuel
program than that adopted today.163 To assure that adequate
supplies of low sulfur diesel fuel will be available throughout all
regions of the country, we are adopting provisions that do not allow
refineries located in states with a state-approved 15 ppm highway
diesel sulfur program to participate in the credit program. In other
words, credit trading is limited only to those refineries complying
with the federal program. For example, without such provisions, if
California were to adopt its own state program requiring the production
of 15 ppm diesel fuel, we are concerned that it might be possible for
California refineries to generate enough credits such that areas
outside of California in PADD V are dominated by the production of 500
ppm sulfur diesel fuel, with little or no 15 ppm fuel available. This
would be problematic for the model year 2007 and later heavy-duty
engines designed to be operated on low sulfur fuel. The reader is
directed to Chapter IV of the RIA for today's action for our complete
analysis supporting the development of the temporary compliance option.
---------------------------------------------------------------------------
\163\ See Section IV.F. for a discussion of preemption of state
diesel sulfur requirements.
---------------------------------------------------------------------------
As discussed in Section IV.F. of this preamble, the State of
Alaska, which is a part of PADD V, will have the opportunity to
develop, and submit to us for approval, an alternative transition plan
for implementing the low sulfur highway diesel fuel program. Such a
plan will allow Alaska to develop a transition program tailored to its
isolated market. If, for some reason, Alaska does not submit an
alternative plan, or we do not approve the plan submitted by Alaska,
then the federal program described in today's action will apply. In the
event we do not approve an alternative plan for Alaska, based on our
analysis of the likely response of refineries in Alaska to the
temporary compliance option and because its fuel distribution system is
essentially isolated from the rest of PADD V, we are
[[Page 5069]]
concerned that all of the fuel offered for sale in Alaska could be 500
ppm sulfur fuel if refineries in Alaska were allowed to purchase
credits from other PADD V refineries. For this reason, under today's
program, refineries in Alaska will be allowed to generate credits as
described earlier. However, they may only sell credits to, or purchase
credits from, other refineries in or importers of fuel to Alaska. We
believe this will provide assurance that low sulfur highway diesel fuel
will be sufficiently available in Alaska and will also reduce the
chance that credits from Alaska will result in significantly less low
sulfur diesel fuel in PADD V areas outside of Alaska. Again, these
default provisions of the national program will only be effective in
the event that we do not approve an alternate transition plan for
Alaska.
Hawaii is in a similar situation to Alaska with regard to fuel
distribution. Hawaii, which is part of PADD V, is an isolated market
and we have similar concerns with regard to whether low sulfur diesel
fuel would be available in Hawaii if the two refineries currently
operating were able to purchase credits from other PADD V refineries
and produce all 500 ppm sulfur fuel. For this reason, under today's
program, the refineries in Hawaii will be allowed to generate credits
as described earlier. However, they may only sell credits to, or
purchase credits from, other refineries in or importers of fuel to
Hawaii. We believe this will ensure that low sulfur highway diesel fuel
will be available in Hawaii.
3. What Information Must Refiners/Importers Submit to Us?
To ensure a smooth transition to the program and to evaluate
compliance once the program has begun, we are requiring refiners and
importers to submit a variety of information to us. Section VII.E of
this document and the regulatory language for today's action provide
detailed description of the information that must be submitted and the
dates when such submittals are due.164
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\164\ As described in Sections IV.B., IV.C. and VII.E., small
refiners and GPA refiners have special supplementary reporting
requirements relating to the optional program they are participating
in.
---------------------------------------------------------------------------
First, refiners and importers that currently or in 2006 expect to
produce or supply highway diesel fuel are required to register with us
by December 31, 2001. This will inform us on the universe of refiners
that we expect to participate in the highway diesel market once the
program begins.
Second, to help facilitate the market for credit trading under the
temporary compliance option, any refiner or importer planning to
produce or import highway diesel in 2006, is required to submit to us
an annual pre-compliance report. Refiners and importers are required to
submit these annual pre-compliance reports from 2003 through 2005.
These reports must contain estimates of the volumes of 15 ppm sulfur
fuel and 500 ppm sulfur fuel that will be produced at each refinery,
and, for those refineries planning to participate in the trading
program, a projection of how many credits will be generated or must be
used by each refinery. These pre-compliance reports must also contain
information outlining each refinery's timeline for compliance and
provide information regarding engineering plans (e.g., design and
construction), the status of obtaining any necessary permits, and
capital commitments for making the necessary modifications to produce
low sulfur highway diesel fuel. Based on the information submitted by
refiners and importers, we plan to issue an annual report that
summarizes, in a way that protects the confidentiality of individual
refiners and importers, the information contained in the pre-compliance
reports. Our annual report will provide information, summarized and
aggregated on a PADD basis, describing the volumes of 15 ppm and 500
ppm highway diesel planned to be produced, and estimates of the number
of credits that refineries expect to generate or use. We believe this
information will be important to refiners as they make plans for
complying with the temporary compliance option. For example, this
information will be useful in giving refiners a better indication of
the potential market for credits and availability of credits in their
PADD. To prevent the release of confidential information, our annual
report will not contain any information on individual refinery
compliance plans.
Third, refiners and importers are required to submit annual
compliance reports that demonstrate compliance with the requirements of
this final rule. The first annual compliance report is due by the end
of February 2007 (for the period of June 1, 2006 through December 31,
2006) and is required annually through February 2011. The reports must
show, on a refinery basis, the volumes of 15 ppm and 500 ppm sulfur
highway diesel fuel produced at each refinery during the compliance
period, the number of credits used (or generated) at each refinery to
demonstrate compliance with the 80 percent requirement for low sulfur
diesel fuel, and the sources of the credits used. The information
submitted in the annual compliance reports must be segregated by PADD.
4. Impacts of the Highway Diesel Fuel Program
Based on analyses we have performed, as described in more detail
below, we believe the temporary compliance provisions contained in
today's final rule will assure adequate supplies of highway diesel
fuel, will provide flexibility for refiners, and should result in lower
costs for both refiners and consumers. In addition, we believe the
temporary compliance provisions as adopted today will ensure sufficient
availability of low sulfur highway diesel fuel to new vehicle owners
who need it without the need for a retailer availability requirement,
and should not lead to significant levels of misfueling and the
associated loss of emission benefits. We have analyzed each of these
issues in developing the final fuel program. A summary of our analyses
and the conclusions we have drawn are discussed below. A detailed
description of these analyses are contained in the RIA for today's
action. In addition, a complete list of the comments related to a
possible phase-in program and our response to those comments is
included in the Response to Comments document for this final rule.
a. Ensures Adequate Supplies of Highway Diesel Fuel
We received several comments on the NPRM fuel program that
suggested there would be a shortfall in the amount of highway diesel
supply if all of the highway diesel fuel were required to meet a 15 ppm
sulfur limit beginning in 2006. As described later in Section V.C., in
response to these comments we analyzed the capability of the entire
diesel fuel refining industry in the U.S. to adjust to the low sulfur
fuel requirements. Based on this analysis, we believe that supplies of
highway diesel fuel will be sufficient even if all highway diesel fuel
were required to comply with the 15 ppm standard in 2006. The temporary
compliance option included in today's rule is intended as a ``safety
valve'' that, along with the hardship provisions discussed in Section
IV.C.,will further help to ensure adequate supplies of highway diesel
fuel beginning in 2006.
In performing the analysis of diesel fuel supply, we examined all
diesel fuel refiners (including those that currently make only off-
highway diesel fuel but not highway diesel fuel) to assess the
likelihood of their investing in the production of 15 ppm highway
diesel
[[Page 5070]]
fuel. Using a refinery cost model, we made projections of the likely
response by refineries to today's low sulfur requirements by estimating
the cost for each refinery to produce low sulfur diesel fuel. The
results of our analysis show that the overall supply of highway diesel
fuel will continue to be adequate to meet market demands as refiners
are required to start producing low sulfur highway diesel fuel. Most
refineries that currently produce highway diesel fuel will produce
about the same volume of low sulfur diesel fuel once the program takes
effect. However, several refineries could economically expand their
current highway diesel fuel production by shifting some of their off-
highway production today, and a few others currently producing only
off-highway diesel fuel could economically shift to some highway diesel
production. Consequently, our analysis indicates that there is ample
capability in the refining industry to continue to economically supply
sufficient quantities of highway diesel fuel when today's program goes
into effect. For a fuller discussion of this analysis, see Section V of
this preamble and Chapter IV of the RIA.
If any potential for highway diesel fuel shortfalls exists by
requiring all fuel to meet 15 ppm sulfur in 2006, as CRA's analysis
suggests, we believe that allowing some continued supply of 500 ppm, as
we are doing under the temporary compliance option and hardship
provisions contained in today's action, addresses this concern. Since
the final rule allows some transition period before the entire highway
diesel pool is required to meet the 15 ppm sulfur standard, some
refiners will not need to change their current operations and will be
able to continue producing 500 ppm fuel during these years. Those
refiners that delay production of low sulfur diesel fuel until the
later years of the program will tend to be the refiners with the
highest cost to comply and, thus, refiners that would otherwise have
the greatest tendency not to invest and thereby impact supply. Refiners
that begin producing low sulfur diesel fuel in the later years of the
program will also be able to take advantage of ongoing improvements in
desulfurization technology. Together, these factors will help avoid or
reduce any potential losses in highway diesel fuel production when the
program requires full compliance with low sulfur diesel fuel.
b. Ensures Widespread Availability of Low Sulfur Diesel Fuel
A major concern we noted in the NPRM regarding a fuel phase-in
program was ensuring the widespread availability of low sulfur diesel
fuel. Without an assurance of widespread availability, there would be
concerns whether the 2007 and later model year heavy-duty vehicles that
were designed to operate on low sulfur fuel would be able to purchase
it in all parts of the country. If such vehicles were fueled with 500
ppm diesel fuel, the emission control systems could be irreversibly
damaged and any benefit of the new emission standards could be
eliminated (see Section III.F. above). Therefore, in setting the
requirements for the temporary compliance option, we have analyzed the
likelihood that fuel will be widely available so that 2007 and later
model year heavy-duty vehicles will be able to find low sulfur fuel in
all local markets across the country. To achieve this goal, we believe
there need to be assurances that refineries producing 15 ppm fuel are
sufficiently scattered throughout each of the PADDs and that most
pipelines will carry 15 ppm fuel (either as the only highway diesel
fuel or in addition to 500 ppm highway fuel).
In determining what fraction of highway diesel fuel would need to
be low sulfur under the temporary compliance option provision, taking
into account the potential impact of the hardship provisions, we used a
refinery cost model to estimate the costs of producing 15 ppm fuel for
all refineries. We then assumed that the refineries with the lowest
costs would convert to 15 ppm fuel and assumed the other refineries
would purchase credits and continue producing 500 ppm fuel through the
compliance option period. We then overlaid the information on which
refineries were estimated to be producing 15 ppm fuel with the highway
diesel fuel distribution system in the United States. We examined
different levels for the temporary compliance option beginning as low
as 20 percent and ranging as high as 90 percent. The results of the
analysis show that at temporary compliance option levels for 15 ppm
below 80 percent, there are local regions of the country where we
believe there would likely be shortages of low sulfur diesel fuel. The
areas where we believe there would be shortages are either (1) served
by pipelines that we believe would not carry 15 ppm fuel, because the
refineries serving those pipelines are projected to produce primarily
500 ppm; or (2) dominated by refineries we believe would continue
producing 500 ppm fuel under the temporary compliance option and are
not currently capable of receiving significant supplies of a second
grade of diesel fuel through other reasonable means. At the 80 percent
level, we believe that all pipelines will carry low sulfur diesel fuel,
since there are a sufficient number of refineries scattered across the
country producing low sulfur diesel fuel and at sufficient volumes for
pipelines to choose to carry it. We also believe that the program
ensures that low sulfur diesel fuel will be sufficiently available to
retail outlets at a reasonable cost either at a local terminal or by
trucking the fuel a limited distance.
As noted earlier, we are not adopting any retailer availability
requirements with today's fuel program. Given the amount of low sulfur
diesel fuel required under today's temporary compliance option, we
believe the distribution system will make low sulfur diesel fuel widely
available without any requirements on retail outlets to supply low
sulfur diesel fuel.
c. Provides Lower Costs to Refineries
One benefit of the temporary compliance option being adopted today
is that a significant number of refiners will have the ability to delay
the date when they convert their highway diesel fuel production to 15
ppm, allowing the refining industry to stretch out its engineering and
construction resources. Given the flexibilities being adopted today, we
believe that many large refineries, and other refineries for which
diesel desulfurization is least expensive, will make the commitment to
convert their entire highway diesel pool to 15 ppm sulfur in 2006 and
sell credits to other refineries that will continue to produce all of
their fuel at the 500 ppm sulfur level. Using a refinery cost model to
estimate how refineries will respond to the temporary compliance option
requirements, we believe that more than half of the refineries will
delay capital investment by buying credits and continue producing 500
ppm sulfur diesel fuel under the temporary compliance option and small
refiner hardship provisions. We estimate that refiners will be able to
save as much as $1.7 billion over the transition period compared to a
requirement that all highway diesel fuel comply with 15 ppm sulfur in
2006. As noted earlier, much of this potential savings will be offset
by increased costs in the distribution system. Nevertheless, we project
that in total, an overall savings of approximately $0.65 billion could
result.
d. Misfueling Concerns Should Be Minimized
By allowing a 500 ppm and 15 ppm sulfur highway diesel fuels to be
in the
[[Page 5071]]
market at the same time, there is the possibility that model year 2007
and later heavy-duty vehicles will be misfueled with 500 ppm sulfur
fuel, either accidentally or intentionally. As discussed above, if such
vehicles are fueled with 500 ppm diesel fuel, the emission control
systems could be irreversibly damaged and any benefit of the new
emission standards could be eliminated. To minimize the possibility of
misfueling, we are adopting labeling requirements that apply to both
retail stations and vehicle manufacturers. Under these provisions,
labels will be applied at the diesel fuel pumps at retail stations and
at the fuel tank inlet on the vehicle. The labels must indicate that
only 15 ppm sulfur highway diesel fuel may be used in 2007 and later
model year heavy-duty vehicles. The labeling requirements for fuel
pumps and vehicles are described in detail in Sections VII.C. and
VI.G., respectively.
Given the program being adopted today, we believe that intentional
misfueling will not be a serious problem. The main incentive vehicle
owners may have for using 500 ppm sulfur fuel would likely be cost
savings. In general, producing 500 ppm sulfur should be cheaper than
producing 15 ppm fuel. However, given the requirements adopted today,
we believe there should not be a large cost differential between the 15
ppm sulfur fuel and the 500 ppm sulfur fuel at retail outlets. Under
the credit trading program, to produce 500 ppm fuel, most refiners will
have to purchase credits from other refiners producing 15 ppm fuel,
increasing the cost of the 500 ppm fuel, while decreasing the cost of
the 15 ppm fuel. At the refinery gate, the cost of both fuels should be
approximately the same. In addition, given the amount of 15 ppm fuel
required under the temporary compliance option, 15 ppm fuel will be
distributed through essentially the entire pipeline system. The
distribution of 500 ppm fuel, on the other hand, will be more limited,
due to its much lower volume. We expect that the 500 ppm fuel will be
distributed by truck in the areas nearby refineries producing this fuel
and through a few major pipelines to a limited number of major fuel
consuming areas. Overall, the better economies of scale of transporting
15 ppm fuel should compensate for any additional handling cost due to
the need to more carefully avoid contamination with higher sulfur
fuels. For these reasons, we expect the price to consumers of 500 ppm
sulfur fuel to be generally close to that of 15 ppm sulfur fuel and,
therefore, there should not be a significant economic incentive to
misfuel with 500 ppm sulfur fuel. Finally, because vehicle owners will
likely void the manufacturer's warranty if they misfuel with 500 ppm
sulfur fuel, they will have an additional incentive not to misfuel.
Owners of heavy-duty vehicles make significant investments in these
vehicles and will not want to take the chance of voiding their warranty
for a relatively small savings in fuel cost.
In addition to our concern about intentional misfueling, we also
have some concerns about accidental misfueling during the optional
compliance program years. This concern is lessened to some extent
because of the limited amount of 500 ppm sulfur fuel that will be
available, the short duration of the optional compliance program, the
knowledgeable owners and operators of trucks and most importantly, the
labels that will be required on both the vehicle and the fuel pumps.
Thus, we do not expect either type of misfueling to be a significant
problem.
e. Summary
In summary, today's program has been structured to ensure a smooth
transition to low sulfur highway diesel fuel. We believe this will
allow the refining industry the ability to spread out capital
investments and provide more time for the market to transition to the
low sulfur diesel fuel. This, in turn, will help to mitigate any
potential for concerns about highway diesel fuel supply shortfalls. We
also believe the provisions included in the program will continue to
provide assurance that adequate supplies of low sulfur highway diesel
fuel will be available throughout the nation for the 2007 and later
model year heavy-duty vehicles that will require the fuel to comply
with the emission standards. Moreover, because the flexibilities
included in the program should reduce the economic impact on refiners,
we will also expect there to be a reduction in the costs to highway
diesel fuel users.
B. What Provisions Apply in the Geographic Phase-in Area?
1. What Is the Geographic Phase-in Area and How Was it Established?
In the low sulfur gasoline rule, we established the GPA provision
which provides temporarily less stringent standards for gasoline sold
in certain parts of the West and Alaska (40 CFR 80.215). A map of the
area is shown in Figure IV-2, below.165 As described in the
preamble to the low sulfur gasoline final rule, we used two criteria to
develop and evaluate the GPA approach: (1) Relative environmental need
and (2) the ability of U.S. refiners and the distribution system to
provide compliant gasoline.
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\165\ Alaska, Colorado, Idaho, Montana, New Mexico, North
Dakota, Utah, and Wyoming. Note that minor changes to this area are
currently under consideration. Any such changes subsequent to
today's rule are intended to be carried over into today's rule as
well.
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BILLING CODE 6560-50-P
[[Page 5072]]
[GRAPHIC] [TIFF OMITTED] TR18JA01.005
BILLING CODE 6560-50-C
In part, we defined the GPA based on the relative difficulty of
producing or obtaining complying low sulfur gasoline (see preamble to
the low sulfur gasoline rule at 65 FR 6698, February 10, 2000). The
refining industry in the GPA is dominated by small capacity,
geographically-isolated refineries located within that area. As a
general rule, refineries in this area will (because of their crude oil
capacity, corporate size, and location) have the most difficult time of
all refineries nationwide in competing for the engineering and
construction resources needed to modify their refineries to comply with
the low sulfur gasoline standards.
Furthermore, an assessment of gasoline production and use data and
information on the products pipeline system shows that states and
counties in the GPA are solely or predominantly dependent on gasoline
produced by these refineries and have limited or no access to gasoline
from other parts of the country. Specifically, Department of Energy
data for 1998 indicate that over 80 percent of the gasoline sold in
this area is produced by the relatively small refineries located within
the region. Much of this gasoline is produced by small volume
refineries that are not owned by small businesses, and are therefore
not afforded the flexibility of the small refiner provisions described
in Section IV.C. Providing low sulfur gasoline to these states and
counties is expected to be more difficult and costly in the near term.
The temporary gasoline provisions for the GPA apply for three
years, 2004 through 2006. Since the low sulfur gasoline standards for
the rest of the country require compliance in January 2006 with a 30
ppm refinery average standard and an 80 ppm gallon cap, the geographic
phase-in provides an additional year for refiners to reach those
standards. This extra year and the somewhat less stringent standards
during the gasoline phase-in will provide the refining industry the
opportunity for a more orderly transition to the 30/80 ppm gasoline
sulfur standards by January 2007.
The gasoline GPA provision covers all gasoline produced (or
imported) for use in the GPA166, whether refined within the
area or distributed within the area via pipeline, barge, truck, or
rail. Foreign refiners are involved in this program through importers,
which are the regulated entities.
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\166\ As stated in the Tier 2/Gasoline Sulfur final rule (See
Sec. 80.215(a)(2)), we plan to expand the GPA to include counties
and tribal lands in states adjacent to the eight core GPA states.
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2. Highway Diesel Provisions for GPA Refiners
In response to our proposal, we received many comments from the
refining industry and others regarding the timing of our proposed
highway diesel fuel sulfur program. Commenters argued that the proposed
schedule for diesel sulfur compliance, beginning in mid-2006, would be
a problem since it directly coincides with the December 2006 gasoline
sulfur compliance date for the GPA. Some said that the timing of the
diesel program could effectively negate the benefit to refiners of the
GPA program since desulfurization investments would need to take place
during essentially the same time period. This could thus increase the
difficulty of refiners in this region to raise capital and to engage
engineering and construction resources. Some also said that an
extension of the GPA gasoline program would allow more rational
planning without unduly reducing the air quality benefits of the
program.
We agree with many of the commenters in this regard--refineries
supplying the GPA tend to be disproportionately challenged compared to
other refiners with respect to capital formation, the availability of
engineering and construction resources, and the isolated nature of many
of the markets. Moreover, the introduction of low sulfur highway diesel
fuel in June 2006 indeed overlaps with the conclusion of the interim
low sulfur gasoline standards for GPA refiners.
In consideration of these comments, we believe that it is
appropriate to grant additional flexibility to refiners that supply
gasoline to the GPA while also meeting the low sulfur diesel standards.
Additional flexibility for GPA refiners will allow them to spread out
their capital investments for producing low sulfur gasoline and highway
diesel fuel. In light of the above, we are modifying
[[Page 5073]]
the GPA gasoline program while still achieving significant
environmental benefits. We expect this provision will have little long-
term impact on the environmental benefits of the Tier 2/Gasoline Sulfur
program, while providing for considerable near-term implementation
flexibility and improved feasibility of the highway diesel fuel
program.
Refiners that produce both gasoline and highway diesel fuel and are
subject to the GPA gasoline sulfur program may choose to stagger their
desulfurization investments for the two fuels. Refiners that comply
with the low sulfur diesel fuel standard by June 1, 2006 for all of
their highway diesel fuel production may receive a two-year extension
of their interim GPA gasoline standards for 2006, that is through
December 31, 2008. In addition to allowing refiners the opportunity to
spread out their desulfurization investments, we believe this provision
will encourage the production of 15 ppm diesel fuel by some refiners
producing fuel for the GPA, which will further help to ensure the new
fuel is widely available for new vehicles throughout the area. Although
the GPA gasoline program applies to both refiners and importers, the
extension of the GPA gasoline program under today's program applies
only to refiners. This reflects the fact that only refiners have to
make capital investments to comply with the diesel sulfur standard.
To receive the two-year extension of the GPA standards, a U.S.
refinery must by June 1, 2006 produce 100 percent of its highway diesel
fuel at 15 ppm sulfur (including refineries that supply only a fraction
of their gasoline production to the GPA). In addition, the refinery
must maintain a production volume of 15 ppm highway diesel fuel that is
at least 85 percent of the baseline highway diesel volume that was
produced at that refinery on average during calendar years 1998 and
1999. We believe that it is very important that the extension of a GPA
refinery's interim gasoline sulfur standard be linked to a substantial
environmental benefit from the production of 15 ppm diesel fuel in
2006. We have established a minimum volume requirement to prevent the
extension of the GPA gasoline program from applying in situations where
a refinery changes its refinery product slate to produce very little
highway diesel fuel--even though this production is at 15 ppm sulfur.
We believe the 85 percent level is sufficient to reflect a substantial
investment in desulfurization technology. At the same time the 85
percent level should allow for any reasonable variation in production
of highway diesel fuel that would be expected to occur in typical
situations between now and 2006, particularly given the continued
growth of the highway diesel market.
Similarly, a foreign refinery that meets the same conditions as a
domestic GPA refiner may also sell gasoline into the GPA that meets a
less stringent sulfur standard during 2007 and 2008.167 That
is, a foreign refinery that by June 1, 2006 sells 100 percent of the
highway diesel fuel it imports into the U.S. as 15 ppm fuel (and that
maintains the 85 percent of baseline volume requirement) may sell
somewhat higher-sulfur gasoline into the GPA in 2007 and 2008. The
actual gasoline sulfur standard during this period, as with domestic
refiners, would be based on the foreign refinery's gasoline sulfur
baseline.
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\167\ Prior to 2007, foreign refiners can participate in the GPA
program through importers. Under today's provisions for 2007 and
2008, importers are not eligible and foreign refiners can
participate directly as refiners.
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If a situation arises where a GPA refinery did not produce highway
diesel fuel in 1998 or 1999 but later begins to produce 15 ppm diesel
fuel, use of the GPA gasoline phase-in extension will require case-by-
case EPA approval. In its application for such approval, a refinery
must show us that the loss of emission reductions will not be
significant and must propose an appropriate minimum production volume.
In evaluating such a proposed minimum volume, we may consider, among
other factors, the typical ratio between highway diesel and gasoline
production for other refineries in the industry. Again, the reason for
the two-year extension of the gasoline interim program is to allow the
GPA refinery to spread out its capital investments while increasing the
quantity of 15 ppm fuel being produced. We expect that GPA refineries
using this option will make a substantive capital investment in diesel
desulfurization and have thus set this minimum 15 ppm diesel production
volume limit.
Since refiners participating in this program are required to
produce 100 percent of their highway diesel at 15 ppm, those that
choose this option cannot participate in the highway diesel temporary
compliance option, and, therefore, are not permitted to generate
credits on the low sulfur diesel fuel that they produce. If, after June
1, 2006, a foreign refinery is not producing 100 percent of its highway
diesel fuel imported into the U.S. at 15 ppm sulfur in the required
volume, it forfeits the two-year extension or any remaining portion of
the extension of its interim gasoline program.
3. How Do Refiners Apply for an Extension of the GPA Gasoline Program?
Any refinery that seeks an extension of its GPA gasoline standards
must apply to us as a part of its registration, due by December 31,
2001. In this application, the refinery must indicate its intention to
produce 100 percent of its highway diesel fuel at 15 ppm (and at a
volume at least 85 percent of the highway diesel fuel volume it
produced on average during calendar years 1998 and 1999) by June 1,
2006.
4. Required Reporting for GPA Refiners
As described in Section VII.E below, refiners that plan to use the
extension of the GPA gasoline standard must report their plans and
progress several times over the course of the program. In addition to
their initial registration and application discussed above, a refinery
must submit pre-compliance reports in 2003, 2004, and 2005, describing
its progress toward the capacity to produce 100 percent of its highway
diesel fuel at 15 ppm sulfur (at a volume at least 85 percent of its
baseline volume). Then, by July 1, 2006, such a refinery must confirm
to us that by June 1, 2006 it was producing 100 percent of its highway
diesel fuel at 15 ppm, at the appropriate volume.168 After
the diesel sulfur program is underway in 2006, the refinery must
provide us with annual compliance reports by the end of February of
2007, 2008, and 2009 (i.e., until after the end of the extended interim
gasoline sulfur program for GPA refiners on December 31, 2008).
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\168\ If the refiner was not producing 15 ppm fuel for all its
highway diesel production at that refinery by June 1, 2006, the July
1, 2006 letter must confirm that the refiner is forfeiting the
``automatic'' two-year extension of that refinery's interim gasoline
program.
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C. Hardship Provisions for Qualifying Refiners
This section describes various provisions for certain qualifying
refiners, both domestic and foreign, that may face hardship
circumstances.
1. Hardship Provisions for Qualifying Small Refiners
In developing our diesel sulfur program, we evaluated the need and
the ability of refiners to meet the 15 ppm standard as expeditiously as
possible. This analysis is described in detail in Chapter IV of the
RIA. As a part of this analysis, we found that while the majority of
refiners would be able to meet the needed air quality goals in the
[[Page 5074]]
2006 time frame, there would be some refiners that would face
particularly challenging circumstances which would cause them to have
more difficulty, in comparison to the industry as a whole, in meeting
the standards.
We believe it is feasible and necessary for the vast majority of
the program to be implemented reasonably quickly to achieve the air
quality benefits as soon as possible. To do otherwise would be to base
the time frame of the entire program on the lowest common denominator.
Thus, we have provided special flexibility provisions for a subset of
refiners that qualify as ``small refiners,'' which represent about five
percent of the overall highway diesel volume. As described in more
detail below, and in the Regulatory Impact Analysis (Chapter VIII of
the RIA), we concluded that refineries owned by small businesses face
unique hardship circumstances, compared to larger companies.
a. Qualifying Small Refiners
The primary reason for special small refiner provisions is that
small businesses generally lack the resources available to large
companies which enable the large companies (including those large
companies that own small volume refineries) to raise capital for
investing in desulfurization equipment. The small businesses are also
likely to have more difficulty in securing loans, competing for
engineering resources, and completing construction of the needed
desulfurization equipment in time to meet the standards adopted today
which begin in 2006. In addition, the implementation of the low sulfur
diesel program will occur in the same general time frame as the
implementation of the low sulfur gasoline program, since most of those
small refiners that are covered by the interim standards under the Tier
2/Gasoline Sulfur program (40 CFR Part 80, Subpart H) are also covered
by today's diesel fuel sulfur program.
The emissions benefits of the low sulfur diesel program are needed
as soon as possible--to allow the implementation of new emission
reduction requirements on heavy-duty engines and vehicles and, thus, to
reduce ozone, particulate matter, and other harmful air pollutants.
Since our analysis showed that small businesses in particular face
hardship circumstances, we are adopting temporary provisions that will
provide refineries owned by small businesses additional time to meet
the ultimate 15 ppm sulfur cap or balance investments of this program
with those related to the Tier 2/Gasoline Sulfur program. This approach
allows us to achieve the earliest implementation date for advanced
technology diesel vehicles (i.e., the 2007 model year) and the needed
emission reductions they will bring.
We believe that the temporary flexibilities described below are an
effective way to begin the broad implementation of the standards as
expeditiously as is feasible and thereby achieve significant air
quality benefits in an expeditious manner. This section describes the
special provisions we are offering small businesses to mitigate the
impacts of our program on them and generally explains the analysis we
undertook of those impacts. Please refer to the Response to Comments
document for a detailed discussion of comments we received on these
provisions, and to the RIA for a more detailed discussion of our
analysis of small refiner circumstances.
As explained in the discussion of our compliance with the
Regulatory Flexibility Act in Section X.B. and in the Regulatory
Flexibility Analysis in Chapter VIII of the RIA, we considered the
impacts of our proposed regulations on small businesses. We have
historically, as a matter of practice, considered the potential impacts
of our regulations on small businesses. We believe that the temporary
flexibilities we are adopting for small refiners contributed to our
development of a framework to achieve significant environmental
benefits from lower sulfur diesel in the most expeditious manner that
is reasonably practicable.
A large part of the analysis of small business impacts conducted
for this rulemaking was performed in conjunction with a Small Business
Advocacy Review (SBAR) Panel we convened, pursuant to the Regulatory
Flexibility Act as amended by the Small Business Regulatory Enforcement
Fairness Act of 1996 (SBREFA). In the SBREFA amendments, Congress
stated that ``uniform Federal regulatory requirements have in numerous
instances imposed unnecessary and disproportionately burdensome demands
including legal, accounting, and consulting costs upon small businesses
. . . with limited resources[,]'' and directed agencies to consider the
impacts of certain actions on small entities. The final report of the
Panel is available in the docket. Through the SBREFA process, the Panel
provided information and recommendations regarding:
The significant economic impact of the proposed rule on
small entities;
Any significant alternatives to the proposed rule which
would ensure that the objectives of the proposal were accomplished
while minimizing the economic impact of the proposed rule on small
entities;
The projected reporting, recordkeeping, and other
compliance requirements of the proposed rule; and,
Other relevant federal rules that may duplicate, overlap,
or conflict with the proposed rule.
In addition to our participation in the SBREFA process, we
conducted our own outreach, fact-finding, and analysis of the potential
impacts of our regulations on small businesses. Some of the small
refiners with whom we and the Panel met indicated their belief that
their businesses may close due to the substantial costs, capital and
other impacts of meeting the 15 ppm diesel fuel standard without either
additional time or flexibility with respect to gasoline sulfur
compliance. Based on these discussions and analyses, the Panel and we
agree that small refiners would likely experience a significant and
disproportionate financial hardship in reaching the objectives of our
diesel fuel sulfur program. However, the Panel also noted that the
burden imposed upon the small refiners by our sulfur requirements
varied from refiner to refiner and could not be alleviated with a
single provision. We agree with the Panel and are offering qualifying
small refiners three options to choose from in moving toward compliance
with the low sulfur diesel fuel requirements.
For today's action, we have structured a selection of temporary
flexibilities for qualifying small refiners, both domestic and foreign,
based on the factors described below. Generally, we structured these
provisions to address small refiner hardship while expeditiously
achieving air quality benefits and ensuring that the low sulfur diesel
fuel coincides with the introduction of 2007 model year diesel
vehicles.
First, the compliance deadlines in the program, combined with
flexibility for small refiners, will quickly achieve the air quality
benefits of the program, while helping to ensure that small refiners
will have adequate time to raise capital for new or revamped equipment.
Most small refiners have limited additional sources of income beyond
refinery earnings for financing the equipment necessary to produce low
sulfur diesel. Because these small refiners typically do not have the
financial backing that larger and generally more integrated companies
have, they can benefit from additional time to secure capital financing
from their lenders.
[[Page 5075]]
Second, we believe that allowing time for refinery sulfur-reduction
technologies to be proven out by larger refiners before small refiners
have to put them in place will reduce the risks incurred by small
refiners that utilize these technologies to meet the standards. The
added time will likely allow for lower costs of these improvements in
desulfurization technology (e.g., better catalyst technology or lower-
pressure hydrotreater technology). Because of the poorer economies of
scale and the higher relative capital and operating costs faced by
small refiners, more time for technology development and
commercialization will limit the economic consequences for small
refiners. Small refiners are disadvantaged by the economies of scale
that exist for the larger refining companies-capital costs and per-
barrel fixed operating costs are generally higher for small refiners.
Third, providing small refiners more time to comply will increase
the availability of engineering and construction resources. Since most
large and small refiners must install additional processing equipment
to meet the sulfur requirements, there will be a tremendous amount of
competition for technology services, engineering manpower, and
construction management and labor. Our analysis shows that there are
limits to the price elasticity of these resources. In addition, vendors
will be more likely to contract their services with the major companies
first, as their projects will offer larger profits for the vendors.
Finally, because the gasoline and diesel sulfur requirements will
occur in approximately the same time frame, small refiners that produce
both fuels will have a greater difficulty than most other refiners in
securing the necessary financing. Hence, any effort that increases
small refiners' ability to stagger investments for low sulfur gasoline
and diesel will facilitate compliance with the two programs.
Providing these options to assist small refiners experiencing
hardship circumstances enables us to go forward with the 15 ppm sulfur
standard beginning in 2006. Without this flexibility, the benefits of
the 15 ppm standard would possibly not be achieved as quickly. By
providing temporary relief to those refiners that need additional time,
we are able to adopt a program that expeditiously reduces diesel sulfur
levels in feasible manner for the industry as a whole. In addition, we
believe the volume of diesel that will be affected by this hardship
provision is marginal. We estimate that small refiners contribute
approximately five percent of all domestic diesel fuel production.
b. How Do We Define Small Refiners?
The following definition of small refiner is based closely on our
small refiner definition in the Tier 2/Gasoline Sulfur rule. We define
a refiner that meets both of the following criteria as a ``small
refiner'' for purposes of this rule:
No more than 1,500 employees corporate-wide, based on the
average number of employees for all pay periods from January 1, 1999 to
January 1, 2000.
A corporate crude oil capacity less than or equal to
155,000 barrels per calendar day (bpcd) for 1999.
In determining the total number of employees and crude oil
capacity, a refiner must include the number of employees and crude oil
capacity of any subsidiary companies, any parent company and
subsidiaries of the parent company, and any joint venture partners. We
define a subsidiary of a company to mean any subsidiary in which the
company has a 50 percent or greater ownership interest. This definition
of small refiner is the same definition used under the recently
promulgated Tier 2/Gasoline Sulfur program (40 CFR 80.225), except that
we have included additional regulatory language to clarify our
interpretation of the term ``subsidiary'' and we have updated the time
period used to determine the employee number and crude oil capacity
criteria to reflect data for the most recent calendar years. This
approach is consistent with the Small Business Administration's
regulations, which specify that, where the number of employees is used
as a size standard, the size determination is to be based on the
average number of employees for all pay periods during the preceding 12
months (13 CFR 121.106).
The gasoline sulfur standards and the diesel sulfur standards will
impact small refiners in approximately the same time frame. For this
reason, we will consider any refiner that we approve as meeting the
small refiner definition under the gasoline sulfur program (40 CFR
80.235) to be a small refiner under the highway diesel sulfur rule as
well without further demonstration.
In addition, a company that after January 1, 2000 either acquires
or reactivates a refinery that was shutdown or non-operational between
January 1, 1999 and January 1, 2000 may also apply for small refiner
status. Such an application needs to be submitted to us no later than
June 1, 2003. In this case, we will judge eligibility under the
employment and crude oil capacity criteria based on the most recent 12
consecutive months unless data provided by the refiner indicates that
another period of time is more appropriate. Companies with refineries
built after January 1, 2000 are not eligible for the small refiner
hardship provisions.
If a refiner with approved small refiner status later exceeds the
1,500 employee threshold or the corporate crude oil capacity of 155,000
bpcd without merger or acquisition, it may keep its small refiner
status. This is to avoid stifling normal company growth and is subject
to our finding that the company did not apply for and receive the small
refiner status in bad faith. On the other hand, if a refiner with
approved small refiner status later exceeds the small refiner criteria
through merger or acquisition, its refineries must forfeit their small
refiner status and begin complying with the national standards by
January 1 of the next calendar year. For example, if a small refiner
with two refineries purchases a third refinery in 2007 and that
purchase causes the refiner to exceed the employee or corporate crude
oil capacity thresholds for small refiner status, then that refiner
must forgo its small refiner status and begin complying with the
national standards by January 1, 2008 at all its refineries.
c. What Options Are Available for Small Refiners?
All refiners producing highway diesel fuel are able to take
advantage of the temporary compliance option discussed in Section IV.A.
Diesel producers that also market gasoline in the GPA may receive
additional flexibility under today's rule (Section IV.B.). As an
alternative, refiners that seek and are granted small refiner status
may choose from the following three options under the diesel sulfur
program. These three options have evolved from concepts on which we
requested and received comment in the proposal. In most cases, we
believe that small refiners will find these options preferable to
either the broader diesel fuel temporary compliance option or the GPA
provision discussed above.
500 ppm Option. A small refiner may continue to produce and sell
diesel fuel meeting the current 500 ppm sulfur standard for four
additional years, until May 31, 2010, provided that it reasonably
ensures the existence of sufficient volumes of 15 ppm fuel in the
marketing area(s) that it serves.
Small Refiner Credit Option. A small refiner that chooses to
produce 15 ppm fuel prior to June 1, 2010 may generate and sell credits
under the broader
[[Page 5076]]
temporary compliance option. Since a small refiner has no requirement
to produce 15 ppm fuel under this option, any fuel it produces at or
below 15 ppm sulfur will qualify for generating credits.
Diesel/Gasoline Compliance Date Option. For small refiners that are
also subject to the Tier 2/Gasoline sulfur program (40 CFR Part 80,
Subpart H), the refiner may choose to extend by three years the
duration of its applicable interim gasoline standards, provided that it
also produces all its highway diesel fuel at 15 ppm sulfur beginning
June 1, 2006.
All refiners producing diesel fuel are required to provide us with
basic data on their progress toward compliance in 2003-2005 under the
pre-compliance reporting requirements described above in Section IV.A.
As a part of their pre-compliance reports, small refiners must provide
a limited amount of additional information specific to the option they
choose. We discuss each option, and the special pre-compliance
reporting requirements for each option, in the next paragraphs and in
Section VII.E below.
i. 500 ppm Option
The 500 ppm option is available for any refiner that qualifies as a
small refiner. Under this option, small refiners may continue selling
highway diesel fuel with sulfur levels meeting the current 500 ppm
standard for four additional years, provided that they supply
information showing that sufficient alternate sources of 15 ppm diesel
fuel in their market area will exist for fueling new heavy-duty highway
vehicles. Under this option, small refiners may supply current 500 ppm
highway diesel fuel to any markets for use only in vehicles with older
(pre-2007) technology until May 31, 2010. In other words, small
refiners that choose this option may delay production of highway diesel
fuel meeting the 15 ppm standard for four years.
This 500 ppm option for small refiners is similar to the option
provided to all refiners under the temporary compliance option
described in Section IV.A above in that it allows a refiner to continue
producing and selling the current 500 ppm fuel for a period of time.
However, this option differs from the broader compliance option in that
small refiners may produce and sell 100 percent of their highway fuel
at 500 ppm without needing to buy credits. In contrast, under the
broader temporary compliance option, refiners must buy credits to
produce any volume of 500 ppm fuel over 20 percent of their total
highway diesel production.
At the retail level, retailers will not be subject to any
availability requirements and thus may sell 500 ppm fuel, 15 ppm
highway fuel, or both (as is the case under the broader diesel
temporary compliance option described in Section IV.A). All parties in
the diesel fuel distribution system will have to maintain the
segregation of 15 ppm fuel and 500 ppm fuel and only 15 ppm fuel may be
sold for use in model year 2007 and later heavy-duty diesel vehicles.
As a part of their pre-compliance reporting due June 1, 2003 (see
Section IV.A. above), any small refiners taking advantage of this 500
ppm option must show that sufficient sources of 15 ppm fuel will likely
exist in the area served by the small refiner in the absence of
production of 15 ppm fuel by that refiner.169 A small
refiner could approach this showing in different ways. For example,
depending on the circumstances, the refiner might point to the presence
of other refiners in the area that are expected to produce 15 ppm fuel,
or to the refiner's proximity to a major pipeline that will be carrying
15 ppm fuel. Similarly, the refiner might show that its market share in
the area's highway diesel market will be too small to significantly
affect the volume of 15 ppm fuel regardless of the small refiner's
actions.
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\169\ If circumstances arise that cause the availability of 15
ppm fuel in the refiner's market area to decline, the refiner must
provide a supplemental showing in its pre-compliance reports due in
June 1, 2004 and/or June 1, 2005. As with the 2003 report, we will
either approve or disapprove these additional showings within four
months or, if we take no action, the showing will be deemed
approved.
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Another approach could be to indicate practical steps that the
refiner itself is prepared to take to help ensure that 15 ppm diesel
fuel will be available. One commenter suggested a plan to add a
separate tank and expand its fuel loading rack for handling 15 ppm
diesel fuel that would be supplied by a different refiner--thus making
low sulfur fuel available, at least at the wholesale level, at its
refinery gate even though it produced no 15 ppm fuel.
Because of the wide distribution of 15 ppm fuel that we believe
will occur under the industry-wide optional compliance program
discussed in Section IV.A. above, we expect that few if any small
refiners wishing to use the 500 ppm option will find it difficult to
make the showing that 15 ppm fuel will exist in the area. If we do not
take action on this showing within four months of receiving a refiner's
2003 pre-compliance report (i.e., by October 1, 2003 at the latest),
the refiner's showing will be considered approved.
Finally, we are providing this option so that small refiners may
use the temporary flexibility provided by the 500 ppm option as a
pathway toward compliance with the 15 ppm standard and not as an
opportunity for those refiners to greatly expand their production of
fuel meeting the 500 ppm sulfur standard. To help ensure that any
significant expansion of refining capacity that a small refiner
undertakes in the future will be accompanied by an expansion of
desulfurization capacity, we are limiting the volume of 500 ppm sulfur
fuel that a small refiner may produce under this option to a baseline
level. Specifically, small refiners selecting this 500 ppm option must
limit the volume they produce of highway diesel fuel meeting the 500
ppm sulfur standard to the lesser of the following values: (1) 105
percent of the average highway diesel volume it produced from crude oil
in calendar years 1998 and 1999 or (2) the average highway diesel
volume it produced from crude oil in calendar years 2004 and 2005. Any
volume of 500 ppm highway diesel fuel (averaged over the previous 12
consecutive months) that exceeds this limitation after 2006 must comply
with the diesel sulfur standards that apply to other refiners under the
broader program (i.e., the standards described in Section IV.A. above,
including the 80% requirement of the temporary compliance option).
ii. Small Refiner Credit Option
We believe that the relative difficulty for small refiners to
comply with today's program warrants compliance flexibility for these
refiners. At the same time, we want to encourage all refiners to
produce low sulfur diesel fuel as early and in as many geographic areas
as possible. As an incentive for small refiners to invest in
desulfurization capacity, those that choose to produce 15 ppm fuel
earlier than required under the 500 ppm option may generate credits for
each gallon of diesel fuel produced that meets the 15 ppm standard.
This includes the ability to generate credits prior to the start of the
program on June 1, 2006 under the provisions described in Section
IV.A.1.a. They could then sell these credits to other refiners for use
in the broader optional diesel fuel compliance program described above
in Section IV.A, helping to offset some low sulfur diesel fuel
production costs.
Under this option, credits may be generated based on the volume of
any diesel fuel that meets the 15 ppm standard. Refiners may then sell
their remaining highway diesel fuel under the 500 ppm option above.
[[Page 5077]]
Pre-compliance reporting for small refiners choosing this Small
Refiner Credit option is identical to that for the 500 ppm option (that
is, if the small refiner is also producing 500 ppm highway diesel
fuel), with the additional requirement that the refiner also report on
any credits it expects to generate and sell. If the quantity of 15 ppm
fuel that the refiner is preparing to produce is significant, this
factor may be useful in making the necessary showing that 15 ppm fuel
will be available in the refiner's market area.
iii. Diesel/Gasoline Compliance Date Option
The Tier 2/Gasoline Sulfur program included a special provision
that applies for refiners that qualify as small refiners (40 CFR Part
80, Subpart H). Under that program, each small refiner is assigned an
interim gasoline sulfur standard for each of its refineries. This
interim standard for each refinery is established based on the baseline
sulfur level of that refinery. The standards are designed to require
each small refiner to either make a partial reduction in their gasoline
sulfur levels or, if they already produce low sulfur fuel, to maintain
their current levels. The interim program lasts for four years, 2004
through 2007, and the refiner can apply for an extension of up to three
years. After the interim program expires, small refiners must produce
the same low sulfur gasoline as other refiners.
Today's diesel sulfur program takes effect in the same time frame
as the small refiner interim program for low sulfur gasoline. To avoid
the need for simultaneous investments in both gasoline and diesel fuel
desulfurization, several small refiners subject to both programs raised
the concept of allowing those investments to be staggered in time.
Because of the relative difficulty small refiners will face in
financing desulfurization projects, especially for both diesel and
gasoline desulfurization in the same time frame, we agree that this
concept has merit and have adopted it for this rule. Under this
concept, small refiners may extend the duration of their gasoline
sulfur interim standards and, thus, potentially postpone some or all of
their gasoline desulfurization investments while they work to achieve
the low sulfur diesel standard ``on time'' in 2006. To the extent that
small refiners choose this Diesel/Gasoline Compliance Date option, this
provision will benefit the overall diesel program by increasing the
availability of 15 ppm diesel fuel in the small refiners' market areas.
Specifically, this option provides that a small refiner can receive
a three-year extension of a refinery's interim gasoline standard, until
January 1, 2011, if it meets two criteria: (1) It produces both
gasoline and diesel fuel at a refinery and chooses to comply with the
15 ppm diesel fuel sulfur standard by June 1, 2006 for all its highway
diesel production at that same refinery, and (2) it produces a minimum
volume of 15 ppm fuel at that refinery that is at least 85 percent of
the average volume of highway diesel fuel that it produced at that
refinery during calendar years 1998 and 1999. We believe that it is
very important that the extension of a small refiner's interim low
sulfur gasoline standard be linked to a substantial environmental
benefit from the production of low sulfur diesel fuel in 2006. We have
established a minimum volume requirement to prevent the Diesel/Gasoline
Compliance Date option from applying in situations where a refiner
changes its refinery product slate to produce very little highway
diesel fuel--even though this production is at a 15 ppm sulfur level--
and yet receives an extension of its interim gasoline sulfur
standard.170 We believe the 85 percent level is sufficient
to reflect a substantial investment in desulfurization technology. At
the same time the 85 percent level should allow for any reasonable
variation in production of highway diesel fuel that would be expected
to occur in typical situations between now and 2006, particularly given
the continued growth of the highway diesel market. Again, the three-
year extension of the gasoline interim program is to allow small
refiners to stretch out their capital investments while increasing the
quantity of 15 ppm fuel being produced. We expect that small refiners
using this option will make a substantive capital investment in diesel
desulfurization and have thus set this minimum 15 ppm diesel volume
limit.
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\170\ If a situation arises where a small refiner did not
produce highway diesel fuel in 1998 or 1999 but later begins to
produce 15 ppm diesel fuel, use of the Diesel/Gasoline Compliance
Date option will require case-by-case EPA approval. In its
application for such approval, a refiner must show us that the net
loss of emission reductions will not be significant and must propose
an appropriate minimum production volume. In evaluating such a
proposed minimum volume, we may consider, among other factors, the
typical ratio between highway diesel and gasoline production for
small-to-medium sized refineries in the industry.
---------------------------------------------------------------------------
We believe that the additional three-year extension of the interim
gasoline sulfur standards provided today is warranted without any
further action by small refiners, provided that they assume the
financial burden of full low sulfur diesel compliance in 2006 (i.e.,
instead of choosing the flexibility of the broader temporary compliance
program). The diesel and gasoline desulfurization investments for those
refiners can thus be staggered in time. We believe a three-year
extension is appropriate due to the substantial investment in highway
diesel fuel that these small refiners will be undertaking.
By July 1, 2006, small refiners that plan to use the Diesel/
Gasoline Compliance Date option for one or more refineries must send a
letter to us confirming that by June 1, 2006 they were producing 100
percent of their highway diesel fuel in compliance with the 15 ppm
sulfur standard at their refinery(ies). These refiners must make
similar confirmations each year through 2011 in their annual compliance
reports (due by the end of February of each year)--until after the end
of the extended interim low sulfur gasoline program for small refiners
on December 31, 2010.
If a given small refiner was not producing 15 ppm fuel for all its
highway diesel production at that refinery by June 1, 2006, the July 1,
2006 letter must confirm that the refiner is forfeiting the
``automatic'' three-year extension of that refinery's interim gasoline
program (although the refiner may still apply for a case-by-case
extension through the Tier 2/Gasoline Sulfur program under 40 CFR
80.260). In this case, we will consider a request that the refiner be
allowed to use either the 500 ppm option or the Small Refiner Credit
option, or both, provided that information addressing the conditions of
these options as described above are included in the July 1, 2006
letter. If the refiner does not request the use of the 500 ppm option
or the Small Refiner Credit option, the letter must confirm that the
refiner is complying with the diesel sulfur requirements applicable to
refiners that are not small refiners.
The Tier 2/Gasoline Sulfur program includes a general hardship
provision for which refiners may apply. (Today's program also includes
a similar provision). Depending on the nature of its hardship, a small
refiner that applies for this general hardship provision under the
gasoline program may be granted a ``tailor-made'' interim gasoline
sulfur program different from the ``default'' program established in
the rule. If such a small refiner were then to be covered by today's
diesel fuel requirements and chose this Diesel/Gasoline Compliance Date
option, we will allow it an extension of its special interim program
for gasoline (as established under the general hardship provision) for
three years beyond the scheduled end date (although no later than
December 31, 2010) so long as it
[[Page 5078]]
met the 15 ppm diesel fuel standard and production volume requirements
in 2006.
As with the other two options, refiners expecting to use the
Diesel/Gasoline Compliance Date option and thus to produce their
highway diesel fuel exclusively at 15 ppm fuel will have to report
certain information beginning in 2003. As a part of their pre-
compliance reporting due June 1, 2003 (see Section IV.A. above), any
small refiners taking advantage of this option must provide information
showing that diesel desulfurization plans are on track. The information
supplied under this requirement must include, but will not be limited
to, the following: (1) Status of applying for and receiving any
necessary air pollution control permits, (2) financing that is in place
or being sought, and (3) the status of engineering or construction
contracts. As a part of the pre-compliance reporting due in 2004 and
2005, the refiner must provide more complete information as it becomes
available to update its earlier report (e.g., the status of beginning
or completing construction of desulfurization equipment).
iv. Relationship of the Options to Each Other
By definition, since a small refiner must produce 100 percent of
its highway diesel as 15 ppm under the Diesel/Gasoline Compliance Date
option, that option is not compatible with either the 500 ppm option or
the Small Refiner Credit option. Thus a refiner choosing the Diesel/
Gasoline Compliance Date option may not choose either of the other two
options. However, the 500 ppm option and the Small Refiner Credit
option are compatible with each other, and so a refiner may choose
either or both of these options.
d. How Do Small Refiners Apply for Small Refiner Status?
Refiners that are not small refiners under the gasoline sulfur
program but that are seeking small refiner status under the diesel
sulfur program must apply to us as a part of their registration for the
general diesel sulfur program, due no later than December 31, 2001. The
application must include the following information: 171
---------------------------------------------------------------------------
\171\ See the Section VII.E below and regulatory language
associated with this rule for detailed requirements for registration
and application for small refiner status.
---------------------------------------------------------------------------
The name and address of each location at which any
employee of the company, including any parent companies or
subsidiaries,172 worked during the 12 months preceding
January 1, 2000;
---------------------------------------------------------------------------
\172\ ``Subsidiary'' here covers entities of which the parent
company has 50 percent or greater ownership.
---------------------------------------------------------------------------
The average number of employees at each location, based on
the number of employees for each of the company's pay periods for the
12 months preceding January 1, 2000;
The type of business activities carried out at each
location; and
The total crude oil refining capacity of its corporation.
We define total capacity as the sum of all individual refinery
capacities for multiple-refinery companies, including any and all
subsidiaries, as reported to the Energy Information Administration
(EIA) for 1999, or in the case of a foreign refiner, a comparable
reputable source, such as professional publication or trade
journal.173 Refiners do not need to include crude oil
capacity used in 1999 through a lease agreement with another refiner in
which it has no ownership interest.
---------------------------------------------------------------------------
\173\ We will evaluate each foreign refiner's documentation of
crude oil capacity on an individual basis.
---------------------------------------------------------------------------
The crude oil capacity information reported to the EIA or
comparable reputable source is presumed to be correct. However, in
cases where a company disputes this information, we will allow 60 days
after the company submits its application for small refiner status for
that company to petition us with detailed data it believes shows that
the EIA or other source's data was in error. We will consider this data
in making a final determination about the refiner's crude oil capacity.
We will consider any refiner that was granted small refiner status
under the Tier 2/Gasoline Sulfur program to also qualify as a small
refiner under today's program, provided that it also produced highway
diesel fuel in 1999. Such a refiner only needs to indicate as a part of
its registration for this program that it is covered by the gasoline
sulfur small refiner program and that it expects to be eligible for any
small refiner optioins available in today's diesel program.
2. Farmer Cooperative Refiners Will Benefit From the Flexible
Provisions Available to Other Refiners
Some refineries in the U.S. are owned by farmer cooperatives. In
the NPRM, we asked for comment on whether it would be appropriate to
extend hardship relief to farmer cooperatives, similar to the
flexibility options for small refiners. Representatives of farmer
cooperative refiners have commented to us that as refiners they face
unique challenges under a diesel fuel sulfur program. As described in
more detail below and in the Response to Comments document, we have
carefully considered the situation of farmer cooperative refiners. We
have concluded that while there are clearly differences in how farmer
cooperative refiners are organized and are financed compared to other
refiners, we are not able to make a determination that farmer
cooperative refiners, as a class, face unique economic hardship. As
discussed further below, we believe that the combination of
flexibilities built into today's diesel program will be valuable to
farmer cooperative refiners. To the extent any of the farmer
cooperative refiners face economic hardship in complying with the
diesel sulfur program, this determination can best be made on a case-
by-case basis for each farmer cooperative refiner, as discussed further
below.
As is the case for all refiners, we believe that farmer cooperative
refiners will be able to benefit significantly from the several
flexibility provisions discussed elsewhere in Section IV of this
preamble. As we mentioned above, the farmer cooperative refiner with
the smallest refinery appears to meet the criteria for status as a
``small refiner,'' and thus will likely be eligible for the special
provisions discussed earlier (Section IV.C.1. above). The second
smallest refinery owned by a farmer cooperative is located and markets
all or most of its gasoline within the geographic GPA and, as such, is
eligible for GPA low sulfur gasoline extension described in Section
IV.B. above (if it meets the production and volume requirements for 15
ppm fuel). Alternatively, this refinery could participate in the
temporary compliance option for diesel fuel described in Section IV.A.
above.
The two other farmer cooperative refiners (as well as any other
refiner) may participate in the temporary compliance option for diesel
fuel and the averaging, banking, and trading provisions described above
(Section IV.A.), potentially allowing them to postpone diesel
desulfurization investments. If needed, any of the farmer cooperative
refiners may also apply for case-by-case hardship relief (Section
IV.C.3. below). Through such a case-by-case review, we will be in a
better position to make a determination of whether a particular farmer
cooperative refiner faced an economic hardship situation, as we would
then have available to us specific financial information about each
cooperative owner. If we determine that a cooperative refiner faced an
economic
[[Page 5079]]
hardship situation, we could then tailor any temporary hardship
provisions to best suit the needs of that refiner. Given this
combination of options and ``safety valves'' built into the diesel
sulfur program, and the factors discussed below, we do not believe it
is necessary to provide special provisions specifically for farmer
cooperative refiners as a class.
Farmer cooperatives that own refineries, like all farmer
cooperatives, are organized as a means for individual farmers (or local
cooperatives owned by individual farmers) to collectively gain benefits
in important aspects of their farming businesses--in this case, the
production and distribution of the fuel needed for their operation. It
should also be noted that the diesel fuel produced by farmer
cooperative refiners is sold not only to farmers, but also to the
wholesale petroleum market, for sale at service stations, truck stops,
or fleets. Individual farmers and others become members of local
cooperatives that provide a range of products and services to their
members. These local cooperatives in turn often form the membership of
larger, regional cooperatives, including those that own three of the
four farmer cooperative refineries in the U.S.
Refiners that are also cooperative businesses are significantly
different from other refiners in several respects. The key aspect is
that several avenues for accessing capital used by many other refiners
(in this case, the capital needed to carry out diesel fuel
desulfurization projects in their refineries) are not available to, or
are not practical for, cooperative refiners. In particular, farmer
cooperatives, unlike publicly-held corporations, are generally not
permitted to raise equity capital in the securities markets (that is,
by selling stock). At the same time, the equity financing provided by
the membership, usually a modest amount assessed from each member as a
condition of membership, provides a return for the members only to the
extent that the members purchase the products or services of the
cooperative. Conventional investors that do not regularly patronize the
cooperative have little incentive to provide investment from the
outside, since their investment will not appreciate in value.
For farmer cooperatives, money for capital projects is generally
raised internally as equity from members and as loans from banks or
other financial institutions. In this sense, farmer cooperative
refiners are similar to privately-held refining companies, which are
also unable to raise capital by selling public stock. In the case of
farmer cooperatives, equity capital is raised either by assessment of
the members or, more often, by retaining a portion of the cooperative's
earnings that would otherwise be distributed to the members (on the
basis of how much business they have done with the cooperative). The
amount of equity available to the cooperative, as well as the earning
prospects of the cooperative, usually determine whether financial
institutions will lend additional capital, how much money will be lent,
and what terms the cooperative will have to agree to. For example, when
a cooperative's equity is low and/or the farm economy is stressed (and
thus the prospects for strong earnings performance by the cooperative
are diminished) cooperatives can have difficulty competing among other
potential borrowers for loans for large capital projects.
While the unique structural and financial characteristics of farmer
cooperative refiners can present special challenges to these refiners,
their status as cooperatives can also provide advantages not shared by
other refiners. The same federal and state laws and regulations that
place limitations on the financial avenues available to cooperatives
also tend to include special provisions only available to cooperatives.
These include special treatment for cooperatives under securities laws,
antitrust laws, contractual marketing laws, and restrictive corporate
entity laws, some or all of which may come into play in efforts to
capitalize refinery desulfurization projects.
Also, the relatively large regionally-based cooperatives that own
refineries have a variety of other business interests as well. This
broader business base, which involves not only the refining and
distribution of fuels but also a variety of other agricultural supply,
processing, and related operations, may often provide an advantage to
these larger cooperative refiners as compared to competing refiners
that have little or no business beyond refining and fuel marketing.
Finally, the three larger farmer cooperative refiners have developed
several economic relationships among one another--including joint
refinery ownership, a joint refinery operating agreement, and a joint
fuel distribution and marketing organization--that together create
greater options for financing than are available to many other
refiners.
Based on the compliance option provisions in this action we do not
believe that farmer cooperative refiners as a class face a
disproportionate economic burden in complying with the diesel sulfur
program. However, certain cooperative refiners may face additional
economic obstacles, therefore the potential need exists for some
financial assistance to farmer cooperative refiners from U.S.
government programs. During interagency review, concerns were discussed
relating to the uniqueness of the structure of farmer cooperative
refineries and the key issue of accessing capital was identified. The
U.S. Department of Agriculture (USDA) has indicated an interest and
willingness to review its existing authorities for the potential
mechanisms to provide financial assistance to refiner cooperatives who
do invest in desulfurization programs. Congress and USDA have long
recognized the unique circumstances of farmers and rural communities by
establishing programs to provide assistance. This assistance would be
primarily in the form of guaranteed loans, which could provide a
significant source of funding for cooperative refiners to make capital
investment in desulfurization. However, USDA's loan program is subject
to limitations, including a $25 million annual cap on individual loans,
so the cooperative refiners may have to acquire additional financing.
EPA understands that USDA supports efforts, where appropriate, to
provide assistance to farmer-owned cooperatives from other sources.
In conclusion, after reviewing this information, we have not been
able to clearly distinguish a unique economic burden that today's
program will place on farmer cooperative refiners, as a class, apart
from other refiners, especially other refiners of similar size and/or
those that are privately-held companies. However, as described above,
several of the flexible provisions we have incorporated into the
overall diesel sulfur program will be valuable to farmer cooperative
refiners.
3. General Hardship Provisions
a. Temporary Waivers from Low Sulfur Diesel Requirements in Extreme
Unforseen Circumstances
In this final rule, we are adopting a provision which, at our
discretion, will permit domestic or foreign refiners to seek a
temporary waiver from the highway diesel sulfur standards under certain
rare circumstances. This waiver provision is similar to provisions in
the reformulated gasoline (RFG) and low sulfur gasoline regulations. It
is intended to provide refiners short-term relief in unanticipated
circumstances--such as a refinery fire or a natural disaster--that
cannot be reasonably foreseen now or in the near future.
[[Page 5080]]
Under this provision, a refiner may seek permission to distribute
highway diesel fuel that does not meet the applicable low sulfur
standards for a brief time period. An approved waiver of this type
could, for example, allow a refiner that has reached its maximum
allowable production volume of 500 ppm sulfur fuel under the temporary
compliance option to temporarily and modestly exceed that volume, so
long as the other conditions described below were met. Such a request
will be based on the refiner's inability to produce complying highway
diesel fuel because of extreme and unusual circumstances outside the
refiner's control that could not have been avoided through the exercise
of due diligence. The request will also need to show that other avenues
for mitigating the problem, such as purchase of credits toward
compliance under the temporary compliance option, had been pursued and
yet were insufficient.
As with other types of relief established in this rule, this type
of temporary waiver will have to be designed to prevent fuel exceeding
the 15 ppm standard from being used in 2007 and later vehicles. As with
the small refiner hardship provisions described above, any such waiver
must show that other sources of 15 ppm fuel exist in the refiner's
market area to help reduce the risk that owners of 2007 and later
diesel vehicles will have difficulty finding the 15 ppm fuel they need
during the period of the waiver.
The conditions for obtaining a low sulfur diesel waiver are similar
to those in the RFG and low sulfur gasoline regulations. These
conditions are necessary and appropriate to ensure that any waivers
that are granted are limited in scope, and that refiners do not gain
economic benefits from a waiver. Therefore, refiners seeking a waiver
must show that the waiver is in the public interest, that the refiner
was not able to avoid the nonconformity, that it will make up the air
quality detriment associated with the waiver, that it will make up any
economic benefit from the waiver, and that it will meet the applicable
diesel sulfur standards as expeditiously as possible.
b. Temporary Waivers Based on Extreme Hardship Circumstances
In addition to the provision for short-term relief in extreme
unforseen circumstances, we are adopting a provision for relief based
on extreme hardship circumstances. In developing our diesel sulfur
program, we considered whether any refiners would face particular
difficulty in complying with the standards in the lead time provided.
As described earlier in this section, we concluded that refineries
owned by small businesses will experience more difficulty in complying
with the standards on time because they have less ability to raise the
capital necessary for refinery investments, face proportionately higher
costs because of poorer economies of scale, and are less able to
successfully compete for limited engineering and construction
resources. However, it is possible that other refiners that are not
small refiners will also face particular difficulty in complying with
the sulfur standards on time. Therefore, we are including in this final
rule a provision which allows us, at our discretion, to grant temporary
waivers from the diesel sulfur standards based on a showing of extreme
hardship circumstances.
The extreme hardship provision allows any domestic or foreign
refiner to request a waiver from the sulfur standards based on a
showing of unusual circumstances that result in extreme hardship and
significantly affect a refiner's ability to comply with the low sulfur
diesel standards by June 1, 2006. An approved extreme hardship waiver
may provide refiners with provisions similar to those for small
refiners, or as with the waiver for extreme unforseen circumstances,
may provide a greater allowance for producing 500 ppm (for sale only
for use in pre-2007 vehicles) during the period the temporary
compliance option is in effect. As with other relief provisions
established in this rule, any waiver under this provision must be
designed to prevent fuel exceeding the 15 ppm standard from being used
in 2007 and later vehicles.
By providing short-term relief to those refiners that need
additional time because they face hardship circumstances, we can adopt
an overall program that reduces diesel fuel sulfur beginning in 2006
for the majority of the industry. However, we do not intend for this
waiver provision to encourage refiners to delay planning and
investments they would otherwise make. We do not expect to grant
temporary waivers that apply to more than approximately one percent of
the national highway diesel fuel pool in any given year.
The regulatory language for today's action includes a complete list
of the information that must be included in a refiner's application for
an extreme hardship waiver. If a refiner fails to provide all the
information, as specified in the regulations, as part of its hardship
application, we can deem the application void. The following are some
examples of the types of information that must be contained in an
application:
--The crude oil refining capacity and diesel fuel sulfur level at
each of the refiner's refineries.
--Details on how the refiner plans to modify its current operation
to achieve future diesel fuel sulfur levels.
--The anticipated timing for the overall project the refiner is
proposing and key milestones to ultimately produce 100 percent of
highway diesel fuel at the 15 ppm sulfur standard.
--The refiner's capital requirements for the proposed project
--Plans for financing the project and financial statements
--List of the areas where the refiner's diesel fuel will be sold.
We will consider several factors in our evaluation of the hardship
waiver applications. Such factors will include whether a refinery's
configuration is unique or atypical; the proportion of diesel fuel
production relative to other refinery products; whether the refiner,
its parent company, and its subsidiaries are faced with severe economic
limitations (for example, a demonstrated inability to raise necessary
capital or an unfavorable bond rating); steps the refiner has taken to
attempt to comply with the standards, including efforts to obtain
credits towards compliance. In addition, we will consider the total
crude oil capacity of the refinery and its parent or subsidiary
corporations, if any, in assessing the degree of hardship and the
refiner's role in the diesel market. Finally, we will consider where
the diesel fuel will be sold in evaluating the environmental impacts of
granting a waiver.
This extreme hardship provision is intended to address unusual
circumstances that should be apparent now or will emerge in the near
future. Thus, refiners seeking additional time under this provision
must apply for relief by June 1, 2002. Applicants for a hardship waiver
must also submit a plan demonstrating how they will achieve the
standards as quickly as possible. In submitting the plan, applicants
must include a timetable for obtaining the necessary capital,
contracting for engineering and construction resources, obtaining any
necessary permits, and beginning and completing construction.
We will review and act on applications and, if a waiver is granted,
will specify a time period, not to extend beyond May 31, 2010, for the
waiver.
D. Technological Feasibility of the Low Sulfur Diesel Fuel Program
This section summarizes our assessment of the feasibility of
refining
[[Page 5081]]
and distributing diesel fuel with a sulfur content of no more than 15
ppm. Based on this evaluation, we believe it is technologically
feasible for refiners to meet the 15 ppm sulfur standard in the lead
time provided. We are summarizing our analysis here and we refer the
reader to the RIA for more details.
1. What Technology Will Refiners Use?
Conventional diesel desulfurization technologies have been
available and in use for many years. Conventional hydrotreating
technology involves combining hydrogen with the distillate (material
falling into the boiling range of diesel fuel) at moderate pressures
and temperatures and flowing the mixture through a fixed bed of
catalyst.
We project that all refiners will be technically capable of meeting
the 15 ppm sulfur cap with extensions of the same conventional
hydrotreating which they are using to meet the current highway diesel
fuel standard of 500 ppm sulfur. This extension will likely mean adding
a second stage of conventional hydrotreating. Converting an existing
one-stage hydrotreater into a two-stage hydrotreater will involve
adding an additional reactor as well as other, more minor units to
support the new desulfurization unit. These units could include
hydrogen plants, sulfur recovery plants, amine plants and sour water
scrubbing facilities. All of these units are already operating in
refineries, but may have to be expanded or enlarged. We also project
that all refiners will utilize recently developed, high activity
catalysts, which increase the amount of sulfur that can be removed
relative to the catalysts which were available when the current
desulfurization units were designed and built.
While still utilizing this conventional hydrotreating technology,
we expect that some refiners (roughly 20 percent of current production
volume) will decide to invest in a completely new two-stage
hydrotreater rather than revamp their current unit. This could occur
because the current hydrotreater is too old or designed to operate at
too low a pressure, or because the refiner desires to expand production
of highway diesel fuel.
The sufficiency of conventional hydrotreating to meet a 15 ppm
sulfur cap with current diesel fuel blendstocks is based primarily on
information provided by several refining technology
vendors.174 The vendors all projected that two-stage
hydrotreating would be sufficient to meet a 15 ppm sulfur cap. However,
their projections of hydrogen consumption and requisite reactor volume
varied widely. Our projections for hydrogen consumption and reactor
volume are near the lower end of the range and are essentially the same
projections as were made in support of the proposed rule.
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\174\ Technology vendors were invited to submit projections of
technology and cost to two studies of the cost of diesel fuel
desulfurization by Mathpro, Inc. One study was performed for EMA,
and the other for the National Petroleum Council.
---------------------------------------------------------------------------
Many refiners commented that we had underestimated the cost of
meeting the 15 ppm sulfur cap. They argued that higher pressure, thick
walled reactors of greater volume would be needed and that hydrogen
consumption would be much higher than we projected. With one exception,
neither the refiners, nor the technology vendors provided any
underlying catalyst performance data with which we could use to
arbitrate between the varying projections. One vendor did submit
catalyst performance data from a commercial unit processing a diesel
fuel like that produced in the U.S. Such commercial data is very
limited, as refiners are generally not currently producing diesel fuel
at sulfur levels below 10 ppm with this technology from diesel fuel
feedstocks typical of U.S. refiners. Some refiners are currently
producing diesel fuel at sulfur levels below either 10 or 50 ppm.
However, their diesel fuel blendstocks differ substantially in quality
from those available in the U.S., so their experience cannot be
extrapolated easily to producing sub-15 ppm sulfur diesel fuel in the
U.S.
Based on our review of the limited catalyst performance data in the
published literature and the one set of confidential data submitted, we
believe that the projections of the more optimistic vendors are the
most accurate for the 2006 timeframe. For example, the confidential
commercial data indicated that five ppm sulfur levels could be achieved
with two-stage hydrotreating a moderate hydrogen pressures despite the
presence of a significant amount of light cycle oil (LCO). The key
factor was the inclusion of a hydrogenation catalyst in the second
stage, which saturated many of the poly-nuclear, aromatic rings in the
diesel fuel, allowing the removal of sulfur from the most sterically
hindered compounds. In addition, refiners that are able to defer
production of 15 ppm diesel fuel through the purchase of credits will
have the added benefit of being able to observe the operation of those
hydrotreating units starting up in 2006. This should allow these
refiners to be able to select from the best technologies which are
employed in the first phase of the program.
In addition, alternative technologies are presently being developed
which could produce additional savings for refiners that are able to
delay production of 15 ppm fuel until 2010. Phillips 66 Company, for
example, just announced that they are developing a version of their S-
Zorb technology for diesel fuel desulfurization. This technology has
been selected by at least one major refiner (Marathon-Ashland) to meet
the Tier 2/low sulfur gasoline requirements. In conjunction with a DOE
research program, Phillips is designing and constructing a commercially
sized S-Zorb diesel fuel unit at their Borger refinery. This unit is
currently scheduled for start-up in 2004. We believe that this
technology could reduce the cost of meeting the 15 ppm cap by roughly
25 percent.
2. Have These Technologies Been Commercially Demonstrated?
As mentioned above, conventional diesel desulfurization
technologies have been available and in use for many years. U.S.
refiners have roughly seven years of experience with this technology in
producing highway diesel fuel with less than 500 ppm sulfur. Refiners
in California also have the same length of experience with meeting the
California 500 ppm cap on sulfur and an additional aromatics
standard.175 To meet both sulfur and aromatics standards,
refineries in California are producing highway and nonroad diesel fuel
with an average sulfur level of 150 ppm.
---------------------------------------------------------------------------
\175\ California allows refiners to use an engine test to
certify an alternative fuel mixture which meets or exceeds the
NOX reducing performance of a 10 volume percent maximum
aromatics and a 500 ppm maximum sulfur diesel fuel.
---------------------------------------------------------------------------
Some refiners in Europe are producing a very low-sulfur, low
aromatics diesel fuel for use in the cities in Sweden (Class I Swedish
Diesel) using two-stage hydrotreating. This ``Swedish city diesel'' is
averaging under 10 ppm sulfur and under 10 volume percent aromatics.
While clearly demonstrating the feasibility of consistently producing
diesel fuel with less than 10 ppm sulfur from selected feedstocks,
there are a few differences between the Swedish fuel and typical U.S.
diesel fuel. First, the tight aromatics specification applicable to
Swedish City diesel fuel usually requires the use of ring-opening or
dearomatization catalysts in the second stage of the two-stage
hydrotreating unit. Second, Swedish Class I diesel fuel also must meet
a tight density specification. Third, it is not clear
[[Page 5082]]
whether any refiner is producing a large fraction of their distillate
production to this specification. Thus, the European experience
demonstrates the efficacy of the two-stage process and its ability to
produce very low sulfur diesel fuel. However, doing so without
saturating most of the aromatics present and with heavier feedstock has
only been demonstrated in pilot plants and not commercially. Even this
pilot plant data has not been available for us to evaluate directly,
due to vendors' competitiveness concerns.
Europe has adopted a 50 ppm cap sulfur standard for all diesel fuel
which takes effect in 2005. Some countries, including England, have
implemented tax incentives for refiners to produce this fuel sooner.
The majority of diesel fuel in England already meets the 50 ppm
specification. Refiners have reported no troubles with this technology.
This diesel fuel is being produced in one-stage hydrotreaters. However,
as mentioned above, European diesel fuel contains less heavier
compounds than diesel fuel in the U.S., so the use of one-stage
conventional hydrotreating to meet very low sulfur levels is
applicable, but not sufficient to demonstrate feasibility in the U.S.
Germany has also established a tax incentive, but for diesel fuel
containing 10 ppm or less sulfur. One European technology vendor
indicated that they have already licensed two desulfurization units to
German refiners planning to produce diesel fuel to obtain this tax
credit. Europe also is considering a 10 ppm sulfur cap to take effect
later in the decade. However, no refiner is currently producing number
two diesel fuel to this specification.
Phillips Petroleum is currently in the process of designing and
constructing a commercial sized S-Zorb unit to produce sub-15 ppm
diesel fuel at their Borger, Texas refinery. This plant is scheduled to
begin commercial operation in 2004. This may not be in time to give
refiners sufficient confidence in this novel process to rely on it to
meet the 2006 deadline. However, this process, with its attendant
hydrogen, cost, and global emission savings should be available for
those refiners that are able to defer investment under the temporary
compliance option and hardship provisions of today's rule. While we are
confident that this and other technology will be available to meet the
requirements of today's rule, EPA will work with the Department of
Energy, refiners and technology providers to continue to monitor and
analyze the progress in further developing and implementing this new
diesel desulfurization technology. This will allow us to improve our
understanding of how this new technology can be employed to enhance the
implementation of this program.
3. Feasibility of Distributing Low Sulfur Highway Diesel Fuel
We believe that with relatively minor changes and associated costs,
the existing distribution system will be capable of adequately managing
sulfur contamination during the transportation of 15 ppm highway diesel
fuel from the refinery through to the end-user. Further, we believe
that the existing system is capable of handling two grades of highway
diesel fuel (500 ppm and 15 ppm sulfur cap) in a limited fashion during
the transition period of the sulfur program at acceptable cost with the
addition of storage tanks at a fraction of distributor facilities.
The following minor changes in distribution practices will be
needed as a result of today's rule during the transition years of the
fuel program when various hardship and optional compliance provisions
are in effect and thereafter:
--To adequately separate shipments of highway diesel fuel from
shipments of higher sulfur products, pipeline operators will need to
increase the amount of highway diesel fuel that they downgrade to a
lower value product.
--Instead of cutting the mixture of jet fuel and highway diesel
fuel that results during pipeline shipments of these products into the
highway diesel pool, pipeline operators will need to segregate this
mixture and sell it into the nonroad diesel pool. This change will
necessitate the addition at some terminals of small tanks to handle the
mixture of jet fuel and highway diesel fuel.
--Terminal operators will need to perform additional quality
control testing to ensure compliance with the 15 ppm sulfur cap.
We also recognize that tank truck operators will need to more
carefully and consistently observe current industry practices to limit
contamination during the transport of 15 ppm sulfur highway diesel
fuel. However, because these practices already exist and need only to
be better enforced by distributors, we continue to believe that this
can be accomplished at insignificant cost. We believe that there will
not be a significant increase in the volume of highway diesel fuel
discovered to exceed the sulfur standard downstream of the refinery as
a result of today's rule. Distributors will quickly optimize the
distribution system using the means described above to avoid creating
additional volumes of out of specification product.
To accommodate two grades of highway diesel fuel during the
transition period, additional storage tanks will need to be added at
some refineries, terminals, bulk plants, and truck stops. There are
significant costs associated with the addition of tanks which are fully
accounted for during the transition period (see Section V). Commenters
on the NPRM stated that in addition to the substantial economic burden
that adding additional storage tanks would represent for some
distributors, limitations in available space and permitting
restrictions could preclude some distributors from installing
additional tanks. This transition is also an added concern for those
users of specialty fuels (i.e., military fuels, etc.) who currently
compete for the limited storage tanks because these fuels must be
segregated. We believe that the burden of adding new storage tanks to
the system is made manageable by the fact that not all distributors
will need to handle 500 ppm as well as 15 ppm sulfur highway diesel
fuel during this time period. Marketplace forces will determine which
facilities assume the additional burden of handling both grades of
highway diesel fuel. Those facilities for which the addition of a
storage tank would represent an unacceptable burden would opt not to
serve the 500 ppm sulfur highway diesel market during the transition
years.
We received several comments on the proposed rule that substantial
uncertainties exist regarding the ability of the distribution system to
adapt to the added hardship of limiting sulfur contamination of highway
diesel fuel meeting a 15 ppm sulfur cap. These commenters noted that
under today's rule other products in the distribution system would have
a sulfur content of over 300 times the 15 ppm highway diesel fuel
sulfur cap, and that unavoidable mixing of small quantities of these
high sulfur products into highway diesel fuel could easily cause the 15
ppm sulfur cap to be exceeded. To illustrate the magnitude of the
challenge, these commenters noted that currently the maximum sulfur
content of any product that shares the distribution system with highway
diesel fuel is no more than 10 times the current 500 ppm sulfur cap for
highway diesel fuel.176 Some commenters stated that the only
way to adequately limit sulfur contamination in the distribution
[[Page 5083]]
of diesel fuel with a 15 ppm sulfur cap may be to create a completely
segregated system (at an unacceptably high cost). These commenters
stated that unavoidable contamination could cause many batches of
highway diesel fuel to be noncompliant with the 15 ppm cap resulting in
shortages and high costs. Some commenters stated that additional
evaluation is needed to determine the capability of the distribution
system to limit contamination to the very low levels necessitated by
today's rule.
---------------------------------------------------------------------------
\176\ Nonroad diesel fuel has a sulfur cap of 5,000 ppm versus a
500 ppm for current highway diesel fuel.
---------------------------------------------------------------------------
While we acknowledge that today's rule will pose a substantial new
challenge to the distribution system, we believe that the additional
measures outlined in this section will substantially address issues
associated with adequately limiting sulfur contamination during the
distribution of 15 ppm sulfur highway diesel fuel.177 Its
true that not all of the potential minute sources of sulfur
contamination in the distribution sources have been identified and that
the cumulative magnitude from these sources is uncertain. However, we
believe that the contamination from such sources, while made more
significant by the implementation of the 15 ppm sulfur cap, is not of a
sufficient magnitude to jeopardize the feasibility of distributing low
sulfur highway diesel fuel. We will work with the Department of Energy,
refiners and others involved in diesel fuel distribution to analyze,
compile data, and conduct additional research, where appropriate, to
not only more fully understand all sources of contamination and
deliverability in the distribution of diesel fuel below the 15ppm cap,
but also their impact on the deliverability of other fuels, including
specialty military fuels. This information will be used, in conjunction
with information being developed on the operation of emission control
devices (which are affected by exposure to sulfur), to monitor progress
on the successful implementation of this final rule which depends on an
integrated vehicle/fuel systems approach. Please refer to Section V.D.
on the costs of today's rule to the distribution system, and to the
Regulatory Impact Analysis and Response to Comments documents for
additional discussion regarding the feasibility of distributing highway
diesel fuel with a 15 ppm sulfur cap.
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\177\ See the Response to Comments document for this rule.
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E. What Are the Potential Impacts of the Low Sulfur Diesel Program on
Lubricity and Other Fuel Properties?
1. What Is Lubricity and Why Might It Be a Concern?
Engine manufacturers depend on diesel fuel lubricity properties to
lubricate and protect moving parts within fuel pumps and injection
systems for reliable performance. Unit injector systems and in-line
pumps, commonly used in heavy-duty engines, are actuated by cams
lubricated with crankcase oil, and have minimal sensitivity to fuel
lubricity. However, rotary and distributor type pumps, commonly used in
light and medium-duty diesel engines, are completely fuel lubricated,
resulting in high sensitivity to fuel lubricity.
In the United States, there is no government or industry standard
for diesel fuel lubricity. Thus, specifications for lubricity are
determined by the market. Since the beginning of the 500 ppm sulfur
highway diesel program in 1993, fuel system producers, engine and
vehicle manufacturers, and the military have been working with the
American Society for Testing and Materials (ASTM) to develop protocols
and standards for diesel fuel lubricity in its D-975 specifications for
diesel fuel. Although the ASTM has not yet adopted specific protocols
and standards, we understand that refiners have been treating diesel
fuel with lubricity additives on a batch to batch basis, when poor
lubricity fuel is expected. In addition, the military has found that
traditional corrosion inhibitor additives that it uses in its fuels
have been highly effective in reducing fuel system component wear. Some
commenters expressed concern about the impacts of a 15 ppm standard on
fuel lubricity.
Experience has shown that it is very rare for a naturally high-
sulfur fuel to have poor lubricity, although, most studies show
relatively poor overall correlation between sulfur content and
lubricity. Considerable research remains to be performed for a better
understanding of the fuel components most responsible for lubricity.
Consequently, we are uncertain about the potential impacts of the 15
ppm sulfur standard on fuel lubricity. There is evidence that the
typical process used to remove sulfur from diesel fuel--hydrotreating--
can impact lubricity depending on the severity of the treatment process
and characteristics of the crude. Because refiners will likely rely on
hydrotreating to achieve the proposed sulfur limit, there may be
reductions in the concentration of those components of diesel fuel
which contribute to adequate lubricity. As a result, the lubricity of
some batches of fuel may be reduced compared to today's levels,
resulting in an increased need for the use of lubricity additives in
highway diesel fuel. In response to the proposal, all comments
submitted regarding lubricity either stated or implied that the
proposed sulfur standard of 15 ppm would likely cause the refined fuel
to have lubricity characteristics that would be inadequate to protect
fuel injection equipment, and that mitigation measures such as
lubricity additives would be necessary. However, the commenters
suggested varied approaches for addressing lubricity. For example, some
suggested that we need to establish a lubricity requirement by
regulation, but others suggested that the current voluntary (market)
system would be adequate. The Department of Defense recommended that we
encourage the industry (ASTM) to adopt lubricity protocols and
standards before the implementation date of the low sulfur fuel
established by today's action. Other suggested approaches included
incorporation of biodiesel as a solution to the lubricity issue, and
the need to further examine the issues.
Blending small amounts of lubricity-enhancing additives increases
the lubricity of poor-lubricity fuels to acceptable levels. These
additives are available in today's market, are effective, and are in
widespread use around the world. For example, in the U.S., we
understand that refiners are treating diesel fuel with lubricity
additives on a batch to batch basis, when poor lubricity fuel is
expected. Other examples include Sweden, Canada, and the U.S. military.
Since 1991, the use of lubricity additives in Sweden's 10 ppm sulfur
Class I fuel and 50 ppm sulfur Class II fuel has resulted in acceptable
equipment durability.178 Since 1997, Canada has required
that its 500 ppm sulfur diesel fuel not meeting a minimum lubricity be
treated with lubricity additives. The U.S. military has found that the
traditional corrosion inhibitor additives that it uses in its fuels
have been highly effective in reducing fuel system component wear.
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\178\ See letter from MTC to Michael P. Walsh, dated October 16,
2000. In public docket, document IV-G-42.
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2. Today's Action on Lubricity: A Voluntary Approach
We have decided to not establish a lubricity standard in today's
action, but have included a 0.2 cents per gallon cost in our
calculations for the economic
[[Page 5084]]
impact to account for the potential increased use of lubricity
additives (see section V.D.2). We believe the best approach is to allow
the industry and the market to address the lubricity issue in the most
economical manner, while avoiding an additional regulatory scheme. A
voluntary approach should provide adequate customer protection from
engine failures due to low lubricity, while providing the maximum
flexibility for the industry. This approach will be a continuation of
current industry practices for diesel fuel produced to meet the current
federal and California 500 ppm sulfur diesel fuel specifications, and
benefits from the considerable experience gained since 1993. It will
also include any new specifications and test procedures that we expect
will be adopted by the American Society for Testing and Materials
(ASTM) regarding lubricity of highway diesel fuel quality.
We do not believe that an EPA regulation for lubricity is
appropriate for several reasons. First, the expertise and mechanism for
a lubricity standard already exist in the industry. According to the
comments, the industry has been working on a lubricity specification
for ASTM D-975, and low cost remedies for poor lubricity have already
been proven and are already being used around the world. Although some
commenters expressed concerns that the ASTM process might move too
slowly to establish a lubricity specification by 2006, we fully expect
the refining industry, engine manufacturers and end users to work
together to resolve any issues as part of their normal process in
dealing with customer and supplier fuel quality issues. Today's action
will increase the urgency of those working to establish an ASTM D-975
lubricity specification, and we believe they will do so in time for the
production and distribution of the low sulfur highway diesel fuel. We
will do our part to encourage the ASTM process be brought to a
successful conclusion.
Second, we have no firm basis to justify a lubricity specification
in today's action. One such basis might be adequate demonstration that
a lubricity level below or above a certain specification would either
cause emissions to increase, or hinder the operation of emission
control equipment. However, we have no evidence that lubricity impacts
emissions, or emission control equipment. This issue is primarily a
concern about equipment performance. Equipment performance is more
appropriately addressed by the industry rather than government
regulation by this Agency.
Third, even if we had a statutory basis to justify a lubricity
standard, we are concerned that establishing an EPA lubricity
regulation would provoke the same disagreements that the industry is
now engaged in its efforts to establish an ASTM D-975 specification. We
are in no better position to judge those issues than the industry
experts who are already involved. Further, once a specification is put
into the regulations and the industry subsequently determines that the
specification should be changed, based on new information or
circumstances, the burden would be on us to amend the mandated
specification by rulemaking. This is a significant burden to put on the
Agency for an engine performance issue that can and should be resolved
by the industry without government intervention.
Subsequent to the close of the comment period another issue related
to lubricity concerns was raised to the Agency. These concerns related
to potential incompatibilities in old vehicles of the new engine oils
the industry hopes to develop for use in the new 2007 and later model
year vehicles. Much of the ash in today's motor oil results from the
need to control acidification of the engine oil (maintain total base
number, or TBN control), which is in large part a function of the
sulfur content of the fuel and the sulfuric acid that it forms. Without
the ability to control acidification of the engine oil, engine wear
increases significantly. The ash in the oil, however, will tend to
shorten the maintenance intervals for particulate filters to remove
built up ash on new 2007 and later model year vehicles. At the same
time, engines operated on low sulfur fuel have much less need for TBN
control and the high ash levels that result. Consequently,
manufacturers are investigating with the lubricant industry the
potential of lower ash oils for use in engines operated on low sulfur
diesel fuel and equipped with particulate traps. If the new oil
developed is not ``backwards compatible'' to sufficiently control
acidification and wear in the pre-existing fleet of vehicles on the
road that may still be operated on high sulfur diesel fuel for the
first few years of the program, then two grades of motor oil would have
to be on the market simultaneously. This has caused some stakeholders
to raise vehicle performance and durability concerns that might result
from using the new oil in the old vehicles--namely ``mis-oiling.''
Since the engine and lubricant industries still have a number of
years to develop these new oil formulations, it is still premature to
determine whether or not the new oils will be backwards compatible and
whether mis-oiling would raise any serious concerns. While this would
not appear to be an air quality concern and as such something the
Agency generally leaves up to the industry to resolve, we will
nevertheless offer to work with the industry and industry associations
on this issue over the coming years.'' EPA anticipates that engine
manufacturers would likely provide engine labels to distinguish low ash
oil from high ash oil because misoiling could result in engine damage.
3. What Are Today's Actions on Fuel Properties Other Than Sulfur?
We are not taking action today on any fuel properties other than
sulfur. We have examined the impact of fuel properties other than
sulfur, such as aromatics, on the materials used in engines and fuel
supply systems. We do not believe there will be impacts on materials
from such other fuel properties.
While there were some problems with leaks from fuel pump O-ring
seals made of a certain material (Nitrile) after the introduction of
500 ppm sulfur diesel fuel in the United States in 1993, these issues
have since been addressed by equipment manufacturers who switched to
materials that are compatible with low aromatic fuels. The leakage from
the Nitrile seals was determined to be due to low aromatics levels in
some 500 ppm sulfur fuel, not the low sulfur levels. In the process of
lowering the sulfur content of some fuel, some of the aromatics had
also been removed. Normally, the aromatics in the fuel penetrate the
Nitrile material and cause it to swell, thereby providing a seal with
the throttle shaft. When low-aromatics fuel is used after conventional
fuel has been used, the aromatics already in the swelled O-ring will
leach out into the low-aromatics fuel. Subsequently, the Nitrile O-ring
will shrink and pull away, thus causing leaks, or the stress on the O-
ring during the leaching process will cause it to crack and leak. Not
all 500 ppm sulfur fuels caused this problem, because the amount and
type of aromatics varied. Fuel pumps using a different material (Viton)
for the seals did not experience leakage. We believe that no additional
problems will occur with a change of fuel from 500 to 15 ppm sulfur.
F. How Are State Programs Affected by the Low Sulfur Diesel Program?
1. State Preemption
Section 211(c)(4)(A) of the CAA prohibits states (and political
[[Page 5085]]
subdivisions of states) from prescribing or attempting to enforce
controls or prohibitions respecting any fuel characteristic or
component if EPA has prescribed a control or prohibition applicable to
such fuel characteristic or component under section 211(c)(1). This
preemption applies to all states except California, as explained in
section 211(c)(4)(B). For states other than California, the Act
provides two mechanisms for avoiding preemption. First, section
211(c)(4)(A)(ii) creates an exception to preemption for state
prohibitions or controls that are identical 179 to the
prohibition or control adopted by EPA. Second, states may seek EPA
approval of SIP revisions containing fuel control measures, as
described in section 211(c)(4)(C). We may approve such SIP revisions,
and thereby ``waive'' preemption, only if it finds the state control or
prohibition ``is necessary to achieve the national primary or secondary
ambient air quality standard which the plan implements.''
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\179\ In evaluating whether a state fuel prohibition or control
is ``identical'' to a prohibition or control adopted by us, we might
consider but is not limited to the following factors in comparing
the measures: (1) The level of an emission reduction or pollution
control standard for any particular batch of diesel fuel; (2) the
use of ``per gallon'' or ``averaged'' amounts in setting that level;
(3) the lead time allowed to the affected industry for compliance;
(4) the test method(s) and sampling requirements used in determining
compliance; and (5) reporting and recordkeeping requirements.
---------------------------------------------------------------------------
When we adopted the current highway diesel fuel sulfur standard of
500 ppm pursuant to our authority under section 211(c)(1) of the CAA in
1990, States were preempted from also doing so under the provisions of
section 211(c)(4)(A). The 15 ppm highway diesel fuel sulfur standard
promulgated today modifies the existing standard and, as a result, do
not initiate any new preemption of state authority. Today's action
continues the explicit preemption under section 211(c)(4)(A) of state
actions to prescribe or enforce highway diesel fuel sulfur controls.
States other than California with highway diesel fuel sulfur control
programs not already approved into their SIPs are preempted under
Section 211(c)(4)(A) and will therefore need to obtain a waiver from us
under the provisions described in section 211(c)(4)(C) for all state
fuel sulfur control measures, unless the state control or prohibition
is identical to ours.
Aside from the explicit preemption in Section 211(c)(4)(A), a court
could also consider whether a state sulfur control is implicitly
preempted under the Supremacy Clause of the U.S. Constitution. Courts
have determined that a state law is preempted by federal law where the
state requirement actually conflicts with federal law by preventing
compliance with both federal and state requirements, or by standing as
an obstacle to accomplishment of Congressional objectives. A court
could thus consider whether a given state sulfur control is preempted,
notwithstanding waiver of preemption under 211(c)(4)(C), if it places
such significant cost and investment burdens on refiners that refiners
cannot meet both state and federal requirements in time, or if the
state control would otherwise meet the criteria for conflict
preemption.
2. What Provisions Apply in Alaska?
There are important nationwide environmental and public health
benefits that will be achieved with cleaner diesel engines and fuel,
particularly from reduced particulate emissions, nitrogen oxides, and
air toxics (as further discussed in section II). Therefore, it is also
important to implement this program in Alaska. Any 2007 and later model
year diesel vehicles in Alaska, or driven to Alaska, must be fueled
with low sulfur highway diesel, or risk potential damage to the
aftertreatment technologies or even the engines themselves. Although
the engine standards established today are not based upon different
technology and cost implications for Alaska as compared to the rest of
the country, the low sulfur fuel program has different implications.
Unlike the rest of the nation, Alaska is currently exempt from the
500 ppm sulfur standard for highway diesel fuel and dye requirements.
Since the beginning of the 500 ppm highway diesel fuel program, we have
granted Alaska exemptions from meeting the sulfur standard and dye
requirements, because of its unique geographical, meteorological, air
quality, and economic factors. (These unique factors are discussed
generally in this section, and in more detail in the RIA.) Because of
these unique factors, we are establishing in today's action an
alternative option for implementing the low sulfur fuel program in
Alaska.
We are providing the State of Alaska an opportunity to develop an
alternative low sulfur transition plan. We intend to facilitate the
development of this plan by working in close cooperation with the state
and key stakeholders. This plan must ensure that sufficient supplies of
low sulfur diesel fuel are available in Alaska to meet the demand of
any new 2007 and later model year diesel vehicles. Given that Alaska's
demand for highway diesel fuel is very low and only a small number of
new diesel vehicles are introduced in Alaska each year, it may be
possible to develop an alternative implementation plan for Alaska in
the early years of the program that provides low sulfur diesel only in
sufficient quantities to meet the demand from the small number of new
diesel vehicles. This would give Alaska refiners more flexibility
during the transition period because they would not have to desulfurize
the entire highway diesel volume. Our goal in offering this additional
flexibility is to transition Alaska into the low sulfur fuel program in
a manner that minimizes costs, while still ensuring that the new
vehicles receive the low sulfur fuel they need. We expect that the
transition plan will begin to be implemented at the same time as the
national program, but the state will have an opportunity to determine
what volumes of low sulfur fuel must be supplied, and in what
timeframes, in different areas of the state.
At a minimum, this transition plan must: (1) Ensure an adequate
supply (either through production or imports) of 15 ppm fuel to meet
the demand of any 2007 or later model year vehicles, (2) ensure
sufficient retail availability of low sulfur fuel for new vehicles in
Alaska, (3) address the growth of supply and availability over time as
more new vehicles enter the fleet, (4) include measures to ensure
segregation of the 15 ppm fuel and avoid contamination and misfueling,
and (5) ensure enforceability. We anticipate that, to develop a
workable transition plan, the state will likely work in close
cooperation with refiners and other key stakeholders, including
retailers, distributors, truckers, engine manufacturers, environmental
groups, and other interested groups. For example, the state will likely
rely on input from the trucking industry in determining the expected
low sulfur fuel volume needed in Alaska, based on the anticipated
number of new vehicles, and how this volume is expected to grow during
the first few years of the program. Similarly, the state will likely
rely on the Alaska refiners' input regarding plans for supplying
(either through production or imports) low sulfur fuel to meet the
expected demand. Further, the state will likely rely on input and
cooperation from retailers and distributors to determine at which
locations the low sulfur fuel should be made available. Retailers
offering low sulfur fuel will have to take measures to prevent
misfueling, such as pump labeling, which must include
[[Page 5086]]
provisions that are at least as stringent as those required of
retailers nationally by the regulations and as described in section
VII. Similarly, all parties in the distribution system must ensure the
low sulfur fuel remains segregated and must take measures to prevent
sulfur contamination, in a manner that is at least as stringent as that
required nationally by the regulations and as described in section VII.
If the state anticipates that the primary demand for low sulfur
fuel will be along the highway system (e.g., to address truck traffic
from the lower-48 states) in the early years of the program, then the
initial stages of the transition plan could be focused in these areas.
We believe it would be appropriate for the state to consider an
extended transition schedule for implementing the low sulfur program in
rural Alaska, as part of the state's overall plan, based on when they
anticipate the introduction of a significant number of 2007 and later
model year vehicles in the remote areas.
Under this approach, the state will be given the opportunity to
develop such a transition plan, as an alternative to the national
program, and submit it to us for approval. We intend to help facilitate
the development of the plan, by working closely with the state and the
relevant stakeholders so they will have an opportunity to address our
concerns in their submittal. It is our intent that any flexibility that
is available to small refiners nationwide (as described in Section IV)
will also be available to small refiners in Alaska under an approved
alternative transition plan. To ensure that refineries and other
affected parties will have certainty regarding their regulatory
requirements with adequate lead time, Alaska must submit this plan by
April 1, 2002 (approximately one year after the effective date of
today's rule). If Alaska submits such a plan to us within one year, and
if it provides a reasonable alternative as described above, we will
conduct a rulemaking with notice for public comment and then publish a
final rule promulgating the new regulatory scheme for Alaska. Our
intent is to issue such a final rule within one year of Alaska's
submittal of the plan. However, if the state chooses not to submit an
alternative plan, or if the plan it submits does not provide a
reasonable alternative for Alaska as described above, then refiners and
other regulated parties in Alaska will be subject to the national
program, including the implementation schedule established in today's
action, without further regulatory action.
a. Today's Action Regarding the 500 ppm Standard in Alaska
We are extending the existing temporary exemption from the current
diesel fuel sulfur standard of 500 ppm for the areas of Alaska served
by the Federal Aid Highway System (FAHS) to the effective date for the
new standard (i.e., June 1, 2006 at the refinery level; July 15, 2006
at the terminal level; and September 1, 2006 at all downstream
locations). While Alaska submitted a petition for a permanent exemption
from the 500 ppm standard for these areas, we are not taking further
action on that petition. Our goal is to take action on that petition in
a way that minimizes costs through Alaska's transition to the new low
sulfur program. The cost of compliance could be reduced if Alaska
refiners were given the flexibility to meet the low sulfur standard in
one step, rather than two steps (i.e., once for the current 500 ppm
sulfur standard in 2004 when the temporary exemption expires, and again
for the new 15 ppm standard in 2006).
As already discussed, we are allowing Alaska to develop an
alternative transition plan for implementing the low sulfur diesel fuel
program. During such a transition period, it is possible that both low
sulfur diesel fuel (for 2007 and later model year vehicles) and higher
sulfur (for older vehicles) highway fuels might be available in Alaska.
To avoid the two-step sulfur program described above during an
alternative transition period, we will consider additional extensions
to the temporary exemption of the 500 ppm standard beyond 2006 (e.g.,
for that portion of the highway diesel pool that is available for the
pre-2007 vehicles) during Alaska's transition period. We will make a
decision on any additional temporary extensions, if appropriate, in the
context of the separate rulemaking taking action on the alternative
transition plan submitted by Alaska.
As in previous actions to grant Alaska sulfur exemptions, we will
not base any vehicle or engine recall on emissions exceedences caused
by the use of high-sulfur (>500 ppm) fuel in Alaska during the period
of the temporary sulfur exemption. Our in-use testing goals are to
establish whether representative engines, when properly maintained and
used, will meet emission standards for their useful lives. These goals
are consistent with the requirements for recall outlined in Section
207(c)(1) of the CAA. Further, manufacturers may have a reasonable
basis for denying emission related warranties where damage or failures
are caused by the use of high sulfur fuel in Alaska.
The Engine Manufacturers Association commented that the level of
protection provided to engine manufacturers under the current exemption
for Alaska and the proposal, as described above, falls short of what is
reasonable and necessary. It asserted that the use of high sulfur
diesel fuel by an engine should raise a ``rebuttable presumption'' that
the fuel has caused the engine failure, and that EPA should have the
burden of rebutting that presumption. It also asserted that the
emissions warranty is a regulatory requirement under Section 207, that
only EPA has the authority to exclude claims based on the use of high
sulfur diesel fuel. We understand and concur with the manufacturers'
concerns about in-use testing of engines operated in an area exempt
from fuel sulfur requirements. Consequently, we affirm that, for recall
purposes, we will not seek to conduct or cause the in-use testing of
engines we know have been exposed to high sulfur fuels. We will likely
screen any engines used in our testing program to see if they have been
operated in the exempt area. We believe we can readily obtain
sufficient samples of engines without testing engines from exempt
areas. Also, in any recall that we order, manufacturers have the option
of requesting a public hearing. The use of engines that have seen high
sulfur fuel will increase the likelihood of a recall hearing. We expect
manufacturers to scrutinize any test engines for sulfur usage that were
used to justify an ordered recall. In reviewing the warranty concerns
of the Engine Manufacturers Association, we have determined that our
position regarding warranties, as previously stated and described
above, is consistent with section 207(a) and (b) of the CAA and does
not require any new or amended regulatory language to implement.
Today's action also grants Alaska's request for a permanent
exemption from the dye requirement of 40 CFR 80.29 and 40 CFR 80.446
for the entire state. The costs of complying with the low sulfur (both
the current 500 ppm sulfur and new 15 ppm sulfur) diesel fuel
requirements could be reduced significantly if Alaska were not required
to dye the non-highway fuel. Dye contamination of other fuels,
particularly jet fuel, is a serious potential problem. This is a
serious issue in Alaska since the same transport and storage tanks used
for jet fuel (which is more than half of Alaska's distillate market)
are generally also used for other diesel products, including off-
highway diesel products which are required to be dyed under the current
[[Page 5087]]
national program. This issue is discussed further in the RIA (Chapter
VIII).
b. Why Are We Treating Alaska Uniquely?
Section 211(i)(4) of the Clean Air Act (CAA) provides that the
states of Alaska and Hawaii may seek an exemption from the diesel fuel
sulfur standard (500 ppm as specified in section 211(i)) in the same
manner as provided in section 325 of the CAA. The requested exemption
could be granted if EPA determines that compliance with such
requirement is not feasible or is unreasonable due to unique
geographical, meteorological, or economic factors of the territory, or
other local factors as EPA considers significant.
On February 12, 1993, Alaska submitted a petition under section 325
of the CAA to exempt highway vehicle diesel fuel in Alaska from
paragraphs (1) and (2) of section 211(i) of the CAA, except for the
minimum cetane index requirement.180 The petition requested
that we temporarily exempt highway vehicle diesel fuel in communities
served by the FAHS from meeting the sulfur content (500 ppm) specified
in section 211(i) of the CAA and the dye requirement for non-highway
diesel fuel of 40 CFR 80.29, until October 1, 1996. The petition also
requested a permanent exemption from those requirements for areas of
Alaska not reachable by the FAHS'the remote areas. On March 22, 1994,
(59 FR 13610), we granted the petition based on geographical,
meteorological, air quality, and economic factors unique to Alaska.
---------------------------------------------------------------------------
\180\ Copies of information regarding Alaska's petition for
exemption, subsequent requests by Alaska, public comments received,
and actions by EPA area available in public docket A-96-26.
---------------------------------------------------------------------------
On December 12, 1995, Alaska submitted a petition for a permanent
exemption for all areas of the state served by the FAHS, that is, those
areas covered only by the temporary exemption. On August 19, 1996, we
extended the temporary exemption until October 1, 1998 (61 FR 42812),
to give us time to consider comments to that petition that were
subsequently submitted by stakeholders. On April 28, 1998 (63 FR 23241)
we proposed to grant the petition for permanent exemption. Substantial
public comments and substantive new information were submitted in
response to the proposal. To give us time to consider those comments
and new information, we extended the temporary exemption for another
nine months until July 1, 1999 (September 16, 1998, 63 FR 49459).
During this time period, we started work on a nationwide rule to
consider more stringent diesel fuel requirements, particularly for the
sulfur content (today's action). To coordinate the decision on Alaska's
request for a permanent exemption with the new nationwide rule on
diesel fuel quality, we extended the temporary exemption until January
1, 2004 (June 25, 1999, 64 FR 34126).
As discussed in the previous section, in today's action we are
extending the temporary exemption from the 500 ppm diesel fuel sulfur
standard to the effective date for the new nationwide 15 ppm diesel
fuel sulfur standard in 2006. While it is important to implement in
Alaska the cleaner diesel engines and fuel of today's action, our goal
is to take action on the petition in a way that minimizes costs through
Alaska's transition to the new low sulfur program. The cost of
compliance could be reduced if Alaska refiners were given the
flexibility to meet the low sulfur standard in one step (i.e., going
straight from uncontrolled levels to the 15 ppm sulfur standard),
rather than in two steps. We considered the prior public comments we
received as a result of our previous notices and actions regarding
exemptions from the 500 ppm sulfur standard for highway diesel fuel in
Alaska (see RIA).
Unlike in the rest of the country, diesel fuel consumption for
highway use in Alaska represents only five percent of the State's total
distillate fuel consumption. Aviation and marine applications, power
generation and heating consume most of the distillate, while Alaska's
highway diesel vehicle fleet is relatively small, particularly outside
the FAHS. The state estimates that there are less than 9000 diesel
vehicles in the entire state, with less than 600 of these vehicles in
all of rural Alaska. The state also indicates that new model vehicles
are introduced into the Alaska market at a slower rate than elsewhere,
thus Alaska does not need to transition its highway fuel to low sulfur
as quickly as the rest of the nation.
Most of the fuel consumed in Alaska is produced by refineries
located in Alaska. This is primarily because of the more severe cloud
point specification needed for the extremely low temperatures
experienced in much of Alaska during the winter and the high cost to
import fuel that is produced elsewhere. There are four commercial
refineries in Alaska. Only one of these refineries currently has any
desulfurization capacity, which is relatively small. Consequently,
because these refineries will have to reduce sulfur from uncontrolled
levels to meet the new 15 ppm standard established by today's action,
these refineries could incur substantially higher costs than those in
the rest of the nation. Given the very small highway diesel demand,
however, it is doubtful that more than one or two Alaska refineries
will choose to produce low sulfur highway fuel, and these refiners
could even decide to import it from refineries outside of Alaska.
Further, Alaska's fuel distribution system faces many unique
challenges. Unlike the rest of the country, because of its current
exemption from the 500 ppm sulfur standard and dye requirements, Alaska
does not currently segregate highway diesel fuel from that used for
off-road, marine, heating oil, and other distillate uses. Therefore,
the distribution system costs for segregating a low sulfur grade of
diesel for highway uses will be significant. The existing fuel storage
facilities limit the number of fuel types that can be stored. In
addition to significant obstacles to expanding tankage in Alaska, the
cost of constructing separate storage facilities, and providing
separate tanks for transporting low sulfur diesel fuel (e.g., by barge
or truck), could be significant. Most of Alaska's communities rely on
barge deliveries, and ice formation on the navigable waters during the
winter months restricts fuel delivery to these areas. Construction
costs are 30 percent higher in Alaska than in the lower-48 states, due
to higher costs for freight deliveries, materials, electrical,
mechanical, and labor. There is also a shorter period of time during
which construction can occur, because of seasonal extremes in
temperature and the amount of daily sunlight.
The severe impacts to Alaska's fuel distribution system of
implementing a low sulfur requirement for highway diesel fuel would
likely occur whether we require the current 500 ppm standard or the new
15 ppm standard. The impacts to Alaska's refineries and fuel importers
are greater at 15 ppm than at 500 ppm. It is likely that the refiners
and fuel importers would have a significant incremental impact if we
required Alaska to implement the 500 ppm diesel fuel sulfur standard in
2004 when the current exemption expires, and the 15 ppm diesel fuel
sulfur standard in 2006 when the new national requirement becomes
effective, rather than only once for the 15 ppm diesel fuel sulfur
standard in 2006.
[[Page 5088]]
3. What Provisions Apply in American Samoa, Guam, and the Commonwealth
of Northern Mariana Islands?
a. Today's Action Regarding the Highway Diesel Fuel Standard in the
Territories
As we proposed, today's action excludes American Samoa, Guam and
the Commonwealth of Northern Mariana Islands from the new diesel fuel
sulfur requirement of 15 ppm and the 2007 heavy-duty diesel vehicle and
engine emissions standards, and other requirements associated with
those emission standards. The territories will continue to have access
to 2006 heavy-duty diesel vehicle and engine technologies, at least as
long as manufacturers choose to market those technologies. We will not,
however, allow the emissions control technology in the territories to
backslide from those available in 2006. If, in the future,
manufacturers choose to market only heavy-duty diesel vehicles and
engines with 2007 and later emission control technologies, we believe
the market will determine when and if the territories will make the
investment needed to obtain and distribute the low sulfur diesel fuel
necessary to support these technologies.
This exclusion from emission standards does not apply to the new
heavy-duty gasoline engine and vehicle emission standards, because low
sulfur gasoline that complies with our regulations will be available,
and so concerns about damage to engines and emissions control systems
will not exist. This exclusion from emission standards also does not
apply to light-duty diesel vehicles and trucks because gasoline
vehicles and trucks meeting the emission standards and capable of
fulfilling the same functions will be available. We believe that the
market will determine when and if having access to new light-duty
diesel technologies in the territories, in place of or in addition to
gasoline technologies, is important enough to obtain and distribute the
low sulfur diesel fuel needed to support those technologies.
As we also proposed, we are requiring all heavy-duty diesel motor
vehicles and engines for these territories to be certified and labeled
to the applicable requirements (either to the 2006 model year standards
and associated requirements under the exclusion, or to the standards
and associated requirements applicable for the model year of production
under the nationwide requirements) and warranted, as otherwise required
under the Clean Air Act and EPA regulations. Special recall and
warranty considerations due to the use of excluded high sulfur fuel are
the same as those for Alaska during its exemption and transition
periods (see the discussion in previous section). To protect against
this exclusion being used to circumvent the emission requirements
applicable to the rest of the United States (i.e., continental United
States, Alaska, Hawaii, Puerto Rico and the U.S. Virgin Islands) after
2006 by routing exempted (pre-2007 technology) vehicles and engines
through one of these territories, we are restricting the importation of
vehicles and engines from these territories into the rest of the United
States. After the 2006 model year, diesel vehicles and engines
certified under this exclusion to meet the 2006 model year emission
standards for sale in American Samoa, Guam and the Commonwealth of the
Northern Mariana Islands will not be permitted entry into the rest of
the United States.
b. Why Are We Treating These Territories Uniquely?
Unlike the rest of the nation (except Alaska), these territories
are currently exempt from the 500 ppm sulfur standard for highway
diesel fuel. Section 325 of the CAA provides that upon request of Guam,
American Samoa, the Virgin Islands, or the Commonwealth of the Northern
Mariana Islands, we may exempt any person or source, or class of
persons or sources, in that territory from any requirement of the CAA,
with some specific exceptions. The requested exemption could be granted
if we determine that compliance with such requirement is not feasible
or is unreasonable due to unique geographical, meteorological, or
economic factors of the territory, or other local factors as we
consider significant.
Prior to the effective date of the current highway diesel sulfur
standard of 500 ppm, the territories of American Samoa, Guam and the
Commonwealth of Northern Mariana Islands petitioned us for an exemption
under section 325 of the CAA from the sulfur requirement under section
211(i) of the CAA and associated regulations at 40 CFR 80.29. The
petitions were based on geographical, meteorological, air quality, and
economic factors unique to those territories. We subsequently granted
the petitions.181
---------------------------------------------------------------------------
\181\ See 57 FR 32010, July 20, 1992 for American Samoa; 57 FR
32010, July 30, 1992 for Guam; and 59 FR 26129, May 19, 1994 for
CNMI.
---------------------------------------------------------------------------
These U.S. territories are islands with limited transportation
networks. Combined, these three territories have only approximately
1300 registered diesel vehicles. Diesel fuel consumption in these
vehicles represents just a tiny fraction of the total diesel fuel
volume consumed on these islands; the bulk of diesel fuel is burned in
marine, nonroad, and stationary applications. Consequently highway
diesel vehicles are believed to have a negligible impact on the air
quality in these territories, which, with minor exceptions, is very
good.
All three of these territories lack internal petroleum supplies and
refining capabilities and rely on long distance imports. Given their
remote location from Hawaii and the U.S. mainland, most petroleum
products are imported from East rim nations, particularly Singapore.
Although Australia, the Philippines, and certain other Asian countries
have or will soon require low sulfur diesel fuel, their sulfur limit is
500 ppm, not the new 15 ppm sulfur limit established by today's action
for the United States. Compliance with low sulfur (15 ppm) requirements
for highway fuel would require construction of separate storage and
handling facilities for small quantities of a unique grade of diesel
fuel for highway purposes, or use of low sulfur (15 ppm) diesel fuel
for all purposes to avoid segregation. Either of these alternatives
would require importation of the low sulfur fuel from Hawaii or the
U.S. mainland, and would significantly add to the already high cost of
diesel fuel in these territories, which rely heavily on United States
support for their economies.
G. Refinery Air Permitting
Prior to making diesel desulfurization changes, some refineries may
be required to obtain a preconstruction permit, under the New Source
Review (NSR) program, from the applicable state/local air pollution
control agency.182 We believe that today's program provides
sufficient lead time for refiners to obtain any necessary NSR permits
well in advance of the compliance date. Further, refiners will be able
to stagger their construction of desulfurization projects, since many
[[Page 5089]]
refineries could take advantage of the temporary compliance option for
low sulfur diesel fuel from 2006-2009, as described in Section IV.A.
Although some refiners commented that obtaining air permits would be a
factor in their ability to comply in the 2006 time frame, state/local
agencies commented that they will make the issuance of permits a top
priority, because they strongly support achieving the environmental
objectives of the low sulfur highway diesel program. State/local
agencies further commented that they are committed to working with all
affected parties to expedite the processing and issuance of any
necessary permits.
---------------------------------------------------------------------------
\182\ Hydrotreating diesel fuel involves the use of process
heaters, which have the potential to emit pollutants associated with
combustion, such as NOX, PM, CO and SO2. In
addition, reconfiguring refinery processes to add desulfurization
equipment could increase fugitive VOC emissions. The emissions
increases associated with diesel desulfurization will vary widely
from refinery to refinery, depending on many source-specific
factors, such as crude oil supply, refinery configuration, type of
desulfurization technology, amount of diesel fuel produced, and type
of fuel used to fire the process heaters.
---------------------------------------------------------------------------
For the Tier 2/gasoline sulfur control program promulgated in
December 1999, refiners had expressed concerns that permit delays might
impede their ability to meet compliance dates. Although we believed
that the Tier 2 program provided sufficient lead time for refiners to
obtain permits, we committed to undertake several actions to minimize
the possibility of any delays for refineries obtaining major NSR
permits for gasoline desulfurization projects. These actions include
providing federal guidance on emission control
technologies183 and the appropriate use of motor vehicle
emission reductions (resulting from the use of low sulfur gasoline),
where available, as emission offsets, as well as forming EPA permit
teams to assist states in quickly resolving issues, where needed. These
three items are discussed in more detail in the Tier 2 final rule (see
65 FR 6773, Feb. 10, 2000).
---------------------------------------------------------------------------
\183\ Best Available Control Technology (BACT) and Lowest
Achievable Emission Rate (LAER) technology.
---------------------------------------------------------------------------
Given that today's diesel sulfur program provides more than five
years of lead time, as well as an additional transitional period, we
believe refiners will have ample time to obtain any necessary
preconstruction permits. Nevertheless, we believe it is reasonable to
continue our efforts under the Tier 2 program, as described above, to
help states in facilitating the issuance of permits under the highway
diesel sulfur program. For example, the guidance on BACT and LAER
control technology that is currently under development for the gasoline
sulfur program should have application for diesel desulfurization
projects as well. We will plan to reevaluate this guidance to the
extent that it may need to be revised or updated for application to
highway diesel desulfurization projects. Similarly, we believe the
concept of EPA permit teams for gasoline sulfur projects could readily
be extended to permits related to diesel projects as well. These teams
will track the overall progress of permit issuance and will be
available to assist state/local permitting authorities, refineries and
the public upon request to resolve site-specific permitting questions.
Further, in Tier 2, we announced our plan to issue guidance to help
states determine whether and to what extent they may wish to use
vehicle emissions reductions as offsets for refineries implementing
gasoline desulfurization projects. We are currently in the process of
evaluating public comments received on the draft guidance relating to
the use of Tier 2 reductions as refinery offsets. Whatever resolution
we determine is appropriate for this guidance in the Tier 2 context, we
plan to apply a similar approach for diesel desulfurization projects as
well. Finally, to facilitate the processing of permits, we encourage
refineries to begin discussions with permitting agencies and to submit
permit applications as early as possible.
V. Economic Impact
This Section discusses the projected economic impact and cost
effectiveness of the emission standards and low-sulfur fuel
requirement. Full details of our cost and cost effectiveness analyses
can be found in the RIA.
A. Cost for Diesel Vehicles to Meet Emissions Standards
1. Summary of New System and Operating Costs
The technologies described in Section III represent significant
technological advancements for controlling emissions, but also make
clear that much effort remains to develop and optimize these new
technologies for maximum emission-control effectiveness with minimum
negative impacts on engine performance, durability, and fuel
consumption. On the other hand, it has become clear that manufacturers
have a great potential to advance beyond the current state of
understanding by identifying aspects of the key technologies that
contribute most to hardware or operational costs or other drawbacks and
pursuing improvements, simplifications, or alternatives to limit those
burdens. To reflect this investment in long-term cost savings
potential, the cost analysis includes an estimated $385 million in R&D
outlays for heavy-duty engine designs and $220 million in R&D for
catalysts systems giving a total R&D outlay for improved emission
control of more than $600 million. The cost and technical feasibility
analyses accordingly reflect substantial improvements on the current
state of technology due to these future developments.
Estimated costs are broken into additional hardware costs and life-
cycle operating costs. The incremental hardware costs for new engines
are comprised of variable costs (for hardware and assembly time) and
fixed costs (for R&D, retooling, and certification). Total operating
costs include the estimated incremental cost for low-sulfur diesel
fuel, any expected increases in maintenance cost or fuel consumption
costs along with any decreases in operating cost expected due to low-
sulfur fuel. Cost estimates based on these projected technology
packages represent an expected incremental cost of engines in the 2007
model year. Costs in subsequent years will be reduced by several
factors, as described below. Separate projected costs were derived for
engines used in three service classes of heavy-duty diesel engines. All
costs are presented in 1999 dollars.
The costs of these new technologies for meeting the 2007 model year
standards are itemized in the RIA and summarized in Table V.A-1. For
light heavy-duty vehicles, the cost of an engine is estimated to
increase by $1,990 in the early years of the program reducing to $1,170
in later years and operating costs over a full life-cycle to increase
by approximately $500 in the near term. For medium heavy-duty vehicles
the cost of a new engine is estimated to increase by $2,560 initially
decreasing to $1,410 in later years with life-cycle operating costs
increasing by approximately $900 in the near term. Similarly, for heavy
heavy-duty engines, the vehicle cost in the first year is expected to
increase by $3,230 decreasing to $1,870 in later years. Estimated
additional life-cycle operating costs for heavy heavy-duty engines in
the near term are approximately $3,800. The higher incremental increase
in operating costs for the heavy heavy-duty vehicles is due to the
larger number of miles driven over their lifetime (714,000 miles on
average) and their correspondingly high lifetime fuel usage. Emission
reductions are also proportional to VMT and so are significantly higher
for heavy heavy-duty vehicles.
We also believe there are factors that will cause cost impacts to
decrease over time, making it appropriate to distinguish between near-
term and long term costs. Research in the costs of manufacturing has
consistently shown that as manufacturers gain experience in production,
they are able to apply innovations to simplify machining and
[[Page 5090]]
assembly operations, use lower cost materials, and reduce the number or
complexity of component parts.184 Our analysis, as described
in more detail in the RIA, incorporates the effects of this learning
curve by projecting that the variable costs of producing the low-
emitting engines decreases by 20 percent starting with the third year
of production (2009 model year) and by reducing variable costs again by
20 percent starting with the fifth year of production. Additionally,
since fixed costs are assumed to be recovered over a five-year period,
these costs are not included in the analysis after the first five model
years. Finally, manufacturers are expected to apply ongoing research to
make emission controls more effective and to have lower operating cost
over time. However, because of the uncertainty involved in forecasting
the results of this research, we have conservatively not accounted for
it in this analysis. Table V.A-1 lists the projected costs for each
category of vehicle in the near-and long-term. For the purposes of this
analysis, ``near-term'' costs are those calculated for the 2007 model
year and ``long term'' costs are those calculated for 2012 and later
model years.
---------------------------------------------------------------------------
\184\ See Chapter V of the final Tier 2 Regulatory Impact
Analysis, contained in Air Docket A-97-10.
Table V.A-1.--Projected Incremental System Cost and Life Cycle Operating Cost for Heavy-Duty Diesel Vehicles
[net present values in the year of sale, 1999 dollars]
----------------------------------------------------------------------------------------------------------------
Life-cycle
Vehicle class Model year Hardware operating
cost cost a b
----------------------------------------------------------------------------------------------------------------
Light................................. near term 1,990 509
Heavy-duty............................ long term 1,170 537
Medium................................ near term 2,560 943
Heavy-duty............................ long term 1,410 996
Heavy................................. near term 3,230 3,785
Heavy-duty............................ long term 1,870 3,979
----------------------------------------------------------------------------------------------------------------
a Incremental life-cycle operating costs include the incremental costs to refine and distribute low sulfur
diesel fuel, the service cost of closed crankcase filtration systems, the maintenance cost for PM filters and
the lower maintenance costs realized through the use of low sulfur diesel fuel (see discussion in Section
V.C).
b These costs are for new vehicles only and do not reflect any costs or savings for the existing fleet.
2. New System Costs for NOX and PM Emission Control
Several new technologies are projected for complying with the 2007
model year emission standards. We are projecting that NOX
adsorbers and catalyzed diesel particulate filters will be the most
likely technologies applied by the industry in order to meet the
emissions standards. The fact that manufacturers will have several
years before implementation of the new standards ensures that the
technologies used to comply with the standards will develop
significantly before reaching production. This ongoing development
could lead to reduced costs in three ways. First, we expect research
will lead to enhanced effectiveness for individual technologies,
allowing manufacturers to use simpler packages of emission control
technologies than we would predict given the current state of
development. Similarly, we anticipate that the continuing effort to
improve the emission control technologies will include innovations that
allow lower-cost production. Finally, we believe that manufacturers
will focus research efforts on any drawbacks, such as fuel economy
impacts or maintenance costs, in an effort to minimize or overcome any
potential negative effects.
We anticipate that in order to meet the standards, industry will
introduce a combination of primary technology upgrades for the 2007
model year. Achieving very low NOX emissions will require
continued development of NOX emission control technologies
and improvements in engine management to take advantage of the exhaust
emission control system capabilities. The manufacturers are expected to
take a systems approach to the problem of optimizing the engine and
exhaust emission control system to realize the best overall performance
possible. Since most research to date with exhaust emission control
technologies has focused on retrofit programs, there remains room for
significant improvements by taking such a systems approach. The
NOX adsorber technology in particular is expected to benefit
from re-optimization of the engine management system to better match
the NOX adsorbers performance characteristics. The majority
of the $600 million dollars we have estimated for research is expected
to be spent on developing this synergy between the engine and
NOX exhaust emission control systems. PM control
technologies are expected to be less sensitive to engine operating
conditions as they have already shown good robustness in retrofit
applications with low-sulfur diesel fuel.
The NOX adsorber system that we are anticipating will be
applied in 2007 consists of a catalyst which combines traditional
gasoline three-way conversion technology with a newly developed
NOX storage function, a reductant metering system and a
means to control exhaust air fuel (A/F) ratio. The NOX
adsorber catalyst itself is a relatively new device, but is benefitting
in its development from over 20 years of gasoline three-way catalyst
development. In order for it to function properly, a systems approach
that includes a reductant metering system and control of exhaust A/F
ratio is also necessary. Many of the new air handling and electronic
system technologies developed in order to meet the 2004 heavy-duty
engine standards can be applied to accomplish the NOX
adsorber control functions as well. Some additional hardware for
exhaust NOX or O2 sensing, for exhaust
partitioning and for fuel metering will likely be required. The RIA
also calculates an increase in warranty costs for this additional
hardware. In total the new NOX control technologies required
in order to meet the 2007 emission standards are estimated to increase
light heavy-duty engine costs by $1,000, medium heavy-duty engine costs
by $1,310 and heavy heavy-duty engine costs by $1,650 in the year 2007.
In the year 2012 and
[[Page 5091]]
beyond the incremental costs are expected to decrease to $590 for a
light heavy-duty engine, $690 for a medium heavy-duty engine and to
$930 for a heavy heavy-duty engine.
Catalyzed diesel particulate filters are experiencing widespread
retrofit use in much of Europe as low-sulfur diesel fuel becomes
readily available. These technologies are proving to be robust in their
non-optimized retrofit applications requiring no modification to engine
or vehicle control functions. We therefore anticipate that catalyzed
diesel particulate filters can be integrated with new diesel engines
with only a minimal amount of engine development. We do not anticipate
that additional hardware beyond the diesel particulate filter itself
and an exhaust pressure sensor for OBD will be required in order to
meet the PM standard. However, in order to ensure trap durability under
all possible operating conditions, some engine manufacturers may choose
to provide backup regeneration technologies for their PM filter based
systems. As detailed further in the RIA and the RTC documents, we do
not anticipate that these redundant systems will add to variable costs.
We estimate in 2007 that diesel particulate filter systems will add
$730 to the cost of a light heavy-duty vehicle, $950 to the cost of a
medium heavy-duty vehicle and $1,190 to the cost of a heavy heavy-duty
vehicle. By 2012 these costs are expected to decrease to $425, $530,
and $690 respectively. These cost estimates are comparable to estimates
made by the Manufacturers of Emission Controls Association for these
technologies.185
---------------------------------------------------------------------------
\185\ Letter from Bruce Bertelsen, Manufacturers of Emission
Controls Association (MECA) to William Charmley, US EPA, December
17, 1998. The letter documents a MECA member survey of expected
diesel particulate filter costs. Air Docket A-98-32 Item II-D-09.
---------------------------------------------------------------------------
The hydrocarbon (HC) exhaust standards set in this rulemaking will
be challenging for both diesel and gasoline engine technologies. For
diesel engines utilizing the NOX adsorber based technology
solution to control NOX emissions, HC control due to
imprecise NOX regeneration control may be difficult. One way
to ensure HC compliance will be to apply a separate diesel oxidation
catalyst which can control HC emissions to the limits set here. These
diesel oxidation catalysts are expected to add an additional cost to
the system of $206 for light heavy-duty vehicles, $261 for medium
heavy-duty vehicles, and $338 for heavy heavy-duty vehicles.
We have eliminated the exemption that allowed turbo-charged heavy-
duty diesel engines to vent crankcase gases directly to the
environment, so called open crankcase systems, and have projected that
manufacturers will rely on engineered closed crankcase ventilation
systems which filter oil from the blow-by gases. We estimate that the
initial cost of these systems in 2007 will be $37, $42, and $49 for
light, medium and heavy heavy-duty diesel engines respectively.
Additionally we expect a portion of the oil filtration system to be a
service replacement oil filter which will be replaced on a 30,000 mile
service interval with a service cost of $10, $12, and $15 for light,
medium, and heavy heavy-duty diesel engines respectively. These cost
are summarized with the other cost for emission controls in Table V.A-1
and are included in the aggregate cost reported in Section V.D.
3. Operating Costs Associated With NOX and PM Control
The RIA assumes that a variety of new technologies will be
introduced to enable heavy-duty vehicles to meet the new emissions
standards. Primary among these are advanced emission control
technologies and low-sulfur diesel fuel. The many benefits of low-
sulfur diesel fuel are described in Section III, and the incremental
cost for low-sulfur fuel is described in Section V.C. The new emission
control technologies are themselves not expected to introduce
additional operating costs in the form of increased fuel consumption.
Operating costs are estimated in the RIA over the life of the vehicle
and are expressed as a net present value (NPV) in 1999 dollars for
comparison purposes.
Total operating cost estimates include both the expected increases
in maintenance and fuel costs (both the incremental cost for low-sulfur
fuel and any fuel consumption penalty) due to the emission control
systems application and the predicted decreases in maintenance cost due
to the use of low-sulfur fuel. Our analysis projects some increase in
operating costs due to the incremental cost of low-sulfur diesel fuel
but no net increase in fuel consumption with the application of the new
emission control technologies (see discussion in Section III.G). The
net increase in operating costs are summarized in Table V.A-1. While we
are using these incremental operating cost estimates for our cost
effectiveness calculations, it is almost certain that the manufacturers
will improve existing technologies or introduce new technologies in
order to offset at least some of the increased operating costs.
We estimate that the low-sulfur diesel fuel required in order to
enable these technologies will have an incremental cost of
approximately $0.045/gallon in the near term increasing to $0.050/
gallon in the long term as discussed in Section V.C. The low-sulfur
diesel fuel may also provide additional benefits by reducing the engine
maintenance costs associated with corrosion due to sulfur in the
current diesel fuel. These benefits, which are discussed further in
Section V.C.5 and in the RIA, include extended oil change intervals due
to the slower acidification rate of the engine oil with low-sulfur
diesel fuel. Service intervals for the EGR system are also expected to
increase due to lower-sulfur induced corrosion than will occur with
today's higher-sulfur fuel. This lengthening of service intervals
provides a significant savings to the end user. As described in more
detail in the RIA we anticipate that low-sulfur diesel fuel will
provide additional cost savings to the consumer of $153 for light
heavy-duty vehicles, $249 for medium heavy-duty vehicles and $610
dollars for heavy heavy-duty vehicles.
The operating costs for replacement filters in the closed crankcase
filtration systems expressed as a net present value in the year of sale
are estimated to be $31 for light heavy-duty vehicles, $59 for medium
heavy-duty vehicles and $218 for heavy heavy-duty vehicles for vehicles
sold in 2007.
PM filter based technologies capture all forms of particulate in
the exhaust including inorganic solid particles which can come from the
engine oil or wear products of the engine. These inorganic particles
(often call ash) must be periodically cleaned from the particulate
filter. We have estimated the additional maintenance cost to clean the
PM filter expressed as a net present value in the year of sale of $55
for light heavy-duty vehicles, $56 for medium heavy-duty vehicles and
$208 dollars for heavy heavy-duty vehicles, as detailed in the RIA.
Factoring the cost savings due to low sulfur diesel fuel into the
additional cost for low-sulfur diesel fuel and the service cost of the
closed crankcase ventilation system and the PM filter system yields an
increase in vehicle operating costs expressed as a net present value in
the year of sale of $509 for a light heavy-duty vehicle, $943 for a
medium heavy-duty vehicle and $3,785 for a heavy heavy-duty vehicle.
These life cycle operating costs are also summarized in Table V.A-1.
The net increase in operating cost can also be expressed as an average
annual operating cost for each class of heavy-duty vehicle by dividing
the total undiscounted operating costs by the average vehicle life
assumed to be 9 years for light heavy-duty vehicles, and
[[Page 5092]]
11 years for medium and heavy heavy-duty engines. Expressed as an
approximate annual per vehicle cost, the additional operating cost is
estimated as $80 for a light heavy-duty vehicle, $130 for a medium
heavy-duty vehicle, and $510 for a heavy heavy-duty vehicle.
B. Cost for Gasoline Vehicles to Meet the New Emissions Standards
1. Summary of New System Costs
To perform a cost analysis for the final gasoline standards, we
first determined a package of likely technologies that manufacturers
could use to meet the standards and then determined the costs of those
technologies. In making our estimates, we have relied on our own
technology assessment which included publicly available information
such as that developed by California, confidential information supplied
by individual manufacturers, and the results of our own in-house
testing.
In general, we expect that heavy-duty gasoline vehicles would (like
Tier 2 light duty vehicles) be able to meet these standards through
refinements of current emissions control components and systems rather
than through the widespread use of new technology. More specifically,
we anticipate a combination of technology upgrades such as the
following:
Improvements to the catalyst system design, structure, and
formulation, plus an increase in average catalyst size and loading.
Air and fuel system modifications including changes such
as improved oxygen sensors, and calibration changes including improved
precision fuel control and individual cylinder fuel control.
Exhaust system modifications, possibly including air
gapped components, insulation, leak free exhaust systems, and thin wall
exhaust pipes.
Increased use of fully electronic exhaust gas
recirculation (EGR).
Increased use of secondary air injection.
Use of ignition spark retard on engine start-up to improve
upon cold start emission control.
Use of low permeability materials and minor improvements
to designs, such as the use of low-loss connectors, in evaporative
emission control systems.
We expect that the technologies needed to meet the heavy-duty
gasoline standards will be very similar to those required to meet the
Tier 2 standards for vehicles over 8,500 pounds GVWR. Few heavy-duty
gasoline vehicles currently rely on technologies such as close coupled
catalysts and secondary air injection, but we expect they would to meet
the new standards.
For each group we developed estimates of both variable costs (for
hardware and assembly time) and fixed costs (for R&D, retooling, and
certification). Cost estimates based on the current projected costs for
our estimated technology packages represent an expected incremental
cost of vehicles in the near-term. For the longer term, we have
identified factors that would cause cost impacts to decrease over time.
First, since fixed costs are assumed to be recovered over a five-year
period, these costs disappear from the analysis after the fifth model
year of production. Second, the analysis incorporates the expectation
that manufacturers and suppliers would apply ongoing research and
manufacturing innovation to making emission controls more effective and
less costly over time. Research in the costs of manufacturing has
consistently shown that as manufacturers gain experience in production
and use, they are able to apply innovations to simplify machining and
assembly operations, use lower cost materials, and reduce the number or
complexity of component parts.186 These reductions in
production costs are typically associated with every doubling of
production volume. Our analysis incorporates the effects of this
``learning curve'' by projecting that a portion of the variable costs
of producing the new vehicles decreases by 20 percent starting with the
third year of production. We applied the learning curve reduction only
once since, with existing technologies, there would be less opportunity
for lowering production costs than would be the case with the adoption
of new technology. We did not apply the learning curve reduction to
precious metal costs, nor did we apply it for the evaporative
standards.
---------------------------------------------------------------------------
\186\ See Chapter V of the final Tier 2 Regulatory Impact
Analysis, contained in Air Docket A-97-10.
---------------------------------------------------------------------------
We have prepared our cost estimates for meeting the new heavy-duty
gasoline standards using a baseline of current technologies for heavy-
duty gasoline vehicles and engines. Finally, we have incorporated what
we believe to be a conservatively high level of R&D spending at
$2,500,000 per engine family where no California counterpart exists. We
have included this large R&D effort because calibration and system
optimization is likely to be a critical part of the effort to meet the
standards. However, we believe that the R&D costs may be generous
because the projection probably underestimates the carryover of
knowledge from the development required to meet the light-duty Tier 2
and CARB LEV-II standards.
Table V.B-1 provides our estimates of the per vehicle cost for
heavy-duty gasoline vehicles and engines. The near-term cost estimates
in Table V.B-1 are for the first years that vehicles meeting the
standards are sold, prior to cost reductions due to lower productions
costs and the retirement of fixed costs. The long-term projections take
these cost reductions into account.
Table V.B-1.--Projected Incremental System Cost and Life Cycle Operating
Cost for Heavy-Duty Gasoline Vehicles
[Net Present Values in the year of sale, 1999 dollars]
------------------------------------------------------------------------
Life-cycle
Vehicle class Model year Incremental operating
system cost cost
------------------------------------------------------------------------
Heavy-Duty................... near term...... $198 $0
Gasoline..................... long term...... 167 0
------------------------------------------------------------------------
[[Page 5093]]
2. Operating Costs Associated With Meeting the Heavy-Duty Gasoline
Standard
Low sulfur gasoline is a fundamental enabling technology which will
allow heavy-duty gasoline vehicles to meet the very low emission
standards being finalized today. The low sulfur gasoline required under
the Tier 2 proposal will enable advanced exhaust emission control for
heavy-duty vehicles as well. Today's final rule puts no additional
requirements on gasoline sulfur levels and as such should not increase
gasoline fuel costs. Additionally, the new technologies being employed
in order to meet the new standards are not expected to increase fuel
consumption for heavy-duty gasoline vehicles. In fact, there may be
some small improvement in fuel economy from the application of improved
fuel and air control systems on these engines. Therefore, in the
absence of changes to gasoline specifications and with no decrease in
fuel economy, we do not expect any increase in vehicle operating costs.
C. Cost of Fuel Change
We estimate that the overall net cost associated with producing and
distributing 15 ppm diesel fuel, when those costs are allocated to all
gallons of highway diesel fuel, will be approximately 5.0 cents per
gallon in the long term, or an annual cost of roughly $2.2 billion per
year once the program is fully effective starting June 1, 2010. During
the initial years under temporary compliance option, the overall net
cost is projected to be 4.5 cents per gallon, or an annual cost of
roughly $1.7 billion per year.
This cost consists of a number of components associated with
refining and distributing the new fuel. The majority of the cost is
related to refining. From 2006-2010, refining costs are estimated to be
approximately 3.3 cents per gallon of highway diesel fuel (4.1 cents
per gallon for that portion produced to the 15 ppm standard),
increasing to 4.3 cents per gallon once the program is fully in place.
In annual terms, the 2006-2010 refining costs are expected to be about
$1.4 billion per year, increasing to about $1.8 billion in 2011. These
figures include the cost of producing slightly more volume of diesel
fuel because: (1) Desulfurization decreases the energy density of the
fuel and (2) slightly more highway diesel fuel is expected to be
downgraded to nonroad diesel fuel in the distribution system.
A small cost of 0.2 cents per gallon is associated with an
anticipated increase in the use of additives to maintain fuel
lubricity. Also, distribution costs are projected to increase by 1.0
cents per gallon during the initial years under the temporary
compliance option, including the cost of distributing slightly greater
volumes of fuel. Together, these two cost components only amount to
about $0.5 billion per year beginning in 2006. These costs drop to only
about $0.3 billion in 2011.
As discussed in Sections V.A. and V.C.5, operation with 15 ppm
sulfur diesel fuel is expected to reduce average vehicle maintenance
costs by approximately 1 cent on a per gallon basis. Beginning in 2011,
this reduction in maintenance costs will total roughly $400 million per
year. All of these cost estimates are discussed in more detail below
and in the RIA.
1. Refinery Costs
As explained in Section IV, EPA believes that refiners will meet
the 15 ppm sulfur standard through an extension of the same
hydrotreating technology which is used today to meet the current 500
ppm sulfur standard. Meeting the new standard will generally require
refiners to install additional hydrotreating equipment. Most refiners
are expected to add another hydrotreating reactor and other related
equipment to their existing desulfurization unit. However, we project
that some refiners, roughly 20 percent, will conclude that it is not
economical to add onto their existing unit and will instead build an
entirely new hydrotreater.
Consistent with our analysis for the NPRM, we estimate that a
refinery's diesel fuel will have to average 7 ppm in order to
consistently meet the 15 ppm standard. For the NPRM, we estimated the
cost of producing highway diesel fuel with a 7 ppm average sulfur level
for the average U.S. refinery. We received a number of comments on the
NPRM which indicated that the cost for various refiners would differ
dramatically, as would the cost of treating the various blendstocks
which comprise highway diesel fuel. In response, we extended our
refining cost model to be specific to each refinery in the U.S., based
on a refinery's production volume and estimated composition of its
highway diesel fuel. Using this model, we estimated each refinery's
cost of producing 7 ppm sulfur highway diesel fuel and then aggregated
these results to estimate a national average cost.
This analysis considers the fact that some diesel fuel blendstocks
are more difficult to desulfurize than others. As indicated in some
comments on the NPRM, this could lead refiners to shift their
blendstocks between highway diesel fuel and other distillate products
in order to minimize costs. For example, our analysis found that the
incremental cost of desulfurizing current highway diesel fuel can be
more expensive for some refiners than the cost to other refiners of
desulfurizing nonroad diesel fuel to meet the 15 ppm standard, despite
the fact that the current sulfur level of nonroad diesel fuel is
roughly 2500-3000 ppm.
We evaluated costs under two scenarios: (1) all current producers
of highway diesel fuel continued to do so, and (2) some refiners
increase production of highway diesel fuel and some refiners facing
higher desulfurization costs leave the highway diesel fuel market. Our
cost projections presented below are based on the first scenario. This
is conservative, because in this scenario, some refineries currently
produce relatively low volumes of highway diesel fuel and would face
relatively high costs per gallon to desulfurize this same volume of
fuel.
We project that the average refining cost to meet the 15 ppm cap
standard will be 4.3 cents per gallon, including capital costs
amortized at 7 percent per year before taxes, once the standard is
fully in place in June, 2010. Refining costs will be lower, 4.1 cents
per gallon of 15 ppm fuel (or 3.3 cents per gallon of all highway
diesel fuel), during optional compliance provisions (2006-2010),
because we expect that those refiners facing the lowest cost of meeting
the standard in each PADD will invest to produce the new fuel. We
project that refiners will invest $3.8 billion in new equipment in
order for about 80 percent of highway diesel fuel to meet the 15 ppm
standard in 2006. An additional $1.4 billion will be invested for the
rest of the highway diesel fuel market to meet the new standard in
2010, for a total capital cost of $5.2 billion. The average refinery is
projected to spend about $43 million in capital costs, and $7 million
per year in operating costs.
Table V.C-1 shows the range of average costs per refinery by PADD.
Despite the varying size of refineries and differences in their
available distillate blendstocks, the variations in the average cost
between PADDs in either 2006 or 2010 are small, with the exception of
PADD 4. PADD 4 average costs are 30-40 percent higher than the costs in
the other PADDs.
[[Page 5094]]
Table V.C-1.--Average Refining Costs by PADD (cents per gallon of 15 ppm
fuel)
------------------------------------------------------------------------
2006 2010
------------------------------------------------------------------------
PADD 1........................................ 4.4 4.7
PADD 2........................................ 4.3 4.5
PADD 3........................................ 3.8 3.9
PADD 4........................................ 5.1 5.3
PADD 5........................................ 4.2 4.5
U.S. Average.................................. 4.1 4.3
------------------------------------------------------------------------
A number of other estimates of the cost of the 15 ppm sulfur
standard were submitted as part of the comments. Mathpro used a
notional refinery model to estimate the national average costs of the
proposed standard for EMA. Charles River Associates (CRA), along with
Baker and O'Brien, used the Prism refinery model to estimate the cost
for each refinery in the U.S. for API. Finally, EnSys used the Oak
Ridge National Laboratory PADD 3 refinery model to estimate costs for
DOE. Table V.C-2 summarizes these estimates after adjusting the
projected costs to represent a 7 percent rate of return on investment
before taxes (except for the CRA cost, which could not be adjusted).
Table V.C-2.--Comparison of National Average Refining Cost Estimates
[7 percent rate of return on investment before taxes]
------------------------------------------------------------------------
Average cost
(cents per Capital cost
gallon of 15 ($ billion)
ppm fuel)
------------------------------------------------------------------------
EPA (Full program)...................... 4.4 5.3
Methpro for EMA*........................ 4.2-6.1 3.4-6.1
CRA for API (10% after tax rate of 6.2 --
return)................................
EnSys for DOE (conservative technology)* 5.1-6.0 3.9-6.5
...............................
EnSys for DOE (optimistic technology)* 4.2-4.4 2.7-4.5
...............................
------------------------------------------------------------------------
* Lower end of range assumes 100 percent revamped equipment; upper end
assumes all new equipment.
Costs are only for the Gulf Coast refining region, which have
slightly lower per-gallon costs than the entire U.S., and about half
the capital costs.
The costs estimated by Mathpro are the most similar to those
estimated by EPA. This is primarily because the desulfurization
technology projected to be used were similar in the two studies.
CRA projected the use of similar technology, but estimated that 40
percent of refiners would build new desulfurization units, versus our
estimate of 20 percent. CRA also assumed that technology vendors are
inherently optimistic in their projections and increased their
projected costs by roughly 20 percent. CRA also projected that nonroad
diesel fuel sulfur levels would be capped at 500 ppm. How this affected
the projected cost of producing 15 ppm fuel is not clear. CRA assumed
that this 500 ppm fuel would be produced by blending 8 ppm sulfur
highway diesel fuel and 3000 ppm heating oil. Much of this production
was assumed to occur due to mixing in the distribution system. An
unknown amount of 500 ppm fuel was produced at refineries.
Desulfurization costs are not linear, as shown by CRA's own study.
Thus, any blending of 15 ppm sulfur highway diesel fuel with non-
desulfurized heating oil at refineries was much more costly than simply
hydrotreating nonroad diesel fuel to 500 ppm. It also required refiners
to hydrotreat the most difficult blendstocks at a much higher cost.
Because of these significant differences in both methodology and
assumptions, it is not surprising that CRA's costs would be higher than
those estimated by Mathpro or ourselves.
EnSys's cost estimates require some explanation due to the number
of scenarios they analyzed. EnSys did not estimate how many refiners
would build new desulfurization units and how many would modify their
current hydrotreaters, but simply presented costs if refiners took one
approach or the other. Thus, the lower limits of the ranges shown in
Table V.C-2 assume refiners modify their current hydrotreaters, while
the upper limits assume that refiners would build new units. EnSys also
projected costs for two separate sets of technologies. One set was
considered conservative and relied on technologies that are already in
commercial use. The other was considered to be optimistic and was
similar to that projected to be used by EPA, Mathpro and CRA. EnSys'
costs using the conservative technology are higher than our estimates.
This is due to the fact that this technology involves greater capital
investment and greater consumption of hydrogen. These greater costs are
due to the fact that this technology is not just designed to reduce
sulfur, but to reduce aromatic content, increase cetane levels and
perform some cracking. EnSys' costs using the optimistic technology are
much more similar to those of EPA and Mathpro, considering that EnSys'
range of costs reflects both revamped and new desulfurization units and
that EPA's costs are dominated (80 percent) by revamped units.
Some of the variation in the costs projected by the various studies
involves uncertainty in exactly what degree of hydrotreating will be
necessary to meet the 15 ppm sulfur standard day in and day out with a
variety of distillate feedstocks. As discussed in Section IV above,
there is currently no commercial experience in the U.S. and only a
limited amount of information in the public literature on the costs
associated with reducing the sulfur level in diesel fuel to very low
levels on an ongoing operational basis. Thus, any cost projections
involve a significant amount of uncertainty.
2. Highway Diesel Fuel Supply
While API and many refiners did not question the feasibility of the
15 ppm standard, they did indicate that the cost would be higher than
that projected by EPA. API believes that those refiners facing higher
than average costs may decide to leave the highway diesel fuel market.
They argue this is especially a possibility if they are faced with a
sulfur standard below a 30 ppm average (or 50 ppm cap), which they
believe will require very large investments for high pressure
hydrotreating to maintain current highway diesel production volumes.
API also believes that many refiners may reduce their production of
highway diesel fuel, by switching the feedstocks (i.e., LCO) which are
most difficult to desulfurize to other markets,
[[Page 5095]]
thus avoiding the higher investments associated with high pressure
hydrotreating. If some refiners reduce highway diesel fuel production,
that could present an opportunity for other refiners, who choose to
make the investment, of higher prices for the new 15 ppm sulfur
product.
This view is embodied by a study by Charles River Associates (CRA)
and Baker and O'Brien which was commissioned by API. CRA polled
refiners concerning their plans under a 15 ppm sulfur cap. Using the
results of this survey, as well as other information, CRA projected
refiners' costs of meeting the 15 ppm standard, as well as their likely
production volumes. CRA concluded that U.S. refiners would likely
reduce their highway diesel fuel production by an average of 12
percent, creating significant shortages and price spikes.
CRA's conclusions appear to have been strongly affected by their
assumptions, as well as the refiner survey they conducted. For example,
CRA assumed that the new sulfur standard would cause 10 percent more
highway diesel fuel to be ``lost'' in the distribution system compared
to today (i.e., downgraded to off-highway diesel fuel). We believe
based on the analysis outlined in the RIA that 2.2 percent is a more
accurate estimate, resulting in 9 percent more 15 ppm fuel being
available than CRA estimated. This difference alone accounts for 75
percent of the potential national supply shortfall projected by CRA.
CRA also concluded, with little explanation, that 20 refineries
producing highway diesel fuel today would not produce highway diesel
fuel under the 15 ppm standard and that many more would reduce
production. Given the lack of information provided in the study, it was
not possible to evaluate CRA's criteria in selecting these 20
refineries, nor was it possible to determine how much of the shortfall
was attributable to this conclusion. While CRA evaluated whether
refiners currently producing highway diesel fuel would be likely to
leave the market, they did not assess whether any refineries currently
not producing highway diesel fuel might enter the market. EPA did
conduct such an assessment. We found 2 refineries that produce
essentially no highway diesel fuel today which could meet the new
standard for less than 5 cents per gallon. Production from these
refineries would increase highway diesel fuel production by 9 percent.
We also found based on our assessment that 4 other refineries could
produce highway diesel fuel from their off-highway diesel fuel
blendstocks for less than 5 cents per gallon. Production from these 6
refineries would increase highway diesel fuel production by 7 percent.
Together with a more reasonable estimate of downgrades in the
distribution system, this would more than compensate for any potential
lost production, even as estimated by CRA.
CRA also implicitly assumed that the material it projected could be
removed from the highway diesel market could be sold at a reasonable
price. However, CRA did not analyze the impact of this additional
supply on the prices which could be obtained in these markets, or even
if these alternative markets could physically absorb all of this
material. Much of this material is not diesel fuel, but poor quality
blendstock. It is not clear that such material could be blended into
non-highway diesel fuel and CRA did not analyze this likely problem.
Our analyses, supported by a study by Muse, Stancil and Co., indicate
that any substantial quantities of highway diesel fuel diverted to
other markets will depress prices in those markets
substantially.187 Hydrotreating diesel fuel to meet the 15
ppm standard avoids these depressed prices, reducing the net cost of
meeting the new standard. Since CRA only considered the cost to
desulfurize highway diesel fuel, and ignored the added cost of dumping
this fuel into markets with depressed prices, CRA's conclusions must be
considered to be seriously flawed in this regard.
---------------------------------------------------------------------------
\187\ ``Alternate Markets for Highway Diesel Fuel Components,''
Muse, Stancil & Co., for Southwest Research Institute, for U.S. EPA,
September, 2000.
---------------------------------------------------------------------------
Furthermore, CRA ignored the fact that roughly 15 percent of
today's highway diesel fuel is consumed in engines and furnaces not
requiring this fuel. Any shortage of highway diesel fuel would lead
many of these non-essential users to switch to nonroad diesel fuel or
heating oil. Only limitations in the fuel distribution system would
cause these users to continue to burn highway diesel fuel.
These problems with CRA's analysis, plus the lack of detail
available concerning the specifics of the study, lead us to reject the
study's conclusions that there will be significant supply shortfalls
under a 15 ppm sulfur standard.
Finally, if any potential for highway diesel fuel shortfalls exists
by requiring all fuel to meet 15 ppm sulfur in 2006, as CRA's analysis
suggests, we believe that allowing some continued supply of 500 ppm, as
we are doing under the temporary compliance option and hardship
provisions contained in today's action, addresses this concern. Since
the final rule allows some transition period before the entire highway
diesel pool is required to meet the 15 ppm sulfur standard, some
refiners will not need to change their current operations and will be
able to continue producing 500 ppm fuel during these years. Those
refiners that delay production of low sulfur diesel fuel until the
later years of the program will tend to be the refiners with the
highest cost to comply and, thus, refiners that would otherwise have
the greatest tendency not to invest and thereby impact supply. Refiners
that begin producing low sulfur diesel fuel in the later years of the
program will also be able to take advantage of ongoing improvements in
desulfurization technology. Together, these factors will help avoid or
reduce any potential losses in highway diesel fuel production when the
program requires full compliance with low sulfur diesel fuel.
As mentioned above, EPA agrees that some refiners will face higher
desulfurization costs than others. This is generally the case with any
fuel quality regulation, since the crude oils processed by, as well as
the configurations and product slates of individual refineries vary
dramatically. As mentioned above and summarized in the RIA, we used our
refining cost model to assess the likelihood that refiners would leave
the highway diesel fuel market or reduce their production of highway
diesel fuel. We also assessed the likelihood of other refiners entering
this market. We found that a number of refiners appear to be in a
position to expand their highway diesel fuel production capacity very
economically relative to other refiners facing higher desulfurization
costs. We also found that up to 2 refineries not now producing highway
diesel fuel could easily enter the highway diesel fuel market at very
competitive costs.
Some refiners may have an alternative market for their diesel fuel.
In the extreme, a refiner would likely prefer to only shift his light
cycle oil to other distillate products, like nonroad diesel fuel and
No. 2 heating oil, retaining his other blendstocks in the higher value
highway diesel fuel market. However, in many cases, a refiner cannot
shift light cycle oil directly to a distillate product, because the
resulting non-highway fuel would no longer meet applicable
specifications, such as sulfur or cetane. In most cases, we expect that
the refiner must shift highway diesel fuel to alternative markets in
order to be able to obtain a reasonable price.
As mentioned above, Muse, Stancil, & Co. analyzed the ability of
refiners to
[[Page 5096]]
divert highway diesel fuel or its blendstocks to other distillate
markets. Muse, Stancil found that this ability varied significantly by
PADD. In PADDs II and IV, it would be difficult for refiners to move
any appreciable quantity of highway diesel fuel to other markets. For
example, compared to the value of highway diesel fuel today, the
achievable value for the diverted material would decrease by 14 to 20
cents per gallon if refiners tried to move more than 5 percent of their
highway diesel fuel to other markets. The loss in value was highest in
these two PADDs, because growth in nonroad diesel fuel consumption is
small or negative, the ability to reduce the consumption of highway
diesel fuel by users other than highway vehicles was limited, and
exports are only available through the Gulf or West Coasts with a large
transportation cost of getting the material there.
In PADDs III and V, the loss of value was lower, at 4.5-5 cents per
gallon and was the lowest in PADD I, 2 cents per gallon. This was
primarily because of the ability to export high sulfur diesel fuel
overseas. Generally, these losses in value apply if diesel fuel was
being diverted to other distillate markets. If light cycle oil was
being diverted, the value would drop an additional 3-3.5 cents per
gallon.
At lower levels of diversion (e.g., 5 percent or less), the loss in
value was much less, ranging from 1.6-5 cents per gallon across the
five PADDs. However, the primary reason for this was the reduced use of
highway diesel fuel by users other than highway vehicles, who do not
require this fuel. Muse believed that such conversions were limited,
but real and could represent roughly a third of the current use of
highway diesel fuel in other than highway vehicles. If this occurs,
then demand for highway diesel fuel drops at the same time. Thus, in
this case, the total refining costs associated with the new sulfur
standard will decline because the total amount of fuel; needing to be
desulfurized will decrease.
The only area where refiners could easily divert substantial
amounts of highway diesel fuel is PADD I. PADD I refiners currently
produce a relatively low amount of highway diesel fuel and substantial
amounts of high sulfur diesel fuel/heating oil are imported. Thus,
refiners in PADD I facing relatively high costs of meeting the 15 ppm
standard could shift some or all of their highway diesel fuel to other
markets, reducing imports and not substantially affecting prices in
this market.
In the end, refiners will make their decisions regarding investment
based on their projections of demand of 15 and 500 ppm diesel fuel, the
prices of these fuels and the prices available in alternative markets.
At this time, we do not project that the specifics involved in this
case (technology, cost, alternative markets) are significantly
different from those which have existed in the past. The last time EPA
regulated diesel fuel, the refining industry actually overbuilt
desulfurization capacity for the current 500 ppm standard, as evidenced
by the significant use in the nonroad market of diesel fuel produced to
the current highway diesel sulfur standard of 500 ppm and the
relatively low price of highway diesel fuel relative to nonroad diesel
fuel. Some of this overproduction may have been due to limitations in
the distribution system to distribute both highway and nonroad grades
of diesel fuel. However, the refinery system as a whole was able to
supply both highway diesel vehicles, plus the use of highway diesel
fuel by other users. This was accomplished despite the fact that a
number of small refiners did decide to switch from the highway diesel
fuel market to the nonroad diesel fuel market, presumably for economic
reasons.
3. Cost of Lubricity Additives
As discussed in Section IV, the refinery processes needed to
achieve the sulfur standard have some potential to degrade the natural
lubricity characteristics of the fuel. Consequently, an increase in the
use of lubricity additives for diesel fuel may be anticipated over the
amounts used today. As described in more detail in the Regulatory
Impact Analysis in the Public Docket, we include in our fuel cost
estimate an average cost of 0.2 cents per gallon for lubricity
additives over the entire pool of low sulfur highway diesel fuel (the
same cost estimate as used in the proposal). This estimate is
comparable to an estimate made by Mathpro in a study sponsored by the
Engine Manufacturers Association, and is consistent with the cost
estimate submitted by Cummins in its comments.
Prior to the proposal, we contacted various producers of lubricity
additives to get their estimates of what costs might be incurred for
this increase in the use of lubricity additives. The cost estimates
varied from 0.1 to 0.5 cents per gallon. The cost is likely to be a
strong function of not only the additive type, but also the assumed
treatment rate and the volume of fuel that needs to be treated, both of
which will be, to some extent, a function of the sulfur cap. We
requested comment on our cost estimate, including whether there may be
unique costs for the military to maintain the lubricity of their
distillate fuels. We requested that comments addressing this issue
include a detailed discussion of the volumes of fuel affected, current
lubricity additive use, and the additional measures that might be
needed (and associated costs) to maintain the appropriate level of fuel
lubricity. In response to the proposal, we received few comments on the
cost of lubricity additives, and none on the volumes of fuel affected,
current lubricity additive use, or additional measures that might be
needed to maintain the appropriate level of lubricity. In considering
the comments, we have found no basis in today's action to use a
different average cost estimate to treat low sulfur diesel for
lubricity than that which was used in the proposal (0.2 cents per
gallon). See more discussion in the Response to Comments Document in
the Public Docket.
4. Distribution Costs
We estimate that as a result of today's rule, distribution costs
will increase by 0.5 cents per gallon of highway diesel fuel supplied
when the sulfur requirements are fully implemented beginning in the
year 2010. During the initial years (2006 through May 31, 2010) we
estimate that the increase in distribution costs will be 0.4 cents per
gallon of highway diesel fuel supplied, with an additional 0.7 cents
per gallon equivalent related to capital costs for additional storage
tanks to handle two grades of highway diesel fuel.188
---------------------------------------------------------------------------
\188\ This cost is expressed in terms of the total volume of
highway diesel fuel supplied, including the fuel which meets the 15
ppm sulfur cap and that which meets the 500 ppm sulfur cap.
---------------------------------------------------------------------------
In the proposal, we estimated that distribution costs would
increase by 0.2 cents per gallon if the proposed requirement that the
entire highway diesel fuel pool meet a 15 ppm sulfur cap beginning in
2006 be adopted. This cost was comprised of roughly 0.1 cents per
gallon due to an increase in pipeline interface and testing costs, and
0.1 cents per gallon for distributing the additional volume of highway
diesel fuel needed due to an anticipated decrease in fuel energy
density as a side effect of reducing the sulfur content to the proposed
15 ppm cap. The case evaluated in the NPRM is most similar to that for
the fully implemented sulfur program in this final rule.
We took advantage of additional information contained in the
comments to the NPRM in formulating a more comprehensive estimate of
the
[[Page 5097]]
distribution costs under today's rule. In some cases this involved
adjusting an estimate for a parameter that factored into our
calculation of costs in the NPRM. One important example is that we
increased our estimate of the additional volume of highway diesel
shipped by pipeline that would need to be downgraded to a lower-value
product. This product downgrade is necessitated by mixing that takes
place between products that abut each other while in the pipeline. The
mixture is referred to as interface when it can be blended into another
product and transmix when it must be returned to the refinery for
reprocessing. In other cases, our reevaluation of distribution costs
included the consideration of parameters that did not factor into the
estimation of distribution costs in the proposed rule. For example,
commenters to the NPRM brought to our attention that there would be
additional costs associated with needed changes in the handling
practices for interface volumes which result from shipments of jet fuel
and highway diesel fuel that abut each other in the pipeline.
There are a number of common factors in the estimation of
distribution costs during the initial period and after the sulfur
requirements are fully implemented, such as the increase in interface
volumes for pipeline shipments of highway diesel fuel. However, there
are other factors that are unique to the estimation of costs during the
initial years as well. For example, with two grades of highway diesel
fuel in the distribution system at the same time there are costs
associated with the need for additional storage tanks at some petroleum
terminals and refineries. Our estimation of distribution costs under
these two periods is discussed separately in the following sections.
Where there is a commonality, the issue is discussed under the section
on distribution costs for the fully implemented program.
a. Distribution Costs Under the Fully Implemented Program
Based on the considerations discussed below, we estimate that the
increase in distribution costs under the fully implemented sulfur
program will be 0.5 cents per gallon of highway diesel fuel supplied.
The cost of distributing the additional volume of highway diesel
fuel needed to compensate for the lower energy density of highway
diesel fuel that meets a 15 ppm sulfur cap is estimated at 0.17 cents
per gallon of highway diesel fuel supplied. As in the NPRM, the cost of
producing this additional volume was included in the calculation of
refinery costs (see Section V.C.1.). In the NPRM, we estimated that the
cost of distributing highway diesel fuel was equal to the difference in
price at the refinery rack and the retail price. For today's final
rule, we based our estimate of distribution cost on a PADD by PADD
evaluation of the difference in the price of highway diesel fuel at the
refiner rack versus the retail price. The price differential for each
PADD was weighted by the additional volume of fuel we anticipate will
need to be produced in each PADD to arrive at an estimate of
distributing the additional volume needed for the nation as a whole. We
believe this approach provides a more accurate estimate of costs.
Based on additional information provided in the comments on the
changes in pipeline interface practices that would result from today's
rule, we adjusted our estimate of the increased volume of highway
diesel fuel that would be downgraded to a lower-value product from 1.5
percent to 2.2 percent of highway diesel fuel supplied (see the RIA to
this rule). As in the NPRM, the cost of producing this additional
volume was included in the calculation of refinery costs (see Section
V.C.1.). The cost of downgrading the increased volume of highway diesel
fuel to a lower-value product is based on the difference in the cost of
15 ppm sulfur diesel fuel and the product to which the interface is
downgraded. Under the fully imlemented program, this downgrade would be
made into the nonroad diesel pool. The cost of this increased volume of
downgrade is estimated at approximately 0.14 cents per gallon of
highway diesel supplied.
We identified that there would also be an increase in the economic
impact for the existing volume of interface currently associated with
pipeline shipments of highway diesel fuel. This is because the cost of
downgrading the existing interface volume would be determined by the
difference between the cost of 15 ppm sulfur fuel and nonroad diesel
fuel rather than the difference in cost between current 500 ppm diesel
fuel and nonroad diesel fuel as it is today. We estimate that the
increase in the cost of downgrading the existing highway diesel
interface would be 0.09 cents per gallon of highway diesel fuel
supplied.
We anticipate that there may be minor costs in addition to those
discussed above associated with optimizing the distribution system to
adequately limit sulfur contamination. These costs could result from
various minor changes to distribution practices and or hardware
discovered to be needed by industry while preparing to comply with
today's rule. While it is not possible to specifically identify the
nature of these changes, they could include the occasional replacement
of a leaking valve or improvements in communication practices to
facilitate batch changes in the pipeline system. There may also be some
cost associated with the process that we anticipate the distribution
industry will undertake to evaluate its readiness to comply with the
requirements in today's rule. Such costs might result from testing to
determine the level of contamination introduced through the use of
various distribution hardware or practices. It is not possible to
specifically identify the costs that might be associated with this
optimization process. However, given the limited nature of the changes
that might be needed and that the need for such changes would not be
widespread, we believe that the associated costs would not pose a
substantial burden. We estimate that the miscellaneous costs associated
with optimizing the distribution system to limit sulfur contamination
would be 0.025 cents per gallon of highway diesel fuel supplied (on
average) during the period from when the sulfur program is fully
implemented (2010) through the year 2020. These costs were amortized at
a rate of 7% over the period of 2006 through 2020. The per gallon cost
is somewhat higher during the initial years.
Commenters to the proposed rule stated that it is current practice
for all of the interface generated when highway diesel fuel abuts jet
fuel in the pipeline to be cut into highway diesel fuel. They pointed
out that this practice would no longer be possible when all highway
diesel fuel is required to meet a 15 ppm sulfur cap because of the
relatively high sulfur content of jet fuel (as high as 3000
ppm).189 They stated that the mixture of highway diesel fuel
meeting a 15 ppm sulfur cap and jet fuel would need to be returned from
the terminal to the refinery for reprocessing, at high cost (i.e. would
need to be treated as transmix). While we agree that handling
procedures for this mixture will need to change, we believe that it
will not be necessary to treat it as transmix. We believe that there
will be opportunity for the mixture to be sold from the terminal into
the nonroad diesel pool. This will increase the cost associated with
downgrading this mixture.
[[Page 5098]]
Expressed in terms of the volume of highway diesel fuel supplied, we
estimate this cost at 0.07 cents per gallon. Additional storage tanks
will be needed to handle the mixture at those terminals that currently
do not handle nonroad diesel fuel. The cost of these tanks has been
fully accounted for in the calculation of costs during the initial
years of the program.
---------------------------------------------------------------------------
\189\ During the initial years of the sulfur program, the
current practice used to handle the interface between shipments of
jet fuel and highway diesel fuel can be used for that portion of the
highway diesel fuel that continues to meet a 500 ppm sulfur cap.
---------------------------------------------------------------------------
The additional quality control testing at the terminal level needed
to ensure compliance with the 15 ppm sulfur cap would be the same
during the initial years as after the requirements are fully
implemented. We estimate that the cost of this additional testing would
be as we projected in the proposal, 0.002 cent per gallon of highway
diesel supplied (see the RIA to this rule).
We believe that there will not be a significant increase in the
volume of highway diesel fuel discovered to exceed the sulfur standard
downstream of the refinery as a result of today's rule. We believe this
will be the case both during the initial years and after the sulfur
requirements are fully implemented. We anticipate that distributors
will quickly optimize their practices to avoid sulfur contamination. We
also anticipate that distributors will gain some experience in reducing
sulfur contamination in the distribution system through complying with
the recently finalized Tier 2 low sulfur gasoline requirements (65 FR
6698, February 10, 2000). While outside the scope of this final rule,
it is worth pointing out that potential difficulties in distributing 15
ppm diesel fuel would be lessened if the sulfur content of nonroad
diesel fuel is reduced by a future rulemaking (as discussed in Section
8). We anticipate that the batches of highway diesel fuel that are
discovered to exceed the 15 ppm sulfur cap will be coped with as
follows:
--When possible, by blending highway diesel fuel that is below the 15
ppm cap with the out-of-specification batch to bring the resulting
mixture into compliance. This practice will be more difficult than it
is currently because the amount of fuel needed to blend the out-of-
specification batch into compliance may increase. However, we expect it
to continue to be the method of choice for handling out-of-
specification highway diesel whenever possible.
--By downgrading the batch either to nonroad diesel fuel or to 500 ppm
highway diesel during the initial years.
--By reprocessing the batch to meet the 15 ppm cap, but only in those
infrequent instances where the previous options do not exist.
We do not believe that the cost of handling out-of specification
highway diesel batches will increase significantly as a result of
today's action.
Tank truck, tank wagon, and barge operators may need to more
carefully and consistently observe current industry practices to limit
contamination in some situations. However, these situations are more
the exception than the rule and are of a limited nature. Consequently,
we believe that this can be accomplished at an insignificant cost.
Additional considerations exist for distributors during the initial
years as discussed in the following section.
Please refer to the Response to Comments Document for an evaluation
of the comments received on the increase in fuel distribution costs
associated with today's rule, and to the RIA for a detailed discussion
of the way in which we derived the our cost estimates.
b. Distribution Costs During the Initial Years
The factors that cause distribution costs to differ during the
initial years include:
--Having a lesser volume of 15 ppm diesel fuel in the system reduces
the costs associated with distributing 15 ppm fuel.
--Having an additional grade of highway diesel fuel in the system (500
ppm) creates additional pipeline interface volumes, and additional
product downgrade costs.
--The need for additional equipment to handle an additional grade leads
to additional costs that must be accounted for during the initial
years.
--Having 500 ppm highway diesel fuel in the system allows some
opportunity for the pipeline interface volumes associated with the
shipment of 15 ppm fuel and jet fuel to be downgraded to 500 ppm diesel
fuel rather than nonroad diesel fuel. This will reduce the cost
associated with downgrading the subject interface volumes.
In calculating the distribution costs for the initial years of the
program, we estimated that 60 percent of the 15 ppm highway diesel fuel
shipped by pipeline will be carried in pipelines that choose not to
carry 500 ppm diesel fuel. We estimated that the remaining 40 percent
of 15 ppm highway diesel fuel shipped by pipeline would be carried in
pipelines that carry 500 ppm as well as nonroad diesel fuel. For the
sake of simplicity and to allow a comparison with distribution costs
when the program is fully implemented, the distribution costs during
the initial years as discussed below are expressed in terms of the
total volume of highway diesel fuel supplied. This includes 500 ppm as
well as 15 ppm highway diesel fuel.
For the reasons outlined above, the following costs, which are also
present under the fully implemented sulfur program, were adjusted to
reflect the unique conditions during the initial years. During the
initial years, the cost of distributing the additional volume of
highway diesel fuel needed to compensate for lower energy density of 15
ppm sulfur fuel is estimated at 0.14 cents per gallon of highway diesel
fuel supplied. The cost of the increased volume of highway diesel fuel
that must be downgraded to a lower-value product is estimated at 0.1
cents per gallon of highway diesel supplied. We estimate that during
the initial years of the program the increase in the cost of
downgrading the existing highway diesel interface would be 0.08 cents
per gallon of highway diesel fuel supplied. During the initial years,
the cost of downgrading the interface between pipeline shipments of jet
fuel and highway diesel fuel is estimated to increase by 0.03 cents per
gallon of highway diesel fuel supplied. The cost of the additional
tanks required at terminals to handle this interface is estimated at
0.009 cents per gallon of highway diesel fuel supplied. This tank cost
was amortized over the period of the four-year transition period. We
estimate that the miscellaneous costs associated with optimizing the
distribution system to limit sulfur contamination would be 0.027 cents
per gallon of highway diesel fuel supplied (on average) during the
initial period (2006--2010).
As noted in the previous section, the additional quality control
testing at the terminal level needed to ensure compliance with the 15
ppm sulfur cap would be the same during the initial years and after the
requirements are fully implemented. We estimate that the cost of this
additional testing would be as we projected in the proposal, 0.002 cent
per gallon of highway diesel supplied.
The cost during the initial years of downgrading the additional
interface volumes associated with having two grades of highway diesel
fuel in part of the pipeline system is estimated at 0.004 cents per
gallon of highway diesel full supplied
The most substantial costs associated with the provisions during
the initial years of the program are due to the need to handle an
additional grade of highway diesel fuel in the distribution
[[Page 5099]]
system. Under the final program, the production of 500 ppm sulfur fuel
will be much less than that of 15 ppm fuel. At the same time, most of
the diesel vehicle fleet can burn 500 ppm fuel during the initial
period. Because of its greater volume and the need to distribute it
everywhere in the country, we expect that essentially all pipelines and
terminals will handle 15 ppm fuel. In contrast, distribution of 500 ppm
fuel will concentrate on those areas nearest the refineries producing
that fuel, plus a few major pipelines serving major refining areas.
Regarding distribution to the final user, we expect that nearly all
truck stops in areas where 500 ppm fuel is available will invest in
piping and tankage to handle a second fuel. Because of the significant
expense involved in adding a second tank, in these areas, we expect
service stations will only carry one fuel or the other, as market
demands dictate. Likewise, we expect that centrally fueled fleets and
card locks will only handle 15 ppm fuel. Under this scenario, sales of
500 ppm fuel are limited to only those vehicles which refuel at truck
stops and service stations. This is somewhat conservative since some
centrally fueled fleets may have the flexibility to inexpensively
handle two fuels. Likewise, some card locks in a given area may be able
to carry 15 ppm fuel and others 500 ppm fuel and still serve their
clients at little extra cost. Still, given the above assumptions, we
project that the 500 ppm fuel will have to be distributed to areas
representing about 50 percent of the national diesel fuel demand. Also,
as the fleet turns over to 2007 and later vehicles during the initial
years, the amount of 500 ppm fuel produced will gradually decrease from
just over 20 percent in 2007 to about 16 percent in 2010.
The tankage cost at refineries, terminals, pipelines and bulk
plants handling both fuels is estimated to be $0.81 billion. The cost
for truck stops to handle two fuels is roughly $0.24 billion, for a
total cost of $1.05 billion. Amortized over all of the highway diesel
fuel supplied during the initial four-years (15 ppm and 500 ppm) at 7
percent per annum, the cost per gallon is 0.7 cents.
5. Benefits of Low-Sulfur Diesel Fuel for the Existing Diesel Fleet
We estimate that the low-sulfur diesel fuel will provide additional
benefits to the existing heavy-duty vehicle fleet as soon as the fuel
is introduced. We believe these benefits will offer significant cost
savings to the vehicle owner without the need for purchasing any new
technologies. The RIA has catalogued a variety of benefits from the
low-sulfur diesel fuel. These benefits are summarized in Table V.C-3.
Table V.C-3.--Components Potentially Affected by Lower Sulfur Levels in
Diesel Fuel
------------------------------------------------------------------------
Effect of lower Potential impact on
Affected components sulfur engine system
------------------------------------------------------------------------
Piston Rings................ Reduce corrosion Extended engine life
wear. and less frequent
rebuilds.
Cylinder Liners............. Reduce corrosion Extended engine life
wear. and less frequent
rebuilds.
Oil Quality................. Reduce deposits and Reduce wear on
less need for piston ring and
alkaline additives. cylinder liner and
less frequent oil
changes.
Exhaust System (tailpipe)... Reduces corrosion Less frequent part
wear. replacement.
EGR......................... Reduces corrosion Less frequent part
wear. replacement.
------------------------------------------------------------------------
The actual value of these benefits over the life of the vehicle
will depend upon the length of time that the vehicle operates on low-
sulfur diesel fuel and the degree to which vehicle operators change
engine maintenance patterns to take advantage of these benefits. For a
vehicle near the end of its life in 2007 the benefits will be quite
small. However for vehicles produced in the years immediately preceding
the introduction of low-sulfur fuel the savings will be substantial.
The RIA estimates that a heavy heavy-duty vehicle introduced into the
fleet in 2006 will realize savings of $610 over its life. This savings
could alternatively be expressed in terms of fuel costs as
approximately 1 cent per gallon as discussed in the RIA. These savings
will occur without additional new cost to the vehicle owner beyond the
incremental cost of the low-sulfur diesel fuel, although these savings
will require changes to existing maintenance schedules. Such changes
seem likely given the magnitude of the savings and the nature of the
regulated industry.
D. Aggregate Costs
Using current data for the size and characteristics of the heavy-
duty vehicle fleet and making projections for the future, the diesel
per-engine, gasoline per-vehicle, and per-gallon fuel costs described
above can be used to estimate the total cost to the nation for the
emission standards in any year. Figure V.D-1 portrays the results of
these projections.190 All capital costs have been amortized.
---------------------------------------------------------------------------
\190\ Figure V.E-1 is based on the amortized engine, vehicle and
fuel costs as described in the RIA. Actual capital investments,
particularly important for fuels, would occur prior to and during
the initial years of the program.
---------------------------------------------------------------------------
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