Control of Emissions of Air Pollution From Nonroad Diesel Engines and Fuel [pp. 39007-39056]

[Federal Register: June 29, 2004 (Volume 69, Number 124)]
[Rules and Regulations]
[Page 39007-39056]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29jn04-22]

[[pp. 39007-39056]]
Control of Emissions of Air Pollution From Nonroad Diesel Engines
and Fuel

[[Continued from page 39006]]

[[Page 39007]]

manufacturer may include equipment produced by other manufacturers
under license to them for which they had primary design responsibility
(see section 1039.625(a) of the regulations). This should cover the
type of situation described by the commenters while preventing an
import-only entity from claiming it is an equipment manufacturer and
thereby gaining access to the allowances.
a. Percent-of-Production Allowance
Under the percent-of-production allowance adopted today, each
equipment manufacturer will be allowed to install engines not certified
to the Tier 4 emission standards in a limited percentage of machines
produced for the U.S. market. Equipment manufacturers will need to
provide written assurance to the engine manufacturer that such engines
are being procured for the purpose of the transition provisions for
equipment manufacturers. These engines will instead have to be
certified to the standards that would apply in the absence of the Tier
4 standards (see Table III.B-1 for the applicable standards). As
proposed, this percentage will apply separately to each of the Tier 4
power categories (engines below 25 horsepower, engines between 25 and
75 horsepower, engines between 75 and 175 horsepower, engines between
175 and 750 horsepower, and engines above 750 horsepower) and is
expressed as a cumulative percentage of 80 percent over the seven years
beginning when the Tier 4 standards apply in a category (see Table
III.B-1 for the applicable seven-year periods). No exemptions will be
allowed after the seventh year. For example, an equipment manufacturer
could install engines certified to the Tier 3 standards in 40 percent
of its entire 2011 production of nonroad equipment that use engines
rated between 175 and 750 horsepower, 30 percent of its entire 2012
production in this horsepower category, and 10 percent of its entire
2013 production in this horsepower category. (During the transitional
period for the Tier 4 standards, the fifty percent of engines that are
allowed to certify to the previous tier NO_X standard but
meet the Tier 4 PM standard are considered Tier 4-compliant engines for
the purpose of the equipment manufacturer transition provisions.) If
the same manufacturer produces equipment using engines rated above 750
horsepower, a separate cumulative percentage allowance of 80 percent
will apply to those machines during the seven years beginning in 2011
or 2015. This percent-of-production allowance is almost identical to
the percent-of-production allowance adopted in the October 1998 final
rule (63 FR 56967, October 23, 2003), the difference being, as
explained earlier, that there are fewer power categories (and
consequent increased flexibility in spreading the flexibility among
engine families) associated with the Tier 4 standards.
The 80 percent exemption allowance, were it to be used to its
maximum extent by all equipment manufacturers, will bring about the
introduction of cleaner engines several months later than would have
occurred if the new standards were to be implemented on their effective
dates. However, the equipment manufacturer flexibility program has been
integrated with the standard-setting process from the initial
development of this rule, and as such we believe it is a key factor in
assuring that there is sufficient lead time to initiate the Tier 4
standards according to the final implementation schedule.\65\
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\65\ As explained at proposal, for emissions modeling purposes,
we have assumed that manufacturers take full advantage of the
allowances under the existing transition program for equipment
manufacturers (adopted in the October 1998 rule; see 63 FR 56967
(October 23, 2003) in establishing the baseline emissions inventory.
In modeling the impact of the Tier 4 standards, because the
standards will not take effect for many years and it is not possible
to accurately forecast use of the transition program for equipment
manufacturers, so to assess costs in a conservative manner, we have
assumed that all engines will meet the Tier 4 standards in the
timeframe required by the standards without use of the Tier 4
transition provisions. As discussed in section VI.C, this is
consistent with our cost analysis, which assumes no use of the
transition program for equipment manufacturers.
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As proposed, machines that use engines built before the effective
date of the Tier 4 standards do not have to be included in an equipment
manufacturer's percent of production calculations under this allowance.
Machines that use engines certified to the previous tier of standards
under our Small Business provisions (as described in section III.C of
this preamble ) do not have to be included in an equipment
manufacturer's percent of production calculations under this allowance.
All engines certified to the Tier 4 standards, including those engines
that produce emissions at higher levels than the standards, but for
which an engine manufacturer uses ABT credits to demonstrate
compliance, will count as Tier 4 complying engines and do not have to
be included in an equipment manufacturer's percent of production
calculations. Engines that meet the Tier 4 PM standards but are allowed
to meet the Tier 3 NMHC+NO_X standards during the phase-in
period also count as Tier 4 complying engines and do not have to be
included in an equipment manufacturer's percent of production calculations.
The choice of a cumulative percent allowance of 80 percent is based
on our best estimate of the degree of reasonable lead time needed by
equipment manufacturers. We believe the 80 percent allowance responds
to the need for flexibility identified by equipment manufacturers,
while ensuring a significant level of emission reductions in the early
years of the program. (As noted in the following section III.B.2.b, we
are adopting a technical hardship provision that allows an equipment
manufacturer to request additional relief under the percent of
production allowance under certain conditions and with EPA approval.)
b. Technical Hardship Flexibility
Ingersoll-Rand commented that the 80% percent of production
allowance level is not sufficient for Tier 4 given the stringency of
the standard and the difficulty engine manufacturers will have
complying with the standards. In further discussions with Ingersoll-
Rand on this issue, they suggested that a percent of production
allowance level of 150% for totally non-integrated equipment
manufacturers (i.e., equipment manufacturers producing no diesel
engines) was appropriate for Tier 4 power categories above 25
horsepower. A fully integrated manufacturer would still receive the 80%
level and partially-integrated companies would receive somewhere
between 80% and 150% depending on the share of self-produced engines in
each specific power category. The basis for this comment is their
belief that non-integrated manufacturers are at a disadvantage to
integrated manufacturers (manufacturers making both the engine and
equipment) when it comes to planning for new Tier 4 engine designs.
Although we do not accept the premise that equipment manufacturer
lead time must be drastically expanded across-the-board for the Tier 4
program, we do agree, as explained earlier, that there may be
situations where additional lead time, in the form of increased
equipment manufacturer transition flexibilities, can be justified.
Therefore, we have added an additional flexibility (which has no direct
analogue in the Tier 2/3 rule) to this rule in order to provide
additional needed lead time in appropriate, individualized
circumstances based on a showing of extreme technical or engineering
hardship. Ingersoll-Rand has agreed, by letter to EPA, that this
provision satisfies all of its concerns regarding

[[Page 39008]]

adequacy of lead time for meeting Tier 4 standards.
This additional flexibility would be available for the three Tier 4
power categories between 25 and 750 horsepower. As noted earlier,
Ingersoll-Rand did not believe additional flexibility was needed for
engines below 25 horsepower. We agree because the Tier 4 standards for
engines below 25 horsepower are not based on the use of advanced
aftertreatment. We also are not including this new provision for
engines above 750 horsepower because nearly all of the equipment
manufacturers utilizing engines above 750 horsepower make small volumes
of equipment. The small-volume allowance (described in the following
section) allows a manufacturer to exempt a specific number of engines
over a seven-year period, which in most cases will be greater than the
increased percentage potentially available under this new provision.
This new provision, found in new Sec. 1039.625(m), is a case-by-
case exemption granted by EPA to an equipment manufacturer. The
equipment manufacturer would have the burden of demonstrating existence
of extreme technical or engineering hardship conditions that are
outside its control. It must also demonstrate that it has exercised
reasonable due diligence to avoid the situation. EPA would treat each
request for technical hardship separately, with no guarantee that it
would grant the exemption. If EPA grants the exemption, the equipment
manufacturer could receive up to an additional 70 percent under the
percent of production allowance for each of the three power categories
noted above (meaning that there is a potential total 150 percent under
the percent of production allowance available, the initial 80 percent
available without application, and an additional potential increment of
up to 70 percent available on a case-by-case basis).
The exemption could only be granted upon written application to EPA
setting forth essentially why the normally successful elements of
engine maker/equipment manufacturer design cycle have not provided
adequate lead time for a particular equipment model. The application
would therefore have to address, with documentation: The engineering or
technical problems that have proved unsolvable within the lead time
provided, the normal design cycle between the engine maker and
equipment manufacturer and why that cycle has not worked in this
instance, all information (such as written specifications, performance
data, prototype engines) the equipment manufacturer has received from
the engine supplier, and a comparison of the design process for the
equipment model for which the exemption is requested with the design
process for other models for which no exemption is needed. The
equipment manufacturer also would have to make and describe all efforts
to find other compliant engines for the model. EPA will then evaluate
and determine whether or not to grant each such request, and what
additional increment under the percent of production allowance (above
the 80 percent normally allowed) is justified (not to exceed an
additional 70 percent as noted above). As part of our evaluation of
requests based on technical hardship, we may contact the engine
supplier(s) listed by the equipment manufacturer to check on the
accuracy of the engine-related information supplied by the equipment
manufacturer. This extension of lead time is premised on the existence
of extreme technical or engineering problems, in contrast to the
economic hardship provision described in section III.B.2.f below, where
consideration of economic impact is critical.
EPA would not grant an application for technical hardship exemption
unless the equipment manufacturer demonstrates that the full 80 percent
allowed under the percent of production allowance is reasonably
expected to be used up in the first two years of the seven-year
flexibility period. The reason is obvious. If that allowance would not
be fully utilized, then no further extension of lead time can be
justified. Furthermore, any technical hardship allowance would have to
be used up within two years after the Tier 4 percent of production
allowances start for any power category. This is because, although we
believe that circumstances of extreme technical or engineering hardship
may arise, we cannot see that these circumstances could not be solved
within the first two years of the transition. Indeed, Ingersoll-Rand
itself clearly indicated that this is a temporary burden which exists
during initial model transition and indicated that only 18 months
(rather than two years) could be needed from receipt of the certified
engine.
This flexibility will be available to all equipment manufacturers,
but may only be requested for equipment in which the equipment
manufacturer is different than the engine manufacturer. We believe that
integrated manufacturers who produce both the equipment and the engine
used in the piece of equipment could have an advantage in the equipment
redesign process (compared to an equipment manufacturer, whether
integrated or not, that uses engines from a different manufacturer)
that makes additional relief under the percent of production allowance
unnecessary. In addition, integrated equipment manufacturers have other
programs available to them (that non-integrated manufacturers do not
have) such as the engine averaging, banking and trading program, which
can provide lead time flexibility during the transition years. Most
basically, integrated manufacturers should be able to design
concurrently in all circumstances, so that extreme technical or
engineering hardships should not arise.
c. Small-Volume Allowance
The percent-of-production approach described above may provide
little benefit to businesses focused on a small number of equipment
models, and hence there could be situations where there is insufficient
lead time for such models. Therefore, with today's action, we are
adopting a small-volume allowance that will allow any equipment
manufacturer to exceed the percent-of-production allowances described
above during the same seven-year period, provided the manufacturer
limits the number of exempted engines to 700 total over the seven
years, and to 200 in any one year. The limit of 700 exempted engines
(and no more than 200 engines per year) applies separately to each of
the Tier 4 power categories (engines below 25 horsepower, engines
between 25 and 75 horsepower, engines between 75 and 175 horsepower,
engines between 175 and 750 horsepower, and engines above 750
horsepower). In addition, manufacturers making use of this provision
must limit exempted engines to a single engine family in each Tier 4
power category.
We are also adopting an alternative small-volume allowance, which
equipment manufacturers have the option of utilizing. In discussions
regarding the current small-volume allowance, some manufacturers
expressed the desire to be able to exempt engines from more than one
engine family, but still fall under the number of exempted engine
limit. For that reason, we solicited comment on a small-volume
allowance program that would allow manufacturers to exempt engines in
more than one family, but have lower numerical limits. Under this
alternative, manufacturers using the small-volume allowance could
exempt 525 machines over seven years (with a maximum of 150 in any
given year) for each of the three power categories below 175
horsepower, and 350 machines over seven years (with a maximum of 100 in

[[Page 39009]]

any given year) for the two power categories above 175 horsepower.
Concurrent with the revised caps of 525 or 350, depending on power
category, manufacturers could exempt engines from more than one engine
family under the small-volume allowance program. Based on sales
information for small businesses, we estimated that the alternative
small-volume allowance program to include lower numbers of eligible
engines and allow manufacturers to exempt more than one engine family
would keep the total number of engines eligible for the allowance at
roughly the same overall level as the 700-unit program.\66\ We also
requested comment on allowing equipment manufacturers to choose between
the two small-volume allowance programs described above (68 FR 28474-
28475, May 23, 2003).
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\66\ ``Analysis of Small Volume Equipment Manufacturer
Flexibilities,'' memo from Phil Carlson (EPA) to Docket A-2001-28.
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Both engine and equipment manufacturers supported dropping the one
engine family restriction from the 700 unit small-volume allowance. In
addition, they commented that if the one engine family restriction was
not dropped from the 700 unit option, they supported the option of
allowing equipment manufacturers to choose between the two small-volume
allowance options. With today's action, we are revising the proposed
small-volume allowance to allow equipment manufacturers to choose
between the 700 unit over seven years option, with exempted engines
limited to one engine family, or the proposed alternative which would
allow equipment manufacturers to exempt fewer engines over seven years
(525 or 350 units, depending on the power category), but with no
restriction on the number of engine families that could be included in
the exempted engine count. Based on our analysis of small businesses
noted above, we expect the number of engines that could be exempted
under either option is roughly the same. Giving equipment manufacturers
the ability to choose between the two options should not significantly
impact the number of engines likely to be exempted under the small-
volume allowance. We have not chosen to drop the one engine family
restriction from the 700-unit small-volume allowance because it would
result in a significant increase in the number of engines eligible to
be exempted to levels which we believe are not needed to provide
adequate lead time for the Tier 4 program.\67\
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\67\ Memorandum, Phil Carlson to Docket A-2001-28, ``Analysis of
Equipment Manufacturer Flexibilities,'' April 15, 2003. Docket A-
2001-28, document no. II-B-24.
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As with the percent-of-production allowance, machines that use
engines built before the effective date of the Tier 4 standards do not
have to be included in an equipment manufacturer's count of engines
under the small-volume allowance. Similarly, machines that use engines
certified to the previous tier of standards under our Small Business
provisions (as described in section III.C of today's action) do not
have to be included in an equipment manufacturer's count of engines
under the small-volume allowance. All engines certified to the Tier 4
standards, including those that produce emissions at higher levels than
the standards but for which an engine manufacturer uses ABT credits to
demonstrate compliance, will be considered to be Tier 4 complying
engines and do not have to be included in an equipment manufacturer's
count of engines under the small-volume allowance. Engines that meet
the Tier 4 PM standards but are allowed to meet the Tier 3
NMHC+NO_X standards during the phase-in period (i.e., phase-
out engines) will also be considered as Tier 4 complying engines and do
not have to be included in an equipment manufacturer's count of engines
under the small-volume allowance. All engines used under the small-
volume allowance must certify to the standards that would be in effect
in the absence of the Tier 4 standards (see Table III.B-1 for the
applicable standards). As noted earlier, equipment manufacturers will
need to provide written assurance to the engine manufacturer when it
purchases engines under the transition provisions for equipment
manufacturers.
The Engine Manufacturers Association commented that the proposed
regulations for the small-volume allowance established a limit on the
total number of engines an equipment manufacturer could use that did
not meet the Tier 4 standards and should be revised to set a limit
based on U.S.-directed production (consistent with the proposed
regulatory language for the percent-of-production allowance). EPA
agrees that the limit under the small-volume allowance should apply to
U.S.-directed production only--as the commenter surmised, this is what
EPA intended--and has revised the final regulations for the small-
volume allowance accordingly.
We are also finalizing a technical hardship provision for small
business equipment manufacturers using 25-50 horsepower engines, as
discussed in III.C.2.b.ii.
d. Early Use of Tier 4 Flexibilities in the Tier 2/3 Timeframe
As proposed, we are also adopting provisions that allow equipment
manufacturers to start using a limited number of the new Tier 4 percent
of production allowances or Tier 4 small-volume allowances once the
seven-year period for the existing Tier 2/Tier 3 program expires (and
so continue using engines meeting Tier 1 or Tier 2 standards). In this
way, a manufacturer can potentially continue exempting the most
difficult applications once the seven-year period of the current Tier
2/3 flexibility provisions is finished. (Under the existing transition
program for equipment manufacturers, any unused Tier 2/3 allowances
expire after the seven-year period.) However, opting to start using
Tier 4 allowances once the seven-year period from the current Tier 2/
Tier 3 program expires will reduce the number of exemptions available
from the Tier 4 standards under either the percent of production
allowance or the small-volume allowance.
With today's action, equipment manufacturers may use up to a total
of 10 percent of their Tier 4 percent of production allowances or up to
100 of their Tier 4 small-volume allowances prior to the effective date
of the Tier 4 standards. (The early use of Tier 4 allowances will be
allowed in each Tier 4 power category.) This amount of equipment
utilizing the early Tier 4 allowances will be subtracted from either
the Tier 4 allowance of 80 percent under the percent of production
allowance or the applicable limit under the small-volume allowance for
the appropriate power category, resulting in fewer allowances once the
Tier 4 standards take effect. For example, if an equipment manufacturer
uses the maximum amount of early Tier 4 percent of production
allowances of 10 percent, then the manufacturer will have a cumulative
total of 70 percent remaining for that power category when the Tier 4
standards take effect (i.e., 80 percent production allowance minus 10
percent).
The California Air Resources Board commented that we should
discount the early use of Tier 4 flexibilities to discourage abuse of
the provisions, by requiring equipment manufacturers to give up more
than one flexibility after Tier 4 begins for every flexibility used
prior to Tier 4. California did not specifically recommend what the
discount level should be. We are not adopting a discount for early use
of the Tier 4 flexibilities. The intent of

[[Page 39010]]

allowing manufacturers to use the Tier 4 flexibilities early was to
allow them to carry over the few remaining equipment models that might
not have been redesigned at the end of the seven-year Tier 2/Tier 3
flexibility period until Tier 4 begins, and not requiring a possible
double redesign in a short period of time. Because we have placed a
relatively low cap (10% under the percent of production allowance or
100 units under the small volume allowance) on the amount an equipment
manufacturer could use early from Tier 4, we do not believe that
manufacturers will be able to abuse the program and therefore should
not have to discount the number of Tier 4 flexibilities used early.
We view this provision on early use of Tier 4 allowances as
providing reasonable lead time for introducing Tier 4 engines, since it
should result in earlier introduction of Tier 4-compliant engines
(assuming that the allowances would otherwise be fully utilized) with
resulting net environmental benefit (notwithstanding longer utilization
of earlier Tier engines, due to the stringency of the Tier 4 standards)
and should do so at net reduction in cost by providing cost savings for
the engines that have used the Tier 4 allowances early. (This is
another reason we see no reason to discount the allowance.)
e. Early Tier 4 Engine Incentive Program for Equipment Manufacturers
Ingersoll-Rand commented that non-integrated equipment
manufacturers who incorporate Tier 4 compliant engines into their
equipment prior to the applicable date for the Tier 4 standards should
be able to earn early compliance credits. These early compliance
credits could allow use of the previous-tier engine (above and beyond
the base percentage granted under the flexibility program) for up to 18
months after the certification date of the engine. Ingersoll-Rand also
commented that such early compliance credits should be able to be
traded across power categories with appropriate weightings applied.
We believe a program that provides an incentive for equipment
manufacturers to use early Tier 4-compliant engines is worthwhile from
both a technology development perspective and an environmental
perspective. As we noted at proposal when we proposed a similar
incentive program for engine makers, early use of Tier 4 compliant
engines will help foster technology development by getting the Tier 4
technologies out in the market early and provide real-world experience
to manufacturers and users (68 FR 28482, May 23, 2003). It will also
lead to additional emission reductions above and beyond those expected
under the existing Tier 2/3 standards in the years prior to Tier 4
taking effect. Moreover, equipment manufacturers (and especially non-
integrated equipment manufacturers) are unlikely to buy early Tier 4
engines without some incentive to do so since these engines are likely
to be more expensive than Tier 2/3 engines. For these reasons, we are
adopting new provisions that will allow any equipment manufacturer to
earn early compliance credits that could be used to increase the number
of equipment flexibilities above and beyond the levels allowed under
the percent of production allowance or small-volume allowance (and for
reasons independent of those allowances: namely, an inducement to make
early use of Tier 4 engines).
The program will be available to all equipment manufacturers
regardless of whether they are integrated or non-integrated. While
Ingersoll-Rand commented that the program should be available to non-
integrated equipment manufacturers only, we believe the program should
provide an incentive for all equipment manufacturers to use early Tier
4 engines (since the benefits accruing from early use of such engines
exist regardless of whether the equipment manufacturer is integrated
with the engine maker).
Before describing this provision further, it is desirable to put it
in context by explaining its relationship to the engine manufacturer
incentive program for early Tier 4 or very low emission engines
(described in section III.M below), as well as to the similar incentive
provisions for engine manufacturers which we proposed (68 FR 28482, May
23, 2003). We are, in essence, redirecting the proposed incentive for
using early Tier 4 compliant engines to equipment manufacturers. Thus,
under today's rule, an engine manufacturer could use the incentive
program (as described in section III.M) only if an equipment
manufacturer uses an early Tier 4 engine but (for whatever reason)
declines to use the early engine flexibility allowance. In such a case,
the engine manufacturer could opt to earn either ``engine offsets''
(which would allow them to make fewer engines certified to the Tier 4
standards once the Tier 4 program takes effect) or ABT credits, but not
both. In the more likely case of an equipment manufacturer using early
Tier 4 engines and using the incentive flexibilities itself, the engine
manufacturer would be eligible to generate ABT credits from such early
Tier 4 compliant engines.
The early Tier 4 engine incentive program for equipment
manufacturers will apply to the four power categories above 25
horsepower where the use of advanced exhaust aftertreatment is expected
under the Tier 4 standards. Because the Tier 4 standards for engines
below 25 horsepower are not expected to result in the use of advanced
aftertreatment technologies, we are not including such engines in the
program.
In order for an engine to be considered an early Tier 4 compliant
engine, it will need to be certified to the final Tier 4 standards for
PM, NO_X, and NMHC (i.e., the 2013 standards for engines
between 25 and 75 horsepower, the 2014 standards for engines between 75
and 175 horsepower, the 2014 standards for engines between 175 and 750
horsepower, and the 2015 standards for engines above 750 horsepower) or
to the final PM and NMHC standards and the alternative NO_X
standards during the phase-in (as described in section II.A.2.c of
today's rule for engines between 75 and 750 horsepower). In order to be
an early Tier 4 compliant engine, these engines would also have to
certify to the Tier 4 CO standards. Because 15 ppm sulfur diesel fuel
will be available on a widespread basis in time for 2007 (due to the
requirements for on-highway heavy-duty engines), we are allowing engine
manufacturers to begin certifying engines to the Tier 4 standards, and
therefore have engines eligible for the early Tier 4 engine incentive
program, beginning with the 2007 model year.
In order to provide assurance that early Tier 4 compliant engines
are placed into equipment earlier than would otherwise happen under the
Tier 4 program, engine manufacturers will be required to certify and
start producing such engines before September 1 of the year prior to
the post-2011 Tier 4 standards taking effect or before September 1,
2010 for engines in the 175 to 750 horsepower category. Similarly,
equipment manufacturers will be required to install such engines in
equipment before January 1 of the year the post-2011 Tier 4 standards
take effect or before January 1, 2011 for engines in the 175 to 750
horsepower category. In addition, in order to be considered an early
Tier 4 compliant engine, such engines would be required to comply with
all of the requirements associated with the final Tier 4 standards such
as NTE requirements, transient testing (where otherwise required for
certification, i.e. for 25-750 horsepower engines), and closed
crankcase requirements. Finally, for engines certified prior to model
year 2011, the engine manufacturer would be

[[Page 39011]]

allowed to demonstrate early compliance with the Tier 4 standards on a
15 ppm sulfur fuel (as allowed under the certification fuel
requirements specified in section III.D of today's rule) provided the
engine manufacturer demonstrates that the equipment in which the
engines are placed will use fuel meeting this low sulfur specification
and includes appropriate information on the engine label and ensures
that ultimate purchasers of equipment using these engines are informed
that ultra low-sulfur diesel fuel is recommended (see section
1039.104(e) of the regulations). Equipment manufacturers using such
pre-2011 engines in their equipment would likewise need to take steps
to ensure that fuel meeting this low sulfur specification is used in
the equipment once operated in use to earn the additional flexibility
allowances.
Equipment manufacturers installing engines complying with the final
Tier 4 standards (as described above) would earn one flexibility
allowance for each early Tier 4 compliant engine used in its equipment.
Equipment manufacturers installing engines between 75 and 750
horsepower that comply with the final Tier 4 PM standard and the
alternative NO_X standard (described in section II.A.2.c)
would earn one-half of a flexibility allowance for each early Tier 4
compliant engine used in its equipment. Table III.B-2 presents the
requirements an engine would need to meet to be considered an early
Tier 4 engine for the purposes of this early Tier 4 engine incentive
program.

Table III.B-2.--Requirements for Engines
[Under the Early Tier 4 Engine Incentive Program]
----------------------------------------------------------------------------------------------------------------
Number of
flexibility
Tier 4 standards the Date before which engines allowances
Power category engines must meet must be installed by the earned for use
equipment manufacturer of early tier
4 engines
----------------------------------------------------------------------------------------------------------------
25 < = hp < 75......................... Model Year 2013............ January 1, 2013\a\......... 1-to-1
(19 < = kW < 56).......................
75 < = hp < 175........................ Model Year 2014............ January 1, 2012............ 1-to-1
(56 < = kW < 130)....................... Model Year 2012\b\......... January 1, 2012............ 0.5-to-1
175 < = hp < = 750...................... Model Year 2014............ January 1, 2011............ 1-to-1
(130 < = kW < = 560).................... Model Year 2011\b\......... January 1, 2011............ 0.5-to-1
Generator Sets........................ Model Year 2015............ January 1, 2015............ 1-to-1
>750 hp...............................
(>560 kW).............................
Other Machines........................ Model Year 2015............ January 1, 2015............ 1-to-1
>750 hp...............................
(>560 kW).............................
----------------------------------------------------------------------------------------------------------------
\a\ The installation date for 50 to 75 horsepower engines purchased from manufacturers choosing to opt out of
the 2008 model year Tier 4 standards and instead comply with the Tier 4 standards beginning in 2012 would be
January 1, 2012.
\b\ To be eligible, engines must meet the 0.01g/bhp-hr PM standard and the alternative NOX standards in section
1039.102 (e) described in section II.A.2.c.

As described above, equipment manufacturers using early Tier 4
compliant engines can earn flexibility allowances that can be used to
effectively increase the number of allowances provided under the
percent of production allowance or the small volume allowance in the
same power category. For example, an equipment manufacturer that uses
500 engines in the 175 to 750 horsepower category that met the model
year 2011 PM standards and alternative NO_X standards would
earn 250 additional flexibility allowances in that power category. That
manufacturer could then exclude 250 engines from its calculations
before demonstrating compliance with the 80 percent limit under the
percent of production allowance (or the applicable limit under the
small volume allowance if the equipment manufacturer is using that
option) once Tier 4 starts in that power category.
Equipment manufacturers would be required to report certain
information regarding the early Tier 4 compliant engines (such as
engine family name, number of engines used prior to Tier 4 in each
power category, the rated power of the engines, and the type of
application the engines above 750 horsepower were used in) when they
submit their first report under the Tier 4 flexibility program. For
engines above 750 horsepower, equipment manufacturers also would be
required to keep records of how many early Tier 4 compliant engines are
used in generator sets, versus how many are used in other machinery.
This is because the additional flexibility allowances earned from the
use of early Tier 4 compliant engines used in generator sets could only
be used for additional flexibility allowances for generator sets.
Likewise, the additional flexibility allowances earned from the use of
early Tier 4 compliant engines used in mobile machinery (labeled `other
machinery' in the table above) applications could only be used for
additional flexibility allowances for other non-generator set applications.
Under the early Tier 4 engine incentive program, we will allow
equipment manufacturers to ``trade'' the additional flexibilities
earned in the two power categories between 75 and 750 horsepower, with
the power rating of the engines factored into the ``trade'' to ensure
equivalent emissions for the engines generating the early allowances
and the engines using the allowances. For example, an equipment
manufacturer that earned 100 additional flexibility allowances under
the early Tier 4 engine incentive program from 100 horsepower engines,
could ``trade'' those flexibilities into the next power category up
(175 to 750 horsepower). The equipment manufacturer would generate
10,000 horsepower-allowances from those early engines (i.e., 100
horsepower times 100 allowances). The equipment manufacturer could then
produce, for this example, an additional 25 engines with a power rating
of 400 horsepower above and beyond the normal limit on allowances (or
any other combination of engines such that the sum of the horsepower-
weighted allowances adds up to the 10,000 horsepower-allowances used in
this

[[Page 39012]]

example). We are not allowing trading for engines in the 25 to 75
horsepower category because the Tier 4 standards for these engines are
based on the application of only PM aftertreatment technology.
Similarly, we are not allowing trading for engines in the above 750
horsepower category because the Tier 4 standards are based on the
application of PM aftertreatment to all engines, but NO_X
aftertreatment for only some engines.
f. Economic Hardship Relief Provision
With today's action, and as proposed, we are providing an
additional Tier 4 transition flexibility for ``economic hardship
relief'' for equipment manufacturers. Under the economic hardship
relief provisions, an equipment manufacturer that does not make its own
engines could obtain limited additional relief by providing evidence
that, despite its best efforts, it cannot meet the implementation
dates, even with the Tier 4 equipment flexibility program provisions
outlined above. Such a situation could occur if an engine supplier
without a major business interest in the equipment manufacturer were to
change or drop an engine model very late in the implementation process.
The purpose of the provision is to redress individual situations of
extreme economic hardship, not merely to perpetuate existing market
share. That is, if situations arise where one equipment maker cannot
produce equipment using Tier 4-compliant engines by the compliance
date, but another can, ordinarily EPA would not adjust the program to
allow use of the non-compliant application absent extreme, compelling
equitability considerations.
Applications for economic hardship relief will have to be made in
writing, and will need to be submitted before the earliest date of
noncompliance. The application will also have to include evidence that
failure to comply is not the fault of the equipment manufacturer (such
as a supply contract broken by the engine supplier), and include
evidence that serious economic hardship to the company will result if
relief is not granted. (As explained in section III.B.2.b above, this
is a significant difference between this economic hardship provision
and the technical hardship flexibility, where consideration of cost is
generally irrelevant.) We expect to work with the applicant to ensure
that all other remedies available under the flexibility provisions are
exhausted before granting additional relief (if appropriate), and place
a limit on the period of relief to no more than one year. Applications
for economic hardship relief generally will only be accepted during the
first year after the effective date of an applicable new emission
standard.
The Agency expects this provision will be rarely used. This
expectation has been supported by our initial experience with the Tier
2 standards in which only one equipment manufacturer has applied under
the existing hardship relief provisions (and the request was
subsequently denied). Requests for economic hardship relief will be
evaluated by EPA on a case-by-case basis, and may require, as a
condition of granting the applications, that the equipment manufacturer
agree (in writing) to some appropriate measure to recover the lost
environmental benefit.
Ingersoll-Rand commented that the provisions regarding eligibility
for hardship relief should be revised so that they do not require a
demonstration of severe economic hardship, noting that such a showing
would invariably preclude large entities (like Ingersoll-Rand) from
utilizing the provision, even though delays were beyond their control.
As described earlier in this section, we have included an additional
flexibility in the Tier 4 rule in order to provide additional needed
lead time in appropriate, individualized circumstances based on a
showing of extreme technical or engineering hardship. We believe the
provisions of the technical hardship address the concerns noted by
Ingersoll-Rand in their comments, and therefore we are not revising the
existing economic hardship relief provisions (which require a
demonstration of severe economic impact) for the Tier 4 final program.
g. Existing Inventory Allowance
The current program for nonroad diesel engines includes a provision
for equipment manufacturers to continue to use engines built prior to
the effective date of new standards, until the older engine inventories
are depleted. It also prohibits stockpiling of previous tier engines.
As proposed, we are extending these provisions for the transition to
the Tier 4 standards adopted today. We are also extending the existing
provision that provides an exception to the applicable compliance
regulations for the sale of replacement engines. In extending this
provision, we are requiring that engines built to replace certified
engines be identical in all material respects to an engine of a
previously certified configuration that is of the same or later model
year as the engine being replaced. The term ``identical in all material
respects'' allows for minor differences that would not reasonably be
expected to affect emissions such as a change in materials or a change
in the company supplying the components of the engine.
3. What Are the Recordkeeping, Notification, Reporting, and Labeling
Requirements Associated With the Equipment Manufacturer Transition
Provisions?
The following section describes the recordkeeping, notification,
reporting, and labeling requirement being adopted today. As proposed,
failure to comply with these requirements will subject the noncomplying
party to penalties as described in 40 CFR 1068.101.
a. Recordkeeping Requirements for Engine and Equipment Manufacturers
With today's action, we are extending the recordkeeping
requirements from the current equipment manufacturer transition
program. Under the Tier 4 transition program, engine manufacturers will
be allowed to continue to build and sell previous tier engines needed
to meet the market demand created by the equipment manufacturer
flexibility program, provided they receive written assurance from the
engine purchasers that such engines are being procured for this
purpose. Engine manufacturers will be required to keep copies of the
written assurance from the engine purchasers for at least five full
years after the final year in which allowances are available for each
power category.
Equipment manufacturers choosing to take advantage of the Tier 4
allowances will be required to: (1) Keep records of the production of
all pieces of equipment excepted under the allowance provisions for at
least five full years after the final year in which allowances are
available for each power category; (2) include in such records the
serial and model numbers and dates of production of equipment and
installed engines, and the rated power of each engine, (3) calculate
annually the number and percentage of equipment made under these
transition provisions to verify compliance that the allowances have not
been exceeded in each power category; and (4) make these records
available to EPA upon request.
b. Notification Requirements for Equipment Manufacturers
We are adopting new notification requirements for equipment
manufacturers with the Tier 4 program. Under the Tier 4 transition
program, equipment manufacturers wishing to participate in the Tier 4
transition provisions will be required to notify EPA prior to their use
of the Tier 4

[[Page 39013]]

transition provisions. Equipment manufacturers will be required to
submit their notification before the first calendar year in which they
intend to use the transition provisions. We believe that prior
notification will greatly enhance our ability to ensure compliance.
Under the newly adopted notification requirements, each equipment
manufacturer will be required to notify EPA in writing and provide the
following information prior to the start of the first year in which the
manufacturer intends to use the flexibilities:
(1) The nonroad equipment manufacturer's name, address, and contact
person's name, phone number;
(2) The allowance program that the nonroad equipment manufacturer
intends to use by power category;
(3) The calendar years in which the nonroad equipment manufacturer
intends to use the exception;
(4) An estimation of the number of engines to be exempted under the
transition provisions by power category;
(5) The name and address of the engine manufacturer from whom the
equipment manufacturer intends to obtain exempted engines; and
(6) Identification of the equipment manufacturer's prior use of
Tier 2/3 transition provisions.
Engine manufacturers supported the new notification requirements
for equipment manufacturers. One equipment company, however, commented
that the notification requirements are of minimal value and should be
deleted. We disagree and continue to believe the new notification
requirements will greatly enhance our ability to ensure compliance with
the flexibility provisions. Given the limited information that must be
provided by equipment manufacturers, we do not expect that the
notifications will require any significant effort to pull the
information together and submit to EPA.
EPA had requested comment on whether the notification provisions
should also apply to the current Tier 2/Tier 3 transition program, and
if so, how these provisions should be phased in for equipment
manufacturers using the current Tier 2/Tier 3 transition provisions. We
did not receive any comments on this issue. However, consistent with
our approach to several other Tier 4 requirements that we were
considering applying to the Tier 2/Tier 3 transition program, we are
not adopting such notification requirements for equipment manufacturers
for the current Tier 2/Tier 3 program.
c. Reporting Requirements for Engine and Equipment Manufacturers
As with the current program, engine manufacturers who participate
in the Tier 4 program will be required to submit information each year
on the number of such engines produced and to whom the engines are
provided. The purpose of these submittals is to help EPA monitor
compliance with the program and prevent abuse of the program.
We are adopting new reporting requirement for equipment
manufacturers participating in the Tier 4 equipment manufacturer
transition provisions. With today's action, equipment manufacturers
participating in the program will be required to submit an annual
written report to EPA that calculates its annual number of exempted
engines under the transition provisions by power category in the
previous year. Equipment manufacturers using the percent of production
allowance, will also have to calculate the percent of production the
exempted engines represented for the appropriate year. Each report will
include a cumulative calculation (both total number and, if
appropriate, the percent of production) for all years the equipment
manufacturer is using the transition provisions for each of the Tier 4
power categories. In order to ease the reporting burden on equipment
manufacturers, EPA intends to work with the manufacturers to develop an
electronic means for submitting information to EPA.
EPA had requested comment on whether these new reporting
requirements for equipment manufacturers should also apply to the
current Tier 2/Tier 3 transition program, and if so, how these
provisions should be phased in for equipment manufacturers using the
current Tier 2/Tier 3 transition provisions. We did not receive any
comments on this issue. However, consistent with our approach to
several other Tier 4 requirements that we were considering applying to
the Tier 2/Tier 3 transition program, we are not adopting reporting
requirements for equipment manufacturers for the current Tier 2/Tier 3
program.
d. Labeling Requirements for Engine and Equipment Manufacturers
Engine manufacturers are currently required to label their
certified engines with a label that contains a variety of information.
Under today's action, as proposed, we are adopting requirements that
engine manufacturers be required to identify on the engine label if the
engine is exempted under the Tier 4 transition program. In addition,
and also as proposed, equipment manufacturers will be required to apply
a label to the engine or piece of equipment that identifies the
equipment as using an engine produced under the Tier 4 transition
program for equipment manufacturers.
Engine manufacturers were opposed to the new labeling requirements.
We believe these new labeling requirements will allow EPA to easily
identify the exempted engines and equipment, verify which equipment
manufacturers are using these exceptions, and more easily monitor
compliance with the transition provisions. Labeling of the equipment
should also help U.S. Customs to quickly identify equipment being
imported using the exemptions for equipment manufacturers.
4. What Are the Requirements Associated With Use of Transition
Provisions for Equipment Produced by Foreign Manufacturers?
Under the current regulations in 40 CFR 89.2, importers are treated
as equipment manufacturers and are each allowed the full allowance
under the transition provisions in 40 CFR 89.102(d). Therefore, under
the current provisions, importers of equipment from a foreign equipment
manufacturer could as a group import more excepted equipment from that
foreign manufacturer than 80% of that manufacturer's production for the
U.S. market (i.e., more than the percent-of-production), or more than
the small-volume allowance. Therefore, the current regulation creates a
potentially significant adverse environmental impact. EPA did not
intend this outcome, and does not believe it is needed to provide
reasonable lead time to foreign equipment manufacturers. EPA thus
proposed to change the current regulations to eliminate this disparity.
As noted earlier, with today's action, only those nonroad equipment
manufacturers that install engines and have primary responsibility for
designing and manufacturing equipment will qualify for the allowances
or other relief provided under the Tier 4 transition provisions.
Foreign equipment manufacturers who comply with the compliance related
provisions discussed below will receive the same allowances and other
transition provisions as domestic manufacturers. Foreign equipment
manufacturers who do not comply with these compliance related
provisions will not receive allowances. Importers that have little
involvement in the manufacturing and assembling of the equipment will not

[[Page 39014]]

receive any allowances or other transition relief directly, but can
import exempt equipment if it is covered by an allowance or transition
provision associated with a foreign equipment manufacturer. These
provisions allow the transition allowances and other provisions to be
used by foreign equipment manufacturers in the same way as domestic
equipment manufacturers, while avoiding the potential for importers
using unnecessary allowances.
Under today's action, a foreign equipment manufacturer includes any
equipment manufacturer that produces equipment outside of the United
States that is eventually sold in the United States. All foreign
nonroad equipment manufacturers wishing to use the transition
provisions will have to comply with all requirements of the regulation
discussed above including: Notification, recordkeeping, reporting and
labeling. Along with the equipment manufacturer's notification
described earlier, a foreign nonroad equipment manufacturer will have
to comply with various compliance related provisions similar to those
adopted in several fuel regulations relating to foreign refiners.\68\
As part of the notification, the foreign nonroad equipment manufacturer
will have to:
---------------------------------------------------------------------------

\68\ See, for example, 40 CFR 80.410 concerning provisions for
foreign refiners with individual gasoline sulfur baselines.

(1) Agree to provide EPA with full, complete and immediate
access to conduct inspections and audits;
(2) Name an agent in the District of Columbia for service of process;
(3) Agree that any enforcement action related to these
provisions will be governed by the Clean Air Act;
(4) Submit to the substantive and procedural laws of the United States;
(5) Agree to additional jurisdictional provisions;
(6) Agree that the foreign nonroad equipment manufacturer will
not seek to detain or to impose civil or criminal remedies against
EPA inspectors or auditors for actions performed within the scope of
EPA employment related to the provisions of this program;
(7) Agree that the foreign nonroad equipment manufacturer
becomes subject to the full operation of the administrative and
judicial enforcement powers and provisions of the United States
without limitation based on sovereign immunity; and
(8) Submit all reports or other documents in the English
language, or include an English language translation.

In addition to these requirements, we are adopting a new provision
for foreign equipment manufacturers that participate in the transition
program to comply with a bond requirement for engines imported into the
U.S. We believe the bond requirements are an important tool to ensure
that foreign equipment manufacturers are subject to the same level of
enforcement as domestic equipment manufacturers. Furthermore, we
believe that a bonding requirement for the foreign equipment
manufacturer is an important enforcement tool in order to ensure that
EPA has the ability to collect any judgements assessed against a
foreign equipment manufacturer for violations of these transition
provisions.
Under the bond program adopted today, a participating foreign
equipment manufacturer will have to obtain annually a bond in the
proper amount that is payable to satisfy United States judicial
judgments that results from administrative or judicial enforcement
actions for conduct in violation of the Clean Air Act. The foreign
equipment manufacturer will have two options for complying with the
bonding requirement. The foreign equipment manufacturer can:

(1) Obtain a bond in the proper amount from a third-party surety
agent that is cited in the U.S. Department of Treasury Circular 570,
``Companies Holding Certificates of Authority as Acceptable Sureties
on Federal Bonds and as Acceptable Reinsuring Companies''; or
(2) Obtain an EPA waiver from the bonding requirement, if the
foreign equipment manufacturer can show that it has assets of an
appropriate value in the United States.

EPA expects the second bond option to address instances where an
equipment manufacturer produces equipment outside the United States
containing flexibility engines, but also has facilities (and thus
significant assets) inside the United States. Under this second option,
such a manufacturer can apply to the EPA for a waiver of the bonding
requirement.
Because EPA's concerns of compliance will relate to the nature and
tier of engines used in the transition equipment, we believe the bond
value should be related to the value of the engine used. Therefore, we
are adopting requirements that the bond be set at a level designed to
represent approximately 10% of the cost of the engine for each piece of
transition equipment produced for import into the United States under
this program. So that manufacturers have certainty regarding the bond
amounts and so that there isn't a need for extensive data submittals
and evaluation between EPA and the manufacturer, the rule specifies the
bond value for each imported engine based on the estimated average cost
for a Tier 4 engine on which the bond would be based. Based on average
engine cost estimates from table 6.2-5 of the final RIA, equipment
using engines exempted under the transition program will require a bond
in the amount shown in table III.B-3.

Table III.B-3.--Bond Value For Engines Imported
[Under the Tier 4 Transition Program]
------------------------------------------------------------------------
Per
engine
Power range bond
value
(dollars)
------------------------------------------------------------------------
0 < hp < 25.................................................. 150
25 < = hp < 75................................................ 300
75 < = hp < 175............................................... 500
175 < = hp < 300.............................................. 1,000
300 < = hp < 600.............................................. 3,000
hp >= 600 hp................................................. 8,000
------------------------------------------------------------------------

Depending on the number of engines/equipment brought into the U.S.
each year, the value of the bond calculated using the above values
could change from year to year. Under the provisions adopted today, an
importer would calculate the estimated bond amount using the values in
table III.B-3 and be required to obtain a bond equal to the highest
bond value estimated over the seven-year flexibility period. Because we
have the authority to bring enforcement actions against a manufacturer
for five years beyond the end of the program, the manufacturer would be
required to maintain the bond for five years beyond the end of the
flexibility period or five years after using up all of its available
allowances, whichever occurs first. Finally, if a foreign equipment
manufacturer's bond is used to satisfy a judgment within the seven-year
flexibility period, the foreign equipment manufacturer will then be
required to increase the bond to cover the amount used within 90 days
of the date the bond is used.
Most comments received on this issue supported the proposed
provisions. However, Ingersoll-Rand commented that EPA should clarify
whether the special requirements for foreign equipment manufacturers
apply to U.S.-based companies that have foreign manufacturing
facilities. Ingersoll-Rand believes that such requirements should not
apply because EPA appears to be concerned about abuse of the program by
foreign companies that export machines into the U.S. With today's
action, all equipment manufacturers who import equipment into the U.S.
will be required to comply with the provisions for foreign equipment
manufacturers, even if they are U.S.-based companies. Because there is
a wide range of actual presence in this country for ``U.S.-based''
companies,

[[Page 39015]]

EPA believes it is important that all companies importing equipment to
the U.S. comply with the requirements for foreign equipment
manufacturers. Neither the notification requirements described earlier
for foreign equipment manufacturers nor the bonding requirements should
cause any burden for companies with significant presence in this
country. We would expect that only those companies with limited
presence or no presence in this country will be impacted to any
measurable degree because of the requirements placed on foreign
equipment manufacturers.
In addition to the foreign equipment manufacturer requirements
discussed above, EPA is also requiring importers of exempted equipment
from a complying foreign equipment manufacturer to comply with certain
provisions. EPA believes these importer provisions are essential to
EPA's ability to monitor compliance with the transition provisions.
Under today's action, each importer will be required to notify EPA
prior to their initial importation of equipment exempted under the Tier
4 transition provisions. Importers will be required to submit their
notification prior to the first calendar year in which they intend to
import exempted equipment from a complying foreign equipment
manufacturer under the transition provisions. The importer's
notification will need to include the following information:

(1) The name and address of importer (and any parent company);
(2) The name and address of the manufacturers of the exempted
equipment and engines the importer expects to import;
(3) Number of exempted equipment the importer expects to import
for each year broken down by equipment manufacturer and power
category; and
(4) The importer's use of the transition provisions in prior
years (number of flexibility engines imported in a particular year,
under what power category, and the names of the equipment and engine
manufacturers).

In addition, EPA is requiring that any importer electing to import
to the United States exempted equipment from a complying foreign
equipment manufacturer will have to submit annual reports to EPA. The
annual report will have to include the number of exempted equipment the
importer actually imported to the United States in the previous
calendar year; and the identification of the equipment manufacturers
and engine manufacturers whose exempted equipment/engines were imported.

C. Engine and Equipment Small Business Provisions (SBREFA)

The Regulatory Flexibility Act (RFA) generally requires an agency
to prepare a regulatory flexibility analysis of any rule subject to
notice and comment rulemaking requirements under the Administrative
Procedure Act or any other statute, unless the agency certifies that
the rule will not have a significant economic impact on a substantial
number of small entities. Small entities include small businesses,
small organizations, and small governmental jurisdictions. As EPA
believed that the ultimate rule could have a significant economic
impact on small businesses, we prepared a regulatory flexibility
analysis as part of this rulemaking. We prepared an Initial Regulatory
Flexibility Analysis (IRFA) pursuant to section 603 of the RFA which is
part of the record for the NPRM, and we prepared a Final Regulatory
Flexibility Analysis (FRFA) to support today's action.
Under section 609(b) of the RFA, a Small Business Advocacy Review
Panel (SBAR Panel or Panel) is required to be convened prior to
publication of both an IRFA and a FRFA. Section 609(b) of the RFA
directs the Panel to, through outreach with small entity
representatives (SERs), report on the comments of the SERs and make
findings under section 603 of the RFA on issues related to identified
elements of an IRFA during the proposal stage of a rulemaking. During
the development of the rulemaking, EPA is to analyze the elements of
the IRFA in developing the FRFA for the final rulemaking (see section
X.C of this preamble for more discussion on the elements of a FRFA).
The purpose of the Panel was to gather information to identify impacts
on small businesses and to develop potential regulatory options to
mitigate these concerns. At the completion of the SBAR Panel process,
the Panel prepared a Final Panel Report. This report includes:
? Background information on the proposed rule being developed;
? Information on the types of small entities that would be
subject to the proposed rule;
? A description of efforts made to obtain the advice and
recommendations of representatives of those small entities; and,
? A summary of the comments that had been received to date
from those representatives.
The Panel report was included in the proposal's rulemaking record
(and hence in the rulemaking record for this final rule), and provided
the Panel and the Agency with an opportunity to identify and explore
potential ways of shaping the rule to minimize the burden of the rule
on small entities while achieving the rule's purposes and being
consistent with Clean Air Act statutory requirements.
EPA approached this process with care and diligence. To identify
representatives of small businesses for this process, we used the
definitions provided by the Small Business Administration (SBA) for
manufacturers of nonroad diesel engines and vehicles. The categories of
small entities in the nonroad diesel sector that will potentially be
affected by this rulemaking are defined in the following table:

------------------------------------------------------------------------
Defined as small
Industry entity by SBA if: Major SIC codes
------------------------------------------------------------------------
Engine manufacturers............ Less than 1,000 Major Group 35
employees.
Equipment manufacturers:
--construction equipment...... Less than 750 Major Group 35
employees.
--industrial truck Less than 750 Major Group 35
manufacturers (i.e., employees.
forklifts).
--all other nonroad equipment Less than 500 Major Group 35
manufacturers. employees.
------------------------------------------------------------------------

One small engine manufacturer and 5 small equipment manufacturers
agreed to serve as Small Entity Representatives (SERs) throughout the
SBAR Panel process for this proposal. These companies represented the
nonroad market well, as the group of SERs consisted of businesses that
manufacture various types of nonroad diesel equipment.
The following are the provisions recommended by the SBAR Panel. As
described in section III.B above, there are other provisions that apply
to all equipment manufacturers; however, the discussion in this section
focuses mainly on small entities.

[[Page 39016]]

1. Nonroad Diesel Small Engine Manufacturers
a. Lead Time Transition Provisions for Small Business Engine Manufacturers
i. Panel Recommendations and Our Proposal
The transition provisions recommended by the SBAR Panel for engines
produced or imported by small entities are listed below. For all of the
provisions, the Panel recommended that small business engine
manufacturers and small importers must have certified engines in model
year 2002 or earlier in order to take advantage of these provisions.
Each manufacturer would be limited to 2,500 units per year as this
number allows for some market growth. The Panel recommended these
stipulations in order to prohibit the misuse of the transition
provisions as a tool to enter the nonroad diesel market or to gain
unfair market position relative to other manufacturers.
Currently, certified nonroad diesel engines produced by small
manufacturers all have a horsepower rating of 80 or less. At proposal,
we considered both a one-step approach, and the two-step approach which
we are finalizing today. Due to the structure of the standards and
their timing, EPA proposed transition provisions for small business
engine manufacturers which encompassed both approaches recommended by
the Panel, with the inclusion of the 2,500 unit limit (as suggested by
the Panel) for each manufacturer. Given the two-step structure of the
final rule, we are only providing those proposed provisions related to
that approach (a complete description of the provisions proposed by the
Panel, and also by specific Panel members, is located in the SBAR Final
Panel Report).
For a two-step approach the Panel recommended that:
? An engine manufacturer should be allowed to skip the first
phase and comply on time with the second; or,
? A manufacturer could delay compliance with each phase of
standards for up to three years.
We proposed the following provisions in the NPRM (based on
available data, we believe that there are no small manufacturers of
nonroad diesel engines above the 75-175 hp category):
With regard to PM--
? Engines under 25 hp and those between 75 and 175 hp have
only one standard so the manufacturer could delay compliance with these
standards for up to three years.
? For engines between 50 and 75 hp, we proposed to delay
compliance for one year if the 2008 interim standards are met, with the
stipulation that small business manufacturers cannot use PM credits to
meet the interim standard. However, if a small manufacturer elects the
optional approach to the standard (elects to skip the interim
standard), no further relief will be provided.
With regard to NO_X--
? There is no change in the level of the NO_X
standard for engines under 25 hp and those between 50 and 75 hp, so we
did not propose any special provisions for these categories.
? For engines in the 25-50 hp and the 75-175 hp categories
we proposed a three year delay in the program consistent with the one-
phase approach recommendation above.
ii. What We Are Finalizing
We are finalizing all of the provisions set out above for
NO_X. For PM, we are finalizing some of the proposed
provisions with certain revisions, as described below. In finalizing
these provisions, we considered not only the recommendations of the
Panel, but also the public comments on the proposed small business
engine manufacturer transition provisions. Extensions of an applicable
standard also apply to all certification requirements associated with
that standards (so that transient and NTE testing would not be required
until expiration of the extension). Based on available data, and
further conversations with manufacturers during the development of this
rulemaking (documented in the administrative record), we have found no
small business manufacturers of nonroad diesel engines above 175 hp.
For engines under 25 hp:
? PM--a manufacturer may elect to delay compliance with the
standard for up to three years.
? NO_X--there is no change in the level of the
existing NO_X standard for engines in this category, so no
special provisions are being provided.
For engines in the 25-50 hp category:
? PM--manufacturers must comply with the interim standards
(the Tier 4 requirements that begin in model year 2008) on time, and
may elect to delay compliance with the 2013 Tier 4 requirements (0.02
g/bhp-hr PM standard) for up to three years. Due to an oversight at
proposal, we did not include transition provisions for this category in
the NPRM, but there is no reason to exclude them when all other small
business engines are eligible for extensions. We therefore are adopting
a three year extension with today's action. As engines in this category
must meet the 2008 standard, we are not conditioning this three year
extension on meeting this standard. (Please note the distinction
between these engines and engines in the 50-75 hp power band, where we
are conditioning a three-year extension on meeting the 2008 standards.
The difference is that engines in the 50-75 hp category have an option
of whether or not to meet those 2008 standards. We consequently have
structured the small business engine extension to encourage a choice to
comply with those standards.)
? NO_X--a manufacturer may elect to delay
compliance with the standard for up to three years.
For engines in the 50-75 hp category:
? As proposed, EPA is adopting special provisions for these
engines, reflecting the special provisions in the rules which give
engine manufacturers the choice of meeting an interim standard for PM
in 2008 and meeting the aftertreatment-based standard in 2013, or
meeting the aftertreatment-based standard in 2012 without meeting an
interim standard. A small business engine manufacturer may delay
compliance with the 2013 Tier 4 requirement of 0.02 g/bhp-hr PM for up
to three years provided that it complies with the interim Tier 4
requirements that begin in model year 2008 on time, without the use of
credits. We proposed an extension of only one year, but this would be
inconsistent with the extension period we are adopting, and which we
proposed, for all of the other power categories. In addition, this
provision for 50-75 hp engines is structured to encourage small
business engine manufacturers to opt for early PM reductions by meeting
the 2008 interim PM standard, so that an extension of three years is
appropriate as an incentive. We are requiring that these engines
achieve the 2008 standard without use of credits to assure that there
be improvements in actual performance by engines certifying to the
standard. We believe that such assurance is a necessary and reasonable
balance for the three year additional lead time for meeting the
aftertreatment-based standard. There were no adverse comments on
conditioning the extension in this manner.
In the alternative, a manufacturer may elect to skip the interim
standard completely. However, manufacturers choosing this option will
receive only one additional year for compliance with the 0.02 g/bhp-hr
standard (i.e. compliance in 2013, rather than 2012). These engines
would already have had eight years of lead time to prepare for the PM
standard without any diversion of resources to meet an interim PM
standard, so that an extension of longer than one year would not be
appropriate,

[[Page 39017]]

within the meaning of section 213(b) of the Act. In addition,
structuring the extension in this way encourages small engine
manufacturers to choose to meet the 2008 interim standard for PM,
furthering the objective of early PM emission reductions.
? NO_X--there is no change in the NO_X
standard for engines in this category, therefore no special provisions
are being provided.
For engines in the 75 to 175 hp category:
? PM--a manufacturer may elect to delay compliance with the
standard for up to three years.
? NO_X--a manufacturer may elect to delay
compliance with the standard for up to three years.
These provisions are also set out below in the following table (in
all instances, these engines must meet the previously applicable
standards as set out in Sec. 1039.104 (c):

------------------------------------------------------------------------
Horsepower category Provision
------------------------------------------------------------------------
< 25 hp.......................... NOX No special provisions are
being provided.
PM Manufacturers may delay
compliance with the standard
for three years.
NOX Manufacturers may delay
compliance with the standard
for three years.
25-50 hp........................ PM Manufacturers must comply with
the interim standards in
2008, and may delay
compliance with the 2013 Tier
4 requirements (0.02 g/bhp-hr
PM standard) for three years.
NOX No special provisions are
being provided.
...... Manufacturers must comply with
the interim Tier 4
requirements in 2008, without
the use of credits, and may
elect to delay compliance
with the 2013 Tier 4
requirements (0.02 g/bhp-hr
PM standard) for three years
50-75 hp........................ PM --OR--
...... Manufacturers may skip the
interim standard completely,
and will receive an
additional year for
compliance with the 0.02 g/
bhp-hr PM Tier 4 standard
(i.e. compliance in 2013,
rather than 2012).
75-175 hp....................... NOX Manufacturers may delay
compliance with the standard
for three years.
PM Manufacturers may delay
compliance with the standard
for three years.
------------------------------------------------------------------------

b. Hardship Provisions for Small Business Engine Manufacturers
i. Panel Recommendations and Our Proposals
The Panel recommended two types of hardship provisions for small
business engine manufacturers. These provisions would allow for relief
in the following cases:
? A catastrophic event, or other extreme unforseen
circumstances, beyond the control of the manufacturer that could not
have been avoided with reasonable discretion (i.e., fire, tornado,
supplier not fulfilling contract, etc.); and
? The event where a manufacturer has taken all reasonable
business, technical, and economic steps to comply but cannot.
The Panel believed that either hardship relief provision would
provide lead time for up to 2 years, and that a manufacturer should
have to demonstrate to EPA's satisfaction that failure to sell the
noncompliant engines would jeopardize the company's solvency. EPA may
also require that the manufacturer make up the lost environmental benefit.
We proposed the Panel recommendations for hardship provisions for
small business engine manufacturers. While perhaps ultimately not
necessary given the phase-in schedule discussed above, we stated that
such provisions provide a useful safety valve in the event of
unforeseen extreme hardship.
ii. What We Are Finalizing
We received two comments on the provisions for small business
engine manufacturers. SBA's Office of Advocacy commented that the rule
would impose significant burdens on a substantial number of small
entities with little corresponding environmental benefit; and further,
that we should exclude smaller engines (those under 75 hp) from further
regulation in order to comply with the Regulatory Flexibility Act and
fulfill the requirement of reducing the burden on small engine classes.
As proposed, we are not adopting standards based on performance of
NO_X aftertreatment technologies for engines under 75 hp. As
described in more detail in section II of this preamble, the Summary
and Analysis of Comment Document, and the RIA, we have found no factual
basis supporting the assertion that standards for PM for engines
between 25 and 75 hp based on use of advanced aftertreatment impose
costs out of relation to environmental benefit, have a disproportionate
impact on small businesses, or are otherwise inappropriate. In fact, it
is our finding that these standards for PM are ``appropriate'' within
the meaning of section 213(a)(4) of the Clean Air Act, and that PM
standards for these engines not based on performance of advanced
aftertreatment would be inappropriate as failing to reflect standards
based on available treatment for these engines (taking into account
costs, noise, safety, and energy factors). We received no adverse
comments from small business engine manufacturers on the proposed
transition provisions for those manufacturers.\69\ Accordingly, we are
finalizing the small business engine manufacturer hardship provisions
that we proposed in the NPRM (as recommended by the Panel). We believe
that these provisions will provide adequate regulatory flexibility for
these manufacturers, while remaining consistent with the requirements
of section 213(a)(4) and 213(b) of the Clean Air Act.
---------------------------------------------------------------------------

\69\ The one comment that we received supported the provisions
proposed for small business engine manufacturers.
---------------------------------------------------------------------------

c. Other Small Business Engine Manufacturer Issues
i. Panel Recommendations and Our Proposals
The Panel also recommended that an ABT program be included as part
of the overall rulemaking program. In addition, the Panel suggested
that EPA take comment on including specific ABT provisions for small
business engine manufacturers. We proposed an ABT program for all
engine manufacturers, with this program retaining the basic structure
of the current nonroad diesel ABT program.
We did not include small business engine manufacturer-specific ABT

[[Page 39018]]

provisions in the proposal. Discussions during the SBAR process
indicated that small volume manufacturers would need extra time to
comply due to cost and personnel constraints, and there is little
reason to believe that small business manufacturer specific ABT
provisions could create an incentive to accelerate compliance.
ii. What We Are Finalizing
As discussed above in section III.B, we are finalizing an ABT
program in today's action similar to that already in place for nonroad
engine manufacturers. We have also made a number of changes to
accommodate implementation of these new emission standards.
2. Small Nonroad Diesel Equipment Manufacturers
a. Transition Provisions for Small Business Equipment Manufacturers
i. Panel Recommendations and Our Proposals
The Panel recommended that we adopt the transition provisions
described below for small business manufacturers and small business
importers of nonroad diesel equipment. These transition provisions are
similar to those in the Tier 2/3 rule (see 40 CFR 89.102). The
recommended transition provisions were as follows:
? Percent-of-Production Allowance: Over a seven model year
period, equipment manufacturers may install engines not certified to
the new emission standards in an amount of equipment equivalent to 80
percent of one year's production. This is to be implemented by power
category with the average determined over the period in which the
flexibility is used.
? Small Volume Allowance: A manufacturer may exceed the 80
percent allowance in seven years as described above, provided that the
previous Tier engine use does not exceed 700 total over seven years,
and 200 in any given year. This is limited to one family per power
category. Alternatively, the Panel recommended, at the manufacturer's
choice by hp category, a program that eliminates the ``single family
provision'' restriction with revised total and annual sales limits as
shown below:
--For categories < =175 hp-525 previous Tier engines (over 7 years)
with an annual cap of 150 units (these engine numbers are separate for
each hp category defined in the regulations)
--For categories of > 175 hp-350 previous Tier engines (over 7
years) with an annual cap of 100 units (these engine numbers are
separate for each hp category defined in the regulations).
The Panel recommended that EPA seek comment on the total number of
engines and annual cap values listed above. In contrast to the Tier 2/
Tier3 rule, the SBA Office of Advocacy expected the transition to the
Tier 4 technology will be more costly and technically difficult.
Therefore, the small business equipment manufacturers may need more
liberal flexibility allowances especially for equipment using the lower
hp engines. The Panel's recommended flexibility may not adequately
address the approximately 50 percent of small business equipment models
where the annual sales per model is less than 300 and the fixed costs
are higher. Thus, the SBA Office of Advocacy and the Office of
Management and Budget (OMB) Panel members recommended that comment be
sought on implementing the small volume allowance (700 engine
provision) for small business equipment manufacturers without a limit
on the number of engine families which could be covered in any hp category.
? Due to the changing nature of the technology as the
manufacturers make the transition from Tier 2 to Tier 3 and Tier 4, the
Panel recommended that the equipment manufacturers be permitted to
borrow from the Tier3/Tier 4 flexibilities for use in the Tier 2/Tier 3
time frame.
? Lastly, the Panel recommended proposing a continuation of
the current transition provisions, without modifications to the levels
or nature of the provisions, that are available to these manufacturers.
To maximize the likelihood that the application of these provisions
will result in the availability of previous Tier engines for use by the
small business equipment manufacturers, the Panel recommended that--
similar to the application of flexibility options that are currently in
place--these provisions should be provided to all equipment
manufacturers.\70\
---------------------------------------------------------------------------

\70\ The Panel recognized that, similar to the Tier 2/3
standards, it may be necessary to provide transition provisions for
all equipment manufacturers, not just for small entities, and the
Panel recommended that this be taken into account.
---------------------------------------------------------------------------

We did in fact propose the Percent-of-Production and Small Volume
Allowances listed above for all equipment manufacturers, and explicitly
took the Panel report into account in making that proposal. We also
requested comment on a number of additional items, some of which were
proposed by the Panel (see section III.B above).
ii. What We Are Finalizing
We are finalizing the Percent-of-Production and Small Volume
Allowances for all equipment manufacturers, with a few changes. Some
non-small equipment manufacturers commented that the small-volume
provision should enable manufacturers to exempt up to 700 pieces of
equipment over a seven-year period, with no engine family restriction.
As explained earlier in section III.B.2.c, we are finalizing provisions
that allow manufacturers to choose between two options: (a)
Manufacturers would be allowed to exempt 700 pieces of equipment over
seven years, within one engine family; or (b) manufacturers using the
small-volume allowance could exempt 525 machines over seven years (with
a maximum of 150 in any given year) for each of the three power
categories below 175 horsepower, and 350 machines over seven years
(with a maximum of 100 in any given year) for the two power categories
above 175 horsepower. Concurrent with the revised caps, manufacturers
could exempt engines from more than one engine family under the small-
volume allowance program. As explained earlier, based on sales
information for small businesses, we estimated that the alternative
small-volume allowance program to include lower caps and allow
manufacturers to exempt more than one engine family would keep the
total number of engines eligible for the allowance at roughly the same
overall level as the 700-unit program. The Agency believes that these
provisions will afford manufacturers the type of transition leeway
recommended by the Panel. Further, these transition provisions could
allow small business equipment manufacturers to postpone any redesign
needed on low sales volume or difficult equipment packages, thus saving
both money and strain on limited engineering staffs. Within limits,
small equipment manufacturers would be able to continue to use their
current engine/equipment configuration and avoid out-of-cycle equipment
redesign until the allowances are exhausted or the time limit passes.
During the SBREFA Panel process, the Panel discussed the possible
misuse of the transition provisions by using them as a loophole to
enter the nonroad diesel equipment market or to gain unfair market
position relative to other manufacturers. See 68 FR at 28481. EPA was
concerned that importers of equipment from a foreign equipment
manufacturer could, as a group, import more exempted equipment from
that foreign manufacturer than 80 percent of

[[Page 39019]]

that manufacturer's production for the United States market or more
than the small volume allowances identified in the transition
provisions. This would create a potentially significant disparity
between the treatment of foreign and domestic equipment manufacturers.
EPA did not intend this outcome, and did not believe it was needed to
provide reasonable lead time to foreign equipment manufacturers. The
Panel recognized that this was a possible problem, and believed that a
requirement that small equipment manufacturers and importers must have
reported equipment sales using certified engines in model year 2002 or
earlier in order to be eligible to access the transition provisions was
sufficient to alleviate this problem. Upon further analysis during the
development of the proposal, EPA decided to limit the availability of
transition provisions to entities that install engines and have primary
responsibility for designing and manufacturing equipment and included
such a requirement in the proposal. Id. at 28477. Therefore, a company
that only imported equipment, and had no involvement in the actual
manufacturing of the equipment, would be ineligible to access the
transition provisions. As described in section III.B.4, we are
finalizing the proposed requirements associated with the use of
transition provisions by foreign importers. Therefore, we no longer
believe it is necessary to have a separate requirement that small
equipment manufacturers and importers have reported equipment sales
using certified engines in model year 2002 or earlier, and therefore
are not finalizing this redundant provision.
We are also finalizing the Panel's recommendation that equipment
manufacturers be allowed to borrow from Tier 4 flexibilities in the
Tier2/3 time frame. See the more extended discussion on this issue in
section III.B.2.d above.
We are not finalizing the Panel recommendation of a provision
allowing small manufacturers to request limited ``application
specific'' alternative standards for equipment configurations which
present unusually challenging technical issues for compliance. We do
not believe that the need for such a provision has been established,
and further, it could likely provide more lead time than can be
justified, and undermine emission reductions which are achievable.
Moreover, no participant in the SBAR process or during the public
comment period offered any empirical support that such a problem even
exists. Nor have such issues been demonstrated (or raised) by equipment
manufacturers, small or large, in implementing the current nonroad
standards. In addition, we believe that any application-specific
difficulties can be accommodated by the transition provisions the
Agency is proposing including ABT.
We are also finalizing two additional provisions for all equipment
manufacturers that small business equipment manufacturers may take
advantage of. These provisions are the Technical Hardship Provision and
the Early Tier 4 Engine Incentive Program. Both provisions are
discussed in greater detail in sections III.B.2.b and e above.
b. Hardship Provisions for Small Business Equipment Manufacturers
i. Panel Recommendations and Our Proposals
The Panel also recommended that two types of hardship provisions be
extended to small business equipment manufacturers. These provisions
would allow for relief in the following cases:
? A catastrophic event, or other extreme unforseen
circumstances, beyond the control of the manufacturer that could not
have been avoided with reasonable discretion (i.e., fire, tornado,
supplier not fulfilling contract, etc.).
? The event where a manufacturer has taken all reasonable
business, technical, and economic steps to comply but cannot. In this
case relief would have to be sought before there is imminent jeopardy
that a manufacturer's equipment could not be sold and a manufacturer
would have to demonstrate to the Agency's satisfaction that failure to
get permission to sell equipment with a previous Tier engine would
create a serious economic hardship. Hardship relief of this nature
cannot be sought by an ``integrated'' manufacturer (one which also
manufactures the engines for its equipment).
We proposed that the hardship provisions recommended by the Panel
be extended to small business equipment manufacturers in addition to
the transition provisions described above. We also requested comment on
the stipulation that, to be eligible for these hardship provisions (as
well as the other proposed transition provisions), equipment
manufacturers and importers must have reported equipment sales using
certified engines in model year 2002 or earlier.
ii. What We Are Finalizing
We are finalizing the Panel-recommended hardship provisions for
small business equipment manufacturers (which are the same provisions
that are being adopted for all equipment manufacturers).
EPA also received comment concerning the situation faced by small
business equipment manufacturers using engines in the 25-50 horsepower
range. The concern was raised that small businesses in this power
grouping will face a greater relative burden in designing equipment for
engines with aftertreatment, and that they may need additional lead
time beyond that provided by the small volume allowances. EPA believes
that in general the small volume allowances should provide reasonable
lead time opportunity for these manufacturers, but recognizes that
there may be individual cases where more lead time would be appropriate
for small business manufacturers in this power category. EPA is
therefore adopting a technical hardship provision similar to that
adopted for the percent of production allowance. Small business
manufacturers using engines in the 25-50 hp range could petition EPA to
approve additional needed lead time in appropriate, individualized
circumstances, based on a showing of extreme technical or engineering
hardship as provided in 40 CFR 1039.625(m). EPA could approve
additional small volume allowances, up to a total number of 1100 units.
This total number includes the allowances that are already available
under the rule without request. These additional allowances could only
be used for engines in the 25-50 horsepower range, and could only be
approved for qualifying small business equipment manufacturers. The
limitations on the use of small volume allowances (such as when
allowances may only be used within a single engine family and the
annual limits) continue to apply to the standard allowances (that are
available under the rule without request). Finally, any additional
allowances granted under this provision would have to be used within 36
months after the transition flexibility period commences for these
engines. The additional allowances would not be subject to the annual
limits noted earlier but they could only be used after the maximum
amount of standard allowances are used in a given year (e.g., a
manufacturer using the 700 unit allowance would have to use 200 of
their standard allowances for that year before they could use any of
the additional allowances granted by EPA under this technical hardship
provisions).
EPA recognizes that it is important to facilitate the process for
small business equipment manufacturers to seek such approval, and
intends to work with

[[Page 39020]]

small manufacturers so that any transaction costs for them or for EPA
can be minimized. For example, EPA could consider at one time a common
request from similarly situated small business equipment manufacturers,
as long as all of the necessary individual information for each
applicant were provided. Given that information in such an application
would still be both company- and fact-specific (and likely confidential
as well), and that the criteria for relief as well as the scope of
appropriate relief are case-specific, we would necessarily evaluate and
decide whether or not to approve additional small volume allowances on
a company-by-company, case-by-case basis.
For a detailed description of the comments received on small
business engine and equipment manufacturer issues, please refer to the
Summary and Analysis of comments, which is a part of the rulemaking
record (E-DOCKET number OAR-2003-0012, and legacy docket number A-2001-
28). A summary of the SBREFA process is located in section X.C of this
preamble.

D. Certification Fuel

It is well-established that measured emissions may be affected by
the properties of the fuel used during the test. For this reason, we
have historically specified allowable ranges for test fuel properties
such as cetane number and sulfur content. These specifications are
intended to represent most typical fuels that are commercially
available in use. This helps to ensure that the emissions reductions
expected from the standards occur in use as well as during emissions
testing.
We are establishing all 6 provisions that we proposed related to
the sulfur content of fuel used in conducting nonroad diesel engine
emissions testing:
? 300-500 ppm for model year 2008 to 2010 engines,
? 7-15 ppm for 2011 and later model year engines,
? Extension through model year 2007 of the maximum 2000 ppm
specification for Agency testing on pre-Tier 4 engines,
? 7-15 ppm for 2007-2010 model year engines that use sulfur-
sensitive technology,
? 7-15 ppm for 2008-2010 model year engines under 75 hp,
? 300-500 ppm for some model year 2006-2007 engines at or above 100 hp.

The last 3 of these provisions are at the certifying manufacturer's
option, and involve additional measures that the manufacturer must take
to help ensure that the specified fuel is used in the field. The below
discussion provides more detail on each of these provisions.
We received very little comment on our proposed certification fuel
provisions. Detroit Diesel commented that we should set a maximum
sulfur specification of 500 ppm for Tier 3 engines, which we are in
fact doing beginning in model year 2008 after this fuel is introduced
in the nonroad market, and optionally allowing as early as 2006, the
earliest Tier 3 model year, provided manufacturers take steps to
encourage the use of this fuel, as discussed below.
Because we are lowering the upper limit for in-use nonroad diesel
fuel sulfur content to 500 ppm in 2007, and again to 15 ppm in 2010, we
are also establishing new ranges of allowable sulfur content for
testing. These are 300 to 500 ppm (by weight) for model year 2008 to
2010 engines, and 7 to 15 ppm (by weight) for 2011 and later model year
engines. We believe that these ranges best correspond to the fuels that
diesel machines will potentially see in use.\71\ These specifications
will apply to emission testing conducted for certification, selective
enforcement audits, in-use, and NTE testing, as well as any other
laboratory engine testing for compliance purposes for engines in the
designated model years. Any compliance testing of previous model year
engines will be done with the fuels designated in our regulations for
those model years. Note that, as proposed, we are allowing
certification with fuel meeting the 7 to 15 ppm sulfur specification in
2010 for under 11 hp, air-cooled, hand-startable, direct injection (DI)
engines certified under the optional standard provision discussed in
section II.A.3.a.
---------------------------------------------------------------------------

\71\ See 66 FR 5112-5113 (January 18, 2001) where we adopted a
similar approach to certification fuels for highway heavy-duty
diesel engines (HDDEs).
---------------------------------------------------------------------------

It is important to note that while these specifications include the
maximum sulfur level allowed for in-use fuel, we believe that it is
generally appropriate to test using the most typical fuels. As for
highway fuel, we expect that, under the 15 ppm maximum sulfur
requirement, refineries will typically produce diesel fuel with about 7
ppm sulfur, and that the fuel could have slightly higher sulfur levels
after distribution. Thus, we expect that we will use fuel having a
sulfur content between 7 and 10 ppm sulfur for our emission testing.
This is the same as the range we indicated will be used for heavy-duty
diesel engine (HDDE) engine testing in model year 2007 and later (66 FR
5002, January 18, 2001). As with the highway fuel, should we determine
that the typical in-use nonroad diesel fuel has significantly more
sulfur than this, we would adjust this target upward.
We are also adopting two options for early use of the new 7 to 15
ppm sulfur diesel test fuel. The first will be available beginning in
the 2007 model year for engines employing sulfur-sensitive technology.
(Model year 2007 coincides approximately with the introduction of 15
ppm highway fuel.) This allowance to use the new fuel in model years
before 2011 will only be available for engines which the manufacturer
demonstrates will be operated in use on fuel with 15 ppm sulfur or
less. Any testing that we perform on these engines will also use fuel
meeting this lower sulfur specification. This optional certification
fuel provision is intended to encourage the introduction of low-
emission diesel technologies in the nonroad sector. These engines will
be able to use the lower sulfur fuel throughout their operating life,
given the early availability of this fuel under the highway program,
and the assured availability of this fuel for nonroad engines by mid-2010.
Considering that our Tier 4 program will subject engines under 75
hp to new emission standards in 2008 when 15 ppm maximum sulfur fuel
will be readily available from highway fuel pumps (and will enter the
nonroad fuel market shortly after in 2010), we believe it is
appropriate to provide a second, less proscriptive, option for use of
15 ppm sulfur certification fuel. This option will be available to any
manufacturers willing to take extra steps to encourage the use of this
fuel before it is required in the field. We are allowing the early use
of 15 ppm certification fuel for 2008-2010 engines under 75 hp,
provided the certifying manufacturer ensures that ultimate purchasers
of equipment using these engines are informed that the use of fuel
meeting the 15 ppm specification is recommended, and also recommends to
equipment manufacturers buying these engines that labels be applied at
the fuel inlet to remind users of this recommendation. This option does
not apply to those 50-75 hp engines not being certified to the 0.22 g/
bhp-hr PM standard, under the manufacturers' option discussed in
section II.A.1.a.
We believe that there may be a very small loss of emissions benefit
from any of these engines for which the operator chooses to ignore the
recommendation. This is because the engine manufacturer will be
designing the engine to comply with the emissions standards when tested
using 15 ppm fuel, potentially resulting in slightly higher emissions
when it is not operated on the 15 ppm

[[Page 39021]]

fuel. We also believe, however, that this is more than offset overall
by the encouragement this provision provides for early use of 15 ppm
fuel. We are not making this option available for engine designs
employing oxidation catalysts or other sulfur-sensitive exhaust
emission control devices except under the more restrictive provision
for early use of 15 ppm fuel described above, involving a demonstration
by the manufacturer that the fuel will indeed be used. Because these
devices could potentially have very high sulfur-to-sulfate conversion
rates (see section II.B.4 and 5 above), and because very high-sulfur
fuels will still be available to some extent, we believe that allowing
this provision for these engines would risk very high PM emissions
until the 15 ppm nonroad fuel is introduced. We are not making this
second early 15 ppm test fuel option available for engines not subject
to a new Tier 4 standard in 2008 as these engines should already be
designed to meet applicable standards in earlier years without need for
the 15 ppm fuel.
We are also adopting a similar provision for use of certification
fuel meeting the 300-500 ppm sulfur specification before the 2008 model
year. We believe certification of model year 2006 and 2007 engines
being designed without the use of sulfur-sensitive technologies to meet
new Tier 2 or Tier 3 emission standards taking effect in those years
(2006 for engines at or above 175 hp and 2007 for 100-175 hp engines)
should be able to use this fuel, provided the certifying manufacturer
is willing to take measures equivalent to those discussed above to
encourage the early use of this fuel (a recommendation to the ultimate
purchaser to use fuel with 500 ppm maximum sulfur and a recommendation
to equipment manufacturers to so label their equipment).
The widespread availability of 500 ppm sulfur highway fuel, the
short time that these 2006 and 2007 engines could use higher sulfur
fuels if an operator were to ignore the recommendation, and the
eventual use of 15 ppm sulfur fuel in most of these engines for most of
their operating lives, gives us confidence that this provision to
encourage early use of lower sulfur fuel will be beneficial to the
environment overall. As with the change to 300-500 ppm cert fuel for
model years 2008-2010, engine manufacturers will design their engines
to comply based on the test fuel specifications for certification and
compliance testing. The change from a fuel specification for compliance
testing that ranges up to 2000 ppm sulfur for Tier 2 and 3 engines to a
specification of 500 ppm sulfur maximum could have some limited effect
on the emissions control designs used on these Tier 2 and 3 engines, in
that it will be slightly easier to meet the Tier 2 and 3 standards
using the lower sulfur test fuel. In general, it is reasonable to set
specifications of test fuel reflecting representative in-use fuels, and
here the engines are expected to be using fuel with sulfur levels of
500 ppm or lower until 2010, and 15 ppm or lower after that. In this
case, any impact on expected engine emissions from this change in test
fuel for Tier 2 and 3 is expected to be slight.
We note that under current regulations manufacturers are already
allowed to conduct testing with certification fuel sulfur levels as low
as 300 ppm. The additional provision for early use of 300-500 ppm
sulfur test fuel will, however, result in any compliance testing
conducted by the Agency being done with fuel meeting the 300-500 ppm
specification. Likewise choice of the option for early use of 15 ppm
sulfur test fuel would result in any Agency testing being done using
that fuel. However, under both of these early certification fuel
options involving a recommended fuel use provision, the Agency will not
reject engines from in-use testing for which there is evidence or
suspicion that the engine had been fueled at some time with higher
sulfur fuel.
Finally, we are extending a provision adopted in the 1998 final
rule (63 FR 56967, October 23, 1998). In that rule we set a 2000 ppm
upper limit on the test fuel sulfur concentration for any testing to be
performed by the Agency on Tier 1 engines under 50 hp and Tier 2
engines at or above 50 hp. We did not extend this provision to later
model year engines at that time because we felt that more time was
needed to assess trends in fuel sulfur levels for fuels used in nonroad
diesels. At this time we are not aware of any additional information
that would indicate that a change in this test specification is
warranted. More importantly, because the fuel regulation we are
adopting will make 500 ppm maximum sulfur nonroad diesel fuel available
by mid-2007, Tier 3 engines at or above 50 hp (which phase in beginning
in 2006) will be in the field for only 1\1/2\ years prior to the in-use
introduction of 500 ppm fuel, and Tier 2 engines under 50 hp (which
phase in beginning in 2004) will be in the field for at most 3\1/2\
years prior to this time. We believe it is appropriate to avoid adding
the unnecessary complication of frequent multiple changes to the test
fuel specification. We are therefore extending the 2000 ppm limit to
testing conducted on engines until the 2008 model year when the 500 ppm
maximum test fuel sulfur level takes effect as discussed above.

E. Temporary In-Use Compliance Margins

The Tier 4 standards will be challenging for diesel engine
manufacturers to achieve, and will require manufacturers to develop and
adapt new technologies for a large number and wide variety of engine
platforms. Not only will manufacturers be responsible for ensuring that
these technologies enable compliance with Tier 4 standards at the time
of certification, they will also have to ensure that these technologies
continue to be highly effective in a wide range of in-use environments
so that their engines will comply in use when tested by EPA.
Furthermore, for the first time, these nonroad diesel engines will be
subject to transient emissions control requirements and to NTE standards.
However, in the early years of a program that introduces new
technology, there are risks of in-use compliance problems that may not
appear in the certification process or during developmental testing.
Thus, we believe that for a limited number of model years after new
standards take effect it is appropriate to adjust the compliance levels
for assessing in-use compliance for diesel engines equipped with high-
efficiency exhaust emissions control devices. This provides assurance
to the manufacturers that they will not face recall if they exceed
standards by a small amount during this transition to clean
technologies. This approach is very similar to that taken in the light-
duty highway Tier 2 final rule (65 FR 6796, February 10, 2000) and the
highway heavy-duty rule (66 FR 5113-5114, January 18, 2001), both of
which involve similar approaches to introducing the new technologies.
In fact, the similarities of nonroad diesel engines and expected Tier 4
control technologies to counterpart engines and technologies for heavy-
duty highway diesel engines led us to model the proposed Tier 4 add-on
provisions after the 2007 heavy-duty highway diesel program, with add-
on levels chosen to be roughly equivalent to the levels adopted in the
highway rule.
Comments on the proposal were received from engine manufacturers,
requesting changes that would make the temporary in-use adjustments
more closely parallel the highway requirements. Specifically, they
requested: (1) Providing two full model years of applicability
following the completion of standards phase-in for the

[[Page 39022]]

75-175 hp category, as was proposed for the other power categories, (2)
adjusting the NO_X threshold for applicability of the
provisions to a level 8% above the split family standard, (3) adopting
3 levels of add-ons based on how many hours the test engine had been
used, with cutpoints at 2000 and 3400 hours, and (4) a 25% upward
adjustment to the add-on levels. We agree that these changes would
result in a closer approximation to the highway program. Our goal in
proposing provisions somewhat different from the highway program was to
avoid unnecessary complexity. However, we believe that maintaining
consistency with the highway program is a more important goal and the
manufacturers' suggested changes do not overly complicate the program,
and so we have decided to make these changes.
We note too that changes we are making to the Tier 4 program for
engines over 750 hp necessitate other changes to the in-use add-on
program for these engines as well. Specifically, these are the
extension of model year applicability to 2016, two years after the
final Tier 4 standards take effect, and the clarification of what PM
thresholds apply for engines used in generator sets and for other engines.
Table III.E-1 shows the in-use adjustments that we will apply.
These in-use add-on levels will be applied only to engines certified in
the indicated model years and having FELs (or certifying to standards
without FELs) at or below the specified threshold levels. These
adjustments are added to the appropriate FELs (see section III.A) or,
for engines certified to the standards without the use of ABT program
credits, to the standards themselves, in determining the in-use
compliance level for a given in-use hours accumulation on the engine
being tested. Note that the PM adjustment is the same for all in-use
hours accumulation. Note also that, because the standards in the
regulations are expressed in g/kW-hr, the adjustments included in the
regulations are set at levels that make the resulting adjusted in-use
standard equivalent in stringency to the standards in this preamble
(expressed in g/bhp-hr) adjusted by the values in Table III.E-1 (also
expressed in g/bhp-hr).
Note too that, as part of the certification demonstration,
manufacturers will still be required to demonstrate compliance with the
unadjusted Tier 4 certification standards using deteriorated emission
rates. Therefore, the manufacturer will not be able to use these in-use
standards as the design targets for the engine. They will need to
project that most engines will meet the standards in-use without
adjustment. The in-use adjustments will merely provide some assurance
that they will not be forced to recall engines because of some small
miscalculation of the expected deterioration rates.

Table III.E-1.--Add-on Levels Used in Determining In-use Standards
----------------------------------------------------------------------------------------------------------------
NOX PM
--------------------------------------------------
Engine power Model years Add-on level For operating Add-On level
\a\ (g/bhp-hr) hours \b\ (g/bhp-hr)
----------------------------------------------------------------------------------------------------------------
25 < = hp < 75................................ 2013-2014 none 0.01
(19 < = kW < 56)..............................
---------------------------------------------
0.12 < = 2000
75 < = hp < 175............................... 2012-2016 0.19 2001-3400 0.01
(56 <= kW <130)............................. 0.25 > 3400
---------------------------------------------
0.12 < = 2000
175 < = hp < =750............................. 2011-2015 0.19 2001-3400 0.01
(130<= kW <=560)............................ 0.25 > 3400
---------------------------------------------
0.12 < = 2000
hp >750..................................... 2011-2016 0.19 2001-3400 0.01
(kW >560)................................... 0.25 > 3400
----------------------------------------------------------------------------------------------------------------
Notes:
\a\ Applicable only to those engines certifying to standards or with FELs at or below 1.6 g/bhp-hr NOX.
\b\ Applicable only to those engines certifying to standards or with FELs at or below the filter-based Tier 4 PM
standards (0.01 g/bhp-hr for 75-750 hp engines, 0.02 g/bhp-hr for 25-75 hp engines and for >750 hp engines in
generator sets, and 0.03 g/bhp-hr for all other >750 hp engines).

F. Test Cycles

1. Transient Test
In the 1998 final rule that set new emission standards for nonroad
diesel engines, EPA expressed a concern that the steady-state test
cycles used to demonstrate compliance with emission standards did not
adequately reflect transient operation as many nonroad engines are used
in applications that are largely transient in nature and would not
therefore yield adequate control of emissions in use (63 FR 56984,
October 23, 1998). Although we were not prepared to adopt a transient
test at that time, we announced our intention in that final rule to
move forward with the development of such a test. This development
progressed steadily and has resulted in the creation of the Nonroad
Transient Composite (NRTC) test cycle which we are adopting in our Tier
4 nonroad diesel program. The NRTC cycle supplements the existing
nonroad steady-state test requirements. Thus, most nonroad engines
subject to today's Tier 4 standards will be required to certify using
both of these tests.\72\ The NRTC cycle captures transient emissions
over much of the typical nonroad engine operating range, and thus helps
to ensure effective control of all regulated pollutants. The speed and
load operating schedule for EPA's NRTC test cycle is described in
regulations at 40 CFR 1039.505. A detailed discussion of the transient
test cycle and its derivation is contained in chapter 4.2 of the RIA
for this rule.
---------------------------------------------------------------------------

\72\ See EPA Dear Manufacturer Letter VPCD-98-13, ``Heavy-duty
Diesel Engines Controlled by Onboard Computers: Guidance on
Reporting and Evaluating Auxiliary Emission Control Devices and the
Defeat Device Prohibition of the Clean Air Act,'' October 15, 1998
and EPA Advisory Circular 24-3, ``Implementation of Requirements
Prohibiting Defeat Devices for On-Highway Heavy-Duty Diesel
Engines.'' A copy of both of these documents is available in EPA Air
Docket A-2001-28.
---------------------------------------------------------------------------

We expect that this transient test requirement will significantly
reduce real world emissions from nonroad diesel equipment. Proper transient

[[Page 39023]]

operation testing captures engine emissions from the broad range of
engine speed and load combinations that the engine may attain in-use,
while the steady-state emission test characterizes emissions at the few
isolated operating points that may be typical for that family of
engines. Testing for transient emissions will likewise identify
emissions which result from the operation of the engine, as with speed
and load changes, turbocharger lag, etc.
In keeping with our goal to maximize the harmonization of emissions
control programs as much as possible, we have developed this cycle in
collaboration with nonroad engine manufacturers and regulatory bodies,
both domestic and foreign, over the last several years.\73\ Further,
the NRTC cycle has been introduced as a work item for possible adoption
as a potential global technical regulation under the 1998 Agreement for
Working Party 29 at the United Nations.\74\
---------------------------------------------------------------------------

\73\ Letter from Jed Mandel of the Engine Manufacturers
Association to Chet France of U.S. EPA, Office of Transportation and
Air Quality, ``Development of appropriate transient test cycle for
variable speed land-based compression ignition non-road engines,''
Air Docket A-2001-28, II-B-33.
\74\ Informal Document No.2, ISO--45th GRPE, ``Proposal for a
Charter for the Working Group on a New Test Protocol for Exhaust
Emissions from Nonroad Mobile Machinery,'' Jan. 13-17, 2003, Air
Docket A-2001-28, document II-A-171.
---------------------------------------------------------------------------

EPA's nonroad transient test will apply (with one exception noted
below) to a nonroad diesel engine when that engine must first show
compliance with EPA's Tier 4 PM and NO_X+NMHC emissions
standards which are based on the performance of the advanced post-
combustion emissions control systems (e.g. catalyzed-diesel particulate
filters and NO_X adsorbers). This is 2011 for engines at 175
hp-750 hp, 2012 for 75-175 hp engines (2012, as well, for 50-75 hp
engines made by a manufacturer choosing the option to not comply with
the 2008 transitional PM standard.), and 2013 for engines under 75 hp.
The transient test cycle will not apply to engines greater than 750 hp.
Specific provision is made for engines under 25 hp for PM and under 75
hp for NO_X (which are not based on performance of advanced
aftertreatment). Constant-speed, variable-load engines of any
horsepower category currently certify to EPA's 5-Mode Steady State duty
cycle and are not subject to transient duty cycle testing. As with
current nonroad diesel standards, today's Tier 4 emission standards
will apply to certification, Selective Enforcement Audits (SEAs) and to
recall testing of equipment in-use for all engines subject to these
standards.

Table III.F-1.--Implementation Model Year for Nonroad Transient Testing
------------------------------------------------------------------------
Transient test
Power category implementation
model years
------------------------------------------------------------------------
< 25 hp............................................... 2013
25 < = hp < 75......................................... 2013
75 < = hp < 175........................................ 2012
175< = hp < 750........................................ 2011
------------------------------------------------------------------------

In addition, any engines for which an engine manufacturer (see
section III.M) or equipment maker (see section III.B.2.c) claims credit
under the incentive program for early-introduction engines will have to
be certified to that program's standards under applicable Tier 4
nonroad transient and steady-state duty cycles, e.g., NRTC, 8-mode and
5-mode steady-state cycles. In turn, any 2011 or later model year
engine that uses these engine count-based credits will not need to
demonstrate compliance under the NRTC cycle. Engines in any power
category certified to an alternate NO_X standard are all
subject to the transient test requirement, as they clearly will be
substantially redesigned to achieve Tier 4 compliance, regardless of
whether or not they use high-efficiency exhaust emission controls. See
section II.A.1.c above.
We solicited comment on whether the transient duty cycle should
apply to NO_X emissions from phase-out engines (68 FR 28484,
May 23, 2003) and received comment from EMA. EMA prefers that the
transient cycle only be applicable to PM emission testing and not for
NO_X, NMHC and CO for phase-out engine families. They believe
that the application of the transient NRTC and standards could result
in the need to redevelop the NO_X/NMHC/CO emission control
systems used for their members' compliance with Tier 3 standards.
We essentially agree with this comment to the extent that phase-out
engines do not include improvements in gaseous pollutant emission
control (i.e. they remain essentially Tier 3 engines for emissions
other than PM). Imposing new requirements with respect to these
engines' gaseous pollutant emissions could divert resources
inappropriately. The rule therefore states (in 40 CFR 1039.102 (a)(2))
that gaseous pollutant emissions from these engines are not subject to
transient testing standards. This would not apply if a manufacturer
declares a new NO_X+NMHC FEL for the engine family (since the
manufacturer would then already be choosing to alter these engines'
performance with respect to gaseous pollutant emissions).\75\
---------------------------------------------------------------------------

\75\ Please note that this discussion does not apply to engines
certifying to the alternative NO_X phase-in standards,
which engines are required to meet transient and NTE requirements
for gaseous pollutants (as well as all other requirements that would
apply to phase-in engines). See discussion at II.A.2.c; also please
note that these engines are expressly not defined as phase-out
engines in the rules; see section 1039.801 and 1039.102 (e).
---------------------------------------------------------------------------

Transient testing standards do apply with respect to PM emissions
from phase-out engines, however. The reason is evident: the PM standard
for phase-out (and phase-in) engines is based on performance of
aftertreatment, so the full complement of test cycles (NTE as well as
transient testing) should apply. A consequence of this is that phase-
out engines will generally be tested over the transient cycle, since
they must do so with respect to PM emissions. We repeat, however, that
although the engines will do transient testing, only PM (and not
gaseous pollutants) is subject to the transient test standard.
In addition, manufacturers choosing to certify engines under 750 hp
using alternative FEL caps during the first four years that the
alternative caps are available (see section III.A.i.2 above) will not
be subject to the transient or NTE standards. However, to properly
account for the transient effects when calculating credits, we are
requiring the FELs of such engines to be adjusted upwards by applying a
Temporary Compliance Adjustment Factor (TCAF) \76\. See 40 CFR 1039.104
(g) (2).
---------------------------------------------------------------------------

\76\ As noted elsewhere, the TCAFs are derived identically to
the Transient Adjustment Factor used in the NONROAD emissions model.
---------------------------------------------------------------------------

Even though we are requiring that NRTC testing start when the PM
aftertreatment-based standards take effect, one should not infer that
the NRTC is directed at solely (or even primarily) at PM control. In
fact, we believe that advanced NO_X emission controls may be
even more sensitive to transient operation than PM filters, since the
PM filters ordinarily operate equally effectively in all operating
modes, as noted earlier. It is, however, our intent that the control of
emissions during transient operation be an integral part of Tier 4
engine design considerations. We have therefore chosen to apply the
transient test requirement starting with the PM filter-based Tier 4 PM
standards as these standards precede or accompany the earliest Tier 4
NO_X or NMHC standards in all power categories except engines
over 750 hp.
As EPA is not promulgating PM filter-based standards for engines
below 25 hp in today's rulemaking, we are likewise not requiring these
engines to be tested

[[Page 39024]]

over the NRTC test cycle until model year 2013. More broadly, though we
intend for transient emissions control to be an integral part of Tier 4
design considerations, we do not believe it appropriate to mandate
compliance with the transient test for the engines under 50 hp which
are subject to PM standards in 2008. We recognize that transient
emission testing, though routine in highway engine programs, involves a
fair amount of laboratory equipment and new expertise in the nonroad
engine certification process. As with the transfer of advanced emission
control technology itself, we believe that the transient test
requirement should be implemented first for larger displacement
engines. These engines are more likely to be made by manufacturers who
provide engines to the on-highway market and therefore have had prior
on-highway engine development and certification experience. We do not
believe that the smaller engines should be the power categories first
charged with implementing the new transient test, as early as 2008,
especially because manufacturers of these engines do not generally make
highway engines and are neither as experienced nor as well-equipped as
their larger engine manufacturer counterparts at conducting transient
cycle testing. However, to encourage earlier transient emission control
in these engines, EPA will allow manufacturers of engines below 25 hp
to submit data describing emission levels for their engines over the
appropriate certification transient duty cycle beginning in model year
2008. We extend this option as well to manufacturers of 25-50 hp
engines, subject to those engines meeting the Tier 4 transitional PM
standard in 2008. Should a manufacturer choose to submit data in the
2008-2011 time frame, prior to required certification data submissions,
that transient data will not be used for compliance enforcement.
EPA requested comment on whether engines greater than 750 hp should
be subject to the transient cycle, noting concerns of technical
difficulties and cost for these engines (68 FR 28484, May 23, 2003).
STAPPA-ALAPCO and other agencies representing the States' interests
responded to EPA that all nonroad engines should be uniformly required
to test their transient emissions. Likewise, they asked that the Agency
not delay implementation of this particular requirement. However, at
this time, the Agency is not adopting a transient emission testing
requirement for engines 750 hp and over. EPA sees the burden of
transient cycle testing in these very large displacement engines as
being greater than the benefit of gathering transient emission
measurements from them. For example, in many instances, these engines
will have multiple aspiration and exhaust systems requiring a test cell
designed to accommodate multiple large flow volumes in real-time on a
five Hertz, or faster, basis. New transient test requirements could
require manufacturers to create new or expanded testing facilities to
house, prepare and run transient tests on these larger engines. The
space requirements, i.e., ``footprint,'' of such facilities could make
building them cost-prohibitive.
Absent transient testing, these engines will still be required to
certify to both steady-state and NTE test requirements. Moreover, we
are modifying the certification requirements to include additional
information for engines under 750 hp. For more detail on this
submission, see the discussion in section III.I of this preamble and 40
CFR 1039.205(p) of the regulations.
Finally, engines in this power category are found in a relatively
small proportion of the nonroad equipment population and, despite the
potential for large quantities of emissions from this class of engines
during operation, units equipped with these engines have likewise been
noted to contribute a small proportion of total diesel nonroad engine
emissions.\77\ Many of these larger-displacement engines operate
predominately in a constant-speed fashion with few transient
excursions, as with electric power generation sets (gen sets) which
make up a significant percent of these larger engines. Many of these
gen sets, too, operate on an intermittent or stand-by only basis.
Indeed, as explained below, such constant-speed, variable-load engines
(for example, those certifying exclusively to the 5-mode steady-state
cycle) of any horsepower category are not subject to the nonroad
transient test cycle.
---------------------------------------------------------------------------

\77\ Memorandum from Kent Helmer to Cleophas Jackson,
``Applicability EPA's NRTC cycle to Nonroad Diesel Population,'' Air
Docket A-2001-28, document II-B-34.
---------------------------------------------------------------------------

Further, the Agency does not intend at this time to require that
manufacturers use partial-flow sampling systems (PFSS) to determine PM
emissions from their engines for certification. A large engine
manufacturer may, however, choose to submit PM data to the Agency using
PFSS as an alternative test method, if that manufacturer can
demonstrate test equivalency using a paired-T test and F-Test, as
outlined in regulations at 40 CFR 86.1306-07.
Transient testing requires consideration of statistical parameters
for verifying that test engines adequately follow the prescribed
schedule of speed and load values. The regulations in 40 CFR 1065.514,
table 1, detail these statistical parameters, also known as cycle
performance statistics. These values are somewhat different than the
comparable values for highway diesel engines to take into account the
characteristics of nonroad engine operation. The values are an
outgrowth of the long development process for the NRTC test cycle, itself.
2. Cold Start Transient Testing
Nonroad diesel engines typically operate in the field by starting
and warming to a point of stabilized hot operation at least once in a
workday. Such ``cold-start'' conditions may also occur at other times
over the course of the workday, such as after a lunch break. We have
observed that certain test engines, which generally had emission-
control technologies for meeting Tier 2 or Tier 3 standards, had
elevated emission levels for about 10 minutes after starting from a
cold condition. The extent and duration of increased cold-start
emissions will likely be affected by changing technology for meeting
Tier 4 standards, but there is no reason to believe that this effect
will lessen. In fact, cold-start concerns are especially pronounced for
engines with catalytic devices for controlling exhaust emissions,
because many require heating to a ``light-off'' or peak-efficiency
temperature to begin working. See, for example, RIA section 4.1.2.2 and
following. EPA's highway engine and vehicle programs, which
increasingly involve such catalytic devices, address this by specifying
a test procedure that first measures emissions with a cold engine, then
repeats the test after the engine is warmed up, weighting emission
results from the two tests for a composite emission measurement.
In the proposal, we described an analytical approach that led to a
weighting of 10 percent for the cold-start test and 90 percent for the
hot-start test. Manufacturers pointed out that their analysis of the
same data led to a weighting of about 4 percent for cold-start testing
and that a high cold-start weighting would affect the feasibility of
the proposed emission standards. Manufacturers also expressed a concern
that there would be a significant test burden associated with cold-
start testing.

[[Page 39025]]

Unlike steady-state tests, which always start with hot-stabilized
engine operation, transient tests come closer to simulating actual in-
use operation, in which engines may start operating after only a short
cool-down (hot-start) or after an extended soak (cold-start). The new
transient test and manufacturers' expected use of catalytic devices to
meet Tier 4 emission standards make it imperative to address cold-start
emissions in the measurement procedure.\78\ We are therefore adopting a
test procedure that requires measurement of both cold-start and hot-
start emissions over the transient duty cycle, much like for highway
diesel engines. We acknowledge, however, that limited data are
available to establish an appropriate cold-start weighting. For this
final rule, we are therefore opting to establish a cold-start weighting
of 5 percent. This is based on a typical scenario of engine operation
involving an overnight soak and a total of seven hours of operation
over the course of a workday. Under this scenario, the 20-minute cold-
start portion constitutes 5 percent of total engine operation for the
day. Section II.B above addresses the feasibility of meeting the
emission standards with cold-start testing. Regarding the test burden
associated with cold-start testing, we believe that manufacturers will
be able to take steps to minimize the burden by taking advantage of the
provision that allows for forced cooling to reduce total testing time
(40 CFR 1039.510(c)).
---------------------------------------------------------------------------

\78\ Note that this discussion applies only to engines that are
subject to testing with transient test procedures. For example, this
excludes constant-speed engines and all engines over 750 hp.
---------------------------------------------------------------------------

We believe the 5-percent weighting is based on a reasonable
assessment of typical in-use operation and it addresses the need to
design engines to control emissions under cold-start operation. We
believe cold-start testing with these weighting factors will be
sufficient to require manufacturers to take steps to minimize emission
increases under cold-start conditions. Once manufacturers have applied
technologies and strategies to minimize cold-start emissions, they will
be achieving the greatest degree of emission reductions achievable
under those conditions. A higher weighting factor for cold-start
testing is not likely be more effective in achieving in-use emission
control as new technologies will be expected to have resulted in
significant control of emissions at engine startup.
However, given our interest in controlling emissions under cold-
start conditions and the relatively small amount of information
available in this area at this time, we intend to revisit the cold-
start weighting factor for transient testing in the future as
additional data become available. Since the composite transient test
represents a combination of variable-speed and constant-speed
operation, we would consider operation from both of these types of
engines in evaluating the cold-start weighting. Also, we intend to
apply the same cold-start weighting when we adopt a transient duty
cycle specifically for engines certified only for constant-speed operation.
The planned data-collection effort will focus on characterizing
cold-start operation for nonroad diesel equipment. The objective will
be to reassess, and if necessary, redevelop a weighting factor that
properly accounts for the degree of cold-start operation so that in-use
engines effectively control emissions during these conditions. As we
move forward with this investigation, other interested parties,
including the State of California, will be invited to participate. We
are interested in pursuing a joint effort, in consultation with other
national government bodies, to ensure a robust and portable data set
that will facilitate common global technical regulations. This effort
will require consideration of at least the following factors:

? What types of equipment will we investigate?
? How many units of each equipment type will we instrument?
? How do we select individual models that will together
provide an accurate cross-section of the type of equipment they represent?
? When will the program start and how long will it last?
? How should we define a cold-start event from the range
of in-use operation?

We expect to complete our further evaluation of the cold-start
weighting in the context of the 2007 Technology Review, if not sooner.
In case changes to the regulation are necessary, this timing will allow
enough time for manufacturers to adjust their designs as needed to meet
the Tier 4 standards.
3. Constant-Speed Tests
The Agency proposed that engine manufacturers could certify
constant-speed engines using EPA's Constant-Speed, Variable-Load (CSVL)
transient duty cycle \79\ as an alternative to certifying these engines
under its NRTC test cycle. The CSVL transient cycle was developed to
approximate the speed and load operating characteristics of many
constant-speed nonroad diesel applications.\80\ It, too, would have
been subject to the cold-start requirement of nonroad transient test
cycles as is the NRTC. However, after considerable discussion with and
comment from engine manufacturers, equipment makers and other
interested parties, the Agency has decided not to promulgate an
alternative nonroad transient test cycle for constant-speed engines at
this time. EMA, in its comments on the CSVL cycle, felt generally that:
(1) The average load factor is much too low; (2) the frequency of the
transient operations was too high; (3) the amplitudes of the transients
were too great; and (4) the rates of transient load increase and
response were too fast.
---------------------------------------------------------------------------

\79\ Two Memoranda from Kent Helmer to Cleophas Jackson, ``Speed
and Load Operating Schedule for the Constant Speed Variable Load
(CSVL) transient test cycle,'' e-Docket OAR-2003-0012-0993, and
``CSVL Cycle Construction,'' A-2001-28, II-B-50.
\80\ Memorandum from Kent Helmer to Cleophas Jackson, ``Brake-
specific Emissions Impact of Nonroad Diesel Engine Testing Over the
NRTC, AWQ, and AW1 duty cycles,'' Docket A-2001-28, #.
---------------------------------------------------------------------------

It was further noted that the CSVL test cycle is based solely upon
the operation of a single, relatively small, naturally-aspirated arc
welder engine, which EMA claims is a variable-speed type of engine
certified generally on the 8-mode test cycle. Arc welders, Cummins
noted, are not much like generator sets, which comprise around 50% of
population of constant-speed engines and have a very different
operation and test cycle than the typical portable generator set.
Generator sets, DDC wrote, were built generally for a higher power
capability at a single speed, many having larger, less-responsive
turbochargers to achieve the higher brake mean effective pressure
(BMEP). This made it difficult for these engines to shed load as
quickly as the CSVL test cycle would require them to do. Commenters
likewise wrote that the test cycle was costly and burdensome for
equipment which, like generator sets, was only operated infrequently or
when emergencies occurred. Some wrote that it would compromise
generator set engine performance if manufacturers had to re-engineer
their products to run over the CSVL test cycle, especially for larger
BMEP engines. One commenter noted that these changes to nonroad engines
would carry over to other stationary applications of these generator
sets. A more extensive discussion of comments relating to the CSVL
cycle may be read in the Summary and Analysis of Comment document for
this rule.
Given these potential problems and the strong possibility of fixing
them by 2007, the Agency has decided to defer adopting the CSVL test
cycle here.

[[Page 39026]]

Instead, EPA with all of its stakeholders in this regard will map out a
process of engine testing and analysis to better characterize constant-
speed equipment in-use to design the most appropriate test cycle for
the largest number of constant-speed engines. EPA undertakes this
process with an eye to initiating rulemaking which would lead to
promulgation of a transient cycle for constant-speed engines before the
Agency's 2007 Nonroad Diesel Technical Review.
EPA defines a constant-speed engine in this regard as one which is
certified to constant-speed operation, in other words, an engine which
may not operate at a speed outside a single, fixed reference speed set
by the engine's governor. It should be clear then that any engine for
which the governor doesn't strictly limit the engine speed in-use to
constant-speed operation, that engine will be subject to the NRTC.
Thus, if a manufacturer's engine is certified to EPA's 8-mode steady-
state test, the engine would also need to certify to the NRTC, since
the 8-mode test does not limit the engine's fixed operating speed.
Conversely, those manufacturers who certify their engines to EPA's
constant-speed steady-state test, the 5-mode test cycle, are not
required to have their engines certify to the NRTC.
By utilizing an inclusive, data-driven approach (see Summary and
Analysis document for more detail), the Agency is allowing time to
develop, and if appropriate, finalize and implement a test procedure
that meets the needs of the Agency, manufacturers, and other parties in
advance of the 2007 Technology Review. In fact, the Agency envisions
constant speed variable load cycle generation to be completed by July
2005. This approach should allow the Agency to develop a testing
program which ensures robust control in-use, is data-driven and remains
globally harmonized. We expect to initiate this effort within 3 months
of promulgation of this rule and to conclude the work on the new test
cycle in enough time to promulgate it through rulemaking and to provide
industry adequate lead time to implement it in an orderly manner. If we
encounter unforeseen and unavoidable delays or complications in this
process, we will consider approaches to control based on available data
at the time of the 2007 Technology Review.
The Agency is adopting additional requirements, in conjunction with
existing steady-state test requirements, which will help ensure that
constant-speed nonroad diesel engines are subject to a rigorous program
of in-use control of emissions and that diesel engine emissions will be
controlled over a wide range of speed and load combinations. EPA is
finalizing stringent nonroad NTE limits and related test procedures for
all new nonroad diesel engines subject to the Tier 4 emissions
standards beginning in 2011 which will supplement the existing steady-
state five-mode test cycle for constant-speed application engines. NTE
testing for transient operation will add further assurance that
emissions from constant-speed engines within this class, which have a
limited speed response in-use, are controlled under in-use operation.
Typically, engines which are designed to a particular transient cycle
will control emissions effectively under other types of transient
operation not specifically included in that certification procedure.
Engines that are capable of meeting emission standards on a constant-
speed, variable-load cycle will have the transient-response
characteristics that are appropriate for controlling emissions at
higher engine loads and for less dynamic transient operation. EPA,
engine manufacturers, and interested parties will, in the mean time,
work to develop a more appropriate transient test for constant-speed
engines. A transient test for this broad class of nonroad engines will
ensure a robust level of emissions control in-use within the diverse
population of constant-speed engines and equipment.
4. Steady-State Tests
Recognizing the variety of both power classes and work applications
to be found within the nonroad equipment and engine population, and as
proposed, EPA is retaining current Federal steady-state test procedures
for nonroad engines. (Manufacturers are thus required to meet emission
standards under steady-state conditions, in addition to meeting
emission standards under the transient test cycle, whenever the
transient test cycle applies.) This requirement, like NTE emission
testing, is one of two tests which apply to every Tier 4 engine. Table
III-2 below sets out the particular steady-state duty cycle applicable
to each of the following categories: (1) Nonroad engines 25 hp and
greater; (2) nonroad engines less than 25 hp; and (3) nonroad engines
having constant-speed, variable-load applications, (e.g., gen sets).
The steady-state cycles remain, respectively, the 8-mode cycle, the 6-
mode cycle and the 5-mode cycle.\81\
---------------------------------------------------------------------------

\81\ These three steady-state test cycles are similar to test
cycles found in the International Standard ISO 8178-4:1996 (E) and
remain consistent with the existing 40 CFR part 89 steady-state duty
cycles.
---------------------------------------------------------------------------

Steady-state test cycles are needed so that testing for
certification will reflect the broad range of operating conditions
experienced by these engines. A steady-state test cycle represents an
important type of modern engine operation, in power and speed ranges
that are typical in-use. The mid-to-high speeds and loads represented
by present steady-state testing requirements are the speeds and loads
at which these engines are designed to operate for extended periods for
maximum efficiency and durability. Details concerning the three steady-
state procedures for nonroad engines and equipment are found in
regulations at 40 CFR 1039.505 and in Appendices I-III to 40 CFR part 1039.
Manufacturers will perform each steady-state test following all
applicable test procedures in the regulations at 40 CFR part 1039,
e.g., procedures for engine warm-up and exhaust emissions measurement.
The testing must be conducted with all emission-related engine control
variables in the maximum NO_X-producing condition which could
be encountered for a 30 second or longer averaging period at a given
test point. Table III.F-2 below summarizes the steady-state testing
requirements by individual engine power categories.

Table III.F-2.--Summary of Steady-State Test Requirements
----------------------------------------------------------------------------------------------------------------
Steady-state testing requirements
--------------------------------------------------------------------------
Nonroad engine power classes 8-Mode cycle (C1 6-Mode cycle (G3 5-Mode cycle (D2
weighting) weighting) weighting)
----------------------------------------------------------------------------------------------------------------
hp < 25 (kW < 19).................... applies \a\............ applies \a\............ applies \b\
25 < = hp < 75 (19 < = kW < 56)........ applies................ NA \c\................. applies \b\
75 < = hp < 175 (56 < = kW < 130)...... applies................ NA \c\................. applies \c\

[[Page 39027]]

175 < = hp < = 750 (130 < = kW < = 560).. applies................ NA \c\................. applies \b\
hp > 750 (kW > 560).................. applies................ NA \c\................. applies \b\
----------------------------------------------------------------------------------------------------------------
\a\ Manufacturers may use either of these tests for this class of engines.
\b\ For constant, or nearly constant, speed engines and equipment with variable, or intermittent, load.
\c\ Testing procedures not applicable to this class of engines.

Nonroad engine manufacturers \82\, have called for steady-state
testing which would collect emissions continuously ``in a pseudo-
transient manner,'' proposing in effect, one-filter PM collections
during a steady-state duty cycle. In response to these and other
manufacturer concerns for emission variability during certification
testing due to unanticipated emission control system regeneration
between steady-state test modes, the Agency \83\ has adopted, in its 40
CFR 1065.515 regulations, the concept of modifying EPA's 40 CFR part 89
steady-state engine certification duty cycles. The section describes
ramped ``modal'' steady-state certification tests which would link the
modes of a steady-state test together for the purpose of collecting a
continuous stream of engine emissions. These tests provide for
operating an engine at all of the modes specified in the present
steady-state nonroad test cycles but without the breaks in emission
collection required by switching between modes, stabilizing engine
operation, and collecting emissions at that next operating mode. Since
a ramped modal cycle (RMC) test cycle may more reliably and
consistently report engine emissions from particulate trap and other
emission control hardware-equipped nonroad engines than the comparable
steady-state duty cycle from which it was derived, the Agency is
providing the option of using these RMC versions of its steady-state
engine duty cycles for nonroad diesel engine certification testing in
lieu of the otherwise applicable steady-state cycles. Details on the
procedures may be found in chapter 4.2 of the RIA for this rule and at
regulations at 40 CFR 1039.505 and Appendix I of part 1039.
---------------------------------------------------------------------------

\82\ Letter from EMA (Engine Manufacturers Association) to EPA
Air Docket A-2001-28, IV-D-402, pp 64.
\83\ Memorandum and summary of technical discussions (including
Appendix ``A'' text) in the e-Docket submission, OAR-2003-0012-0028,
to EPA's Air Docket.
---------------------------------------------------------------------------

The optional RMC duty cycles do not represent a relaxation in
stringency of emission testing nor are they an unreasonable increase in
the emission test burden of diesel engine manufacturers. Rather, the
RMC versions of EPA's steady-state test cycles allow for more
consistent and predictable emission testing of emission control system
hardware-equipped diesel engines. Eliminating the ``downtime'' between
modes for the emission collection equipment allows sampling of
emissions to be done on a composite basis for the whole test as opposed
to sampling emissions mode-by-mode. The RMC versions of these tests
simply create a negligible transition period 20 seconds long connecting
each mode and collects emissions during these brief transitions, as
well as collecting emissions during the running of each test's discrete
operating modes. The continuous emission sampling allows regeneration
events from engine emission control hardware to be captured more
reliably and repeatably. By running emission testing without breaks and
over the same engine duty schedule for each repetition of a RMC test,
regeneration within the engine's emission control hardware should
become almost a predictable event. The longer sampling times of RMCs,
while creating an identical weighting of each mode's emissions, also
help to avoid collecting a minuscule, possibly unreliably measured,
amount of sample over the course of any single operating mode. PM
emissions, for example, can be collected and measured more precisely
under these test conditions as either batch or continuous samples. The
opportunities for loss of emissions during sampling and storage due to
sample retention by equipment at shut-down between modes or by filter
handling and weighing are greatly reduced. As well, running a ``steady-
state'' test on a continuous basis allows cycle performance statistics
to be applied to RMC emission tests (see 40 CFR, part 39).
Manufacturers are familiar with test cycles run with a set of
statistical engine duty cycle performance ``targets''. Further, their
test runs will be subject to less test cell ``tuning'', modifying
control strategies using repeat testing runs to fit the emission test
cycle and the dynamometer to operate a particular engine. Finally,
statistical targets serve to increase repeatability and reduce
variability of engine operating parameters and emission test results on
a test-to-test basis.
Transport refrigeration unit (TRU) engines, a specific application
of a steady-state operation engine (68 FR 28485, May 23, 2003), will be
subject to both steady-state and NTE standards based on any normal
operation that these engines would experience in the field. To that
end, EPA has adopted a four-mode steady-state test cycle designed
specifically for engines used in TRU applications which may be used by
the manufacturer in lieu of normal steady-state testing. Commenters to
the rule agreed that a TRU test cycle would be more representative of
refrigeration unit operation than the nonroad cycles currently
available to manufacturers of TRU engines, but some took issue with
EPA's usage restrictions in paragraphs (d)(2), (e)(2), and (e)(3) of
regulations proposed at 40 CFR part 1039 subpart G. In response, the
final rule allows manufacturers to test their engines under a broad
definition of intermediate test speed. The definition covers the 60-75%
range of engine rpm at the specified test cycle engine load points, as
defined in 40 CFR, 89.2. This will enable an engine manufacturer to
more closely match the TRU cycle to the operation of their engines in-
use. Further, the engine is allowed to exhibit no more than 2%
variation in transient operation (speed or torque change) around the
four operating modes defined under this test cycle. The provisions to
address load set point drift are discussed in detail in the RIA chapter
4.3.2 and in regulations at 40 CFR part 1039 subpart G.
In choosing to certify their engine as a TRU engine, manufacturers
will need to state on the engine emission control label that the engine
will only be used in a TRU application and records must be kept on the
delivery destination(s) for their engines. Manufacturers of these
engines may petition EPA at certification for a waiver of the
requirement to provide smoke emission

[[Page 39028]]

data for their constant-torque engines. A more detailed discussion of
the TRU associated provisions is contained in chapter 4.2 of the RIA.
It should be noted that an RMC version of the steady state TRU duty
cycle is provided in Table 2 of 40 CFR part 1039 subpart G.

G. Other Test Procedure Issues

This section contains further detail and explanation regarding
several related nonroad diesel engine emissions test and measurement
provisions. The test procedures are specified in 40 CFR part 1065 and
part 1039 subpart F. Part 1065 contains general test procedure
requirements and part 1039 contains the provisions that are specific to
CI nonroad engines, such as test cycles. The changes described here
will not significantly affect the stringency of the standards. While
some of the changes being made may appear to increase the stringency of
the standards when considered by themselves, others would appear to
have the opposite effect. When considered together, however, they will
result in more repeatable and less subjective testing that is
equivalent to the existing procedures with respect to stringency.
1. Smoke Testing
To control smoke emissions, we are requiring in this final rule
that the current smoke standards and procedures will continue to apply
to certain engines. We proposed to change these smoke standards and
procedures, based on recent developments toward an established
international protocol that was designed to allow a straightforward
method to test engines in the field (68 FR 28486, May 23, 2003). We
have chosen not to adopt the proposed approach, mainly because it is
becoming increasingly clear that ongoing development of in-use testing
equipment will allow direct measurement of PM emissions in the field.
We believe this will provide the best long-term control of both PM
emissions. Controlling smoke is in some ways independent of PM, but the
interest in developing an in-use smoke test was primarily as a means of
providing a secondary indicator of high in-use PM emissions from these
engines. Direct PM measurement removes much of the advantage of in-use
smoke measurements. Relying on the existing smoke test also addresses
concerns raised by manufacturers that the effort to comply with the new
smoke requirements would be a large testing and development burden with
little air-quality benefit. We believe that aftertreatment-based Tier 4
PM standards will control smoke emissions as well as improved smoke
testing standards and procedures. Engines below 19 kilowatts (kW) will
generally not have particulate filters, but most of these are constant-
speed engines and are therefore not subject to smoke standards, as
described below.
We are continuing the established policy of exempting constant-
speed engines and single-cylinder engines from smoke standards. We do
not believe that constant-speed engines undergo the kind of
acceleration or lugging events that occur during this smoke test
procedure, so it would not be appropriate for these engines to be
subject to smoke standards. We exempt single-cylinder engines for a
different reason. These engines, which very often provide power for
generator sets and other constant-speed applications, but may in some
cases experience accelerations, the nature of single-cylinder engine
operation makes it difficult to get a valid smoke emission measurement.
Single-cylinder engines generally have discrete puffs of smoke, rather
than a stable emission stream for measuring smoke values. We believe it
is not appropriate to use such erratic measurements to evaluate an
engine's emission performance. As a result, we will not require single-
cylinder engines to meet our smoke standards until we find a test
method that takes this into account.
Also, as described in the proposed rule, we are exempting from
smoke emission standards any engines that are certified to PM emission
standards or FELs at or below 0.07 g/kW-hr. We believe any engine that
has such low PM emissions will have inherently low smoke emissions. No
commenters disagreed with this position.
2. Maximum Test Speed
We are changing how test cycles are specified. As proposed, we are
applying the existing definition of maximum test speed in 40 CFR part
1065 to nonroad CI engines. This definition of maximum test speed is
the single point on an engine's normalized maximum power versus speed
curve that lies farthest away from the zero-power, zero-speed point.
This is intended to ensure that the maximum speed of the test is
representative of actual engine operating characteristics and is not
improperly used to influence the parameters under which their engines
are certified. In establishing this definition of maximum test speed,
it was our intent to specify the highest speed at which the engine is
likely to be operated in use. Under normal circumstances this maximum
test speed should be close to the speed at which peak power is
achieved. However, in past discussions, some manufacturers have
indicated that it is possible for the maximum test speed to be
unrepresentative of in-use operation. Since we were aware of this
potential during the original development of this definition, we
included provisions to address issues such as these. Part 1065 allows
EPA to modify test procedures in situations where the specified test
procedures would otherwise be unrepresentative of in-use operation.
Thus, in cases in which the definition of maximum test speed resulted
in an engine speed that was not expected to occur with in-use engines,
we would work with the manufacturers to determine the maximum speed
that would be expected to occur in-use (see regulations at 40 CFR
1065.10 (c)).
3. Improvements to the Test Procedures
As we proposed, we are making changes to the test procedures to
improve the precision of emission measurements. These changes address
the potential effect of measurement precision on the feasibility of the
standards. It is important to note that these changes are not intended
to bias results high or low, but only to improve the precision of the
measurements. Based on our experience with these modified test
procedures, and our discussions with manufacturers about their
experiences, we are confident that these changes will not affect the
stringency of the standards. These changes are summarized briefly here.
The rationale for the changes are discussed in detail elsewhere. The
changes affecting Constant Volume Sampling (CVS) and PM testing are
discussed in a memo to the docket (Air Docket A-99-06, IV-B-11), which
was originally submitted in support of the recent highway heavy-duty
diesel engine rule (66 FR 5001, January 18, 2001).
In general, we are applying the highway heavy-duty engine test
procedures to nonroad CI engines in this rulemaking. Many of the
specific changes being adopted are to the PM sampling procedures. The
PM procedures are the procedures finalized as part of the highway
heavy-duty diesel engine rule (66 FR 5001, January 18, 2001). These
include changes to the type of PM filters that are used and
improvements in how PM filters are weighed before and after emission
measurements, including requirements for more precise microbalances.
It is also worth noting that we intend to make additional
improvements to the test procedures in a separate rulemaking that will
be proposed later this year to incorporate the latest measurement

[[Page 39029]]

technologies. Many of the improvements being considered were discussed
in the previously-mentioned memo to the docket (Air Docket A-99-06, IV-
B-11). We recognize the importance of these improvements for use in
testing by nonroad diesel engine manufacturers and EPA. However, since
we expect that the changes would also apply to many nonroad spark-
ignition engine manufacturers, it is appropriate to conduct a separate
notice and comment rulemaking for all affected parties. We remain
committed to incorporating appropriate additional improvements to the
test procedures. We have placed into the docket a draft revised version
of part 1065 that represents our current thinking on appropriate
testing regulations.

H. Engine Power

Currently, rated power and power rating are undefined, and we are
concerned that this makes the applicability of the standards too
subjective and confusing. One manufacturer may choose to define rated
power as the maximum measured power output, while another may define it
as the maximum measured power at a specific engine speed. Using this
second approach, an engine's rated power may be somewhat less than the
true maximum power output of the engine. Given the importance of engine
power in defining which standards an engine must meet and when, we
believe that it is critical that a singular power value be determined
objectively according to a specific regulatory definition.
To address this, we proposed to add a definition of ``maximum
engine power'' to the regulations. This term was to be used instead of
previously undefined terms such as ``rated power'' or ``power rating''
to specify the applicability of the standards. The addition of this
definition was intended to allow for more objective applicability of
the standards. More specifically, we proposed that:

Maximum engine power means the measured maximum brake power
output of an engine. The maximum engine power of an engine
configuration is the average maximum engine power of the engines
within the configuration. The maximum engine power of an engine
family is the highest maximum engine power of the engines within the family.

During the comment period, manufacturers opposed the proposed
definition. (We received no other comments on this issue.) The
manufacturers correctly pointed out that they cannot know the average
actual power of production engines when they certify an engine family,
because certification typically occurs before production begins.
Therefore the definition of ``maximum engine power'' being finalized
today relies primarily upon the manufacturer's design specifications
and the maximum torque curve that the manufacturer expects to represent
the actual production engines. This provision is specified in a new
section 40 CFR 1039.140. Under this approach the manufacturer would
take the torque curve that is projected for an engine configuration,
based on the manufacturer's design and production specifications, and
convert it into a ``nominal power curve'' that would relate the maximum
power that would be expected to engine speed when a production engine
is mapped according our specified mapping procedures. The maximum
engine power is being defined as the maximum power point on that
nominal power curve.
Manufacturers will be required to report the maximum engine power
of each configuration in their applications for certification. As with
other engine parameters, manufacturers will be required to ensure that
the engines that they produce under the certificate have maximum engine
power consistent with those described in their applications. However,
since we recognize that variability is a normal part of engine
production, we will not require that all production engines have
exactly the power specified in the application. Instead, we will only
require that the power specified in the application be within the
normal range of powers of the production engines. Typically, we would
expect the specified power to be within one standard deviation of the
mean power of the production engines. If a manufacturer determines that
the specified power is outside of the normal range, we may require the
manufacturer to change the settings of the engines being produced and/
or amend the application for certification. In deciding whether to
require such amendment, we would consider the degree to which the
specified power differed from the production engines, the normal power
variability for those engines, whether the engine used or generated
emission credits, and whether the error affected which standards
applied to the engine.
The preceding discussion presumes that each manufacturer will
develop its production processes to produce the engines described in
the application. If a manufacturer were to intentionally produce
engines different than those described in the application, we would
consider the application to be fraudulent, and could void the
certificate ab initio for those engines. For example, for engines that
use emission credits, this could occur if a manufacturer deliberately
biased its production variability so that the engines have higher
average power than described in the application. If we voided the
certificate for those engines the manufacturer would be subject to
large fines and any other appropriate enforcement provisions for each
engine.
Finally, in light of some of the comments that we received, it is
worth clarifying that the maximum engine power will not be used during
engine testing. It is only used to define power categories and
calculate ABT emission credits.

I. Auxiliary Emission Control Devices and Defeat Devices

Existing nonroad regulations prohibit the use of a defeat device
(see 40 CFR 89.107) in nonroad diesel engines. The defeat device
prohibition is intended to ensure that engine manufacturers do not use
auxiliary emission control devices (AECD) which sense engine operation
in a regulatory test procedure and as a result reduce the emission
control effectiveness of that procedure.\84\ In today's notice we are
supplementing existing nonroad test procedures with a transient engine
test cycle and NTE emission standards with associated test
requirements. As such, the Agency believes that a clarification of the
existing nonroad diesel engine regulations regarding defeat devices is
required in light of these additional emission test requirements. The
defeat device prohibition makes it clear that AECDs which reduce the
effectiveness of the emission control system are defeat devices, unless
one of several conditions is met. One of these conditions is that an
AECD which operates under conditions ``included in the test procedure''
is not a defeat device.\85\ While the existing defeat device definition
does contain the term ``test procedure,'' and therefore should be
interpreted as including the supplemental testing requirements, we want
to make it clear that both the supplemental transient test cycle and
NTE emission test procedures are

[[Page 39030]]

included within the defeat device regulations as conditions under which
an operational AECD will not be considered a defeat device. Therefore,
we are clarifying the defeat device regulations by specifying the
appropriate test procedures (i.e., the existing steady-state procedures
and the supplemental tests). We are clarifying the engine manufacturers
certification reporting requirements with respect to the description of
AECDs. Under the previous nonroad engine regulations, manufacturers are
required to provide a generalized description of how the emissions
control system operates and a ``detailed'' description of each AECD
installed on the engine (see 40 CFR 89.115(d)(2)). This change
clarifies what is meant by ``detailed.''
---------------------------------------------------------------------------

\84\ Auxiliary emission control device is defined at 40 CFR 89.2
as ``any element of design that senses temperature, vehicle speed,
engine RPM, transmission gear, or any other parameter for the
purpose of activating, modulating, delaying or deactivating the
operation of any part of the emission control system.''
\85\ 40 CFR 89.107(b)(1) states ``Defeat device includes any
auxiliary emission control device (AECD) that reduces the
effectiveness of the emission control system under conditions which
may reasonably be expected to be encountered in normal operation and
use unless such conditions are included in the test procedure.''
---------------------------------------------------------------------------

For engines rated above 750 horsepower, the expanded interpretation
of ``included in the test cycle'' extends only to the NTE because we
are not requiring these engine to be tested over the supplemental
transient test cycle. Transient emissions control strategies that are
substantially included in the NTE will be considered to comply with the
defeat device criteria. For instances where transient emissions control
strategies are not well represented over the official test
requirements, we will rely on the defeat device provisions to ensure
appropriate transient off-cycle emissions control. The defeat device
provisions restrict the ability of manufacturers to reduce the level of
emissions control during transient operation compared to that employed
over the steady state cycle. In order to evaluate transient emissions
control strategies for compliance with the defeat device provisions, we
are requiring manufacturers to submit information which indicates how
transient emissions are controlled during normal operation and use.
Information that would adequately fulfill this requirement includes but
is not limited to:
A. Emissions data gathered with portable emissions measurement
systems from in-service engines operating over a broad range of typical
transient conditions;
B. Emissions data generated under laboratory conditions
representing a broad range of typical transient operation;
C. Transient test cycle results from certified engines rated at or
below 750 horsepower which share nearly identical transient emissions
control strategies;
D. Base emissions control maps along with an explanation for
differences in control between portions of the map substantially
included in the steady-state test cycle and that which is predominately
associated with transient operation;\86\
---------------------------------------------------------------------------

\86\ Base emissions control maps describe the modulation of an
emissions control parameter as a function of changing engine speed
and torque.
---------------------------------------------------------------------------

E. A comparative analysis of the base emissions control maps from
certified engines rated at or below 750 horsepower and those rated over
750 horsepower.
We will use this information to determine the degree to which the
design and effectiveness of the transient emissions control system
compares to the control demonstrated over the steady-state cycle as
well as the transient control used for certified engines at or below
750 horsepower where compliance over the transient cycle is required.
A thorough disclosure of the presence and purpose of AECDs is
essential in allowing EPA to evaluate the AECD and determine whether it
represents a defeat device. Clearly, any AECD which is not fully
identified in the manufacturer's application for certification cannot
be appropriately evaluated by EPA and therefore cannot be determined to
be acceptable by EPA. Our clarifications to the certification
application requirements include additional detail specific to those
AECDs which the manufacturer believes are necessary to protect the
engine or the equipment in which it is installed against damage or
accident (``engine protection'' AECDs). While the definition of a
defeat device allows as an exception strategies needed to protect the
engine and equipment against damage or accident, we intend to continue
our policy of closely reviewing the use of this exception. In
evaluating whether a reduction in emissions control effectiveness is
needed for engine protection, EPA will closely evaluate the actual
technology employed on the engine family, as well as the use and
availability of other emission control technologies across the
industry, taking into consideration how widespread the use is,
including its use in similar engines and similar equipment. While we
have specified additional information related to engine protection
AECDs in the regulations, we reserve the right to request additional
information on a case-by-case basis as necessary.
In the last several years, EPA has issued extensive guidance on the
disclosure of AECDs for both highway and nonroad diesel engine
manufactures. These provisions do not impose any new certification
burden on engine manufacturers, rather, it clarifies the existing
certification application regulations by specifying what type of
information manufacturers must submit regarding AECDs.
Finally, we take this opportunity to emphasize that the information
submitted must be specific to each engine family. The practice of
describing AECDs in a ``common'' section, wherein the strategies are
described in general for all the manufacturer's engines, is acceptable
as long as each engine family's application contains specific
references to the AECDs in the common section which clearly indicate
which AECDs are present on that engine family, and the application
contains specific calibration information for that engine family's
AECDs. The regulatory requirements can be found at 40 CFR 89.115(d)(2)
in today's notice.

J. Not-To-Exceed Requirements

In today's action we are finalizing not-to-exceed (NTE) emission
standards for all new nonroad diesel engines subject to the Tier 4
emissions standards beginning in 2011. These NTE standards and
requirements are largely identical to the NTE provisions we proposed,
except as noted below.
The NTE standards and test procedures are being finalized to help
ensure that nonroad diesel emissions are controlled over the wide range
of speed and load combinations commonly experienced in-use. EPA has
similar NTE standards for highway heavy-duty diesel engines,
compression ignition marine engines, and nonroad spark-ignition
engines. The NTE requirements supplement the existing steady-state test
as well as the new transient test which is also being finalized today.
The NTE standards and test procedures which we proposed, and which
we are finalizing, are derived from similar NTE standards and test
procedures which EPA adopted for highway heavy-duty diesel engines. In
the proposal, we requested comment on an alternative NTE test procedure
approach (see 68 FR 28369, May 23, 2003). As discussed in the proposal,
the two NTE approaches would result in the same overall level of
emission control, but the implementation of each approach from an in-
use measurement and data gathering perspective are quite different. We
have decided not to finalize this alternative approach. This decision
is based primarily on our belief that nonroad engine manufacturers will
more easily transfer the knowledge and experience gained from the
highway NTE implementation (which begins in 2007) to the nonroad
program if the two programs have similar requirements. For additional
discussion regarding our

[[Page 39031]]

decision to not finalize the alternative approach, please see the
Summary and Analysis of Comments.
The NTE requirements establish an area (the ``NTE zone'' or ``NTE
control area'') under the torque curve of an engine where emissions
must not exceed a specified value for any of the regulated
pollutants.\87\ An illustrative NTE zone is shown in Figure III.J-1.
---------------------------------------------------------------------------

\87\ Torque is a measure of rotational force. The torque curve
for an engine is determined by an engine ``mapping'' procedure
specified in the Code of Federal Regulations. The intent of the
mapping procedure is to determine the maximum available torque at
all engine speeds. The torque curve is merely a graphical
representation of the maximum torque across all engine speeds.
[GRAPHIC]
[TIFF OMITTED]
TR29JN04.002

The NTE standard applies during any conditions that could
reasonably be expected to be seen by that engine in normal operation
and use, within certain broad ranges of real ambient conditions. The
NTE requirements will help to ensure emission benefits over the full
range of in-use operating conditions. The NTE being finalized today for
nonroad contains the same basic provisions as the highway NTE. This NTE
control area is defined in the same manner as the highway NTE control
area, and is therefore a subset of the engine's possible speed and load
operating range. The NTE standard applies to emissions sampled during a
time duration as small as 30 seconds. The NTE standard requirements for
nonroad diesel engines are summarized below and specified in the
regulations at 40 CFR 1039.101 and 40 CFR 1039.515. These requirements
will take effect as early as 2011, as shown in table III.J-1. The NTE
standard applies to engines at the time of certification as well as in
use throughout the useful life of the engine.

Table III.J-1.--NTE Standard Implementation Schedule
------------------------------------------------------------------------
NTE
Power category implementation
model year \a\
------------------------------------------------------------------------
< 25 hp.................................................. 2013
25-75 hp................................................ 2013 \b\
75-175 hp............................................... 2012
175-750 hp.............................................. 2011
>750 hp................................................. 2011
------------------------------------------------------------------------
Notes:
\a\ The NTE applies for each power category once Tier 4 standards are
implemented, such that all engines in a given power category are
required to meet NTE standards.
\b\ The NTE standard would apply in 2012 for any engines in the 50-75 hp
range which choose not to comply with the proposed 2008 transitional
PM standard.

The NTE test procedure can be run in nonroad equipment during field
operation or in an emissions testing laboratory using an appropriate
dynamometer. The test itself does not involve a specific operating
cycle of any specific length; rather, it involves nonroad equipment
operation of any type which could reasonably be expected to occur in
normal nonroad equipment operation that could occur within the bounds
of the NTE control area. The nonroad engine is operated under
conditions that may reasonably be expected to be encountered in normal
operation and use, including operation under steady-state or transient
conditions and under varying ambient conditions. Emissions are averaged
over a minimum time of thirty seconds and then compared to the
applicable emission standard. The NTE standard applies over a wide
range of ambient conditions, including up to an altitude

[[Page 39032]]

of 5,500 feet above-sea level at ambient temperatures as high as 86
deg. F, and at sea-level up to ambient temperatures as high as 100 deg.
F. The specific temperature and altitude conditions under which the NTE
applies, as well as the methodology for correcting emissions results
for temperature and/or humidity, are specified in the regulations.
For new nonroad diesel engines subject to the NTE standards, we
will require that manufacturers state in their application for
certification that they are able to meet the NTE standards under all
conditions that may reasonably be expected to occur in normal equipment
operation and use. Manufacturers will have to maintain a detailed
description of any testing, engineering analysis, and other information
that forms the basis for their statement. We believe that there is a
variety of information that a manufacturer could use as a reasonable
basis for a statement that engines are expected to meet NTE standards.
For example, a reasonable basis could include data from laboratory
steady-state and transient test cycle operation, a robust engine
emissions map derived from laboratory testing (e.g., an emissions map
of similar resolution to the engine's base fuel injection timing map)
and technical analysis relying on good engineering judgment which are
sufficient, in combination, to project emissions levels under NTE
conditions reasonably expected to be encountered in normal operation
and use. Data generated from in-use nonroad equipment testing to
determine emission levels could, at the manufacturer's option, also be
part of this combination. However, a reasonable basis for the
manufacturer's statement does not require in-use emissions test data.
This statement could reasonably be based solely on laboratory test
data, analysis, and other information reasonably sufficient to support
a conclusion that the engine will meet the NTE under conditions
reasonably expected to be encountered in normal vehicle operation and
use. If a manufacturer has relevant in-use nonroad emissions test data,
it should be taken into consideration by the manufacturer in developing
the basis for its statement.
In addition, as we proposed, we are finalizing a transition period
during which a manufacturer could apply for an NTE deficiency for a
nonroad diesel engine family. The NTE deficiency provisions would allow
the Administrator to accept a nonroad diesel engine as compliant with
the NTE standards even though some specific requirements are not fully
met. We are finalizing these NTE deficiency provisions because we
believe that, despite the best efforts of manufacturers, for the first
few model years it is possible some manufacturers may have technical
problems that are limited in nature but cannot be remedied in time to
meet production schedules. We are not limiting the number of NTE
deficiencies a manufacturer can apply for during the first three model
years for which the NTE applies. For the fourth through the seventh
model year after which the NTE standards are implemented, a
manufacturer could apply for no more than three NTE deficiencies per
engine family. Within an engine family, NTE deficiencies must be
applied for on an engine model or power rating basis; however, the same
deficiency when applied to multiple ratings or models counts as a
single deficiency within an engine family. No deficiency may be applied
for or granted after the seventh model year. The NTE deficiency
provision will only be considered for failures to meet the NTE
requirements. EPA will not consider an application for a deficiency for
failure to meet the FTP or supplemental transient standards.
Similar to the 2007 highway HD rule, we are also finalizing a
provision which would allow a manufacturer to exclude defined regions
of the NTE engine control zone from NTE compliance if the manufacturer
could demonstrate that the engine, when installed in a specified
nonroad equipment application(s), is not capable of operating in such
regions. We have also finalized a provision which would allow a
manufacturer to petition the Agency to limit testing in a defined
region of the NTE engine control zone during NTE testing. This optional
provision would require the manufacturer to provide the Agency with in-
use operation data which the manufacturer could use to define a single,
continuous region of the NTE control zone. This single area of the
control zone must be specified such that operation within the defined
region accounts for 5 percent or less of the total in-use operation of
the engine, based on the supplied data. Further, to protect against
``gaming'' by manufacturers, the defined region must generally be
elliptical or rectangular in shape, and share a boundary with the NTE
control zone. If approved by EPA, the regulations then disallow testing
with sampling periods in which operation within the defined region
constitutes more than 5.0 percent of the time-weighted operation within
the sampling period.
The NTE numerical standard is a function of FTP emission standards
contained in today's final rule, which standards are described in
section II. As with the NTE standards we have established for the 2007
highway rule, the nonroad NTE standard is determined as a multiple of
the engine families' underlying FTP emission standard. In addition, as
with the 2007 highway standard, the multiple is either 1.25 or 1.5,
depending on the emission pollutant type and the value of the FTP
standard (or the engine families' FEL). These multipliers are based on
EPA's assessment of the technological feasibility of the NTE standard,
and our assessment that as the underlying FTP standard becomes more
stringent, the NTE multiplier should increase (from 1.25 to 1.5). The
FTP standard or FEL thresholds for the NTE standard's 1.25x multiplier
and the 1.5x multiplier are specified for each regulated emission in
table III.J-2.

Table III.J-2.--Thresholds for Applying NTE Standard of 1.25x FTP
Standard vs. 1.5x FTP Standard
------------------------------------------------------------------------
Apply 1.25x NTE Apply 1.5x when .
Emission when . . . . .
------------------------------------------------------------------------
NOX............................. NOX std or FEL >= NOX std or FEL <
1.9 g/bhp-hr. 1.9 g/bhp-hr
NMHC............................ NOX std or FEL >= NOX std or FEL <
1.9 g/bhp-hr. 1.9 g/bhp-hr
NOX+NMHC........................ NMHC+NOX std or NMHC+NOX std or
FEL >= 2.0 g/bhp- FEL < 2.0 g/bhp-
hr. hr
PM.............................. PM std or FEL >= PM std or FEL <
0.05 g/bhp-hr. 0.05 g/bhp-hr
CO.............................. All stds or FELs.. No stds or FELs
------------------------------------------------------------------------

For example, beginning in 2011, the NTE standard for engines
meeting a FTP PM standard of 0.01 g/bhp-hr and a FTP NO_X
standard of 0.30 g/bhp-hr would be 0.02 g/bhp-hr PM and 0.45 g/bhp-hr
NO_X. In the NPRM, we proposed a NO_X

[[Page 39033]]

threshold value of 1.5 g/bhp-hr as the value at which the NTE
multiplier would switch from 1.5 to 1.25.
We proposed this NO_X emission threshold level (1.5 g/
bhp-hr) primarily because it is the same value as we finalized for the
highway NTE. As shown in table III.J-2, we have finalized a threshold
value of 1.9 g/bhp-hr NO_X for nonroad engines. We have
finalized this higher NO_X threshold based on the differences
in the emission performance of NO_X control technologies
between highway and nonroad diesel engines. Specifically, nonroad
diesel NO_X standards have traditionally been higher than the
equivalent highway NO_X standard due primarily to the
effectiveness of charge-air-cooling and the lack of ram-air for nonroad
applications. For example, the nonroad Tier 3 NMHC+NO_X
standards are higher than the 2004 heavy-duty highway standards (e.g.,
3.0 g/bhp-hr vs. 2.5 g/bhp-hr), and the Tier 4 NO_X standard
is higher than the 2007 heavy-duty highway standard (e.g., 0.3 g/bhp-hr
vs. 0.2 g/bhp-hr). We expect that the nonroad Tier 3 standard for
engines above 100 hp will require NO_X levels of
approximately 2.5 g/bhp-hr and we expect that for the 2004 highway
heavy-duty standards, NO_X levels are approximately 2 g/bhp-
hr. In both cases, these emission levels are the building blocks for
the next set of EPA standards (e.g., Tier 4 for nonroad and 2007 for
highway). Because the nonroad Tier 3 NO_X emission levels are
expected to be approximately 25 percent greater than the 2004 highway
level (2.5 vs 2), we believe that the NTE NO_X multiplier
threshold for nonroad should be 25 percent greater for nonroad as
compared to highway. For these reasons, we have finalized a
NO_X multiplier threshold of 1.9 g/bhp-hr, which is 25
percent greater than the highway multiplier threshold.
In addition, as proposed, we are finalizing a number of specific
engine operating conditions during which the nonroad NTE standard would
not apply. The exact criteria for these conditions are defined in the
regulations, but in summary: the NTE does not apply during engine
start-up conditions; the NTE does not apply during very cold engine
intake air temperatures for EGR-equipped engines during which the
engine may require an engine protection strategy; and, finally, for
engines equipped with NO_X and/or NMHC aftertreatment (such
as a NO_X adsorber), the NTE does not apply during warm-up
conditions for the exhaust emission control device. Finally, while we
did not propose this, we are finalizing the NTE PM carve-out provisions
for engines which will not require PM filters. The PM only carve-out is
a sub-region of the NTE zone in which the NTE PM standard does not
apply. Figure III.J-1 contains an illustration of the PM carve-out.
This is a region of high engine speed and low engine torque during
which engine-out PM emissions are difficult to control to levels below
the PM NTE standard. The dimensions of the PM carve-out are specified
in the regulations. For engines equipped with a PM filter, compliance
with the PM NTE standard in this region is achievable due to the highly
efficient PM reduction capabilities of the CDPF technology. However,
for engines in the under 25 hp category, for which we have established
Tier 4 emission standards that do not require the use of a PM filter,
PM control in this sub-region of the NTE zone with conventional PM
reduction technologies may not be achievable. Therefore, as we allowed
with highway heavy-duty engines certifying to the 0.1 g/bhp-hr
standard, we have created a PM carve-out for nonroad engines that use
in-cylinder PM control technologies. Specifically, the PM carve-out
applies to engines meeting a PM standard or FEL greater than or equal
to 0.05 g/bhp-hr.

K. Investigating and Reporting Emission-Related Defects

In 40 CFR part 1068, subpart F, we are adopting defect reporting
requirements that obligate manufacturers to tell us when they learn
that emission-control systems are defective and to conduct
investigations under certain circumstances to determine if an emission-
related defect is present. Under these defect-reporting requirements,
manufacturers must track available warranty claims and any other
available information from dealers, hotlines, diagnostic reports, or
field-service personnel to identify possible defects. If the number of
possible defects exceeds certain thresholds, they must investigate
future warranty claims and other information to establish whether these
are actual defects.
We believe the investigation requirement in this rule will allow
both EPA and the engine manufacturers to fully understand the
significance of any unusually high rates of warranty claims for systems
or parts that may have an impact on emissions. In the past, defect
reports were submitted based on a very low threshold with the same
threshold applicable to all size engine families and with little
information about the full extent of the problem. The new approach
should result in fewer overall defect reports being submitted by
manufacturers than would otherwise be required under the old defect-
reporting requirements because the number of defects triggering the
submission requirement rises with the engine family size. The new
approach may trigger some additional reports for small-volume families,
but the percentage-based approach will ensure that investigations and
reports correspond to issues that are likely to be significant.
Part 1068, subpart F, is intended to require manufacturers to use
information we would expect them to keep in the normal course of
business. We believe in most cases manufacturers will not be required
to institute new programs or activities to monitor product quality or
performance. A manufacturer that does not keep warranty or replacement
part information may ask for our approval to use an alternate defect-
reporting methodology that is at least as effective in identifying and
tracking possible emission-related defects as the requirements of 40
CFR 1068.501. Thus manufacturers will have the flexibility to develop
defect tracking and reporting programs that work better for their
standard business practices. However, until we approve such a request,
the thresholds and procedures of subpart F continue to apply.
Manufacturers may also ask for our approval to use an alternate
defect-reporting methodology when the requirements of 40 CFR 1068.501
can be demonstrated to be highly impractical or unduly burdensome. In
such cases, we will generally allow alternate methodologies that are at
least as effective in identifying, correcting, and informing EPA of
possible emission-related defects as the requirements of 40 CFR
1068.501. We expect this flexibility to be useful in special
circumstances such as when new models of very large engines are
introduced for the first time. In this situation, it may be appropriate
to allow an alternate defect reporting method because the high cost of
these engines often makes it impractical to build and test large
numbers of prototype engines. The initial production of these engines
can have similar defect rates to the high levels often associated with
prototype engines. While we are concerned about such defects and want
to be kept informed about them, it is not clear that our basic program
would be the best way to address these defects. In such cases, we
believe it may be more appropriate for manufacturers to propose an
alternative approach that consolidates reports on a regular interval,
such as quarterly, and identifies obvious early-life defects without a
formal tracking process. In general, we would encourage manufacturers
to propose an alternate

[[Page 39034]]

approach to ensure that these defects are properly addressed while
minimizing the associated burden.
Issues related to parts shipments received the most attention from
commenters who pointed out that the proposed requirement to track
shipments of all emission-related components was overly burdensome and
not likely to reveal useful information. We have concluded that it is
not appropriate to use parts shipments as a quantitative indicator to
evaluate whether manufacturers exceed the threshold that would trigger
an investigation. We generally agree with manufacturers concerns that
parts-shipments data would be too difficult to evaluate, for example,
because parts are often shipped for stocking purposes, parts are
installed in compliant and noncompliant products (such as exported
engines), and part shipments are generally not identifiable by model
year. The final rule therefore requires manufacturers to pursue a
defect investigation if the number of shipped parts is higher than the
manufacturer would expect based on historical shipment levels,
specifications for scheduled maintenance, or other factors.
We have modified the proposed thresholds to address concerns that
manufacturers would be required to investigate and report defects too
frequently. For engines under 750 hp, we are adopting investigation
thresholds of 10 percent of total production or 50 engines, whichever
is greater, for any single engine family in one model year. Similarly,
we are adopting defect-reporting thresholds of 2 percent of total
production or 20 engines, whichever is greater. For engines over 750
hp, the same percentage thresholds apply, but we are extending the
percentage values down to smaller engine families to reflect their
disproportionate contribution to total emissions. For these engines,
the absolute thresholds are 25 engines for investigations and 10 or 15
engines for defects (see table III.K-1). We believe these thresholds
adequately balance the desire to document emission-related defects
without imposing an unreasonable reporting burden. Also, we believe
this approach to adopting thresholds adequately addresses reporting
requirements for aftertreatment and non-aftertreatment components.

Table III.K-1.--Investigation and Defect-Reporting Thresholds for
Varying Sizes of Engine Families\1\
------------------------------------------------------------------------
Investigation Defect-reporting
Engine size threshold threshold
------------------------------------------------------------------------
< =750 hp........................ less than 500: 50. less than 1,000:
20
500-50,000: 10%... 1,000-50,000: 2%
50,000+: 5,000.... 50,000+: 1,000
>750 hp......................... .................. less than 150: 10
less than 250: 25. 150-750: 15
250+: 10%......... 750+: 2%
------------------------------------------------------------------------
Notes:
\1\ For varying sizes of engine families, based on sales per family in a
given model year.

EMA also expressed concern about the existing regulatory language
in 40 CFR 1068.501(b)(3), which states that manufacturers must
``consider defects that occur within the useful life period, or within
five years after the end of the model year, whichever is longer.''
However, this provision has no effect on the diesel engines subject to
the Tier 4 standards being adopted today, since they all have useful
lives of at least five years. We recognize that this issue may be
relevant to engine categories that do not have five-year useful lives,
such as small SI engines, and will consider these concerns in our
future regulation of such engines.
When manufacturers start an investigation, they must consider any
available information that would help them evaluate whether any of the
possible defects that contributed to triggering the investigation
threshold would lead them to conclude that these were actual defects.
Otherwise, manufacturers are expected to look prospectively at any
possible defects and attempt to determine whether these are actual
defects. Also, during an investigation, manufacturers should use
appropriate statistical methods to project defect rates if they are
unable to collect information to evaluate possible defects, taking
steps as necessary to prevent bias in sampled data (or making adjusted
calculations to take into account any bias that may remain). For
example, if 75 percent of the components replaced under warranty are
available for evaluation, it would be appropriate to extrapolate known
information on failure rates to the components that are unavailable for
evaluation.
The second threshold in 40 CFR 1068.501 specifies when a
manufacturer must report that there is an emission-related defect. This
threshold involves a smaller number of engines because each possible
occurrence has been screened to confirm that it is in fact an emission-
related defect. In counting engines to compare with the defect-
reporting threshold, the manufacturer generally considers a single
engine family and model year. Where information cannot be
differentiated by engine family and model year, the manufacturer must
use good engineering judgment to evaluate whether the information leads
to a conclusion that the number of defects exceeds the applicable
thresholds. However, when a defect report is required, the manufacturer
must report all occurrences of the same defect in all engine families
and all model years.
If the number of engines with a specific defect is found to be less
than the threshold for submitting a defect report, but information such
as warranty data later indicates that there may be additional defective
engines, all the information must be considered in determining whether
the threshold for submitting a defect report has been met. If a
manufacturer has actual knowledge from any source that the threshold
for submitting a defect report has been met, a defect report must be
submitted even if the trigger for investigating has not yet been met.
For example, if manufacturers receive from their dealers, technical
staff or other field personnel information showing conclusively that
there is a recurring emission-related defect, they must submit a defect
report.
If manufacturers trigger the threshold to start an investigation,
they must promptly and thoroughly investigate whether their parts are
defective, collecting specific information to prepare a report
describing their conclusions. Manufacturers must send the report if an
investigation concludes that the number of actual defects did not
exceed reporting thresholds. Manufacturers must also send these as
status reports twice annually during an investigation. After
investigating for

[[Page 39035]]

several months, or perhaps a couple years, it may become clear that the
problems that triggered the investigation will never show enough actual
defects to trigger a defect report. In this case, the manufacturer
would send us a report justifying this conclusion.
In general, we believe this updated approach to defect reporting
will decrease the number of defect reports submitted by manufacturers
overall while significantly improving their quality and their value to
both EPA and the manufacturer.
Note that misbuilds are a special type of emission-related defect.
An engine that is not built consistent with its application for
certification violates the prohibited act of introducing into commerce
engines that are not covered by a certificate of conformity.

L. Compliance With the Phase-In Provisions

In section II we described the NO_X and NMHC standards
phase-in schedule, which is intended to allow engine manufacturers to
phase-in their new advanced technology engines, while they phase-out
existing engines. This phase-in requirement is based on percentages of
a manufacturer's production for the U.S. market. We recognize, however,
that manufacturers need to plan for compliance well in advance of the
start of production, and that actual production volumes for any one
model year may differ from their projections. On the other hand, we
believe that it would be inappropriate and infeasible to base
compliance solely on a manufacturer's projections. That could encourage
manufacturers to overestimate their production of complying phase-in
engines, and could result in significantly lower emission benefits
during the phase-in. In response to these concerns, we proposed to
initially only require nonroad diesel manufacturers to project
compliance with the phase-in based on their projected production
volumes, provided that they made up any deficits (in terms of percent
of production) the following year. We received no comments on this
issue and are finalizing it as proposed.
Because we expect that a manufacturer making a good-faith
projection of sales would not be very far off of the actual production
volumes, we are limiting the size of the deficit that would be allowed,
as in the highway program. In all cases, the manufacturer would be
required to produce at least 25% of its production in each phase-in
power category as ``phase-in'' engines (meeting the NO_X and
NMHC standards or demonstrating compliance through use of ABT credits)
in the phase-in years (after factoring in any adjustments for early
introduction engine credits; see section III.M). This minimum required
production level would be 20% for the 75-175 hp category if a
manufacturer exercises the option to comply with a reduced phase-in
schedule in lieu of using banked Tier 2 ABT credits, as discussed in
section III.A.1.b. Another important restriction is that manufacturers
would not be allowed to have a deficit in the year immediately
preceding the completion of the phase-in to 100%. This would help
ensure that manufacturers are able to make up the deficit. Since they
could not produce more than 100% low-NO_X engines after the
final phase-in year, it would not be possible to make up a deficit from
this year. These provisions are identical to those adopted in the
highway HDDE program.
We are also finalizing the proposed ``split family'' allowance for
the phase-in years. This provision, which is similar to a provision of
the highway program, allows manufacturers to certify engine families to
both the phase-in and phase-out standards. Manufacturers choosing this
option must assign at the end of the model year specific numbers of
engines to the phase-in and phase-out categories. All engines in the
family must be labeled with the same NO_X and PM FELs, which
apply for all compliance testing, and must meet all other requirements
that apply to phase-in engines. Engines assigned to the phase-out
category may generate emission credits relative to the phase-out standards.

M. Incentive Program for Early or Very Low Emission Engines

We believe that it is appropriate and beneficial to provide
voluntary incentives for manufacturers to introduce engines emitting at
very low levels early. Such inducements may help pave the way for
greater and/or more cost effective emission reductions from future
engines and vehicles. To encourage early introduction of low-emission
engines, the proposal contained provisions to allow engine
manufacturers to benefit from producing engines certified to the final
(aftertreatment-based) Tier 4 standards prior to the 2011 model year,
by being allowed to make fewer engines certified to these standards
once the Tier 4 program takes effect, a concept that we are terming
``engine offsets'' to avoid confusion with ABT program credits. The
number of offsets that could be generated would depend on the degree to
which the engines are able to meet, or perform better than, the final
Tier 4 standards. Commenters generally supported this approach, as long
EPA ensures that compliance requirements for these engines are
enforced.
However, one equipment manufacturer submitted comments suggesting
that we should adopt a program that would provide incentives for
equipment manufacturers to use the early Tier 4 engines in their
equipment. For an early low-emission engine program to be successful,
we agree that it is important to provide incentives to both the engine
manufacturer and the equipment manufacturer, who may incur added cost
to install and market the advanced engine in the equipment. As was
pointed out in comments, the proposed program did not provide clear
incentives to equipment manufacturers to use the (presumably more
expensive) early low-emission engines. Therefore, we are adding such
provisions. Section III.B.2.e describes these early Tier 4 engine
incentive provisions under which equipment manufacturers can earn
increased allowance flexibilities. Under those provisions, the engine
manufacturer's incentive to produce the low-emitting engines will come
from customers' demand for them, and from the fact that the engine
manufacturer can earn ABT program credits for these engines in the same
way as without these incentive provisions. If the equipment
manufacturer does not wish to earn the increased allowance
flexibilities, then the engine manufacturer would be allowed to use the
provisions of the incentive program for early low-emission engines
described below in this subsection, though to do so would require the
forfeiture of any ABT credits earned by the subject engines,
essentially to avoid double counting, as explained below. This engine
manufacturer incentive program is being adopted as proposed, except for
engines above 750 hp, for which the proposed program requires some
adjustment to account for the approach we are taking to final standards.
As discussed in section II.A.4, the final rule does not phase in
standards for engines above 750 hp as proposed, and instead adopts
application-specific standards in 2011 and 2015. The 2011 standards are
not based on advanced aftertreatment except for NO_X on
engines above 1200 hp used in generator sets. To avoid overcomplication
of the incentive program, which might discourage its use, we are not
separating over and under 1200 hp generator set engines into separate
groups for these provisions. Instead, any of these engines that meet
the 2015 standards before 2015 can earn offsets. We are, however,

[[Page 39036]]

separating the generator set engines and non-generator set engines
above 750 hp into separate groups, because we are deferring setting a
NO_X standard for the latter that is based on use of advanced
aftertreatment technology.
Table III.M-1 summarizes the requirements and available offsets for
engine manufacturers in this program. As the purpose of the incentive
is to encourage the introduction of clean technology engines earlier
than required, we require that the emission standard levels actually be
met, and met early, by qualifying engines to earn the early
introduction offsets. The regulations specify that the standards must
be met without the use of ABT credits and actual production of the
engines must begin by September 1 preceding the first model year when
the standards would otherwise be applicable. Also, to avoid double-
counting, as explained in the proposal, the early engines can earn
either the engine offsets or the ABT emission credit, but not both.
Note that this is different than the approach taken in the early Tier 4
engine incentive program for equipment manufacturers described in
section III.B.2.e, where incentives for both the engine manufacturer
(ABT credits) and the equipment manufacturer (allowance flexibilities)
are needed to ensure successful early introduction of clean engines.
Because 15 ppm sulfur diesel fuel will be available on a widespread
basis in time for 2007 (due to the requirements for on-highway heavy-
duty engines), we are allowing engine manufacturers to begin certifying
engines to the very low emission levels required to be eligible for
this incentive program, beginning with the 2007 model year.

Table III.M-1.--Program for Early Introduction of Clean Engines
----------------------------------------------------------------------------------------------------------------
Category Engine group Must meet \a\ Per-engine offset
----------------------------------------------------------------------------------------------------------------
Early.............................. 25-75 hp.............. 0.02 g/bhp-hr PM........... 1.5-to-1
PM-only \b\........................ 75-750 hp............. 0.01 g/bhp-hr PM........... PM-only
25-75 hp.............. 0.02/3.5 g/bhp-hr PM/
NMHC+NOX.
75-750 hp............. 0.01/0.30/0.14 g/bhp-hr PM/
NOX/NMHC.
>750 hp generator set. 0.02/0.50/0.14 g/bhp-hr PM/ 1.5-to-1
NOX/NMHC.
Early Engine \b\................... >750 hp non-generator 0.03/2.6/0.14 g/bhp-hr PM/
set. NOX/NMHC.
Low NOX Engine..................... >25 hp................ as above for Early Engine, 2-to-1
except must meet 0.15 g/
bhp-hr NOX standard.
----------------------------------------------------------------------------------------------------------------
Notes:
\a\ All engines must also meet the Tier 4 crankcase emissions requirements. Engines must certify using all test
and other requirements (such as NRTC and NTE) otherwise required for final Tier 4 standards.
\b\ Offsets must be earned prior to the start of phase-in requirements in applicable engine groups (prior to
2013 for 25-75 hp engines, prior to 2012 for 75-175 hp engines, prior to 2011 for 175-750 hp engines, prior to
2015 for >750 hp engines).

For any engines being certified under this program before the 2011
model year using 15 ppm sulfur certification fuel, the manufacturer
would have to meet the requirements described in section III.D,
including demonstrating that the engine would indeed be fueled with 15
ppm sulfur fuel in the field. We expect this would occur through
selling such engines into fleet applications, such as municipal
maintenance fleets, large construction company fleets, or any such
well-managed centrally-fueled fleet. While obtaining a reliable supply
of 15 ppm maximum sulfur diesel fuel prior to the 2011 model year will
be possible, it will require some effort by nonroad diesel machine
operators. We therefore believe it is necessary and appropriate to
provide a greater incentive for early introduction of clean diesel
technology. Thus, as proposed, we would count one early engine (that
is, an engine meeting the final Tier 4 standards) as offsetting 1.5
engines later. This means that fewer clean diesel engines than
otherwise required may enter the market in later years, but, more
importantly, it means that emission reductions would be realized
earlier than under our base program. We believe that providing
incentives for early emission reductions is a worthwhile goal for this
program, because improving air quality is an urgent need in many parts
of the country as explained in section I, and because the early
learning opportunity with new technologies can help to ensure a smooth
transition to Tier 4 standards.
We are providing this early introduction offset for engines over 25
hp that meet all of today's Tier 4 emissions standards (NO_X,
PM, and NMHC) in the applicable engine category. We are also providing
this early introduction offset to engines that pull ahead compliance
with only the PM standard. However, a PM-only early engine would offset
only the PM standard for an offset-using engine. For engines in power
categories with a percentage phase-in, this would correspond (during
the phase-in years) to offset use for ``phase-out'' engines (those
required to meet the new Tier 4 standard for PM but not for
NO_X or NMHC). Engines using the PM-only offset would be
subject to the other applicable Tier 4 emission standards, including
applicable transient and NTE standards (see Section III.F) and
crankcase requirements. The applicable PM standard and requirements for
these PM-only offset-using engines would be those of Tier 3 (Tier 2 for
25-50 hp engines). PM-only offsets would not offset engines required to
meet other Tier 4 standards such as the phase-in NO_X and
NMHC standards (since there is no reason for PM offsets to offset
emissions of other pollutants). Tier 4 engines between 25 and 75 hp
certified to the 2008 PM standard would not participate in this
program, nor would engines below 25 hp, because they do not have
advanced aftertreatment-based standards.
An important aspect of the early incentive provision is that it
must be done on an engine count basis. That is, a diesel engine meeting
new standards early would count as 1.5 such diesel engines later. This
contrasts with a provision done on an engine percentage basis which
would count one percent of diesel engines early as 1.5 percent of
diesel engines later. Basing the incentive on an engine count
alleviates any possible influence of fluctuations in engine sales in
different model years.
Another important aspect of this program is that it is limited to
engines sold prior to the 2013 model year for engines between 25 and 75
hp, prior to the 2012 model year for engines between 75 and 175 hp, and
prior to the 2011 model year for engines between 175 and 750 hp. In
other words, as in the highway program, nonroad diesel engines sold
during the transitional ``phase-in'' model years would not be
considered ``early'' introduction engines and would therefore be
ineligible to

[[Page 39037]]

generate early introduction offsets. However, such engines and vehicles
would still be able to generate ABT credits. Because the engines over
750 hp engines have no percent-of-production phase-in provisions, we
are allowing offsets for early engines in any model year prior to 2015.
For the same reason, there is no PM-only offset for these engines. As
with the phase-in itself, and for the same reasons, an early
introduction engine could only be used to offset requirements for
engines in the same engine group (25-75 hp, 75-175 hp, 175-750 hp, >750
hp generator sets, and >750 hp non-generator sets) as the offset-
generating engine.
As a further incentive to introduce clean engines and vehicles
early, we are also adopting the proposed provision that gives engine
manufacturers an early introduction offset equal to two engines during
or after the phase-in years for engines with NO_X levels well
below the final Tier 4 NO_X standard. This incentive applies
for diesel engines achieving a 0.15 g/bhp-hr NO_X standard
level (one-half of the aftertreatment-based standard for most engines)
while also meeting the NMHC and PM standards. Due to the extremely low
emission levels to which these engines and vehicles would need to
certify, we believe that the double engine count offset is appropriate.
In the NPRM we asked for comment on whether or not we should extend
the existing Blue Sky program that encourages the early introduction of
engines with emission levels (as measured on a transient test) about
40% lower than the Tier 2 standards levels. See 68 FR at 28483. We
received comments both for and against doing so, but no commenter
provided substantive arguments or information. Given the very low
emissions levels being adopted in Tier 4, we have decided not to extend
the existing Blue Sky Series program, because it does not encourage
engines emitting at such low emission levels.

N. Labeling and Notification Requirements

As explained in section II, the emissions standards will make it
necessary for manufacturers to employ exhaust emission control devices
that require very low-sulfur fuel (less than 15 ppm) to ensure proper
operation. This action restricts the sulfur content of diesel fuel used
in these engines. However, the 2008 emissions standards would be
achievable with less sensitive technologies and thus it could be
appropriate for those engines to use diesel fuel with up to 500 ppm
sulfur. There could be situations in which vehicles requiring either 15
ppm fuel or 500 ppm may be accidentally or purposely misfueled with
higher-sulfur fuel. Any of these misfueling events could seriously
degrade the emission performance of sulfur-sensitive exhaust emission
control devices, or perhaps destroy their functionality altogether.
In the highway rule, we adopted a requirement that heavy-duty
vehicle manufacturers notify each purchaser that the vehicle must be
fueled only with the applicable low-sulfur diesel fuel. We also
required that diesel vehicles be equipped by the manufacturer with
labels near the refueling inlet to indicate that low sulfur fuel is
required. We are adopting similar requirements here.\88\ Specifically,
manufacturers will be required to notify each purchaser that the
nonroad engine must be fueled only with the applicable low-sulfur
diesel fuel, and ensure that the equipment is labeled near the
refueling inlet to indicate that low sulfur fuel is required. We
believe that these measures would help owners find and use the correct
fuel and would be sufficient to address misfueling concerns. Thus, more
costly provisions, such as fuel inlet restrictors, should not be necessary.
---------------------------------------------------------------------------

\88\ We also required that highway vehicles be labeled on the
dashboard. Given the type of equipment using nonroad CI engines, we
are not adopting any dashboard requirement here.
---------------------------------------------------------------------------

In general, beginning in model year 2011, nonroad engines will be
required to use the Ultra Low Sulfur diesel fuel (with less than 15 ppm
sulfur). Thus, the default label will state ``ULTRA LOW SULFUR FUEL
ONLY.'' The labeling requirements for earlier model year Tier 4 engines
are specified in Sec. 1039.104(e). Some new labeling requirements for
earlier model year Tier 3 engines are specified in 40 CFR 89.330(e).
These requirements for earlier years generally require that engines and
equipment be labeled consistent with the sulfur of the test fuel used
for their certification. So where the engine is certified using Low
Sulfur diesel fuel (with less than 500 ppm sulfur), the required label
will state ``LOW SULFUR FUEL ONLY.'' See section III.D and the
regulatory text for the other specific requirements related to labeling
the earlier model years.

O. General Compliance

1. Good Engineering Judgment
The process of testing engines and preparing an application for
certification requires the manufacturer to make a variety of judgments.
This includes, for example, selecting test engines, operating engines
between tests, and developing deterioration factors. EPA has the
authority to evaluate whether a manufacturer's use of engineering
judgment is reasonable. The regulations describe the methodology we use
to address any concerns related to how manufacturers use good
engineering judgment in cases where the manufacturer has such
discretion (see 40 CFR 1068.5). If we find a problem with a
manufacturer's use of engineering judgment, we will take into account
the degree to which any error in judgment was deliberate or in bad
faith. If manufacturers object to a decision we make under this
provisions, they are entitled to a hearing. This subpart is consistent
with provisions already adopted for light-duty highway vehicles, marine
diesel engines, industrial spark-ignition engines, and recreational
vehicles.
2. Replacement Engines
In the proposal we included a provision allowing manufacturers to
sell a new, noncompliant engine intended to replace an engine that
fails in service. The proposed language closely mirrored the existing
provisions in 40 CFR 89.1003(b)(7), except that it specified that
manufacturers could produce new, noncompliant replacement engines if no
engine from any manufacturer were available with the appropriate
physical or performance characteristics. Manufacturers objected to this
provision and requested that the final regulations follow the language
in 40 CFR part 89, in which the manufacturer of the new engine confirm
that no appropriate engine is available from its product line (or that
of the manufacturer of the original engine, if that were a different
company). We agree that the language from 40 CFR part 89 is
appropriate, but we note two things to address remaining concerns that
manufacturers could potentially use the replacement-engine provisions
to produce large numbers of noncompliant products. First, we are
including a specific statement in the regulations that manufacturers
may not use the replacement-engine exemption to circumvent the
regulations. Second, we plan to use the data-collection provision under
40 CFR 1068.205(d) to ask manufacturers to report the number of engines
they sell under the replacement-engine exemption. Rather than adopting
a specific data-reporting requirement, we believe this more flexible
approach is most appropriate to allow us to get information to evaluate
how manufacturers are using the exemption without imposing reporting
requirements that may involve more or less information than is actually
needed.

[[Page 39038]]

3. Warranty
We are modifying 40 CFR 1068.115 regarding engine manufacturers'
warranty obligations by removing paragraph (b). This paragraph
addresses specific circumstances under which manufacturers may not deny
emission-related warranty claims, while paragraph (a) of this section
addresses the circumstances under which manufacturers may deny such
claims. As described in our Summary and Analysis of Comments related to
our November 8, 2002 final rule (67 FR 68242), we intended to adopt 40
CFR1068.115 without this paragraph. We wanted to remove paragraph (b)
because we agreed with a comment pointing out that publishing both
paragraphs leaves ambiguous which provision applies if a situation
applies that is not on either list. Since neither list can be
comprehensive, we believe the provisions in paragraph (a) describing
when manufacturers may deny warranty claims appropriately addresses the
issue. As a result, paragraph (b) was inadvertently adopted as part of
the November 2002 final rule.
4. Separate Catalyst Shipment
We are adopting provisions that will allow engine manufacturers to
ship engines to equipment manufacturers where the engine manufacturer
had not yet installed the aftertreatment or otherwise included it as
part of the engine shipment. This allows the engine manufacturer to
ship the engine without the aftertreatment; for example, in cases where
it would be impractical to install aftertreatment devices on the engine
before shipment or even ship products with the aftertreatment devices
uninstalled along with the engine; or where shipping it already
installed would require it to be disassembled and reinstalled when the
engine was placed in the equipment. Today's final rule requires that
the components be included in the price of the engine and that the
engine manufacturer provide sufficiently detailed and clear
instructions so that the equipment manufacturer can readily install the
engine and its ancillary components in a configuration covered under
the certificate of conformity held by the engine manufacturer. We are
also requiring that the engine manufacturer have a contractual
agreement obligating the equipment manufacturer to complete the final
assembly into a certified configuration. The engine manufacturer must
ship any components directly to the equipment manufacturer or arrange
for their shipment from a component supplier. The engine manufacturer
must tag the engines and keep records. The engine manufacturer must
obtain annual affidavits from each equipment manufacturer as to the
parts and part numbers that the equipment manufacturer installed on
each engine and must conduct a limited number of audits of equipment
manufacturers' facilities, procedures, and production records to
monitor adherence to the instructions it provided. Where an equipment
manufacturer is located outside of the U.S., the audits may be
conducted at U.S. port of distribution facilities.
The rule also contains various provisions establishing
responsibility for proper installation. Where the engines are not in a
certified configuration when installed in nonroad equipment because the
equipment manufacturer used improper emission-control devices or failed
to install the shipped parts or failed to install the devices
correctly, then both the engine manufacturer and the installer have
responsibility. For the engine maker, the exemption is void for those
engines that are not in their certified configuration after
installation. We may also suspend or revoke the exemption for future
engines where appropriate, or void the exemption for the entire engine
family. The installer is also liable. We may find the equipment
manufacturer to be in violation of the tampering prohibitions at 40 CFR
1068.101(b)(1) for the improper installation, which could subject it to
substantial civil penalties. In any event, the engine manufacturer
remains liable for the in-use compliance of the engine as installed.
For example, it has responsibility for the emission-related warranty,
including for the aftertreatment, and is responsible for any potential
recall liability. However, if noncompliance of the in-use engines stems
from improper installation of the aftertreatment, then the tampering
that occurred by the installer may remove recall liability. Where the
engine manufacturer had complied with the regulations and the failure
was solely due to the equipment manufacturer's actions, we would not be
inclined to revoke or suspend the exemption or to void the exemption
for the entire engine family. We may deny the exemption for future
model years if the engine manufacturer does not take action to address
the factors causing the nonconformity. On the other hand, if the
manufacturer failed to comply, had shipped improper parts, had provided
instructions that led to improperly installed parts, or had otherwise
contributed to the installation of engines in an uncertified
configuration, we might suspend, revoke, or void the exemption for the
engine family. In this case, the engine manufacturer would be subject
to substantial civil penalties.

P. Other Issues

We are also making other minor changes to the compliance program.
These changes are summarized in table III.Q-1 below. For more
information about these changes, you should read the NPRM and Summary
and Analysis of Comments for this rulemaking. We believe that these
changes are straightforward and noncontroversial.

Table III.Q-1.--Regulatory Changes
----------------------------------------------------------------------------------------------------------------
Issue Regulatory provision
----------------------------------------------------------------------------------------------------------------
Applicability to alcohol-fueled engines.................. Sec. Sec. 1039.101, 1039.107.
Prohibited controls...................................... Sec. 1039.115.
Emission-related maintenance instructions................ Sec. 1039.125.
Engine installation instructions......................... Sec. 1039.130.
Engines labels........................................... Sec. Sec. 1039.20, 1039.135, 1068.320.
Engine family definition................................. Sec. 1039.230.
Test engine selection.................................... Sec. 1039.235.
Deterioration factors.................................... Sec. 1039.240.
Engines that use noncommercial fuels..................... Sec. 1039.615.
Use of good engineering judgment......................... Sec. 1068.5.
Separate shipment of aftertreatment...................... Sec. 1068.260.
Exemptions............................................... 40 CFR 1068 Subpart C.
Importing engines........................................ 40 CFR 1068 Subpart D.

[[Page 39039]]

Hearings................................................. 40 CFR 1068 Subpart G.
----------------------------------------------------------------------------------------------------------------

Q. Highway Engines

We are changing the diesel engine/vehicle labeling requirements in
40 CFR 86.007-35 to be consistent with the new pump labels. This change
corrects a mistake in the proposal that would have resulted in
confusion for highway vehicle operators. (We received no comment on
this issue.)

R. Changes That Affect Other Engine Categories

We are making some minor changes to the regulations in 40 CFR parts
1048 and 1051 for nonroad spark-ignition engines over 19 kW and
recreational vehicles, respectively. We are also changing several
additional provisions in 40 CFR parts 1065 and 1068, which define test
procedures and compliance provisions for these same categories of
engines. See the regulatory text for the specific changes. The proposed
rule included most of these changes. To the extent there were comments
on any of these changes, those issues are addressed elsewhere in this
document or in the Summary and Analysis of Comments.
? In 40 CFR 1048.125 and 40 CFR 1051.125, we are correcting
the provisions related to critical emission-related maintenance to
allow manufacturers to do maintenance during service accumulation for
durability testing, as long as their maintenance steps meet the
specified criteria ensuring that in-use engines will undergo those
maintenance procedures.
? In 40 CFR 1068.27, we clarify that manufacturers must make
available a reasonable number of production-line engines so we can test
or inspect them if we make such a request.
? We are changing the definition of nonroad engine to
explicitly exclude aircraft engines. This is consistent with our
longstanding interpretation of the Clean Air Act. Clarifying the
definition this way allows us to more clearly specify the applicability
of the fuel requirements to nonroad engines in this final rule.
? We are adding a provision directing equipment
manufacturers to request duplicate labels from engine manufacturers and
keep appropriate records if the original label is obscured in the final
installation. The former approach under 40 CFR part 1068 was to require
equipment manufacturers to make their own duplicate labels as needed.
We intend to amend 40 CFR parts 1048 and 1051 to correspond with this
change.
? As described above in section III, we are revising the
criteria manufacturers would use to show that they may use the
replacement-engine exemption under 40 CFR 1068.240. We also clarify
that we may require manufacturers to report to us how many engines they
sell in given year under the replacement-engine exemption.
? As described above and in the Summary and Analysis of
Comments, we are adding a provision in 40 CFR 1068.260 to allow
manufacturers to ship aftertreatment devices directly from the
component supplier to the equipment manufacturer. This regulatory
section includes several provisions to ensure that the equipment
manufacturer installs the aftertreatment device in a way that brings
the engine to its certified configuration.
? As described above, we are modifying the defect-reporting
requirements in 40 CFR 1068.501.
? While most of the changes being adopted for part 1065 will
only affect diesel nonroad engines, we are also making minor changes
that will also apply for SI engines. These changes, however, are
generally limited to clarifications, corrections, and options. They
will not affect the stringency of the standards or create new burdens
for manufacturers.

IV. Our Program for Controlling Nonroad, Locomotive and Marine Diesel
Fuel Sulfur

We are finalizing today a two-step sulfur standard for nonroad,
locomotive and marine (NRLM) diesel fuel that will achieve significant,
cost-effective sulfate PM and SO₂ emission reductions. These
emission reductions will, by themselves, provide dramatic environmental
and public health benefits which far outweigh the cost of meeting the
standards necessary to achieve them. In addition, the final sulfur
standards for nonroad diesel fuel will enable advanced high efficiency
emission control technology to be applied to nonroad engines. As a
result, these nonroad fuel sulfur standards, coupled with our program
for more stringent emission standards for new nonroad engines and
equipment, will also achieve dramatic NO_X and PM emission
reductions. Sulfur significantly inhibits or impairs the function of
the diesel exhaust emission control devices which will generally be
necessary for nonroad diesel engines to meet the emission standards
finalized today. With the 15 ppm sulfur standard for nonroad diesel
fuel, we have concluded that this emission control technology will be
available for model year 2011 and later nonroad diesel engines to
achieve the NO_X and PM emission standards adopted today. The
benefits of today's program also include the sulfate PM and
SO₂ reductions achieved by establishing the same standard
for the sulfur content of locomotive and marine diesel fuel.
The sulfur requirements established under today's program are
similar to the sulfur limits established for highway diesel fuel in
prior rulemakings --500 ppm in 1993 ( 55 FR 34120, August 21, 1990) and
15 ppm in 2006 (66 FR 5002, January 18, 2001). Beginning June 1, 2007,
refiners will be required to produce NRLM diesel fuel with a maximum
sulfur content of 500 ppm. Then, beginning June 1, 2010, the sulfur
content will be reduced for nonroad diesel fuel to a maximum of 15 ppm.
The sulfur content of locomotive and marine diesel fuel will be reduced
to 15 ppm beginning June 1, 2012. The program contains certain
provisions to ease refiners' transition to the lower sulfur standards
and to enable the efficient distribution of all diesel fuels. These
provisions include the 2012 date for locomotive and marine diesel fuel,
early credits for refiners and importers and special provisions for
small refiners, transmix processors, and entities in the fuel
distribution system.
In general, the comments we received during the public comment
period supported the proposed program. Adjustments we have made to the
proposed program will make the final program even stronger, both in
terms of our ability to enforce it and the environmental and public
health benefits that it will achieve. In particular, today's final
program contains provisions to smooth the refining industry's
transition to the low sulfur fuel requirements, encourage earlier
introduction of cleaner burning fuel, maintain the fuel distribution
system's flexibility to fungibly distribute similar products, and
provide an outlet

[[Page 39040]]

for off-specification distillate product, all while maintaining, and
even enhancing, the health and environmental benefits of today's program.
The first adjustment that we made to the proposed program was to
move from the ``refiner baseline'' approach discussed in the proposal
to a ``designate and track'' approach. Under the proposed refiner
baseline approach, any refiner or importer could choose to fungibly
distribute its 500 ppm sulfur NRLM and highway diesel fuels without
adding red dye to the NRLM at the refinery gate. However, the refiners'
production would then be subject to a non-highway distillate baseline,
established as a percentage of its total distillate fuel production
volume. While EPA preferred this approach in the proposal, we decided
not to finalize it because we concluded that it would have
unnecessarily constrained refiners' ability to meet market demands. It
would have encouraged them to dye 500 ppm sulfur NRLM at the refinery
gate, resulting in an additional grade of diesel fuel and,
consequently, an added burden to the distribution system. Furthermore,
we were concerned that it would have created a trend that could reduce
the volume of 15 ppm sulfur highway diesel fuel and potential options
to remove the market constraints could have increased the possibility
for reduced volume.
In place of the refiner baseline approach, we are finalizing a
designate and track approach. The final designate and track approach is
a modified version of the designate and track approach discussed in the
proposal. As finalized it now allows us to enforce the program through
the entire distribution system. In essence, the final designate and
track approach requires refiners and importers to designate the volumes
of diesel fuel they produce and/or import. Refiners/importers will
identify whether their diesel fuel is highway or NRLM and the
applicable sulfur level. They may then mix and fungibly ship highway
and NRLM diesel fuels that meet the same sulfur specification without
dyeing their NRLM diesel fuel at the refinery gate. The designations
will follow the fuel through the distribution system with limits placed
on the ability of downstream parties to change the designation. These
limits are designed to restrict the inappropriate sale of 500 ppm
sulfur NRLM diesel fuel into the highway market , the inappropriate
sale of heating oil into the NRLM market, the inappropriate sale of 500
ppm sulfur LM into the nonroad market, and to implement the downgrading
restrictions that apply to 15 ppm sulfur highway diesel fuel. The
designate and track approach includes record keeping and reporting
requirements for all parties in the fuel distribution system,
associated with tracking designated fuel volumes through each custodian
in the distribution chain until the fuel exits the terminal. The
program also includes enforcement and compliance assurance provisions
to enable the Agency to rapidly and accurately review for discrepancies
the large volume of data collected on fuel volume hand-offs. The bulk
of the designate and track provisions end May 31, 2010 when all highway
diesel fuel must meet the 15 ppm sulfur standard. However, as discussed
below, scaled back designate and track provisions continue beyond 2010
for purposes of enforcing against heating oil being used in the NRLM
market and to enforce against 500 ppm LM diesel fuel being used in the
nonroad market.
The second adjustment that we made to the proposed NRLM diesel fuel
program was to establish a 15 ppm sulfur standard at the refinery gate
for locomotive and marine (LM) diesel fuel in addition to nonroad (NR)
diesel fuel.\89\ We are finalizing this standard for several reasons as
discussed below.
---------------------------------------------------------------------------

\89\ While today's program does not establish more stringent
emission standards for locomotive or marine diesel engines, the
Agency intends in the near future to initiate a rulemaking to adopt
new emission standards for locomotive and marine engines based on
the use of high efficiency exhaust emission control technology like
that required for the nonroad standards adopted in today's rule. An
advanced notice of proposed rulemaking (ANPRM) for this rule is
published elsewhere in today's Federal Register, June 29, 2004.
---------------------------------------------------------------------------

While we are finalizing a 15 ppm sulfur standard for locomotive and
marine diesel fuel, we are doing so in a manner that responds to the
primary concerns raised in comments regarding the need for an outlet
for off-specification product. We are setting a refinery gate standard
of 15 ppm sulfur beginning June 1, 2012, two years later than for
nonroad diesel fuel. We are also continuing to provide an outlet for
off-specification product generated in the distribution system, thereby
affording the opportunity to reduce reprocessing and transportation
costs. We are leaving the downstream standard for LM diesel fuel at 500
ppm sulfur. In this way the LM diesel fuel pool may remain an outlet
for off-specification distillate product and interface/transmix
material.
In developing the provisions of the NRLM diesel fuel program
adopted today, we identified several principles that we want the
program to achieve. Specifically, as described in more detail below, we
believe the fuel program--

(1) Achieves the greatest reduction in sulfate PM and
SO₂ emissions from nonroad, locomotive, and marine diesel
engines as early as practicable;
(2) Provides for a smooth transition of the NRLM diesel fuel
pool to 15 ppm sulfur;
(3) Ensures that 15 ppm sulfur diesel fuel is produced and
distributed widely for use in all 2011 and later model year nonroad
diesel engines;
(4) Ensures that the fuel program's requirements are enforceable
and verifiable.
(5) Enables the efficient distribution of all diesel fuels; and
(6) Maintains the benefits and program integrity of the highway
diesel fuel program.

The remainder of this section covers several topics. In section
IV.A, we discuss the fuel that is covered by today's program, the
standards that apply for refiners and importers (for both steps of the
program), and the standards that apply for downstream entities. In
section IV.B, we address the various hardship provisions that we are
including in today's program. In section IV.C, we describe the special
provisions that apply in the State of Alaska and the Territories. Next,
in section IV.D, we describe the design of the designate and track
provisions of the NRLM diesel fuel program for compliance purposes and
how it differs from what we proposed. In section IV.E, we discuss the
impact of today's program on state NRLM diesel fuel programs. In
sections IV.F and G, we discuss the technological feasibility of the
NRLM diesel fuel standards adopted today and the impacts of today's
program on lubricity and other fuel properties. Finally, in section
IV.H, we discuss the steps the Agency will take to streamline the
refinery air permitting process for the equipment that refiners may
need to install to meet today's NRLM diesel fuel standards..
Analyses supporting the design and cost of the fuel program are
located in chapters 5, 7, and 8 of the RIA. Section V of this preamble
discusses the details of the additional compliance and enforcement
provisions affecting NRLM diesel fuel and explains various additional
elements of the program.

A. Nonroad, Locomotive and Marine Diesel Fuel Quality Standards

1. What Fuel Is Covered by This Program?
The fuel covered by today's final rule is generally the same as the
fuel that was covered by the proposal. We have not expanded or reduced
the pool of diesel fuel that will be subject to the lower sulfur
standards. However, the second step of the program now includes the
same ultra low sulfur standard for locomotive and marine diesel fuel as
for nonroad diesel fuel.

[[Page 39041]]

Specifically, the sulfur standards finalized under today's program
apply to all the diesel fuel that is used in nonroad, locomotive, and
marine diesel applications--fuel not already covered by the previous
standards for highway diesel fuel. This includes all fuel used in
nonroad, locomotive, and marine diesel engines, except for fuels
heavier than a No. 2 distillate used in Category 2 and 3 marine engines
\90\ and any fuel that is exempted for national security or other
reasons. While we are not adopting sulfur standards for other
distillate fuels (such as jet fuel, heating oil, kerosene, and No. 4
fuel oil) we are adopting provisions to prevent the inappropriate use
of these other fuels. Use of distillate fuels in nonroad, locomotive,
or marine diesel engines will generally be prohibited unless they meet
the fuel sulfur standards finalized today.\91\ The program includes
several provisions, as described below in section IV.D, to ensure that
heating oil and other higher sulfur distillate fuels will not be used
in nonroad, locomotive, or marine applications.
---------------------------------------------------------------------------

\90\ Category 3 marine engines frequently are designed to use
residual fuels and include special fuel handling equipment to use
the residual fuel.
\91\ For the purposes of this final rule, the term heating oil
basically refers to any No. 1 or No. 2 distillate other than jet
fuel, kerosene, and diesel fuel used in highway, nonroad,
locomotive, or marine applications. For example, heating oil
includes fuel which is suitable for use in furnaces, boilers,
stationary diesel engines and similar applications and is commonly
or commercially known or sold as heating oil, fuel oil, or other
similar trade names.
---------------------------------------------------------------------------

The regulated fuels under today's program include the following:

(1) Any No. 1 and 2 distillate fuels used, intended for use, or
made available for use in nonroad, locomotive, or marine diesel
engines. Fuels under this category include those meeting the
American Society for Testing and Materials (ASTM) D 975 or D 396
specifications for grades No. 1-D and No. 2-D. Fuels meeting ASTM
DMX and DMA specifications would be covered;
(2) Any No. 1 distillate fuel (e.g., kerosene) added to such No.
2 diesel fuel, e.g., to improve its cold flow properties;
(3) Any other fuel used in nonroad, locomotive, or marine diesel
engines or blended with diesel fuel for use in such engines. Fuels
under this category include non-distillate fuels such as biodiesel
and certain specialty fuel grades such as JP-5, JP-8, and F76 if
used in a nonroad, locomotive, or marine diesel engine, except when
a national security or research and development exemption has been
approved. See V. A.1. and 2.

On the other hand, the sulfur standards do not apply to--

(1) No. 1 distillate fuel used to power aircraft;
(2) No. 1 or No. 2 distillate fuel used for stationary source
purposes, such as to power stationary diesel engines, industrial
boilers, or for heating;
(3) Number 4, 5, and 6 fuels (e.g., residual fuels or residual
fuel blends, IFO Heavy Fuel Oil Grades 30 and higher), used for
stationary source purpose;
(4) Any distillate fuel with a T-90 distillation point greater
than 700 F, when used in Category 2 or 3 marine diesel engines. This
includes Number 4, 5, and 6 fuels (e.g., IFO Heavy Fuel Oil Grades
30 and higher), as well as fuels meeting ASTM specifications DMB,
DMC, and RMA-10 and heavier; and
(5) Any fuel for which a national security or research and
development exemption has been approved or fuel that is exported
from the U.S. (see section V.A.1. and 2).

It is useful to clarify what marine diesel fuels are covered by the
sulfur standards. As with nonroad and locomotive diesel fuel, our basic
approach is that the standards apply to any diesel or distillate fuel
used or intended for use in marine diesel engines. However, the fuel
used by marine diesel engines spans a wide variety of fuels, ranging
from No. 1 and 2 diesel fuel to residual fuel and residual fuel blends
used in the largest engines. It is not EPA's intention to cover all
such fuels, and EPA has adopted an objective criteria to identify those
marine fuels subject to regulation and those that are not. Any
distillate fuel with a T-90 greater than 700 F will not be subject to
the sulfur standards when used in Category 2 or 3 marine engines. This
criteria is designed to exclude fuels heavier than No. 2 distillate,
including blends containing residual fuel. In addition, residual fuel
is not subject to the sulfur standards.
While many marine diesel engines use No. 2 distillate, ASTM
specifications for marine fuels identify four kinds of marine
distillate fuels: DMX, DMA, DMB, and DMC. DMX is a special light
distillate intended mainly for use in emergency engines. DMA (also
called MGO) is a general purpose marine distillate that is to contain
no traces of residual fuel. These fuels can be used in all marine
diesel engines but are primarily used by Category 1 engines. DMX and
DMA fuels intended for use in any marine diesel engine are subject to
the fuel sulfur standards.
DMB, also called marine diesel oil, is not typically used with
Category 1 engines, but is used for Category 2 and 3 engines. DMB is
allowed to have a trace of residual fuel, which can be high in sulfur.
This contamination with residual fuel usually occurs due to the
distribution process, when distillate is brought on board a vessel via
a barge that has previously contained residual fuel, or using the same
supply lines as are used for residual fuel. DMB is produced when fuels
such as DMA are brought on board the vessel in this manner. EPA's
sulfur standards will apply to the distillate that is used to produce
the DMB, for example the DMA distillate, up to the point that it
becomes DMB. DMB itself is not subject to the sulfur standards when it
is used in Category 2 or 3 engines.
DMC is a grade of marine fuel that may contain some residual fuel
and is often a residual fuel blend. This fuel is similar to No. 4
diesel, and can be used in Category 2 and Category 3 marine diesel
engines. DMC is produced by blending a distillate fuel with residual
fuel, for example at a location downstream in the distribution system.
EPA's standards will apply to the distillate that is used to produce
the DMC, up to the point that it is blended with the residual fuel to
produce DMC. DMC itself is not subject to the sulfur standards when it
is used in Category 2 or 3 marine engines.
Residual fuel is typically designated by the prefix RM (e.g., RMA,
RMB, etc.). These fuels are also identified by their nominal viscosity
(e.g., RMA10, RMG35, etc.). Most residual fuels require treatment by a
purifier-clarifier centrifuge system, although RMA and RMB do not
require this. For the purpose of this rule, we consider all RM grade
fuel as residual fuel. Residual fuel is not covered by the sulfur
content standards as it is not a distillate fuel.
The distillation criteria adopted by EPA, T-90 greater than 700F,
is designed to identify those fuels that are not subject to the sulfur
standards when used in Category 2 or 3 marine diesel engines. It is
intended to exclude DMB, DMC, and other heavy distillates or blends,
when used in Category 2 or 3 marine diesel engines.
Hence, the fuel that refiners and importers are required to produce
to the more stringent sulfur standards include those No. 1 and No. 2
diesel fuels as well as similar distillate or non-distillate fuels that
are intended or made available for use in NRLM diesel engines.
Furthermore, the sulfur standard also covers any fuel that is blended
with or substituted for No. 1 or No. 2 diesel fuel for use in nonroad,
locomotive, or marine diesel engines. For instance, as required under
the highway diesel fuel program, in those situations where the same
batch of kerosene is distributed for two purposes (e.g., kerosene to be
used for heating and to improve the cold flow of No. 2 NRLM diesel
fuel), or where a batch distributed just for heating is later
distributed for blending with No. 2 diesel fuel, that batch of kerosene
must meet the standards adopted today for NRLM

[[Page 39042]]

diesel fuel. The purpose of this requirement is to ensure that fuels
like jet fuel, kerosene, and/or military specification fuels meet the
diesel fuel sulfur standards adopted under today's program when they
are used in nonroad, locomotive, or marine diesel engines.
2. Standards and Deadlines for Refiners and Importers
The NRLM diesel fuel program adopted today is a two-step approach
to reduce the sulfur content of NRLM diesel fuel from uncontrolled
levels down to 15 ppm sulfur. While we received several comments
supporting a single step down to 15 ppm sulfur, the vast majority of
commenters, especially most refiners and engine manufacturers,
supported the two-step approach. We are finalizing the two-step
approach primarily because it achieves the greatest reduction in
sulfate PM and SO₂ emissions from nonroad, locomotive, and
marine diesel engines as early as practicable. By starting with an
initial step of 500 ppm sulfur we can achieve significant emission
reductions and associated health and welfare benefits from the current
fleet of equipment as soon as possible. As discussed in section VI, the
health-related benefits of the fuel standards finalized today, even
without the engine standards, amount to more than $28 billion in 2030,
while the projected costs, after taking into account engine maintenance
benefits amount to just $0.7 billion.
In addition, the two-step approach encourages a more smooth and
orderly transition by the refining industry to 15 ppm sulfur NRLM
diesel fuel, by providing more time for refiners to develop the most
cost-effective approaches, finance them, and then implement the
necessary refinery modifications.
Finally, by waiting until 2010 to drop to the 15 ppm sulfur
standard for NR diesel fuel, the two-step approach harmonizes with the
highway diesel fuel program by delaying the implementation of the 15
ppm sulfur standard for NR diesel fuel until the end of the phase-in
period for 15 ppm sulfur highway diesel fuel. The 2010 date also
harmonizes with the date 15 ppm nonroad fuel is needed to enable the
nonroad engines standards finalized today. The second step to 15 ppm
sulfur for the LM diesel fuel is set for 2012. On balance we believe
that the advantages of the two-step approach outweigh those of a single
step down to 15 ppm.
As discussed in section IV.C, below, later deadlines for meeting
the 500 and 15 ppm sulfur standards apply to refineries covered by
special hardship provisions as well as transmix processors.
a. The First Step to 500 ppm Sulfur NRLM Diesel Fuel
Under today's program, NRLM diesel fuel produced by refiners or
imported into the U.S. by importers must meet a 500 ppm sulfur standard
beginning June 1, 2007. Refiners and importers may comply by either
producing such fuel at or below 500 ppm sulfur, or they may comply by
obtaining credits as discussed in section IV.D below.
We believe that the adopted level of 500 ppm sulfur is appropriate
for several reasons. First, the reduction to 500 ppm sulfur is
significant environmentally. The 500 ppm sulfur level achieves
approximately 90 percent of the sulfate PM and SO₂ benefits
otherwise achievable by going all the way to 15 ppm sulfur. Second,
because this first step is only to 500 ppm sulfur, it also allows for a
short lead time for implementation, enabling the environmental benefits
to begin accruing as soon as possible. Third, it is consistent with the
current specification for highway diesel fuel, a grade which may remain
for highway purposes until 2010. As such, adopting the same 500 ppm
sulfur level for NRLM diesel fuel helps to avoid issues and costs
associated with more grades of fuel in the distribution system during
this initial step of the program.
b. The Second Step to 15 ppm Sulfur NRLM Diesel Fuel
We are finalizing a second step of sulfur control down to 15 ppm
sulfur for all NRLM. This second step provides additional important
direct sulfate PM and SO₂ emission reductions and associated
health benefits. As discussed in the RIA, the health related benefits
for this second step of fuel control by itself are greater than the
associated cost. Furthermore, the second step for nonroad diesel fuel
is essential to enable the application of high efficiency exhaust
emission control technologies to nonroad diesel engines beginning with
the 2011 model year as discussed in Section II of this preamble.
In the proposal, the second step of the program only applied to
nonroad diesel fuel, while locomotive and marine diesel fuel could
remain at 500 ppm sulfur. We also sought comment on finalizing the 15
ppm sulfur standard for LM diesel fuel in 2010 along with nonroad
diesel fuel, as well as delaying it until as late as 2012 to allow for
an additional outlet for any off-specification product a refinery might
produce as it shifts all of its distillate production to 15 ppm sulfur.\92\
---------------------------------------------------------------------------

\92\ Off-specification fuel here refers to 15 ppm diesel fuel
that becomes contaminated such that it no longer meets the 15 ppm
sulfur cap. In most cases, off-specification 15 ppm sulfur diesel
fuel is expected to easily meet a 500 ppm sulfur cap.
---------------------------------------------------------------------------

We are finalizing the 15 ppm sulfur standard for locomotive and
marine diesel fuel, along with nonroad diesel fuel, for several
reasons. First, it will provide important health and welfare benefits
from the additional sulfate PM and SO₂ emission reductions
as early as possible. Second, it is technologically feasible, as it is
for nonroad diesel fuel. Third, the benefits outweigh the costs and the
costs do not otherwise warrant delaying this second step for locomotive
and marine. As shown in chapter 8 of the RIA, the costs for the
increment of LM diesel fuel going from 500 to 15 ppm sulfur is just
$0.20 billion in 2030. Fourth, it will simplify the fuel distribution
system and overall design of the fuel program. For example, the
addition of a marker to locomotive and marine diesel fuel after 2012 is
no longer necessary to successfully enforce the program. Finally, it
will allow refiners to coordinate plans to reduce the sulfur content of
all of their off-highway diesel fuel at one time.
Our primary reason in the NPRM for leaving locomotive and marine
diesel fuel at the 500 ppm sulfur specification was to preserve an
outlet for off-specification product that may be created in the
distribution system through contamination of 15 ppm sulfur diesel fuel
with higher sulfur distillates and for off-specification batches of
fuel that are produced by refineries during the first couple years of
the 15 ppm sulfur program (when they are still perfecting their
production processes). However, we have concluded that it is not
necessary to leave the standard for all locomotive and marine diesel
fuel at the 500 ppm sulfur specification to address these concerns.
Setting a 15 ppm sulfur standard for refiners and importers in 2012,
but maintaining a downstream standard for locomotive and marine diesel
fuel at 500 ppm sulfur and allowing off-specification product to
continue to be sold into this market accomplishes the same goal.
In addition, controlling the sulfur content of NRLM diesel fuel
from uncontrolled levels to 15 ppm is clearly a cost-effective fuel
control program. While the incremental cost-effectiveness from 500 ppm
sulfur to 15 ppm sulfur is less cost-effective, the benefits of this
second step outweigh the costs, the concerns about a market for off-
specification product have been addressed, and other factors discussed

[[Page 39043]]

above support the reasonableness of this approach. The body of evidence
strongly supports the view that controlling sulfur in NRLM fuel to 15
ppm, through a two-step process, is quite reasonable in light of the
emissions reductions achieved, taking costs into consideration.
Implementation of today's rule will reduce the sulfur level of
almost all distillate fuel to a 15 ppm maximum sulfur level. In
addition to the small refiner, hardship, and other provisions adopted
in this rule, EPA is adopting several provisions that will help ensure
a smooth transition to the second step of 15 ppm sulfur diesel fuel.
First, refiners and importers of locomotive and marine diesel fuel, a
small segment of the entire distillate pool, will be required to meet a
15 ppm sulfur standard starting June 1, 2012, two years later than for
nonroad diesel fuel. Second, 500 ppm sulfur diesel fuel generated in
the distribution system through contamination of 15 ppm sulfur fuel can
be marketed in the nonroad, locomotive and marine market until June
2014, and in the locomotive and marine market after that date. Third,
500 ppm sulfur diesel fuel produced by transmix processors from
contaminated downstream diesel fuel can also be marketed to the
nonroad, locomotive and marine markets, under the same schedule. While
today's rule does not contain an end date for the downstream
distribution of 500 ppm sulfur locomotive and marine fuel, we will
review the appropriateness of allowing this flexibility based on
experience gained from implementation of the 15 ppm sulfur NRLM diesel
fuel standard. We expect to conduct such an evaluation in 2011.
When EPA adopted a 15 ppm sulfur standard for highway diesel fuel,
we included several provisions to ensure a smooth transition to 15 ppm
sulfur highway fuel. One provision was a temporary compliance option,
with an averaging, banking and trading component. In a similar manner,
the 2012 deadline for 15 ppm sulfur LM fuel, the last, relatively small
segment of diesel fuel, will help ensure that the entire pool of diesel
fuel is smoothly transitioned to the 15 ppm sulfur level over a short
period of time. (See section 8.3 of the summary and analysis of comments.)
EPA is also adopting two provisions aimed at smoothing the
transition of the distribution system to ultra low sulfur diesel fuel.
These provisions are designed to accommodate off-specification fuel
generated in the distribution system, such as through the mixing that
occurs at product interfaces. This off-specification material generally
cannot be added in any significant quantity to either of the adjoining
products that produced the interface.\93\ Under today's program, as
discussed in more detail in section A.3, below, off-specification
material that is generated in the distribution system may be
distributed as 500 ppm NRLM diesel fuel from June 1, 2010 through May
31, 2014 and as 500 ppm LM from June 1, 2014 and beyond. Furthermore,
as discussed in section IV.C, below, transmix processors, which are
facilities that process transmix by separating it into its components
(e.g., separating gasoline from diesel fuel), are treated as a separate
class of refiners. One hundred percent of the diesel fuel they produce
from transmix may be sold as high sulfur NRLM until June 1, 2010, 500
ppm sulfur NRLM until June 1, 2014, and 500 ppm sulfur LM diesel fuel
after June 1, 2014.
---------------------------------------------------------------------------

\93\ In some cases the off-specification product can not be
added to the adjoining products because of the applicable sulfur
standards. In other cases, the off-specification product, called
transmix, must be re-processed before it can be used.
---------------------------------------------------------------------------

These provisions provide refiners and importers with a similar
degree of flexibility for off-specification product as the proposal
which held the sulfur standard for all locomotive and marine diesel
fuel at 500 ppm indefinitely. If off-specification product is produced,
there is a temporary outlet for it. If providing the off-specification
product to a locomotive and marine market is difficult under this final
rule, such that a refiner will choose to re-process it, then the
refiner would have been in the same position under the proposal.
Furthermore, these provisions provide the refining industry an
alternative to reprocessing the off-specification material created in
the distribution system, which preserves refining capacity for the
production of new fuel volume, helping to maintain overall diesel fuel
supply.
As with the 500 ppm sulfur standard under the first step of today's
program, refiners and importers may comply with the 15 ppm sulfur
standard by either producing NRLM diesel fuel containing no more than
15 ppm sulfur or by obtaining sulfur credits (until June 1, 2014), as
described below.
c. Cetane Index or Aromatics Standard
Currently, in addition to containing no more than 500 ppm sulfur,
highway diesel fuel must meet a minimum cetane index level of 40 or, as
an alternative, contain no more than 35 volume percent aromatics.
Today's program extends this cetane index/aromatics content
specification to NRLM diesel fuel.
One refining company commented that EPA should not implement the
cetane index and aromatic requirements in the proposed rule since the
impacts are weak or nonexistent for engines to be used in the future.
In addition, the commenter stated that the vast majority of diesel fuel
already meets the EPA cetane index/aromatics specification for highway
diesel fuel and that there is nothing in the RIA that either
demonstrates the benefits or supports the need for such a requirement.
The commenter also stated that EPA should not set a requirement simply
because the ASTM standard has a cetane number specification for a
particular fuel.
Low cetane levels are associated with increases in NO_X
and PM emissions from current nonroad diesel engines.\94\ Thus, we
expect that extending the cetane index specification to NRLM diesel
fuel will directionally lead to a reduction in these emissions from the
existing fleet. However, because the vast majority of NRLM diesel fuel
already meets the specification, the NO_X and PM emission
reductions will be small. At the same time, the refining/production
costs associated with extending the cetane index specification to NRLM
diesel fuel are negligible as current NRLM diesel fuel already meets a
more stringent ASTM specification.
---------------------------------------------------------------------------

\94\ The Effect of Cetane Number Increase Due to Additives on
NO_X Emissions From Heavy-Duty Highway Engines, Final
Technical Report, February 2003, EPA420-R-03-002.
---------------------------------------------------------------------------

ASTM already recommends a cetane number specification of 40 for
NRLM diesel fuel, which is, in general, more stringent than the similar
40 cetane index specification. Because of this, the vast majority of
current NRLM diesel fuel already meets the EPA cetane index/aromatics
specification for highway diesel fuel. Thus, the cetane index
specification will impact only a few refiners and there will be little
overall cost associated with producing fuel to meet the cetane/aromatic
requirement. In fact, as discussed in chapter 5.9 of the RIA,
compliance with the sulfur standards adopted today is expected to
result in a small cetane increase as increases in cetane correlate with
decreases in sulfur, leaving little or no further control to meet the
standard.
While the emissions benefits and refining/production costs of
extending the specification to NRLM diesel fuel may be small, the
extension will reduce costs by giving refiners and distributors the
ability to fungibly distribute highway and NRLM diesel fuels of like
sulfur content. For that small fraction of NRLM diesel fuel today that
does not meet the cetane index or aromatics

[[Page 39044]]

specification, the requirement will eliminate the need for refiners and
fuel distributors to separately distribute fuels of different cetane/
aromatics specifications. Requiring NRLM diesel fuel to meet this
cetane index specification thus gives fuel distributors certainty in
being able to combine shipments of highway and NRLM diesel fuels.
Perhaps more importantly, it can also give engine manufacturers and
end-users the confidence they need that their fuel will meet the
minimum cetane or maximum aromatics standard. Given the inherent
difficulty in segregating two otherwise identical fuels, were we not to
carry over these standards to NRLM, lower cetane NRLM could easily find
its way into current highway engines. If not designed for this lower
cetane fuel, these engines could have elevated emission levels and
performance problems.
Overall, we believe that there will be a small reduction in
NO_X and PM emissions from current engines and the economic
benefits from more efficient fuel distribution will likely exceed the
cost of raising the cetane level for the small volume of NRLM diesel
fuel that does not already meet the cetane index or aromatics content
specification.
3. Standards, Deadlines, and Flexibilities for Fuel Distributors
The first years of the NRLM diesel fuel program include various
flexibilities to smooth the refining and distribution industry's
transition to 15 ppm sulfur fuel. These flexibilities include a 2012
deadline for production of 15 ppm sulfur locomotive and marine diesel
fuel, credit provisions, small refiner provisions, hardship provisions,
and downstream off-specification fuel provisions. As a result, during
the transition years, we are not able to simply enforce the sulfur
standards downstream based on a single sulfur level of the new
standard. From June 1, 2007 through May 31, 2010, both 500 ppm sulfur
diesel fuel and high sulfur diesel fuel can be produced, distributed,
and sold for use in NRLM diesel engines. From June 1, 2010 through May
31, 2014, both 15 ppm sulfur and 500 ppm sulfur diesel fuel can be
produced, distributed, and sold for use in NRLM diesel engines. Beyond
June 1, 2014, both 15 ppm sulfur and 500 ppm sulfur diesel fuel that is
produced from fuel product downgrade and transmix in the distribution
system can be distributed and sold for use in locomotive and marine
diesel engines. As these transition flexibilities expire, however, we
are able to streamline our downstream enforcement provisions.
a. Standards and Deadlines From June 1, 2007 Through May 31, 2010
As soon as the program begins on June 1, 2007, all NRLM diesel fuel
must be designated or classified and must comply with the designation
or classification stated on its product transfer document (PTD), pump
label, or other documentation. In other words, if the fuel is intended
for sale as NRLM diesel fuel and is labeled as 500 ppm sulfur diesel
fuel, then beginning June 1, 2007, it must comply with the 500 ppm
sulfur standard. Similarly, if fuel is intended for sale as NRLM diesel
fuel and is labeled as 15 ppm sulfur, then beginning June 1, 2010 (or
June 1, 2009 under the early credit provisions), it must comply with
the 15 ppm sulfur standard.
Beginning June 1, 2010, all NRLM diesel fuel produced or imported
is required to meet at least a 500 ppm sulfur limit. In order to allow
for a smooth and orderly transition to 500 ppm sulfur NRLM diesel fuel
in the distribution system, and allow any remaining high sulfur fuel to
be sold, we are providing parties downstream of refineries time to
turnover their NRLM tanks to 500 ppm sulfur diesel fuel. At the
terminal level, all NRLM diesel fuel must meet at least the 500 ppm
sulfur standard beginning August 1, 2010. At any wholesale purchaser-
consumer facilities and any retail stations carrying NRLM diesel fuel,
including bulk plants that serve as retailers, all diesel fuel must
meet the 500 ppm sulfur standard beginning October 1, 2010.\95\ Thus,
beginning October 1, 2010, high sulfur (greater than 500 ppm sulfur)
NRLM diesel fuel may no longer legally exist in the fuel distribution
system.\96\
---------------------------------------------------------------------------

\95\ A bulk plant is a secondary distributor of refined
petroleum products. They typically receive fuel from terminals and
distribute fuel in bulk by truck to end users. Consequently, while
for highway fuel, bulk plants often serve the role of a fuel
distributor, delivering fuel to retail stations, for nonroad fuel,
they often serve the role of the retailer, delivering fuel directly
to the end-user.
\96\ By December 1, 2010, all NRLM diesel fuel, including fuel
in end-user tanks, must comply with at least the 500 ppm sulfur standard.
---------------------------------------------------------------------------

Although we expect that most NRLM diesel fuel in the distribution
system will be subject to the 500 ppm sulfur standard during the period
from June 1, 2007 through May 31, 2010, based on its designation or
classification, some of the 500 ppm sulfur NRLM diesel fuel may be
mixed with high sulfur NRLM diesel fuel. Since the blended product will
likely no longer meet the 500 ppm sulfur standard, it must be re-
designated and labeled as high sulfur NRLM diesel fuel. Similarly, fuel
that results from blending 500 ppm sulfur NRLM diesel fuel and heating
oil must be re-designated and labeled as heating oil.
b. Standards and Deadlines From June 1, 2010 Through May 31, 2014
Beginning June 1, 2010, most NR diesel fuel will be required to
meet the 15 ppm sulfur standard, and beginning June 1, 2012, most LM
diesel fuel will be required to meet the 15 ppm sulfur standard.
However, some production of 500 ppm sulfur NRLM diesel fuel may
continue through May 31, 2014. As with the delayed downstream
compliance dates for the 500 ppm sulfur standard under the first step
of today's program, parties downstream of refineries will be allowed
additional time to turnover their tanks to 15 ppm sulfur NR diesel
fuel. Specifically, at the terminal level, all NR diesel fuel will be
required to meet the 15 ppm sulfur standard beginning August 1, 2014.
At any wholesale purchaser-consumer facilities and retail stations
carrying all NR diesel fuel, including bulk plants serving as
retailers, NR diesel fuel must meet the 15 ppm sulfur standard
beginning October 1, 2014. Thus, beginning October 1, 2014, 500 ppm
sulfur NR diesel fuel may no longer legally exist in the fuel
distribution system.\97\
---------------------------------------------------------------------------

\97\ By December 1, 2014, all NR diesel fuel, including fuel in
end-user tanks, must comply with at least the 15 ppm sulfur standard.
---------------------------------------------------------------------------

Like the first step to 500 ppm sulfur, prior to these 2014
downstream deadlines all NRLM diesel fuel would still be designated or
classified with respect to sulfur level and required to meet the
designation or classification stated on its PTD, pump label, or other
documentation.
c. Sulfur Standard for NRLM Diesel Fuel Beginning June 1, 2014
As discussed above, all refiners will be required to produce and
importers will be required to import only 15 ppm sulfur NRLM diesel
fuel by June 1, 2014. However, we will continue to allow 500 ppm sulfur
diesel fuel to be sold into the LM diesel fuel markets beyond 2014. The
LM diesel fuel markets are expected to provide a valuable outlet for
higher sulfur distillate fuel produced in the distribution system, at
least through the early years of the program. Consequently, beyond
2014, both 15 ppm sulfur and 500 ppm sulfur LM diesel fuel may continue
to exist in the distribution system, and each fuel must comply with the
designation stated on its PTD, pump label, or other documentation.

[[Page 39045]]

d. Interface/Transmix Flexibility for Fuel Distributors
As described above, today's program provides flexibility to the
distribution system by allowing interface/transmix material generated
within the distribution system to be sold into the NRLM diesel fuel
markets. Specifically, any fuel interface/transmix generated in the
fuel distribution system may be sold as:

(1) High sulfur NRLM diesel fuel or heating oil from June 1,
2007 through May 31, 2010;
(2) 500 ppm sulfur NRLM diesel fuel or heating oil from June 1,
2010 through May 31, 2014; or
(3) 500 ppm sulfur LM diesel fuel or heating oil after June 1, 2014.

Hence, beginning June 1, 2014, interface/transmix material
exceeding 15 ppm sulfur may only be sold into the LM diesel fuel or
heating oil markets. As discussed above, the downstream standard for LM
diesel fuel will be 500 ppm sulfur. However, heating oil may not be
shifted into the LM markets. Parties in the distribution system
receiving diesel fuel with a sulfur content greater than 15 ppm sulfur
must maintain records and report to EPA information demonstrating that
they did not shift heating oil into the LM markets, as discussed in
section IV.D.
The generation of greater than 15 ppm sulfur distillate fuel from
pipeline interface/transmix cannot be avoided due to the physical
realities of a multi-product fuel distribution system. Such fuel first
appears at the terminus of the pipeline distribution system; at
terminals due to the generation of segregated interface, or at transmix
processing facilities.\98\ In areas where there is a strong demand for
heating oil, much of this pipeline-generated off-specification fuel can
be sold into the heating oil market, just as it is today. However, in
many areas of the country the demand for heating oil would not be
sufficient to accommodate distillate fuel exceeding 15 ppm sulfur that
is generated in the pipeline. Therefore, such fuel would need to be
returned to a refinery for reprocessing to meet a 15 ppm sulfur
standard. In addition, some refiners may be reluctant to accept such
material for reprocessing given the impact this would have on their
refinery operations. More importantly, because such material appears at
the terminus of the pipeline distribution system and often where no
access to pipeline or marine shipment is available, it would have to be
shipped back to a refinery by truck, or rail if available, at
additional cost.
---------------------------------------------------------------------------

\98\ Segregated interface refers to the mixing zone between two
batches of fuel that abut each other in the pipeline, where the
volume in the mixing zone can not be cut into either of the fuel
batches, but can still meet another fuel product specification
without reprocessing, provided that it is drawn off of the pipeline
separately and segregated.
---------------------------------------------------------------------------

As discussed in chapter 7 of the RIA, fuel generated from such
interface/transmix will typically meet a 500 ppm sulfur standard.
Therefore, allowing the continued use of such 500 ppm sulfur diesel
fuel in locomotive and marine engines could reduce the burden on the
fuel distribution industry by lowering costs. Our cost estimates of
marketing such fuel include additional shipping charges for situations
where there is not a local locomotive or marine market (see section VI
of this preamble).\99\ Allowing the continued sale of 500 ppm sulfur
diesel fuel into the locomotive and marine markets without requiring it
to be reprocessed will also help preserve refining capacity for the
overall diesel fuel production. Therefore, this provision also serves
to address lingering concerns expressed by some refiners regarding the
impacts of the 15 ppm sulfur standard for highway and NRLM diesel fuel
on overall diesel fuel supply.
---------------------------------------------------------------------------

\99\ As mentioned above, the Agency intends in the near future
to initiate a rulemaking to adopt new emission standards for
locomotive and marine engines. An advanced notice of proposed
rulemaking (ANPRM) for this rule is published elsewhere in today's
Federal Register, June 29, 2004. While we are not finalizing a
sunset date for this downgrade provision in today's final rule, we
are evaluating the appropriateness of establishing a sunset date on
this provision in the context of the subsequent engine standards
rule. We also intend to review the appropriateness of any sunset
provision in light of experience gained from implementation of the
15 ppm sulfur NRLM diesel fuel standard. We would conduct such an
evaluation in 2011.
---------------------------------------------------------------------------

Downstream-generated 500 ppm sulfur diesel fuel may only be used in
nonroad engines until December 1, 2014, due to concerns regarding
enforceability and the increased potential for misfueling of nonroad
equipment (equipment with advanced emission controls). Beginning with
the 2011 model year, such equipment will require the use of 15 ppm
sulfur diesel fuel to operate properly. The same concerns do not exist
regarding the continued use of such 500 ppm sulfur diesel fuel in
locomotive and marine engines for three reasons. First, locomotive and
marine engines are not currently required to be equipped with the
sulfur sensitive emissions aftertreatment that will start being used on
nonroad equipment in 2011.\100\ Second, locomotive and marine markets
are centrally fueled to a much greater extent than nonroad markets, and
thus enforceability is not as significant of an issue. Finally, we
believe the program's designate and track provisions discussed below
will be sufficient to enforce the limits on production and use of 500
ppm sulfur diesel fuel.
---------------------------------------------------------------------------

\100\ Although, as mentioned above, the Agency intends in the
near future to initiate a rulemaking to adopt new emission standards
for locomotive and marine engines. An advanced notice of proposed
rulemaking (ANPRM) for this rule is published elsewhere in today's
Federal Register, June 29, 2004.
---------------------------------------------------------------------------

It is difficult to project exactly how much of this downstream
generated downgraded fuel could be segregated and shipped to LM
markets. However, it is clear that this provision represents an
important flexibility for the distribution system. In fact, it provides
virtually the same flexibility as provided by the proposal to handle
off-specification product. In both cases, use of the flexibility is
dependent on the ability to segregate the interface and transport it to
available LM markets. While today's rule does not contain an end date
for the downstream distribution of 500 ppm sulfur locomotive and marine
fuel, we will review the appropriateness of allowing this flexibility
based on experience gained from implementation of the 15 ppm sulfur
NRLM diesel fuel standard. We expect to conduct such an evaluation in 2011.
A summary of the NRLM sulfur levels and final deadlines for
refiners, importers, terminals, and other downstream parties is shown
in table IV-1 below.

Table IV-1.--500 ppm Sulfur and 15 ppm Sulfur NRLM Final Compliance Dates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Bulk plants,
Refiners and wholesale purchaser-
importers Credit, small refiner Terminals consumers and retail Other locations
outlets
--------------------------------------------------------------------------------------------------------------------------------------------------------
500 ppm NRLM....................... June 1, 2007.......... June 1, 2010.......... August 1, 2010....... October 1, 2010...... December 1, 2010.
15 ppm NR.......................... June 1, 2010.......... June 1, 2014.......... August 1, 2014....... October 1, 2014...... December 1, 2014.

[[Page 39046]]

15 ppm LM.......................... June 1, 2012.......... June 1, 2014.........
--------------------------------------------------------------------------------------------------------------------------------------------------------

4. Diesel Sulfur Credit Banking and Trading Provisions
Today's final program includes provisions for refiners and
importers to generate early credits for the production of 500 ppm
sulfur NRLM diesel fuel prior to June 1, 2007 and for the production of
15 ppm sulfur NRLM diesel fuel prior to June 1, 2010. These credit
banking and trading provisions will provide implementation flexibility
by facilitating a somewhat smoother transition at the start of the
program in 2007, with some refineries/import facilities complying
early, others on time, and others a little later. These credit banking
and trading provisions may also facilitate some of the environmental
benefits of the program being achieved earlier than otherwise required,
and may increase the overall environmental benefits of the program. As
discussed below, overall benefits will accrue if refiners produce 500
ppm earlier in lieu of high sulfur NRLM and then bank those credits to
continue producing 500 ppm sulfur NR diesel fuel in 2010 or 500 ppm LM
diesel fuel in 2012 in lieu of 15 ppm.\101\
---------------------------------------------------------------------------

\101\ We are not adopting specific provisions to generate
credits for early production of LM diesel fuel prior to June 1,
2012. The difference in start date between 2010 and 2012 already
provides additional flexibility to producers of LM diesel fuel, and
setting separate credit generation periods for NR and LM diesel fuel
would unnecessarily complicate the compliance assurance provisions.
---------------------------------------------------------------------------

Specifically, credits generated under the NRLM diesel fuel program
may be banked and later used to delay compliance with either the 500
ppm sulfur NRLM standard that begins in 2007, the 15 ppm sulfur NR
standard that begins in 2010, or the 15 ppm sulfur LM standard that
begins in 2012. Credits may also be traded within companies such that
credits generated at one refinery/import facility in a given company
may be traded to another refinery/import facility within that same
company. In addition, refiners or importers may purchase credits
generated by other refiners or importers to meet the program
requirements. Finally, and perhaps most importantly, individual
refineries/import facilities may be able to use credits to permit the
continued sale of otherwise off-specification product at the beginning
of the program's second step when they are still adjusting their
operations for consistent production/importation of NRLM diesel fuel
that is subject to the new sulfur standards.
a. Credit Generation From June 1, 2006 Through May 31, 2007
Credits may be generated under today's program to allow for the
production of high sulfur NRLM diesel fuel after June 1, 2007. A
refiner or importer may obtain credit for early production/importation
of fuel meeting the 500 ppm sulfur standard that they designate as NRLM
diesel fuel, from June 1, 2006 through May 31, 2007. In addition, small
refiners may also generate credits for the early production of 500 ppm
sulfur diesel fuel that they designate as NRLM diesel fuel. As
described in section IV.B, below, small refiners are not required to
produce any 500 ppm sulfur NRLM diesel fuel until June 1, 2010. Those
small refiners who choose to comply with the 500 ppm sulfur standard
earlier than required, that is before June 1, 2010, may generate
credits for any volume of diesel fuel they produce from June 1, 2007
through May 31, 2010 and designate as NRLM. Credits for the early
production of 500 ppm sulfur fuel (including by small refineries) are
fungible, may be banked for future use, or traded to any other refiner
or importer nationwide. In order to ensure that these early credits are
real and not merely shifts from the highway market, both early credits
and small refinery credits will be subject to a limit determined by the
following formula:

Credit_HS = (Vol₁₅ + Vol₅₀₀) -
Vol_hwy
Credit_HS Limit = (Vol₁₅ + Vol₅₀₀) -
Base_hwy
Where:

Credit₅₀₀ Limit = Limit for 500 ppm NRLM credits
Credit_HS = High-Sulfur NRLM credits\102\
---------------------------------------------------------------------------

\102\ For the purposes of this rule, credits are labeled on the
basis of their use in order to follow the convention used in the
highway diesel rule. A high-sulfur credit is generated through the
production of one gallon of 500 ppm sulfur NRLM diesel fuel and
allows the production of one gallon of high sulfur NRLM diesel fuel.
---------------------------------------------------------------------------

Vol₁₅ = Volume of 15 ppm sulfur diesel fuel produced and
designated as highway or NRLM
Vol₅₀₀ = Volume of 500 ppm sulfur diesel fuel produced and
designated as highway or NRLM
Base_hwy = 2003-2005 highway diesel fuel baseline volume
Vol_hwy = Volume of diesel fuel produced and designated as
highway

If the excess production is 15 ppm sulfur diesel fuel instead of
500 ppm sulfur diesel fuel, then the refiner will have the option of
generating 500 ppm sulfur credits under the highway diesel fuel
program. Credit may not be earned under both programs for a given
volume of 500 ppm sulfur or 15 ppm sulfur diesel fuel.
b. Credit Generation From June 1, 2009 Through May 31, 2010
In addition to allowing credit for the early production of 500 ppm
sulfur NRLM diesel fuel, today's program also allows credit for the
early production of 15 ppm sulfur NRLM diesel fuel. Specifically,
refiners and importers may obtain credit for early production/
importation of fuel meeting the 15 ppm sulfur standard and that they
designate as NRLM from June 1, 2009 through May 31, 2010. In addition,
small refiners, which are not required to produce any 15 ppm sulfur
NRLM diesel fuel until June 1, 2014, may also generate credits for the
early production of any volume of 15 ppm sulfur diesel fuel that they
designate as NRLM from June 1, 2010 through December 31, 2013. Again,
these early credits are fungible, may be banked for future use, or
traded to any other refinery or importer nationwide. However, in order
to ensure these credits are real and not merely shifts from the highway
market, credits for the early production or importation of 15 ppm
sulfur fuel will be subject to a limit determined by the following formula:

Credit₅₀₀ = Vol₁₅ - Vol_15hwy
Credit₅₀₀ Limit = Vol_{15 -} Base_15hwy

Where:
Credit₅₀₀ Limit = Limit for 500 ppm sulfur NRLM credits
Vol₁₅ = Volume of 15 ppm sulfur diesel fuel produced and
designated as highway or NRLM
Base_15hwy = 2006-2008 15 ppm sulfur highway diesel fuel
baseline volume

[[Page 39047]]

Hence, to generate credits, a refiner or importer's highway diesel
fuel volume for the compliance period must be greater than or equal to
the baseline volume. That is, a refiner or importer may only generate
credits for ``new'' volumes of 15 ppm sulfur diesel fuel that it
produces. If their highway diesel fuel volume were to drop below the
baseline volume, that would likely indicate a shift in production from
the highway market to generate 15 ppm sulfur NRLM diesel fuel credits.
c. Credit Use
There are two ways in which refiners or importers may use high-
sulfur NRLM credits under the NRLM diesel fuel program. First, credits
may be used during the period from June 1, 2007 through May 31, 2010 to
continue to produce high sulfur NRLM diesel fuel. Any high sulfur NRLM
diesel fuel that is produced, however, must be designated and labeled
as such for tracking purposes throughout the distribution system and be
dyed red at the refinery gate.
The second way in which refiners and importer could use high-sulfur
NRLM credits is by banking them for use during the June 1, 2010 through
May 31, 2014 period. Credits used in this manner would provide a net
environmental benefit, since they were generated by reducing the sulfur
level from approximately 3000 ppm to less than 500 ppm (a net change of
2500 ppm sulfur), but when used only allow the sulfur level to increase
from 15 ppm to 500 ppm (a net change of less than 500 ppm sulfur). 500
ppm sulfur credits generated from the early production of 15 ppm sulfur
NRLM diesel fuel may also be used from June 1, 2010 through May 31,
2014. Thus, during this period, when the 15 ppm sulfur standard is in
effect for nonroad diesel fuel, refiners/importers may use either high
sulfur credits or 500 ppm sulfur credits to continue producing/
importing 500 ppm sulfur nonroad diesel fuel. Any 500 ppm sulfur diesel
fuel that is produced, however, must be appropriately designated and
labeled for tracking purposes throughout the distribution system, and
cannot be sold for use in 2011 and later model year nonroad engines.
From June 1, 2012, when the 15 ppm sulfur standard for LM diesel fuel
becomes effective, through May 31, 2014, refiners/importers may use
either high sulfur credits or 500 ppm sulfur credits to continue
producing/importing 500 ppm sulfur NRLM diesel fuel. All credits expire
after May 31, 2014. Hence, beginning June 1, 2014, all NRLM diesel fuel
produced by refiners or imported in the U.S. will be subject to the 15
ppm sulfur standard, except LM diesel fuel produced by transmix
processors from transmix can continue to meet the 500 ppm sulfur limit.
We proposed that all credits would expire May 31, 2012, however we
are finalizing an expiration date of May 31, 2014 based on the comments
we received. The additional two years that we are now allowing for
credit use (1) will provide a longer period for refiners to sell off-
specification fuel instead of having to reprocess it, (2) is an
environmentally neutral change to the overall program, and (3) is now
consistent with the end-date for small refiner flexibility.
While credits can be generated and traded nationwide, they are
restricted from use in certain parts of the country under the
provisions of this final rule. As discussed in section IV.D, we are
avoiding the burden to terminals of adding marker to heating oil in
those areas of the country where demand for heating oil is expected to
continue to remain high after today's final rule. The NRLM diesel fuel
sulfur standards will be enforced based on sulfur level in these areas,
not through the refinery designation and marker provisions.
Consequently, in the area defined in section IV.D comprising most of
the Northeast and Mid-Atlantic region of the country, as well as in the
State of Alaska, many of the fuel program's flexibilities, including
refiners' ability to use credits, are not allowed. Refiners and
importers may not use credits to produce or import diesel fuel with a
sulfur content greater than 500 ppm beginning June 1, 2007 or 15 ppm
beginning June 1, 2010, for sale or distribution in this Northeast/Mid-
Atlantic area or the State of Alaska. However, credits generated in
these areas can be sold to other refiners and/or importers for use
outside these areas.

B. Hardship Relief Provisions for Qualifying Refiners

As in our gasoline sulfur and highway diesel fuel sulfur programs,
today's program contains the following hardship relief provisions to
provide regulatory flexibility to challenged refiners:
? Small refiner hardship for qualifying small refiners;
? General hardship for any refiner experiencing either--
(1) Extreme unforeseen circumstances such as natural disaster or
acts of God; or
(2) Extreme hardship circumstances such as financial or technical
hardship.
Similar provisions have proved invaluable for some refiners in the
recent implementation of the gasoline sulfur standards, as well as for
refiners' planning for the highway diesel standards. The details of
these provisions are discussed below.
1. Hardship Provisions for Qualifying Small Refiners
As in previous fuel rulemakings, our justification for including
provisions specific to small refiners is that, in general, small
refiners generally have a degree of hardship in complying with the
standards compared to other refiners. In the NPRM, we proposed
flexibilities/transition provisions, or ``hardship provisions'' (these
terms are equivalent), for small refiners. We are adopting the
provisions that were proposed for small refiners virtually unchanged,
and including similar provisions for the treatment of locomotive and
marine fuel.
a. Regulatory Process and Justification for Small Refiner Relief
In developing our NRLM diesel fuel sulfur program, we evaluated the
environmental need as well as the technical and financial ability of
refiners to meet the 500 and 15 ppm sulfur standards as expeditiously
as possible. We believe it is feasible and necessary for the vast
majority of the program to be implemented in the established time frame
to achieve the air quality benefits as soon as possible. Based on
information available from small refiners and others, we believe that
refiners classified as small generally face unique circumstances with
regard to compliance with environmental programs, compared to larger
refiners. Consequently, as discussed below, we are finalizing several
special provisions for refiners that qualify as ``small refiners'' to
reduce the disproportionate burden that today's program will have on them.
Small refiners generally lack the resources that are available to
large refining companies, including those large companies that own
small-capacity refineries, to raise capital for investing in
desulfurization equipment, such as shifting of internal funds, securing
of financing, or selling of assets. Small refiners are also likely to
have more difficulty in competing for engineering and construction
resources needed for the installation of the desulfurization equipment
which will likely be required to meet the standards finalized in this
action.
Because small refiners are more likely to face adverse
circumstances with regard to regulatory compliance than larger
refiners, we are finalizing interim provisions that will provide
additional time for refineries owned by small

[[Page 39048]]

refiners to meet the sulfur standards. This approach will allow the
overall program to begin as early as possible, avoiding the need for
delay in order to address the ability of small refiners to comply.
i. Regulatory Flexibility Process for Small Refiners
As explained in the discussion of our compliance with the
Regulatory Flexibility Act (RFA) in section X.C of this preamble, and
in the Final Regulatory Flexibility Analysis in chapter 11 of the RIA,
we considered the impacts of today's regulations on small businesses.
Most of our analysis of small business impacts was performed as part of
the Small Business Advocacy Review (SBAR) Panel convened by EPA,
pursuant to the RFA as amended by the Small Business Regulatory
Enforcement Fairness Act of 1996 (SBREFA). The Panel's final report is
available in the rulemaking public docket (Docket A-2001-28, Document
No. II-A-172).
For the SBREFA process, EPA conducted outreach, fact-finding, and
analysis of the potential impacts of the proposed nonroad regulations
on small businesses. Based on these discussions and analyses by all
panel members, the Panel concluded that small refiners in general would
likely experience a significant and disproportionate financial burden
in reaching the objectives of the proposed nonroad diesel fuel sulfur
program.
One indication of the disproportionate burden on small refiners is
the relatively high cost per gallon projected for producing NRLM diesel
fuel under today's program. Refinery modeling of refineries owned by
refiners likely to qualify as small refiners, and of refineries owned
by other non-small refiners, indicates significantly higher refining
costs for small refiners. Specifically, we project that without special
provisions, refining costs for small refiners on average would be about
two cents per gallon higher than for other refiners in the same PADD to
meet the 15 ppm sulfur standard.
The Panel also noted that the burden imposed on small refiners by
the proposed sulfur standards may vary from refiner to refiner. Thus,
the Panel recommended more than one type of burden mitigation so that
most, if not all, small refiners could benefit. We considered the
issues raised during the SBREFA process, and discussed them in the
NPRM, and have decided to finalize each of the provisions recommended
by the Panel. A discussion of the comments we received regarding small
refiners and terminal operators, and our responses to those comments,
can be found in section X.C of this preamble, and also the Summary and
Analysis of Comments.
ii. Rationale for Small Refiner Regulatory Flexibility Provisions
Generally, we structured the small refiner provisions to reduce the
burden on small refiners while expeditiously achieving air quality
benefits and ensuring that the availability of 15 ppm sulfur NR diesel
fuel will coincide with the introduction of 2011 model year nonroad
diesel engines and equipment. We believe the special provisions for
small refiners are necessary and appropriate for several reasons.
First, the compliance schedule for today's program, combined with
special relief provisions for small refiners, will achieve the air
quality benefits of the program as soon as possible, while helping to
ensure that small refiners will have adequate time to raise capital for
new or upgraded fuel desulfurization equipment. Most small refiners
have limited additional sources of income beyond refinery earnings for
financing and typically do not have the financial backing that larger
and generally more integrated companies have. Therefore, additional
time to accumulate capital internally or to secure capital financing
from lenders can be central to their ability to comply.
Second, we recognize that while the sulfur levels in today's
program can be achieved using conventional refining technologies, new
technologies are also being developed that may reduce the capital and/
or operating costs of sulfur removal. Thus, we believe that providing
small refiners some additional time to allow for new technologies to be
proven out by other refiners will have the added benefit of reducing
the risks faced by small refiners. The added time will likely enable
small refiners to benefit from the lower costs of these improvements in
desulfurization technology (e.g., better catalyst technology or lower-
pressure hydrotreater technology). This will help to offset the
disproportionate financial burden that may be imposed upon small
refiners.
Finally, providing small refiners more time to comply will spread
out the availability of engineering and construction resources. Most
refiners will need to install additional processing equipment to meet
the NRLM diesel fuel sulfur requirements. We anticipate that there may
be significant competition for technology services, engineering
resources, and construction management and labor. In addition, as has
been the experience in gasoline sulfur control, vendors will be more
likely to contract their services with the larger refiners first, as
their projects will offer larger profits for the vendors. Temporarily
delaying compliance for small refiners will spread out the demand for
these resources and may help reduce cost premiums for everyone caused
by limited engineering and construction supply.
We discuss below the provisions that we are finalizing to minimize
the degree of hardship imposed upon small refiners by this program.
With these provisions we are confident in going forward with the 500
ppm sulfur standard for NRLM diesel fuel in 2007 and the 15 ppm sulfur
standard for NR diesel fuel in 2010 and for LM diesel fuel in 2012, for
the rest of the industry. The provisions for small refiners will allow
these refiners to continue to produce higher sulfur NRLM fuel until
June 1, 2010, and similarly, will allow for the production of 500 ppm
nonroad NRLM fuel until June 1, 2014. Without small refiner relief, we
would have to consider delaying the overall program until the burden of
the program on many small refiners was diminished, which would delay
the air quality benefits of the overall program. By providing temporary
relief to small refiners, we are able to adopt a program that
expeditiously reduces NRLM diesel fuel sulfur levels in a feasible
manner for the industry as a whole.
The four-year leadtime from which begins in 2010 for small refiners
for locomotive and marine diesel fuel is identical to the relief that
was supported by small refiners for nonroad diesel fuel. We believe
that this relief is necessary and adequate to reduce the burden on
small entities while still achieving our air quality goals. Small
refineries vary considerably in their markets for NRLM diesel fuels.
Consequently, the proposal to control nonroad diesel fuel to 15 ppm
sulfur impacted small refiners with significant nonroad market shares,
but left those with significant locomotive and marine market shares
relatively untouched. With control of all NRLM diesel fuel to 15 ppm
sulfur in this final rule, all small refiners of NRLM diesel fuel will
face similar challenges, and therefore the same four year lead time
from 2010 proposed for those small refiners impacted by nonroad fuel
control alone is also appropriate when the standards are expanded to
all NRLM. In essence, while more small refiners face the challenge of
desulfurizing all of their diesel fuel to the 15 ppm sulfur standard,
the magnitude of this challenge is not any greater. Furthermore,
providing

[[Page 39049]]

additional relief (beyond 2014) to small refiners would undermine the
program by further delaying air quality benefits. The 2014 deadline for
all small refiner diesel fuel to 15 ppm sulfur will also simplify the
fuel program and it will allow small refiners the ability to coordinate
their plans to reduce the sulfur content of all off-highway diesel fuel
at the same time.
iii. Impact of Small Refiner Options on Program Emissions Benefits
Small refiners that choose to delay the NRLM diesel fuel sulfur
requirements will also delay to some extent the emission reductions
that would otherwise have been achieved. However, for several reasons,
the overall impact of these postponed emission reductions will be
small. First, small refiners represent only a fraction of national non-
highway diesel production. Today, refiners that we expect to qualify as
small refiners represent only about six percent of all high-sulfur
diesel production. Second, the delayed compliance provisions described
below will affect only engines without new emission controls. During
the program's first step to 500 ppm sulfur NRLM diesel fuel, small
refiner NRLM diesel fuel could be well above 500 ppm sulfur, but the
new advanced engine controls will not yet be required. During the
second step to 15 ppm sulfur NRLM diesel fuel, equipment with the new
controls will be entering the market, but use of the 500 ppm small
refiner fuel will be restricted to older engines without the new
controls. There will be some loss of sulfate PM control in the older
engines that operate on higher sulfur small refiner fuel, but no effect
on the major emission reductions that the new engine standards will
achieve starting in 2011. Finally, because small diesel refiners are
generally dispersed geographically across the country, the limited loss
of sulfate PM control will also be dispersed.
One option for small refiner relief will allow a modest 20 percent
relaxation in the gasoline sulfur interim standards for small refiners
that produce all of their NRLM diesel fuel at 15 ppm sulfur by June 1,
2006. To the extent that small refiners elect this option, a small loss
of emission control from Tier 2 gasoline vehicles that use the higher
sulfur gasoline could occur. We believe that such a loss of control
will be very small. Very few small refiners will be in a position to
use this provision. Further, the relatively small production of
gasoline with slightly higher sulfur levels should have no measurable
impact on the emissions of new Tier 2 vehicles, even if the likely
``blending down'' of sulfur levels does not occur as this fuel mixed
with lower sulfur fuel during distribution. This provision will also
maintain the maximum 450 ppm gasoline sulfur per-gallon cap standard in
all cases, providing a reasonable sulfur ceiling for any small refiners
using this provision.
b. Small Refiner Definition for Purposes of the Hardship Provisions
The definition of small refiner under the NRLM diesel program is
similar to the definitions under the Tier 2/Gasoline Sulfur and Highway
Diesel rules. Under the NRLM program, a small refiner must demonstrate
that it meets the following criteria:
? Produced NRLM diesel from crude;
? No more than 1,500 employees corporate-wide, based on the
average number of employees for all pay periods from January 1, 2002 to
January 1, 2003; and,
? A corporate crude oil capacity less than or equal to
155,000 barrels per calendar day (bpcd) for 2002.
As with the earlier fuel sulfur programs, the effective dates for
the determination of employee count and for calculation of the crude
capacity represent the most recent complete year prior to the issuing
of the proposed rulemaking (2002, in this case).
In determining its 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. However,
refiners owned and controlled by an Alaska Regional or Village
Corporation organized under the Alaska Native Claims Settlement Act (43
U.S.C. 1626), are also eligible for small refiner status, based only on
the refiner's employees and crude oil capacity. Such an exclusion is
consistent with our desire to grant regulatory relief to that part of
the industry that is the most challenged with respect to regulatory
compliance. We believe that very few refiners, probably only one, will
qualify under this provision. We are also incorporating this exclusion
into the small refiner provisions of the highway diesel and gasoline
sulfur rules, which did not address this issue.
As under the gasoline sulfur and highway diesel fuel rules,
refiners that either acquire or restart a refinery in the future may be
eligible for small refiner status under the NRLM program. Specifically,
a refiner that either acquires or restarts a refinery that was shut
down or non-operational between January 1, 2002 and January 1, 2003 may
apply for small refiner status. In such cases, we will judge
eligibility under the employment and crude oil capacity criteria based
on the most recent 12 consecutive months of data unless we conclude
from the data provided by the refiner that another period of time is
more appropriate. Companies with refineries built after January 1, 2002
are not eligible for the small refiner provisions. Similarly, entities
that do not own or operate a refinery are not eligible to apply for
small refiner status.
c. Provisions for Small Refiners
We are finalizing several provisions intended to reduce the
regulatory burden of today's program on small refiners as well as to
encourage their early compliance whenever possible. As described below,
these small refiner relief options consist of additional time for
compliance and, for small refiners that choose to comply earlier than
required, the option of either generating diesel fuel sulfur credits or
receiving a limited relaxation of their gasoline sulfur standards.
i. NRLM Delay Option
First, we are finalizing an option that allows small refiners to
postpone their compliance with the NRLM diesel fuel sulfur standards.
The delayed compliance schedule for small refiners is intended to
compensate for the relatively higher compliance burdens on these
refiners. It is not intended as an opportunity for those refiners to
greatly expand their production of uncontrolled diesel fuel (2007-2010)
or 500 ppm sulfur diesel fuel (2010-2014). To help ensure that any
significant expansion of refining capacity that a small refiner might
undertake in the future is accompanied by an expansion of
desulfurization capacity, small refiners producing higher sulfur fuel
must limit their production to baseline volume levels. Specifically,
during the first step of today's diesel fuel program to 500 ppm sulfur,
from June 1, 2007 through May 31, 2010, a small refiner may at any or
all of its refineries produce uncontrolled NRLM diesel fuel up to the
2003 through 2005 non-highway baseline volume for the refinery(s). Any
diesel fuel produced over the baseline volume will be subject to the
500 ppm sulfur standard applying to other refiners. Similarly, from
June 1, 2010 through May 31, 2014, a small refiner may produce at any
or all of its refineries NRLM diesel fuel subject to

[[Page 39050]]

the 500 ppm sulfur standard at a volume equal to or less than the
refineries' 2006-2008 non-highway baseline volumes. LM fuel produced to
the 500 ppm standard during 2010 to 2012 would be counted towards
meeting this baseline volume. NRLM fuel produced in excess of the
baseline volume will be subject to the 15 ppm sulfur NRLM diesel fuel
standard. The baseline for 2003-2005 will be determined by subtracting
the refinery's highway volume from its total highway and heating oil
volume production. The baseline for 2006-2008 will be determined based
upon the volume of the refinery's NRLM fuel designations discussed in
section IV.D.
As discussed in section IV.D, the costs to the distribution system
to mark heating oil in areas of PADD 1 with high heating oil demand to
distinguish it from small refiner or credit-using high sulfur NRLM made
this option undesirable in these areas. Based on our review of
anticipated small refiner situations, this portion of PADD 1 appears
unlikely to provide a meaningful market for small refiners seeking this
option. Therefore, in this part of the country it imposed costs without
providing the intended benefit. Consequently, while this option was
proposed to be available nationwide, we are not finalizing it for a
portion of PADD 1. This change from the proposal should have no
meaningful impact on small refiners' flexibility, but will reduce the
costs for fuel distributors.
Since new engines with sulfur sensitive emission controls will
begin to become widespread beginning in 2011, small refiner fuel can
only be sold for use in pre-2011 nonroad equipment or in locomotives or
marine engines during this time. Section IV.D below discusses the
requirements for designating and tracking the production of 500 ppm
sulfur NRLM diesel fuel produced by small refiners during this period.
The following table illustrates the small refiner NRLM diesel fuel
sulfur standards as compared to the standards for the base NRLM diesel
fuel program. As previously stated, small refiners will receive
additional lead time, compared to non-small refiners for 15 ppm sulfur
locomotive and marine diesel fuel. This lead time is identical to that
which had been proposed for 15 ppm sulfur nonroad diesel fuel. This
will ensure that emission benefits of ultra low sulfur diesel fuel are
achieved as soon as possible, and should not significantly change the
nature or magnitude of the burden on affected small refiners.

Table IV-4.--Small Refiner NRLM Diesel Fuel Sulfur Standards, ppm \a\
----------------------------------------------------------------------------------------------------------------
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015+
----------------------------------------------------------------------------------------------------------------
Non-Small Refiners-NR fuel...... ...... 500 500 500 15 15 15 15 15 15
Non-Small Refiners-LM fuel...... ...... 500 500 500 500 500 15 15 15 15
Small Refiners-NR diesel fuel... ...... ...... ...... ...... 500 500 500 500 15 15
Small Refiners-LM diesel fuel... ...... ...... ...... ...... 500 500 500 500 15 15
----------------------------------------------------------------------------------------------------------------
Notes: \a\ New standards will take effect on June 1 of the applicable year.

ii. NRLM Credit Option
Some small refiners have indicated that, for a variety of reasons,
they might need to produce fuel meeting the NRLM diesel fuel sulfur
standards earlier than required under the small refiner program
described above. For some small refiners, the distribution system might
limit the number of grades of diesel fuel that will be carried. Others
might find it economically advantageous to make 500 ppm or 15 ppm
sulfur NRLM diesel fuel earlier than required to prevent losing market
share. At least one small refiner has indicated that it might decide to
desulfurize its NRLM pool at the same time as it desulfurizes its
highway diesel fuel, in June 2006, due to limitations in its
distribution system and to take advantage of economies of scale.
The NRLM Credit option allows small refiners to participate in the
NRLM diesel fuel sulfur credit banking and trading program discussed
earlier in this section. Under this option, a small refiner may
generate diesel fuel sulfur credits by producing any volume of 500 ppm
sulfur NRLM diesel fuel from crude oil prior to from June 1, 2006
through May 31, 2010, and by producing any volume from crude oil of 15
ppm sulfur NRLM diesel fuel from June 1, 2010 through December 31,
2013. The specifics of the credit program are described in section
IV.A.4, including how the program applies to small refiners. Generating
and selling credits could provide small refiners with funds to help
defray the costs of early NRLM compliance.
iii. NRLM/Gasoline Compliance Option
The NRLM/Gasoline Compliance option is available to small refiners
that produce greater than 95 percent of their NRLM diesel fuel at the
15 ppm sulfur standard by June 1, 2006 and elect not to use the
provision described above to earn NRLM diesel fuel sulfur credits for
this early compliance. Refiners choosing this option will receive a
modest revision in their small refiner interim gasoline sulfur
standards, beginning January 1, 2004. Specifically, the applicable
small refiner annual average and per-gallon cap gasoline sulfur
standards will be increased by 20 percent for the duration of the
interim program. The interim program is through either 2007 or 2010,
depending on whether the refiner extended the duration of its interim
gasoline sulfur standards by producing 15 ppm sulfur highway diesel
fuel by June 1, 2006, as provided under 40 CFR 80.552(c). In no case
may the per-gallon gasoline sulfur cap exceed 450 ppm, the highest
level allowed under the gasoline sulfur program.
We believe it is very important to link any relaxation of a small
refiner's interim gasoline sulfur standards with the environmental
benefit of early desulfurization of a significant volume of NRLM diesel
fuel. As such, a small refiner choosing to use this option must produce
a minimum volume of NRLM diesel fuel at the 15 ppm sulfur standard by
June 1, 2006. Each participating small refiner must produce a volume of
15 ppm sulfur fuel that is at least 85 percent of the annual average
volume of non-highway diesel fuel it produced from 2003-2005. If the
refiner began to produce gasoline in 2004 at the higher interim
standard under this provision but then either fails to meet the 15 ppm
sulfur standard for its NRLM diesel fuel by June 1, 2006 or fails to
meet the 85 percent minimum volume requirement, the original small
refiner interim gasoline sulfur standard applicable to that refiner
will automatically apply retroactively to 2004. In addition, the
refiner must compensate for the higher gasoline sulfur levels by
purchasing gasoline sulfur credits or producing an equivalent volume of
gasoline below the required sulfur levels. Under this option, a small
refiner could in effect shift some funds from its gasoline sulfur
program to accelerate desulfurization of

[[Page 39051]]

NRLM diesel fuel. While there would be a small potential loss of
emission reduction under the gasoline sulfur program from fuel produced
by the very few small refiners that we believe would choose this second
option, there are also environmental benefits gained from the
production of 15 ppm sulfur diesel fuel earlier than otherwise
required.
iv. Relationship of the Options to Each Other
A small refiner may choose to use the NRLM Delay option, the NRLM
Credit option or both in combination, since it has no requirement to
produce 500 ppm sulfur NRLM diesel fuel before June 1, 2010, or 15 ppm
sulfur NRLM diesel fuel before June 1, 2014. Thus any fuel that it
produces from crude at or below the sulfur standards earlier than
required will qualify for generating credits.
On the other hand, the NRLM/Gasoline Compliance option may not be
used in combination with either the NRLM Delay option or the NRLM
Credit option, since a small refiner must produce at least 85 percent
of its NRLM diesel fuel at the 15 ppm sulfur standard under the NRLM/
Gasoline Compliance option.
d. How Do Refiners Apply for Small Refiner Status?
A refiner applying for small refiner status must provide the Agency
with several types of information by December 31, 2004. The detailed
application requirements are summarized in section V.F.2 below. In
general, a potential small refiner must own the refinery/refineries in
question and must provide the following information for the parent
company and all subsidiaries at all locations: (1) The average number
of employees for all pay periods from January 1, 2002 through January
1, 2003; (2) the total corporate crude oil capacity, which must be a
positive number; and (3) an indication of which small refiner option
the refiner intends to use (see section IV.B.1.c above). As with
applications for relief under other fuel programs, applications for
small refiner status under this rule that are later found to contain
false or inaccurate information will be void ab initio.
e. The Effect of Financial and Other Transactions on Small Refiner
Status and Small Refiner Relief Provisions
Since the gasoline sulfur and highway diesel fuel sulfur programs
were finalized, several refiners have raised concerns about how various
financial and other transactions could affect implementation of the
small refiner fuel sulfur provisions. These types of transactions
typically involve refiners with approved small refiner status that are
involved in potential or actual sales of the small refiner's refinery,
or involve the small refiner merging with another refiner or purchasing
another refinery (or other non-refining asset). We believe that these
concerns are also relevant to the small refiner provisions described
below for the NRLM diesel fuel sulfur program.
i. Large Refiner Purchasing a Small Refiner's Refinery
The first type of transaction involves a ``non-small'' refiner that
wishes to purchase a refinery owned by an approved small refiner. In
some cases, the small refiner may not have completed or even begun
refinery upgrades to meet the long-term fuel sulfur standards if it was
using an interim small refiner compliance provision. Under the gasoline
sulfur and highway diesel fuel sulfur programs, once such a purchase
transaction is completed, the ``non-small'' buyer does not have the
benefit of the small refiner relief provisions that had applied to the
previous owner.
The purchasing refiner would have to perform the necessary upgrades
on the acquired refinery for it to meet the ``non-small'' sulfur
standards. As the gasoline sulfur and highway diesel fuel sulfur
provisions existed prior to today's action, such a refiner would be
left with very little or, in the case of the gasoline sulfur program
which has already begun, no lead time to bring the refinery into
compliance. The refiners that have raised this issue have claimed that
refiners in this situation would not be able to immediately comply with
the ``non-small refiner'' standards upon acquisition of the new
refinery. These refiners claim that this could prevent them from
purchasing a refinery from a small refiner and, as a result, this would
severely limit the ability of small refiners to sell such an asset. The
refiners that raised this issue requested additional lead time before
the non-small refiner sulfur standards take effect.
We received comments on this issue from two refiners. Both refiners
commented that lead time for refiners losing their small refiner status
should only be allowed for the case where a small refiner merges with,
or acquires, another small refiner. Neither refiner supports allowing
additional lead time for a large refiner that merges with or acquires a
small refiner. In addition, these refiners also commented that it would
be inappropriate to allow a small refiner that receives this lead time
to be able to generate credits for ``early'' production of lower sulfur
diesels during this two-year period.
Nevertheless, we continue to believe these lead-time concerns are
valid. Failure to address them could lead to unnecessary disruption to
the diesel fuel market. Therefore, we are adopting a provision to
provide an appropriate period of lead time for compliance with the NRLM
diesel fuel sulfur requirements for situations in which a refiner
purchases any refinery owned by a small refiner, whether by purchase of
the refinery or purchase of the small refiner entity. Refiners that
acquire a refinery from an approved small refiner will be provided 30
additional months from the date of the completion of the purchase
transaction (but no later than June 1, 2010 for 500 ppm NRLM fuel and
June 1, 2014 for 15 ppm NRLM fuel). During this interim period,
production at the newly-acquired refinery may remain at the interim
sulfur levels that applied to that refinery for the previous small
refiner owner under the small refiner options discussed below. At the
end of this period, the refiner must comply with the ``non-small
refinery'' sulfur standards.
We received comments suggesting that the proposed 24 months of
additional lead time would not be adequate, and further, discussions
with several refiners indicated that in most cases, 24 months would be
inadequate. As discussed in section IV.F, we project a range of 27-39
months is needed to design and construct a diesel hydrotreater.
Therefore, in order to allow a reasonable opportunity for complying, we
are finalizing the provision that 30 months of additional lead time
will be afforded. Thirty months should in most cases be sufficient for
the new refiner-owner to accomplish the necessary engineering,
permitting, construction, and start-up of the necessary desulfurization
equipment. However, if there are instances where the technical
characteristics of its planned desulfurization project will require
additional lead time, we have included provisions for the refiner to
apply for up to six months of additional time and for EPA to consider
such requests on a case-by-case basis. Such an application must be
based on the technical factors supporting the need for more time and
should include detailed technical information and projected schedules
for engineering, permitting, construction, and startup. Based on
information provided in such an application and other relevant
information, EPA will decide whether additional time is

[[Page 39052]]

technically necessary and, if so, how much additional time is
appropriate. However, we anticipate that in most cases 30 months will
be sufficient, since developing plans for compliance should be expected
to be a part of any purchase decision.
All existing small refiner provisions and restrictions, as
described below, will also remain in place for that refinery during the
30 months of additional lead time and any further lead time approved by
EPA for the purchasing refiner; including the per-refinery volume
limitation on the amount of NRLM diesel that may be produced at the
small refiner standards. Furthermore, since the purpose of this grace
period is solely to provide time to bring the refinery into compliance
with the NRLM standards, refiners will not be allowed to generate
credits for early compliance during this 30 month period. There will be
no adverse environmental impact of this provision, since the small
refiner would have already been provided this same relief prior to the
purchase and this provision is no more generous.
ii. Small Refiner Losing Its Small Refiner Status Due To Merger or
Acquisition
Another type of transaction involves a refiner with approved small
refiner status that later loses its small refiner status because it
exceeds the small refiner criteria. Under the gasoline sulfur and
highway diesel fuel sulfur regulations, an approved small refiner that
exceeds 1,500 employees due to merger or acquisition will lose its
small refiner status. We also intended for refiners that exceeded the
155,000 barrel per calendar day crude capacity limit due to merger or
acquisition to lose its small refiner status and in this rule we are
amending the regulations to reflect that criterion as well. This
includes exceedances of the employee or crude capacity criteria caused
by acquisitions of assets such as plant and equipment, as well as
acquisitions of business entities.
Our intent in the gasoline and highway diesel fuel sulfur programs,
as well as the NRLM diesel fuel sulfur program, has been and continues
to be, limiting the small refiner relief provisions to a small subset
of refiners that are challenged, as discussed above. At the same time,
it is also our intent to avoid stifling normal business growth.
Therefore, the regulations we are adopting today will disqualify a
refiner from small refiner status if it exceeds the small refiner
criteria through its involvement in transactions such as being acquired
by or merging with another entity, through the small refiner itself
purchasing another entity or assets from another entity, or when it
ceases to process crude oil. However, an approved small refiner who
exceeds the employee or crude oil capacity criteria without merger or
acquisition, may retain its small refiner status for the purposes of
the complying with the NRLM diesel fuel standards. Furthermore, in the
sole case of a merger between two approved small refiners we will allow
such refiners to retain their small refiner status for purposes of
complying with the NRLM diesel fuel program. Commenters explained that
additional financial resources would not typically be provided in the
case of a merger between small refiners. In light of these comments, we
believe the justification for continued small refiner relief for the
merged entity is valid. Small refiner status for the two entities of
the merger will not be affected, hence the original compliance plans of
the two refiners should not be impacted. Moreover, no environmental
detriment will result from the two small refiners maintaining their
small refiner status within the merged entity as they would have likely
maintained their small refiner status had the merger not occurred.
Consistent with our intent in the gasoline sulfur and highway
diesel fuel sulfur programs to limit the use of the small refiner
hardship provisions, we also intended in the gasoline sulfur and
highway diesel fuel sulfur programs that an exceedance of corporate
crude oil capacity limit of 155,000 bpcd, due to merger or acquisition,
would be grounds for disqualifying a refiner's small refiner status.
However, we inadvertently failed to include this second criterion as
grounds for disqualification in the regulations. In today's action, we
are resolving this error by including the crude capacity limit, along
with the employee limit for both the gasoline sulfur and highway diesel
fuel sulfur programs, effective January 1, 2004. Thus, a refiner
exceeding either criterion due to merger or acquisition will lose its
small refiner status. The exception to this would be in the case of
merger only between two small refiners. We received comments supporting
the allowance of additional lead time for small refiners that lose
their small refiner status through a merger with, or acquisition of,
another small refiner.
We recognize that a small refiner that loses its small refiner
status because of a merger with, or acquisition of, a non-small refiner
would face the same type of lead time concerns in complying with the
non-small refiner standards as a non-small refiner that acquired a
small refiner's refinery would. Therefore, the additional lead time
described above for non-small refiners purchasing a small refiner's
refinery will also apply to this situation. Thus, this 30 month lead
time will apply to all of the refineries, existing or newly-purchased,
that had previously been subject to the small refiner program, but
would not apply to a newly-purchased refinery that is subject to the
non-small refiner standards. Again, there would be no adverse
environmental impact because of the pre-existing relief provisions that
applied to the newly-purchased small refiner.
The issues discussed in this section apply equally to the gasoline
sulfur and highway diesel fuel sulfur programs. Thus, we are also
adopting the same provisions relating to additional lead time in cases
of certain financial, or other, transactions for the small refiner
programs in the earlier fuel sulfur programs.
In the proposal for today's final rule, we invited comment on
several other related provisions that were considered during the
development of this rulemaking:
(1) Instead of merely allowing small refiners a grace period to
come into compliance if they lose their small refiner status, we also
asked for comment on whether or not such a small refiner should instead
be allowed to ``grandfather'' the small refiner relief provisions for
its existing refinery or refineries. We did not receive any specific
comments on this issue and we are not finalizing this provision in
today's action.
(2) Regarding small refiners that exceed the small refiner criteria
due to the purchase of a non-small refiner's refinery, we requested
comment on whether or not the proposed additional lead time should
apply to the purchased refinery. We also requested comment on whether
or not the refiner should be required to meet the non-small refiner
standards on schedule at the purchased refinery, since the previous
owner could be assumed to have anticipated the new standards and taken
steps to accomplish this prior to the purchase. One refiner commented
that merger acquisition flexibility for refineries that lose their
small refiner status should be limited to instances where a small
refiner merges with another small refiner. They believed that any small
refiner that loses its small refiner status due to an acquisition of a
non-small refiner's refinery should not be eligible for hardship
relief. Similarly, another refiner commented that a refiner should not
retain small refiner status if it has

[[Page 39053]]

the financial resources to acquire additional refineries that increase
corporate-wide crude processing above 155,000 bpd. We are not adopting
any flexibility for the purchased refinery in this situation (except in
the case of a merger between two small refiners, as discussed above).
f. Provisions for Approved Gasoline and Highway Diesel Fuel Small
Refiners That Do Not Qualify for Small Refiner Status Under Today's Program
Some refiners that have approved small refiner status under the
gasoline sulfur and highway diesel fuel programs may not qualify for
small refiner status under today's program if they have grown through
normal business operations and now exceed the qualification criteria
for NRLM small refiner status. One refiner commented on the lack of a
``grandfather'' provision in the nonroad proposal that would
automatically continue small refiner status to refiners already
approved as small refiners under the gasoline and highway diesel fuel
sulfur programs. Without such a provision some refiners could be
approved small refiners under the gasoline sulfur and highway diesel
fuel sulfur programs (because they grew through normal business
expansions and not through merger or acquisition) but would not qualify
under the NRLM program because they now exceed the criteria. As a
consequence, the commenter argued that in some cases benefits afforded
to such small refiners under the gasoline and highway diesel fuel
sulfur programs could be negated. Specifically, under the highway
diesel rule they were allowed until 2010 before needing to have diesel
fuel hydrotreating capacity. Under the nonroad rule, they would have to
do so in 2007. Since it would only make sense to invest for adequate 15
ppm capacity when they do invest, the nonroad standards essentially
would require them to invest to bring all highway and nonroad diesel to
15 ppm sulfur in 2007, eliminating the flexibility granted them in the
highway rule. Furthermore, the refiners' clean fuel projects for low
sulfur gasoline, highway diesel fuel, and NRLM diesel fuel could no
longer be staggered. In fact, small refiners in such situations would
be required to make investments for compliance with all three fuel
programs in the same three to four year period, if not virtually all at
once.
We believe that a refiner who no longer meets the criteria for
small refiner status, since it has successfully grown through normal
business operations, does not face the same level of hardship described
earlier in this section. We do not intend for the NRLM program to
undermine the benefits afforded to small refiners under the gasoline
and highway diesel fuel sulfur programs, as described in the comments.
At the same time, however, we want to preserve small refiner status
under today's program only for those businesses that meet the criteria
described above. Under the nonroad proposal, a refiner with approved
small refiner status under the highway diesel fuel program but not the
NRLM program would be required to produce 500 ppm sulfur NRLM diesel
fuel in 2007 and both 15 ppm sulfur highway and NR diesel fuel in 2010.
Under today's final program, such a refiner may instead skip the 2007
500 ppm interim sulfur standard for its NRLM diesel fuel, and meet the
15 ppm sulfur standard for both its highway and NR diesel fuel in 2010
and LM diesel fuel in 2012. Such an approach will maintain the
refiner's flexibility under the highway program by allowing it to delay
diesel hydrotreating investment until 2010, while limiting its
flexibility under the nonroad diesel program.
g. Additional Provisions and Program Elements
To reduce the burden on all refiners (including small refiners), we
have chosen to finalize the designate and track approach, rather than
the baseline approach. Discussions with parties in all parts of the
distribution system led us to believe that this is the preferred
approach, as tracking is currently done by parties throughout the
distribution system. We are also finalizing provisions to simplify the
segregation, marking, and dyeing requirements. In addition, we are
finalizing provisions to alleviate the concern raised by small terminal
operators regarding the heating oil marker. Terminals in parts of PADD
1 (Northeast/Mid-Atlantic Area) will not have to add the marker to home
heating oil. Therefore we expect that no terminals inside of the
Northeast/Mid-Atlantic Area will need to install injection equipment.
These provisions are discussed in greater detail in section IV.D, below.
2. General Hardship Provisions
a. Temporary Waivers From NRLM Diesel Fuel Sulfur Requirements in
Extreme Unforseen Circumstances
We are finalizing a provision which, at our discretion, will permit
any domestic or foreign refiner to seek a temporary relief from the
NRLM diesel fuel sulfur standards under certain rare circumstances.
This waiver provision is similar to provisions in the reformulated
gasoline, low sulfur gasoline, and highway diesel fuel sulfur
regulations. It is intended to provide refiners short-term relief due
to unanticipated circumstances, such as a refinery fire or a natural
disaster, that cannot be reasonably foreseen now or in the near future.
Under this provision, a refiner may seek a waiver to distribute
NRLM diesel fuel that does not meet the applicable 500 ppm or 15 ppm
sulfur standards for a brief time period. An approved waiver of this
type could, for example, allow a refiner to produce and distribute
diesel fuel with higher than allowed sulfur levels, so long as the
other conditions described below were met. Such a request must be based
on the refiner's inability to produce complying NRLM 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 must also show that other avenues for mitigating
the problem, such as the purchase of credits to be used toward
compliance, had been pursued yet were insufficient. As with other types
of regulatory relief established in this rule, this type of temporary
waiver will have to be designed to prevent fuel exceeding the 15 ppm
sulfur standard from being used in 2011 and later model year nonroad
engines.
The conditions for obtaining a NRLM diesel fuel sulfur waiver are
similar to those under the RFG, gasoline sulfur, and highway diesel
fuel sulfur 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 will be required to show that the waiver is
in the best public interest and that they: (1) Were not able to avoid
the nonconformity; (2) will make up the air quality detriment
associated with the waiver; (3) will make up any economic benefit from
the waiver; and (4) will meet the applicable diesel fuel sulfur
standards as expeditiously as possible.
b. Temporary Relief Based on Extreme Hardship Circumstances
In addition to the provision for short-term relief under extreme
unforseen circumstances, we are finalizing a provision for relief based
on extreme hardship circumstances such as circumstances that impose
extreme hardship and significantly affect a refiners ability to comply
with the program requirements by the applicable dates. This provision
is also very similar to those established under the gasoline

[[Page 39054]]

sulfur and highway diesel fuel sulfur programs. Under the gasoline
sulfur program, we have granted relief in the form of individual
compliance plans to five refiners. Under the highway diesel program, we
have approved two. Each plan was designed for the specific situation of
that refiner. In all cases, the companies would have experienced severe
hardship if temporary relief had not been granted. Moreover, some
refineries were at a high risk of shutting down without the relief.
In developing today's program, as under our other fuel programs, 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, in general, small refiners
would 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 may also face
particular difficulty in complying on time with the sulfur standards
required under today's program. Therefore, we are including in this
rulemaking a provision which allows us, at our discretion, to grant
temporary waivers from the NRLM diesel fuel sulfur standards based on a
showing of extreme hardship circumstances.
The extreme hardship provision allows any domestic or foreign
refiner to request relief 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 either the 500
ppm or 15 ppm sulfur NRLM diesel fuel standards by either June 1, 2007,
June 1, 2010, or June 1, 2012, respectively. The Agency will evaluate
each application on a case-by-case basis, considering the factors
described below. Approved hardship applications may include compliance
plans with relief similar to the provisions for small refiners, which
are described in detail above in section IV.B.1.c. Depending on the
refiner's specific situation, such approved delays in meeting the
sulfur requirements may be more stringent than those allowed for small
refiners, but will not likely be less stringent. Given such an
approval, we expect to impose appropriate conditions to: (1) Assure the
refiner is making its best effort; and (2) minimize any loss of
emissions benefits from the program. As with other relief provisions
established in this rule, any waiver under this provision will be
designed to prevent fuel exceeding the 15 ppm sulfur standard from
being used in 2011 and later model year nonroad engines.
Providing short-term relief to those refiners that need additional
time because they face hardship circumstances facilitates adoption of
an overall program that reduces NRLM diesel fuel sulfur to 500 ppm
beginning in 2007, and NRLM diesel fuel sulfur to 15 ppm in 2010 and
2012, for the majority of the industry. However, we do not intend for
this waiver provision to encourage refiners to delay the 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 NRLM diesel fuel pool in any given year.
The regulatory language for today's action includes a 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 of the
information specified in the regulations as part of its hardship
application, we will deem the application void. In addition, we may
request additional information as needed. Our experience to date shows
that detailed technical and financial information from the companies
seeking relief has been necessary to fully evaluate whether a hardship
situation exists. The following are some examples of the types of
information that must be contained in an application:

--The crude oil refining capacity and fuel sulfur level(s) of each
diesel fuel product produced at each of the refiner's refineries.
--A technical plan for capital equipment and operating changes to
achieve the NRLM diesel fuel sulfur standards.
--The anticipated timing for the overall project the refiner is
proposing and key milestones to ultimately produce 100 percent of NRLM
diesel fuel at the 15 ppm sulfur cap.
--The refiner's capital requirements for each step of its proposed
projects.
--Detailed plans for financing the project and financial statements
demonstrating the nature of and degree of financial hardship and how
the requested relief would mitigate this hardship. This would include a
description of the overall financial situation of the company and its
plans to secure financing for the desulfurization project (e.g.,
internal cash flow, bank loans, issuing of bonds, sale of assets, or
sale of stock).
--A plan demonstrating how the refiner would achieve the standards as
quickly as possible, including a timetable for obtaining the necessary
capital, contracting for engineering and construction resources,
obtaining any necessary permits, and beginning and completing construction.
--A description of the market area for the refiner's diesel fuel
products.
--In some cases, it could also include a compliance plan for how the
refiner's diesel fuel will be segregated through to the end-user and
information on each of the end-users to whom its fuel is delivered.

We will consider several factors in our evaluation of any hardship
waiver applications that we receive. Such factors include whether a
refinery's configuration is unique or atypical; the proportion of non-
highway diesel fuel production relative to other refinery products;
whether the refiner, its parent company, and its subsidiaries are faced
with severe economic limitations and 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 is intended to be sold in evaluating the environmental
impacts of granting a waiver. Typically, because of EPA's comprehensive
evaluation of both financial and technical information, action on
hardship applications can take six or more months.
This extreme hardship provision is intended to address unusual
circumstances that should be apparent now or could emerge in the near
future. Thus, refiners seeking additional time under this provision
must apply for relief by June 1, 2005, although we retain the
discretion to consider hardship applications later as well for good cause.
3. Provisions for Transmix Facilities
In the petroleum products distribution system, certain types of
interface mixtures in product pipelines cannot be added in any
significant quantity to either of the adjoining products that produced
the interface. These mixtures are known as ``transmix.'' The pipeline
and terminal industry's practice is to transport transmix via truck,
pipeline, or barge to a facility with an on-site fractionator that is
designed to separate the products. The owner or operator of such a
facility is called a ``transmix

[[Page 39055]]

processor.'' Such entities are generally considered to be a refiner
under existing EPA fuel regulations.
Transmix processors, like conventional refiners, are also currently
subject to the ``80 percent/20 percent'' production requirement for 15
ppm and 500 ppm sulfur highway diesel fuel. This requirement, however,
is inconsistent with the inherent nature of the transmix processors'
business. Unlike conventional refiners, transmix processors refine
batches of fuel that vary in volume and timing--largely unpredictably.
Complying with set percentages of different highway diesel fuel sulfur
grades would be very difficult, probably resulting in either a need to
purchase credits or to postpone processing of some shipments. Transmix
processors commented that it would not be appropriate to have any
additional restrictions, beyond those based on sulfur content, imposed
on their ability to market the fuel that they produce. They stated that
the implementation of other restrictions, such as those under the
highway diesel program's 80/20 requirement, would force them to ship
large volumes of blendstocks back to refineries by truck, resulting in
tank lock-outs that could cascade upstream though the distribution
system potentially interfering with pipeline operations. \103\
---------------------------------------------------------------------------

\103\ In a tank lock out situation a storage tank can no longer
accept product from upstream in the distribution system because
there is not sufficient outlet for the product it holds. A tank lock
our downstream can quickly propagate upstream.
---------------------------------------------------------------------------

Furthermore, transmix processors do not have the ability to change
the nature of their products, as their processing equipment consists
only of a distillation column to separate the blendstocks. This simple
refinery configuration further limits their ability to install and
operate a distillate hydrotreater. The commenters added that the sulfur
content of the slate of fuel products that they produce is completely
dependant on feed material that they receive, and that it is not
feasible for them to install desulfurization equipment. We agree that
it is not feasible for transmix processors to alter the sulfur content
of the fuels that they produce and that limiting the market for these
fuels could potentially lead to disruptions in the fuel distribution
system.
In light of this disproportionate burden on transmix processors,
today's final rule removes the restriction on the volume of highway or
NRLM diesel fuel they produce, if they produce diesel fuel according to
typical operational practices involving the separation of transmix and
not, for example, by blending of blendstocks or processing crude or
heavy oils. Therefore, under today's final rule, transmix processors
may choose to continue to produce all of their highway diesel fuel to
the 500 ppm sulfur standard until 2010. They may further choose to
continue to produce all of their NRLM diesel fuel as high sulfur diesel
fuel until June 1, 2010, all of their NRLM diesel fuel to the 500 ppm
sulfur standard until June 1, 2014, and all of their LM diesel fuel to
a 500 ppm sulfur limit indefinitely.
Transmix processors will be required to properly designate their
fuel with the proper PTDs. Because the volume of fuel involved will be
small and the fuel processed will already have been off-specification,
we believe that providing this flexibility for transmix processors will
have essentially no environmental impact and will not affect the
efficient functioning of the NRLM diesel fuel program or the existing
highway diesel fuel program. Rather, this approach will allow fuel
volume to remain in the highway, NRLM, or LM (as applicable based on
time frame) markets that might otherwise be forced into the heating oil
market.

C. Special Provisions for Alaska and the Territories

1. Alaska
The nationwide engine emission standards established today apply to
all NR engines throughout Alaska. The nationwide NRLM diesel fuel
sulfur standards and implementation dates apply to NRLM diesel fuel
used in the areas of Alaska served by the federal aid highway system
(FAHS). In this final rule, EPA is not finalizing fuel sulfur standards
and implementation deadlines for NRLM diesel fuel used in the areas of
Alaska not served by the FAHS (i.e., the ``rural'' areas). They will be
addressed in a separate rulemaking to allow EPA to address the
requirements for highway and NRLM diesel fuel in the rural areas in the
same rulemaking. This final rule does, however, adopt the prohibition
in the rural areas on the use of high sulfur (greater than 15 ppm)
diesel fuel in model year 2011 and later nonroad engines, which will be
manufactured to operate on ultra-low sulfur diesel fuel.
a. How Do the Highway Diesel Engine Standards, the Highway Diesel Fuel
Standards, and Implementation Deadlines Apply in Alaska?
Unlike the rest of the nation, Alaska is currently exempt from the
500 ppm sulfur standard for highway diesel fuel and the dye provisions
for diesel fuel not subject to this standard. Since the beginning of
the 500 ppm sulfur highway diesel fuel program, we have granted Alaska
exemptions from both the sulfur standard and dye provisions because of
its unique geographical, meteorological, air quality, and economic
factors. \104\ 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 previously covered only by a temporary exemption. While
considering that petition, we started work on a nationwide rule to
consider more stringent highway diesel fuel requirements for sulfur
content.
---------------------------------------------------------------------------

\104\ Copies of information regarding Alaska?s petition for
exemption, subsequent requests by Alaska, public comments received,
and actions by EPA are available in public docket A-96-26.
---------------------------------------------------------------------------

In the January 18, 2001, highway diesel rule EPA fully applied the
2007 motor vehicle engine emission standards in Alaska. Based on
factors unique to Alaska, we provided the state with: (1) An extension
of the exemption from the 500 ppm sulfur fuel standard until the
effective date of the new 15 ppm sulfur standard for highway diesel
fuel in 2006; (2) an opportunity to request an alternative
implementation plan for the 15 ppm sulfur diesel fuel program; and (3)
a permanent exemption from the diesel fuel dye provisions. In response
to these provisions in our January 18, 2001, highway rule, Alaska
informed us that areas served by the FAHS, i.e., communities on the
connected road system or served by the Alaska state ferry system
(``urban'' areas), would follow the nationwide requirements. \105\
Diesel fuel produced for use in areas of Alaska served by the FAHS will
therefore be required to meet the same requirements for highway diesel
fuel as diesel fuel produced for the rest of the nation. For the rural
parts of the state--areas not served by the FAHS--Alaska requested that
highway diesel fuel not be subject to the highway diesel fuel sulfur
standard until June 1, 2010. Between 2006 and 2010, the rural
communities would choose their own fuel management strategy, except
that all 2007 model year and newer diesel vehicles would require ultra-
low sulfur diesel fuel. Beginning June 1, 2010, all highway diesel fuel
in the rural areas would be subject to the 15 ppm sulfur highway diesel
fuel sulfur standard. \106\

[[Page 39056]]

EPA intends to propose and request comment on an amendment to the
highway diesel sulfur rule to incorporate the rural area transition
plan submitted by the state.
---------------------------------------------------------------------------

\105\ Letter and attached document to Jeffrey Holmstead of EPA
from Michele Brown of the Alaska Department of Environmental
Conservation, dated April 1, 2002. The communities on the connected
road system or served by the Alaska State ferry system are listed in
the attached document.
\106\ Letter and attached document to Jeffrey Holmstead of EPA
from Ernesta Ballard of the Alaska Department of Environmental
Conservation, dated June 12, 2003.
---------------------------------------------------------------------------

b. What NRLM Diesel Fuel Standards Are We Establishing for Urban Areas
of Alaska?
Since Alaska is currently exempt from the 500 ppm sulfur standard
for highway diesel fuel, we also considered exempting Alaska from the
500 ppm sulfur step of the proposed NRLM standards. However, despite
the exemption, officials from the state of Alaska have informed us that
some 500 ppm sulfur diesel fuel is nevertheless being marketed in many
parts of Alaska. Market forces have brought the prices for 500 ppm
diesel fuel down such that it is now becoming competitive with higher
sulfur, uncontrolled diesel fuel. Assuming this trend continues,
requiring that NRLM diesel fuel be produced to 500 ppm beginning June
1, 2007 would not appear to be unduly burdensome. Even if 500 ppm
diesel fuel were not available in Alaska today, our expectation is that
compliance with the highway program described above will likely result
in the transition of all of the urban area highway diesel fuel
distribution system to 15 ppm sulfur beginning in 2006. It could prove
very challenging for the distribution system in some of the areas to
segregate a 500 ppm sulfur grade of NRLM from a 15 ppm sulfur grade of
highway and an uncontrolled grade for other purposes. We believe
economics would determine whether the distribution system would handle
the new grade of fuel or substitute 15 ppm sulfur highway diesel fuel
for NRLM applications. Thus, in the 2007 to 2010 time frame, the NRLM
market in some urban areas might be supplied with 500 ppm sulfur
diesel, and in other areas might be supplied with 15 ppm sulfur diesel.
For this reason, today's action applies the 500 ppm sulfur standard for
NRLM diesel fuel to Alaska's urban areas.
Regardless of what occurs prior to 2010, we anticipate that 15 ppm
sulfur highway diesel fuel will be made available in urban areas of
Alaska by this time frame. The 2007 and later model year highway fleet
will be growing, demanding more and more supply of 15 ppm sulfur diesel
fuel. Adding nonroad volume to this would not appear to create any
undue burden. Thus, today's action also applies the 15 ppm sulfur
standard for NR and LM diesel fuel in the urban areas of Alaska, along
with the rest of the nation beginning June 1, 2010 and June 1, 2012,
respectively.
The state, in its comments on the proposal, supports today's action
for the urban areas described above. One refiner in Alaska commented
that we should implement a one-step approach requiring 15 ppm sulfur
diesel fuel starting in 2010. The refiner indicated that, due to the
limited NRLM market, the benefits of introducing 500 ppm sulfur diesel
fuel in 2007 would be minimal. Also, the distribution system in Alaska
is not capable of handling the two grades of diesel fuel that would be
required between 2007 and 2010, thus 15 ppm sulfur fuel would be
distributed as NRLM. We agree that the distribution system in Alaska is
limited compared to the rest of the nation, and that consumption of
diesel fuel by NRLM applications in Alaska is small. However, as
previously discussed, we expect that some 500 ppm sulfur diesel fuel
will be available due to market forces, and that 15 ppm sulfur highway
diesel fuel will be available beginning in 2006 in the urban areas.
Thus, requiring 500 ppm sulfur diesel fuel (or 15 ppm sulfur diesel
fuel as a substitute) for the limited NRLM applications beginning in
2007 does not appear to create any undue burden on the fuel supply or
the distribution system in urban Alaska.
During the development of the original 500 ppm sulfur highway
diesel fuel standards in the early 1990's, refiners and distributors in
Alaska expressed concern that if Alaska were required to dye its non-
highway diesel fuel red along with the rest of the country, residual
dye in tanks or other equipment would be enough to contaminate and
disqualify Jet-A kerosene used as aviation fuel. Since much of the
diesel fuel in Alaska is No. 1 and is indistinguishable from Jet-A
kerosene, not only would tanks and transfer equipment have to be
cleaned, but separate tankage would be needed. Consequently, we granted
Alaska temporary exemptions from the dye requirement and in the January
18, 2001, highway diesel rule granted the state a permanent exemption.
The proposed use of a marker for heating oil in the 2007-10 time
period presents similar concerns in Alaska's distribution system. In
response to our request for comments on this issue, the state and
refiners indicated that Alaska's system is not capable of accommodating
dyes or markers and segregation. The priority of the state and fuel
industry is to keep dyes and markers out of the fuel stream to prevent
contamination of Jet-A and facilitate movement of the fuel. The
comments suggested that implementation of refiner product designations,
labeling of fuel pumps, retailer education, and rapid transition to
ULSD would ensure that 500 ppm sulfur diesel fuel is used in NRLM
equipment from 2007-10 and that 15 ppm sulfur diesel fuel is used in
nonroad equipment after 2010.
In section IV.D below, we discuss the provisions that we are
adopting for the State of Alaska that will allow us to enforce the NRLM
diesel fuel program without requiring the fuel marker.
c. Why Are We Deferring Final Action on NRLM Diesel Fuel Standards for
Rural Areas of Alaska?
We are deferring final action on the fuel sulfur standards and
implementation deadlines for the rural areas of Alaska. We proposed to
permanently exempt NRLM diesel fuel used in the rural areas from fuel
content standards, except that diesel fuel used in 2011 and later model
year nonroad engines would have had to meet the sulfur content standard
of 15 ppm sulfur. However, this proposed action is inconsistent with
the action requested by the state in its comments to the proposal. It
is also inconsistent with the state's alternative implementation plan
for highway diesel fuel in rural Alaska, which was submitted after
publication of the proposal.
We intend to issue a supplemental proposal that would address both
highway and NRLM diesel fuel sulfur standards for Alaska's rural areas.
This proposal will address the comments submitted by the state, as well
as the state's alternative implementation plan for highway diesel fuel.
2. American Samoa, Guam, the Commonwealth of Northern Mariana Islands,
and Puerto Rico
a. What Provisions Apply in American Samoa, Guam, and the Commonwealth
of Northern Mariana Islands?
As we proposed, we are excluding American Samoa, Guam and the
Commonwealth of the Northern Mariana Islands (CNMI) from the NRLM
diesel fuel sulfur standards and associated requirements. We also are
excluding these territories from the tier 4 nonroad engine emissions
standards, and other requirements associated with those emission
standards. The territories will continue to have access to new nonroad
diesel engines and equipment using pre-tier 4 technologies, at least as
long as manufacturers choose to market those technologies. In the
future, if manufacturers choose to market nonroad diesel engines and
equipment only with tier 4 emission control

[[Continued on page 39057]]

Notices For
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994

Control of Emissions of Air Pollution From Nonroad Diesel Engines and Fuel [pp. 39007-39056]

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