Reformulated Gasoline Use Under the 8-Hour Ozone Rule
On June 17, 2002, Senator Jeff Bingaman, Chairman of the Senate Committee
on Energy and Natural Resources, requested that the Energy Information
Administration (EIA) provide analysis of eight factors related to the
Senate-passed fuels provisions of H.R. 4, the Energy Policy Act of 2002.1 In response, EIA has prepared a series of analyses discussing the market
impacts of each of these factors.
Because of the rapid delivery time requested by Sen. Bingaman, each requested
factor related to the Senate-passed bill was analyzed separately, that
is, without analyzing the interactions among the various provisions. In
addition, assumptions about State actions, such as their implementation
and timing of MTBE bans, influence the results. Discussions about some
of these interactions have been included in order to explain the interconnected
nature of such issues.
EIA’s projections are not statements of what will happen but what
might happen, given known technologies, technological and demographic
trends, and current laws and regulations. The Annual Energy Outlook 2002
(AEO2002) is used in these analyses to provide a policy-neutral Reference
Case that can be used to analyze energy policy initiatives. EIA does not
propose, advocate or speculate on future legislative or regulatory changes.
Laws and regulations are assumed to remain as currently enacted or in
force in the Reference Case; however, the impacts of emerging regulatory
changes, when clearly defined, are reflected.
The analyses involve simplified representations of reality because reality
is complex. Projections are highly dependent on the data, methodologies,
and assumptions used to develop them. Because many of the events that
shape energy markets are random and cannot be anticipated (including severe
weather, technological breakthroughs, and geopolitical disruptions), energy
market projections are subject to uncertainty. Further, future developments
in technologies, demographics, and resources cannot be foreseen with any
degree of certainty. These uncertainties are addressed through analysis
of alternative cases in the AEO2002.
Introduction
This paper responds to Sen. Bingaman’s inquiry on “[the] impact
on gasoline price and supply when many additional ozone non-attainment
areas come under the new 8-hour ozone standard;…” This new
standard would change the ambient air standard for ozone from 0.12 parts
per million (ppm) averaged over a 1-hour period to a new 0.08 ppm standard
averaged over 8 hours.
In 1997, the United States Environmental Protection Agency (EPA) announced
new national ambient air quality standards (NAAQS) for ground-level ozone,
the primary component of smog. The replacement of the existing 1-hour
NAAQS standard with the proposed 8-hour standard was delayed by legal
challenges, but is now in the process of being implemented. Although the
Final Rule on the implementation of these standards has not yet been promulgated,
designation of the 8-hour nonattainment areas is expected to occur in
2004, States may begin providing State Implementation Plans for attainment
in 2006, and some States must meet the limit in 2007.2
In 1991, 98 areas in the United States were in nonattainment of the 1-hour
ozone standard, according to the EPA. By 2000, only 36 were still designated
nonattainment areas.3 Thirty of the 36 were among the original 98; six were new. EPA has identified approximately 329 counties that are failing to meet the
new 8-hour standards according to 1999-2000 data. Based on EPA projections
for 2007, the number of counties failing the 8-hour NAAQS is expected
to be cut in half,4 as a result of low-sulfur gasoline requirements for
light-duty highway vehicles (referred to as ``Tier 2'' standards) that
become effective in 2004, and as a result of ozone control programs already
in place such as those affecting power plants.
The purpose of this analysis is to determine the potential impact of the
implementation of the 8-hour standard on the reformulated gasoline (RFG)
requirements that are currently tied to nonattainment of the 1-hour standard.
In general, this analysis identified limited potential for increasing
the RFG market as a result of the change in NAAQS standards, and concluded
that States are more likely to look to low Reid vapor pressure (RVP) fuels
and changes in diesel fuel programs to resolve lingering ozone problems
than to increase reliance on RFG, because these are lower-cost alternatives.
Ozone Formation and Trends
Ozone (O3) is a gas composed of three oxygen atoms. Ozone is formed by
the reaction of volatile organic compounds (VOC's) and nitrogen oxides
(NOx) in the presence of heat and sunlight. Ground-level ozone forms readily
in the atmosphere, usually during hot summer weather. VOC’s are
emitted from a variety of sources, including motor vehicles, chemical
plants, refineries, factories, consumer and commercial products, and other
industrial sources. Nitrogen oxides are emitted from motor vehicles, power
plants, and other sources of combustion.
Peak ozone levels typically occur during hot, dry, stagnant summertime
conditions. The length of the ozone season varies from one area of the
United States to another. Southern and Southwestern states may have an
ozone season that lasts nearly the entire year.
EPA is increasingly focusing its efforts on tracking and controlling ground-level
ozone, a key component of smog. Of the six tracked pollutants, progress
has been slowest for ground-level ozone. In the southern and north central
regions of the United States, ozone levels have actually worsened from
1991 to 2000, though they have improved in other parts of the country.5 The highest ambient ozone concentrations are typically found at suburban
sites, consistent with the downwind transport of emissions from urban
centers. For the more recent 10-year period, urban sites show decreases
of approximately 12 percent and suburban sites show 11 percent decreases.
However, at rural monitoring locations national improvements have been
slower. One-hour ozone levels for 2000 are 6 percent below 1991 levels.
In 2000, for the third consecutive year, rural 1-hour ozone levels are
greater than the levels observed for the urban sites, but they are still
lower than levels observed at suburban sites.
Much of this ozone trend is due to increased emissions in NOx, a family
of chemicals that can spread ozone hundreds of miles downwind. Between
1970 and 2000, NOx emissions in the United States have increased almost
20 percent (and 3 percent increase from 1991 to 2000). The majority of
this increase is attributed to growth in emissions from non-road engines
(like construction and recreation equipment), diesel vehicles, and power
plants.
NAAQS for Ozone
In 1997, EPA revised the national ambient air quality standards for ozone,
which had been in place since 1979. Implementation has been delayed by
a legal challenge to the Clean Air Act, which was resolved by the U.S.
Supreme Court in favor of the constitutionality of the Act on February
27, 2001.
In the 1979 standards, EPA set the 1-hour O3 standard at 0.12 ppm daily
maximum 1hour average concentration not to be exceeded more than once
per year on average. Compliance with the 1-hour ozone standard is judged
on the basis of the most recent 3 years of ambient air quality monitoring
data. The 1-hour ozone standard is not met at a monitoring site if the
average number of estimated exceedances of the ozone standard is greater
than 1.0 (1.05 rounds up). A site would be in compliance, for example,
if it had 2 days failing in the first year, none in the second year, and
one in the third year.
In 1997 EPA set a new, stricter 8-hour O3 NAAQS at 0.08 ppm to protect
against longer exposure periods. The 8-hour O3 standard is not met if
the 3-year average of the annual 4th highest daily maximum 8-hour O3 concentration
is greater than 0.08 ppm (0.085 rounds up). EPA changed the form of the
standard from an expected-exceedance form to a concentration-based form
because it more directly relates to ozone concentrations associated with
health effects; and it avoids exceedances, regardless of size, from being
counted equally in the attainment tests.
The 0.12-ppm 1-hour standard will not be revoked in a given area until
that area has achieved 3 consecutive years of air quality data meeting
the 1-hour standard. The purpose of retaining the current 1-hour standard
is to ensure a smooth, legal, and practical transition to the new standard.
The final rule on implementation of the 8-hour ozone rule is scheduled
in 2003. The 8hour ozone nonattainment areas are scheduled to be designated
in 2004. Marginal areas must meet the standard in 2007; moderate areas
in 2010; serious areas in 2013; and severe areas in 2019-2021. Two, 1-year
extensions are possible for each area.
Pending Changes in Gasoline and Diesel Formulation
Some of the strategies for reducing ground-level ozone include:
- Reducing NOx emissions from power plants and industrial combustion
sources;
- Introducing low-emission cars and trucks;
- Using "cleaner" fuels; and
- Improving vehicle inspection programs.
As part of the EPA’s effort to reduce ozone, consumers will begin
to use significantly cleaner gasoline in 2004 and significantly cleaner
diesel fuel in 2006.
Gasoline
Starting in 2004, all gasoline will be required to have a much-reduced
sulfur level in order to ensure the effectiveness of emissions control
technologies that will be needed to meet the Tier 2 emissions targets
of the Clean Air Act Amendments of 1990. This low-sulfur gasoline requirement
will tap almost all of the potential NOx reduction from gasoline.
Compared to average U.S. gasoline sulfur levels outside of California
of 268 ppm in 1998,6 sulfur levels in gasoline will be reduced to 30 ppm
in 2004, greatly reducing NOx in all States. Average gasoline sulfur content
has already declined somewhat due to tighter NOx restriction on RFG that
began in 2000 (Phase 2 RFG).
In February 2000, EPA published its Final Rule on “Tier 2”
Motor Vehicle Emissions Standards and Gasoline Sulfur Control Requirements
for light-duty vehicles.7 In 2004, manufacturers must begin producing vehicles that are cleaner than those
being sold today. The standards would also be extended to light-duty trucks,
minivans, and sport utility vehicles (SUV's), which currently pollute
three to five times more than cars. This is the first time that the same
set of emissions standards will be applied to all passenger vehicles.
In its Final Rule, EPA notes that the single set of standards is appropriate
given the increasing use of light trucks for personal transportation and
the increasing number of vehicle-miles traveled by light trucks. The same
standards will be applied to vehicles operated on any fuel.
Because automotive emissions are linked to the sulfur content of motor
fuels, the Final Rule also requires a reduction in average gasoline sulfur
levels nationwide. Sulfur reduces the effectiveness of the catalyst used
in the emission control systems of advanced technology vehicles, increasing
their emissions of hydrocarbons, CO, and NOx. The sulfur content of gasoline
must be reduced to an annual average of 30 parts per million (ppm), and
a maximum 80 ppm in any gallon, to accommodate the new emissions control
systems and meet the Tier 2 standards. The new Federal standard is equivalent
to the current standard for gasoline in California at about one-fourth
the sulfur content in areas currently using reformulated gasoline and
about one-tenth the current sulfur content of conventional gasoline.
Because the standard will require refiners to invest in sulfur-removing
processes, it will be phased in between 2004 and 2007 and, initially,
will allow less stringent standards for small refiners. To encourage reductions
before 2004, refiners will receive credits for sulfur reductions below
a baseline level. The credits can be used later as “allotments,”
which will allow a refiner to exceed the new sulfur standard by a given
amount. Gasoline produced by most refiners will be required to meet corporate
average sulfur contents of 120 ppm in 2004 and 90 ppm in 2005. The corporate
average will be phased out by 2006. Beginning in 2005, most refiners must
meet a refinery-level average of 30 ppm. Refiners producing most of their
gasoline for the Rocky Mountain region will also be allowed a more gradual
phase-in because of less severe ozone pollution in the area; they will
be required to meet a refinery average of 150 ppm in 2006 and must meet
the 30 ppm requirement in 2007. Small refiners will not be required to
meet the 30-ppm standard until 2007.
In its final Tier 2 gasoline rule, EPA stated that in 1996, cars and light
trucks comprised 21 percent of the NOx emissions from human sources in
the United States. EPA projected that based on the available ozone modeling
and other information, there were 26 metropolitan areas, which would be
unable to attain and maintain the NAAQS, in the absence of additional
reductions. These 26 areas are those that have current violations of the
1-hour ozone NAAQS and are predicted by ozone modeling to still be in
violation without a new Federal vehicle program in 2007. EPA projected
nationwide Tier 2/gasoline sulfur control NOx reductions from cars and
light trucks of approximately 1.0 million tons per year in 2007, reducing
emissions of ozone precursors from cars and light trucks greatly.
On-Road Diesel Fuel
Starting in 2006, most on-road diesel fuel will be required to have a
much-reduced sulfur level in order to ensure the effectiveness of emissions
control in new diesel engines. This low-sulfur diesel requirement will
significantly reduce NOx emissions from diesel engines.
Compared to average U.S. diesel sulfur levels outside California and Alaska
of 340 ppm in 1996,8 sulfur levels in on-road diesel fuel will be reduced
to 15 ppm starting in 2006, reducing NOx in most parts of the United States.
In July 2000, the EPA finalized new regulations to reduce emissions for
new heavy-duty trucks and buses in model years 2004 and later. The standards
for all diesel vehicles over 8,500 pounds will reduce NOx emissions by
more than 40 percent through reductions in hydrocarbons beginning in 2004.9 New test procedures and compliance requirements will begin in the 2007
model year, and on-board diagnostic systems will be required for engines
in vehicles between 8,500 and 14,000 pounds, with a phase-in period covering
the 2005 through 2007 model years. New standards for heavy-duty gasoline
engines and vehicles will reduce both hydrocarbons and NOx for all vehicles
above 8,500 pounds not covered in the Tier 2 light duty vehicle standards,
beginning in 2005. In 1998, the EPA signed consent decrees with several
heavy-duty engine manufacturers, stating that the 2004 emission standards
would be met by October 2002.
In December 2000, EPA published additional standards for on-road heavy-duty
diesel engines that would take effect beginning in model year 2007.10 These standards will require stricter control of NOx emissions. The new
standards apply to diesel-powered vehicles with gross vehicle weight (GVW)
of 14,000 pounds or more. The NOx standards are to be phased in at 50
percent of new vehicle sales in model years 2007 through 2009. In 2010,
all new on-road vehicles will be required to meet the NOx standards. For
years 2007 through 2009, the EPA allows diesel engine manufacturers flexibility
in meeting the NOx standards. Engine manufacturers are provided the option
of producing all diesel engines to meet an average of 2004 and 2007 NOx
emission standards.
In order to enable diesel engine technology to meet tighter emissions
standards, EPA issued new standards for diesel fuel quality in December
2000, which will become effective in mid-2006.11 The standards will cap
diesel fuel sulfur content at 15 ppm starting June 1, 2006, from the current
maximum standard of 500 ppm. Diesel meeting the new specification will
be required at terminals by July 15, 2006, and at retail stations and
wholesalers by September 1, 2006. All 2007 and later model year diesel-fueled
vehicles must be refueled with this new low sulfur diesel fuel. Under
a “temporary compliance option” (phase-in), up to 20 percent
of on-road diesel fuel produced may continue to meet the current 500-ppm
sulfur limit through May 2010; the remaining 80 percent of the on-road
diesel fuel produced must meet the new 15-ppm maximum.
In the Final On-Road Diesel Rule, EPA states that heavy-duty vehicles
contribute about 15 percent to the national NOx inventory for all sources
in 2007. The standards should result in close to a 90 percent reduction
in NOx from new engines. In 2007, EPA estimates that the rule will reduce
NOx emissions by 58,000 tons and 1.82 million tons by 2020.12 For the
37 areas in the East for which EPA's modeling predicted exceedances in
2007, 2020, and/or 2030 and current 1-hour design values are above the
standard or within 10 percent of the standard, EPA’s modeling results
indicated that there will be substantial reductions in the number of exceedances
and the magnitude of high ozone concentrations in both 2020 and 2030 due
to this Rule.
State Options for Mitigation
The Clean Air Act requires each State with air quality problems to have
an approved State Implementation Plan (SIP) that shows how an area plans
to meet its air quality obligations, including achieving and then maintaining
attainment of all of the National Ambient Air Quality Standards (NAAQS),
such as those for ozone. EPA is expected to promulgate regulations for
implementing the 8-hour ozone standards in 2003. Some States are expected
to start providing State Implementation Plans for the 8-hour standard
in 2006. Since SIP’s will be provided after the implementation of
“Tier 2” low-sulfur gasoline requirements in 2004, which will
result in substantial NOx reduction across the country, they are not likely
to make plans based solely on data from 1998 to 2000. Instead they would
rely on future data or emissions projections that would take into account
the air quality improvement from Tier 2 gasoline and other ongoing ozone
improvement programs. EIA estimates that the current number of counties
failing to meet the 8-hour NAAQS may be cut in half by the first effective
date of 2007, based on EPA projections for Eastern States and current
nonattainment status for Western States where no projections were available.
Although the EPA’s authority to apply the 8-hour National Ambient
Air Quality Standards (NAAQS) was upheld by the courts, there is still
considerable uncertainty about how the NAAQS standards will be implemented
and what their impact might be. Among the options States have to reduce
ozone is further adoption of RFG, low-RVP13 gasoline, or ultra-low-sulfur
diesel fuel. In deciding whether or not to require a fuel change as part
of their SIP’s, States are likely to compare the relative cost and
benefit to other measures such as tightening emissions from industry,
power plants, or vehicles.
Reformulated Gasoline
Current participation in the Federal RFG program is based on noncompliance
with the existing 1-hour ozone standard. Under the Clean Air Act Amendments
of 1990 (CAAA), areas classified as “severe” or “extreme”
nonattainment were required to use RFG and other less severe nonattainment
areas were able to opt-into the program. Even though many of these areas
have since come into attainment of the 1-hour standard, they are expected
to continue to use RFG as part of their maintenance plan (Table 1).
Ten of the areas with the worst ozone pollution currently are required
to use RFG under the provisions of CAAA. Areas with less severe ozone
problems in 12 States and the District of Columbia have opted to use RFG
as part of their attainment strategies. When reformulated gasoline first
came into use in 1995, it represented about 28 percent of total gasoline
sales. In 2001, 33.6 percent of gasoline was reformulated. The Baton Rouge,
Louisiana, area currently uses low-RVP gasoline, but will be required
to switch to RFG within the next year or two, because its nonattainment
status was recently reclassified from “serious” to “severe.”
The addition of Baton Rouge to the RFG area is expected to increase the
RFG market by two-tenths of a percentage point to 33.8 percent.
From 1995 to 1999 Phase I of the reformulated gasoline program reduced
VOC emissions by 17 percent and NOx emissions by 2 percent, according
to EPA.14 A more stringent Phase II of the program beginning in 2000 was
designed to make additional reductions.
Reformulated gasoline has the same components as conventional gasoline.
However, the components that contribute most to air pollution are further
processed and refined. RFG is made in a way that prevents it from evaporating
as much as conventional gasoline, has fewer toxic components, and contains
chemical oxygen, known as oxygenate, to improve combustion.
Relative to conventional gasoline, RFG provides reductions of NOx and
VOC emissions, both of which contribute to ozone formation, and also of
air toxics emissions benefits. However, compared to Tier 2 low-sulfur
gasoline, which will come into use in 2004, RFG provides only a VOC and
air toxics benefit. Only the VOC emissions benefit contributes to less
ozone formation. Areas that have ongoing VOC problems may be more likely
to look to low-RVP gasoline as an option for ozone improvement, than RFG
because low-RVP gasoline is less costly to produce.
Areas that switch from conventional to reformulated gasoline are very
likely to pay higher prices. In the Central Atlantic States, for example,
where significant amounts of both RFG and conventional gasoline are consumed,
the 2001 average of weekly regular RFG prices exceeded the average of
conventional prices by 5.3 cents per gallon.15 Low-RVP gasoline prices
are generally closer to conventional gasoline prices than to RFG.
There is no legal obligation for areas that are in nonattainment of the
8-hour ozone standards to use reformulated gasoline (RFG). Requiring the
use of RFG may be an option for States, although there is currently no
clear statutory mechanism for joining the RFG program based on nonattainment
of the 8-hour standard.
Areas that are still projected to fail 8-hour ozone in 2007 would have
little incentive to choose RFG over a low-RVP gasoline. Even if a renewable
fuel standard is enacted requiring the use of relatively high-RVP ethanol,
areas that meet the standard with low-RVP gasoline could buy ethanol credits.
Low-RVP Gasoline
As States developed their State Implementation Plans (SIP’s) to
improve air quality, many found they could achieve the VOC reduction benefits
of RFG by requiring a cheaper low-RVP conventional gasoline. Production
costs for low-RVP conventional fuels can be less than for RFG, because
blending is less complex.
Low-RVP gasoline, defined as conventional gasoline with an RVP of less
than or equal to 7.8 pounds per square inch (psi), is currently required
in 20 States (Figure 1). RVP restrictions as low as 7.0 psi are required
in parts of Alabama, Georgia, Kansas, and Missouri.
As noted above, the introduction of low-sulfur gasoline in 2004 means
that most of the potential NOx reduction from changes to gasoline quality
will already be achieved. Areas that have ongoing VOC problems may be
more likely to look to low-RVP gasoline as an option for ozone improvement
than RFG, because low-RVP gasoline is less costly to produce.
However, low-RVP gasoline is more difficult to produce if ethanol must
be one of the components, because ethanol has a relatively high RVP. If
the renewable fuel standard and ethanol credit trading provisions of the
proposed energy bills are passed, areas with low-RVP gasoline requirements
may find it more economical to trade ethanol credits.
Diesel Fuel
Implementation of clean diesel fuel and engines is expected to be key
to ozone compliance programs. Given that the areas projected to be out
of 8-hour ozone compliance will already be using low-sulfur gasoline and
that many of these areas are already using RFG or low-RVP gasoline, potential
ozone improvement through further VOC controls on gasoline is minor compared
to potential gains from diesel programs.
The Texas SIP issued in 2000 required, for example, that diesel sulfur
levels in certain counties decline to 500 ppm with 10 percent aromatic
hydrocarbons, and a 48 cetane minimum, for both on- and non-road use beginning
this year, with further reductions to 15 ppm on June 1, 2006.16 The areas
affected are Houston-Galveston, Dallas-Fort Worth, Beaumont-Port Arthur,
and 95 central and eastern counties. The SIP regulates non-road diesel
in these counties where no Federal regulations exist, and the 2006 Texas
regulations are imposed slightly earlier than the Federal regulations.
Federal regulations allow the producer to choose between meeting a minimum
cetane number of 40 or a maximum aromatic hydrocarbon content of 35 percent
by volume.
The Texas Natural Resource Conservation Commission concluded that modeling
demonstrated significant emission reductions could be achieved by using
a low aromatic hydrocarbon/high cetane diesel fuel as specified by the
Commission's fuel requirements. By the year 2007, the Texas diesel fuel
program is expected to reduce statewide NOx emissions from on-road vehicles
and non-road equipment by 30 tons per day, of which 6.67 tons per day
of reductions will be achieved in the Houston-Galveston 1-hour ozone nonattainment
area.
EIA Study
By 2007, further NOx reductions from motor vehicles will become increasingly
costly, because gasoline and diesel sulfur reduction programs will have
already dramatically reduced NOx emissions from vehicles. States with
continuing VOC emissions problems are likely to address them with low-RVP
gasoline, rather than more-costly RFG. Therefore, it is unlikely that
the 8-hour ozone rule will lead to much of an increase in RFG consumption.
However, at the request of Committee staff, an “upper bound”
case was developed for increased RFG consumption as a result of the transition
from the 1-hour to the 8-hour ozone rule. This “upper bound”
case must be considered to have a small probability.
Assumptions
EIA’s analysis of the impact of the 8-hour NAAQS takes into account
the national requirement for “Tier 2” low-sulfur gasoline
in 2004 that will substantially reduce NOx emissions for all gasoline
in the United States. Analysis of 8-hour nonattainment for the Eastern
part of the country, including States in Petroleum Allocation Defense
District’s (PADD’s) I through III, is based on EPA’s
projections for the attainment status of counties in 2007 which accounts
for Tier 2 gasoline and other ongoing ozone reduction measures.17 These
projections do not distinguish among marginal, moderate, severe, and serious
nonattainment areas. Since similar projections were not available for
Western states, EIA’s analysis assumes nonattainment/attainment
status of counties in PADD’s IV and V based on 1999-2000 NAAQS data.18
EIA developed an “Upper Bound-RFG” case by identifying counties
and their associated Metropolitan Statistical Areas (MSA’s) that
would be the most likely candidates to switch to RFG as a direct result
of the new 8-hour standards. The “Upper Bound-RFG” case is
based on the following assumptions.
- Projected 8-hour non-attainment areas that are currently using
RFG are expected to continue to use RFG.
- Projected 8-hour non-attainment areas that currently use low-RVP
fuels continue to use these blends. This assumption is based on the premise
that areas currently using RVP restricted gasoline are doing so to address
local summertime VOC problems. Given that virtually all of the potential
NOx reduction from gasoline will be achieved through Tier 2 gasoline requirements,
the VOC problems in areas currently using low-RVP gasoline are assumed
to continue to be addressed through RVP restrictions.
- Projected nonattainment counties that are currently using conventional
gasoline without volatility restrictions (9.0 psi areas) were assumed
to be the most likely to switch to RFG because the emissions benefit would
be the greatest in these areas. Attainment counties in the same MSA as
any of these nonattainment counties were also assumed to be likely to
switch to RFG, because areas are likely to make common plans to reduce
ozone.
- Areas that had previously opted-out of the RFG program were
assumed to have a predisposition against RFG and were not assumed to switch
to RFG.
In addition to the counties already using RFG, the 16 projected nonattainment
counties included in the “Upper Bound RFG” case are shown
in the right-hand column of Table 2, titled “Most Likely to Switch.”
The actual 8-hour “nonattainment areas” have not yet been
designated but these areas are generally the larger metropolitan areas
that the failing county is associated with. The “Upper Bound RFG”
case reflects both the counties projected to fail the 8-hour NAAQS, and
32 other counties in the associated metropolitan areas shifting to RFG
in 2007. As a result of these assumptions, the national market share for
reformulated gasoline is assumed to rise from 33.8 percent under the 1-hour
rule to 38.0 percent under the 8-hour rule.
These State fuel choices are assumed to occur in 2007, regardless of whether
a county is in marginal, moderate, serious, or severe nonattainment. In
reality, areas with moderate, serious, or severe ozone problems may choose
not to switch to RFG until years after 2007. The “Upper Bound RFG”
case represents the shortest possible time period for counties using conventional
gasoline to switch to RFG. Thus, the case represents an “upper bound”
to what is expected to occur.
The “Upper Bound RFG” case is believed to be a reasonable
upper bound on the number of areas that would shift to RFG solely as a
result of the new 8-hour NAAQS. As shown in Table 2, four of the counties
assumed to switch to RFG in the “Upper Bound RFG” case are
currently out of attainment for the 1-hour NAAQS. The fact that these
areas did not choose RFG as a compliance option for the 1-hour NAAQS leads
to the assumption that they will to choose to use RFG only as a “last
resort” as a means of complying with the 8-hour standard. Thus,
the case represented here is an “upper bound” to what is expected
to occur.
The price changes in this scenario are relative to a case that includes
the fuel-related provisions of H.R. 4, as amended by the Senate. This
case includes an 87-percent MTBE ban starting in 2006, a renewable fuel
standard of 5 billion gallons by 2012, the elimination of the current
oxygen requirement on RFG, and the 1-hour ozone nonattainment rule.19
Results
The “Upper Bound RFG” case results in a maximum 12.6 percent
increase in the volume of RFG consumed in 2007 (Figure 2). RFG consumption
is projected to be 3.24 million barrels per day under the 1-hour ozone
case and a maximum of 3.65 million barrels per day under the 8-hour ozone
case in 2007. Total gasoline consumption is almost exactly the same in
the two cases; increased RFG consumption in the 8-hour case replaces conventional
gasoline consumption in the 1-hour case.
National average annual RFG pump prices are up to 0.4 cents per gallon
higher in the Upper Bound case (Figure 3) than a case with the H.R. 4
provisions, as amended by the Senate. Average U.S. gasoline prices are
projected to increase by 0.1 cent per gallon.
Price increases shrink over time, as the industry adds new processing
equipment to meet the new RFG demand.
Because States have other options for improving ozone, it is highly unlikely
that all the projected nonattainment areas currently using conventional
gasoline would switch to RFG and that they would switch to RFG in 2007.
Therefore, EIA considers the “Upper Bound RFG” case as a high-end
case in terms of both the volume of gasoline that would switch to RFG
and the associated price impact.
Relation to Previous Work
Previous work on H.R. 4, as amended by the Senate, showed that reformulated
gasoline prices are expected to rise about 8 cents per gallon from today’s
levels, while national average gasoline prices are 3-3.5 cents higher
than today.20 The effects of the 8-hour ozone rule would be on top of
these increments, but the results presented would be an upper bound on
the average annual incremental price increase.
Conclusion
The potential for increasing the RFG market as a result of the change
in NAAQS standards is expected to be limited to a maximum of 0.4 million
barrels per day. States are more likely to look to low-RVP fuels and changes
in diesel fuel programs to resolve lingering ozone problems than to increase
reliance on RFG, because of its higher cost. The 8-hour ozone rule could
increase average national RFG prices by no more than 0.4 cents per gallon
and average national gasoline prices by up to 0.1 cent per gallon over
those projected for H.R. 4, as amended by the Senate.
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Appendix A: Request Letter from Senator Bingaman |
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Reformulated Gasoline Use Under the 8-Hour Ozone Rule - Tables |
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Notes and Sources |
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Contacts |
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