The evaporative emissions standards that we are proposing for LDVs, LDTs, MDPVs, and HDVs are feasible with relatively small cost impacts.  We estimate the cost of system improvements, including indirect cost markups, to be about $20 (2010$) per vehicle, for all car classes.  This incremental cost reflects the cost of moving to low permeability materials, reduced number of fuel-system connections, longer contiguous lengths of plumbing, and low-permeation connectors.  We believe that learning is also appropriate for evaporative emissions control systems as described above and in more detail in Chapter 2 of the draft RIA.  We request comment on this detailed analysis.  In particular, we request comment on the completeness of the list of emission control components needed for meeting the Tier 3 evaporative emission standards, especially regarding purge and purge-assist technologies.
We have used the individual technology costs discussed briefly here and in more detail in Chapter 2 of the draft RIA to estimate package costs for each of the different gasoline and diesel engine types in the fleet (i.e., I4 passenger car, V6 passenger car, etc.).  We have then multiplied these package costs by the project sales estimates for the years 2017 and later.  The projected sales estimates used, as noted earlier, represent the reference case fleet mix rather than today's fleet mix. That fleet mix is discussed in more detail in Chapter 2 of the draft RIA.  With these total annual costs, we then determined the sales weighted average cost increase for all passenger cars, light trucks and heavy-duty vehicles.  Table VII-4 below provides our estimates of the incremental cost per vehicle (both light-duty and class 2b and 3 vehicles) by model year for both tailpipe and evaporative emissions standards.  These values reflect the total direct and indirect manufacturing costs as well as the appropriate learning rates.  As stated above, a large portion of the cost is incurred in the initial model years due to the adoption of the LEV III declining fleet average.  Costs then continue to rise as the percentage of vehicles complying with the proposed standards increases through the 2025 MY.
We have estimated costs consistent with the fact that manufacturers would be required to start the phase-in of Tier 3 standards in MY 2017 for vehicles under 6,000 lbs GVWR and MY 2018 for vehicles greater than 6,000 lbs GVWR.  Based on the declining fleet averages for cars and trucks, we have apportioned our estimates for full compliance across the phase-in years as a percentage of the final standard.  Manufacturers would be required to move from a Tier 2 Bin 5 fleet average in the 2017 MY (for vehicles <6,000 lbs GVW).  This results in a significant step in stringency.  As a result, a large portion of the costs are expected to be incurred in the initial model years.  It is also important to note that while we are aligned with CARB on the individual cost of each technology and their application rates, our costs are different from California's LEV III costs due to the fact that the California fleet is currently meeting slightly more stringent standards than the federal fleet. Thus, the incremental cost for California is less.  Finally, manufacturers would have the opportunity in 2015 and 2016 MY to earn Tier 3 credits by producing a fleet that is cleaner than the current Tier 2 requirements.  While we expect that most manufacturers would earn credits, either by selling California vehicles as 50 state vehicles or by certifying existing vehicles to lower Tier 2 bins, we have not reflected these credits in our cost analysis.  In that way, we believe that our cost estimates are conservative.
Table VII-4 Per Vehicle Costs by Model Year a
Model Year
2017
2018
2019
2020
2021
2022
2023
2024
2025
$/car
$78
$87
$92
$99
$103
$112
$111
$115
$118
$/truck
$0
$105
$114
$127
$136
$150
$151
$159
$165
Light-duty Combined
$50
$94
$100
$109
$115
$125
$124
$130
$134
$/2b (Truck or Van)
$0
$43
$50
$58
$64
$73
$69
$68
$66
$/3 (Truck or Van)
$0
$38
$46
$55
$63
$73
$69
$68
$66
[a] Costs shown include costs for the proposed Tier 3 standards on vehicles sold in all states except California.
 Total annual costs are shown below in Table VII-5.  This table includes all costs associated with the proposed Tier 3 vehicle standards, i.e., both exhaust and evaporative emission standards, for both light-duty vehicles and 2b and 3 heavy-duty pickup trucks and vans.  Also included are facility related costs associated with the proposed requirements to conduct more PM testing on gasoline vehicles. (Additional detail regarding the PM facility costs are described below.) We show the facility costs in the year 2016 even though the program does not begin until 2017.  These costs represent the construction cost that would have to be done in advance of the first year of the standards in preparation for the testing efforts that would be required.  The annual costs shown for each cost element are undiscounted annual costs for the years 2016 through 2025, then 2030, 2040 and 2050.  The present values shown are for the years 2012-2050 at both the 3 percent and 7 percent discount rates.  We have shown present values in 2012 for comparison to EPA's 2012-2016 GHG final rule and the recent MYs 2017-2025 GHG rule and to more closely estimate the costs of the program today.
Table VII-5 Undiscounted Annual Costs & Costs of the Vehicle Program Discounted back to 2012 at 3% and 7% Discount Rates (Millions of 2010 Dollars)a

                                     Year
                                    Exhaust
                                     Evap
                                  Facilities

                                  Light-duty
                                     2b/3
                                      All
                                  Light-duty
                                     2b/3
                                      All
                                      All
                                     Total
                                     2016
                                                                             $0
                                                                             $0
                                                                             $0
                                                                             $0
                                                                             $0
                                                                             $0
                                                                          $22.5
                                                                          $22.5
                                     2017
                                                                           $634
                                                                             $0
                                                                           $634
                                                                          $71.4
                                                                             $0
                                                                          $71.4
                                                                          $3.75
                                                                           $709
                                     2018
                                                                         $1,150
                                                                          $23.1
                                                                         $1,170
                                                                           $167
                                                                          $3.86
                                                                           $171
                                                                          $3.75
                                                                         $1,340
                                     2019
                                                                         $1,240
                                                                          $28.6
                                                                         $1,270
                                                                           $159
                                                                          $3.76
                                                                           $162
                                                                          $3.75
                                                                         $1,440
                                     2020
                                                                         $1,350
                                                                          $34.2
                                                                         $1,380
                                                                           $216
                                                                          $5.22
                                                                           $221
                                                                          $3.75
                                                                         $1,600
                                     2021
                                                                         $1,470
                                                                          $40.0
                                                                         $1,510
                                                                           $208
                                                                          $5.09
                                                                           $213
                                                                          $3.75
                                                                         $1,730
                                     2022
                                                                         $1,580
                                                                          $46.5
                                                                         $1,630
                                                                           $264
                                                                          $6.52
                                                                           $271
                                                                          $3.75
                                                                         $1,900
                                     2023
                                                                         $1,610
                                                                          $44.8
                                                                         $1,660
                                                                           $253
                                                                          $6.27
                                                                           $259
                                                                          $3.75
                                                                         $1,920
                                     2024
                                                                         $1,720
                                                                          $44.8
                                                                         $1,770
                                                                           $257
                                                                          $6.38
                                                                           $263
                                                                          $3.75
                                                                         $2,040
                                     2025
                                                                         $1,830
                                                                          $44.9
                                                                         $1,870
                                                                           $246
                                                                          $6.12
                                                                           $253
                                                                          $3.75
                                                                         $2,130
                                     2030
                                                                         $1,750
                                                                          $46.5
                                                                         $1,790
                                                                           $246
                                                                          $6.74
                                                                           $253
                                                                          $3.75
                                                                         $2,050
                                     2040
                                                                         $1,750
                                                                          $51.9
                                                                         $1,800
                                                                           $246
                                                                          $7.52
                                                                           $254
                                                                          $3.75
                                                                         $2,060
                                     2050
                                                                         $1,750
                                                                          $58.6
                                                                         $1,810
                                                                           $246
                                                                          $8.49
                                                                           $255
                                                                          $3.75
                                                                         $2,070
                                    NPV, 3%
                                                                        $29,900
                                                                           $814
                                                                        $30,700
                                                                         $4,250
                                                                           $116
                                                                         $4,360
                                                                          $89.1
                                                                        $35,100
                                    NPV, 7%
                                                                        $14,700
                                                                           $384
                                                                        $15,100
                                                                         $2,090
                                                                          $55.0
                                                                         $2,150
                                                                          $52.2
                                                                        $17,300
[a] Costs shown include costs for the proposed Tier 3 standards on vehicles sold in all states except California.
In addition to considering the costs associated with improving the emission control systems on vehicles, we also expect that manufacturers may need to improve their capability to measure PM at the levels we are proposing.  For additional information on the test procedure changes we are proposing, reference Section IV.F.
We have used two sources of information to determine the appropriate costs for upgrading test facilities for PM measurement.  The first was EPA's own cost to upgrade its PM measurement equipment; the second was information provided by vehicle manufacturers.  The cost estimates ranged from $250,000 to $500,000 per PM test site.
  We recognize that the number of sites that a manufacturer would require is dependent on the number of vehicle models it expects to develop and certify in a given model year.  As stated in Section IV.A, we have limited the number of certifications required per model year to 25 percent of the represented durability groups, thereby potentially reducing the number of test sites that require upgrade.  We believe that manufacturers with annual sales of one million units or less would require two facility upgrades at an average cost of $375,000.  For manufacturers with greater than one million units per year annual sales we believe that four facility upgrades may be required to meet the Tier 3 requirements.  In addition to facility upgrades some manufacturers may require an additional employee for PM weigh room operation and/or PM data management.  Therefore we have added the cost of 1 additional full time employee for all manufacturers.  Our estimated costs for each manufacturer are show below in Table VII-6.
Table VII-6 PM Facility Costs (2010 dollars)
                                 Annual Volume
                         # of PM Sites to be upgraded
                                 Cost per site
                              Total Facility Cost
                           (one-time, upfront cost)
                                Additional FTE
                            (annual, ongoing cost)
                                 <=1 million
                                       2
                                   $375,000
                                   $750,000
                             1 @ $150,000 per year
                                > 1 million
                                       4

                                  $1,500,000

                                     Total

                                  $22,500,000
                                  $3,750,000
      [a] FTE  -  Full Time Employee
Estimated Costs of the Fuel Program
Overview
The sulfur control program we are proposing today is expected to result in many refiners further investing in sulfur control hardware and changing the operations in their refineries to reduce their gasoline sulfur levels.  The proposed sulfur control program requires refiners and importers to reduce their gasoline sulfur levels on average down to 10 ppm.  The ABT provisions being proposed along with the 10-ppm average sulfur control standard would allow refiners that reduce their gasoline sulfur levels below 10 ppm to earn credits and transfer those credits to other refiners who would find it more expensive to reduce their sulfur levels down to the average standard.  The ABT program would allow refiners to optimize their investments, which we believe would result in achieving the average sulfur control standard nationwide at lower costs.  We are also proposing to either maintain the current 80-ppm sulfur cap at the refinery gate, or to lower it only as far as 50 ppm.  We have modeled the impacts of the 80-ppm cap, but believe that the results for a 50-ppm cap would be comparable due to the limits on credits resulting from the 10-ppm average.  We estimate that the national average refinery costs incurred to comply with the fully phased-in Tier 3 sulfur control program with ABT program would be 0.89 cents per gallon, averaged over all gasoline.  This estimate includes the capital costs, which are amortized over the volume of gasoline produced.
In this section we summarize the methodology used to estimate the costs of Tier 3 sulfur control and our estimated costs for the program.  A detailed discussion of all of these analyses is found in Chapter 5 of the draft RIA.  We request comment on all aspects of the methodology described in Chapter 5 of the draft RIA used for estimating the cost of the program using the refinery-by-refinery cost model.  In particular, we request comment on: the methodology for estimating the sulfur content of the FCC naphtha; how FCC naphtha sulfur levels are impacted by both an FCC pretreater and an FCC unit; to what extent desulfurization costs for complying with Tier 3 vary due to the sulfur level entering the existing FCC postreaters installed for Tier 2; the estimated level of hydrotreating of light straight run (LSR) naphtha and natural gas liquids (NGL) occurring today; the level of hydrotreating of LSR and NGLs expected to occur under this program and the magnitude of permitting-related costs in comparison to the overall project costs.
Methodology
Overview of the Sulfur Program Cost Methodology
The basic methodology we used to estimate the cost of sulfur control for the proposed rule is similar to that for other rulemakings.  Using a refinery-by-refinery cost model that we developed for this rulemaking, we projected the sulfur control technology expected to be used by each refinery, and the cost of each refinery's sulfur control step, to estimate compliance with the proposed sulfur control program.  We aggregated the individual refinery costs to develop a national average cost estimate for the proposed sulfur control program.  Based on the flexibilities offered by the ABT program, refiners are expected to come very close to achieving the 10-ppm sulfur standard on average.  Linear Programming Cost Model
We considered performing our cost assessments using a linear programming (LP) cost model.  LP cost models are based on a set of complex mathematical representations of refineries which, for national analyses, are usually conducted on a regional basis.  This type of refining cost model has been used by the government and the refining industry for many years for estimating the cost and other implications of changes to fuel quality.
The design of LP models lends itself to modeling situations where every refinery in a region is expected to use the same control strategy and/or has the same process capabilities.  As we began to develop a gasoline sulfur control program with an ABT program, it became clear that LP modeling was not well suited for evaluating such a program.  Because refineries have different equipment, process different crude oils and produce different products, refiners will choose different technologies and run those technologies differently for controlling gasoline sulfur.  In addition, because of the flexibility afforded by the nationwide ABT program, we initiated development of a more appropriate refinery-by-refinery cost model, as described below.  However, the LP model remained important for providing many of the inputs into the refinery-by-refinery cost model developed for this rulemaking.
Refinery-by-Refinery Cost Model
In contrast to LP models, refinery-by-refinery cost models are useful when individual refineries are expected to respond to program requirements in different ways and/or have significantly different process capabilities.  Furthermore, as is the case with sulfur control, such approaches are possible when the refinery changes required are primarily "add on" not impacting the fundamental operation at the refinery.  Thus, in the case of modeling potential gasoline sulfur control programs, we needed a model that could accurately simulate the variety of decisions refiners will make at different refineries, especially in the context of a nationwide ABT program.  For this and other related reasons, we developed a refinery-by-refinery cost model, built off the model developed for the MSAT2 rulemaking by Mathpro, specifically to evaluate the costs and other impacts of the proposed sulfur control program.
Our refinery-by-refinery sulfur cost model incorporates the capacities of all the major units in each refinery in the country, as reported by the Energy Information Administration and in the Oil and Gas Journal.  Regarding operational information, we know less about how specific refineries use the various units to produce gasoline and about such factors as octane and hydrogen costs for individual refineries.  We used previous LP modeling work as the basis for estimating these factors on a regional basis, and we applied the average regional result to each refinery in that region (Petroleum Administration for Defense District; PADD).  We compared the gasoline volumes estimated by the model for each individual refinery to the 2009 gasoline volumes from the RFG data base, which was the most recent year for which data was available, and we were satisfied with the model's volumetric estimates.
Refinery-by-refinery cost models have been used in the past by both EPA and the oil industry for such programs as the MSAT2 gasoline benzene control, highway and nonroad diesel fuel sulfur standards, and they are a proven means for estimating the cost of compliance for fuel control programs.  While they will never precisely model and predict individual refinery operations and impacts, they provide both a better assessment of the overall market impacts than the LP model and of the variation of impacts across the refineries.  For this refinery-by-refinery sulfur cost model, we conducted a peer review process, and have received some comments on the design of our model.  These comments are contained in the peer review reports placed in the docket.  We intend on addressing the peer review comments, as well as any public comments that we receive on our cost analysis for the proposal, when we conduct the cost analysis for the final rule.    The oil industry has also conducted a similar analysis using a refinery-by-refinery cost model, and we discuss the results of their analysis at the end of this chapter.
The refinery unit responsible for the greatest contribution of sulfur to gasoline is the fluidized catalytic cracker unit (FCC).  The FCC processes a very heavy feedstock which contains high levels of sulfur.  When the FCC cracks this heavy, sour feedstock, a portion of the sulfur in the feed to the FCC ends up in the FCC naphtha, an important gasoline blendstock stream.  Before the Tier 2 sulfur control program was implemented, FCC naphtha contributed over 95 percent of the sulfur to a refinery's gasoline, and now that Tier 2 has been fully implemented it still contributes roughly 80 to 90 percent for those refineries with FCC units.  To comply with the Tier 2 sulfur control program, most refiners installed FCC naphtha hydrotreaters (FCC postreaters) and some refiners installed FCC feed hydrotreaters (FCC pretreater) to reduce that unit's sulfur contribution to their gasoline pool.  The technologies installed include Axxens Prime G+, Exxon-Mobil Scanfining, CDTech's CDHydro and CDHDS, Phillips S-Zorb and UOP's ISAL (UOP now offers a postreating technology named Selectfining).  Despite the much lower sulfur contribution to the gasoline pool by the FCC after complying with Tier 2, the vendors which supplied sulfur control technology for complying with Tier 2 sulfur control program have informed us that to comply with a more stringent sulfur standard refiners are expected to further reduce the sulfur in the FCC naphtha.  We contacted each of those technology vendors and some of them provided information that we used to estimate the cost of lowering the sulfur in the FCC naphtha to allow each refinery to reduce the sulfur in its gasoline to 10 ppm.  We also reviewed literature that is available on the Web to further educate ourselves of what would be involved to achieve a 10-ppm sulfur standard using postreating.
Gasoline desulfurization vendors were pessimistic that the operations of FCC pretreaters could be adjusted to enable those refineries which relied on those units to comply with the Tier 2 sulfur standard to meet a 10-ppm sulfur standard.  For the refineries solely relying on FCC pretreaters to comply with Tier 2, desulfurization vendors project that most refineries in this situation will put in grassroots FCC postreaters to allow those refineries to comply with a 10-ppm gasoline sulfur standard.  However, since adding grassroots FCC postreaters is expensive for the amount of sulfur reduction obtained, the ABT analysis we conducted avoided many of these types of investments.   Instead refineries with both pre- and postreaters today are quite able to achieve further gasoline sulfur reductions less than 10 ppm at a relatively low incremental cost and selling the credits to those refineries who would otherwise be faced with grassroots FCC postreater investments.
In addition to addressing the sulfur in the FCC naphtha, we believe that some refineries may need to reduce the sulfur in at least a couple of other gasoline blendstocks to ensure that it would be able to comply with a 10-ppm sulfur standard.  One such gasoline blendstock is light straight run (LSR) naphtha.  Most refiners hydrotreat the LSR before sending that stream to an isomerization unit and therefore that stream is very low in sulfur.  However, some refineries don't have isomerization units and probably do not hydrotreat the LSR.  If LSR is not hydrotreated, we estimate that LSR could contain anywhere between 25 to 500 ppm sulfur.  We believe that refiners that do not currently desulfurize their LSR could do so by either feeding it to their FCC postreater or their naphtha hydrotreater (the hydrotreater which desulfurizes the feed to the isomerization and reformer units).  Because this stream does not contain any olefins, it is an easy stream to hydrotreat and actually improves the hydrotreating conditions within the FCC naphtha hydrotreater.  The second stream that may have to be hydrotreated is butane.  Butane is removed from the incoming crude oil and FCC naphtha and some of it is blended back into gasoline in the summertime to bring the gasoline pool up to the RVP limit.  However, much of the butane is transported to storage for subsequent blending into the wintertime gasoline pool.  We estimate that butane can range from 1 ppm to 140 ppm sulfur, but the typical sulfur level for butane is likely around 10 ppm.  Because butane can be high in sulfur, we project that some refiners may add relatively inexpensive caustic extraction processes which can remove the types of sulfur present in the butane pool.  However, addressing butane sulfur may only be necessary for those refineries that are reducing their gasoline sulfur levels down to 5 ppm to generate credits for sale to refiners seeking to purchase credits.
The nationwide ABT program is intended to optimize sulfur reduction by allowing each refinery to individually choose the most cost-effective means of complying with the program.  To model this phenomenon, we first establish an estimated cost for each refinery for reducing its gasoline sulfur down to 10 ppm and to 5 ppm.  Next we ranked the sulfur control strategies for all the refineries in order from lowest to highest sulfur control cost per gallon of gasoline and estimated the impact of their projected sulfur control strategies on refinery sulfur levels.  The model then follows this ranking, starting with the lowest-cost refineries, and adds refineries and their associated control technologies one-by-one until the projected national average gasoline sulfur level reaches 10 ppm.  This modeling strategy projects the sulfur control technology that will be used by each refinery, as well as identifies those refineries that are expected to generate credits and those that are expected to use credits in lieu of investing in sulfur control.  The sum of the costs of the refineries expected to invest in further sulfur control provides the projected overall cost of the program.
Summary of Costs without ABT Program
Nationwide Costs of the Proposed Sulfur Control Program
We used a refinery-by-refinery cost model to estimate the costs of the sulfur control program being proposed today.  In general, the cost model indicates that further desulfurizing the FCC naphtha will be the most cost-effective means for achieving sulfur control.  We accounted for additional costs to refiners for desulfurizing their light straight run naphtha, in the case where we estimate that the light straight run naphtha is not being desulfurized today.
Based on the results of our cost analysis, we estimate that for each refinery to get to a 10-ppm average level, (without the benefit of trading) the proposed sulfur control program would cost 0.97 cents per gallon when it is fully phased-in, assuming that capital investments are amortized at a seven percent return on investment before taxes and expressed in 2010 dollars.  Refiners would be expected to make $2,527 million in capital investments to achieve this sulfur reduction.
We also estimated annual aggregate costs, including the amortized capital costs, associated with the new fuel standard.   When the 10-ppm gasoline sulfur standard would take effect in 2017, we estimate that the sulfur standard would cost $580 million per year.
Distribution of Refinery Costs
The sulfur reductions estimated by the cost model and associated costs vary significantly refinery-by-refinery.  Figure VII-1 summarizes the estimated per-gallon costs for complying with the sulfur control standard if no ABT program were implemented.

Figure VII-1 Projected Refinery-by-Refinery Sulfur Control Costs for the Proposed Sulfur Control Program Assuming No ABT Program
Figure VII-1 shows that the sulfur control costs would vary from no cost to almost 6.5 cents per gallon.  Some refineries have no FCC unit and thus, their gasoline is naturally low in sulfur and these refineries will not reduce their gasoline sulfur levels and not incur a sulfur control cost.
Summary of Costs with ABT Program
The estimated costs described in Section VII.B.3 above assume that every individual refinery must achieve the proposed 10-ppm sulfur standard on an annual average basis.  However, as described in Section V.A.4, we are also proposing an ABT program that is designed to ease the overall burden on the industry while still achieving the 10-ppm annual average sulfur standard for the nation as a whole.  Under the proposed ABT program, refineries that can reduce sulfur below 10 ppm at a relatively low cost can generate credits which can then be obtained by refiners for whom the cost of attaining the 10-ppm sulfur standard would be relatively high.  The net effect of this credit trading would be to reduce the overall cost of the program.
To estimate the impact that the ABT program could have on nationwide average fuel costs, we began with the refinery-by-refinery costs described in Section VII.B.2.b for sulfur reductions down to either 10 ppm or 5 ppm.  We then determined the lowest cost option among three alternatives for each refinery:
      1.  The refinery reduces its sulfur to 10 ppm.
      2.  The refinery reduces its sulfur to 5 ppm and generates credits for the increment between 10 ppm and 5 ppm.
      3.  The refinery does not lower sulfur, but instead relies on the purchase of credits to comply with the 10-ppm standard.
A fourth category applied to refineries whose average gasoline sulfur levels are already below 10 ppm (there refineries don't have FCC units).  All such refineries were assumed to generate credits for the increment between 10 ppm and their current sulfur level.
To simplify the modeling of how an ABT program might operate, we focused on the circumstances that refineries would face in the longer term, specifically after 2020.  This approach meant that the ABT program modeling did not consider the impact on gasoline sulfur levels of delayed compliance for small refiners and small volume refineries, nor did it consider the generation and use of any early sulfur credits.  Moreover, our ABT modeling considered only gasoline sold for use outside of California, and only gasoline produced by domestic refineries (not importers).
To optimize the nationwide average costs under an ABT program, we determined the credit price at which the total number of credits generated was equal to the total number of credits consumed.  For an idealized scenario in which every refinery has the opportunity to make credit trades with every other refinery in the nation, we determined that more than 60 percent of refineries would be involved in either generating or consuming credits.  The nationwide average cost of compliance with the 10-ppm sulfur standard would be reduced from 0.97 cents per gallon to 0.79 cents per gallon.
Such perfect nationwide trading, however, is not realistic.  Under Tier 2 today, a significant fraction of Tier 2 sulfur credits are bought and sold within companies, but there is still a considerable amount of inter-company trading occurring.  Under Tier 3, it would be more difficult to generate credits, and also more difficult to make up for deficits, consequently, we also investigated how more limited credit trading might affect the average cost of compliance with the 10-ppm sulfur standard.  For instance, to address unplanned equipment downtime or other circumstances that could make future compliance more difficult, individual companies might decide to bank credits for their own use, declining to make credits that they generate at one of their facilities available to other companies.  To evaluate such a scenario, we modeled a situation wherein credit trading would only occur within companies that own more than one refinery.  Of the 21 refining companies in this position, we estimated that credit generation and use would reduce compliance costs at six of them, with 18 refineries generating credits and 8 consuming credits.  Under this scenario, total capital costs would be $2,203 million and the nationwide average cost of compliance with the 10-ppm sulfur standard would be 0.89 cents per gallon.  We have chosen to utilize the costs from this intra-company trading analysis for the proposal.  However, in reality, we expect that some inter-company credit transfers would still occur due to the financial incentive the highest cost refineries would provide.  To the extent that some inter-company credit transfers do occur, our cost estimates can be viewed as somewhat conservative.
A summary of the ABT results assuming nationwide credit transfers and intra-company credit transfers (costs used in the proposal) is shown in Table VII-7.
Table VII-7  Impacts of Nationwide ABT Program

                                    No ABT
                    ABT with intra-company credit transfers
                             (proposed rule costs)
                     ABT with nationwide credit transfers
Average fuel cost (cent/gal)
                                     0.97
                                     0.89
                                     0.79
Total capital cost ($million)
                                     2,527
                                     2,203
                                     1,760
Number of refineries that generate credits
                                       0
                                      18
                                      46
Number of refineries that consume credits
                                       0
                                       8
                                      25
Number of refineries that neither generate nor consume credits
                                      111
                                      85

                                      40
The cost information available for this NPRM was limited to the costs of reducing sulfur to either 10 ppm or 5 ppm, and thus we were not able to estimate refinery-specific costs of reducing sulfur to other levels.  As a result, our ABT modeling could not account for scenarios in which a refinery makes some capital investments to lower sulfur to some interim level, such as 20 ppm, and then purchases credits in order to demonstrate compliance with the 10-ppm standard.  Our ABT analysis also could not account for credit generation at sulfur levels other than 5 ppm.  Our ABT analysis, then, most likely underestimates the cost savings that could occur due to ABT since the greatest efficiencies are achieved when every refinery has the option of using any combination of capital investments and credits generation or use.  For the final rule, we may investigate methods for expanding our ABT analysis to examine these types of scenarios.
Distribution of Refinery Costs
The sulfur reductions estimated by the cost model and associated costs vary significantly refinery-by-refinery.  Figure VII-2 summarizes the estimated per-gallon costs for complying with the sulfur control standard under an ABT program with intra-company credit transfers.

Figure VII-2  Projected Refinery-by-Refinery Sulfur Control Costs for the Proposed Sulfur Control Program with ABT and Intra-Company Credit Transfers
While the distribution of costs shifts slightly under an ABT program with intra-company trading in comparison to no ABT program, Figure VII-2 shows that the sulfur control costs would continue to vary from no cost to nearly 6.5 cents per gallon.
Distribution of Refinery Sulfur Levels
We estimate that 85 out of 111 refineries would meet the 10-ppm sulfur standard without the use of credits under the intra-company trading scenario.  As a result, only about 5 percent of gasoline would continue to have an annual average sulfur level above 10 ppm.  These refineries tend to be smaller than average.  The distribution of sulfur levels under this scenario is shown in Figure VII-3.

Figure VII-3  Projected Refinery-by-Refinery Sulfur Levels for the Proposed Sulfur Control Program with ABT and Intra-Company Credit Transfers

Other Cost Estimates
Three other cost studies were recently conducted to estimate the cost of additional reduction in gasoline sulfur.  All of these studies show average costs of less than 2 cents per gallon.
One of these studies was conducted in October 2011 by the International Council for Clean Transportation (ICCT).   ICCT retained Mathpro for this analysis.  ICCT had Mathpro analyze a 10-ppm average gasoline sulfur standard in PADDs 1  -  4 (generally speaking, PADDs 1  -  4 represents the part of the U.S. east of, and including, the Rocky Mountain states).  The cost presented by ICCT is that complying with a 10-ppm average sulfur standard would cost refiners on average 0.8 cents per gallon.  This cost was calculated based on a before-tax 7 percent return on investment, the same capital amortization basis that we use for our cost analysis.  The cost of a 10-ppm average gasoline sulfur control standard estimated by ICCT is very close to our cost estimate.
API retained Baker and O'Brien to study the cost of additional sulfur control using a refinery-by-refinery cost approach with Baker and O'Brien's Prism model.   API studied a 10 ppm average gasoline sulfur standard, however, API included a very stringent 20 ppm cap standard which did not allow for an ABT program to optimize refinery investments and minimize overall costs.
API made a series of conclusions based on the study.  Perhaps the most important conclusion is that no refinery would shut down as a result of the proposed 10 ppm gasoline sulfur control standard, even though API did not study the flexibilities of an ABT program and used excessively high capital costs for a grassroots FCC postreater (see below).  API did not report average costs, but reported the marginal costs for the cost study.  Marginal costs reflect the cost of the program to the refinery or refineries which would incur the highest costs, assuming that the highest cost refineries would set the price (or in this case, the price increase) of gasoline.  The report concluded that marginal costs after the imposition of a 10 ppm gasoline sulfur program would increase the price of gasoline by 6 to 9 cents per gallon in most markets.  API did not define how its statement "in most markets" would apply to the U.S. gasoline supply.  API also did not provide any justification why it assumed that the refineries that would experience the highest desulfurization cost under Tier 3 would also be the same refineries which sets the gasoline price in the gasoline market today.
Although API did not provide an average gasoline desulfurization cost in its report, we could calculate an average cost based on the gasoline volume and total annual costs provided.  The total cost reported in the report for the 10 ppm average gasoline sulfur standard is $2390MM/yr and the non-California gasoline volume is 7343 thousand barrels per day.  This results in an average per-gallon desulfurization cost of $0.89/bbl or 2.12 c/gal.  The difference between the average cost and marginal cost (price increase) that API is projecting is profit.  Thus, API's analysis would suggest that the oil industry would profit from 10 ppm low sulfur standard by roughly 4 to 7 cents per gallon, or roughly $4 to $8 billion dollars per year as a result of gasoline sulfur control.
 The average cost of the 10 ppm average gasoline sulfur standard described above was calculated using API's methodology for amortizing capital investments.  To assess the costs consistent with OMB's guidance for our rulemakings and to allow a direct comparison between the API cost study and our cost study, we adjusted the API costs to be on a similar basis as our costs.  We adjusted the API costs to reflect a before-tax 7 percent return on investment (ROI) for capital invested for the hydrotreaters and hydrogen plants instead of the after-tax 10 percent ROI used by API.  This lowered the API estimated costs from 2.12 c/gal to 1.58 c/gal.  API's 1.58 cents per gallon cost is still higher than our 0.89 c/gal cost with an ABT program that assumes intercompany trading of credits, and higher than our 0.97 c/gal for the case which assumes no ABT program.  The remaining difference between our estimated costs and those by API are driven by API's assumptions for the capital costs that would be incurred for adding grassroots FCC postreaters, or revamping existing ones.
While little detail is provided by API about what hardware comprises their desulfurization units, the inside battery limits (ISBL) and total capital costs for the FCC postreaters and FCC pretreaters are provided in API's report.  API's FCC pretreaters capital costs are consistent with the capital costs that we have used for this unit.  However, the FCC postreater costs used by API are much higher than what we used and have been used in the past by others.  API's capital cost for a grassroots FCC postreater is $228 million for a 35,000 bbl/day unit, or $6540 per/bbl per day.  API's capital cost includes the outside battery limit (OSBL) costs.  In contrast, the ISBL capital cost that we used for a grassroots FCC postreater is $1500/bbl-day for a 30,000 bbl/day grassroots unit, which increases to $1875/bbl/day when the offsite costs are added on.  Thus, the API capital costs are about 3 (1/2) times higher than the capital costs that we are using for a grassroots FCC postreater.  To check our capital costs, we found other capital cost estimates to which we could compare our costs, including the capital costs used by the National Petroleum Council when it studied the cost of gasoline desulfurization prior to Tier 2.  Compared to the average of the rest of the capital cost estimates, the API capital cost for FCC postreater is about four times higher.  Compared to the next highest cost estimate, which is the FCC postreater capital cost from the Jacobs data base in the Haverly refinery cost model that we use, the API capital costs are almost two times higher.
An important distinction must be made with respect to the severity of desulfurization for the capital cost comparison made for complying with Tier 2 versus Tier 3.  For complying with the Tier 2 gasoline sulfur standard (Jacobs and NPC costs), a typical refinery would have installed an FCC postreater to desulfurize the FCC naphtha from about 800 ppm down to about 75 ppm, a 725 ppm, or a 91 percent sulfur reduction.  In the case of a grassroots postreater that would be installed for Tier 3, the postreater would treat FCC naphtha already low in sulfur due to the pretreater installed before the FCC unit (these refineries are currently complying with Tier 2 using an FCC pretreater). Thus, the new grassroots FCC postreater would only have to reduce the FCC naphtha from 100 ppm to 25 ppm, a much smaller 75 ppm or 75 percent sulfur reduction.  A grassroots FCC postreater installed for Tier 2 would typically remove 10 times more sulfur than one installed for Tier 3.  This is important because a significant portion of the FCC postreater capital cost is devoted to avoiding the recombination reactions which occur when hydrogen sulfide concentrations are high and react with the olefins contained in the FCC naphtha.  Thus, a grassroots FCC postreater installed for Tier 3 would be expected to be significantly lower in capital cost compared to a Tier 2 FCC postreater.  When API presented the costs, they stated that their grassroots capital costs were based on an actual installation for the Tier 2 program.  This could be one reason why the capital costs used by API for its cost study of the Tier 3 program are so high.  Another way to assess the API capital cost for the FCC postreaters is to compare it to the FCC pretreater cost that API is using.  FCC pretreaters are much higher pressure units and use more expensive metallurgy than FCC postreaters and, for these two reasons, are much more expensive than FCC postreaters on a per-barrel basis.  However, API's FCC postreater capital costs are about 50 percent more expensive than its own FCC pretreater capital costs, which is inconsistent with the design requirements of the units.
API's estimated range of capital cost for revamping an FCC postreater is also higher than our range of capital cost for revamping an FCC postreater, when assessing the revamped costs as a percentage of the capital cost for a grassroots unit.  API estimates that revamping an FCC postreater would cost 30 to 70 percent of the capital cost for a grassroots FCC unit.  Our capital cost estimate for revamping an FCC naphtha postreaters from 17 to 50 percent of the capital cost for a grassroots FCC postreater, however, most of the revamps are estimated to cost at the lower end of that range.  Were we to adjust the API study capital costs, the projected costs would fall right in line with the other studies.
 Our assessment of the API study is supported by work performed by The Emissions Control Technology Association (ECTA) which retained personnel within Navigant Economics.  That study assessed the costs of a 10 ppm average gasoline sulfur standard and also evaluated the ICCT and API cost studies.  The authors made a number of conclusions.  After reviewing both the ICCT and API studies, the authors found that a primary difference in estimated costs between the two studies was the capital costs.  The authors contacted vendor companies that license FCC postreater technologies and surveyed the companies to find out what the capital costs are for a FCC postreater.  As a result of the survey, the report authors concluded that API's capital costs were too high, and those used in the ICCT study were about right.  The authors found that Baker and O'Brien has a history of exaggerating the economic impacts of EPA rules, citing the costs and other impacts of its analysis of the 2007 on-highway heavy-duty proposed rulemaking.  The authors concluded that the impact of a 10 ppm gasoline sulfur standard on the average refining cost would likely be closer to the 1 cent per gallon estimate by the ICCT study. Furthermore, the report's authors also pointed out that the marginal cost analysis conducted by API did not consider the proposed averaging banking and trading (ABT) program that we were expected to propose, which would reduce the marginal costs of the Tier 3 proposed rule.
Summary of Proposed Program Costs
While the estimated costs for the separate proposed vehicle and proposed fuel programs are presented in Sections VII.A and VII.B, respectively, it is useful to present the combined cost estimates representing our full proposal.  Such combined costs are also necessary in calculating the cost-effectiveness of the standards in today's proposal as described more fully in Section VII.D below.
We have chosen to use an annual, nationwide cost format to represent the combined vehicle and program costs because this approach provides the most straightforward means for comparing vehicle costs to fuel costs, and for demonstrating the total cost impact of our proposed program.  This approach to combined costs also provides a basis for comparing the program costs to the projected benefits as described more fully in Section VIII.
Table VII-8 below shows our estimated program costs by year.  Complete details of this analysis can be found in the draft RIA.
Table VII-8 Total Annual Vehicle and Control Costs, 2010$ a

                                     Year
                    Vehicle Exhaust Emission Control Costs
                                  ($Million)
                  Vehicle Evaporative Emission Control Costs
                                  ($Million)
                           Facility Costs ($Million)
                           Fuel Sulfur Control Costs
                                  ($Million)
                    Total Proposed Program Costs ($Million)
2016
                                      $0
                                      $0
                                     $22.5
                                     $322
                                     $345
2017
                                     $634
                                     $71.4
                                     $3.75
                                    $1,289
                                    $1,998
2018
                                    $1,170
                                     $171
                                     $3.75
                                    $1,288
                                    $2,628
2019
                                    $1,270
                                     $162
                                     $3.75
                                    $1,285
                                    $2,725
2020
                                    $1,380
                                     $221
                                     $3.75
                                    $1,284
                                    $2,884
2021
                                    $1,510
                                     $213
                                     $3.75
                                    $1,287
                                    $3,017
2022
                                    $1,630
                                     $271
                                     $3.75
                                    $ 1,289
                                    $3,189
2023
                                    $1,660
                                     $259
                                     $3.75
                                    $1,288
                                    $3,208
2024
                                    $1,770
                                     $263
                                     $3.75
                                    $1,289
                                    $3,329
2025
                                    $1,870
                                     $253
                                     $3.75
                                    $1,291
                                    $3,421
2030
                                    $1,790
                                     $253
                                     $3.75
                                    $1,320
                                    $3,370
[a] Costs shown include costs for the proposed Tier 3 standards on vehicles sold in all states except California.

Cost per Ton of Emissions Reduced
This section summarizes the cost per ton analysis conducted by EPA and its results.  The emission reductions used to calculate the costs per ton reported here are consistent with those reductions presented as part of our inventory impacts analysis as described in Section III.B.  The costs used to calculate the costs per ton are consistent with the vehicle and fuel control costs presented in Sections VII.A and VII.B, respectively.  We have calculated the aggregate costs per ton which uses the costs and emission reductions for calendar years 2017 and 2030, consistent with the years that we evaluated for air quality analysis.  For more information on how the cost per ton was calculated please refer to Section 8.2 of the draft RIA.
Note that, even though we are setting new standards for PM, we believe that those standards would be met in complying with the NMOG+NOX standards with additional care being given to proper engineering/calibration, so there is no cost associated with the new PM standard and therefore no separate cost per ton analysis for PM.  Likewise, as described more fully in Sections IV.A and IV.B, while we are also proposing new standards for CO and formaldehyde, we are not attributing any of the control costs to these pollutants since the technologies employed to meet the NOX+NMOG standards would also allow the CO and formaldehyde standards to be met.
The total program costs, the NOX+VOC reductions, and results of our cost per ton analysis are provided in Table VII-9.  The costs of the proposed program would be higher immediately after it is implemented than they would be after several years, since both vehicle manufacturers and refiners can take advantage of decreasing capital and operating costs over time.  In addition, the reductions in NOX and VOC emissions would become greater as a larger percentage of the fleet contains the technologies required to meet the proposed standards.
Table VII-9 Costs per Ton of Emissions Reduced in 2017 and 2030 a

Total Proposed Program Cost ($Million, 2010$)
Total NOX + VOC Reductions (tons)
Cost Effectiveness ($/ton)
2017
$1,999
329,162
$6,072
2030
$3,367
750,818
$4,484
[a] Costs shown include costs associated with the proposed Tier 3 vehicle and fuel  in all states except California.
What are the Estimated Benefits of the Proposed Rule?
This section presents EPA's analysis of the criteria pollutant-related health and environmental impacts that would occur as a result of the proposed Tier 3 standards.  The vehicles and fuels subject to the proposed standards are significant sources of mobile source air pollution such as direct PM, NOX, SOX, VOCs and air toxics.  The standards would affect exhaust and evaporative emissions of these pollutants from vehicles.  Emissions of NOX (a precursor to ozone formation and secondarily-formed PM2.5), SOX (a precursor to secondarily-formed PM2.5), VOCs (a precursor to ozone formation and, to a lesser degree, secondarily-formed PM2.5) and directly-emitted PM2.5 contribute to ambient concentrations of PM2.5 and ozone.  Exposure to ozone, PM2.5, and air toxics is linked to adverse human health impacts such as premature deaths as well as other important public health and environmental effects.
For the proposal, we have estimated the health and environmental impacts in 2030, representing impacts associated with a year when the program is fully implemented and when most of the fleet is turned over. Overall, we estimate that the proposed standards would lead to a net decrease in PM2.5- and ozone-related health impacts.  The decrease in population-weighted national average PM2.5 exposure results in a net decrease in adverse PM-related human health impacts (the decrease in national population-weighted annual average PM2.5 is 0.05 μg/m[3] in 2030).   The decrease in population-weighted national average ozone exposure results in a net decrease in ozone-related health impacts (population-weighted maximum 8-hour average ozone decreases by 0.52 ppb in 2030).
Using the lower end of EPA's range of preferred premature mortality estimates (Pope et al., 2002 for PM2.5 and Bell et al., 2004 for ozone),[,] we estimate that by 2030, implementation of the proposed standards would reduce approximately 970 premature mortalities annually and yield approximately $9.5 billion in total annual benefits.  The upper end of the range of avoided premature mortality estimates associated with the proposed standards (based on Laden et al., 2006 for PM2.5 and Levy et al., 2005 for ozone)[,] results in approximately 2,800 premature mortalities avoided in 2030 and yields approximately $27 billion in total benefits.  Thus, even using the lower end of the range of premature mortality estimates, the health impacts of the proposed standards presented in this rule would clearly be substantial.
We note that of necessity decisions on the emissions and other elements used in the air quality modeling were made early in the analytical process for this proposal.  For this reason, the Tier 3 emission control scenario used in the air quality and benefits modeling includes emission reductions from Tier 3 across the nation, assuming no reductions associated with California's LEV III program (as opposed to including  California's LEV III program and its associated emission reductions in the baseline scenario).  This was because EPA had not granted California a waiver of preemption under CAA section 209 for the LEV III program at the time EPA conducted the air quality modeling.  EPA did include California's fuel program, which independent of LEV III was already resulting in average gasoline sulfur levels of 10 ppm, in the baseline scenario.  Since then, EPA granted a waiver for California's LEV III program (78 FR 2112, January 9, 2013) and ten states have adopted the LEV III program under Section 177 of the Clean Air Act.  Based on this change in circumstances, we will conduct new air quality modeling for the final rule that will include emission reductions from California's LEV III program, both in California and in states that by that time have adopted the LEV III program, in the baseline scenario.
Had we modeled the California LEV III emission impacts in the Tier 3 air quality baseline, we estimate that benefits would decrease by approximately 12-16 percent, depending on the particular health impact functions used to characterize both PM- and ozone-related premature mortality.  As a result, we estimate that in 2030, using the lower end of EPA's range of preferred premature mortality estimates (Pope et al., 2002 for PM2.5 and Bell et al., 2004 for ozone), the proposed standards would reduce approximately 820 premature mortalities annually and yield approximately $8.0 billion in total annual benefits.  The upper end of the range of avoided premature mortality estimates associated with the proposed standards (based on Laden et al., 2006 for PM2.5 and Levy et al., 2005 for ozone) results in approximately 2,400 premature mortalities avoided in 2030 and yields approximately $23 billion in total benefits.  These are rough estimates since, without new photochemical air quality modeling to reflect the revised baseline and control scenarios, we are unable to account for cross-state transport of pollution into or out of California or Section 177 states.  However, we believe this is a reasonable characterization of the small reduction in benefits had we modeled the emission reductions of the LEV III program in California and other state that adopt the LEV III program in the baseline.  We believe our overall cost-benefit conclusions do not materially change with or without the inclusion of emission reductions from California and in other states that adopt the LEV III program in our analysis.  We will conduct new air quality modeling for the final rule that will include emission reductions from the LEV III program in California, and in states that have adopted the program, in the baseline scenario. The rest of this section presents benefits that include emission reductions from the LEV III program.
Overview
We base our analysis of the program's impact on human health on peer-reviewed studies of air quality and human health effects.[,]  These methods are described in more detail in the draft RIA that accompanies this action.  Our benefits methods are also consistent with rulemaking analyses such as the final 2012-2016 MY Light-Duty Vehicle Rule, the final Portland Cement National Emissions Standards for Hazardous Air Pollutants (NESHAP) RIA, the final 2014-2018 MY Heavy-Duty Vehicle Rule, and the final 2017-2025 MY Light-Duty Vehicle Rule.  To model the ozone and PM air quality impacts of the proposed standards, we used the Community Multiscale Air Quality (CMAQ) model (see Chapter 7.2.2 of the draft RIA that accompanies this preamble).  The modeled ambient air quality data serves as an input to the Environmental Benefits Mapping and Analysis Program version 4.0 (BenMAP).  BenMAP is a computer program developed by the U.S. EPA that integrates a number of the modeling elements used in previous analyses (e.g., interpolation functions, population projections, health impact functions, valuation functions, analysis and pooling methods) to translate modeled air concentration estimates into health effects incidence estimates and monetized benefits estimates.
The range of total monetized ozone- and PM-related health impacts in 2030 is presented in Table VIII-1.  We present total benefits based on the PM- and ozone-related premature mortality function used.  The benefits ranges therefore reflect the addition of each estimate of ozone-related premature mortality (each with its own row in Table VIII-1) to estimates of PM-related premature mortality.    The analysis of the proposed standards reflects EPA's work to characterize benefits prior to the most recent PM NAAQS.  EPA will update its benefits analysis, and related uncertainty analysis, to be consistent with the final PM NAAQS for the final Tier 3 regulatory impact analysis.
Table VIII-1 Estimated 2030 Monetized PM-and Ozone-Related Health Benefits[a],b
2030 Total Ozone and PM Benefits  -  PM Mortality Derived from American Cancer Society Analysis and Six-Cities Analysis[b]
                      Premature Ozone Mortality Function
                                   Reference
                                Total Benefits
                 (Billions, 2010$, 3% Discount Rate)[c][,][d]
                                Total Benefits
                 (Billions, 2010$, 7% Discount Rate) [c][,][d]
Multi-city analyses
Bell et al., 2004
Total: $9.5 - $21
PM: $7.7 - $19
Ozone: $1.8
Total: $8.7 - $19
PM: $7.0 - $17
Ozone: $1.8

Huang et al., 2005
Total: $10 - $21
PM: $7.7 - $19
Ozone: $2.6
Total: $9.5 - $20
PM: $7.0 - $17
Ozone: $2.6

Schwartz, 2005
Total: $10 - $22
PM: $7.7 - $19
Ozone: $2.7
Total: $9.6 - $20
PM: $7.0 - $17
Ozone: $2.7
Meta-analyses
Bell et al., 2005
Total: $13 - $24
PM: $7.7 - $19
Ozone: $5.5
Total: $12 - $23
PM: $7.0 - $17
Ozone: $5.5

Ito et al., 2005
Total: $15 - $26
PM: $7.7 - $19
Ozone: $7.5
Total: $15 - $25
PM: $7.0 - $17
Ozone: $7.5

Levy et al., 2005
Total: $15 - $27
PM: $7.7 - $19
Ozone: $7.7
Total: $15 - $25
PM: $7.0 - $17
Ozone: $7.7
a Benefits presented in this table include California emission reductions from the LEV III program. Had we modeled the California LEV III emission impacts in the Tier 3 air quality baseline, we estimate that benefits would decrease by approximately 12-16 percent, depending on the particular health impact functions used to characterize both PM- and ozone-related premature mortality. We will account for emissions in states that have adopted California's LEV III program in the baseline air quality modeling for the final rule.
b Total includes premature mortality-related and morbidity-related ozone and PM2.5 benefits.  Range was developed by adding the estimate from the ozone premature mortality function to the estimate of PM2.5-related premature mortality derived from either the ACS study (Pope et al., 2002) or the Six-Cities study (Laden et al., 2006).
c Note that total benefits presented here do not include a number of unquantified benefits categories.  A detailed listing of unquantified health and welfare effects is provided in Table VIII-2.
d Results reflect the use of both a 3 and 7 percent discount rate, as recommended by EPA's Guidelines for Preparing Economic Analyses and OMB Circular A-4.  Results are rounded to two significant digits for ease of presentation and computation.  Totals may not sum due to rounding.
The benefits in Table VIII-1 include all of the human health impacts we are able to quantify and monetize at this time.  However, the full complement of human health and welfare effects associated with PM and ozone remain unquantified because of current limitations in methods and/or available data.  We have not quantified a number of known or suspected health effects linked with ozone and PM for which appropriate health impact functions are not available or which do not provide easily interpretable outcomes (e.g., changes in heart rate variability).  Additionally, we are unable to quantify a number of known welfare effects, including reduced acid and particulate deposition damage to cultural monuments and other materials, and environmental benefits due to reductions of impacts of eutrophication in coastal areas.  These are listed in Table VIII-2.  As a result, the health benefits quantified in this section are likely underestimates of the total benefits attributable to the proposed standards.
Table VIII-2 Unquantified and Non-Monetized Potential Effects
Pollutant/Effects
Effects Not Included in Analysis - Changes in:
Ozone Healtha
Chronic respiratory damage[b]
Premature aging of the lungs[b]
Non-asthma respiratory emergency room visits
Exposure to UVb (+/-)e
Ozone Welfare
Yields for
-commercial forests
-some fruits and vegetables
-non-commercial crops
Damage to urban ornamental plants
Impacts on recreational demand from damaged forest aesthetics
Ecosystem functions
Exposure to UVb (+/-)[e]
PM Healthc
Premature mortality - short term exposuresd
Low birth weight
Pulmonary function
Chronic respiratory diseases other than chronic bronchitis
Non-asthma respiratory emergency room visits
Exposure to UVb (+/-)[e]
PM Welfare
Residential and recreational visibility in non-Class I areas
Soiling and materials damage
Damage to ecosystem functions
Exposure to UVb (+/-)[e]
Nitrogen and Sulfate Deposition Welfare
Commercial forests due to acidic sulfate and nitrate deposition
Commercial freshwater fishing due to acidic deposition
Recreation in terrestrial ecosystems due to acidic deposition
Existence values for currently healthy ecosystems
Commercial fishing, agriculture, and forests due to nitrogen deposition
Recreation in estuarine ecosystems due to nitrogen deposition
Ecosystem functions
Passive fertilization
CO Health
Behavioral effects
HC/Toxics Healthf
Cancer (benzene, 1,3-butadiene, formaldehyde, acetaldehyde)
Anemia (benzene)
Disruption of production of blood components (benzene)
Reduction in the number of blood platelets (benzene)
Excessive bone marrow formation (benzene)
Depression of lymphocyte counts (benzene)
Reproductive and developmental effects (1,3-butadiene)
Irritation of eyes and mucus membranes (formaldehyde)
Respiratory irritation (formaldehyde)
Asthma attacks in asthmatics (formaldehyde)
Asthma-like symptoms in non-asthmatics (formaldehyde)
Irritation of the eyes, skin, and respiratory tract (acetaldehyde)
Upper respiratory tract irritation and congestion (acrolein)
HC/Toxics Welfare
Direct toxic effects to animals
Bioaccumulation in the food chain
Damage to ecosystem function
Odor
a The public health impact of biological responses such as increased airway responsiveness to stimuli, inflammation in the lung, acute inflammation and respiratory cell damage, and increased susceptibility to respiratory infection are likely partially represented by our quantified endpoints.
[b] The public health impact of effects such as chronic respiratory damage and premature aging of the lungs may be partially represented by quantified endpoints such as hospital admissions or premature mortality, but a number of other related health impacts, such as doctor visits and decreased athletic performance, remain unquantified.
c In addition to primary economic endpoints, there are a number of biological responses that have been associated with PM health effects including morphological changes and altered host defense mechanisms.  The public health impact of these biological responses may be partly represented by our quantified endpoints.
d While some of the effects of short-term exposures are likely to be captured in the estimates, there may be premature mortality due to short-term exposure to PM not captured in the cohort studies used in this analysis.  However, the PM mortality results derived from the expert elicitation do take into account premature mortality effects of short term exposures.
e May result in benefits or disbenefits.
f Many of the key hydrocarbons related to this action are also hazardous air pollutants listed in the CAA.
While there would be impacts associated with air toxic pollutant emission changes that result from the proposed standards, we do not attempt to monetize those impacts (Section III presents the estimated emission reductions associated with the proposal).  This is primarily because currently available tools and methods to assess air toxics risk from mobile sources at the national scale are not adequate for extrapolation to incidence estimations or benefits assessment.  The best suite of tools and methods currently available for assessment at the national scale are those used in the National-Scale Air Toxics Assessment (NATA).  The EPA Science Advisory Board specifically commented in their review of the 1996 NATA that these tools were not yet ready for use in a national-scale benefits analysis, because they did not consider the full distribution of exposure and risk, or address sub-chronic health effects.  While EPA has since improved these tools, there remain critical limitations for estimating incidence and assessing benefits of reducing mobile source air toxics.
As part of the second prospective analysis of the benefits and costs of the Clean Air Act, EPA conducted a case study analysis of the health effects associated with reducing exposure to benzene in Houston from implementation of the Clean Air Act.  While reviewing the draft report, EPA's Advisory Council on Clean Air Compliance Analysis concluded that "the challenges for assessing progress in health improvement as a result of reductions in emissions of hazardous air pollutants (HAPs) are daunting...due to a lack of exposure-response functions, uncertainties in emissions inventories and background levels, the difficulty of extrapolating risk estimates to low doses and the challenges of tracking health progress for diseases, such as cancer, that have long latency periods." EPA continues to work to address these limitations; however, we did not have the methods and tools available for national-scale application in time for the analysis of the proposed standards.
Quantified Human Health Impacts
Table VIII-3 and Table VIII-4 present the core estimates of annual PM2.5 and ozone health impacts, respectively, in the 48 contiguous U.S. states associated with the proposed standards for 2030.  For each endpoint presented in Table VIII-3 and Table VIII-4, we provide both the mean estimate and the 90 percent confidence interval.
Using EPA's preferred estimates, based on the American Cancer Society (ACS) and Six-Cities studies and no threshold assumption in the model of mortality, we estimate that the proposed standards would result in between 800 and 2,100 cases of avoided PM2.5-related premature mortalities annually in 2030.  A sensitivity analysis was also conducted to understand the impact of alternative concentration response functions suggested by experts in the field.  When the range of expert opinion is used, we estimate between 270 and 2,700 fewer premature mortalities in 2030 (see Table 8.8 in the RIA that accompanies this action).  For ozone-related premature mortality in 2030, we estimate a range of between 170 to 770 fewer premature mortalities.
Table VIII-3 Estimated PM2.5-Related Health Impacts[a],b
Health Effect
                      2030 Annual Reduction in Incidence
                             (5[th]% - 95[th]%ile)
Premature Mortality  -  Derived from epidemiology literature[c]
  Adult, age 30+, ACS Cohort Study (Pope et al., 2002)

  Adult, age 25+, Six-Cities Study (Laden et al., 2006)

  Infant, age <1 year (Woodruff et al., 1997)

                                      800
                                (310  -  1,300)
                                     2,100
                               (1,100  -  3,000)
                                       3
                                   (0  -  8)
Chronic bronchitis (adult, age 26 and over)
                                      560
                                (100  -  1,000)
Non-fatal myocardial infarction (adult, age 18 and over)
                                      980
                                (360  -  1,600)
Hospital admissions - respiratory (all ages)[d]
                                      160
                                 (77  -  230)
Hospital admissions - cardiovascular (adults, age >18)[e]
                                      380
                                 (270  -  440)
Emergency room visits for asthma (age 18 years and younger)
                                      600
                                 (350  -  850)
Acute bronchitis, (children, age 8-12)
                                     1,300
                                 (0  -  2,500)
Lower respiratory symptoms (children, age 7-14)
                                    16,000
                              (7,700  -  24,000)
Upper respiratory symptoms (asthmatic children, age 9-18)
                                    12,000
                              (3,800  -  20,000)
Asthma exacerbation (asthmatic children, age 6-18)
                                    27,000
                              (3,000  -  74,000)
Work loss days
                                    100,000
                             (88,000  -  110,000)
Minor restricted activity days (adults age 18-65)
                                    600,000
                             (500,000  -  690,000)
   a Benefits presented in this table include California emission reductions from the LEV III program. We will account for emissions in states that have adopted California's LEV III program in the baseline air quality modeling for the final rule.
   [b] Incidence is rounded to two significant digits. Estimates represent incidence within the 48 contiguous United States.
   [c] PM-related adult mortality based upon the American Cancer Society (ACS) Cohort Study (Pope et al., 2002) and the Six-Cities Study (Laden et al., 2006).  Note that these are two alternative estimates of adult mortality and should not be summed.  PM-related infant mortality based upon a study by Woodruff, Grillo, and Schoendorf, (1997).
   [d] Respiratory hospital admissions for PM include admissions for chronic obstructive pulmonary disease (COPD), pneumonia and asthma.
   [e] Cardiovascular hospital admissions for PM include total cardiovascular and subcategories for ischemic heart disease, dysrhythmias, and heart failure.

Table VIII-4 Estimated Ozone-Related Health Impacts[a],b
Health Effect
                      2030 Annual Reduction in Incidence
                               (5th% - 95th%ile)
Premature Mortality, All ages[c]
Multi-City Analyses
  Bell et al. (2004)  -  Non-accidental

  Huang et al. (2005)  -  Cardiopulmonary

  Schwartz (2005)  -  Non-accidental

Meta-analyses:
  Bell et al. (2005)  -  All cause

  Ito et al. (2005)  -  Non-accidental

  Levy et al. (2005)  -  All cause

                                      170
                                 (73  -  260)
                                      250
                                 (120  -  380)
                                      260
                                 (110  -  410)

                                      540
                                 (300  -  780)
                                      750
                                (500  -  1,000)
                                      770
                                 (560  -  970)
Hospital admissions- respiratory causes (adult, 65 and older)[d]
                                     1,200
                                (160  -  2,200)
Hospital admissions -respiratory causes (children, under 2)
                                      550
                                 (290  -  810)
Emergency room visit for asthma (all ages)
                                      580
                                 (0  -  1,500)
Minor restricted activity days (adults, age 18-65)
                                    970,000
                            (490,000  -  1,500,000)
School absence days
                                    350,000
                             (150,000  -  490,000)
    a Benefits presented in this table include California emission reductions from the LEV III program. We will account for emissions in states that have adopted California's LEV III program in the baseline air quality modeling for the final rule.
    [b] Incidence is rounded to two significant digits. Estimates represent incidence within the 48 contiguous U.S.
    [c] Estimates of ozone-related premature mortality are based upon incidence estimates derived from several alternative studies: Bell et al. (2004); Huang et al. (2005); Schwartz (2005) ; Bell et al. (2005); Ito et al. (2005); Levy et al. (2005).  The estimates of ozone-related premature mortality should therefore not be summed.
    [d] Respiratory hospital admissions for ozone include admissions for all respiratory causes and subcategories for COPD and pneumonia.
Monetized Benefits
Table VIII-5 presents the estimated monetary value of changes in the incidence of ozone and PM2.5-related health effects.  All monetized estimates are stated in 2010$.  These estimates account for growth in real gross domestic product (GDP) per capita between the present and 2030.  Our estimate of total monetized benefits in 2030 for the program, using the ACS and Six-Cities PM mortality studies and the range of ozone mortality assumptions, is $9.5 and $27 billion, assuming a 3 percent discount rate, or between $8.7 and $25 billion, assuming a 7 percent discount rate.  This represents the health benefits of the Tier 3 program anticipated to occur annually when the program is fully implemented and most of the fleet turned over.
Table VIII-5 Estimated Monetary Value of Changes in Incidence of Health and Welfare Effects in 2030 (Millions of 2010$) [a,b]
HEALTH ENDPOINTS
                                     2030
                             (5 AND 95 PERCENTILE)
PM2.5-Related Health Effects
Premature Mortality  -  Derived from Epidemiology Studiesc,d

Adult, age 30+ - ACS study
(Pope et al., 2002)
          3% discount rate

          7% discount rate

                                    $7,200
                              ($920  -  $18,000)
                                    $6,500
                               ($830 - $17,000)

Adult, age 25+ - Six-Cities study (Laden et al., 2006)
          3% discount rate

          7% discount rate

                                    $18,000
                              ($2,600 - $45,000)
                                    $17,000
                              ($2,300 - $41,000)

Infant Mortality, <1 year  -  (Woodruff et al. 1997)
                                      $27
                                  ($0 - $100)
Chronic bronchitis (adults, 26 and over)
                                     $310
                                ($25 - $1,000)
Non-fatal acute myocardial infarctions
          3% discount rate

          7% discount rate

                                     $110
                                 ($24 - $260)
                                      $90
                                 ($19 - $210)
Hospital admissions for respiratory causes
                                     $2.5
                                ($1.2  -  $3.6)
Hospital admissions for cardiovascular causes
                                     $5.5
                                 ($1.2 - $10)
Emergency room visits for asthma
                                     $0.24
                                ($0.13 - $0.36)
Acute bronchitis (children, age 8 - 12)
                                     $0.61
                                ($0.00 - $1.5)
Lower respiratory symptoms (children, 7 - 14)
                                     $0.34
                                ($0.13 - $0.63)
Upper respiratory symptoms (asthma, 9 - 11)
                                     $0.40
                                ($0.12 - $0.89)
Asthma exacerbations
                                     $1.6
                                ($0.17 - $4.4)
Work loss days
                                      $16
                                  ($14 - $19)
Minor restricted-activity days (MRADs)
                                      $41
                                  ($24 - $59)
Ozone-Related Health Effects
Premature Mortality, All ages  -
Derived from Multi-city analyses
Bell et al., 2004
                                    $1,700
                                ($220 - $4,200)

Huang et al., 2005
                                    $2,500
                                ($340 - $6,200)

Schwartz, 2005
                                    $2,600
                                ($330 - $6,500)
Premature Mortality, All ages  -
Derived from Meta-analyses
Bell et al., 2005
                                    $5,400
                               ($760 - $13,000)

Ito et al., 2005
                                    $7,400
                              ($1,100 - $18,000)

Levy et al., 2005
                                    $7,600
                              ($1,100 - $18,000)
Hospital admissions- respiratory causes (adult, 65 and older)
                                      $32
                                 ($4.2 - $56)
Hospital admissions- respiratory causes (children, under 2)
                                     $6.0
                                 ($3.1 - $8.9)
Emergency room visit for asthma (all ages)
                                     $0.23
                                ($0.0 - $0.57)
Minor restricted activity days (adults, age 18-65)
                                      $67
                                 ($31 - $110)
School absence days
                                      $34
                                  ($15 - $48)
a Benefits presented in this table include California emission reductions from the LEV III program. We will account for emissions in states that have adopted California's LEV III program in the baseline air quality modeling for the final rule.
b Monetary benefits are rounded to two significant digits for ease of presentation and computation.  PM and ozone benefits are nationwide.
c Monetary benefits adjusted to account for growth in real GDP per capita between 1990 and the analysis year (2030).
d Valuation assumes discounting over the SAB recommended 20 year segmented lag structure.  Results reflect the use of 3 percent and 7 percent discount rates consistent with EPA and OMB guidelines for preparing economic analyses.

What are the Limitations of the Benefits Analysis?
Every benefit-cost analysis examining the potential effects of a change in environmental protection requirements is limited to some extent by data gaps, limitations in model capabilities (such as geographic coverage), and uncertainties in the underlying scientific and economic studies used to configure the benefit and cost models.  Limitations of the scientific literature often result in the inability to estimate quantitative changes in health and environmental effects, such as potential decreases in premature mortality associated with decreased exposure to carbon monoxide.  Deficiencies in the economics literature often result in the inability to assign economic values even to those health and environmental outcomes which can be quantified. These general uncertainties in the underlying scientific and economics literature, which can lead to valuations that are higher or lower, are discussed in detail in the draft RIA and its supporting references.  Key uncertainties that have a bearing on the results of the benefit-cost analysis of the proposed standards include the following:
The exclusion of potentially significant and unquantified benefit categories (such as health, odor, and ecological benefits of reduction in air toxics, ozone, and PM);
Errors in measurement and projection for variables such as population growth;
Uncertainties in the estimation of future year emissions inventories and air quality (including future year climate uncertainty);
Uncertainty in the estimated relationships of health and welfare effects to changes in pollutant concentrations including the shape of the concentration-response function, the size of the effect estimates, and the relative toxicity of the many components of the PM mixture;
Uncertainties in exposure estimation; and
Uncertainties associated with the effect of potential future actions to limit emissions.
As Table VIII-5 indicates, total benefits are driven primarily by the reduction in premature mortalities each year.  Some key assumptions underlying the premature mortality estimates include the following, which may also contribute to uncertainty:
Inhalation of fine particles is causally associated with premature death at concentrations near those experienced by most Americans on a daily basis.  Although biological mechanisms for this effect have not yet been completely established, the weight of the available epidemiological, toxicological, and experimental evidence supports an assumption of causality.  The impacts of including a probabilistic representation of causality were explored in the expert elicitation-based results of the PM NAAQS RIA.
All fine particles, regardless of their chemical composition, are equally potent in causing premature mortality.  This is an important assumption, because PM produced via transported precursors emitted from vehicle engines may differ significantly from PM precursors released from electric generating units and other industrial sources.  However, no clear scientific grounds exist for supporting differential effects estimates by particle type.
The C-R function for fine particles is approximately linear within the range of ambient concentrations under consideration.  Thus, the estimates include health benefits from reducing fine particles in areas with varied concentrations of PM, including both regions that may be in attainment with PM2.5 standards and those that are at risk of not meeting the standards.
There is uncertainty in the magnitude of the association between ozone and premature mortality.  The range of ozone benefits associated with the coordinated strategy is estimated based on the risk of several sources of ozone-related mortality effect estimates.  In a report on the estimation of ozone-related premature mortality published by the National Research Council, a panel of experts and reviewers concluded that short-term exposure to ambient ozone is likely to contribute to premature deaths and that ozone-related mortality should be included in estimates of the health benefits of reducing ozone exposure.  EPA has requested advice from the National Academy of Sciences on how best to quantify uncertainty in the relationship between ozone exposure and premature mortality in the context of quantifying benefits.
Despite the uncertainties described above, we believe this analysis provides a conservative estimate of the estimated criteria pollutant-related health and environmental benefits of the standards in future years because of the exclusion of potentially significant benefit categories that are not quantifiable at this time.  Acknowledging benefits omissions and uncertainties, we present a best estimate of the total benefits based on our interpretation of the best available scientific literature and methods supported by EPA's technical peer review panel, the Science Advisory Board's Health Effects Subcommittee (SAB-HES).  The National Academies of Science (NRC, 2002) has also reviewed EPA's methodology for analyzing the health benefits of measures taken to reduce air pollution.  EPA addressed many of these comments in the analysis of the final PM NAAQS.[,]  This analysis incorporates this work to the extent possible.
Illustrative Analysis of Monetized Impacts Associated with the Proposal in 2017
For illustrative purposes, this section presents the total estimated monetized benefits associated with the proposed standards in 2017.  As presented in Section III.B, the emissions impacts of the proposed standards in 2017 are primarily due to the effects of sulfur on the existing (pre-Tier 3) fleet.  For reasons explained in Chapter <IP_ADDRESS>.2 of the draft RIA, our analysis of the air quality impacts in 2017 reflects an increase in direct PM emissions from vehicles (along with reductions in NOX, VOCs and other pollutants).  This emissions increase results from a series of conservative assumptions and uncertainties related to fuel parameters in 2017, and is not expected to occur in reality.  Because our air quality modeling assumes this increase, as well as increased direct PM emissions due to an emissions processing error (see Chapter <IP_ADDRESS>.2 of the draft RIA), our illustrative benefits analysis in 2017 overestimates ambient concentrations of PM2.5 and underestimates the benefits of the proposed Tier 3 standards.
Table VIII-6 presents total aggregate monetized benefits of the program in 2017, which includes the modeled direct PM increase described above.  Monetized estimates are presented in 2010$.  Our estimate of total monetized benefits associated with the proposed standards in 2017, using the ACS and Six-Cities PM mortality studies and the range of ozone mortality assumptions, is between $1.0 and $3.4 billion, assuming a 3 percent discount rate, or between $1.0 and $3.3 billion, assuming a 7 percent discount rate.  Had our ambient air quality modeling of PM2.5 not included the increase in direct PM emissions, we estimate that benefits would increase by a range of $400 to $970 million (assuming a 3 percent discount rate) or increase by a range of $360 to $880 million (assuming a 7 percent discount rate), using current EPA benefit-per-ton estimates for direct PM.
For a more detailed presentation of the quantified and monetized impacts of the proposal in 2017, please refer to Chapter 8 of the RIA that accompanies this preamble.
Table VIII-6 Total Monetized Ozone and PM-related Benefits Associated with the Proposed Program in 2017
Total Ozone and PM Benefits (billions, 2010$)  -
           PM Mortality Derived from the ACS and Six-Cities Studies
3% Discount Rate
7% Discount Rate
Ozone Mortality Function
Reference
Mean Total Benefits
Ozone Mortality Function
Reference
Mean Total Benefits
Multi-city
Bell et al., 2004
$1.0 - $1.8
Multi-city
Bell et al., 2004
$0.96 - $1.7

Huang et al., 2005
$1.2 - $1.9

Huang et al., 2005
$1.2 - $1.9

Schwartz, 2005
$1.3 - $2.0

Schwartz, 2005
$1.2 - $1.9
Meta-analysis
Bell et al., 2005
$2.1 - $2.8
Meta-analysis
Bell et al., 2005
$2.0 - $2.7

Ito et al.,
2005
$2.6 - $3.4

Ito et al.,
2005
$2.6 - $3.3

Levy et al., 2005
$2.7 - $3.4

Levy et al., 2005
$2.6 - $3.3
Total Ozone and PM Benefits (billions, 2010$)  -
PM Mortality Derived from Expert Elicitation (Lowest and Highest Estimate)
3% Discount Rate
7% Discount Rate
Ozone Mortality Function
Reference
Mean Total Benefits
Ozone Mortality Function
Reference
Mean Total Benefits
Multi-city
Bell et al., 2004
$0.68 - $3.8
Multi-city
Bell et al., 2004
$0.67 - $2.0

Huang et al., 2005
$0.89 - $2.4

Huang et al., 2005
$0.87 - $2.2

Schwartz, 2005
$0.93 - $2.4

Schwartz, 2005
$0.91 - $2.3
Meta-analysis
Bell et al., 2005
$1.7 - $3.2
Meta-analysis
Bell et al., 2005
$1.7 - $3.1

Ito et al.,
2005
$2.3 - $3.8

Ito et al.,
2005
$2.3 - $3.6

Levy et al., 2005
$2.3 - $3.8

Levy et al., 2005
$2.3 - $3.7

Alternatives Analysis
As described throughout this preamble, we have considered a number of regulatory alternatives in the development of this proposal, including alternatives related to timing and stringency of the proposed standards, as well as program design (e.g., averaging, banking, and trading).  This section summarizes the alternatives considered for both vehicle emission and fuel standards.
Vehicle Emission Standards
The federal vehicle emission standards we are proposing are the most stringent feasible considering anticipated developments in motor vehicle emissions control technology.  As we considered options for these vehicle standards, one of the important factors we considered was harmonization with the CARB LEV III program.  As a result, consideration of alternatives focused less on the level of the per-vehicle standards themselves and more on the phase-in schedule for the standards, which can have an important influence on the cost of the standards.  Phase-in schedules directly impact costs depending on how they are aligned with other light-duty rules and product design cycles.  In addition, phase-in schedules can impact the cost of available resources, specifically design, development and testing resources within vehicle manufacturers and emission control suppliers.
Shorter NMOG+NOX Standard Phase-in
We originally considered requiring full implementation of the final NMOG+NOX final fleet average standard by MY 2022.  However, we determined that this would have disrupted the manufacturer's normal product design cycles, and it would not have allowed manufacturers to use a consistent product design cycle for both the Tier 3 standards and the 2017 LD GHG standards, which reach full implementation in MY 2025.   We are proposing to extend the phase-in schedule to MY 2025 in order to allow vehicle manufacturers to better integrate the compliance with Tier 3 into their product design cycles, as well as take advantage of additional learning to reduce costs.  We believe this implementation schedule for the Tier 3 NMOG+NOX standards would allow us to achieve the environmental objectives without imposing unnecessary cost and burden on the industry.
Longer NMOG+NOX Standards Phase-in Due to Early Credits
In an effort to facilitate the step-down in fleet average stringency in the initial model years of the Tier 3 program, we considered allowing manufacturers to earn credits against the current Tier 2 Bin 5 fleet average and use earned early credits without any limits for the first five years of the Tier 3 program.  CARB, along with some vehicle manufacturers, noted that if a manufacturer were to substantially over comply with the Tier 2 Bin 5 fleet average, these early credits might not only delay achievement of the Tier 3 emission levels, but also delay harmonization between the Tier 3 and LEV III programs for many years.  To address this potential misalignment, we are proposing that the application of the early credits be capped starting in MY 2018 at a manufacturer's LEV III credits adjusted by the ratio of California and Section 177 state sales to federal sales.  (See Section IV.A.7.a for more details.)  This proposed approach would balance the need for some transition flexibility to avoid unnecessary costs, while still ensuring expeditious harmonization with LEV III and achievement of the environmental benefits of the Tier 3 standards.
Shorter PM Standards Phase-in
As we considered potential PM phase-in schedules, we gave strong consideration to manufacturers' PM testing capabilities and product design cycles.  We considered requiring manufacturers to certify 25 percent of their fleet to the Tier 3 PM standards in MY 2017, ramping up to 100 percent by MY 2020.  We initially believed that this schedule would allow manufacturers to focus engineering resources on ensuring their new products meet the proposed Tier 3 standards while other product lines, which we expect would be phased out due to the 2017 LD GHG standards, expire.  However, based on further discussions with the vehicle manufacturers, we recognized that they need time to improve and expand their facilities to measure PM, not only for compliance determination but also for product development work prior to production.  As a result, we are proposing a phase-in schedule for meeting the proposed Tier 3 PM standards that starts with 20 percent of the vehicles at or below 6000 lbs GVWR in MY 2017 and ramps up to 100 percent of the light-duty fleet in MY 2021.  As with the NMOG+ NOX phase-in discussed above, we believe this proposed phase-in schedule for the Tier 3 PM standards would allow us to achieve the environmental objectives without imposing unnecessary cost and burden on the industry.
NMOG+NOX Standards
We believe that the fleet-average NMOG+NOX standards that we are proposing reflect the greatest degree of emission reduction achievable considering cost and technology, assuming that gasoline sulfur levels are reduced to the proposed 10-ppm average.  We also believe the proposed implementation schedule for the NMOG+ NOX standards is as short as practicable, as explained above.  As a result, we believe more stringent standards would not be justified based on the information currently available to EPA.   Therefore, given our goal to harmonize our program with CARB's at the 30 mg/mi level, we did not conduct any detailed analysis of a less stringent fleet average standard.  Based on the work done to quantify the impacts of the 30 mg/mi standard, however, we can say that a fleet-average standard of 50 mg/mi of NMOG+NOX would result in NMOG+NOX emissions in 2030 that are about 100,000 tons higher than the standards we are proposing.  While costs would be lower because the emissions controls discussed in Section VII.A would be applied at a lower rate, such a standard would also not be harmonized with CARB LEV III standards.
PM Standards
The FTP PM standards that we are proposing are the most stringent technically feasible standards within the implementation timeframe of this proposal.  Although CARB has finalized a 1 mg/mi standard which will begin phasing in with MY 2025, they acknowledge that there is a need for continuing PM measurement method development prior to implementing this standard.  The EPA believes that in order to propose a federal PM standard at this level, there should be established methods to reliably and consistently measure PM at levels at and below that standard that would be needed for ensuring compliance.
Fuel Sulfur Standards
As explained in Section V.A.2., we believe that a 10-ppm annual average standard is sufficient to enable the vehicle fleet to meet the proposed Tier 3 standards and appropriately balances feasibility with costs.  Other countries and California have also reduced the sulfur content of their gasoline; California's gasoline is already meeting our proposed 10-ppm average sulfur level, and Europe and Japan have a cap on the sulfur content of gasoline at 10 ppm.  Because vehicle emission performance improves as sulfur is reduced, we considered imposing a 10-ppm cap (i.e., no averaging, banking and trading), as well as lowering gasoline sulfur content below the 10-ppm average (see Section V.A.6).
We considered expressing the standard as a cap similar to the standard in Europe and Japan.  However, by allowing averaging to meet 10 ppm, we believe that the most challenged refiners would be able to avoid what could be cost-prohibitive investments, while still meeting 10 ppm across the fuel pool.  As discussed in Section VII.B., we estimate that allowing averaging would reduce nationwide control costs by nearly 10 percent, and would still be sufficient to enable vehicles to meet the proposed Tier 3 standards.
We also considered an even lower sulfur standard of 5 ppm.  Based upon the results of our test programs and associated modeling, a sulfur standard of 5 ppm could reduce VOC+NOX emissions from the existing fleet by an additional 80,000 tons in 2017.
However, we believe a 5 ppm standard would significantly increase both capital and operating costs.  Such a standard would require:  (1) more severe treatment of FCC gasoline; (2) more overcapacity and storage for reprocessing of off-specification product; (3) treatment of additional (non-FCC) gasoline blendstocks; (4) essentially all refineries to reduce sulfur to 5 ppm, thereby eliminating much of the benefit of the ABT provisions, and (5) controlling the contribution to gasoline sulfur from gasoline additives, transmix, ethanol denaturants, and contamination in the distribution system.
In our analysis of the 10-ppm average standard and refineries that might reduce sulfur to 5 ppm in order to generate credits, we estimated that the sulfur control costs to achieve 5 ppm would be more than 50 percent greater than for our proposed 10-ppm standard.  This is more than twice as high on a cost per ppm-gallon basis. Additionally, as explained earlier, a 5 ppm standard would likely result in the elimination of the ability for refineries to trade credits.  Without a viable trading program it could become prohibitively expensive for the more challenged refineries to comply, creating a financial hardship situation. Because the costs and other economic impacts rise dramatically as sulfur is reduced below 10 ppm, we believe that a 10-ppm sulfur standard is the most stringent feasible standard considering technology and cost.
In addition to lower average sulfur standards, we are also considering lower per-gallon cap standards, which are currently set under the Tier 2 program at 80 ppm sulfur at the refinery gate and 95 ppm sulfur downstream.  As discussed in Section V.A.3., in addition to proposing that these cap standards be maintained, we are co-proposing lowering them to 50 ppm and 65 ppm respectively.  Given the stringency of the 10-ppm average standard, we do not anticipate that this would have a meaningful impact on either program costs or emission reductions.  However, it would provide added assurance that individual vehicles would not be exposed to higher sulfur levels and the resulting impacts on emissions.  Vehicle manufacturers have expressed concern that such exposure could impact not only individual vehicle emissions, but also vehicle operation, due to interference with sensors and feedback controls.  To further address concerns of vehicle manufacturers, we are also requesting comment on the potential implementation of a refinery gate sulfur cap as low as 20 ppm and a downstream sulfur cap as low as 25 ppm.  This would further constrain downstream contamination and limit the temporary exposure of vehicles in-use to sulfur levels that would significantly degrade their emission performance.
Economic Impact Analysis
Introduction
The proposed rule would affect two sectors directly: vehicle manufacturing and petroleum refining.  For these two regulated sectors, the economic impact analysis discusses the market impacts from the proposed rule, the changes in price and quantity sold.  In addition, although analysis of employment impacts is not part of a benefit-cost analysis (except to the extent that labor costs contribute to costs), employment impacts of federal rules are of particular concern in the current economic climate of sizeable unemployment.  The recently issued Executive Order 13563, "Improving Regulation and Regulatory Review" (January 18, 2011), states, "Our regulatory system must protect public health, welfare, safety, and our environment while promoting economic growth, innovation, competitiveness, and job creation" (emphasis added).  For this reason, we are examining the effects of this proposal on employment in the regulated sectors.
Vehicle Sales Impacts
This rule takes effect from MY 2017-2025.  In the intervening years, it is possible that the assumptions underlying a quantitative analysis, as well as market conditions, might change.  For this reason, we present a qualitative discussion of the effects on vehicle sales of the proposed standards at the aggregate market level.  Vehicle manufacturers are expected to comply with the proposed standards primarily through technological changes to vehicles.  These changes to vehicle design and manufacturing are expected to increase manufacturers' costs of vehicle production.
Section VII.A estimates the increase in vehicle costs due to the proposed standards.  These costs differ across years and range from $71 to $102 for cars, $93 to $150 for trucks and $36 to $59 for Class 2b/3 vehicles (see Section VII.A).  These costs are small relative to the cost of a vehicle.  In a fully competitive industry, these costs would be entirely passed through to consumers.  However in an oligopolistic industry such as the automotive sector, these increases in cost may not fully pass through to the purchase price, and the consumers may face an increase in price that is less than the increased manufacturers' costs of vehicle production.  We do not quantify the expected level of cost pass-through or the ultimate vehicle price increase consumers are expected to face, apart from noting that prices are expected to increase by an amount up to the increased manufacturers' costs.
This increase in price is expected to lower the quantity of vehicles sold.  Given that we expect that vehicle prices will not change by more than the cost increase, we expect that the decrease in vehicle sales will be negligible.
The effect of this rule on the use and scrappage of older vehicles would be related to its effects on new vehicle prices and the total sales of new vehicles.  The increase in price is likely to cause the "turnover" of the vehicle fleet (i.e., the retirement of used vehicles and their replacement by new models) to slow slightly, thus reducing the anticipated effect of the rule on fleet-wide emissions.  Because we do not estimate the effect of the rule on new vehicle price changes nor do we have a good estimate of the effect of new vehicle price changes on vehicle turnover, we have not attempted to estimate explicitly the effects of the rule on scrappage of older vehicles and the turnover of the vehicle fleet.
Impacts on Petroleum Refinery Sector Production
The key change for refiners from the proposed standards would be more stringent sulfur requirements.  This change to fuels is expected to increase manufacturers' costs of gasoline production by about 0.9 cents per gallon (see Section VII.B).
In a perfectly competitive industry, this cost would be passed along completely to consumers.  In an imperfectly competitive industry, as noted above, full cost pass-through is not necessary:  firms may choose to reduce impacts on sales by not passing along full costs.  In 2004, the Federal Trade Commission reported that "concentration for most levels of the petroleum industry has remained low to moderate."  Thus the assumption of competitive markets has some foundation in this industry.  We do not estimate the price increase that consumers are likely to face, though we note that it should be positive and up to the increase in manufacturers' costs of gasoline production.
The effect of higher gasoline prices on gasoline sales is expected to be different over the short and long term.  In the long run, in response to the increase in fuel costs, consumers can more easily change their driving habits, including where they live or what vehicles they use.  Because of this, we expect that gasoline sales will decrease more in the long run compared to the short run as a result of the price increase due to the proposed rule.  However, because manufacturers' costs are expected to increase less than one cent per gallon, we expect that the decrease in gasoline sales will be negligible over all time horizons.
Employment Impacts
This section discusses changes in employment due to the proposed rule.  We focus on the auto manufacturing sector and the refinery sector because they are directly regulated, and because they are likely to bear a substantial share of changes in employment due to this proposed rule.  We partially quantify impacts in the auto sector, providing a mix of qualitative and quantitative discussion, following the methods used in the Final Rulemaking for 2017 - 2025 Model Year Light-Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy Standards.  For the refinery sector we provide a qualitative analysis.  We also include discussion of effects on the motor vehicle parts manufacturing sector because the auto manufacturing sector can either produce parts internally or buy them from an external supplier, and we do not have estimates of the likely breakdown of effort between the two sectors.  For the same reasons, we discuss effects on producers of equipment that refiners would use to comply with the proposed standards.
When the economy is at full employment, an environmental regulation is unlikely to have much impact on net overall U.S. employment; instead, labor would primarily be shifted from one sector to another. These shifts in employment impose an opportunity cost on society, approximated by the wages of the employees, as regulation diverts workers from other activities in the economy.   In this situation, any effects on net employment are likely to be transitory as workers change jobs (e.g., some workers may need to be retrained or require time to search for new jobs, while shortages in some sectors or regions could bid up wages to attract workers).
On the other hand, if a regulation comes into effect during a period of high unemployment, a change in labor demand due to regulation may affect net overall U.S. employment because the labor market is not in equilibrium. Schmalansee and Stavins point out that net positive employment effects are possible in the near term when the economy is at less than full employment due to the potential hiring of idle labor resources by the regulated sector to meet new requirements (e.g., to install new equipment) and new economic activity in sectors related to the regulated sector.  In the longer run, the net effect on employment is more difficult to predict and will depend on the way in which the related industries respond to the regulatory requirements. As Schmalansee and Stavins note, it is possible that the magnitude of the effect on employment could vary over time, region, and sector, and positive effects on employment in some regions or sectors could be offset by negative effects in other regions or sectors.  For this reason, they urge caution in reporting partial employment effects since it can "paint an inaccurate picture of net employment impacts if not placed in the broader economic context."
We follow the theoretical structure proposed in a study by Morgenstern, Pizer, and Shih (2002) of the impacts of regulation in employment in the regulated sectors.  In particular, Morgenstern et al. (2002) identify three separate ways that employment levels may change in the regulated industry in response to a new or more stringent regulation.
Demand effect:  higher production costs due to the regulation will lead to higher market prices; higher prices in turn reduce demand for the good, reducing the demand for labor to make that good.  In the authors' words, the "extent of this effect depends on the cost increase passed on to consumers as well as the demand elasticity of industry output."
Cost effect:  as costs go up, plants add more capital and labor (holding other factors constant), with potentially positive effects on employment; in the authors' words, as "production costs rise, more inputs, including labor, are used to produce the same amount of output."
Factor-shift effect:  post-regulation production technologies may be more or less labor-intensive (i.e., more/less labor is required per dollar of output).  In the authors' words, "environmental activities may be more labor intensive than conventional production," meaning that "the amount of labor per dollar of output will rise," though it is also possible that "cleaner operations could involve automation and less employment, for example."
The authors note that the demand effect is expected to have a negative effect on employment, the cost effect to have a positive effect on employment, and the factor-shift effect to have an ambiguous effect on employment.
Morgenstern et al. (2002) estimated the effects on employment of spending on pollution abatement for four highly polluting/regulated industries (pulp and paper, plastics, steel, and petroleum refining) using data for six years between 1979 and 1991.  They concluded that increased abatement expenditures generally have not caused a significant change in employment in those sectors. More specifically, their results showed that, on average across the industries studied, each additional $1 million (1987$) spent on pollution abatement resulted in a (statistically insignificant) net increase of 1.5 jobs.  In the petroleum refining industry in particular, they found statistically significant and positive cost and factor shift effects and an insignificant demand effect, for a net (statistically significant) increase of 2.17 jobs per $1 million (1987$).
Employment Impacts in the Auto Sector
Following the Morgenstern et al. (2002) framework, we consider three effects for the auto sector:  the demand effect, the cost effect, and the factor shift effect.
The Demand Effect
The demand effect depends on the effects of this proposal on vehicle sales.  If vehicle sales decrease, employment associated with these activities would decrease.  As discussed in Section X.B, we do not make a quantitative estimate on the effect of the proposed rule on vehicle sales but we note that the decrease in vehicle sales is expected to be negligible.  Thus we expect any decrease in employment in the auto sector through the demand effect to be small as well.
The Cost Effect
The demand effect, above, measures the effect due to new vehicle sales only.  The cost effect measures the impacts due to the changes in technologies for vehicles that would have been sold in the absence of the rule.  We estimate the cost effect by multiplying the ratio of workers to each $1 million of expenditures in the auto sector by the cost estimates for complying with the rule.
Some of the costs of this proposal would be spent directly in the auto manufacturing sector, but it is also likely that some of the costs would be spent in the auto parts manufacturing sector.  We separately present the ratios for both the auto manufacturing sector and the auto parts manufacturing sector.
There are several public sources for estimates of employment per $1 million expenditures.  The U.S. Bureau of Labor Statistics (BLS) provides its Employment Requirements Matrix (ERM), which provides direct estimates of the employment per $1 million in sales of goods in 202 sectors.  The values considered here are for Motor Vehicle Manufacturing (NAICS 3361) and Motor Vehicle Parts Manufacturing (NAICS 3363).
The Census Bureau provides both the Annual Survey of Manufactures (ASM) and the Economic Census.  The ASM is a subset of the Economic Census, based on a sample of establishments; though the Census itself is more complete, it is conducted only every 5 years, while the ASM is annual.  Both include more sectoral detail than the BLS ERM:  for instance, while the ERM includes the Motor Vehicle Manufacturing sector, the ASM and Economic Census have detail at the 6-digit NAICS code level (e.g., light truck and utility vehicle manufacturing).  While the ERM provides direct estimates of employees/$1 million in expenditures, the ASM and Economic Census separately provide number of employees and value of shipments; the direct employment estimates here are the ratio of those values.  The values reported are for Motor Vehicle Manufacturing (NAICS 3361), Automobile and Light Duty Motor Vehicle Manufacturing (NAICS 33611), and Motor Vehicle Parts Manufacturing (NAICS 3363).
For the cost effect, we use estimates from the Bureau of Labor Statistics and the Census Bureau of the number of workers per $1 million of expenditures in the sectors.  The use of these ratios has both advantages and limitations.  It is often possible to estimate these ratios for quite specific sectors of the economy:  for instance, it is possible to estimate the average number of workers in the light-duty vehicle manufacturing sector per $1 million spent in the sector, rather than use the ratio from another, more aggregated sector, such as motor vehicle manufacturing.  As a result, it is not necessary to extrapolate employment ratios from possibly unrelated sectors.  On the other hand, these estimates are averages for the sectors, covering all the activities in those sectors; they may not be representative of the labor required when expenditures are required on specific activities, as the factor-shift effect indicates.  For instance, the ratio for the motor vehicle manufacturing sector represents the ratio for all vehicle manufacturing, not just for emissions reductions.  In addition, these estimates do not include changes in sectors that supply these sectors, such as steel or electronics producers.  They thus may best be viewed as the effects on employment in the specific sectors due to the changes in expenditures in those sectors, rather than as an assessment of all employment changes due to these changes in expenditures.
The values used here are adjusted to remove the employment effects of imports through use of a ratio of domestic production to domestic sales of 0.667.  As discussed in the draft RIA, trends in the BLS ERM are used to estimate productivity improvements over time that are used to adjust these ratios over time.
Table X-1 provides estimates of the cost effect of this rule on employment.  Chapter 2.1 of the draft RIA discusses the vehicle cost estimates developed for this rule, discussed in Section VII.A, presented in the second column.  The maximum value for employment impacts per $1 million (before adjustments for changes in productivity, after accounting for the share of domestic production) is 1.809 if all the additional costs are in the parts sector; the minimum value is 0.402, if all the additional costs are in the light-duty vehicle manufacturing sector.    Increased costs of vehicles and parts would, by itself, be expected to increase employment between 2017 and 2025 by somewhere between a few hundred to a few thousand jobs.
While we estimate employment impacts, measured in job-years, beginning with program implementation, some of these employment gains may occur earlier as auto manufacturers and parts suppliers hire staff in anticipation of compliance with the standard.  A job-year is a way to calculate the amount of work needed to complete a specific task.  For example, a job-year is one year of work for one person.
Table X-1  Employment Effects due to Increased Costs of Vehicles and Parts, in job-years
YEAR
                           COSTS (MILLIONS OF 2010$)
    MAXIMUM EMPLOYMENT EFFECT (IF ALL EXPENDITURES ARE IN THE PARTS SECTOR)
MINIMUM EMPLOYMENT EFFECT (IF ALL EXPENDITURES ARE IN THE LIGHT DUTY VEHICLE MFG SECTOR)
2016
                                 $          23
                                       0
                                       0
2017
                                 $        709
                                    + 900
                                     +200
2018
                                  $     1,340
                                    +1,700
                                     +400
2019
                                  $     1,440
                                    +1,800
                                     +400
2020
                                  $     1,600
                                    +1,900
                                     +400
2021
                                  $     1,730
                                    +2,000
                                     +400
2022
                                  $     1,900
                                    +2,100
                                     +400
2023
                                  $     1,920
                                    +2,000
                                     +400
2024
                                  $     2,040
                                    +2,100
                                     +400
2025
                                  $     2,130
                                    +2,100
                                     +400
The Factor Shift Effect
The factor shift effect looks at the changes in labor intensity associated with a regulation.  As noted above, the estimates of the cost effect assume constant labor per $1 million in expenditures, though the new technologies may be either more or less labor-intensive than the existing ones.  We have no evidence on the factor shift effect for the compliance technologies and therefore do not quantify it.  An estimate of the factor shift effect would either increase or decrease the estimate used for the cost effect.
Summary of Employment Effects in the Auto Sector