Clarifying that the exemption expires when the equipment
manufacturer takes possession of the engine, but not before it reaches
the point of final assembly
     Clarifying the prohibition related to following
installation instructions to ensure that engines will be in their
certified configuration when installed in a piece of equipment.
    We believe all these amendments are straightforward adjustments
that are appropriate for maintaining a program that allows for
appropriate oversight and implementation.

G. Amendments Related to Stationary Spark-Ignition Engines (40 CFR Part
60)

    On June 12, 2006 we proposed emission standards for stationary
spark-ignition engines (71 FR 33804). The June 2006 proposal specified
that stationary spark-ignition engines at or below 19 kW would be
subject to all the same emission standards and certification
requirements that apply to Small SI engines. If we would include the
new Phase 3 standards for Small SI engines in 40 CFR part 90, these
requirements would apply automatically to those stationary engines.
However, since the Phase 3 standards will be in 40 CFR part 1054, as
described in Section V, we are proposing to revise the regulatory
language for stationary spark-ignition engines in 40 CFR part 60,
subpart JJJJ, to directly reference the Phase 3 standards part 1054.

XII. Projected Impacts

A. Emissions from Small Nonroad and Marine Spark-Ignition Engines

    As discussed in previous sections, this proposal will reduce
exhaust emissions from specific sizes of nonhandheld Small SI and
Marine SI engines. It will also reduce evaporative emissions from the
fuel systems used on nonhandheld and handheld Small SI equipment and
Marine SI vessels (for simplicity we collectively include the
evaporative emission requirements from equipment or vessels when
referring to Small SI or Marine SI engines in the remainder of this
section). The proposed exhaust and evaporative emission standards will
directly affect volatile organic hydrocarbon compounds (VOC), oxides of
nitrogen (NOX), and to a lesser extent carbon monoxide (CO).
Also, we anticipate that the emission control technology which is
likely to be used to meet the exhaust emission standards will affect
directly emitted particulate matter, most importantly particles with
diameters of 2.5 micrometers or less (PM2.5). It will also
incrementally reduce air toxic emissions. A detailed analysis of the
effects of this proposal on emissions and emission inventories can be
found in Chapter 3 of the Draft RIA.
    The contribution of exhaust and evaporative emissions from Small SI
and Marine SI engines to total 50-state emission inventories is
significant and will remain so into the future. Table XII-1 presents
the nationwide inventory for these engines for both 2001 and 2020. (The
inventories cover all Small SI and Marine SI engines including the
portion of Small SI engines regulated by the California ARB.) Table
XII-1 shows that for the primary pollutants affected by this proposal,
these engines contribute about 25 to 30 percent of the nationwide VOC
emissions from all mobile sources. The nationwide contribution to the
total mobile source NOX inventory is about 5 percent or
less. Finally, for PM2.5, the contribution ranges from about
25 to 30 percent.

 Table XII-1.--Contribution of Small Nonroad and Marine SI Engines to National (50-State) Mobile Source Emission
                                                   Inventories
----------------------------------------------------------------------------------------------------------------
                                                               2001                            2020
                                                 ---------------------------------------------------------------
                                                     Small SI/                       Small SI/
                    Pollutant                        marine SI      Percent of       marine SI      Percent of
                                                    inventory,     mobile source    inventory,     mobile source
                                                       tons          inventory         tons          inventory
----------------------------------------------------------------------------------------------------------------
VOC.............................................       2,239,056              28       1,351,739              27
NOX.............................................         159,051               1         201,789               4
PM2.5...........................................          42,294               9          39,271              16
CO..............................................      20,867,436              24      16,373,518              31
----------------------------------------------------------------------------------------------------------------

(1) VOC
    Table XII-2 shows the VOC emissions and emission reductions we
expect both with and without the proposed standards for engines,
equipment, and vessels affected by the proposal. In 2001, Small SI and
Marine SI emitted approximately 1,081,000 and 961,000 tons of VOC,
respectively. Without the proposed standards, these emissions will
decrease because of the effect of the existing emission control
requirements to about 1,005,000 and 490,000 tons by 2040, respectively.
With the proposed controls, this pollutant will be further reduced by
34 percent for Small SI engines and 74 percent for Marine SI engines by
2040. The VOC emission inventory trends over time for both categories
of engines that are subject to the proposal are shown in Figure XII-1.

   Table XII-2.--National (50-State) VOC Emissions and Emission Reductions for Small SI and Marine SI Engines
----------------------------------------------------------------------------------------------------------------
                                                      Without      With proposed                      Percent
          Year                   Category          proposed rule       rule          Reduction       reduction
----------------------------------------------------------------------------------------------------------------
2001....................  Small Engine..........       1,080,898       1,080,898
                          Marine................         961,240         961,240
                          Both..................       2,042,138       2,042,138
2015....................  Small Engine..........         708,331         510,617         197,714              28
                          Marine................         513,105         372,020         141,086              27
                          Both..................       1,221,436         882,637         338,799              28
2020....................  Small Engine..........         764,453         508,677         255,776              33
                          Marine................         466,624         232,697         233,927              50
                          Both..................       1,231,078         741,375         489,703              40
2030....................  Small Engine..........         884,188         581,766         302,422              34
                          Marine................         464,490         135,956         328,533              71
                          Both..................       1,348,678         717,723         630,955              47
2040....................  Small Engine..........       1,005,403         659,976         345,427              34
                          Marine................         490,052         127,158         362,893              74
                          Both..................       1,495,455         787,135         708,320              47
----------------------------------------------------------------------------------------------------------------

[GRAPHIC] [TIFF OMITTED] TP18MY07.001

(2) NOX
    Table XII-3 shows the NOX emissions and emission
reductions we expect both with and without the proposed standards for
engines affected by the proposal. In 2001, Small SI and Marine SI
emitted approximately 102,000 and 41,500 tons of NOX,
respectively. Without the proposed standards, these emissions will
increase to about 135,000, and 95,400 tons by 2040, respectively. With
the proposed controls, this pollutant will be reduced by 47 percent for
Small SI engines and 51 percent for Marine SI engines by 2040. The
NOX emission inventory trends over time for both categories
of engines that are subject to the proposal are shown in Figure XII-2.

   Table XII-3.--National (50-State) NOX Emissions and Emission Reductions for Small SI and Marine SI Engines
----------------------------------------------------------------------------------------------------------------
                                                      Without      With proposed                      Percent
          Year                   Category          proposed rule       rule          Reduction       reduction
----------------------------------------------------------------------------------------------------------------
2001....................  Small Engine..........         101,928         101,928
                          Marine................          41,514          41,514
                          Both..................         143,442         143,442
2015....................  Small Engine..........          94,432          58,117          36,315              38
                          Marine................          73,583          59,024          14,558              20
                          Both..................         168,015         117,141          50,874              30
2020....................  Small Engine..........         102,310          55,241          47,069              46
                          Marine................          80,655          55,656          24,999              31
                          Both..................         182,965         110,896          72,069              39
2030....................  Small Engine..........         118,615          62,778          55,837              47
                          Marine................          89,225          46,859          42,366              47
                          Both..................         207,840         109,637          98,203              47
2040....................  Small Engine..........         135,136          71,361          63,775              47
                          Marine................          95,440          46,874          48,567              51
                          Both..................         230,577         118,235         112,342              49
----------------------------------------------------------------------------------------------------------------

[GRAPHIC] [TIFF OMITTED] TP18MY07.002

(3) PM2.5
    Table XII-4 shows the PM2.5 emissions and emission reductions we
expect both with and without the proposed standards for engines
affected by the proposal. In 2001, Small SI and Marine SI emitted
23,200 and 15,600 tons of PM2.5, respectively. Without the proposed
standards, the PM2.5 emissions from Small SI engines will increase to
39,100 by 2040, while those from Marine SI will decrease to about 6,000
tons in that year due to the effects of the existing emission control
requirements for certain types of recreational marine engines, e.g,
outboards. With the proposed controls, this pollutant will be reduced
by 5 percent for Small SI engines and a further 84 percent for Marine
SI engines by 2040. The PM2.5 emission inventory trends over time for
both categories of engines that are subject to the proposal are shown
in Figure XII-3.

  Table XII-4.--National (50-State) PM2.5 Emissions and Emission Reductions for Small SI and Marine SI Engines
----------------------------------------------------------------------------------------------------------------
                                                      Without      With proposed                      Percent
          Year                   Category          proposed rule       rule          Reduction       reduction
----------------------------------------------------------------------------------------------------------------
2001....................  Small Engine..........          23,163          23,163
                          Marine................          15,625          15,625
                          Both..................          38,789          38,789
2015....................  Small Engine..........          27,747          26,647           1,100               4
                          Marine................           6,823           4,666           2,157              32
                          Both..................          34,570          31,313           3,256               9
2020....................  Small Engine..........          30,009          28,574           1,435               5
                          Marine................           5,908           2,448           3,461              59
                          Both..................          35,917          31,022           4,896              14
2030....................  Small Engine..........          34,535          32,849           1,686               5
                          Marine................           5,719           1,107           4,613              81
                          Both..................          40,255          33,956           6,299              16
2040....................  Small Engine..........          39,079          37,153           1,926               5
                          Marine................           6,016             985           5,031              84
                          Both..................          45,095          38,138           6,957              15
----------------------------------------------------------------------------------------------------------------

[GRAPHIC] [TIFF OMITTED] TP18MY07.003

(4) CO
    Table XII.-5 shows the CO emissions and emission reductions we
expect both with and without the proposed standards for engines
affected by the proposal. In 2001, Small SI and Marine SI emitted
16,108,000 and 2,585,000 tons of PM2.5, respectively. Without the
proposed standards, these emissions will increase slightly for Small SI
engines to 16,727,000 and decrease slightly for Marine SI engines to
2,122,000 tons by 2040, respectively. With the proposed controls, this
pollutant will be reduced by 16 percent for Small SI engines and a
further 22 percent for Marine SI engines by 2040. The CO emission
inventory trends over time for both categories of engines that are
subject to the proposal are shown in Figure XII-4.

    Table XII-5.--National (50-State) CO Emissions and Emission Reductions for Small SI and Marine SI Engines
----------------------------------------------------------------------------------------------------------------
                                                      Without      With proposed                      Percent
          Year                   Category          proposed rule       rule          Reduction       reduction
----------------------------------------------------------------------------------------------------------------
2001....................  Small Engine..........      16,108,103      16,108,103  ..............  ..............
                          Marine................       2,584,786       2,584,786  ..............  ..............
                          Both..................      18,692,890      18,692,890  ..............  ..............
2015....................  Small Engine..........      11,797,078      10,317,051       1,480,027              13
                          Marine................       2,031,684       1,883,241         148,443               7
                          Both..................      13,828,762      12,200,291       1,628,471              12
2020....................  Small Engine..........      12,712,775      10,782,258       1,930,518              15
                          Marine................       1,968,663       1,718,956         249,707              13
                          Both..................      14,681,439      12,501,214       2,180,225              15
2030....................  Small Engine..........      14,700,521      12,411,661       2,288,860              16
                          Marine................       2,009,248       1,607,678         401,570              20
                          Both..................      16,709,768      14,019,339       2,690,429              16
2040....................  Small Engine..........      16,726,708      14,113,517       2,613,191              16
                          Marine................       2,122,336       1,665,392         456,943              22
                          Both..................      18,849,044      15,778,910       3,070,134              16
----------------------------------------------------------------------------------------------------------------

[GRAPHIC] [TIFF OMITTED] TP18MY07.004

B. Estimated Costs

    In assessing the economic impact of setting emission standards, we
have made a best estimate of the costs associated with the technologies
we anticipate manufacturers will use in meeting the standards. In
making our estimates for the proposed rule, we have relied on our own
technology assessment, which includes information developed by EPA's
National Vehicle and Fuel Emissions Laboratory (NVFEL). Estimated costs
include variable costs (e.g. hardware and assembly time) and fixed
costs (e.g. research and development, retooling, engine certification
and test cell upgrades to 40 CFR 1065 requirements). We projected that
manufacturers will recover the fixed costs over five years of
production and used an amortization rate of 7 percent in our analysis.
The analysis also considers total operating costs, including
maintenance and fuel consumption. Cost estimates based on the projected
technologies represent an expected change in the cost of engines as
they begin to comply with new emission standards. All costs are
presented in 2005 dollars. Full details of our cost analysis can be
found in Chapter 6 of the Draft RIA. Estimated costs related to exhaust
emissions were also subject to peer review, as described in a set of
peer review reports that are available in the docket for this
rulemaking.
    Cost estimates based on the current projected costs for our
estimated technology packages represent an expected incremental cost of
equipment in the near term. For the longer term we have identified
factors that would cause cost impacts to decrease over time. First, as
noted above, we project that manufacturers will spread their fixed
costs over the first five years of production. After the fifth year of
production, we project that the fixed costs would be retired and the
unit costs could be reduced as a result.
    The cost analysis considers both long-term and short-term costs. We
expect that over time, manufacturers will undergo a learning process
that will lead to lower variable costs. For instance, the analysis
incorporates the expectation that Small SI engine manufacturers will
optimize the catalyst muffler offerings available and thereby
streamline their production and reduce costs. The cost analysis
generally incorporates this learning effect by decreasing estimated
variable costs by 20 percent starting in the sixth year of production.
Long-term impacts on costs are expected to decrease as manufacturers
fully amortize their fixed costs and learn to optimize their designs
and production processes to meet the standards more efficiently. The
learning curve has not been applied to Small SI EFI systems due to the
fact that the technologies are currently well established on similar
sized engines in other applications.
    We project average costs to comply with the proposed exhaust
emission standards for Small SI engines and equipment to range from $9-
$15 per Class I equipment to meet the Phase 3 standards. We anticipate
the manufacturers will meet the emission standard with several
technologies including engine improvements and catalysts. For Class II
equipment, we project average costs to range from $22-$47 per equipment
to meet the proposed emission standards. We anticipate the
manufacturers of Class II engines would meet the proposed exhaust
emission standards by engine improvements and adding catalysts and/or
electronic fuel injection to their engines.
    For Small SI equipment, we have also estimated a per-unit cost for
the proposed evaporative emission standards. The average short-term
costs without fuel savings are projected to be $0.82 for handheld
equipment, $3.16 for Class I equipment, and $6.90 for Class II
equipment. These costs are based on fuel tank and fuel line permeation
control, and for non-handheld equipment, running loss and diffusion

control. Because evaporative emissions are composed of otherwise usable
fuel that is lost to the atmosphere, measures that reduce evaporative
emissions will result in fuel savings. We estimate that the average
fuel savings, due to permeation control, be about 1.2 gallons over the
5-year average operating lifetime. This translates to a discounted
lifetime savings of more than $2 at an average fuel price of $1.81 per
gallon.
    For marine engines, we estimated per-engine costs for OB, PWC, and
SD/I engines for meeting the proposed exhaust emission standards. The
short-term cost estimates without fuel savings are $280 for OB, $360
for PWC, and $360 for SD/I engines. For OB/PWC engines, we anticipate
that manufacturers would meet the standards through the expanded
production of existing low-emission technologies such as four-stroke
and direct-injection two-stroke engines. For SD/I engines, we
anticipate that manufacturers would use catalytic control to meet the
proposed standards.
    For marine vessels, we have also estimated a per-unit cost for the
proposed evaporative emission standards. The average short-term costs
without fuel savings are projected to be $12 for boats with portable
fuel tanks, $17 for PWC, and $74 for boats with installed fuel tanks.
These costs are based on fuel tank and fuel line permeation control and
diurnal emission control. For portable fuel tanks, diurnal emission
control is based on an automatic sealing vent, for PWC we estimate that
changes will not be necessary from current designs, and for other boats
with installed fuel tanks, the estimated costs are based on the use of
a passively-purged carbon canister. Because evaporative emissions are
composed of otherwise usable fuel that is lost to the atmosphere,
measures that reduce evaporative emissions will result in fuel savings.
We estimate that the average fuel savings, due to permeation control,
be about 31 gallons over the 15-year average operating lifetime. This
translates to a discounted lifetime savings of about $36 at an average
fuel price of $1.81 per gallon.

C. Cost per Ton

    We have calculated the cost per ton of the Phase 3 standards
contained in this proposal by estimating costs and emission benefits
for these engines. We made our best estimates of the combination of
technologies that engine manufacturers might use to meet the new
standards, best estimates of resultant changes to equipment design,
engine manufacturer compliance program costs, and fuel savings in order
to assess the expected economic impact of the proposed Phase 3 emission
standards for Small SI engines and Marine SI engines. Emission
reduction benefits are taken from the results of the Inventory chapter
of the RIA (Chapter 3).
    A summary of the annualized costs to Small SI and Marine SI engine
manufacturers is presented in Table XII-6. These annualized costs are
over a 30-year period and presented both with a 3-percent and a 7-
percent discount rate. The annualized fuel savings for Small SI engines
are due to reduced fuel costs from the use of electronic fuel injection
on Class II engines as well as fuel savings from evaporative measures
on all Small SI engines. The annualized fuel savings for Marine SI
engines are due to reduced fuel costs from the expected elimination of
2-stroke outboard motors from the new engine fleet as well as fuel
savings from evaporative emission controls on all vessels.

  Table XII-6.--Estimated Annualized Cost to Manufacturers and Annualized Fuel Savings over 30 Years Due to the
                                 Phase 3 Small SI and Marine SI Engine Standards
                                     [2005$, 3 and 7 percent discount rates]
----------------------------------------------------------------------------------------------------------------
                                                                 Annualized cost to      Annualized fuel savings
                                                               manufactuers (millions/        (millions/yr)
           Engine category              Emissions category               yr)           -------------------------
                                                             --------------------------
                                                                   3%           7%           3%           7%
----------------------------------------------------------------------------------------------------------------
Small SI Engines....................  Exhaust...............         $281         $267          $71          $63
                                      Evaporative...........           70           67           58           52
                                      Aggregate.............          350          334          129          114
Marine SI Engines...................  Exhaust...............          134          141           76           67
                                      Evaporative...........           26           26           29           25
                                      Aggregate.............          160          167          105           92
----------------------------------------------------------------------------------------------------------------

    We have estimated the Small SI and Marine SI engine cost per ton of
the Phase 3 HC+NOX standards over the typical lifetime of
the equipment that are covered by this proposal. We have examined the
cost per ton by performing a nationwide cost per ton analysis in which
the net present value of the cost of compliance per year is divided by
the net present value of the HC+NOX benefits over 30 years.
The resultant discounted cost per ton is presented in Table XII-7. The
total (exhaust and evaporative) cost per ton, using a 7 percent
discount rate, with fuel savings is $950 for Small SI equipment and
$350 for marine vessels. For the proposal as a whole, the cost per ton
of HC+NOX reduction is $660. Reduced operating costs offset
a portion of the increased cost of producing the cleaner Small SI and
Marine SI engines. Reduced fuel consumption also offsets the costs of
permeation control. Chapter 7 of the RIA contains a more detailed
discussion of the cost per ton analysis.

                      Table XII-7.--Estimated Cost Per Ton of the HC+NOX Emission Standards
                                     [2005$, 3 and 7 percent discount rates]
----------------------------------------------------------------------------------------------------------------
                                                                                Discounted cost per ton
                                                                                -------------------------------
                            Category                              Implementation   Without fuel      With fuel
                                                                       dates       savings  (3%/   savings  (3%/
                                                                                7%)             7%)
----------------------------------------------------------------------------------------------------------------
Small SI Exhaust................................................       2011-2012     $1700/$1860     $1270/$1420

Small SI Evaporative............................................       2008-2013         720/770         120/170
Marine SI Exhaust...............................................       2009-2013         690/820         300/430
Marine SI Evaporative...........................................       2009-2012         530/630         (70)/35
Aggregate.......................................................       2008-2013        660/1120         226/660
----------------------------------------------------------------------------------------------------------------

    As is discussed above, we are also expecting some reduction in
direct PM emissions and carbon monoxide. These reductions will come
primarily as product of the technology being used to meet HC and
NOX standards and not directly as a result of the
implementation of specific technology to achieve these gains. Thus, we
have elected to focus our cost per ton analysis on HC+NOX.
    One useful purpose of cost per ton analysis is to compare this
program to other programs designed to achieve similar air quality
objectives. Toward that end, we made a comparison between the
HC+NOX cost per ton values presented in Table C-2 and the
HC+NOX cost per ton of other recent mobile source programs.
Table XII-8 summarizes the HC+NOX cost per ton of several
recent EPA actions for controlled emissions from mobile sources. While
the analyses for each rule were not completely identical, it is clear
that the Small SI and Marine SI values compare favorably with the other
recent actions.

   Table XII-8.--Cost Per Ton of Previously Implemented HC+NOX Mobile
                             Source Programs
              [2005$, 7 percent discount with fuel savings]
------------------------------------------------------------------------
                                                            Discounted
                         Program                           cost per ton
------------------------------------------------------------------------
2002 HH engines Phase 2.................................             840
2001 NHH engines Phase 2................................           * neg
1998 Marine SI engines..................................            1900
2004 Comm Marine CI.....................................             200
2007 Large SI exhaust...................................              80
2006 ATV exhaust........................................             300
2006 Off-highway motorcycle.............................             290
2006 Recreational marine CI.............................             700
2010 Snowmobile.........................................            1430
2006 < 50cc highway motorcycle...........................            1860
2010 Class 3 highway motorcycle.........................            1650
------------------------------------------------------------------------
* Fuel savings outweigh engineering/hardware costs.

D. Air Quality Impact

    Information on the air quality impacts of this proposed action can
be found in Section II of this preamble. Section II includes health
effect information on ozone, PM, CO and air toxics. It also includes
modeled projections of future ozone concentrations with and without the
controls detailed in this proposal. The proposed emission reductions
would lead to reductions in ambient concentrations of ozone, PM, CO and
air toxics.

E. Benefits

    This section presents our analysis of the health and environmental
benefits that can be expected to occur as a result of the proposed
Small SI and Marine SI engine standards throughout the period from
initial implementation through 2030. Nationwide, the engines that are
subject to the proposed emission standards in this rule are a
significant source of mobile source air pollution. The proposed
standards would reduce exposure to hydrocarbon, CO and NOX
emissions and help avoid a range of adverse health effects associated
with ambient ozone and PM2.5 levels. In addition, the
proposed standards would help reduce exposure to CO, air toxics, and
PM2.5 for persons who operate or who work with or are
otherwise active in close proximity to these engines.
    EPA typically quantifies PM- and ozone-related benefits in its
regulatory impact analyses (RIAs) when possible. In the analysis of
past air quality regulations, ozone-related benefits have included
morbidity endpoints and welfare effects such as damage to commercial
crops. EPA has not recently included a separate and additive mortality
effect for ozone, independent of the effect associated with fine
particulate matter. For a number of reasons, including (1) Advice from
the Science Advisory Board (SAB) Health and Ecological Effects
Subcommittee (HEES) that EPA consider the plausibility and viability of
including an estimate of premature mortality associated with short-term
ozone exposure in its benefits analyses and (2) conclusions regarding
the scientific support for such relationships in EPA's 2006 Air Quality
Criteria for Ozone and Related Photochemical Oxidants (the CD), EPA is
in the process of determining how to appropriately characterize ozone-
related mortality benefits within the context of benefits analyses for
air quality regulations. As part of this process, we are seeking advice
from the National Academy of Sciences (NAS) regarding how the ozone-
mortality literature should be used to quantify the reduction in
premature mortality due to diminished exposure to ozone, the amount of
life expectancy to be added and the

monetary value of this increased life expectancy in the context of
health benefits analyses associated with regulatory assessments. In
addition, the agency has sought advice on characterizing and
communicating the uncertainty associated with each of these aspects in
health benefit analyses.
    Since the NAS effort is not expected to conclude until 2008, the
agency is currently deliberating how best to characterize ozone-related
mortality benefits in its rulemaking analyses in the interim. For the
analysis of the proposed standards, we do not quantify an ozone
mortality benefit. So that we do not provide an incomplete picture of
all of the benefits associated with reductions in emissions of ozone
precursors, we have chosen not to include an estimate of total ozone
benefits in the proposed RIA. By omitting ozone benefits in this
proposal, we acknowledge that this analysis underestimates the benefits
associated with the proposed standards. Our analysis, however,
indicates that the rule's monetized PM2.5 benefits alone
substantially exceed our estimate of the costs.
    The PM2.5 benefits are scaled based on relative changes
in PM2.5 precursor emissions (direct PM and NOX)
between this rule and the proposed Clean Air Nonroad Diesel (CAND)
rule. As explained in Section 8.2.1 of the RIA for this rule, the
PM2.5 benefits scaling approach is limited to those studies,
health impacts, and assumptions that were used in the proposed CAND
analysis. As a result, PM-related premature mortality is based on the
updated analysis of the American Cancer Society cohort (ACS; Pope et
al., 2002).\107\ However, it is important to note that since the CAND
rule, EPA's Office of Air and Radiation (OAR) has adopted a different
format for its benefits analyses in which characterization of the
uncertainty in the concentration-response function is integrated into
the main benefits analysis. This new approach follows the
recommendation of NRC's 2002 report ``Estimating the Public Health
Benefits of Proposed Air Pollution Regulations'' to begin moving the
assessment of uncertainties from its ancillary analyses into its main
benefits presentation through the conduct of probabilistic
analyses.\108\ Within this context, additional data sources are
available, including a recent expert elicitation and updated analysis
of the Six-Cities Study cohort (Laden et al., 2006).\109\ Please see
the PM NAAQS RIA for an indication of the sensitivity of our results to
use of alternative concentration-response functions. The
PM2.5-related benefits associated with the proposed
standards are presented in table XII-9.
---------------------------------------------------------------------------

    \107\ Pope, C.A., III, R.T. Burnett, M.J. Thun, E.E. Calle, D.
Krewski, K. Ito, and G.D. Thurston. 2002. ``Lung Cancer,
Cardiopulmonary Mortality, and Long-term Exposure to Fine
Particulate Air Pollution.'' Journal of the American Medical
Association 287:1132-1141.
    \108\ National Research Council (NRC). 2002. Estimating the
Public Health Benefits of Proposed Air Pollution Regulations.
Washington, DC: The National Academies Press.
    \109\ Laden, F., J. Schwartz, F.E. Speizer, and D.W. Dockery.
2006. Reduction in Fine Particulate Air Pollution and Mortality.
American Journal of Respiratory and Critical Care Medicine. 173:
667-672.
---------------------------------------------------------------------------

    It should be noted that since the CAND rule, EPA's Office of Air
and Radiation (OAR) has adopted a different format for its benefits
analysis in which characterization of uncertainty is integrated into
the main benefits analysis. The benefits scaling approach used in the
analysis of the proposed standards limits our ability to integrate
uncertainty into the main analysis. For the benefits analysis of the
final standards, we will adopt this integrated uncertainty approach.
Please see the PM NAAQS RIA for an indication of the uncertainty
present in the base estimate of benefits and the sensitivity of our
results to the use of alternative concentration-response functions.

   Table XII-9.--Estimated Monetized PM-Related Health Benefits of the
                           Proposed Standards
------------------------------------------------------------------------
                                              Total Benefits a, b, c
                                                 (billions 2005$)
                                         -------------------------------
                                               2020            2030
------------------------------------------------------------------------
Using a 3% discount rate................        $2.1 + B        $3.4 + B
Using a 7% discount rate................        $1.9 + B       $3.1 + B
------------------------------------------------------------------------
\a\ Benefits include avoided cases of mortality, chronic illness, and
  other morbidity health endpoints. PM-related mortality benefits
  estimated using an assumed PM threshold at background levels (3 [mu]g/
  m3). There is uncertainty about which assumed threshold to use and
  this may impact the magnitude of the total benefits estimate. For a
  more detailed discussion of this issue, please refer to Section
  <IP_ADDRESS> of the RIA.
\b\ For notational purposes, unquantified benefits are indicated with a
  ``B'' to represent the sum of additional monetary benefits and
  disbenefits. A detailed listing of unquantified health and welfare
  effects is provided in Table XII-12.
\c\ Results reflect the use of two different discount rates: 3 and 7
  percent, which are recommended by EPA's Guidelines for Preparing
  Economic Analyses\110\ and OMB Circular A-4.\111\ Results are rounded
  to two significant digits for ease of presentation and computation.

(1) Quantified Human Health and Environmental Effects of the Proposed
Standards
---------------------------------------------------------------------------

    \110\ U.S. Environmental Protection Agency. September 2000.
Guidelines for Preparing Economic Analyses. EPA 240-R-00-003.
    \111\ U.S. Office of Management and Budget (OMB). 2003. Circular
A-4 Guidance for Federal Agencies Preparing Regulatory Analyses,
Available at: http://www/whitehouse.gov/omb/inforeg/iraguide.html.

Accessed December 15, 2005.
---------------------------------------------------------------------------

    In this section we discuss the PM2.5 benefits of the
proposed standards. To estimate PM2.5 benefits, we rely on a
benefits transfer technique. The benefits transfer approach uses as its
foundation the relationship between reductions in precursors to
PM2.5 (NOX and direct PM2.5 emissions)
and ambient PM2.5 concentrations modeled across the
contiguous 48 states (and DC) for the Clean Air Nonroad Diesel (CAND)
proposal.\112\ For a given future year, we first calculate the ratio
between CAND direct PM2.5 emission reductions and direct
PM2.5 emission reductions associated with the proposed
control standards (proposed emission reductions/CAND emission
reductions). We calculate a similar ratio for NOX. We then
multiply these ratios by the percent that direct PM2.5 and
NOX emissions, respectively, contribute towards population-
weighted reductions in ambient PM2.5 due to the CAND
standards. This calculation results in a ``benefits apportionment
factor'' for the relationship between direct PM emissions and ambient
PM2.5 and NOX emissions and ambient
PM2.5, which are then applied to the incidence and monetized
benefits from the CAND proposal. In this way, we apportion the results
of the proposed CAND analysis to its underlying PM precursor emission
reductions and scale the apportioned

benefits to reflect differences in emission reductions between the two
rules.\113\ This benefits transfer method is consistent with the
approach used in other recent mobile and stationary source rules.\114\
---------------------------------------------------------------------------

    \112\ See 68 FR 28327, May 23, 2003.
    \113\ Note that while the proposed regulations control
hydrocarbons (VOCs), which contribute to PM formation, the benefits
transfer scaling approach only scales benefits based on
NOX, SO2, and direct PM emission reductions.
PM benefits will likely be underestimated as a result, though we are
unable to estimate the magnitude of the underestimation. Note also
that PM-related mortality benefits estimated for the CAND analysis
used an assumed PM threshold at background levels (3 [mu]g/
m3). There is uncertainty about which threshold to use
and this may impact the magnitude of the total benefits estimate.
For a more detailed discussion of this issue, please refer to
Chapter 8.2 of the RIA.
    \114\ See: Mobile Source Air Toxics proposed rule (71 FR 15803,
March 29, 2006); Clean Air Nonroad Diesel final rule (69 FR 38958,
June 29, 2004); Nonroad Large Spark-Ignition Engines and
Recreational Engines standards (67 FR 68241, November 8, 2002);
Final Industrial Boilers and Process Heaters NESHAP (69 FR 55217,
September 13, 2004); Final Reciprocating Internal Combustion Engines
NESHAP (69 FR 33473, June 15, 2004); Final Clean Air Visibility Rule
(EPA-452/R-05-004, June 15, 2005); Ozone Implementation Rule
(documentation forthcoming).
---------------------------------------------------------------------------

    Table XII-10 presents the primary estimates of reduced incidence of
PM-related health effects for the years 2020 and 2030 for the proposed
emission control strategy.\115\ In 2030, we estimate that PM-related
annual benefits include approximately 450 fewer premature fatalities,
290 fewer cases of chronic bronchitis, 800 fewer non-fatal heart
attacks, 460 fewer hospitalizations (for respiratory and cardiovascular
disease combined), 310,000 days of restricted activity due to
respiratory illness and approximately 52,000 fewer work-loss days. We
also estimate substantial health improvements for children from reduced
upper and lower respiratory illness, acute bronchitis, and asthma
attacks.
---------------------------------------------------------------------------

    \115\ The ``primary estimate'' refers to the estimate of
benefits that reflects the suite of endpoints and assumptions that
EPA believes yields the expected value of air quality improvements
related to the proposed standards. The impact that alternative
endpoints and assumptions have on the benefit estimates are explored
in appendixes to the RIA.

    Table XII-10.--Estimated Annual Reductions in Incidence of Health
                                Effects a
------------------------------------------------------------------------
                                            2020 annual     2030 annual
              Health effect                  incidence       incidence
                                             reduction       reduction
------------------------------------------------------------------------
PM-Related Endpoints:
    Premature Mortality \b\--
    Adult, age 30 and over plus Infant,              290             450
     age <  1 year.......................
    Chronic bronchitis (adult, age 26                200             290
     and over)..........................
    Non-fatal myocardial infarction                  490             800
     (adult, age 18 and over)...........
    Hospital admissions--respiratory                 160             270
     (all ages) \c\.....................
    Hospital admissions--cardiovascular              130             200
     (adults, age > 18) \d\.............
    Emergency room visits for asthma                 210             310
     (age 18 years and younger).........
    Acute bronchitis, (children, age 8-              470             700
     12)................................
    Lower respiratory symptoms                     5,600           8,300
     (children, age 7-14)...............
    Upper respiratory symptoms                     4,300           6,300
     (asthmatic children, age 9-18).....
    Asthma exacerbation (asthmatic                 7,000          10,000
     children, age 6-18)................
    Work loss days......................          38,000          52,000
    Minor restricted activity days               220,000         310,000
     (adults age 18-65).................
------------------------------------------------------------------------
\a\ Incidence is rounded to two significant digits. The PM estimates
  represent benefits from the proposed rule nationwide. The ozone
  estimates only represent benefits from the Eastern 37 states and DC,
  though the program is national in scope.
\b\ PM-related adult mortality based upon studies by Pope, et al
  2002.\116\ PM-related infant mortality based upon studies by Woodruff,
  Grillo, and Schoendorf,1997.\117\
\c\ Respiratory hospital admissions for PM include admissions for
  chronic obstructive pulmonary disease (COPD), pneumonia and asthma.
\d\ Cardiovascular hospital admissions for PM include total
  cardiovascular and subcategories for ischemic heart disease,
  dysrhythmias, and heart failure.

(2) Monetized Benefits
    Table XII-11 presents the estimated monetary value of reductions in
the incidence of health and welfare effects. Annual PM-related health
benefits are approximately $3.4 billion in 2030, assuming a 3 percent
discount rate (or $3.1 billion assuming a 7 percent discount rate). All
monetized estimates are stated in 2005 dollars. These estimates account
for growth in real gross domestic product (GDP) per capita between the
present and the years 2020 and 2030. As the table indicates, total
benefits are driven primarily by the reduction in premature fatalities
each year, which accounts for well over 90 percent of total benefits.
---------------------------------------------------------------------------

    \116\ Pope, C.A., III, R.T. Burnett, M.J. Thun, E.E. Calle, D.
Krewski, K. Ito, and G.D. Thurston. 2002. ``Lung Cancer,
Cardiopulmonary Mortality, and Long-term Exposure to Fine
Particulate Air Pollution.'' Journal of American Medical Association
287:1132-1141.
    \117\ Woodruff, T.J., J. Grillo, and K.C. Schoendorf. 1997.
``The Relationship Between Selected Causes of Postneonatal Infant
Mortality and Particulate Infant Mortality and Particulate Air
Pollution in the United States.'' Environmental Health Perspectives
105(6):608-612.
---------------------------------------------------------------------------

    Table XII-11 indicates with a ``B'' those additional health and
environmental benefits of the rule that we were unable to quantify or
monetize. These effects are additive to the estimate of total benefits,
and are related to the following sources:
     There are many human health and welfare effects associated
with ozone, PM, and toxic air pollutant reductions that remain
unquantified because of current limitations in the methods or available
data. A full appreciation of the overall economic consequences of the
proposed standards requires consideration of all benefits and costs
expected to result from the new standards, not just those benefits and
costs which could be expressed here in dollar terms. A listing of the
benefit categories that could not be quantified or monetized in our
benefit estimates are provided in Table XII-12.
     The PM air quality model only captures the benefits of air
quality improvements in the 48 states and DC; PM benefits for Alaska
and Hawaii are not reflected in the estimate of benefits.
---------------------------------------------------------------------------

    \118\ U.S. Environmental Protection Agency, 2000. Guidelines for
Preparing Economic Analyses. http://www.yosemite1.epa.gov/ee/epa/eed/hsf/pages/Guideline.html
.

    \119\ Office of Management and Budget, The Executive Office of
the President, 2003. Circular A-4. http://www.whitehouse.gov/omb/circulars
.

 Table XII-11.--Estimated Annual Monetary Value of Reductions in Incidence of Health and Welfare Effects (2005$)
                                                      a, b
----------------------------------------------------------------------------------------------------------------
                                                                                2020 estimated  2030 estimated
                                                                                value of        value of
               Health effect                              Pollutant                 reductions      reductions
                                                                                (millions)      (millions)
----------------------------------------------------------------------------------------------------------------
PM-Related Premature mortality c, d
    Adult >30 years........................  PM2.5..............................
        3 percent discount rate............  ...................................          $2,000          $3,100
        7 percent discount rate............  ...................................           1,800           2,800
    Child < 1 year..........................  ...................................               5               6
Chronic bronchitis (adults, 26 and over)...  PM2.5..............................              90             140
Non-fatal acute myocardial infarctions
    3 percent discount rate................  ...................................              50              77
    7 percent discount rate................  PM2.5..............................              48              75
Hospital admissions for respiratory causes.  PM2.5..............................             2.9             5.0
Hospital admissions for cardiovascular       PM2.5..............................             3.1             4.7
 causes.
Emergency room visits for asthma...........  PM2.5..............................            0.07            0.11
Acute bronchitis (children, age 8-12)......  PM2.5..............................            0.20            0.30
Lower respiratory symptoms (children, age 7- PM2.5..............................            0.11            0.16
 14).
Upper respiratory symptoms (asthma, age 9-   PM2.5..............................            0.13            0.19
 11).
Asthma exacerbations.......................  PM2.5..............................            0.36            0.54
Work loss days.............................  PM2.5..............................             5.8             7.0
Minor restricted activity days (MRADs).....  PM2.5..............................              14              19
Monetized Total \e\
    Base estimate:
        3 percent discount rate............  PM2.5..............................       2,100 + B       3,400 + B
        7 percent discount rate............  ...................................       1,900 + B      3,100 + B
----------------------------------------------------------------------------------------------------------------
\a\ Incidence is rounded to two significant digits. The PM estimates represent benefits from the proposed rule
  nationwide.
\b\ Monetary benefits adjusted to account for growth in real GDP per capita between 1990 and the analysis year
  (2020 or 2030).
\c\ Valuation of premature mortality based on long-term PM exposure assumes discounting over the SAB recommended
  20 year segmented lag structure described in the Regulatory Impact Analysis for the Final Clean Air Interstate
  Rule (March 2005). Results show 3 percent and 7 percent discount rates consistent with EPA and OMB guidelines
  for preparing economic analyses (US EPA, 2000 and OMB, 2003).118, 119
\d\ Adult mortality based upon the ACS cohort study (Pope et al., 2002). Infant mortality based upon studies by
  Woodruff, Grillo, and Schoendorf, 1997.
\e\ B represents the monetary value of health and welfare benefits not monetized. A detailed listing is provided
  in Table XII-12.

  Table XII-12.--Unquantified and Non-Monetized Effects of the Proposed
          Small Spark Ignition/Recreational Marine Engine Rule
------------------------------------------------------------------------
                                       Effects not included in primary
         Pollutant/effects                 estimates--changes in:
------------------------------------------------------------------------
Ozone Health a....................  Premature mortality: short-term
                                     exposures b.
                                    Hospital admissions: respiratory.
                                    Emergency room visits for asthma.
                                    Minor restricted-activity days.
                                    School loss days.
                                    Asthma attacks.
                                    Cardiovascular emergency room
                                     visits.
                                    Acute respiratory symptoms.
                                    Chronic respiratory damage.
                                    Premature aging of the lungs.
                                    Non-asthma respiratory emergency
                                     room visits.
                                    Increased exposure to UVb.
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.
                                    Increased exposure to UVb.
PM Health c.......................  Premature mortality--short term
                                     exposures d.
                                    Low birth weight.
                                    Pulmonary function.
                                    Chronic respiratory diseases other
                                     than chronic bronchitis.
                                    Non-asthma respiratory emergency
                                     room visits.
                                    Exposure to UVb ()e.
PM Welfare........................  Visibility in Class I areas.
                                    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     Commercial forests due to acidic
 Welfare.                            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 Health f.......................  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 Welfare........................  Direct toxic effects to animals.
                                    Bioaccumulation in the food chain.
                                    Damage to ecosystem function.
                                    Odor.
------------------------------------------------------------------------
a In addition to primary economic endpoints, there are a number of
  biological responses that have been associated with ozone health
  effects including increased airway responsiveness to stimuli,
  inflammation in the lung, acute inflammation and respiratory cell
  damage, and increased susceptibility to respiratory infection. The
  public health impact of these biological responses may be partly
  represented by our quantified endpoints.
b Recent analyses provide evidence that short-term ozone exposure is
  associated with increased premature mortality. As a result, EPA is
  considering how to incorporate ozone mortality benefits into its
  benefits analyses as a separate estimate of the number of premature
  deaths that would be avoided due to reductions in ozone levels.
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 study upon which
  the primary analysis is based.
e May result in benefits or disbenefits.
f Many of the key hydrocarbons related to this rule are also hazardous
  air pollutants listed in the Clean Air Act.

(3) What Are the Significant 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.
Deficiencies in the scientific literature often result in the inability
to estimate quantitative changes in health and environmental effects,
such as potential increases in premature mortality associated with
increased 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 cause the valuations to be higher or lower, are
discussed in detail in the 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 ozone, air toxics, 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, especially regarding the discrepancy
between the modeled and proposed suite of standards and their impact on
emissions inventories;
     Uncertainties associated with the scaling of the PM
results of the modeled benefits analysis to the proposed standards,
especially regarding the assumption of similarity in geographic
distribution between emissions and human populations and years of
analysis;
     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 XII-11 indicates, total benefits are driven primarily by
the reduction in premature fatalities each year. Elaborating on the
list of uncertainties above, some key assumptions underlying the
primary estimate for the premature mortality category include the
following:

     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 recently published PM NAAQS RIA.
Because the analysis of the proposed standards is constrained to the
studies included in the CAND PM benefits scaling approach, we are
unable to conduct the same analysis of expert elicitation-based
mortality incidence for the proposed standards.\120\ However, we
qualitatively describe the expert elicitation-based mortality results
associated with the final PM NAAQS to provide an indication of the
sensitivity of our PM-related premature mortality results to use of
alternative concentration-response functions. We present this
discussion in the RIA.
---------------------------------------------------------------------------

    \120\ The scaling approach relies on the incidence and valuation
estimates derived from the studies available at the time of the CAND
analysis. Incidence estimates and monetized benefits derived from
new information, including mortality derived from the full expert
elicitation, are not available for scaling. Please refer to section
2 of this preamble and Chapter 12 of the RIA for more information
about the benefits scaling approach.
---------------------------------------------------------------------------

     Since the publication of CAIR, a follow up to the Harvard
six-city study on premature mortality was published (Laden et al., 2006
based on Dockery et al., 1993),121 122 which both confirmed
the effect size from the first study and provided additional evidence
that reductions in PM2.5 directly result in reductions in
the risk of premature death. The impacts of including this study in the
primary analysis were explored in the results of the recently published
PM NAAQS RIA. Because the analysis of the proposed standards is
constrained to the studies included in the CAND PM benefits scaling
approach, we are unable to characterize PM-related mortality based on
Laden et al. However, we discuss the implications of these results in
the RIA for the proposed standards.
---------------------------------------------------------------------------

    \121\ Laden, F., J. Schwartz, F.E. Speizer, and D.W. Dockery.
2006. Reduction in Fine Particulate Air Pollution and Mortality.
American Journal of Respiratory and Critical Care Medicine. 173:
667-672.
    \122\ Dockery, D.W., C.A. Pope, X.P. Xu, J.D. Spengler, J.H.
Ware, M.E. Fay, B.G. Ferris, and F.E. Speizer. 1993. ``An
Association between Air Pollution and Mortality in Six U.S.
Cities.'' New England Journal of Medicine 329(24):1753-1759.
---------------------------------------------------------------------------

     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 Small SI and Marine SI 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 concentration-response 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.
    Taking into account these uncertainties, we believe this benefit-
cost analysis provides a conservative estimate of the expected economic
benefits of the proposed standards in future years because of the
exclusion of potentially significant benefit categories. 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. Furthermore, our analysis reflects
many methodological improvements that were incorporated into the
analysis of the final Clean Air Interstate Rule (CAIR), including a
revised value of a statistical life, a revised baseline rate of future
mortality, and a revised mortality lag assumption. Details of these
improvements can be found in the RIA for this rule and in the final
CAIR rule RIA.\123\ Once again, however, it should be noted that since
the CAIR rule, EPA's Office of Air and Radiation (OAR) has adopted a
different format for its benefits analysis in which characterization of
uncertainty is integrated into the main benefits analysis. Please see
the PM NAAQS RIA for an indication of the uncertainty present in the
base estimate of benefits and the sensitivity of our results to the use
of alternative concentration-response functions.
---------------------------------------------------------------------------

    \123\ See Chapter 4 of the Final Clean Air Interstate Rule RIA
(http://www.epa.gov/cair) for a discussion of EPA's ongoing efforts

to address the NAS recommendations in its regulatory analyses.
---------------------------------------------------------------------------

(4) How Do the Benefits Compare to the Costs of the Proposed Standards?
    The proposed rule establishes separate standards that reduce the
evaporative and exhaust emissions from Small SI and Marine SI engines.
A full appreciation of the overall economic consequences of these
provisions requires consideration of the benefits and costs expected to
result from each standard. Due to limitations in data availability and
analytical methods, however, we are only able to present the benefits
of the entire proposed rule in the aggregate for both PM2.5
and ozone. There are also a number of health and environmental effects
associated with the proposed standards that we were unable to quantify
or monetize (see Table XII-12).
    Table XII-13 contains the estimates of monetized PM2.5-
related benefits of the proposed standards and estimated social welfare
costs for each of the proposed control programs. The annual social
welfare costs of all provisions of this proposed rule are described
more fully in the next section. The results in Table XII-13 suggest
that the 2020 and 2030 monetized benefits of the proposed standards are
much greater than the expected social welfare costs. Specifically, the
annual benefits of the program would be approximately $2.1 + B billion
annually in 2020 using a three percent discount rate (or $1.9 + B
billion using a seven percent discount rate), compared to estimated
social welfare costs of approximately $252 million in that same year.
The net benefits are expected to increase to $3.4 + B billion annually
in 2030 using a three percent discount rate (or $3.1 + B billion using
a seven percent discount rate), even as the social welfare costs of
that program fall to $241 million.
    In Table XII-13, we present the costs and PM-related benefits
related to each of the two broad engine classes regulated by the
proposed standards: Small SI and Marine SI engines. Table XII-13 also
presents the costs and PM-related benefits related to the specific
engine classes regulated by the proposed standards: Small SI--Class I,
Class II, and Handheld (HH); Marine SI--Sterndrive/Inboard (SD/I), and
Outboard/Personal Water Craft (OB/PWC). Using the same PM scaling
approach described in Chapter 8.2 of the RIA, we are able to split out
the estimated PM benefits related to the different Small SI and Marine
SI engine classes. One can see that in all cases, the PM benefits
accrued by the engine classes are greater than the costs, even when
fuel savings is not factored into the cost estimate. The benefit-to-
cost ratio would be even greater if we

estimated the ozone benefits related to the proposed standards.

  Table XII-13.--Summary of Annual Benefits, Costs, and Net Benefits of
            the Proposed Small SI and Marine SI Engine Rule a
------------------------------------------------------------------------
                                       2020  (Millions   2030  (Millions
             Description                  of  2005          of  2005
                                          dollars)          dollars)
------------------------------------------------------------------------
Estimated Social Welfare Costs b c
    Small SI........................             $351              $404
        Class I.....................              145               167
        Class II....................              199               229
        HH d........................                7                 8
    Marine SI.......................              154               164
        SD/I........................               41                44
        OB/PWC......................              113               120
            Total...................              505               569
            Fuel Savings............             (253)             (327)
Total Social Welfare Costs..........              252               241
Estimated Benefits e f
    PM-Only Small SI Benefits
        3 percent discount rate.....              861             1,280
        7 percent discount rate.....              782             1,160
            Class I
                3 percent discount                478               647
                 rate...............
                7 percent discount                434               587
                 rate...............
            Class II
                3 percent discount                383               627
                 rate...............
                7 percent discount                348               570
                 rate...............
    PM-Only Marine SI Benefits
        3 percent discount rate.....            1,280             2,110
        7 percent discount rate.....            1,160             1,190
            SD/I
        3 percent discount rate.....              209               487
        7 percent discount rate.....              190               442
            OB/PWC
        3 percent discount rate.....            1,070             1,620
        7 percent discount rate.....              969             1,470
Total PM-Only Benefits g
        3 percent discount rate.....          2,140+B           3,380+B
        7 percent discount rate.....          1,940+B           3,070+B
Annual Net PM-Only Benefits (Total
 Benefits-Total Costs) g
        3 percent discount rate.....          1,890+B           3,140+B
        7 percent discount rate.....          1,690+B          2,830+B
------------------------------------------------------------------------
\a\ All estimates are rounded to three significant digits and represent
  annualized benefits and costs anticipated for the years 2020 and 2030.
  Columnar totals may not sum due to rounding.
\b\ Note that costs are the annual total costs of reducing all
  pollutants associated with each provision of the proposed control
  package, while the benefits reflect the value of reductions in PM2.5
  only.
\c\ To calculate annual fixed costs, we use a 7 percent average before-
  tax rate of return on private capital (see Chapter 9). We do not
  present annual costs using an alternative rate of return. In Chapter
  9, however, we use both a 3 percent and 7 percent social discount rate
  to calculate the net present value of total social costs consistent
  with EPA and OMB guidelines for preparing economic analyses (US EPA,
  2000 and OMB, 2003).124 125
\d\ Handheld emission reductions associated with the proposed standards,
  volatile organic hydrocarbons, are not accounted for in the PM
  benefits scaling approach. The PM benefit scaling approach is based
  upon changes in NOX and direct PM2.5 (see section 8.2 of the RIA). We
  therefore do not estimate any PM-related benefits associated with
  emission reductions in the handheld engine class.
\e\ PM-related benefits in this table are nationwide.
\f\ Valuation of premature mortality based on long-term PM exposure
  assumes discounting over the SAB recommended 20-year segmented lag
  structure described in section 8.3 of the RIA. Valuation of non-fatal
  myocardial infarctions is based on the cost-of-illness over a 5-year
  period after the incident. The valuation of both endpoints therefore
  requires the use of a discount rate. We present the PM-related
  benefits results using a 3 percent and 7 percent social discount rate
  consistent with EPA and OMB guidelines for preparing economic analyses
  (US EPA, 2000 and OMB, 2003).
\g\ Not all possible benefits or disbenefits are quantified and
  monetized in this analysis. B is the sum of all unquantified benefits
  and disbenefits. Potential benefit categories that have not been
  quantified and monetized are listed in Table XII-12.

F. Economic Impact Analysis
---------------------------------------------------------------------------

    \124\ U.S. Environmental Protection Agency, 2000. Guidelines for
Preparing Economic Analyses. http:// www.yosemite1.epa.gov/ee/epa/

eed/hsf/pages/Guideline.html.
    \125\ Office of Management and Budget, The Executive Office of
the President, 2003. Circular A-4. http://www.whitehouse.gov/omb/circulars
.

---------------------------------------------------------------------------

    We prepared an Economic Impact Analysis (EIA) to estimate the
economic impacts of the proposed emission control program on the Small
SI and Marine SI engine and equipment markets. In this section we
briefly describe the Economic Impact Model (EIM) we developed to
estimate the market-level changes in price and outputs for affected
markets, the social costs of the program, and the expected distribution
of those costs across affected stakeholders. We also present the
results of our analysis. We request comment on all aspects of the
analysis,

including the model and the model inputs.
    We estimate the net social costs of the proposed program to be
about $241 million in 2030.126, 127 This estimate reflects
the estimated compliance costs associated with the Small SI and Marine
SI engine standards and the expected fuel savings from improved
evaporative controls. When the fuel savings are not taken into account,
the results of the economic impact modeling suggest that the social
costs of these programs are expected to be about $569 million in 2030.
Consumers of Small SI and Marine products are expected to bear about 75
percent of these costs. Small SI engine and equipment manufacturers are
expected to bear 6 percent and 19 percent, respectively. We estimate
fuel savings of about $327 million in 2030, which will accrue to
consumers.
---------------------------------------------------------------------------

    \126\ All estimates presented in this section are in 2005$.
    \127\ This analysis is based on an earlier version of the
engineering compliance developed for this rule. The net present
value of the engineering costs used in this analysis (without taking
the fuel savings into account, at a 3 percent discount rate over the
period of the analysis) is $10.0 billion, which is about $100
million less than the net present value of the final estimated
engineering costs, $10.1 billion. We do not expect that a difference
of this magnitude would change the overall results of this economic
impact analysis, in terms of market impacts and how the costs are
expected to be shared among stakeholders.
---------------------------------------------------------------------------

    With regard to market-level impacts in 2030, the average price
increase for Small SI engines is expected to be about 9.1 percent ($17
per unit). The average price increase for Marine SI engines is expected
to be about 1.7 percent ($195 per unit). The largest average price
increase for Small SI equipment is expected to be about 5.6 percent
($15 per unit) for Class I equipment. The largest average price
increase for Marine SI vessels is expected to be about 2.1 percent
($178 per unit) for Personal Watercraft.
(1) What is an Economic Impact Analysis?
    An Economic Impact Analysis (EIA) is prepared to inform decision
makers about the potential economic consequences of a regulatory
action. The analysis consists of estimating the social costs of a
regulatory program and the distribution of these costs across
stakeholders. These estimated social costs can then be compared with
estimated social benefits (as presented in Section XII.E). As defined
in EPA's Guidelines for Preparing Economic Analyses, social costs are
the value of the goods and services lost by society resulting from (a)
The use of resources to comply with and implement a regulation and (b)
reductions in output.\128\ In this analysis, social costs are explored
in two steps. In the market analysis, we estimate how prices and
quantities of goods affected by the proposed emission control program
can be expected to change once the program goes into effect. In the
economic welfare analysis, we look at the total social costs associated
with the program and their distribution across stakeholders.
---------------------------------------------------------------------------

    \128\ EPA Guidelines for Preparing Economic Analyses, EPA 240-R-
00-003, September 2000, p 113. A copy of this document can be found
at http://yosemite.epa.gov/ee/epa/eed.nsf/webpages/Guidelines.html.

---------------------------------------------------------------------------

(2) What Is the Economic Impact Model?
    The EIM is a behavioral model developed for this proposal to
estimate price and quantity changes and total social costs associated
with the emission controls under consideration. The EIM simulates how
producers and consumers of affected products can be expected to respond
to an increase in production costs as a result of the proposed emission
control program. In this EIM, compliance costs are directly borne by
producers of affected goods. Depending on the producers' and consumers'
sensitivity to price changes, producers of affected products will try
to pass some or all of the increased production costs on to the
consumers of these goods through price increases. In response to the
price increases, consumers will decrease their demand for the affected
good. Producers will react to the decrease in quantity demanded by
decreasing the quantity they produce; the market will react by setting
a higher price for those fewer units. These interactions continue until
a new market equilibrium quantity and price combination is achieved.
The amount of the compliance costs that can be passed on to the
consumers is ultimately limited by the price sensitivity of consumers
and producers in the relevant market (represented by the price
elasticity of demand or supply). The EIM explicitly models these
behavioral responses and estimates the new equilibrium prices and
output and the resulting distribution of social costs across these
stakeholders (producers and consumers).
(3) What Economic Sectors Are Included in This Economic Impact
Analysis?
    There are two broad economic sectors affected by the emission
control program described in this proposal: (1) Small SI engines and
equipment, and (2) Marine SI engines and equipment. For Small SI
engines and equipment we distinguish between handheld and nonhandheld
sectors. For handheld, we model one integrated handheld engine and
equipment category. On the nonhandheld side, we model 6 engine
categories, depending on engine class and useful life (Class I: UL125,
UL250, and UL500; Class II: UL250, UL500, UL1000), and 8 equipment
categories (agriculture/construction/general industrial; utility and
recreational vehicles; lawn mowers; tractors; other lawn and garden;
generator sets/welders; pumps/compressors/pressure washers; and
snowblowers). For Marine SI engines and equipment, we distinguish
between sterndrives and inboards (SD/I), outboards (OB), and personal
watercraft (PWC). SD/I and OB are further categorized by whether they
are luxury or not. All of these markets are described in more detail in
Chapter 9 of the RIA and in the industry characterizations prepared for
this proposal.
    This analysis assumes that all of these products are purchased and
used by residential households. This means that to model the behavior
change associated with the proposed standards we model all uses as
residential lawn and garden care or power generation (Small SI) or
personal recreation (Marine SI). We do not explicitly model commercial
uses (how the costs of complying with the proposed programs may affect
the production of goods and services that use Small SI or Marine SI
engines or equipment as production inputs); we treat all commercial
uses as if they were residential uses. We believe this approach is
reasonable because the commercial share of the end use markets for both
Small SI and Marine SI equipment is very small.\129\ In addition, for
any commercial uses of these products the share of the cost of these
products to total production costs is also small (e.g., the cost of a
Small SI generator is only a very small part of the total production
costs for a construction firm). Therefore, a price increase of the
magnitude anticipated for this control program is not expected to have
a noticeable impact on prices or quantities of goods or services
produced using Small SI or Marine SI equipment as inputs (e.g.,
commercial turf care, construction, or fishing).
---------------------------------------------------------------------------

    \129\ The Outdoor Power Equipment Institute (OPEI) provides
annual estimates of Small SI shipments (unit volumes) broken out
into commercial and residential markets. For 2003 and 2004, the
commercial share for NHH products is estimated to be 3.3 percent and
2.8 percent, respectively; for all Small SI products is estimated to
be 1.4 percent and 1.2 percent. Similarly, commercial uses of Marine
SI vessels are limited. See the industry characterizations prepared
for this proposal for more information (RTI, 2006).

---------------------------------------------------------------------------

    In the EIM the Small SI and Marine SI markets are not linked (there
is no feedback mechanism between the Small SI and Marine SI market
segments). This is appropriate because the affected equipment is not
interchangeable and because there is very little overlap between the
engine producers in each market. These two sectors represent different
aspects of economic activity (lawn and garden care and power generation
as opposed to recreational marine) and production and consumption of
one product is not affected by the other. In other words, an increase
in the price of lawnmowers is not expected to have an impact on the
production and supply of personal watercraft, and vice versa.
Production and consumption of each of these products are the results of
other factors that have little cross-over impacts (the need for
residential garden upkeep or power generation; the desire for personal
recreation).
(4) What Are the Key Features of the Economic Impact Model?
    A detailed description of the features of the EIM and the data used
in this analysis is provided in Chapter 9 of the RIA prepared for this
rule. The model methodology is firmly rooted in applied microeconomic
theory and was developed following the methodology set out in OAQPS's
Economic Analysis Resource Document.\130\
---------------------------------------------------------------------------

    \130\ U.S. Environmental Protection Agency, Office of Air
Quality Planning and Standards, Innovative Strategies and Economics
Group, OAQPS Economic Analysis Resource Document, April 1999. A copy
of this document can be found at http://www.epa.gov/ttn/ecas/econdata/Rmanual2
.

---------------------------------------------------------------------------

    The EIM is a computer model comprised of a series of spreadsheet
modules that simulate the supply and demand characteristics of the
markets under consideration. The initial market equilibrium conditions
are shocked by applying the compliance costs for the control program to
the supply side of the markets (this is done by shifting the relevant
supply curves by the amount of the compliance costs). The EIM uses the
model equations, model inputs, and a solution algorithm to estimate
equilibrium prices and quantities for the markets with the regulatory
program. These new prices and quantities are used to estimate the
social costs of the model and how those costs are shared among affected
markets.
    The EIM uses a multi-market partial equilibrium approach to track
changes in price and quantity for the modeled markets. As explained in
EPA's Guidelines for Preparing Economic Analyses, ``partial
equilibrium'' means that the model considers markets in isolation and
that conditions in other markets are assumed either to be unaffected by
a policy or unimportant for social cost estimation. Multi-market
analysis models go beyond partial equilibrium by extending the inquiry
to more than just single markets and attempt to capture at least some
of the interaction between markets--in this case, between selected
engine and equipment markets sectors.\131\
---------------------------------------------------------------------------

    \131\ EPA Guidelines for Preparing Economic Analyses, EPA 240-R-
00-003, September 2000, p. 125-6.
---------------------------------------------------------------------------

    The EIM uses an intermediate run time frame. This means that some
factors of production are fixed and some are variable. In very short
analyses, all factors of production would be assumed to be fixed,
leaving the producers with no means to respond to the increased
production costs associated with the regulation (e.g., they cannot
adjust labor or capital inputs). Under this time horizon, the costs of
the regulation fall entirely on the producer. In the long run, all
factors of production are variable and producers can adjust production
in response to cost changes imposed by the regulation (e.g., using a
different labor/capital mix). In the intermediate run there is some
resource immobility which may cause producers to suffer producer
surplus losses, but they can also pass some of the compliance costs to
consumers.
    The EIM assumes a perfectly competitive market structure. The
perfect competition assumption is a widely accepted economic practice
for this type of analysis, and only in rare cases are other approaches
used.\132\ It should be noted that the perfect competition assumption
is not about the number of firms in a market, it is about how the
market operates. The markets included in this analysis do not exhibit
evidence of noncompetitive behavior: there are no indications of
barriers to entry, the firms in these markets are not price setters,
and there is no evidence of high levels of strategic behavior in the
price and quantity decisions of the firms. These markets are also
mature markets as evidenced by unit sales growing at the rate of
population increases. Pricing power in such markets is typically
limited. In addition, the products produced within each market are
somewhat homogeneous in that engines and equipment from one firm can be
purchased instead of engines and equipment from another firm. Finally,
according to contestable market theory, oligopolies and even monopolies
will behave very much like firms in a competitive market if it is
possible to enter particular markets without cost (i.e., there are no
sunk costs associated with market entry or exit). This is the case with
these markets, as there is significant excess production capacity in
both the Small SI and Marine SI industries, in part due to improved
productivity and efficiency in current plants. Idle production capacity
also limits the ability of firms to raise prices, since competitors can
easily capture market share by increasing their production at the
expense of a producer that increases its prices. For all of these
reasons it is appropriate to use a perfect competition model to
estimate the economic impacts of this proposal.
---------------------------------------------------------------------------

    \132\ See, for example, EPA Guidelines for Preparing Economic
Analyses, EPA 240-R-00-003, September 2000, p 126.
---------------------------------------------------------------------------

    The perfect competition assumption has an impact on the way the EIM
is structured. In a competitive market the supply curve is based on the
industry marginal cost curve; fixed costs do not influence production
decisions at the margin. Therefore, in the market analysis the model is
shocked by variable costs only. However, the nature of the Small SI and
Marine SI markets suggests the market supply curve shifts in the model
should include fixed and variable compliance costs. This is because
Small SI and Marine SI engine and equipment manufacturers produce a
product that changes very little over time. These manufacturers may not
engage in research and development to improve their products on a
continuous basis (as opposed to highway vehicles or nonroad engines and
equipment). If this is the case, then the product changes that would be
required to comply with the proposed standards would require these
manufacturers to devote new funds and resources to product redesign and
facilities changes. In this situation, Small SI and Marine SI engine
and equipment manufacturers would be expected to increase their prices
by the full amount of the compliance costs (both fixed and variable) to
attempt to recover those costs. To reflect these conditions, the supply
shift in this EIM is based on both fixed and variable costs, even
though the model assumes perfect competition. A sensitivity analysis
was performed to investigate the impacts under the alternative
scenarios of shifting the supply curve by the variable costs only. The
results of that analysis can be found in the RIA prepared for this
proposal. We request comment on the extent to which manufacturers can
be expected to devote additional funds to cover the fixed costs
associated with the standards, or whether they in fact do provide for
product development resources on a continuous basis and can

be expected to use those funds to cover the fixed costs. We also
request comment on whether companies would attempt to pass fixed costs
to consumers as an additional price increase and, if so, how much of
the fixed costs would be based on and for how long.
    The market interactions modeled in the EIM are those between
producers and consumers of the specified engines and the equipment that
use those engines. The EIM does not consider sales distribution
networks or how the regulated goods are sold to final consumers through
wholesalers and/or retailers. This is appropriate because the proposed
regulatory program does not impose additional costs on the distribution
networks and those relationships are not expected to change as a result
of the standards. In the case of Small SI equipment, however, concerns
have been raised about the potential for dominant retailers (big box
stores such as Wal-Mart, Sears and K-Mart) to affect the ability of
manufacturers to pass along cost increases associated with new emission
control requirements, forcing them to absorb the compliance costs
associated with the proposed standards. As described in greater detail
in Chapter 9 of the RIA, dominant retailers are not expected to affect
market interactions in ways that would offset the assumption of perfect
competition by preventing firms from passing on increases in costs
associated with the control program. This is because all firms in the
market are expected to comply with the control program, and all will
experience an increase in marginal costs. Profit-maximizing
manufacturers will continue to follow a marginal cost pricing rule
regardless of the distribution arrangements. If large retail
distributors attempted to prevent efficient manufacturers from raising
prices in response to the standards, manufacturers would likely respond
to a retailer's price pressure by reducing output. This would result in
large excess demand in the equipment market which would ultimately have
to be satisfied through a new higher equilibrium price, which in turn
would result in greater supply, thus bidding the price down to a new
market equilibrium after the application of the control program.
    The relationships modeled in the EIM do not include substitution
away from Small SI and Marine SI engines and equipment to diesel or
electric alternatives. This is appropriate because consumers are not
likely to make these substitutions. Substitution to diesel Small SI
equipment is not a viable option for most residential consumers, either
because diesel equipment does not exist (e.g., diesel string trimmers)
or because there would be a large price premium that would discourage
the use of diesel equipment (e.g., diesel lawnmowers and diesel
recreational marine vessels). In addition, most households are not
equipped to handle the additional fuel type and misfueling would carry
a high cost. Finally, the lack of a large infrastructure system already
in place like the one supporting the use of gasoline equipment for
residential and recreational purposes, including refueling and
maintenance, represents a large barrier to substitution from gasoline
to diesel equipment. On the electric side, the impact of substitution
to electric for Small SI equipment (there are no comparable options for
Marine SI) is also expected to be negligible. Gasoline is the power
source of choice for small and inexpensive equipment due to its low
initial cost. Gasoline equipment is also inherently portable, which
make them more attractive to competing electric equipment that must be
connected with a power grid or use batteries that require frequent
recharging.
    The EIM is a market-level analysis that estimates the aggregate
economic impacts of the control program on the relevant market. It is
not a firm-level analysis and therefore the supply elasticity or
individual compliance costs facing any particular manufacturer may be
different from the market average. This difference can be important,
particular where the rule affects different firms' costs over different
volumes of production. However, to the extent there are differential
effects on individual firms, EPA believes that the wide array of
compliance flexibilities provided in this proposal are adequate to
address any cost inequities that are likely to arise.
    Finally, consistent with the proposed emission controls, this EIA
covers engines sold in 49 states. California engines are not included
because California has its own state-level controls for Small SI and
Marine SI engines. The sole exceptions are Small SI engines used in
agriculture and construction applications in California. These engines
are included in the control program and in this analysis because the
Clean Air Act pre-empts California from setting standards for these
engines.
(5) What Are the Key Model Inputs?
    Key model inputs for the EIM are the behavioral parameters, the
market equilibrium quantities and prices, and the compliance cost
estimates.
    The model's behavioral paramaters are the price elasticities of
supply and demand. These parameters reflect how producers and consumers
of the engines and equipment affected by the standards can be expected
to change their behavior in response to the costs incurred in complying
with the standards. More specifically, the price elasticity of supply
and demand (reflected in the slope of the supply and demand curves)
measure the price sensitivity of consumers and producers. The price
elasticities used in this analysis are summarized in Table XII.F-1 and
are described in more detail in Chapter 9 of the RIA. An ``inelastic''
price elasticity (less than one) means that supply or demand is not
very responsive to price changes (a one percent change in price leads
to less than one percent change in demand). An ``elastic'' price
elasticity (more than one) means that supply or demand is sensitive to
price changes (a one percent change in price leads to more than one
percent change in demand). A price elasticity of one is unit elastic,
meaning there is a one-to-one correspondence between a change in price
and change in demand.

                                 Table XII. F-1.--Behavioral Parameters Used in Small SI/Marine SI Economic Impact Model
--------------------------------------------------------------------------------------------------------------------------------------------------------
               Sector                        Market             Demand elasticity            Source           Supply elasticity            Source
--------------------------------------------------------------------------------------------------------------------------------------------------------
Engine.............................  Small SI and Marine SI  Derived...............  N/A..................  3.8 (elastic)........  EPA Econometric
                                      Engine Market.                                                                                Estimate.
Small SI Equipment.................  All handheld..........  -1.9 (elastic)........  EPA Econometric        3.4 (elastic)........  EPA Econometric
                                                                                Estimate.                                     Estimate.
                                     Lawn Mowers...........  -0.2 (inelastic)......  EPA Econometric        Same as above........
                                                                                Estimate.
                                     Other lawn & garden...  -0.9 (inelastic)......  EPA Econometric        Same as above........
                                                                                Estimate.

                                     Gensets/welders (class  -1.4 (elastic)........  EPA Econometric        3.3 (elastic)........  EPA Econometric
                                      I).                                             Estimate.                                     Estimate.
                                     Gensets/welders (class  -1.1 (elastic)........  EPA Econometric        Same as above........
                                      II).                                            Estimate.
                                     All other non-handheld  -1.0 (unit elastic)...  EPA Econometric        3.4 (elastic) Same as
                                                                                Estimate.              above.
Marine SI Equipment................  PWC...................  -2.0 (elastic)........  EPA Econometric        3.4 (elastic)........  EPA Econometric
                                                                                Estimate.                                     Estimate.
                                     All other vessels       Same as above.........  .....................  2.3 (elastic)........  EPA Econometric
                                      types.                                                                                Estimate.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The estimated supply and demand elasticities were based on best
data we could find. We used (1) The industry-level data published by
the National Bureau of Economic Research (NBER)-Center for Economic
Studies (Bartlesman, Becker, and Gray, 2000); (2) Current Industrial
Reports (CIR) series from the U.S. Census Bureau; (3) several data
series reported in a study by Air Improvement Resource Inc. and
National Economic Research Associates (AIR/NERA, 2003) for the walk-
behind lawnmowers; (4) the U.S. Census Bureau historical data on
household income and housing starts (U.S. Census Bureau, 2002; 2004);
(5) price, wage, and material cost indexes from the Bureau of Labor
Statistics (BLS) (BLS, 2004a,b,c,d,e); (6) the implicit gross domestic
product (GDP) price deflator reported by the U.S. Bureau of Economic
Analysis (BEA, 2004). It should be noted that the aggregate data we
used to estimate elasticities include data on other markets as well as
the Small SI or Marine SI markets. If we had been able to obtain
market-specific data for Small SI or Marine SI only, the estimated
price elasticities may have been different.
    The estimated supply elasticities for all of the equipment and
engine markets are elastic, ranging from 2.3 for all recreational
marine except PWC, to 3.3 for generators, 3.4 for PWCs and all Small SI
except generators, and 3.8 for engines. This means that quantities
supplied are expected to be fairly sensitive to price changes (e.g., a
1% change in price yields a 3.3 percent change in quantity of
generators produced).
    On the demand side, the Marine SI equipment market estimated demand
elasticity is elastic, at -2.0. This is consistent with the
discretionary nature of purchases of recreational marine vessels
(consumers can easily decide to spend their recreational budget on
other alternatives).
    The estimated demand elasticity for handheld equipment is elastic,
at -1.9. This suggests that consumers are more sensitive to price
changes for handheld equipment than for other Small SI equipment. In
other words, they are more likely to change their purchase decision for
a small change in the price of a string trimmer, perhaps opting for
trimmer shears or deciding to forego trimming altogether.
    The estimated demand elasticity for lawnmowers is very inelastic at
-0.2. This suggests that consumers of this equipment are not very
sensitive to price changes. Most of this equipment is sold to
individual homeowners, who are often required by local authorities to
keep their lawns trimmed. Household ownership of a gasoline lawnmower
is often their least expensive option. Lawncare services are more
expensive since the price for these services includes labor and other
factors of production. Purchasing other equipment may also not be
attractive, since electric and diesel mowers are generally more
expensive and often less convenient. Finally, the option of using
landscape alternatives (e.g., prairie, wildflower, or rock gardens) may
not be attractive for homeowners who may also use their yards for
recreational purposes. For all these reasons, the price sensitivity of
homeowners to lawnmower prices would be expected to be inelastic.
    All the other demand elasticities, for gensets, welders,
compressors, and ag/construction equipment, are about unit elastic, at
-1.0 meaning a 1 percent change in price is expected to result in a 1
percent change in demand.
    The demand elasticities for the engine markets are internally
derived as part of the process of running the model. This is an
important feature of the EIM, which allows it to link the engine and
equipment components of each model and simulate how compliance costs
can be expected to ripple through the affected market. In actual
markets, for example, the quantity of lawnmowers produced in a
particular period depends on the price of engines (the Small SI engine
market) and the demand for equipment by residential consumers.
Similarly, the number of engines produced depends on the demand for
engines (the lawnmower market) which depends on consumer demand for
equipment. Changes in conditions in one of these markets will affect
the others. By designing the model to derive the engine demand
elasticities, the EIM simulates these connections between supply and
demand among the product markets and replicates the economic
interactions between producers and consumers.
    Initial market equilibrium quantities for these markets are
simulated using the same current year sales quantities used in the
engineering cost analysis. The initial market equilibrium prices for
Small SI and Marine SI engines and equipment were derived from industry
sources and published data and are described in Chapter 9 of the Draft
RIA.
    The compliance costs used to shock the model, to simulate the
application of the control program, are the same as the engineering
costs described in Chapter 6. However, the EIM uses an earlier version
of the engineering compliance developed for this rule. The net present
value of the engineering costs used in this analysis (without taking
the fuel savings into account, at a 3 percent discount rate over the
period of the analysis) is $10.0 billion, which is about $100 million
less than the net present value of the final estimated engineering
costs, $10.1 billion. We do not expect that a difference of this
magnitude would change the overall results of this economic impact
analysis, in terms of market impacts and how the costs are expected to
be shared among stakeholders.
    As explained in Section XII.F.4, the EIM uses both fixed and
variable engineering costs to shock the initial equilibrium conditions.
The fixed costs are amortized over the first 5 years of the standards
and include a 7 percent cost of capital. For some elements of the
program (i.e., evaporative emission controls), fixed costs are incurred

throughout the period of analysis due to the need to replace tooling.
    Additional costs that need to be considered in the EIM are the
operating costs (fuel savings) associated with the evaporative emission
controls. These fuel savings are not included in the market analysis
for this economic impact analysis. This is because all available
evidence suggests that fuel savings do not affect consumer decisions
with respect to the purchase of this equipment. Unlike motor vehicles
or other consumer goods, neither Small SI nor Marine SI equipment is
labeled with expected fuel consumption or expected annual operating
costs. Therefore, there is no information available for the consumer to
use to make this decision. Instead consumers base their purchase
decision on other attributes of the product for which the manufacturer
provides information. For lawn mowers this may be the horsepower of the
engine, whether the machine has a bag or has a mulching feature, its
blade size, etc. For PWC it may be how many people it can carry, its
maximum speed, its horsepower, etc. In many cases, especially for Small
SI equipment, the consumer may not even be aware of the fuel savings
when operating the equipment, especially if he or she uses the same
portable fuel storage container to fuel several different pieces of
equipment.
    These fuel savings are included in the social cost analysis. This
is because they are savings that accrue to society. These savings are
attributed to consumers of the relevant equipment. As explained in more
detail in Section 9.3.5 of the Draft RIA, the social cost analysis is
based on the equivalent of the pre-tax price of gasoline in that
analysis. Although the consumer will realize a savings equal to the
pump price of gasoline (post-tax), part of that savings is offset by a
tax loss to governmental agencies and is thus a loss to consumers of
the services supported by those taxes. This tax revenue loss,
considered a transfer payment in this analysis, does not affect the
benefit-cost analysis results.
(6) What Are the Results of the Economic Impact Modeling?
    Using the model and data described above, we estimated the economic
impacts of the proposed emission control program. We performed a market
analysis for all years and all engine and equipment types. In this
section we present summarized results for selected markets and years.
More detail can be found in the appendices to Chapter 9 of the RIA and
in the docket for this rule.\133\ Also included in Appendix 9H to that
chapter are sensitivity analyses for several key inputs.
---------------------------------------------------------------------------

    \133\ Li, Chi. 2007. Memorandum to Docket EPA-HQ-OAR-2004-0008.
Detailed Results From Economic Impact Model.
---------------------------------------------------------------------------

    The EIA consists of two parts: a market analysis and a welfare
analysis. The market analysis looks at expected changes in prices and
quantities for affected products. The welfare analysis looks at
economic impacts in terms of annual and present value changes in social
costs.
    As explained in Section XII.F.4, the EIM is shocked by the sum of
fixed and variable costs. For the market analysis, this leads to a
small increase in estimated price impacts for the years 2011 through
2016, the period during which fixed costs are recovered. The increase
is small because, for many elements of the program, annual per unit
fixed costs are smaller than annual per unit variable costs. For the
welfare analysis, applying both fixed and variable costs means that the
burden of the social costs attributable to producers and consumers
remains fixed throughout the period of analysis. This is because
producers pass the fixed costs to consumers at the same rate as the
variable costs instead of having to absorb them internally.
(a) Market Impact Analysis
    In the market analysis, we estimate how prices and quantities of
goods affected by the proposed emission control program can be expected
to change once the program goes into effect. The analysis relies on the
initial market equilibrium prices and quantities for each type of
equipment and the price elasticity of supply and demand. It predicts
market reactions to the increase in production costs due to the new
compliance costs (variable and fixed). It should be noted that this
analysis does not allow any other factors of production to vary. In
other words, it does not consider that manufacturers may adjust their
production processes or marketing strategies in response to the control
program. Also, as explained above, while the markets are shocked by
both fixed and variable costs, the market shock is not offset by fuel
savings.
    A summary of the estimated market impacts is presented in Table
XII.F-2 for 2013, 2018, and 2030. These years were chosen because 2013
is the year of highest compliance; after 2018, the fixed costs are
recovered and the market impacts reflect variable costs as well as
growth in equipment population; and 2030 illustrates the long-term
impacts of the program.
    Market level impacts are reported for the engine and equipment
markets separately. This is because the EIM is a two-level model that
treats these markets separately. However, changes in equipment prices
and quantities are due to impacts of both direct equipment compliance
costs and indirect engine compliance costs that are passed through to
the equipment market from the engine market through higher engine
prices.
    The average market-level impacts presented in this section are
designed to provide a broad overview of the expected market impacts
that is useful when considering the impacts of the rule on the economy
as a whole. The average price impacts are product-weighted averages of
the results for the individual engine and equipment categories included
in that sub-sector (e.g., the estimated Marine SI engine price and
quantity changes are weighted averages of the estimated results for all
of the Marine SI engine markets). The average quantity impacts are the
sum of the decrease in units produced units across sub-markets. Price
increases and quantity decreases for specific types of engines and
equipment are likely to be different.
    Although each of the affected equipment in this analysis generally
requires one engine (the exception being Marine SI sterndrive/
inboards), the estimated decrease in the number of engines produced in
Table XII.F-2 is less than the estimated decrease in the number of
equipment produced. At first glance, this result seems counterintuitive
because it does not reflect the approximate one-to-one correspondence
between engines and equipment. This discrepancy occurs because the
engine market-level analysis examines only output changes for engines
that are produced by independent engine manufacturers and subsequently
sold to independent equipment manufacturers. Engines produced and
consumed by vertically integrated equipment/engine manufacturers are
not explicitly modeled. Therefore, the market-level analysis only
reflects engines sold on the ``open market,'' and estimates of output
changes for engines consumed internally are not reflected in this
number.\134\ Despite the fact that changes

in consumption of internally consumed engines are not directly reported
in the market-level analysis results, the costs associated with these
engines are included in the market-level analysis (as supply shift for
the equipment markets). In addition, the cost and welfare analyses
include the compliance costs associated with internally consumed
engines.
---------------------------------------------------------------------------

    \134\ For example, PWC and handheld equipment producers
generally integrate equipment and engine manufacturing processes and
are included in the EIM as one-level equipment markets. Since there
is no engine market for these engines, the EIM does not include PWC
and handheld engine consumption changes in engine market-level
results.
---------------------------------------------------------------------------

Marine SI Market Analysis

    The average price increase for Marine SI engines in 2013, the high
cost year, is estimated to be about 2.3 percent, or $257. By 2018, this
average price increase is expected to decline to about 1.7 percent, or
$196, and remain at that level for later years. The market impact
analysis predicts that with these increases in engine prices the
expected average decrease in total sales in 2013 is about 2.0 percent,
or 8,800 engines. This decreases to about 1.6 percent in 2018, or about
7,000 engines.
    On the vessel side, the average price change reflects the direct
equipment compliance costs plus the portion of the engine costs that
are passed on to the equipment purchaser (via higher engine prices).
The average price increase in 2013 is expected to be about 1.3 percent,
or $232. By 2018, this average price increase is expected to decline to
about 1 percent, or $178. These price increases are expected to vary
across vessel categories. The category with the largest price increase
in 2013 is expected to be personal watercraft engines, with an
estimated price increase of about 2.8 percent in 2013; this is expected
to decrease to 2.1 percent in 2018. The smallest expected change in
2013 is expected to be for sterndrive/inboards and outboard
recreational vessels, which are expected to see price increases of
about 0.7 percent. The market impact analysis predicts that with these
increases in vessel prices the expected average decrease in quantity
produced in 2013 is about 2.7 percent, or 11,000 vessels.\135\ This is
expected to decrease to about 2.0 percent in 2018, or about 8,600
vessels. The personal watercraft category is expected to experience the
largest decline in 2013, about 5.6 percent (4,800 vessels). The
smallest percentage decrease in production is expected for sterndrive/
inboards at 1.4 percent (1,300 vessels); the smallest absolute decrease
in quantity is expected for outboard recreational vessels, at 113
vessels (1.5 percent).
---------------------------------------------------------------------------

    \135\ It should be noted that the absolute change in the number
of engines and equipment does not match. This is because the
absolute change in the quantity of engines represents only engines
sold on the open market. Reductions in engines consumed internally
by integrated engine/equipment manufacturers are not reflected in
this number but are captured in the social cost analysis.
---------------------------------------------------------------------------

Small SI Market Analysis

    The average price increase for Small SI engines in 2013, the high
cost year, is estimated to be about 11.7 percent, or $22. By 2018, this
average price increase is expected to decline to about 9.1 percent, or
$17, and remain at that level for later years. The market impact
analysis predicts that with these increases in engine prices the
expected average decrease in total sales in 2013 is expected to be
about 2.3 percent, or 371,000 engines. This is expected to decrease to
about 1.7 percent in 2018, or about 299,000 engines.
    On the equipment side, the average price change reflects the direct
equipment compliance costs plus the portion of the engine costs that
are passed on to the equipment purchaser (via higher engine prices).
The average price increase for all Small SI equipment in 2013 is
expected to be about 3.1 percent, or $14. By 2018, this average price
increase is expected to decline to about 2.4 percent, or $10. The
average price increase and quantity decrease differs by category of
equipment. As shown in Table XII.F-2, the price increase for Class I
equipment is estimated to be about 6.9 percent ($19) in 2013,
decreasing to 5.5 percent ($15) in 2018. The market impact analysis
predicts that with these increases in equipment prices the expected
average decrease in the quantity of Class I equipment produced in 2013
is about 2.2 percent, or 219,400 units.\136\ This is expected to
decrease to about 1.8 percent in 2018, or about 189,700 units. For
Class II equipment, a higher price increase is expected, about 3.9
percent ($41) in 2013, decreasing to 2.6 percent ($25) in 2018. The
expected average decrease in the quantity of Class II equipment
produced in 2013 is about 4.3 percent, or 157,300 units, decreasing to
2.8 percent, or about 114,000 units, in 2018.
---------------------------------------------------------------------------

    \136\ See previous note.
---------------------------------------------------------------------------

    For the handheld equipment market, prices are expected to increase
about 0.3 percent for all years, and quantities are expected to
decrease about 0.6 percent.

                          Table XII.F-2.--Estimated Market Impacts for 2013, 2018, 2030
                                                     [2005$]
----------------------------------------------------------------------------------------------------------------
                                                                   Change in price         Change in quantity
                           Market                            ---------------------------------------------------
                                                                Absolute     Percent      Absolute     Percent
----------------------------------------------------------------------------------------------------------------
                                                      2013
----------------------------------------------------------------------------------------------------------------
Marine:
    Engines.................................................         $257          2.3       -8,846         -2.0
    Equipment...............................................          232          1.3      -10,847         -2.7
        SD/I................................................          252          0.7       -1,336         -1.4
        OB Recreational.....................................          638          0.7         -113         -1.5
        OB Luxury...........................................          206          1.1       -4,579         -2.1
        PWC.................................................          237          2.8       -4,819         -5.6
Small SI:
    Engines.................................................           22         11.7     -371,097         -2.3
    Equipment...............................................           14          3.1     -482,942         -1.9
        Class I.............................................           19          6.9     -219,400         -2.2
        Class II............................................           41          3.9     -157,306         -4.3
        HH..................................................          0.3          0.3     -106,236         -0.6
----------------------------------------------------------------------------------------------------------------

                                                      2018
----------------------------------------------------------------------------------------------------------------
Marine:
    Engines.................................................          196          1.7       -7,002         -1.6
    Equipment...............................................          178          1.0       -8,563         -2.0
        SD/I................................................          195          0.5       -1,072         -1.1
        OB Recreational.....................................          496          0.6          -91         -1.1
        OB Luxury...........................................          160          0.8       -3,634         -1.6
        PWC.................................................          178          2.1       -3,766         -4.2
Small SI:
    Engines.................................................           17          9.1     -298,988         -1.7
    Equipment...............................................           10          2.4     -401,025         -1.4
        Class I.............................................           15          5.5     -189,771         -1.8
        Class II............................................           25          2.6     -113,999         -2.8
        HH..................................................          0.2          0.3      -97,255         -0.5
----------------------------------------------------------------------------------------------------------------
                                                      2030
----------------------------------------------------------------------------------------------------------------
Marine:
    Engines.................................................          195          1.7       -7,728         -1.6
    Equipment...............................................          179          1.0       -9,333         -2.0
        SD/I................................................          195          0.5       -1,161         -1.1
        OB Recreational.....................................          496          0.6          -98         -1.1
        OB Luxury...........................................          160          0.8       -3,998         -1.7