VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00072 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6769 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 93 Includes batch number, volume, and sulfur content for each batch of gasoline produced in 1997 and 1998. 94 In addition to gasoline produced from crude oil, a small refinery's baseline volume would include gasoline produced from purchased blendstocks where the blendstocks are substantially transformed using a refinery processing unit. iv. How Do Small Refineries Apply for a Sulfur Baseline? A qualifying small refiner, domestic or foreign, may apply for an individual sulfur baseline by December 31, 2000 for any refinery owned by the company by providing the following information: · A calculation of the refinery's sulfur baseline using its average gasoline sulfur level based on 1997 and 1998 production data, 93 and · The average volume of gasoline ( including conventional and reformulated) produced in these two years. As we proposed, baseline sulfur levels and gasoline volumes are averaged over two years ( 1997 and 1998) to account for any production related anomalies that may have occurred in 1997 or 1998. For the overall program, however, we are only using 1997 and 1998 data for the reasons described in Section IV. C. 1, above. For any refiner who reactivates a refinery that was shut down or nonoperational between January 1, 1998 and January 1, 1999, we will use the most recent information available for baseline establishment purposes. The regulations specify the information to be submitted to support the baseline application. The baseline calculations should include any oxygen added to the gasoline at the refinery. This application would be submitted at the same time the refiner applies for small business status; confirmation of small business status would not be required to apply for an individual sulfur baseline. Pending refinery baseline approval, we will assign standards to each of the company's refineries in accordance with Table IV. C.   3. Oxygenate blenders, regardless of their size, are not eligible for the small refiner individual baselines and standards because they would not experience circumstances similar to those of small refining companies. That is, oxygenate blenders do not have the burden of capital costs to install desulfurization equipment, which is the primary reason for allowing small refiners to have a relaxed compliance schedule.

v. Volume Limitation on Use of a Small Refinery Standard Except as noted below, the volume of gasoline subject to a small refinery's individual standards is limited to the average volume of gasoline the refinery produced from crude oil during the baseline years ( 1997 and 1998), excluding the volume of gasoline produced using blendstocks produced at another refinery and exports. 94 Under this approach, the baseline volume for a small refinery would reflect only the volume of gasoline produced from crude oil during the 1997 and 1998 baseline years. However, to ensure that the overall sulfur in gasoline from small refiners does not greatly increase under the terms of the small refiner extension and result in overall gasoline pool sulfur levels higher than anticipated, the volume would be limited beginning in 2004 to the volume of gasoline that is the lesser of: ( 1) 105 percent of the baseline volume, or ( 2) the volume of gasoline produced during the year from crude oil. Any volume of gasoline produced during an averaging period in excess of this limitation is subject to the corporate average standards that apply to all other refiners ( i. e., the corporate average standards listed in Table IV. C.   1). In 2006 and 2007, the refinery averages of Table IV. C.   1 will apply. In this case, the small refinery's annual average standard will be adjusted based on the excess volume in a manner similar to the compliance baseline equation for conventional gasoline under Section 80.101( f) of Part 40 of the Code of Federal Regulations. However, the small refinery's per gallon cap standard will not be adjusted. This limitation assures that small refineries receive relief only for gasoline produced from crude oil, that is the portion of the refinery operation requiring capital investment to meet lower sulfur standards.

vi. Extensions Beyond 2007 for Small Refiners Beginning January 1, 2008, all small companies' refineries must meet the national sulfur standard of 30 ppm on average and the 80 ppm cap, except small refineries under IV. C. 2. i. that apply for and receive an extension of their small refiner status and unique standards. An extension will provide a given small refinery up to an additional two years to comply with the national standards. An extension must be requested in writing and must specify the factors that demonstrate a significant economic hardship to qualify the refinery for such an extension. Factors considered for an extension could include, but are not limited to, the refinery's financial position; its efforts to procure necessary equipment and to obtain design and engineering services and construction contractors; the availability of desulfurization equipment, and any other relevant factors. In order for us to consider an extension, a refiner must submit a detailed request for an extension by January 1, 2007, demonstrating that it has made best efforts to obtain necessary financing, and must provide detailed information regarding any lack of success in obtaining financing. This information shall include, but may not be limited to copies of loan applications for the necessary financing for the construction of appropriate sulfur reduction technology as well as the application of financing for other equipment procurements or improvements in this time frame. If financing has been disapproved or is otherwise unsuccessful, the refiner shall provide documents supporting the basis for that disapproval and evidence of efforts to pursue other means of financing. If we determine that the refiner has made the best efforts possible to achieve compliance with the national standards by January 1, 2008, but has been unsuccessful for reasons beyond its control, we will consider granting the hardship extension initially for the 2008 averaging period. If further relief is appropriate for good reasons, we will consider a further extension through the 2009 averaging period but in no case will this relief be provided unless the refiner can demonstrate conclusively that it has financing in place and that it will be able to complete construction and meet the national gasoline sulfur standards no later than December 31, 2009.

Compliance Plans for Demonstrating a Commitment To Produce Low Sulfur Gasoline This final rule includes a compliance plan provision for those refiners who may seek a hardship extension of their approved interim standards. This provision requires that those refiners with approved interim standards who seek a hardship extension must submit a series of reports to EPA discussing and describing their progress toward producing gasoline that meets the 30/ 80 ppm standards by January 1, 2008. We expect that small refiners will need to begin preparations to meet the national standards in 2008 by 2004. However, we understand that the potential exists for some small refiners to face additional hardship circumstances that will warrant more time to meet the standards. For this reason, we have adopted provisions ( see above) allowing VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00073 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6770 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 95 If a refinery has a baseline sulfur level higher than 120 ppm ( as described below in IV. C. 1. c. v.), then credits are generated from the baseline to 120 ppm and allotments from 120 ppm to the new sulfur level ( and discounted 20 percent if applicable). refiners subject to the interim standards to petition us and make a showing that additional time is needed to meet the national standards. To properly evaluate these hardship applications, we are requiring demonstrations of good faith efforts towards assessing the economic feasibility, along with the business and technical practicality of ultimately producing low sulfur gasoline. Such progress reports must be submitted for a refiner to receive consideration in any future determinations regarding hardship extensions. However, these reports are not required from refiners who will not be seeking a hardship extension. By June 1, 2004, such refiners would need to submit preliminary information in the form of a report outlining its time line for compliance and a project plan discussing areas such as permits, engineering plans ( e. g., design and construction), and capital commitments for making the necessary modifications to produce low sulfur gasoline. Documents showing activities and progress in these areas should be provided if available. By no later than June 1, 2005, these small refiners would need to submit a report to us stating in detail progress to date based on their time line and project plan. This should include copies of approved permits for construction of the equipment, contracts for design and construction, and any available evidence of having secured the necessary financing to complete the required construction. If any difficulties in meeting this requirement are anticipated, the refiner must submit a detailed report of all efforts to date and the factors that may cause delay, including costs, specification of engineering or other design work still needed and reasons for delay, specification of equipment needed and any reasons for delay, potential equipment suppliers and history of negotiations, and any other relevant information. If unavailability of equipment is a factor, the report must include a discussion of other options considered, and the reasons these other options are not feasible. In addition, the small refiner would need to provide evidence by June 1, 2006, that on site construction has begun at its refinery( s) and that absent unforeseen circumstances or problems, they will be producing complying gasoline ( 30/ 80 ppm) by January 1, 2008. While the submission of these progress reports is evidence of a refiner's good faith efforts to comply by 2008, it does not bind the refiner to make gasoline in 2008. There are several reasons why a refiner may choose to exit the gasoline production business in 2008 that go beyond the low sulfur gasoline requirement. As a result of a refiner's efforts in moving toward compliance with the 2008 standards, for market, economic, business, or technical reasons, the company could choose not to make gasoline in 2008. Although we do not believe this will be the likely outcome for small refiners, we cannot preclude it. Any refiner that makes such a determination in its progress reports will have until 2008 to transition out of gasoline production, but will not be considered for a extension of hardship relief.

vii. Can Small Refiners Participate in the ABT Program? As described in IV. C. 1. c. i above, any refinery ( including those owned by small refiners) can generate sulfur allotments ( in ppm gallons) in 2003 by producing gasoline containing less than 60 ppm sulfur on an annual average basis. Once this 60 ppm trigger is reached, allotments will be calculated based on the amount of reduction from 120 ppm 95. However, these allotments may be discounted depending on the actual sulfur level. If a refinery fully demonstrates compliance by producing gasoline with an annual average sulfur level of 0 to 30 ppm, the allotments retain their full value   they are not discounted at all. For actual sulfur levels of 31   60 ppm, which are indicative of a partial demonstration, the allotments are discounted 20 percent. During the period 2000   2003, refineries owned by small refiners can also generate credits by producing gasoline averaging at least 10 percent lower than that refinery's baseline sulfur level. In other words, to generate credits, the refinery's annual average sulfur level for all of its gasoline on average must be 0.9 ´   ( baseline sulfur level). Once this `` trigger'' is reached, credits will be calculated based on the amount of reduction from the refinery's sulfur baseline. For example, if in 2002 a refinery reduced its annual average sulfur level from a baseline of 450 ppm to 150 ppm ( well below the trigger of 0.9 ´   450 = 405 ppm), its sulfur credits would be determined based on the difference in annual sulfur level ( 450   150 = 300 ppm) multiplied by the volume of gasoline produced in 2002. Similarly, small foreign refiner owned refineries with an individual sulfur baseline can generate credits in these years as long as the annual average sulfur level of the gasoline exported to the U. S. from that refinery is lower than 90 percent of the baseline sulfur level. During the period 2004   2007, refineries owned by small refiners will be permitted to generate credits but only if their actual annual sulfur level of all gasoline produced or imported averages below their refinery standard, and only for the difference between the standard and the actual annual sulfur average. A refinery ( owned by a small refiner) wishing to participate in the ABT program can sell credits beginning as soon as January 1, 2000 but may wait until December 31, 2000 to apply for small refiner status. However, the standards assigned to that refinery ( as presented in Table IV. C   3 above) will be based on the sulfur level from which credits were generated, not the baseline sulfur level, since the refiner would have already demonstrated the ability to meet the lower sulfur level. For compliance purposes and to give refineries certainty regarding the gasoline sulfur standards to which they will be held during 2004   2007, the standards for a small refiner refinery participating in ABT will be set based on the refinery's lowest sulfur average for any year between 1999 and 2003. Using the example above, a refinery ( owned by a refiner with small refiner status) with a 1997   98 baseline sulfur level of 450 ppm would have an interim average standard of 450/ 2 = 225 ppm and a cap of 225 ´   1.5 = 338 ppm. If that refinery generated 300 sulfur credits in 2002 by producing gasoline with 150 ppm sulfur, then that refinery's average sulfur standard for 2004   2007 would be ratcheted down to 150 ppm with a cap of 300 ppm. However, that refinery would still be able to use the 300 credits that it had generated and banked in 2002 for compliance with its 150 ppm standard. Based on the comments received on our proposal, we are allowing small refineries to use credits and/ or allotments that they generated and/ or to purchase credits and/ or allotments from another refinery to meet their average standard during 2004   2007. We solicited comment on whether small refiners subject to the interim standards should be permitted to use credits towards meeting those standards, and several small refiners who already produce very clean gasoline commented that the special small refiner standards do not benefit them in any way. These refiners argued that if they could generate sufficient sulfur credits in 2000   2003, or could obtain such credits VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6771 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations through purchases from other refiners, they would not participate in the small refiner program but would instead participate in the sulfur ABT program. But since they are not positioned to generate credits ( due to their already low sulfur levels), and have little certainty of being able to purchase credits, they need the relief provided by the small refiner provisions. We concur with these concerns and thus permit small refiners to use ABT credits and allotments. Small refiners may only use ABT credits and/ or allotments to comply with their refinery average standard, not the per gallon caps applied to their gasoline. At any time, a small refiner can choose to `` opt out'' of the small refiner program and, beginning the next calendar year, comply with the standards in Table IV. C   2. The refiner would have to notify us of this change in its compliance program. Once a small refiner leaves the small refiner program, however, it would not be eligible to reenter the small refiner program.

b. Temporary Waivers From Low Sulfur Requirements in Extreme Unforeseen Circumstances In the final rule, EPA is adopting a provision permitting refiners to seek a temporary waiver from the sulfur standards in certain circumstances. Such waivers will be granted at EPA's discretion. Under this provision a refiner may seek permission to distribute gasoline that does not meet the applicable low sulfur standards for a brief time period, based on the refiner's inability to produce complying gasoline because of extreme and unusual circumstances outside the refiner's control that could not have been avoided through the exercise of due diligence. This provision is similar to a provision in EPA's RFG regulations, and is intended to provide refiners short term relief in unanticipated circumstances such as an accidental refinery fire or a natural disaster. The short term waiver provision is intended to address unanticipated circumstances that cannot be reasonably foreseen at this time or in the near future The conditions for obtaining such a waiver that are similar to those in the RFG regulations. These conditions are necessary and appropriate to ensure that any waivers that are granted are limited in scope, and that refiners do not gain economic benefits from a waiver. Therefore, refiners seeking a waiver must show that the waiver is in the public interest, that the refiner was not able to avoid the nonconformity, that it will make up the air quality detriment associated with the waiver, as well as any economic benefit from the waiver, and that it will meet the applicable sulfur standards as expeditiously as possible.

c. Temporary Waivers Based on Extreme Hardship Circumstances In addition to the provision for shortterm relief in unanticipated circumstances, we are adopting a provision for relief based on extreme hardship circumstances. In developing our sulfur program, we considered whether any refiners would face particular difficulty in complying with the standards in the lead time provided. As described in Section IV. C. 2. a., we concluded that refineries owned by small businesses would experience more difficulty in complying with the standards on time because, as a group, they have less ability to raise capital necessary for refinery investments, face proportionately higher costs because of economies of scale, and are less able to successfully compete for limited engineering and construction resources. However, it is possible that other refiners who do not meet our criteria for the interim standards also face particular difficulty in complying with the sulfur standards on time. Therefore, we are including in the final rule a provision allowing us, at our discretion, to grant temporary waivers from the sulfur standards based on a showing of extreme hardship circumstances. We do not anticipate, nor do we expect there is a need for, granting temporary waivers that apply to more than approximately one percent of the national gasoline pool in any given year. This provision would allow refiners ( domestic and foreign) to request a waiver from the sulfur standards based on a showing of unusual circumstances that result in extreme hardship and significantly affect the ability to comply by the applicable date. As with the small refiner interim standards, this provision furthers our overall environmental goals of achieving low sulfur gasoline nationwide as soon as possible. By providing short term relief to those refiners that need additional time because they face hardship circumstances, we can adopt a program that reduces gasoline sulfur beginning in 2004 for the majority of the industry that can comply by then. As described above, EPA understands that this program will require significant economic investments by the refining industry. We have adopted a program with sufficient flexibilities ( including an ABT program, allotment trading, a geographic phase in, and interim standards for qualifying small refiners) to make these investments reasonable and feasible over the time frame in which the standards are phased in. Because the refining industry encompasses a wide variety of individual circumstances, and our program phases in based on the lead time we believe is reasonable for the industry as a whole, there may be unusual circumstances that impose extreme hardship and significantly affect an individual refinery's ability to comply in the lead time provided. However, we do not intend for this waiver provision to encourage refiners to delay planning and investments they would otherwise make in anticipation of receiving relief from the applicable requirements. In addition, we want to limit the environmental impact of any hardship waivers from compliance with the standards. Thus, we anticipate that hardship waivers will only be granted in rare circumstances. Because of the significant environmental benefits of lowering sulfur in gasoline, we will administer this provision in a manner consistent with continuing to ensure the environmental objectives of the regulation. In our analysis of the interim small refiner standards, we concluded that only a minimal portion of the national gasoline pool would potentially be impacted by the less stringent interim standards, due to the relatively small production volume of these facilities. To limit the potential environmental impact of this hardship provision, we reserve the discretion to deny applications where we find that granting a waiver would result in an unacceptable environmental impact. While this determination will be made on a case by case basis, we do not expect there is a need for, nor do we anticipate, granting waivers that apply to more than approximately one percent of the total national pool of gasoline in any given year, or to more than a minimal percentage of the gasoline supply of an area known to have significant air quality problems. There are several factors we will consider in evaluating a petition for additional time to comply. This could include refinery configuration, severe economic limitations, and other factors that prevent compliance in the lead time provided. Applications for a waiver must include information that will allow us to evaluate all appropriate factors. EPA will consider whether the refinery configuration or operation is unique or atypical, how much of a refinery's gasoline is produced using an FCC unit, its hydrotreating capacity relative to its total crude capacity, total reformer unit throughput capacity relative to total production, gasoline VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00075 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6772 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations production in proportion to other refinery products, and other relevant factors. A refiner may also face severe economic limitations that result in a demonstrated inability to raise capital to make necessary investments to comply in time, which can be shown by an unfavorable bond rating, inadequate resources of the refiner and its parent and/ or subsidiaries, or other relevant factors. In addition, we will look at the total crude capacity of the refinery and its parent corporation. Finally, we will consider where the gasoline will be sold in evaluating the environmental impacts of granting a waiver. This provision is intended to address unusual circumstances that we expect will be foreseeable now or in the immediate future, such as unique and atypical gasoline refinery operations or a demonstrated inability to raise capital. These kinds of circumstances should be apparent at this time or in the near future, so refiners seeking additional time under this provision must apply for relief by September 1, 2000. A refiner seeking a waiver must show that unusual circumstances exist that impose extreme hardship and significantly affect its ability to meet the standards on time, and that it has made best efforts to comply with the standards, including efforts to obtain credits and/ or allotments towards compliance. Applicants for a hardship waiver must also submit a plan demonstrating how the standards will be achieved as expeditiously as possible. In submitting the plan, it must include a timetable for obtaining the necessary capital, contracting for engineering and construction resources, and obtaining permits. EPA will review and act on applications, and, if a waiver is granted, will specify a time period, not to extend beyond January 1, 2008 ( the date by which all gasoline is expected to meet the 30 ppm refinery average and 80 ppm per gallon cap standards), for the waiver. If a waiver is granted, EPA will impose as a condition of the waiver other reasonable requirements, including antibacksliding requirements to ensure no deterioration in the sulfur level of gasoline and interim sulfur standards that the refiner must meet. This is appropriate since some refiners who may qualify for a waiver can achieve some sulfur reductions, and even reductions to levels above 30 ppm will result in some environmental benefits. While this provision allows EPA to waive the per gallon standards as well as the average standards, EPA would not allow gasoline sulfur to exceed the highest per gallon cap applicable to a refiner under the interim small refiner standards described in Section IV. C. 2. Once all applications have been received, EPA will consider the appropriate process to follow in reviewing and acting on applications, including whether to conduct a notice and comment decision making process.

3. Streamlining of Refinery Air Pollution Permitting Process a. Brief Summary of Proposal Industry commenters expressed concern over the ability to obtain permits to construct and operate the facility modifications needed to meet the Tier 2 rule requirements by the end of 2004. As part of the preamble to the proposed rule, we outlined possible approaches to provide greater certainty and to expedite potentially applicable permit processes. In general, we solicited comments on whether and how policy options might be designed so as to exempt Tier 2 projects from major New Source Review ( NSR) and/ or to expedite the processing of permits where such requirements would apply. In particular, we solicited comment on whether the major NSR process could be expedited if: ( 1) EPA provided guidance on Lowest Achievable Emission Rate ( LAER) requirements or Best Available Control Technology ( BACT) determinations; ( 2) emissions reductions could be made available or designated for offsetting Tier 2 activities; ( 3) EPA developed model permits, or ( 4) EPA assisted the States in resolving source specific permitting issues as they would arise. The Agency also solicited comments on how the title V operating permit requirements, where applicable, might need to be integrated with the relevant NSR process. In proposing various mechanisms to expedite the permitting of Tier 2 projects, we recognized that a combination of measures might be needed, since the situations could vary widely among individual refineries due to differences in such factors as available equipment capacity, amount of sulfur in the crude oil, and applicable State regulations. Source specific analyses are also necessary to establish what sulfur reduction techniques can be applied, to determine the applicable permitting requirements, and to evaluate what controls will be necessary as a result of these requirements. We indicated our intent to offer assistance where needed.

b. Significant Comments Received The most significant comments received on the proposal concerning the timing impacts due to air permit requirements are presented below. These commenters focused exclusively on the requirements to obtain a preconstruction permit under the NSR program. Generally, commenters only concerns regarding the title V operating permit program were that the States' ongoing efforts to issue these permits might create a backlog which could delay the issuance of NSR permits for Tier 2 projects. A more detailed discussion of comments received on the proposal and EPA's response are contained in the Response To Comments document and is filed in the Docket for this action. We received written and oral comments from refineries about the permit requirements associated with Tier 2 projects. Refiners emphasized the need for certainty. They pointed out the need to secure preconstruction permits within 18 months ( e. g., 6 months to prepare and file NSR applications and another 12 months to issue the permit) and the need for permitting authorities to commit appropriate resources to meet this time frame. State and local air pollution control agencies did not support providing exemptions from emissions control and permitting requirements. Rather, agency commenters stated that they could accomplish the permitting requirements in the necessary time frames, provided that complete permit applications were received in a timely manner and refiners conferred with their regulatory agencies soon after the Tier 2 requirements are promulgated. They also indicated that the major NSR process could be expedited and have more certainty ( i. e., permits could be processed in 6 to 9 months) if EPA would provide guidance on emissions controls, emissions monitoring, and offsets. In general, environmental and community groups pointed out that the remedies under traditional permitting practices should be exhausted before additional flexibility is granted for Tier 2 projects.

c. Today's Action Based on the comments and other information received in response to the proposal, EPA believes that it is not necessary or appropriate to explore further the development of possible options which would exempt Tier 2 projects from the normally applicable preconstruction review process. This position is supported by: ( 1) The comments of States that industry can, in general, apply and receive NSR permits in time to comply with Tier 2; and ( 2) the recognition of industry's potential ability to use emissions reductions to net Tier 2 projects out of major NSR which would otherwise be applicable. Nonetheless, we believe that actions VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00076 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6773 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations should be taken to facilitate early compliance, to add certainty to the anticipated permitting actions and schedules, and to minimize the possibility of delay. Accordingly, EPA is taking two types of actions to promote these objectives. First, as previously discussed, we have structured the final gasoline sulfur program to allow additional lead time for many refiners ( i. e., certain refineries would be able to make desulfurization changes later than the proposed 2004 compliance date to meet Tier 2 requirements). This approach will help address the concerns over the availability of necessary new equipment and permitting backlogs caused by many refineries acting to obtain permits and order equipment within relatively the same time period. Second, we intend to take several actions ( described in more detail below) to expedite and impart greater certainty in obtaining necessary major NSR permits. As a result of comments received on the proposal, and the lead time provided in the final gasoline sulfur program, we believe that the vast majority of permits can be issued within the necessary time frames, provided that refineries submit their preconstruction applications in a timely manner and regulatory authorities prioritize the issuance of these permits. We also intend to assist States and refiners on a case by case basis in their efforts to address any unique permitting problems that might arise and, thus, remedy potential problems that could cause unanticipated delays. In the unlikely event permitting delays occur, EPA will work with refiners and the state/ local permitting agencies on a case by case basis, where a refinery has unique circumstances that necessitate unique treatment. While today's strategy will help expedite the permitting process, refineries that trigger major NSR as a result of producing low sulfur gasoline will still have to install the stringent level of emissions control technology required by the Act. However, we intend to issue guidance to assist states in making decisions about the levels of control technology, as described more below. In addition, the Agency wishes to clarify that, in our efforts to provide greater certainty and to facilitate more expeditious permitting, we are in no way shortcutting existing opportunities for public participation. We recognize the importance of public participation in making permitting decisions and intend that the measures adopted to address permitting concerns will not diminish the opportunities for public participation. i. Major New Source Review The major NSR program, as it applies to existing major stationary sources of air pollution, requires that a preconstruction permit be issued before a source makes a physical change or change in its method of operation of any project that would result in a significant net emissions increase. As described in the proposal, the steps taken by certain refineries to implement gasoline sulfur reductions to meet today's rule could result in emissions increases in one or more pollutants which may trigger the requirements for this type of preconstruction permit. A number of the refineries are located in areas designated as nonattainment for at least one pollutant. The nonattainment NSR requirements pursuant to part D of the Act would apply to any such refinery undergoing a major modification. For those refineries located in attainment or unclassifiable areas, permit requirements for the prevention of significant deterioration ( PSD) of air quality must be met for major modifications. The EPA recognizes the importance of timely major NSR ( as applicable) permit actions for refineries to proceed with necessary changes to meet the new low sulfur gasoline standard. We encourage refineries to begin discussions with permitting authorities and to submit permit applications   as early as possible. In addition, based on comments received, we believe that there are a few key areas in which assistance would be useful toward helping States issue timely permits to the applicable refineries: · Federal guidance on emissions control technology requirements. Refineries subject to major NSR review will be required to undergo a source specific evaluation to apply either BACT or LAER, depending upon the applicable program requirements. For example, the evaluation for BACT is case by case and takes into account the alternative technologies available to control pollution from a particular emissions unit or process, and considers the energy, environmental, economic and other costs associated with each technology. We intend to issue guidance setting out a level of emissions that, in our view, would be expected to satisfy the requirements for BACT for certain emissions units associated with refinery desulfurization projects. While States would not be required to use the results to establish BACT for a particular refinery subject to review and EPA's guidance on a control technology may not be appropriate where there exists unusual site specific circumstances, such guidance would add the certainty of EPA's expectations. Since negotiation of an appropriate BACT level often is one of the most time consuming aspects of permitting, we believe this EPA guidance will significantly expedite the process. The federal guidance on BACT, by including an evaluation of the most stringent control levels currently being achieved or required, will also provide federal guidance on LAER. The EPA plans to make a draft of this guidance available for public review and comment in January 2000. Final guidance would then be prepared, after relevant comments are considered, in time for States, refiners, and the public to consider in preparing and reviewing permit applications and proposed permits. · Availability of offsets. Refineries located in nonattainment areas must offset any proposed significant emissions increases with an equal or greater amount of emissions reductions from other sources, usually coming from within the same nonattainment area. We believe that vehicle emissions reductions resulting from the use of low sulfur gasoline can be used as offsets for the refineries, as long as the statutory and regulatory criteria for creditable offsets are satisfied and States decide to provide for this opportunity in their SIP attainment demonstration. We believe generally that this option should be available to States since only a small fraction of the total vehicle emissions reductions in any county would be needed to offset refinery emissions increases resulting from implementation of gasoline desulfurization projects. Generally, the reductions must also occur in the same nonattainment area as the location of the refinery for which the offsets are required. The EPA plans to issue the appropriate guidance early in the year 2000 to help a State to determine whether and to what extent it may wish to use vehicle emissions reductions as offsets for Tier 2 projects. · EPA refinery permitting teams. We intend to assemble special EPA teams, comprised of Headquarters and Regional Office experts, that will track the overall progress in permit issuance and will be available to assist State and local permitting authorities, refineries, and the public upon request to resolve site specific permitting issues. These teams will be comprised of persons who are knowledgeable about permitting programs and refinery operations and can provide expert assistance to troubleshoot permitting issues that may arise. As appropriate, the teams will work with stakeholders on a case by

VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00077 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6774 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 96 The NEJAC was chartered in 1993 expressly to give the EPA Administrator independent advice, consultation, and recommendations on environmental justice matters. NEJAC members come from state, tribal, and local governments; tribal and indigenous citizen's organizations; business and industry; academia; and environmental advocacy and grassroots community groups. case basis to evaluate site specific approaches to regulatory compliance within existing policy and regulations.

ii. Environmental Justice The Tier 2/ gasoline sulfur rule will help achieve significant nationwide reductions in the emissions of nitrogen oxides ( NOx), volatile organic compounds ( VOC), particulate matter ( PM), and sulfur dioxide ( SO2). These reductions will improve air quality across the country and will provide increased protection to the public against a wide range of health effects, including chronic bronchitis, respiratory illnesses, and aggravation of asthma symptoms. Furthermore, the Tier 2/ gasoline sulfur rule will achieve environmental benefits in the local areas where refineries are located, due to reductions in tail pipe emissions from vehicles driven in those areas. Although we expect residual emissions increases at some refineries even after installing the stringent level of emissions controls required under the Act, for the vast majority of areas, we believe that these potential refinery emissions increases will be very small compared to the Tier 2 benefits in those same local areas. We believe it is important to understand and address concerns relating to potential localized emissions increases from refineries that make significant process changes to meet the requirements of the Tier 2 rule. We believe that, among other things, the keys to addressing any potential concerns are as follows: · Providing meaningful community involvement early and throughout the process; · Determining what information and actions would eliminate concerns; and · Determining what EPA, States, and industry can do to make the permitting process smoother by ensuring ongoing community involvement in the decision making process and by building trust among stakeholders. To this end, the Agency has already taken some actions to try to mitigate potential environmental justice concerns. First, EPA's Office of Air and Radiation and the Alternative Dispute Resolution Team within EPA's Office of the Administrator implemented a national convening process which was designed to bring together a broad spectrum of stakeholders to explore with them their perceptions and views of issues associated with Tier 2 permitting and to assess the potential for a collaborative process to address specific implementation issues at some time in the future. The convening was carried out by an outside neutral party who conducted interviews with representatives from selected EPA offices, States, industry, environmental groups, and environmental justice organizations. Second, EPA held informational briefings and provided background materials to the National Environmental Justice Advisory Council's ( NEJAC) 96 Air and Water Subcommittee and Enforcement Subcommittee to provide an opportunity for them to provide feedback and recommendations to the Agency. Finally, in October 1999, we met with both national environmental groups and environmental justice advocacy representatives, to discuss their views on the permitting aspects of the proposed rule. The EPA is committed to continue working with all stakeholders to resolve specific Environmental Justice issues if and when they arise. To fulfill this commitment, we plan to undertake additional actions in the future, including providing education and outreach about the rule and its impacts in local communities, developing permitting guidance through a public process and addressing Title VI petitions if they arise.

D. What Are the Economic Impacts, Cost Effectiveness and Monetized Benefits of the Tier 2 Program? Consideration of the economic impacts of new standards for vehicles and fuels has been an important part of our decision making process for this final rule. The following sections describe first the costs associated with meeting the new vehicle standards and the new fuel standards. This will be followed with a discussion of the cost effectiveness of the rule. Lastly, we will discuss the results of a benefit cost assessment that we have prepared. Full details of our cost analyses, including information not presented here, can be found in the RIA associated with this rule. Also, our response to comments on the cost, cost effectiveness, and monetized benefits analyses are contained in the Response to Comments document for this rule.

1. What Are the Estimated Costs of the Vehicle Standards? To perform a cost analysis for the standards, we first determined a package of likely technologies that manufacturers could use to meet the standards and then determined the costs of those technologies. In making our estimates we have relied on our own technology assessment which included publicly available information, such as that developed by California, as well as confidential information supplied by individual manufacturers, and the results of our own in house testing. In general, we expect that the Tier 2 standards will be met through refinements of current emissions control components and systems rather than through the widespread use of new technology. Furthermore, smaller lighter weight vehicles and trucks will generally require less extensive improvements than larger vehicles and trucks. More specifically, we anticipate a combination of technology upgrades such as the following: · Improvements to the catalyst system design, structure, and formulation plus in some cases an increase in average catalyst size and loading; · Air and fuel system modifications including changes such as improved microprocessors, improved oxygen sensors, leak free exhaust systems, air assisted fuel injection, and calibration changes including improved precision fuel control and individual cylinder fuel control; · Engine modifications, possibly including an additional spark plug per cylinder, an additional swirl control valve, or other hardware changes needed to achieve cold combustion stability; · Increased use of fully electronic exhaust gas recirculation ( EGR); and · Increased use of secondary air injection for 6 cylinder and larger engines. The costs for MDPVs have been included here with the LDT4 cost estimates. We expect that the technologies needed to meet the Tier 2 standards for the MDPVs will be very similar to those for LDT4s. However, the MDPVs cost estimates are somewhat higher than for LDT4s. Vehicles over 8,500 pounds GVWR are currently certified to heavy duty engine emissions standards using the heavy duty test procedures. This, at least in part, has led to differences in baseline technologies compared to current LDT4s. Vehicles above 8,500 pounds, for example, are currently equipped with technologies such as close coupled catalysts and secondary air injection to a lesser extent. Therefore, we expect higher incremental costs for the MDPVs compared to LDT4s. There is further information on the costs for MDPVs in the RIA.

VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6775 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 97 `` Learning Curves in Manufacturing,'' Linda Argote and Dennis Epple, Science, February 23, 1990, Vol. 247, pp. 920   924. 98 Even though the NLEV program ends in the Tier 2 timeframe, we have not included the NLEV program costs or benefits in our analysis, since EPA analyzed and adopted NLEV previously. Using a typical mix of changes for each group, we projected costs separately for LDVs, the different LDT classes, and for different engine sizes ( 4, 6, 8, 10 cylinder) within each class. For each group we developed estimates of both variable costs ( for hardware and assembly time) and fixed costs ( for R& D, retooling, and certification). Cost estimates based on the current projected costs for our estimated technology packages represent an expected incremental cost of vehicles in the near term. For the longer term, we have identified factors that would cause cost impacts to decrease over time. First, since fixed costs are assumed to be recovered over a five year period, these costs disappear from the analysis after the fifth model year of production. Second, the analysis incorporates the expectation that manufacturers and suppliers will apply ongoing research and manufacturing innovation to making emission controls more effective and less costly over time. Research in the costs of manufacturing has consistently shown that as manufacturers gain experience in production and use, they are able to apply innovations to simplify machining and assembly operations, use lower cost materials, and reduce the number or complexity of component parts. 97 These reductions in production costs are typically associated with every doubling of production volume. Our analysis incorporates the effects of this `` learning curve'' by projecting that the variable costs of producing the Tier 2 vehicles decreases by 20 percent starting with the third year of production. We applied the learning curve reduction only once since, with existing technologies, there would be less opportunity for lowering production costs than would be the case with the adoption of new technology. We have prepared our cost estimates for meeting the Tier 2 standards using a baseline of NLEV technologies for LDVs, LDT1s, and LDT2s, and Tier 1, or current technologies for LDT3s, LDT4s and MDPVs. These are the standards that vehicles would be meeting in 2003.98 We have not specifically analyzed smaller incremental changes to technologies that might occur due to the interim standards between the baseline and Tier 2. In most cases, we believe these changes will not be significant based on current certification levels and manufacturers will maximize carryover For others, manufacturers can use averaging and other program flexibilities to avoid redesigning vehicles twice within a relatively short period of time. We believe this is likely to be an attractive approach for manufacturers due to the savings in R& D and other resources. For the total annual cost estimates, we projected that manufacturers will start the phase in of Tier 2 vehicles with LDVs in 2004 and progress to heavier vehicles until all LDT2s meet Tier 2 standards in 2007. For LDT3s and LDT4s, we projected some sales of Tier 2 LDT3s prior to 2008 for purposes of averaging in the interim program and that the phase in of Tier 2 vehicles would end with LDT4s and MDPVs in 2009. Finally, we have incorporated what we believe to be a conservatively high level of R& D spending at $ 5,000,000 per vehicle line ( with annual sales of 100,000 units per line). We have included this large R& D effort because calibration and system optimization is likely to be a critical part of the effort to meet Tier 2 standards. However, we believe that the R& D costs may be generous because the projection ignores the carryover of knowledge from the first vehicle lines designed to meet the standard to others phased in later. The evaporative emissions standards we are finalizing today for LDVs, LDTs and MDPVs are feasible with relatively small cost impacts. We estimate the cost of system improvements to be about $ 4 per vehicle, for all vehicle classes. This incremental cost reflects the cost of moving to low permeability materials, improved designs or low loss connectors. R& D for the evaporative emissions standard is included in the R& D estimates given above for the tailpipe standards. We have included no projections of learning curve reductions for the evaporative standard. Table IV. D.   1 provides our estimates of the per vehicle increase in purchase price for LDVs, LDTs, and MDPVs. The near term cost estimates in Table IV. D.   1 are for the first years that vehicles meeting the standards are sold, prior to cost reductions due to lower productions costs and the retirement of fixed costs. The long term projections take these cost reductions into account. We have sales weighted the cost differences for the various engine sizes ( 4, 6, 8, 10 cylinder) within each category.

TABLE IV. D.   1.   ESTIMATED PURCHASE PRICE INCREASES DUE TO TIER 2 TAILPIPE STANDARDS LDV LDT1 LDT2 LDT3 LDT4/ MDPVsa Tailpipe standards: Near term ( year 1) ............................................................................ $ 78 $ 70 $ 125 $ 245 $ 258 Long term ( year 6 and beyond) ........................................................ 49 45 97 199 208 Evaporative Standard .............................................................................. 4 4 4 4 4 Notes: a Weighted average.

We did not receive comments disagreeing with the technology projections or technology cost estimates contained in the proposal. We have, however, revised our cost estimates somewhat based on new information available since the proposal. We moderately lowered our cost estimates due to adjustments we have made in our technology projections. Based on the results of our vehicle testing program described above in section IV. A. 1., we now believe that a few of the hardware changes we had anticipated are not likely to be needed to meet the standards. Albeit there is always fluctuation, the spot prices of precious metals have increased somewhat since the proposal and we have adjusted our analysis to reflect those changes. Overall, the cost estimates are within 5 percent of those in the proposal for LDVs and LLDTs. The changes noted above moderately lowered the costs for HLDTs compared to the proposal. The cost increase due to the inclusion of MDPVs offsets most of the lowered costs VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00079 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6776 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations for the LDT4 category. The resulting cost estimate for the LDT4/ MDPVs tailpipe standards is also within 5 percent of the cost estimates for LDT4s contained in the proposal. The detailed technology and cost analyses are available in the RIA. We are also finalizing OBD II requirements and onboard vapor recovery ( ORVR) requirements for MDPVs. We have estimated that OBD II will cost about $ 80, which includes the costs of additional sensors and system improvements. We have estimated ORVR system costs to be about $ 10. The $ 10 cost for ORVR does not include any fuel cost savings over the life of the vehicles due the recover of fuel vapor during refueling. ORVR provides a fuel cost savings because the vapors are captured, and burned in the engine, rather than escaping to the atmosphere. We estimate the savings over the life of the vehicle to be about $ 6. These costs are not reflected in Table IV. D.   1.

2. Estimated Costs of the Gasoline Sulfur Standards As we explained at the beginning of Section IV. C, we expect that most refiners will have to install capital equipment to meet the gasoline sulfur standard. Presuming that refiners will want to minimize the cost involved, the majority of refiners are expected to desulfurize the gasoline blendstock produced by the fluidized catalytic cracker ( FCC) unit, although a few may choose to desulfurize the feed to the FCC unit. Recent advances have led to significant improvements in the hydrotreating technologies used for FCC gasoline desulfurization. Since these improved technologies represent the lowest cost options and are expected to be used by most refiners needing to install desulfurization equipment, we have based our cost estimates primarily on their use. However, in acknowledgment that some refiners, particularly those which make investment decisions in the near term, are likely to select more traditional approaches using proven technologies, we have included the costs for currently proven desulfurization technologies in our analysis, as well. This is different from the analysis we did in support of our proposal, where we assumed that all refiners would take advantage of the most improved technologies we were aware of at that time. For our analysis of the costs of controlling gasoline sulfur, we estimated the costs in five different regions of the country ( Petroleum Administration Districts for Defense, or PADDs) for reductions from the current PADD average gasoline sulfur level down to a 30 ppm average. We then combined the regional costs to develop an average national individual refinery cost, and used this figure to calculate national aggregate capital and operating costs. In our proposal we estimated a single cost for desulfurizing gasoline, using as an assumption for the purpose of analysis that all refiners would upgrade their refineries by 2004 and that all would choose one of two improved technologies we knew of at the time. We then reduced this cost over time to reflect expected cost reductions due to further technology advancements and reduced operating costs due to improved understanding of the technologies and refinery debottlenecking. Based on improved information about the availability of technologies, we have now analyzed the costs of controlling sulfur on a year byyear basis beginning with 2004, to be consistent with our analysis of the rate at which the industry would invest in desulfurization technologies over the first years of the program and the changing technology selections ( and costs) that would accompany this phasein ( discussed in Section IV. C. 1 above). A detailed description of our calculations can be found in the Regulatory Impact Analysis; the reader can refer to the draft RIA released with the proposed rule for more information on our prior analysis. We estimate that, on average, refineries which install equipment to meet the 30 ppm average standard will invest about $ 44 million for capital equipment and spend about $ 16 million per year for each refinery to cover the operating costs associated with these desulfurization units. Since this average represents many refineries diverse in size and gasoline sulfur level as well as a mix of desulfurization technologies, some refineries will pay more and others less than the average costs. When the average per refinery cost is aggregated for all the gasoline expected to be produced in this country in 2008 ( the first year that all refiners will be required to meet the 30 ppm standard, unless any small refiners are granted a extension of hardship relief), the total investment for desulfurization processing units ( spread between 2003 and 2007) is estimated to be about $ 4.3 billion, and operating costs for these units is expected to be about $ 1.3 billion per year. Using our estimated capital and operating costs for domestic refineries, we calculated the average per gallon cost of reducing gasoline sulfur down to 30 ppm for each year as the program is implemented. Using a capital cost amortization factor ( based on a seven percent rate of return on investment) and including no taxes, we estimated the average national cost for desulfurizing gasoline to be about 1.7   1.9 cents per gallon as the program is phased in. This cost is the cost to society of reducing gasoline sulfur down to 30 ppm that we used for estimating cost effectiveness. Table IV. D.   2 below summarizes our estimates of per gallon gasoline cost increases for select years.

TABLE IV. D.   2.   ESTIMATED PERGALLON COST FOR DESULFURIZING GASOLINE IN FUTURE YEARS Year Cost ( cents/ gallon)

2004 .......................................... 1.9 2005 .......................................... 1.9 2006 .......................................... 1.7 2007 .......................................... 1.7 2008   2018 ................................ 1.7 2019+ ........................................ 1.3 Although the costs shown here are slightly higher than we projected in the proposal, overall, we believe our revised costs are consistent with those in the proposal and that our improved methodology and information are the source of the differences. As stated earlier in this section, we believe this analysis more accurately reflects the actual investment decisions of individual refiners over the years in which the industry is phasing down sulfur levels. Furthermore, we have also made a number of other adjustments to our analysis of capital and operating costs for each individual technology based on new information received from the technology vendors and information we obtained during the comment period. For example, we now include eight different technologies in our analysis, including some more traditional approaches, whereas in the proposal we only considered two new technologies. Hence, the range of costs is broader. In addition, as explained in the RIA, we now believe we underestimated the capital costs of desulfurization slightly in the proposal based on our calculation of the costs of providing hydrogen to the processes. We believe our analysis now reflects the most up to date information about the costs of installing and operating the various desulfurization technologies included in our analysis. These adjustments are explained in detail in the Regulatory Impact Analysis. We still believe that over time, particularly in 2006   8 when the last refineries will be making investments, the costs of gasoline desulfurization equipment will be significantly lower VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00080 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6777 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 99 For a sensitivity analysis of our cost estimates using alternative assumptions, please see Chapter V of the RIA. 100 Figure IV. D.   1 is based on the amortized costs from Tables IV. D.   1 and IV. D.   2. Actual capital investments, particularly important for fuels, would occur prior to and during the initial years of the program, as described above in section IV. D. 2. than it is today. Some of the technologies expected to be selected in this time frame ( specifically, the new adsorption technologies which we didn't know about when we proposed these requirements) are projected to cost about half of what the older technologies cost. Furthermore, with time refiners will have to replace existing desulfurization equipment ( as equipment ages), and by then they will have a number of low cost alternatives to choose from. Thus, as Table IV. D.   2 shows, the long term estimated costs for gasoline desulfurization are lower than those we projected in our proposal. 99 3. What Are the Aggregate Costs of the Tier 2/ Gasoline Sulfur Final Rule? Using current data for the size and characteristics of the vehicle fleet and making projections for the future, the per vehicle and per gallon fuel costs described above can be used to estimate the total cost to the nation for the emission standards in any year. Figure IV. D.   1 portrays the results of these projections. 100 BILLING CODE 6560   50   P BILLING CODE 6560   50   C As can be seen from the figure, the annual cost starts out at about $ 1.9 billion per year and increases over the phase in period to about $ 4.1 billion in 2008. Total annualized costs are projected to remain at about $ 4 billion through 2018. After 2018, annualized fuel costs are projected to decrease somewhat due to the use of new technologies which would enable refiners to produce low sulfur fuel at a lower cost. The gradual rise in costs long term is due to the effects of projected growth in vehicle sales and fuel consumption. The RIA provides further detail regarding these cost projections. 4. How Does the Cost effectiveness of This Program Compare to Other Programs?

This section summarizes the costeffectiveness analysis conducted by EPA and its results. The purpose of this analysis is to show that the reductions from the vehicle and fuel controls being finalized today are cost effective in comparison to alternative means of attaining or maintaining the NAAQS. This analysis involves a comparison of our program not only to past measures, but also to other potential future measures that might be employed to attain and maintain the NAAQS. Both EPA and states have already adopted numerous control measures, and remaining measures tend to be more expensive than those previously employed. As we employ the most costeffective available measures first, more expensive ones tend to become necessary over time. The emission reductions used to calculate the cost effectiveness levels reported here are based on those reductions used for our air quality analysis modeling and benefits analysis. This was done to maintain consistency in the analyses. As noted in Section III. B. above, we have updated our inventory model since the air quality modeling inventories were calculated. In Chapter III of our RIA, Table III. A.   3 compares the updated Tier 2 model with the air quality analysis modeling and shows that the emission reductions expected from Tier 2/ gasoline sulfur will be substantially greater than the amounts originally calculated. If the VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00081 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6778 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations updated numbers were incorporated into our cost effectiveness we would expect the results to be improved over those shown in this section. We received a number of comments on our cost effectiveness analysis in response to our NPRM. Our responses to these comments can be found in the Response To Comments document.

a. Cost Effectiveness of This Program We have calculated the costeffectiveness of the exhaust emission/ gasoline sulfur standards and the evaporative emission standards, based on two different approaches. The first considers the net present value of all costs incurred and emission reductions generated over the life of an average Tier 2 vehicle. This per vehicle approach focuses on the cost effectiveness of the program from the point of view of the Tier 2 vehicles which will be used to meet the new requirements, and is the method used in our proposal. However, the per vehicle approach does not capture all of the costs or emission reductions from the Tier 2/ gasoline sulfur program since it does not account for the use of low sulfur gasoline in pre Tier 2 vehicles. Therefore, we have also calculated an aggregate costeffectiveness using the net present value of costs and emission reductions for all in use vehicles over a 30 year time frame. As described earlier in the discussion of the cost of this program, the cost of complying with the new standards will decline over time as manufacturing costs are reduced and amortized capital investments are recovered. To show the effect of declining cost in the pervehicle cost effectiveness analysis, we have developed both near term and long term cost effectiveness values. More specifically, these correspond to vehicles sold in years one and six of the vehicle and fuel programs. Vehicle cost is constant from year six onward. Fuel costs per gallon continue to decline slowly in the years past year six; however, the overall impact of this decline is small and we have decided to use year six results for our long term cost effectiveness. Chapter VI of the RIA contains a full description of this analysis, and you should look in that document for more details of the results summarized here. The aggregate approach to calculating the cost effectiveness of our program involves the net present value of all nationwide emission reductions and costs for a 30 year period beginning with the start of the program in 2004. This timeframe captures both the early period of the program when very few Tier 2 vehicles will be in the fleet, and the later period when essentially all vehicles in the fleet will meet Tier 2 standards. We have calculated the aggregate cost effectiveness using the net present value of the nationwide emission reductions and costs for each calendar year. These emission reductions and costs are summarized in Sections III. B, III. C, and IV. D. 3, and are given for every calendar year in the RIA. For more information on how the aggregate cost effectiveness was calculated please refer to the RIA. Our per vehicle and aggregate costeffectiveness values are given in Tables IV. D.   3 and IV. D.   4. Table IV. D.   3 summarizes the per vehicle, net present value lifetime costs, NMHC+ NOX emission reductions, and resulting costeffectiveness results for our Tier 2/ gasoline sulfur program using sales weighted averages of the costs ( both near term and long term) and emission reductions of the various vehicle classes affected. Table IV. D.   4 provides the same information from the program aggregate perspective. It includes the net present value of the 30 year stream of vehicle and fuel costs, NMHC+ NOX emission reductions, and the resulting aggregate cost effectiveness. For simplicity, we have used the midpoint of our estimated range of 20 to 65 percent for the irreversibility effect. The full range of irreversibility would only cause the cost effectiveness values to differ from those in Table IV. D   3, for example, by $ 60/ ton to $ 100/ ton. Note that, even though we are setting new standards for PM, those standards are already being met, so there is no cost associated with the new PM standard and therefore no separate costeffectiveness analysis for PM. Tables IV. D.   3 and IV. D.   4 also display cost effectiveness values based on two approaches to account for the reductions in SO2 and tailpipe emitted sulfate particulate matter ( PM) associated with the reduction in gasoline sulfur. While these reductions are not central to the program and are therefore not displayed with their own cost effectiveness, they do represent real emission reductions due to our program. The first set of cost effectiveness numbers in the tables simply ignores these reductions and bases the costeffectiveness on only the NMHC+ NOX reductions from Tier 2/ gasoline sulfur. The second set accounts for these ancillary reductions by crediting some of the cost of the program to SO2 and PM reduction. The amount of cost allocated to SO2 and PM is based on the cost effectiveness of SO2 and PM emission reductions that could be obtained from alternative, potential future EPA programs.

TABLE IV. D   3.   PER VEHICLE COST EFFECTIVENESS OF THE STANDARDS Cost basis Discounted lifetime vehicle & fuel costs Discounted lifetime NMHC + NOX reduction ( tons) Discounted lifetime cost effectiveness per ton Discounted lifetime cost effectiveness per ton with SO2 and direct PM credit a Near term cost ( production year 1) ................................................................................. $ 243 0.110 $ 2,211 $ 1,717 Long term cost ( production year 6) ................................................................................. 205 0.110 1,863 1,368 Notes: a $ 51 credited to SO2 ($ 4,800/ ton), $ 4 to direct PM ($ 10,000/ ton).

VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00082 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6779 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 101 This rulemaking was remanded by the D. C. Circuit Court on May 14, 1999. However, the analyses completed in support of that rulemaking are still relevant, since they were designed to investigate the cost effectiveness of a wide variety of potential future emission control strategies. 102 `` Regulatory Impact Analyses for the Particulate Matter and Ozone National Ambient Air Quality Standards and Proposed Regional Haze Rule,'' Appendix B, `` Summary of control measures in the PM, regional haze, and ozone partial attainment analyses,'' Innovative Strategies and Economics Group, Office of Air Quality Planning and Standards, U. S. Environmental Protection Agency, Research Triangle Park, NC, July 17, 1997. TABLE IV. D   4.   AGGREGATE COST EFFECTIVENESS OF THE STANDARDS Discounted aggregate vehicle & fuel costs Discounted aggregate NMHC + NOX reduction ( tons) ( millions) Discounted aggregate cost effectiveness per ton Discounted aggregate cost effectiveness per ton with SO2 and direct PM credit a $ 48.1 billion 23.5 $ 2,047 $ 1,311 Notes: a $ 13.8 billion credited to SO2 ($ 4,800/ ton), $ 3.5 billion to direct PM ($ 10,000/ ton).

b. How Does the Cost Effectiveness of This Program Compare With Other Means of Obtaining Mobile Source NOX + NMHC Reductions? In comparison with other mobile source control programs, we believe that our program represents the most costeffective new mobile source control strategy currently available that is capable of generating substantial NOX + NMHC reductions. This can be seen by comparing the cost effectiveness of today's program with a number of mobile source standards that EPA has adopted in recent years. Table IV. D.   5 summarizes the cost effectiveness of several recent EPA actions.

TABLE IV. D.   5.   COST EFFECTIVENESS OF PREVIOUSLY IMPLEMENTED MOBILE SOURCE PROGRAMS Program $/ ton a NOX+ NMHC 2004 Highway HD Diesel stds .................................... 204   399 Nonroad Diesel engine stds 410   650 Tier 1 vehicle controls .......... 1,980   2,690 NLEV .................................... 1,859 Marine SI engines ................ 1,128   1,778 On board diagnostics ........... 2,228 Notes: a Costs adjusted to 1997 dollars.

We can see from the table that the cost effectiveness of the Tier 2/ gasoline sulfur standards falls within the range of these other programs. Engine based standards ( the 2004 highway heavy duty diesel standards, the nonroad diesel engine standards and the marine sparkignited engine standards) have generally been less costly than Tier 2/ gasoline sulfur. Vehicle standards, most similar to today's program, have values comparable to or higher than Tier 2/ gasoline sulfur. The values in Table IV. D.   5 might imply that further reductions in NOX and VOC from heavy duty engines could be more cost effective than the reductions that will be produced from our Tier 2/ gasoline sulfur program. However, we do not believe that to be the case. While we are indeed developing a proposal for further control from heavy duty engines, we expect that substantial further emission reductions will require advanced aftertreatment devices. These devices will be more costly than methods used to meet our past standards, and will have difficulty functioning properly without changes to diesel fuel. We therefore expect that the cost effectiveness of future heavy duty standards is not likely to be significantly less than the cost effectiveness of today's rule. On the light duty vehicle side, the last two sets of standards were Tier 1 and NLEV, which had cost effectiveness comparable to or higher than Tier 2/ gasoline sulfur. Compared to engines, these levels reflect the advanced ( and more expensive) state of vehicle control technology, where standards have been in effect for a much longer period than for engines. Considering the increased stringency of the Tier 2 standards, it is noteworthy that the cost effectiveness of Tier 2/ gasoline sulfur is in the same range as these actions. Based on these results, Tier 2/ gasoline sulfur is a logical and consistent next step in vehicle control. In conclusion, we believe that the Tier 2/ Gasoline Sulfur program is a costeffective program for mobile source NOX + NMHC control. We are unable to identify another mobile source control program that would be more costeffective than Tier 2/ gasoline sulfur while also producing equivalent reductions in NOX and NMHC emissions in the same timeframe as our program.

c. How Does the Cost Effectiveness of This Program Compare With Other Known Non Mobile Source Technologies for Reducing NOX + NMHC?

In evaluating the cost effectiveness of the Tier 2/ Gasoline Sulfur program, we also considered whether our program is cost effective in comparison with alternative means of attaining or maintaining the NAAQS other than mobile source programs. As described below, we have concluded that Tier 2/ Gasoline Sulfur is cost effective considering the anticipated cost of other technologies that will be needed to help attain and maintain the NAAQS. In the context of the Agency's rulemaking to revise the ozone and PM NAAQS, 101 the Agency compiled a list of additional known technologies that could be considered in devising new emission reductions strategies. 102 Through this broad review, over 50 technologies were identified that could reduce NOX or VOC. The costeffectiveness of these technologies averaged approximately $ 5,000/ ton for VOC and $ 13,000/ ton for NOX. These values clearly indicate that not only are future emission control strategies likely to be more expensive ( less costeffective than past strategies, but the cost effectiveness of our Tier 2/ Gasoline Sulfur program falls at the lower end of the range for potential future strategies. In addition, our Tier 2/ Gasoline Sulfur program will deliver critical further reductions that are not readily obtainable by any other means known to the Agency. If all of the technologies modeled in the NAAQS analysis costing less than $ 10,000/ ton were implemented nationwide, they would produce NOX emission reductions of about 2.9 million tons per year. The Tier 2/ Gasoline Sulfur program by itself will generate about 2.8 million tons per year once fully implemented. Given the continuing need for further emission reductions, we believe that Tier 2/ Gasoline Sulfur control is clearly a costeffective approach for attaining and maintaining the NAAQS. We recognize that the costeffectiveness calculated for Tier 2/ Gasoline Sulfur is not strictly comparable to a figure for measures targeted at nonattainment areas, since Tier 2/ Gasoline Sulfur is a nationwide program. However, there are several additional considerations that have led us to conclude that Tier 2/ Gasoline Sulfur is cost effective considering VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00083 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6780 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 103 Final Regulatory Impact Analysis: Control of Emissions of Air Pollution from Highway Heavy Duty Engines, September 16, 1997. 104 The `` section 812 studies'' refers to ( 1) US EPA, Report to Congress: The Benefits and Costs of the Clean Air Act, 1970 to 1990, October 1997 ( also known as the `` section 812 Retrospective); and ( 2) the first in the ongoing series of prospective studies estimating the total costs and benefits of the Clean Air Act ( see EPA report number: EPA   410   R   99   001, November 1999). alternative means of attaining and maintaining the NAAQS. First of all is the fact that the cost effectiveness of Tier 2/ Gasoline Sulfur is so much better than the numbers developed for the NAAQS analysis. It is only 20 percent as costly per ton as the $ 10,000 per ton upper limit employed in that analysis for selecting suitable strategies even though, as noted above, Tier 2/ Gasoline Sulfur will produce almost the same level of emission reduction. Furthermore, as a national program, Tier 2/ Gasoline Sulfur can be implemented as a single unified rule without the need for individual action by each of the states. In dealing with the question of comparing local and national programs, it is also relevant to point out that, because of air transport, the need for NOX control is a broad regional issue not confined to non attainment areas only. To reach attainment, future controls will need to be applied over widespread areas of the country. In the analyses supporting the recent NOX standards for highway diesel engines, 103 we looked at this question in some detail and concluded that the regions expected to impact ozone levels in ozone nonattainment areas accounted for over 85% of total NOX emissions from a national heavy duty engine control program. Similarly, NOX emissions in attainment areas also contribute to particulate matter nonattainment problems in downwind areas. Thus, the distinction between local and national control programs for NOX is less important than it might appear. Finally, the statute indicates that in considering the cost effectiveness of Tier 2/ Gasoline Sulfur EPA should consider not only attainment, but also maintenance of the standards. Tier 2/ Gasoline Sulfur   unlike nonattainment area measures   will achieve attainment area reductions that, among other effects, will help to maintain air quality that meets the NAAQS. These reductions relate not only to the ozone and PM NAAQS, but also to SO2 and NO2, and to CO. In summary, given the array of controls that will have to be implemented to make progress toward attaining and maintaining the NAAQS, we believe that the weight of the evidence from alternative means of providing substantial NOX + NMHC emission reductions indicates that the Tier 2/ Gasoline Sulfur program is costeffective This is true from the perspective of other mobile source control programs or from the perspective of other stationary source technologies that might be considered.

5. Does the Value of the Benefits Outweigh the Cost of the Standards? While relative cost effectiveness is the principal economic policy criterion established for these standards in the Clean Air Act ( see CAA § 202( i)), further insight regarding the merits of the standards can be provided by benefitcost analysis. The purpose of this section is to summarize the methods we used and results we obtained in conducting an analysis of the economic benefits of the Tier 2 program, and to compare these economic benefits with the estimated costs of the rule. In summary, the results of our analysis using the EPAs preferred approach to valuing premature mortality indicate that the economic benefits of the Tier 2/ gasoline sulfur standards will likely exceed the costs of meeting the standards by about $ 20 billion ( 1997$).

a. What Is the Purpose of This Benefit Cost Comparison? Benefit cost analysis ( BCA) is a useful tool for evaluating the economic merits of proposed changes in environmental programs and policies. In its traditional application, BCA estimates the economic `` efficiency'' of proposed changes in public policy by organizing the various expected consequences and representing those changes in terms of dollars. Expressing the effects of these policy changes in dollar terms provides a common basis for measuring and comparing these various effects. Because improvement in economic efficiency is typically defined to mean maximization of total wealth spread among all members of society, traditional BCA must be supplemented with other analyses in order to gain a full appreciation of the potential merits of new policies and programs. These other analyses may include such things as examinations of legal and institutional constraints and effects; engineering analyses of technology feasibility, performance and cost; or assessment of the air quality need. In addition to the narrow, economic efficiency focus of most BCAs, the technique is also limited in its ability to project future economic consequences of alternative policies in a definitive way. Critical limitations on the availability, validity, or reliability of data; limitations in the scope and capabilities of environmental and economic effect models; and controversies and uncertainties surrounding key underlying scientific and economic literature all contribute to an inability to estimate the economic effects of environmental policy changes in exact and unambiguous terms. Under these circumstances, we consider it most appropriate to view BCA as a tool to inform, but not dictate, regulatory decisions such as the ones reflected in today's rule. Despite the limitations inherent in BCA of environmental programs, we consider it useful to estimate the potential benefits of today's action both in terms of physical changes in human health and welfare and environmental change, and in terms of the estimated economic value of those physical changes.

b. What Was Our Overall Approach to the Benefit Cost Analysis?

The basic question we sought to answer in the BCA was: `` What are the net yearly economic benefits to society of the reduction in mobile source emissions likely to be achieved by the final Tier 2 program?'' In designing an analysis to answer this question, we selected a future year for analysis ( 2030) that is representative of fullimplementation of the program ( i. e., when the U. S. car and light truck population is virtually only Tier 2 vehicles). We also adopted an analytical structure and sequence similar to that used in the `` section 812 studies'' 104 to estimate the total benefits and costs of the entire Clean Air Act. Moreover, we used many of the same models, and assumptions actually used in the section 812 studies, and other Regulatory Impact Analyses ( RIA's) prepared by the Office of Air and Radiation. By adopting the major design elements, models, and assumptions developed for the section 812 studies and other RIA's, we have largely relied on methods which have already received extensive review by the independent Science Advisory Board, by the public, and by other federal agencies.

c. What Are the Significant Limitations of the Benefit Cost Analysis?

Every BCA 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 VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00084 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6781 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 105 Full documentation of the SAB recommendations can be found at their website ( www. epa. gov/ sab) under the following references: EPA   SAB   COUNCIL   ADV   98   003, 1998; EPA   SAB   COUNCIL   ADV   99   05, 1999; EPA   SAB   COUNCIL   ADV   99   012, 1999; EPA   SAB   COUNCIL   ADV   00   001, 1999; and EPA   SAB   COUNCIL   ADV   00   002, 1999. studies used to configure the benefit and cost models. Deficiencies in the scientific literature often result in the inability to estimate 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, such as changes in visibility in residential areas. While these general uncertainties in the underlying scientific and economics literatures are discussed in detail in the RIA and its supporting documents and references, the key uncertainties which have a bearing on the results of the BCA of today's action are: · The exclusion of potentially significant benefit categories ( e. g., health and ecological benefits of incidentally controlled hazardous air pollutants), · Errors in measurement and projection for variables such as population growth, · Variability in the estimated relationships of health and welfare effects to changes in pollutant concentrations. In addition to these uncertainties and shortcomings which pervade all analyses of criteria air pollutant control programs, a number of limitations apply specifically to the BCA of today's action. Though we used the best data and models currently available, we were required to adopt a number of simplifying assumptions and to use data sets which, while reasonably close, did not match precisely the conditions and effects expected to result from implementation of the standards. For example, to estimate the effects of the program at full implementation we projected vehicle miles traveled and populations in the year 2030. These assumptions may play a significant role in determining the magnitude of the benefits estimate. In addition, although the emissions data sets used for this analysis have been updated from those used in the proposal, they may not anticipate the emissions reductions realized by other future actions and by expected near future control programs. For example, it is possible that the Tier 2/ gasoline sulfur standards will not be the governing vehicle emissions standards in 2030. In the years before 2030, the benefits from the Tier 2 program will be less than those estimated here ( significantly less in the early years), because the Tier 2 fleet will not be fully phased in. Finally, the implementation period for phasing in the rule requirements is a critical period that deserves careful evaluation. The benefit cost analysis for 2030 is not significantly affected by alternative phase in decisions, the primary impact of which will occur in the 2005   2015 time frame. As a result, the analysis of phase in alternatives must rely on other types of analysis ( e. g., cost effectiveness analysis). The key limitations and uncertainties unique to the BCA of the final rule, therefore, include: · Uncertainties in the estimation of future year emissions inventories and air quality, · Uncertainties associated with the extrapolation of air quality monitoring data to some unmonitored areas required to better capture the effects of the standards on affected populations, and · Uncertainties associated with the effect of potential future actions to limit emissions. Despite these uncertainties, which are discussed in more detail or referenced in the RIA, we believe the BCA provide a reasonable indication of the expected economic benefits of the Tier 2 program in 2030 under one set of assumptions. This is because the analysis focuses on estimating the economic effects of the changes in air quality conditions expected to result from today's action, rather than focusing on developing a precise prediction of the absolute levels of air quality likely to prevail in 2030. An analysis focusing on the changes in air quality can give useful insights into the likely economic effects of emission reductions of the magnitude expected to result from today's rule.

d. How Has the Benefit Cost Analysis Changed From Proposal?

We significantly improved the analysis that was presented at proposal. For the final rule, EPA updated the emissions inventory from 1990 to 1996 using updated models, refined the projections of the effects of the rule when it is fully implemented, and updated our air quality modeling to reflect new programs issued since 1990. In addition, we also updated our assumptions for estimating physical effects and monetary benefits based on recommendations from the EPA's Science Advisory Board ( SAB) during the summer of 1999. Details on these recommendations can be found in the advisory statements published by the SAB. 105 All of the changes made since the analysis at proposal serve to update and improve the analysis.

e. How Did We Perform the Benefit Cost Analysis? The analytical sequence begins with a projection of the mix of technologies likely to be deployed to comply with the new standards, and the costs incurred and emissions reductions achieved by these changes in technology. The Tier 2 program has various cost and emission related components, as described earlier in this section. These components would begin at various times and in some cases would phase in over time. This means that during the early years of the program there would not be a consistent match between cost and benefits. This is especially true for the vehicle control portions of the program, where the full vehicle cost would be incurred at the time of vehicle purchase, while the fuel cost along with the emission reductions and benefits would occur throughout the lifetime of the vehicle. To develop a benefit cost number that is representative of a fleet of Tier 2 vehicles, we need to have a stable set of cost and emission reductions to use. This means using a future year where the fleet is fully turned over and there is a consistent annual cost and annual emission reduction. For the Tier 2 program, this stability would not occur until well into the future. For this analysis, we selected the year 2030. The resulting analysis represents a snapshot of benefits and costs in a future year in which the light duty fleet consists almost entirely of Tier 2 vehicles. As such, it depicts the maximum emission reductions ( and resultant benefits) and among the lowest costs that would be achieved in any one year by the program on a `` per mile'' basis. ( Note, however, that net benefits would continue to grow over time beyond those resulting from this analysis, because of growth in population and vehicle miles traveled.) Thus, based on the long term costs for a fully turned over fleet, the resulting benefit cost ratio will be close to its maximum point ( for those benefits which we have been able to value). To present a BCA, we designed the cost estimate to reflect conditions in the same year as the benefit valuation. Costs are, therefore, developed for the year 2030 fleet. For this purpose we used the long term cost once the capital costs have been recovered and the manufacturing learning curve VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00085 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6782 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 106 Though California is included based on the expectation that reductions in surrounding states will achieve some benefits in California, this analysis does not assume additional reductions in California emissions beyond those already achieved by prevailing standards. reductions have been realized, since this will be the case in 2030. We also made adjustments in the costs to account for the fact that there is a time difference between when some of the costs are expended and when the benefits are realized. The vehicle costs are expended when the vehicle is sold, while the fuel related costs and the benefits are distributed over the life of the vehicle. We resolved this difference by using costs distributed over time such that there is a constant cost per ton of emissions reduction and such that the net present value of these distributed costs corresponds to the net present value of the actual costs. The resulting adjusted costs are somewhat greater than the expected actual annual cost of the program, reflecting the time value adjustment. Thus, the costs presented in this section do not represent expected actual annual costs for 2030. Rather, they represent an approximation of the steady state cost per ton that would likely prevail in that time period. The benefit cost ratio for the earlier years of the program would be expected to be lower than that based on these costs, since the per vehicle costs are larger in the early years of the program while the benefits are smaller. In order to estimate the changes in air quality conditions which would result from these emissions reductions, we developed two separate, year 2030 emissions inventories to be used as inputs to the air quality models. The first, baseline inventory, reflects the best available approximation of the countyby county emissions for NOX, VOC, and SO2 expected to prevail in the year 2030 in the absence of the standards. To generate the second, control case inventory, we first estimated the change in vehicle emissions, by pollutant and by county, expected to be achieved by the 2030 control scenario described above. We then took the baseline emissions inventory and subtracted the estimated reduction for each countypollutant combination to generate the second, control case emissions inventory. Taken together, the two resulting emissions inventories reflect two alternative states of the world and the differences between them represent our best estimate of the reductions in emissions which would result from our control scenario. With these two emissions inventories in hand, the next step was to `` map'' the county by county and pollutant bypollutant emission estimates to the input grid cells of two air quality models and one deposition model. The first model, called the Urban Airshed Model ( UAM), is designed to estimate the tropospheric ozone concentrations resulting from a specific inventory of emissions of ozone precursor pollutants, particularly NOX and NMHC. The second model, called the Climatological Regional Dispersion Model Source Receptor Matrix model ( S   R Matrix), is designed to estimate the changes in ambient particulate matter and visibility which would result from a specific set of changes in emissions of primary particulate matter and secondary particulate matter precursors, such as SO2, NOX, and NMHC. Also, nitrogen loadings to watersheds were estimated using factors derived from previous modeling from the Regional Acid Deposition Model ( RADM). By running both the baseline and control case emissions inventories through these models, we were able to estimate the expected 2030 air quality conditions and the changes in air quality conditions which would result from the emissions reductions expected to be achieved by the Tier 2 program. After developing these two sets of year 2030 air quality profiles, we used the same health and environmental effect models used in the section 812 studies to calculate the differences in human health and environmental outcomes projected to occur with and without the proposed standards. Specifically, we used the Criteria Air Pollutant Modeling System ( CAPMS) to estimate changes in human health outcomes, and the Agricultural Simulation Model ( AGSIM) to estimate changes in yields of a selected few agricultural crops. In addition, the impacts of reduced visibility impairment and estimates of the effect of changes in nitrogen deposition to a selection of sensitive estuaries were estimated using slightly modified versions of the methods used in the section 812 studies. Several air qualityrelated health and environmental benefits, however, could not be calculated for the BCA of today's proposed standards. Changes in human health and environmental effects due to changes in ambient concentrations of carbon monoxide ( CO), gaseous sulfur dioxide ( SO2), gaseous nitrogen dioxide ( NO2), and hazardous air pollutants could not be included. In addition, some health and environmental benefits from changes in ozone and PM could not be included in our analysis ( i. e., commercial forestry benefits). To characterize the total economic value of the reductions in adverse effects achieved across the lower 48 states, 106 we used the same set of economic valuation coefficients and models used in the section 812 studies, as approved by the SAB. The net monetary benefits of the Tier 2 program were then calculated by subtracting the estimated costs of compliance from the estimated monetary benefits of the reductions in adverse health and environmental effects. The last step of the analysis is to characterize the uncertainty surrounding our estimate of benefits. Again, we follow the recommendations of the SAB for the presentation of uncertainty. They recommend that a primary estimate should be presented along with a description of the uncertainty associated with each endpoint. At proposal, our characterization of uncertainty was based on an estimated range of benefits which might occur if important but uncertain underlying factors were allowed to vary. This approach, however, is criticized by the SAB because while the low or high end estimates provided for individual endpoints was `` plausible,'' the probability of all of the assumptions in these estimates occurring simultaneously was likely to be small. Therefore, for the final Tier 2/ gasoline sulfur rule, the benefit analysis adopts an approach similar to the section 812 study. Our analysis first presents our estimate for a primary set of benefit endpoints followed by a presentation of `` alternative calculations'' of key health and welfare endpoints to characterize the uncertainty in this primary set. However, the adoption of a value for the projected reduction in the risk of premature mortality is the subject of continuing discussion within the economic and public policy analysis community within and outside the Administration. In response to the sensitivity on this issue, we provide estimates reflecting two alternative approaches for mortality benefits: the EPAs preferred approach using the value of a statistical life, and an alternative approach using the value of a statistical life years. These are discussed further in section f. of this presentation. The presentation of the alternative calculations for certain endpoints seeks to demonstrate how much the overall benefit estimate might vary based on the value EPA has given to a parameter ( which has some uncertainty associated with it) underlying the estimates for human health and environmental effect incidence and the economic valuation VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00086 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6783 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations of those effects. These alternative calculations represent conditions that are possible to occur, however, EPA has selected the best supported values based on current scientific literature for use in the primary estimate. The alternate calculations include: · Presentation of an estimated confidence interval around the Primary estimate of benefits to characterize The standard error in the C R and valuation studies used in developing benefit estimates for each endpoint; · Valuing PM related premature mortality based on a different C R study; · Value of avoided premature mortality incidences based on statistical life years; · Consideration of reversals in chronic bronchitis treated as lowest severity cases; · Value of visibility changes in all Class I areas; · Value of visibility changes in Eastern U. S. residential areas; · Value of visibility changes in Western U. S. residential areas; · Value of reduced household soiling damage; and · Avoided costs of reducing nitrogen loadings in east coast estuaries. For instance, the study by Dockery, et al. estimates of the relationship between PM exposure and premature mortality is a plausible alternative to the Pope, et al. study used for the Primary estimate of benefits. The SAB has noted that `` the study had better monitoring with less measurement error than did most other studies'' ( EPA   SAB   COUNCIL   ADV   99   012, 1999). The Dockery study had a more limited geographic scope ( and a smaller study population) than the Pope, et al. study and the Pope study appears more likely to mitigate a key source of potential confounding. The Dockery study also covered a broader age category ( 25 and older compared to 30 and older in the Pope study) and followed the cohort for a longer period ( 15 years compared to 8 years in the Pope study). For these reasons, the Dockery study is considered to be a plausible alternative estimate of the avoided premature mortality incidences associated with the final Tier 2/ gasoline sulfur rule. The alternative estimate for mortality can be substituted for the valuation component in our primary estimate of mortality benefits to observe how the net benefits of the program may be influenced by this assumption. Unfortunately, it is not possible to combine all of the assumptions used in the alternate calculations to arrive at different total benefit estimates because, it is highly unlikely that the selected combination of alternative values would all occur simultaneously. Therefore, it is better to consider each alternative calculation individually to assess the uncertainty in the estimate. In addition to the estimate for the primary set of endpoints and alternative calculations of benefits, our RIA also presents an appendix with supplemental benefit estimates and sensitivity analyses of other key parameters in the benefit analysis that have greater uncertainty surrounding them due to limitations in the scientific literature. Supplemental estimates are presented for premature mortality associated with short term exposures to PM and ozone, asthma attacks, occurrences of moderate or worse asthma symptoms, and an estimate of the avoided incidences of premature mortality in infants. Even with our efforts to fully disclose the uncertainty in our estimate, this uncertainty presentation method does not provide a definitive or complete picture of the true range of monetized benefits estimates. This approach, as implemented in this BCA, does not reflect important uncertainties in earlier steps of the analysis, including estimation of compliance technologies and strategies, emissions reductions and costs associated with those technologies and strategies, and air quality and deposition changes achieved by those emissions reductions. Nor does this approach provide a full accounting of all potential benefits associated with the Tier 2/ gasoline sulfur standards, due to data or methodological limitations. Therefore, the uncertainty range is only representative of those benefits that we were able to quantify and monetize.

f. What Were the Results of the Benefit Cost Analysis? The BCA for the Tier 2 program reflects a single year `` snapshot'' of the yearly benefits and costs expected to be realized once the standards have been fully implemented and non compliant vehicles have all been retired. Near term costs will be higher than long run costs as vehicle manufacturers and oil companies invest in new capital equipment and develop and implement new technologies. In addition, near term benefits will be lower than long run benefits because it will take a number of years for Tier 2 compliant vehicles to fully displace older, more polluting vehicles. However, as described earlier, we have adjusted the cost estimates upward to compensate for some of this discrepancy in the timing of benefits and costs and to ensure that the longterm benefits and costs are calculated on a consistent basis. The resulting adjusted long term cost value is given in Table IV. D.   5a. Because of the adjustment process, the cost estimates should not be interpreted as reflecting the actual costs expected to be incurred in the year 2030. Actual program costs can be found in Section IV. D. 3.

TABLE IV. D.   5A.   ADJUSTED COST OF THE TIER 2/ GASOLINE SULFUR RULE FOR COMPARISON TO BENEFITS Cost basis Adjusted cost ( billions of dollars)

Long term a ............................... 5.3 Notes: a Note that this estimate of cost is only for purposes of comparing with our 2030 benefits estimate. See Figure IV. D.   1 for our portrayal of total annualized cost of the rule.

With respect to the benefits, several different measures of benefits can be useful to compare and contrast to the estimated compliance costs. These benefit measures include ( a) the tons of emissions reductions achieved, ( b) the reductions in incidences of adverse health and environmental effects, and ( c) the estimated economic value of those reduced adverse effects. Calculating the cost per ton of pollutant reduced is particularly useful for comparing the cost effectiveness of the new standards or programs against existing programs or alternative new programs achieving reductions in the same pollutant or combination of pollutants. The cost effectiveness analysis presented earlier in this preamble provides such calculations on a per vehicle basis. Considering the absolute numbers of avoided adverse health and environmental effects can also provide valuable insights into the nature of the health and environmental problem being addressed by the rule as well as the magnitude of the total public health and environmental gains potentially achieved by the rule. Finally, when considered along with other important economic dimensions   including environmental justice, small business financial effects, and other outcomes related to the distribution of benefits and costs among particular groups   the direct comparison of quantified economic benefits and economic costs can provide useful insights into the potential magnitude of the estimated net economic effect of the rule, keeping in mind the limited set of effects we are able to monetize. Table IV. D.   6 presents the EPAs preferred approach to estimate the benefits of both the estimated reductions in adverse effect incidences and the estimated economic value of VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00087 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6784 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 107 Specifically, the VSLY estimate is calculated by amortizing the $ 5.9 million mean VSL estimate over the 35 years of life expectancy associated with subjects in the labor market studies. The resulting estimate, using a 5 percent discount rate, is $ 360,000 per life year saved in 1997 dollars. This annual average value of a life year is then multiplied times the number of years of remaining life expectancy for the affected population ( in the case of PM related premature mortality, the average number of $ life years saved is 14. those incidence reductions. Specifically, the table lists the avoided incidences of individual health and environmental effects, the pollutant associated with each of these endpoints, and the estimated economic value of those avoided incidences. For several effects, particularly environmental effects, direct calculation of economic value in response to air quality conditions is performed, eliminating the intermediate step of calculating incidences. As the table indicates, we estimate that the Tier 2 program will produce 2300 fewer cases of chronic bronchitis, and we also see significant improvements in minor restricted activity days ( with an estimated 6,255,500 fewer cases). Our estimate also incorporates significant reductions in impacts on children's health, showing reductions of 7,900 cases of acute bronchitis, 87,200 fewer cases of lower respiratory symptoms, and 86,600 fewer cases of upper respiratory symptoms in asthmatic children. Total monetized benefits, however, are driven primarily by the estimated 4300 fewer premature fatalities. The adoption of a value for the projected reduction in the risk of premature mortality is the subject of continuing discussion within the economic and public policy analysis community within and outside the Administration. In response to the sensitivity on this issue, we provide estimates reflecting two alternative approaches. The first approach   supported by some in the above community and preferred by EPA   uses a Value of a Statistical Life ( VSL) approach developed for the Clean Air Act Section 812 benefit cost studies. This VSL estimate of $ 5.9 million ( 1997$) was derived from a set of 26 studies identified by EPA using criteria established in Viscusi ( 1992), as those most appropriate for environmental policy analysis applications. An alternative, age adjusted approach is preferred by some others in the above community both within and outside the Administration. This approach was also developed for the Section 812 studies and addresses concerns with applying the VSL estimate   reflecting a valuation derived mostly from labor market studies involving healthy working age manual laborers   to PM related mortality risks that are primarily associated with older populations and those with impaired health status. This alternative approach leads to an estimate of the value of a statistical life year ( VSLY), which is derived directly from the VSL estimate. It differs only in incorporating an explicit assumption about the number of life years saved and an implicit assumption that the valuation of each life year is not affected by age. 107 The mean VSLY is $ 360,000 ( 1997$); combining this number with a mean life expectancy of 14 years yields an age adjusted VSL of $ 3.6 million ( 1997$). Both approaches are imperfect, and raise difficult methodological issues which are discussed in depth in the recently published Section 812 Prospective Study, the draft EPA Economic Guidelines, and the peerreview commentaries prepared in support of each of these documents. For example, both methodologies embed assumptions ( explicit or implicit) about which there is little or no definitive scientific guidance. In particular, both methods adopt the assumption that the risk versus dollars trade offs revealed by available labor market studies are applicable to the risk versus dollar trade offs in an air pollution context. EPA currently prefers the VSL approach because, essentially, the method reflects the direct, application of what EPA considers to be the most reliable estimates for valuation of premature mortality available in the current economic literature. While there are several differences between the labor market studies EPA uses to derive a VSL estimate and the particulate matter air pollution context addressed here, those differences in the affected populations and the nature of the risks imply both upward and downward adjustments. For example, adjusting for age differences may imply the need to adjust the $ 5.9 million VSL downward as would adjusting for health differences, but the involuntary nature of air pollution related risks and the lower level of risk aversion of the manual laborers in the labor market studies may imply the need for upward adjustments. In the absence of a comprehensive and balanced set of adjustment factors, EPA believes it is reasonable to continue to use the $ 5.9 million value while acknowledging the significant limitations and uncertainties in the available literature. Furthermore, EPA prefers not to draw distinctions in the monetary value assigned to the lives saved even if they differ in age, health status, socioeconomic status, gender or other characteristic of the adult population. Those who favor the alternative, ageadjusted approach ( i. e. the VSLY approach) emphasize that the value of a statistical life is not a single number relevant for all situations. Indeed, the VSL estimate of $ 5.9 million ( 1997 dollars) is itself the central tendency of a number of estimates of the VSL for some rather narrowly defined populations. When there are significant differences between the population affected by a particular health risk and the populations used in the labor market studies   as is the case here   they prefer to adjust the VSL estimate to reflect those differences. While acknowledging that the VSLY approach provides an admittedly crude adjustment ( for age though not for other possible differences between the populations), they point out that it has the advantage of yielding an estimate that is not presumptively biased. Proponents of adjusting for age differences using the VSLY approach fully concur that enormous uncertainty remains on both sides of this estimate   upwards as well as downwards   and that the populations differ in ways other than age ( and therefore life expectancy). But rather than waiting for all relevant questions to be answered, they prefer a process of refining estimates by incorporating new information and evidence as it becomes available. In addition to the presentation of mortality valuation, this table also indicates with a `` B'' those additional health and environmental benefits which could not be expressed in quantitative incidence and/ or economic value terms. A full listing of the benefit categories that could not be quantified or monetized in our estimate are provided in Table IV. D.   8. For instance, visibility is expected to improve in all areas of the country, with the largest improvements occurring in heavily populated residential areas ( e. g., 21% of the metropolitan areas show an improvement of 0.5 deciviews or more). However, due to limitations on sources to value these effects, we include a `` B'' in the primary estimate table for this category. Likewise, the Tier 2/ gasoline sulfur rule will also provide progress for some estuaries to meet their goals for reducing nitrogen deposition ( e. g., nitrogen loadings for the Albemarle/ Pamlico Sound are reduced by 27% of their reductions goal), however, this endpoint is also displayed with a `` B'' in the table. A full appreciation of the overall economic consequences of the Tier 2/ gasoline sulfur standards requires consideration of all benefits and costs expected to result from the new standards, not just those benefits and VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00088 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6785 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations costs which could be expressed here in dollar terms. In summary, the VSL approach   the approach EPA prefers   yields a monetized benefit estimate of $ 25.2 billion in 2030. The alternative, ageadjusted VSLY approach ( presented in Table IV. D. 7) yields monetary benefits of approximately $ 13.8 billion in 2030.

TABLE IV. D.   6.   EPA PREFERRED ESTIMATE OF THE ANNUAL QUANTIFIED AND MONETIZED BENEFITS ASSOCIATED WITH IMPROVED AIR QUALITY RESULTING FROM THE TIER 2/ GASOLINE SULFUR RULE IN 2030 Endpoint Pollutant Avoided incidencec ( cases/ year) Monetary benefitsd ( millions 1997$)

Premature mortality a, b ( adults, 30 and over) .............................................. PMb ....................................... 4,300 ................ $ 23,380 Chronic asthma ( adult males, 27 and over) ................................................ Ozone ................................... 400 ................... 10 Chronic bronchitis ........................................................................................ PM ......................................... 2,300 ................ 730 Hospital Admissions from Respiratory Causes ........................................... Ozone and PM ...................... 2,200 ................ 20 Hospital Admissions from Cardiovascular Causes ...................................... Ozone and PM ...................... 800 ................... 10 Emergency Room Visits for Asthma ............................................................ Ozone and PM ...................... 1,200 ................ < 1 Acute bronchitis ( children, 8   12) ................................................................. PM ......................................... 7,900 ................ < 1 Lower respiratory symptoms ( LRS) ( children, 7   14) ................................... PM ......................................... 87,100 .............. < 5 Upper respiratory symptoms ( URS) ( asthmatic children, 9   11) .................. PM ......................................... 86,500 .............. < 5 Shortness of breath ( African American asthmatics, 7   12) .......................... PM ......................................... 17,400 .............. < 1 Work loss days ( WLD) ( adults, 18   65) ........................................................ PM ......................................... 682,900 ............ 70 Minor restricted activity days ( MRAD)/ Acute respiratory symptoms ........... Ozone and PM ...................... 5,855,000 ......... 270 Other health effects c .................................................................................... Ozone, PM, CO, HAPS ........ U1+ U2+ U3+ U4 ... B1+ B2+ B3+ B4 Decreased worker productivity ..................................................................... Ozone ................................... ........................... 140 Recreational visibility ( 86 Class I Areas) ..................................................... PM ......................................... ........................... 370 Residential visibility ...................................................................................... PM ......................................... ........................... B5 Household soiling damage ........................................................................... PM ......................................... ........................... B6 Materials damage ......................................................................................... PM ......................................... ........................... B7 Nitrogen Deposition to Estuaries ................................................................. Nitrogen ................................ ........................... B8 Agricultural crop damage ( 6 crops) ............................................................. Ozone ................................... ........................... 220 Commercial forest damage .......................................................................... Ozone ................................... ........................... B9 Other welfare effects e .................................................................................. Ozone, PM, CO, HAPS ........ ........................... B10+ B11+ B12+ B13 Monetized Total f, g ............................................................................ ............................................... ........................... $ 25,220+ B Notes: a Premature mortality associated with ozone is not separately included in this analysis. It is assumed that the Pope, et al. C   R function for premature mortality captures both PM mortality benefits and any mortality benefits associated with other air pollutants. Also note that the valuation assumes the 5 year distributed lag structure described earlier. b PM reductions are due to reductions in NOX and SO2 resulting from the Tier 2/ Gasoline Sulfur rule. c Incidences are rounded to the nearest 100. d Dollar values are rounded to the nearest 10 million. e The Ui are the incidences and the Bi are the values for the unquantified category i. A detailed listing of unquantified PM, ozone, CO, and HAPS related health and welfare effects is provided in Table IV. D.   8. f B is equal to the sum of all unmonetized categories, i. e. B1+ B2+ * * * + B13. g These estimates are based on the EPA preferred approach for valuing reductions in premature mortality, the VSL approach. This approach and an alternative, age adjusted approach   the VSLY approach   are discussed more fully in section f above.

TABLE IV. D.   7.   TIER 2/ GASOLINE SULFUR RULE: 2030 MONETIZED BENEFITS ESTIMATES FOR ALTERNATIVE PREMATURE MORTALITY VALUATION APPROACHES [ Millions of 1997 dollars]

Premature mortality valuation approach PM mortality benefits Total benefits Value of statistical life ( VSL) ($ 5.9 million per life saved) a ....................................................................................... $ 23,380 $ 25,220 + B Value of statistical life years ( VSLY) ($ 360,000 per life year saved, which implies $ 3.6 million per life saved, based on the mean of 14 life years saved) a, b. 11,900 13,790 + B Notes:

a Premature mortality estimates are determined assuming a 5 year distributed lag, which applies 25 percent of the incidence in year 1 and 2, and then 16.7 percent of the incidence in years 3, 4, and 5.

b The VSLY estimate is calculated by amortizing the $ 5.9 million mean VSL estimate over the 35 years of life expectancy associated with subjects in the labor market studies used to obtain the VSL estimate. The resulting estimate, using a 5 percent discount rate, is $ 360,000 per lifeyear saved in 1997 dollars. This approach is discussed more fully in section f above.

VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00089 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6786 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations TABLE IV. D.   8.   ADDITIONAL, NON MONETIZED BENEFITS OF THE TIER 2/ GASOLINE SULFUR STANDARDS Pollutant Unquantified effects Ozone Health ......................................................... Premature mortality. a Increased airway responsiveness to stimuli. Inflammation in the lung Chronic respiratory damage Premature aging of the lungs Acute inflammation and respiratory cell damage Increased susceptibility to respiratory infection Non asthma respiratory emergency room visits Reductions in screening of UV   b radiation Ozone Welfare ....................................................... Decreased yields for commercial forests Decreased yields for fruits and vegetables Decreased yields for non commercial crops Damage to urban ornamental plants Impacts on recreational demand from damaged forest aesthetics Damage to ecosystem functions PM Health .............................................................. Infant mortality Low birth weight Changes in pulmonary function Chronic respiratory diseases other than chronic bronchitis Morphological changes Altered host defense mechanisms Nitrogen and Sulfate Deposition Welfare .............. Impacts of acidic sulfate and nitrate deposition on commercial forests Impacts of acidic deposition to commercial freshwater fishing Impacts of acidic deposition to recreation in terrestrial ecosystems Reduced existence values for currently healthy ecosystems Impacts of nitrogen deposition on commercial fishing, agriculture, and forests Impacts of nitrogen deposition on recreation in estuarine ecosystems CO Health .............................................................. Premature mortality a Behavioral effects Hospital admissions   respiratory, cardiovascular, and other Other cardiovascular effects Developmental effects Decreased time to onset of angina Non asthma respiratory ER visits HAPS Health .......................................................... 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) HAPS Welfare ........................................................ Direct toxic effects to animals Bioaccumlation in the food chain a Premature mortality associated with ozone and carbon monoxide is not separately included in this analysis. It is assumed that the Pope, et al. C   R function for premature mortality captures both PM mortality benefits and any mortality benefits associated with other air pollutants.

In addition, in analyzing the present rule, we recognized that the benefits estimates were subject to a number of uncertainties with other parameters. In Table IV D   9, we present alternative calculations representing the effect of different assumptions on individual elements of the benefits analysis and on the total benefits estimate. For example, this table can be used to answer questions like `` What would total benefits be if we were to use the Dockery, et al. C   R function to estimate avoided premature mortality?'' This table also displays some assumptions that can be made to value some of the categories that are indicated with a `` B'' in the primary estimate. Overall, this table provides alternative calculations both for valuation issues ( e. g., the correct value for a statistical life saved) and for physical effects issues ( e. g., how reversals in chronic illnesses are treated). We show how the alternative assumption being valued would change the resulting total primary estimate, and the percentage change from the primary estimate associated with the alternative calculation. This table is not meant to be comprehensive. Rather, it reflects some of the key issues identified by EPA or commenters as likely to have a significant impact on total benefits.