production for all the nonhandheld engine families for which the
manufacturer is using assigned deterioration factors is estimated at
the time of certification to be no more than 10,000 units per year.
Third, we are allowing assigned deterioration factors for all engines
produced by small-volume nonhandheld engine manufacturers.
    For the HC+NOX standard, we are specifying that
manufacturers use a single deterioration factor for the sum of HC and
NOX emissions. However, if manufacturers get approval to
establish a deterioration factor on an engine that is tested with
service accumulation representing less than the full useful life for
any reason, we will require separate deterioration factors for HC and
NOX emissions. The advantage of a combined deterioration
factor is that it can account for an improvement in emission levels for
a given pollutant with aging. However, for engines that have service
accumulation representing less than the full useful life, we believe it
is not appropriate to extrapolate measured values indicating that
emission levels for a particular pollutant will decrease. This is the
same approach we adopted for recreational vehicles.
    EPA is not establishing the values for the assigned deterioration
factors for small-volume nonhandheld engine manufacturers in this final
rule. In an effort to develop deterioration factors that are
appropriate for Small SI engines, we plan to evaluate certification
data from Phase 3 engines certified early with EPA and from engines
certified under California ARB's Tier 3 standards (which began in 2007
and 2008). Because we are not promulgating new exhaust standards for
handheld engines, the assigned deterioration factor provisions adopted
for Phase 2 handheld engines are being retained.
    Although we are not establishing new exhaust standards for handheld
engines, handheld engine manufacturers noted that California ARB has
approved certain durability cycles for accumulating hours on engines
for the purpose of demonstrating the durability of emission controls.
The durability cycles approved by California ARB vary from a 30-second
cycle for chainsaws to a 20-minute cycle for blowers, with 85 percent
of the time operated at wide open throttle and 15 percent of the time
operated at idle. Engine manufacturers can run the durability cycles
repeatedly until they accumulate the hours of operation equivalent to
the useful life for the engine family. Our current regulations state
that ``service accumulation is to be performed in a manner using good
judgment to ensure that emissions are representative of production
engines.'' While we are not changing the regulatory language regarding
service accumulation, the California ARB-approved durability cycles are
appropriate and acceptable to EPA for accumulating hours on handheld
engines for demonstrating the durability of emission controls.
(2) Delegated Final Assembly
    The current practice of attaching exhaust systems to engines
varies. Class I engines are typically designed and produced by the
engine manufacturer with complete emission control systems. Equipment
manufacturers generally buy these engines and install them in their
equipment, adjusting equipment designs if necessary to accommodate the
mufflers and the rest of the exhaust system from the engine
manufacturer.
    Engine manufacturers generally produce Class II engines without
exhaust systems, relying instead on installation instructions to ensure
that equipment manufacturers get mufflers that fall within a specified
range of backpressures that is appropriate for a given engine model.
Equipment manufacturers are free to work with muffler manufacturers to
design mufflers that fit into the space available for a given equipment
model, paying attention to the need to stay within the design
specifications from the engine manufacturers. A similar situation
applies for air filters, where equipment manufacturers in some cases
work with component manufacturers to use air filters that are tailored
to the individual equipment model while staying within the design
specifications defined by the engine manufacturer.
    The existing regulations require that certified engines be in their
certified configuration when they are introduced into commerce. We
therefore need special provisions to address the possibility that
engines will need to be produced and shipped without exhaust systems or
air intake systems that are part of the certified configuration. We
have adopted such provisions for heavy-duty highway engines and for
other nonroad engines in 40 CFR 85.1713 and 40 CFR 1068.260,
respectively. These provisions generally require that engine
manufacturers establish a contractual arrangement with equipment
manufacturers and take additional steps to ensure that engines are in
their certified configuration before reaching the ultimate purchaser.
    We are applying delegated-assembly provisions for nonhandheld
engines that are similar to those adopted for heavy-duty highway
engines. In fact, we have modified the proposed requirements and the
requirements that apply to heavy-duty highway engines (and to other
nonroad engines) such that a single set of requirements in part 1068
will simultaneously apply to all these engine categories. This combined
approach incorporates substantial elements of the program we proposed
for Small SI engines.
    This approach generally requires that engine manufacturers apply
for certification in the normal way, identifying all the engine parts
that make up the engine configurations covered by the certification.
Equipment manufacturers will be able to work with muffler manufacturers
to get mufflers with installed catalysts as specified in the engine
manufacturer's application for certification. If equipment
manufacturers need a muffler or catalyst that is not covered by the
engine manufacturer's certification, the engine manufacturer will need
to amend the application for certification. This may require new
testing if the data from the original emission-data engine are not
appropriate for showing that the new configuration will meet emission
standards, as described in Sec.  1054.225. (Alternatively, the
equipment manufacturer may take on the responsibility for certifying
the new configuration, as described in Sec.  1054.612.) Engine
manufacturers will also identify in the application for certification
their plans to sell engines without emission-related components. We are
adopting several provisions to ensure that engines will eventually be
in their certified configuration. For example, engine manufacturers
will establish contracts with affected equipment manufacturers, include
installation instructions to make clear how engine assembly should be
completed, keep records of the number of engines produced under these
provisions, and obtain annual affidavits from affected equipment
manufacturers to confirm that they are installing the proper emission-
related components on the engines and that they have ordered

the number of components that corresponds to the number of engines
involved.
    While the delegated-assembly provisions are designed for direct
shipment of engines from engine manufacturers to equipment
manufacturers, we are aware that distributors play an important role in
providing engines to large numbers of equipment manufacturers. We are
requiring that these provisions apply to distributors in one of two
ways. First, engine manufacturers may have an especially close working
relationship with primary distributors. In such a case, the engine
manufacturer can establish a contractual arrangement allowing the
distributor to act as the engine manufacturer's agent for all matters
related to compliance with the delegated-assembly provisions. This
allows the distributor to make arrangements with equipment
manufacturers to address design needs and perform oversight functions.
We will hold the engine manufacturer directly responsible if the
distributor fails to meet the regulatory obligations that will
otherwise apply to the engine manufacturer. However, starting in 2015,
we are allowing this approach only with our specific approval for
individual manufacturers and distributors. While this arrangement is
necessary to facilitate making engines available under the Transition
Program for Equipment Manufacturers, we are concerned that it will be
difficult for EPA and for manufacturers to properly ensure that all
engines are built up to a certified configuration when assembly
responsibilities are so far removed from the engine manufacturer. This
is underscored by a recent finding that an equipment manufacturer was
intentionally not following an engine manufacturer's instructions when
installing Small SI engines such that the final installation involved
an engine that was not in a certified configuration. In the years
before 2015, we expect that EPA and manufacturers will learn a lot
about delegated assembly, including the extent to which there are cases
in which engines are improperly assembled, whether those problems
represent intentional violations or mistakes as part of a good-faith
effort to meet applicable requirements. We will be prepared to judge
individual requests based on the experience gained under the initial
years of the Phase 3 standards. However, given the challenges
associated with engine manufacturers allowing distributors to act as
their agents with respect to delegated assembly, we expect
manufacturers to ask us to allow this only in unusual circumstances
when the standard approach would be very impractical. Also, depending
on the broader experience with this provision before 2015, we may
consider changing the regulation to allow this to continue without our
specific approval, for Small SI engines or for all types of engines. If
we find that there are substantial problems in implementing this
provision, we may also consider removing the allowance to continue
using distributors this way for delegated assembly past 2014.
    Second, other distributors may receive shipment of engines without
exhaust systems, but they will add any aftertreatment components before
sending the engines on to equipment manufacturers. Engine manufacturers
will treat these distributors as equipment manufacturers for the
purposes of delegated assembly. Equipment manufacturers buying engines
from such a distributor will not have the option of separately
obtaining mufflers from muffler manufacturers. However, we would expect
distributors to cooperate with small equipment manufacturers to work
out any necessary arrangements to specify and design their components
and equipment. This second situation involves a more straightforward
compliance scenario so this provision does not expire. In both of these
scenarios, the engine manufacturer continues to be responsible for the
in-use compliance of all their engines.
    Engine manufacturers will need to affix a label to the engine to
clarify that it needs certain emission-related components before it is
in its certified configuration. This labeling information is important
for alerting assembly personnel to select mufflers with installed
catalysts; the label will also give in-house inspectors or others with
responsibility for quality control a tool for confirming that all
engines have been properly assembled and installed. Given the large
numbers of engine and equipment models and the interchangeability of
mufflers with and without catalysts, we believe proper labeling will
reduce the possibility that engines will be misbuilt. This labeling can
be done with either of two approaches. First, a temporary label may be
applied such that it could not be removed without a deliberate action
on the part of the equipment manufacturer. We believe it is not
difficult to create a label that will stay on the engine until it is
deliberately removed. Second, manufacturers may add the words
``delegated assembly'' to the engine's permanent emission control
information label (or ``DEL ASSY'' where limited space requires an
abbreviation).
    In addition, engine manufacturers will need to perform or arrange
for audits to verify that equipment manufacturers are properly
assembling engines. Engine manufacturers may rely on third-party agents
to perform auditing functions. Since the purpose of the audit is to
verify that equipment manufacturers are properly assembling products,
they may not perform audits on behalf of engine manufacturers. We are
requiring that audits involve at a minimum reviewing the equipment
manufacturer's production records and procedures, inspecting the
equipment manufacturer's production operations, and inspecting the
final assembled products. Inspection of final assembled products may
occur at any point in the product distribution system. For example,
products may be inspected at the equipment manufacturer's assembly or
storage facilities, at regional distribution centers, or at retail
locations. The audit must also include confirmation that the number of
aftertreatment devices shipped was sufficient for the number of engines
involved. Engine manufacturers would keep records of the audit results
and make these records available to us upon request. These auditing
specifications represent a minimum level of oversight. In certain
circumstances we may expect engine manufacturers to take additional
steps to ensure that engines are assembled and installed in their
certified configuration. For example, equipment manufacturers with very
low order volumes, an unclear history of compliance, or other
characteristics that will cause some concern may prompt us to require a
more extensive audit to ensure effective oversight in confirming that
engines are always built properly. Engine manufacturers must describe
in the application for certification their plan for taking steps to
ensure that all engines will be in their certified configuration when
installed by the equipment manufacturer. EPA approval of a
manufacturer's plan for delegated assembly will be handled as part of
the overall certification process.
    We are requiring that engine manufacturers annually audit twelve
equipment manufacturers, or fewer if they are able to audit all
participating equipment manufacturers on average once every four years.
These audits will be divided over different equipment manufacturers
based on the number of engines sold to each equipment manufacturer. We
specify that these auditing rates are reduced to a maximum of four
equipment manufacturers per year starting in 2015.

In 2019 and later, manufacturers would continue to perform a maximum of
four audits annually, but we specify that audits may be divided evenly
to cover all equipment manufacturers over a ten-year period.
    We are not adopting the proposed requirement for engine
manufacturers to establish an alphanumeric designation to identify each
unique catalyst design and instruct equipment manufacturers to stamp
this code on the external surface of the exhaust system. However,
manufacturers may choose to do this voluntarily as a means of more
readily assessing whether engines have been properly assembled.
    We are requiring that all the same provisions apply for separate
shipment related to air filters if they are part of an engine's
certified configuration, except for the auditing. However, this does
not apply if manufacturers identify intake systems, including air
filters, by simply instructing equipment manufacturers to maintain the
pressure drop within a certain range. This is typical of the way many
exhaust systems are handled today. We will require auditing related to
air filters that are specifically identified in the application for
certification only if engine manufacturers are already performing
audits related to catalysts. We believe there is much less incentive or
potential for problems with equipment manufacturers producing engines
with noncompliant air filters so we believe a separate auditing
requirement for air filters is unnecessary.
    The final regulation specifies that the exemption expires when the
equipment manufacturer takes possession of the engine and the engine
reaches the point of final equipment assembly. The point of final
equipment assembly for purposes of delegated assembly for
aftertreatment components is the point at which the equipment
manufacturer attaches a muffler to the engine. Engines observed in
production or inventory assembled with improper mufflers will be
considered to have been built contrary to the engine manufacturer's
installation instructions. Catalysts are invariably designed as part of
the muffler, so no reason exists for installing a different muffler
once a given muffler has been installed using normal production
procedures. If equipment manufacturers sell equipment without following
these instructions, they will be considered in violation of the
prohibited acts i.e., selling uncertified engines). If there is a
problem with any given equipment manufacturer, we will disallow
continued use of the delegated-assembly provisions for that equipment
manufacturer until the engine manufacturer has taken sufficient steps
to remedy the problem.
    We are aware that the new approach of allowing equipment
manufacturers to make their own arrangements to order mufflers results
in a situation in which the equipment manufacturer must spend time and
money to fulfill their responsibilities under the regulations. This
introduces a financial incentive to install mufflers with inferior
catalysts, or to omit the catalyst altogether. To address this concern,
we are requiring that engine manufacturers get written confirmation
from each equipment manufacturer before an initial shipment of engines
for a given engine model. This confirmation will document the equipment
manufacturer's understanding that they are using the appropriate
aftertreatment components. The written confirmation will be due within
30 days after shipping the engines and will be required before shipping
any additional engines from that engine family to that equipment
manufacturer.
    The shipping confirmation included in the rule for heavy-duty
highway engines is a very substantial provision to address the fact
that vehicle manufacturers will gain a competitive advantage by
producing noncompliant products, and that engines in commerce will be
labeled as if they were fully compliant even though they are not yet in
their certified configuration. This is especially problematic when a
muffler with no catalyst can easily be installed and can perform
without indicating a problem. To address this concern we are requiring
that equipment manufacturers include in their annual affidavits an
accounting for the number of aftertreatment components they have
ordered relative to the number of engines shipped without the catalysts
that the mufflers will otherwise require.
    Production-line testing normally involves building production
engines using normal assembly procedures. For engines shipped without
catalysts under the delegated-assembly provisions, it is not normally
possible to do this at the engine manufacturer's facility, where such
testing will normally occur. To address this, we are specifying that
engine manufacturers must arrange to get a randomly selected catalyst
that will be used with the engine. The catalyst must come from any
point in the normal distribution from the aftertreatment component
manufacturer to the equipment manufacturer. The catalyst may come from
the engine manufacturer's own inventory as long as it is randomly
procured. Engine manufacturers are required to keep records showing how
they randomly selected catalysts.
    See Section 2.8 of the Summary and Analysis of Comments for further
discussion of issues related to delegated assembly.
(3) Transition Program for Equipment Manufacturers
    Given the level of the new Phase 3 exhaust emission standards for
Class II engines, we believe there may be situations where the use of a
catalyzed muffler could require equipment manufacturers to modify their
equipment. We are therefore establishing a set of provisions to provide
equipment manufacturers with reasonable lead time for transitioning to
the new standards. These provisions are similar to the program we
adopted for nonroad diesel engines (69 FR 38958, June 29, 2004).
    Equipment manufacturers will not be obligated to use any of these
provisions, but all equipment manufacturers that produce Class II
equipment are eligible to do so. We are also requiring that all
companies under the control of a common entity will be considered
together for the purposes of applying these allowances. Manufacturers
will be eligible for the allowances described below only if they have
primary responsibility for designing and manufacturing equipment, and
if their manufacturing procedures include installing engines in the
equipment.
(a) General Provisions
    Under the final rule, beginning in the 2011 model year and lasting
through the 2014 model year, each equipment manufacturer may install
Class II engines not certified to the Phase 3 emission standards in a
limited number of equipment applications produced for the U.S. market
(see Sec.  1054.625). We refer to these here as ``flex engines.'' These
flex engines will need to meet the Phase 2 standards. The maximum
number of ``allowances'' each manufacturer can use are based on 30
percent of an average year's production of Class II equipment. The
number of allowances is calculated by determining the average annual
U.S.-directed production of equipment using Class II engines produced
from January 1, 2007 through December 31, 2009. Thirty percent of this
average annual production level is the total number of allowances an
equipment manufacturer may use under this transition program over four
years. Manufacturers can use these allowances for their Class II
equipment over four model years from 2011 through 2014, with the usage
spread over these model years as

determined by the equipment manufacturer. Equipment produced under
these provisions can use engines that meet the Phase 2 emission
standards instead of the Phase 3 standards. If an equipment
manufacturer newly enters the Class II equipment market during 2007,
2008 or 2009, the manufacturer will calculate its average annual
production level based only on the years during which it actually
produced Class II equipment. Equipment manufacturers newly entering the
Class II equipment market after 2009 will not receive any allowances
under the transition program and will need to incorporate Phase 3
compliant engines into the Class II equipment beginning in 2011.
    Equipment using engines built before the effective date of the
Phase 3 standards will not count toward an equipment manufacturer's
allowances. Equipment using engines that are exempted from the Phase 3
standards for any reason will also not count toward an equipment
manufacturer's allowances. For example, we are allowing small-volume
engine manufacturers to continue producing Phase 2 engines for two
model years after the Phase 3 standards apply. All engines subject to
the Phase 3 standards, including those engines that are certified to
FELs at higher levels than the standard, but for which an engine
manufacturer uses exhaust ABT credits to demonstrate compliance, will
count as Phase 3 complying engines and will not be included in an
equipment manufacturer's count of allowances.
    The choice of the allowances based on 30 percent of one year's
production is based on our best estimate of the degree of reasonable
lead time needed by the largest equipment manufacturers to modify their
equipment designs as needed to accommodate engines and exhaust systems
that have changed as a result of more stringent emission standards. We
believe this level of allowances responds to the need for lead time to
accommodate the workload related to redesigning equipment models to
incorporate catalyzed mufflers while ensuring a significant level of
emission reductions in the early years of the new program.
    As described in Section VI, technologies for controlling running
losses may involve a significant degree of integration between engine
and equipment designs. In particular, routing a vapor line from the
fuel tank to the engine's intake system depends on engine modifications
that will allow for this connection. As a result, any equipment using
flex engines will not need to meet running loss standards.
(b) Coordination Between Engine and Equipment Manufacturers
    We are establishing two separate paths for complying with
administrative requirements related to the new transition program,
depending on how the engine manufacturer chooses to make flex engines
available. Engine manufacturers choosing to use the delegated-assembly
provisions described above will be enabling equipment manufacturers to
make the decision whether to complete the engine assembly in the Phase
3 configuration or to use a non-catalyzed muffler such that the engine
will meet Phase 2 standards and will therefore need to be counted as a
flex engine. If engine manufacturers do not use the delegated-assembly
provisions, equipment manufacturers will need to depend on engine
manufacturers to produce and ship flex engines that are already in a
configuration meeting Phase 2 standards and labeled accordingly. Each
of these scenarios involves a different set of compliance provisions,
which we describe below. Note that in no case may an equipment
manufacturer remove a catalyzed muffler from an engine and replace it
with a noncatalyzed muffler; this would be a violation of the
prohibition against tampering.
(i) Compliance Based on Engine Manufacturers
    Engine manufacturers will in many cases produce complete engines.
This will be the case if the engine does not require a catalyst or if
the engine manufacturer chooses to design their own exhaust systems and
ship complete engine assemblies to equipment manufacturers.
    Under this scenario, we are requiring that equipment manufacturers
request a certain number of flex engines from the engine manufacturer.
The regulatory provisions specifically allow engine manufacturers to
continue to build and sell Phase 2 engines needed to meet the market
demand created by the transition program for equipment manufacturers,
provided they receive the written assurance from the equipment
manufacturer that such engines are being procured for this purpose. We
are requiring that engine manufacturers keep copies of the written
assurance from equipment manufacturers for at least five years after
the final year in which allowances are available.
    Engine manufacturers are currently required to label their
certified engines with a variety of information. We are requiring that
engine manufacturers producing complete flex engines under this program
identify on the engine label that they are flex engines. In addition,
equipment manufacturers are required to apply an Equipment Flexibility
Label to the engine or piece of equipment that identifies the equipment
as using an engine produced under the Phase 3 transition program for
equipment manufacturers. These labeling requirements allow EPA to
easily identify flex engines and equipment, verify which equipment
manufacturers are using these flex engines, and more easily monitor
compliance with the transition provisions. Labeling of the equipment
could also help U.S. Customs to quickly identify equipment being
imported lawfully using the Transition Program for Equipment
Manufacturers.
    While manufacturers will need to meet Phase 2 standards with their
flex engines, they will not need to certify them for the current model
year. We are instead applying the provisions of 40 CFR 1068.265, which
require manufacturers to keep records showing that they meet emission
standards without requiring submission of an application for
certification.
(ii) Compliance Based on Equipment Manufacturers
    We are adopting a different set of compliance provisions for engine
manufacturers that make arrangements to ship engines separately from
exhaust-system components. Under this scenario, as discussed above, the
engine manufacturers must establish a relationship with the equipment
manufacturers allowing the equipment manufacturer to install catalysts
to complete engine assembly in compliance with Phase 3 standards.
    In this case, engine manufacturers will design and produce their
Phase 3 engines and label them accordingly. The normal path for these
engines covered by the delegated-assembly provisions will involve
shipment of the engine without an exhaust system to the equipment
manufacturer. The equipment manufacturer will then follow the engine
manufacturer's instructions to add the exhaust system including the
catalyst to bring the engine into a certified Phase 3 configuration.
Under the transition program, equipment manufacturers will choose for
each of these engines to either follow the engine manufacturer's
instructions to install a catalyst to make it compliant with Phase 3
standards or install a non-catalyzed muffler to make it compliant with
Phase 2 standards. Any such engines downgraded to Phase 2 standards
will count toward the equipment manufacturer's total number

of allowances under the transition program.
    To make this work, engine manufacturers will need to take certain
steps to ensure overall compliance. First, engine manufacturers will
need to include emission data in the application for certification
showing that the engine meets Phase 2 standards without any
modification other than installing a non-catalyzed exhaust system. This
may include a specified range of backpressures that equipment
manufacturers must meet in procuring a non-catalyst muffler. If the
Phase 3 engine without a catalyst will otherwise still be covered by
the emission data from engines produced in earlier model years under
the Phase 2 standards, manufacturers could rely on carryover emission
data to make this showing. Second, the installation instructions we
specify under the delegated-assembly provisions will need to describe
the steps equipment manufacturers must take to make either Phase 3
engines or Phase 2 flex engines. Third, for engine families that
generate positive emission credits under the exhaust ABT program,
engine manufacturers must generally decrease the number of ABT credits
generated by the engine family by 10 percent. We believe the 10 percent
decrease should provide an emission adjustment commensurate with the
potential use of the equipment manufacturer flexibility provisions. (As
described earlier in Section V.C.3, EPA is including an option that
will allow engine manufacturers to track the final configuration of the
engines to determine the actual number of engines that were downgraded
for the TPEM program.)
    Equipment manufacturers using allowances under these provisions
must keep records that allow EPA or engine manufacturers to confirm
that equipment manufacturers followed appropriate procedures and
produced an appropriate number of engines without catalysts. In
addition, we are requiring that equipment manufacturers place a label
on the engine as close as possible to the engine manufacturer's
emission control information label to identify it as a flex engine. The
location of this label is important since it effectively serves as an
extension of the engine manufacturer's label, clarifying that the
engine meets Phase 2 standards, not the Phase 3 standards referenced on
the original label. This avoids the problematic situation of changing
or replacing labels, or requiring engine manufacturers to send
different labels.
    Engine manufacturers might choose to produce Class II engines that
are compliant with the Phase 3 standards before the 2011 model year and
set up arrangements for separate shipment of catalyzed mufflers as
described in Section V.E.2. We expect any engine manufacturers
producing these early Phase 3 engines to continue production of
comparable engine models that meet Phase 2 standards rather than
forcing all equipment manufacturers to accommodate the new engine
design early. We believe it will not be appropriate for equipment
manufacturers to buy Phase 3 engines in 2010 or earlier model years and
downgrade them to meet Phase 2 emission standards as described above.
We are therefore allowing the downgrading of Phase 3 engines only for
2011 and later model years.
    Because equipment manufacturers in many cases depend on engine
manufacturers to supply certified engines in time to produce complying
equipment, we are also adopting a hardship provision for all equipment
manufacturers (see Sec.  1068.255). An equipment manufacturer will be
required to use all its allowances under the transition program
described above before being eligible to use this hardship.
(iii) Reporting and Recordkeeping Requirements
    Equipment manufacturers choosing to participate in the transition
program will be required to keep records of the U.S-directed production
volumes of Class II equipment in 2007 through 2009 broken down by
equipment model and calendar year. Equipment manufacturers will also
need to keep records of the number of flex engines they use under this
program.
    We are also establishing certain notification requirements for
equipment manufacturers. Any manufacturer wishing to participate in the
new transition provisions need to notify EPA before producing equipment
with flex engines. They must submit information on production of Class
II equipment over the three-year period from 2007 through 2009,
calculate the number of allowances available, and provide basic
business information about the company. For example, we will want to
know the names of related companies operating under the same parent
company that are required to count engines together under this program.
This early notification will not be a significant burden to the
equipment manufacturer and will greatly enhance our ability to ensure
compliance. Indeed, equipment manufacturers will need to have the
information required in the notification to know how to use the
allowances.
    We are establishing an ongoing reporting requirement for equipment
manufacturers participating in the Phase 3 transition program. Under
the program, participating equipment manufacturers will be required to
submit an annual report to EPA that shows its annual number of
equipment produced with flex engines under the transition provisions in
the previous year. Each report must include a cumulative count of the
number of equipment produced with flex engines for all years. To ease
the reporting burden on equipment manufacturers, EPA intends to work
with the manufacturers to develop an electronic means for submitting
information to EPA.
(c) Additional Allowances for Small and Medium-Sized Companies
    We believe small-volume equipment manufacturers will need a greater
degree of lead time than manufacturers that sell large volumes of
equipment. The small companies are less likely to have access to
prototype engines from engine manufacturers and generally have smaller
engineering departments for making the necessary design changes.
Allowances representing thirty percent of annual U.S.-directed
production provide larger companies with substantial lead time to plan
their product development for compliance but smaller companies may have
a product mix that requires extensive work to redesign products in a
short amount of time. We are therefore specifying that small-volume
equipment manufacturers may use this same transition program with
allowances totaling 200 percent of the average annual U.S.-directed
production of equipment using Class II engines from 2007 through 2009.
For purposes of this program, a small-volume equipment manufacturer is
defined as a manufacturer that produces fewer than 5,000 pieces of
nonhandheld equipment per year subject to EPA regulations in each of
the three years from 2007 through 2009 or meets the SBA definition of
small business equipment manufacturer (i.e., generally fewer than 500
employees for manufacturers of most types of equipment). These
allowances are spread over the same four-year period between 2011 and
2014. For example, a small-volume equipment manufacturer could
potentially use Phase 2 engines on all their Class II equipment for two
years or they might sell half their Class II equipment with Phase 2
engines for four years assuming production stayed constant over the
four years.

    Medium-sized equipment manufacturers, i.e., companies that produce
too much equipment to be considered a small-volume equipment
manufacturer but produce fewer than 50,000 pieces of Class II equipment
annually, may also face difficulties similar to that of small-volume
equipment manufacturers. These companies may be like small-volume
manufacturers if they have numerous product lines with varied
approaches to installing engines and mufflers. Other companies may be
more like bigger companies if they produce most of their equipment in a
small number of high-volume models or have consistent designs related
to engine and muffler installations. We are therefore creating special
provisions that will enable us to increase the number of transition
allowances that are available to these medium-sized companies that have
annual U.S.-directed production of Class II equipment of between 5,000
and 50,000 in each of the three years from 2007 through 2009. To obtain
allowances greater than 30 percent of average annual production, a
medium-sized manufacturer will need to notify us before they produce
equipment with flex engines by January 31, 2010 if they believe the
standard allowances based on 30 percent of average annual production of
Class II equipment do not provide adequate lead time starting in the
2011 model year. Additional allowances may be requested only if the
equipment manufacturer can show they are on track to produce a number
of equipment models representing at least half of their total U.S.-
directed production volume of Class II equipment in the 2011 model year
compliant with all exhaust and evaporative emission standards. As part
of their request, the equipment manufacturer will need to describe why
more allowances are needed to accommodate anticipated changes in engine
designs resulting from engine manufacturers' compliance with changing
exhaust emission standards. The equipment manufacturer will also need
to request a specific number of additional allowances needed with
supporting information to show why that many allowances are needed. We
may approve additional allowances up to 70 percent of the average
annual U.S.-directed production of Class II equipment from 2007 through
2009. If a medium-sized company were granted the full amount of
additional allowances, they will have allowances equivalent to 100
percent of the average annual production volume of Class II equipment.
    As noted above, the determination of whether a company is a small-
or medium-sized manufacturer will be based primarily on production data
over the 2007 through 2009 period submitted to EPA before 2011. After a
company's status as a small- or medium-sized company has been
established based on the data, EPA is requiring that manufactures keep
that status even if a company's production volume grows during the next
few years, such that the company will no longer qualify as a small- or
medium-sized company. EPA believes equipment manufacturers need to know
at the beginning of the transition program (i.e., 2011) how many
allowances they will receive under the program. Changing a company's
size determination during the program, which could affect the number of
allowances available, will make it difficult for companies to plan and
could lead to situations where a company is in violation of the
provisions based on the use of allowances that were previously allowed.
Likewise, if a company is purchased by another company or merges with
another company after the determination of small- or medium-size status
is established in 2010, the combined company could, at its option, keep
the preexisting status for the individual portions of the combined
company. If the combined company chooses to keep the individual
designations, the combined company must submit the annual reports on
the use of allowances broken down for each of the previously separate
companies.
(d) Requirements for Importers and Imported Equipment
    Under this final rule, only companies that manufacture equipment
can qualify for the relief provided under the Phase 3 transition
provisions. Equipment manufacturers producing equipment outside the
United States that comply with the provisions discussed below can enjoy
the same transition provisions as domestic manufacturers. Such
equipment manufacturers that do not comply with the compliance-related
provisions discussed below will not receive allowances. Importers that
do not manufacture equipment will not receive any transition relief
directly, but could import equipment with a flex engine if it is
covered by an allowance or transition provision associated with a
foreign equipment manufacturer. This will allow transition provisions
to be used by equipment manufacturers producing equipment outside the
United States in the same way as equipment manufacturers producing
equipment domestically, at the option of the overseas manufacturer,
while avoiding the potential for importers to inappropriately use
allowances. These regulations apply equally to foreign equipment
manufacturers and to domestic equipment manufacturers that build
equipment outside the country that is eventually sold in the United
States.
    All equipment manufacturers wishing to use the transition
provisions for equipment produced outside the United States must comply
with all the requirements discussed above. Along with the equipment
manufacturer's notification described earlier, an overseas equipment
manufacturer will have to comply with various compliance related
provisions (see Sec.  1054.626). These provisions are similar to those
adopted for nonroad diesel engines. As part of the notification, such
an equipment manufacturer will have to:
     Agree to provide EPA with full, complete and immediate
access to conduct inspections and audits;
     Name an agent in the United States for service;
     Agree that any enforcement action related to these
provisions will be governed by the Clean Air Act;
     Submit to the substantive and procedural laws of the
United States;
     Agree to additional jurisdictional provisions;
     Agree that the equipment manufacturer will not seek to
detain or to impose civil or criminal remedies against EPA inspectors
or auditors for actions performed within the scope of EPA employment
related to the provisions of this program;
     Agree that the equipment manufacturer becomes subject to
the full operation of the administrative and judicial enforcement
powers and provisions of the United States without limitation based on
sovereign immunity; and
     Submit all reports or other documents in the English
language, or include an English language translation.
    In addition to these provisions, we are requiring equipment
manufacturers producing equipment for importation under the transition
program to comply with a bond requirement for equipment imported into
the United States. We believe a bond program is an important tool for
ensuring that importing equipment manufacturers are subject to the same
level of enforcement as equipment manufacturers producing equipment
domestically. Specifically, we believe a bonding requirement for these
equipment manufacturers is an important enforcement tool for ensuring
that EPA has the ability to collect any

judgments assessed against an overseas equipment manufacturer for
violations of these transition provisions.
    Under a bond program, the participating equipment manufacturer will
have to maintain a bond in the proper amount that is payable to satisfy
judgments that result from U.S. administrative or judicial enforcement
actions for conduct in violation of the Clean Air Act. The equipment
manufacturer will generally obtain a bond in the proper amount from a
third party surety agent that has been listed with the Department of
the Treasury. As discussed in Sections V.E.6, EPA is establishing other
bond requirements as well. An equipment manufacturer that is required
to post a bond under any of these provisions will be required to obtain
only one bond of the amount specified for those sections. Equipment
manufacturers may avoid the bond requirements based on the level of
assets in the United States, as described in Section V.E.6.
    In addition to the equipment manufacturer requirements discussed
above, EPA is also requiring importers of equipment with flex engines
from a complying equipment manufacturer to comply with certain
provisions. EPA believes these importer provisions are essential to
EPA's ability to monitor compliance with the transition provisions.
Therefore, the regulations require each importer to notify EPA prior to
their initial importation of equipment with flex engines. Importers
will be required to submit their notification before importing
equipment with flex engines from a complying equipment manufacturer.
The importer's notification will need to include the following
information:
     The name and address of importer (and any parent company);
     The name and address of the manufacturers of the equipment
and engines the importer expects to import; and
     Number of units of equipment with flex engines the
importer expects to import for each year broken down by equipment
manufacturer.
    In addition, EPA is requiring that any importer electing to import
to the United States equipment with flex engines from a complying
equipment manufacturer must submit annual reports to EPA. The annual
report will include the number of units of equipment with flex engines
the importer actually imported to the United States in the previous
calendar year; and identify the equipment manufacturers and engine
manufacturers whose equipment and engines were imported.
(e) Provisions for Rotation-Molded Fuel Tanks
    Equipment manufacturers may face challenges in transitioning to
rotation-molded fuel tanks that meet the new permeation standards.
These modified fuel tanks may require equipment manufacturers to adjust
the designs of their equipment to ensure that the new fuel tanks can be
incorporated without problems. We are therefore allowing equipment
manufacturers to use noncompliant rotational-molded fuel tanks for two
additional years on limited numbers of 2011 and 2012 model year
equipment using Class II engines. Equipment manufacturers may use
noncompliant rotational-molded fuel tanks if the production volume of
the fuel tank design used in Class II equipment models is collectively
no more than 5,000 units in the 2011 model year. In the 2012 model
year, equipment manufacturers may use noncompliant rotational-molded
fuel tanks if the production volume of the fuel tank design used in
Class II equipment models is collectively no more than 5,000 units in
the 2012 model year, but the total number of exempted rotational-molded
fuel tanks across the manufacturer's Class II equipment is limited to
10,000 units. If production volumes are greater than 5,000 for a given
fuel tank design (or greater than 10,000 corporate-wide in 2012), all
those tanks must comply with emission standards. Tank designs would be
considered identical if they are produced under a single part number to
conform to a single design or blueprint. In addition, tank designs
would be considered identical if they differ only with respect to
production variability, post-production changes (such as different
fittings or grommets), supplier, color, or other extraneous design
variables. We originally proposed to allow noncompliant rotation-molded
fuel tanks for any equipment that was counted under the allowances
described in this section which used flex engines meeting Phase 2
exhaust emission standards. However, the approach being finalized today
could be applied to any equipment using Class II engines (subject to
the constraints noted above), whether or not the equipment uses a flex
engine.
(4) Equipment Manufacturer Recertification
    It has generally been engine manufacturers that certify with EPA
for exhaust emissions because the standards are engine-based. However,
because the Phase 3 nonhandheld standards are expected to result in the
use of catalysts, a number of equipment manufacturers, especially those
that make low-volume models, believe it may be necessary to produce
their own unique engine/muffler designs, but using the same catalyst
substrate already used in a muffler that is part of an engine
manufacturers certified configuration. In this situation, the engine
will not be covered by the engine manufacturer's certificate, as the
engine/muffler design is not within the specifications for the
certified engine. The equipment manufacturer is therefore producing a
new distinct engine which is not covered by a certificate and therefore
needs to be certified with EPA.
    To allow the possibility of an equipment manufacturer certifying
such an engine/muffler design with EPA, we are establishing a
simplified engine certification process for nonhandheld equipment
manufacturers (see Sec.  1054.612). Under the simplified certification
process, the nonhandheld equipment manufacturer will need to
demonstrate that it is using the same catalyst substrate as the
approved engine manufacturer's engine family, provide information on
the differences between their engine/exhaust system and the engine/
exhaust system certified by the engine manufacturer, and explain why
the emissions deterioration data generated by the engine manufacturer
will be representative for the equipment manufacturer's configuration.
The equipment manufacturer will need to perform low-hour emission
testing on an engine equipped with their modified exhaust system and
demonstrate that it meets the emission standards after applying the
engine manufacturer's deterioration factors for the certified engine
family. We will not require production-line testing for these engines.
The equipment manufacturer will be responsible to meet all the other
requirements of an engine manufacturer under the regulations, including
labeling, warranty, defect reporting, payment of certification fees,
and other things. The useful life period selected for the original
certification will also apply for the equipment manufacturer's
streamlined certification. This provision is primarily intended for
easing the transition to new standards. Starting in the 2015 model
year, we are therefore limiting these recertification provisions to
small-volume emission families (sales below 5,000 units).
(5) Special Provisions Related to Altitude
    For nonhandheld engines we are requiring compliance with our
standards at all altitudes, consistent

with other engine categories.\97\ However, since spark-ignition engines
without electronic control of air/fuel ratio cannot compensate for
changing air density, their emissions generally change with changing
altitude. In recognition of this technological limit, we are adopting
special testing and compliance provisions related to altitude. As
described in Section V.C.1, we are requiring that nonhandheld engines
meet emission standards without an altitude kit, but will allow, in
certain cases, testing at barometric pressures below 94.0 kPa (which is
roughly equivalent to an elevation of 2,000 feet above sea level) using
an altitude kit. (An altitude kit may be as simple as a single
replacement part for the carburetor that allows a greater volumetric
flow of air into the carburetor to make the engine operate as it would
at low altitudes.) Such kits were allowed under part 90 and we are
keeping the provisions that already apply in part 90 related to
descriptions of these altitude kits in the application for
certification. This includes a description of how engines comply with
emission standards at varying atmospheric pressures, a description of
the altitude kits, and the associated part numbers.
---------------------------------------------------------------------------

    \97\ Note that we are not changing exhaust standards for
handheld engines and are therefore codifying altitude provisions in
the new part 1054 that are consistent with those that apply under
part 90.
---------------------------------------------------------------------------

    During certification, manufacturers will have two choices regarding
testing and compliance at barometric pressures below 94.0 kPa: (1) Test
engines for demonstrating compliance with the standards without an
altitude kit; or (2) test engines for demonstrating compliance with the
standards using an altitude kit. Those manufacturers choosing Option 2
will be required to identify the altitude range for which it expects
proper engine performance and emission control will occur with and
without the altitude kit, state that engines will comply with
applicable emission standards throughout the useful life with the
altitude kit installed according to instructions, and include any
supporting information. Manufacturers choosing Option 2 will also need
to describe a plan for making information and parts available to
consumers such that widespread use of altitude kits will reasonably be
expected in high-altitude areas. For nonhandheld engines, this will
involve all counties with elevations substantially above 4,000 feet
(see Appendix III to part 1068). This includes all U.S. counties where
75 percent of the land mass and 75 percent of the population are above
4,000 feet (see 45 FR 5988, January 24, 1980 and 45 FR 14079, March 4,
1980).
    Assuming we grant a certificate that includes a manufacturer's
reliance on an altitude kit during testing, any compliance testing at
higher altitudes (more precisely, lower barometric pressures) would be
conducted with the altitude kit installed on the engine according to
the manufacturer's instructions. Note that manufacturers would not be
required to submit test data from high-altitude testing in their
applications, provided they could demonstrate through engineering
analysis the basis for knowing the altitude kits will allow the engines
to meet the emission standards at high altitude. Any high-altitude
testing of an engine family that does not use these high altitude
provisions will be tested without an altitude kit installed.
    We considered requiring manufacturers relying on altitude kits to
ensure that all engines sold in high-altitude areas were sold with
altitude kits installed, but determined that such a requirement would
have been burdensome to the manufacturers, impractical, and very
disruptive to the market, and may not work in practice. Certificate
holders will be the engine manufacturers, which generally have little
or no control over the location at which the sale to the ultimate
purchaser is made. In most cases, the engines will be sold to equipment
manufacturers and/or through distributors or large retailers. However,
even in cases when a manufacturer might have control over the location
at which the sale to the ultimate purchaser is made, it is not clear
that the manufacturer could ensure that every piece of equipment sold
in a high-altitude area has an engine with an altitude kit installed.
In light of these potential problems, we believe the approach being
finalized will be effective and is the most appropriate approach. It is
not tampering for a consumer not to install the altitude kit. We expect
it will be common practice for consumers to install altitude kits
because they are inexpensive, easy to install, and improve performance
at higher altitudes. Manufacturers have also emphasized that retailers
and consumers are well aware of the need to modify engines for proper
operation in high-altitude areas. Toward that end, we are requiring
manufacturers to make the information and parts sufficiently easy for
the consumer to obtain so that the manufacturer ``would reasonably
expect that altitude kits would be widely used in the high-altitude
counties.'' This approach should result in effective control of
emissions in high-altitude areas while still addressing the
manufacturers' concerns regarding control over distribution practices
and point of sale. In fact, it is worth noting that we expect this
overall approach to be more effective in achieving emission reductions
than the current regulations under Phase 2. Nevertheless, should we
determine that operation of engines in high-altitude areas without
altitude kits installed is widespread, we would reconsider the need for
additional requirements.
(6) Special Provisions for Compliance Assurance
    EPA's experiences in recent years have highlighted the need for
more effective tools for preventing the introduction of noncompliant
engines into U.S. commerce. These include noncompliant engines sold
without engine labels or with counterfeit engine labels. We are
adopting the special provisions in the following sections to help us
address these problems.
(a) Importation Form
    Importation of engines is regulated both by EPA and by U.S. Customs
and Border Protection. Current Customs regulations specify that anyone
importing a nonroad engine (or equipment containing a nonroad engine)
must complete a declaration form before importation. EPA has created
Declaration Form 3520-21 for this purpose. Customs requires this in
many cases, but there are times when they allow engines to be imported
without the proper form. It will be an important advantage for EPA's
own compliance efforts to be able to enforce this requirement. We are
therefore modifying part 90 to mirror the existing Customs requirement
(and the EPA requirement in Sec.  1068.301) for importers to complete
and retain the declaration form before importing engines (see Sec.
90.601). This will facilitate a more straightforward processing of
cases in which noncompliant products are brought to a U.S. port for
importation because currently no requirement exists for measuring
emissions or otherwise proving that engines are noncompliant at the
port facility. Since this is already a federal requirement, we are
making this effective immediately with the final rule.
(b) Assurance of Warranty Coverage
    Manufacturers of Small SI engines subject to the standards are
required to provide an emission-related warranty so owners are able to
have repairs done at no expense for emission-related defects during an
initial warranty period. Established companies are able to do

this with a network of authorized repair facilities that can access
replacement parts and properly correct any defects. In contrast, we are
aware that some manufacturers are selling certified engines in the
United States without any such network for processing warranty claims.
As such, owners who find that their engines have an emission-related
defect are unable to properly file a warranty claim or get repairs that
should be covered by the warranty. In effect, this allows companies to
certify their engines and agree to provide warranty coverage without
ever paying for legitimate repairs that should be covered by the
warranty. We are therefore requiring that all manufacturers demonstrate
several things before we will approve certification for their engines
(see Sec.  90.1103 and Sec.  1054.120). The following provisions apply
to manufacturers who certify engines, and include importers who certify
engines. First, we are requiring manufacturers to provide and monitor a
toll-free telephone number and an e-mail address for owners to receive
information about how to make a warranty claim and how to make
arrangements for authorized repairs. Second, we are requiring
manufacturers to provide a source of replacement parts within the
United States. For imported parts, this will require at least one
distributor within the United States.
    Finally, we are requiring manufacturers to have a network of
authorized repair facilities or to take one of multiple alternate
approaches to ensure that owners will be able to get free repair work
done under warranty. In the proposal we specified that warranty-related
repairs may be limited to authorized repair facilities as long as
owners did not have to travel more than 100 miles for repairs (or
further in remote areas of the country). For companies without a
nationwide repair network, we proposed alternative methods for meeting
warranty obligations, including free shipping, free service calls, or
reimbursement of costs through local nonauthorized service centers.
Manufacturers suggested a different metric for demonstrating a
readiness to meet warranty obligations, focusing on maintaining
authorized service centers in every metropolitan area with a population
of 100,000 or greater (according to the 2000 census). We agree that the
suggested approach would provide an effective demonstration of a valid
warranty network and are including that in the regulation; however, we
believe it is still appropriate to include the proposed provisions
related to the 100-mile specification in the final rule. For example,
there may be some companies with a regional market that have an
effective network of repair facilities in that region, but not in other
parts of the country. In this circumstance, it is appropriate to allow
the manufacturer multiple paths for showing that it will be able to
respond effectively to all warranty claims nationwide. We are therefore
including the 100-mile approach as an additional alternative in the
regulations, as well as including a variety of adjustments to address
the concerns raised in the comments.
    We believe these requirements are both necessary and effective for
ensuring proper warranty coverage for all owners. At the same time, we
are adopting a flexible approach that allows companies to choose from a
variety of alternatives for providing warranty service. We therefore
believe these requirements are readily achievable for any company. We
are therefore implementing these requirements starting with the 2010
model year. This should allow time for the administrative steps
necessary to arrange for any of the allowable compliance options
described above.
(c) Bond Requirements Related to Enforcement and Compliance Assurance
    Certification initially involves a variety of requirements to
demonstrate that engines and equipment are designed to meet applicable
emission standards. After certification is complete, however, several
important obligations apply to the certifying manufacturer or importer.
For example, we require ongoing testing of production engines, as well
as reporting of recurring defects. Manufacturers may also need to pay
penalties if there is a violation and may need to perform a recall if
their products are found to be noncompliant. For companies operating
within the United States, we are generally able to take steps to
communicate clearly and insist on compliance with applicable
regulations. For example, in certain circumstances we may meet with
specific company representatives, halt production, or seize assets. For
companies without staff or assets in the United States, these
alternatives are not available. Accordingly, we have limited ability to
enforce our requirements or recover any appropriate penalties, which
increases the risk of environmental problems as well as problems for
owners. This creates the potential for a company to gain a competitive
advantage if they do not have substantial assets or operations in the
United States by avoiding some of the costs of complying with EPA
regulations.
    To address this concern, we are adopting a requirement for
manufacturers of certified engines and equipment (including importers)
to post a bond to cover any potential compliance or enforcement actions
under the Clean Air Act. Manufacturers and importers will be exempt
from the bond requirement if they are able to sufficiently demonstrate
an assurance that they will meet any compliance- or enforcement-related
obligations. The bonding requirements apply for companies that do not
have fixed assets in the United States meeting the smallest applicable
thresholds from the following:
     A threshold of $3 million applies for manufacturers that
have been certificate holders in each of the preceding ten years
without failing a test conducted by EPA officials or having been found
by EPA to be noncompliant under applicable regulations.
     A threshold of $6 million applies for secondary engine
manufacturers or for equipment manufacturers that certify no engines
with respect to exhaust emission standards. A secondary engine
manufacturer is generally a certifying company that buys partially
complete engines for final assembly from another engine manufacturer.
     A threshold of $10 million applies for companies that do
not qualify for the smaller specified bond thresholds.
    The value of the bond must be at least $500,000, though a higher
bond value may apply based on multiplying the annual volume of
shipments by a per-engine rate. The per-engine bond amount is $25 for
handheld engines and Class I engines. Class II engines cover a much
wider range of applications, so we further differentiate the bond for
those engines. The proposed per-engine bond amounts for Class II
engines is $50 for engines between 225 and 740 cc, $100 for engines
between 740 and 1,000 cc, and $200 for engines above 1,000 cc. These
values are generally scaled to be approximately 10 to 15 percent of the
retail value. In the case of handheld engines, this is based on the
retail value of equipment with installed engines, since these products
are generally marketed that way. Class II engines are very often sold
as loose engines to equipment manufacturers, so the corresponding per-
engine bond values are based on the retail value of the engine alone.
This approach is similar to the bond requirements that apply for
nonroad diesel engines (see Sec.  1039.626).
    The total bond amount will be based on the value of imported
products over

a one-year period. If a bond is used to satisfy a judgment, the company
will then be required to increase the amount of the bond within 90 days
of the date the bond is used to cover the amount that was used. Also,
we will require the bond to remain in place for five years after the
company no longer imports Small SI engines.
    These bonding requirements apply for 2010 and later model year
engines and are enforceable for all products introduced into U.S.
commerce starting January 1, 2010.
(d) Bond Requirements Related to Warranty
    Warranty is an additional potential compliance obligation. Engine
manufacturers must service warranty claims for emission-related defects
that occur during the prescribed warranty period. We have experience
with companies that have faced compliance-related problems where it was
clear that they did not have the resources to make warranty repairs if
that were necessary. Such companies benefit from certification without
bearing the full range of associated obligations. We believe it is
appropriate to add a requirement to post a bond to ensure that a
company can meet their warranty obligations. The concern for being able
to meet these obligations applies equally to domestic and foreign
manufacturers. The biggest indicator of a manufacturer's ability to
make warranty repairs relates to the presence of repair facilities in
the United States. We are therefore adopting a bond requirement
starting with the 2010 model year for all manufacturers (including
importers) that do not have a repair network in the United States that
is available for processing warranty repairs (see Sec.  90.1007 and
Sec.  1054.120). Such a repair network will need to involve at least
100 authorized repair facilities in the United States, or at least one
such facility for each 5,000 engines sold in the United States,
whichever is less. Companies not meeting these criteria will need to
post a bond as described above for compliance assurance. We will allow
companies that must post bond to arrange for warranty repairs to be
done at independent facilities. Note that a single bond payment will be
required for companies that must post bond for compliance-related
obligations, as described above, in addition to the bond for warranty-
related obligations.
(e) Restrictions Related to Naming Model Years
    We are adopting the proposed provisions that restrict what model
years can be assigned to imported products. Importers can only declare
a model year up to one year before the calendar year of importation in
cases where new emission standards start to apply. We are adopting this
requirement for all engine categories subject to part 1068. See the
detailed discussion of this issue in Section VIII.C.
(f) Import-Specific Information at Certification
    We are requiring additional information to improve our ability to
oversee compliance related to imported engines (see Sec.  90.107 and
Sec.  1054.205). In the application for certification, we are requiring
the following additional information starting with the 2010 model year:
(1) The port or ports at which the manufacturer has imported engines
over the previous 12 months, (2) the names and addresses of the agents
the manufacturer has authorized to import the engines, and (3) the
location of the test facilities in the United States where the
manufacturer will test the engines if we select them for testing under
a selective enforcement audit. See Section 1.3 of the Summary and
Analysis of Comments for further discussion related to naming test
facilities in the United States. The current regulations in part 90 do
not include these specific requirements; however, we do specify already
that we may select imported engines at a port of entry. In such a case,
we will generally direct the manufacturer to do testing at a facility
in the United States. The new provision allows the manufacturers to
make these arrangements ahead of time rather than relying on EPA's
selection of a test lab. Also, the current regulations state in Sec.
90.119 that EPA may conduct testing at any facility to determine
whether engines meet emission standards.
(g) Counterfeit Emission Labels
    We have observed that some importers attempt to import noncompliant
products by creating an emission control information label that is an
imitation of a valid label from another company. We are not requiring
that certifying manufacturers take steps to prevent this, but we are
including a provision that specifically allows manufacturers to add
appropriate features to prevent counterfeit labels. This may include
the engine's serial number, a hologram, or some other unique
identifying feature. This provision is effective immediately upon
completion of the final rule since it is an allowance and not a
requirement (see Sec.  90.114 and Sec.  1054.135).
(h) Partially Complete Engines
    As described in Section VIII, we are clarifying the engine
manufacturers' responsibilities for certification with respect to
partially complete engines. While this is intended to establish a path
for secondary engine manufacturers to get their engines from the
original engine manufacturer, we are aware that this will also prevent
manufacturers from selling partially complete engines as a strategy to
circumvent certification requirements. If long blocks or engines
without fuel systems are introduced into U.S. commerce, either the
original manufacturer or the company completing engine assembly will
need to hold a certificate for that engine.
(7) Using Certified Small SI Engines in Marine Applications
    Manufacturers have described situations in which Small SI engines
are used in marine applications. As described in Section III.E.5, we
are allowing limited numbers of certified Small SI engines to be used
as marine propulsion engines without certifying to the Marine SI
emission standards in part 1045 (see Sec.  1045.610).
(8) Alternate Fuels
    The emission standards apply to all spark-ignition engines
regardless of the fuel they use. Almost all Small SI engines operate on
gasoline, but these engines may also operate on other fuels, such as
natural gas, liquefied petroleum gas, ethanol, or methanol. The test
procedures in 40 CFR part 1065 describe adjustments needed for
operating test engines with oxygenated fuels.
    In some special cases, a single engine is designed to alternately
run on different fuels. For example, some engines can switch back and
forth between natural gas and LPG. We are adding a clarification to the
regulations to describe how manufacturers would submit certification
data and divide such engines into engine families. Manufacturers would
submit test data for each type of fuel. If a manufacturer certifies a
dual-fuel engine family, but produces engines that run only on one fuel
where that dedicated-fuel engine is identical to the certified dual-
fuel engine with respect to that fuel, those engines could be included
in the same family. This is also true for the second fuel. For example,
if a manufacturer produces an engine that can run on both gasoline and
LPG, and also produces that engine model in gasoline-only and LPG-only
versions, without adjusting the calibration or other aspects of each
respective configuration, those engines

may all be included in the same engine family. In effect, these engines
are covered by the original certificate because they are made to
conform to the description included in the original application for
certification except that they do not have the full functionality of
the dual-fuel engines.
    Once an engine is placed into service, someone might want to
convert it to operate on a different fuel. This would take the engine
out of its certified configuration, so we are requiring that someone
performing such a fuel conversion go through a certification process.
We will allow certification of the complete engine using normal
certification procedures, or the aftermarket conversion kit could be
certified using the provisions of 40 CFR part 85, subpart V. This
contrasts with the existing provisions that allow for fuel conversions
that can be demonstrated not to increase emission levels above the
applicable standard. We are applying this requirement starting January
1, 2010. (See Sec.  90.1003 and Sec.  1054.635.)
(9) Other Provisions
    We are also making a variety of changes in the provisions that make
up the certification and compliance program. Most of these changes
serve primarily to align with the regulations we have started to apply
to other types of engines.
    The new warranty provisions are based on the requirements that
already apply under 40 CFR part 90. We are adding an administrative
requirement to describe the provisions of the emission-related warranty
in the owners manual. We expect that many manufacturers already do this
but believe it is appropriate to require this as a routine practice.
(See Sec.  1054.120.)
    Testing new engines requires a period of engine operation to
stabilize emission levels. The regulations specify two separate figures
for break-in periods for purposes of certification testing. First,
engines are generally operated long enough to stabilize emission
levels. Second, we establish a limit on how much an engine may operate
and still be considered a ``low-hour'' engine. The results of testing
with the low-hour engine are compared with a deteriorated value after
some degree of service accumulation to establish a deterioration
factor. For Marine SI engines, we are requiring that the engine can be
presumed to have stabilized emission levels after 12 hours of engine
operation, with a provision allowing approval for more time if needed,
and we generally require that low-hour test engines have no more than
30 hours of engine operation. However, given the shorter useful life
for many Small SI engines, this will not make for a meaningful process
for establishing deterioration factors. For example, emission levels in
Small SI engines may not stabilize before deterioration begins to
affect emission levels, which will prevent the engine from ever truly
having stabilized emission levels. Also, the low-hour emission test
should occur early enough for the deterioration factor to adequately
represent the deterioration over the engine's lifetime.
    We are requiring that Small SI engines with a useful life above 300
hours can be presumed stable after 12 hours with low-hour testing
generally occurring after no more than 24 hours of engine operation.
For Small SI engines with useful life below 300 hours, we are requiring
a combination of provisions to address this concern. First, we are
allowing manufacturers to establish a stabilization period that is less
than 12 hours without showing that emission levels have fully
stabilized (see Sec.  1054.501). Second, we are specifying that low-
hour testing must generally occur after no more than 15 hours of engine
operation (see Sec.  1054.801). This allows some substantial time for
break-in, stabilization, and running multiple tests, without
approaching a significant fraction of the useful life. Third, we are
requiring that manufacturers consistently test low-hour production-line
engines (and emission-data engines in the case of carryover
deterioration factors for certification) using the same degree of
service accumulation to avoid inaccurate application of deterioration
factors (see Sec.  1054.240 and Sec.  1054.305).
    We are clarifying the maintenance that manufacturers may perform
during service accumulation as part of the certification process. The
general approach is to allow any amount of maintenance that is not
emission-related, but to allow emission-related maintenance only if it
is a routine practice with in-use engines. In most of our emission
control programs we specify that 80 percent of in-use engines should
undergo a particular maintenance step before manufacturers can do that
maintenance during service accumulation for certification testing. We
are aware that Small SI engines are predominantly operated by
homeowners with widely varying practices in servicing their lawn and
garden equipment. As such, achieving a rate of 80 percent may be
possible only for the most obvious maintenance steps. We are therefore
adopting a more accommodating approach for Small SI engines. In
particular, we are allowing manufacturers to perform a maintenance step
during certification based on information showing that 60 to 80 percent
of in-use engines get the specified maintenance at the recommended
interval. We will approve the use of such maintenance based on the
relative effect on performance and emissions. For example, we may allow
scheduled fuel-injector replacement if survey data show this is done at
the recommended interval for 65 percent of engines and performance
degradation is shown to be roughly proportional to the degradation in
emission control for engines that do not have their fuel injectors
replaced.
    One maintenance step of particular interest is replacement of air
filters. In larger spark-ignition engines, we do not treat replacement
of air filters as critical emission-related maintenance, largely
because those engines have feedback controls to compensate for changes
in varying pressure drop across the air filter. However, for Small SI
engines varying air flow through the air filter has a direct effect on
the engine's air-fuel ratio, which in turn directly affects the
engine's emission rates for each of the regulated pollutants. Service
accumulation generally takes place in laboratory conditions with far
less debris, dust, or other ambient particles that will cause filter
loading, so filter changes should be unnecessary to address this
conventional concern. We are concerned that the greater effect is from
fuel and oil that may deposit on the back side of the filter,
especially from crankcase ventilation into the intake. This effect will
go undetected if there are no measurements with filters that have
experienced significant engine operation. We believe it would be
appropriate for this rulemaking to allow manufacturers to clean or
change air filters as long as manufacturers perform emission
measurements before and after these maintenance steps. It would be best
to perform testing with each air filter change; however, we would find
it acceptable if manufacturers tested engines before and after every
other air filter change. This approach allows for continued air filter
changes, consistent with our testing to establish the feasibility of
the Phase 3 emission standards, but properly identifies the effect on
emissions. We are taking a similar approach for maintenance with spark
plugs, except that tests must occur before and after each step to clean
or replace the spark plugs. We will be interested in a future
rulemaking to set emission standards based on less optimistic
assumptions regarding the degree of air filter and spark plug
maintenance with in-use equipment.

See Section 2.4 of the Summary and Analysis of Comments for a more
detailed discussion related to maintenance.
    We are defining criteria for establishing engine families that are
very similar to what is currently specified in 40 CFR part 90. We are
requiring that engines with turbochargers be in a different family than
naturally aspirated engines since that will be likely to substantially
change the engine's emission characteristics. Very few if any Small SI
engines are turbocharged today so this change will not be disruptive
for any manufacturer. We are also specifying that engines must have the
same number and arrangement of cylinders and approximately the same
total displacement. This will help us avoid the situation where
manufacturers argue that engines with substantially different engine
blocks should be in the same engine family. We will implement this
provision consistent with the approach adopted by California ARB in
which they limit engine families to include no more than 15 percent
variation in total engine displacement. Similarly, the current
regulations in part 90 do not provide a clear way of distinguishing
engine families by cylinder dimensions (bore and stroke) so we are also
changing part 90 to limit the variation in displacement within an
engine family to 15 percent. (See Sec.  1054.230 and Sec.  90.116.)
    The test procedures for Small SI engines are designed for engines
operating in constant-speed applications. This covers the large
majority of affected equipment; however, we are aware that engines
installed in some types of equipment, such as small utility vehicles or
go carts, are not governed to operate only at a single rated speed.
These engines will be certified based on their emission control over
the constant-speed duty cycle even though they do not experience
constant-speed operation in use. We are not prepared to establish a new
duty cycle for these engines but we are requiring engine manufacturers
to explain how their emission control strategy is not a defeat device
in the application for certification. For example, if engines will
routinely experience in-use operation that differs from the specified
duty cycle for certification, the manufacturer should describe how the
fuel-metering system responds to varying speeds and loads not
represented by the duty cycle. We are also requiring that engine
distributors and equipment manufacturers that replace installed
governors must get a new certificate of conformity for those engines to
avoid a tampering violation.

F. Small-Business Provisions

(1) Small Business Advocacy Review Panel
    On August 17, 2006, we convened a Small Business Advocacy Review
Panel (SBAR Panel or the Panel) under section 609(b) of the Regulatory
Flexibility Act (RFA), as amended by the Small Business Regulatory
Enforcement Fairness Act of 1996 (SBREFA). The purpose of the Panel was
to collect the advice and recommendations of representatives of small
entities that could be affected by this rule and to prepare a report
containing the Panel's recommendations for small entity flexibilities
based on those comments, as well as on the Panel's findings and
recommendations regarding the elements of the Initial Regulatory
Flexibility Analysis (IRFA) under section 603 of the RFA. Those
elements of an IRFA are:
     A description of, and where feasible, an estimate of the
number of small entities to which the rule will apply;
     A description of projected reporting, recordkeeping, and
other compliance requirements of the rule, including an estimate of the
classes of small entities that will be subject to the requirements and
the type of professional skills necessary for preparation of the report
or record;
     An identification, to the extent practicable, of all
relevant Federal rules that may duplicate, overlap, or conflict with
the rule; and
     A description of any significant alternative to the rule
that accomplishes the stated objectives of applicable statutes and that
minimizes any significant economic impact of the rule on small
entities.
    The report of the Panel has been placed in the rulemaking record
for this final rule.
    In addition to EPA's Director of the Office of Regulatory
Management and Information who acted as chairperson, the Panel
consisted of the Director of EPA's Assessment and Standards Division of
the Office of Transportation and Air Quality, the Administrator of the
Office of Management and Budget's Office of Information and Regulatory
Affairs, and the Chief Counsel for Advocacy of the Small Business
Administration.
    Using definitions provided by the Small Business Administration
(SBA), companies that manufacture internal-combustion engines and that
employ fewer than 1,000 people are considered small businesses for the
SBAR Panel. Companies that manufacture equipment and that employ fewer
than 500 people, or fewer than 750 people for manufacturers of
construction equipment, or fewer than 1,000 people for manufacturers of
generators, are considered small businesses for the SBAR Panel. Based
on this information, we asked 25 companies that met the SBA small
business thresholds to serve as small entity representatives for the
duration of the Panel process. Of these 25 companies, 14 of them
represented a cross-section of Small SI engine manufacturers, equipment
manufacturers, and fuel system component manufacturers. (The rest of
the companies were involved in the Marine SI market.)
    With input from small entity representatives, the Panel drafted a
report providing findings and recommendations to us on how to reduce
the potential burden on small businesses that may occur as a result of
the proposed rule. The Panel report is included in the rulemaking
record for this final rule. In light of the Panel report, and where
appropriate, we proposed a number of provisions for small business
engine manufacturers and small business equipment manufacturers. We are
adopting all the flexibility options as proposed. The following section
describes the flexibility options being adopted in this final rule.
    (2) Burden Reduction Approaches for Small-Volume Nonhandheld Engine
Manufacturers
    We are incorporating several provisions for small business
nonhandheld engine manufacturers. The purpose of these provisions is to
reduce the burden on companies for which fixed costs cannot be
distributed over a large number of engines.
    Under EPA's current Phase 2 regulations, EPA provided a number of
provisions for small-volume engine manufacturers. For the Phase 2
regulations, the criteria for determining if a company was a ``small-
volume engine manufacturer'' was based on whether the company projected
at certification to have production of no more than 10,000 nonhandheld
engines per year (excluding engines sold in California that are subject
to the California ARB standards). Based on past experience, EPA
believes that determining the applicability of the provisions based on
number of employees, as compared to volume of products, can be more
problematic given the nature of the workforce in terms of full-time,
part-time, contract, overseas versus domestic, and parent

companies. EPA believes it can avoid these potential complications and
still provide relief to nearly all small businesses by continuing to
use the annual sales criteria for determining which entities qualify as
a small volume engine manufacturer under the Phase 3 program. For these
reasons, EPA is retaining the current production-based criteria for
determining who is a small-volume engine manufacturer and, as a result,
eligible for the Phase 3 flexibilities described below (see Sec.
1054.801).
    Based on confidential sales data provided to EPA by engine
manufacturers, the 10,000 unit cut-off for engine manufacturers will
include all the small business engine manufacturers currently
identified using SBA's employee-based definition. To ensure all small
businesses have access to the flexibilities described below, EPA is
also allowing engine manufacturers exceeding the production cut-off
level noted above but having fewer than 1,000 employees to request
treatment as a small-volume engine manufacturer (see Sec.  1054.635).
In such a case, the manufacturer will need to provide information to
EPA demonstrating that the manufacturer has fewer employees than the
1,000 cut-off level to be approved as a small-volume engine
manufacturer.
    If a small-volume engine manufacturer grows over time and exceeds
the production volume limit of 10,000 nonhandheld engines per year, the
engine manufacturer will no longer be eligible for the small-volume
flexibilities. However, because some of the flexibilities described
below provide manufacturers with the ability to avoid certain testing
such as durability testing or production line testing, it may be
difficult for a manufacturer to fully comply with all the testing
requirements immediately upon losing its small-volume status. In such
cases, the engine manufacturer can contact EPA and request additional
time, subject to EPA approval, before they would be required to meet
the testing requirements that generally apply to engine manufacturers.
(a) Assigned Deterioration Factors
    We are allowing small-volume engine manufacturers to rely on an
assigned deterioration factor to demonstrate compliance with the
standards for the purposes of certification rather than doing service
accumulation and additional testing to measure deteriorated emission
levels at the end of the regulatory useful life (see Sec.  1054.240).
EPA is not establishing actual levels for the assigned deterioration
factors with this final rule. EPA intends to analyze emissions
deterioration information that becomes available over the next few
years to determine what deterioration factors will be appropriate for
nonhandheld engines. This is likely to include deterioration data for
engines certified to comply with California ARB's Tier 3 standards and
engines certified early to EPA's Phase 3 standards. Prior to the
implementation date for the Phase 3 standards, EPA will provide
guidance to engine manufacturers specifying the levels of the assigned
deterioration factors for small-volume engine manufacturers.
(b) Exemption From Production-Line Testing
    We are exempting small-volume engine manufacturers from the
production-line testing requirements (see Sec.  1054.301). Therefore,
small-volume engine manufacturers will not be required to perform
production-line testing on any of their engine families.
(c) Additional Lead Time
    We are allowing small-volume engine manufacturers to delay
implementation of the Phase 3 exhaust emission standards for two years
(see Sec.  1054.145). Small-volume engine manufacturers will be
required to comply with the Phase 3 exhaust emission standards
beginning in model year 2014 for Class I engines and model year 2013
for Class II engines. Under this approach, manufacturers will be able
to apply this delay to all their nonhandheld engines or to just a
portion of their production. For those engine families that are
certified to meet the Phase 3 standards prior to these delayed dates by
selecting an FEL at or below the Phase 3 standards, small volume engine
manufacturers can generate early Phase 3 credits (as discussed in
Section V.C.3) through the 2013 model year for Class I engines and
through the 2012 model years for Class II engines. This option provides
more lead time for small-volume engine manufacturers to redesign their
products. They will also be able to learn from some of the hurdles
overcome by larger manufacturers.
(d) Broad Engine Families
    We are also allowing small-volume engine manufacturers to use a
broader definition of engine family for certification purposes. Under
the existing engine family criteria specified in the regulations,
manufacturers group their various engine lines into engine families
that have similar design characteristics including the combustion
cycle, cooling system, cylinder configuration, number of cylinders,
engine class, valve location, fuel type, aftertreatment design, and
useful life category. We are allowing small-volume engine manufacturers
to group all their Small SI engines into a single engine family for
certification by engine class and useful life category, subject to good
engineering judgment (see Sec.  1054.230).
(e) Hardship Provisions
    We are also establishing two types of hardship provisions for
nonhandheld engine manufacturers consistent with the Panel
recommendations. As has been our experience with similar provisions
already adopted, we anticipate that hardship mechanisms will be used
sparingly. First, under the unusual circumstances hardship provision,
any manufacturer subject to the new standards may apply for hardship
relief if circumstances outside their control cause the failure to
comply and if failure to sell the subject engines or equipment or fuel
system component would have a major impact on the company's solvency
(see Sec.  1068.245). An example of an unusual circumstance outside a
manufacturer's control may be an ``Act of God,'' a fire at the
manufacturing plant, or the unforeseen shutdown of a supplier with no
alternative available. The terms and time frame of the relief will
depend on the specific circumstances of the company and the situation
involved. As part of its application for hardship, a company will be
required to provide a compliance plan detailing when and how it will
achieve compliance with the standards. This hardship provision will be
available to all manufacturers of engines, equipment, boats, and fuel
system components subject to the new standards, regardless of business
size.
    Second, an economic hardship provision allows small businesses
subject to the new standards to petition EPA for limited additional
lead time to comply with the standards (see Sec.  1068.250). A small
business must make the case that it has taken all possible business,
technical, and economic steps to comply, but the burden of compliance
costs would have a significant impact on the company's solvency.
Hardship relief could include requirements for interim emission
reductions and/or the purchase and use of emission credits. The length
of the hardship relief decided during review of the hardship
application will be up to one year, with the potential to extend the
relief as needed. We anticipate that one to two years will normally be
sufficient. As part of its application for

hardship, a company will be required to provide a compliance plan
detailing when and how it will achieve compliance with the standards.
This hardship provision will be available only to qualifying small
businesses.
(3) Burden Reduction Approaches for Small-Volume Nonhandheld Equipment
Manufacturers
    We are establishing three provisions for small-volume nonhandheld
equipment manufacturers. The purpose of these provisions is to reduce
the burden on companies for which fixed costs cannot be distributed
over large sales volumes. That is useful for small-volume equipment
manufacturers that may need more lead time to redesign their equipment
to accommodate the new Phase 3 engine designs.
    Under EPA's current Phase 2 regulations, EPA provided a number of
lead time provisions for small-volume equipment manufacturers. For the
Phase 2 regulations, the criteria for determining if a company was a
``small-volume equipment manufacturer'' was based on whether the
company produced fewer than 5,000 nonhandheld pieces of equipment per
year (excluding equipment sold in California that are subject to the
California ARB standards). For the same reasons noted above for engine
manufacturers, EPA is retaining the current production-based criteria
for determining who is a small-volume equipment manufacturer and, as a
result, eligible for the Phase 3 flexibilities described below (see
Sec.  1054.801). The determination of which companies qualify as small-
volume equipment manufacturers for the purposes of the flexibilities
described below will be based on the average annual U.S.-directed
production of nonhandheld equipment over three years from 2007 through
2009.
    Based on estimated sales data for equipment manufacturers, EPA
believes the 5,000 unit cut-off for equipment manufacturers will
include almost all the small business equipment manufacturers using
SBA's employee-based definition. However, to ensure all small
businesses have access to the flexibilities described below, EPA is
also allowing equipment manufacturers which exceed the production cut-
off level noted above, but comply with SBA's employee-based definition
(e.g., 500 employees for equipment manufacturers, 750 employees for
construction equipment manufacturers, and 1,000 employees for generator
manufacturers), to request treatment as a small-volume equipment
manufacturer (see Sec.  1054.635). In such a case, the manufacturer
must provide information to EPA demonstrating that the manufacturer has
fewer employees than the applicable employee cut-off level to be
approved as a small-volume equipment manufacturer.
(a) Additional Lead Time
    As described in Section V.E.3., EPA is implementing a transition
program for all equipment manufacturers that produce Class II
equipment. Under that program, equipment manufacturers can install
Phase 2 engines in limited numbers of Class II equipment over the first
four years the Phase 3 standards apply (i.e., 2011 through 2014). The
number of equipment that can use Phase 2 engines is based on 30 percent
of an average annual production level of Class II equipment. However,
for small-volume equipment manufacturers, EPA is allowing a higher
level of allowances. Small-volume equipment manufacturers can install
Phase 2 engines at a level of 200 percent of an average annual
production level of Class II equipment. Small-volume equipment
manufacturers can use these allowances over the same four year period
of the transition program noted above (see Sec.  1054.625). Therefore,
a small-volume equipment manufacturer could potentially use Phase 2
engines on all their Class II equipment for two years, consistent with
the SBAR Panel's recommendation, or they might, for example, sell half
their Class II equipment with Phase 2 engines for four years assuming
sales stay constant over time.
(b) Simplified Certification Procedure
    We are establishing a simplified engine certification procedure for
all equipment manufacturers, including small-volume equipment
manufacturers (see Sec.  1054.612). See Section V.E.4 for further
discussion of this provision.
(c) Hardship Provisions
    Because nonhandheld equipment manufacturers in many cases depend on
engine manufacturers to supply certified engines in time to produce
complying equipment, we are also establishing a hardship provision for
all nonhandheld equipment manufacturers, regardless of size. The
provision will allow an equipment manufacturer to request more time if
they are unable to obtain a certified engine and they are not at fault
and will face serious economic hardship without an extension (see Sec.
1068.255).

G. Technological Feasibility

(1) Level of Standards
    We are promulgating new, more stringent exhaust HC+NOX
standards for Class I and II Small SI engines. We are also establishing
a new CO standard for Small SI engines used in marine generator
applications.
    For the 2008 model year manufacturers have certified nearly 500
Class I and II engine families to the Phase 2 standards using a variety
of engine designs and emission control technology. All Class I engines
were produced using carbureted air-fuel induction systems. A small
number of engines used catalyst-based emission control technology.
Similarly, Class II engines were predominantly carbureted. A limited
number of these engines used catalyst technology, electronic engine
controls and fuel injection, or were water-cooled. In both classes,
several engine families were certified at levels that will comply with
the new Phase 3 standards. Also, several families were very close to
the new emission standards. This suggests that, even accounting for the
relative increase in stringency associated with the Phase 3
requirements, some families either will not need to do anything or will
require only modest reductions in their emission performance to meet
the new standards. However, many engine families clearly will have to
do more to improve their emission controls.
    Based on our own testing of advanced technology for these engines,
our engineering assessments, and statements from the affected industry,
we believe the new requirements will require many engine manufacturers
to adopt exhaust aftertreatment technology using catalyst-based
systems. Other likely changes include improved engine designs and fuel
delivery systems. Finally, adding electronic controls or fuel injection
systems may obviate the need for catalytic aftertreatment for some
engine families, with the most likely candidates being multi-cylinder
engine designs.
(2) Implementation Dates
    We are establishing HC+NOX exhaust emission standards of
10.0 g/kW-hr for Class I engines starting in the 2012 model year and
8.0 g/kW-hr for Class II engines starting in the 2011 model year. For
both classes of nonhandheld engines, we are maintaining the existing CO
standard of 610 g/kW-hr. We expect manufacturers to meet these
standards by improving engine combustion and adding catalysts on most
engines.
    For spark-ignition engines used in marine generators, we are
promulgating a more stringent Phase 3 CO emission

standard of 5.0 g/kW-hr. This will apply equally to all sizes of
engines subject to the Class I and II Small SI engine standards, with
implementation dates as described above relative to Class I and Class
II engines.
(3) Technological Approaches
    Our feasibility assessment began by evaluating the emissions
performance of current technology for Small SI engines and equipment.
These initial efforts focused on developing a baseline for emissions
and general engine performance so we could assess the potential for new
emission standards for engines and equipment in this category. This
process involved laboratory and field evaluations of the current
engines and equipment. We reviewed engineering information and data on
existing engine designs and their emissions performance. Patents of
existing catalyst/muffler designs for Class I engines were also
reviewed. We engaged engine manufacturers and suppliers of emission
control-related engine components in discussions regarding recent and
expected advances in emissions performance beyond that required to
comply with the current Phase 2 standards. Finally, we purchased
catalyst/muffler units that were already in mass production by an
engine manufacturer for use on European walk-behind lawn mowers and
conducted engineering and chemical analyses on the design and materials
of those units.
    We used the information and experience gathered in the above
effort, along with the previous catalyst design experience of our
engineering staff, to design and build prototype catalyst-based
emission control systems that were capable of effectively and safely
achieving the new Phase 3 requirement based on dynamometer and field
testing. We also used the information and the results of our engine
testing to assess the potential need for improvements to engine and
fuel system designs, and the selective use of electronic engine
controls and fuel injection on some engine types. A great deal of this
effort was conducted in association with our more exhaustive study
regarding the efficacy and safety of implementing advanced exhaust
emission controls on Small SI engines, as well as new evaporative
requirements for these engines. In other testing, we evaluated advanced
emission controls on a multi-cylinder Class II engine with electronic
fuel injection. The results of that study are also discussed in Section
VII.
    In our test program to assess the feasibility of achieving the
Phase 3 HC+NOX standard, we evaluated 15 Class I engines of
varying displacements and valve-train designs. Each of these engines
was equipped with a catalyst-based control system and all achieved the
applicable standard at the end of their regulatory useful lives. Our
work also suggests that manufacturers of Class I engines may need to
improve the durability of their basic engine designs, ignition systems,
or fuel metering systems for some engines to comply with the emission
regulations.
    We tested five single-cylinder, overhead-valve Class II engines
with prototype catalyst/muffler control systems. Three of the engines
were carbureted and two were equipped with electronic engine and fuel
controls. This latter technology improves the management of air-fuel
mixtures and ignition spark timing. Each of the engines achieved the
requisite emission limit for HC+NOX (i.e., 8.0 g/kW-hr).
Based on this work and information from one manufacturer of emission
controls, we believe either a catalyst-based system or electronic
engine controls appear sufficient to meet the standard. Recent
certification data also suggests a number of Class II engines may be
able to comply with the new standard with engine modifications only.
Finally, similar to Class I engines, we found that manufacturers of
Class II engines may also need to improve the durability of their
ignition systems or fuel metering systems for some engines to comply
with the emission regulations.
    Multi-cylinder Class II engines are very similar to their single-
cylinder counterparts regarding engine design and combustion
characteristics. There are no multi-cylinder Class I engines. Based on
these attributes and our testing of two twin-cylinder engines, we
conclude that the Phase 3 HC+NOX standard is technically
feasible.
    Nonetheless, we also found that multi-cylinder engines may present
a unique concern with the application of catalytic control technology
under atypical operating conditions. More specifically, the concern
relates to the potential consequences of combustion misfire or a
complete lack of combustion in one of the two or more cylinders when a
single catalyst/muffler design is used. A single muffler is typically
used in Class II applications. In a single-catalyst system, the
unburned fuel and air mixture from the malfunctioning cylinder could
combine with hot exhaust gases from the other, properly operating
cylinder. This condition can create high temperatures within the
muffler system as the unburned fuel and air charge from the misfiring
cylinder combusts within the exhaust system. This could potentially
destroy the catalyst.
    One solution is simply to have a separate catalyst/muffler for each
cylinder. Another solution is to employ electronic engine controls to
monitor ignition and put the engine into ``limp-mode'' until necessary
repairs are made. For engines using carburetors, this would effectively
require the addition of electronic controls. For engines employing
electronic fuel injection that may need to add a small catalyst, it
will require that the electronic controls incorporate ignition misfire
detection if they do not already utilize the inherent capabilities
within the engine management system.
    As described earlier, we also expect some engine families to use
electronic fuel injection to meet the Phase 3 standard without
employing catalytic aftertreatment. Engine families that already use
these fuel metering systems and are reasonably close to complying with
the new requirement are likely to need only additional calibration
changes to the engine management system for compliance. In addition, we
expect that some engine families that currently use carbureted fuel
systems will convert directly to electronic fuel injection.
Manufacturers may adopt this strategy to couple achieving the standard
without a catalyst and realizing other advantages of using fuel
injection such as easier starting, more stable and reliable engine
operation, and reduced fuel consumption.
    Our evaluation of electronic fuel injection systems that could be
used to attain the new standard found that a rather simple, low-cost
system should be sufficient. We demonstrated this proof of concept as
part of the engine test program we conducted in anticipation of the
proposed rule. In that program, we fitted two single-cylinder Class II
engines with an electronic control unit and fuel system components
developed for motor-scooters and small-displacement motorcycles for
Asian markets. The sensors for the system were minimized to include a
throttle position sensor, air charge temperature sensor, oil
temperature sensor, manifold absolute pressure sensor, and a crankshaft
position sensor. This is in contrast to the fuel injection systems
currently used in some equipment with two-cylinder Class II engine
applications that employ more sophisticated and expensive automotive-
based components.
    Finally, there are a number of Class II engines that use gaseous
fuels (i.e., liquefied petroleum gas or natural gas). Based on our
engineering evaluation of current and likely emission control

technology for these engines, we conclude that there are no special
concerns relative to achieving the Phase 3 HC+NOX standard.
    Turning to the Phase 3 CO standard for Class I and II Small SI
engines used in marine generator applications, these engines have
several rather unique design considerations that are relevant to
achieving the new standard. Marine generator engines are designed to
operate for very long periods. Manufacturers generally design the
engines to operate at lower loads to accommodate continuous operation.
Manufacturers also design them to take advantage of the cooling
available from the water in the lake or river where the boat is
operating (seawater). By routing seawater through the engine block, or
using a heat exchanger that transfers heat from the engine coolant to
the seawater, manufacturers are able to maintain engine temperatures as
well as or better than automotive engines. Stable temperatures in the
engine block make a very significant difference in engine operation,
enabling much less distortion of the cylinders and a much more
consistent combustion event. These operating characteristics make it
possible to introduce advanced technology for controlling emissions.
Manufacturers also use this cooling water in a jacketing system around
the exhaust in order to minimize surface temperatures and reduce the
risk of fires on boats.
    The vast majority of gasoline marine generators are produced by two
engine manufacturers. Recently, these two manufacturers have converted
their marine generator product lines to new designs which can reduce CO
emissions by more than 99 percent. These manufacturers stated that this
action is to reduce the risk of CO poisoning in response to demands
from boat builders. These low-CO emission designs use closed-loop
electronic fuel injection and catalytic control. Both of these
manufacturers have certified low-CO engines capable of complying with
the new standards. These manufacturers also use electronic controls to
monitor catalyst function.
(4) Consideration of Regulatory Alternatives
    In developing the final emission standards, we considered what was
achievable with catalyst technology. Our technology assessment work
indicated that the new emission standards are feasible in the context
of provisions for establishing emission standards prescribed in section
213 of the Clean Air Act. We also considered what could be achieved
with larger, more efficient catalysts and improved fuel induction
systems. In particular, Chapter 4 of the Final RIA presents data on
Class I engines with more active catalysts and on Class II engines with
closed-loop control fuel injection systems in addition to a catalyst.
In both cases larger emission reductions were achieved.
    Based on this work we considered HC+NOX standards
involving a 50 percent reduction for Class I engines and a 65-70
percent reduction for Class II engines. Chapter 11 of the Final RIA
evaluates these alternatives, including an assessment of the overall
technology and costs of meeting more stringent standards. For Class I
engines a 50 percent reduction standard would require base engine
changes not necessarily involved with the standards we are finalizing
and the use of a more active catalyst. For Class II engines this would
likely require the widespread use of closed-loop fuel injection systems
rather than carburetors and some other engine upgrades in addition to
the use of three-way catalysts.
    We believe it is not appropriate at this time to adopt more
stringent exhaust emission standards for Small SI engines. Our key
concern is lead time. More stringent standards will require three to
five years of lead time beyond the 2011 model year start date we are
allowing for the program contained in this final rule. We believe it
will be more effective to implement the new Phase 3 standards to
achieve near-term emission reductions needed to reduce ozone precursor
emissions and to minimize growth in the Small SI exhaust emissions
inventory in the post 2010 time frame. More efficient catalysts, engine
improvements, and closed-loop electronic fuel injection could be the
basis for more stringent Phase 4 emission standards at some point in
the future.
(5) Our Conclusions
    We believe the Phase 3 exhaust emission standards for nonhandheld
Small SI engines will achieve significant emission reductions.
Manufacturers will likely meet the new standards with a variety of
strategies including catalysts packaged in mufflers, engine
modifications, and fuel-injection systems. Test data from readily
available technologies have demonstrated the feasibility of achieving
the new emission levels.
    As discussed in Section VII, we believe the new standards will have
no negative effects on energy, noise, or safety and may lead to some
positive effects.

VI. Evaporative Emissions

A. Overview

    In this final rule, we are also establishing standards for
controlling evaporative emissions from fuel systems in marine vessels
and equipment powered by Small SI engines. These new standards include
requirements for controlling permeation and diurnal emissions from
marine vessels and permeation and running loss emissions from Small SI
equipment.
    Evaporative emissions refer to hydrocarbons released into the
atmosphere when gasoline or other volatile fuels escape from a fuel
system. The primary source of evaporative emissions from nonroad
gasoline engines and equipment is known as permeation, which occurs
when fuel penetrates the material used in the fuel system and reaches
the ambient air. This is especially common through rubber and plastic
fuel-system components such as fuel lines and fuel tanks. Diurnal
emissions are another important source of evaporative emissions.
Diurnal emissions occur as the fuel heats up due to increases in
ambient temperature. As the fuel heats, liquid fuel evaporates into the
vapor space inside the tank. In a sealed tank, these vapors will
increase the pressure inside the tank; however, most tanks are vented
to prevent this pressure buildup. The evaporating fuel therefore drives
vapors out of the tank into the atmosphere. Running loss emissions are
similar to diurnal emissions except that vapors escape the fuel tank as
a result of heating from the engine or some other source of heat during
operation rather than from normal daily temperature changes.
    Other sources of evaporative emissions include diffusion and
refueling. Diffusion emissions occur when vapor escapes the fuel tank
through an opening as a result of random molecular motion, independent
of changing temperature. Although we are not adopting a specific
standard for diffusion emissions, we expect that these emissions will
be controlled through the running loss and diurnal emission controls.
Refueling losses are vapors that are displaced from the fuel tank to
the atmosphere when someone fills a fuel tank. Refueling spitback is
the spattering of liquid fuel droplets coming out of the filler neck
during a refueling event. Spillage is fuel that is spilled while
refueling. We are continuing to work with manufacturers to develop
industry standards for refueling emission control, and we are adopting
a requirement that manufacturers use fuel system designs

that will help facilitate a reduction in fuel spillage.

B. Fuel Systems Covered by This Rule

    The new evaporative emission standards will apply to fuel systems
for both Small SI engines and Marine SI engines. The marine standards
apply to fuel systems related to both propulsion and auxiliary engines.
In some cases, specific standards are required only for certain types
of equipment, as described below. These standards will apply only to
new products.
    We are incorporating the regulations related to evaporative
emission standards in 40 CFR part 1060, as described in Section VI.C.
Also, as described in Section VIII, we are allowing component
manufacturers and some equipment manufacturers to certify products
under the provisions of part 1060 with respect to recreational vehicles
and Large SI engine. We have also adopted requirements for controlling
evaporative emissions from marine compression-ignition engines that
operate on volatile liquid fuels (such as methanol or ethanol). Now
that we are adopting final requirements in part 1060, we are including
a reference to part 1060 for these marine compression-ignition engines.
    The following definitions are important in establishing which
components are covered by the new standards: ``evaporative,'' ``fuel
system,'' ``fuel line,'' ``portable nonroad fuel tank,'' and
``installed marine fuel tank.'' See the full text of these definitions
in the final regulations at Sec.  1060.801.
    Note in particular that the new standards will apply to fuel lines,
including hose or tubing that contains liquid fuel. This includes fuel
supply lines but not vapor lines or vent lines that are not normally
exposed to liquid fuel. We consider fuel return lines for handheld
engines to be vapor lines, not fuel lines. Data in Chapter 5 of the
Final RIA suggest that permeation rates through vapor lines and vent
lines are already lower than the new standard; this is due to the low
vapor concentration in the vapor line. In contrast, permeation rates
for materials that are consistently exposed to saturated fuel vapor are
generally considered to be about the same as that for liquid fuel. The
new standards also do not apply to primer bulbs exposed to liquid fuel
only for priming, but would apply to primer bulbs that are directly in
the fuel supply line. This standard will apply to marine filler necks
that are filled or partially filled with liquid fuel after a refueling
event where the operator fills the tank as full as possible. In the
case where the fuel system is designed to prevent liquid fuel from
standing in the fill neck, the fill neck will be considered a vapor
line and not subject to the new fuel line permeation standard.
    A special note applies to fuel systems for auxiliary marine
engines. These engines must meet exhaust emission standards that apply
to land-based engines. For evaporative emissions, however, it is
important that the fuel systems for propulsion and auxiliary engines be
subject to the same standards because these engines typically draw fuel
from a common fuel tank and share other fuel-system components. We are
therefore applying the Marine SI evaporative emission standards and
certification requirements to the fuel systems for both auxiliary and
propulsion marine engines on marine vessels. We apply a similar
approach for nonroad engines installed in motor vehicles (such as
generators used to power motor homes). These engines must meet exhaust
emission standards for nonroad engines, but the evaporative
requirements apply under the motor-vehicle program.
    Our evaporative emission standards for automotive applications are
based on a comprehensive measurement from the whole vehicle. However,
the evaporative standards in this final rule are generally based on
individual fuel-system components. For instance, we are promulgating
permeation standards for fuel lines and fuel tanks rather than for the
equipment as a whole.\98\ We have taken this approach for several
reasons. First, most production of Small SI equipment and Marine SI
vessels is not vertically integrated. In other words, the fuel line
manufacturer, the engine manufacturer, the fuel tank manufacturer, and
the equipment manufacturer are typically separate companies. In
addition, there are several hundred equipment manufacturers and boat
builders, many of which are small businesses. Testing the systems as a
whole will place the entire certification burden on the equipment
manufacturers and boat builders. Specifying emission standards and
testing for individual components allows for measurements that are
narrowly focused on the source of emissions and on the technology
changes for controlling emissions. This correspondingly allows for
component manufacturers to certify that their products meet applicable
standards. We believe it is most appropriate for component
manufacturers to certify their products since they are best positioned
to apply emission control technologies and demonstrate compliance.
Equipment manufacturers and boat builders will then be able to purchase
certified fuel-system components rather than doing all their own
testing on individual components or whole systems to demonstrate
compliance with every requirement. In contrast, controlling running
loss emissions cannot be done on a component basis so we are requiring
engine or equipment manufacturers to certify that they meet the running
loss standard. We will otherwise expect most equipment manufacturers to
simply identify a range of certified components and install the
components as directed by the component manufacturer to demonstrate
compliance with the final emission standards.
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    \98\ An exception to component certification is the design
standard for controlling running loss emissions.
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    Second, a great deal of diversity exists in fuel-system designs
(hose lengths, tank sizes/shapes, number of connections, etc.). In most
cases, the specific equipment types are low-volume production runs so
sales will not be large enough to cover the expense of SHED-type
testing. Third, there are similarities in fuel lines and tanks that
allow for component data to be used broadly across products in spite of
extensive variety in the geometry and design of fuel systems. Fourth,
many equipment types, primarily boats, will not fit in standard-size
SHEDs and will require the development of very large, very expensive
test facilities if the entire vessel were tested.
    Finally, by adopting separate standards for fuel line permeation,
fuel tank permeation, diurnal emissions, and running loss emissions, we
are able to include simplified certification requirements without
affecting the level of the standards. Specifying a comprehensive test
with a single standard for all types of evaporative emissions will make
it difficult or impossible to rely on design-based certification.
Requiring emission tests to cover the wide range of equipment models
would greatly increase the cost of compliance with little or no
increase in the effectiveness of the certification program. We believe
the approach being adopted will allow substantial opportunities for
market forces to appropriately divide compliance responsibilities among
affected manufacturers and accordingly result in an effective
compliance program at the lowest possible cost to society.
    The new emission standards generally apply to the particular
engines and their associated fuel systems. However, for ease of
reference, we may refer to evaporative standards as being related to

Small SI equipment or Marine SI vessels, meaning the relevant
evaporative standards for engines and fuel systems used in such
equipment or vessels.\99\ See Section VI.F for a more detailed
description of certification responsibilities for all the new
evaporative standards.
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    \99\ ``Small SI equipment'' includes all nonroad equipment
powered by Small SI engines. ``Marine SI vessels'' includes all
vessels powered by engines that run on volatile liquid fuels. In
almost all cases these engines are powered by gasoline. Note also
that volatile liquid fuels include methanol or ethanol, which could
be used in a compression-ignition engine. While we are aware of no
such equipment or vessels today, they will be covered by the final
regulations. In this preamble, we nevertheless refer to all the
vessels that fall within the scope of the final regulations as
Marine SI vessels. Throughout this section, we generally refer to
Small SI equipment and Marine SI vessels as ``equipment,''
consistent with the regulatory text.