Engines in the less than 25 hp category must meet Tier 1 NMHC+ NO X and PM standards today. We have examined the 2004 model year engine certification data for nonroad diesel engines less than 25 hp. These data indicate that a number of engine families meet the new Tier 4 PM standard ( and the 2008 NMHC+ NO X standard, unchanged from Tier 2) today. The data show that 31 percent of the engine families are at or below the PM standard today, while meeting the 2008 NMHC+ NO X standard. At the time of the proposal, we examined the model year 2002 certification, which indicated approximately 30 percent of the engine families were at or below the 2008 emission standards. This certification data includes both IDI and DI engines, as well as a range of certification test cycles. 61 Many of the engine families are certified well below the Tier 4 standard while meeting the 2008 NMHC+ NO X level. Specifically, for the model year 2002 data, 15 percent of the engine families are cleaner than the new Tier 4 PM standard by more than 20 percent. The public certification data indicate that these engines do not use turbocharging, electronic fuel systems, exhaust gas recirculation, or aftertreatment technologies. We saw little change between the model year 2002 and 2004 data for this power category primarily because both model years are subject to the Tier 1 standards, and many engine families are simply carried over from the previous model year. Tier 2 standards for these engines will not be implemented until model year 2005. A detailed discussion of these data is contained in the RIA.

In summary then, there are two likely means by which companies can comply with the 2008 PM standard for engines under 25 hp. First, engine manufacturers can comply with this standard using known engine out techniques ( e. g., optimizing combustion chamber designs, fuelinjection strategies). In fact, some fraction of engines already would comply with the emission standard. In addition, some engine manufacturers may choose to use diesel oxidation catalysts to meet this standard. Our cost analysis makes the conservative assumption ( i. e., the higher cost assumption) that all manufacturers will use DOCs to comply with these emission standards. 83 As discussed in section II. A, we are finalizing supplemental test procedures and standards ( nonroad transient test cycle and not to exceed requirements) for engines in the under 25 hp category beginning in 2013. The supplemental test procedures and standards will apply not only to PM, but also to NMHC+ NO X. The engine technologies necessary to comply with the supplemental test procedures and standards are the same as the technology necessary to comply with the 2008 standard, and we have given consideration to these test conditions in setting this standard. The range of operating conditions covered by the various test cycles and the mechanism for emission control over those ranges of operation are substantially similar allowing us to conclude that emission control will be substantially uniform across these test procedures. However, we are delaying the implementation of the supplemental test procedures and standards until 2013, as proposed, in order to implement these supplemental requirements on the larger powered nonroad engines before the smallest power category. ( There were no adverse comments on this aspect of the proposed rule.) This will also provide engine manufacturers with additional time to install any emission testing equipment upgrades they may need in order to implement the new nonroad transient test cycle.

Based on the existence of a number of engine families which already comply with the new Tier 4 PM standard ( and the 2008 NMHC+ NO X standard), and the availability of PM reduction technologies such as improved mechanical fuel systems, combustion chamber improvements, and in particular diesel oxidation catalysts, we project that the 0.30 g/ bhp hr PM standards is technologically feasible by model year 2008.

6. Meeting the Crankcase Emissions Requirements The most common way to eliminate crankcase emissions has been to vent the blow by gases into the engine air intake system, so that the gases can be recombusted. Prior to the HD2007 rulemaking, we have required that crankcase emissions be controlled only on naturally aspirated diesel engines. We had made an exception for turbocharged diesel engines ( both highway and nonroad) because of concerns in the past about fouling that could occur by routing the diesel particulates ( including engine oil) into the turbocharger and aftercooler. However, this is an environmentally significant exception since most nonroad equipment over 75 hp use turbocharged engines, and a single engine can emit over 100 pounds of NO X, NMHC, and PM from the crankcase over its lifetime.

Given the available means to control crankcase emissions, we eliminated this exception for highway engines in 2007 and similarly in today's action are eliminating the exception for nonroad diesel engines as well. A number of commenters supported this provision noting that the necessary technologies are already in application in Europe and will be required for heavy duty diesel trucks in the United States beginning in 2007.

We anticipate that the diesel engine manufacturers will be able to control crankcase emissions through the use of closed crankcase filtration systems or by routing unfiltered blow by gases directly into the exhaust system upstream of the emission control equipment. However, the 84 provisions have been written such that if adequate control can be had without " closing" the crankcase then the crankcase can remain " open." Compliance would be ensured by adding the emissions from the crankcase ventilation system to the emissions from the engine control system downstream of any emission control equipment. We have limited this provision for controlling emissions from open crankcases to turbocharged engines, which is the same as for heavy duty highway diesel engines.

Some commenters in essence argued that the Agency was obligated to show that all potential compliance paths were feasible and absent that showing that the Agency should reconsider this provision. Our feasibility analysis is based on the use of closed crankcase technologies designed to filter crankcase gases sending the clean gas to the engine intake for combustion and returning the oil filtered from the gases to the engine crankcase. These systems are proven in use and the use of this technology to eliminate crankcase emissions is acceptable to demonstrate compliance. The other options, the option to vent crankcase emissions into the exhaust or to continue to vent crankcase emissions to the atmosphere provided the total emissions including tailpipe and crankcase emissions do not exceed the standards are provided as alternate solutions that are clearly effective to control emissions ( i. e., if the emissions are measured and are below the standard they are adequately controlled). The commenter suggests however, that they may not be able to control the emissions to the required level using these alternate approaches. In this case, a manufacturer would need to use the primary approach identified by EPA, closing the crankcase and routing the filtered gases to the engine's intake ( this is the approach we used in the cost analysis summarized in section VI). We have allowed the alternative approaches at the recommendation of some in industry, because if they prove to be effective we accept that resulting total emissions will be acceptably low.

C. Why Do We Need 15ppm Sulfur Diesel Fuel?

The new Tier 4 emission standards for most categories of nonroad diesel engines are predicated on the application of advanced diesel emission control technologies that are being developed for on highway diesel engines to meet the HD2007 emission standards, namely catalyzed diesel particulate filters and NO X adsorber catalysts. Sulfur in diesel fuel significantly impacts the durability, efficiency and cost of applying these technologies. Therefore, we required that on highway diesel fuel produced for use in 2007 or newer on highway diesel engines have sulfur content no higher than 15 ppm. Based on the same concerns outlined in the 2007 rulemaking, discussed in the proposal at 68 FR 28395 28400, set out in the RIA, and briefly summarized below, we today are finalizing a requirement that diesel fuel for nonroad engines be reduced to no higher than 15 ppm beginning in 2010. There was consensus among commenters that such standards were necessary if the proposed standards based on advanced diesel emission control technologies were to be achievable.

Sulfur in diesel fuel acts to poison the oxidation function of platinum based catalysts including DOCs and CDPFs reducing the oxidation efficiency substantially, especially at lower temperatures. This poisoning limits the effectiveness of DOCs and CDPFs to oxidize CO and HC 85 emissions. Of even greater concern is the reduction in NO oxidation efficiency of the CDPF due to sulfur poisoning. NO oxidation to NO 2 is a fundamental mechanism for PM filter regeneration necessary to ensure robust operation of the CDPF ( i. e., to prevent filter plugging). Sulfur poisoning from sulfur in diesel fuel at levels higher than 15 ppm has been shown to increase the likelihood of PM filter failure due to a depressed NO to NO 2 oxidation efficiency of the CDPF. The RIA documents substantial field experience in Europe regarding this phenomenon.

Sulfur in diesel fuel can itself be oxidized to form sulfate PM emitted into the environment. CDPFs in particular are designed for robust regeneration and are highly effective at oxidizing sulfur to sulfate PM ( approaching 100 percent conversion under some circumstances). The sulfate PM emissions from a CDPF when operated on 350 ppm fuel can be so high as to actually increase the PM emission rate above the baseline level for an engine without a PM filter. In spite of more than ten years of research, no effective means has been found to provide the NO to NO 2 oxidation efficiency needed to ensure robust filter regeneration without similarly increasing efficiency to oxidize sulfur to sulfate PM. Conversely, technologies developed to suppress sulfate PM formation ( e. g., the addition of vanadium to DOCs designed to operate on 500 ppm sulfur fuel) also suppress NO to NO 2 formation. Therefore, it is not possible to apply the robust CDPF technology to achieve the PM standards without first having lower diesel fuel sulfur levels. The RIA documents substantial test data showing the impact of sulfur in diesel fuel on total PM emissions due to an increase in sulfate PM emissions.

Sulfur from diesel fuel likewise poisons the storage function of the NO X adsorber catalyst. Sulfur in the exhaust in the form of SO X is stored on the catalyst in the same way as the NO X emissions are stored. Unfortunately, due to the chemical properties of the materials, the sulfur is stored preferentially to the NO X and will actually displace the stored NO X emissions. The stored sulfur is not easily removed from the catalyst. A sulfur removal step, called a desulfation, can be accomplished by raising exhaust temperatures to a very high level while simultaneously increasing the reductant content of the exhaust above the stoichiometric level ( i. e., more fuel than oxygen in the exhaust). This process can be effective to remove sulfur from the catalyst but at the expense of damaging the catalyst slightly. Over the lifetime of a diesel engine the cumulative damage from repeated desulfation events, as would be required if operation on higher than 15 ppm sulfur fuels were attempted, would lead to excessive damage and loss in NO X control. The RIA contains an extensive description of this phenomena including the tradeoff between higher fuel sulfur levels and more frequent desulfation events.

The damage that sulfur inflicts on both the CDPF and NO X adsorber technologies not only reduces their effectiveness but also impacts the fuel economy of their application. Reduced soot regeneration potential due to sulfur poisoning would lead to the need for more frequent active CDPF regeneration. As each active soot regeneration event consumes fuel, more frequent regeneration events with higher fuel sulfur levels leads to an increase in fuel consumption. Similarly, higher fuel sulfur levels would necessitate more frequent NO X adsorber desulfation events and thus higher fuel consumption. An estimate of the impact of higher fuel sulfur levels on fuel economy due to more frequent desulfation events can be found in the RIA. 86 For all of the reasons documented in the RIA and summarized here, we remain convinced that a cap of 15 ppm fuel sulfur is necessary for both on highway and nonroad diesel engines in order to apply the advanced emission control technologies necessary to meet the emission standards we are finalizing today. 87 III. Requirements for Engine and Equipment Manufacturers This section describes the regulatory changes being made for the engine and equipment compliance program. A number of specific items are discussed in this section, including test procedures, certification fuels, and credit program provisions. These provisions are important in that they help us ensure the engines and equipment will meet the new requirements throughout their entire useful life, thus achieving the expected emission and public health benefits.

One of the most obvious changes from the Tier 2/ Tier 3 program is that the regulations for Tier 4 engines have been written in a plain language format. They are structured to contain the provisions that are specific to nonroad compression ignition ( CI) engines in a new part 1039, and to apply the general provisions of existing parts 1065 and 1068. The plain language regulations, however, are not intended to significantly change the compliance program, except as specifically noted in today's notice and supporting documents. These plain language regulations will only apply for Tier 4 engines. The changes from the existing nonroad program are described below along with other notable aspects of the compliance program.

As described below, we received comments from a broad range of commenters for some of these issues . For other issues, we received only manufacturer comments or no comments at all. See Chapter 9 of the Summary and Analysis of Comments for more information about the comments received and our responses to them.

A. Averaging, Banking, and Trading 1. Why are we adopting an ABT program for Tier 4 nonroad diesel engines?

EPA has included averaging, banking, and trading ( ABT) programs in almost all of its recent mobile source emission control programs. Our existing regulations for nonroad diesel engines include an ABT program ( 40 CFR 89.201 through 89.212). With today's action we are retaining the basic structure of the existing nonroad diesel ABT program, though we are adopting a number of changes to accommodate implementation of the newly adopted Tier 4 emission standards. The ABT program is intended to enhance the ability of engine manufacturers to meet the stringent standards adopted today. The program is also structured to limit production of very high emitting engines and to avoid unnecessary delay of the transition to the new exhaust emission control technologies.

We view the ABT program as an important element in setting emission standards that are appropriate under CAA section 213( a) with regard to technological feasibility, lead time, and cost, given the wide breadth and variety of engines covered by the standards. As we noted at proposal, if there are engine families that will be particularly costly or have a particularly hard time coming into compliance with the standard, this flexibility allows the manufacturer to adjust the compliance schedule accordingly, without special delays or exceptions having to be written 88 into the rule. Emission credit programs also create an incentive for the early introduction of new technology ( for example, to generate credits in early years to create compliance flexibility for later engines), which allows certain engine families to act as trailblazers for new technology. This can help provide valuable information to manufacturers on the technology before they apply the technology throughout their product line. This early introduction of clean technology improves the feasibility of achieving the standards and can provide valuable information for use in other regulatory programs that may benefit from similar technologies. Early introduction of such engines also secures earlier emission benefits.

In an effort to make information on the ABT program more available to the public, we intend to issue an annual report summarizing use of the ABT program by engine manufacturers. The information contained in the reports will be based on the information submitted to us by engine manufacturers in their annual reports, and summarized in a way that protects the confidentiality of individual engine manufacturers. We believe this information will also be helpful to engine manufacturers by giving them a better indication of the availability of credits.

2. What are the provisions of the ABT program?

The following section describes the ABT provisions being adopted with today's action. Areas in which we have made changes to the proposed ABT program are highlighted. A complete summary of comments received on the proposed ABT program and our response to those comments are contained in the Summary and Analysis of Comments document for this rule.

The ABT program has three main components. Averaging means the exchange of emission credits between engine families within a given engine manufacturer's product line. Engine manufacturers divide their product line into " engine families" that are comprised of engines expected to have similar emission characteristics throughout their useful life. Averaging allows a manufacturer to certify one or more engine families at levels above the applicable emission standard, but below a set upper limit. However, the increased emissions must be offset by one or more engine families within that manufacturer's product line that are certified below the same emission standard, such that the average emissions from all the manufacturer's engine families, weighted by engine power, regulatory useful life, and production volume, are at or below the level of the emission standard. ( The inclusion of engine power, useful life, and production volume in the averaging calculations is designed to reflect differences in the in use emissions from the engines.) Averaging results are calculated for each specific model year. The mechanism by which this is accomplished is certification of the engine family to a " family emission limit" ( FEL) set by the manufacturer, which may be above or below the standard. An FEL that is established above the standard may not exceed an upper limit specified in the ABT regulations. Once an engine family is certified to an FEL, that FEL becomes the enforceable emissions limit for all the engines in that family for purposes of compliance testing. Averaging is allowed only between engine families in the same averaging set, as defined in the regulations. 89 Banking means the retention of emission credits by the engine manufacturer for use in future model year averaging or trading. Trading means the exchange of emission credits between nonroad diesel engine manufacturers which can then be used for averaging purposes, banked for future use, or traded to another engine manufacturer.

The existing ABT program for nonroad diesel engines covers NMHC+ NO X emissions as well as PM emissions. With today's action and as proposed, we are making the ABT program available for the Tier 4 NO X standards ( and NMHC+ NO X standards, where applicable) and the Tier 4 PM standards. As proposed, ABT will not be available for the Tier 4 NMHC standards for engines above 75 horsepower.

Engine manufacturers commented that ABT will most likely be necessary for the Tier 4 CO standards, given the reductions in PM and NO X emissions. In the Tier 4 proposal, we proposed minor changes in CO standards for some engines solely for the purpose of helping to consolidate power categories and improving administrative efficiency. However, as noted earlier in section II. A. 6, we have withdrawn this aspect of the proposal. We do note, however, that we are applying new certification tests to all pollutants covered by the rule, the result being that Tier 4 engines will have to certify to CO standards measured by the transient test ( including a cold start component), and the NTE. However, as shown in RIA chapter <IP_ADDRESS> ( see e. g., note F), we believe that application of Tier 4 technologies will lead to a reduction in CO emissions over the Tier 3 baseline. We thus believe the CO standards will be readily achievable under the transient test and NTE. Moreover, we believe that there will not be any associated costs: the CO standards can be met without any further technological improvements ( i. e., improvements other than those already necessary to meet the Tier 4 standards) and these tests will already be used for certification. Since CO standards measured by the new certification tests are achievable without cost, there is no basis for allowing ABT because no additional lead time is needed.

As noted earlier, the existing ABT program for nonroad diesel engines includes FEL caps  limits on how high the emissions from credit using engine families can be. No engine family may be certified above these FEL caps. These limits provide manufacturers with compliance flexibility while protecting against the introduction of unnecessarily high emitting engines. In the past, we have generally set the FEL caps at the emission levels allowed by the previous standard, unless there was some specific reason to do otherwise. With today's action, we are taking a different approach because the level of the standards being adopted for most engines are significantly lower than the current level of the standards. The transfer to new technology is feasible and appropriate. Thus, as proposed, to ensure that the ABT provisions are not used to continue unnecessarily to produce old technology high emitting engines under the new program, the FEL caps are not, in general, set at the previous standards. Exceptions have been made for the NMHC+ NO X standard for engines between 25 and 50 horsepower effective in model year 2013 and the NO X standards applicable to engines above 750 horsepower in 2011, where we are using the estimated NO X only equivalent for the previously applicable NMHC+ NO X standard for the FEL cap since the gap between the previous and newly adopted standards is approximately 40 percent ( rather than 90 percent for engines between 75 and 750 horsepower), and because the 90 technology basis for these standards can be a form of engine out control, like the previous tier standards. This approach of setting FEL caps at lower levels than the previously applicable standards is consistent with the level of the FEL limits set in the 2007 on highway heavy duty diesel engine program.

STAPPA/ ALAPCO supported the proposed FEL caps. The Engine Manufacturers Association ( EMA) commented that EPA should eliminate the FEL caps altogether. They believe FEL caps are unnecessary because the zero sum requirement of ABT will ensure that there are no adverse emission impacts. Short of eliminating the FEL caps, they commented that EPA should set FEL caps at the level of the previous standards, not the more stringent levels proposed. With today's action, EPA is adopting the FEL caps as proposed, with some exceptions for engines above 750 horsepower ( where we are adopting different standards than originally proposed) and for phase in engines between 75 and 750 horsepower ( where we have adopted an option for manufacturers to certify to alternative NO X standards during the phase in period). We continue to believe that it is important to ensure that technology turns over in a timely manner and that manufacturers do not continue producing large numbers of high emitting, old technology engines once the Tier 4 standards become fully effective. ( As noted below, however, we are adopting provisions that allow manufacturers to produce a limited number of 75 to 750 horsepower engines for a limited period that are certified with FELs as high as the previous tier of standards.) For the Tier 4 standards, where the standards are being reduced by an order of magnitude, we believe this goal to be particularly important, and in keeping with the technology forcing provisions of section 213( a). It simply would not be appropriate to have long term FEL caps that allowed engines to indefinitely have emissions as high as ten times the level of the standard.

For engines between 75 and 750 horsepower certified using the phase in/ phase out approach, there will be two separate sets of engines with different FEL caps. For engines certified to the existing ( Tier 3) NMHC+ NO X standards during the NO X phase in ( referred to generally as " phase out" engines), the FEL cap for these pollutants will ( almost necessarily) be the existing FEL caps adopted in the October 1998 Tier 3 rule. For engines certified to the newly adopted Tier 4 NO X standard during the phase in ( referred to generally as " phase in" engines), we have revised the proposed FEL cap to be 0.60 g/ bhp hr, consistent with the proposed long term Tier 4 NO X FEL cap. As described in section II. A. 2. c above, we have used the creation of alternative NO X standards for engines between 75 and 750 horsepower to restate the phase in/ phase out concept as a path truly focused on achieving high efficiency NO X aftertreatment during the phasein years. Setting the NO X FEL cap at 0.60 g/ bhp hr for phase in engines will ensure this happens if a manufacturer chooses to certify to the phase in provisions. In contrast, the higher FEL caps which we proposed ( see 68 FR 28467   28468) would not have achieved this objective.

Beginning in model year 2014 when the Tier 4 NO X standards for engines between 75 and 750 horsepower take full effect, we are adopting a NO X FEL cap of 0.60 g/ bhp hr for all engines. We reiterate that given the fact that the Tier 4 NO X standard is approximately a 90 percent reduction from the existing standards for engines between 75 and 750 horsepower, we do not believe the previous standard is appropriate as the FEL cap for engines having to comply with the 91 Tier 4 NO X standard of 0.30 g/ bhp hr. We believe that the NO X FEL caps will ensure that manufacturers adopt NO X aftertreatment technology across all of their engine designs.

For the interim PM standards for engines between 25 and 75 horsepower effective in model year 2008 and for the Tier 4 PM standards for engines below 25 horsepower, we are adopting the previously applicable Tier 2 PM standards for the FEL caps ( which do vary within the 25 to 75 horsepower category) because the gap between the previous standards and the newly adopted standards is approximately 50 percent ( rather than in excess of 90 percent for engines between 75 and 750 horsepower), and the technology basis for the 2008 PM standards can be a form of engine out control, like the previous tier standard. For the Tier 4 PM standard effective in model year 2013 for engines between 25 and 75 horsepower, we are adopting a PM FEL cap of 0.04 g/ bhp hr, and for the Tier 4 PM standard effective in model years 2011 and 2012 for engines between 75 and 750 horsepower, we are adopting a PM FEL cap of 0.03 g/ bhp hr. As with the Tier 4 NO X standards for these engines, given the fact that these Tier 4 aftertreatment based PM standards for engines between 25 and 750 horsepower are over 90 per cent more stringent than the previous standards, we do not believe the previous standards are appropriate as FEL caps once the Tier 4 standards take effect. We believe that the newly adopted PM FEL caps will ensure that manufacturers adopt PM aftertreatment technology across all of their engine designs ( except for a limited number of engines), yet will still provide substantial flexibility in meeting the standards.

The final Tier 4 standards for engines above 750 horsepower have been revised from the proposal. We similarly revised a number of the proposed ABT provisions for engines above 750 horsepower. Beginning in 2011, all engines above 750 horsepower will be required to meet a NO X standard of 2.6 g/ bhp hr, except for those above 1200 horsepower used in generator sets which will be required to meet a NO X standard of 0.50 g/ bhp hr. The NO X FEL cap for the 2011 standards will be 4.6 g/ bhp hr, which is an estimate of the NO X emissions level that is expected under the combined NMHC+ NO X standards that apply with the previously applicable tier for engines above 750 horsepower. Beginning in 2011, all engines above 750 horsepower will have to meet a PM standard of 0.075 g/ bhp hr. The PM FEL cap for the 2011 PM standard will be the previously applicable Tier 2 standard of 0.15 g/ bhp hr. As noted above, because the 2011 NO X and PM standards are approximately 50 percent lower than the previous standard ( rather than in excess of 90 percent for engines between 75 and 750 horsepower), and for most engines are based on performance of the same type of technology ( engine out), we are adopting the previously applicable Tier 2 standards for the FEL caps.

Beginning in model year 2015, the 0.50 g/ bhp hr NO X standard will apply to all engines above 750 horsepower used in generator sets. Beginning in model year 2015, the PM standard drops to 0.02 g/ bhp hr for engines greater than 750 horsepower used in generator sets and 0.03 g/ bhp hr for engines greater than 750 horsepower used in other machines. Consistent with the Tier 4 FEL caps for lower horsepower categories where the new standards are significantly lower than the previously applicable standards and reflect performance of aftertreatment technology, we are adopting a NO X FEL cap of 0.80 g/ bhp hr for engines used in generator sets and PM FEL 92 caps of 0.04 g/ bhp hr for engines used in generator sets and 0.05 g/ bhp hr for engines used in other machines ( i. e., mobile machines). We believe that the FEL caps for engines above 750 horsepower will ensure that manufacturers adopt PM aftertreament technology across all of their engine designs and NO X aftertreatment for generator sets once the 2015 standards are adopted, while allowing for some meaningful use of averaging beginning in 2015.

Table III. A 1 contains the FEL caps and the effective model year for the FEL caps ( along with the associated standards adopted for Tier 4). It should be noted that for Tier 4, where we are adopting a new transient test for most engines, as well as retaining the current steady state test, the FEL established by the engine manufacturer will be used as the enforceable limit for the purpose of compliance testing under both test cycles. In addition, under the NTE requirements, the FEL times the appropriate multiplier will be used as the enforceable limit for the purpose of such compliance testing. This is consistent with how FELs are used for compliance purposes in the 2007 on highway heavy duty diesel engine program. 93 Table III. A 1.   FEL Caps for the Tier 4 Standards in the ABT Program ( g/ bhp hr)

Power Category Effective Model Year NOX Standard NOX FEL Cap PM Standard PM FEL Cap hp < 25 ( kW < 19) 2008+ 5.6a 7.8a for < 11hp 7.1a for > 11hp 0.30c 0.60 25

hp < 50 ( 19

kW < 37) 2008 2012 5.6a 7.1a 0.22 0.45 25

hp < 50 ( 19

kW < 37) 2013+ 3.5b 5.6b 0.02 0.04f 50

hp < 75 ( 37

kW < 56) 2008 2012d 3.5a 5.6a 0.22 0.30 50

hp < 75 ( 37

kW < 56) 2013+ e 3.5a 5.6a 0.02 0.04f 75

hp < 175 ( 56

kW < 130) 2012+ 0.30 0.60f, g, h 0.01 0.03f 175

hp

750 ( 130

kW

560) 2011+ 0.30 0.60f, g, h 0.01 0.03f hp > 750 ( kW > 560) 2011 2014 2.6 4.6 0.075 0.15 0.50i 4.6 Generator Sets hp > 750 ( kW > 560) 2015+ 0.50 0.80f 0.02 0.04f Other Machines hp > 750 ( kW > 560) 2015+ 2.6j 4.6j 0.03 0.05f Notes: a These are the previous tier NMHC+ NOX standards and FEL caps. These levels are not being revised with today's rule and are printed here solely for readers' convenience. b These are a combined NMHC+ NOX standard and FEL cap. c A manufacturer may delay implementation until 2010 and then comply with a PM standard of 0.45 g/ bhp hr for air cooled, hand startable, direct injection engines under 11 horsepower. d These FEL caps do not apply if the manufacturer opts out of the 2008 standards. In such cases, the existing Tier 3 standards and FEL caps continue to apply. e The FEL caps apply in model year 2012 if the manufacturer opts out of the 2008 standards. f As described in this section, a small number of engines are allowed to exceed these FEL caps. g For engines certified as phase out engines, the NMHC+ NOX FEL caps for the Tier 3 standards apply. h For engines certified to the alternative NOX standards during the phase in, the NOX FEL caps shown in tables III. A 3 and III. A 4 apply. i The 0.50 g/ bhp hr NOX standard applies only to engines above 1200 horsepower used in generator sets. j The 2011 NOX standard and FEL cap continue to apply unless and until revised by EPA in a future action. 94 As noted above, we are allowing a limited number of engines to have a higher FEL than the caps noted in table III. A 1 in certain instances. The FEL cap for such engines would be set based on the level of the standards that applied in the year prior to the new standards and will allow manufacturers to produce a limited number of engines certified to these earlier standards in the Tier 4 timeframe. The allowance to certify up to these higher FEL caps will apply to Tier 4 engines between 25 and 750 horsepower beginning as early as the 2011 model year, and will apply to engines above 750 horsepower starting with the 2015 model year. The provisions are intended to provide some limited flexibility for engine manufacturers as they make the transition to the aftertreatment based Tier 4 standards while ensuring that the vast majority of engines are converted to the advanced low emission technologies expected under the Tier 4 program.

Under the proposal, manufacturers would have been allowed to certify at levels up to these FEL caps for ten percent of its engines in each of the first four years after the Tier 4 standards took effect and then five percent for subsequent years. The California Air Resources Board supported the proposed allowance. The Engine Manufacturers Association commented that the percentages of engines allowed to the higher FEL caps may not be sufficient, noting that it is too early to tell if the proposed amounts provided enough flexibility.

In an effort to provide flexibility to engine manufacturers while preserving the effective number of engines allowed to certify at levels up to the higher FEL caps, we are revising the proposed provisions with today's action. The revised provisions are intended to allow manufacturers to produce the same number of engines certified to the higher FEL caps as would have been allowed under the proposal, but provide added flexibility in how they distribute the allowances over the first four years of the transition to the new standards. This additional lead time appears appropriate, given the potential that a limited set of nonroad engines may face especially challenging compliance difficulties. Under the provisions adopted today and subject to the limitations explained below, a manufacturer would be allowed to certify up to 40 percent of its engines above the FEL caps shown in table III. A 1 over the first four years the aftertreatmentbased Tier 4 standards take effect ( calculated as a cumulative total of the percent of engines exceeding these FEL caps in each year over the four years), with a maximum of 20 percent allowed in any given year ( provided the FELs for these engines do not exceed levels specified below). During this four year period, manufacturers would not be required to perform transient testing or NTE testing on these engines because we expect these engines would be carried over directly from the previous tier without any modification. ( NTE testing would apply to engines above 750 horsepower because the previously applicable set of standards required NTE testing.) Similarly, for engines between 75 and 750 horsepower, manufacturers would not be required to have closed crankcase controls on these engines because we also expect that these engines would be carried over directly from the previous tier without any modification. ( Engines between 25 and 75 horsepower, and engines above 750 horsepower, would be required to have closed crankcase controls because the previously applicable set of standards require closed crankcase controls.)

For the purpose of calculating the number of credits such engines would use, the manufacturer would include an adjustment to the FEL to be used in the credit calculation 95 equation. The adjustment would be included by multiplying the steady state FEL by a Temporary Compliance Adjustment Factor ( TCAF) of 1.5 for PM and 1.1 for NO X. ( The NO X TCAF would not apply to engines that are not subject to the transient testing requirements for NO X as discussed in section III. F.) We are adopting TCAFs in part to assure in use control of emission from these engines in the absence of transient and NTE testing, and also to assure that any credits these engines use reflect the level of reductions expected in use. The level of the TCAFs are based on data from pre control, Tier 1, and Tier 2 engines which show that the emissions from such engines tested over transient test cycles which are more representative of real in use operation are higher than emissions from those engines tested over the steady state certification test cycle. This is a sales weighted version of the Transient Adjustment Factor used in the NONROAD model. For compliance purposes, a manufacturer would be held accountable to the unadjusted steady state FEL established for the engine family.

As proposed, after the fourth year the Tier 4 standards apply, the allowance to certify engines using the higher FEL caps shown in table III. A 2 will still be available but for no more than five percent of the engines a manufacturer produces in each power category in a given year. When the 5 percent allowance takes effect, these engines will be considered Tier 4 engines and all other requirements for Tier 4 engines will also apply, including the Tier 4 NMHC standard, transient testing, NTE testing, and closed crankcase controls. TCAFs thus do not apply when calculating the number of credits such engines would use.

In the two power categories where we are adopting phase in provisions ( i. e., 75 to 175 horsepower engines and 175 to 750 horsepower engines), the allowance to use a higher FEL cap will only apply to PM from phase out engines during the phase in years. We originally proposed that the allowance to use a higher FEL cap would apply to PM from either phase in or phase out engines during the phase in years. On reflection, this is inconsistent with our policy that phase in engines truly have low emissions reflecting use of aftertreatment ( see also the discussion above where we explain that, for the same reason, we are adopting a NO X FEL cap of 0.60 g/ bhp hr for phase in engines). We consequently are revising the proposed allowance so that it is available for PM emissions only from phase out engines. As proposed, the allowance to use a higher FEL cap for NO X will apply starting in 2014 when the phase in period is complete.

For the power category between 25 and 75 horsepower, this allowance to certify engines at levels up to the higher FEL caps will apply beginning with the Tier 4 standards taking effect in the 2013 model year and will apply to PM only. For manufacturers choosing to opt out of the 2008 model year Tier 4 standards for engines between 50 and 75 horsepower and instead comply with the Tier 4 standards beginning in 2012, the 40% allowance would apply to model years 2012 through 2015, and the 5% allowance would apply to model year 2016 and thereafter. The allowance to use the higher FEL caps is not applicable for the 2008 standards or the 2013 NMHC+ NO X standards for these engines because the FEL caps for those standards already are set at the level of the standard which previously applied. 96 For engines above 750 horsepower, the allowance to certify a limited number of engines at levels up to the higher FEL caps would apply beginning in model year 2015. ( As noted, this is because the FEL caps being adopted for the 2011 standards for engines above 750 horsepower are the previous tier PM standard and the NO X only equivalent of the previous tier standard.) For NO X, the allowance to certify a limited number of engines above the FEL cap beginning in model year 2015 will apply only to engines used in generator sets. Engines used in other machines are still subject to the model year 2011 NO X standard and FEL caps. For PM, the allowance to certify a limited number of engines above the FEL caps beginning in model year 2015 will apply to all engines above 750 horsepower.

Table III. A 2 presents the model years, percent of engines, and higher FEL caps that will apply under these allowances. As noted above, engines certified under these higher FEL caps during the first four years would not be required to perform transient testing or NTE testing and engines between 75 and 750 horsepower would not be required to have closed crankcase controls on these engines. However, as also noted earlier, beginning in the fifth year, when the 5 percent allowance takes effect, these engines will be considered Tier 4 engines and all other requirements for Tier 4 engines will also apply, including the Tier 4 NMHC standard, transient testing, NTE testing, and closed crankcase controls. 97 Table III. A 2.   Allowance for Limited Use of an FEL Cap Higher than the Tier 4 FEL Caps Power Category Model Years Engines Allowed to have Higher FELs NOX FEL Cap ( g/ bhp hr) PM FEL Cap ( g/ bhp hr)

25

hp < 75 ( 19

kW < 56) 2013 2016a 40% b Not applicable 0.22 2017+ a 5%

75

hp < 175 ( 56

kW < 130) 2012 2015 40% b 3.3c for hp < 100 2.8c for hp  100 0.30d for hp < 100 0.22d for hp  100 2016+ 5%

175

hp

750 ( 130

kW

560) 2011 2014 40% b 2.8c 0.15d 2015+ 5%

> 750 hp (> 560 kW) 2015 2018 40% b, e 2.6 0.075 2019+ 5% e Notes:

a For manufacturers choosing to opt out of the 2008 model year Tier 4 standards for engines between 50 and 75 horsepower and instead comply with the Tier 4 standards beginning in 2012, the 40% allowance would apply to model years 2012 through 2015, and the 5% allowance would apply to model year 2016 and thereafter.

b Compliance with the 40% limit is determined by adding the percent of engines that have FELs above the FEL caps shown in table III. A. 1 in each of the four years. A manufacturer may not have more than 20% of its engines exceed the FEL caps shown in table III. A 1 in any model year in any power category.

c The allowance to certify to these higher NOX FEL caps is not applicable during the phase in period.

d These higher PM FEL caps are applicable to phase out engines only during the phase in period.

e The limits of 40% or 5% allowed to exceed the NOX FEL cap would apply to engines used in generator sets only. ( Engines > 750 hp used in other machines are allowed to have an NOX FEL as high as 4.6 g/ bhp hr.) The limits of 40% or 5% allowed to exceed the PM FEL cap would apply to all engines above 750 hp.

Under the Tier 4 program, there will be two different groups of 75 750 horsepower engines during the NO X phase in period. In one group (" phase out engines"), engines will certify to the applicable Tier 3 NMHC+ NO X standard and will be subject to the NMHC+ NO X ABT restrictions and allowances previously established for Tier 3. In the other group (" phase in engines"), engines will certify to the 0.30 g/ bhp hr NO X standard, and will be subject to the restrictions and allowances in this program. Although engines in each group are certified to different standards, we are ( as proposed) allowing manufacturers to transfer credits across these two groups of engines with the following adjustment to the amount of credits generated. 98 Manufacturers will be able to use credits generated during the phase out of engines subject to the Tier 3 NMHC+ NO X standard to average with engines subject to the 0.30 g/ bhp hr NO X standard, but these credits will be subject to a 20 percent discount, the adjustment reflecting the NMHC contribution. Thus, each gram of NMHC+ NO X credits from the phase out engines will be worth 0.8 grams of NO X credits in the new ABT program. The ability to average credits between the two groups of engines will give manufacturers a greater opportunity to gain experience with the low NO X technologies before they are required to meet the final Tier 4 standards across their full production. The 20 percent discount will also apply, for the same reason, to all NMHC+ NO X credits used for averaging purposes with the NO X standards for engines greater than 75 horsepower.

The California Air Resources Board supported the proposed discount of 20 percent on NMHC+ NO X credits used for NO X compliance. The Engine Manufacturer's Association commented that we should eliminate the 20 percent " discount" on NMHC+ NO X credits used for NO X compliance.

We disagree with the Engine Manufacturer's Association comments. As noted in the proposal, we have two main reasons for adopting this adjustment. First, the discounting addresses the fact that NMHC reductions can provide substantial NMHC+ NO X credits, which are then treated as though they were NO X credits. For example, a 2010 model year 175 horsepower engine emitting at 2.7 g/ bhp hr NO X and 0.3 g/ bhp hr NMHC meets the 3.0 g/ bhp hr NMHC+ NO X standard in that year, but gains no credits. In 2011, that engine, equipped with a PM trap to meet the new PM standard, will have very low NMHC emissions because of the trap, an emission reduction already accounted for in our assessment of the air quality benefit of this program. As a result, without substantially redesigning the engine to reduce NO X or NMHC, the manufacturer could garner nearly 0.3 g/ bhp hr of NMHC+ NO X credit for each of these engines produced. Allowing these NMHC derived credits to be used undiscounted to offset NO X emissions on the phase in engines in 2011 ( for which each 0.1 g/ bhp hr of margin can make a huge difference in facilitating the design of engines to meet the 0.30 g/ bhp hr NO X standard) would be inappropriate. Therefore, while we are reducing the value of credits earned from Tier 2/ Tier 3 engines, the adjustment accounts for the NMHC fraction of the credits which we do not believe should be used to demonstrate compliance with the NO X only Tier 4 standards ( such credits would be " windfalls" because they would necessarily occur by virtue of the technology needed to meet the PM standard) ( 68 FR 28469, May 23, 2003). Second, the discounting will work toward providing a small net environmental benefit from the ABT program, such that the more manufacturers use banked and averaged credits, the greater the potential emission reductions overall. Most basically, it is inherently reasonable, in using NO X + NMHC reductions to show credit with a NO X only standard, to use only that portion which represents NO X reductions. ( Indeed, for this reason, terming the 20 per cent a ` discount factor' is a misnomer; it apportions the NMHC fraction of the reduction.) As noted, this is further supported by the fact that the NMHC reductions for phase out engines are not extra reductions above and beyond what would otherwise occur, and therefore don't warrant eligibility as credits. 99 We are adopting one additional restriction on the use of credits under the ABT program. For the Tier 4 standards, we proposed that manufacturers could only use credits generated from other Tier 4 engines or from engines certified to the previously applicable tier of standards ( i. e., Tier 2 for engines below 50 horsepower, Tier 3 for engines between 50 and 750 horsepower, and Tier 2 engines above 750 horsepower). This proposed restriction was similar to a restriction we currently have that prohibits the use of Tier 1 credits to demonstrate Tier 3 compliance. STAPPA/ ALAPCO and the Natural Resources Defense Council supported the proposed approach that limited the use of previous tier credits for Tier 4. The Engine Manufacturer's Association commented that by limiting the use of previous tier credits, we are engaged in an unconstitutional taking because EPA had guaranteed in the previous Tier 2/ Tier 3 rulemaking that such credits would not expire. We disagree that adopting a restriction on the use of the previous tier ABT credits is an unconstitutional taking. EPA did not, and could not, decide in the Tier 2/ 3 rulemaking that Tier 2/ 3 credits could be used to show compliance with some future standards that had not yet even been adopted. Thus, EPA in this rulemaking is not taking away something previously given. We are not revisiting the Tier 2/ 3 standards but establishing a new set of engine standards. In doing so, we necessarily must evaluate the provisions of previous rules and their potential impact on the future standards being considered. We are reasonably concerned that credits from engines certified to relatively high standards could be used to significantly delay the implementation of the final Tier 4 program and its benefits, resulting in a situation where the standards would no longer reflect the greatest degree of emission reduction available as required under section 213( a)( 3) of the Clean Air Act, or would no longer be appropriate under section 213( a)( 4) of the Clean Air Act. Therefore, with today's action, we are adopting the proposed provisions regarding the use of credits from previous tier engines, with one minor revision.

Under today's action, manufacturers may only use credits generated from other Tier 4 engines or from engines certified to the previously applicable tier of standards  except for engines between 50 and 75 horsepower. Because we are adopting Tier 4 standards that take effect as early as 2008 for those engines, the same year the previously adopted Tier 3 standards are scheduled to take effect ( see section II. A. 1. a above), there is no possibility to earn credits against the Tier 3 standards for manufacturers that certify with the pull ahead standards in 2008 for engines between 50 and 75 horsepower. Therefore, we will allow manufacturers to use credits from engines in the Tier 2 power category that includes 50 to 75 horsepower ( i. e., the 50 to 100 horsepower category) that are certified to the Tier 2 standards if they choose to demonstrate compliance with the pull ahead Tier 4 standards in 2008 for engines between 50 and 75 horsepower. Manufacturers that do not choose to comply with the 2008 Tier 4 standards for engines between 50 and 75 horsepower and instead comply with the 2012 Tier 4 standards for such engines will not be allowed to use Tier 2 credits in Tier 4, but instead will be allowed to use Tier 3 credits as allowed under the standard provisions regarding use of previous tier credits only for Tier 4 compliance demonstration.

With regard to other restrictions on the use of ABT credits, we are adopting one restriction on the use of credits across the 750 horsepower threshold. In previous rulemakings, EPA has defined " averaging sets" within which manufacturers may use credits under the ABT 100 program. Credits may not be used outside of the averaging set in which they were generated. As described in section II. A. 4 of today's action, we have revised the Tier 4 standards for engines above 750 horsepower. Because the standards for Tier 4 engines greater than 750 horsepower will not be based on the use of PM aftertreatment technology in 2011 or NO X aftertreatment technology for all mobile machinery engines in 2015, we are adopting provisions that prevent manufacturers from using credits from model year 2011 and later model year engines greater than 750 horsepower to demonstrate compliance with engines below 750 horsepower. Without such a limit, we are concerned that manufacturers could use credits from such engines to significantly delay compliance with the numerically lower standards for engines below 750 horsepower. In addition, without such a limit, we are concerned that manufacturers could use credits from engines below 750 horsepower to delay implementation of aftertreatment technology for engines above 750 horsepower.

One engine manufacturer commented that EPA should include a barrier to trading credits across the 75 horsepower level. They cited concerns over the ability of manufacturers that produce a large range of engine sizes to use credits from high horsepower engines to offset emissions from their small horsepower engines. We are not adopting any averaging set restrictions for Tier 4 engines below 750 horsepower in today's action. In the current nonroad diesel ABT program, there are averaging set restrictions. The current averaging sets consist of engines less than 25 horsepower and engines greater than or equal to 25 horsepower. We adopted this restriction because of concerns over the ability of manufacturers to generate significant credits from the existing engines and use the credits to delay compliance with the newly adopted standards ( 63 FR 56977, October 23, 1998). We believe the Tier 4 standards for engines below 750 horsepower are sufficiently rigorous to limit the ability of manufacturers to generate significant credits from their engines. In addition, we believe the FEL caps being adopted today provide sufficient assurance that low emissions technologies will be introduced in a timely manner. Therefore, we believe averaging can be allowed between all engine power categories below 750 horsepower without restriction effective with the Tier 4 standards. ( It should be noted that the averaging set restriction placed on credits generated from Tier 2 and Tier 3 engines will continue to apply if they are used to demonstrate compliance for Tier 4 engines.)

EPA also proposed to allow engine manufacturers to demonstrate compliance with the NO X phase in requirements by certifying evenly split engine families at, or below, specified NO X FELs ( 68 FR 28470, May 23, 2003). As described in section II. A. 2. c above, EPA is revising the evenly split family provisions for the Tier 4 program and is now codifying them as alternative standards. ( As described in section III. L, we also are adopting the proposed provisions allowing manufacturers to certify " split" engine families during the phase in years.) Because the evenly split family provision has evolved into a set of alternative NO X standards, we believe it is appropriate to allow manufacturers to use ABT for them. Table III. A 3 presents the FEL caps that will apply to engines certified to the alternative NO X standards during the phase in years. The FEL caps for these alternative standards have been set at levels reasonably close to the alternative standards and are intended to ensure sizeable emission reductions from the previouslyapplicable Tier 3 standards. ( For engines between 75 and 175 horsepower certified under the 101 reduced phase in option, the FEL cap is the NO X only equivalent of the previously applicable NMHC+ NO X standards because the alternative standard is sufficiently close to the Tier 3 standard.)

Table III. A 3.   NOX FEL Caps for Engines Certified to the Alternative NOX Standards Power Category Alternative NOX Standard ( g/ bhp hr) NOX FEL Cap ( g/ bhp hr)

50/ 50/ 100 phase in option for 75

hp < 175 ( 56

kW < 130) 1.7 2.2 25/ 25/ 25/ 100 phase in option for 75

hp < 175 ( 56

kW < 130) 2.5 3.3 ( for 75 100 hp)

2.8 ( for 100 175 hp)

175

hp

750 ( 130

kW

560) 1.5 2.0 Because we are allowing manufacturers to use ABT for demonstrating compliance with the alternative standards for engines between 75 and 750 horsepower, we are allowing manufacturers to exceed the FEL caps noted in table III. A 3 and include them in the count of engines allowed to exceed the FEL caps ( i. e., the 40 percent over the first four years the Tier 4 standards take effect as described earlier). Table III. A 4 presents the NO X FEL caps that would apply to engines certified under the alternative standards ( limited by the 40 percent cap over the first four years). The higher NO X FEL caps are set at the estimated NO X only equivalent of the previous tier NMHC+ NO X standards. For manufacturers certifying under the reduced phase in ( 25 percent) option, because the FEL caps are the NO X only equivalent of the Tier 3 NMHC+ NO X standards, they may not exceed the FEL cap during the years the alternative standard applies. 102 Table III. A 4.   Limited Use NOX FEL Caps Under the Alternative NOX Standards Power Category Model Years NOX FEL Cap ( g/ bhp hr)

50/ 50/ 100 phase in option for 75

hp < 175a ( 56

kW < 130) 2012 2013 3.3 for hp < 100 2.8 for hp  100 175

hp

750 ( 130

kW

560) 2011 2013 2.8 103 For reasons explained in section II. A. 1. b. i above, we are also adopting unique phase in requirements for NO X standards for engines between 75 and 175 horsepower in order to ensure appropriate lead time for these engines. Because of these unique phase in provisions, as proposed, we are adopting slightly different provisions regarding 75 to 175 horsepower engines' use of previous tier credits. Under today's action, manufacturers that choose to demonstrate compliance with these phase in requirements ( i. e., 50 percent in 2012 and 2013 and 100 percent in 2014) or the 1.7 g/ bhp hr alternative NO X standard ( which is based on the 50 percent phase in option) will be allowed to use Tier 2 NMHC+ NO X credits generated by engines between 50 and 750 horsepower ( even though they are not generated by previous tier engines), along with any other allowable credits, to demonstrate compliance with the Tier 4 NO X standards for engines between 75 and 175 horsepower during model years 2012, 2013 and 2014 ( the years of the phase in) only. These Tier 2 credits will be subject to the power rating conversion already established in our ABT program, and to the 20% credit adjustment being adopted today for use of NMHC+ NO X credits as NO X credits.

The requirements for manufacturers that choose to demonstrate compliance with the optional reduced phase in requirement for engines between 75 and 175 horsepower ( i. e, the 25/ 25/ 25 percent phase in option; see Table II. A. 2, note b) or the 2.5 g/ bhp hr alternative NO X standard ( which is based on the 25 percent phase in option) are different. Under the reduced phase in requirement, use of credits will be allowed in accordance with the general ABT program provisions. In other words, manufacturers will not have the special allowance to use Tier 2 NMHC+ NO X credits generated by engines between 50 and 750 horsepower noted above to demonstrate compliance with the Tier 4 standards. In addition, manufacturers choosing the reduced phase in option will not be allowed to generate NO X credits from engines in this power category in 2012, 2013, and most of 2014, except for use in averaging within this power category ( i. e., no banking or trading, or averaging with engines in other power categories will be permitted). This restriction will apply throughout this period even if the reduced phase in option is exercised during only a portion of this period. We believe that this restriction is important to avoid potential abuse of the added flexibility allowance, considering that larger engine categories will be required to demonstrate substantially greater compliance levels with the 0.30 g/ bhp hr NO X standard several years earlier than engines built under the reduced phase in option.

As described in section II. A. 3. a of today's action, and as proposed, we are adopting an optional PM standard for air cooled, hand startable, direct injection engines under 11 horsepower effective in 2010. In order to avoid potential abuse of this standard, engines certified under this requirement will not be allowed to generate any credits as part of the ABT program. Credit use by these engines will be allowed. The restriction on generating credits should not be a burden to manufacturers, as it will apply only to those air cooled, hand startable, direct injection engines under 11 horsepower that are certified under the optional approach, and the production of creditgenerating engines would be contrary to the standard's purpose. No adverse comments were submitted to EPA on this issue. 104 The current ABT program contains a restriction on trading credits generated from indirect injection engines greater than 25 horsepower. The restriction was originally adopted because of concerns over the ability of manufacturers to generate significant credits from existing technology engines ( 63 FR 56977, October 23, 1998). With today's action, there will be no restriction prohibiting manufacturers from trading credits generated on Tier 4 indirect fuel injection engines greater than 25 horsepower. Based on the certification levels of indirect injection engines, we do not believe there is the potential for manufacturers to generate significant credits from their currently certified engines against the Tier 4 standards. Therefore, as proposed, we are not adopting any restrictions on the trading of credits generated on Tier 4 indirect injection engines to other manufacturers. The restriction placed on the trading of credits generated from Tier 2 and Tier 3 indirect injection engines will continue to apply in the Tier 4 timeframe. No adverse comments were submitted to EPA on this issue.

As explained in the proposal, we are not applying a specific discount to Tier 3 PM credits used to demonstrate compliance with the Tier 4 standards ( 68 FR 28471, May 23, 2003). PM credits generated under the Tier 3 standards are based on testing performed over a steady state test cycle. Under the Tier 4 standards, the test cycle is being supplemented with a transient test ( see section III. F. 1 below). Because in use PM emissions from Tier 3 engines will vary depending on the type of application in which the engine is used ( most applications having higher in use PM emissions, some having lower in use PM emissions), the relative " value" of the Tier 3 PM credits in the Tier 4 timeframe will differ. Instead of requiring manufacturers to gather information to estimate the level of in use PM emissions compared to the PM level of the steadystate test, we believe allowing manufacturers to bring Tier 3 PM credits directly into the Tier 4 time frame without any adjustment is appropriate because it discounts their value for use in the Tier 4 timeframe ( since the initial baseline being reduced is higher than measured in the Tier 2 test procedure for most applications). No adverse comments were submitted to EPA on this issue.

3. Are We Expanding the Nonroad ABT Program to Include Credits from Retrofit of Nonroad Engines?

In the proposal, we requested comment on expanding the scope of the standards by setting voluntary new engine emission standards applicable to the retrofit of nonroad diesel engines ( 68 FR 28471, May 23, 2003). As described in the proposal, retrofit nonroad engines would be able to generate PM and NO X credits which would be available for use by new nonroad engines in the certification ABT program. We received a significant number of comments on a retrofit ABT program. A number of commenters associated with the agricultural sector were concerned retrofits would be mandatory. Some commenters were opposed to a retrofit credit program that would allow use of the credits under the certification ABT program. However, a number of commenters supported the concept of a retrofit program, but noted a number of concerns regarding the details of such a program, including making sure that any credits earned would be verifiable and enforceable. Some commenters suggested that EPA consider the establishment of a retrofit credit program through a separate rulemaking because there were many details of the program that needed to be explored more fully before adopting such a program. In response to 62 See memorandum referenced at 68 FR 28471 ( May 23, 2003), footnote 299.

105 the comments, we are not adopting a retrofit credit program with today's action. Although we provided a detailed explanation of a potential program at proposal, 62 we believe it is important to more fully consider the details of a nonroad engine retrofit credit program and work with interested parties in determining whether a viable program can be developed. EPA intends to explore the possibility of a voluntary, opt in nonroad retrofit credit program through a separate action later this year. Such a program would be based on the generation of credits beyond the scope of any existing retrofit program. The final rule contains no requirements for retrofitting existing engines or equipment.

B. Transition Provisions for Equipment Manufacturers 1. Why are we adopting transition provisions for equipment manufacturers?

As EPA developed the 1998 Tier 2/ 3 standards for nonroad diesel engines, we determined, as an aspect of determining an appropriate lead time for application of the requisite technology ( pursuant to section 213 ( b) of the Act), that provisions were needed to avoid unnecessary hardship and to create additional flexibility for equipment manufacturers. The specific concern is the amount of work required and the resulting time needed for equipment manufacturers to incorporate all of the necessary equipment redesigns into their applications in order to accommodate engines that meet the new emission standards. We therefore adopted a set of provisions for equipment manufacturers to provide them with reasonable lead time for the transition process to the newly adopted standards. The program consisted of four major elements: ( 1) a percent of production allowance, ( 2) a small volume allowance, ( 3) availability of hardship relief, and ( 4) continuance of the allowance to use up existing inventories of engines ( 63 FR 56977 56978, October 23, 1998 and 68 FR 28472 28476, May 23, 2003).

Given the levels of the newly adopted Tier 4 standards, we believe that there will be engine design and other changes at least comparable in magnitude to those involved during the transition to Tier 2/ 3. Therefore, with a few exceptions described in more detail below, we are adopting transition provisions for Tier 4 that are similar to those adopted with the previous Tier 2/ 3 rulemaking. We also note that opportunities for greater flexibility arises from the structure of the Tier 4 rule. For example, Tier 4 consolidates the nine power categories in Tier2/ 3 into five categories, providing opportunities for more flexibility by allowing more engine families within each power category, with consequent increased averaging possibilities. The NO X phase in also provides increased flexibility opportunities, as do the longer Tier 4 lead times.

We are adding new notification, reporting, and labeling requirements to the Tier 4 program. We believe these additional provisions are necessary for EPA to gain a better understanding of the extent to which these provisions will be used and to ensure compliance with the Tier 4 transition provisions. We are also adopting new provisions dealing specifically with foreign equipment manufacturers and the special concerns raised by the use of the transition 106 provisions for equipment imported into the U. S. The following section describes the Tier 4 transition provisions available to equipment manufacturers. ( Section III. C of this preamble describes all of the provisions that will be available specifically for small businesses.)

As under the existing Tier2/ Tier 3 provisions, equipment manufacturers are not obligated to use any of these provisions, but all equipment manufacturers are eligible to do so. Also, as under the existing program, all entities under the control of a common entity, and that meet the regulatory definition of a nonroad vehicle or nonroad equipment manufacturer, must be considered together for the purpose of applying exemption allowances. This will not only provide certain benefits for the purpose of pooling exemptions, but will also preclude the abuse of the small volume allowances that would exist if companies could treat each operating unit as a separate equipment manufacturer.

2. What transition provisions are we adopting for equipment manufacturers?

The following section describes the transition provisions being adopted with today's action. Areas in which we have made changes to the proposed transition program are highlighted. A complete summary of comments received on the proposed transition program and our response to those comments are contained in the Summary and Analysis of Comments document for this rule.

EPA believes that the lead time provided through the equipment maker transition flexibilities, as adopted in this rule, will be sufficient, as has proved the case in past tiers. These flexibilities provide equipment manufacturers with the selective ability to delay use of the Tier 4 engines in those applications where additional time is needed to successfully incorporate the redesigned engines into their equipment.

Ingersoll Rand, an equipment manufacturer, submitted a number of comments arguing that significant expansions of the proposed flexibility program are needed if equipment manufacturers are to produce compliant applications within the effective dates of the standards. One suggestion was for EPA to include provisions that provide a definitive period of lead time for incorporation of Tier 4 engines into nonroad equipment. Ingersoll Rand would have the rules specify a " made available" date before which each engine supplier must provide technical and performance specifications, complete drawings, and a final compliant engine to EPA and the open market. After the mandated " made available" date, equipment manufacturers should be provided a minimum 18 months of lead time to incorporate the new engines into nonroad equipment. One form of the suggestion also entailed a prohibition on design changes once the engine, specifications, drawings, etc. had been initially provided to EPA and to the open market. As an alternative, Ingersoll Rand urged that the percent of production allowance flexibility be expanded to 150 percent for the power categories between 75 and 750 horsepower and 120 percent for the power category between 25 and 75 horsepower. Ingersoll Rand believes these levels correspond proportionately to the increased challenges facing equipment manufacturers during Tier 4 as opposed to Tier 2 and Tier 3. 63 " Tier 4 Nonroad Diesel Equipment Flexibility Provisions," memorandum from Byron Bunker,

et. al., ( EPA) to EPA Air Docket OAR 2003 0012.

107 As discussed in greater detail in the Summary and Analysis of Comments, as well as in later parts of this section of this preamble and elsewhere in the administrative record, we disagree with most of Ingersoll Rand's suggestions. Our fundamental disagreement is with Ingersoll Rand's premise that Tier 4 will create a situation where need for expanded equipment maker lead time is the norm rather than the exception so that the rule must provide a drastic, across the board expansion of equipment manufacturer lead time. We believe that the lead time provided for equipment makers in this rule is adequate, and that the equipment maker flexibilities we are adopting provide a reasonable and targeted safety valve to deal with isolated problems. There is no across the board problem necessitating a drastic expansion of equipment manufacturer lead time, or a drastic expansion of equipment manufacturer flexibilities. We base these conclusions largely on three factors: a) our investigation and understanding of the engineering process by which engine makers and equipment manufacturers bring new products to market; b) the specific engineering challenges which equipment manufacturers will address in complying with the Tier 4 rule; and c) past practice of equipment manufacturers under previous rules providing transition flexibilities for nonroad equipment.

Because it is in both parties' interest for new engines and new equipment applications to reach the market expeditiously, engine makers and equipment manufacturers usually adopt concurrent engineering programs whereby the new equipment design process occurs simultaneous to the new engine development process. We believe that this concurrent process should work well for Tier 4 because, in many important ways, the engineering challenges facing equipment manufacturers can be anticipated and dealt with early in the design process. We expect that relatively early in the design process, engine manufacturers will be able to define the size and characteristics of the emission control technologies ( e. g., NO X adsorbers and CDPFs), based on the same systems that will be in production for on highway engines. The equipment manufacturers will concurrently redesign their equipment to accommodate these new technologies, including designing, mounting and supporting the catalytic equipment similar to current exhaust muffler systems.

Moreover, while we expect the redesign challenge for Tier 4 equipment to be similar to that for Tier 2/ 3, we also expect the redesign to be better and more clearly defined well in advance of the Tier 4 introduction dates. This is because we do not expect the catalyst system size or shape to change significantly during the last 24 months of the engine design and validation process. 63 We also have studied the extent to which equipment manufacturers have used their flexibilities under the Tier 2/ 3 program. Although at an early stage in the Tier 2/ 3 process, initial indications are that the flexibility program is being used by many equipment manufacturers, but in 64 " Tier 4 Nonroad Diesel Equipment Flexibility Provisions," memorandum from Byron Bunker,

et. al., ( EPA) to EPA Air Docket OAR 2003 0012.

108 general, manufacturers do not appear to be using the full level of allowances. 64 It appears that the flexibilities are being used as EPA intended, providing manufacturers with flexibility to deal with specific limited situations, rather than to deal with an across the board problem.

The emerging pattern is thus the one on which the flexibility program is predicated: there is not a need for across the board drastic expansion of equipment manufacturer lead time. Indeed, such an expansion would be inconsistent with the lead time forcing nature of section 213 ( b) of the Act. This is not to say that there is no need for equipment manufacturer flexibilities, or that the Tier 2/ 3 flexibility format need not be adjusted to accommodate potential problems to be faced under the Tier 4 regime. Instances where additional lead time could be justified are where resource constraints prevent completion of certain applications, or where for business reasons it makes sense for equipment manufacturers to delay completion of small volume families in order to complete larger volume equipment applications. In addition, the Tier 2/ 3 experience illustrates that there can be instances where emission control optimization which necessitates equipment design changes occurs late in the design cycle, resulting in a need for additional equipment manufacturer lead time. The equipment manufacturer flexibilities adopted in today's rule accommodate these possibilities.

We have specific objections to Ingersoll Rand's preferred approach of a mandated made available date, followed by 18 months of additional lead time for equipment manufacturers. Superimposing a government mandate on the engine maker  equipment manufacturer business relationship insinuates EPA into the middle of contractual/ market relationships ( e. g., when is an objectively reasonable delivery date?), forcing EPA to prejudge myriad differing business relationships/ engineering situations. Moreover, selection of any single made available date is bound to be arbitrary in most situations. We also believe that the 18 month lead time following a made available date entails a mandated 18 month period ( at least) with no return on investment to engine suppliers ( i. e. the period between when the Tier 4 engine would be produced and when it could lawfully be sold), which would increase the engine cost, and discourage design changes ( since such changes would entail more investment with delayed return on that investment). The ultimate result would be a costlier rule and less environmental benefit due to the delay in introducing Tier 4 engines. Even were EPA to put forth such a regulation, it is not clear that it could be enforced or that it would help the situation. It would only be natural for engine manufacturers to continue to improve its products even after the predefined " made available date" and equipment manufacturers would want to use this improved product even if it meant they had to make last minute changes to the equipment design. For EPA to preclude engine manufacturers from changing their product designs over the period between the certification date and the equipment manufacturer date would be both unusual and counterproductive to our goal of seeing the best possible products available in the market. Moreover, EPA sees no need to interfere with the concurrent design market mechanism, which allows engine makers and equipment 109 manufacturers to negotiate optimal solutions. We believe it is better to leave to the market participants the actual decision for how and when to conduct concurrent engineering designs.

The California Air Resources Board commented that EPA should eliminate or reduce the amount of flexibilities provided for less than 25 horsepower engines, because the Tier 4 engine standards are not aftertreatment based. The Engine Manufacturers Association commented that we should expand the amount of flexibilities for engines greater than 750 horsepower, given the difficulty of complying with the proposed standards for engines above 750 horsepower. With today's action, we are applying the same flexibility for all power categories, including engines below 25 horsepower and engines above 750 horsepower. While it is true that the Tier 4 standards for engines below 25 horsepower are not aftertreatment based, we believe there will be changes in engine design for many of those engines in response to the Tier 4 standards. As engine designs change, there is the potential for impacts on equipment design as well ( as shown in implementing the Tier 2/ 3 rule). Therefore, we believe providing equipment manufacturer flexibility for engines below 25 horsepower is appropriate and we are adopting the same flexibilities for engines below 25 horsepower as for other power categories. With regard to engines above 750 horsepower, we are retaining the same flexibilities for those engines as for other power categories. As described in section II. A. 4, the Tier 4 standards being adopted today for engines above 750 horsepower have been revised from the proposal. We believe that these revisions have appropriately accommodated concerns for the most difficult to design applications ( i. e., NO X adsorbers for engines in mobile applications), so that additional equipment flexibilities are not warranted for these engines.

The Engine Manufacturers Association commented that some equipment manufacturers may be capable of making an on time transition to the interim Tier 4 standards ( e. g. the 2011 standards applicable for 175 750 horsepower engines) without the use of flexibilities. Such equipment manufacturers would like the ability to start the seven year period in which they may use flexibilities in the year the final Tier 4 standards ( the aftertreatment based standards for both PM and NO X) take effect. Put another way, they would not need more lead time for equipment to meet the interim standards, but could need more lead time for equipment required to meet the final standards. In addition, the commenter suggested a modified approach that could lead to earlier emission reductions than under the proposed rule: requiring delayed flexibility engines to meet the interim Tier 4 standards instead of meeting the Tier 2/ 3 standards ( as would have been allowed under the proposal if the flexibilities started in the first year of the interim Tier 4 standards).

EPA wants to encourage the implementation of the Tier 4 standards as early as possible. Therefore, we believe it makes sense to provide incentives to equipment manufacturers to use interim Tier 4 compliant engines in their equipment during the transition to the final Tier 4 standards. Moreover, it is reasonable to expect that more lead time will be needed for the aftertreatment based standards than for the interim standards. Therefore, in response to these comments, we are revising the proposed flexibility provisions to allow equipment manufacturers to have the option of starting the seven year period in which flexibility engines may be used in 110 either the first year of the interim Tier 4 standards or the first year of the final Tier 4 standards. For engines between 25 and 75 horsepower, the final Tier 4 standards may begin in 2012 or 2013 depending on whether the manufacturer chooses to comply with the interim 2008 Tier 4 standards. An equipment manufacturer who does not use flexibilities in 2008 thus may need flexibilities as early as 2012. Therefore, the seven year period for the final Tier 4 standards for engines between 25 and 75 horsepower will begin in 2012 instead of 2013. Moreover, it is clearly appropriate that these delayed flexibility engines meet the interim Tier 4 standards, in order not to backslide from existing levels of performance.

Table III. B 1 shows the years in which manufacturers could choose to start the Tier 4 flexibilities given the standards being adopted today. ( The seven year period for engines below 25 horsepower takes effect in 2008 as proposed, because there are no interim standards for such engines.)

Table III. B 1.   Flexibility Periods for the Tier 4 Standards Power Category Model Year Flexibility Period Options Standards to which Flexibility Engines would have to Certify 25

hp < 75 ( 19

kW < 56) 2008 2014 Tier 2 standards 2012 2018 Model Year 2008 Tier 4 standards 75

hp < 175 ( 56

kW < 130) 2012 2018 Tier 3 standards 2014 2020 Model Year 2012 Tier 4 standards 175

hp

750 ( 130

kW

560) 2011 2017 Tier 3 standards 2014 2020 Model Year 2011 Tier 4 standards > 750 hp (> 560 kW) 2011 2017 Tier 2 standards 2015 2021 Model Year 2011 Tier 4 standards Under today's action, and as proposed, only those nonroad equipment manufacturers that install engines and have primary responsibility for designing and manufacturing equipment will qualify for the allowances or other relief provided under the Tier 4 transition provisions. As a result of this definition, importers that have little involvement in the manufacturing and assembling of the equipment will be ineligible to receive any allowances. The Engine Manufacturers Association and one engine manufacturer commented that the proposed definition of equipment manufacturer needed to be revised to cover situations in which a manufacturer contracts out the design and production of equipment to another manufacturer. While we understand there are many different types of relationships between equipment manufacturers, we believe it is important 111 to establish firm criteria for determining eligibility to use the equipment manufacturer allowances. We are concerned that the change to the equipment manufacturer definition suggested by the commenters would allow entities that have little or no involvement in the actual design, manufacture and assembly of equipment ( e. g., companies that only import equipment) to claim they contracted with an equipment manufacturer to produce equipment for them and therefore claim allowances. This is the exact situation we are attempting to prevent with the changes to the eligibility requirements for the allowances. Therefore, we are adopting the proposed requirement that only those nonroad equipment manufacturers that install engines and have primary responsibility for designing, and manufacturing equipment will qualify for the allowances or other relief provided under the Tier 4 transition provisions. However, we are revising the provisions regarding which engines an equipment manufacturer may include in its total count of U. S. directed equipment production, which in turn affects the number of allowances an equipment manufacturer may claim. Under today's action, an equipment manufacturer may include equipment produced by other manufacturers under license to them for which they had primary design responsibility ( see section 1039.625( a) of the regulations). This should cover the type of situation described by the commenters while preventing an import only entity from claiming it is an equipment manufacturer and thereby gaining access to the allowances.

a. Percent of Production Allowance Under the percent of production allowance adopted today, each equipment manufacturer will be allowed to install engines not certified to the Tier 4 emission standards in a limited percentage of machines produced for the U. S. market. Equipment manufacturers will need to provide written assurance to the engine manufacturer that such engines are being procured for the purpose of the transition provisions for equipment manufacturers. These engines will instead have to be certified to the standards that would apply in the absence of the Tier 4 standards ( see Table III. B 1 for the applicable standards). As proposed, this percentage will apply separately to each of the Tier 4 power categories ( engines below 25 horsepower, engines between 25 and 75 horsepower, engines between 75 and 175 horsepower, engines between 175 and 750 horsepower, and engines above 750 horsepower) and is expressed as a cumulative percentage of 80 percent over the seven years beginning when the Tier 4 standards apply in a category ( see Table III. B 1 for the applicable seven year periods). No exemptions will be allowed after the seventh year. For example, an equipment manufacturer could install engines certified to the Tier 3 standards in 40 percent of its entire 2011 production of nonroad equipment that use engines rated between 175 and 750 horsepower, 30 percent of its entire 2012 production in this horsepower category, and 10 percent of its entire 2013 production in this horsepower category. ( During the transitional period for the Tier 4 standards, the fifty percent of engines that are allowed to certify to the previous tier NO X standard but meet the Tier 4 PM standard are considered Tier 4 compliant engines for the purpose of the equipment manufacturer transition provisions.) If the same manufacturer produces equipment using engines rated above 750 horsepower, a separate cumulative percentage allowance of 80 percent will apply to those machines during the seven years beginning in 2011 or 2015. This percent of production allowance is almost identical to the percent of production allowance adopted in the October 1998 final rule ( 63 FR 56967, October 23, 2003), the difference 65 As explained at proposal, for emissions modeling purposes, we have assumed that manufacturers take full advantage of the allowances under the existing transition program for equipment manufacturers ( adopted in the October 1998 rule; see 63 FR 56967 ( October 23, 2003) in establishing the baseline emissions inventory. In modeling the impact of the Tier 4 standards, because the standards will not take effect for many years and it is not possible to accurately forecast use of the transition program for equipment manufacturers, so to assess costs in a conservative manner, we have assumed that all engines will meet the Tier 4 standards in the timeframe required by the standards without use of the Tier 4 transition provisions. As discussed in section VI. C, this is consistent with our cost analysis, which assumes no use of the transition program for equipment manufacturers.

112 being, as explained earlier, that there are fewer power categories ( and consequent increased flexibility in spreading the flexibility among engine families) associated with the Tier 4 standards.

The 80 percent exemption allowance, were it to be used to its maximum extent by all equipment manufacturers, will bring about the introduction of cleaner engines several months later than would have occurred if the new standards were to be implemented on their effective dates. However, the equipment manufacturer flexibility program has been integrated with the standardsetting process from the initial development of this rule, and as such we believe it is a key factor in assuring that there is sufficient lead time to initiate the Tier 4 standards according to the final implementation schedule. 65 As proposed, machines that use engines built before the effective date of the Tier 4 standards do not have to be included in an equipment manufacturer's percent of production calculations under this allowance. Machines that use engines certified to the previous tier of standards under our Small Business provisions ( as described in section III. C of this preamble ) do not have to be included in an equipment manufacturer's percent of production calculations under this allowance. All engines certified to the Tier 4 standards, including those engines that produce emissions at higher levels than the standards, but for which an engine manufacturer uses ABT credits to demonstrate compliance, will count as Tier 4 complying engines and do not have to be included in an equipment manufacturer's percent of production calculations. Engines that meet the Tier 4 PM standards but are allowed to meet the Tier 3 NMHC+ NO X standards during the phase in period also count as Tier 4 complying engines and do not have to be included in an equipment manufacturer's percent of production calculations.

The choice of a cumulative percent allowance of 80 percent is based on our best estimate of the degree of reasonable lead time needed by equipment manufacturers. We believe the 80 percent allowance responds to the need for flexibility identified by equipment manufacturers, while ensuring a significant level of emission reductions in the early years of the program. ( As noted in the following section III. B. 2. b, we are adopting a technical hardship provision that allows an equipment manufacturer to request additional relief under the percent of production allowance under certain conditions and with EPA approval.) 113 b. Technical Hardship Flexibility Ingersoll Rand commented that the 80% percent of production allowance level is not sufficient for Tier 4 given the stringency of the standard and the difficulty engine manufacturers will have complying with the standards. In further discussions with Ingersoll Rand on this issue, they suggested that a percent of production allowance level of 150% for totally non integrated equipment manufacturers ( i. e., equipment manufacturers producing no diesel engines) was appropriate for Tier 4 power categories above 25 horsepower. A fully integrated manufacturer would still receive the 80% level and partially integrated companies would receive somewhere between 80% and 150% depending on the share of self produced engines in each specific power category. The basis for this comment is their belief that non integrated manufacturers are at a disadvantage to integrated manufacturers ( manufacturers making both the engine and equipment) when it comes to planning for new Tier 4 engine designs.

Although we do not accept the premise that equipment manufacturer lead time must be drastically expanded across the board for the Tier 4 program, we do agree, as explained earlier, that there may be situations where additional lead time, in the form of increased equipment manufacturer transition flexibilities, can be justified. Therefore, we have added an additional flexibility ( which has no direct analogue in the Tier 2/ 3 rule) to this rule in order to provide additional needed lead time in appropriate, individualized circumstances based on a showing of extreme technical or engineering hardship. Ingersoll Rand has agreed, by letter to EPA, that this provision satisfies all of its concerns regarding adequacy of lead time for meeting Tier 4 standards.

This additional flexibility would be available for the three Tier 4 power categories between 25 and 750 horsepower. As noted earlier, Ingersoll Rand did not believe additional flexibility was needed for engines below 25 horsepower. We agree because the Tier 4 standards for engines below 25 horsepower are not based on the use of advanced aftertreatment. We also are not including this new provision for engines above 750 horsepower because nearly all of the equipment manufacturers utilizing engines above 750 horsepower make small volumes of equipment. The small volume allowance ( described in the following section) allows a manufacturer to exempt a specific number of engines over a seven year period, which in most cases will be greater than the increased percentage potentially available under this new provision.

This new provision, found in new section 1039.625( m), is a case by case exemption granted by EPA to an equipment manufacturer. The equipment manufacturer would have the burden of demonstrating existence of extreme technical or engineering hardship conditions that are outside its control. It must also demonstrate that it has exercised reasonable due diligence to avoid the situation. EPA would treat each request for technical hardship separately, with no guarantee that it would grant the exemption. If EPA grants the exemption, the equipment manufacturer could receive up to an additional 70 percent under the percent of production allowance for each of the three power categories noted above ( meaning that there is a potential total 150 percent under the percent of production allowance available, the initial 80 percent 114 available without application, and an additional potential increment of up to 70 percent available on a case by case basis).

The exemption could only be granted upon written application to EPA setting forth essentially why the normally successful elements of engine maker/ equipment manufacturer design cycle have not provided adequate lead time for a particular equipment model. The application would therefore have to address, with documentation: the engineering or technical problems that have proved unsolvable within the lead time provided, the normal design cycle between the engine maker and equipment manufacturer and why that cycle has not worked in this instance, all information ( such as written specifications, performance data, prototype engines) the equipment manufacturer has received from the engine supplier, and a comparison of the design process for the equipment model for which the exemption is requested with the design process for other models for which no exemption is needed. The equipment manufacturer also would have to make and describe all efforts to find other compliant engines for the model. EPA will then evaluate and determine whether or not to grant each such request, and what additional increment under the percent of production allowance ( above the 80 percent normally allowed) is justified ( not to exceed an additional 70 percent as noted above). As part of our evaluation of requests based on technical hardship, we may contact the engine supplier( s) listed by the equipment manufacturer to check on the accuracy of the engine related information supplied by the equipment manufacturer. This extension of lead time is premised on the existence of extreme technical or engineering problems, in contrast to the economic hardship provision described in section III. B. 2. f below, where consideration of economic impact is critical.

EPA would not grant an application for technical hardship exemption unless the equipment manufacturer demonstrates that the full 80 percent allowed under the percent of production allowance is reasonably expected to be used up in the first two years of the seven year flexibility period. The reason is obvious. If that allowance would not be fully utilized, then no further extension of lead time can be justified. Furthermore, any technical hardship allowance would have to be used up within two years after the Tier 4 percent of production allowances start for any power category. This is because, although we believe that circumstances of extreme technical or engineering hardship may arise, we cannot see that these circumstances could not be solved within the first two years of the transition. Indeed, Ingersoll Rand itself clearly indicated that this is a temporary burden which exists during initial model transition and indicated that only 18 months ( rather than two years) could be needed from receipt of the certified engine.

This flexibility will be available to all equipment manufacturers, but may only be requested for equipment in which the equipment manufacturer is different than the engine manufacturer. We believe that integrated manufacturers who produce both the equipment and the engine used in the piece of equipment could have an advantage in the equipment redesign process ( compared to an equipment manufacturer, whether integrated or not, that uses engines from a different manufacturer) that makes additional relief under the percent of production allowance unnecessary. In addition, integrated equipment manufacturers have other programs available to them ( that nonintegrated manufacturers do not have) such as the engine averaging, banking and trading 66 " Analysis of Small Volume Equipment Manufacturer Flexibilities," memo from Phil Carlson ( EPA) to Docket A 2001 28.

115 program, which can provide lead time flexibility during the transition years. Most basically, integrated manufacturers should be able to design concurrently in all circumstances, so that extreme technical or engineering hardships should not arise.

c. Small Volume Allowance The percent of production approach described above may provide little benefit to businesses focused on a small number of equipment models, and hence there could be situations where there is insufficient lead time for such models. Therefore, with today's action, we are adopting a small volume allowance that will allow any equipment manufacturer to exceed the percent of production allowances described above during the same seven year period, provided the manufacturer limits the number of exempted engines to 700 total over the seven years, and to 200 in any one year. The limit of 700 exempted engines ( and no more than 200 engines per year) applies separately to each of the Tier 4 power categories ( engines below 25 horsepower, engines between 25 and 75 horsepower, engines between 75 and 175 horsepower, engines between 175 and 750 horsepower, and engines above 750 horsepower). In addition, manufacturers making use of this provision must limit exempted engines to a single engine family in each Tier 4 power category.

We are also adopting an alternative small volume allowance, which equipment manufacturers have the option of utilizing. In discussions regarding the current small volume allowance, some manufacturers expressed the desire to be able to exempt engines from more than one engine family, but still fall under the number of exempted engine limit. For that reason, we solicited comment on a small volume allowance program that would allow manufacturers to exempt engines in more than one family, but have lower numerical limits. Under this alternative, manufacturers using the small volume allowance could exempt 525 machines over seven years ( with a maximum of 150 in any given year) for each of the three power categories below 175 horsepower, and 350 machines over seven years ( with a maximum of 100 in any given year) for the two power categories above 175 horsepower. Concurrent with the revised caps of 525 or 350, depending on power category, manufacturers could exempt engines from more than one engine family under the small volume allowance program. Based on sales information for small businesses, we estimated that the alternative small volume allowance program to include lower numbers of eligible engines and allow manufacturers to exempt more than one engine family would keep the total number of engines eligible for the allowance at roughly the same overall level as the 700 unit program. 66 We also requested comment on allowing equipment manufacturers to choose between the two small volume allowance programs described above ( 68 FR 28474 28475, May 23, 2003).

Both engine and equipment manufacturers supported dropping the one engine family restriction from the 700 unit small volume allowance. In addition, they commented that if the one 67 Memorandum, Phil Carlson to Docket A 2001 28, " Analysis of Equipment Manufacturer Flexibilities," April 15, 2003. Docket A 2001 28, document no. II B 24.

116 engine family restriction was not dropped from the 700 unit option, they supported the option of allowing equipment manufacturers to choose between the two small volume allowance options. With today's action, we are revising the proposed small volume allowance to allow equipment manufacturers to choose between the 700 unit over seven years option, with exempted engines limited to one engine family, or the proposed alternative which would allow equipment manufacturers to exempt fewer engines over seven years ( 525 or 350 units, depending on the power category), but with no restriction on the number of engine families that could be included in the exempted engine count. Based on our analysis of small businesses noted above, we expect the number of engines that could be exempted under either option is roughly the same. Giving equipment manufacturers the ability to choose between the two options should not significantly impact the number of engines likely to be exempted under the small volume allowance. We have not chosen to drop the one engine family restriction from the 700 unit small volume allowance because it would result in a significant increase in the number of engines eligible to be exempted to levels which we believe are not needed to provide adequate lead time for the Tier 4 program. 67 As with the percent of production allowance, machines that use engines built before the effective date of the Tier 4 standards do not have to be included in an equipment manufacturer's count of engines under the small volume allowance. Similarly, machines that use engines certified to the previous tier of standards under our Small Business provisions ( as described in section III. C of today's action) do not have to be included in an equipment manufacturer's count of engines under the small volume allowance. All engines certified to the Tier 4 standards, including those that produce emissions at higher levels than the standards but for which an engine manufacturer uses ABT credits to demonstrate compliance, will be considered to be Tier 4 complying engines and do not have to be included in an equipment manufacturer's count of engines under the smallvolume allowance. Engines that meet the Tier 4 PM standards but are allowed to meet the Tier 3 NMHC+ NO X standards during the phase in period ( i. e., phase out engines) will also be considered as Tier 4 complying engines and do not have to be included in an equipment manufacturer's count of engines under the small volume allowance. All engines used under the small volume allowance must certify to the standards that would be in effect in the absence of the Tier 4 standards ( see Table III. B 1 for the applicable standards). As noted earlier, equipment manufacturers will need to provide written assurance to the engine manufacturer when it purchases engines under the transition provisions for equipment manufacturers.

The Engine Manufacturers Association commented that the proposed regulations for the small volume allowance established a limit on the total number of engines an equipment manufacturer could use that did not meet the Tier 4 standards and should be revised to set a limit based on U. S. directed production ( consistent with the proposed regulatory language for the percent of production allowance). EPA agrees that the limit under the small volume allowance should apply to U. S. directed production only  as the commenter surmised, this is what EPA intended  and has revised the final regulations for the small volume allowance accordingly. 117 We are also finalizing a technical hardship provision for small business equipment manufacturers using 25 50 horsepower engines, as discussed in III. C. 2. b. ii d. Early Use of Tier 4 Flexibilities in the Tier 2/ 3 Timeframe As proposed, we are also adopting provisions that allow equipment manufacturers to start using a limited number of the new Tier 4 percent of production allowances or Tier 4 small volume allowances once the seven year period for the existing Tier 2/ Tier 3 program expires ( and so continue using engines meeting Tier 1 or Tier 2 standards). In this way, a manufacturer can potentially continue exempting the most difficult applications once the seven year period of the current Tier 2/ 3 flexibility provisions is finished. ( Under the existing transition program for equipment manufacturers, any unused Tier2/ 3 allowances expire after the seven year period.) However, opting to start using Tier 4 allowances once the seven year period from the current Tier 2/ Tier 3 program expires will reduce the number of exemptions available from the Tier 4 standards under either the percent of production allowance or the small volume allowance.

With today's action, equipment manufacturers may use up to a total of 10 percent of their Tier 4 percent of production allowances or up to 100 of their Tier 4 small volume allowances prior to the effective date of the Tier 4 standards. ( The early use of Tier 4 allowances will be allowed in each Tier 4 power category.) This amount of equipment utilizing the early Tier 4 allowances will be subtracted from either the Tier 4 allowance of 80 percent under the percent of production allowance or the applicable limit under the small volume allowance for the appropriate power category, resulting in fewer allowances once the Tier 4 standards take effect. For example, if an equipment manufacturer uses the maximum amount of early Tier 4 percent of production allowances of 10 percent, then the manufacturer will have a cumulative total of 70 percent remaining for that power category when the Tier 4 standards take effect ( i. e., 80 percent production allowance minus 10 percent).

The California Air Resources Board commented that we should discount the early use of Tier 4 flexibilities to discourage abuse of the provisions, by requiring equipment manufacturers to give up more than one flexibility after Tier 4 begins for every flexibility used prior to Tier 4. California did not specifically recommend what the discount level should be. We are not adopting a discount for early use of the Tier 4 flexibilities. The intent of allowing manufacturers to use the Tier 4 flexibilities early was to allow them to carry over the few remaining equipment models that might not have been redesigned at the end of the seven year Tier 2/ Tier 3 flexibility period until Tier 4 begins, and not requiring a possible double redesign in a short period of time. Because we have placed a relatively low cap ( 10% under the percent of production allowance or 100 units under the small volume allowance) on the amount an equipment manufacturer could use early from Tier 4, we do not believe that manufacturers will be able to abuse the program and therefore should not have to discount the number of Tier 4 flexibilities used early.

We view this provision on early use of Tier 4 allowances as providing reasonable lead time for introducing Tier 4 engines, since it should result in earlier introduction of Tier 4 compliant 118 engines ( assuming that the allowances would otherwise be fully utilized) with resulting net environmental benefit ( notwithstanding longer utilization of earlier Tier engines, due to the stringency of the Tier 4 standards) and should do so at net reduction in cost by providing cost savings for the engines that have used the Tier 4 allowances early. ( This is another reason we see no reason to discount the allowance.)

e. Early Tier 4 Engine Incentive Program for Equipment Manufacturers Ingersoll Rand commented that non integrated equipment manufacturers who incorporate Tier 4 compliant engines into their equipment prior to the applicable date for the Tier 4 standards should be able to earn early compliance credits. These early compliance credits could allow use of the previous tier engine ( above and beyond the base percentage granted under the flexibility program) for up to 18 months after the certification date of the engine. Ingersoll Rand also commented that such early compliance credits should be able to be traded across power categories with appropriate weightings applied.

We believe a program that provides an incentive for equipment manufacturers to use early Tier 4 compliant engines is worthwhile from both a technology development perspective and an environmental perspective. As we noted at proposal when we proposed a similar incentive program for engine makers, early use of Tier 4 compliant engines will help foster technology development by getting the Tier 4 technologies out in the market early and provide real world experience to manufacturers and users ( 68 FR 28482, May 23, 2003). It will also lead to additional emission reductions above and beyond those expected under the existing Tier 2/ 3 standards in the years prior to Tier 4 taking effect. Moreover, equipment manufacturers ( and especially non integrated equipment manufacturers) are unlikely to buy early Tier 4 engines without some incentive to do so since these engines are likely to be more expensive than Tier 2/ 3 engines. For these reasons, we are adopting new provisions that will allow any equipment manufacturer to earn early compliance credits that could be used to increase the number of equipment flexibilities above and beyond the levels allowed under the percent of production allowance or small volume allowance ( and for reasons independent of those allowances: namely, an inducement to make early use of Tier 4 engines).

The program will be available to all equipment manufacturers regardless of whether they are integrated or non integrated. While Ingersoll Rand commented that the program should be available to non integrated equipment manufacturers only, we believe the program should provide an incentive for all equipment manufacturers to use early Tier 4 engines ( since the benefits accruing from early use of such engines exist regardless of whether the equipment manufacturer is integrated with the engine maker).

Before describing this provision further, it is desirable to put it in context by explaining its relationship to the engine manufacturer incentive program for early Tier 4 or very low emission engines ( described in section III. M below), as well as to the similar incentive provisions for engine manufacturers which we proposed ( 68 FR 28482, May 23, 2003). We are, in essence, redirecting 119 the proposed incentive for using early Tier 4 compliant engines to equipment manufacturers. Thus, under today's rule, an engine manufacturer could use the incentive program ( as described in section III. M) only if an equipment manufacturer uses an early Tier 4 engine but ( for whatever reason) declines to use the early engine flexibility allowance. In such a case, the engine manufacturer could opt to earn either " engine offsets" ( which would allow them to make fewer engines certified to the Tier 4 standards once the Tier 4 program takes effect) or ABT credits, but not both. In the more likely case of an equipment manufacturer using early Tier 4 engines and using the incentive flexibilities itself, the engine manufacturer would be eligible to generate ABT credits from such early Tier 4 compliant engines.

The early Tier 4 engine incentive program for equipment manufacturers will apply to the four power categories above 25 horsepower where the use of advanced exhaust aftertreatment is expected under the Tier 4 standards. Because the Tier 4 standards for engines below 25 horsepower are not expected to result in the use of advanced aftertreatment technologies, we are not including such engines in the program.

In order for an engine to be considered an early Tier 4 compliant engine, it will need to be certified to the final Tier 4 standards for PM, NO X, and NMHC ( i. e., the 2013 standards for engines between 25 and 75 horsepower, the 2014 standards for engines between 75 and 175 horsepower, the 2014 standards for engines between 175 and 750 horsepower, and the 2015 standards for engines above 750 horsepower) or to the final PM and NMHC standards and the alternative NO X standards during the phase in ( as described in section II. A. 2. c of today's rule for engines between 75 and 750 horsepower). In order to be an early Tier 4 compliant engine, these engines would also have to certify to the Tier 4 CO standards. Because 15 ppm sulfur diesel fuel will be available on a widespread basis in time for 2007 ( due to the requirements for on highway heavy duty engines), we are allowing engine manufacturers to begin certifying engines to the Tier 4 standards, and therefore have engines eligible for the early Tier 4 engine incentive program, beginning with the 2007 model year.

In order to provide assurance that early Tier 4 compliant engines are placed into equipment earlier than would otherwise happen under the Tier 4 program, engine manufacturers will be required to certify and start producing such engines before September 1 of the year prior to the post 2011 Tier 4 standards taking effect or before September 1, 2010 for engines in the 175 to 750 horsepower category. Similarly, equipment manufacturers will be required to install such engines in equipment before January 1 of the year the post 2011 Tier 4 standards take effect or before January 1, 2011 for engines in the 175 to 750 horsepower category. In addition, in order to be considered an early Tier 4 compliant engine, such engines would be required to comply with all of the requirements associated with the final Tier 4 standards such as NTE requirements, transient testing ( where otherwise required for certification, i. e. for 25 750 horsepower engines), and closed crankcase requirements. Finally, for engines certified prior to model year 2011, the engine manufacturer would be allowed to demonstrate early compliance with the Tier 4 standards on a 15 ppm sulfur fuel ( as allowed under the certification fuel requirements specified in section III. D of today's rule) provided the engine manufacturer 120 demonstrates that the equipment in which the engines are placed will use fuel meeting this low sulfur specification and includes appropriate information on the engine label and ensures that ultimate purchasers of equipment using these engines are informed that ultra low sulfur diesel fuel is recommended ( see section 1039.104( e) of the regulations). Equipment manufacturers using such pre 2011 engines in their equipment would likewise need to take steps to ensure that fuel meeting this low sulfur specification is used in the equipment once operated in use to earn the additional flexibility allowances.

Equipment manufacturers installing engines complying with the final Tier 4 standards ( as described above) would earn one flexibility allowance for each early Tier 4 compliant engine used in its equipment. Equipment manufacturers installing engines between 75 and 750 horsepower that comply with the final Tier 4 PM standard and the alternative NO X standard ( described in section II. A. 2. c) would earn one half of a flexibility allowance for each early Tier 4 compliant engine used in its equipment. Table III. B 2 presents the requirements an engine would need to meet to be considered an early Tier 4 engine for the purposes of this early Tier 4 engine incentive program. 121 Table III. B 2.   Requirements for Engines Under the Early Tier 4 Engine Incentive Program Power Category Tier 4 Standards the Engines Must Meet Date before which Engines must Be Installed by the Equipment Manufacturer Number of Flexibility Allowances Earned for Use of Early Tier 4 Engines 25

hp < 75 ( 19

kW < 56) Model Year 2013 January 1, 2013a 1 to 1 75

hp < 175 ( 56

kW < 130) Model Year 2014 January 1, 2012 1 to 1 Model Year 2012b January 1, 2012 0.5 to 1 175

hp

750 ( 130

kW

560) Model Year 2014 January 1, 2011 1 to 1 Model Year 2011b January 1, 2011 0.5 to 1 Generator Sets > 750 hp (> 560 kW) Model Year 2015 January 1, 2015 1 to 1 Other Machines > 750 hp (> 560 kW) Model Year 2015 January 1, 2015 1 to 1 Notes: a The installation date for 50 to 75 horsepower engines purchased from manufacturers choosing to opt out of the 2008 model year Tier 4 standards and instead comply with the Tier 4 standards beginning in 2012 would be January 1, 2012. b To be eligible, engines must meet the 0.01g/ bhp hr PM standard and the alternative NOX standards in section 1039.102 ( e) described in section II. A. 2. c.

As described above, equipment manufacturers using early Tier 4 compliant engines can earn flexibility allowances that can be used to effectively increase the number of allowances provided under the percent of production allowance or the small volume allowance in the same power category. For example, an equipment manufacturer that uses 500 engines in the 175 to 750 horsepower category that met the model year 2011 PM standards and alternative NO X standards would earn 250 additional flexibility allowances in that power category. That manufacturer could then exclude 250 engines from its calculations before demonstrating compliance with the 80 percent limit under the percent of production allowance ( or the applicable limit under the small volume allowance if the equipment manufacturer is using that option) once Tier 4 starts in that power category. 122 Equipment manufacturers would be required to report certain information regarding the early Tier 4 compliant engines ( such as engine family name, number of engines used prior to Tier 4 in each power category, the rated power of the engines, and the type of application the engines above 750 horsepower were used in) when they submit their first report under the Tier 4 flexibility program. For engines above 750 horsepower, equipment manufacturers also would be required to keep records of how many early Tier 4 compliant engines are used in generator sets, versus how many are used in other machinery. This is because the additional flexibility allowances earned from the use of early Tier 4 compliant engines used in generator sets could only be used for additional flexibility allowances for generator sets. Likewise, the additional flexibility allowances earned from the use of early Tier 4 compliant engines used in mobile machinery ( labeled ` other machinery' in the table above) applications could only be used for additional flexibility allowances for other non generator set applications.

Under the early Tier 4 engine incentive program, we will allow equipment manufacturers to " trade" the additional flexibilities earned in the two power categories between 75 and 750 horsepower, with the power rating of the engines factored into the " trade" to ensure equivalent emissions for the engines generating the early allowances and the engines using the allowances. For example, an equipment manufacturer that earned 100 additional flexibility allowances under the early Tier 4 engine incentive program from 100 horsepower engines, could " trade" those flexibilities into the next power category up ( 175 to 750 horsepower). The equipment manufacturer would generate 10,000 horsepower allowances from those early engines ( i. e., 100 horsepower times 100 allowances). The equipment manufacturer could then produce, for this example, an additional 25 engines with a power rating of 400 horsepower above and beyond the normal limit on allowances ( or any other combination of engines such that the sum of the horsepower weighted allowances adds up to the 10,000 horsepower allowances used in this example). We are not allowing trading for engines in the 25 to 75 horsepower category because the Tier 4 standards for these engines are based on the application of only PM aftertreatment technology. Similarly, we are not allowing trading for engines in the above 750 horsepower category because the Tier 4 standards are based on the application of PM aftertreatment to all engines, but NO X aftertreatment for only some engines.

f. Economic Hardship Relief Provision With today's action, and as proposed, we are providing an additional Tier 4 transition flexibility for " economic hardship relief" for equipment manufacturers. Under the economic hardship relief provisions, an equipment manufacturer that does not make its own engines could obtain limited additional relief by providing evidence that, despite its best efforts, it cannot meet the implementation dates, even with the Tier 4 equipment flexibility program provisions outlined above. Such a situation could occur if an engine supplier without a major business interest in the equipment manufacturer were to change or drop an engine model very late in the implementation process. The purpose of the provision is to redress individual situations of extreme economic hardship, not merely to perpetuate existing market share. That is, if situations arise where one equipment maker cannot produce equipment using Tier 4 compliant engines by the compliance 123 date, but another can, ordinarily EPA would not adjust the program to allow use of the noncompliant application absent extreme, compelling equitability considerations.

Applications for economic hardship relief will have to be made in writing, and will need to be submitted before the earliest date of noncompliance. The application will also have to include evidence that failure to comply is not the fault of the equipment manufacturer ( such as a supply contract broken by the engine supplier), and include evidence that serious economic hardship to the company will result if relief is not granted. ( As explained in section III. B. 2. b above, this is a significant difference between this economic hardship provision and the technical hardship flexibility, where consideration of cost is generally irrelevant.) We expect to work with the applicant to ensure that all other remedies available under the flexibility provisions are exhausted before granting additional relief ( if appropriate), and place a limit on the period of relief to no more than one year. Applications for economic hardship relief generally will only be accepted during the first year after the effective date of an applicable new emission standard.

The Agency expects this provision will be rarely used. This expectation has been supported by our initial experience with the Tier 2 standards in which only one equipment manufacturer has applied under the existing hardship relief provisions ( and the request was subsequently denied). Requests for economic hardship relief will be evaluated by EPA on a caseby case basis, and may require, as a condition of granting the applications, that the equipment manufacturer agree ( in writing) to some appropriate measure to recover the lost environmental benefit.

Ingersoll Rand commented that the provisions regarding eligibility for hardship relief should be revised so that they do not require a demonstration of severe economic hardship, noting that such a showing would invariably preclude large entities ( like Ingersoll Rand) from utilizing the provision, even though delays were beyond their control. As described earlier in this section, we have included an additional flexibility in the Tier 4 rule in order to provide additional needed lead time in appropriate, individualized circumstances based on a showing of extreme technical or engineering hardship. We believe the provisions of the technical hardship address the concerns noted by Ingersoll Rand in their comments, and therefore we are not revising the existing economic hardship relief provisions ( which require a demonstration of severe economic impact) for the Tier 4 final program.

g. Existing Inventory Allowance The current program for nonroad diesel engines includes a provision for equipment manufacturers to continue to use engines built prior to the effective date of new standards, until the older engine inventories are depleted. It also prohibits stockpiling of previous tier engines. As proposed, we are extending these provisions for the transition to the Tier 4 standards adopted today. We are also extending the existing provision that provides an exception to the applicable compliance regulations for the sale of replacement engines. In extending this provision, we are requiring that engines built to replace certified engines be identical in all material respects to an 124 engine of a previously certified configuration that is of the same or later model year as the engine being replaced. The term " identical in all material respects" allows for minor differences that would not reasonably be expected to affect emissions such as a change in materials or a change in the company supplying the components of the engine.

3. What are the recordkeeping, notification, reporting, and labeling requirements associated with the equipment manufacturer transition provisions?

The following section describes the recordkeeping, notification, reporting, and labeling requirement being adopted today. As proposed, failure to comply with these requirements will subject the noncomplying party to penalties as described in 40 CFR 1068.101.

a. Recordkeeping Requirements for Engine and Equipment Manufacturers With today's action, we are extending the recordkeeping requirements from the current equipment manufacturer transition program. Under the Tier 4 transition program, engine manufacturers will be allowed to continue to build and sell previous tier engines needed to meet the market demand created by the equipment manufacturer flexibility program, provided they receive written assurance from the engine purchasers that such engines are being procured for this purpose. Engine manufacturers will be required to keep copies of the written assurance from the engine purchasers for at least five full years after the final year in which allowances are available for each power category.