VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6752 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations C. Our Program for Controlling Gasoline Sulfur As with our program for vehicles, the program we are establishing today for reducing sulfur levels in commercial gasoline will achieve the same large NOX reductions that we projected for the proposed program. Here, too, the final program is very similar to our proposed program. Adjustments we have made to the proposed program will smooth the refining industry's transition to the low sulfur requirements and encourage earlier introduction of cleaner fuel. With today's action, we are requiring substantial reductions in gasoline sulfur levels nationwide. As we explained in Section IV. A, because sulfur significantly inhibits the ability of automotive catalysts to control emissions, we had to consider sulfur's impact in setting the Tier 2 standards. We knew at the time of proposal that newer catalysts were more sensitive to sulfur than older technologies, and projected that Tier 2 catalysts would be as or even more sensitive than those used in today's NLEV vehicles. Furthermore, we believed that the sulfur build up on Tier 2 catalysts may be irreversible. Since the proposal, additional data we've collected have confirmed and strengthened our concerns. It now appears that the catalysts expected to be used in Tier 2 vehicles will be even more sensitive to sulfur than we originally estimated, and that this sulfur impact will be approximately 45 percent irreversible under typical driving conditions. Thus, the gasoline sulfur standards we finalize today will enable the stringent tailpipe emission standards we're implementing for Tier 2 vehicles and will help to ensure that these low emission levels will be realized throughout the life of the vehicle. Furthermore, since vehicles already on the road, including NLEV vehicles, are in many cases quite sensitive to sulfur, gasoline sulfur control will also help to reduce emissions of pollutants that endanger public health and welfare from these vehicles. In developing this gasoline sulfur control program, we gave substantial consideration to the ability of the refining industry to meet these requirements. We proposed a set of standards applying to refiners and to individual refineries combined with a sulfur averaging, banking, and trading ( ABT) program intended to provide flexibility in meeting the standards. We concluded that our proposal was reasonable and cost effective based on our projections regarding the number of refineries that would ( 1) need to reduce sulfur levels each year as the standards tightened, ( 2) need sulfur ABT credits to meet the 30 ppm refinery average standard in 2004 and/ or 2005 to defer installation of desulfurization equipment, and ( 3) install desulfurization equipment prior to 2004, generating the needed sulfur credits. This analysis formed our picture of the industry's investment stream   a year by year estimate of how many refineries would be constructing new equipment and what technologies these refineries would choose. We assumed that any investments would be in the new, lower cost technologies, and that these technologies would be available and adequately demonstrated to allow refiners to select them as early as the year 2000 to begin operation ( and thus, credit generation) as early as 2002. Based on these assumptions, our analysis showed that sufficient credits would be generated before 2004 to enable a number of refineries to delay construction and use credits to meet the 30 ppm standard in 2004, and in some cases, even in 2005. Overall, we believed our analysis represented a reasonable and balanced rate of investment by the industry over a several year time period. In response to our proposal, we received many comments which raised concerns about the feasibility of our program. Some comments suggested that our proposed declining cap ( 300 ppm cap for 2004 and a reduced cap of 180 ppm for 2005) could be an additional and burdensome expense for most refiners to meet. Specifically, these commenters believed that the declining cap would be more constraining than compliance with the corporate average or even the refinery average standards ( as long as the ABT program produced sufficient credits). Because refiners probably would not make multiple investments in such a short time, the 180 ppm cap could force some refiners to install the equipment needed to get to the 80 ppm cap earlier than otherwise needed. The commenters argued that this would force all of the industry's investments into the first years of the program rather than allowing for a smoother transition over several years as we had originally envisioned. Many comments also suggested that since there have not been long term commercial demonstrations of the newer gasoline desulfurization technologies, refiners would not consider these technologies to be viable and, if faced with our proposed 30 ppm standard in 2004, may select the more traditional, higher cost sulfur reduction processes. Some of these commenters suggested that we should delay the 30 ppm standard, and recommended a range of suggested deadlines ( 2005   2007). We also received many comments which suggested that the ABT program restricted the generation of credits, and provided no certainty that credits would be generated prior to 2004. Commenters stated that two features in particular   the delay in establishing each refinery's sulfur baseline due to 1997   98 data review and the strict 150 ppm `` trigger'' for generating credits   caused them to question whether adequate sulfur credits would be available. If credits could not be guaranteed early enough to forestall investment decisions, refiners would be forced to begin construction earlier than we had projected. Under such a scenario, the costs of the program would be substantially greater, and many commenters suggested that, regardless of cost, it would be impossible for the entire industry to meet the deadline ( due to limitations on engineering design and construction resources as well as the time required to obtain permits). Finally, we received many comments which argued that not all refineries would be able to concurrently comply with the proposed standards in the time period provided, given the competition for engineering resources and the time needed for construction of desulfurization equipment. These comments focused specifically on small refineries ( owned by both small and large corporations) and refineries that were relatively isolated geographically ( such as many refineries in the Rocky Mountain region) which had little access to other sources of gasoline should they have difficulty in complying with our requirements. The commenters generally argued that these refiners needed more time than the rest of the industry to meet our proposed standards. Some of the commenters also argued that the standards applicable to many of these refiners should be less stringent because of their belief that the environmental needs of the states where these refineries were located and/ or marketed gasoline were small relative to the needs of other states. Suggestions for temporary and permanent regional programs which provided less stringent control in the Western half of the country were included with many of these comments. Based on what we've learned from the comments received and additional information we've gathered, we have revised our analysis of when refiners will invest in desulfurization equipment and how the sulfur ABT program can VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6753 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations best help to distribute these investments over several years while maintaining the original goals of the program. The following is a brief summary of our new analysis; a more complete explanation of our assumptions can be found in the RIA. About 15 percent of current domestic gasoline production already meets the gasoline sulfur standard, or can do so with very little additional capital investment, and at most a small increase in operating cost. The remainder of the industry   the majority of U. S. refineries   will have to install at least one desulfurization processing unit to lower gasoline sulfur to the required levels. Furthermore, many of these refineries will need to make changes to their operations in advance of 2004 simply to comply with the 300 ppm cap standard, even if they can obtain sufficient ABT credits to delay compliance with the 30 ppm refinery average standard. Refiners facing this situation will need to make their decisions within a year or at most two from today's action. From the comments we received and discussions we've had with refiners and technology vendors, we acknowledge that some of the newer, more promising processes may not be in operation for sufficient time to gain valuable operating experience ( one to two years of operation) until 2002 or later. Hence, we now believe that some refiners may choose from one of the traditional, commercially demonstrated desulfurization processes, even though these technologies may be more costly, to meet our standards. However, we continue to believe that the majority of refiners will delay construction ( taking advantage of the sulfur ABT program and perhaps making modest operational changes in the interim) and will have a wide range of technological options to choose from, at reduced capital investment and operating costs compared to the more traditional approaches. Examples of these technologies are CDHydro and CDHDS ( licensed by the company CDTECH), Octgain 125 and Octgain 220 ( licensed by Mobil Oil), S Zorb ( licensed by Phillips), IRVAD ( licensed by Black & Veatch), and others. These technologies generally use conventional refining processes combined in new ways, with improved catalysts and other design changes that minimize the undesirable impacts ( such as a substantial loss in octane) and maximize the effectiveness of the desulfurization approach. Since these processes provide less costly ways to reduce gasoline sulfur, we have based our economic assessment ( summarized in Section IV. D. below) on the presumption that the majority of refiners will elect to use one of these processes to meet the 30 ppm standard, even if it requires delaying compliance ( through the purchase of ABT program credits) until 2006. However, after considering the data available to us about current refinery sulfur levels and the ability of refiners to reduce sulfur levels to meet the standards, we have made several modest changes to the program. These changes will not affect the environmental performance of the proposed program. We agree that the declining cap had the unintended consequence of forcing investments earlier than desired for an orderly transition to the 80 ppm cap. Thus, we have changed the program from the proposal, establishing a 300 ppm per gallon cap in 2004 and 2005. We do not expect this change to have an impact on the environment ( or on the Tier 2 vehicles that will be introduced in this interim period) since average sulfur levels will be required to decrease due to the declining corporate average, which begins in 2004. We kept the corporate average standards proposed for 2004 and 2005, but are permitting inter company trading around these standards. We believe this change will provide further flexibility to the industry in allowing some refineries to delay construction and encourage others to move forward sooner. Having now concluded that many refiners would benefit from an additional year to evaluate and consider the technological options before having to install equipment to meet the 30 ppm standard, we have delayed this standard for one year. In acknowledgment that some areas of the country have less urgent environmental needs for the emissions reductions that this program will bring, and that many of the refiners that supply gasoline to these areas are ones which will have the most difficulty in meeting the standards, we have finalized a geographic phase in of the standards to complement the temporal phase in applicable to the rest of the industry. Thus, in certain states in the West, refiners have the option of meeting interim standards while delaying compliance with the 30 ppm average until 2007. Finally, we have made changes to the sulfur baseline requirements and the credit trigger to help ensure that the sulfur ABT program functions as we originally envisioned it would. These changes will encourage reductions in gasoline sulfur levels beginning as early as 2000, while providing enough flexibility to require the majority of refineries to meet a 30 ppm average sulfur standard by 2006. Overall, the industry will be able to spread the needed investments over several years rather than having to comply as a whole by 2004, and will be able to maximize the use of the most efficient and lowest cost technologies. While we have provided additional flexibility for the industry, we have done so without compromising the environmental benefits of the program in 2004 and beyond when compared to our proposal. The following sections summarize the requirements for gasoline refiners and importers, including our geographic phase in requirements; special provisions for small refiners, and our plans to facilitate the construction permitting process to enable refiners to install gasoline desulfurization technology in a timely manner. Section VI provides additional information about the compliance and enforcement provisions that will accompany these requirements. More detailed information in support of the conclusions presented here is found in the RIA and in our RTC document.

1. Gasoline Sulfur Standards for Refiners and Importers This section explains who must comply with the gasoline sulfur control requirements, the standards and deadlines for compliance, and how refiners can use the ABT program to meet the standards. The last section discusses how individual state gasoline sulfur programs are affected by today's action. Standards specific to eligible small refiners are presented in Section IV. C. 2.

a. Standards and Deadlines that Refiners/ Importers Must Meet Anyone who produces gasoline for sale in the U. S. must comply with these regulations. This includes anyone meeting our definition of a refiner ( including blenders, in most instances) and importers. Certain refiners may qualify for temporarily less stringent standards and deadlines because these companies either ( 1) market gasoline in the temporary geographic phase in area ( explained in section b below), or ( 2) they qualify under our definition of small refiner ( explained in section IV. C. 2 below). Foreign refiners may also have separate requirements, if they qualify as small refiners. These requirements will apply to all gasoline sold in the U. S., including Alaska, Hawaii, Puerto Rico, American Samoa, the Virgin Islands, Guam, and VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6754 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 78 Gasoline sold in California is exempt from meeting these Federal standards, due to our belief that California gasoline already meets or exceeds these requirements. See Section VI for more discussion on this issue. 79 Including gasoline produced for use in the geographic phase in area and small refiner gasoline. the Northern Mariana Islands. 78 This national approach is appropriate, based on our conclusions that vehicle emissions must be reduced nationwide to adequately protect public health and the environment and Tier 2 vehicles require protection from the harmful impacts of gasoline sulfur regardless of where they are operated. Table IV. C.   1. summarizes the standards for gasoline refiners and importers. There are three standards which refiners and importers must meet. In 2004 and beyond, every gallon of gasoline produced is limited by a pergallon maximum or `` cap.'' The cap standard becomes effective January 1, 2004 ( and January 1 of subsequent years as the cap standard changes). Also, in 2004 and 2005, each refiner must meet an annual average standard for its entire corporate gasoline pool. Finally, each individual refinery is subject to a refinery average standard, beginning in 2005. Refineries that do not take advantage of the sulfur ABT program will have actual sulfur levels averaging 30 ppm beginning in 2005. Additional details about the requirements for meeting these standards is found in the following sections.

TABLE IV. C.   1.   GASOLINE SULFUR STANDARDS FOR REFINERS, IMPORTERS, AND INDIVIDUAL REFINERIES [ Excluding Small Refiners and GPA Gasoline]

Compliance as of   2004 a 2005 2006+

Refinery Average, ppm b .......................................................................................................................... .................... 30 30 Corporate Pool Average, ppm c ............................................................................................................... 120 90 .................... Per Gallon Cap, d ppm ............................................................................................................................. 300 300 80 NOTES: a We project that the pool averages will actually be below 120 ppm in 2004. For a discussion of how the program gets early sulfur reductions before 2004, see section IV. C. 1. c. b The refinery average standard can be met through the use of sulfur credits or allotments from the sulfur ABT program, as long as the applicable corporate pool average and per gallon caps are not exceeded, as explained in Section IV. C. 1. c. viii. c. The corporate pool average standard can be met through the use of corporate allotments obtained from other refiners, if necessary, as explained in Section IV. C. 1. c. iii. d In 2004, exceedances up to 50 ppm beyond the 300 ppm cap are allowed. However, in 2005, the cap for all batches will be reduced by the magnitude of the exceedance.

i. What Are the Per Gallon Caps on Gasoline Sulfur Levels in 2004 and Beyond?

To reduce the potential for permanent damage to the emission controls of Tier 2 vehicles and later NLEV vehicles, we are implementing caps on the sulfur content of every batch of gasoline produced or imported into the country beginning in 2004. As shown in Table IV. C.   1, a cap of 300 ppm is first implemented in 2004. This cap remains in 2005. In 2006 and beyond, the cap is lowered to 80 ppm. These caps apply at the refinery gate. Sulfur caps are also applied to gasoline downstream of the refinery; see Section VI for additional discussion of downstream cap standards. These downstream caps will facilitate compliance and enforcement without changing the way the distribution system currently functions. Several commenters suggested the rule should also include a provision to address the occasions when refiners must temporarily take processing units out of operation so that planned, recurring maintenance can be performed, commonly termed `` turnarounds,'' or if processing units are unexpectedly taken out of operation due to accident or malfunction, commonly termed `` upsets.'' These commenters expressed particular concern that the gasoline produced at a refinery may not meet the sulfur cap standards when a refinery's desulfurization unit is not operating. These commenters contended that the regulations should allow refiners to produce gasoline that exceeds the cap standard for a limited time where the excess sulfur is due to a turnaround or upset. However, they also suggested that the refiner should be required to meet the refinery average standard with the high sulfur gasoline included in its average calculation in order to create an incentive for refiners to limit the volume and sulfur content of high sulfur gasoline. Today's rule does not grant relief to refiners because of turnarounds or upsets. While the concern raised by the commenters is reasonable, the solution they suggested would nevertheless result in distribution of gasoline exceeding the cap standards. The cap standards are necessary because gasoline with higher sulfur levels will significantly harm or destroy the emission controls used in Tier 2 vehicles. We believe there are strategies refiners can use to mitigate or eliminate the difficulties associated with turnarounds and upsets. For example, some refiners schedule turnarounds for a number of refinery processing units at the same time when the refinery largely stops producing gasoline, thereby avoiding the need to produce any high sulfur gasoline. In other situations it may be possible for a refiner to store high sulfur products until the desulfurization unit is operating or to transfer high sulfur products to a neighboring refinery for desulfurization. We commit to continue evaluating the turnaround issue especially as new technologies are introduced. Based on our evaluation, if a problem is evident and if an appropriate solution can be devised, we will act at that time. In 2004, if any batch of gasoline 79 exceeds the 300 ppm cap ( up to 350 ppm), then the cap for all batches produced by the refinery in 2005 will be reduced by the magnitude of the exceedance. For example, if any given batch of gasoline has a cap of 325 ppm ( a 25 ppm exceedance) in 2004, then the cap becomes 275 ppm for all batches of gasoline produced by that refinery in 2005. However, at no time in 2004 can a batch be higher than 350 ppm sulfur. We have made this adjustment to accommodate those refiners who would have to invest in control technologies to meet the 300 ppm cap in 2004 ( perhaps at a higher cost than they would incur if they could delay the investment a year) but could otherwise meet a slightly higher cap through operational changes which would not require new equipment.

VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6755 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations ii. What Standards Must Refiners/ Importers Meet on a Corporate Average Basis?

Refiners and importers must meet annual average, volume weighted sulfur standards for their entire corporate gasoline pool in 2004 and 2005. In 2004, this standard is 120 ppm; in 2005, it is reduced to 90 ppm. In 2006 and beyond, there will no longer be a corporate pool average standard, since each refinery and importer will be held to its own single refinery average standard, as discussed in the next section. These standards represent the maximum allowable sulfur levels, on an annual average basis, for each refiner/ importer, volume weighted across all refineries owned and operated by that refiner ( or all gasoline imported by the importer in the calendar year), rather than at each individual refinery or by each batch of gasoline. Thus, a refiner's gasoline may exceed the average standard of 120 ppm at one refinery, if sufficient gasoline below that standard is produced at its other refinery( ies), such that its corporate, volumeweighted average sulfur level does not exceed 120 ppm. Alternatively, allotments may be used to meet this requirement. This requirement does not apply to small entities or to corporations that do not have to meet the pool average standard in the GPA program. For compliance with this corporate averaging requirement, as well as with the other requirements of this subpart, we consider a parent corporation owning wholly owned subsidiaries that also own refineries to be the refiner of these facilities. Thus, the parent corporation must comply with refiner corporate average requirements. In its compliance calculations, the refiner must include the gasoline produced at the refineries it owns, plus the gasoline produced at the refineries owned by its wholly owned subsidiaries. For purposes of compliance, we proposed that a joint venture, in which two or more refiners collectively own and operate one or more refineries, be treated as a separate refining corporation under the gasoline sulfur requirements. Hence, a refinery owned by a joint venture would have been included in the corporate pool calculations of the joint venture, and could not have been included in calculations with other refineries solely owned by one of the parties to the joint venture. Based on comments we received on this issue which argued that a company with majority ownership in the joint venture should be allowed to count the jointly held refinery in its corporate average, we have revised our treatment of refineries owned by joint ventures. Each joint venture must separately meet the corporate pool average standard, whether the joint venture owns one or multiple refineries. If a joint venture fails to meet the corporate pool average standard, then each partner in the joint venture is jointly and severally liable for the violation. However, if one partner to a joint venture refinery includes the joint venture refinery in its corporate pool, and that corporate pool meets the corporate pool average standard, then the joint venture will be considered by EPA to be in compliance ( if the joint venture owns only the one refinery). If the joint venture owns multiple refineries and only one or some of the refineries is included in the corporate pool calculations of one partner, compliance by the joint venture with the corporate pool average standard will be judged based on the average sulfur levels of the remaining refinery( ies) owned by the joint venture. In meeting the corporate average stds in 2004 and 2005, refiners and importers may use allotments as discussed in IV. C. 1. c below.

iii. What Standards Must be Met by Individual Refineries/ Importers? Beginning in 2005, every refinery must meet an average standard of 30 ppm sulfur at the refinery gate on an annual, volume weighted basis. Similarly, every importer must meet the 30 ppm average standard beginning in 2005. ( These requirements do not apply to small entities or to GPA gasoline). In meeting this standard, individual refineries and importers may use credits generated or purchased under the provisions of the sulfur ABT program discussed below in Section IV. C. 1. c, and/ or, in 2005 ( only), sulfur allotments ( as described in the previous section) obtained from a refiner who has excess allotments to sell, if they are unable to comply based on their actual gasoline sulfur levels. Hence, the actual average sulfur levels for gasoline produced at some refineries can be higher than 30 ppm in 2005, but only if refiners use ( 1) credits generated from cleaner gasoline produced early and/ or ( 2) allotments generated by a refiner which produces gasoline averaging, on a corporate basis, lower than 90 ppm in 2005. However, the corporate pool average standards and per gallon caps will limit the degree to which gasoline can exceed 30 ppm on average. We allow refiners to use either sulfur allotments or ABT credits to meet the 30 ppm standard in 2005 for several reasons. First, this is an environmentally neutral approach because the national pool in 2005 will still average no greater than 90 ppm, since every refiner must meet the corporate average standard before applying allotments to the compliance of any refineries with the 30 ppm standard. Second, it provides refiners who have excess allotments in 2005 an additional market for those allotments, thus giving refiners an incentive to exceed the 90 ppm corporate average standard in 2005. In either case, the reductions will have occurred and thus the allotments and credits have very similar purposes and thus should be interchangeable. In 2006 and beyond, the 30 ppm refinery average standard continues to be a requirement for every refinery or importer. The sulfur credits generated in the ABT program may be used by refineries or importers to comply with this requirement. However, because of the 80 ppm cap in these years, we expect that the majority of refiners/ importers will average 30 ppm, although some individual refineries/ importers could average slightly more or less ( if the refineries/ importers bank, sell, or purchase credits to meet this standard, as explained in the ABT discussion below). Furthermore, the majority of credits will expire at the end of 2006.

b. Standards and Deadlines for Refiners/ Importers Which Provide Gasoline to the Geographic Phase In Area ( GPA) As indicated above, certain refiners may qualify for temporarily less stringent standards and deadlines for some or all of their gasoline because these companies either ( 1) produce gasoline to be sold in the temporary geographic phase in area ( GPA) or ( 2) qualify under our definition of small refiner. In this section, we explain the geographic phase in area of our program and the interim standards and deadlines for compliance in that area. The provisions that apply to qualifying small refiners are described in section IV. C. 2., below.

i. Justification for Our Geographic Phase In Approach In addition to phasing in our national gasoline sulfur program temporally from 2004   2006, we are phasing in our program geographically. In response to our proposal, we received many comments from the refining industry regarding timely implementation of our proposed gasoline sulfur program. Commenters argued that not all refineries would be able to concurrently comply with the proposed standards in the time period provided, given the competition for engineering resources and the time needed for construction of VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6756 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 80 Much of this gasoline is produced by small volume refineries that are not owned by small businesses, and are therefore not afforded the flexibility of the small refiner provisions described in Section IV. C. 2. 81 Alaska, Colorado, Idaho, Montana, New Mexico, North Dakota, Utah, and Wyoming desulfurization equipment. In consideration of these comments, we have made some modifications to enhance the timing of our program without compromising the environmental benefits we expected from our proposal. As part of our assessment we also examined other phase in approaches which might enhance the orderly introduction of refining technology without jeopardizing the environmental benefits of our program. As a result of this assessment, we have concluded that many states in the Great Plains and Rocky Mountain areas of the United States have a somewhat less urgent environmental need for ozone precursor reductions in the near term. Moreover, their gasoline supply is dominated by that produced by small capacity, geographically isolated refineries located therein. As a general rule, refineries in this area will have the most difficult time of all refineries nationwide in competing for the vendor, supply, engineering, and construction resources needed to modify their refineries to comply with the standards. Based on 1998 Department of Energy data, over 80 percent of the gasoline sold in this area is produced by the relatively small refineries located within the region. 80 Similarly, Alaska faces a less urgent environmental need for reductions in ozone precursors and has refineries which are challenged and geographically isolated. A more orderly and cost efficient phase in of the 30 ppm standard could be achieved if all gasoline sold in this area was subject to somewhat less stringent standards than those in the rest of the country for a short time. This approach will allow the refineries producing gasoline for use in this area more compliance flexibility, more time to install and prove out the equipment needed for compliance, and thus a greater opportunity to reduce their overall costs. As described below, this approach results in only a minimal loss in emission reduction benefits. By stretching out demand for design, engineering, construction and other related services during the 2000   06 period, these provisions should also help to reduce the overall costs of the gasoline sulfur program. The remainder of this section is divided into two parts. The first describes the rationale for development of this approach and how we identified the appropriate area, and the second provides a description of the requirements for refiners and importers that produce fuel for sale in the area.

ii. What Is the Geographic Phase in Area ( GPA) and How Was it Established?

As we considered the geographic phase in approach, we aimed to minimize the environmental losses which could occur from exposing Tier 2, NLEV, ( and other) vehicles to higher gasoline sulfur levels when the gasoline sulfur standards are being phased in nationwide. We used two criteria to develop and evaluate this approach: ( 1) relative environmental need and ( 2) the ability of U. S. refiners and the distribution system to provide compliant gasoline. The states we have identified for the GPA are shown in Figure IV. C   1.81 BILLING CODE 6560   50   P BILLING CODE 6560   50   C The first and primary criterion we considered in defining this area was environmental need. In defining the GPA, we identified those states that have somewhat less urgent environmental need in the near term for reductions in ozone precursors and whose emissions are less important in terms of ozone transport concerns. This area includes some states that are located in the Great Plains and the Rocky Mountains, as well as Alaska. Most states within the Rocky Mountains and Great Plains do not have a compliance problem with the 1 hour ozone standard in the near term, although they do have concerns in terms of maintaining compliance with the particulate matter standard. However, there are two states ( Arizona and Nevada) in the Rocky Mountain vicinity that do have ozone air quality concerns. These states have instituted local fuel quality programs ( in Phoenix, AZ and Las Vegas, NV) to reduce ozone precursor emissions. In addition, as shown in Table III. C   2, Arizona and Nevada are projected to have concerns with PM10 compliance in the future. Given these factors, we excluded them VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6757 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 82 As discussed below, refiners can supply gasoline not designated as GPA gasoline to the GPA, provided it meets the standards in Table IV. C.   2. Also, the GPA standards do not apply to gasoline produced by small refiners that is used in the GPA. from the phase in area and its temporarily less stringent standards except as described below in Section IV. C. 1. b. vii for counties and tribal lands in adjacent states. We also defined the phase in area based on the relative difficulty of producing or obtaining complying gasoline. The refining industry in the GPA is dominated by relatively low capacity, geographically isolated refineries many of which are owned by independent companies. Such refineries face special challenges in complying with the requirements of the national program by 2004 because their crude capacity, corporate size, and location make it difficult for them to compete for the design, engineering, and construction resources needed to comply by 2004. Furthermore, an assessment of 1998 gasoline production and use data and information on the products pipeline system shows that states in the GPA and portions of several adjoining states are solely or predominantly dependent on gasoline produced by these refineries and have limited or no access to gasoline from other parts of the country. Based on this analysis, we concluded that several states and portions of other states meeting our first criterion ( less urgent environmental need for ozone precursor emission reductions) also face the likelihood of a supply shortage of low sulfur gasoline. Providing low sulfur gasoline to these states and adjoining areas is expected to be more difficult and costly in the near term. Section IV. C. 1. b. vii below, discusses how the adjoining areas ( counties/ tribal lands) will be identified. Thus, we believe it is appropriate to phase in the 30 ppm average, 80 ppm cap standards in these areas by allowing an additional year compared to the rest of the country, rather than delaying implementation of the standards nationwide to accommodate these states. Under this approach, the areas with the most urgent need for the ozone reduction benefits associated with low sulfur gasoline will realize them as soon as is feasible, and other areas will experience them shortly thereafter. On the other hand, much of the area in the adjoining states has significant pipeline, rail, barge, and truck access to gasoline which will be capable of meeting the standards in Table IV. C   1 beginning in 2004. Even if these states have less environmental need in the near term, there are health benefits ( particulate and air toxic emission reductions) as well as performance benefits for vehicle emission control systems ( including avoidable irreversible sulfur effects) which need not be foregone. Therefore, we concluded that since it will not be more difficult to send gasoline to these adjoining areas through the distribution system, the significant environmental benefits of requiring low sulfur gasoline as early as is feasible justifies excluding these states from the GPA. Some might argue that there are other states which should be considered under this program. However, based on our criteria of environmental need ( including ozone transport and irreversibility concerns) challenged refineries, and limited access to complying gasoline we could identify no other states or territories which to include.

iii. Standards/ Deadlines for Gasoline Sold in the Geographic Phase in Area While the states in the GPA may have less of an environmental need for ozone precursor reductions in the near term, there are significant environmental reasons to make the program as stringent as possible, still enabling a smooth transition to low sulfur gasoline nationwide. Toward that end, we are establishing the following requirements for gasoline sold in the GPA, which we view as the appropriate balance between these two factors. The GPA provision covers all gasoline produced or imported for use in the GPA, whether refined there or brought in by pipeline, truck, rail, etc. 82 Foreign refiners are involved in this program through the importers, who are, in fact, the regulated entities. Refineries and importers must meet a 150 ppm average and a 300 ppm cap for all gasoline produced or imported for the GPA under this program beginning January 1, 2004. However, if a refinery's/ importer's 1997   98 average sulfur level is less than 150 ppm, then that refinery's/ importers gasoline has a standard of its baseline plus 30 ppm but in no case greater than 150 ppm. For example, a refinery with a baseline of 100 ppm would have a sulfur standard of 130 ppm for its GPA gasoline, a refinery with a baseline sulfur level of 140 ppm would have a standard of 150 ppm for its GPA gasoline, and a refinery with a baseline of 200 ppm would have a standard of 150 ppm for its GPA gasoline. Furthermore, if under the ABT provisions discussed below and in section IV. C. 1. c, a refinery/ importer generates credits ( in 2000   2003) and/ or allotments ( in 2003) by dropping its refinery/ imported gasoline average below 150 ppm then the baseline for that refinery is set at the new level and the standard becomes baseline plus 30 ppm but not greater than 150 ppm. This is to ensure that refineries and importers who already are lower than the 150 ppm standard on average maintain current sulfur levels. The 30 ppm factor is intended to allow some flexibility for refineries and importers whose 1997 and 1998 levels are an aberration from normal operations or who face changes in crude slates in future years. Corporate pool average standards apply in the national gasoline sulfur program for calendar years 2004 and 2005. Most refiners/ importers producing gasoline for use in the GPA market the majority of their gasoline outside of the GPA where they compete with many other refineries. Since the phase in of the national program expects compliance with the 120/ 90 ppm corporate pool average standards in 2004 and 2005, we are requiring that refiners/ importers who market the majority ( greater than 50 percent of production volume) of their gasoline outside of the GPA to account for the sulfur levels of their GPA gasoline in their calculation for compliance with the corporate pool average standards. To provide additional flexibility during this phase in, refiners may use sulfur ABT credits and allotments ( as explained in IV. C. 1. c) to meet these standards. Refineries producing GPA gasoline can generate credits beginning in 2000 under the provisions of the national program ( described in section IV. C. 1. c). Also, refineries/ importers marketing gasoline in the GPA may through extraordinary measures be able to generate credits in 2004   2006. To qualify they must achieve levels below 150 ppm or their more stringent baseline levels as discussed above whichever is less. Under these circumstances, these refineries/ importers can earn credits for the GPA gasoline they produce during 2004   06. Credits generated under the GPA program are fully fungible with national credits and are subject to the same regulatory requirements. The national program includes provisions which permit refiners/ importers to generate allotments for use in 2004 and 2005. Refiners and importers marketing gasoline in the GPA may only generate sulfur allotments in 2004 or 2005 if their corporate average sulfur level meets the corporate pool average standards for each year ( as indicated in Table IV. C. 1), including gasoline produced for the GPA, if applicable. Refiners not compelled to meet the corporate pool VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6758 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 83 These segregation and designation requirements do not apply to gasoline produced by refiners subject to the small refiner standards described in Section IV. C. 2. This is because small refiner gasoline can be sold anywhere in the country, and is not subject to different standards depending on where it is sold. average standards under the GPA may not generate allotments. The temporary provisions for the GPA apply for three years, 2004 through 2006. Since the low sulfur standards for the rest of the country require compliance with a 30 ppm refinery average standard and an 80 ppm gallon cap in 2006, the geographic phase in provides an additional year to reach those standards. This extra year and the somewhat less stringent standards during the phase in will provide the refining industry the opportunity for more orderly transition to the 30/ 80 ppm standards by 2007. Requirements for gasoline sold in the GPA are summarized in Table IV. C.   2, below. Gasoline produced by refiners subject to the small refiner standards described in Section IV. C. 2. of this notice is not subject to the provision of the geographic phase in, since the small refiner provisions apply to eligible refiners regardless of geographic location. Gasoline produced by such refiners can be sold nationwide, including in the GPA.

TABLE IV. C.   2.   GASOLINE SULFUR STANDARDS FOR THE GEOGRAPHIC PHASE IN AREA [ Excludes Small Refiners]

Compliance as of   2004 2005 2006 Refinery GPA Gasoline Average a, ppm ................................................................................. 150 150 150. Corporate Pool Average b, ppm ............................................................................................... 120 90 Not Applicable. Per Gallon Cap c, ppm ............................................................................................................ 300 300 300.

Notes: a The refinery average standard for GPA gasoline is the more stringent of: 150 ppm; the refinery 1997   1998 baseline plus 30 ppm; or the sulfur level from which early credits were generated plus 30 ppm. Refiners can use credits or allotments to meet the average. b Applies only to refiners/ importers which sell > 50% of their gasoline outside the GPA. c As discussed above, in 2004 both GPA and Non GPA gasoline may have a sulfur content as high as 350 in which case the refinery or importer becomes subject to a correspondingly more stringent cap standard in 2005.

iv. What Are the Per Gallon Caps on Gasoline Sulfur Levels in the Phase in Area? The sulfur level caps for gasoline sold in the phase in area and the rest of the nation are the same in 2004 and 2005, but in 2006 the cap remains at 300 ppm in this area while it declines to 80 ppm for the rest of the country. To assure that compliance at the refinery gate is correct regardless of where the gasoline is ultimately sold, as gasoline intended for the GPA moves in the distribution system to or through the geographic area it must be identified as phase in area gasoline in product transfer documents and must remain segregated from gasoline intended for use outside this area. In addition, use of phase in area gasoline is prohibited outside the GPA, but the converse is allowed, i. e., gasoline designated for use outside the GPA can be used in this area. For all three years, refiners and importers must meet the requirements described in Tables IV   C. 1 and IV   C. 2, as applicable, and therefore must maintain refinery or import records as applicable as to where a gasoline batch is sold. 83 We recognize that this higher standard/ cap for one year could create the incentive for those not marketing gasoline in the GPA today to seek a market to sell higher sulfur gasoline and for others to seek to increase market share. While this is indeed allowable under our program and is perhaps to be anticipated in a free market system, in all likelihood the incentives are small. Such refiners/ importers would still have to meet the 150 ppm average and would perhaps face increased shipping and marketing costs. Nonetheless, we plan to monitor market developments to assess whether such a provision creates significant market shifts or the potential for increases in average sulfur levels in the GPA gasoline.

v. How Do Refiners/ Importers Account for GPA Fuel in Their Corporate Average Calculations? Those refiners or importers that sell all of their gasoline to the GPA ( i. e., they produce no fuel for use outside the GPA), regardless of whether they are located within or outside of the area, have refinery/ importer standards that are equal to the least of 1) 150 ppm, 2) the refinery's or importer's 1997   98 average sulfur level plus 30 ppm or 3) the refinery's or importer's lowest actual annual sulfur level plus 30 ppm in any year 2000   2003 if credits are generated. Because the refiners produce all of their fuel for use in the GPA, they are exempt from the corporate average standards in Table IV. C   1. Furthermore, any refiner/ importer which certifies 50 percent or more of its gasoline production volume for sale as GPA gasoline in 2004 and 2005 is not required to meet the corporate pool average for that year for its entire gasoline pool. Not only would it be difficult to comply on average ( if it were assumed that the GPA gasoline was 150 ppm and non GPA gasoline was 30 ppm), but also it would undermine the achievement of the basic goal of a more orderly and efficient phase in of low sulfur gasoline since the flexibility afforded by the GPA could be diminished. Otherwise, those who produce less than 50 percent of their gasoline for the GPA ( which is the majority of those refiners which market in both locations), must meet the corporate pool average standards in 2004 and 2005 for their entire gasoline pool. Thus, such refiners must compensate for the higher sulfur levels of their GPA gasoline by producing non GPA gasoline that averages sufficiently less than 120 ppm in 2004 and 90 ppm in 2005 to ensure that their corporate average meets the corporate pool average standard for each year. Importers who provide less than 50 percent of their gasoline to the GPA must also include their GPA gasoline in their overall corporate pool average calculation. Alternatively, the refiner can use sulfur allotments to meet the corporate pool average standard for its total gasoline production, including gasoline sold inside and outside the phase in area. Since most refiners which sell gasoline both in and outside the GPA sell the vast majority outside the GPA the additional flexibility provided for gasoline sold in the phase in area should not significantly affect compliance with the corporate pool average standard for a refiner's nationwide production.

vi. How Do Refiners/ Importers Apply for the Geographic Phase in Area Standards? As part of program administration, we are requiring that any refiner/ importer VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6759 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 84 If a refinery has a baseline sulfur level higher than 120 ppm ( as described below in IV. C. 1. c. v.), then credits are generated from the baseline to 120 ppm and allotments from 120 ppm to the new sulfur level ( and discounted 20 percent if applicable). expecting to sell gasoline in this area during the phase in period ( 2004   2006) make application to EPA in writing by December 31, 2000. This application would provide the minimum information needed by EPA to characterize a refiner's/ importer's participation, establish the applicable standards if the 1997   98 average is less than 150 ppm, and establish our enforcement program for refiners/ importers in this area for gasoline entering or leaving the area. Participation on the part of any refinery or importer is voluntary. At any time, a refiner/ importer who previously opted into the GPA program may produce gasoline meeting the standards in Table IV. C   1 in the GPA, or may cease producing gasoline for the GPA ( and produce gasoline meeting the standards in Table IV. C   1 solely outside of the GPA). Such a decision would affect the averages/ caps which apply to the gasoline sold in the GPA. Gasoline sold in the GPA that is not designated as GPA gasoline is considered Non GPA gasoline for purposes of compliance with the corporate pool average requirement and refinery average requirements.

vii. How Will EPA Establish the GPA in Adjacent States? EPA is establishing a geographic phase in area that encompasses eight states ( MT, ND, ID WY, CO, UT, NM, AK). In addition, counties and tribal lands in states immediately adjacent to these which received a majority of their gasoline in calendar year 1999 from a refinery( ies) located within the GPA will be covered by the phase in area provisions. The criteria to identify these additional counties and tribal areas are designed to identify areas whose gasoline distribution system is closely tied to the eight states such that they share the same characteristics of gasoline supply. Therefore, dispensing outlets ( retail and private) in such areas will continue to have access to that gasoline in most cases. Distribution and production of gasoline in these additional areas will be subject to the same standards and requirements as gasoline in the eight states identified above. At this time, EPA is not able to identify all the counties and tribal lands that would be included in the phase in area. In light of the air quality benefits of introducing low sulfur gasoline as quickly as possible, we want to ensure that the phase in area is accurately identified and that including any areas outside these eight states will not have a significant adverse air quality impact on any counties or tribal lands that are included in the phase in area. EPA will be working with interested stakeholders will to conduct an assessment to determine which counties/ tribal lands within the immediately adjacent states meet the criteria as described in the regulatory text. EPA expects to complete action on this assessment by December 31, 2000. c. How Does the Sulfur Averaging, Banking, and Trading Program Work? The sulfur ABT program provides flexibility to refiners by giving them more time to bring all of their refineries into compliance with the corporate averages in 2004 and 2005 as well as the 30 ppm individual refinery standard in 2005 and beyond. ABT will provide the opportunity for reduced costs by allowing the industry the flexibility to average sulfur levels among different refineries, between companies, and across time. With ABT, some refineries will be able to delay installation of desulfurization equipment, because other refineries will generate sulfur allotments and credits through early sulfur reductions. In this way, installation of desulfurization technology will be spread out over a longer period of time than would be the case without ABT. Since, with the banking provisions, reductions in annual average sulfur levels which occur as early as 2000 have a value during program implementation, the ABT program provides an incentive for technological innovation and the early implementation of refining technology. The ABT program also provides the opportunity for meaningful emissions reductions in 2004 because it allows the Tier 2 standards to be implemented earlier than might otherwise have been possible ( if the Tier 2 standards were delayed to provide the refining industry more time to comply), and because it provides direct environmental benefits even in the years before Tier 2 vehicles are introduced. One benefit is related to the effect of gasoline sulfur on exhaust emissions, as discussed in the Regulatory Impact Analysis. This benefit will result both from older vehicles on the road ( Tier 0 and Tier 1 emission control technologies, which have some degree of sulfur sensitivity and will benefit from sulfur reductions which occur prior to implementation of the refiner and refinery standards summarized in Table IV. C   1) and from NLEV vehicles ( which are more sensitive to sulfur than earlier technologies) which will continue to be sold while Tier 2 vehicles are phasedin Another environmental benefit is the reduction in atmospheric sulfur loads as a direct result of reduced gasoline sulfur levels, leading to reduced emissions of sulfur containing compounds from motor vehicles. The following sections explain the requirements for participation in the sulfur ABT program for allotments and credits.

Sulfur Allotment Program i. Generating Allotments Prior to 2004 To provide additional incentive for early sulfur reductions and to enhance the overall feasibility and cost effectiveness of the gasoline sulfur control program, we are implementing a sulfur allotment program. While few commenters supported the sulfur allotment concept in the NPRM, a number suggested that greater flexibility for compliance in the early years would be helpful. The program described below is in addition to the early sulfur credit program described elsewhere. For 2003, refineries can generate sulfur allotments ( in ppm gallons) by producing gasoline containing less than 60 ppm sulfur on an annual average basis. This 60 ppm `` trigger'' was chosen to reward refineries who demonstrate compliance using technology designed to meet the 30 ppm standard before 2005. Once this 60 ppm trigger is reached, allotments will be calculated based on the amount of reduction from 120 ppm. 84 However, these allotments may be discounted depending on the actual sulfur level. If a refinery fully demonstrates compliance by producing gasoline with an annual average sulfur level of 0 to 30 ppm, the allotments retain their full value   they are not discounted at all. For actual sulfur levels of 31   60 ppm, which are indicative of a partial demonstration of compliance with the ultimate low sulfur standard, the allotments are discounted 20 percent. For example, consider a refinery that has an average sulfur level of 50 ppm at the end of 2003. That refinery would have generated 56 sulfur allotments [( 120 ppm ¥ 50 ppm) ´   0.8 ´   Volume ( in gallons)] to be used or sold in 2004. If that same refinery instead produced fuel with an average sulfur level of 20 ppm at the end of 2003, then it would have generated 100 sulfur allotments [( 120 ppm ¥ 20 ppm) ´ volume ( in gallons)] to be used or sold in 2004.

ii. Generating Allotments in 2004 and 2005 For 2004 and 2005, refiners or importers ( but not individual refineries)

VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6760 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 85 Allotments used for GPA gasoline compliance may be retained until February 2007. Allotments used for small refiner gasoline compliance may be retained until February 2008. can generate allotments by producing gasoline that has a sulfur level below the annual corporate average standard ( 120 ppm and 90 ppm). The number of allotments generated is equal to the difference between 120 ppm ( or 90 ppm) and the corporate average sulfur level. Allotments generated by refiners or importers in 2004 and 2005 are not discounted, unlike some of those that are generated by refineries in 2003. Refiners that sell fuel to the GPA may also generate allotments by producing fuel that is cleaner than the corporate average standards, regardless of the volume of fuel that is produced for use in the GPA. On the other hand, as explained in Section IV. C. 2., gasoline produced by small refiners who are complying with the standards in Table IV. C.   3 cannot be used to generate sulfur allotments since these producers are not required to meet a corporate average standard.

iii. Using Allotments in 2004 and 2005 Refiners and importers can use sulfur allotments that they generate or purchase from other refiners/ importers to demonstrate compliance with the 120 ppm corporate standard in 2004 and the 90 ppm corporate standard in 2005. Each refiner's sulfur allotment for 2004 and 2005 will be calculated based on the total volume of gasoline imported and produced at their refineries ( or only imported gasoline in the case of companies that only import gasoline) and the corporate pool average standard for that year. In anticipation of exceeding or falling short of the standard for any one year, companies may trade sulfur allotments, either in the compliance year or earlier ( as early as the year 2000). For example, a refiner that expects to produce a total of 2.5 billion gallons of gasoline in 2004 has a sulfur allotment of 300 billion ppmgallons ( 120 ppm ´   2.5 billion gallons). If its corporate pool average is actually 200 ppm in 2004, it will exceed its 2004 allotment by 200 billion ppm gallons ( since 200 ppm ´   2.5 billion gallons = 500 ppm gallons), and must obtain sulfur allotments from another refiner to offset this increase. Similarly, if this refiner expects to average 80 ppm in 2004, it has an excess of 100 billion ppm gallons to trade to other refiners. However, if a refiner trades away part of its allotment, the refiner must still comply with the corporate standard, just as another refiner has to do if it does not trade allotments. In 2005, refiners must comply both with the corporate average standard and the refinery average standard for each of their refineries. Once a refiner has established compliance with the 90 ppm corporate average standard ( with or without the use of allotments), each of its refineries can then establish compliance with the 30 ppm refinery standard through actual production of 30 ppm gasoline or through the use of excess allotments and/ or sulfur credits. Once compliance with the 90 ppm corporate pool average standard is established, the refiner would use 90 ppm as each of its refineries actual sulfur level, then apply an appropriate number of credits or allotments to meet the 30 ppm refinery average standard for each refinery. ( See discussion below for an explanation of how a refiner can use both sulfur ABT credits and allotments to comply with the refinery average standard in 2005.)

iv. How Long Do Allotments Last?

We expect most refiners will trade sulfur allotments well before the end of each compliance year so they will have the needed certainty of compliance with the corporate average standard. Our program allows such trades to occur at any time during the year, although the refiner is liable for any shortfall in compliance resulting from having traded away too many allotments. A refiner may also carry over excess 2004 allotments ( those generated in 2003 or 2004) for compliance with the 90 ppm corporate standard for 2005. However, those allotments must be discounted by 50 percent. This 50 percent discount factor is needed to equalize the emission impact of sulfur control between 2004 and 2005. In 2005, there is an extra model year of NLEV/ Tier 2 vehicles relative to 2004. In addition, the NLEV/ Tier 2 fleet is one year older in 2005 than 2004. This increased age translates into higher vehicle emissions due to general deterioration. Since sulfur acts on a percentage basis, the absolute emission increase due to sulfur impacts on vehicle emission control systems in 2005 is higher than in 2004. As discussed below in section IV. C. 1. c. x, a refiner or importer may convert allotments into credits in 2004 and 2005 for compliance with the refinery average standards in 2005 and beyond. All transactions between refiners involving sulfur allotments must conclude by the last day of February in the calendar year following the compliance year in which the allotments are to be used. 85 Sulfur Credit Program v. Establishing Individual Refinery Sulfur Baselines for Credit Generation Purposes The purpose of establishing a sulfur baseline for each refinery is to provide a starting point for determining sulfur credits for reductions in gasoline sulfur levels. We proposed that refiners would have to establish a sulfur baseline for each individual refinery, by submitting to us data establishing their annual average gasoline sulfur level based on the average of their 1997 and 1998 operations. We would review the data and, barring any discrepancies, approve a sulfur baseline for each refinery. We received comments supporting this option as well as comments stating that the time involved for this application and approval process would delay the refiner's ability to plan for and begin construction of gasoline desulfurization technology. Refiners would want the certainty of an approved sulfur baseline before making investment decisions, and thus would wait to obtain EPA's approval before proceeding. We also received comments about what year( s) would be most appropriate to use to establish a sulfur baseline. Some of these comments argued for the use of existing, approved 1990 baselines, or some adjusted version of 1990 baselines, rather than new data, to expedite the process of establishing sulfur baselines. We also proposed a different sulfur baseline for reformulated gasoline ( RFG) produced in the summer for those refineries which produce reformulated gasoline. While the conventional gasoline sulfur baseline ( and the baseline for winter RFG) was proposed to be tied to current sulfur levels, the baseline for summer reformulated gasoline was proposed to be 150 ppm, the approximate level we expect summer reformulated gasoline to contain in 2000 and beyond because of the Phase II reformulated gasoline requirements, which take effect in 2000. We argued that winter RFG did not have any de facto sulfur restrictions, and thus winter RFG should be counted with conventional gasoline for the purpose of credit generation relative to the refinery's conventional gasoline sulfur baseline. Since the proposal, we have learned that overall gasoline sulfur levels ( conventional plus reformulated) are significantly lower than they were in 1990. As explained in the Regulatory Impact Analysis, national average sulfur levels when both conventional and reformulated gasolines are considered dropped to 306 ppm in 1997 and 268 ppm in 1998, compared to the 1990 VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6761 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 86 Refiners may, however, include oxygen added downstream of the refinery when determining Continued national gasoline sulfur average of 339 ppm, decreases of 10 and 21 percent, respectively. The substantial drop between 1997 and 1998 seems to be related to the mandatory use of the Complex Model, which began in 1998 and had implications for both reformulated and conventional gasoline compliance. Thus, we have become convinced that the most appropriate sulfur baseline would be based on data which establish current sulfur levels, not on data which are nearly ten years old. We considered reducing all 1990 baselines by 21 percent to reflect the national average decrease since 1990, but determined that this approach would be inappropriate because some refiners have reduced levels substantially more than 10   21 percent since 1990, and would thus be eligible to generate a very large number of credits for reductions that have already been made. Furthermore, as we proposed, and some commenters argued, we have concluded that averaging data from two years is the most appropriate approach, because averaging over two years will help to account for any unusual variations in operations that may have occurred at individual refineries in either of these years. We concluded that averaging data from 1998 and 1999 is not feasible, because the 1999 data will not be fully available to EPA until after the reporting deadline of May 2000. Hence, we believe it is preferable to use 1997 and 1998 data, rather than delaying the time baselines are established. We do not expect significant changes in 1999 sulfur levels relative to 1998 levels, so we believe the use of the 1997   1998 data provides a reasonable representation of current sulfur levels. We have also learned that summer reformulated gasoline is already averaging close to our expected sulfur level for the year 2000. Winter RFG does not show this same decrease, presumably because refiners are shifting high sulfur blendstocks out of RFG in the summer but back into RFG in the winter to maintain compliance with the conventional gasoline antidumping requirements. Thus, it appears that if we held summer RFG to a lower baseline, as proposed, we would have to raise the winter RFG baseline commensurately to reflect actual refinery operations. The net environmental impact would be no different than if we had a single sulfur baseline applying to all RFG, or to all gasoline produced at the refinery, since the annual pool sulfur levels are constant even while there may be seasonal variations. Therefore, we are not finalizing a separate sulfur baseline for summer RFG, but rather combined conventional and reformulated gasoline sulfur levels. Having considered the comments we received and the new data available to us, we have concluded that refiner sulfur baselines should be established from 1997 and 1998 operating data. Hence, we are requiring refiners which wish to generate sulfur credits prior to 2004 to establish a 1997   98 sulfur baseline for each refinery at which they intend to generate credits. We believe the process we have defined will minimize the burden to the industry and the time it will take for us to review and approve the sulfur baselines. Specifically, refiners which plan to generate sulfur credits must submit to us information which establishes the batch report numbers, sulfur levels, and volumes of each batch of gasoline produced in 1997 and 1998, as well as the annual average sulfur level calculated from these data. Within 60 days, we will review the application and notify the refiner of approval or of any discrepancies we find in the data submitted. If we do not respond within 60 days, the baseline should be considered to be approved. While we expect most refiners will apply for a sulfur baseline in the near future ( to maximize the time that they can generate credits before 2004), there is no cut off date for applying for a sulfur baseline. However, if the refiner wishes to generate credits for a given calendar year, we must receive his baseline application no later than September 30 of that year to provide us adequate time to review the baseline prior to the end of the year ( at which time any credits generated in that year would be assessed and reported by the refiner). We believe that this approach for establishing sulfur baselines meets our goal of providing a workable ABT program that refiners can take advantage beginning in the year 2000, without sacrificing the environmental benefits of the sulfur standards. Foreign refiners which have already established an individual refinery baseline with us, and thus have submitted reports on all batches of gasoline sent to the U. S. in 1997 and 1998, may follow this same procedure if they wish to generate sulfur credits prior to 2004. Foreign refiners which have not reported 1997   98 gasoline qualities to us must follow an alternate approach. Specifically, they must follow the general requirements of our protocol for establishing individual refinery baselines ( see § § 80.91   94 and also § 80.410) by providing sufficient data to establish the volume of gasoline imported to the U. S. from each refinery in 1997   98 and the annual average sulfur level of that gasoline. If the test method used to identify the sulfur level differs from the one specified in today's action, the refiner must provide sufficient information about the test method to allow us to evaluate the appropriateness of the alternative. Because this information will be new to us, we may require more time to review and approve their 1997   98 sulfur baseline. But, consistent with our previous handling of foreign refiner submissions, once we have determined that the submission is complete and the protocol has been followed, they may use the baseline while waiting for our formal approval. However, the refiner will be held to the baseline that is ultimately approved. A foreign refiner who is unable to generate adequate data to establish a 1997   98 sulfur baseline will not be permitted to generate sulfur credits in 2000   2003. Small refiners that plan to request small refiner standards ( as provided in Section IV. C. 2 below) which also want to generate early sulfur ABT credits will use the same data required to define their small refiner baseline to determine their baseline for the ABT program. In other words, if a refiner becomes a small refiner under our definition and procedures, credits generated by that refinery would be calculated relative to the refinery's actual 1997   98 sulfur average. The trigger for generating sulfur credits under the ABT program ( discussed in the next section) would still apply for small refiners generating credits prior to 2004 relative to their 1997   98 sulfur average. In addition, the applicable interim sulfur standard for small refiners who generate credits through sulfur reductions prior to 2004 will be calculated based on the reduced sulfur level, rather than the 1997   98 baseline level, as explained below in Section IV. C. 2. Importers and gasoline blenders will not be assigned a sulfur baseline because they are not eligible to generate early credits ( prior to 2004) under the ABT program. This includes gasoline refiners who are also importers; such parties cannot generate sulfur credits prior to 2004 on the basis of their imported gasoline but may only generate credits based on the gasoline produced by their refinery( ies). It also includes oxygenate blenders, who, as discussed in Section VI below, are not subject to the sulfur standards but are responsible for compliance with the downstream provisions. 86 For importers VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6762 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations compliance with the sulfur standards and the provisions of the ABT program. This is consistent with existing provisions for reformulated and conventional gasolines. 87 As explained in Section IV. C. 1. c. ix, credits generated before 2004 expire in 2006, except for small refiners and credits used for GPA gasoline compliance. and most gasoline blenders, this represents a change from our proposal, but one we believe is appropriate and necessary to ensure that the environmental benefits of the ABT program are maintained. The ABT program allows the refining industry to trade off early sulfur reductions ( 2000   2003) for slight delays in complying with the 30 ppm refinery average standard in 2005   2006.87 We have designed the ABT program to ensure that sufficient credits can be generated by refiners ( domestic or foreign) to enable a smooth transition to the 30 ppm standard. Importers and blenders do not have the same need for the ABT program that refiners have because they will not have to make the same level of investment in desulfurization technology and thus do not need credits generated before 2004 to help their transition to the 30 ppm average standard after 2004. Furthermore, credits could be generated by importers without the overall pool of imported gasoline becoming incrementally cleaner. For example, say that Importer A had a 1997/ 98 sulfur baseline of 600 ppm and Importer B had a sulfur baseline of 100 ppm. In 2002, Importer B could transfer/ sell its 100 ppm gasoline to Importer A prior to unloading the fuel at the port of entry. Once the import transaction was completed, Importer A will have generated 500 ppm ( multiplied by the fuel volume) credits without any fuel becoming incrementally cleaner. We are concerned that if importers and blenders were allowed to generate early credits, they would generate far more credits than needed to make the ABT program work, without necessarily achieving early environmental benefits   credits which either importers or refiners would be able to use to delay compliance with the 30 ppm standard in 2005 and beyond. This would delay the environmental benefits of our program by prolonging the industry's transition to the 30 ppm standard. In the proposal, we also discussed the need for a baseline gasoline volume as well as a baseline sulfur level. This stemmed from the design of our current conventional gasoline anti dumping program, which requires a baseline volume so that we can confirm that conventional gasoline is no dirtier now than it was in 1990. However, for the gasoline sulfur ABT program, we have determined that there is no need to restrict refineries' sulfur baselines ( against which they can generate sulfur credits) to a specific volume of gasoline. The purpose of the ABT program is to encourage early sulfur reductions by some refineries, and we see no need to limit the amount of credits such a refinery can generate on the basis of a historic volume of gasoline production. In fact, additional volumes of cleaner gasoline should achieve additional early environmental benefits.

vi. Generating Sulfur Credits Prior to 2004 In our proposal, we discussed a credit generation trigger of 150 ppm for early credit generation ( 2000   2003), arguing that we wanted to encourage investment in desulfurization technologies that refineries ultimately need to get to a 30 ppm average. Many comments we received argued that the 150 ppm trigger was too restrictive, requiring capital investments that most refiners could not make earlier than 2004 ( due to construction limitations, among other reasons). Thus, few credits would be generated, and without sufficient certainty that credits would be generated, refiners would not be able to count on the flexibility that the ABT program was intended to provide when planning their compliance strategies for 2004 and beyond. Having considered these comments and reanalyzed the ability of the industry to comply with the standards in 2004 ( as we discussed above at the introduction to section IV. C. 1), we have concluded that the proposed 150 ppm trigger would inappropriately limit the credits available. While we want to encourage refiners to make reductions early, we do not want to preclude refiners from making less capital intensive sulfur reductions in the short term while they prepare to reach the 30 ppm average in the long term. At the same time, we believe that a refinery should be required to demonstrate that the sulfur reduction was real and not just a consequence of national variations from year to year. Hence, we are establishing a trigger which we believe represents a sulfur reduction that requires action above and beyond simple annual or even seasonal fluctuations in crude oil sulfur level or product slate variations that could have a very small impact on annual sulfur average. During the period 2000   2003, credits can be generated annually by any refinery that produces gasoline averaging at least 10 percent lower than that refinery's baseline sulfur level. In other words, to generate credits, the refinery's annual average sulfur level for all of its gasoline on average must be 0.9 ´   ( baseline sulfur level). Once this `` trigger'' is reached, credits will be calculated based on the amount of reduction from the refinery's sulfur baseline. For example, if in 2002 a refinery reduced its annual average sulfur level from a baseline of 450 ppm to 150 ppm ( well below the trigger of 0.9 ´ 450= 405 ppm), its sulfur credits will be determined based on the difference in annual sulfur level ( 450   150= 300 ppm) multiplied by the volume of gasoline produced in 2002. Similarly, foreign refineries with an individual sulfur baseline can generate credits in these years as long as the annual average sulfur level of the gasoline imported to the U. S. from that refinery is lower than 90 percent of the baseline sulfur level. Although by adopting a more modest trigger for credit generation we are enabling more credits to be generated, the environment will still benefit from our program. Although the use of a more modest trigger keyed to each refinery's sulfur baseline may allow more credits to be generated, we believe this will only occur because the credit program is providing incentives to refineries to reduce sulfur levels earlier than they would have otherwise, particularly with a strict 150 ppm trigger. Thus, more lower sulfur gasoline will be in the marketplace prior to 2004 than would otherwise have occurred, given our understanding of the state of desulfurization technologies and the likely pattern of investments by the industry. With our corporate average and cap standards, sulfur levels will continue to decrease after 2004, even if individual refineries take an added year or two to meet the 30 ppm standard. We had also proposed that credit generation prior to 2004 would be different for reformulated gasoline than for conventional gasoline, because reformulated gasoline's assigned sulfur baseline was proposed to be 150 ppm. Thus, we proposed that credits could only be generated from reformulated gasoline if the sulfur level averaged below 150 ppm, and that the credits would be calculated based on the difference between 150 ppm and the new, lower average. Since we have not finalized a separate baseline for reformulated gasolines, we are not adopting a different process for generating credits from reformulated gasoline. All gasoline produced at the refinery in 2000 ( and beyond) is considered in calculating the annual average sulfur level, compliance with the 90 percent trigger, and the sulfur credits earned, if any.

VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6763 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 88 Excluding California. Several states have adopted or are considering adopting gasoline sulfur control programs ( see discussion at section IV. C. 1. d below on state sulfur programs). While we had proposed to exclude this gasoline from sulfur credit generation, we have reconsidered our position. Gasoline produced in response to state 88 requirements can be included in the refinery's calculation of sulfur credits generated in a given year. However, this gasoline will be included in the total volume of gasoline produced by that refinery, requiring the annual average sulfur level for total gasoline produced at that refinery to exceed the trigger specified above to generate any credits at all.

vii. Generating Sulfur Credits in 2004 and Beyond In 2004 and beyond, refineries, blenders, and importers can generate credits, but only if the actual annual sulfur level of all gasoline produced or imported averages below 30 ppm, and only for the difference between the standard and the actual annual sulfur average. ( For example, a refinery producing gasoline in 2005 that averages 25 ppm can generate 30   25= 5 ppm sulfur credits on the total volume of gasoline produced at that refinery.) However, since in 2004 and beyond importers are the regulated party responsible for ensuring that imported gasoline meets the sulfur standards, foreign gasoline would in effect generate sulfur credits through the importer beginning in 2004. Foreign refineries which want to send gasoline containing less than 30 ppm sulfur to the U. S. would still benefit from doing so by making appropriate arrangements with importers, which are subject to all of our standards.

viii. Using Sulfur Credits Refineries, blenders, and importers can use sulfur credits to demonstrate compliance with the 30 ppm annual average refinery standard in 2005 and beyond, if they are unable to meet the standard with actual gasoline production. During 2005 and 2006 only, refineries may use credits banked by that refinery in 2000   2003 as a result of early sulfur reductions, or credits purchased from other refineries which have banked early sulfur credits. Blenders and importers can purchase credits from refiners ( including any foreign refiners which generated early credits), or use credits they generated in 2004 and beyond. All transactions will have to be concluded by the last day of February after the close of the annual compliance period ( 2005, 2006, etc.). As discussed above, 2005 is the only year when averaging and trading against the corporate average and averaging, banking, and trading against the refinery average are both allowed. In that year, sulfur credits may only be used against the 30 ppm standard for each refinery once the refiner has demonstrated compliance with the corporate pool average standard. The refiner must meet his corporate average based on actual sulfur levels or through a trade for sulfur allotments if it falls short of the 90 ppm corporate average standard. At that point, each of his refineries is evaluated for compliance with the 30 ppm refinery average standard. Those refineries that are not producing gasoline averaging 30 ppm sulfur must obtain sulfur credits generated in 2005 or earlier and/ or sulfur allotments to bring the refinery's sulfur average from the actual level ( a maximum of 90 ppm for each refinery, since by meeting the corporate average, even if in part through the use of allotments, each refinery in the company will be considered to average no more than 90 ppm) down to 30 ppm. Refineries or importers which sell some or all of their gasoline in the GPA ( and which have elected to participate in the phase in) may also use sulfur credits to meet their refinery averages in 2004   2006. However, because this gasoline must be designated for sale in the GPA, they must account separately for compliance with the 150 ppm refinery average for gasoline sold in the phase in area and with the 30 ppm refinery average for gasoline sold outside of that area. Thus, in 2004, such refiners/ importers may use sulfur credits to establish compliance with the 150 ppm standard for gasoline sold in the phase in area, if required. In 2005 and 2006, they may use credits to meet the 150 ppm standard for gasoline sold in the area and/ or use credits to meet the 30 ppm standard for gasoline sold outside of the area. As explained in section IV. C. 1. b., some of the refiners participating in the GPA are exempt from the corporate average standards, but may use either sulfur credits or sulfur allotments in 2004   2006 to establish compliance with the 150 ppm refinery average standard. Those that are not exempt from the corporate average standards may use sulfur allotments only to meet the corporate average standards. For such refiners, compliance with the corporate average standard will be measured first ( using allotments if needed), then compliance with the refinery average standard ( using credits and/ or allotments as needed) in the same manner as described above for refiners who sell all of their gasoline outside of the GPA. Foreign refineries are not required to comply with the 30 ppm refinery standard in 2005 and beyond; instead, compliance for foreign gasoline is required by the importer. Sulfur credits generated by foreign refineries prior to 2004 will still have value, since these refineries can sell sulfur credits to U. S. refineries, blenders, or importers who need credits to meet the standard in 2005 or beyond. In fact, foreign refiner's credits could simply be transferred to the importer which is importing that refinery's gasoline into the U. S. For example, a foreign refiner could send gasoline exceeding 30 ppm on average to an importer and transfer the appropriate amount of sulfur credits it generated prior to 2004 to allow the importer to meet the 30 ppm standard. Similarly, after 2004 a foreign refiner may send gasoline containing less than 30 ppm to the U. S. through an importer, and the importer would benefit from generating credits ( and presumably would include the value of these credits in the financial transaction with the foreign refinery). As explained in Section IV. C. 3. b. above, in 2005 no batch of domestically produced or imported gasoline can exceed 300 ppm, and a refiner's/ importer's annual corporate pool average sulfur level cannot exceed 90 ppm, except for gasoline sold in the GPA or by small refiners complying with the standards in Table IV. C.   3. In 2006 and beyond, sulfur is capped at 80 ppm and there is no longer a corporate pool average standard. These standards ( as well as the 300 ppm cap and corporate pool averages) cannot be met through the use of credits generated under the ABT program. As described above, credits may only be applied to demonstrate compliance with the 30 ppm refinery standard, not to the corporate pool average or the cap. Given the limitations that the 80 ppm cap places on sulfur levels in 2006 and beyond, we do not expect many sulfur credits to be used in future years of this program ( since, even with the use of credits, no gasoline may exceed 80 ppm in these years). We allow an individual refinery that does not meet the 30 ppm standard in a particular year to carry forward the credit debt one year. Under this provision, the refinery will have to make up the credit deficit and come into compliance with the 30 ppm standard the next calendar year, or face penalties. This provision will in no way absolve the refiner from having to meet the VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6764 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations applicable per gallon cap standard or, when applicable, the corporate average standard. This provision will provide some relief for refiners faced with an unexpected shutdown or that otherwise were unable to obtain sufficient credits to meet the 30 ppm standard. This provision is only available through 2010. After that time, we expect many refineries to be able to consistently operate below 30 ppm, generating a pool of credits which other refineries could purchase in the event of an unforeseen upset. However, in no circumstances after 2005 can the refinery produce gasoline exceeding the 80 ppm pergallon cap standard ( with the exception of small refiners, as discussed in Section IV. C. 2 below). The carry forward provision does not apply to compliance with the 150 ppm refinery average standard applicable in the GPA. We have some concern that the potential exists for credits to be generated by one party and subsequently purchased or used in good faith by another, and later found to have been calculated or created improperly or otherwise determined to be invalid. For this reason, we proposed that both the seller and purchaser would have to adjust their sulfur calculations to reflect the proper credits and either party ( or both) could be deemed in violation of the standards and other requirements if the adjusted calculations demonstrate noncompliance with an applicable standard. One commenter, representing a number of refiners, objected to this approach. Nevertheless, our strong preference is to hold the credit or allotment seller liable for the violation, as opposed to the credit or allotment purchaser. As a general matter we would expect to enforce a shortfall in compliance calculations ( caused by the good faith purchase of invalid credits) against a good faith purchaser only in cases where we are unable to recover valid credits from the seller to cover the compliance shortfall. Moreover, in settlement of such cases we would strongly encourage the seller to purchase credits to cover the good faith purchaser's credit shortfall. Under the deficit provisions of section 80.205( e), for compliance periods through 2010, a credit shortfall may be corrected if the conditions of that section are met. EPA will consider covering a credit deficit through the purchase of valid credits a very important factor in mitigation of any case against a good faith purchaser, whether the purchase of valid credits is made by the seller or by the purchaser. Some commenters stated that sulfur credits should be transferred directly from the refiner or importer that generated them to the party that will use them, as we had proposed. We believe that this helps to ensure that parties purchasing credits will be better able to assess the likelihood that the credits will be valid, and aids compliance monitoring. Therefore, the final rule adopts this provision, with the exception that where a credit generator transfers credits to a refiner or importer who cannot use all the credits, that transferee may transfer the credits to another refiner or importer. That second transferee cannot again transfer the credits; they must either be used or terminated by the second transferee. Nevertheless, there is nothing in the final rule that would prevent a person who is not a refiner or importer from facilitating the transfer of credits from parties that have generated them to parties who need them for compliance, e. g., a broker who would act like a real estate broker. Therefore, under today's rule, any person may act as a credit or allotment broker, whether or not such person is a refiner or importer, so long as the title to the credits or allotments are transferred directly from the generator to the user. Furthermore, any party ( e. g., refiner, importer, or blender) who can generate and hold credits may also resell them.

ix. How Long Do Credits Last? The ABT program is designed to encourage sulfur reductions earlier than the standards require, by providing a market for credit generation. The emissions benefits of these early reductions are most valuable in the early years of the ABT program when national average levels remain substantially higher than the final 30 ppm average standard. At the same time, these emissions reductions are offset in time by higher emissions incurred by later vehicles which use gasoline with a higher sulfur level. Because the overall intention of the gasoline sulfur program is to enable and protect Tier 2 vehicles and provide time for refiners to select and construct desulfurization equipment, sulfur credits should have a limited life to limit the degree to which later Tier 2 vehicles are exposed to higher sulfur levels. The ABT program is also designed to ease implementation of the new standards, particularly the refinery average standard, and the credits will be of their greatest value to refineries during the first few years of the program. ABT is not intended to permit a refinery to operate substantially above the standard for a protracted time period. While limiting credit life may reduce the incentive to generate credits for some refineries, the credit program will be of relatively small value to any refinery/ importer that held credits for a protracted period of time and did not need to use them. This is particularly true in 2006 and beyond, when the 80 ppm cap limits the need for and value of any credits the refinery may possess. Hence, we are finalizing limitations on the life of credits which differ somewhat from our proposal. Credits generated prior to 2004 must be used for compliance purposes and calculations with respect to gasoline produced on or before December 31, 2006. These credits can be used to meet the 30 ppm standard in 2005 or 2006. This expiration date applies to credits used by the refinery which generated the credits, as well as credits transferred to another refinery. While the proposal presented a life through 2007 for credits generated early, we have shortened this life span one year to reflect the fact that early credits are intended to enable and ease compliance with the 30 ppm standard in the first years of the program, allowing refiners to spread out investments without compromising the environmental benefits of the program. At the beginning of 2006, all gasoline ( except that produced by small refiners and that marketed in the GPA) will be capped at 80 ppm, and by the end of 2006, every refinery should be capable of producing gasoline that meets the 30 ppm standard. Hence, the value of the early credits diminishes greatly. It should be noted that early credits can be used for GPA certified gasoline through 2006 and for small refiner gasoline through 2007. Credits generated in 2004 and beyond will have to be used within five years of the year in which they were generated. If these credits are traded to another party during that five year period, they will have to be used by the new owner within that same five years, regardless of when the transfer occurs. This is a change from our proposal, which provided for a potential maximum ten year life for credits that were generated and then traded in the fifth year to another party. However, we believe this approach is more consistent with our environmental goals of keeping sulfur levels averaging 30 ppm in 2006 and beyond. With the 80 ppm cap, refiners will be able to use only very few credits if they are unable to meet the 30 ppm average in 2006 or beyond. Therefore, limiting credit life to five years will likely have minimal impact on the actual use of credits. A longer credit life will make tracking and enforcement difficult, and could have negative environmental consequences. Hence, we have limited credit life to VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00068 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6765 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 89 The term `` state'' or `` states'' includes political subdivisions thereof. 90 In evaluating whether a state fuel prohibition or control is `` identical'' to a prohibition or control adopted by EPA, EPA might consider but is not limited to the following factors in comparing the measures: ( 1) The level of an emission reduction or pollution control standard; ( 2) the use of `` per gallon'' or `` averaged'' amounts in setting that level; ( 3) the effect on that level ( if averaged) of the use of different averaging pools; ( 4) the lead time allowed to the affected industry for compliance; and ( 5) the test method( s) and sampling requirements used in determining compliance. 91 In addition, EPA notes that there are existing federal NOX performance standards which apply to RFG and conventional gasoline and that state controls respecting NOX performance are also preempted under 211( c)( 4)( A). five years. Consistent with our other recordkeeping and reporting requirements, the five year expiration date will be assessed as of the last day of February after the five year deadline. Hence, for example, credits generated in 2005 will expire as of the last day of February, 2011. Again, no third party transfers are allowed.

x. Conversion of Allotments Into Credits A refiner or importer may convert allotments into credits for compliance with the refinery average standards in 2005 and beyond. Allotments that are generated by reducing gasoline sulfur levels to 30 ppm or higher ( defined as Type `` A'' allotments) are equivalent to credits generated in 2000   2003. These allotments may be ( 1) used as allotments by a refiner for compliance with the corporate average standard in 2004 and 2005 or ( 2) converted into credits to be used by the refiner's refineries for compliance with the refinery average standard in 2005 and 2006. Allotments that are generated by reducing gasoline sulfur levels to lower than 30 ppm ( defined as Type `` B'' allotments) are equivalent to credits generated in 2004 and beyond ( by producing gasoline with less than 30 ppm sulfur). Similar to Type `` A'' allotments, these allotments may be ( 1) used as allotments by a refiner for compliance with the corporate average standard in 2004 and 2005 or ( 2) converted into credits to be used by the refiner's refineries for compliance with the refinery average standard in 2005 and beyond. Allotments or credits that are used by refiners for compliance with the GPA gasoline standards must be used by the last day of February 2007. Allotments or credits used by small refiners for compliance with the small refiner standards must be used by the last day of February 2008. Any allotments, whether Type `` A'' or `` B'', that are carried over for compliance with the corporate and refinery average standards for 2005 must be discounted by 50 percent as discussed in above. Any allotments that are converted to credits ( e. g., in 2004) and then carried over to 2005 are not discounted. However, once the conversion and carry over has taken place ( such that the allotments have become credits), the conversion cannot be reversed without applying the discount factor. That is to say, once a 2003 or 2004 allotment is converted to a credit and carried over to 2005, the credit can only be re converted into an allotment that is discounted 50 percent. d. How Are State Sulfur Programs Affected by EPA's Program? Section 211( c)( 4)( A) of the CAA prohibits states 89 from prescribing or attempting to enforce controls or prohibitions respecting any fuel characteristic or component if EPA has prescribed a control or prohibition applicable to such fuel characteristic or component under section 211( c)( 1). This preemption applies to all states except California, as explained in section 211( c)( 4)( B). For states other than California, the Act provides two mechanisms for avoiding preemption. First, section 211( c)( 4)( A)( ii) creates an exception to preemption for state prohibitions or controls that are identical 90 to the prohibition or control adopted by EPA. Second, states may seek EPA approval of SIP revisions containing fuel control measures, as described in section 211( c)( 4)( C). EPA may approve such SIP revisions, and thereby `` waive'' preemption, only if it finds the state control or prohibition `` is necessary to achieve the national primary or secondary ambient air quality standard which the plan implements.'' We are adopting the sulfur standards pursuant to our authority under section 211( c)( 1). Thus, we believe that today's action results in the clear preemption of future state actions to prescribe or enforce fuel sulfur controls. 91 States with fuel sulfur control programs not already approved into their SIPs will therefore need to obtain a waiver from us under the provisions described in section 211( c)( 4)( C) for all state fuel sulfur control measures, unless the state standard is identical to our sulfur standard. Section 211( c)( 4)( A) preempts state fuel controls if EPA has `` prescribed'' federal controls. We read this language to preempt non identical state standards on the date of promulgation of the standards, as opposed to the date the standards become enforceable. Thus, today's action preempts state actions as of December 21, 1999, even though the standards will not require sulfur reductions until 2004. This interpretation is consistent with EPA actions applying other federal fuel measures. See 54 Fed. Reg. 19173 ( May 4, 1989) ( noting preemption of Massachusetts state RVP measure before start of first control period for federal RVP). We also believe this interpretation is consistent with the intent behind section 211( c)( 4)( A). Though the standards are not immediately enforceable, they will have an immediate impact on refiners' investment decisions. We believe, by adopting 211( c)( 4)( A), Congress intended to limit state fuel controls that differ from the federal programs, for example, in the judgments as to level of the standard or its stringency. The lead time to implement a standard should be treated the same way. Aside from the explicit preemption in Section 211( c)( 4)( A), a court could also consider whether a state sulfur control is implicitly preempted under the Supremacy Clause of the U. S. Constitution. Courts have determined that a state law is preempted by federal law where the state requirement actually conflicts with federal law by preventing compliance with both federal and state requirements, or by standing as an obstacle to accomplishment of Congressional objectives. A court could thus consider whether a given state sulfur control is preempted, notwithstanding waiver of preemption under 211( c)( 4)( C), if it places such significant cost and investment burdens on refiners that refiners cannot meet both state and federal requirements in time, or if the state control would otherwise meet the criteria for conflict preemption.

2. Hardship Provision for Qualifying Refiners This section describes various provisions for certain qualifying refiners who may face hardship circumstances.

a. Hardship Provision for Qualifying Small Refiners In developing our gasoline sulfur program, we evaluated the need and the ability of refiners to meet the 30/ 80 standards as expeditiously as possible. This analysis is described in detail in the RIA. As a part of this analysis, we found that while the majority of refiners would be able to meet the needed air quality goals in the 2004   2006 time frame, there would be some refiners who would face particularly difficult circumstances which would cause them to have more difficulty, in comparison VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6766 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations to the industry as a whole, in meeting the standards. In order to ensure that the vast majority of the program could be implemented reasonably quickly in order to achieve the air quality benefits sooner, rather than basing the time frame on the lowest common denominator we have provided an extended phase in for a small group of refiners that represents less than four percent of the overall gasoline volume, and a much smaller percentage in the areas of greatest environmental need. As described in more detail below, and in Chapter VIII of the RIA, we concluded that refineries owned by small businesses face unique hardship circumstances, compared to larger companies. The primary reason for this consideration is that small businesses lack the resources available to large companies which enable the large companies ( including those large companies that own small volume refineries) to raise capital for investing in desulfurization equipment. The small businesses are also likely to have insufficient time to secure loans, compete for engineering resources, and complete construction of the needed desulfurization equipment in time to meet the standards adopted today which begin in 2004. The emissions benefits of low sulfur gasoline are needed as soon as possible, for two primary reasons: ( 1) To reduce ozone and other harmful air pollutants, and ( 2) to enable vehicle emissions control technology for Tier 2 vehicles. Since our analysis showed that small businesses in particular face hardship circumstances, we are adopting temporary, interim standards that will provide refineries owned by small businesses additional time to meet the ultimate 30 ppm refinery average and 80 ppm per gallon cap standards. This approach allows us to achieve the needed emission reductions in the 2004   2007 time frame because hardship circumstances are expected to be faced by only a small portion of the refining industry. We believe that these temporary, interim standards are an effective way to phase in the low sulfur standards as expeditiously as is feasible thereby achieving significant air quality benefits in an expeditious manner. This section describes the special provisions we are offering small businesses to mitigate the impacts of our program on them and generally explains the process we undertook to analyze those impacts. Please refer to the RTC document for a detailed discussion of comments received on these provisions, and to the RIA for a more detailed discussion of our analysis of small refiner circumstances. As explained in the regulatory flexibility analysis in Section VIII. B. of this document and in Chapter 8 of the RIA, we considered the impacts of our proposed regulations on small businesses. We have historically, as a matter of practice, considered the potential impacts of our regulations on small businesses, as discussed in more detail in Section IV. C. 2. a. ii., below. The analysis of small business impacts conducted for this rulemaking was performed in conjunction with a Small Business Advocacy Review ( SBAR) Panel we convened, pursuant to the Regulatory Flexibility Act as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 ( SBREFA). We believe that the temporary, interim standards we are adopting for small refiners contributed to our development of a framework to achieve significant environmental benefits from lower sulfur gasoline in the most expeditious manner that is reasonably practicable. In the SBREFA amendments, Congress stated that `` uniform Federal regulatory * * * requirements have in numerous instances imposed unnecessary and disproportionately burdensome demands including legal, accounting, and consulting costs upon small businesses * * * with limited resources[,]'' and directed agencies to consider the impacts of certain actions on small entities. The final report of the Panel is available in the docket. Through the SBREFA process, the Panel provided information and recommendations regarding: · The significant economic impact of the proposed rule on small entities; · Any significant alternatives to the proposed rule which would ensure that the objectives of the proposal were accomplished while minimizing the economic impact of the proposed rule on small entities; · The projected reporting, recordkeeping, and other compliance requirements of the proposed rule; and, · Other relevant federal rules that may duplicate, overlap, or conflict with the proposed rule. In addition to our participation in the SBREFA process, we conducted our own outreach, fact finding, and analysis of the potential impacts of our regulations on small businesses. Many of the small refiners with whom we and the Panel met indicated their belief that their businesses may close due to the substantial costs, capital and other, of meeting the 30/ 80 standard without additional time. Based on these discussions and our data analysis, the Panel and we agree that small refiners would likely experience a significant and disproportionate economic hardship in reaching the objectives of our gasoline sulfur reduction program. However, the Panel also noted that the undue burden imposed upon the small refiners by our sulfur requirements could be alleviated with additional time for compliance. We agree with the Panel on both of these points. For today's action, we have structured a temporary, interim compliance flexibility for qualifying small refiners, both domestic and foreign, based on the factors described below. Specifically, we structured this provision to address small refiner hardship while achieving air quality benefits expeditiously and ensuring that the reductions needed in gasoline sulfur coincide with the introduction of Tier 2 vehicles. First, the compliance deadlines in the program, combined with flexibility for small refiners, will achieve the air quality benefits of the program quickly, while ensuring that small refiners will have adequate time to raise capital for infrastructure changes. Many, if not most, small refiners have limited, if any, additional sources of income beyond their refinery for financing the equipment necessary to produce low sulfur gasoline. Because these small refiners typically do not have the financial backing that larger and generally more integrated companies have, they need additional time to secure capital financing from their lenders. Second, we believe that allowing time for sulfur reduction technologies to be proven out by larger refiners before small refiners have to put them in place would reduce the risks incurred by small refiners who utilize these technologies to meet the standards. The added time would likely allow for costs of these desulfurization units to decrease, thereby limiting the economic consequences for small refiners. Small refiners are disadvantaged by the economies of scale that exist for the larger refining companies   capital costs and per barrel fixed operating costs are generally higher for them. Finally, providing small refiners more time to comply would ensure that adequate engineering and construction resources would be available. Since most large and small refiners will need to install additional processing equipment to meet the sulfur requirements, there will be a tremendous amount of competition for technology services, engineering manpower, and construction management and labor. Our analysis VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6767 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations shows that there are limitations to the elasticity of these resources. In addition, vendors will be more likely to contract their services with the major companies first, as their projects will offer larger profits for the vendors. Providing this flexibility to allow small refiners to deal with hardship circumstances enables us to go forward with the phase in of the 30 ppm sulfur standard beginning in 2004. Without this flexibility, it is possible that the benefits of the 30 ppm standard would not be achieved as quickly. By providing temporary relief to those refiners that need additional time, we are able to adopt a program that reduces gasoline sulfur levels expeditiously and in a way that is feasible for the industry as a whole. In addition, we believe the volume of gasoline that will be eligible for the interim standards is small. We estimate that small refiners produce approximately four percent of all gasoline used in the U. S., excluding California. In most cases, gasoline produced by refiners is mixed with substantial amounts of other gasoline prior to retail distribution ( due to the nature of the gasoline distribution system). This mixing generally results in only marginal increases in overall sulfur levels. Thus, the sulfur level of gasoline actually used by Tier 2 vehicles should generally be much lower than that produced by individual small refineries under this provision.

i. How Are Small Refiners Defined?

How We Defined `` Small'' Refiner in the Proposal In identifying the small refiners most susceptible to the economic challenge of meeting the low sulfur requirements, we closely examined the Small Business Administration's ( SBA) definition of small refiner for the purposes of regulation. In that assessment we concluded that the SBA definition provided a reasonable metric for identifying small refiners that would be significantly impacted by the sulfur program requirements. By adopting the SBA definition we could expeditiously provide certainty of small refiner status to refiners who applied for the temporary compliance flexibility. Specifically, we proposed a definition where any petroleum refining company having no more than 1,500 employees throughout the corporation as of January 1, 1999 could apply for the temporary compliance flexibilities. This proposed employee limit included any subsidiaries, regardless of the number of individual gasoline producing refineries owned by the company or the number of employees at any given refinery. While we proposed a definition based on corporate employment, in light of the SBA definition and the SBAR Panel's recommendations, we also sought comment on alternative definitions of a small refiner. Such alternatives included definitions based on volume of crude oil processed ( at a given refinery and/ or corporate wide) or volume of gasoline produced, with the understanding that any relief offered to refiners must not substantially reduce the program's environmental benefits.

Our Revised Small Refiner Definition Based on comments received on the proposal, we are making two changes to our definition of a small refiner: we are ( 1) revising the employee number criterion; and, ( 2) adopting a cap on the corporate crude oil capacity for a refining company to qualify as a small business under today's regulations. In regard to the employee number criterion, we are modifying how the employee number is determined, based on comments received from SBA. As mentioned above, our proposed definition applied to any petroleum refining company having no more than 1,500 employees throughout the corporation as of January 1, 1999. We selected that date to prevent companies from `` gaming'' the system. However, as SBA pointed out in its comments, the Small Business Act regulations specify that, where the number of employees is used as a size standard, as we proposed for small refiners, size determination is based on the average number of employees for all pay periods during the preceding 12 months. Since we intended to use SBA's size standard in our proposal, we are incorporating that definition correctly in today's action. It is also worth mentioning that SBA shares our concerns about preventing companies from gaming the system and that it solved this problem specifically by using the average employment over 12 months. In effect, this approach helps to prevent companies from applying for and receiving small refiner status in bad faith. An example of an inappropriate application for small refiner status would be a refiner that temporarily reduced its workforce from 1600 employees to 1495 employees immediately before January 1, 1999 and then immediately rehired those employees after that cutoff date. Furthermore, the averaging concept was designed to properly address firms with seasonal fluctuations, according to SBA. Second, we're amending the small refiner definition to include a corporate crude oil capacity cap. We believe such a corporate volume limitation is necessary to ensure that only truly small businesses benefit from the relaxed interim standards. Refineries that process large amounts of crude are likely to be better able to install desulfurization equipment to meet the national standards in 2004. In addition to ensuring that the interim standards target the appropriate group of refiners that need additional time, the volume limit also serves to ensure that the volume of gasoline subject to such standards is not significant. In addition, we received many comments that we should adopt a threshold based on crude capacity as specified in the Clean Air Act and used in past EPA fuel programs. In the lead phase down program for gasoline, we used a definition of `` small refinery'' that Congress adopted in 1977 specifically for the lead phase down program. The definition was based on crude oil or feedstock capacity at a particular refinery ( less than or equal to 50,000 barrels per calendar day ( bpcd)), combined with total crude oil or feed stock capacity of the refiner that owned the refinery ( less than or equal to 137,500 bpcd). In 1990, the lead phasedown program was complete and Congress removed this provision from the Act. Shortly before the Act was amended in 1990, we set standards for sulfur content in diesel fuel, including a twoyear delay for small refineries. We used the same definition of small refinery as we used in the lead phase down program. This two year delay, like many of the small business flexibilities in our gasoline sulfur proposal, was aimed at problems that small refineries faced in raising capital and in arranging for refinery construction. In the 1990 amendments to the Clean Air Act, Congress rejected this small refinery provision, and instead allocated allowances to small diesel refineries under the Title IV Acid Rain program. ( See CAA Section 410( h).) This approach was also aimed at helping small refineries solve the problem of raising the capital needed to make investments to reduce diesel sulfur. Congress provided allowances to small refineries that met criteria similar to that used in the lead phase down provision   based on the crude oil throughput at a particular refinery, combined with the total crude oil throughput of the refiner that owned the refinery. As mentioned above, the CAA definition was based on crude oil or feedstock capacity at a particular refinery, combined with total crude oil VerDate 27< JAN> 2000 21: 29 Feb 09, 2000 Jkt 190000 PO 00000 Frm 00071 Fmt 4701 Sfmt 4700 E:\ FR\ FM\ 10FER2. SGM pfrm08 PsN: 10FER2 6768 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Rules and Regulations 92 Company means the business structure of the refinery whether privately or publicly owned. or feed stock capacity of the refiner that owned the refinery ( less than or equal to 137,500 bpcd). However, given the mergers, acquisitions, and other changes that have transpired throughout the refining industry in the past few years, we believe the appropriate boundary today is a corresponding corporate crude capacity less than or equal to 155,000 bpcd. Therefore, in consideration of the above, a refiner must meet both of the following criteria to qualify for the special small refiner provisions described in the next section: · No more than 1500 employees corporate wide, based on the average number of employees for all pay periods from January 1, 1998 to January 1, 1999; and · A corporate crude capacity less than or equal to 155,000 bpcd for 1998.

ii. Standards That Small Refiners Must Meet Upon careful review of the comments received on the proposal as well as the recommendations of the SBAR Panel, we have determined that regulatory relief in the form of delayed compliance dates is appropriate to allow small refiners, both foreign and domestic, to comply with our regulations without disproportionate burdens. From 2004 to 2007, when U. S. refiners must meet the 30/ 80 standard or the standards listed in Table IV. C   1 if they are participating in our ABT program, refiners meeting the corporate employee and capacity limits prescribed above are allowed to comply with somewhat less stringent requirements. These interim annualaverage standards for qualifying small refiners are shown in Table IV. C   3 below.

TABLE IV. C   3.   TEMPORARY GASOLINE SULFUR REQUIREMENTS FOR SMALL REFINERS IN 2004   2007 Refinery baseline sulfur level ( ppm) Temporary Sulfur Standards ( ppm)

Average Cap 0 to 30 ................................................................ 30 ppm ............................................................. 300 ppm. 31 to 200 ............................................................ Baseline Level .................................................. 300 ppm. 201 to 400 .......................................................... 200 ppm ........................................................... 300 ppm. 401 to 600 .......................................................... 50% of baseline ............................................... Factor of 1.5 times the average standard. 601 and above ................................................... 300 ................................................................... 450.

The cap standards for the first two `` bins'' of refineries ( that is those with baseline sulfur levels from zero to 30 and 31 to 200) have been relaxed somewhat from the proposal based on comments that the proposed standards for these two bins were more stringent than the options under discussion for all other refiners. We believe that these small refiners should be able to meet the average standards without much, if any, change to their operations but the more lenient cap will give them some flexibility for turnarounds or unexpected equipment `` upsets''. Compliance with the standards in Table IV. C   3 is based on a refiner's demonstration that it meets our specific small refiner criteria. Refiners who qualify as a small refiner under our definition must establish a sulfur baseline for each of their participating refineries. The following sections explain these requirements in more detail to supplement the information presented above. We also explain how small refiners can apply for an extension of up to two additional years of the applicable small refiner standards, based on a variety of factors such as technology availability or financial hardship.

iii. How Do Small Refiners Apply for Small Refiner Status?

Refiners seeking small refiner status under our gasoline sulfur program must apply to us in writing no later than December 31, 2000, requesting this status. This application for small refiner status must contain the information described below. Companies 92 seeking small refiner status must provide us with the following information:

Employment Information · A listing of the name and address of each location where any employee of the company worked during the 12 months preceding January 1, 1999. · The average number of employees at each location based upon the number of employees for each of the company's pay periods for the 12 months preceding January 1, 1999. · The type of business activities carried out at each location.

Crude Capacity Information · The total corporate crude oil capacity of the refiner as reported to the Energy Information Administration ( EIA) of the U. S. Department of Energy ( DOE). For refineries owned by joint ventures, the total employment of both ( all) companies must be considered in determining whether the 1,500 employee limit is met. In addition, a refiner who reactivates a refinery that was shut down or non operational between January 1, 1998 and January 1, 1999, may apply for small refiner status no later than June 1, 2002. In this case, we will consider the information provided to determine the correct period for judging compliance with the 1500 threshold. Where appropriate we will look at the most recent 12 months of employment information. Refiners seeking small refiner status must also provide us with the total crude capacity of their corporation ( the sum of all individual refinery capacities for multiple refinery companies, including any and all subsidiaries) as reported to EIA for 1998 ( published by EIA in 1999). The information submitted to EIA is presumed to be correct. However, in cases where a company disputes this information, we will allow 60 days after the company submits its application for small refiner status for that company to petition the Agency with the appropriate data to correct the record. For reactivated refineries owned by a small refiner, we will consider the information provided to determine the correct period for judging compliance with the corporate capacity threshold. Where appropriate, we will look at the most recent year of crude capacity information. If a refiner with approved small refiner status later exceeds the 1,500 employee threshold without merger or acquisition or the corporate capacity of 155,000 bpcd, its refineries could keep their individual refinery standards. This is to avoid stifling normal company growth and is subject to our finding that the company did not apply for and receive the small refiner status in bad faith.