emission standards. Manufacturers must verify their design by testing a
complete production engine and catalysts in its final assembled
configuration. It is important to note that this allowance does not
limit in any way the manufacturers' or operators' obligations with
respect to safety for catalyst systems, such as those specified by
Coast Guard.
(d) Testing Production Engines
    Under the current regulations, manufacturers must test a sample of
their Category 1 and Category 2 engines during production. We are now
finalizing similar provisions for Category 3 engines. While in the past
we did not believe that such testing was necessary, circumstances have
changed in two important ways. First, relatively inexpensive portable
test systems have recently become available. This greatly reduces the
cost of testing an engine in a ship. Second, the need to verify that
production engines actually comply with the emission standards
increases as standards become more stringent and emission control
technologies become more complicated.
    Specifically, every new Tier 2 or later Category 3 engine must be
tested during the vessel's sea trial to show compliance with the
applicable NOX standard. Any engine that fails to comply
with the standard will need to be repaired and retested. Since we are
not finalizing PM standards for Category 3 engines, and because PM
measurement is more difficult than measuring only gaseous emission, we
will not require PM measurement during testing after

installation, provided PM emissions were measured during certification.
    One concern that manufacturers have raised in the past is that it
can be difficult to achieve the exact test points in use. Therefore, we
are allowing manufacturers flexibility with respect to test points when
testing production engines, consistent with the equivalent allowance
under the NOX Technical Code. Where manufacturers are unable
to duplicate the certification test points during production testing,
we are allowing them to comply with an alternate ``at-sea standard''
that is 10 percent higher than the otherwise applicable standard. This
is specified in Sec.  1042.104(g).
    Since we are requiring testing of every production engine, we are
also excluding Category 3 engines from selective enforcement audits
under 40 CFR part 1068.
(e) PM Measurement
    We are requiring manufacturers to measure PM emissions along with
NOX, HC, and CO during certification testing to report these
results along with the other test data. This is similar to our recently
proposed requirement for manufacturers to measure and report certain
greenhouse gas emissions for a variety of nonroad engine sectors.\109\
Manufacturers should be able to collect these data using stand-alone
partial flow PM measurement systems. In recent years, several vendors
have developed such systems to be compliant with the requirements of
1065.
---------------------------------------------------------------------------

    \109\ 74 FR 16448, April 10, 2009.
---------------------------------------------------------------------------

    It is worth noting that in the past, there has been some concern
regarding the use of older PM measurement procedures with high sulfur
fuels. The primary issue of concern was variability of the PM
measurement, which was strongly influenced by the amount of water bound
to sulfur. However, we believe improvements in PM measurement
procedures, such as those specified in 40 CFR 1065, have addressed
these issues of measurement variability. The U.S. Government recently
submitted proposed procedures for PM measurement to IMO.\110\
---------------------------------------------------------------------------

    \110\ ``Measurement Method For Particulate Matter Emitted From
Marine Engines,'' Submitted by the United States to the
International Maritime Organization Intersessional [sic] Meeting Of
the BLG Working Group On Air Pollution, 5 October 2007.
---------------------------------------------------------------------------

(2) Low Power Operation and Mode Caps
    Emission control performance can vary with the power at which the
engine operates. This is potentially important because Category 3
engines can operate at relatively low power levels when they are
operating in port areas. Ship pilots generally operate engines at
reduced power for several miles to approach a port, with even lower
power levels very close to shore. The International Organization for
Standardization (ISO) E3 and E2 test cycles, which are used for
emission testing of propulsion marine engines, are heavily weighted
towards high power. In the absence of other requirements, it would be
possible for manufacturers to meet the cycle-weighted average emission
standards without significantly reducing emissions at low-power modes.
This could be especially problematic for Tier 3 engines relying on
urea-SCR for NOX control, since the effectiveness of the
control is directly affected by the amount of urea that is injected and
there would be an obvious economic incentive for manufacturers and
operators to minimize the amount of urea injected.
    We are addressing these concerns in two ways. First, we are
applying mode caps for NOX emissions that will ensure that
manufacturers design their emission controls to be fully effective at
25 percent power. This will require that manufacturers meet the
applicable NOX standard at each individual test point, and
not merely as a weighted average of the test points. The caps will only
apply for NOX emissions, and manufacturers will not be
required to meet the HC and CO standards at each test point. For HC and
CO, manufacturers will only be required to meet the applicable
standards as a weighted average of the test points.
    The other concern is related to power levels other than the test
points. To address this, we will continue to rely on our prohibition of
defeat devices to ensure effective control for lower powers. Most
significantly, this will prohibit manufacturers from turning off the
urea supply to SCR systems at these points, unless the exhaust gas
temperature was too cool for the SCR catalyst to function properly.
(Urea at these low temperatures does not react with NOX
molecules and can lead to high emissions of ammonia.)
(3) On-Off Technologies
    Many of the technologies that are projected to be used to meet the
Tier 3 NOX standards (such as SCR, water injection, and EGR)
are not integral to operation of the engine, allowing the engine to be
operated without them. They will also require the operator to supply
the proper reductant. Thus, these technologies are potentially ``on-
off'' technologies. Switching to distillate fuel instead of residual
fuel to reduce SOX and PM emissions can be thought of in the
same way.
    The increased operating costs of such controls associated with urea
(or other reductants) or with distillate usage suggest that it may be
reasonable to allow these systems to be turned off while a ship is
operated on the open ocean, far away from sensitive areas that are
affected by ship emissions. This is the basis of the MARPOL Annex VI
ECA approach, with one set of limits that would apply when ships are
operated in sensitive areas and another that would apply when ships are
operated outside those designated areas.
    We are finalizing the proposed regulatory provision in Sec.
1042.115(g) to address the use of on-off technologies on Category 3
engines subject to the Tier 3 standards. This provision will require
the manufacturer to obtain EPA approval to design the engines to have
on-off features. It will also require the engine's onboard computer to
record the on-off operation (including geographic position and time)
and require that the engine comply fully with the Tier 2 standards when
the Tier 3 controls are turned off.
    In response to comments, we are expanding this option slightly to
address other possible technological solutions. In particular, we will
allow a manufacturer to design the system to have a Tier 3 mode and a
Tier 2 mode that correspond to ``on'' and ``off,'' without regard to
whether any given controls are turned on or off. For example, under
this allowance, a manufacturer could design the system to have a Tier 2
(off) mode in which the SCR system continues to function, while engine-
out emissions are increased. Such a design would be allowed as long as
the emission downstream of the aftertreatment met the Tier 2 standards.
    Our goal is to require manufacturers to comply with the Tier 3
standards in all areas where the emissions significantly affect U.S.
air quality. We expect that all such areas will also ultimately be
included in one or more Emission Control Areas. We describe a North
American ECA in Section V.A, which is intended to include most areas
where the emissions significantly affect U.S. air quality. However, we
have not yet determined the extent to which Category 3 engines affect
air quality in other areas--specifically, the U.S. territories, areas
of Alaska west of Kodiak, the smallest Hawaiian islands, or Puerto Rico
and the U.S. Virgin Islands. Therefore, we are including an interim
provision to exclude those areas with respect to the Tier 3 standards
at this time. We will revisit this should our review of available
modeling results or

other information indicate that compliance with the Tier 3 standards
should be required for some or all of these areas.
(4) NOX Monitoring
    Category 3 engines equipped with on-off controls must be equipped
to continuously monitor NOX concentrations in the exhaust.
Engine manufacturers will be required to include systems to
automatically alert operators of any operation with the emission
controls on where NOX concentrations indicate malfunctioning
emission controls. We are also requiring the engine to record in
nonvolatile computer memory any such operation. However, we are not
requiring monitoring NOX concentrations during operation for
which the emission controls are allowed to be turned off, provided the
record indicated that the controls were turned off. Where the
NOX monitor system indicates a malfunction, operators will
be required to investigate the cause and make any necessary adjustments
or repairs.
    We are defining as a malfunction of the emission controls any
condition that would cause an engine to fail to comply with the
applicable NOX standard (See Section VI.A.1.d for a
discussion of standards that will apply for installed engines at sea).
Such malfunctions could include maladjustment of the engine or
controls, inadequate reductant, or emission controls turned off
completely. We recognize that it is not possible to perfectly correlate
a measured NOX concentration with an equivalent cycle-
weighted emission result. Therefore, the requirement will allow engine
manufacturers to exercise good engineering judgment in using measured
NOX concentrations to monitor the emission performance of
the engine. Should manufacturers decide that it would be helpful to
have a less subjective (and less flexible) requirement, we will be
willing to work with them to make such improvements to this provision
through a future rulemaking.
(5) Parameter Adjustment
    Given the broad range of ignition properties for in-use residual
fuels, we expect that our in-use adjustment allowance for Category 3
engines will result in a broad range of adjustment. We requested
comment on a requirement for operators of ships equipped with
NOX monitors to perform a simple NOX check test
to confirm emissions after parameter adjustments or maintenance
operations, using onboard emission measurement systems with electronic-
logging equipment. While we are not adopting such a requirement at this
time, we may do so in the future should we determine that these engines
are being improperly adjusted in use.
(6) In-Use Liability
    Under the Tier 1 program for Category 3 engines, owners and
operators are required to maintain, adjust, and operate the engines in
such a way as to ensure proper function of the emission controls. These
requirements, which are described in 40 CFR 94.1004, are being
continued in the regulations in part 1042 (See Sec.  1042.660 of the
finalized regulations for these requirements). Owners will also
continue to be required to keep certain records onboard the vessel and
report annually to EPA whether or not the vessel has complied with
these and other requirements.
    Specifically, these provisions require that all maintenance,
repair, adjustment, and alteration of the engine be performed using
good engineering judgment so that the engine continues to meet the
emission standards. Each two-hour period of operation of an engine in a
condition not complying with this requirement will be considered a
separate violation. Some commenters expressed concern that treating
each two-hour period of operation as a separate violation would be
inappropriate for events that occur while the vessel is out at sea.
These commenters correctly noted that where a repair cannot be made at
sea, the operator has no choice but to continue operating the vessel in
its noncompliant condition. Therefore, we are revising the regulations
to clarify that we would not consider operating a vessel in need of
repair to be a violation, if such a repair was not possible.
(7) Replacement Engines
    The existing provisions of Sec.  1042.615 provide an exemption that
allows manufacturers to produce new uncertified engines when they are
needed to replace equivalent existing engines that fail prematurely.
For many engine sectors, this practice is common, but represents a very
small faction of a manufacturer's total engine production. We do not
believe this practice is either common or necessary for Category 3
engines, and therefore we proposed to not allow this exemption for
Category 3 engines. However, engine manufacturers commented that there
have been infrequent but real occurrences where they have needed to
provide a Category 3 replacement engine in response to premature engine
failure. To address this concern, we are finalizing a provision that
would allow us to make an exception in very unusual circumstances and
allow a manufacturer to make a new Category 3 engine that is exempt
from current emission standards. Even for the rare case where
manufacturers would need to supply a replacement Category 3 engine, we
would expect them generally to be able to provide a certified engine.
It is clear that removing a failed engine and installing a replacement
will involve a very significant effort; we would expect this effort to
include reasonable modifications to accommodate a certified engine even
if it was somewhat different than the engine being replaced. However,
if manufacturers can demonstrate under Sec.  1042.615 that no certified
engine has the physical and performance characteristics to properly
power the vessel, they may produce a new engine that is exempt from
emission standards. This may be most likely for vessels that have
paired Category 3 engines where one of the engines fails prematurely
and cannot be repaired without being removed from the vessel.
    It is also important to note that the provisions of Annex VI
related to replacement engines also apply. This generally limits
replacement engines to those that are identical to the engines being
replaced.

B. Compliance Provisions To Implement Annex VI NOX Regulation and the
NOX Technical Code

    In addition to the Clean Air Act provisions being finalized in this
action, we are also establishing new regulations to implement certain
provisions of the Act to Prevent Pollution from Ships. These
regulations are a new part 1043 of title 40.
    The Act to Prevent Pollution from Ships establishes a general
requirement for vessels operating in the exclusive economic zone and
navigable waters of the United States to comply with MARPOL Annex VI.
It also gives EPA and the Administrator the authority to further
implement MARPOL Annex VI. Many of the requirements relating to
NOX emissions and fuel sulfur limits can be implemented
without the need for further elaboration because the Annex, along with
the NOX Technical Code, provides instructions on how to
demonstrate compliance with those requirements. However, APPS
authorizes the Administrator to prescribe any necessary or desired
additional regulations to assist in carrying out the provisions of
Regulations 12 through 19 of Annex VI (see 33 U.S.C. 1903(c)(2)).
Specifically, the regulations being finalized in this FRM in part 1043
of title 40 are

intended to assist in the implementation of the engine and fuel
requirements contained in Regulation 13, 14, and 18 of MARPOL Annex VI.
They address such issues as how to obtain an Engine International Air
Pollution Prevention (EIAPP) certificate (which is equivalent in many
ways to a Clean Air Act certificate of conformity), exemptions for
vessels used exclusively in domestic service, and requirements for
vessels not registered by a country that is a Party to Annex VI.
    The requirements being finalized in part 1043 will generally begin
July 1, 2010. However, the ECA NOX requirements will not
begin until the Tier 3 NOX standards begin (or when the ECA
enters into force for the U.S., whichever is later), and the ECA fuel
requirements will not begin until 12 months after the ECA enters into
force for the U.S., as provided by Annex VI. It is also important to
clarify that Annex VI itself was effective for the United States as of
January 8, 2009. The requirement of the Annex for ships to have a valid
International Air Pollution Prevention (IAPP) certificate applies for
U.S. vessels based on when the keel is laid and when it is dry-docking.
Vessels for which keels were laid (or which were at a similar stage of
construction) before January 8, 2009 must have on board a valid IAPP
certificate no later than the first scheduled dry-docking, but in no
case later than January 8, 2012. Vessels for which keels are laid (or
which are at a similar stage of construction) after January 8, 2009
must have on board a valid IAPP certificate upon completion of its
initial survey before the ship is placed into service.
    The MARPOL Annex VI NOX requirements apply to all marine
diesel engines above 130 kW. Similarly, the MARPOL Annex VI fuel
requirements apply to all fuel oil used onboard a vessel, defined as
any fuel delivered to and intended for combustion purpose for
propulsion or operation on board any ship, including distillate and
residual fuels. Thus the part 1043 compliance program described here
applies somewhat more broadly than the Clean Air Act compliance program
described earlier for Category 3 engines.
    It is worth noting that while APPS generally requires compliance
with Annex VI and future amendments to Annex VI, we have incorporated
by reference the existing 2008 version of the Annex for certain
purposes. Specifically, we require compliance with the 2008 Annex VI
NOX and fuel requirements by non-Party vessels and require
compliance with the ECA requirements by all vessels in our internal
waters; both of these issues are discussed later. We fully expect to
update this incorporation by reference whenever aspects of the Annex
relating to these provisions are amended. However, we recognize that it
is possible that there will be a brief period during which the
incorporated version differs slightly from any amended provisions. To
the extent that occurs, vessels in our internal waters and non-Party
vessels would be subject to the requirements in the 2008 version (or
the latest version that has been incorporated by reference).
    In Sec.  1043.1(d), we clarify that these regulations do not limit
requirements that would otherwise apply pursuant to APPS, except for
excluding domestic vessels from the Annex VI NOX standard
(consistent with the allowance in Regulation <IP_ADDRESS> of the Annex).
(1) EIAPP Certificates
    In general, an engine can be dual-certified under EPA's Clean Air
Act marine diesel engine program and the MARPOL Annex VI/APPS program.
However, we require that engine manufacturers submit separate
applications for the 1042 and EIAPP certificates. The regulations in
part 1043 specify the process that would apply. The process for
obtaining the EIAPP is very similar to the process for obtaining a
certificate of conformity under part 1042, and although there are
differences between the programs, manufacturers should be able to
comply with both programs with very little additional work. The primary
differences are that, to certify to the MARPOL Annex VI standards, the
manufacturer must include a copy of the Technical File and onboard
NOX verification procedures (as specified in Section 2.4 of
the NOX Technical Code) and is not required to provide
information about useful life, emission labels, deterioration factors,
or PM emissions.\111\ Engine manufacturers will be able to apply for
both certifications using the same certification templates and test
data.
---------------------------------------------------------------------------

    \111\ See 68 FR 9746, February 28, 2003, at 9774-5 for a
discussion of these differences as they relate to Category 3 marine
diesel engines.
---------------------------------------------------------------------------

    Consistent with our 1042 program, our 1043 program will require
that each engine installed or intended to be installed on a U.S.-
flagged vessel have an EIAPP before it is introduced into U.S.
commerce. The finalized regulations will create a presumption that all
marine engines manufactured, sold, or distributed in U.S. commerce will
be considered to be intended to be installed on a U.S.-flagged vessel,
although this presumption could be rebutted by clear and convincing
evidence to the contrary (evidence that the engine is intended for
export, for example). We will also require that all engines that are
intended only for domestic use be labeled as such. Thus, all engines
not labeled for domestic use will be presumed to be intended for use on
vessels subject to part 1043.
(2) Approved Methods
    The 2008 amendments to MARPOL Annex VI added a new provision to the
engine standards in Regulation 13 that extends the Tier I
NOX limits to certain engines installed on ships constructed
on or after January 1, 1990 through December 31, 1999. Specifically,
engines with power output greater than 5,000 kW and with per cylinder
displacement at or above 90 liters installed on such ships would be
required to meet the Tier I NOX limits if a certified
Approved Method is available. An Approved Method may be certified by
the Administration of any flag state, but once one is registered with
the IMO the owner of such an engine must either install the Approved
Method or demonstrate compliance with the Annex VI Tier I limits
through some other method. We are including a regulatory section
codifying this requirement. These regulations are contained in Sec.
1043.50.
(3) Other Annex VI Compliance Requirements
    Engine manufacturers, vessel manufacturers, vessel owners, and fuel
providers, fuel distributors, and other directly regulated stakeholders
are required to comply with all aspects of Regulations 13, 14, and 18
of Annex VI as well as the NOX Technical Code. These include
requirements for engine operation, fuel use, fuel oil quality, and
various recordkeeping requirements (e.g., record book of engine
parameters, engine technical file, fuel switching procedures, bunker
delivery notes and associated fuel samples, and fuel sampling
procedures).
    Regulation 18 of both the original and the revised Annex VI sets
out the requirements for bunker delivery notes and associated fuel
samples. All vessels 400 gross tons and above, and each fixed and
floating drilling rig and other platforms (i.e., those vessels subject
to Regulations 5 and 6 of both the original and the revised Annex VI)
are required to keep onboard the vessel bunker delivery notes that
specify the details of fuel oil brought onboard for combustion
purposes. These bunker delivery notes may be inspected by the competent
authority of a Party while the ship is in its port or offshore
terminals. The competent authority may also verify the

contents of bunker delivery notes. A fuel sample is required to
accompany each bunker delivery note, sealed and signed by the
supplier's representative and the master or officer in charge of fuel
operations. The sample should be taken pursuant to IMO guidelines and
is to be retained for at least 12 months from the date of delivery.
While the IMO guidelines were not in place at the time the original
Annex was adopted, they were subsequently developed and Regulation 18
of amended Annex VI refers specifically to these guidelines:
MEPC.96(47).
    Although these are Annex VI requirements, we are not creating a
regulatory requirement for the certification of bunker delivery notes
or fuel samples. Such a requirement would be infeasible with respect to
the time and resources that would be necessary to certify every batch
of fuel sold to a vessel above 400 GT in the United States. In
addition, the requirements in Annex VI clearly call for the sulfur
content of gas fuels delivered to a ship for combustion purposes be
documented by the fuel supplier, and that the required fuel sample be
sealed and signed by the fuel provider and the representative of the
ship owner.
    It has been brought to the attention of EPA and the Coast Guard
that some fuel providers in the United States and elsewhere have not
been issuing bunker delivery notes and/or fuel samples at the time of
fuel delivery. Ship owners and operators, and fuel providers, are
reminded that the bunker delivery notes and fuel samples are
requirements under Annex VI; a vessel can be found in noncompliance
with the Annex VI fuel requirements if the vessel is inspected at a
domestic or foreign port. Therefore, ship owners and operators should
exercise care and diligence in obtaining the necessary bunker delivery
notes and fuel samples at the time fuel is brought onboard, through the
fuel contractual arrangement or through other agreement at the time of
sale, and fuel providers should be certain that they have procedures
and processes in place to provide the bunker delivery note and fuel
sample for each batch of fuel delivered.
(4) Non-Party Vessels
    The finalized regulations specify that vessels flagged by a country
that is not a party to MARPOL (known as non-Party vessels) must comply
with Regulations 13, 14, and 18 of Annex VI when operating in U.S.
waters. This requirement fulfills the requirement of 33 U.S.C. 1902(e),
which requires the adoption of regulations for non-Party vessels such
that they are not treated more favorably than vessels of countries that
are party to the MARPOL Protocol. However, since such vessels cannot
get EIAPP certificates, this provision requires non-party vessels to
obtain equivalent documentation of compliance with the NOX
standards of Annex VI.
(5) Internal Waters
    APPS applies Annex VI requirements, including amendments to Annex
VI that have entered into force for the United States, to ships that
are in the internal waters of the U.S. Among the requirements added in
the 2008 amendments to Annex VI are more stringent standards for fuel
quality and NOX emissions. Many of these standards apply in
``Emission Control Areas'' (ECAs) to be designated by the Parties to
Annex VI. As described earlier, the U.S. and Canada submitted an
application for a North American ECA, adoption of which is anticipated
in March 2010.
    As some commenters have noted, the ECA proposal does not include
U.S. or Canadian internal waters. While the two governments did not
specifically seek designation for internal waters in their ECA
proposal, it is evident that emissions in internal waters are of
greater concern than emissions occurring from the baseline seaward to
200 nautical miles. Vessel emissions in internal waters are often even
closer to U.S. population centers than emissions in coastal waters.
Emissions in internal waters affect U.S. air quality to an equal, if
not greater, degree to emissions in coastal waters. Given these
considerations, EPA believes that Congress' direction to apply Annex VI
requirements to ships in the internal waters of the United States, as
well as its grant of authority to EPA to administer the relevant
regulations of Annex VI, confers the authority to apply the fuel
quality and emissions requirements that apply to ECAs to ships in
internal waters.
    We also note the application of these standards to internal waters
should not disturb reasonable expectations or impose a significant
burden on industry. It has always been presumed in our analyses
supporting the ECA proposal and this rule, and is the customary
practice in the North Sea and Baltic Sea SECAs, that vessels will
continue to comply with the emissions standards anytime they operate on
the landward side of the ECA boundary, including in a country's
internal waters. We are not aware of anyone ever suggesting that a
vessel complying with ECA standards would increase its emissions while
it remains in port or other body of water that is part of or connected
to an ECA. We do not believe that vessels would generally choose to
switch to higher sulfur fuels or choose to turn off Tier III control
strategies in internal waters. In most cases, ocean-going vessels only
operate in internal waters for short periods of time while entering and
leaving ports. Switching to high sulfur fuel or turning off and on
NOX control strategies could be time consuming and may not
be justified by the limited operational cost savings.
    We are finalizing regulatory text to codify Annex VI global
requirements and clarify application of Annex VI ECA requirements to
ships in U.S. internal waters. Specifically, the regulatory text
includes the APPS requirements for vessels to comply with Annex VI
global requirements in our internal waters. The regulatory text also
clarifies that vessels operating in U.S. internal waters, shoreward of
an ECA, that can be accessed by ocean-going vessels must meet Annex VI
ECA requirements. This includes ports and internal waters such as the
Great Lakes. In the regulatory text we refer to the internal waters in
which we are applying the ECA requirements as the ``ECA associated
area.'' The regulatory text will apply the ECA requirements for these
internal waters beginning the same time the ECA takes effect under
Annex VI.
    Application of the ECA requirements under APPS to our internal
waters does not replace but rather augments our Clean Air Act
standards. The Clean Air Act exhaust emission and fuel standards apply
regardless of the APPS provisions, except to the extent that any of the
new CAA provisions refer to the ECA boundaries.
    We received extensive comments on the economic and safety impacts
of applying the ECA engine and fuel requirements to vessels that
operate on the Great Lakes. The Summary and Analysis of Comments for
this rule includes a discussion of the economic impacts of applying the
ECA engine and fuel requirements to vessels that operate on the Great
Lakes. In addition, EPA will perform a study and issue a report
evaluating the economic impact of the final rule on Great Lakes
carriers. We will work with Great Lakes stakeholders in conducting the
study and expect to complete the report in summer 2010.
    In addition to recommending the above-mentioned study, Conference
Report 111-316 accompanying HR 2996, the Department of Interior,
Environment, and Related Agencies Appropriations Act, 2010, suggests
that EPA should include two waiver provisions for Great Lakes carriers
in this final rule. Based on this statement

and concerns that have been raised by the Great Lakes shipping
industry, we are finalizing a new provision to address certain vessels
operating exclusively on the Great Lakes (hereinafter, ``Great Lakes
vessels''). Specifically, we are finalizing a provision that provides
for relief in the event of serious economic hardship. This economic
hardship provision allows Great Lakes shippers to petition EPA for a
temporary exemption from the 2015 fuel sulfur standards. The shipper
must show that despite taking all reasonable business, technical, and
economic steps to comply with the fuel sulfur requirements, the burden
of compliance costs would create a serious economic hardship for the
company. The Agency will evaluate each application on a case-by-case
basis. Our experience to date shows that detailed technical and
financial information from the companies seeking relief has been
necessary to fully evaluate whether a hardship situation exists. As
such, we may request additional information as needed. Typically,
because of EPA's comprehensive evaluation of both financial and
technical information, action on hardship applications can take
approximately six months. Because of this, applications for an economic
hardship waiver must be submitted to EPA by January 1, 2014. As is our
historic practice with fuel waivers, if we approve a delay in meeting
the fuel sulfur requirements, we expect to impose appropriate
conditions to: (1) Ensure the shipper is making its best effort; and
(2) minimize any loss of emissions benefits from the program.
    In the Conference Report, Congress also indicated that EPA should
provide a waiver for the requirement for the use of 1.0 percent fuel
sulfur (10,000 ppm) standard if residual fuel meeting that standard is
not available on the Great Lakes. In response to this statement and
comments from the Lake Carriers Association, we are creating a
provision that will ensure that operators on the Great Lakes will be
able to buy marine residual fuels if compliant 10,000 ppm S fuel is not
available. Under this provision, if marine residual fuel meeting the
10,000 ppm S standard is not available, it will not be a violation of
our standards for vessel operators to bunker and use marine residual
fuel with sulfur content above 10,000 ppm S provided the fuel they do
purchase is the lowest sulfur marine residual fuel available at the
port. We believe this market based approach will provide a significant
incentive to fuel suppliers to provide 10,000 ppm S fuel, while giving
Great Lakes shippers confidence that marine residual fuel will be
available for their use during the 10,000 ppm S fuel program.
    Finally, some commenters raised technical and safety issues
associated with operating Great Lakes steamships on distillate fuel.
Great Lakes steamships operate in fresh water and therefore have very
long lives. Many of the boilers used on these vessels were manufactured
and constructed in the 1940s and 1950s and were designed specifically
to operate on heavy fuel oils. Due to these technical issues, we
considered a number of options for how to address these vessels.
However, Congress placed a prohibition on EPA's use of funds in this
fiscal year to issue a final rule that includes fuel sulfur standards
applicable to existing steamships that operate exclusively within the
Great Lakes. Therefore, we are excluding Great Lakes steamships from
the fuel sulfur requirements. For the purpose of this exclusion, Great
Lakes steamships means vessels, operating exclusively on the Great
Lakes and Saint Lawrence Seaway, whose primary propulsion is a steam
turbine or steam reciprocating engine. In addition, these steamships
must have been in service on the Great Lakes prior to October 30, 2009.
This does not include diesel propulsion Category 3 vessels with
auxiliary boilers.
    Totem Ocean Trailer Express (TOTE) raised similar concerns for the
small number of steamships operating along the U.S. coasts. As these
vessels do not operate exclusively within U.S. internal waters, they
fall under the U.S. Government's (primarily EPA and Coast Guard's)
implementation of the ECA provisions of Annex VI. The requirements of
the Annex VI ECA fuel sulfur limits apply to all vessels and have no
exemptions for steamships. It is not within the scope of this
rulemaking to amend the requirements of the MARPOL Annex VI treaty.
However, through TOTE's comments and follow-up conversations with ship
owners, we agree that special challenges exist for the use of lower
sulfur fuel in steamships. Therefore, we will continue to work on this
issue with the United States Coast Guard and other members of the U.S.
Delegation to IMO as well as other interested stakeholders including
the affected steamship operators. We are committed to resolving this
issue before the end of 2011, well in advance of January 2015 when the
0.1 percent fuel sulfur standard will enter into force.
(6) Exemptions and Exclusions
    Under MARPOL Annex VI and APPS, certain vessels are excluded from
some or all of the requirements. Consistent with Annex VI and APPS, the
regulations in 1043 will exclude public vessels and engines intended to
be used solely for emergencies. For the purpose of this provision, the
term ``public vessels'' includes all warships and naval auxiliary
vessels, as well as any other vessels owned or operated by a sovereign
country engaged in noncommercial service. Consistent with the
provisions in APPS, we are not applying the Annex VI requirements to
U.S.-flagged public vessels (or foreign public vessels excluded by
their flag states). It should be noted, however, that not all public
vessels are exempt from our Clean Air Act engine and fuel requirements.
Only public vessels covered by a national security exemption under
Sec.  94.908 or Sec.  1042.635 are exempt from the Clean Air Act
program.
    The category of emergency engines includes engines that power
equipment such as pumps that are intended to be used solely for
emergencies and engines installed in lifeboats intended to be used
solely in emergencies. It should be noted that the emergency engine
provisions in the Annex and part 1043 are similar but not identical to
the emergency engine provisions in our Clean Air Act program or the
process of obtaining our CAA exemptions. In particular, the emergency
engine exemption from the CAA requirements applies only with respect to
the catalyst-based Tier 4 standards.
    We are exempting from the MARPOL Annex VI NOX standards
engines installed on vessels registered or flagged in the United States
provided the vessel remains within the EEZ of the United States. These
engines will still be required to meet stringent emission standards
since they are covered by our Clean Air Act program. In addition, the
fuels used by these vessels are also covered by our Clean Air Act
program, which has more stringent fuel requirements than Annex VI.
Therefore, as long as the operators of these domestic vessels comply
with these more stringent Clean Air Act fuel requirements, they will be
deemed to be in compliance with the Annex VI requirements. The
combination of these proposed provisions will mean that a fishing
vessel that operates out of a U.S. port and that never leaves U.S.
waters will not be required to have an EIAPP for all engines above 130
kW, a record book of engine parameters and a technical file for each
engines, and vessels over 400 gross tons will not be required to
maintain bunker delivery notes (vessels under 400 gross tons are not
required by Regulation 18 of MARPOL Annex VI to have bunker delivery
notes). Instead, the engines on

that vessel will be required to be in compliance with our marine diesel
engine standards and be required to comply with the manufacturer's
requirements with regard to the proper fueling of those engines. We are
also explicitly precluding these engines from being certified to use
residual fuel if they are exempt from the part 1043 requirements. Thus,
these engines will be required to always use cleaner fuels than are
required by Annex VI. U.S. vessels that operate or may operate in
waters that are under the jurisdiction of another country are not
exempt from these provisions, and the owner of any such vessel may be
required by that country to show compliance with Annex VI. Therefore,
the owner should be sure to maintain the appropriate paperwork for that
engine and have the appropriate engine certification. It should be
noted that engines that must show compliance with the Annex VI
standards are not exempt from EPA's standards for Category 1 or
Category 2 engines.
    Finally, spark-ignition, non-reciprocating engines, and engines
that do not use liquid fuel are not included in Regulation 13 of the
Annex VI program and therefore they will not be covered by the proposed
APPS regulations with respect to NOX emissions. However, the
MARPOL Annex VI fuel requirements do apply for these vessels. These
engines are generally subject to separate Clean Air Act fuel
requirements and/or emission standards that effectively require the use
of low sulfur fuels, either directly or indirectly.

C. Changes to the Requirements Specific to Engines Below 30 Liters per
Cylinder

    The amendments to MARPOL Annex VI were adopted in October of 2008,
after we finalized our Clean Air Act Tier 3 and Tier 4 standards for
Category 1 and Category 2 engines (May 6, 2008, 73 FR 25097). While
these two programs are very similar, there are a few differences
between them with regard to their engine requirements. We are adopting
some changes to our CAA program to facilitate compliance with both
programs. In addition, some of the provisions described in Section VI.D
may also apply to Category 1 and Category 2 marine diesel engines,
regarding non-diesel engines and technical amendments to our current
program.
(1) MARPOL Annex VI and EPA's Standards for Category 1 and Category 2
Engines
    Our existing regulations include an exemption for Category 1 and
Category 2 engines on certain migratory vessels. This allowance is
limited to vessels that are operated primarily outside of the United
States, and that obtain and maintain SOLAS certification and
appropriate EIAPP certification demonstrating compliance with Annex VI.
We are making some minor modifications to this allowance to reflect the
new Annex VI standards.
    We are also revising Sec.  1042.650 to add exemption provisions for
Category 1 and Category 2 auxiliary engines on vessels with Category 3
propulsion engines. These auxiliary engines would be exempt from the
part 1042 standards, but would still be required to comply with the
Annex VI standards. In addition, engines that would have been subject
to the Tier 4 standards of part 1042 would be required to conform to
the Tier III NOX requirements, irrespective of whether they
would be required to comply under Annex VI. For example, this would
affect 2015 Category 2 engines with a maximum engine power of 3000 kW
installed on a 2015 vessel since such an engine would be subject to the
Tier 4 standards under Sec.  1042.101, but would have only been subject
to the Tier II standards under Annex VI.
    Given the MARPOL Annex VI and CAA NOX requirements are
comparable, with slightly different phase-in dates and cut-offs, we
believe this approach will be a less burdensome implementation approach
over transitioning years, and will not have a meaningful impact on
emission reductions. In the absence of this exemption, manufacturers
would have been required to certify special auxiliary engines that met
both Annex VI and 1042 requirements for a U.S. market that could be as
small as one engine per year. By allowing manufacturers to meet only
the Annex VI requirements, they would be able to produce a single
international engine and spread the administrative costs over many more
engines. It is important to note that we are not extending this
exemption to vessels powered by smaller engines because these factors
cannot be presumed for such vessels.
(2) On/Off Technology for Category 1 and 2 Engines
    As described in Section VI.A.3 above, we proposed to allow the use
of auxiliary emission control devices (AECDs) that would allow
modulation of emission control equipment on Category 3 engines outside
of specific geographic areas. These AECDs would be subject to certain
restrictions: (1) The AECD would be available for the Tier 3 standards
only; (2) the AECD would modulate emission controls only while
operating in areas where emissions could reasonably be expected to not
adversely affect U.S. air quality; and (3) an engine equipped with an
AECD must also be equipped with a NOX emission monitoring
device.
    We are expanding our proposed allowance for ocean-going vessels
with Category 3 propulsion engines to also include Category 1 and
Category 2 engines to provide auxiliary power. We are not allowing this
option for U.S. vessels with Category 1 or Category 2 propulsion
engines.

D. Other Regulatory Issues

    In addition to the changes described in Sections VI.A and VI.C, we
are also finalizing changes that apply to marine engines in general,
and/or to other types of engines.
(1) Non-Diesel Engines
    Most of the preceding discussions have focused on conventional
diesel engines using either diesel fuel or residual fuels. It is
important to highlight two other types of engines being affected by
this proposal: engines using other fuels and gas turbine engines.
(a) Engines Not Using Diesel Fuel
    For all categories of marine engines, our existing standards apply
to all engines meeting the definition of compression-ignition,
regardless of the fuel type. For example, compression-ignition Category
3 engines that burn natural gas are subject to our Tier 1 standards and
will be subject to our finalized Tier 2 and Tier 3 standards. We are
continuing to apply this approach for all marine engines subject to our
standards.
    The testing regulations in part 1065 include test fuel
specifications for diesel fuel, residual fuel, and natural gas (as well
as for gasoline and liquefied petroleum gas, which would not typically
be used in a compression-ignition engine). To certify an engine for a
different fuel type, a manufacturer will need to obtain EPA approval to
use an alternate fuel which it recommends for testing. All other
aspects of certification will be the same.
(b) Gas Turbine Engines
    Gas turbine engines are internal combustion engines that can
operate using a variety of fuels (such as diesel fuel or natural gas)
but do not operate on a compression-ignition or other reciprocating
engine cycle. Power is extracted from the combustion gas using a
rotating turbine rather than reciprocating pistons. The primary type

of U.S.-flagged vessels that use gas turbine engines are naval combat
ships. While a small number have been used in commercial ships, we are
not aware of any current sales for commercial applications. They can
range in size from those equivalent in power to mid-size Category 1
engines to those that produce the same power as Category 3 engines.
None of these engines have been subject to our current standards
because they do not meet the definition of compression-ignition engines
in our existing regulations.
    To date, this omission has not been a concern because only a small
number of turbine-powered vessels have been produced and nearly all of
them would have been eligible for a national security exemption.
However, we were concerned that this exclusion may become a loophole in
the future for operators hoping to avoid using engines with advanced
catalytic emission controls. To a lesser degree, we also had concerns
about the possibility of other non-reciprocating engines being
excluded. We are closing this potential loophole by revising the
regulations to treat new gas turbine engines (as well as other non-
reciprocating engines) the same as compression-ignition engines and to
apply our standards for new Category 1 and Category 2 engines
(including NOX, HC, CO, and PM standards) to gas turbine
engines.
    Several commenters objected to finalizing this requirement. They
argued primarily that this would not align with MARPOL. They also
asserted that the proposed requirements would not pass a cost/benefit
analysis and that turbines cannot be tested under the procedures of 40
CFR part 1065. However, they did not provide any information about
costs, benefits, or test procedures. As described in the RIA and the
Summary and Analysis of Comments Document, we continue to believe the
requirements are feasible and appropriate. As described below, we are
finalizing these requirements largely as proposed. The primary revision
being made is to delay them until the Tier 4 timeframe to provide
turbine manufacturers additional lead time.
    To incorporate this approach in our marine emission control
program, we are changing our definitions of Category 1 and Category 2
to include gas turbine engines. Since turbine engines have no
cylinders, we are adopting a conversion convention to apply the
regulatory provisions that depend on a specified value for per-cylinder
displacement. This convention is intended to apply the standards based
on equivalent power ratings, to the extent possible. Specifically, we
are redefining ``Category 1'' to include gas turbines with rated power
up to 2250 kW and redefining ``Category 2'' to include all gas turbines
with higher power ratings. This means we will not consider any gas
turbines as ``Category 3'' engines. The largest gas turbine engines
will be considered to be Category 2 engines, even those that had rated
power more typical of Category 3 diesel engines. We are adopting this
approach primarily because our Category 3 standards vary with engine
speed, and are specified based on a speed range typical of diesel
engines. These formulas do not make sense for gas turbine engines since
they have much higher engine speeds.
    We are aware that some companies are manufacturing new high-
performance recreational vessels using gas turbine engines. In at least
some cases, the engines are modified from surplus military aircraft
engines. We have not yet determined whether such recreational engines
should be held to the same standards as conventional diesel engines. It
is also important to note that under our current regulations, diesel
engines meeting the definition of ``recreational marine engine'' in
Sec.  1042.901 are not subject to catalyst forcing standards. This
approach was applied because of factors such as the usage patterns for
recreational diesel engines. We believe these same factors to apply for
recreational gas turbine engines. Thus, we are not as concerned about a
potential gas turbine loophole for recreational engines as for
commercial engines. We also do not have enough information at this time
to know how feasible it would be for small gas turbine engine
manufacturers to comply with the standards for recreational diesel
engines, or to accurately assess the environmental impact of these
vessels. Nevertheless, it is clear that the environmental impact of
such small numbers of these engines cannot be large. Thus, at this
time, we are not applying this regulatory change to recreational gas
turbine engines (i.e., that is gas turbine engines installed on
recreational vessels). We will continue to investigate these engines
and may subject them to standards in the future.
    Our diesel engine program contains a national security exemption
that automatically exempts vessels ``used or owned by an agency of the
Federal government responsible for national defense, where the vessel
has armor, permanently attached weaponry, specialized electronic
warfare systems, unique stealth performance requirements, and/or unique
combat maneuverability requirements.'' Since it is not our intent to
prohibit naval vessels from using turbine engines, we are revising this
provision to automatically exempt military vessels owned by an agency
of the Federal government responsible for national defense powered by
gas turbine engines.
    We are confident that gas turbine engines could use the same type
of aftertreatment as is projected for diesel engines. The basic
reactions through which SCR reduces NOX emissions can occur
under a wide range of conditions, and exhaust from gas turbine engines
is fundamentally similar to exhaust from diesel engines. Viewed another
way, however, this requirement can be considered to be feasible based
on the fact that the only circumstance in which a vessel would actually
need a gas turbine engine would be for military purposes where our
national security exemption provisions will apply. For all other
vessels, it is entirely feasible for the vessel to be powered by a
diesel engine. In fact, that is what is being done today.
    This program for gas turbine engines will apply to freshly
manufactured engines only. We are not applying our marine remanufacture
program to gas turbine engines. Because there are so few engines in the
fleet, it is not possible to know what common rebuilding process are or
whether and how those practices would return an existing engine to as-
new condition. We may review this approach in the future if there is an
increase in the number of gas turbines in the fleet.
    Finally, it is important to address some confusion expressed by the
commenters about our definitions. We agree that it would be incorrect
to actually define turbine engines as reciprocating or compression
ignition, which is what the commenters thought we had proposed.
However, we did not propose to define turbines to be reciprocating or
compression-ignition engines. The commenters misread Sec.  1042.1(f),
which states that certain marine engines ``are subject to all the
requirements of this part even if they do not meet the definition of
`compression-ignition' in Sec.  1042.901.'' This provision subjects
marine gas turbine engines to the requirements of part 1042, but it
explicitly recognizes that they do not meet the definition of
compression-ignition in Sec.  1042.901. The confusion seems to arise
from the statement that these engines ``are deemed to be compression-
ignition engines for the purposes of this subchapter.'' This statement
is merely a regulatory convention that means the part applies to
turbines as if they did meet the definition.

(2) Technical Amendments
    The finalized regulations include technical amendments to our motor
vehicle and nonroad engine regulations. These changes are generally
corrections and clarifications. A large number of these changes are the
removal of obsolete highway engine text that applied only for past
model years. Many others are changes to the text of part 1042 to make
it more consistent with the language of our other recently corrected
nonroad parts. The last large category of changes includes those
related to the test procedures in part 1065. See the memorandum in the
docket entitled ``Technical Amendments to EPA Regulations'' for a full
description of these changes.\112\
---------------------------------------------------------------------------

    \112\ See ``Technical Amendments to EPA Regulations,'' EPA
memorandum from Alan Stout, in the docket for this rule, Docket No.:
EPA-HQ-OAR-2007-0121.
---------------------------------------------------------------------------

E. U.S. Vessels Enrolled in the Maritime Security Program

    The U.S. Department of Transportation Maritime Administration
(MARAD) oversees the Maritime Security Program (MSP) established by the
Maritime Security Act of 1996 and reauthorized by the Maritime Security
Act of 2003 (MSA). The MSA requires that the Secretary of
Transportation, in consultation with the Secretary of Defense,
establish a fleet of active, commercially viable and militarily useful
vessels to meet national defense and other security requirements and
maintain a U.S. presence in international commercial shipping. The
fleet consists of privately-owned, U.S.-flagged vessels known as the
Maritime Security Fleet (MSF). 46 U.S.C. 53102 outlines that vessels
complying with applicable international agreements and associated
guidelines are eligible for a certificate of inspection from Coast
Guard, and thus inclusion in the MSF.
    The requirements of the MSP may have created confusion for owners
of non-U.S.-flagged vessels regarding their obligation to also comply
with EPA's domestic marine diesel engine emission standards at the time
they re-flag for inclusion in the MSF. We want to remind vessel owners
that the MSA does not preempt the Clean Air Act or alleviate their
obligation to comply with EPA's marine diesel engine program, or any
other EPA requirements that apply to marine vessels. As is clear from
our past rulemakings, it has always been our intent that each U.S.-
flagged vessel must comply with all of EPA's domestic standards,
regardless of whether the vessel was flagged in the U.S. upon original
delivery into service.
    We are revising the regulations to clarify these requirements and,
as noted earlier, to provide exemptions for auxiliary engines on
Category 3. First, we are revising Sec.  1042.1 to clarify that our
regulations apply for all U.S.-flagged vessels. In conjunction with
this, we are revising the definitions of ``model year'' and ``new
marine engine'' to clarify that our marine engine program applies to
all U.S.-flagged vessels regardless of where that vessels is built or
operated, and how the regulations apply for vessels that are re-flagged
to be U.S. vessels.
    We are clarifying that engines on foreign vessels that vessels
become ``new marine engines'' under part 1042 at the point at which
they are reflagged. As new marine engines, we would expect them to be
covered by valid certificates and/or exemptions prior to being placed
into service. If engines on U.S.-flagged vessels are not covered by
valid certificates and/or exemptions when they first enter U.S. waters,
they would be subject to all of the prohibitions of part 1068.101. The
operator would be in violation of the prohibition against introduction
of an uncertified new engine into U.S. commerce.
    Some of the revisions being finalized are intended to simplify the
transition from part 94 to part 1042. Under the revised regulations,
part 1042 becomes the default regulatory part for compression-ignition
marine engines. Section 1043.1 specifies that such marine engines are
subject to part 1042 unless they are certified under part 94. In
addition, Sec.  1042.1(c) specifies that the definition of ``new marine
engine'' in Sec.  1042.901 applies for engines certified under part 94.
This is important because our standards and prohibitions apply for
engines meeting the definition of ``new marine engine''. Thus, to
determine whether an uncertified marine engine is subject to our
standards and prohibitions, you must determine whether it meets any of
the criteria of the definition of ``new marine engine'' in Sec.
1042.901.
    Each ``new marine engine'', is subject to standards based on its
model year. The revised definition of ``model year'' specifies that
engines on re-flagged vessels would generally be subject to the
standards that would have applied in the year they were originally
manufactured. If the engine has a model year before the years the part
94 standards first applied, it would not be subject to any standards.
If the engine has a later model year but one that is before the years
the part 1042 standards apply, it would be subject to the standards of
part 94. According to Sec.  1042.1(c), if the engine is certified to
these part 94 standards, it is not required to comply with the
requirements of part 1042.
    To further smooth this transition, we are finalizing a new interim
provision in Sec.  1042.145(i). This provision is intended to apply for
vessel operators that were not aware that their vessels were required
to comply with our regulations. Once this amendment takes effect, it
will allow them to operate in U.S. waters until July 1, 2010 without
certificates or exemptions for their engines. After that, it will be a
violation of 40 CFR 1068.101 to operate in U.S. waters with uncertified
engines if those engines are subject to our standards. Operation of
such vessels in U.S. waters on or after July 1, 2010 is deemed to be
introduction into U.S. commerce of a new marine engine.

VII. Costs and Economic Impacts

    In this section, we present the projected cost impacts and cost
effectiveness of the coordinated emission control strategy for large
marine vessels with a per cylinder displacement greater than 30 Liters
per cylinder. We also present our analysis of the economic impacts of
the coordinated strategy, which consists of the estimated social costs
of the program and how those costs will likely be shared across
stakeholders. The projected benefits and benefit-cost analysis of the
coordinated strategy are presented in Section VIII.
    We estimate the costs of the coordinated strategy to be about $1.85
billion in 2020, increasing to $3.11 billion in 2030.\113\ Of the 2020
costs, nearly 89 percent or $1.64 billion are attributable to the fuel
sulfur provisions. The total operational costs are estimated to be
$1.82 billion in 2020. The costs to apply engine controls to U.S.-
flagged vessels are expected to be $31.9 million in 2020, increasing to
$47.4 million in 2030 as more ships are built to comply with Clean Air
Act (CAA) Tier 3 NOX limits. All costs are presented in 2006
U.S. dollars.
---------------------------------------------------------------------------

    \113\ These total estimated costs are slightly different than
those reported in the ECA proposal, because the ECA proposal did not
include costs associated with the Annex VI existing engine program,
Tier II, or the costs associated with existing vessel modifications
that may be required to accommodate the use of lower sulfur fuel.
Further, the cost totals presented in the ECA package included
Canadian cost estimates.
---------------------------------------------------------------------------

    When attributed by pollutant, at a net present value of 3 percent
from 2010 through 2040, the NOX controls are expected to
cost about $510 per ton of NOX reduced, SOX
controls are expected to cost about $930 per ton of SOX
reduced, and the PM controls are

expected to cost about $7,950 per ton of PM reduced ($500, $920, and
$7,850 per ton of NOX, SOX, and PM respectively,
at a net present value of 7 percent over the same period). These costs
are comparable to our other recently adopted mobile source programs,
and are one of the most cost-effective programs in terms of
NOX and PM when compared to recent mobile and stationary
programs. The coordinated strategy also provides very cost-effective
SOX reductions comparable to the Heavy-Duty Nonroad diesel
rulemaking.
    The social costs of the program are estimated to be approximately
$3.1 billion in 2030. The impact of these costs on society is estimated
to be minimal. For example, we estimate the cost of shipping a 20-foot
container on the Pacific route, with 1,700 nm of operation in the ECA,
would increase by about $18, or less than 3 percent. Similarly, the
price of a seven-day Alaska cruise that operates mainly in the ECA is
expected to increase by about $7 per day.
    The estimated costs presented in this section are for the entire
coordinated strategy, including those requirements that are the subject
of this action and those that are associated with the proposed ECA
designation. Table VII-1 sets out the different components of the
coordinated strategy for 2020. The costs of the coordinated strategy
consist of the costs associated with the MARPOL Annex VI global
standards that are operational through APPS, some of which we are also
adding to our CAA emission control program for U.S. vessels (Tier 2 and
Tier 3 NOX emission control hardware for U.S. vessels;
operating costs for the Tier 2 NOX requirements; controls
for existing vessels; certain compliance requirements). Also included
are the costs associated with complying with the engine standards and
low sulfur fuel limits in U.S. internal waters (Tier 3 operating costs;
fuel sulfur hardware and operating costs).
    Note that, with regard to hardware costs, the coordinated strategy
includes the entire cost for new U.S. vessels to comply with the Tier 3
NOX standards and fuel limits, even though some of the
benefits from using these emission control systems will occur outside
the United States. Conversely, we do not include any new vessel Tier 3
or fuel hardware costs for foreign vessels that operate in U.S. waters
even though a significant share of the benefits of the coordinated
strategy will arise from foreign vessels that comply with the engine
and fuel sulfur limits while operating within the U.S., ECA and
internal waters.
    The regulatory changes finalized for Category 1 and 2 engines are
not included in this cost analysis as they are intended to be
compliance flexibilities and not result in increased compliance costs.
Similarly, the technical amendments finalized for other engines will
not have significant economic impacts and are therefore not addressed
here. Finally, to provide for a representative comparison between costs
and benefits of the program, the cost analysis presented here assumes
that all vessels currently using residual fuel will operate on
distillate fuel in an ECA, including Great Lakes steamships. As noted
in earlier chapters, Great Lakes steamships have been excluded from the
final fuel sulfur standards. This change is not expected to have a
significant impact on the estimated costs or benefits of the rule as
those vessels are not a large part of the national inventory.

                Table VII-1--Costs Associated With the U.S. Coordinated Strategy and Canadian ECA
                                        [Estimated Costs for 2020, $2006]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
                Program element                     U.S. coordinated strategy              Canadian ECA
----------------------------------------------------------------------------------------------------------------
Hardware--T2 (variable costs;  U.S. vessels....  $3,310,000.....................  NA--not part of ECA.
 fixed costs applied in 2010).
                               Foreign Vessels.  N/A--global std................  NA--not part of ECA.
Hardware--T3 (variable costs;  U.S. vessels      $28,700,000....................  $100,000,000.
 fixed costs recovered in the   (variable
 year in which they occur:      costs; fixed
 2011-15).                      costs recovered
                                in the year in
                                which they
                                occur: 2011-15).
                               Foreign vessels:  $296,700,000...................
                                30% of vessels
                                making 75% of
                                entrances to
                                U.S. ports \a\.
                               Foreign vessels:  $692,200,000...................
                                70% of vessels
                                making 25% of
                                entrances to
                                U.S. ports \a\.
Hardware--Fuel...............  U.S. vessels      $804,000.......................  $10,000,000.
                                (new vessel
                                costs).
                               Foreign vessels   $23,600,000....................
                                (new vessel
                                costs).
Operating--T2 (inside full     U.S. vessels....  $5,630,000.....................  NA--not part of ECA.
 inventory modeling domain).
                               Foreign vessels.  $32,900,000....................  NA--not part of ECA.
Operating--T3 (inside          U.S. vessels....  $15,800,000....................  $30,000,000.
 relevant part of affected
 waterways).
                               Foreign vessels.  $127,000,000...................
Operating--Fuel (inside        U.S. vessels....  $210,000,000...................  $260,000,000.
 relevant part of affected
 waterways).
                               Foreign vessels.  $1,430,000,000.................
Existing vessels--engine       U.S. vessels....  $0.............................  NA--not part of ECA.
 costs (all U.S. vessels 1990-
 99 retrofit during first 5
 years of program, 2011-15).
                               Foreign vessels.  N/A--global std................  NA--not part of ECA.
Existing vessels--vessel fuel  U.S. vessels....  $0.............................  Canada did not provide.
 switching costs (all U.S.
 vessels 1999-90 retrofit
 during first 5 years of
 program, 2011-15).
                               Foreign vessels.  $0.............................  Canada did not provide.
----------------------------------------------------------------------------------------------------------------

    The estimated costs presented in this section are for the Federal
program as a whole. We do not estimate costs on a regional or owner-
specific basis. We received several comments from owners of vessels
operating on the Great Lakes

contending that the impact of the proposed control program on their
operations is unique, and that the economic impacts of the program on
these operators should be estimated separately. As explained in Section
VI of this preamble and in more detail in the Summary and Analysis of
Comments prepared for this final rule, we are providing various
regulatory flexibilities for operators that may have difficulty
complying with the requirements of this rule. In addition, as part of
EPA's appropriation bill (Pub. L. 111-88), Congress recommended that
EPA perform a study to evaluate the economic impact of the final rule
on Great Lakes carriers, with a final report due in the summer of 2010.
We will be soliciting input from affected entities as we prepare that
report.

A. Estimated Fuel Costs

    The coordinated strategy includes fuel sulfur limits which are
included in this cost analysis. Prior to this final rule, all
distillate fuels produced at refineries in the U.S. had a sulfur
limitation of 15 ppm. The coordinated strategy does not impose
additional costs for refiners in the U.S. and actually allows
additional flexibility. Specifically, we are allowing distillate fuel
to have up to 1,000 ppm sulfur for use in Category 3 vessels. The fuel
requirements will impose a cost to the ship owners. This section
presents estimates of the cost of compliance with the 1,000 ppm sulfur
limit in the U.S. waterways.
    Distillate fuel will likely be used to meet the 1,000 ppm fuel
sulfur limit, beginning in 2015. As such, the primary cost of the fuel
sulfur limit for ship owners will be that associated with switching
from heavy fuel oil to higher-cost distillate fuel. Some engines
already operate on distillate fuel and will not be affected by fuel
switching costs. However, distillate fuel costs may be affected by the
need to further refine the distillate fuel to meet the 1,000 ppm sulfur
limit.
    To investigate these effects, studies were performed on the impact
of a North American ECA on global fuel production and costs, to inform
the application for such ECA.\114\ These studies were performed prior
to the ECA being defined; thus, we picked a maximum distance boundary
to ensure the fuel volumes used for the cost analysis would be larger
than required by the program. Specifically, we used the total fuel
consumption in the U.S. and Canada exclusive economic zones.\115\ The
studies are relevant to this regulation as well, since they estimate
the cost of 1,000 ppm sulfur fuel for Category 3 vessels operating in
U.S. waterways.
---------------------------------------------------------------------------

    \114\ Research Triangle Institute, 2009. ``Global Trade and
Fuels Assessment--Future Trends and Effects of Designating Requiring
Clean Fuels in the Marine Sector''. Prepared for U.S. Environmental
Protection Agency. Research Triangle Park, NC.
    \115\ In this analysis, the U.S. included the lower 48
contiguous States and southeastern Alaska.
---------------------------------------------------------------------------

    To assess the effect on the refining industry of the imposition of
a 1,000 ppm sulfur limit on fuels, we needed to first understand and
characterize the fuels market. Research Triangle Institute (RTI) was
contracted to conduct a fuels study using an activity-based economic
approach. The study established baseline bunker fuel demand, projected
a growth rate for bunker fuel demand, and established future bunker
fuel demand volumes.\116\ These volumes then became the input to the
World Oil Refining Logistics and Demand (WORLD) model to evaluate the
effect of the coordinated strategy on fuel cost.
---------------------------------------------------------------------------

    \116\ Research Triangle Institute, 2009. ``Global Trade and
Fuels Assessment--Future Trends and Effects of Designating Requiring
Clean Fuels in the Marine Sector''. Prepared for U.S. Environmental
Protection Agency. Research Triangle Park, NC.
---------------------------------------------------------------------------

    The WORLD model was run by Ensys Energy & Systems, the owner and
developer of the refinery model. The WORLD model is the only such model
currently developed for this purpose and was developed by a team of
international petroleum consultants. It has been widely used by
industries, government agencies, and Organization of the Petroleum
Exporting Countries (OPEC) over the past 13 years, including the Cross
Government/Industry Scientific Group of Experts, established to
evaluate the effects of the different fuel options proposed under the
revision of MARPOL Annex VI. The model incorporates crude sources,
global regions, refinery operations, and world economics. The results
of the WORLD model have been comparable to other independent
predictions of global fuel, air pollutant emissions and economic
predictions.
    The WORLD model was run for 2020, in which the control case
included a fuel sulfur level of 1,000 ppm in the U.S. The baseline case
was modeled as ``business as usual'' in which ships continue to use the
same fuel as today. Because of the recent increases and fluctuations in
oil prices, we had additional WORLD model runs conducted. For these
runs, we used new reference case and high oil price estimates that were
recently released by the U.S. Energy Information Administration (EIA).
In addition to increased oil price estimates, the updated model
accounts for increases in natural gas costs, capital costs for refinery
upgrades, and product distribution costs.
    Because only a small portion of global marine fuel is consumed in
the ECA, the overall impact on global fuel production is small. Global
fuel use in 2020 by ships is projected to be 500 million metric tonnes/
yr. Of this amount, 90 million metric tonnes of fuel is used for U.S./
Canadian trade, or about 18 percent of total global fuel use. In the
proposed ECA, less than 20 million metric tonnes of fuel will be
consumed in 2020, which is less than 4 percent of total global marine
fuel use. Of the amount of fuel to be consumed in the proposed ECA in
2020, about 4 million metric tonnes of distillate will be consumed in
the Business as Usual (BAU) case, which is about 20 percent of the
amount of total fuel to be consumed in the proposed ECA.
    There are two main components to projected increased marine fuel
cost associated with the ECA. The first component results from shifting
from operation on residual fuel to operation on higher cost distillate
fuel. This is the dominant cost component. However, there is also a
small cost associated with desulfurizing the distillate to meet the
1,000 ppm sulfur standard. Based on the WORLD modeling, the average
increase in costs associated with switching from marine residual to
distillate will be $145 per metric tonne of fuel consumed. Due to the
differences in energy density between the two fuels, this translates to
a cost increase of $123 for each metric tonne of residual fuel replaced
by distillate fuel.\117\ This is the cost increase that will be borne
by the shipping companies purchasing the fuel. Of this amount, $6 per
metric tonne is the increase in costs associated with distillate
desulfurization.
---------------------------------------------------------------------------

    \117\ Note that distillate fuel has a higher energy content, on
a per ton basis, than residual fuel. As such, there is an offsetting
cost savings, on a per metric ton basis, for switching to distillate
fuel. Based on a 5 percent higher energy content for distillate, the
net equivalent cost increase is estimated as $123 for each metric
ton of residual fuel that is being replaced by distillate fuel.
---------------------------------------------------------------------------

    Table VII-2 summarizes the fuel cost estimates with and without an
ECA. In the baseline case, fuel volumes for operation are 18% marine
gas oil (MGO), 7% marine diesel oil (MDO), and 75% IFO. Weighted
average baseline distillate fuel cost is $462/tonne. In the ECA, all
fuel volumes are modeled as MGO, at $468/tonne.

                 Table VII-2--Estimate Marine Fuel Costs
------------------------------------------------------------------------
          Fuel                    Units            Baseline       ECA
------------------------------------------------------------------------
MGO....................  $/bbl..................     $ 61.75     $ 62.23
                         $/tonne................      464         468
MDO....................  $/bbl..................       61.89       62.95
                         $/tonne................      458         466
IFO....................  $/bbl..................       49.87       49.63
                         $/tonne................      322         321
------------------------------------------------------------------------

    The increased cost of distillate desulfurization is due both to
additional coking and hydrotreating capacities at refineries. Cokers
crack residual blends in IFO bunker fuel into distillates, using heat
and residence time to make the conversion. The process also produces
useful byproducts such as petroleum coke and off gas. The WORLD model
did not use hydrocracking technology to convert residual fuels into
distillates for either the reference or high price crude cases. Because
of the higher capital and operating costs of hydrocrackers, the WORLD
model favored the use of coking units. As such, the WORLD model assumed
that cokers would convert the residual blendstocks in Intermediate Fuel
Oil grades to distillates. The model added coking processes to
refineries located in the U.S. and, to a lesser extent, to refiner
regions outside of the U.S. Specifically, the model added one
additional coking unit with a capacity of 30 thousand barrels per
stream day (KBPSD), and one to two hydrocracking units representing 50
and 80 KBPSD additional capacity.
    The WORLD model also added new conventional distillate
hydrotreating capacity to lower the sulfur levels for the marine
distillate fuel, in addition to the existing slack distillate
hydrotreating capacity that existed in refiner regions for these fuels.
In addition, the model used lighter crudes and adjusted operating
parameters in refineries. This had the effect of increasing the
projected production of lower sulfur distillate fuels in lieu of adding
distillate hydrotreating capacity. The model elected to use lower
sulfur crudes and used operational adjustments. Higher capital and
operating costs of new units under the high-priced crude scenario
favored use of existing refinery capacity made available from lower
global refiner utilizations.

B. Estimated Engine Costs

    To quantify the cost impacts associated with the coordinated
strategy, we estimated the hardware and operational costs to U.S.-
flagged ships, as well as affected foreign-flagged ships. The hardware
costs included in the total cost of the coordinated strategy are only
applied to U.S.-flagged vessels, and include those associated with the
CAA Tier 2 and Tier 3 NOX standards, the Annex VI existing
engine program, and the use of lower sulfur fuel. Tier 2 hardware costs
consist of changes to the engine block and the migration from
mechanical fuel injection to common rail fuel injection systems. Tier 3
hardware costs include engine modifications, the migration from
mechanical fuel injection to common rail fuel injection systems, and
the installation of Selective Catalytic Reduction (SCR). Hardware costs
associated with the use of lower sulfur fuel are from applying
additional tanks and equipment to enable a vessel to switch from
residual fuel to lower sulfur fuel. These equipment costs were applied
to those new vessels that may need additional hardware, and also
include the estimated cost of retrofitting the portion of the fleet
that may require additional hardware to accommodate the use of lower
sulfur fuel in 2015. The hardware costs also include a per engine cost
of $10,000 associated with the requirement to test each production
engine (Sec.  1042.302). These are the sole engine hardware costs
specifically attributable to our CAA rule.
    The operational costs were applied to both U.S.- and foreign-
flagged vessels and include additional operational costs associated
with the applicable NOX limits and the use of lower sulfur
fuel. The operational costs for NOX controls consist of the
additional fuel required due to an estimated two percent fuel penalty
associated with the use of technologies to meet CAA Tier 2 and global
Tier II NOX standards, and the use of urea for ships
equipped with an SCR unit to meet CAA Tier 3 and global Tier III
NOX standards. The operational costs associated with the use
of lower sulfur fuel include both the differential cost of using lower
sulfur fuel that meets ECA standards instead of using marine distillate
fuel, and the differential cost of using lower sulfur fuel that meets
ECA standards instead of using residual fuel.
    To assess the potential cost impacts, we must understand (1) the
makeup of the fleet of ships expected to visit the U.S. when these
requirements go into effect, (2) the emission reduction technologies
expected to be used, and (3) the cost of these technologies. Chapter 5
of the RIA presents this analysis in greater detail. The total engine
and vessel costs associated with the coordinated strategy are based on
a cost per unit value applied to the number of affected vessels.
Operational costs are based on fuel consumption values determined in
the inventory analysis (Section 5.2). This section discusses a brief
overview of the methodology used to develop the hardware and
operational costs, and the methodology used to develop a fleet of
future vessels to which these hardware and engineering costs were
applied.
(1) Methodology
    To estimate the hardware costs to ships that may be affected by the
coordinated strategy, we used an approach similar to that used to
estimate the emissions inventory. Specifically, the same inputs were
used to develop a fleet of ships by ship type and engine type that may
be expected to visit U.S. ports through the year 2040. In order to
determine the cost of applying emission reduction technology on a per
vessel basis, ICF International was contracted by the U.S. EPA to
conduct a cost study of the various compliance strategies expected to
be used to meet the new NOX standards and fuel sulfur
requirements.\118\ ICF was instructed to develop cost estimates
covering a range of vessel types and sizes, which could be scaled
according to engine speed and power to arrive at an estimated cost per
vessel. The costs developed for these engine configurations were used
to develop a $/kW value that could be applied to any slow or medium
speed engine. Using the average propulsion power by ship type presented
in the inventory analysis, the per-vessel hardware costs were then
applied to the estimated number of applicable vessels built after the
standards take effect.
---------------------------------------------------------------------------

    \118\ ICF International, ``Costs of Emission Reduction
Technologies for Category 3 Marine Engines,'' prepared for the U.S.
Environmental Protection Agency, December 2008. EPA Report Number:
EPA-420-R-09-008.
---------------------------------------------------------------------------

(a) Hardware Costs
    The hardware cost estimates include variable costs (components,
assembly, and the associated markup) and fixed costs (tooling, research
and development, redesign efforts, and certification). Hardware costs
associated with the Annex VI existing engine standards were applied to
the portion of existing U.S.-flagged vessels built between 1990 and
1999 expected to be subject to these standards in 2011 when the
standards go into effect (engines with a per-cylinder displacement of
at least 90 liters and a power output of over 5,000 kW. These costs
were applied over a five-year period beginning in 2011 where 20 percent
of the total subject fleet was estimated to undergo service each year.
The existing engine program fixed costs were phased

in over a five-year period beginning in 2010 and applied on a per-
vessel basis.
    Hardware costs associated with the CAA Tier 2 program were applied
to all new U.S.-flagged vessels beginning in the year 2011 when the
standards take effect. The fixed costs associated with Tier 2 standards
are expected to be incurred over a five-year period; however, as the
Tier 2 standards take effect in 2011, it was assumed that manufacturers
are nearing the end of their research and development. In order to
capture all of these costs, all fixed costs that would have been
incurred during that five-year phase-in period were applied in the year
2010. Hardware costs associated with Tier 3 were estimated for U.S.
vessels and were applied as of 2016. The fixed costs associated with
Tier 3 were phased in over a five-year period beginning in 2011.
    Hardware costs associated with the use of lower sulfur fuel are
estimated separately for both new and existing vessels that may require
additional hardware to accommodate the use of lower sulfur fuel. The
fuel sulfur control related hardware costs for new vessels begin to
apply in 2015, while all retrofit costs are expected to be incurred by
2015 and as such are applied in this year. The fixed costs for both new
and existing vessels that may require additional hardware to
accommodate the use of lower sulfur fuel are applied on a per-vessel
basis and are phased in over a five year period beginning as of 2010.
(b) Operational Costs
    The operational costs estimated here are composed of three parts:
(1) The estimated increase in fuel consumption expected to occur with
the use of Tier II technologies on U.S.- and foreign-flagged vessels,
(2) the differential cost of using lower sulfur fuel applicable for
both U.S.- and foreign-flagged vessels, and (3) the use of urea with
SCR as a Tier III NOX emission reduction technology on both
U.S.- and foreign-flagged vessels. The fuel consumption values
associated with Tier II and Tier III standards were determined in the
inventory analysis (see Chapter 3 of the RIA), with an estimated Tier
II fuel consumption penalty of 2 percent (see Chapter 4 of the RIA).
The two percent fuel penalty estimate is based on the use of
modifications to the fuel delivery system to achieve Tier II
NOX reductions, and does not reflect the possibility that
there may be other technologies available to manufacturers that could
offset this fuel penalty. Additionally, Tier III will provide the
opportunity to re-optimize engines for fuel economy when using
aftertreatment, such as SCR, to provide NOX reductions
similar to the compliance strategy for some heavy-duty truck
manufacturers using urea SCR to meet our 2010 truck standard. The
differential cost of using lower sulfur fuel is discussed above in
Section VII.A of this preamble. The estimated urea cost associated with
the use of Tier III SCR is derived from a urea dosage rate that is 7.5
percent of the fuel consumption rate.
    Operating costs per vessel vary depending on what year the vessel
was built, e.g., vessels built as of 2016 will incur operating costs
associated with the use of urea necessary when using SCR as a Tier III
NOX emission control technology, while vessels built prior
to 2016 do not use urea but will incur operating costs associated with
the differential cost of using lower sulfur fuel. Further, we have
assumed vessels built as of 2011 that meet Tier II standards will incur
a 2 percent fuel consumption penalty; see Table 5-31 of the RIA for
further details on fuel costs and fuel volumes. In addition, vessels
built as of 2016 that meet Tier III NOX standards while
traveling in the regulated U.S. waterways are still required to at
least meet Tier II NOX standards outside of an ECA and will
continue to incur the associated fuel penalty. Therefore, an estimated
fleet had to be developed over a range of years, and provide a breakout
of ships by age in each year.
(2) Fleet Development
    There are currently no available estimates of the number of ships
that may visit U.S. ports in the future or comprehensive engine sales
predictions. Therefore, to develop the costs associated with the
coordinated strategy, an approximation of the number of ships by age
and engine type that may visit U.S. ports in the future was
constructed. To characterize the fleet of ships visiting U.S. ports, we
used U.S. port call data collected in 2002 for the inventory port
analysis (see Chapter 3 of the RIA) which included only vessels with C3
engines where the engine size and type was identified.\119\ We used
this data with the growth rates developed in the inventory analysis to
estimate how many ships, by ship type and engine type, would visit U.S.
ports in future years. Due to the long life of these vessels, and the
fact that there has been no significant event that would have changed
the composition of the world fleet since this baseline data was taken,
it is reasonable to use 2002 data as the basis for modeling the future
fleet upon which to base hardware cost estimates. An analysis is
presented in Section <IP_ADDRESS> of Chapter 5 of the RIA which confirms the
reasonableness of this assumption using 2007 MARAD data.
---------------------------------------------------------------------------

    \119\ In order to separate slow speed engines from medium speed
engines where that information was not explicitly available, 2-
stroke engines were assumed to be slow speed, where 4-stroke engines
were assumed to be medium speed.
---------------------------------------------------------------------------

    The ship type information gathered from this baseline data, for the
purposes of both this analysis and the inventory, was categorized into
one of the following ship types: Auto Carrier, Bulk Carrier, Container,
General Cargo, Miscellaneous, Passenger, Refrigerated Cargo (Reefer),
Roll-On Roll-Off (RoRo), and Tankers. Average engine and vessel
characteristics were developed from the baseline data, and these values
were used to represent the characteristics of new vessels used in this
cost analysis (see Chapter 3 of the RIA). Estimated future fleets were
developed by ship type and engine type through the year 2040 for both
new and existing vessels and both U.S.- and foreign-flagged vessels.
Hardware costs were applied on a per-vessel basis.
    Although most ships primarily operate on residual fuel, they
typically carry some amount of distillate fuel as well. Switching to
the use of lower sulfur distillate fuel is the compliance strategy
assumed here to be used by both new and existing ships in 2015 when the
new lower sulfur fuel standards go into effect. To estimate the
potential cost of this compliance strategy, we evaluated the distillate
storage capacity of the current existing fleet to estimate how many
ships may require additional hardware to accommodate the use of lower
sulfur fuel. We performed this analysis on the entire global fleet
listed in Lloyd's database as of 2008.\120\ Of the nearly 43,000
vessels listed, approximately 20,000 vessels had provided Lloyds with
fuel tankage information, cruise speed, and propulsion engine power
data. Using this information, we were able to estimate how far each
vessel could travel on its existing distillate carrying capacity.
---------------------------------------------------------------------------

    \120\ http://www.sea-web.com.
---------------------------------------------------------------------------

    In order to determine if the current distillate capacity of a
particular ship was sufficient to call on a U.S. coordinated strategy
without requiring additional hardware, we evaluated whether or not each
ship could travel 1,140 nm, or the distance between the Port of Los
Angeles and the Port of Tacoma. This distance was selected because it
represents one of the longer trips a ship could travel without

stopping at another port, and should overestimate the number of vessels
that would require such a modification. The resulting percentages of
ships estimated to require a retrofit were then applied to the number
of existing ships in the 2015 fleet to estimate the total cost of this
compliance strategy for existing ships built prior to 2015. The same
percentages were also applied to all new ships built as of 2015 to
determine the number of ships that may require additional hardware and
estimate the cost of this compliance strategy for new vessels.
(3) NOX Reduction Technologies
(a) Tier 2
    Most engine manufacturers are expected to be able to meet Tier 2
NOX standards using engine modifications. This cost estimate
includes the hardware costs associated with the use of retarded fuel
injection timing, higher compression ratios, and better fuel
distribution. There are no variable costs associated with the engine
modifications as the changes are not expected to require any additional
hardware. Some engines may also be equipped with common-rail fuel
systems instead of mechanical fuel injection to meet Tier 2
NOX standards. It is expected that approximately 75 percent
of SSD and 30 percent of MSD engines will get this modification for
Tier 2. The Tier 2 hardware costs developed here include the costs of
the migration of some engines to common-rail fuel systems. It was also
estimated that these technologies may increase fuel consumption by up
to 2 percent; this fuel penalty is included in the Tier 2 operational
costs. Tier 2 hardware costs included in the total estimated cost of
the coordinated strategy are only associated with U.S.-flagged vessels;
operational costs are applied to both U.S.- and foreign-flagged
vessels.
(b) Tier 3
    Tier 3 NOX standards are approximately 80 percent below
Tier 1 NOX standards, and are likely to require exhaust
aftertreatment such as SCR. ICF performed a detailed cost analysis for
the U.S. EPA that included surveying engine and emission control
technology manufacturers regarding these advanced technology strategies
and their potential costs. Tier 3 NOX standards are
projected to be met through the use of SCR systems. While other
technologies such as EGR or those that include introduction of water
into the combustion chamber either through fumigation, fuel emulsions,
or direct water injection may also enable Tier 3 compliance, we assume
they will only be selected if they are less costly than SCR. Therefore,
we have based this analysis on the exclusive use of SCR.
(c) Engine Modifications
    In addition to SCR, it is expected that manufacturers will also use
compound or two-stage turbocharging as well as electronic valving to
enhance performance and emission reductions to meet Tier 3
NOX standards. Engine modifications to meet Tier 3 emission
levels will include a higher percentage of common-rail fuel injection
coupled with two-stage turbocharging and electronic valving. Engine
manufacturers estimate that nearly all SSD and 80 percent of MSD
engines will use common-rail fuel injection. Two stage turbocharging
will most likely be used on least 70 percent of all engines required to
meet Tier 3 emission levels. Electronically (hydraulically) actuated
intake and exhaust valves for MSD and electronically actuated exhaust
valves for SSD are necessary to accommodate two-stage turbocharging.
Additionally, the remaining SSD engines still using mechanical
injection (approximately 25 percent mechanically controlled, and 75
percent electronically controlled) are expected to migrate to common
rail for Tier 3, while an additional 40 percent of MSD engines are
expected to receive common rail totaling approximately 80 percent of
all MSD engines. The engine modification variable costs were applied to
all new U.S.-flagged vessels equipped with either SSD or MSD engines.
Costs to foreign-flagged vessel expected to visit U.S. ports are
presented as a separate analysis in Chapter 5 of the RIA, and are not
included in the total estimated cost of the coordinated strategy.
(4) SOX/PM Emission Reduction Technology
    In addition to Tier 3 NOX standards, the IMO ECA
requirements also include lower fuel sulfur limits that will result in
reductions in SOX and PM. Category 3 marine engines
typically operate on heavy fuel oil with a sulfur content of 2.7
percent, therefore significant SOX and PM reductions will be
achieved using distillate fuels with a sulfur content of 0.1 percent.
This cost analysis is based on the assumption that vessel operators
will operate their engines using lower sulfur fuel in the U.S.
coordinated strategy waterways. We believe fuel switching will be the
primary compliance approach; fuel scrubbers would be used in the event
that the operator expected to realize a cost savings and are not
considered in this analysis. In some cases, additional capacity and
equipment to accommodate the use of lower sulfur fuel may need to be
installed on a vessel. The potential costs due to these additional
modifications applied to new ships as well as retrofits to any existing
ships are discussed here, and these hardware costs are included as part
of the total cost of this coordinated program.
    Although most ships operate on heavy fuel oil, they typically carry
small amounts of distillate fuel. Some vessel modifications and new
operating practices may be necessary to use lower sulfur distillate
fuels on vessels designed to operate primarily on residual fuel.
Installation and use of a fuel cooler, associated piping, and viscosity
meters to the fuel treatment system may be required to ensure viscosity
matches between the fuel and injection system design. While there are
many existing ships that already have the capacity to operate on both
heavy fuel oil and distillate fuel and have separate fuel tank systems
to support each type of fuel, some ships may not have sufficient
onboard storage capacity. If a new or segregated tank is desired,
additional equipment for fuel delivery and control of these systems may
be required.
(5) NOX and SOX Emission Reduction Technology
Costs
(a) NOX Emission Reduction Technology
    The costs associated with SCR include variable and fixed costs. SCR
hardware costs include the reactor, dosage pump, urea injectors,
piping, bypass valve, an acoustic horn or a cleaning probe, the control
unit and wiring, and the urea tank (the size of the tank is based on
250 hours of normal operation when the ship is operating in the
regulated U.S. waterways and the SCR system is activated.) The size of
the tank is dependent on the frequency with which the individual ship
owner prefers to fill the urea tank. The methodology used here to
estimate the capacity of the SCR systems is based on the power rating
of the propulsion engines only. Auxiliary engine power represents about
20 percent of total installed power on a vessel; however, it would be
unusual to operate both propulsion and auxiliary engines at 100 percent
load. Typically, ships operate under full propulsion power only while
at sea when the SCR is not operating; when nearing ports, the auxiliary
engine is operating at high loads while the propulsion engine is
operating at very low loads.

    In this analysis, we determined the average number of hours a ship
would spend calling on a U.S. port: If the call was straight in and
straight out at 200 nm, the average time spent was slightly over 35
hours. If the distance travelled was substantial, such as from the Port
of Los Angeles to the Port of Tacoma, or 1140 nm, the average time
spent travelling was approximately 75 hours. Therefore, the size of the
tanks and corresponding $/kW values estimated here to carry enough urea
for 250 hours of continuous operation may be an overestimate. Based on
250 hours of operation, a range of urea tank sizes from 20 m\3\ to
approximately 256 m\3\ was determined for the six different engine
configurations used in this analysis.
    To understand what impacts this may have on the cargo hauling
capacity of the ship, we looked at the ISO standard containers used
today. Currently, over two-thirds of the containers in use today are 40
feet long, total slightly over 77 m\3\ and are the equivalent of two
TEU.\121\ The urea tank sizes estimated here reflect a cargo
equivalence of 0.5-2 TEUs, based on a capacity sufficient for 250 hours
of operation. The TEU capacity of container ships, for example,
continues to increase and can be as high as 13,000 TEUs.\122\ Based on
a rate of approximately $1,300 per TEU to ship a container from Asia to
the U.S., a net profit margin of 10%, and an average of 16 trips per
year, the estimated cost due to displaced cargo to call on a U.S./
Canada ECA may be $2,100.123 124 125 The cost analysis
presented here does not include displaced cargo due to the variability
of tank sizes owners choose to install.
---------------------------------------------------------------------------

    \121\ http://www.iicl.org, Institute of International Container
Lessors.
    \122\ Kristensen, Hans Otto Holmegaard, ``Preliminary Ship
Design of Container Ships, Bulk Carriers, Tankers, and Ro-Ro Ships.
Assessment of Environmental Impact from Sea-Borne Transport Compared
with Landbased Transport,'' March, 2008.
    \123\ http://people.hofstra.edu/geotrans/eng/ch2en/conc2en/
maritimefreightrates.html.
    \124\ http://moneycentral.msn.com/investor/invsub/results/
hilite.asp?Symbol=SSW.
    \125\ Based on a container ship carrying nearly 9,000 TEUs
traveling from Hong Kong to the Port of Los Angeles (approximately
6,400 nm) with a cruise speed of 25 nm/hr, the round trip time is
nearly 21 days and this trip could be made roughly 16 times per
year.
---------------------------------------------------------------------------

    To estimate the SCR hardware costs associated with newly built
ships, we needed to generate an equation in terms of $/kW that could be
applied to other engine sizes. Therefore, the $/kW values representing
the hardware costs estimated for the six different engine types and
sizes used in this analysis was developed using a curve fit for both
SSD and MSD engines. The resulting $/kW values range from $40-$80 per
kW for MSD, and $40-$70 for SSD. These costs were then applied based on
the characteristics of the average ship types described in the
inventory section of the RIA (see Chapter 3) to the representative
portion of the future fleet in order to estimate the total costs
associated with this program. Table VII-3 presents the estimated costs
of this technology as applied to different ship and engine types
representing the average ship characteristics discussed in Section
VII.A.2.
(b) Lower Sulfur Fuel Hardware Costs
    This cost analysis is based on the use of switching to lower sulfur
fuel to meet the fuel sulfur standards. The costs presented here may be
incurred by some existing and some newly built ships if additional fuel
tank equipment is required to facilitate the use of lower sulfur fuel.
Based on existing vessel fleet data, we estimate that approximately
one-third of existing vessels may need additional equipment installed
to accommodate additional lower sulfur fuel storage capacity beyond
that installed on comparable new ships. In order to include any costs
that may be incurred on new vessels that choose to add additional lower
sulfur fuel capacity, we also estimated that one-third of new vessels
may require additional hardware. Separate $/kW values were developed
for new and existing vessels as the existing vessel retrofit would
likely require more labor to complete installation.
    The size of the tank is dependent on the frequency with which the
individual ship owner prefers to fill the lower sulfur fuel tank. The
size of the tanks and corresponding $/kW value estimated here will
carry capacity sufficient for 250 hours of propulsion and auxiliary
engine operation. This is most likely an overestimate of the amount of
lower sulfur fuel a ship owner would need to carry, resulting in an
overestimate of the total cost to existing and new vessels. The tank
sizes based on 250 hours of operation and based on the six different
engine configuration used in this analysis range from 240 m\3\ to
nearly 2,000 m\3\. This would be the equivalent of 6-50 TEUs. This cost
analysis does not reflect other design options such as partitioning of
a residual fuel tank to allow for lower sulfur fuel capacity which
would reduce the amount of additional space required, nor does this
analysis reflect the possibility that some ships may have already been
designed to carry smaller amounts of distillate fuel in separate tanks
for purposes other than continuous propulsion. The $/kW value hardware
cost values for the six data points corresponding to the six different
engine types and sizes used in this analysis are $2-7 for SSD and $3-8
for MSD. A curve fit was determined for the slow-speed engine as well
as for the medium speed engines to determine a $/kW value for each
engine type. Table VII-3 presents the estimated costs of the
technologies used to meet the different standards as applied to
different ship and engine types representing the average ship
characteristics discussed in Section VII.A.2. The estimated hardware
costs of retrofitting existing U.S.-flagged vessels that may require
additional hardware to accommodate the use of lower sulfur fuel is
estimated to be $10.4 million in 2015.

                                   Table VII-3--Estimated Variable Costs of Emission Control Technology on a per-Ship Basis--by Ship Type and Engine Type \a\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Lower sulfur
                                                                                Average       MFI to  common   EFI to  common  Tier 3 (SCR and  fuel hardware--   Lower sulfur fuel
                    Ship type                                  Engine speed                 propulsion          rail             rail            engine        new vessels    hardware--existing
                                                                                power (kW)                                       modifications)                         vessels
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Auto Carrier....................................  MSD..................................             9640          $80,500          $30,400         $566,000          $42,300            $56,400
Bulk Carrier....................................  MSD..................................             6360           67,200           24,600          479,000           36,900             48,500
Container.......................................  MSD..................................            13878           92,300           35,400          678,000           49,200             66,600
General Cargo...................................  MSD..................................             5159           60,400           21,700          448,000           34,900             45,600
Passenger.......................................  MSD..................................            23762          109,600           42,800          939,000           65,400             90,400
Reefer..........................................  MSD..................................             7360           71,900           26,600          506,000           38,500             50,900
RoRo............................................  MSD..................................             8561           76,700           28,700          538,000           40,500             53,800
Tanker..........................................  MSD..................................             6697           68,800           25,300          488,000           37,400             49,300

Misc............................................  MSD..................................             9405           79,800           30,000          560,000           41,900             55,800
Auto Carrier....................................  SSD..................................            11298          152,400           55,500          819,000           48,000             64,800
Bulk Carrier....................................  SSD..................................             8434          132,900           48,400          669,000           42,700             57,700
Container.......................................  SSD..................................            27454          211,600           77,200        1,521,000           63,900             86,700
General Cargo...................................  SSD..................................             7718          127,000           46,200          630,000           41,100             55,500
Passenger.......................................  SSD..................................            23595          201,500           73,500        1,374,000           61,200             83,000
Reefer..........................................  SSD..................................            10449          147,200           53,600          776,000           46,500             62,900
RoRo............................................  SSD..................................            15702          174,300           63,500        1,034,000           53,900             72,900
Tanker..........................................  SSD..................................             9755          142,600           51,900          739,000           45,300             61,200
Misc............................................  SSD..................................             4659           93,300           33,900           50,000           32,000             43,100
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ The values presented in Table VII-3 are provided only to show what the estimated costs would be for a range of vessel types given average characteristics (such as DWT, total main, and
  total auxiliary power) for both SSD and MSD engine types. Not all vessels will require all of these technologies; for example, it is estimated that only 30 percent of MSD will get common-
  rail fuel injection systems for Tier II.

(6) Total Costs Associated With the Coordinated Strategy
    The total hardware costs associated with the coordinated strategy
were estimated using the number of new ships by ship type and engine
type entering the fleet each year. Table VII-4 presents the total
hardware costs to U.S.-flagged vessels associated with the coordinated
strategy. These costs consist of the variable and fixed hardware costs
associated with the Annex VI existing engine program, Tier 2 and Tier 3
standards, and additional components that may be required to
accommodate the use of lower sulfur fuel on both new and existing
vessels. This table also presents the total estimated operational costs
associated with the coordinated strategy. These costs consist of the 2
percent fuel consumption penalty associated with Tier 2 (Annex VI Tier
II), the use of urea on vessels equipped with SCR systems, and the
differential cost of using lower sulfur fuel; these costs are incurred
by both U.S.- and foreign-flagged vessels. The total estimated cost of
the coordinated strategy is $3.41 billion in 2030. The total costs from
2010 through 2040 are estimated to be $42.9 billion at a 3 percent
discount rate or $22.1 at a 7 percent discount rate.

                               Table VII-4--Total Hardware and Operational Costs Associated With the Coordinated Strategy
                                                                    [Thousands of $]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Total hardware                                          Total operating costs         Total costs
                                                       costs for        Total new       Total vessel  ---------------------------------- associated with
                       Year                             existing     engine hardware   hardware costs                                    the coordinated
                                                        engines           costs                           U.S. flag       Foreign flag       strategy
--------------------------------------------------------------------------------------------------------------------------------------------------------
2010..............................................           $9,400             $319             $166               $0               $0             $485
2011..............................................          161,000            3,580              173              173            1,130            5,060
2012..............................................          153,000            3,700              179              841            5,590           10,300
2013..............................................          145,000            3,830              186           32,400          213,000          249,000
2014..............................................          137,000            3,960              192           34,400          226,000          265,000
2015..............................................          131,000            4,100           11,100          180,000        1,190,000        1,390,000
2016..............................................                0           27,300              691          189,000        1,250,000        1,470,000
2017..............................................                0           28,500              717          199,000        1,330,000        1,560,000
2018..............................................                0           29,600              745          210,000        1,410,000        1,650,000
2019..............................................                0           30,700              773          221,000        1,500,000        1,750,000
2020..............................................                0           31,900              803          233,000        1,590,000        1,860,000
2021..............................................                0           33,200              834          246,000        1,680,000        1,960,000
2022..............................................                0           34,600              866          258,000        1,770,000        2,060,000
2023..............................................                0           35,900              899          272,000        1,880,000        2,190,000
2024..............................................                0           37,400              934          286,000        1,980,000        2,300,000
2025..............................................                0           38,800              970          300,000        2,090,000        2,430,000
2026..............................................                0           40,400            1,010          315,000        2,200,000        2,560,000
2027..............................................                0           42,100            1,050          330,000        2,310,000        2,680,000
2028..............................................                0           43,700            1,090          345,000        2,430,000        2,820,000
2029..............................................                0           45,500            1,130          362,000        2,550,000        2,960,000
2030..............................................                0           47,400            1,180          378,000        2,680,000        3,110,000
2031..............................................                0           49,300            1,220          395,000        2,810,000        3,260,000
2032..............................................                0           51,300            1,270          413,000        2,950,000        3,420,000
2033..............................................                0           53,400            1,320          431,000        3,080,000        3,570,000
2034..............................................                0           55,500            1,370          451,000        3,240,000        3,750,000
2035..............................................                0           57,900            1,430          471,000        3,390,000        3,920,000
2036..............................................                0           60,200            1,490          494,000        3,560,000        4,120,000
2037..............................................                0           62,800            1,540          517,000        3,740,000        4,320,000
2038..............................................                0           65,300            1,610          541,000        3,930,000        4,540,000
2039..............................................                0           68,000            1,670          566,000        4,110,000        4,750,000
2040..............................................                0           70,800            1,740          591,000        4,310,000        4,970,000
NPV @ 3%..........................................          677,000          663,000           26,500        5,260,000       36,900,000       42,900,000

NPV @ 7%..........................................          610,000          346,000           16,900        2,730,000       19,000,000       22,100,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

C. Cost Effectiveness

    One tool that can be used to assess the value of the coordinated
strategy is the engineering costs incurred per ton of emissions
reduced. This analysis involves a comparison of our program to other
measures that have been or could be implemented. As summarized in this
section, the coordinated strategy represents a highly cost effective
mobile source control program for reducing NOX, PM and
SOX emissions.
    We have estimated the cost per ton based on the net present value
of 3 percent and 7 percent of all hardware costs incurred by U.S.-
flagged vessels, all operational costs incurred by both U.S. and
foreign-flagged vessels, and all emission reductions generated from the
year 2010 through the year 2040. The baseline case for these estimated
reductions is the existing set of engine standards for C3 marine diesel
engines and fuel sulfur limits. Table VII-5 shows the annual emissions
reductions associated with the coordinated strategy; these annual tons
are undiscounted. A description of the methodology used to estimate
these annual reductions can be found in Section II of this preamble and
Chapter 3 of the RIA.

              Table VII-5--Estimated Emissions Reductions Associated With the Coordinated Strategy
                                                  [Short tons]
----------------------------------------------------------------------------------------------------------------
                                                                            Reductions (tons)
                     Calendar year                      --------------------------------------------------------
                                                                NOX                SOX                 PM
----------------------------------------------------------------------------------------------------------------
2010...................................................             47,000                  0                  0
2011...................................................             54,000                  0                  0
2012...................................................             70,000                  0                  0
2013...................................................             88,000            390,000             48,400
2014...................................................            105,000            406,000             50,400
2015...................................................            123,000            641,000             68,000
2016...................................................            150,000            668,000             70,800
2017...................................................            209,000            695,000             73,700
2018...................................................            279,000            724,000             76,800
2019...................................................            349,000            755,000             80,000
2020...................................................            409,000            877,000             94,100
2021...................................................            488,000            916,000             98,200
2022...................................................            547,000            954,000            102,000
2023...................................................            634,000            995,000            107,000
2024...................................................            714,000          1,040,000            111,000
2025...................................................            790,000          1,080,000            116,000
2026...................................................            866,000          1,130,000            121,000
2027...................................................            938,000          1,170,000            126,000
2028...................................................          1,020,000          1,220,000            131,000
2029...................................................          1,100,000          1,280,000            137,000
2030...................................................          1,180,000          1,330,000            143,000
2031...................................................          1,260,000          1,390,000            149,000
2032...................................................          1,330,000          1,450,000            155,000
2033...................................................          1,410,000          1,510,000            162,000
2034...................................................          1,500,000          1,580,000            169,000
2035...................................................          1,590,000          1,650,000            177,000
2036...................................................          1,690,000          1,720,000            184,000
2037...................................................          1,810,000          1,800,000            193,000
2038...................................................          1,920,000          1,880,000            201,000
2039...................................................          2,020,000          1,970,000            210,000
2040...................................................          2,130,000          2,050,000            220,000
NPV at 3%..............................................         14,400,000         19,100,000          2,100,000
NPV at 7%..............................................          6,920,000         10,100,000          1,090,000
----------------------------------------------------------------------------------------------------------------

    The net estimated reductions by pollutant, using a net present
value of 3 percent from 2010 through 2040 are 14.4 million tons of
NOX, 19.1 million tons of SOX, and 2.1 million
tons of PM (6.9 million, 10.1 million, and 1.1 million tons of
NOX, SOX, and PM, respectively, at a net present
value of 7 percent over the same period.)
    Using the above cost and emission reduction estimates, we estimated
the lifetime (2010 through 2040) cost per ton of pollutant reduced. For
this analysis, all of the hardware costs associated with the Annex VI
existing engine program and Tier 2 and Tier 3 NOX standards
as well as the operational costs associated with the

global Tier II and Tier III standards were attributed to NOX
reductions. The costs associated with lower sulfur fuel operational
costs as applied to all vessels visiting U.S. ports and the hardware
costs associated with accommodating the use of lower sulfur fuel on
U.S.-flagged vessels were associated with SOX and PM
reductions. In this analysis, half of the costs associated with the use
of lower sulfur fuel were allocated to PM reductions and half to
SOX, reductions, because the costs incurred to reduce
SOX emissions directly reduce emissions of PM as well. Using