EPA ‘Tier III’ Air Rule Flexibilities Fail To Quell Refiners’ Attacks On Policy

Source: Chris Knight, Inside EPA • Posted: Wednesday, March 5, 2014

EPA’s final “Tier III” fuel and vehicle air rule includes new regulatory flexibilities sought by refiners including making it easier to use existing compliance credits and not making 15 percent ethanol (E15) gasoline a certification fuel, but refiners still oppose the rule and say its low-sulfur fuel mandate could create up to $10 billion in capital costs.

The final rule released March 3 retains the proposed version’s requirement for refiners to cut sulfur content from 30 parts per million to 10 parts per million by Jan. 1, 2017. It also sets tight new tailpipe emissions starting with model year 2017 vehicles, a deadline automakers sought so they can harmonize EPA’s standards with California tailpipe rules already adopted by more than a dozen other states.

“That’s a big deal for us,” General Motors vice president for regulatory affairs Mike Robinson said on a March 3 call hosted by EPA, as automakers want to avoid having to meet different emission rules in different states.

EPA justifies the sulfur cuts in the rule because it says the new gasoline will make it possible for manufacturers to build vehicles that comply with the new tailpipe standards, in addition to providing immediate air quality benefits by making existing cars run cleaner. Sulfur in fuel can “poison” catalysts used in emission control systems, making them less effective, and many automakers say it would be impossible to ever meet the standard without lower-sulfur fuel.

The American Petroleum Institute (API) criticized the expected billions of dollars that it said industry would have to invest to comply with the rule, but public health and environmental groups including the American Lung Association, League of Conservation Voters, Sierra Club and others touted the rule’s expected health benefits.

Lawmakers were divided in their reaction to the rule, with Senate Environment and Public Works Committee Chairman Barbara Boxer (D-CA) and panel member Sheldon Whitehouse (D-RI) praising its health benefits, while Senate Energy and Natural Resources Committee Chairman Mary Landrieu (D-LA) attacked its costs.

Echoing oil industry concerns about the costs of complying with the rule, Landrieu said, “These new costs will be passed on to American consumers in the form of higher gas prices and runs counter to other environmental protections already in place. The EPA is rushing to judgment on this issue, and I urge them to reconsider imposing this regulation without a complete understanding of the environmental and economic implications.”

Rule Revisions

EPA tried to address some industry attacks on the rule by making some revisions to the rule compared to the proposed version issued almost one year ago.

For example, EPA agreed to a request from automakers and oil groups to certify vehicles using widely available 10 percent ethanol gasoline (E10). EPA had proposed to certify vehicles using E15 but in the final rule decided to drop that plan after finding the fuel was not available on a national scale and receiving “near consensus” in comments from stakeholders that E10 was more appropriate.

EPA has also met a request from the oil industry to make it easier for them to “bank” and trade credits for early compliance that starts on Jan. 1, 2014, by extending their expiration dates and making them transferable for compliance with either Tier III or the existing “Tier II” gasoline standards that are already in effect. The agency has also finalized part of its earlier proposal giving small refineries until 2020 to comply.

The agency’s decision to make those averaging, banking and trading (ABT) provisions more flexible, the small refinery delay and the dropping of E15 as the certification fuel did little to quell the oil industry’s criticisms against Tier III. Oil groups have said the rule would increase gasoline prices by up to 9 cents per gallon with negligible air quality benefits, and in recent weeks have focused their criticisms on the three-year compliance deadline.

The ABT changes are “helpful but it doesn’t get to the underlying problem, which is the arbitrarily short implementation timeframe,” says an oil industry source. “EPA is giving industry less than three years to comply. That’s unprecedented and doesn’t recognize the realities of refinery turnaround times.”

API’s March 3 statement on the rule said it would “unnecessarily raise costs,” with API Downstream Group Director Bob Greco saying the rule would provide “negligible, if any, environmental benefits.”

The trade group has argued that Tier III is unnecessary because the oil industry’s existing cuts to sulfur levels in gasoline will continue to generate air quality benefits. API also says the rule could have up to $10 billion in initial capital costs to upgrade refinery equipment.

EPA, in contrast, projects that by 2030 the rule will create between $6.7 billion and $19 billion in annual health benefits — in part by preventing 700 and 2,000 premature deaths — at an annual cost of about $1.5 billion. The rule is expected to add about 0.65 cents to the average gallon of gasoline, with a $72 per vehicle increase in costs by 2025.

Many states are strongly supportive of the rule, as they see the rule as playing a key role helping them meeting EPA’s national ambient air quality standards for ozone and soot and complying with the agency’s regional haze program, among other air quality goals.

“We know of no other air pollution control strategy that can achieve such substantial, cost-effective and immediate emission reductions as Tier III,” Tad Aburn, co-president of the National Association of Clean Air Agencies and air quality director for the Maryland Department of the Environment, said on the March 3 call with reporters.

Aburn said that for many states, the rule’s immediate reductions in nitrogen oxides emissions will “be the difference between attaining the health-based standards and not attaining the health-based standards” for ozone.

Compliance Costs

Critics of Tier III have often touted estimates of an API-backed study finding the rule could increase the costs of gasoline by 6 to 9 cents per gallon in most markets, estimates the agency says in the final rule do not accurately reflect the true costs of compliance, which under EPA’s cost estimates are about an order of magnitude lower.

EPA Administrator Gina McCarthy, on the March 3 call with reporters, specifically addressed the API study, saying that “frankly the estimate that API and others are relying on is an outdated estimate to what they thought we would be proposing.”

EPA, in the regulatory impact assessment that accompanies Tier III, faults the API-backed study for basing its Tier III cost estimates on the “marginal costs” that reflect refineries facing the highest compliance costs, rather than the average costs estimated by EPA. The agency says the API study did not provide “any justification” for why refineries with the highest desulfurization costs would set the price for gasoline.

After adjusting the API study to reflect average costs, EPA says the costs of Tier III would be about 2.1 cents per gallon, and after adjusting for how API calculated return on investment to provided an “apples-to-apples” comparison, the agency says the estimate came down further to 1.6 cents per gallon.

The remainder of the difference, EPA says, is because the API study had assumed higher capital costs for equipment, assumed there would be a more stringent overall sulfur cap for gasoline and did not factor in the ABT provisions. After factoring in those differences, the difference ends up being only 0.1 cents per gallon, EPA says.

The same oil industry source refutes EPA’s criticisms of the study, saying that “I’m not aware of any credible industry source that that thinks you can modify a refinery and achieve the reductions for less than a penny per gallon,” later adding that the study looked at marginal costs, rather than average costs, because “marginal costs are the ones that drive the markets.”

Particulate Limits

Despite efforts to harmonize Tier III with California’s tailpipe emission rules called “LEV III,” the agency’s final rule is less stringent than LEV III’s particulate matter limits for light-duty vehicles that would go into effect on model year 2025 vehicles.

EPA says that it finalized the weaker particulate matter limits that begin with model year 2025 vehicles because it believes they are the “most stringent technically feasible standards within the implementation timeframe of this rule.” The agency says in the rule that it will “work closely” with the California Air Resources Board on the measurement of particulate matter and how that relates to automakers ability to reach “very low” emission standards.

Beyond that change, EPA says that the differences between Tier III and LEV III are “not major,” with most of the differences existing “only in the transitional years” of Tier III, when it is trying to gradually line up with the LEV III standards.

Other changes in the rule also include a more stringent tailpipe particulate matter limit that is intended for periods of aggressive driving. EPA says it tightened this limit based on new test data developed in California that “clearly show” the previous standard was “inappropriately high.” EPA has tightened this standard to 6 milligrams per mile (mg/mi), down from its proposal of 10 mg/mi for light-duty vehicles and 20 mg/mi for heavy-duty vehicles. — Chris Knight (cknight@iwpnews.com)