[Federal Register Volume 69, Number 124 (Tuesday, June 29, 2004)]
[Rules and Regulations]
[Pages 38958-39273]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 04-11293]



[[Page 38957]]

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Part II





Environmental Protection Agency





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40 CFR Parts 9, 69, et al.



Control of Emissions of Air Pollution From Nonroad Diesel Engines and 
Fuel; Final Rule

Federal Register / Vol. 69, No. 124 / Tuesday, June 29, 2004 / Rules 
and Regulations

[[Page 38958]]


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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Parts 9, 69, 80, 86, 89, 94, 1039, 1048, 1051, 1065, and 
1068

[OAR-2003-0012; FRL-7662-4]
RIN 2060-AK27


Control of Emissions of Air Pollution From Nonroad Diesel Engines 
and Fuel

AGENCY: Environmental Protection Agency (EPA).

ACTION: Final rule.

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SUMMARY: Nonroad diesel engines contribute considerably to our nation's 
air pollution. These engines, used primarily in construction, 
agricultural, and industrial applications, are projected to continue to 
contribute large amounts of particulate matter, nitrogen oxides, and 
sulfur oxides, all of which contribute to serious public health 
problems in the United States. These problems include premature 
mortality, aggravation of respiratory and cardiovascular disease, 
aggravation of existing asthma, acute respiratory symptoms, chronic 
bronchitis, and decreased lung function. We believe that diesel exhaust 
is likely to be carcinogenic to humans by inhalation.
    Today, EPA is adopting new emission standards for nonroad diesel 
engines and sulfur reductions in nonroad diesel fuel that will 
dramatically reduce harmful emissions and will directly help States and 
local areas recently designated as 8-hour ozone nonattainment areas to 
improve their air quality. This comprehensive national program 
regulates nonroad diesel engines and diesel fuel as a system. New 
engine standards will begin to take effect in the 2008 model year, 
phasing in over a number of years. These standards are based on the use 
of advanced exhaust emission control devices. We estimate particulate 
matter reductions of 95 percent, nitrogen oxides reductions of 90 
percent, and the virtual elimination of sulfur oxides from nonroad 
engines meeting the new standards. Nonroad diesel fuel sulfur 
reductions of more than 99 percent from existing levels will provide 
significant health benefits as well as facilitate the introduction of 
high-efficiency catalytic exhaust emission control devices as these 
devices are damaged by sulfur. These fuel controls will be phased-in 
starting in mid-2007. Today's nonroad final rule is largely based on 
the Environmental Protection Agency's 2007 highway diesel program.
    To better ensure the benefits of the standards are realized in-use 
and throughout the useful life of these engines, we are also adopting 
new test procedures, including not-to-exceed requirements, and related 
certification requirements. The rule also includes provisions to 
facilitate the transition to the new engine and fuel standards and to 
encourage the early introduction of clean technologies and clean 
nonroad diesel fuel. We have also developed provisions for both the 
engine and fuel programs designed to address small business 
considerations.
    The requirements in this rule will result in substantial benefits 
to public health and welfare through significant reductions in 
emissions of nitrogen oxides and particulate matter, as well as 
nonmethane hydrocarbons, carbon monoxide, sulfur oxides, and air 
toxics. We are now projecting that by 2030, this program will reduce 
annual emissions of nitrogen oxides and particulate matter by 738,000 
and 129,000 tons, respectively. These emission reductions will prevent 
12,000 premature deaths, over 8,900 hospitalizations, and almost a 
million work days lost, and will achieve other quantifiable benefits 
every year. The total benefits of this rule will be approximately $80 
billion annually by 2030. The substantial health and welfare benefits 
we are projecting for this final action exceed those we anticipated at 
the time of this proposal. Costs for both the engine and fuel 
requirements will be many times less, at approximately $2 billion 
annually.

DATES: This final rule is effective on August 30, 2004.
    The incorporation by reference of certain publications listed in 
this regulation is approved by the Director of the Federal Register as 
of August 30, 2004.

ADDRESSES: EPA has established a docket for this action under Docket ID 
Nos. OAR-2003-0012 and A-2001-28. All documents in the docket are 
listed in the EDOCKET index at http://www.epa.gov/edocket. Although 
listed in the index, some information is not publicly available, i.e., 
CBI or other information whose disclosure is restricted by statute. 
Certain other material, such as copyrighted material, is not placed on 
the Internet and will be publicly available only in hard copy form. 
Publicly available docket materials are available either electronically 
in EDOCKET or in hard copy at the Air Docket in the EPA Docket Center, 
EPA/DC, EPA West, Room B102, 1301 Constitution Ave., NW, Washington, 
DC. The Public Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday 
through Friday, excluding legal holidays. The telephone number for the 
Public Reading Room is (202) 566-1744, and the telephone number for the 
Air Docket is (202) 566-1742.

FOR FURTHER INFORMATION CONTACT: Carol Connell, Assessment and 
Standards Division, Office of Transportation and Air Quality, 
Environmental Protection Agency, 2000 Traverwood Drive, Ann Arbor, MI 
48105; telephone number: (734) 214-4349; fax number: (734) 214-4050; e-
mail address: connell.carol@epa.gov, or Assessment and Standards 
Division Hotline; telephone number: (734) 214-4636; e-mail address: 
asdinfo@epa.gov.

SUPPLEMENTARY INFORMATION:

Does This Action Apply To Me?

    This action may affect you if you produce or import new diesel 
engines which are intended for use in nonroad vehicles or equipment, 
such as agricultural and construction equipment, or if you produce or 
import such nonroad vehicles or equipment. It may also affect you if 
you convert nonroad vehicles or equipment, or the engines used in them, 
to use alternative fuels. It may also affect you if you produce, 
import, distribute, or sell nonroad diesel fuel.
    The following table gives some examples of entities that may have 
to follow the regulations. But because these are only examples, you 
should carefully examine the regulations in 40 CFR parts 80, 89, 1039, 
1065, and 1068. If you have questions, call the person listed in the 
FOR FURTHER INFORMATION CONTACT section of this preamble:

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                                                         Examples of
          Category              NAICS       SIC          potentially
                               codes\a\   codes\b\   regulated entities
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Industry....................     333618       3519  Manufacturers of new
                                                     nonroad diesel
                                                     engines.
Industry....................     333111       3523  Manufacturers of
                                                     farm machinery and
                                                     equipment.
Industry....................     333112       3524  Manufacturers of
                                                     lawn and garden
                                                     tractors (home).
Industry....................     333924       3537  Manufacturers of
                                                     industrial trucks.
Industry....................     333120       3531  Manufacturers of
                                                     construction
                                                     machinery.

[[Page 38959]]

 
Industry....................     333131       3532  Manufacturers of
                                                     mining machinery
                                                     and equipment.
Industry....................     333132       3533  Manufacturers of oil
                                                     and gas field
                                                     machinery and
                                                     equipment.
Industry....................     811112       7533  Commercial importers
                                                     of vehicles and
                                                     vehicle components.
                                 811198       7549  ....................
Industry....................     324110       2911  Petroleum refiners.
Industry....................     422710       5171  Diesel fuel
                                                     marketers and
                                                     distributors.
                                 422720       5172  ....................
Industry....................     484220       4212  Diesel fuel
                                                     carriers.
                                 484230       4213  ....................
------------------------------------------------------------------------
Notes:
\a\ North American Industry Classification System (NAICS).
\b\ Standard Industrial Classification (SIC) system code.

How Can I Get Copies of This Document and Other Related Information?

    Docket. EPA has established an official public docket for this 
action under Docket ID No. OAR-2003-0012 at http://www.epa.gov/edocket. 
The official public docket consists of the documents specifically 
referenced in this action, any public comments received, and other 
information related to this action. Although a part of the official 
docket, the public docket does not include Confidential Business 
Information (CBI) or other information whose disclosure is restricted 
by statute. The official public docket is the collection of materials 
that is available for public viewing at the Air Docket in the EPA 
Docket Center, (EPA/DC) EPA West, Room B102, 1301 Constitution Ave., 
NW, Washington, DC. The EPA Docket Center Public Reading Room is open 
from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal 
holidays. The telephone number for the Reading Room is (202) 566-1742, 
and the telephone number for the Air Docket is (202) 566-1742.
    Electronic Access. You may access this Federal Register document 
electronically through the EPA Internet under the ``Federal Register'' 
listings at http://www.epa.gov/fedrgstr/.
    An electronic version of the public docket is available through 
EPA's electronic public docket and comment system, EPA Dockets. You may 
use EPA Dockets at http://www.epa.gov/edocket/ to view public comments, 
access the index listing of the contents of the official public docket, 
and to access those documents in the public docket that are available 
electronically. Although not all docket materials may be available 
electronically, you may still access any of the publicly available 
docket materials through the docket facility identified above. Once in 
the system, select ``search,'' then key in the appropriate docket 
identification number.

Outline of This Preamble

I. Overview
    A. What Is EPA Finalizing?
    B. Why Is EPA Taking This Action?
II. Nonroad Engine Standards
    A. What Are the New Engine Standards?
    B. Are the New Standards Feasible?
    C. Why Do We Need 15ppm Sulfur Diesel Fuel?
III. Requirements for Engine and Equipment Manufacturers
    A. Averaging, Banking, and Trading
    B. Transition Provisions for Equipment Manufacturers
    C. Engine and Equipment Small Business Provisions (SBREFA)
    D. Certification Fuel
    E. Temporary In-Use Compliance Margins
    F. Test Cycles
    G. Other Test Procedure Issues
    H. Engine Power
    I. Auxiliary Emission Control Devices and Defeat Devices
    J. Not-To-Exceed Requirements
    K. Investigating and Reporting Emission-Related Defects
    L. Compliance With the Phase-In Provisions
    M. Incentive Program for Early or Very Low Emission Engines
    N. Labeling and Notification Requirements
    O. General Compliance
    P. Other Issues
    Q. Highway Engines
    R. Changes That Affect Other Engine Categories
IV. Our Program for Controlling Nonroad, Locomotive and Marine 
Diesel Fuel Sulfur
    A. Nonroad, Locomotive and Marine Diesel Fuel Quality Standards
    B. Hardship Relief Provisions for Qualifying Refiners
    C. Special Provisions for Alaska and the Territories
    D. NRLM Diesel Fuel Program Design
    E. How Are State Diesel Fuel Programs Affected by the Sulfur 
Diesel Program?
    F. Technological Feasibility of the 500 and 15 ppm Sulfur Diesel 
Fuel Program
    G. What Are the Potential Impacts of the 15 ppm Sulfur Diesel 
Program on Lubricity and Other Fuel Properties?
    H. Refinery Air Permitting
V. Nonroad, Locomotive and Marine Diesel Fuel Program: Details of 
the Compliance and Enforcement Provisions
    A. Special Fuel Provisions and Exemptions
    B. Additional Requirements for Refiners and Importers
    C. Requirements for Parties Downstream of the Refinery or Import 
Facility
    D. Diesel Fuel Sulfur Sampling and Testing Requirements
    E. Selection of the Marker for Heating Oil
    F. Fuel Marker Test Method
    G. Requirements for Record-keeping, Reporting, and PTDs
    H. Liability and Penalty Provisions for Noncompliance
    I. How Will Compliance With the Sulfur Standards Be Determined?
VI. Program Costs and Benefits
    A. Refining and Distribution Costs
    B. Cost Savings to the Existing Fleet From the Use of Low Sulfur 
Fuel
    C. Engine and Equipment Cost Impacts
    D. Annual Costs and Cost Per Ton
    E. Do the Benefits Outweigh the Costs of the Standards?
    F. Economic Impact Analysis
VII. Alternative Program Options Considered
    A. Summary of Alternatives
    B. Introduction of 15 ppm Nonroad Diesel Sulfur Fuel in One Step
    C. Applying the 15 ppm Sulfur Cap to Locomotive and Marine 
Diesel Fuel
    D. Other Alternatives
VIII. Future Plans
    A. Technology Review
    B. Test Procedure Issues
    C. In-use Testing
    D. Engine Diagnostics
    E. Future NOX Standards for Engines in Mobile 
Machinery Over 750 hp
    F. Emission Standards for Locomotive and Marine Diesel Engines
    G. Retrofit Programs
    H. Reassess the Marker Specified for Heating Oil
IX. Public Participation
X. Statutory and Executive Order Reviews
    A. Executive Order 12866: Regulatory Planning and Review
    B. Paperwork Reduction Act
    C. Regulatory Flexibility Act (RFA), as amended by the Small 
Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), 5 
U.S.C. 601 et. seq
    D. Unfunded Mandates Reform Act
    E. Executive Order 13132: Federalism
    F. Executive Order 13175: Consultation and Coordination With 
Indian Tribal Governments
    G. Executive Order 13045: Protection of Children from 
Environmental Health and Safety Risks

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    H. Executive Order 13211: Actions That Significantly Affect 
Energy Supply, Distribution, or Use
    I. National Technology Transfer Advancement Act
    J. Congressional Review Act
XI. Statutory Provisions and Legal Authority

I. Overview

    EPA today is completing the third recent major program to reduce 
emissions from the nation's mobile sources. Today's final rule 
establishes standards for nonroad diesel engines and fuel and builds on 
the recently adopted Tier 2 program for cars and light trucks and the 
2007 highway diesel program for on-highway diesel engines. These three 
programs have in common large reductions in sulfur levels in fuel that 
will not only achieve public health benefits but also facilitate the 
introduction of advanced emissions control technologies. In 1996, 
emissions from land-based nonroad, marine, and locomotive diesel 
engines were estimated to be about 40 percent of the total mobile 
source inventory of PM2.5 (particulate matter less than 2.5 
microns in diameter) and 25 percent of the NOX (nitrogen 
oxides) inventory. Without today's final rule, these contributions 
would be expected to grow to 44 percent and 47 percent by 2030 for 
PM2.5 and NOX, respectively. By themselves, land-
based nonroad diesel engines are a very large part of the diesel mobile 
source PM2.5 inventory, contributing about 47 percent in 
1996, and growing to 70 percent of this inventory by 2020 without 
today's final rule. In order to meet the Clean Air Act's goal of 
cleaning up the nation's air, emissions reductions from the nonroad 
sector are necessary.
    This program begins to get important emission reductions in 2008, 
and by 2030 we estimate that this program will reduce over 129,000 tons 
PM2.5 and 738,000 tons of NOX annually. These 
emission reductions will be directly helpful to the 474 counties 
nationwide that have been recently designated as nonattainment areas 
for the 8-hour ozone standard and for counties that will be designated 
as nonattainment for PM2.5 later this year. The resulting 
ambient PM2.5 and NOX reductions correspond to 
public health improvements in 2030 including approximately 12,000 fewer 
premature mortalities, 15,000 fewer heart attacks, 1 million fewer lost 
days of work due to adults with respiratory symptoms, 5.9 million fewer 
days when adults have to restrict their activities due to respiratory 
symptoms, and almost 6,000 emergency room visits for asthma attacks in 
children. Our projections in this final rule for public health and 
welfare improvements are greater than estimated at proposal.
    This final rule sets out emission standards for nonroad diesel 
engines--engines used mainly in construction, agricultural, industrial 
and mining operations--that will achieve reductions in PM and 
NOX emissions levels in excess of 95 percent and 90 percent 
respectively. This action also regulates nonroad diesel fuel for the 
first time by reducing sulfur levels in this fuel more than 99 percent 
to 15 parts per million (ppm). These provisions mirror those already in 
place for highway diesel engines, which will lead to the introduction 
of 15 ppm sulfur diesel fuel, followed by stringent engine standards in 
that sector beginning in 2007 based on advanced aftertreatment 
technologies. We believe it is highly appropriate to bring the same 
types of expected advanced aftertreatment technologies to the nonroad 
market as soon as possible and we believe today's nonroad fuel and 
engine program represents the next step in a feasible progression in 
the application of clean technologies to nonroad diesel engines and the 
associated diesel fuel.
    As we did with the proposed nonroad rulemaking, we followed 
specific principles when developing this final rule. First, the program 
achieves reductions in NOX, sulfur oxides (SOX), 
and PM emissions as early as possible. Second, it does so by 
implementing the fuel program as soon as possible while at the same 
time not interfering with the implementation and expected benefits of 
introducing ultra low sulfur fuel (diesel fuel containing no greater 
than 15 ppm sulfur) in the highway market as required by the 2007 
highway diesel rule. Next, we are generally treating vehicles and fuels 
as a system, that is promulgating engine and fuel standards in tandem 
in order to cost-effectively achieve the greatest emission reductions. 
Lastly, the program provides sufficient lead time to allow the 
migration of advanced emissions control technologies from the highway 
sector to nonroad diesel engines as well as the expansion of ultra low 
sulfur diesel fuel production to the nonroad market.
    The May 2003 proposed rulemaking culminated a multi-year effort to 
develop control strategies for nonroad engines. EPA worked 
collaboratively with stakeholders from industry, state and local 
government, and public health organizations in putting together its 
comprehensive (and widely praised) new engine standards and sulfur fuel 
controls. We received about 150,000 comments on the proposal, almost 
all of them in support. We held three public hearings on the proposal 
and have participated in scores of meetings with commenters in 
developing the provisions of today's final rule. An important aspect of 
this collaborative development effort has been EPA's coordination with 
other governments in helping to further world harmonization of nonroad 
engine controls and fuel sulfur levels. Information gathered in these 
comments and discussions, taken in context with the principles 
described above, has been the basis for our action today.
    In summary, this rule sets out engine standards and emission test 
procedures (including not-to-exceed requirements) for new nonroad 
diesel engines, and sulfur control requirements for diesel fuel used in 
land-based nonroad, locomotive, and marine engines (NRLM fuel). 
Beginning in 2008, the new Tier 4 engine standards for five power 
categories for engines from under 25 horsepower (hp) to above 750 
horsepower will be phased in. New engine emissions test procedures will 
be phased in along with these new standards to better ensure emissions 
control over real-world engine operation and to help provide for 
effective compliance determination. The sulfur reductions to land-based 
nonroad diesel fuel will be accomplished in two steps, with an interim 
step from currently uncontrolled levels to a 500 ppm cap starting in 
June, 2007 and the final step to 15 ppm in June, 2010. This change in 
fuel quality will directly lead to important health and welfare 
benefits associated with the reduced generation of sulfate PM and 
SOX. Even more important, introduction of 15 ppm sulfur 
nonroad diesel fuel facilitates the introduction of advanced 
aftertreatment devices for nonroad engines.
    Although we did not propose to control locomotive and marine diesel 
fuel sulfur levels to 15 ppm in the NPRM, recognizing the important 
environmental and public welfare benefits that such a program could 
enable, we have decided to finalize this second step to 15 ppm sulfur 
fuel control program for locomotive and marine diesel fuel beginning in 
2012. Locomotive and marine diesel fuel will first be reduced from 
current uncontrolled levels to a 500 ppm cap starting in June 2007 and 
the second step down to a 15 ppm cap will take place in June, 2012. 
While we have chosen to reduce sulfur levels in locomotive and marine 
diesel fuel to 15 ppm in this rulemaking without adopting corresponding 
engine controls, we note that the Agency has already begun work to 
promulgate appropriate

[[Page 38961]]

new standards for these engines.\1\ The monetized health and welfare 
benefits associated with further sulfur reduction to 15 ppm outweigh 
the costs of the sulfur reductions. Also, doing so now allows for the 
promulgation of a single integrated fuel program and provides the 
refining industry with long term predictability for sulfur control.
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    \1\ EPA is issuing an Advanced Notice of Proposed Rulemaking for 
locomotive and marine engine standards as part of this effort.
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    The requirements in this rule will result in substantial benefits 
to public health and welfare and the environment through significant 
reductions in NOX and PM as well as nonmethane hydrocarbons 
(NMHC), carbon monoxide (CO), SOX, and air toxics. As noted, 
by 2030 this program will reduce annual emissions of NOX and 
PM by 738,000 and 129,000 tons, respectively. We estimate these annual 
emission reductions will prevent 12,000 premature deaths, over 8,900 
hospitalizations, 15,000 nonfatal heart attacks, and approximately 1 
million days that people miss work because of respiratory symptoms, 
among quantifiable benefits. The overall quantifiable benefits will 
total $83 billion annually by 2030 using a 3 percent discount rate and 
$78 billion using a 7 percent discount rate at a cost of approximately 
$2 billion, with a 30-year net present value for the benefits of $805 
billion at 3 percent discounting and $352 billion at 7 percent 
discounting at a net present value cost of $27 billion at 3 percent 
discounting and $14 billion at 7 percent discounting. Clearly the 
benefits of this program dramatically outweigh its cost at a ratio of 
approximately 40:1 in 2030.

A. What Is EPA Finalizing?

    As part of the proposed rulemaking, we set out very detailed 
provisions for new engine exhaust emission controls, sulfur limitations 
in nonroad and locomotive/marine diesel fuels, test procedures, 
compliance requirements, and other information. We also looked at a 
number of alternative program options, such as requiring refiners to 
reduce sulfur from uncontrolled levels to 15 ppm in one step in 2008. 
We continue to believe that the main program options set out in the 
proposal are feasible and the most cost-effective requirements, taking 
into account other factors such as lead time and interaction with the 
highway diesel program, so we are generally adopting the engine and 
fuel provisions which we proposed.
1. Nonroad Diesel Engine Emission Standards
    Today's action adopts Tier 4 standards for nonroad diesel engines 
of all horsepower ratings. These standards are technology-neutral in 
the sense that manufacturers are the responsible party in determining 
which emission control technologies will be needed to meet the 
requirements. Applicable emissions standards are determined by model 
year for each of five engine power band categories. For engines less 
than 25 hp, we are adopting a new engine standard for PM of 0.30 g/bhp-
hr (grams per brake-horsepower-hour) beginning in 2008, and leaving the 
previously-set 5.6 g/bhp-hr combined standard for NMHC+NOX 
in place. For engines of 25 to 75 hp, we are adopting standards 
reflecting approximately 50 percent reductions in PM control from 
today's engines, again applicable beginning in 2008. Then, starting in 
2013, standards of 0.02 g/bhp-hr for PM and 3.5 g/bhp-hr for 
NMHC+NOX will apply for this power category. For engines of 
75 to 175 hp, the standards will be 0.01 g/bhp-hr for PM, 0.30 g/bhp-hr 
for NOX and 0.14 g/bhp-hr for NMHC starting in 2012, with 
the NOX and NMHC standards phased in over a period of three 
to four years in order to address lead time, workload, and feasibility 
considerations. These same standards will apply to engines of 175 to 
750 hp as well starting in 2011, with a similar phase-in. These PM, 
NOX, and NMHC standards and phase-in schedules are similar 
in stringency to the 2007 highway diesel standards and are expected to 
require the use of high-efficiency aftertreatment systems to ensure 
compliance.
    For engines above 750 hp, we are requiring PM and NMHC control to 
0.075 g/bhp-hr and 0.30 g/bhp-hr, respectively, starting in 2011. More 
stringent standards take effect in 2015 with PM standards of 0.02 g/
bhp-hr (for engines used in generator sets) and 0.03 g/bhp-hr (for non-
generator set engines), and an NMHC standard of 0.14 g/bhp-hr. The 
NOX standard in 2011 will be 0.50 g/bhp-hr for generator set 
engines above 1200 hp, and 2.6 g/bhp-hr for all other engines in the 
above 750 hp category. This application of advanced NOX 
emission control technologies to generator set engines above 1200 hp 
will provide substantial NOX reductions and will occur 
earlier than we had proposed in the NPRM. In 2015, the 750-1200 hp 
generator set engines will be added to the stringent 0.50 g/bhp-hr 
NOX requirement as well. The long-term NOX 
standard for engines not used in generator sets (mobile machinery) will 
be addressed in a future action (we are currently considering such an 
action in the 2007 time frame).
    We are also continuing the averaging, banking, and trading 
provisions engine manufacturers can use to demonstrate compliance with 
the standards. We also are continuing provisions providing 
flexibilities which equipment manufacturers may use to facilitate 
transition to compliance with the new standards. In addition, we are 
including turbocharged diesels in the existing regulation of crankcase 
emissions, effective in the same year that the new standards first 
apply in each power category.
    As discussed at length in the proposal, new test procedures and 
compliance provisions, especially the not-to-exceed and transient 
tests, are necessary to ensure the benefits of the standards being 
adopted today are achieved when the aftertreatment-based standards go 
into place. We are therefore adopting the proposed test procedures and 
compliance provisions, with slight modifications designed to better 
implement the provisions, in today's rule. We continue to believe the 
new transient test, cold start transient test, and not-to-exceed test 
procedures and standards will all help achieve our goal of emissions 
reductions being achieved in actual engine operation.
    As noted, the final rule also continues, and in some cases 
modifies, existing provisions that will facilitate the transition to 
the new engine and fuel standards. Many of these provisions will help 
small business engine and equipment manufacturers meet the 
requirements. They will also aid manufacturers in managing their 
development of engines and equipment that will meet our new standards.
2. Nonroad, Locomotive, and Marine Diesel Fuel Quality Standards
    The fuel program requirements are very similar to those included in 
the proposal, with two notable exceptions. The first involves the 
standards themselves with the inclusion of locomotive and marine diesel 
fuel in the 15 ppm standard. The second addresses the compliance 
provisions designed to ensure the effectiveness of the program.
    We are adopting the two-step approach to sulfur control, with all 
land-based nonroad, locomotive, and marine diesel fuel going from 
uncontrolled sulfur levels of approximately 3,000 ppm sulfur to 500 ppm 
in June, 2007. The interim step will by itself achieve significant PM 
and SOX emission reductions with associated important health 
benefits as early as is practicable. Then, in June

[[Page 38962]]

2010, the sulfur cap for land-based nonroad engine diesel fuel will be 
reduced to the final standard of 15 ppm. Two years later, in 2012, the 
15 ppm cap for locomotive and marine engine diesel fuel will go into 
effect. The reduction to 15 ppm sulfur provides additional direct 
control of PM and SOX emissions and is an enabling 
technology for the application of advanced catalyst-based emission 
control technologies.
    Although we did not propose to control locomotive and marine diesel 
fuel to 15 ppm in the NPRM, after careful consideration and reviewing 
substantial comments from stakeholders, we have decided to include fuel 
used in locomotive and marine applications in the final step to 15 ppm 
beginning in 2012. The incremental PM health and welfare benefits 
associated with this standard outweigh the costs. The locomotive and 
marine diesel fuel program provides a near-term positive impact on 
public health and welfare. Also, the 15 ppm sulfur diesel fuel provides 
an opportunity that may enable the application of advanced catalyst-
based emission control technologies to locomotive and marine diesel 
engines. We are issuing an Advance Notice of Proposed Rulemaking for 
locomotive and marine diesel engines that investigates this potential. 
Recognizing the value that a locomotive and marine fuel program could 
have for public health and welfare, State and local authorities and 
public health advocacy organizations provided a large number of 
comments encouraging us to take action in this rulemaking to address 
emissions from this category.
    Including locomotive and marine fuel in the 15 ppm sulfur diesel 
fuel pool also simplifies the overall design of the fuel program and 
will simplify the distribution of diesel fuel. At the same time, we 
have finalized this standard with flexibilities designed specifically 
to address fuel program implementation issues raised in the comments.
    Noting that sulfur levels in highway diesel fuel will generally be 
at or below 15 ppm starting in 2006 and not wanting to reduce the 
benefits of introducing this clean fuel, we spent considerable time 
developing a compliance assurance scheme for introducing our nonroad 
diesel sulfur program to mesh with the highway program requirements. We 
initially thought that a ``baseline'' approach essentially requiring 
refiners to maintain a constraint on sulfur levels of various 
distillate fuels, based on historical production volumes, was the most 
appropriate mechanism. Subsequently we learned that the other mechanism 
we discussed in the proposal, a ``designate and track'' type approach, 
is better suited to address our priorities and commitments for the 
nonroad diesel sulfur control program. This approach allows refiners to 
designate volumes of nonroad fuel into various categories and these 
designations would follow the fuel throughout the distribution system. 
We have successfully worked through our enforceability and other 
concerns with this approach and are now including it as our compliance 
mechanism for the fuel standards of today's program.

B. Why Is EPA Taking This Action?

    As we have discussed extensively in both the proposal and today's 
action, EPA strongly believes it is appropriate to take steps now to 
reduce future emissions from nonroad, locomotive, and marine diesel 
engines. Emissions from these engines contribute greatly to a number of 
serious air pollution problems and would continue to do so in the 
future absent further reduction measures. Such emissions lead to 
adverse health and welfare effects associated with ozone, PM, 
NOX, SOX, and volatile organic compounds, 
including toxic compounds. In addition, diesel exhaust is of specific 
concern because it is likely to be carcinogenic to humans by inhalation 
as well as posing a hazard from noncancer respiratory effects. Ozone, 
NOX, and PM also cause significant public welfare harm such 
as damage to crops, eutrophication, regional haze, and soiling of 
building materials.
    Millions of Americans continue to live in areas with unhealthy air 
quality that may endanger public health and welfare. As discussed in 
more detail below, there are approximately 159 million people living in 
areas that either do not meet the 8-hour ozone National Ambient Air 
Quality Standards (NAAQS) or contribute to violations in other counties 
as noted in EPA's recent nonattainment designations for part or all of 
474 counties. In addition, approximately 65 million people live in 
counties where air quality measurements violate the PM2.5 
NAAQS. These numbers do not include the tens of millions of people 
living in areas where there is a significant future risk of failing to 
maintain or achieve the ozone or PM2.5 NAAQS. Federal, 
state, and local governments are working to bring ozone and PM levels 
into compliance with the NAAQS attainment and maintenance plans and the 
reductions included in today's rule will play a critical part in these 
actions. Reducing regional emissions of SOX is critical to 
this strategy for attaining the PM NAAQS and meeting regional haze 
goals in our treasured national parks. SOX levels can 
themselves pose a respiratory hazard.
    Although controlling air pollution from nonroad diesel exhaust is 
challenging, we strongly believe it can be accomplished through the 
application of high-efficiency emissions control technologies. As 
discussed in much greater detail in section II, very large emission 
reductions (in excess of 90 percent) are possible, especially through 
the use of catalytic emission control devices installed in the nonroad 
equipment's exhaust system and integrated with the engine controls. To 
meet the standards being adopted today, application of such 
technologies for both PM and NOX control will be needed for 
most engines. High-efficiency PM exhaust emission control technology 
has been available for several years, and it is the same technology we 
expect to be applied to meet the PM standards for highway diesel 
engines in 2007. For NOX, we expect the same high-efficiency 
technologies being developed for the 2007 highway diesel engine program 
will be used to meet our new nonroad requirements. All of these 
technologies are dependent on the 15 ppm maximum sulfur levels for 
nonroad diesel fuel being adopted today. The fuel control program being 
adopted today also yields significant and important reductions in 
SOX from these sources.
1. Basis for Action Under the Clean Air Act
    Section 213 of the Clean Air Act (``the Act'' or CAA) gives us the 
authority to establish emissions standards for nonroad engines and 
vehicles. Section 213(a)(3) authorizes the Administrator to set 
standards for NOX, volatile organic compounds (VOCs), and CO 
which ``standards shall achieve the greatest degree of emission 
reduction achievable through the application of technology which the 
Administrator determines will be available for the engines or 
vehicles.'' As part of this determination, the Administrator must give 
appropriate consideration to cost, lead time, noise, energy, and safety 
factors associated with the application of such technology. The 
standards adopted today for NOX implement this provision. 
Section 213(a)(4) authorizes the Administrator to establish standards 
to control emissions of pollutants (other than those covered by section 
213(a)(3)) which ``may reasonably be anticipated to endanger public 
health and welfare.'' Here, the Administrator may promulgate 
regulations that are deemed appropriate for new nonroad vehicles and 
engines

[[Page 38963]]

which cause or contribute to such air pollution, taking into account 
costs, noise, safety, and energy factors. EPA believes the new controls 
for PM in today's rule are an appropriate exercise of EPA's discretion 
under the authority of section 213(a)(4).
    We believe the evidence provided in section II of this preamble and 
in the Regulatory Impact Analysis (RIA) indicates that the stringent 
emission standards adopted today are feasible and reflect the greatest 
degree of emission reduction achievable in the model years to which 
they apply. We have given appropriate consideration to costs in 
promulgating these standards. Our review of the costs and cost-
effectiveness of these standards indicate that they will be reasonable 
and comparable to the cost-effectiveness of other emission reduction 
strategies for the same pollutants that have been required or could be 
required in the future. We have also reviewed and given appropriate 
consideration to the energy factors of this rule in terms of fuel 
efficiency and effects on diesel fuel supply, production, and 
distribution, as discussed below, as well as any safety factors 
associated with these new standards.
    The information in this section and chapters 2 and 3 of the RIA 
regarding air quality and the contribution of nonroad, locomotive, and 
marine diesel engines to air pollution provides strong evidence that 
emissions from such engines significantly and adversely impact public 
health or welfare. First, as noted earlier, there is a significant risk 
that several areas will fail to attain or maintain compliance with the 
NAAQS for 8-hour ozone concentrations or the NAAQS for PM2.5 
during the period that these new vehicle and engine standards will be 
phased into the vehicle population, and that nonroad, locomotive, and 
marine diesel engines contribute to such concentrations, as well as to 
concentrations of other criteria pollutants. This risk will be 
significantly reduced by the standards adopted today, as also noted 
above. However, the evidence indicates that some risk remains even 
after the reductions achieved by these new controls on nonroad diesel 
engines and nonroad, locomotive, and marine diesel fuel. Second, EPA 
believes that diesel exhaust is likely to be carcinogenic to humans. 
The risk associated with exposure to diesel exhaust includes the 
particulate and gaseous components among which are benzene, 
formaldehyde, acetaldehyde, acrolein, and 1,3-butadiene, all of which 
are known or suspected human or animal carcinogens, or have noncancer 
health effects. Moreover, these compounds have the potential to cause 
health effects at environmental levels of exposure. Third, emissions 
from nonroad diesel engines (including locomotive and marine diesel 
engines) contribute to regional haze and impaired visibility across the 
nation, as well as to odor, acid deposition, polycyclic organic matter 
(POM) deposition, eutrophication and nitrification, all of which are 
serious environmental welfare problems.
    EPA has already found in previous rules that emissions from new 
nonroad diesel engines contribute to ozone and CO concentrations in 
more than one area which has failed to attain the ozone and CO NAAQS 
(59 FR 31306, June 17, 1994). EPA has also previously determined that 
it is appropriate to establish standards for PM from new nonroad diesel 
engines under section 213(a)(4), and the additional information on 
diesel exhaust carcinogenicity noted above reinforces this finding. In 
addition, we have already found that emissions from nonroad engines 
significantly contribute to air pollution that may reasonably be 
anticipated to endanger public welfare due to regional haze and 
visibility impairment (67 FR 68242-68243, Nov. 8, 2002). We find here, 
based on the information in this section of the preamble and chapters 2 
and 3 of the RIA, that emissions from the new nonroad diesel engines 
covered by this final action likewise contribute to regional haze and 
to visibility impairment that may reasonably be anticipated to endanger 
public welfare. Taken together, these findings indicate the 
appropriateness of the nonroad diesel engine standards adopted today 
for purposes of section 213(a)(3) and (4) of the Act. These findings 
were unchallenged by commenters.
    These standards must take effect at ``the earliest possible date 
considering the lead time necessary to permit development and 
application of the requisite technology,'' giving ``appropriate 
consideration'' to cost, energy, and safety.\2\ The compliance dates we 
are adopting reflect careful consideration of these factors. The 
averaging, banking, and trading (ABT), equipment manufacturer 
flexibilities, and phase-in provisions for NOX are elements 
in our determination that we have selected appropriate lead times for 
the standards.
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    \2\ See Clean Air Act section 213(b).
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    Section 211(c) of the CAA allows us to regulate fuels where 
emission products of the fuel either: (1) Cause or contribute to air 
pollution that reasonably may be anticipated to endanger public health 
or welfare, or (2) will impair to a significant degree the performance 
of any emission control device or system which is in general use, or 
which the Administrator finds has been developed to a point where in a 
reasonable time it will be in general use were such a regulation to be 
promulgated. This rule meets both of these criteria. Sulfur dioxide 
(SO2)and sulfate PM emissions from nonroad, locomotive, 
marine and diesel vehicles are due to sulfur in diesel fuel. As 
discussed above, emissions of these pollutants cause or contribute to 
ambient levels of air pollution that endanger public health and 
welfare. Control of sulfur to 15 ppm for this fuel through a two-step 
program would lead to significant, cost-effective reductions in 
emissions of these pollutants. Control of sulfur to 15 ppm in nonroad 
diesel fuel will also enable emissions control technology that will 
achieve significant, cost-effective reduction in emissions of these 
pollutants, as discussed in section I.B.2 below. The substantial 
adverse effect of high sulfur levels on the performance of diesel 
emission control devices or systems that would be expected to be used 
to meet the nonroad standards is discussed in detail in section II. 
Control of sulfur to 15 ppm for locomotive and marine diesel fuel, as 
with nonroad diesel fuel, will provide meaningful additional benefits 
that outweigh the costs. In addition, our authority under section 
211(c) is discussed in more detail in Appendix A to chapter 5 of the 
RIA.
2. What Is the Air Quality Impact of This Final Rule?
a. Public Health and Environmental Impacts
    With this rulemaking, we are acting to extend advanced emission 
controls to another major source of diesel engine emissions: Nonroad 
land-based diesel engines. This final rule sets out emission standards 
for nonroad land-based diesel engines--engines used mainly in 
construction, agricultural, industrial and mining operations--that will 
achieve reductions in PM and NOX standards in excess of 95 
percent and 90 percent, respectively for this class of vehicles. This 
action also regulates nonroad diesel fuel for the first time by 
reducing sulfur levels in this fuel more than 99 percent to 15 ppm. The 
diesel fuel sulfur requirements will decrease PM and SO2 
emissions for land-based diesel engines, as well as for three other 
nonroad source categories: Commercial marine diesel vessels, 
locomotives, and recreational marine diesel engines.

[[Page 38964]]

    These sources are significant contributors to atmospheric pollution 
of (among other pollutants) PM, ozone and a variety of toxic air 
pollutants. In 1996, emissions from these four source categories were 
estimated to be 40 percent of the mobile source inventory for 
PM2.5 and 25 percent for NOX, and 10 percent and 
13 percent of overall emissions for these potential health hazards, 
respectively. Without further controls beyond those we have already 
adopted, these sources will emit 44 percent of PM2.5 from 
mobile sources and 47 percent of NOX emissions from mobile 
sources by the year 2030.
    Nonroad engines, and most importantly nonroad diesel engines, 
contribute significantly to ambient PM2.5 levels, largely 
through direct emissions of carbonaceous and sulfate particles in the 
fine (and even ultrafine) size range. Nonroad diesels also currently 
emit high levels of NOX which react in the atmosphere to 
form secondary PM2.5 (namely ammonium nitrate) as well as 
ozone. Nonroad diesels also emit SO2 and hydrocarbons which 
react in the atmosphere to form secondary PM2.5 (namely 
sulfates and organic carbonaceous PM2.5). This section 
summarizes key points regarding the nonroad diesel engine contribution 
to these pollutants and their impacts on human health and the 
environment. EPA notes that we are relying not only on the information 
presented in this preamble, but also on the more detailed information 
in chapters 2 and 3 of the RIA and technical support documents, as well 
as information in the preamble, RIA, and support documents for the 
proposed rule.
    When fully implemented, this final rule will reduce nonroad 
(equipment such as construction, agricultural, and industrial), diesel 
PM2.5 and NOX emissions by 95 percent and 90 
percent, respectively. It will also virtually eliminate nonroad diesel 
SO2 emissions, which amounted to approximately 234,000 tons 
in 1996, and would otherwise grow to approximately 326,000 tons by 
2020. These dramatic reductions in nonroad emissions are a critical 
part of the effort by federal, state and local governments to reduce 
the health related impacts of air pollution and to reach attainment of 
the NAAQS for PM and ozone, as well as to improve other environmental 
effects such as atmospheric visibility. Based on the most recent data 
available for this rule, such problems are widespread in the United 
States. There are almost 65 million people living in 120 counties with 
monitored PM2.5 levels (2000-2002) exceeding the 
PM2.5 NAAQS, and 159 million people living in areas recently 
designated as exceeding 8-hour ozone NAAQS. Figure I-1 illustrates the 
widespread nature of these problems. Shown in this figure are counties 
exceeding the PM2.5 NAAQS or designated for nonattainment 
with the 8-hour ozone NAAQS plus mandatory Federal Class I areas, which 
have particular needs for reductions in atmospheric haze.
    Our air quality modeling also indicates that similar conditions are 
likely to continue to persist in the future in the absence of 
additional controls and that the emission reductions would assist areas 
with attainment and future maintenance of the PM and ozone NAAQS.\3\ 
For example, in 2020, based on emission controls currently adopted, we 
project that 66 million people will live in 79 counties with average 
PM2.5 levels above 15 micrograms per cubic meter (ug/m\3\). 
In 2030, the number of people projected to live in areas exceeding the 
PM2.5 standard is expected to increase to 85 million in 107 
counties. An additional 24 million people are projected to live in 
counties within 10 percent of the standard in 2020, which will increase 
to 64 million people in 2030. Furthermore, for ozone, in 2020, based on 
emission controls currently adopted, the number of counties violating 
the 8-hour ozone standard is expected to decrease to 30 counties where 
43 million people are projected to live. Thereafter, exposure to 
unhealthy levels of ozone is expected to begin to increase again. In 
2030 the number of counties violating the 8-hour ozone NAAQS is 
projected to increase to 32 counties where 47 million people are 
projected to live. In addition, in 2030, 82 counties where 44 million 
people are projected to live will be within 10 percent of violating the 
ozone 8-hour NAAQS.
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    \3\ Note this analysis does not include the effects of the 
proposed Rule to Reduce Interstate Transport of Fine Particulate 
Matter and Ozone (Interstate Air Quality Rule). 69 FR 4566 (January 
30, 2004). See http://www.epa.gov/interstateairquality/rule.html.
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BILLING CODE 6560-50-P

[[Page 38965]]

[GRAPHIC] [TIFF OMITTED] TR29JN04.000

    EPA is still developing the implementation process for bringing the 
nation's air into attainment with the PM2.5 and 8-hour ozone 
NAAQS. Based on section 172(a) provisions in the Act, designated areas 
will need to attain the PM2.5 NAAQS in the 2010 (based on 
2007-2009 air quality data) to 2015 (based on 2012 to 2014 air quality 
data) time frame, and then be required to maintain the NAAQS 
thereafter. Similarly, we expect that most areas covered under subpart 
1 and 2 will attain the ozone standard in the 2007 to 2014 time frame, 
depending on an area's classification and other factors, and then be 
required to maintain the NAAQS thereafter.
    Since the emission reductions expected from this final rule would 
begin in this same time frame, the projected reductions in nonroad 
emissions would be used by states in meeting the PM2.5 and 
ozone NAAQS. In their comments on the proposal, states told EPA that 
they need nonroad diesel engine reductions in order to be able to meet 
and maintain the PM2.5 and ozone NAAQS as well as to make 
progress toward visibility requirements.\4\ Furthermore, this action 
would ensure that nonroad diesel emissions will continue to decrease as 
the fleet turns over in the years beyond 2014; these reductions will be 
important for maintenance of the NAAQS following attainment.
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    \4\ The following are sample comments from states and state 
associations on the proposed rule, which corroborate that this rule 
is a critical element in States' NAAQS attainment efforts. Fuller 
information can be found in the Summary and Analysis of Comments.
    --``Unless emissions from nonroad diesels are sharply reduced, 
it is very likely that many areas of the country will be unable to 
attain and maintain health-based NAAQS for ozone and PM.'' (STAPPA/
ALAPCO)
    --``Adoption of the proposed regulation * * * is necessary for 
the protection of public health in California and to comply with air 
quality standards * * * The need for 15 ppm sulfur diesel fuel 
cannot be overstated.'' (California Air Resources Board)
    --``The EPA's proposed regulation is necessary if the West is to 
make reasonable progress towards improving visibility in our 
nation's Class I areas.'' (Western Regional Air Partnership (WRAP))
    --``Attainment of the NAAQS for ozone and PM2.5 is of 
immediate concern to the states in the northeast region.* * * Thus, 
programs * * * such as the proposed rule for nonroad diesel engines 
are essential.'' (NESCAUM)
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    Scientific studies show ambient PM is associated with a series of 
adverse health effects. These health effects are discussed in detail in 
the EPA Criteria Document for PM as well as the draft updates of this 
document released in the

[[Page 38966]]

past year.5, 6 EPA's ``Health Assessment Document for Diesel 
Engine Exhaust,'' (the ``Diesel HAD'') also reviews health effects 
information related to diesel exhaust as a whole including diesel PM, 
which is one component of ambient PM.\7\ In the Diesel HAD, we note 
that the particulate characteristics in the zone around nonroad diesel 
engines are likely to be substantially the same as published air 
quality measurements made along busy roadways. This conclusion supports 
the relevance of health effects associated with highway diesel engine-
generated PM to nonroad applications.
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    \5\ U.S. EPA (1996.) Air Quality Criteria for Particulate 
Matter--Volumes I, II, and III, EPA, Office of Research and 
Development. Report No. EPA/600/P-95/001a-cF. This material is 
available electronically at http://www.epa.gov/ttn/oarpg/ticd.html.
    \6\ U.S. EPA (2003). Air Quality Criteria for Particulate 
Matter--Volumes I and II (Fourth External Review Draft) This 
material is available electronically at http://cfpub.epa.gov/ncea/
cfm/partmatt.cfm.
    \7\ U.S. EPA (2002). Health Assessment Document for Diesel 
Engine Exhaust. EPA/600/8-90/057F Office of Research and 
Development, Washington, DC. This document is available 
electronically at http://cfpub.epa.gov/ncea/cfm/
recordisplay.cfm?deid=29060.
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    As described in these documents, health effects associated with 
short-term variation in ambient PM have been indicated by epidemiologic 
studies showing associations between exposure and increased hospital 
admissions for ischemic heart disease, heart failure, respiratory 
disease, including chronic obstructive pulmonary disease (COPD) and 
pneumonia. Short-term elevations in ambient PM have also been 
associated with increased cough, lower respiratory symptoms, and 
decrements in lung function. Additional studies have associated changes 
in heart rate and/or heart rhythm in addition to changes in blood 
characteristics with exposure to ambient PM. Short-term variations in 
ambient PM have also been associated with increases in total and 
cardiorespiratory mortality. Studies examining populations exposed to 
different levels of air pollution over a number of years, including the 
Harvard Six Cities Study and the American Cancer Society Study, suggest 
an association between long-term exposure to ambient PM2.5 
and premature mortality, including deaths attributed to lung 
cancer.\8\, \9\ Two studies further analyzing the Harvard 
Six Cities Study's air quality data have also established a specific 
influence of mobile source-related PM2.5 on daily mortality 
and a concentration-response function for mobile source-associated 
PM2.5 and daily mortality. Another recent study in 14 U.S. 
cities examining the effect of PM10 (particulate matter less 
than 10 microns in diameter) on daily hospital admissions for 
cardiovascular disease found that the effect of PM10 was 
significantly greater in areas with a larger proportion of 
PM10 coming from motor vehicles, indicating that 
PM10 from these sources may have a greater effect on the 
toxicity of ambient PM10 when compared with other 
sources.\10\
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    \8\ Dockery, DW; Pope, CA, III; Xu, X; et al. (1993) An 
association between air pollution and mortality in six U.S. cities. 
N Engl J Med 329:1753-1759.
    \9\ Pope, CA, III; Burnett, RT; Calle, EE; et al. (2002) Lung 
cancer, cardiopulmonary mortality, and long-term exposure to fine 
particulate air pollution. JAMA 287: 1132-1141.
    \10\ Janssen, NA; Schwartz J; Zanobetti A; et al. (2002) Air 
conditioning and source-specific particles as modifiers of the 
effect of PM10 on hospital admissions for heart and lung 
disease. Environ Health Perspect 110(1):43-49.
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    Of particular relevance to this rule is a recent cohort study which 
examined the association between mortality and residential proximity to 
major roads in the Netherlands. Examining a cohort of 55 to 69 year-
olds from 1986 to 1994, the study indicated that long-term residence 
near major roads, an index of exposure to primary mobile source 
emissions (including diesel exhaust), was significantly associated with 
increased cardiopulmonary mortality.\11\ Other studies have shown 
children living near roads with high truck traffic density have 
decreased lung function and greater prevalence of lower respiratory 
symptoms compared to children living on other roads.\12\ A recent 
review of epidemiologic studies examining associations between asthma 
and roadway proximity concluded that some coherence was evident in the 
literature, indicating that asthma, lung function decrement, 
respiratory symptoms, and other respiratory problems appear to occur 
more frequently in people living near busy roads.\13\ As discussed 
later, nonroad diesel engine emissions, especially particulate, are 
similar in composition to those from highway diesel vehicles. Although 
difficult to associate directly with PM2.5, these studies 
indicate that direct emissions from mobile sources, and diesel engines 
specifically, may explain a portion of respiratory health effects 
observed in larger-scale epidemiologic studies. Recent studies 
conducted in Los Angeles have illustrated that a substantial increase 
in the concentration of ultrafine particles is evident in locations 
near roadways, indicating substantial differences in the nature of PM 
immediately near mobile source emissions.\14\ For additional 
information on health effects, see the RIA.
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    \11\ Hoek, G; Brunekreef, B; Goldbohm, S; et al. (2002) 
Association between mortality and indicators of traffic-related air 
pollution in the Netherlands: a cohort study. Lancet 360(9341):1203-
1209.
    \12\ Brunekreef, B; Janssen NA; de Hartog, J; et al. (1997) Air 
pollution from traffic and lung function in children living near 
motor ways. Epidemiology (8): 298-303.
    \13\ Delfino RJ. (2002) Epidemiologic evidence for asthma and 
exposure to air toxics: linkages between occupational, indoor, and 
community air pollution research. Env Health Perspect Suppl 110(4): 
573-589.
    \14\ Yifang Zhu, William C. Hinds, Seongheon Kim, Si Shen and 
Constantinos Sioutas Zhu Y; Hinds WC; Kim S; et al. (2002) Study of 
ultrafine particles near a major highway with heavy-duty diesel 
traffic. Atmos Environ 36(27): 4323-4335.
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    In addition to its contribution to ambient PM concentrations, 
diesel exhaust is of specific concern because it has been judged to 
pose a lung cancer hazard for humans as well as a hazard from noncancer 
respiratory effects. In this context, diesel exhaust PM is generally 
used as a surrogate measure for diesel exhaust. Further, nonroad diesel 
engine emissions also contain several substances known or suspected as 
human or animal carcinogens, or that have noncancer health effects as 
described in the Diesel HAD. Moreover, these compounds have the 
potential to cause health effects at environmental levels of exposure. 
These other compounds include benzene, 1,3-butadiene, formaldehyde, 
acetaldehyde, acrolein, dioxin, and POM. For some of these pollutants, 
nonroad diesel engine emissions are believed to account for a 
significant proportion of total nation-wide emissions. All of these 
compounds were identified as national or regional ``risk drivers'' in 
the 1996 NATA.\15\ That is, these compounds pose a significant portion 
of the total inhalation cancer risk to a significant portion of the 
population. Mobile sources contribute significantly to total emissions 
of these air toxics. As discussed in more detail in the RIA, this final 
rulemaking will result in significant reductions of these emissions.
---------------------------------------------------------------------------

    \15\ U.S. EPA (2002). National-Scale Air Toxics Assessment. This 
material is available electronically at http://www.epa.gov/ttn/atw/
nata/.
---------------------------------------------------------------------------

    In EPA's Diesel HAD.\16\ diesel exhaust was classified as likely to 
be carcinogenic to humans by inhalation at environmental exposures, in 
accordance with the revised draft 1996/1999 EPA cancer guidelines. A 
number of other agencies (National Institute for Occupational Safety 
and Health, the International Agency for Research on Cancer, the World 
Health Organization,

[[Page 38967]]

California EPA, and the U.S. Department of Health and Human Services) 
have made similar classifications.
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    \16\ U.S. EPA (2002). Health Assessment Document for Diesel 
Engine Exhaust. EPA/600/8-90/057F Office of Research and 
Development, Washington DC. This document is available 
electronically at http://cfpub.epa.gov/ncea/cfm/
recordisplay.cfm?deid=29060.
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    EPA generally derives cancer unit risk estimates to calculate 
population risk more precisely from exposure to carcinogens. In the 
simplest terms, the cancer unit risk is the increased risk associated 
with average lifetime exposure of 1 ug/m3. EPA concluded in 
the Diesel HAD that it is not possible currently to calculate a cancer 
unit risk for diesel exhaust due to a variety of factors that limit the 
current studies, such as lack of an adequate dose-response relationship 
between exposure and cancer incidence.
    However, in the absence of a cancer unit risk, the EPA Diesel HAD 
sought to provide additional insight into the significance of the 
cancer hazard by estimating possible ranges of risk that might be 
present in the population. The possible risk range analysis was 
developed by comparing a typical environmental exposure level for 
highway diesel sources to a selected range of occupational exposure 
levels and then proportionally scaling the occupationally observed 
risks according to the exposure ratios to obtain an estimate of the 
possible environmental risk. A number of calculations are needed to 
accomplish this, and these can be seen in the EPA Diesel HAD. The 
outcome was that environmental risks from diesel exhaust exposure could 
range from a low of 10-4 to 10-5 or be as high as 
10-3 this being a reflection of the range of occupational 
exposures that could be associated with the relative and absolute risk 
levels observed in the occupational studies. Because of uncertainties, 
the analysis acknowledged that the risks could be lower than 
10-4 or 10-5 and a zero risk from diesel exhaust 
exposure was not ruled out. Although the above risk range is based on 
environmental exposure levels for highway mobile sources only, the 1996 
NATA estimated exposure for nonroad diesel sources as well. Thus, the 
exposure estimates were somewhat higher than those used in the risk 
range analysis described above. The EPA Diesel HAD, therefore, stated 
that the NATA exposure estimates result in a similar risk perspective.
    The ozone precursor reductions expected as a result of this rule 
are also important because of health and welfare effects associated 
with ozone, as described in the Air Quality Criteria Document for Ozone 
and Other Photochemical Oxidants. Ozone can irritate the respiratory 
system, causing coughing, throat irritation, and/or uncomfortable 
sensation in the chest.17, 18 Ozone can reduce lung function 
and make it more difficult to breathe deeply, and breathing may become 
more rapid and shallow than normal, thereby limiting a person's normal 
activity. Ozone also can aggravate asthma, leading to more asthma 
attacks that require a doctor's attention and/or the use of additional 
medication. In addition, ozone can inflame and damage the lining of the 
lungs, which may lead to permanent changes in lung tissue, irreversible 
reductions in lung function, and a lower quality of life if the 
inflammation occurs repeatedly over a long time period (months, years, 
a lifetime). People who are of particular concern with respect to ozone 
exposures include children and adults who are active outdoors. Those 
people particularly susceptible to ozone effects are people with 
respiratory disease, such as asthma, and people with unusual 
sensitivity to ozone, and children. Beyond its human health effects, 
ozone has been shown to injure plants, which has the effect of reducing 
crop yields and reducing productivity in forest 
ecosystems.19, 20
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    \17\ U.S. EPA (1996). Air Quality Criteria for Ozone and Related 
Photochemical Oxidants, EPA/600/P-93/004aF. Docket No. A-99-06. 
Document Nos. II-A-15 to 17.
    \18\ U.S. EPA (1996). Review of National Ambient Air Quality 
Standards for Ozone, Assessment of Scientific and Technical 
Information, OAQPS Staff Paper, EPA-452/R-96-007. Docket No. A-99-
06. Document No. II-A-22.
    \19\ U.S. EPA (1996). Air Quality Criteria for Ozone and Related 
Photochemical Oxidants, EPA/600/P-93/004aF. Docket No. A-99-06. 
Document Nos. II-A-15 to 17.
    \20\ U.S. EPA (1996). Review of National Ambient Air Quality 
Standards for Ozone, Assessment of Scientific and Technical 
Information, OAQPS Staff Paper, EPA-452/R-96-007. Docket No. A-99-
06. Document No. II-A-22.
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    New research suggests additional serious health effects beyond 
those that were known when the 8-hour ozone health standard was set. 
Since 1997, over 1,700 new health and welfare studies relating to ozone 
have been published in peer-reviewed journals.\21\ Many of these 
studies investigate the impact of ozone exposure on such health effects 
as changes in lung structure and biochemistry, inflammation of the 
lungs, exacerbation and causation of asthma, respiratory illness-
related school absence, hospital and emergency room visits for asthma 
and other respiratory causes, and premature mortality. EPA is currently 
evaluating these and other studies as part of the ongoing review of the 
air quality criteria and NAAQS for ozone. A revised Air Quality 
Criteria Document for Ozone and Other Photochemical Oxidants will be 
prepared in consultation with EPA's Clean Air Science Advisory 
Committee (CASAC). Key new health information falls into four general 
areas: Development of new-onset asthma, hospital admissions for young 
children, school absence rate, and premature mortality. In all, the new 
studies that have become available since the 8-hour ozone standard was 
adopted in 1997 continue to demonstrate the harmful effects of ozone on 
public health and the need for areas with high ozone levels to attain 
and maintain the NAAQS.
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    \21\ New Ozone Health and Environmental Effects References, 
Published Since Completion of the Previous Ozone AQCD, National 
Center for Environmental Assessment, Office of Research and 
Development, U.S. Environmental Protection Agency, Research Triangle 
Park, NC 27711 (7/2002) Docket No. A-2001-28, Document II-A-79.
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    Finally, nonroad diesel emissions contribute to nine categories of 
non-health impacts: visibility impairment, soiling and material damage, 
acid deposition, eutrophication of water bodies, plant and ecosystem 
damage from ozone, water pollution resulting from deposition of toxic 
air pollutants with resulting effects on fish and wildlife, and odor. 
In particular, EPA determined that nonroad engines contribute 
significantly to unacceptable visibility conditions where people live, 
work and recreate, including contributing to visibility impairment in 
Federally mandated Class I areas that are given special emphasis in the 
Clean Air Act (67 FR 68242, November 8, 2002). Visibility is impaired 
by fine PM and precursor emissions from nonroad diesel engines subject 
to this final rule. Reductions in emissions from this final rule will 
improve visibility as well as other environmental outcomes as described 
in the RIA.
    As supplementary information, we have made estimates using air 
quality modeling to illustrate the types of change in future 
PM2.5 and ozone levels that we would expect to result from a 
final rule like this as described in chapter 2 of the RIA. That 
modeling shows that control of nonroad emissions would produce 
nationwide air quality improvements in PM2.5 and ozone 
levels as well as visibility improvements. On a population-weighted 
basis, the average modeled change in future-year PM2.5 
annual averages is projected to decrease by 0.42 [mu]g/m\3\ (3.3%) in 
2020, and 0.59 [mu]g/m3 (0.6%) in 2030. In addition, the population-
weighted average modeled change in future year design values for ozone 
would decrease by 1.8 parts per billion (ppb) in 2020, and 2.5 ppb in 
2030. Within areas predicted to violate the ozone NAAQS in the 
projected base case, the average decrease would be somewhat higher: 1.9 
ppb in 2020 and 3.0 ppb in 2030.

[[Page 38968]]

    The PM air quality improvements expected from this final rule are 
anticipated to produce major benefits to human health and welfare, with 
a combined value in excess of half a trillion dollars between 2007 and 
2030. For example, in 2030, we estimate that this program will reduce 
approximately 129,000 tons PM2.5 and 738,000 tons of 
NOX. The resulting ambient PM reductions correspond to 
public health improvements in 2030, including 12,000 fewer premature 
mortalities, 15,000 fewer heart attacks, 200,000 fewer asthma 
exacerbations in children, and 1 million fewer days when adults miss 
work due to their respiratory symptoms, and 5.9 million fewer days when 
adults have to restrict their activities due to respiratory symptoms. 
The reductions will also improve visibility and reduce diesel odor. For 
further details on the economic benefits of this rule, please refer to 
the benefit-cost discussion in section VI of this preamble and chapter 
9 of the RIA.
b. Emissions From Nonroad Diesel Engines
    The engine and fuel standards in this final rule will affect 
emissions of direct PM2.5, SO2, NOX, 
VOCs, and air toxics for land-based nonroad diesel engines. \22\ For 
locomotive, commercial marine vessel (CMV), and recreational marine 
vessel (RMV) engines, the final fuel standards will affect direct 
PM2.5 and SO2 emissions. Each sub-section below 
discusses one of these pollutants,\23\ including expected emission 
reductions associated with the final standards.\24\ Table I.B-1 
summarizes the impacts of this rule for 2020 and 2030. Further details 
on our inventory estimates, including results for other years, are 
available in chapter 3 of the RIA.
---------------------------------------------------------------------------

    \22\ We are also adopting a few minor adjustments of a technical 
nature to current CO standards. Emissions effects from these 
standards are discussed in the RIA.
    \23\ The estimates of baseline emissions and emissions 
reductions from the final rule reported here for nonroad land-based, 
recreational marine, locomotive, and commercial marine vessel diesel 
engines are based on 50 state emissions inventory estimates. A 48 
state inventory was used for air quality modeling that EPA conducted 
for this rule, of which Alaska and Hawaii are not a part. In cases 
where land-based nonroad diesel engine emissions are compared with 
non-mobile source portions of the inventory, we use a 48 state 
emissions inventory, to match the 48 state nature of those other 
inventories.
    \24\ Please see the Summary and Analyses of Comments document 
for discussions of issues raised about the emission inventory 
estimates during the comment period for the NPRM.

Table I.B-1.--Estimated National (50 State) Reductions in Emissions From
   Nonroad Land-Based, Locomotive, Commercial Marine, and Recreational
                          Marine Diesel Engines
------------------------------------------------------------------------
            Pollutant [short tons]                  2020         2030
------------------------------------------------------------------------
Direct PM2.5:
    PM2.5 Emissions Without Rule..............      167,000      181,000
    PM2.5 Emissions With 500 ppm Sulfur in          144,000      155,000
     2007 and No Other Controls...............
    PM2.5 Emissions With 15 ppm Sulfur in 2012      141,000      152,000
     and No Other Controls....................
    PM2.5 Emissions With Entire Rule..........       81,000       52,000
    PM2.5 Reductions Resulting from this Rule.       86,000      129,000
SO2:
    SO2 Emissions Without Rule................      326,000      379,000
    SO2 Emisions With 500 ppm Sulfur in 2007..       37,000       43,000
    SO2 Emissions With Entire Rule (15 ppm            3,000        3,000
     Sulfur in 2012)..........................
    SO2 Reductions Resulting from this Rule...      323,000      376,000
NOX--Land-Based Nonroad Engines Only\a\:
    NOX Emissions Without Rule................    1,125,000    1,199,000
    NOX Emissions With Rule...................      681,000      461,000
    NOX Reductions Resulting from this Rule...      444,000      738,000
VOC--Land-Based Nonroad Engines Only\a\:
    VOC Emissions Without Rule................       98,000       97,000
    VOC Emissions With Rule...................       75,000       63,000
    VOC Reductions Resulting from this Rule...       23,000       34,000
------------------------------------------------------------------------
Notes:
\a\ NOX and VOC numbers only include emissions for land-based nonroad
  diesel engines because the Tier 4 controls will not be applied to
  locomotive, commercial marine, and recreational marine engines; and no
  NOX and VOC emission reductions are generated through the lowering of
  fuel sulfur levels.

i. Direct PM2.5
    As described earlier, the Agency believes that reductions of diesel 
PM2.5 emissions are needed as part of the nation's progress 
toward clean air. Direct PM2.5 emissions from land-based 
nonroad diesel engines amount to increasingly large percentages of 
total man-made diesel PM2.5. Between 1996 and 2030, we 
estimate that the percentage of total man-made diesel PM2.5 
emissions coming from land-based nonroad diesel engines will increase 
from about 46 percent to 72 percent (based on a 48 state inventory).
    Emissions of direct PM2.5 from land-based nonroad diesel 
engines based on a 50 state inventory are shown in table I.B-1, along 
with our estimates of the reductions in 2020 and 2030 we expect would 
result from our final rule for a PM2.5 exhaust emission 
standard and from changes in the sulfur level in land-based nonroad, 
locomotive, and marine diesel fuel. Land-based nonroad, locomotive, and 
marine diesel fuel sulfur levels will be lowered to about 340 ppm in-
use (500 ppm maximum) in 2007. Land-based nonroad diesel fuel sulfur 
will be lowered further to about 11 ppm in-use (15 ppm maximum) in 2010 
and locomotive and marine diesel fuel sulfur will be lowered to the 
same level in 2012. In addition to PM2.5 emissions estimates 
with the final rule, emissions estimates based on lowering diesel fuel 
sulfur without any other controls are shown in table I.B-1 for 2020 and 
2030.
    Figure I.B-1a shows our estimate of PM2.5 emissions 
between 2000 and 2030 both without and with the final standards and 
fuel sulfur requirements of this rule. We estimate that 
PM2.5 emissions from this source would be reduced by 71 
percent in 2030.
ii. SO2
    We estimate that land-based nonroad, CMV, RMV, and locomotive 
diesel engines emitted about 234,000 tons of

[[Page 38969]]

SO2 in 1996, accounting for about 33 percent of the 
SO2 from mobile sources (based on a 48 state inventory). 
With no reduction in diesel fuel sulfur levels, we estimate that these 
emissions will continue to increase, accounting for about 44 percent of 
mobile source SO2 emissions by 2030.
    As part of this final rule, sulfur levels in fuel will be 
significantly reduced, leading to large reductions in nonroad, 
locomotive, and marine diesel SO2 emissions. By 2007, the 
sulfur in diesel fuel used by all land-based nonroad, locomotive, and 
marine diesel engines will be reduced from the current average in-use 
level of between 2,300 to 2,400 ppm \25\ to an average in-use level of 
about 340 ppm, with a maximum level of 500 ppm. By 2010, the sulfur in 
diesel fuel used by land-based nonroad engines will be reduced to an 
average in-use level of 11 ppm with a maximum level of 15 ppm. Sulfur 
in diesel fuel used by locomotive and marine engines will be reduced to 
the same level by 2012. Table II.B-1 and figure II.B-1b show the 
estimated reductions from these sulfur changes.
---------------------------------------------------------------------------

    \25\ Highway fuel is currently used in a significant fraction of 
land based nonroad equipment, locomotives, and marine vessels, 
reducing the in-use average sulfur level from about 3,000 ppm for 
uncontrolled high-sulfur fuel to 2,300 or 2,400 ppm.
---------------------------------------------------------------------------

iii. NOX
    Table I.B-1 shows the 50 state estimated tonnage of NOX 
emissions for 2020 and 2030 without the final rule and the estimated 
tonnage of emissions eliminated with the final rule in place. These 
results are shown graphically in Figure I.E-1c at the end of this 
section. We estimate that NOX emissions from these engines 
will be reduced by 62 percent in 2030.
    We note that the magnitude of NOX reductions determined 
in the final rule analysis is somewhat less than what was reported in 
the proposal's preamble and RIA, especially in the later years when the 
fleet has mostly turned over to Tier 4 designs. The greater part of 
this is due to the fact that we have deferred setting a long-term 
NOX standard for mobile machinery over 750 horsepower to a 
later action. When this future action is completed, we would expect 
roughly equivalent reductions between the proposal and the overall 
final program, though there are some other effects reflected in the 
differing NOX reductions as well, due to updated modeling 
assumptions and the adjusted NOX standards levels for 
engines over 750 horsepower. Section II.A.4 of this preamble contains a 
detailed discussion of the NOX standards we are adopting for 
engines over 750 horsepower as well as the basis for those standards.
iv. VOCs and Air Toxics
    Based on a 48 state emissions inventory, we estimate that land-
based nonroad diesel engines emitted over 221 thousand tons of VOC in 
1996. Between 1996 and 2030, we estimate that land-based nonroad diesel 
engines will contribute about 2 to 3 percent of mobile source VOC 
emissions. Without further controls, land-based nonroad diesel engines 
will emit about 97 thousand tons/year of VOC in 2020 and 2030 
nationally.
    Table I.B-1 shows our projection of the reductions in 2020 and 2030 
for VOC emissions that we expect from implementing the final NMHC 
standards. This estimate is based on a 50 state emissions inventory. By 
2030, VOC emissions from this category would be reduced by 35 percent 
from baseline levels.
    While we are not adopting any specific gaseous air toxics standards 
in today's rule, air toxics emissions would nonetheless be 
significantly reduced through the NMHC standards included in the final 
rule. By 2030, we estimate that emissions of air toxics pollutants, 
such as benzene, formaldehyde, acetaldehyde, 1,3-butadiene, and 
acrolein, would be reduced by 35 percent from land-based nonroad diesel 
engines. Diesel PM reductions were discussed above. For specific air 
toxics reduction estimates, see chapter 3 of the RIA.

[[Page 38970]]

[GRAPHIC] [TIFF OMITTED] TR29JN04.001

II. Nonroad Engine Standards

    In this section we describe the emission standards for nonroad 
diesel engines that we are setting to address the serious air quality 
problems discussed in section I. These Tier 4 standards, which take 
effect starting in 2008, are very similar to those proposed, and obtain 
very similar emissions reductions. The long-term PM filter-based 
standards that apply to all engines over 25 hp, combined with the fuel 
change and new requirements to ensure robust control in the field, will 
yield PM reductions of over 95% from the in-use levels of today's 
cleanest Tier 2 engines. Likewise, the long-term NOX 
standards we are adopting for nearly all engines above 75 hp will yield 
NOX reductions of about 90% from the NOX levels 
expected from even the low-emitting Tier 3 engines due to first reach 
the market in 2006 or later. The Tier 4 standards will bring about 
large

[[Page 38971]]

reductions in toxic hydrocarbon emissions as well.
    In this final rule we are largely adopting the standards and timing 
we proposed, with the exception of those that apply to engines over 750 
hp. We restructured and modified the standards and timing for these 
engines to address technical concerns and to focus on achieving 
comparable emission reductions through the introduction of advanced 
technology as early as feasible from specific applications within this 
power category. See section II.A.4 for a detailed discussion. We also 
are not adopting the proposed minor adjustments to the CO standard 
levels for some engines under 75 hp, as explained in section II.A.6. In 
addition, there are minor changes from the proposal in the phase-in 
approach we are adopting for NOX and NMHC standards, as 
detailed in this section.
    In this section we discuss:
     The Tier 4 engine standards, and the schedule for 
implementing them;
     The feasibility of the Tier 4 standards (in conjunction 
with the low-sulfur nonroad diesel fuel requirement discussed in 
section IV); and
     How diesel fuel sulfur affects an engine's ability to meet 
the new standards.
    Additional provisions for engine and equipment manufacturers are 
discussed in detail in section III. These include:
     The averaging, banking, and trading (ABT) program.
     The transition program for equipment manufacturers.
     The addition of a ``not-to-exceed'' program to ensure in-
use emissions control. This program includes new emission standards and 
related test procedures to supplement the standards discussed in this 
section.
     The test procedures and other compliance requirements 
associated with the emission standards.
     Special provisions to aid small businesses in implementing 
our requirements.
     An incentive program to encourage innovative technologies 
and the early introduction of new technologies.

A. What Are the New Engine Standards?

    The Tier 4 exhaust emissions standards for PM, NOX, and 
NMHC are summarized in tables II.A-1, 2, and 4.\26\ Crankcase emissions 
control requirements are discussed in section II.A.7. Previously 
adopted CO emission standards continue to apply as well. All of these 
standards apply to covered nonroad engines over the useful life periods 
specified in our regulations, except where temporary in-use compliance 
margins apply as discussed in section III.E. To help ensure that these 
emission reductions will be achieved in use, we have adopted test 
procedures for measuring compliance with these standards tailored to 
both steady-state and transient nonroad engine operating 
characteristics. These test procedures are discussed in several 
subsections of section III. Another component of our program to ensure 
control of emissions in-use is the new ``not-to-exceed'' (NTE) emission 
standards and associated test procedures, discussed in section III.J.
---------------------------------------------------------------------------

    \26\ Consistent with past EPA rulemakings for nonroad diesel 
engines, our regulations express standards, power ratings, and other 
quantities in international SI (metric) units--kilowatts, gram per 
kilowatt-hour, etc. This aids in achieving harmonization with 
standards-setting bodies outside the U.S., and in laboratory 
operations in which these units are the norm. However, in this 
preamble and in other rulemaking documents for the general reader, 
we have chosen to use terms more common in general usage in the U.S. 
Hence standards are expressed in units of grams per brake 
horsepower-hour, power ratings in horsepower, etc. In any compliance 
questions that might arise from differences in these due to, for 
example, rounding conventions, the regulations themselves establish 
the applicable requirements.

                           Table II.A-1.--Tier 4 PM Standards (g/bhp-hr) and Schedule
----------------------------------------------------------------------------------------------------------------
                                                                           Model year
                 Engine power                  -----------------------------------------------------------------
                                                   2008       2009       2010       2011       2012       2013
----------------------------------------------------------------------------------------------------------------
hp < 25 (kW < 19).............................   \a\ 0.30  .........  .........  .........  .........  .........
25 <= hp < 75 (19 <= kW < 56).................   \b\ 0.22  .........  .........  .........  .........       0.02
75 <= hp < 175 (56 <= kW < 130)...............  .........  .........  .........  .........       0.01  .........
175 <= hp <= 750 (130 <= kW <= 560)...........  .........  .........  .........       0.01  .........  .........
                                               ------------
hp 750 (kW > 560).............................                          See table II.A-4
----------------------------------------------------------------------------------------------------------------
Notes:
\a\ For air-cooled, hand-startable, direct injection engines under 11 hp, a manufacturer may instead delay
  implementation until 2010 and demonstrate compliance with a less stringent PM standard of 0.45 g/bhp-hr,
  subject also to additional provisions discussed in section II.A.3.a.
\b\ A manufacturer has the option of skipping the 0.22 g/bhp-hr PM standard for all 50-75 hp engines. The 0.02 g/
  bhp-hr PM standard would then take effect one year earlier for all 50-75 hp engines, in 2012.


                            Table II.A-2.--Tier 4 NOX and NMHC Standards and Schedule
----------------------------------------------------------------------------------------------------------------
                                                Standard  (g/bhp-hr)  Phase-in schedule  (model year)  (percent)
                 Engine power                  -----------------------------------------------------------------
                                                   NOX        NMHC       2011       2012       2013       2014
----------------------------------------------------------------------------------------------------------------
25 <= hp < 75 (19 <= kW < 56).................     3.5 NMHC+NOX\a\    .........  .........       100%  .........
75 <= hp < 175 (56 <= kW < 130)...............       0.30       0.14      \b\50      \b\50     \b\100
175 <= hp <= 750 (130 <= kW <= 560)...........       0.30       0.14         50         50         50        100
                                               ------------
hp > 750 (kW > 560)...........................                          See table II.A-4
----------------------------------------------------------------------------------------------------------------
Notes: Percentages indicate production required to comply with the Tier 4 standards in the indicated model year.
 
\a\ This is the existing Tier 3 combined NMHC+NOX standard level for the 50-75 hp engines in this category. In
  2013 it applies to the 25-50 hp engines as well.
\b\ Manufacturers may use banked Tier 2 NMHC+NOX credits from engines at or above 50 hp to demonstrate
  compliance with the 75-175 hp engine NOX standard in this model year. Alternatively, manufacturers may forego
  this special banked credit option and instead meet an alternative phase-in requirement of 25/25/25% in 2012,
  2013, and 2014 through December 30, with 100% compliance required beginning December 31, 2014. See sections
  III.A and II.A.2.b.


[[Page 38972]]

    The long-term 0.01 and 0.02 g/bhp-hr Tier 4 PM standards for 75-750 
hp and 25-75 hp engines, respectively, combined with the fuel change 
and new requirements to ensure robust control in the field, represent a 
reduction of over 95% from in-use levels expected with Tier 2/Tier 3 
engines.\27\ The 0.30 g/bhp-hr Tier 4 NOX standard for 75-
750 hp engines represents a NOX reduction of about 90% from 
in-use levels expected with Tier 3 engines. Emissions reductions from 
engines over 750 hp are discussed in section II.A.4.
---------------------------------------------------------------------------

    \27\ Note that we are grouping all standards in this rule, 
including those that take effect in 2008, under the general 
designation of ``Tier 4 standards.'' As a result, there are no 
``Tier 3'' standards in the multi-tier nonroad program for engines 
below 50 hp or above 750 hp.
---------------------------------------------------------------------------

    In general, there was widespread support in the comments for the 
proposed Tier 4 engine standards and for the timing we proposed for 
them. Some commenters raised category-specific concerns, especially for 
the smaller and the very large engine categories. These comments are 
discussed below.
1. Standards Timing
a. 2008 Standards
    The timing of the Tier 4 engine standards is closely tied to the 
timing of fuel quality changes discussed in section IV, in keeping with 
the systems approach we are taking for this program. The earliest Tier 
4 engine standards take effect in model year 2008, in conjunction with 
the introduction of 500 ppm maximum sulfur nonroad diesel fuel in mid-
2007. This fuel change serves a dual environmental purpose. First, it 
provides a large immediate reduction in PM and SOX emissions 
for the existing fleet of engines in the field. Second, its widespread 
availability by the end of 2007 aids engine designers in employing 
emissions controls capable of achieving the Tier 4 standards for model 
year 2008 and later engines; this is because the performance and 
durability of such technologies as exhaust gas recirculation (EGR) and 
diesel oxidation catalysts is improved by lower sulfur fuel.\28\ The 
reduction of sulfur in nonroad diesel fuel will also provide sizeable 
economic benefits to machine operators as it will reduce wear and 
corrosion and will allow them to extend oil change intervals (see 
section VI.B). These economic benefits will occur for all diesel 
engines using the new fuel, not just for those built in 2008 or later.
---------------------------------------------------------------------------

    \28\ ``Nonroad Diesel Emissions Standards Staff Technical 
Paper,'' EPA420-R-01-052, October 2001.
---------------------------------------------------------------------------

    As we proposed, these 2008 Tier 4 engine standards apply only to 
engines below 75 hp. We are not setting Tier 4 standards taking effect 
in 2008 for larger engines. The reasons for this differ depending on 
the engines' hp rating. Setting Tier 4 2008 standards for engines at or 
above 100 hp would provide an insufficient period of stability (an 
element of lead time) between Tier \2/3\ and Tier 4, and so would not 
be appropriate. This is because these engines become subject to 
existing Tier 2 or 3 NMHC+NOX standards in 2006 or 2007. 
Setting new 2008 standards for them thus would provide only one or two 
years of Tier 2/Tier 3 stability before another round of design changes 
would have to be made in 2008 for Tier 4.
    It is also inappropriate to establish 2008 Tier 4 standards for 
engines of 75-100 hp. The stability issue just noted for larger engines 
is not present for these engines, because these engines are subject to 
Tier 3 NMHC+NOX standards starting in 2008, so that our 
setting a Tier 4 PM standard for them in the same year would not create 
the situation in which engines have to be redesigned twice to comply 
with new standards within a space of one or two years. However, EPA 
believes the more significant concern for these engines is meeting the 
stringent aftertreatment-based standards for PM and NOX in 
2012. We are concerned that adopting interim 2008 standards for these 
engines would divert resources needed to achieve these 2012 standards 
and indeed jeopardize attaining them. Thus, although early emission 
reductions from these engines in 2008 would of course be desirable, we 
felt that the focus we are putting on obtaining much larger reductions 
from them in 2012, together with the fact that we already have a Tier 3 
NMHC+NOX standard taking effect for 75-100 hp engines in 
2008, warrants our not adding additional control requirements for these 
engines during this interim period.
    We note that the 50-75 hp engines also have a Tier 3 
NMHC+NOX standard taking effect in 2008 and, as noted above, 
we are setting a new Tier 4 2008 PM standard for them. Unlike the 
larger 75-100 hp engines, however, the 50-75 hp engines have one 
additional year, until 2013, before filter-based PM standards take 
effect, and also have no additional NOX control requirement 
being set beyond the 2008 Tier 3 standard. These differences justify 
including the interim Tier 4 PM standard for these engines. We note too 
that achieving the 2008 PM standard is enabled in part by the large 
reduction in certification fuel sulfur that applies in 2008 (see 
section III.D). Fuel sulfur has a known correlation to PM generation, 
even for engines without aftertreatment. Moreover, for any 
manufacturers who believe that accomplishing this PM pull-ahead will 
hamper their Tier 3 compliance efforts for these engines, there is an 
alternative Tier 4 compliance option. Instead of meeting new Tier 4 PM 
standards in both 2008 and 2013, manufacturers may skip the Tier 4 2008 
PM standard, and instead focus design efforts on introducing PM filters 
for these engines one year earlier, by complying with the 
aftertreatment-based standard for PM in 2012. These options are 
discussed in more detail in section II.A.3.b.
    We view the 2008 portion of the Tier 4 program as highly important 
because it provides substantial PM and SOX emissions 
reductions during the several years prior to 2011. Initiating Tier 4 in 
2008 also fits well with the lead time (including stability), cost, and 
technology availability considerations of the overall program. 
Initiating the Tier 4 engine standards in 2008 provides three to four 
years of stability after the start of Tier 2 for engines under 50 hp. 
As mentioned above, it also coincides with the start date of Tier 3 
NMHC+NOX standards for 50-75 hp engines and so introduces no 
stability issues for these engines (as redesign for both PM and 
NOX occurs at the same time). The 2008 start date provides 
almost 4 years of lead time to accomplish redesign and testing. The 
evolutionary character of the 2008 standards, based as they are on 
proven technologies, and the fact that some certified engines already 
meet these standards as discussed in section II.B, leads us to conclude 
that the standards are appropriate within the meaning of section 
213(a)(4) of the Clean Air Act and that we are providing adequate lead 
time to achieve those standards.
    Engine and equipment manufacturers argued in their comments that 
the PM pull-ahead option for 50-75 hp engines is inappropriate because 
it constitutes a re-opening of the Tier 3 rule, involving as it does a 
Tier 4 PM standard in 2008, the same year that the Tier 3 
NMHC+NOX takes effect. They further argued that the non-
pull-ahead option is not a real option because PM aftertreatment cannot 
be implemented for these engines in 2012.
    We disagree with both contentions. We determined, as part of our 
feasibility analysis for Tier 4, that it is feasible to design engines 
to meet the 2008 PM standard in the same year that a Tier 3 
NMHC+NOX standard takes effect. See section II.B and RIA 
sections 4.1.4 and 4.1.5. One reason is that a substantial

[[Page 38973]]

part of the 2008 PM emission reductions do not result from engine 
redesign, but rather are due to the reduction in certification test 
fuel maximum sulfur levels from 2000 to 500 ppm that results from the 
fuel change in the field. This reduction in sulfur levels also aids 
engine designers in employing emission control technologies that are 
detrimentally affected by sulfur, not only for PM control, but also for 
NMHC and NOX control. Examples of these sulfur-sensitive 
technologies are oxidation catalysts, which can substantially reduce PM 
and NMHC, and EGR, which is effective at reducing NOX. We 
note further that designing engines to meet the 2008 PM standard is 
also made less difficult by our not requiring engine designers to 
consider the transient test, cold start, and not-to-exceed requirements 
that are otherwise part of the Tier 4 program. These requirements do 
not take effect for these engines until the 0.02 g/bhp-hr standard is 
implemented in 2012 or 2013. See section III.F for details.
    We also believe that the second option (compliance with the 
aftertreatment-based PM standard in 2012, with no interim 2008 
standard) is viable, and may be an attractive choice especially for 
engine families on the higher side of the 50-75 hp range that share a 
design platform with larger engines being equipped with PM filters to 
meet the Tier 4 standard for 75-175 hp engines in 2012. We believe 75 
hp is the appropriate cutpoint for setting and timing emissions 
standards (see section II.A.5), but it obviously is not a hard-and-fast 
separator between engine platforms for all manufacturers in all product 
lines. Even for many 50-75 hp engines that do not share a design 
platform with larger engines, we believe that a 2012 implementation 
date for PM filter technology may be practical, considering the 4-year 
lead time it affords after Tier 3 begins for these engines (in 2008), 
8-year lead time after the last PM standard change (in 2004), and 5-
year lead time after full-scale PM filter technology implementation on 
highway engines (in 2007).
    Engine manufacturers also commented that the two-options approach 
would cause their customers to switch engine suppliers in 2012 to get 
the least expensive engines possible in every year, thus compromising 
the environmental objectives and creating market disruptions. We have 
addressed these concerns as discussed in section II.A.3.b.
b. 2011 and Later Standards
    The second fuel change for nonroad diesel fuel, to 15 ppm maximum 
sulfur in mid-2010, and the related engine standards for PM, 
NOX, and NMHC that begin to phase-in in the 2011 model year, 
provide most of the environmental benefits of the program. Like the 
2008 standards, these standards are timed to provide adequate lead time 
for engine and equipment manufacturers. They also are phased in over 
time to allow for the orderly transfer of technology from the highway 
sector, and to spread the overall workload for engine and equipment 
manufacturers engaged in redesigning a large number and variety of 
products for Tier 4.
    As we explained at proposal, we believe that the high-efficiency 
exhaust emission control technologies being developed to meet our 2007 
emission standards for heavy-duty highway diesel engines can be adapted 
to most nonroad diesel applications. The engines for which we believe 
this adaptation from highway applications will be most straightforward 
are those in the 175-750 hp power range, and thus these engines are 
subject to new standards requiring high-efficiency exhaust emission 
controls as soon as the 15 ppm sulfur diesel fuel is widely available, 
that is, in the 2011 model year. Engines of 75-175 hp are subject to 
the new standards in the following model year, 2012, reflecting the 
need to spread the redesign workload and, to some extent, the greater 
effort that may be involved in adapting highway technologies to these 
engines. Engines between 25 and 75 hp are subject to new standards for 
PM based on high-efficiency exhaust emission controls in 2013, 
reflecting again the need to spread the workload and the challenge of 
adapting this technology to these engines which typically do not have 
highway counterparts. Engines over 750 hp involve a number of special 
considerations, necessitating an implementation approach unique to 
these engines as explained in section II.A.4. Lastly , there are 
additional provisions discussed in sections III.B.2 and III.M to 
encourage early technology introduction and to further draw from the 
highway technology experience.
    This approach of implementing Tier 4 standards by power category 
over 2011-2013 provides for the orderly migration of technology and 
distribution of redesign workload over three model years, as EPA 
provided in Tier 3. Overall, this approach provides 4 to 6 years of 
real world experience with the new technology in the highway sector, 
involving millions of engines (in addition to the several additional 
years provided by demonstration fleets on the road in earlier years), 
before the new standards take effect. We consider the implementation of 
Tier 4 standard start dates over 2011-2013 as described above to be 
responsive to the technology migration and workload distribution 
concerns.
2. Phase-In of NOX and NMHC Standards for 75-750 hp Engines
a. Percent-of-Production Phase-In for NOX and NMHC
    We are finalizing the percent-of-production phase-in for 
NOX and NMHC that we proposed for 75-750 hp engines. Because 
Tier 4 NOX emissions control technology is expected to be 
derived from technology first introduced in highway heavy-duty diesels, 
we proposed to adopt the implementation pattern for the Tier 4 
NOX standard which we adopted for the heavy-duty highway 
diesel program. This will help to ensure a focused, orderly development 
of robust high-efficiency NOX control in the nonroad sector 
and will also help to ensure that manufacturers are able to take 
maximum advantage of the highway engine development program, with 
resulting cost savings.
    The heavy-duty highway rule allows for a gradual phase-in of the 
NOX and NMHC requirements over multiple model years: 50% of 
each manufacturer's U.S.-directed production volume must meet the new 
standard in 2007-2009, and 100% must do so by 2010. Through the use of 
emissions averaging, this phase-in approach also provides the 
flexibility for highway engine manufacturers to meet that program's 
environmental goals by allowing somewhat less-efficient NOX 
controls on more than 50% of their production during the 2007-2009 
phase-in years.
    We follow the same pattern in this rule. As proposed, we are 
phasing in the NOX standards for nonroad diesels over 2011-
2013 as indicated in table II.A-2, based on compliance with the Tier 4 
standards for 50% of a manufacturer's U.S.-directed production in each 
power category between 75 and 750 hp in each phase-in model year. The 
phase-in of standards for engines over 750 hp is discussed in section 
II.A.4. With a NOX phase-in, all manufacturers are able to 
introduce their new technologies on a limited number of engines, 
thereby gaining valuable experience with the technology prior to 
implementing it on their entire product line. In tandem with the 
equipment manufacturer transition program discussed in section III.B, 
the phase-in ensures timely progress to the Tier 4 standard levels 
while providing a great degree of implementation flexibility for the 
industry.

[[Page 38974]]

    This ``percent of production phase-in'' is intended to take maximum 
advantage of the highway program technology development. It adds a new 
dimension of implementation flexibility to the staggered ``phase-in by 
power category'' used in the nonroad program for Tiers 1-3 (and also in 
this Tier 4) which, though structured to facilitate technology 
development and transfer, is more aimed at spreading the redesign 
workload. Because the Tier 4 program involves challenges in addressing 
both technology development and redesign workload, we believe that 
incorporating both of these phase-in mechanisms into the program is 
warranted, resulting in the coordinated phase-in plan shown in table 
II.A-2, which we are finalizing essentially as proposed. Note that this 
results in the new NOX requirements for 75-175 hp engines 
taking effect starting in the second year of the 2011-2013 general 
phase-in, in effect creating a 50-50% phase-in in 2012-2013 for this 
category. This then staggers the Tier 4 start years by power category 
as in past tiers: 2011 for engines at or above 175 hp, 2012 for 75-175 
hp engines, and 2013 for 25-75 hp engines (for which no NOX 
adsorber-based standard and thus no percentage phase-in is being 
adopted), while still providing a production-based phase-in for 
advanced NOX control technologies.
    Comments from the States and environmental organizations argued for 
the completion of the phase-in by the end of 2012, contending that 
technology progress for NOX control in the highway sector 
has been good to date and would support an accelerated phase-in in the 
nonroad sector. However, our assessment continues to show unique 
(though surmountable) challenges in adapting advanced technologies to 
nonroad engines, especially for engines least like highway diesels, and 
it is these engines that would be most affected by a truncated phase-in 
schedule. Furthermore, even if we were to conclude that advanced 
technologies will be ready earlier than expected, we would not be able 
to move up the start of phase-in dates because these dates also depend 
on low-sulfur fuel availability. Thus an end-of-2012 phase-in 
completion date would result in phase-ins as short as one year, thus 
degrading the industry's opportunity to distribute the redesign 
workload and departing from the pattern set by the highway program. 
Both of these are critical factors in our assessment that the proposed 
engine standards are feasible, and so a change to shorter phase-ins 
would jeopardize achievement of our environmental objectives for 
nonroad diesels. Therefore we are not adopting the suggested earlier 
completion of the phase-in.
    As proposed, we are phasing in the Tier 4 NMHC standard for 75-750 
hp engines with the NOX standard, as is being done in the 
highway program. Engines certified to the new NOX 
requirement would be expected to certify to the NMHC standard as well. 
The ``phase-out'' engines (those not certified to the new Tier 4 
NOX and NMHC standards) would continue to be certified to 
the applicable Tier 3 NMHC+NOX standard. As discussed in 
section II.B, we believe that the NMHC standard is readily achievable 
through the application of PM traps to meet the PM standard, which does 
not involve such a phase-in. However, in the highway program we chose 
to phase in the NMHC standard with the NOX standard to 
simplify the phase-in under the percent-of-production approach taken 
there, thus avoiding subjecting the ``phase-out'' engines to separate 
standards for NMHC and NMHC+NOX (which could lead to 
increased administrative costs with essentially no different 
environmental result). The same reasoning applies here because, as in 
the highway program, the previous-tier standards are combined 
NMHC+NOX standards. No commenters objected to this approach.
    Because of the tremendous variety of engine sizes represented in 
the nonroad diesel sector, we are finalizing our proposed requirement 
that the phase-in requirement be met separately in both of the power 
categories with a phase-in (75-175 hp and 175-750 hp).\29\ For example, 
a manufacturer that produces 1000 engines for the 2011 U.S. market in 
the 175 to 750 hp range would have to demonstrate compliance with the 
NOX and NMHC standards on at least 500 of these engines, 
regardless of how many complying engines the manufacturer produces in 
the 75-175 hp category. (Note however that we are allowing averaging of 
emissions between these engine categories through the use of power-
weighted ABT program credits.) We believe that this restriction 
reflects the availability of emissions control technology, and is 
needed to avoid erosion of environmental benefits that might occur if a 
manufacturer with a diverse product offering were to meet the phase-in 
with relatively low cost smaller engines, thereby delaying compliance 
on larger engines with much higher lifetime emissions potential. Even 
so, the horsepower ranges for these power categories are fairly broad, 
so this restriction allows ample freedom to manufacturers to structure 
compliance plans in the most cost-effective manner. There were no 
adverse comments on this approach.
---------------------------------------------------------------------------

    \29\ Note exceptions to the percent phase-in requirements during 
the phase-in model years discussed in sections III.L and III.M. 
These deal with differences between a manufacturer's actual and 
projected production levels, and with incentives for early or very 
low emission engine introductions.
---------------------------------------------------------------------------

b. Special Considerations for the 75-175 hp Category
    As discussed in the proposal, the 75-175 hp category of engines and 
equipment may involve added workload challenges for the industry to 
develop and transfer technology. Though spanning only 100 hp, this 
category represents a great diversity of applications, and comprises a 
disproportionate number of the total nonroad engine and machine models. 
Some of these engines, though having characteristics comparable to many 
highway engines such as turbocharging and electronic fuel control, are 
not directly derived from highway engine platforms and so are likely to 
require more development work than larger engines to transfer emission 
control technology from the highway sector. Furthermore, the engine and 
equipment manufacturers have greatly varying market profiles in this 
category, from focused one- or two-product offerings to very diverse 
product lines with a great many models.
    Therefore, in addition to the flexibility provided through the 
phase-in mechanism, we proposed two optional measures to provide added 
flexibility in implementing the Tier 4 NOX standards, while 
keeping a priority on bringing PM emissions control into this diverse 
power category as quickly as possible. First, we proposed to allow 
manufacturers to use NMHC+NOX credits generated by any Tier 
2 engines over 50 hp (in addition to any other allowable credits) to 
demonstrate compliance with the Tier 4 requirement for 75-175 hp 
engines in 2012, 2013, and 2014 only. Second, we proposed allowing a 
manufacturer to instead demonstrate compliance with a reduced phase-in 
requirement of 25% for NOX and NMHC in each of 2012, 2013, 
and the first 9 months of 2014. Full compliance (100% phase-in) with 
the Tier 4 standards would have needed to be demonstrated beginning 
October 1, 2014.
    Engine manufacturers reinforced the points we made in the proposal 
regarding added workload challenges for this diverse category of 
engines and machines. However, they suggested that the first of the 
proposed options to address these challenges (allowing use

[[Page 38975]]

of Tier 2 credits) is not likely to be used due to a lack of available 
Tier 2 credits, and therefore should be dropped, and that the second 
option (allowing a slower phase-in) provided too short a stability 
period, and should be modified to delay final compliance by an 
additional 3 months, to December 31, 2014 or January 1, 2015. In 
addition to describing the very large redesign workload, they pointed 
out that engines and machines in this category typically do not have a 
model year that differs from the calendar year, and so the substantial 
changes required for Tier 4 compliance in October 2014 could force the 
need to change the product for all of 2014, effectively shortening the 
phase-in to two years. One manufacturer argued that the compliance date 
for the 75-100 hp engines in this category should be delayed an 
additional year, to 2016, and that the start of the phase-in for these 
engines should be likewise delayed from 2012 to 2013.
    We do not feel that the first option (allowing use of Tier 2 
credits) should be dropped, as it provides an alternative flexibility 
mechanism for a power category in which flexibility is clearly 
important, and is environmentally helpful as it provides an option for 
manufacturers to achieve NOX emission reductions earlier 
than under the second option. By providing an opportunity to use Tier 2 
credits in the 75-175 hp category, it coordinates well with the Tier 2 
credit use opportunity we are providing for the 50-75 hp engines 
meeting the 2008 PM standard (see section III.A), and allows for 
coordinated redesign and credit use planning by a manufacturer over 
this wide power range over many years. Nonetheless, recognizing that 
the second option may be more attractive to manufacturers, and 
considering the comments they provided on it, we have concluded that a 
three month phase-in extension until the end of 2014 is warranted to 
address the workload burden and to align product cycle dates. Thus we 
are adopting the December 31, 2014 implementation date suggested in 
comments for completion of the 75-175 hp engine phase-in.
    We do not agree that an additional year of delay is appropriate for 
the 75-100 hp engines in this category. The comment expressing interest 
in our doing so did not provide any basis for it in technological 
feasibility or in workload burden, and we do not see any basis for it 
ourselves.
    Therefore, we are adopting both of the proposed optional measures 
for the 75-175 hp engine phase-in, except that in the second option, 
full compliance (100% phase-in) with the Tier 4 standards will need to 
be demonstrated beginning December 31, 2014. As proposed, manufacturers 
using this reduced phase-in option will not be allowed to generate 
NOX credits from engines in this power category in 2012, 
2013, and 2014, except for use in averaging within the 75-175 hp 
category (that is, no banking or trading, or averaging with engines in 
other power categories). We believe that this restriction on credit use 
is appropriate, considering that larger engine categories will be 
required to demonstrate a substantially greater degree of compliance 
with the 0.30 g/bhp-hr NOX standard several years earlier 
than engines built under this option. As the purpose of this option is 
to aid manufacturers in implementing Tier 4 NOX standards 
for this challenging power category, we do not want any manufacturers 
who might be capable of building substantially greater numbers of 
cleaner engines to use this option as an easy and copious source of 
credits (owing to its slower phase-in of stringent standards) that in 
turn can be used to delay building clean engines in other categories or 
model years.
c. Alternative Phase-In Standards
    To ensure that Tier 4 engine development is able to take maximum 
advantage of highway diesel technology advances, we proposed to adopt 
nonroad diesel provisions in the averaging, banking, and trading 
program that would parallel the heavy-duty highway engine program's 
``split family provisions'' (see 68 FR 28470, May 23, 2003). In 
essence, these allow a manufacturer to declare an engine family during 
the phase-in years that is certified at NOX levels roughly 
midway between the phase-out standard and phase-in standard, without 
the complication of tracking credit generation and use. Because they 
constitute a calculational simplification of the emissions averaging 
provisions, these split family provisions do not result in a loss in 
environmental benefits compared to what the phase-in can achieve.
    The nonroad proposal also included specific emission levels for 
these split families, rather than just describing how they are 
calculated. Commenters suggested that we go one step further still and 
express these levels as alternative standards. They argued that this 
would facilitate attempts at harmonizing standards globally, especially 
for standards-setting bodies such as the European Commission that do 
not have emissions averaging programs. We are also aware that most 
manufacturers of highway diesel engines are now planning to comply with 
our 2007 standards using this emissions averaging approach, increasing 
the significance of comments on the topic from nonroad engine 
manufacturers, many of whom also make highway engines.\30\
---------------------------------------------------------------------------

    \30\ See the recently published ``Highway Diesel Progress Review 
Report 2,'' EPA420-R-04-004, available at http://www.epa.gov/otaq/
diesel.htm#progreport2.
---------------------------------------------------------------------------

    After carefully considering the issues involved, we agree that the 
proposed approach lends itself to expression in terms outside of the 
averaging, banking, and trading program and that it makes sense to do 
so. We are creating such an alternative in the final regulations 
accordingly. These alternative standards do not substantively change 
our Tier 4 program from what we proposed, but rather respond to 
manufacturers' suggestions for administrative simplifications to what 
is essentially an averaging-based flexibility option in demonstrating 
compliance with the percent-of-production NOX phase-in. The 
alternative NOX phase-in standards are shown in table II.A-
3. They apply only during the NOX phase-in years. 
Manufacturers may use both approaches within a power category if 
desired, certifying some engines to the alternative standards, with the 
rest subject to the phase-in percentage requirement. Note that engines 
under 75 hp subject to Tier 4 NOX standards do not have an 
alternative standard because they do not have a NOX phase-
in, and engines over 750 hp do not have an alternative standard because 
of the separate standards we are adopting for these engines (explained 
in section II.A.4).

   Table II.A-3.--Tier 4 Alternative NOX Phase-in Standards (g/bhp-hr)
------------------------------------------------------------------------
                                                           NOX standard
                      Engine power                          (g/bhp-hr)
------------------------------------------------------------------------
75 <= hp < 175 (56 <= kW < 130)........................          \a\ 1.7
175 <= hp <= 750 (130 <= kW <= 560)....................             1.5
------------------------------------------------------------------------
Notes: \a\ Under the option identified in footnote b of table II.A-2, by
  which manufacturers may meet an alternative phase-in requirement of 25/
  25/25% in 2012, 2013, and 2014 through December 30, the corresponding
  alternative NOX standard is 2.5 g/bhp-hr.

    The engines certified under these standards will of course also 
need to meet the Tier 4 PM and crankcase control requirements that take 
effect for all engines in the first phase-in year. They will also need 
to comply with all Tier 4 provisions that would apply to

[[Page 38976]]

phase-in engines, including the 0.14 g/bhp-hr NMHC standard and the NTE 
and transient test requirements for all pollutants. We recognize that 
this differs from what is required under the phase-in approach, in 
which these requirements would not apply to the 50% of engines 
categorized as ``phase-out'' engines. However, under the alternative 
standards approach, what would have been two different engine families 
(one meeting phase-in requirements and one meeting phase-out 
requirements, with NOX and PM emissions averaging allowed 
between them under the ABT provisions) are replaced by a single engine 
family meeting the one set of alternative standards. Therefore all of 
the engines in this family must by default meet the phase-in 
requirements for provisions that lack any sort of averaging mechanism 
(NMHC standard, NTE, etc). As a result, any manufacturer choosing to 
design to the alternative standards rather than using the phase-in 
approach provides some additional environmental benefit as an indirect 
result of choosing this approach.
    We also believe that this alternative standards provision makes 
appropriate a further adjustment to the NOX phase-in scheme 
to better preserve both the advanced technology phase-in approach, for 
those manufacturers choosing that compliance path, and the alternative 
standards approach, for those choosing that path. Under the proposal, 
the provision for certifying a split engine family at a pre-designated 
NOX level would not allow credit generation by or credit use 
on engines in the split family (other than for averaging within the 
family). This was consistent with our goal of providing a simple, 
single average NOX standard level for the family, equivalent 
to arbitrarily designating a portion of the engines in the family as 
``phase-out'' engines (credit generators) and the rest as ``phase-in'' 
engines (credit users) with a net credit balance of zero, while 
avoiding the burden of actually calculating and tracking credits. This 
was also consistent with our approach under the 2007 highway engine 
program from which this concept is derived.
    However, because this split family provision has evolved into a set 
of alternative standards, there is no longer a need to prohibit the 
generation and use of ABT credits for these engines to preserve a de 
facto net zero credit balance, and so, considering that it is also not 
environmentally detrimental, we believe it is appropriate to allow 
credit use and generation for these engines as for other engines. A 
consequence of doing so, consistent with all of our ABT programs, is 
the adoption of NOX FEL caps for these engines. To maintain 
the character of this compliance path as producing engines during the 
phase-in years that emit at NOX levels which are roughly 
averaged between Tier 3 and final Tier 4 levels, we are setting 
NOX FEL caps for these engines at levels reasonably close to 
the alternative standards. (See section III.A for details.) Because we 
are also maintaining the original phase-in/phase-out compliance path, a 
manufacturer wishing to build engines with NOX levels higher 
than these FEL caps, at or approaching the Tier 3 levels, could still 
do so; in fact these would in actuality fit the description of a phase-
out engine. This manufacturer would also, of course, have to produce a 
corresponding number of phase-in engines meeting the aftertreatment-
based Tier 4 NOX standards.
    We also observe that the creation of alternative standards provides 
the opportunity to adjust the phase-in/phase-out provisions so as to 
reinforce their focus on introducing high-efficiency NOX 
aftertreatment technology during the phase-in years, which is, of 
course, their aim. We are doing this by setting NOX family 
emission limit (FEL) caps for phase-in engines at the same low levels 
as for Tier 4 engines produced in the post-phase-in years. (Again, see 
section III.A for details.) Although the engine manufacturers indicated 
in their comments that they did not believe it likely that anyone would 
choose this phase-in/phase-out compliance path, we believe that 
preserving it and focusing it on encouraging very low-NOX 
engines as early as possible provides a potentially useful and 
environmentally desirable alternative path. Thus these two concepts 
have been developed to provide complementary compliance paths obtaining 
equivalent overall NOX reductions, one focused on phasing in 
high-efficiency NOX aftertreatment and the other on 
achieving NOX control for all subject engines during the 
phase-in years at an average level between the Tier 3 and final Tier 4 
standards levels.
3. Standards for Smaller Engines
a. Engines Under 25 hp
    We are finalizing the Tier 4 program we proposed for engines under 
25 hp. In the proposal we presented our view that standards based on 
the use of PM filters should not be set at this time for the very small 
diesel engines below 25 hp. We also discussed our plan to reassess the 
appropriate long-term standards in a technology review. However, for 
the nearer-term, we concluded that other proven PM-reducing 
technologies such as diesel oxidation catalysts and engine optimization 
could be applied to engines under 25 hp. Accordingly, we proposed Tier 
4 PM standards to take effect beginning in 2008 for these engines based 
on use of these technologies.
    In contrast to our proposals for other engine categories, the 
proposed Tier 4 standards for this category elicited very little 
comment from the engine manufacturers other than an expression of 
support for deferring consideration of any more stringent standards 
pending results of a future technology review. The States and 
environmental organizations expressed disappointment that EPA had not 
proposed more stringent standards for these engines, given the very 
large number of these engines in the field and the significant risk 
they pose due to individuals' exposure to diesel PM and air toxics. 
They urged more stringent 2008 PM standards and the adoption of 
standards obtaining emission reductions of 90% or more by the end of 
2012. Emissions control manufacturers argued that more stringent 2008 
standards based on the use of more efficient oxidation catalysts are 
feasible.
    As discussed in section II.B.4, we continue to believe that the 
standards we proposed for engines under 25 hp are feasible, and 
commenters in the nonroad diesel industry provided no comments to the 
contrary. Our reasons for not proposing more stringent Tier 4 standards 
for these engines based on the use of PM filters and NOX 
aftertreatment were mainly focused on the cost of equipping these 
relatively low cost engines with such devices, especially considering 
the prerequisite need for electronic fuel control systems to facilitate 
regeneration. The comments supporting more stringent standards were not 
convincing, as they did not address these cost issues. However, we do 
agree that these small engines likely have a large impact on human 
health, and, as discussed in section VIII.A, we are reaffirming the 
plan we described in the proposal to reassess the appropriate long-term 
standards for these engines in a technology review to take place in 
2007. We will set more stringent standards for these engines at that 
time, if appropriate.
    We also disagree with comments supporting more stringent 2008 
standards that would require the use of diesel oxidation catalysts on 
all small engines. Although we agree that these catalysts can be 
applied so as to achieve emission reductions on some small engines, the 
emissions performance data

[[Page 38977]]

we have analyzed do not support our setting a more stringent standard. 
Section 4.1.5 of the RIA summarizes such data showing a very wide range 
of engine-out PM emissions in this power category. Applying oxidation 
catalyst technology to these engines, though capable of some PM 
reduction if properly designed and matched to the application, is 
limited by sulfur in the diesel fuel. Specifically, precious-metal 
oxidation catalysts (which have the greatest potential for reducing PM) 
can oxidize the sulfur in the fuel and form particulate sulfates. Even 
with the 500 ppm maximum sulfur fuel available after 2007, the sulfate 
production potential is large enough to limit what can be done to set 
more stringent 2008 PM standards through the use of these catalysts. 
The 15 ppm maximum sulfur fuel available after 2010 will greatly 
improve the potential for use of oxidation catalysts, but as we 
discussed above, we believe that the much larger potential reduction 
afforded by PM filter technology warrants our waiting until the 
technology review in 2007 to evaluate the appropriate long-term 
standards for these engines. See section II.B.5 and RIA section 4.1.5 
for further discussion.
    When implemented, the Tier 4 PM standard and related provisions we 
are adopting today for engines under 25 hp will yield an in-use PM 
reduction of over 50% for these engines, and large reductions in toxic 
hydrocarbons as well. Achieving these emission reductions is very 
important, considering the fact that many of these smaller engines 
operate in populated areas and in equipment without closed cabs--in 
mowers, portable electric power generators, small skid steer loaders, 
and the like.
    We are also adopting the alternative compliance option that we 
proposed for air-cooled, direct injection engines under 11 hp that are 
startable by hand, such as with a crank or recoil starter. As we 
explained in the proposal, the alternative is justified due (among 
other things) to these engines' need for loose design fit tolerances, 
their small cylinder displacement and bore sizes, and the difficulty in 
obtaining components for them with tight enough tolerances (68 FR 
28363, May 23, 2003). This alternative allows manufacturers of these 
engines to delay Tier 4 compliance until 2010, and in that year to 
certify them to a PM standard of 0.45 g/bhp-hr, rather than to the 0.30 
g/bhp-hr PM standard applicable beginning in 2008 to the other engines 
in this power category. As proposed, engines certified under this 
alternative compliance requirement will not be allowed to generate 
credits as part of the ABT program, although credit use by these 
engines will still be allowed.
    We received no adverse comments on this proposed alternative for 
qualifying engines under 11 hp. Euromot commented that there are hand-
startable engines in the 11-25 hp range, and that we should extend the 
alternative compliance option to these engines as well. However, hand-
startability is not the sole defining feature of engines for which we 
established this alternative. Rather, the alternative is for a class of 
engines typified by a combination of characteristics (very small, air-
cooled, direct injection, hand-startable), which give rise to the 
potential technical difficulties noted above. To extend the alternative 
to other engines simply because they have a hand-start is not 
justified, because they do not share these technical difficulties (or 
do not share them to the same degree). Such an extension could also 
potentially encourage manufacturers of the many models of these larger 
engines to market a hand-start option simply to avoid more stringent 
standards.
b. Standards for 25-75 hp Engines
    We proposed a 0.22 g/bhp-hr PM standard for 25-75 hp engines, to 
take effect in 2008. We also proposed a filter-based 0.02 g/bhp-hr PM 
standard for these engines, to take effect in 2013, the year in which 
filter-based technology for these engines is expected to be applicable 
on a widespread basis (see section II.A.1). Also in 2013, the 25-50 hp 
engines would be subject to the 3.5 g/bhp-hr NMHC+NOX 
standard already adopted for 50-75 hp engines (taking effect in 2008 as 
part of Tier 3). We are adopting all of these proposed standards in 
this final rule.
    The 2008 PM standard for these engines should maximize reduction of 
PM emissions using technology available in that year. We believe that 
the 2008 PM standard is feasible for these engines, based on the same 
engine or oxidation catalyst technologies feasible for engines under 25 
hp in 2008, following the introduction of nonroad diesel fuel with 
sulfur levels reduced below 500 ppm. We expect in-use PM reductions for 
these engines of over 50% (and large reductions in toxic hydrocarbons 
as well) over the five model years this standard would be in effect 
(2008-2012). These engines will constitute a large portion of the in-
use population of nonroad diesel engines for many years after 2008. 
Although we are finalizing the 2013 standards for 25-75 hp engines 
today, we are also reaffirming our commitment to conducting a 
technology review for these standards in 2007. This planned review is 
discussed in section VIII.A. Additional discussion of our feasibility 
assessment for the 2008 and 2013 standards can be found in section 
II.B.4 and RIA section 4.1.4.
    In comments, emissions controls manufacturers argued that more 
stringent 2008 standards for PM and NMHC based on the use of more 
efficient oxidation catalysts are feasible and should be adopted. 
Environmental organizations argued that PM and NOX standards 
for 2008 should be set at more stringent levels, based on the use of 
oxidation catalysts and improved engine optimization. The California 
Air Resources Board argued for more stringent 2008 standards for 
HC+NOX, PM and toxics, based on the use of oxidation 
catalysts.
    We disagree with the comments calling for more stringent 2008 
standards than proposed for 25-75 hp engines, based on the use of 
diesel oxidation catalysts. The standards we proposed and are adopting 
for these engines pull ahead sizeable PM reductions starting three 
years ahead of the earliest PM filter-based standards for any engine 
size. The pull-ahead standard level balances early reductions with the 
need to ensure that the PM filter-based standards and Tier 3 
NMHC+NOX standards are not jeopardized by an overemphasis on 
early reductions. Although we agree that oxidation catalysts can be 
applied to these engines, the emissions performance data we have 
analyzed do not support our setting a more stringent standard, for the 
same reasons described above in section II.A.3.a for engines under 25 
hp. Refer to section II.B.4 and to section 4.1.4 of the RIA for 
additional discussion. For a discussion of comments opposed to new 
standards in 2008, see sections II.A.1 and II.B of this preamble.
    We also do not agree that more stringent NOX 
requirements based on improved engine optimization are appropriate for 
these engines in 2008. In 2001 we reviewed and confirmed the previously 
set NMHC+NOX emission standards that will be in effect for 
these engines during the time frame in question.\31\ Because of the 
focus we are putting on achieving large PM reductions from these 
engines as early as possible, we felt that it was important to strike a 
balance between PM and NOX control. As a result, we did not 
propose more stringent NOX standards for 50-75 hp engines, 
and we proposed to apply

[[Page 38978]]

the 3.5 g/bhp-hr NMHC+NOX standard to 25-50 hp engines in 
2013 because this is the year in which the PM filter-based standard is 
being implemented. Requiring new NOX controls for these 
engines earlier than 2013 would add a third redesign step to those 
already called for in 2008 and 2013. This would add a potentially 
unacceptable amount of redesign workload, to a point that it could 
jeopardize our objective of bringing stringent PM control to these 
engines as early as possible.
---------------------------------------------------------------------------

    \31\ ``Nonroad Diesel Emissions Standards Staff Technical 
Paper,'' EPA420-R-01-052, October 2001.
---------------------------------------------------------------------------

    Consistent with the proposal, we are not setting more stringent 
NOX standards for engines below 75 hp at this time based on 
the use of NOX aftertreatment. As discussed in section 
4.1.2.3 of the RIA, a high degree of complexity and engine/
aftertreatment integration will be involved in applying NOX 
adsorber technology to nonroad diesel engines. The similarity of larger 
nonroad engines (above 75 hp) to highway diesel engines, which will 
provide the initial experience base for this integration process, is 
key to our assessment that NOX adsorbers are feasible for 
these engines. On the other hand, although engines under 75 hp are 
gradually increasing in sophistication over time, the accumulation of 
experience with designing and operating these engines with more 
advanced technology clearly lags significantly behind the sizeable 
experience base already developed for larger engines. At this point, we 
are unable to forecast how quickly adequate experience may accrue. 
Because this experience is crucial to ensuring the successful 
integration of the engines with NOX adsorber technology, we 
are not adopting NOX adsorber-based standards for engines 
under 75 hp in this final rule. Rather, as discussed in section VIII.A, 
we plan to undertake a technology assessment in the 2007 time frame 
which would evaluate the status of engine and emission control 
technologies, including NOX controls, for engines less than 
75 hp.
    As described in section II.A.1.a, we are providing two PM standard 
compliance options to engine manufacturers for 50-75 hp engines. As 
part of this, we also proposed a measure to ensure that it would not be 
abused by equipment manufacturers who use engines that do not meet the 
PM pull-ahead standard in 2008-2011, but who then switch engine 
suppliers to avoid PM filter-equipped engines in 2012 as well (68 FR 
28360, May 23, 2003). We proposed that an equipment manufacturer making 
a product with engines not meeting the pull-ahead standard in any of 
the years 2008-2011 must use engines in that product in 2012 meeting 
the 0.02 g/bhp-hr PM standard; that is, the equipment manufacturer 
would have to use an engine from the same engine manufacturer or from 
another engine manufacturer choosing the same compliance option. We 
also solicited comment on possible alternative solutions using a 
numerical basis, describing an example that would require the 
percentage of 50-75 hp machines equipped with PM filters in 2012 to be 
no less than the same percentage of 50-75 hp machines produced with 
non-pull-ahead engines in 2008-2011.
    The Engine Manufacturers Association (EMA) and Deere commented on 
the unenforceability of the proposed ``no switch'' measure as part of a 
broader objection to our proposal for 50-75 hp engines. They pointed 
out that changing equipment model designations could easily allow an 
equipment manufacturer seeking to avoid PM filter-equipped engines in 
2012 to declare a product in this model year a ``new product,'' not the 
same as the 2008-2011 product. We have concluded that there is indeed 
potential for this abuse to occur and, although no one commented 
specifically on the alternative approach, we believe it clearly 
addresses this problem because it does not depend on product 
designations.
    Therefore, we are adopting a provision to discourage engine 
switching based on this alternative approach. An equipment manufacturer 
who uses 50-75 hp engines will have three options:

    (1) The manufacturer may exclusively use engines certified to 
the 0.22 g/bhp-hr PM standard (including through use of ABT credits) 
over the 2008-2011 period. This manufacturer is then free to use any 
number of 50-75 hp engines not certified to the 0.02 g/bhp-hr 
standards in 2012.
    (2) The manufacturer may exclusively use engines not certified 
to the 0.22 g/bhp-hr PM standard over the 2008-2011 period. This 
manufacturer must then use only 50-75 hp engines that are certified 
to the 0.02 g/bhp-hr standards in 2012 (including through use of ABT 
credits).
    (3) The manufacturer may use a mix of engines in 2008-2011. In 
this case, the manufacturer must calculate the percentage of 50-75 
hp engines used (in U.S.-directed equipment) over the 2008-2010 
period that are not certified to the 0.22 g/bhp-hr PM pull-ahead 
standard. Then the percentage of 50-75 hp engines this manufacturer 
uses in 2012 that are certified to the 0.02 g/bhp-hr PM standard 
must be no less than this 2008-2010 non-pull-ahead percentage figure 
minus a 5% margin.\32\

    \32\ The 2011 production is not included in the percentage 
calculation to avoid the need for post-2011 confirmation of 
production volumes which, as it would occur in 2012, would be too 
late to easily re-focus 2012 production if the confirmed volumes 
differ from projections. It is not likely that manufacturers would 
abuse the program by switching engine suppliers for this one year of 
production.
---------------------------------------------------------------------------

    As an example of this third option, consider an equipment 
manufacturer who does not use the transition flexibility provisions 
(described in section III.B), and over the 2008-2010 period makes 1000 
50-75 hp machines for use in the U.S., 200 (20%) of which use engines 
not certified to the 0.22 g/bhp-hr standard. In 2012, that manufacturer 
must make at least 15% of his 50-75 hp machines for use in the U.S. 
using engines certified to the 0.02 g/bhp-hr standard. We feel that the 
5% margin is needed to allow for some reasonable sales shifts within 
the manufacturer's product offering over time, but is small enough to 
ensure that any possible advantage gained from selling higher-emissions 
products remains minimal. Equipment manufacturers must keep production 
records sufficient to prove compliance. This restriction and the 
percentage calculation will not apply to any 2008-2012 engines at issue 
that are being produced under the equipment manufacturer transition 
flexibility provisions discussed in section III.B. For example, if in 
addition to the 200 engines in 2008-2010 not certified to the 0.22 g/
bhp-hr standard in the above example, this manufacturer also used 500 
previous-tier engines in 2008-2010 under the flexibility allowance 
program, his percentage target for PM filter-equipped engines in 2012 
would be 35% of all the engines used in 2012 that are not previous-tier 
engines under the flexibility allowance program. \33\
---------------------------------------------------------------------------

    \33\ That is: [200/(1000-500)] = 40%; subtracting the 5% margin 
then yields 35%.
---------------------------------------------------------------------------

4. Standards for Engines Above 750 hp
    We are adopting different Tier 4 standards for over 750 hp engines 
from those we proposed, and we are also adopting different 
implementation dates for these engine standards, though both the 
proposed and final programs have as their primary focus the 
implementation of high-efficiency exhaust emission controls as quickly 
as possible. The approach being adopted reflects our careful review of 
the technical issues presented by these engines. For some of these 
engines, we are accelerating standards based on the use of 
aftertreatment controls. For others, we are deferring a decision on 
such aftertreatment-based standards. This approach represents a 
feasible and efficient approach to redesigning

[[Page 38979]]

engines and installing aftertreatment in a coordinated, orderly manner 
over a decade or more, and will achieve major reductions in PM and 
NOX from these large diesel engines.
    Under the proposal, all engines above 750 hp were treated the same, 
with a phase-in of PM and NOX aftertreatment technology that 
started in 2011 and finished in 2014. The final standards are based on 
our evaluation of the differing technical issues presented by the two 
primary kinds of equipment in this category, mobile power generation 
equipment (generator sets) and mobile machinery. For both generator 
sets and mobile machinery, PM aftertreatment-based standards will start 
in 2015, with no prior phase-in. EPA is replacing the proposed phase-in 
with a PM standard starting in 2011 that is comparable to the overall 
level of control that the proposed phase-in would achieve. Differences 
within these applications, however, call for different approaches to 
the implementation of NOX aftertreatment technology. For 
generator sets above 1200 hp, an aftertreatment-based NOX 
standard will start in 2011, three years earlier than the date we 
proposed for full implementation of such standards. For generator sets 
below 1200 hp, the same aftertreatment-based NOX standard 
will start in 2015. As with the PM standard, there is no phase-in. For 
engines used in mobile machinery, which is assumed to include all 
equipment that is not a generator set, EPA is deferring a decision on 
setting aftertreatment-based NOX standards to allow 
additional time to evaluate the technical issues involved in adapting 
NOX adsorber technology to these applications and engines. 
However, EPA is adopting a NOX standard for these engines 
starting in 2011 that will achieve large NOX reductions by 
relying on engine-based emissions control technology. Consistent with 
the different approaches we are taking to setting standards for engines 
above and below 750 hp, we are also adopting restrictions on ABT credit 
use between these power categories, as described in section III.A.
    Consistent with the approach we took in previous standard-setting 
for these engines, we proposed that nonroad diesels above 750 hp be 
given more lead time than engines in other power categories to fully 
implement Tier 4 standards, due primarily to the relatively long 
product design cycles typical of these high-cost, low-sales volume 
engines and machines. Specifically, we proposed that this category of 
engines move directly from Tier 2 to Tier 4, and that the Tier 4 PM 
standard be phased in for these engines on the same 50-50-50-100% 
schedule as the NOX and NMHC phase-in schedule, over the 
2011-2014 model years. This would provide engine manufacturers with up 
to 8 years of design stability to address concerns specific to this 
category. Although we expressed our belief that these proposed 
provisions would enable the manufacturers to meet proposed Tier 4 
engine standards, we also acknowledged concerns the manufacturers had 
expressed to us, and asked for comment on whether this category, or 
some subset of it defined by hp or application, should have a later 
phase-in start date, a later phase-in end date, adjusted standards, 
additional equipment manufacturer transition flexibility provisions, or 
some combination of these (68 FR 28364, May 23, 2003).
    Comments from manufacturers of engines and equipment in this power 
category expressed their widespread view that the proposed standards 
were inappropriate in critical respects. In addition to reiterating the 
need for extra lead time due to long product design cycles, they 
pointed to difficulties with aftertreatment placement, with fabrication 
of the large filters that would be needed for these engines, with 
potential failures caused by uneven soot loading and regeneration in 
large filters, with stresses due to thermal gradients across large 
filters, and with mechanical stresses in mining applications with high 
shock loads. The manufacturers noted that aftertreatment-based 
standards for NOX and PM were feasible for engines used in 
large mobile power generators. However, manufacturers did not believe 
aftertreatment-based NOX standards could be implemented in 
the time frame proposed for engines used in large mobile machinery such 
as bulldozers and mine haul trucks. States, environmental 
organizations, and manufacturers of emissions controls, on the other 
hand, expressed support for the standards we proposed for these 
engines.
    After evaluating these issues, EPA is adopting an approach that 
tailors the standards to the circumstances presented by the different 
kinds of engines in this power category. The NOX standards 
we are adopting will achieve effective NOX control by 
accelerating the proposed schedule for final NOX standards 
based on high-efficiency NOX aftertreatment for the largest 
generator sets, and by requiring engines in other generator sets to 
also meet aftertreatment-based NOX standards, although we 
are delaying the implementation date for these standards compared to 
the implementation schedule we proposed. We believe that NOX 
adsorber technology will be feasible for these generator set engines. 
We also believe that they may be an especially attractive application 
for Selective Catalytic Reduction (SCR) technology, which relies on the 
injection of urea into the exhaust stream. There are many stationary 
diesel generator sets using SCR today. Large mobile generator sets, 
though moved from location to location, operate much like stationary 
units once in place, with fuel (and potentially urea) delivered and 
replenished periodically. See section II.B.3 for further discussion.
    For equipment other than generator sets, we are deferring a 
decision on setting aftertreatment-based NOX standards to 
allow additional time to evaluate the technical issues involved in 
adapting NOX control technology to these applications and 
engines. We are still evaluating the issues involved for these engines 
to achieve a more stringent NOX standard, and believe that 
these issues are resolvable. We intend to continue evaluating the 
appropriate long-term NOX standard for mobile machinery over 
750 hp and expect to announce further plans regarding these issues (we 
are currently considering such an action in the 2007 time frame). The 
basis for the 0.50 g/bhp-hr NOX standard we are adopting for 
generator sets over 750 hp is discussed in section II.B.3. We are also 
modifying the PM and NMHC standards we proposed (as well as certain 
implementation dates for these provisions), and modifying our proposed 
approach to ensuring transient emissions control for these engines 
(discussed in section III.F). The Tier 4 standards for engines over 750 
hp are shown in table II.A-4.

[[Page 38980]]



                       Table II.A-4.--Tier 4 Standards for Engines Over 750 hp (g/bhp-hr)
----------------------------------------------------------------------------------------------------------------
                                              2011                                      2015
                              ----------------------------------------------------------------------------------
                                   PM          NOX        NMHC         PM              NOX              NMHC
----------------------------------------------------------------------------------------------------------------
Engines used in:
    generator sets <=1200 hp.       0.075         2.6        0.30        0.02                0.50  0.14
    generator sets >1200 hp..       0.075        0.50        0.30        0.02     No new standard  0.14
    all other equipment......       0.075         2.6        0.30        0.03     No new standard  0.14
----------------------------------------------------------------------------------------------------------------

    Unlike NOX control technology, we believe that the more 
advanced state of PM filter technology development today makes their 
availability for these engines by 2015, with over ten years of 
development lead time, more certain, and so we are setting PM standards 
for both mobile machinery and generator sets based on use of this 
technology. We note in section II.B.3 that achieving durable PM filter 
designs for these large applications will likely require the use of 
wire mesh filter technology rather than the somewhat more efficient 
wall flow ceramic-based technology applicable to smaller engines, 
justifying the somewhat higher level for the 2015 PM standards shown in 
table II.A-4 (0.03 or 0.02 g/bhp-hr compared to 0.01 g/bhp-hr). Section 
II.B.3 also contains discussion of our bases for the other Tier 4 
standard levels in this category. We believe that the 2015 
implementation year (versus the proposed 2014 date for the fully 
phased-in standard) is necessary to allow development of the requisite 
technologies for these large engines, and to deal with the redesign 
workload Tier 4 will create for the many engine and equipment models in 
this category which, as noted, typically have very low production 
volumes and long product cycles.
    For the purpose of determining which nonroad engines are subject to 
the generator set standards, we are defining a generator set engine as: 
``An engine used primarily to operate an electrical generator or 
alternator to produce electric power for other applications.'' This 
definition makes it clear that generator set engines do not include 
engines used in machines such as mine trucks that do mechanical work 
but that employ engine-powered electric motors to propel the machine, 
but they do include engines in nonroad equipment for which the primary 
purpose is to generate electric power, even if the machine is also 
self-propelled.
    Similar to other power categories, we proposed a 50% phase-in to 
the final Tier 4 PM, NOX and NMHC standards, with 
opportunity to average PM and NOX between phase-in and 
phase-out engines in the 2011-2013 phase-in years via the ABT program. 
Because in this rule we are no longer phasing in to a final 
NOX standard for some engines over 750 hp, it no longer 
makes sense to express the 2011 standards for these engines in this 
manner. Instead we are setting brake-specific emission standards 
effective in 2011. Furthermore, to avoid further complicating an 
already complex standards structure, we are adopting this pattern for 
the entire category, even with engines such as those used in generator 
sets for which the standards could still be expressed as a percent 
phase-in to final standards. Except for the pull-ahead of the long-term 
NOX standard for large generator sets (which will increase 
the environmental benefit compared to the proposal), these 2011 PM and 
NOX standards essentially correspond to averaged standards 
under a 50% phase-in to aftertreatment-based standards, hence our 
conclusion that the Tier 4 program will provide a level of control in 
2011 that is substantially equivalent to that of the proposal. In 
addition, PM and NOX emissions averaging through the ABT 
program will allow a manufacturer to comply by phasing in 
aftertreatment technologies as in the proposed program, should they 
desire to do so. Although there is no such averaging program for NMHC, 
the 2011 NMHC standard can be achieved without the use of advanced 
aftertreatment (as explained in section II.B.3), thus helping to enable 
a manufacturer to pursue this compliance strategy if desired.
    This approach involving separate 2011 and 2015 standards is 
comparable to the proposed percent phase-in approach with emissions 
averaging. We believe that it enables manufacturers to redesign engines 
and equipment in a coordinated, orderly manner over a decade or more, 
and effectively gives targeted additional flexibility to the industry. 
Given the continuing availability of emissions averaging, we do not 
view this change as the creation of an additional, separate tier of 
standards compared to the proposal's phase-in of the Tier 4 standards.
5. Establishment of New Power Categories
    We are finalizing our proposal to regroup the nine power categories 
established for previous tiers into the five Tier 4 power categories 
shown in table II.A-1. As we explained in the proposal, this regrouping 
will more closely match the degree of challenge involved in 
transferring advanced emissions control technology from highway engines 
to nonroad engines. The proposed choice of 75 hp as the appropriate 
cutpoint for applying aftertreatment-based NOX control drew 
particular attention. In the proposal, we recognized that there is not 
an abrupt power cutpoint above and below which the highway-derived 
nonroad engine families do and do not exist, but noted further that 75 
hp is a more appropriate cutpoint to generally identify nonroad engines 
in Tier 4 that will most likely be using highway-like engine technology 
than either of the closest previously-adopted power category cutpoints 
of 50 or 100 hp. Nonroad diesels produced today with rated power above 
75 hp (up to several hundred hp) are mostly variants of nonroad engine 
platforms with four or more cylinders and per-cylinder displacements of 
one liter or more. These in turn are largely derived from or are 
similar to heavy-duty highway engine platforms. Even where nonroad 
engine models above 75 hp are not so directly derived from highway 
models, they typically share many common characteristics such as 
displacements of one liter per cylinder or more, direct injection 
fueling, turbocharging, and, increasingly, electronic fuel injection. 
These common features provide key building blocks in transferring high-
efficiency exhaust emission control technology from highway to similar 
nonroad diesel engines. We therefore proposed to regroup power ratings 
using the 75 hp cutpoint.
    The Engine Manufacturers Association and Euromot, which together 
represent the companies that make all but a tiny fraction of nonroad 
diesel engines sold in the U.S., expressed their support for the 75 hp 
cutpoint, as did every individual engine

[[Page 38981]]

manufacturer who commented on this subject. These companies generally 
endorsed EPA's reasoning that the 75 hp level is appropriate to 
``delineate those engines (and applications) for which the application 
of on-highway like NOX aftertreatment technologies is not 
likely to be feasible or practical'' (EMA Comments p.10).
    However, the Association of Equipment Manufacturers (AEM) and the 
equipment manufacturer Ingersoll-Rand commented that 100 hp is the more 
appropriate cutpoint for application of advanced NOX control 
technology. They based this view on their observations that 75-100 hp 
engines do not share many of the characteristics of highway diesels, 
thus making technology transfer from the highway sector very costly, 
and customers will be negatively affected due to the relatively large 
cost impacts of NOX aftertreatment on these smaller engines. 
They also argued that the 75 hp cutpoint would create significant 
misalignment in the global marketplace because European regulations do 
not use this cutpoint.
    We agree with the equipment manufacturers' observation that there 
are engines above 75 hp without turbocharging or electronic controls. 
However, EPA did not choose the 75 hp cutpoint with the expectation 
that all engines above it had the same technology characteristics. 
There is a continuum in the degree to which key technology 
characteristics exist on engines throughout the power spectrum, and the 
75 hp cutpoint was based on information from the current fleet of 
engines and on manufacturers' and EPA's expectations for future design 
trends, showing there is a marked difference in the prevalence of these 
and other key engine design characteristics for engines above and below 
75 hp, and that, over time, 75-100 hp engines increasingly share 
advanced technology characteristics common in larger engines. Clear 
evidence of this trend over recent model years is documented in the 
RIA, section 4.1.4. As discussed in section II.B.2, the kind of engine 
technology generally employed by engines in the 75-100 hp range, 
combined with the lead time and phase-in provided for the Tier 4 
NOX standards, leads us to conclude that highway-like 
NOX aftertreatment can be transferred to these engines. In 
addition, since our proposal, the Council of the European Union (EU) 
has issued a revised final version of new nonroad diesel emission 
standards that essentially aligns their power cutpoints with our own, 
including adoption of the 75 hp cutpoint for advanced technology 
NOX control. EPA does not believe that the costs of meeting 
the NOX standard for engines in the 75-100 hp range are 
unreasonable, and we refer the reader to section VI for a detailed 
discussion of our cost analysis for engines and equipment meeting Tier 
4 standards in this power range. Moreover, EPA firmly believes such 
standards are technologically feasible for 75-100 hp engines. (See 
section II.B.2.)
    Ingersoll-Rand also expressed concern that the proposed 
consolidation of 3 previous power categories into a single 175-750 hp 
category creates significant hardship by requiring the introduction of 
aftertreatment technologies in a single year, contrasting this with the 
Tier 2 standards, which phased in over 2001-2003 for these engines. In 
response, we note that the Tier 3 standards, which were set in the same 
rule that established the Tier 2 standards, will be introduced in a 
single year for these engines (2006), and that the Tier 2 phase-in over 
3 years was established in response to particular issues and 
opportunities that were identified, specific to that time frame (see 62 
FR 50181, September 24, 1997). In addition to the gradual phase-in of 
Tier 4 standards over several years, we are adopting significant 
flexibility provisions specifically to provide adequate lead time for 
equipment manufacturers to make the transition to the new standards, 
including some provisions that provide additional flexibility from what 
we proposed, as explained in section III.B.
6. CO Standards
    We proposed minor changes in CO standards for some engines solely 
for the purpose of helping to consolidate power categories. We stated 
in the proposal that we were not exercising our authority to revise the 
CO standard for the purpose of improving air quality, but rather for 
purposes of administrative efficiency. However, manufacturers objected 
to these proposed changes, citing technological feasibility concerns, 
and a lack of parity with highway diesel and nonroad spark-ignition 
engines, given that existing CO standards levels for nonroad engines 
are already five times lower than the standard level for highway 
engines.
    Because we proposed the CO standard changes for the sake of 
simplifying and consolidating power categories and not because of any 
technical considerations relating to emission reductions, we do not 
believe it productive to take issue with the views expressed that these 
proposed changes raise serious feasibility concerns. We instead are 
withdrawing this aspect of the proposal, the result being that the 
existing CO standards remain in place. In doing so, we are not 
considering or reexamining (and at proposal did not consider or 
reexamine) the substantive basis for those standards. Having multiple 
CO standards within a power category will, at worst, create minor 
inconveniences in certification and compliance efforts. As a result, in 
the less than 25 hp category, Tier 4 engines below 11 hp will continue 
to be subject to a different CO standard than 11-25 hp engines, 
identical to Tier 2. Likewise, different CO standards will continue to 
apply in Tier 4 to engines above and below 50 hp in the 25-75 hp 
category.
    We do note, however, that we are applying new certification tests 
to all pollutants covered by the rule, the result being that Tier 4 
engines will have to certify to CO standards measured by the transient 
test (NRTC) (which includes a cold start test), and the NTE. Our intent 
in adopting these new certification requirements is not to alter the 
level of stringency of the standard but rather to ensure robust control 
of emissions to this standard in use. The CO standards remain readily 
achievable using these tests, and we anticipate that no additional 
engine adjustments are necessary for the standards to be achievable (so 
there are no significant associated costs). We also explain there that 
the CO standards can be achieved without jeopardizing the ability to 
achieve all of the other engine standards.
7. Crankcase Emissions Control
    We currently require the control of crankcase emissions from 
naturally-aspiriated nonroad diesel engines. We proposed to extend this 
requirement to turbocharged nonroad diesel engines as well, starting in 
the same model year that Tier 4 exhaust emission standards first apply 
in each power category.
    EMA opposed the proposed extension, reiterating concerns expressed 
in comments on a similar proposed provision in the 2007 heavy-duty 
highway rule, including concerns over the impact that recirculating 
crankcase emissions may have on the feasibility of engine standards 
over the full useful life. These concerns are addressed in the Summary 
and Analysis of Comments document for that rule, which is included in 
the docket for today's rule. Besides the feasibility issues raised by 
EMA for nonroad diesels that are addressed in the highway rule, two 
nonroad-specific issues were raised as well: (1) The need to design 
crankcase emission control systems that operate at the high angularity 
experienced by some

[[Page 38982]]

nonroad machines on uneven ground, and (2) the concern that this 
requirement adds to the large number of ``first time'' requirements 
being adopted for Tier 4. We agree that high angularity operation may 
add new design considerations for these controls, but do not see how it 
would pose a serious barrier that could not be overcome in time. The 
grouping of new EPA requirements in a specific model year is an 
important objective of our program aimed at providing stability to the 
design process, a goal much supported by the engine manufacturers. We 
have accounted for this in assessing feasibility, costs, and 
flexibility needs for the program. One flexibility we are providing is 
the three-path opportunity to satisfy our crankcase control 
requirement, as described below. In fact, in its written comments EMA 
recommended that, if EPA were to proceed with crankcase emission 
control requirements for Tier 4, it adopt all three options for 
demonstrating compliance. This is indeed what we are doing.
    Thus, as proposed, in addition to allowing for compliance through 
the routing of crankcase emissions to the engine air intake system, we 
are also allowing manufacturers to instead meet the requirement by 
routing the crankcase gases into the exhaust stream, provided they keep 
the combined total of the crankcase emissions and the exhaust emissions 
below the applicable exhaust emission standards. Also as proposed, we 
are allowing manufacturers to instead meet the requirement by measuring 
crankcase emissions instead of completely eliminating them, provided 
manufacturers add these measured emissions to exhaust emissions in 
assessing compliance with exhaust emissions standards. Manufacturers 
using this option must also modify their exhaust deterioration factors 
or develop separate deterioration factors to account for increases in 
crankcase emissions as the engine ages, and must ensure that crankcase 
emissions can be readily measured in use. We see no reason to treat 
naturally-aspirated engines differently than turbocharged engines, and 
so are allowing these options for all Tier 4 engines subject to the 
crankcase control requirement, both turbocharged and naturally-
aspirated. The wording of the proposed regulations limiting the options 
to turbocharged engines was inadvertent.
8. Prospects for International Harmonization
    We received numerous comments, especially from engine and equipment 
manufacturers, stressing the need for EPA to work with other 
governmental standards-setting bodies to harmonize standards. We 
recognize the importance of harmonization of international standards 
and have worked diligently with our colleagues in Europe and Japan to 
achieve that objective. Harmonization of these standards will allow 
manufacturers continued access to world markets and lower the required 
research and development and tooling costs needed to meet different 
standards. We will continue to work with standards-setting governmental 
entities and with foreign and domestic manufacturers.
    In October 2003, the Council and Parliament of the European Union 
reached agreement on revisions to a proposal developed by the European 
Commission that would amend Directive 97/68/EC to include nonroad 
diesel emissions standards similar to those in our Tier 4 program, and, 
as in the U.S., coordinated with low sulfur diesel fuel requirements in 
Europe. This revised proposal has since been finalized.\34\ This 
revised Directive aligns well with our program in the Tier 4 time 
frame, even more so than did the original Commission proposal. It also 
closely aligns with our Tier 3 standards in the Tier 3 time frame.
---------------------------------------------------------------------------

    \34\ Council of the European Union, ``Directive of the European 
Parliament and of the Council amending Directive 97/68/EC'', March 
15, 2004.
---------------------------------------------------------------------------

    For engines of 50-750 hp, the Directive's standards are very 
closely aligned with our own Tier 4 standards, including emissions 
levels, implementation dates, the defined power categories, and the 
lower hp limit of NOX control based on high-efficiency 
exhaust emission controls (75 hp). Exceptions are noted below:
     The 2008 PM standard level for 50-75 hp engines (the 
equivalent of 0.3 g/bhp-hr vs our 0.22 g/bhp-hr level). Note, however, 
that we do allow certification to the 0.3 g/bhp-hr level as an option, 
provided the manufacturer must then meet our 0.02 g/bhp-hr standard in 
2012, one year earlier than otherwise.
     The 2013 PM standard level for 50-75 hp engines (the 
equivalent of 0.01 g/bhp-hr vs our 0.02 g/bhp-hr level).
     An October 1, 2014 start for the final 75-175 hp 
NOX standard (the same as our proposed date), compared to 
the December 31, 2014 date we are adopting in this final rule.
     For constant speed engines: no Tier 4-equivalent 
standards. Also, the EU's Tier 3-equivalent standards are not 
implemented on these engines until 2011-2012.
    As the EU program does not provide for emissions averaging, the 
alternative NOX standards we are setting for 75-750 hp 
engines are the NOX levels at which the EU standards are 
generally aligned during our NOX phase-in years. The EU 
Directive also includes transition flexibility provisions for equipment 
manufacturers similar to those in our program, discussed in section 
III.B.
    The EU program for nonroad diesels has not adopted or proposed any 
current or future standards for engines above 750 hp or below 25 hp, 
and its revised Directive for 25-50 hp engines does not subject them to 
any future standards beyond those entering into force in 2007 
(equivalent to 0.45 g/bhp-hr PM and 5.6 g/bhp-hr 
hydrocarbon+NOX), in contrast to our 2013 standards based 
the use of PM filters and more advanced engine-based control 
technologies (0.02 g/bhp-hr PM and 3.5 g/bhp-hr NMHC+NOX). 
However, as discussed further in section VIII.A, the EU Directive 
includes plans to conduct a future technology review of appropriate 
standards for engines below 50 hp and above 750 hp. The year that this 
is planned for is 2007, the same year in which we are planning a 
technology review for engines below 75 hp. Considering progress to 
date, and announced plans for reviews in 2007, we believe that 
prospects for harmonized standards are excellent.
9. Exclusion of Marine Engines
    For reasons outlined in the proposal, we are not applying Tier 4 
standards to the marine diesel engines under 50 hp that are covered 
under our Tier 1 and 2 standards. We believe it is more appropriate to 
consider more stringent standards for a range of marine diesel engines, 
including these, in a future action. It should be noted that the 
existing Tier 2 standards will continue to apply to marine diesel 
engines under 50 hp until that future action is completed. We did not 
receive any adverse comments on this proposed approach.

B. Are the New Standards Feasible?

    Today we are finalizing a program of stringent new standards for a 
broad category of nonroad diesel engines coupled with a new nonroad 
diesel fuel standard that dramatically lowers the sulfur level in 
nonroad diesel fuel ultimately to 15 ppm. We believe these standards 
are technically feasible in the leadtime provided given the 
availability of 15 ppm sulfur fuel and the rapid progress to develop 
the needed emission control technologies. We acknowledge, as pointed 
out by a number of commenters, that these standards will be challenging 
for industry to meet, in

[[Page 38983]]

part due to differences in operating conditions and duty cycles for 
nonroad equipment and the diesel engines used in that equipment. Also, 
we recognize that transferring and effectively applying these 
technologies, which have largely been developed for highway engines, 
will require additional time after the application of the technology to 
on-highway engines. Diesel engine industry commenters and environmental 
stakeholder commenters on our proposal consistently agreed with our 
position that for most engine horsepower categories the technologies to 
meet the standards exist and that the transfer of these technologies to 
nonroad is possible. The biggest difference of opinions in the range of 
comments received by the Agency concerns the timing of the emission 
standards and the flexibility provisions (i.e., the leadtime necessary 
to transfer the technology). One of the most important tasks for a 
feasibility analysis is to determine the appropriate amount of 
development time needed to successfully bring new technologies to 
market. We have carefully weighed the desire to have clean engines 
sooner, with the challenges yet to be overcome in applying the 
technologies to nonroad engines and equipment, in determining the 
appropriate timing and emission levels for the standards finalized 
today.
    The RIA associated with today's action contains a detailed 
description and analysis of diesel emission control technologies, 
issues specific to applying these technologies to nonroad engines, and 
why we believe the new emission standards are feasible. Additional in-
depth discussion of these technologies can be found in the final RIA 
for the HD2007 emission standards, the final RIA for the HD2004 
emission standards, the 2002 Highway Diesel Progress Review and the 
recently released Highway Diesel Progress Review Report 
2.\35\ \36\ \37\ \38\ The following 
sections summarize the challenges to applying these technologies to 
nonroad engines and why we believe the emission standards finalized 
today are technically feasible in the leadtime provided.
---------------------------------------------------------------------------

    \35\ Regulatory Impact Analysis: Heavy-Duty Engine and Vehicle 
Standards and Highway Diesel Fuel Sulfur Control Requirements, 
United States Environmental Protection Agency, December 2000, 
EPA420-R-00-026. Copy Available in EPA Air Docket A-2001-28 Item II-
A-01.
    \36\ Regulatory Impact Analysis: Control of Emissions of Air 
Pollution from Highway Heavy-Duty Engines, United States 
Environmental Protection Agency, June 2000, EPA420-R-00-010. Copy 
available in EPA Air Docket A-2001-28 Item II-A-02.
    \37\ Highway Diesel Progress Review, United States Environmental 
Protection Agency, June 2002, EPA 420-R-02-016. Copy available in 
EPA Air Docket A-2001-28 Item II-A-52.
    \38\ Highway Diesel Progress Review Report 2, United States 
Environmental Protection Agency, March 2004, EPA420-R-04-004. Copy 
available in Docket OAR-2003-0012-0918.
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1. Can Advanced Diesel Emission Control Technologies Be Applied to 
Nonroad Engines and Equipment?
    The emission standards and the introduction dates for those 
standards, as described earlier in this section, are premised on the 
transfer of diesel engine technologies being or already developed to 
meet light-duty and heavy-duty vehicle standards that begin in 2007. 
The advanced technology standards that we are finalizing today for 
engines over 25 horsepower will begin to go into effect four years 
later. This time lag between equivalent highway and nonroad diesel 
engine standards is necessary in order to allow time for engine and 
equipment manufacturers to further develop these highway technologies 
for nonroad engines and to align this program with nonroad Tier 3 
emission standards that begin to go into effect in 2006.
    This section summarizes the engineering challenges to applying 
advanced emission control technologies to nonroad engines and 
equipment, and why we believe that technologies developed for highway 
diesel engines can be further refined to address these issues in a 
timely manner for nonroad engines consistent with the emission 
standards finalized today.
a. Nonroad Operating Conditions and Exhaust Temperatures
    Nonroad equipment is highly diverse in design, application, and 
typical operating conditions. This variety of operating conditions 
affects emission control systems through the resulting variety in the 
torque and speed demands (i.e., power demands). In our proposal, we 
highlighted the challenge for design and implementation of advanced 
emission control technologies posed by this wide range in what 
constitutes typical nonroad operation. Some commenters emphasized their 
concerns regarding this issue as well, and their belief that these 
issues make the application of the technology to nonroad infeasible. 
While we recognize and agree with the commenters regarding the nature 
of the challenges, we disagree with their conclusion regarding 
feasibility because, as described in the following section, we see a 
clear path to overcome the challenges.
    The primary concern for catalyst-based emission control 
technologies is exhaust temperature. In general, exhaust temperature 
increases with engine power and can vary dramatically as engine power 
demands vary. For catalyzed diesel particulate filters (CDPFs), exhaust 
temperature determines the rate of filter regeneration, and if too low, 
causes a need for supplemental means to ensure proper filter 
regeneration. In the case of the CDPF, it is the aggregate soot 
regeneration rate that is important, not the regeneration rate at any 
particular moment in time. A CDPF controls PM emissions under all 
conditions and can function properly (i.e., not plug) even when exhaust 
temperatures are low for an extended time and the regeneration rate is 
lower than the soot accumulation rate, provided that occasionally 
exhaust temperatures and thus the soot regeneration rate are increased 
enough to regenerate the CDPF. Similarly, there is a minimum 
temperature (e.g., 200 [deg]C) for NOX adsorbers below which 
NOX regeneration is not readily possible and a maximum 
temperature (e.g., 500 [deg]C) above which NOX adsorbers are 
unable to effectively store NOX. Therefore, there is a need 
to match diesel exhaust temperatures to conditions for effective 
catalyst operation under the various operating conditions of nonroad 
engines.
    Although the range of products for highway vehicles is not as 
diverse as for nonroad equipment, the need to match exhaust 
temperatures to catalyst characteristics is still present. This is an 
important concern for highway engine manufacturers and has been a focus 
of our ongoing 2007 diesel engine progress review. There we have 
learned that substantial progress is being made to broaden the 
operating temperature window of catalyst technologies while at the same 
time to design engine systems to better control average exhaust 
temperatures (for ongoing catalyst performance) and to attain 
periodically higher temperatures (to control PM filter regeneration and 
NOX adsorber desulfation). Highway diesel engine 
manufacturers are working to address this need through modifications to 
engine design, modifications to engine control strategies, and 
modifications to exhaust system designs. New engine control strategies 
designed to take advantage of engine and exhaust system modifications 
can be used to manage exhaust temperatures across a broad range of 
engine operation. The technology solutions being developed for highway 
engines to better manage exhaust temperature are built upon the same 
emission control technologies (i.e., advanced air handling systems and 
electronic fuel injection systems) that we expect nonroad engine

[[Page 38984]]

manufacturers to use in order to comply with the existing Tier 3 
emission standards.
    Matching the emission control technology and the operating 
temperature window of the broad range of nonroad equipment may be 
somewhat more challenging for nonroad engines than for many highway 
diesel engines simply because of the diversity in equipment design and 
equipment use. Nonetheless, the problem has been successfully solved in 
highway applications facing low exhaust temperature performance 
situations as difficult to address as any encountered by nonroad 
applications. The most challenging temperature regime for highway 
engines are encountered at very light-loads as typified by congested 
urban driving with periods of extended idle operation. Under congested 
urban driving conditions, exhaust temperatures may be too low for 
effective NOX reduction with a NOX adsorber 
catalyst. Similarly, exhaust temperatures may be too low to ensure 
passive CDPF regeneration. To address these concerns, light-duty diesel 
engine manufacturers have developed active temperature management 
strategies that provide effective emissions control even under these 
difficult light-load conditions. Toyota has shown with their prototype 
diesel particulate NOX reduction (DPNR) vehicles that 
changes to EGR and fuel injection strategies can realize an increase in 
exhaust temperatures of more than 100 [deg]F under even very light-load 
conditions allowing the NOX adsorber catalyst to function 
under these normally cold exhaust conditions.\39\ Similarly, PSA 
Peugeot Citroen (PSA) has demonstrated effective CDPF regeneration 
under demanding light-load taxi cab conditions with current production 
technologies. \40\ Both of these are examples of technology paths 
available to nonroad engine manufacturers to increase temperatures 
under light-load conditions.
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    \39\ Sasaki, S., Ito, T., and Iguchi, S., ``Smoke-less Rich 
Combustion by Low Temperature Oxidation in Diesel Engines,'' 9th 
Aachener Kolloquim Fahrzeug--und Motorentechnik 2000. Copy available 
in EPA Air Docket A-2001-28 Item II-A-56.
    \40\ Jeuland, N., et al., ``Performances and Durability of DPF 
(Diesel Particulate Filter) Tested on a Fleet of Peugeot 607 Taxis 
First and Second Test Phases Results,'' October 2002, SAE 2002-01-
2790.
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    While a number of commenters expressed concerns about low 
temperature operation for nonroad equipment, no commenters provided 
data showing that nonroad equipment in-use operating cycles would be 
more demanding of low temperature performance than passenger car urban 
driving. Both the Toyota and PSA systems are designed to function even 
with extended idle operation as would be typified by a taxi waiting to 
pick up a fare.
    It is our conclusion that by actively managing exhaust 
temperatures, for example through engine management to increase exhaust 
temperatures, engine manufacturers can ensure highly effective 
catalyst-based emission control performance (i.e., compliance with the 
emission standards across the applicable tests) and reliable filter 
regeneration across a wide range of engine operation as would be 
typified by the broad range of in-use nonroad duty cycles. Active 
methods of regenerating PM filters have been shown to be reliable under 
all operating conditions and can be applied to nonroad diesel engines 
in the time frame required by these regulations. The additional cost 
for active regeneration, beyond the cost for the PM filter alone, has 
been accounted for in the cost analysis summarized in section VI of 
this preamble.
    We have conducted an analysis of various nonroad equipment 
operating cycles and various nonroad engine power density levels to 
better understand the matching of nonroad engine exhaust temperatures, 
catalyst installation locations and catalyst technologies. This 
analysis, documented in the RIA, shows that for many engine power 
density levels and equipment operating cycles, exhaust temperatures are 
quite well matched to catalyst temperature window characteristics. In 
particular, the nonroad transient cycle (NRTC), the cycle we are 
finalizing to use for certification for most engines with rated power 
less than 750 hp, was shown to be well matched to the NOX 
adsorber characteristics with estimated performance in excess of 90 
percent for a turbocharged diesel engine tested under a range of power 
density levels. The analysis also indicated that the exhaust 
temperatures experienced over the NRTC are better matched to the 
NOX adsorber catalyst temperature window than the 
temperatures that would be expected over the highway FTP test cycle. 
This suggests (when coupled with the fact that PM filters function with 
equal effectiveness at essentially all conditions) that compliance 
based on testing with the nonroad Tier 4 standards on the NRTC will be 
somewhat easier, using similar technology, than complying with the 
highway 2007 emission standards on the highway transient test cycle.
    In sum, we believe based on our analysis of nonroad engines and 
equipment operating characteristics, that, in use, some nonroad engines 
will experience conditions that require the use of temperature 
management strategies (e.g., active regeneration) in order to 
effectively use the NOX adsorber and CDPF systems. We have 
assumed in our cost analysis that all nonroad engines complying with a 
PM standard of 0.03 g/bhp-hr or lower will have an active means to 
control temperature (i.e. we have costed a backup regeneration system, 
although some applications likely may not need one). We have made this 
assumption believing, as indicated by a number of commenters, that 
manufacturers will not be able to accurately predict in-use conditions 
for every piece of equipment and will thus choose to provide the 
technologies on a back-up basis. As explained earlier, the technologies 
necessary to accomplish this temperature management are enhancements of 
both the Tier 3 emission control technologies that will form the 
starting point for Tier 4 engines larger than 50 hp, and the control 
strategies being developed for highway diesel engines.\41\ Based on our 
analyses, we believe that there are no nonroad engine applications 
above 25 horsepower for which these highway engine approaches for 
temperature management will not work. However, we agree with commenters 
that given the diversity in nonroad equipment design and application, 
additional time will be needed in order to match the engine performance 
characteristics to the full range of nonroad equipment.
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    \41\ We do not have Tier 3 emission standards for engines in the 
horsepower category from 25-50 hp. However, we expect that similar 
Tier 3 emission control technologies will form part of the emission 
control technology package used for compliance with the Tier 4 
standards for these engines in 2013. Our cost analysis reflects the 
additional cost to apply these technologies for NOX and 
PM control.
---------------------------------------------------------------------------

    We have concluded that, given the timing of the emissions standards 
finalized today, and the availability and continuing development of 
technologies to address temperature management for highway engines 
which technologies are transferrable to all nonroad engines with 
greater than 25 hp power rating, nonroad engines can be designed to 
meet the new standards in the lead time provided, and can be provided 
to equipment makers in a timely manner within that lead time.
b. Nonroad Operating Conditions and Durability
    Nonroad equipment is designed to be used in a wide range of tasks, 
from mining equipment to crop cultivation and harvesting to excavation 
and

[[Page 38985]]

loading, and operated in harsh environments. In the normal course of 
equipment operation the engine and its associated hardware will 
experience levels of vibration, impacts, and dust that may exceed 
conditions typical of highway diesel vehicles. For this reason, some 
commenters said that the PM filter technology was infeasible for 
nonroad equipment. We disagree with this assertion and continue to 
believe that PM filter technologies can be applied to a wide range of 
nonroad equipment.
    Specific efforts to design for the nonroad operating conditions 
will be required in order to ensure that the benefits of these new 
emission control technologies are realized for the life of nonroad 
equipment. Much of the engineering knowledge and experience to address 
these issues already exists with the nonroad equipment manufacturers. 
Vibration and impact issues are fundamentally mechanical durability 
concerns (rather than issues of technical feasibility of achieving 
emissions reductions) for any component mounted on a piece of equipment 
(e.g., an engine coolant overflow tank). Equipment manufacturers must 
design mounting hardware such as flanges, brackets, and bolts to 
support the new component without failure. Further, the catalyst 
substrate material itself must be able to withstand the conditions 
encountered on nonroad equipment without itself cracking or failing. 
There is a large body of real world testing with retrofit emission 
control technologies on engines up to 750 hp that demonstrate the 
durability of the catalyst components themselves even in the harshest 
of nonroad equipment applications. The evidence for even larger engines 
(i.e., those above 750 hp) is less conclusive because of the limited 
number of applications.
    Deutz, a nonroad engine manufacturer, sold approximately 2,000 
diesel particulate filter systems for nonroad equipment in the period 
from 1994 through 2000. The very largest of these systems were limited 
to engine sizes below 850 hp. The majority of these systems were sold 
into significantly smaller applications. Many of these systems were 
sold for use in mining equipment. Mining equipment is exposed to 
extraordinarily high levels of vibration, experiences impacts with the 
mine walls and face, and encounters high levels of dust. Yet in 
meetings with the Agency, Deutz shared their experience that no system 
had failed due to mechanical failure of the catalyst or catalyst 
housing.\42\ The Deutz system utilized a conventional cordierite PM 
filter substrate as is commonly used for heavy-duty highway truck CDPF 
systems. The canning and mounting of the system was a Deutz design. 
Deutz was able to design the catalyst housing and mounting in such a 
way as to protect the catalyst from the harsh environment as evidenced 
by its excellent record of reliable function.
---------------------------------------------------------------------------

    \42\ ``Summary of Conference Call between U.S. EPA and Deutz 
Corporation on September 19, 2002 regarding Deutz Diesel Particulate 
Filter System'', EPA Memorandum to Air Docket A-2001-28 Item II-B-
31.
---------------------------------------------------------------------------

    A number of commenters asserted that it was not possible to apply 
conventional CDPF technologies (i.e., ceramic wall-flow filter media) 
to the largest diesel engines with power ratings above 750 hp. In the 
draft RIA for the proposal, we described our expectation that these 
highway-based systems could be assembled into larger systems to work 
well for these largest diesel engines. While we continue to believe 
that it may be possible in the time frame of this rulemaking for these 
conventional CDPFs to be applied to engines with more than 750 hp, 
based on the evidence provided by the commenters, we now agree that too 
much uncertainty remains for us to reach that conclusion today. We 
cannot clearly today describe a method to monitor the soot loading of 
individual filter elements in a parallel system made up of a 
significant number of smaller components. This is because for parallel 
systems the pressure drop (the best current method to monitor filter 
condition) across all of the parallel components is exactly the same. 
If a single filter begins to plug and needs to be regenerated it may 
not be detected in such a system. Therefore, we believe that instead of 
a massively parallel filter system, an alternate PM filtering media may 
be more appropriate in order to address issues of scalability, 
durability and packaging for these largest engines. Fortunately, there 
are other filter media technologies (e.g., wire or fiber mesh depth 
filters) that can be successfully scaled to any size and which we have 
confidence in projecting today will be a more appropriate solution for 
the bulk of the engines in this size category. Because these depth 
filtration technologies are not quite as efficient at filtering PM as 
the ceramic systems that are the dominant solution for the smaller 
highway diesel engines, we are finalizing a set of PM filter-based 
standards for engines greater than 750 hp which are slightly higher 
than the proposed PM standards for these engines. Those standards are 
discussed in sections II.A and II.B.3 below. Our cost estimates 
summarized in section VI for engines greater than 750 hp are consistent 
with the use of either silicon carbide or wire mesh PM filter 
technologies.
    Certain nonroad applications, including some forms of harvesting 
equipment, consumer lawn and garden equipment, and mining equipment, 
may have specific limits on maximum surface temperature for equipment 
components in order to ensure that the components do not serve as 
ignition sources for flammable dust particles (e.g., coal dust or fine 
crop/lawn dust). Some commenters have raised concerns that these design 
constraints might limit the equipment manufacturers ability to install 
advanced diesel catalyst technologies such as NOX adsorbers 
and CDPFs. This concern seems to be largely based upon anecdotal 
experience with gasoline catalyst technologies where under certain 
circumstances catalyst temperatures can exceed 1,000 [deg]C and without 
appropriate design considerations could conceivably serve as an 
ignition source. We do not believe that these concerns are justified in 
the case of either the NOX adsorber catalyst or the CDPF 
technology. Catalyst temperatures for NOX adsorbers and 
CDPFs should not exceed the maximum exhaust manifold temperatures 
already commonly experienced by diesel engines (i.e., catalyst 
temperatures are expected to be below 800 [deg]C).\43\ CDPF 
temperatures are not expected to exceed approximately 700 [deg]C in 
normal use and are expected to only reach the 650 [deg]C temperature 
during periods of active regeneration. Similarly, NOX 
adsorber catalyst temperatures are not expected to exceed 700 [deg]C 
and again only during periods of active sulfur regeneration as 
described in section III.C below. Under conditions where diesel exhaust 
temperatures are naturally as high as 650 [deg]C, no supplemental heat 
addition from the emission control system will be necessary for 
regeneration and therefore exhaust temperatures will not exceed their 
natural level. When natural exhaust temperatures are too low for 
effective emission system regeneration

[[Page 38986]]

then supplemental heating, as described earlier, may be necessary but 
would not be expected to produce temperatures higher than the maximum 
levels normally encountered in diesel exhaust. Furthermore, even if it 
were necessary to raise exhaust temperatures to a higher level in order 
to promote effective emission control, there are technologies available 
to isolate the higher exhaust temperatures from flammable materials 
such as dust. One approach would be the use of air-gapped exhaust 
systems (i.e., an exhaust pipe inside another concentric exhaust pipe 
separated by an air-gap) that serve to insulate the inner high 
temperature surface from the outer surface which could come into 
contact with the dust. The use of such a system also may be desirable 
in order to maintain higher exhaust temperatures inside the catalyst in 
order to promote better catalyst function. Another technology to 
control surface temperature already used by some nonroad equipment 
manufacturers is water cooled exhaust systems.\44\ This approach is 
similar to the air-gapped system but uses engine coolant water to 
actively cool the exhaust system.
---------------------------------------------------------------------------

    \43\ The hottest surface on a diesel engine is typically the 
exhaust manifold which connects the engines exhaust ports to the 
inlet of the turbocharger. The hot exhaust gases leave the engine at 
a very high temperature (800 [deg]C at high power conditions) and 
then pass through the turbocharger where the gases expand driving 
the turbocharger providing work. The process of extracting work from 
the hot gases cools the exhaust gases. The exhaust leaving the 
turbocharger and entering the catalyst and the remaining pieces of 
the exhaust system is cooler (as much as 200 [deg]C at very high 
loads) than in the exhaust manifold.
    \44\ ``Engine Technology and Application Aspects for Earthmoving 
Machines and Mobile Cranes,'' Dr. E. Brucker, Liebherr Machines 
Bulle, SA, AVL International Commercial Powertrain Conference, 
October 2001. Copy available in EPA Air Docket A-2001-28, Docket 
Item  II-A-12.
---------------------------------------------------------------------------

    We thus do not believe that flammable dust concerns will prevent 
the use of either a NOX adsorber or a CDPF because catalyst 
temperatures are not expected to be unacceptably high and because 
remediation technologies exist to address these concerns. In fact, 
exhaust emission control technologies (i.e., aftertreatment) have 
already been applied on both an original equipment manufacturer (OEM) 
basis and for retrofit to nonroad equipment for use in potentially 
explosive environments. Many of these applications must undergo 
Underwriters Laboratory (UL) approval before they can be used.\45\ 
Therefore, while we appreciate the commenters' concerns regarding 
safety, we remain convinced that the application of these emission 
control technologies will not compromise (or decrease) equipment 
safety.
---------------------------------------------------------------------------

    \45\ Phone conversation between Byron Bunker, United States 
Environmental Protection Agency and Dale McKinnon, Manufacturers of 
Emission Control Association (MECA), 9 April, 2003 confirming the 
use of emission control technologies on nonroad equipment used in 
coal mines, refineries, and other locations where explosion proofing 
may be required.
---------------------------------------------------------------------------

    We agree that nonroad equipment must be designed to address safety 
and durable performance for a wide range of operating conditions and 
applications that would not commonly be experienced by highway 
vehicles. We believe further as demonstrated by retrofit experiences 
around the world that technical solutions exist which allow catalyst-
based emission control technologies to be applied to nonroad equipment.
2. Are the Standards for Engines 75-750 hp Feasible?
    There are three primary test provisions and associated standards in 
the Tier 4 program we are finalizing today. These are the Nonroad 
Transient Cycle (NRTC), the existing International Organization for 
Standardization (ISO) C1 steady-state cycle, and the highway-based Not-
To-Exceed (NTE) provisions.\46\ Under today's rules, most nonroad 
diesel engines must meet the new standards for each of these three test 
cycles (the exceptions are noted below). Compliance on the transient 
test cycle includes weighting the results from a cold start and hot 
start test with the cold start emissions weighted at 1/20 and hot start 
emissions weighted at 19/20. Additionally, we have alternative optional 
test cycles including the existing ISO-D2 steady-state cycle and the 
Transportation Refrigeration Unit (TRU) cycle which a manufacturer can 
choose to use for certification in lieu of the NRTC and the ISO-C1, 
provided that the manufacturer can demonstrate to the Agency that the 
engine will only be used in a limited range of nonroad equipment with 
known operating conditions. A complete discussion of these various test 
cycles can be found in chapter 4.2, 4.3, and 4.4 of the RIA.
---------------------------------------------------------------------------

    \46\ As an alternative to compliance with the ISO C1 test 
procedure, a manufacturer can show compliance with the standards by 
testing over the Ramped Modal Cycle (RMC) as described in section 
III.F.
---------------------------------------------------------------------------

    The standards we are finalizing today for nonroad engines with 
rated power from 75 to 750 hp are based upon the performance of 
technologies and standards for highway diesel engines which go into 
effect in 2007. As explained above, we believe these technologies, 
namely NOX adsorbers and catalyzed diesel particulate 
filters enabled by 15 ppm sulfur diesel fuel, can be applied to nonroad 
diesel engines in a similar manner as for highway diesel engines. The 
combustion process and the means to modify that process are 
fundamentally the same for highway and nonroad diesel engines 
regardless of engine size. The formation mechanism and quantity of 
pollutants formed in diesel engines are fundamental characteristics of 
engine design and are not inherently different for highway and nonroad 
engines regardless of engine size. The effectiveness of NOX 
adsorbers to control NOX emissions and CDPFs to control PM, 
NMHC, and CO emissions are determined by fundamental catalyst and 
filter characteristics. Therefore, we disagree with commenters who 
suggest that these highway technology based emission standards are 
infeasible for nonroad engines. We acknowledge the comments raised 
regarding the unique characteristics nonroad diesel engines which must 
be considered in setting these standards, and we have addressed those 
issues by allowing (where appropriate) for additional lead time or 
slightly less stringent standards for nonroad diesel engines in 
comparison to highway diesel engines (and likewise have made 
appropriate cost estimates to account for the technology and 
engineering needed to address these issues).
    PM Standard. We are finalizing a PM standard for engines in this 
category of 0.01 g/bhp-hr based upon the emissions reductions possible 
through the application of a CDPF and 15 ppm sulfur diesel fuel. This 
is the same emissions level as for highway diesel engines in the heavy-
duty 2007 (HD2007) program (66 FR 5001, January 18, 2001). While 
emission levels of engine-out soot (the solid carbon fraction of PM) 
may be somewhat higher for some nonroad engines when compared to 
highway engines, these emissions are virtually eliminated (reduced by 
99 percent) by the CDPF technology. With application of the CDPF 
technology, the soluble organic fraction (SOF) portion of diesel PM is 
predicted to be all but eliminated. The primary emissions from a CDPF 
equipped engine are sulfate PM emissions formed from sulfur in diesel 
fuel. The emissions rate for sulfate PM is determined primarily by the 
sulfur level of the diesel fuel and the rate of fuel consumption. With 
the 15 ppm sulfur diesel fuel, the PM emissions level from a CDPF 
equipped nonroad diesel engine will be similar to the emissions rate of 
a comparable highway diesel engine. Therefore, the 0.01 g/bhp-hr 
emission level is feasible for nonroad engines tested on the NRTC cycle 
and on the steady-state cycles, ISO-C1 and ISO-D2. Put another way, 
control of PM using CDPF technology is essentially independent of duty 
cycle given active catalyst technology (for reliable regeneration and 
SOF oxidation), adequate control of temperature (for reliable 
regeneration) and low sulfur diesel fuel (for reliable regeneration and 
low PM emissions). While some commenters argued that PM filters will

[[Page 38987]]

not enable the 0.01 PM emission standard for nonroad engines, we remain 
convinced by the demonstration of 0.01 or lower PM emission levels from 
a number of diesel engines described in the RIA, that the standard is 
feasible given the leadtime provided and the availability of 15 ppm 
sulfur diesel fuel. Likewise, the NTE provisions for nonroad engines 
are the same as for on-highway engines meeting an equivalent PM control 
level. The maximum PM emission level from a CDPF equipped diesel engine 
is primarily determined by the maximum fuel sulfur conversion level 
experienced at the highest operating conditions. As documented in RIA 
chapter 4.1.1.3, testing of diesel engines at conditions representative 
of the highest sulfate PM formation rates shows PM levels below the 
level required by the NTE provisions when tested on less than 15 ppm 
sulfur diesel fuel.
    NOX Standard. We are finalizing a NOX 
standard of 0.30 g/bhp-hr for engines in this category based upon the 
emission reductions possible from the application of NOX 
adsorber catalysts and the expected emission levels for Tier 3 
compliant engines which form the baseline technology for Tier 4 
engines. The Tier 3 emission standards are a combined 
NMHC+NOX standard of 3.0 g/bhp-hr for engines greater than 
100 hp and less than 750 horsepower. For engines less than 100 hp but 
greater than 50 horsepower the Tier 3 NMHC+NOX emission 
standard is 3.5 g/bhp-hr. We believe that in the time-frame of the Tier 
4 emission standards, all engines from 75 to 750 hp can be developed to 
control NOX emissions to engine-out levels of 3.0 g/bhp-hr 
or lower.\47\ This means that all engines will need to apply Tier 3 
emission control technologies (i.e., turbochargers, charge-air-coolers, 
electronic fuel systems, and for some manufacturers EGR systems) to get 
to this baseline level. As discussed in more detail in the RIA, our 
analysis of the NRTC and the ISO-C1 cycles indicates that the 
NOX adsorber catalyst can provide a 90 percent or greater 
NOX reduction level on the cycles. The standard of 0.30 g/
bhp-hr reflects a baseline emissions level of 3.0 g/bhp-hr and a 
greater than 90 percent reduction of NOX emissions through 
the application of the NOX adsorber catalyst. The additional 
lead time available to nonroad engine manufacturers and the substantial 
learning that will be realized from the introduction of these same 
technologies to highway diesel engines, plus the lack of any 
fundamental technical impediment, makes us confident that the new 
NOX standards can be met.
---------------------------------------------------------------------------

    \47\ For engines between 75 and 100 horsepower, this may require 
re-optimization of the engine to lower NOX emissions if 
they are higher than 3.0, but we would not expect any new hardware 
beyond the Tier 3 hardware to be required in the Tier 4 timeframe to 
accomplish this reduction.
---------------------------------------------------------------------------

    Given the fundamental similarities between highway and nonroad 
diesel engines, we believe that the NOX adsorber technology 
developed for highway engines can be applied with equal effectiveness 
to nonroad diesel engines with additional developments in engine 
thermal management (as discussed in section II.B.2 above) to address 
the more widely varied nonroad operating cycles. In fact, as discussed 
previously, the NOX adsorber catalyst temperature window is 
particularly well matched to transient operating conditions as typified 
by the NRTC.
    As pointed out by some commenters, compliance with the NTE 
provisions will be challenging for the nonroad engine industry due to 
the diversity of nonroad products and operating cycles. However, the 
technical challenge is reduced somewhat by the 1.5 multiplier used to 
calculate the NTE standard as discussed in section III.J. Controlling 
NOX emissions under NTE conditions is fundamentally similar 
for both highway and nonroad engines. The range of control is the same 
and the amount of reduction required is also the same. We know of no 
technical impediment, nor were any raised by commenters, that would 
prevent achieving the NTE standard under the zone of operating 
conditions required by the NTE.
    NMHC Standard. Meeting the NMHC standard under the lean operating 
conditions typical of the biggest portion of NOX adsorber 
operation should not present any special challenges to nonroad diesel 
engine manufacturers. Since CDPFs and NOX adsorbers contain 
platinum and other precious metals to oxidize NO to NO2, 
they are also very efficient oxidizers of hydrocarbons. NMHC reductions 
of greater than 95 percent have been shown over transient and steady-
state test procedures.\48\ Given that typical engine-out NMHC is 
expected to be in the 0.40 g/bhp-hr range or lower for engines meeting 
the Tier 3 standards, this level of NMHC reduction will mean that under 
lean conditions emission levels will be well below the standard. For 
the same reasons, there is no obstacle which would prevent achieving 
the NTE standard.
---------------------------------------------------------------------------

    \48\ ``The Impact of Sulfur in Diesel Fuel on Catalyst Emission 
Control Technology,'' report by the Manufacturers of Emission 
Controls Association, March 15, 1999, pp. 9 & 11. Copy available in 
EPA Air Docket A-2001-28 Item II-A-67.
---------------------------------------------------------------------------

    Under the brief episodic periods of rich operation necessary to 
regenerate NOX adsorber catalysts, it is possible to briefly 
experience higher levels of NMHC emissions. Absent a controlling 
standard, it is possible that these NMHC emissions could be high. There 
are two possible means to control the NMHC emissions during these 
periods in order to meet the NMHC standard finalized today. 
Manufacturers can design the regeneration system and the oxygen storage 
(oxidation function under rich conditions) of the NOX 
adsorber catalyst such that the NMHC emissions are inherently 
controlled. This is similar to the control realized on today's three-
way automotive catalysts which also experience operation that toggles 
between rich and lean conditions. Secondly, a downstream clean-up 
catalyst can be used to oxidize the excess NMHC emissions to a level 
below the standard. This approach has been used in the NOX 
adsorber demonstration program at EPA described in the RIA. Our cost 
analysis for engines in the 75 to 750 hp category includes a cost for a 
clean-up catalyst to perform this function.
    Cold Start. The standards include a cold start provision for the 
NRTC procedure. This means that the results of a cold start transient 
test will be weighted with the emissions of a hot start test in order 
to calculate the emissions for compliance against the standards. In a 
change from the proposed rule, the weightings are 1/20 cold start and 
19/20 for the hot start (as opposed to the proposed weightings of 1/10 
and 9/10, respectively) as described more fully in chapter 4.2 of the 
RIA and section III.F below. Because exhaust temperatures are so 
important to catalyst performance, a cold start provision is an 
important tool to ensure that the emissions realized in use are 
consistent with the expectations of this program. Achieving this 
standard represents an additional technical challenge for 
NOX control and to a lesser extent CO and NMHC control 
(i.e., control of gaseous pollutants). PM control with a CDPF is not 
expected to be significantly impacted by cold-start provisions due to 
the primary filter mechanism being largely unaffected by temperature.
    With respect to achievability of the NOX, CO and NMHC 
standards, during the initial start and warmup period for a diesel 
engine, the exhaust temperatures are typically below the light-off 
temperature of a catalyst. As a result, exhaust stack emissions may 
initially be higher during this period of

[[Page 38988]]

operation. The cold start test procedure is designed to quantify these 
emissions to ensure that emission control systems are designed 
appropriately to minimize the contribution of cold-start emissions. 
Cold-start emissions can be minimized by improving catalyst technology 
to allow for control at lower exhaust temperatures (i.e., by lowering 
the catalyst light-off temperature) and by applying strategies to 
quickly raise the exhaust temperature to a level above the catalyst 
light-off temperature.
    There are a number of technologies available to the engine 
manufacturer to promote rapid warmup of the exhaust and emission 
control system. These include retarding injection timing, increasing 
EGR, and potentially late cycle injection, all of which are 
technologies we expect manufacturers to apply as part of the normal 
operation of the NOX adsorber catalyst system. These are the 
same technologies we expect highway engine manufacturers to use in 
order to comply with the highway cold start FTP provision which weights 
cold start emissions more heavily with a 1/7 weighting. As a result, we 
expect the transfer of highway technology to be well matched to 
accomplish this control need for nonroad engines as well. Using these 
technologies we expect nonroad engine manufacturers to be able to 
comply with the new Tier 4 NOX, CO, and NMHC emission 
standards including the cold start provisions of the transient test 
procedure.
    One commenter has raised the concern that if diesel engines are no 
cleaner than 3 g/bhp-hr NOX and if NOX adsorbers 
can be no more efficient than 90 percent, then any increase in 
NOX emissions above the 0.30 g/bhp-hr level on a cold-start 
test will make the emission standards infeasible. We should clarify, 
when discussing the emission reduction potential of the NOX 
adsorber catalyst generically in the NPRM, we have sometimes simply 
stated that it is 90 percent or more effective without plainly saying 
that this refers to our expectation for average performance considering 
both cold and hot start emissions. More precisely then, we would expect 
lower effectiveness over the cold-start test procedure with somewhat 
higher effectiveness realized over the hot-start test procedure. 
Because of the relative weightings of the two test cycles (i.e., 1/20 
for the cold-start and 19/20 for the hot-start), although the 
degradation of performance below 90 percent over the cold-start cycle 
can be substantially greater than the performance above 90 percent 
realized over the hot-start cycle, the standards remain feasible. For 
example, even if the average NOX adsorber performance over 
the cold-start test cycle was only 70 percent, the average 
NOX adsorber performance over the hot-start portion of the 
test cycle would only need to be 91 percent in order to realize a 
weighted average performance of 90 percent. Similarly, were the cold-
start test cycle performance only 50 percent, the hot-start performance 
would only need to be 92 percent in order to realize a weighted average 
performance of 90 percent.\49\ We are confident, based on our estimates 
of NOX adsorber performance over the nonroad test cycle 
summarized in the RIA, that NOX adsorber performance in 
excess of 92 percent can be expected in the time frame of the 
requirements finalized today.
---------------------------------------------------------------------------

    \49\ The combined weighted average performance is calculated as 
1/20 (cold-start) + 19/20 (hot-start). Hence it can be seen that 1/
20 (70%) + 19/20 (91%) = 90% and likewise that 1/20 (50%) + 19/20 
(92%) = 90%.
---------------------------------------------------------------------------

    Complying with the PM standard given consideration of the cold 
start test procedure is not expected to be as challenging as compliance 
with the NOX standard. The effectiveness for PM filtration 
is not significantly effected by exhaust temperatures, as noted 
earlier. Thus, PM emission levels are similar over the cold and hot 
start tests.
    The standards that we are finalizing today for nonroad engines with 
rated horsepower levels from 75 to 750 hp are based upon the same 
emission control technologies, clean 15 ppm or lower sulfur diesel 
fuel, and relative levels of emission control effectiveness as the HD 
2007 emission standards. We have given consideration to the diversity 
of nonroad equipment for which these technologies must be developed and 
the timing of the Tier 3 emissions standards in determining the 
appropriate timing for the Tier 4 standards. Based upon the 
availability of the emission control technologies, the proven 
effectiveness of the technologies to control diesel emissions to these 
levels, the technology paths identified here to address constraints 
specific to nonroad equipment, and the additional lead time afforded by 
the timing of the standards, we have concluded that the standards are 
technically feasible in the leadtime provided.
3. Are the Standards for Engines Above 750 hp Feasible?
    The preceding discussion of the standards for engines of 75 to 750 
hp highlights the main thrust of our new Tier 4 program, a focus on 
realizing very low on-highway like emission levels for the vast 
majority of nonroad diesel engines. The emission standards and the 
combination of technologies that we expect will be used to meet those 
standards are virtually identical to the HD2007 program for on-highway 
engines. The following three sections (II.B.3, II.B.4, and II.B.5) 
describing the feasibility of the standards for engines above 750 hp, 
from 25 to 75 hp, and below 25 hp, while following the same pattern and 
objective, take additional consideration of the fact that engines and 
equipment in these size categories have no direct on-highway equivalent 
and differ from highway engines in substantial ways that cause us to 
reach differing conclusions regarding the appropriate standards and 
timing for those standards. Whether in scale, or use, or operating 
conditions, the characteristics of these engines and equipment are such 
that we have taken particular consideration of them in setting the 
timing and level of the standards. The remainder of this section 
(II.B.3) discusses what makes the above 750 hp category unique and why 
the standards which we are adopting are technologically feasible.
a. What Makes the Over 750 hp Category Different?
    The first and most obvious difference for engines in this 
horsepower category is scale. No on-highway engines come close to the 
size of the largest engines in this category which can produce in 
excess of 3,000 horsepower, consist of 16 or more cylinders and have 12 
or more turbochargers. The engines, and the equipment that they power, 
are quite simply significantly larger than any on-highway diesel 
engine. Many commenters argued that emission technologies from on-
highway vehicles could not be simply scaled up for these larger engines 
and that if they were, the consequences of this resizing would include 
structural weakness and reduced system robustness. As discussed below, 
our review of the information provided with these comments and our 
subsequent analysis of the technical characteristics of some emission 
control components has led us to conclude that revised emission 
standards (based on performance of different technologies that those 
whose performance formed the basis for the proposed rule) from those we 
proposed for this horsepower category are appropriate and available.
    We have concluded that it is appropriate to distinguish between two 
broad categories of engines over 750 hp grouped by application: Mobile 
machines and generator sets. Mobile machines include the very largest 
nonroad equipment used in mining trucks and large excavation equipment.

[[Page 38989]]

The environment and operating conditions (especially for vibration) 
represent the harshest application into which nonroad engines are 
applied. Design considerations for technologies used to control 
emissions from engines in these applications must first consider 
robustness to the harsh environments that will be experienced in use. 
In contrast, mobile nonroad generator sets operate in relatively good 
operating environments. In addition, while mobile nonroad generator 
sets can, and are moved between operating locations, they are always 
stationary during actual operation. Thus the levels of vibration and 
the general environment for engine operation are significantly less 
demanding for generator sets than for mobile machines. Also the dynamic 
range of operation is significantly narrower and less demanding for 
generator sets. Designed to operate at a set engine speed, synchronous 
to the frequency cycle desired for electric generation (i.e., 1200 or 
1800 RPM for 60 hz), diesel engines designed for generator set 
applications can be optimized for operation in this narrow range.
    We have given specific consideration to the unique engineering 
challenges for engines in this horsepower category in determining the 
appropriate emission standards set in today's action. We have also 
taken into account the important differences between generator set 
applications and other mobile applications in developing standards for 
this horsepower category.
b. Are the New Tier 4 Standards for Over 750 hp Engines Technologically 
Feasible?
    The emission standards described in section II.A above describe a 
comprehensive program for engines over 750 hp that give consideration 
to both the physical size of these engines and the applications into 
which these engines are applied. Engines in this power category must 
show compliance with the C1 or D2 steady-state test cycles as 
appropriate as well as with the NTE provisions finalized today. As 
described in sections III.F and III.G, these engines will not be tested 
over the NRTC nor will they be subject to a cold-start test procedure. 
The feasibility discussion in this section describes expected 
performance of the engines over the required test cycles and the NTE. 
This section will briefly summarize the feasibility analysis contained 
in the RIA for these engines.
    PM Standards. Beginning in 2011 all nonroad diesel engines above 
750 hp must meet a PM standard of 0.075 g/bhp-hr. We believe that this 
PM standard is feasible based on the substantial reductions in sulfate 
PM due to the use of 15 ppm sulfur diesel fuel and the potential to 
improve the combustion process to reduce PM emissions formed in the 
engine. Specifically, we believe based on the evidence in the RIA that 
increasing fuel injection pressure, improving electronic controls and 
optimizing the combustion system geometry will allow engine 
manufacturers to meet this level of PM control in 2011. Some engine 
manufacturers have in fact indicated to the Agency that this level of 
control represents an achievable goal by 2011. One commenter argued 
however, that a more relaxed standard of 0.1 g/bhp-hr based on today's 
on-highway diesel engine performance would be appropriate. We disagree 
with this comment, believing that given the substantial leadtime 
available and the potential for further improvements in combustion 
systems, that it is appropriate to set a forward looking PM standard of 
0.075 g/bhp-hr. Conversely, other commenters argued that future on-
highway PM filter technology should be applied to this class of engines 
as early as 2011 (i.e., that a standard of 0.01 g/bhp-hr PM is 
appropriate). While we agree with the commenters that in the long-term 
it will be appropriate to apply filter-based emission control 
technologies to these engines, we do not agree that such control is 
appropriate as early as 2011. As the following section explains, we 
believe that there are remaining technical challenges to be addressed 
prior to the application of PM filters to these engines and that it is 
necessary to allow additional leadtime for those challenges to be 
addressed.
    Beginning in 2015 all nonroad engines over 750 hp must meet 
stringent PM filter technology-based emission standards of 0.02 g/bhp-
hr for engines used in generator set applications and 0.03 g/bhp-hr for 
engines used in mobile machine applications. We are predicating these 
emission standards based on the application of a different form of 
diesel particulate filter technology, a wire or fiber mesh depth filter 
rather than a ceramic wall flow filter. Wire mesh filters are capable 
of reducing PM by 70 percent or more. We have not based these standards 
upon the more efficient (>90 percent) control possible from ceramic 
wall flow style PM filters, because we believe that the application of 
the wall flow filter technology on engines of this size has not been 
adequately demonstrated at this time. While it would certainly be 
possible to apply the ceramic-based technology to these larger engines, 
we cannot today conclude with certainty that such systems would be as 
robust in-use as needed (see earlier discussion in section II.B.1.b). 
Considering the information available to the Agency today, we believe 
it appropriate to set the long term PM standard for these very large 
engines based on technologies which we can project with confidence will 
give high levels of emission reduction, durability, and robustness when 
scaled to these very large engine sizes.
    The 0.01 g/bhp-hr difference in the PM emission standards between 
the standard for generator sets and for other mobile applications in 
this category (0.01 g/bhp-hr lower for generator sets) reflects our 
expectation that engine-out emissions from generator sets can be 
reduced below the level for mobile machines due to generator set 
operation at a single engine speed. Without the need to provide full 
power and control over the wider range of possible operating conditions 
that mobile machines must deliver, we believe that the air handling 
systems (especially the turbocharger match to the engine) can be 
improved to provide a moderate reduction in engine-out emissions. This, 
coupled with the reduction afforded by the PM filter technology, would 
allow generator sets to meet a more stringent 0.02 g/bhp-hr standard. 
Diesel engines designed for use in generator sets meeting this standard 
will need to demonstrate compliance over the appropriate test cycles, 
either the ISO C1 or D2 tests. As discussed in RIA chapter 4.3.6.2, PM 
emission rates are nearly the same for steady-state testing or for 
alternative ramped modal cycle (RMC) testing. These test cycles, like 
the engines, are designed to be representative of the range of 
operation expected from a generator set.
    As discussed previously, PM emission control over the NTE region 
for PM filter equipped diesel engines is predominantly a function of 
sulfate formation at high exhaust temperatures. Given that fuel 
consumption (and thus sulfur) consumption rates on a brake specific 
basis tend to be lower for engines above 750 hp, we can conclude that 
the increase in PM emissions over the NTE region will likely be lower 
for these engines than for engines meeting the 0.01 g/bhp-hr standard. 
Thus, we can conclude based on the evidence in the RIA that compliance 
with the NTE provisions for PM is feasible for engines over 750 hp.
    Although we are projecting that manufacturers will comply with this 
standard using a slightly less efficient PM filter technology, we 
remain convinced that 15 ppm sulfur diesel fuel

[[Page 38990]]

will still be a necessity for this technology to be applied. Regardless 
of the filter media chosen for the PM filter, the filter will still 
require catalyst-based systems to ensure robust regeneration and 
adequate control of the SOF portion of PM. As these catalyst-based 
technologies are adversely impacted by sulfur in diesel fuel as 
described in II.C below, 15 ppm sulfur diesel fuel will be required in 
order to ensure compliance with the PM standards finalized here for 
engines over 750 hp.
    NOX Standards. As with the PM standards, we are setting 
distinct NOX standards for this category of engines 
reflecting particular concerns with the application of technologies to 
engines of this size and our desire to realize significant 
NOX reductions as soon as possible. There are two sets of 
NOX standards that we are finalizing today, a 0.50 g/bhp-hr 
NOX standard for engines used in generator set applications 
and a 2.6 g/bhp-hr NOX standard for mobile machines.
    For engines used in generator set applications we are finalizing a 
0.50 g/bhp-hr standard that goes into effect for engines above 1,200 hp 
in 2011 and in 2015 for engines above 750 hp. We see two possible 
technology options for manufacturers to meet these standards. First, 
compliance with this NOX standard will be possible through 
the application of a dual bed NOX adsorber system (i.e., a 
system that allows regeneration to be controlled external to the 
engine). This approach can work well for generator set applications 
where packaging constraints and vibration issues are greatly reduced. 
Since this approach requires limited engine redesign, it would be an 
appealing approach for these large engines sold in very low volumes. 
NOX adsorber systems for stationary power generation 
(systems that never move) are available today on a retrofit basis, and 
we believe with further development to address packaging and durability 
concerns that similar systems can be applied to mobile generator 
sets.\50\
---------------------------------------------------------------------------

    \50\ Emerachem EMx\TM\ Datasheet--Describing the EMx IC 
(Internal Combustion) System Air Docket OAR-2003-0012-0948.
---------------------------------------------------------------------------

    A second possible technology option for engines in this category is 
urea SCR. The challenges for urea SCR in mobile applications are well 
known, specifically a lack of urea infrastructure to provide urea 
refill at diesel fueling locations and a need to ensure that urea is 
added as necessary in use.\51\ These hurdles can be addressed more 
easily for generator sets than for virtually any other mobile source 
emission category. Although nonroad generator sets are mobile, in 
operation they remain at a fixed location where fuel is delivered to 
them periodically (i.e., a 1,200 hp generator set does not and cannot 
pull into the local truck stop for a fuel fill). Therefore, the same 
infrastructure that currently provides urea delivery for stationary 
power generation can also be utilized for nonroad generator set 
applications.\52\ It would still remain for the manufacturer to develop 
a mechanism to ensure urea refill, but we believe it is likely that 
solutions to this problem can be addressed through monitoring as for 
stationary source emissions or other technology options (e.g., a urea 
interlock that precludes engine operation without the presence of 
urea).
---------------------------------------------------------------------------

    \51\ See for example 68 FR 28375, May 23, 2003.
    \52\ Fleetguard StableGuard\TM\ Urea Premix for use with SCR 
NOX Reduction Systems, Air Docket A-2001-28 Item IV-A-04.
---------------------------------------------------------------------------

    Either of these technology approaches could be applied to realize 
an approximately 90 percent reduction from the current Tier 2 emission 
levels for these engines in order to comply with an emission standard 
of 0.50 g/bhp-hr. The 0.50 g/bhp-hr standard is different from our 
proposed level of 0.30 g/bhp-hr reflecting the changes we have made in 
this final action to the implementation schedule for this class of 
engines and therefore our projections for a technology path. At the 
time of the proposal, we projected that this class of engine would 
follow an integrated two-step technology path. We are now finalizing a 
program that anticipates the application of 90 percent effective 
NOX control to diesel engines for use in generator sets 
without a reduction in engine-out NOX levels beyond Tier 2. 
This reflects our desire to focus on getting the largest emission 
reduction possible in the near term (beginning in 2011) from these 
engines. Where we believe additional technology development is needed, 
as is the case for mobile machines over 750 hp, we are finalizing a 
more gradual emission reduction technology pathway anticipating further 
reductions in engine-out NOX emissions followed by a 
possible future action to reduce emissions further as described in 
section II.A. RIA chapter 4.1.2.3.3 describes NOX adsorber 
effectiveness to control NOX emissions including 
effectiveness over the NTE region. The discussion there is equally 
applicable to engines above and below 750 hp regarding NTE performance 
because the key attribute of NTE performance (exhaust temperature) is 
similar for engines across the horsepower range.
    For engines over 750 hp used in mobile machines (and for 750-1200 
hp generator sets from 2011 until 2015) we are setting a new 
NOX standard of 2.6 g/bhp-hr beginning in 2011. We are 
predicating this level of emission control (an approximate 50 percent 
reduction from Tier 2) on an improved combustion system and proven 
engine-based NOX control technologies. Specifically, we 
believe manufacturers can apply either proven cooled EGR technology, or 
apply additional levels of engine boost, a limited form of Miller Cycle 
operation, and increased intercooling capacity for the two-stage 
turbocharging systems that are used on these engines. The second 
approach for in-cylinder emissions reductions is similar in description 
at least to the Caterpillar ACERT technology which we believe could be 
another path for compliance with this standard. We are projecting a 
modest increase in heat-rejection to the engine coolant for these in-
cylinder emission control solutions and have accounted for those costs 
in our cost analysis. These approaches for NOX reduction 
have been proven for on-highway diesel engines since 2003 including 
compliance with NTE provisions similar to those for nonroad engines 
finalized here. We can conclude based on the on-highway experience that 
the NTE provisions can be met for engines in this horsepower category. 
One commenter suggested that a standard of 3.5 g/bhp-hr would be 
achievable in this time frame. As described here, we believe that 
further emission reductions to 2.6 g/bhp-hr are possible in this time 
frame. Engine manufacturers have indicated to the Agency that they 
believe this level of in-cylinder emission control can be realized for 
these very large diesel engines by 2011. We are deferring any decision 
on setting aftertreatment based NOX standards for mobile 
machinery above 750 hp to allow additional time to evaluate the 
technical issues involved, as discussed in section II.A.4.
    NMHC Standards. We are setting two different NMHC emission 
standards for engines in this category linked to the technologies used 
to control PM emissions. We are requiring all engines over 750 hp to 
meet an NMHC standard of 0.30 g/bhp-hr starting in 2011. As explained 
earlier, in 2011 all engines over 750 hp must meet a PM emission 
standard of 0.075 g/bhp-hr. We are projecting that manufacturers will 
meet this standard through improvements in in-cylinder emission control 
of PM (in conjunction with use of 15 ppm sulfur diesel fuel). These PM 
control technologies, increased fuel injection

[[Page 38991]]

pressure, improved electronic controls and enhanced combustion system 
designs will concurrently lower NMHC emissions to the NMHC standard of 
0.30 g/bhp-hr.
    The second step in our NMHC standards is to a level of 0.14 g/bhp-
hr, consistent with the standard for on-highway diesels beginning in 
2007 and for other nonroad diesel engines from 75 to 750 hp beginning 
in 2011. This change in NMHC standards is timed to coincide with the 
requirement that engines over 750 hp meet stringent PM emission 
standards that we believe will require the use of catalyst-based diesel 
particulate filter systems. These systems are expected to incorporate 
oxidation catalyst functions to control the SOF portion of diesel PM 
and to promote robust soot regeneration within the filter. This same 
oxidation function is highly effective at controlling NMHC emissions 
(the RIA documents reductions of more than 80 percent) and will result 
in a reduction in NMHC emissions below the 0.14 g/bhp-hr standard for 
these engines. As the high level of NMHC control afforded by the 
application of this technology is broadly realized across the wide 
range of diesel engine operation, it will allow for compliance with the 
NTE provisions as well. Although in practice we expect that NMHC 
emissions may be lower than the 0.14 g/bhp-hr standard, we have not 
finalized a more stringent standard for NMHC in order to maintain 
consistency with the NMHC standard we are finalizing for engines from 
75 hp to 750 hp, for which the NMHC standard is in part based on 
feasibility considerations for NOX adsorber catalyst systems 
that use diesel fuel to regenerate themselves (with consequent 
increased NMHC emissions during regeneration events). We believe this 
is appropriate considering our expectation that NOX adsorber 
technology will be found feasible for all nonroad engines over 750 hp.
4. Are the New Tier 4 Standards for Engines 25-75 hp Feasible?
    As discussed in section II.B, our standards for 25-75 hp engines 
consist of a 2008 transitional standard and long-term 2013 standards. 
The transitional standard is a 0.22 g/bhp-hr PM standard. The 2013 
standards consist of a 0.02 g/bhp-hr PM standard and a 3.5 g/bhp-hr 
NMHC+NOX standard.\53\ As discussed in section II.A, the 
transitional standard is optional for 50-75 hp engines, as the 2008 
implementation date is the same as the effective date of the Tier 3 
standards. Manufacturers may decide, at their option, not to undertake 
the 2008 transitional PM standard, in which case their implementation 
date for the 0.02 g/bhp-hr PM standard begins in 2012. The remainder of 
this section discusses what makes the 25-75 hp category unique and why 
the standards are technologically feasible.
---------------------------------------------------------------------------

    \53\ The 2013 NOX+NMHC standard is a new standard 
only for engines in the 25-50 hp category. For engines in the 50-75 
hp category, 3.5 g/bhp-hr NOX+NMHC is the existing Tier 3 
emission standard which will now also apply across the new regulated 
test cycles (e.g., NRTC).
---------------------------------------------------------------------------

a. What Makes the 25-75 hp Category Unique?
    As EPA explained in the proposal, and as discussed in section II.A, 
one cannot assume that highway technologies are automatically 
transferable to 25-75 hp nonroad engines. In contrast with 75-750 hp 
engines, which share similarities in displacement, aspiration, fuel 
systems, and electronic controls with highway diesel engines, engines 
in the 25-75 hp category have a number of technology differences from 
the larger engines. These include a higher percentage of indirect-
injection fuel systems, and a low fraction of turbocharged engines (see 
generally RIA chapter 4.1). The distinction in the under 25 hp category 
is even more pronounced, with no turbocharged engines, nearly one-fifth 
of the engines have two cylinders or less, and a significant majority 
of the engines have indirect-injection fuel systems.
    The distinction is particularly marked with respect to 
electronically controlled fuel systems. These are commonly available in 
the power categories greater than or equal to 75 hp, but, based on the 
available certification data as well as our discussions with engine 
manufacturers, we believe there are very limited numbers, if any, in 
the 25-75 hp category (and no electronic fuel systems in the less than 
25 hp category). The research and development work being performed 
today for the heavy-duty highway market is targeted at engines which 
are 4-cylinders or more, direct-injection, electronically controlled, 
turbocharged, and with per-cylinder displacements greater than 0.5 
liters. As discussed in more detail below, as well as in section II.B.5 
(regarding the under 25 hp category), these engine distinctions are 
important from a technology perspective and warrant a different set of 
standards for the 25-75 hp category (as well as for the under 25 hp 
category).
b. Are the New Tier 4 Standards for 25-75 hp Engines Technologically 
Feasible?
    This section will discuss the technical feasibility of both the 
interim 2008 PM standard and the 2013 standards. For an explanation and 
discussion of the implementation dates, please refer to section II.A.
i. 2008 PM Standards \54\
---------------------------------------------------------------------------

    \54\ As discussed in section II.B., manufacturers can choose, at 
their option, to pull-ahead the 2013 PM standard for the 50-75 hp 
engines to 2012, in which case they do not need to comply with the 
transitional 2008 PM standard.
---------------------------------------------------------------------------

    We are today finalizing the interim PM control program as proposed 
for engines in the power category from 25-75 hp. The new PM standard 
for 2008 is 0.22 g/bhp-hr over the appropriate steady-state test cycle 
(the NRTC and NTE do not apply, for the reasons explained below).\55\ 
The standard is premised on the use of 500 ppm sulfur diesel fuel and 
the potential for improvements in engine-out emission control where 
possible or the application of a diesel oxidation catalyst (DOC). Some 
commenters raised concerns that this level of emission control from 
diesel engines may not be possible in 2008 without fuel cleaner than 
500 ppm or without changes in the Tier 3 NMHC+NOX emission 
standards. Other commenters, including some engine manufacturers, 
supported this interim program. As explained in the following sections, 
we continue to believe that these standards are appropriate and 
feasible in the leadtime provided.
---------------------------------------------------------------------------

    \55\ However, a manufacturer can choose to comply over the TRU 
cycle including the associated NTE provisions. Compliance with the 
NTE for engines selecting to certify on the TRU cycle is 
straightforward because by the very nature of the products, their 
operation is directly limited to a small range of operating modes 
over which compliance with the emission standard has already been 
shown.
---------------------------------------------------------------------------

    Engines in the 25-50 hp category must meet Tier 2 
NMHC+NOX and PM standards today. We have examined the model 
year 2004 engine certification data for engines in the 25-50 hp 
category. These data indicate that over 35 percent of the engine 
families meet the 2008 0.22 g/bhp-hr PM standard and 5.6 g/bhp-hr 
NMHC+NOX standard (unchanged from Tier 2 in 2008) today 
(even without 500 ppm sulfur diesel fuel). At the time of the proposal, 
we had analyzed model year 2002 data for this power range, which at 
that time indicated approximately 10 percent of the engine families 
complied with the 2008 requirements. The most recent data for model 
year 2004 indicates substantial progress has already been made in just 
the past few year in lowering emissions from these engines. This is 
primarily due to the implementation of the Tier 2 standards in model 
year 2004. The model year

[[Page 38992]]

2001 certification data also showed the 2008 standard were achievable 
using a mix of engine technologies (IDI and DI, turbocharged and 
naturally aspirated) tested on a variety of certification test 
cycles.\56\ A detailed discussion of these data is contained in the 
RIA.
---------------------------------------------------------------------------

    \56\ The Tier 1 and Tier 2 standards for this power category 
must be demonstrated on one of a variety of different engine test 
cycles. The appropriate test cycle is selected by the engine 
manufacturer based on the intended in-use application of the engine.
---------------------------------------------------------------------------

    At the time of the proposal, no certification data was available 
for engines in the 50-75 hp range, because those engines were not 
subject to a Tier 1 standard and were not subject to Tier 2 standards 
until model year 2004. We have now had an opportunity to analyze the 
model year 2004 certification data for engines in the 50-75 hp range. 
These data shows that more than 70 percent of the engine families in 
this power range are capable of meeting the 2008 PM standards today. 
However, most of these engines do not yet meet the 3.5 g/bhp-hr Tier 3 
NMHC+NOX standard, which is required in 2008. We expect that 
to comply with the Tier 3 standards, these engines will use 
technologies such as EGR and electronically controlled fuel injection 
systems (and we included the costs of these technologies in assessing 
the costs of the Tier 3 standards). These technologies have been shown 
to reduce NOX emissions by 50 percent without increasing PM 
emissions. The certification data show that for the 70 percent of the 
engine families which meet the 2008 Tier 4 PM standard (0.22 g/bhp-hr), 
a NOX reduction of less than 50 percent is needed for most 
of these engines to meet the 2008 Tier 4 NMHC+NOX standard. 
A detailed discussion of these data is contained in the RIA.
    In addition to using known engine-out techniques, we also project 
that the 2008 standards can be achieved with the use of DOCs. DOCs are 
passive flow-through emission control devices which are typically 
coated with a precious metal or a base-metal washcoat. DOCs have been 
proven to be durable in use on both light-duty and heavy-duty diesel 
applications. In addition, DOCs have already been used to control 
carbon monoxide on some nonroad applications.\57\ Some commenters 
raised concerns that DOCs could actually increase PM emissions when 
used on 500 ppm sulfur diesel fuel due to the potential for oxidation 
of the sulfur in the fuel to sulfate PM. While we agree with the 
commenters that sulfur reductions are important to control PM and in 
the long term that a 15 ppm fuel sulfur level will be the best 
solution, we disagree with the assertion that the amount of sulfate PM 
formed from a DOC will be such that compliance with the 0.22 g/bhp-hr 
standard will be infeasible. While commenters shared data showing 
increased PM emissions when DOCs are used, we have similarly found data 
(included in the RIA) that shows an overall reduction in emissions. To 
understand this discrepancy, it is important to realize that DOCs can 
be designed for operation on a range of fuel sulfur levels. The lower 
the fuel sulfur level, the more effective the PM oxidation function, 
but even at 500 ppm sulfur a properly designed DOC will realize a net 
reduction in PM emissions. DOCs have been successfully applied to 
diesel engines for on-highway applications for PM control on 500 ppm 
fuel since 1994 through careful design of the DOC trading-off PM 
reduction potential and sulfur oxidation potential. The RIA contains 
additional analysis describing DOC function, and its expected 
effectiveness when applied to nonroad diesel engines.
---------------------------------------------------------------------------

    \57\ EPA Memorandum ``Documentation of the Availability of 
Diesel Oxidation Catalysts on Current Production Nonroad Diesel 
Equipment,'' William Charmley. Copy available in EPA Air Docket A-
2001-28 Item II-B-15.
---------------------------------------------------------------------------

    Other commenters argued that the application of DOC to diesel 
engines in this category would lead to an even greater emission 
reduction than estimated in our proposal, thus allowing the Agency to 
finalize a lower PM standard. While we agree that some engines will 
have lower emissions than required to meet the standard and that in the 
long term (once 15 ppm fuel is widely available) the PM emissions will 
be further reduced, we do not believe that an emission level lower than 
0.22 g/bhp-hr will be generally feasible in 2008 due to the sulfur 
level of diesel fuel of 500 ppm sulfur and the potential for sulfate PM 
formation.
    In summary then, there are two likely means by which companies can 
comply with the interim 2008 PM standard. First, engine manufacturers 
can comply with this standard using known engine-out techniques (e.g., 
optimizing combustion chamber designs, fuel-injection strategies). In 
fact, some fraction of engines already would comply with the emission 
standard. In addition, some engine manufacturers may choose to use 
diesel oxidation catalysts to meet this standard. Our cost analysis 
makes the conservative assumption (i.e., the higher cost assumption) 
that all manufacturers will use DOC catalysts to comply with these 
emission standards.
    Based on the existence of a number of engine families which already 
comply with the 0.22 g/bhp-hr PM standard (and the 2008 
NMHC+NOX standard), and the availability of well known PM 
reduction technologies such as engine-out improvements and diesel 
oxidation catalysts, we project that the 0.22 g/bhp-hr PM standards is 
technologically feasible by model year 2008.
ii. 2013 Standards
    For engines in the 25-50 range, we are finalizing standards 
commencing in 2013 of 3.5 g/bhp-hr for NMHC+NOX and 0.02 g/
bhp-hr for PM. For the 50-75 hp engines, we are finalizing a 0.02 g/
bhp-hr PM standard which will be implemented in 2013, and for those 
manufacturers who choose to pull-ahead the standard one-year, 2012 
(manufacturers who choose to pull-ahead the 2013 standard for engines 
in the 50-75 range do not need to comply with the transitional 2008 PM 
standard). A more complete discussion of the options available to 
manufacturers and the nature of the transitional program can be found 
in section II.A. These standards are measured using the NRTC and 
steady-state tests. These engines also will be subject to the NTE 
starting with the 2013 model year.
    PM Standard. For engines in the horsepower category from 25-75 hp, 
we are finalizing a PM standard of 0.02 g/bhp-hr based on the 
application of catalyzed diesel particulate filters to engines in this 
category. We received a wide range of comments on our proposal with 
some arguing that the emission standard could be met earlier than 2013 
and others arguing that while technically possible to apply PM filters 
to engines in this category, that it was not economically or otherwise 
practical to do so.
    The RIA discusses in detail catalyzed diesel particulate filters, 
including explanations of how CDPFs reduce PM emissions, and how to 
apply CDPFs to nonroad engines. We have concluded, as explained above, 
that CDPFs can be used to achieve the 0.01 g/bhp-hr PM standard for 75-
750 hp engines. As also discussed in section II.B.2.a above, PM filters 
will require active back-up regeneration systems for many nonroad 
applications above and below 75 hp because low temperature operation is 
an issue across all power categories. One commenter raised concerns 
regarding the low exhaust temperatures possibly experienced by small 
nonroad engines and argued that such low temperatures make PM filter 
regeneration impossible absent the use of active regeneration 
technologies. We agree with the commenter that active regeneration, as 
described previously, may be necessary and have included the cost for 
such

[[Page 38993]]

systems in our cost estimates. See section II.B.1.a. A number of 
secondary technologies are likely required to enable proper 
regeneration, including possibly electronic fuel systems such as common 
rail systems which are capable of multiple post-injections which can be 
used to raise exhaust gas temperatures to aid in filter regeneration.
    Particulate filter technology, with the requisite trap regeneration 
technology, can also be applied to engines in the 25 to 75 hp range. As 
explained earlier, the fundamentals of how a filter is able to reduce 
PM emissions are not a function of engine power, so that CDPF's are 
just as effective at capturing soot emissions and oxidizing SOF on 
smaller engines as on larger engines. The PM filter regeneration 
systems described in section II.B.2 are also applicable to engines in 
this size range and are likewise feasible. There are specific trap 
regeneration technologies which we believe engine manufacturers in the 
25-75 hp category may prefer over others. For example, some 
manufacturers may choose to apply an electronically-controlled 
secondary fuel injection system (i.e., a system which injects fuel into 
the exhaust upstream of a PM filter). Such a system has been 
commercially used successfully by at least one nonroad engine 
manufacturer, and other systems have been tested by technology 
companies.\58\ However, we recognize that the application of these 
technologies will be challenging and will require additional time to 
develop. We therefore disagree with commenters who say that the 
standard could be met sooner and have decided to finalize the 
implementation schedule as proposed.
---------------------------------------------------------------------------

    \58\ ``The Optimized Deutz Service Diesel Particulate Filter 
System II,'' H. Houben et. al., SAE Technical Paper 942264, 1994 and 
``Development of a Full-Flow Burner DPF System for Heavy Duty Diesel 
Engines,'' P. Zelenka et. al., SAE Technical Paper 2002-01-2787, 
2002.
---------------------------------------------------------------------------

    As we proposed, we are finalizing a slightly higher PM standard 
(0.02 g/bhp-hr rather than 0.01) for engines in this power category. As 
discussed in the preamble to the proposed rule and in some detail in 
the RIA, with the use of a CDPF, the PM emissions emitted by the filter 
are primarily derived from the fuel sulfur (68 FR 28389-28390, May 23, 
2003). The smaller power category engines tend to have higher fuel 
consumption per unit of work than larger engines. This occurs for a 
number of reasons. First, the lower power categories include a high 
fraction of IDI engines which by their nature consume approximately 15 
percent more fuel than a DI engine. Second, as engine displacements get 
smaller, the engine's combustion chamber surface-to-volume ratio 
increases. This leads to higher heat-transfer losses and therefore 
lower efficiency and higher fuel consumption. In addition, frictional 
losses are a higher percentage of total power for the smaller 
displacement engines which also results in higher fuel consumption. 
Because of the higher fuel consumption rate, we expect a higher 
particulate sulfate level, and therefore we have set a 0.02 g/bhp-hr 
standard for engines in this power category. We did not receive any 
comments on our proposal arguing that the technical basis for this 
higher PM level was inappropriate.
    The 0.02 g/bhp-hr standard applies to all of the test cycles 
applicable to engines in this power category (i.e., the NRTC including 
cold-start, the ISO C1, D2 and G2 cycles and the alternative TRU and 
RMC cycles, as appropriate). Our feasibility analysis summarized here 
and detailed in the RIA takes into consideration these different test 
cycles. The control technologies work in a similar manner and provide 
the same high level of emission control across these different 
operating regimes including the NTE. The most significant effect on 
emission performance is related to sulfate PM formation at high load, 
high temperature operating conditions. As the RIA details, this level 
of high sulfate formation rate is not high enough to preclude 
compliance with the PM emission standard with 15 ppm fuel sulfur on the 
regulated test cycles nor is it high enough to preclude compliance with 
the NTE provisions. At higher fuel sulfur levels however, compliance 
with the PM emission standard would not be feasible.
    The majority of negative comments on our proposal to set a PM 
standard based on the control possible from PM filter technologies 
focused on the economic and technical challenges to apply these 
technologies and the major engine technology enabler, electronic fuel 
systems, to smaller diesel engines. Some commenters acknowledged that 
the technologies were ``technically feasible'' but not economically 
feasible or practical for engines in this power category. While we 
acknowledge that the application of these technologies to diesel 
engines in this horsepower category will be challenging and have given 
consideration to this in setting the timing for the new standard, we 
believe that the technical path for compliance is clear and that the 
cost estimates we have made for these engines accurately represent this 
technical path. As discussed in the RIA, at the time of the proposal we 
projected no significant penetration of electronic fuel systems for 
engines in the 50-100 hp range prior to the Tier 3 standards (2008). 
Since the proposal, new information regarding model year 2004 engine 
certifications has become available. That data show 18 percent of the 
engines in the 75-100 hp category already use electronically controlled 
fuel systems. In model year 2001, no engines in this category used 
electronic fuel systems. We believe this strong trend toward the 
introduction of more advanced electronic fuel system technology will 
continue in the future and, importantly for engines in the 25-75 hp 
category, will extend to ever smaller engine categories due to the user 
benefits provided by the technology and the falling cost for such 
systems. However, acknowledging the substantial time between now and 
2012, and the potential for technologies to mature faster or slower 
than we are estimating here, we have decided to conduct a technology 
review of these standards as described in section II.A above. This 
review will provide EPA with another opportunity to confirm that the 
technical path laid out here is indeed progressing in a manner 
consistent with our expectations.
    NMHC+NOX Standard. As we proposed, we are finalizing a 
3.5 g/bhp-hr NMHC+NOX standard for engines in the 25-50 hp 
range for 2013. We received limited comments arguing that the 
NMHC+NOX standard should be less stringent. Like the PM 
standard, some commenters argued that the NOX standard would 
be costly and complicated, although not necessarily infeasible to 
apply. Other commenters argued that the NOX standard for 
engines in this category like the new standard for larger engines, 
should be based upon the application of advanced NOX 
catalyst-based technologies. As described previously in section II.A, 
we do not believe that the catalyst-based NOX technologies 
have matured to a state were we can accurately define a feasible 
technical path for compliance for engines in this power category. We 
intend to revisit this question in our technology review and if we find 
that a viable technical path can be described we will consider the 
appropriateness of a more stringent catalyst-based standard.
    The new standard aligns the NMHC+NOX standard for 
engines in this power range with the Tier 3 standard for engines in the 
50-75 hp range which are implemented in 2008. EPA's recent Staff 
Technical paper which reviewed the technological feasibility of the 
Tier 3 standards contains a detailed discussion of a number of 
technologies which are capable of achieving a 3.5 g/bhp-hr standard. 
These include cooled EGR, uncooled EGR, as well as advanced in-

[[Page 38994]]

cylinder technologies relying on electronic fuel systems and 
turbocharging.\59\ These technologies are capable of reducing 
NOX emissions by as much as 50 percent. Given the Tier 2 
NMHC+NOX standard of 5.6 g/bhp-hr, a 50 percent reduction 
would allow a Tier 2 engine to comply with the 3.5 g/bhp-hr 
NMHC+NOX standard set in this action. Therefore, we are 
projecting that 3.5 g/bhp-hr NOX+NMHC standard is feasible 
with the addition of cooled EGR (the basis for our cost analysis) or 
other equally effective in-cylinder NOX control technology 
as described in the RIA and our recent Staff Technical Paper. In 
addition, because this NMHC+NOX standard is concurrent with 
the 0.02 g/bhp-hr PM standards which we project will be achievable with 
the use of particulate filters, engine designers will have significant 
additional flexibility in reducing NOX because the PM filter 
will lessen the traditional concerns with the engine-out NOX 
vs. PM trade-off.
---------------------------------------------------------------------------

    \59\ See section 2.2 through 2.3 in ``Nonroad Diesel Emission 
Standards--Staff Technical Paper,'' EPA Publication EPA420-R-01-052, 
October 2001. Copy available in EPA Air Docket A-2001-28.
---------------------------------------------------------------------------

    Our recent highway 2004 standard review rulemaking (see 65 FR 
59896, October 2000) demonstrated that a diesel engine with advanced 
electronic fuel injection technology as well as NOX control 
technology such as cooled EGR is capable of complying with an NTE 
standard set at 1.25 times the laboratory-based FTP standard. We 
project that the same technology (electronic fuel systems and cooled 
EGR) are also capable for engine in the 25-75 hp range of complying 
with the NTE standard of 4.4 g/bhp-hr NMHC+NOX (1.25 x 3.5) 
in 2013. This is based on the broad NOX reduction capability 
of cooled EGR technology, which is capable of reducing NOX 
emissions across the engine operating map (including the NTE region) by 
at least 30 percent even under high load conditions.\60\
---------------------------------------------------------------------------

    \60\ See section 8 of ``Control of Emissions of Air Pollution 
from 2004 and Later Model Year Heavy-Duty Highway Engines and 
Vehicles: Response to Comments,'' EPA document EPA420-R-00-011, July 
2000, and chapter 3 of ``Regulatory Impact Analysis: Control of 
Emissions of Air Pollution from Highway Heavy-duty Engines,'' EPA 
document EPA420-R-00-010, July 2000. Copies of both documents 
available in EPA docket A-2001-28.
---------------------------------------------------------------------------

    Based on the information available to EPA and presented here, and 
giving appropriate consideration to the lead time necessary to apply 
the technology as well, we have concluded the 0.02 g/bhp-hr PM standard 
for engines in the 25-75 hp category and the 3.5 g/bhp-hr 
NMHC+NOX standards for the 25-50 hp engines are achievable.
5. Are the Standards for Engines Under 25 hp Feasible?
    As we explained at proposal and as discussed in section II.A, the 
new PM standard for engines less than 25 hp is 0.30 g/bhp-hr beginning 
in 2008. The certification test cycle for this standard is the ISO C1 
cycle (or other appropriate steady-state test as defined by the 
engine's intended use) from 2008 through 2012. Beginning in 2013, the 
NRTC (with cold-start) and the NTE will also apply to engines in this 
category. As discussed below, we are not setting a new standard more 
stringent than the existing Tier 2 NMHC+NOX standard for 
this power category at this time. This section describes what makes the 
less than 25 hp category different and why the standards are 
technologically feasible.
a. What Makes the Under 25 hp Category Unique?
    As we explained at proposal and in the RIA, nonroad engines less 
than 25 hp are the least sophisticated nonroad diesel engines from a 
technological perspective. All of the engines currently sold in this 
power category lack electronic fuel systems and turbochargers. Nearly 
20 percent of the products have two-cylinders or less, and 14 percent 
of the engines sold in this category are single-cylinder products, a 
number of these have no batteries and are crank-start machines, much 
like today's simple walk behind lawnmower engines. In addition, given 
what we know today and taking into account the Tier 2 standards which 
have not yet been implemented, we are not projecting any significant 
penetration of advanced engine technology, such as electronically 
controlled fuel systems, into this category in the next 5 to 10 years.
b. What Data Indicate That the Standards Are Feasible?
    We project the Tier 4 PM standard can be met by 2008 based on: The 
existence of a large number of engine families which meet the new 
standards today; the use of engine-out reduction techniques; and the 
use of diesel oxidation catalysts.
    Engines in the less than 25 hp category must meet Tier 1 
NMHC+NOX and PM standards today. We have examined the 2004 
model year engine certification data for nonroad diesel engines less 
than 25 hp. These data indicate that a number of engine families meet 
the new Tier 4 PM standard (and the 2008 NMHC+NOX standard, 
unchanged from Tier 2) today. The data show that 31 percent of the 
engine families are at or below the PM standard today, while meeting 
the 2008 NMHC+NOX standard. At the time of the proposal, we 
examined the model year 2002 certification, which indicated 
approximately 30 percent of the engine families were at or below the 
2008 emission standards. This certification data includes both IDI and 
DI engines, as well as a range of certification test cycles.\61\ Many 
of the engine families are certified well below the Tier 4 standard 
while meeting the 2008 NMHC+NOX level. Specifically, for the 
model year 2002 data, 15 percent of the engine families are cleaner 
than the new Tier 4 PM standard by more than 20 percent. The public 
certification data indicate that these engines do not use 
turbocharging, electronic fuel systems, exhaust gas recirculation, or 
aftertreatment technologies. We saw little change between the model 
year 2002 and 2004 data for this power category primarily because both 
model years are subject to the Tier 1 standards, and many engine 
families are simply carried over from the previous model year. Tier 2 
standards for these engines will not be implemented until model year 
2005. A detailed discussion of these data is contained in the RIA.
---------------------------------------------------------------------------

    \61\ The Tier 1 and Tier 2 standards for this power category 
must be demonstrated on one of a variety of different engine test 
cycles. The appropriate test cycle is selected by the engine 
manufacturer based on the intended in-use application(s) of the 
engine.
---------------------------------------------------------------------------

    In summary then, there are two likely means by which companies can 
comply with the 2008 PM standard for engines under 25 hp. First, engine 
manufacturers can comply with this standard using known engine-out 
techniques (e.g., optimizing combustion chamber designs, fuel-injection 
strategies). In fact, some fraction of engines already would comply 
with the emission standard. In addition, some engine manufacturers may 
choose to use diesel oxidation catalysts to meet this standard. Our 
cost analysis makes the conservative assumption (i.e., the higher cost 
assumption) that all manufacturers will use DOCs to comply with these 
emission standards.
    As discussed in section II.A, we are finalizing supplemental test 
procedures and standards (nonroad transient test cycle and not-to-
exceed requirements) for engines in the under 25 hp category beginning 
in 2013. The supplemental test procedures and standards will apply not 
only to PM, but also to NMHC+NOX. The engine technologies 
necessary to comply with the supplemental test procedures and standards 
are the same as the technology necessary to comply with the 2008 
standard, and we have given

[[Page 38995]]

consideration to these test conditions in setting this standard. The 
range of operating conditions covered by the various test cycles and 
the mechanism for emission control over those ranges of operation are 
substantially similar allowing us to conclude that emission control 
will be substantially uniform across these test procedures. However, we 
are delaying the implementation of the supplemental test procedures and 
standards until 2013, as proposed, in order to implement these 
supplemental requirements on the larger powered nonroad engines before 
the smallest power category. (There were no adverse comments on this 
aspect of the proposed rule.) This will also provide engine 
manufacturers with additional time to install any emission testing 
equipment upgrades they may need in order to implement the new nonroad 
transient test cycle.
    Based on the existence of a number of engine families which already 
comply with the new Tier 4 PM standard (and the 2008 
NMHC+NOX standard), and the availability of PM reduction 
technologies such as improved mechanical fuel systems, combustion 
chamber improvements, and in particular diesel oxidation catalysts, we 
project that the 0.30 g/bhp-hr PM standards is technologically feasible 
by model year 2008.
6. Meeting the Crankcase Emissions Requirements
    The most common way to eliminate crankcase emissions has been to 
vent the blow-by gases into the engine air intake system, so that the 
gases can be recombusted. Prior to the HD2007 rulemaking, we have 
required that crankcase emissions be controlled only on naturally 
aspirated diesel engines. We had made an exception for turbocharged 
diesel engines (both highway and nonroad) because of concerns in the 
past about fouling that could occur by routing the diesel particulates 
(including engine oil) into the turbocharger and aftercooler. However, 
this is an environmentally significant exception since most nonroad 
equipment over 75 hp use turbocharged engines, and a single engine can 
emit over 100 pounds of NOX, NMHC, and PM from the crankcase 
over its lifetime.
    Given the available means to control crankcase emissions, we 
eliminated this exception for highway engines in 2007 and similarly in 
today's action are eliminating the exception for nonroad diesel engines 
as well. A number of commenters supported this provision noting that 
the necessary technologies are already in application in Europe and 
will be required for heavy-duty diesel trucks in the United States 
beginning in 2007.
    We anticipate that the diesel engine manufacturers will be able to 
control crankcase emissions through the use of closed crankcase 
filtration systems or by routing unfiltered blow-by gases directly into 
the exhaust system upstream of the emission control equipment. However, 
the provisions have been written such that if adequate control can be 
had without ``closing'' the crankcase then the crankcase can remain 
``open.'' Compliance would be ensured by adding the emissions from the 
crankcase ventilation system to the emissions from the engine control 
system downstream of any emission control equipment. We have limited 
this provision for controlling emissions from open crankcases to 
turbocharged engines, which is the same as for heavy-duty highway 
diesel engines.
    Some commenters in essence argued that the Agency was obligated to 
show that all potential compliance paths were feasible and absent that 
showing that the Agency should reconsider this provision. Our 
feasibility analysis is based on the use of closed crankcase 
technologies designed to filter crankcase gases sending the clean gas 
to the engine intake for combustion and returning the oil filtered from 
the gases to the engine crankcase. These systems are proven in use and 
the use of this technology to eliminate crankcase emissions is 
acceptable to demonstrate compliance. The other options, the option to 
vent crankcase emissions into the exhaust or to continue to vent 
crankcase emissions to the atmosphere provided the total emissions 
including tailpipe and crankcase emissions do not exceed the standards 
are provided as alternate solutions that are clearly effective to 
control emissions (i.e., if the emissions are measured and are below 
the standard they are adequately controlled). The commenter suggests 
however, that they may not be able to control the emissions to the 
required level using these alternate approaches. In this case, a 
manufacturer would need to use the primary approach identified by EPA, 
closing the crankcase and routing the filtered gases to the engine's 
intake (this is the approach we used in the cost analysis summarized in 
section VI). We have allowed the alternative approaches at the 
recommendation of some in industry, because if they prove to be 
effective we accept that resulting total emissions will be acceptably 
low.

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

    The new Tier 4 emission standards for most categories of nonroad 
diesel engines are predicated on the application of advanced diesel 
emission control technologies that are being developed for on-highway 
diesel engines to meet the HD2007 emission standards, namely catalyzed 
diesel particulate filters and NOX adsorber catalysts. 
Sulfur in diesel fuel significantly impacts the durability, efficiency 
and cost of applying these technologies. Therefore, we required that 
on-highway diesel fuel produced for use in 2007 or newer on-highway 
diesel engines have sulfur content no higher than 15 ppm. Based on the 
same concerns outlined in the 2007 rulemaking, discussed in the 
proposal at 68 FR 28395-28400, set out in the RIA, and briefly 
summarized below, we today are finalizing a requirement that diesel 
fuel for nonroad engines be reduced to no higher than 15 ppm beginning 
in 2010. There was consensus among commenters that such standards were 
necessary if the proposed standards based on advanced diesel emission 
control technologies were to be achievable.
    Sulfur in diesel fuel acts to poison the oxidation function of 
platinum-based catalysts including DOCs and CDPFs reducing the 
oxidation efficiency substantially, especially at lower temperatures. 
This poisoning limits the effectiveness of DOCs and CDPFs to oxidize CO 
and HC emissions. Of even greater concern is the reduction in NO 
oxidation efficiency of the CDPF due to sulfur poisoning. NO oxidation 
to NO2 is a fundamental mechanism for PM filter regeneration 
necessary to ensure robust operation of the CDPF (i.e., to prevent 
filter plugging). Sulfur poisoning from sulfur in diesel fuel at levels 
higher than 15 ppm has been shown to increase the likelihood of PM 
filter failure due to a depressed NO to NO2 oxidation 
efficiency of the CDPF. The RIA documents substantial field experience 
in Europe regarding this phenomenon.
    Sulfur in diesel fuel can itself be oxidized to form sulfate PM 
emitted into the environment. CDPFs in particular are designed for 
robust regeneration and are highly effective at oxidizing sulfur to 
sulfate PM (approaching 100 percent conversion under some 
circumstances). The sulfate PM emissions from a CDPF when operated on 
350 ppm fuel can be so high as to actually increase the PM emission 
rate above the baseline level for an engine without a PM filter. In 
spite of more than ten years of research,

[[Page 38996]]

no effective means has been found to provide the NO to NO2 
oxidation efficiency needed to ensure robust filter regeneration 
without similarly increasing efficiency to oxidize sulfur to sulfate 
PM. Conversely, technologies developed to suppress sulfate PM formation 
(e.g., the addition of vanadium to DOCs designed to operate on 500 ppm 
sulfur fuel) also suppress NO to NO2 formation. Therefore, 
it is not possible to apply the robust CDPF technology to achieve the 
PM standards without first having lower diesel fuel sulfur levels. The 
RIA documents substantial test data showing the impact of sulfur in 
diesel fuel on total PM emissions due to an increase in sulfate PM 
emissions.
    Sulfur from diesel fuel likewise poisons the storage function of 
the NOX adsorber catalyst. Sulfur in the exhaust in the form 
of SOX is stored on the catalyst in the same way as the 
NOX emissions are stored. Unfortunately, due to the chemical 
properties of the materials, the sulfur is stored preferentially to the 
NOX and will actually displace the stored NOX 
emissions. The stored sulfur is not easily removed from the catalyst. A 
sulfur removal step, called a desulfation, can be accomplished by 
raising exhaust temperatures to a very high level while simultaneously 
increasing the reductant content of the exhaust above the 
stoichiometric level (i.e., more fuel than oxygen in the exhaust). This 
process can be effective to remove sulfur from the catalyst but at the 
expense of damaging the catalyst slightly. Over the lifetime of a 
diesel engine the cumulative damage from repeated desulfation events, 
as would be required if operation on higher than 15 ppm sulfur fuels 
were attempted, would lead to excessive damage and loss in 
NOX control. The RIA contains an extensive description of 
this phenomena including the tradeoff between higher fuel sulfur levels 
and more frequent desulfation events.
    The damage that sulfur inflicts on both the CDPF and NOX 
adsorber technologies not only reduces their effectiveness but also 
impacts the fuel economy of their application. Reduced soot 
regeneration potential due to sulfur poisoning would lead to the need 
for more frequent active CDPF regeneration. As each active soot 
regeneration event consumes fuel, more frequent regeneration events 
with higher fuel sulfur levels leads to an increase in fuel 
consumption. Similarly, higher fuel sulfur levels would necessitate 
more frequent NOX adsorber desulfation events and thus 
higher fuel consumption. An estimate of the impact of higher fuel 
sulfur levels on fuel economy due to more frequent desulfation events 
can be found in the RIA.
    For all of the reasons documented in the RIA and summarized here, 
we remain convinced that a cap of 15 ppm fuel sulfur is necessary for 
both on-highway and nonroad diesel engines in order to apply the 
advanced emission control technologies necessary to meet the emission 
standards we are finalizing today.

III. Requirements for Engine and Equipment Manufacturers

    This section describes the regulatory changes being made for the 
engine and equipment compliance program. A number of specific items are 
discussed in this section, including test procedures, certification 
fuels, and credit program provisions. These provisions are important in 
that they help us ensure the engines and equipment will meet the new 
requirements throughout their entire useful life, thus achieving the 
expected emission and public health benefits.
    One of the most obvious changes from the Tier 2/Tier 3 program is 
that the regulations for Tier 4 engines have been written in a plain 
language format. They are structured to contain the provisions that are 
specific to nonroad compression ignition (CI) engines in a new part 
1039, and to apply the general provisions of existing parts 1065 and 
1068. The plain language regulations, however, are not intended to 
significantly change the compliance program, except as specifically 
noted in today's notice and supporting documents. These plain language 
regulations will only apply for Tier 4 engines. The changes from the 
existing nonroad program are described below along with other notable 
aspects of the compliance program.
    As described below, we received comments from a broad range of 
commenters for some of these issues. For other issues, we received only 
manufacturer comments or no comments at all. See Chapter 9 of the 
Summary and Analysis of Comments for more information about the 
comments received and our responses to them.

A. Averaging, Banking, and Trading

1. Why Are We Adopting an ABT Program for Tier 4 Nonroad Diesel 
Engines?
    EPA has included averaging, banking, and trading (ABT) programs in 
almost all of its recent mobile source emission control programs. Our 
existing regulations for nonroad diesel engines include an ABT program 
(40 CFR 89.201 through 89.212). With today's action we are retaining 
the basic structure of the existing nonroad diesel ABT program, though 
we are adopting a number of changes to accommodate implementation of 
the newly adopted Tier 4 emission standards. The ABT program is 
intended to enhance the ability of engine manufacturers to meet the 
stringent standards adopted today. The program is also structured to 
limit production of very high-emitting engines and to avoid unnecessary 
delay of the transition to the new exhaust emission control 
technologies.
    We view the ABT program as an important element in setting emission 
standards that are appropriate under CAA section 213(a) with regard to 
technological feasibility, lead time, and cost, given the wide breadth 
and variety of engines covered by the standards. As we noted at 
proposal, if there are engine families that will be particularly costly 
or have a particularly hard time coming into compliance with the 
standard, this flexibility allows the manufacturer to adjust the 
compliance schedule accordingly, without special delays or exceptions 
having to be written into the rule. Emission-credit programs also 
create an incentive for the early introduction of new technology (for 
example, to generate credits in early years to create compliance 
flexibility for later engines), which allows certain engine families to 
act as trailblazers for new technology. This can help provide valuable 
information to manufacturers on the technology before they apply the 
technology throughout their product line. This early introduction of 
clean technology improves the feasibility of achieving the standards 
and can provide valuable information for use in other regulatory 
programs that may benefit from similar technologies. Early introduction 
of such engines also secures earlier emission benefits.
    In an effort to make information on the ABT program more available 
to the public, we intend to issue an annual report summarizing use of 
the ABT program by engine manufacturers. The information contained in 
the reports will be based on the information submitted to us by engine 
manufacturers in their annual reports, and summarized in a way that 
protects the confidentiality of individual engine manufacturers. We 
believe this information will also be helpful to engine manufacturers 
by giving them a better indication of the availability of credits.

[[Page 38997]]

2. What Are the Provisions of the ABT Program?
    The following section describes the ABT provisions being adopted 
with today's action. Areas in which we have made changes to the 
proposed ABT program are highlighted. A complete summary of comments 
received on the proposed ABT program and our response to those comments 
are contained in the Summary and Analysis of Comments document for this 
rule.
    The ABT program has three main components. Averaging means the 
exchange of emission credits between engine families within a given 
engine manufacturer's product line. Engine manufacturers divide their 
product line into ``engine families'' that are comprised of engines 
expected to have similar emission characteristics throughout their 
useful life. Averaging allows a manufacturer to certify one or more 
engine families at levels above the applicable emission standard, but 
below a set upper limit. However, the increased emissions must be 
offset by one or more engine families within that manufacturer's 
product line that are certified below the same emission standard, such 
that the average emissions from all the manufacturer's engine families, 
weighted by engine power, regulatory useful life, and production 
volume, are at or below the level of the emission standard. (The 
inclusion of engine power, useful life, and production volume in the 
averaging calculations is designed to reflect differences in the in-use 
emissions from the engines.) Averaging results are calculated for each 
specific model year. The mechanism by which this is accomplished is 
certification of the engine family to a ``family emission limit'' (FEL) 
set by the manufacturer, which may be above or below the standard. An 
FEL that is established above the standard may not exceed an upper 
limit specified in the ABT regulations. Once an engine family is 
certified to an FEL, that FEL becomes the enforceable emissions limit 
for all the engines in that family for purposes of compliance testing. 
Averaging is allowed only between engine families in the same averaging 
set, as defined in the regulations.
    Banking means the retention of emission credits by the engine 
manufacturer for use in future model year averaging or trading. Trading 
means the exchange of emission credits between nonroad diesel engine 
manufacturers which can then be used for averaging purposes, banked for 
future use, or traded to another engine manufacturer.
    The existing ABT program for nonroad diesel engines covers 
NMHC+NOX emissions as well as PM emissions. With today's 
action and as proposed, we are making the ABT program available for the 
Tier 4 NOX standards (and NMHC+NOX standards, 
where applicable) and the Tier 4 PM standards. As proposed, ABT will 
not be available for the Tier 4 NMHC standards for engines above 75 
horsepower.
    Engine manufacturers commented that ABT will most likely be 
necessary for the Tier 4 CO standards, given the reductions in PM and 
NOX emissions. In the Tier 4 proposal, we proposed minor 
changes in CO standards for some engines solely for the purpose of 
helping to consolidate power categories and improving administrative 
efficiency. However, as noted earlier in section II.A.6, we have 
withdrawn this aspect of the proposal. We do note, however, that we are 
applying new certification tests to all pollutants covered by the rule, 
the result being that Tier 4 engines will have to certify to CO 
standards measured by the transient test (including a cold start 
component), and the NTE. However, as shown in RIA chapter 4.1.1.2 (see 
e.g., note F), we believe that application of Tier 4 technologies will 
lead to a reduction in CO emissions over the Tier 3 baseline. We thus 
believe the CO standards will be readily achievable under the transient 
test and NTE. Moreover, we believe that there will not be any 
associated costs: The CO standards can be met without any further 
technological improvements (i.e., improvements other than those already 
necessary to meet the Tier 4 standards) and these tests will already be 
used for certification. Since CO standards measured by the new 
certification tests are achievable without cost, there is no basis for 
allowing ABT because no additional lead time is needed.
    As noted earlier, the existing ABT program for nonroad diesel 
engines includes FEL caps--limits on how high the emissions from 
credit-using engine families can be. No engine family may be certified 
above these FEL caps. These limits provide manufacturers with 
compliance flexibility while protecting against the introduction of 
unnecessarily high-emitting engines. In the past, we have generally set 
the FEL caps at the emission levels allowed by the previous standard, 
unless there was some specific reason to do otherwise. With today's 
action, we are taking a different approach because the level of the 
standards being adopted for most engines are significantly lower than 
the current level of the standards. The transfer to new technology is 
feasible and appropriate. Thus, as proposed, to ensure that the ABT 
provisions are not used to continue unnecessarily to produce old-
technology high-emitting engines under the new program, the FEL caps 
are not, in general, set at the previous standards. Exceptions have 
been made for the NMHC+NOX standard for engines between 25 
and 50 horsepower effective in model year 2013 and the NOX 
standards applicable to engines above 750 horsepower in 2011, where we 
are using the estimated NOX-only equivalent for the 
previously applicable NMHC+NOX standard for the FEL cap 
since the gap between the previous and newly adopted standards is 
approximately 40 percent (rather than 90 percent for engines between 75 
and 750 horsepower), and because the technology basis for these 
standards can be a form of engine-out control, like the previous tier 
standards. This approach of setting FEL caps at lower levels than the 
previously applicable standards is consistent with the level of the FEL 
limits set in the 2007 on-highway heavy-duty diesel engine program.
    STAPPA/ALAPCO supported the proposed FEL caps. The Engine 
Manufacturers Association (EMA) commented that EPA should eliminate the 
FEL caps altogether. They believe FEL caps are unnecessary because the 
zero-sum requirement of ABT will ensure that there are no adverse 
emission impacts. Short of eliminating the FEL caps, they commented 
that EPA should set FEL caps at the level of the previous standards, 
not the more stringent levels proposed. With today's action, EPA is 
adopting the FEL caps as proposed, with some exceptions for engines 
above 750 horsepower (where we are adopting different standards than 
originally proposed) and for phase-in engines between 75 and 750 
horsepower (where we have adopted an option for manufacturers to 
certify to alternative NOX standards during the phase-in 
period). We continue to believe that it is important to ensure that 
technology turns over in a timely manner and that manufacturers do not 
continue producing large numbers of high-emitting, old technology 
engines once the Tier 4 standards become fully effective. (As noted 
below, however, we are adopting provisions that allow manufacturers to 
produce a limited number of 75 to 750 horsepower engines for a limited 
period that are certified with FELs as high as the previous tier of 
standards.) For the Tier 4 standards, where the standards are being 
reduced by an order of magnitude, we believe this goal to be 
particularly important, and in keeping with the technology-

[[Page 38998]]

forcing provisions of section 213(a). It simply would not be 
appropriate to have long-term FEL caps that allowed engines to 
indefinitely have emissions as high as ten times the level of the 
standard.
    For engines between 75 and 750 horsepower certified using the 
phase-in/phase-out approach, there will be two separate sets of engines 
with different FEL caps. For engines certified to the existing (Tier 3) 
NMHC+NOX standards during the NOX phase-in 
(referred to generally as ``phase-out'' engines), the FEL cap for these 
pollutants will (almost necessarily) be the existing FEL caps adopted 
in the October 1998 Tier 3 rule. For engines certified to the newly 
adopted Tier 4 NOX standard during the phase-in (referred to 
generally as ``phase-in'' engines), we have revised the proposed FEL 
cap to be 0.60 g/bhp-hr, consistent with the proposed long-term Tier 4 
NOX FEL cap. As described in section II.A.2.c above, we have 
used the creation of alternative NOX standards for engines 
between 75 and 750 horsepower to restate the phase-in/phase-out concept 
as a path truly focused on achieving high-efficiency NOX 
aftertreatment during the phase-in years. Setting the NOX 
FEL cap at 0.60 g/bhp-hr for phase-in engines will ensure this happens 
if a manufacturer chooses to certify to the phase-in provisions. In 
contrast, the higher FEL caps which we proposed (see 68 FR 28467-28468) 
would not have achieved this objective.
    Beginning in model year 2014 when the Tier 4 NOX 
standards for engines between 75 and 750 horsepower take full effect, 
we are adopting a NOX FEL cap of 0.60 g/bhp-hr for all 
engines. We reiterate that given the fact that the Tier 4 
NOX standard is approximately a 90 percent reduction from 
the existing standards for engines between 75 and 750 horsepower, we do 
not believe the previous standard is appropriate as the FEL cap for 
engines having to comply with the Tier 4 NOX standard of 
0.30 g/bhp-hr. We believe that the NOX FEL caps will ensure 
that manufacturers adopt NOX aftertreatment technology 
across all of their engine designs.
    For the interim PM standards for engines between 25 and 75 
horsepower effective in model year 2008 and for the Tier 4 PM standards 
for engines below 25 horsepower, we are adopting the previously 
applicable Tier 2 PM standards for the FEL caps (which do vary within 
the 25 to 75 horsepower category) because the gap between the previous 
standards and the newly adopted standards is approximately 50 percent 
(rather than in excess of 90 percent for engines between 75 and 750 
horsepower), and the technology basis for the 2008 PM standards can be 
a form of engine-out control, like the previous tier standard. For the 
Tier 4 PM standard effective in model year 2013 for engines between 25 
and 75 horsepower, we are adopting a PM FEL cap of 0.04 g/bhp-hr, and 
for the Tier 4 PM standard effective in model years 2011 and 2012 for 
engines between 75 and 750 horsepower, we are adopting a PM FEL cap of 
0.03 g/bhp-hr. As with the Tier 4 NOX standards for these 
engines, given the fact that these Tier 4 aftertreatment-based PM 
standards for engines between 25 and 750 horsepower are over 90 per 
cent more stringent than the previous standards, we do not believe the 
previous standards are appropriate as FEL caps once the Tier 4 
standards take effect. We believe that the newly adopted PM FEL caps 
will ensure that manufacturers adopt PM aftertreatment technology 
across all of their engine designs (except for a limited number of 
engines), yet will still provide substantial flexibility in meeting the 
standards.
    The final Tier 4 standards for engines above 750 horsepower have 
been revised from the proposal. We similarly revised a number of the 
proposed ABT provisions for engines above 750 horsepower. Beginning in 
2011, all engines above 750 horsepower will be required to meet a 
NOX standard of 2.6 g/bhp-hr, except for those above 1200 
horsepower used in generator sets which will be required to meet a 
NOX standard of 0.50 g/bhp-hr. The NOX FEL cap 
for the 2011 standards will be 4.6 g/bhp-hr, which is an estimate of 
the NOX emissions level that is expected under the combined 
NMHC+NOX standards that apply with the previously applicable 
tier for engines above 750 horsepower. Beginning in 2011, all engines 
above 750 horsepower will have to meet a PM standard of 0.075 g/bhp-hr. 
The PM FEL cap for the 2011 PM standard will be the previously-
applicable Tier 2 standard of 0.15 g/bhp-hr. As noted above, because 
the 2011 NOX and PM standards are approximately 50 percent 
lower than the previous standard (rather than in excess of 90 percent 
for engines between 75 and 750 horsepower), and for most engines are 
based on performance of the same type of technology (engine-out), we 
are adopting the previously applicable Tier 2 standards for the FEL 
caps.
    Beginning in model year 2015, the 0.50 g/bhp-hr NOX 
standard will apply to all engines above 750 horsepower used in 
generator sets. Beginning in model year 2015, the PM standard drops to 
0.02 g/bhp-hr for engines greater than 750 horsepower used in generator 
sets and 0.03 g/bhp-hr for engines greater than 750 horsepower used in 
other machines. Consistent with the Tier 4 FEL caps for lower 
horsepower categories where the new standards are significantly lower 
than the previously applicable standards and reflect performance of 
aftertreatment technology, we are adopting a NOX FEL cap of 
0.80 g/bhp-hr for engines used in generator sets and PM FEL caps of 
0.04 g/bhp-hr for engines used in generator sets and 0.05 g/bhp-hr for 
engines used in other machines (i.e., mobile machines). We believe that 
the FEL caps for engines above 750 horsepower will ensure that 
manufacturers adopt PM aftertreament technology across all of their 
engine designs and NOX aftertreatment for generator sets 
once the 2015 standards are adopted, while allowing for some meaningful 
use of averaging beginning in 2015.
    Table III.A-1 contains the FEL caps and the effective model year 
for the FEL caps (along with the associated standards adopted for Tier 
4). It should be noted that for Tier 4, where we are adopting a new 
transient test for most engines, as well as retaining the current 
steady-state test, the FEL established by the engine manufacturer will 
be used as the enforceable limit for the purpose of compliance testing 
under both test cycles. In addition, under the NTE requirements, the 
FEL times the appropriate multiplier will be used as the enforceable 
limit for the purpose of such compliance testing. This is consistent 
with how FELs are used for compliance purposes in the 2007 on-highway 
heavy-duty diesel engine program.

[[Page 38999]]



                 Table III.A-1.--FEL Caps for the Tier 4 Standards in the ABT Program (g/bhp-hr)
----------------------------------------------------------------------------------------------------------------
                                                               NOX                                PM      PM FEL
          Power category             Effective model year    standard        NOX FEL cap       standard    cap
----------------------------------------------------------------------------------------------------------------
hp <25 (kW <19)...................  2008+................     \a\ 5.6   7.8 \a\ for <11hp...   \c\ 0.30     0.60
                                                                        7.1 \a\ for >11hp...
25 <= hp < 50 (19 <= kW <37)......  2008-2012............     \a\ 5.6   7.1 \a\.............       0.22     0.45
25 <= hp < 50 (19 <= kW <37)......  2013+................      \b\3.5   5.6 \b\.............       0.02   f 0.04
50 <= hp < 75 (37 <= kW <56)......  2008-2012 \d\........     \a\ 3.5   5.6 \a\.............       0.22     0.30
50 <= hp < 75 (37 <= kW <56)......  2013+ \e\............     \a\ 3.5   5.6 \a\.............       0.02      \f\
                                                                                                            0.04
75 <= hp < 175 (56 <= kW <130)....  2012+................         0.30  0.60 f g h..........       0.01      \f\
                                                                                                            0.03
175 <= hp <= 750 (130 <= kW <=      2011+................         0.30  0.60 f g h..........       0.01      \f\
 560).                                                                                                      0.03
hp > 750 (kW >560)................  2011-2014............         2.6   4.6.................      0.075     0.15
                                                              \i\ 0.50  4.6
Generator Sets hp > 750 (kW >560).  2015+................         0.50  0.80 \f\............       0.02      \f\
                                                                                                            0.04
Other Machines hp > 750 (kW >560).  2015+................     \j\ 2.6   4.6 \j\.............       0.03      \f\
                                                                                                           0.05
----------------------------------------------------------------------------------------------------------------
Notes:
\a\ These are the previous tier NMHC+NOX standards and FEL caps. These levels are not being revised with today's
  rule and are printed here solely for readers' convenience.
\b\ These are a combined NMHC+NOX standard and FEL cap.
\c\ A manufacturer may delay implementation until 2010 and then comply with a PM standard of 0.45 g/bhp-hr for
  air-cooled, hand-startable, direct injection engines under 11 horsepower.
\d\ These FEL caps do not apply if the manufacturer opts out of the 2008 standards. In such cases, the existing
  Tier 3 standards and FEL caps continue to apply.
\e\ The FEL caps apply in model year 2012 if the manufacturer opts out of the 2008 standards.
\f\ As described in this section, a small number of engines are allowed to exceed these FEL caps.
\g\ For engines certified as phase-out engines, the NMHC+NOX FEL caps for the Tier 3 standards apply.
\h\ For engines certified to the alternative NOX standards during the phase-in, the NOX FEL caps shown in tables
  III.A-3 and III.A-4 apply.
\i\ The 0.50 g/bhp-hr NOX standard applies only to engines above 1200 horsepower used in generator sets.
\j\ The 2011 NOX standard and FEL cap continue to apply unless and until revised by EPA in a future action.

    As noted above, we are allowing a limited number of engines to have 
a higher FEL than the caps noted in Table III.A-1 in certain instances. 
The FEL cap for such engines would be set based on the level of the 
standards that applied in the year prior to the new standards and will 
allow manufacturers to produce a limited number of engines certified to 
these earlier standards in the Tier 4 timeframe. The allowance to 
certify up to these higher FEL caps will apply to Tier 4 engines 
between 25 and 750 horsepower beginning as early as the 2011 model 
year, and will apply to engines above 750 horsepower starting with the 
2015 model year. The provisions are intended to provide some limited 
flexibility for engine manufacturers as they make the transition to the 
aftertreatment-based Tier 4 standards while ensuring that the vast 
majority of engines are converted to the advanced low-emission 
technologies expected under the Tier 4 program.
    Under the proposal, manufacturers would have been allowed to 
certify at levels up to these FEL caps for ten percent of its engines 
in each of the first four years after the Tier 4 standards took effect 
and then five percent for subsequent years. The California Air 
Resources Board supported the proposed allowance. The Engine 
Manufacturers Association commented that the percentages of engines 
allowed to the higher FEL caps may not be sufficient, noting that it is 
too early to tell if the proposed amounts provided enough flexibility.
    In an effort to provide flexibility to engine manufacturers while 
preserving the effective number of engines allowed to certify at levels 
up to the higher FEL caps, we are revising the proposed provisions with 
today's action. The revised provisions are intended to allow 
manufacturers to produce the same number of engines certified to the 
higher FEL caps as would have been allowed under the proposal, but 
provide added flexibility in how they distribute the allowances over 
the first four years of the transition to the new standards. This 
additional lead time appears appropriate, given the potential that a 
limited set of nonroad engines may face especially challenging 
compliance difficulties. Under the provisions adopted today and subject 
to the limitations explained below, a manufacturer would be allowed to 
certify up to 40 percent of its engines above the FEL caps shown in 
Table III.A-1 over the first four years the aftertreatment-based Tier 4 
standards take effect (calculated as a cumulative total of the percent 
of engines exceeding these FEL caps in each year over the four years), 
with a maximum of 20 percent allowed in any given year (provided the 
FELs for these engines do not exceed levels specified below). During 
this four year period, manufacturers would not be required to perform 
transient testing or NTE testing on these engines because we expect 
these engines would be carried over directly from the previous tier 
without any modification. (NTE testing would apply to engines above 750 
horsepower because the previously applicable set of standards required 
NTE testing.) Similarly, for engines between 75 and 750 horsepower, 
manufacturers would not be required to have closed crankcase controls 
on these engines because we also expect that these engines would be 
carried over directly from the previous tier without any modification. 
(Engines between 25 and 75 horsepower, and engines above 750 
horsepower, would be required to have closed crankcase controls because 
the previously applicable set of standards require closed crankcase 
controls.)
    For the purpose of calculating the number of credits such engines 
would use, the manufacturer would include an adjustment to the FEL to 
be used in the credit calculation equation. The adjustment would be 
included by multiplying the steady-state FEL by a Temporary Compliance 
Adjustment Factor (TCAF) of 1.5 for PM and 1.1 for NOX. (The 
NOX TCAF would not apply to engines that are not subject to 
the transient testing requirements for NOX as discussed in 
section III.F.) We are adopting TCAFs in part to assure in-use control 
of emission from these engines in the absence of transient and NTE 
testing, and also to assure that any credits these engines use reflect 
the

[[Page 39000]]

level of reductions expected in use. The level of the TCAFs are based 
on data from pre-control, Tier 1, and Tier 2 engines which show that 
the emissions from such engines tested over transient test cycles which 
are more representative of real in-use operation are higher than 
emissions from those engines tested over the steady-state certification 
test cycle. This is a sales weighted version of the Transient 
Adjustment Factor used in the NONROAD model. For compliance purposes, a 
manufacturer would be held accountable to the unadjusted steady-state 
FEL established for the engine family.
    As proposed, after the fourth year the Tier 4 standards apply, the 
allowance to certify engines using the higher FEL caps shown in Table 
III.A-2 will still be available but for no more than five percent of 
the engines a manufacturer produces in each power category in a given 
year. When the 5 percent allowance takes effect, these engines will be 
considered Tier 4 engines and all other requirements for Tier 4 engines 
will also apply, including the Tier 4 NMHC standard, transient testing, 
NTE testing, and closed crankcase controls. TCAFs thus do not apply 
when calculating the number of credits such engines would use.
    In the two power categories where we are adopting phase-in 
provisions (i.e., 75 to 175 horsepower engines and 175 to 750 
horsepower engines), the allowance to use a higher FEL cap will only 
apply to PM from phase-out engines during the phase-in years. We 
originally proposed that the allowance to use a higher FEL cap would 
apply to PM from either phase-in or phase-out engines during the phase-
in years. On reflection, this is inconsistent with our policy that 
phase-in engines truly have low emissions reflecting use of 
aftertreatment (see also the discussion above where we explain that, 
for the same reason, we are adopting a NOX FEL cap of 0.60 
g/bhp-hr for phase-in engines). We consequently are revising the 
proposed allowance so that it is available for PM emissions only from 
phase-out engines. As proposed, the allowance to use a higher FEL cap 
for NOX will apply starting in 2014 when the phase-in period 
is complete.
    For the power category between 25 and 75 horsepower, this allowance 
to certify engines at levels up to the higher FEL caps will apply 
beginning with the Tier 4 standards taking effect in the 2013 model 
year and will apply to PM only. For manufacturers choosing to opt out 
of the 2008 model year Tier 4 standards for engines between 50 and 75 
horsepower and instead comply with the Tier 4 standards beginning in 
2012, the 40% allowance would apply to model years 2012 through 2015, 
and the 5% allowance would apply to model year 2016 and thereafter. The 
allowance to use the higher FEL caps is not applicable for the 2008 
standards or the 2013 NMHC+NOX standards for these engines 
because the FEL caps for those standards already are set at the level 
of the standard which previously applied.
    For engines above 750 horsepower, the allowance to certify a 
limited number of engines at levels up to the higher FEL caps would 
apply beginning in model year 2015. (As noted, this is because the FEL 
caps being adopted for the 2011 standards for engines above 750 
horsepower are the previous tier PM standard and the NOX-
only equivalent of the previous tier standard.) For NOX, the 
allowance to certify a limited number of engines above the FEL cap 
beginning in model year 2015 will apply only to engines used in 
generator sets. Engines used in other machines are still subject to the 
model year 2011 NOX standard and FEL caps. For PM, the 
allowance to certify a limited number of engines above the FEL caps 
beginning in model year 2015 will apply to all engines above 750 
horsepower.
    Table III.A-2 presents the model years, percent of engines, and 
higher FEL caps that will apply under these allowances. As noted above, 
engines certified under these higher FEL caps during the first four 
years would not be required to perform transient testing or NTE testing 
and engines between 75 and 750 horsepower would not be required to have 
closed crankcase controls on these engines. However, as also noted 
earlier, beginning in the fifth year, when the 5 percent allowance 
takes effect, these engines will be considered Tier 4 engines and all 
other requirements for Tier 4 engines will also apply, including the 
Tier 4 NMHC standard, transient testing, NTE testing, and closed 
crankcase controls.

             Table III.A-2.--Allowance for Limited Use of an FEL Cap Higher than the Tier 4 FEL Caps
----------------------------------------------------------------------------------------------------------------
                                                           Engines
                                                          allowed to   NOX FEL cap (g/bhp-   PM FEL cap (g/bhp-
         Power category                Model years       have higher           hr)                   hr)
                                                           FELs (%)
----------------------------------------------------------------------------------------------------------------
25 <= hp < 75...................  2013-2016 \a\........       \b\ 40  Not applicable......  0.22
(19 <= kW < 56).................  2017+ \a\............            5
75 <= hp < 175..................  2012-2015............       \b\ 40  3.3 \c\ for hp <100.  0.30 \d\ for hp <100
(56 <= kW <130).................  2016+................            5  2.8 \c\ for hp >=100  0.22 \d\ for hp
                                                                                             >=100
175 <= hp <= 750................  2011-2014............       \b\ 40  2.8 \c\.............  0.15 \d\
(130 <= kW <= 560)..............  2015+................            5
>750 hp.........................  2015-2018............   \b\ \c\ 40  2.6.................  0.075
(>560 kW).......................  2019+................        \e\ 5  ....................
----------------------------------------------------------------------------------------------------------------
\a\ For manufacturers choosing to opt out of the 2008 model year Tier 4 standards for engines between 50 and 75
  horsepower and instead comply with the Tier 4 standards beginning in 2012, the 40% allowance would apply to
  model years 2012 through 2015, and the 5% allowance would apply to model year 2016 and thereafter.
\b\ Compliance with the 40% limit is determined by adding the percent of engines that have FELs above the FEL
  caps shown in Table III.A.-1 in each of the four years. A manufacturer may not have more than 20% of its
  engines exceed the FEL caps shown in Table III.A-1 in any model year in any power category.
\c\ The allowance to certify to these higher NOX FEL caps is not applicable during the phase-in period.
\d\ These higher PM FEL caps are applicable to phase-out engines only during the phase-in period.
\e\ The limits of 40% or 5% allowed to exceed the NOX FEL cap would apply to engines used in generator sets
  only. (Engines >750 hp used in other machines are allowed to have an NOX FEL as high as 4.6 g/bhp-hr.) The
  limits of 40% or 5% allowed to exceed the PM FEL cap would apply to all engines above 750 hp.

    Under the Tier 4 program, there will be two different groups of 75-
750 horsepower engines during the NOX phase-in period. In 
one group (``phase-out engines''), engines will certify to the 
applicable Tier 3 NMHC+NOX standard

[[Page 39001]]

and will be subject to the NMHC+NOX ABT restrictions and 
allowances previously established for Tier 3. In the other group 
(``phase-in engines''), engines will certify to the 0.30 g/bhp-hr 
NOX standard, and will be subject to the restrictions and 
allowances in this program. Although engines in each group are 
certified to different standards, we are (as proposed) allowing 
manufacturers to transfer credits across these two groups of engines 
with the following adjustment to the amount of credits generated. 
Manufacturers will be able to use credits generated during the phase-
out of engines subject to the Tier 3 NMHC+NOX standard to 
average with engines subject to the 0.30 g/bhp-hr NOX 
standard, but these credits will be subject to a 20 percent discount, 
the adjustment reflecting the NMHC contribution. Thus, each gram of 
NMHC+NOX credits from the phase-out engines will be worth 
0.8 grams of NOX credits in the new ABT program. The ability 
to average credits between the two groups of engines will give 
manufacturers a greater opportunity to gain experience with the low-
NOX technologies before they are required to meet the final 
Tier 4 standards across their full production. The 20 percent discount 
will also apply, for the same reason, to all NMHC+NOX 
credits used for averaging purposes with the NOX standards 
for engines greater than 75 horsepower.
    The California Air Resources Board supported the proposed discount 
of 20 percent on NMHC+NOX credits used for NOX 
compliance. The Engine Manufacturer's Association commented that we 
should eliminate the 20 percent ``discount'' on NMHC+NOX 
credits used for NOX compliance.
    We disagree with the Engine Manufacturer's Association comments. As 
noted in the proposal, we have two main reasons for adopting this 
adjustment. First, the discounting addresses the fact that NMHC 
reductions can provide substantial NMHC+NOX credits, which 
are then treated as though they were NOX credits. For 
example, a 2010 model year 175 horsepower engine emitting at 2.7 g/bhp-
hr NOX and 0.3 g/bhp-hr NMHC meets the 3.0 g/bhp-hr 
NMHC+NOX standard in that year, but gains no credits. In 
2011, that engine, equipped with a PM trap to meet the new PM standard, 
will have very low NMHC emissions because of the trap, an emission 
reduction already accounted for in our assessment of the air quality 
benefit of this program. As a result, without substantially redesigning 
the engine to reduce NOX or NMHC, the manufacturer could 
garner nearly 0.3 g/bhp-hr of NMHC+NOX credit for each of 
these engines produced. Allowing these NMHC-derived credits to be used 
undiscounted to offset NOX emissions on the phase-in engines 
in 2011 (for which each 0.1 g/bhp-hr of margin can make a huge 
difference in facilitating the design of engines to meet the 0.30 g/
bhp-hr NOX standard) would be inappropriate. Therefore, 
while we are reducing the value of credits earned from Tier 2/Tier 3 
engines, the adjustment accounts for the NMHC fraction of the credits 
which we do not believe should be used to demonstrate compliance with 
the NOX-only Tier 4 standards (such credits would be 
``windfalls'' because they would necessarily occur by virtue of the 
technology needed to meet the PM standard) (68 FR 28469, May 23, 2003). 
Second, the discounting will work toward providing a small net 
environmental benefit from the ABT program, such that the more 
manufacturers use banked and averaged credits, the greater the 
potential emission reductions overall. Most basically, it is inherently 
reasonable, in using NOX+NMHC reductions to show credit with 
a NOX-only standard, to use only that portion which 
represents NOX reductions. (Indeed, for this reason, terming 
the 20 per cent a ``discount factor'' is a misnomer; it apportions the 
NMHC fraction of the reduction.) As noted, this is further supported by 
the fact that the NMHC reductions for phase-out engines are not extra 
reductions above and beyond what would otherwise occur, and therefore 
don't warrant eligibility as credits.
    We are adopting one additional restriction on the use of credits 
under the ABT program. For the Tier 4 standards, we proposed that 
manufacturers could only use credits generated from other Tier 4 
engines or from engines certified to the previously applicable tier of 
standards (i.e., Tier 2 for engines below 50 horsepower, Tier 3 for 
engines between 50 and 750 horsepower, and Tier 2 engines above 750 
horsepower). This proposed restriction was similar to a restriction we 
currently have that prohibits the use of Tier 1 credits to demonstrate 
Tier 3 compliance. STAPPA/ALAPCO and the Natural Resources Defense 
Council supported the proposed approach that limited the use of 
previous-tier credits for Tier 4. The Engine Manufacturer's Association 
commented that by limiting the use of previous-tier credits, we are 
engaged in an unconstitutional taking because EPA had guaranteed in the 
previous Tier 2/Tier 3 rulemaking that such credits would not expire. 
We disagree that adopting a restriction on the use of the previous tier 
ABT credits is an unconstitutional taking. EPA did not, and could not, 
decide in the Tier 2/3 rulemaking that Tier 2/3 credits could be used 
to show compliance with some future standards that had not yet even 
been adopted. Thus, EPA in this rulemaking is not taking away something 
previously given. We are not revisiting the Tier 2/3 standards but 
establishing a new set of engine standards. In doing so, we necessarily 
must evaluate the provisions of previous rules and their potential 
impact on the future standards being considered. We are reasonably 
concerned that credits from engines certified to relatively high 
standards could be used to significantly delay the implementation of 
the final Tier 4 program and its benefits, resulting in a situation 
where the standards would no longer reflect the greatest degree of 
emission reduction available as required under section 213(a)(3) of the 
Clean Air Act, or would no longer be appropriate under section 
213(a)(4) of the Clean Air Act. Therefore, with today's action, we are 
adopting the proposed provisions regarding the use of credits from 
previous tier engines, with one minor revision.
    Under today's action, manufacturers may only use credits generated 
from other Tier 4 engines or from engines certified to the previously 
applicable tier of standards--except for engines between 50 and 75 
horsepower. Because we are adopting Tier 4 standards that take effect 
as early as 2008 for those engines, the same year the previously-
adopted Tier 3 standards are scheduled to take effect (see section 
II.A.1.a above), there is no possibility to earn credits against the 
Tier 3 standards for manufacturers that certify with the pull-ahead 
standards in 2008 for engines between 50 and 75 horsepower. Therefore, 
we will allow manufacturers to use credits from engines in the Tier 2 
power category that includes 50 to 75 horsepower (i.e., the 50 to 100 
horsepower category) that are certified to the Tier 2 standards if they 
choose to demonstrate compliance with the pull-ahead Tier 4 standards 
in 2008 for engines between 50 and 75 horsepower. Manufacturers that do 
not choose to comply with the 2008 Tier 4 standards for engines between 
50 and 75 horsepower and instead comply with the 2012 Tier 4 standards 
for such engines will not be allowed to use Tier 2 credits in Tier 4, 
but instead will be allowed to use Tier 3 credits as allowed under the 
standard provisions regarding

[[Page 39002]]

use of previous-tier credits only for Tier 4 compliance demonstration.
    With regard to other restrictions on the use of ABT credits, we are 
adopting one restriction on the use of credits across the 750 
horsepower threshold. In previous rulemakings, EPA has defined 
``averaging sets'' within which manufacturers may use credits under the 
ABT program. Credits may not be used outside of the averaging set in 
which they were generated. As described in section II.A.4 of today's 
action, we have revised the Tier 4 standards for engines above 750 
horsepower. Because the standards for Tier 4 engines greater than 750 
horsepower will not be based on the use of PM aftertreatment technology 
in 2011 or NOX aftertreatment technology for all mobile 
machinery engines in 2015, we are adopting provisions that prevent 
manufacturers from using credits from model year 2011 and later model 
year engines greater than 750 horsepower to demonstrate compliance with 
engines below 750 horsepower. Without such a limit, we are concerned 
that manufacturers could use credits from such engines to significantly 
delay compliance with the numerically lower standards for engines below 
750 horsepower. In addition, without such a limit, we are concerned 
that manufacturers could use credits from engines below 750 horsepower 
to delay implementation of aftertreatment technology for engines above 
750 horsepower.
    One engine manufacturer commented that EPA should include a barrier 
to trading credits across the 75 horsepower level. They cited concerns 
over the ability of manufacturers that produce a large range of engine 
sizes to use credits from high horsepower engines to offset emissions 
from their small horsepower engines. We are not adopting any averaging 
set restrictions for Tier 4 engines below 750 horsepower in today's 
action. In the current nonroad diesel ABT program, there are averaging 
set restrictions. The current averaging sets consist of engines less 
than 25 horsepower and engines greater than or equal to 25 horsepower. 
We adopted this restriction because of concerns over the ability of 
manufacturers to generate significant credits from the existing engines 
and use the credits to delay compliance with the newly adopted 
standards (63 FR 56977, October 23, 1998). We believe the Tier 4 
standards for engines below 750 horsepower are sufficiently rigorous to 
limit the ability of manufacturers to generate significant credits from 
their engines. In addition, we believe the FEL caps being adopted today 
provide sufficient assurance that low-emissions technologies will be 
introduced in a timely manner. Therefore, we believe averaging can be 
allowed between all engine power categories below 750 horsepower 
without restriction effective with the Tier 4 standards. (It should be 
noted that the averaging set restriction placed on credits generated 
from Tier 2 and Tier 3 engines will continue to apply if they are used 
to demonstrate compliance for Tier 4 engines.)
    EPA also proposed to allow engine manufacturers to demonstrate 
compliance with the NOX phase-in requirements by certifying 
evenly split engine families at, or below, specified NOX 
FELs (68 FR 28470, May 23, 2003). As described in section II.A.2.c 
above, EPA is revising the evenly split family provisions for the Tier 
4 program and is now codifying them as alternative standards. (As 
described in section III.L, we also are adopting the proposed 
provisions allowing manufacturers to certify ``split'' engine families 
during the phase-in years.) Because the evenly split family provision 
has evolved into a set of alternative NOX standards, we 
believe it is appropriate to allow manufacturers to use ABT for them. 
Table III.A-3 presents the FEL caps that will apply to engines 
certified to the alternative NOX standards during the phase-
in years. The FEL caps for these alternative standards have been set at 
levels reasonably close to the alternative standards and are intended 
to ensure sizeable emission reductions from the previously-applicable 
Tier 3 standards. (For engines between 75 and 175 horsepower certified 
under the reduced phase-in option, the FEL cap is the NOX-
only equivalent of the previously applicable NMHC+NOX 
standards because the alternative standard is sufficiently close to the 
Tier 3 standard.)

  Table III.A-3.--NOX FEL Caps for Engines Certified To the Alternative
                              NOX Standards
------------------------------------------------------------------------
                                Alternative
       Power category          NOX standard     NOX FEL cap (g/bhp-hr)
                                (g/bhp-hr)
------------------------------------------------------------------------
50/50/100 phase-in option                1.7  2.2.
 for 75 <= hp < 175 (56 <=
 kW <130).
25/25/25/100 phase-in option             2.5  3.3 (for 75-100 hp).
 for 75 <= hp < 175 (56 <=                    2.8 (for 100-175 hp)
 kW <130).
175 <= hp <= 750 (130 <= kW              1.5  2.0.
 <= 560).
------------------------------------------------------------------------

    Because we are allowing manufacturers to use ABT for demonstrating 
compliance with the alternative standards for engines between 75 and 
750 horsepower, we are allowing manufacturers to exceed the FEL caps 
noted in table III.A-3 and include them in the count of engines allowed 
to exceed the FEL caps (i.e., the 40 percent over the first four years 
the Tier 4 standards take effect as described earlier). Table III.A-4 
presents the NOX FEL caps that would apply to engines 
certified under the alternative standards (limited by the 40 percent 
cap over the first four years). The higher NOX FEL caps are 
set at the estimated NOX-only equivalent of the previous-
tier NMHC+NOX standards. For manufacturers certifying under 
the reduced phase-in ( 25 percent) option, because the FEL caps are the 
NOX-only equivalent of the Tier 3 NMHC+NOX 
standards, they may not exceed the FEL cap during the years the 
alternative standard applies.

   Table III.A-4.--Limited-Use NOX FEL Caps Under the Alternative NOX
                                Standards
------------------------------------------------------------------------
       Power category           Model years     NOX FEL cap (g/bhp-hr)
------------------------------------------------------------------------
50/50/100 phase-in option          2012-2013  3.3 for hp <100.
 for 75 <= hp < 175\a\.
(56 <= kW <130).............  ..............  2.8 for hp >=100.
175 <= hp <= 750............       2011-2013  2.8.

[[Page 39003]]

 
(130 <= kW <= 560)..........  ..............  ..........................
------------------------------------------------------------------------

    For reasons explained in section II.A.1.b.i above, we are also 
adopting unique phase-in requirements for NOX standards for 
engines between 75 and 175 horsepower in order to ensure appropriate 
lead time for these engines. Because of these unique phase-in 
provisions, as proposed, we are adopting slightly different provisions 
regarding 75 to 175 horsepower engines' use of previous-tier credits. 
Under today's action, manufacturers that choose to demonstrate 
compliance with these phase-in requirements (i.e., 50 percent in 2012 
and 2013 and 100 percent in 2014) or the 1.7 g/bhp-hr alternative 
NOX standard (which is based on the 50 percent phase-in 
option) will be allowed to use Tier 2 NMHC+NOX credits 
generated by engines between 50 and 750 horsepower (even though they 
are not generated by previous-tier engines), along with any other 
allowable credits, to demonstrate compliance with the Tier 4 
NOX standards for engines between 75 and 175 horsepower 
during model years 2012, 2013 and 2014 (the years of the phase-in) 
only. These Tier 2 credits will be subject to the power rating 
conversion already established in our ABT program, and to the 20% 
credit adjustment being adopted today for use of NMHC+NOX 
credits as NOX credits.
    The requirements for manufacturers that choose to demonstrate 
compliance with the optional reduced phase-in requirement for engines 
between 75 and 175 horsepower (i.e, the 25/25/25 percent phase-in 
option; see Table II.A.-2, note b) or the 2.5 g/bhp-hr alternative 
NOX standard (which is based on the 25 percent phase-in 
option) are different. Under the reduced phase-in requirement, use of 
credits will be allowed in accordance with the general ABT program 
provisions. In other words, manufacturers will not have the special 
allowance to use Tier 2 NMHC+NOX credits generated by 
engines between 50 and 750 horsepower noted above to demonstrate 
compliance with the Tier 4 standards. In addition, manufacturers 
choosing the reduced phase-in option will not be allowed to generate 
NOX credits from engines in this power category in 2012, 
2013, and most of 2014, except for use in averaging within this power 
category (i.e., no banking or trading, or averaging with engines in 
other power categories will be permitted). This restriction will apply 
throughout this period even if the reduced phase-in option is exercised 
during only a portion of this period. We believe that this restriction 
is important to avoid potential abuse of the added flexibility 
allowance, considering that larger engine categories will be required 
to demonstrate substantially greater compliance levels with the 0.30 g/
bhp-hr NOX standard several years earlier than engines built 
under the reduced phase-in option.
    As described in section II.A.3.a of today's action, and as 
proposed, we are adopting an optional PM standard for air-cooled, hand-
startable, direct injection engines under 11 horsepower effective in 
2010. In order to avoid potential abuse of this standard, engines 
certified under this requirement will not be allowed to generate any 
credits as part of the ABT program. Credit use by these engines will be 
allowed. The restriction on generating credits should not be a burden 
to manufacturers, as it will apply only to those air-cooled, hand-
startable, direct injection engines under 11 horsepower that are 
certified under the optional approach, and the production of credit-
generating engines would be contrary to the standard's purpose. No 
adverse comments were submitted to EPA on this issue.
    The current ABT program contains a restriction on trading credits 
generated from indirect injection engines greater than 25 horsepower. 
The restriction was originally adopted because of concerns over the 
ability of manufacturers to generate significant credits from existing 
technology engines (63 FR 56977, October 23, 1998). With today's 
action, there will be no restriction prohibiting manufacturers from 
trading credits generated on Tier 4 indirect fuel injection engines 
greater than 25 horsepower. Based on the certification levels of 
indirect injection engines, we do not believe there is the potential 
for manufacturers to generate significant credits from their currently 
certified engines against the Tier 4 standards. Therefore, as proposed, 
we are not adopting any restrictions on the trading of credits 
generated on Tier 4 indirect injection engines to other manufacturers. 
The restriction placed on the trading of credits generated from Tier 2 
and Tier 3 indirect injection engines will continue to apply in the 
Tier 4 timeframe. No adverse comments were submitted to EPA on this 
issue.
    As explained in the proposal, we are not applying a specific 
discount to Tier 3 PM credits used to demonstrate compliance with the 
Tier 4 standards (68 FR 28471, May 23, 2003). PM credits generated 
under the Tier 3 standards are based on testing performed over a 
steady-state test cycle. Under the Tier 4 standards, the test cycle is 
being supplemented with a transient test (see section III.F.1 below). 
Because in-use PM emissions from Tier 3 engines will vary depending on 
the type of application in which the engine is used (most applications 
having higher in-use PM emissions, some having lower in-use PM 
emissions), the relative ``value'' of the Tier 3 PM credits in the Tier 
4 timeframe will differ. Instead of requiring manufacturers to gather 
information to estimate the level of in-use PM emissions compared to 
the PM level of the steady-state test, we believe allowing 
manufacturers to bring Tier 3 PM credits directly into the Tier 4 time 
frame without any adjustment is appropriate because it discounts their 
value for use in the Tier 4 timeframe (since the initial baseline being 
reduced is higher than measured in the Tier 2 test procedure for most 
applications). No adverse comments were submitted to EPA on this issue.
3. Are We Expanding the Nonroad ABT Program To Include Credits From 
Retrofit of Nonroad Engines?
    In the proposal, we requested comment on expanding the scope of the 
standards by setting voluntary new engine emission standards applicable 
to the retrofit of nonroad diesel engines (68 FR 28471, May 23, 2003). 
As described in the proposal, retrofit nonroad engines would be able to 
generate PM and NOX credits which would be available for use 
by new nonroad engines in the certification ABT program. We received a 
significant number of comments on a retrofit ABT program. A number of 
commenters associated with the agricultural sector were concerned 
retrofits would be mandatory. Some commenters were opposed to a 
retrofit credit program that would allow use of the credits under the 
certification ABT program. However, a number of commenters supported 
the concept of a retrofit program, but noted a number of

[[Page 39004]]

concerns regarding the details of such a program, including making sure 
that any credits earned would be verifiable and enforceable. Some 
commenters suggested that EPA consider the establishment of a retrofit 
credit program through a separate rulemaking because there were many 
details of the program that needed to be explored more fully before 
adopting such a program. In response to the comments, we are not 
adopting a retrofit credit program with today's action. Although we 
provided a detailed explanation of a potential program at proposal, 
\62\ we believe it is important to more fully consider the details of a 
nonroad engine retrofit credit program and work with interested parties 
in determining whether a viable program can be developed. EPA intends 
to explore the possibility of a voluntary, opt-in nonroad retrofit 
credit program through a separate action later this year. Such a 
program would be based on the generation of credits beyond the scope of 
any existing retrofit program. The final rule contains no requirements 
for retrofitting existing engines or equipment.
---------------------------------------------------------------------------

    \62\ See memorandum referenced at 68 FR 28471 (May 23, 2003), 
footnote 299.
---------------------------------------------------------------------------

B. Transition Provisions for Equipment Manufacturers

1. Why Are We Adopting Transition Provisions for Equipment 
Manufacturers?
    As EPA developed the 1998 Tier 2/3 standards for nonroad diesel 
engines, we determined, as an aspect of determining an appropriate lead 
time for application of the requisite technology (pursuant to section 
213(b) of the Act), that provisions were needed to avoid unnecessary 
hardship and to create additional flexibility for equipment 
manufacturers. The specific concern is the amount of work required and 
the resulting time needed for equipment manufacturers to incorporate 
all of the necessary equipment redesigns into their applications in 
order to accommodate engines that meet the new emission standards. We 
therefore adopted a set of provisions for equipment manufacturers to 
provide them with reasonable lead time for the transition process to 
the newly adopted standards. The program consisted of four major 
elements: (1) A percent-of-production allowance, (2) a small-volume 
allowance, (3) availability of hardship relief, and (4) continuance of 
the allowance to use up existing inventories of engines (63 FR 56977-
56978, October 23, 1998 and 68 FR 28472-28476, May 23, 2003).
    Given the levels of the newly adopted Tier 4 standards, we believe 
that there will be engine design and other changes at least comparable 
in magnitude to those involved during the transition to Tier 2/3. 
Therefore, with a few exceptions described in more detail below, we are 
adopting transition provisions for Tier 4 that are similar to those 
adopted with the previous Tier 2/3 rulemaking. We also note that 
opportunities for greater flexibility arises from the structure of the 
Tier 4 rule. For example, Tier 4 consolidates the nine power categories 
in Tier 2/3 into five categories, providing opportunities for more 
flexibility by allowing more engine families within each power 
category, with consequent increased averaging possibilities. The 
NOX phase-in also provides increased flexibility 
opportunities, as do the longer Tier 4 lead times.
    We are adding new notification, reporting, and labeling 
requirements to the Tier 4 program. We believe these additional 
provisions are necessary for EPA to gain a better understanding of the 
extent to which these provisions will be used and to ensure compliance 
with the Tier 4 transition provisions. We are also adopting new 
provisions dealing specifically with foreign equipment manufacturers 
and the special concerns raised by the use of the transition provisions 
for equipment imported into the U.S. The following section describes 
the Tier 4 transition provisions available to equipment manufacturers. 
(Section III.C of this preamble describes all of the provisions that 
will be available specifically for small businesses.)
    As under the existing Tier 2/Tier 3 provisions, equipment 
manufacturers are not obligated to use any of these provisions, but all 
equipment manufacturers are eligible to do so. Also, as under the 
existing program, all entities under the control of a common entity, 
and that meet the regulatory definition of a nonroad vehicle or nonroad 
equipment manufacturer, must be considered together for the purpose of 
applying exemption allowances. This will not only provide certain 
benefits for the purpose of pooling exemptions, but will also preclude 
the abuse of the small-volume allowances that would exist if companies 
could treat each operating unit as a separate equipment manufacturer.
2. What Transition Provisions Are We Adopting for Equipment 
Manufacturers?
    The following section describes the transition provisions being 
adopted with today's action. Areas in which we have made changes to the 
proposed transition program are highlighted. A complete summary of 
comments received on the proposed transition program and our response 
to those comments are contained in the Summary and Analysis of Comments 
document for this rule.
    EPA believes that the lead time provided through the equipment 
maker transition flexibilities, as adopted in this rule, will be 
sufficient, as has proved the case in past tiers. These flexibilities 
provide equipment manufacturers with the selective ability to delay use 
of the Tier 4 engines in those applications where additional time is 
needed to successfully incorporate the redesigned engines into their 
equipment.
    Ingersoll-Rand, an equipment manufacturer, submitted a number of 
comments arguing that significant expansions of the proposed 
flexibility program are needed if equipment manufacturers are to 
produce compliant applications within the effective dates of the 
standards. One suggestion was for EPA to include provisions that 
provide a definitive period of lead time for incorporation of Tier 4 
engines into nonroad equipment. Ingersoll-Rand would have the rules 
specify a ``made available'' date before which each engine supplier 
must provide technical and performance specifications, complete 
drawings, and a final compliant engine to EPA and the open market. 
After the mandated ``made available'' date, equipment manufacturers 
should be provided a minimum 18 months of lead time to incorporate the 
new engines into nonroad equipment. One form of the suggestion also 
entailed a prohibition on design changes once the engine, 
specifications, drawings, etc. had been initially provided to EPA and 
to the open market. As an alternative, Ingersoll-Rand urged that the 
percent of production allowance flexibility be expanded to 150 percent 
for the power categories between 75 and 750 horsepower and 120 percent 
for the power category between 25 and 75 horsepower. Ingersoll-Rand 
believes these levels correspond proportionately to the increased 
challenges facing equipment manufacturers during Tier 4 as opposed to 
Tier 2 and Tier 3.
    As discussed in greater detail in the Summary and Analysis of 
Comments, as well as in later parts of this section of this preamble 
and elsewhere in the administrative record, we disagree with most of 
Ingersoll-Rand's suggestions. Our fundamental disagreement is with 
Ingersoll-Rand's premise that Tier 4 will create a situation where need 
for

[[Page 39005]]

expanded equipment maker lead time is the norm rather than the 
exception so that the rule must provide a drastic, across-the-board 
expansion of equipment manufacturer lead time. We believe that the lead 
time provided for equipment makers in this rule is adequate, and that 
the equipment maker flexibilities we are adopting provide a reasonable 
and targeted safety valve to deal with isolated problems. There is no 
across-the-board problem necessitating a drastic expansion of equipment 
manufacturer lead time, or a drastic expansion of equipment 
manufacturer flexibilities. We base these conclusions largely on three 
factors: (a) Our investigation and understanding of the engineering 
process by which engine makers and equipment manufacturers bring new 
products to market; (b) the specific engineering challenges which 
equipment manufacturers will address in complying with the Tier 4 rule; 
and (c) past practice of equipment manufacturers under previous rules 
providing transition flexibilities for nonroad equipment.
    Because it is in both parties' interest for new engines and new 
equipment applications to reach the market expeditiously, engine makers 
and equipment manufacturers usually adopt concurrent engineering 
programs whereby the new equipment design process occurs simultaneous 
to the new engine development process. We believe that this concurrent 
process should work well for Tier 4 because, in many important ways, 
the engineering challenges facing equipment manufacturers can be 
anticipated and dealt with early in the design process. We expect that 
relatively early in the design process, engine manufacturers will be 
able to define the size and characteristics of the emission control 
technologies (e.g., NOX adsorbers and CDPFs), based on the 
same systems that will be in production for on-highway engines. The 
equipment manufacturers will concurrently redesign their equipment to 
accommodate these new technologies, including designing, mounting and 
supporting the catalytic equipment similar to current exhaust muffler 
systems.
    Moreover, while we expect the redesign challenge for Tier 4 
equipment to be similar to that for Tier 2/3, we also expect the 
redesign to be better and more clearly defined well in advance of the 
Tier 4 introduction dates. This is because we do not expect the 
catalyst system size or shape to change significantly during the last 
24 months of the engine design and validation process.\63\
---------------------------------------------------------------------------

    \63\ ``Tier 4 Nonroad Diesel Equipment Flexibility Provisions,'' 
memorandum from Byron Bunker, et al., (EPA) to EPA Air Docket OAR-
2003-0012.
---------------------------------------------------------------------------

    We also have studied the extent to which equipment manufacturers 
have used their flexibilities under the Tier 2/3 program. Although at 
an early stage in the Tier 2/3 process, initial indications are that 
the flexibility program is being used by many equipment manufacturers, 
but in general, manufacturers do not appear to be using the full level 
of allowances.\64\ It appears that the flexibilities are being used as 
EPA intended, providing manufacturers with flexibility to deal with 
specific limited situations, rather than to deal with an across-the-
board problem.
---------------------------------------------------------------------------

    \64\ ``Tier 4 Nonroad Diesel Equipment Flexibility Provisions,'' 
memorandum from Byron Bunker, et al., (EPA) to EPA Air Docket OAR-
2003-0012.
---------------------------------------------------------------------------

    The emerging pattern is thus the one on which the flexibility 
program is predicated: there is not a need for across-the-board drastic 
expansion of equipment manufacturer lead time. Indeed, such an 
expansion would be inconsistent with the lead time-forcing nature of 
section 213 (b) of the Act. This is not to say that there is no need 
for equipment manufacturer flexibilities, or that the Tier 2/3 
flexibility format need not be adjusted to accommodate potential 
problems to be faced under the Tier 4 regime. Instances where 
additional lead time could be justified are where resource constraints 
prevent completion of certain applications, or where for business 
reasons it makes sense for equipment manufacturers to delay completion 
of small volume families in order to complete larger volume equipment 
applications. In addition, the Tier 2/3 experience illustrates that 
there can be instances where emission control optimization which 
necessitates equipment design changes occurs late in the design cycle, 
resulting in a need for additional equipment manufacturer lead time. 
The equipment manufacturer flexibilities adopted in today's rule 
accommodate these possibilities.
    We have specific objections to Ingersoll-Rand's preferred approach 
of a mandated made available date, followed by 18 months of additional 
lead time for equipment manufacturers. Superimposing a government 
mandate on the engine maker--equipment manufacturer business 
relationship insinuates EPA into the middle of contractual/market 
relationships (e.g., when is an objectively reasonable delivery date?), 
forcing EPA to prejudge myriad differing business relationships/
engineering situations. Moreover, selection of any single made 
available date is bound to be arbitrary in most situations. We also 
believe that the 18-month lead time following a made available date 
entails a mandated 18-month period (at least) with no return on 
investment to engine suppliers (i.e. the period between when the Tier 4 
engine would be produced and when it could lawfully be sold), which 
would increase the engine cost, and discourage design changes (since 
such changes would entail more investment with delayed return on that 
investment). The ultimate result would be a costlier rule and less 
environmental benefit due to the delay in introducing Tier 4 engines. 
Even were EPA to put forth such a regulation, it is not clear that it 
could be enforced or that it would help the situation. It would only be 
natural for engine manufacturers to continue to improve its products 
even after the predefined ``made available date'' and equipment 
manufacturers would want to use this improved product even if it meant 
they had to make last minute changes to the equipment design. For EPA 
to preclude engine manufacturers from changing their product designs 
over the period between the certification date and the equipment 
manufacturer date would be both unusual and counterproductive to our 
goal of seeing the best possible products available in the market. 
Moreover, EPA sees no need to interfere with the concurrent design 
market mechanism, which allows engine makers and equipment 
manufacturers to negotiate optimal solutions. We believe it is better 
to leave to the market participants the actual decision for how and 
when to conduct concurrent engineering designs.
    The California Air Resources Board commented that EPA should 
eliminate or reduce the amount of flexibilities provided for less than 
25 horsepower engines, because the Tier 4 engine standards are not 
aftertreatment-based. The Engine Manufacturers Association commented 
that we should expand the amount of flexibilities for engines greater 
than 750 horsepower, given the difficulty of complying with the 
proposed standards for engines above 750 horsepower. With today's 
action, we are applying the same flexibility for all power categories, 
including engines below 25 horsepower and engines above 750 horsepower. 
While it is true that the Tier 4 standards for engines below 25 
horsepower are not aftertreatment-based, we believe there will be 
changes in engine design for many of those engines in response to the 
Tier 4 standards. As engine designs change, there is the potential for 
impacts on

[[Page 39006]]

equipment design as well (as shown in implementing the Tier 2/3 rule). 
Therefore, we believe providing equipment manufacturer flexibility for 
engines below 25 horsepower is appropriate and we are adopting the same 
flexibilities for engines below 25 horsepower as for other power 
categories. With regard to engines above 750 horsepower, we are 
retaining the same flexibilities for those engines as for other power 
categories. As described in section II.A.4, the Tier 4 standards being 
adopted today for engines above 750 horsepower have been revised from 
the proposal. We believe that these revisions have appropriately 
accommodated concerns for the most difficult to design applications 
(i.e., NOX adsorbers for engines in mobile applications), so 
that additional equipment flexibilities are not warranted for these 
engines.
    The Engine Manufacturers Association commented that some equipment 
manufacturers may be capable of making an on-time transition to the 
interim Tier 4 standards (e.g. the 2011 standards applicable for 175-
750 horsepower engines) without the use of flexibilities. Such 
equipment manufacturers would like the ability to start the seven-year 
period in which they may use flexibilities in the year the final Tier 4 
standards (the aftertreatment-based standards for both PM and 
NOX) take effect. Put another way, they would not need more 
lead time for equipment to meet the interim standards, but could need 
more lead time for equipment required to meet the final standards. In 
addition, the commenter suggested a modified approach that could lead 
to earlier emission reductions than under the proposed rule: Requiring 
delayed flexibility engines to meet the interim Tier 4 standards 
instead of meeting the Tier 2/3 standards (as would have been allowed 
under the proposal if the flexibilities started in the first year of 
the interim Tier 4 standards).
    EPA wants to encourage the implementation of the Tier 4 standards 
as early as possible. Therefore, we believe it makes sense to provide 
incentives to equipment manufacturers to use interim Tier 4 compliant 
engines in their equipment during the transition to the final Tier 4 
standards. Moreover, it is reasonable to expect that more lead time 
will be needed for the aftertreatment-based standards than for the 
interim standards. Therefore, in response to these comments, we are 
revising the proposed flexibility provisions to allow equipment 
manufacturers to have the option of starting the seven-year period in 
which flexibility engines may be used in either the first year of the 
interim Tier 4 standards or the first year of the final Tier 4 
standards. For engines between 25 and 75 horsepower, the final Tier 4 
standards may begin in 2012 or 2013 depending on whether the 
manufacturer chooses to comply with the interim 2008 Tier 4 standards. 
An equipment manufacturer who does not use flexibilities in 2008 thus 
may need flexibilities as early as 2012. Therefore, the seven-year 
period for the final Tier 4 standards for engines between 25 and 75 
horsepower will begin in 2012 instead of 2013. Moreover, it is clearly 
appropriate that these delayed flexibility engines meet the interim 
Tier 4 standards, in order not to backslide from existing levels of 
performance.
    Table III.B-1 shows the years in which manufacturers could choose 
to start the Tier 4 flexibilities given the standards being adopted 
today. (The seven-year period for engines below 25 horsepower takes 
effect in 2008 as proposed, because there are no interim standards for 
such engines.)

                          Table III.B-1.--Flexibility Periods for the Tier 4 Standards
----------------------------------------------------------------------------------------------------------------
                                            Model year
                                            flexibility    Standards to which flexibility engines would have to
             Power category                   period                              certify
                                              options
----------------------------------------------------------------------------------------------------------------
25 <= hp < 75...........................       2008-2014  Tier 2 standards.
(19 <= kW < 56).........................       2012-2018  Model Year 2008 Tier 4 standards.
75 <= hp < 175..........................       2012-2018  Tier 3 standards.
(56 <= kW <130).........................       2014-2020  Model Year 2012 Tier 4 standards.
175 <= hp <= 750........................       2011-2017  Tier 3 standards.
(130 <= kW <= 560)......................       2014-2020  Model Year 2011 Tier 4 standards.
>750 hp.................................       2011-2017  Tier 2 standards.
(>560 kW)...............................       2015-2021  Model Year 2011 Tier 4 standards.
----------------------------------------------------------------------------------------------------------------

    Under today's action, and as proposed, only those nonroad equipment 
manufacturers that install engines and have primary responsibility for 
designing and manufacturing equipment will qualify for the allowances 
or other relief provided under the Tier 4 transition provisions. As a 
result of this definition, importers that have little involvement in 
the manufacturing and assembling of the equipment will be ineligible to 
receive any allowances. The Engine Manufacturers Association and one 
engine manufacturer commented that the proposed definition of equipment 
manufacturer needed to be revised to cover situations in which a 
manufacturer contracts out the design and production of equipment to 
another manufacturer. While we understand there are many different 
types of relationships between equipment manufacturers, we believe it 
is important to establish firm criteria for determining eligibility to 
use the equipment manufacturer allowances. We are concerned that the 
change to the equipment manufacturer definition suggested by the 
commenters would allow entities that have little or no involvement in 
the actual design, manufacture and assembly of equipment (e.g., 
companies that only import equipment) to claim they contracted with an 
equipment manufacturer to produce equipment for them and therefore 
claim allowances. This is the exact situation we are attempting to 
prevent with the changes to the eligibility requirements for the 
allowances. Therefore, we are adopting the proposed requirement that 
only those nonroad equipment manufacturers that install engines and 
have primary responsibility for designing, and manufacturing equipment 
will qualify for the allowances or other relief provided under the Tier 
4 transition provisions. However, we are revising the provisions 
regarding which engines an equipment manufacturer may include in its 
total count of U.S.-directed equipment production, which in turn 
affects the number of allowances an equipment manufacturer may claim. 
Under today's action, an equipment

[[Page 39007]]

manufacturer may include equipment produced by other manufacturers 
under license to them for which they had primary design responsibility 
(see section 1039.625(a) of the regulations). This should cover the 
type of situation described by the commenters while preventing an 
import-only entity from claiming it is an equipment manufacturer and 
thereby gaining access to the allowances.
a. Percent-of-Production Allowance
    Under the percent-of-production allowance adopted today, each 
equipment manufacturer will be allowed to install engines not certified 
to the Tier 4 emission standards in a limited percentage of machines 
produced for the U.S. market. Equipment manufacturers will need to 
provide written assurance to the engine manufacturer that such engines 
are being procured for the purpose of the transition provisions for 
equipment manufacturers. These engines will instead have to be 
certified to the standards that would apply in the absence of the Tier 
4 standards (see Table III.B-1 for the applicable standards). As 
proposed, this percentage will apply separately to each of the Tier 4 
power categories (engines below 25 horsepower, engines between 25 and 
75 horsepower, engines between 75 and 175 horsepower, engines between 
175 and 750 horsepower, and engines above 750 horsepower) and is 
expressed as a cumulative percentage of 80 percent over the seven years 
beginning when the Tier 4 standards apply in a category (see Table 
III.B-1 for the applicable seven-year periods). No exemptions will be 
allowed after the seventh year. For example, an equipment manufacturer 
could install engines certified to the Tier 3 standards in 40 percent 
of its entire 2011 production of nonroad equipment that use engines 
rated between 175 and 750 horsepower, 30 percent of its entire 2012 
production in this horsepower category, and 10 percent of its entire 
2013 production in this horsepower category. (During the transitional 
period for the Tier 4 standards, the fifty percent of engines that are 
allowed to certify to the previous tier NOX standard but 
meet the Tier 4 PM standard are considered Tier 4-compliant engines for 
the purpose of the equipment manufacturer transition provisions.) If 
the same manufacturer produces equipment using engines rated above 750 
horsepower, a separate cumulative percentage allowance of 80 percent 
will apply to those machines during the seven years beginning in 2011 
or 2015. This percent-of-production allowance is almost identical to 
the percent-of-production allowance adopted in the October 1998 final 
rule (63 FR 56967, October 23, 2003), the difference being, as 
explained earlier, that there are fewer power categories (and 
consequent increased flexibility in spreading the flexibility among 
engine families) associated with the Tier 4 standards.
    The 80 percent exemption allowance, were it to be used to its 
maximum extent by all equipment manufacturers, will bring about the 
introduction of cleaner engines several months later than would have 
occurred if the new standards were to be implemented on their effective 
dates. However, the equipment manufacturer flexibility program has been 
integrated with the standard-setting process from the initial 
development of this rule, and as such we believe it is a key factor in 
assuring that there is sufficient lead time to initiate the Tier 4 
standards according to the final implementation schedule.\65\
---------------------------------------------------------------------------

    \65\ As explained at proposal, for emissions modeling purposes, 
we have assumed that manufacturers take full advantage of the 
allowances under the existing transition program for equipment 
manufacturers (adopted in the October 1998 rule; see 63 FR 56967 
(October 23, 2003) in establishing the baseline emissions inventory. 
In modeling the impact of the Tier 4 standards, because the 
standards will not take effect for many years and it is not possible 
to accurately forecast use of the transition program for equipment 
manufacturers, so to assess costs in a conservative manner, we have 
assumed that all engines will meet the Tier 4 standards in the 
timeframe required by the standards without use of the Tier 4 
transition provisions. As discussed in section VI.C, this is 
consistent with our cost analysis, which assumes no use of the 
transition program for equipment manufacturers.
---------------------------------------------------------------------------

    As proposed, machines that use engines built before the effective 
date of the Tier 4 standards do not have to be included in an equipment 
manufacturer's percent of production calculations under this allowance. 
Machines that use engines certified to the previous tier of standards 
under our Small Business provisions (as described in section III.C of 
this preamble ) do not have to be included in an equipment 
manufacturer's percent of production calculations under this allowance. 
All engines certified to the Tier 4 standards, including those engines 
that produce emissions at higher levels than the standards, but for 
which an engine manufacturer uses ABT credits to demonstrate 
compliance, will count as Tier 4 complying engines and do not have to 
be included in an equipment manufacturer's percent of production 
calculations. Engines that meet the Tier 4 PM standards but are allowed 
to meet the Tier 3 NMHC+NOX standards during the phase-in 
period also count as Tier 4 complying engines and do not have to be 
included in an equipment manufacturer's percent of production 
calculations.
    The choice of a cumulative percent allowance of 80 percent is based 
on our best estimate of the degree of reasonable lead time needed by 
equipment manufacturers. We believe the 80 percent allowance responds 
to the need for flexibility identified by equipment manufacturers, 
while ensuring a significant level of emission reductions in the early 
years of the program. (As noted in the following section III.B.2.b, we 
are adopting a technical hardship provision that allows an equipment 
manufacturer to request additional relief under the percent of 
production allowance under certain conditions and with EPA approval.)
b. Technical Hardship Flexibility
    Ingersoll-Rand commented that the 80% percent of production 
allowance level is not sufficient for Tier 4 given the stringency of 
the standard and the difficulty engine manufacturers will have 
complying with the standards. In further discussions with Ingersoll-
Rand on this issue, they suggested that a percent of production 
allowance level of 150% for totally non-integrated equipment 
manufacturers (i.e., equipment manufacturers producing no diesel 
engines) was appropriate for Tier 4 power categories above 25 
horsepower. A fully integrated manufacturer would still receive the 80% 
level and partially-integrated companies would receive somewhere 
between 80% and 150% depending on the share of self-produced engines in 
each specific power category. The basis for this comment is their 
belief that non-integrated manufacturers are at a disadvantage to 
integrated manufacturers (manufacturers making both the engine and 
equipment) when it comes to planning for new Tier 4 engine designs.
    Although we do not accept the premise that equipment manufacturer 
lead time must be drastically expanded across-the-board for the Tier 4 
program, we do agree, as explained earlier, that there may be 
situations where additional lead time, in the form of increased 
equipment manufacturer transition flexibilities, can be justified. 
Therefore, we have added an additional flexibility (which has no direct 
analogue in the Tier 2/3 rule) to this rule in order to provide 
additional needed lead time in appropriate, individualized 
circumstances based on a showing of extreme technical or engineering 
hardship. Ingersoll-Rand has agreed, by letter to EPA, that this 
provision satisfies all of its concerns regarding

[[Page 39008]]

adequacy of lead time for meeting Tier 4 standards.
    This additional flexibility would be available for the three Tier 4 
power categories between 25 and 750 horsepower. As noted earlier, 
Ingersoll-Rand did not believe additional flexibility was needed for 
engines below 25 horsepower. We agree because the Tier 4 standards for 
engines below 25 horsepower are not based on the use of advanced 
aftertreatment. We also are not including this new provision for 
engines above 750 horsepower because nearly all of the equipment 
manufacturers utilizing engines above 750 horsepower make small volumes 
of equipment. The small-volume allowance (described in the following 
section) allows a manufacturer to exempt a specific number of engines 
over a seven-year period, which in most cases will be greater than the 
increased percentage potentially available under this new provision.
    This new provision, found in new Sec.  1039.625(m), is a case-by-
case exemption granted by EPA to an equipment manufacturer. The 
equipment manufacturer would have the burden of demonstrating existence 
of extreme technical or engineering hardship conditions that are 
outside its control. It must also demonstrate that it has exercised 
reasonable due diligence to avoid the situation. EPA would treat each 
request for technical hardship separately, with no guarantee that it 
would grant the exemption. If EPA grants the exemption, the equipment 
manufacturer could receive up to an additional 70 percent under the 
percent of production allowance for each of the three power categories 
noted above (meaning that there is a potential total 150 percent under 
the percent of production allowance available, the initial 80 percent 
available without application, and an additional potential increment of 
up to 70 percent available on a case-by-case basis).
    The exemption could only be granted upon written application to EPA 
setting forth essentially why the normally successful elements of 
engine maker/equipment manufacturer design cycle have not provided 
adequate lead time for a particular equipment model. The application 
would therefore have to address, with documentation: The engineering or 
technical problems that have proved unsolvable within the lead time 
provided, the normal design cycle between the engine maker and 
equipment manufacturer and why that cycle has not worked in this 
instance, all information (such as written specifications, performance 
data, prototype engines) the equipment manufacturer has received from 
the engine supplier, and a comparison of the design process for the 
equipment model for which the exemption is requested with the design 
process for other models for which no exemption is needed. The 
equipment manufacturer also would have to make and describe all efforts 
to find other compliant engines for the model. EPA will then evaluate 
and determine whether or not to grant each such request, and what 
additional increment under the percent of production allowance (above 
the 80 percent normally allowed) is justified (not to exceed an 
additional 70 percent as noted above). As part of our evaluation of 
requests based on technical hardship, we may contact the engine 
supplier(s) listed by the equipment manufacturer to check on the 
accuracy of the engine-related information supplied by the equipment 
manufacturer. This extension of lead time is premised on the existence 
of extreme technical or engineering problems, in contrast to the 
economic hardship provision described in section III.B.2.f below, where 
consideration of economic impact is critical.
    EPA would not grant an application for technical hardship exemption 
unless the equipment manufacturer demonstrates that the full 80 percent 
allowed under the percent of production allowance is reasonably 
expected to be used up in the first two years of the seven-year 
flexibility period. The reason is obvious. If that allowance would not 
be fully utilized, then no further extension of lead time can be 
justified. Furthermore, any technical hardship allowance would have to 
be used up within two years after the Tier 4 percent of production 
allowances start for any power category. This is because, although we 
believe that circumstances of extreme technical or engineering hardship 
may arise, we cannot see that these circumstances could not be solved 
within the first two years of the transition. Indeed, Ingersoll-Rand 
itself clearly indicated that this is a temporary burden which exists 
during initial model transition and indicated that only 18 months 
(rather than two years) could be needed from receipt of the certified 
engine.
    This flexibility will be available to all equipment manufacturers, 
but may only be requested for equipment in which the equipment 
manufacturer is different than the engine manufacturer. We believe that 
integrated manufacturers who produce both the equipment and the engine 
used in the piece of equipment could have an advantage in the equipment 
redesign process (compared to an equipment manufacturer, whether 
integrated or not, that uses engines from a different manufacturer) 
that makes additional relief under the percent of production allowance 
unnecessary. In addition, integrated equipment manufacturers have other 
programs available to them (that non-integrated manufacturers do not 
have) such as the engine averaging, banking and trading program, which 
can provide lead time flexibility during the transition years. Most 
basically, integrated manufacturers should be able to design 
concurrently in all circumstances, so that extreme technical or 
engineering hardships should not arise.
c. Small-Volume Allowance
    The percent-of-production approach described above may provide 
little benefit to businesses focused on a small number of equipment 
models, and hence there could be situations where there is insufficient 
lead time for such models. Therefore, with today's action, we are 
adopting a small-volume allowance that will allow any equipment 
manufacturer to exceed the percent-of-production allowances described 
above during the same seven-year period, provided the manufacturer 
limits the number of exempted engines to 700 total over the seven 
years, and to 200 in any one year. The limit of 700 exempted engines 
(and no more than 200 engines per year) applies separately to each of 
the Tier 4 power categories (engines below 25 horsepower, engines 
between 25 and 75 horsepower, engines between 75 and 175 horsepower, 
engines between 175 and 750 horsepower, and engines above 750 
horsepower). In addition, manufacturers making use of this provision 
must limit exempted engines to a single engine family in each Tier 4 
power category.
    We are also adopting an alternative small-volume allowance, which 
equipment manufacturers have the option of utilizing. In discussions 
regarding the current small-volume allowance, some manufacturers 
expressed the desire to be able to exempt engines from more than one 
engine family, but still fall under the number of exempted engine 
limit. For that reason, we solicited comment on a small-volume 
allowance program that would allow manufacturers to exempt engines in 
more than one family, but have lower numerical limits. Under this 
alternative, manufacturers using the small-volume allowance could 
exempt 525 machines over seven years (with a maximum of 150 in any 
given year) for each of the three power categories below 175 
horsepower, and 350 machines over seven years (with a maximum of 100 in

[[Page 39009]]

any given year) for the two power categories above 175 horsepower. 
Concurrent with the revised caps of 525 or 350, depending on power 
category, manufacturers could exempt engines from more than one engine 
family under the small-volume allowance program. Based on sales 
information for small businesses, we estimated that the alternative 
small-volume allowance program to include lower numbers of eligible 
engines and allow manufacturers to exempt more than one engine family 
would keep the total number of engines eligible for the allowance at 
roughly the same overall level as the 700-unit program.\66\ We also 
requested comment on allowing equipment manufacturers to choose between 
the two small-volume allowance programs described above (68 FR 28474-
28475, May 23, 2003).
---------------------------------------------------------------------------

    \66\ ``Analysis of Small Volume Equipment Manufacturer 
Flexibilities,'' memo from Phil Carlson (EPA) to Docket A-2001-28.
---------------------------------------------------------------------------

    Both engine and equipment manufacturers supported dropping the one 
engine family restriction from the 700 unit small-volume allowance. In 
addition, they commented that if the one engine family restriction was 
not dropped from the 700 unit option, they supported the option of 
allowing equipment manufacturers to choose between the two small-volume 
allowance options. With today's action, we are revising the proposed 
small-volume allowance to allow equipment manufacturers to choose 
between the 700 unit over seven years option, with exempted engines 
limited to one engine family, or the proposed alternative which would 
allow equipment manufacturers to exempt fewer engines over seven years 
(525 or 350 units, depending on the power category), but with no 
restriction on the number of engine families that could be included in 
the exempted engine count. Based on our analysis of small businesses 
noted above, we expect the number of engines that could be exempted 
under either option is roughly the same. Giving equipment manufacturers 
the ability to choose between the two options should not significantly 
impact the number of engines likely to be exempted under the small-
volume allowance. We have not chosen to drop the one engine family 
restriction from the 700-unit small-volume allowance because it would 
result in a significant increase in the number of engines eligible to 
be exempted to levels which we believe are not needed to provide 
adequate lead time for the Tier 4 program.\67\
---------------------------------------------------------------------------

    \67\ Memorandum, Phil Carlson to Docket A-2001-28, ``Analysis of 
Equipment Manufacturer Flexibilities,'' April 15, 2003. Docket A-
2001-28, document no. II-B-24.
---------------------------------------------------------------------------

    As with the percent-of-production allowance, machines that use 
engines built before the effective date of the Tier 4 standards do not 
have to be included in an equipment manufacturer's count of engines 
under the small-volume allowance. Similarly, machines that use engines 
certified to the previous tier of standards under our Small Business 
provisions (as described in section III.C of today's action) do not 
have to be included in an equipment manufacturer's count of engines 
under the small-volume allowance. All engines certified to the Tier 4 
standards, including those that produce emissions at higher levels than 
the standards but for which an engine manufacturer uses ABT credits to 
demonstrate compliance, will be considered to be Tier 4 complying 
engines and do not have to be included in an equipment manufacturer's 
count of engines under the small-volume allowance. Engines that meet 
the Tier 4 PM standards but are allowed to meet the Tier 3 
NMHC+NOX standards during the phase-in period (i.e., phase-
out engines) will also be considered as Tier 4 complying engines and do 
not have to be included in an equipment manufacturer's count of engines 
under the small-volume allowance. All engines used under the small-
volume allowance must certify to the standards that would be in effect 
in the absence of the Tier 4 standards (see Table III.B-1 for the 
applicable standards). As noted earlier, equipment manufacturers will 
need to provide written assurance to the engine manufacturer when it 
purchases engines under the transition provisions for equipment 
manufacturers.
    The Engine Manufacturers Association commented that the proposed 
regulations for the small-volume allowance established a limit on the 
total number of engines an equipment manufacturer could use that did 
not meet the Tier 4 standards and should be revised to set a limit 
based on U.S.-directed production (consistent with the proposed 
regulatory language for the percent-of-production allowance). EPA 
agrees that the limit under the small-volume allowance should apply to 
U.S.-directed production only--as the commenter surmised, this is what 
EPA intended--and has revised the final regulations for the small-
volume allowance accordingly.
    We are also finalizing a technical hardship provision for small 
business equipment manufacturers using 25-50 horsepower engines, as 
discussed in III.C.2.b.ii.
d. Early Use of Tier 4 Flexibilities in the Tier 2/3 Timeframe
    As proposed, we are also adopting provisions that allow equipment 
manufacturers to start using a limited number of the new Tier 4 percent 
of production allowances or Tier 4 small-volume allowances once the 
seven-year period for the existing Tier 2/Tier 3 program expires (and 
so continue using engines meeting Tier 1 or Tier 2 standards). In this 
way, a manufacturer can potentially continue exempting the most 
difficult applications once the seven-year period of the current Tier 
2/3 flexibility provisions is finished. (Under the existing transition 
program for equipment manufacturers, any unused Tier 2/3 allowances 
expire after the seven-year period.) However, opting to start using 
Tier 4 allowances once the seven-year period from the current Tier 2/
Tier 3 program expires will reduce the number of exemptions available 
from the Tier 4 standards under either the percent of production 
allowance or the small-volume allowance.
    With today's action, equipment manufacturers may use up to a total 
of 10 percent of their Tier 4 percent of production allowances or up to 
100 of their Tier 4 small-volume allowances prior to the effective date 
of the Tier 4 standards. (The early use of Tier 4 allowances will be 
allowed in each Tier 4 power category.) This amount of equipment 
utilizing the early Tier 4 allowances will be subtracted from either 
the Tier 4 allowance of 80 percent under the percent of production 
allowance or the applicable limit under the small-volume allowance for 
the appropriate power category, resulting in fewer allowances once the 
Tier 4 standards take effect. For example, if an equipment manufacturer 
uses the maximum amount of early Tier 4 percent of production 
allowances of 10 percent, then the manufacturer will have a cumulative 
total of 70 percent remaining for that power category when the Tier 4 
standards take effect (i.e., 80 percent production allowance minus 10 
percent).
    The California Air Resources Board commented that we should 
discount the early use of Tier 4 flexibilities to discourage abuse of 
the provisions, by requiring equipment manufacturers to give up more 
than one flexibility after Tier 4 begins for every flexibility used 
prior to Tier 4. California did not specifically recommend what the 
discount level should be. We are not adopting a discount for early use 
of the Tier 4 flexibilities. The intent of

[[Page 39010]]

allowing manufacturers to use the Tier 4 flexibilities early was to 
allow them to carry over the few remaining equipment models that might 
not have been redesigned at the end of the seven-year Tier 2/Tier 3 
flexibility period until Tier 4 begins, and not requiring a possible 
double redesign in a short period of time. Because we have placed a 
relatively low cap (10% under the percent of production allowance or 
100 units under the small volume allowance) on the amount an equipment 
manufacturer could use early from Tier 4, we do not believe that 
manufacturers will be able to abuse the program and therefore should 
not have to discount the number of Tier 4 flexibilities used early.
    We view this provision on early use of Tier 4 allowances as 
providing reasonable lead time for introducing Tier 4 engines, since it 
should result in earlier introduction of Tier 4-compliant engines 
(assuming that the allowances would otherwise be fully utilized) with 
resulting net environmental benefit (notwithstanding longer utilization 
of earlier Tier engines, due to the stringency of the Tier 4 standards) 
and should do so at net reduction in cost by providing cost savings for 
the engines that have used the Tier 4 allowances early. (This is 
another reason we see no reason to discount the allowance.)
e. Early Tier 4 Engine Incentive Program for Equipment Manufacturers
    Ingersoll-Rand commented that non-integrated equipment 
manufacturers who incorporate Tier 4 compliant engines into their 
equipment prior to the applicable date for the Tier 4 standards should 
be able to earn early compliance credits. These early compliance 
credits could allow use of the previous-tier engine (above and beyond 
the base percentage granted under the flexibility program) for up to 18 
months after the certification date of the engine. Ingersoll-Rand also 
commented that such early compliance credits should be able to be 
traded across power categories with appropriate weightings applied.
    We believe a program that provides an incentive for equipment 
manufacturers to use early Tier 4-compliant engines is worthwhile from 
both a technology development perspective and an environmental 
perspective. As we noted at proposal when we proposed a similar 
incentive program for engine makers, early use of Tier 4 compliant 
engines will help foster technology development by getting the Tier 4 
technologies out in the market early and provide real-world experience 
to manufacturers and users (68 FR 28482, May 23, 2003). It will also 
lead to additional emission reductions above and beyond those expected 
under the existing Tier 2/3 standards in the years prior to Tier 4 
taking effect. Moreover, equipment manufacturers (and especially non-
integrated equipment manufacturers) are unlikely to buy early Tier 4 
engines without some incentive to do so since these engines are likely 
to be more expensive than Tier 2/3 engines. For these reasons, we are 
adopting new provisions that will allow any equipment manufacturer to 
earn early compliance credits that could be used to increase the number 
of equipment flexibilities above and beyond the levels allowed under 
the percent of production allowance or small-volume allowance (and for 
reasons independent of those allowances: namely, an inducement to make 
early use of Tier 4 engines).
    The program will be available to all equipment manufacturers 
regardless of whether they are integrated or non-integrated. While 
Ingersoll-Rand commented that the program should be available to non-
integrated equipment manufacturers only, we believe the program should 
provide an incentive for all equipment manufacturers to use early Tier 
4 engines (since the benefits accruing from early use of such engines 
exist regardless of whether the equipment manufacturer is integrated 
with the engine maker).
    Before describing this provision further, it is desirable to put it 
in context by explaining its relationship to the engine manufacturer 
incentive program for early Tier 4 or very low emission engines 
(described in section III.M below), as well as to the similar incentive 
provisions for engine manufacturers which we proposed (68 FR 28482, May 
23, 2003). We are, in essence, redirecting the proposed incentive for 
using early Tier 4 compliant engines to equipment manufacturers. Thus, 
under today's rule, an engine manufacturer could use the incentive 
program (as described in section III.M) only if an equipment 
manufacturer uses an early Tier 4 engine but (for whatever reason) 
declines to use the early engine flexibility allowance. In such a case, 
the engine manufacturer could opt to earn either ``engine offsets'' 
(which would allow them to make fewer engines certified to the Tier 4 
standards once the Tier 4 program takes effect) or ABT credits, but not 
both. In the more likely case of an equipment manufacturer using early 
Tier 4 engines and using the incentive flexibilities itself, the engine 
manufacturer would be eligible to generate ABT credits from such early 
Tier 4 compliant engines.
    The early Tier 4 engine incentive program for equipment 
manufacturers will apply to the four power categories above 25 
horsepower where the use of advanced exhaust aftertreatment is expected 
under the Tier 4 standards. Because the Tier 4 standards for engines 
below 25 horsepower are not expected to result in the use of advanced 
aftertreatment technologies, we are not including such engines in the 
program.
    In order for an engine to be considered an early Tier 4 compliant 
engine, it will need to be certified to the final Tier 4 standards for 
PM, NOX, and NMHC (i.e., the 2013 standards for engines 
between 25 and 75 horsepower, the 2014 standards for engines between 75 
and 175 horsepower, the 2014 standards for engines between 175 and 750 
horsepower, and the 2015 standards for engines above 750 horsepower) or 
to the final PM and NMHC standards and the alternative NOX 
standards during the phase-in (as described in section II.A.2.c of 
today's rule for engines between 75 and 750 horsepower). In order to be 
an early Tier 4 compliant engine, these engines would also have to 
certify to the Tier 4 CO standards. Because 15 ppm sulfur diesel fuel 
will be available on a widespread basis in time for 2007 (due to the 
requirements for on-highway heavy-duty engines), we are allowing engine 
manufacturers to begin certifying engines to the Tier 4 standards, and 
therefore have engines eligible for the early Tier 4 engine incentive 
program, beginning with the 2007 model year.
    In order to provide assurance that early Tier 4 compliant engines 
are placed into equipment earlier than would otherwise happen under the 
Tier 4 program, engine manufacturers will be required to certify and 
start producing such engines before September 1 of the year prior to 
the post-2011 Tier 4 standards taking effect or before September 1, 
2010 for engines in the 175 to 750 horsepower category. Similarly, 
equipment manufacturers will be required to install such engines in 
equipment before January 1 of the year the post-2011 Tier 4 standards 
take effect or before January 1, 2011 for engines in the 175 to 750 
horsepower category. In addition, in order to be considered an early 
Tier 4 compliant engine, such engines would be required to comply with 
all of the requirements associated with the final Tier 4 standards such 
as NTE requirements, transient testing (where otherwise required for 
certification, i.e. for 25-750 horsepower engines), and closed 
crankcase requirements. Finally, for engines certified prior to model 
year 2011, the engine manufacturer would be

[[Page 39011]]

allowed to demonstrate early compliance with the Tier 4 standards on a 
15 ppm sulfur fuel (as allowed under the certification fuel 
requirements specified in section III.D of today's rule) provided the 
engine manufacturer demonstrates that the equipment in which the 
engines are placed will use fuel meeting this low sulfur specification 
and includes appropriate information on the engine label and ensures 
that ultimate purchasers of equipment using these engines are informed 
that ultra low-sulfur diesel fuel is recommended (see section 
1039.104(e) of the regulations). Equipment manufacturers using such 
pre-2011 engines in their equipment would likewise need to take steps 
to ensure that fuel meeting this low sulfur specification is used in 
the equipment once operated in use to earn the additional flexibility 
allowances.
    Equipment manufacturers installing engines complying with the final 
Tier 4 standards (as described above) would earn one flexibility 
allowance for each early Tier 4 compliant engine used in its equipment. 
Equipment manufacturers installing engines between 75 and 750 
horsepower that comply with the final Tier 4 PM standard and the 
alternative NOX standard (described in section II.A.2.c) 
would earn one-half of a flexibility allowance for each early Tier 4 
compliant engine used in its equipment. Table III.B-2 presents the 
requirements an engine would need to meet to be considered an early 
Tier 4 engine for the purposes of this early Tier 4 engine incentive 
program.

                                    Table III.B-2.--Requirements for Engines
                                [Under the Early Tier 4 Engine Incentive Program]
----------------------------------------------------------------------------------------------------------------
                                                                                                     Number of
                                                                                                    flexibility
                                            Tier 4 standards the      Date before which engines     allowances
            Power category                   engines must meet         must be installed by the   earned for use
                                                                        equipment manufacturer     of early tier
                                                                                                     4 engines
----------------------------------------------------------------------------------------------------------------
25 <= hp < 75.........................  Model Year 2013............  January 1, 2013\a\.........          1-to-1
(19 <= kW < 56).......................
75 <= hp < 175........................  Model Year 2014............  January 1, 2012............          1-to-1
(56 <= kW <130).......................  Model Year 2012\b\.........  January 1, 2012............        0.5-to-1
175 <= hp <= 750......................  Model Year 2014............  January 1, 2011............          1-to-1
(130 <= kW <= 560)....................  Model Year 2011\b\.........  January 1, 2011............        0.5-to-1
Generator Sets........................  Model Year 2015............  January 1, 2015............          1-to-1
>750 hp...............................
(>560 kW).............................
Other Machines........................  Model Year 2015............  January 1, 2015............          1-to-1
>750 hp...............................
(>560 kW).............................
----------------------------------------------------------------------------------------------------------------
\a\ The installation date for 50 to 75 horsepower engines purchased from manufacturers choosing to opt out of
  the 2008 model year Tier 4 standards and instead comply with the Tier 4 standards beginning in 2012 would be
  January 1, 2012.
\b\ To be eligible, engines must meet the 0.01g/bhp-hr PM standard and the alternative NOX standards in section
  1039.102 (e) described in section II.A.2.c.

    As described above, equipment manufacturers using early Tier 4 
compliant engines can earn flexibility allowances that can be used to 
effectively increase the number of allowances provided under the 
percent of production allowance or the small volume allowance in the 
same power category. For example, an equipment manufacturer that uses 
500 engines in the 175 to 750 horsepower category that met the model 
year 2011 PM standards and alternative NOX standards would 
earn 250 additional flexibility allowances in that power category. That 
manufacturer could then exclude 250 engines from its calculations 
before demonstrating compliance with the 80 percent limit under the 
percent of production allowance (or the applicable limit under the 
small volume allowance if the equipment manufacturer is using that 
option) once Tier 4 starts in that power category.
    Equipment manufacturers would be required to report certain 
information regarding the early Tier 4 compliant engines (such as 
engine family name, number of engines used prior to Tier 4 in each 
power category, the rated power of the engines, and the type of 
application the engines above 750 horsepower were used in) when they 
submit their first report under the Tier 4 flexibility program. For 
engines above 750 horsepower, equipment manufacturers also would be 
required to keep records of how many early Tier 4 compliant engines are 
used in generator sets, versus how many are used in other machinery. 
This is because the additional flexibility allowances earned from the 
use of early Tier 4 compliant engines used in generator sets could only 
be used for additional flexibility allowances for generator sets. 
Likewise, the additional flexibility allowances earned from the use of 
early Tier 4 compliant engines used in mobile machinery (labeled `other 
machinery' in the table above) applications could only be used for 
additional flexibility allowances for other non-generator set 
applications.
    Under the early Tier 4 engine incentive program, we will allow 
equipment manufacturers to ``trade'' the additional flexibilities 
earned in the two power categories between 75 and 750 horsepower, with 
the power rating of the engines factored into the ``trade'' to ensure 
equivalent emissions for the engines generating the early allowances 
and the engines using the allowances. For example, an equipment 
manufacturer that earned 100 additional flexibility allowances under 
the early Tier 4 engine incentive program from 100 horsepower engines, 
could ``trade'' those flexibilities into the next power category up 
(175 to 750 horsepower). The equipment manufacturer would generate 
10,000 horsepower-allowances from those early engines (i.e., 100 
horsepower times 100 allowances). The equipment manufacturer could then 
produce, for this example, an additional 25 engines with a power rating 
of 400 horsepower above and beyond the normal limit on allowances (or 
any other combination of engines such that the sum of the horsepower-
weighted allowances adds up to the 10,000 horsepower-allowances used in 
this

[[Page 39012]]

example). We are not allowing trading for engines in the 25 to 75 
horsepower category because the Tier 4 standards for these engines are 
based on the application of only PM aftertreatment technology. 
Similarly, we are not allowing trading for engines in the above 750 
horsepower category because the Tier 4 standards are based on the 
application of PM aftertreatment to all engines, but NOX 
aftertreatment for only some engines.
f. Economic Hardship Relief Provision
    With today's action, and as proposed, we are providing an 
additional Tier 4 transition flexibility for ``economic hardship 
relief'' for equipment manufacturers. Under the economic hardship 
relief provisions, an equipment manufacturer that does not make its own 
engines could obtain limited additional relief by providing evidence 
that, despite its best efforts, it cannot meet the implementation 
dates, even with the Tier 4 equipment flexibility program provisions 
outlined above. Such a situation could occur if an engine supplier 
without a major business interest in the equipment manufacturer were to 
change or drop an engine model very late in the implementation process. 
The purpose of the provision is to redress individual situations of 
extreme economic hardship, not merely to perpetuate existing market 
share. That is, if situations arise where one equipment maker cannot 
produce equipment using Tier 4-compliant engines by the compliance 
date, but another can, ordinarily EPA would not adjust the program to 
allow use of the non-compliant application absent extreme, compelling 
equitability considerations.
    Applications for economic hardship relief will have to be made in 
writing, and will need to be submitted before the earliest date of 
noncompliance. The application will also have to include evidence that 
failure to comply is not the fault of the equipment manufacturer (such 
as a supply contract broken by the engine supplier), and include 
evidence that serious economic hardship to the company will result if 
relief is not granted. (As explained in section III.B.2.b above, this 
is a significant difference between this economic hardship provision 
and the technical hardship flexibility, where consideration of cost is 
generally irrelevant.) We expect to work with the applicant to ensure 
that all other remedies available under the flexibility provisions are 
exhausted before granting additional relief (if appropriate), and place 
a limit on the period of relief to no more than one year. Applications 
for economic hardship relief generally will only be accepted during the 
first year after the effective date of an applicable new emission 
standard.
    The Agency expects this provision will be rarely used. This 
expectation has been supported by our initial experience with the Tier 
2 standards in which only one equipment manufacturer has applied under 
the existing hardship relief provisions (and the request was 
subsequently denied). Requests for economic hardship relief will be 
evaluated by EPA on a case-by-case basis, and may require, as a 
condition of granting the applications, that the equipment manufacturer 
agree (in writing) to some appropriate measure to recover the lost 
environmental benefit.
    Ingersoll-Rand commented that the provisions regarding eligibility 
for hardship relief should be revised so that they do not require a 
demonstration of severe economic hardship, noting that such a showing 
would invariably preclude large entities (like Ingersoll-Rand) from 
utilizing the provision, even though delays were beyond their control. 
As described earlier in this section, we have included an additional 
flexibility in the Tier 4 rule in order to provide additional needed 
lead time in appropriate, individualized circumstances based on a 
showing of extreme technical or engineering hardship. We believe the 
provisions of the technical hardship address the concerns noted by 
Ingersoll-Rand in their comments, and therefore we are not revising the 
existing economic hardship relief provisions (which require a 
demonstration of severe economic impact) for the Tier 4 final program.
g. Existing Inventory Allowance
    The current program for nonroad diesel engines includes a provision 
for equipment manufacturers to continue to use engines built prior to 
the effective date of new standards, until the older engine inventories 
are depleted. It also prohibits stockpiling of previous tier engines. 
As proposed, we are extending these provisions for the transition to 
the Tier 4 standards adopted today. We are also extending the existing 
provision that provides an exception to the applicable compliance 
regulations for the sale of replacement engines. In extending this 
provision, we are requiring that engines built to replace certified 
engines be identical in all material respects to an engine of a 
previously certified configuration that is of the same or later model 
year as the engine being replaced. The term ``identical in all material 
respects'' allows for minor differences that would not reasonably be 
expected to affect emissions such as a change in materials or a change 
in the company supplying the components of the engine.
3. What Are the Recordkeeping, Notification, Reporting, and Labeling 
Requirements Associated With the Equipment Manufacturer Transition 
Provisions?
    The following section describes the recordkeeping, notification, 
reporting, and labeling requirement being adopted today. As proposed, 
failure to comply with these requirements will subject the noncomplying 
party to penalties as described in 40 CFR 1068.101.
a. Recordkeeping Requirements for Engine and Equipment Manufacturers
    With today's action, we are extending the recordkeeping 
requirements from the current equipment manufacturer transition 
program. Under the Tier 4 transition program, engine manufacturers will 
be allowed to continue to build and sell previous tier engines needed 
to meet the market demand created by the equipment manufacturer 
flexibility program, provided they receive written assurance from the 
engine purchasers that such engines are being procured for this 
purpose. Engine manufacturers will be required to keep copies of the 
written assurance from the engine purchasers for at least five full 
years after the final year in which allowances are available for each 
power category.
    Equipment manufacturers choosing to take advantage of the Tier 4 
allowances will be required to: (1) Keep records of the production of 
all pieces of equipment excepted under the allowance provisions for at 
least five full years after the final year in which allowances are 
available for each power category; (2) include in such records the 
serial and model numbers and dates of production of equipment and 
installed engines, and the rated power of each engine, (3) calculate 
annually the number and percentage of equipment made under these 
transition provisions to verify compliance that the allowances have not 
been exceeded in each power category; and (4) make these records 
available to EPA upon request.
b. Notification Requirements for Equipment Manufacturers
    We are adopting new notification requirements for equipment 
manufacturers with the Tier 4 program. Under the Tier 4 transition 
program, equipment manufacturers wishing to participate in the Tier 4 
transition provisions will be required to notify EPA prior to their use 
of the Tier 4

[[Page 39013]]

transition provisions. Equipment manufacturers will be required to 
submit their notification before the first calendar year in which they 
intend to use the transition provisions. We believe that prior 
notification will greatly enhance our ability to ensure compliance. 
Under the newly adopted notification requirements, each equipment 
manufacturer will be required to notify EPA in writing and provide the 
following information prior to the start of the first year in which the 
manufacturer intends to use the flexibilities:
    (1) The nonroad equipment manufacturer's name, address, and contact 
person's name, phone number;
    (2) The allowance program that the nonroad equipment manufacturer 
intends to use by power category;
    (3) The calendar years in which the nonroad equipment manufacturer 
intends to use the exception;
    (4) An estimation of the number of engines to be exempted under the 
transition provisions by power category;
    (5) The name and address of the engine manufacturer from whom the 
equipment manufacturer intends to obtain exempted engines; and
    (6) Identification of the equipment manufacturer's prior use of 
Tier 2/3 transition provisions.
    Engine manufacturers supported the new notification requirements 
for equipment manufacturers. One equipment company, however, commented 
that the notification requirements are of minimal value and should be 
deleted. We disagree and continue to believe the new notification 
requirements will greatly enhance our ability to ensure compliance with 
the flexibility provisions. Given the limited information that must be 
provided by equipment manufacturers, we do not expect that the 
notifications will require any significant effort to pull the 
information together and submit to EPA.
    EPA had requested comment on whether the notification provisions 
should also apply to the current Tier 2/Tier 3 transition program, and 
if so, how these provisions should be phased in for equipment 
manufacturers using the current Tier 2/Tier 3 transition provisions. We 
did not receive any comments on this issue. However, consistent with 
our approach to several other Tier 4 requirements that we were 
considering applying to the Tier 2/Tier 3 transition program, we are 
not adopting such notification requirements for equipment manufacturers 
for the current Tier 2/Tier 3 program.
c. Reporting Requirements for Engine and Equipment Manufacturers
    As with the current program, engine manufacturers who participate 
in the Tier 4 program will be required to submit information each year 
on the number of such engines produced and to whom the engines are 
provided. The purpose of these submittals is to help EPA monitor 
compliance with the program and prevent abuse of the program.
    We are adopting new reporting requirement for equipment 
manufacturers participating in the Tier 4 equipment manufacturer 
transition provisions. With today's action, equipment manufacturers 
participating in the program will be required to submit an annual 
written report to EPA that calculates its annual number of exempted 
engines under the transition provisions by power category in the 
previous year. Equipment manufacturers using the percent of production 
allowance, will also have to calculate the percent of production the 
exempted engines represented for the appropriate year. Each report will 
include a cumulative calculation (both total number and, if 
appropriate, the percent of production) for all years the equipment 
manufacturer is using the transition provisions for each of the Tier 4 
power categories. In order to ease the reporting burden on equipment 
manufacturers, EPA intends to work with the manufacturers to develop an 
electronic means for submitting information to EPA.
    EPA had requested comment on whether these new reporting 
requirements for equipment manufacturers should also apply to the 
current Tier 2/Tier 3 transition program, and if so, how these 
provisions should be phased in for equipment manufacturers using the 
current Tier 2/Tier 3 transition provisions. We did not receive any 
comments on this issue. However, consistent with our approach to 
several other Tier 4 requirements that we were considering applying to 
the Tier 2/Tier 3 transition program, we are not adopting reporting 
requirements for equipment manufacturers for the current Tier 2/Tier 3 
program.
d. Labeling Requirements for Engine and Equipment Manufacturers
    Engine manufacturers are currently required to label their 
certified engines with a label that contains a variety of information. 
Under today's action, as proposed, we are adopting requirements that 
engine manufacturers be required to identify on the engine label if the 
engine is exempted under the Tier 4 transition program. In addition, 
and also as proposed, equipment manufacturers will be required to apply 
a label to the engine or piece of equipment that identifies the 
equipment as using an engine produced under the Tier 4 transition 
program for equipment manufacturers.
    Engine manufacturers were opposed to the new labeling requirements. 
We believe these new labeling requirements will allow EPA to easily 
identify the exempted engines and equipment, verify which equipment 
manufacturers are using these exceptions, and more easily monitor 
compliance with the transition provisions. Labeling of the equipment 
should also help U.S. Customs to quickly identify equipment being 
imported using the exemptions for equipment manufacturers.
4. What Are the Requirements Associated With Use of Transition 
Provisions for Equipment Produced by Foreign Manufacturers?
    Under the current regulations in 40 CFR 89.2, importers are treated 
as equipment manufacturers and are each allowed the full allowance 
under the transition provisions in 40 CFR 89.102(d). Therefore, under 
the current provisions, importers of equipment from a foreign equipment 
manufacturer could as a group import more excepted equipment from that 
foreign manufacturer than 80% of that manufacturer's production for the 
U.S. market (i.e., more than the percent-of-production), or more than 
the small-volume allowance. Therefore, the current regulation creates a 
potentially significant adverse environmental impact. EPA did not 
intend this outcome, and does not believe it is needed to provide 
reasonable lead time to foreign equipment manufacturers. EPA thus 
proposed to change the current regulations to eliminate this disparity.
    As noted earlier, with today's action, only those nonroad equipment 
manufacturers that install engines and have primary responsibility for 
designing and manufacturing equipment will qualify for the allowances 
or other relief provided under the Tier 4 transition provisions. 
Foreign equipment manufacturers who comply with the compliance related 
provisions discussed below will receive the same allowances and other 
transition provisions as domestic manufacturers. Foreign equipment 
manufacturers who do not comply with these compliance related 
provisions will not receive allowances. Importers that have little 
involvement in the manufacturing and assembling of the equipment will 
not

[[Page 39014]]

receive any allowances or other transition relief directly, but can 
import exempt equipment if it is covered by an allowance or transition 
provision associated with a foreign equipment manufacturer. These 
provisions allow the transition allowances and other provisions to be 
used by foreign equipment manufacturers in the same way as domestic 
equipment manufacturers, while avoiding the potential for importers 
using unnecessary allowances.
    Under today's action, a foreign equipment manufacturer includes any 
equipment manufacturer that produces equipment outside of the United 
States that is eventually sold in the United States. All foreign 
nonroad equipment manufacturers wishing to use the transition 
provisions will have to comply with all requirements of the regulation 
discussed above including: Notification, recordkeeping, reporting and 
labeling. Along with the equipment manufacturer's notification 
described earlier, a foreign nonroad equipment manufacturer will have 
to comply with various compliance related provisions similar to those 
adopted in several fuel regulations relating to foreign refiners.\68\ 
As part of the notification, the foreign nonroad equipment manufacturer 
will have to:
---------------------------------------------------------------------------

    \68\ See, for example, 40 CFR 80.410 concerning provisions for 
foreign refiners with individual gasoline sulfur baselines.

    (1) Agree to provide EPA with full, complete and immediate 
access to conduct inspections and audits;
    (2) Name an agent in the District of Columbia for service of 
process;
    (3) Agree that any enforcement action related to these 
provisions will be governed by the Clean Air Act;
    (4) Submit to the substantive and procedural laws of the United 
States;
    (5) Agree to additional jurisdictional provisions;
    (6) Agree that the foreign nonroad equipment manufacturer will 
not seek to detain or to impose civil or criminal remedies against 
EPA inspectors or auditors for actions performed within the scope of 
EPA employment related to the provisions of this program;
    (7) Agree that the foreign nonroad equipment manufacturer 
becomes subject to the full operation of the administrative and 
judicial enforcement powers and provisions of the United States 
without limitation based on sovereign immunity; and
    (8) Submit all reports or other documents in the English 
language, or include an English language translation.

    In addition to these requirements, we are adopting a new provision 
for foreign equipment manufacturers that participate in the transition 
program to comply with a bond requirement for engines imported into the 
U.S. We believe the bond requirements are an important tool to ensure 
that foreign equipment manufacturers are subject to the same level of 
enforcement as domestic equipment manufacturers. Furthermore, we 
believe that a bonding requirement for the foreign equipment 
manufacturer is an important enforcement tool in order to ensure that 
EPA has the ability to collect any judgements assessed against a 
foreign equipment manufacturer for violations of these transition 
provisions.
    Under the bond program adopted today, a participating foreign 
equipment manufacturer will have to obtain annually a bond in the 
proper amount that is payable to satisfy United States judicial 
judgments that results from administrative or judicial enforcement 
actions for conduct in violation of the Clean Air Act. The foreign 
equipment manufacturer will have two options for complying with the 
bonding requirement. The foreign equipment manufacturer can:

    (1) Obtain a bond in the proper amount from a third-party surety 
agent that is cited in the U.S. Department of Treasury Circular 570, 
``Companies Holding Certificates of Authority as Acceptable Sureties 
on Federal Bonds and as Acceptable Reinsuring Companies''; or
    (2) Obtain an EPA waiver from the bonding requirement, if the 
foreign equipment manufacturer can show that it has assets of an 
appropriate value in the United States.

    EPA expects the second bond option to address instances where an 
equipment manufacturer produces equipment outside the United States 
containing flexibility engines, but also has facilities (and thus 
significant assets) inside the United States. Under this second option, 
such a manufacturer can apply to the EPA for a waiver of the bonding 
requirement.
    Because EPA's concerns of compliance will relate to the nature and 
tier of engines used in the transition equipment, we believe the bond 
value should be related to the value of the engine used. Therefore, we 
are adopting requirements that the bond be set at a level designed to 
represent approximately 10% of the cost of the engine for each piece of 
transition equipment produced for import into the United States under 
this program. So that manufacturers have certainty regarding the bond 
amounts and so that there isn't a need for extensive data submittals 
and evaluation between EPA and the manufacturer, the rule specifies the 
bond value for each imported engine based on the estimated average cost 
for a Tier 4 engine on which the bond would be based. Based on average 
engine cost estimates from table 6.2-5 of the final RIA, equipment 
using engines exempted under the transition program will require a bond 
in the amount shown in table III.B-3.

             Table III.B-3.--Bond Value For Engines Imported
                  [Under the Tier 4 Transition Program]
------------------------------------------------------------------------
                                                                  Per
                                                                 engine
                         Power range                              bond
                                                                 value
                                                               (dollars)
------------------------------------------------------------------------
0 < hp < 25..................................................        150
25 <= hp < 75................................................        300
75 <= hp < 175...............................................        500
175 <= hp < 300..............................................      1,000
300 <= hp < 600..............................................      3,000
hp >= 600 hp.................................................      8,000
------------------------------------------------------------------------

    Depending on the number of engines/equipment brought into the U.S. 
each year, the value of the bond calculated using the above values 
could change from year to year. Under the provisions adopted today, an 
importer would calculate the estimated bond amount using the values in 
table III.B-3 and be required to obtain a bond equal to the highest 
bond value estimated over the seven-year flexibility period. Because we 
have the authority to bring enforcement actions against a manufacturer 
for five years beyond the end of the program, the manufacturer would be 
required to maintain the bond for five years beyond the end of the 
flexibility period or five years after using up all of its available 
allowances, whichever occurs first. Finally, if a foreign equipment 
manufacturer's bond is used to satisfy a judgment within the seven-year 
flexibility period, the foreign equipment manufacturer will then be 
required to increase the bond to cover the amount used within 90 days 
of the date the bond is used.
    Most comments received on this issue supported the proposed 
provisions. However, Ingersoll-Rand commented that EPA should clarify 
whether the special requirements for foreign equipment manufacturers 
apply to U.S.-based companies that have foreign manufacturing 
facilities. Ingersoll-Rand believes that such requirements should not 
apply because EPA appears to be concerned about abuse of the program by 
foreign companies that export machines into the U.S. With today's 
action, all equipment manufacturers who import equipment into the U.S. 
will be required to comply with the provisions for foreign equipment 
manufacturers, even if they are U.S.-based companies. Because there is 
a wide range of actual presence in this country for ``U.S.-based'' 
companies,

[[Page 39015]]

EPA believes it is important that all companies importing equipment to 
the U.S. comply with the requirements for foreign equipment 
manufacturers. Neither the notification requirements described earlier 
for foreign equipment manufacturers nor the bonding requirements should 
cause any burden for companies with significant presence in this 
country. We would expect that only those companies with limited 
presence or no presence in this country will be impacted to any 
measurable degree because of the requirements placed on foreign 
equipment manufacturers.
    In addition to the foreign equipment manufacturer requirements 
discussed above, EPA is also requiring importers of exempted equipment 
from a complying foreign equipment manufacturer to comply with certain 
provisions. EPA believes these importer provisions are essential to 
EPA's ability to monitor compliance with the transition provisions. 
Under today's action, each importer will be required to notify EPA 
prior to their initial importation of equipment exempted under the Tier 
4 transition provisions. Importers will be required to submit their 
notification prior to the first calendar year in which they intend to 
import exempted equipment from a complying foreign equipment 
manufacturer under the transition provisions. The importer's 
notification will need to include the following information:

    (1) The name and address of importer (and any parent company);
    (2) The name and address of the manufacturers of the exempted 
equipment and engines the importer expects to import;
    (3) Number of exempted equipment the importer expects to import 
for each year broken down by equipment manufacturer and power 
category; and
    (4) The importer's use of the transition provisions in prior 
years (number of flexibility engines imported in a particular year, 
under what power category, and the names of the equipment and engine 
manufacturers).

    In addition, EPA is requiring that any importer electing to import 
to the United States exempted equipment from a complying foreign 
equipment manufacturer will have to submit annual reports to EPA. The 
annual report will have to include the number of exempted equipment the 
importer actually imported to the United States in the previous 
calendar year; and the identification of the equipment manufacturers 
and engine manufacturers whose exempted equipment/engines were 
imported.

C. Engine and Equipment Small Business Provisions (SBREFA)

    The Regulatory Flexibility Act (RFA) generally requires an agency 
to prepare a regulatory flexibility analysis of any rule subject to 
notice and comment rulemaking requirements under the Administrative 
Procedure Act or any other statute, unless the agency certifies that 
the rule will not have a significant economic impact on a substantial 
number of small entities. Small entities include small businesses, 
small organizations, and small governmental jurisdictions. As EPA 
believed that the ultimate rule could have a significant economic 
impact on small businesses, we prepared a regulatory flexibility 
analysis as part of this rulemaking. We prepared an Initial Regulatory 
Flexibility Analysis (IRFA) pursuant to section 603 of the RFA which is 
part of the record for the NPRM, and we prepared a Final Regulatory 
Flexibility Analysis (FRFA) to support today's action.
    Under section 609(b) of the RFA, a Small Business Advocacy Review 
Panel (SBAR Panel or Panel) is required to be convened prior to 
publication of both an IRFA and a FRFA. Section 609(b) of the RFA 
directs the Panel to, through outreach with small entity 
representatives (SERs), report on the comments of the SERs and make 
findings under section 603 of the RFA on issues related to identified 
elements of an IRFA during the proposal stage of a rulemaking. During 
the development of the rulemaking, EPA is to analyze the elements of 
the IRFA in developing the FRFA for the final rulemaking (see section 
X.C of this preamble for more discussion on the elements of a FRFA). 
The purpose of the Panel was to gather information to identify impacts 
on small businesses and to develop potential regulatory options to 
mitigate these concerns. At the completion of the SBAR Panel process, 
the Panel prepared a Final Panel Report. This report includes:
     Background information on the proposed rule being 
developed;
     Information on the types of small entities that would be 
subject to the proposed rule;
     A description of efforts made to obtain the advice and 
recommendations of representatives of those small entities; and,
     A summary of the comments that had been received to date 
from those representatives.
    The Panel report was included in the proposal's rulemaking record 
(and hence in the rulemaking record for this final rule), and provided 
the Panel and the Agency with an opportunity to identify and explore 
potential ways of shaping the rule to minimize the burden of the rule 
on small entities while achieving the rule's purposes and being 
consistent with Clean Air Act statutory requirements.
    EPA approached this process with care and diligence. To identify 
representatives of small businesses for this process, we used the 
definitions provided by the Small Business Administration (SBA) for 
manufacturers of nonroad diesel engines and vehicles. The categories of 
small entities in the nonroad diesel sector that will potentially be 
affected by this rulemaking are defined in the following table:

------------------------------------------------------------------------
                                   Defined as small
            Industry               entity by SBA if:    Major SIC codes
------------------------------------------------------------------------
Engine manufacturers............  Less than 1,000     Major Group 35
                                   employees.
Equipment manufacturers:
  --construction equipment......  Less than 750       Major Group 35
                                   employees.
  --industrial truck              Less than 750       Major Group 35
   manufacturers (i.e.,            employees.
   forklifts).
  --all other nonroad equipment   Less than 500       Major Group 35
   manufacturers.                  employees.
------------------------------------------------------------------------

    One small engine manufacturer and 5 small equipment manufacturers 
agreed to serve as Small Entity Representatives (SERs) throughout the 
SBAR Panel process for this proposal. These companies represented the 
nonroad market well, as the group of SERs consisted of businesses that 
manufacture various types of nonroad diesel equipment.
    The following are the provisions recommended by the SBAR Panel. As 
described in section III.B above, there are other provisions that apply 
to all equipment manufacturers; however, the discussion in this section 
focuses mainly on small entities.

[[Page 39016]]

1. Nonroad Diesel Small Engine Manufacturers
a. Lead Time Transition Provisions for Small Business Engine 
Manufacturers
i. Panel Recommendations and Our Proposal
    The transition provisions recommended by the SBAR Panel for engines 
produced or imported by small entities are listed below. For all of the 
provisions, the Panel recommended that small business engine 
manufacturers and small importers must have certified engines in model 
year 2002 or earlier in order to take advantage of these provisions. 
Each manufacturer would be limited to 2,500 units per year as this 
number allows for some market growth. The Panel recommended these 
stipulations in order to prohibit the misuse of the transition 
provisions as a tool to enter the nonroad diesel market or to gain 
unfair market position relative to other manufacturers.
    Currently, certified nonroad diesel engines produced by small 
manufacturers all have a horsepower rating of 80 or less. At proposal, 
we considered both a one-step approach, and the two-step approach which 
we are finalizing today. Due to the structure of the standards and 
their timing, EPA proposed transition provisions for small business 
engine manufacturers which encompassed both approaches recommended by 
the Panel, with the inclusion of the 2,500 unit limit (as suggested by 
the Panel) for each manufacturer. Given the two-step structure of the 
final rule, we are only providing those proposed provisions related to 
that approach (a complete description of the provisions proposed by the 
Panel, and also by specific Panel members, is located in the SBAR Final 
Panel Report).
    For a two-step approach the Panel recommended that:
     An engine manufacturer should be allowed to skip the first 
phase and comply on time with the second; or,
     A manufacturer could delay compliance with each phase of 
standards for up to three years.
    We proposed the following provisions in the NPRM (based on 
available data, we believe that there are no small manufacturers of 
nonroad diesel engines above the 75-175 hp category):
    With regard to PM--
     Engines under 25 hp and those between 75 and 175 hp have 
only one standard so the manufacturer could delay compliance with these 
standards for up to three years.
     For engines between 50 and 75 hp, we proposed to delay 
compliance for one year if the 2008 interim standards are met, with the 
stipulation that small business manufacturers cannot use PM credits to 
meet the interim standard. However, if a small manufacturer elects the 
optional approach to the standard (elects to skip the interim 
standard), no further relief will be provided.
    With regard to NOX--
     There is no change in the level of the NOX 
standard for engines under 25 hp and those between 50 and 75 hp, so we 
did not propose any special provisions for these categories.
     For engines in the 25-50 hp and the 75-175 hp categories 
we proposed a three year delay in the program consistent with the one-
phase approach recommendation above.
ii. What We Are Finalizing
    We are finalizing all of the provisions set out above for 
NOX. For PM, we are finalizing some of the proposed 
provisions with certain revisions, as described below. In finalizing 
these provisions, we considered not only the recommendations of the 
Panel, but also the public comments on the proposed small business 
engine manufacturer transition provisions. Extensions of an applicable 
standard also apply to all certification requirements associated with 
that standards (so that transient and NTE testing would not be required 
until expiration of the extension). Based on available data, and 
further conversations with manufacturers during the development of this 
rulemaking (documented in the administrative record), we have found no 
small business manufacturers of nonroad diesel engines above 175 hp.
    For engines under 25 hp:
     PM--a manufacturer may elect to delay compliance with the 
standard for up to three years.
     NOX--there is no change in the level of the 
existing NOX standard for engines in this category, so no 
special provisions are being provided.
    For engines in the 25-50 hp category:
     PM--manufacturers must comply with the interim standards 
(the Tier 4 requirements that begin in model year 2008) on time, and 
may elect to delay compliance with the 2013 Tier 4 requirements (0.02 
g/bhp-hr PM standard) for up to three years. Due to an oversight at 
proposal, we did not include transition provisions for this category in 
the NPRM, but there is no reason to exclude them when all other small 
business engines are eligible for extensions. We therefore are adopting 
a three year extension with today's action. As engines in this category 
must meet the 2008 standard, we are not conditioning this three year 
extension on meeting this standard. (Please note the distinction 
between these engines and engines in the 50-75 hp power band, where we 
are conditioning a three-year extension on meeting the 2008 standards. 
The difference is that engines in the 50-75 hp category have an option 
of whether or not to meet those 2008 standards. We consequently have 
structured the small business engine extension to encourage a choice to 
comply with those standards.)
     NOX--a manufacturer may elect to delay 
compliance with the standard for up to three years.
    For engines in the 50-75 hp category:
     As proposed, EPA is adopting special provisions for these 
engines, reflecting the special provisions in the rules which give 
engine manufacturers the choice of meeting an interim standard for PM 
in 2008 and meeting the aftertreatment-based standard in 2013, or 
meeting the aftertreatment-based standard in 2012 without meeting an 
interim standard. A small business engine manufacturer may delay 
compliance with the 2013 Tier 4 requirement of 0.02 g/bhp-hr PM for up 
to three years provided that it complies with the interim Tier 4 
requirements that begin in model year 2008 on time, without the use of 
credits. We proposed an extension of only one year, but this would be 
inconsistent with the extension period we are adopting, and which we 
proposed, for all of the other power categories. In addition, this 
provision for 50-75 hp engines is structured to encourage small 
business engine manufacturers to opt for early PM reductions by meeting 
the 2008 interim PM standard, so that an extension of three years is 
appropriate as an incentive. We are requiring that these engines 
achieve the 2008 standard without use of credits to assure that there 
be improvements in actual performance by engines certifying to the 
standard. We believe that such assurance is a necessary and reasonable 
balance for the three year additional lead time for meeting the 
aftertreatment-based standard. There were no adverse comments on 
conditioning the extension in this manner.
    In the alternative, a manufacturer may elect to skip the interim 
standard completely. However, manufacturers choosing this option will 
receive only one additional year for compliance with the 0.02 g/bhp-hr 
standard (i.e. compliance in 2013, rather than 2012). These engines 
would already have had eight years of lead time to prepare for the PM 
standard without any diversion of resources to meet an interim PM 
standard, so that an extension of longer than one year would not be 
appropriate,

[[Page 39017]]

within the meaning of section 213(b) of the Act. In addition, 
structuring the extension in this way encourages small engine 
manufacturers to choose to meet the 2008 interim standard for PM, 
furthering the objective of early PM emission reductions.
     NOX--there is no change in the NOX 
standard for engines in this category, therefore no special provisions 
are being provided.
    For engines in the 75 to 175 hp category:
     PM--a manufacturer may elect to delay compliance with the 
standard for up to three years.
     NOX--a manufacturer may elect to delay 
compliance with the standard for up to three years.
    These provisions are also set out below in the following table (in 
all instances, these engines must meet the previously applicable 
standards as set out in Sec.  1039.104 (c):

------------------------------------------------------------------------
       Horsepower category                           Provision
------------------------------------------------------------------------
<25 hp..........................     NOX  No special provisions are
                                           being provided.
                                      PM  Manufacturers may delay
                                           compliance with the standard
                                           for three years.
                                     NOX  Manufacturers may delay
                                           compliance with the standard
                                           for three years.
25-50 hp........................      PM  Manufacturers must comply with
                                           the interim standards in
                                           2008, and may delay
                                           compliance with the 2013 Tier
                                           4 requirements (0.02 g/bhp-hr
                                           PM standard) for three years.
                                     NOX  No special provisions are
                                           being provided.
                                  ......  Manufacturers must comply with
                                           the interim Tier 4
                                           requirements in 2008, without
                                           the use of credits, and may
                                           elect to delay compliance
                                           with the 2013 Tier 4
                                           requirements (0.02 g/bhp-hr
                                           PM standard) for three years
50-75 hp........................      PM  --OR--
                                  ......  Manufacturers may skip the
                                           interim standard completely,
                                           and will receive an
                                           additional year for
                                           compliance with the 0.02 g/
                                           bhp-hr PM Tier 4 standard
                                           (i.e. compliance in 2013,
                                           rather than 2012).
75-175 hp.......................     NOX  Manufacturers may delay
                                           compliance with the standard
                                           for three years.
                                      PM  Manufacturers may delay
                                           compliance with the standard
                                           for three years.
------------------------------------------------------------------------

b. Hardship Provisions for Small Business Engine Manufacturers
i. Panel Recommendations and Our Proposals
    The Panel recommended two types of hardship provisions for small 
business engine manufacturers. These provisions would allow for relief 
in the following cases:
     A catastrophic event, or other extreme unforseen 
circumstances, beyond the control of the manufacturer that could not 
have been avoided with reasonable discretion (i.e., fire, tornado, 
supplier not fulfilling contract, etc.); and
     The event where a manufacturer has taken all reasonable 
business, technical, and economic steps to comply but cannot.
    The Panel believed that either hardship relief provision would 
provide lead time for up to 2 years, and that a manufacturer should 
have to demonstrate to EPA's satisfaction that failure to sell the 
noncompliant engines would jeopardize the company's solvency. EPA may 
also require that the manufacturer make up the lost environmental 
benefit.
    We proposed the Panel recommendations for hardship provisions for 
small business engine manufacturers. While perhaps ultimately not 
necessary given the phase-in schedule discussed above, we stated that 
such provisions provide a useful safety valve in the event of 
unforeseen extreme hardship.
ii. What We Are Finalizing
    We received two comments on the provisions for small business 
engine manufacturers. SBA's Office of Advocacy commented that the rule 
would impose significant burdens on a substantial number of small 
entities with little corresponding environmental benefit; and further, 
that we should exclude smaller engines (those under 75 hp) from further 
regulation in order to comply with the Regulatory Flexibility Act and 
fulfill the requirement of reducing the burden on small engine classes. 
As proposed, we are not adopting standards based on performance of 
NOX aftertreatment technologies for engines under 75 hp. As 
described in more detail in section II of this preamble, the Summary 
and Analysis of Comment Document, and the RIA, we have found no factual 
basis supporting the assertion that standards for PM for engines 
between 25 and 75 hp based on use of advanced aftertreatment impose 
costs out of relation to environmental benefit, have a disproportionate 
impact on small businesses, or are otherwise inappropriate. In fact, it 
is our finding that these standards for PM are ``appropriate'' within 
the meaning of section 213(a)(4) of the Clean Air Act, and that PM 
standards for these engines not based on performance of advanced 
aftertreatment would be inappropriate as failing to reflect standards 
based on available treatment for these engines (taking into account 
costs, noise, safety, and energy factors). We received no adverse 
comments from small business engine manufacturers on the proposed 
transition provisions for those manufacturers.\69\ Accordingly, we are 
finalizing the small business engine manufacturer hardship provisions 
that we proposed in the NPRM (as recommended by the Panel). We believe 
that these provisions will provide adequate regulatory flexibility for 
these manufacturers, while remaining consistent with the requirements 
of section 213(a)(4) and 213(b) of the Clean Air Act.
---------------------------------------------------------------------------

    \69\ The one comment that we received supported the provisions 
proposed for small business engine manufacturers.
---------------------------------------------------------------------------

c. Other Small Business Engine Manufacturer Issues
i. Panel Recommendations and Our Proposals
    The Panel also recommended that an ABT program be included as part 
of the overall rulemaking program. In addition, the Panel suggested 
that EPA take comment on including specific ABT provisions for small 
business engine manufacturers. We proposed an ABT program for all 
engine manufacturers, with this program retaining the basic structure 
of the current nonroad diesel ABT program.
    We did not include small business engine manufacturer-specific ABT

[[Page 39018]]

provisions in the proposal. Discussions during the SBAR process 
indicated that small volume manufacturers would need extra time to 
comply due to cost and personnel constraints, and there is little 
reason to believe that small business manufacturer specific ABT 
provisions could create an incentive to accelerate compliance.
ii. What We Are Finalizing
    As discussed above in section III.B, we are finalizing an ABT 
program in today's action similar to that already in place for nonroad 
engine manufacturers. We have also made a number of changes to 
accommodate implementation of these new emission standards.
2. Small Nonroad Diesel Equipment Manufacturers
a. Transition Provisions for Small Business Equipment Manufacturers
i. Panel Recommendations and Our Proposals
    The Panel recommended that we adopt the transition provisions 
described below for small business manufacturers and small business 
importers of nonroad diesel equipment. These transition provisions are 
similar to those in the Tier 2/3 rule (see 40 CFR 89.102). The 
recommended transition provisions were as follows:
     Percent-of-Production Allowance: Over a seven model year 
period, equipment manufacturers may install engines not certified to 
the new emission standards in an amount of equipment equivalent to 80 
percent of one year's production. This is to be implemented by power 
category with the average determined over the period in which the 
flexibility is used.
     Small Volume Allowance: A manufacturer may exceed the 80 
percent allowance in seven years as described above, provided that the 
previous Tier engine use does not exceed 700 total over seven years, 
and 200 in any given year. This is limited to one family per power 
category. Alternatively, the Panel recommended, at the manufacturer's 
choice by hp category, a program that eliminates the ``single family 
provision'' restriction with revised total and annual sales limits as 
shown below:
    --For categories <=175 hp-525 previous Tier engines (over 7 years) 
with an annual cap of 150 units (these engine numbers are separate for 
each hp category defined in the regulations)
    --For categories of > 175 hp-350 previous Tier engines (over 7 
years) with an annual cap of 100 units (these engine numbers are 
separate for each hp category defined in the regulations).
    The Panel recommended that EPA seek comment on the total number of 
engines and annual cap values listed above. In contrast to the Tier 2/
Tier3 rule, the SBA Office of Advocacy expected the transition to the 
Tier 4 technology will be more costly and technically difficult. 
Therefore, the small business equipment manufacturers may need more 
liberal flexibility allowances especially for equipment using the lower 
hp engines. The Panel's recommended flexibility may not adequately 
address the approximately 50 percent of small business equipment models 
where the annual sales per model is less than 300 and the fixed costs 
are higher. Thus, the SBA Office of Advocacy and the Office of 
Management and Budget (OMB) Panel members recommended that comment be 
sought on implementing the small volume allowance (700 engine 
provision) for small business equipment manufacturers without a limit 
on the number of engine families which could be covered in any hp 
category.
     Due to the changing nature of the technology as the 
manufacturers make the transition from Tier 2 to Tier 3 and Tier 4, the 
Panel recommended that the equipment manufacturers be permitted to 
borrow from the Tier3/Tier 4 flexibilities for use in the Tier 2/Tier 3 
time frame.
     Lastly, the Panel recommended proposing a continuation of 
the current transition provisions, without modifications to the levels 
or nature of the provisions, that are available to these manufacturers.
    To maximize the likelihood that the application of these provisions 
will result in the availability of previous Tier engines for use by the 
small business equipment manufacturers, the Panel recommended that--
similar to the application of flexibility options that are currently in 
place--these provisions should be provided to all equipment 
manufacturers.\70\
---------------------------------------------------------------------------

    \70\ The Panel recognized that, similar to the Tier 2/3 
standards, it may be necessary to provide transition provisions for 
all equipment manufacturers, not just for small entities, and the 
Panel recommended that this be taken into account.
---------------------------------------------------------------------------

    We did in fact propose the Percent-of-Production and Small Volume 
Allowances listed above for all equipment manufacturers, and explicitly 
took the Panel report into account in making that proposal. We also 
requested comment on a number of additional items, some of which were 
proposed by the Panel (see section III.B above).
ii. What We Are Finalizing
    We are finalizing the Percent-of-Production and Small Volume 
Allowances for all equipment manufacturers, with a few changes. Some 
non-small equipment manufacturers commented that the small-volume 
provision should enable manufacturers to exempt up to 700 pieces of 
equipment over a seven-year period, with no engine family restriction. 
As explained earlier in section III.B.2.c, we are finalizing provisions 
that allow manufacturers to choose between two options: (a) 
Manufacturers would be allowed to exempt 700 pieces of equipment over 
seven years, within one engine family; or (b) manufacturers using the 
small-volume allowance could exempt 525 machines over seven years (with 
a maximum of 150 in any given year) for each of the three power 
categories below 175 horsepower, and 350 machines over seven years 
(with a maximum of 100 in any given year) for the two power categories 
above 175 horsepower. Concurrent with the revised caps, manufacturers 
could exempt engines from more than one engine family under the small-
volume allowance program. As explained earlier, based on sales 
information for small businesses, we estimated that the alternative 
small-volume allowance program to include lower caps and allow 
manufacturers to exempt more than one engine family would keep the 
total number of engines eligible for the allowance at roughly the same 
overall level as the 700-unit program. The Agency believes that these 
provisions will afford manufacturers the type of transition leeway 
recommended by the Panel. Further, these transition provisions could 
allow small business equipment manufacturers to postpone any redesign 
needed on low sales volume or difficult equipment packages, thus saving 
both money and strain on limited engineering staffs. Within limits, 
small equipment manufacturers would be able to continue to use their 
current engine/equipment configuration and avoid out-of-cycle equipment 
redesign until the allowances are exhausted or the time limit passes.
    During the SBREFA Panel process, the Panel discussed the possible 
misuse of the transition provisions by using them as a loophole to 
enter the nonroad diesel equipment market or to gain unfair market 
position relative to other manufacturers. See 68 FR at 28481. EPA was 
concerned that importers of equipment from a foreign equipment 
manufacturer could, as a group, import more exempted equipment from 
that foreign manufacturer than 80 percent of

[[Page 39019]]

that manufacturer's production for the United States market or more 
than the small volume allowances identified in the transition 
provisions. This would create a potentially significant disparity 
between the treatment of foreign and domestic equipment manufacturers. 
EPA did not intend this outcome, and did not believe it was needed to 
provide reasonable lead time to foreign equipment manufacturers. The 
Panel recognized that this was a possible problem, and believed that a 
requirement that small equipment manufacturers and importers must have 
reported equipment sales using certified engines in model year 2002 or 
earlier in order to be eligible to access the transition provisions was 
sufficient to alleviate this problem. Upon further analysis during the 
development of the proposal, EPA decided to limit the availability of 
transition provisions to entities that install engines and have primary 
responsibility for designing and manufacturing equipment and included 
such a requirement in the proposal. Id. at 28477. Therefore, a company 
that only imported equipment, and had no involvement in the actual 
manufacturing of the equipment, would be ineligible to access the 
transition provisions. As described in section III.B.4, we are 
finalizing the proposed requirements associated with the use of 
transition provisions by foreign importers. Therefore, we no longer 
believe it is necessary to have a separate requirement that small 
equipment manufacturers and importers have reported equipment sales 
using certified engines in model year 2002 or earlier, and therefore 
are not finalizing this redundant provision.
    We are also finalizing the Panel's recommendation that equipment 
manufacturers be allowed to borrow from Tier 4 flexibilities in the 
Tier2/3 time frame. See the more extended discussion on this issue in 
section III.B.2.d above.
    We are not finalizing the Panel recommendation of a provision 
allowing small manufacturers to request limited ``application 
specific'' alternative standards for equipment configurations which 
present unusually challenging technical issues for compliance. We do 
not believe that the need for such a provision has been established, 
and further, it could likely provide more lead time than can be 
justified, and undermine emission reductions which are achievable. 
Moreover, no participant in the SBAR process or during the public 
comment period offered any empirical support that such a problem even 
exists. Nor have such issues been demonstrated (or raised) by equipment 
manufacturers, small or large, in implementing the current nonroad 
standards. In addition, we believe that any application-specific 
difficulties can be accommodated by the transition provisions the 
Agency is proposing including ABT.
    We are also finalizing two additional provisions for all equipment 
manufacturers that small business equipment manufacturers may take 
advantage of. These provisions are the Technical Hardship Provision and 
the Early Tier 4 Engine Incentive Program. Both provisions are 
discussed in greater detail in sections III.B.2.b and e above.
b. Hardship Provisions for Small Business Equipment Manufacturers
i. Panel Recommendations and Our Proposals
    The Panel also recommended that two types of hardship provisions be 
extended to small business equipment manufacturers. These provisions 
would allow for relief in the following cases:
     A catastrophic event, or other extreme unforseen 
circumstances, beyond the control of the manufacturer that could not 
have been avoided with reasonable discretion (i.e., fire, tornado, 
supplier not fulfilling contract, etc.).
     The event where a manufacturer has taken all reasonable 
business, technical, and economic steps to comply but cannot. In this 
case relief would have to be sought before there is imminent jeopardy 
that a manufacturer's equipment could not be sold and a manufacturer 
would have to demonstrate to the Agency's satisfaction that failure to 
get permission to sell equipment with a previous Tier engine would 
create a serious economic hardship. Hardship relief of this nature 
cannot be sought by an ``integrated'' manufacturer (one which also 
manufactures the engines for its equipment).
    We proposed that the hardship provisions recommended by the Panel 
be extended to small business equipment manufacturers in addition to 
the transition provisions described above. We also requested comment on 
the stipulation that, to be eligible for these hardship provisions (as 
well as the other proposed transition provisions), equipment 
manufacturers and importers must have reported equipment sales using 
certified engines in model year 2002 or earlier.
ii. What We Are Finalizing
    We are finalizing the Panel-recommended hardship provisions for 
small business equipment manufacturers (which are the same provisions 
that are being adopted for all equipment manufacturers).
    EPA also received comment concerning the situation faced by small 
business equipment manufacturers using engines in the 25-50 horsepower 
range. The concern was raised that small businesses in this power 
grouping will face a greater relative burden in designing equipment for 
engines with aftertreatment, and that they may need additional lead 
time beyond that provided by the small volume allowances. EPA believes 
that in general the small volume allowances should provide reasonable 
lead time opportunity for these manufacturers, but recognizes that 
there may be individual cases where more lead time would be appropriate 
for small business manufacturers in this power category. EPA is 
therefore adopting a technical hardship provision similar to that 
adopted for the percent of production allowance. Small business 
manufacturers using engines in the 25-50 hp range could petition EPA to 
approve additional needed lead time in appropriate, individualized 
circumstances, based on a showing of extreme technical or engineering 
hardship as provided in 40 CFR 1039.625(m). EPA could approve 
additional small volume allowances, up to a total number of 1100 units. 
This total number includes the allowances that are already available 
under the rule without request. These additional allowances could only 
be used for engines in the 25-50 horsepower range, and could only be 
approved for qualifying small business equipment manufacturers. The 
limitations on the use of small volume allowances (such as when 
allowances may only be used within a single engine family and the 
annual limits) continue to apply to the standard allowances (that are 
available under the rule without request). Finally, any additional 
allowances granted under this provision would have to be used within 36 
months after the transition flexibility period commences for these 
engines. The additional allowances would not be subject to the annual 
limits noted earlier but they could only be used after the maximum 
amount of standard allowances are used in a given year (e.g., a 
manufacturer using the 700 unit allowance would have to use 200 of 
their standard allowances for that year before they could use any of 
the additional allowances granted by EPA under this technical hardship 
provisions).
    EPA recognizes that it is important to facilitate the process for 
small business equipment manufacturers to seek such approval, and 
intends to work with

[[Page 39020]]

small manufacturers so that any transaction costs for them or for EPA 
can be minimized. For example, EPA could consider at one time a common 
request from similarly situated small business equipment manufacturers, 
as long as all of the necessary individual information for each 
applicant were provided. Given that information in such an application 
would still be both company- and fact-specific (and likely confidential 
as well), and that the criteria for relief as well as the scope of 
appropriate relief are case-specific, we would necessarily evaluate and 
decide whether or not to approve additional small volume allowances on 
a company-by-company, case-by-case basis.
    For a detailed description of the comments received on small 
business engine and equipment manufacturer issues, please refer to the 
Summary and Analysis of comments, which is a part of the rulemaking 
record (E-DOCKET number OAR-2003-0012, and legacy docket number A-2001-
28). A summary of the SBREFA process is located in section X.C of this 
preamble.

D. Certification Fuel

    It is well-established that measured emissions may be affected by 
the properties of the fuel used during the test. For this reason, we 
have historically specified allowable ranges for test fuel properties 
such as cetane number and sulfur content. These specifications are 
intended to represent most typical fuels that are commercially 
available in use. This helps to ensure that the emissions reductions 
expected from the standards occur in use as well as during emissions 
testing.
    We are establishing all 6 provisions that we proposed related to 
the sulfur content of fuel used in conducting nonroad diesel engine 
emissions testing:
     300-500 ppm for model year 2008 to 2010 engines,
     7-15 ppm for 2011 and later model year engines,
     Extension through model year 2007 of the maximum 2000 ppm 
specification for Agency testing on pre-Tier 4 engines,
     7-15 ppm for 2007-2010 model year engines that use sulfur-
sensitive technology,
     7-15 ppm for 2008-2010 model year engines under 75 hp,
     300-500 ppm for some model year 2006-2007 engines at or 
above 100 hp.

The last 3 of these provisions are at the certifying manufacturer's 
option, and involve additional measures that the manufacturer must take 
to help ensure that the specified fuel is used in the field. The below 
discussion provides more detail on each of these provisions.
    We received very little comment on our proposed certification fuel 
provisions. Detroit Diesel commented that we should set a maximum 
sulfur specification of 500 ppm for Tier 3 engines, which we are in 
fact doing beginning in model year 2008 after this fuel is introduced 
in the nonroad market, and optionally allowing as early as 2006, the 
earliest Tier 3 model year, provided manufacturers take steps to 
encourage the use of this fuel, as discussed below.
    Because we are lowering the upper limit for in-use nonroad diesel 
fuel sulfur content to 500 ppm in 2007, and again to 15 ppm in 2010, we 
are also establishing new ranges of allowable sulfur content for 
testing. These are 300 to 500 ppm (by weight) for model year 2008 to 
2010 engines, and 7 to 15 ppm (by weight) for 2011 and later model year 
engines. We believe that these ranges best correspond to the fuels that 
diesel machines will potentially see in use.\71\ These specifications 
will apply to emission testing conducted for certification, selective 
enforcement audits, in-use, and NTE testing, as well as any other 
laboratory engine testing for compliance purposes for engines in the 
designated model years. Any compliance testing of previous model year 
engines will be done with the fuels designated in our regulations for 
those model years. Note that, as proposed, we are allowing 
certification with fuel meeting the 7 to 15 ppm sulfur specification in 
2010 for under 11 hp, air-cooled, hand-startable, direct injection (DI) 
engines certified under the optional standard provision discussed in 
section II.A.3.a.
---------------------------------------------------------------------------

    \71\ See 66 FR 5112-5113 (January 18, 2001) where we adopted a 
similar approach to certification fuels for highway heavy-duty 
diesel engines (HDDEs).
---------------------------------------------------------------------------

    It is important to note that while these specifications include the 
maximum sulfur level allowed for in-use fuel, we believe that it is 
generally appropriate to test using the most typical fuels. As for 
highway fuel, we expect that, under the 15 ppm maximum sulfur 
requirement, refineries will typically produce diesel fuel with about 7 
ppm sulfur, and that the fuel could have slightly higher sulfur levels 
after distribution. Thus, we expect that we will use fuel having a 
sulfur content between 7 and 10 ppm sulfur for our emission testing. 
This is the same as the range we indicated will be used for heavy-duty 
diesel engine (HDDE) engine testing in model year 2007 and later (66 FR 
5002, January 18, 2001). As with the highway fuel, should we determine 
that the typical in-use nonroad diesel fuel has significantly more 
sulfur than this, we would adjust this target upward.
    We are also adopting two options for early use of the new 7 to 15 
ppm sulfur diesel test fuel. The first will be available beginning in 
the 2007 model year for engines employing sulfur-sensitive technology. 
(Model year 2007 coincides approximately with the introduction of 15 
ppm highway fuel.) This allowance to use the new fuel in model years 
before 2011 will only be available for engines which the manufacturer 
demonstrates will be operated in use on fuel with 15 ppm sulfur or 
less. Any testing that we perform on these engines will also use fuel 
meeting this lower sulfur specification. This optional certification 
fuel provision is intended to encourage the introduction of low-
emission diesel technologies in the nonroad sector. These engines will 
be able to use the lower sulfur fuel throughout their operating life, 
given the early availability of this fuel under the highway program, 
and the assured availability of this fuel for nonroad engines by mid-
2010.
    Considering that our Tier 4 program will subject engines under 75 
hp to new emission standards in 2008 when 15 ppm maximum sulfur fuel 
will be readily available from highway fuel pumps (and will enter the 
nonroad fuel market shortly after in 2010), we believe it is 
appropriate to provide a second, less proscriptive, option for use of 
15 ppm sulfur certification fuel. This option will be available to any 
manufacturers willing to take extra steps to encourage the use of this 
fuel before it is required in the field. We are allowing the early use 
of 15 ppm certification fuel for 2008-2010 engines under 75 hp, 
provided the certifying manufacturer ensures that ultimate purchasers 
of equipment using these engines are informed that the use of fuel 
meeting the 15 ppm specification is recommended, and also recommends to 
equipment manufacturers buying these engines that labels be applied at 
the fuel inlet to remind users of this recommendation. This option does 
not apply to those 50-75 hp engines not being certified to the 0.22 g/
bhp-hr PM standard, under the manufacturers' option discussed in 
section II.A.1.a.
    We believe that there may be a very small loss of emissions benefit 
from any of these engines for which the operator chooses to ignore the 
recommendation. This is because the engine manufacturer will be 
designing the engine to comply with the emissions standards when tested 
using 15 ppm fuel, potentially resulting in slightly higher emissions 
when it is not operated on the 15 ppm

[[Page 39021]]

fuel. We also believe, however, that this is more than offset overall 
by the encouragement this provision provides for early use of 15 ppm 
fuel. We are not making this option available for engine designs 
employing oxidation catalysts or other sulfur-sensitive exhaust 
emission control devices except under the more restrictive provision 
for early use of 15 ppm fuel described above, involving a demonstration 
by the manufacturer that the fuel will indeed be used. Because these 
devices could potentially have very high sulfur-to-sulfate conversion 
rates (see section II.B.4 and 5 above), and because very high-sulfur 
fuels will still be available to some extent, we believe that allowing 
this provision for these engines would risk very high PM emissions 
until the 15 ppm nonroad fuel is introduced. We are not making this 
second early 15 ppm test fuel option available for engines not subject 
to a new Tier 4 standard in 2008 as these engines should already be 
designed to meet applicable standards in earlier years without need for 
the 15 ppm fuel.
    We are also adopting a similar provision for use of certification 
fuel meeting the 300-500 ppm sulfur specification before the 2008 model 
year. We believe certification of model year 2006 and 2007 engines 
being designed without the use of sulfur-sensitive technologies to meet 
new Tier 2 or Tier 3 emission standards taking effect in those years 
(2006 for engines at or above 175 hp and 2007 for 100-175 hp engines) 
should be able to use this fuel, provided the certifying manufacturer 
is willing to take measures equivalent to those discussed above to 
encourage the early use of this fuel (a recommendation to the ultimate 
purchaser to use fuel with 500 ppm maximum sulfur and a recommendation 
to equipment manufacturers to so label their equipment).
    The widespread availability of 500 ppm sulfur highway fuel, the 
short time that these 2006 and 2007 engines could use higher sulfur 
fuels if an operator were to ignore the recommendation, and the 
eventual use of 15 ppm sulfur fuel in most of these engines for most of 
their operating lives, gives us confidence that this provision to 
encourage early use of lower sulfur fuel will be beneficial to the 
environment overall. As with the change to 300-500 ppm cert fuel for 
model years 2008-2010, engine manufacturers will design their engines 
to comply based on the test fuel specifications for certification and 
compliance testing. The change from a fuel specification for compliance 
testing that ranges up to 2000 ppm sulfur for Tier 2 and 3 engines to a 
specification of 500 ppm sulfur maximum could have some limited effect 
on the emissions control designs used on these Tier 2 and 3 engines, in 
that it will be slightly easier to meet the Tier 2 and 3 standards 
using the lower sulfur test fuel. In general, it is reasonable to set 
specifications of test fuel reflecting representative in-use fuels, and 
here the engines are expected to be using fuel with sulfur levels of 
500 ppm or lower until 2010, and 15 ppm or lower after that. In this 
case, any impact on expected engine emissions from this change in test 
fuel for Tier 2 and 3 is expected to be slight.
    We note that under current regulations manufacturers are already 
allowed to conduct testing with certification fuel sulfur levels as low 
as 300 ppm. The additional provision for early use of 300-500 ppm 
sulfur test fuel will, however, result in any compliance testing 
conducted by the Agency being done with fuel meeting the 300-500 ppm 
specification. Likewise choice of the option for early use of 15 ppm 
sulfur test fuel would result in any Agency testing being done using 
that fuel. However, under both of these early certification fuel 
options involving a recommended fuel use provision, the Agency will not 
reject engines from in-use testing for which there is evidence or 
suspicion that the engine had been fueled at some time with higher 
sulfur fuel.
    Finally, we are extending a provision adopted in the 1998 final 
rule (63 FR 56967, October 23, 1998). In that rule we set a 2000 ppm 
upper limit on the test fuel sulfur concentration for any testing to be 
performed by the Agency on Tier 1 engines under 50 hp and Tier 2 
engines at or above 50 hp. We did not extend this provision to later 
model year engines at that time because we felt that more time was 
needed to assess trends in fuel sulfur levels for fuels used in nonroad 
diesels. At this time we are not aware of any additional information 
that would indicate that a change in this test specification is 
warranted. More importantly, because the fuel regulation we are 
adopting will make 500 ppm maximum sulfur nonroad diesel fuel available 
by mid-2007, Tier 3 engines at or above 50 hp (which phase in beginning 
in 2006) will be in the field for only 1\1/2\ years prior to the in-use 
introduction of 500 ppm fuel, and Tier 2 engines under 50 hp (which 
phase in beginning in 2004) will be in the field for at most 3\1/2\ 
years prior to this time. We believe it is appropriate to avoid adding 
the unnecessary complication of frequent multiple changes to the test 
fuel specification. We are therefore extending the 2000 ppm limit to 
testing conducted on engines until the 2008 model year when the 500 ppm 
maximum test fuel sulfur level takes effect as discussed above.

E. Temporary In-Use Compliance Margins

    The Tier 4 standards will be challenging for diesel engine 
manufacturers to achieve, and will require manufacturers to develop and 
adapt new technologies for a large number and wide variety of engine 
platforms. Not only will manufacturers be responsible for ensuring that 
these technologies enable compliance with Tier 4 standards at the time 
of certification, they will also have to ensure that these technologies 
continue to be highly effective in a wide range of in-use environments 
so that their engines will comply in use when tested by EPA. 
Furthermore, for the first time, these nonroad diesel engines will be 
subject to transient emissions control requirements and to NTE 
standards.
    However, in the early years of a program that introduces new 
technology, there are risks of in-use compliance problems that may not 
appear in the certification process or during developmental testing. 
Thus, we believe that for a limited number of model years after new 
standards take effect it is appropriate to adjust the compliance levels 
for assessing in-use compliance for diesel engines equipped with high-
efficiency exhaust emissions control devices. This provides assurance 
to the manufacturers that they will not face recall if they exceed 
standards by a small amount during this transition to clean 
technologies. This approach is very similar to that taken in the light-
duty highway Tier 2 final rule (65 FR 6796, February 10, 2000) and the 
highway heavy-duty rule (66 FR 5113-5114, January 18, 2001), both of 
which involve similar approaches to introducing the new technologies. 
In fact, the similarities of nonroad diesel engines and expected Tier 4 
control technologies to counterpart engines and technologies for heavy-
duty highway diesel engines led us to model the proposed Tier 4 add-on 
provisions after the 2007 heavy-duty highway diesel program, with add-
on levels chosen to be roughly equivalent to the levels adopted in the 
highway rule.
    Comments on the proposal were received from engine manufacturers, 
requesting changes that would make the temporary in-use adjustments 
more closely parallel the highway requirements. Specifically, they 
requested: (1) Providing two full model years of applicability 
following the completion of standards phase-in for the

[[Page 39022]]

75-175 hp category, as was proposed for the other power categories, (2) 
adjusting the NOX threshold for applicability of the 
provisions to a level 8% above the split family standard, (3) adopting 
3 levels of add-ons based on how many hours the test engine had been 
used, with cutpoints at 2000 and 3400 hours, and (4) a 25% upward 
adjustment to the add-on levels. We agree that these changes would 
result in a closer approximation to the highway program. Our goal in 
proposing provisions somewhat different from the highway program was to 
avoid unnecessary complexity. However, we believe that maintaining 
consistency with the highway program is a more important goal and the 
manufacturers' suggested changes do not overly complicate the program, 
and so we have decided to make these changes.
    We note too that changes we are making to the Tier 4 program for 
engines over 750 hp necessitate other changes to the in-use add-on 
program for these engines as well. Specifically, these are the 
extension of model year applicability to 2016, two years after the 
final Tier 4 standards take effect, and the clarification of what PM 
thresholds apply for engines used in generator sets and for other 
engines.
    Table III.E-1 shows the in-use adjustments that we will apply. 
These in-use add-on levels will be applied only to engines certified in 
the indicated model years and having FELs (or certifying to standards 
without FELs) at or below the specified threshold levels. These 
adjustments are added to the appropriate FELs (see section III.A) or, 
for engines certified to the standards without the use of ABT program 
credits, to the standards themselves, in determining the in-use 
compliance level for a given in-use hours accumulation on the engine 
being tested. Note that the PM adjustment is the same for all in-use 
hours accumulation. Note also that, because the standards in the 
regulations are expressed in g/kW-hr, the adjustments included in the 
regulations are set at levels that make the resulting adjusted in-use 
standard equivalent in stringency to the standards in this preamble 
(expressed in g/bhp-hr) adjusted by the values in Table III.E-1 (also 
expressed in g/bhp-hr).
    Note too that, as part of the certification demonstration, 
manufacturers will still be required to demonstrate compliance with the 
unadjusted Tier 4 certification standards using deteriorated emission 
rates. Therefore, the manufacturer will not be able to use these in-use 
standards as the design targets for the engine. They will need to 
project that most engines will meet the standards in-use without 
adjustment. The in-use adjustments will merely provide some assurance 
that they will not be forced to recall engines because of some small 
miscalculation of the expected deterioration rates.

                       Table III.E-1.--Add-on Levels Used in Determining In-use Standards
----------------------------------------------------------------------------------------------------------------
                                                                              NOX                       PM
                                                              --------------------------------------------------
                Engine power                    Model years      Add-on level    For operating     Add-On level
                                                               \a\  (g/bhp-hr)       hours       \b\  (g/bhp-hr)
----------------------------------------------------------------------------------------------------------------
25 <= hp <75................................        2013-2014                none                           0.01
(19 <= kW <56)..............................
---------------------------------------------
                                                                          0.12          <= 2000
75 <= hp <175...............................        2012-2016             0.19        2001-3400             0.01
(56 <= kW <130).............................                              0.25           > 3400
---------------------------------------------
                                                                          0.12          <= 2000
175 <= hp <=750.............................        2011-2015             0.19        2001-3400             0.01
(130<= kW <=560)............................                              0.25           > 3400
---------------------------------------------
                                                                          0.12          <= 2000
hp >750.....................................        2011-2016             0.19        2001-3400             0.01
(kW >560)...................................                              0.25          > 3400
----------------------------------------------------------------------------------------------------------------
Notes:
\a\ Applicable only to those engines certifying to standards or with FELs at or below 1.6 g/bhp-hr NOX.
\b\ Applicable only to those engines certifying to standards or with FELs at or below the filter-based Tier 4 PM
  standards (0.01 g/bhp-hr for 75-750 hp engines, 0.02 g/bhp-hr for 25-75 hp engines and for >750 hp engines in
  generator sets, and 0.03 g/bhp-hr for all other >750 hp engines).

F. Test Cycles

1. Transient Test
    In the 1998 final rule that set new emission standards for nonroad 
diesel engines, EPA expressed a concern that the steady-state test 
cycles used to demonstrate compliance with emission standards did not 
adequately reflect transient operation as many nonroad engines are used 
in applications that are largely transient in nature and would not 
therefore yield adequate control of emissions in use (63 FR 56984, 
October 23, 1998). Although we were not prepared to adopt a transient 
test at that time, we announced our intention in that final rule to 
move forward with the development of such a test. This development 
progressed steadily and has resulted in the creation of the Nonroad 
Transient Composite (NRTC) test cycle which we are adopting in our Tier 
4 nonroad diesel program. The NRTC cycle supplements the existing 
nonroad steady-state test requirements. Thus, most nonroad engines 
subject to today's Tier 4 standards will be required to certify using 
both of these tests.\72\ The NRTC cycle captures transient emissions 
over much of the typical nonroad engine operating range, and thus helps 
to ensure effective control of all regulated pollutants. The speed and 
load operating schedule for EPA's NRTC test cycle is described in 
regulations at 40 CFR 1039.505. A detailed discussion of the transient 
test cycle and its derivation is contained in chapter 4.2 of the RIA 
for this rule.
---------------------------------------------------------------------------

    \72\ See EPA Dear Manufacturer Letter VPCD-98-13, ``Heavy-duty 
Diesel Engines Controlled by Onboard Computers: Guidance on 
Reporting and Evaluating Auxiliary Emission Control Devices and the 
Defeat Device Prohibition of the Clean Air Act,'' October 15, 1998 
and EPA Advisory Circular 24-3, ``Implementation of Requirements 
Prohibiting Defeat Devices for On-Highway Heavy-Duty Diesel 
Engines.'' A copy of both of these documents is available in EPA Air 
Docket A-2001-28.
---------------------------------------------------------------------------

    We expect that this transient test requirement will significantly 
reduce real world emissions from nonroad diesel equipment. Proper 
transient

[[Page 39023]]

operation testing captures engine emissions from the broad range of 
engine speed and load combinations that the engine may attain in-use, 
while the steady-state emission test characterizes emissions at the few 
isolated operating points that may be typical for that family of 
engines. Testing for transient emissions will likewise identify 
emissions which result from the operation of the engine, as with speed 
and load changes, turbocharger lag, etc.
    In keeping with our goal to maximize the harmonization of emissions 
control programs as much as possible, we have developed this cycle in 
collaboration with nonroad engine manufacturers and regulatory bodies, 
both domestic and foreign, over the last several years.\73\ Further, 
the NRTC cycle has been introduced as a work item for possible adoption 
as a potential global technical regulation under the 1998 Agreement for 
Working Party 29 at the United Nations.\74\
---------------------------------------------------------------------------

    \73\ Letter from Jed Mandel of the Engine Manufacturers 
Association to Chet France of U.S. EPA, Office of Transportation and 
Air Quality, ``Development of appropriate transient test cycle for 
variable speed land-based compression ignition non-road engines,'' 
Air Docket A-2001-28, II-B-33.
    \74\ Informal Document No.2, ISO--45th GRPE, ``Proposal for a 
Charter for the Working Group on a New Test Protocol for Exhaust 
Emissions from Nonroad Mobile Machinery,'' Jan. 13-17, 2003, Air 
Docket A-2001-28, document II-A-171.
---------------------------------------------------------------------------

    EPA's nonroad transient test will apply (with one exception noted 
below) to a nonroad diesel engine when that engine must first show 
compliance with EPA's Tier 4 PM and NOX+NMHC emissions 
standards which are based on the performance of the advanced post-
combustion emissions control systems (e.g. catalyzed-diesel particulate 
filters and NOX adsorbers). This is 2011 for engines at 175 
hp-750 hp, 2012 for 75-175 hp engines (2012, as well, for 50-75 hp 
engines made by a manufacturer choosing the option to not comply with 
the 2008 transitional PM standard.), and 2013 for engines under 75 hp. 
The transient test cycle will not apply to engines greater than 750 hp. 
Specific provision is made for engines under 25 hp for PM and under 75 
hp for NOX (which are not based on performance of advanced 
aftertreatment). Constant-speed, variable-load engines of any 
horsepower category currently certify to EPA's 5-Mode Steady State duty 
cycle and are not subject to transient duty cycle testing. As with 
current nonroad diesel standards, today's Tier 4 emission standards 
will apply to certification, Selective Enforcement Audits (SEAs) and to 
recall testing of equipment in-use for all engines subject to these 
standards.

 Table III.F-1.--Implementation Model Year for Nonroad Transient Testing
------------------------------------------------------------------------
                                                         Transient test
                    Power category                       implementation
                                                           model years
------------------------------------------------------------------------
< 25 hp...............................................              2013
25 <= hp < 75.........................................              2013
75 <= hp < 175........................................              2012
175<= hp < 750........................................              2011
------------------------------------------------------------------------

    In addition, any engines for which an engine manufacturer (see 
section III.M) or equipment maker (see section III.B.2.c) claims credit 
under the incentive program for early-introduction engines will have to 
be certified to that program's standards under applicable Tier 4 
nonroad transient and steady-state duty cycles, e.g., NRTC, 8-mode and 
5-mode steady-state cycles. In turn, any 2011 or later model year 
engine that uses these engine count-based credits will not need to 
demonstrate compliance under the NRTC cycle. Engines in any power 
category certified to an alternate NOX standard are all 
subject to the transient test requirement, as they clearly will be 
substantially redesigned to achieve Tier 4 compliance, regardless of 
whether or not they use high-efficiency exhaust emission controls. See 
section II.A.1.c above.
    We solicited comment on whether the transient duty cycle should 
apply to NOX emissions from phase-out engines (68 FR 28484, 
May 23, 2003) and received comment from EMA. EMA prefers that the 
transient cycle only be applicable to PM emission testing and not for 
NOX, NMHC and CO for phase-out engine families. They believe 
that the application of the transient NRTC and standards could result 
in the need to redevelop the NOX/NMHC/CO emission control 
systems used for their members' compliance with Tier 3 standards.
    We essentially agree with this comment to the extent that phase-out 
engines do not include improvements in gaseous pollutant emission 
control (i.e. they remain essentially Tier 3 engines for emissions 
other than PM). Imposing new requirements with respect to these 
engines' gaseous pollutant emissions could divert resources 
inappropriately. The rule therefore states (in 40 CFR 1039.102 (a)(2)) 
that gaseous pollutant emissions from these engines are not subject to 
transient testing standards. This would not apply if a manufacturer 
declares a new NOX+NMHC FEL for the engine family (since the 
manufacturer would then already be choosing to alter these engines' 
performance with respect to gaseous pollutant emissions).\75\
---------------------------------------------------------------------------

    \75\ Please note that this discussion does not apply to engines 
certifying to the alternative NOX phase-in standards, 
which engines are required to meet transient and NTE requirements 
for gaseous pollutants (as well as all other requirements that would 
apply to phase-in engines). See discussion at II.A.2.c; also please 
note that these engines are expressly not defined as phase-out 
engines in the rules; see section 1039.801 and 1039.102 (e).
---------------------------------------------------------------------------

    Transient testing standards do apply with respect to PM emissions 
from phase-out engines, however. The reason is evident: the PM standard 
for phase-out (and phase-in) engines is based on performance of 
aftertreatment, so the full complement of test cycles (NTE as well as 
transient testing) should apply. A consequence of this is that phase-
out engines will generally be tested over the transient cycle, since 
they must do so with respect to PM emissions. We repeat, however, that 
although the engines will do transient testing, only PM (and not 
gaseous pollutants) is subject to the transient test standard.
    In addition, manufacturers choosing to certify engines under 750 hp 
using alternative FEL caps during the first four years that the 
alternative caps are available (see section III.A.i.2 above) will not 
be subject to the transient or NTE standards. However, to properly 
account for the transient effects when calculating credits, we are 
requiring the FELs of such engines to be adjusted upwards by applying a 
Temporary Compliance Adjustment Factor (TCAF) \76\. See 40 CFR 1039.104 
(g) (2).
---------------------------------------------------------------------------

    \76\ As noted elsewhere, the TCAFs are derived identically to 
the Transient Adjustment Factor used in the NONROAD emissions model.
---------------------------------------------------------------------------

    Even though we are requiring that NRTC testing start when the PM 
aftertreatment-based standards take effect, one should not infer that 
the NRTC is directed at solely (or even primarily) at PM control. In 
fact, we believe that advanced NOX emission controls may be 
even more sensitive to transient operation than PM filters, since the 
PM filters ordinarily operate equally effectively in all operating 
modes, as noted earlier. It is, however, our intent that the control of 
emissions during transient operation be an integral part of Tier 4 
engine design considerations. We have therefore chosen to apply the 
transient test requirement starting with the PM filter-based Tier 4 PM 
standards as these standards precede or accompany the earliest Tier 4 
NOX or NMHC standards in all power categories except engines 
over 750 hp.
    As EPA is not promulgating PM filter-based standards for engines 
below 25 hp in today's rulemaking, we are likewise not requiring these 
engines to be tested

[[Page 39024]]

over the NRTC test cycle until model year 2013. More broadly, though we 
intend for transient emissions control to be an integral part of Tier 4 
design considerations, we do not believe it appropriate to mandate 
compliance with the transient test for the engines under 50 hp which 
are subject to PM standards in 2008. We recognize that transient 
emission testing, though routine in highway engine programs, involves a 
fair amount of laboratory equipment and new expertise in the nonroad 
engine certification process. As with the transfer of advanced emission 
control technology itself, we believe that the transient test 
requirement should be implemented first for larger displacement 
engines. These engines are more likely to be made by manufacturers who 
provide engines to the on-highway market and therefore have had prior 
on-highway engine development and certification experience. We do not 
believe that the smaller engines should be the power categories first 
charged with implementing the new transient test, as early as 2008, 
especially because manufacturers of these engines do not generally make 
highway engines and are neither as experienced nor as well-equipped as 
their larger engine manufacturer counterparts at conducting transient 
cycle testing. However, to encourage earlier transient emission control 
in these engines, EPA will allow manufacturers of engines below 25 hp 
to submit data describing emission levels for their engines over the 
appropriate certification transient duty cycle beginning in model year 
2008. We extend this option as well to manufacturers of 25-50 hp 
engines, subject to those engines meeting the Tier 4 transitional PM 
standard in 2008. Should a manufacturer choose to submit data in the 
2008-2011 time frame, prior to required certification data submissions, 
that transient data will not be used for compliance enforcement.
    EPA requested comment on whether engines greater than 750 hp should 
be subject to the transient cycle, noting concerns of technical 
difficulties and cost for these engines (68 FR 28484, May 23, 2003). 
STAPPA-ALAPCO and other agencies representing the States' interests 
responded to EPA that all nonroad engines should be uniformly required 
to test their transient emissions. Likewise, they asked that the Agency 
not delay implementation of this particular requirement. However, at 
this time, the Agency is not adopting a transient emission testing 
requirement for engines 750 hp and over. EPA sees the burden of 
transient cycle testing in these very large displacement engines as 
being greater than the benefit of gathering transient emission 
measurements from them. For example, in many instances, these engines 
will have multiple aspiration and exhaust systems requiring a test cell 
designed to accommodate multiple large flow volumes in real-time on a 
five Hertz, or faster, basis. New transient test requirements could 
require manufacturers to create new or expanded testing facilities to 
house, prepare and run transient tests on these larger engines. The 
space requirements, i.e., ``footprint,'' of such facilities could make 
building them cost-prohibitive.
    Absent transient testing, these engines will still be required to 
certify to both steady-state and NTE test requirements. Moreover, we 
are modifying the certification requirements to include additional 
information for engines under 750 hp. For more detail on this 
submission, see the discussion in section III.I of this preamble and 40 
CFR 1039.205(p) of the regulations.
    Finally, engines in this power category are found in a relatively 
small proportion of the nonroad equipment population and, despite the 
potential for large quantities of emissions from this class of engines 
during operation, units equipped with these engines have likewise been 
noted to contribute a small proportion of total diesel nonroad engine 
emissions.\77\ Many of these larger-displacement engines operate 
predominately in a constant-speed fashion with few transient 
excursions, as with electric power generation sets (gen sets) which 
make up a significant percent of these larger engines. Many of these 
gen sets, too, operate on an intermittent or stand-by only basis. 
Indeed, as explained below, such constant-speed, variable-load engines 
(for example, those certifying exclusively to the 5-mode steady-state 
cycle) of any horsepower category are not subject to the nonroad 
transient test cycle.
---------------------------------------------------------------------------

    \77\ Memorandum from Kent Helmer to Cleophas Jackson, 
``Applicability EPA's NRTC cycle to Nonroad Diesel Population,'' Air 
Docket A-2001-28, document II-B-34.
---------------------------------------------------------------------------

    Further, the Agency does not intend at this time to require that 
manufacturers use partial-flow sampling systems (PFSS) to determine PM 
emissions from their engines for certification. A large engine 
manufacturer may, however, choose to submit PM data to the Agency using 
PFSS as an alternative test method, if that manufacturer can 
demonstrate test equivalency using a paired-T test and F-Test, as 
outlined in regulations at 40 CFR 86.1306-07.
    Transient testing requires consideration of statistical parameters 
for verifying that test engines adequately follow the prescribed 
schedule of speed and load values. The regulations in 40 CFR 1065.514, 
table 1, detail these statistical parameters, also known as cycle 
performance statistics. These values are somewhat different than the 
comparable values for highway diesel engines to take into account the 
characteristics of nonroad engine operation. The values are an 
outgrowth of the long development process for the NRTC test cycle, 
itself.
2. Cold Start Transient Testing
    Nonroad diesel engines typically operate in the field by starting 
and warming to a point of stabilized hot operation at least once in a 
workday. Such ``cold-start'' conditions may also occur at other times 
over the course of the workday, such as after a lunch break. We have 
observed that certain test engines, which generally had emission-
control technologies for meeting Tier 2 or Tier 3 standards, had 
elevated emission levels for about 10 minutes after starting from a 
cold condition. The extent and duration of increased cold-start 
emissions will likely be affected by changing technology for meeting 
Tier 4 standards, but there is no reason to believe that this effect 
will lessen. In fact, cold-start concerns are especially pronounced for 
engines with catalytic devices for controlling exhaust emissions, 
because many require heating to a ``light-off'' or peak-efficiency 
temperature to begin working. See, for example, RIA section 4.1.2.2 and 
following. EPA's highway engine and vehicle programs, which 
increasingly involve such catalytic devices, address this by specifying 
a test procedure that first measures emissions with a cold engine, then 
repeats the test after the engine is warmed up, weighting emission 
results from the two tests for a composite emission measurement.
    In the proposal, we described an analytical approach that led to a 
weighting of 10 percent for the cold-start test and 90 percent for the 
hot-start test. Manufacturers pointed out that their analysis of the 
same data led to a weighting of about 4 percent for cold-start testing 
and that a high cold-start weighting would affect the feasibility of 
the proposed emission standards. Manufacturers also expressed a concern 
that there would be a significant test burden associated with cold-
start testing.

[[Page 39025]]

    Unlike steady-state tests, which always start with hot-stabilized 
engine operation, transient tests come closer to simulating actual in-
use operation, in which engines may start operating after only a short 
cool-down (hot-start) or after an extended soak (cold-start). The new 
transient test and manufacturers' expected use of catalytic devices to 
meet Tier 4 emission standards make it imperative to address cold-start 
emissions in the measurement procedure.\78\ We are therefore adopting a 
test procedure that requires measurement of both cold-start and hot-
start emissions over the transient duty cycle, much like for highway 
diesel engines. We acknowledge, however, that limited data are 
available to establish an appropriate cold-start weighting. For this 
final rule, we are therefore opting to establish a cold-start weighting 
of 5 percent. This is based on a typical scenario of engine operation 
involving an overnight soak and a total of seven hours of operation 
over the course of a workday. Under this scenario, the 20-minute cold-
start portion constitutes 5 percent of total engine operation for the 
day. Section II.B above addresses the feasibility of meeting the 
emission standards with cold-start testing. Regarding the test burden 
associated with cold-start testing, we believe that manufacturers will 
be able to take steps to minimize the burden by taking advantage of the 
provision that allows for forced cooling to reduce total testing time 
(40 CFR 1039.510(c)).
---------------------------------------------------------------------------

    \78\ Note that this discussion applies only to engines that are 
subject to testing with transient test procedures. For example, this 
excludes constant-speed engines and all engines over 750 hp.
---------------------------------------------------------------------------

    We believe the 5-percent weighting is based on a reasonable 
assessment of typical in-use operation and it addresses the need to 
design engines to control emissions under cold-start operation. We 
believe cold-start testing with these weighting factors will be 
sufficient to require manufacturers to take steps to minimize emission 
increases under cold-start conditions. Once manufacturers have applied 
technologies and strategies to minimize cold-start emissions, they will 
be achieving the greatest degree of emission reductions achievable 
under those conditions. A higher weighting factor for cold-start 
testing is not likely be more effective in achieving in-use emission 
control as new technologies will be expected to have resulted in 
significant control of emissions at engine startup.
    However, given our interest in controlling emissions under cold-
start conditions and the relatively small amount of information 
available in this area at this time, we intend to revisit the cold-
start weighting factor for transient testing in the future as 
additional data become available. Since the composite transient test 
represents a combination of variable-speed and constant-speed 
operation, we would consider operation from both of these types of 
engines in evaluating the cold-start weighting. Also, we intend to 
apply the same cold-start weighting when we adopt a transient duty 
cycle specifically for engines certified only for constant-speed 
operation.
    The planned data-collection effort will focus on characterizing 
cold-start operation for nonroad diesel equipment. The objective will 
be to reassess, and if necessary, redevelop a weighting factor that 
properly accounts for the degree of cold-start operation so that in-use 
engines effectively control emissions during these conditions. As we 
move forward with this investigation, other interested parties, 
including the State of California, will be invited to participate. We 
are interested in pursuing a joint effort, in consultation with other 
national government bodies, to ensure a robust and portable data set 
that will facilitate common global technical regulations. This effort 
will require consideration of at least the following factors:

     What types of equipment will we investigate?
     How many units of each equipment type will we 
instrument?
     How do we select individual models that will together 
provide an accurate cross-section of the type of equipment they 
represent?
     When will the program start and how long will it last?
     How should we define a cold-start event from the range 
of in-use operation?

    We expect to complete our further evaluation of the cold-start 
weighting in the context of the 2007 Technology Review, if not sooner. 
In case changes to the regulation are necessary, this timing will allow 
enough time for manufacturers to adjust their designs as needed to meet 
the Tier 4 standards.
3. Constant-Speed Tests
    The Agency proposed that engine manufacturers could certify 
constant-speed engines using EPA's Constant-Speed, Variable-Load (CSVL) 
transient duty cycle \79\ as an alternative to certifying these engines 
under its NRTC test cycle. The CSVL transient cycle was developed to 
approximate the speed and load operating characteristics of many 
constant-speed nonroad diesel applications.\80\ It, too, would have 
been subject to the cold-start requirement of nonroad transient test 
cycles as is the NRTC. However, after considerable discussion with and 
comment from engine manufacturers, equipment makers and other 
interested parties, the Agency has decided not to promulgate an 
alternative nonroad transient test cycle for constant-speed engines at 
this time. EMA, in its comments on the CSVL cycle, felt generally that: 
(1) The average load factor is much too low; (2) the frequency of the 
transient operations was too high; (3) the amplitudes of the transients 
were too great; and (4) the rates of transient load increase and 
response were too fast.
---------------------------------------------------------------------------

    \79\ Two Memoranda from Kent Helmer to Cleophas Jackson, ``Speed 
and Load Operating Schedule for the Constant Speed Variable Load 
(CSVL) transient test cycle,'' e-Docket OAR-2003-0012-0993, and 
``CSVL Cycle Construction,'' A-2001-28, II-B-50.
    \80\ Memorandum from Kent Helmer to Cleophas Jackson, ``Brake-
specific Emissions Impact of Nonroad Diesel Engine Testing Over the 
NRTC, AWQ, and AW1 duty cycles,'' Docket A-2001-28, .
---------------------------------------------------------------------------

    It was further noted that the CSVL test cycle is based solely upon 
the operation of a single, relatively small, naturally-aspirated arc 
welder engine, which EMA claims is a variable-speed type of engine 
certified generally on the 8-mode test cycle. Arc welders, Cummins 
noted, are not much like generator sets, which comprise around 50% of 
population of constant-speed engines and have a very different 
operation and test cycle than the typical portable generator set. 
Generator sets, DDC wrote, were built generally for a higher power 
capability at a single speed, many having larger, less-responsive 
turbochargers to achieve the higher brake mean effective pressure 
(BMEP). This made it difficult for these engines to shed load as 
quickly as the CSVL test cycle would require them to do. Commenters 
likewise wrote that the test cycle was costly and burdensome for 
equipment which, like generator sets, was only operated infrequently or 
when emergencies occurred. Some wrote that it would compromise 
generator set engine performance if manufacturers had to re-engineer 
their products to run over the CSVL test cycle, especially for larger 
BMEP engines. One commenter noted that these changes to nonroad engines 
would carry over to other stationary applications of these generator 
sets. A more extensive discussion of comments relating to the CSVL 
cycle may be read in the Summary and Analysis of Comment document for 
this rule.
    Given these potential problems and the strong possibility of fixing 
them by 2007, the Agency has decided to defer adopting the CSVL test 
cycle here.

[[Page 39026]]

Instead, EPA with all of its stakeholders in this regard will map out a 
process of engine testing and analysis to better characterize constant-
speed equipment in-use to design the most appropriate test cycle for 
the largest number of constant-speed engines. EPA undertakes this 
process with an eye to initiating rulemaking which would lead to 
promulgation of a transient cycle for constant-speed engines before the 
Agency's 2007 Nonroad Diesel Technical Review.
    EPA defines a constant-speed engine in this regard as one which is 
certified to constant-speed operation, in other words, an engine which 
may not operate at a speed outside a single, fixed reference speed set 
by the engine's governor. It should be clear then that any engine for 
which the governor doesn't strictly limit the engine speed in-use to 
constant-speed operation, that engine will be subject to the NRTC. 
Thus, if a manufacturer's engine is certified to EPA's 8-mode steady-
state test, the engine would also need to certify to the NRTC, since 
the 8-mode test does not limit the engine's fixed operating speed. 
Conversely, those manufacturers who certify their engines to EPA's 
constant-speed steady-state test, the 5-mode test cycle, are not 
required to have their engines certify to the NRTC.
    By utilizing an inclusive, data-driven approach (see Summary and 
Analysis document for more detail), the Agency is allowing time to 
develop, and if appropriate, finalize and implement a test procedure 
that meets the needs of the Agency, manufacturers, and other parties in 
advance of the 2007 Technology Review. In fact, the Agency envisions 
constant speed variable load cycle generation to be completed by July 
2005. This approach should allow the Agency to develop a testing 
program which ensures robust control in-use, is data-driven and remains 
globally harmonized. We expect to initiate this effort within 3 months 
of promulgation of this rule and to conclude the work on the new test 
cycle in enough time to promulgate it through rulemaking and to provide 
industry adequate lead time to implement it in an orderly manner. If we 
encounter unforeseen and unavoidable delays or complications in this 
process, we will consider approaches to control based on available data 
at the time of the 2007 Technology Review.
    The Agency is adopting additional requirements, in conjunction with 
existing steady-state test requirements, which will help ensure that 
constant-speed nonroad diesel engines are subject to a rigorous program 
of in-use control of emissions and that diesel engine emissions will be 
controlled over a wide range of speed and load combinations. EPA is 
finalizing stringent nonroad NTE limits and related test procedures for 
all new nonroad diesel engines subject to the Tier 4 emissions 
standards beginning in 2011 which will supplement the existing steady-
state five-mode test cycle for constant-speed application engines. NTE 
testing for transient operation will add further assurance that 
emissions from constant-speed engines within this class, which have a 
limited speed response in-use, are controlled under in-use operation. 
Typically, engines which are designed to a particular transient cycle 
will control emissions effectively under other types of transient 
operation not specifically included in that certification procedure. 
Engines that are capable of meeting emission standards on a constant-
speed, variable-load cycle will have the transient-response 
characteristics that are appropriate for controlling emissions at 
higher engine loads and for less dynamic transient operation. EPA, 
engine manufacturers, and interested parties will, in the mean time, 
work to develop a more appropriate transient test for constant-speed 
engines. A transient test for this broad class of nonroad engines will 
ensure a robust level of emissions control in-use within the diverse 
population of constant-speed engines and equipment.
4. Steady-State Tests
    Recognizing the variety of both power classes and work applications 
to be found within the nonroad equipment and engine population, and as 
proposed, EPA is retaining current Federal steady-state test procedures 
for nonroad engines. (Manufacturers are thus required to meet emission 
standards under steady-state conditions, in addition to meeting 
emission standards under the transient test cycle, whenever the 
transient test cycle applies.) This requirement, like NTE emission 
testing, is one of two tests which apply to every Tier 4 engine. Table 
III-2 below sets out the particular steady-state duty cycle applicable 
to each of the following categories: (1) Nonroad engines 25 hp and 
greater; (2) nonroad engines less than 25 hp; and (3) nonroad engines 
having constant-speed, variable-load applications, (e.g., gen sets). 
The steady-state cycles remain, respectively, the 8-mode cycle, the 6-
mode cycle and the 5-mode cycle.\81\
---------------------------------------------------------------------------

    \81\ These three steady-state test cycles are similar to test 
cycles found in the International Standard ISO 8178-4:1996 (E) and 
remain consistent with the existing 40 CFR part 89 steady-state duty 
cycles.
---------------------------------------------------------------------------

    Steady-state test cycles are needed so that testing for 
certification will reflect the broad range of operating conditions 
experienced by these engines. A steady-state test cycle represents an 
important type of modern engine operation, in power and speed ranges 
that are typical in-use. The mid-to-high speeds and loads represented 
by present steady-state testing requirements are the speeds and loads 
at which these engines are designed to operate for extended periods for 
maximum efficiency and durability. Details concerning the three steady-
state procedures for nonroad engines and equipment are found in 
regulations at 40 CFR 1039.505 and in Appendices I-III to 40 CFR part 
1039.
    Manufacturers will perform each steady-state test following all 
applicable test procedures in the regulations at 40 CFR part 1039, 
e.g., procedures for engine warm-up and exhaust emissions measurement. 
The testing must be conducted with all emission-related engine control 
variables in the maximum NOX-producing condition which could 
be encountered for a 30 second or longer averaging period at a given 
test point. Table III.F-2 below summarizes the steady-state testing 
requirements by individual engine power categories.

                            Table III.F-2.--Summary of Steady-State Test Requirements
----------------------------------------------------------------------------------------------------------------
                                                           Steady-state testing requirements
                                      --------------------------------------------------------------------------
     Nonroad engine power classes          8-Mode cycle (C1         6-Mode cycle (G3         5-Mode cycle (D2
                                              weighting)               weighting)               weighting)
----------------------------------------------------------------------------------------------------------------
hp < 25 (kW < 19)....................  applies \a\............  applies \a\............  applies \b\
25 <= hp < 75 (19 <= kW < 56)........  applies................  NA \c\.................  applies \b\
75 <= hp < 175 (56 <= kW < 130)......  applies................  NA \c\.................  applies \c\

[[Page 39027]]

 
175 <= hp <= 750 (130 <= kW <= 560)..  applies................  NA \c\.................  applies \b\
hp > 750 (kW > 560)..................  applies................  NA \c\.................  applies \b\
----------------------------------------------------------------------------------------------------------------
\a\ Manufacturers may use either of these tests for this class of engines.
\b\ For constant, or nearly constant, speed engines and equipment with variable, or intermittent, load.
\c\ Testing procedures not applicable to this class of engines.

    Nonroad engine manufacturers \82\, have called for steady-state 
testing which would collect emissions continuously ``in a pseudo-
transient manner,'' proposing in effect, one-filter PM collections 
during a steady-state duty cycle. In response to these and other 
manufacturer concerns for emission variability during certification 
testing due to unanticipated emission control system regeneration 
between steady-state test modes, the Agency \83\ has adopted, in its 40 
CFR 1065.515 regulations, the concept of modifying EPA's 40 CFR part 89 
steady-state engine certification duty cycles. The section describes 
ramped ``modal'' steady-state certification tests which would link the 
modes of a steady-state test together for the purpose of collecting a 
continuous stream of engine emissions. These tests provide for 
operating an engine at all of the modes specified in the present 
steady-state nonroad test cycles but without the breaks in emission 
collection required by switching between modes, stabilizing engine 
operation, and collecting emissions at that next operating mode. Since 
a ramped modal cycle (RMC) test cycle may more reliably and 
consistently report engine emissions from particulate trap and other 
emission control hardware-equipped nonroad engines than the comparable 
steady-state duty cycle from which it was derived, the Agency is 
providing the option of using these RMC versions of its steady-state 
engine duty cycles for nonroad diesel engine certification testing in 
lieu of the otherwise applicable steady-state cycles. Details on the 
procedures may be found in chapter 4.2 of the RIA for this rule and at 
regulations at 40 CFR 1039.505 and Appendix I of part 1039.
---------------------------------------------------------------------------

    \82\ Letter from EMA (Engine Manufacturers Association) to EPA 
Air Docket A-2001-28, IV-D-402, pp 64.
    \83\ Memorandum and summary of technical discussions (including 
Appendix ``A'' text) in the e-Docket submission, OAR-2003-0012-0028, 
to EPA's Air Docket.
---------------------------------------------------------------------------

    The optional RMC duty cycles do not represent a relaxation in 
stringency of emission testing nor are they an unreasonable increase in 
the emission test burden of diesel engine manufacturers. Rather, the 
RMC versions of EPA's steady-state test cycles allow for more 
consistent and predictable emission testing of emission control system 
hardware-equipped diesel engines. Eliminating the ``downtime'' between 
modes for the emission collection equipment allows sampling of 
emissions to be done on a composite basis for the whole test as opposed 
to sampling emissions mode-by-mode. The RMC versions of these tests 
simply create a negligible transition period 20 seconds long connecting 
each mode and collects emissions during these brief transitions, as 
well as collecting emissions during the running of each test's discrete 
operating modes. The continuous emission sampling allows regeneration 
events from engine emission control hardware to be captured more 
reliably and repeatably. By running emission testing without breaks and 
over the same engine duty schedule for each repetition of a RMC test, 
regeneration within the engine's emission control hardware should 
become almost a predictable event. The longer sampling times of RMCs, 
while creating an identical weighting of each mode's emissions, also 
help to avoid collecting a minuscule, possibly unreliably measured, 
amount of sample over the course of any single operating mode. PM 
emissions, for example, can be collected and measured more precisely 
under these test conditions as either batch or continuous samples. The 
opportunities for loss of emissions during sampling and storage due to 
sample retention by equipment at shut-down between modes or by filter 
handling and weighing are greatly reduced. As well, running a ``steady-
state'' test on a continuous basis allows cycle performance statistics 
to be applied to RMC emission tests (see 40 CFR, part 39). 
Manufacturers are familiar with test cycles run with a set of 
statistical engine duty cycle performance ``targets''. Further, their 
test runs will be subject to less test cell ``tuning'', modifying 
control strategies using repeat testing runs to fit the emission test 
cycle and the dynamometer to operate a particular engine. Finally, 
statistical targets serve to increase repeatability and reduce 
variability of engine operating parameters and emission test results on 
a test-to-test basis.
    Transport refrigeration unit (TRU) engines, a specific application 
of a steady-state operation engine (68 FR 28485, May 23, 2003), will be 
subject to both steady-state and NTE standards based on any normal 
operation that these engines would experience in the field. To that 
end, EPA has adopted a four-mode steady-state test cycle designed 
specifically for engines used in TRU applications which may be used by 
the manufacturer in lieu of normal steady-state testing. Commenters to 
the rule agreed that a TRU test cycle would be more representative of 
refrigeration unit operation than the nonroad cycles currently 
available to manufacturers of TRU engines, but some took issue with 
EPA's usage restrictions in paragraphs (d)(2), (e)(2), and (e)(3) of 
regulations proposed at 40 CFR part 1039 subpart G. In response, the 
final rule allows manufacturers to test their engines under a broad 
definition of intermediate test speed. The definition covers the 60-75% 
range of engine rpm at the specified test cycle engine load points, as 
defined in 40 CFR, 89.2. This will enable an engine manufacturer to 
more closely match the TRU cycle to the operation of their engines in-
use. Further, the engine is allowed to exhibit no more than 2% 
variation in transient operation (speed or torque change) around the 
four operating modes defined under this test cycle. The provisions to 
address load set point drift are discussed in detail in the RIA chapter 
4.3.2 and in regulations at 40 CFR part 1039 subpart G.
    In choosing to certify their engine as a TRU engine, manufacturers 
will need to state on the engine emission control label that the engine 
will only be used in a TRU application and records must be kept on the 
delivery destination(s) for their engines. Manufacturers of these 
engines may petition EPA at certification for a waiver of the 
requirement to provide smoke emission

[[Page 39028]]

data for their constant-torque engines. A more detailed discussion of 
the TRU associated provisions is contained in chapter 4.2 of the RIA. 
It should be noted that an RMC version of the steady state TRU duty 
cycle is provided in Table 2 of 40 CFR part 1039 subpart G.

G. Other Test Procedure Issues

    This section contains further detail and explanation regarding 
several related nonroad diesel engine emissions test and measurement 
provisions. The test procedures are specified in 40 CFR part 1065 and 
part 1039 subpart F. Part 1065 contains general test procedure 
requirements and part 1039 contains the provisions that are specific to 
CI nonroad engines, such as test cycles. The changes described here 
will not significantly affect the stringency of the standards. While 
some of the changes being made may appear to increase the stringency of 
the standards when considered by themselves, others would appear to 
have the opposite effect. When considered together, however, they will 
result in more repeatable and less subjective testing that is 
equivalent to the existing procedures with respect to stringency.
1. Smoke Testing
    To control smoke emissions, we are requiring in this final rule 
that the current smoke standards and procedures will continue to apply 
to certain engines. We proposed to change these smoke standards and 
procedures, based on recent developments toward an established 
international protocol that was designed to allow a straightforward 
method to test engines in the field (68 FR 28486, May 23, 2003). We 
have chosen not to adopt the proposed approach, mainly because it is 
becoming increasingly clear that ongoing development of in-use testing 
equipment will allow direct measurement of PM emissions in the field. 
We believe this will provide the best long-term control of both PM 
emissions. Controlling smoke is in some ways independent of PM, but the 
interest in developing an in-use smoke test was primarily as a means of 
providing a secondary indicator of high in-use PM emissions from these 
engines. Direct PM measurement removes much of the advantage of in-use 
smoke measurements. Relying on the existing smoke test also addresses 
concerns raised by manufacturers that the effort to comply with the new 
smoke requirements would be a large testing and development burden with 
little air-quality benefit. We believe that aftertreatment-based Tier 4 
PM standards will control smoke emissions as well as improved smoke 
testing standards and procedures. Engines below 19 kilowatts (kW) will 
generally not have particulate filters, but most of these are constant-
speed engines and are therefore not subject to smoke standards, as 
described below.
    We are continuing the established policy of exempting constant-
speed engines and single-cylinder engines from smoke standards. We do 
not believe that constant-speed engines undergo the kind of 
acceleration or lugging events that occur during this smoke test 
procedure, so it would not be appropriate for these engines to be 
subject to smoke standards. We exempt single-cylinder engines for a 
different reason. These engines, which very often provide power for 
generator sets and other constant-speed applications, but may in some 
cases experience accelerations, the nature of single-cylinder engine 
operation makes it difficult to get a valid smoke emission measurement. 
Single-cylinder engines generally have discrete puffs of smoke, rather 
than a stable emission stream for measuring smoke values. We believe it 
is not appropriate to use such erratic measurements to evaluate an 
engine's emission performance. As a result, we will not require single-
cylinder engines to meet our smoke standards until we find a test 
method that takes this into account.
    Also, as described in the proposed rule, we are exempting from 
smoke emission standards any engines that are certified to PM emission 
standards or FELs at or below 0.07 g/kW-hr. We believe any engine that 
has such low PM emissions will have inherently low smoke emissions. No 
commenters disagreed with this position.
2. Maximum Test Speed
    We are changing how test cycles are specified. As proposed, we are 
applying the existing definition of maximum test speed in 40 CFR part 
1065 to nonroad CI engines. This definition of maximum test speed is 
the single point on an engine's normalized maximum power versus speed 
curve that lies farthest away from the zero-power, zero-speed point. 
This is intended to ensure that the maximum speed of the test is 
representative of actual engine operating characteristics and is not 
improperly used to influence the parameters under which their engines 
are certified. In establishing this definition of maximum test speed, 
it was our intent to specify the highest speed at which the engine is 
likely to be operated in use. Under normal circumstances this maximum 
test speed should be close to the speed at which peak power is 
achieved. However, in past discussions, some manufacturers have 
indicated that it is possible for the maximum test speed to be 
unrepresentative of in-use operation. Since we were aware of this 
potential during the original development of this definition, we 
included provisions to address issues such as these. Part 1065 allows 
EPA to modify test procedures in situations where the specified test 
procedures would otherwise be unrepresentative of in-use operation. 
Thus, in cases in which the definition of maximum test speed resulted 
in an engine speed that was not expected to occur with in-use engines, 
we would work with the manufacturers to determine the maximum speed 
that would be expected to occur in-use (see regulations at 40 CFR 
1065.10 (c)).
3. Improvements to the Test Procedures
    As we proposed, we are making changes to the test procedures to 
improve the precision of emission measurements. These changes address 
the potential effect of measurement precision on the feasibility of the 
standards. It is important to note that these changes are not intended 
to bias results high or low, but only to improve the precision of the 
measurements. Based on our experience with these modified test 
procedures, and our discussions with manufacturers about their 
experiences, we are confident that these changes will not affect the 
stringency of the standards. These changes are summarized briefly here. 
The rationale for the changes are discussed in detail elsewhere. The 
changes affecting Constant Volume Sampling (CVS) and PM testing are 
discussed in a memo to the docket (Air Docket A-99-06, IV-B-11), which 
was originally submitted in support of the recent highway heavy-duty 
diesel engine rule (66 FR 5001, January 18, 2001).
    In general, we are applying the highway heavy-duty engine test 
procedures to nonroad CI engines in this rulemaking. Many of the 
specific changes being adopted are to the PM sampling procedures. The 
PM procedures are the procedures finalized as part of the highway 
heavy-duty diesel engine rule (66 FR 5001, January 18, 2001). These 
include changes to the type of PM filters that are used and 
improvements in how PM filters are weighed before and after emission 
measurements, including requirements for more precise microbalances.
    It is also worth noting that we intend to make additional 
improvements to the test procedures in a separate rulemaking that will 
be proposed later this year to incorporate the latest measurement

[[Page 39029]]

technologies. Many of the improvements being considered were discussed 
in the previously-mentioned memo to the docket (Air Docket A-99-06, IV-
B-11). We recognize the importance of these improvements for use in 
testing by nonroad diesel engine manufacturers and EPA. However, since 
we expect that the changes would also apply to many nonroad spark-
ignition engine manufacturers, it is appropriate to conduct a separate 
notice and comment rulemaking for all affected parties. We remain 
committed to incorporating appropriate additional improvements to the 
test procedures. We have placed into the docket a draft revised version 
of part 1065 that represents our current thinking on appropriate 
testing regulations.

H. Engine Power

    Currently, rated power and power rating are undefined, and we are 
concerned that this makes the applicability of the standards too 
subjective and confusing. One manufacturer may choose to define rated 
power as the maximum measured power output, while another may define it 
as the maximum measured power at a specific engine speed. Using this 
second approach, an engine's rated power may be somewhat less than the 
true maximum power output of the engine. Given the importance of engine 
power in defining which standards an engine must meet and when, we 
believe that it is critical that a singular power value be determined 
objectively according to a specific regulatory definition.
    To address this, we proposed to add a definition of ``maximum 
engine power'' to the regulations. This term was to be used instead of 
previously undefined terms such as ``rated power'' or ``power rating'' 
to specify the applicability of the standards. The addition of this 
definition was intended to allow for more objective applicability of 
the standards. More specifically, we proposed that:

    Maximum engine power means the measured maximum brake power 
output of an engine. The maximum engine power of an engine 
configuration is the average maximum engine power of the engines 
within the configuration. The maximum engine power of an engine 
family is the highest maximum engine power of the engines within the 
family.

    During the comment period, manufacturers opposed the proposed 
definition. (We received no other comments on this issue.) The 
manufacturers correctly pointed out that they cannot know the average 
actual power of production engines when they certify an engine family, 
because certification typically occurs before production begins. 
Therefore the definition of ``maximum engine power'' being finalized 
today relies primarily upon the manufacturer's design specifications 
and the maximum torque curve that the manufacturer expects to represent 
the actual production engines. This provision is specified in a new 
section 40 CFR 1039.140. Under this approach the manufacturer would 
take the torque curve that is projected for an engine configuration, 
based on the manufacturer's design and production specifications, and 
convert it into a ``nominal power curve'' that would relate the maximum 
power that would be expected to engine speed when a production engine 
is mapped according our specified mapping procedures. The maximum 
engine power is being defined as the maximum power point on that 
nominal power curve.
    Manufacturers will be required to report the maximum engine power 
of each configuration in their applications for certification. As with 
other engine parameters, manufacturers will be required to ensure that 
the engines that they produce under the certificate have maximum engine 
power consistent with those described in their applications. However, 
since we recognize that variability is a normal part of engine 
production, we will not require that all production engines have 
exactly the power specified in the application. Instead, we will only 
require that the power specified in the application be within the 
normal range of powers of the production engines. Typically, we would 
expect the specified power to be within one standard deviation of the 
mean power of the production engines. If a manufacturer determines that 
the specified power is outside of the normal range, we may require the 
manufacturer to change the settings of the engines being produced and/
or amend the application for certification. In deciding whether to 
require such amendment, we would consider the degree to which the 
specified power differed from the production engines, the normal power 
variability for those engines, whether the engine used or generated 
emission credits, and whether the error affected which standards 
applied to the engine.
    The preceding discussion presumes that each manufacturer will 
develop its production processes to produce the engines described in 
the application. If a manufacturer were to intentionally produce 
engines different than those described in the application, we would 
consider the application to be fraudulent, and could void the 
certificate ab initio for those engines. For example, for engines that 
use emission credits, this could occur if a manufacturer deliberately 
biased its production variability so that the engines have higher 
average power than described in the application. If we voided the 
certificate for those engines the manufacturer would be subject to 
large fines and any other appropriate enforcement provisions for each 
engine.
    Finally, in light of some of the comments that we received, it is 
worth clarifying that the maximum engine power will not be used during 
engine testing. It is only used to define power categories and 
calculate ABT emission credits.

I. Auxiliary Emission Control Devices and Defeat Devices

    Existing nonroad regulations prohibit the use of a defeat device 
(see 40 CFR 89.107) in nonroad diesel engines. The defeat device 
prohibition is intended to ensure that engine manufacturers do not use 
auxiliary emission control devices (AECD) which sense engine operation 
in a regulatory test procedure and as a result reduce the emission 
control effectiveness of that procedure.\84\ In today's notice we are 
supplementing existing nonroad test procedures with a transient engine 
test cycle and NTE emission standards with associated test 
requirements. As such, the Agency believes that a clarification of the 
existing nonroad diesel engine regulations regarding defeat devices is 
required in light of these additional emission test requirements. The 
defeat device prohibition makes it clear that AECDs which reduce the 
effectiveness of the emission control system are defeat devices, unless 
one of several conditions is met. One of these conditions is that an 
AECD which operates under conditions ``included in the test procedure'' 
is not a defeat device.\85\ While the existing defeat device definition 
does contain the term ``test procedure,'' and therefore should be 
interpreted as including the supplemental testing requirements, we want 
to make it clear that both the supplemental transient test cycle and 
NTE emission test procedures are

[[Page 39030]]

included within the defeat device regulations as conditions under which 
an operational AECD will not be considered a defeat device. Therefore, 
we are clarifying the defeat device regulations by specifying the 
appropriate test procedures (i.e., the existing steady-state procedures 
and the supplemental tests). We are clarifying the engine manufacturers 
certification reporting requirements with respect to the description of 
AECDs. Under the previous nonroad engine regulations, manufacturers are 
required to provide a generalized description of how the emissions 
control system operates and a ``detailed'' description of each AECD 
installed on the engine (see 40 CFR 89.115(d)(2)). This change 
clarifies what is meant by ``detailed.''
---------------------------------------------------------------------------

    \84\ Auxiliary emission control device is defined at 40 CFR 89.2 
as ``any element of design that senses temperature, vehicle speed, 
engine RPM, transmission gear, or any other parameter for the 
purpose of activating, modulating, delaying or deactivating the 
operation of any part of the emission control system.''
    \85\ 40 CFR 89.107(b)(1) states ``Defeat device includes any 
auxiliary emission control device (AECD) that reduces the 
effectiveness of the emission control system under conditions which 
may reasonably be expected to be encountered in normal operation and 
use unless such conditions are included in the test procedure.''
---------------------------------------------------------------------------

    For engines rated above 750 horsepower, the expanded interpretation 
of ``included in the test cycle'' extends only to the NTE because we 
are not requiring these engine to be tested over the supplemental 
transient test cycle. Transient emissions control strategies that are 
substantially included in the NTE will be considered to comply with the 
defeat device criteria. For instances where transient emissions control 
strategies are not well represented over the official test 
requirements, we will rely on the defeat device provisions to ensure 
appropriate transient off-cycle emissions control. The defeat device 
provisions restrict the ability of manufacturers to reduce the level of 
emissions control during transient operation compared to that employed 
over the steady state cycle. In order to evaluate transient emissions 
control strategies for compliance with the defeat device provisions, we 
are requiring manufacturers to submit information which indicates how 
transient emissions are controlled during normal operation and use. 
Information that would adequately fulfill this requirement includes but 
is not limited to:
    A. Emissions data gathered with portable emissions measurement 
systems from in-service engines operating over a broad range of typical 
transient conditions;
    B. Emissions data generated under laboratory conditions 
representing a broad range of typical transient operation;
    C. Transient test cycle results from certified engines rated at or 
below 750 horsepower which share nearly identical transient emissions 
control strategies;
    D. Base emissions control maps along with an explanation for 
differences in control between portions of the map substantially 
included in the steady-state test cycle and that which is predominately 
associated with transient operation;\86\
---------------------------------------------------------------------------

    \86\ Base emissions control maps describe the modulation of an 
emissions control parameter as a function of changing engine speed 
and torque.
---------------------------------------------------------------------------

    E. A comparative analysis of the base emissions control maps from 
certified engines rated at or below 750 horsepower and those rated over 
750 horsepower.
    We will use this information to determine the degree to which the 
design and effectiveness of the transient emissions control system 
compares to the control demonstrated over the steady-state cycle as 
well as the transient control used for certified engines at or below 
750 horsepower where compliance over the transient cycle is required.
    A thorough disclosure of the presence and purpose of AECDs is 
essential in allowing EPA to evaluate the AECD and determine whether it 
represents a defeat device. Clearly, any AECD which is not fully 
identified in the manufacturer's application for certification cannot 
be appropriately evaluated by EPA and therefore cannot be determined to 
be acceptable by EPA. Our clarifications to the certification 
application requirements include additional detail specific to those 
AECDs which the manufacturer believes are necessary to protect the 
engine or the equipment in which it is installed against damage or 
accident (``engine protection'' AECDs). While the definition of a 
defeat device allows as an exception strategies needed to protect the 
engine and equipment against damage or accident, we intend to continue 
our policy of closely reviewing the use of this exception. In 
evaluating whether a reduction in emissions control effectiveness is 
needed for engine protection, EPA will closely evaluate the actual 
technology employed on the engine family, as well as the use and 
availability of other emission control technologies across the 
industry, taking into consideration how widespread the use is, 
including its use in similar engines and similar equipment. While we 
have specified additional information related to engine protection 
AECDs in the regulations, we reserve the right to request additional 
information on a case-by-case basis as necessary.
    In the last several years, EPA has issued extensive guidance on the 
disclosure of AECDs for both highway and nonroad diesel engine 
manufactures. These provisions do not impose any new certification 
burden on engine manufacturers, rather, it clarifies the existing 
certification application regulations by specifying what type of 
information manufacturers must submit regarding AECDs.
    Finally, we take this opportunity to emphasize that the information 
submitted must be specific to each engine family. The practice of 
describing AECDs in a ``common'' section, wherein the strategies are 
described in general for all the manufacturer's engines, is acceptable 
as long as each engine family's application contains specific 
references to the AECDs in the common section which clearly indicate 
which AECDs are present on that engine family, and the application 
contains specific calibration information for that engine family's 
AECDs. The regulatory requirements can be found at 40 CFR 89.115(d)(2) 
in today's notice.

J. Not-To-Exceed Requirements

    In today's action we are finalizing not-to-exceed (NTE) emission 
standards for all new nonroad diesel engines subject to the Tier 4 
emissions standards beginning in 2011. These NTE standards and 
requirements are largely identical to the NTE provisions we proposed, 
except as noted below.
    The NTE standards and test procedures are being finalized to help 
ensure that nonroad diesel emissions are controlled over the wide range 
of speed and load combinations commonly experienced in-use. EPA has 
similar NTE standards for highway heavy-duty diesel engines, 
compression ignition marine engines, and nonroad spark-ignition 
engines. The NTE requirements supplement the existing steady-state test 
as well as the new transient test which is also being finalized today.
    The NTE standards and test procedures which we proposed, and which 
we are finalizing, are derived from similar NTE standards and test 
procedures which EPA adopted for highway heavy-duty diesel engines. In 
the proposal, we requested comment on an alternative NTE test procedure 
approach (see 68 FR 28369, May 23, 2003). As discussed in the proposal, 
the two NTE approaches would result in the same overall level of 
emission control, but the implementation of each approach from an in-
use measurement and data gathering perspective are quite different. We 
have decided not to finalize this alternative approach. This decision 
is based primarily on our belief that nonroad engine manufacturers will 
more easily transfer the knowledge and experience gained from the 
highway NTE implementation (which begins in 2007) to the nonroad 
program if the two programs have similar requirements. For additional 
discussion regarding our

[[Page 39031]]

decision to not finalize the alternative approach, please see the 
Summary and Analysis of Comments.
    The NTE requirements establish an area (the ``NTE zone'' or ``NTE 
control area'') under the torque curve of an engine where emissions 
must not exceed a specified value for any of the regulated 
pollutants.\87\ An illustrative NTE zone is shown in Figure III.J-1.
---------------------------------------------------------------------------

    \87\ Torque is a measure of rotational force. The torque curve 
for an engine is determined by an engine ``mapping'' procedure 
specified in the Code of Federal Regulations. The intent of the 
mapping procedure is to determine the maximum available torque at 
all engine speeds. The torque curve is merely a graphical 
representation of the maximum torque across all engine speeds.
[GRAPHIC] [TIFF OMITTED] TR29JN04.002

    The NTE standard applies during any conditions that could 
reasonably be expected to be seen by that engine in normal operation 
and use, within certain broad ranges of real ambient conditions. The 
NTE requirements will help to ensure emission benefits over the full 
range of in-use operating conditions. The NTE being finalized today for 
nonroad contains the same basic provisions as the highway NTE. This NTE 
control area is defined in the same manner as the highway NTE control 
area, and is therefore a subset of the engine's possible speed and load 
operating range. The NTE standard applies to emissions sampled during a 
time duration as small as 30 seconds. The NTE standard requirements for 
nonroad diesel engines are summarized below and specified in the 
regulations at 40 CFR 1039.101 and 40 CFR 1039.515. These requirements 
will take effect as early as 2011, as shown in table III.J-1. The NTE 
standard applies to engines at the time of certification as well as in 
use throughout the useful life of the engine.

          Table III.J-1.--NTE Standard Implementation Schedule
------------------------------------------------------------------------
                                                                NTE
                     Power category                       implementation
                                                          model year \a\
------------------------------------------------------------------------
<25 hp..................................................           2013
25-75 hp................................................       2013 \b\
75-175 hp...............................................           2012
175-750 hp..............................................           2011
>750 hp.................................................          2011
------------------------------------------------------------------------
Notes:
\a\ The NTE applies for each power category once Tier 4 standards are
  implemented, such that all engines in a given power category are
  required to meet NTE standards.
\b\ The NTE standard would apply in 2012 for any engines in the 50-75 hp
  range which choose not to comply with the proposed 2008 transitional
  PM standard.

    The NTE test procedure can be run in nonroad equipment during field 
operation or in an emissions testing laboratory using an appropriate 
dynamometer. The test itself does not involve a specific operating 
cycle of any specific length; rather, it involves nonroad equipment 
operation of any type which could reasonably be expected to occur in 
normal nonroad equipment operation that could occur within the bounds 
of the NTE control area. The nonroad engine is operated under 
conditions that may reasonably be expected to be encountered in normal 
operation and use, including operation under steady-state or transient 
conditions and under varying ambient conditions. Emissions are averaged 
over a minimum time of thirty seconds and then compared to the 
applicable emission standard. The NTE standard applies over a wide 
range of ambient conditions, including up to an altitude

[[Page 39032]]

of 5,500 feet above-sea level at ambient temperatures as high as 86 
deg. F, and at sea-level up to ambient temperatures as high as 100 deg. 
F. The specific temperature and altitude conditions under which the NTE 
applies, as well as the methodology for correcting emissions results 
for temperature and/or humidity, are specified in the regulations.
    For new nonroad diesel engines subject to the NTE standards, we 
will require that manufacturers state in their application for 
certification that they are able to meet the NTE standards under all 
conditions that may reasonably be expected to occur in normal equipment 
operation and use. Manufacturers will have to maintain a detailed 
description of any testing, engineering analysis, and other information 
that forms the basis for their statement. We believe that there is a 
variety of information that a manufacturer could use as a reasonable 
basis for a statement that engines are expected to meet NTE standards. 
For example, a reasonable basis could include data from laboratory 
steady-state and transient test cycle operation, a robust engine 
emissions map derived from laboratory testing (e.g., an emissions map 
of similar resolution to the engine's base fuel injection timing map) 
and technical analysis relying on good engineering judgment which are 
sufficient, in combination, to project emissions levels under NTE 
conditions reasonably expected to be encountered in normal operation 
and use. Data generated from in-use nonroad equipment testing to 
determine emission levels could, at the manufacturer's option, also be 
part of this combination. However, a reasonable basis for the 
manufacturer's statement does not require in-use emissions test data. 
This statement could reasonably be based solely on laboratory test 
data, analysis, and other information reasonably sufficient to support 
a conclusion that the engine will meet the NTE under conditions 
reasonably expected to be encountered in normal vehicle operation and 
use. If a manufacturer has relevant in-use nonroad emissions test data, 
it should be taken into consideration by the manufacturer in developing 
the basis for its statement.
    In addition, as we proposed, we are finalizing a transition period 
during which a manufacturer could apply for an NTE deficiency for a 
nonroad diesel engine family. The NTE deficiency provisions would allow 
the Administrator to accept a nonroad diesel engine as compliant with 
the NTE standards even though some specific requirements are not fully 
met. We are finalizing these NTE deficiency provisions because we 
believe that, despite the best efforts of manufacturers, for the first 
few model years it is possible some manufacturers may have technical 
problems that are limited in nature but cannot be remedied in time to 
meet production schedules. We are not limiting the number of NTE 
deficiencies a manufacturer can apply for during the first three model 
years for which the NTE applies. For the fourth through the seventh 
model year after which the NTE standards are implemented, a 
manufacturer could apply for no more than three NTE deficiencies per 
engine family. Within an engine family, NTE deficiencies must be 
applied for on an engine model or power rating basis; however, the same 
deficiency when applied to multiple ratings or models counts as a 
single deficiency within an engine family. No deficiency may be applied 
for or granted after the seventh model year. The NTE deficiency 
provision will only be considered for failures to meet the NTE 
requirements. EPA will not consider an application for a deficiency for 
failure to meet the FTP or supplemental transient standards.
    Similar to the 2007 highway HD rule, we are also finalizing a 
provision which would allow a manufacturer to exclude defined regions 
of the NTE engine control zone from NTE compliance if the manufacturer 
could demonstrate that the engine, when installed in a specified 
nonroad equipment application(s), is not capable of operating in such 
regions. We have also finalized a provision which would allow a 
manufacturer to petition the Agency to limit testing in a defined 
region of the NTE engine control zone during NTE testing. This optional 
provision would require the manufacturer to provide the Agency with in-
use operation data which the manufacturer could use to define a single, 
continuous region of the NTE control zone. This single area of the 
control zone must be specified such that operation within the defined 
region accounts for 5 percent or less of the total in-use operation of 
the engine, based on the supplied data. Further, to protect against 
``gaming'' by manufacturers, the defined region must generally be 
elliptical or rectangular in shape, and share a boundary with the NTE 
control zone. If approved by EPA, the regulations then disallow testing 
with sampling periods in which operation within the defined region 
constitutes more than 5.0 percent of the time-weighted operation within 
the sampling period.
    The NTE numerical standard is a function of FTP emission standards 
contained in today's final rule, which standards are described in 
section II. As with the NTE standards we have established for the 2007 
highway rule, the nonroad NTE standard is determined as a multiple of 
the engine families' underlying FTP emission standard. In addition, as 
with the 2007 highway standard, the multiple is either 1.25 or 1.5, 
depending on the emission pollutant type and the value of the FTP 
standard (or the engine families' FEL). These multipliers are based on 
EPA's assessment of the technological feasibility of the NTE standard, 
and our assessment that as the underlying FTP standard becomes more 
stringent, the NTE multiplier should increase (from 1.25 to 1.5). The 
FTP standard or FEL thresholds for the NTE standard's 1.25x multiplier 
and the 1.5x multiplier are specified for each regulated emission in 
table III.J-2.

    Table III.J-2.--Thresholds for Applying NTE Standard of 1.25x FTP
                     Standard vs. 1.5x FTP Standard
------------------------------------------------------------------------
                                    Apply 1.25x NTE    Apply 1.5x when .
            Emission                  when . . .              . .
------------------------------------------------------------------------
NOX.............................  NOX std or FEL >=   NOX std or FEL <
                                   1.9 g/bhp-hr.       1.9 g/bhp-hr
NMHC............................  NOX std or FEL >=   NOX std or FEL <
                                   1.9 g/bhp-hr.       1.9 g/bhp-hr
NOX+NMHC........................  NMHC+NOX std or     NMHC+NOX std or
                                   FEL >= 2.0 g/bhp-   FEL < 2.0 g/bhp-
                                   hr.                 hr
PM..............................  PM std or FEL >=    PM std or FEL <
                                   0.05 g/bhp-hr.      0.05 g/bhp-hr
CO..............................  All stds or FELs..  No stds or FELs
------------------------------------------------------------------------

    For example, beginning in 2011, the NTE standard for engines 
meeting a FTP PM standard of 0.01 g/bhp-hr and a FTP NOX 
standard of 0.30 g/bhp-hr would be 0.02 g/bhp-hr PM and 0.45 g/bhp-hr 
NOX. In the NPRM, we proposed a NOX

[[Page 39033]]

threshold value of 1.5 g/bhp-hr as the value at which the NTE 
multiplier would switch from 1.5 to 1.25.
    We proposed this NOX emission threshold level (1.5 g/
bhp-hr) primarily because it is the same value as we finalized for the 
highway NTE. As shown in table III.J-2, we have finalized a threshold 
value of 1.9 g/bhp-hr NOX for nonroad engines. We have 
finalized this higher NOX threshold based on the differences 
in the emission performance of NOX control technologies 
between highway and nonroad diesel engines. Specifically, nonroad 
diesel NOX standards have traditionally been higher than the 
equivalent highway NOX standard due primarily to the 
effectiveness of charge-air-cooling and the lack of ram-air for nonroad 
applications. For example, the nonroad Tier 3 NMHC+NOX 
standards are higher than the 2004 heavy-duty highway standards (e.g., 
3.0 g/bhp-hr vs. 2.5 g/bhp-hr), and the Tier 4 NOX standard 
is higher than the 2007 heavy-duty highway standard (e.g., 0.3 g/bhp-hr 
vs. 0.2 g/bhp-hr). We expect that the nonroad Tier 3 standard for 
engines above 100 hp will require NOX levels of 
approximately 2.5 g/bhp-hr and we expect that for the 2004 highway 
heavy-duty standards, NOX levels are approximately 2 g/bhp-
hr. In both cases, these emission levels are the building blocks for 
the next set of EPA standards (e.g., Tier 4 for nonroad and 2007 for 
highway). Because the nonroad Tier 3 NOX emission levels are 
expected to be approximately 25 percent greater than the 2004 highway 
level (2.5 vs 2), we believe that the NTE NOX multiplier 
threshold for nonroad should be 25 percent greater for nonroad as 
compared to highway. For these reasons, we have finalized a 
NOX multiplier threshold of 1.9 g/bhp-hr, which is 25 
percent greater than the highway multiplier threshold.
    In addition, as proposed, we are finalizing a number of specific 
engine operating conditions during which the nonroad NTE standard would 
not apply. The exact criteria for these conditions are defined in the 
regulations, but in summary: the NTE does not apply during engine 
start-up conditions; the NTE does not apply during very cold engine 
intake air temperatures for EGR-equipped engines during which the 
engine may require an engine protection strategy; and, finally, for 
engines equipped with NOX and/or NMHC aftertreatment (such 
as a NOX adsorber), the NTE does not apply during warm-up 
conditions for the exhaust emission control device. Finally, while we 
did not propose this, we are finalizing the NTE PM carve-out provisions 
for engines which will not require PM filters. The PM only carve-out is 
a sub-region of the NTE zone in which the NTE PM standard does not 
apply. Figure III.J-1 contains an illustration of the PM carve-out. 
This is a region of high engine speed and low engine torque during 
which engine-out PM emissions are difficult to control to levels below 
the PM NTE standard. The dimensions of the PM carve-out are specified 
in the regulations. For engines equipped with a PM filter, compliance 
with the PM NTE standard in this region is achievable due to the highly 
efficient PM reduction capabilities of the CDPF technology. However, 
for engines in the under 25 hp category, for which we have established 
Tier 4 emission standards that do not require the use of a PM filter, 
PM control in this sub-region of the NTE zone with conventional PM 
reduction technologies may not be achievable. Therefore, as we allowed 
with highway heavy-duty engines certifying to the 0.1 g/bhp-hr 
standard, we have created a PM carve-out for nonroad engines that use 
in-cylinder PM control technologies. Specifically, the PM carve-out 
applies to engines meeting a PM standard or FEL greater than or equal 
to 0.05 g/bhp-hr.

K. Investigating and Reporting Emission-Related Defects

    In 40 CFR part 1068, subpart F, we are adopting defect reporting 
requirements that obligate manufacturers to tell us when they learn 
that emission-control systems are defective and to conduct 
investigations under certain circumstances to determine if an emission-
related defect is present. Under these defect-reporting requirements, 
manufacturers must track available warranty claims and any other 
available information from dealers, hotlines, diagnostic reports, or 
field-service personnel to identify possible defects. If the number of 
possible defects exceeds certain thresholds, they must investigate 
future warranty claims and other information to establish whether these 
are actual defects.
    We believe the investigation requirement in this rule will allow 
both EPA and the engine manufacturers to fully understand the 
significance of any unusually high rates of warranty claims for systems 
or parts that may have an impact on emissions. In the past, defect 
reports were submitted based on a very low threshold with the same 
threshold applicable to all size engine families and with little 
information about the full extent of the problem. The new approach 
should result in fewer overall defect reports being submitted by 
manufacturers than would otherwise be required under the old defect-
reporting requirements because the number of defects triggering the 
submission requirement rises with the engine family size. The new 
approach may trigger some additional reports for small-volume families, 
but the percentage-based approach will ensure that investigations and 
reports correspond to issues that are likely to be significant.
    Part 1068, subpart F, is intended to require manufacturers to use 
information we would expect them to keep in the normal course of 
business. We believe in most cases manufacturers will not be required 
to institute new programs or activities to monitor product quality or 
performance. A manufacturer that does not keep warranty or replacement 
part information may ask for our approval to use an alternate defect-
reporting methodology that is at least as effective in identifying and 
tracking possible emission-related defects as the requirements of 40 
CFR 1068.501. Thus manufacturers will have the flexibility to develop 
defect tracking and reporting programs that work better for their 
standard business practices. However, until we approve such a request, 
the thresholds and procedures of subpart F continue to apply.
    Manufacturers may also ask for our approval to use an alternate 
defect-reporting methodology when the requirements of 40 CFR 1068.501 
can be demonstrated to be highly impractical or unduly burdensome. In 
such cases, we will generally allow alternate methodologies that are at 
least as effective in identifying, correcting, and informing EPA of 
possible emission-related defects as the requirements of 40 CFR 
1068.501. We expect this flexibility to be useful in special 
circumstances such as when new models of very large engines are 
introduced for the first time. In this situation, it may be appropriate 
to allow an alternate defect reporting method because the high cost of 
these engines often makes it impractical to build and test large 
numbers of prototype engines. The initial production of these engines 
can have similar defect rates to the high levels often associated with 
prototype engines. While we are concerned about such defects and want 
to be kept informed about them, it is not clear that our basic program 
would be the best way to address these defects. In such cases, we 
believe it may be more appropriate for manufacturers to propose an 
alternative approach that consolidates reports on a regular interval, 
such as quarterly, and identifies obvious early-life defects without a 
formal tracking process. In general, we would encourage manufacturers 
to propose an alternate

[[Page 39034]]

approach to ensure that these defects are properly addressed while 
minimizing the associated burden.
    Issues related to parts shipments received the most attention from 
commenters who pointed out that the proposed requirement to track 
shipments of all emission-related components was overly burdensome and 
not likely to reveal useful information. We have concluded that it is 
not appropriate to use parts shipments as a quantitative indicator to 
evaluate whether manufacturers exceed the threshold that would trigger 
an investigation. We generally agree with manufacturers concerns that 
parts-shipments data would be too difficult to evaluate, for example, 
because parts are often shipped for stocking purposes, parts are 
installed in compliant and noncompliant products (such as exported 
engines), and part shipments are generally not identifiable by model 
year. The final rule therefore requires manufacturers to pursue a 
defect investigation if the number of shipped parts is higher than the 
manufacturer would expect based on historical shipment levels, 
specifications for scheduled maintenance, or other factors.
    We have modified the proposed thresholds to address concerns that 
manufacturers would be required to investigate and report defects too 
frequently. For engines under 750 hp, we are adopting investigation 
thresholds of 10 percent of total production or 50 engines, whichever 
is greater, for any single engine family in one model year. Similarly, 
we are adopting defect-reporting thresholds of 2 percent of total 
production or 20 engines, whichever is greater. For engines over 750 
hp, the same percentage thresholds apply, but we are extending the 
percentage values down to smaller engine families to reflect their 
disproportionate contribution to total emissions. For these engines, 
the absolute thresholds are 25 engines for investigations and 10 or 15 
engines for defects (see table III.K-1). We believe these thresholds 
adequately balance the desire to document emission-related defects 
without imposing an unreasonable reporting burden. Also, we believe 
this approach to adopting thresholds adequately addresses reporting 
requirements for aftertreatment and non-aftertreatment components.

    Table III.K-1.--Investigation and Defect-Reporting Thresholds for
                   Varying Sizes of Engine Families\1\
------------------------------------------------------------------------
                                     Investigation     Defect-reporting
           Engine size                 threshold           threshold
------------------------------------------------------------------------
<=750 hp........................  less than 500: 50.  less than 1,000:
                                                       20
                                  500-50,000: 10%...  1,000-50,000: 2%
                                  50,000+: 5,000....  50,000+: 1,000
>750 hp.........................  ..................  less than 150: 10
                                  less than 250: 25.  150-750: 15
                                  250+: 10%.........  750+: 2%
------------------------------------------------------------------------
Notes:
\1\ For varying sizes of engine families, based on sales per family in a
  given model year.

    EMA also expressed concern about the existing regulatory language 
in 40 CFR 1068.501(b)(3), which states that manufacturers must 
``consider defects that occur within the useful life period, or within 
five years after the end of the model year, whichever is longer.'' 
However, this provision has no effect on the diesel engines subject to 
the Tier 4 standards being adopted today, since they all have useful 
lives of at least five years. We recognize that this issue may be 
relevant to engine categories that do not have five-year useful lives, 
such as small SI engines, and will consider these concerns in our 
future regulation of such engines.
    When manufacturers start an investigation, they must consider any 
available information that would help them evaluate whether any of the 
possible defects that contributed to triggering the investigation 
threshold would lead them to conclude that these were actual defects. 
Otherwise, manufacturers are expected to look prospectively at any 
possible defects and attempt to determine whether these are actual 
defects. Also, during an investigation, manufacturers should use 
appropriate statistical methods to project defect rates if they are 
unable to collect information to evaluate possible defects, taking 
steps as necessary to prevent bias in sampled data (or making adjusted 
calculations to take into account any bias that may remain). For 
example, if 75 percent of the components replaced under warranty are 
available for evaluation, it would be appropriate to extrapolate known 
information on failure rates to the components that are unavailable for 
evaluation.
    The second threshold in 40 CFR 1068.501 specifies when a 
manufacturer must report that there is an emission-related defect. This 
threshold involves a smaller number of engines because each possible 
occurrence has been screened to confirm that it is in fact an emission-
related defect. In counting engines to compare with the defect-
reporting threshold, the manufacturer generally considers a single 
engine family and model year. Where information cannot be 
differentiated by engine family and model year, the manufacturer must 
use good engineering judgment to evaluate whether the information leads 
to a conclusion that the number of defects exceeds the applicable 
thresholds. However, when a defect report is required, the manufacturer 
must report all occurrences of the same defect in all engine families 
and all model years.
    If the number of engines with a specific defect is found to be less 
than the threshold for submitting a defect report, but information such 
as warranty data later indicates that there may be additional defective 
engines, all the information must be considered in determining whether 
the threshold for submitting a defect report has been met. If a 
manufacturer has actual knowledge from any source that the threshold 
for submitting a defect report has been met, a defect report must be 
submitted even if the trigger for investigating has not yet been met. 
For example, if manufacturers receive from their dealers, technical 
staff or other field personnel information showing conclusively that 
there is a recurring emission-related defect, they must submit a defect 
report.
    If manufacturers trigger the threshold to start an investigation, 
they must promptly and thoroughly investigate whether their parts are 
defective, collecting specific information to prepare a report 
describing their conclusions. Manufacturers must send the report if an 
investigation concludes that the number of actual defects did not 
exceed reporting thresholds. Manufacturers must also send these as 
status reports twice annually during an investigation. After 
investigating for

[[Page 39035]]

several months, or perhaps a couple years, it may become clear that the 
problems that triggered the investigation will never show enough actual 
defects to trigger a defect report. In this case, the manufacturer 
would send us a report justifying this conclusion.
    In general, we believe this updated approach to defect reporting 
will decrease the number of defect reports submitted by manufacturers 
overall while significantly improving their quality and their value to 
both EPA and the manufacturer.
    Note that misbuilds are a special type of emission-related defect. 
An engine that is not built consistent with its application for 
certification violates the prohibited act of introducing into commerce 
engines that are not covered by a certificate of conformity.

L. Compliance With the Phase-In Provisions

    In section II we described the NOX and NMHC standards 
phase-in schedule, which is intended to allow engine manufacturers to 
phase-in their new advanced technology engines, while they phase-out 
existing engines. This phase-in requirement is based on percentages of 
a manufacturer's production for the U.S. market. We recognize, however, 
that manufacturers need to plan for compliance well in advance of the 
start of production, and that actual production volumes for any one 
model year may differ from their projections. On the other hand, we 
believe that it would be inappropriate and infeasible to base 
compliance solely on a manufacturer's projections. That could encourage 
manufacturers to overestimate their production of complying phase-in 
engines, and could result in significantly lower emission benefits 
during the phase-in. In response to these concerns, we proposed to 
initially only require nonroad diesel manufacturers to project 
compliance with the phase-in based on their projected production 
volumes, provided that they made up any deficits (in terms of percent 
of production) the following year. We received no comments on this 
issue and are finalizing it as proposed.
    Because we expect that a manufacturer making a good-faith 
projection of sales would not be very far off of the actual production 
volumes, we are limiting the size of the deficit that would be allowed, 
as in the highway program. In all cases, the manufacturer would be 
required to produce at least 25% of its production in each phase-in 
power category as ``phase-in'' engines (meeting the NOX and 
NMHC standards or demonstrating compliance through use of ABT credits) 
in the phase-in years (after factoring in any adjustments for early 
introduction engine credits; see section III.M). This minimum required 
production level would be 20% for the 75-175 hp category if a 
manufacturer exercises the option to comply with a reduced phase-in 
schedule in lieu of using banked Tier 2 ABT credits, as discussed in 
section III.A.1.b. Another important restriction is that manufacturers 
would not be allowed to have a deficit in the year immediately 
preceding the completion of the phase-in to 100%. This would help 
ensure that manufacturers are able to make up the deficit. Since they 
could not produce more than 100% low-NOX engines after the 
final phase-in year, it would not be possible to make up a deficit from 
this year. These provisions are identical to those adopted in the 
highway HDDE program.
    We are also finalizing the proposed ``split family'' allowance for 
the phase-in years. This provision, which is similar to a provision of 
the highway program, allows manufacturers to certify engine families to 
both the phase-in and phase-out standards. Manufacturers choosing this 
option must assign at the end of the model year specific numbers of 
engines to the phase-in and phase-out categories. All engines in the 
family must be labeled with the same NOX and PM FELs, which 
apply for all compliance testing, and must meet all other requirements 
that apply to phase-in engines. Engines assigned to the phase-out 
category may generate emission credits relative to the phase-out 
standards.

M. Incentive Program for Early or Very Low Emission Engines

    We believe that it is appropriate and beneficial to provide 
voluntary incentives for manufacturers to introduce engines emitting at 
very low levels early. Such inducements may help pave the way for 
greater and/or more cost effective emission reductions from future 
engines and vehicles. To encourage early introduction of low-emission 
engines, the proposal contained provisions to allow engine 
manufacturers to benefit from producing engines certified to the final 
(aftertreatment-based) Tier 4 standards prior to the 2011 model year, 
by being allowed to make fewer engines certified to these standards 
once the Tier 4 program takes effect, a concept that we are terming 
``engine offsets'' to avoid confusion with ABT program credits. The 
number of offsets that could be generated would depend on the degree to 
which the engines are able to meet, or perform better than, the final 
Tier 4 standards. Commenters generally supported this approach, as long 
EPA ensures that compliance requirements for these engines are 
enforced.
    However, one equipment manufacturer submitted comments suggesting 
that we should adopt a program that would provide incentives for 
equipment manufacturers to use the early Tier 4 engines in their 
equipment. For an early low-emission engine program to be successful, 
we agree that it is important to provide incentives to both the engine 
manufacturer and the equipment manufacturer, who may incur added cost 
to install and market the advanced engine in the equipment. As was 
pointed out in comments, the proposed program did not provide clear 
incentives to equipment manufacturers to use the (presumably more 
expensive) early low-emission engines. Therefore, we are adding such 
provisions. Section III.B.2.e describes these early Tier 4 engine 
incentive provisions under which equipment manufacturers can earn 
increased allowance flexibilities. Under those provisions, the engine 
manufacturer's incentive to produce the low-emitting engines will come 
from customers' demand for them, and from the fact that the engine 
manufacturer can earn ABT program credits for these engines in the same 
way as without these incentive provisions. If the equipment 
manufacturer does not wish to earn the increased allowance 
flexibilities, then the engine manufacturer would be allowed to use the 
provisions of the incentive program for early low-emission engines 
described below in this subsection, though to do so would require the 
forfeiture of any ABT credits earned by the subject engines, 
essentially to avoid double counting, as explained below. This engine 
manufacturer incentive program is being adopted as proposed, except for 
engines above 750 hp, for which the proposed program requires some 
adjustment to account for the approach we are taking to final 
standards.
    As discussed in section II.A.4, the final rule does not phase in 
standards for engines above 750 hp as proposed, and instead adopts 
application-specific standards in 2011 and 2015. The 2011 standards are 
not based on advanced aftertreatment except for NOX on 
engines above 1200 hp used in generator sets. To avoid overcomplication 
of the incentive program, which might discourage its use, we are not 
separating over and under 1200 hp generator set engines into separate 
groups for these provisions. Instead, any of these engines that meet 
the 2015 standards before 2015 can earn offsets. We are, however,

[[Page 39036]]

separating the generator set engines and non-generator set engines 
above 750 hp into separate groups, because we are deferring setting a 
NOX standard for the latter that is based on use of advanced 
aftertreatment technology.
    Table III.M-1 summarizes the requirements and available offsets for 
engine manufacturers in this program. As the purpose of the incentive 
is to encourage the introduction of clean technology engines earlier 
than required, we require that the emission standard levels actually be 
met, and met early, by qualifying engines to earn the early 
introduction offsets. The regulations specify that the standards must 
be met without the use of ABT credits and actual production of the 
engines must begin by September 1 preceding the first model year when 
the standards would otherwise be applicable. Also, to avoid double-
counting, as explained in the proposal, the early engines can earn 
either the engine offsets or the ABT emission credit, but not both. 
Note that this is different than the approach taken in the early Tier 4 
engine incentive program for equipment manufacturers described in 
section III.B.2.e, where incentives for both the engine manufacturer 
(ABT credits) and the equipment manufacturer (allowance flexibilities) 
are needed to ensure successful early introduction of clean engines. 
Because 15 ppm sulfur diesel fuel will be available on a widespread 
basis in time for 2007 (due to the requirements for on-highway heavy-
duty engines), we are allowing engine manufacturers to begin certifying 
engines to the very low emission levels required to be eligible for 
this incentive program, beginning with the 2007 model year.

                         Table III.M-1.--Program for Early Introduction of Clean Engines
----------------------------------------------------------------------------------------------------------------
              Category                    Engine group              Must meet \a\            Per-engine offset
----------------------------------------------------------------------------------------------------------------
Early..............................  25-75 hp..............  0.02 g/bhp-hr PM...........  1.5-to-1
PM-only \b\........................  75-750 hp.............  0.01 g/bhp-hr PM...........  PM-only
                                     25-75 hp..............  0.02/3.5 g/bhp-hr PM/
                                                              NMHC+NOX.
                                     75-750 hp.............  0.01/0.30/0.14 g/bhp-hr PM/
                                                              NOX/NMHC.
                                     >750 hp generator set.  0.02/0.50/0.14 g/bhp-hr PM/  1.5-to-1
                                                              NOX/NMHC.
Early Engine \b\...................  >750 hp non-generator   0.03/2.6/0.14 g/bhp-hr PM/
                                      set.                    NOX/NMHC.
Low NOX Engine.....................  >25 hp................  as above for Early Engine,   2-to-1
                                                              except must meet 0.15 g/
                                                              bhp-hr NOX standard.
----------------------------------------------------------------------------------------------------------------
Notes:
\a\ All engines must also meet the Tier 4 crankcase emissions requirements. Engines must certify using all test
  and other requirements (such as NRTC and NTE) otherwise required for final Tier 4 standards.
\b\ Offsets must be earned prior to the start of phase-in requirements in applicable engine groups (prior to
  2013 for 25-75 hp engines, prior to 2012 for 75-175 hp engines, prior to 2011 for 175-750 hp engines, prior to
  2015 for >750 hp engines).

    For any engines being certified under this program before the 2011 
model year using 15 ppm sulfur certification fuel, the manufacturer 
would have to meet the requirements described in section III.D, 
including demonstrating that the engine would indeed be fueled with 15 
ppm sulfur fuel in the field. We expect this would occur through 
selling such engines into fleet applications, such as municipal 
maintenance fleets, large construction company fleets, or any such 
well-managed centrally-fueled fleet. While obtaining a reliable supply 
of 15 ppm maximum sulfur diesel fuel prior to the 2011 model year will 
be possible, it will require some effort by nonroad diesel machine 
operators. We therefore believe it is necessary and appropriate to 
provide a greater incentive for early introduction of clean diesel 
technology. Thus, as proposed, we would count one early engine (that 
is, an engine meeting the final Tier 4 standards) as offsetting 1.5 
engines later. This means that fewer clean diesel engines than 
otherwise required may enter the market in later years, but, more 
importantly, it means that emission reductions would be realized 
earlier than under our base program. We believe that providing 
incentives for early emission reductions is a worthwhile goal for this 
program, because improving air quality is an urgent need in many parts 
of the country as explained in section I, and because the early 
learning opportunity with new technologies can help to ensure a smooth 
transition to Tier 4 standards.
    We are providing this early introduction offset for engines over 25 
hp that meet all of today's Tier 4 emissions standards (NOX, 
PM, and NMHC) in the applicable engine category. We are also providing 
this early introduction offset to engines that pull ahead compliance 
with only the PM standard. However, a PM-only early engine would offset 
only the PM standard for an offset-using engine. For engines in power 
categories with a percentage phase-in, this would correspond (during 
the phase-in years) to offset use for ``phase-out'' engines (those 
required to meet the new Tier 4 standard for PM but not for 
NOX or NMHC). Engines using the PM-only offset would be 
subject to the other applicable Tier 4 emission standards, including 
applicable transient and NTE standards (see Section III.F) and 
crankcase requirements. The applicable PM standard and requirements for 
these PM-only offset-using engines would be those of Tier 3 (Tier 2 for 
25-50 hp engines). PM-only offsets would not offset engines required to 
meet other Tier 4 standards such as the phase-in NOX and 
NMHC standards (since there is no reason for PM offsets to offset 
emissions of other pollutants). Tier 4 engines between 25 and 75 hp 
certified to the 2008 PM standard would not participate in this 
program, nor would engines below 25 hp, because they do not have 
advanced aftertreatment-based standards.
    An important aspect of the early incentive provision is that it 
must be done on an engine count basis. That is, a diesel engine meeting 
new standards early would count as 1.5 such diesel engines later. This 
contrasts with a provision done on an engine percentage basis which 
would count one percent of diesel engines early as 1.5 percent of 
diesel engines later. Basing the incentive on an engine count 
alleviates any possible influence of fluctuations in engine sales in 
different model years.
    Another important aspect of this program is that it is limited to 
engines sold prior to the 2013 model year for engines between 25 and 75 
hp, prior to the 2012 model year for engines between 75 and 175 hp, and 
prior to the 2011 model year for engines between 175 and 750 hp. In 
other words, as in the highway program, nonroad diesel engines sold 
during the transitional ``phase-in'' model years would not be 
considered ``early'' introduction engines and would therefore be 
ineligible to

[[Page 39037]]

generate early introduction offsets. However, such engines and vehicles 
would still be able to generate ABT credits. Because the engines over 
750 hp engines have no percent-of-production phase-in provisions, we 
are allowing offsets for early engines in any model year prior to 2015. 
For the same reason, there is no PM-only offset for these engines. As 
with the phase-in itself, and for the same reasons, an early 
introduction engine could only be used to offset requirements for 
engines in the same engine group (25-75 hp, 75-175 hp, 175-750 hp, >750 
hp generator sets, and >750 hp non-generator sets) as the offset-
generating engine.
    As a further incentive to introduce clean engines and vehicles 
early, we are also adopting the proposed provision that gives engine 
manufacturers an early introduction offset equal to two engines during 
or after the phase-in years for engines with NOX levels well 
below the final Tier 4 NOX standard. This incentive applies 
for diesel engines achieving a 0.15 g/bhp-hr NOX standard 
level (one-half of the aftertreatment-based standard for most engines) 
while also meeting the NMHC and PM standards. Due to the extremely low 
emission levels to which these engines and vehicles would need to 
certify, we believe that the double engine count offset is appropriate.
    In the NPRM we asked for comment on whether or not we should extend 
the existing Blue Sky program that encourages the early introduction of 
engines with emission levels (as measured on a transient test) about 
40% lower than the Tier 2 standards levels. See 68 FR at 28483. We 
received comments both for and against doing so, but no commenter 
provided substantive arguments or information. Given the very low 
emissions levels being adopted in Tier 4, we have decided not to extend 
the existing Blue Sky Series program, because it does not encourage 
engines emitting at such low emission levels.

N. Labeling and Notification Requirements

    As explained in section II, the emissions standards will make it 
necessary for manufacturers to employ exhaust emission control devices 
that require very low-sulfur fuel (less than 15 ppm) to ensure proper 
operation. This action restricts the sulfur content of diesel fuel used 
in these engines. However, the 2008 emissions standards would be 
achievable with less sensitive technologies and thus it could be 
appropriate for those engines to use diesel fuel with up to 500 ppm 
sulfur. There could be situations in which vehicles requiring either 15 
ppm fuel or 500 ppm may be accidentally or purposely misfueled with 
higher-sulfur fuel. Any of these misfueling events could seriously 
degrade the emission performance of sulfur-sensitive exhaust emission 
control devices, or perhaps destroy their functionality altogether.
    In the highway rule, we adopted a requirement that heavy-duty 
vehicle manufacturers notify each purchaser that the vehicle must be 
fueled only with the applicable low-sulfur diesel fuel. We also 
required that diesel vehicles be equipped by the manufacturer with 
labels near the refueling inlet to indicate that low sulfur fuel is 
required. We are adopting similar requirements here.\88\ Specifically, 
manufacturers will be required to notify each purchaser that the 
nonroad engine must be fueled only with the applicable low-sulfur 
diesel fuel, and ensure that the equipment is labeled near the 
refueling inlet to indicate that low sulfur fuel is required. We 
believe that these measures would help owners find and use the correct 
fuel and would be sufficient to address misfueling concerns. Thus, more 
costly provisions, such as fuel inlet restrictors, should not be 
necessary.
---------------------------------------------------------------------------

    \88\ We also required that highway vehicles be labeled on the 
dashboard. Given the type of equipment using nonroad CI engines, we 
are not adopting any dashboard requirement here.
---------------------------------------------------------------------------

    In general, beginning in model year 2011, nonroad engines will be 
required to use the Ultra Low Sulfur diesel fuel (with less than 15 ppm 
sulfur). Thus, the default label will state ``ULTRA LOW SULFUR FUEL 
ONLY.'' The labeling requirements for earlier model year Tier 4 engines 
are specified in Sec.  1039.104(e). Some new labeling requirements for 
earlier model year Tier 3 engines are specified in 40 CFR 89.330(e). 
These requirements for earlier years generally require that engines and 
equipment be labeled consistent with the sulfur of the test fuel used 
for their certification. So where the engine is certified using Low 
Sulfur diesel fuel (with less than 500 ppm sulfur), the required label 
will state ``LOW SULFUR FUEL ONLY.'' See section III.D and the 
regulatory text for the other specific requirements related to labeling 
the earlier model years.

O. General Compliance

1. Good Engineering Judgment
    The process of testing engines and preparing an application for 
certification requires the manufacturer to make a variety of judgments. 
This includes, for example, selecting test engines, operating engines 
between tests, and developing deterioration factors. EPA has the 
authority to evaluate whether a manufacturer's use of engineering 
judgment is reasonable. The regulations describe the methodology we use 
to address any concerns related to how manufacturers use good 
engineering judgment in cases where the manufacturer has such 
discretion (see 40 CFR 1068.5). If we find a problem with a 
manufacturer's use of engineering judgment, we will take into account 
the degree to which any error in judgment was deliberate or in bad 
faith. If manufacturers object to a decision we make under this 
provisions, they are entitled to a hearing. This subpart is consistent 
with provisions already adopted for light-duty highway vehicles, marine 
diesel engines, industrial spark-ignition engines, and recreational 
vehicles.
2. Replacement Engines
    In the proposal we included a provision allowing manufacturers to 
sell a new, noncompliant engine intended to replace an engine that 
fails in service. The proposed language closely mirrored the existing 
provisions in 40 CFR 89.1003(b)(7), except that it specified that 
manufacturers could produce new, noncompliant replacement engines if no 
engine from any manufacturer were available with the appropriate 
physical or performance characteristics. Manufacturers objected to this 
provision and requested that the final regulations follow the language 
in 40 CFR part 89, in which the manufacturer of the new engine confirm 
that no appropriate engine is available from its product line (or that 
of the manufacturer of the original engine, if that were a different 
company). We agree that the language from 40 CFR part 89 is 
appropriate, but we note two things to address remaining concerns that 
manufacturers could potentially use the replacement-engine provisions 
to produce large numbers of noncompliant products. First, we are 
including a specific statement in the regulations that manufacturers 
may not use the replacement-engine exemption to circumvent the 
regulations. Second, we plan to use the data-collection provision under 
40 CFR 1068.205(d) to ask manufacturers to report the number of engines 
they sell under the replacement-engine exemption. Rather than adopting 
a specific data-reporting requirement, we believe this more flexible 
approach is most appropriate to allow us to get information to evaluate 
how manufacturers are using the exemption without imposing reporting 
requirements that may involve more or less information than is actually 
needed.

[[Page 39038]]

3. Warranty
    We are modifying 40 CFR 1068.115 regarding engine manufacturers' 
warranty obligations by removing paragraph (b). This paragraph 
addresses specific circumstances under which manufacturers may not deny 
emission-related warranty claims, while paragraph (a) of this section 
addresses the circumstances under which manufacturers may deny such 
claims. As described in our Summary and Analysis of Comments related to 
our November 8, 2002 final rule (67 FR 68242), we intended to adopt 40 
CFR1068.115 without this paragraph. We wanted to remove paragraph (b) 
because we agreed with a comment pointing out that publishing both 
paragraphs leaves ambiguous which provision applies if a situation 
applies that is not on either list. Since neither list can be 
comprehensive, we believe the provisions in paragraph (a) describing 
when manufacturers may deny warranty claims appropriately addresses the 
issue. As a result, paragraph (b) was inadvertently adopted as part of 
the November 2002 final rule.
4. Separate Catalyst Shipment
    We are adopting provisions that will allow engine manufacturers to 
ship engines to equipment manufacturers where the engine manufacturer 
had not yet installed the aftertreatment or otherwise included it as 
part of the engine shipment. This allows the engine manufacturer to 
ship the engine without the aftertreatment; for example, in cases where 
it would be impractical to install aftertreatment devices on the engine 
before shipment or even ship products with the aftertreatment devices 
uninstalled along with the engine; or where shipping it already 
installed would require it to be disassembled and reinstalled when the 
engine was placed in the equipment. Today's final rule requires that 
the components be included in the price of the engine and that the 
engine manufacturer provide sufficiently detailed and clear 
instructions so that the equipment manufacturer can readily install the 
engine and its ancillary components in a configuration covered under 
the certificate of conformity held by the engine manufacturer. We are 
also requiring that the engine manufacturer have a contractual 
agreement obligating the equipment manufacturer to complete the final 
assembly into a certified configuration. The engine manufacturer must 
ship any components directly to the equipment manufacturer or arrange 
for their shipment from a component supplier. The engine manufacturer 
must tag the engines and keep records. The engine manufacturer must 
obtain annual affidavits from each equipment manufacturer as to the 
parts and part numbers that the equipment manufacturer installed on 
each engine and must conduct a limited number of audits of equipment 
manufacturers' facilities, procedures, and production records to 
monitor adherence to the instructions it provided. Where an equipment 
manufacturer is located outside of the U.S., the audits may be 
conducted at U.S. port of distribution facilities.
    The rule also contains various provisions establishing 
responsibility for proper installation. Where the engines are not in a 
certified configuration when installed in nonroad equipment because the 
equipment manufacturer used improper emission-control devices or failed 
to install the shipped parts or failed to install the devices 
correctly, then both the engine manufacturer and the installer have 
responsibility. For the engine maker, the exemption is void for those 
engines that are not in their certified configuration after 
installation. We may also suspend or revoke the exemption for future 
engines where appropriate, or void the exemption for the entire engine 
family. The installer is also liable. We may find the equipment 
manufacturer to be in violation of the tampering prohibitions at 40 CFR 
1068.101(b)(1) for the improper installation, which could subject it to 
substantial civil penalties. In any event, the engine manufacturer 
remains liable for the in-use compliance of the engine as installed. 
For example, it has responsibility for the emission-related warranty, 
including for the aftertreatment, and is responsible for any potential 
recall liability. However, if noncompliance of the in-use engines stems 
from improper installation of the aftertreatment, then the tampering 
that occurred by the installer may remove recall liability. Where the 
engine manufacturer had complied with the regulations and the failure 
was solely due to the equipment manufacturer's actions, we would not be 
inclined to revoke or suspend the exemption or to void the exemption 
for the entire engine family. We may deny the exemption for future 
model years if the engine manufacturer does not take action to address 
the factors causing the nonconformity. On the other hand, if the 
manufacturer failed to comply, had shipped improper parts, had provided 
instructions that led to improperly installed parts, or had otherwise 
contributed to the installation of engines in an uncertified 
configuration, we might suspend, revoke, or void the exemption for the 
engine family. In this case, the engine manufacturer would be subject 
to substantial civil penalties.

P. Other Issues

    We are also making other minor changes to the compliance program. 
These changes are summarized in table III.Q-1 below. For more 
information about these changes, you should read the NPRM and Summary 
and Analysis of Comments for this rulemaking. We believe that these 
changes are straightforward and noncontroversial.

                                       Table III.Q-1.--Regulatory Changes
----------------------------------------------------------------------------------------------------------------
                          Issue                                             Regulatory provision
----------------------------------------------------------------------------------------------------------------
Applicability to alcohol-fueled engines..................  Sec.  Sec.   1039.101, 1039.107.
Prohibited controls......................................  Sec.   1039.115.
Emission-related maintenance instructions................  Sec.   1039.125.
Engine installation instructions.........................  Sec.   1039.130.
Engines labels...........................................  Sec.  Sec.   1039.20, 1039.135, 1068.320.
Engine family definition.................................  Sec.   1039.230.
Test engine selection....................................  Sec.   1039.235.
Deterioration factors....................................  Sec.   1039.240.
Engines that use noncommercial fuels.....................  Sec.   1039.615.
Use of good engineering judgment.........................  Sec.   1068.5.
Separate shipment of aftertreatment......................  Sec.   1068.260.
Exemptions...............................................  40 CFR 1068 Subpart C.
Importing engines........................................  40 CFR 1068 Subpart D.

[[Page 39039]]

 
Hearings.................................................  40 CFR 1068 Subpart G.
----------------------------------------------------------------------------------------------------------------

Q. Highway Engines

    We are changing the diesel engine/vehicle labeling requirements in 
40 CFR 86.007-35 to be consistent with the new pump labels. This change 
corrects a mistake in the proposal that would have resulted in 
confusion for highway vehicle operators. (We received no comment on 
this issue.)

R. Changes That Affect Other Engine Categories

    We are making some minor changes to the regulations in 40 CFR parts 
1048 and 1051 for nonroad spark-ignition engines over 19 kW and 
recreational vehicles, respectively. We are also changing several 
additional provisions in 40 CFR parts 1065 and 1068, which define test 
procedures and compliance provisions for these same categories of 
engines. See the regulatory text for the specific changes. The proposed 
rule included most of these changes. To the extent there were comments 
on any of these changes, those issues are addressed elsewhere in this 
document or in the Summary and Analysis of Comments.
     In 40 CFR 1048.125 and 40 CFR 1051.125, we are correcting 
the provisions related to critical emission-related maintenance to 
allow manufacturers to do maintenance during service accumulation for 
durability testing, as long as their maintenance steps meet the 
specified criteria ensuring that in-use engines will undergo those 
maintenance procedures.
     In 40 CFR 1068.27, we clarify that manufacturers must make 
available a reasonable number of production-line engines so we can test 
or inspect them if we make such a request.
     We are changing the definition of nonroad engine to 
explicitly exclude aircraft engines. This is consistent with our 
longstanding interpretation of the Clean Air Act. Clarifying the 
definition this way allows us to more clearly specify the applicability 
of the fuel requirements to nonroad engines in this final rule.
     We are adding a provision directing equipment 
manufacturers to request duplicate labels from engine manufacturers and 
keep appropriate records if the original label is obscured in the final 
installation. The former approach under 40 CFR part 1068 was to require 
equipment manufacturers to make their own duplicate labels as needed. 
We intend to amend 40 CFR parts 1048 and 1051 to correspond with this 
change.
     As described above in section III, we are revising the 
criteria manufacturers would use to show that they may use the 
replacement-engine exemption under 40 CFR 1068.240. We also clarify 
that we may require manufacturers to report to us how many engines they 
sell in given year under the replacement-engine exemption.
     As described above and in the Summary and Analysis of 
Comments, we are adding a provision in 40 CFR 1068.260 to allow 
manufacturers to ship aftertreatment devices directly from the 
component supplier to the equipment manufacturer. This regulatory 
section includes several provisions to ensure that the equipment 
manufacturer installs the aftertreatment device in a way that brings 
the engine to its certified configuration.
     As described above, we are modifying the defect-reporting 
requirements in 40 CFR 1068.501.
     While most of the changes being adopted for part 1065 will 
only affect diesel nonroad engines, we are also making minor changes 
that will also apply for SI engines. These changes, however, are 
generally limited to clarifications, corrections, and options. They 
will not affect the stringency of the standards or create new burdens 
for manufacturers.

IV. Our Program for Controlling Nonroad, Locomotive and Marine Diesel 
Fuel Sulfur

    We are finalizing today a two-step sulfur standard for nonroad, 
locomotive and marine (NRLM) diesel fuel that will achieve significant, 
cost-effective sulfate PM and SO2 emission reductions. These 
emission reductions will, by themselves, provide dramatic environmental 
and public health benefits which far outweigh the cost of meeting the 
standards necessary to achieve them. In addition, the final sulfur 
standards for nonroad diesel fuel will enable advanced high efficiency 
emission control technology to be applied to nonroad engines. As a 
result, these nonroad fuel sulfur standards, coupled with our program 
for more stringent emission standards for new nonroad engines and 
equipment, will also achieve dramatic NOX and PM emission 
reductions. Sulfur significantly inhibits or impairs the function of 
the diesel exhaust emission control devices which will generally be 
necessary for nonroad diesel engines to meet the emission standards 
finalized today. With the 15 ppm sulfur standard for nonroad diesel 
fuel, we have concluded that this emission control technology will be 
available for model year 2011 and later nonroad diesel engines to 
achieve the NOX and PM emission standards adopted today. The 
benefits of today's program also include the sulfate PM and 
SO2 reductions achieved by establishing the same standard 
for the sulfur content of locomotive and marine diesel fuel.
    The sulfur requirements established under today's program are 
similar to the sulfur limits established for highway diesel fuel in 
prior rulemakings --500 ppm in 1993 ( 55 FR 34120, August 21, 1990) and 
15 ppm in 2006 (66 FR 5002, January 18, 2001). Beginning June 1, 2007, 
refiners will be required to produce NRLM diesel fuel with a maximum 
sulfur content of 500 ppm. Then, beginning June 1, 2010, the sulfur 
content will be reduced for nonroad diesel fuel to a maximum of 15 ppm. 
The sulfur content of locomotive and marine diesel fuel will be reduced 
to 15 ppm beginning June 1, 2012. The program contains certain 
provisions to ease refiners' transition to the lower sulfur standards 
and to enable the efficient distribution of all diesel fuels. These 
provisions include the 2012 date for locomotive and marine diesel fuel, 
early credits for refiners and importers and special provisions for 
small refiners, transmix processors, and entities in the fuel 
distribution system.
    In general, the comments we received during the public comment 
period supported the proposed program. Adjustments we have made to the 
proposed program will make the final program even stronger, both in 
terms of our ability to enforce it and the environmental and public 
health benefits that it will achieve. In particular, today's final 
program contains provisions to smooth the refining industry's 
transition to the low sulfur fuel requirements, encourage earlier 
introduction of cleaner burning fuel, maintain the fuel distribution 
system's flexibility to fungibly distribute similar products, and 
provide an outlet

[[Page 39040]]

for off-specification distillate product, all while maintaining, and 
even enhancing, the health and environmental benefits of today's 
program.
    The first adjustment that we made to the proposed program was to 
move from the ``refiner baseline'' approach discussed in the proposal 
to a ``designate and track'' approach. Under the proposed refiner 
baseline approach, any refiner or importer could choose to fungibly 
distribute its 500 ppm sulfur NRLM and highway diesel fuels without 
adding red dye to the NRLM at the refinery gate. However, the refiners' 
production would then be subject to a non-highway distillate baseline, 
established as a percentage of its total distillate fuel production 
volume. While EPA preferred this approach in the proposal, we decided 
not to finalize it because we concluded that it would have 
unnecessarily constrained refiners' ability to meet market demands. It 
would have encouraged them to dye 500 ppm sulfur NRLM at the refinery 
gate, resulting in an additional grade of diesel fuel and, 
consequently, an added burden to the distribution system. Furthermore, 
we were concerned that it would have created a trend that could reduce 
the volume of 15 ppm sulfur highway diesel fuel and potential options 
to remove the market constraints could have increased the possibility 
for reduced volume.
    In place of the refiner baseline approach, we are finalizing a 
designate and track approach. The final designate and track approach is 
a modified version of the designate and track approach discussed in the 
proposal. As finalized it now allows us to enforce the program through 
the entire distribution system. In essence, the final designate and 
track approach requires refiners and importers to designate the volumes 
of diesel fuel they produce and/or import. Refiners/importers will 
identify whether their diesel fuel is highway or NRLM and the 
applicable sulfur level. They may then mix and fungibly ship highway 
and NRLM diesel fuels that meet the same sulfur specification without 
dyeing their NRLM diesel fuel at the refinery gate. The designations 
will follow the fuel through the distribution system with limits placed 
on the ability of downstream parties to change the designation. These 
limits are designed to restrict the inappropriate sale of 500 ppm 
sulfur NRLM diesel fuel into the highway market , the inappropriate 
sale of heating oil into the NRLM market, the inappropriate sale of 500 
ppm sulfur LM into the nonroad market, and to implement the downgrading 
restrictions that apply to 15 ppm sulfur highway diesel fuel. The 
designate and track approach includes record keeping and reporting 
requirements for all parties in the fuel distribution system, 
associated with tracking designated fuel volumes through each custodian 
in the distribution chain until the fuel exits the terminal. The 
program also includes enforcement and compliance assurance provisions 
to enable the Agency to rapidly and accurately review for discrepancies 
the large volume of data collected on fuel volume hand-offs. The bulk 
of the designate and track provisions end May 31, 2010 when all highway 
diesel fuel must meet the 15 ppm sulfur standard. However, as discussed 
below, scaled back designate and track provisions continue beyond 2010 
for purposes of enforcing against heating oil being used in the NRLM 
market and to enforce against 500 ppm LM diesel fuel being used in the 
nonroad market.
    The second adjustment that we made to the proposed NRLM diesel fuel 
program was to establish a 15 ppm sulfur standard at the refinery gate 
for locomotive and marine (LM) diesel fuel in addition to nonroad (NR) 
diesel fuel.\89\ We are finalizing this standard for several reasons as 
discussed below.
---------------------------------------------------------------------------

    \89\ While today's program does not establish more stringent 
emission standards for locomotive or marine diesel engines, the 
Agency intends in the near future to initiate a rulemaking to adopt 
new emission standards for locomotive and marine engines based on 
the use of high efficiency exhaust emission control technology like 
that required for the nonroad standards adopted in today's rule. An 
advanced notice of proposed rulemaking (ANPRM) for this rule is 
published elsewhere in today's Federal Register, June 29, 2004.
---------------------------------------------------------------------------

    While we are finalizing a 15 ppm sulfur standard for locomotive and 
marine diesel fuel, we are doing so in a manner that responds to the 
primary concerns raised in comments regarding the need for an outlet 
for off-specification product. We are setting a refinery gate standard 
of 15 ppm sulfur beginning June 1, 2012, two years later than for 
nonroad diesel fuel. We are also continuing to provide an outlet for 
off-specification product generated in the distribution system, thereby 
affording the opportunity to reduce reprocessing and transportation 
costs. We are leaving the downstream standard for LM diesel fuel at 500 
ppm sulfur. In this way the LM diesel fuel pool may remain an outlet 
for off-specification distillate product and interface/transmix 
material.
    In developing the provisions of the NRLM diesel fuel program 
adopted today, we identified several principles that we want the 
program to achieve. Specifically, as described in more detail below, we 
believe the fuel program--


    (1) Achieves the greatest reduction in sulfate PM and 
SO2 emissions from nonroad, locomotive, and marine diesel 
engines as early as practicable;
    (2) Provides for a smooth transition of the NRLM diesel fuel 
pool to 15 ppm sulfur;
    (3) Ensures that 15 ppm sulfur diesel fuel is produced and 
distributed widely for use in all 2011 and later model year nonroad 
diesel engines;
    (4) Ensures that the fuel program's requirements are enforceable 
and verifiable.
    (5) Enables the efficient distribution of all diesel fuels; and
    (6) Maintains the benefits and program integrity of the highway 
diesel fuel program.

    The remainder of this section covers several topics. In section 
IV.A, we discuss the fuel that is covered by today's program, the 
standards that apply for refiners and importers (for both steps of the 
program), and the standards that apply for downstream entities. In 
section IV.B, we address the various hardship provisions that we are 
including in today's program. In section IV.C, we describe the special 
provisions that apply in the State of Alaska and the Territories. Next, 
in section IV.D, we describe the design of the designate and track 
provisions of the NRLM diesel fuel program for compliance purposes and 
how it differs from what we proposed. In section IV.E, we discuss the 
impact of today's program on state NRLM diesel fuel programs. In 
sections IV.F and G, we discuss the technological feasibility of the 
NRLM diesel fuel standards adopted today and the impacts of today's 
program on lubricity and other fuel properties. Finally, in section 
IV.H, we discuss the steps the Agency will take to streamline the 
refinery air permitting process for the equipment that refiners may 
need to install to meet today's NRLM diesel fuel standards..
    Analyses supporting the design and cost of the fuel program are 
located in chapters 5, 7, and 8 of the RIA. Section V of this preamble 
discusses the details of the additional compliance and enforcement 
provisions affecting NRLM diesel fuel and explains various additional 
elements of the program.

A. Nonroad, Locomotive and Marine Diesel Fuel Quality Standards

1. What Fuel Is Covered by This Program?
    The fuel covered by today's final rule is generally the same as the 
fuel that was covered by the proposal. We have not expanded or reduced 
the pool of diesel fuel that will be subject to the lower sulfur 
standards. However, the second step of the program now includes the 
same ultra low sulfur standard for locomotive and marine diesel fuel as 
for nonroad diesel fuel.

[[Page 39041]]

    Specifically, the sulfur standards finalized under today's program 
apply to all the diesel fuel that is used in nonroad, locomotive, and 
marine diesel applications--fuel not already covered by the previous 
standards for highway diesel fuel. This includes all fuel used in 
nonroad, locomotive, and marine diesel engines, except for fuels 
heavier than a No. 2 distillate used in Category 2 and 3 marine engines 
\90\ and any fuel that is exempted for national security or other 
reasons. While we are not adopting sulfur standards for other 
distillate fuels (such as jet fuel, heating oil, kerosene, and No. 4 
fuel oil) we are adopting provisions to prevent the inappropriate use 
of these other fuels. Use of distillate fuels in nonroad, locomotive, 
or marine diesel engines will generally be prohibited unless they meet 
the fuel sulfur standards finalized today.\91\ The program includes 
several provisions, as described below in section IV.D, to ensure that 
heating oil and other higher sulfur distillate fuels will not be used 
in nonroad, locomotive, or marine applications.
---------------------------------------------------------------------------

    \90\ Category 3 marine engines frequently are designed to use 
residual fuels and include special fuel handling equipment to use 
the residual fuel.
    \91\ For the purposes of this final rule, the term heating oil 
basically refers to any No. 1 or No. 2 distillate other than jet 
fuel, kerosene, and diesel fuel used in highway, nonroad, 
locomotive, or marine applications. For example, heating oil 
includes fuel which is suitable for use in furnaces, boilers, 
stationary diesel engines and similar applications and is commonly 
or commercially known or sold as heating oil, fuel oil, or other 
similar trade names.
---------------------------------------------------------------------------

    The regulated fuels under today's program include the following:

    (1) Any No. 1 and 2 distillate fuels used, intended for use, or 
made available for use in nonroad, locomotive, or marine diesel 
engines. Fuels under this category include those meeting the 
American Society for Testing and Materials (ASTM) D 975 or D 396 
specifications for grades No. 1-D and No. 2-D. Fuels meeting ASTM 
DMX and DMA specifications would be covered;
    (2) Any No. 1 distillate fuel (e.g., kerosene) added to such No. 
2 diesel fuel, e.g., to improve its cold flow properties;
    (3) Any other fuel used in nonroad, locomotive, or marine diesel 
engines or blended with diesel fuel for use in such engines. Fuels 
under this category include non-distillate fuels such as biodiesel 
and certain specialty fuel grades such as JP-5, JP-8, and F76 if 
used in a nonroad, locomotive, or marine diesel engine, except when 
a national security or research and development exemption has been 
approved. See V. A.1. and 2.

    On the other hand, the sulfur standards do not apply to--

    (1) No. 1 distillate fuel used to power aircraft;
    (2) No. 1 or No. 2 distillate fuel used for stationary source 
purposes, such as to power stationary diesel engines, industrial 
boilers, or for heating;
    (3) Number 4, 5, and 6 fuels (e.g., residual fuels or residual 
fuel blends, IFO Heavy Fuel Oil Grades 30 and higher), used for 
stationary source purpose;
    (4) Any distillate fuel with a T-90 distillation point greater 
than 700 F, when used in Category 2 or 3 marine diesel engines. This 
includes Number 4, 5, and 6 fuels (e.g., IFO Heavy Fuel Oil Grades 
30 and higher), as well as fuels meeting ASTM specifications DMB, 
DMC, and RMA-10 and heavier; and
    (5) Any fuel for which a national security or research and 
development exemption has been approved or fuel that is exported 
from the U.S. (see section V.A.1. and 2).

    It is useful to clarify what marine diesel fuels are covered by the 
sulfur standards. As with nonroad and locomotive diesel fuel, our basic 
approach is that the standards apply to any diesel or distillate fuel 
used or intended for use in marine diesel engines. However, the fuel 
used by marine diesel engines spans a wide variety of fuels, ranging 
from No. 1 and 2 diesel fuel to residual fuel and residual fuel blends 
used in the largest engines. It is not EPA's intention to cover all 
such fuels, and EPA has adopted an objective criteria to identify those 
marine fuels subject to regulation and those that are not. Any 
distillate fuel with a T-90 greater than 700 F will not be subject to 
the sulfur standards when used in Category 2 or 3 marine engines. This 
criteria is designed to exclude fuels heavier than No. 2 distillate, 
including blends containing residual fuel. In addition, residual fuel 
is not subject to the sulfur standards.
    While many marine diesel engines use No. 2 distillate, ASTM 
specifications for marine fuels identify four kinds of marine 
distillate fuels: DMX, DMA, DMB, and DMC. DMX is a special light 
distillate intended mainly for use in emergency engines. DMA (also 
called MGO) is a general purpose marine distillate that is to contain 
no traces of residual fuel. These fuels can be used in all marine 
diesel engines but are primarily used by Category 1 engines. DMX and 
DMA fuels intended for use in any marine diesel engine are subject to 
the fuel sulfur standards.
    DMB, also called marine diesel oil, is not typically used with 
Category 1 engines, but is used for Category 2 and 3 engines. DMB is 
allowed to have a trace of residual fuel, which can be high in sulfur. 
This contamination with residual fuel usually occurs due to the 
distribution process, when distillate is brought on board a vessel via 
a barge that has previously contained residual fuel, or using the same 
supply lines as are used for residual fuel. DMB is produced when fuels 
such as DMA are brought on board the vessel in this manner. EPA's 
sulfur standards will apply to the distillate that is used to produce 
the DMB, for example the DMA distillate, up to the point that it 
becomes DMB. DMB itself is not subject to the sulfur standards when it 
is used in Category 2 or 3 engines.
    DMC is a grade of marine fuel that may contain some residual fuel 
and is often a residual fuel blend. This fuel is similar to No. 4 
diesel, and can be used in Category 2 and Category 3 marine diesel 
engines. DMC is produced by blending a distillate fuel with residual 
fuel, for example at a location downstream in the distribution system. 
EPA's standards will apply to the distillate that is used to produce 
the DMC, up to the point that it is blended with the residual fuel to 
produce DMC. DMC itself is not subject to the sulfur standards when it 
is used in Category 2 or 3 marine engines.
    Residual fuel is typically designated by the prefix RM (e.g., RMA, 
RMB, etc.). These fuels are also identified by their nominal viscosity 
(e.g., RMA10, RMG35, etc.). Most residual fuels require treatment by a 
purifier-clarifier centrifuge system, although RMA and RMB do not 
require this. For the purpose of this rule, we consider all RM grade 
fuel as residual fuel. Residual fuel is not covered by the sulfur 
content standards as it is not a distillate fuel.
    The distillation criteria adopted by EPA, T-90 greater than 700F, 
is designed to identify those fuels that are not subject to the sulfur 
standards when used in Category 2 or 3 marine diesel engines. It is 
intended to exclude DMB, DMC, and other heavy distillates or blends, 
when used in Category 2 or 3 marine diesel engines.
    Hence, the fuel that refiners and importers are required to produce 
to the more stringent sulfur standards include those No. 1 and No. 2 
diesel fuels as well as similar distillate or non-distillate fuels that 
are intended or made available for use in NRLM diesel engines. 
Furthermore, the sulfur standard also covers any fuel that is blended 
with or substituted for No. 1 or No. 2 diesel fuel for use in nonroad, 
locomotive, or marine diesel engines. For instance, as required under 
the highway diesel fuel program, in those situations where the same 
batch of kerosene is distributed for two purposes (e.g., kerosene to be 
used for heating and to improve the cold flow of No. 2 NRLM diesel 
fuel), or where a batch distributed just for heating is later 
distributed for blending with No. 2 diesel fuel, that batch of kerosene 
must meet the standards adopted today for NRLM

[[Page 39042]]

diesel fuel. The purpose of this requirement is to ensure that fuels 
like jet fuel, kerosene, and/or military specification fuels meet the 
diesel fuel sulfur standards adopted under today's program when they 
are used in nonroad, locomotive, or marine diesel engines.
2. Standards and Deadlines for Refiners and Importers
    The NRLM diesel fuel program adopted today is a two-step approach 
to reduce the sulfur content of NRLM diesel fuel from uncontrolled 
levels down to 15 ppm sulfur. While we received several comments 
supporting a single step down to 15 ppm sulfur, the vast majority of 
commenters, especially most refiners and engine manufacturers, 
supported the two-step approach. We are finalizing the two-step 
approach primarily because it achieves the greatest reduction in 
sulfate PM and SO2 emissions from nonroad, locomotive, and 
marine diesel engines as early as practicable. By starting with an 
initial step of 500 ppm sulfur we can achieve significant emission 
reductions and associated health and welfare benefits from the current 
fleet of equipment as soon as possible. As discussed in section VI, the 
health-related benefits of the fuel standards finalized today, even 
without the engine standards, amount to more than $28 billion in 2030, 
while the projected costs, after taking into account engine maintenance 
benefits amount to just $0.7 billion.
    In addition, the two-step approach encourages a more smooth and 
orderly transition by the refining industry to 15 ppm sulfur NRLM 
diesel fuel, by providing more time for refiners to develop the most 
cost-effective approaches, finance them, and then implement the 
necessary refinery modifications.
    Finally, by waiting until 2010 to drop to the 15 ppm sulfur 
standard for NR diesel fuel, the two-step approach harmonizes with the 
highway diesel fuel program by delaying the implementation of the 15 
ppm sulfur standard for NR diesel fuel until the end of the phase-in 
period for 15 ppm sulfur highway diesel fuel. The 2010 date also 
harmonizes with the date 15 ppm nonroad fuel is needed to enable the 
nonroad engines standards finalized today. The second step to 15 ppm 
sulfur for the LM diesel fuel is set for 2012. On balance we believe 
that the advantages of the two-step approach outweigh those of a single 
step down to 15 ppm.
    As discussed in section IV.C, below, later deadlines for meeting 
the 500 and 15 ppm sulfur standards apply to refineries covered by 
special hardship provisions as well as transmix processors.
a. The First Step to 500 ppm Sulfur NRLM Diesel Fuel
    Under today's program, NRLM diesel fuel produced by refiners or 
imported into the U.S. by importers must meet a 500 ppm sulfur standard 
beginning June 1, 2007. Refiners and importers may comply by either 
producing such fuel at or below 500 ppm sulfur, or they may comply by 
obtaining credits as discussed in section IV.D below.
    We believe that the adopted level of 500 ppm sulfur is appropriate 
for several reasons. First, the reduction to 500 ppm sulfur is 
significant environmentally. The 500 ppm sulfur level achieves 
approximately 90 percent of the sulfate PM and SO2 benefits 
otherwise achievable by going all the way to 15 ppm sulfur. Second, 
because this first step is only to 500 ppm sulfur, it also allows for a 
short lead time for implementation, enabling the environmental benefits 
to begin accruing as soon as possible. Third, it is consistent with the 
current specification for highway diesel fuel, a grade which may remain 
for highway purposes until 2010. As such, adopting the same 500 ppm 
sulfur level for NRLM diesel fuel helps to avoid issues and costs 
associated with more grades of fuel in the distribution system during 
this initial step of the program.
b. The Second Step to 15 ppm Sulfur NRLM Diesel Fuel
    We are finalizing a second step of sulfur control down to 15 ppm 
sulfur for all NRLM. This second step provides additional important 
direct sulfate PM and SO2 emission reductions and associated 
health benefits. As discussed in the RIA, the health related benefits 
for this second step of fuel control by itself are greater than the 
associated cost. Furthermore, the second step for nonroad diesel fuel 
is essential to enable the application of high efficiency exhaust 
emission control technologies to nonroad diesel engines beginning with 
the 2011 model year as discussed in Section II of this preamble.
    In the proposal, the second step of the program only applied to 
nonroad diesel fuel, while locomotive and marine diesel fuel could 
remain at 500 ppm sulfur. We also sought comment on finalizing the 15 
ppm sulfur standard for LM diesel fuel in 2010 along with nonroad 
diesel fuel, as well as delaying it until as late as 2012 to allow for 
an additional outlet for any off-specification product a refinery might 
produce as it shifts all of its distillate production to 15 ppm 
sulfur.\92\
---------------------------------------------------------------------------

    \92\ Off-specification fuel here refers to 15 ppm diesel fuel 
that becomes contaminated such that it no longer meets the 15 ppm 
sulfur cap. In most cases, off-specification 15 ppm sulfur diesel 
fuel is expected to easily meet a 500 ppm sulfur cap.
---------------------------------------------------------------------------

    We are finalizing the 15 ppm sulfur standard for locomotive and 
marine diesel fuel, along with nonroad diesel fuel, for several 
reasons. First, it will provide important health and welfare benefits 
from the additional sulfate PM and SO2 emission reductions 
as early as possible. Second, it is technologically feasible, as it is 
for nonroad diesel fuel. Third, the benefits outweigh the costs and the 
costs do not otherwise warrant delaying this second step for locomotive 
and marine. As shown in chapter 8 of the RIA, the costs for the 
increment of LM diesel fuel going from 500 to 15 ppm sulfur is just 
$0.20 billion in 2030. Fourth, it will simplify the fuel distribution 
system and overall design of the fuel program. For example, the 
addition of a marker to locomotive and marine diesel fuel after 2012 is 
no longer necessary to successfully enforce the program. Finally, it 
will allow refiners to coordinate plans to reduce the sulfur content of 
all of their off-highway diesel fuel at one time.
    Our primary reason in the NPRM for leaving locomotive and marine 
diesel fuel at the 500 ppm sulfur specification was to preserve an 
outlet for off-specification product that may be created in the 
distribution system through contamination of 15 ppm sulfur diesel fuel 
with higher sulfur distillates and for off-specification batches of 
fuel that are produced by refineries during the first couple years of 
the 15 ppm sulfur program (when they are still perfecting their 
production processes). However, we have concluded that it is not 
necessary to leave the standard for all locomotive and marine diesel 
fuel at the 500 ppm sulfur specification to address these concerns. 
Setting a 15 ppm sulfur standard for refiners and importers in 2012, 
but maintaining a downstream standard for locomotive and marine diesel 
fuel at 500 ppm sulfur and allowing off-specification product to 
continue to be sold into this market accomplishes the same goal.
    In addition, controlling the sulfur content of NRLM diesel fuel 
from uncontrolled levels to 15 ppm is clearly a cost-effective fuel 
control program. While the incremental cost-effectiveness from 500 ppm 
sulfur to 15 ppm sulfur is less cost-effective, the benefits of this 
second step outweigh the costs, the concerns about a market for off-
specification product have been addressed, and other factors discussed

[[Page 39043]]

above support the reasonableness of this approach. The body of evidence 
strongly supports the view that controlling sulfur in NRLM fuel to 15 
ppm, through a two-step process, is quite reasonable in light of the 
emissions reductions achieved, taking costs into consideration.
    Implementation of today's rule will reduce the sulfur level of 
almost all distillate fuel to a 15 ppm maximum sulfur level. In 
addition to the small refiner, hardship, and other provisions adopted 
in this rule, EPA is adopting several provisions that will help ensure 
a smooth transition to the second step of 15 ppm sulfur diesel fuel. 
First, refiners and importers of locomotive and marine diesel fuel, a 
small segment of the entire distillate pool, will be required to meet a 
15 ppm sulfur standard starting June 1, 2012, two years later than for 
nonroad diesel fuel. Second, 500 ppm sulfur diesel fuel generated in 
the distribution system through contamination of 15 ppm sulfur fuel can 
be marketed in the nonroad, locomotive and marine market until June 
2014, and in the locomotive and marine market after that date. Third, 
500 ppm sulfur diesel fuel produced by transmix processors from 
contaminated downstream diesel fuel can also be marketed to the 
nonroad, locomotive and marine markets, under the same schedule. While 
today's rule does not contain an end date for the downstream 
distribution of 500 ppm sulfur locomotive and marine fuel, we will 
review the appropriateness of allowing this flexibility based on 
experience gained from implementation of the 15 ppm sulfur NRLM diesel 
fuel standard. We expect to conduct such an evaluation in 2011.
    When EPA adopted a 15 ppm sulfur standard for highway diesel fuel, 
we included several provisions to ensure a smooth transition to 15 ppm 
sulfur highway fuel. One provision was a temporary compliance option, 
with an averaging, banking and trading component. In a similar manner, 
the 2012 deadline for 15 ppm sulfur LM fuel, the last, relatively small 
segment of diesel fuel, will help ensure that the entire pool of diesel 
fuel is smoothly transitioned to the 15 ppm sulfur level over a short 
period of time. (See section 8.3 of the summary and analysis of 
comments.)
    EPA is also adopting two provisions aimed at smoothing the 
transition of the distribution system to ultra low sulfur diesel fuel. 
These provisions are designed to accommodate off-specification fuel 
generated in the distribution system, such as through the mixing that 
occurs at product interfaces. This off-specification material generally 
cannot be added in any significant quantity to either of the adjoining 
products that produced the interface.\93\ Under today's program, as 
discussed in more detail in section A.3, below, off-specification 
material that is generated in the distribution system may be 
distributed as 500 ppm NRLM diesel fuel from June 1, 2010 through May 
31, 2014 and as 500 ppm LM from June 1, 2014 and beyond. Furthermore, 
as discussed in section IV.C, below, transmix processors, which are 
facilities that process transmix by separating it into its components 
(e.g., separating gasoline from diesel fuel), are treated as a separate 
class of refiners. One hundred percent of the diesel fuel they produce 
from transmix may be sold as high sulfur NRLM until June 1, 2010, 500 
ppm sulfur NRLM until June 1, 2014, and 500 ppm sulfur LM diesel fuel 
after June 1, 2014.
---------------------------------------------------------------------------

    \93\ In some cases the off-specification product can not be 
added to the adjoining products because of the applicable sulfur 
standards. In other cases, the off-specification product, called 
transmix, must be re-processed before it can be used.
---------------------------------------------------------------------------

    These provisions provide refiners and importers with a similar 
degree of flexibility for off-specification product as the proposal 
which held the sulfur standard for all locomotive and marine diesel 
fuel at 500 ppm indefinitely. If off-specification product is produced, 
there is a temporary outlet for it. If providing the off-specification 
product to a locomotive and marine market is difficult under this final 
rule, such that a refiner will choose to re-process it, then the 
refiner would have been in the same position under the proposal. 
Furthermore, these provisions provide the refining industry an 
alternative to reprocessing the off-specification material created in 
the distribution system, which preserves refining capacity for the 
production of new fuel volume, helping to maintain overall diesel fuel 
supply.
    As with the 500 ppm sulfur standard under the first step of today's 
program, refiners and importers may comply with the 15 ppm sulfur 
standard by either producing NRLM diesel fuel containing no more than 
15 ppm sulfur or by obtaining sulfur credits (until June 1, 2014), as 
described below.
c. Cetane Index or Aromatics Standard
    Currently, in addition to containing no more than 500 ppm sulfur, 
highway diesel fuel must meet a minimum cetane index level of 40 or, as 
an alternative, contain no more than 35 volume percent aromatics. 
Today's program extends this cetane index/aromatics content 
specification to NRLM diesel fuel.
    One refining company commented that EPA should not implement the 
cetane index and aromatic requirements in the proposed rule since the 
impacts are weak or nonexistent for engines to be used in the future. 
In addition, the commenter stated that the vast majority of diesel fuel 
already meets the EPA cetane index/aromatics specification for highway 
diesel fuel and that there is nothing in the RIA that either 
demonstrates the benefits or supports the need for such a requirement. 
The commenter also stated that EPA should not set a requirement simply 
because the ASTM standard has a cetane number specification for a 
particular fuel.
    Low cetane levels are associated with increases in NOX 
and PM emissions from current nonroad diesel engines.\94\ Thus, we 
expect that extending the cetane index specification to NRLM diesel 
fuel will directionally lead to a reduction in these emissions from the 
existing fleet. However, because the vast majority of NRLM diesel fuel 
already meets the specification, the NOX and PM emission 
reductions will be small. At the same time, the refining/production 
costs associated with extending the cetane index specification to NRLM 
diesel fuel are negligible as current NRLM diesel fuel already meets a 
more stringent ASTM specification.
---------------------------------------------------------------------------

    \94\ The Effect of Cetane Number Increase Due to Additives on 
NOX Emissions From Heavy-Duty Highway Engines, Final 
Technical Report, February 2003, EPA420-R-03-002.
---------------------------------------------------------------------------

    ASTM already recommends a cetane number specification of 40 for 
NRLM diesel fuel, which is, in general, more stringent than the similar 
40 cetane index specification. Because of this, the vast majority of 
current NRLM diesel fuel already meets the EPA cetane index/aromatics 
specification for highway diesel fuel. Thus, the cetane index 
specification will impact only a few refiners and there will be little 
overall cost associated with producing fuel to meet the cetane/aromatic 
requirement. In fact, as discussed in chapter 5.9 of the RIA, 
compliance with the sulfur standards adopted today is expected to 
result in a small cetane increase as increases in cetane correlate with 
decreases in sulfur, leaving little or no further control to meet the 
standard.
    While the emissions benefits and refining/production costs of 
extending the specification to NRLM diesel fuel may be small, the 
extension will reduce costs by giving refiners and distributors the 
ability to fungibly distribute highway and NRLM diesel fuels of like 
sulfur content. For that small fraction of NRLM diesel fuel today that 
does not meet the cetane index or aromatics

[[Page 39044]]

specification, the requirement will eliminate the need for refiners and 
fuel distributors to separately distribute fuels of different cetane/
aromatics specifications. Requiring NRLM diesel fuel to meet this 
cetane index specification thus gives fuel distributors certainty in 
being able to combine shipments of highway and NRLM diesel fuels. 
Perhaps more importantly, it can also give engine manufacturers and 
end-users the confidence they need that their fuel will meet the 
minimum cetane or maximum aromatics standard. Given the inherent 
difficulty in segregating two otherwise identical fuels, were we not to 
carry over these standards to NRLM, lower cetane NRLM could easily find 
its way into current highway engines. If not designed for this lower 
cetane fuel, these engines could have elevated emission levels and 
performance problems.
    Overall, we believe that there will be a small reduction in 
NOX and PM emissions from current engines and the economic 
benefits from more efficient fuel distribution will likely exceed the 
cost of raising the cetane level for the small volume of NRLM diesel 
fuel that does not already meet the cetane index or aromatics content 
specification.
3. Standards, Deadlines, and Flexibilities for Fuel Distributors
    The first years of the NRLM diesel fuel program include various 
flexibilities to smooth the refining and distribution industry's 
transition to 15 ppm sulfur fuel. These flexibilities include a 2012 
deadline for production of 15 ppm sulfur locomotive and marine diesel 
fuel, credit provisions, small refiner provisions, hardship provisions, 
and downstream off-specification fuel provisions. As a result, during 
the transition years, we are not able to simply enforce the sulfur 
standards downstream based on a single sulfur level of the new 
standard. From June 1, 2007 through May 31, 2010, both 500 ppm sulfur 
diesel fuel and high sulfur diesel fuel can be produced, distributed, 
and sold for use in NRLM diesel engines. From June 1, 2010 through May 
31, 2014, both 15 ppm sulfur and 500 ppm sulfur diesel fuel can be 
produced, distributed, and sold for use in NRLM diesel engines. Beyond 
June 1, 2014, both 15 ppm sulfur and 500 ppm sulfur diesel fuel that is 
produced from fuel product downgrade and transmix in the distribution 
system can be distributed and sold for use in locomotive and marine 
diesel engines. As these transition flexibilities expire, however, we 
are able to streamline our downstream enforcement provisions.
a. Standards and Deadlines From June 1, 2007 Through May 31, 2010
    As soon as the program begins on June 1, 2007, all NRLM diesel fuel 
must be designated or classified and must comply with the designation 
or classification stated on its product transfer document (PTD), pump 
label, or other documentation. In other words, if the fuel is intended 
for sale as NRLM diesel fuel and is labeled as 500 ppm sulfur diesel 
fuel, then beginning June 1, 2007, it must comply with the 500 ppm 
sulfur standard. Similarly, if fuel is intended for sale as NRLM diesel 
fuel and is labeled as 15 ppm sulfur, then beginning June 1, 2010 (or 
June 1, 2009 under the early credit provisions), it must comply with 
the 15 ppm sulfur standard.
    Beginning June 1, 2010, all NRLM diesel fuel produced or imported 
is required to meet at least a 500 ppm sulfur limit. In order to allow 
for a smooth and orderly transition to 500 ppm sulfur NRLM diesel fuel 
in the distribution system, and allow any remaining high sulfur fuel to 
be sold, we are providing parties downstream of refineries time to 
turnover their NRLM tanks to 500 ppm sulfur diesel fuel. At the 
terminal level, all NRLM diesel fuel must meet at least the 500 ppm 
sulfur standard beginning August 1, 2010. At any wholesale purchaser-
consumer facilities and any retail stations carrying NRLM diesel fuel, 
including bulk plants that serve as retailers, all diesel fuel must 
meet the 500 ppm sulfur standard beginning October 1, 2010.\95\ Thus, 
beginning October 1, 2010, high sulfur (greater than 500 ppm sulfur) 
NRLM diesel fuel may no longer legally exist in the fuel distribution 
system.\96\
---------------------------------------------------------------------------

    \95\ A bulk plant is a secondary distributor of refined 
petroleum products. They typically receive fuel from terminals and 
distribute fuel in bulk by truck to end users. Consequently, while 
for highway fuel, bulk plants often serve the role of a fuel 
distributor, delivering fuel to retail stations, for nonroad fuel, 
they often serve the role of the retailer, delivering fuel directly 
to the end-user.
    \96\ By December 1, 2010, all NRLM diesel fuel, including fuel 
in end-user tanks, must comply with at least the 500 ppm sulfur 
standard.
---------------------------------------------------------------------------

    Although we expect that most NRLM diesel fuel in the distribution 
system will be subject to the 500 ppm sulfur standard during the period 
from June 1, 2007 through May 31, 2010, based on its designation or 
classification, some of the 500 ppm sulfur NRLM diesel fuel may be 
mixed with high sulfur NRLM diesel fuel. Since the blended product will 
likely no longer meet the 500 ppm sulfur standard, it must be re-
designated and labeled as high sulfur NRLM diesel fuel. Similarly, fuel 
that results from blending 500 ppm sulfur NRLM diesel fuel and heating 
oil must be re-designated and labeled as heating oil.
b. Standards and Deadlines From June 1, 2010 Through May 31, 2014
    Beginning June 1, 2010, most NR diesel fuel will be required to 
meet the 15 ppm sulfur standard, and beginning June 1, 2012, most LM 
diesel fuel will be required to meet the 15 ppm sulfur standard. 
However, some production of 500 ppm sulfur NRLM diesel fuel may 
continue through May 31, 2014. As with the delayed downstream 
compliance dates for the 500 ppm sulfur standard under the first step 
of today's program, parties downstream of refineries will be allowed 
additional time to turnover their tanks to 15 ppm sulfur NR diesel 
fuel. Specifically, at the terminal level, all NR diesel fuel will be 
required to meet the 15 ppm sulfur standard beginning August 1, 2014. 
At any wholesale purchaser-consumer facilities and retail stations 
carrying all NR diesel fuel, including bulk plants serving as 
retailers, NR diesel fuel must meet the 15 ppm sulfur standard 
beginning October 1, 2014. Thus, beginning October 1, 2014, 500 ppm 
sulfur NR diesel fuel may no longer legally exist in the fuel 
distribution system.\97\
---------------------------------------------------------------------------

    \97\ By December 1, 2014, all NR diesel fuel, including fuel in 
end-user tanks, must comply with at least the 15 ppm sulfur 
standard.
---------------------------------------------------------------------------

    Like the first step to 500 ppm sulfur, prior to these 2014 
downstream deadlines all NRLM diesel fuel would still be designated or 
classified with respect to sulfur level and required to meet the 
designation or classification stated on its PTD, pump label, or other 
documentation.
c. Sulfur Standard for NRLM Diesel Fuel Beginning June 1, 2014
    As discussed above, all refiners will be required to produce and 
importers will be required to import only 15 ppm sulfur NRLM diesel 
fuel by June 1, 2014. However, we will continue to allow 500 ppm sulfur 
diesel fuel to be sold into the LM diesel fuel markets beyond 2014. The 
LM diesel fuel markets are expected to provide a valuable outlet for 
higher sulfur distillate fuel produced in the distribution system, at 
least through the early years of the program. Consequently, beyond 
2014, both 15 ppm sulfur and 500 ppm sulfur LM diesel fuel may continue 
to exist in the distribution system, and each fuel must comply with the 
designation stated on its PTD, pump label, or other documentation.

[[Page 39045]]

d. Interface/Transmix Flexibility for Fuel Distributors
    As described above, today's program provides flexibility to the 
distribution system by allowing interface/transmix material generated 
within the distribution system to be sold into the NRLM diesel fuel 
markets. Specifically, any fuel interface/transmix generated in the 
fuel distribution system may be sold as:

    (1) High sulfur NRLM diesel fuel or heating oil from June 1, 
2007 through May 31, 2010;
    (2) 500 ppm sulfur NRLM diesel fuel or heating oil from June 1, 
2010 through May 31, 2014; or
    (3) 500 ppm sulfur LM diesel fuel or heating oil after June 1, 
2014.

    Hence, beginning June 1, 2014, interface/transmix material 
exceeding 15 ppm sulfur may only be sold into the LM diesel fuel or 
heating oil markets. As discussed above, the downstream standard for LM 
diesel fuel will be 500 ppm sulfur. However, heating oil may not be 
shifted into the LM markets. Parties in the distribution system 
receiving diesel fuel with a sulfur content greater than 15 ppm sulfur 
must maintain records and report to EPA information demonstrating that 
they did not shift heating oil into the LM markets, as discussed in 
section IV.D.
    The generation of greater than 15 ppm sulfur distillate fuel from 
pipeline interface/transmix cannot be avoided due to the physical 
realities of a multi-product fuel distribution system. Such fuel first 
appears at the terminus of the pipeline distribution system; at 
terminals due to the generation of segregated interface, or at transmix 
processing facilities.\98\ In areas where there is a strong demand for 
heating oil, much of this pipeline-generated off-specification fuel can 
be sold into the heating oil market, just as it is today. However, in 
many areas of the country the demand for heating oil would not be 
sufficient to accommodate distillate fuel exceeding 15 ppm sulfur that 
is generated in the pipeline. Therefore, such fuel would need to be 
returned to a refinery for reprocessing to meet a 15 ppm sulfur 
standard. In addition, some refiners may be reluctant to accept such 
material for reprocessing given the impact this would have on their 
refinery operations. More importantly, because such material appears at 
the terminus of the pipeline distribution system and often where no 
access to pipeline or marine shipment is available, it would have to be 
shipped back to a refinery by truck, or rail if available, at 
additional cost.
---------------------------------------------------------------------------

    \98\ Segregated interface refers to the mixing zone between two 
batches of fuel that abut each other in the pipeline, where the 
volume in the mixing zone can not be cut into either of the fuel 
batches, but can still meet another fuel product specification 
without reprocessing, provided that it is drawn off of the pipeline 
separately and segregated.
---------------------------------------------------------------------------

    As discussed in chapter 7 of the RIA, fuel generated from such 
interface/transmix will typically meet a 500 ppm sulfur standard. 
Therefore, allowing the continued use of such 500 ppm sulfur diesel 
fuel in locomotive and marine engines could reduce the burden on the 
fuel distribution industry by lowering costs. Our cost estimates of 
marketing such fuel include additional shipping charges for situations 
where there is not a local locomotive or marine market (see section VI 
of this preamble).\99\ Allowing the continued sale of 500 ppm sulfur 
diesel fuel into the locomotive and marine markets without requiring it 
to be reprocessed will also help preserve refining capacity for the 
overall diesel fuel production. Therefore, this provision also serves 
to address lingering concerns expressed by some refiners regarding the 
impacts of the 15 ppm sulfur standard for highway and NRLM diesel fuel 
on overall diesel fuel supply.
---------------------------------------------------------------------------

    \99\ As mentioned above, the Agency intends in the near future 
to initiate a rulemaking to adopt new emission standards for 
locomotive and marine engines. An advanced notice of proposed 
rulemaking (ANPRM) for this rule is published elsewhere in today's 
Federal Register, June 29, 2004. While we are not finalizing a 
sunset date for this downgrade provision in today's final rule, we 
are evaluating the appropriateness of establishing a sunset date on 
this provision in the context of the subsequent engine standards 
rule. We also intend to review the appropriateness of any sunset 
provision in light of experience gained from implementation of the 
15 ppm sulfur NRLM diesel fuel standard. We would conduct such an 
evaluation in 2011.
---------------------------------------------------------------------------

    Downstream-generated 500 ppm sulfur diesel fuel may only be used in 
nonroad engines until December 1, 2014, due to concerns regarding 
enforceability and the increased potential for misfueling of nonroad 
equipment (equipment with advanced emission controls). Beginning with 
the 2011 model year, such equipment will require the use of 15 ppm 
sulfur diesel fuel to operate properly. The same concerns do not exist 
regarding the continued use of such 500 ppm sulfur diesel fuel in 
locomotive and marine engines for three reasons. First, locomotive and 
marine engines are not currently required to be equipped with the 
sulfur sensitive emissions aftertreatment that will start being used on 
nonroad equipment in 2011.\100\ Second, locomotive and marine markets 
are centrally fueled to a much greater extent than nonroad markets, and 
thus enforceability is not as significant of an issue. Finally, we 
believe the program's designate and track provisions discussed below 
will be sufficient to enforce the limits on production and use of 500 
ppm sulfur diesel fuel.
---------------------------------------------------------------------------

    \100\ Although, as mentioned above, the Agency intends in the 
near future to initiate a rulemaking to adopt new emission standards 
for locomotive and marine engines. An advanced notice of proposed 
rulemaking (ANPRM) for this rule is published elsewhere in today's 
Federal Register, June 29, 2004.
---------------------------------------------------------------------------

    It is difficult to project exactly how much of this downstream 
generated downgraded fuel could be segregated and shipped to LM 
markets. However, it is clear that this provision represents an 
important flexibility for the distribution system. In fact, it provides 
virtually the same flexibility as provided by the proposal to handle 
off-specification product. In both cases, use of the flexibility is 
dependent on the ability to segregate the interface and transport it to 
available LM markets. While today's rule does not contain an end date 
for the downstream distribution of 500 ppm sulfur locomotive and marine 
fuel, we will review the appropriateness of allowing this flexibility 
based on experience gained from implementation of the 15 ppm sulfur 
NRLM diesel fuel standard. We expect to conduct such an evaluation in 
2011.
    A summary of the NRLM sulfur levels and final deadlines for 
refiners, importers, terminals, and other downstream parties is shown 
in table IV-1 below.

                                        Table IV-1.--500 ppm Sulfur and 15 ppm Sulfur NRLM Final Compliance Dates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 Bulk plants,
                                          Refiners and                                                       wholesale purchaser-
                                            importers         Credit, small refiner        Terminals         consumers and retail     Other locations
                                                                                                                   outlets
--------------------------------------------------------------------------------------------------------------------------------------------------------
500 ppm NRLM.......................  June 1, 2007..........  June 1, 2010..........  August 1, 2010.......  October 1, 2010......  December 1, 2010.
15 ppm NR..........................  June 1, 2010..........  June 1, 2014..........  August 1, 2014.......  October 1, 2014......  December 1, 2014.

[[Page 39046]]

 
15 ppm LM..........................  June 1, 2012..........   June 1, 2014.........
--------------------------------------------------------------------------------------------------------------------------------------------------------

4. Diesel Sulfur Credit Banking and Trading Provisions
    Today's final program includes provisions for refiners and 
importers to generate early credits for the production of 500 ppm 
sulfur NRLM diesel fuel prior to June 1, 2007 and for the production of 
15 ppm sulfur NRLM diesel fuel prior to June 1, 2010. These credit 
banking and trading provisions will provide implementation flexibility 
by facilitating a somewhat smoother transition at the start of the 
program in 2007, with some refineries/import facilities complying 
early, others on time, and others a little later. These credit banking 
and trading provisions may also facilitate some of the environmental 
benefits of the program being achieved earlier than otherwise required, 
and may increase the overall environmental benefits of the program. As 
discussed below, overall benefits will accrue if refiners produce 500 
ppm earlier in lieu of high sulfur NRLM and then bank those credits to 
continue producing 500 ppm sulfur NR diesel fuel in 2010 or 500 ppm LM 
diesel fuel in 2012 in lieu of 15 ppm.\101\
---------------------------------------------------------------------------

    \101\ We are not adopting specific provisions to generate 
credits for early production of LM diesel fuel prior to June 1, 
2012. The difference in start date between 2010 and 2012 already 
provides additional flexibility to producers of LM diesel fuel, and 
setting separate credit generation periods for NR and LM diesel fuel 
would unnecessarily complicate the compliance assurance provisions.
---------------------------------------------------------------------------

    Specifically, credits generated under the NRLM diesel fuel program 
may be banked and later used to delay compliance with either the 500 
ppm sulfur NRLM standard that begins in 2007, the 15 ppm sulfur NR 
standard that begins in 2010, or the 15 ppm sulfur LM standard that 
begins in 2012. Credits may also be traded within companies such that 
credits generated at one refinery/import facility in a given company 
may be traded to another refinery/import facility within that same 
company. In addition, refiners or importers may purchase credits 
generated by other refiners or importers to meet the program 
requirements. Finally, and perhaps most importantly, individual 
refineries/import facilities may be able to use credits to permit the 
continued sale of otherwise off-specification product at the beginning 
of the program's second step when they are still adjusting their 
operations for consistent production/importation of NRLM diesel fuel 
that is subject to the new sulfur standards.
a. Credit Generation From June 1, 2006 Through May 31, 2007
    Credits may be generated under today's program to allow for the 
production of high sulfur NRLM diesel fuel after June 1, 2007. A 
refiner or importer may obtain credit for early production/importation 
of fuel meeting the 500 ppm sulfur standard that they designate as NRLM 
diesel fuel, from June 1, 2006 through May 31, 2007. In addition, small 
refiners may also generate credits for the early production of 500 ppm 
sulfur diesel fuel that they designate as NRLM diesel fuel. As 
described in section IV.B, below, small refiners are not required to 
produce any 500 ppm sulfur NRLM diesel fuel until June 1, 2010. Those 
small refiners who choose to comply with the 500 ppm sulfur standard 
earlier than required, that is before June 1, 2010, may generate 
credits for any volume of diesel fuel they produce from June 1, 2007 
through May 31, 2010 and designate as NRLM. Credits for the early 
production of 500 ppm sulfur fuel (including by small refineries) are 
fungible, may be banked for future use, or traded to any other refiner 
or importer nationwide. In order to ensure that these early credits are 
real and not merely shifts from the highway market, both early credits 
and small refinery credits will be subject to a limit determined by the 
following formula:

CreditHS = (Vol15 + Vol500) - 
Volhwy
CreditHS Limit = (Vol15 + Vol500) - 
Basehwy
Where:

Credit500 Limit = Limit for 500 ppm NRLM credits
CreditHS = High-Sulfur NRLM credits\102\
---------------------------------------------------------------------------

    \102\ For the purposes of this rule, credits are labeled on the 
basis of their use in order to follow the convention used in the 
highway diesel rule. A high-sulfur credit is generated through the 
production of one gallon of 500 ppm sulfur NRLM diesel fuel and 
allows the production of one gallon of high sulfur NRLM diesel fuel.
---------------------------------------------------------------------------

Vol15 = Volume of 15 ppm sulfur diesel fuel produced and 
designated as highway or NRLM
Vol500 = Volume of 500 ppm sulfur diesel fuel produced and 
designated as highway or NRLM
Basehwy = 2003-2005 highway diesel fuel baseline volume
Volhwy = Volume of diesel fuel produced and designated as 
highway

    If the excess production is 15 ppm sulfur diesel fuel instead of 
500 ppm sulfur diesel fuel, then the refiner will have the option of 
generating 500 ppm sulfur credits under the highway diesel fuel 
program. Credit may not be earned under both programs for a given 
volume of 500 ppm sulfur or 15 ppm sulfur diesel fuel.
b. Credit Generation From June 1, 2009 Through May 31, 2010
    In addition to allowing credit for the early production of 500 ppm 
sulfur NRLM diesel fuel, today's program also allows credit for the 
early production of 15 ppm sulfur NRLM diesel fuel. Specifically, 
refiners and importers may obtain credit for early production/
importation of fuel meeting the 15 ppm sulfur standard and that they 
designate as NRLM from June 1, 2009 through May 31, 2010. In addition, 
small refiners, which are not required to produce any 15 ppm sulfur 
NRLM diesel fuel until June 1, 2014, may also generate credits for the 
early production of any volume of 15 ppm sulfur diesel fuel that they 
designate as NRLM from June 1, 2010 through December 31, 2013. Again, 
these early credits are fungible, may be banked for future use, or 
traded to any other refinery or importer nationwide. However, in order 
to ensure these credits are real and not merely shifts from the highway 
market, credits for the early production or importation of 15 ppm 
sulfur fuel will be subject to a limit determined by the following 
formula:

Credit500 = Vol15 - Vol15hwy
Credit500 Limit = Vol15 - Base15hwy

Where:
Credit500 Limit = Limit for 500 ppm sulfur NRLM credits
Vol15 = Volume of 15 ppm sulfur diesel fuel produced and 
designated as highway or NRLM
Base15hwy = 2006-2008 15 ppm sulfur highway diesel fuel 
baseline volume


[[Page 39047]]


    Hence, to generate credits, a refiner or importer's highway diesel 
fuel volume for the compliance period must be greater than or equal to 
the baseline volume. That is, a refiner or importer may only generate 
credits for ``new'' volumes of 15 ppm sulfur diesel fuel that it 
produces. If their highway diesel fuel volume were to drop below the 
baseline volume, that would likely indicate a shift in production from 
the highway market to generate 15 ppm sulfur NRLM diesel fuel credits.
c. Credit Use
    There are two ways in which refiners or importers may use high-
sulfur NRLM credits under the NRLM diesel fuel program. First, credits 
may be used during the period from June 1, 2007 through May 31, 2010 to 
continue to produce high sulfur NRLM diesel fuel. Any high sulfur NRLM 
diesel fuel that is produced, however, must be designated and labeled 
as such for tracking purposes throughout the distribution system and be 
dyed red at the refinery gate.
    The second way in which refiners and importer could use high-sulfur 
NRLM credits is by banking them for use during the June 1, 2010 through 
May 31, 2014 period. Credits used in this manner would provide a net 
environmental benefit, since they were generated by reducing the sulfur 
level from approximately 3000 ppm to less than 500 ppm (a net change of 
2500 ppm sulfur), but when used only allow the sulfur level to increase 
from 15 ppm to 500 ppm (a net change of less than 500 ppm sulfur). 500 
ppm sulfur credits generated from the early production of 15 ppm sulfur 
NRLM diesel fuel may also be used from June 1, 2010 through May 31, 
2014. Thus, during this period, when the 15 ppm sulfur standard is in 
effect for nonroad diesel fuel, refiners/importers may use either high 
sulfur credits or 500 ppm sulfur credits to continue producing/
importing 500 ppm sulfur nonroad diesel fuel. Any 500 ppm sulfur diesel 
fuel that is produced, however, must be appropriately designated and 
labeled for tracking purposes throughout the distribution system, and 
cannot be sold for use in 2011 and later model year nonroad engines. 
From June 1, 2012, when the 15 ppm sulfur standard for LM diesel fuel 
becomes effective, through May 31, 2014, refiners/importers may use 
either high sulfur credits or 500 ppm sulfur credits to continue 
producing/importing 500 ppm sulfur NRLM diesel fuel. All credits expire 
after May 31, 2014. Hence, beginning June 1, 2014, all NRLM diesel fuel 
produced by refiners or imported in the U.S. will be subject to the 15 
ppm sulfur standard, except LM diesel fuel produced by transmix 
processors from transmix can continue to meet the 500 ppm sulfur limit.
    We proposed that all credits would expire May 31, 2012, however we 
are finalizing an expiration date of May 31, 2014 based on the comments 
we received. The additional two years that we are now allowing for 
credit use (1) will provide a longer period for refiners to sell off-
specification fuel instead of having to reprocess it, (2) is an 
environmentally neutral change to the overall program, and (3) is now 
consistent with the end-date for small refiner flexibility.
    While credits can be generated and traded nationwide, they are 
restricted from use in certain parts of the country under the 
provisions of this final rule. As discussed in section IV.D, we are 
avoiding the burden to terminals of adding marker to heating oil in 
those areas of the country where demand for heating oil is expected to 
continue to remain high after today's final rule. The NRLM diesel fuel 
sulfur standards will be enforced based on sulfur level in these areas, 
not through the refinery designation and marker provisions. 
Consequently, in the area defined in section IV.D comprising most of 
the Northeast and Mid-Atlantic region of the country, as well as in the 
State of Alaska, many of the fuel program's flexibilities, including 
refiners' ability to use credits, are not allowed. Refiners and 
importers may not use credits to produce or import diesel fuel with a 
sulfur content greater than 500 ppm beginning June 1, 2007 or 15 ppm 
beginning June 1, 2010, for sale or distribution in this Northeast/Mid-
Atlantic area or the State of Alaska. However, credits generated in 
these areas can be sold to other refiners and/or importers for use 
outside these areas.

B. Hardship Relief Provisions for Qualifying Refiners

    As in our gasoline sulfur and highway diesel fuel sulfur programs, 
today's program contains the following hardship relief provisions to 
provide regulatory flexibility to challenged refiners:
     Small refiner hardship for qualifying small refiners;
     General hardship for any refiner experiencing either--
    (1) Extreme unforeseen circumstances such as natural disaster or 
acts of God; or
    (2) Extreme hardship circumstances such as financial or technical 
hardship.
    Similar provisions have proved invaluable for some refiners in the 
recent implementation of the gasoline sulfur standards, as well as for 
refiners' planning for the highway diesel standards. The details of 
these provisions are discussed below.
1. Hardship Provisions for Qualifying Small Refiners
    As in previous fuel rulemakings, our justification for including 
provisions specific to small refiners is that, in general, small 
refiners generally have a degree of hardship in complying with the 
standards compared to other refiners. In the NPRM, we proposed 
flexibilities/transition provisions, or ``hardship provisions'' (these 
terms are equivalent), for small refiners. We are adopting the 
provisions that were proposed for small refiners virtually unchanged, 
and including similar provisions for the treatment of locomotive and 
marine fuel.
a. Regulatory Process and Justification for Small Refiner Relief
    In developing our NRLM diesel fuel sulfur program, we evaluated the 
environmental need as well as the technical and financial ability of 
refiners to meet the 500 and 15 ppm sulfur standards as expeditiously 
as possible. We believe it is feasible and necessary for the vast 
majority of the program to be implemented in the established time frame 
to achieve the air quality benefits as soon as possible. Based on 
information available from small refiners and others, we believe that 
refiners classified as small generally face unique circumstances with 
regard to compliance with environmental programs, compared to larger 
refiners. Consequently, as discussed below, we are finalizing several 
special provisions for refiners that qualify as ``small refiners'' to 
reduce the disproportionate burden that today's program will have on 
them.
    Small refiners generally lack the resources that are available to 
large refining companies, including those large companies that own 
small-capacity refineries, to raise capital for investing in 
desulfurization equipment, such as shifting of internal funds, securing 
of financing, or selling of assets. Small refiners are also likely to 
have more difficulty in competing for engineering and construction 
resources needed for the installation of the desulfurization equipment 
which will likely be required to meet the standards finalized in this 
action.
    Because small refiners are more likely to face adverse 
circumstances with regard to regulatory compliance than larger 
refiners, we are finalizing interim provisions that will provide 
additional time for refineries owned by small

[[Page 39048]]

refiners to meet the sulfur standards. This approach will allow the 
overall program to begin as early as possible, avoiding the need for 
delay in order to address the ability of small refiners to comply.
i. Regulatory Flexibility Process for Small Refiners
    As explained in the discussion of our compliance with the 
Regulatory Flexibility Act (RFA) in section X.C of this preamble, and 
in the Final Regulatory Flexibility Analysis in chapter 11 of the RIA, 
we considered the impacts of today's regulations on small businesses. 
Most of our analysis of small business impacts was performed as part of 
the Small Business Advocacy Review (SBAR) Panel convened by EPA, 
pursuant to the RFA as amended by the Small Business Regulatory 
Enforcement Fairness Act of 1996 (SBREFA). The Panel's final report is 
available in the rulemaking public docket (Docket A-2001-28, Document 
No. II-A-172).
    For the SBREFA process, EPA conducted outreach, fact-finding, and 
analysis of the potential impacts of the proposed nonroad regulations 
on small businesses. Based on these discussions and analyses by all 
panel members, the Panel concluded that small refiners in general would 
likely experience a significant and disproportionate financial burden 
in reaching the objectives of the proposed nonroad diesel fuel sulfur 
program.
    One indication of the disproportionate burden on small refiners is 
the relatively high cost per gallon projected for producing NRLM diesel 
fuel under today's program. Refinery modeling of refineries owned by 
refiners likely to qualify as small refiners, and of refineries owned 
by other non-small refiners, indicates significantly higher refining 
costs for small refiners. Specifically, we project that without special 
provisions, refining costs for small refiners on average would be about 
two cents per gallon higher than for other refiners in the same PADD to 
meet the 15 ppm sulfur standard.
    The Panel also noted that the burden imposed on small refiners by 
the proposed sulfur standards may vary from refiner to refiner. Thus, 
the Panel recommended more than one type of burden mitigation so that 
most, if not all, small refiners could benefit. We considered the 
issues raised during the SBREFA process, and discussed them in the 
NPRM, and have decided to finalize each of the provisions recommended 
by the Panel. A discussion of the comments we received regarding small 
refiners and terminal operators, and our responses to those comments, 
can be found in section X.C of this preamble, and also the Summary and 
Analysis of Comments.
ii. Rationale for Small Refiner Regulatory Flexibility Provisions
    Generally, we structured the small refiner provisions to reduce the 
burden on small refiners while expeditiously achieving air quality 
benefits and ensuring that the availability of 15 ppm sulfur NR diesel 
fuel will coincide with the introduction of 2011 model year nonroad 
diesel engines and equipment. We believe the special provisions for 
small refiners are necessary and appropriate for several reasons.
    First, the compliance schedule for today's program, combined with 
special relief provisions for small refiners, will achieve the air 
quality benefits of the program as soon as possible, while helping to 
ensure that small refiners will have adequate time to raise capital for 
new or upgraded fuel desulfurization equipment. Most small refiners 
have limited additional sources of income beyond refinery earnings for 
financing and typically do not have the financial backing that larger 
and generally more integrated companies have. Therefore, additional 
time to accumulate capital internally or to secure capital financing 
from lenders can be central to their ability to comply.
    Second, we recognize that while the sulfur levels in today's 
program can be achieved using conventional refining technologies, new 
technologies are also being developed that may reduce the capital and/
or operating costs of sulfur removal. Thus, we believe that providing 
small refiners some additional time to allow for new technologies to be 
proven out by other refiners will have the added benefit of reducing 
the risks faced by small refiners. The added time will likely enable 
small refiners to benefit from the lower costs of these improvements in 
desulfurization technology (e.g., better catalyst technology or lower-
pressure hydrotreater technology). This will help to offset the 
disproportionate financial burden that may be imposed upon small 
refiners.
    Finally, providing small refiners more time to comply will spread 
out the availability of engineering and construction resources. Most 
refiners will need to install additional processing equipment to meet 
the NRLM diesel fuel sulfur requirements. We anticipate that there may 
be significant competition for technology services, engineering 
resources, and construction management and labor. In addition, as has 
been the experience in gasoline sulfur control, vendors will be more 
likely to contract their services with the larger refiners first, as 
their projects will offer larger profits for the vendors. Temporarily 
delaying compliance for small refiners will spread out the demand for 
these resources and may help reduce cost premiums for everyone caused 
by limited engineering and construction supply.
    We discuss below the provisions that we are finalizing to minimize 
the degree of hardship imposed upon small refiners by this program. 
With these provisions we are confident in going forward with the 500 
ppm sulfur standard for NRLM diesel fuel in 2007 and the 15 ppm sulfur 
standard for NR diesel fuel in 2010 and for LM diesel fuel in 2012, for 
the rest of the industry. The provisions for small refiners will allow 
these refiners to continue to produce higher sulfur NRLM fuel until 
June 1, 2010, and similarly, will allow for the production of 500 ppm 
nonroad NRLM fuel until June 1, 2014. Without small refiner relief, we 
would have to consider delaying the overall program until the burden of 
the program on many small refiners was diminished, which would delay 
the air quality benefits of the overall program. By providing temporary 
relief to small refiners, we are able to adopt a program that 
expeditiously reduces NRLM diesel fuel sulfur levels in a feasible 
manner for the industry as a whole.
    The four-year leadtime from which begins in 2010 for small refiners 
for locomotive and marine diesel fuel is identical to the relief that 
was supported by small refiners for nonroad diesel fuel. We believe 
that this relief is necessary and adequate to reduce the burden on 
small entities while still achieving our air quality goals. Small 
refineries vary considerably in their markets for NRLM diesel fuels. 
Consequently, the proposal to control nonroad diesel fuel to 15 ppm 
sulfur impacted small refiners with significant nonroad market shares, 
but left those with significant locomotive and marine market shares 
relatively untouched. With control of all NRLM diesel fuel to 15 ppm 
sulfur in this final rule, all small refiners of NRLM diesel fuel will 
face similar challenges, and therefore the same four year lead time 
from 2010 proposed for those small refiners impacted by nonroad fuel 
control alone is also appropriate when the standards are expanded to 
all NRLM. In essence, while more small refiners face the challenge of 
desulfurizing all of their diesel fuel to the 15 ppm sulfur standard, 
the magnitude of this challenge is not any greater. Furthermore, 
providing

[[Page 39049]]

additional relief (beyond 2014) to small refiners would undermine the 
program by further delaying air quality benefits. The 2014 deadline for 
all small refiner diesel fuel to 15 ppm sulfur will also simplify the 
fuel program and it will allow small refiners the ability to coordinate 
their plans to reduce the sulfur content of all off-highway diesel fuel 
at the same time.
iii. Impact of Small Refiner Options on Program Emissions Benefits
    Small refiners that choose to delay the NRLM diesel fuel sulfur 
requirements will also delay to some extent the emission reductions 
that would otherwise have been achieved. However, for several reasons, 
the overall impact of these postponed emission reductions will be 
small. First, small refiners represent only a fraction of national non-
highway diesel production. Today, refiners that we expect to qualify as 
small refiners represent only about six percent of all high-sulfur 
diesel production. Second, the delayed compliance provisions described 
below will affect only engines without new emission controls. During 
the program's first step to 500 ppm sulfur NRLM diesel fuel, small 
refiner NRLM diesel fuel could be well above 500 ppm sulfur, but the 
new advanced engine controls will not yet be required. During the 
second step to 15 ppm sulfur NRLM diesel fuel, equipment with the new 
controls will be entering the market, but use of the 500 ppm small 
refiner fuel will be restricted to older engines without the new 
controls. There will be some loss of sulfate PM control in the older 
engines that operate on higher sulfur small refiner fuel, but no effect 
on the major emission reductions that the new engine standards will 
achieve starting in 2011. Finally, because small diesel refiners are 
generally dispersed geographically across the country, the limited loss 
of sulfate PM control will also be dispersed.
    One option for small refiner relief will allow a modest 20 percent 
relaxation in the gasoline sulfur interim standards for small refiners 
that produce all of their NRLM diesel fuel at 15 ppm sulfur by June 1, 
2006. To the extent that small refiners elect this option, a small loss 
of emission control from Tier 2 gasoline vehicles that use the higher 
sulfur gasoline could occur. We believe that such a loss of control 
will be very small. Very few small refiners will be in a position to 
use this provision. Further, the relatively small production of 
gasoline with slightly higher sulfur levels should have no measurable 
impact on the emissions of new Tier 2 vehicles, even if the likely 
``blending down'' of sulfur levels does not occur as this fuel mixed 
with lower sulfur fuel during distribution. This provision will also 
maintain the maximum 450 ppm gasoline sulfur per-gallon cap standard in 
all cases, providing a reasonable sulfur ceiling for any small refiners 
using this provision.
b. Small Refiner Definition for Purposes of the Hardship Provisions
    The definition of small refiner under the NRLM diesel program is 
similar to the definitions under the Tier 2/Gasoline Sulfur and Highway 
Diesel rules. Under the NRLM program, a small refiner must demonstrate 
that it meets the following criteria:
     Produced NRLM diesel from crude;
     No more than 1,500 employees corporate-wide, based on the 
average number of employees for all pay periods from January 1, 2002 to 
January 1, 2003; and,
     A corporate crude oil capacity less than or equal to 
155,000 barrels per calendar day (bpcd) for 2002.
    As with the earlier fuel sulfur programs, the effective dates for 
the determination of employee count and for calculation of the crude 
capacity represent the most recent complete year prior to the issuing 
of the proposed rulemaking (2002, in this case).
    In determining its total number of employees and crude oil 
capacity, a refiner must include the number of employees and crude oil 
capacity of any subsidiary companies, any parent company and 
subsidiaries of the parent company, and any joint venture partners. We 
define a subsidiary of a company to mean any subsidiary in which the 
company has a 50 percent or greater ownership interest. However, 
refiners owned and controlled by an Alaska Regional or Village 
Corporation organized under the Alaska Native Claims Settlement Act (43 
U.S.C. 1626), are also eligible for small refiner status, based only on 
the refiner's employees and crude oil capacity. Such an exclusion is 
consistent with our desire to grant regulatory relief to that part of 
the industry that is the most challenged with respect to regulatory 
compliance. We believe that very few refiners, probably only one, will 
qualify under this provision. We are also incorporating this exclusion 
into the small refiner provisions of the highway diesel and gasoline 
sulfur rules, which did not address this issue.
    As under the gasoline sulfur and highway diesel fuel rules, 
refiners that either acquire or restart a refinery in the future may be 
eligible for small refiner status under the NRLM program. Specifically, 
a refiner that either acquires or restarts a refinery that was shut 
down or non-operational between January 1, 2002 and January 1, 2003 may 
apply for small refiner status. In such cases, we will judge 
eligibility under the employment and crude oil capacity criteria based 
on the most recent 12 consecutive months of data unless we conclude 
from the data provided by the refiner that another period of time is 
more appropriate. Companies with refineries built after January 1, 2002 
are not eligible for the small refiner provisions. Similarly, entities 
that do not own or operate a refinery are not eligible to apply for 
small refiner status.
c. Provisions for Small Refiners
    We are finalizing several provisions intended to reduce the 
regulatory burden of today's program on small refiners as well as to 
encourage their early compliance whenever possible. As described below, 
these small refiner relief options consist of additional time for 
compliance and, for small refiners that choose to comply earlier than 
required, the option of either generating diesel fuel sulfur credits or 
receiving a limited relaxation of their gasoline sulfur standards.
i. NRLM Delay Option
    First, we are finalizing an option that allows small refiners to 
postpone their compliance with the NRLM diesel fuel sulfur standards. 
The delayed compliance schedule for small refiners is intended to 
compensate for the relatively higher compliance burdens on these 
refiners. It is not intended as an opportunity for those refiners to 
greatly expand their production of uncontrolled diesel fuel (2007-2010) 
or 500 ppm sulfur diesel fuel (2010-2014). To help ensure that any 
significant expansion of refining capacity that a small refiner might 
undertake in the future is accompanied by an expansion of 
desulfurization capacity, small refiners producing higher sulfur fuel 
must limit their production to baseline volume levels. Specifically, 
during the first step of today's diesel fuel program to 500 ppm sulfur, 
from June 1, 2007 through May 31, 2010, a small refiner may at any or 
all of its refineries produce uncontrolled NRLM diesel fuel up to the 
2003 through 2005 non-highway baseline volume for the refinery(s). Any 
diesel fuel produced over the baseline volume will be subject to the 
500 ppm sulfur standard applying to other refiners. Similarly, from 
June 1, 2010 through May 31, 2014, a small refiner may produce at any 
or all of its refineries NRLM diesel fuel subject to

[[Page 39050]]

the 500 ppm sulfur standard at a volume equal to or less than the 
refineries' 2006-2008 non-highway baseline volumes. LM fuel produced to 
the 500 ppm standard during 2010 to 2012 would be counted towards 
meeting this baseline volume. NRLM fuel produced in excess of the 
baseline volume will be subject to the 15 ppm sulfur NRLM diesel fuel 
standard. The baseline for 2003-2005 will be determined by subtracting 
the refinery's highway volume from its total highway and heating oil 
volume production. The baseline for 2006-2008 will be determined based 
upon the volume of the refinery's NRLM fuel designations discussed in 
section IV.D.
    As discussed in section IV.D, the costs to the distribution system 
to mark heating oil in areas of PADD 1 with high heating oil demand to 
distinguish it from small refiner or credit-using high sulfur NRLM made 
this option undesirable in these areas. Based on our review of 
anticipated small refiner situations, this portion of PADD 1 appears 
unlikely to provide a meaningful market for small refiners seeking this 
option. Therefore, in this part of the country it imposed costs without 
providing the intended benefit. Consequently, while this option was 
proposed to be available nationwide, we are not finalizing it for a 
portion of PADD 1. This change from the proposal should have no 
meaningful impact on small refiners' flexibility, but will reduce the 
costs for fuel distributors.
    Since new engines with sulfur sensitive emission controls will 
begin to become widespread beginning in 2011, small refiner fuel can 
only be sold for use in pre-2011 nonroad equipment or in locomotives or 
marine engines during this time. Section IV.D below discusses the 
requirements for designating and tracking the production of 500 ppm 
sulfur NRLM diesel fuel produced by small refiners during this period.
    The following table illustrates the small refiner NRLM diesel fuel 
sulfur standards as compared to the standards for the base NRLM diesel 
fuel program. As previously stated, small refiners will receive 
additional lead time, compared to non-small refiners for 15 ppm sulfur 
locomotive and marine diesel fuel. This lead time is identical to that 
which had been proposed for 15 ppm sulfur nonroad diesel fuel. This 
will ensure that emission benefits of ultra low sulfur diesel fuel are 
achieved as soon as possible, and should not significantly change the 
nature or magnitude of the burden on affected small refiners.

                      Table IV-4.--Small Refiner NRLM Diesel Fuel Sulfur Standards, ppm \a\
----------------------------------------------------------------------------------------------------------------
                                   2006    2007    2008    2009    2010    2011    2012    2013    2014    2015+
----------------------------------------------------------------------------------------------------------------
Non-Small Refiners-NR fuel......  ......     500     500     500      15      15      15      15      15      15
Non-Small Refiners-LM fuel......  ......     500     500     500     500     500      15      15      15      15
Small Refiners-NR diesel fuel...  ......  ......  ......  ......     500     500     500     500      15      15
Small Refiners-LM diesel fuel...  ......  ......  ......  ......     500     500     500     500      15      15
----------------------------------------------------------------------------------------------------------------
Notes: \a\ New standards will take effect on June 1 of the applicable year.

ii. NRLM Credit Option
    Some small refiners have indicated that, for a variety of reasons, 
they might need to produce fuel meeting the NRLM diesel fuel sulfur 
standards earlier than required under the small refiner program 
described above. For some small refiners, the distribution system might 
limit the number of grades of diesel fuel that will be carried. Others 
might find it economically advantageous to make 500 ppm or 15 ppm 
sulfur NRLM diesel fuel earlier than required to prevent losing market 
share. At least one small refiner has indicated that it might decide to 
desulfurize its NRLM pool at the same time as it desulfurizes its 
highway diesel fuel, in June 2006, due to limitations in its 
distribution system and to take advantage of economies of scale.
    The NRLM Credit option allows small refiners to participate in the 
NRLM diesel fuel sulfur credit banking and trading program discussed 
earlier in this section. Under this option, a small refiner may 
generate diesel fuel sulfur credits by producing any volume of 500 ppm 
sulfur NRLM diesel fuel from crude oil prior to from June 1, 2006 
through May 31, 2010, and by producing any volume from crude oil of 15 
ppm sulfur NRLM diesel fuel from June 1, 2010 through December 31, 
2013. The specifics of the credit program are described in section 
IV.A.4, including how the program applies to small refiners. Generating 
and selling credits could provide small refiners with funds to help 
defray the costs of early NRLM compliance.
iii. NRLM/Gasoline Compliance Option
    The NRLM/Gasoline Compliance option is available to small refiners 
that produce greater than 95 percent of their NRLM diesel fuel at the 
15 ppm sulfur standard by June 1, 2006 and elect not to use the 
provision described above to earn NRLM diesel fuel sulfur credits for 
this early compliance. Refiners choosing this option will receive a 
modest revision in their small refiner interim gasoline sulfur 
standards, beginning January 1, 2004. Specifically, the applicable 
small refiner annual average and per-gallon cap gasoline sulfur 
standards will be increased by 20 percent for the duration of the 
interim program. The interim program is through either 2007 or 2010, 
depending on whether the refiner extended the duration of its interim 
gasoline sulfur standards by producing 15 ppm sulfur highway diesel 
fuel by June 1, 2006, as provided under 40 CFR 80.552(c). In no case 
may the per-gallon gasoline sulfur cap exceed 450 ppm, the highest 
level allowed under the gasoline sulfur program.
    We believe it is very important to link any relaxation of a small 
refiner's interim gasoline sulfur standards with the environmental 
benefit of early desulfurization of a significant volume of NRLM diesel 
fuel. As such, a small refiner choosing to use this option must produce 
a minimum volume of NRLM diesel fuel at the 15 ppm sulfur standard by 
June 1, 2006. Each participating small refiner must produce a volume of 
15 ppm sulfur fuel that is at least 85 percent of the annual average 
volume of non-highway diesel fuel it produced from 2003-2005. If the 
refiner began to produce gasoline in 2004 at the higher interim 
standard under this provision but then either fails to meet the 15 ppm 
sulfur standard for its NRLM diesel fuel by June 1, 2006 or fails to 
meet the 85 percent minimum volume requirement, the original small 
refiner interim gasoline sulfur standard applicable to that refiner 
will automatically apply retroactively to 2004. In addition, the 
refiner must compensate for the higher gasoline sulfur levels by 
purchasing gasoline sulfur credits or producing an equivalent volume of 
gasoline below the required sulfur levels. Under this option, a small 
refiner could in effect shift some funds from its gasoline sulfur 
program to accelerate desulfurization of

[[Page 39051]]

NRLM diesel fuel. While there would be a small potential loss of 
emission reduction under the gasoline sulfur program from fuel produced 
by the very few small refiners that we believe would choose this second 
option, there are also environmental benefits gained from the 
production of 15 ppm sulfur diesel fuel earlier than otherwise 
required.
iv. Relationship of the Options to Each Other
    A small refiner may choose to use the NRLM Delay option, the NRLM 
Credit option or both in combination, since it has no requirement to 
produce 500 ppm sulfur NRLM diesel fuel before June 1, 2010, or 15 ppm 
sulfur NRLM diesel fuel before June 1, 2014. Thus any fuel that it 
produces from crude at or below the sulfur standards earlier than 
required will qualify for generating credits.
    On the other hand, the NRLM/Gasoline Compliance option may not be 
used in combination with either the NRLM Delay option or the NRLM 
Credit option, since a small refiner must produce at least 85 percent 
of its NRLM diesel fuel at the 15 ppm sulfur standard under the NRLM/
Gasoline Compliance option.
d. How Do Refiners Apply for Small Refiner Status?
    A refiner applying for small refiner status must provide the Agency 
with several types of information by December 31, 2004. The detailed 
application requirements are summarized in section V.F.2 below. In 
general, a potential small refiner must own the refinery/refineries in 
question and must provide the following information for the parent 
company and all subsidiaries at all locations: (1) The average number 
of employees for all pay periods from January 1, 2002 through January 
1, 2003; (2) the total corporate crude oil capacity, which must be a 
positive number; and (3) an indication of which small refiner option 
the refiner intends to use (see section IV.B.1.c above). As with 
applications for relief under other fuel programs, applications for 
small refiner status under this rule that are later found to contain 
false or inaccurate information will be void ab initio.
e. The Effect of Financial and Other Transactions on Small Refiner 
Status and Small Refiner Relief Provisions
    Since the gasoline sulfur and highway diesel fuel sulfur programs 
were finalized, several refiners have raised concerns about how various 
financial and other transactions could affect implementation of the 
small refiner fuel sulfur provisions. These types of transactions 
typically involve refiners with approved small refiner status that are 
involved in potential or actual sales of the small refiner's refinery, 
or involve the small refiner merging with another refiner or purchasing 
another refinery (or other non-refining asset). We believe that these 
concerns are also relevant to the small refiner provisions described 
below for the NRLM diesel fuel sulfur program.
i. Large Refiner Purchasing a Small Refiner's Refinery
    The first type of transaction involves a ``non-small'' refiner that 
wishes to purchase a refinery owned by an approved small refiner. In 
some cases, the small refiner may not have completed or even begun 
refinery upgrades to meet the long-term fuel sulfur standards if it was 
using an interim small refiner compliance provision. Under the gasoline 
sulfur and highway diesel fuel sulfur programs, once such a purchase 
transaction is completed, the ``non-small'' buyer does not have the 
benefit of the small refiner relief provisions that had applied to the 
previous owner.
    The purchasing refiner would have to perform the necessary upgrades 
on the acquired refinery for it to meet the ``non-small'' sulfur 
standards. As the gasoline sulfur and highway diesel fuel sulfur 
provisions existed prior to today's action, such a refiner would be 
left with very little or, in the case of the gasoline sulfur program 
which has already begun, no lead time to bring the refinery into 
compliance. The refiners that have raised this issue have claimed that 
refiners in this situation would not be able to immediately comply with 
the ``non-small refiner'' standards upon acquisition of the new 
refinery. These refiners claim that this could prevent them from 
purchasing a refinery from a small refiner and, as a result, this would 
severely limit the ability of small refiners to sell such an asset. The 
refiners that raised this issue requested additional lead time before 
the non-small refiner sulfur standards take effect.
    We received comments on this issue from two refiners. Both refiners 
commented that lead time for refiners losing their small refiner status 
should only be allowed for the case where a small refiner merges with, 
or acquires, another small refiner. Neither refiner supports allowing 
additional lead time for a large refiner that merges with or acquires a 
small refiner. In addition, these refiners also commented that it would 
be inappropriate to allow a small refiner that receives this lead time 
to be able to generate credits for ``early'' production of lower sulfur 
diesels during this two-year period.
    Nevertheless, we continue to believe these lead-time concerns are 
valid. Failure to address them could lead to unnecessary disruption to 
the diesel fuel market. Therefore, we are adopting a provision to 
provide an appropriate period of lead time for compliance with the NRLM 
diesel fuel sulfur requirements for situations in which a refiner 
purchases any refinery owned by a small refiner, whether by purchase of 
the refinery or purchase of the small refiner entity. Refiners that 
acquire a refinery from an approved small refiner will be provided 30 
additional months from the date of the completion of the purchase 
transaction (but no later than June 1, 2010 for 500 ppm NRLM fuel and 
June 1, 2014 for 15 ppm NRLM fuel). During this interim period, 
production at the newly-acquired refinery may remain at the interim 
sulfur levels that applied to that refinery for the previous small 
refiner owner under the small refiner options discussed below. At the 
end of this period, the refiner must comply with the ``non-small 
refinery'' sulfur standards.
    We received comments suggesting that the proposed 24 months of 
additional lead time would not be adequate, and further, discussions 
with several refiners indicated that in most cases, 24 months would be 
inadequate. As discussed in section IV.F, we project a range of 27-39 
months is needed to design and construct a diesel hydrotreater. 
Therefore, in order to allow a reasonable opportunity for complying, we 
are finalizing the provision that 30 months of additional lead time 
will be afforded. Thirty months should in most cases be sufficient for 
the new refiner-owner to accomplish the necessary engineering, 
permitting, construction, and start-up of the necessary desulfurization 
equipment. However, if there are instances where the technical 
characteristics of its planned desulfurization project will require 
additional lead time, we have included provisions for the refiner to 
apply for up to six months of additional time and for EPA to consider 
such requests on a case-by-case basis. Such an application must be 
based on the technical factors supporting the need for more time and 
should include detailed technical information and projected schedules 
for engineering, permitting, construction, and startup. Based on 
information provided in such an application and other relevant 
information, EPA will decide whether additional time is

[[Page 39052]]

technically necessary and, if so, how much additional time is 
appropriate. However, we anticipate that in most cases 30 months will 
be sufficient, since developing plans for compliance should be expected 
to be a part of any purchase decision.
    All existing small refiner provisions and restrictions, as 
described below, will also remain in place for that refinery during the 
30 months of additional lead time and any further lead time approved by 
EPA for the purchasing refiner; including the per-refinery volume 
limitation on the amount of NRLM diesel that may be produced at the 
small refiner standards. Furthermore, since the purpose of this grace 
period is solely to provide time to bring the refinery into compliance 
with the NRLM standards, refiners will not be allowed to generate 
credits for early compliance during this 30 month period. There will be 
no adverse environmental impact of this provision, since the small 
refiner would have already been provided this same relief prior to the 
purchase and this provision is no more generous.
ii. Small Refiner Losing Its Small Refiner Status Due To Merger or 
Acquisition
    Another type of transaction involves a refiner with approved small 
refiner status that later loses its small refiner status because it 
exceeds the small refiner criteria. Under the gasoline sulfur and 
highway diesel fuel sulfur regulations, an approved small refiner that 
exceeds 1,500 employees due to merger or acquisition will lose its 
small refiner status. We also intended for refiners that exceeded the 
155,000 barrel per calendar day crude capacity limit due to merger or 
acquisition to lose its small refiner status and in this rule we are 
amending the regulations to reflect that criterion as well. This 
includes exceedances of the employee or crude capacity criteria caused 
by acquisitions of assets such as plant and equipment, as well as 
acquisitions of business entities.
    Our intent in the gasoline and highway diesel fuel sulfur programs, 
as well as the NRLM diesel fuel sulfur program, has been and continues 
to be, limiting the small refiner relief provisions to a small subset 
of refiners that are challenged, as discussed above. At the same time, 
it is also our intent to avoid stifling normal business growth. 
Therefore, the regulations we are adopting today will disqualify a 
refiner from small refiner status if it exceeds the small refiner 
criteria through its involvement in transactions such as being acquired 
by or merging with another entity, through the small refiner itself 
purchasing another entity or assets from another entity, or when it 
ceases to process crude oil. However, an approved small refiner who 
exceeds the employee or crude oil capacity criteria without merger or 
acquisition, may retain its small refiner status for the purposes of 
the complying with the NRLM diesel fuel standards. Furthermore, in the 
sole case of a merger between two approved small refiners we will allow 
such refiners to retain their small refiner status for purposes of 
complying with the NRLM diesel fuel program. Commenters explained that 
additional financial resources would not typically be provided in the 
case of a merger between small refiners. In light of these comments, we 
believe the justification for continued small refiner relief for the 
merged entity is valid. Small refiner status for the two entities of 
the merger will not be affected, hence the original compliance plans of 
the two refiners should not be impacted. Moreover, no environmental 
detriment will result from the two small refiners maintaining their 
small refiner status within the merged entity as they would have likely 
maintained their small refiner status had the merger not occurred.
    Consistent with our intent in the gasoline sulfur and highway 
diesel fuel sulfur programs to limit the use of the small refiner 
hardship provisions, we also intended in the gasoline sulfur and 
highway diesel fuel sulfur programs that an exceedance of corporate 
crude oil capacity limit of 155,000 bpcd, due to merger or acquisition, 
would be grounds for disqualifying a refiner's small refiner status. 
However, we inadvertently failed to include this second criterion as 
grounds for disqualification in the regulations. In today's action, we 
are resolving this error by including the crude capacity limit, along 
with the employee limit for both the gasoline sulfur and highway diesel 
fuel sulfur programs, effective January 1, 2004. Thus, a refiner 
exceeding either criterion due to merger or acquisition will lose its 
small refiner status. The exception to this would be in the case of 
merger only between two small refiners. We received comments supporting 
the allowance of additional lead time for small refiners that lose 
their small refiner status through a merger with, or acquisition of, 
another small refiner.
    We recognize that a small refiner that loses its small refiner 
status because of a merger with, or acquisition of, a non-small refiner 
would face the same type of lead time concerns in complying with the 
non-small refiner standards as a non-small refiner that acquired a 
small refiner's refinery would. Therefore, the additional lead time 
described above for non-small refiners purchasing a small refiner's 
refinery will also apply to this situation. Thus, this 30 month lead 
time will apply to all of the refineries, existing or newly-purchased, 
that had previously been subject to the small refiner program, but 
would not apply to a newly-purchased refinery that is subject to the 
non-small refiner standards. Again, there would be no adverse 
environmental impact because of the pre-existing relief provisions that 
applied to the newly-purchased small refiner.
    The issues discussed in this section apply equally to the gasoline 
sulfur and highway diesel fuel sulfur programs. Thus, we are also 
adopting the same provisions relating to additional lead time in cases 
of certain financial, or other, transactions for the small refiner 
programs in the earlier fuel sulfur programs.
    In the proposal for today's final rule, we invited comment on 
several other related provisions that were considered during the 
development of this rulemaking:
    (1) Instead of merely allowing small refiners a grace period to 
come into compliance if they lose their small refiner status, we also 
asked for comment on whether or not such a small refiner should instead 
be allowed to ``grandfather'' the small refiner relief provisions for 
its existing refinery or refineries. We did not receive any specific 
comments on this issue and we are not finalizing this provision in 
today's action.
    (2) Regarding small refiners that exceed the small refiner criteria 
due to the purchase of a non-small refiner's refinery, we requested 
comment on whether or not the proposed additional lead time should 
apply to the purchased refinery. We also requested comment on whether 
or not the refiner should be required to meet the non-small refiner 
standards on schedule at the purchased refinery, since the previous 
owner could be assumed to have anticipated the new standards and taken 
steps to accomplish this prior to the purchase. One refiner commented 
that merger acquisition flexibility for refineries that lose their 
small refiner status should be limited to instances where a small 
refiner merges with another small refiner. They believed that any small 
refiner that loses its small refiner status due to an acquisition of a 
non-small refiner's refinery should not be eligible for hardship 
relief. Similarly, another refiner commented that a refiner should not 
retain small refiner status if it has

[[Page 39053]]

the financial resources to acquire additional refineries that increase 
corporate-wide crude processing above 155,000 bpd. We are not adopting 
any flexibility for the purchased refinery in this situation (except in 
the case of a merger between two small refiners, as discussed above).
f. Provisions for Approved Gasoline and Highway Diesel Fuel Small 
Refiners That Do Not Qualify for Small Refiner Status Under Today's 
Program
    Some refiners that have approved small refiner status under the 
gasoline sulfur and highway diesel fuel programs may not qualify for 
small refiner status under today's program if they have grown through 
normal business operations and now exceed the qualification criteria 
for NRLM small refiner status. One refiner commented on the lack of a 
``grandfather'' provision in the nonroad proposal that would 
automatically continue small refiner status to refiners already 
approved as small refiners under the gasoline and highway diesel fuel 
sulfur programs. Without such a provision some refiners could be 
approved small refiners under the gasoline sulfur and highway diesel 
fuel sulfur programs (because they grew through normal business 
expansions and not through merger or acquisition) but would not qualify 
under the NRLM program because they now exceed the criteria. As a 
consequence, the commenter argued that in some cases benefits afforded 
to such small refiners under the gasoline and highway diesel fuel 
sulfur programs could be negated. Specifically, under the highway 
diesel rule they were allowed until 2010 before needing to have diesel 
fuel hydrotreating capacity. Under the nonroad rule, they would have to 
do so in 2007. Since it would only make sense to invest for adequate 15 
ppm capacity when they do invest, the nonroad standards essentially 
would require them to invest to bring all highway and nonroad diesel to 
15 ppm sulfur in 2007, eliminating the flexibility granted them in the 
highway rule. Furthermore, the refiners' clean fuel projects for low 
sulfur gasoline, highway diesel fuel, and NRLM diesel fuel could no 
longer be staggered. In fact, small refiners in such situations would 
be required to make investments for compliance with all three fuel 
programs in the same three to four year period, if not virtually all at 
once.
    We believe that a refiner who no longer meets the criteria for 
small refiner status, since it has successfully grown through normal 
business operations, does not face the same level of hardship described 
earlier in this section. We do not intend for the NRLM program to 
undermine the benefits afforded to small refiners under the gasoline 
and highway diesel fuel sulfur programs, as described in the comments. 
At the same time, however, we want to preserve small refiner status 
under today's program only for those businesses that meet the criteria 
described above. Under the nonroad proposal, a refiner with approved 
small refiner status under the highway diesel fuel program but not the 
NRLM program would be required to produce 500 ppm sulfur NRLM diesel 
fuel in 2007 and both 15 ppm sulfur highway and NR diesel fuel in 2010. 
Under today's final program, such a refiner may instead skip the 2007 
500 ppm interim sulfur standard for its NRLM diesel fuel, and meet the 
15 ppm sulfur standard for both its highway and NR diesel fuel in 2010 
and LM diesel fuel in 2012. Such an approach will maintain the 
refiner's flexibility under the highway program by allowing it to delay 
diesel hydrotreating investment until 2010, while limiting its 
flexibility under the nonroad diesel program.
g. Additional Provisions and Program Elements
    To reduce the burden on all refiners (including small refiners), we 
have chosen to finalize the designate and track approach, rather than 
the baseline approach. Discussions with parties in all parts of the 
distribution system led us to believe that this is the preferred 
approach, as tracking is currently done by parties throughout the 
distribution system. We are also finalizing provisions to simplify the 
segregation, marking, and dyeing requirements. In addition, we are 
finalizing provisions to alleviate the concern raised by small terminal 
operators regarding the heating oil marker. Terminals in parts of PADD 
1 (Northeast/Mid-Atlantic Area) will not have to add the marker to home 
heating oil. Therefore we expect that no terminals inside of the 
Northeast/Mid-Atlantic Area will need to install injection equipment. 
These provisions are discussed in greater detail in section IV.D, 
below.
2. General Hardship Provisions
a. Temporary Waivers From NRLM Diesel Fuel Sulfur Requirements in 
Extreme Unforseen Circumstances
    We are finalizing a provision which, at our discretion, will permit 
any domestic or foreign refiner to seek a temporary relief from the 
NRLM diesel fuel sulfur standards under certain rare circumstances. 
This waiver provision is similar to provisions in the reformulated 
gasoline, low sulfur gasoline, and highway diesel fuel sulfur 
regulations. It is intended to provide refiners short-term relief due 
to unanticipated circumstances, such as a refinery fire or a natural 
disaster, that cannot be reasonably foreseen now or in the near future.
    Under this provision, a refiner may seek a waiver to distribute 
NRLM diesel fuel that does not meet the applicable 500 ppm or 15 ppm 
sulfur standards for a brief time period. An approved waiver of this 
type could, for example, allow a refiner to produce and distribute 
diesel fuel with higher than allowed sulfur levels, so long as the 
other conditions described below were met. Such a request must be based 
on the refiner's inability to produce complying NRLM diesel fuel 
because of extreme and unusual circumstances outside the refiner's 
control that could not have been avoided through the exercise of due 
diligence. The request must also show that other avenues for mitigating 
the problem, such as the purchase of credits to be used toward 
compliance, had been pursued yet were insufficient. As with other types 
of regulatory relief established in this rule, this type of temporary 
waiver will have to be designed to prevent fuel exceeding the 15 ppm 
sulfur standard from being used in 2011 and later model year nonroad 
engines.
    The conditions for obtaining a NRLM diesel fuel sulfur waiver are 
similar to those under the RFG, gasoline sulfur, and highway diesel 
fuel sulfur regulations. These conditions are necessary and appropriate 
to ensure that any waivers that are granted are limited in scope, and 
that refiners do not gain economic benefits from a waiver. Therefore, 
refiners seeking a waiver will be required to show that the waiver is 
in the best public interest and that they: (1) Were not able to avoid 
the nonconformity; (2) will make up the air quality detriment 
associated with the waiver; (3) will make up any economic benefit from 
the waiver; and (4) will meet the applicable diesel fuel sulfur 
standards as expeditiously as possible.
b. Temporary Relief Based on Extreme Hardship Circumstances
    In addition to the provision for short-term relief under extreme 
unforseen circumstances, we are finalizing a provision for relief based 
on extreme hardship circumstances such as circumstances that impose 
extreme hardship and significantly affect a refiners ability to comply 
with the program requirements by the applicable dates. This provision 
is also very similar to those established under the gasoline

[[Page 39054]]

sulfur and highway diesel fuel sulfur programs. Under the gasoline 
sulfur program, we have granted relief in the form of individual 
compliance plans to five refiners. Under the highway diesel program, we 
have approved two. Each plan was designed for the specific situation of 
that refiner. In all cases, the companies would have experienced severe 
hardship if temporary relief had not been granted. Moreover, some 
refineries were at a high risk of shutting down without the relief.
    In developing today's program, as under our other fuel programs, we 
considered whether any refiners would face particular difficulty in 
complying with the standards in the lead time provided. As described 
earlier in this section, we concluded that, in general, small refiners 
would experience more difficulty in complying with the standards on 
time because they have less ability to raise the capital necessary for 
refinery investments, face proportionately higher costs because of 
poorer economies of scale, and are less able to successfully compete 
for limited engineering and construction resources. However, it is 
possible that other refiners that are not small refiners may also face 
particular difficulty in complying on time with the sulfur standards 
required under today's program. Therefore, we are including in this 
rulemaking a provision which allows us, at our discretion, to grant 
temporary waivers from the NRLM diesel fuel sulfur standards based on a 
showing of extreme hardship circumstances.
    The extreme hardship provision allows any domestic or foreign 
refiner to request relief from the sulfur standards based on a showing 
of unusual circumstances that result in extreme hardship and 
significantly affect a refiner's ability to comply with either the 500 
ppm or 15 ppm sulfur NRLM diesel fuel standards by either June 1, 2007, 
June 1, 2010, or June 1, 2012, respectively. The Agency will evaluate 
each application on a case-by-case basis, considering the factors 
described below. Approved hardship applications may include compliance 
plans with relief similar to the provisions for small refiners, which 
are described in detail above in section IV.B.1.c. Depending on the 
refiner's specific situation, such approved delays in meeting the 
sulfur requirements may be more stringent than those allowed for small 
refiners, but will not likely be less stringent. Given such an 
approval, we expect to impose appropriate conditions to: (1) Assure the 
refiner is making its best effort; and (2) minimize any loss of 
emissions benefits from the program. As with other relief provisions 
established in this rule, any waiver under this provision will be 
designed to prevent fuel exceeding the 15 ppm sulfur standard from 
being used in 2011 and later model year nonroad engines.
    Providing short-term relief to those refiners that need additional 
time because they face hardship circumstances facilitates adoption of 
an overall program that reduces NRLM diesel fuel sulfur to 500 ppm 
beginning in 2007, and NRLM diesel fuel sulfur to 15 ppm in 2010 and 
2012, for the majority of the industry. However, we do not intend for 
this waiver provision to encourage refiners to delay the planning and 
investments they would otherwise make. We do not expect to grant 
temporary waivers that apply to more than approximately one percent of 
the national NRLM diesel fuel pool in any given year.
    The regulatory language for today's action includes a list of the 
information that must be included in a refiner's application for an 
extreme hardship waiver. If a refiner fails to provide all of the 
information specified in the regulations as part of its hardship 
application, we will deem the application void. In addition, we may 
request additional information as needed. 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. The following are some examples of the types of 
information that must be contained in an application:

--The crude oil refining capacity and fuel sulfur level(s) of each 
diesel fuel product produced at each of the refiner's refineries.
--A technical plan for capital equipment and operating changes to 
achieve the NRLM diesel fuel sulfur standards.
--The anticipated timing for the overall project the refiner is 
proposing and key milestones to ultimately produce 100 percent of NRLM 
diesel fuel at the 15 ppm sulfur cap.
--The refiner's capital requirements for each step of its proposed 
projects.
--Detailed plans for financing the project and financial statements 
demonstrating the nature of and degree of financial hardship and how 
the requested relief would mitigate this hardship. This would include a 
description of the overall financial situation of the company and its 
plans to secure financing for the desulfurization project (e.g., 
internal cash flow, bank loans, issuing of bonds, sale of assets, or 
sale of stock).
--A plan demonstrating how the refiner would achieve the standards as 
quickly as possible, including a timetable for obtaining the necessary 
capital, contracting for engineering and construction resources, 
obtaining any necessary permits, and beginning and completing 
construction.
--A description of the market area for the refiner's diesel fuel 
products.
--In some cases, it could also include a compliance plan for how the 
refiner's diesel fuel will be segregated through to the end-user and 
information on each of the end-users to whom its fuel is delivered.

    We will consider several factors in our evaluation of any hardship 
waiver applications that we receive. Such factors include whether a 
refinery's configuration is unique or atypical; the proportion of non-
highway diesel fuel production relative to other refinery products; 
whether the refiner, its parent company, and its subsidiaries are faced 
with severe economic limitations and steps the refiner has taken to 
attempt to comply with the standards, including efforts to obtain 
credits towards compliance. In addition, we will consider the total 
crude oil capacity of the refinery and its parent or subsidiary 
corporations, if any, in assessing the degree of hardship and the 
refiner's role in the diesel market. Finally, we will consider where 
the diesel fuel is intended to be sold in evaluating the environmental 
impacts of granting a waiver. Typically, because of EPA's comprehensive 
evaluation of both financial and technical information, action on 
hardship applications can take six or more months.
    This extreme hardship provision is intended to address unusual 
circumstances that should be apparent now or could emerge in the near 
future. Thus, refiners seeking additional time under this provision 
must apply for relief by June 1, 2005, although we retain the 
discretion to consider hardship applications later as well for good 
cause.
3. Provisions for Transmix Facilities
    In the petroleum products distribution system, certain types of 
interface mixtures in product pipelines cannot be added in any 
significant quantity to either of the adjoining products that produced 
the interface. These mixtures are known as ``transmix.'' The pipeline 
and terminal industry's practice is to transport transmix via truck, 
pipeline, or barge to a facility with an on-site fractionator that is 
designed to separate the products. The owner or operator of such a 
facility is called a ``transmix

[[Page 39055]]

processor.'' Such entities are generally considered to be a refiner 
under existing EPA fuel regulations.
    Transmix processors, like conventional refiners, are also currently 
subject to the ``80 percent/20 percent'' production requirement for 15 
ppm and 500 ppm sulfur highway diesel fuel. This requirement, however, 
is inconsistent with the inherent nature of the transmix processors' 
business. Unlike conventional refiners, transmix processors refine 
batches of fuel that vary in volume and timing--largely unpredictably. 
Complying with set percentages of different highway diesel fuel sulfur 
grades would be very difficult, probably resulting in either a need to 
purchase credits or to postpone processing of some shipments. Transmix 
processors commented that it would not be appropriate to have any 
additional restrictions, beyond those based on sulfur content, imposed 
on their ability to market the fuel that they produce. They stated that 
the implementation of other restrictions, such as those under the 
highway diesel program's 80/20 requirement, would force them to ship 
large volumes of blendstocks back to refineries by truck, resulting in 
tank lock-outs that could cascade upstream though the distribution 
system potentially interfering with pipeline operations. \103\
---------------------------------------------------------------------------

    \103\ In a tank lock out situation a storage tank can no longer 
accept product from upstream in the distribution system because 
there is not sufficient outlet for the product it holds. A tank lock 
our downstream can quickly propagate upstream.
---------------------------------------------------------------------------

    Furthermore, transmix processors do not have the ability to change 
the nature of their products, as their processing equipment consists 
only of a distillation column to separate the blendstocks. This simple 
refinery configuration further limits their ability to install and 
operate a distillate hydrotreater. The commenters added that the sulfur 
content of the slate of fuel products that they produce is completely 
dependant on feed material that they receive, and that it is not 
feasible for them to install desulfurization equipment. We agree that 
it is not feasible for transmix processors to alter the sulfur content 
of the fuels that they produce and that limiting the market for these 
fuels could potentially lead to disruptions in the fuel distribution 
system.
    In light of this disproportionate burden on transmix processors, 
today's final rule removes the restriction on the volume of highway or 
NRLM diesel fuel they produce, if they produce diesel fuel according to 
typical operational practices involving the separation of transmix and 
not, for example, by blending of blendstocks or processing crude or 
heavy oils. Therefore, under today's final rule, transmix processors 
may choose to continue to produce all of their highway diesel fuel to 
the 500 ppm sulfur standard until 2010. They may further choose to 
continue to produce all of their NRLM diesel fuel as high sulfur diesel 
fuel until June 1, 2010, all of their NRLM diesel fuel to the 500 ppm 
sulfur standard until June 1, 2014, and all of their LM diesel fuel to 
a 500 ppm sulfur limit indefinitely.
    Transmix processors will be required to properly designate their 
fuel with the proper PTDs. Because the volume of fuel involved will be 
small and the fuel processed will already have been off-specification, 
we believe that providing this flexibility for transmix processors will 
have essentially no environmental impact and will not affect the 
efficient functioning of the NRLM diesel fuel program or the existing 
highway diesel fuel program. Rather, this approach will allow fuel 
volume to remain in the highway, NRLM, or LM (as applicable based on 
time frame) markets that might otherwise be forced into the heating oil 
market.

C. Special Provisions for Alaska and the Territories

1. Alaska
    The nationwide engine emission standards established today apply to 
all NR engines throughout Alaska. The nationwide NRLM diesel fuel 
sulfur standards and implementation dates apply to NRLM diesel fuel 
used in the areas of Alaska served by the federal aid highway system 
(FAHS). In this final rule, EPA is not finalizing fuel sulfur standards 
and implementation deadlines for NRLM diesel fuel used in the areas of 
Alaska not served by the FAHS (i.e., the ``rural'' areas). They will be 
addressed in a separate rulemaking to allow EPA to address the 
requirements for highway and NRLM diesel fuel in the rural areas in the 
same rulemaking. This final rule does, however, adopt the prohibition 
in the rural areas on the use of high sulfur (greater than 15 ppm) 
diesel fuel in model year 2011 and later nonroad engines, which will be 
manufactured to operate on ultra-low sulfur diesel fuel.
a. How Do the Highway Diesel Engine Standards, the Highway Diesel Fuel 
Standards, and Implementation Deadlines Apply in Alaska?
    Unlike the rest of the nation, Alaska is currently exempt from the 
500 ppm sulfur standard for highway diesel fuel and the dye provisions 
for diesel fuel not subject to this standard. Since the beginning of 
the 500 ppm sulfur highway diesel fuel program, we have granted Alaska 
exemptions from both the sulfur standard and dye provisions because of 
its unique geographical, meteorological, air quality, and economic 
factors. \104\ On December 12, 1995, Alaska submitted a petition for a 
permanent exemption for all areas of the state served by the FAHS, that 
is, those areas previously covered only by a temporary exemption. While 
considering that petition, we started work on a nationwide rule to 
consider more stringent highway diesel fuel requirements for sulfur 
content.
---------------------------------------------------------------------------

    \104\ Copies of information regarding Alaska?s petition for 
exemption, subsequent requests by Alaska, public comments received, 
and actions by EPA are available in public docket A-96-26.
---------------------------------------------------------------------------

    In the January 18, 2001, highway diesel rule EPA fully applied the 
2007 motor vehicle engine emission standards in Alaska. Based on 
factors unique to Alaska, we provided the state with: (1) An extension 
of the exemption from the 500 ppm sulfur fuel standard until the 
effective date of the new 15 ppm sulfur standard for highway diesel 
fuel in 2006; (2) an opportunity to request an alternative 
implementation plan for the 15 ppm sulfur diesel fuel program; and (3) 
a permanent exemption from the diesel fuel dye provisions. In response 
to these provisions in our January 18, 2001, highway rule, Alaska 
informed us that areas served by the FAHS, i.e., communities on the 
connected road system or served by the Alaska state ferry system 
(``urban'' areas), would follow the nationwide requirements. \105\ 
Diesel fuel produced for use in areas of Alaska served by the FAHS will 
therefore be required to meet the same requirements for highway diesel 
fuel as diesel fuel produced for the rest of the nation. For the rural 
parts of the state--areas not served by the FAHS--Alaska requested that 
highway diesel fuel not be subject to the highway diesel fuel sulfur 
standard until June 1, 2010. Between 2006 and 2010, the rural 
communities would choose their own fuel management strategy, except 
that all 2007 model year and newer diesel vehicles would require ultra-
low sulfur diesel fuel. Beginning June 1, 2010, all highway diesel fuel 
in the rural areas would be subject to the 15 ppm sulfur highway diesel 
fuel sulfur standard. \106\

[[Page 39056]]

EPA intends to propose and request comment on an amendment to the 
highway diesel sulfur rule to incorporate the rural area transition 
plan submitted by the state.
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    \105\ Letter and attached document to Jeffrey Holmstead of EPA 
from Michele Brown of the Alaska Department of Environmental 
Conservation, dated April 1, 2002. The communities on the connected 
road system or served by the Alaska State ferry system are listed in 
the attached document.
    \106\ Letter and attached document to Jeffrey Holmstead of EPA 
from Ernesta Ballard of the Alaska Department of Environmental 
Conservation, dated June 12, 2003.
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b. What NRLM Diesel Fuel Standards Are We Establishing for Urban Areas 
of Alaska?
    Since Alaska is currently exempt from the 500 ppm sulfur standard 
for highway diesel fuel, we also considered exempting Alaska from the 
500 ppm sulfur step of the proposed NRLM standards. However, despite 
the exemption, officials from the state of Alaska have informed us that 
some 500 ppm sulfur diesel fuel is nevertheless being marketed in many 
parts of Alaska. Market forces have brought the prices for 500 ppm 
diesel fuel down such that it is now becoming competitive with higher 
sulfur, uncontrolled diesel fuel. Assuming this trend continues, 
requiring that NRLM diesel fuel be produced to 500 ppm beginning June 
1, 2007 would not appear to be unduly burdensome. Even if 500 ppm 
diesel fuel were not available in Alaska today, our expectation is that 
compliance with the highway program described above will likely result 
in the transition of all of the urban area highway diesel fuel 
distribution system to 15 ppm sulfur beginning in 2006. It could prove 
very challenging for the distribution system in some of the areas to 
segregate a 500 ppm sulfur grade of NRLM from a 15 ppm sulfur grade of 
highway and an uncontrolled grade for other purposes. We believe 
economics would determine whether the distribution system would handle 
the new grade of fuel or substitute 15 ppm sulfur highway diesel fuel 
for NRLM applications. Thus, in the 2007 to 2010 time frame, the NRLM 
market in some urban areas might be supplied with 500 ppm sulfur 
diesel, and in other areas might be supplied with 15 ppm sulfur diesel. 
For this reason, today's action applies the 500 ppm sulfur standard for 
NRLM diesel fuel to Alaska's urban areas.
    Regardless of what occurs prior to 2010, we anticipate that 15 ppm 
sulfur highway diesel fuel will be made available in urban areas of 
Alaska by this time frame. The 2007 and later model year highway fleet 
will be growing, demanding more and more supply of 15 ppm sulfur diesel 
fuel. Adding nonroad volume to this would not appear to create any 
undue burden. Thus, today's action also applies the 15 ppm sulfur 
standard for NR and LM diesel fuel in the urban areas of Alaska, along 
with the rest of the nation beginning June 1, 2010 and June 1, 2012, 
respectively.
    The state, in its comments on the proposal, supports today's action 
for the urban areas described above. One refiner in Alaska commented 
that we should implement a one-step approach requiring 15 ppm sulfur 
diesel fuel starting in 2010. The refiner indicated that, due to the 
limited NRLM market, the benefits of introducing 500 ppm sulfur diesel 
fuel in 2007 would be minimal. Also, the distribution system in Alaska 
is not capable of handling the two grades of diesel fuel that would be 
required between 2007 and 2010, thus 15 ppm sulfur fuel would be 
distributed as NRLM. We agree that the distribution system in Alaska is 
limited compared to the rest of the nation, and that consumption of 
diesel fuel by NRLM applications in Alaska is small. However, as 
previously discussed, we expect that some 500 ppm sulfur diesel fuel 
will be available due to market forces, and that 15 ppm sulfur highway 
diesel fuel will be available beginning in 2006 in the urban areas. 
Thus, requiring 500 ppm sulfur diesel fuel (or 15 ppm sulfur diesel 
fuel as a substitute) for the limited NRLM applications beginning in 
2007 does not appear to create any undue burden on the fuel supply or 
the distribution system in urban Alaska.
    During the development of the original 500 ppm sulfur highway 
diesel fuel standards in the early 1990's, refiners and distributors in 
Alaska expressed concern that if Alaska were required to dye its non-
highway diesel fuel red along with the rest of the country, residual 
dye in tanks or other equipment would be enough to contaminate and 
disqualify Jet-A kerosene used as aviation fuel. Since much of the 
diesel fuel in Alaska is No. 1 and is indistinguishable from Jet-A 
kerosene, not only would tanks and transfer equipment have to be 
cleaned, but separate tankage would be needed. Consequently, we granted 
Alaska temporary exemptions from the dye requirement and in the January 
18, 2001, highway diesel rule granted the state a permanent exemption.
    The proposed use of a marker for heating oil in the 2007-10 time 
period presents similar concerns in Alaska's distribution system. In 
response to our request for comments on this issue, the state and 
refiners indicated that Alaska's system is not capable of accommodating 
dyes or markers and segregation. The priority of the state and fuel 
industry is to keep dyes and markers out of the fuel stream to prevent 
contamination of Jet-A and facilitate movement of the fuel. The 
comments suggested that implementation of refiner product designations, 
labeling of fuel pumps, retailer education, and rapid transition to 
ULSD would ensure that 500 ppm sulfur diesel fuel is used in NRLM 
equipment from 2007-10 and that 15 ppm sulfur diesel fuel is used in 
nonroad equipment after 2010.
    In section IV.D below, we discuss the provisions that we are 
adopting for the State of Alaska that will allow us to enforce the NRLM 
diesel fuel program without requiring the fuel marker.
c. Why Are We Deferring Final Action on NRLM Diesel Fuel Standards for 
Rural Areas of Alaska?
    We are deferring final action on the fuel sulfur standards and 
implementation deadlines for the rural areas of Alaska. We proposed to 
permanently exempt NRLM diesel fuel used in the rural areas from fuel 
content standards, except that diesel fuel used in 2011 and later model 
year nonroad engines would have had to meet the sulfur content standard 
of 15 ppm sulfur. However, this proposed action is inconsistent with 
the action requested by the state in its comments to the proposal. It 
is also inconsistent with the state's alternative implementation plan 
for highway diesel fuel in rural Alaska, which was submitted after 
publication of the proposal.
    We intend to issue a supplemental proposal that would address both 
highway and NRLM diesel fuel sulfur standards for Alaska's rural areas. 
This proposal will address the comments submitted by the state, as well 
as the state's alternative implementation plan for highway diesel fuel.
2. American Samoa, Guam, the Commonwealth of Northern Mariana Islands, 
and Puerto Rico
a. What Provisions Apply in American Samoa, Guam, and the Commonwealth 
of Northern Mariana Islands?
    As we proposed, we are excluding American Samoa, Guam and the 
Commonwealth of the Northern Mariana Islands (CNMI) from the NRLM 
diesel fuel sulfur standards and associated requirements. We also are 
excluding these territories from the tier 4 nonroad engine emissions 
standards, and other requirements associated with those emission 
standards. The territories will continue to have access to new nonroad 
diesel engines and equipment using pre-tier 4 technologies, at least as 
long as manufacturers choose to market those technologies. In the 
future, if manufacturers choose to market nonroad diesel engines and 
equipment only with tier 4 emission control

[[Page 39057]]

technologies, we believe the market will determine if and when the 
territories will make the investment needed to obtain and distribute 
the diesel fuel necessary to support these technologies.
    We are also requiring that all nonroad diesel engines and equipment 
for these territories be certified and labeled to the applicable 
requirements--either to the previous-tier standards and associated 
requirements under this exclusion, or to the Tier 4 standards and 
associated requirements applicable for the model year of production 
under the nationwide requirements of today's action. The engines would 
still be emissions warranted, as otherwise required under the CAA and 
EPA regulations. Special recall and warranty considerations due to the 
use of excluded high sulfur fuel would be the same as those for Alaska 
during its exemption and transition periods for highway diesel fuel and 
for these territories for highway diesel fuel (see 66 FR 5086, 5088, 
January 18, 2001).
    To protect against circumvention of the emission requirements 
applicable to the rest of the U.S., we are restricting the importation 
of nonroad engines and equipment from these territories into the rest 
of the U.S. After the 2010 model year, nonroad diesel engines and 
equipment certified under this exclusion for sale in American Samoa, 
Guam and the Commonwealth of the Northern Mariana Islands will not be 
permitted entry into the rest of the U.S.
b. Why Are We Treating These Territories Uniquely?
    Like Alaska, these territories are currently exempt from the 500 
ppm sulfur standard for highway diesel fuel. Unlike Alaska, they are 
also exempt from the new highway diesel fuel sulfur standard effective 
in 2006 and the new highway vehicle and engine emission standards 
effective beginning in 2007 (see 66 FR 5088, January 18, 2001).
    Section 325 of the CAA provides that upon request of Guam, American 
Samoa, the Virgin Islands, or the Commonwealth of the Northern Mariana 
Islands, we may exempt any person or source, or class of persons or 
sources, in that territory from any requirement of the CAA, with some 
specific exceptions. The requested exemption could be granted if we 
determine that compliance with such requirement is not feasible or is 
unreasonable due to unique geographical, meteorological, or economic 
factors of the territory, or other local factors as we consider 
significant. Prior to the effective date of the current highway diesel 
fuel sulfur standard of 500 ppm, the territories of American Samoa, 
Guam and the Commonwealth of the Northern Mariana Islands petitioned us 
for an exemption under section 325 of the CAA from the sulfur 
requirement under section 211(i) of the CAA and associated regulations 
at 40 CFR 80.29. We subsequently granted the petitions.\107\ Consistent 
with this decision, in our January 18, 2001 highway rule (66 FR 5088), 
we determined that the 2007 heavy-duty engine emission standards and 
2006 diesel fuel sulfur standard would not apply to these territories.
---------------------------------------------------------------------------

    \107\ See 57 FR 32010, July 20, 1992 for American Samoa; 57 FR 
32010, July 30, 1992 for Guam; and 59 FR 26129, May 19, 1994 for 
CNMI.
---------------------------------------------------------------------------

    Compliance with the NRLM diesel fuel sulfur standards would result 
in major economic burden on the territories. All three of these 
territories lack internal petroleum supplies and refining capabilities 
and rely on long distance imports. Given their remote location from 
Hawaii and the U.S. mainland, most petroleum products are imported from 
east rim nations, particularly Singapore. Australia, the Philippines, 
and certain other Asian countries are beginning to consider and in some 
cases implement lower sulfur diesel fuel standards. However, it is not 
clear that supply, especially of 15 ppm sulfur diesel fuel, would be 
possible to these territories.
    Furthermore, compliance with new 15 ppm sulfur requirement for 
highway diesel fuel beginning in 2006 and today's 15 ppm sulfur 
requirement for NRLM diesel fuel beginning in 2010 (or the 500 ppm 
sulfur requirement for NRLM diesel fuel beginning 2007) would require 
construction of separate storage and handling facilities for a unique 
grade of diesel fuel for highway and nonroad purposes, or use of 15 ppm 
sulfur diesel fuel for all diesel applications to avoid segregation. 
Either of these alternatives would require importation of 500 and 15 
ppm sulfur diesel fuel from Hawaii or the U.S. mainland, and would 
significantly add to the already high cost of diesel fuel in these 
territories, which rely heavily on U.S. support for their economies. At 
the same time, it is not clear that the environmental benefits in these 
areas would warrant this cost. Therefore, we are not applying the fuel 
and engine standards to these territories.
    The Caribbean Petroleum Corporation (CPC) commented that the 
proposed nonroad diesel rule would result in a major economic burden 
for Puerto Rico, the environmental benefits do not warrant the cost, 
and that Puerto Rico should be exempt. However, the CPC did not include 
any cost or environmental information to support its claims. We have no 
reason to believe that the costs of the NRLM diesel fuel program in 
Puerto Rico will be significantly greater than that of the U.S. For 
example, Puerto Rico is close to the U.S. mainland, and to South 
American and Central American suppliers of fuel to the U.S. mainland, 
and therefore has ready access to nearby fuel supplies that meet U.S. 
requirements. Similar to the fuel distribution system in the rest of 
the country, the fuel distribution system in Puerto Rico is geared to 
separate fuel handling and storage facilities for highway and non-
highway diesel fuels. Today's rule will require additional segregation 
for the NRLM diesel fuels, but no differently for Puerto Rico than for 
the U.S. Nevertheless, to avoid that additional fuel segregation, 
Puerto Rico could substitute highway fuel for use in NRLM diesel 
engines and equipment. We also believe that the important air quality 
benefits to be realized by today's rule for the four million people in 
Puerto Rico should not be significantly different than those for the 
rest of the country. Consequently, today's rule includes Puerto Rico in 
the NRLM diesel fuel program.

D. NRLM Diesel Fuel Program Design

    In addition to specifying the sulfur standards and the 
implementation dates when the standards take effect, the diesel fuel 
program compliance provisions must be designed and structured carefully 
to achieve the overall principles of the program. Specifically, the 
health and welfare benefits of the NRLM diesel fuel and the highway 
diesel programs, and the need for widespread availability of 15 ppm 
sulfur highway diesel fuel must be maintained. The program benefits and 
fuel availability will only happen if the NRLM diesel fuel program is 
designed such that the amount of 15 ppm sulfur fuel expected to be 
produced under the highway diesel fuel program is in fact produced and 
that 500 ppm highway fuel is not overproduced. Likewise, the benefits 
of the NRLM diesel fuel sulfur standards adopted today will only be 
achieved if the program is designed to ensure that the volume of diesel 
fuel consumed by NRLM diesel engines is matched by the supply of NRLM 
diesel fuel produced to the appropriate low sulfur levels. At the same 
time, promoting the efficiency of the distribution system calls for 
fungible distribution of physically similar products, and minimizing 
the need for product segregation.
    As discussed below, the situation faced in 1993 when EPA first 
regulated the sulfur content of highway diesel fuel parallels some of 
the issues that EPA

[[Page 39058]]

needed to address in today's rule. Prior to the implementation of the 
500 ppm sulfur standard for highway diesel fuel in 1993, most No. 2 
distillate fuel was produced to essentially the same specifications, 
shipped fungibly, and used interchangeably by highway diesel engines, 
nonroad diesel engines, locomotive and marine diesel engines, and 
heating oil applications. Beginning in 1993, highway diesel fuel was 
required to meet a 500 ppm sulfur cap and was segregated from other 
distillate fuels as it left the refinery by the use of a visible level 
of dye solvent red 164 in all non-highway distillate. At about the same 
time, the Internal Revenue Service (IRS) similarly required non-highway 
diesel fuel to be dyed red to a much higher concentration prior to 
retail sale to distinguish it from highway diesel fuel for excise tax 
purposes. Dyed non-highway fuel is exempt from this tax. This splitting 
of the distillate pool necessitated changes in the distribution system 
to ship and store the now distinct products separately. In some parts 
of the country where the costs to segregate non-highway diesel fuel 
from highway diesel fuel could not be justified, both fuels have been 
produced to highway specifications.\108\
---------------------------------------------------------------------------

    \108\ Diesel fuel produced to highway specifications but used 
for non-highway purposes is referred to as ``spill-over.'' It leaves 
the refinery gate and is fungibly distributed as if it were highway 
diesel fuel, and is typically dyed at a point later in the 
distribution system. Once it is dyed it is no longer available for 
use in highway vehicles, and is not part of the supply of highway 
fuel.
---------------------------------------------------------------------------

1. Requirements During the First Step of the Fuel Program
    EPA is adopting specific compliance provisions during the first 
step of today's NRLM diesel fuel sulfur control program for three 
reasons. The first is to maintain the integrity of the highway diesel 
program, while allowing the efficient distribution of highway and NRLM 
diesel fuel. Since 500 ppm sulfur highway diesel fuel allowed under the 
highway diesel fuel program's Temporary Compliance Option (TCO) and 
NRLM diesel fuel meeting today's 500 ppm sulfur standard will be 
physically the same, it would be impossible to maintain the benefits 
and program integrity of the highway diesel fuel program without some 
means of differentiating highway diesel fuel from NRLM diesel fuel.
    Continuing the current practice of dyeing NRLM diesel fuel at the 
refinery gate and requiring that it be segregated throughout the 
distribution system is not a practical way to differentiate NRLM diesel 
fuel from highway fuel. At the same time, allowing the unrestricted 
fungible distribution of highway and NRLM diesel fuel with the same 
sulfur level risks the loss of important benefits of the highway 
program. For example, if a refiner produced all 500 ppm sulfur fuel and 
designated it as NRLM diesel fuel, that refiner would have no 
obligation to produce any 15 ppm sulfur highway diesel fuel. Without an 
effective way of limiting the use in the highway market of 500 ppm 
sulfur diesel fuel produced as NRLM diesel fuel, much more 500 ppm 
sulfur fuel could, and likely would find its way into the highway 
market than would otherwise happen under the current highway program. 
This would displace 15 ppm sulfur diesel fuel that would have otherwise 
been produced. This likely series of events would circumvent the intent 
of the highway program's TCO and sacrifice some of the resulting PM and 
SO2 emission benefits of the overall highway diesel program. 
If this occurred to any significant degree, it could also undermine the 
integrity of the highway program by threatening the availability of 15 
ppm sulfur diesel fuel nationwide for the vehicles that need it. This 
is no longer a concern after 2010, when all highway diesel fuel is 
required to meet a 15 ppm sulfur standard.
    The second reason is to maintain the integrity of the NRLM diesel 
fuel program, while allowing the efficient distribution of NRLM diesel 
fuel and heating oil where they have similar sulfur levels. By 
establishing new sulfur standards for NRLM diesel fuel but not heating 
oil, today's program creates the need to distinguish the fuel used for 
these two purposes. Currently, there is no grade of diesel fuel which 
is produced and marketed as a distinguishable grade for NRLM diesel 
engine uses. It is typically produced and shipped fungibly with other 
distillate used for heating oil purposes, and it is all dyed red in 
accordance with EPA and IRS regulations. Because today's rule includes 
small refiner and credit provisions that allow the limited production 
of high sulfur (greater than 500 ppm) NRLM diesel fuel through 2010, it 
is not possible to rely on sulfur content alone to differentiate NRLM 
diesel fuel from heating oil during the first step of the program. 
Without adequate controls, a refiner could choose not to desulfurize 
any of its fuel that is destined for the NRLM diesel fuel market, 
instead designating that volume as heating oil at the refinery gate. 
This fuel, ostensibly manufactured for use as heating oil could be 
misdirected for use in NRLM diesel equipment, and would be 
indistinguishable from legal high sulfur NRLM diesel fuel produced by 
small refiners and/or through the use of credits. This could 
substantially reduce the environmental benefits of today's rule.
    After 2010, when the 15 ppm sulfur standard for NR diesel fuel goes 
into effect, small refiner and credit NR fuel must meet a 500 ppm 
standard. Therefore, after 2010 NRLM diesel fuel can be distinguished 
from high sulfur (greater than 500 ppm) home heating fuel based on 
sulfur content. However, 500 ppm NR (small refiner, credit) produced 
from June 1, 2010 through May 31, 2012, and 500 ppm NRLM (small 
refiner, credit) diesel fuel produced from June 1, 2012 through May 31, 
2014, could not be distinguished from heating oil produced to meet a 
similar 500 ppm sulfur limit. Likewise, from June 1, 2010 to June 1, 
2012, 500 ppm NR (small refiner, credit) diesel fuel and LM diesel fuel 
need to be distinguished from each other, so that diesel fuel produced 
as 500 ppm LM is not later misdirected to the NR diesel market. Such 
misdirected 500 ppm sulfur LM diesel fuel would be indistinguishable 
from legal 500 ppm sulfur NR diesel fuel, reducing the environmental 
benefits of today's rule. These various 500 ppm fuels could not be 
distinguished based on sulfur level. As previously discussed, the 
situation which was faced in 1993 regarding the need to differentiate 
500 ppm sulfur highway diesel fuel from other diesel fuel is similar to 
the need today to differentiate highway diesel fuel, NRLM diesel fuel, 
and heating oil.
    The third reason is to maintain the integrity of the anti-
downgrading requirements in the highway diesel program. The highway 
diesel program requires that each entity in the distribution system 
downgrade no more than 20 percent of the 15 ppm sulfur highway diesel 
fuel for which it assumes custody to 500 ppm sulfur highway diesel 
fuel. These provisions are necessary to ensure the widespread 
availability of 15 ppm sulfur diesel fuel for use in model year 2007 
and later highway vehicles, in which the use of 15 ppm sulfur fuel is 
essential to facilitate the projected emissions benefits of the highway 
program. The highway program placed no restrictions on the volume of 
highway diesel fuel that could be downgraded to NRLM diesel fuel. Under 
the proposed rule there would be no way to distinguish 500 ppm sulfur 
NRLM diesel fuel from 500 ppm sulfur highway diesel fuel downstream of 
the refinery. Therefore, to preserve the integrity of the highway 
program, the proposal would have made the highway program's anti-
downgrade requirements more stringent by also

[[Page 39059]]

restricting downgrades to 500 ppm sulfur NRLM diesel fuel. We received 
several negative comments on this proposed restriction. The compliance 
and record keeping requirements finalized to address the two concerns 
discussed above, can be utilized to facilitate the implementation of 
the highway program's anti-downgrading requirements without the need to 
further restrict downgrading. As a result, today's rule also contains 
several modifications which clarify the anti-downgrading provisions of 
the highway diesel program.
    The requirements described below will help ensure that the 
projected benefits of the highway diesel program and of today's NRLM 
diesel program are achieved.
a. Ensuring Refiner Production Volumes of 15 ppm Sulfur Highway Diesel 
Fuel Are Consistent With the Highway Rule's 80/20 Requirement
    To avoid adding unnecessary cost to the fuel distribution system, 
we proposed that the current requirement of dyeing non-highway 
distillate fuels at the refinery gate become voluntary as of June 1, 
2006.\109\ As discussed in the proposal, continuing to require that 
NRLM diesel fuel and heating oil contain a visible trace of red dye at 
the refinery gate would allow for simple enforcement of the highway 
standards throughout the duration of the highway program's TCO. Clear, 
undyed diesel fuel would have to meet the 80/20 ratio of 15 ppm to 500 
ppm sulfur highway diesel fuel, and dyed fuel could only be used in 
NRLM diesel equipment or as heating oil. Continuing the current dye 
provisions would therefore ensure that the intended benefits of the 
highway program are achieved. However, maintaining this dye distinction 
would also require segregation of a new grade of dyed 500 ppm sulfur 
NRLM diesel fuel throughout the entire distribution system. The costs 
of requiring segregation of two otherwise identical fuels throughout 
the entire distribution system could be quite substantial.\110\ 
Comments on the proposed rule confirmed EPA's assessment that the 
ability of the fuel distribution system to distribute these fuels 
fungibly is essential, since segregating the fuels could result in 
substantial additional transportation costs and necessitate additional 
storage tanks throughout the system.
---------------------------------------------------------------------------

    \109\ The IRS requirements concerning dyeing of non-highway fuel 
prior to sale to consumers are not changed by this rulemaking.
    \110\ Under the highway program the potential exists to add a 
third grade of diesel fuel in an estimated 40 percent of the 
country, and we projected one-time tankage and distribution system 
costs of $1.05 billion to accomplish this. Using similar 
assumptions, to add a second 500 ppm grade nationwide would cost in 
excess of $2 billion. This assumes that the capability exists to add 
such new tankage.
---------------------------------------------------------------------------

    The NPRM invited comment on two alternative approaches to ensure 
that refiner production of 15 ppm sulfur highway diesel fuel met the 
highway rule's 80/20 requirement; the ``refiner baseline'' approach, 
and the ``designate and track'' approach. The baseline approach is 
essentially a constraint on the sulfur levels of the various distillate 
fuel products a refiner produces, based on historical production 
volumes. Fuel with similar sulfur levels could then be fungibly 
distributed with only limited controls on the downstream distribution 
system. The designate and track approach requires that a refiner 
designate into which market discrete volumes of the distillate fuels it 
produces must be sold, without any consideration of historical 
production volumes. The fuel must then be tracked through the 
distribution system and sold only for its designated purpose (or a 
purpose that requires less control). As with the baseline approach, 
diesel fuel with similar sulfur levels could be fungibly shipped up to 
the point of distribution from a terminal where off-highway diesel fuel 
must be dyed red pursuant to IRS requirements to indicate its tax 
exempt status.
    We proposed the baseline approach because, in the absence of a red 
dye requirement at the refinery-gate for NRLM diesel fuel, we expected 
that it would: (1) Allow for the fungible distribution of 500 ppm 
sulfur highway and NRLM diesel fuel; (2) ensure the enforceability of 
the highway diesel fuel and NRLM diesel fuel standards; (3) maintain 
the projected production volume of 15 ppm sulfur highway diesel fuel; 
(4) allow refinery production of 500 ppm sulfur NRLM diesel fuel and 
heating oil to remain flexible to meet market demand; and (5) enable 
the efficient distribution of diesel fuel while imposing the least 
burden on the parties in the fuel production and distribution system. 
In the proposal, we also discussed how a refiner's baseline would be 
set, and invited comment on ways to account for changes refiners might 
make from their historical production practices in response to the 
highway diesel program.
    In the NPRM, we expressed concerns that a designate and track 
approach would raise significant workability and enforceability issues 
and therefore might not maintain the integrity of highway and NRLM 
diesel fuel sulfur programs. Our concerns about the workability and 
enforceability of a designate and track approach amplified potential 
concerns regarding whether the approach might reduce the volume of 15 
ppm sulfur diesel fuel required to be produced under the highway diesel 
program, leading to a reduction in the environmental benefits of the 
highway diesel program and calling into question the availability of 15 
ppm sulfur diesel fuel. We were also concerned about whether this 
approach would place too much burden on the numerous entities in the 
fuel distribution system, as compliance was focused on downstream 
parties. While the designate and track approach provided greater 
production flexibility to refiners than the baseline approach, it 
appeared to increase the burden and restrictions on downstream parties.
    Of the approaches discussed in the NPRM, we expected that the 
baseline approach would provide the best mechanism to achieve the fuel 
program goals described at the beginning of this section. Since the 
proposal, we have comprehensively evaluated the advantages and 
disadvantages of both approaches. Based on this review, we now believe 
that a baseline approach would produce significant adverse problems 
because of its overly restrictive impact on the ability of fuel 
producers and distributors to efficiently respond to the myriad and 
daily needs of the markets for highway and NRLM diesel fuel. 
Implementation of the approach could also produce an unintended bias 
that would tend to reduce the benefits of the highway program and 
reduce the availability of 15 ppm sulfur highway diesel fuel. At the 
same time, our review of the approaches shows that the designate and 
track approach can be implemented in an enforceable manner and likely 
would not cause a reduction in the environmental benefits of the 
highway diesel program or adversely impact the widespread availability 
of 15 ppm sulfur highway diesel fuel. Our evaluation of these alternate 
approaches is discussed in more detail in the following sections.
i. Proposed Refiner Baseline Approach
    Under the refiner baseline approach, we proposed that from June 1, 
2007 through May 31, 2010, any refiner or importer could choose to 
distribute its 500 ppm sulfur NRLM and highway diesel fuels fungibly 
without adding red dye at the refinery gate. Refiners and importers who 
elect to distribute these fuels fungibly would need to establish a non-
highway distillate baseline, defined as a percentage of its total 
distillate fuel production volume based on historical production data. 
For future production

[[Page 39060]]

purposes, this percentage of the volume of diesel fuel produced would 
have to either meet the 500 ppm sulfur NRLM diesel fuel sulfur standard 
or be marked as heating oil. All the remaining production of diesel 
fuel would have to meet the requirements of the highway fuel program 
(i.e., 80 percent of this fuel would have to meet a 15 ppm sulfur cap). 
Refiners not wishing to participate in the baseline approach would have 
to dye all of their 500 ppm sulfur NRLM diesel fuel at the refinery. 
However, we anticipated that few refiners would opt to dye 500 ppm 
sulfur NRLM diesel fuel, other than the volumes that they dispense from 
their own racks, since this would eliminate the ability to fungibly 
distribute 500 ppm sulfur highway and NRLM diesel fuels.
    Since the publication of the proposed rule, we have developed a 
better understanding of refiner concerns about the constraints 
associated with the baseline approach. Specifically, it is now clear 
that individual refiners would be significantly constrained by the 
baseline approach from efficiently responding to changes in contract 
arrangements with their clients and changes in market demands. Refiners 
commented that they win and lose contracts on a daily basis and that 
depending on which contracts they secure, they may not be able to 
comply with their baseline. Specific concerns were raised regarding the 
ability of refiners to compensate for the loss of export contracts and 
to respond to spikes in the demand for heating oil which periodically 
result from an unexpectedly cold winter. Refiners also related that the 
constraints under the baseline approach could cause an anti-competitive 
dynamic between fuel refiners and their customers.
    Based on our reevaluation of the baseline approach and the 
information gathered from the public comments, it is now clear that the 
constraints on the slate of fuels that a refiner produces under the 
baseline approach could interfere with a refiner's ability to meet 
market demands, which in turn could result in supply shortages and 
increased fuel prices. For example, if a refiner were to lose an export 
contract for high sulfur diesel fuel, the baseline approach could 
prevent that refiner from seeking to market that product domestically. 
This could impact the overall supply of diesel fuel since the refiner 
may not have sufficient facilities to desulfurize diesel fuel. Also, 
knowing that losing such an export contract would leave the refiner 
with no ability to market its fuel domestically could give the 
refiner's export client an undue advantage during contract 
negotiations.
    In the case of a spike in heating oil demand due to an unusually 
cold winter, the baseline approach would limit a refiner's ability to 
produce additional volumes of high sulfur distillate fuel beyond the 
volume established under its baseline. Refiners that were limited in 
their ability to produce additional high sulfur fuel could choose to 
supply low sulfur diesel fuel to the heating oil market. However, they 
may not have sufficient hydrotreating capacity to do so. This could 
limit their ability to respond to a supply shortage.
    The proposed rule suggested various potential modifications to the 
baseline approach to address refiner concerns regarding the associated 
constraints on the slate of fuels they produce. We received comments on 
the potential modifications discussed in the NPRM as well as other 
potential changes to the baseline approach. Some commenters suggested 
that if EPA were to finalize a baseline approach, refiners should be 
able to apply to EPA for a yearly adjustment to their baseline based on 
annual demand forecasts. Even with such flexibility, refiners still 
concluded that in many cases they would likely be forced to dye their 
fuel instead. For fuel distributors, having refiners dye their NRLM 
diesel fuel presented an unacceptable situation due to the need to 
distribute another grade of fuel. As a result, all comments from the 
refining and fuel distribution community were in agreement that the 
baseline approach may be unworkable.
    Based on our review of the comments and our discussions with fuel 
producers and distributors, it has become clear that none of the 
potential modifications to the baseline approach would adequately 
compensate for the inherent inflexibility of requiring refiners to 
comply with set production ratios. Even if EPA were to adjust such 
ratios on an annual basis, refiners might need to approach EPA for an 
interim adjustment if their contractual agreements changed or if market 
demand shifted unexpectedly. The process of evaluating requests for 
baseline adjustments could be very burdensome to the industry and to 
EPA, and EPA would unlikely be able to respond quickly enough to 
changing market conditions.
    More importantly, all of the potential alternatives that we might 
implement to mitigate the constraints of the baseline approach could 
potentially undermine the environmental benefits of the highway 
program. Such alternatives all would involve granting allowances to 
some refiners to produce additional volumes of non-highway fuels above 
the set baseline to facilitate a refiner meeting the market demand for 
such fuels. At the same time, it would not be possible for EPA to 
reduce the ability of other refiners to produce non-highway fuel who 
may have lost these markets. Therefore, for such alternatives to be 
effective in responding to changing market conditions, an unintended 
downward bias would result regarding the required production of 15 ppm 
sulfur highway diesel fuel.
    Even without any changes we discovered from the highway diesel 
program pre-compliance reports that the proposed baseline approach has 
a downward bias that could result in a reduction in the volume of 15 
ppm sulfur diesel fuel produced under the highway diesel program.\111\ 
We proposed that refiners could choose to calculate their off-highway 
baseline using either an average of 2003 through 2005 production data 
or 2006 production data. Providing the option for a 2006 baseline was 
necessary because a number of refiners will be changing the slate of 
fuels that they produce in response to the highway diesel rule which 
becomes effective in 2006. While the highway diesel pre-compliance 
reports indicate an overall increase in production volume, they also 
indicate that 40 percent of highway diesel refiners will decrease the 
volume of highway diesel fuel they produce. If all of these refiners 
were to take a 2006 baseline to determine the volume of 15 ppm sulfur 
diesel fuel they would be required to produce, a substantial drop in 
the total volume of 15 ppm sulfur diesel fuel produced could result.
---------------------------------------------------------------------------

    \111\ ``Summary and Analysis of the Highway Diesel Fuel 2003 
Pre-compliance Reports,'' EPA 420-R-03-103, October 2003.
---------------------------------------------------------------------------

    The pre-compliance reports indicate that the other 60 percent of 
refiners will be increasing the volume of highway diesel fuel they 
produce. We projected that these shifts in the slate of fuel products 
that refiners produce would have an overall positive impact on diesel 
fuel supply. However, refiners that increase the volume of highway fuel 
they produce would likely chose to calculate their baseline using their 
lower 2003-2005 production volumes. Doing so would result in a lower 
percentage of their distillate fuel that would be required to be 
produced for highway diesel use, and subject to a 15 ppm sulfur 
standard.
    The volume of spillover could also be reduced refiners were to dye 
500 ppm sulfur diesel they manufactured to meet anticipated NRLM diesel 
fuel demand in order to avoid needing to comply with the baseline 
approach. Many refiners commented that they

[[Page 39061]]

considered the baseline approach so unworkable and onerous that they 
would choose to dye all of their 500 ppm sulfur NRLM diesel fuel at the 
refinery gate. This could force some parts of the distribution systems 
which had previously not carried two grades of diesel fuel for highway 
and off-highway uses to begin doing so.
    In summary, we are not finalizing the proposed baseline system 
because we believe--
    1. It could unnecessarily constrain refiners ability to meet market 
demands, encouraging them to dye 500 ppm sulfur NRLM diesel fuel at the 
refinery resulting in an added burden to the distribution system;
    2. It could create a bias that could result in a loss in the volume 
of 15 ppm sulfur highway diesel fuel produced, and the options to 
remove these market constraints would only increase the bias to reduce 
the volume of 15 ppm sulfur highway diesel fuel; and
    3. The baseline approach would not ensure that the environmental 
benefits of the 2007 highway diesel program would be maintained.
ii. Designate and Track Approach
    At the time of the NPRM, we invited comment on an alternative to 
the baseline approach called the ``designate and track'' approach. 
Under the envisioned designate and track approach, refiners and 
importers would designate the volumes of 500 ppm sulfur diesel fuel 
they produce/import as either highway or NRLM diesel fuel and would 
ship them fungibly. These designations would follow the fuel through 
the distribution system and be used to restrict the sale of 500 ppm 
sulfur NRLM diesel fuel from the highway market. While we sought 
comment on various forms of the designate and track approach, we also 
expressed serious reservations regarding its workability, 
enforceability, impact on the benefits of the highway rule, and 
constraints on the distribution system. For example, at the time of the 
proposal, refiners supported a designate and track approach where 
certain parts of the distribution system (e.g., pipelines) did not have 
to report. EPA believed that such an approach was unenforceable. 
Refiners were also supporting the designate and track approach as an 
option for refiners to choose in addition to the baseline approach. 
However, EPA believed that the two approaches were incompatible.
    As noted in the proposal, the designate and track approach allows 
maximum flexibility for refiners and importers, but EPA had concerns 
that the volume reconciliation requirements would inappropriately 
restrict the flexibility of downstream parties to respond to market 
changes. EPA also had concerns that it would reduce the amount of 15 
ppm spillover from the highway market, reducing the environmental 
benefits of that rule.
    Since the proposal, we received extensive input both in the written 
comments and through in-depth meetings with representatives of all 
segments of the fuel distribution industry on how the designate and 
track system might be structured to provide the needed compliance 
oversight without placing an undue burden on industry. Refiners now 
agree that the designate and track approach should not be an option for 
refiners in addition to the baseline approach, and support it as a 
stand alone approach. All parties in the fuel distribution system have 
also now expressed support for the record keeping and reporting 
requirements associated with tracking designated fuel volumes through 
each custodian in the distribution chain until the fuel leaves the 
terminal either taxed or dyed. Furthermore, commenters from all 
segments of the fuel distribution industry from the refiner through to 
the terminal stated that the information needed to support the 
designate and track approach is already kept as part of normal business 
practices. Commenters stated that only modest upgrades in their record 
keeping procedures would be needed to compile the needed information 
and that preparing the necessary reports would not represent a 
significant burden. Thus, our concerns that a designate and track 
approach might represent a large burden to fuel distributors were 
unfounded.
    In addition, we have developed appropriate solutions to the various 
open questions and issues that we had with the designate and track 
approach at the time of the proposal. In the proposal it was unclear 
how a designate and track approach would be structured to account for 
the swell in highway diesel fuel volumes in the winter that results 
from downstream kerosene blending to improve cold flow properties. 
Without an adequate control mechanism, normal swell in downstream 
highway diesel fuel volumes in the North due to kerosene blending 
during winter months could mask the inappropriate shifting of NRLM-
designated 500 ppm sulfur fuel to the highway diesel pool. We have 
developed an appropriate mechanism to address this situation as 
described in section IV.D.3.
    In the proposal, we also expressed concerns regarding how normal 
volumetric fluctuations in the distribution system such as those caused 
by product downgrading in pipelines could be adequately accounted for 
under a designate and track system so that such fluctuations would not 
mask the inappropriate shifting of 500 ppm sulfur NRLM diesel fuel to 
the highway pool. We have subsequently developed a periodic volume 
account balance system to account for such fluctuations.
    Through discussions with terminal operators, we have also resolved 
concerns expressed in the NPRM that a designate and track approach 
might limit a terminal operator's ability to respond to shifts in 
demand for 500 ppm sulfur highway versus NRLM diesel fuel. To avoid 
this potential problem today's rule allows terminal operators and 
others to switch the designation of 500 ppm sulfur NRLM diesel fuel to 
highway diesel fuel on a temporary basis but not on a cumulative basis 
over time. This will allow terminal operators to sell NRLM designated 
500 ppm sulfur fuel into the highway market provided that they later 
sell the same volume of highway-designated 500 ppm sulfur fuel into the 
NRLM market. To ensure that 500 ppm sulfur NRLM diesel fuel is not 
inappropriately shifted into the highway diesel pool, terminal 
operators will need to demonstrate that the volume of 500 ppm sulfur 
highway diesel fuel they delivered is less than or equal to the volume 
received.
    In the NPRM, we stated that determining the responsible party for a 
violation of the restriction against shifting 500 ppm sulfur NRLM 
diesel fuel into the highway pool would be difficult under a designate 
and track approach because a number of parties in the distribution 
chain take custody of the fuel without taking ownership. However, this 
concern can be addressed by structuring the provisions to hold the 
custodian of the fuel accountable for any such violation that takes 
place while the fuel is in their custody. Review of electronic data 
submitted from all custodians in the highway and NRLM diesel fuel 
distribution chain will reveal the custodian responsible for a 
violation. By comparing such data on the hand-offs of designated fuel 
volumes between all adjacent pairs of custodians in the distribution 
chain for discrepancies, we can identify any party responsible for 
inappropriately shifting volumes of 500 ppm sulfur fuel designated for 
use in NRLM equipment to the highway market. Many terminals do not take 
ownership of the fuel that they handle. Terminals that lease storage 
tanks to multiple owners will need to enter into contractual agreements 
with their tenants to ensure that they understand their obligations as

[[Page 39062]]

a custodian of designated fuel and do not inappropriately change the 
designation of fuels stored in such leased tanks.
    An effective enforcement and compliance assurance program must 
include the ability to rapidly and accurately review the large amount 
of data on the hand-offs of designated fuel volumes for discrepancies. 
This can be accomplished if all parties report electronically to a 
database which can reconcile hand-off volumes between all parties in 
the distribution chain in an automated fashion. All segments in the 
fuel distribution system are now in support of providing the necessary 
information to such an electronic reporting system. We have conducted a 
review of the Agency resources that would be needed to compile the 
industry reports on the transfer of designated fuel volumes, perform 
quality assurance on these data, and to perform the necessary analysis 
of the database to discover potential violations. Our review indicates 
that the reporting forms can be standardized and the review process 
automated in such a fashion as to minimize the Agency resource 
requirements, while at that same time ensuring the quality of the data 
and completeness of the review process. In light of the above 
discussion, we are now convinced that a designate and track approach 
can be designed to meet our enforcement and compliance assurance needs 
under today's rule.
    In addition to concerns regarding the workability and 
enforceability of a designate and track approach, the NPRM expressed 
concerns that application of such an approach could reduce the benefits 
of the highway diesel program by reducing the amount of highway diesel 
fuel that is used in nonroad equipment due to the logistical 
constraints in the distribution system (``spillover''). Specifically, 
it was thought that the opportunity to fungibly ship batches of 500 ppm 
sulfur NRLM diesel fuel and 500 ppm sulfur highway diesel fuel might 
allow refiners to supply highway and NRLM diesel fuel to markets where 
they would otherwise have supplied just highway fuel for both purposes. 
Our reevaluation since the proposal indicates that this is not a 
significant concern. As noted earlier, there are currently substantial 
regions of the country where only highway diesel fuel is supplied by 
bulk shipments to both the highway and NRLM markets due to the high 
costs associated with segregating an additional distillate grade in the 
distribution system.\112\ These are the same areas where the majority 
of spillover occurs today. After the highway diesel program becomes 
effective in 2006, we project that only 15 ppm sulfur highway diesel 
fuel will be supplied in bulk shipments to both the highway and NRLM 
markets in most of these same areas. Although 500 ppm sulfur highway 
diesel fuel could be shipped in bulk to these areas through 2010 under 
the highway program's TCO, the potential demand for such fuel and for 
500 ppm sulfur NRLM diesel fuel would not be sufficient to justify the 
cost of segregating an additional grade of 500 ppm sulfur diesel fuel 
in these areas for a short period of time. The designate and track 
approach does not impact the costs of segregation, and therefore is not 
expected to change distribution patterns that are based on these costs.
---------------------------------------------------------------------------

    \112\ This highway diesel fuel would meet the currently-
applicable 500 ppm sulfur standard for highway diesel fuel.
---------------------------------------------------------------------------

    After 2010, when 500 ppm sulfur highway fuel no longer exists, the 
total volume of 500 ppm sulfur diesel fuel in the distribution system 
will be substantially reduced, and there will be even less incentive to 
distribute an additional grade of 500 ppm sulfur diesel fuel in bulk. 
Therefore, the only areas where substantial flexibility will exist 
under today's program to supply either highway or NRLM diesel fuel to 
the NRLM market is in areas where this flexibility exists today. 
Despite this flexibility in the current regulations, spillover 
currently still occurs. Therefore, we project that there will be little 
additional potential due to today's rule for refiners to reduce highway 
spillover into the NRLM market under a designate and track approach and 
that such spillover levels would not be significantly reduced from 
historical levels. In contrast, as discussed above, we now believe that 
the baseline approach would have resulted in a significant loss of 15 
ppm diesel production.
    Furthermore, concerns regarding a potential reduction in the 
spillover of 15 ppm sulfur highway diesel into the NRLM markets has 
been lessened by the information provided in the highway program pre-
compliance reports. These reports suggest that more than 95 percent of 
highway diesel fuel will be produced to a 15 ppm sulfur standard 
beginning in 2006. In calculating the projected benefits of the highway 
diesel program, we assumed that only 80 percent of highway diesel fuel 
would meet a 15 ppm sulfur standard. Therefore, the actual benefits of 
the highway program will be substantially greater than estimated if the 
projections in the pre-compliance reports are realized.
    Based on the above discussion, we believe that the concerns 
regarding the designate and track approach's workability, 
enforceability, and ability to preserve the benefits of the highway 
program and today's NRLM diesel fuel program have been satisfactorily 
resolved.
b. Ensuring That Heating Oil Is Not Used in NRLM Equipment From June 1, 
2007 Through June 1, 2010
i. Use of a Fuel Marker in Heating Oil
    To prevent shifting heating oil into the NRLM market, we proposed 
that a fuel marker be added to heating oil at the refinery gate. We 
proposed that the presence of the marker required in heating oil would 
be strictly prohibited in NRLM diesel fuel. As noted earlier, this 
approach is similar to red dye requirements for high sulfur diesel fuel 
that were implemented in 1993 to prevent its use as highway diesel fuel 
subject to the then applicable 500 ppm sulfur standard.
    We proposed that the marker be added at the refinery gate rather 
than at the terminal for several reasons. First, this seemed to be the 
most efficient and lowest cost option for addition of the marker given 
that the number of terminals is far greater than the number of 
refineries.\113\ Second, requiring that the marker be present in 
heating oil when it is introduced into the distribution system would 
ensure that we could differentiate high sulfur small refiner and credit 
fuel from heating oil at any point in the system. This approach would 
provide good assurance that the inability to use fuel sulfur content to 
differentiate heating oil from high sulfur NRLM diesel fuel produced 
under the small refiner and credit provisions in today's rule 
(effective until June 1, 2010) would not provide an opportunity to mask 
the potential use of heating oil in NRLM equipment. Providing such 
assurance is an essential element to enable the implementation of the 
small refiner and credit provisions in today's rule. Lastly, under the 
proposed baseline approach, there was no other way to ensure that 
heating oil was not shifted into the NRLM diesel fuel pool during 
distribution from the refinery/importer to the terminal.
---------------------------------------------------------------------------

    \113\ Additional injection equipment will be required to inject 
the heating oil marker.
---------------------------------------------------------------------------

    We received numerous comments that the upstream addition of the 
proposed marker to heating oil would raise significant concerns that 
the marker

[[Page 39063]]

might contaminate jet fuel. Commenters stated that this would represent 
a substantial safety concern unless the proposed marker was proven not 
to adversely impact the quality of jet fuel and the operation of jet 
engines.
    The designate and track approach described above for 500 ppm sulfur 
NRLM diesel fuel, however, also provides an effective means to address 
concerns about the use of the fuel marker. By extending the designate 
and track approach to high sulfur NRLM diesel fuel and heating oil, 
these otherwise identical fuel grades can be tracked down to the 
terminal, and the marker then can be added at the terminal instead of 
at the refinery gate. Going beyond the terminal with designate and 
track is not feasible give the breadth and nature of entities 
involved.\114\ As a result, the marker is still required downstream of 
the terminal. However, shifting the point of marker addition downstream 
to the terminal should eliminate any significant opportunity for jet 
fuel contamination. Subsequent comments and discussions appear to have 
confirmed this.\115\ EPA will continue to work with other federal 
agencies, including FAA and DoD, and to follow ongoing research and 
studies regarding the effect of dyes and markers on jet fuel, 
particularly potential contamination that could have an adverse impact 
on the safe operation of aircraft. We will keep abreast of the ASTM, 
CRC, FAA, IRS, and EU activities regarding the evaluation of the use of 
SY-124 and commit to a review of our use of SY-124 under today's rule 
based on these findings. If alternative markers are identified that do 
not raise concerns regarding the potential contamination of jet fuel, 
we will initiate a rulemaking to evaluate the use of one of these 
markers in place of SY-124.\116\
---------------------------------------------------------------------------

    \114\ Including every end-user of heating oil.
    \115\ Letter to Paul Machiele, EPA, from James Thomas, American 
Society for Testing and Materials (ASTM), entitled ``Withdrawal of 
ASTM Request,'' January 19, 2004. In this letter ASTM withdraws its 
request for a postponement of the finalization of the heating oil 
marker requirements in today's rule. See section V.E regarding the 
selection of the heating oil marker required in today's rule.
    \116\ See section VIII.H. of today's preamble.
---------------------------------------------------------------------------

    We also received a number of comments expressing concern over the 
inability of the proposed marker to be detected using the standard 
simple test used today to detect contamination with red dye.\117\ The 
marker finalized by today's rule does not provide visual evidence of 
its presence. However, if the marker is added at the terminal it will 
only be present in heating oil when red dye is also present. The fact 
that heating oil will be dyed red pursuant to IRS requirements before 
it leaves the terminal will enable jet fuel distributors to continue to 
use the ``white bucket test'' to detect heating oil contamination, and 
hence marker contamination of jet fuel. Today's rule also includes a 
stand-alone requirement that any fuel to which the fuel marker is added 
must also contain visible evidence of red dye.\118\
---------------------------------------------------------------------------

    \117\ To test for contamination, jet fuel marketers typically 
fill a white five gallon bucket with jet fuel. The presence of a 
pink tinge to the light straw colored jet fuel indicates that the 
fuel has been contaminated with fuel that contains red dye.
    \118\ If IRS amends its red dye requirements, EPA will also 
seriously consider amending the fuel marker and associated red dye 
requirements contained in today's rule. See section V.E. of today's 
preamble.
---------------------------------------------------------------------------

ii. Provisions To Ensure Heating Oil Is Not Used in NRLM Equipment in 
the Northeast and Mid-Atlantic
    In the Northeast, heating oil will continue to be distributed in 
significant quantities after implementation of the NRLM diesel fuel 
program. Discussions with terminal operators in the Northeast, and 
other representatives of heating oil users and distributors, revealed 
concerns that the proposed heating oil marker requirement would 
represent a substantial new burden on terminal operators and users of 
heating oil. Terminal operators stated that the cost of installing new 
injection equipment would be burdensome, and that the cost of the 
marker itself would be significant given the large volume of heating 
oil used in the Northeast. They also stated that they did not expect 
any small refiner or credit fuel to be used in the Northeast, and that 
consequently, the marker requirement was not needed in this area. They 
suggested that if we prohibited the sale of small refiner and credit 
fuel in PADD I, this area could be exempted from the heating oil marker 
requirement.
    We evaluated the viability of avoiding the heating oil marker 
requirement in portions of PADD I and instead enforcing the NRLM diesel 
fuel standards on the basis of sulfur content alone. The heating oil 
marker is needed to ensure that heating oil is not sold into the NRLM 
market as high sulfur NRLM fuel. The marker is needed only if high 
sulfur NRLM fuels will otherwise be in the market. High sulfur NRLM 
fuel can be produced under the small refiner and credit provisions, and 
through the generation of high sulfur NRLM in the distribution system 
from the downgrading of 500 ppm sulfur NRLM. In evaluating the 
feasibility of avoiding the heating oil marker, EPA therefore focused 
on determining the likely production and marketing of these high sulfur 
NRLM fuels in portions of PADD I in this time frame.
    We held in-depth discussions with organizations representing 
refiners, pipelines, and terminal operators to evaluate this issue. 
Representatives of non-small refiners including API and NPRA stated 
that being precluded from selling sulfur credit fuel in the Northeast 
and Mid-Atlantic would not significantly reduce the intended benefits 
to refiners of the credit provisions in today's rule. We also spoke 
with small refiner representatives of and the specific small refiners 
whose marketing area might include the Northeast and Mid-Atlantic and 
found that in fact, small refiners were not expected to market fuel in 
this area. Finally, we evaluated the current and likely future 
practices in the Northeast and Mid-Atlantic areas for the sale of 
downgraded fuel generated in the distribution system. We found that 
this downgraded diesel fuel could easily continue to be sold in the 
very large and ubiquitous heating oil market that is expected to 
continue to exist in this region. This avoids any need for additional 
storage or tankage for both high sulfur and low sulfur NRLM fuels, and 
fits into the pre-existing market structure for heating oil.
    Consequently, unlike the rest of the country, there was little 
expected need to maintain a high sulfur NRLM market in this part of the 
country as an outlet for small refiner, credit, or off-specification, 
downgraded diesel fuel. Based on this input, we concluded that 
codifying this expected practice and making it enforceable, i.e. not 
allowing high sulfur fuel to be marketed as NRLM in this area of the 
country, would be consistent with the current distribution practices in 
this area of the country and that the potential impact of taking such 
an approach on the flexibility offered in the program would be minimal 
or nonexistent. If we codified it we would no longer need the marker 
requirement, and the resulting benefits and cost savings to terminals 
would be substantial. The approach would also simplify and strengthen 
the enforcement of today's sulfur requirements in this area by allowing 
EPA to enforce the NRLM standards simply based on the measurement of 
the sulfur content of the fuel. There would be little expected impact 
on the environment as this is not expected to change the amount of high 
sulfur fuel produced from small refiners, credit usage, or downgrade in 
the distribution system, only the market into which it is sold.

[[Page 39064]]

    In deciding which parts of PADD I to use this enforcement 
mechanism, we attempted to minimize the number of terminals that would 
need to install new injection equipment and the amount of heating oil 
that would need to be marked, while preserving the benefits of the 
small refiner and credit fuel provisions in today's rule to the maximum 
extent possible. To assess the placement of the boundary for the 
Northeast/Mid-Atlantic area where the marker requirement was waived, we 
evaluated the magnitude of heating oil demand by state (see chapter 5 
of the RIA), solicited input from the potentially affected parties, 
evaluated the area supplied by the pipeline distribution systems that 
are expected to continue to ship heating oil after the implementation 
of today's rule, evaluated the locations of terminals that are likely 
to receive bulk shipments of heating oil, evaluated the distribution 
area of small refiner(s) for high sulfur NRLM diesel fuel, and reviewed 
heating oil use levels in areas that will have access to bulk shipments 
of heating oil. Based on our assessment we concluded that defining the 
Northeast/Mid-Atlantic area as described below would best achieve our 
goals.\119\ In most cases, whole states in PADD 1 were assigned to this 
``Northeast/Mid-Atlantic'' area. This decision was primarily based on 
the continued high level of heating oil use projected in these states 
and the lack of significant concern regarding the elimination of the 
program's flexibilities to produce high sulfur NRLM diesel fuel in 
these states. A few counties in Eastern West Virginia were also 
assigned to the Northeast/Mid-Atlantic area based on supply patterns in 
the area. On the other hand, a number of counties in Western New York 
and Pennsylvania were not assigned to the Northeast/Mid-Atlantic area 
due to the need to maintain flexibilities for refiners serving this 
area.
---------------------------------------------------------------------------

    \119\ See chapter V of the RIA for a detailed discussion of the 
analysis which supports our definition of the Northeast/Mid-Atlantic 
areas where the marker requirement is waived. See section VI of 
today's preamble and chapter VII of the RIA for a discussion of the 
costs of the heating oil marker requirements finalized by today's 
rule.
---------------------------------------------------------------------------

    In summary, the areas excluded from the marker requirement and 
where the sale of NRLM diesel fuel produced or imported under the 
credit and hardship provisions or from the downstream downgrade 
provisions of today's rule is prohibited are: North Carolina, Virginia, 
Maryland, Delaware, New Jersey, Connecticut, Rhode Island, 
Massachusetts, Vermont, New Hampshire, Maine, Washington DC, New York 
(except for the counties of Chautauqua, Cattaraugus, and Allegany), 
Pennsylvania (except for the counties of Erie, Warren, Mc Kean, Potter, 
Cameron, Elk, Jefferson, Clarion, Forest, Venango, Mercer, Crawford, 
Lawrence, Beaver, Washington, and Greene), and the eight eastern-most 
counties in West Virginia (namely: Jefferson, Berkeley, Morgan, 
Hampshire, Mineral, Hardy, Grant, and Pendleton). The Northeast/Mid-
Atlantic Area is illustrated in the following figure:
[GRAPHIC] [TIFF OMITTED] TR29JN04.003

    As discussed in section IV.D.2 below, the marker requirement for 
500 ppm sulfur LM diesel fuel that will be effective outside of this 
Northeast/Mid-Atlantic area and Alaska from June 1, 2010, through May 
31, 2012, was not a significant factor in our evaluation of how to 
define the boundary of the Northeast/Mid-Atlantic area. We expect that 
locomotive and marine diesel fuel subject to the marker requirements 
will primarily be distributed via segregated pathways from a limited 
number of refineries. Therefore, a significant number of terminals will 
not need to handle LM diesel fuel that is subject to the marker 
requirement. Thus, the potential cost of installing injection

[[Page 39065]]

equipment to add the marker to 500 ppm sulfur LM diesel fuel which is 
subject to the marker requirement will be limited to only a few 
refineries and terminals (i.e. approximately 15, see section VI.A of 
today's preamble).
    In all areas of the country other than the Northeast/Mid-Atlantic 
area shown in figure IV.D-1 (and Alaska as discussed below), heating 
oil, and high sulfur NRLM diesel fuel will be designated at the 
refinery or importer and tracked through the distribution system to the 
terminal. From June 1, 2010, through May 31, 2012, 500 ppm sulfur LM 
diesel fuel and 500 ppm nonroad diesel fuel must also be designated at 
the refinery or importer and tracked through the distribution system to 
the terminal outside of the Northeast/Mid-Atlantic area and Alaska. The 
specified fuel marker (see section V.E of this preamble) must be added 
to heating oil distributed from all terminals located outside of the 
Northeast/Mid-Atlantic area defined above and Alaska. The same fuel 
marker must also be added to 500 ppm sulfur LM diesel fuel produced at 
a refinery or imported that is distributed from terminals located 
outside of the Northeast/Mid-Atlantic area and Alaska from June 1, 
2010, through May 31, 2012. This includes all heating oil and the 
subject 500 ppm sulfur LM diesel fuel distributed from terminals 
outside of the Northeast/Mid-Atlantic area regardless of whether the 
fuel is delivered to a retailer, wholesale purchaser-consumer, or end-
user located inside or outside of the Northeast/Mid-Atlantic area.
    Terminals inside the Northeast/Mid-Atlantic area are exempted from 
the fuel marker requirements in today's rule, but only for the volume 
of heating oil and 500 ppm sulfur LM diesel fuel subject to the marker 
requirements that is used by wholesale-purchaser-consumers and end-
users that are located inside the Northeast/Mid-Atlantic area. Any 
heating oil and subject 500 ppm sulfur LM diesel fuel distributed from 
terminals inside the Northeast/Mid-Atlantic area to a retailer, 
wholesale-purchaser-consumer, or end-user that is located outside of 
the Northeast/Mid-Atlantic area must be marked.
    Terminal operators do not often distribute fuel to retailers, 
wholesale-purchaser-consumers, and end-users directly. This task is 
frequently accomplished by ``jobbers'' who pick up large tank truck 
loads of fuel from the terminal for delivery to their retailer and 
wholesale-purchaser-consumer customers, ``heating oil dealers'' who 
pick up fuel from a terminal using a smaller capacity tank truck (often 
referred to as a tank wagon) for direct delivery to heating oil users, 
and by bulk plant operators. Bulk plant operators pick up fuel from 
terminals as described above. However, since they maintain their own 
bulk fuel storage facilities, they have the choice of storing the fuel 
at their facility prior to eventual delivery to their customers. Under 
the provisions of today's rule, as long as a bulk plant only receives 
heating oil to which the marker has already been added, it does not 
have to register, keep records, or report. However, if it chooses to 
receive any unmarked heating oil, then it will be treated the same as a 
large terminal under the provisions of today's final rule. We do not 
expect that bulk plants will handle LM diesel fuel to a significant 
degree. For bulk plant operators that might handle LM diesel fuel, 
today's rule provides that as long as a bulk plant does not receive any 
500 ppm sulfur LM diesel fuel which is required to be marked under 
today's rule, but which has not yet been marked, it does not have to 
register, keep records, or report. However, if it chooses to receive 
any unmarked 500 ppm sulfur LM diesel fuel which is subject to the 
marker requirements under today's rule, then it will be treated the 
same as a large terminal under the provisions of today's final rule.
    Any party that transports bulk quantities of heating oil solely to 
the Northeast/Mid-Atlantic area or within this area is not subject to 
the designate and track requirements for heating oil described below. 
Similarly, any party that transports bulk quantities of 500 ppm sulfur 
LM diesel fuel solely to the Northeast/Mid-Atlantic area or within this 
area is not subject to the designate and track requirements for LM 
diesel fuel. However, any high sulfur fuel distributed from inside the 
Northeast/Mid-Atlantic area to outside of the Northeast/Mid-Atlantic 
area must be designated as heating oil by the party responsible for the 
transfer and must be marked. Likewise, any 500 ppm sulfur LM diesel 
fuel distributed from inside the Northeast/Mid-Atlantic area from June 
1, 2010, through May 31, 2012, must be designated as 500 ppm sulfur LM 
diesel fuel by the party responsible for the transfer and must be 
marked.
    Entities who are required to inject marker into heating oil must 
maintain records of the volume of marker used in heating oil, and the 
volume of heating oil distributed over the compliance period. Entities 
that are required to inject marker into 500 ppm sulfur LM diesel fuel 
must maintain records of the volume of marker used in 500 ppm sulfur LM 
diesel fuel, and the volume of 500 ppm sulfur LM diesel that is 
required to be marked which is distributed over the compliance period. 
These records must demonstrate that the prescribed marker concentration 
was present in the heating oil and the 500 ppm sulfur LM diesel fuel 
subject to the marker requirement that they discharged.
iii. State of Alaska
    Although the fuel marker facilitates the enforcement of the NRLM 
diesel fuel sulfur standards by distinguishing it from heating oil, as 
described above, we are not requiring use in Alaska. Unlike the 
situation in the Northeast and Mid-Atlantic area, however, we are not 
prohibiting the production of high sulfur NRLM diesel fuel after 2007, 
and 500 ppm nonroad diesel fuel from after 2010 by small refiners in 
Alaska. While such a prohibition in the Northeast/Mid-Atlantic area 
does not impact small refiners, flexibility for small refiners is 
expected to be important in Alaska. Thus, we need to preserve the 
flexibility for high sulfur NRLM diesel fuel in Alaska for small 
refiners along with eliminating the marker. The program must therefore 
provide another means of enforcing the NRLM diesel fuel sulfur 
standards without eliminating a small refiner's ability to produce and 
distribute high sulfur NRLM diesel fuel.
    Under today's program we are finalizing a provision that will allow 
flexibility for small refiners to delay compliance with the NRLM diesel 
fuel sulfur standards as discussed in section IV.B. Small refiners in 
Alaska may avail themselves of this option provided that the refiner 
first obtains approval from the administrator for a compliance plan. 
The plan must at a minimum show the following information:

    (1) How they will segregate its fuel through to end-users;
    (2) How they will segregate its fuels from other grades and 
other refiners' fuels; and
    (3) All end-users to whom the fuel is sold as well as the fuel 
volumes.

    End-users who receive the fuel must retain records of all fuel 
shipments to demonstrate that no heating oil was used in NRLM diesel 
equipment and that no 500 ppm sulfur LM diesel was used in nonroad 
equipment. In order to limit the potential sources of fuel not meeting 
the sulfur standard, constrain the number of end-users who may 
legitimately have higher sulfur fuel in their NRLM diesel equipment, 
and thus maintain the overall program's enforceability, we are not 
finalizing the other provisions that allow for higher sulfur fuel to be 
produced and/or distributed in Alaska (i.e., credit, transmix 
processor, or downstream

[[Page 39066]]

distribution system provisions). In this regard, Alaska is treated in 
the same manner as the Northeast/Mid-Atlantic area.
c. Updating the Highway Program's Anti-Downgrade Requirements
    Under the highway diesel fuel program, each entity in the 
distribution system may downgrade a maximum of 20 percent of the 15 ppm 
sulfur highway diesel fuel it receives to 500 ppm sulfur highway diesel 
fuel. However, there was no limit on the volume of 15 ppm sulfur 
highway diesel fuel that could be downgraded to NRLM diesel fuel. Prior 
to today's rule, this was appropriate because the sulfur content of 
NRLM diesel fuel was uncontrolled, and hence once 15 ppm sulfur highway 
diesel fuel was downgraded to NRLM diesel fuel such fuel could not be 
used in the 500 ppm sulfur highway diesel market. The implementation of 
today's 500 ppm sulfur standard for NRLM diesel fuel, however, means 
that 15 ppm sulfur highway fuel downgraded to 500 ppm sulfur NRLM 
diesel fuel potentially could be shifted into the highway market. This 
could undermine the benefits of the highway program for the reasons 
described previously. To prevent this situation, we proposed that the 
anti-downgrading requirements under the highway diesel program would 
also apply to the downgrading of 15 ppm sulfur highway diesel fuel to 
500 ppm sulfur NRLM diesel fuel. We received comments from refiners and 
fuel distributors that such a limitation would restrict their ability 
to supply the NRLM diesel market, particularly in areas where refiners 
plan to supply only 15 ppm sulfur diesel fuel for both the highway and 
NRLM markets.
    Putting in place the designate and track provisions allows 500 ppm 
sulfur highway and 500 ppm sulfur NRLM diesel fuel to be tracked 
separately. This enables the anti-downgrading requirements to only 
apply to the downgrading of 15 ppm sulfur highway diesel fuel to 500 
ppm sulfur highway fuel as originally required in the 2007 highway 
final rule. In the context of the designate and track requirements in 
today's rule, the highway program's anti-downgrading provisions are 
clarified as described below. Similar to the approach described above 
regarding the prevention of the use of 500 ppm sulfur NRLM diesel fuel 
in the highway market, each custodian of 15 ppm sulfur No. 2 highway 
diesel fuel must maintain records that demonstrate their compliance 
with the highway program's anti-downgrade requirements. The anti-
downgrading requirements do not apply to 15 ppm sulfur No 1, diesel 
fuel. Such fuel will be manufactured for wintertime blending to improve 
diesel cold flow properties. In a number of areas we expect that 15 ppm 
sulfur No. 1 fuel will be the only No.1 fuel available for winterizing 
highway and NRLM diesel fuel, and heating oil. Therefore, applying the 
anti-downgrading requirements to 15 ppm sulfur No. 1 fuel would be 
unnecessary to maintain the availability of 15 ppm sulfur highway 
diesel fuel, and would interfere with its intended use in the range of 
No. 2 fuels.
    From October 1, 2006, through May 31, 2010, all fuel distributors 
downstream of the refiner or import facility must satisfy one of four 
criteria as outlined in 40 CFR 80.598 of today's regulation to 
demonstrate compliance with the highway program's anti-downgrading 
requirements. These criteria are based on the designate and track 
system for different grades of fuel through the distribution system. 
The first criteria is the simplest and most straightforward, with the 
least record keeping burden. It merely tracks a facility's No. 2 15 ppm 
sulfur highway diesel volume receipts and deliveries and requires the 
deliveries to be at least 80 percent of the receipts. Since the anti-
downgrading provisions were implemented to protect against intentional 
downgrading and not to limit downgrading that would occur in the normal 
distribution of 15 ppm sulfur fuel, we anticipate that most facilities 
will be able to easily meet this simple criteria.
    The second criteria tracks a facility's receipts and distribution 
of both No. 2 15 ppm sulfur fuel and No.2 500 ppm sulfur highway diesel 
fuel, and limits deliveries of No. 2 500 ppm sulfur highway diesel fuel 
to no more than what was received plus 20 percent of the No. 2 15 ppm 
sulfur highway diesel fuel volume received. This allows more 
flexibility than the first criteria by not constraining downgrades to 
NRLM diesel fuel or heating oil, but does so by requiring tracking and 
records of volumes of No. 2 15 ppm sulfur highway diesel fuel received 
and the products to which it is downgraded.
    The third and fourth criteria provide even more flexibility, 
especially for wintertime blending of No. 1 15 ppm sulfur highway 
diesel fuel, and also for any temporary shifts that might occur between 
NRLM diesel fuel and highway diesel fuel markets from 2007-2010. 
However, a facility will have to meet more extensive criteria to 
demonstrate compliance.
    Today's final rule does not change any other aspects of the anti-
downgrading provisions finalized in the 2007 highway diesel final rule, 
such as the provisions unique to fuel retailers.
2. Requirements During the Second Step of Today's Sulfur Control 
Program
    Beginning June 1, 2010, all NR diesel fuel and beginning June 1, 
2012 all LM diesel fuel produced or imported must meet a 15 ppm sulfur 
standard except for fuel manufactured under the credit and small 
refiner provisions in today's rule. This credit and small refiner 
diesel fuel must meet a 500 ppm sulfur level. From June 1, 2010 to June 
1, 2012, all LM diesel fuel must meet a 500 ppm sulfur standard. 
Today's rule also allows 500 ppm sulfur diesel fuel generated in the 
pipeline distribution system to be used in NRLM equipment through May 
31, 2014 \120\ and in locomotive and marine equipment thereafter. After 
May 31, 2014, the credit and small refiner provisions expire.
---------------------------------------------------------------------------

    \120\ The use of 500 ppm fuel in nonroad equipment is restricted 
to 2011 model year and earlier equipment.
---------------------------------------------------------------------------

    We proposed that once refiners were no longer able to produce 500 
ppm sulfur diesel fuel for use in nonroad engines and such fuel had a 
few months to work its way through the distribution system, that 500 
ppm sulfur diesel fuel could no longer be used in nonroad equipment. 
Today's rule adopts this proposed prohibition. Although today's rule 
extends the 15 ppm sulfur nonroad diesel standard to locomotive and 
marine diesel fuel, we have elected not to extend the prohibition 
against the use of 500 ppm sulfur diesel fuel in locomotive and marine 
equipment after refiners and importers are no longer allowed to 
produce/import such fuel. Diesel fuel with a maximum sulfur 
concentration of 500 ppm that is generated in the pipeline distribution 
system can continue to be used in locomotive and marine equipment after 
June 1, 2014, as discussed in section IV.A above.
    Providing for the continued use of 500 ppm sulfur diesel fuel in 
NRLM equipment through May 31, 2014, means that without adequate 
controls similar to those under the first step of today's program, a 
refiner could manufacture 500 ppm sulfur diesel fuel ostensibly for use 
as heating oil which could actually be sold downstream into the NRLM 
market through May 31, 2014. Similarly, the continued use of 500 ppm 
fuel in locomotive and marine engines after May 31, 2014, means that 
without adequate controls, a refiner could continue to manufacture 500 
ppm sulfur diesel fuel ostensibly for use as heating oil which could 
actually be sold

[[Page 39067]]

downstream into the locomotive and marine market indefinitely. To 
prevent this possibility, we have elected to continue the designate and 
track and marker requirements for heating oil applicable under the 
first step of today's program indefinitely with some simplifications. 
It is a significantly smaller program during the second step, since 
only heating oil needs to be tracked, and we expect that by then very 
little heating oil will be produced for sale outside of the Northeast/
Mid-Atlantic area. Consistent with the approach taken during the first 
step of today's program, these designate and track provisions would not 
be applicable in the Northeast/Mid-Atlantic area or Alaska, since the 
flexibility to sell greater than 15 ppm sulfur diesel fuel into the 
NRLM market there does not exist under this final rule.\121\ Any diesel 
fuel with a sulfur content greater than 500 ppm beginning June 1, 2007, 
any NR diesel fuel with greater than 15 ppm sulfur beginning June 1, 
2010, and any LM diesel fuel with greater than 15 ppm sulfur beginning 
June 1, 2012 in the Northeast/Mid-Atlantic area can only be sold as 
heating oil, and if shipped outside of the Northeast/Mid-Atlantic area 
must be marked as heating oil.
---------------------------------------------------------------------------

    \121\ Unless, in the case of Alaska, the refiner segregates its 
fuel through to the end user as discussed in section IV.D.1.b.ii.
---------------------------------------------------------------------------

    While today's rule does not contain an end date for the downstream 
distribution of 500 ppm sulfur locomotive and marine fuel, we will 
review the appropriateness of allowing this flexibility based on 
experience gained from implementation of the 15 ppm sulfur NRLM diesel 
fuel standard. We expect to conduct such an evaluation in 2011. Were we 
to discontinue the downstream provision for downgraded fuel, we would 
also evaluate discontinuing the designate and track and marker 
requirements for heating oil, as is the case now for the Northeast/Mid-
Atlantic area.
    Providing for the continued production and import of 500 ppm sulfur 
LM diesel fuel from June 1, 2010 to June 1, 2012 means that without 
adequate controls similar to those under the first step of today's 
program, a refiner could manufacture 500 ppm sulfur diesel fuel 
ostensibly for use as LM diesel fuel which could actually be sold 
downstream into the NR market. To prevent this possibility, we have 
adopted designate and track and marker requirements similar to those 
applicable to heating oil under the first step of today's program. For 
these two years, 500 ppm sulfur NR and LM diesel fuel would be tracked, 
and the 500 ppm sulfur LM fuel would be marked in the same manner as 
heating oil. The same provisions that apply to marking of heating oil, 
such as the Northeast/Mid-Atlantic area, would also apply to the 
marking of 500 ppm sulfur LM fuel. The tracking and marking provisions 
would not apply to any 15 ppm sulfur LM diesel fuel.
3. Summary of the Designate and Track Requirements
    The designate and track program requires refiners and importers to 
designate the volumes of diesel fuel they produce and/or import. 
Refiners/importers will identify whether their diesel fuel is highway 
or NRLM and the applicable sulfur level. They may then mix and fungibly 
ship highway and NRLM diesel fuels that meet the same sulfur 
specification without dyeing their NRLM diesel fuel at the refinery 
gate. The volume designations will follow the fuel through the 
distribution system with limits placed on the ability of downstream 
parties to change the designation. These limits are designed to 
restrict the inappropriate sale of 500 ppm sulfur NRLM diesel fuel into 
the highway market; from 2007 to 2010, the inappropriate sale of 500 
ppm sulfur LM diesel fuel into the 500 ppm sulfur NR market from 2010 
to 2012; and the inappropriate sale of heating oil into the NRLM 
market. The designate and track approach includes record keeping and 
reporting requirements for all parties in the fuel distribution system, 
associated with tracking designated fuel volumes through each custodian 
in the distribution chain until the fuel exits the terminal. The 
program also includes enforcement and compliance assurance provisions 
to enable the Agency to rapidly and accurately review for discrepancies 
the large volume of data collected on fuel volume hand-offs.
a. Registration
    Each entity in the fuel distribution system, up through and 
including the point where fuel is loaded onto trucks for distribution 
to retailers or wholesale purchaser-consumers, must register each of 
its facilities with EPA no later than December 31, 2005, or six months 
prior to commencement of producing, importing, generating, or 
distributing any designated diesel fuel.\122\ A facility is defined as 
the physical location(s) where a party has custody of designated fuel, 
from when it was produced, imported, or received from one party to when 
it is delivered to another party. The definition also include mobile 
components, such as the vessels in a barge facility. Examples of 
facilities include refineries, import terminals, pipelines, terminals, 
bulk plants, and barge systems. Where the same entity owns and operates 
a series of locations in the distribution system (e.g., refiner to 
pipeline to terminal), it may choose to register them as a single 
aggregated facility, provided the entity maintains custody of the fuel 
throughout the facility. However, if the aggregated facility includes a 
refinery, then it may not receive any diesel fuel from another entity 
at any place within the aggregated facility. Under this approach, a 
pipeline could be treated as one facility from the point where it 
receives fuel to the point where it either delivers it to a terminal, 
or into a tank truck after passing through their terminal. The choice 
made by the entity to treat these places as a single facility or 
separate facilities may not change during any applicable compliance 
period. These same definitions for facility will apply for both the 
designate and track provisions, as well as the anti-downgrading 
provisions of the highway rule. Therefore, if a proprietary system 
chooses to aggregate into one facility for purposes of the designate 
and track provisions, it will also be treated as one facility for 
determining compliance with the 20 percent anti-downgrading limit of 
the highway rule. EPA will provide a unique registration number to each 
custodial facility of designated fuels. In addition, EPA intends to 
work with industry subsequent to this final rule to provide guidance 
regarding facility boundary and aggregation decisions that will address 
the many unique situations.
---------------------------------------------------------------------------

    \122\ This requirement also applies to parties inside of the 
Northeast/Mid-Atlantic area who handle heating oil.
---------------------------------------------------------------------------

    The designation provisions described below require refiners and 
importers to designate all distillates they produce or import 
consistent with the production and end-use requirements in today's 
rule. These designations serve as the foundation upon which the fuel 
distributors are able to properly track, designate, redesignate, and 
label the fuel they receive.
b. Designation by Refiners and Importers
i. Designation of 500 ppm and 15 ppm Sulfur Diesel Fuel
    From June 1, 2006, through May 31, 2010, any refiner \123\ or 
importer that

[[Page 39068]]

produces or imports 15 ppm sulfur diesel fuel, and/or 500 ppm sulfur 
diesel fuel must designate all batches of such fuel as one of the 
following. The purpose of this designation requirement is to ensure 
that 500 ppm sulfur NRLM diesel fuel is not shifted into the highway 
market, and to evaluate compliance with the highway program's anti-
downgrade requirements.
---------------------------------------------------------------------------

    \123\ Transmix operators that produce diesel fuel from transmix 
and terminal operators that produce from segregated interface will 
be treated as a refiner for the purposes of compliance with these 
requirements.
---------------------------------------------------------------------------

     15 ppm sulfur No. 2 highway diesel fuel;
     15 ppm sulfur No. 1 highway diesel fuel;
     500 ppm sulfur No. 2 highway diesel fuel;
     500 ppm sulfur No. 1 highway diesel fuel;
     500 ppm sulfur No. 2 NRLM diesel fuel;
     500 ppm sulfur No. 1 NRLM diesel fuel;
     500 ppm sulfur jet fuel; or
     500 ppm sulfur kerosene.
    The start date for these requirements coincides with the start date 
for the early credit program under today's final rule, and the start 
date for the highway diesel program for the purposes of anti-
downgrading. The end date for these requirements coincides with the end 
date for the highway program's Temporary Compliance Option and today's 
NRLM diesel fuel early credit program.
    Any batch of 15 ppm or 500 ppm No. 1 diesel fuel which is also 
suitable for use as kerosene or jet fuel (referred to as dual-purpose 
kerosene) may be considered kerosene or jet fuel and need not be 
designated as highway or NRLM diesel fuel, even if it may later be 
blended into highway or NRLM diesel fuel downstream of the refinery to 
improve the cold-flow properties of the fuel. Upon such blending, the 
kerosene or jet fuel takes on the designation of the diesel fuel into 
which it was blended. We expect refiners and importers will elect to 
designate all of their 15 ppm sulfur No. 1 diesel fuel as highway fuel, 
since this will aid in their compliance with the highway program's 80/
20 highway fuel production requirement. Designation as highway diesel 
fuel by the refiner will also help avoid downstream blending from 
causing a violation by the downstream party under the tracking and 
compliance calculations finalized today. We also expect that refiners 
and importers will elect to designate their 500 ppm sulfur No. 1 fuel 
as kerosene or jet fuel since this will be the predominant use for such 
fuel, and designating it as highway would hinder their compliance with 
the 80/20 highway requirements. As with 15 ppm sulfur kerosene or jet 
fuel, downstream parties would later redesignate it as highway or NRLM 
diesel fuel if blended in or used for these purposes. Any 500 ppm 
sulfur diesel fuel containing visible evidence of red dye must be 
designated as NRLM diesel fuel or heating oil unless it is tax exempt 
highway diesel fuel (e.g., fuel for use in school buses or certain 
municipal fleets).
    The reported volumes of designated fuels must be the volumes 
delivered to the first downstream party. This is typically a pipeline 
facility, a marine barge/tanker loading dock that accepts product from 
a refiner/importer, or the refiner's/importer's truck loading rack. 
This is consistent with normal business practices. Refiners, importers, 
and transmix processors are not required to add red dye to NRLM diesel 
fuel unless the fuel is distributed over their truck loading rack such 
that the IRS requires the addition of red dye for the assessment of 
taxes.
    Fuel designated by a refiner or importer as highway diesel fuel 
must comply with the highway program's 80/20 requirement for 15 ppm/500 
ppm sulfur highway diesel fuel. The volume of fuel designated as NRLM 
early credit fuel must be consistent with the credit provisions in 
today's rule. Since highway diesel fuel volumes are determined at the 
point of delivery from the refiner/importer to another party, the anti-
downgrade requirements do not apply to refiners and importers. Under 
the highway diesel fuel program, refiners that are required to produce 
100 percent of their highway diesel fuel to a 15 ppm sulfur standard 
are provided with an allowance to deliver a small percentage of 500 ppm 
sulfur diesel fuel to the pipeline (e.g., small refiners and GPA 
refiners who exercise an option under the 2007 highway rule to delay 
compliance with gasoline sulfur standards). This allowance is provided 
because a small volume of ``line-wash'' is typically generated in the 
feed line from the refiner's facility to the pipeline. This line-wash 
will often be suitable for use as 500 ppm sulfur highway diesel fuel. 
Under the provisions of the highway rule this line-wash could have been 
excluded from compliance with the 15 ppm standard if the refiner 
accounted for their production volume prior to shipment. However, in 
this rule, all volume-related requirements are keyed to the volume 
actually delivered. As a result of this change in the point of fuel 
volume measurement (delivered versus produced), we are amending the 
highway diesel fuel program requirements such that refiner who was 
previously required to produce 100 percent of its highway diesel fuel 
to the 15 ppm sulfur standard may now produce 95 percent to the 15 ppm 
sulfur standard (in order to avail itself of the extended gasoline 
sulfur interim standards).
ii. Designation of High Sulfur NRLM Diesel Fuel, Heating Oil, and Jet 
Fuel/Kerosene
    From June 1, 2007 through May 31, 2010, any refiner, or importer 
not located in the Northeast/Mid-Atlantic area or Alaska, that produces 
or imports unmarked high sulfur distillate fuel must designate all 
batches of such fuel as one of the following: heating oil, high sulfur 
NRLM diesel fuel, or jet fuel/kerosene. Any heating oil distributed 
from a refiner's or importer's rack not located in the Northeast/Mid-
Atlantic area or Alaska must contain the designated marker and red dye. 
Any heating oil distributed from a refiner/importer rack inside of the 
Northeast/Mid-Atlantic area or Alaska is exempted from the marker 
requirement except any heating oil that is delivered outside the 
Northeast/Mid-Atlantic area must be marked.
    As discussed previously, 500 ppm sulfur diesel fuel may be used in 
NRLM equipment through May 31, 2014 and in locomotive and marine 
equipment thereafter. Therefore, designate and track provisions for 
heating oil will be needed to ensure that heating oil is not shifted 
into the NRLM market from June 1, 2007 through May 31, 2014, and to the 
locomotive and marine market thereafter. Consequently, from June 1, 
2010 through May 31, 2014, refiners and importers must continue to 
designate any heating oil they produce as such as well as any 500 ppm 
sulfur NRLM diesel fuel produced under the small refiner, transmix/
segregated interface, and credit provisions.
    Beginning June 1, 2014, refiners and importers may no longer 
produce or import 500 ppm sulfur diesel fuel for use in NRLM equipment. 
Therefore, beginning June 1, 2014, all diesel fuel with a sulfur level 
greater than 15 ppm must be designated as heating oil, jet fuel, or 
kerosene. The one exception to this is transmix processors and 
terminals acting as refiners which will be permitted to produce 500 ppm 
sulfur diesel fuel for use in locomotive and marine equipment from 
transmix and segregated interface.
iii. Designation of 500 ppm NR and 500 ppm LM Sulfur Diesel Fuel
    From June 1, 2010, through May 31, 2012, any refiner or importer 
that

[[Page 39069]]

produces or imports 500 ppm sulfur NR diesel fuel (small refiner and 
credit) and/or 500 ppm sulfur LM diesel fuel must designate all batches 
of such fuel. The purpose of this designation requirement is to ensure 
that 500 ppm sulfur LM diesel fuel is not shifted into the NR market. 
Any 500 ppm sulfur LM diesel fuel distributed from a refiner's or 
importer's rack not located in the Northeast/Mid-Atlantic area or 
Alaska must contain the designated marker and red dye, along with 
heating oil. Any 500 ppm sulfur LM diesel fuel distributed from a 
refiner/importer rack inside of the Northeast/Mid-Atlantic area or 
Alaska is exempted from the marker requirement except any 500 ppm 
sulfur LM fuel that is delivered outside the Northeast/Mid-Atlantic 
area must be marked.
c. Designation and Tracking Requirements Downstream of the Refinery or 
Importer
    The result of the refiner/importer designation provisions is that 
all of the diesel fuel received by distributors will be clearly and 
accurately designated. The distributors are then subject to their own 
designation and tracking requirements. The downstream provisions are 
designed to ensure that certain fuel shifts do not occur, such as the 
inappropriate shifting of 500 ppm sulfur NRLM diesel fuel to the 
highway market, the inappropriate shifting of 500 ppm sulfur LM diesel 
fuel into the nonroad market, the inappropriate downgrading of 15 ppm 
sulfur to 500 ppm sulfur highway diesel fuel, and the inappropriate 
shifting of heating oil to the NRLM market. The downstream provisions 
are designed to ensure these results in a readily enforceable manner 
while maximizing downstream flexibility to address changing market 
conditions.
    In general, each time custody of designated fuel is transferred 
from one facility to another facility, the transferor must designate 
the fuel and record it's volume. The party who receives custody must 
record the same information, to ensure that each party relies on the 
same designation and volume for its own compliance purposes. This 
process occurs each time custody of diesel fuel is transferred. Each 
distributor may redesignate fuel while in its custody or when it is 
delivered, subject to certain basic requirements. First, any re-
designation must be accurate. For example, 500 ppm sulfur NRLM diesel 
fuel can not be redesignated as 15 ppm unless it in fact meets the 15 
ppm standard. The sulfur standard applicable to downstream fuel is 
based on the fuel's designation. Second, there are limits on the fuel 
volumes that can be redesignated, calculated as a volume balance over a 
specified compliance period. Specifically, the volumes of 15 ppm and 
500 ppm sulfur highway received must be compared to the volumes of 
these fuels delivered, to ensure that the amount of 15 ppm sulfur 
highway diesel fuel that is downgraded to 500 ppm sulfur highway diesel 
fuel complies with the highway program's anti-downgrading requirements. 
The volumes of 500 ppm sulfur highway and NRLM diesel fuel that a 
distributor receives must also be compared to the volumes of 500 ppm 
sulfur highway and NRLM diesel fuel delivered, to ensure that NRLM 
diesel fuel was not inappropriately transferred to the highway market. 
The volumes of 500 ppm sulfur NR and LM diesel fuel received must be 
compared to the volumes of 500 ppm sulfur NR and LM diesel fuel 
delivered, to ensure that the 500 ppm sulfur LM fuel was not 
inappropriately transferred to the NR market. In addition, the volumes 
of heating oil received must be compared to the volumes distributed to 
ensure it was not inappropriately transferred to the NRLM market. These 
volume balances are calculated over a compliance period, providing 
distributor's the day to day flexibility to redesignate fuel based on 
market conditions, as long as the required volume balance is achieved 
over the compliance period. Finally, once NRLM diesel fuel is dyed, 500 
ppm sulfur LM diesel fuel is marked (2010-2012), or heating oil is 
marked, the dye and marker may be used to ensure the fuels are not 
inappropriately shifted to other markets, and the designation, tracking 
and volume balance requirements are no longer needed; just the PTD, 
labeling, and record keeping provisions typical of our other fuel 
regulations (e.g., highway diesel) apply.
    In large part, the designate and track provisions are structured to 
be compatible with the normal business practices currently used by the 
industry to record and reconcile volume transactions between parties. 
As such, EPA expects that these downstream provisions can be 
implemented in a fairly straightforward manner.
i. Designation and Tracking of 500 ppm and 15 ppm Sulfur Diesel Fuel
    From June 1, 2006 through May 31, 2010, facilities downstream of 
the refiner or importer must designate and maintain records of all 
volumes of fuel designated as 15 ppm sulfur highway diesel fuel, 500 
ppm sulfur highway diesel fuel, or 500 ppm sulfur NRLM diesel fuel that 
they receive and deliver. In many cases, we expect that downstream 
facilities will not change the designation of 500 ppm sulfur diesel 
fuel from NRLM diesel fuel to highway while the fuel is in their 
custody. However, to accommodate fluctuations in the demand for 
highway-designated versus NRLM-designated 500 ppm sulfur fuel, today's 
rule allows terminals and other distributors to change the designation 
of 500 ppm sulfur fuel from NRLM diesel fuel to highway diesel fuel on 
a daily basis, as long as the required volume balance is achieved over 
the compliance period.\124\ Terminal operators must ensure that the 
running balance of total highway-designated fuel that they discharged 
from the beginning of today's program does not exceed the volume of 
highway fuel that they received since, and had in their possession at 
the beginning of today's program (adjusted for changes in inventory). 
This simple one-sided test allows 15 ppm sulfur highway diesel fuel to 
flow to 500 ppm sulfur highway diesel fuel (subject to anti-downgrading 
limits), 500 ppm sulfur NRLM diesel fuel, or heating oil. It also 
allows 500 ppm sulfur highway diesel fuel to flow to NRLM diesel fuel 
or heating oil. However, the flow of NRLM diesel fuel to highway diesel 
fuel must first have been offset by shifts from highway to NRLM diesel 
fuel. In this way we can have assurance that the 500 ppm sulfur fuel 
sold for highway purposes was in fact produced pursuant to the 80/20 
requirements of the highway rule. Since any 500 ppm sulfur diesel fuel 
in the possession of parties downstream of the refiner at the beginning 
of today's program will be considered as highway diesel fuel, each 
custodian will begin today's program with a positive volumetric account 
balance regarding their input/output of highway-designated 500 ppm 
sulfur. Conformity with this requirement will be evaluated by EPA at 
the end of each quarterly compliance period.
---------------------------------------------------------------------------

    \124\ Any party is free to redesignate highway diesel fuel to 
NRLM diesel fuel or heating oil at any time. The required volume 
balance does not limit such designations.
---------------------------------------------------------------------------

    In order to accommodate volumetric fluctuations due to such factors 
as thermal expansion of the fuel, facilities such as pipelines upstream 
of the terminal can use the same volumetric balance. However, since 
these facilities typically do not, and should not change designations, 
the compliance periods can be annual. In addition, to ensure that there 
are no significant redesignations, we are also requiring that the 
volume of highway-designated 500 ppm sulfur diesel fuel that a facility

[[Page 39070]]

discharges from its custody must be no greater than 102 percent of the 
volume of such fuel that it received during each annual compliance 
period. All parties downstream of the refiner, importer, or transmix 
processor also must demonstrate that over any given compliance period, 
they did not downgrade more than 20 percent of the 15 ppm highway 
diesel fuel that they received to 500 ppm sulfur highway diesel fuel.
    From June 1, 2006 through May 31, 2010, distributors must maintain 
records regarding each transfer of a designated fuel into and out of 
their facility on a batch-by-batch basis. These records must include 
the EPA registration number of the source or recipient facility, and 
the volume of each designated fuel transfer. However, for transfers of 
dyed NRLM and highway diesel fuel on which taxes have been assessed, 
the recipient or source facility need not be specifically identified. 
In such cases, records must be kept regarding the total volume of dyed 
and tax assessed fuel that is received, discharged, and in inventory 
during each compliance period. After May 31, 2010, unique records for 
these designate and track provisions are no longer required, but the 
normal records and PTDs must still be kept regarding compliance with 
the fuel standards.
ii. Designation and Tracking of High Sulfur NRLM Diesel Fuel and 
Heating Oil
    The requirements regarding the designation and tracking of heating 
oil and high sulfur or 500 ppm sulfur NRLM diesel fuel parallel those 
regarding the designation and tracking of 500 ppm sulfur highway and 
NRLM diesel fuel discussed above. However, the requirements described 
below pertain only to facilities not in the Northeast/Mid-Atlantic area 
or Alaska, and to facilities inside of the Northeast/Mid-Atlantic area 
that transport heating oil outside of the Northeast/Mid-Atlantic area.
    From June 1, 2007 through May 31, 2010, facilities downstream of 
the refiner or importer must designate all high sulfur diesel fuel they 
distribute as NRLM diesel fuel and all heating oil they distribute as 
heating oil, and must keep records of all volumes of fuel designated as 
high sulfur NRLM diesel fuel or heating oil. In many cases, we expect 
that downstream facilities will not change the designation of diesel 
fuel from heating oil to high sulfur NRLM diesel fuel while the fuel is 
in their custody. However, today's final rule provides the flexibility 
to make this change in designation provided that volume balance 
requirements for high sulfur NRLM diesel fuel are met.
    The volume balance for heating oil requires that the volumes of 
high sulfur NRLM diesel fuel and heating oil received must be compared 
to the volumes of high sulfur NRLM diesel fuel and heating oil 
delivered over a compliance period. The volume of high sulfur NRLM 
diesel fuel may not increase by a greater proportion than the volume of 
heating oil over a compliance period. There are many reasons why the 
combined pool of high sulfur fuel will increase in volume such as the 
inevitable downgrades from 15 ppm and 500 ppm when these fuels are 
shipped by pipeline. The volume balance allows for this to occur while 
keeping fuel produced as heating oil from being shifted to NRLM diesel 
fuel. The volume balance calculation allows high sulfur NRLM diesel 
fuel and heating oil to increase proportionately, satisfying both 
needs. As discussed previously, high sulfur NRLM diesel fuel and 
heating oil compliance will be required on a quarterly basis for 
terminal facilities that add marker/dye (and are more likely to change 
designations on a day to day basis), while compliance for other 
entities (e.g., pipelines) will be on an annual basis. Compliance with 
the volume balance requirement is determined by comparing volumes 
received and delivered during that compliance period. There is no need 
to have a running total volume of high sulfur NRLM diesel fuel 
delivered from the beginning of the program since we do not expect any 
party will need to redesignate heating oil to high sulfur NRLM diesel 
fuel, even on a day-to-day basis. Further, we are not providing any 
tolerance since sufficient flexibility already exists due to the many 
sources of downgrade to heating oil.
    Facilities must maintain records regarding each transfer of heating 
oil and high sulfur NRLM diesel fuel that they receive and discharge 
from June 1, 2007 through May 31, 2010 on a batch-by-batch basis.\125\ 
These records must include the EPA registration number of the source or 
recipient facility, and the volume of each fuel transfer. However, for 
transfers of marked heating oil, the recipient or source facility need 
not be specifically identified. In such cases, records must be kept 
regarding the total volume of marked heating oil that is received, 
discharged, and in inventory during each compliance period. For 
transfers of dyed high sulfur NRLM diesel fuel from a truck loading 
rack, the specific recipients also do not need to be identified. In 
such cases, records must be kept regarding the total volume of high 
sulfur NRLM diesel fuel that is received, discharged, and in inventory 
during each compliance period.
---------------------------------------------------------------------------

    \125\ As discussed in section V, these records must be kept for 
five years.
---------------------------------------------------------------------------

    From June 1, 2010 through May 31, 2014, facilities downstream of 
the refiner or importer must continue to designate heating oil and any 
500 ppm sulfur NRLM diesel fuel that they distribute. Beyond June 1 
2014, they must designate 500 ppm sulfur LM diesel fuel in addition to 
heating oil. Designations for heating oil are subject to the volume 
balance requirements and records must be kept on the designations.
    Beginning June 1, 2010, the volume balance requirement for heating 
oil is simply that the volume of heating oil may not decrease. As 
discussed previously, there are many reasons why the volume could 
increase. Consequently, if the volume decreases it would mean that 
heating oil is being shifted to NRLM or locomotive and marine uses, 
thereby allowing refiners to circumvent the NRLM diesel fuel sulfur 
standards. Given the likely increase in heating oil volume for other 
reasons, there should be ample flexibility provided with this one-sided 
test to account for minor variations due to volume swell/shrinkage 
related to temperature, meter differences, or other causes, so no 
additional tolerance or flexibility is necessary.
iii. Designation and Tracking of 500 ppm Sulfur NR and LM Diesel Fuel
    The requirements regarding the designation and tracking of 500 ppm 
sulfur NR and LM diesel fuel parallel those regarding the designation 
and tracking of 500 ppm sulfur highway and NRLM diesel fuel discussed 
above. However, the requirements described below pertain only to 
facilities not in the Northeast/Mid-Atlantic area or Alaska, and to 
facilities inside of the Northeast/Mid-Atlantic area that transport 500 
ppm sulfur NR and LM diesel fuel outside of the Northeast/Mid-Atlantic 
area.
    From June 1, 2010 through May 31, 2012, facilities downstream of 
the refiner or importer must continue to designate 500 ppm sulfur NR 
and LM diesel fuel that they distribute, and must keep records of all 
volumes of fuel designated as these fuels. In many cases, we expect 
that downstream facilities will not change the designation of diesel 
fuel from 500 ppm sulfur LM to 500 ppm sulfur NR diesel fuel while the 
fuel is in their custody. However, today's final rule provides the 
flexibility to make this change in designation provided that volume 
balance

[[Page 39071]]

requirements for 500 ppm sulfur NR diesel fuel are met.
    The volume balance for 500 ppm sulfur NR and LM diesel fuel 
requires that the volumes of 500 ppm sulfur NR and LM diesel fuel 
received must be compared to the volumes of 500 ppm sulfur NR and LM 
diesel fuel delivered over a compliance period. The volume of 500 ppm 
sulfur NR diesel fuel may not increase by a greater proportion than the 
volume of 500 ppm sulfur LM diesel fuel over a compliance period. The 
combined pool of 500 ppm sulfur diesel fuel may increase in volume such 
as the inevitable downgrades from 15 ppm and 500 ppm sulfur diesel fuel 
when these fuels are shipped by pipeline. The volume balance allows for 
this to occur while keeping fuel produced as 500 ppm sulfur LM diesel 
fuel from being shifted to NR fuel. The volume balance calculation 
allows 500 ppm sulfur NR and LM diesel fuel to increase 
proportionately, satisfying both needs. 500 ppm sulfur NR and LM diesel 
fuel compliance will be required on an annual basis, for terminal 
facilities as well as other entities. Compliance with the volume 
balance requirement is determined by comparing volumes received and 
delivered during that compliance period.
    Facilities must maintain records regarding each transfer of 500 ppm 
sulfur NR and LM diesel fuel that they receive and discharge from June 
1, 2010 through May 31, 2012 on a batch-by-batch basis. These records 
must include the EPA registration number of the source or recipient 
facility, and the volume of each fuel transfer. However, for transfers 
of marked 500 ppm sulfur LM diesel fuel, the recipient or source 
facility need not be specifically identified. In such cases, records 
must be kept regarding the total volume of marked 500 ppm sulfur LM 
diesel fuel that is received, discharged, and in inventory during each 
compliance period. For transfers of dyed 500 ppm sulfur NR diesel fuel 
from a truck loading rack, the specific recipients also do not need to 
be identified. In such cases, records must be kept regarding the total 
volume of 500 ppm sulfur NR diesel fuel that is received, discharged, 
and in inventory during each compliance period.
    EPA plans to work closely with members of the diesel fuel refining 
and distribution industry, to provide clear and comprehensive guidance 
on what is expected of the various parties under the designate and 
track and volume balance provisions adopted in this rule. EPA invites 
suggestions from these parties on the most useful ways to provide such 
guidance.
d. Reporting Requirements
i. Compliance and Reporting Periods
    We believe that any regulatory program should promote compliance 
and deter non-compliance. Today's program includes compliance and 
reporting provisions to deter noncompliance and to detect and correct 
instances of noncompliance in a timely fashion. Under today's program 
entities must submit to the Agency compliance reports containing 
information on the diesel fuel volumes they handle, separately by fuel 
designation category. Compliance with these volume designation and 
tracking requirements will be determined on an annual basis for 
refiners and pipelines and a quarterly basis for terminals during the 
first step of today's program. Compliance will be determined on an 
annual basis for everyone after 2010. To demonstrate compliance, 
refiners, pipelines, and terminals will be required to submit reports 
on a quarterly basis during the first step of today's program and then 
on an annual basis every year thereafter.
    We are requiring the submission of volume reports on a quarterly 
basis during the first step of today's program for several reasons. 
First, and most importantly, today's program allows entities to change 
the designations of 500 ppm sulfur diesel fuel from NRLM diesel fuel to 
highway diesel fuel and heating oil to NRLM diesel fuel on a daily 
basis (provided that they later redesignate the same volume of 500 ppm 
diesel fuel from highway diesel fuel to NRLM diesel fuel and the same 
volume of NRLM diesel fuel to heating oil). Second, quarterly reporting 
coupled with quarterly compliance by terminals will constrain the 
magnitude of any noncompliance. Finally, during the start up of the 
designate and track system, there may also be a greater potential for 
errors in the transmission of records between custodians of designated 
fuels, in the calculations related to compliance with the volume 
account balance requirements, and in the materials provided in reports.
    Today's program establishes quarterly compliance periods which are 
based on standard industry practices. Specifically, the quarterly 
compliance periods finalized in today's rule are as follows:
     1st quarter: July 1-September 30;
     2nd quarter: October 1-December 31;
     3rd quarter: January 1-March 31;
     4th quarter: April 1-June 30.
    Where the start and end dates of the program do not line up with 
these dates, the quarters are lengthened or shortened accordingly 
(e.g., June 1, 2007-September 30, 2007, and April 1, 2010-May 31, 
2010). Quarterly reports are due two months following the end of the 
quarterly compliance period (i.e., December 1, March 1, June 1, and 
September 1). Annual compliance periods begin on July 1 and end June 30 
of the following year. Again, certain annual compliance periods were 
lengthened or shortened to match the significant dates of the program 
(e.g., June 1, 2007-June 30, 2008). Annual reports are due by August 31 
following the annual compliance period. For the sake of simplifying 
compliance and record keeping, the compliance periods for the highway 
final rule have been adjusted to match these.
    Reports must be submitted electronically, or in a form which 
facilitates direct entry into an electronic database. Without reliance 
on an electronic database and reporting system to cross check and 
verify reported information, the designate and track provisions would 
become so cumbersome as to be virtually unenforceable by EPA staff 
given projected resource availability.
ii. Reporting Requirements During the First Step of Today's Program
    During the first step of today's program, from June 1, 2007 through 
May 31, 2010, entities must report to EPA for each of their facilities 
regarding the total volume of each of the designated fuels that they 
receive from, or discharge to, another entity's facility in the fuel 
distribution system. If a facility is a refiner as well as a 
distributor (e.g., a blender of biodiesel or blendstocks from 
unfinished diesel fuel or heating oil or otherwise both accepts 
previously designated fuel and also produces fuel), it must also report 
both volumes produced and released to other entities in its capacity as 
refiner and also report the volumes received and released for each 
designation like any other terminal or pipeline.
    For example, an entity that operates a pipeline may have multiple 
points where it discharges fuel, and at each of these points it may 
supply multiple terminals. The pipeline operator must report on the 
receipt of designated fuel from each party that transfers fuel to it, 
and on the designated fuel transferred by the pipeline at each 
discharge point which specifies the fuel transferred, separately for 
each of its terminal customers. Entities must report for each of their 
facilities the total volumes of the designated fuels that were either 
dyed red, marked, or on which taxes were assessed tax while in their 
custody. Reports regarding these volumes do not

[[Page 39072]]

need to include details on the recipients of the fuel (but product 
transfer documents must be kept to facilitate EPA's ability to compare 
the outgoing transfers and to fuel received).
    Entities that handle only dyed NRLM diesel fuel, dyed and marked 
500 ppm sulfur LM diesel fuel (2010-2012) and heating oil, or highway 
diesel fuel on which taxes have been assessed do not need to report to 
EPA. Information from such entities is not needed for compliance 
purposes, because there is no chance of violating the prohibitions 
against the shifting of fuel from one pool to another contained in 
today's rule without also violating either the requirement that highway 
diesel fuel contain no red dye, or the requirement that NRLM diesel 
fuel contain no heating oil marker. Furthermore, consistent with the 
highway rule, there are no periodic reporting requirements regarding 
the demonstration of compliance with the highway program's anti-
downgrading requirements in today's rule. Maintenance of records should 
be sufficient for EPA to adequately monitor compliance with these 
requirements, as insufficient 15 ppm sulfur diesel fuel availability in 
an area should highlight potential anti-downgrading violations.
    Quarterly reports from facilities downstream of the refinery and 
importer must also include data on the total volume of the designated 
fuels received, discharged, and in inventory during the quarterly 
reporting period. Using these data, the reporting party must 
demonstrate compliance with the volume account balance requirements 
regarding highway diesel fuel and high sulfur NRLM.
iii. Reporting Requirements During the Second Step of Today's Program
    We believe that we may safely dispense with quarterly reporting and 
compliance evaluations starting June 1, 2010 and instead rely on annual 
reports. During the second step of today's rule, the designate and 
track requirements will be focused on preventing the use of heating oil 
in NRLM equipment, and during 2010-2012 preventing the use of 500 ppm 
sulfur LM diesel fuel in nonroad equipment. By 2010, all reporting 
parties in the system will have had experience in complying with the 
program's designate and track provisions. In addition, the Agency will 
have had ample experience in administering the system. Consequently, we 
expect that there will be few errors or omissions in reports and that 
EPA will have determined how best to detect and remedy instances of 
noncompliance. We believe an annual reporting period is therefore 
sufficient and appropriate.
    Beginning June 1, 2010, entities that produce, import, or take 
custody of 500 ppm sulfur NRLM diesel fuel, marked heating oil, or 
unmarked heating oil outside of the Northeast/Mid-Atlantic area and 
Alaska, must submit an annual report to EPA that provides summary 
information regarding the transfer of these fuels.\126\ Entities must 
report for each of their facilities the total volume of each of these 
fuels that they received from, or discharge to, another entity's 
facility in the fuel distribution system during each annual compliance 
period. For batches of heating oil that are delivered marked, the 
reports do not need to indicate the entities to which the batches were 
delivered--only the total volume of marked heating oil delivered during 
each compliance period must be reported. If an entity only receives 
marked heating oil (i.e., it does not receive any unmarked heating 
oil), it does not need to report at all. If a facility received marked 
heating oil in addition to unmarked heating oil, it must report the 
volume of marked heating oil separately and indicate the facility from 
which the marked heating oil was received.
---------------------------------------------------------------------------

    \126\ 500 ppm sulfur NR diesel fuel, and starting June 1, 2012, 
500 ppm sulfur NRLM diesel fuel, is not permitted in the Northeast/
Mid-Atlantic area and only in the State of Alaska in limited 
circumstances.
---------------------------------------------------------------------------

    Beginning June 1, 2010 to June 1, 2012, entities that produce, 
import, or take custody of 500 ppm sulfur NR and LM diesel fuel outside 
of the Northeast/Mid-Atlantic area and Alaska, must submit an annual 
report to EPA that provides summary information regarding the transfer 
of these fuels.\127\ Entities must report for each of their facilities 
the total volume of each of these fuels that they received from, or 
discharge to, another entity's facility in the fuel distribution system 
during each annual compliance period. For batches of 500 ppm sulfur LM 
diesel fuel that are delivered marked, the reports do not need to 
indicate the entities to which the batches were delivered--only the 
total volume of marked 500 ppm sulfur LM diesel fuel delivered during 
each compliance period must be reported. If an entity only receives 
marked 500 ppm sulfur LM diesel fuel (i.e., it does not receive any 
unmarked 500 ppm sulfur LM diesel fuel), it does not need to report at 
all. If a facility received marked in addition to unmarked 500 ppm 
sulfur LM diesel fuel, it must report the volume of marked 500 ppm 
sulfur LM diesel fuel separately and indicate the facility from which 
the marked 500 ppm sulfur LM diesel fuel was received.
---------------------------------------------------------------------------

    \127\ During this time period, 500 ppm sulfur NR diesel fuel is 
not permitted in the Northeast/Mid-Atlantic area and only in the 
State of Alaska in limited circumstances.
---------------------------------------------------------------------------

E. How Are State Diesel Fuel Programs Affected by the Sulfur Diesel 
Program?

    Section 211(c)(4)(A) of the CAA prohibits states and political 
subdivisions of states from prescribing or attempting to enforce, for 
purposes of motor vehicle emission control, ``any control or 
prohibition respecting any characteristic or component of a fuel or 
fuel additive in a motor vehicle or motor vehicle engine,'' if EPA has 
prescribed ``a control or prohibition applicable to such characteristic 
or component of the fuel or fuel additive'' under section 211(c)(1). 
This prohibition applies to all states except California, as explained 
in section 211(c)(4)(B). This express preemption provision in section 
211(c)(4)(A) applies only to controls or prohibitions respecting any 
characteristics or components of fuels or fuel additives for motor 
vehicles or motor vehicle engines, that is, highway vehicles. It does 
not apply to controls or prohibitions respecting any characteristics or 
components of fuels or fuel additives for nonroad engines or nonroad 
vehicles.\128\
---------------------------------------------------------------------------

    \128\ See 66 FR 36543, July 12, 2001 (notice proposing approval 
of Houston SIP revisions). See also letter from Carl Edlund, 
Director, Multimedia Planning and Permitting Division, U.S. 
Environmental Protection Agency, Region VI, to Jeffrey Saitas, 
Executive Director, Texas Natural Resources Conservation Commission, 
dated September 25, 2000, providing comments on proposed revisions 
to the Texas State Implementation Plan for the control of ozone, 
specifically the Post 99 Rate of Progress Plan and Attainment 
Demonstration for the Houston/Galveston area. This letter noted that 
preemption under section 211(c)(4) of the CAA did not apply to 
controls on nonroad diesel fuel.
---------------------------------------------------------------------------

    Section 211(c)(4)(A) specifically mentions only controls respecting 
characteristics or components of fuel or fuel additives in a ``motor 
vehicle or motor vehicle engine,'' adopted ``for purposes of motor 
vehicle emissions control,'' and the definitions of motor vehicle and 
nonroad engines and vehicles in CAA section 216 are mutually exclusive. 
This is in contrast to sections 211(a) and (b), which specifically 
mention application to fuels or fuel additives used in nonroad engines 
or nonroad vehicles, and with section 211(c)(1) which refers to fuel 
used in motor vehicles or engines or nonroad engines or vehicles.
    Thus, today's action does not preempt state controls or 
prohibitions respecting characteristics or components of fuel or fuel 
additives used in nonroad, locomotive, or marine engines or

[[Page 39073]]

nonroad, locomotive, or marine vehicles under the provisions of section 
211(c)(4)(A). At the same time, a state control that regulates both 
highway fuel and nonroad fuel is preempted to the extent that the state 
control respects a characteristic or component of highway fuel 
regulated by EPA under section 211(c)(1).
    A court may consider whether a state control for fuels or fuel 
additives used in nonroad engines or nonroad vehicles is implicitly 
preempted under the supremacy clause of the U.S. constitution. Courts 
have determined that a state law is preempted by federal law where the 
state requirement actually conflicts with federal law by preventing 
compliance with the federal requirement, or by standing as an obstacle 
to accomplishment of congressional objectives. A court could thus 
consider whether a given state standard for sulfur in nonroad, 
locomotive or marine diesel fuel is preempted if it places such 
significant cost and investment burdens on refiners that refiners 
cannot meet both state and federal requirements in time, or if the 
state control would otherwise meet the criteria for conflict 
preemption.

F. Technological Feasibility of the 500 and 15 ppm Sulfur Diesel Fuel 
Program

    This section summarizes our assessment of the feasibility of 
refining and distributing 500 ppm NRLM diesel fuel starting in 2007 and 
15 ppm nonroad diesel fuel in 2010 and locomotive and marine diesel 
fuel in 2012. Based on this evaluation, we believe it is 
technologically feasible for refiners and distributors to meet both 
sulfur standards in the lead time provided with the desulfurization 
technology available. We begin this section by describing the nonroad, 
locomotive and marine diesel fuel market and how these fuels differ 
from current highway diesel fuel. We discuss desulfurization 
technologies, both conventional and advanced, which are available for 
complying with the 500 ppm and 15 ppm NRLM standards. We then present 
what mix of technologies we believe will be used. Next we provide our 
analysis of the lead time for complying with either standard. Finally, 
we analyze the feasibility of distributing low sulfur NRLM diesel fuel. 
We refer the reader to the Final RIA for more details regarding these 
assessments.
1. What Is the Nonroad, Locomotive and Marine Diesel Fuel Market Today?
    Nonroad, locomotive and marine (NRLM) engines almost exclusively 
use No. 2 distillate fuel. No. 2 distillate fuel is a class of fuel 
defined by its boiling range. It boils at a higher average temperature 
than gasoline, No. 1 distillate, jet fuel and kerosene, and at a lower 
average temperature than residual fuel (or bunker fuel). ASTM defines 
three No. 2 distillate fuels: (1) Low sulfur No. 2 diesel fuel (No. 2-
D); (2) high sulfur No. 2-D; and (3) No. 2 fuel oil.\129\ Low sulfur 
No. 2-D fuel must contain 500 ppm sulfur or less, have a minimum cetane 
number of 40, and have a minimum cetane index limit of 40 (or a maximum 
aromatic content of 35 volume percent) (i.e., meet the EPA standard for 
highway diesel fuel).\130\ Both high sulfur No. 2-D and No. 2 fuel oil 
must contain no more than 5000 ppm sulfur,\131\ and currently averages 
3000 ppm nationwide. The ASTM specification for high sulfur No. 2-D 
fuel also includes a minimum cetane number of 40. Practically, since 
most No. 2 fuel oil meets this minimum cetane number specification, 
pipelines which ship fuel fungibly need only carry one high sulfur No. 
2 distillate fuel which meets both sets of specifications. Currently, 
nonroad, locomotive and marine engines can be and are fueled with both 
low and high sulfur No. 2-D fuels. If No. 1 distillate is blended into 
highway diesel fuel, as is sometimes done to prevent gelling in the 
winter, the final blend must meet the 500 ppm EPA cap.
---------------------------------------------------------------------------

    \129\ ``Standard Specification for Diesel Fuel Oils,'' ASTM D 
975-98b and ``Standard Specifications for Fuel Oils,'' ASTM D 396-
98.
    \130\ These ASTM requirements were formed after and are 
consistent with the EPA regulations for highway diesel fuel.
    \131\ Some states, particularly those in the Northeast, limit 
the sulfur content of No. 2 fuel oil to 2000-3000 ppm.
---------------------------------------------------------------------------

    No. 1 distillate (e.g., jet fuel and kerosene) meets lower boiling 
point and viscosity specifications requirements than No. 2 distillate. 
No. 1 distillate, or any of these other similar boiling distillates, 
added to No. 2 NRLM distillate becomes NRLM diesel fuel and thus, must 
meet the applicable specifications for No. 2 distillate.
    For the purpose of this rule, we split the No. 2 distillate market 
into three pieces, according to the sulfur standard which each must 
meet: (1) Highway diesel fuel, (2) NRLM diesel fuel, and heating oil, 
which is used in both furnaces and boilers, as well as in stationary 
diesel engines to generate power.
    In the NPRM, EPA estimated current production and demand for NRLM 
fuel from studies conducted by the U.S. Energy Information 
Administration (EIA). We projected growth in nonroad fuel demand using 
EPA's NONROAD emission model. We based the growth in locomotive and 
marine fuel demand from analyses supporting EPA's locomotive and marine 
engine rulemaking. These future levels of NRLM fuel demand differed 
from those implicit in our projection of the emission reductions 
associated with the rule, which were based primarily on EPA's NONROAD 
emission model. We pointed out this inconsistency in the rule and 
indicated that we would resolve this inconsistency for the final rule.
    In their comments on the NPRM, the American Petroleum Institute 
(API), the Engine Manufacturers Association (EMA) and others 
highlighted this inconsistency and suggested that EPA resolve it by 
basing its projection of future NRLM fuel demand using information 
developed by EIA and not from the NONROAD emission model. API pointed 
to a lower estimate of nonroad fuel demand developed in a contracted 
study performed by Baker and O'Brien. A detailed analysis of these 
comments and additional technical analyses of distillate fuel demand 
are described in Section 4.6.3.1 of the Summary and Analysis document 
to this rule. In summary, we decided to continue using the NONROAD 
emission model to project the emission benefits of this rule. To 
eliminate the inconsistency in the NPRM, we also use the NONROAD model 
to determine demand for nonroad fuel and project the economic impacts 
of this final rule. However, the analyses presented in Section 4.6.3.1 
of the Summary and Analysis document to this rule identified 
uncertainties in the current and future level of nonroad fuel demand. 
To insure that these uncertainties did not affect the outcome of this 
rulemaking process, we evaluate the emissions, costs and cost 
effectiveness of the standards contained in this rule using an 
alternative estimate of nonroad fuel demand derived from EIA 
information. This alternative analysis is presented in Appendix 8A of 
the Final RIA. In addition to use of the NONROAD model to project 
nonroad fuel demand, we also updated our projections of the production 
of and demand for highway fuel and heating oil using more recent 
versions of the same EIA reports used in the NPRM analysis.
    In 2001, nationwide outside of California, nonroad diesel fuel 
comprised about 18 percent of all No. 2 distillate fuel, while 
locomotive and marine diesel fuel comprised about eight percent of all 
No. 2 distillate fuel. Diesel fuel consumed by highway vehicles/engines 
comprised about 56 percent of all No. 2 distillate fuel.

[[Page 39074]]

Heating oil comprised about 19 percent of No. 2 distillate. Because of 
limitations in the fuel distribution system and other factors, about 18 
percent of all non-highway distillate met the 500 ppm highway diesel 
fuel cap. Thus, about 64 percent of No. 2 distillate pool met the 500 
ppm sulfur cap, not just the 56 percent used in highway vehicles. We 
project that this spillover of highway fuel to the NRLM diesel fuel 
market will continue under the highway diesel fuel program. Thus, 
today's rule will only materially affect about 19 percent of today's 
distillate market. The remaining 17 percent of No. 2 distillate which 
is high sulfur heating oil is estimated to remain at higher sulfur 
levels.
    This rule will also affect any No. 1 distillate which is blended 
into wintertime NRLM fuel. Because gelling can also be prevented 
through the use of pour point additives, the current and future level 
of this of No. 1 distillate blending is uncertain. However, the 
feasibility of desulfurizing and distributing this No. 1 distillate 
will also be addressed below.
2. What Technology Will Refiners Use To Meet the 500 ppm Sulfur Cap?
    Refiners currently hydrotreat most or all of their distillate 
blendstocks using what is commonly referred to as ``conventional'' 
hydrotreating technology to meet the 500 ppm sulfur and cetane limits 
applicable to highway diesel fuel. This conventional technology has 
been available and in use for many years. U.S. refiners have nearly ten 
years of experience with this technology in producing highway diesel 
fuel. The distillate blendstocks comprising NRLM fuel do not differ 
substantially from those comprising highway diesel fuel. Thus, the 
technology to produce 500 ppm sulfur NRLM diesel fuel has clearly been 
demonstrated and optimized over the last decade. Additionally, this 
technology continues to evolve primarily through the development of 
more active catalysts and motivated by the 15 ppm cap applicable to 
most highway diesel fuel starting in 2006.
    Several advanced desulfurization technologies are being developed 
and are discussed in more detail in the next section. However, the fact 
that none of these technologies have been demonstrated commercially for 
a typical catalyst life (i.e., two years) makes it unlikely that they 
would be selected by many refiners for use in mid-2007. Also, these 
advanced technologies promise the greatest cost savings in achieving 15 
ppm levels, rather than 500 ppm. These advanced technologies can also 
be combined with a conventional hydrotreater to meet the 15 ppm 
standard in 2010 and 2012. EPA therefore projects that the 500 ppm 
sulfur cap NRLM standard will be met using conventional hydrotreating 
technology. We made this same projection in the NPRM and no comments to 
the contrary were received.
    In some cases, refiners will also need to install or expand several 
ancillary processes related to sulfur removal (e.g., hydrogen 
production and purification, sulfur processing, and sour water 
treatment). These technologies are all commercially demonstrated, as 
nearly all refineries already have such units.
3. Is the Leadtime Sufficient To Meet the 2007 500 ppm NRLM Sulfur 
Standard?
    After the highway diesel fuel program is implemented, we project 
that 92 refineries in U.S. will be producing high sulfur distillate 
fuel. We project that 36 of these refineries will likely produce 500 
ppm sulfur NRLM diesel fuel in 2007. Of those 36, 30 will have to build 
new hydrotreaters while the other 6 are expected to use existing 
hydrotreaters to produce 500 ppm NRLM diesel fuel.\132\ The remaining 
56 refineries are projected to continue to produce high sulfur 
distillate fuel, with 26 of the 56 refineries producing heating oil. 
The other 30 refineries are owned by small refiners and will likely 
produce high sulfur NRLM diesel fuel. The 56 refineries continuing to 
produce high sulfur distillate will not have to add or modify any 
equipment to continue producing this fuel.
---------------------------------------------------------------------------

    \132\ These refiners have said that they will leave the highway 
market in 2006 in their pre-compliance reports for complying with 
the Highway Diesel Rule, thus freeing up their existing 
hydrotreaters to produce 500 ppm NRLM diesel fuel.
---------------------------------------------------------------------------

    This rule will provide refiners and importers 37 months before they 
will have to begin producing 500 ppm NRLM diesel fuel on June 1, 2007. 
Our lead time analysis projects that 27-39 months are typically needed 
to design and construct a diesel fuel hydrotreater.\133\ As discussed 
below, we believe that 37 months will be sufficient for all refiners of 
NRLM fuel.
---------------------------------------------------------------------------

    \133\ ``Highway Diesel Progress Review,'' USEPA, EPA420-R-02-
016, June 2002. The leadtime analysis in the RIA can be found in 
section 5.3.
---------------------------------------------------------------------------

    Easing the task is the fact that we project that essentially all 
refiners will use conventional hydrotreating to comply with the 500 ppm 
sulfur NRLM diesel fuel cap. This technology has been used extensively 
for more than 10 years and its capabilities to process a wide range of 
diesel fuel blendstocks are well understood. Thus, the time necessary 
to apply this technology for a specific refiner's situation should be 
relatively short.
    Twenty-six out of the 36 refineries projected to produce 500 ppm 
NRLM diesel fuel in 2007 have indicated that they will produce highway 
diesel fuel in their highway diesel fuel pre-compliance reports, see 
RIA section 7.2.1.3.4.1, Table 7.2.1-38 and following discussion for 
description of these refineries. Thus, roughly 70% of the refiners 
likely to produce 500 ppm sulfur NRLM diesel fuel in 2007 are already 
well into their planning for meeting the 15 ppm highway diesel fuel 
standard, effective June 1, 2006. It is likely that these refiners have 
already chemically characterized their high sulfur diesel fuel 
blendstocks, as well as their highway diesel fuel, in assessing how to 
meet produce 15 ppm fuel. They will also have already assessed the 
various technologies for producing 15 ppm diesel fuel. This provides an 
extensive base of information on how to design a hydrotreater to 
produce 500 ppm NRLM fuel, as well as how to revamp this hydrotreater 
to produce 15 ppm NRLM diesel fuel in 2010 and 2012. Those refiners 
only producing high sulfur distillate fuel today will be able to take 
advantage of the significant experience that technology vendors have 
obtained in assisting refiners of highway diesel fuel meet the 15 ppm 
cap in 2006.
    We also expect that roughly 20 percent of the 101 refineries in the 
U.S. and its territories will build a new hydrotreater to produce 15 
ppm highway fuel. Those which also produce high sulfur distillate will 
be able to produce 500 ppm NRLM fuel with their existing highway 
hydrotreater. In 2007, we conservatively assumed that 20% of the 500 
ppm NRLM production from refineries that produce highway and high 
sulfur distillate could be produced with these existing treaters at no 
capital costs (existing highway treater capacity available for 500 ppm 
NRLM production would be higher if based on highway treater capacity). 
Thus, in 2007 we project that four refineries will be able to use their 
recently idled highway treater due to building a new highway treater 
unit for 2006. Furthermore, the highway diesel program pre-compliance 
reports indicate that another 7 refineries currently producing 500 ppm 
highway fuel will likely leave the highway fuel market in 2006. We 
project that 2 of these would use their existing treater to produce 500 
ppm NRLM with no investment costs. Another three of these 101 
refineries produce relatively small volumes of high sulfur distillate 
compared to highway diesel fuel today. We project that they will be 
able to

[[Page 39075]]

produce 500 ppm sulfur NRLM fuel from their high sulfur distillate with 
only minor modification to their existing highway diesel fuel 
hydrotreater.
    Refiners not planning on producing 100 percent highway fuel in 2006 
will also need some time to assess which distillate market in which to 
participate starting in 2007, NRLM or heating oil. While this is a 
decision which requires some amount of time for analysis, refiners also 
needed to assess what market they would participate in for the 1993 500 
ppm highway diesel fuel sulfur cap. In all, we project that the task of 
producing 500 ppm sulfur NRLM fuel in 2007 will be less difficult than 
the task refiners faced with the implementation of the 500 ppm highway 
diesel fuel cap in 1993. Refiners had just over three years of lead 
time for complying with the 1993 500 ppm highway diesel fuel cap, as is 
the case here, and this proved sufficient.
    No explicit comments were made by refiners on the lead time needed 
for complying with the proposed NRLM 500 ppm sulfur standard. However, 
their comments supported the two step approach, preferring it over a 
one step, 15 ppm NRLM cap starting in 2008.
4. What Technology Will Refiners Use To Meet the 15 ppm Sulfur Cap?
    In the highway diesel rule, we projected that refiners producing 15 
ppm fuel in 2006 would utilize extensions of conventional hydrotreating 
technology. We also projected that refiners first producing 15 ppm fuel 
in 2010 would use a mix of extensions of conventional and advanced 
technologies. Based on the refiners' highway pre-compliance reports, it 
appears that 95% of highway fuel could meet the 15 ppm cap in 2006. We 
expect that virtually all of this 15 ppm fuel will be produced with 
conventional hydrotreating. Thus, it appears that conventional 
hydrotreating will be used to produce the vast majority of 15 ppm 
highway diesel fuel.
    In the nonroad NPRM, we projected that refiners would use advanced 
desulfurization technologies to produce 80 percent of 15 ppm nonroad 
diesel fuel in 2010, with the balance using conventional hydrotreating. 
At the time of the NPRM, all of the advanced technologies appeared to 
be progressing rapidly. Since the proposal, we have learned that a 
couple of these technologies, Unipure and S-Zorb, are not going to be 
commercially demonstrated as soon as expected. However, one refiner is 
already using Process Dynamics' IsoTherming technology to commercially 
produce 15 ppm diesel fuel. Thus, we continue to believe that advanced 
technologies will be used to produce a large percentage of 15 ppm NRLM 
fuel. However, the number of advanced technologies used may be smaller. 
Because of the more limited choices, we project that the penetration of 
advanced technologies will be only 60 percent. The remainder of this 
section discusses the production of 15 ppm diesel fuel using 
conventional and advanced technologies.
    One approach to produce 15 ppm NRLM fuel would be to revamp the 
conventional hydrotreater built to produce 500 ppm NRLM fuel in 2007. 
Knowing that the 500 ppm NRLM cap will only be in effect for three 
years for nonroad refiners and five years for locomotive and marine 
refiners (four years for small refiners), we expect that refiners will 
design their 500 ppm hydrotreater to allow the production of 15 ppm 
fuel through the addition of reactor volume or a second hydrotreating 
stage. Refiners might also shift to a more active catalyst in the 
existing reactor, as the life of that catalyst might be nearing its 
end. Equipment to further purify its hydrogen supply could also be 
added. Producing 15 ppm NRLM fuel via these steps will be feasible as 
they are essentially the same steps refiners will be using in 2006 to 
produce 15 ppm highway diesel fuel.
    EPA recently reviewed the progress being made by refining 
technology vendors and refiners in meeting the 2006 highway diesel 
sulfur cap.\134\ All evidence available confirms EPA's projection that 
conventional hydrotreating will be capable of producing diesel fuel 
containing less than 10 ppm sulfur. Furthermore, as part of the highway 
program's reporting requirements, refiners are required to report their 
progress in complying with the 15 ppm highway diesel fuel standard. In 
those reports they indicated that they primarily will be applying 
extensions of conventional hydrotreating. NRLM fuel refiners will have 
the added advantage of being able to design their 500 ppm hydrotreater 
with the production of 15 ppm fuel in mind. Additionally, refiners 
producing 15 ppm NRLM fuel will be able to take advantage of the 
experience gained from those producing 15 ppm highway fuel.
---------------------------------------------------------------------------

    \134\ ``Highway Diesel Progress Review,'' USEPA, EPA420-R-02-
016, June 2002.
---------------------------------------------------------------------------

    As mentioned above, several advanced technologies are presently 
being developed to produce 15 ppm diesel fuel at lower cost. One of 
these advanced technologies, Process Dynamics IsoTherming, improves the 
contact between hydrogen, diesel fuel and the desulfurization catalyst. 
The IsoTherming process dissolves the hydrogen in the liquid fuel phase 
prior to passing the liquid over the catalyst, eliminating the need for 
a two-phase (gas and liquid) reactor. The liquid, plug flow reactor 
design also avoids the poor liquid distribution over the catalyst bed 
often present in a two-phase reactor design. Process Dynamics projects 
that their IsoTherming process could reduce the hydrotreater volume 
required to achieve sub-15 ppm sulfur levels by roughly a factor of 
two.
    Process Dynamics has already built a commercial-sized demonstration 
unit (5000 barrels per day) at a refinery in New Mexico. They have been 
operating the unit since September 2002, and demonstrating the 
capability to meet a 15 ppm cap since the spring of 2003. Thus, 
refiners will have 4-5 years of operating data on this process before 
they would have to select a technology to produce 15 ppm nonroad diesel 
fuel in 2010, and 6-7 years before producing 15 ppm locomotive and 
marine diesel fuel in 2012. This should be more than sufficient for 
essentially all refiners to consider this process for 2010 or 2012. 
Based on information received from Process Dynamics, we estimate that 
this technology could reduce the cost of meeting the 15 ppm cap for 
many refiners by about 30 percent. This savings arises from a smaller 
reactor, less catalyst and avoiding the need for a recycle gas 
compressor and reactor distributor. Refineries facing poorer economies 
of scale, such as small refineries, would particularly benefit from 
this desulfurization process.
    A second process being developed to produce 15 ppm diesel fuel is 
the Unipure oxidation process. This process oxidizes the sulfur in 
distillate molecules, facilitating its removal. Unipure Corporation 
installed a small (50 barrels per day), continuous flow demonstration 
unit at Valero's Krotz Spring refinery in the spring of 2003. It 
appears that this technology could reduce the cost of producing 15 ppm 
diesel fuel for some refiners compared to conventional hydrotreating. 
However, the small size of the demonstration unit may make the risk 
associated with a new technology too large. Thus, we believe that this 
technology needs be demonstrated further before most refiners will 
seriously considered it for commercial application. This technology, 
however, may be ideal for use at transmix processing plants or large 
terminals to reprocess 15 ppm diesel fuel which have become 
contaminated during shipment. We

[[Page 39076]]

discuss this distillate downgrade in greater detail in Section VI.A.2 
of this preamble. This oxidation process avoids the need for high 
pressure hydrogen, which is usually not economically available at these 
smaller facilities.
    Finally, Conoco-Phillips has adapted their S-Zorb adsorption 
technology which was originally designed for gasoline desulfurization, 
for diesel fuel desulfurization. At the time of the NPRM, Conoco-
Phillips had signed 23 licensing agreements with refiners in North 
America regarding the use of S-Zorb to comply with the Tier 2 gasoline 
sulfur standards. Furthermore, Conoco-Phillips had plans for the quick 
installation of an S-Zorb unit to demonstrate the production of 15 ppm 
diesel fuel. However, we have since learned that Conoco-Phillips has 
dropped its plans to build a commercial demonstration unit for 
desulfurizing diesel fuel. Without a commercial unit operating in the 
2006 time frame, we do not believe that many refiners will seriously 
consider S-Zorb to produce 15 ppm NRLM diesel fuel in 2010 and 2012.
    Due to the fact that the Process Dynamics IsoTherming process is 
already operating commercially and operational data indicate a 30 
percent reduction in the cost of producing 15 ppm fuel relative to 
conventional hydrotreating, we project that 60 percent of the new 
volume of 15 ppm NRLM diesel fuel will be produced using this 
technology. We project that the remaining 40 percent of 15 ppm NRLM 
diesel fuel will use extensions of conventional hydrotreating. We 
assume this 60/40 mix of Isotherming and extensions of conventional 
hydrotreating, respectively, for 2010, 2012 and even for 2014 when the 
small refiners exemptions expire.
    API commented that the advanced desulfurization technologies have 
not been commercially demonstrated and thus should not be used as the 
basis for estimating the cost of desulfurizing NRLM diesel fuel to 15 
ppm. While this is true for the Unipure oxidation and Conoco-Phillip's 
S-Zorb processes, the Process Dynamics IsoTherming process has been 
commercially demonstrated. It is therefore appropriate for use as a 
partial basis for the refining costs associated with today's final 
rule. To indicate the effect that this projection for the use of 
IsoTherming has on the rule's cost, in Section 7.2.2 of the Final RIA, 
we estimate the cost of producing 15 ppm NRLM fuel with only the use of 
conventional hydrotreating technology.
5. Is the Leadtime Sufficient To Meet the 2010 and 2012 15 ppm NRLM 
Sulfur Cap?
    We project that 32 refineries will produce 15 ppm nonroad diesel 
fuel in 2010, with two of these being owned by small refiners. In 2012, 
we project that 15 refineries will produce 15 ppm locomotive and marine 
diesel fuel. We project that an additional 15 refineries will produce 
500 ppm nonroad diesel fuel in 2010 under the small refiner provisions 
included in the today's final rule. Then in 2014, we project that the 
15 refineries exempted under the small refiner provisions will begin 
producing 15 ppm NRLM diesel fuel in 2014.
    The timing of this rule provides refiners and importers with more 
than six years before they will have to produce 15 ppm nonroad diesel 
fuel, and two years more for producing 15 ppm locomotive and marine 
diesel fuel. Our leadtime analysis, which is presented in Section 5.4.2 
of the Final RIA, projects that 30-39 months are typically needed to 
design and construct a diesel fuel hydrotreater, perhaps less if it is 
a Process Dynamics unit. Thus, refiners will have about three years 
before they would have to begin detailed design and construction for 
2010, and five years before 2012. This will allow sufficient time to 
consult with vendors, test their diesel fuel in pilot plants to assess 
the difficulty of its desulfurization via a variety of technologies, 
and to select its technology for 2010 and 2012. In addition, these 
refiners will also have the chance to observe the performance of the 
hydrotreaters being used to produce 15 ppm highway diesel fuel for at 
least one year for those complying in 2010, and two years more for 
those complying in 2012. While not a full catalyst cycle, any unusual 
degradation in catalyst performance should be apparent within the first 
year. Based on the pre-compliance reports, some refineries in the U.S. 
will be producing 15 ppm sulfur highway diesel fuel earlier than 2006. 
Some refineries are expected to produce complying fuel earlier than the 
compliance date in Europe as well. The refineries which are complying 
early will accrue experience earlier and longer providing refiners a 
better sense of the reliability of producing 15 ppm diesel fuel. Thus, 
we project that the 2010 and 2012 start dates will allow refiners to be 
quite certain that the designs they select in mid-2007 will perform 
adequately in 2010 and 2012.
    In addition, refiners will have three to four years or more to 
observe the performance of the Process Dynamics IsoTherming process 
before having to make their technology selections for 2010 and 2012 . 
This should be more than adequate to fully access the costs and 
capabilities of this technology for all but the most cautious refiners.
    Considering the amount of leadtime available and the 
desulfurization technologies which will be available and proven for 
complying with a 15 ppm sulfur standard, we do not expect that the 
leadtime for complying with the 15 ppm NRLM cap standard in 2010 and 
2012 will be an issue for refiners.
6. Feasibility of Distributing 500 and 15 ppm NRLM Fuel
    There are two considerations with respect to the feasibility of 
distributing non-highway diesel fuels meeting the sulfur standards in 
today's rule. The first pertains to whether sulfur contamination can be 
adequately managed throughout the distribution system so that fuel 
delivered to the end-user does not exceed the specified maximum sulfur 
concentration. The second pertains to the physical limitations of the 
system to accommodate any additional segregation of product grades.
a. Limiting Sulfur Contamination
    With respect to limiting sulfur contamination during distribution, 
the physical hardware and distribution practices for non-highway diesel 
fuel do not differ significantly from those for highway diesel fuel. 
Therefore, we do not anticipate any new issues with respect to limiting 
sulfur contamination during the distribution of non-highway fuel that 
would not have already been accounted for in distributing highway 
diesel fuel. Highway diesel fuel has been required to meet a 500 ppm 
sulfur standard since 1993. Thus, we expect that limiting contamination 
during the distribution of 500 ppm non-highway diesel engine fuel can 
be readily accomplished by the industry. This applies to locomotive and 
marine diesel fuel as well as nonroad diesel fuel.
    In the highway diesel rule, EPA acknowledged that meeting a 15 ppm 
sulfur specification would pose a substantial new challenge to the 
distribution system. Refiners, pipelines, and terminals would have to 
pay careful attention to and eliminate any potential sources of 
contamination in the system (e.g., tank bottoms, deal legs in 
pipelines, leaking valves, interface cuts, etc.). In addition, bulk 
plant operators and delivery truck operators would have to carefully 
observe recommended industry practices to limit contamination, 
including practices as simple as cleaning out transfer hoses,

[[Page 39077]]

proper sequencing of fuel deliveries, and parking on a level surface 
when draining the storage tank. Due to the need to prepare for 
compliance with the highway diesel program, we anticipate that issues 
related to limiting sulfur contamination during the distribution of 15 
ppm NRLM diesel fuel will be resolved well in advance of the 2010 and 
2012 implementation dates . We are not aware of any additional issues 
that might arise unique to NRLM diesel fuel. If anything we anticipate 
limiting contamination will become easier as batch sizes are allowed to 
increase and potential sources of contamination decrease as more and 
more of the diesel pool turns over to 500 and 15 ppm sulfur. Industry 
representatives acknowledge that the task can be accomplished. However, 
they are still in the process of identifying all of the measures that 
will need to be taken.
b. Potential Need for Additional Product Segregation
    As discussed in section IV.D, we have designed the NRLM diesel fuel 
program to minimize the need for additional product segregation and the 
feasibility and cost issues associated with it. This final rule allows 
for the fungible distribution of 500 ppm highway and 500 ppm sulfur 
NRLM diesel fuel in 2007, and 15 ppm highway and 15 ppm NR diesel fuel 
in 2010 and 15 ppm NRLM diesel fuel in 2012, up until the point where 
NRLM, LM, or nonroad fuel must be dyed for IRS excise tax purposes. We 
proposed that heating oil would be required to be segregated throughout 
the distribution system by the use of a marker added at the refiners 
from 2007 through 2010. We received comments that addition of the 
marker at the refinery would cause significant concerns regarding 
potential marker contamination in the jet fuel. In responding to these 
and other comments, we have chosen to adopt a designate and track 
system of ensuring refiner compliance with desulfurization requirements 
(see IV.D.). This allows the point of marker addition to be moved 
downstream to the terminal where such contamination concerns are 
minimal. As a result heating oil and high-sulfur NRLM will also be 
fungible in the distribution system up to the point where the fuel 
marker must be added at the terminal.\135\
---------------------------------------------------------------------------

    \135\ The fuel marker requirements only apply outside of the 
Northeast/Mid-Atlantic area. Inside the Northeast/Mid-Atlantic area, 
high sulfur NRLM cannot be sold to end users. See section IV.D for a 
detailed discussion of the fuel marker provisions.
---------------------------------------------------------------------------

    The design of today's fuel program eliminates any potential 
feasibility issues associated with the need for product segregation. 
This is not to say that additional steps will not have to be taken. 
However, this program will result in only a limited number of entities 
in the distribution system choosing to add new tankage due to new 
product segregation. Bulk plants in areas of the country where heating 
oil is expected to remain in the market will have to decide whether to 
add tankage to distribute both heating oil and 500 ppm sulfur NRLM 
fuel. Terminal operators commented that the proposed presence of a fuel 
marker in heating oil would make it impossible for them to blend 500 
ppm sulfur diesel from 15 ppm sulfur and high sulfur fuels. They 
related that this ability would be important to certain terminal 
operators who would not have the storage facilities available for three 
grades of diesel fuel, but would still not wish to forgo selling 500 
ppm diesel fuel.\136\ Today's rule allows the required marker to be 
added to heating oil before it leaves the terminal (see section IV.D of 
this preamble). Therefore, terminals will be able to blend 500 ppm 
diesel from 15 ppm and high sulfur diesel fuels, provided they fulfill 
all of the responsibilities associated with acting as a fuel refiner 
(see section V of this preamble).\137\ However, because this will be a 
relatively costly way of producing 500 ppm diesel fuel, we do not 
expect that the practice will be widespread. In all other cases we 
anticipate segments of the distribution system will choose to avoid any 
fuel segregation costs by limiting the range of sulfur grades they 
choose to carry, just as they do today. Regardless, however, the costs 
and impacts of these choices are small. A more detailed explanation of 
this assessment can be found in chapter 7 of the RIA.
---------------------------------------------------------------------------

    \136\ 15 ppm diesel fuel and high sulfur heating oil will be the 
largest volume products at such terminals.
    \137\ The definition of a refiner includes persons who produce 
highway or NRLM diesel fuel by blending.
---------------------------------------------------------------------------

    A limited volume of 500 ppm sulfur diesel fuel is projected to be 
produced downstream due to interface mixing in the distribution system 
(see section IV.A).\138\ Fuel from these sources is currently sold into 
the NRLM and heating oil markets. The implementation of the 15 ppm 
sulfur standard for NR diesel fuel in 2010 and for LM diesel fuel in 
2012 raises the concern that the heating oil market might be 
insufficient to absorb all such downstream 500 ppm sulfur diesel fuel 
in areas outside of the Northeast (where most heating oil is used). If 
the market for this fuel was limited, it would have to be trucked back 
to a refinery to be desulfurized which could raise significant 
logistical and cost issues. Consequently, today's rule provides that 
500 ppm sulfur diesel fuel produced due to interface mixing can 
continue to be used in nonroad equipment until 2014 (subject to 
specific sulfur requirements for new equipment), and in locomotive and 
marine engines indefinitely.\139\ These provisions ensure that there 
will be a sufficient market for such 500 ppm sulfur diesel fuel.
---------------------------------------------------------------------------

    \138\ This fuel will be produced by transmix processors and at 
terminals by segregating the pipeline interface between 15 ppm 
diesel fuel and jet fuel.
    \139\ While today?s rule does not contain an end date for the 
downstream distribution of 500 ppm sulfur locomotive and marine 
fuel, we will review the appropriateness of allowing this 
flexibility based on experience gained from implementation of the 15 
ppm sulfur NRLM diesel fuel standard. We expect to conduct such an 
evaluation in 2011.
---------------------------------------------------------------------------

G. What Are the Potential Impacts of the 15 ppm Sulfur Diesel Program 
on Lubricity and Other Fuel Properties?

1. What Is Lubricity and Why Might It Be a Concern?
    Engine manufacturers and owner/operators depend on diesel fuel 
lubricity properties to lubricate and protect moving parts within fuel 
pumps and injection systems for reliable performance. Unit injector 
systems and in-line pumps, commonly used in diesel engines, are 
actuated by cams lubricated with crankcase oil, and have minimal 
sensitivity to fuel lubricity. However, rotary and distributor type 
pumps, commonly used in light and medium-duty diesel engines, are 
completely fuel lubricated, resulting in high sensitivity to fuel 
lubricity. The types of fuel pumps and injection systems used in 
nonroad diesel engines are the same as those used in highway diesel 
vehicles. Consequently, nonroad and highway diesel engines share the 
same need for adequate fuel lubricity to maintain fuel pump and 
injection system durability.
    Diesel fuel lubricity concerns were first highlighted for private 
and commercial vehicles during the initial implementation of the 
federal 500 ppm sulfur highway diesel program and the state of 
California's diesel program. The Department of Defense (DoD) also has a 
longstanding concern regarding the lubricity of distillate fuels used 
in its equipment as evidenced by the implementation of its own fuel 
lubricity improver performance specification in 1989.\140\ The diesel 
fuel requirements in the state of California differed from the

[[Page 39078]]

federal requirements by substantially restricting the aromatic content 
of diesel fuel which requires more severe hydrotreating than reducing 
the sulfur content to meet a 500 ppm standard.\141\ Consequently, 
concerns regarding diesel fuel lubricity have primarily been associated 
with California diesel fuel and some California refiners treat their 
diesel fuel with a lubricity additive as needed. Outside of California, 
hydrotreating to meet the current 500 ppm sulfur specification does not 
typically result in a substantial reduction of lubricity. Diesel fuels 
outside of California seldom require the use of a lubricity additive. 
Therefore, we anticipate only a marginal increase in the use of 
lubricity additives in NRLM diesel fuel meeting the 500 ppm sulfur 
standard for 2007.\142\ Today's action requires diesel fuel used in 
nonroad, locomotive, and marine diesel engines to meet a 15 ppm sulfur 
standard in 2010 and 2012, respectively. Based on the following 
discussion, we believe that the increase in the use of lubricity 
additives in 15 ppm sulfur NRLM diesel fuel would be the same as that 
estimated for 15 ppm highway diesel fuel.
---------------------------------------------------------------------------

    \140\ DoD Performance Specification, Inhibitor, Corrosion/
Lubricity Improver, Fuel Soluble, MIL-PRF-25017F, 10 November 1997, 
Superseding MIL-I-25017E, 15 June 1989.
    \141\ Chevron Products Diesel Fuel Technical Review provides a 
discussion of the impacts on fuel lubricity of current diesel fuel 
compositional requirements in California versus the rest of the 
nation; see http://www.chevron.com/prodserv/fuels/bulletin/diesel/
l2%5F7%5F2%5Frf.htm.
    \142\ The cost from the increased use of lubricity additives in 
500 ppm NRLM diesel fuel in 2007 and in 15 ppm nonroad diesel fuel 
in 2010 and locomotive and marine diesel fuel in 2012 is discussed 
in section VI of this preamble.
---------------------------------------------------------------------------

    The state of California currently requires the same standards for 
diesel fuel used in nonroad equipment as in highway equipment. Outside 
of California, highway diesel fuel is often used in nonroad equipment 
when logistical constraints or market influences in the fuel 
distribution system limit the availability of high sulfur fuel. Thus, 
for nearly a decade nonroad equipment has been using federal 500 ppm 
sulfur diesel fuel and California diesel fuel, some of which may have 
been treated with lubricity additives. During this time, there has been 
no indication that the level of diesel lubricity needed for fuel used 
in nonroad engines differs substantially from the level needed for fuel 
used in highway diesel engines.
    Blending small amounts of lubricity-enhancing additives increases 
the lubricity of poor-lubricity fuels to acceptable levels. These 
additives are available in today's market, are effective, and are in 
widespread use around the world. Among the available additives, 
biodiesel has been suggested as one potential means for increasing the 
lubricity of conventional diesel fuel. Indications are that low 
concentrations of biodiesel might be sufficient to raise the lubricity 
to acceptable levels. Biodiesel is a renewable fuel made from 
agricultural sources such as soybean oil, peanut oil and other 
vegetable oils as well as rendered and animal fats and recycled cooking 
oils. Biodiesel generally contains very low amounts of sulfur, which is 
an attractive characteristic for use in diesel engines using advanced 
aftertreatment systems. Additionally, biodiesel, by virtue of its 
lubricity properties, may be a good alternative to additives currently 
used to ensure adequate fuel lubricity. According to the U.S. 
Department of Agriculture, there is a current capacity to produce 100 
million gallons annually. Thus, we believe that biodiesel is a feasible 
technology that could help support today's clean diesel fuel program.
    Research remains to be performed to better understand which fuel 
components are most responsible for lubricity. Consequently, it is 
unclear whether and to what degree the sulfur standards for NRLM diesel 
fuel will impact fuel lubricity. Nevertheless, there is evidence that 
the typical process used to remove sulfur from diesel fuel 
``hydrotreating'' can impact lubricity depending on the severity of the 
treatment process and characteristics of the crude. We expect that 
hydrotreating will be the predominant process used to reduce the sulfur 
content of NRLM diesel fuel to meet the 500 ppm sulfur standard during 
the first step of the program. Similarly, we project that both 
conventional hydrotreating and the Linde Isotherming process will be 
used to meet the 15 ppm sulfur standard for NRLM diesel fuel.
    Based on our comparison of the blendstocks and processes used to 
manufacture non-highway diesel fuels, we believe that the potential 
decrease in the lubricity of these fuels from hydrotreating that might 
result from the sulfur standards should be approximately the same as 
that experienced in desulfurizing highway diesel fuel.\143\ To provide 
a conservative, high cost estimate, we assumed that the potential 
impact on fuel lubricity from the use of the new desulfurization 
processes would be the same as that experienced when hydrotreating 
diesel fuel to meet a 15 ppm sulfur standard. Given that the 
requirements for fuel lubricity in highway and nonroad engines are the 
same, and the potential decrease in lubricity from desulfurization of 
NRLM diesel fuel would be no greater than that experienced in 
desulfurizing highway diesel fuel, we estimate that the potential need 
for lubricity additives in NRLM diesel fuel under today's action would 
be the same as that for highway diesel fuel meeting the same sulfur 
standard.
---------------------------------------------------------------------------

    \143\ See chapter 5 of the RIA for a discussion of the potential 
impacts on fuel lubricity of this proposal.
---------------------------------------------------------------------------

a. Farm and Mining Equipment
    The types of fuel pumps and injection systems used in the nonroad 
diesel engines found in farm and mining equipment are similar to those 
used in highway diesel vehicles.\144\ The hydrotreating process for 
generating 500 ppm diesel fuel will not adversely effect fuel injection 
equipment in farm and mining equipment based on the use of comparable 
injection systems in highway diesel vehicles. We believe that the use 
of lubricity additives in 15 ppm sulfur NRLM diesel fuel will be 
required and result in adequate protection of fuel injection equipment 
and is similar to that needed for 15 ppm sulfur highway diesel fuel.
---------------------------------------------------------------------------

    \144\ Nonroad and highway diesel engines meeting similar 
emissions standards use similar fuel systems provided by common 
suppliers. For example, a nonroad engine meeting the 2001 Tier 2 
nonroad diesel engine emission standards would have the same fuel 
system as a highway diesel engine meeting the 1998 highway diesel 
engine emissions standards.
---------------------------------------------------------------------------

b. Locomotives
    One of the locomotive manufacturers expressed concern in its 
comments that low sulfur fuel might damage existing locomotives. 
However, the manufacturer provided no evidence to show that such damage 
would likely occur. Locomotives already use a significant amount of low 
sulfur fuel, especially in California, and we have not seen any 
evidence of sulfur-related problems. The railroads expressed a similar 
concern, but acknowledged that any potential problems would be 
manageable with sufficient lead time. At this time, we see no reason 
for any special concern related to locomotives using low sulfur fuel.
2. A Voluntary Approach on Lubricity
    In the United States, there is no government or industry standard 
for diesel fuel lubricity. Therefore, specifications for lubricity are 
determined by the market. Since the beginning of the 500 ppm sulfur 
highway diesel program in 1993, refiners, engine manufacturers, engine 
component manufacturers, and the military have been working with ASTM

[[Page 39079]]

to develop protocols and standards for diesel fuel lubricity in its D 
975 specifications for diesel fuel. ASTM is working towards a single 
lubricity specification that is applicable to all diesel fuel used in 
any type of engine. Although ASTM has not yet adopted specific 
protocols and standards, refiners that supply the U.S. market have been 
treating diesel fuel with lubricity additives on a batch by batch 
basis, when poor lubricity fuel is produced. ASTM's target 
implementation date for this specification is January 1, 2005.
    The potential need for lubricity additives in diesel fuel meeting a 
15 ppm sulfur specification was evaluated during the development of 
EPA's highway diesel rule. In response to the proposed highway diesel 
rule, all comments submitted regarding lubricity either stated or 
implied that the proposed sulfur standard of 15 ppm would likely cause 
the refined fuel to have lubricity characteristics that would be 
inadequate to protect fuel injection equipment, and that mitigation 
measures such as lubricity additives would be necessary. However, the 
commenters suggested varied approaches for addressing lubricity. For 
example, some suggested that we need to establish a lubricity 
requirement by regulation while others suggested that the current 
voluntary, market based system would be adequate. The Department of 
Defense recommended that we encourage the industry (ASTM) to adopt 
lubricity protocols and standards before the 2006 implementation date 
of the 15 ppm sulfur standard for highway diesel fuel.
    The final highway diesel rule did not establish a lubricity 
standard for highway diesel fuel. We believe the issues related to the 
need for diesel lubricity in fuel used in nonroad diesel engines are 
substantially the same as those related to the need for diesel 
lubricity for highway engines. Consequently, we expect the same 
industry-based voluntary approach to ensuring adequate lubricity in 
nonroad diesel fuels that we recognized for highway diesel fuel. We 
believe the best approach is to allow the market to address the 
lubricity issue in the most economical manner, while avoiding an 
additional regulatory scheme. A voluntary approach should provide 
adequate customer protection from engine failures due to low lubricity, 
while providing the maximum flexibility for the industry. This approach 
would be a continuation of current industry practices for diesel fuel 
produced to meet the current federal and California 500 ppm sulfur 
highway diesel fuel specifications, and benefits from the considerable 
experience gained since 1993. It would also include any new 
specifications and test procedures that we expect would be adopted by 
ASTM regarding lubricity of NRLM diesel fuel quality.
    In any event, this is an issue that will be resolved to meet the 
demands of the highway diesel market, and whatever resolution is 
reached for highway diesel fuel could be applied to NRLM diesel fuel 
with sufficient advance notice. We are continuing to participate in the 
ASTM Diesel Fuel Lubricity Task Force \145\ and will assist their 
efforts to finalize a lubricity standard. We are hopeful that ASTM can 
reach a consensus this summer at the next meeting of the ASTM's 
Lubricity Task Force. If for some reason ASTM does not take action to 
set a lubricity specification, EPA will consider taking appropriate 
action to ensure 15 ppm sulfur diesel fuel has adequate lubricity.
---------------------------------------------------------------------------

    \145\ ASTM sub committee D02.E0.
---------------------------------------------------------------------------

3. What Other Impact Would Today's Actions Have on the Performance of 
Diesel and Other Fuels?
    We do not expect that the fuel program finalized today will have 
any negative impacts on the performance of diesel engines in the 
existing fleet which would use the fuels regulated today.
    While the process of lowering sulfur levels to 500 ppm does lower 
polynuclear aromatic hydrocarbons (PNAs) and total aromatics in 
general, it does not achieve the near-zero levels previously seen in 
California. The 15 ppm sulfur standard will further reduce PNAs, 
however, in most diesel fuel, there will still be PNAs present. 
Furthermore, since the 1990's, diesel engine manufacturers have 
switched to alternative materials (such as Viton), which do not 
experience leakage when PNAs are reduced. We believe that there will be 
no issues with leaking fuel pump O-rings with the changes in diesel 
fuel sulfur levels required by this rulemaking.
    The moderate reduction in PNAs and total aromatics associated with 
the hydrotreating of diesel fuel will tend to increase the cetane index 
and number of diesel fuel. This will improve the driveability of 
vehicles operating on this higher cetane diesel fuel.
    We do not expect any negative impacts on other fuels, such as jet 
fuel or heating oil. We do expect that the sulfur levels of heating oil 
may decrease because of this rulemaking. Beginning in mid-2007, we 
expect that controlling NRLM diesel fuel to 500 ppm sulfur will lead 
many pipelines to discontinue carrying high sulfur heating oil as a 
separate grade. In areas served by these pipelines, heating oil users 
will likely switch to 500 ppm sulfur diesel fuel. This will reduce 
emissions of SO2 and sulfate PM from furnaces and boilers 
fueled with heating oil. The primary exception to this will likely be 
the Northeast, where a distinct higher sulfur heating oil will still be 
distributed as a separate fuel. Also, we expect that a small volume of 
moderate sulfur distillate fuel will be created during distribution 
from the mixing of low sulfur diesel fuels and higher sulfur fuels, 
such as jet fuel in the pipeline interface. Such moderate sulfur 
distillate will often be sold by the terminal as high sulfur heating 
oil, but in fact its sulfur level will be lower than that normally sold 
as heating oil.

H. Refinery Air Permitting

    Prior to beginning diesel desulfurization projects, some refineries 
may be required to obtain a preconstruction permit, under the New 
Source Review (NSR) program, from the applicable state/local air 
pollution control agency.\146\ We believe that today's program provides 
sufficient lead time for refiners to obtain any necessary NSR permits 
well in advance of the applicable compliance dates.
---------------------------------------------------------------------------

    \146\ Hydrotreating diesel fuel involves the use of process 
heaters, which have the potential to emit pollutants associated with 
combustion, such as NOX, PM, CO and SO2. In 
addition, reconfiguring refinery processes to add desulfurization 
equipment could increase fugitive VOC emissions. The emissions 
increases associated with diesel desulfurization would vary widely 
from refinery to refinery, depending on many source-specific 
factors, such as crude oil supply, refinery configuration, type of 
desulfurization technology, amount of diesel fuel produced, and type 
of fuel used to fire the process heaters.
---------------------------------------------------------------------------

    Given that today's diesel sulfur program provides roughly three 
years of lead time before the 500 ppm standard takes effect, we believe 
refiners will have time to obtain any necessary preconstruction 
permits. In addition, the experience gained by many refineries to 
obtain the preconstruction permits needed to comply with the Tier 2 and 
highway diesel fuel programs should benefit them in obtaining the 
necessary permits to comply with today's new diesel fuel requirements. 
Nevertheless, we believe it is reasonable to continue our efforts under 
the Tier 2 and highway diesel fuel programs, to help states in 
facilitating the issuance of permits under the NRLM diesel fuel sulfur 
program whenever such assistance may be needed and requested. We 
anticipate that such assistance may include both technical

[[Page 39080]]

and procedural assistance as would be provided by the appropriate EPA 
Regional and Headquarters offices. Finally, to facilitate the 
processing of permits, we encourage refineries to begin discussions 
with permitting agencies and to submit permit applications as early as 
possible.

V. Nonroad, Locomotive and Marine Diesel Fuel Program: Details of the 
Compliance and Enforcement Provisions

    As with earlier fuel programs, we have developed a comprehensive 
set of compliance and enforcement provisions designed to promote 
effective and efficient implementation of this fuel program and thus to 
achieve the full environmental potential of the program. The compliance 
provisions under today's final rule are designed to ensure that 
nonroad, locomotive, and marine diesel fuel sulfur content requirements 
are met throughout the distribution system, from the refiner or 
importer through to the end user, subject to certain provisions 
applicable during the early transition years. Section IV above 
describes our program for the reduction of sulfur in nonroad, 
locomotive and marine (NRLM) diesel fuel including the standards and 
basic design of the compliance and enforcement program. This section 
contains additional details regarding the compliance and assurance 
program. The provisions discussed in this section fall into several 
broad categories:

--Special fuel provisions and exemptions;
--Additional provisions applicable to refiners and importers;
--Additional provisions applicable to parties downstream of the 
refinery or importer;
--Special provisions regarding additives, kerosene, and the prohibition 
against the use of motor oil in fuel;
--Fuel testing and sampling requirements;
--Records required to be kept, including those applying under the 
designate and track, credit provisions, small refiner, and refiner 
hardship provisions;
--Reporting requirements;
--Exemptions from the program;
--Provisions concerning liability, defenses, and penalties for 
noncompliance; and
--The selection of the marker for heating oil and 500 ppm sulfur LM 
diesel fuel. (The specific requirements with respect to heating oil and 
500 ppm sulfur LM diesel fuel inside and outside of the Northeast/Mid-
Atlantic Area are discussed in section IV.D.)

A. Special Fuel Provisions and Exemptions

    As discussed in section IV.A.1 above, the sulfur standards in 
today's rule generally cover all the diesel fuel that is intended for 
use in or used in nonroad, locomotive, and marine (NRLM) applications 
that is not already covered by the standards for highway diesel fuel. 
For the purposes of this preamble, this fuel is defined primarily by 
the type of engine which it is used to power: Land-based nonroad, 
locomotive, and marine diesel engines. Section IV.A.1 above also 
describes several types of petroleum distillate that are not covered by 
the sulfur standards promulgated today, including jet fuel and heating 
oil, provided they are not used in NRLM engines. The following 
paragraphs discuss several provisions and exemptions for NRLM diesel 
fuel that will apply in special circumstances.
1. Fuel Used in Military Applications
    NRLM diesel fuel used in military applications is treated in the 
same manner as under the recent highway diesel rule. Refiners are not 
required to produce these fuels to the NRLM standards. However, at the 
same time, their use is limited only to certain military applications. 
NRLM diesel fuel is defined so that JP-5, JP-8, F76, and any other 
military fuel that is used or intended for use in NRLM diesel engines 
or equipment is initially subject to all of the requirements applicable 
to NRLM diesel fuel. However, today's rule also exempts these military 
fuels from the diesel fuel sulfur content and other requirements in 
certain circumstances. First, these fuels are exempt if they are used 
in tactical military motor vehicles or nonroad engines, or equipment 
that have a national security exemption from the vehicle or engine 
emissions standards. Due to national security considerations, EPA's 
existing regulations allow the military to request and receive national 
security exemptions (NSE) for their motor vehicles and NRLM diesel 
engines and equipment from emissions regulations if the operational 
requirements for such vehicles, engines, or equipment warrant such an 
exemption. This final rule does not change these provisions. Fuel used 
in these applications is exempt. Second, these fuels are also exempt if 
they are used in tactical military vehicles, engines, or equipment that 
are not covered by a national security exemption but, for national 
security reasons (such as the need to be ready for immediate deployment 
overseas), these vehicles, engines, and equipment need to be fueled on 
the same fuel as vehicles, engines, or equipment with a national 
security exemption. Use of JP-5, JP-8, F76, or any other fuel not 
meeting NRLM diesel fuel standards in a motor vehicle or NRLM diesel 
engine or equipment other than the those described above is prohibited 
under today's rule.
    EPA and the Department of Defense have developed a process to 
address the tactical vehicles, engines, and equipment covered by the 
diesel fuel exemption and are discussing whether changes to it might be 
appropriate. Based on data provided by the Department of Defense to 
date in the context of implementing a similar exemption provision in 
the highway program, EPA believes that providing an exemption for 
military fuel used in tactical nonroad engines and equipment will not 
have any significant environmental impact.
    The Department of Defense (DoD) commented that EPA should 
reconsider its determination that the definition of diesel fuel 
includes JP8 and JP5. DoD cited a 1995 letter from EPA which stated 
that there was insufficient reason to conclude that JP-8 is commonly 
and commercially known as diesel fuel under the then applicable 
definition of motor vehicle diesel fuel. Since the time of this letter, 
EPA has become aware of a substantial number of cases of the misuse of 
aviation turbine fuel in highway engines. The potential for misuse of 
JP-8 or similar fuels in NRLM equipment where no national security 
exemption exists would remain. To ensure that NRLM equipment is 
properly fueled with low sulfur fuel, the definition of NRLM diesel 
fuel has been written to encompass all diesel or other distillate fuels 
used or intended for use in NRLM engines, which would include JP-8 and 
JP-5. Furthermore, the provisions in today's rule allow vehicles, 
engines, and equipment to be fueled with military specification fuels 
that are exempt from the sulfur standards when needed for national 
security. We believe that this provides DoD with the needed flexibility 
to meet its goals of keeping vehicles, engines, and equipment ready for 
quick deployment overseas.
2. Fuel Used in Research, Development, and Testing
    Today's final rule permits parties to request an exemption from the 
sulfur or other standards for NRLM diesel fuel used for research, 
development and testing purposes (``R & D exemption''). We recognize 
that there may be legitimate research programs that require the use of 
diesel fuel with higher sulfur levels than allowed under today's

[[Page 39081]]

rule. As a result, this final rule contains provisions for obtaining an 
exemption from the prohibitions for persons, producing, distributing, 
transporting, storing, selling, or dispensing NRLM diesel fuel that 
exceeds the standards, where such diesel fuel is necessary to conduct a 
research, development, or testing program.
    Parties seeking an R & D exemption must submit an application for 
exemption to EPA that describes the purpose and scope of the program, 
and the reasons why higher-sulfur diesel fuel is necessary. Upon 
presentation of the required information, an exemption can be granted 
at the discretion of the Administrator, with the condition that EPA can 
withdraw the exemption in the event the Agency determines the exemption 
is not justified. In addition, an exemption based on false or 
inaccurate information will be considered void ab initio. Fuel subject 
to an exemption is exempt from certain provisions of this rule, 
including the sulfur standards, provided certain requirements are met. 
These requirements include the segregation of the exempt fuel from non-
exempt NRLM and highway diesel fuel, identification of the exempt fuel 
on PTDs, pump labeling, and where appropriate, the replacement, repair, 
or removal from service of emission systems damaged by the use of the 
high sulfur fuel.
3. Fuel Used in Racing Equipment
    There are no provisions for an exemption from the sulfur or other 
content standard and other requirements for diesel fuel used in racing 
in today's final rule. Under certain conditions, racing vehicles are 
not considered nonroad vehicles. See, for example, 40 CFR Sec.  89.2, 
definition of ``nonroad vehicle.'' The fuel used by such racing 
vehicles would not necessarily be considered nonroad diesel fuel. 
However, we believe that there is a realistic chance that such fuel 
also could be used in NRLM equipment, and therefore, should be 
considered NRLM diesel fuel. We received no comments supporting the 
need for an exemption for racing fuel. We are not aware of any 
advantage for racing vehicles or racing equipment to use fuel having 
higher sulfur levels than are required by this rule, and we are 
concerned about the potential for misfueling of nonroad equipment and 
motor vehicles that could result from having a high sulfur (e.g., 3,000 
ppm) fuel for vehicle or nonroad equipment available in the 
marketplace. Consequently, as was the case with the highway diesel 
rule, this final rule does not provide an exemption from the nonroad 
diesel fuel requirements for fuel used in racing vehicles or equipment.
4. Fuel for Export
    Fuel produced for export, and that is actually exported for use in 
a foreign country, is exempt from the fuel content standards and other 
requirements of this final rule. Such fuel will be considered as 
intended for use in the U.S. and subject to the standards in today's 
rule unless it is designated by the refiner as for export only and PTDs 
state that the fuel is for export only. Fuel intended for export must 
be segregated from all fuel intended for use in the U.S., and 
distributing or dispensing such fuel for domestic use is illegal.

B. Additional Requirements for Refiners and Importers

    The primary requirements for refiners and importers under today's 
final rule are discussed in section IV above. In that section, we 
discuss the general structure of the compliance and enforcement 
provisions applicable to refiners and importers, including fuel content 
standards, fuel volume designation and tracking provisions, and credit 
provisions. In this subsection, we discuss several additional 
requirements for refiners and importers that are not addressed in 
section IV. In addition, sections V.G, V.H, and V.I below discuss 
several provisions that apply to all parties in the diesel fuel 
production and distribution system, including refiners and importers.
1. Transfer of Credits
    This final rule includes provisions for NRLM diesel sulfur credit 
transfers that are essentially identical to other fuels rules that have 
credits provisions. As in other fuels rules, NRLM diesel sulfur credits 
can only be transferred between the refiner or importer generating the 
credits and the refiner or importer using the credits. If a credit 
purchaser can not use all the credits it purchased from the refiner who 
generated them, the credits can be transferred one additional time. We 
recognize that there is potential for credits to be generated by one 
party and subsequently purchased and used in good faith by another 
party, where the credits are later found to have been calculated or 
created improperly, or otherwise found to be invalid. As with the 
reformulated gasoline rule, the Tier 2/Gasoline Sulfur rule, and the 
highway diesel sulfur rule, invalid credits purchased in good faith are 
not valid for use by the purchaser. To allow such use would not be 
consistent with the environmental goals of the regulation. In addition, 
both the seller and purchaser of invalid credits must adjust their 
credit calculations to reflect the proper credits and either party (or 
both) can be deemed in violation if the adjusted calculations 
demonstrated noncompliance. We expect that the parties to such a credit 
transaction will develop contractual provisions to address these 
circumstances.
    Nevertheless, in a situation where invalid credits are transferred, 
our strong preference will be to hold the credit seller liable for the 
violation, rather than the credit purchaser. As a general matter we 
expect to enforce a shortfall in credit compliance calculations against 
the credit seller, and we expect to enforce a compliance shortfall 
(caused by the good faith purchase of invalid credits) against a good 
faith purchaser only in cases where we are unable to recover sufficient 
valid credits from the seller to cover the shortfall. Moreover, in 
settlement of such cases we will strongly encourage the seller to 
purchase credits to cover the good faith purchaser's credit shortfall. 
EPA will consider the covering of a credit deficit through the purchase 
of valid credits a very important factor in mitigation of any case 
against a good faith purchaser, whether the purchase of valid credits 
is made by the seller or by the purchaser.
2. Additional Provisions for Importers and Foreign Refiners Subject to 
the Credit Provisions or Hardship Provisions
    Since this final rule includes several compliance options that can 
be used by NRLM diesel fuel importers and foreign refiners, we are also 
finalizing specific compliance and enforcement provisions to ensure 
compliance for imported NRLM diesel fuel. These additional foreign 
refiner provisions are similar to those under the gasoline anti-dumping 
regulations, the gasoline sulfur regulations and the highway diesel 
fuel regulations (see 40 CFR 80.94, 80.410, and 80.620).
    Under today's final rule, the per gallon standards for NRLM diesel 
fuel produced by refineries owned by foreign refiners must be met by 
the importer, unless the foreign refiner has been approved to produce 
NRLM diesel fuel under the credit provisions, small refiner provisions 
or hardship provisions of this final rule. If the foreign refiner is 
approved under any of these provisions, the volume and other 
requirements must be met by the foreign refiner for its refinery(s) and 
the foreign refiner must be the entity(s) generating, using, banking or 
trading any credits for the NRLM diesel fuel produced for and

[[Page 39082]]

imported into the U.S. Importers themselves are not eligible for small 
refiner or hardship relief as they do not face the same capital cost 
and lead-time issues faced by refiners. Importers may participate in 
the credit programs, however, an importer and a foreign refiner may not 
generate credits for the same fuel.
    Any foreign refiner that produces NRLM diesel fuel subject to the 
credit provisions, small refiner provisions or the hardship provisions 
will be subject to the same requirements as domestic refiners operating 
under the same provisions. Additionally, provisions for foreign 
refiners exist that are similar to the provisions at 40 CFR 80.94, 
80.410, and 80.620, which include:

--Segregation of NRLM diesel fuel produced at the foreign refinery 
until it reaches the U.S. and separate tracking of volumes imported 
into each PADD;
--Controls on product designation;
--Load port and port of entry testing; and
--Requirements regarding bonds and sovereign immunity.

    These provisions will aid the Agency in tracking NRLM diesel fuel 
from the foreign refinery to its point of import into this country. We 
believe these provisions are necessary and sufficient to ensure that 
foreign refiners' compliance can be monitored and that the diesel fuel 
requirements in today's rule can be enforced against foreign refiners.
3. Diesel Fuel Treated as Blendstock (DTAB)
    Under today's program, a situation could arise for importers where 
fuel that was expected to comply with the 15 ppm sulfur NRLM standard 
is found to be slightly higher in sulfur than the standard. Rather than 
require that importer to account for, and report, that fuel as 500 ppm 
sulfur fuel, an importer will be able to designate the non-complying 
fuel as blendstock--``diesel fuel treated as blendstock'' or DTAB--
rather than as NRLM diesel fuel. In its capacity as a refiner, the 
party can then blend this DTAB fuel with lower sulfur diesel fuel or 
with other blendstocks to cause the sulfur level of the combined 
product to meet the 15 ppm sulfur NRLM diesel fuel standard prior to 
delivery to another entity. The same situation exists with respect to 
compliance with the 15 ppm sulfur highway standard. However, no 
provision was made in the 2007 highway final rule for this. 
Consequently, we are also finalizing these DTAB provisions in this 
final rule for application to 15 ppm sulfur highway diesel fuel.
    Where diesel fuel that has been previously designated by a refiner 
is used to reduce the sulfur level of the DTAB to 15 ppm or less, the 
party, in its refiner capacity, is required to report only the volume 
of the imported DTAB as the amount of diesel fuel produced.\147\ This 
avoids the double counting that would result if the same diesel fuel is 
reported twice (i.e., once by the refiner who originally produced it 
and again by the refiner using it to blend with DTAB). If the product 
that is blended with the DTAB is not previously designated diesel fuel, 
but is also blendstock, the total combined volume of the DTAB and other 
blendstock constitutes the batch produced.
---------------------------------------------------------------------------

    \147\ Volumes of previously designated diesel fuel would be 
reported as volumes received under the designate and track 
provisions of Section IV.D.
---------------------------------------------------------------------------

    When an importer classifies diesel fuel as DTAB, that DTAB does not 
count toward the importer's calculations under the highway diesel 
rule's temporary compliance option, toward credit generation or use, or 
for volume account balance compliance calculations (see section 
IV).\148\ The same party, however, must include the DTAB in such 
calculations in its capacity as a refiner. We believe such an approach 
will increase the supply of 15 ppm sulfur fuel by reducing the volume 
of near-compliant fuel that is downgraded to higher sulfur 
designations. In essence, it allows importers the same flexibility that 
refiners have within their refinery gate.
---------------------------------------------------------------------------

    \148\ Importer/refiners availing themselves of the DTAB 
provisions are still subject to the downgrading provisions, and 
other provisions applicable to any importer or refiner.
---------------------------------------------------------------------------

    Similar to the provisions discussed above regarding the manufacture 
of 15 ppm sulfur diesel fuel using DTAB, 500 ppm sulfur NRLM and 
highway diesel fuel can also be manufactured using DTAB provided that 
this is appropriately reflected in the importer's compliance 
calculations.

C. Requirements for Parties Downstream of the Refinery or Import 
Facility

    In order for the environmental benefits of the NRLM diesel program 
to be realized, parties in the fuel distribution system downstream of 
the refinery (including pipelines, terminals, bulk plants, wholesale 
purchaser-consumers, and retailers \149\) must ensure that the sulfur 
level of fuels supplied to the various end-users covered by today's 
rule complies with the requirements in today's rule. At certain points 
in the distribution system, such parties must keep the various grades 
of fuel having different sulfur specifications physically 
separate,\150\ and ensure that the fuel is properly designated and 
labeled. In other words, fuel represented as 15 ppm sulfur must comply 
with the 15 ppm sulfur standard, and fuel represented as 500 ppm sulfur 
must meet the 500 ppm sulfur standard. At other points in the 
distribution system, certain fuels may be commingled provided that the 
fuel volumes are appropriately designated and accounted for in the 
custody holders volume account balance. Owners and operators of NRLM 
diesel equipment must also use fuels meeting specific sulfur content 
standards. The following paragraphs discuss several provisions that 
apply to these parties: Distribution of various fuel sulfur grades; 
diesel fuel pump labeling; use of used motor oil in diesel fuel; use of 
kerosene in diesel fuel; use of additives in diesel fuel; requirements 
for end users; and provisions covering downgrading of undyed diesel 
fuel to different grades of fuel. These provisions are analogous to 
similar provisions that apply to highway diesel fuel under the highway 
program. Section IV discusses in detail the provisions applicable to 
downstream parties under the designate and track program.
---------------------------------------------------------------------------

    \149\ An owner/operator of a tanker truck that delivers fuel 
directly from the tanker truck tank into motor vehicles or nonroad 
equipment of another business entity (i.e. a mobile refueler) would 
be acting as a retailer, and the truck would be operating as a 
retail outlet. In other words, the term retail outlet is not limited 
to stationary facilities. EPA proposed specific textual changes to 
the definition of retail outlet to clarify this, but has decided 
there is no need to change the definition, as it has always had this 
plain meaning. The owner/operator of such a tanker truck may also be 
subject to distributor requirements and prohibitions, or carrier 
responsibilities if the trucker company does not take title to the 
fuel. As the definitions in 40 CFR 80.2 make clear, it is the 
functions performed by the owner/operator that determine whether 
they come within the scope of the applicable definitions, and the 
resulting obligations or requirements that apply. Mobile refuelers 
are not subject to the labeling requirements applicable to other 
retailers but are required to provide PTDs to their customers.
    \150\ For example: Once the required marker is added to heating 
oil at the terminal, heating oil must be segregated from all other 
fuel grades. Once red dye is added to NRLM it must be segregated 
from highway diesel fuel.
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1. Product Segregation and End Use Requirements
    The main requirements for compliance with the fuel sulfur standards 
under today's rule, including the designate and track provisions, are 
discussed in section IV of today's preamble. The sulfur content of all 
fuels subject to the sulfur requirements in today's rule must be 
appropriately

[[Page 39083]]

represented (designated/classified/labeled) at all times through to the 
retailer or wholesale purchaser consumer. Furthermore, the designation 
and classification information on the label and PTD, and the actual 
sulfur content of any subject fuel must be consistent with the 
requirements detailed in section IV. Section IV also details how to 
accurately redesignate, reclassify, and re-label fuel volumes. This 
subsection discusses the various grades and uses of NRLM fuel under the 
NRLM diesel program. In later subsections, we discuss related 
requirements for PTDs to identify fuels throughout the distribution 
system and provisions relating to the liability that all parties in the 
distribution face for failing to maintain the standards of these 
different fuel sulfur grades.
a. The Period From June 1, 2007 Through May 31, 2010
    From June 1, 2007 through May 31, 2010, all fuel used in NRLM 
equipment must meet a 500 ppm sulfur standard except for fuel produced 
or imported under the hardship, small refiner, and credit 
provisions.\151\ Outside of the Northeast/Mid-Atlantic Area and Alaska, 
we will not be able to rely upon the measurement of sulfur content 
alone to enforce the segregation requirements for heating oil, and are 
therefore requiring that heating oil be marked before it leaves the 
terminal by the addition of 6 mg/L of SY-124. Fuel containing more than 
0.1 mg/L of the marker will be deemed to be heating oil and may not be 
used as nonroad, locomotive or marine fuel.
---------------------------------------------------------------------------

    \151\ Fuel produced in the distribution system that meets a 500 
ppm sulfur specification may be used in NRLM equipment through June 
1, 2014, and in locomotive and marine equipment thereafter.
---------------------------------------------------------------------------

    NRLM fuel designated or labeled as 500 ppm sulfur must meet the 500 
ppm sulfur standard and any fuel designated or labeled as 15 ppm must 
meet the 15 ppm sulfur standard.\152\ If a fuel meeting these standards 
is mixed or contaminated with a higher sulfur fuel it must be 
downgraded to the higher sulfur product and new documentation (e.g., 
PTD, label) must be created to reflect the downgrade. During this 
period there will also be nonroad equipment that is expected to be 
equipped with sulfur sensitive emissions control technology that needs 
to operate on 500 ppm sulfur or less fuel in order to meet the NRLM 
program's emission standards in-use. Fuels sold for use in, or 
dispensed into, these engines must be identified as meeting the 15 ppm 
sulfur standard or the 500 ppm sulfur standard, as applicable, and if 
so identified must meet such standard. Distributors and retailers must 
avoid contaminating fuel represented by them on PTDs or pump labels as 
15 ppm sulfur fuel or 500 ppm sulfur fuel with higher sulfur fuels. End 
users are required to use only the fuel grades identified as 
appropriate for use on the label affixed to their NRLM equipment.
---------------------------------------------------------------------------

    \152\ This requirement becomes effective June 1, 2006 to support 
the anti-downgrade requirements in the highway diesel rule.
---------------------------------------------------------------------------

b. The Period From June 1, 2010 Through May 31, 2012
    Beginning June 1, 2010, all fuel used in nonroad equipment must 
meet a 15 ppm sulfur standard except for 500 ppm sulfur fuel produced 
or imported under the hardship, small refiner, and credit provisions, 
or downstream flexibility provisions which may continue to be used in 
nonroad engines produced prior to 2011. Locomotive and marine fuel will 
continue to be subject to the sulfur requirements applicable beginning 
June 1, 2007, until May 31, 2012.
    During this time period, we will not be able to rely upon the 
measurement of sulfur content alone to enforce the segregation 
requirements for LM fuel and NR 500 ppm sulfur fuel outside of the 
Northeast/Mid-Atlantic Area and Alaska, and are therefore requiring 
that LM fuel produced or imported for use outside of the Northeast/Mid-
Atlantic Area and Alaska be marked before it leaves the terminal by the 
addition of 6 mg/L of SY-124. Fuel containing more than 0.1 mg/L of the 
marker will be deemed to be either LM fuel or heating oil and may not 
be used as nonroad fuel. Fuel containing the marker that meets a 500 
ppm sulfur standard will be deemed to be LM fuel, whereas fuel 
containing the marker with a sulfur content above 500 ppm will be 
deemed to be heating oil.
    As discussed in section IV above, small refiners will be able to 
continue to produce 500 ppm sulfur nonroad fuel, through May 31, 2014. 
Other refiners may use credits through May 31, 2014 to continue to 
produce fuel to the 500 ppm sulfur nonroad diesel fuel standard. 
Nonroad diesel fuel meeting a 500 ppm sulfur standard may also be 
produced due to interface mixing in the distribution system.\153\ In 
any case, 15 ppm sulfur diesel fuel must be segregated from 500 ppm 
sulfur NRLM diesel fuel throughout the distribution system including 
the end user, such that it maintains its designation, or it must be 
redesignated and labeled to its downgraded specification.\154\
---------------------------------------------------------------------------

    \153\ Such 500 ppm sulfur downstream flexibility nonroad diesel 
fuel may be also be used in LM equipment since it complies with the 
LM sulfur standard applicable during this time period. Thus, both 
marked and unmarked 500 ppm sulfur fuel may be used in LM equipment 
during this time period.
    \154\ These flexibilities do not exist in the Northeast/Mid-
Atlantic Area, and only the small refiner option exists in Alaska.
---------------------------------------------------------------------------

    Because of the sulfur sensitivity of the expected engine emission 
control systems beginning in model year 2011 for nonroad diesel 
engines, it is imperative that the distribution system segregate 
nonroad diesel fuel subject to the 15 ppm sulfur standard from higher 
sulfur distillate products, such as 500 ppm sulfur LM fuel, 500 ppm 
sulfur nonroad diesel fuel produced by small refiners or through the 
use of credits, heating oil, and jet fuel. End users are required to 
use only the fuel grades identified as appropriate for use on the label 
affixed to their NR and LM equipment.
    We are also concerned about potential misfueling of engines 
requiring 15 ppm sulfur fuel at retail or wholesale purchaser-consumer 
facilities (as defined under this program), or other end-user 
facilities, even when segregation of 15 ppm sulfur fuel from the 
higher-sulfur grades of diesel fuel has been maintained in the 
distribution system. Thus, downstream compliance and enforcement 
provisions of this rule are aimed at both preventing contamination of 
nonroad diesel fuel subject to the 15 ppm sulfur standard (i.e., fuel 
represented to meet that standard) and preventing misfueling of new 
nonroad equipment.
c. The Period From June 1, 2012 Through May 31, 2014
    Beginning June 1, 2012, all fuel used in locomotive and marine 
equipment must meet a 15 ppm sulfur standard except for 500 ppm sulfur 
fuel produced or imported under the hardship, small refiner, and credit 
provisions, or downstream flexibility provisions. As discussed in 
section IV above, small refiners will be able to continue to produce 
500 ppm sulfur LM fuel, through May 31, 2014. Other refiners may use 
credits through May 31, 2014 to continue to produce fuel to the 500 ppm 
sulfur LM diesel fuel standard. Locomotive, and marine diesel fuel 
meeting a 500 ppm sulfur standard may also be produced due to interface 
mixing in the distribution system indefinitely.
    The marker requirement for 500 ppm sulfur LM diesel fuel expires on 
June 1, 2012. After June 1, 2012, only heating oil must continue to be 
marked and any LM diesel fuel distributed from the terminal must not 
contain the marker. To allow marked LM diesel fuel

[[Page 39084]]

distributed prior to June 1, 2012 to be consumed by end-users, the 
downstream prohibition against LM fuel containing the marker will not 
become effective until October 1, 2012. Beginning October 1, 2012, LM 
diesel fuel at any location must contain no more than 0.1 mg/L of the 
marker.\155\ We believe that allowing four months for downstream 
parties to blend down their stocks of marked LM diesel fuel with 
receipts of unmarked LM diesel fuel will be sufficient for such parties 
to comply with the prohibition against possessing LM fuel with a marker 
concentration greater than 0.1 mg/L.
---------------------------------------------------------------------------

    \155\ Allowing four months for the LM fuel distribution system 
to sufficiently purge itself of marked fuel is consistent with the 
time allowed for LM diesel fuel to comply with a 500 ppm sulfur 
standard after the refinery gate 15 ppm sulfur standard for LM fuel 
becomes effective.
---------------------------------------------------------------------------

    The requirements that became effective for fuel used in nonroad 
equipment on June 1, 2010, will remain effective until May 31, 2014.
d. After May 31, 2014
    After the small refiner, credit, and off-specification fuel 
flexibilites have expired, the remaining sulfur grades of diesel fuel 
will be 15 ppm sulfur highway and NRLM fuel, 500 ppm sulfur LM diesel 
fuel (produced due to interface mixing in the distribution system 
outside of the Northeast/Mid-Atlantic Area and Alaska), and heating 
oil, some of which may meet a 500 ppm sulfur standard. Product transfer 
documents are required to accompany the batches of such fuels which 
must contain the specified identifying information. Highway and NRLM 
diesel fuel meeting a 15 ppm sulfur specification must be segregated 
from 500 ppm sulfur LM diesel fuel, and heating oil. Today's rule 
contains provisions for the fungible shipment of LM diesel fuel with 
any heating oil meeting a 500 ppm sulfur cap up to the point where the 
fuel leaves the terminal that are similar to the provisions that allow 
the fungible shipment of high sulfur NRLM diesel fuel and high sulfur 
heating oil discussed in the previous section. Under such circumstances 
the designate and track and heating oil account balance requirements 
must be satisfied.
2. Diesel Fuel Pump Labeling To Discourage Misfueling
    For any multiple-fuel program like the two-step program we are 
finalizing today, we believe that the clear labeling of nonroad diesel 
fuel pumps is vital so that end users can readily distinguish between 
the several grades of fuel that may be available at fueling facilities, 
and properly fuel their nonroad equipment. Section III.N above 
describes the labels that manufacturers are required to place on 
nonroad equipment, and the information that must be provided to nonroad 
equipment owners. Section VI discusses the likely benefit for many 
nonroad engines to utilize 500 ppm sulfur diesel fuel as soon as it 
becomes available in 2007. Today's final rule includes requirements for 
labeling fuel pump stands used to fuel NRLM equipment and highway 
diesel vehicles.
    To help prevent misfueling of nonroad, locomotive and marine 
engines, and to thus ensure that the environmental benefits of the 
program are realized, we are finalizing pump labeling requirements 
similar to those adopted in the highway diesel rule (40 CFR 80.570). 
Today's pump dispenser labeling requirements are discussed separately 
according to the date they become effective: June 1, 2006, June 1, 
2007, June 1, 2010, and June 1, 2014.
    Today's final rule also amends the pump dispenser labeling language 
in the highway diesel regulations for consistency with the NRLM 
program. Because existing highway diesel regulations prohibit highway 
diesel fuel with sulfur levels above 500 ppm, the highway diesel final 
rule and this program have different meanings for the terms ``low 
sulfur'' and ``high sulfur,'' and the highway diesel final rule does 
not use the term ``ultra low-sulfur.'' Further, because the highway 
diesel final rule did not need to categorize the different uses of non-
highway diesel fuel, the highway diesel final rule and this program 
have different meanings for the term ``nonroad.'' \156\ The amendments 
to the highway pump dispenser labeling language finalized by today's 
rule are meant to avoid confusion at the fuel pumps caused by labels 
that would have different meanings depending on whether the pump is 
dispensing highway or non-highway diesel fuel. Today's final rule adds 
effective dates to each paragraph of the labeling provisions of the 
highway diesel rule for consistency with the additional pump labeling 
sections of this program, and to distinguish the non-highway labeling 
requirement effective June 1, 2006 under the highway diesel rule from 
the non-highway labeling requirements of this rule that are effective 
in 2007.
---------------------------------------------------------------------------

    \156\ In the highway diesel rule, the term ``high-sulfur'' means 
diesel fuel with a sulfur level greater than 15 ppm, whereas in this 
rule it means diesel fuel with a sulfur level greater than 500 ppm. 
In the highway diesel rule, the term ``low-sulfur'' means diesel 
fuel with a sulfur level less than or equal to 15 ppm, whereas in 
this rule it means diesel fuel with a sulfur level less than or 
equal to 500 ppm. In addition, the term ``nonroad'' as used in the 
highway diesel rule means ``non-highway'' (i.e., all fuel that is 
not highway fuel), but the term ``nonroad'' as used in this rule 
does not include locomotive diesel, marine diesel and heating oil.
---------------------------------------------------------------------------

    Alternate labels to those specified in today's rule may be used if 
they are approved by the Administrator.
    Today's rule also finalizes labeling requirements for pumps in 
Alaska that dispense NRLM diesel fuel and heating oil which is exempt 
from the red dye and fuel marker requirements which differ from the 
labeling requirements discussed in this section. Please refer to Sec.  
69.52(e) of the regulatory text to today's rule for these pump labeling 
requirements applicable in Alaska.
a. Pump Labeling Requirements that Become Effective June 1, 2006
    The pump labeling requirements described in this section become 
effective June 1, 2006.
i. Pumps Dispensing Highway Diesel Fuel Subject to the 15 ppm Sulfur 
Standard
    The label on pumps dispensing highway diesel fuel subject to the 15 
ppm sulfur standard must read as follows:

ULTRA LOW-SULFUR HIGHWAY DIESEL FUEL (15 ppm Sulfur Maximum)

    Required for use in all model year 2007 and later highway diesel 
vehicles and engines.
    Recommended for use in all diesel vehicles and engines.

    The above labeling requirement for 15 ppm sulfur highway diesel 
fuel continues through May 31, 2010, after which time different pump 
label requirements for this fuel become effective as described in 
section V.C.2.c.3. of this preamble.
ii. Pumps Dispensing Highway Diesel Fuel Subject to the 500 ppm Sulfur 
Standard
    The label on pumps dispensing highway diesel fuel subject to the 
500 ppm sulfur standard must read as follows:

LOW-SULFUR HIGHWAY DIESEL FUEL (500 ppm Sulfur Maximum)

WARNING

    Federal law prohibits use in model year 2007 and later highway 
vehicles and engines.
    Its use may damage these vehicles and engines.

    Dispensing highway diesel fuel that has a sulfur content above 15 
ppm is prohibited into any highway vehicle after September 30, 2010. 
Hence no pumps may display the above label after September 30, 2010.

[[Page 39085]]

iii. Pumps Dispensing Diesel Fuel for Non-Highway Equipment That Does 
Not Meet the Standards for Motor Vehicle Diesel Fuel
    The label on pumps dispensing diesel fuel for non-highway equipment 
that does not meet the standards for motor vehicle diesel fuel must 
read as follows:

NON-HIGHWAY DIESEL FUEL (May Exceed 500 ppm Sulfur)

WARNING

    Federal law prohibits use in any highway vehicle or engine
    Its use may damage these vehicles and engines.

    This labeling requirement is effective until May 31, 2007, after 
which high sulfur non-highway diesel fuel must be labeled according to 
the provisions described in section V.C.2.b.iii and 500 ppm sulfur non-
highway diesel fuel must be labeled according to the provisions 
described in section V.C.2.b.1. of today's preamble.
b. Pump Labeling Requirements That Become Effective June 1, 2007
    As discussed in section IV, between June 1, 2007 and September 30, 
2010, end users are not always required to dispense fuel meeting the 
500 ppm sulfur standard into nonroad, equipment, locomotives or marine 
vessels. During this time period, small refiner fuel and fuel produced 
under the credit provisions with sulfur levels exceeding 500 ppm will 
continue to exist in the distribution system. During this time period, 
there will also be nonroad equipment with engines certified as meeting 
the Tier 4 emission standards (i.e., engines equipped with emission 
controls that allow them to meet the Tier 4 standards earlier than 
required). Some of this equipment is expected to be equipped with 
sulfur sensitive technology that will need to operate on fuel with a 
sulfur content of 500 ppm or less to function properly. For this 
reason, it is important that NRLM end users be able to know the sulfur 
level of the fuel they are purchasing and dispensing. Therefore, fuel 
pump dispensers for the various sulfur grades must also be properly 
labeled. The following pump labeling requirements become effective from 
June 1, 2007:
i. Pumps Dispensing NRLM Diesel Fuel Subject to the 500 ppm Sulfur 
Standard
    The label on pumps dispensing 500 ppm (maximum) sulfur content 
diesel fuel for use in NRLM engines must read as follows:

LOW-SULFUR NON-HIGHWAY DIESEL FUEL (500 ppm Sulfur Maximum)

WARNING

    Federal law prohibits use in any highway vehicle or engine

    The above labeling requirement remains effective until May 31, 
2010, after which it is superceded by the requirements described below.
ii. Pumps Dispensing NRLM Diesel Fuel Subject to the 15 ppm Sulfur 
Standard
    It is also likely that prior to June 1, 2010 some 15 ppm sulfur 
(maximum) diesel fuel will be introduced into the nonroad market early. 
Both the engine and fuel credit provisions envision such early 
introduction of 2011-compliant engines and 15 ppm sulfur diesel fuel. 
Thus, it is important that nonroad end users be able to know when they 
are purchasing diesel fuel with 15 ppm or less sulfur.\157\ The label 
on pumps dispensing 15 ppm sulfur diesel fuel for use in NRLM engines 
must read as follows:
---------------------------------------------------------------------------

    \157\ The IRS requires that 15 ppm sulfur non-highway diesel 
fuel must contain red dye after it leaves the terminal.
---------------------------------------------------------------------------

ULTRA-LOW SULFUR NON-HIGHWAY DIESEL FUEL (15 ppm Sulfur Maximum)

    Required for use in all model year 2011 and newer nonroad diesel 
engines.
    Recommended for use in all nonroad, locomotive and marine diesel 
engines.

WARNING

    Federal law prohibits use in any highway vehicle or engine.

    The above labeling requirement continues until May 31, 2014, after 
which it is superceded by the labeling provisions described in section 
V.C.2.e.i of today's preamble.
iii. Pumps Dispensing Diesel Fuel With a Sulfur Content Greater Than 
500 ppm for Use in Older NRLM Equipment
    The label on pumps dispensing diesel fuel having a sulfur content 
greater than 500 ppm (for use in older nonroad, locomotive, and marine 
diesel engines) must read as follows:

HIGH-SULFUR NON-HIGHWAY DIESEL FUEL (May Exceed 500 ppm Sulfur)

WARNING

    Federal law prohibits use in highway vehicles or engines
    May damage nonroad, diesel engines required to use low-sulfur or 
ultra-low sulfur diesel fuel.

    The above labeling requirement remains effective until September 
30, 2010. After September 30, 2010 no pump may display this label.
iv. Pumps Dispensing Heating Oil
    As discussed in section IV.B.2.b, it is necessary to segregate 
heating oil from NRLM diesel fuel to ensure that the fuel used in 
nonroad, locomotive, and marine equipment is compliant with the sulfur 
standards in today's rule. The label on pumps dispensing non-highway 
diesel fuel for use other than in nonroad, locomotive or marine 
engines, such as for use in stationary diesel engines or as heating 
oil, must read as follows:

HEATING OIL (May Exceed 500 ppm Sulfur)

WARNING

    Federal law prohibits use in highway vehicles or engines, or in 
nonroad, locomotive, or marine engines.
    Its use may damage these diesel engines.

    The above labeling will remain effective indefinitely.
c. Pump Labeling Requirements That Become Effective June 1, 2010
    Beginning October 1, 2010, all diesel fuel introduced into highway 
diesel vehicles, regardless of the year of manufacture, must meet the 
15 ppm sulfur standard. Furthermore, with certain exceptions, fuel 
introduced into any nonroad engine must meet the 15 ppm sulfur 
standard. The exceptions are fuel allowed to meet the 500 ppm sulfur 
standard for use only in pre-model year 2011 nonroad engines and 
locomotive and marine engines, for example, small refiner nonroad 
diesel fuel and credit nonroad diesel fuel, as well as downgraded 15 
ppm sulfur diesel fuel from the distribution system. This use of 500 
ppm sulfur diesel fuel in nonroad engines will continue through 
September 30, 2014,\158\ after which all nonroad diesel fuel must meet 
the 15 ppm sulfur standard. The following pump labeling requirements 
become effective June 1, 2010:
---------------------------------------------------------------------------

    \158\ Production of 500 ppm sulfur fuel under the credit 
provisions is allowed until June 1, 2012, but small refiner fuel 
subject to the 500 ppm sulfur standard can continue to be produced 
until June 1, 2014 and will be available to end users until 
September 1, 2014.
---------------------------------------------------------------------------

i. Pumps Dispensing NRLM Diesel Fuel Subject to the 500 ppm Sulfur 
Standard
    The label on pumps dispensing 500 ppm (maximum) nonroad, 
locomotive, and marine diesel fuel, as discussed in section IV.B.3.b, 
must read as follows:

LOW-SULFUR NON-HIGHWAY DIESEL FUEL (500 ppm Sulfur Maximum)

WARNING

    Federal law prohibits use in all model year 2011 and newer 
nonroad engines.
    May damage model year 2011 and newer nonroad engines.

[[Page 39086]]

    Federal Law Prohibits Use in any Highway Vehicle or Engine.
    Recommended for use in all locomotive and marine equipment.

    The above labeling requirement remains effective until September 
30, 2014. After September 30, 2014, no pump may display this label.
ii. Pumps Dispensing Marked LM Fuel
    The label on pumps dispensing 500 ppm sulfur locomotive, and marine 
diesel fuel, as discussed in section IV.B.3.b., must read as follows:

LOW-SULFUR LOCOMOTIVE AND MARINE DIESEL FUEL (500 ppm Sulfur Maximum)

WARNING

    Federal law prohibits use in nonroad engines or in highway 
vehicles or engines.

    The above labeling requirement remains effective until September 
30, 2012. After September 30, 2012, no pump may display this label.
iii. Pumps Dispensing Highway Diesel Fuel Subject to the 15 ppm Sulfur 
Standard
    The label on pumps dispensing highway diesel fuel subject to the 15 
ppm sulfur standard of Sec.  80.520(a)(1) must read as follows:

ULTRA LOW-SULFUR HIGHWAY DIESEL FUEL (15 ppm Sulfur Maximum)

    Required for use in all highway diesel vehicles and engines.
    Recommended for use in all diesel vehicles and engines.

    The above labeling requirement for 15 ppm sulfur highway diesel 
fuel continues indefinitely.
d. Pump Labeling Requirements That Become Effective June 1, 2014
    Beginning October 1, 2014, all nonroad fuel distributed to end-
users is required to meet the 15 ppm sulfur standard, without 
exception. Locomotive and marine fuel downstream of the refinery or 
importer is still subject to the 500 ppm sulfur standard. The pump 
labels for heating oil will continue to be the same as for the period 
2010 through 2014. The following pump labeling requirements become 
effective beginning June 1, 2014:
i. Pumps Dispensing NRLM Diesel Fuel Subject to the 15 ppm Sulfur 
Standard
    For pumps dispensing nonroad diesel fuel the label must read as 
follows:

ULTRA-LOW SULFUR NON-HIGHWAY DIESEL FUEL (15 ppm Sulfur Maximum)

    Required for use in all nonroad diesel engines.
    Recommended for use in all locomotive and marine diesel engines.

WARNING

    Federal law prohibits use in any highway vehicle or engine.

    The above labeling requirement continues indefinitely.
ii. Pumps Dispensing Locomotive and Marine Diesel Fuel Subject to the 
500 ppm Sulfur Standard
    For pumps dispensing locomotive or marine diesel fuel, the label 
must read as follows:

LOW-SULFUR LOCOMOTIVE OR MARINE DIESEL FUEL (500 ppm Sulfur Maximum)

WARNING

    Federal law prohibits use in nonroad engines or in highway 
vehicles or engines.
    Its use may damage these engines.

    The above labeling requirement will remain effective indefinitely.
f. Nozzle Size Requirements or other Requirements To Prevent Misfueling
    Like the highway diesel fuel program, the NRLM diesel fuel program 
does not include a nozzle size requirement. In part this is because we 
are not aware of an effective and practicable scheme to prevent 
misfueling through the use of different nozzle sizes or shapes, and in 
part because we do not believe that improper fueling will be a 
significant enough problem to warrant such an action. In the preamble 
to the highway diesel fuel rule, we stated our belief that the use of 
unique nozzles, color-coded scuff-guards, or dyes to distinguish the 
grades of diesel fuel may be useful in preventing accidental use of the 
wrong fuel. (See 66 FR 5119, January 18, 2001.) However, we did not 
finalize any such requirements, for the reasons described in the RIA 
for that final rule (section IV.E).
    Similar reasoning applies to the NRLM diesel fuel program. For 
example, 15 ppm sulfur diesel fuel will be the dominant fuel in the 
market by 2010, likely comprising more than 80 percent of all number 2 
distillate. Further, we believe that 500 ppm sulfur diesel fuel will 
have limited availability between 2010 and 2014. High-sulfur distillate 
for heating oil uses will remain, but will only exist in significant 
volumes in certain parts of the country. In addition, as with highway 
diesel engines, there is currently no standardization of fuel tank 
openings and filler necks that would allow for a simple, inexpensive, 
standardization of nozzles. In any event, we believe that most owners 
and operators of new nonroad diesel engines and equipment will not risk 
voiding the general warranty and the emissions warranty by misfueling.
    Although in the highway diesel fuel rule we did not finalize any 
provisions beyond fuel pump labeling requirements, we recognized that 
some potential for misfueling could still exist. Consequently, we 
expressed a desire to continue to explore with industry simple, cost-
effective approaches that could further minimize misfueling potential 
such as color-coded nozzles/scuff guards. Since the highway diesel rule 
was promulgated, we have had discussions with fuel retailers, wholesale 
purchaser-consumers, vehicle manufacturers, and nozzle manufacturers, 
and continue to examine different methods for preventing accidental or 
intentional misfueling under the highway diesel fuel sulfur program. To 
date, the affected stakeholders, including engine and truck 
manufacturers, truck operators, fuel retailers, and fuel nozzle 
manufacturers have not reached any common view that the concerns over 
misfueling warrant any additional prevention measures.
3. Prohibition Against the Use of Used Motor Oil in New Nonroad Diesel 
Equipment
    We understand that used motor oil is sometimes blended with diesel 
fuel today for use as fuel in nonroad diesel equipment. Such practices 
include blending used motor oil directly into the equipment fuel tank, 
blending it into the fuel storage tanks, and blending small amounts of 
motor oil from the engine crank case into the fuel system as the 
equipment is operated.
    However, motor oil normally contains high levels of sulfur. Thus, 
the addition of used motor oil to nonroad diesel fuel could 
substantially impair the sulfur-sensitive emissions control equipment 
expected to be used by engine manufacturers to meet the emissions 
standards in today's final rule. Depending on how the oil is blended, 
it could increase the sulfur content of the fuel by as much as 200 ppm 
sulfur. As a result, we believe blending used motor oil into nonroad 
diesel fuel could render inoperative the expected emission control 
technology and potentially cause driveability problems. Consequently, 
it would violate the tampering prohibition in the Act. See CAA sections 
203(a)(3), and 213(d).
    Therefore, like the highway diesel rule, today's rule prohibits any 
person from introducing or causing or allowing the introduction of used 
motor oil, or diesel fuel containing used motor oil, into the fuel 
delivery systems of nonroad equipment engines manufactured in model 
year 2011 and later. The only exception to this will be

[[Page 39087]]

where the engine was explicitly certified to the emission standard with 
used motor oil added and the oil was added in a manner consistent with 
the certification. Furthermore, as discussed in section IV, today's 
rule includes certain sunset dates when all NRLM diesel fuel in the 
distribution system must meet the applicable sulfur standard, and 
before that date any NRLM designated, classified, or labeled as 15 ppm 
sulfur fuel must meet that sulfur standard. Blending of used motor oil 
into NRLM could cause these standards to be exceeded in violation of 
today's rule. Any party who causes the sulfur content of nonroad diesel 
fuel subject to the 15 ppm sulfur standard to exceed 15 ppm by blending 
motor oil into nonroad diesel fuel, or by using motor oil as nonroad 
diesel fuel, is subject to liability for violating the sulfur standard. 
Similarly, parties who cause the sulfur level of nonroad diesel fuel 
subject to the 500 ppm sulfur nonroad diesel fuel standard to exceed 
that standard by blending motor oil into the fuel, are also subject to 
liability.
4. Use of Kerosene in Diesel Fuel
    As we discussed in the highway diesel final rule, kerosene is 
commonly added to diesel fuel to reduce fuel viscosity in cold weather 
(see 66 FR 5120, January 18, 2001). This final rule does not limit this 
practice with regard to 15 ppm sulfur or 500 ppm sulfur NRLM diesel 
fuel. However the resulting blend will still be subject to the 15 ppm 
sulfur or 500 ppm sulfur standard. Kerosene that is used, intended for 
use, or made available for use as, or for blending with, 15 ppm sulfur 
or 500 ppm sulfur diesel fuel is itself required to meet the 15 ppm 
sulfur or 500 ppm sulfur standard.
    As a general matter, any party who blends kerosene, or any 
blendstock, into NRLM diesel fuel, or who produces NRLM diesel fuel by 
mixing blendstocks, will be treated as a refiner and will be subject to 
the requirements and prohibitions applicable to refiners under today's 
rule. For example, the fuel that they manufacture must meet the sulfur 
standards established in this rule, and represented on the PTD. 
However, in deference to the longstanding and widespread practice of 
blending kerosene into diesel fuel at downstream locations, downstream 
parties who only blend kerosene into NRLM and highway diesel fuel will 
not be subject to the requirements applicable to other refiners, 
provided that they do not alter the fuel in any other way, and do not 
violate the volume balance requirements discussed in section IV.D. For 
example, they will not need to meet the 80/20 requirements under the 
highway diesel program. This activity is treated the same way under the 
final highway diesel rule. Parties that blend kerosene into diesel fuel 
are subject to the downstream designate and track provisions applicable 
to other downstream parties.
    In order to ensure the continued compliance of 15 ppm sulfur fuel 
with the 15 ppm sulfur standard, downstream parties choosing to blend 
kerosene into 15 ppm sulfur NRLM diesel fuel are required to either 
have a PTD for that kerosene indicating compliance with the 15 ppm 
sulfur standard, or to have test results for the kerosene establishing 
such compliance. Further, downstream parties choosing to blend kerosene 
into 15 ppm sulfur NRLM diesel fuel are entitled to the two ppm 
adjustment factor discussed in section V.D.2. for both the kerosene and 
the diesel fuel into which it is blended at downstream locations, 
provided that the kerosene had been transferred to the party with a PTD 
indicating compliance with that standard. Sulfur test results from 
downstream locations of parties who do not have such a PTD for their 
kerosene will not be subject to this adjustment factor, either for the 
kerosene itself, or for the NRLM diesel fuel into which it is blended.
    Any party who causes the sulfur content of NRLM diesel fuel 
represented as meeting the 15 ppm sulfur standard to exceed 15 ppm 
sulfur by blending kerosene into NRLM diesel fuel, or by using greater 
than 15 ppm sulfur kerosene as NRLM diesel fuel, is subject to 
liability for violating the sulfur standard. Similarly, parties who 
cause the sulfur level of NRLM diesel fuel subject to the 500 ppm 
sulfur diesel fuel standard to exceed that standard by blending 
kerosene into the fuel, are also subject to liability.
    Today's rule does not require refiners or importers of kerosene to 
produce or import kerosene meeting the 15 ppm sulfur standard. However, 
we believe that refiners will produce ultra low sulfur kerosene in the 
same refinery processes that they use to produce ultra low sulfur 
diesel fuel, and that the market will drive supply of ultra low sulfur 
kerosene for those areas where, and during those seasons when, the 
product is needed for blending with NRLM, as well a highway, diesel 
fuel.
    As discussed in section IV.D, kerosene blending also factors into 
the designate and track provisions finalized today from June 1, 2006 
until June 1, 2010. During this time period it is possible, and in fact 
likely, that kerosene meeting the 15 ppm sulfur standard will instead 
be designated as No. 1 highway diesel fuel, and will simply need to 
meet all of the requirements of highway diesel fuel. It is also 
possible, though less likely that kerosene meeting the 500 ppm sulfur 
standard will be designated as No. 1 highway diesel fuel. However, if 
it is, it would also merely need to comply with all the requirements 
applicable to highway diesel fuel.
5. Use of Diesel Fuel Additives
    Diesel fuel additives include lubricity improvers, corrosion 
inhibitors, cold-operability improvers, and static dissipaters. Use of 
such additives is distinguished from the use of kerosene or biodiesel 
by the low concentrations at which they are used (defined to be one 
percent or less) and their relatively more complex chemistry.\159\ The 
suitability of diesel fuel additives for use in diesel fuel meeting a 
500 ppm sulfur specification has been well established due to the 
existence of 500 ppm sulfur highway diesel fuel in the marketplace 
since 1993. The suitability of additives for use in 15 ppm sulfur 
diesel fuel was first addressed by EPA in the highway diesel program, 
which requires highway diesel fuel to meet a 15 ppm sulfur standard 
beginning in 2006. At the time of the finalization of the highway 
diesel final rule and during our development of the proposed NRLM 
diesel rule, our review of data submitted by additive and fuel 
manufacturers to comply with EPA's Fuel and Fuel Additive Registration 
requirements indicated that additives to meet every purpose, including 
static dissipation, are currently in common use which meet a 15 ppm cap 
on sulfur content.\160\
---------------------------------------------------------------------------

    \159\ Diesel fuel additives are used at concentrations commonly 
expressed in parts per million. Diesel fuel additives can include 
specially-formulated polymers and other complex chemical components. 
Kerosene is used at much higher concentrations, expressed in volume 
percent. Unlike diesel fuel additives, kerosene is a narrow 
distillation fraction of the range of hydrocarbons normally 
contained in diesel fuel.
    \160\ See Chapter IV.D. of the RIA for the highway diesel fuel 
rule for more information on diesel fuel additives, EPA Air docket 
A-99-06, docket item V-B-01. Also see 40 CFR part 79.
---------------------------------------------------------------------------

a. Additives Used in 15 ppm Sulfur Diesel Fuel
    Similar to the highway diesel rule, today's rule allows the bulk 
addition of diesel fuel additives with a sulfur content greater than 15 
ppm in NRLM diesel fuel under certain circumstances.\161\ However, NRLM

[[Page 39088]]

diesel fuel containing such additives will continue to be subject to 
the 15 ppm sulfur cap. We believe that it is most appropriate for the 
market to determine how best to accommodate increases in fuel sulfur 
content from the refinery gate to the end user, while maintaining the 
15 ppm sulfur cap, and whether such increases result from contamination 
in the distribution system or bulk diesel additive use. By providing 
this flexibility, we anticipate that market forces will encourage an 
optimal balance between the competing demands of manufacturing fuel 
lower than the 15 ppm sulfur cap, limiting contamination in the 
distribution system, and limiting the bulk additive contribution to 
fuel sulfur content.
---------------------------------------------------------------------------

    \161\ Most diesel fuel additives are added at the terminal to 
bulk fuel volumes before sale to the consumer. These additives are 
referred to as bulk additives. End users and wholesale purchaser 
consumers sometimes also add additives to diesel fuel by hand 
blending into the vehicle fuel tank or fleet fuel storage tanks. 
Such additives are referred to as aftermarket additives. As 
discussed at the end of this section, today's rule contains 
different requirements regarding the use of aftermarket additives.
---------------------------------------------------------------------------

    Thus, as in the highway diesel program, additive manufacturers that 
market bulk diesel additives with a sulfur content higher than 15 ppm 
and blenders that use them in nonroad diesel have additional 
requirements to ensure that the 15 ppm sulfur cap for NRLM diesel fuel 
is not exceeded.
    The 15 ppm sulfur cap on highway diesel fuel that becomes effective 
in 2006 may encourage the gradual retirement of additives that do not 
meet a 15 ppm sulfur cap. The 15 ppm sulfur cap for NR fuel in 2010 and 
for LM fuel in 2012 may further this trend. However, we do not 
anticipate that this will result in disruption to additive users and 
producers or a significant increase in cost. Additive manufacturers 
commonly reformulate their additives on a periodic basis as a result of 
competitive pressures. We anticipate that any reformulation that might 
need to occur to meet a 15 ppm sulfur cap, will be accomplished prior 
to the implementation of the 15 ppm sulfur cap on highway diesel fuel 
in 2006.
    Like the highway diesel fuel rule, this rule will limit the 
continued use in 15 ppm sulfur fuel of a bulk additive that exceeds 15 
ppm sulfur to a concentration of less than one volume percent. We 
believe that this limitation is appropriate and will not cause any 
undue burden because the diesel fuel additives for which this 
flexibility was included are always used today at concentrations well 
below one volume percent. Further, one volume percent is the threshold 
above which the blender of an additive becomes subject to all the 
requirements applicable to a refiner. See 40 CFR 79.2(d)(1) and 40 CFR 
part 80.
    The specific requirements regarding the use of bulk diesel fuel 
additives in NRLM fuel subject to the 15 ppm sulfur standard are as 
follows:

--Bulk additives that have a sulfur content at or below 15 ppm must be 
accompanied by a PTD that states: ``The sulfur content of this additive 
does not exceed 15 ppm.''
--Bulk additives that exceed 15 ppm sulfur could continue to be used in 
diesel fuel subject to the 15 ppm sulfur standard provided that they 
are used at a concentration of less than one volume percent and their 
transfer is accompanied by a PTD that lists the following:

    (1) A warning that the additive's sulfur content may exceed 15 ppm 
and that improper use of the additive may result in non-complying fuel,
    (2) The additive's maximum sulfur concentration,
    (3) The maximum recommended concentration for use of the additive 
in diesel fuel, and
    (4) The contribution to the sulfur level of the fuel that would 
result if the additive is used at the maximum recommended 
concentration.
    We proposed that the affirmative defenses to presumptive liability 
for blenders of bulk additives with a sulfur content greater than 15 
ppm must include periodic sulfur tests after the addition of the 
additive showing that the finished fuel does not exceed the 15 ppm 
sulfur cap. We are adopting this proposed requirement for additives 
other than static dissipater additives.
b. Static Dissipater Additives
    Comments from diesel fuel distributors and additive manufactures 
stated that static dissipater additives are unique among the various 
types of diesel fuel additives in that there are currently none 
available with a sulfur content below 15 ppm which are fully effective. 
Considering the lack of static dissipater additives meeting a 15 ppm 
sulfur cap, and the inability to add static dissipater (S-D) additives 
prior to shipment by pipeline, commenters stated that the prohibitive 
cost of testing fuel batches after the addition of static dissipater 
additives could discourage their use. To avoid the potential adverse 
impact on the safety of the fuel distribution industry which could 
result, commenters requested that we provide an alternative method for 
use in demonstrating their affirmative defense to presumptive liability 
when they use static dissipater additives with a sulfur content above 
15 ppm. Manufacturers of static dissipater additives stated that due to 
very low treatment rates that are needed for such additives, their use 
will raise the sulfur content of the finished fuel by no more than 0.02 
ppm. Commenters stated that because of the extremely low potential 
contribution to the sulfur level of the finished diesel fuel which 
might result from the use of static dissipater additives, there was 
little risk that use of such additives would result in noncompliance 
with the 15 ppm sulfur cap.
    We contacted all of the additive manufactures that have registered 
static dissipater additives in EPA's Fuel and Fuel Additive 
Database.\162\ All of these manufactures stated that there are no 
fully-effective static dissipater additives available that have a 
sulfur content below 15 ppm. They further stated that sulfur is an 
essential component in static dissipater additives, and that it is 
currently unclear how to formulate a static dissipater additive that 
would have a sulfur content below 15 ppm. Because of this input, we now 
recognize that static dissipater additives are in a unique category 
with respect to the ability to comply with a 15 ppm sulfur cap. 
Additive manufactures stated that reformulation of static dissipater 
additives to meet a 15 ppm sulfur cap will likely be a lengthy 
undertaking.
---------------------------------------------------------------------------

    \162\ All additives must be registered with EPA Fuel and Fuel 
Additive Database prior to their use in motor vehicle diesel fuel.
---------------------------------------------------------------------------

    It is unclear which of the naturally-occurring components in diesel 
fuel act to dissipate static electricity. However, certain batches of 
fuel are periodically found which do not have adequate static 
dissipating qualities. In such cases, static dissipater additives are 
necessary to prevent a static discharge from occurring during the 
transfer of fuel into a storage tank which might cause an explosion. 
Therefore, it is essential that today's rule is structured in such a 
way so as to not impede the use static dissipater additives. Because of 
the lack of static dissipater additives meeting a 15 ppm sulfur 
specification, the unique difficulty in reformulating them to meet a 15 
ppm sulfur standard, the fact that they are essential to the safety of 
the fuel distribution system, and the impracticability for them to be 
added at the refinery, today's rule includes special affirmative 
defense provisions to reduce the sulfur testing burden associated with 
the use of static dissipater additives that have a sulfur content 
greater than 15 ppm.
    Commenters suggested an alternative mechanism to demonstrate an 
affirmative defense to presumptive liability for blenders of static-
dissipater (S-D) additives which would avoid the need to test every 
batch of fuel at the

[[Page 39089]]

terminal after additization. Under this approach, blenders of S-D 
additives would be required to provide volume accounting reconciliation 
(VAR) records similar to those under EPA's deposit control additive 
rule (40 CFR part 80, subpart G) which would show whether the S-D 
additive is being added at the appropriate rate on average over a 
course of a monthly accounting period. Today's rule finalizes the 
approach suggested by commenters with certain modifications. In cases 
where a violation of the 15 ppm sulfur cap for diesel fuel is 
discovered on a batch of fuel downstream of a blender of S-D additives 
that have a sulfur content above 15 ppm, the S-D additive blender must 
provide the following information to EPA in order to meet their 
affirmative defense to presumptive liability regarding the potential 
that the use of S-D additive might have caused or contributed to the 
violation:
     A sulfur test on the diesel batch prior to the addition of 
the S-D additive package that indicates that the additive, when added, 
will not cause the fuel to exceed 15 ppm
     A product transfer document that accompanied the transfer 
of the S-D additive package to the additive blender which contains the 
following:
--A statement that the S-D additive package exceeds 15 ppm in sulfur 
content and that special requirements apply if it is to be used in 
diesel fuel subject to the 15 ppm sulfur cap.
--The maximum sulfur level of the S-D additive package including other 
additive components such as diesel detergents and carrier fluid to the 
extent that they are part of the package. Each component of the 
additive package other than the S-D additive itself must comply with 
the 15 ppm sulfur cap.
--The maximum recommended concentration for the S-D additive package.
--The contribution to the final sulfur content of a finished fuel when 
the additive is added at the maximum recommended concentration. The 
maximum recommended concentration must result in a potential increase 
in the sulfur content of the finished fuel of no more than 0.05 ppm.

     Monthly volume accounting reconciliation (VAR) records 
that include:
--The amount of S-D additive package used during the month
--The volume of the fuel into which the additive was injected during 
the month
--The measured sulfur level of each fuel batch prior to injection of 
the additive which shows that the contribution to the sulfur level of 
the finished diesel fuel from the use of the additive at the treatment 
level at which it was injected would not cause any such batch of fuel 
to exceed the 15 ppm sulfur specification
     Quality assurance records which show that the precision of 
the additive injection equipment has been maintained in such a manner 
as to prevent malfunctions which could result in the injection of the 
S-D additive at a higher concentration than that reported.
    The additive blender must also be able to meet its normal diesel 
fuel defense elements: That the additive blender-fuel distributor did 
not cause the violation; that PTDs account for all the fuel and show 
apparent compliance; and that quality assurance sampling and testing 
has occurred, as modified by the discussion above.
    In addition, the ratio of the amount of additive used to the amount 
of fuel into which the additive was injected over any given monthly VAR 
period must not exceed the maximum treatment rate which could be added 
to any batch of fuel additized during the period. If not, the blender 
could be liable for any batch of diesel fuel found that exceeded the 15 
ppm sulfur cap which had been in their possession. The above provisions 
are only relevant for establishing affirmative defense to presumptive 
liability regarding the potential that the use of S-D additives might 
have caused a violation. Under no circumstances may an additive blender 
cause the sulfur level of any batch of finished fuel to exceed the 15 
ppm sulfur cap. Blenders of S-D additives must meet all other 
requirements for distributors of 15 ppm sulfur diesel fuel. Regardless 
of the cause of a violation of the 15 ppm sulfur standard, any party 
that had custody or title of off-specification fuel is potentially 
liable and responsible for their affirmative defense elements.
    These provisions may only be used for static dissipater additives 
which have the potential to raise the sulfur content of the finished 
fuel by no more than 0.050 ppm when used at their maximum recommended 
treatment level. Based on the input from additive manufacturers noted 
above, this will allow the use of S-D additives that are fully 
effective for this purpose. The use of S-D additives that might have a 
higher contribution to the sulfur content of the finished fuel, 
therefore, is unnecessary. To establish affirmative defense to 
presumptive liability, blenders that use S-D additives that could 
contribute more than 0.050 ppm to the sulfur content of a finished fuel 
subject to the 15 ppm sulfur specification when used at the maximum 
recommended treatment level are required to conduct a sulfur test on 
the fuel batch after the addition of the additive. Blenders of 
additives other than S-D additives which have a sulfur content greater 
than 15 ppm into diesel fuel subject to the 15 ppm sulfur standard are 
also required to conduct a sulfur test on the fuel batch after the 
addition of the additive for affirmative defense purposes.
    EPA may require additive manufactures to supply samples of the 
additive packages (or the components additives in such packages) that 
are used in 15 ppm sulfur diesel fuel, or may sample from additive 
batches already in the distribution system. In such cases, we may test 
the sulfur content of these additives to evaluate whether they are in 
compliance with the information provided on the PTDs or other relevant 
documentation. In cases where a violation is discovered, any party in 
the distribution system that had custody of the additive batch found to 
be in violation may be held presumptively liable for the violation.
    Today's rule amends the highway diesel regulation so that the 
provisions finalized today regarding the use of S-D additives with a 
sulfur content above 15 ppm in NRLM diesel fuel also apply to the use 
of such additives in highway diesel fuel subject to a 15 ppm sulfur 
standard. However, we continue to be concerned about the use of 
additives having a sulfur content greater than 15 ppm. We will continue 
to monitor this issue and may initiate an additional rulemaking in the 
future to consider further limiting or prohibiting the use of greater 
than15 ppm sulfur additives in diesel fuel subject to a 15 ppm sulfur 
cap.
    The special provisions for static-dissipater additives finalized in 
today's rule will ensure that the unique challenges regarding the 
manufacture and use of such additives do not present a barrier to their 
continued use. Additive manufactures have stated that they are working 
on reformulation of their S-D additives to meet a 15 ppm sulfur limit.
    We recently learned that industry is beginning to develop a 
standardized test to quantify the concentration of static-dissipater 
additives in finished fuel.\163\ If such a test were available, it 
might be useful for establishing an additive blender's affirmative 
defense to presumptive liability in place of some of the VAR provisions 
described above. If

[[Page 39090]]

a batch of fuel was found to exceed the 15 ppm sulfur cap, the use of 
such a test would allow for the measurement of the contribution to the 
sulfur level of the finished fuel which resulted from the addition of 
the static dissipater additive. If the contribution was below the 
permissible level given the sulfur measurements on each batch of fuel 
additized with the greater than 15 ppm S-D additive, it might be useful 
in association with other blender records to demonstrate that the 
additive blender was not at fault for the violation. If such a 
standardized test becomes available, EPA will work with the appropriate 
industry parties to evaluate its applicability for affirmative defense 
purposes, and conduct a rulemaking if appropriate to amend the elements 
required to establish affirmative defense to presumptive liability 
under the NRLM and highway diesel programs.
---------------------------------------------------------------------------

    \163\ Phone conversation with Eon McMullen, Octel additives, 
February 12, 2004.
---------------------------------------------------------------------------

c. Additives Used in 500 ppm Sulfur Diesel Fuel
    The 1993 and 2007 highway diesel programs did not contain any 
requirements regarding the maximum sulfur content of additives used in 
highway diesel fuel subject to a 500 ppm sulfur cap.\164\ Our 
experience under the highway program indicates that application of the 
500 ppm sulfur cap throughout the distribution system to the end-user 
has been sufficient to prevent the use of additives from jeopardizing 
compliance with the 500 ppm sulfur standard. The potential increase of 
several ppm in the sulfur content of diesel fuel which might result 
from the use of some diesel additives raises substantial concerns 
regarding the impact on compliance with a 15 ppm sulfur cap. However, 
this is not the case with respect to the potential impact on compliance 
with a 500 ppm sulfur cap. The current average sulfur content of 
highway diesel fuel of 340 ppm provides ample margin for the minimal 
increase in the fuel sulfur content which might result from the use of 
additives. We expect that this will also be the case for NRLM fuel 
subject to the 500 ppm sulfur standard. Therefore, we are not 
finalizing any requirements regarding the sulfur content of additives 
used in NRLM fuel subject to the 500 ppm sulfur standard. We believe 
that the requirement that NRLM fuel comply with a 500 ppm sulfur cap 
throughout the distribution system to the end-user will be sufficient 
to ensure that entities who introduce additives into such fuel take 
into account the potential increase in fuel sulfur content.
---------------------------------------------------------------------------

    \164\ The 500 ppm sulfur highway diesel final rule contains the 
requirement that highway diesel fuel not exceed 500 ppm sulfur at 
any point in the fuel distribution system including after the 
blending of additives. Fuel Quality Regulations for Highway Diesel 
Fuel Sold in 1993 and Later Calendar Years, Final Rule, 55 FR 34120, 
August 21, 1990.
---------------------------------------------------------------------------

d. Aftermarket Additives
    We believe that more stringent requirements are needed for 
aftermarket additives than for bulk additives due to the lack of 
practical safeguards to ensure that the use of such additives do not 
cause a violation of the sulfur standards in today's rule. Also, the 
presence of multiple grades of aftermarket additives, some suitable for 
use in engines equipped with sulfur sensitive emissions control 
equipment as well as pre-control engines, and some suitable for use 
only in pre-control engines would raise significant concerns regarding 
the misuse. The misuse of a high sulfur additive in an engine with 
sulfur sensitive emissions control equipment could damage this 
equipment. Therefore, today's rule requires that all aftermarket 
additives sold for use in nonroad, locomotive, and marine equipment 
must meet a 500 ppm sulfur cap beginning June 1, 2007, and that all 
aftermarket additives sold for use in nonroad equipment must meet a 15 
ppm sulfur specification beginning June 1, 2010. After June 1, 2010, 
aftermarket additives with a sulfur content less than 500 ppm may 
continue to be used in locomotive and marine engines. This approach is 
consistent with that taken in the highway diesel rule which requires 
all aftermarket additives to meet a 15 ppm sulfur specification 
beginning June 1, 2006.
6. End User Requirements
    In light of the importance of ensuring that the proper fuel is used 
in nonroad, locomotive, and marine engines covered by this program, any 
person is prohibited from fueling such an engine with fuel not meeting 
the applicable sulfur standard.
    Specifically:
    (1) No person may introduce, or permit the introduction of fuel 
containing the heating oil marker into nonroad, locomotive, marine or 
highway diesel engines;
    (2) No person may introduce, or permit the introduction of, fuel 
that exceeds 15 ppm sulfur content into nonroad equipment with a model 
year 2011 or later engine;
    (3) Beginning December 1, 2010, no person may introduce, or permit 
the introduction of any fuel exceeding 500 ppm sulfur content into any 
nonroad, locomotive, and marine engine; and
    (4) Beginning December 1, 2014, no person may introduce, or permit 
the introduction of any fuel exceeding 15 ppm sulfur content into any 
nonroad diesel engine regardless of year of manufacture.

D. Diesel Fuel Sulfur Sampling and Testing Requirements

1. Testing Requirements
    Today's action provides a new approach for fuel sulfur measurement. 
The details of this approach are described below, followed by a 
description of who will be required to conduct fuel sulfur testing as 
well as what fuel must be tested. The diesel fuel sulfur sampling and 
testing provisions described below are similar to those that were 
proposed. Adjustments we made to the proposed provisions were in 
response to comments we received during the public comment period.
a. Test Method Approval, Record-keeping, and Quality Control 
Requirements
    Most current and past EPA fuel programs designated specific 
analytical methods which refiners, importers, and downstream parties 
\165\ use to analyze fuel samples at all points in the fuel 
distribution system for regulatory compliance purposes. Some of these 
programs have also allowed certain specific alternative methods which 
may be used as long as the test results are correlated to the 
designated test method. The highway diesel rule (66 FR 5002, January 
18, 2001), for example, specifies one designated test method and three 
alternative methods for measuring the sulfur content of highway diesel 
fuel subject to the 15 ppm sulfur standard. The rule also specifies one 
designated method and three alternative methods for measuring the 
sulfur content of highway diesel fuel subject to the 500 ppm sulfur 
standard.
---------------------------------------------------------------------------

    \165\ Other EPA fuels regulations have allowed downstream 
parties conducting periodic quality assurance testing for defense 
purposes to use methods other than the designated method, so long as 
the method is an ASTM method appropriate for testing for the 
applicable fuel property, and so long as the instrument is 
correlated to the designated method.

[[Page 39091]]



  Table V.H-1.--Designated and Alternative Sulfur Test Methods Allowed
                    Under the Highway Diesel Program
------------------------------------------------------------------------
       Sulfur Test Method               500 ppm             15 ppm
------------------------------------------------------------------------
ASTM D 2622-03, as modified,      Designated........  Alternative.
 Standard Test Method for Sulfur
 in Petroleum Products by
 Wavelength Dispersive X-ray
 Fluorescence Spectrometry.
ASTM D 3120-03a, Standard Test    ..................  Alternative.
 Method for Trace Quantities of
 Sulfur in Light Liquid
 Petroleum Hydrocarbons by
 Oxidative Microcoulometry.
ASTM D 4294-03, Standard Test     Alternative.......  ..................
 Method for Sulfur in Petroleum
 and Petroleum Products by
 Energy-Dispersive X-ray
 Fluorescence Spectrometry.
ASTM D 5453-03a, Standard Test    Alternative.......  Alternative.
 Method for Determination of
 Total Sulfur in Light
 Hydrocarbons, Motor Fuels and
 Motor Oils by Ultraviolet
 Fluorescence.
ASTM D 6428-99, Test Method for   Alternative.......  Designated.
 Total Sulfur in Liquid Aromatic
 Hydrocarbons and Their
 Derivatives by Oxidative
 Combustion and Electrochemical
 Detection.
------------------------------------------------------------------------

    The highway diesel fuel rule also announced the Agency's intention 
to adopt a performance-based test method approach in the future, as 
well as our intention to continue working with the industry to develop 
and improve sulfur test methods. Today's action adopts such a 
performance-based test method approach for both highway and NRLM diesel 
fuel subject to the 15 ppm and 500 ppm sulfur standards. In addition, 
the current approach for measuring the sulfur content of diesel fuel 
subject to the 500 ppm sulfur standard, i.e., using the designated 
sulfur test method or one of the alternative test methods with 
correlation will remain applicable.
    Under the performance-based approach, a given test method can be 
approved for use in a specific laboratory by meeting certain precision 
and accuracy criteria specified in the regulations. The method can be 
approved for use by that laboratory as long as appropriate quality 
control procedures are followed. Properly selected precision and 
accuracy values allow multiple methods and multiple commercially 
available instruments to be approved, thus providing greater 
flexibility in method and instrument selection while also encouraging 
the development and use of better methods and instrumentation in the 
future. Under today's rule, there is no designated sulfur test method 
as specified under previous regulations.
    Since any test method that meets the specified performance criteria 
may qualify, this type of approach does not conflict with the 
``National Technology Transfer and Advancement Act of 1995'' (NTTAA), 
section 12(d) of Public Law 104-113, and the Office of Management and 
Budget (OMB) Circular A-119. Both of these are designed to encourage 
the adoption of standards developed by ``voluntary consensus standards 
bodies'' (VCSB) \166\ and to reduce reliance on government-unique 
standards where such consensus standards would suffice. Under the 
performance criteria approach in today's rule, methods developed by 
consensus bodies as well as methods not yet approved by a consensus 
body qualify for approval provided they meet the specified performance 
criteria as well as the record-keeping and reporting requirements for 
quality control purposes.
---------------------------------------------------------------------------

    \166\ These are standard-setting organizations, like ASTM, and 
ISO that have broad representation of all interested stakeholders 
and make decisions by consensus.
---------------------------------------------------------------------------

i. How Can a Given Method Be Approved?
    A given test method can be approved for use under today's program 
by meeting certain precision and accuracy criteria. Approval applies on 
a laboratory/facility-specific basis. If a company chooses to employ 
more than one laboratory for fuel sulfur testing purposes, then each 
laboratory must separately seek approval for each method it intends to 
use. Likewise, if a laboratory chooses to use more than one sulfur test 
method, then each method must be approved separately. Separate approval 
is not necessary for individual operators or laboratory instruments 
within a given laboratory facility.
    The specific precision and accuracy criteria were derived from 
existing sulfur test methods that are either required or allowed under 
the highway diesel fuel sulfur program. The first criterion, precision, 
refers to the consistency of a set of measurements and is used to 
determine how closely analytical results can be duplicated based on 
repeat measurements of the same material under prescribed conditions. 
To demonstrate the precision of a given sulfur test method under the 
performance-based approach, a laboratory facility must perform 20 
repeat tests over 20 days on samples taken from a homogeneous supply of 
a commercially available diesel fuel. Based on the comments we received 
on this issue, we are also clarifying that the test results must in 
general be a sequential record of the analyses with no omissions. A 
laboratory facility may exclude a given sample or test result only if 
(1) the exclusion is for a valid reason under good laboratory practices 
and (2) it maintains records regarding the sample and test results and 
the reason for excluding them. Using the test results\167\ of ASTM D 
3120 for diesel fuel subject to the 15 ppm sulfur standard, the 
precision must be less than 0.72 ppm.\168\ Similarly, using the test 
results of ASTM D 2622 for diesel fuel subject to the 500 ppm sulfur 
standard, the precision must be less than 9.68 ppm.
---------------------------------------------------------------------------

    \167\ Sulfur Repeatability of Diesel by Method at 15 ppm, ASTM 
Report on Low Level Sulfur Determination in Gasoline and Diesel 
Interlaboratory Study--A Status Report, June 2002.
    \168\ 0.72 ppm is equal to 1.5 times the standard deviation of 
ASTM D 3120, where the standard deviation is equal to the 
repeatability of ASTM D 3120 (1.33) divided by 2.77. 9.68 ppm is 
equal to 1.5 times the standard deviation of ASTM D 2622, where the 
standard deviation is equal to the repeatability of ASTM D 2622 
(17.88) divided by 2.77. In the proposal, we stated that the 
repeatability of ASTM D 2622 was 26.81. While that reported value 
was incorrect due to either a typographical or a computational 
error, the resulting precision value that we are finalizing today 
was correctly calculated and reported as 9.68 ppm. The ``sample 
standard deviation'' should be used for this purpose. By its use of 
N-1 in the denominator, this measure applies a correction for the 
small sample bias and provides an unbiased estimate of the standard 
deviation of the larger population from which the sample was drawn. 
Since the conditions of the precision qualification test admit more 
sources of variability than the conditions under which ASTM 
repeatability is determined (longer time span, different operators, 
environmental conditions, etc.) the repeatability standard deviation 
derived from the round robin was multiplied by what we believe to be 
a reasonable adjustment factor, 1.5, to compensate for the 
difference in conditions.
---------------------------------------------------------------------------

    The second criterion, accuracy, refers to the closeness of 
agreement between a measured or calculated value and the actual or 
specified value. To demonstrate the accuracy of a given test method 
under the performance-based approach, a laboratory facility is required 
to perform 10 repeat tests on a

[[Page 39092]]

standard sample, the mean of which for diesel fuel subject to the 15 
ppm sulfur standard can not deviate from the Accepted Reference Value 
(ARV) of the standard by more than 0.54 ppm and for diesel fuel subject 
to the 500 ppm sulfur standard can not deviate from the ARV of the 
standard by more than 7.26 ppm \169\. These tests must be performed 
using commercially available gravimetric sulfur standards. Ten tests 
are required using each of two different sulfur standards. For 15 ppm 
fuel, one must be in the range of 1-10 ppm sulfur and the other in the 
range of 10-20 ppm sulfur. For 500 ppm fuel, one must be in the range 
of 100-200 ppm sulfur and the other in the range of 400-500 ppm sulfur 
for 500 ppm sulfur diesel fuel. Therefore, a minimum of 20 total tests 
is required for sufficient demonstration of accuracy for a given sulfur 
test method at a given laboratory facility. As with the requirement for 
precision demonstration described above, the test results must be a 
sequential record of the analyses with no omissions. Finally, any known 
interferences for a given test method must be mitigated.
---------------------------------------------------------------------------

    \169\ 0.54 and 7.26 are equal to 0.75 times the precision values 
of 0.72 for 15 ppm sulfur diesel and 9.68 for 500 ppm sulfur diesel, 
respectively.
---------------------------------------------------------------------------

    Some commenters remarked that the ARV of the standards does not 
account for any uncertainty given that all commercially available 
standards have an uncertainty associated with the certified value. The 
commenters added that EPA should specify what maximum value in the 
uncertainty associated with the ARV is allowed.
    These requirements are not intended to be overly burdensome. 
Indeed, we believe these requirements are equivalent to what a 
laboratory would do during the normal start up procedure for a given 
test method. In addition, we believe this approach will allow regulated 
entities to know that they are measuring diesel fuel sulfur levels 
accurately and within reasonable site reproducibility limits.
ii. What Information Must Be Reported to the Agency?
    For test methods that have already been approved by a VCSB, such as 
ASTM or the International Standards Organization (ISO), each laboratory 
facility must report to the Agency the precision and accuracy results 
as described above for each method for which it is seeking approval. 
Such submissions to EPA, as described elsewhere, are subject to the 
Agency's review for 90 days, and the method will be considered approved 
in the absence of EPA comment. Laboratory facilities are required to 
retain the fuel samples used for precision and accuracy demonstration 
for 90 days. While we proposed a 30 day sample retention period, 
commenters stated that the sample retention period for fuel samples 
that are used for precision and accuracy demonstrations should be 
equivalent to the length of EPA's review period (i.e., 90 days). We 
agree with the commenters and are thus finalizing a 90 day sample 
retention period in today's rule. This sample retention requirement 
also applies to non-VCSB methods which are described below.
    For test methods that have not been approved by a VCSB, full test 
method documentation, including a description of the technology/
instrumentation that makes the method functional, as well as subsequent 
EPA approval of the method is also required. These submissions will 
also be subject to the Agency's review for 90 days, and the method will 
be considered approved in the absence of EPA comment. Submission of 
VCSB methods is not required since they are available in the public 
domain. In addition, industry and the Agency will likely have had 
substantial experience with such methods.
    As described above, federal government and EPA policy is to use 
standards developed by voluntary consensus bodies when available. The 
purpose of the NTTAA, at least in part, is to foster consistency in 
regulatory requirements, to take advantage of the collective industry 
wisdom and wide-spread technical evaluation required before a test 
method is approved by a consensus body, and to take advantage of the 
ongoing oversight and evaluation of a test method by the consensus body 
that results from wide-spread use of an approved method e.g., the 
ongoing round-robin type analysis and typical annual updating of the 
method by the consensus body. These goals are not met where the Agency 
allows use of a non-consensus body test method in perpetuity. Moreover, 
it is not possible to realize many of the advantages that result from 
consensus status where a test method is used by only one or a few 
companies. It will not have the practical scrutiny that comes from 
ongoing wide-spread use, or the independent scrutiny of the consensus 
body and periodic updating. In addition, EPA does not have the 
resources to conduct the degree of initial scrutiny or ongoing scrutiny 
that are practiced by consensus bodies. Nevertheless, EPA believes it 
is appropriate to allow limited use of a proprietary test method for a 
limited time, even though the significant advantages of consensus test 
methods are absent, because EPA can evaluate the initial quality of a 
method and a company may have invested significant resources in 
developing a method. However, if after a reasonable time a test method 
fails to gain consensus body approval, EPA believes approval of the 
method should be withdrawn because of the absence of ongoing consensus 
oversight. Accordingly, a non-VCSB method will cease to be qualified 
five years from the date of its original approval by EPA in the absence 
of VCSB approval.
    To assist the Agency in determining the performance of a given 
sulfur test method, non-VCSB methods, in particular, we reserve the 
right to send samples of commercially available fuel to laboratories 
for evaluation. Such samples are intended for situations in which the 
Agency has concerns regarding a test method and, in particular, its 
ability to measure the sulfur content of a random commercially 
available diesel fuel. Laboratory facilities are required to report 
their results from tests of this material to the Agency.
iii. What Quality Control Provisions Are Required?
    We are requiring ongoing Quality Control (QC) procedures for sulfur 
measurement instrumentation. These are procedures used by laboratory 
facilities to ensure that the test methods they have qualified and the 
instruments on which the methods are run are yielding results with 
appropriate accuracy and precision, e.g., that the results from a 
particular instrument do not ``drift'' over time to yield unacceptable 
values. It is our understanding that most laboratories already employ 
QC procedures, and that these are commonly viewed as important good 
laboratory practices. Laboratories will be required, at a minimum, to 
abide by the following QC procedures for each instrument used to test 
batches of diesel fuel under these regulations even where a laboratory 
elects to use the test method used to establish the precision and 
accuracy criteria finalized in today's rule:
    (1) Follow the mandatory provisions of ASTM D 6299-02, Standard 
Practice for Applying Statistical Quality Assurance Techniques to 
Evaluate Analytical Measurement System Performance. Laboratories are 
required to construct control charts from the mandatory QC sample 
testing prescribed in paragraph 7.1, following the guidelines under A 
1.5.1 for individual observation charts and A 1.5.2 for moving range 
charts.
    (2) Follow ASTM D 6299-02 paragraph 7.3.1 (check standards) using

[[Page 39093]]

a standard reference material. Check standard testing is required to 
occur at least monthly and should take place following any major change 
to the laboratory equipment or test procedure. Any deviation from the 
accepted reference value of the check standard greater than 1.44 ppm 
for diesel fuel subject to the 15 ppm sulfur standard and 19.36 ppm for 
diesel fuel subject to the 500 ppm sulfur standard\170\ must be 
investigated.
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    \170\ 1.44 ppm is equal to two times the precision value of 0.72 
ppm for 15 ppm diesel and 19.36 is equal to two times the precision 
value of 9.68 ppm for 500 ppm diesel.
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    (3) Upon discovery of any QC testing violation of A 1.5.2.1 or A 
1.5.3.2 or check standard deviation greater than 1.44 ppm and 19.36 ppm 
for 15 ppm sulfur diesel and 500 ppm sulfur diesel, respectively, as 
provided in item 2 above, any measurement made while the system was out 
of control must be tagged as suspect and an investigation conducted 
into the reasons for this anomalous performance. Refiners and importers 
are required to retain batch samples for 30 days or the period equal to 
the interval between QC sample tests, whichever is longer. If an 
instrument is found to be out of control, all of the retained samples 
since the last time the instrument was shown to be in control must be 
retested.
    (4) QC records, including investigations under item 3 above must be 
retained for five years and must be provided to the Agency upon 
request.
b. Requirements To Conduct Fuel Sulfur Testing
    Given the importance of assuring that NRLM diesel fuel designated 
to meet the 15 ppm sulfur standard in fact meets that standard, we are 
requiring that refiners, importers, and transmix processors test each 
batch of NRLM diesel fuel designated to meet the 15 ppm sulfur standard 
and maintain records of such testing. Requiring that refiners, 
importers, and transmix processors test each batch of fuel subject to 
the 15 ppm sulfur NRLM standard assures that compliance can be 
confirmed through testing records, and even more importantly, assures 
that diesel fuel exceeding the 15 ppm standard is not introduced into 
commerce as fuel for use in nonroad equipment having sulfur-sensitive 
emission control devices. Batch testing was not required under the 
highway diesel fuel rule. Instead, such testing was expected to be 
performed to establish a defense to potential liability. However, for 
the same reasons discussed above, today's rule extends this batch 
testing requirement to15 ppm sulfur highway diesel fuel beginning in 
2006.
    In order to address situations where refiners produce NRLM diesel 
fuel using computer-controlled inline blending equipment and do not 
have storage tanks from which to withdraw samples, we are including in 
today's final rule a provision to allow refiners to test a composited 
sample of a batch of diesel fuel for its sulfur content after the 
diesel fuel has been shipped from the refinery. This inline blending 
provision is similar to the provision that exists under the 
reformulated gasoline and gasoline sulfur programs and applies to both 
highway and NRLM diesel fuel under today's action.
    Today's rule does not require downstream parties to conduct every-
batch testing. However, we believe that most downstream parties will 
voluntarily conduct ``periodic'' sampling and testing for quality 
assurance purposes if they want to establish a defense to presumptive 
liability, as discussed in section V.H. below.
2. Two Part-Per-Million Downstream Sulfur Measurement Adjustment
    We believe that it is appropriate to recognize sulfur test 
variability in determining compliance with the 15 ppm sulfur NRLM 
diesel fuel standards downstream of a refinery or import facility. 
Thus, today's rule provides that for all 15 ppm sulfur NRLM diesel fuel 
at locations downstream of a refinery or import facility, sulfur test 
results can be adjusted by subtracting two ppm. In the same manner as 
finalized for 15 ppm sulfur highway diesel fuel, the sole purpose of 
this downstream compliance provision is to address test variability 
concerns (see the highway diesel fuel rule). We received comments 
suggesting that a higher downstream test tolerance is needed based on 
the current values for test method variability. However, we anticipate 
that the reproducibility of sulfur test methods is likely to improve to 
two ppm or even less by the time the 15 ppm sulfur standard for highway 
diesel fuel is implemented--four years before implementation date of 
the 15 ppm standard for NRLM diesel fuel. With this provision, we 
anticipate that refiners will be able to produce diesel fuel with an 
average sulfur level of approximately 7-8 ppm and some contamination 
could occur throughout the distribution system, without fear of causing 
a downstream violation due solely to test variability. As test methods 
improve in the future, we will reevaluate whether two ppm is the 
appropriate allowance for purposes of this compliance provision. We 
also received comments that a test tolerance should be provided in 
determining compliance with the 500 ppm sulfur standards for NRLM fuel. 
We believe that such a tolerance is not needed for fuels subject to a 
500 ppm sulfur standard because of the flexibility that refiners 
possess to produce fuel with a sufficiently low sulfur content to 
accommodate test variability.
3. Sampling Requirements
    Today's rule adopts the same sampling methods adopted by the 
highway diesel rule (66 FR 5002, January 18, 2001). These sampling 
methods are American Society for Testing and Materials (ASTM) D 4057-95 
(manual sampling) and D 4177-95 (automatic sampling from pipelines/in-
line blending). The requirement to use these methods becomes effective 
for NRLM diesel fuel on June 1, 2007. These same methods were also 
adopted for use in the Tier 2/Gasoline Sulfur rule.\171\
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    \171\ 65 FR 6833-34 (Feb. 10, 2000). Today's rule also provides 
that these methods be used under the RFG and CG rules. See 62 FR 
37337 et seq. (July 11, 1997).
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4. Alternative Sampling and Testing Requirements for Importers of 
Diesel Fuel Who Transport Diesel Fuel by Tanker Truck
    We understand that importers who transport diesel fuel into the 
U.S. by tanker truck are frequently relatively small businesses that 
could be subject to a substantial burden if they were required to 
sample and test each batch of NRLM or highway diesel fuel imported by 
truck, especially where a trucker imports many small loads of diesel 
fuel. Therefore, today's rule provides that truck importers may comply 
with an alternative sampling and testing requirement, involving a 
sampling and testing program of the foreign truck loading terminal, if 
certain conditions are met. For an importer to be eligible for the 
alternative sampling and testing requirement, the terminal must conduct 
sampling and testing of the NRLM or highway diesel fuel immediately 
after each receipt into its terminal storage tank but before loading 
product into the importer's tanker truck storage compartments or 
immediately prior to loading product into the importer's tanker truck 
if it hasn't tested after each receipt. Moreover, the importer will be 
required to conduct periodic quality assurance testing of the 
terminal's diesel fuel, and the importer will be required to assure EPA 
that we will be allowed to make unannounced

[[Page 39094]]

inspections and audits, to sample and test fuel at the foreign terminal 
facility, to assure that the terminal maintained sampling and testing 
records, and to submit such records to EPA upon request.

E. Selection of the Marker for Heating Oil

    As discussed in section IV.D, to ensure that heating oil is not 
shifted into the NRLM market, we need a way to distinguish heating oil 
from high sulfur or 500 ppm sulfur NRLM diesel fuel produced under the 
small refiner and credit provisions in today's rule. Currently, there 
is no differentiation today between fuel used for NRLM uses and heating 
oil. Both are typically produced to the same sulfur specification, and 
both are required to have the same red dye added prior to distribution 
from downstream of the terminal. Based on recommendations from 
refiners, in the NPRM, we concluded that the best approach to 
differentiate heating oil from NRLM diesel fuel would be to require 
that a marker be added to heating oil at the refinery gate. Since the 
proposal we received additional information which allows us to rely 
upon record-keeping and reporting provisions to differentiate heating 
oil from NRLM up to the point where it leaves the terminal (see section 
IV.D). Therefore, today's rule requires that a marker be added to 
heating oil before it leaves the terminal gate rather than the refinery 
gate as proposed.\172\
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    \172\ Heating oil sold inside the Northeast/Mid-Atlantic Area 
adopted under today's rule and Alaska does not need to contain a 
marker (see section IV.D.).
---------------------------------------------------------------------------

    Section IV.D of today's preamble also discusses the need to 
distinguish 500 ppm sulfur locomotive and marine fuel produced by 
refiners and imported from 2010-2012 from 500 ppm sulfur nonroad diesel 
fuel produced during this time frame under the small refiner, credit, 
and downstream flexibility provisions in today's rule. Without this 
ability, it would be possible for 500 ppm sulfur LM diesel fuel to be 
shifted into the nonroad market during this time period outside of the 
Northeast/Mid-Atlantic Area and Alaska. Therefore, today's rule 
requires that from June 1, 2010 through May 31, 2012, the same marker 
added to heating oil must also be added to 500 ppm sulfur LM diesel 
fuel produced by a refiner or imported for use outside of the 
Northeast/Mid-Atlantic Area and Alaska before the fuel leaves the 
terminal. Nonroad diesel fuel meeting a 500 ppm sulfur standard 
produced under the small refiner or credit provisions, and 500 ppm 
sulfur NRLM diesel fuel generated under the downstream flexibility 
provisions in today's rule could be sold into the LM market outside of 
the Northeast/Mid-Atlantic Area and Alaska. Such 500 ppm sulfur NRLM 
diesel fuel does not need to be marked. Therefore, both marked and 
unmarked 500 ppm sulfur diesel fuel could be used in locomotive and 
marine diesel equipment outside of the Northeast/Mid-Atlantic Area and 
Alaska from 2010 through 2012.\173\
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    \173\ Inside the Northeast/Mid-Atlantic Area, 500 ppm sulfur 
fuel produced from transmix or segregated interface could be sold 
into the LM or heating oil markets from 2010-2012, and could only be 
sold into the heating oil market after 2012. Outside of the 
Northeast/Mid-Atlantic Area, such fuel could be sold into the NRLM 
market from 2010-2012, and into the LM market thereafter.
---------------------------------------------------------------------------

    As discussed in section IV.D., use of the same marker in heating 
oil and 500 ppm sulfur LM fuel is feasible because the underlying goal 
is the same, i.e., keeping 500 ppm sulfur diesel fuel produced as 
heating oil or LM fuel from begin shifted into the nonroad diesel 
market from 2010 through 2012. We will be able to determine whether 
heating oil with a sulfur content greater than 500 ppm has been shifted 
into the LM market downstream of the terminal by testing the sulfur 
content of LM. 500 ppm fuel initially designated as heating oil can be 
later shifted into the LM market, since the sulfur standard for LM 
diesel fuel during this period is 500 ppm.
    Terminal operators suggested that we might be able to rely on 
record-keeping and reporting downstream of the terminal as well as 
above the terminal level, thereby eliminating any need for a fuel 
marker. However, we believe such record-keeping and reporting 
mechanisms would be insufficient to keep heating oil out of the NRLM 
market and 500 ppm sulfur LM fuel produced by a refiner or imported out 
of the nonroad market downstream of the terminal under typical 
circumstances. We can rely on such measures before the fuel leaves the 
terminal because it is feasible to require all of the facilities in the 
distribution system to report to EPA on their fuel transfers. As 
discussed in section IV.D., these electronic reports can be compared by 
EPA to identify parties responsible for shifting heating oil into the 
NRLM market from 2007-2014, 500 ppm sulfur LM fuel into the nonroad 
market from 2010-2012, and heating oil into the LM market beginning 
2014. Downstream of the terminal the parties involved in the fuel 
distribution system become far too numerous for such a system to be 
implemented and enforced (including jobbers, bulk plant operators, 
heating oil dealers, retailers, and even end-users with storage tanks 
such as farmers. Reporting errors for even a small fraction would 
require too many resources to track down and correct and would 
eliminate the effectiveness of the system.
    Our proposal envisioned that a fuel marker would be required in 
heating oil from June 1, 2006 through May 31, 2010, and that the same 
marker would be required in locomotive and marine fuel from June 1, 
2010 through May 31, 2014. As a consequence of finalizing the 15 ppm 
sulfur standard for locomotive and marine fuel in 2012, we no longer 
need to require that LM diesel fuel be marked after June 1, 2012. The 
2010-2012 marking requirement for 500 ppm sulfur LM diesel fuel does 
not apply to 500 ppm sulfur LM fuel produced by a refiner or imported 
in the Northeast/Mid-Atlantic Area or in Alaska. There is an ongoing 
need to require the continued use of the marker in heating oil 
indefinitely (see section IV of today's preamble).
    We proposed that beginning June 1, 2007 SY-124 must be added to 
heating oil in the U.S. at a concentration of 6 milligrams per liter 
(mg/L). Today's rule adopts this requirement except for heating oil 
used in the Northeast/Mid-Atlantic Area and Alaska.\174\ The chemical 
composition of SY-124 is as follows: N-ethyl-N-[2-[1-(2-
methylpropoxy)ethoxyl]-4-phenylazo]-benzeneamine.\175\ This 
concentration is sufficient to ensure detection of SY-124 in the 
distribution system, even if diluted by a factor of 50. Any fuel found 
with a marker concentration of 0.1 milligrams per liter or more will be 
presumed to be heating oil. Below this level, the prohibition on use in 
highway, nonroad, locomotive, or marine applications would not apply.
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    \174\ See section IV.D of today's preamble for a discussion of 
the provisions for the Northeast/Mid-Atlantic Area and Alaska.
    \175\ Opinion on Selection of a Community-wide Mineral Oils 
Marking System, (``Euromarker''), European Union Scientific 
Committee for Toxicity, Ecotoxicity and the Environment plenary 
meeting, September 28, 1999.
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    There are a number of other types of dyes and markers. Visible dyes 
are most common, are inexpensive, and are easily detected. Using a 
second dye in addition to the red dye required by IRS in all non-
highway fuel for segregation of heating oil based on visual 
identification raises certain challenges. The marker that we require in 
heating oil and 500 ppm sulfur LM diesel fuel must be different from 
the red dye currently required by IRS and EPA and not interfere with 
the identification of red dye in distillate fuels. Invisible

[[Page 39095]]

markers are beginning to see more use in branded fuels and are somewhat 
more expensive than visible markers. Such markers are detected either 
by the addition of a chemical reagent or by their fluorescence when 
subjected to near-infra-red or ultraviolet light. Some chemical-based 
detection methods are suitable for use in the field. Others must be 
conducted in the laboratory due to the complexity of the detection 
process or concerns regarding the toxicity of the reagents used to 
reveal the presence of the marker. Near-infra-red and ultra-violet 
flourescent markers can be easily detected in the field using a small 
device and after brief training of the operator. There are also more 
exotic markers available such as those based on immunoassay, and 
isotopic or molecular enhancement. Such markers typically need to be 
detected by laboratory analysis.
    We selected SY-124, however, for a number of reasons:
    (1) There is considerable data and experience with it which 
indicates there are no significant issues with its use;
    (2) It is compatible with the existing red dye;
    (3) Test methods exist to quantify its concentration, even if 
diluted by a factor of 50 to one;
    (4) It is reasonably inexpensive; and
    (5) It can be produced and provided by a number of sources.
    Effective in August 2002, the European Union (EU) enacted the 
requirement that SY-124 be added at 6 mg/L to diesel fuel that is taxed 
at a lower rate in all EU member states.\176\ Solvent yellow 124 is 
referred to as the ``Euromarker'' in the EU. The EU has found this 
treatment rate to be sufficient for their enforcement purposes while 
not interfering with the identification of the various different 
colored dyes required by different EU member states (including the same 
red dye that is required in the U.S.). Despite its name, SY-124 does 
not impart a strong color to diesel fuel when used at a concentration 
of 6 mg/L. Most often it is reportedly nearly invisible in distillate 
fuel given that the slight yellow color imparted is similar to the 
natural color of many distillate fuels.\177\ In the presence of red 
dye, SY-124 can impart a slight orange tinge to the fuel. However, it 
does not interfere with the visual identification of the presence of 
red dye or the quantification of the concentration of red dye in 
distillate fuel. Thus, the use of SY-124 at 6 mg/L in diesel fuel would 
not interfere with the use of the red dye by IRS to identify non-taxed 
fuels.
---------------------------------------------------------------------------

    \176\ The European Union marker legislation, 2001/574/EC, 
document C(2001) 1728, was published in the European Council 
Official Journal, L203 28.072001.
    \177\ The color of distillate fuel can range from near water 
white to a dark blackish brown but is most frequently straw colored.
---------------------------------------------------------------------------

    Solvent yellow 124 is chemically similar to other additives used in 
gasoline and diesel fuel, and has been registered by EPA as a fuel 
additive under 40 CFR part 79. Therefore, we expect that its products 
of combustion would not have an adverse impact on emission control 
devices, such as a catalytic converter. Extensive evaluation and 
testing of SY-124 was conducted by the European Commission. This 
included combustion testing which showed no detectable difference 
between the emissions from marked and unmarked fuel. Norway 
specifically evaluated the use of distillate fuel containing SY-124 for 
heating purposes and determined that the presence of the Euromarker did 
not cause an increase in harmful emissions from heating equipment. 
Based on the European experience with SY-124, we do not expect that 
there would be concerns regarding the compatibility of SY-124 in the 
U.S. fuel distribution system or for use in motor vehicle engines and 
other equipment such as in residential furnaces.
    Our evaluation of the process conducted by the EU in selecting SY-
124 for use in the EU convinced us that SY-124 was also the most 
appropriate marker to propose for use in heating oil under today's 
program. We received a number of comments expressing concern about the 
use of SY-124 in heating oil. Based on our evaluation of these comments 
(summarized below and in the S&A), we continue to believe that SY-124 
is the most appropriate marker to specify for use in heating oil and 
500 ppm sulfur LM diesel fuel under today's rule. Therefore, today's 
rule requires that beginning June 1, 2007, SY-124 be added to heating 
oil, and that from June 1, 2010 through May 31, 2012, SY-124 be added 
to 500 ppm sulfur LM diesel fuel produced by a refiner or imported at a 
concentration of 6 mg/L before such fuel leaves the terminal except in 
the Northeast/Mid-Atlantic Area and Alaska.
    The concerns regarding the use of SY-124 in heating oil primarily 
pertained to: the potential impact on jet engines if jet fuel were 
contaminated with SY-124; the potential health effects of SY-124 when 
used in fuel for heating purposes, particularly for unvented heaters; 
the potential cost impact on fuel distributors and transmix processors; 
and the potential conflict with IRS red dye requirements.
    The American Society of Testing and Materials (ASTM), the 
Coordinating Research Council (CRC), and the Federal Aviation 
Administration (FAA) requested that we delay finalizing the selection 
of a specific marker for use in heating oil in today's rule. They 
requested that selection of a specific marker should be deferred until 
testing could be conducted regarding the potential impact of SY-124 on 
jet engines. The Air Transport Association stated that EPA should 
conduct an extensive study regarding the potential for contamination, 
determine the levels at which the marker will not pose a risk to jet 
engines, and seek approval of SY-124 as a jet fuel additive. Other 
parties including the Department of Defense (DoD) also stated that EPA 
should refrain from specifying a heating oil marker under today's rule 
until industry and other potentially affected parties can recommend an 
appropriate marker. Representatives of the heating oil industry stated 
that they were concerned that EPA had not conducted an independent 
review regarding the safety/suitability of SY-124 for use in heating 
oil.
    We met and corresponded with numerous and diverse parties to 
evaluate the concerns expressed regarding the use of SY-124, and to 
determine whether it might be more appropriate to specify a different 
marker for use in heating oil. These parties include IRS, FAA, ASTM, 
CRC, various marker/dye manufacturers, European distributors of fuels 
containing the Euromarker, marker suppliers, and members of all 
segments in the U.S. fuel distribution system.
    We believe that concerns related to potential jet fuel 
contamination have been sufficiently addressed for us to finalize the 
selection of SY-124 as the required heating oil marker in today's 
rule.\178\ As discussed in section IV.D of today's preamble, changes in 
the structure of the fuel program finalized in today's rule from that 
in the proposed program have allowed us to move the point where the 
marker must be added from the refinery gate to the terminal. The vast 
majority of concerns regarding the potential for contamination of jet 
fuel with SY-124 pertained to the shipment of marked fuel by pipeline. 
All parties were in agreement that nearly all of the potential for 
marker con