Diesel Fuel and Engines: An Analysis of EPA's New Regulations
Report for Congress
Diesel Fuel and Engines:
An Analysis of EPA’s New Regulations
Updated May 1, 2001
Brent D. Yacobucci, James E. McCarthy, John W. Fischer,
Alejandro E. Segarra, and Lawrence C. Kumins
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress
Diesel Fuel and Engines:
An Analysis of EPA’s New Regulations
This report reviews the final regulations on diesel fuel and diesel engine
emissions signed by Environmental Protection Agency Administrator Carol Browner
December 21, 2000 and promulgated January 18, 2001. The engine regulations
would be phased in beginning with Model Year 2007, with full compliance required
by Model Year 2010. As compared to current engines, engines meeting the proposed
standards would emit 90% less particulate matter (a respiratory irritant and likely
human carcinogen) and 95% less nitrogen oxides, a group of gases that contribute to
the formation of ozone. Because sulfur interferes with the operation of the emission
control technologies to be used, the regulation also requires a reduction of 97% in the
allowable concentration of sulfur in diesel fuel, from 500 to 15 parts per million,
effective in June 2006.
Reactions to the new regulations are mixed. State and local air pollution
officials, environmental groups, the auto industry, and diesel engine manufacturers
appear largely satisfied with the rule, although some want EPA to modify its
implementation schedule or require even greater reductions in fuel sulfur. Refiners,
service station owners, the trucking industry, and agricultural groups have largely
opposed the rule, arguing that it would be difficult and costly to meet, could result in
refinery closures, and would cause shortages of diesel fuel, with associated price
spikes. Instead of 15 parts per million (ppm), the refining industry has backed a 50
ppm sulfur standard. EPA, the engine manufacturers, and the manufacturers of
emissions controls say that 50 ppm would not be sufficiently stringent to permit
optimal operation of pollution controls.
While the refining industry has generally opposed the rule, two refiners (BP and
Tosco) are supportive. Conversely, while engine manufacturers have generally
supported the rule, Cummins Engine has expressed reservations about the availability
of the technology and suggested that EPA delay promulgation of the final rule
pending further development and demonstration of the necessary pollution controls.
Some reactions to the rule are influenced by the knowledge that, in the absence of
strong federal standards, states (including California) have begun to adopt their own
standards. Thus, the California Trucking Association supports the EPA proposal, in
hopes of leveling the playing field between them and out-of-state trucking firms.
This report examines the rule’s potential impacts on fuel supply, summarizes the
issues related to pollution controls, discusses potential impacts on the economy, and
discusses issues raised by the timing and implementation schedule of the proposed
EPA held 5 public hearings on the proposed rule during the month of June 2000
and accepted public comment until August 14. The Clean Air Subcommittee of
Senate Environment and Public Works held hearings June 15 and September 21,
Introduction ................................................... 1
Why Are Diesel Emissions A Concern?...............................2
Sulfur in Diesel Fuel..........................................5
Cost and Supply of Low-Sulfur Diesel............................6
Availability and Performance of Emissions Control Technology........13
Economic Effects of the New Fuel and Engine Standards.............17
Timing of the New Standards..................................24
List of Figures
Figure 1. Effective Dates of New Diesel Regulations
Diesel Fuel and Engines: An Analysis of
EPA’s New Regulations
Since the beginning of federal regulation of vehicle emissions in the late 1960s,
diesel vehicles and engines have faced less stringent emission standards than their
gasoline counterparts. The most significant reason is that passenger vehicles (which
generally have gasoline engines) were seen as the greatest contributor to mobile
source pollution and were targeted first. As emissions from gasoline engines have
improved, and the share of emissions from diesel engines has increased, more
attention is now being paid to reducing the emissions from diesels.1
On June 2, 2000, under authority of the Clean Air Act, the Environmental
Protection Agency (EPA) proposed tighter rules for emissions from heavy-duty trucks
and buses starting in model year (MY) 2007. These regulations were finalized
December 21, 2000.2 To ensure that the emission control technologies necessary to
meet the tighter standards will operate effectively, EPA included in the rule
requirements for a reduction of 97% in the allowable sulfur in diesel fuel. The new
regulations are in addition to earlier regulations on light- and heavy-duty vehicles
starting in MY2004.
The Agency’s move to regulate diesel engine and vehicle emissions more
stringently responds to concerns over the health effects of certain components of
diesel exhaust, especially fine particulate matter and nitrogen oxides. In addition to
the standards for diesel trucks and highway fuel, the Agency has also promulgated
standards to control emissions from diesel locomotives, light-duty diesel vehicles, and
marine diesel engines.3 Additionally, EPA expects to propose standards for diesel
engines and fuel used in off-road vehicles (e.g. farm and construction equipment) in
The Subcommittee on Clean Air, Wetlands, Private Property, and Nuclear Safety
of the Senate Environment and Public Works Committee held hearings June 15 and
September 21, 2000, on the proposed rules. Given the broad nature of the rules’
potential impacts, others in Congress have expressed an interest, and congressional
1Several states have been active in creating new policies that would tighten highway and
nonroad diesel emissions, especially in the Northeast, Southwest, and West Coast.
2 The final regulations were signed by EPA Administrator Browner December 21, 2000. They
appeared in the Federal Register January 18, 2001 (66 FR, p. 5002). Additional background
information is available on EPA’s web site at [http://www.epa.gov/otaq/diesel.htm].
3Information on these regulations can be found at [http://www.epa.gov/otaq/nonroad.htm].
interest is considered likely to continue in the 107th Congress. Anticipating continued
interest, this report provides an analysis of EPA’s proposal.
Why Are Diesel Emissions A Concern?
The regulation of diesel fuel and engines presents a growing environmental
policy issue in the United States and other countries. On one hand, the better fuel
economy of diesel engines leads to lower emissions of carbon dioxide.4 Furthermore,
since diesel fuel burns more completely, diesel engines tend to have lower
hydrocarbon and carbon monoxide emissions.5 On the other hand, diesel fuel tends
to lead to higher emissions of particulate matter (PM) and nitrogen oxides (NOx).
Particulate matter emissions from diesel vehicles are a key concern because of
the potential health effects, including asthma and reduced lung function. Particulate
matter is one of six so-called “criteria” air pollutants for which EPA has set nation-
wide health standards (National Ambient Air Quality Standards) to be attained by
states and local areas. Currently, 76 metropolitan areas with a combined population
of 29.8 million have not attained the National Ambient Air Quality Standard
(NAAQS) for PM. Under stricter standards promulgated by the Agency in 1997 but
not yet implemented, many additional areas would be added to the list.
Diesel particulates are also increasingly considered to be toxic air pollutants.
Because of the reported health effects of diesel PM, the California Air Resources
Board in 1998 declared diesel PM a toxic air contaminant;6 in 1990, California had
identified diesel exhaust as a chemical “known to the State to cause cancer.”7 A study
undertaken by California’s South Coast Air Quality Management District in 1999
concluded that diesel emissions account for 71% of the estimated cancer incidence
from urban air toxics -- an estimated 16,250 cases of cancer in the Los Angeles area
alone.8 EPA is also currently investigating the health effects of diesel exhaust,
4Although not a regulated pollutant, carbon dioxide is an environmental concern because it is
considered a greenhouse gas.
5Both regulated pollutants, carbon monoxide and hydrocarbons contribute to ground-level
6State of California, Air Resources Board, Resolution 98-35. August 27, 1998. The validity
of this study has been criticized by engine manufacturers because, they argue, it relies on tests
using outdated engine technology and because it improperly uses existing health data. See
Engine Manufacturers Association, Engine Manufacturers Challenge California Report on
Diesel Exhaust. April 23, 1998.
7State of California, Air Resources Board, Scientific Review Panel Chairman's Cover Letter
and Panel Findings on Proposed Identification of Diesel Exhaust as a Toxic Air Contaminant,
May 27, 1998, available at [http://www.arb.ca.gov/regact/diesltac/diesltac.htm].
8 See “Diesel Soot Emerges as Leading Cancer Threat in Air Toxics Study,” Daily
Environment Report, November 8, 1999, p. A-8. The study referred to is the Multiple Air
Toxics Exposure Study (MATES-II) Draft Report, November 5, 1999, undertaken by South
Coast Air Quality Management District. The final report (in which the conclusions did not
including its cancer-causing potential; the Agency’s draft health assessment,
undergoing final revision after a decade of review, concludes that diesel emissions are
a “likely” human carcinogen.9
Nitrogen oxide emissions from diesel engines are also a key concern: NOx is a
precursor of ozone, which can cause respiratory problems and aggravate existing
respiratory conditions. As of January 2001, 272 counties with a combined population
of 109.3 million have not attained the NAAQS ozone standard. While other ozone
precursors (volatile organic compounds and carbon monoxide) have decreased over
the past ten years, emissions of NOx, including those from on-road vehicles, have
EPA’s new regulations on diesel fuel and vehicles cover light-duty vehicles,
heavy-duty vehicles, and sulfur in diesel fuel. Light-duty vehicles include all highway
vehicles under 8,600 pounds of gross vehicle weight, and passenger vehicles below
10,000 pounds gross vehicle weight.11 Heavy-duty vehicles are highway vehicles
above these weight ratings.
On February 10, 2000, EPA promulgated new rules regulating emissions from
light-duty vehicles, including both passenger cars and light trucks.12 These standards
will be phased in between Model Year 2004 and MY2009. In addition to requiring
substantial reductions in emissions, these so-called “Tier 2” standards were notable
for two features: 1) for the first time, the regulations required light trucks and
passenger cars to meet identical standards (trucks, including vans and sport utility
vehicles, had previously been allowed greater emissions); and 2) the regulations13
require vehicles to meet the same standards regardless of fuel type. Under previous
regulations, diesel vehicles have been allowed to emit higher levels of NOx than
gasoline vehicles. Few light-duty vehicles are diesel-fueled, so the existing difference
in standards has had little effect; but EPA was concerned that less stringent standards
change) is available at [http://www.aqmd.gov/matesiidf/matestoc.htm].
9See Health Assessment Document for Diesel Exhaust, SAB Review Draft, July 2000, p. I-4,
available at [http://www.epa.gov/ncea/dieslexh.htm].
10EPA, National Air Quality and Emissions Trends Report, 1998, March 2000, pp. 11, 27,
11Gross vehicle weight is defined as the weight of the vehicle plus the weight of passengers
and a full load of cargo.
12The category of light trucks includes pickups, sport utility vehicles (SUVs), and vans.
13For an analysis of the Tier 2 standards, see CRS Report RL30298, Air Quality and Motor
Vehicles: An Analysis of Current and Proposed Emission Standards.
Figure 1. Effective Dates of New Diesel Regulations
• Light-duty vehicles: Emissions standards for light-duty vehicles must be
significantly reduced under the Tier 2 regulations; diesel and gasoline
standards are equalized under “fuel neutral” strategy.
• Heavy-duty vehicles: NOx standards for heavy-duty diesel engines will be
decreased by 50%.
• Heavy-duty vehicles: Engine NOx standards will be decreased a further
90% (a 95% decrease from current levels) and PM standards take effect, a
90% reduction from current levels. The standards apply to 50% of vehicles
sold in MY2007-2009, with full compliance required in MY2010.
• Diesel Fuel: Allowable sulfur levels in diesel fuel will be decreased from
500 ppm to 15 ppm–a 97% reduction from current levels. Approximately
for diesel vehicles might lead to an increase in their use, with negative effects on air
The fuel-neutral approach to regulation embodied in the Tier 2 standards
concerns some engine manufacturers who think that making diesel vehicles that meet
the new standards will lead to higher consumer costs. EPA predicts that the new
regulations will cost less than $100 per vehicle for most passenger cars, less than $200
for most light trucks, and less than $300 for the largest (8,600 - 10,000 pound)
passenger vehicles, with no increases in the cost of vehicle care and maintenance.14
In the public comment period for the proposed rule, critics argued that EPA did not
look at diesel-fueled light-duty vehicles specifically, and that per vehicle costs for
diesels could be as high as $1,000. In response, EPA contended that while diesel
costs were not specifically addressed, additional costs will be negligible compared to
the costs for gasoline vehicles, because increased costs will be spread over large
production runs and across multiple models.15
14Environmental Protection Agency, Tier 2/Gasoline Sulfur Final Rulemaking: Regulatory
Impact Analysis - Review Draft. December 22, 1999. p. V-26.
15Environmental Protection Agency, Tier 2 Motor Vehicle Standards and Gasoline Sulfur
Control Requirements: Response to Comments. p. 23-2.
In addition to the Tier 2 rules, in 1997, EPA promulgated tighter emission
standards for heavy-duty vehicles that will take effect in MY2004. In October 1999,
EPA reaffirmed the technological feasibility, cost-effectiveness, and appropriateness
of these standards. These new standards will cut NOx emissions from heavy-duty16
highway engines by approximately 50% from the MY1998 standards. Responding
to concerns that engine manufacturers were building engines that emitted higher
amounts of pollution on the road than during testing, on October 6, 2000, EPA
promulgated more accurate emissions testing procedures and standards to guarantee
that actual emissions are reduced to the levels that the new standards require. As part
of this rule, all heavy-duty vehicles under 14,000 pounds gross vehicle weight will be
required to have on-board diagnostic equipment to monitor the performance of
emission control devices.17
In addition to the MY2004 standards, on January 18, 2001, EPA promulgated
further heavy-duty engine standards that take effect in MY2007. (These proposed
standards are the focus of this report.) These standards will reduce NOx emissions by18
approximately 90% below the MY2004 levels, and PM by 90%. The technology
necessary to meet the PM standard has been demonstrated on the road and is
available, but the NOx reduction technology has not been demonstrated outside the
lab. (Whether this technology will be available in time for engine manufacturers to
meet the proposed standard is one of the major issues raised by the new rule. The
issue is discussed below, on pp. 13-16.)
Sulfur in Diesel Fuel
Meeting the proposed emission standards will require very low levels of sulfur
in diesel fuel. Sulfur can corrupt emission control devices, and the newest
technologies for emissions control are especially sensitive to sulfur. Supporters of
tightened standards argue that in addition to allowing the use of advanced technology
in new vehicles, lower sulfur levels will also lead to decreased emissions from existing
16Environmental Protection Agency, Control of Emissions of Air Pollution From Highway
Heavy-Duty Engines; Final Rule. 62 FR 54693-54730. October 21, 1997.
17Environmental Protection Agency, Emissions Control, Air Pollution From 2004 and Later
Model Year Heavy-Duty Highway Engines and Vehicles; Light-Duty On-Board Diagnostics
Requirements, Revision; Final Rule. 65 FR 59895-59978. October 6, 2000. Because the
Clean Air Act requires four years of lead time for new requirements, and because the rule was
finalized after the start of MY2001, the testing and on-board diagnostic requirements will be
delayed until MY2005 (MY2006 for some manufacturers). The emissions standards were
finalized in 1997, so those will still go into effect starting in MY2004.
18Environmental Protection Agency, Office of Transportation and Air Quality, “Heavy-Duty
Engine and Vehicle Standards and Highway Diesel Fuel Sulfur Control Requirements,”
Regulatory Announcement, December2000, available at [http://www.epa.gov/otaq/diesel.htm].
19Environmental Protection Agency, Control of Diesel Fuel Quality; Advance Notice of
Currently, highway diesel fuel is regulated at a maximum of 500 parts per million
(ppm) sulfur, and averages around 300 ppm. EPA has proposed a reduction to 15
ppm to allow for the use of advanced emission controls. Agency officials argue that
any higher level would jeopardize the efficiency and reliability of emission control
systems, and any lower level would produce little benefit compared to the added
Refiners have criticized this standard as too costly and likely to lead to supply
disruptions and market instability.21 The American Petroleum Institute, the industry’s
trade association, contends that a standard of 50 ppm, the same as that being adopted
in 2005 by Japan and the European Union (EU),22 would achieve clean air goals
without substantial disruption of supply or price. (This issue is further discussed
below, on pp. 6 - 12.)
The new diesel fuel and engine regulations will likely promote long-term
improvements in air quality and public health. However, several issues have been
raised by various stakeholders. The four main issue areas are: the cost of meeting the
diesel fuel standards, and the possibility of fuel supply disruptions; the availability,
performance, and cost of new emissions control technology; the economic effects on
users of diesel fuel and on consumers in general; and the timing of the new standards.
These four areas will be addressed in turn.
Cost and Supply of Low-Sulfur Diesel
One of the key issues in the debate over the proposed rule is the potential cost
to refiners, and the ultimate cost to consumers of the new ultra-low sulfur diesel fuel.
The refining industry argues that the cost will be high, that some refiners will choose
not to make the required investments, and that, as a result, there will be shortages of
diesel fuel for as long as two years after the deadline for implementation (September
1, 2006).23 According to the refining industry, these shortages, combined with
difficulties in distributing the new fuel, will cause price spikes and supply disruptions,
with negative effects that will ripple through the economy.
Proposed Rulemaking. 64 Federal Register 26142-26158, May 13, 1999.
20Environmental Protection Agency, Control of Air Pollution from New Motor Vehicles:
Proposed Heavy-Duty Engine and Vehicle Standards and Highway Diesel Fuel Sulfur
Control Requirements, 65 Federal Register 35480, June 2, 2000.
21American Petroleum Institute, API Comments on the 2007 Heavy-Duty Engine/Diesel
Sulfur Proposed Rule, August 14, 2000.
22EU members have the option of mandating lower sulfur ppm standards if they choose.
23Personal communication, David Montgomery, Charles River Associates, October 4, 2000.
Mr. Montgomery was the principal consultant on a study of the rule’s potential impact,
conducted for the American Petroleum Institute.
Technology Concerns. EPA argues that there are many reasons to believe that
scenarios in which refiners cannot produce the necessary fuel and distributors cannot
distribute it are unlikely. According to EPA and most independent industry analysts,
there are no significant technological barriers to reducing sulfur levels to 15 ppm.24
Sulfur is removed from diesel fuel in refinery units called hydrotreaters. In
hydrotreaters, oil is heated and subjected to high pressure with hydrogen as an added
input. The oil reacts with the hydrogen in the presence of a catalyst, separating the
sulfur from the fuel. To remove additional amounts of sulfur in a hydrotreater
requires higher temperatures and pressures, improved catalysts, and increased
EPA says that existing hydrotreaters and other equipment used to meet the 500
ppm standard can be expanded, and additional systems can be added. Given the lead-
time of more than five years, the Agency expects that refiners will be able to plan the
necessary expansions during scheduled down times. Also, EPA believes that some
refiners will experience synergy in meeting both the diesel sulfur regulations and the
related Tier 2 gasoline sulfur regulations, which begin to take effect in 2004.
Refiners claim that those promoting the diesel sulfur standard underestimate the
barriers to the expansion of desulfurization technology. Refining industry
representatives argue that while some existing equipment can be used, significant
additional desulfurization equipment will be necessary to meet the very low level of
sulfur required. Furthermore, they contend that because of the higher pressures called
for in refinery units making the new fuel, some existing equipment will need to be
Refiners are also concerned that ultra-low sulfur diesel will require additional
capital investment without added profits. Small refiners especially have raised this as25
an issue; they contend that less investment capital is available to them. These
smaller refiners believe that the new regulations could force them out of the diesel fuel
Because of these concerns, EPA granted refiners additional flexibility in the final
rule. Large refiners will be allowed to produce up to 20% of their total highway fuel
at the old 500 ppm standard during a transition period that stretches from 2006 until
June 1, 2010. During this period, credit trading within five geographic areas will
allow refiners who choose not to meet the 80% requirement to purchase credits from
others who exceed the requirement. Small refiners will be entirely exempt from the
standard until June 1, 2010, provided that the refiners ensure the existence of
sufficient volumes of 15 ppm fuel in the marketing area they serve. Small refiners
who produce 15 ppm fuel prior to June 1, 2010, will generate credits that may be sold
to other refiners and used as a method of compliance. Credits can also be generated
by any refiner for early compliance after June 1, 2005. There are also special
provisions for refiners in 8 western states, and a general hardship provision for which
24 See 65 Federal Register, pp. 35483-35486, June 2, 2000.
25 Statement of J. Louis Frank, President of Marathon Ashland Petroleum (for the American
Petroleum Institute), before the Senate Committee on Environment and Public Works Clean
Air Subcommittee, June 15, 2000.
any refiner may apply. These provisions essentially give refiners who expect difficulty
in meeting the new standard four extra years to achieve compliance.26
Cost. Whatever disagreements there may be concerning the capability of the
refining industry to produce lower sulfur fuel, all stakeholders agree that the new fuel
will cost more to manufacture. While many stakeholders – including some major
refiners – are confident that 15 ppm sulfur fuel can be produced in the quantities
necessary to meet demand, estimates for the increase in production cost cover a wide
range. EPA predicts that the added production cost for ultra-low sulfur diesel will be
approximately 4.4¢/gallon,27 while a study by MathPro, Inc. for the Engine28
Manufacturers Association estimates the cost at 4.6 to 6.2¢/gallon. In its comments
on EPA’s proposed rule, the Department of Energy’s Oak Ridge National Laboratory
(ORNL) predicted that it would cost approximately 4.3¢ to 5.9¢ per gallon to convert
50% of domestic highway diesel production capacity to ultra-low sulfur diesel, and
approximately 7.5¢ to 9.9¢ per gallon to convert the last quartile of domestic capacity
to produce the proposed fuel.29 The American Petroleum Institute (API) estimated30
the cost at 8.9¢ per gallon.
Most of these cost estimates assume that current technologies will be used to
produce the ultra-low sulfur fuel. Technology may improve, however, bringing lower
costs. For example, on October 3, 2000, Phillips Petroleum announced that it has
developed a new sulfur removal technology that uses significantly lower pressures
than conventional hydrotreating processes, uses less hydrogen, and permits the
regeneration of sorbent material while the unit is operating, allowing for “prolonged
run times between shutdowns.” While not being specific regarding cost savings, the
26A quick summary of these provisions is provided in the EPA Office of Air and Radiation
Fact Sheet (EPA 420-F-00-057), "Heavy-Duty Engine and Vehicle Standards and Highway
Diesel Fuel Sulfur Control Requirements," December 2000, p. 3, available at
[http://www.epa.gov/otaq/diesel.htm#documents]. More complete details are provided in
Sections V. A., B., and C. of the Preamble to the Final Rule, pp. 146-186, available at the
27These costs would be partially offset, in EPA’s analysis, by engine maintenance savings
averaging one cent per gallon, for a net increase in cost of 3 to 4 cents per gallon.
28 The value from the MathPro study is actually an interpolation made by EPA, since MathPro
looked at the refining costs for 2 ppm and 20 ppm sulfur diesel fuel, as opposed to the 15 ppm
required in the proposed rule. See U.S. EPA, Office of Air and Radiation, Draft Regulatory
Impact Analysis for the Proposed Heavy Duty Engine and Vehicle Standards and Highway
Diesel Fuel Sulfur Control Requirements Rule, p. V-89.
29EnSys Energy & Systems, Inc. for Oak Ridge National Laboratory, Modeling Impacts of
Reformulated Diesel Fuel: Interim Report, August 14, 2000, p. 16. The ORNL study notes,
however, that rather than domestic refiners investing to convert the most difficult domestic
fuel streams to low sulfur diesel, it might be cheaper to have refiners outside the United States
process their “easiest” streams to less than 10 ppm (at lower cost) and export those to the
United States, thus lowering the total cost of compliance with the rule. Ibid., p. 12.
30American Petroleum Institute, “API Comments on the 2007 Heavy-Duty Engine/Diesel
Sulfur Proposed Rule,” p. 74. API adds that incorporating additional distribution costs
(discussed below) and losses in fuel economy brings the cost to manufacture and distribute
the fuel to 11.0¢ per gallon.
company stated that, “The technology is expected to help minimize capital costs and
everyday operating expenses while achieving targeted product quality.”31
Distribution Issues. Stakeholders opposing the rule are also concerned that
distributing the new fuel could be expensive. Segregating ultra-low sulfur diesel from
other distillates in pipeline transport may be difficult. The specification ratio (the
ratio of a given specification of two abutting streams in a pipeline or at a terminal –
in this case, the ratio of the sulfur content of 15 ppm diesel fuel with other distillates
such as off-road diesel fuel) could be as much as 300:1. The only comparable
situation was the introduction of unleaded gasoline, where the ratio was
approximately 50:1. Because of the difference in the two fuels, more fuel is required
as an interface between the abutting streams. Fuel contaminated in spacing batches
of distillate would be downgraded to a lower specification or returned to the refinery
for reprocessing, with the loss in value due to downgrading considered part of the
added cost of distributing the lower sulfur fuel.
EPA estimates that the added cost of distributing ultra-low sulfur diesel fuel will
be approximately 0.5¢/gallon long term (i.e., once the sulfur standard is fully effective
in 2010). In the initial period between 2006 and 2010, when two grades of highway
fuel would be available, costs of distribution will be higher because of the need to
provide additional tanks at refineries, terminals, and truck stops for an extra grade of
fuel: EPA estimates the distribution costs during this initial period as 1.1¢/gallon.32
Another study, by Turner, Mason & Company for the American Petroleum Institute,
estimates that the added long term cost could be as much as 0.9¢/gallon.33 This
discrepancy arises from the fact that Turner Mason assumes a higher percentage of
each batch of diesel fuel will need to be downgraded than does EPA.
Turner, Mason & Company also identify another potential problem.
Downgrading of large batches of fuel could lead to localized supply disruptions.
According to their study, some terminals may not have enough demand for the other
distillate fuels to which contaminated ultra low sulfur diesel would be downgraded,
and may not have the additional tankage necessary to store the downgraded fuel. If
this is the case, some terminals may need to return fuel to the refinery for reprocessing
or face a situation where they have no storage space available for a new batch of34
uncontaminated ultra-low sulfur diesel. However, if terminals are permitted to
expand and if they have the available capital, it appears that the five-and-a-half years
of lead-time provided by the promulgated rule should allow for construction of more
31Phillips Petroleum Company, “Phillips Announces S Zorb Sulfur Removal Technology for
Diesel,” press release, October 3, 2000, available at [http://phillips66.com/newsroom/].
32U.S. EPA, Regulatory Impact Analysis, p. V-124.
33Turner, Mason & Company, Revised Supplement to Report - Costs/Impacts of Distributing
Potential Ultra Low Sulfur Diesel, August 8, 2000, Table 2.
34Turner, Mason & Company, Costs/Impacts of Distributing Potential Ultra Low Sulfur
Diesel, February 2000, p. 16.
Other Factors Affecting Supply. A few other supply concerns have also been
presented. A key concern raised by fuel marketers is that the technology does not
exist to produce low sulfur diesel from certain blendstocks. Specifically, one
blendstock, light cycle oil (LCO), has a very high sulfur content, in addition to a high35
aromatic content. Fuel marketers argue that it would be economically infeasible to
use it to produce low-sulfur diesel fuel. Therefore, they argue, the diesel supply could36
be limited from the start. EPA argues that, due to the higher weight of LCO, it is
a relatively easy process to remove LCO from the input blend. Then, it is possible to
use the remaining, purer blendstock for low-sulfur diesel, while using LCO to produce
other fuels such as heating oil or non-road diesel.37
Another issue raised by diesel suppliers is that the United States would be unable
to import diesel to meet domestic shortages. Because the proposed sulfur level is
below that of most other countries, unless foreign refiners upgrade their refineries to38
meet the new U.S. standard, their supplies would be unavailable to U.S. markets.
Effects of Supply Disruptions. A related concern is the question of supply
disruptions with the introduction of the new fuel. According to a study by Charles
River Associates for API, some refiners will be unlikely to expand production of
diesel fuel, and may even reduce or eliminate diesel fuel production in light of the
uncertainty brought on by the new sulfur requirements. They predict that this could
lead to price spikes of 15¢ to 50¢ per gallon until such time as production capacity
can expand and/or imports can increase.39 In addition, the National Petroleum
Council (NPC), which is composed largely of industry executives, but acts in an
advisory capacity to the Secretary of Energy, states that there is a significant risk of
supply disruptions if ultra-low sulfur diesel is required before 2007, since the
introduction would overlap with the introduction of low-sulfur gasoline.40
However, according to the Turner, Mason study, as well as the EPA rulemaking
documents, over the last 25 years the petroleum industry has faced many challenges
with introducing new fuels, and most changes were relatively benign. In many cases,
including the introduction of the current low sulfur (500 ppm) diesel in response to
Clean Air Act requirements in 1993, the refining industry converted more equipment
than necessary to meet the new standards, resulting in overproduction and leading to
35The high aromatic content of LCO makes it especially difficult to remove sulfur because the
aromatics must first be removed or chemically altered.
36 Statement of James A. Haslam, Pilot Oil Corporation, before the Subcommittee on Clean
Air, Wetlands, Private Property and Nuclear Safety, Senate Committee on Environment and
Public Works, June 15, 2000, available at [http://www.senate.gov/~epw/has_0615.htm].
37U.S. EPA, Draft Regulatory Impact Analysis, p. IV-25.
38James A. Haslam, op. cit.
39 Charles River Associates, Inc., An Assessment of the Potential Impacts of Proposed
Environmental Regulations on U.S. Refinery Supply of Diesel Fuel, August 2000, p. 3.
40National Petroleum Council, U.S. Petroleum Refining - Executive Summary, June 20, 2000,
p. 24. Under the Tier 2 rule, low sulfur gasoline will be required beginning in 2004.
prices lower than those predicted.41 That is not to say that changes in fuel
specifications have not come at some difficulty and expense, but major price spikes
have been uncommon.
In the Clinton Administration’s final discussions concerning this issue, the
Department of Energy argued that cost impacts and the potential for price spikes
could be substantially lowered by phasing in the rule. DOE suggested a 9-year phase-
in, with 20% of highway diesel fuel required to meet the 15-ppm standard in 2007 and
additional increments each year until 100% compliance would be reached in 2015.
DOE estimated the cost savings from such a phased implementation at $14-27
DOE’s position was opposed not only by EPA, but also by the petroleum
industry. Spokesmen for the American Petroleum Institute and the National
Petrochemical and Refiners Association termed a phase-in “expensive” and
“awkward”; in addition to causing distributional difficulties and requiring large
investments to keep the two fuels separate during the phase-in period, the additional
costs would be stranded when the market reverted to a single fuel in 2015, according
to the industry groups.43
As noted, the final rule will allow several exemptions from the 15 ppm standard
during a 4-year transition period. (The exemptions are described above, on page 7.)
These provisions are expected to allow up to 25% of highway diesel fuel to continue
to be produced at the 500 ppm sulfur standard until 2010. This fuel will need to be
separated from 15 ppm fuel in the distribution system, however, and may only be used
in pre-2007 model year engines.
Petroleum Industry Alternative. While two major refiners (BP and Tosco)44
supported EPA’s 15 ppm proposal, and another (Phillips) has announced the
development of new technology to help meet its requirements, the bulk of the
petroleum refining, transportation, and marketing industry opposes the 15-ppm rule.
Instead of EPA’s proposal, the American Petroleum Institute (API) and the National
Petrochemical and Refiners Association (NPRA) developed an alternative proposal
to limit diesel sulfur to 50 ppm.
41Personal communication, David Montgomery, Charles River Associates, October 4, 2000.
42Margaret K. Singh, Center for Transportation Research, Argonne National Laboratory, for
U.S. Department of Energy, Office of Policy and Office of Transportation Technologies,
Analysis of the Cost of a Phase-in of 15 ppm Sulfur Cap Diesel Fuel, November 2000, p. 2.
43 See “Groups Make Last Pitch for Diesel Rule in Letter to Clinton, Talks with Officials,”
Daily Environment Report, December 7, 2000, p. A-1, and “EPA vs. DOE: The Diesel
Battle,” Air Daily, December 6, 2000, p. 1.
44 “BP’s Comments on EPA’s Proposed Rulemaking for Heavy Duty Diesel Engines, Vehicle
Standards and Diesel Fuel Sulfur,” August 14, 2000, and “Tosco Corporation Announces
Support of Low-Sulfur Diesel Proposal and Results of 2000 Annual Meeting of
Stockholders,” Press Release, May 18, 2000. The latter is available at
As stated by Jerry Thompson of CITGO Petroleum, representing NPRA at a
Senate hearing, June 15, 2000:
The refining industry agrees that the sulfur levels in diesel must
be reduced, but the program must be reasonable. The industry
proposed a plan to EPA that would lower the current limit of
reduction. This is a very significant step. It will enable diesel
engines to meet the particulate matter standards sought by EPA
and also achieve significant NOx reductions. Our plan can yield
a 90% reduction in particulate matter and a 75% reduction in
NOx emissions from new heavy-duty diesel engines. Industry's
plan is still expensive – we estimate it will cost the industry
roughly $4 billion to implement. But, unlike EPA's extreme and
much more costly proposal, the level of sulfur reduction45
proposed by industry is attainable and sustainable.
The petroleum industry plan, like EPA’s, relies on the use of particle filters (or
“traps”) to capture particulate matter; but the additional sulfur in 50 ppm fuel would
affect the performance of the filters, require more frequent maintenance, and shorten
their expected life, according to manufacturers of the equipment.46
NOx, on the other hand, would be removed by a completely different technology,
in the oil industry’s plan: selective catalytic reduction (SCR), rather than the NOx
adsorbers that the engine manufacturers expect to use (and on which EPA based the
rule).47 SCR is a promising NOx removal technology, modeled on controls used by
power plants and other stationary sources; but, it requires the use of urea (a
compound of ammonia that is commonly used as a fertilizer) to react with the sulfur.
The urea would have to be supplied to the nation’s truck stops and diesel fueling
stations through an entirely new distribution system; this approach would put the
burden on truckers to maintain urea levels in their emission control systems
(according to API, urea would need to be replenished every 5,000 - 10,000 miles).
If the urea were not replenished, the emission control system would not function.48
For this and other reasons, engine manufacturers, the emission controls industry, and
45 Statement of Jerry Thompson, CITGO Petroleum, on behalf of the National Petrochemical
& Refiners Association, Highway Diesel Fuel Sulfur Regulations Hearing, Senate
Environment and Public Works Committee, Subcommittee on Clean Air, Wetlands, Private
Property, and Nuclear Safety, June 15, 2000, p. 1.
46 Written Statement of the Manufacturers of Emission Controls Association on the U.S.
Environmental Protection Agency’s Proposed Heavy-Duty Engine and Vehicle Standards and
Highway Diesel Sulfur Control, Docket No. A99-06, August 14, 2000, pp. 7-8.
47 For a discussion of SCR technology, including API’s analysis of its feasibility, see API
Comments on the 2007 Heavy-Duty Engine/Diesel Sulfur Proposed Rule, August 14, 2000,
48 Ibid., p. 38. EPA discusses this issue, and its preference for NOx adsorbers at 65 Federal
Register 35470, June 2, 2000.
EPA have concluded that such a system would be impractical for long haul trucks,
although it might be an option in the case of centrally fueled and maintained fleets.
Availability and Performance of Emissions Control
In addition to the price and availability of diesel fuel, stakeholders (particularly
engine manufacturers) are concerned that the technology necessary to meet the new
emissions standards may be unavailable. While PM control technology is
commercially available now, NOx control technology is still in research and
development. If the emissions control technology that EPA relies on fails to meet
commercialization goals or fails to provide the expected benefits, EPA would be
unable to certify engines as meeting the proposed standard. Without certification,
engines cannot legally be offered for sale.
Engine Manufacturers. In comments filed with EPA, the Engine
Manufacturers Association outlined a number of concerns with the proposed rule,
arguing that the standards are not technologically feasible within the proposed time
frame, that the test methods specified by the Agency cannot accurately measure
compliance, that the NOx and PM standards need to be made less stringent, and that
– in contrast to the views of the petroleum industry – the sulfur content of diesel fuel
should be capped at 5 ppm (10 ppm less than EPA is requiring).49
In its oral statement at EPA’s public hearings, the association appeared more
supportive, however. Its comments focused almost exclusively on the need to remove
“essentially all sulfur from diesel fuel”; otherwise, the industry’s spokesman sounded
optimistic about the industry’s ability to perform:
As we sit here today, we are on the cusp – the critical turning
point – of something spectacular. We have within our grasp the
potential to dramatically reduce the emissions of the most fuel
efficient, reliable and durable source of motive power available
There are issues which will require a great deal of work by
manufacturers and the Agency. But it is no longer a question of
if. Give us fuel improvements, sufficient time, compliance
flexibility, and testing certainty, and tremendous emission
reduction can be achieved.50
49 Statement of the Engine Manufacturers Association, Control of Air Pollution from New
Motor Vehicles: Proposed Heavy-Duty Engine and Vehicle Standards and Highway Diesel
Fuel Sulfur Control Requirements, EPA Docket No. A-99-06, August 14, 2000.
50Oral Statement of the Engine Manufacturers Association, Control of Air Pollution from New
Motor Vehicles: Proposed Heavy-Duty Engine and Vehicle Standards and Highway Diesel
Fuel Sulfur Control Requirements, Docket No. A-99-06, Public Hearings, June 2000,
available at [http://www.engine-manufacturers.org/rulemaking/].
If the industry has been generally supportive, one of the major engine
manufacturers, Cummins Engine Company, was vocal in asking that EPA take
additional time before finalizing the regulations. In testimony before the Senate
Environment and Public Works Committee’s Clean Air Subcommittee, a Cummins
Cummins’ current best estimate of the system of aftertreatment
devices necessary for compliance includes four components: a
particulate trap, a sulfur trap, a NOx adsorber and an oxidation
catalyst. These devices, however, are in varying stages of early
development. Particulate traps are in limited production with
more development required. Sulfur traps [are] being developed,
but are not developed yet. The NOx adsorber is currently in the
lab, but is still years away from field-testing. And, finally the
oxidation catalyst is in production, but on limited applications.
We can neither evaluate the pieces individually nor as an
integrated system with the potential to achieve the proposed
reductions. Moreover, we can only guess as to what impact the
envisioned system of aftertreatment technologies will have on
engine performance, fuel economy and cost.51
Cummins has not publicly argued with the implementation date of 2007, however.
Rather, the company has asked that EPA delay finalizing the rule until further research
and development can be done:
We are urging EPA to provide an additional 18 to 24 months so
that stakeholders can assess these issues, which are critical to the
success of the ultimate rule. EPA can do this and still implement
a rule for 2007.52
Manufacturers of Emission Controls. In achieving the mandated reductions,
the engine manufacturers will work with companies that provide emission control
equipment and catalysts. Representatives of these companies are confident of the
standards’ attainability, and are fully supportive of the rule. In an October 2000 press
release, the industry’s trade association (MECA, the Manufacturers of Emission
Controls Association) stated that “the Agency’s proposal constitutes a carefully
crafted and balanced program .... If the program is finalized, it will result in53
substantial, cost-effective emission reductions over the next several decades.”
51 Statement of Tina Vujovich, Cummins Inc., before the Subcommittee on Clean Air,
Wetlands, Private Property and Nuclear Safety, Senate Committee on Environment and Public
Works, September 21, 2000, available at
53Statement of Bruce Bertelson, Executive Director, Manufacturers of Emission Controls
Association, in “MECA Voices Support for Finalizing U.S. EPA’s Heavy-Duty Engine
Standards/Diesel Sulfur Limits,” press release, October 3, 2000, available at
The MECA statement went on to address the question of whether the proposal
offered sufficient time to develop and implement technology not yet demonstrated:
If the EPA delays this important regulatory initiative, the
substantial commitment in financial and human resources that is
being made by MECA member companies and many others to
develop and/or optimize the necessary technology solutions
likely will be scaled back. ... Further, suggestions that EPA
should wait until the necessary technological solutions are
commercially available is totally unrealistic. Virtually no
investment in technology development will occur based on the
vague prospect that if technology is developed, regulations may
be adopted. Such logic flies in the face of the 30-year success
story of the Clean Air Act.54
Whether the technology to meet the standards can be developed in time will need
to be apparent several years in advance of the rule’s effective date: manufacturers
expect to design and test prototypes and make manufacturing decisions by late 2004.55
If the technology chosen by the manufacturers meets the emission standards for test
engines and vehicles, the rule as finalized would presumably go forward. If the
technology does not meet the standards, EPA would be faced with a choice of altering
the standard, extending the deadline for compliance, or allowing manufacturers to
produce and sell noncomplying engines “under limited circumstances in exchange for56
paying a penalty to the government.”
An Historical Analogy. The situation in which EPA and the engine
manufacturers find themselves is not unlike that faced in the early 1970s by auto
manufacturers and the Agency. The Clean Air Amendments of 1970, signed by
President Nixon on December 31 of that year, required reductions in auto emissions
by model year 1975 that would necessitate the use of technology not yet
demonstrated on any motor vehicle in production. The manufacturers had less time
than that offered by the diesel rule (only a little over three and a half years) between
the enactment of the law and the effective date of its standards.
Representatives of the automotive industry appear to have been unanimous in
stating that it would not be possible to meet standards by 1975, and ultimately EPA
granted repeated suspensions of the standards. While granting suspensions, the
55 Personal communication, Tina Vujovich, Vice President, Environmental Policy and Product
Strategy, Cummins Engine Company, Inc., September 14, 2000.
56The quote is from the EPA Federal Register notice, in which the Agency asked, among other
things, for comment on the role such “nonconformance penalties” might play in the final rule.
See 65 Federal Register, p. 35479, June 2, 2000.
Agency set interim standards to assure progress toward the ultimate goals.57
Following the EPA suspensions, Congress eventually modified the statute, relaxing
the standards, in 1977. It wasn’t until 1980 and 1981 that the original standards for
hydrocarbons and carbon monoxide were met; not until 1994 did the original NOx
standard of 0.4 grams per mile go into effect.
While the standards themselves were implemented more slowly than envisioned,
the basic technologies on which EPA and the manufacturers relied (unleaded gasoline
and catalytic converters) were implemented in time for the 1975 model year. The
auto manufacturers and their suppliers gradually improved both engine and converter
technologies after that date to achieve lower emissions. Unleaded fuel and catalytic
converters still play key roles in auto emission control systems 25 years later.
Technology Review. In order to guarantee the effectiveness of the proposed
diesel rules, EPA considered conducting a technology review in 2003 or 2004. This
would allow the Agency to revisit the standards before implementation, and determine
whether the necessary technology was likely or unlikely to be available by MY2007.
A technology review was criticized by some as promoting inaction by the regulated
entities. Notably, the Engine Manufacturers Association was among those opposed
to a technology review, arguing that it would create additional uncertainty and
“effectively prevent engine manufacturers from fully developing and investing
resources toward achieving the standards finally adopted.”58 The final rule did not
incorporate a technology review.
Cost. Engine manufacturers and users of heavy-duty vehicles are also concerned
about the potential cost of the new technology. EPA predicts that new vehicle costs
could increase by $1,990 for a lighter heavy-duty truck to $3,230 for the heaviest
trucks in 2007, with a 40% decrease (to $1,170 and $1,870, respectively) by 2012.
The Agency expects operating costs (including increased fuel cost) to increase by
about $600 (for a light heavy-duty truck) to as much as $4,030 (for the heaviest
trucks) in the long term.59 Engine manufacturers argue that with so many
uncertainties, engine costs could be much higher, and that in the short term, costs will
certainly be higher.60
57 For information regarding two of the suspensions, see Bureau of National Affairs,
Environment Reporter, August 3, 1973 and March 7, 1975.
58 Statement of the Engine Manufacturers Association, EPA Docket No. A-99-06, August 14,
59EPA, Office of Air and Radiation, Regulatory Impact Analysis: Heavy-Duty Engine and
Vehicle Standards and Highway Diesel Fuel Sulfur Control Requirements, December 2000,
pp. vii-viii. Available at [http://www.epa.gov/otaq/diesel.htm#documents].
60Statement of Cummins Inc. to EPA, Docket No. A-99-06. August 14, 2000. See also
Statement of the Engine Manufacturers Association, previously cited, p. 93.
Economic Effects of the New Fuel and Engine Standards61
Whether the new regulations will have broad impacts on the U.S. economy
primarily depends on whether large fuel price increases or disruptions in the supply
of diesel fuel occur. As noted previously, diesel fuel cost increases have been
estimated by four different sources to range from 4.3 cents to 9.9 cents per gallon.
Net costs could be lower if adjustments are made for maintenance cost savings or the
likely introduction of lower-cost sulfur removal technology. Supply disruptions could
cause increased prices, fuel shortages, and other short-term problems if introduction
of the new fuel is not properly managed. Whether this occurs depends to a large
extent on whether distributors of diesel fuel and other distillates use the next five-and-
a-half years to prepare the distribution and fuel storage infrastructure to handle
A recent CRS report addressed the potential for fuel price increases to affect
broader economic variables. In Rising Oil Prices: What Dangers Do They Pose for
the Economy?, Marc Labonte noted that several recent studies had concluded that the
effects of recent increases in the price of crude oil or even the effect of a further $1062
per barrel increase would be modest.
A $10-per-barrel crude oil price increase would translate to a 25-cent-per-gallon
cost increase that could affect all liquid fuels (gasoline, diesel, kerosene, home heating
oil, etc.). The projected cost increase from the proposed regulations are substantially
less than that (4.3 to 9.9 cents), and affect only highway diesel fuel, which accounts
for roughly 10% of oil consumption. Thus, the impact of diesel fuel price increases
economy-wide would be substantially less than the impact of recent crude oil price
Nevertheless, the price of diesel fuel is an important consideration in certain
industries, notably trucking, transit, and long distance bus (motorcoaches). Farmers,
who use diesel fuel to power a majority of the nation’s farm machinery, have also
expressed concerns. Potential effects on these sectors are addressed below.
Trucking. The trucking industry accounts for more than 80% by revenue of all
freight moved in the United States.63 It is a large and fragmented industry dominated
by small businesses. More than 450,000 firms participate in this industry, with a large
61This section focuses on the impact of the proposed fuel standards, as has most comment on
the economic effects of the proposed rule. The fuel standards have attracted more comment
most likely because an increase in fuel costs or a disruption in fuel supply would have
immediate impacts across most sectors of the economy, whereas an increase in the cost of new
trucks or engines would initially affect a smaller segment of the economy.
62See CRS Report RL30634, August 15, 2000, pp. 14-18. Among the reasons cited in that
report that recent oil price increases have had little impact are that the U.S. economy uses less
energy per capita and per unit of Gross Domestic Product than it did during the oil shocks of
the 1970s -- using just half the fuel per dollar of Gross Domestic Product in 1999 that it did
63All data on trucking, unless otherwise noted, are from McGraw-Hill Companies, U.S.
Industry & Trade Outlook 2000. Trucking. p. 54-1.
percentage of them being owner-operators. The largest 50 firms in the industry
accounted for only 13% of industry revenues in 1997. There were 1.79 million
combination trucks in the U.S. in 1997, and they consumed almost 20.3 billion gallons64
of primarily diesel fuel during the same year.
Many of the small firms in this industry, especially owner-operators, are very
sensitive to cost increases. The average profit margin in the trucking industry is only
1.95%. Because of the large amount of competition in the industry, it is difficult for
individual firms to raise rates. Fuel costs average roughly 15% of the industry’s total
operating costs, according to recent estimates.65 The industry will, therefore, be
especially concerned about cost increases associated with low sulfur fuels.
Equipment and maintenance costs are also a major concern. There seems to be
considerable doubt in the industry that EPA’s truck cost estimates are accurate. Even
if they are accurate, the American Trucking Association argues, the combined new
purchase and life cycle cost estimates are $6,230 per truck in the short term, which
is a significant sum, especially for small operators.66
The trucking industry also believes that EPA’s new diesel emission standards
unfairly discriminate against it vis-a-vis its principal intermodal competitors: railroads
and barges. The American Trucking Association (ATA) has taken the position that
there should be only one diesel standard for all freight transportation carriers. EPA
has recently implemented new standards for locomotives, which require emission
reductions of about two-thirds for NOx and about 50 percent for hydrocarbons and
particulate matter. These standards began taking effect this year.67 Barges powered
by marine diesel engines must meet standards that take effect in 2004 and 2007.
These standards will result in only a 24% reduction in NOx and a 12% reduction in68
particulate matter when fully implemented, however. These standards are not as
stringent as the promulgated standards for diesel trucks.
On the other hand, some sectors of the trucking industry face standards at least
as stringent as those proposed by EPA, as a result of planned state or local
regulations. California and the Los Angeles area’s South Coast Air Quality
Management District, for example, have adopted standards for diesel fuel and engines
64U.S. Department of Transportation. Bureau of Transportation Statistics. National
Transportation Statistics 1999.Washington, D.C. p. 301.
65See John W. Fischer and Bernard A. Gelb, Transportation Fuel Taxes: Impacts of a Repeal
or Moratorium, CRS Report RS20521, March 28, 2000, p. 3.
66Statement of Beth Law, Vice-President for Law and Environmental Affairs, American
Trucking Association, at EPA Public Hearing, June 29, 2000, Denver, CO.
67The locomotive standards were signed in December 1997 and published in the Federal
Register, April 16, 1998. For more information, see U.S. EPA, Office of Air and Radiation,
“Environmental Benefits of Emission Standards for Locomotives,” December 1997, available
68For information on the marine engine standards, see [http://www.epa.gov/otaq/marine.htm].
more stringent than those promulgated by EPA.69 The California requirements will
require ultra-low sulfur fuel and retrofit of existing engines, in addition to controls on
new engines. Facing these state and local requirements, California-based truckers are
strongly supportive of EPA’s new national standards: they perceive that it will help
level the playing field between them and out-of-state trucking firms.70
Other areas are also moving forward with state or local requirements on diesel
fuel and engines. In its proposed State Implementation Plan (SIP) for the Houston-
Galveston area, for example, Texas proposed to require the use of 30 ppm ultra-low
sulfur diesel fuel for both on-highway and off-highway purposes in East and Central
Texas beginning in May 2004, with a further reduction to 15 ppm in May 2006.71 The
final version of the SIP dropped the 2004 requirement, but includes limits on the
aromatic content of diesel fuel and other requirements applicable to both on and off-
highway diesel fuels, beginning in 2002.72 The state has also proposed restrictions on
the use of heavy equipment to reduce emissions.
Faced with what they consider inadequate federal standards for diesel emissions
in the 2005-2006 period, at least 17 states are adopting standards for diesel engine
emissions that are stricter than the federal standards for those years.73 Had EPA not
acted, this tendency toward fragmentation of the national market for fuels and engines
might have continued; the result of such fragmentation could have been increased
costs in the affected areas beyond those projected for compliance with EPA’s rule.
Transit. There were approximately 698,000 buses in the United States in74
1997. The majority of these were school buses. School buses mostly use gasoline
engines for propulsion and are not subject to the diesel standard. (There are,
however, new standards for heavy-duty gasoline engines in another part of the rule,
and low sulfur gasoline requirements that begin to take effect in 2004.)
69See “CARB to Begin Writing Rules to Implement Major Diesel Emission-Reduction
Program,” Daily Environment Report, October 3, 2000, p. AA-1. In addition, the South
Coast Air Quality Management District (covering the Los Angeles metropolitan area), voted
September 15, 2000, to require a 15 ppm limit on sulfur in diesel fuel beginning January 1,
2005. See “AQMD Board Votes for Cleaner Diesel to Reduce Cancer,” at
70See “Commenters at California Hearing Urge EPA to Strengthen Diesel Regulation,” Daily
Environment Report, June 29, 2000, pp. A-4, A-5. See also, Stephanie Williams, “The Fight
for a National Diesel Standard: CTA comments on federal EPA low-sulfur diesel fuel
proposal,” September 4, 2000, available at the California Trucking Association website
71See Texas Natural Resource Conservation Commission, “Houston-Galveston Clean Air
Rules and Plans,” at [http://www.tnrcc.state.tx.us/oprd/hgasip.html].
72Personal communication, Morris Brown, Texas Natural Resource Conservation
Commission, January 16, 2001.
73See “California Adopts 'Not-to-Exceed' Rule for 2005-2006 Model Year Diesel Engines,”
Daily Environment Report, December 14, 2000, p. A-2.
74U.S. Department of Transportation. Bureau of Transportation Statistics. National
Transportation Statistics 1999. Washington, D.C. p. 300.
According to the American Public Transit Association (APTA) there were
72,170 transit buses in service in 1997.75 Of these, just over 47,000 used diesel as
their primary fuel. Total diesel fuel consumption for these vehicles in 1997 exceeded
Unlike the other industries discussed here, the transit industry is not a profitable
one. Only 40.1% of transit’s operating costs are recovered directly from its principal
customer base in the form of passenger fares. The remainder of transit operating
funding, and much of its capital funding, are provided by federal, state, and local
governments. Experience has shown that it is difficult for the transit industry to pass
all of its cost increases through to its passengers in the form of higher fares without
losing ridership. It is, therefore, likely that any cost increases imposed on the industry
will affect both passengers and the budgets of various government subsidy providers.
An important concern to this industry is the life of its equipment. Transit buses
are heavily used and have a life span of over a decade; new buses cost, on average,
over $250,000. It is not uncommon for a transit bus to be re-engined several times
during its useful life. APTA and transit operators have expressed a concern that the
use of ultra-low sulfur fuel and associated engine technology could seriously reduce
the expected service life of transit engines. If this occurred, it would result in costs
significantly above those suggested by EPA.
On the other hand, transit systems throughout the country are under pressure
from regulators and the public to reduce emissions from their existing bus fleets.
Many (including New York, Los Angeles, and Washington, D.C.) are purchasing
buses powered by compressed natural gas (CNG) because of public concerns about
diesel emissions. Without marked improvement in diesel emissions, more of this
industry is likely to switch to CNG or other alternative fuels, with many of the same
concerns regarding the cost and reliability of a new technology.
Motorcoach. According to the American Bus Association, there are
approximately 44,000 commercial motorcoaches in service in 2000 in the United76
States and Canada, the vast majority of which are based in the United States. About
12% are used in regularly scheduled passenger service (as opposed to providing
charter service); these account for roughly half of all of the mileage operated by the
industry. Most of the 4,000 firms in this industry are small businesses, but the largest
50 firms in the industry account for 56% of all passengers. In 1999, the motorcoach
industry consumed approximately 498 million gallons of fuel, most of which was
The motorcoach industry has some of the same concerns as the transit industry.
This industry’s largest concerns are likely to be the cost of low sulfur fuel and the cost
of new equipment.
75All data on transit are from: American Public Transit Association. APTA 1999 Transit Fact
Book. Washington. 1999.
76The Department of Transportation does not have specific data on this industry segment.
This discussion relies on: American Bus Association. Motorcoach Industry Facts.
Motorcoach use patterns, however, differ from those of the transit industry.
Motorcoaches provide longer distance service without the harsh stop and go service
patterns typical of transit. Hence, motorcoaches are likely to have even longer service
lives than their transit counterparts, making the issue of long term maintainability of
new technology engines a paramount concern. At the same time, because of these
long service lives, the motorcoach industry may be able to spread out replacement of
many engines until the technology has been more clearly demonstrated.
Agriculture. A number of agricultural organizations have expressed concerns
about the impact on farmers and their capacity to produce if fuel supply disruptions
occur as a result of the new rule. (It should be noted that off-road equipment and
fuel, including farm equipment, are exempt from the rule, which addresses highway
fuel and trucks only. But off-road use of diesel fuel is relatively small compared to
highway use – of total diesel fuel consumption, about 15% is off-road vs. 85% on –
so some have suggested that highway fuel may be used for off-road purposes in rural
areas, where it simplifies distribution of diesel fuel to do so.77)
Agricultural organizations have raised two possibilities: 1) that changes in the
price of diesel fuel have the potential to affect farm production costs; and 2) that
potential disruptions in the distribution system serving farmers could have a significant
structural impact on petroleum cooperatives. Other off-farm impacts could affect
agricultural production costs if fuel price increases cause changes in transportation
Energy costs in U.S. agriculture represent a higher proportion of total costs than
in many other major sectors such as manufacturing.78 According to the U.S.
Department of Agriculture (USDA), agricultural production in the United States relies
heavily on technologies that require energy inputs in relatively expensive forms, such
as electricity and petroleum-based fuels. In addition, many experts believe that the
impact of fuel price increases is potentially greater in agriculture than in other sectors,79
given its limited capacity for switching to alternative energy sources in the short run.
Recent estimates by USDA showed that 4.3% of total farm expenditures came
from energy consumption in 2000, up from 3.8% in 1999. U.S. farmers' energy costs
were forecast by USDA to be $7.7 billion in 2000, of which 36% ($2.8 billion) will
be for diesel fuel.80
Despite sizeable energy expenditures in the farm sector, the USDA’s Economic
Research Service (ERS) estimates that higher oil and fuel prices generally boost the
77There is also a counterargument, raised by some petroleum cooperatives, that large refiners
will dump off-spec highway fuel in the off-road market, depressing prices.
78 U.S. Department of Agriculture, Economic Research Service, Agricultural Resources and
Environmental Indicators, 1996-97. Agricultural Handbook No. 712.
79 N.D. Uri and M. Gill, “The Agricultural Demand for Electricity in the United States,”
International Journal of Energy Research, Volume 19, 1995.
80 Personal communication. James Duffield. USDA Office of Energy Policy and New Uses.
September 7, 2000.
overall rate of inflation only slightly and usually mean very modest gains in food
costs.81 Calculations by CRS of the impact of increasing on-farm fuel costs (i.e.,
diesel only) on production costs support ERS’ conclusion. For instance, using
USDA figures, it appears that a 3% (5¢) increase in the price of diesel would increase
agricultural fuel costs by $84 million nationwide and push the price of production up
by about 0.05%. Similarly, a 9% (15¢) increase in diesel price translates into an
estimated nationwide fuel cost increase of $252 million, and thus increases production82
costs by 0.14%.
The other major concern raised by agricultural organizations is the potential
effect of the diesel rule on farm cooperatives. Since the 1930s, cooperatives have
provided the fuel supplies needed by a sizable proportion of U.S. farmers. In 1993
(the last year when a USDA study collected these data) cooperatives provided 37%
of diesel fuel sold to farmers in the United States.83 Today, the situation seems little
changed. According to cooperatives’ spokespersons, cooperatives account for about
40% of all the on-farm fuel used in the United States, even though they represent less
than 2% of petroleum refining industry capacity. Similarly, farmer cooperatives
supply much of the highway diesel and home heating oil needs in rural America,
according to these sources. According to industry sources, cooperative diesel sales
are strongest in the Corn Belt and the Great Lakes States (40%) and weakest in the
Southeast and the Delta Region (12%).84
Cooperatives maintain that EPA’s new diesel sulfur requirements could: (1)
induce supply disruptions (or price spikes) by reducing diesel production capacity in
established co-op distribution channels; (2) force cooperative and other small refiners
to produce costly ultra-low sulfur diesel fuel for farm and other off-highway uses,
which are not required to use it (this assumes that, rather than produce two grades of
fuel, the co-ops would produce fuel that meets the more stringent standard and sell
it for both highway and off-road uses); (3) jeopardize the economic viability of
farmer-owned refineries, leading to further concentration in the petroleum industry
serving rural America; and (4) impose major capital investment costs with no return
on investment. Estimates for capital investment needed to achieve compliance vary
81 USDA, Economic Research Service, The Impact of a Sustained Oil Price Increase on the
Agricultural Sector, May 22, 2000. Available at
82 These estimates assume a base diesel price of $1.70 per gallon, which is higher than the
U.S. average of $1.609, according to U.S. Department of Energy (as of 09/04/00), but closer
to prices on the West Coast, where prices are closer to $2.00 per gallon. Estimate does not
include indirect costs increases.
83USDA, Rural Business and Cooperative Development Service, Petroleum Cooperatives:
84Mr. Jesse Sevcik, Farmland Industries Inc. Personal communication. September 11, 2000.
from $80-$200 million per refinery, according to a co-op source.85 EPA’s estimates,
on the other hand, are $14 million for small refineries.86
Petroleum cooperatives have asked:
!that EPA not require a phase-in period which would allow two sulfur levels in
on-road diesel fuels (500 ppm and 15 ppm). Spokespersons for the petroleum
coops state that the local coops and farmers’ fuel retail businesses cannot
afford to add thousands of new tanks and pumps to accommodate two fuels
temporarily. In addition, petroleum coops have an extensive network of
pipelines and distribution terminals that would have to be renovated to
accommodate two fuel grades. As noted, the final rule will allow two fuel
grades in the 2006-2010 transition period, but there is no requirement that a
distributor, terminal, or retailer offer both grades;
!that the date for petroleum coops and other small producers to achieve
compliance with EPA low-sulfur rules on diesel and gasoline be extended from
2006 to 2010. [The final rule does provide that a small refiner may continue to
produce and sell diesel fuel meeting the current 500 ppm sulfur standard until
June 1, 2010, “provided that it reasonably ensures the existence of sufficient
volumes of 15 ppm fuel in the marketing area(s) that it serves.”87] Coops state
that this time is needed to absorb the shock of renovating their refining, storage
and distribution facilities; and
!that financial assistance, in terms of loan guarantees, be provided by the federal
government to coops allowing these to secure private financing of refinery and
distribution upgrades. [The Preamble to the Final Rule states that “The U.S.
Department of Agriculture (USDA) has indicated an interest and willingness
to review its existing authorities for the potential mechanisms to provide
financial assistance to refiner cooperatives who do invest in desulfurization
programs.88] Coop sources maintain that creditors will be reluctant to lend
capital due to the severe risk of default by petroleum coops during the phase-in
86U.S. EPA, Office of Air and Radiation, Regulatory Impact Analysis: Heavy-Duty Engine
and Vehicle Standards and Highway Diesel Fuel Sulfur Control Requirements, p. V-100,
available at [http://www.epa.gov/otaq/diesel.htm#documents].
87U.S. EPA, Office of Air and Radiation, Regulatory Impact Analysis: Heavy-Duty Engine
and Vehicle Standards and Highway Diesel Fuel Sulfur Control Requirements, Executive
Summary, p. xviii. Available at [http://www.epa.gov/otaq/diesel.htm#documents]. Not all
of the cooperative refiners will qualify for this provision, because most don’t qualify as
“small” under EPA’s definition; but the Agency believes that the larger coops will be able to
postpone desulfurization investments, if necessary, through the purchase of credits from other
refiners, or by applying to the Agency for hardship relief. For discussion of the status of each
cooperative refiner, see Section IV. C. 2. of the Preamble to the Final Rule, pp. 181-182,
available at the same web site.
88Ibid., p. 183.
period. Coops expect that larger refiners will “dump” diesel fuel below cost
to increase market share during this period, thus jeopardizing their existence.89
Small refining operations have similar concerns about the capital costs of
switching over to ultra-low sulfur diesel.
Timing of the New Standards
As EPA worked to finalize the new standards in the fall of 2000, several
concerns were expressed regarding the timing of the new heavy-duty engine and
diesel sulfur standards. Some stakeholders believed that EPA was “in a rush” to
finalize the rules before the end of 2000. They argued that the Agency should take
more time to further analyze the feasibility and cost of the proposed rules. These
concerns were magnified by the nature of the proposal: both the degree of emission
reduction and the role to be played by yet-to-be-demonstrated technology are larger
in this regulation than in many other EPA rules.
Whether the rule was rushed is difficult to judge on objective criteria. While the
specifics of the proposal were not finalized until early 2000, EPA and the engine
manufacturers have been engaged in discussions regarding the need for additional
regulations since at least 1995.90 These discussions did not, at first, envision the level
of emission reductions eventually proposed; but the need to obtain greater emission
reductions (driven by air quality considerations) and advances in available technology
appear to have combined to produce a stricter EPA proposal than initially envisioned.
Another factor in the discussion of the rule’s timing was that, under the Agency’s
schedule, the decision was finalized in the last days of the Clinton Administration.
Failure to promulgate the rule before a new Administration took office might have
caused substantial delay, resulting in less lead time for industry compliance, or a delay
in the date of implementation. On the other hand, the Bush Administration did review
the regulation, even though it was already promulgated. The review did not lead to
changes, however: on February 28, 2001, EPA Administrator Whitman announced
that the Administration had determined that implementation would not be delayed.91
As noted previously, if the availability and ultimate cost of the technology are the
main concerns, one way of addressing them might have been through a formal
“technology review” at some point after promulgation but before major investment
decisions must be made. In its diesel proposal, EPA asked for comments on whether
it should conduct such a reassessment of diesel NOx control technology and
associated fuel sulfur requirements in 2003, allowing it to modify the standards or
89National Council of Farmer Cooperatives, press release, May 17, 2000, and personal
communication, Jesse Sevcik, previously cited.
90 See “Control of Air Pollution from Heavy-Duty Engines,” Advance Notice of Proposed
Rule, 60 Federal Register 45580, August 31, 1995.
91 See “EPA Will Not Delay March 19 Date for Implementation of Diesel Sulfur Rule,” Daily
Environment Report, March 1, 2001, p. AA-1.
extend the compliance date based on its review.92 The Agency did not promulgate
such an approach, however. Many argued that it would create uncertainty regarding
the standard and provide a disincentive for industry to invest in the equipment
necessary to achieve compliance. As noted previously, engine manufacturers and
manufacturers of emission controls both argued against a technology review in
comments submitted on the proposed rule.
While no legislation was introduced in the 106th Congress concerning diesel fuel
or engines, several committee oversight hearings were held on the Tier 2 emissions
regulations and the heavy-duty truck and diesel sulfur issues discussed in this report.93
Such oversight activities may continue in the 107th Congress, even though final rules
are now in place.
In the final weeks of the 106th Congress, there reportedly was an attempt to add
language delaying the diesel rule to EPA’s annual appropriation.94 Draft legislative
language was circulated that would have directed the National Academy of Sciences
to study the feasibility and cost-effectiveness of EPA's proposed diesel rule, and issue
a final report by June 2001. The amendment would have required EPA to take public
comment on the NAS study before finalizing or implementing a rule. The amendment
was not adopted.
Ultimately, Congress has the ability not only under appropriations measures, but
also under the Congressional Review Act, to disapprove EPA regulatory measures.
If congressional dissatisfaction with the final rule were sufficiently strong, there would
be a number of legislative options available for addressing those concerns. That does
not appear to be the case at present. Nevertheless, there remains some uncertainty
regarding the new regulations, in part because the rule is now the subject of a lawsuit
filed by the National Petrochemical & Refiners Association, February 2, 2001.95 This
uncertainty, coupled with the wide range of potential impacts from the rule, may fuel
continued congressional interest in the 107th Congress.
92See 65 Federal Register, pp. 35478-9, June 2, 2000.
93These include hearings by the Senate Committee on Environment and Public Works on June
94See “White House Fighting Possible Rider Meant to Delay EPA Diesel Regulation,” Daily
Environment Report, October 4, 2000, p. AA-1.
95 NPRA v. EPA, No. 01-1052 (D.C. Cir. filed Feb. 2, 2001).