[Federal Register: February 10, 2000 (Volume 65, Number 28)]
[Rules and Regulations]               
[Page 6747-6796]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10fe00-19]                         
 
[[pp. 6747-6796]] Control of Air Pollution From New Motor Vehicles: Tier 2 Motor 
Vehicle Emissions Standards and Gasoline Sulfur Control Requirements

[[Continued from page 6746]]

[[Page 6747]]

    In the NPRM, we proposed that, for LDV/LLDTs, all bins with 
NO<INF>X</INF> values over 0.20 g/mi would expire at the end of the 
2006 model year when there are no longer any interim LDV/LLDTs. Table 
IV-B.-4 shows that the two highest bins, bins 9 and 10, which were 
derived from NLEV and included to smooth the transition from NLEV to 
the interim program will be unuseable for LDV/LLDTs after 2006--the 
last year of the LDV/LLDT phase-in. Otherwise all bins will remain 
viable for the duration of the Tier 2 program unless altered by another 
rulemaking.
    We proposed to align the useful life periods for interim standards 
with those of the Tier 2 standards (full useful life of 120,000 miles), 
as discussed in Section V.B. below. The end result of this proposal 
would have been that all LDV/LLDTs--whether in the Tier 2 program or 
interim program--would go from 100,000 mile useful lives to 120,000 
mile useful lives in 2004. However, manufacturers were extremely 
concerned about the certification workload burden for 2004. They 
commented that they would be unable to carry any of their LDV/LLDTs 
over from 2003 and that they would have to recertify all of their 
vehicles in 2004 and then likely recertify them again as they were 
phased into the Tier 2 standards. Therefore, based upon comments, we 
are finalizing that useful lives of the interim LDV/LLDTs may remain at 
100,000 miles. Our reasons for this change are discussed in greater 
detail in Section V.B.
    We are finalizing as proposed a corporate average full useful life 
NO<INF>X</INF> standard of 0.30 g/mi for this interim program. This 
standard is derived from the NLEV program and represents the full 
useful life NO<INF>X</INF> standard in NLEV that is associated with LEV 
LDVs and LDT1s. LDVs and LDT1s will already be at this level, on 
average, under the NLEV program. LDT2s are subject to standards that 
effectively impose a NO<INF>X</INF> average standard of 0.5 g/mi under 
NLEV, but we believe they should readily be able to meet the 0.30 g/mi 
average especially since they can be averaged with the LDVs and LDT1s. 
To aid LDV/LLDTs in meeting the 0.30 g/mi corporate average 
NO<INF>X</INF> standard in the interim program, we are providing an 
optional NMOG value for LDT2s certifying to bin 9 (where the 
NO<INF>X</INF> standard=0.3 g/mi). This option is only for LDT2s, and 
only for those produced by manufacturers that elect to comply with the 
interim requirements for all of their HLDTs for the 2004 model year 
(see next section). The optional NMOG values for qualifying LDT2s are 
0.130 g/mi at full useful life and 0.100 at intermediate useful life.
    The 0.30 g/mi corporate average NO<INF>X</INF> standard will apply 
only to non-Tier 2 (interim) LDV/LLDTs and only for the 2004-2006 model 
years. Manufacturers will compute, bank, average, trade, account for, 
and report interim NO<INF>X</INF> credits via the same processes and 
equations described in this preamble for Tier 2 vehicles, substituting 
the 0.30 g/mi corporate average standard for the 0.07 g/mi corporate 
average standard in the basic program. Also, EPA will condition the 
certificates of conformity on compliance with the corporate average 
standard, as described for Tier 2 vehicles. These NO<INF>X</INF> 
credits will be good only for the 2004-2006 model years and will only 
apply to the interim non-Tier 2 LDV/LLDTs. Credits will not be subject 
to any discounts, and credit deficits can be carried forward as 
described under Section IV.B.4.d.vi. above.
    NMOG credits from the NLEV program can not be used in this interim 
program in any way. NO<INF>X</INF> credits generated under this interim 
program will not be applicable to the Tier 2 NO<INF>X</INF> average 
standard of 0.07 g/mi because of our concern that a windfall credit 
situation could occur. This could happen because credits are relatively 
easy to generate under a 0.30 g/mi standard compared to generating 
credits under a 0.07 g/mi standard. As we indicated in the preamble to 
the NPRM we believe the application of credits earned under the interim 
standard to the Tier 2 standards could significantly delay the fleet 
turnover to Tier 2 vehicles. We do not believe there is a need or that 
it would be appropriate to allow such a delay. The requirements of the 
interim program will be monitored and enforced in the same fashion as 
for Tier 2 vehicles.
    For the reasons cited above, we believe it is appropriate to extend 
interim, NLEV-like standards beyond 2003 as a mandatory program and to 
bring all LDVs and LLDTs within its scope. Manufacturers have already 
demonstrated their ability to make LDVs and LLDTs that comply at levels 
well below these standards. As the interim standards for LDV/LLDTs are 
essentially `phase-out'' standards, we did not propose and are not 
finalizing early banking provisions for the interim LDV/LLDTs.

ii. Interim Exhaust Emission Standards for HLDTs

    We believe these interim standards are necessary and reasonable for 
HLDTs. While these trucks make up a fairly small portion of the light-
duty fleet (about 14%), their current standards under Tier 1 are far 
less stringent than the NLEV standards that apply to current model year 
LDVs and LLDTs. Given the delayed phase-in we are finalizing for HLDTs, 
we believe it is appropriate to require some interim reductions from 
these vehicles. Further, manufacturers have already demonstrated their 
ability to meet these interim standards with HLDTs. These standards are 
a reasonable first step toward the Tier 2 program and will provide 
meaningful reductions in the near term relative to current 
certification levels under the Tier 1 emission standards.
    We also proposed interim standards to begin in 2004 for HLDTs. 
These vehicles are not included in the NLEV program and will be subject 
only to the Tier 1 standards prior to today's rule taking effect. Tier 
1 standards permit NO<INF>X</INF> emissions of 0.98 g/mi for LDT3s and 
1.53 g/mi for LDT4s. We are finalizing these standards generally as 
proposed; to address statutory lead time requirements, we are offering 
two options for the phase-in of HLDTs to the interim standards. 
Manufacturers can choose between either of these two options:
    (Option 1) Like we proposed in the NPRM, manufacturers must bring 
their entire production of 2004 model year HLDTs under the interim 
requirements and phase 25% of them into the 0.20 g/mi fleet average 
NO<INF>X</INF> requirement, followed by 50% in 2005, 75% in 2006, and 
then 100% in 2007; or
    (Option 2) We are including this option to address statutory lead 
time requirements for HLDTs. In the case of 2004 model year test groups 
whose model years commence before the fourth anniversary of the 
signature date of today's rule, the manufacturer may exclude those test 
groups from the interim HLDT provisions of the rule. In the case of 
2004 model year test groups whose model years commence on or after the 
fourth anniversary of this rule's signature, the manufacturer must 
bring all such HLDTs under the requirements of our interim program, and 
all such vehicles or 25% of the manufacturer's sales of 2004 model year 
HLDTs, whichever is less, must comply with the corporate average 
NO<INF>X</INF> standard of 0.20 g/mi. The manufacturer must then bring 
all of its HLDTs into the interim requirements beginning with the 2005 
model year including a 50%, 75%, 100% phase-in to the 0.20 g/mi fleet 
average NO<INF>X</INF> standard beginning that year. The beginning of a 
test group's model year is determined under section 202(b)(3) of the 
Act and 40 CFR Part 85 Subpart X.

[[Page 6748]]

    Our final rule is consistent with the requirements of the Act 
because manufacturers won't have to phase-in HLDTs until the model year 
that commences four years from the signature of this rule if they don't 
want to. However, to provide incentive for manufacturers to comply with 
the interim requirements for all of their HLDTs beginning with the 2004 
model year, i.e. to elect Option 1, we are finalizing a provision to 
permit those manufacturers to use higher NMOG values in two situations. 
Manufacturers electing to meet the interim requirements for all of 
their 2004 model year HLDTs including the 25% phase-in number must so 
declare in their 2004 model year HLDT certification applications. They 
may then:
    <bullet> Use a full useful life NMOG value, through the 2008 model 
year, of 0.280 g/mi for LDT4s certified to bin 10 (0.195 g/mi at 
intermediate life); and
    <bullet> Use a full useful life NMOG value, through the 2006 model 
year, of 0.130 g/mi for LDT2s certified to bin 9 (0.100 g/mi at 
intermediate life). \70\
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    \70\ Manufacturers must cite this declaration in their LDT2 
certification applications for the 2004-2006 model years and in 
their LDT4 applications for the 2004-2008 model years. If 
manufacturers employ alternate phase-in schedules that begin prior 
to 2004, they must also make the declaration in each applicable year 
before 2004.
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    In the case of the LDT4s, the optional NMOG standard will enable 
manufacturers to more easily meet our interim HLDT NO<INF>X</INF> 
standards, the highest of which (0.6 g/mi) is one-third tighter than 
what will be required in California under Cal LEV I through 2006. For 
the LDT2s, the optional NMOG standard will help manufacturers certify 
more LDT2s to bin 9 (0.3 g/mi) than they likely would otherwise (they 
would probably certify some LDT2s to bin 10 where NO<INF>X</INF>=0.6 g/
mi). Therefore, both of these optional standards are consistent with 
our goal to achieve important early NO<INF>X</INF> benefits from our 
program.
    Except for the application of the new option described above, the 
interim standards for HLDTs will apply as proposed, and will phase-in 
through the 2007 model year, as shown in Table IV.B.-2. We are 
finalizing the proposed corporate average full-life NO<INF>X</INF> 
standard of 0.20 g/mi for interim HLDTs. Manufacturers will comply with 
the corporate average HLDT NO<INF>X</INF> standard by certifying their 
interim HLDTs to any of the full useful life bins shown in Table IV-B.-
4. Where applicable, manufacturers will also comply with the 
intermediate useful life standards shown in Table IV.B.-5. Interim 
HLDTs not needed to meet the phase-in percentages during model years 
2004-2006 will have to be certified to the standards of one of the bins 
in Table IV.B.-4 (and -5), and NO<INF>X</INF> will thus be capped at 
0.60 g/mi. These trucks will not be included in the calculation to 
demonstrate compliance with the 0.20 g/mi average.
    At the end of each model year, manufacturers will determine their 
compliance with the 0.20 NO<INF>X</INF> standard by calculating a sales 
weighted average of all the bins to which they certified any interim 
HLDTs, excluding those not needed to meet the applicable phase-in 
requirements during 2004-2006. The excluded trucks must comply with the 
standards from one of the bins in Table IV-B-4 (and -5) which 
effectively caps their emissions at 0.60 g/mi.
    For HLDT test groups that are not subject to the phase-in in model 
year 2004 under Option 2 above, the same requirements as described 
above apply except that there are no new standards for these vehicles 
in the 2004 model year. Also, the optional higher NMOG values for LDT2s 
and LDT4s do not apply for any manufacturer that uses Option 2.
    Given that the interim HLDT standards are ``phase-in'' standards 
through 2007 (as opposed to the interim LDV/LLDT standards, which are 
``phase-out'' standards), we are including provisions that 
manufacturers may employ alternative phase-in schedules as proposed for 
the Tier 2 standards and described in detail in section IV.B.4.b.ii. of 
this preamble. These schedules provide manufacturers with greater 
flexibility and we believe they also provide incentive for 
manufacturers to introduce advanced emission control technology at an 
earlier date. Alternative phase-in schedules will have to provide 100% 
phase-in by the same year as the primary phase-in schedule (2007). 
Manufacturers will be eligible for alternate phase-in schedules to the 
extent that they produce HLDTs that meet or surpass the NO<INF>X</INF> 
average standard for interim HLDTs of 0.20 g/mi in 2001-2003 or to the 
extent that they produce more HLDTs than required that meet the 0.20 
average standard in 2004 or later.
    Where manufacturers elect not to meet the phase-in requirements for 
all of their 2004 model year HLDTs, as discussed above under Option 2, 
they may still employ alternate phase-in schedules, but the sum of 225 
percent is required rather than the 250 percent required for alternate 
phase-ins described in section IV.B.4.b.ii. In this case, the sum of 
phase-in percentages up through the 2005 model year must total to at 
least 50%. Also, manufacturers must raise the 225% value to the extent 
that any of their 2004 HLDTs' model years commence on or after the 
fourth anniversary of the signature date of this rule and are brought 
into compliance with the 0.20 g/mi average NO<INF>X</INF> standard.
    Lastly, note that for bin 10, which is only usable during the 
interim program, we have established a PM standard of 0.08 g/mi, which 
is more stringent than the Tier 1 standard previously in effect for 
these vehicles. We do not expect low sulfur diesel fuel to be widely 
available during the time frame of the interim program but we expect 
that bin 10 levels can be reached by diesel technology on current 
diesel fuel. As a part of this overall approach, we are making the 
intermediate life standards optional for diesels for this bin.
f. Light-Duty Evaporative Emission Standards
    We are finalizing as proposed a set of more stringent evaporative 
emission standards for all Tier 2 light-duty vehicles and light-duty 
trucks. The standards we are finalizing are shown in Table IV.B.-9 and 
represent, for most vehicles, more than a 50% reduction in diurnal plus 
hot soak standards from those that will be in effect in the years 
immediately preceding Tier 2 implementation. The higher standards for 
HLDTs provide allowance for greater non-fuel emissions related to 
larger vehicle size.

[[Page 6749]]



          Table IV.B.-9.--Final Evaporative Emission Standards
                            [Grams per test]
------------------------------------------------------------------------
                                                          Supplemental 2
              Vehicle class                3 day diurnal    day diurnal
                                             +hot soak       +hot soak
------------------------------------------------------------------------
LDVs and LLDTs..........................            0.95             1.2
HLDTs...................................            1.2              1.5
------------------------------------------------------------------------

    Evaporative emissions from LDVs and LDTs represent nearly half of 
the light duty VOC inventory projected for the 2007-2010 time frame, 
according to MOBILE5 projections. Manufacturers are currently 
certifying to levels that are, on average, about half of the current 
standards, and in many cases, much less than half the standards. Thus, 
meeting these standards appears readily feasible. Even though 
manufacturers are already certifying at levels much below the current 
standard, we believe that reducing the standards will result in 
emission reductions as all manufacturers seek to certify with adequate 
margins to allow for in-use deterioration. Further, we believe that 
tighter standards will prevent ``backsliding'' toward the current 
standards as manufacturers pursue cost reductions.
    As mentioned in section IV.B.-4.b above, we will phase in the Tier 
2 evaporative standards by the same mechanism as the Tier 2 exhaust 
standards; e.g., 25/50/75/100 percent beginning in 2004 for LDV/LLDTs 
and 50/100 percent beginning in 2008 for HLDTs (as shown in Table 
IV.B.-2). As for the exhaust standards, alternative phase-in plans will 
also be available.
    The evaporative emission standards we proposed and are finalizing 
today are the same as those that manufacturers' associations proposed 
during the development of California's LEV II proposal. California 
ultimately opted for more stringent standards; we believe that our 
standards are appropriate for federal vehicles certified on higher-
volatility federal test fuel.
g. Passenger Vehicles Above 8,500 Pounds GVWR
    Historically, we have categorized all vehicles above 8,500 pounds 
GVWR as heavy-duty vehicles regardless of their application and they 
have been subject to standards and test procedures designed for 
vehicles used in heavier work applications. \71\ In the Tier 2 NPRM, we 
requested comment on whether some portion of vehicles above 8,500 
pounds GVWR should be included in the Tier 2 program, based on vehicle 
use or design characteristics. The Tier 2 proposals, however, applied 
to light-duty vehicles and light-duty trucks and did not cover any 
vehicles above 8,500 pounds GVWR.
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    \71\ The heavy-duty definition also includes vehicles that weigh 
over 6000 lbs curb weight regardless of their GVWR. We are not aware 
that any vehicles currently produced have curb weights above 6,000 
lbs, but GVWRs of 8,500 lbs or less. Nevertheless, this discussion 
and our requirements includes such vehicles.
---------------------------------------------------------------------------

    On October 29, 1999, after carefully considering all of the 
comments on this issue, we proposed to include all personal use 
passenger vehicles (both gasoline and diesel fueled) between 8,500 and 
10,000 pounds GVWR in the Tier 2 program. This group of vehicles would 
include large SUVs and passenger vans and may include other types of 
``crossover'' multipurpose vehicles in the future, depending on new 
vehicle designs. We proposed this Tier 2 program change in our NPRM 
concerning emissions standards for 2004 and later heavy-duty vehicles 
and engines, (64 FR 58472).
    Specifically, we proposed to revise the definition of light-duty 
truck to include any complete vehicle between 8,500 and 10,000 pounds 
GVWR that is designed primarily for the transportation of persons and 
has a capacity of not more than 12 persons. We expected that this 
definition would exclude vehicles that have been designed for a 
legitimate work function as their primary use, such as the largest 
pick-up trucks, the largest passenger vans, and cargo vans; these 
vehicles would continue to be categorized as heavy-duty and would be 
subject to applicable heavy-duty standards. We requested comment on 
whether the proposed definition would adequately exclude these 
vehicles, or whether additional criteria may be needed and how that 
criteria might be used.
    Today, we are finalizing Tier 2 standards for passenger vehicles 
above 8,500 pounds GVWR. These vehicles are included in the Tier 2 
program beginning in 2004 and are required to meet the final Tier 2 
standards in 2009 and later. As we intended in the proposal, these 
vehicles will generally be subject to the same requirements as HLDTs. 
We have made modifications to the program, primarily in response to 
comments we received in two areas: (1) Changing the definition of 
light-duty truck and (2) the interim program requirements.

New Vehicle Category: Medium-Duty Passenger Vehicles (MDPVs)

    The mechanism we proposed to bring the passenger vehicles over 
8,500 pounds into the Tier 2 program, was to modify the definition of 
light-duty truck to include those vehicles. The objective of this 
proposal was to have these vehicles treated as HLDTs within Tier 2. We 
are finalizing requirements which remain consistent with our objective 
of including these vehicles in Tier 2 beginning in 2004. However, the 
approach we are finalizing is somewhat different than that proposed.
    Rather than finalizing the revised definitions for light-duty truck 
as we proposed, we are creating a new category of heavy-duty vehicles 
termed ``medium-duty passenger vehicles'' (MDPVs). These vehicles will 
generally be grouped with and treated as HLDTs in the Tier 2 program. 
The MDPV category is defined along the lines of the proposed definition 
change for the LDT category, with some modification, as described 
below. Our decision to create a new sub-category of heavy-duty vehicles 
rather than modify the existing LDT definition does not, in and of 
itself, change the way in which Tier 2 standards are applied to the 
vehicles.
    We decided upon the above approach because section 216 of the CAA 
establishes the definition for LDT as having the meaning contained in 
the CFR as of 1990. We received several comments that EPA may not 
change the definition and must instead devise a way to categorize the 
vehicles for purposes of Tier 2 which does not change the definition of 
light-duty truck. Rather than adopt a change to the LDT definition that 
would be questionable from a legal perspective, we are adopting an 
approach that we believe is clearly legally acceptable. Under this 
approach (as with the proposed approach), the standards for these 
vehicles are promulgated under

[[Page 6750]]

section 202(a)(3), which applies to heavy-duty vehicles/engines.
    We are defining medium-duty passenger vehicles as any complete 
heavy duty vehicle less than10,000 pounds GVWR designed primarily for 
the transportation of persons including conversion vans (i.e., vans 
which are intended to be converted to vans primarily intended for the 
transportation of persons. The conversion from cargo to passenger use 
usually includes the installation of rear seating, windows, carpet, and 
other amenities). We are not including any vehicle that (1) has a 
capacity of more than 12 persons total or, (2) that is designed to 
accommodate more than 9 persons in seating rearward of the driver's 
seat or, (3) has a cargo box (e.g., a pick-up box or bed) of six feet 
or more in interior length. We would consider vehicles designed 
primarily for passenger use to be those that have seating available 
behind the driver's seat. We have added the rear passenger seating 
capacity criterion to exclude large passenger vehicles which are 
primarily used in heavy-load passenger applications. We do not believe 
vehicles designed primarily for personal use passenger transportation 
would be equipped with rear seating for more than 9 passengers. \72\
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    \72\ Vehicles that are ``designed'' to accommodate more than 
nine passengers in the rearward seating area in their standard 
configuration but that have some of the standard rear seating 
removed to accommodate two or more wheel chair tie downs would 
usually not be considered MDPVs.
---------------------------------------------------------------------------

    We have added the pick-up bed length criterion to the definition to 
clearly distinguish standard pick-ups from other vehicles meeting the 
GVWR and seating capacity criteria. We received several comments that 
although the proposal clearly states our intention not to include 
heavy-duty pick-up trucks in the Tier 2 program, the proposed 
regulatory definition was unclear. Currently, heavy-duty pick-ups have 
beds in excess of six feet. Any future offerings of vehicles that are 
equipped with significantly shorter beds would be included in the MDPV 
category, if the vehicle also met the weight and seating capacity 
criteria. EPA is making a distinction based on bed length because a 
vehicle introduced with a shorter bed would have reduced cargo capacity 
and would likely have increased seating capacity relative to current 
pick-ups, making it more likely to be used primarily as a passenger 
vehicle.

Interim Standards

    As noted above, the MDPVs and HLDTs must meet the final Tier 2 
standards by 2009 at the latest. Prior to 2009, HLDTs and MDPVs are 
required to meet interim standards. The interim standards, as described 
earlier in section IV.B.4, are based on a corporate average full life 
NO<INF>X</INF> standard of 0.20 g/mile which is phased in 25/50/75/100 
percent in 2004-2007. MDPVs must be grouped with HLDTs for the interim 
standards phase-in.
    We received several comments from manufacturers that requiring 
these larger vehicles to meet a new, unique standard prior to phase-in 
to the interim program would worsen the workload burden created by the 
Tier 2 program. Manufacturers do not currently have facilities 
available for chassis-testing diesel vehicles and there is not enough 
time to fold diesel vehicles into a chassis-based program by 2004.\73\
---------------------------------------------------------------------------

    \73\ Currently, diesel heavy-duty engines are certified to 
heavy-duty engine standards rather than vehicle standards.
---------------------------------------------------------------------------

    To address this situation, we are providing the following temporary 
additional flexibilities for MDPVs. We are finalizing an additional 
upper bin for MDPVs for the interim program (effective in model years 
2004 through 2008). This bin would only be available for MDPVs. The 
bin, shown in Table IV.B-10, is equivalent to the California LEV I 
standards that are applicable to these vehicles prior to 2004. Vehicles 
certified to this bin must be tested at adjusted loaded vehicle weight 
(ALVW), consistent with California program testing requirements.\74\ 
Including this upper bin provides manufacturers with the ability to 
carry over their California vehicles to the federal program prior to 
their phase-in to the interim and final Tier 2 standards. Once phased 
in to the interim standards manufacturers may continue to use the upper 
bin but the vehicles must be included in the 0.20 g/mi NO<INF>X</INF> 
average. The upper bin is not available to manufacturers for the final 
Tier 2 program.
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    \74\ ALVW is the average of curb weight and GVWR. The test 
weight is sometimes refered to as ``half payload''.

                  Table IV.B.-10.--Temporary Interim Exhaust Emission Standards Bin for MDPVs <INF>a</INF>
----------------------------------------------------------------------------------------------------------------
                                                 NO<INF>X</INF>          NMOG           CO           HCHO           PM
----------------------------------------------------------------------------------------------------------------
Full Useful Life (120,000 mile)...........          0.9         0.280           7.3         0.032         0.12
----------------------------------------------------------------------------------------------------------------
Notes:
\a\ Bin expires after model year 2008.

    We proposed that HLDTs not needed to meet the phase-in percentages 
for the interim program during model years 2004--2006 would be required 
to meet one of the interim bins. Such vehicles, however, would not be 
included in the calculation to demonstrate compliance with the 0.20 g/
mile average. Thus, we proposed that the emissions of all interim HLDTs 
would be capped at a NO<INF>X</INF> value of 0.6 g/mile. We are 
retaining the bin structure and requirements which effectively cap 
NO<INF>X</INF> emissions at 0.6 g/mile for all HLDTs below 8,500 pounds 
GVWR, as described in section IV.B. Similarly, for MDPVs, the 0.9 g bin 
described above is the highest bin available and acts as the cap for 
vehicles not yet phased-in to the interim standards.
    In addition, for diesel MDPVs prior to 2008, we are allowing 
manufacturers the option of meeting the heavy-duty engine standards in 
place for the coinciding model year. Diesels meeting the engine-based 
standards would be excluded from the interim program averaging pool. In 
2008, the manufacturers must chassis certify diesel vehicles and 
include them either in the interim program or in the final Tier 2 
program. In 2009 and later, all MDPVs, including diesels, must be 
brought into the final Tier 2 program. As with the higher bin of 
chassis-based standards, the purpose of this diesel provision is to 
provide the option of carry-over of vehicles until they are brought 
into the Tier 2 program. We believe these modifications to the program 
will substantially ease the workload concerns of manufacturers in the 
interim years by allowing them to carry-over vehicle models and engine 
families. The provisions also remain consistent with EPA's goal of 
including the vehicles in the overall Tier 2 program structure.

[[Page 6751]]

    For diesel engines that are engine certified and used in MDPVs, as 
allowed through model year 2007, we are requiring those engines to 
comprise a separate averaging set under the averaging, banking and 
trading requirements applicable to heavy-duty diesel engines. We are 
permitting engine-based certification for these diesel vehicles to 
provide time and flexibility for manufacturers who may have limited 
experience with chassis certifying vehicles containing such engines. 
However, we do not want to create a situation where engines above 
applicable engine standards could be used in these vehicles, when other 
MDPVs are being brought under stringent standards. Therefore we believe 
it is appropriate to constrain the application of credits to these 
engines. We note that we are not permitting credits from other programs 
(like NLEV) to be applied in any way to Tier 2 or interim vehicles.
    For LDT4s, we have finalized an optional higher NMOG level of 0.280 
g/mile for bin 10 (0.6 g/mile NO<INF>X</INF>), as described in section 
IV.B.4.a of the preamble. MDPVs placed in bin 10 may also certify to 
the higher NMOG level of 0.280 g/mile. This provision provides 
manufacturers with the incentive of selecting the lower NO<INF>X</INF> 
bin for MDPVs, since the NMOG level is not an obstacle to compliance.
    As described in section IV. B.4.e.ii., manufacturers have two 
options for the start of the program requirements. In Option 1, the 
program begins with the 2004 model year for 25 percent all vehicles. In 
Option 2, manufacturers can exempt 2004 model year vehicle test groups 
whose model years begin on or after the fourth anniversary of this 
rule's signature. These options are also available for MDPVs for the 
same reasons we are providing them for HLDTs. However, the additional 
0.9 g bin contained in Table IV.B.-10, the optional higher NMOG 
standard of 0.280 g/mile for bin 10, and the option of certifying to 
the engine-based standards for diesels are available only with Option 
1.

Other Emission Control Requirements

    We are requiring all non-diesel MDPVs to be OBDII compliant 
beginning in 2004. California requires OBDII for their LEV I program 
and therefore, the new OBDII requirements are consistent with the 
approach of allowing vehicles to be carried over from California. \75\ 
Diesel vehicles which are carried over from the California program are 
required to be equipped with the OBD system as the system is certified 
in California. Diesel vehicles not carried over from California are not 
required as part of this rulemaking to be equipped with OBDII. However, 
we have proposed OBDII requirements for heavy-duty diesel engines in 
our heavy-duty engines NPRM (64 FR 58472). If OBDII requirements are 
finalized for heavy-duty engines and vehicles as part of that 
rulemaking the OBDII requirements would likewise apply to diesels in 
the MDPV category.
---------------------------------------------------------------------------

    \75\ As with HLDTs, the California OBDII compliance option is 
available for MDPVs.
---------------------------------------------------------------------------

    As proposed, we are applying Tier 2 evaporative emissions standards 
and existing HLDT ORVR requirements to MDPVs. MDPVs must be grouped 
with HLDTs for purposes of phasing in to the Tier 2 evaporative 
emission standards contained in this rule. We have added somewhat 
higher standards for the MDPVs to account for their larger fuel tanks 
and vehicle sizes.\76\ However, the stringency of the standards remains 
similar to that for HLDTs. These standards are described in section 
IV.B.4.f of the preamble. ORVR requirements currently exist for HLDTs 
and are to be phased-in through model years 2004-2006.\77\ We proposed 
to apply the same standards and phase-in requirements to vehicles over 
8,500 pounds GVWR. We are finalizing these ORVR requirements for MDPVs, 
which must be grouped with HLDTs for purposes of phased-in to the ORVR 
requirements.
---------------------------------------------------------------------------

    \76\ For Tier 2 MDPVs, evaporative standards will be 1.4 g/test 
for the 3 day diurnal+hot soak test and 1.75 g/test for the 
supplemental 2 day diurnal+hot soak test.
    \77\ ORVR requirements are phased in for HLDTs, at 40/80/100 
percent in 2004-2006 (see 40 CFR 86.1810-01 (k)).
---------------------------------------------------------------------------

    For those manufacturers electing option 2, OBD is required when the 
vehicle family is covered under these new requirements (i.e., 2004 or 
2005 depending on when certification occurs). For ORVR, the situation 
is similar. The phase-in is 40 percent of any 2004 certifications which 
occur four years after this rule is promulgated, 80 percent in 2005, 
and 100 percent in 2006. As before, the vehicles covered by these 
phase-ins must be combined with those in the LDT3/4 phase-in for 
purposes of calculating compliance.
    We are finalizing Cold CO and Certification Short Test requirements 
for Tier 2 MDPVs. However, we are not finalizing SFTP standards for 
MDPVs in today's rulemaking. Currently, SFTP standards do not apply to 
any vehicles above 8,500 pounds GVWR, including those in the California 
LEV I and LEV II programs. We are concerned, therefore, that finalizing 
SFTP requirements in today's rulemaking would prevent manufacturers 
from carrying over vehicle models during the phase-in years of the 
program. We are currently contemplating a new SFTP rulemaking which 
would consider ``Tier 2'' SFTP standards for all vehicles, including 
MDPVs. California is also interested in developing more stringent SFTP 
standards within the context of their LEV II program and we are 
coordinating with California on these new SFTP standards.

Sustained Severe Use; In-Use Testing of MDPVs

    While we are confident that MDPVs can comply in-use with the 
standards we are finalizing, manufacturers are concerned about in-use 
liability for MDPVs that are in sustained severe-use. In our in-use 
emission testing program, we generally screen vehicles for proper 
maintenance and use and delete vehicles that we believe may have been 
misused or malmaintained. Also, in the regulations for manufacturer in-
use testing, we permit manufacturers to delete vehicles from samples if 
they have been used for ``severe duty (trailer towing for passenger 
cars, snow plowing, racing)'', and we provide that vehicles may be 
deleted for other reasons upon EPA approval.
    We recognize that MDPVs will be marketed and used for carrying many 
passengers, carrying heavy loads and trailer towing. While it is not 
our intention to exempt vehicles from in-use liability that have been 
used for their intended purposes, we understand that some MDPVs may be 
subject to sustained severe service applications, such as frequent 
overloading or frequent towing beyond manufacturer's advertised 
capacity and could not be considered to be representative of properly 
maintained and used vehicles. Furthermore, we would not necessarily 
consider to be representative MDPVs which are routinely or regularly 
used in heavy-load hauling application or towing even within the 
manufacturers limits. Thus, for example, an SUV MDPV used on a daily 
basis to haul a work crew and tow equipment to a distant work site may 
not be representative while the same SUV used to haul the family and 
tow a boat to the lake on weekend excursions would be representative. 
MDPVs in sustained severe operations should not be included in 
manufacturer or EPA in-use test programs, while those that see less 
frequent severe operation should be included.

[[Page 6752]]

C. Our Program for Controlling Gasoline Sulfur

    As with our program for vehicles, the program we are establishing 
today for reducing sulfur levels in commercial gasoline will achieve 
the same large NO<INF>X</INF> reductions that we projected for the 
proposed program. Here, too, the final program is very similar to our 
proposed program. Adjustments we have made to the proposed program will 
smooth the refining industry's transition to the low-sulfur 
requirements and encourage earlier introduction of cleaner fuel.
    With today's action, we are requiring substantial reductions in 
gasoline sulfur levels nationwide. As we explained in Section IV.A, 
because sulfur significantly inhibits the ability of automotive 
catalysts to control emissions, we had to consider sulfur's impact in 
setting the Tier 2 standards. We knew at the time of proposal that 
newer catalysts were more sensitive to sulfur than older technologies, 
and projected that Tier 2 catalysts would be as or even more sensitive 
than those used in today's NLEV vehicles. Furthermore, we believed that 
the sulfur build-up on Tier 2 catalysts may be irreversible. Since the 
proposal, additional data we've collected have confirmed and 
strengthened our concerns. It now appears that the catalysts expected 
to be used in Tier 2 vehicles will be even more sensitive to sulfur 
than we originally estimated, and that this sulfur impact will be 
approximately 45 percent irreversible under typical driving conditions. 
Thus, the gasoline sulfur standards we finalize today will enable the 
stringent tailpipe emission standards we're implementing for Tier 2 
vehicles and will help to ensure that these low emission levels will be 
realized throughout the life of the vehicle. Furthermore, since 
vehicles already on the road, including NLEV vehicles, are in many 
cases quite sensitive to sulfur, gasoline sulfur control will also help 
to reduce emissions of pollutants that endanger public health and 
welfare from these vehicles.
    In developing this gasoline sulfur control program, we gave 
substantial consideration to the ability of the refining industry to 
meet these requirements. We proposed a set of standards applying to 
refiners and to individual refineries combined with a sulfur averaging, 
banking, and trading (ABT) program intended to provide flexibility in 
meeting the standards. We concluded that our proposal was reasonable 
and cost-effective based on our projections regarding the number of 
refineries that would (1) need to reduce sulfur levels each year as the 
standards tightened, (2) need sulfur ABT credits to meet the 30 ppm 
refinery average standard in 2004 and/or 2005 to defer installation of 
desulfurization equipment, and (3) install desulfurization equipment 
prior to 2004, generating the needed sulfur credits. This analysis 
formed our picture of the industry's investment stream--a year-by-year 
estimate of how many refineries would be constructing new equipment and 
what technologies these refineries would choose. We assumed that any 
investments would be in the new, lower cost technologies, and that 
these technologies would be available and adequately demonstrated to 
allow refiners to select them as early as the year 2000 to begin 
operation (and thus, credit generation) as early as 2002. Based on 
these assumptions, our analysis showed that sufficient credits would be 
generated before 2004 to enable a number of refineries to delay 
construction and use credits to meet the 30 ppm standard in 2004, and 
in some cases, even in 2005. Overall, we believed our analysis 
represented a reasonable and balanced rate of investment by the 
industry over a several year time period.
    In response to our proposal, we received many comments which raised 
concerns about the feasibility of our program. Some comments suggested 
that our proposed declining cap (300 ppm cap for 2004 and a reduced cap 
of 180 ppm for 2005) could be an additional and burdensome expense for 
most refiners to meet. Specifically, these commenters believed that the 
declining cap would be more constraining than compliance with the 
corporate average or even the refinery average standards (as long as 
the ABT program produced sufficient credits). Because refiners probably 
would not make multiple investments in such a short time, the 180 ppm 
cap could force some refiners to install the equipment needed to get to 
the 80 ppm cap earlier than otherwise needed. The commenters argued 
that this would force all of the industry's investments into the first 
years of the program rather than allowing for a smoother transition 
over several years as we had originally envisioned. Many comments also 
suggested that since there have not been long-term commercial 
demonstrations of the newer gasoline desulfurization technologies, 
refiners would not consider these technologies to be viable and, if 
faced with our proposed 30 ppm standard in 2004, may select the more 
traditional, higher cost sulfur reduction processes. Some of these 
commenters suggested that we should delay the 30 ppm standard, and 
recommended a range of suggested deadlines (2005-2007).
    We also received many comments which suggested that the ABT program 
restricted the generation of credits, and provided no certainty that 
credits would be generated prior to 2004. Commenters stated that two 
features in particular--the delay in establishing each refinery's 
sulfur baseline due to 1997-98 data review and the strict 150 ppm 
``trigger'' for generating credits--caused them to question whether 
adequate sulfur credits would be available. If credits could not be 
guaranteed early enough to forestall investment decisions, refiners 
would be forced to begin construction earlier than we had projected. 
Under such a scenario, the costs of the program would be substantially 
greater, and many commenters suggested that, regardless of cost, it 
would be impossible for the entire industry to meet the deadline (due 
to limitations on engineering design and construction resources as well 
as the time required to obtain permits).
    Finally, we received many comments which argued that not all 
refineries would be able to concurrently comply with the proposed 
standards in the time period provided, given the competition for 
engineering resources and the time needed for construction of 
desulfurization equipment. These comments focused specifically on small 
refineries (owned by both small and large corporations) and refineries 
that were relatively isolated geographically (such as many refineries 
in the Rocky Mountain region) which had little access to other sources 
of gasoline should they have difficulty in complying with our 
requirements. The commenters generally argued that these refiners 
needed more time than the rest of the industry to meet our proposed 
standards. Some of the commenters also argued that the standards 
applicable to many of these refiners should be less stringent because 
of their belief that the environmental needs of the states where these 
refineries were located and/or marketed gasoline were small relative to 
the needs of other states. Suggestions for temporary and permanent 
regional programs which provided less stringent control in the Western 
half of the country were included with many of these comments.
    Based on what we've learned from the comments received and 
additional information we've gathered, we have revised our analysis of 
when refiners will invest in desulfurization equipment and how the 
sulfur ABT program can

[[Page 6753]]

best help to distribute these investments over several years while 
maintaining the original goals of the program. The following is a brief 
summary of our new analysis; a more complete explanation of our 
assumptions can be found in the RIA.
    About 15 percent of current domestic gasoline production already 
meets the gasoline sulfur standard, or can do so with very little 
additional capital investment, and at most a small increase in 
operating cost. The remainder of the industry--the majority of U.S. 
refineries--will have to install at least one desulfurization 
processing unit to lower gasoline sulfur to the required levels. 
Furthermore, many of these refineries will need to make changes to 
their operations in advance of 2004 simply to comply with the 300 ppm 
cap standard, even if they can obtain sufficient ABT credits to delay 
compliance with the 30 ppm refinery average standard. Refiners facing 
this situation will need to make their decisions within a year or at 
most two from today's action. From the comments we received and 
discussions we've had with refiners and technology vendors, we 
acknowledge that some of the newer, more promising processes may not be 
in operation for sufficient time to gain valuable operating experience 
(one to two years of operation) until 2002 or later. Hence, we now 
believe that some refiners may choose from one of the traditional, 
commercially-demonstrated desulfurization processes, even though these 
technologies may be more costly, to meet our standards.
    However, we continue to believe that the majority of refiners will 
delay construction (taking advantage of the sulfur ABT program and 
perhaps making modest operational changes in the interim) and will have 
a wide range of technological options to choose from, at reduced 
capital investment and operating costs compared to the more traditional 
approaches. Examples of these technologies are CDHydro and CDHDS 
(licensed by the company CDTECH), Octgain 125 and Octgain 220 (licensed 
by Mobil Oil), S Zorb (licensed by Phillips), IRVAD (licensed by Black 
& Veatch), and others. These technologies generally use conventional 
refining processes combined in new ways, with improved catalysts and 
other design changes that minimize the undesirable impacts (such as a 
substantial loss in octane) and maximize the effectiveness of the 
desulfurization approach. Since these processes provide less costly 
ways to reduce gasoline sulfur, we have based our economic assessment 
(summarized in Section IV.D. below) on the presumption that the 
majority of refiners will elect to use one of these processes to meet 
the 30 ppm standard, even if it requires delaying compliance (through 
the purchase of ABT program credits) until 2006.
    However, after considering the data available to us about current 
refinery sulfur levels and the ability of refiners to reduce sulfur 
levels to meet the standards, we have made several modest changes to 
the program. These changes will not affect the environmental 
performance of the proposed program. We agree that the declining cap 
had the unintended consequence of forcing investments earlier than 
desired for an orderly transition to the 80 ppm cap. Thus, we have 
changed the program from the proposal, establishing a 300 ppm per-
gallon cap in 2004 and 2005. We do not expect this change to have an 
impact on the environment (or on the Tier 2 vehicles that will be 
introduced in this interim period) since average sulfur levels will be 
required to decrease due to the declining corporate average, which 
begins in 2004. We kept the corporate average standards proposed for 
2004 and 2005, but are permitting inter-company trading around these 
standards. We believe this change will provide further flexibility to 
the industry in allowing some refineries to delay construction and 
encourage others to move forward sooner. Having now concluded that many 
refiners would benefit from an additional year to evaluate and consider 
the technological options before having to install equipment to meet 
the 30 ppm standard, we have delayed this standard for one year. In 
acknowledgment that some areas of the country have less urgent 
environmental needs for the emissions reductions that this program will 
bring, and that many of the refiners that supply gasoline to these 
areas are ones which will have the most difficulty in meeting the 
standards, we have finalized a geographic phase-in of the standards to 
complement the temporal phase-in applicable to the rest of the 
industry. Thus, in certain states in the West, refiners have the option 
of meeting interim standards while delaying compliance with the 30 ppm 
average until 2007. Finally, we have made changes to the sulfur 
baseline requirements and the credit trigger to help ensure that the 
sulfur ABT program functions as we originally envisioned it would.
    These changes will encourage reductions in gasoline sulfur levels 
beginning as early as 2000, while providing enough flexibility to 
require the majority of refineries to meet a 30 ppm average sulfur 
standard by 2006. Overall, the industry will be able to spread the 
needed investments over several years rather than having to comply as a 
whole by 2004, and will be able to maximize the use of the most 
efficient and lowest cost technologies. While we have provided 
additional flexibility for the industry, we have done so without 
compromising the environmental benefits of the program in 2004 and 
beyond when compared to our proposal.
    The following sections summarize the requirements for gasoline 
refiners and importers, including our geographic phase-in requirements; 
special provisions for small refiners, and our plans to facilitate the 
construction permitting process to enable refiners to install gasoline 
desulfurization technology in a timely manner. Section VI provides 
additional information about the compliance and enforcement provisions 
that will accompany these requirements. More detailed information in 
support of the conclusions presented here is found in the RIA and in 
our RTC document.
1. Gasoline Sulfur Standards for Refiners and Importers
    This section explains who must comply with the gasoline sulfur 
control requirements, the standards and deadlines for compliance, and 
how refiners can use the ABT program to meet the standards. The last 
section discusses how individual state gasoline sulfur programs are 
affected by today's action. Standards specific to eligible small 
refiners are presented in Section IV.C.2.
a. Standards and Deadlines that Refiners/Importers Must Meet
    Anyone who produces gasoline for sale in the U.S. must comply with 
these regulations. This includes anyone meeting our definition of a 
refiner (including blenders, in most instances) and importers. Certain 
refiners may qualify for temporarily less stringent standards and 
deadlines because these companies either (1) market gasoline in the 
temporary geographic phase-in area (explained in section b below), or 
(2) they qualify under our definition of small refiner (explained in 
section IV.C.2 below). Foreign refiners may also have separate 
requirements, if they qualify as small refiners.
    These requirements will apply to all gasoline sold in the U.S., 
including Alaska, Hawaii, Puerto Rico, American Samoa, the Virgin 
Islands, Guam, and

[[Page 6754]]

the Northern Mariana Islands. \78\ This national approach is 
appropriate, based on our conclusions that vehicle emissions must be 
reduced nationwide to adequately protect public health and the 
environment and Tier 2 vehicles require protection from the harmful 
impacts of gasoline sulfur regardless of where they are operated.
---------------------------------------------------------------------------

    \78\ Gasoline sold in California is exempt from meeting these 
Federal standards, due to our belief that California gasoline 
already meets or exceeds these requirements. See Section VI for more 
discussion on this issue.
---------------------------------------------------------------------------

    Table IV.C.-1. summarizes the standards for gasoline refiners and 
importers. There are three standards which refiners and importers must 
meet. In 2004 and beyond, every gallon of gasoline produced is limited 
by a per-gallon maximum or ``cap.'' The cap standard becomes effective 
January 1, 2004 (and January 1 of subsequent years as the cap standard 
changes). Also, in 2004 and 2005, each refiner must meet an annual-
average standard for its entire corporate gasoline pool. Finally, each 
individual refinery is subject to a refinery average standard, 
beginning in 2005. Refineries that do not take advantage of the sulfur 
ABT program will have actual sulfur levels averaging 30 ppm beginning 
in 2005. Additional details about the requirements for meeting these 
standards is found in the following sections.

 Table IV.C.-1.--Gasoline Sulfur Standards for Refiners, Importers, and
                          Individual Refineries
               [Excluding Small Refiners and GPA Gasoline]
------------------------------------------------------------------------
        Compliance as of--            2004 <INF>a</INF>        2005        2006+
------------------------------------------------------------------------
Refinery Average, ppm \b\........  ...........           30           30
Corporate Pool Average, ppm <SUP>c</SUP>....          120           90  ...........
Per-Gallon Cap,\d\ ppm...........          300          300          80
------------------------------------------------------------------------
NOTES:
\a\ We project that the pool averages will actually be below 120 ppm in
  2004. For a discussion of how the program gets early sulfur reductions
  before 2004, see section IV.C.1.c.
\b\ The refinery average standard can be met through the use of sulfur
  credits or allotments from the sulfur ABT program, as long as the
  applicable corporate pool average and per-gallon caps are not
  exceeded, as explained in Section IV.C.1.c.viii.
<SUP>c.</SUP> The corporate pool average standard can be met through the use of
  corporate allotments obtained from other refiners, if necessary, as
  explained in Section IV.C.1.c.iii.
\d\ In 2004, exceedances up to 50 ppm beyond the 300 ppm cap are
  allowed. However, in 2005, the cap for all batches will be reduced by
  the magnitude of the exceedance.

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

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

    \79\ Including gasoline produced for use in the geographic 
phase-in area and small refiner gasoline.

---------------------------------------------------------------------------

[[Page 6755]]

ii. What Standards Must Refiners/Importers Meet on a Corporate Average 
Basis?

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

iii. What Standards Must be Met by Individual Refineries/Importers?

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

i. Justification for Our Geographic Phase-In Approach

    In addition to phasing in our national gasoline sulfur program 
temporally from 2004-2006, we are phasing in our program 
geographically. In response to our proposal, we received many comments 
from the refining industry regarding timely implementation of our 
proposed gasoline sulfur program. Commenters argued that not all 
refineries would be able to concurrently comply with the proposed 
standards in the time period provided, given the competition for 
engineering resources and the time needed for construction of

[[Page 6756]]

desulfurization equipment. In consideration of these comments, we have 
made some modifications to enhance the timing of our program without 
compromising the environmental benefits we expected from our proposal.
    As part of our assessment we also examined other phase-in 
approaches which might enhance the orderly introduction of refining 
technology without jeopardizing the environmental benefits of our 
program. As a result of this assessment, we have concluded that many 
states in the Great Plains and Rocky Mountain areas of the United 
States have a somewhat less urgent environmental need for ozone 
precursor reductions in the near term. Moreover, their gasoline supply 
is dominated by that produced by small capacity, geographically-
isolated refineries located therein. As a general rule, refineries in 
this area will have the most difficult time of all refineries 
nationwide in competing for the vendor, supply, engineering, and 
construction resources needed to modify their refineries to comply with 
the standards. Based on 1998 Department of Energy data, over 80 percent 
of the gasoline sold in this area is produced by the relatively small 
refineries located within the region.\80\ Similarly, Alaska faces a 
less urgent environmental need for reductions in ozone precursors and 
has refineries which are challenged and geographically isolated.
---------------------------------------------------------------------------

    \80\ Much of this gasoline is produced by small volume 
refineries that are not owned by small businesses, and are therefore 
not afforded the flexibility of the small refiner provisions 
described in Section IV.C.2.
---------------------------------------------------------------------------

    A more orderly and cost-efficient phase-in of the 30 ppm standard 
could be achieved if all gasoline sold in this area was subject to 
somewhat less stringent standards than those in the rest of the country 
for a short time. This approach will allow the refineries producing 
gasoline for use in this area more compliance flexibility, more time to 
install and prove out the equipment needed for compliance, and thus a 
greater opportunity to reduce their overall costs. As described below, 
this approach results in only a minimal loss in emission reduction 
benefits. By stretching out demand for design, engineering, 
construction and other related services during the 2000-06 period, 
these provisions should also help to reduce the overall costs of the 
gasoline sulfur program.
    The remainder of this section is divided into two parts. The first 
describes the rationale for development of this approach and how we 
identified the appropriate area, and the second provides a description 
of the requirements for refiners and importers that produce fuel for 
sale in the area.

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

    As we considered the geographic phase-in approach, we aimed to 
minimize the environmental losses which could occur from exposing Tier 
2, NLEV, (and other) vehicles to higher gasoline sulfur levels when the 
gasoline sulfur standards are being phased in nationwide. We used two 
criteria to develop and evaluate this approach: (1) relative 
environmental need and (2) the ability of U.S. refiners and the 
distribution system to provide compliant gasoline.
    The states we have identified for the GPA are shown in Figure IV.C-
1.\81\
---------------------------------------------------------------------------

    \81\ Alaska, Colorado, Idaho, Montana, New Mexico, North Dakota, 
Utah, and Wyoming

BILLING CODE 6560-50-P
[GRAPHIC] [TIFF OMITTED] TR10FE00.005


BILLING CODE 6560-50-C
    The first and primary criterion we considered in defining this area 
was environmental need. In defining the GPA, we identified those states 
that have somewhat less urgent environmental need in the near term for 
reductions in ozone precursors and whose emissions are less important 
in terms of ozone transport concerns. This area includes some states 
that are located in the Great Plains and the Rocky Mountains, as well 
as Alaska. Most states within the Rocky Mountains and Great Plains do 
not have a compliance problem with the 1-hour ozone standard in the 
near term, although they do have concerns in terms of maintaining 
compliance with the particulate matter standard. However, there are two 
states (Arizona and Nevada) in the Rocky Mountain vicinity that do have 
ozone air quality concerns. These states have instituted local fuel 
quality programs (in Phoenix, AZ and Las Vegas, NV) to reduce ozone 
precursor emissions. In addition, as shown in Table III.C-2, Arizona 
and Nevada are projected to have concerns with PM10 compliance in the 
future. Given these factors, we excluded them

[[Page 6757]]

from the phase-in area and its temporarily less stringent standards 
except as described below in Section IV.C.1.b.vii for counties and 
tribal lands in adjacent states.
    We also defined the phase-in area based on the relative difficulty 
of producing or obtaining complying gasoline. The refining industry in 
the GPA is dominated by relatively low capacity, geographically-
isolated refineries many of which are owned by independent companies. 
Such refineries face special challenges in complying with the 
requirements of the national program by 2004 because their crude 
capacity, corporate size, and location make it difficult for them to 
compete for the design, engineering, and construction resources needed 
to comply by 2004.
    Furthermore, an assessment of 1998 gasoline production and use data 
and information on the products pipeline system shows that states in 
the GPA and portions of several adjoining states are solely or 
predominantly dependent on gasoline produced by these refineries and 
have limited or no access to gasoline from other parts of the country. 
Based on this analysis, we concluded that several states and portions 
of other states meeting our first criterion (less urgent environmental 
need for ozone precursor emission reductions) also face the likelihood 
of a supply shortage of low sulfur gasoline. Providing low sulfur 
gasoline to these states and adjoining areas is expected to be more 
difficult and costly in the near term. Section IV.C.1.b.vii below, 
discusses how the adjoining areas (counties/tribal lands) will be 
identified.
    Thus, we believe it is appropriate to phase in the 30 ppm average, 
80 ppm cap standards in these areas by allowing an additional year 
compared to the rest of the country, rather than delaying 
implementation of the standards nationwide to accommodate these states. 
Under this approach, the areas with the most urgent need for the ozone 
reduction benefits associated with low sulfur gasoline will realize 
them as soon as is feasible, and other areas will experience them 
shortly thereafter.
    On the other hand, much of the area in the adjoining states has 
significant pipeline, rail, barge, and truck access to gasoline which 
will be capable of meeting the standards in Table IV.C-1 beginning in 
2004. Even if these states have less environmental need in the near 
term, there are health benefits (particulate and air toxic emission 
reductions) as well as performance benefits for vehicle emission 
control systems (including avoidable irreversible sulfur effects) which 
need not be foregone. Therefore, we concluded that since it will not be 
more difficult to send gasoline to these adjoining areas through the 
distribution system, the significant environmental benefits of 
requiring low sulfur gasoline as early as is feasible justifies 
excluding these states from the GPA.
    Some might argue that there are other states which should be 
considered under this program. However, based on our criteria of 
environmental need (including ozone transport and irreversibility 
concerns) challenged refineries, and limited access to complying 
gasoline we could identify no other states or territories which to 
include.

iii. Standards/Deadlines for Gasoline Sold in the Geographic Phase-in 
Area

    While the states in the GPA may have less of an environmental need 
for ozone precursor reductions in the near term, there are significant 
environmental reasons to make the program as stringent as possible, 
still enabling a smooth transition to low sulfur gasoline nationwide. 
Toward that end, we are establishing the following requirements for 
gasoline sold in the GPA, which we view as the appropriate balance 
between these two factors.
    The GPA provision covers all gasoline produced or imported for use 
in the GPA, whether refined there or brought in by pipeline, truck, 
rail, etc.\82\ Foreign refiners are involved in this program through 
the importers, who are, in fact, the regulated entities. Refineries and 
importers must meet a 150 ppm average and a 300 ppm cap for all 
gasoline produced or imported for the GPA under this program beginning 
January 1, 2004. However, if a refinery's/importer's 1997-98 average 
sulfur level is less than 150 ppm, then that refinery's/importers 
gasoline has a standard of its baseline plus 30 ppm but in no case 
greater than 150 ppm. For example, a refinery with a baseline of 100 
ppm would have a sulfur standard of 130 ppm for its GPA gasoline, a 
refinery with a baseline sulfur level of 140 ppm would have a standard 
of 150 ppm for its GPA gasoline, and a refinery with a baseline of 200 
ppm would have a standard of 150 ppm for its GPA gasoline. Furthermore, 
if under the ABT provisions discussed below and in section IV.C.1.c, a 
refinery/importer generates credits (in 2000-2003) and/or allotments 
(in 2003) by dropping its refinery/imported gasoline average below 150 
ppm then the baseline for that refinery is set at the new level and the 
standard becomes baseline plus 30 ppm but not greater than 150 ppm. 
This is to ensure that refineries and importers who already are lower 
than the 150 ppm standard on average maintain current sulfur levels. 
The 30 ppm factor is intended to allow some flexibility for refineries 
and importers whose 1997 and 1998 levels are an aberration from normal 
operations or who face changes in crude slates in future years.
---------------------------------------------------------------------------

    \82\ As discussed below, refiners can supply gasoline not 
designated as GPA gasoline to the GPA, provided it meets the 
standards in Table IV.C.-2. Also, the GPA standards do not apply to 
gasoline produced by small refiners that is used in the GPA.
---------------------------------------------------------------------------

    Corporate pool average standards apply in the national gasoline 
sulfur program for calendar years 2004 and 2005. Most refiners/
importers producing gasoline for use in the GPA market the majority of 
their gasoline outside of the GPA where they compete with many other 
refineries. Since the phase-in of the national program expects 
compliance with the 120/90 ppm corporate pool average standards in 2004 
and 2005, we are requiring that refiners/importers who market the 
majority (greater than 50 percent of production volume) of their 
gasoline outside of the GPA to account for the sulfur levels of their 
GPA gasoline in their calculation for compliance with the corporate 
pool average standards.
    To provide additional flexibility during this phase-in, refiners 
may use sulfur ABT credits and allotments (as explained in IV.C.1.c) to 
meet these standards. Refineries producing GPA gasoline can generate 
credits beginning in 2000 under the provisions of the national program 
(described in section IV.C.1.c). Also, refineries/importers marketing 
gasoline in the GPA may through extraordinary measures be able to 
generate credits in 2004-2006. To qualify they must achieve levels 
below 150 ppm or their more stringent baseline levels as discussed 
above whichever is less. Under these circumstances, these refineries/
importers can earn credits for the GPA gasoline they produce during 
2004-06. Credits generated under the GPA program are fully fungible 
with national credits and are subject to the same regulatory 
requirements.
    The national program includes provisions which permit refiners/
importers to generate allotments for use in 2004 and 2005. Refiners and 
importers marketing gasoline in the GPA may only generate sulfur 
allotments in 2004 or 2005 if their corporate average sulfur level 
meets the corporate pool average standards for each year (as indicated 
in Table IV.C.1), including gasoline produced for the GPA, if 
applicable. Refiners not compelled to meet the corporate pool

[[Page 6758]]

average standards under the GPA may not generate allotments.
    The temporary provisions for the GPA apply for three years, 2004 
through 2006. Since the low sulfur standards for the rest of the 
country require compliance with a 30 ppm refinery average standard and 
an 80 ppm gallon cap in 2006, the geographic phase-in provides an 
additional year to reach those standards. This extra year and the 
somewhat less stringent standards during the phase-in will provide the 
refining industry the opportunity for more orderly transition to the 
30/80 ppm standards by 2007.
    Requirements for gasoline sold in the GPA are summarized in Table 
IV.C.-2, below. Gasoline produced by refiners subject to the small 
refiner standards described in Section IV.C.2. of this notice is not 
subject to the provision of the geographic phase-in, since the small 
refiner provisions apply to eligible refiners regardless of geographic 
location. Gasoline produced by such refiners can be sold nationwide, 
including in the GPA.

                   Table IV.C.-2.--Gasoline Sulfur Standards for the Geographic Phase-In Area
                                            [Excludes Small Refiners]
----------------------------------------------------------------------------------------------------------------
             Compliance as of--                  2004         2005                        2006
----------------------------------------------------------------------------------------------------------------
Refinery GPA Gasoline Average \a\, ppm.....          150          150  150.
Corporate Pool Average \b\, ppm............          120           90  Not Applicable.
Per-Gallon Cap  \c\, ppm...................          300          300  300.
----------------------------------------------------------------------------------------------------------------
Notes:
\a\ The refinery average standard for GPA gasoline is the more stringent of: 150 ppm; the refinery 1997-1998
  baseline plus 30 ppm; or the sulfur level from which early credits were generated plus 30 ppm. Refiners can
  use credits or allotments to meet the average.
\b\ Applies only to refiners/importers which sell >50% of their gasoline outside the GPA.
\c\ As discussed above, in 2004 both GPA and Non-GPA gasoline may have a sulfur content as high as 350 in which
  case the refinery or importer becomes subject to a correspondingly more stringent cap standard in 2005.

iv. What Are the Per-Gallon Caps on Gasoline Sulfur Levels in the 
Phase-in Area?

    The sulfur level caps for gasoline sold in the phase-in area and 
the rest of the nation are the same in 2004 and 2005, but in 2006 the 
cap remains at 300 ppm in this area while it declines to 80 ppm for the 
rest of the country. To assure that compliance at the refinery gate is 
correct regardless of where the gasoline is ultimately sold, as 
gasoline intended for the GPA moves in the distribution system to or 
through the geographic area it must be identified as phase-in area 
gasoline in product transfer documents and must remain segregated from 
gasoline intended for use outside this area. In addition, use of phase-
in area gasoline is prohibited outside the GPA, but the converse is 
allowed, i.e., gasoline designated for use outside the GPA can be used 
in this area. For all three years, refiners and importers must meet the 
requirements described in Tables IV-C.1 and IV-C.2, as applicable, and 
therefore must maintain refinery or import records as applicable as to 
where a gasoline batch is sold. \83\
---------------------------------------------------------------------------

    \83\ These segregation and designation requirements do not apply 
to gasoline produced by refiners subject to the small refiner 
standards described in Section IV.C.2. This is because small refiner 
gasoline can be sold anywhere in the country, and is not subject to 
different standards depending on where it is sold.
---------------------------------------------------------------------------

    We recognize that this higher standard/cap for one year could 
create the incentive for those not marketing gasoline in the GPA today 
to seek a market to sell higher sulfur gasoline and for others to seek 
to increase market share. While this is indeed allowable under our 
program and is perhaps to be anticipated in a free market system, in 
all likelihood the incentives are small. Such refiners/importers would 
still have to meet the 150 ppm average and would perhaps face increased 
shipping and marketing costs. Nonetheless, we plan to monitor market 
developments to assess whether such a provision creates significant 
market shifts or the potential for increases in average sulfur levels 
in the GPA gasoline.

v. How Do Refiners/Importers Account for GPA Fuel in Their Corporate 
Average Calculations?

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

vi. How Do Refiners/Importers Apply for the Geographic Phase-in Area 
Standards?

    As part of program administration, we are requiring that any 
refiner/importer

[[Page 6759]]

expecting to sell gasoline in this area during the phase-in period 
(2004-2006) make application to EPA in writing by December 31, 2000. 
This application would provide the minimum information needed by EPA to 
characterize a refiner's/importer's participation, establish the 
applicable standards if the 1997-98 average is less than 150 ppm, and 
establish our enforcement program for refiners/importers in this area 
for gasoline entering or leaving the area. Participation on the part of 
any refinery or importer is voluntary. At any time, a refiner/importer 
who previously opted into the GPA program may produce gasoline meeting 
the standards in Table IV.C-1 in the GPA, or may cease producing 
gasoline for the GPA (and produce gasoline meeting the standards in 
Table IV.C-1 solely outside of the GPA). Such a decision would affect 
the averages/caps which apply to the gasoline sold in the GPA. Gasoline 
sold in the GPA that is not designated as GPA gasoline is considered 
Non-GPA gasoline for purposes of compliance with the corporate pool 
average requirement and refinery average requirements.

vii. How Will EPA Establish the GPA in Adjacent States?

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

Sulfur Allotment Program

i. Generating Allotments Prior to 2004

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

    \84\ If a refinery has a baseline sulfur level higher than 120 
ppm (as described below in IV.C.1.c.v.), then credits are generated 
from the baseline to 120 ppm and allotments from 120 ppm to the new 
sulfur level (and discounted 20 percent if applicable).
---------------------------------------------------------------------------

ii. Generating Allotments in 2004 and 2005

    For 2004 and 2005, refiners or importers (but not individual 
refineries)

[[Page 6760]]

can generate allotments by producing gasoline that has a sulfur level 
below the annual corporate average standard (120 ppm and 90 ppm). The 
number of allotments generated is equal to the difference between 120 
ppm (or 90 ppm) and the corporate average sulfur level. Allotments 
generated by refiners or importers in 2004 and 2005 are not discounted, 
unlike some of those that are generated by refineries in 2003. Refiners 
that sell fuel to the GPA may also generate allotments by producing 
fuel that is cleaner than the corporate average standards, regardless 
of the volume of fuel that is produced for use in the GPA. On the other 
hand, as explained in Section IV.C.2., gasoline produced by small 
refiners who are complying with the standards in Table IV.C.-3 cannot 
be used to generate sulfur allotments since these producers are not 
required to meet a corporate average standard.

iii. Using Allotments in 2004 and 2005

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

iv. How Long Do Allotments Last?

    We expect most refiners will trade sulfur allotments well before 
the end of each compliance year so they will have the needed certainty 
of compliance with the corporate average standard. Our program allows 
such trades to occur at any time during the year, although the refiner 
is liable for any shortfall in compliance resulting from having traded 
away too many allotments. A refiner may also carry over excess 2004 
allotments (those generated in 2003 or 2004) for compliance with the 90 
ppm corporate standard for 2005. However, those allotments must be 
discounted by 50 percent. This 50 percent discount factor is needed to 
equalize the emission impact of sulfur control between 2004 and 2005. 
In 2005, there is an extra model year of NLEV/Tier 2 vehicles relative 
to 2004. In addition, the NLEV/Tier 2 fleet is one year older in 2005 
than 2004. This increased age translates into higher vehicle emissions 
due to general deterioration. Since sulfur acts on a percentage basis, 
the absolute emission increase due to sulfur impacts on vehicle 
emission control systems in 2005 is higher than in 2004.
    As discussed below in section IV.C.1.c.x, a refiner or importer may 
convert allotments into credits in 2004 and 2005 for compliance with 
the refinery average standards in 2005 and beyond. All transactions 
between refiners involving sulfur allotments must conclude by the last 
day of February in the calendar year following the compliance year in 
which the allotments are to be used.\85\
---------------------------------------------------------------------------

    \85\ Allotments used for GPA gasoline compliance may be retained 
until February 2007. Allotments used for small refiner gasoline 
compliance may be retained until February 2008.
---------------------------------------------------------------------------

Sulfur Credit Program

v. Establishing Individual Refinery Sulfur Baselines for Credit 
Generation Purposes

    The purpose of establishing a sulfur baseline for each refinery is 
to provide a starting point for determining sulfur credits for 
reductions in gasoline sulfur levels. We proposed that refiners would 
have to establish a sulfur baseline for each individual refinery, by 
submitting to us data establishing their annual average gasoline sulfur 
level based on the average of their 1997 and 1998 operations. We would 
review the data and, barring any discrepancies, approve a sulfur 
baseline for each refinery. We received comments supporting this option 
as well as comments stating that the time involved for this application 
and approval process would delay the refiner's ability to plan for and 
begin construction of gasoline desulfurization technology. Refiners 
would want the certainty of an approved sulfur baseline before making 
investment decisions, and thus would wait to obtain EPA's approval 
before proceeding. We also received comments about what year(s) would 
be most appropriate to use to establish a sulfur baseline. Some of 
these comments argued for the use of existing, approved 1990 baselines, 
or some adjusted version of 1990 baselines, rather than new data, to 
expedite the process of establishing sulfur baselines.
    We also proposed a different sulfur baseline for reformulated 
gasoline (RFG) produced in the summer for those refineries which 
produce reformulated gasoline. While the conventional gasoline sulfur 
baseline (and the baseline for winter RFG) was proposed to be tied to 
current sulfur levels, the baseline for summer reformulated gasoline 
was proposed to be 150 ppm, the approximate level we expect summer 
reformulated gasoline to contain in 2000 and beyond because of the 
Phase II reformulated gasoline requirements, which take effect in 2000. 
We argued that winter RFG did not have any de facto sulfur 
restrictions, and thus winter RFG should be counted with conventional 
gasoline for the purpose of credit generation relative to the 
refinery's conventional gasoline sulfur baseline.
    Since the proposal, we have learned that overall gasoline sulfur 
levels (conventional plus reformulated) are significantly lower than 
they were in 1990. As explained in the Regulatory Impact Analysis, 
national average sulfur levels when both conventional and reformulated 
gasolines are considered dropped to 306 ppm in 1997 and 268 ppm in 
1998, compared to the 1990

[[Page 6761]]

national gasoline sulfur average of 339 ppm, decreases of 10 and 21 
percent, respectively. The substantial drop between 1997 and 1998 seems 
to be related to the mandatory use of the Complex Model, which began in 
1998 and had implications for both reformulated and conventional 
gasoline compliance. Thus, we have become convinced that the most 
appropriate sulfur baseline would be based on data which establish 
current sulfur levels, not on data which are nearly ten years old. We 
considered reducing all 1990 baselines by 21 percent to reflect the 
national average decrease since 1990, but determined that this approach 
would be inappropriate because some refiners have reduced levels 
substantially more than 10-21 percent since 1990, and would thus be 
eligible to generate a very large number of credits for reductions that 
have already been made.
    Furthermore, as we proposed, and some commenters argued, we have 
concluded that averaging data from two years is the most appropriate 
approach, because averaging over two years will help to account for any 
unusual variations in operations that may have occurred at individual 
refineries in either of these years. We concluded that averaging data 
from 1998 and 1999 is not feasible, because the 1999 data will not be 
fully available to EPA until after the reporting deadline of May 2000. 
Hence, we believe it is preferable to use 1997 and 1998 data, rather 
than delaying the time baselines are established. We do not expect 
significant changes in 1999 sulfur levels relative to 1998 levels, so 
we believe the use of the 1997-1998 data provides a reasonable 
representation of current sulfur levels.
    We have also learned that summer reformulated gasoline is already 
averaging close to our expected sulfur level for the year 2000. Winter 
RFG does not show this same decrease, presumably because refiners are 
shifting high sulfur blendstocks out of RFG in the summer but back into 
RFG in the winter to maintain compliance with the conventional gasoline 
antidumping requirements. Thus, it appears that if we held summer RFG 
to a lower baseline, as proposed, we would have to raise the winter RFG 
baseline commensurately to reflect actual refinery operations. The net 
environmental impact would be no different than if we had a single 
sulfur baseline applying to all RFG, or to all gasoline produced at the 
refinery, since the annual pool sulfur levels are constant even while 
there may be seasonal variations. Therefore, we are not finalizing a 
separate sulfur baseline for summer RFG, but rather combined 
conventional and reformulated gasoline sulfur levels.
    Having considered the comments we received and the new data 
available to us, we have concluded that refiner sulfur baselines should 
be established from 1997 and 1998 operating data. Hence, we are 
requiring refiners which wish to generate sulfur credits prior to 2004 
to establish a 1997-98 sulfur baseline for each refinery at which they 
intend to generate credits. We believe the process we have defined will 
minimize the burden to the industry and the time it will take for us to 
review and approve the sulfur baselines. Specifically, refiners which 
plan to generate sulfur credits must submit to us information which 
establishes the batch report numbers, sulfur levels, and volumes of 
each batch of gasoline produced in 1997 and 1998, as well as the annual 
average sulfur level calculated from these data. Within 60 days, we 
will review the application and notify the refiner of approval or of 
any discrepancies we find in the data submitted. If we do not respond 
within 60 days, the baseline should be considered to be approved.
    While we expect most refiners will apply for a sulfur baseline in 
the near future (to maximize the time that they can generate credits 
before 2004), there is no cut-off date for applying for a sulfur 
baseline. However, if the refiner wishes to generate credits for a 
given calendar year, we must receive his baseline application no later 
than September 30 of that year to provide us adequate time to review 
the baseline prior to the end of the year (at which time any credits 
generated in that year would be assessed and reported by the refiner). 
We believe that this approach for establishing sulfur baselines meets 
our goal of providing a workable ABT program that refiners can take 
advantage beginning in the year 2000, without sacrificing the 
environmental benefits of the sulfur standards.
    Foreign refiners which have already established an individual 
refinery baseline with us, and thus have submitted reports on all 
batches of gasoline sent to the U.S. in 1997 and 1998, may follow this 
same procedure if they wish to generate sulfur credits prior to 2004. 
Foreign refiners which have not reported 1997-98 gasoline qualities to 
us must follow an alternate approach. Specifically, they must follow 
the general requirements of our protocol for establishing individual 
refinery baselines (see Secs. 80.91-94 and also Sec. 80.410) by 
providing sufficient data to establish the volume of gasoline imported 
to the U.S. from each refinery in 1997-98 and the annual average sulfur 
level of that gasoline. If the test method used to identify the sulfur 
level differs from the one specified in today's action, the refiner 
must provide sufficient information about the test method to allow us 
to evaluate the appropriateness of the alternative. Because this 
information will be new to us, we may require more time to review and 
approve their 1997-98 sulfur baseline. But, consistent with our 
previous handling of foreign refiner submissions, once we have 
determined that the submission is complete and the protocol has been 
followed, they may use the baseline while waiting for our formal 
approval. However, the refiner will be held to the baseline that is 
ultimately approved. A foreign refiner who is unable to generate 
adequate data to establish a 1997-98 sulfur baseline will not be 
permitted to generate sulfur credits in 2000-2003.
    Small refiners that plan to request small refiner standards (as 
provided in Section IV.C.2 below) which also want to generate early 
sulfur ABT credits will use the same data required to define their 
small refiner baseline to determine their baseline for the ABT program. 
In other words, if a refiner becomes a small refiner under our 
definition and procedures, credits generated by that refinery would be 
calculated relative to the refinery's actual 1997-98 sulfur average. 
The trigger for generating sulfur credits under the ABT program 
(discussed in the next section) would still apply for small refiners 
generating credits prior to 2004 relative to their 1997-98 sulfur 
average. In addition, the applicable interim sulfur standard for small 
refiners who generate credits through sulfur reductions prior to 2004 
will be calculated based on the reduced sulfur level, rather than the 
1997-98 baseline level, as explained below in Section IV.C.2.
    Importers and gasoline blenders will not be assigned a sulfur 
baseline because they are not eligible to generate early credits (prior 
to 2004) under the ABT program. This includes gasoline refiners who are 
also importers; such parties cannot generate sulfur credits prior to 
2004 on the basis of their imported gasoline but may only generate 
credits based on the gasoline produced by their refinery(ies). It also 
includes oxygenate blenders, who, as discussed in Section VI below, are 
not subject to the sulfur standards but are responsible for compliance 
with the downstream provisions.\86\ For importers

[[Page 6762]]

and most gasoline blenders, this represents a change from our proposal, 
but one we believe is appropriate and necessary to ensure that the 
environmental benefits of the ABT program are maintained. The ABT 
program allows the refining industry to trade off early sulfur 
reductions (2000-2003) for slight delays in complying with the 30 ppm 
refinery average standard in 2005-2006.\87\ We have designed the ABT 
program to ensure that sufficient credits can be generated by refiners 
(domestic or foreign) to enable a smooth transition to the 30 ppm 
standard. Importers and blenders do not have the same need for the ABT 
program that refiners have because they will not have to make the same 
level of investment in desulfurization technology and thus do not need 
credits generated before 2004 to help their transition to the 30 ppm 
average standard after 2004. Furthermore, credits could be generated by 
importers without the overall pool of imported gasoline becoming 
incrementally cleaner. For example, say that Importer A had a 1997/98 
sulfur baseline of 600 ppm and Importer B had a sulfur baseline of 100 
ppm. In 2002, Importer B could transfer/sell its 100 ppm gasoline to 
Importer A prior to unloading the fuel at the port of entry. Once the 
import transaction was completed, Importer A will have generated 500 
ppm (multiplied by the fuel volume) credits without any fuel becoming 
incrementally cleaner. We are concerned that if importers and blenders 
were allowed to generate early credits, they would generate far more 
credits than needed to make the ABT program work, without necessarily 
achieving early environmental benefits--credits which either importers 
or refiners would be able to use to delay compliance with the 30 ppm 
standard in 2005 and beyond. This would delay the environmental 
benefits of our program by prolonging the industry's transition to the 
30 ppm standard.
---------------------------------------------------------------------------

    \86\ Refiners may, however, include oxygen added downstream of 
the refinery when determining compliance with the sulfur standards 
and the provisions of the ABT program. This is consistent with 
existing provisions for reformulated and conventional gasolines.
    \87\ As explained in Section IV.C.1.c.ix, credits generated 
before 2004 expire in 2006, except for small refiners and credits 
used for GPA gasoline compliance.
---------------------------------------------------------------------------

    In the proposal, we also discussed the need for a baseline gasoline 
volume as well as a baseline sulfur level. This stemmed from the design 
of our current conventional gasoline anti-dumping program, which 
requires a baseline volume so that we can confirm that conventional 
gasoline is no dirtier now than it was in 1990. However, for the 
gasoline sulfur ABT program, we have determined that there is no need 
to restrict refineries' sulfur baselines (against which they can 
generate sulfur credits) to a specific volume of gasoline. The purpose 
of the ABT program is to encourage early sulfur reductions by some 
refineries, and we see no need to limit the amount of credits such a 
refinery can generate on the basis of a historic volume of gasoline 
production. In fact, additional volumes of cleaner gasoline should 
achieve additional early environmental benefits.

vi. Generating Sulfur Credits Prior to 2004

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

[[Page 6763]]

    Several states have adopted or are considering adopting gasoline 
sulfur control programs (see discussion at section IV.C.1.d below on 
state sulfur programs). While we had proposed to exclude this gasoline 
from sulfur credit generation, we have reconsidered our position. 
Gasoline produced in response to state \88\ requirements can be 
included in the refinery's calculation of sulfur credits generated in a 
given year. However, this gasoline will be included in the total volume 
of gasoline produced by that refinery, requiring the annual average 
sulfur level for total gasoline produced at that refinery to exceed the 
trigger specified above to generate any credits at all.
---------------------------------------------------------------------------

    \88\ Excluding California.
---------------------------------------------------------------------------

vii. Generating Sulfur Credits in 2004 and Beyond

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

viii. Using Sulfur Credits

    Refineries, blenders, and importers can use sulfur credits to 
demonstrate compliance with the 30 ppm annual average refinery standard 
in 2005 and beyond, if they are unable to meet the standard with actual 
gasoline production. During 2005 and 2006 only, refineries may use 
credits banked by that refinery in 2000-2003 as a result of early 
sulfur reductions, or credits purchased from other refineries which 
have banked early sulfur credits. Blenders and importers can purchase 
credits from refiners (including any foreign refiners which generated 
early credits), or use credits they generated in 2004 and beyond. All 
transactions will have to be concluded by the last day of February 
after the close of the annual compliance period (2005, 2006, etc.).
    As discussed above, 2005 is the only year when averaging and 
trading against the corporate average and averaging, banking, and 
trading against the refinery average are both allowed. In that year, 
sulfur credits may only be used against the 30 ppm standard for each 
refinery once the refiner has demonstrated compliance with the 
corporate pool average standard. The refiner must meet his corporate 
average based on actual sulfur levels or through a trade for sulfur 
allotments if it falls short of the 90 ppm corporate average standard. 
At that point, each of his refineries is evaluated for compliance with 
the 30 ppm refinery average standard. Those refineries that are not 
producing gasoline averaging 30 ppm sulfur must obtain sulfur credits 
generated in 2005 or earlier and/or sulfur allotments to bring the 
refinery's sulfur average from the actual level (a maximum of 90 ppm 
for each refinery, since by meeting the corporate average, even if in 
part through the use of allotments, each refinery in the company will 
be considered to average no more than 90 ppm) down to 30 ppm.
    Refineries or importers which sell some or all of their gasoline in 
the GPA (and which have elected to participate in the phase-in) may 
also use sulfur credits to meet their refinery averages in 2004-2006. 
However, because this gasoline must be designated for sale in the GPA, 
they must account separately for compliance with the 150 ppm refinery 
average for gasoline sold in the phase-in area and with the 30 ppm 
refinery average for gasoline sold outside of that area. Thus, in 2004, 
such refiners/importers may use sulfur credits to establish compliance 
with the 150 ppm standard for gasoline sold in the phase-in area, if 
required. In 2005 and 2006, they may use credits to meet the 150 ppm 
standard for gasoline sold in the area and/or use credits to meet the 
30 ppm standard for gasoline sold outside of the area.
    As explained in section IV.C.1.b., some of the refiners 
participating in the GPA are exempt from the corporate average 
standards, but may use either sulfur credits or sulfur allotments in 
2004-2006 to establish compliance with the 150 ppm refinery average 
standard. Those that are not exempt from the corporate average 
standards may use sulfur allotments only to meet the corporate average 
standards. For such refiners, compliance with the corporate average 
standard will be measured first (using allotments if needed), then 
compliance with the refinery average standard (using credits and/or 
allotments as needed) in the same manner as described above for 
refiners who sell all of their gasoline outside of the GPA.
    Foreign refineries are not required to comply with the 30 ppm 
refinery standard in 2005 and beyond; instead, compliance for foreign 
gasoline is required by the importer. Sulfur credits generated by 
foreign refineries prior to 2004 will still have value, since these 
refineries can sell sulfur credits to U.S. refineries, blenders, or 
importers who need credits to meet the standard in 2005 or beyond. In 
fact, foreign refiner's credits could simply be transferred to the 
importer which is importing that refinery's gasoline into the U.S. For 
example, a foreign refiner could send gasoline exceeding 30 ppm on 
average to an importer and transfer the appropriate amount of sulfur 
credits it generated prior to 2004 to allow the importer to meet the 30 
ppm standard. Similarly, after 2004 a foreign refiner may send gasoline 
containing less than 30 ppm to the U.S. through an importer, and the 
importer would benefit from generating credits (and presumably would 
include the value of these credits in the financial transaction with 
the foreign refinery).
    As explained in Section IV.C.3.b. above, in 2005 no batch of 
domestically produced or imported gasoline can exceed 300 ppm, and a 
refiner's/importer's annual corporate pool average sulfur level cannot 
exceed 90 ppm, except for gasoline sold in the GPA or by small refiners 
complying with the standards in Table IV.C.-3. In 2006 and beyond, 
sulfur is capped at 80 ppm and there is no longer a corporate pool 
average standard. These standards (as well as the 300 ppm cap and 
corporate pool averages) cannot be met through the use of credits 
generated under the ABT program. As described above, credits may only 
be applied to demonstrate compliance with the 30 ppm refinery standard, 
not to the corporate pool average or the cap. Given the limitations 
that the 80 ppm cap places on sulfur levels in 2006 and beyond, we do 
not expect many sulfur credits to be used in future years of this 
program (since, even with the use of credits, no gasoline may exceed 80 
ppm in these years).
    We allow an individual refinery that does not meet the 30 ppm 
standard in a particular year to carry forward the credit debt one 
year. Under this provision, the refinery will have to make up the 
credit deficit and come into compliance with the 30 ppm standard the 
next calendar year, or face penalties. This provision will in no way 
absolve the refiner from having to meet the

[[Page 6764]]

applicable per-gallon cap standard or, when applicable, the corporate 
average standard. This provision will provide some relief for refiners 
faced with an unexpected shutdown or that otherwise were unable to 
obtain sufficient credits to meet the 30 ppm standard. This provision 
is only available through 2010. After that time, we expect many 
refineries to be able to consistently operate below 30 ppm, generating 
a pool of credits which other refineries could purchase in the event of 
an unforeseen upset. However, in no circumstances after 2005 can the 
refinery produce gasoline exceeding the 80 ppm per-gallon cap standard 
(with the exception of small refiners, as discussed in Section IV.C.2 
below). The carry-forward provision does not apply to compliance with 
the 150 ppm refinery average standard applicable in the GPA.
    We have some concern that the potential exists for credits to be 
generated by one party and subsequently purchased or used in good faith 
by another, and later found to have been calculated or created 
improperly or otherwise determined to be invalid. For this reason, we 
proposed that both the seller and purchaser would have to adjust their 
sulfur calculations to reflect the proper credits and either party (or 
both) could be deemed in violation of the standards and other 
requirements if the adjusted calculations demonstrate noncompliance 
with an applicable standard. One commenter, representing a number of 
refiners, objected to this approach.
    Nevertheless, our strong preference is to hold the credit or 
allotment seller liable for the violation, as opposed to the credit or 
allotment purchaser. As a general matter we would expect to enforce a 
shortfall in compliance calculations (caused by the good faith purchase 
of invalid credits) against a good faith purchaser only in cases where 
we are unable to recover valid credits from the seller to cover the 
compliance shortfall. Moreover, in settlement of such cases we would 
strongly encourage the seller to purchase credits to cover the good 
faith purchaser's credit shortfall. Under the deficit provisions of 
section 80.205(e), for compliance periods through 2010, a credit 
shortfall may be corrected if the conditions of that section are met. 
EPA will consider covering a credit deficit through the purchase of 
valid credits a very important factor in mitigation of any case against 
a good faith purchaser, whether the purchase of valid credits is made 
by the seller or by the purchaser.
    Some commenters stated that sulfur credits should be transferred 
directly from the refiner or importer that generated them to the party 
that will use them, as we had proposed. We believe that this helps to 
ensure that parties purchasing credits will be better able to assess 
the likelihood that the credits will be valid, and aids compliance 
monitoring. Therefore, the final rule adopts this provision, with the 
exception that where a credit generator transfers credits to a refiner 
or importer who cannot use all the credits, that transferee may 
transfer the credits to another refiner or importer. That second 
transferee cannot again transfer the credits; they must either be used 
or terminated by the second transferee. Nevertheless, there is nothing 
in the final rule that would prevent a person who is not a refiner or 
importer from facilitating the transfer of credits from parties that 
have generated them to parties who need them for compliance, e.g., a 
broker who would act like a real estate broker. Therefore, under 
today's rule, any person may act as a credit or allotment broker, 
whether or not such person is a