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Mar 2014
10
March 10, 2014

New Tailpipe Standard for Sulfur Will Create Challenges for Industry, Cause Higher Gas Prices


The U.S. Environmental Protection Agency’s plan to reduce sulfur content in gasoline by 66 percent will lead to higher fuel prices at the pump and could cause hardships for the petroleum industry.

The EPA’s sulfur reduction mandate for light duty vehicles was contained in the agency’s “Tier III rule,” also known as Control of Air Pollution from Motor Vehicles: Tier 3 Motor Vehicle Emission and Fuel Standards.  The sulfur rule is the latest addition to the National Ambient Air Quality Standards (NAAQS), which was established by the federal Clean Air Act.

The NAAQS are health-based standards for various pollutants and regulatory mechanisms designed to assure that areas of the country in attainment with NAAQS remain in attainment, and that areas not in attainment make progress toward attainment.  Many urbanized areas of the United States have been and remain non-compliant with the ozone NAAQS. This problem will only worsen when the EPA, as expected, promulgates a more stringent air quality standard for ozone within the next few years.

Not surprisingly, a meaningful contributor to urban air pollution, including ozone, is motor vehicle exhaust.  While the federal CAA generally precludes states or localities from adopting emission standards for motor vehicles, the CAA has long had a provision, the “California waiver,” allowing California to adopt unique emission standards for motor vehicles in recognition of the air quality problems in California that can be attributed to motor vehicles emissions.  Once California is allowed under the CAA to adopt such standards through grant of an EPA “waiver,” then other states become authorized to adopt those standards. Thus California, with an approving EPA, can drive the regulatory agenda nationwide for vehicle emissions.

On March 3, the EPA announced its new regulation, Control of Air Pollution from Motor Vehicles: Tier 3 Motor Vehicle Emission and Fuel Standards (“Tier III rule”).  This new rulemaking, promulgated under the authorities of Sections 202 and 211 of the CAA, strengthens the light-duty vehicle tailpipe emission standards for ozone precursors, such as organics and NOx, beginning with model year 2017 and supplants the so-called “Tier II” standards promulgated in 2000. Full implementation of the rule will occur between the 2017 and 2025 model years, coinciding with the implementation period under EPA and DOT’s 2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy rule.

The EPA clearly believes that the same powertrain technology and platform design needed to meet the GHG and mileage standards under its GHG rulemaking will allow vehicle manufacturers to meet the Tier III emission standards. Importantly, EPA also believes that its Tier III rule is consistent with California’s LEV III standards which EPA previously granted a waiver for in 2012 and which have been adopted now by 12 states.  Thus, EPA believes that vehicle manufactures will be able to satisfy both federal and these independently established state standards with the same vehicle fleets – a goal previously achieved relative to GHG emissions through the industry’s acceptance of the initial vehicle GHG standards in 2010.

The EPA’s Tier III rule lowers the sulfur content standard for gasoline from the current 30 ppm standard established under the Tier II rule to a new 10 ppm standard. The agency believes revising the gasoline sulfur standard is warranted on several fronts. First, the EPA recognizes that achieving and sustaining vehicle emission performance is dependent upon catalytic technology, which can be “poisoned” by fuel sulfur. Second, the fuel sulfur standard is achievable by the petroleum industry and is consistent with standards already adopted in California, Europe and Japan.

Vehicle manufacturers appear to be relieved that the EPA has now federalized emission standards such that separate vehicle fleets will not have to be manufactured and sold in California and other states following the California standards. But the petroleum industry is clearly concerned about the timeline afforded to meeting the revised sulfur standard, the amount of flexibility provided for satisfying the standard, and the cost both in capital expenditures and the price at the pump.

The EPA and the American Petroleum Institute (API) have widely varying views on this issue. EPA officials believe the cost of meeting the new sulfur standard may be as small as .01 cents per gallon of gasoline. API thinks the cost may be as high as 6-t-9 cents per gallon in some markets. Whether the petroleum industry will challenge the EPA’s rulemaking remains to be seen.

If you have questions or desire further information regarding this issue, please contact Steven Kohl at 248.784.5141, or skohl@wnj.com, or any other member of the Resource, Energy and Environment Practice Group.

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