[Federal Register Volume 67, Number 153 (Thursday, August 8, 2002)]
[Rules and Regulations]
[Pages 51464-51478]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-19981]


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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 86

[AMS-FRL-7256-5]
RIN 2060-AJ73


Control of Air Pollution From New Motor Vehicles and New Motor 
Vehicle Engines; Non-Conformance Penalties for 2004 and later Model 
Year Emission Standards for Heavy-Duty Diesel Engines and Heavy-Duty 
Diesel Vehicles

AGENCY: Environmental Protection Agency (EPA).

ACTION: Final rule.

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SUMMARY: EPA is finalizing nonconformance penalties (NCPs) for the 2004 
and later model year non-methane hydrocarbons and nitrogen oxides 
(NMHC+NOX) standard for heavy-duty diesel engines and 
vehicles. In general, the availability of NCPs allows a manufacturer of 
heavy-duty engines (HDEs) whose engines fail to conform with the 
applicable 2004 model year emission standards, but do not exceed a 
designated upper limit, to be issued a certificate of conformity upon 
payment of a monetary penalty. This final rule establishes the upper 
limit associated with the 2004 emission standard for 
NMHC+NOX as 4.5 grams per brake-horsepower-hour for light 
and medium heavy-duty engines and urban buses, and 6.0 grams per brake-
horsepower-hour for heavy heavy-duty engines. Based on these upper 
limits, this rule also establishes the cost inputs used in the general 
NCP formula currently in the regulations.

DATES: This rule is effective on August 8, 2002.

ADDRESSES: Comments: All comments and materials relevant to today's 
action have been placed in Public Docket No. A-2001-25 at the following 
address: U.S. Environmental Protection Agency (EPA), Air Docket (6102), 
Room M-1500, 401 M Street, SW., Washington, DC 20460 (on the ground 
floor in Waterside Mall) from 8:00 a.m. to 5:30 p.m., Monday through 
Friday, except on government holidays. You can reach the Air Docket by 
telephone at (202) 260-7548 and by facsimile at (202) 260-4400. We may 
charge a reasonable fee for copying docket materials, as provided in 40 
CFR part 2.

FOR FURTHER INFORMATION CONTACT: Margaret Borushko, U.S. EPA, National 
Vehicle and Fuels Emission Laboratory, 2000 Traverwood, Ann Arbor, MI 
48105; Telephone (734) 214-4334; Fax: (734) 214-4816; E-mail: 
[email protected].

SUPPLEMENTARY INFORMATION:

Regulated Entities

    This action may affect you if you produce or import new heavy-duty 
diesel engines which are intended for use in highway vehicles such as 
trucks and buses or other types of heavy-duty highway vehicles. The 
table below gives some examples of entities that may have to follow the 
regulations. But because these are only examples, you should carefully 
examine the regulations in 40 CFR part 86. If you have questions, call 
the person listed in the FOR FURTHER INFORMATION CONTACT section above.

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                                       NAICS \a\    SIC  Codes
              Category                   Codes          \b\         Examples of potentially regulated entities
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Industry...........................       336112          3711   Engine and truck manufacturers.
                                          336120
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\a\ North American Industry Classification System (NAICS).
\b\ Standard Industrial Classification (SIC) system code.

Access to Rulemaking Documents Through the Internet

    This final rule is available electronically on the day of 
publication from the Environmental Protection Agency Internet Web site 
listed below. Electronic copies of the preamble, regulatory language, 
Technical Support Document, and other documents associated with today's 
final rule are available from the EPA Office of Transportation and Air 
Quality (formerly the Office of Mobile Sources) Web site listed below 
shortly after the rule is signed by the Administrator. This service is 
free of charge, except any cost that you incur for connecting to the 
Internet.

Environmental Protection Agency Web Site: http://www.epa.gov/fedrgstr/
(Either select a desired date or use the Search feature.)

Office of Transportation and Air Quality (OTAQ) Web Site: http://www.epa.gov/otaq/
(Look in ``Recent Additions'' or under the ``Heavy Trucks/Buses'' 
topic.)

    Please note that due to differences between the software used to 
develop the document and the software into which document may be 
downloaded, changes in format, page length, etc. may occur.

Table of Contents

I. Background and Statutory Authority
    A. Background to Nonconformance Penalty Rules
    B. Statutory Authority

[[Page 51465]]

    C. Heavy-duty Diesel Consent Decrees
II. Nonconformance Penalties for 2004 and Later Heavy-Duty Engines 
and Heavy-Duty Vehicles
    A. Finding of Eligibility for NCPs
    B. Penalty Rates
III. Significant Issues Raised in this Rulemaking
    A. Relation of NCP Costs to Rulemaking Costs
    B. Discount Rate
    C. Upper Limit
    D. Use of Penalty Funds
    E. Incorporating Factors Not Provided For In The NCP Regulations
    F. Fuel Cost
IV. Economic Impact
V. Environmental Impact
VII. Administrative Requirements
    A. Regulatory Planning and Review: Executive Order 12866
    B. Regulatory Flexibility Analysis
    C. Compliance with the Paperwork Reduction Act
    D. Unfunded Mandates Reform Act
    E. Executive Order 13175: Consultation and Coordination with 
Indian Tribal Governments
    F. National Technology Transfer and Advancement Act
    G. Executive Order 13045: Children's Health Protection
    H. Executive Order 13132: Federalism
    I. Executive Order 13211:Energy Effects
    J. Congressional Review Act

I. Background and Statutory Authority

A. Background to Nonconformance Penalty Rules

    Since the promulgation of the first NCP rule in 1985, NCP rules 
have generally been described as continuing ``phases'' of the NCP 
program. The first NCP rule (Phase I), sometimes referred to as the 
``generic'' NCP rule, established three basic criteria for determining 
the eligibility of emission standards for nonconformance penalties in 
any given model year (50 FR 35374, August 30, 1985). For regulatory 
language, see 40 CFR 86.1103-87. First, the emission standard in 
question must become more difficult to meet. This can occur in two 
ways, either by the emission standard itself becoming more stringent, 
or due to its interaction with another emission standard that has 
become more stringent. Second, substantial work must be required in 
order to meet the emission standard. EPA considers ``substantial work'' 
to mean the application of technology not previously used in that 
vehicle or engine class/subclass, or a significant modification of 
existing technology, in order to bring that vehicle/engine into 
compliance. EPA does not consider minor modifications or calibration 
changes to be classified as substantial work. Third, a technological 
laggard must be likely to develop. Prior NCP rules have considered a 
technological laggard to be a manufacturer who cannot meet a particular 
emission standard due to technological (not economic) difficulties and 
who, in the absence of NCPs, might be forced from the marketplace, 
including the elimination of one or more engine families/configurations 
from production. EPA will make the determination that a technological 
laggard is likely to develop, based in large part on the first two 
criteria. However, these criteria are not always sufficient to 
determine the likelihood of the development of a technological laggard. 
An emission standard may become more difficult to meet and substantial 
work may be required for compliance, but if that work merely involves 
transfer of well-developed technology from another vehicle class, it is 
unlikely that a technological laggard would develop.
    The criteria and methodologies established in the 1985 rule have 
since been used to determine eligibility and to establish NCPs for a 
number of heavy-duty emission standards. Phases II, III, IV, and V, 
published in the period from 1985 to 1996, established NCPs that, in 
combination, cover the full range of heavy-duty--from heavy light-duty 
trucks (6,000-8,500 pounds gross vehicle weight) to the largest diesel 
truck and urban bus engines. NCPs have been established for engine 
emission standards for hydrocarbons (HC), carbon monoxide (CO), 
nitrogen oxides (NOX), and particulate matter (PM). The most 
recent NCP rule (61 FR 6949, February 23, 1996) established NCPs for 
the 1998 and later model year NOX standard for heavy-duty 
diesel engines (HDDEs), the 1996 and later model year for Light-Duty 
Truck 3 (LDT3) NOX standard, and the 1996 and later urban 
bus PM standard. A concurrent but separate final rule (61 FR 6944, 
February 23, 1996) established NCPs for the 1996 LDT3 PM standard. The 
NCP rulemaking phases are summarized in greater detail in the Final 
Technical Support Document for this rule.

B. Statutory Authority

    Section 206(g) of the Clean Air Act (the Act), 42 U.S.C. 7525(g), 
requires EPA to issue a certificate of conformity for HDEs or HDVs 
which exceed a federal emissions standard, but do not exceed an upper 
limit associated with that standard, if the manufacturer pays an NCP 
established by rulemaking. Congress adopted section 206(g) in the Clean 
Air Act Amendments of 1977 as a response to perceived problems with 
technology-forcing heavy-duty emissions standards. Following 
International Harvester v. Ruckelshaus, 478 F.2d 615 (D.C. Cir. 1973), 
Congress realized the dilemma that technology-forcing standards might 
cause for motor vehicle manufacturers. If strict standards were 
maintained, then some manufacturers, ``technological laggards,'' might 
be unable to comply initially and would be forced out of the 
marketplace. NCPs were intended to remedy this potential problem. The 
NCP would provide a temporary alternative that would permit 
manufacturers to sell their engines or vehicles by payment of a 
penalty. At the same time, conforming manufacturers would not suffer an 
economic disadvantage compared to nonconforming manufacturers, because 
the NCP would be based, in part, on money saved by the technological 
laggard and its customer from the nonconforming engine or vehicle.
    Under section 206(g)(1), NCPs may be offered for HDVs or HDEs. The 
penalty may vary by pollutant and by class or category of vehicle or 
engine. HDVs are defined in section 202(b)(3)(C) of the CAA as vehicles 
in excess of 6,000 pounds gross vehicle weight rating (GVWR). The 
light-duty truck (LDT) classification includes trucks that have a GVWR 
of 8500 lbs or less. Therefore, certain LDTs may be classified as HDVs. 
Historically, LDTs up through 6000 lbs GVWR have been considered 
``light light-duty trucks'' (LLDTs) and LDTs between 6,001 and 8,500 
pounds GVWR have been considered ``heavy light-duty trucks'' (HLDTs). 
Based on various new requirements established by the Clean Air Act 
Amendments of 1990, each of these two light truck categories has been 
further subdivided into groups by weight. The LLDTs are classified by 
weight based on ``loaded vehicle weight,'' or LVW, which maintains its 
current definition: curb weight plus 300 lbs. The trucks up through 
3750 lbs LVW make up a subclass called light-duty-trucks-1, or LDT1. 
Those greater than 3750 lbs LVW but less than or equal to 6000 lbs GVWR 
are the subclass light-duty-trucks-2, or LDT2. The HLDTs are divided at 
5750 lbs ``adjusted loaded vehicle weight,'' or ALVW. Adjusted loaded 
vehicle weight is the average of the curb weight and the GVWR. The 
HLDTs that are up through 5750 lbs ALVW are called light-duty trucks-3, 
or LDT3. Those above 5750 lbs ALVW but less than or equal to 8500 lbs 
GVWR are light-duty-trucks-4, or LDT4. The LDT3 and LDT4 subclasses 
make up the HLDT vehicle class. Since NCPs can only be established for 
heavy duty vehicles or engines, emission standards for light-duty 
trucks of the LDT3 and LDT4 categories are the only light-duty truck 
categories eligible for NCPs.
    Section 206(g)(3) requires that NCPs:

[[Page 51466]]

     Account for the degree of emission nonconformity;
     Increase periodically to provide incentive for 
nonconforming manufacturers to achieve the emission standards; and
     Remove the competitive disadvantage to conforming 
manufacturers.
    Section 206(g) authorizes EPA to require testing of production 
vehicles or engines in order to determine the emission level on which 
the penalty is based. If the emission level of a vehicle or engine 
exceeds an upper limit of nonconformity established by EPA through 
regulation, the vehicle or engine would not qualify for an NCP under 
section 206(g) and no certificate of conformity could be issued to the 
manufacturer. If the emission level is below the upper limit but above 
the standard, that emission level becomes the ``compliance level,'' the 
level to which the engine must conform. This is also the benchmark for 
warranty and recall liability. The manufacturer who elects to pay the 
NCP is liable for vehicles or engines that exceed the compliance level 
in-use, unless, for the case of HLDTs, the compliance level is below 
the in-use standard. The manufacturer does not have in-use warranty or 
recall liability for emissions levels above the standard but below the 
compliance level.
    Section 307(d) of the CAA applies to today's rule as provided by 
Section 307(d)(1)(v), 42 U.S.C. 7607(d)(1)(v).

C. Heavy-Duty Diesel Consent Decrees

    On October 22, 1998, the Department of Justice and the 
Environmental Protection Agency announced settlements with seven major 
manufacturers whose diesel engines comprise a majority of the diesel 
engine market. The settlements resolved claims that the manufacturers 
installed computer software on heavy duty diesel engines that turned 
off the engine emission control system during highway driving in 
violation of the CAA's prohibition on defeat devices (42 USC 
7522(a)(3)). The settlements were entered by the U.S. District Court 
for the District of Columbia on July 1, 1999. These consent decrees 
with the U.S. Government contained a number of provisions applying to 
heavy-duty on-road, and in some cases, nonroad, engines. Specific to 
the on-road engines, the decrees permit the continued use of non-
complying engines for a period of time (although emissions are capped 
by limits associated with new supplemental test procedures). Other 
elements of these consent decrees include a program under which the 
consent decree manufacturers are required to invest considerable 
resources to evaluate instrumentation and methodologies for on-road 
testing. Because the Consent Decrees refer to NCPs for the 2004 model 
year, if established, promulgation of this rule would have an impact on 
the penalties determined under the Consent Decrees.

II. Nonconformance Penalties for 2004 and Later Heavy-Duty Engines 
and Heavy-Duty Vehicles

A. Finding of Eligibility for NCPs

    In the Notice of Proposed Rulemaking (NPRM) (67 FR 2159, January 
16, 2002), we identified the heavy-duty diesel NMHC+NOX 
standard becoming effective in model year 2004, the heavy-duty gasoline 
standards generally taking effect in the 2005 model year, and the Tier 
2 standards for Medium-duty Passenger Vehicles & Heavy Light-duty 
Trucks taking effect in 2004 as new standards for which we have 
statutory authority for considering NCPs. We then applied the three 
generic NCP criteria (discussed in section I.A) to each of those 
emission standards, and identified the 2004 heavy-duty diesel 
NMHC+NOX standard of 2.4 g/bhp-hr as satisfying the required 
NCP criteria and, therefore, proposed to make NCPs available for heavy-
duty engines subject to that standard. We also proposed upper limits 
for that standard and numerical values to be used in the calculation of 
the NCP for the associated vehicles.
    We did not propose NCPs for the other new standards because they 
did not meet all three of the generic NCP criteria. No comments were 
received during the public comment period indicating that NCPs should 
be proposed for these other new standards. See the NPRM for additional 
detail on the consideration of these standards for NCPs. For the 
reasons stated in the NPRM, EPA therefore is not adopting NCPs at this 
time for the other new standards.
    As discussed in section I.A., EPA must determine that three 
criteria are met in order to determine that an NCP should be 
established in any given model year. For the model year 2004 heavy-duty 
diesel NMHC+NOX standard, we believe these criteria have 
been met and it is therefore appropriate to establish NCPs for the 2004 
model year NMHC+NOX standard.
    The first criteria requires that the emission standard in question 
must become more difficult to meet. This is the case with the 2004 
NMHC+NOX standard. The previous emission standards to which 
manufacturers must certify for this category are 4.0 g/bhp-hr 
NOX and 1.3 g/bhp-hr HC. The 2004 standard is a combined 
NMHC+NOX standard of 2.4 g/bhp-hr, or optionally a 2.5 g/
bhp-hr NMHC+NOX with a limit of 0.5 g/bhp-hr NMHC.\1\ When 
promulgated, the Agency concluded that the 2004 standard was a 
technology forcing standard, and therefore it is reasonable to conclude 
that the increased level of stringency made the standard more difficult 
to meet.
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    \1\ NMHC stands for non-methane hydrocarbons, which is a measure 
of total hydrocarbons with the methane emissions subtracted out. For 
typical on-highway diesel fueled heavy-duty engines, methane 
emissions are on the order of 10 percent of the total hydrocarbon 
emissions.
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    The second criteria which must be met in order for EPA to determine 
that an NCP should be established is the determination that substantial 
work must be required to meet the emission standard. This criteria has 
also been met. As discussed in both the 1997 final rule (see 62 FR 
54694, October 21, 1997) which established the 2004 standards, as well 
as the 2000 final rule (see 65 FR 59896, October 6, 2000) which 
reaffirmed those standards, EPA projected that new emission control 
technologies would be needed to achieve the 2004 standards. In these 
previous rulemakings EPA identified technologies such as cooled exhaust 
gas recirculation (EGR) and variable geometry turbochargers (VGT) as 
some of the technologies manufacturers could use to meet the 2004 
standards. Such technologies have not previously been used in the on-
highway heavy-duty diesel market, and EPA estimated substantial 
research and development efforts by the engine manufacturers would be 
undertaken to meet the 2004 standards. We continue to believe such new 
technologies will be used by a number of engine manufacturers, and in 
fact several manufacturers have indicated in recent statements that 
they will use new emission control technologies in order to achieve the 
2004 standards.\2\
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    \2\ See press releases from Caterpillar Inc., Cummins, Detroit 
Diesel Corp. and Mack, available in EPA Air Docket A-2001-25.
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    The final criteria for EPA to determine that an NCP should be 
established is that a technological laggard is likely to develop. There 
are several reasons to believe a technological laggard is likely, as 
discussed below.
    First, during our recent discussions with a number of engine 
manufacturers, several manufacturers have indicated that they are not 
yet sure that they will be able to make the necessary technological 
changes to meet the 2004 emission standards for a limited number of 
their high horsepower rated engines

[[Page 51467]]

by model year 2004, and may need to use NCPs for a limited time period 
to certify these configurations in 2004. Nevertheless, manufacturers 
are exploring a number of technologies to address these limitations.
    Second, during recent discussions with engine manufacturers, one 
manufacturer has indicated that a few low volume engine families 
currently available may not be ready by 2004. A low volume engine 
family may require specific and targeted research and development 
efforts in order to comply with the 2004 standards, and it is 
reasonable to expect that manufacturers may focus their efforts on 
these low volume products later in the development process, and time 
may be too short to bring the product into compliance for the 2004 
model year.
    Finally, in the final rule completed in 2000 which reaffirmed the 
2004 NMHC+NOX standard, three engine manufactures as well as 
the Engine Manufacturers Association (EMA), commented that EPA should 
establish NCPs for the 2004 standards.\3\ EMA commented the standards 
``will be technology-forcing and likely will result in the inability of 
some engine manufacturers and/or engine families to comply with the 
standards.'' Detroit Diesel Corp. commented ``Meeting the 2004 
standards will require the use of sophisticated new emission control 
technology and will require emission durability evaluation over a 
greatly extended useful life period.* * * Any development setbacks or 
misjudgement regarding the capability or durability of the new emission 
control technology could, at the last minute, put an engine 
manufacturer into a laggard position and prevent certification of an 
engine family. The likelihood of a technological laggard for 2004 is at 
least as great and probably much greater than for other standards for 
which NCPs have been provided.'' When we reaffirmed the 2004 
NOX+NMHC standard in 2000 we agreed that the standards were 
technology-forcing and that sophisticated technologies would be 
required, and thus, that the first two eligibility criteria were likely 
met. However, we concluded at the time that it was too early to 
determine the likelihood of a technological laggard, and further, that 
it was not necessary to attempt to make such a judgement at that time. 
Now we are a year closer to implementation of the 2004 standards, and 
manufacturers have not withdrawn their claims that the likelihood of a 
technological laggard is high. The fact that several engine 
manufacturers as well as a major trade organization have indicated they 
believe a technological laggard is likely to develop is a relevant 
indicator for the Agency regarding the technological laggard criteria.
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    \3\ See EPA Air Docket A-98-32, comments from Navistar (item IV-
D-29), Mack Truck (IV-D-06), Detroit Diesel Corp. (IV-D-28), and EMA 
(IV-D-05).
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    It is clear that most companies and most engine configurations will 
be able to comply with the standards in 2004. However, based on the 
discussion above, the Agency believes it is reasonable to conclude that 
a technological laggard is likely to develop for the 2004 
NMHC+NOX heavy-duty diesel standard.

B. Penalty Rates

    This final rule is the most recent in a series of NCP rulemakings. 
The discussion of penalty rates in the Phase IV rulemaking (58 FR 
68532, December 28, 1993), Phase III rulemaking (55 FR 46622, November 
5, 1990), the Phase II rulemaking (50 FR 53454, December 31, 1985) as 
well as the Phase I rulemaking (50 FR 35374, August 30, 1985) are 
incorporated by reference. This section briefly reviews the penalty 
rate formula and discusses how EPA arrived at the penalty rates in this 
final rule.
    As in the previous NCP rules, the NCP formula for the 2004 model 
year standard uses the following parameters: COC50, 
COC90, MC50, F, and UL. This rule specifies the 
value for these parameters. The NCP formula for the 2004 model year 
standard is the same as that promulgated in the Phase I rule. As was 
done in previous NCP rules, costs include additional manufacturer costs 
and additional owner costs, but do not include certification costs 
because both complying and noncomplying manufacturers must incur 
certification costs. COC50 is an estimate of the industry-
wide average incremental cost per engine (references to engines are 
intended to include vehicles as well) associated with meeting the 
standard for which an NCP is offered, compared with meeting the upper 
limit. More precisely, the values of COC50 presented here 
are estimates of the sales weighted mean incremental cost.
    COC90 is EPA's best estimate of the 90th percentile 
incremental cost per-engine associated with meeting the standard for 
which an NCP is offered, compared with meeting the associated upper 
limit. MC50 is an estimate of the industry-wide average 
marginal cost of compliance per unit of reduced pollutant associated 
with the least cost effective emission control technology installed to 
meet the new standard. MC50 is measured in dollars per g/
bhp-hr for HDEs. F is a factor used to derive MC90, the 90th 
percentile marginal cost of compliance with the NCP standard for 
engines in the NCP category. MC90 defines the slope of the 
penalty rate curve near the standard and is equal to MC50 
multiplied by F. UL is the upper limit above which no engine may be 
certified. UL is specified for each of the four service classes for 
which NCPs are promulgated.
    Table 1 displays the parameter values to be used in the NCP formula 
for the 2004 and later model year NMHC+NOX standard of 2.5 
g/bhp-hr for diesel heavy-duty engines and diesel urban bus engines at 
full useful life. The derivation of the NCP cost parameters is 
described in a support document entitled ``Technical Support Document: 
Nonconformance Penalties for 2004 Highway Heavy-Duty Diesel Engines,'' 
(TSD) which is available in the public docket for this rulemaking. All 
costs are presented in 2001 dollars. Because we are trying to account 
for cost differences over time, all costs were converted to net present 
value (NPV) for calendar year 2004 using a discount rate of seven 
percent.

                                      Table 1.--NCP Calculation Parameters
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                               Light heavy-duty    Medium Heavy-   Heavy heavy-duty
          Parameter             diesel Engines      duty diesel     diesel Engines        Urban bus engines
                                    (LHDDE)       Engines (MHDDE)       (HHDDE)
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COC50........................  $1,240..........  $2,740..........  $6,810..........  $3,930
COC90........................  $2,710..........  $4,930..........  $12,210.........  $6,660
MC50.........................  $2,000 per g/bhp- $1,400 per g/bhp- $5,600 per g/bhp- $3,800 per g/bhp-hr
                                hr.               hr.               hr.
F............................  1.3.............  1.3.............  1.3.............  1.3
UL (NOX+NMHC)................  4.5 g/bhp-hr....  4.5 g/bhp-hr....  6.0 g/bhp-hr....  4.5 g/bhp-hr
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[[Page 51468]]

    The calculation parameters listed in Table 1 are used to calculate 
the actual penalty rates for each heavy-duty service class. These 
parameters are used in the penalty rate formulas which are defined in 
the existing NCP regulations (See 40 CFR 86.1113(a)(1) and (2)). 
Figures 1-4 below show the approximate first-year penalties for 
different compliance levels for each service class. This curves were 
determined using the parameters in Table 1, and the general equations 
in the regulations. To determine actual penalties you would also need 
to include the annual adjustment factors specified in the regulations 
and the inflation adjustment. Thus, these figures, which are shown here 
for illustrative purposes only, cannot be used to determine the actual 
penalty amount to be paid by a manufacturer.

BILLIND CODE 6560-50-P
[GRAPHIC] [TIFF OMITTED] TR08AU02.019


[[Page 51469]]


[GRAPHIC] [TIFF OMITTED] TR08AU02.020

BILLING CODE 6560-50-C
    During the rulemaking we asked for comment on all aspects of our 
analysis including the cost information used and the manner in which we 
analyzed it. We received only a small amount of additional information 
after the proposal and we incorporated this information into the 
overall analysis. Beyond that, we held in-depth discussions with 
several manufacturers to determine whether the information they 
provided for the NPRM was still current and the best available in the 
context of ongoing business decisions, projected technological 
progress, and cost reduction efforts. Based on the comments and other 
new information, we have updated our analysis from that used in the 
NPRM. These changes are described in the Technical Support Document. 
While most of the changes were relatively minor, we made four 
adjustments to the methodology that are more significant:
     For heavy heavy-duty engines, we estimated that by the 
2004, the average fuel consumption would be about one-half percent 
better than current manufacturer estimates. Manufacturers

[[Page 51470]]

made it clear that fuel economy improvement was a top priority and are 
making public projections about further improvements by 2004.
     In the NPRM we based our diesel fuel price on the 2000 
average of about $1.50 per gallon and asked for comment on using a 3-5 
year average as opposed to a one year value. As is discussed below, we 
are using a fuel price of $1.29 per gallon, which is the average diesel 
fuel price for 1997 through 2001.
     A review with the manufacturers revealed that in providing 
their cost estimates for 2004 they did not incorporate manufacturing 
learning from the consent decree pull ahead engines. We included a 
learning curve benefit of 10 percent for heavy-heavy duty engines.
     Manufacturer warranty cost estimates varied by more than a 
factor of ten. In the NPRM we used a sales-weighted average. Through 
discussions with manufacturers, we learned that the broad range in 
estimates was a result of different approaches used by companies to 
address warranty costs, such that a straight average of the estimates 
is not the appropriate way to project actual costs. Thus for the final 
rule we based warranty on a flat percentage of the average rather than 
the average itself for most service classes.
    The table below compares the COC50 and COC90 
values for the NPRM and FRM.

                                       Table 2.--NCP Parameter Comparisons
----------------------------------------------------------------------------------------------------------------
                        Service class                          COC50 NPRM   COC50 FRM    COC90 NPRM   COC90 FRM
----------------------------------------------------------------------------------------------------------------
LHDDE.......................................................       $1,080       $1,240       $2,610       $2,710
MHDDE.......................................................        3,360        2,740        6,870        4,930
HHDDE.......................................................        8,940        6,810       14,790       12,210
Urban Bus...................................................        4,400        3,930        7,120        6,660
----------------------------------------------------------------------------------------------------------------

III. Significant Issues Raised in This Rulemaking

    This section discusses several significant issues raised in this 
rulemaking, including comments on the proposal. Additional issues are 
also discussed in the Technical Support Document and Response to 
Comments documents.

A. Relation of NCP Costs to Rulemaking Costs

    Traditionally, NCP costs are different than those presented in the 
rulemaking analysis which implemented the standards. This occurs for 
several reasons:
     NCP costs represent first year costs and thus generally do 
not include the effects of manufacturing learning that occurs in 
reality and is included in the rulemaking cost analysis, but do include 
the full amortized annual fixed costs which are eliminated after the 
first few years of production
     Cost information gathered from manufacturers and vendors 
during the NCP rulemaking process reflects a more complete 
understanding of the optimum technology path for compliance and the 
operating costs and savings which occur over the life of the vehicle/
engine as compared to the information that existed during the standard-
setting rulemaking
     The NCP is by statute intended to protect the complying 
manufacturer and thus it is important to avoid underestimating 
reasonably projected actual costs.
    However, this specific case is unique. The analysis presented in 
the NCP TSD results in costs that differ from the estimated costs 
presented in the rulemaking that initially established the 2004 
standards (62 FR 54694, October 21, 1997), as well as the rulemaking 
that affirmed the 2004 standards and updated the cost analysis (65 FR 
59896 October 6, 2000). There are several key reasons that account for 
these differences. The most important reason is the difference in the 
emission characteristics of the baseline engine used in the analysis. 
When the rulemaking costs were determined in 1997, the agency assumed a 
1998 model year engine in full compliance with the 4.0 g/bhp-hr 
NOX level as the baseline for the 2004 standard. As 
discussed above, after that rule was promulgated, it became evident 
that all manufacturers were not fully complying with the 4.0 g/bhp-hr 
NOX level and in fact in some cases were emitting at levels 
far in excess of the standard during significant periods of operation. 
We proposed an upper limit of 6.0 g/bhp-hr NMHC+NOX for the 
2004 NCP for heavy heavy-duty diesel engines because that baseline 
value reasonably represents the current emissions characteristics of 
nearly all 2001 heavy heavy-duty engines. This distinction between 
baselines is critical to the cost analysis and creates a fundamental 
difference between the estimated costs presented in this NCP final rule 
and the estimated costs presented in the standard-setting rulemaking.
    The compliance costs estimated in the standards setting rulemaking 
for the heavy heavy-duty engine service class were intended to reflect 
the cost associated with bringing an engine in full compliance with the 
current standard of 4.0 g/bhp-hr NOX into full compliance 
with the 2004 NMHC+NOX standard of 2.5 g/bhp-hr. In this NCP 
rulemaking, however, the penalty rate factors for heavy heavy-duty were 
based on the costs required to bring an engine at the 6.0 g/bhp-hr 
Upper Limit (e.g., a 2001 model year engine) into compliance with the 
2004 model year standard. The fundamental properties of the existing 
engines in 2001, however, are not what was envisioned by or 
incorporated into the analyses performed for the rulemakings that 
established and confirmed the 2004 standards. This important 
distinction between the baselines engines impacts every cost category 
considered in the NCP rule. Much of the cost associated with the heavy 
heavy-duty service class NCPs are attributable to those costs required 
to remedy the non-compliance with the current 4.0 g/bhp-hr 
NOX standard while reducing emission to meet the 2004 
standards, and are not attributable solely to the 2004 standards. 
Consider the following:
     A heavy heavy-duty diesel engine in full compliance with 
the current 4.0 g/bhp-hr NOX standard would likely have 
sustained little or no increased fuel costs relative to an engine 
meeting the 2004 standard of 2.5 g/bhp-hr NMHC+NOX. The fuel 
economy ``penalty'' associated with bringing an Upper Limit engine into 
compliance with the 2004 standards is probably equivalent to the 
penalty that would have resulted from bringing a current non-complying 
engine into compliance with the defeat device prohibition. Thus, the 
cost of reduced fuel economy is incorporated into the NCP costs, but 
not into the estimated long-term rulemaking costs.

[[Page 51471]]

     A heavy heavy-duty diesel engine in full compliance with 
the current 4.0 g/bhp-hr NOX standard would have 
incorporated different, more advanced emission control techniques and 
hardware to comply with the 4.0 g/bhp-hr standard than have been 
incorporated on current 6.0 g/bhp-hr engines that do not fully comply 
with the current regulations. Thus, additional costs associated with 
implementing additional control technologies for 6.0 g/bhp-hr engines, 
which are incorporated into the NCP costs, include some hardware and 
development costs that would not have been applicable for the 
rulemaking analysis where the baseline was a compliant 4.0 g/bhp-hr 
engine.
     A heavy heavy-duty diesel engine in full compliance with 
the current 4.0 g/bhp-hr NOX standard would possibly have 
had more frequent oil change intervals, resulting in higher baseline 
maintenance costs than the current 6.0 g/bhp-hr non-complying engines. 
The NCP costs presented in this rule incorporate the lower operating 
costs of today's engines in the baseline, with an associated increase 
in operating costs to comply with the 2.5 g/bhp-hr standard. However, 
the operating costs estimated in the rulemakings that established the 
2004 standards were based on engines in full compliance with the 4.0 g/
bhp-hr NOX standard.
    Thus, the use of fundamentally different baselines accounts for a 
substantial amount of the difference between the resulting cost 
estimates for heavy heavy-duty diesel engines. In addition, as is 
described in the Technical Support Document, even for the other service 
classes that have Upper Limits based directly on the 4.0 g/bhp-hr 
NOX standard, the impact on engine designs of the alleged 
defeat device strategies used by a number of engine manufacturers over 
the past decade makes comparison between the standard-setting rule cost 
analysis and this analysis difficult.
    While the baseline issue described above is the most important 
reason for the differences between the NCP costs and the rulemaking 
costs, there is a second major reason for the difference. Unlike the 
case with a rulemaking analysis, it is the objective of this NCP 
analysis to focus solely on the compliance costs associated with the 
first year of production. This has been the historical approach to 
incorporating cost parameters into the determination of the NCP. 
Regulatory actions that establish emission standards require analyses 
with a longer term view, projecting costs out into future years and 
decades and not focusing solely on the costs in the first year. As one 
would expect, the immediate costs associated with the first year of 
production are higher than the long-term costs and are not 
representative of long-term costs because manufacturers often make 
significant progress in reducing certain costs over time. This is 
especially true for costs associated with hardware, reliability, and 
fuel consumption.
    Finally, in the process of conducting our cost analysis for this 
NCP rule, some new information was provided that was not brought to our 
attention during the prior rulemaking processes. For example, the NCP 
analysis includes costs attributable to the truck manufacturer (as 
opposed to the engine manufacturer) that result from having to 
accommodate new engine configurations with increased size and/or weight 
in their trucks. We have also included the negative impact on revenue 
due to the increased weight of the engine and the resulting loss in 
freight capacity, as well as the impact of post-warranty repair costs. 
We believe that incorporation of this information is appropriate to 
include in the NCP cost estimation analysis as it represents 
industries' most current perspective on compliance costs.

B. Discount Rate

    In the NPRM, we derived the factors for the NCP formula using the 
net present value (NPV) of manufacturer and user costs. Consistent with 
other EPA rulemaking analyses, a compounding/discount rate of seven 
percent was used in these calculations. We also presented the values 
using a rate of three percent and asked for comment on the issue 
including input on which of two values was more appropriate or if 
another value or set of values was more representative of industry 
practice. As is discussed in the Response to Comments document, the 
response was mixed. Some commenters supported seven percent, some three 
percent, and one commenter supported using different rates for 
compounding pre-production costs and discounting user costs but did not 
suggest values for these industry sectors. Given this mixed response, 
EPA has decided to continue to use the seven percent value as it is 
clear from the comments that this rate is adequately representative of 
industry practice and thus will protect the complying manufacturers. 
Nonetheless, EPA will continue to seek more information on this issue 
for consideration in future rule analyses.

C. Upper Limit

    The upper limit is the emission level established by regulation 
above which NCPs are not available and a heavy duty engine cannot be 
certified or introduced into commerce. CAA section 206(g)(2) refers to 
the upper limit as a percentage above the emission standard, set by 
regulation, that corresponds to an emission level EPA determines to be 
``practicable.'' The upper limit is an important aspect of the NCP 
regulations not only because it establishes an emission level above 
which no engine can be certified, but it is also a critical component 
of the cost analysis used to develop the NCP factors. The regulations 
specify that the relevant NCP costs for determining the 
COC50 factors are the difference between an average engine 
at the upper limit and one that meets the new standards (see 40 CFR 
86.1113-87).
    The regulatory approach adopted under the first NCP rule sets the 
Upper Limit (UL) at the prior emission standard when a prior emission 
standard exists and that standard is changed and becomes more 
stringent. EPA concluded that the UL should be reasonably achievable by 
all manufacturers with vehicles in the relevant class. It should be 
within reach of all manufacturers of HDEs or HDVs that are currently 
allowed so that they can, if they choose, pay NCPs and continue to sell 
their engines and vehicles while finishing their development of 
complying engines. A manufacturer of a previously certified engine or 
vehicle should not be forced to immediately remove an HDE or HDV from 
the market when an emission standard becomes more stringent. In past 
NCP rules, the prior emissions standard meet these goals, because 
manufacturers had already certified their vehicles to that standard. In 
the first NCP rule, EPA rejected a suggestion that the upper limit 
should be more stringent than the prior emission standard, because it 
would be very difficult to identify a limit that would be within reach 
of, and could be met by, all manufacturers.
    In this final action, we have established an Upper Limit for light-
heavy, medium-heavy and urban bus engines of 4.5g/bhp-hr 
NMHC+NOX, and for the heavy-heavy service class we have 
established an Upper Limit of 6.0 g/bhp-hr NMHC+NOX. These 
final rule Upper Limit values are identical to the proposed values.
    In this case, the new standard is a limit on the combination of 
NOX+NMHC, while the prior regulatory standards are separate 
limits, one for NOX and one for total HC. In addition, in 
establishing the Upper Limit we took into consideration that for a 
large portion of the industry, there are also

[[Page 51472]]

emissions limits set under judicial Consent Decrees (CD), many of which 
vary from the regulatory standards, in particular for the heavy-heavy 
service class as discussed latter in this section. The Consent Decrees 
establish legally binding requirements on the manufacturers that 
directly affect the way engine manufacturers design their engines. In 
many cases it is the CD limits, and not the regulatory standards, that 
are the controlling factor and dictate the level of emissions control 
required on engines produced during the term of the Decrees. Since the 
purpose of an NCP is to address the real world problems associated with 
a transition from a prior emissions requirement to a new more stringent 
requirement, it is appropriate to take the CD requirements into account 
where the levels required under the CDs are in fact the controlling 
factor in establishing the prior level of control.
    For light heavy-duty, medium heavy-duty, and urban bus engines, the 
CD requirements are consistent with the regulatory requirements for the 
current FTP-based standards and the defeat device prohibition. 
Manufacturers are currently certifying to the emissions levels provided 
under the CD. An examination of model year 2001 certification data 
shows that for both CD and non-CD engine manufacturers, engines are 
generally being certified with HC emissions below 0.3 g/bhp-hr, and no 
engines in these service classes certified to the 4.0 g/bhp-hr 
NOX standard have a combined NOX plus HC emission 
level greater than 4.5 g/bhp-hr.\4\ Therefore, an UL of 4.5 g/bhp-hr 
NOX+NMHC on the FTP is most consistent with the policy 
approach embodied in 40 CFR 86.1104-91, allowing continued production 
of current engines, but not allowing backsliding. We received only 
supportive comments on the proposal to establish an Upper Limit of 4.5 
g/bhp-hr NMHC+NOX for the light heavy-duty, medium heavy-
duty, and urban bus engines.
---------------------------------------------------------------------------

    \4\ EPA Memorandum ``Summary of Model Year 2001 Heavy-duty 
Diesel Engine HC and NOX Certification Data'', copy 
available in the docket for this rulemaking.
---------------------------------------------------------------------------

    For heavy heavy-duty engines, however, the CDs provides a 
significantly different approach. For these engines, limits are set for 
Euro III and not-to-exceed (NTE) levels that allow for significantly 
higher emissions off the FTP than EPA would expect to allow under the 
defeat device prohibition. While the CDs, like the regulations, require 
the use of the FTP to measure emissions, it is the level of off-cycle 
control (e.g., control of emissions during operation not fully 
represented during the FTP, but which are captured by the supplemental 
tests contained in the CDs, the Euro III and NTE tests) that drives the 
design requirements for the engine manufacturers. They are the legal 
requirements that drive the level of control embodied in the engine 
design. Model year 2001 certification data shows that combined HC and 
NOX emissions for these engines are at or below 6.0 g/bhp-hr 
when measured using the Euro III test.\5\
---------------------------------------------------------------------------

    \5\ EPA Memorandum ``Summary of Model Year 2001 Heavy-duty 
Diesel Engine HC and NOX Certification Data'', copy 
available in the docket for this rulemaking.
---------------------------------------------------------------------------

    This NCP rulemaking focuses on technological laggards, which would 
be those heavy-duty engines that need more lead time to comply with the 
2004 NOX+NMHC standard. For heavy heavy-duty engines, the 
prior actual level of control that many manufacturers are now achieving 
and certifying to is established by the CDs and not by the 1998 
regulatory emission standards. As such, an UL at the level of control 
required under the CD would set a level that is within the reach of all 
manufacturers, including the technological laggards. It would be 
reasonably achievable by all manufacturers in this class, and would 
avoid forcing the technical laggards to remove an engine from the 
market when the 2004 emissions standards go into effect. It would allow 
continued production of current engines but would not allow 
backsliding. A 6.0 g/bhp-hr Upper Limit, therefore, is consistent with 
the policy embodied in the NCP regulations.
    EPA recognizes that under the CD this group of heavy-duty engines 
is also required to achieve the 2004 emissions levels by October 2002. 
However, as discussed before, EPA has determined that there is likely 
to be a technological laggard for purposes of meeting the 2004 
standards. The prior deadline in the CD does not change this 
determination, and means only that some manufacturers would also be 
subject to the requirements in the CD, including its compliance and 
enforcement provisions. The CDs allow manufacturers to pay penalties to 
produce engines which emit above the October 2002 emission limits 
defined in the CDs, thus the CDs also provide a mechanism for 
technological laggards to continue to produce today's engines.
    EPA also recognizes that the CD calls for compliance with a 4.0 
NOX standard on the FTP and with a 6.0 NOX limit 
for the Euro III test procedure for today's engines, and the 6.0 g/bhp-
hr UL we are proposing is for the FTP. 2004 MY engines eligible for 
certification under this NCP rule will need to meet the applicable FTP 
standard and will also need to comply with the defeat device 
prohibition. However, a 2004 MY engine with EURO III levels 
significantly higher than its FTP levels would raise significant 
concerns about compliance with the defeat device prohibition. While the 
Euro III is not a regulatory emissions standard in 2004, it is 
representative of typical highway cruise operation and EPA uses EURO 
III emissions levels as a screening tool in evaluating compliance with 
the defeat device prohibition. See Advisory Circular 24-3. If EPA sets 
the UL at 6.0 g/bhp-hr NOX+NMHC for the FTP, continued 
production of engines with EURO III levels comparable to 2001 MY levels 
of 6.0 g/bhp-hr would not be expected to raise significant defeat 
device concerns. However, if EPA were to set the UL at 4.5 g/bhp-hr 
NOX+NMHC for the FTP, an engine with EURO III emissions 
levels of approximately 6.0 g/bhp-hr, like current CD engines, would 
raise very significant concerns about defeat device compliance, based 
on the disparity between FTP and EURO III levels, EPA would not expect 
that such an engine could be certified. Setting an UL at 6.0 g/bhp-hr 
is therefore appropriate as it should allow for the continued 
production of engines with EURO III levels comparable to those allowed 
under the CD for MY 2001.
    We received comments both supporting and opposing an Upper Limit of 
6.0 g/bhp-hr for the heavy-heavy service class. One commenter who 
opposed the 6.0 value suggested that an UL of 4.5 was appropriate for 
the heavy-heavy engines. However, an UL of 4.5 NOX +NMHC 
would require that CD engine manufacturers significantly reduce the 
level of off-cycle emissions for these engines. Such an emission 
reduction would require significant design changes for existing engines 
at the same time design work is underway to meet the 2.5 standard. This 
approach is inconsistent with the policy EPA has used in past NCP 
rulemakings, where the Upper Limit has been established at a level 
which would allow engine manufacturers to continue to focus on 
developing the technology necessary to comply with the new emission 
standards rather than diverting resources to comply with an 
intermediate emission level more stringent than existing products but 
not at the level of the new standard. A more

[[Page 51473]]

detailed discussion of the comments we received and our response to 
those comments is contained in the Response to Comments document for 
this final rule.

D. Use of Penalty Funds

    Some of the comments on the proposed rule suggested that the 
revenues generated by the NCPs should be used for clean air projects, 
such as regional PM and toxics reduction projects and diesel retrofit 
projects. It is not within EPA's authority or ability to direct the use 
of the penalty monies. Section 206(g) of the Clean Air Act, 42 U.S.C. 
Sec. 7525(g), authorizes EPA to establish nonconformance penalties, but 
it does not authorize EPA to retain and use any penalty monies paid by 
a manufacturer. Absent such authority to retain and use penalty monies 
received, the Miscellaneous Receipts Act, 31 U.S.C. Sec. 3302(b), 
requires that such monies be deposited in the General Revenue Fund of 
the U.S. Treasury. Funds deposited in the General Revenue Fund may then 
be appropriated by Congress.

E. Incorporating Factors Not Provided for in the NCP Regulations

    In the NPRM EPA invited comment on whether an adjustment to the NCP 
level should be added to account for the potential competitive benefits 
gained by producing an engine that has better performance 
characteristics compared to a complying engine. EPA invited comment on 
whether the current cost factors used to develop the NCP levels, such 
as warranty and related costs, fully reflected the competitive benefits 
gained in the marketplace by such a non-complying engine. EPA indicated 
there was significant uncertainty in this regard, and that in any case 
it would be hard to quantify this competitive benefit with adequate 
certainty.
    EPA asked for comment on this issue and for input on how to 
accommodate it in protecting the complying manufacturer. Two companies 
supported this concern and one suggested an approach based on including 
the lost profit margin in the NCP. EPA sees no practical way to 
implement this comment. It would require proprietary profit margin, 
cost, price, and perhaps other economic analysis information for this 
industry (e.g., price elasticity) not available to EPA even to evaluate 
it, and even at that it is difficult to judge the degree to which the 
purchaser perception will affect purchase decisions (i.e., how many 
engine purchases will switch to NCP engines based solely on this 
concern). The comments did not provide adequate information to evaluate 
the incorporation of an additional adjustment. Given the uncertainty 
and difficulty in quantifying the purchaser perception element EPA 
cannot incorporate an additional element in the NCP formula at this 
time. Nonetheless, we will continue to consider this issue in the 
future, including evaluating whether there is usable data available to 
quantify this factor for future NCP rules.

F. Fuel Cost

    One of the most significant categories of cost is the cost related 
to the impact of the standards on fuel consumption rates. However, this 
cost element is difficult to estimate because actual fuel costs will 
vary based on the price of the fuel and on the vehicle operation. We 
proposed to use the current fuel price, but we also requested comment 
on the use of an average fuel price. As described below, we now believe 
that a five-year average best approximates future actual fuel costs 
considering the economic significance of changes in fuel consumption 
rates.
    Fuel price varies with time and with location. According to the 
Energy Information Administration (EIA), the national average highway 
diesel fuel price in February of 1999 was 95 cents per gallon (with 
taxes), but in October of 2000 it was $1.67 per gallon (with taxes). 
That represents a 76 percent increase in the fuel price within a two 
year period. Figure 5 shows the variation in diesel fuel prices 
adjusted for inflation. In terms of constant dollars, the price of 
diesel fuel in the late 1990s was unusually low. We believe that a 
five-year average most appropriately addresses the longer term trends 
of fuel prices. Thus, we calculated the fuel consumption impacts using 
a fuel price of $1.29 per gallon for calendar years 2004 and 2005, 
which represents the five-year average retail price of on-highway 
diesel fuel for 1997 through 2001 (EIA estimate) adjusted using the 
Consumer Price Index (CPI) to be equivalent to 2001 dollars, plus 44 
cents for federal and state tax. We use a fuel price of $1.34 per 
gallon for later calendar years to account for the introduction of 
lower sulfur fuel.

[[Page 51474]]

[GRAPHIC] [TIFF OMITTED] TR08AU02.021

    Another important factor in estimating fuel cost is how much fuel a 
model year 2004 vehicle will use over its lifetime. This is most 
important for heavy-heavy duty engines. Some vehicles may be scrapped 
after their regulatory useful life (435,000 miles) while others may be 
rebuilt more than once and not be scrapped until after 2 million miles. 
Thus, the fuel cost could vary by a factor of four from one vehicle to 
another. We addressed this by using estimated average lifetime mileages 
of each service class for our COC50 analysis, and high 
mileage estimates for the COC90 analysis. The mileage 
estimates that we used in our analysis are shown in the table below. 
The Technical Support Document provides more information about how we 
used these mileage estimates (see Chapter III).

Estimates of Lifetime Vehicle Miles Traveled (VMT) Used in Cost Analysis
------------------------------------------------------------------------
                                                  VMT for      VMT used
                                                  average     for COC90
                                                  vehicle      analysis
------------------------------------------------------------------------
                                                  for COC90
Light Heavy...................................      209,000      280,000
Medium Heavy..................................      262,000      343,000
Heavy Heavy...................................      767,000    1,000,000
------------------------------------------------------------------------

IV. Economic Impact

    Because the use of NCPs is optional, manufacturers have the 
flexibility and will likely choose whether or not to use NCPs based on 
their ability to comply with emissions standards. If no HDE 
manufacturer elects to use NCPs, these manufacturers and the users of 
their products will not incur any additional costs related to NCPs. 
NCPs remedy the potential problem of having a manufacturer's engines 
forced out of the marketplace due to that manufacturer's inability to 
conform to new, strict emission standards in a timely manner. Without 
NCPs, a manufacturer which has difficulty certifying HDEs in 
conformance with emission standards or whose engines fail a Selective 
Enforcement Audit has only two alternatives: fix the nonconforming 
engines, perhaps at a prohibitive cost, or do not introduce them into 
commerce. The availability of NCPs provides manufacturers with a third 
alternative: upon payment of a penalty, continue production and 
introduce into commerce an engine that exceeds the standard until an 
emission conformance technique is developed. Therefore, NCPs represent 
a regulatory mechanism that allows affected manufacturers to have 
increased flexibility. A decision to use NCPs may be a manufacturer's 
only way to continue to introduce HDEs into commerce. The NCP rates 
promulgated in this rule will also be used to set the per engine 
penalty under the October 1998 consent decrees between several heavy-
duty diesel engine manufacturers and the EPA. EPA recognizes that if we 
did not set this rule the per engine penalty under fallback provisions 
in the consent decrees would be less. We expect the net difference in 
effect between the rule and the fallback provisions (assuming the rule 
becomes final before October 1, 2002) would be less than $100 million 
in total for any year in which the consent decree penalties are an 
option for the manufacturers.

V. Environmental Impact

    When evaluating the environmental impact of this rule, one must 
keep in mind that, under the Act, NCPs are a consequence of enacting 
new, more stringent emissions requirements for heavy duty engines. 
Emission standards are set at a level that most, but not necessarily 
all, manufacturers can achieve by the model year in which the standard 
becomes effective. Following International Harvester v. Ruckelshaus, 
478 F. 2d 615 (D.C. Cir. 1973), Congress realized the dilemma that 
technology-forcing standards might cause for motor vehicle 
manufacturers, and allowed manufacturers of heavy-duty engines to 
certify nonconforming vehicles/engines upon the payment of an NCP, 
under certain conditions. This mechanism would allow manufacturer(s) 
who cannot meet technology-forcing standards immediately to continue to 
manufacture these nonconforming engines while they tackle the 
technological problems associated with meeting new emission 
standard(s). Thus, as part of the statutory structure to force 
technological improvements while avoiding driving manufacturers out of 
the market, NCPs provide flexibility that fosters long-term

[[Page 51475]]

emissions improvement through the setting of lower emission standards 
at an earlier date than might otherwise be possible. By design, NCPs 
encourage the technological laggard that is using NCPs to reduce 
emission levels to the more stringent standard as quickly as possible.
    However, we believe that the potential exists for there to be more 
widespread use of the NCPs in this rule in comparison to prior NCPs, 
thus indicating the possibility for an environmental impact somewhat 
greater in magnitude than we have suggested in prior NCP rules. 
Nevertheless, we believe that any such impacts would be short-term in 
nature. By including an annual adjustment factor that increases the 
levels of the penalties, the NCP program is structured such that the 
incentives to produce engines that meet the standards increase year-by-
year. The practical impact of this adjustment factor is that the NCPs 
will rapidly become an unattractive option for non-complying 
manufacturers. However, we are not able to predict at this time how 
many manufacturers will make use of the NCPs, how many engine families 
would be subject to the NCP program, or what level of emissions the 
engines will exhibit. Because of these uncertainties we are unable to 
accurately quantify the potential impact the NCPs might have on 
emission inventories, although, as stated above, any impacts are 
expected to be short-term in nature.

VII. Administrative Requirements

A. Regulatory Planning and Review: Executive Order 12866

    Under Executive Order 12866 (58 FR 51735, Oct. 4, 1993), the Agency 
is required to determine whether this regulatory action would be 
``significant'' and therefore subject to review by the Office of 
Management and Budget (OMB) and the requirements of the Executive 
Order. The order defines a ``significant regulatory action'' as any 
regulatory action that is likely to result in a rule that may:
     Have an annual effect on the economy of $100 million or 
more or adversely affect in a material way the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or 
communities;
     create a serious inconsistency or otherwise interfere with 
an action taken or planned by another agency;
     materially alter the budgetary impact of entitlements, 
grants, user fees, or loan programs or the rights and obligations of 
recipients thereof; or,
     raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
the Executive Order.
    Pursuant to the terms of Executive Order 12866, the Office of 
Management and Budget (OMB) has notified EPA that it considers this a 
``significant regulatory action'' within the meaning of the Executive 
Order. This action was submitted to OMB for review as required by 
Executive Order 12866. For this reason, written comments from OMB on 
today's action and documents submitted to OMB are in the public docket 
for this rulemaking.

B. Regulatory Flexibility Analysis

    EPA has determined that it is not necessary to prepare a regulatory 
flexibility analysis in connection with this final rule. EPA has also 
determined that this rule will not have a significant economic impact 
on a substantial number of small entities. For purposes of assessing 
the impact of today's rule on small entities, small entities are 
defined as: (1) A small business that has no more than 1,000 employees; 
(2) a small governmental jurisdiction that is a government of a city, 
county, town, school district or special district with a population of 
less than 50,000; and (3) a small organization that is any not-for-
profit enterprise which is independently owned and operated and is not 
dominant in its field.
    After considering the economic impacts of today's final rule on 
small entities, EPA has concluded that this action will not have a 
significant economic impact on a substantial number of small entities. 
This final rule will not impose any requirements on small entities. The 
NCPs that are established by this final rule are for emission standards 
that pertain to heavy-duty diesel engines. When these emission 
standards were established, the final rulemaking (65 FR 59895, October 
6, 2000) noted that only two small entities were known to be affected. 
Those entities were small businesses that certify alternative fuel 
engines or vehicles, either newly manufactured or modified from 
previously certified gasoline engines. The emission standards for 
heavy-duty diesel engines, for which NCPs are promulgated in this final 
rule, do not pertain to the engines manufactured by these businesses.

C. Compliance with the Paperwork Reduction Act

    The information collection requirements in this final rule have 
been submitted for approval to the Office of Management and Budget 
(OMB) under the Paperwork Reduction Act, 44 U.S.C. 3501 et seq. An 
Information Collection Request (ICR) document has been prepared by EPA 
(ICR No. 1285.05) and a copy may be obtained from Susan Auby by mail at 
U.S. Environmental Protection Agency (2822), Office of Environmental 
Information, Collection Strategies Division, 1200 Pennsylvania Avenue., 
NW., Washington, DC 20460, by email at [email protected], or 
by calling (202) 566-1672. A copy may also be downloaded off the 
internet at http://www.epa.gov/icr. The following ICR document has been 
prepared by EPA:

------------------------------------------------------------------------
             EPA ICR #                              Title
------------------------------------------------------------------------
1285.05...........................  Nonconformance Penalties for Heavy-
                                     Duty Engines and Heavy-Duty
                                     Vehicles, Including Light-Duty
                                     Trucks; Reporting and Recordkeeping
                                     Requirements.
------------------------------------------------------------------------

    The Agency will collect information related to nonconformance 
penalties. This information will be used to ensure compliance with and 
enforce the provisions in this rule. Responses will be mandatory in 
order to complete the certification process. Section 206(g) of the 
Clean Air Act (Act) contains the nonconformance penalty provisions. 
Section 208(a) of the Clean Air Act requires that manufacturers provide 
information the Administrator may reasonably require to determine 
compliance with the regulations; submission of the information is 
therefore mandatory. EPA will consider confidential all information 
meeting the requirements of section 208(c) of the Clean Air Act.
    This collection of information affects an estimated 2 respondents 
with a total of 52 responses per year and an total hour burden of 1,178 
hours, for an estimated 23 hours per response, with estimated total 
annualized costs of $18,200.00 per year. The hours and annual cost of 
information collection activities by a given manufacturer depends on 
manufacturer-specific variables, such as the number of engine families, 
production changes, and so forth. Burden means the total time, effort, 
or financial resources expended by persons to generate, maintain, 
retain, or disclose or provide information to or for a Federal agency. 
This includes the time needed to review instructions; develop, acquire, 
install, and utilize technology and systems for the purposes of 
collecting, validating, and verifying information, processing and

[[Page 51476]]

maintaining information, and disclosing and providing information; 
adjust the existing ways to comply with any previously applicable 
instructions and requirements; train personnel to be able to respond to 
a collection of information; search data sources; complete and review 
the collection of information; and transmit or otherwise disclose the 
information.
    An Agency may not conduct or sponsor, and a person is not required 
to respond to a collection of information unless it displays a 
currently valid OMB control number. The OMB control numbers for EPA's 
regulations are listed in 40 CFR part 9 and 48 CFR Chapter 15.
    Comments are requested on the Agency's need for this information, 
the accuracy of the provided burden estimates, and any suggested 
methods for minimizing respondent burden, including through the use of 
automated collection techniques. Send comments on the ICR to the 
Director, Collection Strategies Division, Office of Environmental 
Information, U.S. Environmental Protection Agency (2822); 1200 
Pennsylvania Ave., NW., Washington, DC 20460; and to the Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
725 17th St., NW., Washington, DC 20503, marked ``Attention: Desk 
Officer for EPA.'' Include the ICR number 1285.05 in any 
correspondence.

D. Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public 
Law 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments and the private sector. Under section 202 of the UMRA, EPA 
generally must prepare a written statement, including a cost-benefit 
analysis, for proposed and final rules with ``Federal mandates'' that 
may result in expenditures to State, local, and tribal governments, in 
the aggregate, or to the private sector, of $100 million or more in any 
one year. Before promulgating an EPA rule for which a written statement 
is needed, section 205 of the UMRA generally requires EPA to identify 
and consider a reasonable number of regulatory alternatives and adopt 
the least costly, most cost-effective or least burdensome alternative 
that achieves the objectives of the rule. The provisions of section 205 
do not apply when they are inconsistent with applicable law. Moreover, 
section 205 allows EPA to adopt an alternative other than the least 
costly, most cost-effective or least burdensome alternative if the 
Administrator publishes with the final rule an explanation why that 
alternative was not adopted.
    Before EPA establishes any regulatory requirements that may 
significantly or uniquely affect small governments, including tribal 
governments, it must have developed under section 203 of the UMRA a 
small government agency plan. The plan must provide for notifying 
potentially affected small governments, enabling officials of affected 
small governments to have meaningful and timely input in the 
development of EPA regulatory proposals with significant Federal 
intergovernmental mandates, and informing, educating, and advising 
small governments on compliance with the regulatory requirements.
    This final rule contains no Federal mandates (under the regulatory 
provisions of Title II of the UMRA) for State, local, or tribal 
governments or the private sector. The final rule will impose no 
enforceable duty on any State, local or tribal governments or the 
private sector.
    EPA has determined that this rule does not contain a Federal 
mandate that may result in expenditures of $100 million or more for 
State, local, and tribal governments, in the aggregate, or the private 
sector in any one year. Because the use of NCPs is optional, 
manufacturers have the flexibility and will likely choose whether or 
not to use NCPs based on their ability to comply with emissions 
standards. Without NCPs, manufacturers must either modify the engine to 
be in compliance with the standards or withdraw the engine from the 
marketplace. The availability of NCPs provides manufacturers with a 
third alternative: continue production and introduce into commerce upon 
payment of a penalty an engine that exceeds the standard until an 
emission conformance technique is developed. Therefore, NCPs represent 
a regulatory mechanism that allows affected manufacturers to have 
increased flexibility. Thus, today's rule is not subject to the 
requirements of sections 202 and 205 of the UMRA.
    EPA has determined that this rule contains no regulatory 
requirements that might significantly or uniquely affect small 
governments. The requirements of this rule apply only to the 
manufacturers of heavy-duty diesel engines.

E. Executive Order 13175: Consultation and Coordination With Indian 
Tribal Governments

    Executive Order 13175, entitled ``Consultation and Coordination 
with Indian Tribal Governments'' (65 FR 67249, November 6, 2000), 
requires EPA to develop an accountable process to ensure ``meaningful 
and timely input by tribal officials in the development of regulatory 
policies that have tribal implications.''
    This final rule does not have tribal implications as specified in 
Executive Order 13175. The non-conformance penalties and associated 
requirements in this final rule apply only to heavy-duty diesel engine 
manufacturers.

F. National Technology Transfer and Advancement Act

    Section 12(d) of the National Technology Transfer and Advancement 
Act of 1995 (NTTAA), Section 12(d) of Public Law 104-113, directs EPA 
to use voluntary consensus standards in its regulatory activities 
unless to do so would be inconsistent with applicable law or otherwise 
impractical. Voluntary consensus standards are technical standards 
(e.g., materials specifications, test methods, sampling procedures, and 
business practices) developed or adopted by voluntary consensus 
standards bodies. The NTTAA directs EPA to provide Congress, through 
OMB, explanations when the Agency decides not to use available and 
applicable voluntary consensus standards.
    This final rule does not involve technical standards. Therefore, 
EPA did not consider the use of any voluntary consensus standards.

G. Executive Order 13045: Children's Health Protection

    Executive Order 13045: ``Protection of Children from Environmental 
Health Risks and Safety Risks'' (62FR19885, April 23, 1997) applies to 
any rule that: (1) Is determined to be ``economically significant'' as 
defined under Executive Order 12866, and (2) concerns an environmental 
health or safety risk that EPA has reason to believe may have a 
disproportionate effect on children. If the regulatory action meets 
both criteria, the Agency must evaluate the environmental health or 
safety effects of the planned rule on children, and explain why the 
planned regulation is preferable to other potentially effective and 
reasonably feasible alternatives considered by the Agency.
    EPA interprets Executive Order 13045 as applying only to those 
regulatory actions that are based on health or safety risks, such that 
the analysis required under section 5-501 of the Order has the 
potential to influence the regulation. This final rule is not subject 
to Executive Order 13045 because it does not establish an environmental 
standard intended to mitigate health or safety risks and because it is 
not economically significant as defined in Executive Order 12866.

[[Page 51477]]

H. Executive Order 13132: Federalism

    Executive Order 13132, entitled ``Federalism'' (64 FR 43255, August 
10, 1999), requires EPA to develop an accountable process to ensure 
``meaningful and timely input by State and local officials in the 
development of regulatory policies that have federalism implications.'' 
``Policies that have federalism implications'' is defined in the 
Executive Order to include regulations that have ``substantial direct 
effects on the States, on the relationship between the national 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government.''
    This final rule does not have federalism implications. It will not 
have substantial direct effects on the States, on the relationship 
between the national government and the States, or on the distribution 
of power and responsibilities among the various levels of government, 
as specified in Executive Order 13132. This final rule adopts NCPs for 
national emission standards for certain categories of motor vehicles. 
Thus, Executive Order 13132 does not apply to this rule.

I. Executive Order 13211: Energy Effects

    This final rule is not a ``significant energy action'' as defined 
in Executive Order 13211, ``Actions Concerning Regulations That 
Significantly Affect Energy Supply, Distribution, or Use'' (66 FR 
28355, May 22, 2001) because it is not likely to have a significant 
adverse effect on the supply, distribution, or use of energy. As 
described in the 2000 final rule in which we affirmed the 2004 standard 
(65 FR 59896, Oct. 6, 2000), we have concluded that there would be no 
net long-term change in the fuel consumption performance of heavy-duty 
diesel engines as a result of the 2004 model year emission standards. 
However, there may be the potential for higher fuel consumption rates 
in the short term as diesel engine manufacturers work to balance the 
inherent tradeoff between control of NOX emissions and fuel 
consumption. The availability of NCPs for the 2004 and later model 
years provides manufacturers with another option for balancing this 
tradeoff and working towards optimizing fuel consumption and 
emissions--they would be able to use NCPs to emit somewhat higher 
NOX levels than they would otherwise be allowed, while at 
the same time avoiding undesirable fuel consumption impacts. Thus, we 
have concluded that this final rule is not likely to have any 
significant adverse energy effects.

J. Congressional Review Act

    The Congressional Review Act, 5 U.S.C. 801 et seq., as added by the 
Small Business Regulatory Enforcement Fairness Act of 1996, generally 
provides that before a rule may take effect, the agency promulgating 
the rule must submit a rule report, which includes a copy of the rule, 
to each House of the Congress and to the Comptroller General of the 
United States. EPA will submit a report containing this rule and other 
required information to the U.S. Senate, the U.S. House of 
Representatives, and the Comptroller General of the United States prior 
to publication of the rule in the Federal Register. A ``major rule'' 
cannot take effect until 60 days after it is published in the Federal 
Register. This action is not a ``major rule'' as defined by 5 U.S.C. 
804(a).

List of Subjects in 40 CFR Part 86

    Environmental protection, Administrative practice and procedure, 
Confidential business information, Motor vehicle pollution, Reporting 
and recordkeeping requirements.

    Dated: August 1, 2002.
Christine Todd Whitman,
Administrator.

    For the reasons set forth in the preamble, chapter I, title 40 of 
the Code of Federal Regulations is amended as follows:

PART 86--CONTROL OF EMISSIONS FROM NEW AND IN-USE HIGHWAY VEHICLES 
AND ENGINES

    1. The authority citation for part 86 continues to read as follows:

    Authority: 42 U.S.C. 7401--7521(l) and 7521(m)--7671q.

    2. Section 86.1105-87 is amended by revising paragraph (e) and by 
adding paragraph (i), to read as follows:


Sec. 86.1105-87  Emission standards for which nonconformance penalties 
are available.

* * * * *
    (e) The values of COC50, COC90, and 
MC50 in paragraphs (a) and (b) of this section are expressed 
in December 1984 dollars. The values of COC50, 
COC90, and MC50 in paragraphs (c) and (d) of this 
section are expressed in December 1989 dollars. The values of 
COC50, COC90, and MC50 in paragraph 
(f) of this section are expressed in December 1991 dollars. The values 
of COC50, COC90, and MC50 in 
paragraphs (g) and (h) of this section are expressed in December 1994 
dollars. The values of COC50, COC90, and 
MC50 in paragraph (i) of this section are expressed in 
December 2001 dollars. These values shall be adjusted for inflation to 
dollars as of January of the calendar year preceding the model year in 
which the NCP is first available by using the change in the overall 
Consumer Price Index, and rounded to the nearest whole dollar in 
accordance with ASTM E29-67 (reapproved 1980), Standard Recommended 
Practice for Indicating Which Places of Figures are to be Considered 
Significant in Specified Limiting Values. The method was approved by 
the Director of the Federal Register in accordance with 5 U.S.C. 552(a) 
and 1 CFR part 51. This document is available from ASTM International, 
100 Barr Harbor Drive, P.O. Box C700, West Conshohocken, PA 19428-2959, 
and is also available for inspection as part of Docket A-91-06, located 
at the Central Docket Section, EPA, 401 M Street, SW., Washington, DC 
or at the Office of the Federal Register, 800 North Capitol Street, 
NW., suite 700, Washington, DC. This incorporation by reference was 
approved by the Director of the Federal Register on January 13, 1992. 
These materials are incorporated as they exist on the date of the 
approval and a notice of any change in these materials will be 
published in the Federal Register.
* * * * *
    (i) Effective in the 2004 model year, NCPs will be available for 
the following emission standard:
    (1) Diesel heavy-duty engine non-methane hydrocarbon plus oxides of 
nitrogen standard of 2.4 grams per brake horsepower-hour (or 
alternatively, 2.5 grams per brake horsepower-hour with a limit on non-
methane hydrocarbon emissions of 0.5 grams per brake horsepower-hour), 
in Sec. 86.004-11(a)(1)(i).
    (i) For light heavy-duty diesel engines:
    (A) The following values shall be used to calculate an NCP in 
accordance with Sec. 86.1113-87(a):
    (1) COC50: $1,240.
    (2) COC90: $2,710.
    (3) MC50: $2,000 per gram per brake horsepower-hour.
    (4) F: 1.3.
    (5) UL: 4.5 grams per brake horsepower-hour; notwithstanding 
Sec. 86.1104-91.
    (B) The following factor shall be used to calculate the engineering 
and development component of the NCP for the standard set forth in 
Sec. 86.004-11(a)(1)(i) in accordance with Sec. 86.1113-87(h): 0.403.
    (ii) For medium heavy-duty diesel engines:
    (A) The following values shall be used to calculate an NCP in 
accordance with Sec. 86.1113-87(a):

[[Page 51478]]

    (1) COC50: $2,740.
    (2) COC90: $4,930.
    (3) MC50: $1,400 per gram per brake horsepower-hour.
    (4) F: 1.3.
    (5) UL: 4.5 grams per brake horsepower-hour; notwithstanding 
Sec. 86.1104-91.
    (B) The following factor shall be used to calculate the engineering 
and development component of the NCP for the standard set forth in 
Sec. 86.004-11(a)(1)(i) in accordance with Sec. 86.1113-87(h): 0.197.
    (iii) For heavy heavy-duty diesel engines:
    (A) The following values shall be used to calculate an NCP in 
accordance with Sec. 86.1113-87(a):
    (1) COC50: $6,810.
    (2) COC90: $12,210.
    (3) MC50: $5,600 per gram per brake horsepower-hour.
    (4) F: 1.3.
    (5) UL: 6.0 grams per brake horsepower-hour; notwithstanding 
Sec. 86.1104-91.
    (B) The following factor shall be used to calculate the engineering 
and development component of the NCP for the standard set forth in 
Sec. 86.004-11(a)(1)(i) in accordance with Sec. 86.1113-87(h): 0.090.
    (iv) For diesel urban bus engines:
    (A) The following values shall be used to calculate an NCP in 
accordance with Sec. 86.1113-87(a):
    (1) COC 50: $3,930.
    (2) COC90: $6,660.
    (3) MC50: $3,800 per gram per brake horsepower-hour.
    (4) F: 1.3.
    (5) UL: 4.5 grams per brake horsepower-hour; notwithstanding 
Sec. 86.1104-91.
    (B) The following factor shall be used to calculate the engineering 
and development component of the NCP for the standard set forth in 
Sec. 86.004-11(a)(1)(i) in accordance with Sec. 86.1113-87(h): 0.155.
    (2) [Reserved]

[FR Doc. 02-19981 Filed 8-7-02; 8:45 am]
BILLING CODE 6560-50-P