[Federal Register Volume 69, Number 7 (Monday, January 12, 2004)]
[Rules and Regulations]
[Pages 1824-1835]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-458]



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Part III





Environmental Protection Agency





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40 CFR Part 90



Amendments to the Phase 2 Requirements for Spark-Ignition Nonroad 
Engines at or Below 19 Kilowatts; Direct Final Rule and Proposed Rule

  Federal Register / Vol. 69, No. 7 / Monday, January 12, 2004 / Rules 
and Regulations  

[[Page 1824]]


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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 90

[AMS-FRL-7606-1]
RIN 2060-AL88


Amendments to the Phase 2 Requirements for Spark-Ignition Nonroad 
Engines at or Below 19 Kilowatts

AGENCY: Environmental Protection Agency (EPA).

ACTION: Direct final rule.

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SUMMARY: EPA adopted Phase 2 requirements for spark-ignition nonroad 
handheld engines at or below 19 kilowatts in April 2000. The Phase 2 
requirements are being phased-in between 2002 and 2007. Based on 
initial experience with the Phase 2 program for handheld engines, we 
are adopting several amendments intended to provide additional 
compliance flexibility to engine manufacturers to smooth the transition 
to the Phase 2 requirements. The amendments contain two revisions 
intended to increase flexibility in the averaging, banking, and trading 
program as it applies to handheld engines. First, the credit discounts 
and credit bonuses will be eliminated from the program. Second, 
manufacturers will be allowed to carry limited credit deficits during 
the phase-in period (through 2007) provided the deficits are made up 
within a set period of time. The amendments also contain minor changes 
to the certification requirements intended to help manufacturers 
respond in a more efficient manner to unexpected variations in the 
emission levels from production engines while still achieving the 
required emission objectives.

DATES: This direct final rule is effective on March 12, 2004 without 
further notice, unless we receive adverse comments by February 11, 2004 
or receive a request for a public hearing by January 27, 2004. We are 
also publishing a notice of proposed rulemaking in the ``Proposed 
Rules'' section of today's Federal Register, which matches the 
substance of this direct final rule. If we receive any adverse comments 
on this direct final rule or receive a request for a hearing within the 
time frame described above, we will publish a timely withdrawal in the 
Federal Register informing the public that this rule will not take 
effect. We will then take final action to amend the Phase 2 
requirements for spark-ignition nonroad engines at or below 19 
kilowatts in a final rule based on the accompanying proposal. We will 
not institute a second comment period.

ADDRESSES: Comments: All comments and materials relevant to this action 
should be submitted to Public Docket No. OAR-2003-0195 at the following 
address by the date indicated under DATES above.
    Docket: Materials relevant to this rulemaking are in Public Dockets 
A-96-55 and OAR-2003-0195 at the following address: EPA Docket Center 
(EPA/DC), Public Reading Room, Room B102, EPA West Building, 1301 
Constitution Avenue, NW., Washington, DC. The EPA Docket Center Public 
Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday through 
Friday, except on government holidays. You can reach the Air Docket by 
telephone at (202) 566-1742 and by facsimile at (202) 566-1741. You may 
be charged a reasonable fee for photocopying docket materials, as 
provided in 40 CFR part 2.

FOR FURTHER INFORMATION CONTACT: Phil Carlson, Assessment and Standards 
Division, e-mail [email protected], voice-mail (734) 214-4636.

SUPPLEMENTARY INFORMATION: 

I. General Information

A. Regulated Entities

    This action will affect companies and persons that manufacture, 
sell, or import into the United States spark-ignition nonroad handheld 
engines at or below 19 kilowatts. Affected categories and entities 
include the following:

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                                       NAICS  Code
              Category                     \1\                Examples of potentially affected entities
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Industry...........................          333112  Lawn & Garden Equipment Manufacturers.
Industry...........................          336618  Other Engine Equipment Manufacturers.
----------------------------------------------------------------------------------------------------------------
\1\ North American Industry Classification System (NAICS).

    This list is not intended to be exhaustive, but rather provides a 
guide regarding entities likely to be affected by this action. To 
determine whether particular activities may be affected by this action, 
you should carefully examine the regulations. You may direct questions 
regarding the applicability of this action as noted in FOR FURTHER 
INFORMATION CONTACT.

B. How Can I Get Copies of This Document?

    1. Docket. EPA has established an official public docket for this 
action under Air Docket Number OAR-2003-0195. The official public 
docket consists of the documents specifically referenced in this 
action, any public comments received, and other information related to 
this action. Although a part of the official docket, the public docket 
does not include Confidential Business Information (CBI) or other 
information whose disclosure is restricted by statute. The official 
public docket is the collection of materials that is available for 
public viewing at the Air Docket in the EPA Docket Center, (EPA/DC) EPA 
West, Room B102, 1301 Constitution Ave., NW., Washington, DC. The EPA 
Docket Center Public Reading Room is open from 8:30 a.m. to 4:30 p.m., 
Monday through Friday, excluding legal holidays. The telephone number 
for the Public Reading Room is (202) 566-1744, and the telephone number 
for the Air Docket is (202) 566-1742.
    2. Electronic Access. This direct final rule is available 
electronically from the EPA Internet Web site. This service is free of 
charge, except for any cost incurred for internet connectivity. The 
electronic version of this final rule is made available on the date of 
publication on the primary Web site listed below. The EPA Office of 
Transportation and Air Quality also publishes Federal Register notices 
and related documents on the secondary Web site listed below.
    1. http://www.epa.gov/docs/fedrgstr/EPA-AIR (either select desired 
date or use Search features).
    2. http://www.epa.gov/otaq (look in What's New or under the 
specific rulemaking topic).
    Please note that due to differences between the software used to 
develop the documents and the software into which the document may be 
downloaded, format changes may occur.

C. How and to Whom Do I Submit Comments?

    You may submit comments electronically, by mail, by facsimile, or 
through hand delivery/courier. To ensure proper receipt by EPA, 
identify the appropriate docket identification number in the subject 
line on the first page of your comment. Please ensure

[[Page 1825]]

that your comments are submitted within the specified comment period. 
Comments received after the close of the comment period will be marked 
``late.'' EPA is not required to consider these late comments.
    1. Electronically. If you submit an electronic comment as 
prescribed below, EPA recommends that you include your name, mailing 
address, and an e-mail address or other contact information in the body 
of your comment. Also include this contact information on the outside 
of any disk or CD ROM you submit, and in any cover letter accompanying 
the disk or CD ROM. This ensures that you can be identified as the 
submitter of the comment and allows EPA to contact you in case EPA 
cannot read your comment due to technical difficulties or needs further 
information on the substance of your comment. EPA's policy is that EPA 
will not edit your comment, and any identifying or contact information 
provided in the body of a comment will be included as part of the 
comment that is placed in the official public docket, and made 
available in EPA's electronic public docket. If EPA cannot read your 
comment due to technical difficulties and cannot contact you for 
clarification, EPA may not be able to consider your comment.
    i. EPA dockets. Your use of EPA's electronic public docket to 
submit comments to EPA electronically is EPA's preferred method for 
receiving comments. Go directly to EPA Dockets at http://www.epa.gov/edocket, and follow the online instructions for submitting comments. 
Once in the system, select ``search,'' and then key in Docket ID No. 
OAR-2003-0195. The system is an ``anonymous access'' system, which 
means EPA will not know your identity, e-mail address, or other contact 
information unless you provide it in the body of your comment.
    ii. E-mail. Comments may be sent by electronic mail (e-mail) to [email protected] Attention Air Docket ID No. OAR-2003-0195. In 
contrast to EPA's electronic public docket, EPA's e-mail system is not 
an ``anonymous access'' system. If you send an e-mail comment directly 
to the Docket without going through EPA's electronic public docket, 
EPA's e-mail system automatically captures your e-mail address. E-mail 
addresses that are automatically captured by EPA's e-mail system are 
included as part of the comment that is placed in the official public 
docket, and made available in EPA's electronic public docket.
    iii. Disk or CD ROM. You may submit comments on a disk or CD ROM 
that you mail to the mailing address identified in ADDRESSES above. 
These electronic submissions will be accepted in WordPerfect or ASCII 
file format. Avoid the use of special characters and any form of 
encryption.
    2. By Mail. Send two copies of your comments to: Air Docket, 
Environmental Protection Agency, Mailcode: 6102T, 1200 Pennsylvania 
Ave., NW., Washington, DC, 20460, Attention Docket ID No. OAR-2003-
0195.
    3. By Hand Delivery or Courier. Deliver your comments to: EPA 
Docket Center, Room B102, EPA West Building, 1301 Constitution Avenue, 
NW., Washington, DC, Attention Air Docket ID No. OAR-2003-0195. Such 
deliveries are only accepted during the Docket's normal hours of 
operation as identified in ADDRESSES above.
    4. By Facsimile. Fax your comments to: (202) 566-1741, Attention 
Docket ID No. OAR-2003-0195.

II. Summary of Rule

A. What Is the History of the Phase 2 Handheld Engine Rule?

    The development of the Phase 2 regulations for handheld nonroad 
spark-ignition (SI) engines at or below 19 kilowatts (kW) started in 
1992 while the Phase 1 standards were also being developed. Initially, 
a formal regulatory negotiation process was attempted.
    After it became clear that the disparate interests of the multiple 
parties would not result in an agreement, the regulatory negotiation 
process concluded without reaching consensus in February 1996. 
Thereafter, EPA developed the framework for a Phase 2 handheld rule 
which was described in a Statement of Principles signed by 
manufacturers representing a significant portion of the United States 
handheld equipment market and by other stakeholders. The Statement of 
Principles was issued as part of an Advance Notice of Proposed 
Rulemaking on March 27, 1997 (see 62 FR 14740). The Statement of 
Principles for handheld engines formed the basis of requirements 
proposed in the Phase 2 Notice of Proposed Rulemaking (NPRM) on January 
27, 1998 (see 63 FR 3950). (The January 1998 NPRM proposed standards 
for both handheld and nonhandheld nonroad SI engines at or below 19 kW. 
We finalized Phase 2 standards and compliance program requirements for 
Class I and Class II nonhandheld nonroad SI engines at or below 19 kW 
in a separate final rulemaking on March 30, 1999 (see 64 FR 15208).)
    The January 1998 NPRM contained a lengthy discussion of the 
proposed Phase 2 standards for handheld engines, the expected costs of 
their implementation, and the technologies that we expected 
manufacturers would use to meet the standards. The January 1998 NPRM 
also discussed the potential costs and benefits of adopting more 
stringent standards such as the second phase of standards that were 
under consideration by the California Air Resources Board (ARB) at that 
time.
    Upon reviewing information supplied during and after the comment 
period for the January 1998 NPRM, we determined that it was desirable 
to get further details regarding the technological feasibility, cost 
and lead time implications of meeting handheld engine standards more 
stringent than those contained in the January 1998 NPRM. For the 
purpose of gaining additional information on feasibility, cost and lead 
time implications of more stringent standards, we had several meetings, 
phone conversations, and written correspondence with specific engine 
manufacturers, with industry associations representing engine and 
equipment manufacturers, with developers of emission control 
technologies and suppliers of emission control hardware, with 
representatives of state regulatory associations, and with members of 
Congress. We published a Notice of Availability on December 1, 1998 
(see 63 FR 66081) highlighting the additional information gathered in 
response to the January 1998 NPRM and continued having discussions with 
various parties regarding low emission technologies for the small SI 
handheld engine market.
    After the publication of the Phase 2 NPRM in January 1998, members 
of the industry provided data to EPA which indicated that rapid 
advances in emission reduction technologies for handheld engines were 
in the offing. After having reviewed the most up-to-date information 
available on these new technologies, we believed the information 
supported Phase 2 standards for handheld engines that were 
significantly more stringent than those proposed in the January 1998 
NPRM and even more stringent than the second phase of standards that, 
by that time, had been adopted by the California ARB. In light of this 
new information, and in the interest of providing an opportunity for 
public comment on the stringent levels being considered for the Phase 2 
handheld engine emission standards and the potential technologies 
available for meeting such standards, we reproposed Phase 2 regulations 
for handheld engines in a July 28, 1999 Supplemental NPRM (see 64 FR 
40940). The July 1999

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Supplemental NPRM proposed Phase 2 hydrocarbon plus oxides of nitrogen 
(HC+NOX) standards of 50 grams per kilowatt-hour (g/kW-hr) 
for Class III and Class IV engines and of 72 g/kW-hr for Class V 
engines, phased in over several years. The reproposal also proposed to 
include handheld engines in an averaging, banking, and trading program 
for all nonroad small SI engines that had been adopted in the separate 
March 1999 final rule for nonhandheld engines. The July 1999 
Supplemental NPRM also proposed revised compliance program requirements 
for handheld engines, including requirements for a production line 
testing program. Most of the proposed compliance program changes were 
intended to make the handheld engine compliance program the same as the 
requirements finalized for nonhandheld engines in March 1999 and to 
establish a consistent approach to compliance for all nonroad small SI 
engines.
    The Phase 2 final rule for Class III, Class IV, and Class V 
handheld engines was finalized on April 25, 2000 (see 65 FR 24268). 
Table 1 summarizes the Phase 2 HC+NOX emission standards 
adopted for Class III, Class IV, and Class V handheld engines and when 
the standards are scheduled to take effect. In response to comments 
submitted on the July 1999 Supplemental NPRM, the standards and 
implementation schedule contained in the Phase 2 final rule for 
handheld engines reflected a four year phase in schedule instead of a 
five year phase in schedule as proposed in the Supplemental NPRM. When 
fully phased in, these Phase 2 standards were projected to result in an 
estimated 70 percent annual reduction in combined HC+NOX 
emissions from small SI handheld engines compared to the Phase 1 
emission requirements for such engines.

                        Table 1.--Phase 2 HC+NOX Emission Standards for Handheld Engines
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                                                            HC+NOX standards (g/kW-hr) by model year
                                              ------------------------------------------------------------------
                 Engine class                                                                          2007 and
                                                  2002       2003       2004       2005       2006       later
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Class III....................................        238        175        113         50         50          50
Class IV.....................................        196        148         99         50         50          50
Class V......................................  .........  .........        143        119         96          72
----------------------------------------------------------------------------------------------------------------

    Table 2 summarizes the technologies we concluded were capable of 
meeting the newly adopted Phase 2 standards for handheld engines by 
engine class. The compression wave technology and the stratified 
scavenging with lean combustion design are based on 2-stroke engine 
designs which are used to power the great majority handheld 
applications.

                                 Table 2.--Potential Technologies for Meeting the Phase 2 Standards for Handheld Engines
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            Engine class                                                                 Technologies
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III.................................  --Compression wave technology + low-medium efficiency catalyst.
                                      --Stratified scavenging with lean combustion + medium-high efficiency catalyst.
                                      --4-Stroke.
IV..................................  --Compression wave technology.
                                      --Compression wave technology + low efficiency catalyst.
                                      --Stratified scavenging with lean combustion + medium efficiency catalyst.
                                      --4-Stroke.
V...................................  --Compression wave technology.
                                      --Stratified scavenging with lean combustion.
                                      --4-Stroke (on certain applications).
--------------------------------------------------------------------------------------------------------------------------------------------------------

    To help engine manufacturers meet the Phase 2 HC+NOX 
standards, we adopted provisions to include Phase 2 handheld engines in 
the averaging, banking and trading (ABT) program, previously adopted in 
the March 1999 final rule for Phase 2 nonhandheld engines. The 
combination of the declining Phase 2 handheld standards and the ABT 
program were intended to help manufacturers make an orderly and 
efficient transition from their existing Phase 1 engine designs and 
technologies to those able to meet the Phase 2 requirements and to 
provide an incentive for the early introduction of clean engines. The 
basic framework of the ABT program adopted for handheld engines is the 
same as the program previously adopted for nonhandheld engines. 
However, to address comments submitted on the July 1999 Supplemental 
NPRM relating to the stringency of the phase-in standards and the 
periods, we adopted a number of unique provisions for handheld engines.
    The ABT program is an integral part of the Phase 2 
HC+NOX standards adopted for handheld engines. Averaging 
means the exchange of emission credits among engine families within a 
given engine manufacturer's product line. Averaging allows a 
manufacturer to certify one or more engine families to Family Emissions 
Limits (FELs) above the applicable emission standard. However, the 
increased emissions have to be offset by one or more engine families 
certified to FELs below the same emission standard, such that the 
average emissions in a given model year from all of the manufacturer's 
families (weighted by various parameters including engine power, useful 
life, and number of engines produced) are at or below the level of the 
emission standard. Banking means the retention of emission credits by 
the engine manufacturer generating the credits for use in future model 
year averaging or trading. Trading means the exchange of emission 
credits between engine manufacturers which then can be used for 
averaging purposes, banked for future use, or traded to another engine 
manufacturer.
    Under the April 2000 rule's ABT provisions for handheld engines 
(those promulgated in Sec. Sec.  90.201 through 90.220), manufacturers 
are able to select

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from two options for the purpose of generating credits. One we refer to 
as the ``Normal'' program, the second as the ``Optional Transition Year 
Program.'' These two programs have some significantly different design 
parameters, so credits from the two programs may be used only in the 
program in which they are generated.
    Under the ``Normal'' credit program of the April 2000 rule, 
manufacturers certifying Class III or IV engine families with FELs at 
or below 72 g/kW-hr and Class V engine families with FELs at or below 
87 g/kW-hr may generate credits that have an unlimited credit life. 
Such credits are available to the manufacturer for the duration of the 
Phase 2 program and are not discounted in any manner. Under the 
``Normal Credit'' program, credits generated by Class III or IV engine 
families certified with FELs above 72 g/kW-hr and Class V engine 
families with FELs above 87 g/kW-hr can be used by a manufacturer in 
the model year in which they are generated for its own averaging 
purposes, or traded to another manufacturer to be used for averaging 
purposes in that model year. However, such credits may not be carried 
over to the next model year (i.e., the credits cannot be banked), 
including when traded to another manufacturer.
    Alternatively under the April 2000 regulations, a manufacturer may 
choose to have a family participate in the ``Optional Transition Year'' 
credit program. Under this program, any family with FELs below the 
applicable phase-in standards shown in Table 1 is eligible to generate 
credits. However, these credits are progressively discounted the higher 
the family's FEL is compared to the final standards for that class. For 
example, in Class IV, a family with an FEL of 87 g/kW-hr or higher in 
model year 2002 would have its credits discounted by 75 percent if they 
are to be banked for use in future model years. If the family's FEL was 
equal to 72 g/kW-hr but less than 87 g/kW-hr, its credits would be 
discounted by 50 percent before being banked for use in future model 
years. This combination of ability to generate credits with families of 
higher emission levels but discounting the credits for these higher-
emitting engines was intended to provide an increased incentive for 
manufacturers to make interim emission improvements while preserving 
the environmental benefits of the Phase 2 program. The ``Optional 
Transition Year'' program also provides an additional incentive for 
manufacturers to produce especially clean equipment by providing a 25 
percent credit bonus for engines certified with an FEL below specified 
levels in the first two years of the phase-in period.
    ``Optional Transition Year'' credits have a limited life and 
application under the April 2000 regulations. They may be used without 
limitation through the 2007 model year. For model years 2008 through 
2010, they may also be used, but only if the manufacturer's production- 
and power-weighted average HC+NOX emission level is below an 
emission level determined by production-weighting the manufacturer's 
product line assuming emission levels of 72 g/kW-hr for Class III and 
IV engines and 87 g/kW-hr for Class V engines. The ``Optional 
Transition Year'' program expires at the end of the 2010 model year, 
under the April 2000 rules.
    The provisions related to credit generation in these two programs 
were revised in the April 2000 final rule in response to comments on 
the Supplemental NPRM. At the time, we believed the approach adopted in 
the final rule was necessary to ensure that the ABT program did not 
contribute to a significant delay in implementation of the low-emitting 
technologies envisioned under the Phase 2 program, a risk under the 
proposed program which commenters raised to us in comments on the 
Supplemental NPRM. Without the limitations on credit generation, we 
were concerned that manufacturers could certify marginally cleaner 
engines, especially during the first years of the phase in period when 
the fleet average standards were the highest, and generate enough 
credits to significantly delay implementation of technologies meeting 
the long term standards (i.e., 50 g/kW-hr for Classes III and IV and 72 
g/kW-hr for Class V) for a significant portion of the fleet. We noted 
that generation of a significant amount of credits through short-term 
engine improvements that would not result in compliance with either 
California's standards or the final Phase 2 standards was an 
unacceptable outcome if it caused delay of the ultimate transition to 
cleaner technology.
    We also adopted a Production Line Testing (PLT) program for Phase 2 
handheld engines. The intent of the PLT program is to require a sample 
of production line engines to be tested for emission performance to 
assure that the certified emissions levels demonstrated on production 
prototypes are being achieved in mass production. The amount of PLT 
testing required by the manufacturer depends on how close the test 
results from the initial engines tested are to the applicable 
standards. If the initial test results indicate the design is well 
below the applicable standards, few engines need to be tested. For 
those designs where the test results indicate emission levels are very 
close to the applicable standards, additional tests are required to 
make sure the design is being produced with acceptable emission 
performance. The PLT program requires manufacturers to conduct testing 
on each of their engine families (unless they have been relieved of 
this requirement under a small-volume flexibility provision). The 
maximum sample size required for each engine family is 30 engines or 1 
percent of a family's projected production, whichever is smaller. 
However, the actual number of tests ultimately required is determined 
by the testing results.
    In adopting the Phase 2 standards for handheld engines, we 
concluded that the standards adopted, considering the lead time 
provided and other flexibility provisions such as averaging, banking, 
and trading, were technologically feasible for the handheld industry 
and appropriate under section 213 of the Clean Air Act. At the same 
time, we recognized that certain manufacturers who would be subject to 
the Phase 2 provisions believed that the standards may not be 
technologically feasible for them. This issue was most clearly raised 
with respect to the Class V standards. While EPA's adoption of the 
standards reflected our view that the Class V standards were 
achievable, we also believed that it was appropriate in responding to 
the manufacturers' comments and concerns to invite all members of the 
regulated industry as well as other interested parties to continue to 
explore the issue of technological feasibility of the Class V standards 
as industry made progress in moving towards implementation of the Phase 
2 program. Therefore, in the April 2000 final rule, we stated our 
intent to perform a study of the technological feasibility of the Phase 
2 Class V standards, to be completed by the end of 2002. We noted that 
the intent of the technology study was to focus on availability of 
technology, certification data, in-use performance, and other factors 
of interest.
    Shortly after the April 2000 final rule was published, two members 
of the industry sued EPA over the Phase 2 handheld engine requirements. 
There were three main points in the lawsuit. First, they claimed that 
the Phase 2 standards did not meet the Clean Air Act requirement to 
provide the best balance of factors. Second, they claimed the standards 
were not supported by substantial evidence in the record. Last,

[[Page 1828]]

they claimed that we did not follow proper procedural requirements of 
the Clean Air Act with regard to changes made between the Supplemental 
NPRM and the FRM, specifically citing the 4-year phase-in period and 
the significantly revised ABT programs. In June, 2001, the United 
States Court of Appeals for the District of Columbia Circuit rejected 
all of industry's substantive and procedural challenges to the Phase 2 
rule, and upheld EPA's rules as reasonably supported by substantial 
evidence. Husqvarna AB v. EPA, 254 F.3d 195 (DC Cir. 2001).
    In the Fall of 2001, EPA began preliminary investigation of 
industry's progress in complying with the fully phased-in Class V 
emission standard of 72 g/kW-hr HC+NOX. (As noted earlier, 
as part of the April 2000 FRM we committed to perform a study of the 
technological feasibility of the Phase 2 Class V standards.) The 
investigation focused on certification information for engines 
currently certified to meet the Phase 2 standards and on discussions 
with certain manufacturers regarding promising Phase 2 technologies.
    The results of the preliminary investigation showed that 
manufacturers were focusing their Phase 2 development efforts primarily 
on Class IV engines. (As noted earlier in Table 1, the Phase 2 
standards for Class IV engines took effect in 2002--two years before 
the Class V standards--and become more stringent each year until 2005.) 
The investigation also showed that while a small number of Class V 
engine families were certified with HC+NOX levels below 72 
g/kW-hr, little work had been done with regard to the majority of Class 
V engines. Given the limited information available on Class V engines, 
we drafted a memorandum and placed it in the small engine Phase 2 
docket (EPA Air Docket A-96-55) in early 2002 noting that it would be 
premature to initiate the Class V feasibility study described in the 
April 2000 final rule. We also noted that we would continue to monitor 
the status of technology development for handheld engines and make 
further progress in conducting the Class V technology review during 
2002.
    Beginning in 2002, the Phase 2 requirements for Classes III and IV 
began to take effect. As noted earlier in Table 1, the Phase 2 
standards are based on a declining average over four years in each 
class. (The Phase 2 standards for Class V engines do not start until 
2004.) As expected, manufacturers have certified a number of different 
technologies with a wide range in emission levels with certification 
levels ranging from 16 g/kW-hr HC+NOX on a 4-stroke engine 
to 245 g/kW-hr HC+NOX on a 2-stroke engine. (This range is 
based on Class IV certification information; for Classes III-V, most 
industry sales are in Class IV.) The technologies being used currently 
are mostly 2-stroke engines with a limited number of 4-stroke engines 
as well. For the 2-stroke engines, there are a number of stratified 
scavenging designs as well as a number of engines equipped with 
catalysts.
    With regard to the ABT program, manufacturers are using the program 
primarily for averaging purposes. Contrary to our earlier concerns 
about manufacturers certifying marginally-cleaner engines and earning 
significant credits which could delay the transition to the final Phase 
2 standards, the sales-weighted certification levels for individual 
manufacturers in model year 2002 and 2003 have been near the required 
average standard. Because most manufacturer's average emission are near 
the phase-in standards, there has been only limited use of the banking 
provisions.
    In April and November of 2002, the Outdoor Power Equipment 
Institute (OPEI), a trade organization that represents most of the 
manufacturers of handheld engines in the United States, met with EPA to 
raise concerns about a number of the Phase 2 provisions for handheld 
engines. EUROMOT, a trade organization that represents European 
handheld engine manufacturers also met with EPA in August 2002 to 
discuss their concerns with the Phase 2 program for handheld engines. 
OPEI and EUROMOT highlighted similar areas of concern in the meetings. 
First, they noted concerns over the Class V schedule of emission 
standards, indicating that the Phase II standards were more challenging 
than first thought and that they were pushing hard to meet the Class 
III and IV requirements with the hope and expectation that this 
experience would enhance their Class V compliance. Second, they noted 
their desire to revise the two ABT programs for handheld engines into 
one program without the discounting provisions of the current programs. 
They provided data which showed that there were relatively few credits 
being generated (compared to EPA's original concern) and they claimed 
that in some cases the provisions of the two ABT programs created a 
disincentive to introduce clean technology as soon as otherwise 
possible. Finally, they noted their interest in gaining some 
flexibility in the PLT program, especially with regard to the procedure 
for revising Family Emission Limits (FELs).
    In follow-up to the meetings with OPEI and EUROMOT, we held 
individual discussions with eight handheld engine manufacturers to 
explore the status of each manufacturer's progress on the Phase 2 
program and to better understand each manufacturer's perspective on the 
issues highlighted by OPEI and EUROMOT. The eight manufacturers 
represent over 90 percent of total handheld engine sales in the United 
States. Although each manufacturer's situation is different, there were 
several common themes raised during our discussions about the Phase 2 
program. A summary of our findings is presented below.
    With regard to the Phase 2 standards, we found that all of the 
manufacturers expect to be able to comply with the ultimate standards 
of 50/50/72 g/kW-hr HC+NOX for Classes III/IV/V, 
respectively, although, as noted below, several raised concerns about 
being able to comply with the timing of the phase-in. Manufacturers 
view the emission standards and ABT program as an inter-related 
package. Since the declining average emission standard is expected to 
be met on a power/life/sales weighted average basis for all families in 
Classes III-V, it is important that the ABT program be structured such 
that it maximizes the opportunity to gain extra and early emission 
reductions. The manufacturers stressed the technological and practical 
challenges of meeting the emission standards in all of their different 
engines/equipment and emphasized the need for an ABT program which 
functioned as intended in order to meet the declining average emission 
standards.
    It appears that the technology to be used most widely for complying 
with the final Phase 2 standards will be the stratified scavenging 2-
stroke design, with or without a catalyst. There will also be a number 
of 4-stroke engine designs and limited engines equipped with the 
compression wave technology. While the compression wave technology was 
touted by some as a simple solution to meeting the Phase 2 standards 
during the rulemaking, it is not expected to see widespread use.
    Based on their experience to date in developing technologies for 
Phase 2, manufacturers raised concerns about their ability to comply 
with the set of declining average phase-in standards, especially in the 
later years of the phase in and in Class V. Manufacturers have been 
focusing their design efforts on Class III and IV engines because the 
Phase 2 standards for those classes took effect first. Manufacturers 
are finding it more challenging than expected to develop their Phase 2 
designs for all of

[[Page 1829]]

their engine families across the wide range of applications in which 
they are used. Many engines are used in multiple types of equipment 
applications, resulting in significant design challenges as the 
manufacturers need to ensure compliance with the emission standards 
while maintaining acceptable operating characteristics, including 
temperature issues and the need for additional cooling associated with 
the use of catalysts. There are approximately 275 Class III-V engine 
families and many of these are used in multiple equipment designs and 
cover both residential and commercial applications.
    Because of the need to focus on Class III and IV engines and the 
challenges of applying new designs across their entire product mix, 
manufacturers of Class V engines (all of which are heavily involved in 
Class III and IV as well) have not focused as much effort on their 
Class V engines designs which are scheduled to begin to phase in during 
2004. While Class V manufacturers expect to use the same basic 
technologies as they are employing in Class III and IV, they are still 
addressing the technical challenges facing Class V engines.
    Unlike most Class III and IV engines which are used primarily in 
residential applications, Class V engines are used almost exclusively 
in commercial applications. Commercial equipment is operated under much 
more rigorous conditions than residential equipment and is operated for 
much longer periods of time by professionals in forestry and lawn care 
operations. Class V engines, which have the largest displacement of all 
handheld engines, also have the largest volume of exhaust. 
Manufacturers expect to use catalysts on at least some of their Class V 
designs. Manufacturers are still working to address the best way to 
incorporate catalysts on such large engines, while maintaining current 
levels of performance and addressing weight concerns and temperature 
issues with the need for upgraded cooling.
    With regard to ABT, we found that manufacturers are using the 
current ABT programs primarily for averaging purposes and are not 
significantly below the fleet average levels required in Class III and 
IV in the first two years of the Phase 2 program. There is some banking 
of credits taking place, but at relatively low levels. This is in stark 
contrast to the concerns cited in the April 2000 final rule over the 
potential for significant levels of ``windfall'' credits from 
marginally cleaner engines. Manufacturers believe the current ABT 
programs have discouraged the pull ahead of clean technologies because 
of the steep discounts placed on credits in the program. Because of the 
high level of competition in the marketplace, especially for 
residential equipment which makes up the large majority of equipment in 
Classes III and IV, the incentive to pull ahead cleaner, more expensive 
engine designs has been removed by applying such high levels of 
discounting for any engines not meeting very low emission levels. 
Because most of the residential equipment is sold to large retailers, 
small differences in price between manufacturers, can result in lost 
sales. Manufacturers have been unwilling to take the business risk to 
pull ahead the introduction of any significant number of clean engines 
especially whenever the ABT program heavily discounts the value of 
credits that might be earned from these engines. In addition, because 
of the continuing efforts to address Class V engines discussed above, 
manufacturers are less certain regarding the ability to rely on the 
April 2000 rule's ABT programs for help in complying with the Phase 2 
standards in Class V.
    One final issue raised by manufacturers was related to the 
production line testing program required under the Phase 2 rules. 
Manufacturers believe they need additional flexibility beyond that 
currently allowed in the event that they need to revise the FEL limits 
because of unexpected variations in production engine emission levels. 
Manufacturers are allowed to make such changes under the current rules, 
but must notify EPA and await approval before continuing production of 
the engine. If approval is not received quickly, a manufacturer is 
forced to stop production. As manufacturers are making the transition 
to new technologies to comply with the Phase 2 standards, the potential 
for producing new designs on an assembly line where the emission levels 
of production engines (which are tested under the PLT program) are not 
at the levels expected is increased. Manufacturers would like to be 
able to revise their FELs, provided they have data to support their 
changes, without prior EPA approval so that the production of engines 
is not interrupted.
    Shortly after completing our discussions with engine manufacturers, 
OPEI, on behalf of their members, submitted an administrative 
``Petition for Reopening'' the Phase 2 handheld rules to EPA in 
February 2003. The petition contained a request to modify the Phase 2 
program for handheld engines in three areas. First, OPEI requested a 
delay in the Class V implementation schedule (citing either a one year 
delay in the phase-in schedule or a change in the level of the 
standards during the phase-in). Second, OPEI requested that the 
``Optional Transition Year'' credit program be eliminated, and that FEL 
caps that apply for banking credits in the ``Normal Credit'' program be 
dropped. Finally, OPEI requested that manufacturers be allowed to 
generate and use credits for averaging purposes in the PLT program in a 
given model year. A copy of the petition has been placed in the public 
docket for this rulemaking.
    This action is a fulfillment of the technology review concerning 
the Class V standards and also is responsive to OPEI's request that we 
reopen the Phase 2 handheld rule. We believe that these amendments 
sufficiently resolve all issues related to these matters, and expect to 
take no further action in response to OPEI's petition or in relation to 
the technology review beyond that in this final rule.
    We also note that while OPEI in its petition relied upon section 
307(c) of the Clean Air Act, 42 U.S.C. 7607(c), as a basis for its 
requests, we do not agree that section 307(c) has any applicability to 
either OPEI's petition or to our action in response. Nor are EPA's 
rulemakings regarding nonroad engines under CAA section 213 subject to 
section 553(e) of the Administrative Procedure Act, 5 U.S.C. 553(e), 
another provision relied upon by OPEI in its request. See CAA section 
307(d)(1), 42 U.S.C. 7607(d)(1). Finally, we disagree with OPEI's 
suggestion that, pursuant to section 307(b)(1) of the CAA, 42 U.S.C. 
7607(b)(1), OPEI has presented ``grounds arising after [the] sixtieth 
day'' following publication of the April 2000 final Phase 2 rule, such 
that a new petition for judicial review of that rule could be filed in 
the DC Circuit Court of Appeals in the absence of further final 
regulatory action on EPA's part. As OPEI is aware, in the face of a 
challenge by one of OPEI's member companies that court has already 
fully affirmed EPA's Phase 2 handheld regulations, and the court did 
not retain jurisdiction of the case pending any possible ongoing 
technology review or discussions with industry. Husqvarna AB v. EPA, 
254 F.3d 195 (D.C. Cir. 2001).

B. What Amendments Are We Adopting Today?

    Based on our analysis of the information gathered under the Class V 
technology review and our assessment of the petition presented by 
industry, we do not believe it is necessary to revise our April 2000 
final rule determination that the Phase II

[[Page 1830]]

handheld standards are technologically feasible and otherwise 
appropriate under the Act. Thus, we are not taking action to revise the 
standards and phase-in schedule of the Phase II handheld program 
(Classes III-V) and they remain as promulgated. However, we also 
believe that several relatively modest changes to the rule are 
appropriate to ensure an orderly transition to compliance with the 
Phase 2 standards for the industry as a whole. Toward that end, we are 
promulgating three changes to the Phase II program. These changes 
facilitate transition to the Phase 2 standards while retaining all of 
the long term emission control benefits of the program. Each of these 
changes is discussed below.
    Because EPA views the provisions of the action as noncontroversial 
and does not expect adverse comment, it is appropriate to proceed by 
direct final rulemaking. If we receive adverse comment on one or more 
distinct amendments, paragraphs, or sections of this rulemaking, we 
will publish a timely withdrawal in the Federal Register indicating 
which provisions will become effective and which provisions are being 
withdrawn due to adverse comment. Any distinct amendment, paragraph, or 
section of today's rulemaking for which we do not receive adverse 
comment will become effective on the date set out above, 
notwithstanding any adverse comment on any other distinct amendment, 
paragraph, or section of today's rule.
1. Averaging Banking, and Trading (ABT)
    The first set of changes is related to the certification ABT 
programs. As discussed above, the April 2000 final rule for handheld 
engines contained two ABT programs, referred to as the ``Normal'' 
credit program and the ``Optional Transition Year'' credit program.
    Under the ``Normal'' credit program, manufacturers certifying Class 
III or IV engine families with FELs at or below 72 g/kW-hr and Class V 
engine families with FELs at or below 87 g/kW-hr may generate credits 
that have an unlimited credit life and are not discounted in any 
manner. (We refer to these as the ``credit program trigger levels.'') 
Under the ``Normal Credit'' program, credits generated by handheld 
engine families certified with FELs above the credit program trigger 
levels can be used by a manufacturer in the model year in which they 
are generated for its own averaging purposes, or traded to another 
manufacturer to be used for averaging purposes in that model year. 
However, such credits may not be carried over to the next model year 
(i.e., banked), including when traded to another manufacturer.
    Alternatively under the April 2000 final regulations, a 
manufacturer may choose to have a family participate in what is 
referred to as the ``Optional Transition Year'' credit program. Under 
this program, any engine family with FELs below the applicable phase-in 
standards shown in Table 1 is eligible to generate credits. However, as 
is described in 40 CFR 90.216, these credits are progressively 
discounted or in some cases multiplied depending on the certification 
FEL. This combination of ability to generate credits with families of 
higher emission levels for current year averaging but adjusting the 
credits for these higher/lower-emitting engines for purposes of banking 
was intended to provide an increased incentive for manufacturers to 
make interim emission improvements while preserving the environmental 
benefits of the Phase 2 program. ``Optional Transition Year'' credits 
have a limited life and application under the April 2000 final 
regulations. They may be used without limitation through the 2007 model 
year. For model years 2008 through 2010, they may also be used, but 
only if, prior to the use of any credits, the manufacturer's 
production- and power-weighted average emission level is below a level 
determined by production-weighting the manufacturer's product line by 
emission levels of 72/72/87 g/kW-hr for Classes III/IV/V. The 
``Optional Transition Year'' credit program expires at the end of the 
2010 model year, under the April 2000 final rule.
    When we adopted the April 2000 final rule, we believed the ABT 
provisions contained therein were necessary to ensure that neither the 
``Normal'' credit program nor the ``Optional Transition Year'' credit 
program would contribute to a significant delay in implementation of 
the low-emitting technologies envisioned under the Phase 2 program. 
Without the limitations on credit generation, we were concerned that 
manufacturers could certify marginally cleaner engines, especially 
during the first years of the phase in period when the new equipment 
standards are the highest, and generate enough credits to significantly 
delay implementation of technologies meeting the long term standards 
shown in Table 1 for a significant portion of the equipment population.
    There have now been several model years of experience with 
certifying Class III and IV Phase 2 engines. The results indicate that 
the manufacturers have been able to comply with the declining average 
HC+NOX standards, but the certification compliance margins 
have generally not been large and there have not been a large number of 
credits generated. The ``windfall'' credit generation concern discussed 
in the April 2000 final rule has not occurred and would not have 
occurred even if the ``credit program trigger level'' provisions of the 
Normal ABT program and the discount and multiplier provisions of the 
Optional Transition Year program were not in place. Thus, to enable the 
ABT program to better fulfill its intended purpose and avoid 
maintaining unnecessary restrictions, EPA is revising the ABT program 
for 2003 and later model years: ABT credit program trigger levels are 
eliminated as are the credit discount and multipliers and limits on 
credit life. Essentially, the program is being revised to follow a 
simple ABT program such as was discussed in the July 1999 Supplemental 
NPRM. Provisions related to credits generated in model year 2002 and 
earlier would not be changed. In assessing the appropriateness of this 
change, EPA examined the potential future emissions impact of the 
removing the discounts and multipliers as part of the ABT program 
changes for 2003 and later. Using 2003 certification information, we 
have estimated that these ABT changes could potentially result in about 
3,000 tons of future new ABT program credits in 2003 and 2004 with the 
in-use emissions impact spread out over the next five to seven years. 
This represents less than one percent of the emission reductions from 
the Phase 2 standards over these years. EPA expects these credits will 
be used to comply with the Class V standards during the transition 
years.
2. Class V Credit Deficit Carryforward
    Several manufacturers have indicated that the engines used in Class 
V present the biggest technological challenge and assert that progress 
in Class V has been slowed by the need to meet the standards in Classes 
III and IV in earlier model years. Manufacturers are likely to adapt 
the technologies used in Class IV engines into Class V. They have 
indicated that they are confident that the long-term standards are 
feasible for Class V, but that they may need additional transition 
flexibility. Even with the cross class averaging and the ABT program 
changes made above, compliance during the transition years may depend 
on the expected success of technological progress, meeting expected 
sales goals in other Classes for purposes of credit generation, and a 
favorable sales mix among the products and Classes. Toward that end, as 
a

[[Page 1831]]

transition tool, we are revising the certification provisions to 
facilitate compliance for Class V.
    Specifically, and only for Class V, we are revising the 
certification and compliance provisions to allow for credit deficit 
carryforward flexibility for model years 2004 through 2007. Under these 
provisions, a manufacturer who certifies Class V equipment during the 
transition period (model years 2004 through 2007) may run a net 
accumulated credit deficit within its three Class average (III-V) for a 
given model year if the deficit is attributable to negative credits 
from Class V engine families. Such credit deficits are permitted in any 
model year of the transition, but cannot occur for more than two 
consecutive model years. Once a deficit occurs, a manufacturer could, 
in the first subsequent model year, cover it at a 1:1 rate with credits 
from any or all of the handheld or non-handheld equipment classes. In 
the second and third following model years the deficit payback rate 
would be 1.1:1. In the fourth following model year, the deficit payback 
rate would be 1.2:1. Manufacturers with a credit deficit are prohibited 
from trading credits to other manufacturers (although manufacturers 
would be allowed to purchase credits from other manufacturers in 
trading), and from banking credits for future use. Any positive credit 
balance must be applied to that deficit. A manufacturer can use banked 
or traded credits to cover deficits.
    As with the April 2000 regulations, two groups of engines are 
excluded from the ABT program. California certified sales in non pre-
empted classes would not be included in the program in any way. Small 
volume manufacturers and small volume families which have extended 
compliance dates under the April 2000 final rule (an extra three years 
beyond the last of the transition years) would not be included, unless 
the manufacturer opted to pull-ahead certification of such engines for 
the purpose of generating credits.
    EPA implemented a deficit carryforward provision in its Tier 2 
automotive rule (65 FR 6867, February 10, 2002) and its recreational 
vehicle rule (67 FR 68389, November 8, 2002) to address similar 
concerns in the affected industries. This approach has the benefits of 
assuring the expected emission reductions are achieved while providing 
both the industry and EPA the flexibility to attain an orderly 
transition to the new standards.
3. Production Year FEL Changes
    The implementation of new technology often brings with it 
unexpected emissions variability and performance shortfalls during the 
transition from prototype to mass production. Manufacturers account for 
this in setting their FELs, but even so there are times when an FEL 
adjustment is needed. Under the April 2000 final rule, manufacturers 
identifying an emissions problem with its production engines must 
contact EPA to get approval to change its FEL upward and subsequently 
to implement a certification running change to fix the problem and 
reduce the FEL. This process is time consuming for EPA and the industry 
and can result in production line slowdowns and stoppages as 
manufacturers await EPA approvals. In this rule, we are revising the 
process to adjust FELs upward and downward during the production year. 
Specifically, we are streamlining the certification FEL change process 
(up or down) through a regulatory revision to permit changes without 
pre-approval. Any changes to FELs must be based on engineering 
evaluation and emission test data which justifies the new FEL and be 
submitted to EPA within three working days. Failure to meet these 
requirements would be a violation of the certificate for any engines 
produced during the interim period. EPA believes such a provision 
streamlines both its internal processes and those of the manufacturers 
without compromising the emission reductions associated with the 
standards.

III. Statutory and Executive Order Reviews

A. Executive Order 12866: Regulatory Planning and Review

    Under Executive Order 12866 the Agency must determine whether the 
regulatory action is ``significant'' and therefore subject to review by 
the Office of Management and Budget (OMB) and the requirements of this 
Executive Order. The Executive Order defines a ``significant regulatory 
action'' as any regulatory action that is likely to result in a rule 
that may:
    [sbull] 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;
    [sbull] Create a serious inconsistency or otherwise interfere with 
an action taken or planned by another agency;
    [sbull] Materially alter the budgetary impact of entitlements, 
grants, user fees, or loan programs, or the rights and obligations of 
recipients thereof; or
    [sbull] Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
the Executive Order.
    This direct final rule is not a significant regulatory action as it 
merely amends previously adopted requirements for handheld engines to 
provide additional compliance flexibility to manufacturers in meeting 
the Phase 2 requirements. There are no new costs associated with this 
rule. A Final Regulatory Support Document was prepared in connection 
with the original Phase 2 regulations for handheld engines as 
promulgated on April 25, 2000 (65 FR 24268) and we have no reason to 
believe that our analysis in the original rulemaking is inadequate. The 
relevant analysis is available in the docket for the Phase 2 rulemaking 
(A-96-55) and at the following Internet address: http://www.epa.gov/otaq/equip-ld.htm. The original action was submitted to the Office of 
Management and Budget for review under Executive Order 12866.

B. Paperwork Reduction Act

    This direct final rule does not include any new collection 
requirements. The information collection requirements (ICR) for the 
original Phase 2 rulemaking (65 FR 24268, April 25, 2000) were approved 
on September 21, 2001 by the Office of Management and Budget (OMB) 
under the Paperwork Reduction Act, 44 U.S.C. 3501 et seq.

C. Regulatory Flexibility Analysis

    EPA has determined that it is not necessary to prepare a regulatory 
flexibility analysis in connection with this direct 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 impacts of this final rule on small entities, a small 
entity is defined as: (1) A small business that meets the definition 
for business based on SBA size standards; (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. In 
determining whether a rule has a significant economic impact on a 
substantial number of small entities, the impact of concern is any 
significant adverse economic impact on small entities, since the 
primary purpose of the regulatory flexibility analysis is to identify 
and address regulatory alternatives ``which minimize the

[[Page 1832]]

significant economic impact of the proposed rule on small entities.'' 5 
U.S.C. 603 and 604. Thus, an agency may conclude that a rule will not 
have a significant economic impact on a substantial number of small 
entities if the rule relieves regulatory burden, or otherwise has a 
positive economic effect on small entities subject to the rule. This 
direct final rule merely amends the previously adopted Phase 2 
requirements for handheld engines to provide additional compliance 
flexibility to engine manufacturers, including small entities, and will 
reduce regulatory burden.

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 of why such 
an alternative was 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 rule contains no Federal mandates for State, local, or tribal 
governments as defined by the provisions of Title II of the UMRA. The 
rule imposes no enforceable duties on any of these governmental 
entities. Nothing in the rule would significantly or uniquely affect 
small governments. EPA has determined that this rule contains no 
Federal mandates that may result in expenditures of more than $100 
million to the private sector in any single year. This direct final 
rule merely amends previously adopted requirements for Phase 2 handheld 
engines to provide additional compliance flexibility to manufacturers. 
The requirements of UMRA therefore do not apply to this action.

E. 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'' are 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.''
    Under Section 6 of Executive Order 13132, EPA may not issue a 
regulation that has federalism implications, that imposes substantial 
direct compliance costs, and that is not required by statute, unless 
the Federal Government provides the funds necessary to pay the direct 
compliance costs incurred by State and local governments, or EPA 
consults with State and local officials early in the process of 
developing the regulation. EPA also may not issue a regulation that has 
federalism implications and that preempts State law, unless the Agency 
consults with State and local officials early in the process of 
developing the regulation.
    Section 4 of the Executive Order contains additional requirements 
for rules that preempt State or local law, even if those rules do not 
have federalism implications (i.e., the rules 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). Those 
requirements include providing all affected State and local officials 
notice and an opportunity for appropriate participation in the 
development of the regulation. If the preemption is not based on 
express or implied statutory authority, EPA also must consult, to the 
extent practicable, with appropriate State and local officials 
regarding the conflict between State law and Federally protected 
interests within the agency's area of regulatory responsibility.
    This 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 direct final rule merely 
amends previously adopted requirements for Phase 2 handheld engines to 
provide additional compliance flexibility to manufacturers.

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

    Executive Order 13175, entitled ``Consultation and Coordination 
with Indian Tribal Governments'' (59 FR 22951, 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.'' ``Policies that have tribal 
implications'' is defined in the Executive Order to include regulations 
that have ``substantial direct effects on one or more Indian tribes, on 
the relationship between the Federal Government and the Indian tribes, 
or on the distribution of power and responsibilities between the 
Federal Government and Indian tribes.''
    This rule does not have tribal implications. It will not have 
substantial direct effects on tribal governments, on the relationship 
between the Federal Government and Indian tribes, or on the 
distribution of power and responsibilities between the Federal 
Government and Indian tribes, as specified in Executive Order 13175. 
This rule does not uniquely affect the communities of Indian Tribal 
Governments. Further, no circumstances specific to such communities 
exist that would cause an impact on these communities beyond those 
discussed in the other sections of this rule. This direct final rule 
merely amends previously adopted requirements for Phase 2 handheld 
engines to provide additional compliance flexibility to manufacturers. 
Thus, Executive Order 13175 does not apply to this rule.

[[Page 1833]]

G. Executive Order 13045: Protection of Children From Environmental 
Health and Safety Risks

    Executive Order 13045, ``Protection of Children from Environmental 
Health Risks and Safety Risks'' (62 FR 19885, 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, section 5-501 of the Order directs the Agency to 
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.
    This rule is not subject to the Executive Order because it is not 
economically significant, and does not involve decisions on 
environmental health or safety risks that may disproportionately affect 
children.

H. Executive Order 13211: Actions That Significantly Affect Energy 
Supply, Distribution, or Use

    This 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. This 
direct final rule merely amends previously adopted requirements for 
Phase 2 handheld engines to provide additional compliance flexibility 
to manufacturers.

I. National Technology Transfer and Advancement Act

    Section 12(d) of the National Technology Transfer and Advancement 
Act of 1995 (``NTTAA''), Public Law 104-113, section 12(d) (15 U.S.C. 
272 note) directs EPA to use voluntary consensus standards in its 
regulatory activities unless doing so would be inconsistent with 
applicable law or otherwise impractical. Voluntary consensus standards 
are technical standards (such as materials specifications, test 
methods, sampling procedures, and business practices) that are 
developed or adopted by voluntary consensus standards bodies. NTTAA 
directs EPA to provide Congress, through OMB, explanations when the 
Agency decides not to use available and applicable voluntary consensus 
standards.
    This direct final rule does not involve technical standards. This 
direct final rule merely amends previously adopted requirements for 
Phase 2 handheld engines to provide additional compliance flexibility 
to manufacturers. Thus, we have determined that the requirements of the 
NTTAA do not apply.

J. Congressional Review Act

    The Congressional Review Act, 5 U.S.C. 801 et seq., as amended 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 Congress and the Comptroller General of the United 
States. We 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 before 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(2). This direct final rule 
is effective on March 12, 2004.

K. Statutory Authority

    The statutory authority for this action comes from sections 202, 
203, 204, 205, 206, 207, 208, 209, 213, 215, 216, and 301(a) of the 
Clean Air Act as amended (42 U.S.C. 7521, 7522, 7523, 7524, 7525, 7541, 
7542, 7543, 7547, 7549, 7550, and 7601(a)). This action is a rulemaking 
subject to the provisions of Clean Air Act section 307(d). See 42 
U.S.C. 7606(d)(1).

List of Subjects in 40 CFR Part 90

    Environmental protection, Administrative practice and procedure, 
Air pollution control, Confidential business information, Imports, 
Labeling, Reporting and recordkeeping requirements, Research, 
Warranties.

    Dated: December 23, 2003
Michael O. Leavitt,
Administrator.

0
For the reasons set out in the preamble, title 40, chapter I of the 
Code of Federal Regulations is amended as follows:

PART 90--CONTROL OF EMISSIONS FROM NONROAD SPARK-IGNITION ENGINES 
AT OR BELOW 19 KILOWATTS

0
1. The authority citation for part 90 continues to read as follows:

    Authority: 42 U.S.C. 7521, 7522, 7523, 7524, 7525, 7541, 7542, 
7543, 7547, 7549, 7550, and 7601(a).

Subpart B--Emission Standards and Certification Provisions

0
2. Section 90.122 is amended by revising paragraphs (e)(1) and (e)(2) 
to read as follows:


Sec.  90.122  Amending the application and certificate of conformity.

* * * * *
    (e)(1) Alternatively, an engine manufacturer may make changes in or 
additions to production engines concurrently with amending the 
application for an engine family as set forth in paragraph (a) and (b) 
of this section. In these circumstances the manufacturer may implement 
the production change without EPA pre-approval provided the request for 
change together with all supporting emission test data, related 
engineering evaluations, and other supporting documentation is received 
at EPA within three working days of implementing the change. Such 
changes are ultimately still subject to the provisions of paragraphs 
(c) and (d) of this section.
    (2) If, after a review, the Administrator determines that 
additional testing or information is required, the engine manufacturer 
must provide required test data or information within 30 days or cease 
production of the affected engines.
* * * * *

Subpart C--Certification Averaging, Banking, and Trading Provisions

0
3. Section 90.203 is amended by revising paragraphs (e)(1), (e)(5), 
(g)(1), and the second sentence of paragraph (h) to read as follows:


Sec.  90.203  General provisions.

* * * * *
    (e) (1) A manufacturer may certify engine families at Family 
Emission Limits (FELs) above or below the applicable emission standard 
subject to the limitation in paragraph (f) of this section, provided 
the summation of the manufacturer's projected balance of credits from 
all calculations and credit transactions for all engine classes in a 
given model year is greater than or equal to zero, as determined under 
Sec.  90.207. Notwithstanding the previous sentence, a manufacturer may 
project a negative balance of credits as allowed under Sec.  
90.207(c)(2).
* * * * *
    (5) In the case of a production line testing (PLT) failure pursuant 
to subpart H of this part, a manufacturer may revise the FEL based upon 
production line testing results obtained under

[[Page 1834]]

subpart H of this part and upon Administrator approval pursuant to 
Sec.  90.122(d). The manufacturer may use credits to cover both past 
production and subsequent production of the engines as needed as 
allowed under Sec.  90.207(c)(1).
* * * * *
    (g)(1) Credits generated in a given model year by an engine family 
subject to the Phase 2 emission requirements may only be used in 
averaging, banking or trading, as appropriate, for any other engine 
family for which the Phase 2 requirements are applicable. Credits 
generated in one model year may not be used for prior model years, 
except as allowed under Sec.  90.207(c).
* * * * *
    (h) * * * Except as provided in Sec.  90.207(c), an engine family 
generating negative credits for which the manufacturer does not obtain 
or generate an adequate number of positive credits by that date from 
the same or previous model year engines will violate the conditions of 
the certificate of conformity. * * *
* * * * *

0
4. Section 90.204 is amended by adding a sentence to the end of 
paragraph (a) and adding a sentence to paragraph (c) immediately after 
the first sentence to read as follows:


Sec.  90.204  Averaging.

    (a) * * * A manufacturer may have a negative balance of credits as 
allowed under Sec.  90.207(c)(2).
* * * * *
    (c) * * * Credits generated under the previously available 
``Optional transition year averaging, banking, and trading program for 
Phase 2 handheld engines'' of Sec. Sec.  90.212 through 90.220, since 
repealed, may also be used in averaging. * * *
* * * * *

0
5. Section 90.205 is amended by revising paragraphs (a)(4) and (a)(5) 
to read as follows:


Sec.  90.205  Banking.

    (a) * * *
    (4) For the 2002 model year, a manufacturer of a Class III or Class 
IV engine family may bank credits for use in future model year 
averaging and trading from only those Class III or Class IV engine 
families with an FEL at or below 72 g/kW-hr. Beginning with the 2003 
model year, a manufacturer of a Class III or Class IV engine family 
with an FEL below the applicable emission standard may generate credits 
for use in future model year averaging and trading.
    (5) Beginning with the 2004 model year, a manufacturer of a Class V 
engine family with an FEL below the applicable emission standard may 
generate credits for use in future model year averaging and trading.
* * * * *

0
6. Section 90.206 is amended by revising paragraph (a) to read as 
follows:


Sec.  90.206  Trading.

    (a) An engine manufacturer may exchange emission credits with other 
engine manufacturers in trading, subject to the trading restriction 
specified in Sec.  90.207(c)(2).
* * * * *

0
7. Section 90.207 is amended by redesignating paragraph (c) as 
paragraph (c)(1), adding a new paragraph (c)(2), and adding a new 
paragraph (g) to read as follows:


Sec.  90.207  Credit calculation and manufacturer compliance with 
emission standards.

* * * * *
    (c)(2) For model years 2004 through 2007, an engine manufacturer 
who certifies at least one Class V engine family in a given model year 
may carry forward a credit deficit for four model years, but must not 
carry such deficit into the fifth year, provided the deficit is 
attributable to negative credits from its Class V engine families, 
subject to the following provisions:
    (i) Credit deficits are permitted for model years 2004 through 2007 
but cannot occur for more than two consecutive model years for a given 
manufacturer;
    (ii)(A) If an engine manufacturer calculates that it has a credit 
deficit for a given model year, it must obtain sufficient credits from 
engine families produced by itself or another manufacturer in a model 
year no later than the fourth model year following the model year for 
which it calculated the credit deficit. (Example: if a manufacturer 
calculates that it has a credit deficit for the 2004 model year, it 
must obtain sufficient credits to offset that deficit from its own 
production or that of other manufacturers' 2008 or earlier model year 
engine families.);
    (B) An engine manufacturer carrying the deficit into the first 
model year following the year in which it was generated must generate 
or obtain credits to offset that deficit and apply them to the deficit 
at a rate of 1:1. An engine manufacturer carrying the deficit into the 
second and third model years must generate or obtain credits to offset 
that deficit and apply them to the deficit at a rate of 1.1:1 (i.e., 
deficits carried into the second and third model year must be repaid 
with credits equal to 110 percent of the deficit). Deficits carried 
into the fourth model year must be offset by credits at a rate of 1.2:1 
(i.e., 120 percent of the deficit);
    (iii) An engine manufacturer who has a credit deficit may use 
credits from any class of spark-ignition nonroad engines at or below 19 
kilowatts generated or obtained through averaging, banking or trading 
to offset the credit deficit; and,
    (iv) An engine manufacturer must not bank credits for future use or 
trade credits to another engine manufacturer during a model year in 
which it has generated a deficit or into which it has carried a 
deficit.
* * * * *
    (g) Credit deficits. (1) Manufacturers must offset any deficits for 
a given model year by the reporting deadline for the fourth model year 
following the model year in which the deficits were generated as 
required in paragraph (c)(2) of this section. Manufacturers may offset 
deficits by generating credits or acquiring credits generated by 
another manufacturer.
    (2)(i) Failure to meet the requirements of paragraph (c)(2) of this 
section within the required timeframe for offsetting deficits will be 
considered to be a failure to satisfy the conditions upon which the 
certificate(s) was issued and the individual noncomplying engines not 
covered by the certificate must be determined according to this 
section.
    (ii) If deficits are not offset within the specified time period, 
the number of engines which could not be covered in the calculation to 
show compliance with the fleet average HC+NOX standard in 
the model year in which the deficit occurred and thus are not covered 
by the certificate must be calculated using the methodology described 
in paragraph (g)(2)(iii) of this section.
    (iii) EPA will determine the engines for which the condition on the 
certificate was not satisfied by designating engines in the Class V 
engine family with the highest HC+NOX FELs first and 
continuing progressively downward through the Class V engine families 
until a number of engines having a credit need, as calculated under 
paragraph (a) of this section, equal to the remaining deficit is 
reached. If this calculation determines that only a portion of engines 
in a Class V engine family contribute to the deficit situation, then 
EPA will designate a subset of actual engines in that engine family as 
not covered by the certificate, starting with the last engine produced 
and counting backwards. EPA may request additional information from the 
manufacturer that would help identify the actual engine not covered by 
the certificate.

[[Page 1835]]

    (iv) In determining the engine count, EPA will calculate the mass 
of credits based on the factors identified in paragraph (a) of this 
section.
    (3) If a manufacturer is purchased by, merges with or otherwise 
combines with another manufacturer, the manufacturer continues to be 
responsible for offsetting any deficits outstanding within the required 
time period. Any failure to offset the deficits will be considered to 
be a violation of paragraph (g)(1) of this section and may subject the 
manufacturer to an enforcement action for sale of engines not covered 
by a certificate, pursuant to paragraph (g)(2) of this section.
    (4) If a manufacturer that has a deficit ceases production of 
handheld engines, the manufacturer will be considered immediately in 
violation of paragraph (g)(1) of this section and may be subject to an 
enforcement action for sale of engines not covered by a certificate, 
pursuant to paragraph (g)(2) of this section
    (5) For purposes of calculating the statute of limitations, a 
violation of the requirements of paragraph (g)(1) of this section, a 
failure to satisfy the conditions upon which a certificate(s) was 
issued and hence a sale of engines not covered by the certificate, all 
occur upon the expiration of the deadline for offsetting deficits 
specified in paragraph (g)(1) of this section.


Sec. Sec. 90.212, 90.213, 90.214, 90.215, 90.216, 90.217, 90.218, 
90.219, 90.220  [REMOVED]

0
8. Sections 90.212 through 90.220 are removed.

[FR Doc. 04-458 Filed 1-9-04; 8:45 am]
BILLING CODE 6560-50-P